SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11840
THE ALLSTATE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3871531
(State of Incorporation) (I.R.S. Employer Identification No.)
2775 Sanders Road, Northbrook, Illinois 60062
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 847/402-5000
REGISTRANT HAS FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES /X/ NO
AS OF October 31, 1997, THE REGISTRANT HAD 428,816,434 COMMON SHARES,$.01
PAR VALUE, OUTSTANDING.
THE ALLSTATE CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 1997
PART 1 - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements.
Condensed Consolidated Statements of Operations
for the Three- and Nine-Months Ended September 30, 1997
and 1996 (unaudited). 1
Condensed Consolidated Statements of Financial
Position as of September 30, 1997 (unaudited)
and December 31, 1996. 2
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1997
and 1996 (unaudited). 3
Notes to Condensed Consolidated Financial
Statements (unaudited). 4
Independent Certified Public Accountants'
Review Report. 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 22
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
(Unaudited)
(In millions except per share data)
REVENUES
Property-liability insurance premiums earned $ 4,685 $ 4,598 $ 13,877 $ 13,792
Life and annuity premiums and contract charges 356 338 1,077 950
Net investment income 995 958 2,906 2,842
Realized capital gains and losses 348 121 776 658
-------- -------- ------- --------
6,384 6,015 18,636 18,242
-------- -------- ------- --------
COSTS AND EXPENSES
Property-liability insurance claims and claims expense 3,395 3,825 10,137 11,041
Life and annuity contract benefits 584 578 1,765 1,685
Amortization of deferred policy acquisition costs 712 584 2,060 1,721
Operating costs and expenses 475 433 1,419 1,590
California Earthquake Authority assessment - 150 - 150
Interest expense 26 24 74 71
-------- -------- ------- --------
5,192 5,594 15,455 16,258
-------- -------- ------- --------
LOSS ON DISPOSITION OF OPERATIONS (8) (125) (8) (125)
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE,
DIVIDENDS ON PREFERRED SECURITIES, AND EQUITY
IN NET INCOME OF UNCONSOLIDATED SUBSIDIARY 1,184 296 3,173 1,859
INCOME TAX EXPENSE 359 11 936 400
-------- -------- ------- --------
INCOME BEFORE DIVIDENDS ON PREFERRED SECURITIES AND
EQUITY IN NET INCOME OF UNCONSOLIDATED SUBSIDIARY 825 285 2,237 1,459
DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARY TRUSTS (10) - (29) -
EQUITY IN NET INCOME OF UNCONSOLIDATED SUBSIDIARY 9 7 26 21
-------- -------- ------- --------
NET INCOME $ 824 $ 292 $ 2,234 $ 1,480
======== ======== ======= ========
NET INCOME PER SHARE $ 1.89 0.65 5.09 3.30
======== ========== ======= ========
WEIGHTED-AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 435.7 447.4 438.7 448.7
======== ========== ======= ========
See notes to condensed consolidated financial statements.
-1-
THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
September 30, December 31,
($ in millions) 1997 1996
--------------- ---------------
(Unaudited)
ASSETS
Investments
Fixed income securities, at fair value
(amortized cost $47,643 and $ $
$45,057) 50,364 47,095
Equity securities, at fair value (cost $4,158 and
$3,999) 6,393 5,561
Mortgage loans
3,038 3,146
Real estate
720 738
Short-term
618 1,278
Other
540 511
--------------- ---------------
Total investments
61,673 58,329
Premium installment receivables, net
3,079 2,886
Deferred policy acquisition costs
2,795 2,614
Reinsurance recoverables, net
2,146 2,147
Property and equipment, net
727 714
Accrued investment income
769 715
Deferred income taxes
- 232
Cash
167 116
Other assets
1,302 1,204
Separate Accounts
7,332 5,551
--------------- ---------------
TOTAL ASSETS $ $
79,990 74,508
=============== ===============
LIABILITIES
Reserve for property-liability insurance
claims and claims expense $ $
17,532 17,382
Reserve for life-contingent contract benefits
6,753 6,287
Contractholder funds
20,302 20,120
Unearned premiums
6,335 6,174
Claim payments outstanding
590 594
Other liabilities and accrued expenses
3,195 2,824
Deferred income taxes
431 -
Short-term debt
235 152
Long-term debt
1,238 1,234
Separate Accounts
7,332 5,539
--------------- ---------------
TOTAL LIABILITIES
63,943 60,306
--------------- ---------------
COMMITMENTS AND CONTINGENT LIABILITIES (Notes 2 and 4)
MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS 750 750
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, 25 million
shares authorized, none issued
- -
Common stock, $.01 par value, 1 billion shares
authorized and 450 million issued, 430 million
and 442 million shares outstanding
5 5
Additional capital paid-in
3,139 3,133
Unrealized net capital gains
2,716 2,003
Unrealized foreign currency translation adjustments
14 21
Retained income
10,877 8,958
Deferred ESOP expense
(281) (280)
Treasury stock, at cost (20 million and 8 million
shares) (1,173) (388)
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY
15,297 13,452
--------------- ---------------
TOTAL LIABILITIES AND $ $
SHAREHOLDERS' EQUITY 79,990 74,508
=============== ===============
See notes to condensed consolidated financial statements.
