0000899051 all:EquityAndIndexContractMember all:LifeAndAnnuityContractBenefitsMember 2019-01-01 2019-12-31
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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ý | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 20162019
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o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-11840
THE ALLSTATE CORPORATIONCORPORATION
(Exact name of registrant as specified in its charter) |
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| Delaware | | 36-3871531 |
| (State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
2775 Sanders Road, Northbrook, Illinois60062
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (847) (847) 402-5000
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | Trading Symbols | Name of each exchange on which registered |
| Common Stock, par value $0.01 per share | ALL | New York Stock Exchange Chicago Stock Exchange |
5.10%5.100% Fixed-to-Floating Rate Subordinated Debentures due 2053 | ALL.PR.B | New York Stock Exchange |
Depositary Shares each representing arepresent 1/1,000th interest in1,000th of a share of Fixed Rate5.625% Noncumulative Perpetual Preferred Stock, Series A G | ALL PR G | New York Stock Exchange |
Depositary Shares each representing arepresent 1/1,000th interest in1,000th of a share of Fixed Rate5.100% Noncumulative Perpetual Preferred Stock, Series C H | ALL PR H | New York Stock Exchange |
Depositary Shares each representing arepresent 1/1,000th interest in1,000th of a share of Fixed Rate4.750% Noncumulative Perpetual Preferred Stock, Series D I | | New York Stock Exchange |
Depositary Shares each representing a 1/1,000th interest in a share of Fixed Rate Noncumulative Perpetual Preferred Stock, Series E
| | New York Stock Exchange |
Depositary Shares each representing a 1/1,000th interest in a share of Fixed Rate Noncumulative Perpetual Preferred Stock, Series F
| ALL PR I | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes☒ No ☐
Yes X No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐No☒
Yes No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes☒ No ☐
Yes X No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes X ☒ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer X | ☒ | Accelerated filer | ☐ |
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| Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
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| | Accelerated filer Emerging growth company
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Non-accelerated filer (Do not check if a smaller reporting company)
| | Smaller reporting company
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ____
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No X ☒
The aggregate market value of the common stock held by non-affiliates of the registrant, computed by reference to the closing price as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2016,2019, was approximately $25.63$33.04 billion.
As of January 31, 2017,2020, the registrant had 365,129,091316,913,648 shares of common stock outstanding.
Documents Incorporated By Reference
Portions of the following documents are incorporated herein by reference as follows:
Part III of this Form 10-K incorporates by reference certain information from the registrant’s definitive proxy statement for its annual stockholders meeting to be held on May 25, 201719, 2020, (the “Proxy Statement”) to be filed not later than 120 days after the end of the fiscal year covered by this Form 10-K.
TABLE OF CONTENTS
Table of Contents
2019 Form 10-KItem 1. Business
Part I
Item 1. Business
The Allstate Corporation was incorporated under the laws of the State of Delaware on November 5, 1992, to serve as the holding company for Allstate Insurance Company. Its business is conducted principally through Allstate Insurance Company, Allstate Life Insurance Company and other subsidiaries (collectively, including The Allstate Corporation, “Allstate”).
Allstate’s purpose is to protect people from life’s uncertainties and prepare them for the future so they can realize their hopes and dreams. Allstate is primarily engaged in the property-liabilityproperty and casualty insurance business and the life insurance, retirement and investment products business. It offers its products in the United States and Canada. Additionally, Allstate provides customers other protection offerings such as life, accident and health insurance and protection plans that cover electronic devices and personal identities.
The Allstate Corporation is one of the largest publicly held personal lines insurerinsurers in the United States. Allstate’s personal property-liability strategy is to serve distinct customer segmentsincrease market share by providing auto insurance with differentiated offerings.a competitive value proposition and offering a circle of protection. The Allstate brand is widely known through the “You’re In Good Hands With Allstate®” slogan. Allstate is the 2ndthird largest personal property and casualty insurer in the United States on the basis of 20152018 statutory direct premiums written according to A.M. Best.
In addition, accordingAllstate also has strong market positions in other protection products. According to A.M. Best, itAllstate is the nation’s 1820thlargest issuer of life insurance business on the basis of 20152018 ordinary life insurance in force and 3140stth largest on the basis of 20152018 statutory admitted assets.
Allstate Benefits provides accident, health and life insurance through employers and is one of the top five voluntary benefits carriers in the market based on a 2018 voluntary/worksite industry survey. SquareTrade, which sells consumer protection plans using the Allstate Protection Plans name in the U.S., provides protection plans on a wide variety of consumer goods such as cell phones, tablets, computers and appliances, and has four business segments:
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• Allstate Protection | | • Discontinued Lines and Coverages |
• Allstate Financial | | • Corporate and Other |
To achieve its goalsa leading position in 2017,distribution through major retailers. InfoArmor, which provides identity protection through employers using the Allstate is focused on the following priorities:
•better serve our customers;
•achieve target economic returns on capital;
•grow customer base;
•proactively manage investments; and
•build long-term growth platforms.Identity Protection name, has a leading position in this distribution channel. In total, Allstate had 145.9 million policies in force (“PIF”) as of December 31, 2019.
In this annual reportAnnual Report on Form 10-K, we occasionally refer to statutory financial information. All domestic United States insurance companies are required to prepare statutory-basis financial statements. As a result, industry data is available that enables comparisons between insurance companies, including competitors that are not subject to the requirementrequired to prepare financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”). We frequently use industry publications containing statutory financial information to assess our competitive position.
The Allstate Corporation 1
ALLSTATE PROTECTION SEGMENT2019 Form 10-KItem 1. Business
Products
Strategy and DistributionSegment Information
Total 
Allstate’s strategy has two components: increase personal property-liability market share and expand protection businesses including Service Businesses, Allstate Life and Allstate Benefits. We create shareholder value through customer satisfaction, unit growth, attractive returns on capital, sustainable profitability and a diversified business platform.Transformative Growth Plan
We have implemented a multi-year Transformative Growth Plan that leverages the Allstate brand, people and technology. The Transformative Growth Plan will enable us to better serve customers in a changing world. The plan will ensure Allstate remains a strong competitor and local agencies continue to provide high value to customers. Winning is our past, our present and our future.
Allstate has thrived for 88 years by adapting to better serve customers. Our Transformative Growth Plan builds on our success by leveraging the Allstate brand, people and technology to improve our long-term competitive position and accelerate growth. The plan has three components:
Expanded customer access — Consumers currently can access Allstate branded property-liability products through Allstate agencies, contact centers and online. Access will be expanded to enable consumers to select a method of interaction. All consumers will have the opportunity to decide if they want access to an Allstate agency, so we will no longer need to use both the Allstate and Esurance brands for direct sales and Esurance will be integrated into the Allstate brand in 2020.
Improved customer value—Property-liability products will be redesigned to be affordable, simple and connected. Insurance pricing will utilize sophisticated rating algorithms, such as telematics, and reflect the service model a customer chooses.
Centralized customer service capabilities are being expanded to improve consistency, reduce costs and enable Allstate agencies to focus on acquiring new customers and developing relationships with existing customers.
2019 Form 10-KItem 1. Business
We will improve our expense position by focusing on reducing spending while eliminating redundancies. Simplification efforts will continue to eliminate the need for manual work and optimize our operating model.
Increased investments in marketing and technology—Investments in marketing the Allstate brand will be increased by reallocating Esurance spending. New technology ecosystems are being built to support increased connectivity, new products and operational adaptability.
This plan is focused on the customer experience, providing a circle of protection through people and technology along with increased connectivity, combined with distribution, product, and technology enhancements.
We are expanding protection businesses utilizing enterprise capabilities and resources such as distribution, analytics, claims, investment expertise, talent and capital. Using innovative growth platforms (such as telematics and identity protection) and broad distribution including Allstate exclusive agencies, contact centers, online, retailers, workplace benefits brokers, auto dealers, original equipment manufacturers and telecom providers further enhance our customer value proposition.
We evaluate performance and make resource and capital decisions across seven reportable segments.
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| Reportable segments |
Allstate Protection (1) | | Includes the Allstate, Encompass and Esurance brands and Answer Financial. Offers private passenger auto, homeowners, other personal lines and commercial insurance through agencies, contact centers and online. Esurance will be integrated into the Allstate brand in 2020 as we are repositioning the Allstate brand for broader customer access. |
| Service Businesses | | Includes Allstate Protection Plans, Allstate Dealer Services, Allstate Roadside Services, Arity and Allstate Identity Protection, which offer a broad range of products and services that expand and enhance our customer value propositions. |
| Allstate Life | | Offers traditional, interest-sensitive and variable life insurance products primarily through Allstate exclusive agents and exclusive financial specialists. |
| Allstate Benefits | | Offers voluntary benefits products, including life, accident, critical illness, short-term disability and other health insurance products sold through independent agents, benefits brokers and Allstate exclusive agents. |
| Allstate Annuities | | Consists of deferred fixed annuities and immediate fixed annuities (including standard and sub-standard structured settlements) in run-off. |
Discontinued Lines and Coverages (1) | | Relates to property and casualty insurance policies written during the 1960's through the mid-1980's with exposure to asbestos, environmental and other claims in run-off. |
| Corporate and Other | | Includes holding company activities and certain non-insurance operations. |
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(1) | Allstate Protection and Discontinued Lines and Coverages segments comprise Property-Liability. |
2019 Form 10-KItem 1. Business
Allstate Protection premiums written were $31.60 billion in 2016. Segment
Our Allstate Protection segment accounted for 93%90.3% of Allstate’s 20162019 consolidated insurance premiums and contract charges. In this segment, we principally sell privatecharges and 23.1% of Allstate’s December 31, 2019 PIF. Private passenger auto, homeowners, other personal lines and other property-liabilitycommercial insurance products offered through agencies and directly through contact centers and online are included in this segment. Our strategy is to position product offerings, distribution and technology to meet customers’ evolving needs and protect them from life’s uncertainties.
Strategy
Allstate Protection currently has four market-facing property-liability businesses with products and services that cater to different customer preferences for advice and brand recognition to improve our competitive position and performance. As part of the internet. These products are underwritten underTransformative Growth Plan, we will enable consumers to select a method of interaction and Esurance will be integrated into the Allstate®, brand in 2020. Investments in marketing for the Allstate brand will be increased by reallocating Esurance® spending.
We currently serve our consumers using differentiated products, analytical expertise, telematics and Encompass® brand names.
Our Unique StrategyConsumer Segments
Allstate serves four different consumer segmentsan integrated digital enterprise that leverages data and technology to redesign our processes with distinct interaction preferences (local advicea focus on greater effectiveness and assistance versus self-directed)efficiencies and brand preferences (brand-neutral versus brand-sensitive).long-term expense savings.
Allstate brand auto and homeowners insurance products are sold primarilystrategy
Our strategy is to grow profitably through Allstate exclusive agencies and serve customers who preferdirect channels, while leveraging best-in-class operational capabilities to gain market share and efficiencies. The Allstate brand differentiates itself by offering comprehensive product options and features with access to agencies that provide local personalized advice and service, including a partnership with exclusive financial specialists to deliver life and retirement solutions.
This strategy focuses on four customer-centric themes to expand and deliver profitable growth:
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| Available | | Competitive | | Simple | | Connected |
Provide products and services that protect what matters most | | Offer products that make good use of our customers’ hard-earned money | | Easy to interact with | | Know our customers and proactively interact in value-added ways |
| Innovative and integrated distribution system that provides consumers with broad points of presence across all channels and offers a comprehensive product portfolio | | Improve price competitiveness through advancing sophistication and reducing our expenses | | Provide easy, seamless and unified customer experience with open access across all touchpoints | | Digitally connected with customers, enabling continual interactions that deepen relationships and provide value |
Available Being available is about making sure customers can find us whenever, wherever and however they choose. And once they do, offer them the protection they need as effectively as possible. In 2020, we are brand-sensitive.expanding access by allowing customers to choose how they interact with us.
Consumers will have the opportunity to select an Allstate agency to get tailored solutions and support
based on their needs from Allstate’s 10,800 exclusive agencies or interact directly with Allstate through mobile, online or contact centers. Agencies are established in 10,700 locations, supported by 27,100 licensed sales professionals and 1,000 exclusive financial specialists.
Allstate exclusive agents also sell specialty auto products including motorcycle, trailer, motor homeoffer life and off-road vehicle insurance policies; other personal lines products including renter, condominium, landlord, boat, umbrellaretirement solutions and manufactured home insurance policies; commercial lines products for small business owners; roadside assistance products;can partner with exclusive
Item 1. Business 2019 Form 10-K
financial specialists who provide expertise with more complex life and service contractsretirement solutions and other products sold in conjunction with auto lendingfinancial needs of our customers.
Exclusive agencies and vehicle sales transactions. Allstate brand sales and servicefinancial specialists are supported through contact centersmarketing assistance, service and business processes, technology, education, offering financing to grow their businesses and other resources to help them enhance the internet. In 2016,customer experience and to acquire and retain more customers.
Focus areas include improving the effectiveness of the sales and distribution systems through integrated support, tools and technology and reinventing products and services, supported by people and technology.
Affordable Leveraging the Allstate brand, represented 91%people and technology to improve our long-term competitive position and accelerate growth.
Data, analytics and technology support advances in pricing sophistication for all lines of business. Pricing and underwriting strategies and decisions are designed to generate sustainable profitable growth.
Targeted marketing includes messaging that communicates the value of our Good Hands®, the importance of having proper coverage, product options, and the ease of doing business with Allstate.
Enhanced loss cost management and expense control are priorities. To achieve this, we are continuing to modernize our operating platform (including enhanced digital capabilities) and optimizing vendor relationships. Investments are being made to increase efficiencies and reduce expenses.
Simple The strategy to keep things simple for customers and improve their experience with us across the board, giving them open access to shop, get service or file a claim in whatever channel is convenient.
Focus areas include streamlined quoting and binding processes, intelligent services allowing customers to easily find the optimal channel to address their service needs, expanded customer self-service, and continued claims transformation.
Emerging technologies and predictive analytics are being used to simplify the customer experience and expedite the quoting, underwriting and claims processes.
Connected We are enhancing customer connectivity by broadening and deepening the way we stay connected, providing compelling features to customers that connect to us through our Allstate Protection segment’s written premium. InMobile application while continually developing solutions to enhance offerings and make Allstate Mobile core to the U.S., wecustomer experience.
Current capabilities are being expanded through our partnership with Arity, which uses telematics to offer these Allstate brand products in approximately 10,200 locations through approximately 34,160 licensed producers including approximately 10,360personalized, engaging programs that empower drivers with insights about their vehicle’s health, costs and safety.
Exclusive agent compensation structureThe compensation structure for Allstate exclusive agencies and approximately 23,800 licensed sales professionals. We also offer these products through approximately 2,200 independent agencies that are primarily in rural areas in the U.S. In Canada, we offer Allstate brand products through approximately 870 employee producers working in five provinces across the country (Ontario, Quebec, Alberta, New Brunswick and Nova Scotia).
Esurance brand auto, homeowners, renter and motorcycle insurance products are soldagents rewards them for delivering high value to customers online, through contact centers or through select agents. Esurance serves self-directed, brand-sensitive customers. In 2016, the Esurance brand represented 5%and achieving certain business outcomes such as profitable growth and household penetration. Allstate exclusive agent remuneration comprises a base commission, variable compensation and a bonus.
Agents receive a monthly base commission payment as a percentage of the Allstate Protection segment’stheir total eligible written premium.
Encompass brand auto, homeowners, umbrella and other insurance products, sold predominantly in the form ofVariable compensation rewards agents for acquiring new customers by exceeding a single annual household (“package”) policy, are distributed through independent agencies that serve customers who prefer personal advice and assistance from an independent adviser and are brand neutral. In 2016, the Encompass brand represented 4% of the Allstate Protection segment’s written premium. Encompass brand products are distributed through approximately 2,400 independent agencies. Encompassbase production goal.
Bonus compensation is among the top 20 largest providers of personal property and casualty insurance products through independent agencies in the United States, based on statutory written premium information provideda percentage of premiums and can be earned by A.M. Bestagents who are meeting certain sales goals and selling additional policies to meet customer needs profitably.
Compensation changes for 2015.2020 shift variable compensation toward new business and eliminates variable compensation for renewing customers. We are aligning agent compensation to emphasize growth while simultaneously improving customer service consistency.
Answer Financial, a personal lines insurance agency, serves self-directed, brand-neutral consumers who want a choice between insurance carriers. It offers comparison quotes for autoAgents have the ability to earn commissions and homeowners insurance from approximately 25 insurance companies through its website and over the phone and receives commissions for this service. Answer Financial had $599 million of non-proprietary premiums written in 2016.
Through arrangements made with other companies, agencies, and brokers, the Allstate Protection segment may offeradditional bonuses on non-proprietary products provided to consumerscustomers when an Allstate product is not available. As of December 31, 2016, Allstate agenciesIn 2019 Ivantage, which provides access to these products, had approximately $1.3$1.90 billion of non-proprietary personal insurance premiums under management primarily related to property business in hurricane exposed areas, and approximately $200 millionis a leading provider of non-proprietary commercial insurance premiums under management.
Competition
The markets for personal private passenger auto and homeowners insurance are highly competitive. The following charts provide the market shares of our principal competitors in the U.S. by direct written premium for the year ended December 31, 2015 according to A.M. Best.
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| Personal Lines Insurance | | Private Passenger Auto Insurance | | Homeowners Insurance |
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| Insurer | | Market Share | | Insurer | | Market Share | | Insurer | | Market Share |
| State Farm | | 18.6% | | State Farm | | 18.3% | | State Farm | | 19.1% |
| Allstate | | 9.6 | | GEICO | | 11.4 | | Allstate | | 8.5 |
| GEICO | | 7.8 | | Allstate | | 10.1 | | Liberty Mutual | | 6.5 |
| Progressive | | 6.3 | | Progressive | | 8.8 | | Farmers | | 5.7 |
| Liberty Mutual | | 5.5 | | USAA | | 5.3 | | USAA | | 5.4 |
| USAA | | 5.3 | | Farmers | | 5.0 | | Nationwide | | 4.0 |
| Farmers | | 5.2 | | Liberty Mutual | | 5.0 | | Travelers | | 3.7 |
| Nationwide | | 3.8 | | Nationwide | | 3.7 | | | | |
In the personal property and casualty brokerage services.
Allstate agents and exclusive financial specialists receive commissions for proprietary and non-proprietary life and retirement sales and are eligible for a quarterly bonus based on the volume of non-proprietary sales.
Allstate independent agent remuneration comprises a base commission and a bonus that can be earned by agents who achieve sales goals and a target loss ratio.
Commercial lines strategy We are actively pursuing profitable expansion of our commercial lines business in the shared economy, including transportation and home-sharing network companies. Profit improvement actions have been implemented for our traditional commercial lines insurance products, emphasizing pricing, claims, governance and operational improvements.
Esurance strategy
Esurance has grown in the direct channel with a focus on making insurance surprisingly painless by innovating to make it simple, transparent and affordable with a seamless online and mobile experience. Esurance is 2.4 times bigger, as measured by premiums written, than when it was acquired eight years ago. Esurance will be integrated into the Allstate brand in 2020.
The Allstate Corporation 5
2019 Form 10-KItem 1. Business
Encompass strategy
Currently, customers who prefer an independent agent can access products under either the Encompass or Allstate brand. As part of Allstate’s multi-year Transformative Growth Plan, independent agent access will be increased as we combine our Allstate and Encompass brand independent agency businesses and go to market we compete principally using customer value propositions for each consumer segment. This includes different brands,exclusively with the scope and type of distribution system, price and the breadth of product offerings, product features, customer service, claim handling, and use of technology.Encompass brand. In addition ourto bringing the organizations together, we will expand the independent agency footprint, provide a superior agency and customer experience, and offer contemporary products with sophisticated pricing.
Over the past several years, Encompass has been executing a profit improvement plan emphasizing pricing, governance and operational improvements at both the state and countrywide levels. These actions have improved underlying profitability but led to a reduction of policies in force compared to prior years for both auto and homeowners. We expect these profit improvement actions to continue as we implement the Transformative Growth Plan.
Answer Financial strategy
Answer Financial is an insurance agency that sells other insurance companies’ products directly to customers online. Our strategy as a technology-enabled insurance agency is to provide comparison shopping and related services for businesses, offering customers choice, convenience and ease of use.
Allstate Protection pricing and risk management strategies
Our pricing and underwriting strategies and decisions are designed to generate sustainable profitable growth.
A proprietary database of underwriting and pricingloss experience enables Allstate to use sophisticated pricing algorithms and methodologies to more accurately price risks while also seeking to attract and retain more customers. customers in multiple risk segments.
For auto insurance, risk evaluation factors can include, but are not limited toto: vehicle make, model and year; driver age and marital status; territory; years licensed; loss history; years insured with prior carrier;
prior liability limits; prior lapse in coverage; and insurance scoring utilizing certain credit reporttelematics data and other consumer information.
For property insurance, risk evaluation factors can include, but are not limited toto: the amount of insurance purchased; geographic location of the property; loss history; age, condition and construction characteristics of the property; and characteristics of the insured including insurance scoring utilizing certain credit reportother consumer information.
A combination of underwriting information, pricing and discounts are also used to achieve a more competitive position and growth. The pricing strategy involves local marketplace pricing and underwriting decisions based on risk evaluation factors to the extent permissible by applicable law and an evaluation of competitors.
Pricing of property products is intended to generate risk-adjusted returns that are acceptable over a long-term period. Rate increases are pursued to keep pace with loss trends, including losses from catastrophic events and those that are weather-related (such as wind, hail, lightning and freeze not meeting our criteria to be declared a catastrophe). We also take into consideration potential customer disruption, the impact on our ability to market our products, regulatory limitations, our competitive position and profitability.
In any reporting period, loss experience from catastrophic events and weather-related losses may contribute to negative or positive underwriting performance relative to the expectations incorporated into product pricing.
Property catastrophe exposure is managed with the goal of providing shareholders an acceptable return on the risks assumed in the property business. Catastrophe exposure management includes purchasing reinsurance to provide coverage for known exposure to hurricanes, earthquakes and fires following earthquakes, wildfires and other catastrophes. Our current catastrophe reinsurance program supports our risk tolerance framework that targets less than a 1% likelihood of annual aggregate catastrophe losses from hurricanes and earthquakes, net of reinsurance, exceeding $2 billion.
The use of different assumptions and updates to industry models and to our risk transfer program could materially change the projected loss. Growth strategies include areas where we believe diversification can be enhanced and an appropriate return can be earned for the risk. As a result, our modeled exposure may increase, but in aggregate remain lower than $2 billion as noted above. In addition, we have exposure to other severe weather events and wildfires, which impact catastrophe losses.
We are promoting measures to prevent and mitigate losses and make homes and communities more resilient, including enactment of stronger building codes and effective enforcement of those codes, adoption of sensible land use policies, and development of effective and affordable methods of improving the resilience of existing structures.
Item 1. Business 2019 Form 10-K
Products and distribution
Allstate Protection differentiates itself from competitors by focusing on theoffering solutions to meet broad-based household protection needs of the entire household and offering a comprehensive range of innovative product options and features throughacross distribution channels that best suit each marketconsumer segment. Allstate’s Your Choice Auto® insurance allows qualified customers to choose from a variety of options, such as Accident Forgiveness, Deductible Rewards®, Safe Driving Bonus®, and New Car Replacement. We believe that Your Choice Auto insurance promotes increased growth and increased retention.
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Insurance products (1) | | Auto |
| Homeowners |
| Specialty auto (motorcycle, trailer, motor home and off-road vehicle) |
| Other personal lines (renters, condominium, landlord, boat, umbrella, manufactured home and stand-alone scheduled personal property) |
| Commercial lines |
| Answer Financial | | Comparison quotes and sales of non-proprietary auto, homeowners and other personal lines (condominium, renters, motorcycle, recreational vehicle and boat) |
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(1) | Insurance products are offered by the Allstate, Esurance and Encompass brands. |
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| Distribution channels |
| Allstate brand | In the U.S., we offer products through 10,800 Allstate exclusive agencies operating in 10,700 locations, supported by 27,100 licensed sales professionals, and 1,000 exclusive financial specialists. We also offer products through 3,400 independent agencies, contact centers and online. In Canada, we offer Allstate brand products through 1,000 employee producers. |
| Esurance brand | Sold to customers online and through contact centers. (Esurance will be integrated into the Allstate brand in 2020.)
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| Encompass brand | Distributed through 2,800 independent agencies.
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| Answer Financial | Comparison quotes and sales offered to customers online or through contact centers. |
Allstate exclusive agencies also support the Service Businesses, Allstate Life and Allstate Benefits segments through offering roadside assistance, consumer protection plans, identity protection, life insurance and voluntary benefits products.
When an Allstate product is not available, we may offer non-proprietary products to consumers through Ivantage and arrangements made with other companies, agencies, and brokers. As of December 31, 2019, Allstate agencies had approximately $1.7 billion of non-proprietary personal insurance premiums under management, primarily related to property business in hurricane exposed areas, and approximately $225 million of non-proprietary commercial insurance premiums under management. Additionally, we offer a Claim Satisfaction GuaranteeSM feature that promises a returnhomeowners product through our excess and surplus lines carrier, North Light Specialty Insurance Company, in certain areas with higher risk of premium tocatastrophes or where customers do not meet the Allstate brand standard auto insurance customers dissatisfied with their claims experience.underwriting profile.
The Allstate House and Home® insurance is our homeowners product that provides options of coverage for roof damageCorporation 7
2019 Form 10-KItem 1. Business
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| Innovative product offerings and features |
| Market-leading solutions |
| Allstate brand | Your Choice Auto® | | Qualified customers choose from a variety of options, such as Accident Forgiveness, Deductible Rewards®, Safe Driving Bonus® and New Car Replacement. |
Allstate House and Home® | | Featured options include Claim RateGuard®, Claim-Free Bonus, Deductible RewardsSM and flexibility in options and coverages, including graduated roof coverage and pricing based on roof type and age for damage related to wind and hail events. |
Claim Satisfaction Guarantee® | | Promised return of premium to standard auto insurance customers dissatisfied with their claims experience. |
| Bundling Benefits | | Auto customers with a qualifying property policy are provided an auto renewal guarantee and a deductible waiver (when the same event, with the same covered cause of loss, damages both auto and property). Offered in 39 states as of December 31, 2019. |
New Car Replacement
Protection | | Replaces a qualifying customer’s vehicle (two model years old or less) involved in a total loss accident with a vehicle of the same or similar make and model. Offered in 39 states as of December 31, 2019. |
| Encompass brand | EncompassOne® Policy | | Packaged insurance product with one premium, one bill, one policy deductible and one renewal date. Broad coverage options include customizable features such as enhanced accident forgiveness, new-car replacement coverage, walk-away home coverage option should the insured decide not to rebuild, flexible additional living expense coverage, water-sewer backup coverage options and roadside assistance. This product is offered in 36 states and the District of Columbia (“D.C.”) as of December 31, 2019. |
Surround Solutions by Encompass® | | Offers auto (6-months), homeowner and specialty lines products, pricing, services and support designed to provide flexibility and be customized based on consumer needs. Offered exclusively in four states for Encompass as of December 31, 2019. |
| Telematics offerings |
| Allstate brand | Drivewise® | | Telematics-based program, available in 50 states and the District of Columbia as of December 31, 2019, that uses a mobile application or an in-car device to capture driving behaviors and encourage safe driving. It provides customers with information and tools, incentives and driving challenges. For example, in most states, Allstate Rewards® provides reward points for safe driving. |
Milewise® | | Usage-based insurance product, available in 14 states as of December 31, 2019, that gives customers flexibility to customize their insurance and pay based on the number of miles they drive. |
| Esurance brand | DriveSense® | | Telematics-based insurance program, available in 37 states as of December 31, 2019, that primarily uses a mobile application to capture driving behaviors and reward customers for safe driving. |
| Encompass brand | Route ReportSM | | Telematics application, available in 16 states as of December 31, 2019, used to capture driving behaviors and reward customer participation. |
| Shared economy solutions |
| Allstate brand | Transportation Network Company Commercial Auto | | Commercial coverage of transportation networking company independent drivers during various phases of the ride sharing service. |
Allstate Ride for Hire®/ HostAdvantage® | | Supplemental personal insurance coverage for those using their vehicle to drive for a transportation network company or their house for peer-to-peer property sharing. |
Item 1. Business 2019 Form 10-K
Competition
The personal lines insurance markets, including private passenger auto and homeowners insurance, are highly competitive. The following charts provide Allstate Protection’s combined market share compared to our principal U.S. competitors using statutory direct written premium for the year ended December 31, 2018, according to A.M. Best.
Geographic markets
We primarily operate in the U.S (all 50 states and D.C.) and Canada. Our top geographic markets based on roof type2019 statutory direct written premiums are reflected below.
The Allstate Corporation 9
2019 Form 10-KItem 1. Business
Service Businesses Segment
Our Service Businesses segment accounted for 3.7% of Allstate’s 2019 consolidated total revenue and age. Good Hands Rescue® is a service that provides pay on demand access to roadside services.
Our Allstate branded Drivewise® and our Esurance branded DriveSense® offerings are telematic-based insurance programs that use a mobile application or an in-car device to capture driving behaviors and reward customers for driving safely. The Drivewise mobile application also provides customers with information and tools to encourage safer driving and incentivize them through driving challenges. Drivewise offers Allstate Rewards®, a program that provides reward points for safe driving.
Our Allstate Milewise® and Esurance Pay Per Mile® usage-based insurance products give customers flexibility to customize their insurance and pay based on the number72.6% of miles they drive.
In 2016, we launched Arity, a non-insurance technology company that leverages software, data and analytics and our telematics-based insurance programs to help better manage risk. Allstate brand, Esurance and Answer Financial are currently using Arity’s software, data and analytics. Arity is planning to market its services to non-affiliates in 2017.
The Encompass® package policy offers broad coverage options specifically focused on customers who prefer an independent agency while simplifying the insurance experience by packaging a product into a single annual household policy with one premium, one bill, one policy deductible and one renewal date. Broad coverage options include features such as enhanced home replacement with a cash-out option should the insured decide not to rebuild, additional living expense coverage with no specific time or dollar limit, water-sewer back up coverage, an unlimited accident forgiveness feature and roadside assistance.
On November 28, 2016, we announced an agreement to acquire SquareTrade Holding Company, Inc. (“SquareTrade”), a consumer product protection plan provider that distributes through many of America’s major retailers. Known for its exceptional service, SquareTrade provides protection plans for consumer appliances and electronics, such as TVs, smartphones and computers. This will broaden Allstate’s product offerings to better meet consumers’ needs. The transaction closed on January 3, 2017.
Geographic Markets
The Company’s principal geographic markets for auto, homeowners, and other personal property and casualty products are in the United States. Through various subsidiaries, we are authorized to sell a variety of personal property and casualty insurance products in all 50 states, the District of Columbia and Puerto Rico. We also sell personal property and casualty insurance products in Canada.
The following table reflects, in percentages, the principal geographic distribution of premiums earned for theDecember 31, 2019 PIF. Service Businesses includes Allstate Protection segment for 2016, based on information contained in statements filedPlans®, Allstate Dealer Services®, Allstate Roadside Services®, Arity® andAllstate Identity Protection®, which offer a broad range of products and services that expand and enhance customer value propositions.
Strategy - To deliver superior value propositions and build strategic platforms to connect and engage with state insurance departments. No other jurisdiction accounted for more than 5 percent of the premiums earned for the segment.customers and effectively address their changing needs and preferences.
|
| | |
TexasAllstateSM Protection Plans | 11.1 | %Expand distribution of consumer protection plan and technical support products through new and existing retail and mobile operator accounts while increasing profitability and returns. |
CaliforniaAllstate Dealer Services® | 9.4 |
Expand distribution of Allstate branded finance and insurance products and services to auto dealerships, while pursuing additional distribution through strategic partnerships. |
New YorkAllstate Roadside Services® | 8.9 |
Modernize the roadside assistance business through technology and enhance capabilities to deliver a superior customer experience while improving efficiency and returns. |
FloridaArity® | 7.2 |
Leverage analytics and deep understanding of driver risk to create a strategic platform. The platform will be used by those industries affected most by the changing face of transportation, including insurance companies, shared mobility companies and the automotive ecosystem. |
AllstateSM Identity Protection | | Create a leading position in the identity protection market, offering full identity protection monitoring with proactive alerts, digital exposure reporting and identity theft reimbursement as well as expanding into other distribution channels. |
Additional Information
Information regarding the last three years’ revenues and income from operations attributable to the Allstate Protection segment is contained in Note 19 of the consolidated financial statements. Note 19 also includes information regarding the last three years’ identifiable assets attributable to our property-liability operations, which includes our Allstate Protection and Discontinued Lines and Coverages segments. Note 19 is incorporated in this Part I, Item 1 by reference.
Information regarding the amount of premium earned for Allstate Protection segment products for the last three years is set forth in Part II, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the table regarding premiums earned by brand. That table is incorporated in this Part I, Item 1 by reference.
ALLSTATE FINANCIAL SEGMENT
Products and Distributiondistribution
Our Allstate Financial segment sells traditional, interest-sensitive and variable life insurance and voluntary accident and health insurance products. We previously offered and continue to have in force fixed annuities such as deferred and immediate annuities. We sell Allstate Financial products through Allstate exclusive agencies and approximately 1,000 exclusive financial specialists, and 6,000 workplace enrolling independent agents. The majority of life insurance business written involves exclusive financial specialists, including referrals from exclusive agencies and licensed sales professionals. The table below lists our current distribution channels with the associated products and target customers. |
| | |
| Products and services |
| Allstate Protection Plans | | Provides consumer protection plans and related technical support for mobile phones, consumer electronics and appliances which provide customers protection from mechanical or electrical failure, and in certain cases, accidental damage from handling. |
| Allstate Dealer Services | | Offers finance and insurance products, including vehicle service contracts, guaranteed asset protection waivers, road hazard tire and wheel protection, and paintless dent repair protection. |
Allstate Roadside Services | | Offers towing, jump-start, lockout, fuel delivery and tire change services to retail customers and customers of our wholesale partners. Good Hands Rescue® is a pay-per-use mobile application service that connects users to a select countrywide network of third-party providers and a proprietary crowdsourced network to assist with emergencies. |
Arity | | Provides data and analytics solutions with the Arity platform using automotive telematics information. Customers receive value from our solutions either by using web-based software tools, white labeled mobile applications or through embedding our technology in their mobile applications. |
| Allstate Identity Protection | | Provides identity protection services including monitoring, alerts, remediation and a proprietary indicator of identity health. |
|
| | |
Distribution Channelschannels |
| Allstate Protection Plans | Proprietary Products | Target CustomersMajor retailers in the U.S. and mobile operators in Europe. |
| Allstate Dealer Services | | Independent agencies and brokers through auto dealerships in the U.S. in conjunction with the purchase of a new or used vehicle. |
| Allstate Roadside Services | | Allstate exclusive agencies, wholesale partners, affinity groups and a mobile application. |
| Arity | | Sells directly to affiliate and non-affiliate customers and through strategic partners. |
| Allstate Identity Protection | | Primarily through workplace benefit programs. |
Geographic markets
The Service Businesses primarily operate in the U.S., with certain businesses offering services in Europe, Canada, and Puerto Rico.
Competition
We compete on a variety of factors, including product offerings, brand recognition, financial strength, price, distribution and the customer experience. The market for these services is highly fragmented and competitive.
Item 1. Business 2019 Form 10-K
Allstate Life Segment
Strategy
Our Allstate Life segment accounted for 4.4% of Allstate’s 2019 consolidated total revenue and 1.3% of Allstate’s December 31, 2019 PIF. Our overall strategy is to broaden Allstate’s customer relationships and value proposition. We also distribute non-proprietary retirement products offered by third-party providers. Our target customers are middle market consumers with family and financial protection needs.
Our product positioning provides solutions to help meet customer needs during various phases of life. Term and whole life insurance products offer basic life protection solutions while universal life and retirement products cover more advanced needs. Many Allstate exclusive agencies partner with exclusive financial specialists to deliver life and retirement solutions to their customers. These specialists have expertise with advanced life and retirement cases and other more complex customer needs. Successful partnerships assist agencies with building stronger and deeper customer relationships. Improvements in sales education and technology are being made to ensure agencies have the tools and information needed to help customers meet their needs and build personal relationships.
The operating model is being modernized through investments in data and analytics and technology capabilities, tailoring distribution support, product innovation and enhancing the underwriting process.
Products and distribution
|
| | |
| Insurance products |
| Term life | | Interest-sensitive life |
Whole life
| | Variable life |
|
|
| Distribution channel |
Allstate exclusive agencies and exclusive financial specialists | Term life insurance | Customers who prefer local personalized advice and service and are brand-sensitive |
Whole life insurance |
Interest-sensitive life insurance |
Variable life insurance |
Workplace enrolling independent agents
Allstate exclusive agencies and exclusive financial specialists
| Workplace life and voluntary accident and health insurance: | Middle market consumers with family financial protection needs employed by small, medium, and large size firms |
Interest-sensitive and term life insurance |
Disability income insurance |
Cancer, accident, critical illness and heart/stroke insurance |
Hospital indemnity |
Dental insurancespecialists. |
Allstate exclusive agencies and exclusive financial specialists also sell certain non-proprietary retirement and investment products, including mutual funds, fixed and variable annuities, disability insurance, and long-term care insurance to provide a broad suite of protection and retirement products. As of December 31, 2016,2019, Allstate agencies had approximately $14.1$16.5 billion of non-proprietary mutual funds and fixed and variable annuity account balances under management. New and additional deposits into these non-proprietary products were $1.9$2.4 billion in 2016.2019.
Competition
We compete on a variety of factors, including product offerings, brand recognition, financial strength and ratings, price, distribution and customer service. The market for life insurance continues to be highly fragmented and competitive. As of December 31, 2018, there were approximately 350 groups of life insurance companies in the United States.
Geographic markets
We primarily operate in the U.S. (all 50 states and D.C.). Our top geographic markets based on 2019 statutory direct premiums are reflected below.
The Allstate Corporation 11
2019 Form 10-KItem 1. Business
Allstate Benefits Segment
Strategy
Our Allstate Benefits segment accounted for 2.8% of Allstate’s 2019 consolidated total revenue and 2.9% of Allstate’s December 31, 2019 PIF. The Allstate Benefits segment provides consumers with financial protection against the risk of accidents, illness and mortality. We are among the industry leaders in the growing voluntary benefits market, offering a broad range of products through workplace enrollment. Our life insurance portfolio includes individual and group permanent life solutions. Target customers are middle market consumers with family and financial protection needs employed by small, medium and large sized firms. Allstate Benefits is well represented in all market segments and is a leader in the large and mega (over 10,000 employees) market segments.
Our products are offered through independent agents, benefits brokers and Allstate exclusive agencies. Allstate Benefits is differentiated through its broad product portfolio, flexible enrollment solutions, strong national accounts team and well-recognized brand.
Our strategy for growth is to deliver substantially more value through innovative products and technology, tailored solutions and exceptional service. Initiatives are focused on expanding into non-traditional products and becoming an integrated digital enterprise through investments in future-state technologies and data and analytics capabilities.
Products and distribution
|
| | |
| Voluntary benefits products |
| Life | | Short-term disability |
| Accident | | Other health |
Critical illness
| | |
|
|
| Distribution channels |
| 4,960 workplace enrolling independent agents and benefits brokers. |
| Allstate exclusive agencies, focusing on small employers. |
Competition
We compete on a wide variety of factors, including product offerings, brand recognition, financial strength and ratings, price, distribution and the level of customer service. The market for life insurance continues to be highly fragmented and competitive. As of December 31, 2015, there were approximately 380 groups of life insurance companies in the United States, most of which offered one or more similar products. According to A.M. Best, as of December 31, 2015, the Allstate Financial segment is the nation’s 18th largest issuer of life insurance and related business on the basis of 2015 ordinary life insurance in force and 31st largest on the basis of 2015 statutory admitted assets.
The market for voluntary benefits is growing as these products help employees fill the increasing gaps associated with continued medical cost inflation and the shifting of costs from employers seek to shift benefit costsemployees to employees.cover co-pays and deductibles. Favorable industry and economic trends have increased competitive pressure and attracted new traditional and non-traditional entrants to the voluntary benefits market. Recent entrants, including large group medical, life and lifedisability insurance carriers, are leveraging core benefit capabilities by bundling and discounting to capture voluntary market share. Allstate will need to continue strengthening its value proposition and add new capabilities to maintain its strong leadership position in voluntary benefits.
Geographic Marketsmarkets
We sell life insurance and voluntary accident and health insurance throughoutprimarily operate in the United States. Through subsidiaries, we are authorized to sell various types of these products in allU.S. (all 50 states the District of Columbia, Puerto Rico, the U.S. Virgin Islands and Guam. We also sell voluntary accidentD.C.) and health insurance in Canada.
The
following table reflects, in percentages, the principaltop geographic
distribution of direct statutory premiums and annuity considerations for the Allstate Financial segment for 2016,markets based on
information contained in statements filed with state insurance departments. Direct2019 statutory
direct premiums
and annuity considerations exclude reinsurance assumed. No other jurisdiction accounted for more than 5 percent of the direct statutory premiums and annuity considerations.are reflected below. 
|
| | |
New York | 10.8 | % |
Texas | 10.1 |
|
Florida | 9.9 |
|
California | 6.5 |
|
Additional Information
Information regarding revenues and income from operations attributable to the Allstate Financial segment for the last three years is contained in Note 19 of the consolidated financial statements. Note 19 also includes information regarding identifiable assets attributable to the Allstate Financial segment for the last three years. Note 19 is incorporated in this Part I, Item 1 by reference.
Information regarding premiums and contract charges for Allstate Financial segment products for the last three years is set forth in Part II, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the table that summarizes premiums and contract charges by product. That table is incorporated in this Part I, Item 1 by reference.
ALLSTATE AGENCIES2019 Form 10-KItem 1. Business
Allstate Annuities Segment
Strategy
Our Allstate Annuities segment accounted for 2.9% of Allstate’s 2019 consolidated total revenue and 0.1% of Allstate’s December 31, 2019 PIF. The Allstate Annuities segment consists primarily of deferred fixed annuities and immediate fixed annuities (including standard and sub-standard structured settlements). The segment is in run-off and is focused on increasing lifetime economic value. Both the deferred and immediate annuity businesses have been adversely impacted by the historically low interest rate environment. Our immediate annuity business has also been impacted by medical advancements that have resulted in annuitants living longer than anticipated when many of these contracts were originated.
Allstate exclusive agenciesAnnuities focuses on the distinct risk and return profiles of the specific products when developing investment and liability management strategies. The level of legacy deferred annuities in force has been significantly reduced and the investment portfolio and crediting rates are proactively managed to improve profitability of the business while providing appropriate levels of liquidity.
The investment portfolio supporting our immediate annuities is managed to ensure the assets match the characteristics of the liabilities and provide the long-term returns needed to support this business. To better match the long-term nature of our immediate annuities, we use performance-based investments (primarily limited partnership investments) in which we have ownership interests and a greater proportion of return is derived from idiosyncratic asset or operating performance.
We continue to review strategic options to reduce exposure and improve returns of the business. As a result, we may take additional operational and financial actions that offer return improvement and risk reduction opportunities.
Products and distribution
We previously offered and continue to have in force deferred fixed annuities and immediate fixed annuities. We discontinued the sale of proprietary annuities over an eight-year period from 2006 to 2014, reflecting our expectations of declining returns. In 2006, we disposed of substantially all of the variable annuity business through reinsurance agreements. For discussion of non-proprietary retirement and investment products targeted to consumers that prefer local personalized advice and branded products from both the Allstate Protection and Allstate Financial segments. They offer Allstate brand auto and homeowners insurance policies; specialty auto products including motorcycle, trailer, motor home and off-road vehicle insurance policies; other personal lines products including renter, condominium, landlord, boat, umbrella and manufactured home insurance policies; commercial lines products for small business owners; and roadside assistance products.sold through our Allstate exclusive agencies and exclusive financial specialists, offer various life insurance products, as well as voluntary accident and health insurance products. In addition, arrangements made with other companies, agencies, and brokers allowsee Part I, Item 1. Allstate exclusive agencies the ability to make available non-proprietary products to consumers when an Allstate product is not available.
In the U.S., Allstate brand products are sold in approximately 10,200 locations through approximately 34,160 licensed producers including approximately 10,360 Allstate exclusive agencies employing approximately 23,800 licensed sales professionals, who are licensed to sell our products. We also offer these products through approximately 2,200 independent agencies in primarily rural areas in the U.S. All Allstate brand customers who purchase their policies directly through contact centers and the internet, currently less than 7%Life Segment of new business, are provided an Allstate agency relationship at the time of purchase. In Canada, we offer Allstate brand products through approximately 870 producers working in five provinces across the country (Ontario, Quebec, Alberta, New Brunswick and Nova Scotia).
Trusted Advisor In 2016, we continued to focus on a multi-year effort to position exclusive agents, licensed sales professionals and exclusive financial specialists to serve customers as trusted advisors. Being a trusted advisor means that our agencies:
•Have a local presence that instills confidence;
•Know their customers and understand the unique needs of their households;
•Help them assess the potential risks they face;
Provide local expertise and personalized guidance on how to protect what matters most to them by offering customized solutions; and
•Support them when they have changes in their lives and during their times of need.
To ensure agencies have the resources, capacity, and support needed to serve customers at this level, we are deploying education and support focused on relationship initiation and insurance and retirement expertise and are continuing efforts to enhance agency capabilities with customer-centric technology while simplifying and automating service processes to enable agencies to focus more time in an advisory role.
Allstate exclusive agencies engage with exclusive financial specialists through a partnership agreement, which documents common business goals and commitments to deliver customer solutions for life and retirement products. Exclusive agencies utilize an exclusive financial specialist for their expertise with advanced life and retirement cases and other financial needs of customers. Successful partnerships will assist agencies with building stronger and deeper customer relationships and increased compensation.
We support our exclusive agencies in a variety of ways to facilitate customer service and Allstate’s overall growth strategy. For example, we offer assistance with marketing, sales, service and business processes and provide education and other resources to help them acquire more business and retain more customers. Our programs support exclusive agencies and help them grow by offering financing to acquire other agencies and awarding additional resources to better performing agencies. We support our relationship with Allstate exclusive agencies through several national and regional working groups:
The Agency Executive Council engages exclusive agencies on our customer service and growth strategies. Membership includes approximately 14 Allstate exclusive agency owners selected on the basis of performance, thought leadership and credibility among their peer group.
The National Advisory Board brings together Allstate’s senior leadership and a cross section of Allstate exclusive agents and exclusive financial specialists from around the country to address national business issues and develop solutions.
Regional Advisory Boards support Allstate exclusive agency owner engagement within each of Allstate’s 15 regional offices in the U.S. and within Canada.
The compensation structure for Allstate exclusive agencies rewards agencies for delivering high value to our customers and achieving certain business outcomes such as product profitability, net growth and household penetration. Allstate exclusive agent remuneration comprises a base commission (Property-Liability and Allstate Financial products), variable compensation and a bonus. Variable compensation consists of three components: agency success factors (Allstate Financial insurance policies sold and licensed staff), which must be achieved in order to qualify for the second and third components, customer satisfaction and Allstate Financial insurance policies sold relative to the size of the agency. A bonus, based on a percentage of premiums can be earned by agents who achieve a targeted loss ratio and a defined amount of Allstate Financial sales. The bonus is earned by achieving a targeted percentage of multi-category households (customers with policies purchased through an Allstate agent in at least two of the following product categories: vehicle, personal property, or life and retirement) and increases in Allstate Protection (Allstate brand) and Allstate Financial policies in force. In addition, through arrangements made with other companies, agencies, and brokers, Allstate exclusive agencies have the ability to earn commissions on non-proprietary products provided to consumers when an Allstate product is not available.
We pursue opportunities for growing Allstate brand exclusive agency distribution based on market opportunities with a focus on penetrating under-served markets. Similar to prior years, Allstate will continue to offer newly appointed agents, new locations or newly purchased locations with a low premium base an opportunity to earn enhanced compensation. The enhanced compensation program is designed to incent and reward agencies for investing their time, talent, and capital to generate premium growth trajectory sufficient to establish a sustainable business over a defined timeframe. While the intent and reward will remain largely consistent, the program will be modified for agents who open an agency on or after April 1, 2017 to more efficiently incentivize agents to support trusted advisor principles, including an enhanced on-boarding process and contemporized standards for capital and licensed support staff. Other elements of exclusive agency compensation and support include start-up agency bonuses, marketing support payments, technology and data allowances, regional promotions and recognition trips based on achievement. These compensation components combine to provide these locally owned small businesses opportunities and incentives to earn incremental working capital throughout the year to support the cash flow needed for sustainable investment in agency staff, marketing, and business development. Allstate exclusive financial specialists receive commissions for proprietary and non-proprietary sales and earn a bonus based on the volume of business produced in partnership with their Allstate exclusive agent. In 2017, a new bonus was introduced for sales of Allstate Financial products along with adjustments to the Allstate Financial commission structure.
Allstate independent agent remuneration comprises a base commission (Property-Liability products) and a bonus which can be earned by agents who achieve a target loss ratio. The bonus, which is a percentage of premiums, is earned by achieving a targeted percentage of multi-category households (customers with Allstate policies in at least two of the following product categories: vehicle, personal property or life and retirement) and increased Allstate Protection (Allstate brand) net written premium above a minimum threshold. Other elements of independent agency compensation and support include marketing support payments, national and regional promotions and recognition trips based on achievement. There are no significant changes to the compensation framework planned for 2017.
Allstate employs field sales leaders who are responsible for recruiting and retaining Allstate agents and helping them grow their business and profitability. The field sales leaders’ compensation is aligned with agency success and includes a bonus based on the level of agent remuneration described above and agency geographic footprint.report.
OTHER BUSINESS SEGMENTS
Other Business Segments
Discontinued Lines and Coverages Segment
The Discontinued Lines and Coverages segment includes results from property and casualty insurance coverage that primarily relates to policies written during the 1960s through the mid-1980s.
Strategy Management of this segment has been assigned to a designated group of professionals with expertise in claims handling, policy coverage interpretation, exposure identification, litigation and reinsurance collection. As part of its responsibilities, this group pursues settlement agreements including policy buybacks on direct excess commercial business when appropriate to improve the certainty of the liabilities. At the end of 2019, 72.2% of the direct excess gross case reserves were attributable to settlement agreements. This group also manages other direct commercial and assumed reinsurance business in runoff and engages in reinsurance ceded and assumed commutations as required or when considered economically advantageous.
Changes in the reserves established for asbestos, environmental and other discontinued lines losses have occurred and may continue. Reserve changes can be caused by new information relating to new and additional claims, new exposures or the impact of resolving unsettled claims based on unanticipated events such as arbitrations, litigation, legislative, judicial or regulatory actions. Environmental losses may also increase as the result of additional funding for environmental site clean-up.
Challenges related to the concentration of insurance and reinsurance claims from companies who specialize in this business continue to be addressed.
Corporate and Other Segment
Our Corporate and Other segment is comprised of holding company activities and certain non-insurance operations. Note 19 of the consolidated financial statements contains information regarding the revenues, income from operations, and identifiable assets attributable to our Corporate and Other segment over the last three years.
Our Discontinued Lines and Coverages segment includes results from property-liability insurance coverage that we no longer write and results for certain commercial and other businesses in run-off. Our exposure to asbestos, environmental and other discontinued lines claims is presented in this segment. Note 19 of the consolidated financial statements contains information for the last three years regarding revenues, income from operations, and identifiable assets attributable to our property-liability operations, which includes both our Allstate Protection and our Discontinued Lines and Coverages segments. Note 19 is incorporated in this Part I,
2019 Form 10-KItem 1 by reference.1. Business
REGULATION
Regulation
Allstate is subject to extensive regulation, primarily at the state level. The method, extent and substance of such regulation variesvary by state but generally has itshave their source in statutes that establish standards and requirements for conducting the business of insurance and that also delegate regulatory authority to a state agency. These rules have a substantial effect on our business and relate to a wide variety of matters, including insurer solvency and statutory surplus sufficiency, reserve adequacy, insurance company licensing and examination, agent and adjuster licensing, agent and broker compensation, policy forms, rate setting, the nature and amount of investments, claims practices, participation in shared markets and guaranty funds, transactions with affiliates, the payment of dividends, underwriting standards, statutory accounting methods, trade practices, privacy regulation and data security, corporate governance and risk management. Some of these matters are discussed in more detail below. In addition, state legislators and insurance regulators continue to examine the appropriate nature and scope of state insurance regulation. For a discussion of statutory financial information, see Note 16 of the consolidated financial statements.
For a discussion of regulatory contingencies, see Note 14 of the consolidated financial statements. Notes 14 and 16 are incorporated in this Part I, Item 1 by reference.As part of an effort to strengthen the regulation of the financial services market, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) was enacted in 2010. Dodd-Frank created the Federal Insurance Office (“FIO”) within the U.S. Department of the Treasury (“Treasury”). The FIO monitors the insurance industry, provides advice to the Financial Stability Oversight Council (“FSOC”), represents the U.S. on international insurance matters, and studies the current regulatory system.
Additional regulations or new requirements may emerge from the activities of various regulatory entities, including the Federal Reserve Board, FIO, FSOC, the National Association of Insurance Commissioners (“NAIC”), and the International Association of Insurance Supervisors (“IAIS”), that are evaluating solvency and capital standards for insurance company groups. In addition, the NAIC has adopted amendments to its model holding company law whichthat have been adopted by some jurisdictions. The outcome of these actions is uncertain; however, these actions may result in an increase in the level of capital and liquidity required by insurance holding companies. Additional discussion of Dodd-Frank appears later in this section.
We cannot predict whether any specific state or federal measures will be adopted to change the nature or scope of the regulation of insurance or what effect any such measures would have on Allstate. We are working for changes in the regulatory environment to make insurance more available and affordable for customers, encourage market innovation, improve driving safety, strengthen cybersecurity, and promote better catastrophe preparedness and loss mitigation.mitigation
Agent
and Broker Compensation. In recent years, several states considered new legislation or regulations regarding the compensation of agents and brokers by insurance companies. The proposals ranged in nature from new disclosure requirementsadvocate for appropriate long-term capital standards to new duties on insurance agents and brokers in dealing with customers. New York requires the disclosure of certain information concerning agent and broker compensation.support optimal risk adjusted returns.
Limitations on Dividends Byby Insurance Subsidiaries. As a holding company with no significant business operations of its own, The Allstate Corporation relies on dividends from Allstate Insurance Company as one of the principal sources of cash to pay dividends and to meet its obligations, including the payment of principal and interest on debt or to fund non-insurance relatednon-insurance-related businesses. Allstate Insurance Company is regulated as an insurance company in Illinois, and its ability to pay dividends is restricted by Illinois law. For additional information regarding those restrictions, see Part II, Item 5 of this report. The laws of the other jurisdictions that generally govern our other insurance subsidiaries contain similar limitations on the payment of dividends anddividends. However, such laws in some jurisdictions the laws may be more restrictive.
For additional information regarding limitations, see Part II, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report. In addition, the NAIC has formed a working group for the development of a group capital calculation covering all entities of the insurance company group for use in solvency monitoring activities. The calculation is intended to provide analytical information and we do not expect potential revisions to impact our current dividend plans, any increase in the amount of capital or reserves our insurance subsidiaries are required to hold could reduce the amount of future dividends such subsidiaries are able to distribute to the holding company. Any reduction in the RBC ratios of our insurance subsidiaries could also adversely affect their financial strength ratings as determined by statistical rating agencies.
Insurance Holding Company Regulation – Change of Control. The Allstate Corporation and Allstate Insurance Company are insurance holding companies subject to regulation in the jurisdictions in which their insurance subsidiaries do business. In the U.S., these subsidiaries are organized under the insurance codes of Florida, Illinois, Massachusetts, New Jersey, New York, Texas, and Wisconsin, andWisconsin. Additionally, some of these subsidiaries are considered commercially domiciled in California and Florida.
Generally, the insurance codes in these states provide that the acquisition or change of “control” of a domestic or commercially domiciled insurer or of any person that controls such an insurer cannot be consummated without the prior approval of the relevant insurance regulator. In general, a presumption of “control” arises from the ownership, control, possession with the power to vote, or possession of proxies with respect to ten percent or more of the voting securities of an insurer or of a person thatwho controls an insurer. In addition, certain state insurance laws require pre-acquisition notification to state agencies of a change in control with respect to a non-domestic insurance company licensed to do business in that state. While such pre-acquisition notification
Item 1. Business 2019 Form 10-K
statutes do not authorize the state agency to disapprove the change of control, such statutes do authorize certain remedies, including the issuance of a cease and desistcease-and-desist order with respect to the non-domestic insurer if certain conditions exist, such as undue market concentration.
Thus, any transaction involving the acquisition of ten percent or more of The Allstate Corporation’s common stock would generally require prior approval by the state insurance departments in California, Florida, Illinois, Massachusetts, New Jersey, New York, Texas and Wisconsin. Moreover, notification would be required in those other states that have adopted pre-acquisition notification provisions and where the insurance subsidiaries are admitted to transact business. Such approval requirements may deter, delay or prevent certain transactions affecting the ownership of The Allstate Corporation’s common stock.
Rate Regulation. Nearly all states have insurance laws requiring personal property and casualty insurers to file rating plans, policy or coverage forms, and other information with the state’s regulatory authority. In many cases, such rating plans, policy forms, or both must be approved prior to use.
The speed with which an insurer can change rates in response to competition or in response to increasing costs depends in part, on whether the state rating laws, are (i) priorwhich include the following categories:
Prior approval (ii) file-and-use, or (iii) use-and-file laws. In states having prior approval laws, the regulator— Regulators must approve a rate before the insurer may use it. In states having file-and-use laws, the insurer doesit
File-and-use — Insurers do not have to wait for the regulator’s approval to use a rate, but the rate must be filed with the regulatory authority prior to being used. A use-and-file law requiresused
Use-and-file — Requires an insurer to file rates within a certain period of time after the insurer begins using them. Eighteen states, including California and New York, have priorthem
No approval laws. — One state, representing less than 1% of 2019 statutory direct written premiums, does not impose a rate filing requirement
Under all three types ofthese rating laws, the regulator has the authority to disapprove a rate filing. The percentage of 2019 statutory direct written premiums based on state rating laws are reflected below.
An insurer’s ability to adjust its rates in response to competition or to changing costs is dependent on an insurer’s ability to demonstrate to the regulator that its rates or proposed rating plan meets the requirements of the rating laws. In those states that significantly restrict an insurer’s discretion in selecting the business
that it wants to underwrite, an insurer can manage its risk of loss by charging a rate that reflects the cost and expense of providing the insurance. In those states that significantly restrict an insurer’s ability to charge a rate that reflects the cost and expense of providing the insurance, the insurer can manage its risk of loss by being more selective in the type of business it underwrites. When a state significantly restricts both underwriting and pricing, it becomes more difficult for an insurer to maintain its profitability.
From time to time, the personal lines insurance industry comes under pressure from state regulators, legislators, and special interestspecial-interest groups to reduce, freeze, or set rates at levels that do not correspond with our analysis of underlying costs, catastrophe loss exposure, and expenses. We expect this kind of pressure to persist. Allstate and other insurers are using increasingly sophisticated pricing models and rating plans that are reviewed by regulators and special interestspecial-interest groups. State regulators may interpret existing law or rely on future legislation or regulations to impose new restrictions that adversely affect profitability or growth. We cannot predict the impact on our business of possible future legislative and regulatory measures regarding rating.insurance rates.
Involuntary Markets. As a condition of maintaining our licenses to write personal property and casualty insurance in various states, we are required to participate in assigned risk plans, reinsurance facilities, and joint underwriting associations that provide various types of insurance coverage to individuals or entities that otherwise are unable to purchase such coverage from private insurers. Underwriting results related to these arrangements, which tend to be adverse, have been immaterial to our results of operations.
Michigan Catastrophic Claims Association. TheFor a discussion of these items see Note 14 of the consolidated financial statements. Note 14 is incorporated in this Part I, Item 1 by reference.Indemnification Programs. We are a participant in state-based industry pools, facilities or associations, mandating participation by insurers offering certain coverage in their state, including the Michigan Catastrophic Claims Association (“MCCA”) is a mandatory insurance coverage, the New Jersey Property-Liability Insurance Guaranty Association, the North Carolina Reinsurance Facility and reinsurance indemnification mechanism for personal injury protection losses that provides indemnification for losses over a retention level that increases every other MCCA fiscal year by the lesser of 6% or the increaseFlorida Hurricane Catastrophe Fund. We also participate in the Consumer Price Index. It operates similar to a reinsurance program and is funded by participating member companies (companies actively writing motor vehicle coverage in Michigan) through a per vehicle annual assessment that is currently $160 for automobiles. This assessment is incurred by the Company as policies are written and recovered as a component of premiums from our customers. The participating company retention level will be $555 thousand per claim for the fiscal two-years ending June 30, 2019 compared to $545 thousand per claim for the fiscal two-years ending June 30, 2017.Federal Government National Flood Insurance Program.
The MCCA provides unlimited lifetime medical benefits for qualifying injuries from automobile, motorcycle and commercial vehicle accidents. Many of these injuries are catastrophic in nature, resulting in serious permanent disabilities that require attendant and residential care for periods that may span decades. As required for a member company (companies actively writing motor vehicle coverage in Michigan and those with runoff policies), we report covered paid and unpaid claims to the MCCA when estimates of loss for a reported claim are expected to exceed the retention level. The MCCA reimburses members as qualifying claims are paid and billed by membersRecent regulatory changes have occurred related to the MCCA. BecauseAt this time, we are unable to determine whether, or to what extent, these changes will have on our claims and claims expense reserves and corresponding MCCA indemnification recoverables.
On May 17, 2018, member companies of the natureMCCA were notified of the coverage, losses (the most significantratification of which areamendments to the MCCA’s Plan of Operation. The amendments were designed to clarify the MCCA’s preapproval requirements for certain actions and activities involving benefits provided to covered claimants, including the preapproval of any agreement that sets attendant care rates or residential and attendant care) may be paid over the lifetime of a claimant, and accordingly, significant levels of ultimate incurred claim reserves are recorded by member companies as well as offsetting reinsurance recoverables. A significant portion of the ultimate incurred claim reservescare facility
The Allstate Corporation 15
2019 Form 10-KItem 1. Business
rates and the recoverable can be attributedpreapproval of all non-emergency medical flights.
On May 30, 2019, the Governor of Michigan signed new legislation to a small number of catastrophic claims. Disputes for coverage on certain reported claims can result in additional losses, which may be recoverable from the MCCA, however, the litigation expenses are not reimbursable.reform Michigan’s no-fault auto insurance system. The MCCA is not currently funded on an ultimate claims basis although it has an obligation to indemnify its members for their actuarially expected losses. Legislativereform includes:
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| – | Allowing insureds to choose levels of personal injury protection coverage, including the option to opt-out of personal injury protection coverage in certain circumstances. |
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| – | Implementing mandated rate reductions that correspond to the level of personal injury protection coverage chosen by insureds, which go into effect July 2, 2020. |
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| – | Setting fee schedules for personal injury protection claims at 200% of Medicare rates in 2021, declining to 195% in 2022 and 190% in 2023, for any providers other than certain unique categories of providers and applying to treatment on existing and new claims beginning after July 1, 2021. |
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| – | Implementing or creating new processes for reviewing claims, assessing allowable expenses and setting limits on certain allowable expenses. |
Other legislative proposals to change the MCCA operation in the future are put forth periodically, however, no changes have been enacted. We do not anticipate any material adverse financial impact from this association on Allstate.periodically.
New Jersey Property-Liability Insurance Guaranty Association. The New Jersey Property-Liability Insurance Guaranty Association (“PLIGA”) provides reimbursement to insurers for the medical benefits portionFor a discussion of personal injury protection coverage paid in excess of $75,000 with no limits for policies issued or renewed prior to January 1, 1991, and paid in excess of $75,000 and capped at $250,000 for policies issued or renewed from January 1, 1991 to December 31, 2004. As the statutory administratorthese items see Note 10 of the New Jersey Unsatisfied Claim and Judgment Fund (“UCJF”), PLIGA also provides compensation to qualified claimants forconsolidated financial statements. Note 10 is incorporated in this Part I, Item 1 by reference.
personal injury protection, bodily injury, or death caused by private passenger automobiles operated by uninsured or “hit and run” drivers. The UCJF also provides private passenger stranger pedestrian personal injury protection benefits when no other coverage is available. A significant portion of the incurred claim reserves and the recoverable can be attributed to a small number of catastrophic claims. PLIGA annually assesses all admitted property and casualty insurers writing motor vehicle liability insurance in New Jersey for direct PLIGA expenses and UCJF reimbursements and expenses. No insurer may be assessed in any year an amount greater than 2% of that insurer’s net direct written premiums. It has been the practice of the New Jersey Department of Banking and Insurance to issue a recoupment order allowing insurance companies to recover the assessment from the Company’s customers over a reasonable period of time. As of December 31, 2015, PLIGA had a surplus of $279 million. We do not anticipate any material adverse financial impact from PLIGA or the UCJF on Allstate.
Guaranty Funds. Under state insurance guaranty fund laws, insurers doing business in a state can be assessed, up to prescribed limits, in order to cover certain obligations of insolvent insurance companies. We do not anticipate any material adverse financial impact on Allstate from these assessments.
National Flood Insurance Program. We voluntarily participate as a Write Your Own carrier in the National Flood Insurance Program (“NFIP”). The NFIP is administered and regulated by the Federal Emergency Management Agency (“FEMA”). We operate in a fiduciary capacity as a fiscal agent of the federal government in the issuing and administering of the Standard Flood Insurance Policy. This involves the collection of premiums belonging to the federal government, the adjustment of claims, and the paying of covered claims and certain allocated loss adjustment expenses entirely drawn from federal funds. We receive expense allowances from the NFIP for underwriting administration, claims management, commissions, and adjusting expenses. The federal government is obligated to pay all claims and certain allocated loss adjustment expenses in accordance with the arrangement. In 2015, FEMA intervened and took direct responsibility for settling claims in litigation related to named storm Sandy, which occurred in 2012. FEMA also implemented a review process for non-litigated claims and offered to review claims that had previously been closed. These claims have been paid by directly drawing on federal funds to settle litigation and to pay additional amounts on claims reviewed by FEMA and submitted for processing. Due to this review process, approximately 2,300 Allstate claims were re-opened by FEMA. As of December 31, 2016, Allstate had received 1,556 directives from FEMA regarding payments. It is not known if FEMA may take similar actions on other past or future flood related claims. Allstate has not had any involvement in determining the additional payment amounts or settling these claims. Allstate did not accept any additional loss adjustment fees for the additional payments directed by FEMA. FEMA’s actions may have created potential exposure that Allstate is confident it has sufficiently addressed for all Sandy claims. Congressional authorization for the NFIP expires September 30, 2017. Congress is considering reforms to the program that would be incorporated in legislation to reauthorize the NFIP.
Investment Regulation. Our insurance subsidiaries are subject to regulationsstate regulation that require investment portfolio diversificationspecifies the types of investments that can be made and that limit the amountconcentration limits of investment in certain categories.invested assets. Failure to comply with these rules leads to the treatment of non-conforming investments as non-admitted assets for purposes of measuring statutory surplus. Further, in some instances, these rules require divestiture of non-conforming investments.
Exiting Geographic Markets; Canceling and Non-Renewing Policies. Most states regulate an insurer’s ability to exit a market. For example, states may limit, to varying degrees, an insurer’s ability to cancel and non-renew policies. Some states restrict or prohibit an insurer from withdrawing one or more types of insurance business from the state, except pursuant to a plan that is approved by the state insurance department. Regulations that limit cancellation and non-renewal and that subject withdrawal plans to prior approval requirements may restrict an insurer’s ability to exit unprofitable markets.
Variable Life Insurance and Registered Fixed Annuities. The sale and administration of variable life insurance and registered fixed annuities with market value adjustment features are subject to extensive
regulatory oversight at the federal and state level, including regulation and supervision by the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”).
Broker-Dealers, Investment Advisors and Investment Companies. The Allstate entities that operate as broker-dealers, registered investment advisors, and investment companies are subject to regulation and supervision by the SEC, FINRA and/or, in some cases, state securities administrators. In April 2016, the U.S. DepartmentThe SEC has adopted a best interest standard that has a compliance effective date of Labor (“DOL”) issued a rule that expands the rangeJune 30, 2020 and applies to recommendations of activities that would be consideredsecurities products to be “investment advice”retail customers. Certain other state and establishes a new framework for determining whether a person is afederal regulators are considering or have implemented best interest or fiduciary when selling mutual funds, variable and indexed annuities, or variable life products in connection with an Individual Retirement Account (“IRA”) or employee benefit plan covered under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The rule, in its current form, would have anstandards. Such standards could impact on the non-proprietary products provided by Allstate agencies and Allstate’s broker-dealer, Allstate Financial Services, LLC,broker-dealers, their sales processes, and volumes,sales volume, and producer compensation arrangements. Allstate does not currently sell proprietary annuities or proprietary variable life products in connection with IRAs or employee benefit plans covered under ERISA. Allstate Benefits offers universal life products which, when sold in an employee welfare benefit plan, may be considered subject to the fiduciary rule as an insurance product with an “investment component.” Products that we previously offered and continue to have in force, such as indexed annuities, could also be impacted by the rule. These more onerous requirements may increase regulatory costs and litigation exposure. The financial impact to
Allstate is expected to be immaterial. Compliance of certain components of the rule is required by April 10, 2017 and full compliance is required by January 1, 2018. On February 3, 2017, the President of the United States executed a memorandum directing the DOL to examine the fiduciary duty rule to determine whether it might adversely affect the ability of Americans to gain access to retirement information and financial advice. The outcome of the DOL’s examination of the rule is yet to be determined but could result in a delay in the compliance dates or changes to the rule’s requirements.
Dodd-Frank. Dodd-Frank: Covered Agreement. The Secretary of the Treasury (operating through FIO) and the Office of the U.S. Trade Representative (“USTR”) are jointly authorized, pursuant to the Dodd-Frank, to negotiate a Covered Agreement with one or more foreign governments, authorities, or regulatory entities.Agreements. A Covered Agreement is a written bilateral or multilateral agreement that “relates to the recognition of prudential measures with respect to the business of insurance or reinsurance that achieves a level of protection for insurance or reinsurance consumers that is substantially equivalent to the level of protection achieved under State insurance or reinsurance regulation.” A
On September 22, 2017, the U.S. and European Union (“EU”) signed a Covered Agreement. In addition to signing the Covered Agreement, becomes effective 90 days afterTreasury and the SecretaryUSTR jointly issued a policy statement clarifying how the U.S. views implementation of certain provisions of the TreasuryCovered Agreement. The policy statement affirms the U.S. system of insurance regulation, including the role of state insurance regulators as the primary supervisors of the business of insurance and USTR jointly submit a final agreement to the House Financial Services, House Ways and Means, Senate Banking, and Senate Finance committees. The House and Senate committees are not required to vote onaddresses several other key provisions of the Covered Agreement for it to become effective. As provided in Dodd-Frank, a Covered Agreement cannot preempt (i.e., displace) state insurance measures that govern an insurer’s rates, premiums, underwriting or sales practices; any state insurance coverage requirements; thewhich constituents sought clarity, including prospective application of antitrust laws of any state to the business of insurance; or any state insurance measure governing insurer capital or solvency, except where a state insurance measure results in less favorable treatment of a non-U.S. insurer than a U.S. insurer.
In November 2015, pursuant to Dodd-Frank, Treasury and USTR notified Congress that they were formally initiating negotiations on a Covered Agreement with the European Union (“EU”) (the “Covered Agreement”) addressing: permanent equivalence treatment of the U.S. regulatory system by the EU; confidential sharing of information across jurisdictions; and uniform treatment of EU-based reinsurers operating in the U.S., including with respect to reinsurance collateral. On January 13, 2017, the Secretary of the Treasuryagreements and USTR jointly submitted a Covered Agreement consistent with their November 2015 notification to Congress. Once effective,an affirmation that the Covered Agreement is designeddoes not require development of a group capital standard or group capital requirement in the U.S.
The U.S. has five years from the date of signing to secure equivalence treatment of the U.S. regulatory system by the EU, addresses the confidential sharing of information by regulators across jurisdictions, and eliminate reinsurance collateral requirements for EU-based foreign reinsurers in all States that meet certain conditions. In accordance with authorities provided in Dodd-Frank, the Covered Agreement may preempt (i.e., displace) state laws after 60 months fromamend its effective date if then existing State insurance measures affected by the Covered Agreement result in less favorable treatment of an EU insurer or reinsurer subject to the Covered Agreement than a U.S. insurer domiciled, licensed, or otherwise admitted in a U.S. State.
Prior to the Secretary of the Treasury and the USTR submitting the Covered Agreement to Congress, the NAIC had amended its Credit for Reinsurance Model Law and Regulation in 2011 (“Revised Reinsurance Model Law”), and statutory enactments implementing the amendments have been passed in 35 states. The amendments establish a new category of “certified reinsurers,” allowing domestic insurers to receive statutory capital credit for reinsurance cededlaws and regulations to certified reinsurers absentconform with the reinsurers fully collateralizing their assumed reinsurance obligations. Under the NAIC’s regulatory scheme preceding the Revised Reinsurance Model Law, which remains in effect in Illinois, domestic ceding companies are not allowed to take statutory capital credit for reserves ceded to unauthorized reinsurers unless the insurer withholds funds due to the reinsurer in an amount equal to the reserves, obtains a letter of credit on behalf of the unauthorized reinsurer equal to the amount of the reserves, or is the beneficiary of a credit for reinsurance trust with assets equal to the amount of the reserves.
The termsrequirements of the Covered Agreement provide states with 60 months fromor face federal preemption determinations by the effective date ofFIO. To address the Covered Agreement to modify their state-based regulatory requirements to comply with the terms of the Covered Agreement. In accordance with the terms of the Covered Agreement, and consistent with the authorities set forth in Dodd-Frank, after 42 months from the effective date of the Covered Agreement, the U.S. isNAIC has formally adopted revisions to begin a process of notifying states of potential preemptionits existing credit for any state insurance measure that is inconsistentreinsurance model law and model regulation to conform with the terms of the Covered Agreement. After 60 months from the effective daterequirements of the Covered Agreement with the expectation that states will adopt and implement the modified model law and regulation by September 2022.
On December 19, 2018, the U.S. isand the United Kingdom (“UK”) signed a separate Covered Agreement consistent with the U.S.-EU Covered Agreement to complete any preemption determinations with respect to anycoordinate regulation of the insurance industry doing business in the U.S. State insurance measures subject to evaluation.and UK in the event the UK leaves
On June 23, 2016, the U.K. held a referendum in which they voted to leave
Item 1. Business 2019 Form 10-K
the EU. FollowingConsistent with the vote,U.S.-EU Covered Agreement (the “Agreement”) signed in 2017, Treasury and the U.K. is developingUSTR also issued a formal plan for withdrawal under Article 50policy statement regarding implementation of the Lisbon TreatyAgreement affirming the role that state insurance regulators play as the primary supervisors of the U.S. insurance industry. The Agreement will become effective once U.S. and UK governments exchange written notifications that they have completed all domestic internal requirements and procedures. This is expectedanticipated to commence as early as March of 2017. Ifoccur when the British Parliament authorizes the initiation of Brexit discussions in March 2017 pursuant to Article 50, withdrawalUK is expected to be completed during 2019. Article 50 provides only for the negotiation of a withdrawal arrangement but does not address future relationships between the U.K. and EU. Upon exiting the EU, the U.K. insurance market will no longer covered by the Agreement following the UK withdrawal from the EU.
Division Statute. On November 27, 2018, the Illinois General Assembly passed legislation authorizing a statute that makes available a process by which a domestic insurance company may divide into two or more domestic insurance companies. The statute, which became effective January 1, 2019, can be inused to divide continuing blocks of insurance business from insurance business no longer marketed, or otherwise has been discontinued, into separate companies with separate capital. The statute can also be used for sale to a third party or to manage risks associated with indemnification programs. Before a plan of division can be effected it must be approved according to the scopeorganizational documents of the Covered Agreement.dividing insurer and submitted for approval by the Illinois Department of Insurance.
Federal Reserve Board. In June 2016, the Federal Reserve Board (“FRB”) issued an Advanced Notice of Proposed Rulemaking soliciting comments on two separate capital framework proposals developed for insurance groups designated as systemically important financial institutions (“SIFI”)Privacy Regulation and insurance companies that own insured depository institutions (“IDIs”). As of December 31, 2016, we are not designated as a SIFI and do not own an IDI. The proposals at a very high level describe how capital and financial risk could be measured. The capital proposal applicable to insurance IDIs uses a Building Block Approach (“BBA”).
The BBA uses, as a starting point, available and required capital obtained from existing regulatory frameworks, such as the National Association of Insurance Commissioners Risk-Based Capital, developed from financial statements constructed using Statutory Accounting Principles (“SAP”) and applies a Basel-like approach to remaining assets not covered by a specific regulatory framework. The proposed capital framework applicable to SIFI’s would be a Consolidated Approach, which would rely on a new risk-based framework to be applied to consolidated U.S. GAAP based financial measures.
While the proposed application of the SIFI proposal is limited, the potential implication of its wider application could be significant. Most insurance groups, including those that currently prepare financial statements in accordance with U.S. GAAP, typically do not develop audited U.S. GAAP financial statements for all domestic and international insurance and non-insurance subsidiaries. The current Consolidated Approach proposal as communicated does not require insurance companies, subject to the framework, to prepare U.S. GAAP financial statements for their underlying subsidiaries. However, any change to the final rule, which requires application of risk-based capital requirements to audited U.S. GAAP financial statements at the subsidiary level would require the preparation of U.S. GAAP financial statements. This could create significant incremental costs to maintain audited financial statements and maintenance of regulatory capital computations for subsidiaries on both a U.S. GAAP and SAP basis. The FRB proposals remain in the development stage and their final form, content, and applicability of the framework(s) may be significantly different from the current proposals.
Privacy Regulation.Data Security. Federal law and the laws of many states require financial institutions to protect the security and confidentiality of customerconsumer information and to notify customersconsumers about their policies and practices relating to collection, use, and disclosure of customerconsumer information and their policies relating to protecting the security and confidentiality of that information. Federal law and the laws of many states also regulate disclosures and disposal of customerconsumer information. Congress, state legislatures, and regulatory authorities are expected to consider additional regulation relating to privacy and other aspects of customerconsumer information.
For example, the European Commission adopted the General Data Protection Regulation, which greatly increases the jurisdictional reach of its laws and adds a broad array of requirements for handling personal data, such as the public disclosure of significant data breaches, privacy impact assessments, data portability and the appointment of data protection officers. The California Consumer Privacy Act, which took effect in January 2020, adopted similar compliance requirements for businesses that collect personal information on California residents. Additional states are likely to adopt similarly themed privacy requirements in the future. Further, the New York State Department of Financial Services has issued cybersecurity regulations for financial services institutions, including banking and insurance entities, that impose a variety of detailed security measures on covered entities. The NAIC has also adopted the Insurance Data Security Model Law, which, if adopted as state legislation, would establish standards for data security and for the investigation of and notification to insurance commissioners of cybersecurity events. We cannot predict the impact on our business of possible
future legislative measures regarding privacy or cybersecurity.
Asbestos. Congress has repeatedly considered legislation to address asbestos claims and litigation in the past, and during the last Congress, the House of Representatives passed the Furthering Asbestos Claims Transparency Act. The Act is designed to enable asbestos trust funds to pay only those who are entitled by law to compensation from the funds. The Act failed to move in the Senate. The Act must now be re-introduced in the new Congress to be considered by either the House or Senate.past. We cannot predict the impact on our business of possible future legislative measures regarding asbestos.
Environmental. Environmental pollution and clean-up of polluted waste sites is the subject of both federal and state regulation. The Comprehensive Environmental Response Compensation and Liability Act of 1980 (“Superfund”(the “Superfund”) and comparable state statutes (“mini-Superfund”(the “mini-Superfunds”) govern the clean-up and restoration of waste sites by Potentially Responsible Parties (“PRPs”). The Superfund and the mini-Superfunds (Environmental(collectively, the “Environmental Clean-up LawsLaws” or “ECLs”) establish a mechanism to assign liability to PRPs or to fund the clean-up of waste sites if PRPs fail to do so. The extent of liability to be allocated to a PRP is dependentdepends on a variety of factors. By some estimates, there are thousands of potential waste sites subject to clean-up, but the exact number is unknown. The extent of clean-up necessary and the process of assigning liability remain in dispute. The insurance industry is involved in extensive litigation regarding coverage issues arising out of the clean-up of waste sites by insured PRPs and the insured parties’ alleged liability to third parties responsible for the clean-up. The insurance industry, including Allstate, has disputed and is disputing many such claims. Key coverage issues include whether the Superfund response, investigation, and clean-up costs are considered damages under the policies; trigger of coverage; the applicability of several types ofwhether coverage has been triggered; whether any pollution exclusions;exclusion applies; whether there has been proper notice of claims; whether administrative liability triggers the duty to defend; whether there is an appropriate allocation of liability among triggeredpotentially responsible insurers; and whether the liability in question falls within the definition of an “occurrence.” Identical coverage issues exist for clean-up and waste sites not covered under the Superfund. To date, courts have been inconsistent in their rulings on these issues.
Allstate’s exposure to liability with regard to its insureds that have been, or may be, named as PRPs is uncertain. While comprehensive Superfund reform proposals have been introduced in Congress, only modest reform measures have been enacted. In May 2017, the Environmental Protection Agency created a Superfund Task Force that issued proposed reforms in a July 2018 report. These recommendations address expediting clean-up and remediation processes, reducing the financial burden of the clean-up process, encouraging private investment, promoting redevelopment and community revitalization, and building and strengthening partnerships. We cannot predict which, if any, of these reforms will be enacted.
Developments in the insurance and reinsurance industries have fostered a movement to segregate asbestos, environmental and other discontinued lines exposures into separate legal entities with dedicated capital. Regulatory bodies in certain cases have supported these actions. We are unable to determine the impact, if any, that these developments will have on the collectability of reinsurance recoverables in the future.
The Allstate Corporation 17
INTERNET WEBSITE2019 Form 10-KItem 1. Business
Website
Our Internet website address is allstate.com. The Allstate Corporation’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports that we file or furnish pursuant to Section 13(a) of the Securities Exchange Act of 1934 are available on the Investor Relations section of our website (www.allstateinvestors.com), free of charge, as soon as reasonably practicable after they are electronically filed or furnished to the SEC. In addition, our corporate governance guidelines,Corporate Governance Guidelines, our codeGlobal Code of ethics,Business Conduct, and the charters of our Audit Committee, Compensation and Succession Committee, Executive Committee, Nominating and Governance Committee, and Risk and Return Committee are available on the Investor Relations section of our website and in print to any stockholder who requests copies by contacting Investor Relations, The Allstate Corporation, 2775 Sanders Road, Northbrook, Illinois 60062-6127, 1-847-402-2800. The information found on our website is not incorporated by reference into this Annual Report on Form 10-K or in any other report or document filed with the SEC.
OTHER INFORMATION ABOUT ALLSTATE
Other Information About Allstate
As of December 31, 2016,2019, Allstate had approximately 43,05045,780 full-time employees and 450510 part-time employees.
Allstate continues to explore and invest in innovative solutions for the consumer and to expand its use of global resources, including business process and information technology operations in India and Northern Ireland.
Information regarding revenues generated outside of the United States is incorporated in this Part I, Item 1 by reference to Note 19 of the consolidated financial statements.
Allstate’s four businessseven reportable segments use shared services, including human resources, investment, finance, information technology and legal services, provided by Allstate Insurance Company and other affiliates.
Although the insurance business generally is not seasonal, claims and claims expense for the Allstate Protection segment tend to be higher for periods of severe or inclement weather.
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| • | “Allstate®” is a very well-recognized brand name in the United States. We use the “Allstate®,” “Esurance®,” “Encompass®” and “Answer Financial®” brands extensively in our business. We also provide additional protection products and services through “AllstateSM Protection Plans”, “Allstate Dealer Services®”, “Allstate Roadside Services®”, “Arity®”, “AllstateSM Identity Protection” and “Allstate Benefits®”. These brands, products and services are supported with the related service marks, logos, and slogans. Our rights in the United States to these names, service marks, logos and slogans continue as long as we continue to use them in commerce. Many service marks used by Allstate are the subject of renewable U.S. and/or foreign service mark registrations. We believe that these service marks are important to our business and we intend to maintain our rights to them. |
“Allstate” is a very well-recognized brand name in the United States. We use the names “Allstate,” “Esurance,” “Encompass” and “Answer Financial” extensively in our business, along with related service marks, logos, and slogans, such as “Good Hands®.” Our rights in the United States to these names, service marks, logos, and slogans continue so long as we continue to use them in commerce. Many service marks used by Allstate are the subject of renewable U.S. and/or foreign service mark registrations. We believe that these service marks are important to our business and we intend to maintain our rights to them.
Item 1. Business 2019 Form 10-K
Information about our Executive Officers of the Registrant
The following table sets forth the names of our executive officers, their ages as of February 1, 2017,2020, their positions, business experience, and the years of their first election as officers. “AIC” refers to Allstate Insurance Company.
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| Name | | Age | | Position/Offices | | Year First Elected Officer |
| Thomas J. Wilson | | 59 | | Chairman of the Board and Chief Executive Officer of The Allstate Corporation and of AIC. | | 1995 |
| Don Civgin | | 55 | | President, Emerging Businesses of AIC. | | 2008 |
| Mary Jane Fortin | | 52 | | President, Allstate Financial of AIC. | | 2015 |
| Sanjay Gupta | | 48 | | Executive Vice President, Marketing, Innovation and Corporate Relations of AIC. | | 2012 |
| Suren Gupta | | 55 | | Executive Vice President, Enterprise Technology and Strategic Ventures of AIC. | | 2011 |
| Harriet K. Harty | | 50 | | Executive Vice President, Human Resources of AIC. | | 2012 |
| Susan L. Lees | | 59 | | Executive Vice President, General Counsel, and Secretary of The Allstate Corporation and of AIC (Chief Legal Officer). | | 2008 |
| Samuel H. Pilch | | 70 | | Senior Group Vice President and Controller of The Allstate Corporation and of AIC. | | 1996 |
| Steven E. Shebik | | 60 | | Executive Vice President and Chief Financial Officer of The Allstate Corporation and of AIC. | | 1999 |
| Matthew E. Winter | | 60 | | President of The Allstate Corporation and of AIC. | | 2009 |
Each of the officers named abovebelow may be removed from office at any time, with or without cause, by the board of directors of the relevant company.
Messrs. Wilson, Civgin, Suren Gupta, Pilch, Shebik and Winter, and Mses. Harty and Lees have held the listed positions for at least the last five years or have served |
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| Name | | Age | | Position with Allstate and Business Experience | | Year First Elected Officer |
| Thomas J. Wilson | | 62 | | Chair of the Board (May 2008 to present), President (June 2005 to January 2015 and February 2018 to present), and Chief Executive Officer (January 2007 to present) of The Allstate Corporation and AIC. | | 1995 |
| Carolyn D. Blair | | 51 | | Executive Vice President and Chief Human Resources Officer of AIC (October 2019 to present); President of Tartan Advisory Group, Inc. (November 2018 to October 2019); Executive Vice President, Chief Human Resources & Communications Officer of Sun Life Financial (April 2014 to June 2018). | | 2019 |
| Elizabeth A. Brady | | 55 | | Executive Vice President and Chief Marketing, Customer and Communications Officer of AIC (January 2020 to present); Executive Vice President and Chief Marketing, Innovation and Corporate Relations Officer of AIC (August 2018 to January 2020); Senior Vice President, Global Brand Management of Kohler Co. (November 2013 to July 2018). | | 2018 |
| Don Civgin | | 58 | | Chief Executive Officer, Protection Products and Services of AIC (January 2020 to present); President, Service Businesses of AIC (January 2018 to January 2020); President, Emerging Businesses of AIC (February 2015 to January 2018); President and Chief Executive Officer, Allstate Financial of AIC (March 2012 to February 2015). | | 2008 |
John E. Dugenske
| | 53 | | President, Investments and Financial Products of AIC (January 2020 to present); Executive Vice President and Chief Investment and Corporate Strategy Officer of AIC (January 2018 to January 2020); Executive Vice President and Chief Investment Officer of AIC (March 2017 to January 2018); Group Managing Director and Global Head of Fixed Income at UBS Global Asset Management (December 2008 to February 2017). | | 2017 |
| Mary Jane Fortin | | 55 | | President, Financial Products of AIC (January 2020 to present); President, Allstate Financial Businesses of AIC (February 2017 to January 2020); President, Allstate Life and Retirement of AIC (October 2015 to February 2017); Executive Vice President and Chief Financial Officer, Global Consumer Insurance of AIG (April 2012 to September 2015). | | 2015 |
| Suren Gupta | | 58 | | Executive Vice President, Chief Information Technology and Enterprise Services Officer of AIC (January 2020 to present); Executive Vice President, Enterprise Technology and Strategic Ventures of AIC (February 2015 to January 2020); Executive Vice President, Allstate Technology and Operations of AIC (April 2011 to February 2015). | | 2011 |
| Susan L. Lees | | 62 | | Executive Vice President, Chief Legal Officer, General Counsel, and Secretary of The Allstate Corporation and AIC (January 2020 to present); Executive Vice President, General Counsel, and Secretary of The Allstate Corporation (May 2013 to January 2020) and of AIC (June 2013 to January 2020); Executive Vice President and General Counsel of The Allstate Corporation (June 2012 to May 2013) and of AIC (June 2012 to June 2013). | | 2008 |
| Jesse E. Merten | | 45 | | Executive Vice President and Chief Risk Officer of AIC (December 2017 to present); Treasurer of The Allstate Corporation (January 2015 to April 2019) and of AIC (February 2015 to May 2019); Senior Vice President and Chief Financial Officer, Allstate Financial of AIC (January 2012 to February 2015).
| | 2012 |
| John C. Pintozzi | | 54 | | Senior Vice President, Controller, and Chief Accounting Officer of The Allstate Corporation (August 2019 to present) and of AIC (September 2019 to present); Senior Vice President and Chief Financial Officer, Allstate Investments (May 2012 to August 2019) | | 2005 |
| Mario Rizzo | | 53 | | Executive Vice President and Chief Financial Officer of The Allstate Corporation and AIC (January 2018 to present); Senior Vice President and Chief Financial Officer, Allstate Personal Lines of AIC (February 2015 to January 2018); Senior Vice President and Treasurer of The Allstate Corporation (November 2010 to January 2015) and of AIC (November 2010 to February 2015).
| | 2010 |
| Glenn T. Shapiro | | 54 | | President, Personal Property-Liability of AIC (January 2020 to present); President, Allstate Personal Lines of AIC (January 2018 to January 2020); Executive Vice President, Claims of AIC (April 2016 to January 2018); Executive Vice President and Chief Claims Officer of Liberty Mutual Commercial Insurance (May 2011 to March 2016). | | 2016 |
| Steven E. Shebik | | 63 | | Vice Chair of The Allstate Corporation and AIC (January 2018 to present); Executive Vice President and Chief Financial Officer of The Allstate Corporation (February 2012 to January 2018) and of AIC (March 2012 to January 2018).
| | 1999 |
The Allstate in various executive or administrative capacities for at least five years.Corporation 19
Prior to joining Allstate in 2015, Ms. Fortin served as Chief Financial Officer of AIG’s Consumer Insurance business from 2012 to 2015 and President and CEO of American General Life Insurance Company from 2009 to 2012.
Prior to joining Allstate in 2012, Mr. Sanjay Gupta served as Chief Marketing Officer of Ally Financial from 2008 to 2012 and Senior Vice President of Global Consumer and Small Business Marketing at Bank of America from 2001 to 2008.
2019 Form 10-KItem 1. Business
Forward-Looking Statements
This report contains “forward-looking statements” that anticipate results based on our estimates, assumptions and 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,” “seeks,” “expects,” “will,” “should,” “anticipates,” “estimates,” “intends,” “believes,” “likely,” “targets” and other words with similar meanings. These statements may address, among other things, our strategy for growth, catastrophe exposure management, product development, investment results, regulatory approvals, market position, expenses, financial results,
litigation and reserves. We believe that these statements are based on reasonable estimates, assumptions and plans. Forward-looking statements speak only as of the date on which they are made, and we assume no obligation to update any forward-looking statements as a result of new information or future events or developments. In addition, forward-looking statements are subject to certain risks or uncertainties that could cause actual results to differ materially from those communicated in these forward-looking statements. These risks and uncertainties include, but are not limited to, those described in Part 1, “Item 1A. Risk Factors” and elsewhere in this report and those described from time to time in our other reports filed with the Securities and Exchange Commission.
Part I - Item 1A. Risk Factors and Other Disclosures 2019 Form 10-K
Item 1A. Risk Factors
In addition to the normal risks of business, weSummary Risks are subject to significant risks and uncertainties, including those listed below, which apply to us as an insurer, investor and a provider of other productscategorized by (1) insurance and financial services. Theseservices, (2) business, strategy and operations and (3) macro, regulatory and risk environment. Many risks include insurance, investment, financial, operationalmay affect more than one category and strategic risks. Theseare included where the impact is most significant. The table below includes examples of risks from each category.
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| Insurance and financial services | | | Business, strategy and operations | | | Macro, regulatory and risk environment |
| Risks that are unique to the insurance and financial services industries | | Risks that are unique to Allstate’s business and operating model | | Risks that impact most companies |
•Claim frequency and severity volatility •Catastrophes and severe weather •Loss cost estimates are complex and losses are unknown at the time policies are sold • Investment results are subject to volatility and valuation judgments • Large-scale pandemic events | | • Highly competitive industry, impacted by new and changing technologies • Operating model effectiveness in light of changing customer preferences • Ability to maintain catastrophe reinsurance programs and limits • Fluctuations in financial strength and ratings
| | • Adverse changes in economic and capital market conditions •Cybersecurity controls and privacy •Regulatory and political changes • Loss of key business relationships • Ability to attract, develop and retain talent |
Allstate manages these risks through an Enterprise Risk and Return Management framework on an integrated basis following our risk and return principles.
See Management’s Discussion and Analysis (“MD&A”), Enterprise Risk and Return Management for further details. Consider these cautionary statements should be considered carefully together with other factors discussed elsewhere in this document, in our filings with the Securities and Exchange Commission (“SEC”) or in materials incorporated therein by reference.
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| Insurance and financial services |
Unexpected increases in the Property-Liability business
As afrequency or severity of property and casualty insurer, weclaims may faceadversely affect our results of operations and financial condition
A significant increase in claim frequency could adversely affect our results of operations and financial condition. Changes in mix of business, miles driven, weather, distracted driving or other factors can lead to changes in auto claim frequency. We may experience volatility in claim frequency, and short-term trends may not be predictive of future losses over the longer term.
Increases in claim severity can arise from numerous causes that are inherently difficult to predict. The following factors may impact claim severity for auto bodily injury, property damage and homeowners coverages:
Bodily injury — inflation in medical costs, litigation trends and precedents and regulation
Vehicle property damage — inflation in repair costs, including parts and labor rates, mix of total losses declared, costs associated with repairing sophisticated newer vehicles, model year and used-car values
Homeowners — inflation in the construction industry, building materials and home furnishings, changes in the mix of loss type, and other economic and environmental factors, including short-term supply imbalances for services and supplies in areas affected by catastrophes
Catastrophes and severe weather events may subject us to significant losses
Because of the exposure of our property and casualty business to catastrophicCatastrophic events Allstate Protection’scould adversely affect operating results and financial condition maycause them to vary significantly from one period to the next. Catastrophes can be caused by various natural and man-made events, including earthquakes, volcanic eruptions, wildfires, tornadoes, tsunamis, hurricanes, tropical storms, terrorism or industrial accidents. We may incur catastrophe losses in our auto and property business in excess of: (1) those experienced in prior years, (2) the average expected level used in pricing, (3) our current reinsurance coverage limits, or (4) loss estimates from external hurricane and earthquake models at various levels of probability. Despite our catastrophe management programs, we are exposed to catastrophes that could have a material effect on our operating results and financial condition. For example, our historical catastrophe experience includes losses relating to Hurricane Katrina in 2005 totaling $3.6 billion, the Northridge earthquake of 1994 totaling $2.1 billion and Hurricane Andrew in 1992 totaling $2.3 billion. We are also exposed to assessments from the California Earthquake Authority and various state-created insurance facilities, and to losses that could surpass the capitalization of these facilities. Although we have historically financed the settlement of catastrophes from operating cash flows, including very large catastrophes that had complicated issues resulting in settlement delays,Also, our liquidity could be constrained by a catastrophe, or multiple catastrophes, which could result in extraordinary losses, sales of investments or a downgrade of our debt and/or financial strength ratings.
In addition, weCatastrophic losses are caused by wind and hail, wildfires, tornadoes, hurricanes, tropical storms, earthquakes, volcanic eruptions, terrorism and industrial accidents and other such events.
Our personal property insurance business may incur catastrophe losses greater than:
Those experienced in prior years
The average expected level used in pricing
Current reinsurance coverage limits
Loss estimates from hurricane and earthquake models at various levels of probability
Property and casualty businesses are subject to claims arising from severe weather events such as winter storms, rain, hail and high winds. The incidence and severity of weather conditions resulting in claims are largely unpredictable. There is generally an increase
The total number of policyholders affected by the event, the severity of the event and the coverage provided contribute to catastrophe and severe weather losses. Increases in the frequencyinsured values of covered property, geographic concentration and the number of policyholders exposed to certain events
The Allstate Corporation 21
2019 Form 10-KPart I - Item 1A. Risk Factors and Other Disclosures
could increase the severity of autoclaims from catastrophic and property claims when severe weather conditions occur.events.
The natureLimitations in analytical models used to assess and levelpredict the exposure to catastrophe losses may adversely affect our results of catastrophes in any period cannot be predicted and could be material to our operating resultsoperations and financial condition
AlongWe use internally developed and third-party vendor models along with others in the insurance industry, Allstate Protection uses models developed by third party vendors as well as our own historichistorical data in assessing our property insuranceto assess exposure to catastrophe losses. TheseThe models assume various conditions and probability scenarios. Such models doscenarios and may not necessarily accurately predict future losses or accurately measure losses currently incurred. Catastrophe models, which have been evolving since the early 1990s, use historical information
Price competition and scientific research about hurricaneschanges in underwriting standards in property and earthquakes and also utilize detailed information about our in-force business. While we use this information in connection with our pricing and risk management activities, there are limitations with respect to its usefulness in predicting losses in any reporting period as actual catastrophic events vary considerably. Other limitations are evident in significant variations in estimates between models, material increases and decreases in results due to model changes and refinements of the underlying data elements and actual conditions that are not yet well understood or may not be properly incorporated into the models.
Our catastrophe management strategycasualty businesses may adversely affect premium growth
Due to Allstate Protection’s catastrophe risk management efforts, the size of our homeowners business has been negatively impacted in the past and may be negatively impacted if we take further actions. Homeowners premium growth rates and retention could be adversely impacted by adjustments to our business structure, size and underwriting practices in markets with significant severe weather and catastrophe risk exposure.
Unexpected increases in the frequency or severity of claims may adversely affect our operating results and financial condition
Unexpected changes in the frequency or severity of claims will affect the profitability of our Allstate Protection segment. Our Allstate Protection segment may experience volatility in claim frequency from time to time, and short-term trends may not continue over the longer term. Changes in auto claim frequency may result from changes in mix of business, miles driven or other
macroeconomic factors. A significant increase in claim frequency could have an adverse effect on our operating results and financial condition.
Changes in bodily injury claim severity are impacted by inflation in medical costs, litigation trends and precedents, regulation and the overall safety of automobile travel. Changes in auto property damage claim severity are driven primarily by inflation in the cost to repair vehicles, including parts and labor rates, the mix of vehicles that are declared total losses, model year mix as well as used car values. Changes in homeowners claim severity are driven by inflation in the construction industry, building materials and home furnishings, changes in the mix of loss type, and by other economic and environmental factors, including short-term supply imbalances for services and supplies in areas affected by catastrophes. Increases in claim severity can arise from unexpected events that are inherently difficult to predict. Although we pursue various loss management initiatives in the Allstate Protection segment in order to mitigate future increases in claim severity, there can be no assurances that these initiatives will successfully identify or reduce the effect of future increases in claim severity.
A regulatory environment that requires rate increases to be approved and that can dictate underwriting practices and mandate participation in loss sharing arrangements may adversely affect our operating results and financial condition
From time to time, political events and positions affect the insurance market, including efforts to suppress rates to a level that may not allow us to reach targeted levels of profitability. For example, if Allstate Protection’s loss ratio compares favorably to that of the industry, state or provincial regulatory authorities may impose rate rollbacks, require us to pay premium refunds to policyholders, or challenge or delay our efforts to raise rates even if the property and casualty industry generally is not experiencing regulatory challenges to rate increases. Such challenges affect our ability to obtain approval for rate changes that may be required to achieve targeted levels of profitability and returns on equity. We are pursuing auto insurance rate increases in 2017. Our ability to purchase reinsurance required to reduce our catastrophe risk in designated areas may be dependent upon the ability to adjust rates for its cost. If we are unsuccessful, our operating results could be negatively impacted.
In addition to regulating rates, certain states have enacted laws that require a property-liability insurer conducting business in that state to participate in assigned risk plans, reinsurance facilities and joint underwriting associations or require the insurer to offer coverage to all consumers, often restricting an insurer’s ability to charge the price it might otherwise charge. In these markets, we may be compelled to underwrite significant amounts of business at lower than desired rates, possibly leading to an unacceptable return on equity, or as the facilities recognize a financial deficit, they may in turn have the ability to assess participating insurers, adversely affecting our results of operations and financial condition. Lawscondition
The personal property-liability market is highly competitive with carriers competing through underwriting, advertising, price, customer service, innovation and regulations of many states also limit an insurer’s ability to withdraw from onedistribution. Companies can alter underwriting standards, lower prices and increase advertising, which could result in lower growth or more lines of insuranceprofitability for Allstate. A decline in the state, except pursuant to a plan that is approved by the state insurance department. Additionally, certain states require insurers to participate in guaranty funds for impairedgrowth or insolvent insurance companies. These funds periodically assess losses against all insurance companies doing business in the state. Our operating results and financial condition could be adversely affected by any of these factors.
Impacts from the Covered Agreement may involve the introduction of new capital and solvency regulations and changes in state insurance laws that may adversely affect our operating results and financial condition
The Covered Agreement extends to capital and solvency matters and does not recognize the National Association of Insurance Commissioners (“NAIC”) Risk-Based Capital (“RBC”) as equivalent to the European Union’s (“EU’s”) Solvency II capital and solvency framework. The solvency and capital requirements in the Covered Agreement are expressed in terms of group supervision, which is the basis of Solvency II, but not consistent with the NAIC RBC framework, which evaluates capital and solvency on a legal entity basis. While the NAIC is considering the potential future adoption of a group supervision based framework, there is no certainty that the effort will be successful or timely in meeting the requirements of the Covered Agreement when it becomes effective. In the absence of a group supervision based capital and solvency framework, U.S. insurers may become subject to a group supervision based capital and solvency framework developed by the Federal Reserve Board (“FRB”) or alternatively, the Solvency II framework, which the Covered Agreement implicitly deems equivalent to the FRB group capital proposal, which may adversely affect our measurement of regulatory capital adequacy.
Existing law in 15 states require some form of collateral to be posted for the benefit of the ceding insurer when an assuming reinsurer is not domiciled in the ceding company’s state of domicile. In the remaining states, laws governing reinsurance typically require an assuming reinsurer to post an amount of collateral, which may be zero, based on an independently determined financial strength rating and other factors including whether a particular reinsurer has achieved certified status. Through the authority provided by Dodd-Frank, a Covered Agreement may preempt state insurance laws if they are incompatible with the terms of a Covered Agreement. The Covered Agreement submitted to Congress provides states with 60 months to conform their laws with the terms of the Covered Agreement to avoid preemption. The Covered Agreement between the U.S. and EU could eliminate the requirement for all EU reinsurers that meet certain minimum requirements to post collateral. The scope of the Covered Agreement includes amended reinsurance agreements. Depending on the interpretation of amended, which could include administrative modifications, a release of existing collateral could occur that may adversely affect our operating results and financial condition if reinsurers fail to pay our reinsurance billings.
Changes in the level of price competition and the use of underwriting standards in the property and casualty business may adversely affect our operating results and financial condition
The property and casualty market historically has been cyclical with periods characterized by relatively high levels of price competition, less restrictive underwriting standards and relatively low premium rates, followed by periods of relatively lower levels of competition, more selective underwriting standards and relatively high premium rates. A downturn in the profitability of the property and casualty businessbusinesses could have a material effect on our operating results of operations and financial condition.
Additionally, we may change premium ratesProperty and underwriting standards in response to underwriting results. Premium rate increases and adopting tighter underwriting practices may result in a decline in new business and renewals and negatively impact our competitive position.
The potential benefits of our sophisticated risk segmentation process may not be fully realized
We believe that our sophisticated pricing and underwriting methods have allowed us to offer competitive pricing to attract and retain more customers while continuing to operate profitably. However, because many of our competitors seek to adopt underwriting criteria and sophisticated pricing models similar to those we use, our competitive advantage could decline or be lost. Further, the use of increasingly sophisticated pricing models is being reviewed by regulators and special interest groups. Competitive pressures could also force us to modify our sophisticated pricing models. Furthermore, we cannot be assured that these sophisticated pricing models will accurately reflect the level of losses that we will ultimately incur.
Actualcasualty actual claims incurredcosts may exceed current reserves established for claims due to changes in the inflationary, regulatory and may adversely affect our operating results and financial conditionlitigation environment
RecordedEstimating claim reserves inis an inherently uncertain and complex process as expected losses are unknown at the Property-Liability businesstime policies are based onsold. We continually refine our best estimates of losses both reported and incurred but not reported claims reserves (“IBNR”), after considering known facts and interpretations of circumstances and using modelsthe circumstances.
Our reserving methodology may be impacted by the following:
Models that rely on the assumption that past loss development patterns will persist into the future. future
Internal factors are considered including our experience with similar cases, actual claims paid, historical trends involving claim payment patterns, pending levels of unpaid claims, loss management programs, product mix, contractual terms and changes in claim reporting and settlement practices. practices
External factors are also considered, such as inflation, court decisions;decisions, changes in law;law or litigation imposing unintended coverage, and benefits such as disallowing the use of benefit payment schedules, requiring coverage designed to cover losses that occur in a single policy period to losses that develop continuously over multiple policy periods or requiring the availability of multiple limits; regulatory requirements and economic conditions. Because reserves are estimates of the unpaid portion of losses that have occurred, including IBNR losses, the establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain and complex process that is continually refined to reflect current processes and practices. conditions
The ultimate cost of losses may vary materially from recorded reserves and such variance may adversely affect our operating results of operations and financial condition as the reserves and amounts due from reinsurers are reestimated.
Predicting claim costs relating to asbestos, environmental and other discontinued lines is inherently uncertain and may have a material effect on our operating results and financial condition
The processSee MD&A, Application of estimating asbestos, environmental and other discontinued lines liabilities is complicated by complex legal issues concerning, among other things, the interpretation of various insurance policy provisions and whether losses are covered, or were ever intended to be covered, and whether losses could be recoverable through retrospectively determined premium, reinsurance or other contractual agreements. Asbestos-related bankruptcies and other asbestos litigation are complex, lengthy proceedings that involve substantial uncertaintyCritical Accounting Estimates for insurers. Actuarial techniques and databases used in estimating asbestos, environmental and other discontinued lines net loss reserves may prove to be inadequate indicators of the extent of probable loss. Ultimate net losses from these discontinued lines could materially exceed established loss reserves and expected recoveries and have a material effect on our operating results and financial condition as the reserves are reestimated.Risks Relating to the Allstate Financial Segment
Changes in underwriting and actual experience could materially affect profitability and financial condition
Our product pricing includes long-term assumptions regarding investment returns, mortality, morbidity, persistency and operating costs and expenses of the business. We establish target returns for each product based upon these factors and the average amount of capital that we must hold to support in-force contracts taking into account rating agencies and regulatory requirements. We monitor and manage our pricing and overall sales mix to achieve target new business returns on a portfolio basis, which could result in the discontinuation or de-emphasis of products and a decline in sales. Profitability from new business emerges over a period of years depending on the nature and life of the product and is subject to variability as actual results may differ from pricing assumptions. Additionally, many of our products have fixed or guaranteed terms that limit our ability to increase revenues or reduce benefits, including credited interest, once the product has been issued.
Our profitability in this segment depends on the sufficiency of premiums and contract charges to cover mortality and morbidity benefits, the adequacy of investment spreads, the persistency of policies, the management of market and credit risks associated
with investments, and the management of operating costs and expenses within anticipated pricing allowances. Legislation and regulation of the insurance marketplace and products could also affect our profitability and financial condition.
Changes in reserve estimates may adversely affect our operating results
The reserve for life-contingent contract benefits payable under insurance policies,including traditional life insurance, life-contingent immediate annuities and voluntary accident and health insurance products, is computed on the basis of long-term actuarial assumptions of future investment yields, mortality, morbidity, persistency and expenses. Mortality and morbidity may continue to improve in the future from current levels, due to medical advancements that have resulted in policyholders living longer than anticipated. We periodically review the adequacy of these reserves on an aggregate basis and if future experience differs significantly from assumptions, adjustments to reserves and amortization of deferred policy acquisition costs (“DAC”) may be required that could have a material effect on our operating results. We also review these policies on an aggregate basis for circumstances where projected profits would be recognized in early years followed by projected losses in later years. If this circumstance exists in the future, we will be required to accrue a liability, during the period of profits, to offset the losses at such time as the future losses are expected to commence.
Changes in market interest rates or performance-based investment returns may lead to a significant decrease in the profitability of spread-based products
Our ability to manage the in-force Allstate Financial spread-based products, such as fixed annuities, is dependent upon maintaining profitable spreads between investment returns and interest crediting rates. When market interest rates decrease or remain at relatively low levels, proceeds from investments that have matured or have been prepaid or sold may be reinvested at lower yields, reducing investment spread. Lowering interest crediting rates on some products in such an environment can partially offset decreases in investment yield. However, these changes could be limited by regulatory minimum rates or contractual minimum rate guarantees on many contracts and may not match the timing or magnitude of changes in investment yields. Increases in market interest rates can have negative effects on Allstate Financial, for example by increasing the attractiveness of other investments to our customers, which can lead to increased surrenders at a time when the segment’s fixed income investment asset values are lower as a result of the increase in interest rates. This could lead to the sale of fixed income securities at a loss. In addition, changes in market interest rates impact the valuation of derivatives embedded in equity-indexed annuity contracts that are not hedged, which could lead to volatility in net income. Additionally, the amount of net investment income from our performance-based investments backing the immediate annuity liabilities can vary substantially from quarter to quarter. Significant volatility or market downturns could adversely impact net investment income, valuation and returns on these investments.
Changes in estimates of profitability on interest-sensitive life products may adversely affect our profitability and financial condition
DAC related to interest-sensitive life contracts is amortized in proportion to actual historical gross profits and estimated future gross profits (“EGP”) over the estimated lives of the contracts. The principal assumptions for determining the amount of EGP are mortality, persistency, expenses, investment returns, including capital gains and losses on assets supporting contract liabilities, interest crediting rates to contractholders, and the effects of any hedges. Updates to these assumptions (commonly referred to as “DAC unlocking”) could result in accelerated amortization of DAC and thereby adversely affect our profitability and financial condition. In addition, assumption changes impact the reserve for secondary guarantees on interest-sensitive life insurance and could also lead to volatility in net income.
Reducing our concentration in spread-based business and exiting certain distribution channels may adversely affect reported results
We have been reducing our concentration in spread-based business since 2008 and discontinued offering fixed annuities effective January 1, 2014. We also exited the independent master brokerage agencies and structured settlement annuity brokers distribution channels in 2013 and sold Lincoln Benefit Life Company (“LBL”) on April 1, 2014. The reduction in sales of these products has and will continue to reduce investment portfolio levels. It may also affect the settlement of contract benefits including forced sales of assets with unrealized capital losses, and affect goodwill impairment testing and insurance reserves deficiency testing.
Changes in tax laws may decrease sales and profitability of products and adversely affect our financial condition
Under current federal and state income tax law, certain products we provide, primarily life insurance, receive beneficial tax treatment. This favorable treatment may give certain of our products a competitive advantage over noninsurance products. Congress and various state legislatures from time to time consider legislation that would reduce or eliminate the beneficial policyholder tax treatment currently applicable to life insurance. Congress and various state legislatures also consider proposals to reduce the taxation of certain products or investments that may compete with life insurance. Legislation that increases the taxation on insurance products or reduces the taxation on competing products could lessen the advantage or create a disadvantage for certain of our products making them less competitive. Such proposals, if adopted, could have a material effect on our profitability and financial
condition or ability to sell such products and could result in the surrender of some existing contracts and policies. In addition, changes in the federal estate tax laws could negatively affect the demand for the types of life insurance used in estate planning.
We may not be able to mitigate the capital impact associated with statutory reserving and capital requirements, potentially resulting in a need to increase prices, reduce sales of certain products, and/or accept a return on equity below original levels assumed in pricing
Regulatory capital and reserving requirements affect the amount of capital retained in Allstate Financial companies. Changes to capital or reserving requirements or regulatory interpretations may result in additional capital held in Allstate Financial companies. To support statutory reserves for certain life insurance products, we currently utilize reinsurance and captive reserve financing solutions for financing a portion of our statutory reserve requirements deemed to be non-economic. Changes to capital or reserving requirements or an inability to continue existing financing as a result of market conditions or otherwise could require us to increase prices, reduce our sales of certain products, and/or accept a return on equity below original levels assumed in pricing.
A decline in Lincoln Benefit Life Company’s financial strength ratings may adversely affect our results of operations
We reinsure life insurance and payout annuity business from LBL. Premiums and contract charges assumed from LBL totaled $749 million in 2016. A decline in LBL’s financial strength ratings could lead to an increase in policy lapses. This could adversely affect our results of operations by decreasing future premiums.
Risks Relating to Investmentsfurther details.
Our investment portfolios are subject to market risk and declines in credit quality which may adversely affect investment income and cause realized and unrealized losses
We continually reevaluate ourevaluate investment management strategies since we are subject to the risk of loss due to adverse changes in interest rates, credit spreads, equity prices, orreal estate values, currency exchange rates.rates and liquidity. Adverse changes in these rates, spreads and prices may occur due to changes in monetary and fiscal policy and the economic climate, the liquidity of a market or market segment, investor return expectations and/or risk tolerance, insolvency or financial distress of key market makers or participants, or changes in market perceptions of credit worthiness. The performance andAdverse changes in market conditions could cause the value of our investment portfolios are also subject to market risk related to investments in real estate, loans and securities collateralized by real estate. Some of our investment strategies target individual investments with unique risks that are less highly correlated with broad market risks. Although we expect these investments to increase total portfolio returns over time, their performance may vary fromdecrease significantly and under-perform relative to the market.impact our results of operations and financial condition.
Our investment portfoliosinvestments are subject to risks associated with potential declines in credit quality relatedeconomic and capital market conditions and factors that may be unique to specific issuers or specific industries and a generalour portfolio, including:
General weakening of the economy, which areis typically reflected through higher credit spreads. Credit spread isspreads and lower equity valuations
Declines in credit quality
Declines in market interest rates, credit spreads or sustained low interest rates could lead to further declines in portfolio yields and investment income
Increases in market interest rates, credit spreads or a decrease in liquidity could have an adverse effect on the additional yield onvalue of our fixed income securities and loans above the risk-free rate (typically referenced as the yield on U.S. Treasury securities) that market participants require to compensate them for assuming credit, liquidity and/or prepayment risks. Credit spreads vary (i.e. increase or decrease) in response to the market’s perception of risk and liquidity inform a specific issuer or specific sector and are influenced by the credit ratings, and the reliability of those ratings, published by external rating agencies. Although we have the ability to use derivative financial instruments to manage these risks, the effectiveness of such instruments varies with liquidity and other conditions that may impact derivative and bond markets. Adverse economic conditions or other factors could cause declines in the quality and valuationsubstantial majority of our investment portfolio that would resultportfolios
Weak performance of general partners and underlying investments unrelated to general market or economic conditions could lead to declines in investment income and cause realized and unrealized losses. The concentration oflosses in our investment portfolioslimited partnership interests
Concentration in any particular issuer, industry, collateral type, group of related industries, geographic sector or risk type could have an adverse effect on
The amount and timing of net investment income, capital contributions and distributions from our investment portfoliosperformance-based investments, which primarily includes limited partnership interests, can fluctuate significantly due to the underlying investments’ performance or changes in market or economic conditions. Additionally, these investments are less liquid than similar, publicly-traded investments and consequently on our results of operations and financial condition.
Aa decline in market interest rates or credit spreadsliquidity could have an adverse effect on investment income as we invest cash in new investments that may earn less than the portfolio’s average yield. In a low interest rate environment, borrowers may prepay or redeem securities more quickly than expected as they seekimpact our ability to refinancesell them at lower rates. Sustained low interest rates could also lead to purchases of longer-term or riskier assets in order to obtain adequate investment yields, which could also result in a duration gap when compared to the duration of liabilities. Alternatively, longer-term assets may be sold and reinvested in shorter-term assets that may have lower yields in anticipation of rising interest rates. An increase in market interest rates or credit spreads could have an adverse effect on the value of our investment portfolio by decreasing the fair values of the fixed income securities that comprise a substantial majority of our investment portfolio. their current carrying values.
Declining equity markets and/or increases in interest rates or credit spreads could also cause the value of the investments in our pension plans to decrease. Declines in interest rates could cause the funding ratio to decline and the value of the obligations for our pension and postretirement plans to increase. These factors could decrease the funded status of our pension and postretirement plans, increasing the likelihood or magnitude of future benefit expense and contributions. This could also reduce the accumulated other comprehensive income component of shareholders’ equity.
The amount
Part I - Item 1A. Risk Factors and timing of net investment income from our performance-based investments, which primarily includes limited partnership interests, can fluctuate significantly as a resultOther Disclosures 2019 Form 10-K
Determination of the performance of the underlying investments. Additionally, the timing of capital contributionsfair value and distributions depends on particular events, schedules for making distributions, and cash needs related to the investments. As a result, the amount of net investment income recognizedrealized capital losses recorded for impairments of investments includes subjective judgments and cash contributed to orcould materially impact our results of operations and financial condition
The valuation of the portfolio is subjective, and the value of assets may differ from the actual amount received fromupon the sale of an asset. The degree of judgment required in determining fair values increases when:
Market observable information is less readily available
theseThe use of different valuation assumptions may have a material effect on the assets’ fair values
Changing market conditions could materially affect the fair value of investments can vary substantially from quarter to quarter. Significant volatility or market downturns could adversely impact net investment income, valuation and returns on these investments.
The determination of the amount of realized capital losses recorded for impairments of our investments is subjective and could materially impact our operating results and financial condition
The determination of the amount of realized capital losses recorded for impairments varyvaries by investment type and is based upon ouron ongoing evaluation and assessment of known and inherent risks associated with the respective asset class. class or investment.
Such evaluations and assessments are highly judgmental and are revised as conditions change and new information becomes available.
We update our evaluations regularly and reflect changes in other-than-temporary impairments in our results of operations. The assessment of whether other-than-temporary impairments have occurred is based on our case-by-case evaluation of the underlying reasons for the decline in fair value. Our conclusions on such assessments are judgmental and include assumptions and projections of future cash flows and price recovery which may ultimately prove to be incorrect as assumptions, facts and circumstances change. Furthermore, historicalHistorical trends may not be indicative of future impairments and additional impairments may need to be recorded in the future.
TheChanges in market interest rates or performance-based investment returns may lead to a significant decrease in the profitability of our annuity business
Spread-based products, such as fixed annuities, are dependent upon maintaining profitable spreads between investment returns and interest crediting rates. When market interest rates decrease or remain at low levels, investment income may decline. Lowering interest crediting rates on some products in such an environment can partially offset decreases in investment yield. However, these changes could be limited by regulatory minimum rates or contractual minimum rate guarantees on many contracts and may not match the timing or magnitude of changes in investment yields.
Increases in market interest rates can lead to increased surrenders at a time when fixed income investment asset values are lower due to the increase in interest rates. Liquidating investments to fund surrenders could result in a loss that would adversely impact results of operations.
Changes in reserve estimates and amortization of deferred acquisition costs (“DAC”) could materially affect results of operations and financial condition of our life, voluntary benefits and annuity businesses
We use long-term assumptions, including future investment yields, mortality, morbidity, persistency and expenses in pricing and valuation. If experience differs significantly from assumptions, adjustments to reserves and amortization of DAC may be required that could have a material adverse effect on our results of operations and financial condition.
See MD&A, Application of Critical Accounting Estimates and Note 2 of the consolidated financial statements for further details. Our participation in indemnification programs subjects us to the risk that reimbursement for qualifying claims and claims expenses may not be received
Participation in state-based industry pools, facilities and associations as well as the National Flood Insurance Program may have a material, adverse effect on our results of operations and financial condition. Our largest exposure is associated with the Michigan Catastrophic Claim Association (“MCCA”), a state-mandated indemnification mechanism for qualified personal injury protection losses that exceed a specified level. To the extent the MCCA’s current and future assessments are insufficient to reimburse its ultimate obligation on existing claims to member companies, our ability to obtain the 100% indemnification of ultimate loss could be impaired.
For further discussion of these items, see Regulation section, Indemnification Programs and Note 10 of the consolidated financial statements. We may not be able to mitigate the capital impact associated with statutory reserving and capital requirements
Regulatory capital and reserving requirements affect the amount of capital required to be maintained by our subsidiary insurance companies. Changes to capital or reserving requirements or regulatory interpretations may result in additional capital held in our insurance companies and could require us to increase prices, reduce our sales of certain products, and/or accept a return on equity below original levels assumed in pricing.
A downgrade in financial strength ratings may have an adverse effect on our business
Financial strength ratings are important factors in establishing the competitive position of insurance companies and their access to capital markets. Rating agencies could downgrade or change the outlook on our ratings due to:
Changes in the financial profile of one of our insurance companies
Changes in a rating agency’s determination of the fair valueamount of capital required to maintain a particular rating
The Allstate Corporation 23
2019 Form 10-KPart I - Item 1A. Risk Factors and Other Disclosures
Increases in the perceived risk of our fixed incomeinvestment portfolio, a reduced confidence in management or our business strategy, as well as other considerations that may or may not be under our control
A downgrade in our ratings could have a material effect on our sales, competitiveness, customer retention, the marketability of our product offerings, liquidity, access to and equity securities is subjective and could materially impact our operatingcost of borrowing, results of operations and financial conditioncondition.
In determining fair values, we principally useChanges in tax laws may adversely affect the market approachsales and profitability of life insurance products
Changes in taxation of life insurance products could reduce sales and result in the surrender of some existing contracts and policies, which utilizes market transaction data for the same or similar instruments. The degree of judgment involved in determining fair values is inversely related to the availability of market observable information. The fair value of assets may differ from the actual amount received upon the sale of an asset in an orderly transaction between market participants at the measurement date. Moreover, the use of different valuation assumptions may have a material effect on the assets’ fair values. The difference between amortized cost or costour profitability and fair value, net of deferred income taxes and related life and annuity DAC, deferred sales inducement costs and reserves for life-contingent contract benefits, is reflected as a component of accumulated other comprehensive income in shareholders’ equity. Changing market conditions could materially affect the determination of the fair value of securities and unrealized net capital gains and losses could vary significantly.financial condition.
Risks Relating to the Insurance IndustryOur future growth and profitability are dependent in part on our ability to successfully |
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We operate in an insurance industrymarkets that isare highly competitive and may be impacted by new or changing technologies
The insurance industry isMarkets in which we operate are highly competitive. Many of our primary insurance competitors have well-established national reputationscompetitive, and market similar products. In addition, the insurance industry consistently attracts well-capitalized new entrantswe must continually allocate resources to the market.
We have invested in growth strategies by utilizing unique customer value propositions for each of our brands, differentiated product offeringsrefine and distinctive advertising campaigns.improve products and services to remain competitive. If we are unsuccessful in generating new business, and retaining a sufficient number of customers or renewing contracts, our ability to maintain or increase premiums written or the ability to sell our products could be adversely impacted. In addition, if we experience unexpected increases
Determining competitive position is complicated in underlying costs (suchthe auto and homeowners insurance business as the frequency or severitycompanies use different underwriting standards to accept new customers and quotes and close rates can fluctuate across companies and locations. Pricing of claims costs), it could result in decreases inproducts is driven by multiple factors, including expense structure and dissimilar profitability and leadreturn targets. Additionally, sophisticated pricing algorithms make it difficult to determine what price increases which could negatively impact our competitive position leading to a decline in new and renewal business. Further, many of our competitors arepotential customers would pay across competitors.
There is also using data analytics to improve pricing accuracy, be more targeted in marketing, strengthen customer relationships and provide more customized services. If they are able to use data analytics more effectively than we are, it may give them a competitive advantage.
Because of the competitive nature of the insurance industry, there can be no assurance that we will continue to compete effectively with our industry rivals, including new entrants, or that competitive pressures will not have a material effect on our business, operating results or financial condition. This includessignificant competition for producers such as exclusive and independent agents and their licensed sales professionals. In the eventGrowth and retention may be materially affected if we are unable to attract and retain theseeffective producers theyor if those producers are unable to attract and retain their licensed sales professionals or theycustomers. Similarly, growth and retention may be impacted if customer preferences change, including customer demand for direct distribution channels or an increase in point-of-sale distribution channels.
Our business could also be affected by technological changes, such as autonomous or partially autonomous vehicles or technologies that facilitate ride, car or home sharing. Such changes could disrupt the demand for products from current customers, create coverage issues, impact the frequency or severity of losses, or reduce the size of the automobile insurance market causing our auto insurance business to decline. Since auto insurance constitutes a significant portion of our overall business, we may be more sensitive than other insurers and more adversely affected by trends that could decrease auto insurance rates or reduce demand for auto insurance over time.
Technological advancements and innovation are occurring in distribution, underwriting, claims and operations at a rapid pace that may continue to accelerate. Innovations must be implemented in compliance with applicable insurance regulations and may require extensive modifications to our systems and processes and extensive coordination with and reliance on the systems of third parties. If we are unable to attractadapt to or bring such advancements and retain customers forinnovations to market, the quality of our products, growthour relationships with customers and retention couldagents, competitive position and business prospects may be materially affected. Furthermore, certain competitors operate using a mutual insurance company structureChanges in technology related to collection and thereforeanalysis of data regarding customers could expose us to regulatory or legal actions and may have dissimilar profitabilitya material adverse effect on our business, reputation, results of operations and return targets. Additionally, manyfinancial condition.
Technological changes may also impact the ways in which we interact and do business with our customers. For example, changing customer preferences for direct distribution channels may drive a need to redesign our products or distribution model and the way we interact with customers. We may not be able to respond effectively to these changes, which could have a material effect on our results of operations and financial condition.
Our ability to adequately and effectively price our products and services is affected by the evolving nature of consumer needs and preferences, market dynamics, broader use of telematics-based rate segmentation and potential reduction in consumer demand.
Many voluntary benefits employer contracts are renewed annually. There is a risk that employers may be able to obtain more favorable terms from competitors than they could by renewing coverage with us. These competitive pressures may adversely affect the persistencyrenewal of these products,contracts, as well as our ability to sell our products in the future.products.
Our ability to successfully operate may also be impaired if we are not effective in developing the talent and skills of our human resources, attracting and assimilating new executive talent into our organization, retaining experienced and qualified employees, or deploying human resource talent consistently with our business goals.
New or changing technologies could materially impact our operating results and financial condition
We are investing in telematics and broadening the value proposition for the connected consumer. If we are not effective in anticipating the impact on our business of changing technology, including automotive technology, our ability to successfully operate may be impaired. Also, telematics devices used have been identified as a potential means for an unauthorized person to connect with a vehicle’s computer system resulting in theft or damage, which could affect our ability to use these technologies successfully. Other potential technological changes, such as autonomous or partially autonomous vehicles or technologies that facilitate ride or home sharing, could disrupt the demand for our products from current customers, create coverage issues or impact the frequency or severity of losses, and we Transformative Growth Plan may not be ableeffectively implementedOur Transformative Growth Plan is intended to respondaccelerate profitable growth by expanding customer access, improving customer value, increasing marketing and technology investments and reducing operating expenses. This strategy involves several interdependent components. If components are not implemented effectively which could haveand/or on a material effect ontimely basis, our operating resultscustomer and financial condition.
Difficult conditions in the global economy and capital markets could adversely affect our business and operating results and these conditions may not improve in the near future
As with most businesses, we believe difficult conditions in the global economy and capital markets, such as relatively stagnant macroeconomic trends, including relatively high and sustained unemployment in certain regions and lower labor participation rates in other regions, reduced consumer spending, low economic growth lower residential and commercial real estate prices, substantial increases in delinquencies on consumer debt, including defaults on home mortgages, the relatively low availability of credit and ineffective central bank monetary policies could have an adverse effect on our business and operating results.
Stressed conditions, volatility and disruptions in global capital markets, particular markets or financial asset classes could adversely affect our investment portfolio. Disruptions in one market or asset class can also spread to other markets or asset classes. Although the disruption in the global financial markets has moderated, the rate of recovery from the U.S. recession has been below historic averages, and the pace of recovery in many foreign markets is lagging that of the U.S. In addition, events in the U.S. or foreign markets, such as the United Kingdom’s June 2016 referendum in which they voted to leave the European Union, can impact the global economy and capital markets and the impact of such events is difficult to predict.
In the years since the financial crisis, the central banks of most developed countries have pursued fairly similar, and highly accommodative, monetary policies. As the U.S. Federal Reserve, through the Federal Open Market Committee, raises interest rates and as global monetary policies diverge, it may result in higher volatility and less certainty in capital markets.
General economic conditions could adversely affect us by impacting consumer behavior and pressuring investment results. Consumer behavior changes could include decreased demand for our products. For example, if consumers purchase fewer automobiles, sales of auto insurance may decline. Also, if consumers become more cost conscious, they may choose lower levels of auto and homeowners insurance. In addition, holders of interest-sensitive life insurance and annuity products may engage in an elevated level of discretionary withdrawals of contractholder funds. Investment resultsobjectives could be adversely affected as deteriorating financial and business conditions affect the issuers of the securities in the investment portfolio.
Losses from legal and regulatory actionsimpacted or there may be material to our operating results, cash flows and financial condition
We are involved in various legal actions, including class action litigation challenging a range of company practices and coverage provided by our insurance products, some of which involve claims for substantial or indeterminate amounts. We are also involved in various regulatory actions and inquiries, including market conduct exams by state insurance regulatory agencies. In the event of an unfavorable outcome in one or more of these matters, the ultimate liability may be in excess of amounts currently accrued, if any, and may be material to our operating results or cash flows for a particular quarter or annual period and to our financial condition. The aggregate estimate of the range of reasonably possible loss in excess of the amount accrued, if any, disclosed in Note 14 of the consolidated financial statements is not an indication of expected loss, if any. Actual results may vary significantly from the current estimate.
We are subject to extensive regulation and potential further restrictive regulation may increase our operating costs and limit our growth
As insurance companies, broker-dealers, investment advisers, investment companies andunintended adverse impacts on other types of companies, many of our subsidiaries are subject to extensive laws and regulations. These laws and regulations are complex and subject to change. Changes may sometimes lead to additional expenses, increased legal exposure, increased required reserves or capital, and additional limits on our ability to grow or to achieve targeted profitability. Moreover, laws and regulations are administered and enforced by a number of different governmental authorities, each of which exercises a degree of interpretive latitude, including state insurance regulators; state securities administrators; state attorneys general and federal agencies including the SEC, the Financial Industry Regulatory Authority, the U.S. Department of Justice and the National Labor Relations Board. Consequently, we are subject to the risk that compliance with any particular regulator’s or enforcement authority’s interpretation of a legal issue may not result in compliance with another’s interpretation of the same issue, particularly when compliance is judged in hindsight. In addition, there is risk that any particular regulator’s or enforcement authority’s interpretation of a legal issue may change over time to our detriment, or that changes in the overall legal environment may, even absent any particular regulator’s or enforcement authority’s interpretation of a legal issue changing, cause us to change our views regarding the actions we need to take from a legal risk management
perspective, thus necessitating changes to our practices that may, in some cases, limit our ability to grow or to improve the profitabilityparts of our business. Furthermore, in some cases, these laws and regulations are designedLost business opportunities may result due to protect or benefit the interests of a specific constituency ratherslower than a range of constituencies. For example, state insurance laws and regulations are generally intendedanticipated speed to protect or benefit purchasers or users of insurance products, not holders of securities, which is generally the jurisdiction of the SEC, issued by The Allstate Corporation. In many respects, these laws and regulations may limit our ability to grow or to improve the profitability of our business.
Regulatory reforms, and the more stringent application of existing regulations, may make it more expensive for us to conduct our business
The federal government has enacted comprehensive regulatory reforms for financial services entities. As part of a larger effort to strengthen the regulation of the financial services market, certain reforms are applicable to the insurance industry,market. External forces including the Federal Insurance Office (“FIO”) established within the U.S. Department of the Treasury.
In recent years, the state insurance regulatory framework has come under public scrutiny, members of Congress have discussed proposals to provide for federal chartering of insurance companies, and the FIO and Financial Stability Oversight Council (“FSOC”) were established. In the future, if the FSOC were to determine that Allstate is a “systemically important” nonbank financial company, Allstate would be subject to regulation by the Federal Reserve Board. We can make no assurances regarding the potential impact of state or federal measures that may change the nature or scope of insurance and financial regulation.
In April 2016, the U.S. Department of Labor (“DOL”) issued a rule that expands the range of activities that would be considered to be “investment advice” and establishes a new framework for determining whether a person is a fiduciary when selling mutual funds, variable and indexed annuities, or variable life products in connection with an Individual Retirement Account (“IRA”) or employee benefit plan covered under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The rule, in its current form, would have an impact on the non-proprietary products provided by Allstate agencies and Allstate’s broker-dealer, Allstate Financial Services, LLC, their sales processes and volumes, and producer compensation arrangements. Allstate does not currently sell proprietary annuities or proprietary variable life products in connection with IRAs or employee benefit plans covered under ERISA. Allstate Benefits offers universal life products which, when sold in an employee welfare benefit plan, may be considered subject to the fiduciary rule as an insurance product with an “investment component.” Products that we previously offered and continue to have in force, such as indexed annuities, could also be impacted by the rule. These more onerous requirements may increase regulatory costs and litigation exposure. Compliance of certain components of the rule is required by April 10, 2017 and full compliance is required by January 1, 2018. On February 3, 2017, the President of the United States executed a memorandum directing the DOL to examine the fiduciary duty rule to determine whether it might adversely affect the ability of Americans to gain access to retirement information and financial advice. The outcome of the DOL’s examination of the rule is yet to be determined but could result in a delay in the compliance dates or changes to the rule’s requirements.
Such regulatory reforms, any additional legislativecompetitor actions or regulatory requirements and any further stringent enforcement of existing regulations may make it more expensive for us to conduct our business, or may limit our ability to grow or to achieve profitability.
Reinsurance may be unavailable at current levels and prices, which may limit our ability to write new business
Our personal lines catastrophe reinsurance program was designed, utilizing our risk management methodology, to address our exposure to catastrophes nationwide. Market conditions beyond our control impact the availability and cost of the reinsurance we purchase. No assurances can be made that reinsurance will remain continuously available to us to the same extent and on the same terms and rates as is currently available. For example, our ability to afford reinsurance to reduce our catastrophe risk in designated areas may be dependent upon our ability to adjust premium rates for its cost, and there are no assurances that the terms and rates for our current reinsurance program will continue to be available in future years. If we were unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider sufficient and at prices that we consider acceptable, we would have to either accept an increase in our catastrophe exposure, reduce our insurance writings, or develop or seek other alternatives.
Reinsurance subjects us to risks of our reinsurers and may not be adequate to protect us against losses arising from ceded insurance, which could have a material effect on our operating results and financial condition
The collectability of reinsurance recoverables is subject to uncertainty arising from a number of factors, including changes in market conditions, whether insured losses meet the qualifying conditions of the reinsurance contract and whether reinsurers, or their affiliates, have the financial capacity and willingness to make payments under the terms of a reinsurance treaty or contract. Additionally, reinsurance placed in the catastrophe bond market may not provide the same level of coverage as reinsurance placed in the traditional market and any disruption, volatility and uncertainty in the financial markets may decrease our ability to access such market on terms favorable to us or at all. Our inability to collect a material recovery from a reinsurer could have a material effect on our operating results and financial condition.
Our participation in certain state industry pools and facilities subjects us to the risk that reimbursement for qualifying claims and claims expenses may not be received, which could have a material effect on our operating results and financial condition
We have exposure associated with the Michigan Catastrophic Claim Association (“MCCA”), a mandatory insurance coverage and a reimbursement indemnification mechanism for personal injury protection losses and certain qualifying allocated loss adjustment expenses that provides indemnification for losses over a retention level that increases every other MCCA fiscal year based on a formula, which is operating with a deficit, and the New Jersey Property-Liability Insurance Guaranty Association (“PLIGA”) that provides reimbursement to insurers for certain qualifying medical benefits portion of personal injury protection coverage paid in excess of certain levels. Our ultimate reinsurance recoverable from the MCCA and PLIGA was $4.95 billion and $506 million, respectively, as of December 31, 2016.
The MCCA is funded by annually assessing participating member companies actively writing motor vehicle coverage in Michigan through a per vehicle annual assessment. The MCCA’s assessment of participating member companies is an amount each year sufficient to cover members’ actuarially determined present value of expected payments on lifetime claims of all persons expected to be catastrophically injured in that year, its operating expenses and adjustments for the amount of excesses or deficiencies in prior assessments. The MCCA reimburses all member companies for qualifying claims and claims expenses incurred in an accident while the member companies were actively writing the mandatory personal injury protection coverage including member companies that are no longer actively writing motor vehicle insurance in Michigan.
The MCCA’s annual assessments have been sufficient to fund current operations and member companies’ reimbursements but have not resulted in sufficient pre-funding of its ultimate obligation to reimburse all expected future billings from member companies for reimbursement of their ultimate qualifying claims. The MCCA does not employ any managed care, contractual service or care oversight programs that could improve care and reduce expenditures. Member companies actively writing automobile coverage in Michigan include the MCCA annual assessments in determining the level of premiums to charge insureds in the state.
The MCCA has a statutory accounting permitted practice that has been granted by the Michigan Department of Insurance to discount its liabilities for loss and loss adjustment expense. As of June 30, 2016, the date of the most recent statutory financial reports, the permitted practice reduced the MCCA’s accumulated deficit of $44.01 billion by $42.27 billion to $1.74 billion. Calculation of the pre-funding shortfall is dependent on actuarial estimates and investment funding decisions. As of December 31, 2015, our auto market share in Michigan was 9.0%.
Technological changes such as autonomous or partially autonomous vehicles or technologies that facilitate ride sharing could significantly impact the number of vehicles in use or the extent of customer needs for vehicle insurance. Although the timing and extent of the technology changes and their impact on the numbers of motor vehicle insurance policies and the extent of their coverage in Michigan are uncertain, these changes may result in a diminished number of vehicles to insure over which MCCA assessments can be recovered. If this occurs, we may not be able to recover all of the MCCA’s assessments through our insurance premiums collected from our insureds and, as a result, we may experience increased costs to operate our business. Moreover, the MCCA may not be able to sufficiently assess member companies annually to fund its obligation to reimburse its ultimate obligation to all member companies for qualifying claims and claims expenses. Our inability to recover MCCA annual assessments from insureds or obtain reimbursement for the payment of covered claims ultimately reimbursable by the MCCA could have a material effect on our operating results and financial condition.
A downgrade in our financial strength ratings may have an adverse effect on our competitive position, the marketability of our product offerings, our liquidity, access to and cost of borrowing, operating results and financial condition
Financial strength ratings are important factors in establishing the competitive position of insurance companies and generally have an effect on an insurance company’s business. On an ongoing basis, rating agencies review our financial performance and condition and could downgrade or change the outlook on our ratings due to, for example, a change in the statutory capital of one of our insurance companies; a change in a rating agency’s determination of the amount of risk-adjusted capital required to maintain a particular rating; an increase in the perceived risk of our investment portfolio; a reduced confidence in management or our business strategy; as well as a number of other considerations that may or may not be under our control. The insurance financial strength ratings of Allstate Insurance Company and Allstate Life Insurance Company and The Allstate Corporation’s senior debt ratings from A.M. Best, S&P Global Ratings and Moody’s are subject to continuous review, and the retention of current ratings cannot be assured. A downgrade in any of these ratings could have a material effect on our sales, our competitiveness, the marketability of our product offerings, our liquidity, access to and cost of borrowing, operating results and financial condition.
Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs or our ability to obtain credit on acceptable terms
In periods of extreme volatility and disruption in the capital and credit markets, liquidity and credit capacity may be severely restricted. In such circumstances, our ability to obtain capital to fund operating expenses, financing costs, capital expenditures or
acquisitions may be limited, and the cost of any such capital may be significant. Our access to additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to our industry, our credit ratings and credit capacity, as well as lenders’ perception of our long- or short-term financial prospects. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. If a combination of these factors were to occur, our internal sources of liquidity may prove to be insufficient and in such case, we may not be able to successfully obtain additional financing on favorable terms.
The failure in cyber or other information security, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning could result in a loss or disclosure of confidential information, damage to our reputation, additional costs and impairment of our ability to conduct business effectively
We depend heavily on computer systems and mathematical algorithms and data to perform necessary business functions. Despite our implementation of a variety of security measures, we are increasingly exposed to the risk that our computer systems could be subject to cyber-attacks and unauthorized access, such as physical and electronic break-ins or unauthorized tampering. We have experienced threats to our data and systems, including malware and computer virus attacks, unauthorized access, system failures and disruptions. Events such as these could jeopardize the confidential, proprietary and other information (including personal information of our customers, claimants or employees) processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations, which could result in damage to our reputation, financial losses, litigation, increased costs, regulatory penalties and/or customer dissatisfaction or loss. These risks may increase in the future as we continue to expand our internet and mobile strategies, develop additional remote connectivity solutions to serve our customers, and build and maintain an integrated digital enterprise.
We are continually enhancing our cyber and other information security in order to remain secure against emerging threats, together with increasing our ability to detect system compromise and recover should a cyber-attack or unauthorized access occur. Following an assessment of our cybersecurity program by an independent advisor engaged by our Audit Committee in 2016, we implemented a plan to address certain issues identified during the assessment. However, due to the increasing frequency and sophistication of such cyber-attacks and changes in technology, there can be no assurance that a cyber-attack will not take place with adverse consequences to our business, operating results and financial condition.
The occurrence of a disaster, such as a natural catastrophe, pandemic, industrial accident, blackout, terrorist attack, war, cyber-attack, computer virus, insider threat, unanticipated problems with our disaster recovery systems, or a support failure from external providers, could have an adverse effect on our ability to conduct business and on our results of operations and financial condition, particularly if those events affect our computer-based data processing, transmission, storage, and retrieval systems or destroy data. If a significant number of our managers were unavailable in the event of a disaster, our ability to effectively conduct our business could be severely compromised.
Third parties to whom we outsource certain of our functions are also subject to the risks outlined above. We review and assess the cybersecurity controls of our third party providers, as appropriate, and make changes to our business processes to manage these risks. We also have business process and information technology operations in Canada, Northern Ireland and India and is subject to operating, regulatory and political risks in those countries. Any of these may result in our incurring substantial costs and other negative consequences, including a material adverse effect on our business, financial condition, results of operations and liquidity.
A large scale pandemic, the continued threat or occurrence of terrorism or military actions may have an adverse effect on the level of claim losses we incur,value generated from the value of our investment portfolio, our competitive position, marketability of product offerings, liquiditytransformation.
Part I - Item 1A. Risk Factors and operating resultsOther Disclosures 2019 Form 10-K
A large scale pandemic, the continued threat or occurrence of terrorism, within the U.S. and abroad, or military and other actions, and heightened security measures in response to these types of threats, may cause significant volatility and losses in our investment portfolio from declines in the equity markets and from interest rate changes in the U.S., Europe and elsewhere, and result in loss of life, property damage, disruptions to commerce and reduced economic activity. Some of the assets in our investment portfolio may be adversely affected by declines in the equity markets and reduced economic activity caused by a large scale pandemic or the continued threat of terrorism. Additionally, a large scale pandemic or terrorist act could have a material effect on the sales, profitability, competitiveness, marketability of product offerings, liquidity, and operating results.
Acquisitions of businesses may not produce anticipated benefits resulting in operating difficulties, unforeseen liabilities or asset impairments, whichOur catastrophe management strategy may adversely affect our operating results and financial conditionpremium growth
Our ability to achieve certain financial benefits we anticipate fromCatastrophe risk management actions have negatively impacted the acquisition of SquareTrade Holding Company, Inc. or other businesses will depend in part upon our ability to successfully grow the businesses consistent with our anticipated acquisition economics. Our financial results could be adversely affected by unanticipated performance issues, unforeseen liabilities, transaction-related charges, diversion of management time and resources to acquisition integration challenges or growth strategies, loss of key employees, amortization of expenses related to intangibles, charges for impairment of long-term assets or goodwill
and indemnifications. In addition, acquired businesses may not perform as projected, cost savings anticipated from the acquisition may not materialize, and costs associated with the integration may be greater than anticipated and result in the company not achieving returns on its investment at the level projected at acquisition.
We may be required to recognize impairments in the valuesize of our goodwill, which may adversely affect our operating resultshomeowners business and financial condition
Goodwill represents the excess of amounts paid for acquiring businesses over the fair value of the net assets acquired. Goodwill is evaluated for impairment annually, or more frequently if conditions warrant, by comparing the carrying value (attributed equity) of a reporting unit to its estimated fair value. Market declines orcustomer retention, including customers with auto and other events impacting the fair value of a reporting unit could result in a goodwill impairment, resulting in a charge to income. Such a charge could have an adverse effect on our results of operations or financial condition.
Changes in accounting standards issued by the Financial Accounting Standards Board or other standard-setting bodies may adversely affect our results of operations and financial condition
Our financial statements are subject to the application of generally accepted accounting principles, which are periodically revised, interpreted and/or expanded. Our life insurance business involvespersonal lines products that remain in force for extended time periods. Accordingly, we may be required to adopt new guidance or interpretations, including those that relate to products which remain in force for extended time periods and were designed and issued in contemplation of a different accounting framework, or new transactions impacted by modified guidance, which may have a material effect on our results of operations and financial condition that is either unexpected or has a greater impact than expected. For a description of changes in accounting standards that are currently pending and, if known, our estimates of their expected impact, see Note 2 of the consolidated financial statements.
Our policyholders and shareholders make decisions in part based on an evaluation of our reported financial condition and results of operations, and the stability and predictability of those conditions and results. Potential accounting changes that retroactively affect long-duration insurance contracts and require more market-based measurements may introduce substantial variability and may unfavorablynegatively impact future sales if further actions are taken. Adjustments to our reported financial conditionbusiness structure, size and results of operations as well as their stabilityunderwriting practices in markets with significant severe weather and predictability. The potential impacts of a retroactive accounting change applied to long-duration insurance contractscatastrophe risk exposure could be pervasiveadversely impact premium growth rates and may unfavorably impact policyholder and shareholder assessments of our financial condition and results of operations.
The realization of deferred tax assets is subject to uncertainty
The realization of our deferred tax assets, net of valuation allowance, if any, is based on our assumption that we will be able to fully utilize the deductions that are ultimately recognized for tax purposes. However, actual results may differ from our assumptions if adequate levels of taxable income are not attained.retention.
The ability of our subsidiaries to pay dividends may affect our liquidity and ability to meet our obligations
The Allstate Corporation is a holding company with no significant operations. TheIts principal assets are the stock of its subsidiaries and the holding company’sits directly held short-term cash portfolio, and theinvestment portfolios. Its liabilities include debt and pension and other postretirement benefit obligations related to Allstate Insurance Company employees. State insurance regulatory authorities limit the payment of dividends by insurance subsidiaries, as described in Note 16 of the consolidated financial statements. The limitations are based on statutory income and surplus. In addition, competitive pressures generally require the subsidiaries to maintain insurance financial strength ratings. These restrictions and other regulatory requirements may affect the ability of the subsidiaries to make dividend payments. Limits on the ability of the subsidiaries to pay dividends could adversely affect holding company liquidity, including ourthe ability to pay dividends to shareholders, service our debt or complete share repurchase programs as planned.
Changes in the timeframe expected.regulatory capital requirements could decrease deployable capital and potentially reduce future dividends paid by our insurance companies.
Management views enterprise economicFor a discussion of capital asrequirements, including a combination of statutory surplus and invested assets at the parent holding company level. Deterioration in statutory surplus or earnings, from developments such as catastrophe losses, or changes in market conditions or interest rates, could adversely affect holding company liquiditypotential change to a group capital calculation, see Regulation section, Limitations on Dividends by impacting the amount of dividends from our subsidiaries or the utilization of invested assets at the holding company to increase statutory surplus or for other corporate purposes.Insurance Subsidiaries.Our ability to pay dividends or repurchase stock is subject to limitations under terms of certain of our securities
Subject to certain limited exceptions, during any dividend period while our preferred stock is outstanding, unless the full preferred stock dividends for the preceding dividend period have been declared and paid or declared and a sum sufficient for the payment thereof has been set aside and any declared but unpaid preferred stock dividends for any prior period have been paid, we may not repurchase or pay dividends on common stock. If and when dividends on preferred stock have not been declared and paid in full for at least six quarterly dividend periods, the authorized number of directors then constituting the board of directors will be increased by two additional directors, to be elected by the holders of preferred stock together with the holders of all other affected classes and series of voting parity stock, voting as a single class, subject to certain conditions.
We are prohibited from declaring or paying dividends on preferred stock if we fail to meet specified capital adequacy, net income or shareholders’ equity levels. The prohibition is subject to an exception permitting us to declare dividends out of the net proceeds of common stock issued by us during the 90 days prior to the date of declaration even if we fail to meet such levels.
The terms of the outstanding subordinated debentures also prohibit us from declaring or paying any dividends or distributions on our common or preferred stock or redeeming, purchasing, acquiring or making liquidation payments on our common stock or preferred stock if we have elected to defer interest payments on the subordinated debentures, subject to certain limited exceptions.
Changing climateWe are prohibited from declaring or paying dividends on our Series G preferred stock if we fail to meet specified capital adequacy, net income or shareholders’ equity levels. The prohibition is subject to an exception permitting us to declare dividends out of the net proceeds of common stock issued by us during the 90 days before the date of declaration even if we fail to meet such levels.
If the full preferred stock dividends for all preceding dividend periods have not been declared and weatherpaid, we generally may not repurchase or pay dividends on common stock during any dividend period while our preferred stock is outstanding.
See Note 12 of the consolidated financial statements. Reinsurance may be unavailable at current levels and prices, which may limit our ability to write new business
Market conditions beyond our control impact the availability and cost of the reinsurance we purchase. Reinsurance may not remain continuously available to us to the same extent and on the same terms and rates as is currently available. Our ability to economically justify reinsurance to reduce our catastrophe risk in designated areas may depend on our ability to adjust premium rates to fully or partially recover cost. If we cannot maintain our current level of reinsurance or purchase new reinsurance protection in amounts we consider sufficient at acceptable prices, we would have to either accept an increase in our catastrophe exposure, reduce our insurance exposure or seek other alternatives.
Reinsurance subjects us to counterparty risk and may not be adequate to protect us against losses arising from ceded insurance
Collecting from reinsurers is subject to uncertainty arising from factors, including:
Whether reinsurers, their affiliates or certain indemnitors have the financial capacity and willingness to make payments under the terms of a reinsurance treaty or contract
Whether insured losses meet the qualifying conditions of the reinsurance contract
Our inability to recover from a reinsurer could have a material effect on our results of operations and financial condition.
Disruption, volatility or uncertainty in the insurance linked securities market may decrease our ability to access such market on favorable terms or at all.
Acquisitions or divestitures of businesses may not produce anticipated benefits, resulting in operating difficulties, unforeseen liabilities or asset impairments
The ability to achieve certain anticipated financial benefits from the acquisition of businesses depends in part on our ability to successfully grow and integrate the businesses consistent with our anticipated acquisition economics. Financial results could be adversely affectaffected by unanticipated performance issues, unforeseen liabilities, transaction-related charges, diversion of management time and resources to acquisition integration challenges or growth strategies, loss of key employees, amortization of expenses related to intangibles, charges for impairment of long-term assets or goodwill and indemnifications.
Acquired businesses may not perform as projected, cost savings anticipated from the acquisition may not materialize, and costs associated
The Allstate Corporation 25
2019 Form 10-KPart I - Item 1A. Risk Factors and Other Disclosures
with the integration may be greater than anticipated. As a result, if we do not manage these transitions effectively and bring innovations to market with the requisite speed, the quality of our products as well as our relationships with customers and retail partners for our protection plans business may result in the company not achieving returns on its investment at the level projected at acquisition.
We also may divest businesses from time to time. These transactions may result in continued financial involvement in the divested businesses, such as through reinsurance, guarantees or other financial arrangements, following the transaction. If the acquiring companies do not perform under the arrangements, our financial condition, profitability or cash flows
Climate change, solar flares, eruption of volcanoes, El Niño, La Niña and other events to the extent any one of these produces changes in weather patterns,results could affect the frequency or severity of weather events and wildfires and the demand, price and availability of homeowners insurance, the results for our Allstate Protection segment and the value of our investment portfolio.
Loss of key vendor relationships or failure of a vendor to protect our data, confidential and proprietary information, or personal information of our customers, claimants or employees could affect our operations
We rely on services and products provided by many vendors in the U.S. and abroad. These include, for example, vendors of computer hardware and software and vendors and/or outsourcing of services such as claim adjustment services, human resource benefits management services and investment management services. In the event that one or more of our vendors suffers a bankruptcy or otherwise becomes unable to continue to provide products or services, or fails to protect our data, confidential and proprietary information, or personal information of our customers, claimants or employees, we may suffer operational impairments and financial losses.be negatively impacted.
We may be subject to the risks and costs associated with intellectual property infringement, misappropriation and third partythird-party claims
We rely on a combination of contractual rights and copyright, trademark, patent and trade secret laws to establish and protect our intellectual property. Although we use a broad range of measures to protect intellectual property rights, thirdThird parties may infringe or misappropriate our intellectual property. We may have to litigate to enforce and protect intellectual property and to determine its scope, validity or enforceability, which could divert significant resources and prove unsuccessful. An inability to protect intellectual property or an inability to successfully defend against a claim of intellectual property infringement could have a material effect on our business.
We may be subject to claims by third parties for patent, trademark or copyright infringement or breach of usage rights. Any such claims and any resulting litigation could result in significant expense and liability. If third partythird-party providers or we are found to have infringed a third-party intellectual property right, either of us could be enjoined from providing certain products or services or from utilizing and benefiting from certain methods, processes, copyrights, trademarks, trade secrets or licenses. Alternatively, we could be required to enter into costly licensing arrangements with third parties or implement a costly work around.work-around. Any of these scenarios could have a material effect on our business and results of operations.
|
| |
| Macro, regulatory and risk environment |
Conditions in the global economy and capital markets could adversely affect our business and results of operations
Global economic and capital market conditions could adversely impact demand for our products, returns on our investment portfolio and results of operations. The conditions that would have the largest impact on our business include:
Low or negative economic growth
Sustained low interest rates
Rising inflation increasing claims and claims expense
Substantial increases in delinquencies or defaults on debt
Significant downturns in the market value or liquidity of our investment portfolio
Reduced consumer spending and business investment
Stressed conditions, volatility and disruptions in global capital markets or financial asset classes could adversely affect our investment portfolio.
Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs or obtain credit on acceptable terms
In periods of extreme volatility and disruption in the capital and credit markets, liquidity and credit capacity may be severely restricted. Our access to additional financing depends on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to our industry, our credit ratings and credit capacity, as well as lenders’ perception of our long- or short-term financial prospects. In such circumstances, our ability to obtain capital to fund operating expenses, financing costs, capital expenditures or acquisitions may be limited, and the cost of any such capital may be significant.
A large-scale pandemic, the occurrence of terrorism or military actions may have an adverse effect on our business
A large-scale pandemic, the occurrence of terrorism or military and other actions, may result in loss of life, property damage, and disruptions to commerce and reduced economic activity. Some of the assets in our investment portfolio may be adversely affected by declines in the equity markets, changes in interest rates, reduced liquidity and economic activity caused by a large-scale pandemic. Additionally, a large-scale pandemic or terrorist act could have a material effect on sales, liquidity and operating results.
The failure in cyber or other information security controls, as well as the occurrence of events unanticipated in our disaster recovery processes and business continuity planning, could result in a loss or disclosure of confidential information, damage to our reputation, additional costs and impair our ability to conduct business effectively
We depend heavily on computer systems, mathematical algorithms and data to perform necessary business functions. There are threats that could impact our ability to protect our data and systems; if the threats are successful, they could impact confidentiality, integrity and availability:
Confidentiality — protecting our data from disclosure to unauthorized parties
Integrity — ensuring data is not changed accidentally or without authorization and is accurate
Availability — ensuring our data and systems are accessible to meet our business needs
Part I - Item 1A. Risk Factors and Other Disclosures 2019 Form 10-K
We collect, use, store or transmit a large amount of confidential, proprietary and other information (including personal information of customers, claimants or employees) in connection with the operation of our business. Systems are subject to increased attempted cyberattacks and unauthorized access, such as physical and electronic break-ins or unauthorized tampering.
We constantly defend against threats to our data and systems, including malware and computer virus attacks, unauthorized access, system failures and disruptions. Events like these could jeopardize the information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations, which could result in damage to our reputation, financial losses, litigation, increased costs, regulatory penalties and/or customer dissatisfaction.
These risks may increase in the future as threats become more sophisticated and we continue to expand internet and mobile strategies, develop additional remote connectivity solutions to serve our employees and customers, develop and expand products and services designed to protect customers’ digital footprint, and build and maintain an integrated digital enterprise. Our increased use of third-party services (e.g., cloud technology and software as a service) can make it more difficult to identify and respond to cyberattacks in any of the above situations. Third parties to whom we outsource certain functions are also subject to these risks.
Personal information is subject to an increasing number of federal, state, local and international laws and regulations regarding privacy and data security, as well as contractual commitments. Any failure or perceived failure by us to comply with such obligations may result in governmental enforcement actions and fines, litigation or public statements against us by consumer advocacy groups or others and could cause our employees and customers to lose trust in us, which could have an adverse effect on our reputation and business.
See the Regulation section, Privacy Regulation and Data Security, for additional information. The occurrence of a disaster, such as a natural catastrophe, pandemic, industrial accident, blackout, terrorist attack, war, cyberattack, computer virus, insider threat, unanticipated problems with our disaster recovery processes, or a support failure from external providers, could have an adverse effect on our ability to conduct business and on our results of operations and financial condition, particularly if those events affect our computer-based data processing, transmission, storage, and retrieval systems or destroy data. If a significant number of employees were unavailable in the event of a disaster, our ability to effectively conduct business could be severely compromised. Our systems are also subject to compromise from internal threats.
Losses from changing climate and weather conditions may adversely affect our financial condition, profitability or cash flows
Climate change may affect the occurrence of certain natural events, such as an increase in the frequency or severity of wind, tornado, hailstorm and thunderstorm events due to increased convection in the atmosphere. There could also be more frequent wildfires in certain geographies, more flooding and the potential for increased severity of hurricanes due to higher sea surface temperatures. As a result, incurred losses from such events and the demand, price and availability of reinsurance coverages for automobile and homeowners insurance may be affected.
Climate change may also impact insurability by impairing our ability to identify and quantify potential hazards that will result in losses and offer our customers products at an affordable price. Our investment portfolio is also subject to the effects of climate change as economic shifts alter the return dynamic of long-term investments and reduce valuations.
Due to significant variability associated with future changing climate conditions, we are unable to predict the impact climate change will have on our businesses.
We are subject to extensive regulation, and potential further restrictive regulation may increase operating costs and limit growth
Many of our affiliates operate in the highly regulated insurance and broader financial services sector and are subject to extensive laws and regulations that are complex and subject to change. Changes may lead to additional expenses, increased legal exposure, increased reserve or capital requirements limiting our ability to grow or to achieve targeted profitability. Moreover, laws and regulations are administered and enforced by governmental authorities that exercise interpretive latitude, including state insurance regulators; state securities administrators; state attorneys general as well as federal agencies including the SEC, the Financial Industry Regulatory Authority, the Department of Labor, the U.S. Department of Justice and the National Labor Relations Board. Consequently, compliance with one regulator’s or enforcement authority’s interpretation of a legal issue may not result in compliance with another’s interpretation of the same issue.
In addition, there is risk that one regulator’s or enforcement authority’s interpretation of a legal issue may change to our detriment. There is also a risk that changes in the overall legal environment may cause us to change our views regarding the actions we need to take from a legal risk management perspective. This could necessitate changes to our practices that may adversely impact our business. In some cases, state insurance laws and regulations are generally intended to protect or benefit purchasers or users of insurance products, not holders of securities that we issue. These laws and regulations may limit our ability to grow or to improve the profitability of our business.
The Allstate Corporation 27
2019 Form 10-KPart I - Item 1A. Risk Factors and Other Disclosures
A regulatory environment that requires rate increases to be approved, can dictate underwriting practices and mandate participation in loss sharing arrangements may adversely affect results of operations and financial condition
Political events and positions can affect the insurance market, including efforts to suppress rates to a level that may not allow us to reach targeted levels of profitability. Regulatory challenges to rate increases may restrict rate changes that may be required to achieve targeted levels of profitability and returns on equity. If we are unsuccessful, our results of operations could be negatively impacted.
In addition, certain states have enacted laws that require an insurer conducting business in that state to participate in assigned risk plans, reinsurance facilities and joint underwriting associations. Certain states also require the insurer to offer coverage to all consumers, often restricting an insurer’s ability to charge the price it might otherwise charge for the risk acceptance. In these markets, we may be compelled to underwrite significant amounts of business at lower-than-desired rates, possibly leading to an unacceptable return on equity. Alternatively, as the facilities recognize a financial deficit, they could have the ability to assess participating insurers, adversely affecting our results of operations and financial condition. Laws and regulations of many states also limit an insurer’s ability to withdraw from one or more lines of insurance, except pursuant to a plan that is approved by the state insurance department. Certain states require an insurer to participate in guaranty funds for impaired or insolvent insurance companies. These funds periodically assess losses against all insurance companies doing business in the state. Our results of operations and financial condition could be adversely affected by any of these factors.
Regulatory reforms, and the more stringent application of existing regulations, may make it more expensive for us to conduct our business
The federal government has enacted comprehensive regulatory reforms for financial services entities. As part of a larger effort to strengthen the regulation of the financial services market, certain reforms are applicable to the insurance industry.
The Federal Insurance Office (“FIO”) and Financial Stability Oversight Council were established, and the federal government may enact reforms that affect the state insurance regulatory framework. The potential impact of state or federal measures that change the nature or scope of insurance and financial regulation is uncertain but may make it more expensive for us to conduct business and limit our ability to grow or achieve profitability.
We have business process and information technology operations in Canada, India and the United Kingdom that are subject to operating, regulatory and political risks in those countries. We may incur substantial costs and other negative consequences if any of these occur, including an adverse effect on our business, results of operations and financial condition.
Losses from legal and regulatory actions may be material to our results of operations, cash flows and financial condition
We are involved in various legal actions, including class-action litigation challenging a range of company practices and coverage provided by our insurance products, some of which involve claims for substantial or indeterminate amounts. We are also involved in various regulatory actions and inquiries, including market conduct exams by state insurance regulatory agencies. In the event of an unfavorable outcome in any of these matters, the ultimate liability may be more than amounts currently accrued or disclosed in our reasonably possible loss range and may be material to our results of operations, cash flows and financial condition.
See Note 14 of the consolidated financial statements. Changes in or the application of accounting standards issued by standard-setting bodies and changes in tax laws may adversely affect our results of operations and financial condition
Our financial statements are subject to the application of accounting principles generally accepted in the United States of America, which are periodically revised, interpreted and/or expanded. Accordingly, we may be required to adopt new guidance or interpretations, which may have a material effect on our results of operations and financial condition and could adversely impact financial strength ratings.
Market declines, changes in business strategies or other events impacting the fair value of goodwill or purchased intangible assets could result in an impairment charge to income
Pending changes to accounting for long-duration insurance contracts such as traditional life, life-contingent immediate annuities and certain voluntary accident and health insurance products will have a material effect on reserves and could adversely impact financial strength ratings
Realization of our deferred tax assets assumes that we can fully utilize the deductions recognized for tax purposes; we may recognize additional tax expense if these assets are not fully utilized
New tax legislative initiatives may be enacted that may impact our effective tax rate and could adversely affect our tax positions or tax liabilities
See MD&A, Application of Critical Accounting Estimates and Note 2 of the consolidated financial statements for further details. Loss of key vendor relationships or failure of a vendor to protect our data, confidential and proprietary information, or personal information of our customers, claimants or employees could adversely affect our operations
We rely on services and products provided by many vendors in the U.S. and abroad. These include, vendors of computer hardware, software, cloud
Part I - Item 1A. Risk Factors and Other Disclosures 2019 Form 10-K
technology and software as a service, as well as vendors and/or outsourcing of services such as:
Claim adjustment or call center services
Human resource benefits management
Information technology support
Investment management services
If any vendor becomes unable to continue to provide products or services, or fails to protect our confidential, proprietary, and other information, we may suffer operational impairments and financial losses.
Our ability to attract, develop, and retain talent to maintain appropriate staffing levels, and establish a successful work culture is critical to our success
Competition from within the insurance industry and from other industries, including the technology sector, for qualified employees with highly specialized knowledge in areas such as underwriting, data and analytics, technology and e-commerce, has often been intense and we have experienced increased competition in hiring and retaining employees.
Factors that affect our ability to attract and retain such employees include:
Compensation and benefits
Training and re-skilling programs
Reputation as a successful business with a culture of fair hiring, and of training and promoting qualified employees
Recognize and respond to changing trends and other circumstances that affect employees
The unexpected loss of key personnel could have a material adverse impact on our business because of the loss of their skills, knowledge of our products and offerings and years of industry experience and, in some cases, the difficulty of promptly finding qualified replacement personnel.
Misconduct or fraudulent acts by employees, agents and third parties may expose us to financial loss, disruption of business, regulatory assessments and reputational harm
The company and the insurance industry are inherently susceptible to past and future misconduct or fraudulent activities by employees, representative agents, vendors, customers and other third parties. These activities could include:
Fraud against the company, its employees and its customers through illegal or prohibited activities
Unauthorized acts or representations, unauthorized use or disclosure of personal or proprietary information, deception, and misappropriation of funds or other benefits
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our home office complex is owned and located in Northbrook, Illinois. As of December 31, 2016,2019, the home office complex consists of several buildings totaling 1.9 million square feet of office space on a 186-acre site.
We also operate from approximately 1,240450 administrative, data processing, claims handling and other support facilities in North America. In addition to our home office facilities, 1.3 million825 thousand square feet are owned and 6.06.1 million square feet are leased.
Outside North America, we own one and lease three properties in Northern Ireland comprising 166,460approximately 220 thousand square feet. We also have two leased facilities in India for 232,200approximately 434 thousand square feet and one leasetwo leased facilities in London for 1,3907,182 square feet. Generally, only major Allstate facilities are owned. In a majority of cases, new lease terms and renewals are for five years or less.
The locations out of which thewhere Allstate exclusive agencies operate in the U.S. are normally leased by the agencies as lessees.agencies.
Item 3. Legal Proceedings
Information required for Item 3 is incorporated by reference to the discussion under the heading “Regulation and Compliance”compliance” and under the heading “Legal and regulatory proceedings and inquiries” in Note 14 of the consolidated financial statements.
Item 4. Mine Safety Disclosures
Not applicable.
The Allstate Corporation 29
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
As of January 31, 2017,2020, there were 80,36767,204 holders of record of The Allstate Corporation’s common stock. The principal market for the common stock is the New York Stock Exchange, but itwhere our common stock trades under the trading symbol “ALL”. Our common stock is also listed on the Chicago Stock Exchange. Set forth below are
Common stock performance graph
The following performance graph compares the high and low New York Stock Exchange Composite listing prices of, and cash dividends declared for, thecumulative total shareholder return on Allstate common stock during 2016for a five-year period (December 31, 2014 to December 31, 2019) with the cumulative total return of the S&P Property and 2015.Casualty Insurance Index (S&P P/C) and the S&P’s 500 stock index.
|
| | | | | | | |
| | High | | Low | | Close | | Dividends Declared |
| 2016 | | | | | | | |
| First quarter | 67.92 | | 56.03 | | 67.37 | | 0.33 |
| Second quarter | 69.95 | | 64.36 | | 69.95 | | 0.33 |
| Third quarter | 70.38 | | 67.24 | | 69.18 | | 0.33 |
| Fourth quarter | 74.77 | | 66.55 | | 74.12 | | 0.33 |
| | | | | | | | |
| 2015 | | | | | | | |
| First quarter | 72.87 | | 68.38 | | 71.17 | | 0.30 |
| Second quarter | 72.51 | | 64.62 | | 64.87 | | 0.30 |
| Third quarter | 69.48 | | 54.12 | | 58.24 | | 0.30 |
| Fourth quarter | 64.69 | | 56.97 | | 62.09 | | 0.30 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Value at each year-end of $100 initial investment made on December 31, 2014 |
| | | 12/31/2014 |
| | 12/31/2015 |
| | 12/31/2016 |
| | 12/31/2017 |
| | 12/31/2018 |
| | 12/31/2019 |
|
| Allstate | | $ | 100.00 |
| | $ | 90.04 |
| | $ | 109.58 |
| | $ | 157.38 |
| | $ | 126.66 |
| | $ | 175.82 |
|
| S&P P/C | | $ | 100.00 |
| | $ | 109.53 |
| | $ | 126.73 |
| | $ | 155.10 |
| | $ | 147.83 |
| | $ | 186.07 |
|
| S&P 500 | | $ | 100.00 |
| | $ | 101.37 |
| | $ | 113.49 |
| | $ | 138.26 |
| | $ | 132.19 |
| | $ | 173.80 |
|
The payment of dividends by Allstate Insurance Company (“AIC”) to The Allstate Corporation 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 ending December 31, 2016, AIC paid dividends of $1.90 billion. Based on the greater of 2016 statutory net income or 10% of statutory surplus, the maximum amount of dividends that AIC will be able to pay, without prior Illinois Department of Insurance approval, at a given point in time in 2017 is $1.56 billion, less dividends paid during the preceding twelve months measured at that point in time. Notification and approval of intercompany lending activities is also required by the Illinois Department of Insurance for those transactions that exceed formula amounts based on statutory admitted assets and statutory surplus.
Issuer Purchases of Equity Securities
| | | Period | Total number of shares (or units) purchased (1) | | Average price paid per share (or unit) | | Total number of shares (or units) purchased as part of publicly announced plans or programs (3) | | Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs (4) | | Total number of shares (or units) purchased (1) | | Average price paid per share (or unit) | | Total number of shares (or units) purchased as part of publicly announced plans or programs (3) | | Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs (4) |
October 1, 2016 -
October 31, 2016 | | | | | | | |
October 1, 2019 -
October 31, 2019 | | | | | | | | | |
| Open Market Purchases | 4,849 |
| | $ | 67.8480 |
| | — |
| | | 2,479,268 |
| | $ | 107.41 |
| | 2,472,623 |
| | |
November 1, 2016 -
November 30, 2016 | | | | | | | |
Wells Fargo ASR (2) | 568,688 |
| | 68.0952 |
| | 568,688 |
| | |
November 1, 2019 -
November 30, 2019 | | | | | | | | | |
| Open Market Purchases | 393,044 |
| | 70.5701 |
| | 392,400 |
| | | 122,866 |
| | $ | 106.19 |
| | 112,930 |
| | |
December 1, 2016 -
December 31, 2016 | | | | | | | |
ASR Agreement (2) | | | 4,013,220 |
| | — |
| | 4,013,220 |
| | |
December 1, 2019 -
December 31, 2019 | | | | | | | | | |
| Open Market Purchases | 2,725,178 |
| | 73.0555 |
| | 2,485,300 |
| | | 54 |
| | $ | 110.14 |
| | — |
| | |
| Total | 3,691,759 |
| | $ | 72.0200 |
| | 3,446,388 |
| | $691 million | | 6,615,408 |
| | | | 6,598,773 |
| | $ | 259 | million |
| |
(1) | In accordance with the terms of its equity compensation plans, Allstate acquired the following shares in connection with the vesting of restricted stock units and performance stock awards and the exercise of stock options held by employees and/or directors. The shares were acquired in satisfaction of withholding taxes due upon exercise or vesting and in payment of the exercise price of the options. |
October: 4,8496,645
November: 6449,936
December: 19,17354
| |
(2) | On September 23, 2016,November 1, 2019, Allstate entered into an accelerated share repurchase agreement (“ASR Agreement”agreement”) with Wells Fargo Bank, National AssociationGoldman Sachs & Co. LLC (“Wells Fargo”Goldman Sachs”), to purchase $250$500 million of our outstanding common stock. In exchange for an upfront payment of $500 million, Goldman Sachs initially delivered 4.01 million shares of common stock, whichto Allstate. The ASR agreement settled on November 23, 2016. Under this ASR Agreement,January 8, 2020, and we repurchased a total of 3.74.6 million shares at an average repurchase price of $68.0952.$109.51. |
| |
(3) | From time to time, repurchases under our programs are executed under the terms of a pre-set trading plan meeting the requirements of Rule 10b5-1(c) of the Securities Exchange Act of 1934. |
| |
(4) | On February 4, 2015,October 31, 2018, we announced the approval of a common share repurchase program for $3 billion, which was completed in April 2016. On May 4, 2016, we announced the approval of a new common share repurchase program for $1.5 billion, to be completed by November 2017.January 2020. |
The Allstate Corporation 31
Item 6. Selected Financial Data
5-YEAR SUMMARY OF SELECTED FINANCIAL DATA
| | | ($ in millions, except per share data and ratios) | 2016 | | 2015 | | 2014 | | 2013 | | 2012 | |
| 5-year summary of selected financial data | | 5-year summary of selected financial data |
| ($ in millions, except per share data) | | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Consolidated Operating Results | | | | | | | | | | | | | | | | | | | |
| Insurance premiums and contract charges | $ | 33,582 |
| | $ | 32,467 |
| | $ | 31,086 |
| | $ | 29,970 |
| | $ | 28,978 |
| | $ | 38,577 |
| | $ | 36,513 |
| | $ | 34,678 |
| | $ | 33,582 |
| | $ | 32,467 |
|
| Other revenue | | | 1,054 |
| | 939 |
| | 883 |
| | 865 |
| | 863 |
|
| Net investment income | 3,042 |
| | 3,156 |
| | 3,459 |
| | 3,943 |
| | 4,010 |
| | 3,159 |
| | 3,240 |
| | 3,401 |
| | 3,042 |
| | 3,156 |
|
| Realized capital gains and losses | (90 | ) | | 30 |
| | 694 |
| | 594 |
| | 327 |
| |
Realized capital gains and losses (1) | | | 1,885 |
| | (877 | ) | | 445 |
| | (90 | ) | | 30 |
|
| Total revenues | 36,534 |
|
| 35,653 |
|
| 35,239 |
|
| 34,507 |
|
| 33,315 |
| | 44,675 |
|
| 39,815 |
|
| 39,407 |
|
| 37,399 |
|
| 36,516 |
|
| Net income applicable to common shareholders | 1,761 |
| | 2,055 |
| | 2,746 |
| | 2,263 |
| | 2,306 |
| | 4,678 |
| | 2,012 |
| | 3,438 |
| | 1,692 |
| | 2,138 |
|
| Net income applicable to common shareholders per common share: |
|
| |
|
| |
|
| |
|
| |
|
| | | | | | | | | | |
| Net income applicable to common shareholders per common share - Basic | 4.72 |
| | 5.12 |
| | 6.37 |
| | 4.87 |
| | 4.71 |
| | 14.25 |
| | 5.78 |
| | 9.50 |
| | 4.54 |
| | 5.33 |
|
| Net income applicable to common shareholders per common share - Diluted | 4.67 |
| | 5.05 |
| | 6.27 |
| | 4.81 |
| | 4.68 |
| | 14.03 |
| | 5.70 |
| | 9.35 |
| | 4.48 |
| | 5.26 |
|
| Cash dividends declared per common share | 1.32 |
| | 1.20 |
| | 1.12 |
| | 1.00 |
| | 0.88 |
| | 2.00 |
| | 1.84 |
| | 1.48 |
| | 1.32 |
| | 1.20 |
|
| Consolidated Financial Position | | | | | | | | | | | | | | | | | | | |
Investments (1) | $ | 81,799 |
| | $ | 77,758 |
| | $ | 81,113 |
| | $ | 81,155 |
| | $ | 97,278 |
| |
| Investments | | | $ | 88,362 |
| | $ | 81,260 |
| | $ | 82,803 |
| | $ | 81,799 |
| | $ | 77,758 |
|
| Total assets | 108,610 |
| | 104,656 |
| | 108,479 |
| | 123,460 |
| | 126,893 |
| | 119,950 |
| | 112,249 |
| | 112,422 |
| | 108,610 |
| | 104,656 |
|
Reserves for claims and claims expense, life-contingent contract benefits and contractholder funds (1) | 57,749 |
| | 57,411 |
| | 57,832 |
| | 58,547 |
| | 75,502 |
| |
| Reserves for claims and claims expense, life-contingent contract benefits and contractholder funds | | | 57,704 |
| | 58,002 |
| | 58,308 |
| | 57,749 |
| | 57,411 |
|
| Long-term debt | 6,347 |
| | 5,124 |
| | 5,140 |
| | 6,141 |
| | 6,003 |
| | 6,631 |
| | 6,451 |
| | 6,350 |
| | 6,347 |
| | 5,124 |
|
| Shareholders’ equity | 20,573 |
| | 20,025 |
| | 22,304 |
| | 21,480 |
| | 20,580 |
| | 25,998 |
| | 21,312 |
| | 22,551 |
| | 20,569 |
| | 20,020 |
|
| Shareholders’ equity per diluted common share | 50.77 |
| | 47.34 |
| | 48.24 |
| | 45.31 |
| | 42.39 |
| | 73.12 |
| | 57.56 |
| | 57.58 |
| | 50.76 |
| | 47.33 |
|
| Property-Liability Operations | | | | | | | | | | |
| Premiums earned | $ | 31,307 |
| | $ | 30,309 |
| | $ | 28,929 |
| | $ | 27,618 |
| | $ | 26,737 |
| |
| Net investment income | 1,266 |
| | 1,237 |
| | 1,301 |
| | 1,375 |
| | 1,326 |
| |
| Net income applicable to common shareholders | 1,664 |
| | 1,690 |
| | 2,427 |
| | 2,754 |
| | 1,968 |
| |
Operating ratios (2) | | | | | | | | | | |
| Claims and claims expense (“loss”) ratio | 71.0 |
| | 69.4 |
| | 67.2 |
| | 64.9 |
| | 69.1 |
| |
| Expense ratio | 25.1 |
| | 25.5 |
| | 26.7 |
| | 27.1 |
| | 26.4 |
| |
| Combined ratio | 96.1 |
| | 94.9 |
| | 93.9 |
| | 92.0 |
| | 95.5 |
| |
| Allstate Financial Operations | | | | | | | | | | |
| Premiums and contract charges | $ | 2,275 |
| | $ | 2,158 |
| | $ | 2,157 |
| | $ | 2,352 |
| | $ | 2,241 |
| |
| Net investment income | 1,734 |
| | 1,884 |
| | 2,131 |
| | 2,538 |
| | 2,647 |
| |
| Net income applicable to common shareholders | 391 |
| | 663 |
| | 631 |
| | 95 |
| | 541 |
| |
| Investments | 36,840 |
| | 36,792 |
| | 38,809 |
| | 39,105 |
| | 56,999 |
| |
| |
(1) | As of December 31, 2013, $11.98 billion of investments and $12.84 billion of reserves for life-contingent contract benefits and contractholder funds were classified as held for sale relatingDue to the saleadoption of Lincoln Benefit Life Company.a new accounting standard for the recognition and measurement of financial assets and financial liabilities, the periodic change in fair value of equity investments is recognized within realized capital gains and losses on the Consolidated Statements of Operations effective January 1, 2018. As a result, 2019 and 2018 net realized capital gains and losses are not comparable to other periods presented. |
| |
(2)
| We use operating ratios to measure the profitability of our Property-Liability results. We believe that they enhance an investor’s understanding of our profitability. They are calculated as follows: Claims and claims expense (“loss”) ratio is the ratio of claims and claims expense to premiums earned. Loss ratios include the impact of catastrophe losses. Expense ratio is the ratio of amortization of deferred policy acquisition costs, operating costs and expenses, and restructuring and related charges to premiums earned. Combined ratio is the ratio of claims and claims expense, amortization of deferred policy acquisition costs, operating costs and expenses, and restructuring and related charges to premiums earned. The combined ratio is the sum of the loss ratio and the expense ratio. The difference between 100% and the combined ratio represents underwriting income as a percentage of premiums earned, or underwriting margin. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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| Service Businesses | | |
| Claims and Claims Expense Reserves | | |
| Life | | |
| Allstate Benefits | | |
Allstate Financial SegmentAnnuities | | |
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| Application of Critical Accounting Estimates | | |
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The Allstate Corporation 33
2019 Highlights
Overview
The following discussion highlights significant factors influencing the consolidated financial position and results of operations of The Allstate Corporation (referred to in this document as “we,” “our,” “us,” the “Company” or “Allstate”). It should be read in conjunction with the 5-year summary of selected financial data, consolidated financial statements and related notes found under Part II. Item 6. and Item 8. contained herein. Further analysis
This section of our insurance segments is providedthis Form 10-K generally discusses 2019 and 2018 results and year-to-year comparisons between 2019 and 2018. Discussions of 2017 results and year-to-year comparisons between 2018 and 2017 that are not included in the Property-Liability Operations (which includes the Allstate Protection and the Discontinued Lines and Coverages segments) andthis Form 10-K can be found in the Allstate Financial Segment sections of Management’s Discussion and Analysis (“MD&A”). The segments are consistent in Part II, Item 7 of our annual report on Form 10-K for 2018, filed February 15, 2019, and the Company’s Current Report on Form 8-K filed on May 16, 2019, Exhibit 99.1, reflecting the Company’s 2018 Form 10-K with adjustments to Part II. Item 6., Item 7. and Item 8. for the wayCompany’s change in which we use financial information to evaluate business performanceaccounting principle for pension and to determine the allocation of resources. Resources are allocated by the chief operating decision maker and performance is assessed for Allstate Protection, Discontinued Lines and Coverages and Allstate Financial. Allstate Protection and Allstate Financial performance and resources are managed by committees of senior officers of the respective segments.
