| General | Note 1 General Basis of presentation The accompanying condensed consolidated financial statements include the accounts of The Allstate Corporation (the “Corporation”) and its wholly owned subsidiaries, primarily Allstate Insurance Company (“AIC”), a property and casualty insurance company with various property and casualty and life and investment subsidiaries, including Allstate Life Insurance Company (“ALIC”) (collectively referred to as the “Company” or “Allstate”). These condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The condensed consolidated financial statements and notes as of June 30, 2019 and for the three and six month periods ended June 30, 2019 and 2018 are unaudited. The condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods. These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 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 Company’s change in accounting principle for pension and other postretirement benefit plans. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year. All significant intercompany accounts and transactions have been eliminated. To conform to the current year presentation, certain amounts in the prior year condensed consolidated financial statements and notes have been reclassified. Impairment of purchased intangibles During the second quarter of 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 Plan name. The SquareTrade trade name will continue to be used outside of the United States. The change in the second quarter of 2019 required an impairment evaluation of the indefinite-lived intangible asset recognized in the Service Businesses segment for SquareTrade’s trade name that was recorded when SquareTrade was acquired in 2017. As a result, the Company recognized an impairment of $55 million pre-tax during the second quarter of 2019. Adopted accounting standards Accounting for Leases Effective January 1, 2019 the Company adopted new Financial Accounting Standards Board (“FASB”) guidance 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 right-of-use (“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 Condensed 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 practical expedients which do not require reassessment of existing contracts for the existence of a lease or reassessment of existing lease classifications. Upon adoption, the new guidance required sellers in a sale-leaseback transaction to recognize the entire 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, 2019 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 to better align with an organization’s risk management activities. 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. Changes to significant accounting policies 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 11 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 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 ROU asset recorded in other assets. As of June 30, 2019, the Company had $558 million in lease liabilities and $461 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 lease commencement when determining the present value of future lease payments. The Company has lease agreements with lease and non-lease components, which are generally 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 $42 million and $83 million , including $8 million and $15 million of variable lease costs for the three and six months ended June 30, 2019, respectively. Other information related to operating leases As of June 30, 2019 Weighted average remaining lease term (years) 6 Weighted average discount rate 3.39 % Maturity of lease liabilities ($ in millions) Operating leases 2019 (1) $ 50 2020 136 2021 107 2022 89 2023 74 2024 57 Thereafter 105 Total lease payments $ 618 Less: interest (60 ) Present value of lease liabilities $ 558 (1) Excludes maturity of lease liabilities for the six months ended June 30, 2019. Pending accounting standards 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 and includes 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 a 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 results in a net carrying value at the amount expected to be collected. The reporting entity must consider all relevant information available when estimating expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts over the 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 amount below zero. The guidance is effective for reporting 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 remain in process, 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 mortgage loans, bank loans and reinsurance recoverables and will depend on economic conditions and judgments at the date of adoption as well as the size and composition of the loan portfolios and reinsurance balances. The impact of adoption is not expected to be material to the Company’s results of operations or financial position. 