Allstate is focused on the following priorities in 2017:
better serve our customers;
achieve target economic returns on capital;
grow customer base;
proactively manage investments; and
build long-term growth platforms.other postretirement benefit plans.
The most important factors we monitor to evaluate the financial condition and performance offor our company include:
For Allstate Protection: premium, the number of policies in force (“PIF”), new business sales, policy retention, price changes, claim frequency and severity, catastrophes, loss ratio, expenses, underwriting results, and relative competitive position.
For Allstate Financial: benefit and investment spread, asset-liability matching, amortization of deferred policy acquisition costs (“DAC”), expenses, operating income, net income, new business sales, invested assets, and premiums and contract charges.
For Investments: exposure to market risk, asset allocation, credit quality/experience, total return, net investment income, cash flows, realized capital gains and losses, unrealized capital gains and losses, stability of long-term returns, and asset and liability duration.
For financial condition: liquidity, parent holding company level of deployable assets, financial strength ratings, operating leverage, debt levels, book value per share, and return on equity.
Summary of Results:
Consolidated net income applicable to common shareholders was $1.76 billion in 2016 compared to $2.06 billion in 2015 and $2.75 billion in 2014. The decrease in 2016 compared to 2015 was primarily due to higher Property-Liability insurance claims and claims expense and catastrophe losses, net realized net capital losses in 2016 compared to net realized net capital gains in 2015 and lower net investment income, partially offset by higher Property-Liability insurance premiums. The decrease in 2015 compared to 2014 was primarily due to higher Property-Liability insurance claims and claims expense and lower realized net capital gains and net investment income, partially offset by higher Property-Liability insurance premiums and decreased catastrophe losses and operating costs and expenses. Net income applicable to common shareholders per diluted common share was $4.67, $5.05 and $6.27 in 2016, 2015 and 2014, respectively.
Allstate Protection had underwriting income of $1.32 billion in 2016 compared to $1.61 billion in 2015 and $1.89 billion in 2014. The decrease in 2016 compared to 2015 was primarily due to decreases in underwriting income in homeowners resulting from increased catastrophe losses and commercial lines, partially offset by increases in underwriting income in auto resulting from increased insurance premiums. The decrease in 2015 compared to 2014 was primarily due to decreases in underwriting income in auto and commercial lines, partially offset by increases in underwriting income in homeowners and other personal lines and lower catastrophe losses. For a discussion on the components of the increase (decrease) in underwriting income, see the Allstate Protection segment section of the MD&A. The Allstate Protection combined ratio was 95.8, 94.7 and 93.5 in 2016, 2015 and 2014, respectively. Underwriting income is defined in the Property-Liability Operations section of the MD&A.
Allstate Financial net income applicable to common shareholders was $391 million in 2016 compared to $663 million in 2015 and $631 million in 2014. The decrease in 2016 primarily relates to net realized capital losses in 2016 compared to net realized capital gains in 2015 and lower net investment income, partially offset by higher premiums and contract charges. The increase in 2015 primarily relates to higher net realized capital gains and lower loss on disposition related to the Lincoln Benefit Life Company (“LBL”) sale, partially offset by lower net investment incomereportable segments and the reduction in business due to the sale of LBL.Company include:
2016 HIGHLIGHTS
Consolidated net income applicable to common shareholders was $1.76 billion in 2016 compared to $2.06 billion in 2015. Net income applicable to common shareholders per diluted common share was $4.67 in 2016 compared to $5.05 in 2015.
Property-Liability net income applicable to common shareholders was $1.66 billion in 2016 compared to $1.69 billion in 2015.
The Property-Liability combined ratio was 96.1 in 2016 compared to 94.9 in 2015.
Allstate Financial net income applicable to common shareholders was $391 million in 2016 compared to $663 million in 2015.
Total revenues were $36.53 billion in 2016 compared to $35.65 billion in 2015.
Property-Liability premiums earned totaled $31.31 billion in 2016, an increase of 3.3% from $30.31 billion in 2015.
Investments totaled $81.80 billion as of December 31, 2016, increasing from $77.76 billion as of December 31, 2015. Net investment income was $3.04 billion in 2016, a decrease of 3.6% from $3.16 billion in 2015.
Net realized capital losses were $90 million in 2016 compared to net realized capital gains of $30 million in 2015.
Book value per diluted common share (ratio of common shareholders’ equity to total common shares outstanding and dilutive potential common shares outstanding) was $50.77 as of December 31, 2016, an increase of 7.2% from $47.34 as of December 31, 2015.
For the twelve months ended December 31, 2016, return on the average of beginning and ending period common shareholders’ equity of 9.5% decreased by 1.1 points from 10.6% for the twelve months ended December 31, 2015.
As of December 31, 2016, shareholders’ equity was $20.57 billion. This total included $2.43 billion in deployable assets at the parent holding company level comprising cash and investments that are generally saleable within one quarter.
CONSOLIDATED NET INCOME
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Revenues | | | | | |
| Property-liability insurance premiums | $ | 31,307 |
| | $ | 30,309 |
| | $ | 28,929 |
|
| Life and annuity premiums and contract charges | 2,275 |
| | 2,158 |
| | 2,157 |
|
| Net investment income | 3,042 |
| | 3,156 |
| | 3,459 |
|
| Realized capital gains and losses: | | | | | |
| Total other-than-temporary impairment (“OTTI”) losses | (313 | ) | | (452 | ) | | (242 | ) |
| OTTI losses reclassified to (from) other comprehensive income | 10 |
| | 36 |
| | (3 | ) |
| Net OTTI losses recognized in earnings | (303 | ) | | (416 | ) | | (245 | ) |
| Sales and other realized capital gains and losses | 213 |
| | 446 |
| | 939 |
|
| Total realized capital gains and losses | (90 | ) | | 30 |
| | 694 |
|
| Total revenues | 36,534 |
|
| 35,653 |
|
| 35,239 |
|
| | | | | | |
| Costs and expenses | | | | | |
| Property-liability insurance claims and claims expense | (22,221 | ) | | (21,034 | ) | | (19,428 | ) |
| Life and annuity contract benefits | (1,857 | ) | | (1,803 | ) | | (1,765 | ) |
| Interest credited to contractholder funds | (726 | ) | | (761 | ) | | (919 | ) |
| Amortization of deferred policy acquisition costs | (4,550 | ) | | (4,364 | ) | | (4,135 | ) |
| Operating costs and expenses | (4,106 | ) | | (4,081 | ) | | (4,341 | ) |
| Restructuring and related charges | (30 | ) | | (39 | ) | | (18 | ) |
| Loss on extinguishment of debt | — |
| | — |
| | (1 | ) |
| Interest expense | (295 | ) | | (292 | ) | | (322 | ) |
| Total costs and expenses | (33,785 | ) |
| (32,374 | ) |
| (30,929 | ) |
| | | | | | |
| Gain (loss) on disposition of operations | 5 |
| | 3 |
| | (74 | ) |
| Income tax expense | (877 | ) | | (1,111 | ) | | (1,386 | ) |
| Net income | 1,877 |
|
| 2,171 |
|
| 2,850 |
|
| | | | | | |
| Preferred stock dividends | (116 | ) | | (116 | ) | | (104 | ) |
| Net income applicable to common shareholders | $ | 1,761 |
|
| $ | 2,055 |
|
| $ | 2,746 |
|
| | | | | | |
| Property-Liability | $ | 1,664 |
| | $ | 1,690 |
| | $ | 2,427 |
|
| Allstate Financial | 391 |
| | 663 |
| | 631 |
|
| Corporate and Other | (294 | ) | | (298 | ) | | (312 | ) |
| Net income applicable to common shareholders | $ | 1,761 |
|
| $ | 2,055 |
|
| $ | 2,746 |
|
IMPACT OF LOW INTEREST RATE ENVIRONMENT
In December 2016, the Federal Open Market Committee (“FOMC”) tightened monetary policy by setting the new target range for the federal funds rate at 1/2 percent to 3/4 percent. The FOMC indicated that monetary policy remains accommodative after the increase, thereby supporting further strengthening in the labor market and a return to 2 percent inflation. The path of the federal funds rate increase will depend on economic conditions and their impact on the economic outlook. We anticipate that interest rates will continue to increase but remain below historic averages and that financial markets may continue to have periods of high volatility and less liquidity.
Deferred annuity contracts and interest-sensitive life insurance policies with fixed and guaranteed crediting rates, or floors that limit crediting rate reductions, are adversely impacted by a prolonged low interest rate environment since we may not be able to reduce crediting rates sufficiently to maintain investment spreads. Financial results of long duration products that do not have stated crediting rate guarantees but for which underlying assets may have to be reinvested at interest rates that are lower than portfolio rates, such as structured settlements and term life insurance, may also be adversely impacted. Our investment strategy for structured settlements includes increasing performance-based investments in which we have ownership interests and a greater proportion of return is derived from idiosyncratic asset or operating performance. We stopped selling new fixed annuity products January 1, 2014 and structured settlement annuities March 22, 2013.
The following table summarizes the weighted average guaranteed crediting rates and weighted average current crediting rates as of December 31, 2016 for certain fixed annuities and interest-sensitive life contracts where management has the ability to change the crediting rate, subject to a contractual minimum. Other products, including equity-indexed, variable and immediate annuities, and equity-indexed and variable life totaling $5.62 billion of contractholder funds, have been excluded from the analysis because management does not have the ability to change the crediting rate or the minimum crediting rate is not considered meaningful in this context.
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| | | | | | | | | |
| ($ in millions) | Weighted average guaranteed crediting rates | | Weighted average current crediting rates | | Contractholder funds |
| Annuities with annual crediting rate resets | 3.10 | % | | 3.11 | % | | $ | 5,362 |
|
Annuities with multi-year rate guarantees (1): | | | | | |
| Resettable in next 12 months | 1.85 |
| | 3.24 |
| | 401 |
|
| Resettable after 12 months | 1.37 |
| | 3.25 |
| | 1,212 |
|
| Interest-sensitive life insurance | 3.99 |
| | 4.05 |
| | 7,668 |
|
| |
(1)
• | These contracts include interest rate guarantee periods which are typically 5, 6 or 10 years.Allstate Protection: premium, policies in force (“PIF”), new business sales, policy retention, price changes, claim frequency and severity, catastrophes, loss ratio, expenses, underwriting results, and relative competitive position. |
| |
| • | Service Businesses: revenues, premium written, PIF, adjusted net income and net income. |
| |
| • | Allstate Life: premiums and contract charges, new business sales, PIF, benefit spread, investment spread, expenses, adjusted net income and net income. |
| |
| • | Allstate Benefits: premiums, new business sales, PIF, benefit ratio, expenses, adjusted net income and net income. |
| |
| • | Allstate Annuities: investment spread, asset-liability matching, contract benefits, expenses, adjusted net income, net income and invested assets. |
| |
| • | Investments: exposure to market risk, asset allocation, credit quality/experience, total return, net investment income, cash flows, realized capital gains and losses, unrealized capital gains and losses, stability of long-term returns, and asset and liability duration. |
| |
| • | Financial condition: liquidity, parent holding company deployable assets, financial strength ratings, operating leverage, debt levels, book value per share and return on equity. |
Investing activity will continue to decrease our portfolio yield as long as market yields remain below the current portfolio yield. In the Allstate Financial
Measuring segment the portfolio yield has been less impacted by reinvestment in the current low interest rate environment than the Property-Liability segment because much of the investment cash flows have been used to fund the managed reduction in spread-based liabilities. The declines in both invested assets and portfolio yield are expected to result in lower net investment income in future periods.
As of December 31, 2016, Allstate Financial has fixed income securities that are not subject to prepayment with an amortized cost of $23.52 billion and $4.21 billion of commercial mortgage loans, of which approximately 5.9% and 7.0%, respectively, are expected to mature in 2017. Additionally, for asset-backed securities (“ABS”), residential mortgage-backed securities (“RMBS”) and commercial mortgage-backed securities (“CMBS”) that have the potential for prepayment and are therefore not categorized by contractual maturity, we received periodic principal payments of $981 million in 2016. To the extent portfolio cash flows are reinvested into fixed income securities, the average pre-tax investment yield is expected to decline due to lower market yields. We shortened the maturity profile of the fixed income securities in Allstate Financial in 2015 to make the portfolio less sensitive to rising interest rates. Proceeds from the sale of longer duration fixed income securities were initially reinvested in shorter duration fixed income and public equity securities that lowered net investment income and portfolio yields. We expect to increase the portfolio allocation to performance-based investments over time, to better match the long-term nature of our immediate annuity liabilities and improve long-term economic results. We anticipate higher long-term returns on these investments. Since June 30, 2015, the carrying value of performance-based investments and market-based equity securities have increased by $1.37 billion to $4.36 billion.
As of December 31, 2016, Property-Liability has fixed income securities that are not subject to prepayment with an amortized cost of $29.02 billion, of which approximately 10.8% are expected to mature in 2017. Additionally, for ABS, RMBS and CMBS securities that have the potential for prepayment and are therefore not categorized by contractual maturity, we received periodic principal payments of $213 million in 2016. We have maintained a shorter maturity profile of the fixed income securities in Property-Liability so the portfolio is less sensitive to rising interest rates. This approach to reducing interest rate risk resulted in realized capital gains in 2013, but contributed to lower portfolio yields as sales proceeds were invested at lower market yields.
profit or loss
The portfolio yield will respond more quickly to changesmeasure of segment profit or loss used in market interest rates as a result of its shorter maturity profile. The average pre-tax investment yield may decline to the extent reinvestmentevaluating performance is at lower market yields.
In order to mitigate the unfavorable impact that the current and changing interest rate environment could have on investment results, we are:
Managing our exposure to interest rate risk by maintaining a shorter maturity profile in the Property-Liability and Allstate Financial portfolios which will also result in the yield responding more quickly to changes in market interest rates.
Shifting the portfolio mix over time to have less reliance on investments whose returns come primarily from interest payments to performance-based investments in which we have ownership interests and a greater proportion of return is derived from idiosyncratic asset or operating performance.
Seeking opportunities to increase portfolio yield by extending duration primarily in the Property-Liability portfolio as market interest rates increase.
Investingunderwriting income for the specific needs and characteristics of Allstate’s businesses.
We expect volatility in accumulated other comprehensive income resulting from changes in unrealized net capital gains and losses and unrecognized pension cost.
These topics are discussed in more detail in the respective sections of the MD&A.
PROPERTY-LIABILITY 2016 HIGHLIGHTS
Net income applicable to common shareholders was $1.66 billion in 2016 compared to $1.69 billion in 2015.
Premiums written totaled $31.60 billion in 2016, an increase of 2.4% from $30.87 billion in 2015.
Premiums earned totaled $31.31 billion in 2016, an increase of 3.3% from $30.31 billion in 2015.
The loss ratio was 71.0 in 2016 compared to 69.4 in 2015.
Catastrophe losses were $2.57 billion in 2016 compared to $1.72 billion in 2015. The effect of catastrophes on the combined ratio was 8.2 in 2016 compared to 5.7 in 2015.
Prior year reserve reestimates totaled $17 million favorable in 2016 compared to $81 million unfavorable in 2015.
Underwriting income was $1.21 billion in 2016 compared to $1.56 billion in 2015. Underwriting income is defined below.
Investments were $42.72 billion as of December 31, 2016, an increase of 11.0% from $38.48 billion as of December 31, 2015, including $1.25 billion in proceeds from the issuance of debt that were used to fund the acquisition of SquareTrade Holding Company, Inc. (“SquareTrade”) on January 3, 2017. Net investment income was $1.27 billion in 2016, an increase of 2.3% from $1.24 billion in 2015.
Net realized capital losses were $6 million in 2016 compared to $237 million in 2015.
PROPERTY-LIABILITY OPERATIONS
Overview Our Property-Liability operations consist of two reporting segments: Allstate Protection and Discontinued Lines and Coverages.Coverages segments and adjusted net income for the Service Businesses, Allstate Protection comprises three brands where we accept underwriting risk:Life, Allstate®, Esurance® Benefits, Allstate Annuities, and Encompass®. Allstate Protection is principally engaged in the sale of personal propertyCorporate and casualty insurance, primarily private passenger auto and homeowners insurance, to individuals in the United States and Canada. Discontinued Lines and Coverages includes results from property-liability insurance coverage that we no longer write and results for certain commercial and other businesses in run-off. These segments are consistent with the groupings of financial information that management uses to evaluate performance and to determine the allocation of resources.Other segments.
Underwriting income is calculated as premiums earned and other revenue, less claims and claims expense (“losses”), amortization of DAC,deferred policy acquisition costs (“DAC”), operating costs and expenses, and restructuring and related charges and amortization or impairment of purchased intangibles, as determined using accounting principles generally accepted in the United States of America (“GAAP”). We use this measure in our evaluation of results of operations to analyze the profitability of the Property-Liability insurance operations separately from investment results. Underwriting income is reconciled to net income applicable to common shareholders below.
The table below includes GAAP operating ratios we use to measure our profitability. We believe that they enhance an investor’s understanding of our profitability. They are calculated as follows:
Claims and claims expense (“loss”) ratio - the ratio of claims and claims expense to premiums earned. Loss ratios include the impact of catastrophe losses.
Expense ratio - the ratio of amortization of DAC, operating costs and expenses, and restructuring and related charges to premiums earned.
Combined ratio - the ratio of claims and claims expense, amortization of DAC, operating costs and expenses, and restructuring and related charges to premiums earned. The combined ratio is the sum of the loss ratio and the expense ratio. The difference between 100% and the combined ratio represents underwriting income as a percentage of premiums earned, or underwriting margin.
We have also calculated the following impacts of specific items on the GAAP operating ratios because of the volatility of these items between fiscal periods.
Effect of catastrophe losses on combined ratio - the percentage of catastrophe losses included in claims and claims expense to premiums earned. This ratio includes prior year reserve reestimates of catastrophe losses.
Effect of prior year reserve reestimates on combined ratio - the percentage of prior year reserve reestimates included in claims and claims expense to premiums earned. This ratio includes prior year reserve reestimates of catastrophe losses.
Effect of amortization of purchased intangible assets on combined ratio - the percentage of amortization of purchased intangible assets to premiums earned.
Effect of restructuring and related charges on combined ratio - the percentage of restructuring and related charges to premiums earned.
Effect of Discontinued Lines and Coverages on combined ratio - the ratio of claims and claims expense and operating costs and expenses in the Discontinued LinesProperty-Liability Operations section of Management’s Discussion and Coverages segmentAnalysis (“MD&A”).
Adjusted net income is net income applicable to Property-Liability premiums earned. The sum of the effect of Discontinued Lines and Coverages on the combined ratio and the Allstate Protection combined ratiocommon shareholders, excluding:
|
|
• Realized capital gains and losses, after-tax, except for periodic settlements and accruals on non-hedge derivative instruments, which are reported with realized capital gains and losses but included in adjusted net income |
• Pension and other postretirement remeasurement gains and losses, after-tax |
• Valuation changes on embedded derivatives not hedged, after-tax
|
• Amortization of DAC and deferred sales inducement costs (“DSI”), to the extent they resulted from the recognition of certain realized capital gains and losses or valuation changes on embedded derivatives not hedged, after-tax |
• Business combination expenses and the amortization or impairment of purchased intangible assets, after-tax |
• Gain (loss) on disposition of operations, after-tax |
• Adjustments for other significant non-recurring, infrequent or unusual items, when (a) the nature of the charge or gain is such that it is reasonably unlikely to recur within two years, or (b) there has been no similar charge or gain within the prior two years |
Adjusted net income is equal to the Property-Liability combined ratio.
Summarized financial data, a reconciliation of underwriting incomereconciled to net income applicable to common shareholders and GAAP operating ratios for our Property-Liability operations are presented in the following table.Service Businesses, Allstate Life, Allstate Benefits and Allstate Annuities Segment sections of MD&A.
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| | | | | | | | | | | |
| ($ in millions, except ratios) | 2016 | | 2015 | | 2014 |
| Premiums written | $ | 31,600 |
| | $ | 30,871 |
| | $ | 29,614 |
|
| | | | | | |
| Revenues | | | | | |
| Premiums earned | $ | 31,307 |
| | $ | 30,309 |
| | $ | 28,929 |
|
| Net investment income | 1,266 |
| | 1,237 |
| | 1,301 |
|
| Realized capital gains and losses | (6 | ) | | (237 | ) | | 549 |
|
| Total revenues | 32,567 |
| | 31,309 |
| | 30,779 |
|
| | | | | | |
| Costs and expenses | | | | | |
| Claims and claims expense | (22,221 | ) | | (21,034 | ) | | (19,428 | ) |
| Amortization of DAC | (4,267 | ) | | (4,102 | ) | | (3,875 | ) |
| Operating costs and expenses | (3,580 | ) | | (3,575 | ) | | (3,838 | ) |
| Restructuring and related charges | (29 | ) | | (39 | ) | | (16 | ) |
| Total costs and expenses | (30,097 | ) | | (28,750 | ) | | (27,157 | ) |
| | | | | | |
| Gain on disposition of operations | — |
| | — |
| | 16 |
|
| Income tax expense | (806 | ) | | (869 | ) | | (1,211 | ) |
| Net income applicable to common shareholders | $ | 1,664 |
|
| $ | 1,690 |
|
| $ | 2,427 |
|
| | | | | | |
| Underwriting income | $ | 1,210 |
| | $ | 1,559 |
| | $ | 1,772 |
|
| Net investment income | 1,266 |
| | 1,237 |
| | 1,301 |
|
| Income tax expense on operations | (812 | ) | | (952 | ) | | (1,040 | ) |
| Realized capital gains and losses, after-tax | — |
| | (154 | ) | | 357 |
|
| Gain on disposition of operations, after-tax | — |
| | — |
| | 37 |
|
| Net income applicable to common shareholders | $ | 1,664 |
|
| $ | 1,690 |
|
| $ | 2,427 |
|
| | | | | | |
| Catastrophe losses | $ | 2,572 |
| | $ | 1,719 |
| | $ | 1,993 |
|
| | | | | | |
| GAAP operating ratios | | | | | |
| Claims and claims expense ratio | 71.0 |
| | 69.4 |
| | 67.2 |
|
| Expense ratio | 25.1 |
| | 25.5 |
| | 26.7 |
|
| Combined ratio | 96.1 |
| | 94.9 |
| | 93.9 |
|
| Effect of catastrophe losses on combined ratio | 8.2 |
| | 5.7 |
| | 6.9 |
|
| Effect of prior year reserve reestimates on combined ratio | (0.1 | ) | | 0.3 |
| | (0.3 | ) |
Effect of catastrophe losses included in prior year reserve reestimates on combined ratio (1) | — |
| | — |
| | 0.1 |
|
| Effect of amortization of purchased intangible assets on combined ratio | 0.1 |
| | 0.2 |
| | 0.2 |
|
| Effect of restructuring and related charges on combined ratio | 0.1 |
| | 0.1 |
| | 0.1 |
|
| Effect of Discontinued Lines and Coverages on combined ratio | 0.3 |
| | 0.2 |
| | 0.4 |
|
|
| | | | | |
Allstate Delivered on 2019 Operating Priorities (1) |
| | | | | |
| Better Serve Customers | | Enterprise Net Promoter Score increased with improvement at most businesses |
|
| Grow Customer Base | | Total policies in force reached 145.9 million, a 27.7% increase from prior year |
| Property-Liability policies increased 1.3% from prior year to 33.7 million |
| Achieve Target Returns on Capital | | Strong results in Property-Liability insurance with a combined ratio of 92.0 |
| 21.7% return on average common shareholders’ equity in 2019 |
| Proactively Manage Investments | | Net investment income of $3.2 billion in 2019 reflects higher market-based portfolio yields |
| Performance-based results were below expectations, but long-term returns have been strong |
| Total return of 9.2% on $88.4 billion investment portfolio in 2019 |
| Build Long-Term Growth Platforms | | Accelerating Transformative Growth Plan |
| Arity continued to expand telematics usage and capabilities
|
| Expanding Allstate Identity Protection |
| |
(1) | Prior year reserve reestimates included2020 operating priorities will remain consistent with the 2019 priorities. |
|
| | | | |
| Consolidated Net Income |
($ in catastrophemillions) |
|
|
Consolidated net income applicable to common shareholders increased $2.67 billion in 2019 compared to 2018, primarily due to net realized capital gains in 2019 compared to losses totaled $6 million unfavorable, $15 million favorablein 2018 from increased valuations on equity investments and $43 million unfavorablehigher underwriting income in 2016, 2015Allstate Protection. |
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| | | | |
| Total Revenue |
($ in millions)
|
|
|
Total revenue increased 12.2% in 2019 compared to 2018, driven by net realized capital gains in 2019 compared to losses in 2018 and 2014, respectively.a 5.7% increase in insurance premiums and contract charges. Insurance premiums increased in the following segments: Allstate Protection (Allstate and Esurance brands), Service Businesses (Allstate Protection Plans and Allstate Dealer Services), Allstate Life and Allstate Benefits. |
ALLSTATE PROTECTION SEGMENT |
| | | | |
Net Investment Income
|
| ($ in millions) |
|
|
Net investment income decreased 2.5% in 2019 compared to 2018, primarily due to lower income from performance-based investment results, partially offset by higher income from the market-based portfolio. |
The Allstate Corporation 35
Summarized financial results
|
| | | | | | | | | | | | |
| | | Years Ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Revenues | | | | | | |
| Property and casualty insurance premiums | | $ | 36,076 |
| | $ | 34,048 |
| | $ | 32,300 |
|
| Life premiums and contract charges | | 2,501 |
| | 2,465 |
| | 2,378 |
|
| Other revenue | | 1,054 |
| | 939 |
| | 883 |
|
| Net investment income | | 3,159 |
| | 3,240 |
| | 3,401 |
|
| Realized capital gains and losses | | 1,885 |
| | (877 | ) | | 445 |
|
| Total revenues | | 44,675 |
| | 39,815 |
| | 39,407 |
|
| | | | | | | |
| Costs and expenses | | | | | | |
| Property and casualty insurance claims and claims expense | | (23,976 | ) | | (22,778 | ) | | (21,847 | ) |
| Life contract benefits and interest credited to contractholder funds | | (2,679 | ) | | (2,627 | ) | | (2,613 | ) |
| Amortization of deferred policy acquisition costs | | (5,533 | ) | | (5,222 | ) | | (4,784 | ) |
| Operating, restructuring and interest expenses | | (6,058 | ) | | (5,993 | ) | | (5,627 | ) |
| Pension and other postretirement remeasurement gains and losses | | (114 | ) | | (468 | ) | | 217 |
|
| Amortization of purchased intangibles | | (126 | ) | | (105 | ) | | (99 | ) |
| Impairment of goodwill and purchased intangibles | | (106 | ) | | — |
| | (125 | ) |
| Total costs and expenses | | (38,592 | ) | | (37,193 | ) | | (34,878 | ) |
| | | | | | | |
| Gain on disposition of operations | | 6 |
| | 6 |
| | 20 |
|
| Income tax expense | | (1,242 | ) | | (468 | ) | | (995 | ) |
| Net income | | 4,847 |
| | 2,160 |
| | 3,554 |
|
| | | | | | | |
| Preferred stock dividends | | (169 | ) | | (148 | ) | | (116 | ) |
| Net income applicable to common shareholders | | $ | 4,678 |
| | $ | 2,012 |
| | $ | 3,438 |
|
Segment Highlights
Allstate Protection segmentunderwriting income totaled $2.91 billion in 2019, a 24.3% increase from $2.34 billion in 2018, primarily sells private passenger auto, homeowners,due to increased premiums earned and other personal lines insurance productslower catastrophe losses, partially offset by higher non-catastrophe losses and amortization of DAC.
Catastrophe losses were $2.56 billion in 2019 compared $2.86 billion in 2018.
Premiums written increased 5.6% to individuals through agencies$35.42 billion in 2019 compared to 2018.
Service Businessesadjusted net income was $38 million in 2019 compared to $8 million in 2018. The improvement in 2019 was primarily due to growth of Allstate Protection Plans, favorable loss experience of both Allstate Protection Plans and directly through contact centersAllstate Dealer Services, partially offset by higher operating expenses related to investing in growth and the internet. Our strategy is to position ourdeveloping new products and distribution systemschannels for Allstate Protection Plans and Allstate Identity Protection.
Total revenues increased 25.1% or $331 million to meet the changing needs$1.65 billion in 2019 from $1.32 billion in 2018.
Allstate Life adjusted net income was $261 million in 2019 compared to $295 million in 2018. The decrease was primarily due to higher amortization of our customer in managing the risks they face. This includes customers who want local advice and assistance and those who are self-directed. In addition, there are customers who are brand-sensitive and those who are brand-neutral. Our strategy is to serve all four of these consumer segments with unique products and value propositions, while leveraging our claims, pricing and operational capabilities. When we do not offer a product our customers need, we may make available non-proprietary products that meet their needs.
Our products are marketed under the Allstate, Esurance and Encompass brand names. The Allstate brand serves customers who prefer local personalized advice and service and are brand-sensitive. The Esurance brand serves self-directed, brand-sensitive customers, while the Encompass brand serves customers who prefer personal advice and assistance from an independent adviser and are brand-neutral. For those customers who are self-directed and brand-neutral, Answer Financial, a personal lines insurance agency, offers a choice between insurance carriers and comparison quotes for auto and homeowners insurance from approximately 25 insurance companies through its website and over the phone. It receives commissions for this service. We utilize specific customer value propositions for each brand to improve our competitive position and performance. Over time, delivering on these customer value propositions may include investments in resources and require significant changesDAC related to our products, service, capabilitiesannual review of assumptions and processes.higher contract benefits, partially offset by higher premiums and net investment income, and lower operating costs and expenses.
Our pricingPremiums and underwriting strategies and decisions for allcontract charges totaled $1.34 billion in 2019, an increase of our brands are2.1% from $1.32 billion in 2018.
Allstate Benefits adjusted net income was $115 million in 2019 compared to $124 million in 2018. The decrease was primarily designeddue to achieve appropriate returns along with enhancing our competitive position. Our sophisticated pricing methodology allows us to attract and retain customers in multiple risk segments. A combination of underwriting information, pricing and discounts are also used to achieve a more competitive position. Our pricing strategy involves local marketplace pricing and underwriting decisions that are based on these risk evaluation factors and an evaluation of competitorshigher DAC amortization related primarily to the extent permissiblenon-renewal of a large underperforming account and increased operating costs and expenses, partially offset by applicable law.higher premiums.
PricingPremiums and contract charges totaled $1.15 billion in 2019, an increase of property products is typically intended0.9% from $1.14 billion in 2018.
Allstate Annuities adjusted net income was $10 million in 2019 compared to establish risk adjusted returns that we deem acceptable over a long-term period. Losses, including losses$131 million in 2018. The decrease was primarily due to lower net investment income, partially offset by lower interest credited to contractholder funds.
Net investment income decreased 16.3% to $917 million in 2019 from catastrophic events$1.10 billion in 2018. The decrease was primarily due to lower performance-based investment results, mainly from limited partnerships, and weather-related losses (suchlower average investment balances.
Financial Highlights
Investments totaled $88.36 billion as wind, hail, lightning and freeze losses not meeting our criteriaof December 31, 2019, increasing from $81.26 billion as of December 31, 2018. Unrealized net capital gains totaled $2.74 billion as of December 31, 2019 compared to be declared a catastrophe), are recognized on an occurrence basis within the policy period. Therefore, in any reporting period, loss experience from catastrophic events and weather-related losses may contribute to negative or positive underwriting performance relative to the expectations we incorporated into product pricing. We pursue rate increases where indicated, taking into consideration potential customer disruption, the impact on our ability to market our auto and homeowners lines, regulatory limitations, our competitive position and profitability, using a methodology that appropriately addresses the changing costsnet unrealized capital gains of losses from catastrophes such$33 million as severe weather and the net cost of reinsurance.December 31, 2018.
We continue to manage our property catastrophe exposure with the goal of providing shareholders an acceptable return on the risks assumed in our property business and to reduce the variability of our earnings. Our property business includes personal homeowners, commercial property and other property insurance lines.Shareholders’ equity As of December 31, 2016, we have less than a 1% likelihood2019, shareholders’ equity was $26.00 billion. This total included $2.30 billion in deployable assets at the parent holding company level comprising cash and investments that are generally saleable within one quarter.
Book value per diluted common share (ratio of exceedingcommon shareholders’ equity to total common shares outstanding and dilutive potential common shares outstanding) was $73.12 as of December 31, 2019, an increase of 27.03% from $57.56 as of December 31, 2018.
Return on average annual aggregate catastrophe lossescommon shareholders’ equity For the twelve months ended December 31, 2019, net income applicable to common shareholders’ return on the average of beginning and ending period common shareholders’ equity of 21.7% increased by $2 billion, net of reinsurance,11.7 points from hurricanes and earthquakes, based on modeled assumptions and applications currently available. The use of different assumptions and updates to industry models, and updates to our risk transfer program, could materially change the projected loss. Our growth strategies include areas previously restricted where we believe we can enhance diversification and earn an appropriate return10.0% for the risk and as a result our exposure may increase, but in aggregate remain lower than $2 billion as noted above. In addition, we have exposure to severe weather events which impact catastrophe losses.
Property catastrophe exposure management includes purchasing reinsurance to provide coverage for known exposure to hurricanes, earthquakes, wildfires, fires following earthquakes and other catastrophes. We are also working to promote measures to prevent and mitigate losses and make homes and communities more resilient, including enactment of stronger building codes and effective enforcement of those codes, adoption of sensible land use policies, and development of effective and affordable methods of improving the resilience of existing structures.
Allstate Protection outlook
Allstate Protection will continue to focus on its strategy of offering differentiated products and services to our customers while maintaining pricing discipline.
We will continue to take actions to improve auto profitability by increasing prices, evaluating underwriting standards, managing expenses, and managing loss cost through focus on claims process excellence.
We will pursue growth in homeowners policies that do not significantly increase catastrophe exposure.
We expect that volatility in the level of catastrophes we experience will contribute to variation in our underwriting results; however, this volatility will be mitigated due to our catastrophe management actions, including the purchase of reinsurance.
We will continue the implementation of our trusted advisor strategy, enabling Allstate agencies to more fully deliver on the Allstate brand customer value proposition.
We will continue to modernize our operating model, including enhancing our digital capabilities, to efficiently deliver our customer value propositions.
We will invest in building long-term growth platforms.
Underwriting results are shown in the following table.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Premiums written | $ | 31,597 |
| | $ | 30,871 |
| | $ | 29,613 |
|
| Premiums earned | $ | 31,307 |
| | $ | 30,309 |
| | $ | 28,928 |
|
| Claims and claims expense | (22,116 | ) | | (20,981 | ) | | (19,315 | ) |
| Amortization of DAC | (4,267 | ) | | (4,102 | ) | | (3,875 | ) |
| Other costs and expenses | (3,578 | ) | | (3,573 | ) | | (3,835 | ) |
| Restructuring and related charges | (29 | ) | | (39 | ) | | (16 | ) |
| Underwriting income | $ | 1,317 |
| | $ | 1,614 |
| | $ | 1,887 |
|
| Catastrophe losses | $ | 2,572 |
| | $ | 1,719 |
| | $ | 1,993 |
|
| | | | | | |
| Underwriting income (loss) by line of business | | | | | |
| Auto | $ | 172 |
| | $ | 23 |
| | $ | 604 |
|
| Homeowners | 1,075 |
| | 1,431 |
| | 1,097 |
|
| Other personal lines | 160 |
| | 175 |
| | 150 |
|
| Commercial lines | (110 | ) | | (40 | ) | | 9 |
|
| Other business lines | 27 |
| | 33 |
| | 40 |
|
| Answer Financial | (7 | ) | | (8 | ) | | (13 | ) |
| Underwriting income | $ | 1,317 |
| | $ | 1,614 |
| | $ | 1,887 |
|
The following table summarizes the changes in underwriting results from the prior year by the components of the increase (decrease) in underwriting income (loss) by line of business. The 2016 column presents changes in 2016 compared to 2015. The 2015 column presents changes in 2015 compared to 2014.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | Auto | | Homeowners | | Other personal lines | | Commercial lines | | Allstate Protection (1) |
| | 2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 |
| Underwriting income (loss) - prior year | $ | 23 |
| | $ | 604 |
| | $ | 1,431 |
| | $ | 1,097 |
| | $ | 175 |
| | $ | 150 |
| | $ | (40 | ) | | $ | 9 |
| | $ | 1,614 |
| | $ | 1,887 |
|
Changes in underwriting income (loss) from: | | | | | | | | | | | | | | | | | | | |
| Premiums earned | 854 |
| | 1,066 |
| | 121 |
| | 232 |
| | 8 |
| | 30 |
| | (4 | ) | | 34 |
| | 998 |
| | 1,381 |
|
Incurred claims and claims expense (“losses”): | | | | | | | | | | | | | | | | | | | |
Incurred losses, excluding catastrophe losses and reserve reestimates | (499 | ) | | (1,491 | ) | | 14 |
| | (62 | ) | | 26 |
| | (42 | ) | | (6 | ) | | (65 | ) | | (453 | ) | | (1,658 | ) |
Catastrophe losses, excluding reserve reestimates | (321 | ) | | 80 |
| | (443 | ) | | 128 |
| | (58 | ) | | 2 |
| | (9 | ) | | 6 |
| | (832 | ) | | 216 |
|
| | | | | | | | | | | | | | | | | | | | |
| Non-catastrophes reserve reestimates | 193 |
| | (265 | ) | | 13 |
| | (13 | ) | | 27 |
| | 18 |
| | (60 | ) | | (19 | ) | | 171 |
| | (282 | ) |
| Catastrophes reserve reestimates | (8 | ) | | (3 | ) | | (13 | ) | | 66 |
| | — |
| | (2 | ) | | — |
| | (3 | ) | | (21 | ) | | 58 |
|
| Total reserve reestimates | 185 |
| | (268 | ) | | — |
| | 53 |
| | 27 |
| | 16 |
| | (60 | ) | | (22 | ) | | 150 |
| | (224 | ) |
| Losses subtotal - (loss) income | (635 | ) | | (1,679 | ) | | (429 | ) | | 119 |
| | (5 | ) | | (24 | ) | | (75 | ) | | (81 | ) | | (1,135 | ) | | (1,666 | ) |
| | | | | | | | | | | | | | | | | | | | |
| Expenses | (70 | ) | | 32 |
| | (48 | ) | | (17 | ) | | (18 | ) | | 19 |
| | 9 |
| | (2 | ) | | (160 | ) | | 12 |
|
| Underwriting income (loss) | $ | 172 |
| | $ | 23 |
| | $ | 1,075 |
| | $ | 1,431 |
| | $ | 160 |
| | $ | 175 |
| | $ | (110 | ) | | $ | (40 | ) | | $ | 1,317 |
| | $ | 1,614 |
|
(1) Includes other business lines underwriting income of $27 million and $33 million in 2016 and 2015, respectively, and Answer Financial underwriting loss of $7 million and $8 million in 2016 and 2015, respectively.
Underwriting income totaled $1.32 billion in 2016, an 18.4% decrease from $1.61 billion in 2015,twelve months ended December 31, 2018, primarily due to higher catastrophe losses and rising loss costs,net income applicable to common shareholders, partially offset by increased premiums earned. Underwriting income totaled $1.61 billionan increase in 2015, a 14.5%average common shareholders’ equity.
Pension and other postretirement measurement gains and lossesPension and other postretirement measurement losses were $114 million in 2019 compared to losses of $468 million in 2018. The decrease from $1.89 billion in 2014,was primarily duerelated to rising loss costs,favorable asset performance compared to the expected return on plan assets, partially offset by increased premiums earned.
Investment results are not includeda decrease in the underwriting income analysis above. discount rate used to value the liabilities. See Note 17 of the consolidated financial statements for further information.
The Company doesAllstate Corporation 37
2019 Form 10-KProperty-Liability
Property-Liability Operations
Overview Property-Liability operations consist of two reportable segments: Allstate Protection and Discontinued Lines and Coverages. These segments are consistent with the groupings of financial information that management uses to evaluate performance and to determine the allocation of resources.
We do not allocate Property-Liability investment income, realized capital gains and losses, or assets to the Allstate Protection and Discontinued Lines and Coverages segments. Management reviews assets at the Property-Liability level for decision-making purposes. For a more detailed
The table below includes GAAP operating ratios we use to measure our profitability. We believe that they enhance an investor’s understanding of our profitability. They are calculated as follows:
| |
| • | Loss ratio:the ratio of claims and claims expense to premiums earned. Loss ratios include the impact of catastrophe losses. |
| |
| • | Expense ratio: the ratio of amortization of DAC, operating costs and expenses, amortization or impairment of purchased intangibles and restructuring and related charges, less other revenue to premiums earned. |
| |
| • | Combined ratio: is the sum of the loss ratio and the expense ratio. The difference between 100% and the combined ratio represents underwriting income as a percentage of premiums earned, or underwriting margin. |
discussion
We have also calculated the following impacts of specific items on the GAAP operating ratios because of the volatility of these items between fiscal periods.
| |
| • | Effect of catastrophe losses on combined ratio: the ratio of catastrophe losses included in claims and claims expense to premiums earned. This ratio includes prior year reserve reestimates of catastrophe losses. |
| |
| • | Effect of prior year reserve reestimates on combined ratio: the ratio of prior year reserve reestimates included in claims and claims expense to premiums earned. This ratio includes prior year reserve reestimates of catastrophe losses. |
| |
| • | Effect of amortization of purchased intangibles on combined ratio: the ratio of amortization of purchased intangibles to premiums earned. |
| |
| • | Effect of impairment of purchased intangibles on combined ratio:the ratio of impairment of purchased intangibles to premiums earned. |
| |
| • | Effect of restructuring and related charges on combined ratio: the ratio of restructuring and related charges to premiums earned. |
| |
| • | Effect of Discontinued Lines and Coverages on combined ratio: the ratio of claims and claims expense and operating costs and expenses in the Discontinued Lines and Coverages segment to Property-Liability premiums earned. The sum of the effect of Discontinued Lines and Coverages on the combined ratio and the Allstate Protection combined ratio is equal to the Property-Liability combined ratio. |
Property-Liability 2019 Form 10-K
|
| | | | | | | | | | | | |
| Summarized financial data |
| ($ in millions, except ratios) | | 2019 | | 2018 | | 2017 |
| Premiums written | | $ | 35,419 |
| | $ | 33,555 |
| | $ | 31,648 |
|
| | | | | | | |
| Revenues | | | | | | |
| Premiums earned | | $ | 34,843 |
| | $ | 32,950 |
| | $ | 31,433 |
|
| Other revenue | | 741 |
| | 738 |
| | 703 |
|
| Net investment income | | 1,533 |
| | 1,464 |
| | 1,478 |
|
| Realized capital gains and losses | | 1,470 |
| | (639 | ) | | 401 |
|
| Total revenues | | 38,587 |
| | 34,513 |
| | 34,015 |
|
| | | | | | | |
| Costs and expenses | | | | | | |
| Claims and claims expense | | (23,622 | ) | | (22,435 | ) | | (21,484 | ) |
| Amortization of DAC | | (4,649 | ) | | (4,475 | ) | | (4,205 | ) |
| Operating costs and expenses | | (4,420 | ) | | (4,465 | ) | | (4,164 | ) |
| Restructuring and related charges | | (38 | ) | | (60 | ) | | (78 | ) |
Impairment of purchased intangibles (1) | | (51 | ) | | — |
| | — |
|
| Total costs and expenses | | (32,780 | ) | | (31,435 | ) | | (29,931 | ) |
| | | | | | | |
| Gain on disposition of operations | | — |
| | — |
| | 14 |
|
Income tax expense | | (1,196 | ) | | (613 | ) | | (1,285 | ) |
| Net income applicable to common shareholders | | $ | 4,611 |
|
| $ | 2,465 |
|
| $ | 2,813 |
|
| | | | | | | |
| Underwriting income | | $ | 2,804 |
| | $ | 2,253 |
| | $ | 2,205 |
|
| Net investment income | | 1,533 |
| | 1,464 |
| | 1,478 |
|
| Income tax expense on operations | | (887 | ) | | (747 | ) | | (1,187 | ) |
| Realized capital gains and losses, after-tax | | 1,161 |
| | (500 | ) | | 272 |
|
| Gain on disposition of operations, after-tax | | — |
| | — |
| | 9 |
|
| Tax Legislation (expense) benefit | | — |
| | (5 | ) | | 36 |
|
| Net income applicable to common shareholders | | $ | 4,611 |
|
| $ | 2,465 |
|
| $ | 2,813 |
|
| | | | | | | |
| Catastrophe losses | | | | | | |
| Catastrophe losses, excluding reserve reestimates | | $ | 2,509 |
| | $ | 2,830 |
| | $ | 3,246 |
|
Catastrophe reserve reestimates (2) | | 48 |
| | 25 |
| | (18 | ) |
| Total catastrophe losses | | $ | 2,557 |
| | $ | 2,855 |
| | $ | 3,228 |
|
| | | | | | | |
Non-catastrophe reserve reestimates (2) | | (176 | ) | | (278 | ) | | (487 | ) |
Prior year reserve reestimates (2) | | (128 | ) | | (253 | ) | | (505 | ) |
| | | | | | | |
| GAAP operating ratios | | | | | | |
| Loss ratio | | 67.8 |
| | 68.1 |
| | 68.4 |
|
Expense ratio (3) | | 24.2 |
| | 25.1 |
| | 24.6 |
|
| Combined ratio | | 92.0 |
| | 93.2 |
| | 93.0 |
|
| Effect of catastrophe losses on combined ratio | | 7.3 |
| | 8.7 |
| | 10.3 |
|
Effect of prior year reserve reestimates on combined ratio | | (0.3 | ) | | (0.7 | ) | | (1.6 | ) |
| Effect of catastrophe losses included in prior year reserve reestimates on combined ratio | | 0.1 |
| | 0.1 |
| | (0.1 | ) |
| Effect of restructuring and related charges on combined ratio | | 0.1 |
| | 0.2 |
| | 0.2 |
|
Effect of impairment of purchased intangibles (1) | | 0.1 |
| | — |
| | — |
|
| Effect of Discontinued Lines and Coverages on combined ratio | | 0.4 |
| | 0.3 |
| | 0.3 |
|
| |
(1) | Our Transformative Growth Plan included a decision to reposition the Allstate brand for broader customer access, resulting in a $51 million impairment for the Esurance brand trade name. See the Esurance section of this Item for further details. |
| |
(2) | Favorable reserve reestimates are shown in parentheses. |
| |
(3) | Other revenue is deducted from operating costs and expenses in the expense ratio calculation. |
The Allstate Corporation 39
2019 Form 10-KProperty-Liability
Net investment income increased 4.7% or $69 million in 2019 compared to 2018, due to higher income from market-based portfolios, partially offset by lower performance-based investment results, seemainly from limited partnerships. 2019 performance-based investment results included lower valuations in the fourth quarter, on two private equity investments totaling $37 million. We increased the maturity profile of fixed income securities in our Property-Liability Investment Results sectionportfolio to a duration of the MD&A5.2 years as of December 31, 2019 compared to 4.1 years as of December 31, 2018.
|
| | | | | | | | | | | | |
| Net investment income |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Fixed income securities | | $ | 1,066 |
| | $ | 943 |
| | $ | 909 |
|
| Equity securities | | 155 |
| | 121 |
| | 122 |
|
| Mortgage loans | | 17 |
| | 17 |
| | 12 |
|
| Limited partnership interests | | 296 |
| | 378 |
| | 432 |
|
| Short-term investments | | 56 |
| | 40 |
| | 17 |
|
| Other | | 107 |
| | 123 |
| | 100 |
|
| Investment income, before expense | | 1,697 |
| | 1,622 |
| | 1,592 |
|
Investment expense (1) (2) | | (164 | ) | | (158 | ) | | (114 | ) |
| Net investment income | | $ | 1,533 |
| | $ | 1,464 |
| | $ | 1,478 |
|
| |
(1) | Investment expense includes $51 million and $45 million of investee level expenses in 2019 and 2018, respectively. Investee level expenses include depreciation and asset level operating expenses on directly held real estate and other consolidated investments. |
| |
(2) | Investment expense includes $27 million and $18 million related to the portion of reinvestment income on securities lending collateral paid to the counterparties in 2019 and 2018, respectively. |
Realized capital gains and Note 19 of the consolidated financial statements. Additional analysislosses Net realized capital gains in 2019, primarily related to premiums writtenincreased valuation of equity investments and the combined ratios, including loss and expense ratios are included below andgains on sales of fixed income securities. Valuation of equity investments for 2019 includes $883 million of appreciation in the brand sections.valuation of equity securities and $141 million of appreciation primarily related to certain limited partnerships where the underlying assets are predominately public equity securities. Net realized capital losses in 2018, primarily related to decreases in the valuation of equity investments and losses on sales of fixed income securities.
|
| | | | | | | | | | | | |
| Realized capital gains and losses |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Impairment write-downs | | $ | (26 | ) | | $ | (5 | ) | | $ | (56 | ) |
| Change in intent write-downs | | — |
| | — |
| | (44 | ) |
| Net OTTI losses recognized in earnings | | (26 | ) | | (5 | ) | | (100 | ) |
| Sales | | 498 |
| | (148 | ) | | 531 |
|
| Valuation of equity investments | | 1,024 |
| | (522 | ) | | — |
|
| Valuation and settlements of derivative instruments | | (26 | ) | | 36 |
| | (30 | ) |
| Realized capital gains and losses, pre-tax | | 1,470 |
| | (639 | ) | | 401 |
|
| Income tax (expense) benefit | | (309 | ) | | 139 |
| | (129 | ) |
| Realized capital gains and losses, after-tax | | $ | 1,161 |
| | $ | (500 | ) | | $ | 272 |
|
Beginning January 1, 2018, equity securities are reported at fair value with changes in fair value recognized in realized capital gains and losses. Limited partnerships previously reported using the cost method are reported at fair value with changes in fair value recognized in net investment income. As a result, 2017 net investment income and net realized capital gains and losses are not comparable to other periods presented.
Allstate Protection 2019 Form 10-K
Allstate Protection Segment
Private passenger auto, homeowners, and other personal lines insurance products are offered to consumers through agencies and directly through contact centers and online. Our strategy is to position product offerings and distribution channels to meet customers’ needs and protect them from life’s uncertainties. For additional information on our strategy and outlook, see Part I, Item 1. Business - Strategy and Segment Information.
|
| | | | | | | | | | | | |
Underwriting results
|
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Premiums written | | $ | 35,419 |
| | $ | 33,555 |
| | $ | 31,648 |
|
| Premiums earned | | $ | 34,843 |
| | $ | 32,950 |
| | $ | 31,433 |
|
| Other revenue | | 741 |
| | 738 |
| | 703 |
|
| Claims and claims expense | | (23,517 | ) | | (22,348 | ) | | (21,388 | ) |
| Amortization of DAC | | (4,649 | ) | | (4,475 | ) | | (4,205 | ) |
| Other costs and expenses | | (4,417 | ) | | (4,462 | ) | | (4,161 | ) |
| Restructuring and related charges | | (38 | ) | | (60 | ) | | (78 | ) |
| Impairment of purchased intangibles | | (51 | ) | | — |
| | — |
|
| Underwriting income | | $ | 2,912 |
| | $ | 2,343 |
| | $ | 2,304 |
|
| Catastrophe losses | | $ | 2,557 |
| | $ | 2,855 |
| | $ | 3,228 |
|
| | | | | | | |
| Underwriting income (loss) by line of business | | | | | | |
| Auto | | $ | 1,688 |
| | $ | 1,791 |
| | $ | 1,437 |
|
| Homeowners | | 914 |
| | 483 |
| | 689 |
|
Other personal lines (1) | | 224 |
| | 110 |
| | 141 |
|
| Commercial lines | | 14 |
| | (83 | ) | | (13 | ) |
Other business lines (2) | | 75 |
| | 49 |
| | 51 |
|
| Answer Financial | | (3 | ) | | (7 | ) | | (1 | ) |
| Underwriting income | | $ | 2,912 |
| | $ | 2,343 |
| | $ | 2,304 |
|
| |
(1) | Other personal lines include renters, condominium, landlord and other personal lines products. |
| |
(2) | Other business lines primarily represent Ivantage, a general agency for Allstate exclusive agencies. Ivantage provides agencies a solution for their customers when coverage through Allstate brand underwritten products is not available. |
The Allstate Corporation 41
2019 Form 10-KAllstate Protection
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Changes in underwriting results from prior year by component and by line of business (1) |
| | | For the year ended December 31, |
| | | Auto | | Homeowners | | Other personal lines | | Commercial lines | | Allstate Protection (2) |
| ($ in millions) | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
| Underwriting income (loss) - prior year | | $ | 1,791 |
| | $ | 1,437 |
| | $ | 483 |
| | $ | 689 |
| | $ | 110 |
| | $ | 141 |
| | $ | (83 | ) | | $ | (13 | ) | | $ | 2,343 |
| | $ | 2,304 |
|
| Changes in underwriting income (loss) from: | | | | | | | | | | | | | | | | | | | | |
| Increase (decrease) premiums earned | | 1,218 |
| | 1,092 |
| | 395 |
| | 207 |
| | 53 |
| | 58 |
| | 227 |
| | 160 |
| | 1,893 |
| | 1,517 |
|
| Increase (decrease) other revenue | | 1 |
| | 30 |
| | — |
| | 3 |
| | (1 | ) | | 4 |
| | — |
| | (2 | ) | | 3 |
| | 35 |
|
| (Increase) decrease incurred claims and claims expense (“losses”): | | | | | | | | | | | | | | | | | | | | |
| Incurred losses, excluding catastrophe losses and reserve reestimates | | (1,002 | ) | | (642 | ) | | (183 | ) | | (263 | ) | | 21 |
| | (72 | ) | | (219 | ) | | (138 | ) | | (1,383 | ) | | (1,115 | ) |
| Catastrophe losses, excluding reserve reestimates | | (33 | ) | | 336 |
| | 294 |
| | 92 |
| | 51 |
| | (13 | ) | | 9 |
| | 1 |
| | 321 |
| | 416 |
|
| Catastrophe reserve reestimates | | (22 | ) | | 24 |
| | (1 | ) | | (72 | ) | | (1 | ) | | 4 |
| | 1 |
| | 1 |
| | (23 | ) | | (43 | ) |
| Non-catastrophe reserve reestimates | | (110 | ) | | (59 | ) | | (50 | ) | | (73 | ) | | (14 | ) | | 4 |
| | 90 |
| | (90 | ) | | (84 | ) | | (218 | ) |
| Losses subtotal | | (1,167 | ) | | (341 | ) | | 60 |
| | (316 | ) | | 57 |
| | (77 | ) | | (119 | ) | | (226 | ) | | (1,169 | ) | | (960 | ) |
| (Increase) decrease expenses | | (155 | ) | | (427 | ) | | (24 | ) | | (100 | ) | | 5 |
| | (16 | ) | | (11 | ) | | (2 | ) | | (158 | ) | | (553 | ) |
| Underwriting income (loss) | | $ | 1,688 |
| | $ | 1,791 |
| | $ | 914 |
| | $ | 483 |
| | $ | 224 |
| | $ | 110 |
| | $ | 14 |
| | $ | (83 | ) | | $ | 2,912 |
| | $ | 2,343 |
|
| |
(1) | The 2019 column presents changes in 2019 compared to 2018. The 2018 column presents changes in 2018 compared to 2017. |
| |
(2) | Includes other business lines underwriting income of $75 million and $49 million in 2019 and 2018, respectively, and Answer Financial underwriting loss of $3 million and $7 million in 2019 and 2018, respectively. |
Underwriting income increased 24.3% or $569 million in 2019 compared to 2018, primarily due to increased premiums earned and lower catastrophe losses, partially offset by higher non-catastrophe losses and amortization of DAC.
Allstate Protection 2019 Form 10-K
Premiums written is the amount of premiums charged for policies issued during a fiscal period. Premiums are considered earned and are included in the financial results on a pro-rata basis over the policy period. The portion of premiums written applicable to the unexpired term of the policies is recorded as unearned premiums on our Consolidated Statements of Financial Position.
|
| | | | | | | | | | | | |
Premiums written and earned by line of business
|
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Premiums written | | | | | | |
| Auto | | $ | 24,462 |
| | $ | 23,367 |
| | $ | 22,042 |
|
| Homeowners | | 8,165 |
| | 7,698 |
| | 7,350 |
|
| Other personal lines | | 1,890 |
| | 1,831 |
| | 1,768 |
|
| Subtotal – Personal lines | | 34,517 |
| | 32,896 |
| | 31,160 |
|
| Commercial lines | | 902 |
| | 659 |
| | 488 |
|
| Total premiums written | | $ | 35,419 |
| | $ | 33,555 |
| | $ | 31,648 |
|
| Reconciliation of premiums written to premiums earned: | | | | | | |
| Increase in unearned premiums | | (614 | ) | | (544 | ) | | (258 | ) |
| Other | | 38 |
| | (61 | ) | | 43 |
|
| Total premiums earned | | $ | 34,843 |
| | $ | 32,950 |
| | $ | 31,433 |
|
| | | | | | | |
| Auto | | $ | 24,188 |
| | $ | 22,970 |
| | $ | 21,878 |
|
| Homeowners | | 7,912 |
| | 7,517 |
| | 7,310 |
|
| Other personal lines | | 1,861 |
| | 1,808 |
| | 1,750 |
|
| Subtotal – Personal lines | | 33,961 |
| | 32,295 |
| | 30,938 |
|
| Commercial lines | | 882 |
| | 655 |
| | 495 |
|
| Total premiums earned | | $ | 34,843 |
| | $ | 32,950 |
| | $ | 31,433 |
|
Auto insurance premiums written increased 4.7% or $1.10 billion in 2019 compared to premiums earned is shown in the following table.2018.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Premiums written | | | | | |
| Allstate Protection | $ | 31,597 |
| | $ | 30,871 |
| | $ | 29,613 |
|
Discontinued Lines and Coverages (1) | 3 |
| | — |
| | 1 |
|
| Property-Liability premiums written | 31,600 |
|
| 30,871 |
|
| 29,614 |
|
| Increase in unearned premiums | (381 | ) | | (549 | ) | | (723 | ) |
| Other | 88 |
| | (13 | ) | | 38 |
|
| Property-Liability premiums earned | $ | 31,307 |
|
| $ | 30,309 |
|
| $ | 28,929 |
|
| Premiums earned | | | | | |
| Allstate Protection | $ | 31,307 |
| | $ | 30,309 |
| | $ | 28,928 |
|
| Discontinued Lines and Coverages | — |
| | — |
| | 1 |
|
| Property-Liability | $ | 31,307 |
| | $ | 30,309 |
| | $ | 28,929 |
|
|
| | | | | | | | | | | | | | | | | | | | |
Unearned premium balance and the time frame in which we expect to recognize these premiums as earned
|
| ($ in millions) | | As of December 31, | | % earned after |
| | 2019 | | 2018 | | Three months | | Six months | | Nine months | | Twelve months |
| Allstate brand: | | | | | | | | | | | | |
| Auto | | $ | 5,916 |
| | $ | 5,635 |
| | 70.9 | % | | 96.4 | % | | 99.1 | % | | 100.0 | % |
| Homeowners | | 4,158 |
| | 3,908 |
| | 43.3 | % | | 75.5 | % | | 94.2 | % | | 100.0 | % |
| Other personal lines | | 950 |
| | 917 |
| | 43.5 | % | | 75.5 | % | | 94.1 | % | | 100.0 | % |
| Commercial lines | | 270 |
| | 250 |
| | 43.4 | % | | 74.7 | % | | 93.7 | % | | 100.0 | % |
| Total Allstate brand | | 11,294 |
| | 10,710 |
| | 58.0 | % | | 86.6 | % | | 96.8 | % | | 100.0 | % |
| Esurance brand: | | | | | | | | | | | | |
| Auto | | 489 |
| | 471 |
| | 74.4 | % | | 99.1 | % | | 99.8 | % | | 100.0 | % |
| Homeowners | | 62 |
| | 53 |
| | 43.4 | % | | 75.6 | % | | 94.2 | % | | 100.0 | % |
| Other personal lines | | 2 |
| | 2 |
| | 43.6 | % | | 75.5 | % | | 94.2 | % | | 100.0 | % |
| Total Esurance brand | | 553 |
| | 526 |
| | 70.8 | % | | 96.3 | % | | 99.1 | % | | 100.0 | % |
| Encompass brand: | | | | | | | | | | | | |
| Auto | | 276 |
| | 275 |
| | 44.1 | % | | 75.9 | % | | 94.3 | % | | 100.0 | % |
| Homeowners | | 214 |
| | 212 |
| | 43.9 | % | | 75.8 | % | | 94.3 | % | | 100.0 | % |
| Other personal lines | | 41 |
| | 42 |
| | 44.2 | % | | 76.0 | % | | 94.3 | % | | 100.0 | % |
| Total Encompass brand | | 531 |
| | 529 |
| | 44.0 | % | | 75.9 | % | | 94.3 | % | | 100.0 | % |
| Allstate Protection unearned premiums | | $ | 12,378 |
| | $ | 11,765 |
| | 57.9 | % | | 86.5 | % | | 96.8 | % | | 100.0 | % |
The Allstate Corporation 43
2019 Form 10-KAllstate Protection
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Combined ratios by line of business |
| | | For the years ended December 31, |
| | | Loss ratio | | Expense ratio (1) | | Combined ratio |
| | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Auto | | 68.2 |
| | 66.8 |
| | 68.5 |
| | 24.8 |
| | 25.4 |
| | 24.9 |
| | 93.0 |
| | 92.2 |
| | 93.4 |
|
| Homeowners | | 65.1 |
| | 69.4 |
| | 67.0 |
| | 23.3 |
| | 24.2 |
| | 23.6 |
| | 88.4 |
| | 93.6 |
| | 90.6 |
|
| Other personal lines | | 61.1 |
| | 66.0 |
| | 63.8 |
| | 26.9 |
| | 27.9 |
| | 28.1 |
| | 88.0 |
| | 93.9 |
| | 91.9 |
|
| Commercial lines | | 81.3 |
| | 91.3 |
| | 75.1 |
| | 17.1 |
| | 21.4 |
| | 27.5 |
| | 98.4 |
| | 112.7 |
| | 102.6 |
|
| Total | | 67.5 |
| | 67.8 |
| | 68.1 |
| | 24.1 |
| | 25.1 |
| | 24.6 |
| | 91.6 |
| | 92.9 |
| | 92.7 |
|
| |
(1) | Primarily represents retrospective reinsurance premium recognized when billed.Other revenue is deducted from operating costs and expenses in the expense ratio calculation. |
Premiums written and earned by line of business are shown in the following table.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Premiums written | | | | | |
| Auto | $ | 21,425 |
| | $ | 20,662 |
| | $ | 19,668 |
|
| Homeowners | 7,240 |
| | 7,238 |
| | 7,051 |
|
Other personal lines (1) | 1,724 |
| | 1,699 |
| | 1,683 |
|
| Subtotal – Personal lines | 30,389 |
| | 29,599 |
| | 28,402 |
|
| Commercial lines | 499 |
| | 516 |
| | 494 |
|
Other business lines (2) | 709 |
| | 756 |
| | 717 |
|
| Total | $ | 31,597 |
| | $ | 30,871 |
| | $ | 29,613 |
|
| Premiums earned | | | | | |
| Auto | $ | 21,264 |
| | $ | 20,410 |
| | $ | 19,344 |
|
| Homeowners | 7,257 |
| | 7,136 |
| | 6,904 |
|
Other personal lines (1) | 1,700 |
| | 1,692 |
| | 1,662 |
|
| Subtotal – Personal lines | 30,221 |
| | 29,238 |
| | 27,910 |
|
| Commercial lines | 506 |
| | 510 |
| | 476 |
|
Other business lines (2) | 580 |
| | 561 |
| | 542 |
|
| Total | $ | 31,307 |
| | $ | 30,309 |
| | $ | 28,928 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loss ratios by line of business
|
| | | For the years ended December 31, |
| | | Loss ratio | | Effect of catastrophe losses on combined ratio | | Effect of prior year reserve reestimates on combined ratio | | Effect of catastrophe losses included in prior year reserve reestimates on combined ratio |
| | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Auto | | 68.2 |
| | 66.8 |
| | 68.5 |
| | 1.7 |
| | 1.6 |
| | 3.3 |
| | (1.4 | ) | | (2.0 | ) | | (2.3 | ) | | (0.1 | ) | | (0.2 | ) | | (0.1 | ) |
| Homeowners | | 65.1 |
| | 69.4 |
| | 67.0 |
| | 24.8 |
| | 30.0 |
| | 31.1 |
| | 0.8 |
| | 0.2 |
| | (1.7 | ) | | 0.8 |
| | 0.8 |
| | (0.1 | ) |
| Other personal lines | | 61.1 |
| | 66.0 |
| | 63.8 |
| | 9.0 |
| | 12.1 |
| | 11.9 |
| | 0.5 |
| | (0.4 | ) | | 0.1 |
| | — |
| | — |
| | 0.2 |
|
| Commercial lines | | 81.3 |
| | 91.3 |
| | 75.1 |
| | 1.4 |
| | 3.4 |
| | 4.8 |
| | 1.9 |
| | 16.5 |
| | 3.9 |
| | (0.1 | ) | | — |
| | 0.2 |
|
| Total | | 67.5 |
| | 67.8 |
| | 68.1 |
| | 7.3 |
| | 8.7 |
| | 10.3 |
| | (0.7 | ) | | (1.0 | ) | | (1.9 | ) | | 0.1 |
| | 0.1 |
| | (0.1 | ) |
| |
(1)
| Other personal lines include renter, condominium, landlord and other personal lines products. |
| |
(2)
| Other business lines primarily include Allstate Roadside Services and Allstate Dealer Services. |
Auto premiums written totaled $21.43 billionCatastrophe losses decreased 10.4% or $298 million in 2016, a 3.7% increase from $20.66 billion in 2015, following a 5.1% increase in 2015 from $19.67 billion in 2014.
Homeowners premiums written totaled $7.24 billion in 2016, which was comparable to 2015, following a 2.7% increase in 2015 from $7.05 billion in 2014. Excluding the cost of catastrophe reinsurance, which is recorded as a reduction to premiums, premiums written decreased 0.4% in 20162019 compared to 2015. For a more detailed discussion on reinsurance, see the Property-Liability Claims and Claims Expense Reserves section of the MD&A and Note 10 of the consolidated financial statements.
The following table shows the unearned premium balance as of December 31 and the time frame in which we expect to recognize these premiums as earned.
|
| | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | | | | % earned after |
| | 2016 | | 2015 | | Three months | | Six months | | Nine months | | Twelve months |
| Allstate brand: | | | | | | | | | | | |
| Auto | $ | 5,134 |
| | $ | 4,947 |
| | 71.2 | % | | 96.6 | % | | 99.2 | % | | 100.0 | % |
| Homeowners | 3,682 |
| | 3,685 |
| | 43.4 | % | | 75.6 | % | | 94.2 | % | | 100.0 | % |
| Other personal lines | 868 |
| | 837 |
| | 43.3 | % | | 75.3 | % | | 94.1 | % | | 100.0 | % |
| Commercial lines | 253 |
| | 259 |
| | 44.3 | % | | 75.5 | % | | 94.0 | % | | 100.0 | % |
| Other business lines | 966 |
| | 837 |
| | 16.1 | % | | 30.0 | % | | 42.0 | % | | 52.2 | % |
| Total unearned premium | 10,903 |
| | 10,565 |
| | 54.3 | % | | 81.6 | % | | 92.0 | % | | 95.8 | % |
| Esurance brand: | | | | | | | | | | | |
| Auto | 399 |
| | 385 |
| | 74.2 | % | | 98.8 | % | | 99.7 | % | | 100.0 | % |
| Homeowners | 31 |
| | 17 |
| | 43.5 | % | | 75.6 | % | | 94.2 | % | | 100.0 | % |
| Other personal lines | 2 |
| | 2 |
| | 43.3 | % | | 75.3 | % | | 94.1 | % | | 100.0 | % |
| Total Esurance brand | 432 |
| | 404 |
| | 71.9 | % | | 97.1 | % | | 99.3 | % | | 100.0 | % |
| Encompass brand: | | | | | | | | | | | |
| Auto | 298 |
| | 329 |
| | 44.3 | % | | 75.9 | % | | 94.2 | % | | 100.0 | % |
| Homeowners | 241 |
| | 267 |
| | 44.4 | % | | 76.3 | % | | 94.4 | % | | 100.0 | % |
| Other personal lines | 50 |
| | 54 |
| | 44.2 | % | | 75.9 | % | | 94.3 | % | | 100.0 | % |
| Total Encompass brand | 589 |
| | 650 |
| | 44.3 | % | | 76.1 | % | | 94.3 | % | | 100.0 | % |
| Allstate Protection unearned premiums | $ | 11,924 |
| | $ | 11,619 |
| | 54.5 | % | | 81.9 | % | | 92.4 | % | | 96.2 | % |
Combined ratios by line of business are analyzed in the following table.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Loss ratio (1) | | Expense ratio (1) | | Combined ratio |
| | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
| Auto | 74.7 |
| | 74.7 |
| | 70.1 |
| | 24.5 |
| | 25.2 |
| | 26.8 |
| | 99.2 |
| | 99.9 |
| | 96.9 |
|
| Homeowners | 61.3 |
| | 56.3 |
| | 59.9 |
| | 23.9 |
| | 23.6 |
| | 24.2 |
| | 85.2 |
| | 79.9 |
| | 84.1 |
|
| Other Personal lines | 62.9 |
| | 62.9 |
| | 62.6 |
| | 27.7 |
| | 26.8 |
| | 28.4 |
| | 90.6 |
| | 89.7 |
| | 91.0 |
|
| Commercial lines | 93.9 |
| | 78.4 |
| | 67.0 |
| | 27.8 |
| | 29.4 |
| | 31.1 |
| | 121.7 |
| | 107.8 |
| | 98.1 |
|
| Other business lines | 43.8 |
| | 46.9 |
| | 48.3 |
| | 51.5 |
| | 47.2 |
| | 44.3 |
| | 95.3 |
| | 94.1 |
| | 92.6 |
|
| Total | 70.6 |
| | 69.2 |
| | 66.8 |
| | 25.2 |
| | 25.5 |
| | 26.7 |
| | 95.8 |
| | 94.7 |
| | 93.5 |
|
| |
(1)
| Ratios are calculated using the premiums earned for the respective line of business. |
Loss ratios by line of business are analyzed in the following table and discussed in detail in the brand sections below.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Loss ratio | | Effect of catastrophe losses on combined ratio | | Effect of prior year reserve reestimates on combined ratio | | Effect of catastrophe losses included in prior year reserve reestimates on combined ratio |
| | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
| Auto | 74.7 |
| | 74.7 |
| | 70.1 |
| | 2.7 |
| | 1.2 |
| | 1.7 |
| | (0.7 | ) | | 0.1 |
| | (1.2 | ) | | — |
| | (0.1 | ) | | (0.1 | ) |
| Homeowners | 61.3 |
| | 56.3 |
| | 59.9 |
| | 24.4 |
| | 18.4 |
| | 21.8 |
| | (0.3 | ) | | (0.4 | ) | | 0.4 |
| | 0.2 |
| | — |
| | 0.9 |
|
| Other Personal lines | 62.9 |
| | 62.9 |
| | 62.6 |
| | 11.3 |
| | 7.9 |
| | 8.1 |
| | (0.5 | ) | | 1.1 |
| | 2.0 |
| | (0.1 | ) | | (0.1 | ) | | (0.3 | ) |
| Commercial lines | 93.9 |
| | 78.4 |
| | 67.0 |
| | 6.9 |
| | 5.1 |
| | 6.1 |
| | 12.2 |
| | 0.4 |
| | (4.2 | ) | | 1.0 |
| | 1.0 |
| | 0.4 |
|
| Other business lines | 43.8 |
| | 46.9 |
| | 48.3 |
| | 0.2 |
| | — |
| | — |
| | 0.7 |
| | 0.4 |
| | (0.2 | ) | | — |
| | — |
| | — |
|
| Total | 70.6 |
| | 69.2 |
| | 66.8 |
| | 8.2 |
| | 5.7 |
| | 6.9 |
| | (0.4 | ) | | 0.1 |
| | (0.7 | ) | | — |
| | — |
| | 0.1 |
|
Catastrophe losses were $2.57 billion in 2016 compared to $1.72 billion in 2015 and $1.99 billion in 2014.
2018. We define a “catastrophe” as an event that produces pre-tax losses before reinsurance in excess of $1 million and involves multiple first party policyholders, or a winter weather event that produces a number of claims in excess of a preset, per-event threshold of average claims in a specific area, occurring within a certain amount of time following the event. Catastrophes are caused by various natural events including high winds, winter storms and freezes, tornadoes, hailstorms, wildfires, tropical storms, tsunamis, hurricanes, earthquakes and volcanoes. We are also exposed to man-made catastrophic events, such as certain types of terrorism, wildfires or industrial accidents. The nature and level of catastrophes in any period cannot be reliably predicted.
Catastrophe losses in 2016 by the size of event are shown in the following table.
|
| | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | | | | | | | | | | |
| | Number of Events | | | | Claims and claims expense | | | | Combined ratio impact | | Average catastrophe loss per event |
| Size of catastrophe loss | | | | | | | | | | | |
| Greater than $250 million | 2 |
| | 2.3 | % | | $ | 629 |
| | 24.5 | % | | 2.0 |
| | $ | 315 |
|
| $101 million to $250 million | 2 |
| | 2.3 |
| | 330 |
| | 12.8 |
| | 1.1 |
| | 165 |
|
| $50 million to $100 million | 8 |
| | 9.3 |
| | 591 |
| | 23.0 |
| | 1.9 |
| | 74 |
|
| Less than $50 million | 74 |
| | 86.1 |
| | 1,016 |
| | 39.5 |
| | 3.2 |
| | 14 |
|
| Total | 86 |
| | 100.0 | % | | 2,566 |
| | 99.8 |
| | 8.2 |
| | 30 |
|
| Prior year reserve reestimates | | | | | 6 |
| | 0.2 |
| | — |
| | |
| Total catastrophe losses | | | | | $ | 2,572 |
| | 100.0 | % | | 8.2 |
| | |
Catastrophe losses by the type of event are shown in the following table. |
| | | | | | | | | | | | | | | | | | | | |
| Catastrophe losses in 2019 by the size of event |
| ($ in millions) | | Number of events | | | | Claims and claims expense | | | | Combined ratio impact | | Average catastrophe loss per event |
| Size of catastrophe loss | | | | | | | | | | | | |
| Greater than $250 million | | 1 |
| | 1.0 | % | | $ | 362 |
| | 14.1 | % | | 1.0 |
| | $ | 362 |
|
| $101 million to $250 million | | 2 |
| | 1.8 |
| | 342 |
| | 13.4 |
| | 1.0 |
| | 171 |
|
| $50 million to $100 million | | 9 |
| | 8.2 |
| | 662 |
| | 25.9 |
| | 1.9 |
| | 74 |
|
| Less than $50 million | | 98 |
| | 89.0 |
| | 1,143 |
| | 44.7 |
| | 3.3 |
| | 12 |
|
| Total | | 110 |
| | 100.0 | % | | 2,509 |
| | 98.1 |
| | 7.2 |
| | 23 |
|
| Prior year reserve reestimates | | | | | | 48 |
| | 1.9 |
| | 0.1 |
| | |
| Total catastrophe losses | | | | | | $ | 2,557 |
| | 100.0 | % | | 7.3 |
| | |
| | Catastrophe losses by the type of event
| | Catastrophe losses by the type of event
|
| | | | For the years ended December 31, |
| ($ in millions) | 2016 | | 2015 | | 2014 | | Number of events | | 2019 | | Number of events | | 2018 | | Number of events | | 2017 |
| | Number of events | | | | Number of events | | | | Number of events | | | |
| Hurricanes/Tropical storms | 2 |
| | $ | 156 |
| | 1 |
| | $ | 21 |
| | 1 |
| | $ | 2 |
| | 3 |
| | $ | 86 |
| | 3 |
| | $ | 200 |
| | 3 |
| | $ | 613 |
|
| Tornadoes | 2 |
| | 7 |
| | 2 |
| | 152 |
| | 2 |
| | 99 |
| | 6 |
| | 551 |
| | 3 |
| | 17 |
| | 3 |
| | 100 |
|
| Wind/Hail | 72 |
| | 2,256 |
| | 72 |
| | 1,274 |
| | 70 |
| | 1,429 |
| | 91 |
| | 1,721 |
| | 99 |
| | 1,752 |
| | 93 |
| | 1,973 |
|
| Wildfires | 8 |
| | 92 |
| | 6 |
| | 51 |
| | 5 |
| | 19 |
| | 4 |
| | 28 |
| | 10 |
| | 745 |
| | 10 |
| | 536 |
|
| Other events | 2 |
| | 55 |
| | 4 |
| | 236 |
| | 7 |
| | 401 |
| | 6 |
| | 123 |
| | 2 |
| | 116 |
| | 2 |
| | 24 |
|
| Prior year reserve reestimates | | | 6 |
| | | | (15 | ) | | | | 43 |
| | | | 48 |
| | | | 25 |
| | | | (18 | ) |
| Total catastrophe losses | 86 |
| | $ | 2,572 |
| | 85 |
| | $ | 1,719 |
| | 85 |
| | $ | 1,993 |
| | 110 |
| | $ | 2,557 |
| | 117 |
| | $ | 2,855 |
| | 111 |
| | $ | 3,228 |
|
Expense ratio for
Allstate Protection decreased 0.3 points in 2016 compared to 2015. The expense ratios by line of business are shown in the following table.2019 Form 10-K
|
| | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| Auto | 24.5 |
| | 25.2 |
| | 26.8 |
|
| Homeowners | 23.9 |
| | 23.6 |
| | 24.2 |
|
| Other personal lines | 27.7 |
| | 26.8 |
| | 28.4 |
|
| Commercial lines | 27.8 |
| | 29.4 |
| | 31.1 |
|
| Other business lines | 51.5 |
| | 47.2 |
| | 44.3 |
|
| Total expense ratio | 25.2 |
| | 25.5 |
| | 26.7 |
|
The impact of specific costs and expenses on the expense ratio are shown in the following table.
|
| | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| Amortization of DAC | 13.6 |
| | 13.6 |
| | 13.4 |
|
| Advertising expense | 2.5 |
| | 2.5 |
| | 3.2 |
|
| Amortization of purchased intangible assets | 0.1 |
| | 0.2 |
| | 0.2 |
|
| Other costs and expenses | 8.9 |
| | 9.1 |
| | 9.8 |
|
| Restructuring and related charges | 0.1 |
| | 0.1 |
| | 0.1 |
|
| Total expense ratio | 25.2 |
| | 25.5 |
| | 26.7 |
|
DAC We establish a DAC asset for costs that are related directly to the successful acquisition of new or renewal insurance policies, principally agents’ remuneration and premium taxes. For the Allstate Protection business, DAC is amortized to income over the period in which premiums are earned.
The DAC balance as of December 31 by product type are shown in the following table.
|
| | | | | | | |
| ($ in millions) | 2016 | | 2015 |
| Auto | $ | 738 |
| | $ | 713 |
|
| Homeowners | 540 |
| | 546 |
|
| Other personal lines | 122 |
| | 118 |
|
| Commercial lines | 32 |
| | 33 |
|
| Other business lines | 756 |
| | 619 |
|
| Total DAC | $ | 2,188 |
| | $ | 2,029 |
|
Income tax expense in first quarter 2015 included $28 million related to our adoption of new accounting guidance for investments in qualified affordable housing projects.
Catastrophe management
Historical catastrophe experience For the last ten years, the average annual impact of catastrophes on our Property-Liability loss ratio was 8.28.3 points, but it has varied from 4.5 points to 14.7 points. The average annual impact of catastrophes on the homeowners loss ratio for the last ten years was 32.326.8 points. Over time, we have limited our aggregate insurance exposure to catastrophe losses in certain regions of the country that are subject to high levels of natural catastrophes. Limitations includecatastrophes by our participation in various state facilities. For further discussion of these facilities, such assee Note 14 of the California Earthquake Authority (“CEA”), which provides insurance for California earthquake losses; the Florida Hurricane Catastrophe Fund, which provides reimbursements to participating insurers for certain qualifying Florida hurricane losses; and other state facilities, such as wind pools.consolidated financial statements. However, the impact of these actions may be diminished by the growth in insured values, and the effect of state insurance laws and regulations. In addition, in various states we are required to participate in assigned risk plans, reinsurance facilities and joint underwriting associations that provide insurance coverage to individuals or entities that otherwise are unable to purchase such coverage from private insurers. Because of our participation in these and other state facilities such as wind pools, we may be exposed to losses that surpass the capitalization of these facilities and to assessments from these facilities.
We have continued to take actions to maintain an appropriate level of exposure to catastrophic events while continuing to meet the needs of our customers, including the following:
Continuing to limit or not offer new homeowners, manufactured home and landlord package policy business in certain coastal geographies.
Increased capacity in our brokerage platform for customers not offered an Allstate policy.
North Light Specialty Insurance Company (“North Light”), our surplus lines company that operates under different regulatory rules,We began writingto write a limited number of homeowners policies in select areas of California in February 2013 and continued operations in 43 states. Any earthquake coverage provided under homeowners writings (other than fire following earthquakes) in California is currently ceded via quota share reinsurance.2016, additionally we:
| |
| – | Continue to renew current policyholders and allow replacement policies for existing customers who buy a new home or change their residence to rental property |
| |
| – | Have decreased our overall homeowner exposures in California by more than 50% since 2007 |
| |
| – | Write homeowners coverage through our excess and surplus lines carrier, North Light Specialty Insurance Company (“North Light”), which includes earthquake coverage (other than fire following earthquakes) that is currently ceded via quota share reinsurance. |
In certain states, we have been ceding wind exposure related to insured property located in wind pool eligible areas.
In 2016,Starting in the second quarter of 2017, we began to writewriting a limited number of homeowners policies in select areas of California. Meanwhile, we willFlorida and continue to renew current policyholders and allow replacement policies for existing customers who buy a new home, or change their residence to rental property. For landlord package policies we allow replacement policies on an exception basis, and offer a small number of new landlord package policies in order to accommodate current personal umbrella policy customers.
Since 2011, homeowners business in Florida has been focused onsupport existing customers who replace their currently-insured home with an acceptable property. Encompass withdrew from property lines in Florida in 2009.
Tropical cyclone deductibles are generally higher than all peril deductibles and are in place for a large portion of coastal insured properties.
Auto comprehensive damage coverage generally includes coverage for flood-related loss. We have additional catastrophe exposure, beyond the property lines, for auto customers who have purchased physicalcomprehensive damage coverage. Auto physical damage coverage generally includes coverage for flood-related loss. We manage this additional exposure through inclusion of auto losses in our nationwide reinsurance program, including Florida personal lines automobile business, as of June 1, 2016. New Jersey is excluded from the nationwide reinsurance program as auto losses are included in our New Jersey reinsurance program.
| |
| • | DesignedWe offer a homeowners new business offering,policy available in 43 states, Allstate House and Home®, that provides options of coverage for roof damage, including graduated coverage and pricing based on roof type and age. Allstate House and Home is currently availableIn 2019, premiums written totaled $3.44 billion or 42.1% of homeowners premiums written compared to $2.84 billion or 36.9% in 40 states. The House and Home product is available in 76% of the states where our catastrophe losses occurred in 2016.2018.
|
Hurricanes We consider the greatest areas of potential catastrophe losses due to hurricanes generally to be major metropolitan centers in counties along the eastern and gulf coasts of the United States. Usually, theThe average premium on a property policy near these coasts is generally greater than in other areas. However, average premiums are often not considered commensurate with the inherent risk of loss. In addition, and as explained in Note 14 of the consolidated financial statements, in various states Allstate is subject to assessments from assigned risk plans, reinsurance facilities and joint underwriting associations providing insurance for wind related property losses.
We have addressed our risk of hurricane loss by, among other actions, purchasing reinsurance for specific states and on a countrywide basis for our personal lines property insurance in areas most exposed to hurricanes, limiting personal homeowners, landlord package policy and manufactured home new business writings in coastal areas in southern and eastern states, implementing tropical cyclone deductibles where appropriate, and not offering continuing coverage on certain policies in coastal counties in certain states. We continue to seek appropriate returns for the risks we write. This may require further actions, similar to those already taken, in geographies where we are not getting appropriate returns. However, we may maintain or opportunistically increase our presence in areas where we achieve adequate risk adjusted returns and do not materially increase our hurricane risk.can be achieved.
Earthquakes We do not offer earthquake coverage in most states and actions taken to reduce our exposure from earthquake losses are complete. We purchased reinsurance in the state of Kentucky and entered into arrangements in many states to make earthquake coverage available through non-proprietary insurers.
states. We retain approximately 28,00022,000 PIF with earthquake coverage, primarily in Kentucky, due to regulatory and other reasons. We purchase reinsurance in Kentucky and enter into arrangements in many states to make earthquake coverage available through our brokerage platform.
We continue to have exposure to earthquake risk on certain policies that do not specifically exclude coverage for earthquake losses, including our auto policies, and to fires following earthquakes. Allstate policyholders in the state of California are offered homeowners coverage through the CEA,California Earthquake Authority (“CEA”), a privately-financed, publicly-managed state agency created to provide insurance coverage for earthquake damage. Allstate is subject to
The Allstate Corporation 45
2019 Form 10-KAllstate Protection
assessments from the CEA under certain circumstances as explained in Note 14 of the consolidated financial statements. While North Light writes property policies in California, which can include earthquake coverage, this coverage is 100% ceded via quota share reinsurance.
Fires Following Earthquakesfollowing earthquakes Under a standard homeowners policy we cover fire losses, including those caused by an earthquake. Actions taken related to our risk of loss from fires following earthquakes include restrictive underwriting guidelines in California for new business writings, purchasing reinsurance for Kentucky personal lines property risks, and purchasing nationwide occurrence reinsurance, excluding Florida and New Jersey.Florida.
Wildfires Actions taken related to managing our risk of loss from wildfires include changing homeowners underwriting requirements in certain states and purchasing nationwide occurrence reinsurance. We also havereinsurance, new and renewal inspection programs to identify homes thatand remediate wildfire risk as well as leveraging contemporary underwriting tools in select areas. While these programs are susceptibledesigned to wildfires.mitigate risk, the exposure to wildfires still exists. We continue to manage ourexposure and seek appropriate returns for the risks we write.
To manage the exposure, this may require further actions, similar to those already taken, in geographies where we are not achieving appropriate returns. However, we may maintain or opportunistically increase our presence in areas where adequate risk adjusted returns can be achieved.
Reinsurance A description of our current catastrophe reinsurance program appears in Note 10 of the consolidated financial statements.
California wildfire subrogation PG&E Corporation and Pacific Gas and Electric Company (together, "PG&E") have reached agreements to resolve insurance subrogation and tort claimants’ claims arising from the 2017 Northern California wildfires and the 2018 Camp Fire for $11 billion and $13.5 billion, respectively. Allstate is one of the insurance companies that is party to the agreement with subrogating insurers. PG&E has also reached agreement to settle claims of its bondholders.
The settlements with insurers and tort claimants have been approved by the bankruptcy court overseeing PG&E's Chapter 11 case. The settlement with the bondholders has not yet been approved. All will be subject to confirmation of a Plan of Reorganization, which has not yet occurred. There remain other uncertainties with respect to the ultimate resolution of all claims, including the allocation of benefits among claimants and the amount of recovery, if any, that we may receive. Accordingly, we have not recorded any benefit related to the potential proceeds from the subrogation settlement agreement in the consolidated financial statements. We will continue to monitor this matter.
Expense ratio decreased 1.0 point in 2019 compared to 2018.
|
| | | | | | | | | |
| Impact of specific costs and expenses on the expense ratio |
| | | For the years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Amortization of DAC | | 13.4 |
| | 13.6 |
| | 13.4 |
|
| Advertising expense | | 2.4 |
| | 2.5 |
| | 2.2 |
|
| Other costs and expenses | | 8.1 |
| | 8.8 |
| | 8.8 |
|
| Restructuring and related charges | | 0.1 |
| | 0.2 |
| | 0.2 |
|
| Impairment of purchased intangibles | | 0.1 |
| | — |
| | — |
|
| Total expense ratio | | 24.1 |
| | 25.1 |
| | 24.6 |
|
Deferred acquisition costs We establish a DAC asset for costs that are related directly to the successful acquisition of new or renewal insurance policies, principally agency remuneration and premium taxes. DAC is amortized to income over the period in which premiums are earned.
|
| | | | | | | | |
DAC balance as of December 31 by product type
|
| ($ in millions) | | 2019 | | 2018 |
| Auto | | $ | 849 |
| | $ | 845 |
|
| Homeowners | | 600 |
| | 599 |
|
| Other personal lines | | 141 |
| | 141 |
|
| Commercial lines | | 34 |
| | 33 |
|
| Total DAC | | $ | 1,624 |
| | $ | 1,618 |
|
Allstate Protection 2019 Form 10-K
The following table presents premiums written, PIF and underwriting income (loss), premiums written and PIF by line of business for Allstate brand, Esurance brand, Encompass brand and Allstate Protection as of or for the year ended December 31, 2016.2019. Detailed analysis of underwriting results, premiums written and earned, and the combined ratios, including loss and expense ratios, are discussed in the brand sections below.sections.
| | | Premiums written, policies in force and underwriting income (loss) | | Premiums written, policies in force and underwriting income (loss) |
| ($ in millions) | Allstate brand | | Esurance brand | | Encompass brand | | Allstate Protection | | Allstate brand | | Esurance brand | | Encompass brand | | Allstate Protection |
| Underwriting income (loss) | | | Percent to total | | | | Percent to total | | | | Percent to total | | | | Percent to total | |
| Auto | $ | 266 |
| | 18.4 | % | | $ | (65 | ) | | 52.4 | % | | $ | (29 | ) | | — | % | | $ | 172 |
| | 13.1 | % | |
| Homeowners | 1,098 |
| | 75.9 |
| | (59 | ) | | 47.6 |
| | 36 |
| | — |
| | 1,075 |
| | 81.6 |
| |
| Other personal lines | 166 |
| | 11.5 |
| | — |
| | — |
| | (6 | ) | | — |
| | 160 |
| | 12.1 |
| |
| Commercial lines | (110 | ) | | (7.6 | ) | | — |
| | — |
| | — |
| | — |
| | (110 | ) | | (8.4 | ) | |
| Other business lines | 27 |
| | 1.8 |
| | — |
| | — |
| | — |
| | — |
| | 27 |
| | 2.1 |
| |
| Answer Financial | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7 | ) | | (0.5 | ) | |
| Total | $ | 1,447 |
| | 100.0 | % | | $ | (124 | ) | | 100.0 | % | | $ | 1 |
| | — | % | | $ | 1,317 |
| | 100.0 | % | |
| | | | | | | | | | | | | | | | | |
| Premiums written | | | | | | | | | | | | | | | | | Amount | | Percent to total brand | | Amount | | Percent to total brand | | Amount | | Percent to total brand | | Amount | | Percent to total |
| Auto | $ | 19,209 |
| | 66.8 | % | | $ | 1,625 |
| | 96.2 | % | | $ | 591 |
| | 51.9 | % | | $ | 21,425 |
| | 67.8 | % | | $ | 21,936 |
| | 67.9 | % | | $ | 1,986 |
| | 94.0 | % | | $ | 540 |
| | 52.9 | % | | $ | 24,462 |
| | 69.1 | % |
| Homeowners | 6,730 |
| | 23.4 |
| | 56 |
| | 3.3 |
| | 454 |
| | 39.8 |
| | 7,240 |
| | 22.9 |
| | 7,645 |
| | 23.7 |
| | 119 |
| | 5.6 |
| | 401 |
| | 39.3 |
| | 8,165 |
| | 23.1 |
|
| Other personal lines | 1,621 |
| | 5.6 |
| | 8 |
| | 0.5 |
| | 95 |
| | 8.3 |
| | 1,724 |
| | 5.5 |
| | 1,803 |
| | 5.6 |
| | 8 |
| | 0.4 |
| | 79 |
| | 7.8 |
| | 1,890 |
| | 5.3 |
|
| Commercial lines | 499 |
| | 1.7 |
| | — |
| | — |
| | — |
| | — |
| | 499 |
| | 1.6 |
| | 902 |
| | 2.8 |
| | — |
| | — |
| | — |
| | — |
| | 902 |
| | 2.5 |
|
| Other business lines | 709 |
| | 2.5 |
| | — |
| | — |
| | — |
| | — |
| | 709 |
| | 2.2 |
| |
| Total | $ | 28,768 |
| | 100.0 | % | | $ | 1,689 |
| | 100.0 | % | | $ | 1,140 |
| | 100.0 | % | | $ | 31,597 |
| | 100.0 | % | | $ | 32,286 |
| | 100.0 | % | | $ | 2,113 |
| | 100.0 | % | | $ | 1,020 |
| | 100.0 | % | | $ | 35,419 |
| | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Percent to total Allstate Protection | | | 91.1 | % | | | | 5.3 | % | | | | 3.6 | % | | | | 100.0 | % | | | | 91.1 | % | | | | 6.0 | % | | | | 2.9 | % | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| PIF (thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Auto | 19,742 |
| | 63.5 | % | | 1,391 |
| | 93.0 | % | | 622 |
| | 61.3 | % | | 21,755 |
| | 64.7 | % | | 20,398 |
| | 65.4 | % | | 1,515 |
| | 90.9 | % | | 493 |
| | 61.4 | % | | 22,406 |
| | 66.5 | % |
| Homeowners | 6,099 |
| | 19.6 |
| | 58 |
| | 3.9 |
| | 295 |
| | 29.1 |
| | 6,452 |
| | 19.2 |
| | 6,254 |
| | 20.0 |
| | 105 |
| | 6.3 |
| | 234 |
| | 29.1 |
| | 6,593 |
| | 19.6 |
|
| Other personal lines | 4,214 |
| | 13.5 |
| | 47 |
| | 3.1 |
| | 98 |
| | 9.6 |
| | 4,359 |
| | 13.0 |
| | 4,344 |
| | 13.9 |
| | 46 |
| | 2.8 |
| | 76 |
| | 9.5 |
| | 4,466 |
| | 13.2 |
|
| Commercial lines | 285 |
| | 0.9 |
| | — |
| | — |
| | — |
| | — |
| | 285 |
| | 0.8 |
| | 227 |
| | 0.7 |
| | — |
| | — |
| | — |
| | — |
| | 227 |
| | 0.7 |
|
| Other business lines | 768 |
| | 2.5 |
| | — |
| | — |
| | — |
| | — |
| | 768 |
| | 2.3 |
| |
| Total | 31,108 |
| | 100.0 | % | | 1,496 |
| | 100.0 | % | | 1,015 |
| | 100.0 | % | | 33,619 |
| (1) | 100.0 | % | | 31,223 |
| | 100.0 | % | | 1,666 |
| | 100.0 | % | | 803 |
| | 100.0 | % | | 33,692 |
| | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Percent to total Allstate Protection | | | 92.5 | % | | | | 4.5 | % | | | | 3.0 | % | | | | 100.0 | % | | | | 92.7 | % | | | | 4.9 | % | | | | 2.4 | % | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | |
| Underwriting income (loss) | | | | | | | | | | | | | | | | | |
| Auto | | | $ | 1,727 |
| | 58.5 | % | | $ | (47 | ) | (1 | ) | 109.4 | % | | $ | 8 |
| | 114.3 | % | | $ | 1,688 |
| | 58.0 | % |
| Homeowners | | | 910 |
| | 30.9 |
| | 2 |
| | (4.7 | ) | | 2 |
| | 28.6 |
| | 914 |
| | 31.4 |
|
| Other personal lines | | | 225 |
| | 7.6 |
| �� | 2 |
| | (4.7 | ) | | (3 | ) | | (42.9 | ) | | 224 |
| | 7.6 |
|
| Commercial lines | | | 14 |
| | 0.5 |
| | — |
| | — |
| | — |
| | — |
| | 14 |
| | 0.5 |
|
| Other business lines | | | 75 |
| | 2.5 |
| | — |
| | — |
| | — |
| | — |
| | 75 |
| | 2.6 |
|
| Answer Financial | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3 | ) | | (0.1 | ) |
| Total | | | $ | 2,951 |
| | 100.0 | % | | $ | (43 | ) | | 100.0 | % | | $ | 7 |
| | 100.0 | % | | $ | 2,912 |
| | 100.0 | % |
| |
(1) | Our Transformative Growth Plan included a decision to reposition the Allstate Protection PIF excludes 21 thousandbrand for broader customer access, resulting in a $51 million impairment for the Esurance brand trade name. See the Esurance section of PIF related to North Light, our excess and surplus line. Including North Light, total Allstate Protection PIF was 33,640 thousand as of December 31, 2016.this Item for further details. |
When analyzing premium measures and statistics for all three brands the following calculations are used as described below.
PIF: | |
| • | PIF: Policy counts are based on items rather than customers. A multi-car customer would generate multiple item (policy) counts, even if all cars were insured under one policy while Commercial lines PIF counts for shared economy agreements typically reflect contracts that cover multiple rather than individual drivers. |
| |
| • | New issued applications: Item counts of automobile or homeowner insurance applications for insurance policies that were issued during the period, regardless of whether the customer was previously insured by another Allstate Protection brand. Allstate brand includes automobiles added by existing customers when they exceed the number allowed (currently 10) on a policy. |
| |
| • | Average premium-gross written (“average premium”): Gross premiums written divided by issued item count. Gross premiums written include the impacts from discounts, surcharges and ceded reinsurance premiums and exclude the impacts from mid-term premium adjustments and premium refund accruals. Average premiums represent the appropriate policy term for each line. Allstate and Esurance brand policy terms are 6 |
New issued applications: Item counts of automobiles or homeowners insurance applications for insurance policies that were issued during the period, regardless of whether the customer was previously insured by another Allstate Protection brand. Allstate brand includes automobiles added by existing customers when they exceed the number allowed on a policy, which in 2015 was either four or ten depending on the state. Currently all states allow ten automobiles on a policy.
Average premium-gross written (“average premium”): Gross premiums written divided by issued item count. Gross premiums written include the impacts from discounts, surcharges and ceded reinsurance premiums and exclude the impacts from mid-term premium adjustments and premium refund accruals. Average premiums represent the appropriate policy term for each line. Allstate and Esurance brands policy terms are 6 months for auto and 12 months for homeowners. Encompass brand policy terms are generally 12 months for auto and homeowners.
Renewal ratio: Renewal policies issued during the period, based on contract effective dates, divided by the total policies issued 6 months prior for auto (12 months prior for Encompass brand) or 12 months prior for homeowners.
Allstate brand
Strategy In 2016, we continued to focus on a multi-year effort to position agents, licensed sales professionals and exclusive financial specialists to serve customers as trusted advisors. Our strategy centers around customers who prefer local personal advice and service and are brand-sensitive. Being a trusted advisor means that our agencies have a local presence that instills confidence; know their customers and understand the unique needs of their households; help them assess the potential risks they face; provide local expertise and personalized guidance on how to protect what matters most to them by offering customized solutions; and support them when they have changes in their lives and during their times of need. To ensure agencies have the resources, capacity, and support needed to serve customers at this level, we are deploying technology, processes, education and support focused on relationship initiation and insurance and retirement expertise. This includes continuing efforts to enhance agency capabilities with customer-centric technology while simplifying and automating service processes to enable agencies to focus more time in an advisory role.
Our customer-focused strategy aligns targeted marketing, product innovation, distribution effectiveness, and pricing toward acquiring and retaining an increased share of our target customers. Our target customers are those who want to purchase multiple products from one insurance provider including auto, homeowners and financial products, and who potentially present more favorable prospects for profitability over the course of their relationships with us. The Allstate brand differentiates itself from competitors by offering a comprehensive range of innovative product options and features through a network of agencies that provide local advice and service, including a partnership with exclusive financial specialists to deliver life and retirement solutions.
We utilize marketing delivered to target customers to promote our strategic priorities, with messaging that communicates the value of our “Good Hands®”, the importance of having proper coverage by highlighting our comprehensive product and coverage options, and the ease of doing business with Allstate and Allstate agencies.
We offer Allstate Your Choice Auto® with product features and options such as Accident Forgiveness, Deductible Rewards®, Safe Driving Bonus® and New Car Replacement. The Allstate House and Home product includes features such as Claim RateGuard®, Claim-Free Bonus, flexibility in options and coverages, including graduated roof coverage and pricing based on roof type and age for damage related to wind and hail events. In addition, we offer a Claim Satisfaction GuaranteeSM that promises a return of premium to Allstate brand auto insurance customers dissatisfied with their claims experience. Our Drivewise® program, available in 49 states and the District of Columbia as of December 31, 2016, uses a mobile application or an in-car device to capture driving behaviors and reward customers for driving safely. The Drivewise mobile application also provides customers with information and tools to encourage safer driving and incentivize through driving challenges. In 2015, Drivewise began offering Allstate Rewards®, a program that provides reward points for safe driving. Milewise®, Allstate’s usage based insurance product, was launched in 2016 and is currently available to customers as a limited market test. Milewise gives customers flexibility to customize their insurance and pay based on the number of miles they drive. We will continue to focus on developing and introducing products and services that benefit today’s customers and further differentiate Allstate and enhance the customer experience. In 2016, we launched Arity, a non-insurance technology company that leverages software, data and analytics and our telematics-based insurance programs to help better manage risk. Currently Allstate brand, Esurance, and Answer Financial use Arity’s services internally. Arity is planning to market to non-affiliates in 2017.
We plan to deepen customer relationships through value-added customer interactions and expanding our presence in households with multiple products by providing financial protection for customer needs, including life insurance products. In certain areas with higher risk of catastrophes or where customers do not meet our standard underwriting profile, we offer a homeowners product from North Light. When an Allstate product is not available, we may make available non-proprietary products for customers through brokering arrangements. Allstate agencies sell non-proprietary property insurance products, primarily related to property
business in hurricane exposed areas and commercial insurance. Allstate agencies and exclusive financial specialists also sell non-proprietary retirement and investment products, including mutual funds, fixed and variable annuities, disability insurance and long-term care insurance. These non-proprietary products are offered to our customers who prefer to use a single agent for all of their insurance needs.
We are implementing an organizationally driven approach, using the continuous improvement management process. This process helps deliver holistic, sustainable change in process efficiency, effectiveness, performance management, and organizational alignment. The approach enables our employees to engage more effectively and directly in problem solving and ultimately helping to improve the customer experience, agency owner experience and business outcomes. As part of continuous improvement, our claims organization is focused on three key strategic efforts: improving our core operations, strengthening the foundation and building the future. Improving our core operations is focused on enhanced loss cost management, expense control and customer experience. Strengthening the foundation will advance our capabilities in knowledge management, quality assurance and data and analytics. Building our future is focused on leveraging emerging technologies and predictive analytics to simplify the customer experience and expedite the claims process. This strategy aligns the claims organization along coverages to achieve operational efficiencies and to facilitate comparable claims processes throughout the nation.
We continue to enhance our technology to improve customer service, facilitate the introduction of new products and services, improve the handling of claims and reduce infrastructure costs related to supporting our agency force. These actions and others are designed to optimize the effectiveness of our distribution and service channels by increasing the productivity of the Allstate brand’s exclusive agencies and exclusive financial specialists.
Other personal lines sold under the Allstate brand include renter, condominium, landlord, boat, umbrella and manufactured home insurance policies. Commercial lines primarily include auto insurance products for small business owners.
Other business lines include Allstate Roadside Services, Allstate Dealer Services and Ivantage. Allstate Roadside Services is a leading provider of roadside assistance in North America with approximately 750 thousand retail customers and wholesale partners that incorporated our service offerings into approximately one quarter of the new vehicles sold in the United States in 2016. Customers are served through a combination of proprietary and third party services, Allstate-branded plans, and pay-per-use plans. In 2016, Allstate Roadside Services handled approximately three million roadside rescues through thousands of service providers. Our strategy for Allstate Roadside Services remains focused on delivering a superior customer experience, expanding capabilities, digitizing the business and offering new services while at the same time, lowering costs in the customer assistance centers and optimizing the rescue network at the local level to improve profitability.
Allstate Dealer Services leverages the Allstate brand to deliver finance and insurance products and services. These products and services are distributed countrywide by independent agencies and brokers through auto dealerships in the U.S. to customers in conjunction with the purchase of a new or used vehicle. The products primarily include vehicle service contracts, guaranteed asset protection waivers, road hazard tire and wheel protection, and paintless dent repair protection. Where required by state regulations, Allstate Dealer Services issues contractual liability insurance policies or guaranteed asset protection reimbursement insurance policies to cover the liabilities of these products. The products offered through Allstate Dealer Services fall under the regulation of departments of insurance in many states with requirements for filing of forms and rates varying by product and by state. Our strategy for Allstate Dealer Services focuses on continuing to leverage strategic relationships with auto dealerships while improving both operational efficiency and profitability.
Ivantage is a general agency for Allstate exclusive agencies. Our strategy for Ivantage is focused on providing agencies a solution for their customers when coverage through Allstate brand underwritten products is not available. The agent access to this coverage is technology driven with a focus on enhancing the agency ease of doing business while meeting customer needs.
Underwriting results are shown in the following table.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Premiums written | $ | 28,768 |
| | $ | 28,014 |
| | $ | 26,820 |
|
| Premiums earned | $ | 28,445 |
| | $ | 27,452 |
| | $ | 26,218 |
|
| Claims and claims expense | (20,003 | ) | | (18,856 | ) | | (17,244 | ) |
| Amortization of DAC | (4,005 | ) | | (3,827 | ) | | (3,601 | ) |
| Other costs and expenses | (2,962 | ) | | (2,919 | ) | | (3,125 | ) |
| Restructuring and related charges | (28 | ) | | (38 | ) | | (13 | ) |
| Underwriting income | $ | 1,447 |
| | $ | 1,812 |
| | $ | 2,235 |
|
| Catastrophe losses | $ | 2,425 |
| | $ | 1,594 |
| | $ | 1,809 |
|
| | | | | | |
| Underwriting income (loss) by line of business | | | | | |
| Auto | $ | 266 |
| | $ | 204 |
| | $ | 906 |
|
| Homeowners | 1,098 |
| | 1,418 |
| | 1,120 |
|
| Other personal lines | 166 |
| | 197 |
| | 160 |
|
| Commercial lines | (110 | ) | | (40 | ) | | 9 |
|
| Other business lines | 27 |
| | 33 |
| | 40 |
|
| Underwriting income | $ | 1,447 |
| | $ | 1,812 |
| | $ | 2,235 |
|
The following table summarizes the changes in underwriting results from the prior year by the components of the increase (decrease) in underwriting income. The 2016 column presents changes in 2016 compared to 2015. The 2015 column presents changes in 2015 compared to 2014.
|
| | | | | | | |
| ($ in millions) | 2016 | | 2015 |
| Underwriting income - prior year | $ | 1,812 |
| | $ | 2,235 |
|
| Changes in underwriting income from: | | | |
| Premiums earned | 993 |
| | 1,234 |
|
| Incurred claims and claims expense (“losses”): | | | |
| Incurred losses, excluding catastrophe losses and reserve reestimates | (480 | ) | | (1,563 | ) |
| Catastrophe losses, excluding reserve reestimates | (811 | ) | | 160 |
|
| | | | |
| Non-catastrophes reserve reestimates | 164 |
| | (264 | ) |
| Catastrophes reserve reestimates | (20 | ) | | 55 |
|
| Total reserve reestimates | 144 |
| | (209 | ) |
| Losses subtotal - loss | (1,147 | ) | | (1,612 | ) |
| Expenses | (211 | ) | | (45 | ) |
| Underwriting income | $ | 1,447 |
| | $ | 1,812 |
|
Underwriting income totaled $1.45 billion in 2016, a 20.1% decrease from $1.81 billion in 2015, primarily due to lower homeowners underwriting income resulting from higher catastrophe losses and higher commercial lines underwriting losses due to rising loss costs, partially offset by increased auto underwriting income as a result of rate actions. Underwriting income totaled $1.81 billion in 2015, an 18.9% decrease from $2.24 billion in 2014, primarily due to lower auto underwriting income resulting from rising loss costs, partially offset by increased homeowners underwriting income as a result of growth actions.
Our underwriting results were impacted by our profit improvement actions. We regularly monitor profitability trends and take appropriate pricing actions, underwriting actions, claims process improvements and targeted expense spending reductions to achieve adequate returns.
Given auto loss trends emerging in 2015 and continuing into 2016, we responded with a multi-faceted approach to improve profitability, which has impacted our growth and retention.
We increased and accelerated rate filings broadly across the country. Approximately 28% of the Allstate brand rate increases approved in 2016 were earned in 2016, with the remainder expected to be earned in 2017 and 2018. We continue to aggressively pursue rate increases to respond to higher loss trends, subject to regulatory processes and review.
We made underwriting guideline adjustments in state specific locations and customer segments experiencing less than acceptable returns which reduced the number of new issued applications and slowed growth. Underwriting guideline adjustments vary by state and include restrictions on business with no prior insurance as well as business with prior accidents and violations. Changes in down payment requirements and coverage plan adjustments have also been implemented. These changes are intended to increase underwriting margin and are continually monitored. In 2016, as targeted underwriting results in these segments were achieved, the guidelines were modified appropriately.
For homeowners, we continue to be disciplined in how we manage margins through underwriting guidelines, risk management policies, property inspections and implement rate and other actions to maintain or improve returns where required. Our growth actions planned include continuing to implement our House & Home product, leveraging agency sales practices focused on multi-line households, increasing availability in coastal markets, improving penetration in underserved markets in the middle of the country and targeted advertising campaigns.
Premiums writtenand earned by line of business are shown in the following table.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Premiums written | | | | | |
| Auto | $ | 19,209 |
| | $ | 18,445 |
| | $ | 17,504 |
|
| Homeowners | 6,730 |
| | 6,711 |
| | 6,536 |
|
Other personal lines (1) | 1,621 |
| | 1,586 |
| | 1,569 |
|
| Subtotal – Personal lines | 27,560 |
| | 26,742 |
| | 25,609 |
|
| Commercial lines | 499 |
| | 516 |
| | 494 |
|
Other business lines (2) | 709 |
| | 756 |
| | 717 |
|
| Total | $ | 28,768 |
| | $ | 28,014 |
| | $ | 26,820 |
|
| Premiums earned | | | | | |
| Auto | $ | 19,031 |
| | $ | 18,191 |
| | $ | 17,234 |
|
| Homeowners | 6,736 |
| | 6,613 |
| | 6,415 |
|
Other personal lines (1) | 1,592 |
| | 1,577 |
| | 1,551 |
|
| Subtotal – Personal lines | 27,359 |
| | 26,381 |
| | 25,200 |
|
| Commercial lines | 506 |
| | 510 |
| | 476 |
|
Other business lines (2) | 580 |
| | 561 |
| | 542 |
|
| Total | $ | 28,445 |
| | $ | 27,452 |
| | $ | 26,218 |
|
| |
(1)
• | Other personal lines include renter, condominium, landlord and other personal lines products.Renewal ratio: Renewal policy item counts issued during the period, based on contract effective dates, divided by the total policy item counts issued 6 months prior for auto (generally 12 months prior for Encompass brand) or 12 months prior for homeowners. |
| |
(2)
• | Other business lines primarily include Allstate Roadside Services and Allstate Dealer Services. |
Auto premium measures and statistics that are used to analyze the business are shown in the following table. |
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| PIF (thousands) | 19,742 |
| | 20,326 |
| | 19,916 |
|
| New issued applications (thousands) | 2,312 |
| | 2,962 |
| | 3,033 |
|
| Average premium | $ | 523 |
| | $ | 492 |
| | $ | 479 |
|
| Renewal ratio (%) | 87.8 |
| | 88.6 |
| | 88.9 |
|
Approved rate changes (1): | | | | | |
# of locations (2) | 53 |
| | 50 |
| | 46 |
|
Total brand (%) (3) | 7.2 |
| | 5.3 |
| | 2.3 |
|
Location specific (%) (4)(5) | 8.1 |
| | 7.6 |
| | 3.2 |
|
| |
(1)
| Rate changes that are indicated basedApproved rate changes: Based on loss trend analysis to achieve a targeted return will continue to be pursued. Rate changes dohistorical premiums written in locations where the brands operate, not include ratingincluding rate plan enhancements including(such as the introduction of discounts and surcharges that result in no change in the overall rate level in a location. These rate changes do not reflectlevel) and initial rates filed for insurance subsidiaries initially writing business in a location. Allstate brand auto rate changes were cumulatively $2.28 billion or 12.5% in 2016 and 2015. |
| |
(2)
| Allstate brand operates in 50 states, the District of Columbia, and 5 Canadian provinces. |
| |
(3)
| Represents the impact in the states, the District of Columbia and Canadian provinces where rate changes were approved during the period as a percentage of total brand prior year-end premiums written. |
| |
(4)
| Represents the impact in the states, the District of Columbia and Canadian provinces where rate changes were approved during the period as a percentage of its respective total prior year-end premiums written in those same locations. |
| |
(5)
| Based on historical premiums written in the locations noted above, rate changes approved for auto totaled $1.33 billion, $942 million and $399 million in 2016, 2015 and 2014, respectively. |
Auto premiums written totaled $19.21 billion in 2016, a 4.1% increase from $18.45 billion in 2015. Factors impacting premiums written were the following:
2.9% or 584 thousand decrease in PIF as of December 31, 2016 compared to December 31, 2015. Allstate brand auto PIF increased in 9 states, including 1 out of our largest 10 states, as of December 31, 2016 compared to December 31, 2015.
21.9% decrease in new issued applications in 2016 compared to 2015. All of our largest 10 states experienced decreases in new issued applications in 2016 compared to 2015. New issued applications were relatively consistent throughout the year.
6.3% increase in average premium in 2016 compared to 2015, primarily due to rate increases. These amounts do not assume customer choices such as non-renewal or changes in policy terms which might reduce future premiums. Approximately 61% of the change in rates approved for auto in 2016 are driven by the increases approved in our 10 largest states.
0.8 point decrease in the renewal ratio in 2016 compared to 2015. Of our largest 10 states, 9 experienced decreases in the renewal ratio in 2016 compared to 2015.
Auto premiums written totaled $18.45 billion in 2015, a 5.4% increase from $17.50 billion in 2014. Factors impacting premiums written were the following:
2.1% or 410 thousand increase in PIF as of December 31, 2015 compared to December 31, 2014. Allstate brand auto PIF increased in 39 states, including 8 out of our largest 10 states, as of December 31, 2015 compared to December 31, 2014.
2.3% decrease in new issued applications to 2,962 thousand in 2015 from 3,033 thousand in 2014. A change was implemented in 2015 allowing a greater number of autos on a single policy, which reduced the new issued application growth rate by 3.2 points. Without this change, new issued applications would have increased 0.9% in 2015 from 2014.
2.7% increase in average premium in 2015 compared to 2014, primarily due to rate increases. Based on historical premiums written, rate changes approved for auto totaled $942 million in 2015 compared to $399 million in 2014. These amounts do not assume customer choices such as non-renewal or changes in policy terms which might reduce future premiums. Fluctuation in the Canadian exchange rate reduced premiums written and average premium growth rates in 2015 by 0.7 points.
0.3 point decrease in the renewal ratio in 2015 compared to 2014.
Homeowners premium measures and statistics that are used to analyze the business are shown in the following table.
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| PIF (thousands) | 6,099 |
| | 6,174 |
| | 6,106 |
|
| New issued applications (thousands) | 712 |
| | 781 |
| | 725 |
|
| Average premium | $ | 1,177 |
| | $ | 1,155 |
| | $ | 1,140 |
|
| Renewal ratio (%) | 87.8 |
| | 88.5 |
| | 88.4 |
|
Approved rate changes (1): | | | | | |
# of locations (2) | 40 |
| | 36 |
| | 37 |
|
| Total brand (%) | 1.1 |
| (4) | 2.8 |
| | 1.7 |
|
Location specific (%) (3) | 2.2 |
| (4) | 5.0 |
| | 4.7 |
|
| |
(1)
| Includes rate changes approved based on our net cost of reinsurance. Allstate brand homeownerThe rate change percentages are calculated using approved rate changes were cumulatively $265 million or 3.9%during the period as a percentage of: |
| |
| – | Total brand premiums written |
| |
| – | Premiums written in 2016respective locations with rate changes |
The Allstate Corporation 47
2019 Form 10-KAllstate Protection: Allstate brand
Allstate brand products are sold primarily through Allstate exclusive agencies and serve customers who prefer local personalized advice and service and are brand-sensitive. In 2019, the Allstate brand represented 91.1% of the Allstate Protection segment’s written premium. For additional information on our strategy and outlook, see Part I, Item 1. Business - Strategy and Segment Information. |
| | | | | | | | | | | | |
| Underwriting results |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Premiums written | | $ | 32,286 |
| | $ | 30,591 |
| | $ | 28,885 |
|
| Premiums earned | | $ | 31,738 |
| | $ | 30,058 |
| | $ | 28,631 |
|
| Other revenue | | 583 |
| | 582 |
| | 559 |
|
| Claims and claims expense | | (21,178 | ) | | (20,237 | ) | | (19,273 | ) |
| Amortization of DAC | | (4,411 | ) | | (4,242 | ) | | (3,963 | ) |
| Other costs and expenses | | (3,748 | ) | | (3,752 | ) | | (3,497 | ) |
| Restructuring and related charges | | (33 | ) | | (52 | ) | | (70 | ) |
| Underwriting income | | $ | 2,951 |
| | $ | 2,357 |
| | $ | 2,387 |
|
| Catastrophe losses | | $ | 2,391 |
| | $ | 2,701 |
| | $ | 2,985 |
|
| | | | | | | |
| Underwriting income (loss) by line of business | | | | | | |
| Auto | | $ | 1,727 |
| | $ | 1,788 |
| | $ | 1,465 |
|
| Homeowners | | 910 |
| | 496 |
| | 754 |
|
Other personal lines (1) | | 225 |
| | 107 |
| | 130 |
|
| Commercial lines | | 14 |
| | (83 | ) | | (13 | ) |
Other business lines (2) | | 75 |
| | 49 |
| | 51 |
|
| Underwriting income | | $ | 2,951 |
| | $ | 2,357 |
| | $ | 2,387 |
|
| |
(1) | Other personal lines include renters, condominium, landlord and 2015.other personal lines products. |
| |
(2) | Other business lines represent Ivantage. |
|
| | | | | | | | |
Changes in underwriting results from prior year by component (1) |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 |
| Underwriting income - prior year | | $ | 2,357 |
| | $ | 2,387 |
|
| Changes in underwriting income (loss) from: | | | | |
| Increase (decrease) premiums earned | | 1,680 |
| | 1,427 |
|
| Increase (decrease) other revenue | | 1 |
| | 23 |
|
| (Increase) decrease incurred claims and claims expense (“losses”): | | | | |
| Incurred losses, excluding catastrophe losses and reserve reestimates | | (1,185 | ) | | (1,022 | ) |
| Catastrophe losses, excluding reserve reestimates | | 337 |
| | 311 |
|
| Catastrophe reserve reestimates | | (27 | ) | | (27 | ) |
| Non-catastrophe reserve reestimates | | (66 | ) | | (226 | ) |
| Losses subtotal | | (941 | ) | | (964 | ) |
| (Increase) decrease expenses | | (146 | ) | | (516 | ) |
| Underwriting income | | $ | 2,951 |
| | $ | 2,357 |
|
(1) The 2019 column presents changes in 2019 compared to 2018. The 2018 column presents changes in 2018 compared to 2017.
Underwriting income increased 25.2% or $594 million in 2019 compared to 2018, primarily due to increased premiums earned and lower catastrophe losses, partially offset by higher non-catastrophe losses and amortization of DAC.
Allstate Protection: Allstate brand 2019 Form 10-K
|
| | | | | | | | | | | | |
Premiums written and earned by line of business
|
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Premiums written | | | | | | |
| Auto | | $ | 21,936 |
| | $ | 20,991 |
| | $ | 19,859 |
|
Homeowners (1) | | 7,645 |
| | 7,199 |
| | 6,865 |
|
| Other personal lines | | 1,803 |
| | 1,742 |
| | 1,673 |
|
| Subtotal – Personal lines | | 31,384 |
| | 29,932 |
| | 28,397 |
|
| Commercial lines | | 902 |
| | 659 |
| | 488 |
|
| Total | | $ | 32,286 |
| | $ | 30,591 |
| | $ | 28,885 |
|
| Premiums earned | | | | | | |
| Auto | | $ | 21,680 |
| | $ | 20,662 |
| | $ | 19,676 |
|
| Homeowners | | 7,403 |
| | 7,025 |
| | 6,811 |
|
| Other personal lines | | 1,773 |
| | 1,716 |
| | 1,649 |
|
| Subtotal – Personal lines | | 30,856 |
| | 29,403 |
| | 28,136 |
|
| Commercial lines | | 882 |
| | 655 |
| | 495 |
|
| Total | | $ | 31,738 |
| | $ | 30,058 |
| | $ | 28,631 |
|
| |
(1) | The cost of our catastrophe reinsurance program increased $22 million to $286 million in 2019 from $264 million in 2018. Catastrophe placement premiums are recorded primarily in the Allstate brand and are a reduction of premium. For a more detailed discussion on reinsurance, see the Claims and Claims Expense Reserves section of the MD&A and Note 10 of the consolidated financial statements. |
|
| | | | | | | | | | | | | | | | | | | | |
| Auto premium measures and statistics |
| | | 2019 | | 2018 | | 2017 | | 2019 vs. 2018 | | 2018 vs. 2017 |
| PIF (thousands) | | 20,398 |
| | 20,104 |
| | 19,580 |
| | 1.5 | % | | 2.7 | % |
| New issued applications (thousands) | | 2,942 |
| | 2,933 |
| | 2,520 |
| | 0.3 | % | | 16.4 | % |
| Average premium | | $ | 586 |
| | $ | 570 |
| | $ | 550 |
| | 2.8 | % | | 3.6 | % |
| Renewal ratio (%) | | 88.6 |
| | 88.5 |
| | 87.6 |
| | 0.1 |
| | 0.9 |
|
| Approved rate changes: | | | | | | | | | | |
| Impact of rate changes ($ in millions) | | $ | 574 |
| | $ | 215 |
| | $ | 773 |
| | $ | 359 |
| | $ | (558 | ) |
# of locations (1) | | 47 |
| | 47 |
| | 49 |
| | — |
| | (2 | ) |
| Total brand (%) | | 2.7 |
| | 1.1 |
| | 4.0 |
| | 1.6 |
| | (2.9 | ) |
| Location specific (%) | | 4.6 |
| | 2.9 |
| | 6.0 |
| | 1.7 |
| | (3.1 | ) |
| |
(1) | Allstate brand operates in 50 states, the District of Columbia,D.C. and 5 Canadian provinces. |
Auto insurance premiums written increased 4.5% or $945 million in 2019 compared to 2018, primarily due to an increase in average premium and growth.
PIF increased by 294 thousand policies compared to the prior year with increases in 33 states, including 6 of our largest 10 states.
|
| | | | | | | | | | | | | | | | | | | | |
Homeowners premium measures and statistics
| | | | |
| | | 2019 | | 2018 | | 2017 | | 2019 vs. 2018 | | 2018 vs. 2017 |
| PIF (thousands) | | 6,254 |
| | 6,186 |
| | 6,088 |
| | 1.1 | % | | 1.6 | % |
| New issued applications (thousands) | | 848 |
| | 826 |
| | 733 |
| | 2.7 | % | | 12.7 | % |
| Average premium | | $ | 1,295 |
| | $ | 1,231 |
| | $ | 1,197 |
| | 5.2 | % | | 2.8 | % |
| Renewal ratio (%) | | 88.3 |
| | 88.0 |
| | 87.3 |
| | 0.3 |
| | 0.7 |
|
| Approved rate changes: | | | | | | | | | | |
| Impact of rate changes ($ in millions) | | $ | 239 |
| | $ | 189 |
| | $ | 122 |
| | $ | 50 |
| | $ | 67 |
|
# of locations (1) | | 39 |
| | 40 |
| | 30 |
| | (1 | ) | | 10 |
|
| Total brand (%) | | 3.2 |
| | 2.7 |
| | 1.8 |
| | 0.5 |
| | 0.9 |
|
| Location specific (%) | | 5.1 |
| | 4.3 |
| | 3.7 |
| | 0.8 |
| | 0.6 |
|
| |
(3)(1)
| Based on historical premiums writtenAllstate brand operates in the locations noted above, rate changes approved for homeowners totaled $75 million, $190 million50 states, D.C., and $124 million in 2016, 2015 and 2014, respectively.5 Canadian provinces. |
Homeowners insurance premiums written increased 6.2% or $446 million in 2019 compared to 2018, primarily due to higher average premiums, including rate changes and inflation in insured home valuations, and growth. PIF increased 68 thousand policies with increases in 31 states, including 6 of our largest 10 states.
Other personal lines premiums written increased 3.5% or $61 million in 2019 compared to 2018. The increase in 2019 was primarily due to increases in personal umbrella and condominium insurance premiums.
The Allstate Corporation 49
2019 Form 10-KAllstate Protection: Allstate brand
Commercial lines premiums written increased 36.9% or $243 million in 2019 compared to 2018. The increase in 2019 was primarily due to expansion in our shared economy business, including growth in our current agreements and addition of new customers.
Growth in premiums written is not reflected in growth in policies in force as the shared economy agreements typically reflect contracts that cover multiple drivers as opposed to individual drivers.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Combined ratios by line of business |
| | | For the years ended December 31, |
| | | Loss ratio | | Expense ratio (1) | | Combined ratio |
| | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Auto | | 67.3 |
| | 65.9 |
| | 67.9 |
| | 24.7 |
| | 25.4 |
| | 24.7 |
| | 92.0 |
| | 91.3 |
| | 92.6 |
|
| Homeowners | | 64.9 |
| | 69.3 |
| | 66.0 |
| | 22.8 |
| | 23.6 |
| | 22.9 |
| | 87.7 |
| | 92.9 |
| | 88.9 |
|
| Other personal lines | | 60.6 |
| | 66.3 |
| | 64.1 |
| | 26.7 |
| | 27.5 |
| | 28.0 |
| | 87.3 |
| | 93.8 |
| | 92.1 |
|
| Commercial lines | | 81.3 |
| | 91.3 |
| | 75.1 |
| | 17.1 |
| | 21.4 |
| | 27.5 |
| | 98.4 |
| | 112.7 |
| | 102.6 |
|
| Total | | 66.7 |
| | 67.3 |
| | 67.3 |
| | 24.0 |
| | 24.9 |
| | 24.4 |
| | 90.7 |
| | 92.2 |
| | 91.7 |
|
| |
(4)(1)
| IncludesOther revenue is deducted from operating costs and expenses in the impact of a rate decrease in California in first quarter 2016. Excluding California, Allstate brand homeowners total brand and location specific rate changes were 2.1% and 5.1% in 2016, respectively.expense ratio calculation. |
Homeowners premiums written totaled $6.73 billion in 2016, a 0.3% increase from $6.71 billion in 2015. Factors impacting premiums written were the following:
1.2% or 75 thousand decrease in PIF as of December 31, 2016 compared to December 31, 2015. Allstate brand homeowners PIF increased in 17 states, including 3 out of our largest 10 states, as of December 31, 2016 compared to December 31, 2015.
8.8% decrease in new issued applications in 2016 compared to 2015. Of our largest 10 states, 8 experienced decreases in new issued applications in 2016 compared to 2015. New issued applications were relatively consistent throughout the year.
1.9% increase in average premium in 2016 compared to 2015 primarily due to rate changes and increasing insured home valuations due to inflationary costs.
0.7 point decrease in the renewal ratio in 2016 compared to 2015. Of our largest 10 states, 9 experienced decreases in the renewal ratio in 2016 compared to 2015.
$35 million decrease in the cost of our catastrophe reinsurance program to $335 million in 2016 from $370 million in 2015. Catastrophe reinsurance premiums are a reduction of premium.
Premiums written for Allstate’s House and Home product, our redesigned homeowners new business offering currently available in 80% of total states, totaled $1.89 billion in 2016 compared to $1.46 billion in 2015.
In states with severe weather and risk, our excess and surplus lines carrier North Light as well as non-proprietary products will remain a critical component to our overall homeowners strategy to profitably grow and serve our customers.
Homeowners premiums written totaled $6.71 billion in 2015, a 2.7% increase from $6.54 billion in 2014. Factors impacting premiums written were the following:
1.1% or 68 thousand increase in PIF as of December 31, 2015 compared to December 31, 2014 due primarily to increases in new issued applications. Allstate brand homeowners PIF increased in 32 states, including 7 out of our largest 10 states, as of December 31, 2015 compared to December 31, 2014.
7.7% increase in new issued applications to 781 thousand in 2015 from 725 thousand in 2014.
1.3% increase in average premium in 2015 compared to 2014 primarily due to rate changes and increasing insured home valuations due to inflationary costs. Fluctuation in the Canadian exchange rate has reduced premiums written and average premium growth rates in 2015 by 0.5 points.
0.1 point increase in the renewal ratio in 2015 compared to 2014.
$19 million decrease in the cost of our catastrophe reinsurance program to $370 million in 2015 from $389 million in 2014.
Other personal lines premiums written totaled $1.62 billion in 2016, a 2.2% increase from $1.59 billion in 2015, following a 1.1% increase in 2015 from $1.57 billion in 2014. The increase in 2016 was primarily due to increased average premium for condominium insurance, partially offset by a decreased volume of landlords insurance. The increase in 2015 primarily relates to renters insurance.
Commercial lines premiums written totaled $499 million in 2016, a 3.3% decrease from $516 million in 2015, following a 4.5% increase in 2015 from $494 million in 2014. The decrease in 2016 was driven by decreased new business and lower renewals due to profit improvement actions. The increase in 2015 was driven by higher renewals and increased average premiums.
Other business lines premiums written totaled $709 million in 2016, a 6.2% decrease from $756 million in 2015, following a 5.4% increase in 2015 from $717 million in 2014. The decrease in 2016 was driven by lower wholesale rescue volume primarily due to partner exits and lower retail memberships in force in Allstate Roadside Services and a decrease in guaranteed asset protection contracts due to rate increases in Allstate Dealer Services. The increase in 2015 was primarily due to increased sales of vehicle service contracts, guaranteed asset protection contracts, and other products at Allstate Dealer Services, partially offset by a decline in Allstate Roadside Services premiums.
Combined ratios by line of business are analyzed in the following table.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Loss ratio (1) | | Expense ratio (1) | | Combined ratio |
| | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
| Auto | 74.5 |
| | 74.5 |
| | 69.2 |
| | 24.1 |
| | 24.4 |
| | 25.5 |
| | 98.6 |
| | 98.9 |
| | 94.7 |
|
| Homeowners | 61.0 |
| | 55.6 |
| | 58.7 |
| | 22.7 |
| | 23.0 |
| | 23.8 |
| | 83.7 |
| | 78.6 |
| | 82.5 |
|
| Other personal lines | 62.0 |
| | 60.9 |
| | 61.7 |
| | 27.6 |
| | 26.6 |
| | 28.0 |
| | 89.6 |
| | 87.5 |
| | 89.7 |
|
| Commercial lines | 93.9 |
| | 78.4 |
| | 67.0 |
| | 27.8 |
| | 29.4 |
| | 31.1 |
| | 121.7 |
| | 107.8 |
| | 98.1 |
|
| Other business lines | 43.8 |
| | 46.9 |
| | 48.3 |
| | 51.5 |
| | 47.2 |
| | 44.3 |
| | 95.3 |
| | 94.1 |
| | 92.6 |
|
| Total | 70.3 |
| | 68.7 |
| | 65.8 |
| | 24.6 |
| | 24.7 |
| | 25.7 |
| | 94.9 |
| | 93.4 |
| | 91.5 |
|
| |
(1)
| Ratios are calculated using the premiums earned for the respective line of business. |
Loss ratios by line of business are analyzed in the following table. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loss ratios by line of business
|
| | | For the years ended December 31, |
| | | Loss ratio | | Effect of catastrophe losses | | Effect of prior year reserve reestimates | | Effect of catastrophe losses included in prior year reserve reestimates |
| | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Auto | | 67.3 |
| | 65.9 |
| | 67.9 |
| | 1.7 |
| | 1.6 |
| | 3.4 |
| | (1.5 | ) | | (2.2 | ) | | (2.4 | ) | | (0.1 | ) | | (0.2 | ) | | (0.1 | ) |
| Homeowners | | 64.9 |
| | 69.3 |
| | 66.0 |
| | 24.8 |
| | 30.5 |
| | 30.7 |
| | 0.7 |
| | — |
| | (2.0 | ) | | 0.8 |
| | 0.8 |
| | (0.1 | ) |
| Other personal lines | | 60.6 |
| | 66.3 |
| | 64.1 |
| | 9.2 |
| | 12.3 |
| | 12.2 |
| | 0.6 |
| | 0.5 |
| | 0.7 |
| | 0.1 |
| | (0.1 | ) | | 0.2 |
|
| Commercial lines | | 81.3 |
| | 91.3 |
| | 75.1 |
| | 1.4 |
| | 3.4 |
| | 4.8 |
| | 1.9 |
| | 16.5 |
| | 3.9 |
| | (0.1 | ) | | — |
| | 0.2 |
|
| Total | | 66.7 |
| | 67.3 |
| | 67.3 |
| | 7.5 |
| | 9.0 |
| | 10.4 |
| | (0.7 | ) | | (1.1 | ) | | (2.0 | ) | | 0.1 |
| | — |
| | (0.1 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Loss ratio | | Effect of catastrophe losses on combined ratio | | Effect of prior year reserve reestimates on combined ratio | | Effect of catastrophe losses included in prior year reserve reestimates on combined ratio |
| | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
| Auto | 74.5 |
| | 74.5 |
| | 69.2 |
| | 2.8 |
| | 1.3 |
| | 1.6 |
| | (0.7 | ) | | 0.2 |
| | (1.2 | ) | | (0.1 | ) | | (0.1 | ) | | (0.1 | ) |
| Homeowners | 61.0 |
| | 55.6 |
| | 58.7 |
| | 24.6 |
| | 18.3 |
| | 21.4 |
| | (0.3 | ) | | (0.3 | ) | | 0.4 |
| | 0.1 |
| | (0.1 | ) | | 1.0 |
|
| Other personal lines | 62.0 |
| | 60.9 |
| | 61.7 |
| | 11.8 |
| | 8.1 |
| | 8.2 |
| | (0.9 | ) | | 0.5 |
| | 2.1 |
| | (0.2 | ) | | (0.1 | ) | | (0.2 | ) |
| Commercial lines | 93.9 |
| | 78.4 |
| | 67.0 |
| | 6.9 |
| | 5.1 |
| | 6.1 |
| | 12.2 |
| | 0.4 |
| | (4.2 | ) | | 1.0 |
| | 1.0 |
| | 0.4 |
|
| Other business lines | 43.8 |
| | 46.9 |
| | 48.3 |
| | 0.2 |
| | — |
| | — |
| | 0.7 |
| | 0.4 |
| | (0.2 | ) | | — |
| | — |
| | — |
|
| Total | 70.3 |
| | 68.7 |
| | 65.8 |
| | 8.5 |
| | 5.8 |
| | 6.9 |
| | (0.4 | ) | | 0.1 |
| | (0.7 | ) | | — |
| | (0.1 | ) | | 0.1 |
|
Auto loss ratio in 2016 was comparable to 2015, primarily due to increased catastrophe losses and rising loss costs, offset by increased premiums earned and favorable prior year reserve reestimates. Auto loss ratio for the Allstate brand increased 5.3 points
in 2015 compared to 2014, primarily due to higher claim frequency and severity and unfavorable reserve reestimates, partially offset by increased premiums earned and decreased catastrophe losses.
Frequency and severity statistics, which are influenced by driving patterns, inflation and other factors, are provided to describe the trends in loss costs of the business. Our reserving process incorporates changes in loss patterns, operational statistics and changes in claims reporting processes to determine our best estimate of recorded reserves. We use the following statistics to evaluate losses:
Paid claim frequency is calculated as annualized notice counts closed with payment in the period divided by the average of policies in force with the applicable coverage during the period. Gross claim frequency is calculated as annualized notice counts received in the period divided by the average of policies in force with the applicable coverage during the period. Gross claim frequency includes all actual notice counts, regardless of their current status (open or closed) or their ultimate disposition (closed with a payment or closed without payment). Frequency statistics exclude counts associated with catastrophe events. The percent change in paid or gross claim frequency is calculated as the amount of increase or decrease in the paid or gross claim frequency in the current period compared to the same period in the prior year; divided by the prior year paid or gross claim frequency. |
|
• Paid claim frequency (1) is calculated as annualized notice counts closed with payment in the period divided by the average of PIF with the applicable coverage during the period. |
• Gross claim frequency (1) is calculated as annualized notice counts received in the period divided by the average of PIF with the applicable coverage during the period. Gross claim frequency includes all actual notice counts, regardless of their current status (open or closed) or their ultimate disposition (closed with a payment or closed without payment). |
• Paid claim severity is calculated by dividing the sum of paid losses and loss expenses by claims closed with a payment during the period.
|
• Percent change in frequency or severity statistics is calculated as the amount of increase or decrease in the paid or gross claim frequency or severity in the current period compared to the same period in the prior year divided by the prior year paid or gross claim frequency or severity. |
| |
(1) | Frequency statistics exclude counts associated with catastrophe events. |
Paid claim frequency trends will often differ from gross claim frequency trends due to differences in the timing of when notices are received and when claims are settled. For property damage claims, paid
frequency trends reflect littlesmaller differences as timing between opening and settlement is minimal.generally less. For bodily injury, gross frequency trends reflect emerging trends since the difference in timing between opening and settlement is much greater and gross frequency does not typically experience the same volatility in quarterly fluctuations seen in paid frequency. In evaluating frequency, we typically rely upon paid frequency trends for physical damage coverages such as property damage and gross frequency for casualty coverages such as bodily injury to provide an indicator of emerging trends in overall claim frequency while also providing insights for our analysis of severity.
Paid claim severity is calculated by dividing the sum of paid lossesWe are continuing to implement new technology and loss expenses by claims closed with a payment during the period. The percent change in paid claim severity is calculated as the amount of increase or decrease in paid claim severity in the current period compared to the same period in the prior year; divided by the prior year paid claims severity.
Claims is undergoing continuous improvement focusing on effectiveprocess improvements that provide continued loss cost management, process efficiencyaccuracy, efficient processing and leveraging emerging technologies to enhance theenhanced customer experience to ensure our claim processes result in an easy settlement experienceexperiences that isare simple, fast and fair. While this is occurring,produce high degrees of satisfaction. We use Digital Operating Centers to handle auto physical damage claims countrywide utilizing our virtual estimation capabilities, which includes estimating damage with photos and video through the use of QuickFoto Claim® and Virtual Assist®. We are also leveraging virtual capabilities to handle property claims by estimating damage through video with Virtual Assist and aerial imagery using satellites, airplanes and drones. These organizational and process changes impact frequency and severity statistics may be impacted by claims organizational and processas changes which started in the second half of 2016 and are anticipated to continue for several years. Changes in claim opening and closing practices and shifts in timing, if any, can impact claim frequency and severity comparisons to prior periods.
Bodily injury gross claim frequency Auto loss ratio increased 0.5%1.4 points in 20162019 compared to 2015. Bodily injury 2018, primarily due to higher claim severity and lower favorable non-catastrophe prior
Allstate Protection: Allstate brand 2019 Form 10-K
year reserve reestimates, partially offset by higher premiums earned and lower claim frequency.
Property damage paid claim frequency decreased 7.9% while bodily injury paid claim severity increased 4.7%2.2% in 20162019 compared to 2015. These changes are related and reflect payment mix and claim closure patterns that were impacted by changes in bodily injury claim processes in the second half of 2016 related to enhanced documentation of injuries and related medical treatments. Paid claim severity was impacted by increases in medical inflationary trends that were offset by improvements in loss cost management.
Property damage paid claim frequency increased 0.3% in 2016 compared to 2015. Approximately 30% of individual states experienced a year over year increase in property damage paid claim frequency in 2016 when compared to 2015. Property2018. Property damage paid claim severities increased 4.1%6.5% in 20162019 compared to 20152018 due to the impact of higher costs to repair more sophisticated, newer model vehicles, higher third-party subrogation demands and increased volumenumber of total losses.
Bodily injury gross claim frequency decreased 1.8% in 2019 compared to 2018. Bodily injury severity trends increased at a rate above medical care inflation indices in 2019.
Homeowners loss ratio increased 5.4 decreased 4.4 points in 2019 compared to 61.0 in 2016 from 55.6 in 2015,2018, primarily due to higher catastrophe losses,lower catastrophes, increased premiums earned and improved claim frequency, partially offset by increases in premiums earned.increased claim severity. Paid claim frequency excluding
catastrophe losses decreased 4.3%6.0% in 20162019 compared to 2015.2018. Paid claim severity excluding catastrophe losses increased 0.9%11.8% in 20162019 compared to 2015.2018 as we experienced increased claim severity in fire and water perils. Homeowner paid claim severity can be impacted by both the mix of perils and the magnitude of specific losses paid during the year. Homeowners
Other personal lines loss ratiodecreased 3.15.7 points in 2019 compared to 55.6 in 2015 from 58.7 in 2014,2018, primarily due to lower catastrophe losses decreased claim frequency excluding catastrophe losses and increased premiums earned. Claim frequency excluding catastrophe losses decreased 2.3% in 2015 compared to 2014. Paid claim severity excluding catastrophe losses increased 4.3% in 2015 compared to 2014.
Commercial lines loss ratioincreased 15.5decreased 10.0 points in 20162019 compared to 2015,2018, primarily due to higherincreased premiums earned and lower unfavorable non-catastrophe prior year reserve reestimates, partially offset by higher claim severity and higher catastrophe losses.severity. Commercial lines recorded losses related to the shared economy agreements are primarily based on original pricing expectations given limited loss ratio increased 11.4 points in 2015 compared to 2014.experience.
Catastrophe losses were $2.43 billion in 2016 compared to $1.59 billion in 2015 and $1.81 billion in 2014.
Expense ratio The expense ratios by line of business are shown in the following table.
|
| | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| Auto | 24.1 |
| | 24.4 |
| | 25.5 |
|
| Homeowners | 22.7 |
| | 23.0 |
| | 23.8 |
|
| Other personal lines | 27.6 |
| | 26.6 |
| | 28.0 |
|
| Commercial lines | 27.8 |
| | 29.4 |
| | 31.1 |
|
| Other business lines | 51.5 |
| | 47.2 |
| | 44.3 |
|
| Total expense ratio | 24.6 |
| | 24.7 |
| | 25.7 |
|
The impact of specific costs and expenses on the expense ratio are shown in the following table. |
| | | | | | | | | |
| Impact of specific costs and expenses on the expense ratio |
| | | For the years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Amortization of DAC | | 13.9 |
| | 14.1 |
| | 13.8 |
|
| Advertising expense | | 2.2 |
| | 2.2 |
| | 2.0 |
|
| Other costs and expenses | | 7.8 |
| | 8.4 |
| | 8.4 |
|
| Restructuring and related charges | | 0.1 |
| | 0.2 |
| | 0.2 |
|
| Total expense ratio | | 24.0 |
| | 24.9 |
| | 24.4 |
|
|
| | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| Amortization of DAC | 14.1 |
| | 14.0 |
| | 13.7 |
|
| Advertising expense | 2.1 |
| | 2.0 |
| | 2.5 |
|
| Other costs and expenses | 8.3 |
| | 8.6 |
| | 9.5 |
|
| Restructuring and related charges | 0.1 |
| | 0.1 |
| | — |
|
| Total expense ratio | 24.6 |
| | 24.7 |
| | 25.7 |
|
Expense ratio decreased 0.1 point0.9 points in 20162019 compared to 2015. The decrease2018, primarily relateddue to expense spending reductions in professional serviceslower agent incentive compensation and lower compensation incentives earneddecreased operating expenses driven by employees in 2016, partially offset by an increase in the amortization of acquisition costs. Expense spending reductions were primarily related to actions that could be modified as margins return to targeted underwriting results or that fluctuate based on growth and profitability. For areas where we are trending towards acceptable levels of return, spending on growth is being reinstated.enterprise-wide cost reduction efforts. Amortization of DAC primarily includes agent remuneration and premium taxes. Allstate agency total incurred base commissions, variable compensation and bonuses in 20162019 were higherlower than 2015.2018.
Expense
Commercial lines expense ratio decreased 1.0 point4.3 points in 20152019 compared to 2014. 2018, primarily due to growth in our shared economy business, which has a lower expense ratio.
The decrease primarily related to expense spending reductions in advertising and professional services costs, partially offset by an increase in the amortization of acquisition costs. Expense reductions were primarily related to actions that could be modified as margins return to targeted underwriting results. Allstate agency total incurred base commissions, variable compensation and bonuses in 2015 were higher than 2014.Corporation 51
2019 Form 10-KAllstate Protection: Esurance brand
Esurance brand products are sold directly to self-directed, brand-sensitive consumers online and through contact centers. We manage the direct-to-customer business based on its profitability over the lifetime of the customer relationship. In 2019, the Esurance brand represented 6.0% of the Allstate Protection segment’s written premium. For additional information on our strategy and outlook, see Part I, Item 1. Business - Strategy and Segment Information.
|
| | | | | | | | | | | | |
| Underwriting results |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Premiums written | | $ | 2,113 |
| | $ | 1,948 |
| | $ | 1,728 |
|
| Premiums earned | | $ | 2,087 |
| | $ | 1,869 |
| | $ | 1,712 |
|
| Other revenue | | 83 |
| | 80 |
| | 67 |
|
| Claims and claims expense | | (1,650 | ) | | (1,443 | ) | | (1,329 | ) |
| Amortization of DAC | | (46 | ) | | (43 | ) | | (41 | ) |
| Other costs and expenses | | (465 | ) | | (487 | ) | | (462 | ) |
| Restructuring and related charges | | (1 | ) | | (1 | ) | | (3 | ) |
| Impairment of purchased intangibles | | (51 | ) | | — |
| | — |
|
| Underwriting loss | | $ | (43 | ) | | $ | (25 | ) | | $ | (56 | ) |
| Catastrophe losses | | $ | 51 |
| | $ | 52 |
| | $ | 50 |
|
| | | | | | | |
| Underwriting income (loss) by line of business | | | | | | |
| Auto | | $ | (47 | ) | | $ | (11 | ) | | $ | (37 | ) |
| Homeowners | | 2 |
| | (14 | ) | | (20 | ) |
| Other personal lines | | 2 |
| | — |
| | 1 |
|
| Underwriting loss | | $ | (43 | ) | | $ | (25 | ) | | $ | (56 | ) |
|
| | | | | | | | |
Changes in underwriting results from prior year by component (1)
|
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 |
| Underwriting income (loss) - prior year | | $ | (25 | ) | | $ | (56 | ) |
| Changes in underwriting income (loss) from: | | | | |
| Increase (decrease) premiums earned | | 218 |
| | 157 |
|
| Increase (decrease) other revenue | | 3 |
| | 13 |
|
| (Increase) decrease incurred claims and claims expense (“losses”): | | | | |
| Incurred losses, excluding catastrophe losses and reserve reestimates | | (207 | ) | | (110 | ) |
| Catastrophe losses, excluding reserve reestimates | | — |
| | 1 |
|
| Catastrophe reserve reestimates | | 1 |
| | (3 | ) |
| Non-catastrophe reserve reestimates | | (1 | ) | | (2 | ) |
| Losses subtotal | | (207 | ) | | (114 | ) |
| (Increase) decrease expenses: | | | | |
| Expenses, excluding impairment of purchased intangibles | | 19 |
| | (25 | ) |
| Impairment of purchased intangibles | | (51 | ) | | — |
|
| Expenses subtotal | | (32 | ) | | (25 | ) |
| Underwriting loss | | $ | (43 | ) | | $ | (25 | ) |
(1) The 2019 column presents changes in 2019 compared to 2018. The 2018 column presents changes in 2018 compared to 2017.
Underwriting loss increased 72.0% or $18 million in 2019 compared to 2018, primarily due to the impairment of purchased intangibles of $51 million for the Esurance brand focuses on self-directed customers. To best serve these customers,trade name as we integrate Esurance develops its technology, websiteinto the Allstate brand.
Excluding the impairment of purchased intangibles, Esurance underwriting income totaled $8 million in 2019, an increase of $33 million from an underwriting loss of $25 million in 2018. The improvement was primarily due to increased premiums earned and mobile capabilities to continuously improve its hassle-free purchase and claims experience and offer innovative product options and features.lower operating expenses, partially offset by increased loss costs.
Allstate Protection: Esurance continues to develop additional products to complement its auto line of business and provide a more comprehensive solution to its customers. Esurance also continues to invest in geographic expansion of its products. Esurance expanded its homeowners products in 2016 from 25 to 31 states and renters from 20 to 21 states. Esurance continues to focus on increasing its preferred driver mix, while raising marketing effectiveness to support growth and profitability. Esurance’s DriveSense® program, available in 32 states as of December 31, 2016, enables participating customers to be eligible for discounts based on driving performance as measured by a device installed in the vehicle or a mobile application. Esurance Pay Per Mile® usage-based insurance product was launched in 2015 and gives customers flexibility to customize their insurance and pay based on the number of miles they drive.brand 2019 Form 10-K
Underwriting results are shown in the following table.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Premiums written | $ | 1,689 |
| | $ | 1,613 |
| | $ | 1,513 |
|
| Premiums earned | $ | 1,660 |
| | $ | 1,588 |
| | $ | 1,463 |
|
| Claims and claims expense | (1,258 | ) | | (1,192 | ) | | (1,123 | ) |
| Amortization of DAC | (41 | ) | | (40 | ) | | (40 | ) |
| Other costs and expenses | (485 | ) | | (520 | ) | | (559 | ) |
| Restructuring and related charges | — |
| | — |
| | — |
|
| Underwriting loss | $ | (124 | ) | | $ | (164 | ) | | $ | (259 | ) |
| Catastrophe losses | $ | 36 |
| | $ | 14 |
| | $ | 19 |
|
| | | | | | |
| Underwriting income (loss) by line of business | | | | | |
| Auto | $ | (65 | ) | | $ | (145 | ) | | $ | (256 | ) |
| Homeowners | (59 | ) | | (19 | ) | | 1 |
|
| Other personal lines | — |
| | — |
| | (4 | ) |
| Underwriting loss | $ | (124 | ) | | $ | (164 | ) | | $ | (259 | ) |
The following table summarizes the changes in underwriting results from the prior year by the components of the increase (decrease) in underwriting income (loss). The 2016 column presents changes in 2016 compared to 2015. The 2015 column presents changes in 2015 compared to 2014. |
| | | | | | | | | | | | |
| Premiums written and earned by line of business |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Premiums written | | | | | | |
| Auto | | $ | 1,986 |
| | $ | 1,839 |
| | $ | 1,641 |
|
| Homeowners | | 119 |
| | 101 |
| | 79 |
|
| Other personal lines | | 8 |
| | 8 |
| | 8 |
|
| Total | | $ | 2,113 |
| | $ | 1,948 |
| | $ | 1,728 |
|
| Premiums earned | | | | | | |
| Auto | | $ | 1,969 |
| | $ | 1,771 |
| | $ | 1,636 |
|
| Homeowners | | 110 |
| | 90 |
| | 68 |
|
| Other personal lines | | 8 |
| | 8 |
| | 8 |
|
| Total | | $ | 2,087 |
| | $ | 1,869 |
| | $ | 1,712 |
|
|
| | | | | | | |
| ($ in millions) | 2016 | | 2015 |
| Underwriting loss - prior year | $ | (164 | ) | | $ | (259 | ) |
| Changes in underwriting loss from: | | | |
| Premiums earned | 72 |
| | 125 |
|
| Incurred claims and claims expense (“losses”): | | | |
| Incurred losses, excluding catastrophe losses and reserve reestimates | (47 | ) | | (76 | ) |
| Catastrophe losses, excluding reserve reestimates | (23 | ) | | 6 |
|
| | | | |
| Non-catastrophes reserve reestimates | 3 |
| | 2 |
|
| Catastrophes reserve reestimates | 1 |
| | (1 | ) |
| Total reserve reestimates | 4 |
| | 1 |
|
| Losses subtotal - loss | (66 | ) | | (69 | ) |
| Expenses | 34 |
| | 39 |
|
| Underwriting loss | $ | (124 | ) | | $ | (164 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
Auto premium measures and statistics
|
| | | 2019 | | 2018 | | 2017 | | 2019 vs. 2018 | | 2018 vs. 2017 |
| PIF (thousands) | | 1,515 |
| | 1,488 |
| | 1,352 |
| | 1.8 | % | | 10.1 | % |
| New issued applications (thousands) | | 593 |
| | 633 |
| | 484 |
| | (6.3 | )% | | 30.8 | % |
| Average premium | | $ | 620 |
| | $ | 605 |
| | $ | 574 |
| | 2.5 | % | | 5.4 | % |
| Renewal ratio (%) | | 82.8 |
| | 83.3 |
| | 81.5 |
| | (0.5 | ) | | 1.8 |
|
| Approved rate changes: | | | | | | | | | | |
| Impact of rate changes ($ in millions) | | $ | 92 |
| | $ | 28 |
| | $ | 78 |
| | $ | 64 |
| | $ | (50 | ) |
# of locations (1) | | 30 |
| | 30 |
| | 39 |
| | — |
| | (9 | ) |
| Total brand (%) | | 5.0 |
| | 1.8 |
| | 4.8 |
| | 3.2 |
| | (3.0 | ) |
| Location specific (%) | | 5.7 |
| | 2.7 |
| | 5.5 |
| | 3.0 |
| | (2.8 | ) |
Our underwriting results were impacted by profit improvement actions that include rate increases, underwriting guideline adjustments, and decreased marketing in select geographies to manage risks.
Underwriting loss totaled $124 million in 2016, a 24.4% decrease from $164 million in 2015, primarily due to improved auto underwriting losses resulting from the profit improvement plan, partially offset by an increase in homeowners underwriting losses due to higher advertising expenses. Underwriting loss totaled $164 million in 2015, a 36.7% decrease from $259 million in 2014, primarily due to lower auto underwriting losses resulting from profit improvement actions, partially offset by higher homeowners underwriting losses due to higher catastrophe losses.
Premiums writtenand earned by line of business are shown in the following table.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Premiums written | | | | | |
| Auto | $ | 1,625 |
| | $ | 1,576 |
| | $ | 1,499 |
|
| Homeowners | 56 |
| | 30 |
| | 9 |
|
| Other personal lines | 8 |
| | 7 |
| | 5 |
|
| Total | $ | 1,689 |
| | $ | 1,613 |
| | $ | 1,513 |
|
| Premiums earned | | | | | |
| Auto | $ | 1,610 |
| | $ | 1,562 |
| | $ | 1,455 |
|
| Homeowners | 42 |
| | 19 |
| | 3 |
|
| Other personal lines | 8 |
| | 7 |
| | 5 |
|
| Total | $ | 1,660 |
| | $ | 1,588 |
| | $ | 1,463 |
|
Auto premium measures and statistics that are used to analyze the business are shown in the following table.
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| PIF (thousands) | 1,391 |
| | 1,415 |
| | 1,424 |
|
| New issued applications (thousands) | 597 |
| | 627 |
| | 747 |
|
| Average premium | $ | 547 |
| | $ | 516 |
| | $ | 499 |
|
| Renewal ratio (%) | 79.4 |
| | 79.5 |
| | 79.5 |
|
Approved rate changes (1): | | | | | |
# of locations (2) | 33 |
| | 37 |
| | 38 |
|
Total brand (%) (3) | 4.2 |
| | 7.1 |
| | 6.0 |
|
Location specific (%) (4) (5) | 6.1 |
| | 9.3 |
| | 6.9 |
|
| |
(1) | Rate changes that are indicated based on loss trend analysis to achieve a targeted return will continue to be pursued. Rate changes do not include rating plan enhancements, including the introduction of discounts and surcharges that result in no change in the overall rate level in a location. These rate changes do not reflect initial rates filed for insurance subsidiaries initially writing business in a location. |
| |
(2)
| Esurance brand operates in 43 states and 1 Canadian province.states. |
Auto insurancepremiums written increased 8.0% or $147 million in 2019 compared to 2018 due to higher average premium primarily due to rate changes approved and PIF growth, partially offset by a lower renewal ratio.
PIF increased 1.8% or 27 thousand in 2019 compared to 2018. New issued applications decreased 6.3% in 2019 compared to 2018 due to lower advertising spend.
|
| | | | | | | | | | | | | | | | | | | | |
| Homeowners premium measures and statistics |
| | | 2019 | | 2018 | | 2017 | | 2019 vs. 2018 | | 2018 vs. 2017 |
| PIF (thousands) | | 105 |
| | 95 |
| | 79 |
| | 10.5 | % | | 20.3 | % |
| New issued applications (thousands) | | 29 |
| | 32 |
| | 34 |
| | (9.4 | )% | | (5.9 | )% |
| Average premium | | $ | 1,055 |
| | $ | 982 |
| | $ | 917 |
| | 7.4 | % | | 7.1 | % |
Renewal ratio (%) (1) | | 84.5 |
| | 85.3 |
| | 85.5 |
| | (0.8 | ) | | (0.2 | ) |
| Approved rate changes: | | | | | | | | | | |
| Impact of rate changes ($ in millions) | | $ | 5 |
| | $ | 2 |
| | $ | 3 |
| | $ | 3 |
| | $ | (1 | ) |
# of locations (2) | | 5 |
| | 6 |
| | 3 |
| | (1 | ) | | 3 |
|
| Total brand (%) | | 4.7 |
| | 2.1 |
| | 4.5 |
| | 2.6 |
| | (2.4 | ) |
| Location specific (%) | | 17.1 |
| | 6.9 |
| | 18.5 |
| | 10.2 |
| | (11.6 | ) |
| |
(3)
| Represents the impact in the states and Canadian provinces where rate changes were approved during the period as a percentage of total brand prior year-end premiums written. |
| |
(4)
| Represents the impact in the states and Canadian provinces where rate changes were approved during the period as a percentage of its respective total prior year-end premiums written in those same locations. |
| |
(5)
| Based on historical premiums written in the locations noted above, rate changes approved for auto for Esurance brand totaled $65 million, $106 million and $77 million in 2016, 2015 and 2014, respectively. |
Auto premiums written totaled $1.63 billion in 2016, a 3.1% increase from $1.58 billion in 2015. Factors impacting premiums written were the following:
1.7% or 24 thousand decrease in PIF as of December 31, 2016 compared to December 31, 2015.
4.8% decrease in new issued applications in 2016 compared to 2015 due to a decrease in marketing activities and the impact of rate increases. Quote volume decreased due to marketing spending reductions. The conversion rate (the percentage of actual issued policies to completed quotes) increased 0.1 points in 2016 compared to 2015.
6.0% increase in average premium in 2016 compared to 2015.
0.1 point decrease in the renewal ratio in 2016 compared to 2015 primarily due to continued pressure from rate actions.
Auto premiums written totaled $1.58 billion in 2015, a 5.1% increase from $1.50 billion in 2014. Factors impacting premiums written were the following:
0.6% or 9 thousand decrease in PIF as of December 31, 2015 compared to December 31, 2014.
16.1% decrease in new issued applications to 627 thousand in 2015 from 747 thousand in 2014 due to a decrease in marketing activities and an increase in rates. Quote volume declined reflecting lower advertising spend. The conversion rate (the percentage of actual issued policies to completed quotes) decreased 0.3 points in 2015 compared to 2014.
3.4% increase in average premium in 2015 compared to 2014.
The renewal ratio in 2015 was comparable to 2014.
Homeowners premium measures and statistics that are used to analyze the business are shown in the following table.
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| PIF (thousands) | 58 |
| | 32 |
| | 10 |
|
| New issued applications (thousands) | 37 |
| | 28 |
| | 11 |
|
| Average premium | $ | 875 |
| | $ | 833 |
| | $ | 811 |
|
Renewal ratio (%) (1) | 76.6 |
| | 72.7 |
| | N/A |
|
Approved rate changes (2): | | | | | |
# of locations (3) | 1 |
| | N/A |
| | N/A |
|
| Total brand (%) | (0.5 | ) | (4) | N/A |
| | N/A |
|
| Location specific (%) | (10.0 | ) | (4) | N/A |
| | N/A |
|
| |
(1) | Esurance’s renewal ratios will appear lower due to its underwriting process.exclude the impact of risk related cancellations. Customers can enter into a policy without a physical inspection. During the underwriting review period, a number of policies may be canceled if upon inspection the condition is unsatisfactory. Excluding the impact of risk related cancellations, Esurance’s renewal ratio was 82.6 in 2016 compared to 81.9 in 2015. |
| |
(2) | Includes rate changes approved based on our net cost of reinsurance. |
| |
(3)
| Esurance brand operates in 31 states and 2 Canadian provinces. |
| |
(4)
| Includes the impact of a rate decrease in Texas. No rate changes were approved in any other states in 2016. No rate changes were approved for homeowners in 2015 or 2014.states. |
N/A reflects not applicable.
Homeowners insurancepremiums written totaled $56 increased 17.8% or $18 million in 20162019 compared to $30 million in 2015. Factors impacting premiums written were the following:
26 thousand increase in PIF as of December 31, 2016 compared2018 due to December 31, 2015.
9 thousand increase in new issued applications in 2016 comparedhigher average premium primarily due to 2015.
approved rate changes. As of December 31, 2016,2019, Esurance is writingcontinues to write homeowners insurance in
31 states with lower hurricane risk, that havecontributing to lower average premium.
Homeowners premiums written totaled $30 million in 2015premium compared to $9 millionthe industry.
PIF increased 10.5% or 10 thousand in 2014. Factors impacting premiums written were the following:
22 thousand increase in PIF as of December 31, 20152019 compared to December 31, 2014.2018.
New issued applications totaled 28 thousand in 2015 compared to 11 thousand in 2014.
As of December 31, 2015,The Allstate Corporation 53
2019 Form 10-KAllstate Protection: Esurance is writing homeowners insurance in 25 states with lower hurricane risk that have lower average premium.brand
Combined ratios by line of business are analyzed in the following table.
| | | Combined ratios by line of business | | Combined ratios by line of business |
| | | | | | | | | | | | | | | | | | | | For the years ended December 31, |
| | Loss ratio (1) | | Expense ratio (1) | | Combined ratio | | Loss ratio | | Expense ratio (1) | | Combined ratio |
| | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Auto | 75.8 |
| | 75.3 |
| | 76.8 |
| | 28.2 |
| | 34.0 |
| | 40.8 |
| | 104.0 |
| | 109.3 |
| | 117.6 |
| | 79.4 |
| | 77.0 |
| | 77.5 |
| | 23.0 |
| | 23.6 |
| | 24.8 |
| | 102.4 |
| | 100.6 |
| | 102.3 |
|
| Homeowners | 78.6 |
| | 63.2 |
| | 66.7 |
| | 161.9 |
| | 136.8 |
| | — |
| | 240.5 |
| | 200.0 |
| | 66.7 |
| | 74.6 |
| | 83.4 |
| | 83.8 |
| | 23.6 |
| | 32.2 |
| | 45.6 |
| | 98.2 |
| | 115.6 |
| | 129.4 |
|
| Other personal lines | 62.5 |
| | 57.1 |
| | 60.0 |
| | 37.5 |
| | 42.9 |
| | 120.0 |
| | 100.0 |
| | 100.0 |
| | 180.0 |
| |
| Total | 75.8 |
| | 75.1 |
| | 76.8 |
| | 31.7 |
| | 35.2 |
| | 40.9 |
| | 107.5 |
| | 110.3 |
| | 117.7 |
| | 79.1 |
| | 77.2 |
| | 77.6 |
| | 23.0 |
| | 24.1 |
| | 25.7 |
| | 102.1 |
| | 101.3 |
| | 103.3 |
|
| |
(1) | Ratios are calculated usingOther revenue is deducted from operating costs and expenses in the premiums earned for the respective line of business.expense ratio calculation. |
Loss ratios by line of business are analyzed in the following table.
| | | Loss ratios by line of business | | Loss ratios by line of business |
| | | | | | | | | | | | | | | | | | | | | | | | | | For the years ended December 31, |
| | Loss ratio | | Effect of catastrophe losses on combined ratio | | Effect of prior year reserve reestimates on combined ratio | | Effect of catastrophe losses included in prior year reserve reestimates on combined ratio | | Loss ratio | | Effect of catastrophe losses | | Effect of prior year reserve reestimates | | Effect of catastrophe losses included in prior year reserve reestimates |
| | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Auto | 75.8 |
| | 75.3 |
| | 76.8 |
| | 1.5 |
| | 0.7 |
| | 1.3 |
| | (1.3 | ) | | (1.1 | ) | | (1.1 | ) | | — |
| | — |
| | — |
| | 79.4 |
| | 77.0 |
| | 77.5 |
| | 1.2 |
| | 1.5 |
| | 2.1 |
| | 0.1 |
| | 0.1 |
| | 0.1 |
| | — |
| | — |
| | — |
|
| Homeowners | 78.6 |
| | 63.2 |
| | 66.7 |
| | 28.6 |
| | 15.8 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 74.6 |
| | 83.4 |
| | 83.8 |
| | 24.6 |
| | 27.8 |
| | 23.5 |
| | 0.9 |
| | 2.2 |
| | (3.0 | ) | | 0.9 |
| | 2.2 |
| | (1.5 | ) |
| Other personal lines | 62.5 |
| | 57.1 |
| | 60.0 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Total | 75.8 |
| | 75.1 |
| | 76.8 |
| | 2.2 |
| | 0.9 |
| | 1.3 |
| | (1.3 | ) | | (1.1 | ) | | (1.1 | ) | | — |
| | 0.1 |
| | — |
| | 79.1 |
| | 77.2 |
| | 77.6 |
| | 2.4 |
| | 2.8 |
| | 2.9 |
| | 0.1 |
| | 0.2 |
| | (0.1 | ) | | — |
| | 0.1 |
| | (0.1 | ) |
Auto loss ratioincreased 0.52.4 points in 20162019 compared to 2015,2018, primarily due to higher claim frequencyseverity and catastrophe losses, partially offset by increases in premiums earned. Auto loss ratio decreased 1.5 points in 2015 compared to 2014, primarily due to increases in premiums earned and lower catastrophe losses,a lesser extent higher frequency, partially offset by higher claimpremiums earned.
Homeowners loss ratio decreased 8.8 points in 2019 compared to 2018, primarily due to lower frequency and severity across several coverages.
Catastrophe losses were $36 million in 2016 compared to $14 million in 2015 and $19 million in 2014.
Expense ratio The expense ratioshigher premiums earned, partially offset by line of business are shown in the following table.higher claims severity.
|
| | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| Auto | 28.2 |
| | 34.0 |
| | 40.8 |
|
| Homeowners | 161.9 |
| | 136.8 |
| | — |
|
| Other personal lines | 37.5 |
| | 42.9 |
| | 120.0 |
|
| Total expense ratio | 31.7 |
| | 35.2 |
| | 40.9 |
|
|
| | | | | | | | | |
| Impact of specific costs and expenses on the expense ratio |
| | | For the years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Amortization of DAC | | 2.2 |
| | 2.3 |
| | 2.4 |
|
| Advertising expense | | 7.0 |
| | 8.7 |
| | 8.3 |
|
| Amortization of purchased intangibles | | 0.1 |
| | 0.1 |
| | 0.2 |
|
| Other costs and expenses | | 11.2 |
| | 12.9 |
| | 14.6 |
|
| Restructuring and related charges | | — |
| | 0.1 |
| | 0.2 |
|
| Impairment of purchased intangibles | | 2.5 |
| | — |
| | — |
|
| Total expense ratio | | 23.0 |
| | 24.1 |
| | 25.7 |
|
The impactExpense ratiodecreased 1.1 points in 2019 compared to 2018. Excluding the impairment of specific costs and expenses onpurchased intangibles, the expense ratio are shown in the following table.
|
| | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| Amortization of DAC | 2.5 |
| | 2.5 |
| | 2.7 |
|
| Advertising expense | 11.2 |
| | 12.6 |
| | 17.4 |
|
| Amortization of purchased intangible assets | 1.4 |
| | 2.2 |
| | 3.3 |
|
| Other costs and expenses | 16.6 |
| | 17.9 |
| | 17.5 |
|
| Total expense ratio | 31.7 |
| | 35.2 |
| | 40.9 |
|
Expense ratiodecreased 3.5by 3.6 points in 2016 compared to 2015. Esurance uses a direct distribution model, therefore its primary acquisition-related costs are advertising as opposed to commissions. Esurance has continued to invest in growth, including offering2018.
a comprehensive suite of products including homeowners, motorcycle and usage-based insurance as well as expanding into the Canadian market. Esurance advertising expense ratio decreased 1.4 points in 2016 compared to 2015 in conjunction with our profitability actions. Strategic reductions in marketing spending have been made on auto while homeowners advertising spending was increased. We manage the direct to customer business based on its profitability over the lifetime of the customer relationship. We continue to review our advertising spend to ensure our acquisition costs meet our targeted returns. Esurance incurs substantially all of its acquisition costs in the year of policy inception. As a result, the Esurance expense ratio will be higher or lower depending on the advertising expenditures incurred related to our profitability actions. Esurance’s annual combined ratio is below 100, excluding amortization of purchased intangible assets, after the year of policy inception (in which substantially all acquisition costs are incurred), driven by pricing changes, customer mix and renewal experience. Other costs and expenses, including salaries of telephone sales personnel and other underwriting costs related to customer acquisition, were 1.7 points lower in 2016 than 2015. Expense ratio includes amortization2019 compared to 2018 reflecting continued implementation of purchased intangible assets from the original acquisition in 2011. Starting in 2017, the portion of the remaining purchased intangible asset relateddigital self-service capabilities and premium growth.
Esurance uses a direct distribution model, therefore its primary acquisition-related costs are advertising as opposed to thecommissions. Esurance brand name will be classified as an infinite-lived intangible and will no longer be amortized, but tested for impairment on an annual basis.
Expenseadvertising expense ratio decreased 5.71.7 points in 20152019 compared to 2014. Advertising expenses decreased in 2015 compared to 2014 in conjunction with our profitability actions. Other costs and expenses, including salaries of telephone sales personnel and other underwriting costs related to customer acquisition, were higher in 2015 than 2014.2018.
Allstate Protection: Encompass brand 2019 Form 10-K
Encompass brand
Strategy Our strategy forproducts are sold through independent agencies that serve brand-neutral customers who prefer personal service and support from an independent agent. In 2019, the Encompass brand centers around offering broad coverage options specifically focusedrepresented 2.9% of the Allstate Protection segment’s written premium. For additional information on the customers who prefer an independent agency while simplifying the insurance experience by packaging products into a single annual household (“package”) policy with one premium, one bill, one policy deductible, one renewal date and one advisor - an independent insurance agent. Package policies represent over 85% of premiums written where they are offered, with concentrations in suburban and urban areas throughout the country. Package policies currently are not offered in Massachusetts, North Carolina and Texas. In pursuit of thisour strategy and to achieve its financial objectives, Encompass is partnering with dedicated independent agency professionals who understand the needs of our coverage conscious customersoutlook, see Part I, Item 1. Business - Strategy and the value of the Encompass products. Agency segmentation and strategic deployment are a continued focus, as are improved sales leader effectiveness and accountability. Encompass is focused on improving returns while building a foundation for future growth. We seek to achieve these goals in 2017 by continuing to implement profit improvement actions in states with inadequate returns, continuing to contemporize product offerings, and maintaining focus on claims operational excellence, while accelerating growth in markets achieving target returns.
Underwriting results are shown in the following table.Segment Information.
| | | Underwriting results | | Underwriting results |
| | | | | | | | | For the years ended December 31, |
| ($ in millions) | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
| Premiums written | $ | 1,140 |
| | $ | 1,244 |
| | $ | 1,280 |
| | $ | 1,020 |
| | $ | 1,016 |
| | $ | 1,035 |
|
| Premiums earned | $ | 1,202 |
| | $ | 1,269 |
| | $ | 1,247 |
| | $ | 1,018 |
| | $ | 1,023 |
| | $ | 1,090 |
|
| Other revenue | | | 5 |
| | 5 |
| | 6 |
|
| Claims and claims expense | (855 | ) | | (933 | ) | | (948 | ) | | (689 | ) | | (668 | ) | | (786 | ) |
| Amortization of DAC | (221 | ) | | (234 | ) | | (234 | ) | | (192 | ) | | (190 | ) | | (201 | ) |
| Other costs and expenses | (124 | ) | | (127 | ) | | (138 | ) | | (131 | ) | | (145 | ) | | (130 | ) |
| Restructuring and related charges | (1 | ) | | (1 | ) | | (3 | ) | | (4 | ) | | (7 | ) | | (5 | ) |
| Underwriting income (loss) | $ | 1 |
| | $ | (26 | ) | | $ | (76 | ) | | $ | 7 |
| | $ | 18 |
| | $ | (26 | ) |
| Catastrophe losses | $ | 111 |
| | $ | 111 |
| | $ | 165 |
| | $ | 115 |
| | $ | 102 |
| | $ | 193 |
|
| | | | | | | | | | | | |
| Underwriting income (loss) by line of business | | | | | | | | | | | |
| Auto | $ | (29 | ) | | $ | (36 | ) | | $ | (46 | ) | | $ | 8 |
| | $ | 14 |
| | $ | 9 |
|
| Homeowners | 36 |
| | 32 |
| | (24 | ) | | 2 |
| | 1 |
| | (45 | ) |
| Other personal lines | (6 | ) | | (22 | ) | | (6 | ) | | (3 | ) | | 3 |
| | 10 |
|
| Underwriting income (loss) | $ | 1 |
| | $ | (26 | ) | | $ | (76 | ) | | $ | 7 |
| | $ | 18 |
| | $ | (26 | ) |
|
| | | | | | | | |
Changes in underwriting results from prior year by component (1) |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 |
| Underwriting income (loss) - prior year | | $ | 18 |
| | $ | (26 | ) |
| Changes in underwriting income (loss) from: | | | | |
| Increase (decrease) premiums earned | | (5 | ) | | (67 | ) |
| Increase (decrease) other revenue | | — |
| | (1 | ) |
| (Increase) decrease incurred claims and claims expense (“losses”): | | | | |
| Incurred losses, excluding catastrophe losses and reserve reestimates | | 9 |
| | 17 |
|
| Catastrophe losses, excluding reserve reestimates | | (16 | ) | | 104 |
|
| Catastrophes reserve reestimates | | 3 |
| | (13 | ) |
| Non-catastrophe reserve reestimates | | (17 | ) | | 10 |
|
| Losses subtotal | | (21 | ) | | 118 |
|
| (Increase) decrease expenses | | 15 |
| | (6 | ) |
| Underwriting income | | $ | 7 |
| | $ | 18 |
|
(1) The following table summarizes the changes in underwriting results from the prior year by the components of the increase (decrease) in underwriting income (loss). The 20162019 column presents changes in 20162019 compared to 2015.2018. The 20152018 column presents changes in 20152018 compared to 2014.2017.
|
| | | | | | | |
| ($ in millions) | 2016 | | 2015 |
| Underwriting loss - prior year | $ | (26 | ) | | $ | (76 | ) |
| Changes in underwriting loss from: | | | |
| Premiums earned | (67 | ) | | 22 |
|
| Incurred claims and claims expense (“losses”): | | | |
| Incurred losses, excluding catastrophe losses and reserve reestimates | 74 |
| | (19 | ) |
| Catastrophe losses, excluding reserve reestimates | 2 |
| | 50 |
|
| | | | |
| Non-catastrophes reserve reestimates | 4 |
| | (20 | ) |
| Catastrophes reserve reestimates | (2 | ) | | 4 |
|
| Total reserve reestimates | 2 |
| | (16 | ) |
| Losses subtotal - income | 78 |
| | 15 |
|
| Expenses | 16 |
| | 13 |
|
| Underwriting income (loss) | $ | 1 |
| | $ | (26 | ) |
Underwriting income totaled $1 decreased 61.1% or $11 million in 2016, an improvement from an underwriting loss of $26 million in 2015, primarily due2019 compared to lower underwriting losses on other personal lines and auto and higher underwriting income on homeowners resulting from lower loss costs and expenses. Underwriting loss totaled $26 million in 2015, a 65.8% decrease from $76 million in 2014,2018, primarily due to higher homeowners underwriting income resulting fromcatastrophe losses and lower catastrophe losses,favorable non-catastrophe prior year reestimates, partially offset by higher underwriting losses on other personal lines.lower operating expenses.
Our underwriting results were impacted by our profit improvement actions that are being implemented in states with inadequate returns, while targeted growth plans are being focused on states with adequate returns. These actions are tailored based on geography and include higher rates, enhanced pricing and underwriting sophistication, adopting best in class underwriting and claim processes, enhanced product analytics, and a focus on geographic presence and product distribution.
Premiums written and earned by line of business are shown in the following table.The Allstate Corporation 55
2019 Form 10-KAllstate Protection: Encompass brand
| | | Premiums written and earned by line of business | | Premiums written and earned by line of business |
| | | | | | | | | For the years ended December 31, |
| ($ in millions) | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
| Premiums written | | | | | | | | | | | |
| Auto | $ | 591 |
| | $ | 641 |
| | $ | 665 |
| | $ | 540 |
| | $ | 537 |
| | $ | 542 |
|
| Homeowners | 454 |
| | 497 |
| | 506 |
| | 401 |
| | 398 |
| | 406 |
|
| Other personal lines | 95 |
| | 106 |
| | 109 |
| | 79 |
| | 81 |
| | 87 |
|
| Total | $ | 1,140 |
| | $ | 1,244 |
| | $ | 1,280 |
| | $ | 1,020 |
| | $ | 1,016 |
| | $ | 1,035 |
|
| Premiums earned | | | | | | | | | | | |
| Auto | $ | 623 |
| | $ | 657 |
| | $ | 655 |
| | $ | 539 |
| | $ | 537 |
| | $ | 566 |
|
| Homeowners | 479 |
| | 504 |
| | 486 |
| | 399 |
| | 402 |
| | 431 |
|
| Other personal lines | 100 |
| | 108 |
| | 106 |
| | 80 |
| | 84 |
| | 93 |
|
| Total | $ | 1,202 |
| | $ | 1,269 |
| | $ | 1,247 |
| | $ | 1,018 |
| | $ | 1,023 |
| | $ | 1,090 |
|
Auto premium measures and statistics that are used to analyze the business are shown in the following table. | | | Auto premium measures and statistics | | Auto premium measures and statistics |
| | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 | | 2019 vs. 2018 | | 2018 vs. 2017 |
| PIF (thousands) | 622 |
| | 723 |
| | 790 |
| | 493 |
| | 502 |
| | 530 |
| | (1.8 | )% | | (5.3 | )% |
| New issued applications (thousands) | 54 |
| | 82 |
| | 135 |
| | 82 |
| | 76 |
| | 52 |
| | 7.9 | % | | 46.2 | % |
| Average premium | $ | 1,008 |
| | $ | 945 |
| | $ | 895 |
| | $ | 1,134 |
| | $ | 1,118 |
| | $ | 1,079 |
| | 1.4 | % | | 3.6 | % |
| Renewal ratio (%) | 74.4 |
| | 77.3 |
| | 79.7 |
| |
Approved rate changes (1): | | | | | | |
Renewal ratio (%) (1) | | | 78.1 |
| | 74.9 |
| | 73.4 |
| | 3.2 |
| | 1.5 |
|
| Approved rate changes: | | | | | | | | | | | |
| Impact of rate changes ($ in millions) | | | $ | 8 |
| | $ | 13 |
| | $ | 37 |
| | $ | (5 | ) | | $ | (24 | ) |
# of locations (2) | 24 |
| | 30 |
| | 29 |
| | 17 |
| | 17 |
| | 27 |
| | — |
| | (10 | ) |
Total brand (%) (3) | 10.5 |
| | 9.4 |
| | 6.6 |
| |
Location specific (%) (4)(5) | 14.3 |
| | 11.1 |
| | 7.9 |
| |
| Total brand (%) | | | 1.5 |
| | 2.4 |
| | 6.2 |
| | (0.9 | ) | | (3.8 | ) |
| Location specific (%) | | | 4.1 |
| | 4.8 |
| | 7.8 |
| | (0.7 | ) | | (3.0 | ) |
| |
(1) | Rate changes that are indicated based on loss trend analysisEncompass announced a plan to achieve a targeted return will continue to be pursued. Rate changes do not include rating plan enhancements, including the introduction of discounts and surcharges that resultexit business in no changeMassachusetts in the overall rate level insecond quarter of 2017 and previously announced a location. These rate changes do not reflect initial rates filed for insurance subsidiaries initially writingplan to exit business in a location.North Carolina in the first half of 2016, which impacted the renewal ratio. Excluding Massachusetts and North Carolina, the renewal ratios were 76.5 points in 2018 compared to 74.5 points in 2017. |
| |
(2) | Encompass brand operates in 40 states and D.C. |
Auto insurance premiums written increased 0.6% or $3 million in 2019 compared to 2018, primarily due to higher average premiums due to rate changes over the past 12 months, with the top 10 states representing
approximately 70% of premiums written. PIF decreased 1.8% or 9 thousand in 2019 compared to 2018.
|
| | | | | | | | | | | | | | | | | | | | |
| Homeowners premium measure and statistics |
| | | 2019 | | 2018 | | 2017 | | 2019 vs. 2018 | | 2018 vs. 2017 |
| PIF (thousands) | | 234 |
| | 239 |
| | 254 |
| | (2.1 | )% | | (5.9 | )% |
| New issued applications (thousands) | | 42 |
| | 37 |
| | 30 |
| | 13.5 | % | | 23.3 | % |
| Average premium | | $ | 1,795 |
| | $ | 1,724 |
| | $ | 1,684 |
| | 4.1 | % | | 2.4 | % |
Renewal ratio (%) (1) | | 82.5 |
| | 80.0 |
| | 78.5 |
| | 2.5 |
| | 1.5 |
|
| Approved rate changes: | | | | | | | | | | |
| Impact of rate changes ($ in millions) | | $ | 38 |
| | $ | 20 |
| | $ | 23 |
| | $ | 18 |
| | $ | (3 | ) |
# of locations (2) | | 27 |
| | 20 |
| | 21 |
| | 7 |
| | (1 | ) |
| Total brand (%) | | 9.2 |
| | 4.7 |
| | 4.8 |
| | 4.5 |
| | (0.1 | ) |
| Location specific (%) | | 10.9 |
| | 8.1 |
| | 8.4 |
| | 2.8 |
| | (0.3 | ) |
| |
(1) | Encompass announced a plan to exit business in Massachusetts in the second quarter of 2017 and previously announced a plan to exit business in North Carolina in the first half of 2016, which has impacted the renewal ratio. Excluding Massachusetts and North Carolina, the renewal ratios were 80.8 points in 2018 compared to 79.0 points in 2017. |
| |
(2) | Encompass brand operates in 40 states and the District of Columbia.D.C. |
Homeowners insurance premiums written increased 0.8% or $3 million in 2019 compared to 2018, primarily due to higher average premiums due to rate changes over the past 12 months, with the top 10
states representing approximately 70% of premiums written. PIF decreased 2.1% or 5 thousand in 2019 compared to 2018.
Allstate Protection: Encompass brand 2019 Form 10-K
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Combined ratios by line of business |
| | | For the years ended December 31, |
| | | Loss ratio | | Expense ratio (1) | | Combined ratio |
| | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Auto | | 66.8 |
| | 65.0 |
| | 68.0 |
| | 31.7 |
| | 32.4 |
| | 30.4 |
| | 98.5 |
| | 97.4 |
| | 98.4 |
|
| Homeowners | | 68.2 |
| | 66.7 |
| | 80.3 |
| | 31.3 |
| | 33.1 |
| | 30.1 |
| | 99.5 |
| | 99.8 |
| | 110.4 |
|
| Other personal lines | | 71.3 |
| | 60.7 |
| | 59.1 |
| | 32.5 |
| | 35.7 |
| | 30.1 |
| | 103.8 |
| | 96.4 |
| | 89.2 |
|
| Total | | 67.7 |
| | 65.3 |
| | 72.1 |
| | 31.6 |
| | 32.9 |
| | 30.3 |
| | 99.3 |
| | 98.2 |
| | 102.4 |
|
| |
(3)(1)
| Represents the impactOther revenue is deducted from operating costs and expenses in the states and the District of Columbia where rate changes were approved during the period as a percentage of total brand prior year-end premiums written. |
| |
(4)
| Represents the impact in the states and the District of Columbia where rate changes were approved during the period as a percentage of its respective total prior year-end premiums written in those same locations. |
| |
(5)
| Based on historical premiums written in the locations noted above, rate changes approved for auto totaled $68 million, $63 million and $44 million in 2016, 2015 and 2014, respectively.expense ratio calculation. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loss ratios by line of business |
| | | For the years ended December 31, |
| | | Loss ratio | | Effect of catastrophe losses | | Effect of prior year reserve reestimates | | Effect of catastrophe losses included in prior year reserve reestimates |
| | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Auto | | 66.8 |
| | 65.0 |
| | 68.0 |
| | 1.9 |
| | 1.1 |
| | 2.1 |
| | (1.9 | ) | | (1.9 | ) | | (1.1 | ) | | — |
| | (0.2 | ) | | (0.2 | ) |
| Homeowners | | 68.2 |
| | 66.7 |
| | 80.3 |
| | 25.1 |
| | 22.1 |
| | 40.1 |
| | 3.7 |
| | 3.3 |
| | 0.5 |
| | 2.5 |
| | 3.0 |
| | — |
|
| Other personal lines | | 71.3 |
| | 60.7 |
| | 59.1 |
| | 6.3 |
| | 8.3 |
| | 8.6 |
| | (2.5 | ) | | (16.7 | ) | | (10.8 | ) | | (1.2 | ) | | 1.2 |
| | — |
|
| Total | | 67.7 |
| | 65.3 |
| | 72.1 |
| | 11.3 |
| | 10.0 |
| | 17.7 |
| | 0.3 |
| | (1.1 | ) | | (1.3 | ) | | 0.9 |
| | 1.2 |
| | (0.1 | ) |
Auto premiums written totaled $591 millionloss ratio increased 1.8 points in 2016, a 7.8% decrease from $641 million in 2015. Factors impacting premiums written were the following:
14.0% or 101 thousand decrease in PIF as of December 31, 20162019 compared to December 31, 2015.2018, primarily due to increased claim severity and higher catastrophe losses, partially offset by favorable claim frequency.
34.1% decrease
Homeowners loss ratio increased 1.5 points in new issued applications in 20162019 compared to 2015.
6.7% increase in average premium in 2016 compared2018, primarily due to 2015.
2.9 point decrease in the renewal ratio in 2016 compared to 2015. Encompass sells a high percentage of package policies that include both autohigher catastrophe losses and homeowners; therefore, declines in one coverage can contribute to declines in the other.unfavorable prior year reserve reestimates, partially offset by lower non-catastrophe losses driven by favorable claim frequency.
Auto premiums written totaled $641 million in 2015, a 3.6% decrease from $665 million in 2014. Factors impacting premiums written were the following:
8.5% or 67 thousand decrease in PIF as of December 31, 2015 compared to December 31, 2014.
39.3% decrease in new issued applications to 82 thousand in 2015 from 135 thousand in 2014.
5.6% increase in average premium in 2015 compared to 2014.
2.4 point decrease in the renewal ratio in 2015 compared to 2014.
Homeowners premium measures and statistics that are used to analyze the business are shown in the following table.
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| PIF (thousands) | 295 |
| | 338 |
| | 365 |
|
| New issued applications (thousands) | 34 |
| | 48 |
| | 70 |
|
| Average premium | $ | 1,639 |
| | $ | 1,555 |
| | $ | 1,457 |
|
| Renewal ratio (%) | 79.4 |
| | 82.5 |
| | 85.6 |
|
Approved rate changes (1): | | | | | |
# of locations (2) | 19 |
| | 27 |
| | 23 |
|
| Total brand (%) | 5.1 |
| | 6.5 |
| | 4.7 |
|
Location specific (%) (3) | 9.0 |
| | 8.8 |
| | 8.9 |
|
|
| | | | | | | | | |
| Impact of specific costs and expenses on the expense ratio |
| | | For the years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Amortization of DAC | | 18.8 |
| | 18.5 |
| | 18.3 |
|
| Advertising expense | | 0.2 |
| | 0.2 |
| | 0.2 |
|
| Other costs and expenses | | 12.2 |
| | 13.5 |
| | 11.3 |
|
| Restructuring and related charges | | 0.4 |
| | 0.7 |
| | 0.5 |
|
| Total expense ratio | | 31.6 |
| | 32.9 |
| | 30.3 |
|
| |
(1)
| Includes rate changes approved based on our net cost of reinsurance. |
| |
(2)
| Encompass brand operates in 40 states and the District of Columbia. |
| |
(3)
| Based on historical premiums written in the locations noted above, rate changes approved for homeowner totaled $27 million, $35 million and $23 million in 2016, 2015 and 2014, respectively. |
Homeowners premiums written totaled $454 millionExpense ratio decreased 1.3 points in 2016, an 8.7% decrease from $497 million in 2015. Factors impacting premiums written were the following:
12.7% or 43 thousand decrease in PIF as of December 31, 20162019 compared to December 31, 2015.
29.2% decrease in new issued applications in 2016 compared to 2015.
5.4% increase in average premium in 2016 compared to 2015, primarily due to rate changes.
3.1 point decrease in the renewal ratio in 2016 compared to 2015. Encompass sells a high percentage of package policies that include both auto and homeowners; therefore, declines in one coverage can contribute to declines in the other.
Homeowners premiums written totaled $497 million in 2015, a 1.8% decrease from $506 million in 2014. Factors impacting premiums written were the following:
7.4% or 27 thousand decrease in PIF as of December 31, 2015 compared to December 31, 2014.
31.4% decrease in new issued applications to 48 thousand in 2015 from 70 thousand in 2014.
6.7% increase in average premium in 2015 compared to 2014.
3.1 point decrease in the renewal ratio in 2015 compared to 2014.
Combined ratios by line of business are analyzed in the following table.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Loss ratio (1) | | Expense ratio (1) | | Combined ratio |
| | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
| Auto | 76.1 |
| | 77.0 |
| | 77.1 |
| | 28.6 |
| | 28.5 |
| | 29.9 |
| | 104.7 |
| | 105.5 |
| | 107.0 |
|
| Homeowners | 63.5 |
| | 64.9 |
| | 74.7 |
| | 29.0 |
| | 28.8 |
| | 30.2 |
| | 92.5 |
| | 93.7 |
| | 104.9 |
|
| Other personal lines | 77.0 |
| | 92.6 |
| | 75.5 |
| | 29.0 |
| | 27.8 |
| | 30.2 |
| | 106.0 |
| | 120.4 |
| | 105.7 |
|
| Total | 71.1 |
| | 73.5 |
| | 76.0 |
| | 28.8 |
| | 28.5 |
| | 30.1 |
| | 99.9 |
| | 102.0 |
| | 106.1 |
|
| |
(1)
| Ratios are calculated using the premiums earned for the respective line of business. |
Loss ratios by line of business are analyzed in the following table.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Loss ratio | | Effect of catastrophe losses on combined ratio | | Effect of prior year reserve reestimates on combined ratio | | Effect of catastrophe losses included in prior year reserve reestimates on combined ratio |
| | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
| Auto | 76.1 |
| | 77.0 |
| | 77.1 |
| | 1.6 |
| | 1.1 |
| | 3.2 |
| | — |
| | 0.3 |
| | (2.0 | ) | | (0.4 | ) | | (0.1 | ) | | (0.2 | ) |
| Homeowners | 63.5 |
| | 64.9 |
| | 74.7 |
| | 20.3 |
| | 19.3 |
| | 28.2 |
| | — |
| | (1.0 | ) | | 0.4 |
| | 0.5 |
| | (0.2 | ) | | 0.7 |
|
| Other personal lines | 77.0 |
| | 92.6 |
| | 75.5 |
| | 4.0 |
| | 6.5 |
| | 6.6 |
| | 5.0 |
| | 9.3 |
| | 1.9 |
| | — |
| | — |
| | — |
|
| Total | 71.1 |
| | 73.5 |
| | 76.0 |
| | 9.2 |
| | 8.7 |
| | 13.2 |
| | 0.4 |
| | 0.6 |
| | (0.7 | ) | | — |
| | (0.1 | ) | | 0.1 |
|
Auto loss ratio decreased 0.9 points in 2016 compared to 2015,2018, primarily due to lower loss costs, partially offset by higher catastrophe losses. Auto loss ratio decreased 0.1 points in 2015 compared to 2014, primarily due to lower catastrophe lossestechnology and increased premiums earned.
Homeowners loss ratio decreased 1.4 points in 2016 compared to 2015, primarily due to lower claim frequency. Homeowners loss ratio decreased 9.8 points in 2015 compared to 2014, primarily due to lower catastrophe losses and increased premiums earned.
Catastrophe losses were $111 million in 2016 compared to $111 million in 2015 and $165 million in 2014.
Expense ratio The expense ratios by line of business are shown in the following table.employee-related costs.
|
| | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| Auto | 28.6 |
| | 28.5 |
| | 29.9 |
|
| Homeowners | 29.0 |
| | 28.8 |
| | 30.2 |
|
| Other personal lines | 29.0 |
| | 27.8 |
| | 30.2 |
|
| Total expense ratio | 28.8 |
| | 28.5 |
| | 30.1 |
|
The impact of specific costs and expenses on the expense ratio are shown in the following table.
The Allstate Corporation 57
|
| | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| Amortization of DAC | 18.4 |
| | 18.4 |
| | 18.8 |
|
| Advertising expense | 0.2 |
| | 0.4 |
| | 0.4 |
|
| Other costs and expenses | 10.1 |
| | 9.6 |
| | 10.7 |
|
| Restructuring and related charges | 0.1 |
| | 0.1 |
| | 0.2 |
|
| Total expense ratio | 28.8 |
| | 28.5 |
| | 30.1 |
|
Expense ratio increased 0.3 points in 2016 compared to 2015 primarily due to increased spending in professional services, partially offset by expense spending reductions in advertising and marketing. The Encompass brand DAC amortization rate is higher on average than Allstate brand DAC amortization due to higher commission rates paid to independent agencies.
Expense ratio decreased 1.6 points in 2015 compared to 2014 primarily due to agency compensation, employee compensation and technology costs.
DISCONTINUED LINES AND COVERAGES SEGMENT2019 Form 10-KDiscontinued Lines and Coverages
Overview
Discontinued Lines and Coverages Segment
The Discontinued Lines and Coverages segment includes results from property-liabilityproperty and casualty insurance coverage that we no longer write and results for certain commercial and other businesses in run-off.primarily relates to policies written during the 1960s through the mid-1980s. Our exposure to asbestos, environmental and other discontinued lines claims is reported in this segment. We have assigned management of this segment to a designated group of professionals with expertise in claims handling, policyarises principally from direct excess commercial insurance, assumed reinsurance coverage, interpretation, exposure identification and reinsurance collection. As part of its responsibilities, this group may at times be engaged in policy buybacks, settlements and reinsurance assumed and ceded commutations.
Discontinued Lines and Coverages outlook
We may continue to experience asbestos and/or environmental losses in the future. These losses could be due to the potential adverse impact of new information relating to new and additional claims or the impact of resolving unsettled claims based on unanticipated events such as arbitrations, litigation, legislative, judicial or regulatory actions. Environmental losses may also increase as the result of additional funding for environmental site cleanup. Because of our annual review, we believe that our reserves are appropriately established based on available information, technology, laws and regulations.
We anticipate progress in the resolution of certain bankruptcies related to insureds with asbestos claims, reducing the industry’s asbestos related claims exposures.
We continue to address challenges related to the concentration ofdirect primary commercial insurance and reinsurance industry legacy claims into companies who specializeother businesses in the runoff of this business.
Summarized underwriting results for the years ended December 31 are presented in the following table.run-off. For additional information on our strategy and outlook, see Part I, Item 1. Business - Strategy and Segment Information.
| | | Underwriting results | | Underwriting results |
| | | | For the years ended December 31, |
| ($ in millions) | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
| Premiums written | $ | 3 |
| | $ | — |
| | $ | 1 |
| |
| | | | | | | |
| Premiums earned | $ | — |
| | $ | — |
| | $ | 1 |
| |
| Claims and claims expense | (105 | ) | | (53 | ) | | (113 | ) | |
Claims and claims expense (1) | | | $ | (105 | ) | | $ | (87 | ) | | $ | (96 | ) |
| Operating costs and expenses | (2 | ) | | (2 | ) | | (3 | ) | | (3 | ) | | (3 | ) | | (3 | ) |
| Underwriting loss | $ | (107 | ) |
| $ | (55 | ) |
| $ | (115 | ) | | $ | (108 | ) |
| $ | (90 | ) |
| $ | (99 | ) |
(1) The cost of administering claims settlements totaled $11 million for all periods presented.
Underwriting losses of $107 million in 20162019 primarily related to our annual reserve review using established industry and actuarial best practices resultingpractices. The annual review resulted in unfavorable reestimates of $96$95 million, including a $67 million unfavorable reestimate of asbestos reserves, a $23 million unfavorable reestimate of environmental reserves and a $6 million increase in the allowance for future uncollectible reinsurance with other exposure reserves essentially unchanged. The cost of administering claims settlements totaled $9$28 million for 2016, $10 million for 2015, and $10 million for 2014.
Underwriting losses of $55 million in 2015asbestos exposures, primarily related to our annual reserve review resulting in unfavorable reestimatesnew reported information and settlement agreements, including bankruptcy proceedings; $36 million for environmental exposures primarily related to the reporting of $44additional clean-up sites; $37 million including a $39 million unfavorable reestimate of asbestos reserves, a $1 million unfavorable reestimate of environmental reserves and a $9 million unfavorable reestimate offor other exposure reserves,exposures based on new reported information, partially offset by a $5$6 million decrease in the allowance for future uncollectible reinsurance.
Underwriting losses of $115 million in 20142018 primarily related to our annual reserve review, resultingwhich resulted in unfavorable reestimates of $102$76 million, including an $87$44 million unfavorable reestimate offor asbestos reserves,exposures, $20 million for environmental exposures and $13 million for other exposures, partially offset by a $15$1 million unfavorable reestimate of environmental reserves and a $3 million increasedecrease in the allowance for future uncollectible reinsurance.
|
| | | | | | | | |
| Reserves for asbestos, environmental and other discontinued lines claims before and after the effects of reinsurance |
| ($ in millions) | | December 31, 2019 |
| December 31, 2018 |
| Asbestos claims | | | | |
| Gross reserves | | $ | 1,172 |
| | $ | 1,266 |
|
| Reinsurance | | (362 | ) | | (400 | ) |
| Net reserves | | 810 |
| | 866 |
|
| Environmental claims | | | | |
| Gross reserves | | 219 |
| | 209 |
|
| Reinsurance | | (40 | ) | | (39 | ) |
| Net reserves | | 179 |
| | 170 |
|
| Other discontinued lines | | | | |
| Gross reserves | | 427 |
| | 389 |
|
| Reinsurance | | (51 | ) | | (34 | ) |
| Net reserves | | 376 |
| | 355 |
|
| Total | | | | |
Gross reserves | | 1,818 |
| | 1,864 |
|
Reinsurance | | (453 | ) | | (473 | ) |
| Net reserves | | $ | 1,365 |
| | $ | 1,391 |
|
Discontinued Lines and Coverages 2019 Form 10-K
|
| | | | | | | | |
| Reserves by type of exposure before and after the effects of reinsurance |
| ($ in millions) | | December 31, 2019 | | December 31, 2018 |
| Direct excess commercial insurance | | | | |
Gross reserves (1) | | $ | 948 |
| | $ | 973 |
|
Reinsurance (2) | | (332 | ) | | (355 | ) |
| Net reserves | | 616 |
| | 618 |
|
| Assumed reinsurance coverage | | | | |
Gross reserves (3) | | 606 |
| | 625 |
|
Reinsurance (4) | | (53 | ) | | (53 | ) |
| Net reserves | | 553 |
| | 572 |
|
| Direct primary commercial insurance | | | | |
Gross reserves (5) | | 169 |
| | 171 |
|
Reinsurance (6) | | (54 | ) | | (48 | ) |
| Net reserves | | 115 |
| | 123 |
|
| Other run-off business | | | | |
| Gross reserves | | 15 |
| | 19 |
|
| Reinsurance | | (13 | ) | | (16 | ) |
| Net reserves | | 2 |
| | 3 |
|
| Unallocated loss adjustment expenses | | | | |
| Gross reserves | | 80 |
| | 76 |
|
| Reinsurance | | (1 | ) | | (1 | ) |
| Net reserves | | 79 |
| | 75 |
|
| Total | | | | |
| Gross reserves | | 1,818 |
| | 1,864 |
|
| Reinsurance | | (453 | ) | | (473 | ) |
| Net reserves | | $ | 1,365 |
| | $ | 1,391 |
|
(1) Gross reserves as of December 31, 2019 comprised 68% case reserves and 32% incurred but not reported (“IBNR”) reserves. Approximately 72% of the total gross case reserves are subject to settlement agreements. In 2019, total gross payments from case reserves were $122 million with approximately 83% attributable to settlements. Reserves as of December 31, 2018, comprised 67% case reserves and 33% IBNR reserves.
(2)Ceded reserves as of December 31, 2019 comprised 78% case reserves and 22% IBNR reserves. Approximately 79% of the total ceded case reserves are subject to settlement agreements. In 2019, reinsurance partially offsetbillings of ceded case reserves were $53 million with approximately 87% attributable to settlements. Reserves as of December 31, 2018, comprised 78% case reserves and 22% IBNR reserves.
(3) Gross reserves as of December 31, 2019 comprised 34% case reserves and 66% IBNR reserves. In 2019, total gross payments from case reserves were $43 million. Reserves as of December 31, 2018, comprised 34% case reserves and 66% IBNR reserves.
(4)Ceded reserves as of December 31, 2019 comprised 35% case reserves and 65% IBNR reserves. In 2019, reinsurance billings of ceded case reserves were $3 million. Reserves as of December 31, 2018, comprised 37% case reserves and 63% IBNR reserves.
(5)Gross reserves as of December 31, 2019 comprised 56% case reserves and 44% IBNR reserves. In 2019, total gross payments from case reserves were $15 million. Reserves as of December 31, 2018, comprised 58% case reserves and 42% IBNR reserves.
(6)Ceded reserves as of December 31, 2019 comprised 78% case reserves and 22% IBNR reserves. In 2019, reinsurance billings of ceded case reserves were $2 million. Reserves as of December 31, 2018, comprised 78% case reserves and 22% IBNR reserves.
Total net reserves as of December 31, 2019, included $660 million or 48% of estimated IBNR reserves compared to $693 million or 50% of estimated IBNR reserves as of December 31, 2018.
Total gross payments were $183 million and $156 million for 2019 and 2018, respectively, primarily related to payments on settlement agreements reached with several insureds on large claims, mainly asbestos related losses, where the scope of coverages has been agreed upon.
The claims associated with these settlement agreements are expected to be substantially paid out over the next several years as qualified claims are submitted by a $3these insureds. Reinsurance collections were $49 million favorable reestimate of other exposure reserves.and $62 million for 2019 and 2018, respectively.
See the Property-Liability Claims and Claims Expense Reserves section of the MD&Athis Item for a more detailed discussion.
The Allstate Corporation 59
PROPERTY-LIABILITY INVESTMENT RESULTS2019 Form 10-KService Businesses
Net investment income The following table presents
Service Businesses Segment
Service Businesses comprise Allstate Protection Plans, Allstate Dealer Services, Allstate Roadside Services, Arity and Allstate Identity Protection. In 2019, Service Businesses represented 3.7% of total revenue, 72.6% of total PIF and 1.1% of total adjusted net investment income.
We offer consumer product protection plans, finance and insurance products (including vehicle service contracts, guaranteed asset protection waivers, road hazard tire and wheel and paintless dent repair protection), roadside assistance, device and mobile data collection services and analytic solutions using automotive telematics information and identity protection. For additional information on our strategy and outlook, see Part I, Item 1. Business - Strategy and Segment Information. |
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Fixed income securities | $ | 882 |
| | $ | 885 |
| | $ | 860 |
|
| Equity securities | 95 |
| | 81 |
| | 95 |
|
| Mortgage loans | 12 |
| | 15 |
| | 17 |
|
| Limited partnership interests | 269 |
| | 262 |
| | 346 |
|
| Short-term investments | 9 |
| | 5 |
| | 4 |
|
| Other | 89 |
| | 75 |
| | 65 |
|
| Investment income, before expense | 1,356 |
|
| 1,323 |
|
| 1,387 |
|
| Investment expense | (90 | ) | | (86 | ) | | (86 | ) |
| Net investment income | $ | 1,266 |
| | $ | 1,237 |
| | $ | 1,301 |
|
|
| | | | | | | | | | | | |
| Summarized financial information |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Premiums written | | $ | 1,535 |
| | $ | 1,431 |
| | $ | 1,094 |
|
| | | | | | | |
| Revenues | | | | | | |
| Premiums | | $ | 1,233 |
| | $ | 1,098 |
| | $ | 867 |
|
| Other revenue | | 188 |
| | 82 |
| | 66 |
|
Intersegment insurance premiums and service fees (1) | | 154 |
| | 122 |
| | 110 |
|
| Net investment income | | 42 |
| | 27 |
| | 16 |
|
| Realized capital gains and losses | | 32 |
| | (11 | ) | | — |
|
| Total revenues | | 1,649 |
| | 1,318 |
| | 1,059 |
|
| | | | | | | |
| Costs and expenses | | | | | | |
| Claims and claims expense | | (363 | ) | | (350 | ) | | (369 | ) |
| Amortization of DAC | | (543 | ) | | (463 | ) | | (296 | ) |
| Operating costs and expenses | | (661 | ) | | (505 | ) | | (460 | ) |
Restructuring and related charges (2) | | — |
| | (4 | ) | | (13 | ) |
| Amortization of purchased intangibles | | (122 | ) | | (94 | ) | | (92 | ) |
| Impairment of purchased intangibles | | (55 | ) | | — |
| | — |
|
| Total costs and expenses | | (1,744 | ) | | (1,416 | ) | | (1,230 | ) |
| | | | | | | |
| Income tax benefit | | 18 |
| | 19 |
| | 194 |
|
| Net (loss) income applicable to common shareholders | | $ | (77 | ) | | $ | (79 | ) | | $ | 23 |
|
| | | | | | | |
| Adjusted net income (loss) | | $ | 38 |
| | $ | 8 |
| | $ | (54 | ) |
| Realized capital gains and losses, after-tax | | 25 |
| | (9 | ) | | — |
|
| Amortization of purchased intangibles, after-tax | | (97 | ) | | (74 | ) | | (60 | ) |
| Impairment of purchased intangibles, after-tax | | (43 | ) | | — |
| | — |
|
| Tax Legislation (expense) benefit | | — |
| | (4 | ) | | 137 |
|
| Net (loss) income applicable to common shareholders | | $ | (77 | ) | | $ | (79 | ) | | $ | 23 |
|
| | | | | | | |
Allstate Protection Plans (3) | | $ | 60 |
| | $ | 23 |
| | $ | (22 | ) |
| Allstate Dealer Services | | 26 |
| | 15 |
| | (1 | ) |
| Allstate Roadside Services | | (15 | ) | | (20 | ) | | (17 | ) |
| Arity | | (7 | ) | | (11 | ) | | (14 | ) |
Allstate Identity Protection (4) | | (26 | ) | | 1 |
| | — |
|
| Adjusted net income (loss) | | $ | 38 |
| | $ | 8 |
| | $ | (54 | ) |
| | | | | | | |
| Allstate Protection Plans | | 99,632 |
| | 68,588 |
| | 38,719 |
|
| Allstate Dealer Services | | 4,205 |
| | 4,338 |
| | 4,088 |
|
| Allstate Roadside Services | | 599 |
| | 663 |
| | 699 |
|
| Allstate Identity Protection | | 1,511 |
| | 1,040 |
| | — |
|
| Policies in force as of December 31 (in thousands) | | 105,947 |
| | 74,629 |
| | 43,506 |
|
| |
(1) | Primarily related to Arity and Allstate Roadside Services and are eliminated in our consolidated financial statements. |
| |
(2) | 2018 related to organizational changes at Allstate Roadside Services and 2017 related to a one-time vendor contract termination. |
| |
(3) | SquareTrade, which sells consumer protection plans using the Allstate Protection Plans name in the U.S., acquired PlumChoice on November 30, 2018 and iCracked on February 12, 2019. |
| |
(4) | InfoArmor, which sells identity protection plans using the Allstate Identity Protection name was acquired on October 5, 2018. |
Service Businesses 2019 Form 10-K
Net investment income increased 2.3%loss applicable to common shareholders decreased 2.5% or $29$2 million to $1.27 billion in 2016 from $1.24 billion in 2015 after decreasing 4.9% in 20152019 compared to 2014.2018. 2019 results included a $55 million intangible asset impairment related to the change in trade name from SquareTrade to Allstate Protection Plans.
Adjusted net income increased $30 million in 2019 compared to 2018. The 2016 increaseimprovement in 2019 was primarily due to higher equity dividendsgrowth of Allstate Protection Plans, favorable loss experience of both Allstate Protection Plans and higher limited partnership income. The 2015 decrease was primarily due to lower limited partnership income, a decline in average investment balances and lower prepayment fee income and litigation proceeds,Allstate Dealer Services, partially offset by higher taxable fixed income portfolio yields.
The average pre-tax investment yields for the years ended December 31 are presented in the following table. Pre-tax yield is calculated as investment income, generally before investment expense (including dividend income in the case of equity securities) divided by the average of investment balances at the beginning of the year and the end of each quarter during the year. For the purposes of the pre-tax yield calculation, income for directly held real estate, timber and other consolidated investments is net of asset level operating expenses (depreciationrelated to investing in growth and direct expenses of the assets reporteddeveloping new products and distribution channels for Allstate Protection Plans and Allstate Identity Protection.
Total revenues increased 25.1% or $331 million in investment expense). For investments carried2019 compared to 2018, primarily due to Allstate Protection Plan’s growth through its U.S. retail and international channels, higher Allstate Identity Protection revenue due to its acquisition in fourth quarter 2018 and increased premiums earned on Allstate Dealer Services’ vehicle service contracts.
Premiums written increased 7.3% or $104 million in 2019 compared to 2018, primarily due to growth at fair value, investment balances exclude unrealized capital gainsAllstate Protection Plans and losses.increased premiums written by Allstate Dealer Services, partially offset by declines in Allstate Roadside Services wholesale and retail business.
PIF increased 42.0% or 31 million in 2019 compared to 2018 due to continued growth at Allstate Protection Plans. |
| | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| Fixed income securities: tax-exempt | 2.1 | % | | 2.4 | % | | 2.6 | % |
| Fixed income securities: tax-exempt equivalent | 3.1 |
| | 3.5 |
| | 3.8 |
|
| Fixed income securities: taxable | 3.1 |
| | 3.1 |
| | 2.9 |
|
| Equity securities | 2.8 |
| | 2.9 |
| | 2.9 |
|
| Mortgage loans | 3.9 |
| | 4.5 |
| | 4.3 |
|
| Limited partnership interests | 9.6 |
| | 10.4 |
| | 13.1 |
|
| Total portfolio | 3.4 |
| | 3.4 |
| | 3.6 |
|
Realized capital gainsIntersegment premiums and losses are presentedservice fees increased 26.2% or $32 million in the following table.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Impairment write-downs | $ | (130 | ) | | $ | (132 | ) | | $ | (21 | ) |
| Change in intent write-downs | (56 | ) | | (156 | ) | | (169 | ) |
| Net other-than-temporary impairment losses recognized in earnings | (186 | ) |
| (288 | ) |
| (190 | ) |
| Sales and other | 185 |
| | 85 |
| | 789 |
|
| Valuation and settlements of derivative instruments | (5 | ) | | (34 | ) | | (50 | ) |
| Realized capital gains and losses, pre-tax | (6 | ) |
| (237 | ) |
| 549 |
|
| Income tax benefit (expense) | 6 |
| | 83 |
| | (192 | ) |
| Realized capital gains and losses, after-tax | $ | — |
|
| $ | (154 | ) |
| $ | 357 |
|
Realized capital gains and losses in 20162019 compared to 2018, primarily related to impairmentincreased auto connections and changedevice sales through Arity’s device and mobile data collection services and analytic solutions.
Other revenue increased $106 million in intent write-downs,2019 compared to 2018, primarily due to the acquisition of Allstate Identity Protection and Allstate Protection Plans' acquisitions of PlumChoice and iCracked. All of the revenue from these acquired businesses is reported as other revenue. See Note 3 of the consolidated financial statements for further details.
Claims and claims expense increased 3.7% or $13 million in 2019 compared to 2018, primarily due to higher loss costs at Allstate Protection Plans driven by growth of the business, partially offset by net gains on sales.improved loss experience at both Allstate Protection Plans and Allstate Dealer Services.
Amortization of DAC increased 17.3% or $80 million in 2019 compared to 2018. The increase is in line with the growth experienced at Allstate Protection Plans and Allstate Dealer Services.
Operating costs and expenses increased 30.9% or $156 million in 2019 compared to 2018, primarily due to the acquisitions of Allstate Identity Protection, PlumChoice and iCracked, product development costs, investments in growing Allstate Protection Plans and expanding Allstate Identity Protection.
Amortization and impairment of purchased intangibles relates to the acquisitions of Allstate Protection Plans in 2017 and Allstate Identity Protection in 2018. We recognized $486 million and $257 million of intangible assets subject to amortization for Allstate Protection Plans and Allstate Identity Protection, respectively. We recorded amortization expense of $122 million in 2019 compared to $94 million in 2018.
During 2019, we made the decision to phase-out the use of the SquareTrade trade name in the United States and sell consumer protection plans under the Allstate Protection Plans name. The SquareTrade trade name will continue to be used outside of the United States. This resulted in a $55 million impairment in 2019 of the intangible asset related to the trade name established in 2017 when SquareTrade was acquired.
The Allstate Corporation 61
PROPERTY-LIABILITY CLAIMS AND CLAIMS EXPENSE RESERVES2019 Form 10-KClaims and Claims Expense Reserves
Property-Liability underwriting
Claims and Claims Expense Reserves
Underwriting results are significantly influenced by estimates of property-liability claims and claims expense reserves. For a description of our reserve process, see Note 8 of the consolidated financial statements andstatements. Further, for a further description of our reserving policies and the potential variability in our reserve estimates, see the Application of Critical Accounting Estimates section of the MD&A. These reserves are an estimate of amounts necessary to settle all outstanding claims, including incurred but not reported (“IBNR”)IBNR claims, as of the reporting date.
The facts and circumstances leading to our reestimates of reserves relate to changes in claim activity and revisions to the development factors used to predict how losses are likely to develop from the end of a reporting period until all claims have been paid. Reestimates occur becausewhen actual losses are likely different thandiffer from those predicted by the estimated development factors used in prior reserve estimates. As of December 31, 2016, the impact of a reserve reestimation corresponding to a one percent increase or decrease in net reserves would be a decrease or increase of approximately $124 million in net income applicable to common shareholders.
We believe the net loss reserves for Allstate Protection exposures are appropriately established based on available facts, technology, laws and regulations.
The table below shows total reserves net of reinsurance recoverables (“net reserves”) as of December 31 by line of business.
| | Total reserves, net of recoverables (“net reserves”), as of December 31, by line of business
| | Total reserves, net of recoverables (“net reserves”), as of December 31, by line of business
|
| ($ in millions) | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
| Allstate brand | $ | 16,132 |
| | $ | 14,974 |
| | $ | 14,214 |
| | $ | 17,809 |
| | $ | 17,272 |
| | $ | 16,826 |
|
| Esurance brand | 740 |
| | 717 |
| | 649 |
| | 941 |
| | 862 |
| | 777 |
|
| Encompass brand | 749 |
| | 770 |
| | 754 |
| | 646 |
| | 691 |
| | 758 |
|
| Total Allstate Protection | 17,621 |
| | 16,461 |
| | 15,617 |
| | 19,396 |
| | 18,825 |
| | 18,361 |
|
| Discontinued Lines and Coverages | 1,445 |
| | 1,516 |
| | 1,612 |
| | 1,365 |
| | 1,391 |
| | 1,407 |
|
| Total Property-Liability | $ | 19,066 |
| | $ | 17,977 |
| | $ | 17,229 |
| | 20,761 |
| | 20,216 |
| | 19,768 |
|
| Service Businesses | | | 39 |
| | 52 |
| | 86 |
|
| Total net reserves | | | $ | 20,800 |
| | $ | 20,268 |
| | $ | 19,854 |
|
The year-end 20162019 gross reserves of $25.25$27.71 billion for property-liability insurance claims and claims expense as determined under GAAP, were $7.53$8.34 billion more than the net reserve balance of $17.72$19.37 billion recorded on the basis of statutory accounting practices for reports provided to state regulatory authorities. The principal differences are reinsurance recoverables from third parties totaling $6.18$6.91 billion, including $4.95$5.46 billion of indemnification recoverables related to the Michigan Catastrophic Claims Association (“MCCA”), that reduce reserves for statutory reporting, but are
recorded as assets for GAAP reporting, and a liability for the reserves of the Canadian subsidiaries for $1.21$1.33 billion whichthat are a component of our GAAPconsolidated reserves, but not included in our USU.S. statutory reserves. Remaining differences are due to variations in requirements between GAAP and statutory reporting.
The tables below show net reserves representing the estimated cost of outstanding claims as they were recorded at the beginning of years 2016, 20152019, 2018 and 20142017, and the effect of reestimates in each year.
|
| | | | | | | | | | | |
| ($ in millions) | January 1 reserves |
| | 2016 | | 2015 | | 2014 |
| Allstate brand | $ | 14,974 |
| | $ | 14,214 |
| | $ | 14,225 |
|
| Esurance brand | 717 |
| | 649 |
| | 575 |
|
| Encompass brand | 770 |
| | 754 |
| | 747 |
|
| Total Allstate Protection | 16,461 |
|
| 15,617 |
|
| 15,547 |
|
| Discontinued Lines and Coverages | 1,516 |
| | 1,612 |
| | 1,646 |
|
| Total Property-Liability | $ | 17,977 |
|
| $ | 17,229 |
|
| $ | 17,193 |
|
| | | ($ in millions, except ratios) | 2016 | | 2015 | | 2014 | |
Net reserves
| | Net reserves
|
| | Reserve reestimate (1) | | Effect on combined ratio (2) | | Reserve reestimate (1) | | Effect on combined ratio (2) | | Reserve reestimate (1) | | Effect on combined ratio (2) | | January 1 reserves |
| ($ in millions) | | | 2019 | | 2018 | | 2017 |
| Allstate brand | $ | (106 | ) | | (0.3 | ) | | $ | 38 |
| | 0.1 |
| | $ | (171 | ) | | (0.6 | ) | | $ | 17,272 |
| | $ | 16,826 |
| | $ | 16,108 |
|
| Esurance brand | (21 | ) | | (0.1 | ) | | (17 | ) | | — |
| | (16 | ) | | (0.1 | ) | | 862 |
| | 777 |
| | 740 |
|
| Encompass brand | 5 |
| | — |
| | 7 |
| | — |
| | (9 | ) | | — |
| | 691 |
| | 758 |
| | 749 |
|
| Total Allstate Protection | (122 | ) | | (0.4 | ) | | 28 |
| | 0.1 |
| | (196 | ) | | (0.7 | ) | | 18,825 |
|
| 18,361 |
|
| 17,597 |
|
| Discontinued Lines and Coverages | 105 |
| | 0.3 |
| | 53 |
| | 0.2 |
| | 112 |
| | 0.4 |
| | 1,391 |
| | 1,407 |
| | 1,445 |
|
Total Property-Liability (3) | $ | (17 | ) |
| (0.1 | ) |
| $ | 81 |
|
| 0.3 |
|
| $ | (84 | ) |
| (0.3 | ) | |
| Reserve reestimates, after-tax | $ | (11 | ) | | | | $ | 53 |
| | | | $ | (55 | ) | | | |
Consolidated net income applicable to common shareholders | $ | 1,761 |
| | | | $ | 2,055 |
| | | | $ | 2,746 |
| | | |
| Reserve reestimates as a % impact on consolidated net income applicable to common shareholders | 0.6 | % | | | | (2.6 | )% | | | | 2.0 | % | | | |
| Total Property-Liability | | | 20,216 |
|
| 19,768 |
|
| 19,042 |
|
| Service Businesses | | | 52 |
| | 86 |
| | 24 |
|
| Total net reserves | | | $ | 20,268 |
| | $ | 19,854 |
| | $ | 19,066 |
|
Claims and Claims Expense Reserves 2019 Form 10-K
|
| | | | | | | | | | | | | | | | | | | | | |
Impact of reserve reestimates by brand on combined ratio and net income applicable to common shareholders(1) (2)
|
| | | 2019 | | 2018 | | 2017 |
| ($ in millions, except ratios) | | Reserve reestimate | | Effect on combined ratio | | Reserve reestimate | | Effect on combined ratio | | Reserve reestimate | | Effect on combined ratio |
| Allstate brand | | $ | (239 | ) | | (0.7 | ) | | $ | (332 | ) | | (1.0 | ) | | $ | (585 | ) | | (1.8 | ) |
| Esurance brand | | 3 |
| | — |
| | 3 |
| | — |
| | (2 | ) | | — |
|
| Encompass brand | | 3 |
| | — |
| | (11 | ) | | — |
| | (14 | ) | | (0.1 | ) |
| Total Allstate Protection | | (233 | ) | | (0.7 | ) | | (340 | ) | | (1.0 | ) | | (601 | ) | | (1.9 | ) |
| Discontinued Lines and Coverages | | 105 |
| | 0.4 |
| | 87 |
| | 0.3 |
| | 96 |
| | 0.3 |
|
| Total Property-Liability | | (128 | ) |
| (0.3 | ) |
| (253 | ) |
| (0.7 | ) |
| (505 | ) |
| (1.6 | ) |
| Service Businesses | | (2 | ) | | — |
| | (2 | ) | | — |
| | 2 |
| | — |
|
| Total | | $ | (130 | ) | | | | $ | (255 | ) | | | | $ | (503 | ) | | |
| Reserve reestimates, after-tax | | $ | (103 | ) | | | | $ | (201 | ) | | | | $ | (327 | ) | | |
| Consolidated net income applicable to common shareholders | | $ | 4,678 |
| | | | $ | 2,012 |
| | | | $ | 3,438 |
| | |
| Reserve reestimates as a % impact on consolidated net income applicable to common shareholders | | 2.2 | % | | | | 10.0 | % | | | | 9.5 | % | | |
| Property-Liability prior year reserve reestimates included in catastrophe losses | | $ | 48 |
| | | | $ | 25 |
| | | | $ | (18 | ) | | |
| |
(1) | Favorable reserve reestimates are shown in parentheses. |
| |
(2) | Ratios are calculated using Property-Liabilityproperty and casualty premiums earned. |
| |
(3)
| Prior year reserve reestimates included in catastrophe losses totaled $6 million unfavorable, $15 million favorable and $43 million unfavorable in 2016, 2015 and 2014, respectively. |
The following tables reflect the accident years to which the reestimates shown above are applicable. Favorable reserve reestimates are shown in parentheses.
2016 Prior year reserve reestimates |
| | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 prior year reserve reestimates |
| ($ in millions) | | 2014 & prior | | 2015 | | 2016 | | 2017 | | 2018 | | Total |
| Allstate brand | | $ | (133 | ) | | $ | (44 | ) | | $ | (25 | ) | | $ | (96 | ) | | $ | 59 |
| | $ | (239 | ) |
| Esurance brand | | (5 | ) | | (2 | ) | | (1 | ) | | (3 | ) | | 14 |
| | 3 |
|
| Encompass brand | | (2 | ) | | 2 |
| | (2 | ) | | 4 |
| | 1 |
| | 3 |
|
| Total Allstate Protection | | (140 | ) | | (44 | ) | | (28 | ) | | (95 | ) | | 74 |
| | (233 | ) |
| Discontinued Lines and Coverages | | 105 |
| | — |
| | — |
| | — |
| | — |
| | 105 |
|
| Total Property-Liability | | (35 | ) | | (44 | ) | | (28 | ) | | (95 | ) | | 74 |
| | (128 | ) |
| Service Businesses | | — |
| | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) |
| Total | | $ | (35 | ) | | $ | (44 | ) | | $ | (28 | ) | | $ | (95 | ) | | $ | 72 |
| | $ | (130 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | 2006 & prior | | 2007 | | 2008 | | 2009 | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | Total |
| Allstate brand | $ | 1 |
| | $ | 3 |
| | $ | (11 | ) | | $ | 2 |
| | $ | 7 |
| | $ | (13 | ) | | $ | (52 | ) | | $ | (69 | ) | | $ | (40 | ) | | $ | 66 |
| | $ | (106 | ) |
| Esurance brand | — |
| | 1 |
| | (5 | ) | | (1 | ) | | (1 | ) | | (1 | ) | | (3 | ) | | (5 | ) | | (9 | ) | | 3 |
| | (21 | ) |
| Encompass brand | (1 | ) | | (2 | ) | | (4 | ) | | (4 | ) | | (4 | ) | | (10 | ) | | 7 |
| | 3 |
| | 14 |
| | 6 |
| | 5 |
|
| Total Allstate Protection | — |
| | 2 |
| | (20 | ) | | (3 | ) | | 2 |
| | (24 | ) | | (48 | ) | | (71 | ) | | (35 | ) | | 75 |
| | (122 | ) |
| Discontinued Lines and Coverages | 105 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 105 |
|
| Total Property-Liability | $ | 105 |
| | $ | 2 |
| | $ | (20 | ) | | $ | (3 | ) | | $ | 2 |
| | $ | (24 | ) | | $ | (48 | ) | | $ | (71 | ) | | $ | (35 | ) | | $ | 75 |
| | $ | (17 | ) |
2015 Prior year reserve reestimates |
| | | | | | | | | | | | | | | | | | | | | | | | |
| 2018 prior year reserve reestimates |
| ($ in millions) | | 2013 & prior | | 2014 | | 2015 | | 2016 | | 2017 | | Total |
| Allstate brand | | $ | (61 | ) | | $ | (50 | ) | | $ | (25 | ) | | $ | (146 | ) | | $ | (50 | ) | | $ | (332 | ) |
| Esurance brand | | (5 | ) | | (6 | ) | | 9 |
| | 13 |
| | (8 | ) | | 3 |
|
| Encompass brand | | (12 | ) | | (11 | ) | | (15 | ) | | 1 |
| | 26 |
| | (11 | ) |
| Total Allstate Protection | | (78 | ) | | (67 | ) | | (31 | ) | | (132 | ) | | (32 | ) | | (340 | ) |
| Discontinued Lines and Coverages | | 87 |
| | — |
| | — |
| | — |
| | — |
| | 87 |
|
| Total Property-Liability | | 9 |
| | (67 | ) | | (31 | ) | | (132 | ) | | (32 | ) | | (253 | ) |
| Service Businesses | | — |
| | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) |
| Total | | $ | 9 |
| | $ | (67 | ) | | $ | (31 | ) | | $ | (132 | ) | | $ | (34 | ) | | $ | (255 | ) |
| | | 2017 prior year reserve reestimates | | 2017 prior year reserve reestimates |
| ($ in millions) | 2005 & prior | | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | Total | | 2012 & prior | | 2013 | | 2014 | | 2015 | | 2016 | | Total |
| Allstate brand | $ | 39 |
| | $ | (1 | ) | | $ | (17 | ) | | $ | (15 | ) | | $ | (58 | ) | | $ | (21 | ) | | $ | (74 | ) | | $ | (29 | ) | | $ | 42 |
| | $ | 172 |
| | $ | 38 |
| | $ | 3 |
| | $ | (99 | ) | | $ | (103 | ) | | $ | (121 | ) | | $ | (265 | ) | | $ | (585 | ) |
| Esurance brand | — |
| | (1 | ) | | (1 | ) | | (1 | ) | | (1 | ) | | (1 | ) | | (3 | ) | | (2 | ) | | (5 | ) | | (2 | ) | | (17 | ) | | (3 | ) | | (1 | ) | | (12 | ) | | 1 |
| | 13 |
| | (2 | ) |
| Encompass brand | (2 | ) | | (2 | ) | | (2 | ) | | (2 | ) | | (1 | ) | | (2 | ) | | 1 |
| | 2 |
| | 12 |
| | 3 |
| | 7 |
| | (6 | ) | | (1 | ) | | (4 | ) | | (1 | ) | | (2 | ) | | (14 | ) |
| Total Allstate Protection | 37 |
| | (4 | ) | | (20 | ) | | (18 | ) | | (60 | ) | | (24 | ) | | (76 | ) | | (29 | ) | | 49 |
| | 173 |
| | 28 |
| | (6 | ) | | (101 | ) | | (119 | ) | | (121 | ) | | (254 | ) | | (601 | ) |
| Discontinued Lines and Coverages | 53 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 53 |
| | 96 |
| | — |
| | — |
| | — |
| | — |
| | 96 |
|
| Total Property-Liability | $ | 90 |
| | $ | (4 | ) | | $ | (20 | ) | | $ | (18 | ) | | $ | (60 | ) | | $ | (24 | ) | | $ | (76 | ) | | $ | (29 | ) | | $ | 49 |
| | $ | 173 |
| | $ | 81 |
| | 90 |
| | (101 | ) | | (119 | ) | | (121 | ) | | (254 | ) | | (505 | ) |
| Service Businesses | | | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2 |
|
| Total | | | $ | 90 |
| | $ | (101 | ) | | $ | (119 | ) | | $ | (121 | ) | | $ | (252 | ) | | $ | (503 | ) |
2014 Prior year reserve reestimates
The Allstate Corporation 63
2019 Form 10-KClaims and Claims Expense Reserves
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | 2004 & prior | | 2005 | | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | 2011 | | 2012 | | 2013 | | Total |
| Allstate brand | $ | (38 | ) | | $ | (10 | ) | | $ | (11 | ) | | $ | 2 |
| | $ | (20 | ) | | $ | 37 |
| | $ | (86 | ) | | $ | (35 | ) | | $ | (99 | ) | | $ | 89 |
| | $ | (171 | ) |
| Esurance brand | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (9 | ) | | 6 |
| | (13 | ) | | (16 | ) |
| Encompass brand | 2 |
| | 1 |
| | — |
| | 1 |
| | (1 | ) | | (2 | ) | | (2 | ) | | (5 | ) | | (6 | ) | | 3 |
| | (9 | ) |
| Total Allstate Protection | (36 | ) | | (9 | ) | | (11 | ) | | 3 |
| | (21 | ) | | 35 |
| | (88 | ) | | (49 | ) | | (99 | ) | | 79 |
| | (196 | ) |
| Discontinued Lines and Coverages | 112 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 112 |
|
| Total Property-Liability | $ | 76 |
| | $ | (9 | ) | | $ | (11 | ) | | $ | 3 |
| | $ | (21 | ) | | $ | 35 |
| | $ | (88 | ) | | $ | (49 | ) | | $ | (99 | ) | | $ | 79 |
| | $ | (84 | ) |
Allstate brand prior year reserve reestimates were $106 million favorable in 2016, $38 million unfavorable in 2015 and $171 million favorable in 2014. In 2016, this was primarily due to severity development for auto liability coverages that was better than expected. In 2015, this was primarily due to severity development for bodily injury coverage for recent years that was more than expected and litigation settlements from older years. In 2014, this was primarily due to severity development that was better than expected.
These trends are primarily responsible for revisions to loss development factors, as described above, used to predict how losses are likely to develop from the end of a reporting period until all claims have been paid. Because these trends cause actual losses to differ from those predicted by the estimated development factors used in prior reserve estimates, reserves are revised as actuarial studies validate new trends based on the indications of updated development factor calculations.
The impact of these reestimates on the Allstate brand underwriting income is shown in the table below.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Reserve reestimates | $ | (106 | ) | | $ | 38 |
| | $ | (171 | ) |
| Allstate brand underwriting income | 1,447 |
| | 1,812 |
| | 2,235 |
|
| Reserve reestimates as a % impact on underwriting income | 7.3 | % | | (2.1 | )% | | 7.7 | % |
Esurance brand prior year reserve reestimates were $21 million favorable in 2016, $17 million favorable in 2015 and $16 million favorable in 2014. In 2016, 2015 and 2014, this was primarily due to severity development that was better than expected for liability coverages.
The impact of these reestimates on the Esurance brand underwriting loss is shown in the table below.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Reserve reestimates | $ | (21 | ) | | $ | (17 | ) | | $ | (16 | ) |
| Esurance brand underwriting loss | (124 | ) | | (164 | ) | | (259 | ) |
| Reserve reestimates as a % impact on underwriting loss | 16.9 | % | | 10.4 | % | | 6.2 | % |
Encompass brand prior year reserve reestimates were $5 million unfavorable in 2016, $7 million unfavorable in 2015 and $9 million favorable in 2014. In 2016 and 2015, this was primarily due to severity development that was more than expected for personal umbrella policies. In 2014, this was primarily due to severity development that was better than expected.
The impact of these reestimates on the Encompass brand underwriting income (loss) is shown in the table below.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Reserve reestimates | $ | 5 |
| | $ | 7 |
| | $ | (9 | ) |
| Encompass brand underwriting income (loss) | 1 |
| | (26 | ) | | (76 | ) |
| Reserve reestimates as a % impact on underwriting income (loss) | N/A |
| | (26.9 | )% | | 11.8 | % |
N/A reflects not applicable.
Loss Reserve Reestimates
The following Loss Reserve Reestimates table illustrates the change over time of the net reserves established for property-liability insurance claims and claims expense at the end of the last eleven calendar years. The first section shows the reserves as originally reported at the end of the stated year. The second section, reading down, shows the cumulative amounts paid as of the end of successive years with respect to that reserve liability. The third section, reading down, shows retroactive reestimates of the original recorded reserve as of the end of each successive year which is the result of Allstate’s expanded awareness of additional facts and circumstances that pertain to the unsettled claims. The last section compares the latest reestimated reserve to the reserve originally established, and indicates whether the original reserve was adequate to cover the estimated costs of unsettled claims. The table also presents the gross reestimated liability as of the end of the latest reestimation period, with separate disclosure of the related reestimated reinsurance recoverable.
The Loss Reserve Reestimates table is cumulative and, therefore, ending balances should not be added since the amount at the end of each calendar year includes activity for both the current and prior years. Unfavorable reserve reestimates are shown in this table in parentheses.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | Loss Reserve Reestimates |
| | December 31, |
| | 2006 & prior | | 2007 | | 2008 | | 2009 | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 |
| Gross reserves for unpaid claims and claims expense | $ | 18,866 |
| | $ | 18,865 |
| | $ | 19,456 |
| | $ | 19,167 |
| | $ | 19,468 |
| | $ | 20,375 |
| | $ | 21,288 |
| | $ | 21,857 |
| | $ | 22,923 |
| | $ | 23,869 |
| | $ | 25,250 |
|
| Reinsurance recoverable | 2,256 |
| | 2,205 |
| | 2,274 |
| | 2,139 |
| | 2,072 |
| | 2,588 |
| | 4,010 |
| | 4,664 |
| | 5,694 |
| | 5,892 |
| | 6,184 |
|
| Reserve for unpaid claims and claims expense | 16,610 |
| | 16,660 |
| | 17,182 |
| | 17,028 |
| | 17,396 |
| | 17,787 |
| | 17,278 |
| | 17,193 |
| | 17,229 |
| | 17,977 |
| | 19,066 |
|
| Paid (cumulative) as of: | | | | | | | | | | | | | | | | | | | | | |
| One year later | 6,684 |
| | 6,884 |
| | 6,995 |
| | 6,571 |
| | 6,302 |
| | 6,435 |
| | 6,338 |
| | 6,468 |
| | 6,626 |
| | 6,910 |
| | |
| Two years later | 9,957 |
| | 9,852 |
| | 10,069 |
| | 9,491 |
| | 9,396 |
| | 9,513 |
| | 9,511 |
| | 9,686 |
| | 9,774 |
| | | | |
| Three years later | 11,837 |
| | 11,761 |
| | 11,915 |
| | 11,402 |
| | 11,287 |
| | 11,467 |
| | 11,477 |
| | 11,586 |
| | | | | | |
| Four years later | 12,990 |
| | 12,902 |
| | 13,071 |
| | 12,566 |
| | 12,497 |
| | 12,650 |
| | 12,651 |
| | | | | | | | |
| Five years later | 13,723 |
| | 13,628 |
| | 13,801 |
| | 13,323 |
| | 13,239 |
| | 13,405 |
| | | | | | | | | | |
| Six years later | 14,239 |
| | 14,154 |
| | 14,305 |
| | 13,823 |
| | 13,778 |
| | | | | | | | | | | | |
| Seven years later | 14,657 |
| | 14,543 |
| | 14,702 |
| | 14,248 |
| | | | | | | | | | | | | | |
| Eight years later | 14,985 |
| | 14,887 |
| | 15,070 |
| | | | | | | | | | | | | | | | |
| Nine years later | 15,283 |
| | 15,225 |
| | | | | | | | | | | | | | | | | | |
| Ten years later | 15,600 |
| | | | | | | | | | | | | | | | | | | | |
| Reserve reestimated as of: | | | | | | | | | | | | | | | | | | | | | |
| End of year | 16,610 |
| | 16,660 |
| | 17,182 |
| | 17,028 |
| | 17,396 |
| | 17,787 |
| | 17,278 |
| | 17,193 |
| | 17,229 |
| | 17,977 |
| | 19,066 |
|
| One year later | 16,438 |
| | 16,830 |
| | 17,070 |
| | 16,869 |
| | 17,061 |
| | 17,122 |
| | 17,157 |
| | 17,109 |
| | 17,310 |
| | 17,960 |
| | |
| Two years later | 16,633 |
| | 17,174 |
| | 17,035 |
| | 16,903 |
| | 16,906 |
| | 17,001 |
| | 16,994 |
| | 17,017 |
| | 17,218 |
| | | | |
| Three years later | 17,135 |
| | 17,185 |
| | 17,217 |
| | 16,909 |
| | 16,869 |
| | 16,937 |
| | 16,853 |
| | 16,960 |
| | | | | | |
| Four years later | 17,238 |
| | 17,393 |
| | 17,260 |
| | 16,892 |
| | 16,854 |
| | 16,825 |
| | 16,867 |
| | | | | | | | |
| Five years later | 17,447 |
| | 17,477 |
| | 17,306 |
| | 16,965 |
| | 16,818 |
| | 16,887 |
| | | | | | | | | | |
| Six years later | 17,542 |
| | 17,560 |
| | 17,344 |
| | 16,953 |
| | 16,904 |
| | | | | | | | | | | | |
| Seven years later | 17,671 |
| | 17,619 |
| | 17,392 |
| | 17,037 |
| | | | | | | | | | | | | | |
| Eight years later | 17,727 |
| | 17,685 |
| | 17,479 |
| | | | | | | | | | | | | | | | |
| Nine years later | 17,813 |
| | 17,792 |
| | | | | | | | | | | | | | | | | | |
| Ten years later | 17,918 |
| | | | | | | | | | | | | | | | | | | | |
| Initial reserve (less than) in excess of reestimated reserve: | | | | | | | | | | | | | | | | | | | | | |
| Amount of reestimate | (1,308 | ) | | (1,132 | ) | | (297 | ) | | (9 | ) | | 492 |
| | 900 |
| | 411 |
| | 233 |
| | 11 |
| | 17 |
| | |
| Percent | (7.9 | )% | | (6.8 | )% | | (1.7 | )% | | (0.1 | )% | | 2.8 | % | | 5.1 | % | | 2.4 | % | | 1.4 | % | | 0.1 | % | | 0.1 | % | | |
| Gross reestimated liability-latest | 23,370 |
| | 23,150 |
| | 22,944 |
| | 22,289 |
| | 22,167 |
| | 22,278 |
| | 23,301 |
| | 22,728 |
| | 23,048 |
| | 23,930 |
| | |
| Reestimated recoverable-latest | 5,452 |
| | 5,358 |
| | 5,465 |
| | 5,252 |
| | 5,263 |
| | 5,391 |
| | 6,434 |
| | 5,768 |
| | 5,830 |
| | 5,970 |
| | |
| Net reestimated liability-latest | 17,918 |
| | 17,792 |
| | 17,479 |
| | 17,037 |
| | 16,904 |
| | 16,887 |
| | 16,867 |
| | 16,960 |
| | 17,218 |
| | 17,960 |
| | |
| Gross cumulative reestimate (increase) decrease | $ | (4,504 | ) | | $ | (4,285 | ) | | $ | (3,488 | ) | | $ | (3,122 | ) | | $ | (2,699 | ) | | $ | (1,903 | ) | | $ | (2,013 | ) | | $ | (871 | ) | | $ | (125 | ) | | $ | (61 | ) | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | Amount of reestimates for each segment |
| | December 31, |
| | 2006 & prior | | 2007 | | 2008 | | 2009 | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 |
| Net Discontinued Lines and Coverages reestimate | $ | (601 | ) | | $ | (554 | ) | | $ | (536 | ) | | $ | (512 | ) | | $ | (484 | ) | | $ | (463 | ) | | $ | (412 | ) | | $ | (270 | ) | | $ | (158 | ) | | $ | (105 | ) |
| Net Allstate Protection reestimate | (707 | ) | | (578 | ) | | 239 |
| | 503 |
| | 976 |
| | 1,363 |
| | 823 |
| | 503 |
| | 169 |
| | 122 |
|
| Amount of reestimate (net) | $ | (1,308 | ) | | $ | (1,132 | ) | | $ | (297 | ) | | $ | (9 | ) | | $ | 492 |
| | $ | 900 |
| | $ | 411 |
| | $ | 233 |
| | $ | 11 |
| | $ | 17 |
|
As shown in the above table, the subsequent cumulative increase in the net reserves established up to December 31, 2006, in general, reflect additions to reserves in the Discontinued Lines and Coverages Segment, primarily for asbestos and environmental liabilities, which offset the effects of favorable severity trends experienced by Allstate Protection, as discussed more fully below. The cumulative increases in reserves established as of December 31, 2006 and 2007 are due to the shift of reserves to older accident years attributable to a reallocation of reserves related to employee postretirement benefits to more accident years, litigation settlements, reclassification of injury and non-injury reserves to older years along with reserve strengthening as discussed below.
The following table is derived from the Loss Reserve Reestimates table and summarizes the effect of reserve reestimates, net of reinsurance, on calendar year operations for the ten-year period ended December 31, 2016. The total of each column details the amount of reserve reestimates made in the indicated calendar year and shows the accident years to which the reestimates are
applicable. The amounts in the total accident year column on the far right represent the cumulative reserve reestimates for the indicated accident year(s). Favorable reserve reestimates are shown in this table in parentheses. The changes in total reserve reestimates, as shown and described below, have generally been favorable other than 2008 which was adversely impacted due to litigation filed in conjunction with a Louisiana deadline for filing suits related to Hurricane Katrina.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | Effect of net reserve reestimates on calendar year operations |
| | 2007 | | 2008 | | 2009 | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | Total |
| BY ACCIDENT YEAR | | | | | | | | | | | | | | | | | | | | | |
| 2006 & prior | $ | (172 | ) | | $ | 195 |
| | $ | 502 |
| | $ | 103 |
| | $ | 209 |
| | $ | 95 |
| | $ | 129 |
| | $ | 56 |
| | $ | 86 |
| | $ | 105 |
| | $ | 1,308 |
|
| 2007 | | | (25 | ) | | (158 | ) | | (92 | ) | | (1 | ) | | (11 | ) | | (46 | ) | | 3 |
| | (20 | ) | | 2 |
| | (348 | ) |
| 2008 | | | | | (456 | ) | | (46 | ) | | (26 | ) | | (41 | ) | | (37 | ) | | (21 | ) | | (18 | ) | | (20 | ) | | (665 | ) |
| 2009 | | | | | | | (124 | ) | | (148 | ) | | (37 | ) | | (63 | ) | | 35 |
| | (60 | ) | | (3 | ) | | (400 | ) |
| 2010 | | | | | | | | | (369 | ) | | (161 | ) | | (20 | ) | | (88 | ) | | (24 | ) | | 2 |
| | (660 | ) |
| 2011 | | | | | | | | | | | (510 | ) | | (84 | ) | | (49 | ) | | (76 | ) | | (24 | ) | | (743 | ) |
| 2012 | | | | | | | | | | | | | — |
| | (99 | ) | | (29 | ) | | (48 | ) | | (176 | ) |
| 2013 | | | | | | | | | | | | | | | 79 |
| | 49 |
| | (71 | ) | | 57 |
|
| 2014 | | | | | | | | | | | | | | | | | 173 |
| | (35 | ) | | 138 |
|
| 2015 | | | | | | | | | | | | | | | | | | | 75 |
| | 75 |
|
| TOTAL | $ | (172 | ) | | $ | 170 |
| | $ | (112 | ) | | $ | (159 | ) | | $ | (335 | ) | | $ | (665 | ) | | $ | (121 | ) | | $ | (84 | ) | | $ | 81 |
| | $ | (17 | ) | | $ | (1,414 | ) |
In 2016, favorable prior year reserve reestimates were primarily due to severity development for auto liability coverages that was better than expected. The increased reserves in accident years 2006 & prior is due to reserve strengthening by the Discontinued Lines and Coverages segment.
In 2015, unfavorable prior year reserve reestimates were primarily due to severity development for bodily injury coverage for recent years that was more than expected. The increased reserves in accident years 2005 & prior is due to reserve strengthening by the Discontinued Lines and Coverages segment and litigation settlements from older years.
In 2014, favorable prior year reserve reestimates were primarily due to auto severity development that was better than expected. The increased reserves in accident years 2004 & prior is due to reserve strengthening by the Discontinued Lines and Coverages segment.
In 2013, favorable prior year reserve reestimates were primarily due to auto severity development that was less than anticipated in previous estimates and catastrophe losses. The increased reserves in accident years 2003 & prior is due to reserve strengthening by the Discontinued Lines and Coverages segment and a reclassification of injury reserves to older years.
In 2012, favorable prior year reserve reestimates were primarily due to catastrophe losses and auto severity development that was less than anticipated in previous estimates. The increased reserves in accident years 2002 & prior is due to a reclassification of injury reserves to older years and reserve strengthening.
In 2011, favorable prior year reserve reestimates were primarily due to auto severity development that was less than anticipated in previous estimates and catastrophe losses. The increased reserves in accident years 2001 & prior is due to a reclassification of injury reserves to older years and reserve strengthening.
In 2010, favorable prior year reserve reestimates were primarily due to Allstate Protection catastrophe losses and auto severity development that was less than anticipated in previous estimates, partially offset by litigation settlements. The increased reserves in accident years 2000 & prior is due to litigation settlements of $100 million, a reclassification of injury reserves to older years and reserve strengthening.
In 2009, favorable prior year reserve reestimates were primarily due to Allstate Protection catastrophe losses that were less than anticipated in previous estimates. The shift of reserves to older accident years is attributable to a reallocation of reserves related to employee postretirement benefits to more accident years, and a reclassification of injury and 2008 non-injury reserves to older years.
In 2008, unfavorable prior year reserve reestimates were primarily due to Allstate Protection catastrophe losses that were more than anticipated in previous estimates.
In 2007, favorable prior year reserve reestimates were primarily due to Allstate Protection auto severity development that was less than what was anticipated in previous estimates. Decreased reserve reestimates for Allstate Protection more than offset increased reestimates of losses primarily related to environmental liabilities reported by the Discontinued Lines and Coverages segment.
Allstate Protection
The tables below show Allstate Protection net reserves representing the estimated cost of outstanding claims as they were recorded at the beginning of years 2016, 2015,2019, 2018, and 2014,2017, and the effect of reestimates in each year.
| | | Net reserves by line | | Net reserves by line |
| | | | January 1 reserves |
| ($ in millions) | January 1 reserves | | 2019 | | 2018 | | 2017 |
| | 2016 | | 2015 | | 2014 | |
| Auto | $ | 12,459 |
| | $ | 11,698 |
| | $ | 11,616 |
| | $ | 14,378 |
| | $ | 14,051 |
| | $ | 13,530 |
|
| Homeowners | 1,937 |
| | 1,849 |
| | 1,821 |
| | 2,157 |
| | 2,205 |
| | 1,990 |
|
| Other personal lines | 1,490 |
| | 1,502 |
| | 1,512 |
| | 1,489 |
| | 1,489 |
| | 1,456 |
|
| Commercial lines | 554 |
| | 549 |
| | 576 |
| | 801 |
| | 616 |
| | 621 |
|
| Other business lines | 21 |
| | 19 |
| | 22 |
| |
| Total Allstate Protection | $ | 16,461 |
| | $ | 15,617 |
| | $ | 15,547 |
| | $ | 18,825 |
| | $ | 18,361 |
| | $ | 17,597 |
|
| | | Impact of reserve reestimates by line on combined ratio and underwriting income | | Impact of reserve reestimates by line on combined ratio and underwriting income |
| | | | 2019 | | 2018 | | 2017 |
| ($ in millions, except ratios) | 2016 | | 2015 | | 2014 | | Reserve reestimate | | Effect on combined ratio | | Reserve reestimate | | Effect on combined ratio | | Reserve reestimate | | Effect on combined ratio |
| | Reserve reestimate | | Effect on combined ratio | | Reserve reestimate | | Effect on combined ratio | | Reserve reestimate | | Effect on combined ratio | |
| Auto | $ | (155 | ) | | (0.5 | ) | | $ | 30 |
| | 0.1 |
| | $ | (238 | ) | | (0.8 | ) | | $ | (323 | ) | | (0.9 | ) | | $ | (455 | ) | | (1.3 | ) | | $ | (490 | ) | | (1.6 | ) |
| Homeowners | (24 | ) | | (0.1 | ) | | (24 | ) | | (0.1 | ) | | 29 |
| | 0.1 |
| | 65 |
| | 0.2 |
| | 14 |
| | — |
| | (131 | ) | | (0.4 | ) |
| Other personal lines | (9 | ) | | — |
| | 18 |
| | 0.1 |
| | 34 |
| | 0.1 |
| | 8 |
| | — |
| | (7 | ) | | — |
| | 1 |
| | — |
|
| Commercial lines | 62 |
| | 0.2 |
| | 2 |
| | — |
| | (20 | ) | | (0.1 | ) | | 17 |
| | — |
| | 108 |
| | 0.3 |
| | 19 |
| | 0.1 |
|
| Other business lines | 4 |
| | — |
| | 2 |
| | — |
| | (1 | ) | | — |
| |
| Total Allstate Protection | $ | (122 | ) |
| (0.4 | ) |
| $ | 28 |
|
| 0.1 |
|
| $ | (196 | ) |
| (0.7 | ) | | $ | (233 | ) |
| (0.7 | ) |
| $ | (340 | ) |
| (1.0 | ) |
| $ | (601 | ) |
| (1.9 | ) |
| Underwriting income | $ | 1,317 |
| | | | $ | 1,614 |
| | | | $ | 1,887 |
| | | | $ | 2,912 |
| | | | $ | 2,343 |
| | | | $ | 2,304 |
| | |
| Reserve reestimates as a % impact on underwriting income | 9.3 | % | | | | (1.7 | )% | | | | 10.4 | % | | | | 8.0 | % | | | | 14.5 | % | | | | 26.1 | % | | |
AutoPrior year reserve reestimates are developed based on factors that are calculated quarterly and periodically throughout the year for data elements such as claims reported and settled, paid losses and paid losses combined with case reserves. We use significant judgment and these data elements to make revisions to loss development factors that predict how losses are likely to develop from the end of a reporting period until all claims have been paid. When actual development of these data elements is different than the historical development pattern used in 2016a prior period reserve estimate, reserves are revised as actuarial studies validate new trends based on the indications of updated development factor calculations. On-going claims organizational and process changes that are occurring are considered within our estimation process.
Favorable reserve reestimates for auto in 2019 primarily related to continued favorable personal lines auto injury coverage development, offset by strengthening in our homeowners lines. Auto liability claims process changes implemented in prior years, including a program requiring enhanced documentation of injuries and related medical
treatments, have resulted in favorable severity trends compared to those originally estimated as we continue to develop greater experience in settling claims under these programs. The impact of these program changes continues to moderate. Unfavorable results for homeowners lines in 2019 were primarily due to severitycatastrophe development for auto liability coverages that was better than expected. Auto reserve reestimates in 2015 were primarily due to claim severity development for bodily injury coverage for recent years that was more than expected and litigation settlements from older years for Allstate brand. Auto reserve reestimates in 2014 were primarily due to claim severity development that was better than expected.
Favorable homeowners reserve reestimates in 2016 and 2015 were primarily due to favorable non-catastrophe reserve reestimates. Unfavorable homeowners reserve reestimates in 2014 were primarily due to unfavorable catastrophe reserve reestimates.
Other personal lines reserve reestimates in 2016 was primarily due to the result of non-catastrophe loss development lower than anticipated in previous estimates. Other personal lines reserve reestimates in 2015 and 2014 were primarily the result of non-catastrophe loss developmentbeing higher than anticipated in previous estimates.
Commercial linesFavorable reserve reestimates for auto in 20162018 primarily related to continued favorable personal lines auto injury coverage development, offset by strengthening in our commercial lines and personal injury protection (“PIP”) coverage, including an unfavorable ruling against the insurance industry related to Florida PIP. Unfavorable results for commercial lines in 2018 were primarily due to severitynon-catastrophe auto loss development for auto bodily injury coverage that was more than expected. Commercial lines reserve reestimates in 2015 were primarily the result of non-catastrophe loss developmentbeing higher than anticipated in previous estimates. Commercial lines reserve reestimates in 2014 were primarily due
Estimating the ultimate cost of claims and claims expenses is an inherently uncertain and complex process involving a high degree of judgment and is subject to favorable non-catastrophe reserve reestimates.the evaluation of numerous variables.
Pending, new and closed claims for Allstate Protection are summarized in the following table for the years ended December 31. The increase in pending claims as of December 31, 2016 compared to December 31, 2015 was primarily due to higher auto counts. The increase in pending claims as of December 31, 2015 compared to December 31, 2014 relates to auto frequency and growth.
Claims and Claims Expense Reserves 2019 Form 10-K
|
| | | | | | | | |
| Number of claims | 2016 | | 2015 | | 2014 |
| Auto | | | | | |
| Pending, beginning of year | 521,890 |
| | 487,227 |
| | 473,703 |
|
| New | 6,844,491 |
| | 6,752,401 |
| | 6,330,940 |
|
| Total closed | (6,831,850 | ) | | (6,717,738 | ) | | (6,317,416 | ) |
| Pending, end of year | 534,531 |
| | 521,890 |
| | 487,227 |
|
| Homeowners | | | | | |
| Pending, beginning of year | 38,865 |
| | 33,648 |
| | 37,420 |
|
| New | 818,084 |
| | 714,562 |
| | 759,794 |
|
| Total closed | (822,258 | ) | | (709,345 | ) | | (763,566 | ) |
| Pending, end of year | 34,691 |
| | 38,865 |
| | 33,648 |
|
| Other personal lines | | | | | |
| Pending, beginning of year | 15,835 |
| | 15,494 |
| | 17,004 |
|
| New | 219,053 |
| | 307,011 |
| | 204,549 |
|
| Total closed | (219,951 | ) | | (306,670 | ) | | (206,059 | ) |
| Pending, end of year | 14,937 |
| | 15,835 |
| | 15,494 |
|
| Commercial lines | | | | | |
| Pending, beginning of year | 11,837 |
| | 11,836 |
| | 10,422 |
|
| New | 73,139 |
| | 74,942 |
| | 65,970 |
|
| Total closed | (73,458 | ) | | (74,941 | ) | | (64,556 | ) |
| Pending, end of year | 11,518 |
| | 11,837 |
| | 11,836 |
|
| Total Allstate Protection | | | | | |
| Pending, beginning of year | 588,427 |
| | 548,205 |
| | 538,549 |
|
| New | 7,954,767 |
| | 7,848,916 |
| | 7,361,253 |
|
| Total closed | (7,947,517 | ) | | (7,808,694 | ) | | (7,351,597 | ) |
| Pending, end of year | 595,677 |
| | 588,427 |
| | 548,205 |
|
Discontinued Lines and Coverages
We conduct an annual review in the third quarter of each year to evaluate and establish asbestos, environmental and other discontinued lines reserves. Reserves are recorded in the reporting period in which they are determined. Using established industry and actuarial best practices and assuming no change in the
regulatory or economic environment, this detailed and comprehensive methodology determines reserves based on assessments of the characteristics of exposure (e.g. claim activity, potential liability, jurisdiction, products versus non-products exposure) presented by policyholders.
Reserve reestimates for the Discontinued Lines and Coverages are shown in the table below.
| | | Discontinued Lines and Coverages reserve reestimates | | Discontinued Lines and Coverages reserve reestimates |
| | | | 2019 | | 2018 | | 2017 |
| ($ in millions) | 2016 | | 2015 | | 2014 | | January 1 reserves | | Reserve reestimate | | January 1 reserves | | Reserve reestimate | | January 1 reserves | | Reserve reestimate |
| | January 1 reserves | | Reserve reestimate | | January 1 reserves | | Reserve reestimate | | January 1 reserves | | Reserve reestimate | |
| Asbestos claims | $ | 960 |
| | $ | 67 |
| | $ | 1,014 |
| | $ | 39 |
| | $ | 1,017 |
| | $ | 87 |
| | $ | 866 |
| | $ | 28 |
| | $ | 884 |
| | $ | 44 |
| | $ | 912 |
| | $ | 61 |
|
| Environmental claims | 179 |
| | 23 |
| | 203 |
| | 1 |
| | 208 |
| | 15 |
| | 170 |
| | 36 |
| | 166 |
| | 20 |
| | 179 |
| | 10 |
|
| Other discontinued lines | 377 |
| | 15 |
| | 395 |
| | 13 |
| | 421 |
| | 10 |
| | 355 |
| | 41 |
| | 357 |
| | 23 |
| | 354 |
| | 25 |
|
| Total Discontinued Lines and Coverages | $ | 1,516 |
|
| $ | 105 |
|
| $ | 1,612 |
|
| $ | 53 |
|
| $ | 1,646 |
|
| $ | 112 |
| |
| Total | | | $ | 1,391 |
|
| $ | 105 |
|
| $ | 1,407 |
|
| $ | 87 |
|
| $ | 1,445 |
|
| $ | 96 |
|
| Underwriting loss | | | $ | (107 | ) | | | | $ | (55 | ) | | | | $ | (115 | ) | | | | $ | (108 | ) | | | | $ | (90 | ) | | | | $ | (99 | ) |
| Reserve reestimates as a % impact on underwriting loss | | | (98.1 | )% | | | | (96.4 | )% | | | | (97.4 | )% | |
Reserve additions for asbestos in 20162019 were primarily related to insured business and claim development, new reported information on insured’s claims, expanded expected exposure periods and other legal settlementssettlement agreements, including insured’s bankruptcy proceedings. Reserve additions for asbestos in 20152018 were primarily related to a settlement with a large insured and morenew reported information, changes in our projections of reported claims than expected. Reserve additions for asbestos in 2014 were primarily related to more reported claims than expected and increased severitysettlement agreements, including claims from certain large insurance programs.bankruptcy proceedings.
Reserve additions for environmental in 2016 and 20142019 were primarily related to greater reported loss activity than expected. There were no significant reservethe reporting of additional clean-up sites. Reserve additions for environmental reserves in 2015.
The table below summarizes reserves and claim2018 were primarily related to expected greater loss activity for asbestos and environmental claims before (Gross) and after (Net) the effects of reinsurance for the past three years.future claims.
| | | Reserves and claim activity before (Gross) and after (Net) the effects of reinsurance | | Reserves and claim activity before (Gross) and after (Net) the effects of reinsurance |
| | | | 2019 | | 2018 | | 2017 |
| ($ in millions, except ratios) | 2016 | | 2015 | | 2014 | | Gross | | Net | | Gross | | Net | | Gross | | Net |
| | Gross | | Net | | Gross | | Net | | Gross | | Net | |
| Asbestos claims | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning reserves | $ | 1,418 |
| | $ | 960 |
| | $ | 1,492 |
| | $ | 1,014 |
| | $ | 1,495 |
| | $ | 1,017 |
| | $ | 1,266 |
| | $ | 866 |
| | $ | 1,296 |
| | $ | 884 |
| | $ | 1,356 |
| | $ | 912 |
|
| Incurred claims and claims expense | 96 |
| | 67 |
| | 51 |
| | 39 |
| | 124 |
| | 87 |
| | 39 |
| | 28 |
| | 89 |
| | 44 |
| | 79 |
| | 61 |
|
| Claims and claims expense paid | (158 | ) | | (115 | ) | | (125 | ) | | (93 | ) | | (127 | ) | | (90 | ) | | (133 | ) | | (84 | ) | | (119 | ) | | (62 | ) | | (139 | ) | | (89 | ) |
| Ending reserves | $ | 1,356 |
|
| $ | 912 |
|
| $ | 1,418 |
|
| $ | 960 |
|
| $ | 1,492 |
|
| $ | 1,014 |
| | $ | 1,172 |
|
| $ | 810 |
|
| $ | 1,266 |
|
| $ | 866 |
|
| $ | 1,296 |
|
| $ | 884 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Annual survival ratio | 8.6 |
| | 7.9 |
| | 11.3 |
| | 10.3 |
| | 11.7 |
| | 11.3 |
| | 8.8 |
| | 9.6 |
| | 10.6 |
| | 14.0 |
| | 9.3 |
| | 9.9 |
|
| 3-year survival ratio | 9.9 |
| | 9.2 |
| | 11.7 |
| | 10.8 |
| | 12.5 |
| | 12.1 |
| | 9.0 |
| | 10.3 |
| | 9.1 |
| | 9.7 |
| | 9.2 |
| | 8.9 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Environmental claims | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning reserves | $ | 222 |
| | $ | 179 |
| | $ | 267 |
| | $ | 203 |
| | $ | 268 |
| | $ | 208 |
| | $ | 209 |
| | $ | 170 |
| | $ | 199 |
| | $ | 166 |
| | $ | 219 |
| | $ | 179 |
|
| Incurred claims and claims expense | 24 |
| | 23 |
| | (13 | ) | | 1 |
| | 22 |
| | 15 |
| | 42 |
| | 36 |
| | 30 |
| | 20 |
| | 9 |
| | 10 |
|
| Claims and claims expense paid | (27 | ) | | (23 | ) | | (32 | ) | | (25 | ) | | (23 | ) | | (20 | ) | | (32 | ) | | (27 | ) | | (20 | ) | | (16 | ) | | (29 | ) | | (23 | ) |
| Ending reserves | $ | 219 |
|
| $ | 179 |
|
| $ | 222 |
|
| $ | 179 |
|
| $ | 267 |
|
| $ | 203 |
| | $ | 219 |
|
| $ | 179 |
|
| $ | 209 |
|
| $ | 170 |
|
| $ | 199 |
|
| $ | 166 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Annual survival ratio | 8.1 |
| | 7.8 |
| | 6.9 |
| | 7.2 |
| | 11.6 |
| | 10.2 |
| | 6.8 |
| | 6.6 |
| | 10.5 |
| | 10.6 |
| | 6.9 |
| | 7.2 |
|
| 3-year survival ratio | 8.1 |
| | 7.8 |
| | 9.3 |
| | 9.0 |
| | 14.1 |
| | 12.7 |
| | 8.1 |
| | 8.1 |
| | 8.4 |
| | 8.2 |
| | 6.9 |
| | 6.9 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Combined environmental and asbestos claims | | | | | | | | | | | | | | | | | | | | | | | |
| Annual survival ratio | 8.5 |
| | 7.9 |
| | 10.4 |
| | 9.7 |
| | 11.7 |
| | 11.1 |
| | 8.4 |
| | 8.9 |
| | 10.6 |
| | 13.3 |
| | 8.9 |
| | 9.4 |
|
| 3-year survival ratio | 9.6 |
| | 8.9 |
| | 11.3 |
| | 10.4 |
| | 12.7 |
| | 12.2 |
| | 8.8 |
| | 9.9 |
| | 9.0 |
| | 9.5 |
| | 8.8 |
| | 8.5 |
|
| Percentage of IBNR in ending reserves | | | 56.7 | % | |
|
| | 56.9 | % | |
|
| | 56.9 | % | | | | 48.8 | % | |
|
| | 49.6 | % | |
|
| | 52.7 | % |
The survival ratio is calculated by taking our ending reserves divided by payments made during the year. This is a commonly used but extremely simplistic and imprecise approach to measuring the adequacy of asbestos and environmental 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, claim payments and the resultant ratio. As payments result in corresponding reserve reductions, survival ratios can be expected to vary over time.
In 2016, 20152019 and 2014,2018, the asbestos and environmental net 3-year survival ratio decreasedincreased due to increasedlower claim payments.payments associated with settlement agreements.
Our net asbestos reserves by type of exposure
The Allstate Corporation 65
2019 Form 10-KClaims and total reserve additions are shown in the following table.Claims Expense Reserves
| | | Net asbestos reserves by type of exposure and total reserve additions | | Net asbestos reserves by type of exposure and total reserve additions |
| | | | December 31, 2019 | | December 31, 2018 | | December 31, 2017 |
| ($ in millions) | December 31, 2016 | | December 31, 2015 | | December 31, 2014 | | Active policy-holders | | Net reserves | | % of reserves | | Active policy-holders | | Net reserves | | % of reserves | | Active policy-holders | | Net reserves | | % of reserves |
| | Active policy-holders | | Net reserves | | % of reserves | | Active policy-holders | | Net reserves | | % of reserves | | Active policy-holders | | Net reserves | | % of reserves | |
| Direct policyholders: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Primary | 51 |
| | $ | 9 |
| | 1 | % | | 48 |
| | $ | 10 |
| | 1 | % | | 44 |
| | $ | 8 |
| | 1 | % | | 58 |
| | $ | 12 |
| | 1 | % | | 51 |
| | $ | 12 |
| | 1 | % | | 48 |
| | $ | 10 |
| | 1 | % |
| Excess | 297 |
| | 266 |
| | 29 |
| | 298 |
| | 248 |
| | 26 |
| | 296 |
| | 265 |
| | 26 |
| | 299 |
| | 292 |
| | 36 |
| | 295 |
| | 309 |
| | 36 |
| | 296 |
| | 308 |
| | 35 |
|
| Total | 348 |
|
| 275 |
|
| 30 |
|
| 346 |
|
| 258 |
|
| 27 |
|
| 340 |
|
| 273 |
|
| 27 |
| |
| Total case reserves | | | 357 |
|
| 304 |
|
| 37 |
|
| 346 |
|
| 321 |
|
| 37 |
|
| 344 |
|
| 318 |
|
| 36 |
|
| Assumed reinsurance | | | 125 |
| | 14 |
| |
| | 156 |
| | 16 |
| | | | 166 |
| | 16 |
| | | | 127 |
| | 16 |
| | | | 138 |
| | 16 |
| | | | 117 |
| | 13 |
|
| IBNR | | | 512 |
| | 56 |
| |
| | 546 |
| | 57 |
| | | | 575 |
| | 57 |
| | | | 379 |
| | 47 |
| | | | 407 |
| | 47 |
| | | | 449 |
| | 51 |
|
| Total net reserves | | | $ | 912 |
| | 100 | % | | | | $ | 960 |
| | 100 | % | | | | $ | 1,014 |
| | 100 | % | | | | $ | 810 |
| | 100 | % | | | | $ | 866 |
| | 100 | % | | | | $ | 884 |
| | 100 | % |
| Total reserve additions | | | $ | 67 |
| | | | | | $ | 39 |
| | | | | | $ | 87 |
| | | | | | $ | 28 |
| | | | | | $ | 44 |
| | | | | | $ | 61 |
| | |
During the last three years, 45 direct primary and excess policyholders reported new claims, and claims of 51 policyholdersAt December 31, 2019, there were closed, decreasing the number of357 active policyholders with open asbestos claims.
| |
| • | Active policyholders increased by 11 in 2019, including 16 policyholders reporting asbestos claims for the first time and the closing of all claims for 5 policyholders. |
Active policyholders increased by 6 during the period. There was a net increase of 2 policyholders in 2016,2018, including 17 new13 policyholders reporting new asbestos
claims for the first time and the closing of 15 policyholders’ claims. There was a net increase of 6 policyholders in 2015, including 15 new policyholders reporting newall claims and the closing of 9 policyholders’ claims. There was a net decrease of 14 in 2014, including 13 new policyholders reporting new claims and the closing of 27 policyholders’ claims.for 11 policyholders.
IBNR net reserves decreased $34$28 million as of December 31, 20162019 compared to December 31, 2015. As of December 31, 2016, IBNR represented 56% of total net asbestos reserves, compared to 57% as of December 31, 2015 and 2014.2018. IBNR provides for reserve development of known claims and future reporting of additional unknown claims from current policyholders and ceding companies.
Pending, new, total closed and closed without payment claims for asbestos and environmental exposures for the years ended December 31 are summarized in the following table.
| | Claims counts for asbestos and environmental exposures
| | Claims counts for asbestos and environmental exposures
|
| | | | | | | | For the years ended December 31, |
| Number of claims | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
| Asbestos | | | | | | | | | | | |
| Pending, beginning of year | 7,151 |
| | 7,306 |
| | 7,444 |
| | 6,440 |
| | 6,659 |
| | 6,883 |
|
| New | 477 |
| | 530 |
| | 727 |
| | 332 |
| | 427 |
| | 406 |
|
| Closed | (745 | ) | | (685 | ) | | (865 | ) | | (551 | ) | | (646 | ) | | (630 | ) |
| Pending, end of year | 6,883 |
|
| 7,151 |
|
| 7,306 |
| | 6,221 |
|
| 6,440 |
|
| 6,659 |
|
| Closed without payment | 373 |
| | 398 |
| | 433 |
| | 392 |
| | 446 |
| | 377 |
|
| | | | | | | | | | | | |
| Environmental | | | | | | | | | | | |
| Pending, beginning of year | 3,504 |
| | 3,552 |
| | 3,717 |
| | 3,229 |
| | 3,351 |
| | 3,399 |
|
| New | 292 |
| | 347 |
| | 381 |
| | 273 |
| | 335 |
| | 375 |
|
| Closed | (397 | ) | | (395 | ) | | (546 | ) | | (323 | ) | | (457 | ) | | (423 | ) |
| Pending, end of year | 3,399 |
|
| 3,504 |
|
| 3,552 |
| | 3,179 |
|
| 3,229 |
|
| 3,351 |
|
| Closed without payment | 211 |
| | 254 |
| | 369 |
| | 197 |
| | 320 |
| | 299 |
|
Property-Liability reinsurance ceded For Allstate Protection, weReinsurance and indemnification programs We utilize reinsurance to reduce exposure to catastrophe risk and manage capital, and to support the required statutory surplus and the insurance financial strength ratings of certain subsidiaries such as Castle Key Insurance Company (“CKIC”) and Allstate New Jersey Insurance Company.Company (“ANJ”). We purchase significant reinsurance to manage our aggregate countrywide exposure to an acceptable level. The price and terms of reinsurance and the credit quality of the reinsurer are considered in the purchase process, along with whether the price can be appropriately reflected in the costs that are considered in setting future rates
charged to policyholders. We also participate in various reinsurance mechanisms, including industry pools and facilities, which are backed by the financial resources of the property-liability insurance company market participants, and have historicallyalso purchased reinsurance to mitigate exposures in our long-tail liability lines, including environmental, asbestos and other discontinued lines exposures.as well as our commercial lines, including shared economy. We retain primary liability as a direct insurer for all risks ceded to reinsurers. The MCCA providesalso participate in various indemnification for losses over a retention levelmechanisms, including state-based industry pool or facility programs mandating participation by insurers offering certain coverage in their state and under the federal government National Flood Insurance Program (“NFIP”) the Federal Government pays all covered claims and certain qualifying claim expenses.
Our reinsurance recoverable balances are shown in the following table as of December 31, net. See Note 10 of the allowance we have establishedconsolidated financial statements for uncollectible amounts.additional details on these programs.
Claims and Claims Expense Reserves 2019 Form 10-K
|
| | | | | | | | | | | | | |
($ in millions)
| S&P financial strength rating (1) | | Reinsurance recoverable on paid and unpaid claims, net | |
| | | | 2016 | | | 2015 | |
| Industry pools and facilities | | | | | | | |
| MCCA | N/A | | $ | 4,949 |
| (2 | ) | | $ | 4,664 |
| (2 | ) |
| New Jersey Property-Liability Insurance Guaranty Association (“PLIGA”) | N/A | | 506 |
| | | 500 |
| |
| North Carolina Reinsurance Facility | N/A | | 81 |
| | | 71 |
| |
| NFIP | N/A | | 77 |
| | | 27 |
| |
| Other | | | 6 |
| | | 3 |
| |
| Subtotal | | | 5,619 |
| | | 5,265 |
| |
| | | | | | | | |
| Other reinsurance | | | | | | | |
| Lloyd’s of London (“Lloyd’s”) | A+ | | 174 |
| | | 183 |
| |
| Westport Insurance Corporation | AA- | | 61 |
| | | 62 |
| |
| New England Reinsurance Corporation | N/A | | 35 |
| | | 32 |
| |
| Clearwater Insurance Company | N/A | | 27 |
| | | 28 |
| |
| R&Q Reinsurance Company | N/A | | 23 |
| | | 26 |
| |
| Bedivere Insurance Company | N/A | | 23 |
| | | 23 |
| |
| Other, including allowance for future uncollectible reinsurance recoverables | | | 315 |
| | | 360 |
| |
| Subtotal | | | 658 |
| | | 714 |
| |
| Total Property-Liability | | | $ | 6,277 |
| | | $ | 5,979 |
| |
|
| | | | | | | | | | |
| Reinsurance and indemnification recoverables, net of the allowance established for uncollectible amounts |
| | | S&P financial strength rating (1) | | Reinsurance or indemnification recoverable on paid and unpaid claims, net |
| ($ in millions) | | | 2019 | | 2018 |
| Indemnification programs | | | | | | |
| State-based industry pool or facility programs | | | | | | |
MCCA (2) | | N/A | | $ | 5,499 |
| | $ | 5,400 |
|
| New Jersey Property-Liability Insurance Guaranty Association (“PLIGA”) | | N/A | | 446 |
| | 461 |
|
| North Carolina Reinsurance Facility | | N/A | | 78 |
| | 86 |
|
| Florida Hurricane Catastrophe Fund (“FHCF”) | | N/A | | 52 |
| | 104 |
|
| Other | | | | 9 |
| | 9 |
|
Federal Government - NFIP | | N/A | | 25 |
| | 31 |
|
| Subtotal | | | | 6,109 |
| | 6,091 |
|
| | | | | | | |
| Catastrophe reinsurance recoverables | | | | | | |
| Renaissance Reinsurance Limited | | A+ | | 27 |
| | 65 |
|
| Swiss Reinsurance America Corporation | | AA- | | 15 |
| | 39 |
|
| Everest Reinsurance Company | | A+ | | 15 |
| | 33 |
|
| Other | | | | 179 |
| | 416 |
|
| Subtotal | | | | 236 |
|
| 553 |
|
| | | | | | | |
Other reinsurance recoverables (3) | | | | | | |
Lloyd’s of London (“Lloyd’s”) (4) | | A+ | | 158 |
| | 165 |
|
| Aleka Insurance Inc. | | N/A | | 115 |
| | 37 |
|
| Westport Insurance Corporation | | AA- | | 55 |
| | 60 |
|
| TIG Insurance Company | | N/A | | 38 |
| | 35 |
|
| Other, including allowance for future uncollectible recoverables | | | | 293 |
| | 307 |
|
| Subtotal | | | | 659 |
| | 604 |
|
| Total Property-Liability | | | | 7,004 |
| | 7,248 |
|
| Service Businesses | | | | 20 |
| | 18 |
|
| Total | | | | $ | 7,024 |
| | $ | 7,266 |
|
| |
(1) | N/A reflects no S&P Global Ratings (“S&P”) rating available. |
| |
(2) | As of December 31, 20162019 and 2015,2018, MCCA includes $28$39 million and $29$30 million of reinsurance recoverable on paid claims, respectively, and $4.92$5.46 billion and $4.63$5.37 billion of reinsurance recoverable on unpaid claims, respectively. |
| |
(3) | Other reinsurance recoverables primarily relate to asbestos, environmental and other liability exposures as well as commercial lines, including shared economy. |
| |
(4) | As of December 31, 2019, case reserves for Lloyd’s were 68% of the reinsurance recoverable for unpaid claims. |
Reinsurance and indemnification recoverables include an estimate of the amount of property-liability insurance claims and claims expense reserves that are ceded under the terms of the reinsurance agreements, including incurred but not reported unpaid losses. We calculate our ceded reinsurance estimateand indemnification estimates based on the terms of each applicable reinsurance agreement, including an estimate of how IBNR losses will ultimately be ceded under the agreement. We also consider other limitations and coverage exclusions under our reinsurance agreements. Accordingly, our estimate of reinsurance recoverables is subject to similar risks and uncertainties as our estimate of reserves for property-liability claims and claims expense. We believe the recoverables are appropriately established; however, as our underlying reserves continue to develop, the amount ultimately recoverable may vary from amounts currently recorded. We regularly evaluate the reinsurers and the respective amounts recoverable,of our reinsurance recoverables, and a provision for uncollectible reinsurance recoverables is recorded, if needed. The establishment of reinsurance recoverables and the related allowance for
uncollectible reinsurance is also an inherently uncertain process involving estimates. Changes in estimates could result in additional changes to the Consolidated Statements of Operations.
Indemnification recoverables are considered collectible based on the industry pool and facility enabling legislation and the Company has not had any credit losses related to these programs and we do not anticipate losses in the foreseeable future. We also have not experienced credit losses on our catastrophe reinsurance programs, which include highly rated reinsurers.
The allowance for uncollectible reinsurance primarily relates to other reinsurance programs primarily related to our Discontinued Lines and Coverages reinsurance recoverables andsegment. This allowance was $84$60 million and $80$65 million as of December 31, 20162019 and 2015, respectively. The allowance for Discontinued Lines and Coverages represents 13.3% and 11.9% of the related reinsurance recoverable balances as of December 31, 2016 and 2015,2018, respectively. The allowance is based upon our ongoing review of amounts outstanding, length of collection periods, changes in reinsurer credit standing, and other relevant factors. In addition, in the ordinary course of
The Allstate Corporation 67
2019 Form 10-KClaims and Claims Expense Reserves
business, we may become involved in coverage disputes with certain of our reinsurers whichthat may ultimately result in lawsuits and arbitrations brought by or against such reinsurers to determine the parties’ rights and obligations under the various reinsurance agreements. We employ dedicated specialists to manage reinsurance collections and disputes. We also consider recent developments in commutation activity between reinsurers and cedents, and recent trends in arbitration and litigation outcomes in disputes between cedents and reinsurers in seeking to maximize our reinsurance recoveries.
Adverse developments in the insurance industry have led to a decline in the financial strength of some of our reinsurance carriers, causing amounts recoverable from them and future claims ceded to them to be considered a higher risk. There has also been consolidation activity in the industry, which causes reinsurance risk across the industry to be concentrated among fewer companies. In addition, some companies have segregated asbestos, environmental, and other discontinued lines exposures into separate legal entities with dedicated capital. Regulatory bodies in certain cases have supported these actions. We are unable to determine the impact, if any, that these developments will have on the collectability of reinsurance recoverables in the future.
For a detailed description offurther details related to our reinsurance and indemnification recoverables, see the MCCA, PLIGARegulation section in Part I and Lloyd’s, see Note 10 of the consolidated financial statements. As of December 31, 2016, other than the recoverable balances listed in the table above, no other amount due or estimated to be due from any single Property-Liability reinsurer was in excess of $22 million.
The effects of reinsurance |
| | | | | | | | | | | | | |
Effects of reinsurance ceded and indemnification programs on our premiums earned and claims and claims expense
|
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Allstate Protection - Premiums | | | | | | |
| Indemnification programs | | | | | | |
| State-based industry pool or facility programs | | | | | | |
| MCCA | | $ | 89 |
| | $ | 77 |
| | $ | 73 |
|
| PLIGA | | 8 |
| | 9 |
| | 9 |
|
| FHCF | | 9 |
| | 10 |
| | 11 |
|
| Other | | 85 |
| | 90 |
| | 108 |
|
Federal Government - NFIP | | 258 |
| | 258 |
| | 263 |
|
| Catastrophe reinsurance | | 377 |
| | 344 |
| | 344 |
|
| Other reinsurance programs | | 121 |
| | 54 |
| | — |
|
| Total Allstate Protection | | 947 |
| | 842 |
| | 808 |
|
| Discontinued Lines and Coverages | | — |
| | — |
| | — |
|
| Total Property-Liability | | 947 |
| | 842 |
| | 808 |
|
| Service Businesses | | 175 |
| | 174 |
| | 163 |
|
| Total effect on premiums earned | | $ | 1,122 |
| | $ | 1,016 |
| | $ | 971 |
|
| | | | | | | |
| Allstate Protection - Claims | | | | | | |
| Indemnification programs | | | | | | |
| State-based industry pool or facility programs | | | | | | |
| MCCA | | $ | 208 |
| | $ | 233 |
| | $ | 410 |
|
| PLIGA | | 3 |
| | (6 | ) | | 3 |
|
| FHCF | | 31 |
| | 148 |
| | 19 |
|
| Other | | 67 |
| | 90 |
| | 89 |
|
Federal Government - NFIP | | 150 |
| | 118 |
| | 1,116 |
|
Catastrophe reinsurance | | (166 | ) | (1 | ) | 604 |
| | 46 |
|
| Other reinsurance programs | | 94 |
| | 40 |
| | — |
|
| Total Allstate Protection | | 387 |
|
| 1,227 |
|
| 1,683 |
|
| Discontinued Lines and Coverages | | 39 |
| | 57 |
| | 35 |
|
| Total Property-Liability | | 426 |
| | 1,284 |
| | 1,718 |
|
| Service Businesses | | 98 |
| | 94 |
| | 89 |
|
| Total effect on claims and claims expense | | $ | 524 |
|
| $ | 1,378 |
|
| $ | 1,807 |
|
| |
(1) | Decline reflects reestimates in claims and claims expense related to the 2018 Camp Fire. |
In 2019 and 2018, ceded on our property-liability premiums earned increased primarily due to increased activity within our shared economy business and catastrophe reinsurance premium rates. In 2019, ceded claims and claims expense for the years ended December 31 are summarized in the following table.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Ceded property-liability premiums earned | $ | 987 |
| | $ | 1,006 |
| | $ | 1,030 |
|
| | | | | | |
| Ceded property-liability claims and claims expense | | | | | |
| Industry pool and facilities | | | | | |
| MCCA | $ | 386 |
| | $ | 337 |
| | $ | 1,042 |
|
| NFIP | 537 |
| | 120 |
| | 38 |
|
| PLIGA | 20 |
| | 9 |
| | 158 |
|
| Other | 78 |
| | 78 |
| | 69 |
|
| Subtotal industry pools and facilities | 1,021 |
|
| 544 |
|
| 1,307 |
|
| Other | 95 |
| | 58 |
| | 86 |
|
| Ceded property-liability claims and claims expense | $ | 1,116 |
|
| $ | 602 |
|
| $ | 1,393 |
|
In 2016, ceded property-liability premiums earnedexpenses decreased $19$854 million, primarily due to decreasedlower amounts related to the catastrophe reinsurance premium rates and a decrease in policies written for the NFIP.program, partially offset by increased activity with our shared economy business. In 2015,2018, ceded property-liability premiums earned decreased $24 million, primarily due to decreased reinsurance premium rates and a decrease in policies written for the NFIP and the MCCA. MCCA ceded premiums earned were $73 million, $84 million and $99 million in 2016, 2015 and 2014, respectively.
Ceded property-liability claims and claims expenses increased in 2016decreased $429 million, primarily due to higher amounts cededrelated to the NFIP. Ceded property-liability claims and claims expense decreasedNFIP in 2015 primarily due to lower reserve increases for the MCCA and PLIGA programs.
Reserve increases in the PLIGA program in 2016 and 2015 are attributable to limited personal injury protection coverage on policies written prior to 2004. The ceded claims reflect increased longer term paid loss trends due to increased costs of medical
care and increased longevity of claimants. New claims for this cohort of policies are unlikely and pending claims are expected to decline.2017.
Our claim reserve development experience is similar toconsistent with the MCCAMCCA’s overall experience with
reported and pending claims increasing in recent years. Moreover, theThe MCCA has reported severity increasing with nearly 60%55% of reimbursements for attendant and residential care services. The Governor of Michigan signed new legislation on May 30, 2019 to reform Michigan’s unique no-fault motor vehicleauto insurance law provides unlimited lifetime coverage for medical expenses resulting from motor vehicle accidents. The reserve increases insystem. For further discussion of these items, see Regulation, Indemnification Programs and Note 10 of the MCCA program are attributable to an increased recognition of longer term paid loss trends. The paid loss trends are rising due to increased costs in medicalconsolidated financial statements.
Claims and attendant care and increased longevity of claimants. As a result of continuing to originate motor vehicle policies in Michigan with unlimited personal injury protection coverage, we expect the number of MCCA covered claims and losses to increase each year.Claims Expense Reserves 2019 Form 10-K
The table below summarizes reserves and claim activity for Michigan personal injury protection claims before (gross) and after (net) the effects of MCCA reinsurance for the years ended December 31.
| | Michigan personal injury protection reserve and claim activity before and after the effects of MCCA recoverables
| | Michigan personal injury protection reserve and claim activity before and after the effects of MCCA recoverables
|
| | | For the years ended December 31,
|
| | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 |
| ($ in millions) | 2016 | | 2015 | | 2014 | | Gross | | Net | | Gross | | Net | | Gross | | Net |
| | Gross | | Net | | Gross | | Net | | Gross | | Net | |
| Beginning reserves | $ | 5,121 |
| | $ | 486 |
| | $ | 4,804 |
| | $ | 417 |
| | $ | 3,798 |
| | $ | 365 |
| | $ | 5,975 |
| | $ | 605 |
| | $ | 5,799 |
| | $ | 565 |
| | $ | 5,443 |
| | $ | 522 |
|
| Incurred claims and claims expense-current year | 578 |
| | 214 |
| | 526 |
| | 200 |
| | 420 |
| | 178 |
| | 446 |
| | 202 |
| | 449 |
| | 189 |
| | 513 |
| | 195 |
|
| Incurred claims and claims expense-prior years | 8 |
| | (15 | ) | | 37 |
| | 26 |
| | 819 |
| | 19 |
| | (16 | ) | | 20 |
| | 9 |
| | 35 |
| | 117 |
| | 25 |
|
Claims and claims expense paid-current year (1) | (60 | ) | | (58 | ) | | (56 | ) | | (55 | ) | | (46 | ) | | (45 | ) | | (55 | ) | | (53 | ) | | (52 | ) | | (51 | ) | | (54 | ) | | (53 | ) |
Claims and claims expense paid-prior years (1) | (204 | ) | | (105 | ) | | (190 | ) | | (102 | ) | | (187 | ) | | (100 | ) | | (244 | ) | | (127 | ) | | (230 | ) | | (133 | ) | | (220 | ) | | (124 | ) |
Ending reserves (2) | $ | 5,443 |
| | $ | 522 |
| | $ | 5,121 |
| | $ | 486 |
| | $ | 4,804 |
| | $ | 417 |
| | $ | 6,106 |
| | $ | 647 |
| | $ | 5,975 |
| | $ | 605 |
| | $ | 5,799 |
| | $ | 565 |
|
| |
(1) | Paid claims and claims expenses reported in the table for the current and prior years, recovered from the MCCA totaled $101$119 million, $89$98 million and $88$97 million in 2016, 20152019, 2018 and 2014,2017, respectively. |
| |
(2) | Gross reserves for the year ended December 31, 2019, comprise 85% case reserves and 15% IBNR. Gross reserves for the year ended December 31, 2018, comprise 88% case reserves and 12% IBNR. Gross reserves for the year ended December 31, 20162017 comprise 85% case reserves (claims with a file review conducted) and 15% IBNR. Reserves for the years ended December 31, 2015 and 2014, comprise 86%87% case reserves and 14%13% IBNR. The MCCA does not require member companies to report ultimate case reserves. |
Pending MCCA claims differ from most personal lines insurance pending claims as other personal lines policies have coverage limits and incurred claims settle in shorter periods. Claims are considered pending as long as payments are continuing pursuant to an outstanding MCCA claim, which can be for a claimant’s lifetime. ClaimsMany of these injuries are catastrophic in
nature, resulting in serious permanent disabilities that require attendant and residential care for periods that may span decades. A significant portion of the ultimate incurred claim reserves and the recoverables can be attributed to a small number of catastrophic claims that occurred more than 5five years ago and continue to be paid often includepay lifetime benefits. Pending, new and closed claims for Michigan personal injury protection exposures, including those covered and not covered by the MCCA reinsurance, for the years ended December 31 are summarized in the following table.
| | | Number of claims | 2016 | | 2015 | | 2014 | |
Pending, new and closed claims for Michigan personal injury protection exposures
| | Pending, new and closed claims for Michigan personal injury protection exposures
|
| | | | For the years ended December 31, |
Number of claims (1) | | | 2019 | | 2018 | | 2017 |
| Pending, beginning of year | 5,127 |
| | 4,936 |
| | 4,684 |
| | 4,812 |
| | 4,983 |
| | 5,388 |
|
| New | 9,577 |
| | 8,956 |
| | 8,620 |
| | 7,807 |
| �� | 7,858 |
| | 8,494 |
|
| Closed | (9,316 | ) | | (8,765 | ) | | (8,368 | ) | | (7,677 | ) | | (8,029 | ) | | (8,899 | ) |
| Pending, end of year | 5,388 |
|
| 5,127 |
|
| 4,936 |
| | 4,942 |
|
| 4,812 |
|
| 4,983 |
|
| |
(1) | Total claims includes those covered and not covered by the MCCA indemnification. |
As of December 31, 2016,2019, approximately 1,3301,600 of our pending claims have been reported to the MCCA, of which approximately 60%55% represents claims that occurred more than 5 years ago. There are 7573 Allstate brand claims with reserves in excess of $15 million as of December 31, 20162019, which comprise approximately 40%32% of the gross ending reserves in the table above. As a result, significant developments with a single claimant can result in volatility in prior year incurred claims.
Reinsurance recoverable on paid and unpaid claims including IBNR as of December 31, 2016 and 2015 includes $4.95 billion and $4.66 billion, respectively, from the MCCA.
Intercompany reinsuranceWe enter into certain intercompany insurance and reinsurance transactions for the Property-Liability operations in order to maintain underwriting control and manage 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.
Catastrophe reinsurance
Our catastrophe reinsurance program is designed utilizing our risk management methodology, to address our exposure to catastrophes nationwide.nationwide, utilizing our risk management methodology. Our program is designed to provide reinsurance protection for catastrophes resulting from multiple perils including hurricanes, windstorms, hail, tornadoes, earthquakes, wildfires, and fires following earthquakes, earthquakes and wildfires.earthquakes. These reinsurance agreements are part of our catastrophe management strategy, which is intended to provide our shareholders an acceptable return on the risks assumed in our property business, and to reduce variability of earnings, while providing protection to our customers.
We anticipate completing the placement of our 20172020 nationwide catastrophe reinsurance program in the second quarter of 2017.2020. We expect the program will be similar to our 20162019 nationwide catastrophe reinsurance program.program but will evaluate opportunities to improve the economic terms and conditions. For further details of the existing 20162019 program, see Note 10 of the consolidated financial statements.
The Allstate Corporation 69
ALLSTATE FINANCIAL 2016 HIGHLIGHTS2019 Form 10-KAllstate Life
Allstate Life Segment
Allstate Life offers traditional, interest-sensitive and variable life insurance. In 2019, Allstate Life represented 4.4% of total revenue, 1.3% of total PIF and 7.5% of total adjusted net income. Our target customers are middle market consumers with family and financial protection needs. For additional information on our strategy and outlook, see Part I, Item 1. Business - Strategy and Segment Information. |
| | | | | | | | | | | | |
| Summarized financial information |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Revenues | | | | | | |
| Premiums and contract charges | | $ | 1,343 |
| | $ | 1,315 |
| | $ | 1,280 |
|
| Other revenue | | 125 |
| | 119 |
| | 114 |
|
| Net investment income | | 514 |
| | 505 |
| | 489 |
|
| Realized capital gains and losses | | 1 |
| | (14 | ) | | 5 |
|
| Total revenues | | 1,983 |
| | 1,925 |
| | 1,888 |
|
| | | | | | | |
| Costs and expenses | | | | | | |
| Contract benefits | | (855 | ) | | (809 | ) | | (765 | ) |
| Interest credited to contractholder funds | | (299 | ) | | (285 | ) | | (282 | ) |
| Amortization of DAC | | (173 | ) | | (132 | ) | | (134 | ) |
| Operating costs and expenses | | (354 | ) | | (361 | ) | | (342 | ) |
| Restructuring and related charges | | (2 | ) | | (3 | ) | | (2 | ) |
| Total costs and expenses | | (1,683 | ) | | (1,590 | ) | | (1,525 | ) |
| | | | | | | |
| Income tax (expense) benefit | | (53 | ) | | (75 | ) | | 226 |
|
| Net income applicable to common shareholders | | $ | 247 |
| | $ | 260 |
| | $ | 589 |
|
| | | | | | | |
| Adjusted net income | | $ | 261 |
| | $ | 295 |
| | $ | 259 |
|
| Realized capital gains and losses, after-tax | | — |
| | (11 | ) | | 2 |
|
| Valuation changes on embedded derivatives not hedged, after-tax | | (9 | ) | | — |
| | — |
|
| DAC and DSI amortization related to realized capital gains and losses and valuation changes on embedded derivatives not hedged, after-tax | | (5 | ) | | (8 | ) | | (10 | ) |
| Tax Legislation (expense) benefit | | — |
| | (16 | ) | | 338 |
|
| Net income applicable to common shareholders | | $ | 247 |
| | $ | 260 |
| | $ | 589 |
|
| | | | | | | |
| Reserve for life-contingent contract benefits as of December 31 | | $ | 2,736 |
| | $ | 2,677 |
| | $ | 2,636 |
|
| | | | | | | |
| Contractholder funds as of December 31 | | $ | 7,805 |
| | $ | 7,656 |
| | $ | 7,608 |
|
| | | | | | | |
| Policies in force as of December 31 by distribution channel (in thousands) | | | | | �� | |
| Allstate agencies | | 1,816 |
| | 1,831 |
| | 1,822 |
|
| Closed channels | | 107 |
| | 114 |
| | 123 |
|
| Total | | 1,923 |
| | 1,945 |
| | 1,945 |
|
Net income applicable to common shareholders was $391 decreased 5.0% or $13 million in 20162019 compared to $6632018. 2018 results include a tax expense of $16 million related to the Tax Legislation.
Adjusted net income decreased 11.5% or $34 million in 2015.
Premiums and contract charges on underwritten products, including traditional life, interest-sensitive life and accident and health insurance, totaled $2.26 billion in 2016, an increase of 5.5% from $2.14 billion in 2015.
Investments totaled $36.84 billion as of December 31, 2016, reflecting an increase of $48 million from $36.79 billion as of December 31, 2015. Net investment income decreased 8.0% to $1.73 billion in 2016 from $1.88 billion in 2015.
Net realized capital losses totaled $81 million in 20162019 compared to net realized capital gains of $267 million in 2015.
Contractholder funds totaled $20.26 billion as of December 31, 2016, reflecting a decrease of $1.04 billion from $21.30 billion as of December 31, 2015.
On April 1, 2014, we sold Lincoln Benefit Life Company’s (“LBL”) life insurance business generated through independent master brokerage agencies, and all of LBL’s deferred fixed annuity and long-term care insurance business to Resolution Life Holdings, Inc. Therefore, 2014 includes LBL’s results for one quarter.
ALLSTATE FINANCIAL SEGMENT
Overview and strategy The Allstate Financial segment sells traditional, interest-sensitive and variable life insurance and voluntary accident and health insurance products. We serve our customers through Allstate exclusive agencies and exclusive financial specialists, and workplace enrolling independent agents. We previously offered and continue to have in force fixed annuities such as deferred and immediate annuities. We also previously offered institutional products consisting of funding agreements sold to unaffiliated trusts that used them to back medium-term notes. There are no institutional products outstanding as of December 31, 2016. Allstate exclusive agencies and exclusive financial specialists have a portfolio of non-proprietary products to sell, including mutual funds, fixed and variable annuities, disability insurance and long-term care insurance, to help meet customer needs.
Allstate Financial brings value to The Allstate Corporation in three principal ways: through improving the economics of the Protection business through increased customer loyalty and deepened customer relationships based on cross selling Allstate Financial products to existing customers, bringing new customers to Allstate, and profitable growth. Allstate Financial’s strategy is focused on expanding Allstate customer relationships, growing the number of products delivered to customers through Allstate exclusive agencies and Allstate Benefits (our workplace distribution business), and managing the runoff of our in-force annuity products to improve returns.
Allstate Financial outlook
Our growth initiatives for life insurance continue to focus on increasing the number of customers served through our proprietary Allstate agencies. This includes positioning Allstate exclusive agencies and exclusive financial specialists as trusted advisors.
The Allstate Benefits strategy for growth includes expansion in the national accounts market and expanding in targeted geographic locations, including Canada, for increased new sales. We are investing in new generation enrollment and administrative technology to improve our customer experience and modernize our operating model.
We will continue to focus on improving long-term economic returns on our in-force annuity products and managing the impacts of historically low interest rates. We expect lower investment spread on annuities due to the continuing managed reduction in contractholder funds and a continuation of our asset allocation strategy for long-term immediate annuities to include more performance-based investments. A greater proportion of the return on these investments is derived from idiosyncratic asset or operating performance. While we anticipate higher returns on these investments over time, the investment income can vary significantly between periods.
Allstate Financial has limitations on the amount of dividends Allstate Financial companies can pay without prior insurance department approval.
We continue to review strategic options to reduce exposure and improve returns of the spread-based businesses. As a result, we may take additional operational and financial actions that offer return improvement and risk reduction opportunities.
Summary analysis Summarized financial data for the years ended December 31 is presented in the following table. |
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Revenues | | | | | |
| Life and annuity premiums and contract charges | $ | 2,275 |
| | $ | 2,158 |
| | $ | 2,157 |
|
| Net investment income | 1,734 |
| | 1,884 |
| | 2,131 |
|
| Realized capital gains and losses | (81 | ) | | 267 |
| | 144 |
|
| Total revenues | 3,928 |
|
| 4,309 |
|
| 4,432 |
|
| | | | | | |
| Costs and expenses | | | | | |
| Life and annuity contract benefits | (1,857 | ) | | (1,803 | ) | | (1,765 | ) |
| Interest credited to contractholder funds | (726 | ) | | (761 | ) | | (919 | ) |
| Amortization of DAC | (283 | ) | | (262 | ) | | (260 | ) |
| Operating costs and expenses | (497 | ) | | (472 | ) | | (466 | ) |
| Restructuring and related charges | (1 | ) | | — |
| | (2 | ) |
| Total costs and expenses | (3,364 | ) |
| (3,298 | ) |
| (3,412 | ) |
| | | | | | |
| Gain (loss) on disposition of operations | 5 |
| | 3 |
| | (90 | ) |
| Income tax expense | (178 | ) | | (351 | ) | | (299 | ) |
| Net income applicable to common shareholders | $ | 391 |
|
| $ | 663 |
|
| $ | 631 |
|
| | | | | | |
| Life insurance | $ | 230 |
| | $ | 248 |
| | $ | 242 |
|
| Accident and health insurance | 85 |
| | 85 |
| | 105 |
|
| Annuities and institutional products | 76 |
| | 330 |
| | 284 |
|
| Net income applicable to common shareholders | $ | 391 |
|
| $ | 663 |
|
| $ | 631 |
|
| | | | | | |
| Allstate Life | $ | 219 |
| | $ | 229 |
| | $ | 232 |
|
| Allstate Benefits | 96 |
| | 104 |
| | 115 |
|
| Allstate Annuities | 76 |
| | 330 |
| | 284 |
|
| Net income applicable to common shareholders | $ | 391 |
|
| $ | 663 |
|
| $ | 631 |
|
| | | | | | |
| Investments as of December 31 | $ | 36,840 |
| | $ | 36,792 |
| | $ | 38,809 |
|
Net income applicable to common shareholders was $391 million in 2016 compared to $663 million in 2015. The decrease was2018, primarily due to net realized capital losses in 2016 comparedhigher amortization of DAC related to net realized capital gains in 2015our annual review of assumptions and lower net investment income,higher contract benefits, partially
offset by higher premiums and contract charges. The decrease in net income was primarily concentrated in Allstate Annuities.
Net income applicable to common shareholders was $663 million in 2015 compared to $631 million in 2014. The increase primarily relates to higher net realized capital gains and the loss on disposition related to the LBL sale in 2014, partially offset by lower net investment income, and the reduction in business due to the April 1, 2014 sale of LBL. Net income applicable to common shareholders in 2014 included an after-tax loss on disposition of LBL totaling $60 million. Excluding the loss on disposition as well as the net income of the LBL business for first quarter 2014 oflower operating costs and expenses.
Premiums and contract chargesincreased 2.1% or $28 million net income applicablein 2019 compared to common shareholders in 2015 was comparable to 2014,2018, primarily due to higher net realized capital gains, highergrowth in traditional life and annuity premiums and contract charges, and lower interest credited to contractholder funds offsetting lower net investment income and higher life and annuity contract benefits.
Analysisinsurance. Approximately 85% of revenues Total revenues decreased 8.8% or $381 million in 2016 compared to 2015, primarily due to net realized capital losses in 2016 compared to net realized capital gains in 2015 and lower net investment income, partially offset by higher premiums and contract charges. Total revenues decreased 2.8% or $123 million in 2015 compared to 2014. Excluding results of the LBL business for first quarter 2014 of $211 million, total revenues increased 2.1% or $88 million in 2015 compared to 2014, primarily due to higher net realized capital gains and higher life and annuity premiums and contract charges, partially offset by lower net investment income.
Life and annuity premiums and contract charges Premiums represent revenues generated fromAllstate Life’s traditional life insurance accident and health insurance, and immediate annuities with life contingencies that have significant mortality or morbidity risk. Contract charges are revenues generated from interest-sensitive and variablepremium relates to term life insurance and fixed annuities for which deposits are classified as contractholder funds or separate account liabilities. Contract charges are assessed against the contractholder account values for maintenance, administration, cost of insurance and surrender prior to contractually specified dates.products.
The following table summarizes life and annuity premiums and contract charges by product for the years ended December 31.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Underwritten products | | | | | |
| Traditional life insurance premiums | $ | 533 |
| | $ | 505 |
| | $ | 476 |
|
| Accident and health insurance premiums | 2 |
| | 2 |
| | 8 |
|
| Interest-sensitive life insurance contract charges | 715 |
| | 716 |
| | 781 |
|
| Subtotal — Allstate Life | 1,250 |
|
| 1,223 |
|
| 1,265 |
|
| Traditional life insurance premiums | 40 |
| | 37 |
| | 35 |
|
| Accident and health insurance premiums | 857 |
| | 778 |
| | 736 |
|
| Interest-sensitive life insurance contract charges | 114 |
| | 106 |
| | 98 |
|
| Subtotal — Allstate Benefits | 1,011 |
|
| 921 |
|
| 869 |
|
| Total underwritten products | 2,261 |
|
| 2,144 |
|
| 2,134 |
|
| | | | | | |
| Annuities | | | | | |
| Immediate annuities with life contingencies premiums | — |
| | — |
| | 4 |
|
| Other fixed annuity contract charges | 14 |
| | 14 |
| | 19 |
|
| Total — Allstate Annuities | 14 |
|
| 14 |
|
| 23 |
|
| | | | | | |
Life and annuity premiums and contract charges (1) | $ | 2,275 |
|
| $ | 2,158 |
|
| $ | 2,157 |
|
|
| | | | | | | | | | | | |
| Premiums and contract charges by product |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Traditional life insurance premiums | | $ | 630 |
| | $ | 600 |
| | $ | 568 |
|
| Accident and health insurance premiums | | 2 |
| | 2 |
| | 2 |
|
Interest-sensitive life insurance contract charges (1) | | 711 |
| | 713 |
| | 710 |
|
Premiums and contract charges | | $ | 1,343 |
| | $ | 1,315 |
| | $ | 1,280 |
|
| |
(1) | Contract charges related to the cost of insurance totaled $556$499 million $550, $493 million and $593$487 million in 2016, 20152019, 2018 and 2014,2017, respectively. |
Total
Allstate Life 2019 Form 10-K
Other revenue increased 5.0% or $6 million in 2019 compared to 2018, primarily due to higher gross dealer concessions earned on Allstate agencies’ sales of non-proprietary fixed and variable annuities, and mutual funds.
Contract benefits increased 5.7% or $46 million in 2019 compared to 2018, primarily due to higher claim experience on interest-sensitive life insurance, partially offset by a favorable change associated with the annual review of assumptions.
Our annual review of assumptions in 2019 resulted in a $5 million decrease in reserves primarily for secondary guarantees on interest-sensitive life insurance due to utilizing more refined policy level information and assumptions. In 2018, the review resulted in a $1 million increase in reserves, primarily for secondary guarantees on interest-sensitive life insurance due to higher than anticipated policyholder persistency.
Benefit spread reflects our mortality and morbidity results using the difference between premiums and contract charges increased 5.4% or $117earned for the cost of insurance and contract benefits (“benefit spread”). Benefit spread decreased 3.5% to $276 million in 20162019 compared to 2015. The increase for Allstate Life$286 million in 2018, primarily relatesdue to increasedhigher claim experience on interest-sensitive life insurance, partially offset by growth in traditional life insurance renewal premiums as well as lower levels of reinsurance premiums ceded. The increase for Allstate Benefits primarily relatespremiums.
Interest credited to growth in critical illness, accident and hospital indemnity products.
Total premiums and contract chargescontractholder funds increased $14.9% or $14 million in 20152019 compared to 2014. Excluding results of the LBL business for first quarter 2014 of $85 million, premiums and contract charges2018. Valuation changes on derivatives embedded in equity-indexed universal life contracts that are not hedged increased $86interest credited to contractholder funds by $11 million in 20152019 compared to 2014,zero in 2018.
Investment spread reflects the difference between net investment income and interest credited to contractholder funds (“investment spread”) and is used to analyze the impact of net investment income and interest credited to contractholder funds on net income.
|
| | | | | | | | | | | | |
| Investment spread |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Investment spread before valuation changes on embedded derivatives not hedged | | $ | 226 |
| | $ | 220 |
| | $ | 207 |
|
| Valuation changes on derivatives embedded in equity-indexed universal life contracts that are not hedged | | (11 | ) | | — |
| | — |
|
| Total investment spread | | $ | 215 |
| | $ | 220 |
| | $ | 207 |
|
Investment spread before valuation changes on embedded derivatives not hedged increased 2.7% in 2019 compared to 2018, primarily due to growthhigher net investment income, partially offset by higher credited interest.
Amortization of DAC increased 31.1% or $41 million in 2019 compared to 2018, primarily due to higher amortization acceleration for changes in assumptions, partially offset by lower gross profits on interest-sensitive life insurance.
|
| | | | | | | | | | | | |
| Components of amortization of DAC |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Amortization of DAC before amortization relating to realized capital gains and losses, valuation changes on embedded derivatives that are not hedged and changes in assumptions | | $ | 109 |
| | $ | 117 |
| | $ | 134 |
|
Amortization relating to realized capital gains and losses (1) and valuation changes on embedded derivatives that are not hedged | | 6 |
| | 10 |
| | 14 |
|
| Amortization acceleration (deceleration) for changes in assumptions (‘‘DAC unlocking’’) | | 58 |
| | 5 |
| | (14 | ) |
| Total amortization of DAC | | $ | 173 |
| | $ | 132 |
| | $ | 134 |
|
| |
(1) | The impact of realized capital gains and losses on amortization of DAC is dependent upon the relationship between the assets that give rise to the gain or loss and the product liability supported by the assets. Fluctuations result from changes in the impact of realized capital gains and losses on actual and expected gross profits. |
Our annual comprehensive review of assumptions underlying estimated future gross profits for our interest-sensitive life contracts covers assumptions for mortality, persistency, expenses, investment returns, including capital gains and losses, interest crediting rates to policyholders, and the effect of any hedges. An assessment is made of future projections to ensure the reported DAC balances reflect current expectations.
In 2019, the review resulted in an acceleration of DAC amortization (decrease to income) of $58 million. DAC amortization acceleration primarily related to the
investment margin component of estimated gross profits and was due to lower projected future interest rates and investment returns compared to our previous expectations. The acceleration related to benefit margin was due to decreased projected interest rates that result in lower projected policyholder account values which increases benefits on guaranteed products and more refined policy level information and assumptions.
In 2018, the review resulted in an acceleration of DAC amortization (decrease to income) of $5 million. DAC amortization acceleration primarily related to the
The Allstate Benefits accidentCorporation 71
2019 Form 10-KAllstate Life
investment margin component of estimated gross profits and health insurance business as well as increased traditional life insurance renewal premiums. The growth at was due to lower projected investment returns. This was partially offset by DAC amortization deceleration (increase to income) for changes in the
benefit margin due to a decrease in projected mortality.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Changes in DAC |
| ($ in millions) | | Traditional life and accident and health | | Interest-sensitive life insurance | | Total |
| | | For the years ended December 31, |
| | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
| Balance, beginning of year | | $ | 489 |
| | $ | 465 |
| | $ | 811 |
| | $ | 687 |
| | $ | 1,300 |
| | $ | 1,152 |
|
| Acquisition costs deferred | | 63 |
| | 65 |
| | 60 |
| | 65 |
| | 123 |
| | 130 |
|
Amortization of DAC before amortization relating to realized capital gains and losses, valuation changes on embedded derivatives that are not hedged and changes in assumptions (1) | | (44 | ) | | (41 | ) | | (65 | ) | | (76 | ) | | (109 | ) | | (117 | ) |
Amortization relating to realized capital gains and losses (1) and valuation changes on embedded derivatives that are not hedged | | — |
| | — |
| | (6 | ) | | (10 | ) | | (6 | ) | | (10 | ) |
Amortization (acceleration) deceleration for changes in assumptions (“DAC unlocking”) (1) | | — |
| | — |
| | (58 | ) | | (5 | ) | | (58 | ) | | (5 | ) |
Effect of unrealized capital gains and losses (2) | | — |
| | — |
| | (171 | ) | | 150 |
| | (171 | ) | | 150 |
|
| Ending balance | | $ | 508 |
| | $ | 489 |
| | $ | 571 |
| | $ | 811 |
| | $ | 1,079 |
| | $ | 1,300 |
|
| |
(1) | Included as a component of amortization of DAC on the Consolidated Statements of Operations. |
| |
(2) | Represents the change in the DAC adjustment for unrealized capital gains and losses. The DAC adjustment represents the amount by which the amortization of DAC would increase or decrease if the unrealized gains and losses in the respective product portfolios were realized. |
Operating costs and expensesdecreased1.9% or $7 million in 2019 compared to 2018, primarily due to lower employee-related expenses, partially offset by higher commissions on non-proprietary product sales.
Analysis of reserves and contractholder funds
|
| | | | | | | | |
| Reserve for life-contingent contract benefits |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 |
| Traditional life insurance | | $ | 2,612 |
| | $ | 2,539 |
|
| Accident and health insurance | | 124 |
| | 138 |
|
| Reserve for life-contingent contract benefits | | $ | 2,736 |
| | $ | 2,677 |
|
Allstate Benefits primarily relates to accident, critical illness and hospital indemnity products.Life 2019 Form 10-K
Contractholder funds represent interest-bearing liabilities arising from the sale of products such as interest-sensitive life insurance, fixed annuities and funding agreements.insurance. The balance of contractholder funds is equal to the cumulative deposits received and interest credited to the contractholder less cumulative contract benefits, surrenders, withdrawals maturities and contract charges for mortality or administrative expenses.
The following table shows the changes in contractholder funds for the years ended December 31.
| | | Change in contractholder funds | | Change in contractholder funds |
| | | | | | | | | For the years ended December 31, |
| ($ in millions) | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
| Contractholder funds, beginning balance | $ | 21,295 |
| | $ | 22,529 |
| | $ | 24,304 |
| | $ | 7,656 |
| | $ | 7,608 |
| | $ | 7,464 |
|
| Contractholder funds classified as held for sale, beginning balance | — |
| | — |
| | 10,945 |
| |
| Total contractholder funds, including those classified as held for sale | 21,295 |
|
| 22,529 |
|
| 35,249 |
| |
| | | | | | | | | | | | |
| Deposits | | | | | | | 949 |
| | 965 |
| | 973 |
|
| Interest-sensitive life insurance | 1,002 |
| | 1,004 |
| | 1,059 |
| |
| Fixed annuities | 162 |
| | 199 |
| | 274 |
| |
| Total deposits | 1,164 |
|
| 1,203 |
|
| 1,333 |
| |
| | | | | | | | | | | | |
| Interest credited | 722 |
| | 760 |
| | 919 |
| | 298 |
| | 284 |
| | 282 |
|
| | | | | | | | | | | | |
| Benefits, withdrawals, maturities and other adjustments | | | | | | |
| Benefits, withdrawals and other adjustments | | | | | | | |
| Benefits | (966 | ) | | (1,077 | ) | | (1,197 | ) | | (233 | ) | | (232 | ) | | (241 | ) |
| Surrenders and partial withdrawals | (1,053 | ) | | (1,278 | ) | | (2,273 | ) | | (261 | ) | | (259 | ) | | (254 | ) |
| Maturities of and interest payments on institutional products | (86 | ) | | (1 | ) | | (2 | ) | |
| Contract charges | (829 | ) | | (818 | ) | | (881 | ) | | (702 | ) | | (704 | ) | | (704 | ) |
| Net transfers from separate accounts | 5 |
| | 7 |
| | 7 |
| | 10 |
| | 6 |
| | 4 |
|
Other adjustments (1) | 8 |
| | (30 | ) | | 36 |
| | 88 |
| | (12 | ) | | 84 |
|
| Total benefits, withdrawals, maturities and other adjustments | (2,921 | ) |
| (3,197 | ) |
| (4,310 | ) | |
| | | | | | | |
| Contractholder funds sold in LBL disposition | — |
| | — |
| | (10,662 | ) | |
| | | | | | | |
| Total benefits, withdrawals and other adjustments | | | (1,098 | ) | | (1,201 | ) | | (1,111 | ) |
| Contractholder funds, ending balance | $ | 20,260 |
| | $ | 21,295 |
| | $ | 22,529 |
| | $ | 7,805 |
| | $ | 7,656 |
| | $ | 7,608 |
|
| |
(1) | The table above illustrates the changes in contractholder funds, which are presented gross of reinsurance recoverables on the Consolidated Statements of Financial Position. The table above is intended to supplement our discussion and analysis of revenues, which are presented net of reinsurance on the Consolidated Statements of Operations. As a result, the net change in contractholder funds associated with products reinsured is reflected as a component of the other adjustments line. |
Contractholder funds decreased 4.9% and 5.5% in 2016 and 2015, respectively, primarily due to the continued runoff of our deferred fixed annuity business. We stopped offering new deferred fixed annuities beginning January 1, 2014 but still accept additional deposits on existing contracts.
Contractholder deposits decreased 3.2%1.7% in 20162019 compared to 2015, primarily due to lower additional deposits on deferred fixed annuities. Contractholder deposits decreased 9.8% in 2015 compared to 2014, primarily due to lower additional deposits on fixed annuities2018. The weighted average guaranteed crediting rate and lower deposits onweighted average current crediting rate for our interest-sensitive life insurance due to the LBL sale.
Surrenders and partial withdrawals on deferred fixed annuities and interest-sensitivecontracts, excluding variable life, insurance products decreased 17.6% to $1.05 billion in 2016 from $1.28 billion in 2015, primarily due to decreases in deferred fixed annuities. Surrenders and partial withdrawals on deferred fixed annuities and interest-sensitive life insurance products decreased 43.8% to $1.28 billion in 2015 from $2.27 billion in 2014, primarily due to the continued runoff of our deferred annuity business and the LBL sale. Additionally, 2014 had elevated surrenders on fixed annuities resulting from a large number of contracts reaching the 30-45 day period (typically at their 5 or 6 year anniversary) during which there is no surrender charge. The surrender and partial withdrawal rate on deferred fixed annuities and interest-sensitive life insurance products, based on the beginning of year contractholder funds, was 6.2% in 2016 compared to 7.1% in 2015 and 9.9% in 2014.
Maturities of and interest payments on institutional products included an $85 million maturity in 2016. There are no institutional products outstandingboth 3.9% as of December 31, 2016.2019.
The Allstate Corporation 73
2019 Form 10-KAllstate Life
Allstate Life reinsurance ceded
In the normal course of business, we seek to limit aggregate and single exposure to losses on large risks by purchasing reinsurance. In addition, we have used reinsurance to effect the disposition of certain blocks of business.
Net investment incomeWe retain primary liability as a direct insurer for the years endedall risks ceded to reinsurers. As of December 31, are presented2019, approximately 13% of our face amount of life insurance in the following table.force was reinsured.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Fixed income securities | $ | 1,134 |
| | $ | 1,296 |
| | $ | 1,561 |
|
| Equity securities | 42 |
| | 29 |
| | 22 |
|
| Mortgage loans | 205 |
| | 213 |
| | 248 |
|
| Limited partnership interests | 292 |
| | 287 |
| | 267 |
|
| Short-term investments | 6 |
| | 3 |
| | 2 |
|
| Other | 129 |
| | 114 |
| | 100 |
|
| Investment income, before expense | 1,808 |
| | 1,942 |
| | 2,200 |
|
| Investment expense | (74 | ) | | (58 | ) | | (69 | ) |
| Net investment income | $ | 1,734 |
| | $ | 1,884 |
| | $ | 2,131 |
|
| | | | | | |
| Allstate Life | $ | 482 |
| | $ | 490 |
| | $ | 519 |
|
| Allstate Benefits | 71 |
| | 71 |
| | 72 |
|
| Allstate Annuities | 1,181 |
| | 1,323 |
| | 1,540 |
|
| Net investment income | $ | 1,734 |
| | $ | 1,884 |
| | $ | 2,131 |
|
|
| | | | | | | | | | |
| Reinsurance recoverables by reinsurer | | | | | | |
| | | S&P financial strength rating (1) | | Reinsurance recoverable on paid and unpaid benefits |
| | | |
| | | | | For the years ended December 31, |
| ($ in millions) | | | | 2019 | | 2018 |
| RGA Reinsurance Company | | AA- | | $ | 197 |
| | $ | 210 |
|
| Swiss Re Life and Health America, Inc. | | AA- | | 155 |
| | 156 |
|
| Munich American Reassurance | | AA- | | 80 |
| | 87 |
|
| Transamerica Life Group | | AA- | | 75 |
| | 76 |
|
Scottish Re (U.S.), Inc. (2) | | N/A | | 70 |
| | 66 |
|
| John Hancock Life & Health Insurance Company | | AA- | | 50 |
| | 53 |
|
Triton Insurance Company (3) | | N/A | | 43 |
| | 45 |
|
American Health & Life Insurance Co. (3) | | N/A | | 32 |
| | 34 |
|
| Lincoln National Life Insurance | | AA- | | 27 |
| | 25 |
|
| Security Life of Denver | | A+ | | 23 |
| | 24 |
|
| SCOR Global Life | | AA- | | 14 |
| | 14 |
|
| American United Life Insurance Company | | AA- | | 11 |
| | 13 |
|
Other (4) | | | | 17 |
| | 20 |
|
| Total | | | | $ | 794 |
| | $ | 823 |
|
Net investment income decreased 8.0% or $150 million to $1.73 billion in 2016 from $1.88 billion in 2015, primarily due to lower fixed income portfolio yields and lower average investment balances. Net investment income decreased 11.6% or $247 million to $1.88 billion in 2015 from $2.13 billion in 2014. Excluding $126 million related to the LBL business for first quarter 2014, net investment income decreased $121 million in 2015 compared to 2014, primarily due to lower average investment balances, fixed income portfolio yields, and prepayment fee income and litigation proceeds, partially offset by higher limited partnership income.
In 2015, we shortened the maturity profile of the fixed income securities in Allstate Financial to make the portfolio less sensitive to rising interest rates. The approximately $2 billion of proceeds from the sale of longer duration fixed income securities were initially reinvested in shorter duration fixed income and public equity securities. We expect to shift the majority of the proceeds to performance-based investments over time. These investments primarily support our immediate annuity liabilities and are intended to improve our long-term economic results. We anticipate higher long-term returns on these investments. The dispositions generated net realized capital gains which results in lower future investment income due to the lower yields on the reinvested proceeds until repositioned to performance-based investments. Since June 30, 2015, the carrying value of performance-based investments and market-based equity securities have increased by $1.37 billion to $4.36 billion. The increase is expected to reach $2 billion by the end of 2018. The carrying value will vary from period to period and reflects amounts invested, cash distributions received from investments and changes in valuation of the underlying investments.
The average pre-tax investment yields were 5.0% for 2016, 5.4% for 2015 and 5.6% for 2014.
Realized capital gains and losses for the years ended December 31 are presented in the following table.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Impairment write-downs | $ | (101 | ) | | $ | (63 | ) | | $ | (11 | ) |
| Change in intent write-downs | (13 | ) | | (65 | ) | | (44 | ) |
| Net other-than-temporary impairment losses recognized in earnings | (114 | ) |
| (128 | ) |
| (55 | ) |
| Sales and other | 28 |
| | 385 |
| | 185 |
|
| Valuation and settlements of derivative instruments | 5 |
| | 10 |
| | 14 |
|
| Realized capital gains and losses, pre-tax | (81 | ) |
| 267 |
|
| 144 |
|
| Income tax benefit (expense) | 27 |
| | (94 | ) | | (50 | ) |
| Realized capital gains and losses, after-tax | $ | (54 | ) |
| $ | 173 |
|
| $ | 94 |
|
| | | | | | |
| Allstate Life | $ | (24 | ) | | $ | 1 |
| | $ | 4 |
|
| Allstate Benefits | (4 | ) | | — |
| | 1 |
|
| Allstate Annuities | (26 | ) | | 172 |
| | 89 |
|
| Realized capital gains and losses, after-tax | $ | (54 | ) | | $ | 173 |
| | $ | 94 |
|
Net realized capital losses in 2016 primarily related to impairment write-downs, partially offset by net gains on sales in connection with ongoing portfolio management.
Analysis of costs and expenses Total costs and expenses increased 2.0% or $66 million in 2016 compared to 2015, primarily due to higher contract benefits, operating costs and expenses and amortization of DAC, partially offset by lower interest credited to contractholder funds. Total costs and expenses decreased 3.3% or $114 million in 2015 compared to 2014. Excluding results
of the LBL business for first quarter 2014 of $168 million, total costs and expenses increased $54 million in 2015 compared to 2014, primarily due to higher life and annuity contract benefits, partially offset by lower interest credited to contractholder funds.
Life and annuity contract benefits increased 3.0% or $54 million in 2016 compared to 2015, primarily due to growth and higher claim experience at Allstate Benefits, and unfavorable immediate annuity mortality experience, partially offset by favorable life insurance mortality experience. Our 2016 annual review of assumptions resulted in a $10 million increase in reserves primarily for secondary guarantees on interest-sensitive life insurance due to higher than anticipated retention of guaranteed interest-sensitive life business.
Life and annuity contract benefits increased 2.2% or $38 million in 2015 compared to 2014. Excluding results of the LBL business for first quarter 2014 of $65 million, life and annuity contract benefits increased $103 million in 2015 compared to 2014, primarily due to unfavorable life insurance mortality experience and growth at Allstate Benefits. Our 2015 annual review of assumptions resulted in a $4 million increase in reserves primarily for secondary guarantees on interest-sensitive life insurance due to higher than anticipated retention on guaranteed interest-sensitive life business.
In 2016, we completed a mortality study for our structured settlement annuities with life contingencies (a type of immediate fixed annuities). The study indicated that annuitants are living longer and receiving benefits for a longer period than originally estimated. A substantial portion of the structured settlement annuity business includes annuitants with severe injuries or other health impairments which significantly reduced their life expectancy at the time the annuity was issued. Medical advances and access to medical care may be favorably impacting mortality rates. The results of the study were included in the premium deficiency and profits followed by losses evaluations as of December 31, 2016, and no adjustments were recognized. We aggregate traditional life insurance products and immediate annuities with life contingencies in these evaluations. While there was an unfavorable change in mortality assumptions as a result of the study, there was a favorable change in the long-term investment yield assumptions due to the increase in performance-based investments and equity securities.
We analyze our mortality and morbidity results using the difference between premiums and contract charges earned for the cost of insurance and life and annuity contract benefits excluding the portion related to the implied interest on immediate annuities with life contingencies (“benefit spread”). This implied interest totaled $511 million, $511 million and $521 million in 2016, 2015 and 2014, respectively.
The benefit spread by product group for the years ended December 31 is disclosed in the following table.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Life insurance | $ | 287 |
| | $ | 250 |
| | $ | 287 |
|
| Accident and health insurance | (6 | ) | | (10 | ) | | (8 | ) |
| Subtotal — Allstate Life | 281 |
|
| 240 |
|
| 279 |
|
| Life insurance | 20 |
| | 24 |
| | 17 |
|
| Accident and health insurance | 427 |
| | 396 |
| | 397 |
|
| Subtotal — Allstate Benefits | 447 |
|
| 420 |
|
| 414 |
|
| Allstate Annuities | (86 | ) | | (80 | ) | | (85 | ) |
| Total benefit spread | $ | 642 |
|
| $ | 580 |
|
| $ | 608 |
|
Benefit spread increased 10.7% or $62 million in 2016 compared to 2015. The Allstate Life benefit spread increased primarily due to higher life insurance premiums and favorable life insurance mortality experience. The Allstate Benefits benefit spread increased primarily due to growth in business in force, partially offset by higher claim experience. The Allstate Annuities benefit spread decreased primarily due to unfavorable immediate annuity mortality experience.
Benefit spread decreased 4.6% or $28 million in 2015 compared to 2014. Excluding results of the LBL business for first quarter 2014 of $(1) million, benefit spread decreased $29 million in 2015 compared to 2014, primarily due to unfavorable life insurance mortality experience, partially offset by higher life insurance premiums.
Interest credited to contractholder funds decreased 4.6% or $35 million in 2016 compared to 2015, primarily due to lower average contractholder funds. Interest credited to contractholder funds decreased 17.2% or $158 million in 2015 compared to 2014. Excluding results of the LBL business for first quarter 2014 of $90 million, interest credited to contractholder funds decreased 8.2% or $68 million in 2015 compared to 2014, primarily due to lower average contractholder funds and lower interest crediting rates. Valuation changes on derivatives embedded in equity-indexed annuity contracts that are not hedged increased interest credited to contractholder funds by $3 million in 2016 compared to $2 million in 2015 and $22 million in 2014.
In order to analyze the impact of net investment income and interest credited to contractholders on net income, we monitor the difference between net investment income and the sum of interest credited to contractholder funds and the implied interest on immediate annuities with life contingencies, which is included as a component of life and annuity contract benefits on the Consolidated Statements of Operations (“investment spread”).
The investment spread by product group for the years ended December 31 is shown in the following table.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Life insurance | $ | 116 |
| | $ | 130 |
| | $ | 93 |
|
| Accident and health insurance | 5 |
| | 5 |
| | 8 |
|
| Net investment income on investments supporting capital | 76 |
| | 76 |
| | 110 |
|
| Subtotal — Allstate Life | 197 |
|
| 211 |
|
| 211 |
|
| Life insurance | 10 |
| | 10 |
| | 10 |
|
| Accident and health insurance | 11 |
| | 11 |
| | 11 |
|
| Net investment income on investments supporting capital | 14 |
| | 14 |
| | 15 |
|
| Subtotal — Allstate Benefits | 35 |
|
| 35 |
|
| 36 |
|
| Annuities and institutional products | 128 |
| | 238 |
| | 320 |
|
| Net investment income on investments supporting capital | 140 |
| | 130 |
| | 146 |
|
| Subtotal — Allstate Annuities | 268 |
|
| 368 |
|
| 466 |
|
| Investment spread before valuation changes on embedded derivatives that are not hedged | 500 |
| | 614 |
| | 713 |
|
| Valuation changes on derivatives embedded in equity-indexed annuity contracts that are not hedged | (3 | ) | | (2 | ) | | (22 | ) |
| Total investment spread | $ | 497 |
|
| $ | 612 |
|
| $ | 691 |
|
Investment spread before valuation changes on embedded derivatives that are not hedged decreased 18.6% or $114 million in 2016 compared to 2015, primarily due to lower net investment income at Allstate Annuities. Investment spread before valuation changes on embedded derivatives that are not hedged decreased 13.9% or $99 million in 2015 compared to 2014. Excluding results of the LBL business for first quarter 2014 of $46 million, investment spread before valuation changes on embedded derivatives that are not hedged decreased $53 million in 2015 compared to 2014, primarily due to lower net investment income, partially offset by lower credited interest.
To further analyze investment spreads, the following table summarizes the weighted average investment yield on assets supporting product liabilities and capital, interest crediting rates and investment spreads. For purposes of these calculations, investments, reserves and contractholder funds classified as held for sale were included for periods prior to April 1, 2014. Investment spreads may vary significantly between periods due to the variability in investment income, particularly for immediate fixed annuities where the investment portfolio includes limited partnerships.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Weighted average investment yield | | Weighted average interest crediting rate | | Weighted average investment spreads |
| | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
| Interest-sensitive life insurance | 4.9 | % | | 5.2 | % | | 5.3 | % | | 3.9 | % | | 3.9 | % | | 3.9 | % | | 1.0 | % | | 1.3 | % | | 1.4 | % |
| Deferred fixed annuities and institutional products | 4.1 |
| | 4.3 |
| | 4.5 |
| | 2.8 |
| | 2.8 |
| | 2.9 |
| | 1.3 |
| | 1.5 |
| | 1.6 |
|
| Immediate fixed annuities with and without life contingencies | 6.5 |
| | 7.0 |
| | 7.3 |
| | 5.9 |
| | 5.9 |
| | 6.0 |
| | 0.6 |
| | 1.1 |
| | 1.3 |
|
| Investments supporting capital, traditional life and other products | 3.9 |
| | 4.0 |
| | 4.4 |
| | n/a |
| | n/a |
| | n/a |
| | n/a |
| | n/a |
| | n/a |
|
The following table summarizes our product liabilities as of December 31 and indicates the value of those contracts and policies for which an investment spread is generated.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Immediate fixed annuities with life contingencies | $ | 8,622 |
| | $ | 8,714 |
| | $ | 8,904 |
|
| Other life contingent contracts and other | 3,617 |
| | 3,533 |
| | 3,476 |
|
| Reserve for life-contingent contract benefits | $ | 12,239 |
|
| $ | 12,247 |
|
| $ | 12,380 |
|
| | | | | | |
| Interest-sensitive life insurance | $ | 8,062 |
| | $ | 7,975 |
| | $ | 7,880 |
|
| Deferred fixed annuities | 8,921 |
| | 9,748 |
| | 10,860 |
|
| Immediate fixed annuities without life contingencies | 3,012 |
| | 3,226 |
| | 3,450 |
|
| Institutional products | — |
| | 85 |
| | 85 |
|
| Other | 265 |
| | 261 |
| | 254 |
|
| Contractholder funds | $ | 20,260 |
|
| $ | 21,295 |
|
| $ | 22,529 |
|
The following table summarizes reserves and contractholder funds for Allstate Life, Allstate Benefits and Allstate Annuities as of December 31.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Allstate Life | $ | 2,577 |
| | $ | 2,535 |
| | $ | 2,481 |
|
| Allstate Benefits | 944 |
| | 897 |
| | 874 |
|
| Allstate Annuities | 8,718 |
| | 8,815 |
| | 9,025 |
|
| Reserve for life-contingent contract benefits | $ | 12,239 |
| | $ | 12,247 |
| | $ | 12,380 |
|
| | | | | | |
| Allstate Life | $ | 7,326 |
| | $ | 7,226 |
| | $ | 7,130 |
|
| Allstate Benefits | 952 |
| | 942 |
| | 929 |
|
| Allstate Annuities | 11,982 |
| | 13,127 |
| | 14,470 |
|
| Contractholder funds | $ | 20,260 |
| | $ | 21,295 |
| | $ | 22,529 |
|
Amortization of DAC The components of amortization of DAC for the years ended December 31 are summarized in the following table.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Amortization of DAC before amortization relating to realized capital gains and losses, valuation changes on embedded derivatives that are not hedged and changes in assumptions | $ | 279 |
| | $ | 256 |
| | $ | 263 |
|
Amortization relating to realized capital gains and losses (1) and valuation changes on embedded derivatives that are not hedged | 6 |
| | 5 |
| | 5 |
|
| Amortization (deceleration) acceleration for changes in assumptions (“DAC unlocking”) | (2 | ) | | 1 |
| | (8 | ) |
| Total amortization of DAC | $ | 283 |
|
| $ | 262 |
|
| $ | 260 |
|
| | | | | | |
| Allstate Life | $ | 131 |
| | $ | 133 |
| | $ | 140 |
|
| Allstate Benefits | 145 |
| | 124 |
| | 112 |
|
| Allstate Annuities | 7 |
| | 5 |
| | 8 |
|
| Total amortization of DAC | $ | 283 |
| | $ | 262 |
| | $ | 260 |
|
| |
(1) | The impactN/A reflects no S&P rating available. |
| |
(2) | In December 2018, the Delaware Insurance Commissioner placed Scottish Re (U.S.), Inc. under regulatory supervision and in March 2019, the reinsurer was placed in rehabilitation. We have been permitted to exercise certain setoff rights while the parties address any potential disputes. See Note 10 of realized capital gainsthe consolidated financial statements for further details. |
| |
(3) | A.M. Best rating is B++. |
| |
(4) | As of December 31, 2019 and losses on amortization2018, the other category includes $12 million and $9 million, respectively, of DAC is dependent upon the relationship between the assets that give rise to the gainrecoverables due from reinsurers rated A- or loss and the product liability supportedbetter by the assets. Fluctuations result from changes in the impact of realized capital gains and losses on actual and expected gross profits.S&P. |
AmortizationWe continuously monitor the creditworthiness of DACreinsurers in order to determine our risk of recoverability on an individual and aggregate basis, and a provision for uncollectible reinsurance is recorded if needed. No amounts have been deemed unrecoverable in the three-years ended December 31, 2019, except for an allowance related to Scottish Re (U.S.), Inc. that was established in 2019.
We enter into certain intercompany reinsurance transactions for the Allstate Life operations in order to maintain underwriting control and manage insurance risk among various legal entities. These reinsurance agreements have been approved by the appropriate regulatory authorities. All significant intercompany transactions have been eliminated in consolidation.
Allstate Benefits 2019 Form 10-K
Allstate Benefits Segment
Allstate Benefits offers voluntary benefits products, including life, accident, critical illness, short-term disability and other health products. In 2019, Allstate Benefits represented 2.8% of total revenue, 2.9% of total PIF and 3.3% of total adjusted net income. Our target customers are middle market consumers with family and financial protection needs. For additional information on our strategy and outlook, see Part I, Item 1. Business - Strategy and Segment Information. |
| | | | | | | | | | | | |
| Summarized financial information |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Revenues | | | | | | |
| Premiums and contract charges | | $ | 1,145 |
| | $ | 1,135 |
| | $ | 1,084 |
|
| Net investment income | | 83 |
| | 77 |
| | 72 |
|
| Realized capital gains and losses | | 12 |
| | (9 | ) | | 1 |
|
| Total revenues | | 1,240 |
| | 1,203 |
| | 1,157 |
|
| | | | | | | |
| Costs and expenses | | | | | | |
| Contract benefits | | (601 | ) | | (595 | ) | | (564 | ) |
| Interest credited to contractholder funds | | (34 | ) | | (35 | ) | | (35 | ) |
| Amortization of DAC | | (161 | ) | | (145 | ) | | (142 | ) |
| Operating costs and expenses | | (285 | ) | | (278 | ) | | (258 | ) |
| Restructuring and related charges | | — |
| | — |
| | (3 | ) |
| Total costs and expenses | | (1,081 | ) | | (1,053 | ) | | (1,002 | ) |
| | | | | | | |
| Income tax expense | | (35 | ) | | (32 | ) | | (1 | ) |
| Net income applicable to common shareholders | | $ | 124 |
| | $ | 118 |
| | $ | 154 |
|
| | | | | | | |
| Adjusted net income | | $ | 115 |
| | $ | 124 |
| | $ | 100 |
|
| Realized capital gains and losses, after-tax | | 9 |
| | (7 | ) | | — |
|
| DAC and DSI amortization related to realized capital gains and losses, after-tax | | — |
| | 1 |
| | — |
|
| Tax Legislation benefit | | — |
| | — |
| | 54 |
|
| Net income applicable to common shareholders | | $ | 124 |
| | $ | 118 |
| | $ | 154 |
|
| | | | | | | |
Benefit ratio (1) | | 52.5 |
| | 52.4 |
| | 52.0 |
|
| | | | | | | |
Operating expense ratio (2) | | 24.9 |
| | 24.5 |
| | 23.8 |
|
| | | | | | | |
| Reserve for life-contingent contract benefits as of December 31 | | $ | 1,034 |
| | $ | 1,007 |
| | $ | 979 |
|
| | | | | | | |
| Contractholder funds as of December 31 | | $ | 915 |
| | $ | 898 |
| | $ | 890 |
|
| | | | | | | |
| Policies in force as of December 31 (in thousands) | | 4,183 |
| | 4,208 |
| | 4,033 |
|
| |
(1) | Benefit ratio is calculated as contract benefits divided by premiums and contract charges. |
| |
(2) | Operating expense ratio is calculated as operating costs and expenses divided by premiums and contract charges. |
Net income applicable to common shareholders increased 8.0%5.1% or $21$6 million in 20162019 compared to 2015,2018.
Adjusted net income decreased 7.3% or $9 million in 2019 compared to 2018, primarily due to growth at Allstate Benefits.higher DAC amortization related primarily to the non-renewal of a large underperforming account and increased operating costs and expenses, partially offset by higher premiums.
Amortization of DAC
Premiums and contract charges increased 0.8%0.9% or $2$10 million in 20152019 compared to 2014. Excluding results of the LBL business for first quarter 2014 of $5 million, amortization of DAC increased $72018, primarily related to growth in hospital indemnity (included in other health), critical illness and life products.
The Allstate Corporation 75
2019 Form 10-KAllstate Benefits
|
| | | | | | | | | | | | |
| Premiums and contract charges by product |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Life | | $ | 157 |
| | $ | 155 |
| | $ | 155 |
|
| Accident | | 298 |
| | 297 |
| | 280 |
|
| Critical illness | | 479 |
| | 476 |
| | 468 |
|
| Short-term disability | | 107 |
| | 108 |
| | 102 |
|
| Other health | | 104 |
| | 99 |
| | 79 |
|
Premiums and contract charges | | $ | 1,145 |
| | $ | 1,135 |
| | $ | 1,084 |
|
New annualized premium sales (annualized premiums at initial customer enrollment) decreased 4.4% to $372 million in 20152019 and decreased 12.4% to $389 million in 2018. The decrease in 2019 relates to increased competition and higher initial enrollments for certain accounts in the prior year.
Contract benefits increased 1.0% or $6 million in 2019 compared to 2014,2018, primarily due to amortization acceleration for changeshigher claim experience on critical illness and disability products, partially offset by favorable mortality experience on life products.
Benefit ratio increased to 52.5 in assumptions in 20152019 compared to 52.4 in 2018 due to higher claim experience on critical illness and disability products, partially offset by
favorable mortality experience on life products and improved claims experience on other health products.
Amortization of DAC increased 11.0% or $16 million in 2019 compared to 2018, primarily due to DAC amortization deceleration in 2014.related to the non-renewal of a large underperforming account and an unfavorable adjustment associated with our annual review of assumptions.
Our annual comprehensive review of assumptions underlying estimated future gross profits for our interest-sensitive life fixed annuities and other investment contracts covers assumptions for persistency, mortality, expenses, investment returns, including capital gains and losses, interest crediting rates to policyholders, and the effect of any hedges in all product lines. In 2016, the review resulted in a deceleration of DAC amortization (credit to income) of $2 million related to interest-sensitive life insurance.
In 2015, the review resulted in an acceleration of DAC amortization (charge(decrease to income) of $1$2 million relatedin 2019 compared to interest-sensitive life insurance.
In 2014, the review resulted in a deceleration of DAC amortization (increase to income) of $8 million. Amortization deceleration of $10$4 million related to interest-sensitive life insurance and was primarily due to a decrease in projected expenses, partially offset by increased projected mortality. Amortization acceleration of $2 million related to fixed annuities and was primarily due to a decrease in projected gross profits.2018.
The changes in DAC for the years ended December 31 are detailed in the following table.
| | | Changes in DAC | | Changes in DAC |
| | | | For the years ended |
| ($ in millions) | Traditional life and accident and health | | Interest-sensitive life insurance | | Fixed annuities | | Total | | 2019 | | 2018 |
| | 2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 | |
| Balance, beginning of year | $ | 792 |
| | $ | 753 |
| | $ | 993 |
| | $ | 905 |
| | $ | 47 |
| | $ | 47 |
| | $ | 1,832 |
| | $ | 1,705 |
| | $ | 549 |
| | $ | 542 |
|
| Acquisition costs deferred | 191 |
| | 178 |
| | 100 |
| | 107 |
| | — |
| | — |
| | 291 |
| | 285 |
| | 142 |
| | 150 |
|
Amortization of DAC before amortization relating to realized capital gains and losses, valuation changes on embedded derivatives that are not hedged and changes in assumptions (1) | (162 | ) | | (139 | ) | | (110 | ) | | (111 | ) | | (7 | ) | | (6 | ) | | (279 | ) | | (256 | ) | |
Amortization relating to realized capital gains and losses and valuation changes on embedded derivatives that are not hedged (1) | — |
| | — |
| | (6 | ) | | (6 | ) | | — |
| | 1 |
| | (6 | ) | | (5 | ) | |
Amortization of DAC before amortization relating to changes in assumptions (1) | | | (159 | ) | | (150 | ) |
Amortization relating to realized capital gains and losses (1) | | | — |
| | 1 |
|
Amortization deceleration (acceleration) for changes in assumptions (“DAC unlocking”) (1) | — |
| | — |
| | 2 |
| | (1 | ) | | — |
| | — |
| | 2 |
| | (1 | ) | | (2 | ) | | 4 |
|
Effect of unrealized capital gains and losses (2) | — |
| | — |
| | (74 | ) | | 99 |
| | — |
| | 5 |
| | (74 | ) | | 104 |
| | (3 | ) | | 2 |
|
| Ending balance | $ | 821 |
|
| $ | 792 |
|
| $ | 905 |
|
| $ | 993 |
|
| $ | 40 |
|
| $ | 47 |
|
| $ | 1,766 |
|
| $ | 1,832 |
| | $ | 527 |
| | $ | 549 |
|
| |
(1) | Included as a component of amortization of DAC on the Consolidated Statements of Operations. |
| |
(2) | Represents the change in the DAC adjustment for unrealized capital gains and losses. The DAC adjustment represents the amount by which the amortization of DAC would increase or decrease if the unrealized gains and losses in the respective product portfolios were realized. |
The following table summarizes the DAC balance for Allstate Life, Allstate Benefits and Allstate Annuities as of December 31.
|
| | | | | | | |
| ($ in millions) | 2016 | | 2015 |
| Allstate Life | $ | 1,200 |
| | $ | 1,271 |
|
| Allstate Benefits | 526 |
| | 514 |
|
| Allstate Annuities | 40 |
| | 47 |
|
| Total DAC balance | $ | 1,766 |
| | $ | 1,832 |
|
|
| | | | | | | | | | | | |
| Operating costs and expenses |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Non-deferrable commissions | | $ | 104 |
| | $ | 109 |
| | $ | 98 |
|
| General and administrative expenses | | 181 |
| | 169 |
| | 160 |
|
| Total operating costs and expenses | | $ | 285 |
| | $ | 278 |
| | $ | 258 |
|
Operating costs and expensesincreased 5.3% or $25 million in 2016 compared to 2015. Operating costs and expenses increased 1.3% or $6 million in 2015 compared to 2014. Excluding results of the LBL business for first quarter 2014 of $8 million, operating costs and expenses increased $14 million in 2015 compared to 2014.
The following table summarizes operating costs and expenses for the years ended December 31.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Non-deferrable commissions | $ | 109 |
| | $ | 95 |
| | $ | 99 |
|
| General and administrative expenses | 337 |
| | 325 |
| | 314 |
|
| Taxes and licenses | 51 |
| | 52 |
| | 53 |
|
| Total operating costs and expenses | $ | 497 |
|
| $ | 472 |
|
| $ | 466 |
|
| | | | | | |
| Restructuring and related charges | $ | 1 |
| | $ | — |
| | $ | 2 |
|
| | | | | | |
| Allstate Life | $ | 225 |
| | $ | 212 |
| | $ | 232 |
|
| Allstate Benefits | 240 |
| | 222 |
| | 206 |
|
| Allstate Annuities | 32 |
| | 38 |
| | 28 |
|
| Total operating costs and expenses | $ | 497 |
|
| $ | 472 |
|
| $ | 466 |
|
General and administrative expenses increased 3.7% or $12 million in 2016 compared to 2015, primarily due to increased technology and employee costs related to growth at Allstate Benefits.
General and administrative expenses increased 3.5% or $11 million in 2015 compared to 2014, primarily due to increased expenses at Allstate Benefits relating to employee costs, reinsurance expense allowances paid to LBL for business reinsured to Allstate Life Insurance Company (“ALIC”) after the sale, and a guaranty fund accrual release in the prior year period, partially offset by lower technology costs.
Income tax expense in first quarter 2015 included $17 million related to our adoption of new accounting guidance for investments in qualified affordable housing projects.
The following section provides more detail on the strategy and results for Allstate Life, Allstate Benefits and Allstate Annuities.
Allstate Life
Strategy The strategy for our life insurance business centers on the continuation of efforts to fully integrate the business into the Allstate brand customer value proposition and modernizing our operating model. The life insurance product portfolio and sales process provide for clear and distinct positioning to meet the varied needs of Allstate customers and position Allstate exclusive agencies and exclusive financial specialists as trusted advisors. Our product positioning provides solutions to help meet customer needs during various life stages ranging from basic mortality protection to more complex mortality and financial planning solutions. Basic mortality protection solutions are provided through less complex products, such as term and whole life insurance, sold through exclusive agents and licensed sales professionals to deepen customer relationships. More advanced mortality and financial planning solutions are provided primarily through exclusive financial specialists with an emphasis on our more complex offerings, such as universal life insurance products. Many Allstate exclusive agencies utilize an exclusive financial specialist for their expertise with advanced life and retirement cases and other financial needs of customers. Successful partnerships will assist agencies with building stronger and deeper customer relationships. Sales producer education and technology improvements are being made to ensure agencies have the tools and information needed to help customers meet their needs and build personal relationships as trusted advisors. Additionally, tools will be made available to consumers to help them understand their needs and encourage interaction with their local agencies.
The financial results for Allstate Life for the years ended December 31 are presented in the following table.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Revenues | | | | | |
| Life and annuity premiums and contract charges | $ | 1,250 |
| | $ | 1,223 |
| | $ | 1,265 |
|
| Net investment income | 482 |
| | 490 |
| | 519 |
|
| Realized capital gains and losses | (38 | ) | | 2 |
| | 6 |
|
| Total revenues | 1,694 |
| | 1,715 |
| | 1,790 |
|
| | | | | | |
| Costs and expenses | | | | | |
| Life and annuity contract benefits | (742 | ) | | (749 | ) | | (734 | ) |
| Interest credited to contractholder funds | (285 | ) | | (282 | ) | | (311 | ) |
| Amortization of DAC | (131 | ) | | (133 | ) | | (140 | ) |
| Operating costs and expenses | (225 | ) | | (212 | ) | | (232 | ) |
| Restructuring and related charges | (1 | ) | | (1 | ) | | (2 | ) |
| Total costs and expenses | (1,384 | ) | | (1,377 | ) | | (1,419 | ) |
| | | | | | |
| Loss on disposition of operations | — |
| | (1 | ) | | (40 | ) |
| Income tax expense | (91 | ) | | (108 | ) | | (99 | ) |
| Net income applicable to common shareholders | $ | 219 |
| | $ | 229 |
| | $ | 232 |
|
Net income applicable to common shareholders was $219 million in 2016 compared to $229 million in 2015. The decrease was primarily due to net realized capital losses in 2016 compared to net realized capital gains in 2015 and higher operating costs and expenses, partially offset by higher premiums and contract charges. Net income applicable to common shareholders was $229 million in 2015 compared to $232 million in 2014.
Premiums and contract charges increased 2.2% or $27 million in 2016 compared to 2015. The increase primarily relates to increased traditional life insurance renewal premiums as well as lower levels of reinsurance premiums ceded. Over 85% of Allstate Life’s traditional life insurance premium relates to term life insurance products. Total premiums and contract charges decreased $42 million in 2015 compared to 2014. Excluding results of the LBL business for first quarter 2014 of $83 million, premiums and contract charges increased $41 million in 2015 compared to 2014, primarily due to increased traditional life insurance renewal premiums.
Net realized capital losses in 2016 primarily related to net losses on sales in connection with ongoing portfolio management and impairment write-downs.
Contract benefits decreased 0.9%2.5% or $7 million in 20162019 compared to 2015, primarily due to favorable life insurance mortality experience. Contract benefits increased 2.0% or $15 million in 2015 compared to 2014, primarily due to unfavorable life insurance mortality experience.
Benefit spread increased 17.1% to $281 million in 2016 compared to $240 million in 2015,2018, primarily due to higher life insurance premiumstechnology and favorable life insurance mortality experience. Benefit spread decreased 14.0%employee-related costs.
Operating expense ratio increased to $240 million24.9 in 20152019 compared to $279 million24.5 in 2014, primarily due to unfavorable life insurance mortality experience, partially offset by higher life insurance premiums.
Operating costs and expenses increased 6.1% or $13 million in 2016 compared to 2015,2018, primarily due to higher non-deferrable commissions and increased regulatory compliance costs. Operating costs and expenses decreased 8.6% or $20 millioninvestment in 2015 compared to 2014.technology.
Allstate Benefits
Strategy Allstate Benefits is an industry leader in the voluntary benefits market, offering a broad rangeAnalysis of products, including critical illness, accident, cancer, hospital indemnity, disability and universal and group term life. Allstate Benefits differentiates itself by offering a broad product portfolio, flexible enrollment solutions and technology (including significant presence on employer benefit administration systems), and its strong national accounts team, as well as the well-recognized Allstate brand. We are investing in new generation enrollment and administrative technology to improve our customer experience and modernize our operating model.
Market trends for voluntary benefits are favorable as the market has nearly doubled in size since 2006, driven by the ability of voluntary benefits to fill gaps from employers seeking to contain rising health care costs, by providing higher deductible medical plans, and shifting costs to employees. Allstate Benefits has introduced new products and enhanced existing products to address these gaps by providing protection for catastrophic events such as a critical illness, accident or hospital stay. We are expanding our group life capabilities, offering employer paid life to broaden our product portfolio. Originally a provider of voluntary benefits to small and mid-sized businesses, Allstate Benefits now provides benefit solutions to companies of all sizes and industries including the large account voluntary benefits marketplace.