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 AOCI and into the income statement in the coming year and the anticipated impact of 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. Accounting for Long-Duration Insurance Contracts In 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, cash flows 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 would result in reserves that are deficient compared to the reserves recorded. The new guidance requires deferred policy acquisition costs (“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 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. Market risk benefit product features are required to 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 is to be included in the comparable financial statements issued in reporting periods beginning after December 15, 2020, 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. In July 2019, the FASB voted to expose a proposal for a thirty-day comment period to delay the effective date of the new guidance for public business entities that are SEC filers to reporting periods beginning after December 15, 2021. If adopted, the proposal would extend the effective date of the new guidance for public business entities that are SEC filers by one year. 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 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. Change in accounting principle The Company changed 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 Condensed 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 to remeasure its pension and postretirement plans on a quarterly basis. D ifferences 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 other 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 4) participant experience different from demographic assumptions. The Company also changed its policy for recognizing expected returns on plan assets by eliminating the permitted accounting practice allowing the five-year smoothing of equity 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 economic obligations in accounting results and better aligns with fair 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 retrospective basis and as of January 1, 2018 resulted in a cumulative effect decrease to retained income of $1.58 billion , with a corresponding offset to AOCI and had no impact on total shareholders’ equity. Pension and other postretirement service cost, interest cost, expected return on plan assets and amortization of prior service credits are allocated to the Company’s reportable segments. The pension and other postretirement remeasurement gains and losses are now reported in the Corporate and Other segment. The impacts of the adjustments on the financial statements are summarized in the following tables. Condensed Consolidated Statements of Operations (unaudited) Previous accounting principle Impact of change (1) As reported ($ in millions, except per share data) Three months ended June 30, 2019 Property and casualty insurance claims and claims expense $ 6,376 $ (20 ) $ 6,356 Operating costs and expenses 1,401 (21 ) 1,380 Pension and other postretirement remeasurement gains and losses — 125 125 Restructuring and related charges 5 4 9 Total costs and expenses 9,980 88 10,068 Income from operations before income tax expense 1,166 (88 ) 1,078 Income tax expense 246 (19 ) 227 Net income 920 (69 ) 851 Net income applicable to common shareholders $ 890 $ (69 ) $ 821 Earnings per common share: Net income applicable to common shareholders per common share - Basic $ 2.68 $ (0.21 ) $ 2.47 Net income applicable to common shareholders per common share - Diluted $ 2.64 $ (0.20 ) $ 2.44 Six months ended June 30, 2019 Property and casualty insurance claims and claims expense $ 12,205 $ (29 ) $ 12,176 Operating costs and expenses 2,789 (29 ) 2,760 Pension and other postretirement remeasurement gains and losses — 140 140 Restructuring and related charges 27 — 27 Total costs and expenses 19,357 82 19,439 Income from operations before income tax expense 2,780 (82 ) 2,698 Income tax expense 573 (18 ) 555 Net income 2,207 (64 ) 2,143 Net income applicable to common shareholders $ 2,146 $ (64 ) $ 2,082 Earnings per common share: Net income applicable to common shareholders per common share - Basic $ 6.46 $ (0.19 ) $ 6.27 Net income applicable to common shareholders per common share - Diluted $ 6.36 $ (0.19 ) $ 6.17 (1) The Company merged two of its