The Allstate Benefits strategy for growth includes expansion in the national accounts market by increasing the number of sales, enrollment technology and account management personnel and expanding independent agent distribution in targeted geographic locations, including Canada, for increased new sales. We are also increasing Allstate exclusive agency engagement to drive cross selling of voluntary benefits products, and developing opportunities for revenue growth through new product and value added service offerings. Allstate Benefits new business written premiums increased 5.6% and 6.0% in 2016 and 2015, respectively.
The financial results for Allstate Benefits for the years ended December 31 are presented in the following table.reserves
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Revenues | | | | | |
| Life and annuity premiums and contract charges | $ | 1,011 |
| | $ | 921 |
| | $ | 869 |
|
| Net investment income | 71 |
| | 71 |
| | 72 |
|
| Realized capital gains and losses | (5 | ) | | 1 |
| | 1 |
|
| Total revenues | 1,077 |
| | 993 |
| | 942 |
|
| | | | | | |
| Costs and expenses | | | | | |
| Life and annuity contract benefits | (509 | ) | | (452 | ) | | (411 | ) |
| Interest credited to contractholder funds | (36 | ) | | (36 | ) | | (36 | ) |
| Amortization of DAC | (145 | ) | | (124 | ) | | (112 | ) |
| Operating costs and expenses | (240 | ) | | (222 | ) | | (206 | ) |
| Total costs and expenses | (930 | ) | | (834 | ) | | (765 | ) |
| | | | | | |
| Income tax expense | (51 | ) | | (55 | ) | | (62 | ) |
| Net income applicable to common shareholders | $ | 96 |
| | $ | 104 |
| | $ | 115 |
|
|
| | | | | | | | |
| Reserve for life-contingent contract benefits |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 |
| Traditional life insurance | | $ | 285 |
| | $ | 269 |
|
| Accident and health insurance | | 749 |
| | 738 |
|
| Reserve for life-contingent contract benefits | | $ | 1,034 |
| | $ | 1,007 |
|
Net income applicable to common shareholders was $96 million in 2016 compared to $104 million in 2015.
Allstate Benefits 2019 Form 10-K
Allstate Benefits reinsurance ceded
The decrease was primarily due to higher contract benefits, amortizationvast majority of DAC and operating costs and expenses, partially offset by higher premiums and contract charges. Net income applicable to common shareholders was $104 million in 2015 compared to $115 million in 2014. The decrease was primarily due to higher contract benefits and operating costs and expenses, partially offset by increased premiums and contract charges.
Premiums and contract charges increased 9.8% or $90 million in 2016 compared to 2015. The increase primarilyreinsurance relates to growth in critical illness, accident and hospital indemnity products. Policies in force increased 13.4% to 3,758 thousand as of December 31, 2016 compared to 3,315 thousand as of December 31, 2015. Total premiums and contract charges increased 6.0% or $52 million in 2015 compared to 2014. The increase primarily relates to growth in accident, critical illness and hospital indemnity products. Policies in force increased 11.1% to 3,315 thousand as of December 31, 2015 compared to 2,983 thousand as of December 31, 2014.
Contract benefits increased 12.6% or $57 million in 2016 compared to 2015, primarily due to growth and higher claim experience. Contract benefits increased 10.0% or $41 million in 2015 compared to 2014, primarily due to growth.
Benefit spread increased 6.4% to $447 million in 2016 compared to $420 million in 2015, primarily due to growth in business in force, partially offset by higher claim experience. Benefit spread increased 1.4% to $420 million in 2015 compared to $414 million in 2014, primarily due to growth in business in force.
Operating costs and expenses increased 8.1% or $18 million in 2016 compared to 2015, primarily due to increased employee and technology costs related to growth. Operating costs and expenses increased 7.8% or $16 million in 2015 compared to 2014, primarily due to increased employee related costs.
Allstate Annuities
Strategy We exited the continuing sale of annuities over an eight year period from 2006 to 2014, reflecting our expectations of declining returns. As a result, the declining volume of Allstate Annuities business is managed with a focus on increasing lifetime economic value. While we may choose to selectively issue liabilities in the future, we currently do not expect any issuance to be material. Both the deferred and immediate annuity businesses have been adversely impacted by the historically low interest rate environment. Our immediate annuity business has also been impacted by medical advancements that have resulted in annuitants living longer than anticipated when many of these contracts were originated. Allstate Financial focuses on the distinct risk and return profiles of the specific products outstanding when developing investment and liability management strategies. The level of legacy deferred annuities in force has been significantly reduced and the investment portfolio and annuity crediting rates are proactively managed to improve the profitability of the business while providing appropriate levels of liquidity. The investment portfolio supporting our immediate annuities is managed to ensure the assets match the characteristics of the liabilities and provide the long-term returns needed to support this business. To better match the long-term nature of our immediate annuities, we continue to increase performance-based investments in which we have ownership interests and a greater proportion of return is derived from idiosyncratic asset or operating performance.
The financial results for Allstate Annuities for the years ended December 31 are presented in the following table.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Revenues | | | | | |
| Life and annuity premiums and contract charges | $ | 14 |
| | $ | 14 |
| | $ | 23 |
|
| Net investment income | 1,181 |
| | 1,323 |
| | 1,540 |
|
| Realized capital gains and losses | (38 | ) | | 264 |
| | 137 |
|
| Total revenues | 1,157 |
| | 1,601 |
| | 1,700 |
|
| | | | | | |
| Costs and expenses | | | | | |
| Life and annuity contract benefits | (606 | ) | | (602 | ) | | (620 | ) |
| Interest credited to contractholder funds | (405 | ) | | (443 | ) | | (572 | ) |
| Amortization of DAC | (7 | ) | | (5 | ) | | (8 | ) |
| Operating costs and expenses | (32 | ) | | (38 | ) | | (28 | ) |
| Restructuring and related charges | — |
| | 1 |
| | — |
|
| Total costs and expenses | (1,050 | ) | | (1,087 | ) | | (1,228 | ) |
| | | | | | |
| Gain (loss) on disposition of operations | 5 |
| | 4 |
| | (50 | ) |
| Income tax expense | (36 | ) | | (188 | ) | | (138 | ) |
| Net income applicable to common shareholders | $ | 76 |
| | $ | 330 |
| | $ | 284 |
|
Net income applicable to common shareholders was $76 million in 2016 compared to $330 million in 2015. The decrease was primarily due to net realized capital losses in 2016 compared to net realized capital gains in 2015 and lower net investment income, partially offset by lower interest credited to contractholder funds. Net income applicable to common shareholders was $330 million in 2015 compared to $284 million in 2014.
Net realized capital losses in 2016 primarily related to impairment write-downs, partially offset by net gains on sales in connection with ongoing portfolio management. Net realized capital gains in 2015 included gains on sales of longer duration fixed income securities in connection with the maturity profile shortening and equity securities in connection with ongoing portfolio management. Net realized capital gains in 2014 primarily related to sales of equity and fixed income securities in connection with ongoing portfolio management.
Net investment income decreased 10.7% or $142 million in 2016 compared to 2015, primarily due to lower fixed income portfolio yields and lower average investment balances. The lower fixed income yields relate to duration shortening in 2015 and the repositioning into performance-based investments and equity securities to support our long-term immediate annuities. While we anticipate higher returns on these investments over time, the investment income can vary significantly between periods. Net investment income decreased 14.1% or $217 million in 2015 compared to 2014, primarily due to lower average investment balances resulting from the sale of LBL on April 1, 2014 and the runoff of the deferred fixed annuity business.
Contract benefits increased 0.7% or $4 million in 2016 compared to 2015, primarily due to unfavorable immediate annuity mortality experience. Contract benefits decreased 2.9% or $18 million in 2015 compared to 2014.
Interest credited to contractholder funds decreased 8.6% or $38 million in 2016 compared to 2015, primarily due to lower average contractholder funds. Interest credited to contractholder funds decreased 22.6% or $129 million in 2015 compared to 2014, primarily due to the reduction in business due to the sale of LBL on April 1, 2014 and the runoff of the deferred fixed annuity business. Valuation changes on derivatives embedded in equity-indexed annuity contracts that are not hedged increased interest credited to contractholder funds by $3 million in 2016 compared to $2 million in 2015 and $22 million in 2014.
Investment spread before valuation changes on embedded derivatives that are not hedged decreased 27.2% to $268 million in 2016 compared to $368 million in 2015, primarily due to lower net investment income. Investment spread before valuation changes on embedded derivatives that are not hedged decreased 21.0% to $368 million in 2015 compared to $466 million in 2014, primarily due to lower net investment income, partially offset by lower credited interest.
Operating costs and expenses decreased 15.8% or $6 million in 2016 compared to 2015, primarily due to lower employee related and other operating costs as a result of the runoff of the business. Operating costs and expenses increased 35.7% or $10 million in 2015 compared to 2014.
Allstate Financial Reinsurance Ceded
In the normal course of business, we seek to limit aggregate and single exposure to losses on large risks by purchasing reinsurance. In addition, Allstate Financial has used reinsurance to effect the disposition of certainlong-term care and other closed blocks of business.business several years ago. We retain primary liability as a direct insurer for all risks ceded to reinsurers. As of December 31, 2016 and 2015, 20% and 21%, respectively, of our face amount of life insurance in force was reinsured. Additionally, we ceded substantially all of the risk associated with our variable annuity business to Prudential Insurance Company of America.
Our reinsurance recoverables, summarized by reinsurer as of December 31, are shown in the following table.
|
| | | | | | | | | |
| ($ in millions) | S&P financial strength rating (1) | | Reinsurance recoverable on paid and unpaid benefits |
| | |
| | | | 2016 | | 2015 |
| Prudential Insurance Company of America | AA- | | $ | 1,406 |
| | $ | 1,438 |
|
| RGA Reinsurance Company | AA- | | 252 |
| | 268 |
|
| Swiss Re Life and Health America, Inc. | AA- | | 152 |
| | 153 |
|
| Munich American Reassurance | AA- | | 99 |
| | 103 |
|
| Scottish Re Group | N/A | | 90 |
| | 94 |
|
| Transamerica Life Group | AA- | | 85 |
| | 83 |
|
| Mutual of Omaha Insurance | AA- | | 84 |
| | 85 |
|
| John Hancock Life & Health Insurance Company | AA- | | 55 |
| | 56 |
|
| Triton Insurance Company | N/A | | 49 |
| | 51 |
|
| American Health & Life Insurance Co. | N/A | | 41 |
| | 43 |
|
| Lincoln National Life Insurance | AA- | | 32 |
| | 34 |
|
| Security Life of Denver | A | | 30 |
| | 31 |
|
| General Re Life Corporation | AA+ | | 24 |
| | 23 |
|
| SCOR Global Life | AA- | | 17 |
| | 18 |
|
Other (2) | | | 52 |
| | 59 |
|
| Total | | | $ | 2,468 |
| | $ | 2,539 |
|
| | | | | | |
| Allstate Life | | | $ | 934 |
| | $ | 971 |
|
| Allstate Benefits | | | 110 |
| | 111 |
|
| Allstate Annuities | | | 1,424 |
| | 1,457 |
|
| Total | | | $ | 2,468 |
| | $ | 2,539 |
|
|
| | | | | | | | | | |
| Reinsurance recoverables by reinsurer |
| | | S&P financial strength rating | | Reinsurance recoverable on paid and unpaid benefits |
| | | |
| | | | | For the years ended December 31, |
| ($ in millions) | | | | 2019 | | 2018 |
| Mutual of Omaha Insurance | | AA- | | $ | 64 |
| | $ | 71 |
|
| General Re Life Corporation | | AA+ | | 18 |
| | 19 |
|
Other (1) | | | | 6 |
| | 5 |
|
| Total | | | | $ | 88 |
| | $ | 95 |
|
| |
(1) | N/A reflects no S&P rating available. |
| |
(2)
| As of both December 31, 20162019 and 2015,2018, the other category includes $45$4 million and $47 million, respectively, of recoverables due from reinsurers with an investment grade credit rating fromrated A- or better by S&P. |
We continuously monitor the creditworthiness of reinsurers in order to determine our risk of recoverability on an individual and aggregate basis, and a provision for uncollectible reinsurance is recorded if needed. No amounts have been deemed unrecoverable in the three-years ended December 31, 2016.2019.
We enter into certain intercompany reinsurance transactions for the Allstate FinancialBenefits operations in order to maintain underwriting control and manage insurance risk among various legal entities. These reinsurance agreements have been approved by the appropriate regulatory authorities. All significant intercompany transactions have been eliminated in consolidation.
The Allstate Corporation 77
INVESTMENTS 2016 HIGHLIGHTS2019 Form 10-KAllstate Annuities
Investments
Allstate Annuities Segment
Allstate Annuities consists primarily of deferred fixed annuities and immediate fixed annuities (including standard and sub-standard structured settlements). In 2019, Allstate Annuities represented 2.9% of total revenue, 0.1% of total PIF and 0.3% of total adjusted net income. We discontinued the sale of proprietary annuities over an eight-year period from 2006 to 2014, reflecting our expectations of declining returns. This segment is in run-off, and we manage it with a focus on increasing economic value through our investment strategy. For additional information on our strategy and outlook, see Part I, Item 1. Business - Strategy and Segment Information. |
| | | | | | | | | | | | |
| Summarized financial information |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Revenues | | | | | | |
| Contract charges | | $ | 13 |
| | $ | 15 |
| | $ | 14 |
|
| Net investment income | | 917 |
| | 1,096 |
| | 1,305 |
|
| Realized capital gains and losses | | 346 |
| | (166 | ) | | 44 |
|
| Total revenues | | 1,276 |
| | 945 |
| | 1,363 |
|
| | | | | | | |
| Costs and expenses | | | | | | |
| Contract benefits | | (583 | ) | | (569 | ) | | (594 | ) |
| Interest credited to contractholder funds | | (307 | ) | | (334 | ) | | (373 | ) |
| Amortization of DAC | | (7 | ) | | (7 | ) | | (7 | ) |
| Operating costs and expenses | | (29 | ) | | (31 | ) | | (34 | ) |
| Restructuring and related charges | | (1 | ) | | — |
| | — |
|
| Total costs and expenses | | (927 | ) | | (941 | ) | | (1,008 | ) |
| | | | | | | |
| Gain on disposition of operations | | 6 |
| | 6 |
| | 6 |
|
| Income tax (expense) benefit | | (73 | ) | | 66 |
| | 58 |
|
| Net income applicable to common shareholders | | $ | 282 |
| | $ | 76 |
| | $ | 419 |
|
| | | | | | | |
| Adjusted net income | | $ | 10 |
| | $ | 131 |
| | $ | 205 |
|
| Realized capital gains and losses, after-tax | | 274 |
| | (131 | ) | | 28 |
|
| Valuation changes on embedded derivatives not hedged, after-tax | | (6 | ) | | 3 |
| | — |
|
| Gain on disposition of operations, after-tax | | 4 |
| | 4 |
| | 4 |
|
| Tax Legislation benefit | | — |
| | 69 |
| | 182 |
|
| Net income applicable to common shareholders | | $ | 282 |
| | $ | 76 |
| | $ | 419 |
|
| | | | | | | |
| Reserve for life-contingent contract benefits as of December 31 | | $ | 8,530 |
| | $ | 8,524 |
| | $ | 8,934 |
|
| | | | | | | |
| Contractholder funds as of December 31 | | $ | 8,972 |
| | $ | 9,817 |
| | $ | 10,936 |
|
| | | | | | | |
| Policies in force as of December 31 (in thousands) | | | | | | |
| Deferred annuities | | 114 |
| | 127 |
| | 142 |
|
| Immediate annuities | | 78 |
| | 84 |
| | 89 |
|
| Total | | 192 |
| | 211 |
| | 231 |
|
Net income applicable to common shareholders increased $206 million in 2019 compared to 2018. 2018 results include a tax benefit of $69 million related to the Tax Legislation.
Adjusted net income decreased $121 million in 2019 compared to 2018, primarily due to lower net investment income, partially offset by lower interest credited to contractholder funds.
Net investment income decreased 16.3% or $179 million in 2019 compared to 2018, primarily due to lower performance-based investment results, mainly from limited partnerships, and lower average investment balances. 2019 performance-based investment results included lower valuations in the fourth quarter, on two private equity investments totaling $37 million.
The investment portfolio supporting immediate annuities is managed to ensure the assets match the characteristics of the liabilities and provide the long-term returns needed to support this business. To better match the long-term nature of our immediate annuities, we use performance-based investments in which we have ownership interests, and a greater proportion of return is derived from idiosyncratic asset or operating performance. Performance-based income can vary significantly between periods and is influenced by economic conditions, equity market performance, comparable public company earnings multiples, capitalization rates, operating performance of the underlying investments and the timing of asset sales.
Allstate Annuities 2019 Form 10-K
Net realized capital gains in 2019 primarily related to increased valuation of equity investments and gains on sales of fixed income securities. Net realized capital losses in 2018 primarily related to decreased valuation of equity investments and losses on sales of fixed income securities.
Contract benefits increased 2.5% or $14 million in 2019 compared to 2018, primarily due to worse immediate annuity mortality experience, partially offset by lower implied interest on immediate annuities with life contingencies.
Our annual review of assumptions in 2019 resulted in no adjustment to reserves for guaranteed benefits. In 2018, the review resulted in a $2 million increase in reserves primarily for guaranteed withdrawal benefits on equity-indexed annuities due to higher projected guaranteed benefits.
As of December 31, 2019 and 2018, our premium deficiency and profits followed by losses evaluations for our immediate annuities with life contingencies concluded that no adjustments were required to be recognized. For further detail on these evaluations, see Reserve for life-contingent contract benefits estimation in the Application of Critical Accounting Estimates section.
Benefit spread reflects our mortality results using the difference between contract charges earned and contract benefits excluding the portion related to the implied interest on immediate annuities with life contingencies. This implied interest totaled $81.80$479 million and $492 million in 2019 and 2018, respectively. Total benefit spread was $(95) million and $(68) million in 2019 and 2018, respectively.
Interest credited to contractholder funds decreased 8.1% or $27 million in 2019 compared to 2018, primarily due to lower average contractholder funds. Valuation changes on derivatives embedded in equity-indexed annuity contracts that are not hedged increased interest credited to contractholder funds by $8 million in 2019 compared to a decrease of $3 million in 2018.
Investment spread reflects the difference between net investment income and the sum of interest credited to contractholder funds and the implied interest on immediate annuities with life contingencies, which is included as a component of contract benefits and is used to analyze the impact of net investment income and interest credited to contractholders on net income.
|
| | | | | | | | | | | | |
| Investment spread |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Investment spread before valuation changes on embedded derivatives not hedged | | $ | 139 |
| | $ | 267 |
| | $ | 432 |
|
| Valuation changes on derivatives embedded in equity-indexed annuity contracts that are not hedged | | (8 | ) | | 3 |
| | (1 | ) |
| Total investment spread | | $ | 131 |
| | $ | 270 |
| | $ | 431 |
|
Investment spread before valuation changes on embedded derivatives not hedged decreased 47.9% or $128 million in 2019 compared to 2018, primarily due to lower investment income, mainly from limited partnership interests, partially offset by lower interest credited to contractholder funds.
To further analyze investment spreads, the following table summarizes the weighted average investment yield on assets supporting product liabilities, interest crediting rates and investment spreads. Investment spreads may vary significantly between periods due to the variability in investment income, particularly for immediate fixed annuities where the investment portfolio includes performance-based investments.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Analysis of investment spread |
| | | Weighted average investment yield | | Weighted average interest crediting rate | | Weighted average investment spreads |
| | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Deferred fixed annuities | | 4.3 | % | | 4.1 | % | | 4.2 | % | | 2.7 | % | | 2.8 | % | | 2.8 | % | | 1.6 | % | | 1.3 | % | | 1.4 | % |
| Immediate fixed annuities with and without life contingencies | | 5.0 |
| | 6.4 |
| | 8.0 |
| | 5.9 |
| | 6.0 |
| | 6.0 |
| | (0.9 | ) | | 0.4 |
| | 2.0 |
|
The Allstate Corporation 79
2019 Form 10-KAllstate Annuities
The following table summarizes the weighted average guaranteed crediting rates and weighted average current crediting rates as of December 31, 2019 for certain fixed annuities where management has the ability to change the crediting rate, subject to a contractual minimum. Other products, including equity-indexed, variable and immediate annuities totaling $4.12 billion of contractholder funds, have been excluded from the analysis because management does not have the ability to change the crediting rate or the minimum crediting rate is not considered meaningful in this context.
|
| | | | | | | | | | |
| Weighted average guaranteed crediting rates and weighted average current crediting rates |
| ($ in millions) | | Weighted average guaranteed crediting rates | | Weighted average current crediting rates | | Contractholder
funds |
| Annuities with annual crediting rate resets | | 3.16 | % | | 3.17 | % | | $ | 4,220 |
|
Annuities with multi-year rate guarantees (1): | | | | | | |
| Resettable in next 12 months | | 1.73 |
| | 2.89 |
| | 116 |
|
| Resettable after 12 months | | 2.22 |
| | 2.63 |
| | 518 |
|
| |
(1) | These contracts include interest rate guarantee periods, the majority of which are 5 years. |
Operating costs and expensesdecreased 6.5% or $2 million in 2019 compared to 2018, primarily due to lower technology and employee-related costs.
Analysis of reserves and contractholder funds
|
| | | | | | | | |
| Product liabilities |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 |
| Immediate fixed annuities with life contingencies | | | | |
Sub-standard structured settlements and group pension terminations (1) | | $ | 5,085 |
| | $ | 4,990 |
|
Standard structured settlements and SPIA (2) | | 3,367 |
| | 3,425 |
|
| Other | | 78 |
| | 109 |
|
| Reserve for life-contingent contract benefits | | $ | 8,530 |
| | $ | 8,524 |
|
| | | | | |
| Deferred fixed annuities | | $ | 6,499 |
| | $ | 7,156 |
|
| Immediate fixed annuities without life contingencies | | 2,346 |
| | 2,525 |
|
| Other | | 127 |
| | 136 |
|
| Contractholder funds | | $ | 8,972 |
| | $ | 9,817 |
|
| |
(1) | Comprises structured settlement annuities for annuitants with severe injuries or other health impairments which increased their expected mortality rate at the time the annuity was issued (“sub-standard structured settlements”) and group annuity contracts issued to sponsors of terminated pension plans. |
| |
(2) | Comprises structured settlement annuities for annuitants with standard life expectancy (“standard structured settlements”) and single premium immediate annuities (“SPIA”) with life contingencies. |
Allstate Annuities 2019 Form 10-K
Contractholder funds represent interest-bearing liabilities arising from the sale of products such as fixed annuities. The balance of contractholder funds is equal to the cumulative deposits received and interest credited to the contractholder less cumulative contract benefits, surrenders, withdrawals and contract charges for mortality or administrative expenses.
|
| | | | | | | | | | | | |
| Changes in contractholder funds |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Contractholder funds, beginning balance | | $ | 9,817 |
| | $ | 10,936 |
| | $ | 11,915 |
|
| | | | | | | |
| Deposits | | 16 |
| | 15 |
| | 28 |
|
| | | | | | | |
| Interest credited | | 304 |
| | 331 |
| | 370 |
|
| | | | | | | |
| Benefits, withdrawals and other adjustments | | | | | | |
| Benefits | | (547 | ) | | (587 | ) | | (638 | ) |
| Surrenders and partial withdrawals | | (602 | ) | | (854 | ) | | (723 | ) |
| Contract charges | | (9 | ) | | (9 | ) | | (9 | ) |
| Net transfers from separate accounts | | — |
| | — |
| | 1 |
|
Other adjustments (1) | | (7 | ) | | (15 | ) | | (8 | ) |
| Total benefits, withdrawals and other adjustments | | (1,165 | ) | | (1,465 | ) | | (1,377 | ) |
| Contractholder funds, ending balance | | $ | 8,972 |
| | $ | 9,817 |
| | $ | 10,936 |
|
| |
(1) | The table above illustrates the changes in contractholder funds, which are presented gross of reinsurance recoverables on the Consolidated Statements of Financial Position. The table above is intended to supplement our discussion and analysis of revenues, which are presented net of reinsurance on the Consolidated Statements of Operations. As a result, the net change in contractholder funds associated with products reinsured is reflected as a component of the other adjustments line. |
Contractholder funds decreased 8.6% in 2019, primarily due to the continued runoff of our deferred fixed annuity business. We discontinued the sale of proprietary annuities but still accept additional deposits on existing contracts.
Surrenders and partial withdrawals decreased 29.5% or $252 million in 2019 compared to 2018. 2018 had elevated surrenders on fixed annuities resulting from an increased number of contracts reaching the 30-45 day period during which there is no surrender charge. The surrender and partial withdrawal rate on deferred fixed annuities, based on the beginning of year contractholder funds, was 9.2% in 2019 compared to 11.4% in 2018.
Allstate Annuities reinsurance ceded
We ceded substantially all of the risk associated with our variable annuity business to Prudential Insurance Company of America (“Prudential”). Our reinsurance recoverables from Prudential totaled $1.29 billion and $1.36 billion as of December 31, 2016, increasing2019 and 2018, respectively. We also have reinsurance recoverables from $77.76 billionother reinsurers of $17 million as of both December 31, 2015.2019 and 2018.
Unrealized net capital gains totaled $1.77 billionWe retain primary liability as a direct insurer for all risks ceded to reinsurers. We continuously monitor the creditworthiness of reinsurers in order to determine our risk of recoverability on an individual and aggregate basis, and a provision for uncollectible reinsurance is recorded if needed. No amounts have been deemed unrecoverable in the three-years ended December 31, 2016, increasing from $1.03 billion as of December 31, 2015.2019.
Net investment income was $3.04 billion in 2016, a decrease of 3.6% from $3.16 billion in 2015.
Net realized capital losses were $90 million in 2016 compared to net realized capital gains of $30 million in 2015.The Allstate Corporation 81
INVESTMENTS2019 Form 10-KInvestments
Investments
Overview and strategy The return on our investment portfolios is an important component of our ability to offer good value to customers, fund business improvements and create value for shareholders. Investment portfolios are held for the Property-Liability, Service Businesses, Allstate FinancialLife, Allstate Benefits, Allstate Annuities, and Corporate and Other operations. While taking into consideration the investment portfolio in aggregate, the management of the underlying portfolios is significantly influenced by the nature of each respective business and its corresponding liability profile. For each operation,business, we identify a strategic asset allocation which considers both the nature of the liabilities and the risk and return characteristics of the various asset classes in which we invest. This allocation is informed by our long-term and market expectations, as well as other considerations such as risk appetite, portfolio diversification, duration, desired liquidity and capital. Within appropriate ranges relative to strategic allocations, tactical allocations are made in consideration of prevailing and potential future market conditions. We manage risks that involve uncertainty related to interest rates, credit spreads, equity returns and currency exchange rates.
The Property-Liability portfolio emphasizes protection of principal and consistent income generation, within a total return framework. This approach has produced competitive returns over the long term and is designed to ensure financial strength and stability for paying claims, while maximizing economic value and surplus growth. Products with lower liquidity needs, such as auto insurance and discontinued lines and coverages, and capital create capacity to invest in less liquid higher yielding fixed income securities, performance-based investments such as limited partnerships and equity securities. Products with higher liquidity needs, such as homeowners insurance, are invested primarily in high quality liquid fixed income securities.
The Service Businesses portfolio is focused on protection of principal and consistent income generation, within a total return framework. The portfolio is largely comprised of fixed income securities with a lesser allocation to equity securities and short-term investments.
The Allstate FinancialLife portfolio is comprised of assets chosen to generate returns to support corresponding liabilities within an asset-liability framework that targets an appropriate return on capital. This portfolio is well diversified and primarily consists of longer duration fixed income securities and commercial mortgage loans.
The Allstate Benefits portfolio is focused on protection of principal and consistent income generation while targeting an appropriate return on capital. The portfolio is largely comprised of fixed income securities and commercial mortgage loans with a small allocation to equity securities.
The Allstate Annuities portfolio is managed to ensure the assets match the characteristics of the liabilities. For longer-term immediate annuity liabilities, we invest primarily in performance-based investments such as limited partnerships and equity securities. For shorter-term annuity and life insurance liabilities, we invest primarily in interest-bearing investments, such as fixed income securities and commercial mortgage loans.loans with maturity profiles aligned with liability cash flow requirements.
The Corporate and Other portfolio balances unique liquidity needs related to the overall corporate capital structure with the pursuit of returns.
Within each segment, we utilize four high leveltwo primary strategies to manage risks and returns and to position our portfolio to take advantage of market opportunities while attempting to mitigate adverse effects. As strategies and market conditions evolve, the asset allocation may change or assets may be moved between strategies.
Market-Based CoreMarket-basedstrategy includes investments primarily in public fixed income and equity securities. It seeks to deliver predictable earnings aligned to business needs through investments primarily in public fixed income and equity securities. Private fixed income assets, such as commercial mortgages, bank loans and privately placed debt are also included in this category. As of December 31, 2016, 81% of the total portfolio follows this strategy with 83% in fixed income securities and mortgage loans and 6% in equity securities.
Market-Based Activestrategy seeks to outperform within the public markets through tactical positioning and by takingtake advantage of short-term opportunities. This strategy may generate results that meaningfully deviate from those achieved by market indices, both favorablyopportunities primarily through public and unfavorably. The portfolio primarily includes publicprivate fixed income investments and public equity securities. As of December 31, 2016, 12% of the total portfolio follows this strategy with 76% in fixed income securities and 14% in equity securities.
Performance-Based Long-Term (“PBLT”) Performance-basedstrategy seeks to deliver attractive risk-adjusted returns overand supplement market risk with idiosyncratic risk. Returns are impacted by a longer horizon. The return is a functionvariety of bothfactors including general macroeconomic and public market conditions andas public benchmarks are often used in the valuation of underlying investments. Variability in earnings will also result from the performance of the underlying assets or businesses.business and the timing of sales of those investments. Earnings from the sales of investments may be recorded as net investment income or realized capital gains and losses. The portfolio, which primarily includes private equity and real estate infrastructure, timber and agriculture-related assets,with a majority being limited partnerships, is diversified across a number of characteristics, including managers or partners, vintage years, strategies, geographies (including international) and industry sectors or property types. These investments are generally illiquid in nature, often require specialized expertise, typically involve a third partythird-party manager, and may offer the potential to add valueoften enhance returns and income through transformation at the company or property level. AsA portion of December 31, 2016, 7% of the total portfolio follows this strategy with 88%these investments seek returns in limited partnership interests.
Performance-Based Opportunisticstrategy seeks to earn attractive returns by making investmentsmarkets or asset classes that involve asset dislocationsare dislocated or special situations, oftenprimarily in private markets.
Investments outlookImpact of Low Interest Rate Environment
In December 2016,January 2020, the FOMC tightened monetary policy by settingFederal Open Market Committee (“FOMC”) maintained the new target range for the federal funds rate at 1/1-1/2 percent to 3/1-3/4 percent and maintained their inflation target of 2 percent. The FOMC noted that the current stance of monetary policy remains accommodative after the increase, thereby supporting further strengthening in theis appropriate to support sustained expansion of economic activity, strong labor market conditions and a returninflation returning to the target of 2 percent inflation.percent. The path
Investments 2019 Form 10-K
of the federal funds rate increase will depend on economic conditions and their impact on the economic outlook. We anticipate that interest ratesInterest-bearing investments are comprised of fixed income securities, mortgage loans, short-term
investments and other investments, including bank and agent loans.
|
| | | | | | | | | | | | | | |
| Contractual maturities and yields of fixed income securities and mortgage loans for the next three years |
| | | Fixed income securities | | Mortgage loans |
| ($ in millions) | | Carrying value | | Investment yield | | Carrying value | | Investment yield |
| 2020 | | $ | 3,239 |
| | 3.6 | % | | $ | 58 |
| | 4.8 | % |
| 2021 | | 5,877 |
| | 3.4 |
| | 446 |
| | 4.8 |
|
| 2022 | | 6,107 |
| | 3.3 |
| | 460 |
| | 4.3 |
|
Investing activity will continue to increase but remain below historic averages and that financial markets may continue to have periods of high volatility and less liquidity.
Invested assets and income are expected to decline in line with reductions in contractholder funds for the Allstate Financial segment. Additionally, investment income will declinedecrease our portfolio yield as we continue to invest and reinvest investment proceeds atlong as market yields that areremain below the current portfolio yield. In the Allstate Annuities segment, the portfolio yield has been less impacted by reinvestment in the current low interest rate environment than other portfolios because much of the investment cash flows have been used to fund the managed reduction in spread-based liabilities. The decline in market-based portfolio yield and Allstate Annuities invested assets are expected to result in lower net investment income in future periods.
Investments Outlook
We plan to focus on the following priorities:
Expanding our capabilities in performance-based investing to increaseEnhance investment portfolio returns through use of a dynamic capital allocation framework and capital creation and taking advantage of increased market volatility through allocations to market-based active strategies.focus on tax efficiency.
Continue
Leverage our broad capabilities to shift the portfolio mix to include more performance-based investments. A greater proportion of the return on these investments is derived from idiosyncratic asset or operating performance. While we anticipateearn higher risk-adjusted returns on these investments over time, the investment income can vary significantly between periods.capital.
InvestingInvest for the specific needs and characteristics of Allstate’s businesses, including its corresponding liability profile.
Portfolio composition by reporting segment The composition of the investment portfolios by reporting segment as of December 31, 2016 is presented in the following table.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | Property-Liability (5) | | Allstate Financial (5) | | Corporate and Other (5) | | Total |
| | | | Percent to total | | | | Percent to total | | | | Percent to total | | | | Percent to total |
Fixed income securities (1) | $ | 30,302 |
| | 70.9 | % | | $ | 25,578 |
| | 69.4 | % | | $ | 1,959 |
| | 87.6 | % | | $ | 57,839 |
| | 70.7 | % |
Equity securities (2) | 4,074 |
| | 9.5 |
| | 1,589 |
| | 4.3 |
| | 3 |
| | 0.1 |
| | 5,666 |
| | 6.9 |
|
| Mortgage loans | 280 |
| | 0.7 |
| | 4,206 |
| | 11.4 |
| | — |
| | — |
| | 4,486 |
| | 5.5 |
|
Limited partnership interests (3) | 3,042 |
| | 7.1 |
| | 2,771 |
| | 7.5 |
| | 1 |
| | — |
| | 5,814 |
| | 7.1 |
|
Short-term investments (4) | 3,405 |
| | 8.0 |
| | 609 |
| | 1.7 |
| | 274 |
| | 12.3 |
| | 4,288 |
| | 5.3 |
|
| Other | 1,619 |
| | 3.8 |
| | 2,087 |
| | 5.7 |
| | — |
| | — |
| | 3,706 |
| | 4.5 |
|
| Total | $ | 42,722 |
|
| 100.0 | % |
| $ | 36,840 |
|
| 100.0 | % |
| $ | 2,237 |
|
| 100.0 | % |
| $ | 81,799 |
|
| 100.0 | % |
| |
(1)
| Fixed income securities are carried at fair value. Amortized cost basis for these securities was $30.20 billion, $24.42 billion, $1.95 billion and $56.58 billion for Property-Liability, Allstate Financial, Corporate and Other, and in Total, respectively. |
| |
(2)
| Equity securities are carried at fair value. Cost basis for these securities was $3.67 billion, $1.48 billion, $3 million and $5.16 billion for Property-Liability, Allstate Financial, Corporate and Other, and in Total, respectively. |
| |
(3)
| We have commitments to invest in additional limited partnership interests totaling $1.58 billion, $1.40 billion and $2.98 billion for Property-Liability, Allstate Financial and in Total, respectively. |
| |
(4)
| Short-term investments are carried at fair value. Amortized cost basis for these investments was $3.41 billion, $609 million, $274 million and $4.29 billion for Property-Liability, Allstate Financial, Corporate and Other, and in Total, respectively. |
| |
(5)
| Balances reflect the elimination of related party investments between segments. |
Investments totaled $81.80 billion as of December 31, 2016, increasing from $77.76 billion as of December 31, 2015, primarily due to positive operating cash flows, proceeds from the issuance of debt, and higher fixed income and equity valuations, partially offset by common share repurchases, net reductions in contractholder funds and dividends paid to shareholders.
The Property-Liability investment portfolio totaled $42.72 billion as of December 31, 2016, increasing from $38.48 billion as of December 31, 2015, primarily due to the proceeds from the issuance of debt that were used to fund the acquisition of SquareTrade on January 3, 2017, positive operating cash flows and higher fixed income and equity valuations, partially offset by dividends paid by Allstate Insurance Company (“AIC”) to The Allstate Corporation (the “Corporation”).
The Allstate Financial investment portfolio totaled $36.84 billion as of December 31, 2016, increasing from $36.79 billion as of December 31, 2015, primarily due to positive operating cash flows from life and accident and health insurance products and higher fixed income valuations, partially offset by net reductions in contractholder funds.
The Corporate and Other investment portfolio totaled $2.24 billion as of December 31, 2016, decreasing from $2.49 billion as of December 31, 2015, primarily due to common share repurchases and dividends paid to shareholders, partially offset by dividends paid by AIC to the Corporation.
Portfolio composition by investment strategy The following table presents the investment portfolio by strategy as of December 31, 2016.
|
| | | | | | | | | | | | | | | | | | | |
| ($ in millions) | Total | | Market-Based Core | | Market-Based Active | | Performance-Based Long-Term | | Performance-Based Opportunistic |
| Fixed income securities | $ | 57,839 |
| | $ | 50,527 |
| | $ | 7,246 |
| | $ | 66 |
| | $ | — |
|
| Equity securities | 5,666 |
| | 4,221 |
| | 1,346 |
| | 99 |
| | — |
|
| Mortgage loans | 4,486 |
| | 4,486 |
| | — |
| | — |
| | — |
|
| Limited partnership interests | 5,814 |
| | 502 |
| | — |
| | 5,292 |
| | 20 |
|
| Short-term investments | 4,288 |
| | 3,475 |
| | 813 |
| | — |
| | — |
|
| Other | 3,706 |
| | 3,014 |
| | 160 |
| | 532 |
| | — |
|
| Total | $ | 81,799 |
| | $ | 66,225 |
| | $ | 9,565 |
| | $ | 5,989 |
| | $ | 20 |
|
| % of total | | | 81 | % | | 12 | % | | 7 | % | | — | % |
| | | | | | | | | | |
| Property-Liability | $ | 42,722 |
| | $ | 31,216 |
| | $ | 8,313 |
| | $ | 3,181 |
| | $ | 12 |
|
| % of Property-Liability | | | 73 | % | | 20 | % | | 7 | % | | — | % |
| Allstate Financial | $ | 36,840 |
| | $ | 32,772 |
| | $ | 1,252 |
| | $ | 2,808 |
| | $ | 8 |
|
| % of Allstate Financial | | | 89 | % | | 3 | % | | 8 | % | | — | % |
| Corporate & Other | $ | 2,237 |
| | $ | 2,237 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| % of Corporate & Other | | | 100 | % | | — | % | | — | % | | — | % |
| | | | | | | | | | |
| Unrealized net capital gains and losses | | | | | | | | | |
| Fixed income securities | $ | 1,263 |
| | $ | 1,236 |
| | $ | 27 |
| | $ | — |
| | $ | — |
|
| Equity securities | 509 |
| | 447 |
| | 53 |
| | 9 |
| | — |
|
| Limited partnership interests | (4 | ) | | — |
| | — |
| | (4 | ) | | — |
|
| Other | 2 |
| | 2 |
| | — |
| | — |
| | — |
|
| Total | $ | 1,770 |
| | $ | 1,685 |
| | $ | 80 |
| | $ | 5 |
| | $ | — |
|
During 2016, strategic actions focused on optimizing portfolio yield, return and risk in the low interest rate environment. In the Property-Liability portfolio, we maintained the shorter maturity profile of our fixed income securities established in 2013. In the Allstate Financial portfolio, we maintained the portfolio’s shorter maturity profile established in 2015 and continued to shift the proceeds from the sale of longer duration fixed income securities primarily to performance-based investments. These actions have reduced our exposure to rising interest rates. We continue to increase our performance-based investments in both theour Property-Liability and Allstate Financial portfolios,portfolio, consistent with our ongoing strategy to have a greater proportion of return derived from idiosyncratic asset or operating performanceperformance.
Invested assets and market-based income are expected to decline with reductions in contractholder funds and income related to performance-based investments will result in variability of earnings for the Allstate Annuities segment.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio composition and strategy by reporting segment (1) |
| | | As of December 31, 2019 |
| ($ in millions) | | Property-Liability | | Service Businesses | | Allstate Life | | Allstate Benefits | | Allstate Annuities | | Corporate and Other | | Total |
Fixed income securities (2) | | $ | 33,299 |
| | $ | 1,157 |
| | $ | 8,061 |
| | $ | 1,298 |
| | $ | 13,984 |
| | $ | 1,245 |
| | $ | 59,044 |
|
Equity securities (3) | | 5,919 |
| | 311 |
| | 210 |
| | 80 |
| | 1,300 |
| | 342 |
| | 8,162 |
|
| Mortgage loans | | 538 |
| | — |
| | 1,861 |
| | 209 |
| | 2,209 |
| | — |
| | 4,817 |
|
| Limited partnership interests | | 4,846 |
| | — |
| | — |
| | — |
| | 3,232 |
| | — |
| | 8,078 |
|
Short-term investments (4) | | 2,186 |
| | 76 |
| | 396 |
| | 44 |
| | 815 |
| | 739 |
| | 4,256 |
|
| Other | | 1,626 |
| | — |
| | 1,386 |
| | 310 |
| | 681 |
| | 2 |
| | 4,005 |
|
| Total | | $ | 48,414 |
| | $ | 1,544 |
|
| $ | 11,914 |
|
| $ | 1,941 |
|
| $ | 22,221 |
|
| $ | 2,328 |
| | $ | 88,362 |
|
| | | | | | | | | | | | | | | |
| Percent to total | | 54.9 | % | | 1.7 | % | | 13.5 | % | | 2.2 | % | | 25.1 | % | | 2.6 | % | | 100.0 | % |
| | | | | | | | | | | | | | | |
| Market-based | | $ | 43,256 |
| | $ | 1,544 |
| | $ | 11,914 |
| | $ | 1,941 |
| | $ | 18,672 |
| | $ | 2,326 |
| | $ | 79,653 |
|
| Performance-based | | 5,158 |
| | — |
| | — |
| | — |
| | 3,549 |
| | 2 |
| | 8,709 |
|
| Total | | $ | 48,414 |
| | $ | 1,544 |
| | $ | 11,914 |
| | $ | 1,941 |
| | $ | 22,221 |
| | $ | 2,328 |
| | $ | 88,362 |
|
| |
(1) | Balances reflect the elimination of related party investments between segments. |
| |
(2) | Fixed income securities are carried at fair value. Amortized cost basis for these securities was $32.22 billion, $1.12 billion, $7.43 billion, $1.23 billion, $13.08 billion, $1.21 billion and $56.29 billion for Property-Liability, Service Businesses, Allstate Life, Allstate Benefits, Allstate Annuities, Corporate and Other, and in Total, respectively. |
| |
(3) | Equity securities are carried at fair value. The fair value of equity securities, held as of December 31, 2019, was $1.59 billion in excess of cost. These net gains were primarily concentrated in the consumer goods and technology sectors and in domestic equity index funds. |
| |
(4) | Short-term investments are carried at fair value. |
Investments totaled $88.36 billion as of December 31, 2019, increasing from $81.26 billion as of December 31, 2018, primarily due to higher fixed income and equity securities. valuations, positive investment and operating cash flows and issuance of preferred stock and senior debt, partially offset by common share repurchases, dividends paid to shareholders, net reductions in contractholder funds and repayment of preferred stock and senior debt.
Beginning January 1, 2018, equity securities are reported at fair value with changes in fair value recognized in realized capital gains and losses. Limited partnerships previously reported using the cost method are reported at fair
The Allstate Corporation 83
2019 Form 10-KInvestments
value with changes in fair value recognized in net investment income. As a result, 2017 net investment income and net realized capital gains and losses are not comparable to other periods presented.
|
| | | | | | | | | | | | |
| Portfolio composition by investment strategy |
| | | As of December 31, 2019 |
| ($ in millions) | | Market-based | | Performance-based | | Total |
| Fixed income securities | | $ | 58,950 |
| | $ | 94 |
| | $ | 59,044 |
|
| Equity securities | | 7,822 |
| | 340 |
| | 8,162 |
|
| Mortgage loans | | 4,817 |
| | — |
| | 4,817 |
|
| Limited partnership interests | | 906 |
| | 7,172 |
| | 8,078 |
|
| Short-term investments | | 4,256 |
| | — |
| | 4,256 |
|
| Other | | 2,902 |
| | 1,103 |
| | 4,005 |
|
| Total | | $ | 79,653 |
| | $ | 8,709 |
| | $ | 88,362 |
|
| | | | | | | |
| Percent to total | | 90.1 | % | | 9.9 | % | | 100.0 | % |
| | | | | | | |
| Unrealized net capital gains and losses | | | | | | |
| Fixed income securities | | $ | 2,751 |
| | $ | — |
| | $ | 2,751 |
|
| Limited partnership interests | | — |
| | (4 | ) | | (4 | ) |
| Other | | (3 | ) | | — |
| | (3 | ) |
| Total | | $ | 2,748 |
| | $ | (4 | ) | | $ | 2,744 |
|
During 2019, strategic actions focused on optimizing portfolio yield, return and risk in the low interest rate environment.
We continued to increase performance-based investments in the Property-Liability portfolio.
We increased the maturity profile of fixed income securities in our Property-Liability portfolio to a duration of 5.2 years, while maintaining duration at 5.9 years and 4.5 years for the Allstate Life and Allstate Annuities portfolios, respectively.
In the Allstate Financial’sAnnuities portfolio, performance-basedinvested assets and market-based income declined with reductions in contractholder funds. Performance-based investments and equity securities will continue to be allocated primarily to the longer-term immediate annuity liabilities to improvereduce the risk that investment returns on those products. Shorter-termare below levels required to meet their funding needs while shorter-term annuity and life insurance liabilities will continue to be invested primarily in interest-bearing investments, such as fixed income securities and commercial mortgage loans.market-based investments.
Fixed income securities by type are listed in the following table.
| | | Fixed income securities by type | | Fixed income securities by type |
| | | | | | | | | | | Fair value as of December 31, |
| ($ in millions) | Fair value as of December 31, 2016 | | Percent to total investments | | Fair value as of December 31, 2015 | | Percent to total investments | | 2019 | | 2018 |
| U.S. government and agencies | $ | 3,637 |
| | 4.5 | % | | $ | 3,922 |
| | 5.0 | % | | $ | 5,086 |
| | $ | 5,517 |
|
| Municipal | 7,333 |
| | 9.0 |
| | 7,401 |
| | 9.5 |
| | 8,620 |
| | 9,169 |
|
| Corporate | 43,601 |
| | 53.3 |
| | 41,827 |
| | 53.8 |
| | 43,078 |
| | 40,158 |
|
| Foreign government | 1,075 |
| | 1.3 |
| | 1,033 |
| | 1.4 |
| | 979 |
| | 747 |
|
| ABS | 1,171 |
| | 1.4 |
| | 2,327 |
| | 3.0 |
| |
| RMBS | 728 |
| | 0.9 |
| | 947 |
| | 1.2 |
| |
| CMBS | 270 |
| | 0.3 |
| | 466 |
| | 0.6 |
| |
| Redeemable preferred stock | 24 |
| | — |
| | 25 |
| | — |
| |
| Asset-backed securities (“ABS”) | | | 862 |
| | 1,045 |
|
| Mortgage-backed securities (“MBS”) | | | 419 |
| | 534 |
|
| Total fixed income securities | $ | 57,839 |
|
| 70.7 | % |
| $ | 57,948 |
|
| 74.5 | % | | $ | 59,044 |
|
| $ | 57,170 |
|
Fixed income securities are rated by third partythird-party credit rating agencies and/or are internally rated. As of December 31, 2016, 85.1%2019, 87.9% of the consolidated fixed income securities portfolio was rated investment grade, which is defined as a security having a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A or BBB from S&P, a comparable rating from another nationally recognized rating agency, or a comparable internal rating if an externally provided rating is not available. Credit ratings below these designations are
considered lowlower credit quality or below investment grade, which includes high yield bonds. Market prices for certain securities may have credit spreads which imply higher or lower credit quality than the current third partythird-party rating. Our initial investment decisions and ongoing monitoring procedures for fixed income securities are based on a thorough due diligence process which includes, but is not limited to, an assessment of the credit quality, sector, structure and liquidity risks of each issue.
The following table summarizes the fair value and unrealized net capital gains and losses for fixed income securities by credit quality as of December 31, 2016.
Investments 2019 Form 10-K
|
| | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | Investment grade | | Below investment grade | | Total |
| | Fair value | | Unrealized gain/(loss) | | Fair value | �� | Unrealized gain/(loss) | | Fair value | | Unrealized gain/(loss) |
| U.S. government and agencies | $ | 3,637 |
| | $ | 65 |
| | $ | — |
| | $ | — |
| | $ | 3,637 |
| | $ | 65 |
|
| Municipal | | | | | | | | |
| |
|
| Tax exempt | 4,943 |
| | (38 | ) | | 39 |
| | (5 | ) | | 4,982 |
| | (43 | ) |
| Taxable | 2,297 |
| | 261 |
| | 54 |
| | (1 | ) | | 2,351 |
| | 260 |
|
| Corporate | | | | | | | | |
| |
|
| Public | 26,806 |
| | 511 |
| | 4,686 |
| | 68 |
| | 31,492 |
| | 579 |
|
| Privately placed | 9,053 |
| | 246 |
| | 3,056 |
| | 34 |
| | 12,109 |
| | 280 |
|
| Foreign government | 1,070 |
| | 32 |
| | 5 |
| | — |
| | 1,075 |
| | 32 |
|
| ABS | | | | | | | | |
| |
|
| Collateralized debt obligations (“CDO”) | 624 |
| | (4 | ) | | 53 |
| | 3 |
| | 677 |
| | (1 | ) |
| Consumer and other asset-backed securities (“Consumer and other ABS”) | 490 |
| | 2 |
| | 4 |
| | 1 |
| | 494 |
| | 3 |
|
| RMBS | | | | | | | | |
| |
|
| U.S. government sponsored entities (“U.S. Agency”) | 143 |
| | 4 |
| | — |
| | — |
| | 143 |
| | 4 |
|
| Non-agency | 36 |
| | 1 |
| | 549 |
| | 72 |
| | 585 |
| | 73 |
|
| CMBS | 94 |
| | 1 |
| | 176 |
| | 7 |
| | 270 |
| | 8 |
|
| Redeemable preferred stock | 24 |
| | 3 |
| | — |
| | — |
| | 24 |
| | 3 |
|
| Total fixed income securities | $ | 49,217 |
|
| $ | 1,084 |
|
| $ | 8,622 |
|
| $ | 179 |
|
| $ | 57,839 |
|
| $ | 1,263 |
|
| | | | | | | | | | | | |
| Property-Liability | $ | 25,011 |
| | $ | 5 |
| | $ | 5,291 |
| | $ | 93 |
| | $ | 30,302 |
| | $ | 98 |
|
| Allstate Financial | 22,329 |
| | 1,069 |
| | 3,249 |
| | 85 |
| | 25,578 |
| | 1,154 |
|
| Corporate & Other | 1,877 |
| | 10 |
| | 82 |
| | 1 |
| | 1,959 |
| | 11 |
|
| Total fixed income securities | $ | 49,217 |
| | $ | 1,084 |
| | $ | 8,622 |
| | $ | 179 |
| | $ | 57,839 |
| | $ | 1,263 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair value and unrealized net capital gains (losses) for fixed income securities by credit quality |
| | | As of December 31, 2019 | | |
| | | Investment grade | | Below investment grade | | Total | | |
| ($ in millions) | | Fair value | | Unrealized gain (loss) | | Fair value | | Unrealized gain (loss) | | Fair value | | Unrealized gain (loss) | | Percent rated investment grade |
| U.S. government and agencies | | $ | 5,086 |
| | $ | 115 |
| | $ | — |
| | $ | — |
| | $ | 5,086 |
| | $ | 115 |
| | 100.0 | % |
| Municipal | | 8,569 |
| | 546 |
| | 51 |
| | (6 | ) | | 8,620 |
| | 540 |
| | 99.4 |
|
| Corporate | | | | | | | | | |
| |
| | |
| Public | | 27,777 |
| | 1,356 |
| | 3,103 |
| | 122 |
| | 30,880 |
| | 1,478 |
| | 90.0 |
|
| Privately placed | | 8,581 |
| | 391 |
| | 3,617 |
| | 119 |
| | 12,198 |
| | 510 |
| | 70.3 |
|
| Total Corporate | | 36,358 |
| | 1,747 |
| | 6,720 |
| | 241 |
| | 43,078 |
| | 1,988 |
| | 84.4 |
|
| Foreign government | | 972 |
| | 11 |
| | 7 |
| | — |
| | 979 |
| | 11 |
| | 99.3 |
|
| ABS | | 791 |
| | 1 |
| | 71 |
| | 1 |
| | 862 |
| | 2 |
| | 91.8 |
|
| MBS | | 123 |
| | 3 |
| | 296 |
| | 92 |
| | 419 |
| | 95 |
| | 29.4 |
|
| Total fixed income securities | | $ | 51,899 |
|
| $ | 2,423 |
|
| $ | 7,145 |
|
| $ | 328 |
|
| $ | 59,044 |
|
| $ | 2,751 |
| | 87.9 | % |
Municipal bonds, including tax exempt and taxable securities, totaled $7.33 billion as of December 31, 2016 with an unrealized net capital gain of $217 million. The municipal bond portfolio includesinclude general obligations of state and local issuers and revenue bonds (including pre-refunded bonds, which are bonds for which an irrevocable trust has been established to fund the remaining payments of principal and interest).
The following table summarizes by state the fair value, amortized cost and credit rating of our municipal bonds, excluding $282 million of pre-refunded bonds, as of December 31, 2016.
|
| | | | | | | | | | | | | | | | | | | | | |
($ in millions)
State | State general obligation | | Local general obligation | | Revenue (1) | | Fair value | | Amortized cost | | Average credit rating |
| Texas | $ | 17 |
| | $ | 364 |
| | $ | 321 |
| | $ | 702 |
| | $ | 667 |
| | Aa |
| California | 89 |
| | 186 |
| | 234 |
| | 509 |
| | 465 |
| | Aa |
| New York | 9 |
| | 80 |
| | 393 |
| | 482 |
| | 469 |
| | Aa |
| Florida | 94 |
| | 34 |
| | 277 |
| | 405 |
| | 399 |
| | Aa |
| Washington | 248 |
| | 7 |
| | 141 |
| | 396 |
| | 391 |
| | Aa |
| Michigan | 228 |
| | 8 |
| | 147 |
| | 383 |
| | 383 |
| | Aa |
| Oregon | 89 |
| | 186 |
| | 46 |
| | 321 |
| | 292 |
| | Aa |
| Pennsylvania | 85 |
| | 50 |
| | 139 |
| | 274 |
| | 273 |
| | Aa |
| Illinois | 1 |
| | 46 |
| | 174 |
| | 221 |
| | 208 |
| | A |
| Ohio | 97 |
| | 26 |
| | 94 |
| | 217 |
| | 216 |
| | Aa |
| All others | 764 |
| | 633 |
| | 1,744 |
| | 3,141 |
| | 3,083 |
| | Aa |
| Total | $ | 1,721 |
|
| $ | 1,620 |
|
| $ | 3,710 |
|
| $ | 7,051 |
|
| $ | 6,846 |
| | Aa |
| |
(1)
| The nature of the activities supporting revenue bonds is diversified and includes transportation, health care, industrial development, housing, higher education, utilities, recreation/convention centers and other activities. |
Our practice for acquiring and monitoring municipal bonds is predominantly based on the underlying credit quality of the primary obligor. We currently rely on the primary obligor to pay all contractual cash flows and are not relying on bond insurers for payments. As a result of downgrades in the insurers’ credit ratings, the ratings of the insured municipal bonds generally reflect the underlying ratings of the primary obligor. As of December 31, 2016, 99.7% of our insured municipal bond portfolio is rated investment grade.
Corporate bonds, including include publicly traded and privately placed totaled $43.60 billion as of December 31, 2016, with an unrealized net capital gain of $859 million.securities. Privately placed securities primarily consist of corporate issued senior debt securities that are directly negotiated with the borrower or are in unregistered form.
Our $12.11 billion portfolio of privately placed securities is diversified by issuer, industry sector and country. The portfolio is made up of 432478 issuers. Privately placed corporate obligations may contain structural security features such as financial covenants and call protections that provide investors greater protection against credit deterioration, reinvestment risk or fluctuations in interest rates than those typically found in publicly registered debt securities. Additionally, investments in these securities are made after due diligence of the issuer, typically including discussions with senior management and on-site visits to company facilities. Ongoing monitoring includes direct periodic dialog with senior management of the issuer and continuous monitoring of operating performance and financial position. Every issue not rated by an independent rating agency is internally rated with a formal rating affirmation at least once a year.
Our corporate bonds portfolio includes $7.74$6.72 billion of below investment grade bonds, $3.06$3.62 billion of which are privately placed. These securities are diversified by issuer and industry sector. The below
investment grade corporate bonds portfolio is made up of 276289 issuers. We employ fundamental analyses of issuers and sectors along with macro and asset class views to identify investment opportunities. This results in a portfolio with broad exposure to the high yield market yet with an emphasis on idiosyncratic positions reflective of our views of market conditions and opportunities.
Foreign government securities totaled $1.08 billion as include 83.8% of December 31, 2016, with 99.5% rated investment grade and an unrealized net capital gain of $32 million. Of these securities, 69.1% are in Canadian governmental and provincial securities (64.4%(83.0% of which are held by our Canadian companies), 19.2% are15.5% backed by the U.S. government and the remaining 11.7%0.7% that are highly diversified in other foreign governments.
ABS RMBS and CMBSMBS are structured securities that are primarily collateralized by consumer or corporate borrowings and residential and commercial real estate loans. The cash flows from the underlying collateral paid to the securitization trust are generally applied in a pre-determined order and are designed so that each security issued by the trust, typically referred to as a “class”, qualifies for a specific original rating.
For example, the “senior” portion or “top” of the capital structure, or rating class, which would originally qualify for a rating of Aaa typically has priority in receiving principal repayments on the underlying collateral and retains this priority until the class is paid in full. In a sequential structure, underlying collateral principal repayments are directed to the most senior rated Aaa class in the structure until paid in full, after which principal repayments are directed to the next most senior Aaa class in the structure until it is paid in full. Senior Aaa classes generally share any losses from the underlying collateral on a pro-rata basis after losses are absorbed by classes with lower original ratings.
The payment priority and class subordination included in these securities serves as credit enhancement for holders of the senior or top portions of the
structures. These securities continue to retain the payment priority features that existed at the origination of the securitization trust. Other forms of credit enhancement may include structural features
The Allstate Corporation 85
2019 Form 10-KInvestments
embedded in the securitization trust, such as overcollateralization, excess spread and bond insurance. The underlying collateral may contain fixed interest rates, variable interest rates (such as adjustable rate mortgages), or both fixed and variable rate features.
ABS, including CDO and Consumer includes collateralized debt obligations, consumer and other ABS, totaled $1.17 billion as of December 31, 2016, with 95.1% rated investment grade and an unrealized net capital gain of $2 million.ABS. Credit risk is managed by monitoring the performance of the underlying collateral. Many of the securities in the ABS portfolio have credit enhancement with features such as overcollateralization, subordinated structures, reserve funds, guarantees and/or insurance.
CDO totaled $677 million as of December 31, 2016, with 92.2% rated investment gradeMBS includes residential mortgage-backed securities (“RMBS”) and an unrealized net capital loss of $1 million. CDO consist of obligations collateralized by cash flow CDO, which are structures collateralized primarily by below investment grade senior secured corporate loans.
Consumer and other ABS totaled $494 million as of December 31, 2016, with 99.2% rated investment grade. Consumer and other ABS consists of $208 million of consumer auto, $126 million of credit card and $160 million of other ABS with unrealized net capital gains of zero, zero and $3 million, respectively.
commercial mortgage-backed securities (“CMBS”). RMBS totaled $728 million as of December 31, 2016, with 24.6% rated investment grade and an unrealized net capital gain of $77 million. The RMBS portfolio is subject to interest rate risk, but unlike other fixed income securities, is additionally subject to prepayment risk from the underlying residential mortgage loans. RMBS consists of a U.S. Agency portfolio having collateral issued or guaranteed by U.S. government agencies and a non-agency portfolio consisting of securities collateralized by Prime, Alt-A and Subprime loans. The non-agency portfolio totaled $585 million as of December 31, 2016, with 6.2% rated investment grade and an unrealized net capital gain of $73 million.
CMBS totaled $270 million as of December 31, 2016, with 34.8% rated investment grade and an unrealized net capital gain of $8 million. The CMBS portfolio is subject to credit risk and has a sequential paydown structure. Of the CMBS investments 91.8% are primarily traditional conduit transactions collateralized by commercial mortgage loans, broadly diversified across property types and geographical area. The remainder consists of non-traditional CMBS such as privately placed, small balance transactions.
Equity securities primarily include common stocks, exchange traded and mutual funds, non-redeemable preferred stocks and real estate
investment trust equity investments. The equityExchange traded and mutual funds that have fixed income securities portfolio was $5.67as their underlying investments totaled $1.79 billion as of December 31, 2016, with2019, an unrealized net capital gainincrease of $509 million.
Mortgage loans, which are primarily held in the Allstate Financial portfolio, totaled $4.49$1.39 billion as ofcompared to December 31, 2016 and primarily2018.
Mortgage loans mainly comprise loans secured by first mortgages on developed commercial real estate. Key considerations used to manage our exposure include property type and geographic diversification. For further detail on our mortgage loan portfolio, see Note 5 of the consolidated financial statements.
Limited partnership interests include interests in$6.13 billion of private equity funds and co-investments,interests, $1.04 billion of real estate funds interests and joint ventures, and$906 million of other funds. The following table presents carrying value and other information about our limited partnershipfunds interests as of December 31, 2016.
|
| | | | | | | | | | | | | | | |
| ($ in millions) | Private equity | | Real estate | | Other | | Total |
| Cost method of accounting (“Cost”) | $ | 1,105 |
| | $ | 132 |
| | $ | 45 |
| | $ | 1,282 |
|
| Equity method of accounting (“EMA”) | 3,105 |
| | 970 |
| | 457 |
| | 4,532 |
|
| Total | $ | 4,210 |
|
| $ | 1,102 |
|
| $ | 502 |
|
| $ | 5,814 |
|
| | | | | | | | |
| Number of managers | 121 |
| | 38 |
| | 14 |
| | 173 |
|
| Number of individual investments | 226 |
| | 81 |
| | 19 |
| | 326 |
|
| Largest exposure to single investment | $ | 171 |
| | $ | 71 |
| | $ | 210 |
| | $ | 210 |
|
Short-term investments totaled $4.292019. We have commitments to invest additional amounts in limited partnership interests totaling $2.84 billion as of December 31, 2016. This includes $1.4 billion that was used to fund the acquisition of SquareTrade on January 3, 2017.2019.
OtherShort-term investments primarily comprise $1.67money market funds, commercial paper, U.S. Treasury bills and other short-term investments, including securities lending collateral of $1.81 billion.
Other investments primarily comprise $1.20 billion of bank loans, $904$1.01 billion of real estate, $894 million of policy loans, $467$666 million of agent loans (loans issued to exclusive Allstate agents), $318 million of real estate and $111$140 million of derivatives as of December 31, 2016.2019. For further detail on our use of derivatives, see Note 7 of the consolidated financial statements.
Unrealized net capital gains totaled $1.77 billion as of December 31, 2016 compared to $1.03 billion as of December 31, 2015. The increase for fixed income securities was primarily due to a decrease in market yields resulting from tighter credit spreads partially offset by an increase in risk-free interest rates. The increase for equity securities was primarily due to favorable equity market performance, as well as the realization of unrealized net capital losses through write-downs, partially offset by the realization of unrealized net capital gains through sales.
The following table presents unrealized net capital gains and losses as of December 31.
| | | Unrealized net capital gains (losses) | | Unrealized net capital gains (losses) |
| | | | | | | As of December 31, |
| ($ in millions) | 2016 | | 2015 | | 2019 | | 2018 |
| U.S. government and agencies | $ | 65 |
| | $ | 86 |
| | $ | 115 |
| | $ | 131 |
|
| Municipal | 217 |
| | 369 |
| | 540 |
| | 206 |
|
| Corporate | 859 |
| | 153 |
| | 1,988 |
| | (399 | ) |
| Foreign government | 32 |
| | 50 |
| | 11 |
| | 8 |
|
| ABS | 2 |
| | (32 | ) | | 2 |
| | (4 | ) |
| RMBS | 77 |
| | 90 |
| |
| CMBS | 8 |
| | 28 |
| |
| Redeemable preferred stock | 3 |
| | 3 |
| |
| MBS | | | 95 |
| | 94 |
|
| Fixed income securities | 1,263 |
| | 747 |
| | 2,751 |
| | 36 |
|
| Equity securities | 509 |
| | 276 |
| |
| Derivatives | 2 |
| | 6 |
| | (3 | ) | | (3 | ) |
| EMA limited partnerships | (4 | ) | | (4 | ) | |
| Equity method of accounting (“EMA”) limited partnerships | | | (4 | ) | | — |
|
| Unrealized net capital gains and losses, pre-tax | $ | 1,770 |
| | $ | 1,025 |
| | $ | 2,744 |
| | $ | 33 |
|
| | | | | |
| Property-Liability | $ | 500 |
| | $ | 84 |
| |
| Allstate Financial | 1,263 |
| | 929 |
| |
| Corporate & Other | 7 |
| | 12 |
| |
| Unrealized net capital gains and losses, pre-tax | $ | 1,770 |
| | $ | 1,025 |
| |
We have a comprehensive
Investments 2019 Form 10-K
Fixed income portfolio monitoringis acomprehensive process to identify and evaluate each fixed income and equity security that may be other-than-temporarily impaired. The process includes a quarterly review of all securities to identify instances where the fair value of a security compared to its amortized cost (for fixed income securities) or cost (for equity securities) is below established thresholds. The process also includes the monitoring of other impairment indicators such as ratings, ratings downgrades and payment defaults. The securities identified, in addition to other securities for which we may have a concern, are evaluated for potential other-than-temporary impairment using all reasonably available information relevant to the collectability or recovery of the security. Inherent in our evaluation of other-than-temporary impairment for these fixed income and equity securities are assumptions and estimates about the financial condition and future earnings potential of the issue or issuer.
Some of the factors that may be considered in evaluating whether a decline in fair value is other than temporary are: 1) the financial
| |
| 1) | Financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices |
| |
| 2) | Specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity |
| |
| 3) | Length of time and extent to which the fair value has been less than amortized cost or cost. All investments in an unrealized loss position as of December 31, 2019 were included in our portfolio monitoring process for determining whether declines in value were other than temporary. |
|
| | | | | | | | |
| Gross unrealized gains (losses) on fixed income securities |
| | | As of December 31, |
| ($ in millions) | | 2019 | | 2018 |
| Gross unrealized gains | | $ | 2,847 |
| | $ | 993 |
|
| Gross unrealized losses | | (96 | ) | | (957 | ) |
| Unrealized net capital gains and losses | | $ | 2,751 |
| | $ | 36 |
|
Fixed income valuations increased primarily due to a decrease in risk-free interest rates and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; 2) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity; and 3) the length of time and extent to which the fair value has been less than amortized cost or cost. All investments in an unrealized loss position as of December 31, 2016 were included in our portfolio monitoring process for determining whether declines in value were other than temporary.tighter credit spreads.
The unrealized net capital gain for the fixed income portfolio totaled $1.26 billion, comprised of $1.71 billion of gross unrealized gains and $447 million of gross unrealized losses as of December 31, 2016. This is compared to an unrealized net capital gain for the fixed income portfolio totaling $747 million, comprised of $1.71 billion of gross unrealized gains and $960 million of gross unrealized losses as of December 31, 2015.
Gross unrealized gains and losses on fixed income securities by type and sector as of December 31, 2016 are provided in the following table.
|
| | | | | | | | | | | | | | | |
| ($ in millions) | Amortized cost | | Gross unrealized | | Fair value |
| | | Gains | | Losses | |
| Corporate: | | | | | | | |
| Consumer goods (cyclical and non-cyclical) | $ | 13,971 |
| | $ | 263 |
| | $ | (101 | ) | | $ | 14,133 |
|
| Utilities | 5,048 |
| | 323 |
| | (49 | ) | | 5,322 |
|
| Capital goods | 4,278 |
| | 108 |
| | (33 | ) | | 4,353 |
|
| Banking | 3,316 |
| | 36 |
| | (27 | ) | | 3,325 |
|
| Communications | 3,689 |
| | 81 |
| | (26 | ) | | 3,744 |
|
| Transportation | 1,672 |
| | 76 |
| | (24 | ) | | 1,724 |
|
| Technology | 3,504 |
| | 49 |
| | (19 | ) | | 3,534 |
|
| Basic industry | 2,113 |
| | 67 |
| | (16 | ) | | 2,164 |
|
| Financial services | 2,747 |
| | 76 |
| | (12 | ) | | 2,811 |
|
| Energy | 2,055 |
| | 88 |
| | (11 | ) | | 2,132 |
|
| Other | 349 |
| | 11 |
| | (1 | ) | | 359 |
|
| Total corporate fixed income portfolio | 42,742 |
|
| 1,178 |
|
| (319 | ) |
| 43,601 |
|
| U.S. government and agencies | 3,572 |
| | 74 |
| | (9 | ) | | 3,637 |
|
| Municipal | 7,116 |
| | 304 |
| | (87 | ) | | 7,333 |
|
| Foreign government | 1,043 |
| | 36 |
| | (4 | ) | | 1,075 |
|
| ABS | 1,169 |
| | 13 |
| | (11 | ) | | 1,171 |
|
| RMBS | 651 |
| | 85 |
| | (8 | ) | | 728 |
|
| CMBS | 262 |
| | 17 |
| | (9 | ) | | 270 |
|
| Redeemable preferred stock | 21 |
| | 3 |
| | — |
| | 24 |
|
| Total fixed income securities | $ | 56,576 |
|
| $ | 1,710 |
|
| $ | (447 | ) |
| $ | 57,839 |
|
|
| | | | | | | | | | | | | | | | |
| Gross unrealized gains (losses) on fixed income securities by type |
| | | As of December 31, 2019 |
| | | Amortized cost | | Gross unrealized | | Fair value |
| ($ in millions) | | | Gains | | Losses | |
| Corporate | | $ | 41,090 |
|
| $ | 2,035 |
|
| $ | (47 | ) |
| $ | 43,078 |
|
| U.S. government and agencies | | 4,971 |
| | 141 |
| | (26 | ) | | 5,086 |
|
| Municipal | | 8,080 |
| | 551 |
| | (11 | ) | | 8,620 |
|
| Foreign government | | 968 |
| | 16 |
| | (5 | ) | | 979 |
|
| ABS | | 860 |
| | 8 |
| | (6 | ) | | 862 |
|
| MBS | | 324 |
| | 96 |
| | (1 | ) | | 419 |
|
| Total fixed income securities | | $ | 56,293 |
|
| $ | 2,847 |
|
| $ | (96 | ) |
| $ | 59,044 |
|
The consumer goods, utilities and capital goods sectors comprise 32%28%, 12%13% and 10%12%, respectively, of the carrying value of our corporate fixed income securities portfolio as of December 31, 2016.2019. The consumer goods,banking, energy and utilities sectors comprise 30%, 30% and capital goods sectors had13%, respectively, of the highest concentration of gross unrealized losses inof our corporate fixed income securities portfolio as of December 31, 2016. 2019.
In general, the gross unrealized losses are related to an increase in market yields, which may include increased risk-free interest rates and/or wider credit
spreads since the time of initial purchase. Similarly, gross unrealized gains reflect a decrease in market yields since the time of initial purchase.
Global oil prices and natural gas values declined significantly from 2014 through the first quarter of 2016. We decreased our exposure to the energy sector in first quarter 2016. Our remaining holdings appreciated in value as oil and natural gas values increased over the remainder of the year. In the fixed income and equity securities tables above and below, oil and natural gas exposure is reflected within the energy sector.
Securities that have direct exposure to the energy sector are presented in the following table.
|
| | | | | | | | | | | | | | | |
| ($ in millions) | December 31, 2016 | | December 31, 2015 |
| | Fair value | | Amortized cost or Cost | | Fair value | | Amortized cost or Cost |
| Fixed income securities | $ | 2,132 |
| | $ | 2,055 |
| | $ | 4,256 |
| | $ | 4,549 |
|
| Equity securities | 330 |
| | 294 |
| | 235 |
| | 255 |
|
| Total | $ | 2,462 |
| | $ | 2,349 |
| | $ | 4,491 |
| | $ | 4,804 |
|
The following table summarizes the fair value and gross unrealized losses of fixed income securities in a loss position by type and credit quality as of December 31, 2016.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | Investment grade | | Below investment grade | | Total |
| | Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses |
| Corporate: | | | | | | | | |
| |
|
| Consumer goods (cyclical and non-cyclical) | $ | 4,200 |
| | $ | (76 | ) | | $ | 1,051 |
| | $ | (25 | ) | | $ | 5,251 |
| | $ | (101 | ) |
| Utilities | 1,206 |
| | (29 | ) | | 214 |
| | (20 | ) | | 1,420 |
| | (49 | ) |
| Capital goods | 1,364 |
| | (31 | ) | | 147 |
| | (2 | ) | | 1,511 |
| | (33 | ) |
| Banking | 858 |
| | (26 | ) | | 11 |
| | (1 | ) | | 869 |
| | (27 | ) |
| Communications | 994 |
| | (19 | ) | | 339 |
| | (7 | ) | | 1,333 |
| | (26 | ) |
| Transportation | 422 |
| | (23 | ) | | 31 |
| | (1 | ) | | 453 |
| | (24 | ) |
| Technology | 1,000 |
| | (16 | ) | | 179 |
| | (3 | ) | | 1,179 |
| | (19 | ) |
| Basic industry | 451 |
| | (10 | ) | | 242 |
| | (6 | ) | | 693 |
| | (16 | ) |
| Financial services | 764 |
| | (11 | ) | | 45 |
| | (1 | ) | | 809 |
| | (12 | ) |
| Energy | 246 |
| | (5 | ) | | 214 |
| | (6 | ) | | 460 |
| | (11 | ) |
| Other | 43 |
| | (1 | ) | | — |
| | — |
| | 43 |
| | (1 | ) |
| Total corporate fixed income portfolio | 11,548 |
| | (247 | ) | | 2,473 |
| | (72 | ) | | 14,021 |
| | (319 | ) |
| U.S. government and agencies | 943 |
| | (9 | ) | | — |
| | — |
| | 943 |
| | (9 | ) |
| Municipal | 3,061 |
| | (75 | ) | | 41 |
| | (12 | ) | | 3,102 |
| | (87 | ) |
| Foreign government | 225 |
| | (4 | ) | | — |
| | — |
| | 225 |
| | (4 | ) |
| ABS | 317 |
| | (8 | ) | | 14 |
| | (3 | ) | | 331 |
| | (11 | ) |
| RMBS | 66 |
| | (1 | ) | | 78 |
| | (7 | ) | | 144 |
| | (8 | ) |
| CMBS | 11 |
| | — |
| | 63 |
| | (9 | ) | | 74 |
| | (9 | ) |
| Total fixed income securities | $ | 16,171 |
| | $ | (344 | ) | | $ | 2,669 |
| | $ | (103 | ) | | $ | 18,840 |
| | $ | (447 | ) |
| | | | | | | | | | | | |
| Property-Liability | $ | 10,260 |
| | $ | (185 | ) | | $ | 1,664 |
| | $ | (49 | ) | | $ | 11,924 |
| | $ | (234 | ) |
| Allstate Financial | 5,129 |
| | (152 | ) | | 981 |
| | (53 | ) | | 6,110 |
| | (205 | ) |
| Corporate & Other | 782 |
| | (7 | ) | | 24 |
| | (1 | ) | | 806 |
| | (8 | ) |
| Total fixed income securities | $ | 16,171 |
| | $ | (344 | ) | | $ | 2,669 |
| | $ | (103 | ) | | $ | 18,840 |
| | $ | (447 | ) |
The following table summarizes the fair value and gross unrealized losses for below investment grade corporate fixed income securities in a loss position by sector and credit rating as of December 31, 2016.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | Less than 12 months |
| | Ba | | B | | Caa or lower | | Total |
| | Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses |
| Corporate: | | | | | | | | | | | | | | | |
| Consumer goods (cyclical and non-cyclical) | $ | 501 |
| | $ | (11 | ) | | $ | 451 |
| | $ | (9 | ) | | $ | 34 |
| | $ | (2 | ) | | $ | 986 |
| | $ | (22 | ) |
| Utilities | 53 |
| | (4 | ) | | 102 |
| | (4 | ) | | 10 |
| | (7 | ) | | 165 |
| | (15 | ) |
| Capital goods | 57 |
| | (1 | ) | | 79 |
| | (1 | ) | | — |
| | — |
| | 136 |
| | (2 | ) |
| Banking | 2 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
|
| Communications | 245 |
| | (3 | ) | | 32 |
| | — |
| | — |
| | — |
| | 277 |
| | (3 | ) |
| Transportation | 15 |
| | — |
| | 16 |
| | (1 | ) | | — |
| | — |
| | 31 |
| | (1 | ) |
| Technology | 173 |
| | (3 | ) | | — |
| | — |
| | — |
| | — |
| | 173 |
| | (3 | ) |
| Basic industry | 224 |
| | (6 | ) | | 13 |
| | — |
| | — |
| | — |
| | 237 |
| | (6 | ) |
| Financial services | 9 |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | 10 |
| | — |
|
| Energy | 102 |
| | (1 | ) | | 50 |
| | (1 | ) | | 5 |
| | — |
| | 157 |
| | (2 | ) |
| Subtotal | $ | 1,381 |
| | $ | (29 | ) | | $ | 744 |
| | $ | (16 | ) | | $ | 49 |
| | $ | (9 | ) | | $ | 2,174 |
| | $ | (54 | ) |
| | | | | | | | | | | | | | | | |
| | 12 months or more |
| | Ba | | B | | Caa or lower | | Total |
| | Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses |
| Corporate: | | | | | | | | | | | | | | | |
| Consumer goods (cyclical and non-cyclical) | $ | 10 |
| | $ | — |
| | $ | 33 |
| | $ | (1 | ) | | $ | 22 |
| | $ | (2 | ) | | $ | 65 |
| | $ | (3 | ) |
| Utilities | — |
| | — |
| | 32 |
| | (2 | ) | | 17 |
| | (3 | ) | | 49 |
| | (5 | ) |
| Capital goods | — |
| | — |
| | 11 |
| | — |
| | — |
| | — |
| | 11 |
| | — |
|
| Banking | 9 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | 9 |
| | (1 | ) |
| Communications | 42 |
| | (2 | ) | | 20 |
| | (2 | ) | | — |
| | — |
| | 62 |
| | (4 | ) |
| Transportation | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Technology | 4 |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | 6 |
| | — |
|
| Basic industry | — |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| | 5 |
| | — |
|
| Financial services | 35 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | 35 |
| | (1 | ) |
| Energy | 16 |
| | (3 | ) | | 36 |
| | — |
| | 5 |
| | (1 | ) | | 57 |
| | (4 | ) |
| Subtotal | $ | 116 |
| | $ | (7 | ) | | $ | 132 |
| | $ | (5 | ) | | $ | 51 |
| | $ | (6 | ) | | $ | 299 |
| | $ | (18 | ) |
| | | | | | | | | | | | | | | | |
| Total | $ | 1,497 |
| | $ | (36 | ) | | $ | 876 |
| | $ | (21 | ) | | $ | 100 |
| | $ | (15 | ) | | $ | 2,473 |
| | $ | (72 | ) |
Of the unrealized losses on below investment grade corporate fixed income securities, 25.0% or $18 million relate to securities that had been in an unrealized loss position for a period of twelve or more consecutive months as of December 31, 2016.
The unrealized net capital gain for the equity portfolio totaled $509 million, comprised of $594 million of gross unrealized gains and $85 million of gross unrealized losses as of December 31, 2016. This is compared to an unrealized net capital gain for the equity portfolio totaling $276 million, comprised of $415 million of gross unrealized gains and $139 million of gross unrealized losses as of December 31, 2015.
Gross unrealized gains and losses on equity securities by sector as of December 31, 2016 are provided in the table below.
|
| | | | | | | | | | | | | | | |
| ($ in millions) | Cost | | Gross unrealized | | Fair value |
| | | Gains | | Losses | |
| Consumer goods (cyclical and non-cyclical) | $ | 1,280 |
| | $ | 96 |
| | $ | (46 | ) | | $ | 1,330 |
|
| Communications | 236 |
| | 23 |
| | (11 | ) | | 248 |
|
| Banking | 498 |
| | 94 |
| | (6 | ) | | 586 |
|
| Financial services | 353 |
| | 37 |
| | (5 | ) | | 385 |
|
| Real estate | 131 |
| | 6 |
| | (4 | ) | | 133 |
|
| Energy | 294 |
| | 39 |
| | (3 | ) | | 330 |
|
| Utilities | 116 |
| | 9 |
| | (3 | ) | | 122 |
|
| Technology | 529 |
| | 81 |
| | (2 | ) | | 608 |
|
| Capital goods | 450 |
| | 44 |
| | (2 | ) | | 492 |
|
| Basic industry | 162 |
| | 18 |
| | (2 | ) | | 178 |
|
| Transportation | 79 |
| | 13 |
| | — |
| | 92 |
|
| Funds | 1,029 |
| | 134 |
| | (1 | ) | | 1,162 |
|
| Total equity securities | $ | 5,157 |
|
| $ | 594 |
|
| $ | (85 | ) |
| $ | 5,666 |
|
Within the equity portfolio, the unrealized losses were primarily concentrated in the consumer goods and communications sectors. The unrealized losses were company and sector specific.
As of December 31, 2016,2019, we have not made the decision to sell and it is not more likely than not we will be required to sell fixed income securities with unrealized losses before recovery of the amortized cost basis. As of December 31, 2016, we have the intent and ability to hold equity securities with unrealized losses for a period of time sufficient for them to recover.
On June 23, 2016, the United Kingdom (“U.K.”) held a referendum in which they voted to leave the European Union. A formal process of withdrawal under Article 50 of the Lisbon Treaty is expected to be followed and, once invoked, would take place over a period of up to two years. Significant uncertainty exists as the U.K.’s exit from the European Union will be a multi-year process and impacts on the global economy are difficult to predict. We expect the impact on the Company’s investment activities to be immaterial.
Net investment income
The following table presents net investment income for the years ended December 31.Allstate Corporation 87
2019 Form 10-KInvestments
| | | Net investment income | | Net investment income |
| | | | | | | |
| For the years ended December 31, |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| 2019 |
| 2018 |
| 2017 |
| Fixed income securities | $ | 2,060 |
| | $ | 2,218 |
| | $ | 2,447 |
|
| $ | 2,175 |
|
| $ | 2,077 |
|
| $ | 2,078 |
|
| Equity securities | 137 |
| | 110 |
| | 117 |
|
| 206 |
|
| 170 |
|
| 174 |
|
| Mortgage loans | 217 |
| | 228 |
| | 265 |
|
| 220 |
|
| 217 |
|
| 206 |
|
| Limited partnership interests | 561 |
| | 549 |
| | 614 |
|
| 471 |
|
| 705 |
|
| 889 |
|
| Short-term investments | 16 |
| | 9 |
| | 7 |
|
| 102 |
|
| 73 |
|
| 30 |
|
| Other | 222 |
| | 192 |
| | 170 |
|
| 262 |
|
| 272 |
|
| 236 |
|
| Investment income, before expense | 3,213 |
|
| 3,306 |
|
| 3,620 |
|
| 3,436 |
|
| 3,514 |
|
| 3,613 |
|
| Investment expense | (171 | ) | | (150 | ) | | (161 | ) | |
Investment expense (1) (2) | |
| (277 | ) |
| (274 | ) |
| (212 | ) |
| Net investment income | $ | 3,042 |
|
| $ | 3,156 |
|
| $ | 3,459 |
|
| $ | 3,159 |
|
| $ | 3,240 |
|
| $ | 3,401 |
|
| | | | | | |
|
|
|
|
|
|
|
|
|
| Property-Liability | $ | 1,266 |
| | $ | 1,237 |
| | $ | 1,301 |
| |
| Allstate Financial | 1,734 |
| | 1,884 |
| | 2,131 |
| |
| Corporate & Other | 42 |
| | 35 |
| | 27 |
| |
| Net investment income | $ | 3,042 |
| | $ | 3,156 |
| | $ | 3,459 |
| |
| | | | | | | |
| Market-Based Core | $ | 2,340 |
| | $ | 2,495 |
| | | |
| Market-Based Active | 262 |
| | 213 |
| | | |
| Performance-Based Long-Term | 606 |
| | 589 |
| | | |
| Performance-Based Opportunistic | 5 |
| | 9 |
| | | |
| Market-based | | | $ | 2,893 |
| | $ | 2,734 |
| | $ | 2,661 |
|
| Performance-based | |
| 543 |
|
| 780 |
|
| 952 |
|
| Investment income, before expense | $ | 3,213 |
| | $ | 3,306 |
| |
|
|
| $ | 3,436 |
|
| $ | 3,514 |
|
| $ | 3,613 |
|
| |
(1) | Investment expense includes $81 million, $71 million and $40 million of investee level expenses in 2019, 2018 and 2017, respectively, and has increased compared to prior year, primarily due to growth in real estate investments. Investee level expenses include depreciation and asset level operating expenses on directly held real estate and other consolidated investments. |
| |
(2) | Investment expense includes $40 million, $28 million and $10 million related to the portion of reinvestment income on securities lending collateral paid to the counterparties in 2019, 2018 and 2017, respectively. |
Net investment income decreased 3.6%2.5% or $114$81 million in 20162019 compared to 2015, after decreasing 8.8% or $303 million in 2015 compared to 2014. The 2016 decrease was2018, primarily due to lower fixedperformance-based results, primarily from limited partnerships, partially offset by higher market-based income.
|
| | | | | | | | | | | | |
| Performance-based investment income |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Limited partnerships | | | | | | |
| Private equity | | $ | 330 |
| | $ | 582 |
| | $ | 725 |
|
| Real estate | | 138 |
| | 123 |
| | 164 |
|
| Performance-based - limited partnerships | | 468 |
| | 705 |
| | 889 |
|
| | | | | | | |
| Non-limited partnerships | | | | | | |
| Private equity | | 9 |
| | 9 |
| | 19 |
|
| Real estate | | 66 |
| | 66 |
| | 44 |
|
| Performance-based - non-limited partnerships | | 75 |
| | 75 |
| | 63 |
|
| | | | | | | |
| Total | | | | | | |
| Private equity | | 339 |
| | 591 |
| | 744 |
|
| Real estate | | 204 |
| | 189 |
| | 208 |
|
| Total performance-based | | $ | 543 |
| | $ | 780 |
| | $ | 952 |
|
| | | | | | | |
Investee level expenses (1) | | $ | (74 | ) | | $ | (64 | ) | | $ | (35 | ) |
| |
(1) | Investee level expenses include depreciation and asset level operating expenses reported in investment expense. |
Performance-based investment income yields resulting from lower market yields and portfolio repositioning (including both the 2015 maturity profile shorteningdecreased 30.4% or $237 million in Allstate Financial and the shift2019 compared to performance-based investments). The 2015 decrease was2018, primarily due to lower average investment balances including the sale of LBL on April 1, 2014,asset appreciation related to private equity investments and lower limited partnership income, lower yields due to maturity profile shorteningvaluations in the Allstate Financial portfolio,fourth quarter, on two private equity investments totaling $74 million.
Performance-based investment results and lower prepayment fee income and litigation proceeds, partially offset by an increased allocation to high yield investments and
lower investment expenses. Net investment income in 2016 includes $45 million related to prepayment fee income compared to $65 million in 2015. Prepayment fee income maycan vary significantly from period to period.
Realized capital gainsbetween periods and losses The following table presentsare influenced by economic conditions, equity market performance, comparable public company earnings multiples, capitalization rates, operating performance of the components of realized capital gains and lossesunderlying investments and the related tax effect for the years ended December 31.timing of asset sales.
Investments 2019 Form 10-K
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Impairment write-downs | $ | (234 | ) | | $ | (195 | ) | | $ | (32 | ) |
| Change in intent write-downs | (69 | ) | | (221 | ) | | (213 | ) |
| Net other-than-temporary impairment losses recognized in earnings | (303 | ) |
| (416 | ) |
| (245 | ) |
| Sales and other | 213 |
| | 470 |
| | 975 |
|
| Valuation and settlements of derivative instruments | — |
| | (24 | ) | | (36 | ) |
| Realized capital gains and losses, pre-tax | (90 | ) |
| 30 |
|
| 694 |
|
| Income tax benefit (expense) | 34 |
| | (11 | ) | | (243 | ) |
| Realized capital gains and losses, after-tax | $ | (56 | ) |
| $ | 19 |
|
| $ | 451 |
|
| | | | | | |
| Property-Liability | $ | — |
| | $ | (154 | ) | | $ | 357 |
|
| Allstate Financial | (54 | ) | | 173 |
| | 94 |
|
| Corporate & Other | (2 | ) | | — |
| | — |
|
| Realized capital gains and losses, after-tax | $ | (56 | ) | | $ | 19 |
| | $ | 451 |
|
| | | | | | |
| Market-Based Core | $ | (42 | ) | | $ | 70 |
| | |
| Market-Based Active | 21 |
| | 9 |
| | |
| Performance-Based Long-Term | (76 | ) | | (46 | ) | | |
| Performance-Based Opportunistic | 7 |
| | (3 | ) | | |
| Realized capital gains and losses, pre-tax | $ | (90 | ) | | $ | 30 |
| |
|
|
| | | | | | | | | | | | |
| Components of realized capital gains (losses) and the related tax effect |
| | | For the year December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Impairment write-downs: | | | | | | |
| Fixed income securities | | $ | (14 | ) | | $ | (10 | ) | | $ | (26 | ) |
| Equity securities | | — |
| | — |
| | (38 | ) |
| Mortgage loans | | — |
| | — |
| | (1 | ) |
| Limited partnership interests | | (6 | ) | | (3 | ) | | (32 | ) |
| Other investments | | (27 | ) | | (1 | ) | | (5 | ) |
| Total impairment write-downs | | (47 | ) | | (14 | ) | | (102 | ) |
| Change in intent write-downs | | — |
| | — |
| | (48 | ) |
| Net OTTI losses recognized in earnings | | (47 | ) |
| (14 | ) |
| (150 | ) |
| Sales | | 575 |
| | (215 | ) | | 641 |
|
| Valuation of equity investments - appreciation (decline): | | | | | | |
| Equity securities | | 1,210 |
| | (594 | ) | | — |
|
Limited partnerships (1) | | 162 |
| | (97 | ) | | — |
|
| Total valuation of equity investments | | 1,372 |
| | (691 | ) | | — |
|
| Valuation and settlements of derivative instruments | | (15 | ) | | 43 |
| | (46 | ) |
| Realized capital gains and losses, pre-tax | | 1,885 |
|
| (877 | ) |
| 445 |
|
| Income tax (expense) benefit | | (397 | ) | | 189 |
| | (147 | ) |
| Realized capital gains and losses, after-tax | | $ | 1,488 |
|
| $ | (688 | ) |
| $ | 298 |
|
| | | | | | | |
| Market-based | | $ | 1,750 |
| | $ | (946 | ) | | $ | 486 |
|
| Performance-based | | 135 |
| | 69 |
| | (41 | ) |
| Realized capital gains and losses, pre-tax | | $ | 1,885 |
| | $ | (877 | ) | | $ | 445 |
|
| |
(1) | Relates to limited partnerships where the underlying assets are predominately public equity securities. |
Impairment write-downs, which include changes Realized capital gains in the mortgage loan2019 related primarily to increased valuation allowance, for the years ended December 31 are presented in the following table.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Fixed income securities | $ | (44 | ) | | $ | (75 | ) | | $ | (24 | ) |
| Equity securities | (125 | ) | | (59 | ) | | (6 | ) |
| Mortgage loans | — |
| | 4 |
| | 5 |
|
| Limited partnership interests | (56 | ) | | (51 | ) | | (7 | ) |
| Other investments | (9 | ) | | (14 | ) | | — |
|
| Impairment write-downs | $ | (234 | ) |
| $ | (195 | ) |
| $ | (32 | ) |
Impairment write-downsof equity investments and gains on sales of fixed income securitiessecurities.
Impairment write-downs in 2016 were primarily driven by corporate fixed income securities impacted by issuer specific circumstances. Equity securities were written down primarily due to the length of time2019 and extent to which fair value was below cost, considering our assessment of the financial condition and near-term and long-term prospects of the issuer, including relevant industry conditions and trends. Limited partnership write-downs primarily2018 related to investments with exposureinvestment-specific circumstances.
Salesin 2019 related primarily to the energy sector, partially offset by the recovery in value of a limited partnership that was previously written-down. Impairment write-downs in 2016 included $108 million related to investments with exposure to the energy sector.
Impairment write-downs on fixed income securities in 2015 were primarily driven by corporate fixed income securities impacted by issuer specific circumstances including exposure to oil and natural gas, defaulted special assessment municipal bonds, and collateralized loan obligations that experienced deterioration in expected cash flows. Equity securities were written down primarily due to the length of time and extent to which fair value was below cost, considering our assessment of the financial condition and near-term and long-term prospects of the issuer, including relevant industry conditions and trends. Limited partnership write-downs primarily related to two investments that have been impacted by the decline in natural gas prices. Impairment write-downs in 2015 included $97 million and $18 million of investments with exposure to the energy sector and metals and mining exposure in the basic industry sector, respectively.
Impairment write-downs on fixed income securities in 2014 were primarily driven by collateralized loan obligations that experienced deterioration in expected cash flows and municipal and corporate fixed income securities impacted by issuer specific circumstances. Limited partnership write-downs primarily related to cost method limited partnerships that experienced declines in portfolio valuations deemed to be other than temporary. Equity securities were written down primarily due to the length of time and extent to which fair value was below cost, considering our assessment of the financial condition and near-term and long-term prospects of the issuer, including relevant industry conditions and trends. The valuation allowance on mortgage loans as of December 31, 2014 decreased compared to December 31, 2013 primarily due to reversals related to impaired loan payoffs.
Change in intent write-downs totaled $69 million, $221 million and $213 million in 2016, 2015 and 2014, respectively. The change in intent write-downs primarily relate to equity securities that we may not hold for a period of time sufficient to recover unrealized losses given our preference to maintain flexibility to reposition the portfolio. As of December 31, 2016, these holdings totaled $1.7 billion. For certain equity securities managed by third parties, we do not retain decision making authority as it pertains to selling securities that are in an unrealized loss position and therefore we recognize any unrealized loss at the end of the period through a charge to earnings. As of December 31, 2016, these holdings totaled $49 million and we recognized change in intent write-downs of $3 million in 2016.
Sales and other generated $213 million, $470 million and $975 million of net realized capital gains in 2016, 2015 and 2014, respectively. Sales and other in 2016 included sales of equity and fixed income securities in connection with ongoing portfolio management, as well as gains from valuation changes in public securities held in certain limited partnerships. Sales in first quarter 2016 included $105 million of losses on $1.90 billion of sales2018 related primarily to reduce our exposure to the energy, metals and mining sectors. Sales and other in 2015 included sales of longer duration fixed income securities in connection with the maturity profile shortening in Allstate Financial and equity securities in connection with ongoing portfolio management, as well as losses from valuation changes in public securities held in certain limited partnerships. Sales and other in 2014 primarily related to equity and fixed income securities in connection with ongoing portfolio management.
Valuation and settlements of derivative instruments net realized capital in 2019 primarily comprised losses on equity options and futures used for risk management, partially offset by gains nettedon interest rate futures and total return swaps used for asset replication due to zeroincreases in 2016 and net realized capital losses were $24 million and $36 million in 2015 and 2014, respectively. 2016equity indices. 2018 primarily comprised gains on foreign currency contracts due to the strengthening of the U.S. Dollar, offset by lossesdollar and gains on equity futuresoptions used for risk management due to increasesa decrease in equity indices, andpartially offset by losses on credit defaulttotal return swaps due to the tightening of credit spreads on the underlying credit names. The net realized capital losses in 2015 primarily comprised losses on foreign currency contracts due to the weakening of the Canadian Dollar. The net realized capital losses in 2014 primarily comprised losses onand equity options and futures used for risk managementasset replication due to increasesdecreases in equity indices and losses on foreign currency contracts due to the weakening of the Canadian dollar.indices.
Performance-based long-term investments primarily include private equity, real estate, infrastructure, timber and agriculture-related assets and are materially reflected through our limited partnership investments.
The following table presents investment income for PBLT investments for the years ended December 31.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Limited partnerships | | | | | |
Private equity (1) | $ | 455 |
| | $ | 402 |
| | $ | 391 |
|
| Real estate | 103 |
| | 158 |
| | 211 |
|
| Timber and agriculture-related | 3 |
| | (1 | ) | | — |
|
PBLT - limited partnerships (2) | 561 |
| | 559 |
| | 602 |
|
| | | | | | |
| Other | | | | | |
| Private equity | 4 |
| | 1 |
| | — |
|
| Real estate | 33 |
| | 22 |
| | 14 |
|
| Timber and agriculture-related | 8 |
| | 7 |
| | 9 |
|
| PBLT - other | 45 |
| | 30 |
| | 23 |
|
| | | | | | |
| Total | | | | | |
| Private equity | 459 |
| | 403 |
| | 391 |
|
| Real estate | 136 |
| | 180 |
| | 225 |
|
| Timber and agriculture-related | 11 |
| | 6 |
| | 9 |
|
| Total PBLT | $ | 606 |
| | $ | 589 |
| | $ | 625 |
|
| | | | | | |
Asset level operating expenses (3) | $ | (32 | ) | | $ | (19 | ) | | $ | (14 | ) |
| | | | | | |
| Property-Liability | $ | 297 |
| | $ | 294 |
| | $ | 354 |
|
| Allstate Financial | 309 |
| | 295 |
| | 271 |
|
| Total PBLT | $ | 606 |
| | $ | 589 |
| | $ | 625 |
|
| |
(1)
| Includes infrastructure. |
| |
(2)
| Other limited partnership interests are located in the market-based core and performance-based opportunistic investing strategies and are not included in the performance-based long-term table above. Investment income (loss) was zero, $(10) million and $12 million in 2016, 2015 and 2014, respectively, for these limited partnership interests. |
| |
(3)
| Asset level operating expenses include depreciation and direct expenses of the assets reported in investment expense. When calculating the pre-tax yields, asset level operating expenses are netted against income for directly held real estate, timber and other consolidated investments. |
|
| | | | | | | | | | | | |
| Realized capital gains (losses) for performance-based investments |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Impairment write-downs | | $ | (6 | ) | | $ | (3 | ) | | $ | (32 | ) |
| Sales | | 103 |
| | 7 |
| | 15 |
|
| Valuation of equity investments | | 31 |
| | 36 |
| | — |
|
| Valuation and settlements of derivative instruments | | 7 |
| | 29 |
| | (24 | ) |
| Total performance-based | | $ | 135 |
| | $ | 69 |
| | $ | (41 | ) |
PBLTRealized capital gains for performance-based investments produced investment income of $606 million in 2016 compared to $589 million in 2015. The increase2019 primarily related to income realizationgains on directsales of investments in directly held real estate, investments and higher valuations, including private equity investments with exposure to the energy sector, partially offset by lower distributions from cost method funds due to a decrease in realizationsgain on the underlying investments.
PBLT investments produced investment income of $589 million in 2015 compared to $625 million in 2014. The decrease primarily related to lower income on real estate investments due to modest returns compared to significant returns in 2014. Partially offsetting the decrease was higher income on private equity investments due to net returns from the diversified portfolio along with strong distributions as acquirer access to financing and an active global merger and acquisition market facilitated the sales of underlying investments, which more than offset a decline in valuations of investments with exposure to the energy sector.
The following table presents realized capital gains and losses for PBLT investments for the years ended December 31.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Limited partnerships | | | | | |
Private equity | $ | (57 | ) | | $ | (46 | ) | | $ | (40 | ) |
| Real estate | 5 |
| | (4 | ) | | 53 |
|
| Timber and agriculture-related | — |
| | — |
| | — |
|
PBLT - limited partnerships (1) | (52 | ) | | (50 | ) | | 13 |
|
| | | | | | |
| Other | | | | | |
| Private equity | (26 | ) | | 6 |
| | — |
|
| Real estate | 2 |
| | (3 | ) | | 7 |
|
| Timber and agriculture-related | — |
| | 1 |
| | — |
|
| PBLT - other | (24 | ) | | 4 |
| | 7 |
|
| | | | | | |
| Total | | | | | |
| Private equity | (83 | ) | | (40 | ) | | (40 | ) |
| Real estate | 7 |
| | (7 | ) | | 60 |
|
| Timber and agriculture-related | — |
| | 1 |
| | — |
|
| Total PBLT | $ | (76 | ) | | $ | (46 | ) | | $ | 20 |
|
| | | | | | |
| Property-Liability | $ | (46 | ) | | $ | (34 | ) | | $ | 22 |
|
| Allstate Financial | (30 | ) | | (12 | ) | | (2 | ) |
| Total PBLT | $ | (76 | ) | | $ | (46 | ) | | $ | 20 |
|
| |
(1)
| Other limited partnership interests are located in the market-based core and performance-based opportunistic investing strategies and are not included in the performance-based long-term table above. Realized capital gains and losses were $31 million, $(43) million and zero in 2016, 2015 and 2014, respectively, for these limited partnership interests. |
Realized capital losses on PBLT investments were $76 million and $46 million in 2016 and 2015, respectively, compared to realized capital gains of $20 million in 2014. 2016 included impairment write-downs on certain investments with exposure to the energy sector, partially offset by the recovery in valuesale of a limited partnership that was previously written-down. 2015 included impairment write-downsand increased valuation of equity investments. 2018 primarily related to two energy relatedincreased valuation of equity investments that had been impacted by a decline in natural gas prices.and gains on valuation and settlements of derivative instruments.
Economic conditions and equity market performance are reflected in PBLT investment results and we continue to expect this income to vary significantly between periods.
The Allstate Corporation 89
MARKET RISK2019 Form 10-KMarket Risk
Market Risk
Market risk is the risk that we will incur losses due to adverse changes in interest rates, credit spreads, equity prices, commodity prices or currency exchange rates. Adverse changes to these rates and prices may occur due to changes in fiscal policy, the economic climate, the liquidity of a market or market segment, insolvency or financial distress of key market makers or participants or changes in market perceptions of credit worthiness and/or risk tolerance. Our primary market risk exposures are to changes in interest rates, credit spreads and equity prices. We also have direct and indirect exposure to commodity price changes through our diversified investments in timber, agriculture, infrastructure and energy primarily held in limited partnership interests and consolidated subsidiaries.
The active management of market risk is integral to our results of operations. We may use the following approaches to manage exposure to market risk within defined tolerance ranges: 1) rebalancing existing asset or liability portfolios, 2) changing the type of investments purchased in the future and 3) using derivative instruments to modify the market risk characteristics of existing assets and liabilities or assets expected to be purchased. For a more detailed discussion of our use of derivative financial instruments, see Note 7 of the consolidated financial statements.
| |
| 1) | Rebalancing existing asset or liability portfolios |
| |
| 2) | Changing the type of investments purchased in the future |
| |
| 3) | Using derivative instruments to modify the market risk characteristics of existing assets and liabilities or assets expected to be purchased |
Overview In formulating and implementing guidelines for investing funds, we seek to earn attractive risk-adjusted returns that enhance our ability to offer competitive rates and prices to customers while contributing to attractive and stable profits and long-term capital growth. Accordingly, our investment decisions and objectives are a function ofinformed by the underlying risks and product profiles of each business.
profiles. Investment policies define the overall framework for managing market and other investment risks, including accountability and controls over risk management activities. Subsidiaries that conduct investment activities follow policies that have been approved by their respective boards of directors. These investment policiesdirectors and which specify the investment limits and strategies that are appropriate given the liquidity, surplus, product profile and regulatory requirements of the subsidiary. Executive oversight of investment activities is conducted primarily through the subsidiaries’ boards of directors and legal entity investment committees. The Enterprise Risk and Return Council (“ERRC”) oversees the aggregate risk of Allstate and its subsidiaries. Working in conjunction with the board or the investment committee of each subsidiary, as applicable, the ERRC evaluates the risk tolerance of each subsidiary and determines the aggregate risk tolerance of the enterprise.
For Allstate Financial, itslife and annuity products, the asset-liability management (“ALM”) policies further define the overall framework for managing market and investment risks.risks and are approved by the subsidiaries’ respective boards of directors. ALM focuses on strategies to enhance yields, mitigate market risks and optimize capital to improve profitability and returns for Allstate Financial while factoring inincorporating future expected cash requirements to repay liabilities. Allstate Financial ALM activities follow asset-liability policies that have been approved by their respective boards of directors. These ALM policies specify limits, ranges and/or targets for investments that best meet Allstate Financial’s
business objectives in light of itsthe unique demands and characteristics of the product liabilities.liabilities and are intended to result in a prudent, methodical and effective adjudication of market risk and return.
We use widely-accepted quantitative and qualitative market-based approaches to measure, monitor and manage market risk. We evaluate our exposure to market risk through the use ofexposure using multiple measures including but not limited to duration, value-at-risk, scenario analysis and sensitivity analysis. Duration measures the price sensitivity of assets and liabilities to changes in interest rates. For example, if interest rates increase 100 basis points, the fair value of an asset with a duration of 5 is expected to decrease in value by 5%. Value-at-risk is a statistical estimate of the probability that the change in fair value of a portfolio will exceed a certain amount over a given time horizon. Scenario analysis estimates the potential changes in the fair value of a portfolio that could occur under different hypothetical market conditions defined by changes to multiple market risk factors: interest rates, credit spreads, equity prices or currency exchange rates. Sensitivity analysis estimates the potential changes in the fair value of a portfolio that could occur under different hypothetical shocks to a market risk factor. to:
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• Duration, a measure of the price sensitivity of assets and liabilities to changes in interest rates |
• Value-at-risk, a statistical estimate of the probability that the change in fair value of a portfolio will exceed a certain amount over a given time horizon |
• Scenario analysis, an estimate of the potential changes in the fair value of a portfolio that could occur under hypothetical market conditions defined by changes to multiple market risk factors: interest rates, credit spreads, equity prices or currency exchange rates |
•Sensitivity analysis, an estimate of the potential changes in the fair value of a portfolio that could occur using hypothetical shocks to a market risk factor.
The selection of measures used in our sensitivity analysis should not be construed as our prediction of future market events, but only as an illustration of the potential effect of such an event. |
In general, we establish investment portfolio asset allocation and market risk limits for the Property-Liability and Allstate Financial businesses based upon a combination of duration, value-at-risk, scenario analysis and sensitivity analysis.these measures. The asset allocation limits place restrictions on the total funds that may be invested within an asset class. Comprehensive 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 investment policies. For Allstate Financial, this day-to-day management is integrated with and informed by the activities of the ALM organization. This integration is intended to result in a prudent, methodical and effective adjudication of market risk and return, conditioned by the unique demands and dynamics of Allstate Financial’s product liabilities and supported by the continuous application of advanced risk technology and analytics.
Although we apply a similar overall philosophy to market risk, the underlying business frameworks and the accounting and regulatory environments may differ considerably between the Property-Liabilityour products and Allstate Financial businesses affectingtherefore affect investment decisions and risk parameters.
Interest rate risk is the risk that we will incur a loss due to adverse changes in interest rates relative to the characteristics of our interest bearinginterest-bearing assets and liabilities. Interest rate risk includes risks related to changes in U.S. Treasury yields and other key risk-free reference yields. This risk arises from many of our primary activities, as we invest substantial funds in interest-sensitive assets and issue interest-sensitive liabilities. Interest rate risk includes risks relatedChanges in interest rates can have favorable and unfavorable effects on our results. For example, increases in rates can improve investment income, but decrease the fair value of our fixed income securities portfolio and increase policyholder surrenders requiring us to changesliquidate assets. Decreases in U.S. Treasuryrates could increase the fair value of our fixed income securities portfolio while decreasing investment income due to reinvesting at lower market yields and other key risk-free reference yields.accelerating pay-downs and prepayments of certain investments.
For our corporate debt, we monitor market interest rates and evaluate refinancing opportunities
Market Risk 2019 Form 10-K
as maturity dates approach. To mitigate this risk, we ladder the maturity dates of our debt. For our noncumulative perpetual preferred stock, we monitor market dividend rates and evaluate opportunities to redeem or refinance on or after specified dates. For further detail regarding our debt and our preferred stock, see Note 12 of the consolidated financial statements and the Capital Resources and Liquidity section of this Item.
We manage the interest rate risk in our assets relative to the interest rate risk in our liabilities and our assessment of overall economic and capital risk. One of the measures used to quantify this exposure is duration. The difference in the duration of our assets relative to our liabilities is our duration gap. To calculate the duration gap between assets and liabilities, we project asset and liability cash flows and calculate their net present value using a risk-free market interest rate adjusted for credit quality, sector attributes, liquidity and other specific risks. Duration is calculated by revaluing these cash flows at alternative interest rates and determining the percentage change in aggregate fair value. The cash flows used in this calculation include the expected maturity
and repricing characteristics of our derivative financial instruments, all other financial instruments, and certain other items including, unearned premiums, property-liability insurance claims and claims expense reserves, annuity liabilities and other interest-sensitive liabilities.
The projections include assumptions (based upon historical market experience and our experience) that reflect the effect of changing interest rates on the prepayment, lapse, leverage and/or option features of instruments, where applicable. The preceding assumptions relate primarily to callable municipal and corporate bonds, fixed rate single and flexible premium deferred annuities, mortgage-backed securities and municipal housing bonds. Additionally, the calculations include assumptions regarding the renewal of property-liability policies.property and casualty products.
As of December 31, 2016,2019, the difference between our asset and liability duration was a (2.02)(1.48) gap compared to a (1.25)(1.16) gap as of December 31, 2015.2018. The calculation excludes traditional and interest-sensitive life insurance and accident and health insurance products that are not considered financial instruments. A negative duration gap indicates that the fair value of our liabilities is more sensitive to interest rate movements than the fair value of our assets, while a positive duration gap indicates that the fair value of our assets is more sensitive to interest rate movements than the fair value of our liabilities. The Property-Liability segment generally maintains a positive duration gap between its assets and liabilities dueDue to the relatively short duration of our property and casualty liabilities, primarily related to auto and homeowners claims, which are its primarythe investments generally maintain a positive duration gap between assets and liabilities. The Allstate Financial segmentIn contrast, for our annuity products the duration gap may have abe positive or negative duration gap, as the duration of its assets and liabilities vary with its product mixbased on the characteristics of the products in-force and investing activity. As of December 31, 2016, Property-Liability2019, property and casualty products had a positive duration gap while Allstate Financialannuity products had a negative duration gap.
In
To reduce the managementrisk that investment returns are below levels required to meet the funding needs of certain liabilities, we are executing our performance-based strategy that supplements market risk with idiosyncratic risk. We are using these investments, supporting the Property-Liability business, we adherein addition to an objectivepublic equity securities, to support a portion of emphasizing safety of principalour property and consistency of income within a total return framework. This approach is designedcasualty products and long-term annuity liabilities. Shorter-term annuity liabilities will continue to ensure our financial strength and stability for paying claims, while maximizing economic value and surplus growth.
For the Allstate Financial business, we seek to invest premiums, contract charges and depositsbe invested in market-based investments to generate future cash flows that will fund future claims, benefits and expenses, and that will earn stable returns across a wide variety of interest rate and economic scenarios. To achieve this objective and limit interest rate risk for Allstate Financial, we adhere to a philosophy of managing the duration of assets and related liabilities within predetermined tolerance levels. This philosophy is executed using duration targets for fixed incomePerformance-based investments and may also include interest rate swaps, futures, forwards, caps, floors and swaptionspublic equity securities are generally not interest-bearing; accordingly, using them to reduce the interest rate risk resulting from mismatches between existing assets andsupport interest-bearing liabilities and financial futures and other derivative instruments to hedge the interest rate risk of anticipated purchases and sales of investments.contributes toward a negative duration gap.
Based upon the information and assumptions used in the duration calculation, and interest rates in effect as of December 31, 2016, we estimate that a 100 basis point immediate, parallel increase in interest rates (“rate shock”) would increase the net fair value of the assets and liabilities by $1.50 billion, compared to an increase of $963 million as of December 31, 2015, reflecting year to year changes in duration and the amount of assets and liabilities. The selection of a 100 basis point immediate, parallel change in interest rates should not be construed as our prediction of future market events, but only as an illustration of the potential effect of such an event. The estimate excludes traditional and interest-sensitive life insurance and other products that are not considered financial instruments and the $10.85 billion of assets supporting them and the associated liabilities. The $10.85 billion of assets excluded from the calculation increased from $9.86 billion as of December 31, 2015. Based on assumptions described above, in the event of a 100 basis point immediate increase in interest rates, the assets supporting life insurance and other products that are not considered financial instruments would decrease in value by $560 million compared to a decrease of $558 million as of December 31, 2015. |
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Interest rate shock analysis (1) |
| | | As of December 31, |
| ($ in millions) | | 2019 | | 2018 |
Increase in fair value of the assets net of liabilities (2) | | $ | 1,209 |
| | $ | 889 |
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(1) | Represents an immediate, parallel increase of 100 basis points based on information and assumptions used in the duration calculations and market interest rates as of December 31, 2019. |
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(2) | Estimate excludes traditional and interest-sensitive life insurance and accident and health insurance products that are not considered financial instruments. The assets supporting these products totaled $12.14 billion and $11.07 billion as of December 31, 2019 and 2018, respectively. Based on assumptions described above, these assets would decrease in value by $649 million as of December 31, 2019 compared to a decrease of $593 million as of December 31, 2018. |
To the extent that conditions differ from the assumptions we used in these calculations, duration and rate shock measures could be significantly impacted. Additionally, our calculations assume 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 effect of non-parallel changes in the term structure of interest rates and/or large changes in interest rates.
Credit spread risk is the risk that we will incur a loss due to adverse changes in credit spreads (“spreads”). Credit spread is the additional yield on fixed income securities and loans above the risk-free rate (typically referenced as the yield on U.S. Treasury securities) that market participants require to compensate them for assuming credit, liquidity and/or prepayment risks. The magnitude of the spread will depend on the likelihood that a particular issuer will default (“credit risk”).default. This risk arises from many of our primary activities, as we invest substantial funds in spread-sensitive fixed income assets.
We manage the spread risk in our assets. One of the measures used to quantify this exposure is spread duration. Spread duration measures the price sensitivity of the assets to changes in spreads. For example, if spreads increase 100 basis points, the fair value of an asset exhibiting a
The Allstate Corporation 91
2019 Form 10-KMarket Risk
spread duration of 5 is expected to decrease in value by 5%.
Spread duration is calculated similarly to interest rate duration. As of December 31, 2016,2019, the spread duration of Property-Liability assets was 3.20,4.60 compared to 3.384.28 as of December 31, 2015, and the spread duration of Allstate Financial assets was 4.83, compared to 4.91 as of December 31, 2015. Based upon the information and assumptions we use in this spread duration calculation, and spreads in effect as of December 31, 2016, we estimate that a 100 basis point immediate, parallel increase in spreads across all asset classes, industry sectors and credit ratings (“spread shock”) would decrease the net fair value of the assets by $2.40 billion compared to $2.52 billion as of December 31, 2015. Reflected in the spread duration calculation are the effects of our tactical2018.
actions that use credit default swaps to manage spread risk. The selection of a 100 basis point immediate parallel change in spreads should not be construed as our prediction of future market events, but only as an illustration of the potential effect of such an event. |
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Credit spread shock analysis (1) |
| | | As of December 31, |
| ($ in millions) | | 2019 | | 2018 |
Decrease in net fair value of the assets (2) | | $ | 2,877 |
| | $ | 2,493 |
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(1) | Represents an immediate, parallel increase of 100 basis points across all asset classes, industry sectors and credit ratings based on information and assumptions used in the spread duration calculations and market interest rates as of December 31, 2019. |
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(2) | Reflects effects of tactical positions that include the use of credit default swaps to manage spread risk. |
Equity price risk is the risk that we will incur losses due to adverse changes in the general levels of the equity markets.
Equity investments As of December 31, 2016,2019, we held $5.48$7.28 billion in common stocksequity securities, excluding those with fixed income securities as their underlying investments, and exchange traded and mutual funds and $6.00 billion in other securities with equity risk (including primarily limited partnership interests and non-redeemable preferred securities),where the underlying assets are predominately public equity securities, compared to $4.98$5.29 billion and $4.98 billion, respectively, as of December 31, 2015. 71.3%2018. 80.4% of the common stocks and exchange traded and mutual funds and 53.5% of the other securitiesinvestments with public equity risk are in Property-Liabilitysupported property and casualty products as of December 31, 2016,2019, compared to 68.3% and 53.4%, respectively,73.2% as of December 31, 2015.
2018. As of December 31, 2016, our portfolio of common stocks and other securities with2019, these investments had an equity risk had a cash market portfolio beta of 1.04,1.02, compared to a beta of 1.171.00 as of December 31, 2015.2018. Beta represents a widely used methodology to describe, quantitatively, an investment’s market risk characteristics relative to an index such as the Standard & Poor’s 500 Composite Price Index (“S&P 500”). Based on the beta analysis, we estimate that if the S&P 500 increases
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| Change in S&P 500 by 10% |
| | | As of December 31, |
| ($ in millions) | | 2019 | | 2018 |
| Change in net fair value of equity investments | | $ | 742 |
| | $ | 527 |
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We periodically use put options to reduce equity price risk or decreases by 10%, the fair value ofcall options to adjust our equity investments will increaserisk profile. Put options provide an offset to declines in equity market values below a targeted level, while call options provide participation in equity market appreciation above a targeted level. Options can expire, terminate early or decrease by 10.4%, respectively. Based upon the informationoption can be exercised. If the equity index does not fall below the put’s strike price or rise above the call’s strike price, the maximum loss on purchased puts and assumptions we usedcalls is limited to calculate beta asthe amount of the premium paid.
Limited partnership interests As of December 31, 2016,2019, we estimate that an immediate increase or decreaseheld $7.17 billion in limited partnership interests excluding those limited partnership interests
where the S&P 500 of 10% would increase or decrease the net fair value of ourunderlying assets are predominately public equity investments by $1.20 billion,securities compared to $1.17$6.86 billion as of December 31, 2015. The selection2018. 56.7% of the limited partnership interests supported property and casualty products as of December 31, 2019, compared to 53.9% as of December 31, 2018. These investments are primarily comprised of private equity and real estate funds. These investments are idiosyncratic in nature and a 10% immediate increase or decreasegreater portion of the return is derived from asset operating performance. They are not actively traded, and valuation changes typically reflect the performance of the underlying asset. |
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| Change in private market valuations by 10% |
| | | As of December 31, |
| ($ in millions) | | 2019 | | 2018 |
| Change in net fair value of limited partnership interests | | $ | 717 |
| | $ | 686 |
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For limited partnership interests, quarterly changes in fair values may not be highly correlated to equity indices in the S&P 500 should not be construed as our predictionshort-term and changes in value of future market events, but only as an illustrationthese investments are generally recognized on a three-month delay due to the availability of the potential effect of such an event.
The beta of our common stocks and other securities with equity risk was determined by calculating the change in the fair value of the portfolio resulting from stressing the equity market up and down 10%.related investee financial statements. The illustrations noted above may not reflect our actual experience if the future composition of the portfolio (hence its beta) and correlation relationships differ from the historical relationships.
Separate AccountsAs of December 31, 20162019 and 2015,2018, we had separate account assets related to variable annuity and variable life contracts with account values totaling $3.39$3.04 billion and $3.66$2.81 billion, respectively. Equity risk exists for contract charges based on separate account balances and guarantees for death and/or income benefits provided by our variable products.
In 2006, we disposed of substantially all of the variable annuity business through reinsurance agreements with The Prudential Insurance Company of America, a subsidiary of Prudential Financial Inc. and therefore mitigated this aspect of our risk. Equity risk for our variable life business relates to contract charges and policyholder benefits. Total variable life contract charges, including reinsurance assumed, for both 20162019 and 20152018 were $40 million.$45 million and $44 million, respectively. Separate account liabilities related to variable life contracts were $66$85 million and $69$68 million as of December 31, 20162019 and 2015,2018, respectively.
Equity-indexed Life and Annuity LiabilitiesAs of both December 31, 20162019 and 2015,2018, we had $1.81$1.92 billion and $1.83 billion, respectively, in equity-indexed life and annuity liabilities that provide customers with interest crediting rates based on the performance of the S&P 500. We hedge the majority of the risk associated with these liabilities using equity-indexed options and futures and eurodollar futures, maintaining risk within specified value-at-risk limits.
Market Risk 2019 Form 10-K
Foreign currency exchange rate risk is the risk that we will incur economic losses due to adverse changes in foreign currency exchange rates. This risk primarily arises from our foreign equity investments, including common stocks, limited partnership interests, and our Canadian, Northern Ireland and Indian operations. We also have investments in certain fixed income securities and emerging market fixed income funds that are denominated in foreign currencies and derivatives are used to hedge approximately 48% of thisuse foreign currency derivative contracts to partially offset this risk.
As of December 31, 2016,2019, we had $1.86$2.80 billion in foreign currency denominated equity investments, $901 millionincluding the impact of foreign currency derivative contracts, $1.08 billion net investment in our foreign subsidiaries, primarily related to our Canadian operations, and $97$113 million in unhedged non-dollarnon-U.S. dollar fixed income securities. These amounts were $1.97$2.10 billion, $780$860 million, and $17$96 million, respectively, as of December 31, 2015. 65% of the foreign currency exposure is in the Property-Liability business.2018.
Based upon the information and assumptions used as of December 31, 2016, we estimate that a 10% immediate unfavorable change in each of the foreign currency exchange rates to which we are exposed would decrease the value of our foreign currency denominated instruments by $269 million, compared with an estimated $278 million decrease as of December 31, 2015. The selection of a 10% immediate decrease in all currency exchange rates should not be construed as our prediction of future market events, but only as an illustration of the potential effect of such an event.
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Change in foreign currency exchange rates (1) |
| | | As of December 31, |
| ($ in millions) | | 2019 | | 2018 |
| Decrease in value of foreign currency denominated instruments | | $ | 402 |
| | $ | 306 |
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(1) | Represents a 10% immediate unfavorable change in each of the foreign currency exchange rates to which we are exposed based on information and assumptions used, including the impact of foreign currency derivative contracts. |
The modeling technique we use to report our currency exposure does not take into account correlation among foreign currency exchange rates. Even though we believe it is very unlikely that all of the foreign currency exchange rates that we are exposed to would simultaneously decrease by 10%, we nonetheless stress test our portfolio under this and other hypothetical extreme adverse market scenarios. Our actual experience may differ from these results because of assumptions we have used or because significant liquidity and market events could occur that we did not foresee.
PENSION AND OTHER POSTRETIREMENT PLANS
We have defined benefit pension plans, which cover most full-time employees, certain part-time employees and employee-agents. Benefits are based primarily on a cash balance formula; however, certain participants have a significant portion of their benefits attributable to a former final average pay formula. 89% of the projected benefit obligation of our primary qualified employee plan is related to the former final average pay formula. See Note 17 of the consolidated financial statements for a complete discussion of these plans and their effect on the consolidated financial statements. The pension and other postretirement plans may be amended or terminated at any time. Any revisions could result in significant changes to our obligations and our obligation to fund the plans.
We report unrecognized pension and other postretirement benefit cost in the Consolidated Statements of Financial Position as a component of accumulated other comprehensive income in shareholders’ equity. It represents the after-tax differences between the fair value of plan assets and the projected benefit obligation (“PBO”) for pension plans and the accumulated postretirement benefit obligation for other postretirement plans that have not yet been recognized as a component of net periodic cost. As of December 31, 2016, unrecognized pension and other postretirement benefit cost totaled $1.42 billion comprising $1.62 billion of unrecognized costs related to pension benefits and $204 million of unrecognized benefits related to other postretirement benefits. The unrecognized pension and other postretirement benefit cost increased by $104 million as of December 31, 2016 from $1.32 billion as of December 31, 2015. The measurement of the unrecognized pension and other postretirement benefit cost can vary based upon the fluctuations in the fair value of plan assets and the actuarial assumptions used for the plans as discussed below. The increase in the unrecognized pension and other postretirement benefit cost is primarily related to actuarial assumptions and census data updates, including decreases in the discount rate assumptions and lump sums paid at interest rates lower than the actuarially assumed rates, partially offset by asset returns that were greater than expected.
The components of net periodic pension cost for all pension plans for the years ended December 31 are as follows:
The Allstate Corporation 93
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| ($ in millions) | 2016 | | 2015 | | 2014 |
| Service cost | $ | 113 |
| | $ | 114 |
| | $ | 96 |
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| Interest cost | 286 |
| | 258 |
| | 262 |
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| Expected return on plan assets | (398 | ) | | (424 | ) | | (398 | ) |
| Amortization of: | | | | | |
| Prior service credit | (56 | ) | | (56 | ) | | (58 | ) |
| Net actuarial loss | 174 |
| | 190 |
| | 127 |
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| Settlement loss | 27 |
| | 31 |
| | 54 |
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| Net periodic cost | $ | 146 |
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| $ | 113 |
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| $ | 83 |
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The service cost component is the actuarial present value of the benefits attributed by the plans benefit formula to services rendered by the employees during the period. Interest cost is the increase in the PBO in the period due to the passage of time at the discount rate. Interest cost fluctuates as the discount rate changes and is also impacted by the related change in the size of the PBO. The decrease or increase in the PBO due to an increase or decrease in the discount rate is deferred and decreases or increases the net actuarial loss. It is recorded in accumulated other comprehensive income as unrecognized pension benefit cost and may be amortized.
The expected return on plan assets is determined as the product of the expected long-term rate of return on plan assets and the adjusted fair value of plan assets, referred to as the market-related value of plan assets. To determine the market-related value, the fair value of plan assets is adjusted annually so that differences between changes in the fair value of equity securities and hedge fund limited partnerships and the expected long-term rate of return on these securities are recognized into the market-related value of plan assets over a five year period. We believe this is consistent with the long-term nature of pension obligations.
When the actual return on plan assets exceeds the expected return on plan assets it reduces the net actuarial loss; when the expected return exceeds the actual return it increases the net actuarial loss. It is recorded in accumulated other comprehensive income as unrecognized pension benefit cost and may be amortized. The market-related value adjustment represents the current difference between actual returns and expected returns on equity securities and hedge fund limited partnerships recognized over a five year period. The market-related value adjustment is a deferred net loss of $23 million as of December 31, 2016. The expected return on plan assets fluctuates when the market-related value of plan assets changes and when the expected long-term rate of return on plan assets assumption changes.
Amortization of net actuarial loss in pension cost is recorded when the net actuarial loss excluding the unamortized market-related value adjustment exceeds 10% of the greater of the PBO or the market-related value of plan assets. The amount of amortization is equal to the excess divided by the average remaining service period for active employees for each plan, which approximates 10 years for Allstate’s largest plan. As a result, the effect of changes in the PBO due to changes in the discount rate and changes in the fair value of plan assets may be experienced in our net periodic pension cost in periods subsequent to those in which the fluctuations actually occur.
Net actuarial loss fluctuates as the discount rate fluctuates, as the actual return on plan assets differ from the expected long-term rate of return on plans assets, and as actual plan experience differs from other actuarial assumptions. Net actuarial loss related to changes in the discount rate will change when interest rates change and from amortization of net actuarial loss when there is an excess sufficient to qualify for amortization. Net actuarial loss related to changes in the fair value of plan assets will change when plan assets change in fair value and when there is an excess sufficient to qualify for amortization. Other net actuarial loss will change over time due to changes in other valuation assumptions and the plan participants or when there is an excess sufficient to qualify for amortization.
A decrease in the discount rate increased the net actuarial loss by $389 million in 2016, an increase in the discount rate decreased the net actuarial loss by $465 million in 2015, and a decrease in the discount rate increased the net actuarial loss by $576 million in 2014. The difference between actual and expected returns on plan assets decreased the net actuarial loss by $93 million in 2016, increased the loss by $466 million in 2015 and decreased the loss by $144 million in 2014.
Settlement charges are non-cash charges that accelerate the recognition of unrecognized pension benefit cost, that would have been incurred in subsequent periods, when plan payments, primarily lump sums from qualified pension plans, exceed a threshold of service plus interest cost for the period. The value of lump sums paid in 2016 was lower than in 2015, in the primary employee plan, and did not exceed the settlement charge threshold. The value of lump sums paid in 2015 was higher than 2014, in the primary employee plan, but did not exceed the settlement charge threshold.
Net periodic pension cost in 2017 is estimated to be $135 million including expected settlement charges of $33 million primarily for lump sum payments under the employee-agent plan. Expected returns on plan assets and amortization of prior service credits partially offset the other components of pension cost. The decrease is primarily due to lower interest costs as a result of decreases in discount rates. Pension expense is reported consistent with other types of employee compensation and as a result is included in claims expense, operating costs and expenses and investment expense. Net periodic pension cost increased in 2016 to $146 million compared to $113 million in 2015 due to higher interest costs as a result of increases in discount rates. Net periodic pension cost increased in 2015 to $113 million compared to $83 million in 2014 due to higher amortization of net actuarial loss offset by a higher expected return on assets. In 2016, 2015 and 2014, net pension cost included non-cash settlement charges resulting from lump sum distributions. Settlement charges are likely to continue for some period in the future as we settle our remaining pension obligations from the employee-agent plan by making lump sum distributions. The settlement charge threshold for our primary employee plan is lower beginning in 2014 due to the new benefit formula and low interest rates and as a result a lower amount of lump sum benefits may trigger settlement charges in the future. If interest rates increase in 2017, there may be an increase in employees electing retirement, which could trigger settlement charges in 2017.
We anticipate that the net actuarial loss for our pension plans will exceed 10% of the greater of the PBO or the market-related value of assets in 2017 and into the foreseeable future, resulting in additional amortization and net periodic pension cost. The net actuarial loss will be amortized over the remaining service life of active employees (approximately 10 years) or will reverse with increases in the discount rate or better than expected returns on plan assets.
Amounts recorded for net periodic pension cost and accumulated other comprehensive income are significantly affected by changes in the assumptions, particularly the discount rate and the expected long-term rate of return on plan assets. The discount rate is based on rates at which expected pension benefits attributable to past employee service could effectively be settled on a present value basis at the measurement date. We develop the assumed discount rate by utilizing the weighted average yield of a theoretical dedicated portfolio derived from non-callable bonds and bonds with a make-whole provision available in the Bloomberg corporate bond universe having ratings of at least “AA” by S&P or at least “Aa” by Moody’s on the measurement date with cash flows that match expected plan benefit requirements. Significant changes in discount rates, such as those caused by changes in the credit spreads, yield curve, the mix of bonds available in the market, the duration of selected bonds and expected benefit payments, may result in volatility in pension cost and accumulated other comprehensive income.
Holding other assumptions constant, a hypothetical decrease of 100 basis points in the discount rate would result in an increase of $28 million, pre-tax, in net periodic pension cost and a $446 million, after-tax, increase in the unrecognized pension cost liability recorded as accumulated other comprehensive income as of December 31, 2016, compared to an increase of $33 million, pre-tax, in net periodic pension cost and a $426 million, after-tax, increase in the unrecognized pension cost liability as of December 31, 2015. A hypothetical increase of 100 basis points in the discount rate would decrease net periodic pension cost by $25 million, pre-tax, and would decrease the unrecognized pension cost liability recorded as accumulated other comprehensive income by $375 million, after-tax, as of December 31, 2016, compared to a decrease in net periodic pension cost of $30 million, pre-tax, and a $360 million, after-tax, decrease in the unrecognized pension cost liability recorded as accumulated other comprehensive income as of December 31, 2015. This non-symmetrical range results from the non-linear relationship between discount rates and pension obligations, and changes in the amortization of unrealized net actuarial gains and losses.
The expected long-term rate of return on plan assets reflects the average rate of earnings expected on plan assets. While this rate reflects long-term assumptions and is consistent with long-term historical returns, sustained changes in the market or changes in the mix of plan assets may lead to revisions in the assumed long-term rate of return on plan assets that may result in variability
of pension cost. Differences between the actual return on plan assets and the expected long-term rate of return on plan assets are a component of net actuarial loss and are recorded in accumulated other comprehensive income.
Holding other assumptions constant, a hypothetical decrease of 100 basis points in the expected long-term rate of return on plan assets would result in an increase of $56 million in net periodic pension cost as of December 31, 2016, compared to $54 million as of December 31, 2015. A hypothetical increase of 100 basis points in the expected long-term rate of return on plan assets would result in a decrease in net periodic pension cost of $56 million as of December 31, 2016, compared to $54 million as of December 31, 2015.
The primary qualified plans have unrealized net gains as of December 31, 2016 of $525 million, an increase of $306 million from the prior year. $523 million of unrealized gains are related to equity securities as of December 31, 2016 compared to $283 million as of December 31, 2015. During 2016, the two primary qualified plans realized capital gains of $82 million. Given the Plan’s exposure to an increase in interest rates, the plans continue to maintain a shortened duration in the fixed income portfolio.
We target funding levels in accordance with applicable regulations, including those under the Internal Revenue Code (“IRC”) for the U.S. pension plans, and generally accepted actuarial principles. Our funding levels were within our targeted range as of December 31, 2016. In 2016, we contributed $131 million to our pension plans. We expect to contribute $136 million for the 2017 fiscal year to maintain the plans’ funded status. This estimate could change significantly following either an improvement or decline in investment markets.
Participating subsidiaries fund the Plans’ contributions under our master services cost sharing agreement. In addition, as a result of joint and several pension liability rules under the IRC and the Employee Retirement Income Security Act of 1974, as amended, many liabilities that arise in connection with pension plans are joint and several across all members of a controlled group of entities.
GOODWILL2019 Form 10-KCapital Resources and Liquidity
Goodwill represents the excess of amounts paid for acquiring businesses over the fair value of the net assets acquired. The goodwill balances were $823 million
Capital Resources and $396 million as of December 31, 2016 for the Allstate Protection segment and the Allstate Financial segment, respectively. Our reporting units are equivalent to our reporting segments, Allstate Protection and Allstate Financial. Goodwill is allocated to reporting units based on which unit is expected to benefit from the synergies of the business combination.Liquidity
Goodwill is not amortized but is tested for impairment at least annually. We perform our annual goodwill impairment testing during the fourth quarter of each year based upon data as of the close of the third quarter. We also review goodwill for impairment whenever events or changes in circumstances, such as deteriorating or adverse market conditions, indicate that it is more likely than not that the carrying amount of goodwill may exceed its implied fair value.
Impairment testing requires the use of estimates and judgments. For purposes of goodwill impairment testing, if the carrying value of a reporting unit exceeds its estimated fair value, the second step of the goodwill test is required. In such instances, the implied fair value of the goodwill is determined in the same manner as the amount of goodwill that would be determined in a business acquisition. The excess of the carrying value of goodwill over the implied fair value of goodwill would be recognized as an impairment and recorded as a charge against net income.
To estimate the fair value of our reporting units for our annual impairment test, we initially utilize a stock price and market capitalization analysis and apportion the value between our reporting units using peer company price to book multiples. If the stock price and market capitalization analysis does not result in the fair value of the reporting unit exceeding its carrying value, we may also utilize a peer company price to earnings multiples analysis and/or a discounted cash flow analysis to supplement the stock price and market capitalization analysis. If a combination of valuation techniques are utilized, the analyses would be weighted based on management’s judgment of their relevance given current facts and circumstances.
The stock price and market capitalization analysis takes into consideration the quoted market price of our outstanding common stock and includes a control premium, derived from historical insurance industry acquisition activity, in determining the estimated fair value of the consolidated entity before allocating that fair value to individual reporting units. The total market capitalization of the consolidated entity is allocated to the individual reporting units using book value multiples derived from peer company data for the respective reporting units. The peer company price to earnings multiples analysis takes into consideration the price earnings multiples of peer companies for each reporting unit and estimated income from our strategic plan. The discounted cash flow analysis utilizes long term assumptions for revenue growth, capital growth, earnings projections including those used in our strategic plan, and an appropriate discount rate. We apply significant judgment when determining the fair value of our reporting units and when assessing the relationship of market capitalization to the estimated fair value of our reporting units. The valuation analyses described above are subject to critical judgments and assumptions and may be potentially sensitive to variability. Estimates of fair value are inherently uncertain and represent management’s reasonable expectation regarding future developments. These estimates and the judgments and assumptions utilized may differ from future actual results. Declines in the estimated fair value
of our reporting units could result in goodwill impairments in future periods which may be material to our results of operations but not our financial position.
During fourth quarter 2016, we completed our annual goodwill impairment test using information as of September 30, 2016. The stock price and market capitalization analysis resulted in the fair value of our reporting units exceeding their respective carrying values. The results of this analysis are supported by the operating performance of the individual reporting units as well as their respective industry sector’s performance. Goodwill impairment evaluations indicated no impairment as of December 31, 2016 and no reporting unit was at risk of having its carrying value including goodwill exceed its fair value.
CAPITAL RESOURCES AND LIQUIDITY 2016 HIGHLIGHTS
Shareholders’ equity as of December 31, 2016 was $20.57 billion, an increase of 2.7% from $20.03 billion as of December 31, 2015.
On January 4, 2016, April 1, 2016, July 1, 2016, and October 3, 2016, we paid common shareholder dividends of $0.30, $0.33, $0.33 and $0.33, respectively. On November 18, 2016, we declared a common shareholder dividend of $0.33 payable on January 3, 2017. On February 10, 2017, we declared a common shareholder dividend of $0.37 payable on April 3, 2017.
In 2016, we returned $1.8 billion to shareholders through a combination of common stock dividends and repurchasing 5.3% of our beginning-of-year outstanding shares. As of December 31, 2016, there was $691 million remaining on the $1.5 billion common share repurchase program.
CAPITAL RESOURCES AND LIQUIDITY
Capital resourcesconsist of shareholders’ equity and debt, representing funds deployed or available to be deployed to support business operations or for general corporate purposes. The following table summarizes our capital resources as of December 31.
| | | Capital resources | | | | | | | |
| | | | | | | | | As of December 31, |
| ($ in millions) | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
| Preferred stock, common stock, treasury stock, retained income and other shareholders’ equity items | $ | 20,989 |
| | $ | 20,780 |
| | $ | 21,743 |
| | $ | 24,048 |
| | $ | 21,194 |
| | $ | 20,662 |
|
| Accumulated other comprehensive (loss) income | (416 | ) | | (755 | ) | | 561 |
| | 1,950 |
| | 118 |
| | 1,889 |
|
| Total shareholders’ equity | 20,573 |
|
| 20,025 |
|
| 22,304 |
| | 25,998 |
|
| 21,312 |
|
| 22,551 |
|
| Debt | 6,347 |
| | 5,124 |
| | 5,140 |
| | 6,631 |
| | 6,451 |
| | 6,350 |
|
| Total capital resources | $ | 26,920 |
|
| $ | 25,149 |
|
| $ | 27,444 |
| | $ | 32,629 |
|
| $ | 27,763 |
|
| $ | 28,901 |
|
| Ratio of debt to shareholders’ equity | 30.9 | % | | 25.6 | % | | 23.0 | % | | 25.5 | % | | 30.3 | % | | 28.2 | % |
| Ratio of debt to capital resources | 23.6 | % | | 20.4 | % | | 18.7 | % | | 20.3 | % | | 23.2 | % | | 22.0 | % |
Shareholders’ equity increased in 2016,2019, primarily due to net income, and increased net unrealized net capital gains on investments and issuance of preferred stock, partially offset by common share repurchases and dividends paid to shareholders. In 2016,2019, we paid dividends of $486$653 million and $116$134 million related to our common and preferred shares, respectively. Shareholders’ equity decreased in 2015,2018, primarily due to common share repurchases, decreased net unrealized net capital gains on investments, common share repurchases and dividends paid to shareholders, partially offset by net income.income and issuance of preferred stock.
Debt On December 8, 2016, we issued $550 million of 3.28% Senior Notes due 2026 and $700 million of 4.20% Senior Notes due 2046. The proceeds of this issuance were used for general corporate purposes, including in part to fund the purchase price for the acquisition of SquareTrade that closed on January 3, 2017.
We have no debt maturities until May 2018.Common share repurchases As of December 31, 2016 and 2015, there were no outstanding commercial paper borrowings. For further information on outstanding debt, see Note 12 of the consolidated financial statements.
Common share repurchases As of December 31, 2016,2019, there was $691$259 million remaining on the $3.00 billion common share repurchase program.
In April 2016,January 2020, we completed the $3$3.00 billion common share repurchase program that commenced in March 2015. In May 2016,November 2018. On February 6, 2020, the Board authorized a new $1.5$3.00 billion common share repurchase program that is expected to be completed by the end of 2021.
In November 2017.2019, we entered into an ASR agreement with Goldman Sachs & Co. LLC (“Goldman Sachs”) to purchase $500 million of our outstanding common stock. Under the ASR agreement, we paid $500 million upfront and initially acquired 4.0 million shares. The ASR agreement settled on January 8, 2020, and we repurchased a total of 4.6 million shares at an average price of $109.51.
During 2016,2019, we repurchased 20.216.4 million common shares for $1.34$1.81 billion. The common share repurchases were completed through open market transactions and two accelerated share repurchaseASR agreements.
Since 1995, we have acquired 666724 million shares of our common stock at a cost of $29.61$35.18 billion, primarily as part of various stock repurchase programs. We have reissued 133144 million common shares since 1995, primarily associated with our equity incentive plans, the 1999 acquisition of American Heritage Life Investment Corporation and the 2001 redemption of certain mandatorily redeemable preferred securities. Since 1995, total common shares outstanding has decreased by 533580 million shares or 59.3%64.5%, primarily due to our repurchase programs.
Common shareholder dividends On January 2, 2019, April 1, 2019, July 1, 2019, and October 1, 2019, we paid common shareholder dividends of $0.46, $0.50, $0.50 and $0.50, respectively. On November 15, 2019, we declared a common shareholder dividend of $0.50, payable on January 2, 2020. On February 20, 2020, we declared a common shareholder dividend of $0.54, payable on April 1, 2020.
Issuance and redemption of preferred stock On August 8, 2019, we issued 46,000 shares of 5.100% Fixed Rate Noncumulative Perpetual Preferred Stock, Series H for gross proceeds of $1.15 billion.
On October 15, 2019, we redeemed all 5,400 shares of our Fixed Rate Noncumulative Perpetual Preferred Stock, Series D, all 29,900 shares of our Fixed Rate Noncumulative Perpetual Preferred Stock, Series E, and all 10,000 shares of our Fixed Rate Noncumulative Perpetual Preferred Stock, Series F and the corresponding depository shares for $1.13 billion.
On November 8, 2019, we issued 12,000 shares of 4.750% Fixed Rate Noncumulative Perpetual Preferred Stock, Series I for gross proceeds of $300 million.
On January 15, 2020, we redeemed all 11,500 shares of Fixed Rate Noncumulative Preferred Stock, Series A and the corresponding depositary shares for $288 million.
For additional details on these transactions, see Note 12 of the consolidated financial statements.
Issuance and repayment of debtOn June 10, 2019, we issued $500 million of 3.850% Senior Notes due 2049. Interest on the Senior Notes is payable semi-annually in arrears on February 10 and August 10 of each year, beginning on February 10, 2020. The Senior Notes are redeemable at any time at the applicable redemption price prior to the maturity date. The proceeds of this issuance are used for general corporate purposes.
On May 16, 2019, we repaid $317 million of 7.450% Senior Notes, Series B, at maturity.
Capital Resources and Liquidity 2019 Form 10-K
Financial ratings and strength The following table summarizes our senior long-term debt, commercial paper and insurance financial strength ratings as of December 31, 2016.
|
| | | | | | |
| Senior long-term debt, commercial paper and insurance financial strength ratings |
| | As of December 31, 2019 |
| | Moody’s | | S&P Global Ratings | | A.M. Best |
| The Allstate Corporation (debt) | | A3 | | A- | | a-a |
| The Allstate Corporation (short-term issuer) | | P-2 | | A-2 | | AMB-1AMB-1+ |
| Allstate Insurance Company (insurance financial strength) | | Aa3 | | AA- | | A+ |
| Allstate Life Insurance Company (insurance financial strength) | A1 | A2 | | A+ | | A+ |
| Allstate Assurance Company (insurance financial strength) | A1 | A2 | | N/A | | A+ |
Our ratings are influenced by many factors including our operating and financial performance, asset quality, liquidity, asset/liability management, overall portfolio mix, financial leverage (i.e., debt), exposure to risks such as catastrophes and the current level of operating leverage. The preferred stock and subordinated debentures are viewed as having a common equity component by certain rating agencies and are given equity credit up to a pre-determined limit in our capital structure as determined by their respective methodologies. These respective methodologies consider the existence of certain terms and features in the instruments such as the noncumulative dividend feature in the preferred stock.
In April 2016,May 2019, A.M. Best affirmed The Allstate Corporation’s debt and short-term issuer ratings of a-a and AMB-1,AMB-1+, respectively, and the insurer financial strength ratings of A+ for Allstate Insurance Company (“AIC”), Allstate Life Insurance Company (“ALIC”), and Allstate Assurance Company (“AAC”). The outlook for the ratings is stable.
In July 2019, Moody’s affirmed The Allstate Corporation’s debt and short-term issuer ratings of A3 and P-2, respectively, and the insurance financial strength rating of Aa3 for AIC. Moody’s downgraded ALIC and AAC insurance financial strength ratings of A+to A2 from A1 reflecting Moody’s shift to a more standard single rating level positive adjustment for AIC and ALIC.subsidiary company ratings. The outlook for the ratings remainedis stable. The insurance financial strength rating of Allstate Assurance Company was upgraded to A+ from A. The outlook for the rating was revised to stable from positive.
In November 2016,December 2019, S&P updated The Allstate Corporation’s short-term issuer rating to A-2 from A-1 due to criteria misapplication. In December 2016, S&PGlobal affirmed The Allstate Corporation’s debt and short-term issuer ratings of A- and A-2, respectively, and the insurance financial strength ratings of AA- for AIC and A+ for ALIC. The outlook for the ratings remainedis stable. There was no change to our ratings from Moody’s in 2016.
We have distinct and separately capitalized groups of subsidiaries licensed to sell property and casualty insurance that maintain separate group ratings. The ratings of these groups are influenced by the risks that relate specifically to each group. Many mortgage companies require property owners to have insurance from an insurance carrier with a secure financial strength rating from an accredited rating agency. In April 2016,May 2019, A.M. Best affirmed the Allstate New Jersey Insurance Company,A rating of ANJ, which writes auto and homeowners insurance, and the A+ rating of A-, and North Light, Specialty Insurance Company, our excess and surplus lines carrier, rating of A+.
carrier. The outlook for these ratings arethe ANJ rating and North Light rating is stable. Allstate New Jersey Insurance CompanyANJ also has a Financial Stability Rating® of A”" from Demotech, which was affirmed in November 2016.2019. In October 2016,March 2019, A.M. Best affirmedupgraded the Castle Key Insurance Company,CKIC, which underwrites personal lines property insurance in Florida, rating of B-. Castle Key Insurance Companyto B+. CKIC also has a Financial Stability Rating® of A’A’ from Demotech whichthat was affirmed in November 2016.2019. ANJ, North Light and CKIC do not have support agreements with AIC.
ALIC, AIC, AACAllstate’s domestic property and casualty and life insurance subsidiaries prepare their statutory-basis financial statements in conformity with accounting practices prescribed or permitted by the insurance department of the applicable state of domicile. Statutory surplus is a measure that is often used as a basis for determining dividend paying capacity, operating leverage and premium growth capacity, and it is also reviewed by rating agencies in determining their ratings.
The property and casualty business is comprised of 29 insurance companies, each of which has individual company dividend limitations. As of December 31, 2019, total statutory surplus is $20.40 billion compared to $18.15 billion as of December 31, 2018. Property and casualty subsidiaries surplus was $16.19 billion as of December 31, 2019, compared to $14.33 billion as of December 31, 2018. Life insurance subsidiaries surplus was $4.21 billion as of December 31, 2019, compared to $3.82 billion as of December 31, 2018.
The National Association of Insurance Commissioners (“NAIC”) has developed financial relationships or tests known as the Insurance Regulatory Information System to assist state insurance regulators in monitoring the financial condition of insurance companies and identifying companies that require special attention or actions by state insurance regulators. The NAIC analyzes financial data provided by insurance companies using prescribed ratios, each with defined “usual ranges”. Additional regulatory scrutiny may occur if a company’s ratios fall outside the usual ranges for four or more of the ratios. Our domestic insurance companies have no significant departure from these ranges.
The Allstate Corporation 95
2019 Form 10-KCapital Resources and Liquidity
Liquidity sources and usesOur potential sources and uses of funds principally include the following activities below.
|
| | | | | | | | | | | | |
| Activities for potential sources of funds |
| | Property- Liability | | Service Businesses | | Allstate Life | | Allstate Benefits | | Allstate Annuities | | Corporate and Other |
| Receipt of insurance premiums | | ü | | ü | | ü | | ü | | | | |
| Recurring service fees | | ü | | ü | | | | ü | | | | |
| Contractholder fund deposits | | | | | | ü | | ü | | ü | | |
| Reinsurance and indemnification program recoveries | | ü | | ü | | ü | | ü | | ü | | |
| Receipts of principal, interest and dividends on investments | | ü | | ü | | ü | | ü | | ü | | ü |
| Sales of investments | | ü | | ü | | ü | | ü | | ü | | ü |
| Funds from securities lending, commercial paper and line of credit agreements | | ü | | | | ü | | | | ü
| | ü |
| Intercompany loans | | ü | | ü | | ü | | ü | | ü
| | ü |
| Capital contributions from parent | | ü | | ü | | ü | | ü
| | ü | | ü |
| Dividends or return of capital from subsidiaries | | ü | | ü | | ü | | ü | | ü | | ü |
| Tax refunds/settlements | | ü | | ü | | ü | | ü | | ü | | ü |
| Funds from periodic issuance of additional securities | | | | | | | | | | | | ü |
| Receipt of intercompany settlements related to employee benefit plans | | | | | | | | | | | | ü |
|
| | | | | | | | | | | | |
| Activities for potential uses of funds |
| | Property- Liability | | Service Businesses | | Allstate Life | | Allstate Benefits | | Allstate Annuities | | Corporate and Other |
| Payment of claims and related expenses | | ü | | ü
| | | | | | | | |
| Payment of contract benefits, surrenders and withdrawals | | | | | | ü | | ü | | ü | | |
| Reinsurance cessions and indemnification program payments | | ü | | ü | | ü | | ü | | ü | | |
| Operating costs and expenses | | ü | | ü | | ü | | ü | | ü | | ü |
| Purchase of investments | | ü | | ü | | ü | | ü | | ü | | ü |
| Repayment of securities lending, commercial paper and line of credit agreements | | ü | | | | ü | | | | ü | | ü |
| Payment or repayment of intercompany loans | | ü | | ü | | ü | | ü | | ü | | ü |
| Capital contributions to subsidiaries | | ü | | ü | | ü | | ü | | ü | | ü |
| Dividends or return of capital to shareholders/parent company | | ü | | ü | | ü | | ü | | ü | | ü |
| Tax payments/settlements | | ü | | ü | | ü | | ü | | ü | | ü |
| Common share repurchases | | | | | | | | | | | | ü |
| Debt service expenses and repayment | | ü | | | | | | | | | | ü |
| Payments related to employee benefit plans | | ü | | ü | | ü | | ü | | ü | | ü |
| Payments for acquisitions | | ü | | ü | | ü | | ü | | ü | | ü |
We actively manage our financial position and liquidity levels in light of changing market, economic, and business conditions. Liquidity is managed at both the entity and enterprise level across the Company and is assessed on both base and stressed level liquidity needs. We believe we have sufficient liquidity to meet these needs. Additionally, we have existing intercompany agreements in place that facilitate liquidity management across the Company to enhance flexibility.
As of December 31, 2019, we held $12.79 billion of cash, U.S. government and agencies fixed income securities, and public equity securities (excluding non-redeemable preferred stocks and foreign equities) which, under normal market conditions, we would
expect to be able to liquidate within one week. In addition, we regularly estimate how much of the total portfolio, which includes high quality corporate fixed income and municipal holdings, can be reasonably liquidated within one quarter. These estimates are subject to considerable uncertainty associated with evolving market conditions. As of December 31, 2019, cash and estimated liquidity available within one quarter, under normal market conditions and at current market prices, was $27.25 billion.
Certain remote events and circumstances could constrain our liquidity. Those events and circumstances include, for example, a catastrophe resulting in extraordinary losses, a downgrade in our senior long-term debt ratings to non-investment grade
Capital Resources and Liquidity 2019 Form 10-K
status, or a downgrade in AIC’s or ALIC’s financial strength ratings. The rating agencies also consider the interdependence of our individually rated entities; therefore, a rating change in one entity could potentially affect the ratings of other related entities.
The Allstate Corporation is party to an Amended and Restated Intercompany Liquidity Agreement (“Liquidity Agreement”) with certain subsidiaries, which include, but are not limited to, ALIC and AIC. The Liquidity Agreement allows for short-term advances of funds to be made between parties for liquidity and other general corporate purposes. The Liquidity Agreement does not establish a commitment to advance funds on the part of any party. ALIC and AIC each serve as a lender and borrower, AAC servescertain other subsidiaries serve only as a borrower,borrowers, and the Corporation serves only as a lender. AIC also has a capital support agreement with ALIC. Under the capital support agreement, AIC is committed to provideproviding capital to ALIC to maintain an adequate capital level. The maximum amount of potential funding under each of these agreements is $1.00 billion.
In addition to the Liquidity Agreement, the Corporation also has an intercompany loan agreement with certain of its subsidiaries, which include, but are not limited to, AIC and ALIC. The amount of intercompany loans available to the Corporation’s subsidiaries is at the discretion of the Corporation. The maximum amount of loans the Corporation will have outstanding to all its eligible subsidiaries at any given point in time is limited to $1.00 billion. The Corporation may use commercial paper borrowings, bank lines of credit and securities lending to fund intercompany borrowings.
Allstate’s domestic property-liability and life insurance subsidiaries prepare their statutory-basis financial statements in conformity with accounting practices prescribed or permitted by the insurance department of the applicable state of domicile. Statutory surplus is a measure that is often used as a basis for determining dividend paying capacity, operating leverage and premium growth capacity, and it is also reviewed by rating agencies in determining their ratings. Property-Liability is comprised of 29 insurance companies, each of which has individual company dividend limitations. As of December 31, 2016, total statutory surplus is $16.82 billion compared to $16.49 billion as of December 31, 2015. Property-Liability surplus was $13.44 billion as of December 31, 2016, compared to $13.33 billion as of December 31, 2015. Allstate Financial surplus was $3.38 billion as of December 31, 2016, compared to $3.16 billion as of December 31, 2015. In 2016, we completed a mortality study for our structured settlement annuities with life contingencies. The study indicated that annuitants are living longer and receiving benefits for a longer period than originally estimated. The final results of the study were incorporated in the statutory reserving process and led to an additional $143 million increase in statutory reserves as of December 31, 2016. This decreased Allstate Financial’s surplus by approximately $105 million, after-tax.
The ratio of net premiums written to statutory surplus is a common measure of operating leverage used in the property-casualty insurance industry and serves as an indicator of a company’s premium growth capacity. Ratios in excess of 3 to 1 are typically considered outside the usual range by insurance regulators and rating agencies, and for homeowners and related coverages that have significant net exposure to natural catastrophes, a ratio of 1 to 1 is typically within the usual range. AIC’s combined premium to surplus ratio was 1.9x as of both December 31, 2016 and December 31, 2015.
The National Association of Insurance Commissioners (“NAIC”) has also developed a set of financial relationships or tests known as the Insurance Regulatory Information System to assist state insurance regulators in monitoring the financial condition of insurance companies and identifying companies that require special attention or actions by state insurance regulators. The NAIC analyzes financial data provided by insurance companies using prescribed ratios, each with defined “usual ranges”. Additional regulatory scrutiny may occur if a company’s ratios fall outside the usual ranges for four or more of the ratios. Our domestic insurance companies have no significant departure from these ranges.
Liquidity sources and uses Our potential sources of funds principally include activities shown in the following table.
|
| | | | | |
| Property-
Liability
| | Allstate
Financial
| | Corporate
and Other
|
Receipt of insurance premiums | X | | X | | |
Contractholder fund deposits | | | X | | |
Reinsurance recoveries | X | | X | | |
Receipts of principal, interest and dividends on investments | X | | X | | X |
Sales of investments | X | | X | | X |
Funds from securities lending, commercial paper and line of credit agreements | X | | X | | X |
Intercompany loans | X | | X | | X |
Capital contributions from parent | X | | X | | |
Dividends or return of capital from subsidiaries | X | | | | X |
Tax refunds/settlements | X | | X | | X |
Funds from periodic issuance of additional securities | | | | | X |
Receipt of intercompany settlements related to employee benefit plans | | | | | X |
Our potential uses of funds principally include activities shown in the following table.
|
| | | | | |
| Property-
Liability
| | Allstate
Financial
| | Corporate
and Other
|
Payment of claims and related expenses | X | | | | |
Payment of contract benefits, maturities, surrenders and withdrawals | | | X | | |
Reinsurance cessions and payments | X | | X | | |
Operating costs and expenses | X | | X | | X |
Purchase of investments | X | | X | | X |
Repayment of securities lending, commercial paper and line of credit agreements | X | | X | | X |
Payment or repayment of intercompany loans | X | | X | | X |
Capital contributions to subsidiaries | X | | | | X |
Dividends or return of capital to shareholders/parent company | X | | X | | X |
Tax payments/settlements | X | | X | | |
Common share repurchases | | | | | X |
Debt service expenses and repayment | X | | X | | X |
Payments related to employee and employee-agent benefit plans | X | | X | | X |
Payments for acquisitions | X | | X | | X |
We actively manage our financial position and liquidity levels in light of changing market, economic, and business conditions. Liquidity is managed at both the entity and enterprise level across the Company, and is assessed on both base and stressed level liquidity needs. We believe we have sufficient liquidity to meet these needs. Additionally, we have existing intercompany agreements in place that facilitate liquidity management across the Company to enhance flexibility.
As of December 31, 2016, we held $7.75 billion of cash, U.S. government and agencies fixed income securities, and public equity securities (excluding non-redeemable preferred stocks and foreign equities) which, under normal market conditions, we would expect to be able to liquidate within one week. In addition, we regularly estimate how much of the total portfolio, which includes high quality corporate fixed income and municipal holdings, can be reasonably liquidated within one quarter. These estimates are subject to considerable uncertainty associated with evolving market conditions. As of December 31, 2016, estimated liquidity available within one quarter without generating significant net realized capital losses was $20.82 billion. As of December 31, 2016, gross unrealized losses related to fixed income and equity securities totaled $532 million.
Parent company capital capacity At the parent holding company level, we have deployable assets totaling $2.43$2.30 billion as of December 31, 20162019, comprising cash and investments that are generally saleable within one quarter. Deployable assets increased by the proceeds from the Preferred Stock, Series I issuance, which were subsequently used for the Series A redemption that occurred on January 15, 2020. The substantial earnings capacity of the operating subsidiaries is the primary source of capital generation for the Corporation. In 2017,
The payment of dividends by AIC to The Allstate Corporation 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. Based on the greater of 2019 statutory net income or 10% of statutory surplus, the maximum amount of dividends that AIC will have the capacitybe able to pay, dividends currentlywithout prior Illinois Department of Insurance approval, at a given point in time in 2020 is estimated at $1.56$3.73 billion, without prior regulatory approval. This providesless dividends paid during the preceding twelve months measured at that point in time. Notification and approval of intercompany lending activities are also required by the Illinois Department of Insurance for those transactions that exceed formula amounts based on statutory admitted assets and statutory surplus.
These holding company assets and subsidiary dividends provide funds for the parent company’s fixed charges and other corporate purposes. In addition, we have access to $1.00 billion of funds from either commercial paper issuance or an unsecured revolving credit facility.
In 2016,Intercompany dividends were paid in 2019, 2018 and 2017 between the following companies: AIC, paid dividends totaling $1.90 billion to its parent, Allstate Insurance Holdings, LLC (“AIH”), which then paid $1.87 billion of dividends to the Corporation. In 2015, AIC paid dividends totaling $2.31 billion to AIH, which then paid $2.30 billion of dividends to the Corporation. In 2014, AIC paid dividends totaling $2.47 billion to AIH, which then paid $2.46 billion of dividends to the Corporation. In December 2014, AIC repurchased 2,967 common shares held by AIH for an aggregate cash price of $1.20 billion, pursuant to the Stock Repurchase Agreement between AIC and AIH entered into as of December 9, 2014. A subsequent return of capital totaling $1.20 billion was paid by AIH to the Corporation, in December 2014. In 2016, 2015 and 2014, ALIC, paid zero, $103 million and $700 million, respectively, of returns of capital, repayments of surplus notes and dividends to AIC. In 2016, 2015 and 2014, American Heritage Life Insurance Company paid dividends totaling $55 million, $80 million(“AHL”) and $106 million, respectively, to Allstate Financial Insurance Holdings Corporation which then paid zero, zero and $42 million, respectively, of dividends to the Corporation. There were no capital contributions paid by the Corporation to AIC in 2016, 2015 or 2014. There were no capital contributions by AIC to ALIC in 2016, 2015 or 2014. In 2016, the Corporation paid a capital contribution of $1.50 billion to Allstate Non-Insurance Holdings, Inc. that was used to fund the acquisition of SquareTrade on January 3, 2017.(“AFIHC”).
|
| | | | | | | | | | | | |
| Intercompany dividends |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| AIC to AIH | | $ | 2,732 |
| | $ | 2,874 |
| | $ | 1,555 |
|
| AIH to the Corporation | | 2,747 |
| | 2,897 |
| | 1,613 |
|
| ALIC to AIC | | 75 |
| | 250 |
| | 600 |
|
| AHL to AFIHC | | 80 |
| | 55 |
| | 70 |
|
| AFIHC to the Corporation | | 50 |
| | — |
| | — |
|
Dividends may not be paid or declared on our common stock and shares of common stock may not be repurchased unless the full dividends for the latest completed dividend period on our preferred stock have been declared and paid or provided for.
We are prohibited from declaring or paying dividends on our Series G preferred stock if we fail to meet specified capital adequacy, net income or shareholders’ equity levels, except out of the net proceeds of common stock issued during the 90 days prior to the date of declaration. As of December 31, 2016,2019, we satisfied all of the tests with no current restrictions on the payment of preferred stock dividends. There were no capital contributions paid by the Corporation to AIC or capital contributions by AIC to ALIC in 2019, 2018 or 2017.
The terms of our outstanding subordinated debentures also prohibit us from declaring or paying any dividends or distributions on our common or preferred stock or redeeming, purchasing, acquiring, or making liquidation payments on our common stock or preferred stock if we have elected to defer interest payments on the subordinated debentures, subject to certain limited exceptions. In 2016,2019, we did not defer interest payments on the subordinated debentures.
Additional borrowingsresources to support liquidity are as follows:
The Corporation has access to a commercial paper facility with a borrowing limit of $1.00 billion to cover short-term cash needs. As of December 31, 2016, there were no balances outstanding and therefore the remaining borrowing capacity was $1.00 billion; however, the outstanding balance can fluctuate daily. | |
| • | The Corporation has access to a commercial paper facility with a borrowing limit of $1.00 billion to cover short-term cash needs. As of December 31, 2019, there were no balances outstanding and therefore the remaining borrowing capacity was $1.00 billion. |
The Corporation, AIC and ALIC have access to a $1.00 billion unsecured revolving credit facility that is available for short-term liquidity requirements. In April 2016, we extended theThe maturity date of this facility tois April 2021. The facility is fully subscribed among 11 lenders with the largest commitment being $115 million. The commitments of the lenders are several and no lender is responsible for any other lender’s commitment if such lender fails to make a loan
The Allstate Corporation 97
2019 Form 10-KCapital Resources and Liquidity
under the facility. This facility contains an increase provision that would allow up to an additional $500 million of borrowing. This facility has a financial covenant requiring that we not exceed a 37.5% debt to capitalization ratio as defined in the agreement. This ratio was 15.8%15.9% as of December 31, 2016.2019. Although the right to borrow under the facility is not subject to a minimum rating requirement, the costs of maintaining the facility and borrowing under it are based on the ratings of our senior unsecured, unguaranteed long-term debt. There were no borrowings under the credit facility during 2016.2019.
The Corporation has access to a universal shelf registration statement that was filed with the Securities and Exchange Commission on April 30, 2015. We can use this shelf registration to issue an unspecified amount of debt securities, common stock (including 534 million shares of treasury stock as of December 31, 2016), preferred stock, depositary shares, warrants, stock purchase contracts, stock purchase units and securities of trust subsidiaries. The specific terms of any securities we issue under this registration statement will be provided in the applicable prospectus supplements.
| |
| • | The Corporation has access to a universal shelf registration statement with the Securities and Exchange Commission that expires in 2021. We can use this shelf registration to issue an unspecified amount of debt securities, common stock (including 581 million shares of treasury stock as of December 31, 2019), preferred stock, depositary shares, warrants, stock purchase contracts, stock purchase units and securities of trust subsidiaries. The specific terms of any securities we issue under this registration statement will be provided in the applicable prospectus supplements. |
Liquidity exposure Contractholder funds were $20.26$17.69 billion as of December 31, 2016. The following table summarizes contractholder funds by their contractual withdrawal provisions as of December 31, 2016.2019.
| | | Contractholder funds by contractual withdrawal provisions | | | | | |
| ($ in millions) | | | Percent to total | | December 31, 2019 | | Percent to total |
| Not subject to discretionary withdrawal | $ | 3,132 |
| | 15.4 | % | | $ | 2,718 |
| | 15.4 | % |
| Subject to discretionary withdrawal with adjustments: | | | | | | | |
Specified surrender charges (1) | 5,138 |
| | 25.4 |
| | 4,760 |
| | 26.9 |
|
Market value adjustments (2) | 1,617 |
| | 8.0 |
| | 808 |
| | 4.6 |
|
Subject to discretionary withdrawal without adjustments (3) | 10,373 |
| | 51.2 |
| | 9,406 |
| | 53.1 |
|
Total contractholder funds (4) | $ | 20,260 |
| | 100.0 | % | | $ | 17,692 |
| | 100.0 | % |
| |
(1) | Includes $1.32$1.46 billion of liabilities with a contractual surrender charge of less than 5% of the account balance. |
| |
(2) | $1.04 billion369 million of the contracts with market value adjusted surrenders have a 30-45 day period at the end of their initial and subsequent interest rate guarantee periods (which are typically 1, 5, 7 or 10 years) during which there is no surrender charge or market value adjustment. $279$168 million of these contracts have their 30-45 day window period in 2017.2020. |
| |
(3) | 89% of these contracts have a minimum interest crediting rate guarantee of 3% or higher. |
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(4) | Includes $775$698 million of contractholder funds on variable annuities reinsured to The Prudential Insurance Company of America, a subsidiary of Prudential Financial Inc., in 2006. |
Retail life and annuity products may be surrendered by customers for a variety of reasons. Reasons unique to individual customers include a current or unexpected need for cash or a change in life insurance coverage needs. Other key factors that may impact the likelihood of customer surrender include the level of the contract surrender charge, the length of time the contract has been in force, distribution channel, market interest rates, equity market conditions and potential tax implications.
In addition, the propensity for retail life insurance policies to lapse is lower than it is for fixed annuities because of the need for the insured to be re-underwritten upon policy replacement.
The surrender and partial withdrawal rate on deferred fixed annuities and interest-sensitive life insurance products, based on the beginning of year contractholder funds, was 6.2%6.0% in 2019 and 7.1%7.2% in 2016 and 2015, respectively. Allstate Financial strives2018. We strive to promptly pay customers who request cash surrenders; however, statutory regulations generally provide up to six months in most states to fulfill surrender requests.
Our asset-liability management practices enable us to manage the differences between the cash flows generated by our investment portfolio and the expected cash flow requirements of our life insurance and annuity product obligations.
Certain remote events
Capital Resources and circumstances could constrain our liquidity. Those events and circumstances include, for example, a catastrophe resulting in extraordinary losses, a downgrade in our senior long-term debt ratings to non-investment grade status, a downgrade in AIC’s financial strength ratings, or a downgrade in ALIC’s financial strength ratings. The rating agencies also consider the interdependence of our individually rated entities; therefore, a rating change in one entity could potentially affect the ratings of other related entities.Liquidity 2019 Form 10-K
The following table summarizes consolidated cash flow activities by segment.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | Property-Liability (1) | | Allstate Financial (1) | | Corporate and Other (1) | | Consolidated |
| | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
| Net cash provided by (used in): | | | | | | | | | | | | | | | | | | | | | | | |
| Operating activities | $ | 3,604 |
| | $ | 3,198 |
| | $ | 2,765 |
| | $ | 398 |
| | $ | 383 |
| | $ | 720 |
| | $ | (9 | ) | | $ | 35 |
| | $ | (249 | ) | | $ | 3,993 |
| | $ | 3,616 |
| | $ | 3,236 |
|
| Investing activities | (3,579 | ) | | (839 | ) | | 99 |
| | 595 |
| | 867 |
| | 2,315 |
| | 458 |
| | 714 |
| | (793 | ) | | (2,526 | ) | | 742 |
| | 1,621 |
|
| Financing activities | 55 |
| | 52 |
| | (3 | ) | | (1,025 | ) | | (1,275 | ) | | (2,274 | ) | | (556 | ) | | (3,297 | ) | | (2,598 | ) | | (1,526 | ) | | (4,520 | ) | | (4,875 | ) |
| Net decrease in consolidated cash | | | | | | | | | | | | | | | | | | | $ | (59 | ) |
| $ | (162 | ) |
| $ | (18 | ) |
| |
(1)
| Business unit cash flows reflect the elimination of intersegment dividends, contributions and borrowings. |
Property-Liability Higher cash provided by operating activities in 2016 compared to 2015 was primarily due to increased premiums and lower tax payments, partially offset by higher claim payments. Higher cash provided by operating activities in 2015 compared to 2014 was primarily due to increased premiums partially offset by higher claims payments, higher contributions to benefit plans, lower net investment income and higher income tax payments.
Higher cash used in investing activities in 2016 compared to 2015 was primarily the result of the purchase of short-term investments using the debt issuance proceeds in advance of the closing of the acquisition of SquareTrade. Cash used in investing activities in 2015 compared to cash provided by investing activities in 2014 was primarily the result of decreased sales of securities, partially offset by decreased purchases of securities.
Allstate Financial Higher cash provided by operating activities in 2016 compared to 2015 was primarily due to lower tax payments and higher premiums on accident and health and traditional life insurance products, partially offset by lower net investment income and higher contract benefits. Lower cash provided by operating activities in 2015 compared to 2014 was primarily due
to lower net investment income and higher income tax payments, partially offset by higher premiums on accident and health and traditional life insurance products.
Lower cash provided by investing activities in 2016 compared to 2015 was the result of less cash used in financing activities due to decreased payments for contractholder fund disbursements. Lower cash provided by investing activities in 2015 compared to 2014 was the result of lower cash used in financing activities due to lower contractholder fund disbursements.
Lower cash used in financing activities in 2016 compared to 2015 was primarily due to decreased payments for contractholder benefits and withdrawals on fixed annuities. Lower cash used in financing activities in 2015 compared to 2014 was primarily due to lower contractholder benefits and withdrawals on fixed annuities and interest-sensitive life insurance, partially offset by lower deposits. For quantification of the changes in contractholder funds, see the Allstate Financial Segment section of the MD&A.
Corporate and Other Fluctuations in the Corporate and Other operating cash flows were primarily due to the timing of intercompany settlements. Investing activities primarily relate to investments in the parent company portfolio. Financing cash flows of the Corporate and Other segment reflect actions such as fluctuations in dividends to shareholders of The Allstate Corporation, common share repurchases, short-term debt, repayment of debt and proceeds from the issuance of debt and preferred stock; therefore, financing cash flows are affected when we increase or decrease the level of these activities.
Contractual obligations and commitmentsOur contractual obligations as of December 31, 20162019, and the payments due by period are shown in the following table.
| | | Contractual obligations and payments due by period | | Contractual obligations and payments due by period |
| | | | | | | | | | | | | As of December 31, 2019 |
| ($ in millions) | Total | | Less than 1 year | | 1 to 3 years | | Over 3 years to 5 years | | Over 5 years | | Total | | Less than 1 year | | 1 to 3 years | | Over 3 years to 5 years | | Over 5 years |
Liabilities for collateral (1) | $ | 1,129 |
| | $ | 1,129 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,829 |
| | $ | 1,829 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Contractholder funds (2) | 39,012 |
| | 2,441 |
| | 4,595 |
| | 4,010 |
| | 27,966 |
| | 35,751 |
| | 2,058 |
| | 3,903 |
| | 3,561 |
| | 26,229 |
|
Reserve for life-contingent contract benefits (2) | 39,988 |
| | 1,389 |
| | 2,654 |
| | 2,484 |
| | 33,461 |
| | 38,446 |
| | 1,449 |
| | 2,642 |
| | 2,424 |
| | 31,931 |
|
Long-term debt (3) | 14,217 |
| | 334 |
| | 1,131 |
| | 597 |
| | 12,155 |
| | 13,869 |
| | 316 |
| | 872 |
| | 1,335 |
| | 11,346 |
|
Operating leases (4) | 606 |
| | 122 |
| | 191 |
| | 124 |
| | 169 |
| | 644 |
| | 133 |
| | 223 |
| | 151 |
| | 137 |
|
Unconditional purchase obligations (4) | 663 |
| | 244 |
| | 293 |
| | 120 |
| | 6 |
| | 590 |
| | 192 |
| | 239 |
| | 109 |
| | 50 |
|
Defined benefit pension plans and other postretirement benefit plans (4)(5) | 990 |
| | 45 |
| | 113 |
| | 117 |
| | 715 |
| | 967 |
| | 47 |
| | 111 |
| | 115 |
| | 694 |
|
Reserve for property-liability insurance claims and claims expense (6) | 25,250 |
| | 11,047 |
| | 8,285 |
| | 3,034 |
| | 2,884 |
| |
Reserve for property and casualty insurance claims and claims expense (6) | | | 27,712 |
| | 12,317 |
| | 8,707 |
| | 3,085 |
| | 3,603 |
|
Other liabilities and accrued expenses (7)(8) | 5,132 |
| | 5,000 |
| | 104 |
| | 12 |
| | 16 |
| | 5,320 |
| | 5,025 |
| | 266 |
| | 17 |
| | 12 |
|
Net unrecognized tax benefits (9) | 10 |
| | 10 |
| | — |
| | — |
| | — |
| | 70 |
| | 58 |
| | 12 |
| | — |
| | — |
|
| Total contractual cash obligations | $ | 126,997 |
|
| $ | 21,761 |
|
| $ | 17,366 |
|
| $ | 10,498 |
|
| $ | 77,372 |
| | $ | 125,198 |
|
| $ | 23,424 |
|
| $ | 16,975 |
|
| $ | 10,797 |
|
| $ | 74,002 |
|
| |
(1) | Liabilities for collateral are typically fully secured with cash or short-term investments. We manage our short-term liquidity position to ensure the availability of a sufficient amount of liquid assets to extinguish short-term liabilities as they come due in the normal course of business, including utilizing potential sources of liquidity as disclosed previously. |
| |
(2) | Contractholder funds represent interest-bearing liabilities arising from the sale of products such as interest-sensitive life and fixed annuities, including immediate annuities without life contingencies. The reserve for life-contingent contract benefits relates primarily to traditional life insurance, immediate annuities with life contingencies and voluntary accident and health insurance. These amounts reflect the present value of estimated cash payments to be made to contractholders and policyholders. Certain of these contracts, such as immediate annuities without life contingencies, involve payment obligations where the amount and timing of the payment isare essentially fixed and determinable. These amounts relate to (i) policies or contracts where we are currently making payments and will continue to do so and (ii) contracts where the timing of a portion or all of the payments has been determined by the contract. Other contracts, such as interest-sensitive life, fixed deferred annuities, traditional life insurance and voluntary accident and health insurance, involve payment obligations where a portion or all of the amount and timing of future payments is uncertain. For these contracts, we are not currently making payments and will not make payments until (i) the occurrence of an insurable event such as death or illness or (ii) the occurrence of a payment triggering event such as the surrender or partial withdrawal on a policy or deposit contract, which is outside of our control. For immediate annuities with life contingencies, the amount of future payments is uncertain since payments will continue as long as the annuitant lives. We have estimated the timing of payments related to these contracts based on historical experience and our expectation of future payment patterns. Uncertainties relating to these liabilities include mortality, morbidity, expenses, customer lapse and withdrawal activity, estimated additional deposits for interest-sensitive life contracts, and renewal premium for life policies, which may significantly impact both the timing and amount of future payments. Such cash outflows reflect adjustments for the estimated timing of mortality, retirement, and other appropriate factors, but are undiscounted with respect to interest. As a result, the sum of the cash outflows shown for all years in the table exceeds the corresponding liabilities of $20.26$17.69 billion for contractholder funds and $12.24$12.30 billion for reserve for life-contingent contract benefits as included in the Consolidated Statements of Financial Position as of December 31, 2016.2019. The liability amount in the Consolidated Statements of Financial Position reflects the discounting for interest as well as adjustments for the timing of other factors as described above. Future premium collections are not included in the amounts presented in the table above. |
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(3) | Amount differs from the balance presented on the Consolidated Statements of Financial Position as of December 31, 20162019, because the long-term debt amount above includes interest and excludes debt issuance costs. |
| |
(4) | Our payment obligations relating to operating leases, unconditional purchase obligations and pension and other postretirement benefits (“OPEB”) contributions are managed within the structure of our intermediate to long-term liquidity management program. |
| |
(5) | The pension plans’ obligations in the next 12 months represent our planned contributions to certain unfunded non-qualified plans where the benefit obligation exceeds the assets, and the remaining years’ contributions are projected based on the average remaining service period using the current underfunded status of the plans. The OPEB plans’ obligations are estimated based on the expected benefits to be paid. These liabilities are discounted with respect to interest, and as a result the sum of the cash outflows shown for all years in the table exceeds the corresponding liability amount of $514$534 million included in other liabilities and accrued expenses on the Consolidated Statements of Financial Position. |
| |
(6) | Reserve for property-liabilityproperty and casualty insurance claims and claims expense is an estimate of amounts necessary to settle all outstanding claims, including claims that have been IBNR as of the balance sheet date. We have estimated the timing of these payments based on our historical experience and our expectation of future payment patterns. However, the timing of these payments may vary significantly from the amounts shown above, especially for IBNR claims. The ultimate cost of losses may vary materially from recorded amounts whichthat are our best estimates. The reserve for property-liability insurance claims and claims expense includes loss reserves related to asbestos and environmental claims as of December 31, 2016, of $1.36 billion and $219 million respectively. |
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(7) | Other liabilities primarily include accrued expenses and certain benefit obligations and claim payments and other checks outstanding. Certain of these long-term liabilities are discounted with respect to interest, as a result, the sum of the cash outflows shown for all years in the table exceedsmay exceed the corresponding liability amount by $8 million.amount. |
The Allstate Corporation 99
2019 Form 10-KCapital Resources and Liquidity
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(8) | Balance sheet liabilities not included in the table above include unearned and advance premiums of $13.33$16.13 billion and gross deferred tax liabilities of $2.25 billion.$2.35 billion. These items were excluded as they do not meet the definition of a contractual liability as we are not contractually obligated to pay these amounts to third parties. Rather, they represent an accounting mechanism that allows us to present our financial statements on an accrual basis. In addition, other liabilities of $227$280 million were not included in the table above because they did not represent a contractual obligation or the amount and timing of their eventual payment was sufficiently uncertain. |
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(9) | Net unrecognized tax benefits represent our potential future obligation to the taxing authority for a tax position that was not recognized in the consolidated financial statements. We believe it is reasonably possible that the liability balance will not significantly increasea decrease of up to $58 million in unrecognized tax benefits may occur within the next twelve months.months due to IRS settlements. The resolution of this obligation may be for an amount different than what we have accrued. |
Our contractual commitments as of December 31, 2016 and the periods in which the commitments expire are shown in the following table.
| | | Contractual commitments and periods in which commitments expire | | Contractual commitments and periods in which commitments expire |
| | | | | | | | | | | | | As of December 31, 2019 |
| ($ in millions) | Total | | Less than 1 year | | 1 to 3 years | | Over 3 years to 5 years | | Over 5 years | | Total | | Less than 1 year | | 1 to 3 years | | Over 3 years to 5 years | | Over 5 years |
| Other commitments – conditional | $ | 144 |
| | $ | 89 |
| | $ | — |
| | $ | 4 |
| | $ | 51 |
| | $ | 205 |
| | $ | 91 |
| | $ | 46 |
| | $ | 8 |
| | $ | 60 |
|
| Other commitments – unconditional | 2,987 |
| | 133 |
| | 129 |
| | 390 |
| | 2,335 |
| | 2,889 |
| | 284 |
| | 250 |
| | 385 |
| | 1,970 |
|
| Total commitments | $ | 3,131 |
|
| $ | 222 |
|
| $ | 129 |
|
| $ | 394 |
|
| $ | 2,386 |
| | $ | 3,094 |
|
| $ | 375 |
|
| $ | 296 |
|
| $ | 393 |
|
| $ | 2,030 |
|
Contractual commitments represent investment commitments such as private placements, limited partnership interests municipal bonds and other loans. Limited partnership interests are typically funded over the commitment period which is shorter than the contractual expiration date of the partnership and as a result, the actual timing of the funding may vary.
We have agreements in place for services we conduct, generally at cost, between subsidiaries relating to insurance, reinsurance, loans and capitalization. All material intercompany transactions have been appropriately eliminated in consolidation. Intercompany transactions among insurance subsidiaries and affiliates have been approved by the appropriate departments of insurance as required.
For a more detailed discussion of our off-balance sheet arrangements, see Note 7 of the consolidated financial statements.
ENTERPRISE RISK AND RETURN MANAGEMENTEnterprise Risk and Return Management 2019 Form 10-K
Enterprise Risk and Return Management
In addition to the normal risks of the business, Allstate is subject to significant risks as an insurer and a provider of other products and financial services. These risks are discussed in more detail in the Risk Factors section of this document. We regularly identify, measure, manage, monitor and report on all significant risks, but the majorrisks. Major categories of enterprise risksrisk are strategic, insurance, investment, financial, investment, operational and strategic risks. culture.
Allstate manages these risks through an Enterprise Risk and Return Management (“ERRM”) framework that includes governance, practices,processes, culture, and activities that are performed on an integrated, enterprise-wide basis, following our risk and return principles. Our legal and capital structures are designed to manage capital and solvency on a legal entity basis. Our risk-return principles define how we operate and guide decision-making around risk and return.return decision making. These principles state that our priority is to protectmaintain a strong foundation by protecting solvency, complycomplying with laws and actacting with integrity. Building upon this foundation, we strive to build strategic value and optimize risk and return.
Governance ERRM governance includes board oversight, an executive management committee, structure, as well asand enterprise and market-facing business unit chief risk officers (“CROs”). officers.
The Allstate Corporation Board of Directors (“Allstate Board”) has overall responsibility for oversight of management’sManagement’s design and implementation of ERRM.
The Risk and Return Committee (“RRC”) of the Allstate Board oversees effectiveness of the ERRM framework,program, governance structure and risk-related decision-making, while focusing on the Company’s overall risk profile.
The Audit Committee oversees the effectiveness of internal controls over financial reporting, disclosure controls and procedures as well as management’s risk control framework for risks. and cybersecurity program.
The Enterprise Risk and Return Council (“ERRC”) is Allstate’s senior risk management committee thatERRC, directs ERRM by establishing risk-returnrisk and return targets, determining economic capital levels and directingmonitoring integrated strategies and actions from an enterprise risk and return perspective.
The ERRC consists of Allstate’s chief executive officer, president, business unit presidents,vice chair, chief investmentfinancial officer, enterprise and business unit chief risk officersofficer and chief financial officers, general counsel and treasurer. other senior leaders.
Other key committees work with the ERRC to direct ERRM activities, including the Strategy & ReinventionOperating Committee, (“S&RC”), legal entitythe Operational Risk Council, the Information Security Council, the Corporate Asset Liability Committee, liability governance committees, and legal entity investment committees.
Key risks are assessed and reported quarterly through a comprehensive ERRM risk dashboardreports prepared for senior management and the RRC. The risk dashboardsummary report communicates key risk and return conditions, provides an overall perspectivealignment of Allstate’s risk profile with risk and return principles while providing a perspective on risk position. Discussion promotes active discussion and engagement with management and the RRC. Internal controls over key risks are managed and reported to senior management and the Audit Committee of the Company through a semiannual risk control dashboard. Annually, we communicate with both the Company’s board of directors and RRC about economic capital andreview risks related to the strategic plan, operating plan, and incentive compensation program.programs with the Allstate Board.
The Allstate Corporation 101
2019 Form 10-KEnterprise Risk and Return Management
Framework We apply these principles using an integrated ERRM framework that focuses on measurement,assessment, transparency and dialogue. Our framework provides a comprehensive view of risks and is used by senior management and business managers to drive strategic and businessrisk-return based decisions. We continually validate and improve our ERRM practices by benchmarking and obtaining external perspectives.
Allstate’s risk appetite is integrated in planning through our economic capital framework. Management and the ERRC rely on internal and external perspectives to determine an appropriate level of target economic capital. Internal perspectives include enterprise solvency and volatility measures,assessments, stress scenarios, model assumptions, and management judgment. External considerations include NAIC risk-based capital as well as S&P’s, Moody’s, and A.M. Best’s capital adequacy measurement. Our economic capital reflects senior management’s view of the aggregate level of capital necessary to satisfy stakeholder interests, manage Allstate’s risk profile and maintain financial strength over a multiple year time horizon.strength. The impact of strategic initiatives on enterprise risk is evaluated through the economic capital risk-return framework.
The NAIC has adopted the Risk Management and Own Risk and Solvency Assessment Model Act (“ORSA Model Act”), which has been enacted by our insurance subsidiaries’ domiciliary states. The ORSA Model Act requires that insurers maintain a risk management framework and conduct an internal own risk and solvency assessment of the insurer’s material risks in normal and stressed environments. Results of the assessment are filed annually.
Allstate’s risk appetite is measured through our economic capital framework. The enterprise risk appetite is cascaded into individual risk limits which set boundaries on the amount of risk we are willing to accept from one specific risk category before escalating for further management discussion and action. Risk limits are established based upon expected returns, volatility, tail/stresspotential tail losses, and impact on the enterprise portfolio. To effectively operate within risk limits and for risk-return optimization, business units establish risk limits and capital targets specific to their businesses. Allstate’s risk management strategies adapt to changes in business and market environments.
ProcessOur shared ERRM framework establishes a basis for transparency and dialogue across the enterprise and for continuous learning by embedding our risk and return management culture of identifying, measuring,assessing, managing, monitoring and reporting risks within the organization. Allstate designs business and enterprise strategies that seek to optimize risk-adjusted returns on capital. Risks are managed at both the legal entity and enterprise level.
A summary of our process to manage each of our major risk categories follows:
Strategic risk and return managementaddresses loss associated with inadequate or flawed business planning or strategy setting, including product mix, mergers or acquisitions and market positioning, and unexpected changes within the market or regulatory
environment in which Allstate operates. This includes reputational risk, which is the potential for negative publicity regarding a company’s conduct or business practices to adversely impact its profitability, operations, consumer base, or require costly litigation and other defensive measures.
We manage strategic risk through the Allstate Board and senior management strategy reviews that include a risk and return assessment of our strategic plans and ongoing monitoring of our strategic actions, key assumptions and the external competitive environment. Using the ERRM framework, Allstate designs strategies that seek to optimize risk-adjusted returns on economic capital for risk types including interest rate risk, credit risk, equity investments, including those with idiosyncratic return potential, auto profitability, and growing property exposure.
Insurance risk and return management addresses fluctuations in the timing, frequency, and severity of benefits, expenses, and premiums relative to the return expectations at the time of pricing inclusive of systemic risk, concentration of insurance exposures, policy terms, reinsurance coverage, and claims handling practices. This includes credit risk that arises when an external party fails to meet a contractual obligation such as reinsurance for ceded claims.
Insurance risk exposures include our operating results and financial conditions,condition, claims frequency and severity, catastrophes and severe weather, and mortality and morbidity risk.
Insurance risk exposures are measured and monitored with a number of different approaches including:
Stochastic methods: measures and monitors risks such as natural catastrophes and severe weather. We develop probabilistic estimates of risk that is based on our exposures, historical observed volatility and/or industry-recognized models in the case of catastrophe risk.
Scenario analysis: measures and monitors risks and estimateestimated losses due to catastrophe scenarios. Stress scenarioextreme but plausible insurance-related events such as multiple hurricanes and/or wildfires. Scenarios evaluated include combined multiple event scenarios across risk categories and time periods, considering the effects of macroeconomic conditions.
Investment risk and return management addresses financial loss due to changes in the valuations of assets held in the Allstate investment portfolio, as well as liability valuation within the Life and Annuity business. Such losses may be caused by macro developments, such as changes to interest rates, credit spreads, and equity price levels, or could be specific to individual investments in the portfolio. These losses can encompass both daily market volatility and permanent impairments of capital due to credit defaults and equity write-downs.
Investment risk exposures include interest rate risk, credit spread risk, equity price risk and foreign currency exchange rate risk.
Investment risk exposures are also analyzed for mortality/morbiditymeasured and monitored in a number of ways including:
Sensitivity analysis: measures the impact from a unit change in a market risk exposures.input.
Enterprise Risk and Return Management 2019 Form 10-K
Stochastic and probabilistic estimation of potential losses: combines portfolio risk exposures with historical or recent market volatilities and correlations to assess the potential range of future investment results.
Scenario analysis: measures material adverse outcomes such as shock scenarios applied to credit, public and private equity markets.
Some of the stress scenarios are a combination of multiple scenarios across risk categories and over multiple time periods, considering the effects of macroeconomic conditions.
Financial risk and return management addresses the risk of insufficient cash flows to meet corporate or policyholder needs, risk of inadequate aggregate capital or capital within any subsidiary, inability to access capital markets, credit risk that arises when an external party fails to meet a contractual obligation such as reinsurance for ceded claims, or risk associated with a business counterparty default.
Financial risk exposures include capital resources and liquidity sources and uses.
We actively manage our capital and liquidity levels in light of changing market, economic, and business conditions. Our capital position, capital generation capacity, and targeted risk profile provide strategic and financial flexibility.
We generally assess solvency on a statutory accounting basis, but also consider GAAP volatility.holding company capital and liquidity needs. Current enterprise economic capital, which exceeds economic targeted levels, approximatesis based on a combination of total statutory surplus and deployable invested assets at the parent holding company level which were $16.82 billion and $2.43 billion, respectively, as of December 31, 2016.level.
Investment risk management addresses financial loss due to changes in the valuations of assets held in the Allstate investment portfolio. Such losses may be caused by macro developments, such as rising interest rates, widening credit spreads, and falling
equity prices, or could be specific to individual investments in the portfolio. These losses can encompass both daily market volatility and permanent impairments of capital due to credit defaults and equity write-downs.
Investment risk exposures include interest rate risk, credit spread risk, equity priceOperational risk and foreign currency exchange rate risk.
Investment risk exposures are measured and monitored in a number of ways including:
•Sensitivity analysis: measures the impact from a unit change in a market risk input.
Stochastic and probabilistic estimation of potential losses: combines portfolio risk exposures with historical or recent market volatilities and correlations to assess the potential span of future investment results.
Stress testing: measures material adverse outcomes such as shock scenarios applied to credit, public and private equity markets.
Operational riskreturn managementaddresses loss as a result of the failure of people, processes, and systems or from external events.culture. Operational risk exposures include human resources,capital, privacy, regulatory compliance, ethics, fraud, system availability, cybersecurity, data quality, disaster recovery and business continuity.
Operational risk is managed at the enterprise and market-facing business unit levels, through an integrated Operational Risk and Return Management (“ORRM”) program, with business unitsresources throughout the enterprise identifying, measuring, monitoring, managing, and reporting these and otheron operational risks at a more detailed level.
StrategicFrom time to time, we engage independent advisors to assess and consult on operational risks. We also perform assessments of the quality of our operational risk management addresses loss associated with inadequate or flawed business planning or strategy setting, including product mix, mergers or acquisitionsprogram and market positioning,identify opportunities to strengthen our internal controls.
Culture risk and unexpected changes within the market or regulatory environment in which Allstate operates. This includes reputational risk, which isreturn management addresses the potential for negative publicity regardingloss of stakeholder value from a company’s conductsuboptimal work environment, missed opportunities, or business practicesineffective risk management practices. Allstate defines organization culture as a self-sustaining system of shared values, principles and priorities that shape beliefs, drive behavior and influence decision-making within an organization. Culture is managed based on a set of core cultural elements that have been established as a basis for assessment and measurement. Results of culture risk assessment are reported to adversely impact its profitability, operations, consumer base, or require costly litigationthe ERRC and other defensive measures.RRC throughout the year.
Strategic risk exposures include strategic priorities or business model, workforce and reputation.
We manage strategic risk through the Company’s boardThe Allstate Corporation 103
2019 Form 10-KApplication of directors and senior management strategy reviews that include a risk and return assessmentCritical Accounting Estimates
Application of our strategic plans, S&RC governance, and ongoing monitoring of our strategic actions and the external competitive environment. Using the ERRM framework, Allstate designs strategies that seek to optimize risk-adjusted returns on economic capital for risk types including interest rate risk, credit risk to equity investments with idiosyncratic return potential, auto profitability, and growing property exposure.
Critical Accounting Estimates
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the consolidated financial statements. The most critical estimates, presented in the order they appear in the Consolidated Statements of Financial Position, include those used in determining:
•Fair value of financial assets
•Impairment of fixed income and equity securities
•Deferred policy acquisition costs amortization
•Evaluation of goodwill for impairment
Reserve for property-liabilityproperty and casualty insurance claims and claims expense estimation
•Reserve for life-contingent contract benefits estimation
| |
| • | Pension and other postretirement plans net costs and assumptions |
In making these determinations, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to our businesses and operations. It is reasonably likely that changes in these estimates could occur from period to period and result in a material impact on our consolidated financial statements.
A brief summary of each of these critical accounting estimates follows. For a more detailed discussion of the effect of these estimates on our consolidated financial statements, and the judgments and assumptions related to these estimates, see the referenced sections of this document. For a completemore detailed summary of our significant accounting policies, see the notes to the consolidated financial statements.
Fair value of financial assetsFair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We are responsible for the determination of fair value of financial assets and the supporting assumptions and methodologies. We use independent third-party valuation service providers, broker quotes and internal pricing methods to determine fair values. We obtain or calculate only one single quote or price for each financial instrument.
Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of proprietary models, produce valuation information in the form of a single fair value for individual fixed income and other securities for which a fair value has been requested under the terms of our agreements. The inputs used by the valuation service providers include, but are not limited to, market prices
from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, liquidity spreads, currency rates, and other information, as applicable. Credit and liquidity spreads are typically implied from completed transactions and transactions of comparable securities. Valuation service providers also use proprietary discounted cash flow models that are widely accepted in the financial services industry and similar to those used by other market participants to value the same financial instruments. The valuation models take into account, among other things, market observable information as of the measurement date, as described above, as well as the specific attributes of the security being valued including its term, interest rate, credit rating, industry sector, and where applicable, collateral quality and other issue or issuer specific information. Executing valuation models effectively requires seasoned professional judgment and experience. For certain equity securities, valuation service providers provide market quotations for completed transactions on the measurement date. In cases where market transactions or other market observable data is limited, the extent to which judgment is applied varies inversely with the availability of market observable information.
For certain of our financial assets measured at fair value, where our valuation service providers cannot provide fair value determinations, we obtain a single non-binding price quote from a broker familiar with the security who, similar to our valuation service providers, may consider transactions or activity in similar securities among other information. The brokers providing price quotes are generally from the brokerage divisions of leading financial institutions with market making, underwriting and distribution expertise regarding the security subject to valuation.
The fair value of certain financial assets, including privately placed corporate fixed income securities and certain free-standing derivatives, for which our valuation service providers or brokers do not provide fair value determinations, is determineddeveloped using valuation methods and models widely accepted in the financial services industry. Our internal pricing methods are primarily based on models using discounted cash flow methodologies that develop a single best estimate of fair value. Our models generally incorporate inputs that we believe are representative of inputs other market participants would use to determine fair value of the same instruments, including yield curves, quoted market prices of comparable securities or instruments, published credit spreads, and other applicable market data as well as instrument-specific characteristics that include, but are not limited to, coupon rates, expected cash flows, sector of the issuer, and call provisions. JudgmentBecause judgment is required in developing these fair values. As a result, the fair valuevalues of these financial assets, they may differ from the amount actually received to sell an asset in an orderly transaction between market participants at the measurement date. Moreover, the use of different valuation assumptions may have a material effect on the financial assets’ fair values.
Application of Critical Accounting Estimates 2019 Form 10-K
For most of our financial assets measured at fair value, all significant inputs are based on or corroborated by market observable data, and significant management judgment does not affect the periodic determination of fair value. The determination of fair value using discounted cash flow models involves management judgment when significant model inputs are not based on or corroborated by market observable data. However, where market observable data is available, it takes precedence, and as a result, no range of reasonably likely inputs exists from which the basis of a sensitivity analysis could be constructed.
We gain assurance that our financial assets are appropriately valued through the execution of various processes and controls designed to ensure the overall reasonableness and consistent application of valuation methodologies, including inputs and assumptions, and compliance with accounting standards. For fair values received from third parties or internally estimated, our processes and controls are designed to ensure that the valuation methodologies are appropriate and consistently applied, the inputs and assumptions are reasonable and consistent with the objective of determining fair value, and the fair values are accurately recorded. For example, on a continuing basis, we assess the reasonableness of individual fair values that have stale security prices or that exceed certain thresholds as compared to previous fair values received from valuation service providers or brokers or derived from internal models. We perform procedures to understand and assess the methodologies, processes and controls of valuation service providers.
In addition, we may validate the reasonableness of fair values by comparing information obtained from valuation service providers or brokers to other third partythird-party valuation sources for selected securities. We perform ongoing price validation procedures such as back-testing of actual sales, which corroborate the various inputs used in internal models to market observable data. When fair value determinations are expected to be more variable, we validate them through reviews by members of management who have relevant expertise and who are independent of those charged with executing investment transactions.
We also perform an analysis to determine whether there has been a significant decrease in the volume and level of activity for the asset when compared to normal market activity, and if so, whether transactions may not be orderly. Among the indicators we consider in determining whether a significant decrease in the volume and level of market activity for a specific asset has occurred include the level of new issuances in the primary market, trading volume in the secondary market, level of credit spreads over historical levels, bid-ask spread, and price consensuses among market participants and sources. If evidence indicates that prices are based on transactions that are not orderly, we place little, if any, weight on the transaction price and will estimate fair value using an internal model. As of December 31, 20162019 and 2015,2018, we did not adjust fair values provided by our valuation service providers or brokers or substitute them with an internal model for such securities.
The following table identifies fixed income and equity securities and short-term investments as of December 31, 2016 by source of fair value determination.
| | | Fixed income, equity securities and short-term investments by source of fair value determination | | Fixed income, equity securities and short-term investments by source of fair value determination |
| | | | | | | December 31, 2019 |
| ($ in millions) | Fair value | | Percent to total | | Fair value | | Percent to total |
| Fair value based on internal sources | $ | 3,647 |
| | 5.4 | % | | $ | 2,611 |
| | 3.7 | % |
Fair value based on external sources (1) | 64,146 |
| | 94.6 |
| | 68,851 |
| | 96.3 |
|
| Total | $ | 67,793 |
| | 100.0 | % | | $ | 71,462 |
| | 100.0 | % |
| |
(1) | Includes $957$373 million that are valued using broker quotes.quotes and $269 million that are valued using quoted prices or quoted net asset values from deal sponsors. |
For additional detail on fair value measurements, see Note 6 of the consolidated financial statements.
Impairment of fixed income and equity securitiesFor investmentsfixed income securities classified as available for sale,available-for-sale, the difference between fair value and amortized cost, for fixed income securities and cost for equity securities, net of certain other items and deferred income taxes (as disclosed in Note 5)5 of the consolidated financial statements), is reported as a component of accumulated other comprehensive incomeAOCI on the Consolidated Statements of Financial Position and is not reflected in the operating results of any period until reclassified to net income upon the consummation of a transaction with an unrelated third party or when a write-down is recorded due to an other-than-temporary decline in fair value. We have a comprehensive portfolio monitoring process to identify and evaluate each fixed income and equity security whose carrying value may be other-than-temporarily impaired.
For each fixed income security in an unrealized loss position, we assess whether management with the
appropriate authorityhas made the decision to sell or whether it is more likely than not we will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes. If a security meets either of these criteria, the security’s decline in fair value is considered other than temporary and is recorded in earnings.
If we have not made the decision to sell the fixed income security and it is not more likely than not we will be required to sell the fixed income security before recovery of its amortized cost basis, we evaluate whether we expect to receive cash flows sufficient to recover the entire amortized cost basis of the security. We use our best estimate of future cash flows expected to be collected from the fixed income security, discounted at the security’s original or current effective rate, as appropriate, to calculate a recovery value and determine whether a credit loss exists. The determination of cash flow estimates is inherently subjective, and methodologies may vary depending on
The Allstate Corporation 105
2019 Form 10-KApplication of Critical Accounting Estimates
facts and circumstances specific to the security. All reasonably available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable assumptions and forecasts, areis considered when developing the estimate of cash flows expected to be collected. That information generally
includes, but is not limited to, the remaining payment terms of the security, prepayment speeds, foreign exchange rates, the financial condition and future earnings potential of the issue or issuer, expected defaults, expected recoveries, the value of underlying collateral, vintage, geographic concentration, available reserves or escrows, current subordination levels, third partythird-party guarantees and other credit enhancements. Other information, such as industry analyst reports and forecasts, sector credit ratings, financial condition of the bond insurer for insured fixed income securities, and other market data relevant to the realizability of contractual cash flows, may also be considered. The estimated fair value of collateral will be used to estimate recovery value if we determine that the security is dependent on the liquidation of collateral for ultimate settlement. If the estimated recovery value is less than the amortized cost of the security, a credit loss exists and an other-than-temporary impairment for the difference between the estimated recovery value and amortized cost is recorded in earnings. The portion of the unrealized loss related to factors other than credit remains classified in accumulated other comprehensive income.AOCI. If we determine that the fixed income security does not have sufficient cash flow or other information to estimate a recovery value for the security, we may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings.
There are a number of assumptions and estimates inherent in evaluating impairments of equity securities and determining if they are other than temporary, including: 1) our ability and intent to hold the investment for a period of time sufficient to allow for an anticipated recovery in value; 2) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; 3) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity; and 4) the length of time and extent to which the fair value has been less than cost.
Once assumptions and estimates are made, any number of changes in facts and circumstances could cause us to subsequently determine that a fixed income or equity security is other-than-temporarily impaired, including: 1) general economic conditions that are worse than previously forecastedforecast or that have a greater adverse effect on a particular issuer or industry sector than originally estimated; 2) changes in the facts and circumstances related to a particular issue or issuer’s ability to meet all of its contractual obligations; and 3) changes in facts and circumstances that result in management’s decision to sell or result in our assessment that it is more likely than not we will be required to sell before recovery of the amortized cost basis of a fixed income security or causes a change in our ability or intent to hold an equity security until it recovers in value.basis. Changes in assumptions, facts and circumstances could result in additional charges to earnings in future periods to the extent that losses are realized. The charge to earnings, while potentially significant to net income, would not have a significant effect on shareholders’ equity, since our fixed income securities are designated as available for saleavailable-for-sale and carried at fair value and as a result, any related unrealized loss, net of deferred income taxes and related DAC, deferred sales inducement costs and reserves for life-contingent contract benefits, would already be reflected as a component of accumulated other comprehensive incomeAOCI in shareholders’ equity.
The determination of the amount of other-than-temporary impairment is an inherently subjective
process based on periodic evaluations of the factors described above. Such evaluations and assessments are revised as conditions change and new information becomes available. We update our evaluations regularly and reflect changes in other-than-temporary impairments in our results of operations as such evaluations are revised. The use of different methodologies and assumptions in the determination of the amount of other-than-temporary impairments may have a material effect on the amounts recognized and presented within the consolidated financial statements.
For additional detail on investment impairments, see Note 5 of the consolidated financial statements.
Deferred policy acquisition costs amortizationWe incur significant costs in connection with acquiring insurance policies and investment contracts. In accordance with GAAP, costs that are related directly to the successful acquisition of new or renewal insurance policies and investment contracts are deferred and recorded as an asset on the Consolidated Statements of Financial Position.
DAC related to property-liabilityproperty and casualty contracts is amortized into income as premiums are earned, typically over periods of six or twelve months. The amortization methodologymonths for DACpersonal lines policies or generally one to five years for protection plans and other contracts (primarily related to Allstate Financial policiesfinance and contracts includes significant assumptions and estimates.insurance products).
DAC related to traditional life and voluntary accident and health insurance is amortized over the premium paying period of the related policies in proportion to the estimated revenues on such business. Significant assumptions relating to estimated premiums, investment returns, as well as mortality, persistency and expenses to administer the business are established at the time the policy is issued and are generally not revised during the life of the policy. The assumptions for determining the timing and amount of DAC amortization are consistent with the assumptions used to calculate the reserve for life-contingent contract benefits. Any deviations from projected business in force resulting from actual policy terminations differing from expected levels and any estimated premium deficiencies may result in a change to the rate of amortization in the period such events occur. Generally, the amortization periods for these policies approximatesapproximate the estimated lives of the policies. The recovery of DAC is dependent upon the future profitability of the business.
We periodically review the adequacy of reserves and recoverability of DAC for these policies on an aggregate basis using actual experience.experience and current assumptions. We aggregateevaluate our traditional life insurance products, and immediate annuities with life contingencies, in one analysis, and voluntary accident and health insurance in a separate analysis.products individually. In the event actual
experience is significantlyand current assumptions are adverse compared to the original assumptions and a premium deficiency is determined to exist, any remaining unamortized DAC balance must be expensed to the extent not recoverable and a premium deficiency reserve may be required if the remaining DAC balance is insufficient to absorb the deficiency. In 2016, 20152019 and 2014,
Application of Critical Accounting Estimates 2019 Form 10-K
2018, our reviews concluded that no premium deficiency adjustments were necessary. For additional detail on reserve adequacy, see the Reserve for life-contingent contract benefits estimation section.
DAC related to interest-sensitive life insurance and fixed annuities is amortized in proportion to the incidence of the total present value of gross profits, which includes both actual historical gross profits (“AGP”) and estimated future gross profits (“EGP”) expected to be earned over the estimated lives of the contracts. The amortization is net of interest on the prior period DAC balance using rates established at the inception of the contracts. Actual amortization periods generally range from 15-30 years; however, incorporating estimates of the rate of customer surrenders, partial withdrawals and deaths generally results in the majority of the DAC being amortized during the surrender charge period, which is typically 10-20 years for interest-sensitive life and 5-10 years for fixed annuities.life. The cumulativerate of DAC amortization is reestimated and adjusted by a cumulative charge or credit to income when there is a difference between the incidence of actual versus expected gross profits in a reporting period or when there is a change in total EGP.
AGP and EGP primarily consist of the following components: contract charges for the cost of insurance less mortality costs and other benefits (benefit margin); investment income and realized capital gains and losses less interest credited (investment margin); and surrender and other contract charges less maintenance expenses (expense margin). The principal assumptions for determining the amount of EGP are mortality, persistency, expenses, investment returns, including capital gains and losses on assets supporting contract liabilities, interest crediting rates to contractholders, and the effects of any hedges, and thesehedges. These assumptions are reasonably likely to have the greatest impact on the amount of DAC amortization. Changes in these assumptions can be offsetting and we are unable to reasonably predict their future movements or offsetting impacts over time.
Each reporting period, DAC amortization is recognized in proportion to AGP for that period adjusted for interest on the prior period DAC balance.
This amortization process includes an assessment of AGP compared to EGP, the actual amount of business remaining in force and realized capital gains and losses on investments supporting the product liability. The impact of realized capital gains and losses on amortization of DAC depends upon which product liability is supported by the assets that give rise to the gain or loss. If the AGP is greater than EGP in the period, but the total EGP is unchanged, the amount of DAC amortization will generally increase, resulting in a current period decrease to earnings. The opposite result generally occurs when the AGP is less than the EGP in the period, but the total EGP is unchanged. However, when DAC amortization or a component of gross profits for a quarterly period is potentially negative (which would result in an increase of the DAC balance) as a result of negative AGP, the specific facts and circumstances surrounding the potential negative amortization are considered to determine whether it is appropriate for recognition in the consolidated financial statements. Negative amortization is only recorded when the increased DAC balance is determined to be recoverable based on facts and circumstances. For products whose supporting investments are exposed to capital losses in excess of our expectations which may cause periodic AGP to become temporarily negative, EGP and AGP utilized in DAC amortization may be modified to exclude the excess capital losses.
Annually, we review and update the assumptions underlying the projections of EGP, including mortality, persistency, expenses, investment returns, comprising investment income and realized capital gains and losses, interest crediting rates and the effect of any hedges, using our experience and industry experience. At each reporting period, we assess whether any revisions to assumptions used to determine DAC amortization are required. These reviews and updates may result in amortization acceleration or deceleration, which are referred to as “DAC unlocking”. If the update of assumptions causes total EGP to increase, the rate of DAC amortization will generally decrease, resulting in a current period increase to earnings. A decrease to earnings generally occurs when the assumption update causes the total EGP to decrease.
The following table provides the effect on DAC amortization of changes in assumptions relating to the gross profit components of investment margin, benefit margin and expense margin during the years ended December 31.
| | | Effect on DAC amortization of changes in assumptions relating to gross profit components | | Effect on DAC amortization of changes in assumptions relating to gross profit components |
| | | | | | | | | For the years ended December 31, |
| ($ in millions) | 2016 | | 2015 | | 2014 | | 2019 | | 2018 |
| Investment margin | $ | (1 | ) | | $ | 2 |
| | $ | 11 |
| | $ | 23 |
| | $ | 10 |
|
| Benefit margin | 1 |
| | 1 |
| | 35 |
| | 38 |
| | (11 | ) |
| Expense margin | (2 | ) | | (2 | ) | | (54 | ) | | (1 | ) | | 2 |
|
| Net (deceleration) acceleration | $ | (2 | ) | | $ | 1 |
| | $ | (8 | ) | |
| Net acceleration | | | $ | 60 |
| | $ | 1 |
|
In 2016,2019, DAC amortization decelerationacceleration for changes in the investment margin component of EGP related to interest-sensitive life insurance and was due to increasedlower projected future interest rates and investment margins from a favorable asset portfolio mix.returns compared to our previous expectations. The acceleration related to benefit margin primarily related to interest-sensitive life insurance and was due to decreased projected interest rates that result in lower than expected persistencyprojected policyholder account values which increases benefits on non-guaranteed products. The expense margin deceleration related primarily to variable life insuranceguaranteed products and was due to a decrease in projected expenses.more refined policy level information and assumptions.
In 2015,2018, DAC amortization acceleration for changes in the investment margin component of EGP related to interest-sensitive life insurance and was due to lower projected investment returns. The accelerationdeceleration related to benefit margin primarily related to
interest-sensitive life insurance and was due to a true up of actual inforce data. The deceleration related to expense margin primarily related to interest-sensitive life insurance and was due to a decrease in projected expenses.mortality.
In 2014, DAC amortization acceleration for changes in the investment margin component
The Allstate Corporation 107
2019 Form 10-KApplication of EGP related to interest-sensitive life insurance and fixed annuities and was due to lower projected investment returns. The acceleration related to benefit margin primarily related to interest-sensitive life insurance and was due to an increase in projected mortality. The deceleration related to expense margin primarily related to interest-sensitive life insurance and was due to a decrease in projected expenses.Critical Accounting Estimates
The following table displays the sensitivity of reasonably likely changes in assumptions included in the gross profit components of investment margin or
benefit margin to amortization of the DAC balance as of December 31, 2016.2019.
| | | ($ in millions) | Increase/(reduction) in DAC | | Increase/(reduction) |
| Increase in future investment margins of 25 basis points | $ | 54 | | | $ | 52 | |
| Decrease in future investment margins of 25 basis points | $ | (59) | | | | (57) | |
| | | | |
| Decrease in future life mortality by 1% | $ | 15 | | | $ | 14 | |
| Increase in future life mortality by 1% | $ | (15) | | | | (14) | |
Any potential changes in assumptions discussed above are measured without consideration of correlation among assumptions. Therefore, it would be inappropriate to add them together in an attempt to estimate overall variability in amortization.amortization.
For additional detail related to DAC, see the Allstate FinancialLife Segment section of the MD&A.
Evaluation of goodwill for impairment Goodwill represents the excess of amounts paid for acquiring businesses over the fair value of the net assets acquired, less any impairment of goodwill recognized. Goodwill is recognized when acquired and allocated to reporting units based on which unit is expected to benefit from the synergies of the business combination. Our goodwill reporting units are equivalent to our reportable segments: Allstate Protection, Service Businesses, Allstate Life and Allstate Benefits to which goodwill has been assigned.
Upon acquisition, the purchase price of the acquired business is assumed to be its fair value. Subsequently, we estimate the fair value of our businesses in each goodwill reporting unit, utilizing a combination of widely accepted valuation techniques including a stock price and market capitalization analysis, discounted cash flow (“DCF”) calculations and an estimate of a business’s fair value using market to book multiples derived from peer company analysis. The stock price and market capitalization analysis takes into consideration the quoted market price of our outstanding common stock and includes a control premium, derived from relevant historical acquisition activity, in determining the estimated fair value of the consolidated entity before allocating that fair value to individual reporting units. The DCF analysis utilizes long term assumptions for revenues, investment income, benefits, claims, other operating expenses and income taxes to produce projections of both income and cash flows available for dividends that are present valued using the weighted average cost of capital. Market to book multiples represent the mean market to book multiple for selected peer companies with operations similar to our goodwill reporting units to which the multiple is applied. The outputs from these methods are weighted based on the nature of the business and the relative amount of market observable assumptions supporting the estimates. The computed values are then weighted to reflect the fair value estimate based on the specific attributes of each goodwill reporting unit.
Estimating the fair value of reporting units is a subjective process that involves the use of significant estimates by management. Changes in market inputs
or other events impacting the fair value of these businesses, including discount rates, operating results, investment returns, strategies and growth rate assumptions, among other factors, could result in goodwill impairments, resulting in a charge to income. Certain of our goodwill reporting units are comprised of a combination of legacy and acquired businesses and as a result have substantial internally generated and unrecognized intangibles and fair values that significantly exceed their carrying values. Our Service Businesses goodwill reporting unit is more heavily comprised of newly acquired businesses and as a result does not have a significant excess of fair value over its carrying value attributable to internally generated unrecognized intangibles. Therefore, this reporting unit may be more susceptible to potential future goodwill impairment based on changes to growth or margin assumptions.
The most significant assumptions utilized in the determination of the estimated fair value of the Service Businesses reporting unit are the earnings growth rate and discount rate. The growth rate utilized in our fair value estimates is consistent with our plans to grow these businesses more rapidly over the near-term with more moderated growth rates in later years.
The discount rate, which is consistent with the weighted average cost of capital expected by a market participant, is based upon industry specific required rates of return, including consideration of both debt and equity components of the capital structure. Our discount rate may be impacted by changes in the risk-free rate, cost of debt, equity risk premium and entity specific risks.
Changes in our growth assumptions, including the risk of loss of key customers, or adverse changes in the discount rates could result in a decline in fair value and result in a goodwill impairment charge.
Reserve for property-liabilityproperty and casualty insurance claims and claims expenseestimation Reserves are established to provide for the estimated costs of paying claims and claims expenses under insurance policies we have issued. Property-Liability underwritingUnderwriting results are significantly influenced by estimates of property-liabilityproperty and casualty insurance claims and claims expense reserves. These reserves are an estimate of amounts necessary to settle all outstanding claims, including IBNR, as of the financial statement date.
Characteristics of reservesReserves are established independently of business segment management for each business segment and line of business based on estimates of the ultimate cost to
Application of Critical Accounting Estimates 2019 Form 10-K
settle claims, less losses that have been paid. The significant lines of business are auto, homeowners, and other personal lines for Allstate Protection, and asbestos, environmental, and other discontinued lines for Discontinued Lines and Coverages. Allstate Protection’s claims are typically reported promptly with relatively little reporting lag between the date of occurrence and the date the loss is reported. Auto and homeowners liability losses generally take an average of about two years to settle, while auto physical damage, homeowners property and other personal lines have an average settlement time of less than one year. Discontinued Lines and Coverages involve long-tail losses, such as those related to asbestos and environmental claims, which often involve substantial reporting lags and extended times to settle.
Reserves are the difference between the estimated ultimate cost of losses incurred and the amount of paid losses as of the reporting date. Reserves are estimated for both reported and unreported claims, and include estimates of all expenses associated with processing and settling all incurred claims. We update most of our reserve estimates quarterly and as new information becomes available or as events emerge that may affect the resolution of unsettled claims. Changes in prior reserve estimates (reserve reestimates), which may be material, are determined by comparing updated estimates of ultimate losses to prior estimates, andwith the differences are recorded as property-liabilityproperty and casualty insurance claims and claims expense in the Consolidated Statements of Operations in the period such changes are determined. Estimating the ultimate cost of claims and claims expenses is an inherently uncertain and complex process involving a high degree of judgment and is subject to the evaluation of numerous variables.
The actuarial methods used to develop reserve estimates Reserve estimates are derived by using several different actuarial estimation methods that are variations on one primary actuarial technique. The actuarial technique is known as a “chain ladder” estimation process in which historical loss patterns are applied to actual paid losses and reported losses (paid losses plus individual case reserves established by claim adjusters) for an accident year or a report year to create an estimate of how losses are likely to develop over time. An accident year refers to classifying claims based on the year in which the claims occurred. A report year refers to classifying claims based on the year in which the claims are reported. Both classifications are used to prepare estimates of required reserves for payments to be made in the future. The key assumptions affecting our reserve estimates comprise data elements including claim counts, paid losses, case reserves, and development factors calculated with this data.
See Discontinued and Lines and Coverages reserve estimates section for specific disclosures of industry and actuarial best practices for this segment.
In the chain ladder estimation technique, a ratio (development factor) is calculated which compares current period results to results in the prior period for
each accident year. A three-year or two-yearmulti-year average development factor, based on historical results, is usually multiplied by the current period experience to estimate the development of losses of each accident year into the next time period. The development factors for the future time periods for each accident year are compounded over the remaining future periods to calculate an estimate of ultimate losses for each accident year. The implicit assumption of this technique is that an average of historical development factors is predictive of future loss development, as the significant size of our experience database achieves a high degree of statistical credibility in actuarial projections of this type. The effects of inflation are implicitly considered in the reserving process, the implicit assumption being that a multi-year average development factor includes an adequate provision.
The “chain ladder”development factor estimation relies on the assumption that the past loss development patterns will persist in the future. This assumptionmethodology may require modification when data changes due to changing claim reporting practices, changing claim settlement patterns, external regulatory or financial influences, or contractual coverage changes. In these situations, actuarial estimation techniques are applied to appropriately modify the “chain ladder” assumptions. These actuarial techniques are necessary to analyze the effects of changing loss data to develop modified development factor selections. The actuarial estimation techniques include exclusion of unusual losses or aberrations and adjustment of historical data to present conditions. Actuarially modified patterns of development are calculated with the adjusted historical data. Actuarial judgment is then applied to make appropriate development factor assumptions needed to develop a best estimate of gross ultimate losses. These developments are discussed further in the Allstate brand loss ratio disclosures in the Allstate Protection Segment sectionand the Claims and Claims Expense Reserves sections of the MD&A.
How reserve estimates are established and updatedReserve estimates are developed at a very detailed level, and the results of these numerous micro-level best estimates are aggregated to form a consolidated reserve estimate. For example, over one thousand actuarial estimates of the types described above are prepared each quarter to estimate losses for each line of insurance, major components of losses (such as coverages and perils), major states or groups of states and for reported losses and IBNR. The actuarial methods described above are used to analyze the settlement patterns of claims by determining the development factors for specific data elements that are necessary components of a reserve estimation process. Development factors are calculated quarterly and periodically throughout the year for data elements such as claim counts reported and settled, paid losses, and paid losses combined with case reserves. The calculation of development factors from changes in these data elements also impacts claim severity trends, which is a common industry reference used to explain changes in reserve estimates.trends. The historical development patterns for these data elements are used as the assumptions to calculate reserve estimates.
Often, several different estimates are prepared for each detailed component, incorporating alternative
The Allstate Corporation 109
2019 Form 10-KApplication of Critical Accounting Estimates
analyses of changing claim settlement patterns and other influences on losses, from which we select our best estimate for each component, occasionally incorporating additional analyses and actuarial judgment, as described above. These micro-level estimates are not based on a single set of assumptions. Actuarial judgments that may be applied to these components of certain micro-level estimates generally do not have a material impact on the consolidated level of reserves. Moreover, this detailed micro-level process does not permit or result in a compilation of a company-wide roll up to generate a range of needed loss reserves that would be meaningful. Based on our review of these estimates, our best estimate of required reserves for each state/line/coverage component is recorded for each accident year, and the required reserves for each component are summed to create the reserve balance carried on our Consolidated Statements of Financial Position.
Reserves are reestimated quarterly and periodically throughout the year, by combining historical results with current actual results to calculate new development factors. This process continuously incorporates the historic and latest actual trends, and other underlying changes in the data elements used to calculate reserve estimates. New development factors are likely to differ from previous development factors used in prior reserve estimates because actual results (claims
(claims reported or settled, losses paid, or changes to case reserves) occur differently than the implied assumptions contained in the previous development factor calculations. If claims reported, paid losses, or case reserve changes are greater or less than the levels estimated by previous development factors, reserve reestimates increase or decrease. When actual development of these data elements is different than the historical development pattern used in a prior period reserve estimate, a new reserve is determined. The difference between indicated reserves based on new reserve estimates and recorded reserves (the previous estimate) is the amount of reserve reestimate and is recognized as an increase or decrease in property-liability insurance claims and claims expense in the Consolidated Statements of Operations. Total Property-Liability net reserve reestimates, after-tax, favorable impact on net income applicable to common shareholders were 0.6% favorable2.2%, 10.0% and 9.5% in 2016, 2.6% unfavorable in 20152019, 2018 and 2.0% favorable in 2014.2017, respectively. The 3-year average of net reserve reestimates as a percentage of total reserves was zero for Property-Liability, a favorable 0.6%2.1% for Allstate Protection, and an unfavorable 5.9%6.9% for Discontinued Lines and Coverages and a favorable 1.1% for Service Businesses, each of these results being consistent within a reasonable actuarial tolerance for ourthe respective businesses. A more detailed discussion of reserve reestimates is presented in the Property-Liability Claims and Claims Expense Reserves section of the MD&A.
The following table shows net claims and claims expense reserves by segment and line of business as of December 31:
| | | Net claims and claims expense reserves by segment and line of business | | Net claims and claims expense reserves by segment and line of business | | |
| | | | | | | | | As of December 31, |
| ($ in millions) | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
| Allstate Protection | | | | | | | | | | | |
| Auto | $ | 13,530 |
| | $ | 12,459 |
| | $ | 11,698 |
| | $ | 14,728 |
| | $ | 14,378 |
| | $ | 14,051 |
|
| Homeowners | 1,989 |
| | 1,937 |
| | 1,849 |
| | 2,138 |
| | 2,157 |
| | 2,205 |
|
| Other lines | 2,102 |
| | 2,065 |
| | 2,070 |
| | 2,530 |
| | 2,290 |
| | 2,105 |
|
| Total Allstate Protection | 17,621 |
| | 16,461 |
| | 15,617 |
| | 19,396 |
| | 18,825 |
| | 18,361 |
|
| Discontinued Lines and Coverages | | | | | | | | | | | |
| Asbestos | 912 |
| | 960 |
| | 1,014 |
| | 810 |
| | 866 |
| | 884 |
|
| Environmental | 179 |
| | 179 |
| | 203 |
| | 179 |
| | 170 |
| | 166 |
|
| Other discontinued lines | 354 |
| | 377 |
| | 395 |
| | 376 |
| | 355 |
| | 357 |
|
| Total Discontinued Lines and Coverages | 1,445 |
| | 1,516 |
| | 1,612 |
| | 1,365 |
| | 1,391 |
| | 1,407 |
|
| Total Property-Liability | $ | 19,066 |
| | $ | 17,977 |
| | $ | 17,229 |
| |
| Total Service Businesses | | | 39 |
| | 52 |
| | 86 |
|
| Total net claims and claims expense reserves | | | $ | 20,800 |
| | $ | 20,268 |
| | $ | 19,854 |
|
Allstate Protection reserve estimatesestimate
Factors affecting reserve estimatesReserve estimates are developed based on the processes and historical development trends described above. These estimates are considered in conjunction with known facts and interpretations of circumstances and factors including our experience with similar cases, actual claims paid, historical trends involving claim payment patterns and pending levels of unpaid claims, loss management programs, product mix and contractual terms, changes in law and regulation, judicial decisions, and economic conditions. When we experience changes of the type previously mentioned, we may need to apply actuarial judgment in the determination and selection of development factors considered more reflective of the new trends, such as combining shorter or longer periods of historical results with current actual results to produce development factors based
on two-year, three-year, or longer development periods to reestimate our reserves. For example, if a legal change is expected to have a significant impact on the development of claim severity for a coverage which is part of a particular line of insurance in a specific state, actuarial judgment is applied to determine appropriate development factors that will most accurately reflect the expected impact on that specific estimate. Another example would be when a change in economic conditions is expected to affect the cost of repairs to damaged autos or property for a particular line, coverage, or state, actuarial judgment is applied to determine appropriate development factors to use in the reserve estimate that will most accurately reflect the expected impacts on severity development.
Application of Critical Accounting Estimates 2019 Form 10-K
As claims are reported, for certain liability claims of sufficient size and complexity, the field adjusting staff establishes case reserve estimates of ultimate cost, based on their assessment of facts and circumstances related to each individual claim. For other claims which occur in large volumes and settle in a relatively short time frame, it is not practical or efficient to set case reserves for each claim, and a statistical case reserve is set for these claims based on estimation techniques described above. In the normal course of business, we may also supplement our claims processes by utilizing third partythird-party adjusters, appraisers, engineers, inspectors, and other professionals and information sources to assess and settle catastrophe and non-catastrophe related claims.
Historically, the case reserves set by the field adjusting staff have not proven to be an entirely accurate estimate of the ultimate cost of claims. To provide for this, a development reserve is estimated using the processes described above and allocated to pending claims as a supplement to case reserves. Typically, the case, including statistical case, and supplemental development reserves comprise about 90% of total reserves.
Another major component of reserves is IBNR, which comprises about 10% of total reserves. IBNR can be a small percentage of reserves for relatively short-term claims, such as auto physical damage claims, or a large percentage of reserves for claims that have uncertain payout requirements over a long period of time, such as auto injury and MCCA claims. All major components of reserves are affected by changes in claim frequency as well as claim severity.
Generally, the initial reserves for a new accident year are established based on actual claim frequency and severity assumptions for different business segments, lines and coverages based on historical relationships to relevant inflation indicators. Reserves for prior accident years are statistically determined using processes described above. Changes in auto claim frequency may result from changes in mix of business, the rate of distracted driving, miles driven or other macroeconomic factors. Changes in auto current year claim severity are generally influenced by inflation in the medical and auto repair sectors of the economy and the effectiveness and efficiency of our claim practices. We mitigate these effects through various loss management 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. For auto physical damage coverages, we monitor our rate of increase in average cost per claim against the Maintenanceauto maintenance, repair, parts and Repairequipment price index and the Parts and Equipment price index and other external indices. We believe our claim settlement initiatives, such as improvements to the claim review and settlement process, the use of special investigative units to detect fraud and handle suspect claims, litigation management and defense strategies, as well as various other loss management initiatives underway, contribute to the mitigation of injury and physical damage severity trends.
Changes in homeowners current year claim severity are generally influenced by inflation in the cost
of building materials, the cost of construction and property repair services, the cost of replacing home furnishings and other contents, the types of claims that qualify for coverage, deductibles, other economic and environmental factors and the effectiveness and efficiency of our claim practices. We employ various loss management programs to mitigate the effect of these factors.
As loss experience for the current year develops for each type of loss, it is monitored relative to initial assumptions until it is judged to have sufficient statistical credibility. From that point in time and forward, reserves are reestimated using statistical actuarial processes to reflect the impact actual loss trends have on development factors incorporated into the actuarial estimation processes. Statistical credibility is usually achieved by the end of the first calendar year; however, when trends for the current accident year exceed initial assumptions sooner, they are usually determined to be credible, and reserves are increased accordingly.
The very detailed processes for developing reserve estimates, and the lack of a need and existence of a common set of assumptions or development factors, limits aggregate reserve level testing for variability of data elements. However, by applying standard actuarial methods to consolidated historic accident year loss data for major loss types, comprising auto injury losses, auto physical damage losses and homeowner losses, we develop variability analyses consistent with the way we develop reserves by measuring the potential variability of development factors, as described in the section titled “Potential Reserve Estimate Variability” below.
Causes of reserve estimate uncertainty Since reserves are estimates of unpaid portions of claims and claims expenses that have occurred, including IBNR losses, the establishment of appropriate reserves, including reserves for catastrophe losses, requires regular reevaluation and refinement of estimates to determine our ultimate loss estimate.
At each reporting date, the highest degree of uncertainty in estimates for most of our losses from ongoing businesses arise from claims remaining to be settled for the current accident year and the most recent preceding accident year. The greatest degree of uncertainty exists in the current accident year because the current accident year contains the greatest proportion of losses that have not been reported or settled but must be estimated as of the current reporting date. Most of these losses relate to damaged property such as automobiles and homes, and medical care for injuries from accidents. During the first year after the end of an accident year, a large portion of the total losses for that accident year are settled. When accident year losses paid through the end of the first year following the initial accident year are incorporated into updated actuarial estimates, the trends inherent in the settlement of claims emerge more clearly. Consequently, this is the point in time at which we tend to make our largest reestimates of losses for an accident year. After the second year, the losses that we pay for an accident year typically relate
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2019 Form 10-KApplication of Critical Accounting Estimates
to claims that are more difficult to settle, such as those involving serious injuries or litigation. Private passenger auto insurance provides a good illustration of the uncertainty of future loss estimates: our typical annual percentage payout of reserves remaining at December 31 for an accident year is approximately 45% in the first year after the end of the accident year, 20% in the second year, 15% in the third year, 10% in the fourth year, and the remaining 10% thereafter.
Reserves for catastrophe lossesProperty-Liability claims and claims expense reserves also include reserves for catastrophe losses. Catastrophe lossesare an inherent risk of the property-liabilityproperty and casualty insurance industry that have contributed, and will continue to contribute, to potentially material year-to-year fluctuations in our results of operations and financial position. We define a “catastrophe” as an event that produces pre-tax losses before reinsurance in excess of $1 million and involves multiple first party policyholders, or a winter weather event that produces a number of claims in excess of a preset, per-event threshold of average claims in a specific area, occurring within a certain amount of time following the event. Catastrophes are caused by various natural events including high winds, winter storms and freezes, tornadoes, hailstorms, wildfires, tropical storms, hurricanes, earthquakes and volcanoes. We are also exposed to man-made catastrophic events, such as certain types of terrorism or industrial accidents. The nature and level of catastrophes in any period cannot be reliably predicted.
The estimation of claims and claims expense reserves for catastrophe losses also comprises estimates of losses from reported claims and IBNR, primarily for damage to property. In general, our estimates for catastrophe reserves are based on claim adjuster inspections and the application of historical loss development factors as described above. However, depending on the nature of the catastrophe, the estimation process can be further complicated. For example, for hurricanes, complications could include the inability of insureds to promptly report losses, limitations placed on claims adjusting staff affecting their ability to inspect losses, determining whether losses are covered by our homeowners policy (generally for damage caused by wind or wind driven rain) or specifically excluded coverage caused by flood, estimating additional living expenses, and assessing the impact of demand surge, exposure to mold damage, and the effects of numerous other considerations, including the timing of a catastrophe in relation to other events, such as at or near the end of a financial reporting period, which can affect the availability of information needed to estimate reserves for that reporting period. In these situations, we may need to adapt our practices to accommodate these circumstances in order to determine a best estimate of our losses from a catastrophe. For example, to complete estimates for certain areas affected by catastrophes not yet inspected by our claims adjusting staff, or where we believed our historical loss development factors were not predictive, we rely on analysis of actual claim notices received compared to total PIF, as well as visual, governmental and third partythird-party information, including aerial photos, using dronessatellites, aircrafts and satellites,drones, area observations, and
data on wind speed and flood depth to the extent available.
Potential reserve estimate variability The aggregation of numerous micro-level estimates for each business segment, line of insurance, major components of losses (such as coverages and perils), and major states or groups of states for reported losses and IBNR forms the reserve liability recorded in the Consolidated Statements of Financial Position. Because of this detailed approach to developing our reserve estimates, there is not a single set of assumptions that determinedetermines our reserve estimates at the consolidated level. Given the numerous micro-level estimates for reported losses and IBNR, management does not believe the processes that we follow will produce a statistically credible or reliable actuarial reserve range that would be meaningful. Reserve estimates, by their very nature, are very complex to determine and subject to significant judgment, and do not represent an exact determination for each outstanding claim. Accordingly, as actual claims, paid losses, and/or case reserve results emerge, our estimate of the ultimate cost to settle will be different than previously estimated.
To develop a statistical indication of potential reserve variability within reasonably likely possible outcomes, an actuarial technique (stochastic modeling) is applied to the countrywide consolidated data elements for paid losses and paid losses combined with case reserves separately for injury losses, auto physical damage losses, and homeowners losses excluding catastrophe losses. Based on the combined historical variability of the development factors calculated for these data elements, an estimate of the standard error or standard deviation around these reserve estimates is calculated within each accident year for the last twelve years for each type of loss. The variability of these reserve estimates within one standard deviation of the mean (a measure of frequency of dispersion often viewed to be an acceptable level of accuracy) is believed by management to represent a reasonable and statistically probable measure of potential variability. Based on our products and coverages, historical experience, the statistical credibility of our extensive data and stochastic modeling of actuarial chain ladder methodologies used to develop reserve estimates, we estimate that the potential variability of our Allstate Protection reserves, excluding reserves for catastrophe losses, within a reasonable probability of other possible outcomes, may be approximately plus or minus 4%, or plus or minus $600$800 million in net income applicable to common shareholders. A lower level of variability exists for auto injury losses, which comprise approximately 80% of reserves, due to their relatively stable development patterns over a longer duration of time required to settle claims. Other types of losses, such as auto physical damage, homeowners losses and other personal lines losses, which comprise about 20% of reserves, tend to have greater variability but are settled in a much shorter period of time. Although this evaluation reflects most reasonably likely outcomes, it is possible the final outcome may fall below or above these amounts. Historical variability of reserve
Application of Critical Accounting Estimates 2019 Form 10-K
estimates is reported in the Property-Liability Claims and Claims Expense Reserves section of the MD&A.
Reserves for Michigan and New Jersey unlimited personal injury protection Property-Liability claims Claims and claims expense reserves include reserves for Michigan mandatory unlimited personal injury protection which is a mandatory coverage that provides unlimited personal injury protection to covered insureds involved in certainqualifying motor vehicle accidents. The administration of this program is through the MCCA, a private,state-mandated, non-profit association created by the state of which all insurers actively writing automobile coverage in Michigan the MCCA.are members.
The comprehensive process employed to estimate MCCA covered losses involves a number of activities including the comprehensive review and interpretation of MCCA actuarial reports, other MCCA members’ reports and our personal injury protection loss trends which have increased in severity over time. A significant portion of incurred claim reserves can be attributed to a small number of catastrophic claims and thus a large portion of the recoverable is similarly concentrated. We conduct comprehensive claim file reviews to develop case reserve type estimates of specific claims, which have increasedinform our view of future claim development and longevity of claimants. Each year, we update the actuarial estimate of our ultimate reserves and recoverables. We report our paid and unpaid claims and case reserves, which include our best estimate of the ultimate claim cost, excluding IBNR to the MCCA based on theirMCCA requirements. The MCCA develops its own reserving estimates based on its own reserve methodologies, which may not align with our estimations. The MCCA does not provide member companies with its estimate of a company’s claim costs. We continue to update each comprehensive claim file case reserve estimate when there is a significant change in the status of the claimant, or once every three years if there have been no significant changes. A significant portion of incurred claim reserves can be attributed to a small number of catastrophic claims and thus a large portion of the recoverable is similarly concentrated.
We provide similar personal injury protection coverage in New Jersey for auto policies issued or renewed in New Jersey prior to 1991 that is administered by PLIGA. We use similar actuarial estimating techniques as for the MCCA exposures to estimate loss reserves for unlimited personal injury protection coverage for policies covered by PLIGA. We continue to update our estimates for these claims as the status of claimantsclaimant’s changes. However, unlimited coverage was no longer offered after 1991,1991; therefore, no new claimants are being added.
Reserve estimates are confidential and proprietary and by their nature are very complex to determine and subject to significant judgments, andjudgments. Reserve estimates do not represent an exact determination for each outstanding claim. Claims may be subject to litigation. As actual claims, paid losses and/or case reserve results emerge, our estimate of the ultimate cost to settle may be materially greater or less than previously estimated amounts.
For additional information related to indemnification recoverables, see Item 1 - Regulation, Indemnification Programs and Note 10 of the consolidated financial statements.
Adequacy of reserve estimates We believe our net claims and claims expense reserves are appropriately
established based on available methodologies, facts, technology, laws and regulations. We calculate and record a single best reserve estimate, in conformance with generally accepted actuarial standards and practices, for each line of insurance, its components (coverages and perils) and state, for reported losses and for IBNR losses, and as a result we believe that no other estimate is better than our recorded amount. Due to the uncertainties involved, the ultimate cost of losses may vary materially from recorded amounts, which are based on our best estimates.
Discontinued Lines and Coverages reserve estimates
Characteristics of Discontinued Lines exposureOur exposure to asbestos, environmental and other discontinued lines claims arisesarise principally from assumed reinsurance coverage written during the 1960s through the mid-1980s, including reinsurance on primary insurance written on large U.S. companies, and from direct excess commercial insurance written from 1972 through 1985, including substantial excess general liability coverages on large U.S. companies. Additional exposure stems from direct primary commercial insurance written during the 1960s through the mid-1980s. Asbestos claims relate primarily to bodily injuries asserted by peopleclaimants who were exposed to asbestos or products containing asbestos. Environmental claims relate primarily to pollution and related clean-up costs. Other discontinued lines exposures primarily relate to general liability and product liability mass tort claims, such as those for medical devices and other products, workers’ compensation claims and claims for various other coverage exposures other than asbestos and environmental.
In 1986, the general liability policy form used by us and others in the property-liabilityproperty and casualty industry was amended to introduce an “absolute pollution exclusion,” which excluded coverage for environmental damage claims, and to add an asbestos exclusion. Most general liability policies issued prior to 1987 contain annual aggregate limits for product liability coverage. General liability policies issued in 1987 and thereafter contain annual aggregate limits for product liability coverage and annual aggregate limits for all coverages. Our experience to date is that these policy form changes have limited the extent of our exposure to environmental and asbestos claim risks.
Our exposure to liability for asbestos, environmental and other discontinued lines losses manifests differently depending on whether it arises from assumed reinsurance coverage, direct excess commercial insurance or direct primary commercial insurance. The direct insurance coverage we provided that covered asbestos, environmental and other discontinued lines was substantially “excess” in nature.
Direct excess commercial insurance and reinsurance involve coverage written by us for specific layers of protection above retentions and other insurance plans. The nature of excess coverage and reinsurance provided to other insurers limits our exposure to loss to specific layers of protection in excess of policyholder retention on primary insurance
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2019 Form 10-KApplication of Critical Accounting Estimates
plans. Our exposure is further limited by the significant reinsurance that we had purchased on our direct excess business.
Our assumed reinsurance business involved writing generally small participations in other insurers’ reinsurance programs. The reinsured losses in which we participate may be a proportion of all eligible losses or eligible losses in excess of defined retentions. The majority of our assumed reinsurance exposure, approximately 85%, is for excess of loss coverage, while the remaining 15% is for pro-rata coverage.
Our direct primary commercial insurance business did not include coverage to large asbestos manufacturers. This business comprises a cross section of policyholders engaged in many diverse business sectors located throughout the country.
How reserve estimates are established and updatedWe conduct an annual review in the third quarter to evaluate, establish and establishadjust as necessary, asbestos, environmental and other discontinued lines reserves. Changes to reserves are recorded in the reporting period in which they are determined. Using established industry and actuarial best practices and assuming no change in the regulatory or economic environment, this detailed and comprehensive methodology determines asbestos reserves based on assessments of the characteristics of exposure (i.e. claim activity, potential liability, jurisdiction, products versus non-products exposure) presented by individual policyholders, and determines environmental reserves based on assessments of the characteristics of exposure (i.e. environmental damages, respective shares of liability of potentially responsible parties, appropriateness and cost of remediation) to pollution and related clean-up costs. The number and cost of these claims isare affected by intense advertising by trial lawyers seeking asbestos plaintiffs, and entities with asbestos exposure seeking bankruptcy protection as a result of asbestos liabilities, initially causing a delay in the reporting of claims, often followed by an acceleration and an increase in claims and claims expenses as settlements occur.
After evaluating our insureds’ probable liabilities for asbestos and/or environmental claims, we evaluate our insureds’ coverage programs for such claims. We consider our insureds’ total available insurance coverage, including the coverage we issued. We also consider relevant judicial interpretations of policy language and applicable coverage defenses or determinations, if any.
Evaluation of both the insureds’ estimated liabilities and our exposure to the insureds depends heavily on an analysis of the relevant legal issues and litigation environment. This analysis is conducted by our specialized claims adjusting staff and legal counsel. Based on these evaluations, case reserves are established by claims adjusting staff and actuarial analysis is employed to develop an IBNR reserve, which includes estimated potential reserve development and claims that have occurred but have not been reported. As of both December 31, 20162019 and 2015,2018, IBNR was 57%49% and 50%, respectively, of combined net asbestos and environmental reserves.
For both asbestos and environmental reserves, we also evaluate our historical direct net loss and expense paid and incurred experience to assess any emerging trends, fluctuations or characteristics suggested by the aggregate paid and incurred activity.
Other Discontinued Lines and Coverages The following table shows reserves for
Characteristics of other discontinued lines which provide for remaining loss and loss expense liabilities related to business no longer written by us, other than asbestos and environmental, as of December 31.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Other mass torts | $ | 142 |
| | $ | 162 |
| | $ | 167 |
|
| Workers’ compensation | 76 |
| | 88 |
| | 94 |
|
| Commercial and other | 136 |
| | 127 |
| | 134 |
|
| Other discontinued lines | $ | 354 |
| | $ | 377 |
| | $ | 395 |
|
exposuresOther mass torts describesincludes direct excess commercial and reinsurance general liability coverage provided for cumulative injury losses other than asbestos and environmental. Workers’ compensation and commercial and other include run-off from discontinued direct primary, direct excess commercial and reinsurance commercial insurance operations of various coverage exposures other than asbestos and environmental. Reserves are based on considerations similar to those described above, as they relate to the characteristics of specific individual coverage exposures.
|
| | | | | | | | |
| Reserves for other discontinued lines |
| | | As of December 31, |
| ($ in millions) | | 2019 | | 2018 |
| Other mass torts | | $ | 177 |
| | $ | 148 |
|
| Workers’ compensation | | 66 |
| | 69 |
|
| Commercial and other | | 133 |
| | 138 |
|
| Other discontinued lines | | $ | 376 |
| | $ | 355 |
|
Potential reserve estimate variability Establishing Discontinued Lines and Coverages net loss reserves for asbestos, environmental and other discontinued lines claims is subject to uncertainties that are much greater than those presented by other types of property-liabilityproperty and casualty claims. Among the complications are lack of historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure and unresolved legal issues regarding policy coverage; unresolved legal issues regarding the determination, availability and timing of exhaustion of policy limits; plaintiffs’ evolving and expanding theories
of liability; availability and collectability of recoveries from reinsurance; retrospectively determined premiums and other contractual agreements; estimates of the extent and timing of any contractual liability; the impact of bankruptcy protection sought by various asbestos producers and other asbestos defendants; and other uncertainties. There are also complex legal issues concerning the interpretation of various insurance policy provisions and whether those losses are covered, or were ever intended to be covered, and could be recoverable through retrospectively determined premium, reinsurance or
Application of Critical Accounting Estimates 2019 Form 10-K
other contractual agreements. 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 insurer obligation to defend; how policy limits are determined; how policy exclusions and conditions are applied and interpreted; and whether clean-up costs represent insured property damage. Our reserves for asbestos and environmental exposures could be affected by tort reform, class action litigation, and other potential legislation and judicial decisions. Environmental exposures could also be affected by a change in the existing federal Superfund law and similar state statutes. There can be no assurance that any reform legislation will be enacted or that any such legislation will provide for a fair, effective and cost-efficient system for settlement of asbestos or environmental claims. We believe these issues are not likely to be resolved in the near future, and the ultimate costs may vary materially from the amounts currently recorded resulting in material changes in loss reserves. Historical variability of reserve estimates is demonstrated in the Property-Liability Claims and Claims Expense Reserves section of the MD&A.
Adequacy of reserve estimates Management believes its net loss reserves for asbestos, environmental asbestos and other discontinued lines exposures are appropriately established based on available facts, technology, laws, regulations, and assessments of other pertinent factors and characteristics of exposure (i.e. claim activity, potential liability, jurisdiction, products versus non-products exposure) presented by individual policyholders, assuming no change in the legal, legislative or economic environment. 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.
Further discussion of reserve estimates For further discussion of these estimates and quantification of the impact of reserve estimates, reserve reestimates and assumptions, see Notes 8 and 14 toof the consolidated financial statements and the Property-Liability Claims and Claims Expense Reserves section of the MD&A.
Reserve for life-contingent contract benefits estimationDue to the long termlong-term nature of traditional life insurance, life-contingent immediate annuities and voluntary accident and health insurance products,benefits are payable over many years; accordingly, the reserves are calculated as the present value of future expected benefits to be paid, reduced by the present value of future expected net premiums. Long-term actuarial assumptions of future investment yields, mortality, morbidity, policy terminations and expenses are used when establishing the reserve for life-contingent contract benefits payable under these insurance policies. These assumptions, which for traditional life insurance are applied using the net level
premium method, include provisions for adverse deviation and generally vary by characteristics such as type of coverage, year of issue and policy duration. Future investment yield assumptions are determined based upon prevailing investment yields as well as estimated reinvestment yields. Mortality, morbidity and policy termination assumptions are based on our experience and industry experience. Expense assumptions include the estimated effects of inflation and expenses to be incurred beyond the premium-paying period. These assumptions are established at the time the policy is issued, are consistent with assumptions for determining DAC amortization for these policies, and are generally not changed during the policy coverage period. However, if actual experience emerges in a manner that is
significantly adverse relative to the original assumptions, adjustments to DAC or reserves may be required resulting in a charge to earnings which could have a material effect on our operating results and financial condition.
We periodically review the adequacy of reserves and recoverability of DAC for these policies on an aggregate basis using actual experience.experience and current assumptions. In the event actual experience is significantlyand current assumptions are adverse compared to the original assumptions and a premium deficiency is determined to exist, any remaining unamortized DAC balance must be expensed to the extent not recoverable and the establishment of a premium deficiency reserve may be required.
We evaluate our traditional life insurance products, immediate annuities with life contingencies, and voluntary accident and health insurance individually. In 2016, 20152019 and 2014,2018, our reviews concluded that no premium deficiency adjustments were necessary. In 2016, there was an increase in projected profit fromAs of December 31, 2019, traditional life insurance and accident and health insurance both have a substantial sufficiency.
As of December 31, 2019, there is marginal sufficiency in the evaluation of immediate annuities with life contingencies had a projected profit compared to projected losses in the prior year. While there was an unfavorable change inwhich has been adversely impacted primarily by sub-standard structured settlement mortality assumptions for immediate annuities with life contingencies as a result of the mortality study described below, there was a favorable change in the long-term investment yield assumptions due to the increase in performance-based investmentsexpectations, where annuitants are living longer than originally anticipated, and equity securities. The investment strategy changes for immediate annuities are discussed further in the Allstate Financial Segment section of the MD&A. The favorable impact of higher long-term investment yield assumptions more than offset the impact of unfavorable mortality assumptions.interest rates, which are lower than originally anticipated and are expected to remain low for an extended period. The net sufficiency represents approximately 17%3% of applicable reserves for Allstate Annuities as of December 31, 20162019. Additional reserves may be required in future periods if mortality and substantially relatesinterest rates continue to traditional life insurance.develop in a manner that results in a premium deficiency.
The following table displays the sensitivity of permanent changes in the future investment yield assumption included in the annuity premium deficiency evaluation to the sufficiency balance as of December 31, 2019.
|
| | | | |
| ($ in millions) | | Increase/(reduction) in sufficiency | | Change in sufficiency as a percentage of applicable reserves
|
| Increase in future investment yields of 25 basis points | | $200 | | 3% |
| Decrease in future investment yields of 25 basis points | | $(211) | | (3)% |
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We also review these policies on an aggregate basis for circumstances where projected profits would be recognized in early years followed by projected losses in later years. In 2016, 20152019 and 2014,2018, our reviews concluded that there were no projected losses following projected profits in each long-term projection.
In 2016, we completed a mortality study for our structured settlement annuities with life contingencies. The study indicated that annuitants are living longer and receiving benefits for a longer period than originally estimated. A substantial portion of the structured settlement annuity business includes annuitants with severe injuries or other health impairments which significantly reduced their life expectancy at the time the annuity was issued. Medical advances and access to medical care are favorably impacting mortality rates. The results of the study were included in the premium deficiency and profits followed by losses evaluations described above.
We will continue to monitor the experience of our traditional life insurance and immediate annuities. We periodically complete comprehensive mortality studies for our structured settlement annuities with life contingencies to determine whether annuitants are living for a longer period than originally estimated. We anticipate that mortality, investment and reinvestment yields, mortality, and policy terminations are the factors that would be most likely to require premium deficiency adjustments to these reserves or related DAC. Mortality rates and investment and reinvestment yields are the factors that would be most likely to require a profits followed by losses liability accrual.
For further detail on the reserve for life-contingent contract benefits, see Note 9 of the consolidated financial statements.
Pension and other postretirement plans net costs and assumptions Our defined benefit pension plans cover most full-time employees, certain part-time employees and employee-agents. Benefits are based primarily on a cash balance formula; however, certain participants have a significant portion of their benefits attributable to a former final average pay formula. 88% of the projected benefit obligation (“PBO”) of our primary qualified employee plan is related to the former final average pay formula. See Note 17 of the consolidated financial statements for a discussion of these plans and their effect on the consolidated financial statements.
Our pension and other postretirement benefit costs are calculated using various actuarial assumptions and methodologies. These assumptions include discount rates, health care cost trend rates, inflation, expected returns on plan assets, mortality and other factors. The assumptions utilized in recording the obligations under our pension plans represent our best estimates and we believe they are reasonable based on information as to historical experience and performance as well as other factors that might cause future expectations to differ from past trends.
Net costs for our defined benefit plans are recognized on the Consolidated Statements of Operations and consist of two elements: 1) costs comprised of service and interest costs, expected return of plan assets and amortization of prior service credit which are reported in property and casualty claims and claims expense, operating costs and expenses, net investment income and, if applicable, restructuring charges and 2) remeasurement gains and losses comprised of changes in actuarial assumptions and the difference between actual and expected returns on plan assets which are recognized immediately in earnings as part of pension and other postretirement remeasurement gains and losses.
We recognize expected returns on plan assets using an unadjusted fair value method. Our policy is to remeasure our pension and postretirement plans on a quarterly basis. We immediately recognize remeasurement of projected benefit obligation and plan assets in earnings as it provides greater transparency of our economic obligations in accounting results and better aligns the recognition of the effects of economic and interest rate changes on pension and other postretirement plan assets and liabilities in the year in which the gains and losses are incurred.
Differences in actual experience or changes in assumptions affect our pension and other postretirement obligations, plan assets and expenses. The primary factors contributing to pension and postretirement remeasurement gains and losses are 1) changes in the discount rate used to value pension and postretirement obligations as of the measurement date, 2) differences between the expected and the actual return on plan assets, 3) changes in demographic assumptions, including mortality and participant experience.
Pension and other postretirement service cost, interest cost, expected return on plan assets and amortization of prior service credits are allocated to our reportable segments. The pension and other postretirement remeasurement gains and losses are reported in the Corporate and Other segment.
Impact of assumption changes to net cost for pension and other postretirement plans Due to changes in assumptions and the difference between actual and expected returns on plan assets as described below, we recognized pension and other postretirement remeasurement losses of $114 million in 2019 compared to $468 million in 2018.
The discount rate is based on rates at which expected pension benefits attributable to past employee service could effectively be settled on a present value basis at the measurement date. We develop the assumed discount rate by utilizing the weighted average yield of a theoretical dedicated portfolio derived from non-callable bonds and bonds with a make-whole provision available in the Bloomberg corporate bond universe having ratings of at least “AA” by S&P or at least “Aa” by Moody’s on the measurement date with cash flows that match expected plan benefit requirements. Significant changes in discount rates, such as those caused by changes in the credit spreads, yield curve, the mix of bonds available in the market, the duration of selected bonds and expected benefit payments, may result in volatility in pension cost. The weighted average discount rate used to measure the benefit obligation decreased to 3.31% in 2019 compared to 4.31% in 2018. Pension and other postretirement remeasurement losses due to declines in the weighted average discount rate were $633 million in 2019 compared to gains of $392 million in 2018.
The expected long-term rate of return on plan assets reflects the average rate of earnings expected on plan assets. While this rate reflects long-term
Application of Critical Accounting Estimates 2019 Form 10-K
assumptions and is consistent with long-term historical returns, sustained changes in the market or changes in the mix of plan assets may lead to revisions in the assumed long-term rate of return on plan assets that may result in variability of pension cost. Differences between the actual return on plan assets and the expected long-term rate of return on plan assets are immediately recognized through earnings upon remeasurement. Short-term asset performance can differ significantly from the expected rate of return, especially in volatile markets. In 2019, the actual return on plan assets compared to our expected return was a gain of $832 million compared to a loss of $727 million in 2018. The improvement was primarily due to strong equity market performance and declines in interest rates which increased the fair value of our fixed income investments.
We complete periodic evaluations of demographic information and historical experience that affects our pension and other postretirement obligations to identify any required changes to long-term actuarial
assumptions and methodologies. Demographic assumptions affect both our pension and postretirement plans and include elements such as retirement rates and participation rates in our postretirement programs, among other factors. These actuarial assumption updates affect our pension and other postretirement obligations and are incorporated into our best estimates of these assumptions. Actuarial assumption updates that affect our pension and other postretirement obligations resulted in remeasurement losses of $313 million in 2019 compared to losses of $133 million in 2018.
The assumed health care trend rate represents the rate at which health care costs are assumed to increase and is based on historical and expected experience. Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement health care plans. An increase in the trend rate would increase our obligation and expense.
|
| | | | | | |
Sensitivity of assumption changes included in the calculation of net cost as of December 31, 2019 |
| ($ in millions) | | Basis/percentage point change | | Increase (decrease) to net cost |
| Pension plans discount rate | | +100 basis points | | $ | (842 | ) |
| | -100 basis points | | 1,045 |
|
| Expected long-term rate of return on assets | | +100 basis points | | (59 | ) |
| | -100 basis points | | 59 |
|
| Postretirement plans assumed health care cost trend rate | | +1% | | 27 |
|
| | -1% | | (23 | ) |
The Allstate Corporation 117
REGULATION AND LEGAL PROCEEDINGS2019 Form 10-K
Regulation and Legal Proceedings
We are subject to extensive regulation and we are involved in various legal and regulatory actions, all of which have an effect on specific aspects of our business. For a detailed discussion of the legal and regulatory actions in which we are involved, see Note 14 of the consolidated financial statements.
PENDING ACCOUNTING STANDARDSPending Accounting Standards
There are several pending accounting standards that we have not implemented because the implementation date has not yet occurred. For a discussion of these pending standards, see Note 2 of the consolidated financial statements.
The effect of implementing certain accounting standards on our financial results and financial condition is often based in part on market conditions at the time of implementation of the standard and other factors we are unable to determine prior to implementation. For this reason, we are sometimes unable to estimate the effect of certain pending accounting standards until the relevant authoritative body finalizes these standards or until we implement them.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Information required for Item 7A is incorporated by reference to the material under the caption “Market Risk” in Part II, Item 7 of this report.
Item 8. Financial Statements and Supplementary Data
|
| | |
| | |
Consolidated Financial Statements
| | Page |
| | |
| | |
| | |
| Consolidated Statements of Shareholders’ Equity | | |
| | |
| | | | |
| | |
| Note 1 | General | | |
| Note 2 | Summary of Significant Accounting Policies
| | |
| Note 3 | Acquisitions
| | |
| Note 4 | Reportable Segments | | |
| Note 5 | Investments
| | |
| Note 6 | Fair Value of Assets and Liabilities
| | |
| Note 7 | Derivative Financial Instruments and Off-balance Sheet Financial Instruments
| | |
| Note 8 | Reserve for Property and Casualty Insurance Claims and Claims Expense
| | |
| Note 9 | Reserve for Life-Contingent Contract Benefits and Contractholder Funds
| | |
| Note 10 | Reinsurance and Indemnification
| | |
| Note 11 | Deferred Policy Acquisition and Sales Inducement Costs
| | |
| Note 12 | Capital Structure
| | |
| Note 13 | Company Restructuring
| | |
| Note 14 | Commitments, Guarantees and Contingent Liabilities
| | |
| Note 15 | Income Taxes
| | |
| Note 16 | Statutory Financial Information and Dividend Limitations
| | |
| Note 17 | Benefit Plans
| | |
| Note 18 | Equity Incentive Plans
| | |
| Note 19 | Supplemental Cash Flow Information
| | |
| Note 20 | Other Comprehensive Income
| | |
| Note 21 | Quarterly Results (unaudited)
| | |
| | | | |
| | |
The Allstate Corporation 119
THE ALLSTATE CORPORATION AND SUBSIDIARIES2019 Form 10-KFinancial Statements
CONSOLIDATED STATEMENTS OF OPERATIONS
The Allstate Corporation and Subsidiaries
Consolidated Statements of Operations
| | | | | | | | | | | Years Ended December 31, |
| ($ in millions, except per share data) | Year Ended December 31, | | 2019 | | 2018 | | 2017 |
| | 2016 | | 2015 | | 2014 | |
| Revenues | | | | | | | | | | | |
| Property-liability insurance premiums (net of reinsurance ceded of $987, $1,006 and $1,030) | $ | 31,307 |
| | $ | 30,309 |
| | $ | 28,929 |
| |
| Life and annuity premiums and contract charges (net of reinsurance ceded of $309, $332 and $416) | 2,275 |
| | 2,158 |
| | 2,157 |
| |
| Property and casualty insurance premiums (net of reinsurance ceded and indemnification programs of $1,122, $1,016 and $971) | | | $ | 36,076 |
| | $ | 34,048 |
| | $ | 32,300 |
|
| Life premiums and contract charges (net of reinsurance ceded of $285, $290 and $303) | | | 2,501 |
| | 2,465 |
| | 2,378 |
|
| Other revenue | | | 1,054 |
| | 939 |
| | 883 |
|
| Net investment income | 3,042 |
| | 3,156 |
| | 3,459 |
| | 3,159 |
| | 3,240 |
| | 3,401 |
|
| Realized capital gains and losses: | | | | | | | | | | | |
| Total other-than-temporary impairment (“OTTI”) losses | (313 | ) | | (452 | ) | | (242 | ) | | (48 | ) | | (13 | ) | | (146 | ) |
| OTTI losses reclassified to (from) other comprehensive income | 10 |
| | 36 |
| | (3 | ) | |
| OTTI losses reclassified to (from) other comprehensive income ("OCI") | | | 1 |
| | (1 | ) | | (4 | ) |
| Net OTTI losses recognized in earnings | (303 | ) |
| (416 | ) |
| (245 | ) | | (47 | ) |
| (14 | ) |
| (150 | ) |
| Sales and other realized capital gains and losses | 213 |
| | 446 |
| | 939 |
| |
| Sales and valuation changes on equity investments and derivatives | | | 1,932 |
| | (863 | ) | | 595 |
|
| Total realized capital gains and losses | (90 | ) |
| 30 |
|
| 694 |
| | 1,885 |
|
| (877 | ) |
| 445 |
|
| Total revenues | | | 44,675 |
|
| 39,815 |
|
| 39,407 |
|
| | 36,534 |
|
| 35,653 |
|
| 35,239 |
| | | | | | |
| Costs and expenses | | | | | | | | | | | |
| Property-liability insurance claims and claims expense (net of reinsurance ceded of $1,116, $602 and $1,393) | 22,221 |
| | 21,034 |
| | 19,428 |
| |
| Life and annuity contract benefits (net of reinsurance ceded of $208, $219 and $356) | 1,857 |
| | 1,803 |
| | 1,765 |
| |
| Interest credited to contractholder funds (net of reinsurance ceded of $26, $25 and $26) | 726 |
| | 761 |
| | 919 |
| |
Property and casualty insurance claims and claims expense (net of reinsurance ceded and indemnification programs of $524, $1,378 and $1,807) | | | 23,976 |
| | 22,778 |
| | 21,847 |
|
| Life contract benefits (net of reinsurance ceded of $165, $240 and $179) | | | 2,039 |
| | 1,973 |
| | 1,923 |
|
| Interest credited to contractholder funds (net of reinsurance ceded of $20, $24 and $25) | | | 640 |
| | 654 |
| | 690 |
|
| Amortization of deferred policy acquisition costs | 4,550 |
| | 4,364 |
| | 4,135 |
| | 5,533 |
| | 5,222 |
| | 4,784 |
|
| Operating costs and expenses | 4,106 |
| | 4,081 |
| | 4,341 |
| | 5,690 |
| | 5,594 |
| | 5,196 |
|
| Pension and other postretirement remeasurement gains and losses | | | 114 |
| | 468 |
| | (217 | ) |
| Restructuring and related charges | 30 |
| | 39 |
| | 18 |
| | 41 |
| | 67 |
| | 96 |
|
| Loss on extinguishment of debt | — |
| | — |
| | 1 |
| |
| Amortization of purchased intangibles | | | 126 |
| | 105 |
| | 99 |
|
| Impairment of goodwill and purchased intangibles | | | 106 |
| | — |
| | 125 |
|
| Interest expense | 295 |
| | 292 |
| | 322 |
| | 327 |
| | 332 |
| | 335 |
|
| Total costs and expenses | | | 38,592 |
| | 37,193 |
| | 34,878 |
|
| | 33,785 |
| | 32,374 |
| | 30,929 |
| | | | | | |
| | | | | | | |
| Gain (loss) on disposition of operations | 5 |
| | 3 |
| | (74 | ) | |
| Gain on disposition of operations | | | 6 |
| | 6 |
| | 20 |
|
| | | | | | | | | | | | |
| Income from operations before income tax expense | 2,754 |
|
| 3,282 |
|
| 4,236 |
| | 6,089 |
|
| 2,628 |
|
| 4,549 |
|
| | | | | | | | | | | | |
| Income tax expense | 877 |
| | 1,111 |
| | 1,386 |
| | 1,242 |
| | 468 |
| | 995 |
|
| | | | | | | | | | | | |
| Net income | 1,877 |
|
| 2,171 |
|
| 2,850 |
| | 4,847 |
|
| 2,160 |
|
| 3,554 |
|
| | | | | | | | | | | | |
| Preferred stock dividends | 116 |
| | 116 |
| | 104 |
| | 169 |
| | 148 |
| | 116 |
|
| | | | | | | | | | | | |
| Net income applicable to common shareholders | $ | 1,761 |
|
| $ | 2,055 |
|
| $ | 2,746 |
| | $ | 4,678 |
|
| $ | 2,012 |
|
| $ | 3,438 |
|
| | | | | | | | | | | | |
| Earnings per common share: | | | | | | | | | | | |
| Net income applicable to common shareholders per common share - Basic | $ | 4.72 |
| | $ | 5.12 |
| | $ | 6.37 |
| | $ | 14.25 |
| | $ | 5.78 |
| | $ | 9.50 |
|
| Weighted average common shares - Basic | 372.8 |
| | 401.1 |
| | 431.4 |
| | 328.2 |
| | 347.8 |
| | 362.0 |
|
| Net income applicable to common shareholders per common share - Diluted | $ | 4.67 |
| | $ | 5.05 |
| | $ | 6.27 |
| | $ | 14.03 |
| | $ | 5.70 |
| | $ | 9.35 |
|
| Weighted average common shares - Diluted | 377.3 |
| | 406.8 |
| | 438.2 |
| | 333.5 |
| | 353.2 |
| | 367.8 |
|
| Cash dividends declared per common share | $ | 1.32 |
| | $ | 1.20 |
| | $ | 1.12 |
| |
See notes to consolidated financial statements.
THE ALLSTATE CORPORATION AND SUBSIDIARIESFinancial Statements 2019 Form 10-K
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
The Allstate Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
| | | | | | | | | | | Years Ended December 31, |
| ($ in millions) | Year Ended December 31, | | 2019 | | 2018 | | 2017 |
| | 2016 | | 2015 | | 2014 | |
| Net income | $ | 1,877 |
| | $ | 2,171 |
| | $ | 2,850 |
| | $ | 4,847 |
| | $ | 2,160 |
| | $ | 3,554 |
|
| | | | | | | | | | | | |
| Other comprehensive income (loss), after-tax | | | | | | | | | | | |
| Changes in: | | | | | | | | | | | |
| Unrealized net capital gains and losses | 433 |
| | (1,306 | ) | | 280 |
| | 1,889 |
| | (754 | ) | | 319 |
|
| Unrealized foreign currency translation adjustments | 10 |
| | (58 | ) | | (40 | ) | | (10 | ) | | (48 | ) | | 45 |
|
| Unrecognized pension and other postretirement benefit cost | (104 | ) | | 48 |
| | (725 | ) | |
| Unamortized pension and other postretirement prior service credit | | | (47 | ) | | (59 | ) | | (52 | ) |
| Other comprehensive income (loss), after-tax | 339 |
| | (1,316 | ) | | (485 | ) | | 1,832 |
| | (861 | ) | | 312 |
|
| | | | | | | | | | | | |
| Comprehensive income | $ | 2,216 |
|
| $ | 855 |
|
| $ | 2,365 |
| | $ | 6,679 |
|
| $ | 1,299 |
|
| $ | 3,866 |
|
See notes to consolidated financial statements.
The Allstate Corporation 121
THE ALLSTATE CORPORATION AND SUBSIDIARIES2019 Form 10-KFinancial Statements
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
The Allstate Corporation and Subsidiaries
Consolidated Statements of Financial Position
| | | | | | | | | December 31, |
| ($ in millions, except par value data) | December 31, | | 2019 | | 2018 |
| | 2016 | | 2015 | |
| Assets | | | | | | | |
| Investments | | | | | | | |
| Fixed income securities, at fair value (amortized cost $56,576 and $57,201) | $ | 57,839 |
| | $ | 57,948 |
| |
| Equity securities, at fair value (cost $5,157 and $4,806) | 5,666 |
| | 5,082 |
| |
| Fixed income securities, at fair value (amortized cost $56,293 and $57,134) | | | $ | 59,044 |
| | $ | 57,170 |
|
| Equity securities, at fair value (cost $6,568 and $4,489) | | | 8,162 |
| | 5,036 |
|
| Mortgage loans | 4,486 |
| | 4,338 |
| | 4,817 |
| | 4,670 |
|
| Limited partnership interests | 5,814 |
| | 4,874 |
| | 8,078 |
| | 7,505 |
|
| Short-term, at fair value (amortized cost $4,288 and $2,122) | 4,288 |
| | 2,122 |
| |
| Short-term, at fair value (amortized cost $4,256 and $3,027) | | | 4,256 |
| | 3,027 |
|
| Other | 3,706 |
| | 3,394 |
| | 4,005 |
| | 3,852 |
|
| Total investments | 81,799 |
| | 77,758 |
| | 88,362 |
| | 81,260 |
|
| Cash | 436 |
| | 495 |
| | 338 |
| | 499 |
|
| Premium installment receivables, net | 5,597 |
| | 5,544 |
| | 6,472 |
| | 6,154 |
|
| Deferred policy acquisition costs | 3,954 |
| | 3,861 |
| | 4,699 |
| | 4,784 |
|
| Reinsurance recoverables, net | 8,745 |
| | 8,518 |
| |
| Reinsurance and indemnification recoverables, net | | | 9,211 |
| | 9,565 |
|
| Accrued investment income | 567 |
| | 569 |
| | 600 |
| | 600 |
|
| Property and equipment, net | 1,065 |
| | 1,024 |
| | 1,145 |
| | 1,045 |
|
| Goodwill | 1,219 |
| | 1,219 |
| | 2,545 |
| | 2,530 |
|
| Other assets | 1,835 |
| | 2,010 |
| | 3,534 |
| | 3,007 |
|
| Separate Accounts | 3,393 |
| | 3,658 |
| | 3,044 |
| | 2,805 |
|
| Total assets | $ | 108,610 |
| | $ | 104,656 |
| | $ | 119,950 |
| | $ | 112,249 |
|
| Liabilities | | | | | | | |
| Reserve for property-liability insurance claims and claims expense | $ | 25,250 |
| | $ | 23,869 |
| |
| Reserve for property and casualty insurance claims and claims expense | | | $ | 27,712 |
| | $ | 27,423 |
|
| Reserve for life-contingent contract benefits | 12,239 |
| | 12,247 |
| | 12,300 |
| | 12,208 |
|
| Contractholder funds | 20,260 |
| | 21,295 |
| | 17,692 |
| | 18,371 |
|
| Unearned premiums | 12,583 |
| | 12,202 |
| | 15,343 |
| | 14,510 |
|
| Claim payments outstanding | 879 |
| | 842 |
| | 929 |
| | 1,007 |
|
| Deferred income taxes | 487 |
| | 90 |
| | 1,154 |
| | 425 |
|
| Other liabilities and accrued expenses | 6,599 |
| | 5,304 |
| | 9,147 |
| | 7,737 |
|
| Long-term debt | 6,347 |
| | 5,124 |
| | 6,631 |
| | 6,451 |
|
| Separate Accounts | 3,393 |
| | 3,658 |
| | 3,044 |
| | 2,805 |
|
| Total liabilities | 88,037 |
| | 84,631 |
| | 93,952 |
| | 90,937 |
|
| Commitments and Contingent Liabilities (Note 7, 8 and 14) |
| |
| |
| |
|
| Shareholders’ equity | | | | | | | |
| Preferred stock and additional capital paid-in, $1 par value, 25 million shares authorized, 72.2 thousand issued and outstanding, $1,805 aggregate liquidation preference | 1,746 |
| | 1,746 |
| |
| Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 366 million and 381 million shares outstanding | 9 |
| | 9 |
| |
| Preferred stock and additional capital paid-in, $1 par value, 25 million shares authorized, 92.5 thousand and 79.8 thousand shares issued and outstanding, $2,313 and $1,995 aggregate liquidation preference | | | 2,248 |
| | 1,930 |
|
| Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 319 million and 332 million shares outstanding | | | 9 |
| | 9 |
|
| Additional capital paid-in | 3,303 |
| | 3,245 |
| | 3,463 |
| | 3,310 |
|
| Retained income | 40,678 |
| | 39,413 |
| | 48,074 |
| | 44,033 |
|
| Deferred ESOP expense | (6 | ) | | (13 | ) | |
| Treasury stock, at cost (534 million and 519 million shares) | (24,741 | ) | | (23,620 | ) | |
Deferred Employee Stock Ownership Plan (“ESOP”) expense | | | — |
| | (3 | ) |
| Treasury stock, at cost (581 million and 568 million shares) | | | (29,746 | ) | | (28,085 | ) |
| Accumulated other comprehensive income: | | | | | | | |
| Unrealized net capital gains and losses: | | | | | | | |
| Unrealized net capital gains and losses on fixed income securities with OTTI | 57 |
| | 56 |
| | 70 |
| | 75 |
|
| Other unrealized net capital gains and losses | 1,091 |
| | 608 |
| | 2,094 |
| | (51 | ) |
| Unrealized adjustment to DAC, DSI and insurance reserves | (95 | ) | | (44 | ) | | (277 | ) | | (26 | ) |
| Total unrealized net capital gains and losses | 1,053 |
| | 620 |
| | 1,887 |
| | (2 | ) |
| Unrealized foreign currency translation adjustments | (50 | ) | | (60 | ) | | (59 | ) | | (49 | ) |
| Unrecognized pension and other postretirement benefit cost | (1,419 | ) | | (1,315 | ) | |
| Total accumulated other comprehensive loss | (416 | ) | | (755 | ) | |
| Unamortized pension and other postretirement prior service credit | | | 122 |
| | 169 |
|
| Total accumulated other comprehensive income ("AOCI") | | | 1,950 |
| | 118 |
|
| Total shareholders’ equity | 20,573 |
|
| 20,025 |
| | 25,998 |
|
| 21,312 |
|
| Total liabilities and shareholders’ equity | $ | 108,610 |
|
| $ | 104,656 |
| | $ | 119,950 |
|
| $ | 112,249 |
|
See notes to consolidated financial statements.
THE ALLSTATE CORPORATION AND SUBSIDIARIESFinancial Statements 2019 Form 10-K
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
The Allstate Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Equity
| | | ($ in millions) | Year Ended December 31, | |
| | 2016 | | 2015 | | 2014 | | Years Ended December 31, |
| ($ in millions, except per share data) | | | 2019 | | 2018 | | 2017 |
| | | | | | | | | | | | |
| Preferred stock par value | $ | — |
|
| $ | — |
|
| $ | — |
| | $ | — |
|
| $ | — |
|
| $ | — |
|
| | | | | | | |
| Preferred stock additional capital paid-in | | | | | | | | | | | |
| Balance, beginning of year | 1,746 |
| | 1,746 |
| | 780 |
| | 1,930 |
| | 1,746 |
| | 1,746 |
|
| Preferred stock issuance | — |
| | — |
| | 966 |
| |
| Preferred stock issuance, net of issuance costs | | | 1,414 |
| | 557 |
| | — |
|
| Preferred stock redemption | | | (1,096 | ) | | (373 | ) | | — |
|
| Balance, end of year | 1,746 |
|
| 1,746 |
|
| 1,746 |
| | 2,248 |
|
| 1,930 |
|
| 1,746 |
|
| | | | | | | | | | | | |
| Common stock | 9 |
| | 9 |
| | 9 |
| |
| | | | | | | |
| Additional capital paid-in | | | | | | |
| Common stock par value | | | 9 |
| | 9 |
| | 9 |
|
| Common stock additional capital paid-in | | | | | | | |
| Balance, beginning of year | 3,245 |
| | 3,199 |
| | 3,143 |
| | 3,310 |
| | 3,313 |
| | 3,303 |
|
| Forward contract on accelerated share repurchase agreement | | | 75 |
| | (105 | ) | | (45 | ) |
| Equity incentive plans activity | 58 |
| | 46 |
| | 56 |
| | 78 |
| | 102 |
| | 55 |
|
| Balance, end of year | 3,303 |
|
| 3,245 |
|
| 3,199 |
| | 3,463 |
|
| 3,310 |
|
| 3,313 |
|
| | | | | | | | | | | | |
| Retained income | | | | | | | | | | | |
| Balance, beginning of year | 39,413 |
| | 37,842 |
| | 35,580 |
| | 44,033 |
| | 41,579 |
| | 39,009 |
|
| Cumulative effect of change in accounting principle | | | 21 |
| | 1,088 |
| | — |
|
| Net income | 1,877 |
| | 2,171 |
| | 2,850 |
| | 4,847 |
| | 2,160 |
| | 3,554 |
|
| Dividends on common stock | (496 | ) | | (484 | ) | | (484 | ) | |
| Dividends on common stock (declared per share of $2.00, $1.84 and $1.48) | | | (658 | ) | | (646 | ) | | (540 | ) |
| Dividends on preferred stock | (116 | ) | | (116 | ) | | (104 | ) | | (169 | ) | | (148 | ) | | (116 | ) |
| Reclassification of tax effects due to change in accounting principle | | | — |
| | — |
| | (328 | ) |
| Balance, end of year | 40,678 |
|
| 39,413 |
|
| 37,842 |
| | 48,074 |
|
| 44,033 |
|
| 41,579 |
|
| | | | | | | | | | | | |
| Deferred ESOP expense | | | | | | | | | | | |
| Balance, beginning of year | (13 | ) | | (23 | ) | | (31 | ) | | (3 | ) | | (3 | ) | | (6 | ) |
| Payments | 7 |
| | 10 |
| | 8 |
| | 3 |
| | — |
| | 3 |
|
| Balance, end of year | (6 | ) | | (13 | ) | | (23 | ) | | — |
| | (3 | ) | | (3 | ) |
| | | | | | | | | | | | |
| Treasury stock | | | | | | | | | | | |
| Balance, beginning of year | (23,620 | ) | | (21,030 | ) | | (19,047 | ) | | (28,085 | ) | | (25,982 | ) | | (24,741 | ) |
| Shares acquired | (1,341 | ) | | (2,804 | ) | | (2,306 | ) | | (1,810 | ) | | (2,198 | ) | | (1,423 | ) |
| Shares reissued under equity incentive plans, net | 220 |
| | 214 |
| | 323 |
| | 149 |
| | 95 |
| | 182 |
|
| Balance, end of year | (24,741 | ) | | (23,620 | ) | | (21,030 | ) | | (29,746 | ) | | (28,085 | ) | | (25,982 | ) |
| | | | | | | | | | | | |
| Accumulated other comprehensive income (loss) | | | | | | | | | | | |
| Balance, beginning of year | (755 | ) | | 561 |
| | 1,046 |
| | 118 |
| | 1,889 |
| | 1,249 |
|
| Cumulative effect of change in accounting principle | | | — |
| | (910 | ) | | — |
|
| Change in unrealized net capital gains and losses | 433 |
| | (1,306 | ) | | 280 |
| | 1,889 |
| | (754 | ) | | 319 |
|
| Change in unrealized foreign currency translation adjustments | 10 |
| | (58 | ) | | (40 | ) | | (10 | ) | | (48 | ) | | 45 |
|
| Change in unrecognized pension and other postretirement benefit cost | (104 | ) | | 48 |
| | (725 | ) | |
| Change in unamortized pension and other postretirement prior service credit | | | (47 | ) | | (59 | ) | | (52 | ) |
| Reclassification of tax effects due to change in accounting principle | | | — |
| | — |
| | 328 |
|
| Balance, end of year | (416 | ) | | (755 | ) | | 561 |
| | 1,950 |
| | 118 |
| | 1,889 |
|
| Total shareholders’ equity | $ | 20,573 |
|
| $ | 20,025 |
|
| $ | 22,304 |
| | $ | 25,998 |
|
| $ | 21,312 |
|
| $ | 22,551 |
|
See notes to consolidated financial statements.
The Allstate Corporation 123
THE ALLSTATE CORPORATION AND SUBSIDIARIES2019 Form 10-KFinancial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
The Allstate Corporation and Subsidiaries
Consolidated Statements of Cash Flows
| | | | | | | | | | | Years Ended December 31, |
| ($ in millions) | Year Ended December 31, | | 2019 | | 2018 | | 2017 |
| | 2016 | | 2015 | | 2014 | |
| Cash flows from operating activities | | | | | | | | | | | |
| Net income | $ | 1,877 |
| | $ | 2,171 |
| | $ | 2,850 |
| | $ | 4,847 |
| | $ | 2,160 |
| | $ | 3,554 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | |
| Depreciation, amortization and other non-cash items | 382 |
| | 371 |
| | 366 |
| | 647 |
| | 511 |
| | 483 |
|
| Realized capital gains and losses | 90 |
| | (30 | ) | | (694 | ) | | (1,885 | ) | | 877 |
| | (445 | ) |
| Loss on extinguishment of debt | — |
| | — |
| | 1 |
| |
| (Gain) loss on disposition of operations | (5 | ) | | (3 | ) | | 74 |
| |
| Pension and other postretirement remeasurement gains and losses | | | 114 |
| | 468 |
| | (217 | ) |
| Gain on disposition of operations | | | (6 | ) | | (6 | ) | | (20 | ) |
| Interest credited to contractholder funds | 726 |
| | 761 |
| | 919 |
| | 640 |
| | 654 |
| | 690 |
|
| Impairment of goodwill and purchased intangibles | | | 106 |
| | — |
| | 125 |
|
| Changes in: | | |
| | | | | | | | |
| Policy benefits and other insurance reserves | 631 |
| | 473 |
| | 541 |
| | (508 | ) | | 469 |
| | 302 |
|
| Unearned premiums | 362 |
| | 638 |
| | 766 |
| | 801 |
| | 915 |
| | 463 |
|
| Deferred policy acquisition costs | (165 | ) | | (239 | ) | | (220 | ) | | (85 | ) | | (296 | ) | | (214 | ) |
| Premium installment receivables, net | (42 | ) | | (134 | ) | | (257 | ) | | (299 | ) | | (396 | ) | | (131 | ) |
| Reinsurance recoverables, net | (264 | ) | | (178 | ) | | (1,068 | ) | | 320 |
| | (656 | ) | | (211 | ) |
| Income taxes | 417 |
| | (119 | ) | | 205 |
| | 487 |
| | (380 | ) | | (52 | ) |
| Other operating assets and liabilities | (16 | ) | | (95 | ) | | (247 | ) | | (50 | ) | | 855 |
| | (13 | ) |
| Net cash provided by operating activities | 3,993 |
| | 3,616 |
| | 3,236 |
| | 5,129 |
| | 5,175 |
| | 4,314 |
|
| Cash flows from investing activities | | | | | | | | | | | |
| Proceeds from sales | | | | | | | | | | | |
| Fixed income securities | 25,061 |
| | 28,693 |
| | 34,609 |
| | 29,849 |
| | 33,183 |
| | 25,341 |
|
| Equity securities | 5,546 |
| | 3,754 |
| | 6,755 |
| | 5,277 |
| | 6,859 |
| | 6,504 |
|
| Limited partnership interests | 881 |
| | 1,101 |
| | 1,473 |
| | 756 |
| | 764 |
| | 1,125 |
|
| Mortgage loans | — |
| | 6 |
| | 10 |
| |
| Other investments | 262 |
| | 545 |
| | 406 |
| | 303 |
| | 533 |
| | 274 |
|
| Investment collections | | | | | | | | | | | |
| Fixed income securities | 4,533 |
| | 4,432 |
| | 3,736 |
| | 2,570 |
| | 3,466 |
| | 4,194 |
|
| Mortgage loans | 501 |
| | 538 |
| | 1,106 |
| | 695 |
| | 529 |
| | 600 |
|
| Other investments | 421 |
| | 293 |
| | 191 |
| | 254 |
| | 488 |
| | 642 |
|
| Investment purchases | | | | | | | | | | | |
| Fixed income securities | (27,990 | ) | | (30,758 | ) | | (38,759 | ) | | (31,317 | ) | | (36,960 | ) | | (31,145 | ) |
| Equity securities | (5,950 | ) | | (4,960 | ) | | (5,443 | ) | | (7,176 | ) | | (5,936 | ) | | (6,585 | ) |
| Limited partnership interests | (1,450 | ) | | (1,343 | ) | | (1,398 | ) | | (1,332 | ) | | (1,679 | ) | | (1,440 | ) |
| Mortgage loans | (646 | ) | | (687 | ) | | (501 | ) | | (844 | ) | | (664 | ) | | (646 | ) |
| Other investments | (885 | ) | | (902 | ) | | (972 | ) | | (666 | ) | | (864 | ) | | (999 | ) |
| Change in short-term investments, net | (2,446 | ) | | 385 |
| | 272 |
| | (767 | ) | | (505 | ) | | 2,610 |
|
| Change in other investments, net | (51 | ) | | (52 | ) | | 46 |
| | 42 |
| | (98 | ) | | (30 | ) |
| Purchases of property and equipment, net | (313 | ) | | (303 | ) | | (288 | ) | | (433 | ) | | (277 | ) | | (299 | ) |
| Disposition (acquisition) of operations | — |
| | — |
| | 378 |
| |
| Net cash (used in) provided by investing activities | (2,526 | ) | | 742 |
| | 1,621 |
| |
| Acquisition of operations | | | (18 | ) | | (558 | ) | | (1,356 | ) |
| Net cash used in investing activities | | | (2,807 | ) | | (1,719 | ) | | (1,210 | ) |
| Cash flows from financing activities | | | | | | | | | | | |
| Proceeds from issuance of long-term debt | 1,236 |
| | — |
| | — |
| | 491 |
| | 498 |
| | — |
|
| Repayments of long-term debt | (17 | ) | | (20 | ) | | (1,006 | ) | |
| Redemption and repayment of long-term debt | | | (317 | ) | | (400 | ) | | — |
|
| Proceeds from issuance of preferred stock | — |
| | — |
| | 965 |
| | 1,414 |
| | 557 |
| | — |
|
| Redemption of preferred stock | | | (1,132 | ) | | (385 | ) | | — |
|
| Contractholder fund deposits | 1,049 |
| | 1,052 |
| | 1,184 |
| | 996 |
| | 1,010 |
| | 1,025 |
|
| Contractholder fund withdrawals | (2,087 | ) | | (2,327 | ) | | (3,446 | ) | | (1,662 | ) | | (1,967 | ) | | (1,890 | ) |
| Dividends paid on common stock | (486 | ) | | (483 | ) | | (477 | ) | | (653 | ) | | (614 | ) | | (525 | ) |
| Dividends paid on preferred stock | (116 | ) | | (116 | ) | | (87 | ) | | (134 | ) | | (134 | ) | | (116 | ) |
| Treasury stock purchases | (1,337 | ) | | (2,808 | ) | | (2,301 | ) | | (1,735 | ) | | (2,303 | ) | | (1,495 | ) |
| Shares reissued under equity incentive plans, net | 164 |
| | 130 |
| | 266 |
| | 120 |
| | 73 |
| | 135 |
|
| Excess tax benefits on share-based payment arrangements | 32 |
| | 45 |
| | 41 |
| |
| Other | 36 |
| | 7 |
| | (14 | ) | | 129 |
| | 91 |
| | (57 | ) |
| Net cash used in financing activities | (1,526 | ) | | (4,520 | ) | | (4,875 | ) | | (2,483 | ) | | (3,574 | ) | | (2,923 | ) |
| Net decrease in cash | (59 | ) | | (162 | ) | | (18 | ) | |
| Net (decrease) increase in cash | | | (161 | ) | | (118 | ) | | 181 |
|
| Cash at beginning of year | 495 |
| | 657 |
| | 675 |
| | 499 |
| | 617 |
| | 436 |
|
| Cash at end of year | $ | 436 |
| | $ | 495 |
| | $ | 657 |
| | $ | 338 |
| | $ | 499 |
| | $ | 617 |
|
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements 2019 Form 10-K
Notes to Consolidated Financial Statements
Basis of presentation
The accompanying consolidated financial statements include the accounts of The Allstate Corporation (the “Corporation”) and its wholly owned subsidiaries, primarily Allstate Insurance Company (“AIC”), a property-liabilityproperty and casualty insurance company with various property-liabilityproperty and casualty and life and investment subsidiaries, including Allstate Life Insurance Company (“ALIC”) (collectively referred to as the “Company” or “Allstate”). These consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Legislation”) became effective, permanently reducing the U.S. corporate income tax rate from 35% to 21% beginning January 1, 2018. As a result, the corporate tax rate is not comparable between periods.
Nature of operations
Allstate is engaged, principally in the United States, in the property-liabilityproperty and casualty insurance and life insurance business. businesses. Allstate is one of the country’s largest personal property and casualty insurers and is organized into 7 reportable segments: Allstate Protection, Discontinued Lines and Coverages, Service Businesses, Allstate Life, Allstate Benefits, Allstate Annuities, and Corporate and Other.
Allstate’s primary business is the sale of private passenger auto and homeowners insurance. The Company also sellsoffers several other personal property and casualty insurance products, select commercial property and casualty coverages, consumer product protection plans, device and mobile data collection services and analytic solutions using automotive telematics information, roadside assistance, finance and insurance products, life insurance, and voluntary accident and health insurance.insurance and identity protection. Allstate primarily distributes its products through exclusive agencies, financial specialists, independent agencies and brokers, major retailers, contact centers and the internet.
The Allstate Protection segment principally sells private passenger auto
Risks and homeowners insurance, with earned premiums accounting for 86% of Allstate’s 2016 consolidated revenues. Allstate was the country’s second largest personal property and casualty insurer as of December 31, 2015. Allstate Protection, through several companies, is authorized to sell certain property-liability products in all 50 states, the District of Columbia and Puerto Rico. The Company is also authorized to sell certain insurance products in Canada. For 2016, the top geographic locations for premiums earned by the Allstate Protection segment were Texas, California, New York and Florida. No other jurisdiction accounted for more than 5% of premiums earned for Allstate Protection.uncertainties
Allstate has exposure to catastrophes,catastrophic events, including wind and hail, wildfires, tornadoes, hurricanes, tropical storms, earthquakes, volcanic eruptions, terrorism and industrial accidents.
Catastrophes, an inherent risk of the property-liabilityproperty and casualty insurance business, which have contributed, and will continue to contribute, to material year-to-year fluctuations in the Company’s results of operations and financial position (see Note 8). The nature and level of catastrophic loss caused by natural events (high winds, winter storms, tornadoes, hailstorms, wildfires, tropical storms, hurricanes, earthquakes and volcanoes) and man-made events (terrorism and industrial accidents) experienced in any period cannot be predicted and could be material to results of operations and financial position.
The Company considers the following categories and locations to be the greatest areas of potential catastrophe losses due to hurricanes to generally be majorlosses:
Wildfires — California, Colorado, Arizona and Texas
Hurricanes — Major metropolitan centers in counties along the eastern and gulf coasts of the United States. The Company considers the greatest areas of potential catastrophe losses due to earthquakesStates
Wind/Hail, Rain and Tornado — Texas, Illinois, Colorado and Georgia
Earthquakes and fires following earthquakes to be major—Major metropolitan areas near fault lines in the states of California, Oregon, Washington, South Carolina, Missouri, Kentucky and Tennessee. The Company also has exposure to asbestos, environmental and other discontinued lines claims (see Note 14).Tennessee
The Allstate Financial segment sells traditional, interest-sensitive and variable life insurance and voluntary accident and health insurance products. The Company previously offered and continues to have in force fixed annuities such as deferred and immediate annuities. The Company also previously offered institutional products consisting of funding agreements sold to unaffiliated trusts that used them to back medium-term notes. There are no institutional products outstanding as of December 31, 2016.Corporation 125
Allstate Financial, through several companies, is authorized to sell life insurance and retirement products in all 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands and Guam. Voluntary accident and health insurance products are also sold in Canada. For 2016, the top geographic locations for direct statutory premiums and annuity considerations for the Allstate Financial segment were New York, Texas, Florida and California. No other jurisdiction accounted for more than 5% of direct statutory premiums and annuity considerations for Allstate Financial. Allstate Financial distributes its products through Allstate exclusive agencies and exclusive financial specialists, and workplace enrolling independent agents.
Allstate has exposure to market risk as a result of its investment portfolio. Market risk is the risk that the Company will incur realized and unrealized net capital losses due to adverse changes in interest rates, credit spreads, equity prices or currency exchange rates. The Company’s primary market risk exposures are to changes in interest rates, credit spreads and equity prices. Interest rate risk is the risk that the Company will incur a loss due to adverse changes in interest rates relative to the interest rate characteristics of its interest bearing assets and liabilities. This risk arises from many of the Company’s primary activities, as it invests substantial funds in interest-sensitive assets and issues interest-sensitive liabilities. Interest rate risk includes risks related to changes in U.S. Treasury yields and other key risk-free reference yields. Credit spread risk is the risk that the Company will incur a loss due to adverse changes in credit spreads. This risk arises from many of the Company’s primary activities, as the Company invests
substantial funds in spread-sensitive fixed income assets. Equity price risk is the risk that the Company will incur losses due to adverse changes in the general levels of the equity markets.
The Company monitors economic and regulatory developments that have the potential to impact its business. Federal and state laws and regulations affect the taxation of insurance companies and life insurance products. Congress and various state legislatures from time to time consider legislation that would reduce or eliminate the favorable policyholder tax treatment currently applicable to life insurance. Congress and various state legislatures also consider proposals to reduce the taxation of certain products or investments that may compete with life insurance. Legislation that increases the taxation on insurance products or reduces the taxation on competing products could lessen the advantage or create a disadvantage for certain of the Company’s products making them less competitive. Such proposals, if adopted, could have an adverse effect on the Company’s financial position or Allstate Financial’s ability to sell such products and could result in the surrender of some existing contracts and policies. In addition, changes in the federal estate tax laws could negatively affect the demand for the types of life insurance used in estate planning.
2. Summary of Significant Accounting Policies2019 Form 10-KNotes to Consolidated Financial Statements
|
| |
| Note 2 | Summary of Significant Accounting Policies
|
Investments
Fixed income securities include bonds, asset-backed securities (“ABS”), residential and mortgage-backed securities (“RMBS”MBS”),. MBS includes residential and commercial mortgage-backed securities (“CMBS”) and redeemable preferred stocks.that were previously disclosed separately. Fixed income securities, which may be sold prior to their contractual maturity, are designated as available for saleavailable-for-sale and are carried at fair value. The difference between amortized cost and fair value, net of deferred income taxes and related life and annuity deferred policy acquisition costs (“DAC”), deferred sales inducement costs (“DSI”) and reserves for life-contingent contract benefits, is reflected as a component of accumulated other comprehensive income.AOCI. Cash received from calls and make-whole payments is reflected as a component of proceeds from sales and cash received from maturities and pay-downs is reflected as a component of investment collections within the Consolidated Statements of Cash Flows.
Equity securities primarily include common stocks, exchange traded and mutual funds, non-redeemable preferred stocks and real estate investment trust equity investments. Certain exchange traded and mutual funds have fixed income securities as their underlying investments. Equity securities are designated as available for sale and are carried at fair value. The difference betweenEquity securities without readily determinable or estimable fair values are measured using the measurement alternative, which is cost less impairment, if any, and adjustments resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. Due to the adoption of a new accounting standard for the recognition and measurement of financial assets and financial liabilities, the periodic change in fair value of equity securities is recognized within realized capital gains and losses on the Consolidated Statements of Operations effective January 1, 2018. As a result, 2017 net of deferredinvestment income taxes, is reflected as a component of accumulatedand net realized capital gains and losses are not comparable to other comprehensive income.periods presented.
Mortgage loans are carried at unpaid principal balances, net of unamortized premium or discount and valuation allowances. Valuation allowances are established for impaired loans when it is probable that contractual principal and interest will not be collected.
Investments in limited partnership interests are primarily accounted for in accordance with the equity method of accounting (“EMA”) and include interests in private equity funds, and co-investments, real estate funds and joint ventures, and other funds. WhereInvestments in limited partnership interests purchased prior to January 1, 2018, where the Company’s interest is so minor that it exercises virtually no influence over operating and financial policies, investments in limited partnership interests are accounted for in accordance withat fair value primarily utilizing the cost method of accounting; all other investments in limited partnership interests are accounted for in accordance with the equity method of accountingnet asset value (“EMA”NAV”). as a practical expedient to determine fair value.
Short-term investments, including money market funds, commercial paper, U.S. Treasury bills money market funds and other short-term investments, are carried at fair value. Other investments primarily consist of bank loans, policy loans, real estate, agent loans real estate and derivatives. Bank
loans are primarily senior secured corporate loans and are carried at amortized cost. Policy loans are carried at unpaid principal balances and were $904 million and $905 million as of December 31, 2016 and 2015, respectively.balances. Real estate is carried at cost less accumulated depreciation. Agent loans are loans issued to exclusive Allstate agents and are carried at unpaid principal balances, net of valuation allowances and unamortized deferred fees or costs. Real estate is carried at cost less accumulated depreciation.allowances. Derivatives are carried at fair value.
Investment income primarily consists of interest, dividends, income from limited partnership interests, rental income from real estate, and income from certain derivative transactions. Interest is recognized on an accrual basis using the effective yield method and dividends are recorded at the ex-dividend date. Interest income for ABS RMBS and CMBSMBS is determined considering estimated pay-downs, including prepayments, obtained from third partythird-party data sources and internal estimates. Actual prepayment experience is periodically reviewed, and effective yields are recalculated when differences arise between the prepayments originally anticipated and the actual prepayments received and currently anticipated. For ABS RMBS and CMBSMBS of high credit quality with fixed interest rates, the effective yield is recalculated on a retrospective basis. For all others, the effective yield is recalculated on a prospective basis. Accrual of income is suspended for other-than-temporarily impaired fixed income securities when the timing and amount of cash flows expected to be received is not reasonably estimable. Accrual of income is suspended for mortgage loans, bank loans and agent loans that are in default or when full and timely collection of principal and interest payments is not probable. Cash receipts on investments on nonaccrual status are generally recorded as a reduction of carrying value. Income from cost method limited partnership interests carried at fair value is recognized based upon receiptthe changes in fair value of amounts distributed by the partnerships.investee’s equity primarily determined using NAV. Income from EMA
limited partnership interests is recognized based on the Company’s share of the partnerships’ net income, including unrealized gains and losses, andearnings. Income from EMA limited partnership interests is generally recognized on a three month delay due to the availability of the related financial statements.statements from investees.
Realized capital gains and losses include gains and losses on investment sales, write-downs in value due to other-than-temporary declines in fair value, adjustments to valuation allowances on mortgage loans and agent loans, valuation changes of equity investments, including equity securities and certain limited partnerships where the underlying assets are predominately public equity securities, and periodic changes in fair value and settlements of certain derivatives, including hedge ineffectiveness and valuation changes in public securities held in certain limited partnerships.ineffectiveness. Realized capital gains and losses on investment sales are determined on a specific identification basis.
Derivative and embedded derivative financial instruments
Derivative financial instruments include interest rate swaps, credit default swaps, futures (interest rate and equity), options (including swaptions), interest rate caps, warrants and rights, foreign currency swaps,
Notes to Consolidated Financial Statements 2019 Form 10-K
foreign currency forwards, total return swaps and certain investment risk transfer reinsurance agreements, and certain bond forward purchase commitments.agreements. Derivatives required to be separated from the host instrument and accounted for as derivative financial instruments (“subject to bifurcation”) are embedded in certain fixed income securities, equity-indexed life and annuity contracts and reinsured variable annuity contracts and certain funding agreements.contracts.
All derivatives are accounted for on a fair value basis and reported as other investments, other assets, other liabilities and accrued expenses or contractholder funds. Embedded derivative instruments subject to bifurcation are also accounted for on a fair value basis and are reported together with the host contract. The change in fair value of derivatives embedded in certain fixed income securities and subject to bifurcation is reported in realized capital gains and losses. The change in fair value of derivatives embedded in life and annuity product contracts and subject to bifurcation is reported in life and annuity contract benefits or interest credited to contractholder funds. Cash flows from embedded derivatives subject to bifurcation and derivatives receiving hedge accounting are reported consistently with the host contracts and hedged risks, respectively, within the Consolidated Statements of Cash Flows. Cash flows from other derivatives are reported in cash flows from investing activities within the Consolidated Statements of Cash Flows.
When derivatives meet specific criteria, they may be designated as accounting hedges and accounted for as fair value, cash flow, foreign currency fair value or foreign currency cash flow hedges. The hedged item may be either all or a specific portion of a recognized asset, liability or an unrecognized firm commitment attributable to a particular risk for fair value hedges. At the inception of the hedge, the Company formally documents the hedging relationship and risk management objective and strategy. The documentation identifies the hedging instrument, the hedged item, the nature of the risk being hedged and the methodology used to assess the effectiveness of the hedging instrument in offsetting the exposure to changes in the hedged item’s fair value attributable to the hedged risk. For a cash flow hedge, this documentation includes the exposure to changes in the variability in cash flows attributable to the hedged risk. The Company does not exclude any component of the change in fair value of the hedging instrument from the effectiveness assessment. At each reporting date, the Company confirms that the hedging instrument continues to be highly effective in offsetting the hedged risk. Ineffectiveness in fair value hedges and cash flow hedges, if any, is reported in realized capital gains and losses.
Fair value hedges The change in fair value of hedging instruments used in fair value hedges of investment assets or a portion thereof is reported in net investment income, together with the change in fair value of the hedged items. The change in fair value of hedging instruments used in fair value hedges of contractholder funds liabilities or a portion thereof is reported in interest credited to contractholder funds, together with the change in fair value of the hedged items. Accrued periodic settlements on swaps are reported together with the changes in fair value of the related swaps in net investment income or interest credited to contractholder funds. The amortized cost
for fixed income securities, the carrying value for mortgage loans or the carrying value of thea designated hedged liability is adjusted for the change in fair value of the hedged risk.
Cash flow hedges For hedging instruments used in cash flow hedges, the changes in fair value of the derivatives representing the effective portion of the hedge are reported in accumulated other comprehensive income.AOCI. Amounts are reclassified to net investment income, realized capital gains and losses or interest expense as the hedged or forecasted transaction affects income. Accrued periodic settlements on derivatives used in cash flow hedges are reported in net investment income. The amount reported in accumulated other comprehensive incomeAOCI for a hedged transaction is limited to the lesser of the cumulative gain or loss on the derivative less the amount reclassified to income, or the cumulative gain or loss on the derivative needed to offset the cumulative change in the expected future cash flows on the hedged transactioninstrument from inception of the hedge less the derivative gaingains or losslosses previously reclassified from accumulated other comprehensive income toAOCI into income. If the Company expects at any time that the loss reported in accumulated other comprehensive incomeAOCI would lead to a net loss on the combination of the hedging instrument and the hedged transaction which may not be recoverable, a loss is recognized immediately in realized capital gains and losses. If an impairment loss is recognized on an asset or an additional obligation is incurred on a liability involved in a hedge transaction, any offsetting gain in accumulated other comprehensive incomeAOCI is reclassified and reported together with the impairment loss or recognition of the obligation.
Termination of hedge accounting If, subsequent to entering into a hedge transaction, the derivative becomes ineffective (including if the hedged item is sold or otherwise extinguished, the occurrence of a hedged forecasted transaction is no longer
probable or the hedged asset becomes other-than-temporarily impaired), the Company may terminate the derivative position. The Company may also terminate derivative instruments or redesignate them as non-hedge as a result of other events or circumstances. If the derivative instrument is not terminated when a fair value hedge is no longer effective, the future gains and losses recognized on the derivative are reported in realized capital gains and losses. When a fair value hedge is no longer effective, is redesignated as non-hedge or when the derivative has been terminated, the fair value gain or loss on the hedged asset, liability or portion thereof which has already beenpreviously recognized in income while the hedge was in place and used to adjust the amortized cost forof hedged fixed income securities, the carrying value forof hedged mortgage loans or the carrying value of thea hedged liability, is amortized over the remaining life of the hedged asset, liability or portion thereof, and reflected in net investment income or interest credited to contractholder funds beginning in the period that hedge accounting is no longer applied. If the hedged item in a fair value hedge is an asset that has become other-than-temporarily impaired, the adjustment made to the amortized cost for fixed income securities or the carrying value for mortgage loans is subject to the accounting policies applied to other-than-temporarily impaired assets.
When a derivative instrument used in a cash flow hedge of an existing asset or liability is no longer effective or is terminated, the gain or loss recognized on the derivative is reclassified from accumulated other comprehensive incomeAOCI to income as the hedged risk impacts income. If the derivative
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2019 Form 10-KNotes to Consolidated Financial Statements
instrument is not terminated when a cash flow hedge is no longer effective, the future gains and losses recognized on the derivative are reported in realized capital gains and losses. When a derivative instrument used in a cash flow hedge of a forecasted transaction is terminated because it is probable the forecasted transaction will not occur, the gain or loss recognized on the derivative is immediately reclassified from accumulated other comprehensive incomeAOCI to realized capital gains and losses in the period that hedge accounting is no longer applied.
Non-hedge derivative financial instruments For derivatives for which hedge accounting is not applied, the income statement effects, including fair value gains and losses and accrued periodic settlements, are reported either in realized capital gains and losses or in a single line item together with the results of the associated asset or liability for which risks are being managed.
Securities loaned
The Company’s business activities include securities lending transactions, which are used primarily to generate net investment income. The proceeds received in conjunction with securities lending transactions arecan be reinvested in short-term investments or fixed income securities. These transactions are short-term in nature, usually 30 days or less.
The Company receives cash collateral for securities loaned in an amount generally equal to 102% and 105% of the fair value of domestic and foreign securities, respectively, and records the related obligations to return the collateral in other liabilities and accrued expenses. The carrying value of these obligations approximates fair value because of their relatively short-term nature. The Company monitors the market value of securities loaned on a daily basis and obtains additional collateral as necessary under the terms of the agreements to mitigate counterparty credit risk. The Company maintains the right and ability to repossess the securities loaned on short notice.
Recognition of premium revenues and contract charges, and related benefits and interest credited
Property-liabilityProperty and casualty insurance premiums include premiums from personal lines policies, protection plans, other contracts (primarily finance and insurance products) and roadside assistance.
Personal lines insurance premiums are deferred and earned on a pro-rata basis over the terms of the policies, typically periods of six or twelve months.
Revenues related to protection plans, other contracts (primarily finance and insurance products) and roadside assistance are deferred and earned over the term of the contract in a manner that recognizes revenue as obligations under the contracts are performed. Revenues from these products are classified as premiums as the products are backed by insurance. Protection plans and finance and insurance premiums are recognized using a cost-based incurrence method over the term of the contracts, which is generally over one to five years. Roadside assistance premiums are recognized evenly over the
term of the contract as performance obligations are fulfilled.
The portion of premiums written applicable to the unexpired terms of the policies is recorded as unearned premiums. As of December 31, 2019, unearned premiums were $12.57 billion and $2.76 billion for Allstate Protection and Service Businesses, respectively. Premium installment receivables, net, represent premiums written and not yet collected, net of an allowance for uncollectible premiums. The Company regularly evaluates premium installment receivables and adjusts its valuation allowance as appropriate. The valuation allowance for uncollectible premium installment receivables was $84$90 million and $90$77 million as of December 31, 20162019 and 2015,2018, respectively.
Traditional life insurance products consist principally of products with fixed and guaranteed premiums and benefits, primarily term and whole life insurance products. Voluntary accident and health insurance products are expected to remain in force for an extended period and therefore are primarily classified as long-duration contracts. Premiums from these products are recognized as revenue when due from policyholders. Benefits are reflected in life and annuity contract benefits and recognized over the life of the policy in relation to premiums.
Immediate annuities with life contingencies, including certain structured settlement annuities, provide insurance protectionbenefits over a period that extends beyond the period during which premiums are collected. Premiums from these products are recognized as revenue when received at the inception of the contract. Benefits and expenses are recognized in relation to premiums.premiums with the establishment of a reserve. The change in reserve over time is recorded in contract benefits and primarily relates to accumulation at the discount rate and annuitant mortality. Profits from these policies come primarily from investment income, which is recognized over the life of the contract.
Interest-sensitive life contracts, such as universal life and single premium life, are insurance contracts whose terms are not fixed and guaranteed. The terms that may be changed include premiums paid by the contractholder, interest credited to the contractholder account balance and contract charges assessed against the contractholder account balance. Premiums from these contracts are reported as contractholder fund deposits. Contract charges consist of fees assessed against the contractholder account balance for the cost of insurance (mortality risk), contract administration and surrender of the contract prior to contractually
specified dates. These contract charges are recognized as revenue when assessed against the contractholder account balance. Life and annuity contractContract benefits include life-contingent benefit payments in excess of the contractholder account balance.
Contracts that do not subject the Company to significant risk arising from mortality or morbidity are referred to as investment contracts. Fixed annuities, including market value adjusted annuities, equity-indexed annuities and immediate annuities without life
Notes to Consolidated Financial Statements 2019 Form 10-K
contingencies, and funding agreements (primarily backing medium-term notes) are considered investment contracts. Consideration received for such contracts is reported as contractholder fund deposits. Contract charges for investment contracts consist of fees assessed against the contractholder account balance for maintenance, administration and surrender of the contract prior to contractually specified dates, and are recognized when assessed against the contractholder account balance.
Interest credited to contractholder funds represents interest accrued or paid on interest-sensitive life and investment contracts. Crediting rates for certain fixed annuities and interest-sensitive life contracts are adjusted periodically by the Company to reflect current market conditions subject to contractually guaranteed minimum rates. Crediting rates for indexed life and annuities and indexed funding agreements are generally based on a specified interest rate index or an equity index, such as the Standard & Poor’s 500 Index (“S&P 500”). Interest credited also includes amortization of DSI expenses. DSI is amortized into interest credited using the same method used to amortize DAC.
Contract charges for variable life and variable annuity products consist of fees assessed against the contractholder account balances for contract maintenance, administration, mortality, expense and surrender of the contract prior to contractually specified dates. Contract benefits incurred for variable annuity products include guaranteed minimum death, income, withdrawal and accumulation benefits. Substantially all of the Company’s variable annuity business is ceded through reinsurance agreements and the contract charges and contract benefits related thereto are reported net of reinsurance ceded.
Other revenue
Other revenue represents fees collected from policyholders relating to premium installment payments, commissions on sales of non-proprietary products, sales of identity protection services, fee-based services and other revenue transactions. Other revenue is recognized when performance obligations are fulfilled.
Deferred policy acquisition and sales inducement costs
Costs that are related directly to the successful acquisition of new or renewal property-liability insurance life insurancepolicies and investment contracts are deferred and recorded as DAC. These costs are principally agents’agency’s and brokers’ remuneration, premium taxes and certain underwriting expenses. DSI costs, which are deferred and recorded as other assets, relate to sales inducements offered on sales to new customers, principally on fixed annuity and interest-sensitive life contracts. These sales inducements are primarily in the form of additional credits to the customer’s account balance or enhancements to interest credited for a specified period which are in excess of the rates currently being credited to similar contracts without sales inducements. All other acquisition costs are expensed as incurred and included in operating costs and expenses. DAC associated with property-liability insurance is amortized into income as premiums are earned, typically over periods of six or twelve months, and is included in amortization of deferred policy acquisition costs. DAC associated with property-liability insurance is periodically reviewed for recoverability and adjusted if necessary. Future investment income is considered in determining the recoverability of DAC. Amortization of DAC associated with life insurance and investment contracts is included in amortization of deferred policy acquisition costs and is described in more detail below. DSI is amortized into income using the same methodology and assumptions as DAC and is included in interest credited to contractholder funds. All other acquisition costs are expensed as incurred and included in operating costs and expenses.
For property and casualty insurance, DAC is amortized into income as premiums are earned, typically over periods of six or twelve months for personal lines policies or generally one to five years for protection plans and other contracts (primarily related to finance and insurance products), and is included in amortization of deferred policy acquisition costs. DAC associated with property and casualty insurance is periodically reviewed for recoverability and adjusted if necessary. Future investment income is considered in determining the recoverability of DAC.
For traditional life and voluntary accident and health insurance, DAC is amortized over the premium paying period of the related policies in proportion to the estimated revenues on such business. Assumptions used in the amortization of DAC and reserve calculations are established at the time the policy is issued and are generally not revised during the life of the policy. Any deviations from projected business in force resulting from actual policy terminations differing from expected levels and any estimated premium deficiencies may result in a change to the rate of amortization in the period such events occur. Generally, the amortization periods for these policies approximates the estimated lives of the policies. The Company periodically reviews the recoverability of DAC for these policies on an aggregate basis using actual experience. Theexperience and current assumptions. Prior to fourth quarter 2017, the Company aggregatesevaluated traditional life insurance products and immediate annuities with life contingencies on an aggregate basis. In conjunction with the segment changes that occurred in one analysis,the fourth quarter of 2017, traditional life insurance products, immediate annuities with life contingencies, and voluntary accident and health insurance in a separate analysis.products are reviewed individually. If actual experience is significantlyand current assumptions are adverse compared to the original assumptions and a premium deficiency is determined to exist, any remaining unamortized DAC balance would be expensed to the extent not recoverable and the establishment of a premium deficiency reserve may be required.required for any remaining deficiency.
For interest-sensitive life insurance, and fixed annuities, DAC and DSI are amortized in proportion to the incidence of the total present value of gross profits, which includes both actual historical gross profits (“AGP”) and estimated future gross profits (“EGP”) expected to be earned over the estimated lives of the contracts. The amortization is net of interest on the prior period DAC balance using rates established at the inception of the contracts. Actual amortization periods generally range from 15-30 years; however, incorporating estimates of the rate of customer surrenders, partial withdrawals and deaths generally results in the majority of the DAC being amortized during the surrender charge period, which is typically 10-20 years for interest-sensitive life and 5-10 years for fixed annuities.life. The cumulativerate of DAC and DSI amortization is reestimated and adjusted by a cumulative charge or credit to income when there is a difference between the incidence of actual versus expected gross profits in a reporting period or when there is a change in total EGP. When DAC or DSI amortization or a component of gross profits for a quarterly period is potentially negative (which would result in an increase of the DAC
The Allstate Corporation 129
2019 Form 10-KNotes to Consolidated Financial Statements
or DSI balance) as a result of negative AGP, the specific facts and circumstances surrounding the potential negative amortization are considered to determine whether it is appropriate for recognition
in the consolidated financial statements. Negative amortization is only recorded when the increased DAC or DSI balance is determined to be recoverable based on facts and circumstances. Recapitalization of DAC and DSI is limited to the originally deferred costs plus interest.
AGP and EGP primarily consist of the following components: contract charges for the cost of insurance less mortality costs and other benefits; investment income and realized capital gains and losses less interest credited; and surrender and other contract charges less maintenance expenses. The principal assumptions for determining the amount of EGP are mortality, persistency, expenses, investment returns, including capital gains and losses on assets supporting contract liabilities, interest crediting rates to contractholders, and the effects of any hedges. For products whose supporting investments are exposed to capital losses in excess of the Company’s expectations which may cause periodic AGP to become temporarily negative, EGP and AGP utilized in DAC and DSI amortization may be modified to exclude the excess capital losses.
The Company performs quarterly reviews of DAC and DSI recoverability for interest-sensitive life and fixed annuity contracts in the aggregate using current assumptions. If a change in the amount of EGP is significant, it could result in the unamortized DAC or DSI not being recoverable, resulting in a charge which is included as a component of amortization of deferred policy acquisition costs or interest credited to contractholder funds, respectively.
The DAC and DSI balances presented include adjustments to reflect the amount by which the amortization of DAC and DSI would increase or decrease if the unrealized capital gains or losses in the respective product investment portfolios were actually realized. The adjustments are recorded net of tax in accumulated other comprehensive income.AOCI. DAC, DSI and deferred income taxes determined on unrealized capital gains and losses and reported in accumulated other comprehensive incomeAOCI recognize the impact on shareholders’ equity consistently with the amounts that would be recognized in the income statement on realized capital gains and losses.
Customers of the Company may exchange one insurance policy or investment contract for another offered by the Company, or make modifications to an existing investment, life or property-liabilityproperty and casualty contract issued by the Company. These transactions are identified as internal replacements for accounting purposes. Internal replacement transactions determined to result in replacement contracts that are substantially unchanged from the replaced contracts are accounted for as continuations of the replaced contracts. Unamortized DAC and DSI related to the replaced contracts continue to be deferred and amortized in connection with the replacement contracts. For interest-sensitive life and investment contracts, the EGP of the replacement contracts are
treated as a revision to the EGP of the replaced contracts in the determination of amortization of DAC and DSI. For traditional life and property-liabilityproperty and casualty insurance policies, any changes to unamortized DAC that result from replacement contracts are treated as prospective revisions. Any costs associated with the issuance of replacement contracts are characterized as maintenance costs and expensed as incurred. Internal replacement transactions determined to result in a substantial change to the replaced contracts are accounted for as an extinguishment of the replaced contracts, and any unamortized DAC and DSI related to the replaced contracts are eliminated with a corresponding charge to amortization of deferred policy acquisition costs or interest credited to contractholder funds, respectively.
The costs assigned to the right to receive future cash flows from certain business purchased from other insurers are also classified as DAC in the Consolidated Statements of Financial Position. The costs capitalized represent the present value of future profits expected to be earned over the lives of the contracts acquired. These costs are amortized as profits emerge over the lives of the acquired business and are periodically evaluated for recoverability. The present value of future profits was $53$39 million and $58$45 million as of December 31, 20162019 and 2015,2018, respectively. Amortization expense of the present value of future profits was $5$6 million, $8$2 million and $13$6 million in 2016, 20152019, 2018 and 2014,2017, respectively.
Reinsurance and Indemnification
ReinsuranceIn the normal course of business, the Company seeks to limit aggregate and single exposure to losses on large risks by purchasing reinsurance. The Company has also used reinsurance to effect the disposition of certain blocks of business. The Company also participates in various reinsurance mechanisms, including industry pools and facilities, which are backed by the financial resources of the property-liability insurance company market participants. The amounts reported as reinsurance recoverables include amounts billed to reinsurers on losses paid as well as estimates of amounts expected to be recovered from reinsurers on insurance liabilities and contractholder funds that have not yet been paid. Reinsurance recoverables on unpaid losses are estimated based upon assumptions consistent with those used in establishing the liabilities related to the underlying reinsured contracts. Insurance liabilities are reported gross of reinsurance recoverables. Reinsurance premiums are generally reflected in income in a manner consistent with the recognition of premiums on the reinsured contracts. For catastrophe coverage, the cost of reinsurance premiums is recognized ratably over the contract period to the extent coverage remains available. Reinsurance does not extinguish the Company’s primary liability under the policies written. Therefore, the Company regularly evaluates the financial condition of its reinsurers, including their activities with respect to claim settlement practices and commutations, and establishes allowances for uncollectible reinsurance as appropriate.
Indemnification The Company also participates in various indemnification mechanisms, including industry pools and facilities, which are backed by the financial resources of the property and casualty insurance company market participants. Indemnification recoverables are considered collectible based on the industry pool and facility enabling legislation.
The amounts reported as reinsurance and indemnification recoverables include amounts billed to reinsurers and indemnitors on losses paid as well as estimates of amounts expected to be recovered from reinsurers and indemnitors on insurance liabilities and contractholder funds that have not yet been paid. Reinsurance and indemnification recoverables on unpaid losses are estimated based upon assumptions consistent with those used in establishing the liabilities related to the underlying contracts. Insurance liabilities are reported gross of reinsurance and indemnification recoverables. Reinsurance and
Notes to Consolidated Financial Statements 2019 Form 10-K
indemnification premiums are generally reflected in income in a manner consistent with the recognition of premiums on the associated contracts. For catastrophe coverage, the cost of reinsurance premiums is recognized ratably over the contract period to the extent coverage remains available.
Reinsurance and indemnification recoverables are recognized as an offset to gross reserves for property and casualty insurance claims and claims expense.
Goodwill
Goodwill represents the excess of amounts paid for acquiring businesses over the fair value of the net assets acquired.acquired, less any impairment of goodwill recognized. The Company’s goodwill balances were $823 million and $396 million as of both December 31, 2016 and December 31, 2015 for the Allstate Protection segment and the Allstate Financial segment, respectively. The Company’s reporting units are equivalent to its reportingreportable segments, Allstate Protection, Service Businesses, Allstate Life and Allstate Financial. Benefits to which goodwill has been assigned. |
| | | | | | | | |
| Goodwill by reporting unit |
| | | As of December 31, |
| ($ in millions) | | 2019 | | 2018 |
| Allstate Protection | | $ | 810 |
| | $ | 810 |
|
| Service Businesses | | 1,464 |
| | 1,449 |
|
| Allstate Life | | 175 |
| | 175 |
|
| Allstate Benefits | | 96 |
| | 96 |
|
| Total | | $ | 2,545 |
| | $ | 2,530 |
|
Goodwill is recognized when acquired and allocated to reporting units based on which unit is expected to benefit from the synergies of the business combination. Goodwill is not amortized but is tested for impairment at least annually. The Company performs its annual goodwill impairment testing during the fourth quarter of each year based upon data as of the close of the third quarter. Goodwill impairment is measured and recognized as the amount by which a reporting unit’s carrying value, including goodwill, exceeds its fair value, not to exceed the carrying amount of goodwill allocated to the reporting unit. The Company also reviews goodwill for impairment whenever events or changes in circumstances, such as deteriorating or adverse market conditions, indicate that it is more likely than not that the carrying amount of the reporting unit including goodwill may exceed its implied fair value.
To estimate the fair value of itsthe reporting unit. The goodwill impairment analysis is performed at the reporting unit level.
In fourth quarter 2017, the Company adopted new reportable segments, which required the Company to evaluate goodwill, including the allocation of goodwill to any new reporting units on a relative fair value basis. The reallocation was computed using fair values for the Company may utilize a combination of widely accepted valuation techniques including a stock price and market capitalization analysis,goodwill reporting units determined using discounted cash flow (“DCF”) calculations and market to book multiples derived from a peer company priceanalysis. In conjunction with the reallocation of goodwill, the Company recognized $125 million of goodwill impairment related to earnings multiples analysis. The stock pricethe goodwill allocated to the Allstate Annuities reporting unit reflecting a market-based valuation. As of December 31, 2019 and market capitalization analysis takes into consideration2018, the quoted market price of the Company’s outstanding common stock and includes a control premium, derived from historical insurance industry acquisition activity, in determining the estimated fair value of the consolidated entity before allocating that fair valueCompany’s reporting units exceeded their carrying values.
Intangible assets
Intangible assets (reported in other assets) consist of capitalized costs primarily related to individual reporting units.acquired customer relationships, trade names and licenses, technology and other assets. The discounted cash flow analysis utilizes long term assumptions for revenue growth, capital growth, earnings projections including those usedestimated useful lives of customer relationships, technology and other intangible assets are generally 10 years, 5 years and 7 years, respectively. Intangible assets are carried at cost less accumulated amortization. Amortization expense is calculated using an accelerated amortization method. Amortization expense on intangible assets was $126 million, $105 million and $99 million in the Company’s strategic plan,2019, 2018 and an appropriate discount rate. The peer company price to earnings multiples analysis takes into consideration the price to earnings multiples of peer companies for each reporting unit2017, respectively.
|
| | | | |
| Amortization expense of intangible assets for the next five years and thereafter |
| ($ in millions) | | |
| 2020 | | $ | 109 |
|
| 2021 | | 91 |
|
| 2022 | | 74 |
|
| 2023 | | 60 |
|
| 2024 | | 45 |
|
| Thereafter | | 64 |
|
| Total amortization | | $ | 443 |
|
Accumulated amortization on intangible assets was $633 million and estimated income from the Company’s strategic plan.
Goodwill impairment evaluations indicated no impairment$572 million as of December 31, 20162019 and 2018, respectively. Trade names and licenses are considered to have an indefinite useful life and are reviewed for impairment at least annually or 2015.more frequent if circumstances arise that indicate an impairment may have occurred. An impairment is recognized if the carrying amount of the asset exceeds its estimated fair value.
|
| | | | | | | | |
| Intangible assets by type |
| | | As of December 31, |
| ($ in millions) | | 2019 | | 2018 |
| Customers relationships | | $ | 419 |
| | $ | 530 |
|
| Trade names and licenses | | 38 |
| | 143 |
|
| Technology and other | | 24 |
| | 40 |
|
| Total | | $ | 481 |
| | $ | 713 |
|
During second quarter 2019, the Company made the decision to phase-out the use of the SquareTrade trade name in the United States and sell consumer protection plans under the Allstate Protection Plans name. The SquareTrade trade name will continue to be used outside of the United States. The change required an impairment evaluation of the indefinite-lived intangible asset recognized in the Service Businesses segment for SquareTrade’s trade name recorded when SquareTrade was acquired in 2017.
During fourth quarter 2019, the Company made the decision to integrate Esurance into the Allstate brand as part of the Transformative Growth Plan. This required an impairment evaluation of the indefinite-lived intangible asset recognized in the Allstate Protection segment for the Esurance trade name recorded when Esurance was acquired in 2011.
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2019 Form 10-KNotes to Consolidated Financial Statements
As a result of these actions, the Company recognized total impairment charges of $106 million pre-tax during 2019.
Property and equipment
Property and equipment is carried at cost less accumulated depreciation. Included in property and equipment are capitalized costs related to computer software licenses and software developed for internal use. These costs generally consist of certain external payroll and payroll related costs. Property and equipment depreciation is calculated using the straight-line method over the estimated useful lives of the assets, generally 3 to 10 years for equipment and 40 years for real property. Depreciation expense is reported in operating costs and expenses. Accumulated depreciation on property and equipment was $2.16$2.60 billion and $2.09$2.41 billion as of December 31, 20162019 and 2015,2018, respectively. Depreciation expense on property and equipment was $267$326 million, $255$299 million and $228$290 million in 2016, 20152019, 2018 and 2014,2017, respectively. The Company reviews its property and equipment for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Income taxes
The income tax provision is calculatedIncome taxes are accounted for using the asset and liability method under the liability method. Deferredwhich deferred tax assets and liabilities are recorded based on the differencerecognized for temporary differences between the financial statementreporting and tax bases of assets and liabilities at the enacted tax rates. The principal assets and liabilities giving rise to such differences are DAC, unearned premiums, investments (including unrealized capital gains and losseslosses) and insurance reserves. A deferred tax asset valuation allowance is established when thereit is uncertainty thatmore likely than not such assets will not be realized. The Company recognizes interest expense related to income tax matters in income tax expense and penalties in other expense.
Reserve for property-liabilityproperty and casualty insurance claims and claims expense
The reserve for property-liabilityproperty and casualty insurance claims and claims expense is the estimate of amounts necessary to settle all reported and unreported incurred claims for the ultimate cost of insured property-liabilityproperty and casualty losses, based upon the facts of each case and the Company’s experience with similar cases. Estimated amounts of salvage and subrogation are deducted from the reserve for claims and claims expense. The establishment of appropriate reserves, including reserves for catastrophe losses, is an inherently uncertain and complex process. Reserve estimates are primarily derived using an actuarial estimation process in which historical loss patterns are applied to actual paid losses and reported losses (paid losses plus individual case reserves established by claim adjusters) for an accident or report year to create an estimate of how losses are likely to develop over time. Development factors are calculated quarterly and periodically throughout the year for data elements such as claims reported and settled, paid losses, and paid losses combined with case reserves. The
historical development patterns for these data elements are used as the assumptions to calculate reserve estimates, including the reserves for reported and unreported claims. Reserve estimates are regularly reviewed and updated, using the most current information available. Any resulting reestimates are reflected in current results of operations.
Reserve for life-contingent contract benefits
The reserve for life-contingent contract benefits payable under insurance policies, including traditional life insurance, life-contingent immediate annuities and voluntary accident and health insurance products, is computed on the basis of long-term actuarial assumptions of future investment yields, mortality, morbidity, policy terminations and expenses. These assumptions, which for traditional life insurance are applied using the net level premium method, include provisions for adverse deviation and generally vary by characteristics such as type of coverage, year of issue and policy duration. The assumptions are established at the time the policy is issued and are generally not changed during the life of the policy. The Company periodically reviews the
adequacy of reserves for these policies on an aggregate basis using actual experience.experience and current assumptions. If actual experience is significantlyand current assumptions are adverse compared to the original assumptions and a premium deficiency is determined to exist, any remaining unamortized DAC balance would be expensed to the extent not recoverable and the establishment of a premium deficiency reserve may be required.required for any remaining deficiency. In 2019 and 2018, the Company’s reviews concluded that no premium deficiency adjustments were necessary. Prior to fourth quarter 2017, the Company evaluated traditional life insurance products and immediate annuities with life contingencies on an aggregate basis. In conjunction with the Company’s segment changes that occurred in the fourth quarter of 2017, traditional life insurance products, immediate annuities with life contingencies, and voluntary accident and health insurance are reviewed individually. The Company also reviews these policies on an aggregate basis for circumstances where projected profits would be recognized in early years followed by projected losses in later years. If this circumstance exists, the Company will accrue a liability, during the period of profits, to offset the losses at such time as the future losses are expected to commence using a method updated prospectively over time. To the extent that unrealized gains on fixed income securities would result in a premium deficiency if those gains were realized, the related increase in reserves for certain immediate annuities with life contingencies is recorded net of tax as a reduction of unrealized net capital gains included in accumulated other comprehensive income.AOCI.
Contractholder funds
Contractholder funds represent interest-bearing liabilities arising from the sale of products such as interest-sensitive life insurance and fixed annuities and funding agreements.annuities. Contractholder funds primarily comprise cumulative deposits received and interest credited to the contractholder less cumulative contract benefits, surrenders, withdrawals maturities and contract charges for
Notes to Consolidated Financial Statements 2019 Form 10-K
mortality or administrative expenses. Contractholder funds also include reserves for secondary guarantees on interest-sensitive life insurance and certain fixed annuity contracts and reserves for certain guarantees on reinsured variable annuity contracts.
Pension and other postretirement remeasurement gains and losses
Pension and other postretirement gains and losses represent the remeasurement of projected benefit obligation and plan assets, which are immediately recognized in earnings and are referred to as pension and other postretirement remeasurement gains and losses on the Consolidated Statements of Operations. The Company’s policy is to remeasure its pension and postretirement plans on a quarterly basis.
Differences between expected and actual returns and changes in assumptions affect our pension and other postretirement obligations, plan assets and expenses.
The primary factors contributing to pension and postretirement remeasurement gains and losses are: |
|
• Changes in the discount rate used to value pension and postretirement obligations as of the measurement date |
• Differences between the expected and the actual return on plan assets |
• Changes in demographic assumptions, including mortality and participant experience |
Pension and other postretirement service cost, interest cost, expected return on plan assets and amortization of prior service credits are allocated to the Company’s reportable segments. The pension and other postretirement remeasurement gains and losses are reported in the Corporate and Other segment.
Separate accounts
Separate accounts assets are carried at fair value. The assets of the separate accounts are legally segregated and available only to settle separate accounts contract obligations. Separate accounts liabilities represent the contractholders’ claims to the related assets and are carried at an amount equal to the separate accounts assets. Investment income and realized capital gains and losses of the separate accounts accrue directly to the contractholders and therefore are not included in the Company’s Consolidated Statements of Operations. Deposits to and surrenders and withdrawals from the separate accounts are reflected in separate accounts liabilities and are not included in consolidated cash flows.
Absent any contract provision wherein the Company provides a guarantee, variable annuity and variable life insurance contractholders bear the investment risk that the separate accounts’ funds may not meet their stated investment objectives. Substantially all of the Company’s variable annuity business was reinsured beginning in 2006.
Legal contingencies
The Company reviews its lawsuits, regulatory inquiries, and other legal proceedings on an ongoing basis. The Company establishes accruals for such
matters at management’s best estimate when the Company assesses that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company’s assessment of whether a loss is reasonably possible or probable is based on its assessment of the ultimate outcome of the matter following all appeals. The Company does not include potential recoveries in its estimates of reasonably possible or probable losses. Legal fees are expensed as incurred.
Long-term debt
Long-term debt includes senior notes, senior debentures, subordinated debentures and junior subordinated debentures issued by the Corporation. Unamortized debt issuance costs are reported in long-term debt and are amortized over the expected period the debt will remain outstanding.
Deferred Employee Stock Ownership Plan (“ESOP”) expense
Deferred ESOP expense represents the remaining unrecognized cost of shares acquired by the Allstate ESOP to pre-fund a portion of the Company’s contribution to the Allstate 401(k) Savings Plan.
Equity incentive plans
The Company has equity incentive plans under which the Company grants nonqualified stock options, restricted stock units and performance stock awards (“equity awards”) to certain employees and directors of the Company. The Company measures the fair value of equity awards at the award date and recognizes the expense over the shorter of the period in which the requisite service is rendered or retirement eligibility is attained. The expense for performance stock awards is adjusted each period to reflect the performance factor most likely to be achieved at the end of the performance period. The Company uses a binomial lattice model to determine the fair value of employee stock options.
Leases
The Company has certain operating leases for office facilities, computer and office equipment, and vehicles. The Company’s leases have remaining lease terms of 1 year to 10 years, some of which include options to extend the leases for up to 20 years, and some of which include options to terminate the leases within 60 days.
The Company determines if an arrangement is a lease at inception. Leases with an initial term less than one year are not recorded on the balance sheet and the lease costs for these leases are recorded as an expense on a straight-line basis over the lease term. Operating leases with terms greater than one year result in a lease liability recorded in other liabilities with a corresponding right-of-use (“ROU”) asset recorded in other assets. As of December 31, 2019, the Company had $586 million in lease liabilities and $483 million in ROU assets.
Operating lease liabilities are recognized at the commencement date based on the present value of future minimum lease payments over the lease term. ROU assets are recognized based on the corresponding lease liabilities adjusted for qualifying initial direct costs, prepaid or accrued lease payments and unamortized lease incentives. As most of the Company’s leases do not disclose the implicit interest rate, the Company uses collateralized incremental borrowing rates based on information available at
The Allstate Corporation 133
2019 Form 10-KNotes to Consolidated Financial Statements
lease commencement when determining the present value of future lease payments. The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease. Lease terms may include options to extend or terminate the lease which are incorporated into the Company’s measurements when it is reasonably certain that the Company will exercise the option.
Operating lease costs are recognized on a straight-line basis over the lease term and include interest expense on the lease liability and amortization of the ROU asset. Variable lease costs are expensed as incurred and include maintenance costs and real estate taxes. Lease costs are reported in operating costs and expenses and totaled$171 million, including $30 million of variable lease costs in 2019.
|
| | | |
| Other information related to operating leases |
| | As of December 31, 2019 |
| Weighted average remaining lease term (years) | | 6 |
|
| Weighted average discount rate | | 3.15 | % |
|
| | | | |
| Maturity of lease liabilities |
| ($ in millions) | | Operating leases |
| 2020 | | $ | 133 |
|
| 2021 | | 121 |
|
| 2022 | | 102 |
|
| 2023 | | 84 |
|
| 2024 | | 67 |
|
| Thereafter | | 137 |
|
| Total lease payments | | $ | 644 |
|
| Less: interest | | (58 | ) |
| Present value of lease liabilities | | $ | 586 |
|
Off-balance sheet financial instruments
Commitments to invest, commitments to purchase private placement securities, commitments to extend loans, financial guarantees and credit guarantees have off-balance sheet risk because their contractual amounts are not recorded in the Company’s Consolidated Statements of Financial Position (see NoteNotes 7 and Note 14).
Consolidation of variable interest entities (“VIEs”)
The Company consolidates VIEs when it is the primary beneficiary. A primary beneficiary is the variable interest holder in a VIE with both the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the VIE.
Foreign currency translation
The local currency of the Company’s foreign subsidiaries is deemed to be the functional currency of the country in which these subsidiaries operate. The financial statements of the Company’s foreign subsidiaries are translated into U.S. dollars at the exchange rate in effect at the end of a reporting period for assets and liabilities and at average exchange rates during the period for results of operations.
The unrealized gains and losses from the translation of the net assets are recorded as unrealized foreign currency translation adjustments and included in accumulated other comprehensive income.AOCI. Changes in unrealized foreign currency translation adjustments are included in other comprehensive income.OCI. Gains and losses from foreign currency transactions are reported in operating costs and expenses and have not been material.
Notes to Consolidated Financial Statements 2019 Form 10-K
Earnings per common share
Basic earnings per common share is computed using the weighted average number of common shares outstanding, including vested unissued participating restricted stock units. Diluted earnings per common share is computed using the weighted average number of common and dilutive potential common shares outstanding.
For the Company, dilutive potential common shares consist of outstanding stock options and unvested non-participating restricted stock units and contingently issuable performance stock awards.
The computation of basic and diluted earnings per common share for the years ended December 31 is presented in the following table.
|
| | | | | | | | | | | |
| ($ in millions, except per share data) | 2016 | | 2015 | | 2014 |
| Numerator: | | | | | |
| Net income | $ | 1,877 |
| | $ | 2,171 |
| | $ | 2,850 |
|
| Less: Preferred stock dividends | 116 |
| | 116 |
| | 104 |
|
Net income applicable to common shareholders (1) | $ | 1,761 |
| | $ | 2,055 |
| | $ | 2,746 |
|
| | | | | | |
| Denominator: | | | | | |
| Weighted average common shares outstanding | 372.8 |
| | 401.1 |
| | 431.4 |
|
| Effect of dilutive potential common shares: | | | | | |
| Stock options | 3.2 |
| | 4.0 |
| | 4.7 |
|
| Restricted stock units (non-participating) and performance stock awards | 1.3 |
| | 1.7 |
| | 2.1 |
|
| Weighted average common and dilutive potential common shares outstanding | 377.3 |
| | 406.8 |
| | 438.2 |
|
| | | | | | |
| Earnings per common share – Basic | $ | 4.72 |
| | $ | 5.12 |
| | $ | 6.37 |
|
| Earnings per common share – Diluted | $ | 4.67 |
| | $ | 5.05 |
| | $ | 6.27 |
|
_____________________________
| |
(1)
| Net income applicable to common shareholders is net income less preferred stock dividends. |
The effect of dilutive potential common shares does not include the effect of options with an anti-dilutive effect on earnings per common share because their exercise prices exceed the average market price of Allstate common shares during the period or for which the unrecognized compensation cost would have an anti-dilutive effect. Options to purchase 3.8 million, 2.2 million and 3.0 million Allstate common shares, with exercise prices ranging from $53.91 to $71.29, $57.98 to $71.29 and $49.96 to $67.61, were outstanding in 2016, 2015 and 2014, respectively, but were not included in the computation of diluted earnings per common share in those years.
|
| | | | | | | | | | | | |
| Computation of basic and diluted earnings per common share |
| | | For the years ended December 31, |
| ($ in millions, except per share data) | | 2019 | | 2018 | | 2017 |
| Numerator: | | | | | | |
| Net income | | $ | 4,847 |
| | $ | 2,160 |
| | $ | 3,554 |
|
| Less: Preferred stock dividends | | 169 |
| | 148 |
| | 116 |
|
Net income applicable to common shareholders (1) | | $ | 4,678 |
| | $ | 2,012 |
| | $ | 3,438 |
|
| | | | | | | |
| Denominator: | | | | | | |
| Weighted average common shares outstanding | | 328.2 |
| | 347.8 |
| | 362.0 |
|
| Effect of dilutive potential common shares: | | | | | | |
| Stock options | | 3.2 |
| | 3.6 |
| | 4.3 |
|
| Restricted stock units (non-participating) and performance stock awards | | 2.1 |
| | 1.8 |
| | 1.5 |
|
| Weighted average common and dilutive potential common shares outstanding | | 333.5 |
| | 353.2 |
| | 367.8 |
|
| | | | | | | |
| Earnings per common share – Basic | | $ | 14.25 |
| | $ | 5.78 |
| | $ | 9.50 |
|
| Earnings per common share – Diluted | | $ | 14.03 |
| | $ | 5.70 |
| | $ | 9.35 |
|
| | | | | | | |
| Anti-dilutive options excluded from diluted earnings per common share | | 3.7 |
| | 2.0 |
| | 1.5 |
|
Adopted accounting standards
Accounting for Share-Based Payments WhenLeases Effective January 1, 2019 the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period
In June 2014, theCompany adopted new Financial Accounting Standards Board (“FASB”) issuedguidance related to accounting for leases. Upon adoption of the guidance under the optional transition method that allows application of the transition provisions at the adoption date instead of the earliest period presented, the Company recorded a $585 million lease liability equal to the present value of lease payments and a $488 million ROU asset, which is the corresponding lease liability adjusted for qualifying accrued lease payments. The lease liability and ROU asset were reported as part of other liabilities and other assets on the Consolidated Statements of Financial Position. The impact of these changes at adoption had no impact on net income or shareholders’ equity. Prior periods were not restated under the new standard. The Company utilized the package of practical expedients permitted under the transition guidance which, clarifies thatamong other things, did not require reassessment of existing contracts for the existence of a performance target that affects vesting and could be achieved after the requisite service period should be treated as a performance condition and not reflected in estimating the grant-date fair valuelease or reassessment of the award. Compensation costs should reflect the amount attributable to the periods for which the requisite service has been rendered. Total compensation expense recognized during and after the requisite service period (which may differ from the vesting period) should reflect the number of awards that are expected to vest and shouldexisting lease classifications.
be adjusted to reflect the number of awards that ultimately vest. The Company’s existing accounting policy for performance targets that affect the vesting of share-based payment awards was consistent withUpon adoption, the new guidance and as suchrequired sellers in a sale-leaseback transaction to recognize the adoption asentire gain from the sale of an underlying asset at the time the sale is recognized rather than over the leaseback term. The carrying value of unrecognized gains on sale-leaseback transactions executed prior to January 1, 20162019 was $21 million, after-tax, and was recorded as an increase to retained income at the date of adoption.
Accounting for Hedging Activities Effective January 1, 2019 the Company adopted new FASB guidance intended to better align hedge accounting with an organization’s risk management activities. The new guidance expands hedge accounting to nonfinancial and financial risk components and revises the measurement methodologies. Separate presentation of hedge ineffectiveness is eliminated with the intention to provide greater transparency to the full impact of hedging by requiring presentation of the results of the hedged item and hedging instrument in a single financial statement line item. In addition, the amendments were designed to reduce complexity by simplifying hedge effectiveness testing. The adoption had no impact on the Company’s results of operations or financial position.
Amendments to the Consolidation Analysis
In February 2015, the FASB issued guidance affecting the consolidation evaluation for limited partnerships and similar entities, fees paid to a decision maker or service provider, and variable interests in a variable interest entity held by related parties of the reporting enterprise. The adoption of this guidance as of January 1, 2016 did not have a material impact on the Company’s results of operations or financial position.
Disclosures about Short-Duration Contracts
In May 2015, the FASB issued guidance requiring expanded disclosures for insurance entities that issue short-duration contracts. The expanded disclosures are designed to provide additional insight into an insurance entity’s significant estimates made in measuring the liability for unpaid claims and claim adjustment expenses. The disclosures include information about incurred and paid claims development by accident year, on a net basis after reinsurance, for the number of years claims incurred typically remain outstanding, not to exceed ten years. Each period presented in the disclosure about claims development that precedes the current reporting period is considered required supplementary information. The expanded disclosures also include information about significant changes in methodologies and assumptions, a reconciliation of incurred and paid claims development to the carrying amount of the liability for unpaid claims and claim adjustment expenses, the total amount of incurred but not reported liabilities plus expected development, the incidence of claims including the methodology used to determine the incidence of claims, and claim duration. The guidance is effective for annual periods beginning after December 15, 2015, and interim periods beginning after December 15, 2016, and is to be applied retrospectively. The new guidance affects disclosures only and therefore, the adoption as of December 31, 2016 had no impact on the Company’s results of operations or financial position.
Pending accounting standards
Revenue from Contracts with Customers
In May 2014, the FASB issued guidance which revises the criteria for revenue recognition. Insurance contracts are excluded from the scope of the new guidance. Under the guidance, the transaction price is attributed to underlying performance obligations in the contract and revenue is recognized as the entity satisfies the performance obligations and transfers control of a good or service to the customer. Incremental costs of obtaining a contract may be capitalized to the extent the entity expects to recover those costs. The guidance is effective for reporting periods beginning after December 15, 2017 and is to be applied retrospectively. The Company is in the process of evaluating the impact of adoption, which is not expected to be material to the Company’s results of operations or financial position.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued guidance requiring equity investments, including equity securities and limited partnership interests, that are not accounted for under the equity method of accounting or result in consolidation to be measured at fair value with changes in fair value recognized in net income. Equity investments without readily determinable fair values may be measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. When a qualitative assessment of equity investments without readily determinable fair values indicates that impairment exists, the carrying value is required to be adjusted to fair value, if lower. The guidance clarifies that an entity should evaluate the realizability of a deferred tax asset related to available-for-sale fixed income securities in combination with the entity’s other deferred tax assets. The guidance also changes certain disclosure requirements. The guidance is effective for interim and annual periods beginning after December 15, 2017, and is to be applied through a cumulative-effect adjustment to beginning retained income as of the beginning of the period of adoption. The new guidance related to equity investments without readily determinable fair values is to be applied prospectively as of the date of adoption. The Company is in the process of evaluating the impact of adoption. The most significant impacts, using values as of December 31, 2016, are expected to be the change in accounting for equity securities where $509 million of pre-tax unrealized net capital gains would be reclassified from accumulated other comprehensive income to retained income and cost method limited partnership interests (excluding limited partnership interests accounted for on a cost recovery basis) where the carrying value would increase by approximately $178 million, pre-tax, with the adjustment recorded in retained income.
Accounting for Leases
In February 2016, the FASB issued guidance that revises the accounting for leases. Under the new guidance, lessees will be required to recognize a right-of-use asset and lease liability for all leases other than those that meet the definition of a short-term lease. The lease liability will be equal to the present value of lease payments. A right-of-use asset will be based on the lease liability adjusted for qualifying initial direct costs. The expense of operating leases under the new guidance will be recognized in the income statement on a straight-line basis after combining the lease expense components (interest expense on the lease liability
and amortization of the right-of-use asset) over the term of the lease. For finance leases, the expense components are computed separately and produce greater up-front expense compared to operating leases as interest expense on the lease liability is higher in early years and the right-of-use asset is amortized on a straight-line basis consistent with operating leases. Lease classification will be based on criteria similar to those currently applied. The accounting model for lessors will be similar to the current model with modifications to reflect definition changes for components such as initial direct costs. Lessors will continue to classify leases as operating, direct financing, or sales-type. The guidance is effective for reporting periods beginning after December 15, 2018 using a modified retrospective approach applied at the beginning of the earliest period presented. The Company is in the process of evaluating the impact of adoption, which is not expected to be material to the Company’s results of operations or financial position.
Employee Share-Based Payment Accounting
In March 2016, the FASB issued guidance to amend the accounting for share-based payments. Under the new guidance, reporting entities will be required to recognize all tax effects related to share-based payments at settlement (or expiration) through the income statement and will no longer be permitted to recognize excess tax benefits and tax deficiencies in additional paid in capital. The change will be applied on a modified retrospective basis, with a cumulative effect adjustment to beginning retained income. In addition, all tax-related cash flows resulting from share-based payments will be reported as operating activities on the statement of cash flows, with either prospective or retrospective transition permitted. The new guidance will permit employers to withhold shares upon settlement of an award to satisfy the employer’s tax withholding requirement (up to the employee’s maximum individual statutory tax rate) without causing liability classification of the award. The new guidance clarifies that all cash payments made to taxing authorities on an employee’s behalf for withheld shares should be presented as financing activities on the statement of cash flows. Also under the new guidance, reporting entities are permitted to make an accounting policy election to estimate forfeitures or recognize them when they occur. If elected, the change to recognize forfeitures when they occur must be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to beginning retained income. The new guidance is effective for reporting periods beginning after December 15, 2016. The Company is in the process of evaluating the impact of adoption, which is not expected to be material to the Company’s results of operations or financial position.
Transition to Equity Method Accounting
In March 2016, the FASB issued guidance amending the accounting requirements for transitioning to the equity method of accounting (“EMA”), including a transition from the cost method. The guidance requires the cost of acquiring an additional interest in an investee to be added to the existing carrying value to establish the initial basis of the EMA investment. Under the new guidance, no retroactive adjustment is required when an investment initially qualifies for EMA treatment. The guidance is effective for interim and annual periods beginning after December 15, 2016, and is to be applied prospectively. The guidance will principally affect the future accounting for investments that qualify for EMA after application of the cost method of accounting. The Company is in the process of evaluating the impact of adoption, which is not expected to be material to the Company’s results of operations or financial position.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued guidance which revises the credit loss recognition criteria for certain financial assets measured at amortized cost.cost, including reinsurance recoverables. The new guidance replaces the existing incurred loss recognition model with an expected loss recognition model. The objective of the expected credit loss model is for thea reporting entity to recognize its estimate of expected credit losses for affected financial assets in a valuation allowance that when deducted from the amortized cost basis of the related financial assets that results in presenting thea net carrying value of the financial assets at the amount expected to be collected. The reporting
The Allstate Corporation 135
2019 Form 10-KNotes to Consolidated Financial Statements
entity must consider all available relevant information available when estimating expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts over the contractual life of an asset. Financial assets may be evaluated individually or on a pooled basis when they share similar risk characteristics. The measurement of credit losses for available-for-sale debt securities measured at fair value is not affected except that credit losses recognized are limited to the amount by which fair value is below amortized cost and the carrying value adjustment is recognized through a valuation allowance which may change over time but once recorded cannot subsequently be reduced to an allowance and not as a direct write-down.amount below zero. The guidance is effective for interim and annualreporting periods beginning after December 15, 2019, and for most affected instruments must be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to beginning retained income.
The Company’s implementation activities, which are being finalized, include review and validation of models, methodologies, data inputs and assumptions to be used to estimate expected credit losses. The implementation impacts relate primarily to the Company’s commercial mortgage loans, bank loans and reinsurance recoverables and are dependent on economic conditions and judgments at the date of adoption. Based on the economic conditions at the date of adoption and the balances at the reporting date, the Company isestimates the application of the current expected credit loss requirements will result in total valuation allowances for credit losses of approximately $300 million, as of the date of adoption. After consideration of existing valuation allowances maintained prior to adoption of the new guidance, the Company expects to recognize a cumulative-effect decrease in retained income of approximately $100 million, after-tax, to adjust existing valuation allowances to the basis in the processnew requirements.
Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued amendments to modify certain disclosure requirements for defined benefit plans. Disclosure additions relate to the weighted-average interest crediting rates for cash balance plans and other plans with interest crediting rates and explanations for significant gains and losses related to changes in the benefit obligation during the reporting period. Disclosures to be removed include those that identify amounts that are expected to be reclassified out of evaluatingAOCI and into the income statement in the coming year and the anticipated impact of adoption.a one-percentage point change in assumed health care cost trend rate on service and interest cost and on the accumulated benefit obligation. The amendments are effective for annual reporting periods beginning after December 15, 2020. The impacts of adoption are to the Company’s disclosures only.
Goodwill ImpairmentAccounting for Long-Duration Insurance Contracts
In January 2017,August 2018, the FASB issued guidance revising the accounting for certain long-duration insurance
contracts. The new guidance introduces material changes to the measurement of the Company’s reserves for traditional life, life-contingent immediate annuities and certain voluntary accident and health insurance products.
Under the new guidance, measurement assumptions, including those for mortality, morbidity and policy terminations, will be required to be reviewed and updated at least annually. The effect of updating measurement assumptions other than the discount rate are required to be measured on a retrospective basis and reported in net income. In addition, reserves under the new guidance are required to be discounted using an upper medium grade fixed income instrument yield required to be updated through OCI at each reporting date. Current GAAP requires reserves to utilize assumptions set at policy issuance unless updated current assumptions indicate that recorded reserves are deficient.
The new guidance also requires DAC and other capitalized balances currently amortized in proportion to premiums or gross profits to be amortized on a constant level basis over the expected term for all long-duration insurance contracts. DAC will not be subject to loss recognition testing but will be reduced when actual lapse experience exceeds expected experience. The new guidance will no longer require adjustments to DAC and deferred sales inducement costs (“DSI”) related to unrealized gains and losses on investment securities supporting the related business.
All market risk benefit product features will be measured at fair value with changes in fair value recorded in net income with the exception of changes in the fair value attributable to changes in the reporting entity’s own credit risk, which are required to be recognized in OCI. Substantially all of the Company’s market risk benefits are reinsured and therefore these impacts are not expected to be material to the Company.
The new guidance will be included in the comparable financial statements issued in reporting periods beginning after December 15, 2021, thereby requiring restatement of prior periods presented. Early adoption is permitted. The new guidance will be applied to affected contracts and DAC on the basis of existing carrying amounts at the earliest period presented or retrospectively using actual historical experience as of contract inception. The new guidance for market risk benefits is required to be adopted retrospectively.
The Company is evaluating the anticipated impacts of applying the new guidance to both retained income and AOCI. The requirements of the new guidance represent a material change from existing GAAP, however, the underlying economics of the business and related cash flows are unchanged. The Company is evaluating the specific impacts of adopting the new guidance and anticipates the financial statement impact of adopting the new guidance to be material, largely attributed to the impact of transitioning to a discount rate based on an upper-medium grade fixed income investment yield
Notes to Consolidated Financial Statements 2019 Form 10-K
and updates to mortality assumptions. The Company expects the most significant impacts will occur in the run-off annuity segment. The revised accounting for DAC will be applied prospectively using the new model and any DAC effects existing in AOCI as a result of applying existing GAAP at the date of adoption will be reversed.
Simplifications to the Accounting for Income Taxes
In December 2019, the FASB issued amendments to simplify the accounting for goodwill impairment that removesincome taxes. The amendments eliminate certain exceptions in the second stepexisting guidance including those related to intraperiod tax allocation and deferred tax liability recognition when changes in control of equity method and foreign subsidiary investments occur. The amendments require recognition of the goodwill impairment testeffect of an enacted change in tax laws or rates in the interim period that requiresincludes the enactment date, provide an option to not allocate taxes to a hypothetical purchase price allocation. Under the new guidance, goodwill impairment will be measured and recognizedlegal entity that is not subject to tax as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill allocated to the reporting unit.well as other minor changes. The revised guidance does not affect the reporting entity’s ability to first assess qualitative factors by reporting unit to determine whether it is necessary to perform the quantitative goodwill impairment test. The guidance isamendments are effective for goodwill impairment tests in fiscal yearsinterim and annual reporting periods beginning after December 15, 2019, with early adoption
permitted.2020. The new guidance is tospecifies which amendments should be applied prospectively, retrospective to all periods presented or on a prospectivemodified retrospective basis withthrough a cumulative-effect adjustment to retained income as of the effects, if any, recognized in net income inbeginning of the periodyear of adoption. The impact of adoption is not expected to be material to the Company’s results of operations or financial position.
Change in accounting principle
The Company upon adoptionchanged its accounting principle for recognizing actuarial gains and losses and expected return on plan assets for its pension and other postretirement plans to a more preferable policy under U.S. GAAP. Under the new principle, remeasurement of
projected benefit obligation and plan assets are immediately recognized in earnings and are referred to as pension and other postretirement remeasurement gains and losses on the Consolidated Statements of Operations. Previously, actuarial gains and losses and differences between the expected and actual returns on plan assets were recognized as a component of AOCI, and were subject to amortization into earnings in future periods. This change has been applied on a retrospective basis. The Company’s policy is dependent uponto remeasure its pension and postretirement plans on a quarterly basis.
The Company also changed its policy for recognizing expected returns on plan assets by eliminating the excess, if any,permitted accounting practice allowing the five-year smoothing of carryingequity returns and moving to an unadjusted fair value method.
The Company believes that immediately recognizing remeasurement of projected benefit obligation and plan assets in earnings is preferable as it provides greater transparency of the Company’s reporting units over their respectiveeconomic obligations in accounting results and better aligns with fair values,value accounting principles by recognizing the effects of economic and interest rate changes on pension and other postretirement plan assets and liabilities in the year in which the gains and losses are incurred. These changes have been applied on a measureretrospective basis and as of January 1, 2017 resulted in a cumulative effect decrease to retained income of $1.58 billion, with a corresponding offset to AOCI and had 0 impact on total shareholders’ equity.