pension plans, which had no impact on our financial statements as we remeasure pension plan assets and projected benefit obligations immediately in earnings on a quarterly basis. However, the plan merger increased the impact of change by $18 million for both the second quarter and first six months of 2019, reflecting the shorter amortization period for losses deferred in AOCI from one of the merged plans that was required as part of the merger. Condensed Consolidated Statements of Operations (unaudited) Previously reported Impact of change As adjusted ($ in millions, except per share data) Three months ended June 30, 2018 Property and casualty insurance claims and claims expense $ 5,792 $ (15 ) $ 5,777 Operating costs and expenses 1,384 (26 ) 1,358 Pension and other postretirement remeasurement gains and losses — (7 ) (7 ) Restructuring and related charges 27 (4 ) 23 Total costs and expenses 9,256 (52 ) 9,204 Income from operations before income tax expense 845 52 897 Income tax expense 169 11 180 Net income 676 41 717 Net income applicable to common shareholders $ 637 $ 41 $ 678 Earnings per common share: Net income applicable to common shareholders per common share - Basic $ 1.82 $ 0.12 $ 1.94 Net income applicable to common shareholders per common share - Diluted $ 1.80 $ 0.11 $ 1.91 Six months ended June 30, 2018 Property and casualty insurance claims and claims expense $ 10,941 $ (35 ) $ 10,906 Operating costs and expenses 2,717 (56 ) 2,661 Pension and other postretirement remeasurement gains and losses — 7 7 Restructuring and related charges 49 (7 ) 42 Total costs and expenses 17,803 (91 ) 17,712 Income from operations before income tax expense 2,069 91 2,160 Income tax expense 418 19 437 Net income 1,651 72 1,723 Net income applicable to common shareholders $ 1,583 $ 72 $ 1,655 Earnings per common share: Net income applicable to common shareholders per common share - Basic $ 4.50 $ 0.21 $ 4.71 Net income applicable to common shareholders per common share - Diluted $ 4.43 $ 0.20 $ 4.63 Condensed Consolidated Statements of Comprehensive Income (unaudited) Previous accounting principle Impact of change As reported ($ in millions) Three months ended June 30, 2019 Net income $ 920 $ (69 ) $ 851 Other comprehensive income (loss), after-tax Changes in: Unrealized net capital gains and losses 682 — 682 Unrealized foreign currency translation adjustments 7 (3 ) 4 Unrecognized pension and other postretirement benefit cost (1) 125 (136 ) (11 ) Other comprehensive income (loss), after-tax 814 (139 ) 675 Comprehensive income $ 1,734 $ (208 ) $ 1,526 Six months ended June 30, 2019 Net income $ 2,207 $ (64 ) $ 2,143 Other comprehensive income (loss), after-tax Changes in: Unrealized net capital gains and losses 1,656 — 1,656 Unrealized foreign currency translation adjustments 14 (5 ) 9 Unrecognized pension and other postretirement benefit cost (1) 135 (158 ) (23 ) Other comprehensive income (loss), after-tax 1,805 (163 ) 1,642 Comprehensive income $ 4,012 $ (227 ) $ 3,785 (1) Financial statement line item has been updated to “ Unamortized pension and other postretirement prior service credit ”. Condensed Consolidated Statements of Comprehensive Income (unaudited) Previously reported Impact of change As adjusted ($ in millions) Three months ended June 30, 2018 Net income $ 676 $ 41 $ 717 Other comprehensive loss, after-tax Changes in: Unrealized net capital gains and losses (133 ) — (133 ) Unrealized foreign currency translation adjustments (7 ) 1 (6 ) Unrecognized pension and other postretirement benefit cost 22 (38 ) (16 ) Other comprehensive loss, after-tax (118 ) (37 ) (155 ) Comprehensive income $ 558 $ 4 $ 562 Six months ended June 30, 2018 Net income $ 1,651 $ 72 $ 1,723 Other comprehensive loss, after-tax Changes in: Unrealized net capital gains and losses (698 ) — (698 ) Unrealized foreign currency translation adjustments (11 ) 3 (8 ) Unrecognized pension and other postretirement benefit cost 45 (75 ) (30 ) Other comprehensive loss, after-tax (664 ) (72 ) (736 ) Comprehensive income $ 987 $ — $ 987 Condensed Consolidated Statements of Financial Position (unaudited) Previous accounting principle Impact of change As reported ($ in millions) June 30, 2019 Deferred income taxes $ 1,057 $ (60 ) $ 997 Other liabilities and accrued expenses 8,855 287 9,142 Total liabilities 93,671 227 93,898 Retained income 47,542 (1,739 ) 45,803 Unrealized foreign currency translation adjustments (50 ) 10 (40 ) Unrecognized pension and other postretirement benefit cost (1,356 ) 1,502 146 Total AOCI 248 1,512 1,760 Total shareholders’ equity $ 24,703 $ (227 ) $ 24,476 Previously reported Impact of change As