The impacts of the adjustments on the financial statements are summarized in the following tables.
|
| | | | | | | | | | | | |
| Consolidated Statements of Operations |
| | | Previous accounting principle | | Impact of change (1) | | As reported |
| ($ in millions, except per share data) | | Year Ended December 31, 2019 |
| Property and casualty insurance claims and claims expense | | $ | 24,074 |
| | $ | (98 | ) | | $ | 23,976 |
|
| Operating costs and expenses | | 5,752 |
| | (62 | ) | | 5,690 |
|
| Pension and other postretirement remeasurement gains and losses | | — |
| | 114 |
| | 114 |
|
| Restructuring and related charges | | 41 |
| | — |
| | 41 |
|
| Total costs and expenses | | 38,638 |
| | (46 | ) | | 38,592 |
|
| Income from operations before income tax expense | | 6,043 |
| | 46 |
| | 6,089 |
|
| Income tax expense | | 1,232 |
| | 10 |
| | 1,242 |
|
| Net income | | 4,811 |
| | 36 |
| | 4,847 |
|
| Net income applicable to common shareholders | | $ | 4,642 |
| | $ | 36 |
| | $ | 4,678 |
|
| | | | | | | |
| Earnings per common share: | | | | | | |
| Net income applicable to common shareholders per common share - Basic | | $ | 14.14 |
| | $ | 0.11 |
| | $ | 14.25 |
|
| Net income applicable to common shareholders per common share - Diluted | | $ | 13.92 |
| | $ | 0.11 |
| | $ | 14.03 |
|
(1) The Company merged two of its pension plans, which had no impact on its financial statements as the Company remeasures pension plan assets and projected benefit obligations immediately in earnings on a quarterly basis. However, the plan merger increased the impact of change by $41 million for 2019, reflecting the shorter amortization period for losses deferred in AOCI from one of the merged plans that is not currently determinable.was required as part of the merger.
The Allstate Corporation 137
2019 Form 10-KNotes to Consolidated Financial Statements
|
| | | | | | | | | | | | |
| Consolidated Statements of Operations |
| | | Previous accounting principle | | Change in accounting principle | | As adjusted |
| | | Year Ended December 31, 2018 |
| Property and casualty insurance claims and claims expense | | $ | 22,839 |
| | $ | (61 | ) | | $ | 22,778 |
|
| Operating costs and expenses | | 5,869 |
| | (275 | ) | | 5,594 |
|
| Pension and other postretirement remeasurement gains and losses | | — |
| | 468 |
| | 468 |
|
| Restructuring and related charges | | 83 |
| | (16 | ) | | 67 |
|
| Total costs and expenses | | 37,077 |
| | 116 |
| | 37,193 |
|
| Income from operations before income tax expense | | 2,744 |
| | (116 | ) | | 2,628 |
|
| Income tax expense | | 492 |
| | (24 | ) | | 468 |
|
| Net income | | 2,252 |
| | (92 | ) | | 2,160 |
|
| Net income applicable to common shareholders | | $ | 2,104 |
| | $ | (92 | ) | | $ | 2,012 |
|
| | | | | | | |
| Earnings per common share: | | | | | | |
| Net income applicable to common shareholders per common share - Basic | | $ | 6.05 |
| | $ | (0.27 | ) | | $ | 5.78 |
|
| Net income applicable to common shareholders per common share - Diluted | | $ | 5.96 |
| | $ | (0.26 | ) | | $ | 5.70 |
|
| | | | | | | |
| | | Year Ended December 31, 2017 |
| Property and casualty insurance claims and claims expense | | $ | 21,929 |
| | $ | (82 | ) | | $ | 21,847 |
|
| Operating costs and expenses | | 5,442 |
| | (246 | ) | | 5,196 |
|
| Pension and other postretirement remeasurement gains and losses | | — |
| | (217 | ) | | (217 | ) |
| Restructuring and related charges | | 109 |
| | (13 | ) | | 96 |
|
| Total costs and expenses | | 35,436 |
| | (558 | ) | | 34,878 |
|
| Income from operations before income tax expense | | 3,991 |
| | 558 |
| | 4,549 |
|
| Income tax expense | | 802 |
| | 193 |
| | 995 |
|
| Net income | | 3,189 |
| | 365 |
| | 3,554 |
|
| Net income applicable to common shareholders | | $ | 3,073 |
| | $ | 365 |
| | $ | 3,438 |
|
| | | | | | | |
| Earnings per common share: | | | | | | |
| Net income applicable to common shareholders per common share - Basic | | $ | 8.49 |
| | $ | 1.01 |
| | $ | 9.50 |
|
| Net income applicable to common shareholders per common share - Diluted | | $ | 8.36 |
| | $ | 0.99 |
| | $ | 9.35 |
|
Notes to Consolidated Financial Statements 2019 Form 10-K
|
| | | | | | | | | | | | |
| Consolidated Statements of Comprehensive Income | | |
| | | Previous accounting principle | | Impact of change | | As reported |
| ($ in millions) | | Year Ended December 31, 2019 |
| Net income | | $ | 4,811 |
| | $ | 36 |
| | $ | 4,847 |
|
| | | | | | | |
| Other comprehensive income (loss), after-tax | | | | | | |
| Changes in: | | | | | | |
| Unrealized net capital gains and losses | | 1,889 |
| | — |
| | 1,889 |
|
| Unrealized foreign currency translation adjustments | | (4 | ) | | (6 | ) | | (10 | ) |
Unrecognized pension and other postretirement benefit cost (1) | | 141 |
| | (188 | ) | | (47 | ) |
| Other comprehensive income, after-tax | | 2,026 |
| | (194 | ) | | 1,832 |
|
| | | | | | | |
| Comprehensive income | | 6,837 |
| | (158 | ) | | 6,679 |
|
| | | | | | | |
| | | Year Ended December 31, 2018 |
| Net income | | $ | 2,252 |
| | $ | (92 | ) | | $ | 2,160 |
|
| | | | | | | |
| Other comprehensive income (loss), after-tax | | | | | | |
| Changes in: | | | | | | |
| Unrealized net capital gains and losses | | (754 | ) | | — |
| | (754 | ) |
| Unrealized foreign currency translation adjustments | | (55 | ) | | 7 |
| | (48 | ) |
Unrecognized pension and other postretirement benefit cost (1) | | (144 | ) | | 85 |
| | (59 | ) |
| Other comprehensive loss, after-tax | | (953 | ) | | 92 |
| | (861 | ) |
| | | | | | | |
| Comprehensive income | | 1,299 |
| | — |
| | 1,299 |
|
| | | | | | | |
| | | Year Ended December 31, 2017 |
| Net income | | $ | 3,189 |
| | $ | 365 |
| | $ | 3,554 |
|
| | | | | | | |
| Other comprehensive income (loss), after-tax | | | | | | |
| Changes in: | | | | | | |
| Unrealized net capital gains and losses | | 319 |
| | — |
| | 319 |
|
| Unrealized foreign currency translation adjustments | | 47 |
| | (2 | ) | | 45 |
|
Unrecognized pension and other postretirement benefit cost (1) | | 307 |
| | (359 | ) | | (52 | ) |
| Other comprehensive income, after-tax | | 673 |
| | (361 | ) | | 312 |
|
| | | | | | | |
| Comprehensive income | | 3,862 |
| | 4 |
| | 3,866 |
|
(1) Financial statement line item has been updated to “Unamortized pension and other postretirement prior service credit“.
|
| | | | | | | | | |
| Consolidated Statements of Financial Position | | |
| | | Previous accounting principle | | Impact of change | | As reported |
| ($ in millions) | | December 31, 2019 |
| Retained income | | 49,713 |
| | (1,639 | ) | | 48,074 |
|
| Unrealized foreign currency translation adjustments | | (68 | ) | | 9 |
| | (59 | ) |
Unrecognized pension and other postretirement benefit cost (1) | | (1,350 | ) | | 1,472 |
| | 122 |
|
| Total AOCI | | 469 |
| | 1,481 |
| | 1,950 |
|
| Total shareholders’ equity | | 26,156 |
| | (158 | ) | | 25,998 |
|
| | | | | | | |
| | | December 31, 2018 |
| Retained income | | 45,708 |
| | (1,675 | ) | | 44,033 |
|
| Unrealized foreign currency translation adjustments | | (64 | ) | | 15 |
| | (49 | ) |
Unrecognized pension and other postretirement benefit cost (1) | | (1,491 | ) | | 1,660 |
| | 169 |
|
| Total AOCI | | (1,557 | ) | | 1,675 |
| | 118 |
|
| Total shareholders’ equity | | 21,312 |
| | — |
| | 21,312 |
|
(1) Financial statement line item has been updated to “Unamortized pension and other postretirement prior service credit“.
The Allstate Corporation 139
2019 Form 10-KNotes to Consolidated Financial Statements
|
| | | | | | | | | | | | |
Consolidated Statements of Shareholders’ Equity
| | | | | | |
| ($ in millions) | | Previous accounting principle | | Impact of change | | As reported |
| | | Year Ended December 31, 2019 |
| Retained income | | | | | | |
| Balance, beginning of year | | $ | 45,708 |
| | $ | (1,675 | ) | | $ | 44,033 |
|
| Cumulative effect of change in accounting principle | | 21 |
| | — |
| | 21 |
|
| Net income | | 4,811 |
| | 36 |
| | 4,847 |
|
| Dividends on common stock (declared per share of $2.00) | | (658 | ) | | — |
| | (658 | ) |
| Dividends on preferred stock | | (169 | ) | | — |
| | (169 | ) |
| Balance, end of year | | 49,713 |
| | (1,639 | ) | | 48,074 |
|
| | | | | | | |
| Accumulated other comprehensive income (loss) | | | | | | |
| Balance, beginning of year | | (1,557 | ) | | 1,675 |
| | 118 |
|
| Cumulative effect of change in accounting principle | | — |
| | — |
| | — |
|
| Change in unrealized net capital gains and losses | | 1,889 |
| | — |
| | 1,889 |
|
| Change in unrealized foreign currency translation adjustments | | (4 | ) | | (6 | ) | | (10 | ) |
Change in unrecognized pension and other postretirement benefit cost (1) | | 141 |
| | (188 | ) | | (47 | ) |
| Balance, end of year | | $ | 469 |
| | $ | 1,481 |
| | $ | 1,950 |
|
| | | | | | | |
| | | Year Ended December 31, 2018 |
| Retained income | | | | | | |
| Balance, beginning of year | | $ | 43,162 |
| | $ | (1,583 | ) | | $ | 41,579 |
|
| Cumulative effect of change in accounting principle | | 1,088 |
| | — |
| | 1,088 |
|
| Net income | | 2,252 |
| | (92 | ) | | 2,160 |
|
| Dividends on common stock (declared per share of $1.84) | | (646 | ) | | — |
| | (646 | ) |
| Dividends on preferred stock | | (148 | ) | | — |
| | (148 | ) |
| Balance, end of year | | 45,708 |
| | (1,675 | ) | | 44,033 |
|
| | | | | | | |
| Accumulated other comprehensive income (loss) | | | | | | |
| Balance, beginning of year | | 306 |
| | 1,583 |
| | 1,889 |
|
| Cumulative effect of change in accounting principle | | (910 | ) | | — |
| | (910 | ) |
| Change in unrealized net capital gains and losses | | (754 | ) | | — |
| | (754 | ) |
| Change in unrealized foreign currency translation adjustments | | (55 | ) | | 7 |
| | (48 | ) |
Change in unrecognized pension and other postretirement benefit cost (1) | | (144 | ) | | 85 |
| | (59 | ) |
| Balance, end of year | | (1,557 | ) | | 1,675 |
| | 118 |
|
| | | | | | | |
| | | Year Ended December 31, 2017 |
| Retained income | | | | | | |
| Balance, beginning of year | | $ | 40,678 |
| | $ | (1,669 | ) | | $ | 39,009 |
|
| Net income | | 3,189 |
| | 365 |
| | 3,554 |
|
| Dividends on common stock (declared per share of $1.48) | | (540 | ) | | — |
| | (540 | ) |
| Dividends on preferred stock | | (116 | ) | | — |
| | (116 | ) |
| Reclassification of tax effects due to change in accounting principle | | (49 | ) | | (279 | ) | | (328 | ) |
| Balance, end of year | | 43,162 |
| | (1,583 | ) | | 41,579 |
|
| | | | | | | |
| Accumulated other comprehensive income (loss) | | | | | | |
| Balance, beginning of year | | (416 | ) | | 1,665 |
| | 1,249 |
|
| Change in unrealized net capital gains and losses | | 319 |
| | — |
| | 319 |
|
| Change in unrealized foreign currency translation adjustments | | 47 |
| | (2 | ) | | 45 |
|
Change in unrecognized pension and other postretirement benefit cost (1) | | 307 |
| | (359 | ) | | (52 | ) |
| Reclassification of tax effects due to change in accounting principle | | 49 |
| | 279 |
| | 328 |
|
| Balance, end of year | | 306 |
| | 1,583 |
| | 1,889 |
|
(1) Financial statement line item has been updated to “Change in unamortized pension and other postretirement prior service credit”.
Notes to Consolidated Financial Statements 2019 Form 10-K
|
| | | | | | | | | | | | |
| Consolidated Statements of Cash Flows | | |
| | | Previous accounting principle | | Impact of change | | As reported |
| ($ in millions) | | Year Ended December 31, 2019 |
| Cash flows from operating activities | | | | | | |
| Net income | | $ | 4,811 |
| | $ | 36 |
| | $ | 4,847 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Pension and other postretirement measurement gains and losses | | — |
| | 114 |
| | 114 |
|
| Income taxes | | 477 |
| | 10 |
| | 487 |
|
| Other operating assets and liabilities | | 110 |
| | (160 | ) | | (50 | ) |
| Net cash provided by operating activities | | $ | 5,129 |
| | $ | — |
| | $ | 5,129 |
|
| | | | | | | |
| | | Year Ended December 31, 2018 |
| Cash flows from operating activities | | | | | | |
| Net income | | $ | 2,252 |
| | $ | (92 | ) | | $ | 2,160 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Pension and other postretirement measurement gains and losses | | — |
| | 468 |
| | 468 |
|
| Income taxes | | (356 | ) | | (24 | ) | | (380 | ) |
| Other operating assets and liabilities | | 1,207 |
| | (352 | ) | | 855 |
|
| Net cash provided by operating activities | | $ | 5,175 |
| | $ | — |
| | $ | 5,175 |
|
| | | | | | | |
| | | Year Ended December 31, 2017 |
| Cash flows from operating activities | | | | | | |
| Net income | | $ | 3,189 |
| | $ | 365 |
| | $ | 3,554 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Pension and other postretirement measurement gains and losses | | — |
| | (217 | ) | | (217 | ) |
| Income taxes | | (245 | ) | | 193 |
| | (52 | ) |
| Other operating assets and liabilities | | 328 |
| | (341 | ) | | (13 | ) |
| Net cash provided by operating activities | | $ | 4,314 |
| | $ | — |
| | $ | 4,314 |
|
The Allstate Corporation 141
3. Acquisition2019 Form 10-KNotes to Consolidated Financial Statements
iCracked On February 12, 2019, the Company acquired iCracked Inc. (“iCracked”) which offers on-site, on-demand repair services for smartphones and Dispositiontablets in North America, supporting Allstate Protection Plans' (formerly known as SquareTrade) operations. In conjunction with the iCracked acquisition, the Company recorded goodwill of $17 million.
PlumChoiceOn November 28, 2016,30, 2018, the Company announced an agreementacquired PlumChoice, Inc. (“PlumChoice”) for $30 million in cash to acquire SquareTrade Holdingprovide technical support services to Allstate Protection Plans' customers and small businesses. In conjunction with the PlumChoice acquisition, the Company recorded goodwill of $23 million.
Allstate Identity Protection On October 5, 2018, the Company acquired InfoArmor, Inc. (“SquareTrade”InfoArmor”), a consumer productleading provider of identity protection plan provider that distributes through many of America’s major retailers,in the employee benefits market, for approximately $1.4 billion$525 million in cash. SquareTrade providesInfoArmor primarily offers identity protection plans for consumer appliancesto employees and electronics, such as TVs, smartphones and computers. This will broaden Allstate’s unique product offerings to better meet consumers’ needs. The transaction closed on January 3, 2017.
Due totheir family members through voluntary benefit programs at over 1,400 firms, including more than 100 of the limited time sinceFortune 500 companies. Starting in the closing date, the initial accounting for the acquisition is incomplete. As a result,third quarter of 2019, the Company is unable to provide amounts recognized as ofreporting InfoArmor using the closing date forname Allstate Identity Protection.
In connection with the major classes of assets acquired and liabilities assumed. The Company will include this information in its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017.
On April 1, 2014,acquisition, the Company sold Lincoln Benefit Life Company (“LBL”), LBL’s life insurance business generated through independent master brokerage agencies, and allrecorded goodwill of LBL’s deferred fixed annuity and long-term care insurance business to Resolution Life Holdings, Inc. The gross sale price was $797 million, representing $596 million of cash and the retention of tax benefits. The loss on disposition in 2014 was $101 million, pre-tax ($60 million, after-tax) and included a $22 million, pre-tax, reduction in goodwill.
4. Supplemental Cash Flow Information
Non-cash investing activities include $326 million, $131$318 million and $120 million related to mergers and exchanges completed with equity securities and modificationsintangible assets of certain mortgage loans, fixed income securities and other investments in 2016, 2015 and 2014, respectively, and a $89 million obligation to fund a limited partnership investment in 2015. Non-cash financing activities$257 million. The intangible assets include $41 million, $74$225 million and $47$32 million related to the issuanceacquired customer relationships and technology, respectively.
|
| |
| Note 4 | Reportable Segments |
The Company’s chief operating decision maker reviews financial performance and makes decisions about the allocation of Allstate common sharesresources for vested equity awards in 2016, 2015the 7 reportable segments. These segments are described below and 2014, respectively. Non-cash financing activities also include $34 million related to debt acquired in conjunction with the purchase of an investment in 2016.
Liabilities for collateral received in conjunctionalign with the Company’s securities lending programkey product and service offerings.
Allstate Protection principally offers private passenger auto and homeowners insurance in the United States and Canada, with earned premiums accounting for 78.0% of Allstate’s 2019 consolidated revenues. Allstate Protection primarily operates in the U.S. (all 50 states and the District of Columbia (“D.C.”)) and Canada. For 2019, the top U.S. geographic locations for premiums earned by the Allstate Protection segment were $1.12Texas, California, New York and Florida. No other jurisdiction accounted for more than 5% of premium earned for Allstate Protection. Revenues from external customers generated outside the United States were $1.37 billion, $829$1.20 billion and $1.13 billion in 2019, 2018 and 2017, respectively.
Discontinued Lines and Coverages includes property and casualty insurance coverage that primarily relates to policies written during the 1960s through the mid-1980s. Our exposure to asbestos, environmental and other discontinued lines claims arises principally from direct excess commercial insurance, assumed reinsurance coverage, direct primary commercial insurance and other businesses in run-off.
Service Businesses comprise Allstate Protection Plans, Allstate Dealer Services, Allstate Roadside Services, Arity and Allstate Identity Protection. Service Businesses offer consumer product protection plans, finance and insurance products (including vehicle service contracts, guaranteed asset protection waivers, road hazard tire and wheel and paintless dent repair protection), roadside assistance, device and mobile data collection services and analytic solutions using automotive telematics information and identity protection. The Service Businesses primarily operate in the U.S., with certain businesses offering services in Europe, Canada, and Puerto Rico. Revenues from
external customers generated outside the United States relate to consumer product protection plans sold primarily in the European Union and were $95 million, $61 million and $780$35 million asin 2019, 2018 and 2017, respectively.
Allstate Lifeoffers traditional, interest-sensitive and variable life insurance products. Allstate Life primarily operates in the U.S. (all 50 states and D.C.). For 2019, the top geographic locations for statutory direct life insurance premiums were New York, California, Texas, Florida and Illinois. No other jurisdiction accounted for more than 5% of December 31, 2016, 2015statutory direct life insurance premiums.
Allstate Benefits offers voluntary benefits products, including life, accident, critical illness, short-term disability and 2014, respectively,other health products. Allstate Benefits primarily operates in the U.S. (all 50 states and are reported in other liabilities and accrued expenses. Obligations to return cash collateral for over-the-counter (“OTC”D.C.) and cleared derivativesCanada. For 2019, the top geographic locations for statutory direct accident and health insurance premiums were $5 million, $11 millionFlorida, Texas, North Carolina, New York and $2 millionCalifornia. No other jurisdiction accounted for more than 5% of statutory direct accident and health insurance premiums. Revenues from external customers generated outside the United States relate to voluntary accident and health insurance sold in Canada and were not material.
Allstate Annuities consists primarily of deferred fixed annuities and immediate annuities (including standard and sub-standard structured settlements). This segment is in run-off.
Corporate and Other comprises holding company activities and certain non-insurance operations, including expenses associated with strategic initiatives.
Allstate Protection and Discontinued Lines and Coverages segments comprise Property-Liability. The Company does not allocate investment income, realized capital gains and losses, or assets to the Allstate Protection and Discontinued Lines and Coverages segments. Management reviews assets at the Property-Liability, Service Businesses, Allstate Life,
Notes to Consolidated Financial Statements 2019 Form 10-K
Allstate Benefits, Allstate Annuities, and Corporate and Other levels for decision-making purposes.
The accounting policies of the reportable segments are the same as those described in Note 2. The effects of December 31, 2016, 2015 and 2014, respectively, andintersegment transactions are reported in other liabilities and accrued expenses or other investments. The accompanying cash flows are included in cash flows from operating activitieseliminated in the Consolidated Statements of Cash Flows along withconsolidated results. For segment results, services provided by Service Businesses to Allstate Protection are not eliminated as management considers those transactions in assessing the activities resulting from managementresults of the proceeds, whichrespective segments.
Measuring segment profit or loss
The measure of segment profit or loss used in evaluating performance is underwriting income for the years ended December 31 areAllstate Protection and Discontinued Lines and Coverages segments and adjusted net income for the Service Businesses, Allstate Life, Allstate Benefits, Allstate Annuities, and Corporate and Other segments. A reconciliation of these measures to net income applicable to common shareholders is provided below.
Underwriting income is calculated as follows:premiums earned and other revenue, less claims and claims expenses (“losses”), amortization of DAC, operating costs and expenses, restructuring and related charges and amortization or impairment of purchased intangibles as determined using GAAP.
Adjusted net income is net income applicable to common shareholders, excluding:
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Net change in proceeds managed | | | | | |
| Net change in fixed income securities | $ | (584 | ) | | $ | — |
| | $ | — |
|
| Net change in short-term investments | 295 |
| | (59 | ) | | (167 | ) |
| Operating cash flow used | (289 | ) | | (59 | ) | | (167 | ) |
| Net change in cash | — |
| | 1 |
| | 9 |
|
| Net change in proceeds managed | $ | (289 | ) |
| $ | (58 | ) |
| $ | (158 | ) |
| | | | | | |
| Net change in liabilities | | | | | |
| Liabilities for collateral, beginning of year | $ | (840 | ) | | $ | (782 | ) | | $ | (624 | ) |
| Liabilities for collateral, end of year | (1,129 | ) | | (840 | ) | | (782 | ) |
| Operating cash flow provided | $ | 289 |
|
| $ | 58 |
|
| $ | 158 |
|
|
|
• Realized capital gains and losses, after-tax, except for periodic settlements and accruals on non-hedge derivative instruments, which are reported with realized capital gains and losses but included in adjusted net income |
• Pension and other postretirement remeasurement gains and losses, after-tax |
• Valuation changes on embedded derivatives not hedged, after-tax
|
• Amortization of DAC and DSI, to the extent they resulted from the recognition of certain realized capital gains and losses or valuation changes on embedded derivatives not hedged, after-tax |
• Business combination expenses and the amortization or impairment of purchased intangibles, after-tax |
• Gain (loss) on disposition of operations, after-tax |
• Adjustments for other significant non-recurring, infrequent or unusual items, when (a) the nature of the charge or gain is such that it is reasonably unlikely to recur within two years, or (b) there has been no similar charge or gain within the prior two years |
5. Investments
Fair values
The amortized cost, gross unrealized gainsAllstate Corporation 143
2019 Form 10-KNotes to Consolidated Financial Statements
|
| | | | | | | | | | | | |
| Reportable segments revenue information |
| | | For the years ended December 31,
|
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Property-Liability | | | | | | |
| Insurance premiums | | | | | | |
| Auto | | $ | 24,188 |
| | $ | 22,970 |
| | $ | 21,878 |
|
| Homeowners | | 7,912 |
| | 7,517 |
| | 7,310 |
|
| Other personal lines | | 1,861 |
| | 1,808 |
| | 1,750 |
|
| Commercial lines | | 882 |
| | 655 |
| | 495 |
|
| Allstate Protection | | 34,843 |
| | 32,950 |
| | 31,433 |
|
| Discontinued Lines and Coverages | | — |
| | — |
| | — |
|
| Total Property-Liability insurance premiums | | 34,843 |
| | 32,950 |
| | 31,433 |
|
| Other revenue | | 741 |
| | 738 |
| | 703 |
|
| Net investment income | | 1,533 |
| | 1,464 |
| | 1,478 |
|
| Realized capital gains and losses | | 1,470 |
| | (639 | ) | | 401 |
|
| Total Property-Liability | | 38,587 |
| | 34,513 |
| | 34,015 |
|
| | | | | | | |
| Service Businesses | | | | | | |
| Consumer product protection plans | | 633 |
| | 503 |
| | 295 |
|
| Roadside assistance | | 238 |
| | 263 |
| | 268 |
|
| Finance and insurance products | | 362 |
| | 332 |
| | 304 |
|
Intersegment premiums and service fees (1) | | 154 |
| | 122 |
| | 110 |
|
| Other revenue | | 188 |
| | 82 |
| | 66 |
|
| Net investment income | | 42 |
| | 27 |
| | 16 |
|
| Realized capital gains and losses | | 32 |
| | (11 | ) | | — |
|
| Total Service Businesses | | 1,649 |
| | 1,318 |
| | 1,059 |
|
| | | | | | | |
| Allstate Life | | | | | | |
| Traditional life insurance premiums | | 630 |
| | 600 |
| | 568 |
|
| Accident and health insurance premiums | | 2 |
| | 2 |
| | 2 |
|
| Interest-sensitive life insurance contract charges | | 711 |
| | 713 |
| | 710 |
|
| Other revenue | | 125 |
| | 119 |
| | 114 |
|
| Net investment income | | 514 |
| | 505 |
| | 489 |
|
| Realized capital gains and losses | | 1 |
| | (14 | ) | | 5 |
|
| Total Allstate Life | | 1,983 |
| | 1,925 |
| | 1,888 |
|
| | | | | | | |
| Allstate Benefits | | | | | | |
| Traditional life insurance premiums | | 43 |
| | 44 |
| | 42 |
|
| Accident and health insurance premiums | | 988 |
| | 980 |
| | 928 |
|
| Interest-sensitive life insurance contract charges | | 114 |
| | 111 |
| | 114 |
|
| Net investment income | | 83 |
| | 77 |
| | 72 |
|
| Realized capital gains and losses | | 12 |
| | (9 | ) | | 1 |
|
| Total Allstate Benefits | | 1,240 |
| | 1,203 |
| | 1,157 |
|
| | | | | | | |
| Allstate Annuities | | | | | | |
| Fixed annuities contract charges | | 13 |
| | 15 |
| | 14 |
|
| Net investment income | | 917 |
| | 1,096 |
| | 1,305 |
|
| Realized capital gains and losses | | 346 |
| | (166 | ) | | 44 |
|
| Total Allstate Annuities | | 1,276 |
| | 945 |
| | 1,363 |
|
| | | | | | | |
| Corporate and Other | | | | | | |
| Net investment income | | 70 |
| | 71 |
| | 41 |
|
| Realized capital gains and losses | | 24 |
| | (38 | ) | | (6 | ) |
| Total Corporate and Other | | 94 |
| | 33 |
| | 35 |
|
Intersegment eliminations (1) | | (154 | ) | | (122 | ) | | (110 | ) |
| Consolidated revenues | | $ | 44,675 |
| | $ | 39,815 |
| | $ | 39,407 |
|
(1) Intersegment insurance premiums and lossesservice fees are primarily related to Arity and fair value for fixed income securitiesAllstate Roadside Services and are as follows:eliminated in the consolidated financial statements.
Notes to Consolidated Financial Statements 2019 Form 10-K
|
| | | | | | | | | | | | | | | |
| ($ in millions) | Amortized cost | | Gross unrealized | | Fair value |
| | | Gains | | Losses | |
| December 31, 2016 | | | | | | | |
| U.S. government and agencies | $ | 3,572 |
| | $ | 74 |
| | $ | (9 | ) | | $ | 3,637 |
|
| Municipal | 7,116 |
| | 304 |
| | (87 | ) | | 7,333 |
|
| Corporate | 42,742 |
| | 1,178 |
| | (319 | ) | | 43,601 |
|
| Foreign government | 1,043 |
| | 36 |
| | (4 | ) | | 1,075 |
|
| ABS | 1,169 |
| | 13 |
| | (11 | ) | | 1,171 |
|
| RMBS | 651 |
| | 85 |
| | (8 | ) | | 728 |
|
| CMBS | 262 |
| | 17 |
| | (9 | ) | | 270 |
|
| Redeemable preferred stock | 21 |
| | 3 |
| | — |
| | 24 |
|
| Total fixed income securities | $ | 56,576 |
| | $ | 1,710 |
| | $ | (447 | ) | | $ | 57,839 |
|
| | | | | | | | |
| December 31, 2015 | | | | | | | |
| U.S. government and agencies | $ | 3,836 |
| | $ | 90 |
| | $ | (4 | ) | | $ | 3,922 |
|
| Municipal | 7,032 |
| | 389 |
| | (20 | ) | | 7,401 |
|
| Corporate | 41,674 |
| | 1,032 |
| | (879 | ) | | 41,827 |
|
| Foreign government | 983 |
| | 50 |
| | — |
| | 1,033 |
|
| ABS | 2,359 |
| | 11 |
| | (43 | ) | | 2,327 |
|
| RMBS | 857 |
| | 100 |
| | (10 | ) | | 947 |
|
| CMBS | 438 |
| | 32 |
| | (4 | ) | | 466 |
|
| Redeemable preferred stock | 22 |
| | 3 |
| | — |
| | 25 |
|
| Total fixed income securities | $ | 57,201 |
| | $ | 1,707 |
| | $ | (960 | ) | | $ | 57,948 |
|
|
| | | | | | | | | | | | |
| Reportable segments financial performance |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Property-Liability | | | | | | |
| Allstate Protection | | $ | 2,912 |
| | $ | 2,343 |
| | $ | 2,304 |
|
| Discontinued Lines and Coverages | | (108 | ) | | (90 | ) | | (99 | ) |
| Total underwriting income | | 2,804 |
| | 2,253 |
| | 2,205 |
|
| Net investment income | | 1,533 |
| | 1,464 |
| | 1,478 |
|
| Income tax expense on operations | | (887 | ) | | (747 | ) | | (1,187 | ) |
| Realized capital gains and losses, after-tax | | 1,161 |
| | (500 | ) | | 272 |
|
| Gain on disposition of operations, after-tax | | — |
| | — |
| | 9 |
|
| Tax Legislation (expense) benefit | | — |
| | (5 | ) | | 36 |
|
| Property-Liability net income applicable to common shareholders | | 4,611 |
| | 2,465 |
| | 2,813 |
|
| | | | | | | |
| Service Businesses | | | | | | |
| Adjusted net income (loss) | | 38 |
| | 8 |
| | (54 | ) |
| Realized capital gains and losses, after-tax | | 25 |
| | (9 | ) | | — |
|
| Amortization of purchased intangibles, after-tax | | (97 | ) | | (74 | ) | | (60 | ) |
| Impairment of purchased intangibles, after-tax | | (43 | ) | | — |
| | — |
|
| Tax Legislation (expense) benefit | | — |
| | (4 | ) | | 137 |
|
| Service Businesses net (loss) income applicable to common shareholders | | (77 | ) | | (79 | ) | | 23 |
|
| | | | | | | |
| Allstate Life | | | | | | |
| Adjusted net income | | 261 |
| | 295 |
| | 259 |
|
| Realized capital gains and losses, after-tax | | — |
| | (11 | ) | | 2 |
|
| Valuation changes on embedded derivatives not hedged, after-tax | | (9 | ) | | — |
| | — |
|
DAC and DSI amortization related to realized capital gains and losses and valuation changes on embedded derivatives not hedged, after-tax
| | (5 | ) | | (8 | ) | | (10 | ) |
| Tax Legislation (expense) benefit | | — |
| | (16 | ) | | 338 |
|
| Allstate Life net income applicable to common shareholders | | 247 |
| | 260 |
| | 589 |
|
| | | | | | | |
| Allstate Benefits | | | | | | |
| Adjusted net income | | 115 |
| | 124 |
| | 100 |
|
| Realized capital gains and losses, after-tax | | 9 |
| | (7 | ) | | — |
|
| DAC and DSI amortization related to realized capital gains and losses, after-tax | | — |
| | 1 |
| | — |
|
| Tax Legislation benefit | | — |
| | — |
| | 54 |
|
| Allstate Benefits net income applicable to common shareholders | | 124 |
| | 118 |
| | 154 |
|
| | | | | | | |
| Allstate Annuities | | | | | | |
| Adjusted net income | | 10 |
| | 131 |
| | 205 |
|
| Realized capital gains and losses, after-tax | | 274 |
| | (131 | ) | | 28 |
|
| Valuation changes on embedded derivatives not hedged, after-tax | | (6 | ) | | 3 |
| | — |
|
| Gain on disposition of operations, after-tax | | 4 |
| | 4 |
| | 4 |
|
| Tax Legislation benefit | | — |
| | 69 |
| | 182 |
|
| Allstate Annuities net income applicable to common shareholders | | 282 |
| | 76 |
| | 419 |
|
| | | | | | | |
| Corporate and Other | | | | | | |
| Adjusted net loss | | (438 | ) | | (406 | ) | | (320 | ) |
| Realized capital gains and losses, after-tax | | 19 |
| | (30 | ) | | (4 | ) |
| Pension and other postretirement remeasurement gains and losses, after-tax | | (90 | ) | | (370 | ) | | 141 |
|
| Goodwill impairment | | — |
| | — |
| | (125 | ) |
| Business combination expenses, after-tax | | — |
| | (7 | ) | | (14 | ) |
| Tax Legislation expense | | — |
| | (15 | ) | | (238 | ) |
| Consolidated and Other net loss applicable to common shareholders | | (509 | ) | | (828 | ) | | (560 | ) |
| | | | | | | |
| Consolidated net income applicable to common shareholders | | $ | 4,678 |
| | $ | 2,012 |
| | $ | 3,438 |
|
Scheduled maturities
The scheduled maturities for fixed income securities are as follows as of December 31, 2016:
The Allstate Corporation 145
2019 Form 10-KNotes to Consolidated Financial Statements
|
| | | | | | | |
| ($ in millions) | Amortized cost | | Fair value |
| Due in one year or less | $ | 4,873 |
| | $ | 4,898 |
|
| Due after one year through five years | 27,836 |
| | 28,307 |
|
| Due after five years through ten years | 16,448 |
| | 16,612 |
|
| Due after ten years | 5,337 |
| | 5,853 |
|
| | 54,494 |
| | 55,670 |
|
| ABS, RMBS and CMBS | 2,082 |
| | 2,169 |
|
| Total | $ | 56,576 |
| | $ | 57,839 |
|
|
| | | | | | | | | | | | |
| Additional significant financial performance data | | | | | | |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Amortization of DAC | | | | | | |
| Property-Liability | | $ | 4,649 |
| | $ | 4,475 |
| | $ | 4,205 |
|
| Service Businesses | | 543 |
| | 463 |
| | 296 |
|
| Allstate Life | | 173 |
| | 132 |
| | 134 |
|
| Allstate Benefits | | 161 |
| | 145 |
| | 142 |
|
| Allstate Annuities | | 7 |
| | 7 |
| | 7 |
|
| Consolidated | | $ | 5,533 |
| | $ | 5,222 |
| | $ | 4,784 |
|
| | | | | | | |
| Income tax expense (benefit) | | | | | | |
| Property-Liability | | $ | 1,196 |
| | $ | 613 |
| | $ | 1,285 |
|
| Service Businesses | | (18 | ) | | (19 | ) | | (194 | ) |
| Allstate Life | | 53 |
| | 75 |
| | (226 | ) |
| Allstate Benefits | | 35 |
| | 32 |
| | 1 |
|
| Allstate Annuities | | 73 |
| | (66 | ) | | (58 | ) |
| Corporate and Other | | (97 | ) | | (167 | ) | | 187 |
|
| Consolidated | | $ | 1,242 |
| | $ | 468 |
| | $ | 995 |
|
Interest expense is primarily incurred in the Corporate and Other segment. Capital expenditures for long-lived assets are generally made in Property-Liability as the Company does not allocate assets to the Allstate Protection and Discontinued Lines and Coverages segments. A portion of these long-lived assets are used by entities included in the Service Businesses, Allstate Life, Allstate Benefits, Allstate Annuities and Corporate and Other segments and, accordingly, are charged to expenses in proportion to their use.
|
| | | | | | | | |
Reportable segment total assets and investments (1) | | | | |
| | | As of December 31, |
| ($ in millions) | | 2019 | | 2018 |
| Assets | | | | |
| Property-Liability | | $ | 67,243 |
| | $ | 61,947 |
|
| Service Businesses | | 5,746 |
| | 5,473 |
|
| Allstate Life | | 14,771 |
| | 13,613 |
|
| Allstate Benefits | | 2,915 |
| | 2,822 |
|
| Allstate Annuities | | 26,914 |
| | 26,798 |
|
| Corporate and Other | | 2,361 |
| | 1,596 |
|
| Consolidated | | $ | 119,950 |
| | $ | 112,249 |
|
| | | | | |
| Investments | | | | |
| Property-Liability | | $ | 48,414 |
| | $ | 43,634 |
|
| Service Businesses | | 1,544 |
| | 1,203 |
|
| Allstate Life | | 11,914 |
| | 10,809 |
|
| Allstate Benefits | | 1,941 |
| | 1,809 |
|
| Allstate Annuities | | 22,221 |
| | 22,336 |
|
| Corporate and Other | | 2,328 |
| | 1,469 |
|
| Consolidated | | $ | 88,362 |
| | $ | 81,260 |
|
| |
(1) | The balances reflect the elimination of related party investments between segments. |
Notes to Consolidated Financial Statements 2019 Form 10-K
|
| | | | | | | | | | | | | | | | |
| Amortized cost, gross unrealized gains (losses) and fair value for fixed income securities |
| | | Amortized cost | | Gross unrealized | | Fair value |
| ($ in millions) | | | Gains | | Losses | |
| December 31, 2019 | | | | | | | | |
| U.S. government and agencies | | $ | 4,971 |
| | $ | 141 |
| | $ | (26 | ) | | $ | 5,086 |
|
| Municipal | | 8,080 |
| | 551 |
| | (11 | ) | | 8,620 |
|
| Corporate | | 41,090 |
| | 2,035 |
| | (47 | ) | | 43,078 |
|
| Foreign government | | 968 |
| | 16 |
| | (5 | ) | | 979 |
|
| ABS | | 860 |
| | 8 |
| | (6 | ) | | 862 |
|
| MBS | | 324 |
| | 96 |
| | (1 | ) | | 419 |
|
| Total fixed income securities | | $ | 56,293 |
| | $ | 2,847 |
| | $ | (96 | ) | | $ | 59,044 |
|
| | | | | | | | | |
| December 31, 2018 | | | | | | | | |
| U.S. government and agencies | | $ | 5,386 |
| | $ | 137 |
| | $ | (6 | ) | | $ | 5,517 |
|
| Municipal | | 8,963 |
| | 249 |
| | (43 | ) | | 9,169 |
|
| Corporate | | 40,557 |
| | 491 |
| | (890 | ) | | 40,158 |
|
| Foreign government | | 739 |
| | 13 |
| | (5 | ) | | 747 |
|
| ABS | | 1,049 |
| | 6 |
| | (10 | ) | | 1,045 |
|
| MBS | | 440 |
| | 97 |
| | (3 | ) | | 534 |
|
| Total fixed income securities | | $ | 57,134 |
| | $ | 993 |
| | $ | (957 | ) | | $ | 57,170 |
|
|
| | | | | | | | |
| Scheduled maturities for fixed income securities |
| | | As of December 31, 2019 |
| ($ in millions) | | Amortized cost | | Fair value |
| Due in one year or less | | $ | 3,214 |
| | $ | 3,239 |
|
| Due after one year through five years | | 24,108 |
| | 24,781 |
|
| Due after five years through ten years | | 18,194 |
| | 19,177 |
|
| Due after ten years | | 9,593 |
| | 10,566 |
|
| | | 55,109 |
| | 57,763 |
|
| ABS and MBS | | 1,184 |
| | 1,281 |
|
| Total | | $ | 56,293 |
| | $ | 59,044 |
|
Actual maturities may differ from those scheduled as a result of calls and make-whole payments by the issuers. ABS RMBS and CMBSMBS are shown separately because of the potential for prepayment of principal prior to contractual maturity dates.
Net investment income |
| | | | | | | | | | | | |
| Net investment income |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Fixed income securities | | $ | 2,175 |
| | $ | 2,077 |
| | $ | 2,078 |
|
| Equity securities | | 206 |
| | 170 |
| | 174 |
|
| Mortgage loans | | 220 |
| | 217 |
| | 206 |
|
| Limited partnership interests | | 471 |
| | 705 |
| | 889 |
|
| Short-term investments | | 102 |
| | 73 |
| | 30 |
|
| Other | | 262 |
| | 272 |
| | 236 |
|
| Investment income, before expense | | 3,436 |
| | 3,514 |
| | 3,613 |
|
| Investment expense | | (277 | ) | | (274 | ) | | (212 | ) |
| Net investment income | | $ | 3,159 |
| | $ | 3,240 |
| | $ | 3,401 |
|
Net investment income for the years ended December 31 is as follows:
The Allstate Corporation 147
2019 Form 10-KNotes to Consolidated Financial Statements
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Fixed income securities | $ | 2,060 |
| | $ | 2,218 |
| | $ | 2,447 |
|
| Equity securities | 137 |
| | 110 |
| | 117 |
|
| Mortgage loans | 217 |
| | 228 |
| | 265 |
|
| Limited partnership interests | 561 |
| | 549 |
| | 614 |
|
| Short-term investments | 16 |
| | 9 |
| | 7 |
|
| Other | 222 |
| | 192 |
| | 170 |
|
| Investment income, before expense | 3,213 |
| | 3,306 |
| | 3,620 |
|
| Investment expense | (171 | ) | | (150 | ) | | (161 | ) |
| Net investment income | $ | 3,042 |
| | $ | 3,156 |
| | $ | 3,459 |
|
Realized capital gains and losses
Realized capital gains and losses by asset type for the years ended December 31 are as follows:
|
| | | | | | | | | | | | |
| Realized capital gains (losses) by asset type |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Fixed income securities | | $ | 461 |
| | $ | (237 | ) | | $ | 94 |
|
| Equity securities | | 1,210 |
| | (594 | ) | | 255 |
|
| Mortgage loans | | — |
| | 2 |
| | 1 |
|
| Limited partnership interests | | 200 |
| | (101 | ) | | 132 |
|
| Derivatives | | (15 | ) | | 46 |
| | (46 | ) |
| Other | | 29 |
| | 7 |
| | 9 |
|
| Realized capital gains and losses | | $ | 1,885 |
| | $ | (877 | ) | | $ | 445 |
|
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Fixed income securities | $ | (91 | ) | | $ | 212 |
| | $ | 130 |
|
| Equity securities | 23 |
| | (50 | ) | | 582 |
|
| Mortgage loans | — |
| | 6 |
| | 2 |
|
| Limited partnership interests | (21 | ) | | (93 | ) | | 13 |
|
| Derivatives | 3 |
| | (21 | ) | | (38 | ) |
| Other | (4 | ) | | (24 | ) | | 5 |
|
| Realized capital gains and losses | $ | (90 | ) | | $ | 30 |
| | $ | 694 |
|
Realized capital gains and losses by transaction type for the years ended December 31 are as follows:
|
| | | | | | | | | | | | |
| Realized capital gains (losses) by transaction type |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Impairment write-downs | | $ | (47 | ) | | $ | (14 | ) | | $ | (102 | ) |
| Change in intent write-downs | | — |
| | — |
| | (48 | ) |
| Net OTTI losses recognized in earnings | | (47 | ) | | (14 | ) | | (150 | ) |
| Sales | | 575 |
| | (215 | ) | | 641 |
|
Valuation of equity investments (1) | | 1,372 |
| | (691 | ) | | — |
|
| Valuation and settlements of derivative instruments | | (15 | ) | | 43 |
| | (46 | ) |
| Realized capital gains and losses | | $ | 1,885 |
| | $ | (877 | ) | | $ | 445 |
|
| |
(1) | Includes valuation of equity securities and certain limited partnership interests where the underlying assets are predominately public equity securities. |
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Impairment write-downs | $ | (234 | ) | | $ | (195 | ) | | $ | (32 | ) |
| Change in intent write-downs | (69 | ) | | (221 | ) | | (213 | ) |
| Net other-than-temporary impairment losses recognized in earnings | (303 | ) | | (416 | ) | | (245 | ) |
| Sales and other | 213 |
| | 470 |
| | 975 |
|
| Valuation and settlements of derivative instruments | — |
| | (24 | ) | | (36 | ) |
| Realized capital gains and losses | $ | (90 | ) | | $ | 30 |
| | $ | 694 |
|
GrossSales of fixed income securities resulted in gross gains of $631$607 million, $915$120 million and $1.10 billion$737 million and gross losses of $461$132 million, $399$347 million and $169$276 million were realized on salesduring 2019, 2018 and 2017, respectively.
The following table presents the net pre-tax appreciation (decline) recognized in net income of fixed income and equity securities during 2016, 2015 and 2014, respectively.
Other-than-temporary impairment losses by asset type for the years ended December 31limited partnership interests carried at fair value that are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| | Gross | | Included in OCI | | Net | | Gross | | Included in OCI | | Net | | Gross | | Included in OCI | | Net |
| Fixed income securities: | | | | | | | | | | | | | | | | | |
| Municipal | $ | — |
| | $ | — |
| | $ | — |
| | $ | (17 | ) | | $ | 4 |
| | $ | (13 | ) | | $ | (10 | ) | | $ | — |
| | $ | (10 | ) |
| Corporate | (33 | ) | | 9 |
| | (24 | ) | | (61 | ) | | 11 |
| | (50 | ) | | (7 | ) | | — |
| | (7 | ) |
| ABS | (6 | ) | | — |
| | (6 | ) | | (33 | ) | | 22 |
| | (11 | ) | | (12 | ) | | 1 |
| | (11 | ) |
| RMBS | — |
| | (1 | ) | | (1 | ) | | 1 |
| | (1 | ) | | — |
| | 6 |
| | (4 | ) | | 2 |
|
| CMBS | (15 | ) | | 2 |
| | (13 | ) | | (1 | ) | | — |
| | (1 | ) | | (1 | ) | | — |
| | (1 | ) |
| Total fixed income securities | (54 | ) | | 10 |
| | (44 | ) | | (111 | ) | | 36 |
| | (75 | ) | | (24 | ) | | (3 | ) | | (27 | ) |
| Equity securities | (194 | ) | | — |
| | (194 | ) | | (279 | ) | | — |
| | (279 | ) | | (196 | ) | | — |
| | (196 | ) |
| Mortgage loans | — |
| | — |
| | — |
| | 4 |
| | — |
| | 4 |
| | 5 |
| | — |
| | 5 |
|
| Limited partnership interests | (56 | ) | | — |
| | (56 | ) | | (51 | ) | | — |
| | (51 | ) | | (27 | ) | | — |
| | (27 | ) |
| Other | (9 | ) | | — |
| | (9 | ) | | (15 | ) | | — |
| | (15 | ) | | — |
| | — |
| | — |
|
| Other-than-temporary impairment losses | $ | (313 | ) |
| $ | 10 |
|
| $ | (303 | ) |
| $ | (452 | ) |
| $ | 36 |
|
| $ | (416 | ) |
| $ | (242 | ) |
| $ | (3 | ) |
| $ | (245 | ) |
The total amount of other-than-temporary impairment losses included in accumulated other comprehensive income at the time of impairment for fixed income securities, which were not included in earnings, are presented in the following table. The amount excludes $221 million and $233 million as of December 31, 2016 and 2015, respectively, of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.
|
| | | | | | | |
| ($ in millions) | December 31,
2016 | | December 31,
2015 |
| Municipal | $ | (8 | ) | | $ | (9 | ) |
| Corporate | (7 | ) | | (7 | ) |
| ABS | (21 | ) | | (23 | ) |
| RMBS | (90 | ) | | (102 | ) |
| CMBS | (7 | ) | | (6 | ) |
| Total | $ | (133 | ) | | $ | (147 | ) |
Rollforwards of the cumulative credit losses recognized in earnings for fixed income securitiesstill held as of December 31,
are as follows:2019 and 2018, respectively. |
| | | | | | | | |
| Net appreciation (decline) recognized in net income |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 |
| Equity securities | | $ | 1,073 |
| | $ | (261 | ) |
| Limited partnership interests carried at fair value | | 149 |
| | 249 |
|
| Total | | $ | 1,222 |
| | $ | (12 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| OTTI losses by asset type |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| | | Gross | | Included in OCI | | Net | | Gross | | Included in OCI | | Net | | Gross | | Included in OCI | | Net |
| Fixed income securities: | | | | | | | | | | | | | | | | | | |
| Municipal | | $ | (2 | ) | | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1 | ) | | $ | (3 | ) | | $ | (4 | ) |
| Corporate | | (5 | ) | | (2 | ) | | (7 | ) | | (4 | ) | | 2 |
| | (2 | ) | | (9 | ) | | 3 |
| | (6 | ) |
| ABS | | (4 | ) | | — |
| | (4 | ) | | (1 | ) | | (2 | ) | | (3 | ) | | (1 | ) | | (2 | ) | | (3 | ) |
| MBS | | (4 | ) | | 1 |
| | (3 | ) | | (4 | ) | | (1 | ) | | (5 | ) | | (11 | ) | | (2 | ) | | (13 | ) |
| Total fixed income securities | | (15 | ) | | 1 |
| | (14 | ) | | (9 | ) | | (1 | ) | | (10 | ) | | (22 | ) | | (4 | ) | | (26 | ) |
| Equity securities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (86 | ) | | — |
| | (86 | ) |
| Mortgage loans | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Limited partnership interests | | (6 | ) | | — |
| | (6 | ) | | (3 | ) | | — |
| | (3 | ) | | (32 | ) | | — |
| | (32 | ) |
| Other | | (27 | ) | | — |
| | (27 | ) | | (1 | ) | | — |
| | (1 | ) | | (5 | ) | | — |
| | (5 | ) |
| OTTI losses | | $ | (48 | ) |
| $ | 1 |
|
| $ | (47 | ) |
| $ | (13 | ) |
| $ | (1 | ) |
| $ | (14 | ) |
| $ | (146 | ) |
| $ | (4 | ) |
| $ | (150 | ) |
Notes to Consolidated Financial Statements 2019 Form 10-K
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Beginning balance | $ | (392 | ) | | $ | (380 | ) | | $ | (513 | ) |
| Additional credit loss for securities previously other-than-temporarily impaired | (21 | ) | | (30 | ) | | (6 | ) |
| Additional credit loss for securities not previously other-than-temporarily impaired | (23 | ) | | (45 | ) | | (18 | ) |
| Reduction in credit loss for securities disposed or collected | 117 |
| | 60 |
| | 95 |
|
| Change in credit loss due to accretion of increase in cash flows | 1 |
| | 3 |
| | 3 |
|
| Reduction in credit loss for securities sold in LBL disposition | — |
| | — |
| | 59 |
|
| Ending balance | $ | (318 | ) |
| $ | (392 | ) |
| $ | (380 | ) |
|
| | | | | | | | |
OTTI losses included in AOCI at the time of impairment for fixed income securities which were not included in earnings (1) |
| | | As of December 31, |
| ($ in millions) | | 2019 | | 2018 |
| Municipal | | $ | (7 | ) | | $ | (5 | ) |
| Corporate | | — |
| | (2 | ) |
| ABS | | (10 | ) | | (10 | ) |
| MBS | | (56 | ) | | (69 | ) |
| Total | | $ | (73 | ) | | $ | (86 | ) |
| |
(1) | The amounts exclude $161 million and $180 million as of December 31, 2019 and 2018, respectively, of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date. |
|
| | | | | | | | | | | | |
| Rollforward of the cumulative credit losses recognized in earnings for fixed income securities held |
| | | As of December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Beginning balance | | $ | (204 | ) | | $ | (226 | ) | | $ | (318 | ) |
| Additional credit loss for securities previously other-than-temporarily impaired | | (10 | ) | | (7 | ) | | (18 | ) |
| Additional credit loss for securities not previously other-than-temporarily impaired | | (4 | ) | | (3 | ) | | (8 | ) |
| Reduction in credit loss for securities disposed or collected | | 32 |
| | 30 |
| | 116 |
|
| Change in credit loss due to accretion of increase in cash flows | | — |
| | 2 |
| | 2 |
|
| Ending balance | | $ | (186 | ) |
| $ | (204 | ) |
| $ | (226 | ) |
The Company uses its best estimate of future cash flows expected to be collected from the fixed income security, discounted at the security’s original or current effective rate, as appropriate, to calculate a recovery value and determine whether a credit loss exists. The determination of cash flow estimates is inherently subjective, and methodologies may vary depending on facts and circumstances specific to the security. All reasonably available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable assumptions and forecasts, are considered when developing the estimate of cash flows expected to be collected. That information generally includes, but is not limited to, the remaining payment terms of the security, prepayment speeds, foreign exchange rates, the financial condition and future earnings potential of the issue or issuer, expected defaults, expected recoveries, the value of underlying collateral, vintage, geographic concentration of underlying collateral, available reserves or escrows, current subordination levels, third partythird-party guarantees and other credit
enhancements. Other information, such as industry analyst reports and forecasts, sector credit ratings, financial condition of the bond insurer for insured fixed income securities, and other market data relevant to the realizability of contractual cash flows, may also be considered. The estimated fair value of collateral will be used to estimate recovery value if the Company determines that the security is dependent on the liquidation of collateral for ultimate settlement. If the estimated recovery value is less than the amortized cost of the security, a credit loss exists and an other-than-temporary impairmentOTTI for the difference between the estimated recovery value and amortized cost is recorded in earnings. The portion of the unrealized loss related to factors other than credit remains classified in accumulated other comprehensive income.AOCI. If the Company determines that the fixed income security does not have sufficient cash flow or other information to estimate a recovery value for the security, the Company may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings.
Unrealized net capital gains and losses
Unrealized net capital gains and losses included in accumulated other comprehensive income are as follows:
The Allstate Corporation 149
2019 Form 10-KNotes to Consolidated Financial Statements
|
| | | | | | | | | | | | | | | |
| ($ in millions) | Fair value | | Gross unrealized | | Unrealized net gains (losses) |
| December 31, 2016 | | Gains | | Losses | |
| Fixed income securities | $ | 57,839 |
| | $ | 1,710 |
| | $ | (447 | ) | | $ | 1,263 |
|
| Equity securities | 5,666 |
| | 594 |
| | (85 | ) | | 509 |
|
| Short-term investments | 4,288 |
| | — |
| | — |
| | — |
|
Derivative instruments (1) | 5 |
| | 5 |
| | (3 | ) | | 2 |
|
EMA limited partnerships (2) | | | | | | | (4 | ) |
| Unrealized net capital gains and losses, pre-tax | | | | | | | 1,770 |
|
| Amounts recognized for: | | | | | | | |
Insurance reserves (3) | | | | | | | — |
|
DAC and DSI (4) | | | | | | | (146 | ) |
| Amounts recognized | | | | | | | (146 | ) |
| Deferred income taxes | | | | | | | (571 | ) |
| Unrealized net capital gains and losses, after-tax | | | | | | | $ | 1,053 |
|
|
| | | | | | | | | | | | | | | | |
| Unrealized net capital gains and losses included in AOCI |
| ($ in millions) | | Fair value | | Gross unrealized | | Unrealized net gains (losses) |
| December 31, 2019 | | | Gains | | Losses | |
| Fixed income securities | | $ | 59,044 |
| | $ | 2,847 |
| | $ | (96 | ) | | $ | 2,751 |
|
| Short-term investments | | 4,256 |
| | — |
| | — |
| | — |
|
| Derivative instruments | | — |
| | — |
| | (3 | ) | | (3 | ) |
EMA limited partnerships (1) | | | | | | | | (4 | ) |
| Unrealized net capital gains and losses, pre-tax | | | | | | | | 2,744 |
|
| Amounts recognized for: | | | | | | | | |
Insurance reserves (2) | | | | | | | | (126 | ) |
DAC and DSI (3) | | | | | | | | (224 | ) |
| Amounts recognized | | | | | | | | (350 | ) |
| Deferred income taxes | | | | | | | | (507 | ) |
| Unrealized net capital gains and losses, after-tax | | | | | | | | $ | 1,887 |
|
| | | | | | | | | |
| December 31, 2018 | | | | | | | | |
| Fixed income securities | | $ | 57,170 |
| | $ | 993 |
| | $ | (957 | ) | | $ | 36 |
|
| Short-term investments | | 3,027 |
| | — |
| | — |
| | — |
|
| Derivative instruments | | — |
| | — |
| | (3 | ) | | (3 | ) |
| EMA limited partnerships | | | | | | | | — |
|
| Unrealized net capital gains and losses, pre-tax | | | | | | | | 33 |
|
| Amounts recognized for: | | | | | | | | |
| Insurance reserves | | | | | | | | — |
|
| DAC and DSI | | | | | | | | (33 | ) |
| Amounts recognized | | | | | | | | (33 | ) |
| Deferred income taxes | | | | | | | | (2 | ) |
| Unrealized net capital gains and losses, after-tax | | | | | | | | $ | (2 | ) |
| |
(1) | Included in the fair value of derivative instruments is $5 million classified as assets. |
| |
(2)
| Unrealized net capital gains and losses for limited partnership interests represent the Company’s share of EMA limited partnerships’ other comprehensive income.OCI. Fair value and gross unrealized gains and losses are not applicable. |
| |
(3)(2)
| The insurance reserves adjustment represents the amount by which the reserve balance would increase if the net unrealized gains in the applicable product portfolios were realized and reinvested at current lower interest rates, resulting in a premium deficiency. Although the Company evaluates premium deficiencies on the combined performance of life insurance and immediate annuities with life contingencies, theThis adjustment if any, primarily relates to structured settlement annuities with life contingencies in addition to annuity buy-outs and certain payout annuities with life contingencies.(a type of immediate fixed annuities). |
| |
(4)(3)
| The DAC and DSI adjustment balance represents the amount by which the amortization of DAC and DSI would increase or decrease if the unrealized gains or losses in the respective product portfolios were realized. |
|
| | | | | | | | | | | | |
| Change in unrealized net capital gains (losses) |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Fixed income securities | | $ | 2,715 |
| | $ | (1,431 | ) | | $ | 204 |
|
Equity securities (1) | | — |
| | — |
| | 651 |
|
| Derivative instruments | | — |
| | (2 | ) | | (3 | ) |
| EMA limited partnerships | | (4 | ) | | (1 | ) | | 5 |
|
| Total | | 2,711 |
| | (1,434 | ) | | 857 |
|
| Amounts recognized for: | | | | | | |
| Insurance reserves | | (126 | ) | | 315 |
| | (315 | ) |
| DAC and DSI | | (191 | ) | | 163 |
| | (50 | ) |
| Amounts recognized | | (317 | ) | | 478 |
| | (365 | ) |
| Deferred income taxes | | (505 | ) | | 202 |
| | 117 |
|
| Increase (decrease) in unrealized net capital gains and losses, after-tax | | $ | 1,889 |
|
| $ | (754 | ) |
| $ | 609 |
|
|
| | | | | | | | | | | | | | | |
| ($ in millions) | Fair value | | Gross unrealized | | Unrealized net gains (losses) |
| December 31, 2015 | | Gains | | Losses | |
| Fixed income securities | $ | 57,948 |
| | $ | 1,707 |
| | $ | (960 | ) | | $ | 747 |
|
| Equity securities | 5,082 |
| | 415 |
| | (139 | ) | | 276 |
|
| Short-term investments | 2,122 |
| | — |
| | — |
| | — |
|
Derivative instruments (1) | 10 |
| | 10 |
| | (4 | ) | | 6 |
|
| EMA limited partnerships | | | | | | | (4 | ) |
| Unrealized net capital gains and losses, pre-tax | | | | | | | 1,025 |
|
| Amounts recognized for: | | | | | | | |
| Insurance reserves | | | | | | | — |
|
| DAC and DSI | | | | | | | (67 | ) |
| Amounts recognized | | | | | | | (67 | ) |
| Deferred income taxes | | | | | | | (338 | ) |
| Unrealized net capital gains and losses, after-tax | | | | | | | $ | 620 |
|
| |
(1) | Included inUpon adoption of the fair valuerecognition and measurement accounting standard on January 1, 2018, $1.16 billion of derivative instruments are $6 million classified as assets and $(4) million classified as liabilities.pre-tax unrealized net capital gains for equity securities were reclassified from AOCI to retained income. |
Change in unrealized net capital gains and losses
The change in unrealized net capital gains and losses for the years ended December 31 is as follows:
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Fixed income securities | $ | 516 |
| | $ | (2,021 | ) | | $ | 866 |
|
| Equity securities | 233 |
| | (136 | ) | | (212 | ) |
| Derivative instruments | (4 | ) | | 8 |
| | 16 |
|
| EMA limited partnerships | — |
| | 1 |
| | (2 | ) |
| Investments classified as held for sale | — |
| | — |
| | (190 | ) |
| Total | 745 |
| | (2,148 | ) | | 478 |
|
| Amounts recognized for: | | | | | |
| Insurance reserves | — |
| | 28 |
| | (28 | ) |
| DAC and DSI | (79 | ) | | 112 |
| | (21 | ) |
| Amounts recognized | (79 | ) | | 140 |
| | (49 | ) |
| Deferred income taxes | (233 | ) | | 702 |
| | (149 | ) |
| Increase (decrease) in unrealized net capital gains and losses, after-tax | $ | 433 |
|
| $ | (1,306 | ) |
| $ | 280 |
|
Portfolio monitoring
The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed income and equity security whose carrying value may be other-than-temporarily impaired.
For each fixed income security in an unrealized loss position, the Company assesses whether management with the appropriate authority has made the decision to sell or whether it is more likely than not the Company will be required to sell the security before recovery of the amortized cost basis for reasons such
Notes to Consolidated Financial Statements 2019 Form 10-K
as liquidity, contractual or regulatory purposes. If a security meets either of these criteria, the security’s decline in fair value is considered other than temporary and is recorded in earnings.
If the Company has not made the decision to sell the fixed income security and it is not more likely than not the Company will be required to sell the fixed income security before recovery of its amortized cost basis, the Company evaluates whether it expects to receive cash flows sufficient to recover the entire amortized cost basis of the security. The Company calculates the estimated recovery value by discounting the best estimate of future cash flows at the security’s original or current effective rate, as appropriate, and compares this to the amortized cost of the security. If the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the fixed income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss related to other factors recognized in other comprehensive income.
For equity securities, the Company considers various factors, including whether it has the intent and ability to hold the equity security for a period of time sufficient to recover its cost basis. Where the Company lacks the intent and ability to hold to recovery, or believes the recovery period is extended, the equity security’s decline in fair value is considered other than temporary and is recorded in earnings.
For fixed income and equity securities managed by third parties, either the Company has contractually retained its decision making authority as it pertains to selling securities that are in an unrealized loss position or it recognizes any unrealized loss at the end of the period through a charge to earnings.
OCI.
The Company’s portfolio monitoring process includes a quarterly review of all securities to identify
instances where the fair value of a security compared to its amortized cost (for fixed income securities) or cost (for equity securities) is below established thresholds. The process also includes the monitoring of other impairment indicators such as ratings, ratings downgrades and payment defaults. The securities identified, in addition to other securities for which the Company may have a concern, are evaluated for potential other-than-temporary impairmentOTTI using all reasonably available information relevant to the collectability or recovery of the security. Inherent in the Company’s evaluation of other-than-temporary impairmentOTTI for these fixed income and equity securities are assumptions and estimates about the financial condition and future earnings potential of the issue or issuer. Some of the factors that may be considered in evaluating whether a decline in fair value is other than temporary are: 1) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; 2) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity; and 3) the length of time and extent to which the fair value has been less than amortized cost or cost.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross unrealized losses and fair value by type and length of time held in a continuous unrealized loss position |
| | | Less than 12 months | | 12 months or more | | |
| ($ in millions) | | Number of issues | | Fair value | | Unrealized losses | | Number of issues | | Fair value | | Unrealized losses | | Total unrealized losses |
| December 31, 2019 | | | | | | | | | | | | | | |
| Fixed income securities | | | | | | | | | | | | | | |
| U.S. government and agencies | | 31 |
| | $ | 1,713 |
| | $ | (26 | ) | | 10 |
| | $ | 26 |
| | $ | — |
| | $ | (26 | ) |
| Municipal | | 307 |
| | 576 |
| | (9 | ) | | 1 |
| | 14 |
| | (2 | ) | | (11 | ) |
| Corporate | | 186 |
| | 1,392 |
| | (20 | ) | | 65 |
| | 485 |
| | (27 | ) | | (47 | ) |
| Foreign government | | 55 |
| | 412 |
| | (4 | ) | | 6 |
| | 102 |
| | (1 | ) | | (5 | ) |
| ABS | | 36 |
| | 193 |
| | (2 | ) | | 23 |
| | 160 |
| | (4 | ) | | (6 | ) |
| MBS | | 27 |
| | 15 |
| | — |
| | 123 |
| | 14 |
| | (1 | ) | | (1 | ) |
| Total fixed income securities | | 642 |
| | $ | 4,301 |
| | $ | (61 | ) | | 228 |
| | $ | 801 |
| | $ | (35 | ) | | $ | (96 | ) |
| Investment grade fixed income securities | | 581 |
| | $ | 3,878 |
| | $ | (41 | ) | | 185 |
| | $ | 594 |
| | $ | (20 | ) | | $ | (61 | ) |
| Below investment grade fixed income securities | | 61 |
| | 423 |
| | (20 | ) | | 43 |
| | 207 |
| | (15 | ) | | (35 | ) |
| Total fixed income securities | | 642 |
| | $ | 4,301 |
| | $ | (61 | ) | | 228 |
| | $ | 801 |
| | $ | (35 | ) | | $ | (96 | ) |
| | | | | | | | | | | | | | | |
| December 31, 2018 | | | | | | | | | | | | | | |
| Fixed income securities | | | | | | | | | | | | | | |
| U.S. government and agencies | | 11 |
| | $ | 55 |
| | $ | — |
| | 38 |
| | $ | 364 |
| | $ | (6 | ) | | $ | (6 | ) |
| Municipal | | 943 |
| | 1,633 |
| | (10 | ) | | 1,147 |
| | 1,554 |
| | (33 | ) | | (43 | ) |
| Corporate | | 1,736 |
| | 19,243 |
| | (543 | ) | | 645 |
| | 8,374 |
| | (347 | ) | | (890 | ) |
| Foreign government | | 7 |
| | 20 |
| | (1 | ) | | 27 |
| | 412 |
| | (4 | ) | | (5 | ) |
| ABS | | 64 |
| | 454 |
| | (5 | ) | | 28 |
| | 161 |
| | (5 | ) | | (10 | ) |
| MBS | | 169 |
| | 37 |
| | — |
| | 197 |
| | 52 |
| | (3 | ) | | (3 | ) |
| Total fixed income securities | | 2,930 |
| | $ | 21,442 |
| | $ | (559 | ) | | 2,082 |
| | $ | 10,917 |
| | $ | (398 | ) | | $ | (957 | ) |
| Investment grade fixed income securities | | 2,348 |
| | $ | 17,485 |
| | $ | (331 | ) | | 2,021 |
| | $ | 10,626 |
| | $ | (360 | ) | | $ | (691 | ) |
| Below investment grade fixed income securities | | 582 |
| | 3,957 |
| | (228 | ) | | 61 |
| | 291 |
| | (38 | ) | | (266 | ) |
| Total fixed income securities | | 2,930 |
|
| $ | 21,442 |
|
| $ | (559 | ) |
| 2,082 |
|
| $ | 10,917 |
|
| $ | (398 | ) |
| $ | (957 | ) |
The following table summarizes the gross unrealized losses and fair value of fixed income and equity securities by the length of time that individual securities have been in a continuous unrealized loss position.Allstate Corporation 151
2019 Form 10-KNotes to Consolidated Financial Statements
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | Less than 12 months | | 12 months or more | | |
| | Number of issues | | Fair value | | Unrealized losses | | Number of issues | | Fair value | | Unrealized losses | | Total unrealized losses |
| December 31, 2016 | | | | | | | | | | | | | |
| Fixed income securities | | | | | | | | | | | | | |
| U.S. government and agencies | 46 |
| | $ | 943 |
| | $ | (9 | ) | | — |
| | $ | — |
| | $ | — |
| | $ | (9 | ) |
| Municipal | 1,310 |
| | 3,073 |
| | (76 | ) | | 8 |
| | 29 |
| | (11 | ) | | (87 | ) |
| Corporate | 862 |
| | 13,343 |
| | (256 | ) | | 83 |
| | 678 |
| | (63 | ) | | (319 | ) |
| Foreign government | 41 |
| | 225 |
| | (4 | ) | | — |
| | — |
| | — |
| | (4 | ) |
| ABS | 31 |
| | 222 |
| | (1 | ) | | 14 |
| | 109 |
| | (10 | ) | | (11 | ) |
| RMBS | 89 |
| | 53 |
| | (1 | ) | | 179 |
| | 91 |
| | (7 | ) | | (8 | ) |
| CMBS | 15 |
| | 59 |
| | (4 | ) | | 4 |
| | 15 |
| | (5 | ) | | (9 | ) |
| Redeemable preferred stock | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total fixed income securities | 2,395 |
| | 17,918 |
| | (351 | ) | | 288 |
| | 922 |
| | (96 | ) | | (447 | ) |
| Equity securities | 195 |
| | 654 |
| | (56 | ) | | 46 |
| | 165 |
| | (29 | ) | | (85 | ) |
| Total fixed income and equity securities | 2,590 |
| | $ | 18,572 |
| | $ | (407 | ) | | 334 |
| | $ | 1,087 |
| | $ | (125 | ) | | $ | (532 | ) |
| Investment grade fixed income securities | 2,202 |
| | $ | 15,678 |
| | $ | (293 | ) | | 201 |
| | $ | 493 |
| | $ | (51 | ) | | $ | (344 | ) |
| Below investment grade fixed income securities | 193 |
| | 2,240 |
| | (58 | ) | | 87 |
| | 429 |
| | (45 | ) | | (103 | ) |
| Total fixed income securities | 2,395 |
| | $ | 17,918 |
| | $ | (351 | ) | | 288 |
| | $ | 922 |
| | $ | (96 | ) | | $ | (447 | ) |
| | | | | | | | | | | | | | |
| December 31, 2015 | | | | | | | | | | | | | |
| Fixed income securities | | | | | | | | | | | | | |
| U.S. government and agencies | 53 |
| | $ | 1,874 |
| | $ | (4 | ) | | — |
| | $ | — |
| | $ | — |
| | $ | (4 | ) |
| Municipal | 222 |
| | 810 |
| | (6 | ) | | 9 |
| | 36 |
| | (14 | ) | | (20 | ) |
| Corporate | 1,361 |
| | 17,915 |
| | (696 | ) | | 111 |
| | 1,024 |
| | (183 | ) | | (879 | ) |
| Foreign government | 9 |
| | 44 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| ABS | 133 |
| | 1,733 |
| | (24 | ) | | 20 |
| | 324 |
| | (19 | ) | | (43 | ) |
| RMBS | 88 |
| | 69 |
| | — |
| | 176 |
| | 125 |
| | (10 | ) | | (10 | ) |
| CMBS | 13 |
| | 75 |
| | (2 | ) | | 1 |
| | 2 |
| | (2 | ) | | (4 | ) |
| Total fixed income securities | 1,879 |
|
| 22,520 |
|
| (732 | ) |
| 317 |
|
| 1,511 |
|
| (228 | ) |
| (960 | ) |
| Equity securities | 265 |
| | 1,397 |
| | (107 | ) | | 37 |
| | 143 |
| | (32 | ) | | (139 | ) |
| Total fixed income and equity securities | 2,144 |
|
| $ | 23,917 |
|
| $ | (839 | ) |
| 354 |
|
| $ | 1,654 |
|
| $ | (260 | ) |
| $ | (1,099 | ) |
| Investment grade fixed income securities | 1,405 |
| | $ | 17,521 |
| | $ | (362 | ) | | 225 |
| | $ | 972 |
| | $ | (105 | ) | | $ | (467 | ) |
| Below investment grade fixed income securities | 474 |
| | 4,999 |
| | (370 | ) | | 92 |
| | 539 |
| | (123 | ) | | (493 | ) |
| Total fixed income securities | 1,879 |
|
| $ | 22,520 |
|
| $ | (732 | ) |
| 317 |
|
| $ | 1,511 |
|
| $ | (228 | ) |
| $ | (960 | ) |
|
| | | | | | | | | | | | |
| Gross unrealized losses by unrealized loss position and credit quality as of December 31, 2019 |
| ($ in millions) | | Investment grade | | Below investment grade | | Total |
Fixed income securities with unrealized loss position less than 20% of amortized cost (1) (2) | | $ | (48 | ) | | $ | (27 | ) | | $ | (75 | ) |
Fixed income securities with unrealized loss position greater than or equal to 20% of amortized cost (3) (4) | | (13 | ) | | (8 | ) | | (21 | ) |
| Total unrealized losses | | $ | (61 | ) | | $ | (35 | ) | | $ | (96 | ) |
| |
(1) | Below investment grade fixed income securities include $14 million that have been in an unrealized loss position for less than twelve months. |
| |
(2) | Related to securities with an unrealized loss position less than 20% of amortized cost, the degree of which suggests that these securities do not pose a high risk of being other-than-temporarily impaired. |
| |
(3) | NaN below investment grade fixed income securities have been in an unrealized loss position for a period of twelve or more consecutive months. |
| |
(4) | Evaluated based on factors such as discounted cash flows and the financial condition and near-term and long-term prospects of the issue or issuer and were determined to have adequate resources to fulfill contractual obligations. |
As of December 31, 2016, $444 million of the $532 million unrealized losses are related to securities with an unrealized loss position less than 20% of amortized cost or cost, the degree of which suggests that these securities do not pose a high risk of being other-than-temporarily impaired. Of the $444 million, $318 million are related to unrealized losses on investment grade fixed income securities and $55 million are related to equity securities. Of the remaining $71 million, $47 million have been in an unrealized loss position for less than 12 months. Investment grade is defined as a security having a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A or BBB from S&P Global Ratings (“S&P”), a comparable rating from another nationally
recognized rating agency, or a comparable internal rating if an externally provided rating is not available. Market prices for certain securities may have credit spreads which imply higher or lower credit quality than the current third partythird-party rating. Unrealized losses on investment grade securities are principally related to an increase in market yields which may include increased risk-free interest rates and/or wider credit spreads since the time of initial purchase.
As of December 31, 2016, the remaining $88 million of The unrealized losses are relatedexpected to reverse as the securities in unrealized loss positions greater than or equal to 20% of amortized cost or cost. Investment grade fixed income securities comprising $26 million of these unrealized losses were evaluated based on factors such as discounted cash flows and the financial condition and near-term and long-term prospects of the issue or issuer and were determined to have adequate resources to fulfill contractual obligations. Of the $88 million, $32 million are related to below investment grade fixed income securities and $30 million are related to equity securities. Of these amounts, $14 million are related to below investment grade fixed income securities that had been in an unrealized loss position greater than or equal to 20% of amortized cost for a period of twelve or more consecutive months as of December 31, 2016.approach maturity.
ABS RMBS and CMBSMBS in an unrealized loss position were evaluated based on actual and projected collateral losses relative to the securities’ positions in the respective securitization trusts, security specific expectations of cash flows, and credit ratings. This evaluation also takes into consideration credit enhancement, measured in terms of (i) subordination from other classes of securities in the trust that are contractually obligated to absorb losses before the class of security the Company owns, and (ii) the expected impact of other structural features embedded in the securitization trust beneficial to the class of securities the Company owns, such as overcollateralization and excess spread, and (iii) for ABS and RMBS in an unrealized loss position, credit enhancements from reliable bond insurers, where applicable.spread. Municipal bonds in an unrealized loss position were evaluated based on the underlying credit quality of the primary obligor, obligation type and quality of the underlying assets. Unrealized losses on equity securities are primarily related to temporary equity market fluctuations of securities that are expected to recover.
As of December 31, 2016,2019, the Company has not made the decision to sell and it is not more likely than not the Company will be required to sell fixed income
securities with unrealized losses before recovery of the amortized cost basis.
Limited partnerships
Investments in limited partnership interests include interests in private equity funds, real estate funds and other funds. As of December 31, 2016, the Company had the intent2019 and ability to hold equity securities with unrealized losses for a period of time sufficient for them to recover.
Limited partnerships
As of December 31, 2016 and 2015,2018, the carrying value of EMA limited partnerships totaled $6.26 billion and $5.73 billion, respectively, and limited partnerships carried at fair value totaled $1.81 billion and $1.78 billion, respectively. Principal factors influencing carrying value appreciation or decline include operating performance, comparable public company earnings multiples, capitalization rates and the economic environment. For equity method limited partnerships, totaled $4.53 billion and $3.72 billion, respectively. Thethe Company recognizes an impairment loss for equity method limited partnerships when evidence demonstrates that the loss is other than temporary. Evidence of a loss in value that is other than temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment.
As of December 31, 2016 and 2015, the carrying Changes in fair value for cost method limited partnerships was $1.28 billionare recorded through net investment income and $1.15 billion, respectively. To determine if an other-than-temporary impairment has occurred, the Company evaluates whether an impairment indicator has occurred in the period that may have a significant adverse effect on the carrying value of the investment. Impairment indicators may include: significantly reduced valuations of the investments held by the limited partnerships; actual recent cash flows received being significantly less than expected cash flows; reduced valuations based on financing completed at a lower value; completed sale of a material underlying investment at a price significantly lower than expected; or any other adverse events since the last financial statements received that might affect the fair value of the investee’s capital. Additionally, the Company’s portfolio monitoring process includes a quarterly review of all cost method limited partnerships to identify instances where the net asset value is below established thresholdstherefore are not tested for certain periods of time, as well as investments that are performing below expectations, for further impairment consideration. If a cost method limited partnership is other-than-temporarily impaired, the carrying value is written down to fair value, generally estimated to be equivalent to the reported net asset value.
impairment.
Mortgage loans
The Company’s mortgage loans are commercial mortgage loans collateralized by a variety of commercial real estate property types located across the United States and totaled, net of valuation allowance, $4.49$4.82 billion and $4.34$4.67 billion as of December 31, 20162019 and 2015,2018, respectively. Substantially all of the commercial mortgage loans are non-recourse to the borrower.
The following table shows the principal geographic distribution of commercial real estate represented in the Company’s mortgage loan portfolio. No other state represented more than 5% of the portfolio as of December 31.
Notes to Consolidated Financial Statements 2019 Form 10-K
|
| | | | | |
| (% of mortgage loan portfolio carrying value) | 2016 | | 2015 |
| California | 19.3 | % | | 21.3 | % |
| Texas | 10.5 |
| | 9.7 |
|
| New Jersey | 8.2 |
| | 8.7 |
|
| Illinois | 6.7 |
| | 7.1 |
|
| Florida | 5.4 |
| | 5.3 |
|
The types of properties collateralizing the mortgage loans as of December 31 are as follows:
|
| | | | | | |
| Principal geographic distribution of commercial real estate exceeding 5% of the mortgage loans portfolio |
| | | As of December 31, |
| (% of mortgage loan portfolio carrying value) | | 2019 | | 2018 |
| Texas | | 16.9 | % | | 14.9 | % |
| California | | 15.1 |
| | 16.4 |
|
| Illinois | | 7.1 |
| | 7.8 |
|
| Florida | | 6.4 |
| | 6.1 |
|
| New Jersey | | 5.6 |
| | 6.8 |
|
| North Carolina | | 4.5 |
| | 5.1 |
|
|
| | | | | |
| (% of mortgage loan portfolio carrying value) | 2016 | | 2015 |
| Apartment complex | 27.6 | % | | 26.4 | % |
| Office buildings | 23.9 |
| | 22.7 |
|
| Retail | 20.4 |
| | 21.3 |
|
| Warehouse | 17.0 |
| | 18.4 |
|
| Other | 11.1 |
| | 11.2 |
|
| Total | 100.0 | % | | 100.0 | % |
The contractual maturities of the mortgage loan portfolio as of December 31, 2016 are as follows:
|
| | | | | | |
| Types of properties collateralizing the mortgage loan portfolio |
| | | As of December 31, |
| (% of mortgage loan portfolio carrying value) | | 2019 | | 2018 |
| Apartment complex | | 36.8 | % | | 34.4 | % |
| Office buildings | | 22.6 |
| | 24.5 |
|
| Warehouse | | 16.8 |
| | 15.8 |
|
| Retail | | 13.4 |
| | 14.4 |
|
| Other | | 10.4 |
| | 10.9 |
|
| Total | | 100.0 | % | | 100.0 | % |
| | | Contractual maturities of the mortgage loan portfolio | | Contractual maturities of the mortgage loan portfolio |
| | | | As of December 31, 2019 |
| ($ in millions) | Number of loans | | Carrying value | | Percent | | Number of loans | | Carrying value | | Percent |
| 2017 | 28 |
| | $ | 295 |
| | 6.6 | % | |
| 2018 | 29 |
| | 336 |
| | 7.5 |
| |
| 2019 | 10 |
| | 267 |
| | 6.0 |
| |
| 2020 | 14 |
| | 190 |
| | 4.2 |
| | 9 |
| | $ | 58 |
| | 1.2 | % |
| 2021 | | | 36 |
| | 446 |
| | 9.3 |
|
| 2022 | | | 28 |
| | 460 |
| | 9.5 |
|
| 2023 | | | 52 |
| | 776 |
| | 16.1 |
|
| Thereafter | 222 |
| | 3,398 |
| | 75.7 |
| | 161 |
| | 3,077 |
| | 63.9 |
|
| Total | 303 |
| | $ | 4,486 |
| | 100.0 | % | | 286 |
| | $ | 4,817 |
| | 100.0 | % |
Mortgage loans are evaluated for impairment on a specific loan basis through a quarterly credit monitoring process and review of key credit quality indicators. Mortgage loans are considered impaired when it is probable that the Company will not collect the contractual principal and interest. Valuation allowances are established for impaired loans to reduce the carrying value to the fair value of the collateral less costs to sell or the present value of the loan’s expected future repayment cash flows discounted at the loan’s original effective interest rate. Impaired mortgage loans may not have a valuation allowance when the fair value of the collateral less costs to sell is higher than the carrying value. Valuation allowances are adjusted for subsequent changes in the fair value of the collateral less costs to sell or present value of the loan’s expected future repayment cash flows. Mortgage loans are charged off against their corresponding valuation allowances when there is no reasonable expectation of recovery. The impairment evaluation is non-statistical in respect to
the aggregate portfolio but considers facts and circumstances attributable to each loan. It is not considered probable that additional impairment losses, beyond those identified on a specific loan basis, have been incurred as of December 31, 2016.2019.
Accrual of income is suspended for mortgage loans that are in default or when full and timely collection of principal and interest payments is not probable. Cash receipts on mortgage loans on nonaccrual status are generally recorded as a reduction of carrying value.
Debt service coverage ratio is considered a key credit quality indicator when mortgage loans are evaluated for impairment. Debt service coverage ratio represents the amount of estimated cash flows from the property available to the borrower to meet principal and interest payment obligations. Debt service coverage ratio estimates are updated annually or more frequently if conditions are warranted based on the Company’s credit monitoring process.
The following table reflects the carrying value of non-impaired fixed rate and variable rate mortgage loans summarized by debt service coverage ratio distribution as of December 31:
The Allstate Corporation 153
2019 Form 10-KNotes to Consolidated Financial Statements
|
| | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 |
| Debt service coverage ratio distribution | Fixed rate mortgage loans | | Variable rate mortgage loans | | Total | | Fixed rate mortgage loans | | Variable rate mortgage loans | | Total |
| Below 1.0 | $ | 60 |
| | $ | — |
| | $ | 60 |
| | $ | 64 |
| | $ | — |
| | $ | 64 |
|
| 1.0 - 1.25 | 324 |
| | — |
| | 324 |
| | 382 |
| | — |
| | 382 |
|
| 1.26 - 1.50 | 1,293 |
| | — |
| | 1,293 |
| | 1,219 |
| | — |
| | 1,219 |
|
| Above 1.50 | 2,765 |
| | 39 |
| | 2,804 |
| | 2,667 |
| | — |
| | 2,667 |
|
| Total non-impaired mortgage loans | $ | 4,442 |
| | $ | 39 |
| | $ | 4,481 |
| | $ | 4,332 |
| | $ | — |
| | $ | 4,332 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Carrying value of non-impaired mortgage loans summarized by debt service coverage ratio distribution |
| | | As of December 31, |
| ($ in millions) | | 2019 | | 2018 |
| Debt Service Coverage Ratio Distribution | | Fixed rate mortgage loans | | Variable rate mortgage loans | | Total | | Fixed rate mortgage loans | | Variable rate mortgage loans | | Total |
| Below 1.0 | | $ | 13 |
| | $ | 32 |
| | $ | 45 |
| | $ | 6 |
| | $ | 31 |
| | $ | 37 |
|
| 1.0 - 1.25 | | 225 |
| | — |
| | 225 |
| | 273 |
| | — |
| | 273 |
|
| 1.26 - 1.50 | | 1,219 |
| | 18 |
| | 1,237 |
| | 1,192 |
| | — |
| | 1,192 |
|
| Above 1.50 | | 3,264 |
| | 38 |
| | 3,302 |
| | 3,063 |
| | 101 |
| | 3,164 |
|
| Total non-impaired mortgage loans | | $ | 4,721 |
| | $ | 88 |
| | $ | 4,809 |
| | $ | 4,534 |
| | $ | 132 |
| | $ | 4,666 |
|
Mortgage loans with a debt service coverage ratio below 1.0 that are not considered impaired primarily relate to instances where the borrower has the financial capacity to fund the revenue shortfalls from the properties for the foreseeable term, the decrease
in cash flows from the properties is considered temporary, or there are other risk mitigating circumstances such as additional collateral, escrow balances or borrower guarantees.
The net carrying value of impaired mortgage loans as of December 31 is as follows:
|
| | | | | | | | |
| Net carrying value of impaired mortgage loans |
| | | As of December 31, |
| ($ in millions) | | 2019 | | 2018 |
| Impaired mortgage loans with a valuation allowance | | $ | 8 |
| | $ | 4 |
|
| Impaired mortgage loans without a valuation allowance | | — |
| | — |
|
| Total impaired mortgage loans | | $ | 8 |
| | $ | 4 |
|
| Valuation allowance on impaired mortgage loans | | $ | 3 |
| | $ | 3 |
|
|
| | | | | | | |
| ($ in millions) | 2016 | | 2015 |
| Impaired mortgage loans with a valuation allowance | $ | 5 |
| | $ | 6 |
|
| Impaired mortgage loans without a valuation allowance | — |
| | — |
|
| Total impaired mortgage loans | $ | 5 |
| | $ | 6 |
|
| Valuation allowance on impaired mortgage loans | $ | 3 |
| | $ | 3 |
|
The average balance of impaired loans was $6$5 million, $11$4 million and $27$7 million during 2016, 20152019, 2018 and 2014,2017, respectively.
The rollforward of the valuation allowance on impaired mortgage loans for the years ended December 31 is as follows: |
| | | | | | | | | | | | |
| Rollforward of the valuation allowance on impaired mortgage loans |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Beginning balance | | $ | 3 |
| | $ | 3 |
| | $ | 3 |
|
| Net increase in valuation allowance | | — |
| | — |
| | 1 |
|
| Charge offs | | — |
| | — |
| | (1 | ) |
| Ending balance | | $ | 3 |
| | $ | 3 |
| | $ | 3 |
|
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Beginning balance | $ | 3 |
| | $ | 8 |
| | $ | 21 |
|
| Net decrease in valuation allowance | — |
| | (4 | ) | | (5 | ) |
| Charge offs | — |
| | (1 | ) | | (8 | ) |
| Ending balance | $ | 3 |
| | $ | 3 |
| | $ | 8 |
|
Payments on all mortgage loans were current as of December 31, 20162019, 2018 and 2015.2017.
Municipal bonds
The Company maintains a diversified portfolio of municipal bonds. The following table shows the principal geographic distribution of municipal bond issuers represented in the Company’s portfoliobonds, including tax exempt and taxable securities, which totaled $8.62 billion and $9.17 billion as of December 31. No31, 2019 and 2018, respectively.
The municipal bond portfolio includes general obligations of state and local issuers and revenue bonds (including pre-refunded bonds, which are bonds for which an irrevocable trust has been established to fund the remaining payments of principal and interest).
|
| | | | | | |
| Principal geographic distribution of municipal bond issuers exceeding 5% of the portfolio |
| | | As of December 31, |
| (% of municipal bond portfolio carrying value) | | 2019 | | 2018 |
| Texas | | 12.7 | % | | 12.3 | % |
| California | | 8.6 |
| | 7.4 |
|
| Colorado | | 5.8 |
| | 4.0 |
|
| Washington | | 5.5 |
| | 6.2 |
|
| New York | | 3.7 |
| | 5.6 |
|
Short-term investments
Short-term investments, including money market funds, commercial paper, U.S. Treasury bills and other state represents more than 5%short-term investments, are carried at fair value. As of December 31, 2019 and 2018, the portfolio.fair value of short-term investments totaled $4.26 billion and $3.03 billion, respectively.
Other investments
Other investments primarily consist of bank loans, real estate, policy loans, agent loans and derivatives. Bank loans are primarily senior secured corporate loans and are carried at amortized cost. Policy loans are carried at unpaid principal balances. Real estate is carried at cost less accumulated depreciation. Agent
|
| | | | | |
| (% of municipal bond portfolio carrying value) | 2016 | | 2015 |
| Texas | 10.0 | % | | 9.2 | % |
| California | 7.2 |
| | 6.3 |
|
| New York | 6.8 |
| | 7.7 |
|
| Florida | 5.7 |
| | 5.6 |
|
| Washington | 5.6 |
| | 5.6 |
|
| Michigan | 5.4 |
| | 3.9 |
|
Notes to Consolidated Financial Statements 2019 Form 10-K
loans are loans issued to exclusive Allstate agents and are carried at unpaid principal balances, net of valuation allowances and unamortized deferred fees or costs. Derivatives are carried at fair value.
|
| | | | | | | | |
| Other investments by asset type |
| ($ in millions) | | December 31, 2019 | | December 31, 2018 |
| Bank loans | | $ | 1,204 |
| | $ | 1,350 |
|
| Real estate | | 1,005 |
| | 791 |
|
| Policy loans | | 894 |
| | 891 |
|
| Agent loans | | 666 |
| | 620 |
|
| Derivatives and other | | 236 |
| | 200 |
|
| Total | | $ | 4,005 |
| | $ | 3,852 |
|
Concentration of credit risk
As of December 31, 2016,2019, the Company is not exposed to any credit concentration risk of a single issuer and its affiliates greater than 10% of the Company’s shareholders’ equity, other than the U.S. government and its agencies.
Securities loaned
The Company’s business activities include securities lending programs with third parties, mostly large banks. As of December 31, 20162019 and 2015,2018, fixed income and equity securities with a carrying value of $1.08$1.74 billion and $798 million,$1.40 billion, respectively, were on loan under these agreements. Interest income on collateral, net of fees, was $6$5 million, $4 million and $7 million in 20162019, 2018 and $2 million in each of 2015 and 2014.2017, respectively.
Other investment information
Included in fixed income securities are below investment grade assets totaling $8.62$7.15 billion and $8.64$5.23 billion as of December 31, 20162019 and 2015,2018, respectively.
As of December 31, 2016,2019, fixed income securities and short-term investments with a carrying value of $168$147 million were on deposit with regulatory authorities as required by law.
As of December 31, 2016,2019, the carrying value of fixed income securities and other investments that were non-income producing was $70$40 million.
6. Fair Value of Assets and Liabilities |
| |
| Note 6 | Fair Value of Assets and Liabilities
|
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Assets and liabilities recorded on the Consolidated Statements of Financial Position at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows:
Level 1: Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access.
Level 2: Assets and liabilities whose values are based on the following:
| |
| (a) | Quoted prices for similar assets or liabilities in active markets; |
| |
| (b) | Quoted prices for identical or similar assets or liabilities in markets that are not active; or |
| |
| (c) | Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability. |
Level 3: Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Unobservable inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the assets and liabilities.
The availability of observable inputs varies by instrument. In situations where fair value is based on internally developed pricing models or inputs that are unobservable in the market, the determination of fair value requires more judgment. The degree of judgment exercised by the Company in determining fair value is typically greatest for instruments categorized in Level 3. In many instances, valuation inputs used to measure fair value fall into different levels of the fair value hierarchy. The category level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments.
The Company is responsible for the determination of fair value and the supporting assumptions and methodologies. The Company gains assurance that assets and liabilities are appropriately valued through
The Allstate Corporation 155
2019 Form 10-KNotes to Consolidated Financial Statements
the execution of various processes and controls designed to ensure the overall reasonableness and consistent application of valuation methodologies, including inputs and assumptions, and compliance with accounting standards. For fair values received from third parties or internally estimated, the Company’s processes and controls are designed to ensure that the valuation methodologies are appropriate and consistently applied, the inputs and assumptions are reasonable and consistent with the objective of determining fair value, and the fair values are accurately recorded. For example, on a continuing basis, the Company assesses the reasonableness of individual fair values that have stale security prices or that exceed certain thresholds as compared to previous fair values received from valuation service providers or brokers or derived from internal models. The Company performs procedures to understand and assess the methodologies, processes and controls of valuation service providers. In addition, the Company may validate the reasonableness of fair values by comparing information obtained from valuation service providers or brokers to other third partythird-party valuation sources for selected securities. The Company performs ongoing price validation procedures such as back-testing of actual sales, which corroborate the various inputs used in internal models to market observable data. When fair value determinations are expected to be more variable, the Company validates them through reviews by members of management who have relevant expertise and who are independent of those charged with executing investment transactions.
The Company has two types of situations where investments are classified as Level 3 in the fair value hierarchy. The first is where specific inputs significant to the fair value estimation models are not market observable. This primarily occurs in the Company’s use of broker quotes to value certain securities where the inputs have not been corroborated to be market observable, and the use of valuation models that use significant non-market observable inputs.hierarchy:
The second situation where the Company classifies securities in Level 3 is where quotes continue to be received from independent third-party valuation service providers and all significant inputs are market observable; however, there has been a
significant decrease in the volume and level of activity for the asset when compared to normal market activity such that the degree of market observability has declined to a point where categorization as a Level 3 measurement is considered appropriate. The indicators considered in determining whether a significant decrease in the volume and level of activity for a specific asset has occurred include the level of new issuances in the primary market, trading volume in the secondary market, the level of credit spreads over historical levels, applicable bid-ask spreads, and price consensus among market participants and other pricing sources.
| |
| (1) | Specific inputs significant to the fair value estimation models are not market observable. This primarily occurs in the Company’s use of broker quotes to value certain securities where the inputs have not been corroborated to be market observable, and the use of valuation models that use significant non-market observable inputs. |
| |
| (2) | Quotes continue to be received from independent third-party valuation service providers and all significant inputs are market observable; however, there has been a significant decrease in the volume and level of activity for the asset when compared to normal market activity such that the degree of market observability has declined to a point where categorization as a Level 3 measurement is considered appropriate. The indicators considered in determining whether a significant decrease in the volume and level of activity for a specific asset has occurred include the level of new issuances in the primary market, trading volume in the secondary market, the level of credit spreads over historical levels, applicable bid-ask spreads, and price consensus among market participants and other pricing sources. |
Certain assets are not carried at fair value on a recurring basis, including investments such as mortgage loans, limited partnership interests, bank loans, agent loans and policy loans. Accordingly, such investments are only included
in the fair value hierarchy disclosure when the investment is subject to remeasurement at fair value after initial recognition and the resulting remeasurement is reflected in the consolidated financial statements. In addition, derivatives embedded in fixed income securities are not disclosed in the hierarchy as free-standing derivatives since they are presented with the host contracts in fixed income securities.
In determining fair value, the Company principally uses the market approach which generally utilizes market transaction data for the same or similar instruments. To a lesser extent, the Company uses the income approach which involves determining fair values from discounted cash flow methodologies. For the majority of Level 2 and Level 3 valuations, a combination of the market and income approaches is used.
Summary of significant inputs and valuation techniques for Level 2 and Level 3 assets and liabilities measured at fair value on a recurring basis
Level 1 measurements
Fixed income securities: Comprise certain U.S. Treasury fixed income securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.
Equity securities: Comprise actively traded, exchange-listed equity securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.
Short-term: Comprise U.S. Treasury bills valued based on unadjusted quoted prices for identical assets in active markets that the Company can access and actively traded money market funds that have daily quoted net asset values for identical assets that the Company can access.
Separate account assets: Comprise actively traded mutual funds that have daily quoted net asset values for identical assets that the Company can access. Net asset values for the actively traded mutual funds in which the separate account assets are invested are obtained daily from the fund managers.
Level 2 measurements
Fixed income securities:
U.S. government and agencies:agencies, municipal, corporate - public and foreign government: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.
Municipal: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.
Corporate - public: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.
Corporate - privately placed:ValuedPrivately placed are valued using a discounted cash flow model that is widely accepted in the financial services industry and uses market observable inputs and inputs derived principally from, or corroborated by, observable market data. The primary inputs to the discounted cash flow model include an interest rate yield curve, as well as published credit spreads for similar assets in markets that are not active that incorporate the credit quality and industry sector of the issuer.
Foreign government: The primary inputs to the valuation includeCorporate - privately placed also includes redeemable preferred stock that are valued using quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, underlying stock prices and credit spreads.
ABS - collateralized debt obligations (“CDO”) and ABS - consumer and other: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads. Certain ABS - CDO and ABS - consumer and other are valued based on non-binding broker quotes whose inputs have been corroborated to be market observable.
RMBS: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads.
CMBS:MBS: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, collateral performance, and credit spreads.
Redeemable preferred stock: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, underlying stock prices and credit spreads.
Equity securities: The primary inputs to the valuation include quoted prices or quoted net asset values for identical or similar assets in markets that are not active.
Short-term: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads. For certain short-term investments, amortized cost is used as the best estimate of fair value.
Other investments: Free-standing exchange listed derivatives that are not actively traded Certain ABS are valued based on quoted pricesnon-binding broker quotes whose inputs have been corroborated to be market observable. Residential MBS include prepayment speeds as a primary input for identical instruments in markets that are not active.valuation.
| |
| • | Equity securities:The primary inputs to the valuation include quoted prices or quoted net asset values for identical or similar assets in markets that are not active. |
| |
| • | Short-term:The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads. |
OTC
Notes to Consolidated Financial Statements 2019 Form 10-K
| |
| • | Other investments: Free-standing exchange listed derivatives that are not actively traded are valued based on quoted prices for identical instruments in markets that are not active. |
Over-the-counter (“OTC”) derivatives, including interest rate swaps, foreign currency swaps, total return swaps, foreign exchange forward contracts, certain options and certain credit default swaps, are valued using models that rely on inputs such as interest rate yield curves, implied volatilities, index price levels, currency rates, and counterparty credit spreads that are observable for substantially the full term of the contract. The valuation techniques underlying the models are widely accepted in the financial services industry and do not involve significant judgment.
Level 3 measurements
Fixed income securities:
Municipal: Comprise municipal bonds that are not rated by third partythird-party credit rating agencies. The primary inputs to the valuation of these municipal bonds include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields and credit spreads. Also included are municipal bonds valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable and municipal bonds in default valued based on the present value of expected cash flows.
Corporate - public and Corporate - privately placed:placed, ABS and MBS: Primarily valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable. Other inputs for corporate fixed income securities include an interest rate yield curve, as well as published credit spreads for similar assets that incorporate the credit quality and industry sector of the issuer.
ABS - CDO, ABS - consumer and other, RMBS and CMBS: Valued based on non-binding broker quotes received from brokers who are familiar with the investments and where the inputs have not been corroborated to be market observable.
Equity securities: The primary inputs to the valuation include quoted prices or quoted net asset values for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements.
Other investments: Certain OTC derivatives, such as interest rate caps, certain credit default swaps and certain options (including swaptions), are valued using models that are widely accepted in the financial services industry. These are categorized as Level 3 as a result of the significance of non-market observable inputs such as volatility. Other primary inputs include interest rate yield curves and credit spreads.
Contractholder funds: Derivatives embedded in certain life and annuity contracts are valued internally using models widely accepted in the financial services industry that determine a single best estimate of fair value for the embedded derivatives within a block of contractholder liabilities. The models primarily use stochastically determined cash flows based on the contractual elements of embedded derivatives, projected option cost and applicable market data, such as interest rate yield curves and equity index volatility assumptions. These are categorized as Level 3 as a result of the significance of non-market observable inputs.
Assets and liabilities measured at fair value on a non-recurring basis
Mortgage loans written-down to fair value in connection with recognizing impairments are valued based on the fair value of the underlying collateral less costs to sell. Limited partnership interests written-down to fair value in connection with recognizing other-than-temporary impairments are generally valued using net asset values.
The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2016.
|
| | | | | | | | | | | | | | | | | | | |
| ($ in millions) | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | | Counterparty and cash collateral netting | | Balance as of December 31, 2016 |
| Assets | | | | | | | | | |
| Fixed income securities: | | | | | | | | | |
| U.S. government and agencies | $ | 2,918 |
| | $ | 719 |
| | $ | — |
| | | | $ | 3,637 |
|
| Municipal | — |
| | 7,208 |
| | 125 |
| | | | 7,333 |
|
| Corporate - public | — |
| | 31,414 |
| | 78 |
| | | | 31,492 |
|
| Corporate - privately placed | — |
| | 11,846 |
| | 263 |
| | | | 12,109 |
|
| Foreign government | — |
| | 1,075 |
| | — |
| | | | 1,075 |
|
| ABS - CDO | — |
| | 650 |
| | 27 |
| | | | 677 |
|
| ABS - consumer and other | — |
| | 452 |
| | 42 |
| | | | 494 |
|
| RMBS | — |
| | 727 |
| | 1 |
| | | | 728 |
|
| CMBS | — |
| | 248 |
| | 22 |
| | | | 270 |
|
| Redeemable preferred stock | — |
| | 24 |
| | — |
| | | | 24 |
|
| Total fixed income securities | 2,918 |
| | 54,363 |
| | 558 |
| | | | 57,839 |
|
| Equity securities | 5,247 |
| | 256 |
| | 163 |
| | | | 5,666 |
|
| Short-term investments | 850 |
| | 3,423 |
| | 15 |
| | | | 4,288 |
|
| Other investments: Free-standing derivatives | — |
| | 119 |
| | 1 |
| | $ | (9 | ) | | 111 |
|
| Separate account assets | 3,393 |
| | — |
| | — |
| | | | 3,393 |
|
| Other assets | — |
| | — |
| | 1 |
| | | | 1 |
|
| Total recurring basis assets | 12,408 |
| | 58,161 |
| | 738 |
| | (9 | ) | | 71,298 |
|
Non-recurring basis (1) | — |
| | — |
| | 24 |
| | | | 24 |
|
| Total assets at fair value | $ | 12,408 |
| | $ | 58,161 |
| | $ | 762 |
| | $ | (9 | ) | | $ | 71,322 |
|
| % of total assets at fair value | 17.4 | % | | 81.5 | % | | 1.1 | % | | — | % | | 100.0 | % |
| Liabilities | | | | | | | | | |
| Contractholder funds: Derivatives embedded in life and annuity contracts | $ | — |
| | $ | — |
| | $ | (290 | ) | | | | $ | (290 | ) |
| Other liabilities: Free-standing derivatives | (1 | ) | | (68 | ) | | (3 | ) | | $ | 28 |
| | (44 | ) |
| Total liabilities at fair value | $ | (1 | ) | | $ | (68 | ) | | $ | (293 | ) | | $ | 28 |
| | $ | (334 | ) |
| % of total liabilities at fair value | 0.3 | % | | 20.4 | % | | 87.7 | % | | (8.4 | )% | | 100.0 | % |
| |
(1)
• | Includes $24 million of limited partnership interests written-downEquity securities:The primary inputs to the valuation include quoted prices or quoted net asset values for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value in connection with recognizing other-than-temporary impairments.measurements. |
The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2015:
|
| | | | | | | | | | | | | | | | | | | |
| ($ in millions) | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | | Counterparty and cash collateral netting | | Balance as of December 31, 2015 |
| Assets | | | | | | | | | |
| Fixed income securities: | | | | | | | | | |
| U.S. government and agencies | $ | 3,056 |
| | $ | 861 |
| | $ | 5 |
| | | | $ | 3,922 |
|
| Municipal | — |
| | 7,240 |
| | 161 |
| | | | 7,401 |
|
| Corporate - public | — |
| | 30,356 |
| | 46 |
| | | | 30,402 |
|
| Corporate - privately placed | — |
| | 10,923 |
| | 502 |
| | | | 11,425 |
|
| Foreign government | — |
| | 1,033 |
| | — |
| | | | 1,033 |
|
| ABS - CDO | — |
| | 716 |
| | 61 |
| | | | 777 |
|
| ABS - consumer and other | — |
| | 1,500 |
| | 50 |
| | | | 1,550 |
|
| RMBS | — |
| | 946 |
| | 1 |
| | | | 947 |
|
| CMBS | — |
| | 446 |
| | 20 |
| | | | 466 |
|
| Redeemable preferred stock | — |
| | 25 |
| | — |
| | | | 25 |
|
| Total fixed income securities | 3,056 |
| | 54,046 |
| | 846 |
| | | | 57,948 |
|
| Equity securities | 4,786 |
| | 163 |
| | 133 |
| | | | 5,082 |
|
| Short-term investments | 615 |
| | 1,507 |
| | — |
| | | | 2,122 |
|
| Other investments: Free-standing derivatives | — |
| | 65 |
| | 1 |
| | $ | (13 | ) | | 53 |
|
| Separate account assets | 3,658 |
| | — |
| | — |
| | | | 3,658 |
|
| Other assets | 2 |
| | — |
| | 1 |
| | | | 3 |
|
| Total recurring basis assets | 12,117 |
|
| 55,781 |
|
| 981 |
|
| (13 | ) |
| 68,866 |
|
Non-recurring basis (1) | — |
| | — |
| | 55 |
| | | | 55 |
|
| Total assets at fair value | $ | 12,117 |
|
| $ | 55,781 |
|
| $ | 1,036 |
|
| $ | (13 | ) |
| $ | 68,921 |
|
| % of total assets at fair value | 17.6 | % | | 80.9 | % | | 1.5 | % | | — | % | | 100.0 | % |
| | | | | | | | | | |
| Liabilities | | | | | | | | | |
| Contractholder funds: Derivatives embedded in life and annuity contracts | $ | — |
| | $ | — |
| | $ | (299 | ) | | | | $ | (299 | ) |
| Other liabilities: Free-standing derivatives | (1 | ) | | (23 | ) | | (8 | ) | | $ | 7 |
| | (25 | ) |
| Total liabilities at fair value | $ | (1 | ) | | $ | (23 | ) | | $ | (307 | ) | | $ | 7 |
| | $ | (324 | ) |
| % of total liabilities at fair value | 0.3 | % | | 7.1 | % | | 94.8 | % | | (2.2 | )% | | 100.0 | % |
| |
| • | (1)Short-term:For certain short-term investments, amortized cost is used as the best estimate of fair value.
|
Includes $42 million | |
| • | Other investments: Certain OTC derivatives, such as interest rate caps, certain credit default swaps and certain options (including swaptions), are valued using models that are widely accepted in the financial services industry. These are categorized as Level 3 as a result of limited partnership intereststhe significance of non-market observable inputs such as volatility. Other primary inputs include interest rate yield curves and $13 millioncredit spreads. |
| |
| • | Contractholder funds: Derivatives embedded in certain life and annuity contracts are valued internally using models widely accepted in the financial services industry that determine a single best estimate of other investments written-down to fair value in connection with recognizing other-than-temporary impairments.for the embedded derivatives within a block of contractholder liabilities. The models primarily use stochastically determined cash flows based on the contractual elements of embedded derivatives, projected option cost and applicable market data, such as interest rate yield curves and equity index volatility assumptions. These are categorized as Level 3 as a result of the significance of non-market observable inputs. |
The following table summarizes quantitative information aboutInvestments excluded from the significant unobservable inputs used in Level 3 fair value measurements.hierarchy
Limited partnerships carried at fair value, which do not have readily determinable fair values, use NAV provided by the investees and are excluded from the fair value hierarchy. These investments are generally not redeemable by the investees and generally cannot be sold without approval of the general partner. The Company receives distributions of income and proceeds from the liquidation of the underlying assets of the investees, which usually takes place in years 4-9 of the typical contractual life of 10-12 years. As of December 31, 2019, the Company has commitments to invest $492 million in these limited partnership interests.
The Allstate Corporation 157
2019 Form 10-KNotes to Consolidated Financial Statements
|
| | | | | | | | | | | |
| ($ in millions) | Fair value | | Valuation technique | | Unobservable input | | Range | | Weighted average |
| December 31, 2016 | | | | | | | | | |
| Derivatives embedded in life and annuity contracts – Equity-indexed and forward starting options | $ | (247 | ) | | Stochastic cash flow model | | Projected option cost | | 1.0 - 2.2% | | 1.75% |
| | | | | | | | | | |
| December 31, 2015 | | | | | | | | | |
| Derivatives embedded in life and annuity contracts – Equity-indexed and forward starting options | $ | (247 | ) | | Stochastic cash flow model | | Projected option cost | | 1.0 - 2.2% | | 1.76% |
|
| | | | | | | | | | | | | | | | | | | | |
| Assets and liabilities measured at fair value |
| | | As of December 31, 2019 |
| ($ in millions) | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | | Counterparty and cash collateral netting | | Total |
| Assets | | | | | | | | | | |
| Fixed income securities: | | | | | | | | | | |
| U.S. government and agencies | | $ | 4,689 |
| | $ | 397 |
| | $ | — |
| | | | $ | 5,086 |
|
| Municipal | | — |
| | 8,558 |
| | 62 |
| | | | 8,620 |
|
| Corporate - public | | — |
| | 30,819 |
| | 61 |
| | | | 30,880 |
|
| Corporate - privately placed | | — |
| | 12,084 |
| | 114 |
| | | | 12,198 |
|
| Foreign government | | — |
| | 979 |
| | — |
| | | | 979 |
|
| ABS | | — |
| | 797 |
| | 65 |
| | | | 862 |
|
| MBS | | — |
| | 379 |
| | 40 |
| | | | 419 |
|
| Total fixed income securities | | 4,689 |
| | 54,013 |
| | 342 |
| | | | 59,044 |
|
| Equity securities | | 7,407 |
| | 384 |
| | 371 |
| | | | 8,162 |
|
| Short-term investments | | 1,940 |
| | 2,291 |
| | 25 |
| | | | 4,256 |
|
| Other investments: Free-standing derivatives | | — |
| | 180 |
| | — |
| | (40 | ) | | 140 |
|
| Separate account assets | | 3,044 |
| | — |
| | — |
| | | | 3,044 |
|
| Other assets | | 1 |
| | — |
| | — |
| | | | 1 |
|
| Total recurring basis assets | | 17,081 |
| | 56,868 |
| | 738 |
| | (40 | ) | | 74,647 |
|
| Total assets at fair value | | $ | 17,081 |
| | $ | 56,868 |
| | $ | 738 |
| | $ | (40 | ) | | $ | 74,647 |
|
| % of total assets at fair value | | 22.9 | % | | 76.2 | % | | 1.0 | % | | (0.1 | )% | | 100.0 | % |
| | | | | | | | | | | |
| Investments reported at NAV | | | | | | | | | | 1,814 |
|
| Total | | | | | | | | | | $ | 76,461 |
|
| | | | | | | | | | | |
| Liabilities | | | | | | | | | | |
| Contractholder funds: Derivatives embedded in life and annuity contracts | | $ | — |
| | $ | — |
| | $ | (462 | ) | | | | $ | (462 | ) |
| Other liabilities: Free-standing derivatives | | — |
| | (84 | ) | | — |
| | $ | 12 |
| | (72 | ) |
| Total recurring basis liabilities | | $ | — |
| | $ | (84 | ) | | $ | (462 | ) | | $ | 12 |
| | $ | (534 | ) |
| % of total liabilities at fair value | | — | % | | 15.7 | % | | 86.5 | % | | (2.2 | )% | | 100.0 | % |
Notes to Consolidated Financial Statements 2019 Form 10-K
|
| | | | | | | | | | | | | | | | | | | | |
| Assets and liabilities measured at fair value |
| | | As of December 31, 2018 |
| ($ in millions) | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | | Counterparty and cash collateral netting | | Total |
| Assets | | | | | | | | | | |
| Fixed income securities: | | | | | | | | | | |
| U.S. government and agencies | | $ | 5,085 |
| | $ | 432 |
| | $ | — |
| | | | $ | 5,517 |
|
| Municipal | | — |
| | 9,099 |
| | 70 |
| | | | 9,169 |
|
| Corporate - public | | — |
| | 29,200 |
| | 70 |
| | | | 29,270 |
|
| Corporate - privately placed | | — |
| | 10,798 |
| | 90 |
| | | | 10,888 |
|
| Foreign government | | — |
| | 747 |
| | — |
| | | | 747 |
|
| ABS | | — |
| | 976 |
| | 69 |
| | | | 1,045 |
|
| MBS | | — |
| | 508 |
| | 26 |
| | | | 534 |
|
| Total fixed income securities | | 5,085 |
| | 51,760 |
| | 325 |
| | | | 57,170 |
|
| Equity securities | | 4,364 |
| | 331 |
| | 341 |
| | | | 5,036 |
|
| Short-term investments | | 1,338 |
| | 1,659 |
| | 30 |
| | | | 3,027 |
|
| Other investments: Free-standing derivatives | | — |
| | 139 |
| | 1 |
| | $ | (23 | ) | | 117 |
|
| Separate account assets | | 2,805 |
| | — |
| | — |
| | | | 2,805 |
|
| Other assets | | 2 |
| | — |
| | — |
| | | | 2 |
|
| Total recurring basis assets | | $ | 13,594 |
|
| $ | 53,889 |
|
| $ | 697 |
|
| $ | (23 | ) |
| $ | 68,157 |
|
| % of total assets at fair value | | 19.9 | % | | 79.1 | % | | 1.0 | % | | — | % | | 100.0 | % |
| Investments reported at NAV | | | | | | | | | | 1,779 |
|
| Total | | | | | | | | | | $ | 69,936 |
|
| Liabilities | | | | | | | | | | |
| Contractholder funds: Derivatives embedded in life and annuity contracts | | $ | — |
| | $ | — |
| | $ | (224 | ) | | | | $ | (224 | ) |
| Other liabilities: Free-standing derivatives | | (1 | ) | | (62 | ) | | — |
| | $ | 6 |
| | (57 | ) |
| Total recurring basis liabilities | | $ | (1 | ) | | $ | (62 | ) | | $ | (224 | ) | | $ | 6 |
| | $ | (281 | ) |
| % of total liabilities at fair value | | 0.3 | % | | 22.1 | % | | 79.7 | % | | (2.1 | )% | | 100.0 | % |
|
| | | | | | | | | | | | |
| Quantitative information about the significant unobservable inputs used in Level 3 fair value measurements |
| ($ in millions) | | Fair value | | Valuation technique | | Unobservable input | | Range | | Weighted average |
| December 31, 2019 | | | | | | | | | | |
| Derivatives embedded in life and annuity contracts – Equity-indexed and forward starting options | | $ | (430 | ) | | Stochastic cash flow model | | Projected option cost | | 1.0 - 4.2% | | 2.67% |
| | | | | | | | | | | |
| December 31, 2018 | | | | | | | | | | |
| Derivatives embedded in life and annuity contracts – Equity-indexed and forward starting options | | $ | (185 | ) | | Stochastic cash flow model | | Projected option cost | | 1.0 - 2.2% | | 1.74% |
The embedded derivatives are equity-indexed and forward starting options in certain life and annuity products that provide customers with interest crediting rates based on the performance of the S&P 500. If the projected option cost increased (decreased), it would result in a higher (lower) liability fair value.
As of December 31, 20162019 and 2015,2018, Level 3 fair value measurements of fixed income securities total $558$342 million and $846$325 million, respectively, and include $307$50 million and $625$105 million, respectively, of securities valued based on non-binding broker quotes where the inputs have not been corroborated to be market
observable and $80$36 million and $96$44 million, respectively, of municipal fixed income securities that are not rated by third partythird-party credit rating agencies. TheAs the Company does not develop the Level 3 fair value unobservable inputs used in measuring fair value; therefore,for these fixed income securities, they are not included in the table above. However, an increase (decrease) in credit spreads for fixed income securities valued based on non-binding broker quotes would result in a lower (higher) fair value, and an increase (decrease) in the credit rating of municipal bonds that are not rated by third partythird-party credit rating agencies would result in a higher (lower) fair value.
The Allstate Corporation 159
2019 Form 10-KNotes to Consolidated Financial Statements
The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the year ended December 31, 2016.
|
| | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | | Total gains (losses) included in: | | | | | |
| | Balance as of December 31, 2015 | | Net income (1) | | OCI | | Transfers into Level 3 | | Transfers out of Level 3 | |
| Assets | | | | | | | | | | |
| Fixed income securities: | | | | | | | | | | |
| U.S. government and agencies | $ | 5 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (4 | ) | |
| Municipal | 161 |
| | 12 |
| | (10 | ) | | 6 |
| | (23 | ) | |
| Corporate - public | 46 |
| | — |
| | — |
| | 41 |
| | (43 | ) | |
| Corporate - privately placed | 502 |
| | 15 |
| | 18 |
| | 16 |
| | (398 | ) | |
| ABS - CDO | 61 |
| | 1 |
| | 6 |
| | 10 |
| | (43 | ) | |
| ABS - consumer and other | 50 |
| | — |
| | (3 | ) | | 3 |
| | (35 | ) | |
| RMBS | 1 |
| | 1 |
| | — |
| | — |
| | — |
| |
| CMBS | 20 |
| | — |
| | — |
| | — |
| | (1 | ) | |
| Total fixed income securities | 846 |
| | 29 |
| | 11 |
| | 76 |
| | (547 | ) | |
| Equity securities | 133 |
| | (32 | ) | | 12 |
| | — |
| | (12 | ) | |
| Short-term investments | — |
| | — |
| | — |
| | — |
| | — |
| |
| Free-standing derivatives, net | (7 | ) | | 6 |
| | — |
| | — |
| | — |
| |
| Other assets | 1 |
| | — |
| | — |
| | — |
| | — |
| |
| Total recurring Level 3 assets | $ | 973 |
|
| $ | 3 |
|
| $ | 23 |
|
| $ | 76 |
|
| $ | (559 | ) | |
| Liabilities | | | | | | | | | | |
| Contractholder funds: Derivatives embedded in life and annuity contracts | $ | (299 | ) | | $ | 5 |
| | $ | — |
| | $ | — |
| | $ | — |
| |
| Total recurring Level 3 liabilities | $ | (299 | ) |
| $ | 5 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
| |
| | | | | | | | | | | |
| | Purchases | | Sales | | Issues | | Settlements | | Balance as of December 31, 2016 | |
| Assets | | | | | | | | | | |
| Fixed income securities: | | | | | | | | | | |
| U.S. government and agencies | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1 | ) | | $ | — |
| |
| Municipal | 22 |
| | (40 | ) | | — |
| | (3 | ) | | 125 |
| |
| Corporate - public | 47 |
| | (11 | ) | | — |
| | (2 | ) | | 78 |
| |
| Corporate - privately placed | 181 |
| | (15 | ) | | — |
| | (56 | ) | | 263 |
| |
| ABS - CDO | 40 |
| | (3 | ) | | — |
| | (45 | ) | | 27 |
| |
| ABS - consumer and other | 35 |
| | (5 | ) | | — |
| | (3 | ) | | 42 |
| |
| RMBS | — |
| | (1 | ) | | — |
| | — |
| | 1 |
| |
| CMBS | 5 |
| | — |
| | — |
| | (2 | ) | | 22 |
| |
| Total fixed income securities | 330 |
| | (75 | ) | | — |
| | (112 | ) | | 558 |
| |
| Equity securities | 65 |
| | (4 | ) | | — |
| | 1 |
| | 163 |
| |
| Short-term investments | 15 |
| | — |
| | — |
| | — |
| | 15 |
| |
| Free-standing derivatives, net | — |
| | — |
| | — |
| | (1 | ) | | (2 | ) | (2 | ) |
| Other assets | — |
| | — |
| | — |
| | — |
| | 1 |
| |
| Total recurring Level 3 assets | $ | 410 |
| | $ | (79 | ) | | $ | — |
| | $ | (112 | ) | | $ | 735 |
| |
| Liabilities | | | | | | | | | | |
| Contractholder funds: Derivatives embedded in life and annuity contracts | $ | — |
| | $ | — |
| | $ | (3 | ) | | $ | 7 |
| | $ | (290 | ) | |
| Total recurring Level 3 liabilities | $ | — |
| | $ | — |
| | $ | (3 | ) | | $ | 7 |
| | $ | (290 | ) | |
| |
(1)
| The effect to net income totals $8 million and is reported in the Consolidated Statements of Operations as follows: $(9) million in realized capital gains and losses, $12 million in net investment income, $(4) million in interest credited to contractholder funds and $9 million in life and annuity contract benefits. |
| |
(2)
| Comprises $1 million of assets and $3 million of liabilities. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Rollforward of Level 3 assets and liabilities held at fair value during the year ended December 31, 2019 |
| | | Balance as of December 31, 2018 | | Total gains (losses) included in: | | Transfers | | | | | | | | | | Balance as of December 31, 2019 |
| ($ in millions) | | | Net income | | OCI | | Into Level 3 | | Out of Level 3 | | Purchases | | Sales | | Issues | | Settlements | |
| Assets | | | | | | | | | | | | | | | | | | | | |
| Fixed income securities: | | | | | | | | | | | | | | | | | | | | |
| Municipal | | $ | 70 |
| | $ | 1 |
| | $ | 4 |
| | $ | — |
| | $ | (5 | ) | | $ | — |
| | $ | (5 | ) | | $ | — |
| | $ | (3 | ) | | $ | 62 |
|
| Corporate - public | | 70 |
| | — |
| | 3 |
| | 30 |
| | (113 | ) | | 86 |
| | (11 | ) | | — |
| | (4 | ) | | 61 |
|
| Corporate - privately placed | | 90 |
| | (1 | ) | | 2 |
| | 43 |
| | (2 | ) | | 4 |
| | (13 | ) | | — |
| | (9 | ) | | 114 |
|
| ABS | | 69 |
| | 1 |
| | (1 | ) | | 76 |
| | (210 | ) | | 159 |
| | (22 | ) | | — |
| | (7 | ) | | 65 |
|
| MBS | | 26 |
| | — |
| | (2 | ) | | 9 |
| | — |
| | 9 |
| | — |
| | — |
| | (2 | ) | | 40 |
|
| Total fixed income securities | | 325 |
| | 1 |
| | 6 |
| | 158 |
| | (330 | ) | | 258 |
| | (51 | ) | | — |
| | (25 | ) | | 342 |
|
| Equity securities | | 341 |
| | 30 |
| | — |
| | — |
| | — |
| | 82 |
| | (82 | ) | | — |
| | — |
| | 371 |
|
| Short-term investments | | 30 |
| | — |
| | — |
| | — |
| | — |
| | 35 |
| | (40 | ) | | — |
| | — |
| | 25 |
|
| Free-standing derivatives, net | | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total recurring Level 3 assets | | 697 |
| | 30 |
| | 6 |
| | 158 |
| | (330 | ) | | 375 |
| | (173 | ) | | — |
| | (25 | ) | | 738 |
|
| Liabilities | | | | | | | | | | | | | | | | | | | | |
| Contractholder funds: Derivatives embedded in life and annuity contracts | | (224 | ) | | (61 | ) | | — |
| | (175 | ) | | — |
| | — |
| | — |
| | (16 | ) | | 14 |
| | (462 | ) |
| Total recurring Level 3 liabilities | | $ | (224 | ) | | $ | (61 | ) | | $ | — |
| | $ | (175 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (16 | ) | | $ | 14 |
| | $ | (462 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
| Total Level 3 gains (losses) included in net income for the year ended December 31, 2019 |
| ($ in millions) | | Net investment income | | Realized capital gains and losses | | Life contract benefits | | Interest credited to contractholder funds | | Total |
| Components of net income | | $ | (2 | ) | | $ | 32 |
| | $ | 7 |
| | $ | (68 | ) | | $ | (31 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Rollforward of Level 3 assets and liabilities held at fair value during the year ended December 31, 2018 |
| | | Balance as of December 31, 2017 | | Total gains (losses) included in: | | Transfers | | | | | | | | | | Balance as of December 31, 2018 |
| ($ in millions) | | | Net income | | OCI | | Into Level 3 | | Out of Level 3 | | Purchases | | Sales | | Issues | | Settlements | |
| Assets | | | | | | | | | | | | | | | | | | | | |
| Fixed income securities: | | | | | | | | | | | | | | | | | | | | |
| Municipal | | $ | 101 |
| | $ | 1 |
| | $ | (2 | ) | | $ | — |
| | $ | (26 | ) | | $ | 10 |
| | $ | (8 | ) | | $ | — |
| | $ | (6 | ) | | $ | 70 |
|
| Corporate - public | | 108 |
| | — |
| | (3 | ) | | 17 |
| | (21 | ) | | 10 |
| | (38 | ) | | — |
| | (3 | ) | | 70 |
|
| Corporate - privately placed | | 224 |
| | (1 | ) | | (3 | ) | | 20 |
| | (119 | ) | | 22 |
| | (5 | ) | | — |
| | (48 | ) | | 90 |
|
| ABS | | 147 |
| | — |
| | 2 |
| | 42 |
| | (159 | ) | | 160 |
| | (97 | ) | | — |
| | (26 | ) | | 69 |
|
| MBS | | 26 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | (1 | ) | | 26 |
|
| Total fixed income securities | | 606 |
| | — |
| | (6 | ) | | 79 |
| | (325 | ) | | 203 |
| | (148 | ) | | — |
| | (84 | ) | | 325 |
|
| Equity securities | | 210 |
| | 37 |
| | — |
| | — |
| | — |
| | 109 |
| | (15 | ) | | — |
| | — |
| | 341 |
|
| Short-term investments | | 20 |
| | — |
| | — |
| | — |
| | — |
| | 55 |
| | (45 | ) | | — |
| | — |
| | 30 |
|
| Free-standing derivatives, net | | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
| Total recurring Level 3 assets | | $ | 837 |
| | $ | 37 |
| | $ | (6 | ) | | $ | 79 |
| | $ | (325 | ) | | $ | 367 |
| | $ | (208 | ) | | $ | — |
| | $ | (84 | ) | | $ | 697 |
|
| Liabilities | | | | | | | | | | | | | | | | | | | | |
| Contractholder funds: Derivatives embedded in life and annuity contracts | | $ | (286 | ) | | $ | 58 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (2 | ) | | $ | 6 |
| | $ | (224 | ) |
| Total recurring Level 3 liabilities | | $ | (286 | ) | | $ | 58 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (2 | ) | | $ | 6 |
| | $ | (224 | ) |
The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the year ended December 31, 2015.
|
| | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | | Total gains (losses) included in: | | | | | |
| | Balance as of December 31, 2014 | | Net income (1) | | OCI | | Transfers into Level 3 | | Transfers out of Level 3 | |
| Assets | | | | | | | | | | |
| Fixed income securities: | | | | | | | | | | |
| U.S. government and agencies | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
| Municipal | 270 |
| | (4 | ) | | (7 | ) | | 3 |
| | (2 | ) | |
| Corporate - public | 214 |
| | — |
| | — |
| | — |
| | (175 | ) | |
| Corporate - privately placed | 677 |
| | 13 |
| | (20 | ) | | 13 |
| | (106 | ) | |
| ABS - CDO | 104 |
| | (1 | ) | | 4 |
| | 43 |
| | (52 | ) | |
| ABS - consumer and other | 92 |
| | (1 | ) | | — |
| | — |
| | (98 | ) | |
| RMBS | 1 |
| | — |
| | — |
| | — |
| | — |
| |
| CMBS | 23 |
| | — |
| | — |
| | — |
| | — |
| |
| Total fixed income securities | 1,387 |
|
| 7 |
|
| (23 | ) |
| 59 |
|
| (433 | ) | |
| Equity securities | 83 |
| | (3 | ) | | (5 | ) | | — |
| | — |
| |
| Short-term investments | 5 |
| | — |
| | — |
| | — |
| | — |
| |
| Free-standing derivatives, net | (7 | ) | | 1 |
| | — |
| | — |
| | — |
| |
| Other assets | 1 |
| | — |
| | — |
| | — |
| | — |
| |
| Total recurring Level 3 assets | $ | 1,469 |
|
| $ | 5 |
|
| $ | (28 | ) |
| $ | 59 |
|
| $ | (433 | ) | |
| Liabilities | | | | | | | | | | |
| Contractholder funds: Derivatives embedded in life and annuity contracts | $ | (323 | ) | | $ | 19 |
| | $ | — |
| | $ | — |
| | $ | — |
| |
| Total recurring Level 3 liabilities | $ | (323 | ) |
| $ | 19 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
| |
| | | | | | | | | | | |
| | Purchases | | Sales | | Issues | | Settlements | | Balance as of December 31, 2015 | |
| Assets | | | | | | | | | | |
| Fixed income securities: | | | | | | | | | | |
| U.S. government and agencies | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1 | ) | | $ | 5 |
| |
| Municipal | — |
| | (91 | ) | | — |
| | (8 | ) | | 161 |
| |
| Corporate - public | 11 |
| | — |
| | — |
| | (4 | ) | | 46 |
| |
| Corporate - privately placed | 79 |
| | (74 | ) | | — |
| | (80 | ) | | 502 |
| |
| ABS - CDO | — |
| | (2 | ) | | — |
| | (35 | ) | | 61 |
| |
| ABS - consumer and other | 70 |
| | (5 | ) | | — |
| | (8 | ) | | 50 |
| |
| RMBS | — |
| | — |
| | — |
| | — |
| | 1 |
| |
| CMBS | 12 |
| | — |
| | — |
| | (15 | ) | | 20 |
| |
| Total fixed income securities | 172 |
| | (172 | ) | | — |
| | (151 | ) | | 846 |
| |
| Equity securities | 69 |
| | (11 | ) | | — |
| | — |
| | 133 |
| |
| Short-term investments | 35 |
| | (40 | ) | | — |
| | — |
| | — |
| |
| Free-standing derivatives, net | — |
| | — |
| | — |
| | (1 | ) | | (7 | ) | (2) |
| Other assets | — |
| | — |
| | — |
| | — |
| | 1 |
| |
| Total recurring Level 3 assets | $ | 276 |
| | $ | (223 | ) | | $ | — |
| | $ | (152 | ) | | $ | 973 |
| |
| Liabilities | | | | | | | | | | |
| Contractholder funds: Derivatives embedded in life and annuity contracts | $ | — |
| | $ | — |
| | $ | (2 | ) | | $ | 7 |
| | $ | (299 | ) | |
| Total recurring Level 3 liabilities | $ | — |
| | $ | — |
| | $ | (2 | ) | | $ | 7 |
| | $ | (299 | ) | |
| |
(1)
| The effect to net income totals $24 million and is reported in the Consolidated Statements of Operations as follows: $(8) million in realized capital gains and losses, $13 million in net investment income, $26 million in interest credited to contractholder funds and $(7) million in life and annuity contract benefits. |
| |
(2)
| Comprises $1 million of assets and $8 million of liabilities. |
|
| | | | | | | | | | | | | | | | | | | | |
| Total Level 3 gains (losses) included in net income for the year ended December 31, 2018 |
| ($ in millions) | | Net investment income | | Realized capital gains and losses | | Life contract benefits | | Interest credited to contractholder funds | | Total |
| Components of net income | | $ | — |
| | $ | 37 |
| | $ | (5 | ) | | $ | 63 |
| | $ | 95 |
|
The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the year ended December 31, 2014.
Notes to Consolidated Financial Statements 2019 Form 10-K
|
| | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | | Total gains (losses) included in: | | | | | |
| | Balance as of December 31, 2013 | | Net income (1) | | OCI | | Transfers into Level 3 | | Transfers out of Level 3 | |
| Assets | | | | | | | | | | |
| Fixed income securities: | | | | | | | | | | |
| U.S. government and agencies | $ | 7 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
| Municipal | 343 |
| | (2 | ) | | 18 |
| | — |
| | (17 | ) | |
| Corporate | 1,109 |
| | 24 |
| | (14 | ) | | 89 |
| | (125 | ) | |
| ABS | 192 |
| | 1 |
| | 2 |
| | 49 |
| | (144 | ) | |
| RMBS | 2 |
| | — |
| | — |
| | — |
| | — |
| |
| CMBS | 43 |
| | (1 | ) | | — |
| | 5 |
| | (4 | ) | |
| Redeemable preferred stock | 1 |
| | — |
| | — |
| | — |
| | — |
| |
| Total fixed income securities | 1,697 |
|
| 22 |
|
| 6 |
|
| 143 |
|
| (290 | ) | |
| Equity securities | 132 |
| | 22 |
| | (16 | ) | | — |
| | (2 | ) | |
| Short-term investments | — |
| | — |
| | — |
| | — |
| | — |
| |
| Free-standing derivatives, net | (5 | ) | | — |
| | — |
| | — |
| | — |
| |
| Other assets | — |
| | 1 |
| | — |
| | — |
| | — |
| |
| Assets held for sale | 362 |
| | (1 | ) | | 2 |
| | 4 |
| | (2 | ) | |
| Total recurring Level 3 assets | $ | 2,186 |
|
| $ | 44 |
|
| $ | (8 | ) |
| $ | 147 |
|
| $ | (294 | ) | |
| Liabilities | | | | | | | | | | |
| Contractholder funds: Derivatives embedded in life and annuity contracts | $ | (307 | ) | | $ | (8 | ) | | $ | — |
| | $ | — |
| | $ | — |
| |
| Liabilities held for sale | (246 | ) | | 17 |
| | — |
| | — |
| | — |
| |
| Total recurring Level 3 liabilities | $ | (553 | ) |
| $ | 9 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
| |
| | | | | | | | | | | |
| | Sold in LBL disposition (3) | | Purchases/Issues (4) | | Sales | | Settlements | | Balance as of December 31, 2014 | |
| Assets | | | | | | | | | | |
| Fixed income securities: | | | | | | | | | | |
| U.S. government and agencies | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1 | ) | | $ | 6 |
| |
| Municipal | — |
| | 6 |
| | (74 | ) | | (4 | ) | | 270 |
| |
| Corporate | — |
| | 64 |
| | (140 | ) | | (116 | ) | | 891 |
| |
| ABS | — |
| | 119 |
| | — |
| | (23 | ) | | 196 |
| |
| RMBS | — |
| | — |
| | — |
| | (1 | ) | | 1 |
| |
| CMBS | 4 |
| | 8 |
| | (1 | ) | | (31 | ) | | 23 |
| |
| Redeemable preferred stock | — |
| | — |
| | (1 | ) | | — |
| | — |
| |
| Total fixed income securities | 4 |
| | 197 |
| | (216 | ) | | (176 | ) | | 1,387 |
| |
| Equity securities | — |
| | 83 |
| | (136 | ) | | — |
| | 83 |
| |
| Short-term investments | — |
| | 45 |
| | (40 | ) | | — |
| | 5 |
| |
| Free-standing derivatives, net | — |
| | 2 |
| | — |
| | (4 | ) | | (7 | ) | (2 | ) |
| Other assets | — |
| | — |
| | — |
| | — |
| | 1 |
| |
| Assets held for sale | (351 | ) | | — |
| | (8 | ) | | (6 | ) | | — |
| |
| Total recurring Level 3 assets | $ | (347 | ) | | $ | 327 |
| | $ | (400 | ) | | $ | (186 | ) | | $ | 1,469 |
| |
| Liabilities | | | | | | | | | | |
| Contractholder funds: Derivatives embedded in life and annuity contracts | $ | — |
| | $ | (14 | ) | | $ | — |
| | $ | 6 |
| | $ | (323 | ) | |
| Liabilities held for sale | 230 |
| | (4 | ) | | — |
| | 3 |
| | — |
| |
| Total recurring Level 3 liabilities | $ | 230 |
| | $ | (18 | ) | | $ | — |
| | $ | 9 |
| | $ | (323 | ) | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Rollforward of Level 3 assets and liabilities held at fair value during the year ended December 31, 2017 | | | | Balance as of December 31, 2016 | | Total gains (losses) included in: | | Transfers | | | | | | | | | | Balance as of December 31, 2017 | | ($ in millions) | | | Net income | | OCI | | Into Level 3 | | Out of Level 3 | | Purchases | | Sales | | Issues | | Settlements | | | Assets | | | | | | | | | | | | | | | | | | | | | | Fixed income securities: | | | | | | | | | | | | | | | | | | | | | | Municipal | | $ | 125 |
| | $ | (1 | ) | | $ | 7 |
| | $ | — |
| | $ | (6 | ) | | $ | 8 |
| | $ | (29 | ) | | $ | — |
| | $ | (3 | ) | | $ | 101 |
| | Corporate - public | | 78 |
| | — |
| | — |
| | 4 |
| | (30 | ) | | 60 |
| | — |
| | — |
| | (4 | ) | | 108 |
| | Corporate - privately placed | | 263 |
| | 8 |
| | (2 | ) | | 30 |
| | (49 | ) | | 44 |
| | (30 | ) | | — |
| | (40 | ) | | 224 |
| | ABS | | 69 |
| | — |
| | 6 |
| | 60 |
| | (280 | ) | | 322 |
| | — |
| | — |
| | (30 | ) | | 147 |
| | MBS | | 23 |
| | — |
| | — |
| | — |
| | — |
| | 6 |
| | — |
| | — |
| | (3 | ) | | 26 |
| | Total fixed income securities | | 558 |
| | 7 |
| | 11 |
| | 94 |
| | (365 | ) | | 440 |
| | (59 | ) | | — |
| | (80 | ) | | 606 |
| | Equity securities | | 163 |
| | 13 |
| | 4 |
| | — |
| | (4 | ) | | 48 |
| | (14 | ) | | — |
| | — |
| | 210 |
| | Short-term investments | | 15 |
| | — |
| | — |
| | — |
| | — |
| | 45 |
| | (40 | ) | | — |
| | — |
| | 20 |
| | Free-standing derivatives, net | | (2 | ) | | 3 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | Other assets | | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | Total recurring Level 3 assets | | $ | 735 |
| | $ | 22 |
| | $ | 15 |
| | $ | 94 |
| | $ | (369 | ) | | $ | 533 |
| | $ | (113 | ) | | $ | — |
| | $ | (80 | ) | | $ | 837 |
| | Liabilities | | | | | | | | | | | | | | | | | | | | | | Contractholder funds: Derivatives embedded in life and annuity contracts | | $ | (290 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (2 | ) | | $ | 6 |
| | $ | (286 | ) | | Total recurring Level 3 liabilities | | $ | (290 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (2 | ) | | $ | 6 |
| | $ | (286 | ) |
| | | | | | | | | | | | | | | | | | | | | | | Total Level 3 gains (losses) included in net income for the year ended December 31, 2017 | | ($ in millions) | | Net investment income | | Realized capital gains and losses | | Life contract benefits | | Interest credited to contractholder funds | | Total | | Components of net income | | $ | 19 |
| | $ | 4 |
| | $ | 9 |
| | $ | (10 | ) | | $ | 22 |
|
| The effect to net income totals $53 million and is reported in the Consolidated Statements of Operations as follows: $34 million in realized capital gains and losses, $13 million in net investment income, $(5) million in interest credited to contractholder funds, $15 million in life and annuity contract benefits and $(4) million in loss on disposition of operations. |
| |
(2)
| Comprises $2 million of assets and $9 million of liabilities. |
| |
(3)
| Includes transfers from held for sale that took place in first quarter 2014 of $4 million for CMBS and $(4) million for Assets held for sale. |
| |
(4)
| Represents purchases for assets and issues for liabilities. |
Transfers between level categorizations may occur due to changes in the availability of market observable inputs, which generally are caused by changes in market conditions such as liquidity, trading volume or bid-ask spreads. Transfers between level categorizations may also occur due to changes in the valuation source. For example, insource, including situations where a fair value quote is not provided by the Company’s independent third-party valuation service provider and as a resultresulting in the price isbecoming stale or has been replaced with a broker quote whose inputs have not been corroborated to be market observable,observable. This situation will result in the transfer of a security is transferred into Level 3. Transfers in and out of level categorizations are reported as having occurred at the beginning of the quarter in which the transfer occurred. Therefore, for all transfers into Level 3, all realized and changes in unrealized gains and losses in the quarter of transfer are reflected in the Level 3 rollforward table.
There were no0 transfers between Level 1 and Level 2 during 2016, 20152019, 2018 or 2014.2017.
Transfers into Level 3 during 2016, 20152019, 2018 and 20142017 included situations where a fair value quote was not provided by
the Company’s independent third-party valuation service provider and as a result the price was stale or had been replaced with a broker quote where the inputs had not been corroborated to be market observable resulting in the security being classified as Level 3. Transfers into Level 3 during 2019 also included derivatives embedded in equity-indexed universal life contracts due to refinements in the valuation modeling resulting in an increase in significance of non-market observable inputs.
Transfers out of Level 3 during 2016, 20152019, 2018 and 20142017 included situations where a broker quote was used in the prior period and a fair value quote became available from the Company’s independent third-party valuation service provider in the current period. A quote utilizing the new pricing source was not available as of the prior period, and any gains or losses related to the change in valuation source for individual securities were not significant.
The following table provides the change in unrealized gains and losses included in net income for Level 3 assets and liabilities held as of December 31.Allstate Corporation 161
2019 Form 10-KNotes to Consolidated Financial Statements
|
| | | | | | | | | | | | |
| Valuation changes included in net income for Level 3 assets and liabilities held as of |
| | | December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Assets | | | | | | |
| Fixed income securities: | | | | | | |
| Municipal | | $ | 1 |
| | $ | — |
| | $ | (3 | ) |
| Corporate | | — |
| | — |
| | 1 |
|
| Total fixed income securities | | 1 |
|
| — |
|
| (2 | ) |
| Equity securities | | 6 |
| | 36 |
| | 13 |
|
| Free-standing derivatives, net | | (1 | ) | | — |
| | — |
|
| Other assets | | — |
| | — |
| | (1 | ) |
| Total recurring Level 3 assets | | $ | 6 |
|
| $ | 36 |
|
| $ | 10 |
|
| Liabilities | | | | | | |
| Contractholder funds: Derivatives embedded in life and annuity contracts | | $ | (61 | ) | | $ | 58 |
| | $ | — |
|
| Total recurring Level 3 liabilities | | (61 | ) |
| 58 |
|
| — |
|
| Total included in net income | | $ | (55 | ) | | $ | 94 |
| | $ | 10 |
|
| | | | | | | |
| Components of net income | | | | | | |
| Net investment income | | $ | (2 | ) | | $ | — |
| | $ | 19 |
|
| Realized capital gains and losses | | 8 |
| | 36 |
| | (8 | ) |
| Life contract benefits | | 7 |
| | (5 | ) | | 9 |
|
| Interest credited to contractholder funds | | (68 | ) | | 63 |
| | (10 | ) |
| Total included in net income | | $ | (55 | ) | | $ | 94 |
| | $ | 10 |
|
|
| | | | | | | | | | | | | | | | | | |
| Carrying values and fair value estimates of financial instruments not carried at fair value |
| ($ in millions) | | | | December 31, 2019 | | December 31, 2018 |
| Financial assets | | Fair value level | | Carrying value | | Fair value | | Carrying value | | Fair value |
| Mortgage loans | | Level 3 | | $ | 4,817 |
| | $ | 5,012 |
| | $ | 4,670 |
| | $ | 4,703 |
|
| Bank loans | | Level 3 | | 1,204 |
| | 1,185 |
| | 1,350 |
| | 1,298 |
|
| Agent loans | | Level 3 | | 666 |
| | 664 |
| | 620 |
| | 617 |
|
| | | | | | | | | | | |
| Financial liabilities | | | | | | | | | | |
| Contractholder funds on investment contracts | | Level 3 | | 8,438 |
| | 9,158 |
| | 9,250 |
| | 9,665 |
|
| Long-term debt | | Level 2 | | 6,631 |
| | 7,738 |
| | 6,451 |
| | 6,708 |
|
| Liability for collateral | | Level 2 | | $ | 1,829 |
| | $ | 1,829 |
| | $ | 1,458 |
| | $ | 1,458 |
|
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Assets | | | | | |
| Fixed income securities: | | | | | |
| Municipal | $ | 2 |
| | $ | (12 | ) | | $ | (7 | ) |
| Corporate | 2 |
| | 11 |
| | 11 |
|
| ABS | — |
| | 2 |
| | 1 |
|
| RMBS | — |
| | — |
| | (1 | ) |
| Total fixed income securities | 4 |
|
| 1 |
|
| 4 |
|
| Equity securities | (32 | ) | | (4 | ) | | — |
|
| Free-standing derivatives, net | 5 |
| | 1 |
| | 5 |
|
| Other assets | — |
| | — |
| | 1 |
|
| Total recurring Level 3 assets | $ | (23 | ) |
| $ | (2 | ) |
| $ | 10 |
|
| Liabilities | | | | | |
| Contractholder funds: Derivatives embedded in life and annuity contracts | $ | 5 |
| | $ | 19 |
| | $ | (8 | ) |
| Liabilities held for sale | — |
| | — |
| | 17 |
|
| Total recurring Level 3 liabilities | $ | 5 |
|
| $ | 19 |
|
| $ | 9 |
|
The amounts in the table above represent the change in unrealized gains and losses included in net income for the period of time that the asset or liability was determined to be in Level 3. These gains and losses total $(18) million in 2016 and are reported as follows: $(36) million in realized capital gains and losses, $13 million in net investment income, $(4) million in interest credited to contractholder funds and $9 million in life and annuity contract benefits. These gains and losses total $17 million in 2015 and are reported as follows: $(20) million in realized capital gains and losses, $18 million in net investment income, $26 million in interest credited to contractholder funds and $(7) million in life and annuity contract benefits. These gains and losses total $19 million in 2014 and are reported as follows: $(3) million in realized capital gains and losses, $12 million in net investment income, $(5) million in interest credited to contractholder funds and $15 million in life and annuity contract benefits.
Presented below are the carrying values and fair value estimates of financial instruments not carried at fair value.
Financial assets |
| |
| Note 7 | Derivative Financial Instruments and Off-balance Sheet Financial Instruments
|
|
| | | | | | | | | | | | | | | |
| ($ in millions) | December 31, 2016 | | December 31, 2015 |
| | Carrying value | | Fair value | | Carrying value | | Fair value |
| Mortgage loans | $ | 4,486 |
| | $ | 4,514 |
| | $ | 4,338 |
| | $ | 4,489 |
|
| Cost method limited partnerships | 1,282 |
| | 1,493 |
| | 1,154 |
| | 1,450 |
|
| Bank loans | 1,669 |
| | 1,677 |
| | 1,565 |
| | 1,527 |
|
| Agent loans | 467 |
| | 467 |
| | 422 |
| | 408 |
|
The fair value of mortgage loans is based on discounted contractual cash flows or, if the loans are impaired due to credit reasons, the fair value of collateral less costs to sell. Risk adjusted discount rates are selected using current rates at which similar loans
would be made to borrowers with similar characteristics, using similar types of properties as collateral. The fair value of cost method limited partnerships is determined using reported net asset values. The fair value of bank loans, which are reported in other investments, is based on broker quotes from brokers familiar with the loans and current market conditions. The fair value of agent loans, which are reported in other investments, is based on discounted cash flow calculations. Risk adjusted discount rates are selected using current rates at which similar loans would be made to borrowers with similar characteristics. The fair value measurements for mortgage loans, cost method limited partnerships, bank loans and agent loans are categorized as Level 3.
Financial liabilities
|
| | | | | | | | | | | | | | | |
| ($ in millions) | December 31, 2016 | | December 31, 2015 |
| | Carrying value | | Fair value | | Carrying value | | Fair value |
| Contractholder funds on investment contracts | $ | 11,313 |
| | $ | 12,009 |
| | $ | 12,424 |
| | $ | 12,874 |
|
| Long-term debt | 6,347 |
| | 6,920 |
| | 5,124 |
| | 5,648 |
|
| Liability for collateral | 1,129 |
| | 1,129 |
| | 840 |
| | 840 |
|
The fair value of contractholder funds on investment contracts is based on the terms of the underlying contracts incorporating current market-based crediting rates for similar contracts that reflect the Company’s own credit risk. Deferred annuities classified in contractholder funds are valued based on discounted cash flow models that incorporate current market-based margins and reflect the Company’s own credit risk. Immediate annuities without life contingencies and funding agreements are valued based on discounted cash flow models that incorporate current market-based implied interest rates and reflect the Company’s own credit risk. The fair value measurement for contractholder funds on investment contracts is categorized as Level 3.
The fair value of long-term debt is based on market observable data (such as the fair value of the debt when traded as an asset) or is determined using discounted cash flow calculations based on current interest rates for instruments with comparable terms and considers the Company’s own credit risk. The liability for collateral is valued at carrying value due to its short-term nature. The fair value measurements for long-term debt and liability for collateral are categorized as Level 2.
7. Derivative Financial Instruments and Off-balance sheet Financial Instruments
The Company uses derivatives for risk reduction and to increase investment portfolio returns through asset replication. Risk reduction activity is focused on managing the risks with certain assets and liabilities arising from the potential adverse impacts from changes in risk-free interest rates, changes in equity market valuations, increases in credit spreads and foreign currency fluctuations.
Asset replication refers to the “synthetic” creation of assets through the use of derivatives. The Company replicates fixed income securities using a combination of a credit default swap, index total return swap, or a foreign currency forward contract and one or more highly rated fixed income securities, primarily investment grade host bonds, to synthetically replicate the economic characteristics of one or more cash market securities. The Company replicates equity securities using futures, index total return swaps, and options to increase equity exposure.
Property-Liability may use interest rate swaps, swaptions, futures and options to manage the interest rate risks of existing investments. These instruments are utilized to change the duration of the portfolio in order to offset the economic effect that interest rates would otherwise have on the fair value of its fixed income securities. Fixed income index total return swaps are used to offset valuation losses in the fixed income portfolio during periods of declining market values. Credit default swaps are typically used to mitigate the credit risk within the Property-Liability fixed income portfolio. Equity index total return swaps, futures and options are used by Property-Liability to offset valuation losses in the equity portfolio during periods of declining equity market values. In addition, equity futures are used to hedge the market risk related to deferred compensation liability contracts. Forward contracts are primarily used by Property-Liability to hedge foreign currency risk associated with
Notes to Consolidated Financial Statements 2019 Form 10-K
holding foreign currency denominated investments and foreign operations.
Allstate Financial utilizes several derivative strategies to manage risk. Asset-liability management is a risk management strategypractice that is principally employed by Allstate FinancialLife and Allstate Annuities to balance the respective interest-rate sensitivities of its assets and liabilities. Depending upon the attributes of the assets acquired and liabilities issued, derivative instruments such as interest rate swaps, caps, swaptions and futures are utilized to change the interest rate characteristics of existing assets and liabilities to ensure the relationship is maintained within specified ranges and to reduce exposure to rising or falling interest rates. Fixed income index total return swaps are used to offset valuation losses in the portfolio during periods of declining market values. Credit default swaps are typically used to mitigate the credit risk within the Allstate FinancialLife and Allstate Annuities fixed income portfolio.portfolios. Futures and options are used for hedging the equity exposure contained in Allstate Financial’s equity indexed life and annuity product contracts that offer equity returns to contractholders. In addition, Allstate Financialthe Company uses equity index total return swaps, options and futures to offset valuation losses in the equity portfolio during periods of declining equity market values. Interest rate swaps are used to hedge interest rate risk inherent in funding agreements. Foreign currency swaps and forwards are primarily used by Allstate Financial to reduce the foreign currency risk associated with holding foreign currency denominated investments.
The Company may also use derivatives to manage the risk associated with corporate actions, including the sale of a business. During 2014, swaptions were utilized to hedge the expected proceeds from the disposition of LBL.
Asset replication refers to the “synthetic” creation of assets through the use of derivatives. The Company replicates fixed income securities using a combination of a credit default swap or a foreign currency forward contract and one or more highly rated fixed income securities, primarily investment grade host bonds, to synthetically replicate the economic characteristics of one or more cash market securities. The Company replicates equity securities using futures to increase equity exposure.
The Company also has derivatives embedded in non-derivative host contracts that are required to be separated from the host contracts and accounted for at fair value with changes in fair value of embedded derivatives reported in net income. The Company’s primary embedded derivatives are equity options in life and annuity product contracts, which provide returns linked to equity returnsindices to contractholders and conversion options in fixed income securities, which provide the Company with the right to convert the instrument into a predetermined number of shares of common stock.contractholders.
When derivatives meet specific criteria, they may be designated as accounting hedges and accounted for as fair value, cash flow, foreign currency fair value or foreign currency cash flow hedges. Allstate FinancialThe Company designates certain investment risk transfer reinsurance agreements as fair value hedges when the hedging instrument is highly effective in offsetting the risk of changes in the fair value of the hedged item. Allstate Financial designates certainThe fair value of its foreign currency swap contracts as cash flow hedges when the hedging instrument is highly effective in offsetting the exposure of variations in cash flows for the hedged risk that could affect net income. Amounts are reclassifiedliability is reported in contractholder funds in the Consolidated Statements of Financial Position. The impact from results of the fair value hedge is reported in interest credited to net investment income or realized capital gains and losses as
contractholder funds in the hedged item affects net income.Consolidated Statements of Operations.
The notional amounts specified in the contracts are used to calculate the exchange of contractual payments under the agreements and are generally not representative of the potential for gain or loss on these agreements. However, the notional amounts specified in credit default swaps where the Company has sold credit protection represent the maximum amount of potential loss, assuming no0 recoveries.
Fair value, which is equal to the carrying value, is the estimated amount that the Company would receive or pay to terminate the derivative contracts at the reporting date. The carrying value amounts for OTC derivatives are further adjusted for the effects, if any, of enforceable master netting agreements and are presented on a net basis, by counterparty agreement, in the Consolidated Statements of Financial Position. For certain exchange traded and cleared derivatives, margin deposits are required as well as daily cash settlements of margin accounts. As of December 31, 2016, the Company pledged $9 million of cash in the form of margin deposits.
For those derivatives which qualify forand have been designated as fair value hedge accounting hedges, net income includes the changes in the fair value of both the derivative instrument and the hedged risk, and therefore reflects any hedging ineffectiveness.risk. For cash flow hedges, gains and losses are amortized from accumulated other comprehensive incomeAOCI and are reported in net income in the same period the forecasted transactions being hedged impact net income.
Non-hedge accounting is generally used for “portfolio” level hedging strategies where the terms of the individual hedged items do not meet the strict homogeneity requirements to permit the application of hedge accounting. For non-hedge derivatives, net income includes changes in fair value and accrued periodic settlements, when applicable. With the exception of non-hedge derivatives used for asset replication and non-hedge embedded derivatives, all of the Company’s derivatives are evaluated for their ongoing effectiveness as either accounting hedge or non-hedge derivative financial instruments on at least a quarterly basis.
Fair value hedgesThe following table providesCompany had 1 derivative designated as a summary of the volume and fair value positions of derivative instruments as well as their reporting location in the Consolidated Statement of Financial Positionhedge as of December 31, 2016.2019 and 2018.
Cash flow hedges The Company had 0 derivatives designated as a cash flow hedge as of December 31, 2019 and 2018.
The Allstate Corporation 163
2019 Form 10-KNotes to Consolidated Financial Statements
| | | Summary of the volume and fair value positions of derivative instruments as of December 31, 2019 | | Summary of the volume and fair value positions of derivative instruments as of December 31, 2019 |
| | | | Volume (1) | | | | | | |
| ($ in millions, except number of contracts) | | Volume (1) | | | | | | | Balance sheet location | | Notional amount | | Number of contracts | | Fair value, net | | Gross asset | | Gross liability |
| | Balance sheet location | | Notional amount | | Number of contracts | | Fair value, net | | Gross asset | | Gross liability | |
| Asset derivatives | | | | | | | | | | | | | | | | | | | | | |
| Derivatives designated as accounting hedging instruments | | | | | | | | | | | |
| Foreign currency swap agreements | Other investments | | $ | 49 |
| | n/a |
| | $ | 5 |
| | $ | 5 |
| | $ | — |
| |
| Derivatives designated as fair value accounting hedging instruments | | Derivatives designated as fair value accounting hedging instruments | | | | | | | | | | |
| Other | | Other assets | | $ | 2 |
| | n/a |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Derivatives not designated as accounting hedging instruments | Derivatives not designated as accounting hedging instruments | | | | | | | | | | | Derivatives not designated as accounting hedging instruments | | | | | | | | | | |
| Interest rate contracts | | | | | | | | | | | | | | | | | | | | | |
| Interest rate cap agreements | Other investments | | 65 |
| | n/a |
| | 1 |
| | 1 |
| | — |
| |
| Futures | | Other assets | | — |
| | 3,668 |
| | — |
| | — |
| | — |
|
| Equity and index contracts | | | | | | | | | | | | | | | | | | | | | |
| Options | Other investments | | — |
| | 3,972 |
| | 88 |
| | 88 |
| | — |
| Other investments | | — |
| | 5,539 |
| | 140 |
| | 140 |
| | — |
|
| Financial futures contracts | Other assets | | — |
| | 261 |
| | — |
| | — |
| | — |
| |
| Foreign currency contracts | | | | | | | | | | | |
| Foreign currency forwards | Other investments | | 759 |
| | n/a |
| | — |
| | 24 |
| | (24 | ) | |
| Futures | | Other assets | | — |
| | 1,533 |
| | 1 |
| | 1 |
| | — |
|
| Total return index contracts | | | | | | | | | | | | |
| Total return swap agreements - fixed income | | Other investments | | 56 |
| | n/a |
| | 1 |
| | 1 |
| | — |
|
| Credit default contracts | | | | | | | | | | | | | | | | | | | | | |
| Credit default swaps – buying protection | Other investments | | 87 |
| | n/a |
| | (4 | ) | | — |
| | (4 | ) | Other investments | | 17 |
| | n/a |
| | — |
| | — |
| | — |
|
| Credit default swaps – selling protection | Other investments | | 140 |
| | n/a |
| | 2 |
| | 2 |
| | — |
| |
| Other contracts | | | | | | | | | | | |
| Other contracts | Other assets | | 3 |
| | n/a |
| | 1 |
| | 1 |
| | — |
| |
| Subtotal | | 1,054 |
|
| 4,233 |
|
| 88 |
|
| 116 |
|
| (28 | ) | | | 73 |
|
| 10,740 |
|
| 142 |
|
| 142 |
|
| — |
|
| Total asset derivatives | | $ | 1,103 |
|
| 4,233 |
|
| $ | 93 |
|
| $ | 121 |
|
| $ | (28 | ) | | | $ | 75 |
|
| 10,740 |
|
| $ | 142 |
|
| $ | 142 |
|
| $ | — |
|
| | | | | | | | | | | | | | | | | | | | | |
| Liability derivatives | | | | | | | | | | | | | | | | | | | | | |
| Derivatives not designated as accounting hedging instruments | Derivatives not designated as accounting hedging instruments | | | | | | | | | | | Derivatives not designated as accounting hedging instruments | | | | | | | | | | |
| Interest rate contracts | | | | | | | | | | | | |
| Interest rate cap agreements | | Other liabilities & accrued expenses | | $ | 34 |
| | n/a |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Futures | | Other liabilities & accrued expenses | | — |
| | 1,089 |
| | — |
| | — |
| | — |
|
| Equity and index contracts | | | | | | | | | | | | | | | | | | | | | |
| Options and futures | Other liabilities & accrued expenses | | $ | — |
| | 4,848 |
| | $ | (39 | ) | | $ | — |
| | $ | (39 | ) | |
| Options | | Other liabilities & accrued expenses | | — |
| | 5,400 |
| | (68 | ) | | — |
| | (68 | ) |
| Futures | | Other liabilities & accrued expenses | | — |
| | 3 |
| | — |
| | — |
| | — |
|
| Total return index contracts | | | | | | | | | | | | |
| Total return swap agreements - fixed income | | Other liabilities & accrued expenses | | 119 |
| | n/a |
| | — |
| | — |
| | — |
|
| Total return swap agreements - equity index | | Other liabilities & accrued expenses | | 187 |
| | n/a |
| | 11 |
| | 11 |
| | — |
|
| Foreign currency contracts | | | | | | | | | | | | |
| Foreign currency forwards | | Other liabilities & accrued expenses | | 745 |
| | n/a |
| | 19 |
| | 28 |
| | (9 | ) |
| Embedded derivative financial instruments | | | | | | | | | | | Embedded derivative financial instruments | | | | | | | | | | |
| Guaranteed accumulation benefits | Contractholder funds | | 391 |
| | n/a |
| | (34 | ) | | — |
| | (34 | ) | Contractholder funds | | 161 |
| | n/a |
| | (18 | ) | | — |
| | (18 | ) |
| Guaranteed withdrawal benefits | Contractholder funds | | 290 |
| | n/a |
| | (9 | ) | | — |
| | (9 | ) | Contractholder funds | | 205 |
| | n/a |
| | (14 | ) | | — |
| | (14 | ) |
| Equity-indexed and forward starting options in life and annuity product contracts | Contractholder funds | | 1,751 |
| | n/a |
| | (247 | ) | | — |
| | (247 | ) | Contractholder funds | | 1,791 |
| | n/a |
| | (430 | ) | | — |
| | (430 | ) |
| Credit default contracts | | | | | | | | | | | | | | | | | | | | | |
| Credit default swaps – buying protection | Other liabilities & accrued expenses | | 136 |
| | n/a |
| | (2 | ) | | — |
| | (2 | ) | Other liabilities & accrued expenses | | 152 |
| | n/a |
| | (7 | ) | | — |
| | (7 | ) |
| Credit default swaps – selling protection | Other liabilities & accrued expenses | | 105 |
| | n/a |
| | (3 | ) | | — |
| | (3 | ) | Other liabilities & accrued expenses | | 9 |
| | n/a |
| | — |
| | — |
| | — |
|
| Subtotal | | 2,673 |
|
| 4,848 |
|
| (334 | ) |
| — |
|
| (334 | ) | |
| Total liability derivatives | | 2,673 |
|
| 4,848 |
|
| (334 | ) |
| $ | — |
|
| $ | (334 | ) | | | 3,403 |
|
| 6,492 |
|
| (507 | ) |
| $ | 39 |
|
| $ | (546 | ) |
| Total derivatives | | $ | 3,776 |
|
| 9,081 |
|
| $ | (241 | ) | | | | | | | $ | 3,478 |
|
| 17,232 |
|
| $ | (365 | ) | | | | |
| |
(1) | Volume for OTC and cleared derivative contracts is represented by their notional amounts. Volume for exchange traded derivatives is represented by the number of contracts, which is the basis on which they are traded. (n/a = not applicable) |
The following table provides a summary of the volume and fair value positions of derivative instruments as well as their reporting location in the Consolidated Statement of Financial Position as of December 31, 2015.
Notes to Consolidated Financial Statements 2019 Form 10-K
|
| | | | | | | | | | | | | | | | | | | | |
| ($ in millions, except number of contracts) | | | Volume (1) | | | | | | |
| | Balance sheet location | | Notional amount | | Number of contracts | | Fair value, net | | Gross asset | | Gross liability |
| Asset derivatives | | | | | | | | | | | |
| Derivatives designated as accounting hedging instruments | | | | | | | | | | |
| Foreign currency swap agreements | Other investments | | $ | 45 |
| | n/a |
| | $ | 6 |
| | $ | 6 |
| | $ | — |
|
| Derivatives not designated as accounting hedging instruments | | | | | | | | | | |
| Interest rate contracts | | | | | | | | | | | |
| Interest rate cap agreements | Other investments | | 42 |
| | n/a |
| | — |
| | — |
| | — |
|
| Equity and index contracts | | | | | | | | | | | |
Options and warrants (2) | Other investments | | — |
| | 3,730 |
| | 44 |
| | 44 |
| | — |
|
| Financial futures contracts | Other assets | | — |
| | 1,897 |
| | 2 |
| | 2 |
| | — |
|
| Foreign currency contracts | | | | | | | | | | | |
| Foreign currency forwards | Other investments | | 185 |
| | n/a |
| | 1 |
| | 2 |
| | (1 | ) |
| Embedded derivative financial instruments | | | | | | | | | | | |
| Other embedded derivative financial instruments | Other investments | | 1,000 |
| | n/a |
| | — |
| | — |
| | — |
|
| Credit default contracts | | | | | | | | | | | |
| Credit default swaps – buying protection | Other investments | | 112 |
| | n/a |
| | 4 |
| | 5 |
| | (1 | ) |
| Credit default swaps – selling protection | Other investments | | 150 |
| | n/a |
| | 2 |
| | 2 |
| | — |
|
| Other contracts | | | | | | | | | | | |
| Other contracts | Other investments | | 31 |
| | n/a |
| | 1 |
| | 1 |
| | — |
|
| Other contracts | Other assets | | 3 |
| | n/a |
| | 1 |
| | 1 |
| | — |
|
| Subtotal | | | 1,523 |
|
| 5,627 |
|
| 55 |
|
| 57 |
|
| (2 | ) |
| Total asset derivatives | | | $ | 1,568 |
| | 5,627 |
| | $ | 61 |
|
| $ | 63 |
|
| $ | (2 | ) |
| | | | |
| | |
| | |
| | |
| | |
|
| Liability derivatives | | | | | | | | | | | |
| Derivatives designated as accounting hedging instruments | | | | | | | | | | |
| Foreign currency swap agreements | Other liabilities & accrued expenses | | $ | 19 |
| | n/a |
| | $ | 4 |
| | $ | 4 |
| | $ | — |
|
| Derivatives not designated as accounting hedging instruments | | | | | | | | | | |
| Interest rate contracts | | | | | | | | | | | |
| Interest rate swap agreements | Other liabilities & accrued expenses | | 85 |
| | n/a |
| | — |
| | — |
| | — |
|
| Interest rate cap agreements | Other liabilities & accrued expenses | | 72 |
| | n/a |
| | 1 |
| | 1 |
| | — |
|
| Equity and index contracts | | | | | | | | | | | |
| Options and futures | Other liabilities & accrued expenses | | — |
| | 4,406 |
| | (7 | ) | | — |
| | (7 | ) |
| Foreign currency contracts | | | | | | | | | | | |
| Foreign currency forwards | Other liabilities & accrued expenses | | 361 |
| | n/a |
| | (12 | ) | | 1 |
| | (13 | ) |
| Embedded derivative financial instruments | | | | | | | | | | | |
| Guaranteed accumulation benefits | Contractholder funds | | 481 |
| | n/a |
| | (38 | ) | | — |
| | (38 | ) |
| Guaranteed withdrawal benefits | Contractholder funds | | 332 |
| | n/a |
| | (14 | ) | | — |
| | (14 | ) |
| Equity-indexed and forward starting options in life and annuity product contracts | Contractholder funds | | 1,781 |
| | n/a |
| | (247 | ) | | — |
| | (247 | ) |
| Other embedded derivative financial instruments | Contractholder funds | | 85 |
| | n/a |
| | — |
| | — |
| | — |
|
| Credit default contracts | | | | | | | | | | | |
| Credit default swaps – buying protection | Other liabilities & accrued expenses | | 88 |
| | n/a |
| | (2 | ) | | — |
| | (2 | ) |
| Credit default swaps – selling protection | Other liabilities & accrued expenses | | 105 |
| | n/a |
| | (8 | ) | | — |
| | (8 | ) |
| Subtotal | | | 3,390 |
|
| 4,406 |
|
| (327 | ) |
| 2 |
|
| (329 | ) |
| Total liability derivatives | | | 3,409 |
|
| 4,406 |
|
| (323 | ) |
| $ | 6 |
|
| $ | (329 | ) |
| Total derivatives | | | $ | 4,977 |
|
| 10,033 |
|
| $ | (262 | ) | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| Summary of the volume and fair value positions of derivative instruments as of December 31, 2018 |
| | | | Volume | | | | | | |
| ($ in millions, except number of contracts) | Balance sheet location | | Notional amount | | Number of contracts | | Fair value, net | | Gross asset | | Gross liability |
| Asset derivatives | | | | | | | | | | | |
| Derivatives not designated as accounting hedging instruments | | | | | | | | | | |
| Interest rate contracts | | | | | | | | | | | |
| Interest rate cap agreements | Other investments | | $ | 6 |
| | n/a |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Futures | Other assets | | — |
| | 1,330 |
| | 1 |
| | 1 |
| | — |
|
| Equity and index contracts | | | | | | | | | | | |
| Options | Other investments | | — |
| | 11,131 |
| | 115 |
| | 115 |
| | — |
|
| Futures | Other assets | | — |
| | 1,453 |
| | 1 |
| | 1 |
| | — |
|
| Total return index contracts | | | | | | | | | | | |
| Total return swap agreements - fixed income | Other investments | | 7 |
| | n/a |
| | — |
| | — |
| | — |
|
| Total return swap agreements - equity index | Other investments | | 61 |
| | n/a |
| | (2 | ) | | — |
| | (2 | ) |
| Foreign currency contracts | | | | | | | | | | | |
| Foreign currency forwards | Other investments | | 258 |
| | n/a |
| | 10 |
| | 11 |
| | (1 | ) |
| Credit default contracts | | | | | | | | | | | |
| Credit default swaps – buying protection | Other investments | | 136 |
| | n/a |
| | (1 | ) | | 2 |
| | (3 | ) |
| Other contracts | | | | | | | | | | | |
| Other | Other assets | | 2 |
| | n/a |
| | — |
| | — |
| | — |
|
| Total asset derivatives | | | $ | 470 |
| | 13,914 |
| | $ | 124 |
|
| $ | 130 |
|
| $ | (6 | ) |
| | | | | | | | | | | | |
| Liability derivatives | | | | | | | | | | | |
| Derivatives not designated as accounting hedging instruments | | | | | | | | | | |
| Interest rate contracts | | | | | | | | | | | |
| Interest rate cap agreements | Other liabilities & accrued expenses | | $ | 31 |
| | n/a |
| | $ | 1 |
| | $ | 1 |
| | $ | — |
|
| Futures | Other liabilities & accrued expenses | | — |
| | 1,300 |
| | (1 | ) | | — |
| | (1 | ) |
| Equity and index contracts | | | | | | | | | | | |
| Options and futures | Other liabilities & accrued expenses | | — |
| | 10,956 |
| | (50 | ) | | — |
| | (50 | ) |
| Total return index contracts | | | | | | | | | | | |
| Total return swap agreements - fixed income | Other liabilities & accrued expenses | | 38 |
| | n/a |
| | (1 | ) | | — |
| | (1 | ) |
| Total return swap agreements - equity index | Other liabilities & accrued expenses | | 71 |
| | n/a |
| | (4 | ) | | — |
| | (4 | ) |
| Foreign currency contracts | | | | | | | | | | | |
| Foreign currency forwards | Other liabilities & accrued expenses | | 341 |
| | n/a |
| | 10 |
| | 11 |
| | (1 | ) |
| Embedded derivative financial instruments | | | | | | | | | | |
| Guaranteed accumulation benefits | Contractholder funds | | 169 |
| | n/a |
| | (25 | ) | | — |
| | (25 | ) |
| Guaranteed withdrawal benefits | Contractholder funds | | 210 |
| | n/a |
| | (14 | ) | | — |
| | (14 | ) |
| Equity-indexed and forward starting options in life and annuity product contracts | Contractholder funds | | 1,770 |
| | n/a |
| | (185 | ) | | — |
| | (185 | ) |
| Credit default contracts | | | | | | | | | | | |
| Credit default swaps – buying protection | Other liabilities & accrued expenses | | 40 |
| | n/a |
| | — |
| | — |
| | — |
|
| Credit default swaps – selling protection | Other liabilities & accrued expenses | | 5 |
| | n/a |
| | — |
| | — |
| | — |
|
| Total liability derivatives | | | 2,675 |
|
| 12,256 |
|
| (269 | ) |
| $ | 12 |
|
| $ | (281 | ) |
| Total derivatives | | | $ | 3,145 |
|
| 26,170 |
|
| $ | (145 | ) | | | | |
The Allstate Corporation 165
2019 Form 10-KNotes to Consolidated Financial Statements
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Gross and net amounts for OTC derivatives (1) |
| | | | | Offsets | | | | | | |
| ($ in millions) | | Gross amount | | Counter- party netting | | Cash collateral (received) pledged | | Net amount on balance sheet | | Securities collateral (received) pledged | | Net amount |
| December 31, 2019 | | | | | | | | | | | | |
| Asset derivatives | | $ | 40 |
| | $ | (39 | ) | | $ | (1 | ) | | $ | — |
| | $ | — |
| | $ | — |
|
| Liability derivatives | | (16 | ) | | 39 |
| | (27 | ) | | (4 | ) | | — |
| | (4 | ) |
| | | | | | | | | | | | | |
| December 31, 2018 | | | | | | | | | | | | |
| Asset derivatives | | $ | 25 |
| | $ | (18 | ) | | $ | (5 | ) | | $ | 2 |
| | $ | — |
| | $ | 2 |
|
| Liability derivatives | | (12 | ) | | 18 |
| | (12 | ) | | (6 | ) | | — |
| | (6 | ) |
| |
(1) | Volume forAll OTC and cleared derivative contracts is represented by their notional amounts. Volume for exchange traded derivatives is represented by the number of contracts, which is the basis on which they are traded. (n/a = not applicable) |
| |
(2)
| In additionsubject to the number of contracts presented in the table, the Company held 220 stock rights and warrants. Stock rights and warrants can be converted to cash upon sale of those instruments or exercised for shares of common stock.enforceable master netting agreements. |
|
| | | | | | | | | | | | | | | | | | | | |
| Gains (losses) from valuation and settlements reported on derivatives not designated as accounting hedges |
| ($ in millions) | | Realized capital gains (losses) | | Life contract benefits | | Interest credited to contractholder funds | | Operating costs and expenses | | Total gain (loss) recognized in net income on derivatives |
| 2019 | | | | | | | | | | |
| Interest rate contracts | | $ | 51 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 51 |
|
| Equity and index contracts | | (116 | ) | | — |
| | 63 |
| | 40 |
| | (13 | ) |
| Embedded derivative financial instruments | | — |
| | 7 |
| | (70 | ) | | — |
| | (63 | ) |
| Foreign currency contracts | | 8 |
| | — |
| | — |
| | — |
| | 8 |
|
| Credit default contracts | | (8 | ) | | — |
| | — |
| | — |
| | (8 | ) |
| Total return swaps - fixed income | | 14 |
| | — |
| | — |
| | — |
| | 14 |
|
| Total return swaps - equity index | | 36 |
| | — |
| | — |
| | — |
| | 36 |
|
| Total | | $ | (15 | ) |
| $ | 7 |
|
| $ | (7 | ) |
| $ | 40 |
|
| $ | 25 |
|
| | | | | | | | | | | |
| 2018 | | | | | | | | | | |
| Interest rate contracts | | $ | (2 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (2 | ) |
| Equity and index contracts | | 21 |
| | — |
| | (24 | ) | | (21 | ) | | (24 | ) |
| Embedded derivative financial instruments | | — |
| | (5 | ) | | 67 |
| | — |
| | 62 |
|
| Foreign currency contracts | | 29 |
| | — |
| | — |
| | (1 | ) | | 28 |
|
| Credit default contracts | | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
| Total return swaps - fixed income | | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) |
| Total return swaps - equity index | | (6 | ) | | — |
| | — |
| | — |
| | (6 | ) |
| Total | | $ | 43 |
|
| $ | (5 | ) |
| $ | 43 |
|
| $ | (22 | ) |
| $ | 59 |
|
| | | | | | | | | | | |
| 2017 | | | | | | | | | | |
| Equity and index contracts | | $ | (15 | ) | | $ | — |
| | $ | 47 |
| | $ | 28 |
| | $ | 60 |
|
| Embedded derivative financial instruments | | — |
| | 9 |
| | (6 | ) | | — |
| | 3 |
|
| Foreign currency contracts | | (27 | ) | | — |
| | — |
| | 6 |
| | (21 | ) |
| Credit default contracts | | (4 | ) | | — |
| | — |
| | — |
| | (4 | ) |
| Total | | $ | (46 | ) |
| $ | 9 |
|
| $ | 41 |
|
| $ | 34 |
|
| $ | 38 |
|
The following table provides gross and net amounts for the Company’s OTC derivatives, all of which are subject to enforceable master netting agreements.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | | Offsets | | | | | | |
| | Gross amount | | Counter- party netting | | Cash collateral (received) pledged | | Net amount on balance sheet | | Securities collateral (received) pledged | | Net amount |
| December 31, 2016 | | | | | | | | | | | |
| Asset derivatives | $ | 31 |
| | $ | (28 | ) | | $ | 19 |
| | $ | 22 |
| | $ | (9 | ) | | $ | 13 |
|
| Liability derivatives | (33 | ) | | 28 |
| | — |
| | (5 | ) | | 4 |
| | (1 | ) |
| | | | | | | | | | | | |
| December 31, 2015 | | | | | | | | | | | |
| Asset derivatives | $ | 21 |
| | $ | (8 | ) | | $ | (5 | ) | | $ | 8 |
| | $ | (4 | ) | | $ | 4 |
|
| Liability derivatives | (25 | ) | | 8 |
| | (1 | ) | | (18 | ) | | 9 |
| | (9 | ) |
The following table provides a summary of the impacts of the Company’s foreign currency contracts in cash flow hedging relationships for the years ended December 31. Amortization of net gains from accumulated other comprehensive income related to cash flow hedges is expected to be a gain of $2 million during the next twelve months. There was no hedge ineffectiveness reported in realized gains and losses in 2016, 2015 or 2014.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Gain recognized in OCI on derivatives during the period | $ | — |
| | $ | 10 |
| | $ | 12 |
|
| Gain (loss) recognized in OCI on derivatives during the term of the hedging relationship | 2 |
| | 6 |
| | (2 | ) |
| Gain (loss) reclassified from AOCI into income (net investment income) | 1 |
| | (1 | ) | | (2 | ) |
| Gain (loss) reclassified from AOCI into income (realized capital gains and losses) | 3 |
| | 3 |
| | (2 | ) |
The following tables present gains and losses from valuation and settlements reported on derivatives not designated as accounting hedging instruments in the Consolidated Statements of Operations. In 2016, 2015 and 2014, the Company had no derivatives used in fair value hedging relationships.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | Realized capital gains and losses | | Life and annuity contract benefits | | Interest credited to contractholder funds | | Operating costs and expenses | | Loss on disposition of operations | | Total gain (loss) recognized in net income on derivatives |
| 2016 | | | | | | | | | | | |
| Equity and index contracts | $ | (12 | ) | | $ | — |
| | $ | 18 |
| | $ | 19 |
| | $ | — |
| | $ | 25 |
|
| Embedded derivative financial instruments | — |
| | 9 |
| | — |
| | — |
| | — |
| | 9 |
|
| Foreign currency contracts | 17 |
| | — |
| | — |
| | (35 | ) | | — |
| | (18 | ) |
| Credit default contracts | (5 | ) | | — |
| | — |
| | — |
| | — |
| | (5 | ) |
| Total | $ | — |
|
| $ | 9 |
|
| $ | 18 |
|
| $ | (16 | ) |
| $ | — |
|
| $ | 11 |
|
| | | | | | | | | | | | |
| 2015 | | | | | | | | | | | |
| Interest rate contracts | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| Equity and index contracts | 1 |
| | — |
| | (9 | ) | | (1 | ) | | — |
| | (9 | ) |
| Embedded derivative financial instruments | — |
| | (7 | ) | | 31 |
| | — |
| | — |
| | 24 |
|
| Foreign currency contracts | (24 | ) | | — |
| | — |
| | (8 | ) | | — |
| | (32 | ) |
| Credit default contracts | (2 | ) | | — |
| | — |
| | — |
| | — |
| | (2 | ) |
| Total | $ | (24 | ) |
| $ | (7 | ) |
| $ | 22 |
|
| $ | (9 | ) |
| $ | — |
|
| $ | (18 | ) |
| | | | | | | | | | | | |
| 2014 | | | | | | | | | | | |
| Interest rate contracts | $ | (10 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (4 | ) | | $ | (14 | ) |
| Equity and index contracts | (18 | ) | | — |
| | 38 |
| | 9 |
| | — |
| | 29 |
|
| Embedded derivative financial instruments | — |
| | 15 |
| | (14 | ) | | — |
| | — |
| | 1 |
|
| Foreign currency contracts | (9 | ) | | — |
| | — |
| | (8 | ) | | — |
| | (17 | ) |
| Credit default contracts | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
| Other contracts | — |
| | — |
| | (2 | ) | | — |
| | — |
| | (2 | ) |
| Total | $ | (36 | ) |
| $ | 15 |
|
| $ | 22 |
|
| $ | 1 |
|
| $ | (4 | ) |
| $ | (2 | ) |
The Company manages its exposure to credit risk by utilizing highly rated counterparties, establishing risk control limits, executing legally enforceable master netting agreements (“MNAs”) and obtaining collateral where appropriate. The Company uses MNAs for OTC derivative transactions that permit either party to net payments due for transactions and collateral is either pledged or obtained when certain predetermined exposure limits are exceeded. As of December 31, 2016,2019, counterparties pledged $13$31 million in cash and securitiescollateral to the Company, and the Company pledged $27$3 million in cash and securities to counterparties aswhich includes $3 million of collateral posted under MNAs for contracts without credit-risk-contingent features.
containing credit-risk contingent provisions that are in a liability position.