adjusted ($ in millions) 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 (1,491 ) 1,660 169 Total AOCI $ (1,557 ) $ 1,675 $ 118 Condensed Consolidated Statements of Shareholders’ Equity (unaudited) Previous accounting principle Impact of change As reported ($ in millions) Three months ended June 30, 2019 Retained income Balance, beginning of period $ 46,818 $ (1,670 ) $ 45,148 Cumulative effect of change in accounting principle — — — Net income 920 (69 ) 851 Dividends on common stock (166 ) — (166 ) Dividends on preferred stock (30 ) — (30 ) Balance, end of period 47,542 (1,739 ) 45,803 Accumulated other comprehensive income (loss) Balance, beginning of period (566 ) 1,651 1,085 Cumulative effect of change in accounting principle — — — Change in unrealized net capital gains and losses 682 — 682 Change in unrealized foreign currency translation adjustments 7 (3 ) 4 Change in unrecognized pension and other postretirement benefit cost (1) 125 (136 ) (11 ) Balance, end of period 248 1,512 1,760 Total shareholders’ equity $ 24,703 $ (227 ) $ 24,476 Six months ended June 30, 2019 Retained income Balance, beginning of period $ 45,708 $ (1,675 ) $ 44,033 Cumulative effect of change in accounting principle 21 — 21 Net income 2,207 (64 ) 2,143 Dividends on common stock (333 ) — (333 ) Dividends on preferred stock (61 ) — (61 ) Balance, end of period 47,542 (1,739 ) 45,803 Accumulated other comprehensive income (loss) Balance, beginning of period (1,557 ) 1,675 118 Cumulative effect of change in accounting principle — — — Change in unrealized net capital gains and losses 1,656 — 1,656 Change in unrealized foreign currency translation adjustments 14 (5 ) 9 Change in unrecognized pension and other postretirement benefit cost (1) 135 (158 ) (23 ) Balance, end of period 248 1,512 1,760 Total shareholders’ equity $ 24,703 $ (227 ) $ 24,476 (1) Financial statement line item has been updated to “ Change in unamortized pension and other postretirement prior service credit ”. Condensed Consolidated Statements of Shareholders’ Equity (unaudited) Previously reported Impact of change As adjusted ($ in millions) Three months ended June 30, 2018 Retained income Balance, beginning of period $ 45,031 $ (1,552 ) $ 43,479 Net income 676 41 717 Dividends on common stock (160 ) — (160 ) Dividends on preferred stock (39 ) — (39 ) Balance, end of period 45,508 (1,511 ) 43,997 Accumulated other comprehensive income (loss) Balance, beginning of period (1,150 ) 1,548 398 Change in unrealized net capital gains and losses (133 ) — (133 ) Change in unrealized foreign currency translation adjustments (7 ) 1 (6 ) Change in unrecognized pension and other postretirement benefit cost 22 (38 ) (16 ) Balance, end of period (1,268 ) 1,511 243 Total shareholders’ equity $ 23,122 $ — $ 23,122 Six months ended June 30, 2018 Retained income Balance, beginning of period $ 43,162 $ (1,583 ) $ 41,579 Cumulative effect of change in accounting principle 1,088 — 1,088 Net income 1,651 72 1,723 Dividends on common stock (325 ) — (325 ) Dividends on preferred stock (68 ) — (68 ) Balance, end of period 45,508 (1,511 ) 43,997 Accumulated other comprehensive income (loss) Balance, beginning of period 306 1,583 1,889 Cumulative effect of change in accounting principle (910 ) — (910 ) Change in unrealized net capital gains and losses (698 ) — (698 ) Change in unrealized foreign currency translation adjustments (11 ) 3 (8 ) Change in unrecognized pension and other postretirement benefit cost 45 (75 ) (30 ) Balance, end of period (1,268 ) 1,511 243 Total shareholders’ equity $ 23,122 $ — $ 23,122 Condensed Consolidated Statements of Cash Flows (unaudited) Previous accounting principle Impact of change As reported ($ in millions) Six months ended June 30, 2019 Cash flows from operating activities Net income $ 2,207 $ (64 ) $ 2,143 Adjustments to reconcile net income to net cash provided by operating activities: Pension and other postretirement remeasurement gains and losses — 140 140 Income taxes 177 (18 ) 159 Other operating assets and liabilities (447 ) (58 ) (505 ) Net cash provided by operating activities $ 2,062 $ — $ 2,062 Condensed Consolidated Statements of Cash Flows (unaudited) Previously reported Impact of change As adjusted ($ in millions) Six months ended June 30, 2018 Cash flows from operating activities Net income $ 1,651 $ 72 $ 1,723 Adjustments to reconcile net income to net cash provided by operating activities: Pension and other postretirement remeasurement gains and losses — 7 7 Income taxes (257 ) 19 (238 ) Other operating assets and liabilities 51 (98 ) (47 ) Net cash provided by operating activities $ 2,090 $ — $ 2,090 |