The Company has not incurred any losses on derivative financial instruments due to counterparty nonperformance. Other derivatives, including futures and certain option contracts, are traded on organized exchanges which require margin deposits and guarantee the execution of trades, thereby mitigating any potential credit risk.
Notes to Consolidated Financial Statements 2019 Form 10-K
Counterparty credit exposure represents the Company’s potential loss if all of the counterparties concurrently fail to perform under the contractual terms of the contracts and all collateral, if any, becomes worthless.
This exposure is measured by the fair value of OTC derivative contracts with a positive fair value at the reporting date reduced by the effect, if any, of legally enforceable master netting agreements.
The following table summarizes the counterparty credit exposure as of December 31 by counterparty credit rating as it relates to the Company’s OTC derivatives.
| | | OTC derivatives counterparty credit exposure by counterparty credit rating | | OTC derivatives counterparty credit exposure by counterparty credit rating |
| ($ in millions) | | 2016 | | 2015 | | 2019 | | 2018 |
Rating (1) | | Number of counter-parties | | Notional amount (2) | | Credit exposure (2) | | Exposure, net of collateral (2) | | Number of counter-parties | | Notional amount (2) | | Credit exposure (2) | | Exposure, net of collateral (2) | | Number of counter-parties | | Notional amount (2) | | Credit exposure (2) | | Exposure, net of collateral (2) | | Number of counter-parties | | Notional amount (2) | | Credit exposure (2) | | Exposure, net of collateral (2) |
| AA– | | 2 |
| | $ | 80 |
| | $ | 2 |
| | $ | 2 |
| | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
| A+ | | 5 |
| | 698 |
| | 20 |
| | 9 |
| | 1 |
| | 82 |
| | 5 |
| | — |
| | 6 |
| | 868 |
| | 29 |
| | — |
| | 3 |
| | 643 |
| | 19 |
| | 1 |
|
| A | | — |
| | — |
| | — |
| | — |
| | 5 |
| | 375 |
| | 9 |
| | 6 |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 121 |
| | 1 |
| | — |
|
| A– | | 1 |
| | 110 |
| | 1 |
| | 1 |
| | 1 |
| | 41 |
| | 3 |
| | — |
| |
| BBB+ | | — |
| | — |
| | — |
| | — |
| | 2 |
| | 49 |
| | — |
| | 1 |
| |
| Total | | 8 |
| | $ | 888 |
|
| $ | 23 |
|
| $ | 12 |
|
| 9 |
|
| $ | 547 |
|
| $ | 17 |
|
| $ | 7 |
| | 6 |
| | $ | 868 |
|
| $ | 29 |
|
| $ | — |
|
| 5 |
|
| $ | 764 |
|
| $ | 20 |
|
| $ | 1 |
|
| |
(1) | Rating isAllstate uses the lower of S&P&P’s or Moody’s long-term debt issuer ratings. |
| |
(2) | Only OTC derivatives with a net positive fair value are included for each counterparty. |
For certain exchange traded and cleared derivatives, margin deposits are required as well as daily cash settlements of margin accounts. As of December 31, 2019, the Company pledged $48 million in the form of margin deposits.
Market risk is the risk that the Company will incur losses due to adverse changes in market rates and prices. Market risk exists for all of the derivative financial instruments the Company currently holds, as these instruments may become less valuable due to adverse changes in market conditions. To limit this risk, the Company’s senior management has established risk control limits. In addition, changes in fair value of the derivative financial instruments that the Company uses for risk management purposes are generally offset by the change in the fair value or cash flows of the hedged risk component of the related assets, liabilities or forecasted transactions.
Certain of the Company’s derivative instruments contain credit-risk-contingent termination events, cross-default provisions and credit support annex agreements. Credit-risk-contingent termination events
allow the counterparties to terminate the derivative agreement or a specific trade on certain dates if AIC’s, ALIC’s or Allstate Life Insurance Company of New York’s (“ALNY”) financial strength credit ratings by Moody’s or S&P fall below a certain level. Credit-risk-contingent cross-default provisions allow the counterparties to terminate the derivative agreement if the Company defaults by pre-determined threshold amounts on certain debt instruments. Credit-risk-contingent credit support annex agreements specify the amount of collateral the Company must post to counterparties based on AIC’s, ALIC’s or ALNY’s financial strength credit ratings by Moody’s or S&P, or in the event AIC, ALIC or ALNY are no longer rated by either Moody’s or S&P.
The following summarizes the fair value of derivative instruments with termination, cross-default or collateral credit-risk-contingent features that are in a liability position as of December 31, as well as the fair value of assets and collateral that are netted against the liability in accordance with provisions within legally enforceable MNAs.
| | | ($ in millions) | 2016 | | 2015 | | 2019 | | 2018 |
| Gross liability fair value of contracts containing credit-risk-contingent features | $ | 9 |
| | $ | 21 |
| | $ | 16 |
| | $ | 11 |
|
| Gross asset fair value of contracts containing credit-risk-contingent features and subject to MNAs | (7 | ) | | (3 | ) | | (11 | ) | | (5 | ) |
| Collateral posted under MNAs for contracts containing credit-risk-contingent features | — |
| | (13 | ) | | (3 | ) | | (2 | ) |
| Maximum amount of additional exposure for contracts with credit-risk-contingent features if all features were triggered concurrently | $ | 2 |
| | $ | 5 |
| | $ | 2 |
| | $ | 4 |
|
Credit derivatives – selling protection
A credit default swap (“CDS”) is a derivative instrument, representing an agreement between two parties to exchange the credit risk of a specified entity (or a group of entities), or an index based on the credit risk of a group of entities (all commonly referred to as the “reference entity” or a portfolio of “reference entities”), in return for a periodic premium. In selling protection, CDS are used to replicate fixed income securities and to complement the cash market when credit exposure to certain issuers is not available or when the derivative alternative is less expensive than the cash market alternative. CDS typically have a five-year term.
The following table shows the CDS notional amounts by credit rating and fair value of protection sold.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | Notional amount | | |
| | AA | | A | | BBB | | BB and lower | | Total | | Fair value |
| December 31, 2016 | | | | | | | | | | | |
| Single name | | | | | | | | | | | |
| Corporate debt | $ | 20 |
| | $ | 10 |
| | $ | 35 |
| | $ | — |
| | $ | 65 |
| | $ | 1 |
|
| First-to-default Basket | | | | | | | | | | | |
| Municipal | — |
| | — |
| | 100 |
| | — |
| | 100 |
| | (3 | ) |
| Index | | | | | | | | | | | |
| Corporate debt | 1 |
| | 19 |
| | 50 |
| | 10 |
| | 80 |
| | 1 |
|
| Total | $ | 21 |
|
| $ | 29 |
|
| $ | 185 |
|
| $ | 10 |
|
| $ | 245 |
|
| $ | (1 | ) |
| December 31, 2015 | | | | | | | | | | | |
| Single name | | | | | | | | | | | |
| Corporate debt | $ | 20 |
| | $ | 10 |
| | $ | 45 |
| | $ | — |
| | $ | 75 |
| | $ | 1 |
|
| First-to-default Basket | | | | | | | | | | | |
| Municipal | — |
| | — |
| | 100 |
| | — |
| | 100 |
| | (8 | ) |
| Index | | | | | | | | | | | |
| Corporate debt | 1 |
| | 20 |
| | 52 |
| | 7 |
| | 80 |
| | 1 |
|
| Total | $ | 21 |
|
| $ | 30 |
|
| $ | 197 |
|
| $ | 7 |
|
| $ | 255 |
|
| $ | (6 | ) |
In selling protection with CDS, the Company sells credit protection on an identified single name, a basket of names in a first-to-default (“FTD”) structure or credit derivative index (“CDX”) that is generally investment grade, and in return receives periodic premiums through expiration or termination of the agreement. With single name CDS, this premium or credit spread generally corresponds to the difference between the yield on the reference entity’s public fixed maturity cash instruments and swap rates at the time the agreement is executed. With a FTD basket, because of the additional credit risk inherent in a basket of named reference entities, the premium generally corresponds to a high proportion of the sum of the credit spreads of the names in the basket and the correlation between the names. CDX is utilized to take a position on multiple (generally 125) reference entities. Credit events are typically defined as bankruptcy, failure to pay, or restructuring, depending on the nature of the reference entities. If a credit event occurs, the Company settles with the counterparty, either through physical settlement or cash settlement. In a physical settlement, a reference asset is delivered by the buyer of protection to the Company, in exchange for cash payment at par, whereas in a cash settlement, the Company pays the difference between par and the prescribed value of the reference asset. When a credit event occurs in a single name or FTD basket (for FTD, the first credit event occurring for any one name in the basket), the contract terminates at the time of settlement. For CDX, the reference entity’s name incurring the credit event is removed from the index while the contract continues until expiration. The maximum payout on a CDS is the contract notional amount. A physical settlement may afford the Company with recovery rights as the new owner of the asset.
The Company monitors risk associated with credit derivatives through individual name credit limits at both a credit derivative and a combined cash instrument/credit derivative level. The ratings of individual names for which protection has been sold are also monitored.
Off-balance sheet financial instruments
The contractual amounts of off-balance sheet financial instruments as of December 31 are as follows: |
| | | | | | | | |
| Contractual amounts of off balance sheet financial instruments |
| | | As of December 31, |
| ($ in millions) | | 2019 | | 2018 |
| Commitments to invest in limited partnership interests | | $ | 2,837 |
| | $ | 3,028 |
|
| Private placement commitments | | 68 |
| | 47 |
|
| Other loan commitments | | 189 |
| | 233 |
|
|
| | | | | | | |
| ($ in millions) | 2016 | | 2015 |
| Commitments to invest in limited partnership interests | $ | 2,979 |
| | $ | 2,551 |
|
| Private placement commitments | 69 |
| | 89 |
|
| Municipal bond forward commitments | — |
| | 36 |
|
| Other loan commitments | 83 |
| | 46 |
|
In the preceding table, the contractual amounts represent the amount at risk if the contract is fully drawn upon, the counterparty defaults and the value of any underlying security becomes worthless. Unless noted otherwise, the Company does not require
collateral or other security to support off-balance sheet financial instruments with credit risk.
Commitments to invest in limited partnership interests represent agreements to acquire new or additional participation in certain limited partnership
The Allstate Corporation 167
2019 Form 10-KNotes to Consolidated Financial Statements
investments. The Company enters into these agreements in the normal course of business. Because the investments in limited partnerships are not actively traded, it is not practical to estimate the fair value of these commitments.
Private placement commitments represent commitments to purchase private placement debt and private equity securities at a specified future date. The Company enters into these agreements in the normal course of business. The fair value of the debt commitments generally cannot be estimated on the date the commitment is made as the terms and conditions of the underlying private placement securities are not yet final. Because the private equity securities are not actively traded, it is not practical to estimate fair value of the commitments.
Municipal bond forward commitments represent purchases of newly issued debt securities with a settlement period in excess of a standard period of generally 30-60 days. The Company enters into these agreements in the normal course of business.
Other loan commitments are agreements to lend to a borrower provided there is no violation of any condition established in the contract. The Company enters into these agreements to commit to future loan fundings at predetermined interest rates. Commitments generally have either fixed or varying expiration dates or other termination clauses. The fair value of these commitments is insignificant.
8. Reserve for Property-Liability Insurance Claims and Claims Expense |
| |
| Note 8 | Reserve for Property and Casualty Insurance Claims and Claims Expense
|
The Company establishes reserves for claims and claims expense on reported and unreported claims of insured losses. The Company’s reserving process takes into account known facts and interpretations of circumstances and factors including the Company’s experience with similar cases, actual claims paid, historical trends involving claim payment patterns and pending levels of unpaid claims, loss management programs, product mix and contractual terms, changes in lawslaw and regulations,regulation, judicial decisions, and economic conditions. In the normal course of business, the Company may also supplement its claims processes by utilizing third partythird-party adjusters, appraisers, engineers, inspectors, and 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.
Because reserves are estimates of unpaid portions of losses that have occurred, including incurred but not
reported (“IBNR”) losses, the establishment of appropriate reserves, including reserves for catastrophes, Discontinued Lines and Coverages and reinsurance and indemnification recoverables, is an inherently uncertain and complex process. The ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimates. The highest degree of uncertainty is associated with reserves for losses incurred in the current reporting period as it contains the greatest proportion of losses that have not been reported or settled. The Company regularly updates its reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in prior year reserve estimates, which may be material, are reported in property-liabilityproperty and casualty insurance claims and claims expense in the Consolidated Statements of Operations in the period such changes are determined.
Activity in the reserve for property-liability insurance claims and claims expense is summarized as follows:
| | | Rollforward of reserve for property and casualty insurance claims and claims expense | | Rollforward of reserve for property and casualty insurance claims and claims expense |
| ($ in millions) | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
| Balance as of January 1 | $ | 23,869 |
| | $ | 22,923 |
| | $ | 21,857 |
| | $ | 27,423 |
| | $ | 26,325 |
| | $ | 25,250 |
|
| Less reinsurance recoverables | 5,892 |
| | 5,694 |
| | 4,664 |
| |
Less recoverables (1) | | | (7,155 | ) | | (6,471 | ) | | (6,184 | ) |
| Net balance as of January 1 | 17,977 |
|
| 17,229 |
|
| 17,193 |
| | 20,268 |
|
| 19,854 |
|
| 19,066 |
|
SquareTrade acquisition as of January 3, 2017
| | | — |
| | — |
| | 17 |
|
| Incurred claims and claims expense related to: | | | | | | | | | | | |
| Current year | 22,238 |
| | 20,953 |
| | 19,512 |
| | 24,106 |
| | 23,033 |
| | 22,350 |
|
| Prior years | (17 | ) | | 81 |
| | (84 | ) | | (130 | ) | | (255 | ) | | (503 | ) |
| Total incurred | 22,221 |
| | 21,034 |
| | 19,428 |
| | 23,976 |
| | 22,778 |
| | 21,847 |
|
| Claims and claims expense paid related to: | | | | | | | | | | | |
| Current year | 14,222 |
| | 13,660 |
| | 12,924 |
| | (15,160 | ) | | (14,877 | ) | | (14,112 | ) |
| Prior years | 6,910 |
| | 6,626 |
| | 6,468 |
| | (8,284 | ) | | (7,487 | ) | | (6,964 | ) |
| Total paid | 21,132 |
|
| 20,286 |
|
| 19,392 |
| | (23,444 | ) |
| (22,364 | ) |
| (21,076 | ) |
| Net balance as of December 31 | 19,066 |
| | 17,977 |
| | 17,229 |
| | 20,800 |
| | 20,268 |
| | 19,854 |
|
| Plus reinsurance recoverables | 6,184 |
| | 5,892 |
| | 5,694 |
| |
| Plus recoverables | | | 6,912 |
| | 7,155 |
| | 6,471 |
|
| Balance as of December 31 | $ | 25,250 |
| | $ | 23,869 |
| | $ | 22,923 |
| | $ | 27,712 |
| | $ | 27,423 |
| | $ | 26,325 |
|
(1) Recoverables comprises reinsurance and indemnification recoverables. See Note 10 for further details.
Notes to Consolidated Financial Statements 2019 Form 10-K
|
| | | | | | | | |
| Reconciliation of total claims and claims expense incurred and paid by coverage | | December 31, 2019 |
| ($ in millions) | | Incurred | | Paid |
| Allstate Protection | | | | |
| Auto insurance - liability coverage | | $ | 9,142 |
| | $ | (8,419 | ) |
| Auto insurance - physical damage coverage | | 5,576 |
| | (5,570 | ) |
| Homeowners insurance | | 4,625 |
| | (4,616 | ) |
| Total auto and homeowners insurance | | 19,343 |
| | (18,605 | ) |
| Other personal lines | | 1,024 |
| | (1,059 | ) |
| Commercial lines | | 648 |
| | (404 | ) |
| Service Businesses | | 297 |
| | (311 | ) |
| Discontinued Lines and Coverages | | 91 |
| | (121 | ) |
| Unallocated loss adjustment expenses (“ULAE”) | | 2,687 |
| | (2,585 | ) |
| Claims incurred and paid from before 2015 | | (97 | ) | | (444 | ) |
| Other | | (17 | ) | | 85 |
|
Total
| | $ | 23,976 |
| | $ | (23,444 | ) |
Incurred claims and claims expense represents the sum of paid losses, claim adjustment expenses and reserve changes in the calendar year. This expense includes losses from catastrophes of $2.57$2.56 billion, $1.72$2.86 billion and $1.99$3.23 billion in 2016, 20152019, 2018 and 2014,2017, respectively, net of reinsurance and other recoveries (see Note 10).recoverables. Catastrophes are an inherent risk of the property-liabilityproperty and casualty insurance business that
have contributed to, and will continue to contribute to, material year-to-year fluctuations in the Company’s results of operations and financial position.
The Company calculates and records a single best reserve estimate for losses from catastrophes, in conformance with generally accepted actuarial standards. As a result, management believes that no other estimate is better than the recorded amount. Due to the uncertainties involved, including the factors described above, the ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimates. Accordingly, management believes that it is not practical to develop a meaningful range for any such changes in losses incurred.
During 2016, incurred claims and claims expense related to prior years was primarily composed of net decreases in auto reserves of $155 million primarily due to claim severity development for bodily injury coverage that was better than expected, net decreases in homeowners reserves of $24 million due to favorable non-catastrophe reserve reestimates, net increases in other reserves of $57 million primarily due to unfavorable commercial business non-catastrophe losses , and net increases in Discontinued Lines and Coverages reserves of $105 million. Incurred claims and claims expense includes unfavorable catastrophe loss reestimates of $6 million, net of reinsurance and other recoveries.
During 2015, incurred claims and claims expense related to prior years was primarily composed of net increases in auto reserves of $30 million primarily due to claim severity development for bodily injury coverage that was more than expected and litigation settlements, net decreases in homeowners reserves of $24 million due to favorable non-catastrophe reserve reestimates, net increases in other reserves of $22 million, and net increases in Discontinued Lines and Coverages reserves of $53 million. Incurred claims and claims expense includes favorable catastrophe loss reestimates of $15 million, net of reinsurance and other recoveries.During 2014, incurred claims and claims expense related to prior years was primarily composed of net decreases in auto reserves of $238 million primarily due to claim severity development that was better than expected, net increases in homeowners reserves of $29 million due to unfavorable non-catastrophe reserve reestimates, net increases in other reserves of $13 million, and net increases in Discontinued Lines and Coverages reserves of $112 million. Incurred claims and claims expense includes unfavorable catastrophe loss reestimates of $43 million, net of reinsurance and other recoveries. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Prior year reserve reestimates included in claims and claims expense (1) |
| | | Twelve months ended December 31, |
| ($ in millions) | | Non-catastrophe losses | | Catastrophe losses | | Total |
| | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
Auto (2) | | $ | (306 | ) | | $ | (416 | ) | | $ | (475 | ) | | $ | (17 | ) | | $ | (39 | ) | | $ | (15 | ) | | $ | (323 | ) | | $ | (455 | ) | | $ | (490 | ) |
| Homeowners | | (1 | ) | | (51 | ) | | (124 | ) | | 66 |
| | 65 |
| | (7 | ) | | 65 |
| | 14 |
| | (131 | ) |
| Other personal lines | | 8 |
| | (6 | ) | | (2 | ) | | — |
| | (1 | ) | | 3 |
| | 8 |
| | (7 | ) | | 1 |
|
| Commercial lines | | 18 |
| | 108 |
| | 18 |
| | (1 | ) | | — |
| | 1 |
| | 17 |
| | 108 |
| | 19 |
|
Discontinued Lines and Coverages (3) | | 105 |
| | 87 |
| | 96 |
| | — |
| | — |
| | — |
| | 105 |
| | 87 |
| | 96 |
|
| Service Businesses | | (2 | ) | | (2 | ) | | 2 |
| | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) | | 2 |
|
| Total prior year reserve reestimates | | $ | (178 | ) | | $ | (280 | ) | | $ | (485 | ) | | $ | 48 |
| | $ | 25 |
| | $ | (18 | ) | | $ | (130 | ) | | $ | (255 | ) | | $ | (503 | ) |
| |
(1) | Favorable reserve reestimates are shown in parentheses. |
| |
(2) | Non-catastrophe results related to continued favorable personal lines auto injury coverage development. |
| |
(3) | The Company’s 2019 annual reserve review, using established industry and actuarial best practices, resulted in unfavorable reestimates of $95 million. |
The Allstate Corporation 169
2019 Form 10-KFinancial Statements
The following presents information about incurred and paid claims development as of December 31, 2016,2019, net of reinsurance,recoverables, as well as the cumulative number of reported claims and the total of IBNR reserves plus expected development on reported claims included in the net incurred claims amounts. See Note 2 for the accounting policy and methodology for determining reserves for claims and claims expense, including both reported and IBNR claims. The cumulative number of reported claims is identified by coverage and excludes reported claims for industry pools and facilities where information is not available. The information about incurred and paid claims development for the 20122015 to 20152019 years, and the average annual percentage payout of incurred claims by age as of December 31, 2016,2019, is presented as required supplementary information.
Auto Insuranceinsurance – liability coverage
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions, except number of reported claims) | | Incurred claims and allocated claim adjustment expenses, net of recoverables | | | | IBNR reserves plus expected development on reported claims | | Cumulative number of reported claims |
| | | For the years ended December 31, | | Prior year reserve reestimates | | As of December 31, 2019 |
| | | (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) | | | | |
| Accident year | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | |
| 2015 | | $ | 8,763 |
| | $ | 8,733 |
| | $ | 8,677 |
| | $ | 8,617 |
| | $ | 8,578 |
| | $ | (39 | ) | | $ | 519 |
| | 2,383,853 |
|
| 2016 | | — |
| | 9,030 |
| | 8,833 |
| | 8,732 |
| | 8,683 |
| | (49 | ) | | 988 |
| | 2,399,890 |
|
| 2017 | | — |
| | — |
| | 8,457 |
| | 8,389 |
| | 8,305 |
| | (84 | ) | | 1,777 |
| | 2,214,254 |
|
| 2018 | | — |
| | — |
| | — |
| | 8,727 |
| | 8,708 |
| | (19 | ) | | 3,093 |
| | 2,169,753 |
|
| 2019 | | — |
| | — |
| | — |
| | — |
| | 9,333 |
| | | | 5,838 |
| | 2,108,919 |
|
| | | | | | | | | Total |
| | $ | 43,607 |
| | $ | (191 | ) | | | | |
| Reconciliation to total prior year reserve reestimates recognized by line | | | | | | |
| Prior year reserve reestimates for pre-2015 accident years | | (56 | ) | | | | |
| Prior year reserve reestimates for ULAE | | 14 |
| | | | |
| Other | | (1 | ) | | | | |
| Total prior year reserve reestimates | | $ | (234 | ) | | | | |
| | | | | | | | | | | | | | | | | |
| | | Cumulative paid claims and allocated claims adjustment expenses, net of recoverables | | | | | | |
| | | For the years ended December 31, | | | | | | |
| | | (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) | | | | | | | | |
| Accident year | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | | | | | |
| 2015 | | $ | 3,524 |
| | $ | 5,837 |
| | $ | 6,883 |
| | $ | 7,565 |
| | $ | 8,059 |
| | | | | | |
| 2016 | | — |
| | 3,485 |
| | 5,768 |
| | 6,849 |
| | 7,695 |
| | | | | | |
| 2017 | | — |
| | — |
| | 3,149 |
| | 5,330 |
| | 6,528 |
| | | | | | |
| 2018 | | — |
| | — |
| | — |
| | 3,229 |
| | 5,615 |
| | | | | | |
| 2019 | | — |
| | — |
| | — |
| | — |
| | 3,495 |
| | | | | | |
| | | | | | | | | Total |
| | $ | 31,392 |
| | | | | | |
| All outstanding liabilities before 2015, net of recoverables | | 1,274 |
| | | | | | |
| Liabilities for claims and claim adjustment expenses, net of recoverables | | $ | 13,489 |
| | | | | | |
|
| | | | | | | | | | | | | | | |
| Average annual percentage payout of incurred claims by age, net of recoverables, as of December 31, 2019 |
| | | 1 year | | 2 years | | 3 years | | 4 years | | 5 years |
Auto insurance – liability coverage | | 40.0 | % | | 27.2 | % | | 12.9 | % | | 8.2 | % | | 4.9 | % |
Notes to Consolidated Financial Statements 2019 Form 10-K
Auto insurance – physical damage coverage |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions, except number of reported claims) | | Incurred claims and allocated claim adjustment expenses, net of recoverables | | | | IBNR reserves plus expected development on reported claims | | Cumulative number of reported claims |
| | | For the years ended December 31, | | Prior year reserve reestimates | | As of December 31, 2019 |
| | | (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) | | | | |
| Accident year | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | |
| 2015 | | $ | 4,653 |
| | $ | 4,681 |
| | $ | 4,669 |
| | $ | 4,660 |
| | $ | 4,656 |
| | $ | (4 | ) | | $ | 2 |
| | 4,390,288 |
|
| 2016 | | — |
| | 5,125 |
| | 5,052 |
| | 5,025 |
| | 5,020 |
| | (5 | ) | | 5 |
| | 4,431,735 |
|
| 2017 | | — |
| | — |
| | 5,119 |
| | 5,037 |
| | 5,025 |
| | (12 | ) | | (2 | ) | | 4,236,640 |
|
| 2018 | | — |
| | — |
| | — |
| | 5,216 |
| | 5,154 |
| | (62 | ) | | 17 |
| | 4,306,335 |
|
| 2019 | | — |
| | — |
| | — |
| | — |
| | 5,659 |
| | | | 244 |
| | 4,312,306 |
|
| | | | | | | | | Total |
| | $ | 25,514 |
| | $ | (83 | ) | | | | |
| Reconciliation to total prior year reserve reestimates recognized by line | | | | | | |
| Prior year reserve reestimates for pre-2015 accident years | | (4 | ) | | | | |
| Prior year reserve reestimates for ULAE | | (2 | ) | | | | |
| Other | | — |
| | | | |
| Total prior year reserve reestimates | | $ | (89 | ) | | | | |
| | | | | | | | | | | | | | | | | |
| | | Cumulative paid claims and allocated claims adjustment expenses, net of recoverables | | | | | | |
| | | For the years ended December 31, | | | | | | |
| | | (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) | | | | | | | | |
| Accident year | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | | | | | |
| 2015 | | $ | 4,507 |
| | $ | 4,672 |
| | $ | 4,658 |
| | $ | 4,655 |
| | $ | 4,654 |
| | | | | | |
| 2016 | | — |
| | 4,887 |
| | 5,031 |
| | 5,019 |
| | 5,016 |
| | | | | | |
| 2017 | | — |
| | — |
| | 4,845 |
| | 5,036 |
| | 5,027 |
| | | | | | |
| 2018 | | — |
| | — |
| | — |
| | 4,968 |
| | 5,137 |
| | | | | | |
| 2019 | | — |
| | — |
| | — |
| | — |
| | 5,414 |
| | | | | | |
| | | | | | | | | Total |
| | $ | 25,248 |
| | | | | | |
| All outstanding liabilities before 2015, net of recoverables | | 7 |
| | | | | | |
| Liabilities for claims and claim adjustment expenses, net of recoverables | | $ | 273 |
| | | | | | |
|
| | | | | | | | | | | | | | | |
| Average annual percentage payout of incurred claims by age, net of recoverables, as of December 31, 2019 |
| | | 1 year | | 2 years | | 3 years | | 4 years | | 5 years |
Auto insurance – physical damage coverage | | 97.0 | % | | 3.0 | % | | (0.2 | )% | | — | % | | — | % |
The Allstate Corporation 171
2019 Form 10-KFinancial Statements
Homeowners insurance |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions, except number of reported claims) | | Incurred claims and allocated claim adjustment expenses, net of recoverables | | | | IBNR reserves plus expected development on reported claims | | Cumulative number of reported claims |
| | | For the years ended December 31, | | Prior year reserve reestimates | | As of December 31, 2019 |
| | | (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) | | | | |
| Accident year | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | |
| 2015 | | $ | 3,558 |
| | $ | 3,611 |
| | $ | 3,553 |
| | $ | 3,537 |
| | $ | 3,520 |
| | $ | (17 | ) | | $ | 36 |
| | 721,328 |
|
| 2016 | | — |
| | 3,959 |
| | 3,993 |
| | 3,955 |
| | 3,951 |
| | (4 | ) | | 77 |
| | 813,728 |
|
| 2017 | | — |
| | — |
| | 4,475 |
| | 4,617 |
| | 4,612 |
| | (5 | ) | | 177 |
| | 907,218 |
|
| 2018 | | — |
| | — |
| | — |
| | 4,747 |
| | 4,851 |
| | 104 |
| | 340 |
| | 807,012 |
|
| 2019 | | — |
| | — |
| | — |
| | — |
| | 4,547 |
| | | | 1,233 |
| | 721,434 |
|
| | | | | | | | | Total |
| | $ | 21,481 |
| | $ | 78 |
| | | | |
| Reconciliation to total prior year reserve reestimates recognized by line | | | | | | |
| Prior year reserve reestimates for pre-2015 accident years | | (36 | ) | | | | |
| Prior year reserve reestimates for ULAE | | 23 |
| | | | |
| Other | | — |
| | | | |
| Total prior year reserve reestimates | | $ | 65 |
| | | | |
| | | | | | | | | | | | | | | | | |
| | | Cumulative paid claims and allocated claims adjustment expenses, net of recoverables | | | | | | |
| | | For the years ended December 31, | | | | | | |
| | | (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) | | | | | | | | |
| Accident year | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | | | | | |
| 2015 | | $ | 2,586 |
| | $ | 3,296 |
| | $ | 3,399 |
| | $ | 3,458 |
| | $ | 3,484 |
| | | | | | |
| 2016 | | — |
| | 2,947 |
| | 3,678 |
| | 3,809 |
| | 3,874 |
| | | | | | |
| 2017 | | — |
| | — |
| | 3,227 |
| | 4,246 |
| | 4,435 |
| | | | | | |
| 2018 | | — |
| | — |
| | — |
| | 3,489 |
| | 4,511 |
| | | | | | |
| 2019 | | — |
| | — |
| | — |
| | — |
| | 3,314 |
| | | | | | |
| | | | | | | | | Total |
| | $ | 19,618 |
| | | | | | |
| All outstanding liabilities before 2015, net of recoverables | | 126 |
| | | | | | |
| Liabilities for claims and claim adjustment expenses, net of recoverables | | $ | 1,989 |
| | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions, except number of reported claims) | | Incurred claims and allocated claim adjustment expenses, net of reinsurance | | IBNR reserves plus expected development on reported claims | | Cumulative number of reported claims |
| | | For the years ended December 31, | | As of December 31, 2016 |
| | | (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) | | | |
| Accident year | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | |
| 2012 | | $ | 11,299 |
| | $ | 11,187 |
| | $ | 11,079 |
| | $ | 11,046 |
| | $ | 11,015 |
| | $ | 444 |
| | 5,801,971 |
|
| 2013 | | — |
| | 11,329 |
| | 11,269 |
| | 11,273 |
| | 11,204 |
| | 888 |
| | 5,890,375 |
|
| 2014 | | — |
| | — |
| | 12,166 |
| | 12,220 |
| | 12,121 |
| | 1,603 |
| | 6,335,312 |
|
| 2015 | | — |
| | — |
| | — |
| | 13,521 |
| | 13,466 |
| | 2,963 |
| | 6,754,829 |
|
| 2016 | | — |
| | — |
| | — |
| | — |
| | 14,265 |
| | 5,896 |
| | 6,572,689 |
|
| | | | | | | | | | | $ | 62,071 |
| | | | |
| | | | | | | | | | | | | | | |
| | | Cumulative paid claims and allocated claims adjustment expenses, net of reinsurance | | | | |
| | | For the years ended December 31, | | | | |
| | | (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) | | | | | | |
| Accident year | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | | | |
| 2012 | | $ | 6,818 |
| | $ | 8,760 |
| | $ | 9,660 |
| | $ | 10,251 |
| | $ | 10,571 |
| | | | |
| 2013 | | — |
| | 6,662 |
| | 8,826 |
| | 9,770 |
| | 10,316 |
| | | | |
| 2014 | | — |
| | — |
| | 7,312 |
| | 9,586 |
| | 10,518 |
| | | | |
| 2015 | | — |
| | — |
| | — |
| | 8,027 |
| | 10,503 |
| | | | |
| 2016 | | — |
| | — |
| | — |
| | — |
| | 8,369 |
| | | | |
| | | | | | | | | Total | | $ | 50,277 |
| | | | |
| All outstanding liabilities before 2012, net of reinsurance | | 1,167 |
| | | | |
| Liabilities for claims and claim adjustment expenses, net of reinsurance | | $ | 12,961 |
| | | | |
|
| | | | | | | | | | | | | | | |
| Average annual percentage payout of incurred claims by age, net of recoverables, as of December 31, 2019 |
| | | 1 year | | 2 years | | 3 years | | 4 years | | 5 years |
| Homeowners insurance | | 74.5 | % | | 18.9 | % | | 3.1 | % | | 1.4 | % | | 0.7 | % |
Notes to Consolidated Financial Statements 2019 Form 10-K
|
| | | | | | | | | | | | | | |
| Average annual percentage payout of incurred claims by age, net of reinsurance, as of December 31, 2016 |
| | 1 year | | 2 years | | 3 years | | 4 years | | 5 years |
| Auto insurance | 60.2 | % | | 19.1 | % | | 8.0 | % | | 5.2 | % | | 3.1 | % |
|
| | | | |
| Reconciliation of the net incurred and paid claims development tables above to the reserve for property and casualty insurance claims and claims expense |
| ($ in millions) | | As of December 31, 2019 |
| Net outstanding liabilities | | |
| Allstate Protection | | |
| Auto insurance - liability coverage | | $ | 13,489 |
|
| Auto insurance - physical damage coverage | | 273 |
|
| Homeowners insurance | | 1,989 |
|
| Other personal lines | | 1,326 |
|
| Commercial lines | | 1,010 |
|
| Service Businesses | | 36 |
|
Discontinued Lines and Coverages (1) | | 1,286 |
|
| ULAE | | 1,391 |
|
| Net reserve for property and casualty insurance claims and claims expense | | 20,800 |
|
| | | |
| Recoverables | | |
| Allstate Protection | | |
| Auto insurance - liability coverage | | 5,891 |
|
| Auto insurance - physical damage coverage | | 3 |
|
| Homeowners insurance | | 214 |
|
| Other personal lines | | 160 |
|
| Commercial lines | | 130 |
|
| Service Businesses | | 13 |
|
| Discontinued Lines and Coverages | | 452 |
|
| ULAE | | 49 |
|
| Total recoverables | | 6,912 |
|
| Gross reserve for property and casualty insurance claims and claims expense | | $ | 27,712 |
|
Homeowners Insurance
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions, except number of reported claims) | | Incurred claims and allocated claim adjustment expenses, net of reinsurance | | IBNR reserves plus expected development on reported claims | | Cumulative number of reported claims |
| | | For the years ended December 31, | | As of December 31, 2016 |
| | | (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) | | | |
| Accident year | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | |
| 2012 | | $ | 3,833 |
| | $ | 3,915 |
| | $ | 3,930 |
| | $ | 3,913 |
| | $ | 3,891 |
| | $ | 63 |
| | 1,003,156 |
|
| 2013 | | — |
| | 3,091 |
| | 3,163 |
| | 3,156 |
| | 3,135 |
| | 97 |
| | 682,525 |
|
| 2014 | | — |
| | — |
| | 3,600 |
| | 3,644 |
| | 3,646 |
| | 172 |
| | 764,101 |
|
| 2015 | | — |
| | — |
| | — |
| | 3,565 |
| | 3,615 |
| | 323 |
| | 717,025 |
|
| 2016 | | — |
| | — |
| | — |
| | — |
| | 3,964 |
| | 1,020 |
| | 755,683 |
|
| | | | | | | | | | | $ | 18,251 |
| | | | |
| | | | | | | | | | | | | | | |
| | | Cumulative paid claims and allocated claims adjustment expenses, net of reinsurance | | | | |
| | | For the years ended December 31, | | | | |
| | | (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) | | | | | | |
| Accident year | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | | | |
| 2012 | | $ | 2,942 |
| | $ | 3,606 |
| | $ | 3,742 |
| | $ | 3,802 |
| | $ | 3,828 |
| | | | |
| 2013 | | — |
| | 2,283 |
| | 2,878 |
| | 2,991 |
| | 3,038 |
| | | | |
| 2014 | | — |
| | — |
| | 2,730 |
| | 3,358 |
| | 3,474 |
| | | | |
| 2015 | | — |
| | — |
| | — |
| | 2,584 |
| | 3,293 |
| | | | |
| 2016 | | — |
| | — |
| | — |
| | — |
| | 2,944 |
| | | | |
| | | | | | | | | Total | | $ | 16,577 |
| | | | |
| All outstanding liabilities before 2012, net of reinsurance | | 187 |
| | | | |
| Liabilities for claims and claim adjustment expenses, net of reinsurance | | $ | 1,861 |
| | | | |
|
| | | | | | | | | | | | | | |
| Average annual percentage payout of incurred claims by age, net of reinsurance, as of December 31, 2016 |
| | 1 year | | 2 years | | 3 years | | 4 years | | 5 years |
| Homeowners insurance | 74.2 | % | | 19.1 | % | | 2.8 | % | | 1.4 | % | | 0.7 | % |
The reconciliation of the net incurred and paid claims development tables above to the reserve for property-liability insurance claims and claims expense in the Consolidated Statement of Financial Position as of December 31, 2016 is as follows:
|
| | | |
| ($ in millions) | |
| Net outstanding liabilities: | |
| Auto insurance | $ | 12,961 |
|
| Homeowners insurance | 1,861 |
|
| Other personal lines | 1,310 |
|
| Commercial lines | 597 |
|
| Other business lines | 22 |
|
Discontinued Lines and Coverages (1) | 1,382 |
|
| Unallocated loss adjustment expenses | 933 |
|
| Net reserve for property-liability insurance claims and claims expense | 19,066 |
|
| | |
| Reinsurance recoverable: | |
| Auto insurance | 5,422 |
|
| Homeowners insurance | 9 |
|
| Other personal lines | 212 |
|
| Commercial lines | 21 |
|
| Other business lines | 10 |
|
| Discontinued Lines and Coverages | 508 |
|
| Unallocated loss adjustment expenses | 2 |
|
| Total reinsurance recoverable | 6,184 |
|
| Gross reserve for property-liability insurance claims and claims expense | $ | 25,250 |
|
| |
(1) | Discontinued Lines and Coverages includes business in run-off. Allrun-off with most of the claims relaterelated to accident years more than 1030 years ago. IBNR reserves represent $800$660 million of the total reserves as of December 31, 2016.2019. |
Management believes that the reserve for property-liabilityproperty and casualty insurance claims and claims expense, net of reinsurance recoverables, is appropriately established in the aggregate and adequate to cover the ultimate net cost of reported and unreported claims arising from losses which had occurred by the date of the Consolidated Statements of Financial Position based on available facts, technology, laws and regulations.
Allstate’s reserves for asbestos claims were $810 million and $866 million, net of reinsurance recoverables of $362 million and $400 million, as of December 31, 2019 and 2018, respectively. Reserves for environmental claims were $179 million and $170 million, net of reinsurance recoverables of $40 million and $39 million, as of December 31, 2019 and 2018, respectively. For further discussion of asbestos and environmental reserves, see Note 14.
The Allstate Corporation 173
9. Reserve for Life-Contingent Contract Benefits and Contractholder Funds2019 Form 10-KNotes to Consolidated Financial Statements
As of December 31, the reserve for life-contingent contract benefits consists of the following:
|
| | | | | | | |
| ($ in millions) | 2016 | | 2015 |
| Immediate fixed annuities: | | | |
| Structured settlement annuities | $ | 6,681 |
| | $ | 6,673 |
|
| Other immediate fixed annuities | 1,941 |
| | 2,041 |
|
| Traditional life insurance | 2,643 |
| | 2,584 |
|
| Accident and health insurance | 873 |
| | 844 |
|
| Other | 101 |
| | 105 |
|
| Total reserve for life-contingent contract benefits | $ | 12,239 |
| | $ | 12,247 |
|
|
| |
| Note 9 | Reserve for Life-Contingent Contract Benefits and Contractholder Funds
|
|
| | | | | | | | |
| Reserve for life-contingent contract benefits |
| | | As of December 31, |
| ($ in millions) | | 2019 | | 2018 |
| Immediate fixed annuities: | | | | |
| Structured settlement annuities | | $ | 6,840 |
| | $ | 6,701 |
|
| Other immediate fixed annuities | | 1,612 |
| | 1,714 |
|
| Traditional life insurance | | 2,897 |
| | 2,808 |
|
| Accident and health insurance | | 873 |
| | 876 |
|
| Other | | 78 |
| | 109 |
|
| Total reserve for life-contingent contract benefits | | $ | 12,300 |
| | $ | 12,208 |
|
The following table highlights the key assumptions generally used in calculating the reserve for life-contingent contract benefits:
|
| | | | | | |
| Key assumptions generally used in calculating the reserve for life-contingent contract benefits |
| Product | | Mortality | | Interest rate | | Estimation method |
| Structured settlement annuities | | U.S. population with projected calendar year improvements; mortality rates adjusted for each impaired life based on reduction in life expectancy | | Interest rate assumptions range from 2.9%3.8% to 9.0%7.5% | | Present value of contractually specified future benefits |
| Other immediate fixed annuities | | 1983 group annuity mortality table with internal modifications; 1983 individual annuity mortality table; Annuity 2000 mortality table with internal modifications; Annuity 2000 mortality table; 1983 individual annuity mortality table with internal modifications | | Interest rate assumptions range from 0%0.3% to 11.5%9.0% | | Present value of expected future benefits based on historical experience |
| Traditional life insurance | | Actual company experience plus loading | | Interest rate assumptions range from 2.5% to 11.3% | | Net level premium reserve method using the Company’s withdrawal experience rates; includes reserves for unpaid claims |
| Accident and health insurance | | Actual company experience plus loading | | Interest rate assumptions range from 3.0% to 7.0% | | Unearned premium; additional contract reserves for mortality risk and unpaid claims |
Other: Variable annuity guaranteed minimum death benefits (1) | | Annuity 2012 mortality table with internal modifications | | Interest rate assumptions range from 2.0% to 5.8% | | Projected benefit ratio applied to cumulative assessments |
| |
(1) | In 2006, the Company disposed of substantially all of its variable annuity business through reinsurance agreements with The Prudential Insurance Company of America, a subsidiary of Prudential Financial, Inc. (collectively “Prudential”). |
To the extent that unrealized gains on fixed income securities would result in a premium deficiency had those gains actually been realized, a premium deficiency reserve is recorded for certain immediate annuities with life contingencies. A liability is included inThe Company records an adjustment to the reserve for life-contingent contract benefits with respect to thisthat represents the amount by which the reserve balance would increase if the net unrealized gains in the applicable product investment portfolios were realized and reinvested at current lower interest rates, resulting in a premium deficiency. The offset to this liability is recorded as a reduction of the unrealized net capital gains included in accumulated other comprehensive income.AOCI. This liability was zero$126 million and 0 as of both December 31, 2016 and 2015.
As of December 31, contractholder funds consist of the following:2019 and 2018, respectively.
|
| | | | | | | | |
| Contractholder funds |
| | | As of December 31, |
| ($ in millions) | | 2019 | | 2018 |
| Interest-sensitive life insurance | | $ | 8,384 |
| | $ | 8,229 |
|
| Investment contracts: | | | | |
| Fixed annuities | | 8,845 |
| | 9,681 |
|
| Other investment contracts | | 463 |
| | 461 |
|
| Total contractholder funds | | $ | 17,692 |
| | $ | 18,371 |
|
Notes to Consolidated Financial Statements 2019 Form 10-K
|
| | | | | | | |
| ($ in millions) | 2016 | | 2015 |
| Interest-sensitive life insurance | $ | 8,062 |
| | $ | 7,975 |
|
| Investment contracts: | | | |
| Fixed annuities | 11,933 |
| | 12,974 |
|
| Funding agreements backing medium-term notes | — |
| | 85 |
|
| Other investment contracts | 265 |
| | 261 |
|
| Total contractholder funds | $ | 20,260 |
| | $ | 21,295 |
|
The following table highlights the key contract provisions relating to contractholder funds:
|
| | | | |
| Key contract provisions of contractholder funds |
| Product | | Interest rate | | Withdrawal/surrender charges |
| Interest-sensitive life insurance | | Interest rates credited range from 0%0.0% to 10.5%10.0% for equity-indexed life (whose returns are indexed to the S&P 500) and 1.0% to 6.0% for all other products | | Either a percentage of account balance or dollar amount grading off generally over 20 years |
| Fixed annuities | | Interest rates credited range from 0%0.5% to 9.8%7.5% for immediate annuities; (8.0)% to 13.3%10.0% for equity-indexed annuities (whose returns are indexed to the S&P 500); and 0.1% to 6.0% for all other products | | Either a declining or a level percentage charge generally over ten years or less. Additionally, approximately 17.9%12.0% of fixed annuities are subject to market value adjustment for discretionary withdrawals |
Other investment contracts: Guaranteed minimum income, accumulation and withdrawal benefits on variable (1) and fixed annuities and secondary guarantees on interest-sensitive life insurance and fixed annuities | | Interest rates used in establishing reserves range from 1.5%1.7% to 10.3% | | Withdrawal and surrender charges are based on the terms of the related interest-sensitive life insurance or fixed annuity contract |
| |
(1) | In 2006, the Company disposed of substantially all of its variable annuity business through reinsurance agreements with Prudential. |
Contractholder funds as of December 31, 2015 included funding agreements held by a VIE, Allstate Life Global Funding, that issued medium-term notes. The VIE’s primary assets were funding agreements used exclusively to back medium-term note programs. |
| | | | | | | | | | | | |
| Contractholder funds activity |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Balance, beginning of year | | $ | 18,371 |
| | $ | 19,434 |
| | $ | 20,260 |
|
| Deposits | | 1,091 |
| | 1,109 |
| | 1,130 |
|
| Interest credited | | 636 |
| | 650 |
| | 687 |
|
| Benefits | | (791 | ) | | (844 | ) | | (901 | ) |
| Surrenders and partial withdrawals | | (884 | ) | | (1,135 | ) | | (999 | ) |
| Contract charges | | (825 | ) | | (824 | ) | | (826 | ) |
| Net transfers from separate accounts | | 10 |
| | 6 |
| | 5 |
|
| Other adjustments | | 84 |
| | (25 | ) | | 78 |
|
| Balance, end of year | | $ | 17,692 |
| | $ | 18,371 |
| | $ | 19,434 |
|
Contractholder funds activity for the years ended December 31 is as follows:
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Balance, beginning of year | $ | 21,295 |
| | $ | 22,529 |
| | $ | 24,304 |
|
| Classified as held for sale, beginning balance | — |
| | — |
| | 10,945 |
|
| Total, including those classified as held for sale | 21,295 |
| | 22,529 |
|
| 35,249 |
|
| Deposits | 1,164 |
| | 1,203 |
| | 1,333 |
|
| Interest credited | 722 |
| | 760 |
| | 919 |
|
| Benefits | (966 | ) | | (1,077 | ) | | (1,197 | ) |
| Surrenders and partial withdrawals | (1,053 | ) | | (1,278 | ) | | (2,273 | ) |
| Maturities of and interest payments on institutional products | (86 | ) | | (1 | ) | | (2 | ) |
| Contract charges | (829 | ) | | (818 | ) | | (881 | ) |
| Net transfers from separate accounts | 5 |
| | 7 |
| | 7 |
|
| Other adjustments | 8 |
| | (30 | ) | | 36 |
|
| Sold in LBL disposition | — |
| | — |
| | (10,662 | ) |
| Balance, end of year | $ | 20,260 |
| | $ | 21,295 |
| | $ | 22,529 |
|
The Company offered various guarantees to variable annuity contractholders. In 2006, the Company disposed of substantially all of its variable annuity business through reinsurance agreements with Prudential. Liabilities for variable contract guarantees related to death benefits are included in the reserve for life-contingent contract benefits and the liabilities related to the income, withdrawal and accumulation benefits are included in contractholder funds. All liabilities for variable contract guarantees are reported on a gross basis on the balance sheet with a corresponding reinsurance recoverable asset for those contracts subject to reinsurance.
Absent any contract provision wherein the Company guarantees either a minimum return or account value upon death, a specified contract anniversary date, partial withdrawal or annuitization, variable annuity and variable life insurance contractholders bear the investment risk that the separate accounts’ funds may not meet their stated investment objectives. The account balances of variable annuitiesannuity contracts’ separate accounts with guarantees included $2.93$2.68 billion and $3.22$2.47 billion of equity, fixed income and balanced mutual funds and $364$253 million and $341$245 million of money market mutual funds as of December 31, 20162019 and 2015,2018, respectively.
The Allstate Corporation 175
2019 Form 10-KNotes to Consolidated Financial Statements
The table below presents information regarding the Company’s variable annuity contracts with guarantees. The Company’s variable annuity contracts may offer more than one type of guarantee in each contract; therefore, the sum of amounts listed exceeds the total account balances of variable annuity contracts’ separate accounts with guarantees.
| | | ($ in millions) | December 31, | | As of December 31, |
| | 2016 | | 2015 | | 2019 | | 2018 |
| In the event of death | | | | | | | |
| Separate account value | $ | 3,298 |
| | $ | 3,560 |
| | $ | 2,928 |
| | $ | 2,711 |
|
Net amount at risk (1) | $ | 585 |
| | $ | 675 |
| | $ | 373 |
| | $ | 605 |
|
| Average attained age of contractholders | 70 years |
| | 69 years |
| | 71 years |
| | 71 years |
|
| At annuitization (includes income benefit guarantees) | | | | | | | |
| Separate account value | $ | 915 |
| | $ | 967 |
| | $ | 848 |
| | $ | 778 |
|
Net amount at risk (2) | $ | 265 |
| | $ | 281 |
| | $ | 173 |
| | $ | 264 |
|
| Weighted average waiting period until annuitization options available | None |
| | None |
| | None |
| | None |
|
| For cumulative periodic withdrawals | | | | | | | |
| Separate account value | $ | 267 |
| | $ | 294 |
| | $ | 190 |
| | $ | 190 |
|
Net amount at risk (3) | $ | 10 |
| | $ | 10 |
| | $ | 13 |
| | $ | 16 |
|
| Accumulation at specified dates | | | | | | | |
| Separate account value | $ | 310 |
| | $ | 371 |
| | $ | 123 |
| | $ | 129 |
|
Net amount at risk (4) | $ | 26 |
| | $ | 31 |
| | $ | 15 |
| | $ | 26 |
|
| Weighted average waiting period until guarantee date | 3 years |
| | 4 years |
| | 4 years |
| | 4 years |
|
| |
(1) | Defined as the estimated current guaranteed minimum death benefit in excess of the current account balance as of the balance sheet date. |
| |
(2) | Defined as the estimated present value of the guaranteed minimum annuity payments in excess of the current account balance. |
| |
(3) | Defined as the estimated current guaranteed minimum withdrawal balance (initial deposit) in excess of the current account balance as of the balance sheet date. |
| |
(4) | Defined as the estimated present value of the guaranteed minimum accumulation balance in excess of the current account balance. |
The liability for death and income benefit guarantees is equal to a benefit ratio multiplied by the cumulative contract charges earned, plus accrued interest less contract excess guarantee benefit payments. The benefit ratio is calculated as the estimated present value of all expected contract excess guarantee benefits divided by the present value of all expected contract charges. The establishment of reserves for these guarantees requires the projection of future fund values, mortality, persistency and customer benefit utilization rates. These assumptions are periodically reviewed and updated. For guarantees related to death benefits, benefits represent the projected excess guaranteed minimum death benefit payments. For guarantees related to income benefits, benefits represent the present value of the minimum guaranteed annuitization benefits in excess of the projected account balance at the time of annuitization.
Projected benefits and contract charges used in determining the liability for certain guarantees are developed using models and stochastic scenarios that are also used in the development of estimated expected gross profits. Underlying assumptions for the liability related to income benefits include assumed future annuitization elections based on factors such as the extent of benefit to the potential annuitant, eligibility conditions and the annuitant’s attained age. The liability for guarantees is re-evaluated periodically, and adjustments are made to the liability balance through a charge or credit to life and annuity contract benefits.
Guarantees related to the majority of withdrawal and accumulation benefits are considered to be derivative financial instruments; therefore, the liability for these benefits is established based on its fair value.
Notes to Consolidated Financial Statements 2019 Form 10-K
The following table summarizes the liabilities for guarantees.
| | | Summary of liabilities for guarantees | | Summary of liabilities for guarantees |
| ($ in millions) | Liability for guarantees related to death benefits and interest-sensitive life products | | Liability for guarantees related to income benefits | | Liability for guarantees related to accumulation and withdrawal benefits | | Total | | Liability for guarantees related to death benefits and interest-sensitive life products | | Liability for guarantees related to income benefits | | Liability for guarantees related to accumulation and withdrawal benefits | | Total |
Balance, December 31, 2015 (1) | $ | 223 |
| | $ | 68 |
| | $ | 75 |
| | $ | 366 |
| |
Balance, December 31, 2018 (1) | | | $ | 308 |
| | $ | 39 |
| | $ | 97 |
| | $ | 444 |
|
| Less reinsurance recoverables | 106 |
| | 64 |
| | 52 |
| | 222 |
| | 111 |
| | 35 |
| | 39 |
| | 185 |
|
| Net balance as of December 31, 2015 | 117 |
|
| 4 |
|
| 23 |
|
| 144 |
| |
| Net balance as of December 31, 2018 | | | 197 |
|
| 4 |
|
| 58 |
|
| 259 |
|
| Incurred guarantee benefits | 26 |
| | — |
| | 11 |
| | 37 |
| | 18 |
| | — |
| | 12 |
| | 30 |
|
| Paid guarantee benefits | — |
| | — |
| | — |
| | — |
| | (3 | ) | | — |
| | — |
| | (3 | ) |
| Net change | 26 |
| | — |
| | 11 |
|
| 37 |
| | 15 |
| | — |
| | 12 |
|
| 27 |
|
| Net balance as of December 31, 2016 | 143 |
| | 4 |
| | 34 |
| | 181 |
| |
| Net balance as of December 31, 2019 | | | 212 |
| | 4 |
| | 70 |
| | 286 |
|
| Plus reinsurance recoverables | 101 |
| | 40 |
| | 43 |
| | 184 |
| | 81 |
| | 20 |
| | 32 |
| | 133 |
|
Balance, December 31, 2016 (2) | $ | 244 |
|
| $ | 44 |
|
| $ | 77 |
|
| $ | 365 |
| |
Balance, December 31, 2019 (2) | | | $ | 293 |
|
| $ | 24 |
|
| $ | 102 |
|
| $ | 419 |
|
| | | | | | | | | | | | | | | | |
Balance, December 31, 2014 (3) | $ | 195 |
| | $ | 95 |
| | $ | 60 |
| | $ | 350 |
| |
Balance, December 31, 2017 (3) | | | $ | 262 |
| | $ | 29 |
| | $ | 79 |
| | $ | 370 |
|
| Less reinsurance recoverables | 98 |
| | 91 |
| | 45 |
| | 234 |
| | 87 |
| | 25 |
| | 34 |
| | 146 |
|
| Net balance as of December 31, 2014 | 97 |
|
| 4 |
|
| 15 |
|
| 116 |
| |
| Net balance as of December 31, 2017 | | | 175 |
|
| 4 |
|
| 45 |
|
| 224 |
|
| Incurred guarantee benefits | 20 |
| | — |
| | 8 |
| | 28 |
| | 24 |
| | — |
| | 13 |
| | 37 |
|
| Paid guarantee benefits | — |
| | — |
| | — |
| | — |
| | (2 | ) | | — |
| | — |
| | (2 | ) |
| Net change | 20 |
|
| — |
|
| 8 |
|
| 28 |
| | 22 |
|
| — |
|
| 13 |
|
| 35 |
|
| Net balance as of December 31, 2015 | 117 |
| | 4 |
| | 23 |
| | 144 |
| |
| Net balance as of December 31, 2018 | | | 197 |
| | 4 |
| | 58 |
| | 259 |
|
| Plus reinsurance recoverables | 106 |
| | 64 |
| | 52 |
| | 222 |
| | 111 |
| | 35 |
| | 39 |
| | 185 |
|
Balance, December 31, 2015 (1) | $ | 223 |
|
| $ | 68 |
|
| $ | 75 |
|
| $ | 366 |
| |
Balance, December 31, 2018 (1) | | | $ | 308 |
|
| $ | 39 |
|
| $ | 97 |
|
| $ | 444 |
|
| |
(1) | Included in the total liability balance as of December 31, 20152018 are reserves for variable annuity death benefits of $105$109 million, variable annuity income benefits of $65$36 million, variable annuity accumulation benefits of $38$25 million, variable annuity withdrawal benefits of $14$14 million and other guarantees of $144 million.$260 million. |
| |
(2) | Included in the total liability balance as of December 31, 20162019 are reserves for variable annuity death benefits of $100$78 million, variable annuity income benefits of $40$21 million, variable annuity accumulation benefits of $34$18 million, variable annuity withdrawal benefits of $9$14 million and other guarantees of $182 million.$288 million. |
| |
(3) | Included in the total liability balance as of December 31, 20142017 are reserves for variable annuity death benefits of $96$85 million, variable annuity income benefits of $92$26 million, variable annuity accumulation benefits of $32$22 million, variable annuity withdrawal benefits of $13$12 million and other guarantees of $117 million.$225 million. |
The Allstate Corporation 177
10. Reinsurance2019 Form 10-KNotes to Consolidated Financial Statements
|
| |
| Note 10 | Reinsurance and Indemnification
|
|
| | | | | | | | | | | | |
| Effects of reinsurance and indemnification on property and casualty premiums written and earned and life premiums and contract charges |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Property and casualty insurance premiums written | | | | | | |
| Direct | | $ | 37,976 |
| | $ | 35,895 |
| | $ | 33,685 |
|
| Assumed | | 95 |
| | 99 |
| | 64 |
|
| Ceded | | (1,117 | ) | | (1,008 | ) | | (1,007 | ) |
| Property and casualty insurance premiums written, net of recoverables | | $ | 36,954 |
| | $ | 34,986 |
| | $ | 32,742 |
|
| | | | | | | |
| Property and casualty insurance premiums earned | | | | | | |
| Direct | | $ | 37,104 |
| | $ | 34,977 |
| | $ | 33,221 |
|
| Assumed | | 94 |
| | 87 |
| | 50 |
|
| Ceded | | (1,122 | ) | | (1,016 | ) | | (971 | ) |
| Property and casualty insurance premiums earned, net of recoverables | | $ | 36,076 |
| | $ | 34,048 |
| | $ | 32,300 |
|
| | | | | | | |
| Life premiums and contract charges | | | | | | |
| Direct | | $ | 2,074 |
| | $ | 2,001 |
| | $ | 1,894 |
|
| Assumed | | 712 |
| | 754 |
| | 787 |
|
| Ceded | | (285 | ) | | (290 | ) | | (303 | ) |
| Life premiums and contract charges, net of recoverables | | $ | 2,501 |
| | $ | 2,465 |
| | $ | 2,378 |
|
Property and casualty reinsurance and indemnification recoverables
Total amounts recoverable from reinsurers and indemnitors as of December 31, 2019 and 2018 were $7.02 billion and $7.27 billion, respectively, including $112 million and $111 million, respectively, related to property and casualty losses paid by the Company and billed to reinsurers and indemnitors, and $6.91 billion and $7.15 billion, respectively, estimated by the Company with respect to ceded or indemnifiable unpaid losses (including IBNR), which are not billable until the losses are paid. The effectsallowance for uncollectible reinsurance was $60 million and $65 million as of December 31, 2019 and 2018, respectively, primarily related to reinsurance recoverables arising from the Discontinued Lines and Coverages segment. Indemnification recoverables are considered collectible based on property-liability insurance premiums writtenthe industry pool and earnedfacility enabling legislation.
Property and lifecasualty programs are grouped by the following characteristics:
| |
| 1. | Indemnification programs - industry pools, facilities or associations that are governed by state insurance statutes or regulations or the federal government. |
| |
| 2. | Catastrophe reinsurance programs - reinsurance protection for catastrophe exposure nationwide and by specific states, as applicable. |
| |
| 3. | Other reinsurance programs - reinsurance protection for asbestos, environmental and other liability exposures as well as commercial lines, including shared economy. |
Property and annuity premiums and contract chargescasualty reinsurance is in place for the years ended December 31 are as follows:
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Property-liability insurance premiums written | | | | | |
| Direct | $ | 32,614 |
| | $ | 31,924 |
| | $ | 30,686 |
|
| Assumed | 47 |
| | 39 |
| | 48 |
|
| Ceded | (1,061 | ) | | (1,092 | ) | | (1,120 | ) |
| Property-liability insurance premiums written, net of reinsurance | $ | 31,600 |
| | $ | 30,871 |
| | $ | 29,614 |
|
| Property-liability insurance premiums earned | | | | | |
| Direct | $ | 32,249 |
| | $ | 31,274 |
| | $ | 29,914 |
|
| Assumed | 45 |
| | 41 |
| | 45 |
|
| Ceded | (987 | ) | | (1,006 | ) | | (1,030 | ) |
| Property-liability insurance premiums earned, net of reinsurance | $ | 31,307 |
| | $ | 30,309 |
| | $ | 28,929 |
|
| Life and annuity premiums and contract charges | | | | | |
| Direct | $ | 1,766 |
| | $ | 1,641 |
| | $ | 1,944 |
|
| Assumed | 818 |
| | 849 |
| | 629 |
|
| Ceded | (309 | ) | | (332 | ) | | (416 | ) |
| Life and annuity premiums and contract charges, net of reinsurance | $ | 2,275 |
| | $ | 2,158 |
| | $ | 2,157 |
|
Property-Liability
Allstate Protection, Discontinued Lines and Coverages and Service Businesses segments. The Company purchases reinsurance after evaluating the financial condition of the reinsurer as well as the terms and price of coverage. Developments in the insurance and reinsurance industries have fostered a movement to segregate asbestos, environmental and other discontinued lines exposures into separate legal entities with dedicated capital. Regulatory bodies in certain cases have supported these actions.
Indemnification programs
The Company is unable to determine the impact, if any, that these developments will have on the collectability of reinsurance recoverablesparticipates in the future.
Property-Liability reinsurance recoverable
Total amounts recoverable from reinsurers as of December 31, 2016 and 2015 were $6.28 billion and $5.98 billion, respectively,state-based industry pools or facilities mandating participation by insurers offering certain coverage in their state, including $93 million and $86 million, respectively, related to property-liability losses paid by the Company and billed to reinsurers, and $6.18 billion and $5.89 billion, respectively, estimated by the Company with respect to ceded unpaid losses (including IBNR), which are not billable until the losses are paid.
With the exception of the recoverable balances from the Michigan Catastrophic Claims Association (“MCCA”), Lloyd’s of London,the New Jersey Property-Liability Insurance Guaranty Association (“PLIGA”), the North Carolina Reinsurance Facility (“NCRF”) and otherthe Florida Hurricane Catastrophe Fund (“FHCF”). When the Company pays qualifying claims under the coverage indemnified by a state’s pool or facility, the Company is reimbursed for the qualifying claim losses or expenses. Each state pool or facility may assess participating companies to collect sufficient amounts to meet its total indemnification requirements. The enabling legislation for each state’s pool or facility compels the pool or facility only to indemnify participating companies for qualifying claim losses or expenses; the state pool or facility does not underwrite the coverage or take on the ultimate risk of the indemnified business. As a pass through, these pools or facilities manage the receipt of assessments paid by participating companies and payment of indemnified amounts for covered claims presented by participating companies. The Company has not had any credit losses related to these indemnification programs.
State-based industry pools and facilities, the largest reinsurance recoverable balance the Company had outstanding was $61 million and $62 million from Westport Insurance Corporation as of December 31, 2016 and 2015, respectively. No other amount due or estimated to be due from any single property-liability reinsurer was in excess of $35 million and $32 million as of December 31, 2016 and 2015, respectively.
The allowance for uncollectible reinsurance was $84 million and $80 million as of December 31, 2016 and 2015, respectively, and is primarily related to the Company’s Discontinued Lines and Coverages segment.
Industry pools and facilities
Reinsurance recoverableMichigan Catastrophic Claims Association The MCCA is a statutory indemnification mechanism for
Notes to Consolidated Financial Statements 2019 Form 10-K
member insurers’ qualifying personal injury protection claims paid for the unlimited lifetime medical benefits above the applicable retention level for qualifying injuries from automobile, motorcycle and commercial vehicle accidents. Indemnification recoverables on paid and unpaid claims, including IBNR, as of December 31, 20162019 and 2015 includes $4.952018 include $5.50 billion and $4.66$5.40 billion, respectively, from the MCCA. MCCA for its indemnification obligation.
The MCCA is funded by annually assessing participating member companies actively writing motor vehicle coverage in Michigan on a mandatory insuranceper vehicle basis that is currently $220 per vehicle insured. The MCCA’s calculation of the annual assessment is based upon the total of members’ actuarially determined present value of expected payments on lifetime claims by all persons expected to be catastrophically injured in that year and ultimately qualify for MCCA reimbursement, its operating expenses, and adjustments for the amount of excesses or deficiencies in prior assessments. The assessment is incurred by the Company as policies are written and recovered as a component of premiums from the Company’s customers.
The MCCA indemnifies qualifying claims of all current and former member companies (whether or not actively writing motor vehicle coverage in Michigan) for qualifying claims and reinsurance indemnification mechanism forclaims expenses incurred while the member companies were actively writing the mandatory personal injury protection losses that provides indemnificationcoverage in Michigan. Member companies actively writing automobile coverage in Michigan include the MCCA annual assessments in determining the level of premiums to charge insureds in the state.
As required for losses overmember companies by the MCCA, the Company reports covered paid and unpaid claims to the MCCA when estimates of loss for a reported claim are expected to exceed the retention level, that increasesthe claims involve certain types of severe injuries, or there are litigation demands received suggesting the claim value exceeds certain thresholds. The retention level is adjusted upward every other MCCA fiscal year by the lesser of 6% or the increase in the Consumer Price Index. The retention level will be $580 thousand per claim for the fiscal two-years ending June 30, 2021 compared to $555 thousand per claim for the fiscal two-years ending June 30, 2019 compared to $545 thousand per claim for the fiscal two-years ending June 30, 2017. 2019.
The MCCA is obligated to fund the ultimate liability forof member companies (companies actively writing motor vehicle coverage in Michigan and those with runoff policies)companies’ qualifying claims and claimsclaim expenses. The MCCA operates similardoes not underwrite the insurance coverage or hold any underwriting risk.
The MCCA indemnifies members as qualifying claims are paid and billed by members to a reinsurance program and is annually fundedthe MCCA. Unlimited lifetime covered losses result in significant levels of ultimate incurred claim reserves being recorded by participating member companies (companies actively writing motor vehiclealong with offsetting indemnification recoverables. Disputes with claimants over coverage on certain reported claims can result in Michigan)additional losses, which may be recoverable from the MCCA, excluding litigation expenses. There is currently no method by which insurers are able to
obtain the benefit of managed care programs to reduce claims costs through a per vehicle annual assessment. the MCCA.
The MCCA has been legally authorized to annually assess participatingannual assessments fund current operations and member companies pursuant to enabling legislation that describes both the annual determination and assessment. This assessment is recorded as a component of the premiums charged to the Company’s customers. These assessments paid to the MCCA provide funds for the indemnification for losses described above. The MCCA is required to assess an amount each year sufficient to cover members’ actuarially determined present value of expected payments on lifetime claims of all persons expected to be catastrophically injured in that year, its operating expenses, and adjustments for the amount of excesses or deficiencies in prior assessments.company reimbursements. The MCCA prepares statutory-basis financial statements in conformity with accounting practices prescribed or permitted by the State of Michigan Department of Insurance and Financial Services (“MI DOI”). The MI DOI has granted the MCCA a statutory permitted practice that expires in 2019June 30, 2022 to discount its liabilities for loss and loss adjustment expense. As of June 30, 2016,2019, the date of its most recent annual financial report, the MCCA had cash and invested assets of $18.48$21.83 billion and an accumulated deficitsurplus of $1.74$1.28 billion. The permitted practice reduced the accumulated deficit by $42.27$39.64 billion.
Allstate sells and administers policies as a participant in the National FloodNew Jersey Property-Liability Insurance Program (“NFIP”). The amounts recoverable as of December 31, 2016 and 2015 were $77 million and $27 million, respectively. Ceded premiums earned include $274 million, $293 million and $312 million in 2016, 2015 and 2014, respectively. Ceded losses incurred include $537 million, $120 million and $38 million in 2016, 2015 and 2014, respectively. Under the arrangement, the Federal Government pays all covered claims and certain qualifying claim expenses.
The Guaranty Association PLIGA serves as the statutory administrator of the New Jersey Unsatisfied Claim and Judgment Fund (“UCJF”), Workers’ Compensation Security Fund and the New Jersey Surplus Lines Insurance Guaranty Fund.
In addition to its insolvency protection responsibilities, PLIGA reimburses insurers for unlimited excess medical benefits (“EMBs”) paid in connection with personal injury protection claims in excess of $75,000 for policies issued or renewed prior to January 1, 1991, and limited EMB claims in excess of $75,000 and capped at $250,000 for policies issued or renewed on or after January 1, 1991, to December 31, 2003.
A significant portion of the incurred claim reserves and the recoverables can be attributed to a small number of catastrophic claims. Assessments paid to PLIGA for the EMB program totaled $8.1 million in 2019. The amounts of paid and unpaid recoverables as of December 31, 2019 and 2018 were $446 million and $461 million, respectively.
PLIGA annually assesses all admitted property and casualty insurers writing covered lines in New Jersey for PLIGA indemnification and expenses. PLIGA assessments may be recouped as a surcharge on premiums collected. PLIGA does not ultimately retain underwriting risk as it assesses member companies for their expected qualifying losses to provide funding for payment of its indemnification obligation to member companies for their actual losses. As a pass through, PLIGA facilitates these transactions of receipt of assessments paid by member companies and payment to member companies for covered claims presented by them for indemnification. As of December 31, 2018, the date of its most recent annual financial report, PLIGA had a fund balance of $250 million.
As statutory administrator of the UCJF, PLIGA provides compensation to qualified claimants for personal injury protection, bodily injury, or death caused by private passenger automobiles operated by uninsured or “hit and run” drivers. The UCJF also provides private passenger stranger pedestrian personal injury protection benefits when no other coverage is available.
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PLIGA annually collects a UCJF assessment from all admitted property and casualty insurers writing motor vehicle liability insurance in New Jersey for UCJF indemnification and expenses. UCJF assessments can be expensed as losses recoverable in rates as appropriate. As of December 31, 2018, the date of its most recent annual financial report, the UCJF fund had a balance of $41 million.
North Carolina Reinsurance Facility The NCRF provides automobile liability insurance to drivers that insurers are not otherwise willing to insure. All insurers licensed to write automobile insurance in North Carolina are members of the NCRF. Premiums, losses and expenses are assigned to the NCRF. North Carolina law allows the NCRF to recoup operating losses for certain insureds through a surcharge to policyholders. As of September 30, 2019, the NCRF reported a deficit of $110 million in members’ equity. The NCRF implemented a loss recoupment surcharge on all private passenger and commercial fleet policies effective October 1, 2019, through September 30, 2020. Member companies are assessed the recoupment surcharge. The loss recoupment surcharge will be adjusted on October 1, 2020 and discontinued once losses are recovered. The NCRF results are shared by the member companies in proportion to their respective North Carolina automobile liability writings. For the fiscal quarter ending September 30, 2019, net income was $105 million, including $1.10 billion of earned premiums, $271 million of certain private passenger auto risk recoupment and $137 million of member loss recoupments. As of December 31, 2019, the NCRF recoverables on paid claims is $9.4 million and recoverables on unpaid claims is $69.1 million. Paid recoverable balances, if covered, are typically settled within sixty days of monthly filing.
Florida Hurricane Catastrophe Fund Allstate subsidiaries Castle Key Insurance Company (“CKIC”) and Castle Key Indemnity Company (“CKI”, and together with CKIC, “Castle Key”) participate in the mandatory coverage provided by the FHCF and therefore have access to reimbursement for certain qualifying Florida hurricane losses from the FHCF. Castle Key has exposure to insurersassessments and pays annual premiums to the FHCF for this reimbursement protection. The FHCF has the medical benefits portion of personal injury protection coverage paidauthority to issue bonds to pay its obligations to participating insurers in excess of $75,000 with no limitsits capital balances. Payment of these bonds is funded by emergency assessments on all property and casualty premiums in the state, except workers’ compensation, medical malpractice, accident and health insurance and policies written under the National Flood Insurance Program (“NFIP”). The FHCF emergency assessments are limited to 6% of premiums per year beginning the first year in which reimbursements require bonding, and up to a total of 10% of premiums per year for assessments in the second and subsequent years, if required to fund additional bonding. The FHCF issued $2.00 billion in pre-event bonds in 2013 to build its capacity to reimburse member companies’ claims. The FHCF plans to fund these pre-event bonds through current FHCF cash flows. Pursuant to an Order issued by the Florida Office of Insurance Regulation (“FL OIR”), the
emergency assessment is 0 for all policies issued or renewed prior toon or after January 1, 1991 and in excess of $75,000 and capped at $250,000 for policies issued or renewed from January 1, 1991 to December 31, 2004. The amounts recoverable as of December 31, 2016 and 2015 were $506 million and $500 million, respectively.2015.
CededAnnual premiums earned and paid under the Florida Hurricane Catastrophe Fund (“FHCF”)FHCF agreement were $12$9 million, $13$10 million and $11 million in 2016, 20152019, 2018 and 2014,2017, respectively. ThereQualifying losses were no ceded losses incurred$33 million, $143 million and $19 million in 2016, 2015 or 2014.2019, 2018 and 2017, respectively. The Company has access to reimbursement provided by the FHCF for 90% of qualifying personal property losses that exceed its current retention
of $58$52 million for the 2 largest hurricanes and $19$17 million for other hurricanes, up to a maximum total of $185$145 million, effective from June 1, 20162019 to May 31, 2017. There were no2020. The amounts recoverable from the FHCF totaled $52 million and $104 million as of December 31, 2016 or 2015.2019 and 2018, respectively.
Federal Government - National Flood Insurance Program NFIP is a program administered by the Federal Emergency Management Agency (“FEMA”) whereby the Company sells and services NFIP flood insurance policies as an agent of FEMA and receives fees for its services. The Company is fully indemnified for claims and claim expenses and does not retain any ultimate risk for the indemnified business. The federal government is obligated to pay all claims and certain allocated loss adjustment expenses in accordance with the arrangement.
Congressional authorization for the NFIP is periodically evaluated and may be subjected to freezes, including when the federal government experiences a shutdown. FEMA has a NFIP reinsurance program to manage the future exposure of the NFIP through the transfer of risk to private reinsurance companies and capital market investors. Congress is evaluating the funding of the program as well as considering reforms to the program that would be incorporated in legislation to reauthorize the NFIP.
The amounts recoverable as of December 31, 2019 and 2018 were $25 million and $31 million, respectively. Premiums earned under the NFIP include $258 million, $258 million and $263 million in 2019, 2018 and 2017, respectively. Qualifying losses incurred include $150 million, $118 million and $1.12 billion in 2019, 2018 and 2017, respectively.
Catastrophe reinsurance
The Company has theCompany’s reinsurance program is designed to provide reinsurance protection for catastrophes resulting from multiple perils including hurricanes, windstorms, hail, tornadoes, earthquakes, wildfires, and fires following catastrophe reinsurance agreements in effect as of December 31, 2016:earthquakes.
The majority of ourthe Company’s program comprises multi-year contracts, primarily placed in the traditional reinsurance market, such that one thirdgenerally one-third of the program is renewed every year. The duration of the contracts in the program vary from one to seven-year terms.
Coverage is generally purchased on a broad geographic, product line and multiple peril loss basis.
The Company purchases reinsurance from traditional reinsurance companies as well as the insurance linked securities market (i.e. “PCS Agreements”).market.
Notes to Consolidated Financial Statements 2019 Form 10-K
Florida property and New Jersey property and auto are each covered by separate agreements, as the risk of loss is different and ourthe Company’s subsidiaries operating in these states are separately capitalized.
The Company has not experienced credit losses on its catastrophe reinsurance programs. The Company ceded premiums earned of $376 million, $343 million and $344 million under catastrophe reinsurance agreements in 2019, 2018 and 2017, respectively. The Company has the following catastrophe reinsurance agreements in effect as of December 31, 2019:
The Nationwide Per Occurrence Excess Catastrophe Reinsurance programProgram (the “Nationwide program”Program”) provides $4.55$4.86 billion of reinsurance coverage subject to a $500 million retention and is subject to the amount of reinsurance placed in each of its tennine layers.
Per Occurrence and Aggregate Excess Agreements, include occurrence coverage in contracts from both the traditional reinsurance and insurance linked securities (“ILS”) markets, while aggregate protection is included in two contracts supported by the ILS market. The Nationwide program comprises four agreements: Theagreements provide multi-line catastrophe coverage in every state except Florida, where coverage is only provided for personal lines automobile.
Layer 1 through Layer 5 - Per Occurrence Excess Catastrophe Reinsurance agreement,Agreement For the 2013-1 Property Claim Services (“PCS”) Excess Catastrophe Reinsurance agreement, the 2014-1 PCS Excess Catastrophe Reinsurance agreement, and the Gap Fill Layer Catastrophe Reinsurance agreement.
The Per Occurrence Excess Catastrophe Reinsurance agreement, whichJune 1, 2019 to May 31, 2020 term, coverage for each of layers one through five is placed in the traditional reinsurance market reinsures personal lines property and automobile excess catastrophe losses caused by multiple perils in every state, except Florida’s personal lines property excess catastrophe losses and both personal lines property and automobile excess catastrophe losses in New Jersey. The program comprises layers one through six and a portion of layer nine. Coverage for each of the first through fifth layers comprises three contracts, with each layer comprising 3 contracts. Each contract providingprovides one-third of 95% of the total layer limit and expiring May 31, 2017,2020, May 31, 20182021 and May 31, 2019. The sixth layer is 95% placed2022, respectively. One-third of the limit provided by each of layers one through five includes coverage for New Jersey. Two-thirds of the limit provided by each of layers one through five also includes coverage for the Company’s commercial lines property and comprises one contract expiring May 31, 2022.automobile catastrophe losses. The contracts for each of layers one through six provide $3.07 billion infive include one reinstatement of limits per occurrence reinsurance limitsyear, with premium required. Reinsurance premiums are subject to a $500 million retention.redetermination for exposure changes on an annual basis.
Coverage for a portion ofLayer 6 – Per Occurrence Excess Agreement The layer six contract placed in the ninth layer is provided by one contract expiring May 31, 2022, which provides 29% of $446 million or $131 million in limits in excess of $3.75 billion. Unlike the contracts expiring May 31, 2017 and May 31, 2018, the newly placed contracts expiring May 31, 2019 include coverage for automobile losses in Florida. The sixth layer and ninth layer contracts containtraditional reinsurance market contains comparable contract terms and conditions as layers one through five. Unlikefive, with New Jersey and commercial lines property and automobile catastrophe losses included in the definition of subject loss. The layer six contract provides a $324 million limit, is 95% placed, and expires May 31, 2022. This contract contains a variable reset option, which the ceding entities may elect to invoke at each anniversary and which allows for the annual adjustment of the attachment and exhaustion level within specified limits. The layer six contract contains one through five contracts, the sixth and ninth layer contracts each containreinstatement of limits over its seven-year term with premium required. As of July 1, 2019, a reinstatement of limits has not been executed under this contract. Reinsurance premiums for this contract are subject to redetermination for exposure changes on an annual basis.
Layer 7 – Per Occurrence Excess and Aggregate Agreements The seventh layer consists of four contracts:
Seven-Year Term
2019-1 Excess Catastrophe Reinsurance
Wrap Fill Excess Catastrophe Reinsurance
2017-1 Excess Catastrophe Reinsurance
Seven-Year Term Contract, which is placed in the traditional reinsurance market contains comparable contract terms and conditions as layer six. The contract provides a $446 million limit and is 29.37% placed, and expires May 31, 2022. The contract contains a variable reset option which allows for the annual adjustment of each contract’sthe attachment and exhaustion levelslevel within specified limits. The variable reset option requires a premium adjustment. The contracts for each of the first through fifth layers include one reinstatement of limits, per year, with premium required. The sixth and ninth layer contracts each contain onecontract contains 1 reinstatement of limits over their seven yearits seven-year term with premium required. Reinsurance premiums for all contracts are subject to redetermination for exposure changes on an annual basis.
The 2013-1 PCS2019-1 Excess Catastrophe Reinsurance agreementContract reinsures personal lines property and automobile excess catastrophe losses caused by hurricanes in 2849 states and the District of Columbia, excluding Florida, caused by named storms, earthquakes and earthquakes, including firesfire following earthquakes, severe weather, wildfires, and other naturally occurring or man-made events declared to be a catastrophe by the Company. This contract is placed with Sanders Re II Ltd. which obtained funding from the ILS market to collateralize the contract’s limit. The contract reinsures business located in California, New Yorkthe covered territory and Washingtonarising out of covered events. The contract’s risk period began April 1, 2019 and comprises portionsterminates on March 31, 2023. The contract provides a $400 million limit and is 75% placed, during its four-year term which can be used on a per occurrence or an annual aggregate basis. For a qualifying loss occurrence, the contract provides 75% of layers eight and nine of the program. The agreement comprises two contracts that expire May 3, 2017: a Class B Excess Catastrophe Reinsurance contract which provides 44% of $338 million or $150$400 million in reinsurance limits in excess of a $3.22minimum $2.75 billion attachment point, and a Class Aretention for the April 1, 2019 to March 31, 2020 period. The New Jersey Excess Catastrophe ReinsuranceAgreement, layer six, the Seven-Year Term Contract for layer seven, and the 5% co-participation inure to the benefit of this contract whichfor events that exceed the retention. As a result, while those layers are fully intact, the contract would begin to pay subject losses in excess of $3.07 billion.
The contract also provides 45%an annual aggregate limit of $447 million or $20075% of $400 million in reinsurance limits excessbetween a $3.54 billion to $3.94 billion layer subject to an annual retention of a $3.75 billion attachment point. This agreement is placed with a Bermuda insurance company, Sanders Re Ltd. (“Sanders Re”), which obtained funding from$3.54 billion. For each annual period beginning April 1, the insurance linked securities (“ILS”) marketCompany declared catastrophes occurring during such annual period can be aggregated to collateralizeerode the agreement’s limit. Amounts payableaggregate retention and qualify for coverage under the agreement are based on insured industry losses as reported by PCS and further indexed by annual pay-out factors specific to personal lines property and automobile exposures in the agreement’s covered areas.aggregate limit. Reinsurance recoveries from and including layers one through seven of the Nationwide Program and the New Jersey Excess Catastrophe Agreement inure to the benefit of the annual aggregate layer.
Reinsurance recoveries collected under the 2013-1 PCS agreementper occurrence limit of this contract are not eligible for cession under the annual aggregate limit of this
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2019 Form 10-KNotes to Consolidated Financial Statements
contract. Reinsurance recoveries for all loss occurrences and annual aggregate losses qualifying for coverage during the contract’s four-year risk period are limited to ourthe Company’s ultimate net loss from a PCS reported hurricane or earthquake event, in excess of each contract’s specific attachment pointcovered events and subject to eachthe contract’s limit.$400 million limit, 75% placed. The contracts do not include a reinstatement of limits.
The 2014-1 PCS Excess Catastrophe Reinsurance agreement reinsures personal lines property and automobile excess catastrophe losses caused by hurricanes in 29 states and the District of Columbia, and earthquakes, including fires following earthquakes, in California, New York and Washington and comprises portions of the eight, ninth and tenth layer of the program. The agreement comprises three contracts: a Class D Excess Catastrophe Reinsurance contract provides 51% of $603 million or $305 million in limits in excess of a $3.15 billion attachment point, a Class C Excess Catastrophe Reinsurance contract provides 26% of $447 million or $115 million in limits in excess of a $3.75 billion attachment point, and a Class B
Excess Catastrophe Reinsurance contract provides 95% of $347 million or $330 million in limits excess of a $4.20 billion attachment point. This agreement is also placed with Sanders Re which obtained ILS market funding to collateralize the agreement’s limit and the provisions regarding amounts payable and reinsurance recoveries as described above for the 2013-1 PCS agreement. Each contract’s risk period begins on May 22, 2014, with two of the three contracts’ risk periods expiring on May 21, 2018 and one contract’s risk period expiring on May 21, 2019. The contracts comprising the agreement containcontains a variable reset option, which the ceding entities may invoke for risk periods subsequent to the first risk period and which allows for the annual adjustment of eachthe contract’s attachment and exhaustion levels within specified limits.
Wrap Fill Excess Catastrophe Reinsurance Contract provides a $200 million limit in excess of a minimum $2.75 billion retention, is 100% placed in the traditional market, and expires March 31, 2020. This layer is structured to cover gaps around the traditional Seven-Year Term Contract and the Sanders Re II Ltd. 2019-1 contract. The contract provides additional gap coverage as the layer shifts down in attachment, subject to the $2.75 billion minimum retention level as lower layer limits are exhausted. A retention co-participation of 5% for a layer of $1.61 billion in excess of $2.75 billion is deemed in place and inures to the benefit of this contract. Recoveries from contracts in layers six and seven, with the exception of Sanders Re Ltd. 2017-1, inure to the benefit of this contract, as this multiple peril contract provides coverage for perils and subject business not reinsured in portions of layers seven. While those layers are fully intact, the contract would begin to pay subject losses in excess of $3.07 billion. This contract does not include a reinstatement of limits.
2017-1 Excess Catastrophe Reinsurance Contract reinsures personal lines property and automobile excess losses in 49 states and the District of Columbia, excluding the State of Florida, caused by named storms, earthquakes and fire following earthquakes, severe thunderstorms, winter storms, volcanic eruptions, and meteorite impacts. This contract is placed with Sanders Re Ltd., which obtained funding from the ILS market to collateralize the contract’s limit. The contract reinsures actual losses to personal lines property business located in the covered territory and arising out of a covered event. Amounts payable for automobile losses are based on insured industry losses as reported by Property Claim Services (“PCS”) and further adjusted to account for the Company’s auto exposures in reinsured areas. Reinsurance recoveries under the contract are limited to the Company’s ultimate net loss from a covered event subject to the contract’s limit. The contract’s risk period began March 31, 2017 and terminates on November 30, 2021. The contract provides a $375 million limit in excess of $2.75 billion retention. The New Jersey Excess Catastrophe Agreement, layer six, the Seven-Year Term Contract for layer seven, the Wrap Fill contract, and the 5% co-participation inure to the benefit of this contract for events that exceed the retention. As a result, while those layers are fully intact, the contract would begin to pay subject losses in excess of $3.69 billion.
The contract contains a variable reset option, which the ceding entities may invoke for risk periods subsequent to the first risk period and which allows for
the annual adjustment of the contract’s attachment and exhaustion levels within specified limits. The variable reset option requires a premium adjustment. The contracts docontract does not include a reinstatement of limits.
TheTo summarize the order of operations and inuring protection for the seventh layer for an occurrence loss, for losses below $3.40 billion, the portion of the seventh layer placed in the traditional market would not be enacted. Once the sixth layer is exhausted, the co-participation of 5% would apply and then the 2019-1 Excess Catastrophe Reinsurance contract and Wrap Fill contract, dependent on the subject business contributing to the per occurrence loss. For losses greater than the $3.40 billion retention, the portions of the seventh layer placed in the traditional market would apply first as they inure to the benefit of the portions of the seventh layer placed in the ILS market. This would be followed by the co-participation of 5%, the 2019-1 Excess Catastrophe Reinsurance Contract, the Wrap Fill, and the 2017-1 Excess Catastrophe Reinsurance Contract, dependent on the per occurrence loss.
Layer 8 – Per Occurrence Excess Agreement – Gap Fill Excess Catastrophe Reinsurance Contract provides a $219 million limit in excess of a $2.75 billion retention, is 100% placed in the traditional market, and expires May 31, 2020. The contract provides additional gap coverage as the layer shifts down to the $2.75 billion retention level as lower layers are exhausted. A retention co-participation of 5% for a layer of $1.61 billion in excess of $2.75 billion is deemed in place and inures to the benefit of this contract. Recoveries from contracts in layers six and seven inure to the benefit of this contract, as this multiple peril contract provides coverage for perils and subject business not reinsured in portions of layers seven. While all inuring contracts are fully in place, this contract would begin to cover an occurrence subject loss in excess of $4.13 billion. This contract does not include a reinstatement of limits.
Layer 9 – Per Occurrence and Aggregate Excess Agreement – 2018-1 Excess Catastrophe Reinsurance Contract reinsures personal lines property and automobile excess catastrophe losses in 49 states and the District of Columbia, excluding the State of Florida, caused by multiple perils in all states, except Florida’s personal lines property excessnamed storms, earthquakes and fire following earthquakes, severe weather, wildfires, and other naturally occurring or man-made events declared to be a catastrophe losses and both personal lines property and automobile excess catastrophe losses in New Jersey.by the Company. This contract is placed with Sanders Re Ltd., which obtained funding from the ILS market to collateralize the contract’s limit. The contract expires Mayreinsures business located in the covered territory and arising out of a covered event. The contract’s risk period began April 1, 2018 and terminates on March 31, 2017 and2022. The contract provides one annual limit of $175$500 million during its four-year term, which can be used on a per occurrence or aggregate basis. For each qualifying loss occurrence, the contract provides 100% of $500 million in excessreinsurance limits, between a $4.36 billion to $4.86 billion layer for the April 1, 2019 to March 31, 2020 period.
The contract also provides an aggregate limit of 100% of $500 million in reinsurance limits between a $2.75
Notes to Consolidated Financial Statements 2019 Form 10-K
$3.94 billion retention. Recoveriesto $4.44 billion. For each annual period beginning April 1, the Company declared catastrophes occurring during such annual period can be aggregated to erode the aggregate retention and qualify for coverage under the sixthaggregate limit. Reinsurance recoveries from and ninthincluding layers one through seven of Thethe Nationwide Per OccurrenceProgram and the New Jersey Excess Catastrophe and the PCS Excess Catastrophe Reinsurance agreements, as described above,Agreement inure to the benefit of the annual aggregate layer.
Reinsurance recoveries collected under the per occurrence limit of this contract are not eligible for cession under the aggregate limit of this contract. Reinsurance recoveries for all loss occurrences and aggregate losses qualifying for coverage during the contract’s four-year risk period are limited to the Company’s ultimate net loss from covered events and subject to the contract’s $500 million limit. The contract is placed in the traditional reinsurance market and does not include a reinstatement of limits. Reinsurance premium is subject to redetermination for exposure changes.
Other catastrophe reinsurance programs – The following programs are designed apartseparately from the Nationwide programProgram to address distinct exposures in certain states and markets. These programs are described below and are disregarded when determining coverage under the contracts included in the Nationwide program.
The Company has a separate reinsurance program designed to cover personal lines property policies in Florida written through Castle Key, its separately capitalized wholly-owned subsidiaries.
Florida Excess Catastrophe Reinsurance agreement Agreement comprises five5 contracts, as described below, which reinsurereinsures Castle Key Insurance Company (“CKIC”) and Castle Key Indemnity Company’s (“CKI”, and together with CKIC, “Castle Key”) for personal lines property excess catastrophe losses in Florida. TheFor the June 1, 2019 to May 31, 2020 term, the agreement includes two contacts2 contracts placed in the traditional market, CKIC’s and CKI’sCastle Key’s reimbursement contracts with the Florida Hurricane Catastrophe Fund (“mandatoryMandatory FHCF contracts”), and the Sanders Re 2014-22017-2 Contract (“Sanders Re 2014-2 contact”2017-2”) placed in the ILS markets.
The belowBelow FHCF contract Contract reinsures personal lines property excess catastrophe losses caused by multiple perils in Florida. The contract provides 3 separate limits of $40$34 million in excess of a $20 million retention, each occurrence, and is 100% placed. The contract includes 2 reinstatements of limits. The first reinstatement of limits is prepaid and the second or final reinstatement requires additional premium. Only the portion of the limit utilized to indemnify losses from an event mandatorily reinstates; the remaining reinstatement limit remains available and will be used as future events erode the per occurrence contract limit. Reinsurance premium is subject to redetermination for exposure changes.
The mandatoryMandatory FHCF contracts reinsureContracts indemnify qualifying personal lines property losses caused by storms the National Hurricane Center declares to be hurricanes. The contracts provide 90% of $191$151 million of limits in excess of a $54 million provisional retention and are 90% placed (or $136 million in excess of a $54 million provisional retention), and also include reimbursement of up to 10% of eligible loss adjustment expenses, which is part of and not in addition to the reinsurance limit provided, with no reinstatement of limits. The limits and retentions of the mandatory FHCF contracts are calculated independently for CKIC and CKI and are subject to re-measurement based on June 30, 2016 exposure data. For each of the two2 largest hurricanes, the provisional retention is $60$54 million and a retention equal to one thirdone-third of that
amount, or approximately $20$18 million, is applicable to all other hurricanes for the season beginning June 1, 2016.2019. The limit and retention of the Mandatory FHCF Contracts are subject to remeasurement based on June 30, 2019 exposure data. In addition, the FHCF’s retention is subject to adjustment upward or downward to an actual retention based on exposures submitted exposures to the FHCF by all participants.
The Excess contract reinsures personal lines property excess catastrophe losses caused by multiple perils in Florida. The contract is a two-year term contract effective June 1, 2018 to May 31, 2020 and provides $249 million of reinsurance limits each contract year. For the June 1, 2019 to May 31, 2020 term, the contract provides one limit of $254$249 million in excess of a $20 million retention.retention and is 100% placed. Recoveries from the Below FHCF contract and Mandatory FHCF contracts inure to the benefit of this contract. The contract resultingprovides reinsurance limits above the Mandatory FHCF Contracts, for CKIC’s and CKI’s 10% co-participation in the Excess contract providing reinsuranceMandatory FHCF Contracts, and for loss occurrences not subject to reimbursement under the Mandatory FHCF contracts but reinsured under the multiple peril Excess contract.Contracts which only reinsure losses arising out of hurricanes. The contract does not include a reinstatement of limits. Reinsurance premium is subject to redetermination for exposure.exposure changes.
The Sanders Re 2014-22017-2 is a three-year term contract with a risk period effective June 1, 2017 through May 31, 2020. It reinsures qualifying personal lines property losses caused by a named storm event, a severe thunderstorm event, or an earthquake event, a wildfire event, a volcanic eruption event, or a meteorite impact event in Florida. The contract provides limits of $200 million in excess of $60 million and $425 million which is equivalent to the mandatory FHCF coverage as if 100% placed and reinsurance limits provided by the excess contract above the mandatory FHCF coverage, for the June 1, 2016 to May 31, 2017 risk period. These events are defined in the Sanders Re 2014-2 contractFlorida as events declared by various reporting agencies, including PCS.PCS and as defined in the contract. Should PCS cease to report on severe thunderstorms, then such event will be deemed a severe thunderstorm event if Castle Key has assigned a catastrophe code to such severe thunderstorm. Sanders Re obtained funding from the ILS market to provide collateral equal to the contract’s limit.
The contract provides limits of $200 million in excess of a $20 million retention and in excess of “stated reinsurance” and is 100% placed. For the June 1, 2019 to May 31, 2020 risk period, stated reinsurance is defined to include the Below FHCF contract, the Mandatory FHCF contracts, which are deemed to exhaust due to loss occurrences subject to the non-FHCF contracts, and the Excess contract. Stated reinsurance is deemed to be provided on a multiple peril basis under the terms of the non-FHCF contracts and includes an erosion feature, which provides that upon the exhaustion of a portion of the stated reinsurance, coverage under the Sanders Re contract shall be concurrently placed above and contiguous to the unexhausted portion of the stated reinsurance, if any. The Sanders Re 2017-2 contract contains a variable reset option, which Castle Key may invoke for risk periods subsequent to the first risk period and which allows for the annual adjustment of the contract’s attachment and exhaustion levels. The variable reset option requires a premium adjustment.
The Allstate Corporation 183
2019 Form 10-KNotes to Consolidated Financial Statements
The contract does not includecontain a reinstatement of limits.
Losses recoverable under theThe Company’s New Jersey, Pennsylvania, Kentucky, Florida and Southeast States and California reinsurance agreements are described below.
The New Jersey Excess Catastrophe Reinsurance agreementAgreement comprises three2 existing contracts and a newly placed contract that reinsurereinsures personal lines property and automobile excess catastrophe losses in New Jersey caused by multiple perils. The placed contracts effective June 1, 2018 and June 1, 2019 include coverage for commercial lines property and automobile (physical damage only) catastrophe losses.
The contracts expire May 31, 2017,2020, May 31, 20182021 and May 31, 2019,2022, and provide 31.67%, 31.66%31.67% and 31.67%31.66%, respectively, of $400 million of limits in excess of a provisional $169$145 million retention, a $162$150 million retention, and a $150 million retention, respectively. Each contract includes
one 1 reinstatement of limits per contract year with premium due. The reinsurance premium and retention are subject to redetermination for exposure changes on an annual basis.
The PennsylvaniaKentucky Earthquake Excess Catastrophe Reinsurance agreement comprisesContract is a three-year term contract that reinsures personal lines property excess catastrophe losses in PennsylvaniaKentucky caused by multi-perils.earthquakes and fire following earthquakes. The agreementcontract expires May 31, 20182020 and provides three3 limits of $100$28 million in excess of a $100$2 million retention, subject to twowith 2 limits being available in any one1 contract year, and is 95% placed. The reinsurance premium and retention are not subject to redetermination for exposure changes.
The Kentucky EarthquakeFlorida and Southeast Auto Aggregate Excess Catastrophe Reinsurance agreement Contract is a one-year term contract effective June 1, 2019 to May 31, 2020. This contract provides a single reinsurance limit at 80% of $250 million, subject to a $250 million aggregate retention, for catastrophe losses to personal lines and commercial lines automobile business (physical damage only) arising out of multiple perils and provided such losses arise out of a company declared catastrophe and result in a qualifying loss in the State of Florida. For these qualifying catastrophe events, coverage is also provided for losses to personal lines and commercial lines automobile business (physical damage only) in Alabama, Georgia, Louisiana, Mississippi, North Carolina, and/or South Carolina. The contract does not include a reinstatement of limits.
Excess & Surplus (E&S) Earthquake Contract is a three-year contract that reinsures personal lines property excess catastrophe losses in Kentucky caused by earthquakes and fires following earthquakes. The contract expires May 31, 2017 and provides $25 million in excess of a $5 million retention with two limits being available in any one contract year and is 95% placed. The reinsurance premium and retention are not subject to redetermination for exposure changes.
The E&S Earthquake agreement comprises one contract which reinsures personal lines property catastrophe losses in California caused by the peril of earthquakeearthquakes and is insured by ourthe Company’s excess and surplus lines insurer. The contract reinsures only shake damage resulting from the earthquake peril. The contract is effective July 1, 2018 and expires June 30, 2018. Unlike the contracts comprising the Nationwide Program, the E&S Earthquake agreement2021, both days inclusive, and provides reinsurance on a 100% quota share basis with
no retention. The agreement reinsures only shake damage resulting fromcontract allows for cession of policies providing earthquake coverage as long as the earthquake peril.total amount of in-force building limits provided by those policies does not exceed $400 million. This $400 million cap limits the policies that are covered by the reinsurance contract and not the amount of loss eligible for cession, which includes losses to dwellings, other structures, personal property and additional living expenses on policies covered by this program. As of December 31, 2019, the $400 million cap which serves to limit cessions to the contract has not been exceeded.
Other reinsurance programs
The Company ceded premiums earned of $381 million, $414 million and $437 million under catastropheCompany’s other reinsurance agreements in 2016, 2015 and 2014, respectively.
Asbestos,programs relate to asbestos, environmental, and other
Reinsurance liability exposures and commercial lines, including shared economy. These programs include reinsurance recoverables include $174of $158 million and $183$165 million from Lloyd’s of London as of December 31, 20162019 and 2015,2018, respectively. Excluding Lloyd’s of London, the largest reinsurance recoverable balance the Company had outstanding was $115 million and $37 million from Aleka Insurance Inc. as of December 31, 2019 and 2018, respectively.
Lloyd’s of London, through the creation of Equitas Limited (“Equitas”), implemented a restructuring to solidify its capital base and to segregate claims for years prior to 1993. In 2007, Berkshire Hathaway’s subsidiary, National Indemnity Company, assumed responsibility for the EquitasEquitas’ claim liabilities through a loss portfolio transfer reinsurance agreement and continues to runoff the EquitasEquitas’ claims.
Allstate FinancialLife and annuity reinsurance recoverables
The Company’s Allstate Financial segmentCompany reinsures certain of itslife insurance and annuity risks to other insurers primarily under yearly renewable term, coinsurance, modified coinsurance and coinsurance with funds withheld agreements. These agreements result in a passing of the agreed-upon percentage of risk to the reinsurer in exchange for negotiated reinsurance premium payments. Modified coinsurance and coinsurance with funds withheld are similar to coinsurance, except that the cash and investments that support the liability for contract benefits are not transferred to the assuming company and settlements are made on a net basis between the companies.
For certain term life insurance policies issued prior to October 2009, Allstate Financialthe Company ceded up to 90% of the mortality risk depending on the year of policy issuance under coinsurance agreements to a pool of fourteen14 unaffiliated reinsurers. Effective October 2009, mortality risk on term business is ceded under yearly renewable term agreements under which Allstate Financialthe Company cedes mortality in excess of its retention, which is consistent with how Allstate Financialthe Company generally reinsures its permanent life insurance business. The following table summarizes those retention limits by period of policy issuance.
Notes to Consolidated Financial Statements 2019 Form 10-K
|
| | |
| Retention limits by period of policy issuance |
| Period | | Retention limits |
| April 2015 through current | | Single life: $2 million per life Joint life: no longer offered |
| April 2011 through March 2015 | | Single life: $5 million per life, $3 million age 70 and over, and $10 million for contracts that meet specific criteria Joint life: $8 million per life, and $10 million for contracts that meet specific criteria |
| July 2007 through March 2011 | | $5 million per life, $3 million age 70 and over, and $10 million for contracts that meet specific criteria |
| September 1998 through June 2007 | | $2 million per life, in 2006 the limit was increased to $5 million for instances when specific criteria were met |
| August 1998 and prior | | Up to $1 million per life |
In addition, Allstate Financialthe Company has used reinsurance to effect the disposition of certain blocks of business. Allstate FinancialThe Company had reinsurance recoverables of $1.41$1.29 billion and $1.44$1.36 billionas of December 31, 20162019 and 2015,
2018, respectively, due from Prudential related to the disposal of substantially all of its variable annuity business that was effected through reinsurance agreements. In 2016, life and annuity premiums and contract charges of $78 million, contract benefits of $21 million, interest credited to contractholder funds of $20 million, and operating costs and expenses of $15 million were ceded to Prudential. In 2015, life and annuity premiums and contract charges of $94 million, contract benefits of $40 million, interest credited to contractholder funds
|
| | | | | | | | | | | | |
| Amounts ceded to Prudential |
| | | As of December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Premiums and contract charges | | $ | 65 |
| | $ | 72 |
| | $ | 76 |
|
| Contract benefits | | 4 |
| | 87 |
| | 7 |
|
| Interest credited to contractholder funds | | 19 |
| | 20 |
| | 20 |
|
| Operating costs and expenses | | 12 |
| | 14 |
| | 15 |
|
of $21 million, and operating costs and expenses of $18 million were ceded to Prudential. In 2014, life and annuity premiums and contract charges of $109 million, contract benefits of $36 million, interest credited to contractholder funds of $21 million, and operating costs and expenses of $20 million were ceded to Prudential. In addition, asAs of December 31, 20162019 and 2015, Allstate Financial2018, the Company had reinsurance recoverables of $144$112 million and $148$118 million, respectively, due from subsidiaries of Citigroup (Triton Insurance and American Health and Life Insurance) and Scottish Re (U.S.), Inc. in connection with the disposition of substantially all of the direct response distribution business in 2003.
Allstate FinancialAs of December 31, 2019, the Company had $70 million of reinsurance recoverables, net of an allowance for estimated uncollectible amounts, related to Scottish Re (U.S.), Inc. On December 14, 2018, the Delaware Insurance Commissioner placed Scottish Re (U.S.), Inc. under regulatory supervision. On March 6, 2019, the Chancery Court of the State of Delaware entered a Rehabilitation and Injunction Order (the “Rehabilitation Order”) in response to a petition filed by the Insurance Commissioner (the “Petition”). Pursuant to the Petition, it is expected that Scottish Re (U.S.), Inc. will submit a Plan of Rehabilitation. The Company joined in a joint motion filed on behalf of several affected parties asking the court to allow a specified amount of offsetting claim payments and losses against premiums remitted to Scottish Re (U.S.), Inc. The Company also filed a separate motion related to the reimbursement of claim payments where Scottish
Re (U.S.), Inc. is also acting as administrator. The Court has not yet ruled on either of these motions. In the interim, the Company and several other affected parties have been permitted to exercise certain setoff rights while the parties address any potential disputes. The Company continues to monitor Scottish Re (U.S.), Inc. for future developments and will reevaluate its allowance for uncollectible amounts as new information becomes available.
The Company is the assuming reinsurer for LBL’sLincoln Benefit Life Company’s (“LBL’s”) life insurance business sold through the Allstate agency channel and LBL’s payout annuity business in force prior to the sale of LBL on April 1, 2014. Under the terms of the reinsurance agreement, the Company is required to have a trust with assets greater than or equal to the statutory reserves ceded by LBL to the Company, measured on a monthly basis. As of December 31, 2016,2019, the trust held $5.94$6.25 billion of investments, which are reported in the Consolidated Statement of Financial Position.
As of December 31, 2016,2019, the gross life insurance in force was $442.36$449.20 billion of which $90.01$74.02 billion was ceded to the unaffiliated reinsurers.
Allstate Financial’s reinsurance recoverables on paid and unpaid benefits as of December 31 are summarized in the following table.
|
| | | | | | | | |
| Reinsurance recoverables on paid and unpaid benefits |
| | | As of December 31, |
| ($ in millions) | | 2019 | | 2018 |
| Annuities | | $ | 1,305 |
| | $ | 1,381 |
|
| Life insurance | | 749 |
| | 776 |
|
| Other | | 133 |
| | 142 |
|
| Total | | $ | 2,187 |
| | $ | 2,299 |
|
|
| | | | | | | |
| ($ in millions) | 2016 | | 2015 |
| Annuities | $ | 1,424 |
| | $ | 1,457 |
|
| Life insurance | 860 |
| | 897 |
|
| Other | 184 |
| | 185 |
|
| Total Allstate Financial | $ | 2,468 |
| | $ | 2,539 |
|
As of both December 31, 20162019 and 2015,2018, approximately 92%93% of Allstate Financial’sthe reinsurance recoverables are due from companies rated A- or better by S&P.
The Allstate Corporation 185
11. Deferred Policy Acquisition and Sales Inducement Costs2019 Form 10-KNotes to Consolidated Financial Statements
Deferred policy acquisition costs for the years ended December 31 are as follows:
|
| | | | | | | | | | | |
| ($ in millions) | 2016 |
| | Allstate Financial | | Property-Liability | | Total |
| Balance, beginning of year | $ | 1,832 |
| | $ | 2,029 |
| | $ | 3,861 |
|
| Acquisition costs deferred | 291 |
| | 4,426 |
| | 4,717 |
|
| Amortization charged to income | (283 | ) | | (4,267 | ) | | (4,550 | ) |
| Effect of unrealized gains and losses | (74 | ) | | — |
| | (74 | ) |
| Balance, end of year | $ | 1,766 |
|
| $ | 2,188 |
|
| $ | 3,954 |
|
| | | | | | |
| | 2015 |
| | Allstate Financial | | Property-Liability | | Total |
| Balance, beginning of year | $ | 1,705 |
| | $ | 1,820 |
| | $ | 3,525 |
|
| Acquisition costs deferred | 285 |
| | 4,311 |
| | 4,596 |
|
| Amortization charged to income | (262 | ) | | (4,102 | ) | | (4,364 | ) |
| Effect of unrealized gains and losses | 104 |
|
| — |
|
| 104 |
|
| Balance, end of year | $ | 1,832 |
| | $ | 2,029 |
| | $ | 3,861 |
|
| | | | | | |
| | 2014 |
| | Allstate Financial | | Property-Liability | | Total |
| Balance, beginning of year | $ | 1,747 |
| | $ | 1,625 |
| | $ | 3,372 |
|
| Classified as held for sale, beginning balance | 743 |
| | — |
| | 743 |
|
| Total, including those classified as held for sale | 2,490 |
| | 1,625 |
| | 4,115 |
|
| Acquisition costs deferred | 280 |
| | 4,070 |
| | 4,350 |
|
| Amortization charged to income | (260 | ) | | (3,875 | ) | | (4,135 | ) |
| Effect of unrealized gains and losses | (98 | ) | | — |
| | (98 | ) |
| Sold in LBL disposition | (707 | ) | | — |
| | (707 | ) |
| Balance, end of year | $ | 1,705 |
|
| $ | 1,820 |
|
| $ | 3,525 |
|
DSI activity for Allstate Financial, which primarily relates to fixed annuities and interest-sensitive life contracts, for the years ended December 31 was as follows: |
| |
| Note 11 | Deferred Policy Acquisition and Sales Inducement Costs
|
|
| | | | | | | | | | | | |
| Deferred policy acquisition costs activity |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Balance, beginning of year | | $ | 4,784 |
| | $ | 4,191 |
| | $ | 3,954 |
|
| SquareTrade acquisition | | — |
| | — |
| | 66 |
|
| Acquisition costs deferred | | 5,622 |
| | 5,663 |
| | 5,001 |
|
| Amortization charged to income | | (5,533 | ) | | (5,222 | ) | | (4,784 | ) |
| Effect of unrealized gains and losses | | (174 | ) | | 152 |
| | (46 | ) |
| Balance, end of year | | $ | 4,699 |
|
| $ | 4,784 |
|
| $ | 4,191 |
|
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Balance, beginning of year | $ | 45 |
| | $ | 44 |
| | $ | 42 |
|
| Classified as held for sale, beginning balance | — |
| | — |
| | 28 |
|
| Total, including those classified as held for sale | 45 |
| | 44 |
| | 70 |
|
| Sales inducements deferred | 1 |
| | 3 |
| | 4 |
|
| Amortization charged to income | (5 | ) | | (4 | ) | | (4 | ) |
| Effect of unrealized gains and losses | (1 | ) | | 2 |
| | (3 | ) |
| Sold in LBL disposition | — |
| | — |
| | (23 | ) |
| Balance, end of year | $ | 40 |
|
| $ | 45 |
|
| $ | 44 |
|
12. Capital Structure
Debt
Total debt outstanding as of December 31 consisted of the following:
|
| | | | | | | | | | | | |
Deferred sales inducement costs activity (1) |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Balance, beginning of year | | $ | 34 |
| | $ | 36 |
| | $ | 40 |
|
| Amortization charged to income | | (5 | ) | | (4 | ) | | (4 | ) |
| Effect of unrealized gains and losses | | (2 | ) | | 2 |
| | — |
|
| Balance, end of year | | $ | 27 |
|
| $ | 34 |
|
| $ | 36 |
|
|
| | | | | | | |
| ($ in millions) | 2016 | | 2015 |
| 6.75% Senior Debentures, due 2018 | $ | 176 |
| | $ | 176 |
|
7.45% Senior Notes, due 2019 (1) | 317 |
| | 317 |
|
3.15% Senior Notes, due 2023 (1) | 500 |
| | 500 |
|
3.28% Senior Notes, due 2026 (1) | 550 |
| | — |
|
6.125% Senior Notes, due 2032 (1) | 159 |
| | 159 |
|
5.35% Senior Notes due 2033 (1) | 323 |
| | 323 |
|
5.55% Senior Notes due 2035 (1) | 546 |
| | 546 |
|
5.95% Senior Notes, due 2036 (1) | 386 |
| | 386 |
|
| 6.90% Senior Debentures, due 2038 | 165 |
| | 165 |
|
5.20% Senior Notes, due 2042 (1) | 62 |
| | 62 |
|
4.50% Senior Notes, due 2043 (1) | 500 |
| | 500 |
|
4.20% Senior Notes, due 2046 (1) | 700 |
| | — |
|
| 5.10% Subordinated Debentures, due 2053 | 500 |
| | 500 |
|
| 5.75% Subordinated Debentures, due 2053 | 800 |
| | 800 |
|
| 6.125% Junior Subordinated Debentures, due 2067 | 224 |
| | 241 |
|
| 6.50% Junior Subordinated Debentures, due 2067 | 500 |
| | 500 |
|
| Long-term debt total principal | 6,408 |
| | 5,175 |
|
| Debt issuance costs | (61 | ) | | (51 | ) |
| Total long-term debt | 6,347 |
| | 5,124 |
|
Short-term debt (2) | — |
| | — |
|
| Total debt | $ | 6,347 |
| | $ | 5,124 |
|
| |
(1) | Deferred sales inducement costs primarily relate to fixed annuities and interest-sensitive life contracts and are recorded as part of other assets on the Consolidated Statements of Financial Position. |
Notes to Consolidated Financial Statements 2019 Form 10-K
|
| | | | | | | | |
| Total debt outstanding |
| | | As of December 31, |
| ($ in millions) | | 2019 | | 2018 |
7.450% Senior Notes, due 2019 (1) | | $ | — |
| | $ | 317 |
|
Floating Rate Senior Notes, due 2021(1) | | 250 |
| | 250 |
|
Floating Rate Senior Notes, due 2023 (1) | | 250 |
| | 250 |
|
3.150% Senior Notes, due 2023 (1) | | 500 |
| | 500 |
|
| Due after one year through five years | | 1,000 |
| | 1,317 |
|
3.280% Senior Notes, due 2026 (1) | | 550 |
| | 550 |
|
| Due after five years through ten years | | 550 |
| | 550 |
|
6.125% Senior Notes, due 2032 (1) | | 159 |
| | 159 |
|
5.350% Senior Notes due 2033 (1) | | 323 |
| | 323 |
|
5.550% Senior Notes due 2035 (1) | | 546 |
| | 546 |
|
5.950% Senior Notes, due 2036 (1) | | 386 |
| | 386 |
|
| 6.900% Senior Debentures, due 2038 | | 165 |
| | 165 |
|
5.200% Senior Notes, due 2042 (1) | | 62 |
| | 62 |
|
4.500% Senior Notes, due 2043 (1) | | 500 |
| | 500 |
|
4.200% Senior Notes, due 2046 (1) | | 700 |
| | 700 |
|
| 3.850% Senior Notes, due 2049 | | 500 |
| | — |
|
| 5.100% Subordinated Debentures, due 2053 | | 500 |
| | 500 |
|
| 5.750% Subordinated Debentures, due 2053 | | 800 |
| | 800 |
|
| 6.500% Junior Subordinated Debentures, due 2067 | | 500 |
| | 500 |
|
| Due after ten years | | 5,141 |
| | 4,641 |
|
| | | | | |
| Long-term debt total principal | | 6,691 |
| | 6,508 |
|
| Debt issuance costs | | (60 | ) | | (57 | ) |
| Total long-term debt | | 6,631 |
| | 6,451 |
|
Short-term debt (2) | | — |
| | — |
|
| Total debt | | $ | 6,631 |
| | $ | 6,451 |
|
| |
(1) | Senior Notes, with the exception of Senior Floating Notes (as defined below), are subject to redemption at the Company’s option in whole or in part at any time at the greater of either 100% of the principal amount plus accrued and unpaid interest to the redemption date or the discounted sum of the present values of the remaining scheduled payments of principal and interest and accrued and unpaid interest to the redemption date. |
| |
(2) | The Company classifies any borrowings which have a maturity of twelve months or less at inception as short-term debt. |
Debt maturities for each of the next five years and thereafter as of December 31, 2016 are as follows:
|
| | | | |
Debt maturities for each of the next five years and thereafter |
| ($ in millions) | | |
| 2020 | | $ | — |
|
| 2021 | | 250 |
|
| 2022 | | — |
|
| 2023 | | 750 |
|
| 2024 | | — |
|
| Thereafter | | 5,691 |
|
| Total long-term debt principal | | $ | 6,691 |
|
|
| | | |
| ($ in millions) | |
| 2017 | $ | — |
|
| 2018 | 176 |
|
| 2019 | 317 |
|
| 2020 | — |
|
| 2021 | — |
|
| Thereafter | 5,915 |
|
| Total long-term debt principal | $ | 6,408 |
|
On December 8, 2016,May 16, 2019, the Company repaid $317 million of 7.450% Senior Notes, Series B, at maturity.
On June 10, 2019, the Company issued $550$500 million of 3.28%3.850% Senior Notes due 2026 and $700 million of 4.20%2049. Interest on the Senior Notes due 2046.is payable semi-annually in arrears on February 10 and August 10 of each year, beginning on February 10, 2020. The Senior Notes are redeemable at any time at the applicable redemption price prior to
the maturity date. The proceeds of this issuance wereare used for general corporate purposes, including in part to fund the purchase price for the acquisition of SquareTrade.
During 2016, 2015 and 2014, the Company repurchased principal debt amounts of $17 million, $11 million and $10 million, respectively. The Company recognized a loss on extinguishment of $1 million, pre-tax, in 2014, representing the excess of the repurchase price over the principal repaid, the write-off of the unamortized debt issuance costs and other costs related to the repurchase transactions.purposes.
The Subordinated Debentures may be redeemed (i) in whole at any time or in part from time to time on or after January 15, 2023 for the 5.10%5.100% Subordinated Debentures and August 15, 2023 for the 5.75%5.750% Subordinated Debentures at their principal amount plus accrued and unpaid interest to, but excluding, the date of redemption; provided that if the Subordinated Debentures are not redeemed in whole, at least $25 million aggregate principal amount must remain outstanding, or (ii) in whole, but not in part, prior to January 15, 2023 for the 5.10%5.100% Subordinated Debentures and August 15, 2023 for the 5.75%5.750% Subordinated Debentures, within 90 days after the occurrence of certain tax and rating agency events, at their principal amount or, if greater, a make-whole redemption price, plus accrued and unpaid interest to, but excluding, the date of redemption. The 5.75%5.750% Subordinated Debentures have this make-whole redemption price provision only when a reduction of equity credit assigned by a rating agency has occurred.
The Allstate Corporation 187
2019 Form 10-KNotes to Consolidated Financial Statements
Interest on the 5.10%5.100% Subordinated Debentures is payable quarterly at the stated fixed annual rate to January 14, 2023, or any earlier redemption date, and then at an annual rate equal to the three-month LIBOR plus 3.165%. Interest on the 5.75%5.750% Subordinated Debentures is payable semi-annually at the stated fixed annual rate to August 14, 2023, or any earlier redemption date, and then quarterly at an annual rate equal to the three-month LIBOR plus 2.938%. The Company may elect to defer payment of interest on the Subordinated Debentures for one or more consecutive interest periods that do not exceed five years. During a deferral period, interest will continue to accrue on the Subordinated Debentures at the then-applicable rate and deferred interest will compound on each interest payment date. If all deferred interest on the Subordinated Debentures is paid, the Company can again defer interest payments.
TheAs of December 31, 2019, the Company hashad outstanding $500 million of Series A 6.50% and $224 million of Series B 6.125%6.500% Fixed-to-Floating Rate Junior Subordinated Debentures (together the “Debentures”(“Debentures”). The scheduled maturity datesdate for the Debentures areis May 15, 2057 and May 15, 2037 for Series A and Series B, respectively, with a final maturity date of May 15, 2067. The Debentures may be redeemed (i) in whole or in part, at any time on or after May 15, 2037 or May 15, 2017 for Series A and Series B, respectively, at theirthe principal amount plus accrued and unpaid interest to the date of redemption, or (ii) in certain circumstances, in whole or in part, prior to May 15, 2037 and May 15, 2017 for Series A and Series B, respectively, at theirthe principal amount plus accrued and unpaid interest to the date of redemption or, if greater, a make-whole price.
Interest on the Debentures is payable semi-annually at the stated fixed annual rate to May 15, 2037, and May 15, 2017 for Series A and Series B, respectively, and then payable quarterly at an annual rate equal to the three-month LIBOR plus 2.12% and 1.935% for Series A and Series B, respectively.2.120%. The Company may elect at one or more times to defer payment of interest on the Debentures for one or more consecutive interest periods that do not exceed 10 years. Interest compounds during such deferral periods at the rate in effect for each period. The interest deferral feature obligates the Company in certain circumstances to issue common stock or certain other types of securities if it cannot otherwise raise sufficient funds to make the required interest payments. The Company has reserved 75 million shares of its authorized and unissued common stock to satisfy this obligation.
The continuation of LIBOR on the current basis is not guaranteed after 2021 and LIBOR may be discontinued or modified by 2021. The Subordinated Debentures allow for the use of an alternative benchmark if LIBOR is no longer available.
The terms of the Company’s outstanding subordinated debentures prohibit the Company from declaring or paying any dividends or distributions on common or preferred stock or redeeming, purchasing, acquiring, or making liquidation payments on common stock or preferred stock if the Company has elected to defer interest payments on the subordinated debentures, subject to certain limited exceptions.
In connection with the issuance of the Debentures, the Company entered into a replacement capital covenants
covenant (“RCCs”RCC”). These covenants wereThis covenant was not intended for the benefit of the holders of the Debentures and could not be enforced by them. Rather, they wereit was for the benefit of holders of one or more other designated series of the Company’s indebtedness (“covered debt”), currently the 7.45% Senior Notes5.750% Subordinated Debentures due 2019.2053. Pursuant to the RCCs,RCC, the Company has agreed that it will not repay, redeem, or purchase the Debentures on or before May 15, 2067 and May 15, 2047 for Series A and Series B, respectively, (or such earlier date on which the RCCs terminateRCC terminates by theirits terms) unless, subject to certain limitations, the Company has received net cash proceeds in specified amounts from the sale of common stock or certain other qualifying securities. The promises and covenants contained in the RCC will not apply if (i) S&P upgrades the Company’s issuer credit rating to A or above, (ii) the Company redeems the Debentures due to a tax event, (iii) after notice of redemption has been given by the Company and a market disruption event occurs preventing the Company from raising proceeds in accordance with the RCCs,RCC, or (iv) the Company repurchases or redeems up to 10% of the outstanding principal of the Debentures in any one-year period, provided that no more than 25% will be so repurchased, redeemed or purchased in any ten-year period.
The RCCs terminateRCC terminates in 2067 and 2047 for Series A and Series B, respectively.2067. The RCCsRCC will terminate prior to theirits scheduled termination date if (i) the applicable series of Debentures isare no longer outstanding and the Company has fulfilled its obligations under the RCCsRCC or they areit is no longer applicable, (ii) the holders of a majority of the then-outstanding principal amount of the then-effective series of covered debt consent to agree to the termination of the RCCs,RCC, (iii) the Company does not have any series of outstanding debt that is eligible to be treated as covered debt under the RCCs,RCC, (iv) the applicable series of Debentures isare accelerated as a result of an event of default, (v) certain rating agency or change in control events occur, (vi) S&P, or any successor thereto, no longer assigns a solicited rating on senior debt issued or guaranteed by the Company, or (vii) the termination of the RCCsRCC would have no effect on the equity credit provided by S&P with respect to the Debentures. An event of default, as defined by the supplemental indenture, includes default in the payment of interest or principal and bankruptcy proceedings.
To manage short-term liquidity, the Company maintains a commercial paper program and a credit facility as a potential source of funds. These include a $1.00 billion unsecured revolving credit facility and a commercial paper program with a borrowing limit of $1.00 billion. In April 2016, the Company extended the maturity date of the facility to April 2021. This facility contains an increase provision that would allow up to an additional $500 million of borrowing. This facility has a financial covenant requiring the Company not to exceed a 37.5% debt to capitalization ratio as defined in the agreement. Although the right to borrow under the facility is not subject to a minimum rating requirement, the costs of maintaining the facility and borrowing under it are based on the ratings of the Company’s senior unsecured, unguaranteed long-term debt. The total amount outstanding at any point in time under the combination of the commercial paper
Notes to Consolidated Financial Statements 2019 Form 10-K
program and the credit facility cannot exceed the amount that can be borrowed under the credit facility. NoNaN amounts were outstanding under the credit facility as of December 31, 20162019 or 2015.2018. The Company had no0 commercial paper outstanding as of December 31, 20162019 or 2015.2018.
The Company paid $287$312 million, $289$330 million and $332 million of interest on debt in 2016, 20152019, 2018 and 2014,2017, respectively.
The Company had $132$389 million and $107$260 million of investment-related debtthat is reported in other liabilities and accrued expenses as of December 31, 20162019 and 2015,2018, respectively. This includes a commitment to fund a limited partnership of $45 million and $89 million and debt related to other investments of $87 million and $18 million as of December 31, 2016 and 2015, respectively. The Company has an outstanding line of credit to fund the limited partnership.
During 2015,2018, the Company filed a universal shelf registration statement with the Securities and Exchange Commission (“SEC”) that expires in 2018. 2021.
The registration statement covers an unspecified amount of securities and can be used to issue debt securities, common stock, preferred stock, depositary shares, warrants, stock purchase contracts, stock purchase units and securities of trust subsidiaries.
Common stock
The Company had 900 million shares of issued common stock of which 366319 million shares were outstanding and 534581 million shares were held in treasury as of December 31, 2016.2019. In 2016,2019, the Company reacquired 20acquired 16 million shares at an average cost of $66.45$110.37 and reissued 53 million net shares under equity incentive plans.
Preferred stock
The following table summarizes the Company’s All outstanding preferred stock as of December 31, 2016. All representrepresents noncumulative perpetual preferred stock with a $1.00 par value per share and a liquidation preference of $25,000 per share.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total preferred stock outstanding |
| | | As of December 31, | | Aggregate liquidation preference ($ in millions) | | | | Dividend per depository share (1) | | Aggregate dividend payment ($ in millions) |
| | | 2019 | | 2018 | | 2019 | | 2018 | | Dividend rate | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Series A | | 11,500 |
| | 11,500 |
| | $ | 287.5 |
| | $ | 287.5 |
| | 5.625 | % | | $ | 1.41 |
| | $ | 1.41 |
| | $ | 1.41 |
| | $ | 16 |
| | $ | 16 |
| | $ | 16 |
|
| Series C | | — |
| | — |
| | — |
| | — |
| | 6.750 | % | | — |
| | 1.69 |
| | 1.69 |
| | — |
| | 26 |
| (2) | 26 |
|
| Series D | | — |
| | 5,400 |
| | — |
| | 135.0 |
| | 6.625 | % | | 1.66 |
| | 1.66 |
| | 1.66 |
| | 9 |
| (2) | 9 |
| | 9 |
|
| Series E | | — |
| | 29,900 |
| | — |
| | 747.5 |
| | 6.625 | % | | 1.66 |
| | 1.66 |
| | 1.66 |
| | 49 |
| (2) | 49 |
| | 49 |
|
| Series F | | — |
| | 10,000 |
| | — |
| | 250.0 |
| | 6.250 | % | | 1.56 |
| | 1.56 |
| | 1.56 |
| | 16 |
| (2) | 16 |
| | 16 |
|
| Series G | | 23,000 |
| | 23,000 |
| | 575.0 |
| | 575.0 |
| | 5.625 | % | | 1.41 |
| | 1.41 |
|
| — |
| | 32 |
| | 18 |
| | — |
|
| Series H | | 46,000 |
| | — |
| | 1,150.0 |
| | — |
| | 5.100 | % | | 1.28 |
| | — |
| | — |
| | 12 |
| | — |
| | — |
|
| Series I | | 12,000 |
| | — |
| | 300.0 |
| | — |
| | 4.750 | % | | 1.19 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | | 92,500 |
| | 79,800 |
| | $ | 2,313 |
| | $ | 1,995 |
| | | |
| |
| |
| | $ | 134 |
| (2) | $ | 134 |
| (2) | $ | 116 |
|
| |
(1) | Each depositary share represents a 1/1,000th interest in a share of preferred stock. |
| |
(2) | Excludes $37 million and $13 million in 2019 and 2018, respectively, related to original issuance costs in preferred stock dividends on the Consolidated Statements of Operations and Consolidated Statements of Shareholders’ Equity as a result of the preferred stock redemptions. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions, except per share data) | | Aggregate liquidation preference | | | | Dividend Per Share | | Aggregate Dividend Payment |
| | Shares | | | Dividend rate | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
| Series A | 11,500 |
| | $ | 287.5 |
| | 5.625 | % | | $ | 1.41 |
| | $ | 1.41 |
| | $ | 1.41 |
| | $ | 16 |
| | $ | 16 |
| | $ | 16 |
|
| Series C | 15,400 |
| | 385.0 |
| | 6.750 | % | | 1.69 |
| | 1.69 |
| | 1.69 |
| | 26 |
| | 26 |
| | 26 |
|
| Series D | 5,400 |
| | 135.0 |
| | 6.625 | % | | 1.66 |
| | 1.66 |
| | 1.79 |
| | 9 |
| | 9 |
| | 10 |
|
| Series E | 29,900 |
| | 747.5 |
| | 6.625 | % | | 1.66 |
| | 1.66 |
| | 1.44 |
| | 49 |
| | 49 |
| | 43 |
|
| Series F | 10,000 |
| | 250.0 |
| | 6.250 | % | | 1.56 |
| | 1.56 |
| | 0.92 |
| | 16 |
| | 16 |
| | 9 |
|
| Total | 72,200 |
| | $ | 1,805 |
| | | |
| |
| |
| | $ | 116 |
| | $ | 116 |
| | $ | 104 |
|
In March 2014,On August 8, 2019, the Company issued 46,000 shares of 5.100% Fixed Rate Noncumulative Perpetual Preferred Stock, Series H, par value $1.00 per share and liquidation preference $25,000 per share, for gross proceeds of $1.15 billion.
On October 15, 2019, the Company redeemed all 5,400 shares of its Fixed Rate Noncumulative Perpetual Preferred Stock, Series D, par value $1.00 per share and liquidation preference $25,000 per share, all 29,900 shares of 6.625%its Fixed Rate Noncumulative Perpetual Preferred Stock, Series E, for gross proceeds of $747.5 million. In June 2014, the Company issuedpar value $1.00 per share and liquidation preference $25,000 per share, all 10,000 shares of 6.25%its Fixed Rate Noncumulative Perpetual Preferred Stock, Series F, par value $1.00 per share and liquidation preference $25,000 per share, and the corresponding depositary shares. The total redemption payment was $1.13 billion, using the proceeds from the issuance of the Fixed Rate Noncumulative Perpetual Preferred Stock, Series H. In 2019, the Company recognized $37 million of original issuance costs in preferred stock dividends on the Consolidated Statements of Operations and Consolidated Statements of Shareholders’ Equity as a result of the preferred stock redemptions.
On November 8, 2019, the Company issued 12,000 shares of 4.750% Fixed Rate Noncumulative Perpetual Preferred Stock, Series I, par value $1.00 per share and liquidation preference $25,000 per share, for gross proceeds of $250$300 million.
Subsequent event On January 15, 2020, the Company redeemed all 11,500 shares of its Fixed Rate Noncumulative Preferred Stock, Series A, par value $1.00 per share and liquidation preference $25,000 per share and the corresponding depositary shares. The total redemption payment was $288 million, using the proceeds from the issuance of both issuances were used for general corporate purposes.the Fixed Rate Noncumulative Perpetual Preferred Stock, Series I. In the first quarter of 2020, the Company will recognize $10 million of original issuance costs in preferred stock dividends on the Consolidated Statements of Operations and Consolidated Statements of Shareholders’ Equity as a result of the preferred stock redemption.
The preferred stock ranks senior to the Company’s common stock with respect to the payment of dividends and liquidation rights. The Company will pay dividends on the preferred stock on a noncumulative
The Allstate Corporation 189
2019 Form 10-KNotes to Consolidated Financial Statements
basis only when, as and if declared by the Company’s board of directors (or a duly authorized committee of the board) and to the extent that the Company has legally available funds to pay dividends. If dividends are declared on the preferred stock, they will be payable quarterly in arrears at an annual fixed rate. Dividends on the preferred stock are not cumulative. Accordingly, in the event dividends are not declared on the
preferred stock for payment on any dividend payment date, then those dividends will cease to be payable. If the Company has not declared a dividend before the dividend payment date for any dividend period, the Company has no obligation to pay dividends for that dividend period, whether or not dividends are declared for any future dividend period. No dividends may be paid or declared on the Company’s common stock and no shares of the Company’s common stock may be repurchased unless the full dividends for the latest completed dividend period on the preferred stock have been declared and paid or provided for.
The Company is prohibited from declaring or paying dividends on its Series G preferred stock in excess of the amount of net proceeds from an issuance of common stock taking place within 90 days before a dividend declaration date if, on that dividend declaration date, either: (1) the risk-based capital ratios of the largest U.S. property-casualty insurance subsidiaries that collectively account for 80% or more of the net written premiums of U.S. property-casualty insurance business on a weighted average basis were less than 175% of their company action level risk-based capital as of the end of the most recent year; or (2) consolidated net income for the four-quarter period ending on the preliminary quarter end test date (the quarter that is two quarters prior to the most recently completed quarter) is zero or negative and consolidated shareholders’ equity (excluding accumulated other comprehensive income,AOCI, and subject to certain other adjustments relating to changes in U.S. GAAP) as of each of the preliminary quarter test date and the most recently completed quarter has declined by 20% or more from its level as measured at the end of the benchmark quarter (the date that is ten quarters prior to the most recently completed quarter). If the Company fails to satisfy either of these tests on any dividend declaration date,
the restrictions on dividends will continue until the Company is able again to satisfy the test on a dividend declaration date. In addition, in the case of a restriction arising under (2) above, the restrictions on dividends will continue until consolidated shareholders’ equity (excluding accumulated other comprehensive income,AOCI, and subject to certain other adjustments relating to changes in U.S. GAAP) has increased, or has declined by less than 20%, in either case as compared to its level at the end of the benchmark quarter for each dividend payment date as to which dividend restrictions were imposed.
The preferred stock does not have voting rights except with respect to certain changes in the terms of the preferred stock, in the case of certain dividend nonpayments, certain other fundamental corporate events, mergers or consolidations and as otherwise provided by law. If and when dividends have not been declared and paid in full for at least six quarterly dividend periods or their equivalent (whether or not consecutive), the authorized number of directors then constituting our board of directors will be increased by two.2. The holders of the preferred stock, together with the holders of all other affected classes and series of voting parity stock, voting as a single class, will be entitled to elect the two2 additional members of the board of directors of the Company, subject to certain conditions. The board of directors shall at no time have more than two2 preferred stock directors.
The preferred stock is perpetual and has no maturity date. The preferred stock is redeemable at the Company’s option in whole or in part, on or after JuneApril 15, 20182023 for Series A,G, October 15, 20182024 for Series C, AprilH and January 15, 20192025 for Series D and E, and October 15, 2019 for Series F,I at a redemption price of $25,000 per share of preferred stock, plus declared and unpaid dividends. Prior to JuneApril 15, 20182023 for Series A,G, October 15, 20182024 for Series C, AprilH and January 15, 20192025 for Series D and E, and October 15, 2019 for Series F,I, the preferred stock is redeemable at the Company’s option, in whole but not in part, within 90 days of the occurrence of certain rating agency eventsregulatory capital event at a redemption price equal to $25,000 or $25,500 per share or if greater, a make-wholecertain rating agency event at a redemption price equal to $25,000 or $25,500 per share, plus declared and unpaid dividends.dividends for Series G and for Series H and I, respectively.
13. Company Restructuring |
| |
| Note 13 | Company Restructuring
|
The Company undertakes various programs to reduce expenses. These programs generally involve a reduction in staffing levels, and in certain cases, office closures. Restructuring and related charges primarily include employee termination and relocation benefits, and post-exit rent expenses in connection withthe following costs related to these programs, and non-cash charges resulting from pension benefit payments made to agents and certain legal expenses incurred in connection with the 1999 reorganization of Allstate’s multiple agency programs to a single exclusive agency program. programs:
| |
| • | Employee - severance and relocation benefits |
| |
| • | Exit - contract termination penalties |
The expenses related to these activities are included in the Consolidated Statements of Operations as restructuring and related charges, and totaled $30$41 million, $39$67 million and $18$96 million in 2016, 20152019, 2018 and 2014,2017, respectively. Restructuring expenses in 20162019 primarily related to programs and actions designedrealignment of certain employees to transform business operations within the organization.centralized talent centers as well as claims reorganization initiatives.
The following table presents changes in the restructuring liability in 2016.
Notes to Consolidated Financial Statements 2019 Form 10-K
|
| | | | | | | | | | | |
| ($ in millions) | Employee costs | | Exit costs | | Total liability |
| Balance as of December 31, 2015 | $ | 1 |
| | $ | 1 |
| | $ | 2 |
|
| Expense incurred | 8 |
| | 6 |
| | 14 |
|
| Payments applied against liability | (9 | ) | | (5 | ) | | (14 | ) |
| Balance as of December 31, 2016 | $ | — |
| | $ | 2 |
| | $ | 2 |
|
The payments applied against the liability for employee costs primarily reflect severance costs, and the payments for exit costs generally consist of post-exit rent expenses and contract termination penalties. |
| | | | | | | | | | | | |
| Restructuring activity during the period |
| ($ in millions) | | Employee costs | | Exit costs | | Total liability |
| Restructuring liability as of December 31, 2018 | | $ | 29 |
| | $ | 15 |
| | $ | 44 |
|
| Expense incurred | | 43 |
| | 7 |
| | 50 |
|
| Adjustments to liability | | (9 | ) | | — |
| | (9 | ) |
| Payments and non-cash pension settlements | | (49 | ) | | (14 | ) | | (63 | ) |
| Restructuring liability as of December 31, 2019 | | $ | 14 |
| | $ | 8 |
| | $ | 22 |
|
As of December 31, 2016,2019, the cumulative amount incurred to date for active programs related to employee severance, relocation benefits and post-exit
rent expenses totaled $78$112 million for employee costs and $66$12 million for exit costs.
14. Commitments, Guarantees and Contingent Liabilities
Leases
The Company leases certain office facilities, computer and office equipment, aircraft and automobiles. Total rent expense for all leases was $147 million, $179 million and $187 million in 2016, 2015 and 2014, respectively.
Minimum rental commitments under operating leases with an initial or remaining term of more than one year as of December 31, 2016 are as follows:
|
| | | | |
| ($ in millions) | | |
| 2017 | | $ | 122 |
|
| 2018 | | 103 |
|
| 2019 | | 88 |
|
| 2020 | | 71 |
|
| 2021 | | 53 |
|
| Thereafter | | 169 |
|
| Total | | $ | 606 |
|
|
| |
| Note 14 | Commitments, Guarantees and Contingent Liabilities
|
Shared markets and state facility assessments
The Company is required to participate in assigned risk plans, reinsurance facilities and joint underwriting associations in various states that provide insurance coverage to individuals or entities that otherwise are unable to purchase such coverage from private insurers.
The Company routinely reviews its exposure to assessments from these plans, facilities and government programs. Underwriting results related to these arrangements, which tend to be adverse, have been immaterial to the Company’s results of operations. Because of the Company’s participation, it may be exposed to losses that surpass the capitalization of these facilities and/or assessments from these facilities.
Florida Citizens
Castle Key is subject to assessments from Citizens Property Insurance Corporation in the state of Florida (“FL Citizens”), which was initially created by the state of Florida to provide insurance to property owners unable to obtain coverage in the private insurance market. FL Citizens, at the discretion and direction of its Board of Governors (“FL Citizens Board”), can levy a regular assessment on assessable insurers and assessable insureds for a deficit in any calendar year up to a maximum of the greater of: 2% of the projected deficit or 2% of the aggregate statewide direct written premium for the prior calendar year. The base of assessable insurers includes all property and casualty premiums in the state, except workers’ compensation, medical malpractice, accident and health insurance and policies written under the NFIP. An insurer may recoup a regular assessment through a surcharge to policyholders. In order to recoup this assessment, an insurer must file for a policy surcharge with the Florida Office of Insurance Regulation (“FL OIR”)OIR at least fifteen days prior to imposing the surcharge on policies. If a deficit remains after the regular assessment, FL Citizens can also levy emergency assessments in the current and subsequent years. Companies are required to collect the emergency assessments directly from residential property policyholders and remit to FL Citizens as collected. Pursuant to an Order issued by the FL OIR,Currently, the emergency assessment is zero0 for all policies issued or renewed on or after July 1, 2015.
Louisiana Citizens
The Company is also subject to assessments from Louisiana Citizens Property Insurance Corporation (“LA Citizens”). LA Citizens can levy a regular
assessment on participating companies for a deficit in any calendar year up to a maximum of the greater of 10% of the calendar year deficit or 10% of Louisiana direct property premiums industry-wide for the prior calendar year. If the plan year deficit exceeds the amount that can be recovered through Regular Assessments, LA Citizens may fund the remaining deficit by issuing revenue assessment bonds in the capital markets. LA Citizens then declares Emergency Assessments each year to provide debt service on the bonds until they are retired. Companies writing assessable lines must surcharge their policyholders Emergency Assessments in the percentage established annually by LA Citizens and must remit amounts collected to the bond trustee on a quarterly basis.
Florida Hurricane Catastrophe Fund
Castle Key participates in the mandatory coverage provided by the FHCF and therefore has access to reimbursements on certain qualifying Florida hurricane losses from the FHCF (see Note 10), has exposure to Emergency assessments and pays annual premiums to the FHCF for this reimbursement protection. The FHCF has the authority to issue bonds to pay its obligations to insurers participatingoff bonds issued in 2007 for the mandatory coverage in excesshurricanes of its capital balances. Payment of these bonds is funded by emergency assessments on all property and casualty premiums in the state, except workers’ compensation, medical malpractice, accident and health insurance and policies written under the NFIP. The FHCF emergency assessments are limited to 6% of premiums per year beginning the first year in which reimbursements require bonding, and up to a total of 10% of premiums per year for assessments in the second and subsequent years, if required to fund additional bonding. The FHCF issued $625 million in bonds in 2008, and
the FL OIR ordered an emergency assessment of 1% of premiums collected for all policies renewed January 1, 2007 through December 31, 2010. The FHCF issued $676 million in bonds in 2010 and the FL OIR ordered an emergency assessment of 1.3% of premiums collected for all policies written or renewed January 1, 2011 through December 31, 2014. Pursuant to an Order issued by the FL OIR, the emergency assessment is zero for all policies issued or renewed on or after January 1, 2015. The FHCF issued $2 billion in pre-event bonds in 2013 to build their capacity to reimburse member companies’ claims. The FHCF plans to fund these pre-event bonds through current FHCF cash flows.2005 will continue until 2025.
Facilities such as FL Citizens and LA Citizens and the FHCF are generally designed so that the ultimate cost is borne by policyholders; however, the exposure to assessments from these facilities and the availability of recoupments or premium rate increases may not offset each other in the Company’s financial statements. Moreover, even if they do offset each other, they may not offset each other in financial statements for the same fiscal period due to the ultimate timing of the assessments and recoupments or premium rate increases, as well as the possibility of policies not being renewed in subsequent years.
California Earthquake Authority
Exposure to certain potential losses from earthquakes in California is limited by the Company’s participation in the California Earthquake Authority (“CEA”), which provides insurance for California earthquake losses. The CEA 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 policies continue to include coverages for losses caused by explosions, theft, glass breakage and fires following an earthquake, which are not underwritten by the CEA.
As of September 30, 2016,October 31, 2019, the CEA’s capital balance was approximately $5.32$6.01 billion. Should losses arising from an earthquake cause a deficit in the CEA, an
The Allstate Corporation 191
2019 Form 10-KNotes to Consolidated Financial Statements
additional $680$721 million would be obtained from the proceeds of revenue bonds the CEA may issue, an existing $4.78$8.26 billion reinsurance layer, $1.0 billion from policyholders surcharge, and finally, if needed, assessments on participating insurance companies. Participating insurers are required to pay an assessment, currently estimated not to exceed $1.66 billion, if the capital of the CEA falls below $350 million. Participating insurers are required to pay a second additional assessment, currently estimated not to exceed $128 million, if aggregate CEA earthquake losses exceed $12.57 billion and the capital of the CEA falls below $350 million. Within the limits previously described, the assessment could be intended to restore the CEA’s capital to a level of $350 million. There is no provision that allows insurers to recover assessments through a premium surcharge or other mechanism. The CEA’s projected aggregate claim paying capacity is $12.57$17.65 billion as of September 30, 2016October 31, 2019 and if an event were to result in claims greater than its capacity, affected policyholders may be paid a prorated portion of their covered losses, paid on an installment basis, or no payments may be made if the claim paying capacity of the CEA is insufficient.
All future assessments on participating CEA insurers are based on their CEA insurance market share as of December 31 of the preceding year. As of December 31, 2015,2018, the Company’s market share of the CEA was 12.1%9.8%. The Company does not expect its CEA market share to materially change. At this level, the Company’s maximum possible CEA assessment would be $217$162 million during 2017.2020. These amounts are re-evaluated by the board of directors of the CEA on an annual basis. Accordingly, assessments from the CEA for a particular quarter or annual period may be material to the results of operations and cash flows, but not the financial position of the Company. Management believes the Company’s exposure to earthquake losses in California has been significantly reduced as a result of its participation in the CEA.
Texas Windstorm Insurance Association
The Company participates as a member of the Texas Windstorm Insurance Association (“TWIA”), which provides wind and hail property coverage to coastal risks unable to procure coverage in the voluntary market. Wind and hail coverage is written on a TWIA-issued policy. TWIA follows a funding structure first utilizing currently available funds set aside from periods (including current and prior years).years. Under the current law, to the extent losses exceed premiums received from policyholders, TWIA utilizes a combination of reinsurance, and TWIA issued securities, as well as member and policyholder assessments to fund its payments of losses. Reinsurance is procured annually in an amount determined byloss payments.
During 2019, the TWIA board. Once those currently available fundsBoard announced assessments primarily related to Hurricane Harvey for which the Company’s share was $12 million. These costs were recorded in property and available reinsurance are utilized, TWIA could issue up to $1 billioncasualty insurance claims and claims expense as catastrophe losses on the Consolidated Statements of securities, which will be repaid by billing policyholders and assessing participating insurers. The Company’s current participation ratio is approximately 13% based upon its proportion of the premiums written. The TWIA board has not indicated the likelihood of any possible future assessments to insurers at this time. However,Operations. Any assessments from TWIA for a particular quarter or annual period may be material to the results of operations and cash flows, but not to the financial position of the Company.
New Jersey Property-Liability Insurance GuarantyTexas Fair Plan Association
The PLIGA,Company participates as the statutory administratora member of the UCJF,Texas Fair Plan Association (“FAIR Plan”), which provides compensation to qualified claimants for personal injury protection, bodily injury, or death caused by private passenger automobiles operated by uninsured or “hit and run” drivers. The UCJF also provides private passenger stranger pedestrian personal injury protection benefits when no other coverage is available. The fund provides reimbursement to insurers for the medical benefits portion of personal injury protection coverage paid in excess of $75,000 with no limits for policies issued or renewed prior to January 1, 1991 and in excess of $75,000 and capped at $250,000
for policies issued or renewed from January 1, 1991 to December 31, 2004. PLIGA annually assesses all admittedresidential property and casualty insurers writing motor vehicle liability insurance in New Jersey for direct PLIGA expenses and UCJF reimbursements and expenses. Assessments paid to PLIGA totaled $6.7 million in 2016.
North Carolina Reinsurance Facility
The North Carolina Reinsurance Facility (“NCRF”) provides automobile liability insurance to driversinland areas designated as
underserved by the Commissioner of Insurance and the applicant(s) are unable to procure coverage in the voluntary market. The FAIR Plan issues insurance policies, like an insurance company, and it also functions as a pooling mechanism that insurers are not otherwise willing to insure. All insurers licensed to write automobile insurance in North Carolina are members of the NCRF. Premiums, lossesallocates premiums, claims and expenses are cededback to the NCRF. North Carolina law allows the NCRF to recoup operating losses through a surcharge to policyholders. As of September 30, 2016, the NCRF reported a deficit of $261.1 million in members’ equity. The NCRF implemented a loss recoupment surcharge on all private passenger policies becoming effective October 1, 2016 through March 31, 2017. The loss recoupment surcharge will be adjusted at March 31, 2017 and discontinued once losses are recovered. The NCRF results are shared by the member companies in proportion to their respective North Carolina automobile liability writings.insurance industry. As a result of the NCRF also haslosses incurred related to Hurricane Harvey, in 2017 the FAIR Plan Board unanimously voted to approve its first ever member assessment of which the Company’s share was $8 million based on total direct premium written in Texas. Insurers are permitted to recover the assessment through either a premium surcharge applied to existing customers over a three-year period or increased rates, but the ability to assess members Companies for recoupment of losses calculated on a pro-rata basis across member companies based on participation ratios, determined annually.fully recover the assessment may be impacted by market conditions or other factors.
North Carolina Joint Underwriters Association
The North Carolina Joint Underwriters Association (“NCJUA”) was created to provide property insurance for properties (other than the state’s beach and coastal areas) that insurers are not otherwise willing to insure. All insurers licensed to write property insurance in North Carolina are members of the NCJUA. Premiums, losses and expenses of the NCJUA are shared by the member companies in proportion to their respective North Carolina property insurance writings. Member companies participate in plan deficits or surpluses based on their participation ratios, which are determined annually. The Company had a $2.5$5 million receivable from the NCJUA at December 31, 2016,2019 representing our participation in the NCJUA’s surplusdeficit of $28.1$29 million for all open years.
North Carolina Insurance Underwriting Association
The North Carolina Insurance Underwriting Association (“NCIUA”) provides windstorm and hail coverage as well as homeowners policies for properties located in the state’s beach and coastal areas that insurers are not otherwise willing to insure. All insurers licensed to write residential and commercial property insurance in North Carolina are members of the NCIUA. Members are assessed in proportion to their North Carolina residential and commercial property insurance writings, which is determined annually and varies by coverage, for plan deficits. As of September 30, 2016,December 31, 2019, the NCIUA had a surplus of $1.3 billion.$439 million. No member company shall beis entitled to the distribution of any portion of the Association’s surplus. The Company does not recognize any interest related to this surplus. Legislation in 2009 capped insurers’ assessments for losses incurred in any calendar year at $1$1.00 billion. Subsequent to an industry assessment of $1$1.00 billion, if the plan continues to require funding, it may authorize insurers to assess a 10% surchargecatastrophe recovery charge on each property insurance policy statewide located in the state’s beach and coastal areas to be remitted to the plan.
Other programs The Company is also subject to assessments by the NCRF and the FHCF, which are described in Note 10.
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
Notes to Consolidated Financial Statements 2019 Form 10-K
insurance companies to policyholders and claimants. Amounts assessed to each company are typically related to its proportion of business written in each state. The Company’s policy is to accrue assessments when the entity for which the insolvency relates has met its state of domicile’s statutory definition of insolvency, the amount of the loss is reasonably estimable and the related premium upon which the assessment is based is written. In most states, the definition is met with a declaration of financial insolvency by a court of competent jurisdiction. In certain states there must also be a final order of liquidation. Since most states allow a credit against premium or other state related taxes for assessments, an asset is recorded based on paid and accrued assessments for the amount the Company expects to recover on the respective state’s tax return and is realized over the period allowed by each state. As of December 31, 20162019 and 2015,2018, the liability balance included in other liabilities and accrued expenses was $4$13 million and $13$12 million, respectively. The related premium tax offsets included in other assets were $9$15 million and $14$16 million as of December 31, 20162019 and 2015,2018, respectively.
Guarantees
The Company provides residual value guarantees on Company leased automobiles. If all outstanding leases were terminated effective December 31, 2016, the Company’s maximum obligation pursuant to these guarantees, assuming the automobiles have no residual value, would be $46 million as of December 31, 2016. The remaining term of each residual value guarantee is equal to the term of the underlying lease that ranges from less than one year to four years. Historically, the Company has not made any material payments pursuant to these guarantees.
Related to the sale of LBL on April 1, 2014, ALIC agreed to indemnify Resolution Life Holdings, Inc. in connection with certain representations, warranties and covenants of ALIC, and certain liabilities specifically excluded from the transaction, subject to specific contractual limitations regarding ALIC’s maximum obligation. Management does not believe these indemnifications will have a material effect on results of operations, cash flows or financial position of the Company.
Related to the disposal through reinsurance of substantially all of Allstate Financial’s variable annuity business to Prudential in 2006, the Company and its consolidated subsidiaries, ALIC and ALNY, have agreed to indemnify Prudential for certain pre-
closing contingent liabilities (including extra-contractual liabilities of ALIC and ALNY and liabilities specifically excluded from the transaction) that ALIC and ALNY have agreed to retain. In addition, the Company, ALIC and ALNY will each indemnify Prudential for certain post-closing liabilities that may arise from the acts of ALIC, ALNY and their agents, including certain liabilities arising from ALIC’s and ALNY’s provision of transition services. The reinsurance agreements contain no limitations or indemnifications with regard to insurance risk transfer and transferred all of the future risks and responsibilities for performance on the underlying variable annuity contracts to Prudential, including those related to benefit guarantees. Management does not believe this agreement will have a material effect on results of operations, cash flows or financial position of the Company.
In the normal course of business, the Company provides standard indemnifications to contractual counterparties in connection with numerous transactions, including acquisitions and divestitures. The types of indemnifications typically provided include indemnifications for breaches of representations and warranties, taxes and certain other liabilities, such as third partythird-party lawsuits. The indemnification clauses are often standard contractual terms and are entered into in the normal course of business based on an assessment that the risk of loss would be remote. The terms of the indemnifications vary in duration and nature. In many cases, the maximum obligation is not explicitly stated and the contingencies triggering the obligation to indemnify have not occurred and are not expected to occur. Consequently, the maximum amount of the obligation under such indemnifications is not determinable. Historically, the Company has not made any material payments pursuant to these obligations.
Related to the sale of Lincoln Benefit Life Company on April 1, 2014, ALIC agreed to indemnify Resolution Life Holdings, Inc. in connection with certain representations, warranties and covenants of ALIC, and certain liabilities specifically excluded from the transaction, subject to specific contractual limitations regarding ALIC’s maximum obligation. Management does not believe these indemnifications will have a material effect on results of operations, cash flows or financial position of the Company.
The aggregate liability balance related to all guarantees was not material as of December 31, 2016.2019.
Regulation and Compliancecompliance
The Company is subject to extensive laws, regulations, administrative directives, and regulatory actions. From time to time, regulatory authorities or
legislative bodies seek to influence and restrict premium rates, require premium refunds to policyholders, require reinstatement of terminated policies, prescribe rules or guidelines on how affiliates compete in the marketplace, restrict the ability of insurers to cancel or non-renew policies, require insurers to continue to write new policies or limit their ability to write new policies, limit insurers’ ability to change coverage terms or to impose underwriting standards, impose additional regulations regarding agentagency and broker compensation, regulate the nature of and amount of investments, impose fines and penalties for unintended errors or mistakes, impose additional regulations regarding cybersecurity and privacy, and otherwise expand overall regulation of insurance products and the insurance industry. In addition, the Company is subject to laws and regulations administered and enforced by federal agencies, international agencies, and other organizations, including but not limited to the Securities and Exchange Commission,SEC, the Financial Industry Regulatory Authority, the Department of Labor, the U.S. Equal Employment Opportunity Commission, and the U.S. Department of Justice. The Company has established procedures and policies to facilitate compliance with laws and regulations, to foster prudent business operations, and to support financial reporting. The Company routinely reviews its practices to validate compliance with laws and regulations and with internal procedures and policies. As a result of these reviews, from time to time the Company may decide to modify some of its procedures and policies. Such modifications, and the reviews that led to them, may be accompanied by payments being made and costs being incurred. The ultimate changes and eventual effects of these actions on the Company’s business, if any, are uncertain.
Legal and regulatory proceedings and inquiries
The Company and certain subsidiaries are involved in a number of lawsuits, regulatory inquiries, and other legal proceedings arising out of various aspects of its business.
Background
These matters raise difficult and complicated factual and legal issues and are subject to many uncertainties and complexities, including the underlying facts of each matter; novel legal issues; variations between jurisdictions in which matters are being litigated, heard, or investigated; changes in assigned judges; differences or developments in applicable laws and judicial interpretations; judges reconsidering prior rulings; the length of time before many of these matters might be resolved by settlement, through litigation, or otherwise; adjustments with respect to anticipated trial schedules and other proceedings; developments in similar actions against other companies; the fact that some of the lawsuits are putative class actions in which a class has not been certified and in which the purported class may not be clearly defined; the fact that some of the lawsuits involve multi-state class actions in which the applicable law(s) for the claims at issue is in dispute and therefore unclear; and the current challenging legal environment faced by corporations and insurance companies.
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The outcome of these matters may be affected by decisions, verdicts, and settlements, and the timing of such decisions, verdicts, and settlements, in other individual and class action lawsuits that involve the Company, other insurers, or other entities and by other legal, governmental, and regulatory actions that involve the Company, other insurers, or other entities. The outcome may also be affected by future state or federal legislation, the timing or substance of which cannot be predicted.
In the lawsuits, plaintiffs seek a variety of remedies which may include equitable relief in the form of injunctive and other remedies and monetary relief in the form of contractual and extra-contractual damages. In some cases, the monetary damages sought may include punitive or treble damages. Often specific information about the relief sought, such as the amount of damages, is not available because plaintiffs have not requested specific relief in their pleadings. When specific monetary demands are made,
they are often set just below a state court jurisdictional limit in order to seek the maximum amount available in state court, regardless of the specifics of the case, while still avoiding the risk of removal to federal court. In Allstate’s experience, monetary demands in pleadings bear little relation to the ultimate loss, if any, to the Company.
In connection with regulatory examinations and proceedings, government authorities may seek various forms of relief, including penalties, restitution, and changes in business practices. The Company may not be advised of the nature and extent of relief sought until the final stages of the examination or proceeding.
Accrual and disclosure policy
The Company reviews its lawsuits, regulatory inquiries, and other legal proceedings on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. The Company establishes accruals for such matters at management’s best estimate when the Company assesses that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company does not establish accruals for such matters when the Company does not believe both that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company’s assessment of whether a loss is reasonably possible, or probable, is based on its assessment of the ultimate outcome of the matter following all appeals. The Company does not include potential recoveries in its estimates of reasonably possible or probable losses. Legal fees are expensed as incurred.
The Company continues to monitor its lawsuits, regulatory inquiries, and other legal proceedings for further developments that would make the loss contingency both probable and estimable, and accordingly accruable, or that could affect the amount of accruals that have been previously established. There may continue to be exposure to loss in excess of any amount accrued. Disclosure of the nature and amount of an accrual is made when there have been sufficient legal and factual developments such that the
Company’s ability to resolve the matter would not be impaired by the disclosure of the amount of accrual.
When the Company assesses it is reasonably possible or probable that a loss has been incurred, it discloses the matter. When it is possible to estimate the reasonably possible loss or range of loss above the amount accrued, if any, for the matters disclosed, that estimate is aggregated and disclosed. Disclosure is not required when an estimate of the reasonably possible loss or range of loss cannot be made.
For certain of the matters described below in the “Claims related proceedings” and “Other proceedings” subsections, the Company is able to estimate the reasonably possible loss or range of loss above the amount accrued, if any. In determining whether it is possible to estimate the reasonably possible loss or range of loss, the Company reviews and evaluates the disclosed matters, in conjunction with counsel, in light of potentially relevant factual and legal developments.
These developments may include information learned through the discovery process, rulings on dispositive motions, settlement discussions, information obtained from other sources, experience from managing these and other matters, and other rulings by courts, arbitrators or others. When the Company possesses sufficient appropriate information to develop an estimate of the reasonably possible loss or range of loss above the amount accrued, if any, that estimate is aggregated and disclosed below. There may be other disclosed matters for which a loss is probable or reasonably possible, but such an estimate is not possible. Disclosure of the estimate of the reasonably possible loss or range of loss above the amount accrued, if any, for any individual matter would only be considered when there have been sufficient legal and factual developments such that the Company’s ability to resolve the matter would not be impaired by the disclosure of the individual estimate.
The Company currently estimates that the aggregate range of reasonably possible loss in excess of the amount accrued, if any, for the disclosed matters where such an estimate is possible is zero0 to $875$75 million, pre-tax. This disclosure is not an indication of expected loss, if any. Under accounting guidance, an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely” and an event is “remote” if “the chance of the future event or events occurring is slight.” This estimate is based upon currently available information and is subject to significant judgment and a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimate will change from time to time, and actual results may vary significantly from the current estimate. The estimate does not include matters or losses for which an estimate is not possible. Therefore, this estimate represents an estimate of possible loss only for certain matters meeting these criteria. It does not represent the Company’s maximum possible loss exposure. Information is provided below regarding the nature of all of the disclosed matters and, where specified, the amount, if any, of plaintiff claims associated with these loss contingencies.
Notes to Consolidated Financial Statements 2019 Form 10-K
Due to the complexity and scope of the matters disclosed in the “Claims related proceedings” and “Other proceedings” subsections below and the many uncertainties that exist, the ultimate outcome of these matters cannot be predicted.predicted and in the Company’s judgment, a loss, in excess of amounts accrued, if any, is not probable. In the event of an unfavorable outcome in one or more of these matters, the ultimate liability may be in excess of amounts currently accrued, if any, and may be material to the Company’s operating results or cash flows for a particular quarterly or annual period. However, based on information currently known to it, management believes that the ultimate outcome of all matters described below, as they are resolved over time, is not likely to have a material effect on the financial position of the Company.
Claims related proceedings
The Company is litigating twomanaging various disputes in Florida that raise challenges to the Company’s practices, processes, and procedures relating to claims for personal injury protection benefits under Florida auto policies. Medical providers continue to pursue litigation under various theories that challenge the amounts that the Company pays under the personal injury protection benefits. There are pending putative class actions and litigation involving individual plaintiffs. The Company is vigorously asserting both procedural and substantive defenses to these lawsuits.
Other proceedings The stockholder derivative actions described below are disclosed pursuant to SEC disclosure requirements for these types of matters. The putative class action casesalleging violations of the federal securities laws is disclosed because it involves similar allegations to those made in Californiathe stockholder derivative actions.
Biefeldt / IBEW Consolidated Action. Two separately filed stockholder derivative actions have been consolidated into a single proceeding that is pending in whichthe Circuit Court for Cook County, Illinois, Chancery Division. The original complaint in the first-filed of those actions, Biefeldt v. Wilson, et al., was filed on August 3, 2017, in that court by a plaintiff alleging that she is a stockholder of the Company. On June 29, 2018, the court granted defendants’ motion to dismiss that complaint for failure to make a pre-suit demand on the Allstate Board before instituting the suit, but granted the plaintiff permission to file an amended complaint. The original complaint in IBEW Local No. 98 Pension Fund v. Wilson, et al., was filed on April 12, 2018, in the same court by another plaintiff alleging to be a stockholder of the Company. After the court issued its dismissal decision in the Biefeldt action, the plaintiffs agreed to consolidate the two actions and filed a consolidated amended complaint naming the Company’s chairman, president and chief executive officer, its former president, and certain present or former members of the board of directors. In that complaint, the plaintiffs allege off-the-clock wagethat the directors and hour claims. Plaintiffsofficer defendants breached their fiduciary duties to the Company in both cases seek recovery of unpaid compensation, liquidated damages, penalties,connection with allegedly material misstatements or omissions concerning the Company’s automobile insurance claim frequency statistics and attorneys’ feesthe reasons for a claim frequency increase for Allstate
brand auto insurance between October 2014 and costs.
August 3, 2015. The first case is Christopher Williams, et al. v.factual allegations are substantially similar to those at issue in In re The Allstate Insurance CompanyCorp. Securities Litigation. The Williams case is pendingplaintiffs further allege that a senior officer and several outside directors engaged in Los Angeles Superior Court and was filedstock option exercises allegedly while in December 2007.possession of material nonpublic information. The case involves two classes. The first class includes auto field physical damage adjusters employed in the stateplaintiffs seek, on behalf of California from January 1, 2005 to the date of final judgment, to the extent the Company, failedan unspecified amount of damages and various forms of equitable relief. Defendants moved to paydismiss the consolidated complaint on September 24, 2018 for off-the-clock workfailure to those adjusters who performed certain duties prior to their first assignments. The other class includes all non-exempt employees in California from December 19, 2006 until June 2011 who received pay statements frommake a demand on the Allstate which allegedly did not comply with California law.Board. On April 13, 2016,May 14, 2019, the court granted the Company’sdefendants’ motion to decertify both classes; both classes are thus dissolved unless and untildismiss the appellate court orderscomplaint, but allowed the classes recertified.plaintiffs leave to file a second consolidated amended complaint by June 11, 2019. On May 17, 2016,June 3, 2019, the plaintiffs filed their noticea motion to stay the action, or in the alternative defer the filing of appeal. Plaintiff’s opening briefthe second consolidated amended complaint, to allow the plaintiffs to conduct an inspection of the Company’s books and records. The parties reached a compromise by which the Company produced certain board materials and the deadline for the plaintiffs to file the second consolidated amended complaint was extended. On September 17, 2019, the plaintiffs filed a second consolidated amended complaint. Defendants moved to dismiss the complaint on November 22, 2016. Allstate’s response is due April 24, 2017.1, 2019 for failure to make a demand on the Allstate Board.
The second case is Jack Jimenez,In Sundquist v. Wilson, et al. v. Allstate Insuranceal., another plaintiff alleging to be a stockholder of the Company. Jimenez was filed a stockholder derivative complaint in the U.S.United States District Court for the CentralNorthern District of California in September 2010.Illinois on May 21, 2018. The plaintiffs allege that they worked off-the-clock; they also allege other California Labor Code violations resulting from purported unpaid overtime. In April 2012,plaintiff seeks, on behalf of the court certified a class that includes all adjusters in the stateCompany, an unspecified amount of California, except auto field adjusters, from September 29, 2006 to final judgment. Allstate appealed the court’s decision to certify the class, first to the Ninth Circuit Court of Appeals and then to the U.S. Supreme Court. On June 15, 2015, the U.S. Supreme Court denied Allstate’s petition for a writ of certiorari. The case was scheduled for trial on September 27, 2016. On May 4, 2016, the court vacated that trial date in part because the court had not approved a trial plan. No trial date has been scheduled because the parties continue to wait for the court’s approval of a trial plan.
In addition to the California class actions, the case of Maria Victoria Perez and Kaela Brown, et al. v. Allstate Insurance Company was filed in the U.S. District Court for the Eastern District of New York. Plaintiffs allege that no-fault claim adjusters have been improperly classified as exempt employees under New York Labor Law and the Fair Labor Standards Act. The case was filed in April 2011, and the plaintiffs are seeking unpaid wages, liquidated damages, injunctive relief, compensatory and punitive damages and attorneys’ fees. On September 16, 2014,various forms of equitable relief. The complaint names as defendants the court certified a class of no-fault adjusters under New York Labor LawCompany’s chairman, president and refused to decertify a Fair Labor Standards Act class of no-fault adjusters. Notice tochief executive officer, its former president, its former chief financial officer, who is now the class was issued in December 2015Company’s vice chairman, and no opt outs were received. During the discovery phase of the case, it was determined that 50 Encompass adjusters had been erroneously omitted from the New York Labor Law and Fair Labor Standards Act classes. On April 8, 2016, notice was sent to the omitted Encompass adjusters. Eleven Encompass adjusters opted in. As a result, there are now 105certain present or former members of the Fair Labor Standards Act classboard of directors.
The complaint alleges breaches of fiduciary duty based on allegations similar to those asserted in In re TheAllstate Corp. Securities Litigation as well as state law “misappropriation” claims based on stock option transactions by the Company’s chairman, president and 137chief executive officer, its former chief financial officer, who is now the Company’s vice chairman, and certain members of the New York Labor Law class. The parties are currently engaged in discovery regardingboard of directors. Defendants moved to dismiss and/or stay the Encompass adjusters.
Incomplaint on August 7, 2018. On December 4, 2018, the Company’s judgment, a loss is not probable in these three cases.
The Florida personal injury protection statute permits insurers to pay personal injury protection benefits for reasonable medical expenses based on certain benefit reimbursement limitations which are authorized bycourt granted the personal injury protection statute (generally referred to as “fee schedules”) resulting from automobile accidents. The Company has been involved in litigation challenging whetherdefendants’ motion and stayed the Company’s personal injury protection policies include sufficient language providing noticecase pending the resolution of the Company’s election to apply the fee schedules.consolidated Biefeldt/IBEW matter.
On January 26, 2017, the Florida Supreme Court issued its decision in Allstate Insurance CompanyMims v. Orthopedic Specialists,Wilson, et al., holding that Allstate’s language was clear and unambiguous and provided adequate notice of its intent to use the fee schedules. This was a 4-3 decision (two separate opinions, the majority for Allstate, and a dissent), reversing the decision of the District Court of Appeal for the Fourth District. The District Court of Appeal for the Fourth District had previously issued a divided decision (three separate opinions, two against Allstate and one dissenting opinion deeming Allstate’s language sufficient), holding that Allstate’s language was not sufficient. On is an additional stockholder derivative action filed on February 7, 2017, Orthopedic Specialists filed a motion for rehearing. Allstate’s response is due February 22, 2017. On February 8, 2017, the amicus curiae, Florida Medical Association, filed its own motion for rehearing. Allstate’s response to that motion is due February 23, 2017. The Florida Supreme Court’s decision is not final until the motions for rehearing are resolved.
In light of this ruling (assuming there is no change as a result of the motions for rehearing), the fee schedule issue will be resolved favorably to Allstate in other pending cases. There are three cases with petitions for leave to appeal to the Florida Supreme Court pending (Stand-Up MRI of Tallahassee, et al. v. Allstate Fire & Casualty Insurance Company,Markley Chiropractic & Acupuncture LLC, et al. v. Allstate Indemnity Company, and Florida Wellness & Rehabilitation Center of Hialeah, et al. v. Allstate Fire & Casualty Insurance Company). In those cases, three District Courts of Appeal had previously ruled in favor of Allstate. Those petitions for leave to appeal had been stayed awaiting the outcome of the Orthopedic Specialists case, and will likely be dismissed once Orthopedic Specialists is final.
The Company is also litigating one class action on this issue, Randy Rosenberg, et al. v. Allstate Fire & Casualty Insurance Company, Allstate Insurance Company, and Allstate Property & Casualty Insurance Company,12, 2020 in the U.S.United States District Court for the Northern District of Illinois. This case has been stayed byThe plaintiff seeks, on behalf of the Illinois federal court pendingCompany, an unspecified amount of damages and various forms of equitable relief. The complaint names as defendants the Company’s chairman, president and chief executive officer, its former president, its former chief financial officer, who is now the Company’s vice chairman, and certain present or former members of the board of directors. The complaint alleges breaches
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of fiduciary duty and unjust enrichment based on allegations similar to those asserted in In re The Allstate Corp. Securities Litigation.
Inre The Allstate Corp. Securities Litigation is a decisioncertified class action filed on this issue by the Florida Supreme Court, and will likely be dismissed once Orthopedic Specialists is final.
This fee schedule issue has also been the subject of thousands of individual lawsuits filed against Allstate in Florida. The decision by the Florida Supreme Court in Orthopedic Specialists, once final, will establish Florida law on the sufficiency of Allstate’s fee schedule policy language which will be binding on all Florida courts, as well as the Illinois federal class action. An outcome in favor of Allstate’s position that the fee schedule policy language was sufficient will resultNovember 11, 2016 in the resolution of all related claims that are currently in litigation along with those claims that are not currently in litigation. Allstate may be able to seek restitution from some plaintiffs for attorneys’ fees and costs. However, if Orthopedic Specialists were to be changed adverse to the Company as a result of the motions for rehearing, there will be significant costs to Allstate in the form of additional benefits due to medical providers along with penalties, interest, postage, and attorneys’ fees.
In the Company’s judgment, a loss is not probable in any of these cases.
Other proceedings
The Company is defending certain matters in the U.S.United States District Court for the EasternNorthern District of Pennsylvania relating toIllinois against the Company’s agency program reorganization announced in 1999. The principal focus in these matters has related to a releaseCompany and two of its officers asserting claims signed byunder the vast majorityfederal securities laws. Plaintiffs allege that they purchased Allstate common stock during the class period and suffered damages as the result of the former agents whose employment contracts were terminated inconduct alleged. Plaintiffs seek an unspecified amount of damages, costs, attorney’s fees, and other relief as the reorganization program. The court recently entered a scheduledeems appropriate. Plaintiffs allege that the Company and certain senior officers made allegedly material misstatements or omissions concerning claim frequency statistics and the reasons for determining the merits of certain claims asserted in the matters described below, with the release issue to be addressed in unspecified future proceedings.
Romero I: In 2001, approximately 32 former employee agents, on behalf of a putative class of approximately 6,300 former employee agents, filed a putative class action alleging claims for age discrimination under the Age Discrimination in Employment Act (“ADEA”), interference with benefits under ERISA, breach of contract, and breach of fiduciary duty. Plaintiffs also assert a claim frequency increase for Allstate brand auto insurance between October 2014 and August 3, 2015.
Plaintiffs’ further allege that a declaratory judgmentsenior officer engaged in stock option exercises during that time allegedly while in possession of material nonpublic information about Allstate brand auto insurance claim frequency. The Company, its chairman, president and chief executive officer, and its former president are the release of claims constitutes unlawful retaliation and should be set aside. Plaintiffs seek broad but unspecified “make whole relief,” including back pay, compensatory and punitive damages, liquidated damages, lost investment capital, attorneys’ fees and costs, and equitable relief, including reinstatement to employee agent status with all attendant benefits.
Romero II: A putative nationwide class action was also filed in 2001 by former employee agents alleging various violations of ERISA (“Romero II”). This action has been consolidated with Romero I. The Romero II plaintiffs, most of whom are also plaintiffs in Romero I, are challenging certain amendments tonamed defendants. After the Agents Pension Plan and seek to have service as exclusive agent independent contractors count toward eligibility for benefits under the Agents Pension Plan. Plaintiffs seek broad but unspecified “make whole” or other equitable relief, including loss of benefits as a result ofcourt denied their conversion to exclusive agent independent contractor status or retirement from the Company between November 1, 1999 and December 31, 2000. They also seek repeal of the challenged amendments to the Agents Pension Plan with all attendant benefits revised and recalculated for thousands of former employee agents, and attorneys’ fees and costs. The court granted the Company’s initial motion to dismiss on February 27, 2018, defendants answered the complaint. complaint, denying plaintiffs’ allegations that there was any misstatement or omission or other misconduct. On June 22, 2018, plaintiffs filed their motion for class certification, which was fully briefed as of January 11, 2019. On September 12, 2018, the court allowed the lead plaintiffs to amend their complaint to add the City of Providence Employee Retirement System as a proposed class representative.
The Thirdamended complaint was filed the same day. On March 26, 2019, the court granted plaintiffs’ motion for class certification and certified a class consisting of all persons who purchased Allstate common stock between October 29, 2014 and August 3, 2015. On April 9, 2019, defendants filed with the Seventh Circuit Court of Appeals reversed that dismissala petition for permission to appeal this ruling pursuant to Federal Rule of Civil Procedure 23 (f) and remanded for further proceedings.
Romero I and II consolidated proceedings: In 2004, the court ruled that the release was voidable and certified classes of agents, including a mandatory class of agents who had signed the release, for purposes of effectuating the court’s declaratory judgment that the release was voidable. In 2007, the court vacated its ruling and granted the Company’s motion for summary judgment on all claims. Plaintiffs appealed and in July 2009, the U.S. Court of Appeals for the Third Circuit vacated the trial court’s entrygranted that petition on April 25, 2019. The appeal was fully briefed as of summary judgment in the Company’s favor, remanded the case to the trial court for additional discovery, and instructed the trial court to address the validity of the release after additional discovery. Following the completion of discovery limited to the validity of the release, the parties filed cross motions for summary judgment with respect to the validity of the release. On February 28, 2014, the trial court denied plaintiffs’July 31, 2019, and the Company’s motions for summary judgment, concluding that the questionSeven Circuit Court of whether the releases were knowingly and voluntarily signed under a totality of circumstances test raised disputed issues of fact to be resolved at trial. Among other things, the court also held that the release, if valid, would bar all claims in Romero I and II. On May 23, 2014, plaintiffs moved to certify a class as to certain issues relating to the validity of the release. The court denied plaintiffs’ class certification motionAppeals heard oral argument on October 6, 2014, stating, among other things, that individual factors and circumstances must be considered to determine whether each release signer entered into the release knowingly and voluntarily. The court entered an order on December 11, 2014, (a) stating that the court’s October 6, 2014 denial of class certification as to release-related issues did not resolve whether issues relating to the merits of plaintiffs’ claims may be subject to class certification at a later time, and (b) holding that the court’s October 6, 2014 order restarted the running of the statute of limitation for any former employee agent who wished to challenge the validity of the release. In an order entered January 7, 2015, the court denied reconsideration of its December 11, 2014 order and clarified that all statutes of limitations to challenge the release would resume running on March 2, 2015. Since the court’s January 7, 2015 order, a total of 459 additional individual plaintiffs have filed separate lawsuits similar to Romero I or sought to intervene in the Romero I action. Trial proceedings commenced to determine the question of whether
the releases of the original named plaintiffs in Romero I and II were knowingly and voluntarily signed. Additionally, plaintiffs asserted two equitable defenses to the release which were to be determined by the court and not the jury. As to the first trial proceeding involving ten plaintiffs, the jury reached verdicts on June 17, 2015 finding that two plaintiffs signed their releases knowingly and voluntarily and eight plaintiffs did not sign their releases knowingly and voluntarily. On January 28, 2016, the court entered its opinion and judgment finding in Allstate’s favor as to all ten plaintiffs on the two equitable defenses to the release. The trial result is not yet final and may be subject to further proceedings. The remaining two trials for the original Romero I and II plaintiffs were scheduled to commence in the fourth quarter of 2015; however, the order setting these trials was subsequently vacated.
On February 1, 2016, these cases were reassigned to a new judge who initially entered orders addressing pending motions for reconsideration of the dismissal of plaintiffs’ state law claims, but then vacated those orders. On April 12, 2016, these cases were again reassigned to a new judge. On May 2, 2016, the new judge entered an order vacating the setting of additional release trials, consolidating all of the original and intervening plaintiffs’ claims, and granting leave to file a Consolidated Amended Complaint by May 20, 2016. The court entered a second order on May 2, 2016, scheduling deadlines for completion of discovery and filing of summary judgment motions on the merits of plaintiffs’ ERISA and ADEA claims, and setting a non-jury ERISA trial to occur in December 2016. The court’s order also set deadlines for completion of discovery and summary judgment motions with regard to the remaining claims and defenses by the first quarter of 2017, with a jury trial on those claims and defenses to occur in May 2017. The court subsequently clarified the scope of the scheduled trials, ruling that (a)the December 2016 non-jury trial shall only resolve liability on plaintiffs’ claims challenging certain plan amendments under ERISA (“Phase I”); (b) the second trial currently scheduled for May 2017 shall resolve alleged interference with employee benefits under ERISA and disparate impact under the ADEA, with the court deciding the ERISA claim (“Phase II”); and (c) plaintiffs’ ADEA disparate treatment claims will not be resolved in the second trial but will be resolved in a manner to be determined at a later date. On May 4, 2016, the court entered an order denying Allstate’s post-trial motion for judgment as a matter of law with respect to the jury’s June 17, 2015 verdicts in favor of eight plaintiffs on the issue whether they knowingly and voluntarily signed their releases.
On May 20, 2016, a Consolidated Amended Complaint was filed on behalf of 499 plaintiffs, most of whom had previously filed separate lawsuits or intervened in Romero I. Allstate filed a partial motion to dismiss the Consolidated Amended Complaint, which the court granted in part and denied in part on July 6, 2016. Among other things, the court denied without prejudice Allstate’s motion to dismiss the state law claims, granted dismissal of plaintiffs’ retaliation claims under the ADEA and ERISA.
Phase I discovery closed and the Company filed a motion for summary judgment as to all Phase I claims. Plaintiffs did not move for summary judgment. On November 22, 2016, the court granted in part, and denied in part, Allstate’s Phase I summary judgment motion. The court determined that there were material issues of disputed fact requiring a trial on plaintiffs’ claim challenging certain Plan amendments. The court granted the motion with respect to one plaintiff whose claim the court determined was barred by the statute of limitations. Further, the court granted the motion with respect to two other claims: 1) a claim that a 1993 Plan amendment resulted in an unlawful cutback of benefits; and 2) a claim for breach of fiduciary duty. The parties thereafter proceeded to a bench trial on December 5-6, 2016. Briefing on proposed findings of fact and conclusions of law has been completed.
On September 2, 2016, in two cases asserting similar claims to those asserted in Romero I that had been filed on May 15, 2015, the U.S. District Court for the Southern District of Texas entered judgment in Allstate’s favor on statute of limitations and other grounds. Plaintiffs did not appeal the judgments.
Based on the trial court’s February 28, 2014 order in Romero I and II, if the validity of the release is decided in favor of the Company for any plaintiff, that would preclude any damages or other relief being awarded to that plaintiff.The final resolution of these matters is subject to various uncertainties and complexities including how trials, post trial motions, possible appeals with respect to the validity of the release, and any rulings on the merits will be resolved.
In the Company’s judgment, a loss is not probable.18, 2019.
Asbestos and environmental
Allstate’s reserves for asbestos claims were $912 million and $960 million, net of reinsurance recoverables of $444 million and $458 million, as of December 31, 2016 and 2015, respectively. Reserves for environmental claims were $179 million and $179 million, net of reinsurance recoverables of $40 million and $43 million, as of December 31, 2016 and 2015, respectively. Approximately 57% of the total net asbestos and environmental reserves as of both December 31, 2016 and 2015 were for incurred but not reported estimated losses.
Management believes its net loss reserves for asbestos, environmental and other discontinued lines exposures are appropriately established based on available facts, technology, laws and regulations. However, establishing net loss reserves for asbestos, environmental and other discontinued lines claims is subject to uncertainties that are much greater than those presented by other types of claims. The ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimate. Among the complications are lack of historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure and unresolved legal issues regarding policy
coverage; unresolved legal issues regarding the
determination, availability and timing of exhaustion of policy limits; plaintiffs’ evolving and expanding theories of liability; availability and collectability of recoveries from reinsurance; retrospectively determined premiums and other contractual agreements; estimates of the extent and timing of any contractual liability; the impact of bankruptcy protection sought by various asbestos producers and other asbestos defendants; and other uncertainties.
There are also complex legal issues concerning the interpretation of various insurance policy provisions and whether those losses are covered, or were ever intended to be covered, and could be recoverable through retrospectively determined premium, reinsurance or other contractual agreements. 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 insurer obligation to defend; how policy limits are determined; how policy exclusions and conditions are applied and interpreted; and whether clean-up costs represent insured property damage. Further, insurers and claims administrators acting on behalf of insurers are increasingly pursuing evolving and expanding theories of reinsurance coverage for asbestos and environmental losses. Adjudication of reinsurance coverage is predominately decided in confidential arbitration proceedings which may have limited precedential or predictive value further complicating management’s ability to estimate probable loss for reinsured asbestos and environmental claims. Management believes these issues are not likely to be resolved in the near future, and the ultimate costs may vary materially from the amounts currently recorded resulting in material changes in loss reserves. In addition, while the Company believes that improved actuarial techniques and databases have assisted in its ability to estimate asbestos, environmental, and other discontinued lines 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.
15. Income TaxesNotes to Consolidated Financial Statements 2019 Form 10-K
The Company and its domestic subsidiaries file a consolidated federal income tax return. Tax liabilities and benefits realized by the consolidated group are allocated as generated by the respective entities.
Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. Deferred tax assets and liabilities are adjusted through income tax expense as changes in tax laws or rates are enacted.
Regulatory tax examinations The Internal Revenue Service (“IRS”) is currently examining the Company’s 2015 and 2016 federal income tax returns and is expected to complete its exam by mid-2020. The 2017 and 2018 audit cycle is expected to begin
mid-2020. The 2013 and 2014 federal income tax returns. The Company’s tax years prior to 2013 have been examinedreturn audit is complete through the exam phase and the Company has reached a tentative agreement on one outstanding issue, pending final review by the IRS and the statuteJoint Committee of limitations has expired on those years.Taxation expected in 2020. Any adjustments that may result from IRS examinations of the Company’s tax returns are not expected to have a material effect on the results of operations, cash flows orconsolidated financial statements.
Unrecognized tax benefits The Company recognizes tax positions in the consolidated financial statements only when it is more likely than not that the position will be sustained on examination by the relevant taxing authority based on the technical merits of the Company.
The reconciliationposition. A position that meets this standard is measured at the largest amount of the changebenefit that will more likely than not be realized on settlement. A liability is established for differences between positions taken in a tax return and amounts recognized in the amount of unrecognized tax benefits for the years ended December 31 is as follows:consolidated financial statements.
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Balance – beginning of year | $ | 7 |
| | $ | — |
| | $ | — |
|
| Increase for tax positions taken in a prior year | — |
| | 4 |
| | — |
|
| Decrease for tax positions taken in a prior year | — |
| | — |
| | — |
|
| Increase for tax positions taken in the current year | 3 |
| | 3 |
| | — |
|
| Decrease for tax positions taken in the current year | — |
| | — |
| | — |
|
| Decrease for settlements | — |
| | — |
| | — |
|
| Reductions due to lapse of statute of limitations | — |
| | — |
| | — |
|
| Balance – end of year | $ | 10 |
| | $ | 7 |
| | $ | — |
|
|
| | | | | | | | | | | | |
| Reconciliation of the change in the amount of unrecognized tax benefits |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Balance – beginning of year | | $ | 70 |
| | $ | 55 |
| | $ | 10 |
|
| Increase for tax positions taken in a prior year | | — |
| | 3 |
| | 34 |
|
| Increase for tax positions taken in the current year | | — |
| | 12 |
| | 11 |
|
| Balance – end of year | | $ | 70 |
| | $ | 70 |
| | $ | 55 |
|
The Company believes it is reasonably possible that the liability balance will not significantly increasea decrease of up to $58 million in unrecognized tax benefits may occur within the next twelve months. Because of the impact of deferred tax accounting, recognition of previously unrecognized tax benefits is not expectedmonths due to impact the Company’s effective tax rate.
The Company recognizes interest accrued related to unrecognized tax benefits in income tax expense. The Company did not record interest income or expense relating to unrecognized tax benefits in income tax expense in 2016, 2015 or 2014. As of December 31, 2016 and 2015, there was no interest accrued with respect to unrecognized tax benefits. No amounts have been accrued for penalties.
The components of the deferred income tax assets and liabilities as of December 31 are as follows:IRS settlements.
|
| | | | | | | | |
| Components of the deferred income tax assets and liabilities |
| | | As of December 31, |
| ($ in millions) | | 2019 | | 2018 |
| Deferred tax assets | | | | |
| Unearned premium reserves | | $ | 642 |
| | $ | 594 |
|
| Pension | | 197 |
| | 192 |
|
| Accrued compensation | | 147 |
| | 145 |
|
| Discount on loss reserves | | 78 |
| | 67 |
|
| Other postretirement benefits | | 49 |
| | 45 |
|
| Net operating loss carryover | | 26 |
| | 50 |
|
| Other assets | | 54 |
| | 57 |
|
| Total deferred tax assets | | 1,193 |
| | 1,150 |
|
| Deferred tax liabilities | | | | |
| DAC | | (847 | ) | | (854 | ) |
| Unrealized net capital gains | | (507 | ) | | (2 | ) |
| Investments | | (567 | ) | | (278 | ) |
| Life and annuity reserves | | (222 | ) | | (194 | ) |
| Intangible assets | | (98 | ) | | (145 | ) |
| Other liabilities | | (106 | ) | | (102 | ) |
| Total deferred tax liabilities | | (2,347 | ) | | (1,575 | ) |
| Net deferred tax liability | | $ | (1,154 | ) | | $ | (425 | ) |
|
| | | | | | | |
| ($ in millions) | 2016 | | 2015 |
| Deferred assets | | | |
| Unearned premium reserves | $ | 819 |
| | $ | 796 |
|
| Pension | 294 |
| | 236 |
|
| Accrued compensation | 203 |
| | 189 |
|
| Discount on loss reserves | 188 |
| | 203 |
|
| Difference in tax bases of invested assets | 78 |
| | 202 |
|
| Other postretirement benefits | 64 |
| | 76 |
|
| Other assets | 118 |
| | 137 |
|
| Total deferred assets | 1,764 |
| | 1,839 |
|
| Deferred liabilities | | | |
| DAC | (1,211 | ) | | (1,157 | ) |
| Unrealized net capital gains | (529 | ) | | (303 | ) |
| Life and annuity reserves | (324 | ) | | (260 | ) |
| Other liabilities | (187 | ) | | (209 | ) |
| Total deferred liabilities | (2,251 | ) | | (1,929 | ) |
| Net deferred liability | $ | (487 | ) | | $ | (90 | ) |
Although realization is not assured, management believes it is more likely than not that the deferred tax assets will be realized based on the Company’s assessment that the deductions ultimately recognized for tax purposes will be fully utilized.
As of December 31, 2016,2019, the Company has U.S. federal and foreign net operating loss carryforwards of $42$93 million which will expire at the end of 2025 through 2029.and $29 million, respectively.
The Allstate Corporation 197
2019 Form 10-KNotes to Consolidated Financial Statements
The componentsprovisions of incomethe Tax Cuts and Jobs Act of 2017 eliminated the 20-year carryforward period and made it indefinite for federal net operating losses generated in tax expense for the years endedafter December 31, are as follows:2017. For such amounts generated prior to 2018, the 20-year carryforward period continues to apply.
|
| | | | | | | | | | | | |
| Components of the net operating loss carryforwards as of December 31, 2019 |
| ($ in millions) | | 20-Year Carryforward Expires in 2025-2037 | | Indefinite Carryforward Period | | Total |
| US Federal | | $ | 72 |
| | $ | 21 |
| | $ | 93 |
|
| Foreign | | — |
| | 29 |
| | 29 |
|
| Total | | $ | 72 |
| | $ | 50 |
| | $ | 122 |
|
| | | Components of income tax expense | | Components of income tax expense |
| | | | | | | | | For the years ended December 31, |
| ($ in millions) | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
| Current | $ | 654 |
| | $ | 1,033 |
| | $ | 1,123 |
| | $ | 991 |
| | $ | 704 |
| | $ | 1,018 |
|
| Deferred | 223 |
| | 78 |
| | 263 |
| | 251 |
| | (236 | ) | | (23 | ) |
| Total income tax expense | $ | 877 |
| | $ | 1,111 |
| | $ | 1,386 |
| | $ | 1,242 |
| | $ | 468 |
| | $ | 995 |
|
The Company paid income taxes of $359$648 million, $1.07 billion$731 million and $1.07 billion$968 million in 2016, 20152019, 2018 and 2014,2017, respectively.
The Company had a current income tax payable of $135$124 million and a current tax receivable of $124 million as of December 31, 20162019 and current income tax receivable of $59 million as of December 31, 2015.2018, respectively.
A reconciliation of the statutory federal income tax rate |
| | | | | | | | | | | | | | | | | | |
| Reconciliation of the statutory federal income tax rate to the effective income tax rate |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Income before income taxes | | $ | 6,089 |
| | | $ | 2,628 |
| | | $ | 4,549 |
| |
| | | | | | | | | | |
| Statutory federal income tax rate on income from operations | | 1,279 |
| 21.0 | % | | 552 |
| 21.0 | % | | 1,592 |
| 35.0 | % |
| Tax credits | | (33 | ) | (0.5 | ) | | (34 | ) | (1.3 | ) | | (59 | ) | (1.3 | ) |
| Share-based payments | | (24 | ) | (0.4 | ) | | (16 | ) | (0.6 | ) | | (63 | ) | (1.4 | ) |
| Tax-exempt income | | (27 | ) | (0.4 | ) | | (24 | ) | (0.9 | ) | | (32 | ) | (0.7 | ) |
| State income taxes | | 41 |
| 0.7 |
| | 27 |
| 1.0 |
| | 21 |
| 0.5 |
|
| Tax Legislation benefit | | — |
| — |
| | (29 | ) | (1.1 | ) | | (509 | ) | (11.2 | ) |
| Non-deductible goodwill impairment | | — |
| — |
| | — |
| — |
| | 44 |
| 1.0 |
|
| Other | | 6 |
| — |
| | (8 | ) | (0.3 | ) | | 1 |
| — |
|
| Effective income tax rate on income from operations | | $ | 1,242 |
| 20.4 | % |
| $ | 468 |
| 17.8 | % |
| $ | 995 |
| 21.9 | % |
Notes to the effective income tax rate on income from operations for the years ended December 31 is as follows:Consolidated Financial Statements 2019 Form 10-K
|
| | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| Statutory federal income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
| Tax-exempt income | (1.2 | ) | | (1.0 | ) | | (0.9 | ) |
| Tax credits | (1.2 | ) | | (0.9 | ) | | (0.7 | ) |
| Sale of subsidiary | — |
| | — |
| | (0.9 | ) |
Other (1) | (0.7 | ) | | 0.8 |
| | 0.2 |
|
| Effective income tax rate | 31.9 | % |
| 33.9 | % |
| 32.7 | % |
|
| |
(1)
Note 16 | Includes $45 million of income tax expense related to the change in accounting guidance for investments in qualified affordable housing projects adopted in 2015.Statutory Financial Information and Dividend Limitations
|
16. Statutory Financial Information and Dividend Limitations
Allstate’s domestic property-liabilityproperty and casualty and life insurance subsidiaries prepare their statutory-basis financial statements in conformity with accounting practices prescribed or permitted by the insurance department of the applicable state of domicile. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (“NAIC”), as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed.
All states require domiciled insurance companies to prepare statutory-basis financial statements in conformity with the NAIC Accounting Practices and Procedures Manual, subject to any deviations prescribed or permitted by the applicable insurance commissioner and/or director. Statutory accounting practices differ from GAAP primarily since they require charging policy acquisition and certain sales inducement costs to expense as incurred, establishing life insurance reserves based on different actuarial assumptions, and valuing certain investments and establishing deferred taxes on a different basis.
Statutory net income (loss) and capital and surplus of Allstate’s domestic insurance subsidiaries, determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities are as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| Statutory net income (loss) and capital and surplus of Allstate’s domestic insurance subsidiaries |
| | | Net income (loss) | | Capital and surplus |
($ in millions)
| | 2019 | | 2018 | | 2017 | | 2019 | | 2018 |
| Amounts by major business type: | | | | | | | | | | |
| Property and casualty insurance | | $ | 3,989 |
| | $ | 2,939 |
| | $ | 3,050 |
| | $ | 16,192 |
| | $ | 14,328 |
|
| Life insurance, annuities and voluntary accident and health insurance | | 422 |
| | 465 |
| | 327 |
| | 4,208 |
| | 3,819 |
|
| Amount per statutory accounting practices | | $ | 4,411 |
|
| $ | 3,404 |
|
| $ | 3,377 |
|
| $ | 20,400 |
|
| $ | 18,147 |
|
|
| | | | | | | | | | | | | | | | | | | |
| ($ in millions) | Net income (loss) | | Capital and surplus |
| | 2016 | | 2015 | | 2014 | | 2016 | | 2015 |
| Amounts by major business type: | | | | | | | | | |
Property-Liability (1) | $ | 1,520 |
| | $ | 1,826 |
| | $ | 2,501 |
| | $ | 13,436 |
| | $ | 13,332 |
|
| Allstate Financial | 197 |
| | (56 | ) | | 1,130 |
| | 3,383 |
| | 3,154 |
|
| Amount per statutory accounting practices | $ | 1,717 |
|
| $ | 1,770 |
|
| $ | 3,631 |
|
| $ | 16,819 |
|
| $ | 16,486 |
|
| |
(1)
| The Property-Liability statutory capital and surplus balances exclude wholly-owned subsidiaries included in the Allstate Financial segment. |
Dividend Limitations
There are no regulatory restrictions that limit the payment of dividends by the Corporation, except those generally applicable to corporations incorporated in Delaware. Dividends are payable only out of certain components of shareholders’ equity as permitted by Delaware law. However, the ability of the Corporation to pay dividends is dependent on business conditions, income, cash requirements of the Company, receipt of dividends from AIC and other relevant factors.
The payment of shareholder dividends by AIC without the prior approval of the Illinois Department of Insurance (“IL DOI”) is limited to formula amounts based on net income and capital and surplus, determined in conformity with statutory accounting practices, as well as the timing and amount of dividends paid in the preceding twelve months. AIC paid dividends of $1.90$2.73 billion in 2016.2019. The maximum amount of dividends AIC will be able to pay without prior IL DOI approval at a given point in time during 20172020 is $1.56$3.73 billion, less dividends paid during the preceding twelve months measured at that point in time. The payment of a dividend in excess of this amount requires 30 days advance written notice to the IL DOI. The dividend is deemed approved, unless the IL DOI disapproves it within the 30 day notice period. Additionally, any dividend must be paid out of unassigned surplus excluding unrealized appreciation from investments, which for AIC totaled $10.26$12.09 billion as of December 31, 2016,2019, and cannot result in capital and surplus being less than the minimum amount required by law.
Under state insurance laws, insurance companies are required to maintain paid up capital of not less than the minimum capital requirement applicable to the types of insurance they are authorized to write. Insurance companies are also subject to risk-based capital (“RBC”) requirements adopted by state
insurance regulators. A company’s “authorized control level RBC” is calculated using various factors applied to certain financial balances and activity. Companies that do not maintain adjusted statutory capital and surplus at a level in excess of the company action level RBC, which is two2 times authorized control level RBC, are required to take specified actions. Company action level RBC is significantly in excess of the minimum capital requirements. Total adjusted statutory capital and surplus and authorized control level RBC of AIC were $15.88$19.57 billion and $2.56$3.04 billion, respectively, as of December 31, 2016. Substantially all2019. Most of the Corporation’s insurance subsidiaries are subsidiaries of and/or reinsure all of their business to AIC, including ALIC. AIC’s subsidiaries are included as a component of AIC’s total statutory capital and surplus.
The amount of restricted net assets, as represented by the Corporation’s investment in its insurance subsidiaries, was $23$28.93 billion as of December 31, 2016.2019.
Intercompany transactions
Notification and approval of intercompany lending activities is also required by the IL DOI for transactions that exceed a level that is based on a formula using statutory admitted assets and statutory surplus.
The Allstate Corporation 199
17. Benefit Plans2019 Form 10-KNotes to Consolidated Financial Statements
Pension and other postretirement plans
Defined benefit pension plans cover most full-time employees, certain part-time employees and employee-agents. Benefits under the pension plans are based upon the employee’s length of service, eligible annual compensation and, prior to January 1, 2014, either a cash balance or final average pay formula. A cash balance formula applies to all eligible employees hired after August 1, 2002. Eligible employees hired before August 1, 2002 chose between the cash balance formula and the final average pay formula. In July 2013, the Company amended its primary plans effective January 1, 2014 to introduce a new cash balance formula to replace the previous formulas (including the final average pay formula and the previous cash balance formula) under which eligible employees accrue benefits. The Company merged two of its qualified pension plans effective March 31, 2019.
The Company also provides a medical coverage subsidy for eligible employees hired before January 1, 2003, including their eligible dependents, when they retire and certain life insurance benefits for eligible retirees (“postretirement benefits”). In July 2013, the Company amended the plan to eliminate the life insurance benefits effective January 1, 2014 for current eligible employees and effective January 1, 2016 for eligible retirees who retired after 1989. In 2016, theThe Company continues to pay life insurance premiums for certain retiree plaintiffs subject to a court order requiring it to do so until such time as their lawsuit seeking to keep their life insurance benefits intact is resolved. Qualified employees may become eligible for a medical subsidy if they retire in accordance with the terms of the applicable plans and are continuously insured under the Company’s group plans or other approved plans in accordance with the plan’s participation requirements. The Company shares the cost of retiree medical
benefits with non Medicare-eligible retirees based on years of service, with the Company’s share being subject to a 5% limit on future annual medical cost inflation after retirement. For Medicare-eligible retirees, the Company provides a fixed Company contribution based on years of service and other factors, which is not subject to adjustments for inflation.
The Company has reserved the right to modify or terminate its benefit plans at any time and for any reason.
Obligations and funded status
The Company calculates benefit obligations based upon generally accepted actuarial methodologies using the projected benefit obligation (“PBO”) for pension plans and the accumulated postretirement benefit obligation (“APBO”) for other postretirement plans. The determination of pensionPension costs and other postretirement obligations are determined using a December 31 measurement date. The benefit obligations represent the actuarial present value of all benefits attributed to employee service rendered as of the measurement date. The PBO is measured using the pension benefit formulas and assumptions as to future compensation levels.assumptions. A plan’s funded status is calculated as the difference between the benefit obligation and the fair value of plan assets. The Company’s funding policy for the pension plans is to make contributions at a level in accordance with regulations under the Internal Revenue Code (“IRC”) and generally accepted actuarial principles. The Company’s other postretirement benefit plans are not funded.
The components of the pension and other postretirement plans’ funded status that are reflected in the Consolidated Statements of Financial Position as of December 31 are as follows:
Notes to Consolidated Financial Statements 2019 Form 10-K
|
| | | | | | | | | | | | | | | |
| ($ in millions) | Pension benefits | | Postretirement benefits |
| | 2016 | | 2015 | | 2016 | | 2015 |
| Fair value of plan assets | $ | 5,650 |
| | $ | 5,353 |
| | $ | — |
| | $ | — |
|
| Less: Benefit obligation | 6,591 |
| | 6,130 |
| | 373 |
| | 405 |
|
| Funded status | $ | (941 | ) |
| $ | (777 | ) |
| $ | (373 | ) |
| $ | (405 | ) |
| | | | | | | | |
| Items not yet recognized as a component of net periodic cost: | | | | | | | |
| Net actuarial loss (gain) | $ | 2,807 |
| | $ | 2,710 |
| | $ | (251 | ) | | $ | (263 | ) |
| Prior service credit | (310 | ) | | (365 | ) | | (62 | ) | | (61 | ) |
| Unrecognized pension and other postretirement benefit cost, pre-tax | 2,497 |
|
| 2,345 |
|
| (313 | ) |
| (324 | ) |
| Deferred income tax | (874 | ) | | (821 | ) | | 109 |
| | 115 |
|
| Unrecognized pension and other postretirement benefit cost | $ | 1,623 |
|
| $ | 1,524 |
|
| $ | (204 | ) |
| $ | (209 | ) |
|
| | | | | | | | | | | | | | | | |
| Change in projected benefit obligation, plan assets and funded status |
| | | As of December 31, |
| | | Pension benefits | | Postretirement benefits |
| ($ in millions) | | 2019 | | 2018 | | 2019 | | 2018 |
| Change in projected benefit obligation | | | | | | | | |
| Benefit obligation, beginning of year | | $ | 6,224 |
| | $ | 6,815 |
| | $ | 375 |
| | $ | 386 |
|
| Service cost | | 117 |
| | 110 |
| | 8 |
| | 7 |
|
| Interest cost | | 240 |
| | 255 |
| | 14 |
| | 15 |
|
| Participant contributions | | — |
| | — |
| | 15 |
| | 13 |
|
| Actuarial losses (gains) | | 927 |
| | (255 | ) | | 19 |
| | (4 | ) |
| Benefits paid | | (356 | ) | | (646 | ) | | (39 | ) | | (35 | ) |
| Translation adjustment and other | | (13 | ) | | (55 | ) | | 5 |
| | (7 | ) |
| Benefit obligation, end of year | | $ | 7,139 |
| | $ | 6,224 |
| | $ | 397 |
| | $ | 375 |
|
| | | | | | | | | |
| Change in plan assets | | | | | | | | |
| Fair value of plan assets, beginning of year | | $ | 5,299 |
| | $ | 6,284 |
| | | | |
| Actual return on plan assets | | 1,235 |
| | (300 | ) | | | | |
| Employer contribution | | 27 |
| | 16 |
| | | | |
| Benefits paid | | (356 | ) | | (646 | ) | | | | |
| Translation adjustment and other | | (13 | ) | | (55 | ) | | | | |
| Fair value of plan assets, end of year | | $ | 6,192 |
| | $ | 5,299 |
| |
| |
|
| | | | | | | | | |
Funded status (1) | | $ | (947 | ) | | $ | (925 | ) | | $ | (397 | ) | | $ | (375 | ) |
| | | | | | | | | |
| Amounts recognized in AOCI | | | | | | | | |
| Unamortized pension and other postretirement prior service credit | | $ | (142 | ) | | $ | (198 | ) | | $ | (13 | ) | | $ | (16 | ) |
| |
(1) | The funded status is recorded within other liabilities and accrued expenses on the Consolidated Statements of Financial Position. |
|
| | | | | | | | |
| Changes in items not yet recognized as a component of net cost for pension and other postretirement plans |
| ($ in millions) | | Pension benefits | | Postretirement benefits |
| Items not yet recognized as a component of net cost – December 31, 2018 | | $ | (198 | ) | | $ | (16 | ) |
| Prior service credit amortized to net cost | | 56 |
| | 3 |
|
| Items not yet recognized as a component of net cost – December 31, 2019 | | $ | (142 | ) | | $ | (13 | ) |
The $97 million increase in the pension net actuarial loss during 2016 is primarily related to a decrease in the discount rate. The majority of the $2.81 billion net actuarial pension benefit losses not yet recognized in 2016 reflects decreases in the discount rate and the effect of unfavorable equity market conditions on the value of the pension plan assets in prior years. The $12 million decrease in the OPEB net actuarial gain during 2016 primarily related to favorable claims and participant experience.
The primary qualified employee plan represents 81% of the pension benefits’ underfunded status as of December 31, 2016.
The change in 2016 in items not yet recognized as a component of net periodic cost, which is recorded in unrecognized pension and other postretirement benefit cost, is shown in the table below.
|
| | | | | | | |
| ($ in millions) | Pension benefits | | Postretirement benefits |
| Items not yet recognized as a component of net periodic cost – December 31, 2015 | $ | 2,345 |
| | $ | (324 | ) |
| Net actuarial loss (gain) arising during the period | 294 |
| | (14 | ) |
| Net actuarial (loss) gain amortized to net periodic benefit cost | (201 | ) | | 24 |
|
| Prior service credit arising during the period | — |
| | (22 | ) |
| Prior service credit amortized to net periodic benefit cost | 56 |
| | 21 |
|
| Translation adjustment and other | 3 |
| | 2 |
|
| Items not yet recognized as a component of net periodic cost – December 31, 2016 | $ | 2,497 |
| | $ | (313 | ) |
The net actuarial loss (gain)service credit is recognized as a component of net periodic cost for pension and other postretirement plans amortized over the average remaining service period of active employees expected to receive benefits. Estimates of the net actuarial loss (gain) andThe prior service credit expectedthat will be amortized to net cost for pension and postretirement plans in 2020 is estimated to be recognized as a component of net periodic benefit cost during 2017 are shown in the table below.
|
| | | | | | | |
| ($ in millions) | Pension benefits | | Postretirement benefits |
| Net actuarial loss (gain) | $ | 189 |
| | $ | (24 | ) |
| Prior service credit | (56 | ) | | (24 | ) |
The accumulated benefit obligation (“ABO”) for all defined benefit pension plans was $6.52$7.02 billion and $6.05$6.15 billion as of December 31, 20162019 and 2015,2018, respectively. The ABO is the actuarial present value of all benefits attributed by the pension benefit formula
to employee service rendered at the measurement date. However, it differs from the PBO due to the exclusion of an assumption as to future compensation levels.
The PBO, ABO and fair value of plan assets for the Company’s pension plans with an ABO in excess of plan assets were $6.24$6.73 billion, $6.18$6.62 billion and $5.30$5.79 billion, respectively, as of December 31, 20162019 and $5.81$5.99 billion, $5.74$5.93 billion and $5.02$5.07 billion, respectively, as of December 31, 2015.2018. Included in the accrued benefit cost of the pension benefits are certain unfunded non-qualified plans with accrued benefit costs of $141$137 million and $143$135 million for 20162019 and 2015,2018, respectively.
The Allstate Corporation 201
2019 Form 10-KNotes to Consolidated Financial Statements
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Components of net cost (benefit) for pension and other postretirement plans |
| | | For the years ended December 31, |
| | | Pension benefits | | Postretirement benefits | | Total Pension and Postretirement Benefits |
| ($ in millions) | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Service cost | | $ | 117 |
| | $ | 110 |
| | $ | 111 |
| | $ | 8 |
| | $ | 7 |
| | $ | 8 |
| | $ | 125 |
| | $ | 117 |
| | $ | 119 |
|
| Interest cost | | 240 |
| | 255 |
| | 254 |
| | 14 |
| | 15 |
| | 15 |
| | 254 |
| | 270 |
| | 269 |
|
| Expected return on plan assets | | (403 | ) | | (427 | ) | | (419 | ) | | — |
| | — |
| | — |
| | (403 | ) | | (427 | ) | | (419 | ) |
| Amortization of prior service credit | | (56 | ) | | (56 | ) | | (56 | ) | | (3 | ) | | (21 | ) | | (25 | ) | | (59 | ) | | (77 | ) | | (81 | ) |
| Costs and expenses | | (102 | ) | | (118 | ) | | (110 | ) | | 19 |
| | 1 |
| | (2 | ) | | (83 | ) | | (117 | ) | | (112 | ) |
| Remeasurement of projected benefit obligation | | 927 |
| | (255 | ) | | 406 |
| | 19 |
| | (4 | ) | | 8 |
| | 946 |
| | (259 | ) | | 414 |
|
| Remeasurement of plan assets | | (832 | ) | | 727 |
| | (631 | ) | | — |
| | — |
| | — |
| | (832 | ) | | 727 |
| | (631 | ) |
| Remeasurement gains and losses | | 95 |
| | 472 |
| | (225 | ) | | 19 |
| | (4 | ) | | 8 |
| | 114 |
| | 468 |
| | (217 | ) |
| Total net (benefit) cost | | $ | (7 | ) | | $ | 354 |
| | $ | (335 | ) | | $ | 38 |
| | $ | (3 | ) | | $ | 6 |
| | $ | 31 |
| | $ | 351 |
| | $ | (329 | ) |
The service cost component is the actuarial present value of the benefits attributed by the plans’ benefit formula to services rendered by the employees during the period.
Interest cost is the increase in the PBO in the period due to the passage of time at the discount rate. Interest cost fluctuates as the discount rate changes and is also impacted by the related change in the size of the PBO.
The expected return on plan assets is determined as the product of the expected long-term rate of return on plan assets and the fair value of plan assets.
Pension and other postretirement service cost, interest cost, expected return on plan assets and
amortization of prior service credit are reported in property and casualty insurance claims and claims expense, operating costs and expenses, net investment income and (if applicable) restructuring and related charges on the Consolidated Statements of Operations.
Remeasurement gains and losses relate to changes in benefit obligations for all plans fordiscount rates, the years ended December 31 are as follows:differences between actual return on plan assets and the expected long-term rate of return on plan assets, and differences between actual plan experience and actuarial assumptions.
|
| | | | | | | | | | | | | | | | | | |
| Weighted average assumptions used to determine net pension cost and net postretirement benefit cost |
| | | For the years ended December 31, |
| | | Pension benefits | | Postretirement benefits |
| ($ in millions) | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Discount rate | | 3.70 | % | | 4.06 | % | | 3.96 | % | | 3.61 | % | | 3.95 | % | | 3.91 | % |
| Expected long-term rate of return on plan assets | | 7.34 |
| | 7.33 |
| | 7.32 |
| | n/a |
| | n/a |
| | n/a |
|
|
| | | | | | | | | | | | | | | |
| ($ in millions) | Pension benefits | | Postretirement benefits |
| | 2016 | | 2015 | | 2016 | | 2015 |
| Benefit obligation, beginning of year | $ | 6,130 |
| | $ | 6,493 |
| | $ | 405 |
| | $ | 575 |
|
| Service cost | 113 |
| | 114 |
| | 9 |
| | 12 |
|
| Interest cost | 286 |
| | 258 |
| | 17 |
| | 23 |
|
| Participant contributions | 1 |
| | — |
| | 16 |
| | 19 |
|
| Actuarial loss (gain) | 387 |
| | (225 | ) | | (14 | ) | | (158 | ) |
Benefits paid (1) | (301 | ) | | (443 | ) | | (41 | ) | | (54 | ) |
| Plan amendments | — |
| | — |
| | (22 | ) | | — |
|
| Translation adjustment and other | (25 | ) | | (67 | ) | | 3 |
| | (12 | ) |
| Benefit obligation, end of year | $ | 6,591 |
|
| $ | 6,130 |
|
| $ | 373 |
|
| $ | 405 |
|
| |
(1)
| Benefits paid include lump sum distributions, a portion of which may trigger settlement accounting treatment. |
Components of net periodic cost
The components of net periodic cost for all plans for the years ended December 31 are as follows:
|
| | | | | | | | | | | | |
| Weighted average assumptions used to determine benefit obligations |
| | | For the years ended December 31, |
| | | Pension benefits | | Postretirement benefits |
| | | 2019 | | 2018 | | 2019 | | 2018 |
| Discount rate | | 3.31 | % | | 4.31 | % | | 3.27 | % | | 4.22 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension benefits | | Postretirement benefits |
| ($ in millions) | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
| Service cost | $ | 113 |
| | $ | 114 |
| | $ | 96 |
| | $ | 9 |
| | $ | 12 |
| | $ | 10 |
|
| Interest cost | 286 |
| | 258 |
| | 262 |
| | 17 |
| | 23 |
| | 23 |
|
| Expected return on plan assets | (398 | ) | | (424 | ) | | (398 | ) | | — |
| | — |
| | — |
|
| Amortization of: | | | | | | | | | | | |
| Prior service credit | (56 | ) | | (56 | ) | | (58 | ) | | (21 | ) | | (22 | ) | | (23 | ) |
| Net actuarial loss (gain) | 174 |
| | 190 |
| | 127 |
| | (24 | ) | | (9 | ) | | (22 | ) |
| Settlement loss | 27 |
| | 31 |
| | 54 |
| | — |
| | — |
| | — |
|
| Net periodic cost (credit) | $ | 146 |
|
| $ | 113 |
|
| $ | 83 |
|
| $ | (19 | ) |
| $ | 4 |
|
| $ | (12 | ) |
Assumptions
Weighted average assumptions used to determine net pension cost and net postretirement benefit cost for the years ended December 31 are:
|
| | | | | | | | | | | | | | | | | |
| | Pension benefits | | Postretirement benefits |
| ($ in millions) | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
| Discount rate | 4.83 | % | | 4.10 | % | | 5.00 | % | | 4.59 | % | | 3.97 | % | | 5.11 | % |
| Rate of increase in compensation levels | 3.20 |
| | 3.50 |
| | 3.50 |
| | n/a |
| | n/a |
| | n/a |
|
| Expected long-term rate of return on plan assets | 7.30 |
| | 7.33 |
| | 7.36 |
| | n/a |
| | n/a |
| | n/a |
|
Weighted average assumptions used to determine benefit obligations as of December 31 are listed in the following table.
|
| | | | | | | | | | | |
| | Pension benefits | | Postretirement benefits |
| | 2016 | | 2015 | | 2016 | | 2015 |
| Discount rate | 4.15 | % | | 4.83 | % | | 4.07 | % | | 4.56 | % |
| Rate of increase in compensation levels | 3.20 |
| | 3.20 |
| | n/a |
| | n/a |
|
The weighted average health care cost trend rate used in measuring the accumulated postretirement benefit cost is 6.3%7.0% for 2017,2020, gradually declining to 4.5% in 20382035 and remaining at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement health care plans. A one percentage-point increase in assumed health care cost trend rates would increase the total of the service and interest cost components of net periodic benefit cost of other postretirement benefits and the APBO by $2 million and $24 million, respectively. A one percentage-point decrease in assumed health care cost trend rates would decrease the total of the service and interest cost components of net periodic benefit cost of other postretirement benefits and the APBO by $2 million and $21 million, respectively.
Pension plan assets
The change in pension plan assets for the years ended December 31 is as follows:
|
| | | | | | | |
| ($ in millions) | 2016 | | 2015 |
| Fair value of plan assets, beginning of year | $ | 5,353 |
| | $ | 5,783 |
|
| Actual return on plan assets | 491 |
| | (43 | ) |
| Employer contribution | 131 |
| | 125 |
|
| Benefits paid | (301 | ) | | (443 | ) |
| Translation adjustment and other | (24 | ) | | (69 | ) |
| Fair value of plan assets, end of year | $ | 5,650 |
| | $ | 5,353 |
|
In general, the Company’s pension plan assets are managed in accordance with investment policies approved by pension investment committees. The purpose of the policies is to ensure the plans’ long-term ability to meet benefit obligations by prudently investing plan assets and Company contributions, while taking into consideration regulatory and legal requirements and current market conditions. The investment policies are reviewed periodically and specify target plan asset allocation by asset category. In addition, the policies specify various
asset allocation and other risk limits. The target asset allocation takes the plans’ funding status into consideration, among other factors, including anticipated demographic changes or liquidity requirements that may affect the funding status such as the potential impact of lump sum settlements as well as existing or expected market conditions. In general, the allocation has a lower overall investment risk when a plan is in a stronger funded status position since there is less economic incentive to take risk to increase the expected returns on the plan assets. As a result, the primary employee plan has a greater allocation to equity securities than the employee-agent plan. The primary qualified employee plan comprises 80% of total plan assets and 86% of equity securities. The pension plans’ asset exposure within each asset category is tracked against widely accepted established benchmarks for each asset class with limits on variation from the benchmark established in the
Notes to Consolidated Financial Statements 2019 Form 10-K
investment policy. Pension plan assets are regularly monitored for compliance with these limits and other risk limits specified in the investment policies.
The pension plans’ weighted average target asset allocation and the actual percentage of plan assets, by asset category as of December 31, 2016 are as follows:
| | | Weighted average target asset allocation and actual percentage of plan assets by asset category | | Weighted average target asset allocation and actual percentage of plan assets by asset category |
| | Target asset allocation (1) | | Actual percentage of plan assets | | As of December 31, 2019 |
| Asset category | 2016 | | 2016 | | 2015 | |
| | | | Target asset allocation (1) | | Actual percentage of plan assets |
| Pension plan’s asset category | | | 2019 | | 2019 | | 2018 |
Equity securities (2) | 50 - 68% | | 62 | % | | 60 | % | | 37 - 55% | | 50 | % | | 47 | % |
| Fixed income securities | 27 - 37% | | 29 |
| | 30 |
| | 37 - 48% | | 38 |
| | 41 |
|
| Limited partnership interests | 0 - 14% | | 7 |
| | 7 |
| | 1 - 15% | | 10 |
| | 9 |
|
| Short-term investments and other | — | | 2 |
| | 3 |
| | — | | 2 |
| | 3 |
|
Total without securities lending (3) | | 100 | % | | 100 | % | | | | 100 | % | | 100 | % |
| |
(1) | The target asset allocation considers risk basedrisk-based exposure while the actual percentage of plan assets utilizes a financial reporting view excluding exposure provided through derivatives. |
| |
(2) | The actual percentage of plan assets for equity securities includeincludes 1% of private equity investments in both 2019 and 2018 that are subject to the limited partnership interests target allocation of 1% and 2% in 2016NaN and 2015, respectively,4% of fixed income mutual funds in 2019 and 2018, respectively, that are subject to the fixed income securities target allocation of 3% for both 2016 and 2015 as well as 1% of equity exposure created through a derivative which is not included in the actual allocations in 2016.allocation. |
| |
(3) | Securities lending collateral reinvestment of $143$258 million and $152$208 million is excluded from the table above in 20162019 and 2015,2018, respectively. |
The target asset allocation for an asset category may be achieved either through direct investment holdings, through replication using derivative instruments (e.g., futures or swaps) or net of hedges using derivative instruments to reduce exposure to an asset category. The net notional amount of derivatives used for replication and hedgesnon-hedging strategies is limited to 105% or 115% of total plan assets depending on the plan.assets. Market performance of the different asset categories may, from time to time, cause deviation from the target
asset allocation. The asset allocation mix is reviewed on a periodic basis and rebalanced to bring the allocation within the target ranges.
Outside the target asset allocation, the pension plans participate in a securities lending program to enhance returns. As of December 31, 2016,2019, U.S. government fixed income securities and U.S. equity securities are lent out and cash collateral is invested in short-term investments.
The following table presents the fair values of pension plan assets as of December 31, 2016.Allstate Corporation 203
2019 Form 10-KNotes to Consolidated Financial Statements
| | | Fair values of pension plan assets as of December 31, 2019 | | Fair values of pension plan assets as of December 31, 2019 |
| ($ in millions) | | | | | | | | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | | Balance as of December 31, 2019 |
| | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | | Balance as of December 31, 2016 | |
| Equity securities | $ | 155 |
| | $ | 3,230 |
| | $ | 79 |
| | $ | 3,464 |
| | $ | 216 |
| | $ | 45 |
| | $ | — |
| | $ | 261 |
|
| Fixed income securities: | | | | | | |
| | | | | | | | |
| U.S. government and agencies | 30 |
| | 285 |
| | — |
| | 315 |
| | 237 |
| | 1,096 |
| | — |
| | 1,333 |
|
| Corporate | — |
| | 1,309 |
| | 10 |
| | 1,319 |
| | — |
| | 1,060 |
| | — |
| | 1,060 |
|
| Short-term investments | 144 |
| | 121 |
| | — |
| | 265 |
| | 128 |
| | 252 |
| | — |
| | 380 |
|
| Limited partnership interests: | | | | | | |
| |
Real estate funds (1) | — |
| | — |
| | 100 |
| | 100 |
| |
Private equity funds (2) | — |
| | — |
| | 261 |
| | 261 |
| |
| Hedge funds | — |
| | — |
| | 2 |
| | 2 |
| |
| Cash and cash equivalents | 32 |
| | — |
| | — |
| | 32 |
| |
| Free-standing derivatives: | | | | | | |
| | | | | | | | |
| Assets | (1 | ) | | 1 |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| | 5 |
|
| Liabilities | | | (2 | ) | | (17 | ) | | — |
| | (19 | ) |
| Total plan assets at fair value | $ | 360 |
|
| $ | 4,946 |
|
| $ | 452 |
|
| 5,758 |
| | $ | 579 |
| | $ | 2,441 |
| | $ | — |
| | 3,020 |
|
| % of total plan assets at fair value | 6.3 | % |
| 85.9 | % |
| 7.8 | % | | 100.0 | % | | 19.2 | % | | 80.8 | % | | — | % | | 100.0 | % |
| | | | | | | | | | | | | | | | |
Securities lending obligation (3) | | | | | | | (158 | ) | |
Other net plan assets (4) | | | | | | | 50 |
| |
| Investments measured using the net asset value practical expedient | | | | | | | | | 3,418 |
|
Securities lending obligation (1) | | | | | | | | | (272 | ) |
| Derivatives counterparty and cash collateral netting | | | | | | | | | 9 |
|
Other net plan assets (2) | | | | | | | | | 17 |
|
| Total reported plan assets | | | | | | | $ | 5,650 |
| | | | | | | | $ | 6,192 |
|
| |
(1) | Real estate funds held by the pension plans are primarily invested in U.S. commercial real estate. |
| |
(2)
| Private equity investments held by the pension plans are primarily comprised of buyout and growth funds in North America and other developed markets. |
| |
(3)
| The securities lending obligation represents the plan’s obligation to return securities lending collateral received under a securities lending program. The terms of the program allow both the plan and the counterparty the right and ability to redeem/return the securities loaned on short notice. Due to its relatively short-term nature, the outstanding balance of the obligation approximates fair value. |
| |
(4)(2)
| Other net plan assets represent cash and cash equivalents, interest and dividends receivable and net receivables related to settlements of investment transactions, such as purchases and sales. |
The following table presents the fair values of pension plan assets as of December 31, 2015. |
| | | | | | | | | | | | | | | | |
| Fair values of pension plan assets as of December 31, 2018 |
| ($ in millions) | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | | Balance as of December 31, 2018 |
| Equity securities | | $ | 51 |
| | $ | 265 |
| | $ | — |
| | $ | 316 |
|
| Fixed income securities: | | | | | | | | |
| U.S. government and agencies | | 172 |
| | 509 |
| | — |
| | 681 |
|
| Corporate | | — |
| | 1,479 |
| | 5 |
| | 1,484 |
|
| Short-term investments | | 122 |
| | 198 |
| | — |
| | 320 |
|
| Free-standing derivatives: | | | | | | | | |
| Assets | | — |
| | 19 |
| | — |
| | 19 |
|
| Liabilities | | — |
| | (11 | ) | | — |
| | (11 | ) |
| Total plan assets at fair value | | $ | 345 |
| | $ | 2,459 |
| | $ | 5 |
| | 2,809 |
|
| % of total plan assets at fair value | | 12.3 | % | | 87.5 | % | | 0.2 | % | | 100.0 | % |
| | | | | | | | | |
| Investments measured using the net asset value practical expedient | | | | | | | | 2,687 |
|
| Securities lending obligation | | | | | | | | (222 | ) |
| Derivatives counterparty and cash collateral netting | | | | | | | | (6 | ) |
| Other net plan assets | | | | | | | | 31 |
|
| Total reported plan assets | | | | | | | | $ | 5,299 |
|
|
| | | | | | | | | | | | | | | |
| ($ in millions) | | | | | | | |
| | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | | Balance as of December 31, 2015 |
| Equity securities | $ | 136 |
| | $ | 2,945 |
| | $ | 100 |
| | $ | 3,181 |
|
| Fixed income securities: | | | | | | |
|
| U.S. government and agencies | 72 |
| | 334 |
| | — |
| | 406 |
|
| Municipal | — |
| | — |
| | 7 |
| | 7 |
|
| Corporate | — |
| | 1,205 |
| | 10 |
| | 1,215 |
|
| Short-term investments | 112 |
| | 184 |
| | — |
| | 296 |
|
| Limited partnership interests: | | | | | | |
|
| Real estate funds | — |
| | — |
| | 104 |
| | 104 |
|
| Private equity funds | — |
| | — |
| | 237 |
| | 237 |
|
| Hedge funds | — |
| | — |
| | 33 |
| | 33 |
|
| Cash and cash equivalents | 22 |
| | — |
| | — |
| | 22 |
|
| Total plan assets at fair value | $ | 342 |
|
| $ | 4,668 |
|
| $ | 491 |
| | 5,501 |
|
| % of total plan assets at fair value | 6.2 | % |
| 84.9 | % |
| 8.9 | % | | 100.0 | % |
| | | | | | | | |
| Securities lending obligation | | | | | | | (167 | ) |
| Other net plan assets | | | | | | | 19 |
|
| Total reported plan assets | | | | | | | $ | 5,353 |
|
The fair values of pension plan assets are estimated using the same methodologies and inputs as those used to determine the fair values for the respective asset category of the Company. These methodologies and inputs are disclosed in Note 6.
The following table presents the rollforward of Level 3 plan assets for the year ended December 31, 2016.
Notes to Consolidated Financial Statements 2019 Form 10-K
|
| | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | | Actual return on plan assets: | | | | | | |
| | Balance as of December 31, 2015 | | Relating to assets sold during the period | | Relating to assets still held at the reporting date | | Purchases, sales and settlements, net | | Net transfers in and/or (out) of Level 3 | | Balance as of December 31, 2016 |
| Equity securities | $ | 100 |
| | $ | (2 | ) | | $ | (1 | ) | | $ | (18 | ) | | $ | — |
| | $ | 79 |
|
| Fixed income securities: | | | | | | | | | | | |
| Municipal | 7 |
| | — |
| | — |
| | (7 | ) | | — |
| | — |
|
| Corporate | 10 |
| | — |
| | — |
| | (5 | ) | | 5 |
| | 10 |
|
| Limited partnership interests: | | | | | | | | | | | |
| Real estate funds | 104 |
| | — |
| | 5 |
| | (9 | ) | | — |
| | 100 |
|
| Private equity funds | 237 |
| | — |
| | 24 |
| | — |
| | — |
| | 261 |
|
| Hedge funds | 33 |
| | — |
| | (2 | ) | | (29 | ) | | — |
| | 2 |
|
| Total Level 3 plan assets | $ | 491 |
|
| $ | (2 | ) |
| $ | 26 |
|
| $ | (68 | ) |
| $ | 5 |
|
| $ | 452 |
|
The following table presents the rollforward of Level 3 plan assets for the year ended December 31, 2015. |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Rollforward of Level 3 plan assets during December 31, 2019 |
| | | | | Actual return on plan assets: | | | | | | |
| ($ in millions) | | Balance as of December 31, 2018 | | Relating to assets sold during the period | | Relating to assets still held at the reporting date | | Purchases, sales and settlements, net | | Net transfers in and/or (out) of Level 3 | | Balance as of December 31, 2019 |
| Equity securities | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Fixed income securities: | | | | | | | | | | | | |
| Corporate | | 5 |
| | — |
| | — |
| | (5 | ) | | — |
| | — |
|
| Total Level 3 plan assets | | $ | 5 |
| | $ | — |
| | $ | — |
| | $ | (5 | ) | | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | | Actual return on plan assets: | | | | | | |
| | Balance as of December 31, 2014 | | Relating to assets sold during the period | | Relating to assets still held at the reporting date | | Purchases, sales and settlements, net | | Net transfers in and/or (out) of Level 3 | | Balance as of December 31, 2015 |
| Equity securities | $ | 75 |
| | $ | 1 |
| | $ | (5 | ) | | $ | 29 |
| | $ | — |
| | $ | 100 |
|
| Fixed income securities: | | | | | | | | | | | |
| Municipal | 14 |
| | — |
| | — |
| | (7 | ) | | — |
| | 7 |
|
| Corporate | 12 |
| | — |
| | — |
| | — |
| | (2 | ) | | 10 |
|
| Limited partnership interests: | | | | | | | | | | | |
| Real estate funds | 154 |
| | — |
| | (12 | ) | | (38 | ) | | — |
| | 104 |
|
| Private equity funds | 218 |
| | — |
| | (8 | ) | | 27 |
| | — |
| | 237 |
|
| Hedge funds | 32 |
| | — |
| | 1 |
| | — |
| | — |
| | 33 |
|
| Total Level 3 plan assets | $ | 505 |
|
| $ | 1 |
|
| $ | (24 | ) |
| $ | 11 |
|
| $ | (2 | ) |
| $ | 491 |
|
The following table presents the rollforward of Level 3 plan assets for the year ended December 31, 2014. |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Rollforward of Level 3 plan assets during December 31, 2018 |
| | | | | Actual return on plan assets: | | | | | | |
| ($ in millions) | | Balance as of December 31, 2017 | | Relating to assets sold during the period | | Relating to assets still held at the reporting date | | Purchases, sales and settlements, net | | Net transfers in and/or (out) of Level 3 | | Balance as of December 31, 2018 |
| Equity securities | | $ | 29 |
| | $ | — |
| | $ | 3 |
| | $ | — |
| | $ | (32 | ) | | $ | — |
|
| Fixed income securities: | | | | | | | | | | | | |
| Corporate | | 10 |
| | — |
| | — |
| | (5 | ) | | — |
| | 5 |
|
| Total Level 3 plan assets | | $ | 39 |
| | $ | — |
| | $ | 3 |
| | $ | (5 | ) | | $ | (32 | ) | | $ | 5 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Rollforward of Level 3 plan assets during December 31, 2017 |
| | | | | Actual return on plan assets: | | | | | | |
| ($ in millions) | | Balance as of December 31, 2016 | | Relating to assets sold during the period | | Relating to assets still held at the reporting date | | Purchases, sales and settlements, net | | Net transfers in and/or (out) of Level 3 | | Balance as of December 31, 2017 |
| Equity securities | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 29 |
| | $ | — |
| | $ | 29 |
|
| Fixed income securities: | | | | | | | | | | | | |
| Corporate | | 10 |
| | — |
| | — |
| | — |
| | — |
| | 10 |
|
| Total Level 3 plan assets | | $ | 10 |
| | $ | — |
| | $ | — |
| | $ | 29 |
| | $ | — |
| | $ | 39 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | | Actual return on plan assets: | | | | | | |
| | Balance as of December 31, 2013 | | Relating to assets sold during the period | | Relating to assets still held at the reporting date | | Purchases, sales and settlements, net | | Net transfers in and/or (out) of Level 3 | | Balance as of December 31, 2014 |
| Equity securities | $ | 237 |
| | $ | 2 |
| | $ | 2 |
| | $ | (166 | ) | | $ | — |
| | $ | 75 |
|
| Fixed income securities: | | | | | | | | | | | |
| Municipal | 18 |
| | — |
| | — |
| | (4 | ) | | — |
| | 14 |
|
| Corporate | 18 |
| | — |
| | — |
| | (6 | ) | | — |
| | 12 |
|
| Limited partnership interests: | | | | | | | | | | | |
| Real estate funds | 197 |
| | (3 | ) | | 6 |
| | (46 | ) | | — |
| | 154 |
|
| Private equity funds | 211 |
| | (4 | ) | | 4 |
| | 7 |
| | — |
| | 218 |
|
| Hedge funds | 9 |
| | — |
| | — |
| | 23 |
| | — |
| | 32 |
|
| Total Level 3 plan assets | $ | 690 |
|
| $ | (5 | ) |
| $ | 12 |
|
| $ | (192 | ) |
| $ | — |
|
| $ | 505 |
|
The expected long-term rate of return on plan assets reflects the average rate of earnings expected on plan assets. The Company’s assumption for the expected long-term rate of return on plan assets is reviewed annually giving consideration to appropriate financial data including, but not limited to, the plan asset allocation, forward-looking expected returns for the period over which benefits will be paid, historical returns on plan assets and other relevant market data. Given the long-term forward lookingforward-looking nature of this assumption, the actual returns in any one year do not immediately result in a change. In giving consideration to the targeted plan asset allocation, the Company evaluated returns using the same sources it has used historically which include: historical average asset class returns from an independent nationally recognized vendor of this type of data blended together using the asset allocation policy weights for the Company’s pension plans; asset class return forecasts from a large global independent
asset management firm that specializes in providing multi-asset class investment fund products which were blended together using the asset allocation policy weights; and expected portfolio returns from a proprietary simulation methodology of a widely recognized external investment consulting firm
that performs asset allocation and actuarial services for corporate pension plan sponsors. This same methodology has been applied on a consistent basis each year. All of these were consistent with the Company’s weighted average long-term rate of return on plan assets assumption of 7.30%7.34% used for 20162019 and 7.31%an estimate of 7.08% that will be used for 2017. The assumption for the primary qualified employee plan is 7.75% and the employee-agent plan is 5.75% for both years. The employee-agent plan assumption is lower than the primary qualified employee plan assumption due to a lower investment allocation to equity securities and a higher allocation to fixed income securities.2020. As of the 20162019 measurement date, the arithmetic average of the annual actual return on plan assets for the most recent 10 and 5 years was 6.5%10.0% and 8.5%9.6%, respectively.
Cash flows
There was no required cash contribution necessary to satisfy the minimum funding requirement under the IRC for the tax qualified pension plans as ofplan for the year ended December 31, 2016. 2019.
The Company currently plans to contribute $136$25 million to its unfunded non-qualified plans and 0 and $4 million to its primary and other qualified funded pension plans, respectively, in 2017.2020.
The Company contributed $25$24 million and $35$22 million to the postretirement benefit plans in 20162019 and 2015,2018, respectively. Contributions by participants were $16$15 million and $19$13 million in 20162019 and 2015,2018, respectively.
Estimated future benefit payments
Estimated future benefit payments expected to be paid in the next 10 years, based on the assumptions used to measure the Company’s benefit obligation as of December 31, 2016, are presented in the table below.
The Allstate Corporation 205
2019 Form 10-KNotes to Consolidated Financial Statements
|
| | | | | | | |
| ($ in millions) | Pension benefits | | Postretirement benefits |
| 2017 | $ | 412 |
| | $ | 23 |
|
| 2018 | 421 |
| | 23 |
|
| 2019 | 463 |
| | 24 |
|
| 2020 | 487 |
| | 25 |
|
| 2021 | 521 |
| | 26 |
|
| 2022-2026 | 2,512 |
| | 137 |
|
| Total benefit payments | $ | 4,816 |
| | $ | 258 |
|
|
| | | | | | | | |
| Estimated future benefit payments expected to be paid in the next 10 years |
| | | As of December 31, 2019 |
| ($ in millions) | | Pension benefits | | Postretirement benefits |
| 2020 | | $ | 600 |
| | $ | 23 |
|
| 2021 | | 629 |
| | 24 |
|
| 2022 | | 636 |
| | 26 |
|
| 2023 | | 634 |
| | 27 |
|
| 2024 | | 626 |
| | 27 |
|
| 2025-2029 | | 2,401 |
| | 136 |
|
| Total benefit payments | | $ | 5,526 |
| | $ | 263 |
|
Allstate 401(k) Savings Plan
Employees of the Company, with the exception of those employed by the Company’s international, EsuranceSquareTrade, InfoArmor and Answer FinancialEsurance subsidiaries, are eligible to become members of the Allstate 401(k) Savings Plan (“Allstate Plan”). The Company’s contributions are based on the Company’s matching obligation. The Company is responsible for funding its anticipated contribution to the Allstate Plan, and may, athas used the discretion of management, use theremaining ESOP shares to pre-fund certain portions.a portion of the contribution. In connection with the Allstate Plan, the Company hashad a note from the ESOP with aESOP. On
December 31, 2019, the note matured and the remaining principal balance of $5$2 million as of December 31, 2016. The ESOP note has a fixed interest rate of 7.9% and matures in 2019.was repaid. The Company records dividends on the ESOP shares in retained income and all the shares held by the ESOP are included in basic and diluted weighted average common shares outstanding.
The Company’s contribution to the Allstate Plan was $80$93 million, $79$89 million and $75$81 million in 2016, 20152019, 2018 and 2014,2017, respectively. These amounts were reduced by the ESOP benefit computed for the years ended December 31 as follows:benefit.
|
| | | | | | | | | | | | |
| ESOP benefit |
| | | For the years December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Interest expense recognized by ESOP | | $ | — |
| | $ | — |
| | $ | — |
|
| Less: dividends accrued on ESOP shares | | (1 | ) | | (1 | ) | | (1 | ) |
| Cost of shares allocated | | 3 |
| | — |
| | 3 |
|
| Compensation expense | | 2 |
| | (1 | ) | | 2 |
|
| Reduction of defined contribution due to ESOP | | 43 |
| | 1 |
| | 38 |
|
| ESOP benefit | | $ | (41 | ) | | $ | (2 | ) | | $ | (36 | ) |
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Interest expense recognized by ESOP | $ | 1 |
| | $ | 1 |
| | $ | 1 |
|
| Less: dividends accrued on ESOP shares | (3 | ) | | (3 | ) | | (4 | ) |
| Cost of shares allocated | 7 |
| | 10 |
| | 8 |
|
| Compensation expense | 5 |
| | 8 |
| | 5 |
|
| Reduction of defined contribution due to ESOP | 60 |
| | 73 |
| | 71 |
|
| ESOP benefit | $ | (55 | ) |
| $ | (65 | ) |
| $ | (66 | ) |
The Company made $2 million, $2 million0 and $3$1 million in contributions to the ESOP in 2016, 20152019, 2018 and 2014,2017, respectively. As of December 31, 2016, total2019, there were 0.4 million, 39 million and 0 of the remaining ESOP shares that have been committed to be released, allocated and unallocated, ESOP shares were 1 million, 37 million and 1 million, respectively.
Allstate’s Canadian, SquareTrade, Esurance and Answer Financial subsidiaries sponsor defined contribution plans for their eligible employees. Expense for these plans was $10$15 million, $10$15 million and $11$12 million in 2016, 20152019, 2018 and 2014,2017, respectively. Effective January 1, 2020, Answer Financial employees will be included in the Allstate Plan.
18. Equity Incentive PlansNotes to Consolidated Financial Statements 2019 Form 10-K
|
| |
| Note 18 | Equity Incentive Plans
|
The Company currently has equity incentive plans under which the Company grants nonqualified stock options, restricted stock units and performance stock awards to certain employees and directors of the Company. The total compensation expense related to equity awards was $80$105 million, $81$125 million and $88$106 million and the total income tax benefits were $28$17 million, $28$22 million and $30$22 million for 2016, 20152019, 2018 and 2014,2017, respectively. Total cash received from the exercise of options was $187$154 million, $187$92 million and $314$178 million for 2016, 20152019, 2018 and 2014,2017, respectively. Total tax benefit realized on options exercised and the release of stock restrictions was $61$43 million, $82$28 million and $73$96 million for 2016, 20152019, 2018 and 2014,2017, respectively.
The Company records compensation expense related to awards under these plans over the shorter of the period in which the requisite service is rendered or retirement eligibility is attained. Compensation expense for performance share awards is based on the probable number of awards expected to vest using the performance level most likely to be achieved at the end of the performance period. As of December 31, 2016,2019, total unrecognized compensation cost related to all nonvested awards was $62$79 million, of which $25$29 million related to nonqualified stock options which areis expected to be recognized over the weighted average vesting period of 1.721.68 years, $25$21 million related to restricted stock units which areis expected to be recognized over the weighted average vesting period of 1.791.69 years and $12$29 million related to performance stock awards which areis expected to be recognized over the weighted average vesting period of 1.681.55 years.
Options are granted to employees with exercise prices equal to the closing share price of the Company’s common stock on the applicable grant date. Options granted to employees on or after February 18, 2014 vest ratably over a three-year period. Options granted prior to February 18, 2014 vest 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversaries of the grant date. Vesting is subject to continued service, except for employees who are retirement eligible and in certain other limited circumstances. Options may be exercised once vested and will expire no later than ten years after the date of grant.
Restricted stock units for directors vest immediately and convert into shares of stock on the earlier of the day of the third anniversary of the grant
date or the date the director’s service terminates, unless a deferred period of restriction is elected. Restricted stock units granted to directors prior to June 1, 2016 convert upon leaving the board. Restricted stock units granted to employees on or after February 18, 2014 vest on the day prior to the third anniversary of the grant date. Awards granted to employees prior to February 18, 2014 vest 50% on the day prior to the second anniversary of the grant date and 25% on each of the days prior to the third and fourth anniversaries of the grant date. Restricted stock units granted to employees subsequently convert into shares of stock on the day of the respective anniversary of the grant date. Vesting is subject to continued service, except for employees who are retirement eligible and in certain other limited circumstances.
Performance stock awards vest into shares of stock on the day prior to the third anniversary of the grant date. Vesting of the number of performance stock awards earned based on the attainment of performance goals for each of the performance periods is subject to continued service, except for employees who are retirement eligible and in certain other limited circumstances, and achievement of performance goals.circumstances. Performance stock awards subsequently convert into shares of stock in full the day of the third anniversary of the grant date.
ASince 2001, a total of 97.6110.8 million shares of common stock were authorized to be used for awards under the plans, subject to adjustment in accordance with the plans’ terms. As of December 31, 2016, 21.72019, 24.0 million shares were reserved and remained available for future issuance under these plans. The Company uses its treasury shares for these issuances.
The fair value of each option grant is estimated on the date of grant using a binomial lattice model. The Company uses historical data to estimate option exercise and employee termination within the valuation model. In addition, separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from the output of the binominalbinomial lattice model and represents the period of time that options granted are expected to be outstanding. The expected volatility of the price of the underlying shares is implied based on traded options and historical volatility of the Company’s common stock. The expected dividends were based on the current dividend yield of the Company’s stock as of the date of the grant. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The assumptions used are shown in the following table.
|
| | | | | | | | | |
| Option grant assumptions |
| | | 2019 | | 2018 | | 2017 |
| Weighted average expected term | | 5.8 years |
| | 5.7 years |
| �� | 6.1 years |
|
| Expected volatility | | 15.6 - 28.9% |
| | 15.6 - 30.7% |
| | 15.7 - 32.7% |
|
| Weighted average volatility | | 18.4 | % | | 19.8 | % | | 21.0 | % |
| Expected dividends | | 1.9 - 2.2% |
| | 1.5 - 2.2% |
| | 1.4 - 1.9% |
|
| Weighted average expected dividends | | 2.2 | % | | 2.0 | % | | 1.9 | % |
| Risk-free rate | | 1.3 - 2.7% |
| | 1.3 - 3.2% |
| | 0.5 - 2.5% |
|
The Allstate Corporation 207
2019 Form 10-KNotes to Consolidated Financial Statements
|
| | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| Weighted average expected term | 5.0 years |
| | 6.5 years |
| | 6.5 years |
|
| Expected volatility | 16.0 - 34.3% |
| | 16.0 - 37.8% |
| | 16.8 - 42.2% |
|
| Weighted average volatility | 24.3 | % | | 24.7 | % | | 28.3 | % |
| Expected dividends | 1.9 - 2.1% |
| | 1.6 - 2.1% |
| | 1.7 - 2.2% |
|
| Weighted average expected dividends | 2.1 | % | | 1.7 | % | | 2.1 | % |
| Risk-free rate | 0.2 - 2.4% |
| | 0.0 - 2.4% |
| | 0.0 - 3.0% |
|
A summary of option activity for the year ended December 31, 2016 is shown in the following table.
|
| | | | | | | | | | | | | |
| Summary of option activity |
| | | For the year ended December 31, 2019 |
| | | Number (in 000s) | | Weighted average exercise price | | Aggregate intrinsic value (in 000s) | | Weighted average remaining contractual term (years) |
| Outstanding as of January 1, 2019 | | 11,730 |
| | $ | 65.82 |
| | | | |
| Granted | | 2,802 |
| | 92.66 |
| | | | |
| Exercised | | (2,622 | ) | | 58.70 |
| | | | |
| Forfeited | | (235 | ) | | 89.20 |
| | | | |
| Expired | | (4 | ) | | 31.78 |
| | | | |
| Outstanding as of December 31, 2019 | | 11,671 |
| | 73.40 |
| | $ | 455,691 |
| | 6.3 |
| Outstanding, net of expected forfeitures | | 11,547 |
| | 73.20 |
| | 453,268 |
| | 6.3 |
| Outstanding, exercisable (“vested”) | | 6,744 |
| | 60.81 |
| | 348,285 |
| | 4.8 |
|
| | | | | | | | | | | | |
| | Number (in 000s) | | Weighted average exercise price | | Aggregate intrinsic value (in 000s) | | Weighted average remaining contractual term (years) |
| Outstanding as of January 1, 2016 | 15,716 |
| | $ | 45.81 |
| | | | |
| Granted | 3,013 |
| | 62.84 |
| | | | |
| Exercised | (4,755 | ) | | 43.20 |
| | | | |
| Forfeited | (378 | ) | | 61.64 |
| | | | |
| Expired | (36 | ) | | 64.83 |
| | | | |
| Outstanding as of December 31, 2016 | 13,560 |
| | 50.01 |
| | $ | 326,911 |
| | 6.0 |
| Outstanding, net of expected forfeitures | 13,434 |
| | 49.88 |
| | 325,668 |
| | 5.9 |
| Outstanding, exercisable (“vested”) | 8,104 |
| | 42.24 |
| | 258,367 |
| | 4.5 |
The weighted average grant date fair value of options granted was $12.25, $15.45$14.96, $17.03 and $12.50$14.60 during 2016, 20152019, 2018 and 2014,2017, respectively. The intrinsic value, which is the difference between the fair value and the exercise price, of options exercised was $119$114 million, $117$72 million and $151$199 million during 2016, 20152019, 2018 and 2014,2017, respectively. |
| | | | | | | |
| Changes in restricted stock units |
| | | For the year ended December 31, 2019 |
| | | Number (in 000s) | | Weighted average grant date fair value |
| Nonvested as of January 1, 2019 | | 957 |
| | $ | 74.58 |
|
| Granted | | 271 |
| | 92.97 |
|
| Vested | | (308 | ) | | 62.89 |
|
| Forfeited | | (43 | ) | | 84.75 |
|
| Nonvested as of December 31, 2019 | | 877 |
| | 83.87 |
|
The changes in restricted stock units are shown in the following table for the year ended December 31, 2016.
|
| | | | | | |
| | Number (in 000s) | | Weighted average grant date fair value |
| Nonvested as of January 1, 2016 | 1,839 |
| | $ | 52.86 |
|
| Granted | 360 |
| | 63.51 |
|
| Vested | (449 | ) | | 39.30 |
|
| Forfeited | (71 | ) | | 59.51 |
|
| Nonvested as of December 31, 2016 | 1,679 |
| | 58.49 |
|
The fair value of restricted stock units is based on the market value of the Company’s stock as of the date of the grant. The market value in part reflects the payment of future dividends expected. The weighted average grant date fair value of restricted stock units granted was $63.51, $69.25$92.97, $93.16 and $52.70$80.12 during 2016, 20152019, 2018 and 2014,2017, respectively. The total fair value of restricted stock units vested was $29 million, $63$47 million and $60$58 million during 2016, 20152019, 2018 and 2014,2017, respectively.
|
| | | | | | | |
| Changes in performance stock awards |
| | | For the year ended December 31, 2019 |
| | | Number (in 000s) | | Weighted average grant date fair value |
| Nonvested as of January 1, 2019 | | 1,248 |
| | $ | 77.35 |
|
| Granted | | 415 |
| | 92.49 |
|
| Adjustment for performance achievement | | 267 |
| | 62.32 |
|
| Vested | | (702 | ) | | 62.32 |
|
| Forfeited | | (47 | ) | | 87.83 |
|
| Nonvested as of December 31, 2019 | | 1,181 |
| | 87.78 |
|
The changeschange in performance stock awards are shown in the following table for the year ended December 31, 2016.
|
| | | | | | |
| | Number (in 000s) | | Weighted average grant date fair value |
| Nonvested as of January 1, 2016 | 930 |
| | $ | 53.27 |
|
| Granted | 520 |
| | 62.32 |
|
| Adjustment for performance achievement | (15 | ) | | 45.61 |
|
| Vested | (442 | ) | | 45.61 |
|
| Forfeited | (74 | ) | | 61.87 |
|
| Nonvested as of December 31, 2016 | 919 |
| | 61.50 |
|
The change in PSA’s comprises those initially granted in 20162019 and the adjustment to previously granted PSA’sperformance stock awards for performance achievement. The fair value of performance stock awards is based on the market value of the Company’s stock as of the date of the grant. The market value in part reflects the payment of future dividends expected. The weighted average grant date fair value of performance stock awards granted was $62.32, $70.37$92.49, $92.88 and $52.18$78.47 during 2016, 20152019, 2018 and 2014,2017, respectively. The total fair value of performance stock awards vested was $28$65 million, $15 million and $56$17 million during 20162019, 2018 and 2015,2017, respectively. None of the performance stock awards vested during 2014.
The Company recognizes all tax benefit realizedeffects related to tax deductions from stock option exercises and included in shareholders’ equity was $23 million in each of 2016, 2015 and 2014. The tax benefit realized in 2016, 2015 and 2014 relatedshare-based payments at settlement or expiration through the income statement.
Notes to all stock-based compensation and recorded directly to shareholders’ equity was $30 million, $46 million and $32 million, respectively.
Consolidated Financial Statements 2019 Form 10-K
19. Reporting Segments
Allstate management is organized around products and services, and this structure is considered in the identification of its four reportable segments. These segments and their respective operations are as follows:
Allstate Protection principally sells private passenger auto and homeowners insurance in the United States and Canada. Revenues from external customers generated outside the United States were $1.06 billion, $1.03 billion and $1.08 billion in 2016, 2015 and 2014, respectively. The Company evaluates the results of this segment based upon underwriting results.
Discontinued Lines and Coverages consists of property-liability business no longer written by Allstate, including results from asbestos, environmental and other discontinued lines claims, and certain commercial and other businesses in run-off. This segment also includes the historical results of the commercial and reinsurance businesses sold in 1996. The Company evaluates the results of this segment based upon underwriting results.
Allstate Financial sells traditional, interest-sensitive and variable life insurance and voluntary accident and health insurance products. Allstate Financial previously offered and continues to have in force fixed annuities such as deferred and immediate annuities. Allstate Financial also previously offered institutional products consisting of funding agreements sold to unaffiliated trusts that used them to back medium-term notes. There are no institutional products outstanding as of December 31, 2016. Revenues from external customers generated outside the United States relate to voluntary accident and health insurance sold in Canada and were $1 million in 2016. Allstate Financial had no revenues from external customers generated outside the United States in 2015 or 2014. The Company evaluates the results of this segment based upon operating income.
Corporate and Other comprises holding company activities and certain non-insurance operations.
Allstate Protection and Discontinued Lines and Coverages comprise Property-Liability. The Company does not allocate Property-Liability investment income, realized capital gains and losses, or assets to the Allstate Protection and Discontinued Lines and Coverages segments. Management reviews assets at the Property-Liability, Allstate Financial, and Corporate and Other levels for decision-making purposes. Allstate Protection and Allstate Financial performance and resources are managed by committees of senior officers of the respective segments.
The accounting policies of the reportable segments are the same as those described in Note 2. The effects of certain inter-segment transactions are excluded from segment performance evaluation and therefore are eliminated in the segment results.
Measuring segment profit or loss
The measure of segment profit or loss used by Allstate’s management in evaluating performance is underwriting income for the Allstate Protection and Discontinued Lines and Coverages segments and operating income for the Allstate Financial and Corporate and Other segments. A reconciliation of these measures to net income applicable to common shareholders is provided below.
Underwriting income is calculated as premiums earned, less claims and claims expenses (“losses”), amortization of DAC, operating costs and expenses, and restructuring and related charges as determined using GAAP.
Operating income is net income applicable to common shareholders, excluding:
realized capital gains and losses, after-tax, except for periodic settlements and accruals on non-hedge derivative instruments, which are reported with realized capital gains and losses but included in operating income,
valuation changes on embedded derivatives that are not hedged, after-tax,
amortization of DAC and DSI, to the extent they resulted from the recognition of certain realized capital gains and losses or valuation changes on embedded derivatives that are not hedged, after-tax,
amortization of purchased intangible assets, after-tax,
gain (loss) on disposition of operations, after-tax, and
adjustments for other significant non-recurring, infrequent or unusual items, when (a) the nature of the charge or gain is such that it is reasonably unlikely to recur within two years, or (b) there has been no similar charge or gain within the prior two years.
Summarized revenue data for each of the Company’s reportable segments for the years ended December 31 are as follows:
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Revenues | | | | | |
| Property-Liability | | | | | |
| Property-liability insurance premiums | | | | | |
| Auto | $ | 21,264 |
| | $ | 20,410 |
| | $ | 19,344 |
|
| Homeowners | 7,257 |
| | 7,136 |
| | 6,904 |
|
| Other personal lines | 1,700 |
| | 1,692 |
| | 1,662 |
|
| Commercial lines | 506 |
| | 510 |
| | 476 |
|
| Other business lines | 580 |
| | 561 |
| | 542 |
|
| Allstate Protection | 31,307 |
| | 30,309 |
| | 28,928 |
|
| Discontinued Lines and Coverages | — |
| | — |
| | 1 |
|
| Total property-liability insurance premiums | 31,307 |
| | 30,309 |
| | 28,929 |
|
| Net investment income | 1,266 |
| | 1,237 |
| | 1,301 |
|
| Realized capital gains and losses | (6 | ) | | (237 | ) | | 549 |
|
| Total Property-Liability | 32,567 |
| | 31,309 |
| | 30,779 |
|
| Allstate Financial | | | | | |
| Life and annuity premiums and contract charges | | | | | |
| Life and annuity premiums | | | | | |
| Traditional life insurance | 573 |
| | 542 |
| | 511 |
|
| Immediate annuities with life contingencies | — |
| | — |
| | 4 |
|
| Accident and health insurance | 859 |
| | 780 |
| | 744 |
|
| Total life and annuity premiums | 1,432 |
| | 1,322 |
| | 1,259 |
|
| Contract charges | | | | | |
| Interest-sensitive life insurance | 829 |
| | 822 |
| | 879 |
|
| Fixed annuities | 14 |
| | 14 |
| | 19 |
|
| Total contract charges | 843 |
| | 836 |
| | 898 |
|
| Total life and annuity premiums and contract charges | 2,275 |
| | 2,158 |
| | 2,157 |
|
| Net investment income | 1,734 |
| | 1,884 |
| | 2,131 |
|
| Realized capital gains and losses | (81 | ) | | 267 |
| | 144 |
|
| Total Allstate Financial | 3,928 |
| | 4,309 |
| | 4,432 |
|
| Corporate and Other | | | | | |
| Service fees | 4 |
| | 3 |
| | 5 |
|
| Net investment income | 42 |
| | 35 |
| | 27 |
|
| Realized capital gains and losses | (3 | ) | | — |
| | 1 |
|
| Total Corporate and Other before reclassification of service fees | 43 |
| | 38 |
| | 33 |
|
Reclassification of service fees (1) | (4 | ) | | (3 | ) | | (5 | ) |
| Total Corporate and Other | 39 |
| | 35 |
| | 28 |
|
| Consolidated revenues | $ | 36,534 |
| | $ | 35,653 |
| | $ | 35,239 |
|
|
| |
(1)
Note 19 | For presentation in the Consolidated Statements of Operations, service fees of the Corporate and Other segment are reclassified to operating costs and expenses.Supplemental Cash Flow Information
|
Non-cash investing activities include $198 million, $94 million and $106 million related to mergers and exchanges completed with equity securities, fixed income securities and limited partnerships, and modifications of certain mortgage loans and other investments in 2019, 2018 and 2017, respectively.
Non-cash financing activities include $50 million, $32 million and $43 million related to the issuance of Allstate common shares for vested equity awards in 2019, 2018 and 2017, respectively. Non-cash financing activities also include $90 million related to debt acquired in conjunction with purchases of investments in 2017.
Cash flows used in operating activities in the Consolidated Statements of Cash Flows include cash paid for operating leases related to amounts included
Summarized financial performance data for eachin the measurement of the Company’s reportable segmentslease liabilities of $155 million for the yearstwelve months ended December 31, 2019. Non-cash operating activities include $604 million related to ROU assets obtained in exchange for lease obligations, including $488 million related to the adoption of new guidance related to accounting for leases, for the twelve months ended December 31, 2019.
Liabilities for collateral received in conjunction with the Company’s securities lending program and OTC and cleared derivatives are reported in other liabilities and accrued expenses or other investments. The accompanying cash flows are included in cash flows from operating activities in the Consolidated Statements of Cash Flows along with the activities resulting from management of the proceeds as follows:
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Net income | | | | | |
| Property-Liability | | | | | |
| Underwriting income | | | | | |
| Allstate Protection | $ | 1,317 |
| | $ | 1,614 |
| | $ | 1,887 |
|
| Discontinued Lines and Coverages | (107 | ) | | (55 | ) | | (115 | ) |
| Total underwriting income | 1,210 |
| | 1,559 |
| | 1,772 |
|
| Net investment income | 1,266 |
| | 1,237 |
| | 1,301 |
|
Income tax expense on operations (1) | (812 | ) | | (952 | ) | | (1,040 | ) |
| Realized capital gains and losses, after-tax | — |
| | (154 | ) | | 357 |
|
| Gain on disposition of operations, after-tax | — |
| | — |
| | 37 |
|
| Property-Liability net income applicable to common shareholders | 1,664 |
| | 1,690 |
| | 2,427 |
|
| Allstate Financial | | | | | |
| Life and annuity premiums and contract charges | 2,275 |
| | 2,158 |
| | 2,157 |
|
| Net investment income | 1,734 |
| | 1,884 |
| | 2,131 |
|
| Periodic settlements and accruals on non-hedge derivative instruments | — |
| | — |
| | (1 | ) |
| Contract benefits and interest credited to contractholder funds | (2,580 | ) | | (2,563 | ) | | (2,663 | ) |
| Operating costs and expenses and amortization of deferred policy acquisition costs | (774 | ) | | (729 | ) | | (721 | ) |
| Restructuring and related charges | (1 | ) | | — |
| | (2 | ) |
| Income tax expense on operations | (206 | ) | | (241 | ) | | (294 | ) |
| Operating income | 448 |
| | 509 |
| | 607 |
|
| Realized capital gains and losses, after-tax | (54 | ) | | 173 |
| | 94 |
|
| Valuation changes on embedded derivatives that are not hedged, after-tax | (2 | ) | | (1 | ) | | (15 | ) |
| DAC and DSI amortization related to realized capital gains and losses and valuation changes on embedded derivatives that are not hedged, after-tax | (4 | ) | | (3 | ) | | (3 | ) |
| Reclassification of periodic settlements and accruals on non-hedge derivative instruments, after-tax | — |
| | — |
| | 1 |
|
| Gain (loss) on disposition of operations, after-tax | 3 |
| | 2 |
| | (53 | ) |
| Change in accounting for investments in qualified affordable housing projects, after-tax | — |
| | (17 | ) | | — |
|
| Allstate Financial net income applicable to common shareholders | 391 |
| | 663 |
| | 631 |
|
| Corporate and Other | | | | | |
Service fees (2) | 4 |
| | 3 |
| | 5 |
|
| Net investment income | 42 |
| | 35 |
| | 27 |
|
Operating costs and expenses (2) | (328 | ) | | (329 | ) | | (364 | ) |
| Income tax benefit on operations | 106 |
| | 109 |
| | 124 |
|
| Preferred stock dividends | (116 | ) | | (116 | ) | | (104 | ) |
| Operating loss | (292 | ) | | (298 | ) | | (312 | ) |
| Realized capital gains and losses, after-tax | (2 | ) | | — |
| | — |
|
| Corporate and Other net loss applicable to common shareholders | (294 | ) | | (298 | ) | | (312 | ) |
| Consolidated net income applicable to common shareholders | $ | 1,761 |
| | $ | 2,055 |
| | $ | 2,746 |
|
|
| | | | | | | | | | | | |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| Net change in proceeds managed | | | | | | |
| Net change in fixed income securities | | $ | 80 |
| | $ | 234 |
| | $ | 259 |
|
| Net change in short-term investments | | (451 | ) | | (568 | ) | | (255 | ) |
| Operating cash flow (used) provided | | (371 | ) | | (334 | ) | | 4 |
|
| Net change in cash | | — |
| | — |
| | 1 |
|
| Net change in proceeds managed | | $ | (371 | ) |
| $ | (334 | ) |
| $ | 5 |
|
| | | | | | | |
| Net change in liabilities | | | | | | |
| Liabilities for collateral, beginning of year | | $ | (1,458 | ) | | $ | (1,124 | ) | | $ | (1,129 | ) |
| Liabilities for collateral, end of year | | (1,829 | ) | | (1,458 | ) | | (1,124 | ) |
| Operating cash flow provided (used) | | $ | 371 |
|
| $ | 334 |
|
| $ | (5 | ) |
|
| |
(1)
Note 20 | Other Comprehensive Income tax on operations for Property-Liability segment includes $28 million of expense related to the change in accounting guidance for investments in qualified affordable housing projects adopted in 2015.
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Components of other comprehensive income (loss) on a pre-tax and after-tax basis |
| | | For the years ended December 31, |
| ($ in millions) | | 2019 | | 2018 | | 2017 |
| | | Pre-tax | | Tax | | After-tax | | Pre-tax | | Tax | | After-tax | | Pre-tax | | Tax | | After-tax |
| Unrealized net holding gains and losses arising during the period, net of related offsets | | $ | 2,807 |
| | $ | (592 | ) | | $ | 2,215 |
| | $ | (1,142 | ) | | $ | 241 |
| | $ | (901 | ) | | $ | 866 |
| | $ | (304 | ) | | $ | 562 |
|
| Less: reclassification adjustment of realized capital gains and losses | | 413 |
| | (87 | ) | | 326 |
| | (186 | ) | | 39 |
| | (147 | ) | | 374 |
| | (131 | ) | | 243 |
|
| Unrealized net capital gains and losses | | 2,394 |
| | (505 | ) | | 1,889 |
| | (956 | ) | | 202 |
| | (754 | ) | | 492 |
| | (173 | ) | | 319 |
|
| Unrealized foreign currency translation adjustments | | (13 | ) | | 3 |
| | (10 | ) | | (61 | ) | | 13 |
| | (48 | ) | | 69 |
| | (24 | ) | | 45 |
|
| Unamortized pension and other postretirement prior service credit | | (59 | ) | | 12 |
| | (47 | ) | | (77 | ) | | 18 |
| | (59 | ) | | (80 | ) | | 28 |
| | (52 | ) |
| Other comprehensive income (loss) | | $ | 2,322 |
| | $ | (490 | ) | | $ | 1,832 |
| | $ | (1,094 | ) | | $ | 233 |
| | $ | (861 | ) | | $ | 481 |
| | $ | (169 | ) | | $ | 312 |
|
The Allstate Corporation 209
2019 Form 10-KNotes to Consolidated Financial Statements
|
| |
(2)
Note 21 | For presentation in the Consolidated Statements of Operations, service fees of the Corporate and Other segment are reclassified to operating costs and expenses.Quarterly Results (unaudited)
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
($ in millions, except per share data)
| | 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| Revenues | | $ | 10,990 |
| | $ | 9,770 |
| | $ | 11,144 |
| | $ | 10,099 |
| | $ | 11,069 |
| | $ | 10,465 |
| | $ | 11,472 |
| | $ | 9,481 |
|
| Net income (loss) applicable to common shareholders | | 1,261 |
| | 977 |
| | 821 |
| | 678 |
| | 889 |
| | 942 |
| | 1,707 |
| | (585 | ) |
| Earnings per common share - Basic | | 3.79 |
| | 2.76 |
| | 2.47 |
| | 1.94 |
| | 2.71 |
| | 2.72 |
| | 5.32 |
| | (1.71 | ) |
| Earnings per common share - Diluted | | 3.74 |
| | 2.71 |
| | 2.44 |
| | 1.91 |
| | 2.67 |
| | 2.68 |
| | 5.23 |
| | (1.71 | ) |
Additional significant financial performance dataThe Company changed its accounting principle for eachrecognizing actuarial gains and losses and expected return on plan assets for its pension and other postretirement plans to a more preferable policy under U.S. GAAP. See Note 2 for discussion of the Company’s reportable segments forchange in accounting principle and further information regarding the years ended December 31 are as follows:
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Amortization of DAC | | | | | |
| Property-Liability | $ | 4,267 |
| | $ | 4,102 |
| | $ | 3,875 |
|
| Allstate Financial | 283 |
| | 262 |
| | 260 |
|
| Consolidated | $ | 4,550 |
| | $ | 4,364 |
| | $ | 4,135 |
|
| | | | | | |
| Income tax expense | | | | | |
| Property-Liability | $ | 806 |
| | $ | 869 |
| | $ | 1,211 |
|
| Allstate Financial | 178 |
| | 351 |
| | 299 |
|
| Corporate and Other | (107 | ) | | (109 | ) | | (124 | ) |
| Consolidated | $ | 877 |
| | $ | 1,111 |
| | $ | 1,386 |
|
Interest expense is primarily incurred in the Corporate and Other segment. Capital expenditures for long-lived assets are generally made in the Property-Liability segment. A portion of these long-lived assets are used by entities included in the Allstate Financial and Corporate and Other segments and, accordingly, are charged expenses in proportion to their use.
Summarized data for total assets and investments for eachimpact of the Company’s reportable segments as of December 31 are as follows:change on the consolidated financial statements.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impact of change | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
($ in millions, except per share data)
| | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
| Revenues | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Net income (loss) applicable to common shareholders | | 5 |
| | 31 |
| | (69 | ) | | 41 |
| | (140 | ) | | 109 |
| | 240 |
| | (273 | ) |
| Earnings per common share - Basic | | 0.01 |
| | 0.09 |
| | (0.21 | ) | | 0.12 |
| | (0.43 | ) | | 0.31 |
| | 0.75 |
| | (0.80 | ) |
| Earnings per common share - Diluted | | 0.02 |
| | 0.08 |
| | (0.20 | ) | | 0.11 |
| | (0.42 | ) | | 0.31 |
| | 0.73 |
| | (0.80 | ) |
|
| | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| Assets | | | | | |
| Property-Liability | $ | 60,394 |
| | $ | 55,671 |
| | $ | 55,767 |
|
| Allstate Financial | 45,945 |
| | 46,342 |
| | 49,248 |
|
| Corporate and Other | 2,271 |
| | 2,643 |
| | 3,464 |
|
| Consolidated | $ | 108,610 |
| | $ | 104,656 |
| | $ | 108,479 |
|
| | | | | | |
| Investments | | | | | |
| Property-Liability | $ | 42,722 |
| | $ | 38,479 |
| | $ | 39,083 |
|
| Allstate Financial | 36,840 |
| | 36,792 |
| | 38,809 |
|
| Corporate and Other | 2,237 |
| | 2,487 |
| | 3,221 |
|
| Consolidated | $ | 81,799 |
| | $ | 77,758 |
| | $ | 81,113 |
|
The balances above reflect the elimination of related party investments between segments.
20. Other Comprehensive Income2019 Form 10-K
The components of other comprehensive income (loss) on a pre-tax and after-tax basis for the years ended December 31 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | 2016 | | 2015 | | 2014 |
| | Pre-tax | | Tax | | After-tax | | Pre-tax | | Tax | | After-tax | | Pre-tax | | Tax | | After-tax |
| Unrealized net holding gains and losses arising during the period, net of related offsets | $ | 486 |
| | $ | (170 | ) | | $ | 316 |
| | $ | (1,896 | ) | | $ | 663 |
| | $ | (1,233 | ) | | $ | 1,026 |
| | $ | (358 | ) | | $ | 668 |
|
| Less: reclassification adjustment of realized capital gains and losses | (180 | ) | | 63 |
| | (117 | ) | | 112 |
| | (39 | ) | | 73 |
| | 597 |
| | (209 | ) | | 388 |
|
| Unrealized net capital gains and losses | 666 |
| | (233 | ) | | 433 |
| | (2,008 | ) | | 702 |
| | (1,306 | ) | | 429 |
| | (149 | ) | | 280 |
|
| Unrealized foreign currency translation adjustments | 15 |
| | (5 | ) | | 10 |
| | (89 | ) | | 31 |
| | (58 | ) | | (62 | ) | | 22 |
| | (40 | ) |
| Unrecognized pension and other postretirement benefit cost arising during the period | (263 | ) | | 94 |
| | (169 | ) | | (64 | ) | | 25 |
| | (39 | ) | | (1,197 | ) | | 421 |
| | (776 | ) |
| Less: reclassification adjustment of net periodic cost recognized in operating costs and expenses | (100 | ) | | 35 |
| | (65 | ) | | (134 | ) | | 47 |
| | (87 | ) | | (78 | ) | | 27 |
| | (51 | ) |
| Unrecognized pension and other postretirement benefit cost | (163 | ) | | 59 |
| | (104 | ) | | 70 |
| | (22 | ) | | 48 |
| | (1,119 | ) | | 394 |
| | (725 | ) |
| Other comprehensive income (loss) | $ | 518 |
| | $ | (179 | ) | | $ | 339 |
| | $ | (2,027 | ) | | $ | 711 |
| | $ | (1,316 | ) | | $ | (752 | ) | | $ | 267 |
| | $ | (485 | ) |
21. Quarterly Results (unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions, except per share data) | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| | 2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 |
| Revenues | $ | 8,871 |
| | $ | 8,952 |
| | $ | 9,164 |
| | $ | 8,982 |
| | $ | 9,221 |
| | $ | 9,028 |
| | $ | 9,278 |
| | $ | 8,691 |
|
| Net income applicable to common shareholders | 217 |
| | 648 |
| | 242 |
| | 326 |
| | 491 |
| | 621 |
| | 811 |
| | 460 |
|
| Net income applicable to common shareholders earnings per common share - Basic | 0.57 |
| | 1.56 |
| | 0.65 |
| | 0.80 |
| | 1.32 |
| | 1.56 |
| | 2.20 |
| | 1.19 |
|
| Net income applicable to common shareholders earnings per common share - Diluted | 0.57 |
| | 1.53 |
| | 0.64 |
| | 0.79 |
| | 1.31 |
| | 1.54 |
| | 2.18 |
| | 1.18 |
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
The Allstate Corporation
Northbrook, Illinois 60062
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying Consolidated Statements of Financial Position of The Allstate Corporation and subsidiaries (the “Company”) as of December 31, 20162019 and 2015, and2018, the related Consolidated Statements of Operations, Comprehensive Income, Shareholders’ Equity, and Cash Flows for each of the three years in the period ended December 31, 2016.2019, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2016,2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Commission (“COSO”).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principles
As discussed in Note 2 to the financial statements, the Company elected during 2019 to change its principles of accounting for recognizing pension and other postretirement benefit plan costs. The Company adopted this change on a retrospective basis. Also discussed in Note 2 to the financial statements, the Company changed its presentation and method of accounting for the recognition and measurement of financial assets and financial liabilities on January 1, 2018, due to the adoption of FASB Accounting Standards Update No. 2016-01, Financial Instruments - Overall (Subtopic 825-10).
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A. Controls and Procedures. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
The Allstate Corporation 211
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of theits inherent limitations, of internal control over financial reporting including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be preventedprevent or detected on a timely basis.detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
InThe critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, referredtaken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to abovewhich they relate.
Reserve for Property and Casualty Insurance Claims and Claims Expense - Refer to Notes 2 and 8 to the Financial Statements
Critical Audit Matter Description
The Company establishes reserves for property and casualty insurance claims and claims expense on reported and unreported claims of insured losses. Using established industry and actuarial best practices as well as the Company’s historical claims experience, the reserve for property and casualty insurance claims and claims expense is estimated based on (i) claims reported, (ii) claims incurred but not reported, and (iii) projections of claim payments to be made in the future.
Given the subjectivity of estimating claims incurred but not reported and projections of claim payments to be made in the future, particularly those with payout requirements over a longer period of time, the related audit effort in evaluating the reserve for property and casualty insurance claims and claims expense required a high degree of auditor judgment and an increased extent of effort, including involvement of our actuarial specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the reserve for property and casualty insurance claims and claims expense included the following:
We tested the effectiveness of controls related to the reserve for property and casualty insurance claims and claims expense, including those over the Company’s estimates and projections.
We evaluated the methods and assumptions used by the Company to estimate the reserve for property and casualty insurance claims and claims expense by:
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| ◦ | Testing the underlying data that served as the basis for the actuarial analysis, including historical claims, to test that the inputs to the actuarial estimate were complete and accurate. |
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| ◦ | Comparing the Company’s prior year assumptions of expected development and ultimate loss to actual losses incurred during the year to assess the reasonableness of those assumptions, including consideration of potential bias, in the determination of the reserve for property and casualty claims and claims expense. |
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| ◦ | With the assistance of our actuarial specialists, we developed independent estimates for the reserve for property and casualty insurance claims and claims expense, utilizing loss data and industry claim development factors, and compared our estimates to management’s estimates. |
Premium Deficiency Reserve for Life-Contingent Immediate Annuities - Refer to Notes 2 and 9 to the Financial Statements.
Critical Audit Matter Description
Due to the long-term nature of life-contingent immediate annuities, benefits are payable over many years. The Company establishes reserves as the present fairly, in all material respects,value of future expected benefits to be paid, reduced by the financial positionpresent value of future expected net premiums. Long-term actuarial assumptions of future investment yields and mortality are used when establishing the reserve. These assumptions are established at the time the policy is issued and are generally not changed during the life of the policy. The Allstate CorporationCompany periodically performs a gross premium valuation (“GPV”) analysis to review the adequacy of reserves using actual experience and subsidiaries ascurrent assumptions. If actual experience and current assumptions are adverse compared to the original assumptions and a premium deficiency is determined to exist, any remaining unamortized deferred acquisition costs (“DAC”) balance would be expensed to the extent not recoverable and the establishment of a premium deficiency reserve may be required for any remaining deficiency. As of December 31, 20162019, the Company’s GPV analysis indicated that reserves for these policies were sufficient and 2015, andtherefore, the results of their operations and their cash flowsCompany has not established a premium deficiency reserve.
The Company also reviews these policies for each ofcircumstances where projected profits would be recognized in early years followed by projected losses in later years through a profits followed by losses (“PFBL”) analysis. If this circumstance exists, the three years inCompany will accrue a liability, during the period ended December 31, 2016, in conformity with accounting principles generally accepted inof profits, to offset the United States of America. Also, in our opinion,losses at such time as the Company maintained, in all material respects, effective internal controlfuture losses are expected to commence using a method updated prospectively over financial reporting astime. As of December 31, 2016, based on2019, the criteriaCompany’s PFBL analysis did not indicate periods of profits followed by periods of losses and therefore, the Company has not established a PFBL reserve.
Given the subjectivity involved in Internal Control – Integrated Framework (2013) issuedselecting the current assumptions for projected investment yields and mortality, and the sensitivity of the estimate to these assumptions, the related audit effort in evaluating the premium deficiency reserve and PFBL analysis for life-contingent immediate annuities required a high degree of auditor judgment and an increased extent of effort, including involvement of our actuarial specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the premium deficiency reserve, including the GPV and PFBL analysis for life-contingent immediate annuities, included the following:
We tested the effectiveness of controls over management’s premium deficiency reserve and GPV and PFBL analysis, including those over the Company’s selection of assumptions.
With the assistance of our actuarial specialists, we evaluated the reasonableness of assumptions and their incorporation into the projection model used by the CommitteeCompany to perform its premium deficiency reserve analysis by:
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| ◦ | Testing the underlying data that served as the basis for the assumptions setting and the underlying data used in the projection model to ensure the inputs were complete and accurate. |
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| ◦ | Comparing mortality assumptions selected to actual historical experience. |
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| ◦ | Comparing projected investment yields selected to historical portfolio returns, evaluating for consistency with current investment portfolio yields and the Company’s long-term reinvestment strategy, and comparing to independently obtained market data. |
With the assistance of Sponsoring Organizationsour actuarial specialists, we independently calculated the gross premium valuation reserves from the Company’s projection model for a sample of contracts and compared our estimates to management’s estimates.
With the Treadway Commission.assistance of our actuarial specialists, we evaluated the aggregate cash flows generated through the Company’s premium deficiency reserve testing for evidence of potential PFBL scenarios that would require the accrual of additional reserves to cover such future losses.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
February 17, 201721, 2020
We have served as the Company's auditor since 1992.
The Allstate Corporation 213
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, the principal executive officer and the principal financial officer concluded that our disclosure controls and procedures are effective in providing reasonable assurance that material information required to be disclosed in our reports filed with or submitted to the Securities and Exchange Commission under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities Exchange Act and made known to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 20162019 based on the criteria related to internal control over financial reporting described in “Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2016.2019.
Deloitte & Touche LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this Form 10-K, has issued their attestation report on the Company’s internal control over financial reporting, which is included herein.
Changes in Internal Control over Financial Reporting. During the fiscal quarter ended December 31, 2016,2019, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
On February 14, 2017, Herbert L. Henkel informed20, 2020, The Allstate Corporation (the “Corporation”filed a Certificate of Elimination to its Restated Certificate of Incorporation with the Secretary of State of the State of Delaware eliminating from the Restated Certificate of Incorporation all matters set forth in the Certificates of Designations with respect to its: (i) 5.625% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A; (ii) 6.750% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C; (iii) 6.625% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series D; (iv) 6.625% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series E; and (v) 6.250% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series F (together collectively referred to as the “Preferred Stock”) that he will not stand for re-election. These series of Preferred Stock have been previously redeemed by the Corporation and no shares remain outstanding.
A copy of the Certificate of Elimination relating to the board of directors at the Corporation’s annual stockholders meeting scheduled for May 25, 2017. Mr. Henkel will continuePreferred Stock is listed as Exhibit 3.6 to serve as a director until such stockholders meeting. Mr. Henkel’s decision to not stand for re-election did not involve any disagreement with the Corporation.this report and is incorporated herein by reference.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Information regarding directors of The Allstate Corporation standing for election at the 20172020 annual stockholders meeting is incorporated in this Item 10 by reference to the descriptions in the Proxy Statement under the captions “Corporate Governance – Proposal 1. Election of 11 Directors - Director Nominees.Nominees’ Skills and Experience.”
Information regarding our audit committee and audit committee financial experts is incorporated in this Item 10 by reference to the information under the caption “Corporate Governance – Board Meetings and Committees” in the Proxy Statement.
Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated in this Item 10 by reference to “Stock Ownership Information – Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.
Information regarding executive officers of The Allstate Corporation is incorporated in this Item 10 by reference to Part I, Item 1 of this report under the caption “Executive Officers of the Registrant.“Information about our Executive Officers.”
We have adopted a codeGlobal Code of ethicsBusiness Conduct that applies to all of our directors and employees, including our principal executive officer, principal financial officer and controller.controller and principal accounting officer. The text of our codeGlobal Code of ethicsBusiness Conduct is posted on our website, www.allstateinvestors.com. We intend to satisfy the disclosure requirements, under Item 5.05 of Form 8-K, regarding amendments to, and waiver from, the provisions of our codeGlobal Code of ethicsBusiness Conduct by posting such information on the same website.website pursuant to applicable NYSE and SEC rules.
Item 11. Executive Compensation
Information required for Item 11 is incorporated by reference to the sections of the Proxy Statement with the following captions:
Corporate Governance – Director Compensation
Executive Compensation
The Allstate Corporation 215
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information regarding security ownership of certain beneficial owners and management is incorporated in this Item 12 by reference to the sections of the Proxy Statement with the following captions:
Other Compensation Proposals - Proposal 4. Approval of The Allstate Corporation 2017 Equity Compensation Plan for Non-Employee Directors - Equity Compensation Plan Information
Stock Ownership Information – Security Ownership of Directors and Executive Officers
Stock Ownership Information – Security Ownership of Certain Beneficial Owners
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| Equity compensation plan information |
| The following table includes information as of December 31, 2019, with respect to The Allstate Corporation’s equity compensation plans: |
| Plan Category | | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) | |
| | | (a) | | (b) | | (c) | |
Equity Compensation Plans Approved by Security Holders (1) | | 14,910,325 |
| (2) | $ | 73.40 |
| | 21,472,103 |
| (3) |
| Total | | 14,910,325 |
| (2) | $ | 73.40 |
| | 21,472,103 |
| (3) |
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(1) | Consists of the 2019 Equity Incentive Plan, which amended and restated the 2013 Equity Incentive Plan; the 2017 Equity Compensation Plan for Non-Employee Directors; the 2006 Equity Compensation Plan for Non-Employee Directors; and the Equity Incentive Plan for Non-Employee Directors (the equity plan for non-employee directors prior to 2006). The Corporation does not maintain any equity compensation plans not approved by stockholders. |
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(2) | As of December 31, 2019, 877,151 restricted stock units (“RSUs”) and 2,362,608 performance stock awards (“PSAs”) were outstanding. The weighted-average exercise price of outstanding options, warrants, and rights does not take into account RSUs and PSAs, which have no exercise price. PSAs are reported at the maximum potential amount awarded for incomplete performance periods and the amount earned for the 2017 PSA grant, reduced for forfeitures. For incomplete performance periods, the actual number of shares earned may be less and are based upon measures achieved at the end of the three-year performance period for those PSAs granted in 2018 and 2019. |
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(3) | Includes 21,121,308 shares that may be issued in the form of stock options, unrestricted stock, restricted stock, restricted stock units, stock appreciation rights, performance units, performance stock, and stock in lieu of cash under the 2019 Equity Incentive Plan; and 350,795 shares that may be issued in the form of stock options, unrestricted stock, restricted stock, restricted stock units, and stock in lieu of cash compensation under the 2017 Equity Compensation Plan for Non-Employee Directors. |
Asset managers, such as those that manage mutual funds and exchange traded funds, principally on behalf of third partythird-party investors, at times acquire sufficient voting ownership interests in Allstate to require disclosure. BlackRock, Inc. has disclosed that it, together with certain subsidiaries, held 7.7% of our common stock as of December 31, 2016. BlackRock also manages approximately $3.2 billion of Allstate’s investment portfolio under an investment management agreement and has licensed an investment technology software system to Allstate. The terms of these arrangements are customary and the aggregate related fees are not material. State Street Corp. manages an investment portfolio of $2.7$3.4 billion on behalf of participants in Allstate’s 401(k) Savings Plan and $3.1$2.3 billion on behalf of Allstate domestic qualified pension plans.plan. The terms of these arrangements are customary, and the aggregate related fees are not material.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required for Item 13 is incorporated by reference to the material in the Proxy Statement under the captions “Corporate Governance – Board Leadership StructureIndependence and PracticesRelated Person Transactions - Nominee Independence Determinations," “Corporate Governance – Board Independence and Related Person Transactions - Related Person Transactions” and “Corporate Governance –Board Composition and Nominee Considerations – Nominee Independence Determinations” and “Appendix“Other Information - Appendix B – Categorical Standards of Independence.”
Item 14. Principal Accounting Fees and Services
Information required for Item 14 is incorporated by reference to the material in the Proxy Statement under the caption “Audit Committee Matters – Proposal 5.3. Ratification of Deloitte & Touche LLP as the Independent Registered Public Accountant for 2017.2020.”
Part IV
Item 15. (a) (1) Exhibits and Financial Statement Schedules.
The following consolidated financial statements, notes thereto and related information of The Allstate Corporation (the “Company”) are included in Item 8.
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Financial Position
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Item 15. (a) (2)
The following additional financial statement schedules and independent auditors’ report are furnished herewith pursuant to the requirements of Form 10-K.
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| The Allstate Corporation | | Page |
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| Schedules required to be filed under the provisions of Regulation S-X Article 7: |
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All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the Consolidated Financial Statements or in notes thereto.
Item 15. (a) (3)
The following is a list of the exhibits filed as part of this Form 10-K. The exhibit numbers followed by an asterisk (*) indicate exhibits that are management contracts or compensatory plans or arrangements. A dagger (†) indicates an award form first used under The Allstate Corporation 2001 Equity Incentive Plan, which was amended and restated as The Allstate Corporation 2009 Equity Incentive Plan. A plus (+) indicates an award form first used under The Allstate Corporation 2009 Equity Incentive Plan, which was subsequently amended and restated as The Allstate Corporation 2013 Equity Incentive Plan, and further amended and restated as The Allstate Corporation 2019 Equity Incentive Plan.
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| | | Incorporated by Reference | |
Exhibit Number | Exhibit Description | Form | File Number | Exhibit | Filing Date | Filed or Furnished Herewith |
| 2.1 | Agreement and Plan of Merger, dated as of November 28, 2016, among SquareTrade Holding Company, Inc., Allstate Non-Insurance Holdings, Inc., Piazza Merger Sub Inc., Shareholder Representative Services LLC, and the Registrant. (Certain schedules and exhibits to the Agreement and Plan of Merger are omitted pursuant to Item 601(b)(2) of Regulation S-K. The Registrant agrees to furnish to the Securities and Exchange Commission, upon request, a copy of any omitted schedule or exhibit.) | 8-K | 1-11840 | 2.1 | November 28, 2016 | |
| 3.1 | Restated Certificate of Incorporation filed with the Secretary of State of Delaware on May 23, 2012 | 8-K | 1-11840 | 3(i) | May 23, 2012 | |
| 3.2 | Amended and Restated By-Laws of The Allstate Corporation as amended November 19, 2015 | 8-K | 1-11840 | 3.1 | November 19, 2015 | |
| 3.3 | Certificate of Designations with respect to the Preferred Stock, Series A of the Registrant, dated June 10, 2013 | 8-K | 1-11840 | 3.1 | June 12, 2013 | |
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| | | Incorporated by Reference | |
Exhibit Number | Exhibit Description | Form | File Number | Exhibit | Filing Date | Filed or Furnished Herewith |
| 3.1 | | 8-K | 1-11840 | 3(i) | May 23, 2012 | |
| 3.2 | | 8-K | 1-11840 | 3.1 | November 19, 2015 | |
| 3.3 | | 8-K | 1-11840 | 3.1 | March 29, 2018 | |
| 3.4 | | 8-K | 1-11840 | 3.1 | August 5, 2019 | |
| 3.5 | | 8-K | 1-11840 | 3.1 | November 8, 2019 | |
| 3.6 | | | | | | X |
| 4.1 | The Allstate Corporation hereby agrees to furnish to the Commission, upon request, the instruments defining the rights of holders of each issue of long-term debt of it and its consolidated subsidiaries | | | | | |
| 4.2 | | | | | | X |
The Allstate Corporation 217
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| | | Incorporated by Reference | |
Exhibit Number | Exhibit Description | Form | File Number | Exhibit | Filing Date | Filed or Furnished Herewith |
| 3.4 | Certificate of Designations with respect to the Preferred Stock, Series C of the Registrant, dated September 26, 2013 | 8-K | 1-11840 | 3.1 | September 30, 2013 | |
| 3.5 | Certificate of Designations with respect to the Preferred Stock, Series D of the Registrant, dated December 13, 2013 | 8-K | 1-11840 | 3.1 | December 16, 2013 | |
| 3.6 | Certificate of Correction of Certificate of Designations with respect to the Preferred Stock, Series A of the Registrant dated February 18, 2014 | 10-K | 1-11840 | 3.6 | February 20, 2014 | |
| 3.7 | Certificate of Designations with respect to the Preferred Stock, Series E of the Registrant, dated February 27, 2014 | 8-K | 1-11840 | 3.1 | March 3, 2014 | |
| 3.8 | Certificate of Designations with respect to the Preferred Stock, Series F of the Registrant, dated June 11, 2014 | 8-K | 1-11840 | 3.1 | June 12, 2014 | |
| 4.1 | The Allstate Corporation hereby agrees to furnish to the Commission, upon request, the instruments defining the rights of holders of each issue of long-term debt of it and its consolidated subsidiaries | | | | | |
| 4.2 | Deposit Agreement, dated June 12, 2013, among the Registrant, Wells Fargo Bank, N.A., as depositary, and the holders from time to time of the depositary receipts described therein (Series A) | 8-K | 1-11840 | 4.1 | June 12, 2013 | |
| 4.3 | Form of Preferred Stock Certificate, Series A (included as Exhibit A to Exhibit 3.3 above) | 8-K | 1-11840 | 4.2 | June 12, 2013 | |
| 4.4 | Form of Depositary Receipt, Series A (included as Exhibit A to Exhibit 4.2 above) | 8-K | 1-11840 | 4.3 | June 12, 2013 | |
| 4.5 | Deposit Agreement, dated September 30, 2013, among the Registrant, Wells Fargo Bank, N.A., as depositary, and the holders from time to time of the depositary receipts described therein (Series C) | 8-K | 1-11840 | 4.1 | September 30, 2013 | |
| 4.6 | Form of Preferred Stock Certificate, Series C (included as Exhibit A to Exhibit 3.4 above) | 8-K | 1-11840 | 4.2 | September 30, 2013 | |
| 4.7 | Form of Depositary Receipt, Series C (included as Exhibit A to Exhibit 4.5 above) | 8-K | 1-11840 | 4.3 | September 30, 2013 | |
| 4.8 | Deposit Agreement, dated December 16, 2013, among the Registrant, Wells Fargo Bank, N.A., as depositary, and the holders from time to time of the depositary receipts described therein (Series D) | 8-K | 1-11840 | 4.1 | December 16, 2013 | |
| 4.9 | Form of Preferred Stock Certificate, Series D (included as Exhibit A to Exhibit 3.5 above) | 8-K | 1-11840 | 4.2 | December 16, 2013 | |
| 4.10 | Form of Depositary Receipt, Series D (included as Exhibit A to Exhibit 4.8 above) | 8-K | 1-11840 | 4.3 | December 16, 2013 | |
| 4.11 | Deposit Agreement, dated March 3, 2014, among the Registrant, Wells Fargo Bank, N.A., as depositary, and the holders from time to time of the depositary receipts described therein (Series E) | 8-K | 1-11840 | 4.1 | March 3, 2014 | |
| 4.12 | Form of Preferred Stock Certificate, Series E (included as Exhibit A to Exhibit 3.7 above) | 8-K | 1-11840 | 4.2 | March 3, 2014 | |
| 4.13 | Form of Depositary Receipt, Series E (included as Exhibit A to Exhibit 4.11 above) | 8-K | 1-11840 | 4.3 | March 3, 2014 | |
| 4.14 | Deposit Agreement, dated June 12, 2014, among the Registrant, Wells Fargo Bank, N.A., as depositary, and the holders from time to time of the depositary receipts described therein (Series F) | 8-K | 1-11840 | 4.1 | June 12, 2014 | |
| 4.15 | Form of Preferred Stock Certificate, Series F (included as Exhibit A to Exhibit 3.8 above) | 8-K | 1-11840 | 4.2 | June 12, 2014 | |
| 4.16 | Form of Depositary Receipt, Series F (included as Exhibit A to Exhibit 4.14 above) | 8-K | 1-11840 | 4.3 | June 12, 2014 | |
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Exhibit Number | Exhibit Description | Form | File Number | Exhibit | Filing Date | Filed or Furnished Herewith |
| 4.3 | | 8-K | 1-11840 | 4.1 | March 29, 2018 | |
| 4.4 | | 8-K | 1-11840 | 4.2 | March 29, 2018 | |
| 4.5 | Form of Depositary Receipt, Series G (included as Exhibit A to Exhibit 4.3 above)
| 8-K | 1-11840 | 4.3 | March 29, 2018 | |
| 4.6 | | 8-K | 1-11840 | 4.1 | August 8, 2019 | |
| 4.7 | | 8-K | 1-11840 | 4.2 | August 8, 2019 | |
| 4.8 | Form of Depositary Receipt, Series H (included as Exhibit A to Exhibit 4.6 above)
| 8-K | 1-11840 | 4.3 | August 8, 2019 | |
| 4.9 |
| 8-K | 1-11840 | 4.1 | November 8, 2019 | |
| 4.10 | | 8-K | 1-11840 | 4.2 | November 8, 2019 | |
| 4.11 | Form of Depositary Receipt, Series I (included as Exhibit A to Exhibit 4.9 above) | 8-K | 1-11840 | 4.3 | November 8, 2019 | |
| 10.1 | Credit Agreement dated April 27, 2012 among The Allstate Corporation, Allstate Insurance Company and Allstate Life Insurance Company, as Borrowers; the Lenders party thereto, Wells Fargo Bank, National Association, as Syndication Agent; Citibank, N.A. and Bank of America, N.A., as Documentation Agents; and JPMorgan Chase Bank, N.A., as Administrative Agent | 10-Q | 1-11840 | 10.6 | May 2, 2012 | |
| 10.2 | | 8-K | 1-11840 | 10.1 | April 29, 2014 | |
| 10.3* | | Proxy | 1-11840 | App. B | April 7, 2014 | |
| 10.4* | | S-8 | 1-11840 | 4 | November 20, 2018 | |
| 10.5* | | Proxy | 1-11840 | App. D | April 8, 2019 | |
| 10.6*+ | | 10-Q | 1-11840 | 10.2 | May 1, 2018 | |
| 10.7*+ | | 10-Q | 1-11840 | 10.4 | May 2, 2012 | |
| 10.8*+ | | 10-Q | 1-11840 | 10.3 | May 1, 2018 | |
| 10.9*+ | | 10-Q | 1-11840 | 10.3 | May 2, 2012 | |
| 10.10*+ | | 8-K | 1-11840 | 10.2 | December 28, 2011 | |
| 10.11*+ | | 10-Q | 1-11840 | 10.3 | April 27, 2011 | |
| 10.12*+ | | 8-K/A | 1-11840 | 10.3 | May 20, 2009 | |
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Exhibit Number | Exhibit Description | Form | File Number | Exhibit | Filing Date | Filed or Furnished Herewith |
| 10.1 | Credit Agreement dated April 27, 2012 among The Allstate Corporation, Allstate Insurance Company and Allstate Life Insurance Company, as Borrowers; the Lenders party thereto, Wells Fargo Bank, National Association, as Syndication Agent; Citibank, N.A. and Bank of America, N.A., as Documentation Agents; and JPMorgan Chase Bank, N.A., as Administrative Agent | 10-Q | 1-11840 | 10.6 | May 2, 2012 | |
| 10.2 | Amendment No. 1 to Credit Agreement dated as of April 27, 2014 | 8-K | 1-11840 | 10.1 | April 29, 2014 | |
| 10.3* | The Allstate Corporation Annual Executive Incentive Plan | Proxy | 1-11840 | App. B | April 7, 2014 | |
| 10.4* | The Allstate Corporation Deferred Compensation Plan, as amended and restated as of January 1, 2015 | 10-Q | 1-11840 | 10.1 | May 5, 2015 | |
| 10.5* | The Allstate Corporation 2013 Equity Incentive Plan, as amended and restated effective February 19, 2014 | 10-Q | 1-11840 | 10.1 | May 6, 2014 | |
| 10.6*+ | Form of Performance Stock Award Agreement for awards granted on or after March 6, 2012 under The Allstate Corporation 2009 Equity Incentive Plan | 10-Q | 1-11840 | 10.4 | May 2, 2012 | |
| 10.7*+ | Form of Option Award Agreement for awards granted on or after February 21, 2012 under The Allstate Corporation 2009 Equity Incentive Plan | 10-Q | 1-11840 | 10.3 | May 2, 2012 | |
| 10.8*+ | Form of Option Award Agreement for awards granted on or after December 30, 2011 and prior to February 21, 2012 under The Allstate Corporation 2009 Equity Incentive Plan | 8-K | 1-11840 | 10.2 | December 28, 2011 | |
| 10.9*+ | Form of Option Award Agreement for awards granted on or after February 22, 2011 and prior to December 30, 2011 under The Allstate Corporation 2009 Equity Incentive Plan | 10-Q | 1-11840 | 10.3 | April 27, 2011 | |
| 10.10*+ | Form of Option Award Agreement for awards granted on or after May 19, 2009 and prior to February 22, 2011 under The Allstate Corporation 2009 Equity Incentive Plan | 8-K/A | 1-11840 | 10.3 | May 20, 2009 | |
| 10.11*† | Form of Option Award Agreement for awards granted on or after September 13, 2008 and prior to May 19, 2009 under The Allstate Corporation 2001 Equity Incentive Plan | 8-K | 1-11840 | 10.3 | September 19, 2008 | |
| 10.12*† | Form of Executive Officer Option Award Agreement for awards granted on or after July 18, 2006 and prior to September 13, 2008 under The Allstate Corporation 2001 Equity Incentive Plan | 8-K | 1-11840 | 10.1 | July 20, 2006 | |
| 10.13*+ | Form of Restricted Stock Unit Award Agreement for awards granted on or after February 21, 2012 under The Allstate Corporation 2009 Equity Incentive Plan | 10-Q | 1-11840 | 10.2 | May 2, 2012 | |
| 10.14* | Supplemental Retirement Income Plan, as amended and restated effective January 1, 2014 | 10-Q | 1-11840 | 10.3 | July 31, 2013 | |
| 10.15* | The Allstate Corporation Change in Control Severance Plan effective December 30, 2011 | 8-K | 1-11840 | 10.1 | December 28, 2011 | |
| 10.16* | The Allstate Corporation Deferred Compensation Plan for Non-Employee Directors, as amended and restated effective September 15, 2008 | 8-K | 1-11840 | 10.7 | September 19, 2008 | |
| 10.17* | The Allstate Corporation Equity Incentive Plan for Non-Employee Directors as amended and restated effective September 15, 2008 | 8-K | 1-11840 | 10.5 | September 19, 2008 | |
| 10.18* | The Allstate Corporation 2006 Equity Compensation Plan for Non-Employee Directors, as amended and restated effective September 15, 2008 | 8-K | 1-11840 | 10.6 | September 19, 2008 | |
| 10.19* | Form of Option Award Agreement under The Allstate Corporation 2006 Equity Compensation Plan for Non-Employee Directors | 8-K | 1-11840 | 10.3 | May 19, 2006 | |
| 10.20* | Form of amended and restated Restricted Stock Unit Award Agreement with regards to awards outstanding on September 15, 2008 under The Allstate Corporation 2006 Equity Compensation Plan for Non-Employee Directors | 8-K | 1-11840 | 10.8 | September 19, 2008 | |
|
| | | | | | |
| | | Incorporated by Reference | |
Exhibit Number | Exhibit Description | Form | File Number | Exhibit | Filing Date | Filed or Furnished Herewith |
| 10.13*+ | | 10-Q | 1-11840 | 10.2 | May 2, 2012 | |
| 10.14*+ | | 10-Q | 1-11840 | 10.4 | May 1, 2018 | |
| 10.15* | | 10-K | 1-11840 | 10.16 | February 15, 2019 | |
| 10.16* | | 8-K | 1-11840 | 10.1 | December 28, 2011 | |
| 10.17* | | 8-K | 1-11840 | 10.7 | September 19, 2008 | |
| 10.18* | | 8-K | 1-11840 | 10.5 | September 19, 2008 | |
| 10.19* | | 8-K | 1-11840 | 10.6 | September 19, 2008 | |
| 10.20* | | Proxy | 1-11840 | App. D | April 12, 2017 | |
| 10.21* | | 8-K | 1-11840 | 10.8 | September��19, 2008 | |
| 10.22* | | 8-K | 1-11840 | 10.9 | September 19, 2008 | |
| 10.23* |
| 10-Q | 1-11840 | 10.2 | August 3, 2016 | |
| 10.24* |
| 10-Q | 1-11840 | 10.2 | August 1, 2017 | |
| 10.25* | | 10-Q | 1-11840 | 10.2 | August 1, 2007 | |
| 10.26* | | 10-K | 1-11840 | 10.24 | February 17, 2017 | |
| 10.27* | | 10-K | 1-11840 | 10.29 | February 15, 2019 | |
| 10.28 | | 8-K | 1-11840 | 10.1 | April 7, 2014 | |
| 10.29* | | 10-Q | 1-11840 | 10.1 | May 1, 2018 | |
| 10.30* | | 10-Q | 1-11840 | 10.1 | May 1, 2019 | |
| 21 | | | | | | X |
| 23 | | | | | | X |
| 31(i) | | | | | | X |
| 31(i) | | | | | | X |
| 32 | | | | | | X |
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | | | | X |
The Allstate Corporation 219
|
| | | | | | |
| | | Incorporated by Reference | |
Exhibit Number | Exhibit Description | Form | File Number | Exhibit | Filing Date | Filed or Furnished Herewith |
| 10.21* | Form of Restricted Stock Unit Award Agreement for awards granted on or after September 15, 2008, and prior to June 1, 2016, under The Allstate Corporation 2006 Equity Compensation Plan for Non-Employee Directors | 8-K | 1-11840 | 10.9 | September 19, 2008 | |
| 10.22* | Form of Restricted Stock Unit Award Agreement for awards granted on or after June 1, 2016, under The Allstate Corporation 2006 Equity Compensation Plan for Non-Employee Directors | 10-Q | 1-11840 | 10.2 | August 3, 2016 | |
| 10.23* | Form of Indemnification Agreement between the Registrant and Director | 10-Q | 1-11840 | 10.2 | August 1, 2007 | |
| 10.24* | Resolutions regarding Non-Employee Director Compensation | | | | | X |
| 10.25* | Resolutions regarding Non-Employee Director Equity Compensation | 10-Q | 1-11840 | 10.1 | August 3, 2016 | |
| 10.26 | Stock Purchase Agreement, dated July 17, 2013, among Allstate Life Insurance Company, Resolution Life Holdings, Inc., and Resolution Life L.P. | 8-K | 1-11840 | 10.1 | July 22, 2013 | |
| 10.27 | Amended and Restated Reinsurance Agreement, dated April 1, 2014, between Allstate Life Insurance Company and Lincoln Benefit Life Company | 8-K | 1-11840 | 10.1 | April 7, 2014 | |
| 10.28 | Consulting Agreement, dated March 10, 2016, between Judith P. Greffin and Allstate Insurance Company | 8-K | 1-11840 | 10 | March 10, 2016 | |
| 12 | Computation of Earnings to Fixed Charges Ratio | | | | | X |
| 21 | Subsidiaries of The Allstate Corporation | | | | | X |
| 23 | Consent of Independent Registered Public Accounting Firm | | | | | X |
| 31(i) | Rule 13a-14(a) Certification of Principal Executive Officer | | | | | X |
| 31(i) | Rule 13a-14(a) Certification of Principal Financial Officer | | | | | X |
| 32 | Section 1350 Certifications | | | | | X |
| 101.INS | XBRL Instance Document | | | | | X |
| 101.SCH | XBRL Taxonomy Extension Schema | | | | | X |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | | | | | X |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase | | | | | X |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase | | | | | X |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase | | | | | X |
|
| | | | | | |
| | Incorporated by Reference | |
Exhibit Number | Exhibit Description | Form | File Number | Exhibit | Filing Date | Filed or Furnished Herewith |
| 101.SCH | Inline XBRL Taxonomy Extension Schema | | | | | X |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | | | | | X |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | | | | | X |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | | | | | X |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | | | | | X |
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | | | | | X |
Item 15. (b)
The exhibits are listed in Item 15. (a)(3) above.
Item 15. (c)
The financial statement schedules are listed in Item 15. (a)(2) above.
Item 16.
None.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | |
| | | THE ALLSTATE CORPORATIONThe Allstate Corporation
(Registrant) |
| | | |
| | | /s/ Samuel H. PilchJohn C. Pintozzi |
| | | By: Samuel H. Pilch John C. Pintozzi |
| | Senior Group Vice President, Controller, and ControllerChief Accounting Officer |
| | (Principal Accounting Officer) |
| | | February 17, 201721, 2020 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
| Signature | | Title | | Date |
| | | | | |
| /s/ Thomas J. Wilson | | Chairman of the Board, President, Chief Executive Officer and a Director (Principal (Principal Executive Officer) | | February 17, 201721, 2020 |
| Thomas J. Wilson | | |
| | | | | |
/s/ Steven E. ShebikMario Rizzo | | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | | February 17, 201721, 2020 |
Steven E. ShebikMario Rizzo | | |
| | | | |
| /s/ John C. Pintozzi | | Senior Vice President, Controller, and Chief Accounting Officer (Principal Accounting Officer) | | February 21, 2020 |
| John C. Pintozzi | | |
| | | | | |
| /s/ Kermit R. Crawford | | Director | | February 17, 201721, 2020 |
| Kermit R. Crawford | | |
| | | | | |
| /s/ Michael L. Eskew | | Director | | February 17, 201721, 2020 |
| Michael L. Eskew | | |
| | | | | |
/s/ Herbert L. HenkelMargaret M. Keane | | Director | | February 17, 201721, 2020 |
Herbert L. HenkelMargaret M. Keane | | |
| | | | | |
| /s/ Siddharth N. Mehta | | Director | | February 17, 201721, 2020 |
| Siddharth N. Mehta | | |
| | | | | |
| /s/ Jacques P. Perold | | Director | | February 17, 201721, 2020 |
| Jacques P. Perold | | |
| | | | | |
| /s/ Andrea Redmond | | Director | | February 17, 201721, 2020 |
| Andrea Redmond | | |
| | | | | |
/s/ John W. RoweGregg M. Sherrill | | Director | | February 17, 201721, 2020 |
John W. RoweGregg M. Sherrill | | |
| | | | | |
| /s/ Judith A. Sprieser | | Lead Director | | February 17, 201721, 2020 |
| Judith A. Sprieser | | |
| | | | |
/s/ Mary Alice Taylor | | Director | | February 17, 2017 |
Mary Alice Taylor | | |
| | | | | |
| /s/ Perry M. Traquina | | Director | | February 17, 201721, 2020 |
| Perry M. Traquina | | |
The Allstate Corporation 221
THE ALLSTATE CORPORATION AND SUBSIDIARIES2019 Form 10-K
SCHEDULE
The Allstate Corporation and Subsidiaries
Schedule I — SUMMARY OF INVESTMENTSSummary of Investments Other than Investments in Related Parties
OTHER THAN INVESTMENTS IN RELATED PARTIES |
| | | | | | | | | | | | |
| | | As of December 31, 2019 |
| ($ in millions) | | Cost/amortized cost | | Fair value (if applicable) | | Amount shown in the Balance Sheet |
| Type of investment | | | | | | |
| Fixed maturities: | | | | | | |
| Bonds: | | | | | | |
| United States government, government agencies and authorities | | $ | 4,971 |
| | $ | 5,086 |
| | $ | 5,086 |
|
| States, municipalities and political subdivisions | | 8,080 |
| | 8,620 |
| | 8,620 |
|
| Foreign governments | | 968 |
| | 979 |
| | 979 |
|
| Public utilities | | 5,197 |
| | 5,576 |
| | 5,576 |
|
| All other corporate bonds | | 35,893 |
| | 37,502 |
| | 37,502 |
|
| Asset-backed securities | | 860 |
| | 862 |
| | 862 |
|
| Mortgage-backed securities | | 324 |
| | 419 |
| | 419 |
|
| Total fixed maturities | | 56,293 |
| | $ | 59,044 |
| | 59,044 |
|
| | | | | | | |
| Equity securities: | | | | | | |
| Common stocks: | | | | | | |
| Public utilities | | 98 |
| | 136 |
| | 136 |
|
| Banks, trusts and insurance companies | | 565 |
| | 771 |
| | 771 |
|
| Industrial, miscellaneous and all other | | 5,662 |
| | 6,957 |
| | 6,957 |
|
| Nonredeemable preferred stocks | | 243 |
| | 298 |
| | 298 |
|
| Total equity securities | | 6,568 |
| | $ | 8,162 |
| | 8,162 |
|
| | | | | | | |
| Mortgage loans on real estate | | 4,817 |
| | 5,012 |
| | 4,817 |
|
| Real estate (none acquired in satisfaction of debt) | | 1,005 |
| | | | 1,005 |
|
| Policy loans | | 894 |
| | | | 894 |
|
| Derivative instruments | | 140 |
| | 140 |
| | 140 |
|
| Limited partnership interests | | 8,078 |
| | | | 8,078 |
|
| Other long-term investments | | 1,966 |
| | | | 1,966 |
|
| Short-term investments | | 4,256 |
| | 4,256 |
| | 4,256 |
|
| Total investments | | $ | 84,017 |
| |
| | $ | 88,362 |
|
DECEMBER 31, 2016
The Allstate Corporation and Subsidiaries
Schedule II — Condensed Financial Information of Registrant Statement of Operations |
| | | | | | | | | | | |
| ($ in millions) | Cost/amortized cost | | Fair value | | Amount at which shown in the Balance Sheet |
| Type of investment | | | | | |
| Fixed maturities: | | | | | |
| Bonds: | | | | | |
| United States government, government agencies and authorities | $ | 3,572 |
| | $ | 3,637 |
| | $ | 3,637 |
|
| States, municipalities and political subdivisions | 7,116 |
| | 7,333 |
| | 7,333 |
|
| Foreign governments | 1,043 |
| | 1,075 |
| | 1,075 |
|
| Public utilities | 5,048 |
| | 5,322 |
| | 5,322 |
|
| All other corporate bonds | 37,694 |
| | 38,279 |
| | 38,279 |
|
| Asset-backed securities | 1,169 |
| | 1,171 |
| | 1,171 |
|
| Residential mortgage-backed securities | 651 |
| | 728 |
| | 728 |
|
| Commercial mortgage-backed securities | 262 |
| | 270 |
| | 270 |
|
| Redeemable preferred stocks | 21 |
| | 24 |
| | 24 |
|
| Total fixed maturities | 56,576 |
| | $ | 57,839 |
| | 57,839 |
|
| | | | | | |
| Equity securities: | | | | | |
| Common stocks: | | | | | |
| Public utilities | 108 |
| | $ | 114 |
| | 114 |
|
| Banks, trusts and insurance companies | 804 |
| | 895 |
| | 895 |
|
| Industrial, miscellaneous and all other | 4,100 |
| | 4,477 |
| | 4,477 |
|
| Nonredeemable preferred stocks | 145 |
| | 180 |
| | 180 |
|
| Total equity securities | 5,157 |
| | $ | 5,666 |
| | 5,666 |
|
| | | | | | |
| Mortgage loans on real estate | 4,486 |
| | $ | 4,514 |
| | 4,486 |
|
| Real estate (none acquired in satisfaction of debt) | 318 |
| | | | 318 |
|
| Policy loans | 904 |
| | | | 904 |
|
| Derivative instruments | 106 |
| | $ | 111 |
| | 111 |
|
| Limited partnership interests | 5,814 |
| | | | 5,814 |
|
| Other long-term investments | 2,373 |
| | | | 2,373 |
|
| Short-term investments | 4,288 |
| | $ | 4,288 |
| | 4,288 |
|
| | | | | | |
| Total investments | $ | 80,022 |
| | | | $ | 81,799 |
|
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
($ in millions)
| | 2019 | | 2018 | | 2017 |
| Revenues | | | | | | |
| Investment income, less investment expense | | $ | 35 |
| | $ | 25 |
| | $ | 10 |
|
| Realized capital gains and losses | | 9 |
| | (10 | ) | | (2 | ) |
| Other income | | 41 |
| | 3 |
| | 36 |
|
| | | 85 |
| | 18 |
| | 44 |
|
| | | | | | | |
| Expenses | | | | | | |
| Interest expense | | 355 |
| | 337 |
| | 334 |
|
| Pension and other postretirement remeasurement gains and losses | | 103 |
| | 454 |
| | (219 | ) |
| Pension and other postretirement benefit expense | | (122 | ) | | (116 | ) | | (224 | ) |
| Other operating expenses | | 49 |
| | 50 |
| | 50 |
|
| | | 385 |
| | 725 |
| | (59 | ) |
| | | | | | | |
| (Loss) gain from operations before income tax benefit and equity in net income of subsidiaries | | (300 | ) | | (707 | ) | | 103 |
|
| | | | | | | |
| Income tax (benefit) expense | | (75 | ) | | (136 | ) | | 105 |
|
| Loss before equity in net income of subsidiaries | | (225 | ) | | (571 | ) | | (2 | ) |
| | | | | | | |
| Equity in net income of subsidiaries | | 5,072 |
| | 2,731 |
| | 3,556 |
|
| Net income | | 4,847 |
| | 2,160 |
| | 3,554 |
|
| | | | | | | |
| Preferred stock dividends | | 169 |
| | 148 |
| | 116 |
|
| | | | | | | |
| Net income applicable to common shareholders | | 4,678 |
| | 2,012 |
| | 3,438 |
|
| | | | | | | |
| Other comprehensive income (loss), after-tax | | | | | | |
| Changes in: | | | | | | |
| Unrealized net capital gains and losses | | 1,889 |
| | (754 | ) | | 319 |
|
| Unrealized foreign currency translation adjustments | | (10 | ) | | (48 | ) | | 45 |
|
| Unamortized pension and other postretirement prior service credit | | (47 | ) | | (59 | ) | | (52 | ) |
| Other comprehensive income (loss), after-tax | | 1,832 |
| | (861 | ) | | 312 |
|
| Comprehensive income | | $ | 6,679 |
| | $ | 1,299 |
| | $ | 3,866 |
|
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE II —
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
|
| | | | | | | | | | | |
| ($ in millions) | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Revenues | | | | | |
| Investment income, less investment expense | $ | 11 |
| | $ | 8 |
| | $ | 3 |
|
| Realized capital gains and losses | 2 |
| | — |
| | — |
|
| Other income | 55 |
| | 66 |
| | 67 |
|
| | 68 |
| | 74 |
| | 70 |
|
| | | | | | |
| Expenses | | | | | |
| Interest expense | 295 |
| | 292 |
| | 321 |
|
| Loss on extinguishment of debt | — |
| | — |
| | 1 |
|
| Pension and other postretirement benefit expense | 10 |
| | (15 | ) | | 41 |
|
| Other operating expenses | 28 |
| | 34 |
| | 38 |
|
| | 333 |
| | 311 |
| | 401 |
|
| | | | | | |
| Loss from operations before income tax benefit and equity in net income of subsidiaries | (265 | ) | | (237 | ) | | (331 | ) |
| | | | | | |
| Income tax benefit | (115 | ) | | (108 | ) | | (142 | ) |
| Loss before equity in net income of subsidiaries | (150 | ) | | (129 | ) | | (189 | ) |
| | | | | | |
| Equity in net income of subsidiaries | 2,027 |
| | 2,300 |
| | 3,039 |
|
| Net income | 1,877 |
| | 2,171 |
| | 2,850 |
|
| | | | | | |
| Preferred stock dividends | 116 |
| | 116 |
| | 104 |
|
| | | | | | |
| Net income applicable to common shareholders | 1,761 |
| | 2,055 |
| | 2,746 |
|
| | | | | | |
| Other comprehensive income (loss), after-tax | | | | | |
| Changes in: | | | | | |
| Unrealized net capital gains and losses | 433 |
| | (1,306 | ) | | 280 |
|
| Unrealized foreign currency translation adjustments | 10 |
| | (58 | ) | | (40 | ) |
| Unrecognized pension and other postretirement benefit cost | (104 | ) | | 48 |
| | (725 | ) |
| Other comprehensive income (loss), after-tax | 339 |
| | (1,316 | ) | | (485 | ) |
| Comprehensive income | $ | 2,216 |
| | $ | 855 |
| | $ | 2,365 |
|
See accompanying notes to condensed financial information and notes to consolidated financial statements.
THE ALLSTATE CORPORATION AND SUBSIDIARIESThe Allstate Corporation S-2
SCHEDULE
The Allstate Corporation and Subsidiaries
Schedule II (CONTINUED)(Continued) —
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF FINANCIAL POSITION Condensed Financial Information of Registrant Statement of Financial Position
| | | ($ in millions, except par value data) | December 31, | | December 31, |
| | 2016 | | 2015 | | 2019 | | 2018 |
| Assets | | | | | | | |
| Investments in subsidiaries | $ | 26,929 |
| | $ | 25,047 |
| | $ | 33,428 |
| | $ | 29,301 |
|
| Fixed income securities, at fair value (amortized cost $510 and $485) | 513 |
| | 485 |
| |
| Short-term investments, at fair value (amortized cost $219 and $277) | 219 |
| | 277 |
| |
| Fixed income securities, at fair value (amortized cost $458 and $355) | | | 466 |
| | 356 |
|
| Short-term investments, at fair value (amortized cost $702 and $285) | | | 702 |
| | 285 |
|
| Cash | 2 |
| | 4 |
| | 2 |
| | — |
|
| Receivable from subsidiaries | 385 |
| | 339 |
| | 448 |
| | 426 |
|
| Deferred income taxes | 348 |
| | 302 |
| | 230 |
| | 225 |
|
| Other assets | 138 |
| | 133 |
| | 86 |
| | 92 |
|
| Total assets | $ | 28,534 |
| | $ | 26,587 |
| | $ | 35,362 |
| | $ | 30,685 |
|
| | | | | | | | |
| Liabilities | | | | | | | |
| Long-term debt | $ | 6,347 |
| | $ | 5,124 |
| | $ | 6,631 |
| | $ | 6,451 |
|
| Pension and other postretirement benefit obligations | 1,079 |
| | 948 |
| | 1,081 |
| | 1,050 |
|
| Deferred compensation | 274 |
| | 259 |
| | 327 |
| | 281 |
|
| Payable to subsidiaries | | | 14 |
| | 3 |
|
| Notes due to subsidiaries | | | 1,000 |
| | 1,250 |
|
| Dividends payable to shareholders | 157 |
| | 150 |
| | 199 |
| | 198 |
|
| Other liabilities | 104 |
| | 81 |
| | 112 |
| | 140 |
|
| Total liabilities | 7,961 |
| | 6,562 |
| | 9,364 |
| | 9,373 |
|
| | | | | | | | |
| Shareholders’ equity | | | | | | | |
| Preferred stock and additional capital paid-in, $1 par value, 25 million shares authorized, 72.2 thousand issued and outstanding, and $1,805 aggregate liquidation preference | 1,746 |
| | 1,746 |
| |
| Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 366 million and 381 million shares outstanding | 9 |
| | 9 |
| |
| Preferred stock and additional capital paid-in, $1 par value, 25 million shares authorized, 92.5 thousand and 79.8 thousand shares issued and outstanding, $2,313 and $1,995 aggregate liquidation preference | | | 2,248 |
| | 1,930 |
|
| Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 319 million and 332 million shares outstanding | | | 9 |
| | 9 |
|
| Additional capital paid-in | 3,303 |
| | 3,245 |
| | 3,463 |
| | 3,310 |
|
| Retained income | 40,678 |
| | 39,413 |
| | 48,074 |
| | 44,033 |
|
| Deferred ESOP expense | (6 | ) | | (13 | ) | | — |
| | (3 | ) |
| Treasury stock, at cost (534 million and 519 million shares) | (24,741 | ) | | (23,620 | ) | |
| Treasury stock, at cost (581 million and 568 million shares) | | | (29,746 | ) | | (28,085 | ) |
| Accumulated other comprehensive income: | | | | | | | |
| Unrealized net capital gains and losses | 1,053 |
| | 620 |
| | 1,887 |
| | (2 | ) |
| Unrealized foreign currency translation adjustments | (50 | ) | | (60 | ) | | (59 | ) | | (49 | ) |
| Unrealized pension and other postretirement benefit cost | (1,419 | ) | | (1,315 | ) | |
| Total accumulated other comprehensive loss | (416 | ) | | (755 | ) | |
| Unamortized pension and other postretirement prior service credit | | | 122 |
| | 169 |
|
| Total accumulated other comprehensive income | | | 1,950 |
| | 118 |
|
| Total shareholders’ equity | 20,573 |
| | 20,025 |
| | 25,998 |
| | 21,312 |
|
| Total liabilities and shareholders’ equity | $ | 28,534 |
| | $ | 26,587 |
| | $ | 35,362 |
| | $ | 30,685 |
|
See accompanying notes to condensed financial information and notes to consolidated financial statements.
THE ALLSTATE CORPORATION AND SUBSIDIARIESS-3 www.allstate.com
SCHEDULE
The Allstate Corporation and Subsidiaries
Schedule II (CONTINUED)(Continued) —
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS Condensed Financial Information of Registrant Statement of Cash Flows
| | | ($ in millions) | Year Ended December 31, | | Years Ended December 31, |
| | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
| Cash flows from operating activities | | | | | | | | | | | |
| Net income | $ | 1,877 |
| | $ | 2,171 |
| | $ | 2,850 |
| | $ | 4,847 |
| | $ | 2,160 |
| | $ | 3,554 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | |
| Equity in net income of subsidiaries | (2,027 | ) | | (2,300 | ) | | (3,039 | ) | | (5,072 | ) | | (2,731 | ) | | (3,556 | ) |
| Dividends received from subsidiaries | 1,874 |
| | 2,300 |
| | 2,497 |
| | 2,434 |
| | 2,059 |
| | 1,671 |
|
| Realized capital gains and losses | (2 | ) | | — |
| | — |
| | (9 | ) | | 10 |
| | 2 |
|
| Loss on extinguishment of debt | — |
| | — |
| | 1 |
| |
| Pension and other postretirement remeasurement gains and losses | | | 103 |
| | 454 |
| | (219 | ) |
| Changes in: | | | | | | | | | | | |
| Pension and other postretirement benefits | 10 |
| | (15 | ) | | 41 |
| | (122 | ) | | (116 | ) | | (224 | ) |
| Income taxes | 13 |
| | 77 |
| | (158 | ) | | 13 |
| | (28 | ) | | 232 |
|
| Operating assets and liabilities | 43 |
| | 26 |
| | (29 | ) | | 111 |
| | 160 |
| | 56 |
|
| Net cash provided by operating activities | 1,788 |
| | 2,259 |
| | 2,163 |
| | 2,305 |
| | 1,968 |
| | 1,516 |
|
| | | | | | | | | | | | |
| Cash flows from investing activities | | | | | | | | | | | |
| Proceeds from sales of investments | 389 |
| | 399 |
| | 351 |
| | 1,094 |
| | 1,370 |
| | 880 |
|
| Proceeds from sales of investments to subsidiaries | | | — |
| | 390 |
| | — |
|
| Investment purchases | (243 | ) | | (4 | ) | | (1,174 | ) | | (892 | ) | | (1,037 | ) | | (748 | ) |
| Investment collections | 60 |
| | — |
| | 155 |
| | 65 |
| | 108 |
| | 13 |
|
| Return of capital from subsidiaries | (1,500 | ) | | 50 |
| | 1,200 |
| |
| Transfers to subsidiaries through intercompany loan agreement | (30 | ) | | — |
| | — |
| |
| Capital contribution or return of capital from subsidiaries | | | 43 |
| | (975 | ) | | 42 |
|
| Change in short-term investments, net | 58 |
| | 397 |
| | (88 | ) | | (417 | ) | | (115 | ) | | 48 |
|
| Net cash (used in) provided by investing activities | (1,266 | ) | | 842 |
| | 444 |
| | (107 | ) | | (259 | ) | | 235 |
|
| | | | | | | | | | | | |
| Cash flows from financing activities | | | | | | | | | | | |
| Proceeds from borrowings from subsidiaries | | | 1,000 |
| | 1,250 |
| | 300 |
|
| Repayment of notes due to subsidiaries | | | (1,250 | ) | | (250 | ) | | (50 | ) |
| Proceeds from issuance of long-term debt | 1,236 |
| | — |
| | — |
| | 491 |
| | 498 |
| | — |
|
| Repayment of long-term debt | (17 | ) | | (20 | ) | | (962 | ) | |
| Redemption of preferred stock | | | (1,132 | ) | | (385 | ) | | — |
|
| Redemption and repayment of long-term debt | | | (317 | ) | | (400 | ) | | — |
|
| Proceeds from issuance of preferred stock | — |
| | — |
| | 965 |
| | 1,414 |
| | 557 |
| | — |
|
| Dividends paid on common stock | (486 | ) | | (483 | ) | | (477 | ) | | (653 | ) | | (614 | ) | | (525 | ) |
| Dividends paid on preferred stock | (116 | ) | | (116 | ) | | (87 | ) | | (134 | ) | | (134 | ) | | (116 | ) |
| Treasury stock purchases | (1,337 | ) | | (2,808 | ) | | (2,301 | ) | | (1,735 | ) | | (2,303 | ) | | (1,495 | ) |
| Shares reissued under equity incentive plans, net | 164 |
| | 130 |
| | 266 |
| | 120 |
| | 73 |
| | 135 |
|
| Excess tax benefits on share-based payment arrangements | 32 |
| | 45 |
| | 41 |
| |
| Other | — |
| | — |
| | (2 | ) | | — |
| | (1 | ) | | (2 | ) |
| Net cash used in financing activities | (524 | ) | | (3,252 | ) | | (2,557 | ) | | (2,196 | ) | | (1,709 | ) | | (1,753 | ) |
| | | | | | | | | | | | |
| Net (decrease) increase in cash | (2 | ) | | (151 | ) | | 50 |
| |
| Net increase (decrease) in cash | | | 2 |
| | — |
| | (2 | ) |
| Cash at beginning of year | 4 |
| | 155 |
| | 105 |
| | — |
| | — |
| | 2 |
|
| Cash at end of year | $ | 2 |
| | $ | 4 |
| | $ | 155 |
| | $ | 2 |
| | $ | — |
| | $ | — |
|
See accompanying notes to condensed financial information and notes to consolidated financial statements.
THE ALLSTATE CORPORATION AND SUBSIDIARIESThe Allstate Corporation S-4
SCHEDULE
The Allstate Corporation and Subsidiaries
Schedule II (CONTINUED)(Continued) — Condensed Financial Information of Registrant
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATIONNotes to Condensed Financial Information
1. General
ThePursuant to rules and regulations of the SEC, the unconsolidated condensed financial statements of the Parent Company do not reflect all of the information and notes normally included with financial statements prepared in accordance with GAAP. Therefore, these condensed financial statements of the Registrant should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8.
The long-term debt presented in Note 12 “Capital Structure” are direct obligations of the Registrant. A majority of the pension and other postretirement benefits plans presented in Note 17 “Benefit Plans” are direct obligations of the Registrant.
Participating subsidiaries fund the pension plans contributions under a master services cost sharing agreement. In addition, as a result of joint and several pension liability rules under the Internal Revenue Code and the Employee Retirement Income Security Act of 1974, as amended, many liabilities that arise in connection with pension plans are joint and several across all members of a controlled group of entities.
2. Notes due to subsidiaries
On June 19, 2019, the Registrant issued a $1.00 billion note, with a rate of 2.63% due on June 19, 2020 to Kennett Capital Inc. The proceeds of this issuance were used for cash management purposes.
On October 11, 2018 and December 18, 2018, the Registrant issued $250 million and $1.00 billion notes, with a rate of 2.49% and 3.03% due on April 11, 2019 and June 18, 2019, respectively, both to its wholly owned subsidiary Kennett Capital Inc. The proceeds of these issuances were used for cash management purposes. On April 11, 2019 and June 18, 2019, the Registrant repaid $250 million and $1.00 billion, respectively, to Kenneth Capital Inc.
3. Supplemental Disclosures of Cash Flow Information
The Registrant paid $287$312 million, $289$330 million and $332$331 million of interest on debt in 2016, 20152019, 2018 and 2014,2017, respectively.
THE ALLSTATE CORPORATION AND SUBSIDIARIES2019 Form 10-K
SCHEDULE
The Allstate Corporation and Subsidiaries
Schedule III — SUPPLEMENTARY INSURANCE INFORMATION
Supplementary Insurance Information |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | As of December 31, | | For the year ended December 31, |
| Segment | | Deferred policy acquisition costs | | Reserves for claims and claims expense, contract benefits and contractholder funds | | Unearned premiums | | Premium revenue and contract charges | | Net investment income (1) | | Claims and claims expense, contract benefits and interest credited to contractholders | | Amortization of deferred policy acquisition costs | | Other operating costs and expenses | | Premiums written (excluding life) |
| 2016 | | | | | | | | | | | | | | | | | | |
| Property-Liability operations | | | | | | | | | | | | | | | | | | |
| Allstate Protection | | $ | 2,188 |
| | $ | 23,297 |
| | $ | 12,571 |
| | $ | 31,307 |
| | | | $ | 22,116 |
| | $ | 4,267 |
| | $ | 3,607 |
| | $ | 31,597 |
|
| Discontinued Lines and Coverages | | — |
| | 1,953 |
| | — |
| | — |
| | | | 105 |
| | — |
| | 2 |
| | 3 |
|
| Total Property-Liability | | 2,188 |
| | 25,250 |
| | 12,571 |
| | 31,307 |
| | $ | 1,266 |
| | 22,221 |
| | 4,267 |
| | 3,609 |
| | 31,600 |
|
| Allstate Financial operations | | 1,766 |
| | 32,499 |
| | 12 |
| | 2,275 |
| | 1,734 |
| | 2,583 |
| | 283 |
| | 498 |
| | 855 |
|
| Corporate and Other | | — |
| | — |
| | — |
| | — |
| | 42 |
| | — |
| | — |
| | 324 |
| | — |
|
| Total | | $ | 3,954 |
| | $ | 57,749 |
| | $ | 12,583 |
| | $ | 33,582 |
| | $ | 3,042 |
| | $ | 24,804 |
| | $ | 4,550 |
| | $ | 4,431 |
| | $ | 32,455 |
|
| 2015 | | | | | | | | | | | | | | | | | | |
| Property-Liability operations | | | | | | | | | | | | | | | | | | |
| Allstate Protection | | $ | 2,029 |
| | $ | 21,807 |
| | $ | 12,189 |
| | $ | 30,309 |
| | | | $ | 20,981 |
| | $ | 4,102 |
| | $ | 3,612 |
| | $ | 30,871 |
|
| Discontinued Lines and Coverages | | — |
| | 2,062 |
| | — |
| | — |
| | | | 53 |
| | — |
| | 2 |
| | — |
|
| Total Property-Liability | | 2,029 |
| | 23,869 |
| | 12,189 |
| | 30,309 |
| | $ | 1,237 |
| | 21,034 |
| | 4,102 |
| | 3,614 |
| | 30,871 |
|
| Allstate Financial operations | | 1,832 |
| | 33,542 |
| | 13 |
| | 2,158 |
| | 1,884 |
| | 2,564 |
| | 262 |
| | 472 |
| | 777 |
|
| Corporate and Other | | — |
| | — |
| | — |
| | — |
| | 35 |
| | — |
| | — |
| | 326 |
| | — |
|
| Total | | $ | 3,861 |
| | $ | 57,411 |
| | $ | 12,202 |
| | $ | 32,467 |
| | $ | 3,156 |
| | $ | 23,598 |
| | $ | 4,364 |
| | $ | 4,412 |
| | $ | 31,648 |
|
| 2014 | | | | | | | | | | | | | | | | | | |
| Property-Liability operations | | | | | | | | | | | | | | | | | | |
| Allstate Protection | | $ | 1,820 |
| | $ | 20,709 |
| | $ | 11,640 |
| | $ | 28,928 |
| | | | $ | 19,315 |
| | $ | 3,875 |
| | $ | 3,851 |
| | $ | 29,613 |
|
| Discontinued Lines and Coverages | | — |
| | 2,214 |
| | — |
| | 1 |
| | | | 113 |
| | — |
| | 3 |
| | 1 |
|
| Total Property-Liability | | 1,820 |
| | 22,923 |
| | 11,640 |
| | 28,929 |
| | $ | 1,301 |
| | 19,428 |
| | 3,875 |
| | 3,854 |
| | 29,614 |
|
| Allstate Financial operations | | 1,705 |
| | 34,909 |
| | 15 |
| | 2,157 |
| | 2,131 |
| | 2,684 |
| | 260 |
| | 468 |
| | 746 |
|
| Corporate and Other | | — |
| | — |
| | — |
| | — |
| | 27 |
| | — |
| | — |
| | 360 |
| | — |
|
| Total | | $ | 3,525 |
| | $ | 57,832 |
| | $ | 11,655 |
| | $ | 31,086 |
| | $ | 3,459 |
| | $ | 22,112 |
| | $ | 4,135 |
| | $ | 4,682 |
| | $ | 30,360 |
|
________________________ |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | As of December 31, | | For the years ended December 31, |
| Segment | | Deferred policy acquisition costs | | Reserves for claims and claims expense, contract benefits and contractholder funds | | Unearned premiums | | Premium revenue and contract charges | | Net investment income (1) | | Claims and claims expense, contract benefits and interest credited to contractholders | | Amortization of deferred policy acquisition costs | | Other operating costs and expenses | | Premiums written (excluding life) |
| 2019 | | | | | | | | | | | | | | | | | | |
| Property-Liability | | | | | | | | | | | | | | | | | | |
| Allstate Protection | | $ | 1,624 |
| | $ | 25,843 |
| | $ | 12,567 |
| | $ | 34,843 |
| | | | $ | 23,517 |
| | $ | 4,649 |
| | $ | 4,506 |
| | $ | 35,419 |
|
| Discontinued Lines and Coverages | | — |
| | 1,818 |
| | — |
| | — |
| | | | 105 |
| | — |
| | 3 |
| | — |
|
| Total Property-Liability | | 1,624 |
| | 27,661 |
| | 12,567 |
| | 34,843 |
| | $ | 1,533 |
| | 23,622 |
| | 4,649 |
| | 4,509 |
| | 35,419 |
|
Service Businesses (2) | | 1,449 |
| | 51 |
| | 2,765 |
| | 1,387 |
| | 42 |
| | 363 |
| | 543 |
| | 838 |
| | 1,535 |
|
| Allstate Life | | 1,079 |
| | 10,541 |
| | 3 |
| | 1,343 |
| | 514 |
| | 1,154 |
| | 173 |
| | 356 |
| | — |
|
| Allstate Benefits | | 527 |
| | 1,950 |
| | 8 |
| | 1,145 |
| | 83 |
| | 635 |
| | 161 |
| | 285 |
| | 988 |
|
| Allstate Annuities | | 20 |
| | 17,501 |
| | — |
| | 13 |
| | 917 |
| | 890 |
| | 7 |
| | 30 |
| | — |
|
| Corporate and Other | | — |
| | — |
| | — |
| | — |
| | 70 |
| | — |
| | — |
| | 531 |
| | — |
|
Intersegment Eliminations (2) | | — |
| | — |
| | — |
| | (154 | ) | | — |
| | (9 | ) | | — |
| | (145 | ) | | — |
|
| Total | | $ | 4,699 |
| | $ | 57,704 |
| | $ | 15,343 |
| | $ | 38,577 |
| | $ | 3,159 |
| | $ | 26,655 |
| | $ | 5,533 |
| | $ | 6,404 |
| | $ | 37,942 |
|
| 2018 | | | | | | | | | | | | | | | | | | |
| Property-Liability | | | | | | | | | | | | | | | | | | |
| Allstate Protection | | $ | 1,618 |
| | $ | 25,495 |
| | $ | 11,953 |
| | $ | 32,950 |
| | | | $ | 22,348 |
| | $ | 4,475 |
| | $ | 4,522 |
| | $ | 33,555 |
|
| Discontinued Lines and Coverages | | — |
| | 1,864 |
| | — |
| | — |
| | | | 87 |
| | — |
| | 3 |
| | — |
|
| Total Property-Liability | | 1,618 |
| | 27,359 |
| | 11,953 |
| | 32,950 |
| | $ | 1,464 |
| | 22,435 |
| | 4,475 |
| | 4,525 |
| | 33,555 |
|
Service Businesses (2) | | 1,290 |
| | 64 |
| | 2,546 |
| | 1,220 |
| | 27 |
| | 350 |
| | 463 |
| | 603 |
| | 1,431 |
|
| Allstate Life | | 1,300 |
| | 10,333 |
| | 3 |
| | 1,315 |
| | 505 |
| | 1,094 |
| | 132 |
| | 364 |
| | — |
|
| Allstate Benefits | | 549 |
| | 1,905 |
| | 8 |
| | 1,135 |
| | 77 |
| | 630 |
| | 145 |
| | 278 |
| | 980 |
|
| Allstate Annuities | | 27 |
| | 18,341 |
| | — |
| | 15 |
| | 1,096 |
| | 903 |
| | 7 |
| | 31 |
| | — |
|
| Corporate and Other | | — |
| | — |
| | — |
| | — |
| | 71 |
| | — |
| | — |
| | 880 |
| | — |
|
Intersegment Eliminations (2) | | — |
| | — |
| | — |
| | (122 | ) | | — |
| | (7 | ) | | — |
| | (115 | ) | | — |
|
| Total | | $ | 4,784 |
| | $ | 58,002 |
| | $ | 14,510 |
| | $ | 36,513 |
| | $ | 3,240 |
| | $ | 25,405 |
| | $ | 5,222 |
| | $ | 6,566 |
| | $ | 35,966 |
|
| 2017 | | | | | | | | | | | | | | | | | | |
| Property-Liability | | | | | | | | | | | | | | | | | | |
| Allstate Protection | | $ | 1,510 |
| | $ | 24,336 |
| | $ | 11,409 |
| | $ | 31,433 |
| | | | $ | 21,388 |
| | $ | 4,205 |
| | $ | 4,239 |
| | $ | 31,648 |
|
| Discontinued Lines and Coverages | | — |
| | 1,893 |
| | — |
| | — |
| | | | 96 |
| | — |
| | 3 |
| | — |
|
| Total Property-Liability | | 1,510 |
| | 26,229 |
| | 11,409 |
| | 31,433 |
| | $ | 1,478 |
| | 21,484 |
| | 4,205 |
| | 4,242 |
| | 31,648 |
|
Service Businesses (2) | | 954 |
| | 96 |
| | 2,052 |
| | 977 |
| | 16 |
| | 369 |
| | 296 |
| | 565 |
| | 1,094 |
|
| Allstate Life | | 1,152 |
| | 10,244 |
| | 4 |
| | 1,280 |
| | 489 |
| | 1,047 |
| | 134 |
| | 344 |
| | — |
|
| Allstate Benefits | | 541 |
| | 1,869 |
| | 8 |
| | 1,084 |
| | 72 |
| | 599 |
| | 142 |
| | 261 |
| | 919 |
|
| Allstate Annuities | | 34 |
| | 19,870 |
| | — |
| | 14 |
| | 1,305 |
| | 967 |
| | 7 |
| | 34 |
| | — |
|
| Corporate and Other | | — |
| | — |
| | — |
| | — |
| | 41 |
| | — |
| | — |
| | 292 |
| | — |
|
Intersegment Eliminations (2) | | — |
| | — |
| | — |
| | (110 | ) | | — |
| | (6 | ) | | — |
| | (104 | ) | | — |
|
| Total | | $ | 4,191 |
| | $ | 58,308 |
| | $ | 13,473 |
| | $ | 34,678 |
| | $ | 3,401 |
| | $ | 24,460 |
| | $ | 4,784 |
| | $ | 5,634 |
| | $ | 33,661 |
|
| |
(1) | A single investment portfolio supports both Allstate Protection and Discontinued Lines and Coverages segments. |
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE IV — REINSURANCE
|
| | | | | | | | | | | | | | | | | | |
| ($ in millions) | | | | | | | | | |
| | Gross amount | | Ceded to other companies (1) | | Assumed from other companies | | Net amount | | Percentage of amount assumed to net |
| Year ended December 31, 2016 | | | | | | | | | |
| Life insurance in force | $ | 167,355 |
| | $ | 90,011 |
| | $ | 275,008 |
| | $ | 352,352 |
| | 78.0 | % |
| Premiums and contract charges: | | | | | | | | | |
| Life insurance | $ | 877 |
| | $ | 279 |
| | $ | 818 |
| | $ | 1,416 |
| | 57.8 | % |
| Accident and health insurance | 889 |
| | 30 |
| | — |
| | 859 |
| | — | % |
| Property-liability insurance | 32,249 |
| | 987 |
| | 45 |
| | 31,307 |
| | 0.1 | % |
| Total premiums and contract charges | $ | 34,015 |
| | $ | 1,296 |
| | $ | 863 |
| | $ | 33,582 |
| | 2.6 | % |
| Year ended December 31, 2015 | | | | | | | | |
|
| Life insurance in force | $ | 156,486 |
| | $ | 93,326 |
| | $ | 280,644 |
| | $ | 343,804 |
| | 81.6 | % |
| Premiums and contract charges: | | | | | | | | |
|
| Life insurance | $ | 828 |
| | $ | 299 |
| | $ | 849 |
| | $ | 1,378 |
| | 61.6 | % |
| Accident and health insurance | 813 |
| | 33 |
| | — |
| | 780 |
| | — | % |
| Property-liability insurance | 31,274 |
| | 1,006 |
| | 41 |
| | 30,309 |
| | 0.1 | % |
| Total premiums and contract charges | $ | 32,915 |
| | $ | 1,338 |
| | $ | 890 |
| | $ | 32,467 |
| | 2.7 | % |
| Year ended December 31, 2014 | | | | | | | | |
|
| Life insurance in force | $ | 135,627 |
| | $ | 98,165 |
| | $ | 290,565 |
| | $ | 328,027 |
| | 88.6 | % |
| Premiums and contract charges: | | | | | | | | |
|
| Life insurance | $ | 1,144 |
| | $ | 360 |
| | $ | 629 |
| | $ | 1,413 |
| | 44.5 | % |
| Accident and health insurance | 800 |
| | 56 |
| | — |
| | 744 |
| | — | % |
| Property-liability insurance | 29,914 |
| | 1,030 |
| | 45 |
| | 28,929 |
| | 0.2 | % |
| Total premiums and contract charges | $ | 31,858 |
| | $ | 1,446 |
| | $ | 674 |
| | $ | 31,086 |
| | 2.2 | % |
| |
(2) | Includes intersegment premiums and service fees and the related incurred losses and expenses that are eliminated in the consolidated financial statements. |
The Allstate Corporation S-6
The Allstate Corporation and Subsidiaries
Schedule IV — Reinsurance
|
| | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | Gross amount | | Ceded to other companies (1) | | Assumed from other companies | | Net amount | | Percentage of amount assumed to net |
| Year ended December 31, 2019 | | | | | | | | | | |
| Life insurance in force | | $ | 219,785 |
| | $ | 74,021 |
| | $ | 229,419 |
| | $ | 375,183 |
| | 61.1 | % |
| Premiums and contract charges: | | | | | | | | | | |
| Life insurance | | $ | 1,062 |
| | $ | 262 |
| | $ | 712 |
| | $ | 1,512 |
| | 47.1 | % |
| Accident and health insurance | | 1,012 |
| | 23 |
| | — |
| | 989 |
| | — | % |
| Property and casualty insurance | | 37,104 |
| | 1,122 |
| | 94 |
| | 36,076 |
| | 0.3 | % |
| Total premiums and contract charges | | $ | 39,178 |
| | $ | 1,407 |
| | $ | 806 |
| | $ | 38,577 |
| | 2.1 | % |
| Year ended December 31, 2018 | | | | | | | | | |
|
| Life insurance in force | | $ | 207,434 |
| | $ | 81,186 |
| | $ | 243,161 |
| | $ | 369,409 |
| | 65.8 | % |
| Premiums and contract charges: | | | | | | | | | |
|
| Life insurance | | $ | 994 |
| | $ | 266 |
| | $ | 754 |
| | $ | 1,482 |
| | 50.9 | % |
| Accident and health insurance | | 1,007 |
| | 24 |
| | — |
| | 983 |
| | — | % |
| Property and casualty insurance | | 34,977 |
| | 1,016 |
| | 87 |
| | 34,048 |
| | 0.3 | % |
| Total premiums and contract charges | | $ | 36,978 |
| | $ | 1,306 |
| | $ | 841 |
| | $ | 36,513 |
| | 2.3 | % |
| Year ended December 31, 2017 | | | | | | | | | |
|
| Life insurance in force | | $ | 188,186 |
| | $ | 86,642 |
| | $ | 259,671 |
| | $ | 361,215 |
| | 71.9 | % |
| Premiums and contract charges: | | | | | | | | | |
|
| Life insurance | | $ | 936 |
| | $ | 276 |
| | $ | 787 |
| | $ | 1,447 |
| | 54.4 | % |
| Accident and health insurance | | 958 |
| | 27 |
| | — |
| | 931 |
| | — | % |
| Property and casualty insurance | | 33,221 |
| | 971 |
| | 50 |
| | 32,300 |
| | 0.2 | % |
| Total premiums and contract charges | | $ | 35,115 |
| | $ | 1,274 |
| | $ | 837 |
| | $ | 34,678 |
| | 2.4 | % |
| |
(1) | NoNaN reinsurance or coinsurance income was netted against premium ceded in 2016, 20152019, 2018 or 2014.2017. |
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE V — VALUATION ALLOWANCES AND QUALIFYING ACCOUNTS
|
| | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | | Additions | | | | |
| Description | Balance as of beginning of period | | Charged to costs and expenses | | Other additions | | Deductions | | Balance as of end of period |
| Year ended December 31, 2016 | | | | | | | | | |
| Allowance for reinsurance recoverables | $ | 80 |
| | $ | 5 |
| | $ | — |
| | $ | 1 |
| | $ | 84 |
|
| Allowance for premium installment receivable | 90 |
| | 107 |
| | — |
| | 113 |
| | 84 |
|
| Allowance for deferred tax assets | — |
| | — |
| | — |
| | — |
| | — |
|
| Allowance for estimated losses on mortgage loans | 3 |
| | — |
| | — |
| | — |
| | 3 |
|
| Year ended December 31, 2015 | | | | | | | | |
|
| Allowance for reinsurance recoverables | $ | 95 |
| | $ | (15 | ) | | $ | — |
| | $ | — |
| | $ | 80 |
|
| Allowance for premium installment receivable | 83 |
| | 107 |
| | — |
| | 100 |
| | 90 |
|
| Allowance for deferred tax assets | — |
| | — |
| | — |
| | — |
| | — |
|
| Allowance for estimated losses on mortgage loans | 8 |
| | (4 | ) | | — |
| | 1 |
| | 3 |
|
| Year ended December 31, 2014 | | | | | | | | |
|
| Allowance for reinsurance recoverables | $ | 92 |
| | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 95 |
|
| Allowance for premium installment receivable | 77 |
| | 99 |
| | — |
| | 93 |
| | 83 |
|
| Allowance for deferred tax assets | — |
| | — |
| | — |
| | — |
| | — |
|
| Allowance for estimated losses on mortgage loans | 21 |
| | (5 | ) | | — |
| | 8 |
| | 8 |
|
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE VI — SUPPLEMENTARY INFORMATION CONCERNING
CONSOLIDATED PROPERTY-CASUALTY INSURANCE OPERATIONS
|
| | | | | | | | | | | |
| ($ in millions) | As of December 31, |
| | 2016 | | 2015 | | 2014 |
| Deferred policy acquisition costs | $ | 2,188 |
| | $ | 2,029 |
| | $ | 1,820 |
|
| Reserves for insurance claims and claims expense | 25,250 |
| | 23,869 |
| | 22,923 |
|
| Unearned premiums | 12,571 |
| | 12,189 |
| | 11,640 |
|
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Earned premiums | $ | 31,307 |
| | $ | 30,309 |
| | $ | 28,929 |
|
| Net investment income | 1,266 |
| | 1,237 |
| | 1,301 |
|
| Claims and claims adjustment expense incurred | | | | | |
| Current year | 22,238 |
| | 20,953 |
| | 19,512 |
|
| Prior years | (17 | ) | | 81 |
| | (84 | ) |
| Amortization of deferred policy acquisition costs | 4,267 |
| | 4,102 |
| | 3,875 |
|
| Paid claims and claims adjustment expense | 21,132 |
| | 20,286 |
| | 19,392 |
|
| Premiums written | 31,600 |
| | 30,871 |
| | 29,614 |
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
The Allstate Corporation
Northbrook, Illinois 60062
We have audited the consolidated financial statements of The Allstate Corporation and subsidiaries (the “Company”) as of December 31, 2016Subsidiaries
Schedule V — Valuation Allowances and 2015, and for each of the three years in the period ended December 31, 2016, and the Company’s internal control over financial reporting as of December 31, 2016, and have issued our report thereon dated February 17, 2017; such consolidated financial statements and report are included elsewhere in this Annual Report on Form 10-K. Our audits also included the consolidated financial statement schedules of the Company listed in the accompanying index at Item 15. These consolidated financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
February 17, 2017
Qualifying Accounts
S-10 |
| | | | | | | | | | | | | | | | | | | | |
| ($ in millions) | | | | Additions | | | | |
| Description | | Balance as of beginning of period | | Charged to costs and expenses | | Other additions | | Deductions | | Balance as of end of period |
| Year ended December 31, 2019 | | | | | | | | | | |
| Allowance for reinsurance recoverables | | $ | 65 |
| | $ | (2 | ) | | $ | — |
| | $ | — |
| | $ | 63 |
|
| Allowance for premium installment receivable | | 77 |
| | 137 |
| | — |
| | 124 |
| | 90 |
|
| Allowance for deferred tax assets | | — |
| | — |
| | — |
| | — |
| | — |
|
| Allowance for estimated losses on mortgage loans | | 3 |
| | — |
| | — |
| | — |
| | 3 |
|
| Allowance for estimated losses on agent loans | | 2 |
| | 1 |
| | — |
| | — |
| | 3 |
|
| Year ended December 31, 2018 | | | | | | | | | |
|
| Allowance for reinsurance recoverables | | $ | 70 |
| | $ | (5 | ) | | $ | — |
| | $ | — |
| | $ | 65 |
|
| Allowance for premium installment receivable | | 77 |
| | 118 |
| | — |
| | 118 |
| | 77 |
|
| Allowance for deferred tax assets | | — |
| | — |
| | — |
| | — |
| | — |
|
| Allowance for estimated losses on mortgage loans | | 3 |
| | — |
| | — |
| | — |
| | 3 |
|
| Allowance for estimated losses on agent loans | | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
| Year ended December 31, 2017 | | | | | | | | | |
|
| Allowance for reinsurance recoverables | | $ | 84 |
| | $ | (10 | ) | | $ | — |
| | $ | 4 |
| | $ | 70 |
|
| Allowance for premium installment receivable | | 84 |
| | 109 |
| | — |
| | 116 |
| | 77 |
|
| Allowance for deferred tax assets | | — |
| | — |
| | — |
| | — |
| | — |
|
| Allowance for estimated losses on mortgage loans | | 3 |
| | 1 |
| | — |
| | 1 |
| | 3 |
|
| Allowance for estimated losses on agent loans | | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
The Allstate Corporation S-8