-2-
THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
------------------------------
($ in millions) 1997 1996
------------ -----------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ $
2,234 1,480
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation, amortization and other non-cash
items (13) (7)
Realized capital gains and losses
(776) (658)
Loss on disposition of operations
8 125
Interest credited to contractholder funds
910 905
Increase in policy benefit and other insurance
reserves 145 587
Increase in unearned premiums
161 311
Increase in deferred policy acquisition costs
(240) (368)
Increase in premium installment receivables, net
( 193) (149)
Change in reinsurance recoverables, net
1 (374)
Change in deferred income taxes
283 109
Changes in other operating assets and liabilities
187 137
------------ -----------
Net cash provided by operating activities 2,707 2,098
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales
Fixed income securities
9,474 7,839
Equity securities
2,632 2,902
Investment collections
Fixed income securities
3,545 3,319
Mortgage loans
425 292
Investment purchases
Fixed income securities
(15,344) (14,570)
Equity securities
(2,204) (1,572)
Mortgage loans
(323) (280)
Change in short-term investments, net
672 (148)
Change in other investments, net
8 32
Proceeds from disposition of operations
- 341
Purchases of property and equipment, net
(104) (82)
------------ -----------
Net cash used in investing activities
(1,219) (1,927)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in short-term debt, net 83 192
Repayment of long-term debt - (2)
Proceeds from issuance of long-term debt 4 3
Contractholder fund deposits 1,867 2,311
Contractholder fund withdrawals (2,291) (2,196)
Dividends paid (315) (284)
Treasury stock purchases (827) (137)
Other 42 16
------------ -----------
Net cash used in financing activities (1,437) (97)
------------ -----------
NET INCREASE IN CASH 51 74
CASH AT BEGINNING OF PERIOD 116 90
------------ -----------
CASH AT END OF PERIOD $ 167 $ 164
============ ===========
See notes to condensed consolidated financial statements.
-3-
THE ALLSTATE CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of The Allstate Corporation and its wholly owned subsidiaries,
primarily Allstate Insurance Company ("AIC"), a property-liability insurance
company with various property-liability and life and annuity subsidiaries,
including Allstate Life Insurance Company (collectively referred to as the
"Company" or "Allstate").
The condensed consolidated financial statements and notes as of September
30, 1997 and for the three-month and nine-month periods ended September 30, 1997
and 1996 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 Allstate Corporation Annual Report to Shareholders and Annual
Report on Form 10-K for 1996. The results of operations for the interim periods
should not be considered indicative of results to be expected for the full year.
To conform with the 1997 presentation, certain items in the prior years'
financial statements and notes have been reclassified.
2. RESERVE FOR PROPERTY-LIABILITY INSURANCE CLAIMS AND CLAIMS EXPENSE
The Company establishes reserves for claims and claims expense on reported
and unreported claims of insured losses. These reserve estimates are based on
known facts and interpretation of circumstances, including the Company's
experience with similar cases and historical trends involving claim payment
patterns, loss payments, pending levels of unpaid claims and product mix, as
well as other factors including court decisions, economic conditions and public
attitudes.
The establishment of appropriate reserves, including reserves for
catastrophes, is an inherently uncertain process. Allstate regularly updates its
reserve estimates as new facts become known and further events occur which may
impact the resolution of unsettled claims. Changes in prior year reserve
estimates, which may be material, are reflected in the results of operations in
the period such changes are determined to be needed.
Catastrophes are an inherent risk of the property-liability insurance
business which have contributed, and will continue to contribute, to material
year-to-year fluctuations in the Company's results of operations and financial
position. The level of catastrophe loss experienced in any year cannot be
predicted and could be material to the results of operations and financial
position.
4
THE ALLSTATE CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Reserves for environmental, asbestos and mass tort exposures are comprised
of reserves for reported claims, incurred but not reported claims and related
expenses. Establishing net loss reserves for these types of claims is subject to
uncertainties that are greater than those presented by other types of claims.
Among the complications are a lack of historical data, long reporting delays,
uncertainty as to the number and identity of insureds with potential exposure,
unresolved legal issues regarding policy coverage, availability of reinsurance
and the extent and timing of any such contractual liability. The legal issues
concerning the interpretation of various insurance policy provisions and whether
these losses are, or were ever intended to be covered, are complex. Courts have
reached different and sometimes inconsistent conclusions as to when losses are
deemed to have occurred and which policies provide coverage; what types of
losses are covered; whether there is an insured obligation to defend; how policy
limits are determined; how policy exclusions are applied and interpreted; and
whether environmental and asbestos clean-up costs represent insured property
damage. Management believes these issues are not likely to be resolved in the
near future.
In 1986, the general liability policy form used by Allstate and others in
the property-liability industry was amended to introduce an "absolute pollution
exclusion" which excluded coverage for environmental damage claims and added an
asbestos exclusion. Most general liability policies issued prior to 1987 contain
annual aggregate limits for products liability coverage, and policies issued
after 1986 also have an annual aggregate limit as to all coverages. Allstate's
experience to date is that these policy form changes have effectively limited
its exposure to environmental and asbestos claims risks assumed as well as
primary commercial coverages written, for most policies written in 1986 and all
policies written after 1986. Allstate's reserves, net of reinsurance
recoverables of $411 million and $489 million, for environmental and asbestos
claims were $1.13 billion and $1.23 billion at September 30, 1997 and December
31, 1996, respectively.
During 1996, Allstate gained access to complex databases developed by
outside experts to estimate the cost of liabilities for environmental claims.
The Company also refined its own estimation techniques, which were tested and
validated by outside actuaries, to estimate environmental and asbestos losses.
In addition to environmental and asbestos exposures, the studies also included
an assessment of current claims for mass tort exposures.
Management believes its net loss reserves for environmental, asbestos, and
mass tort exposures are appropriately established based on available facts,
technology, laws and regulations. However, due to the inconsistencies of court
coverage decisions, plaintiffs' expanded theories of liability, the risks
inherent in major litigation and other uncertainties, the ultimate cost of these
claims may vary materially from the amounts currently recorded, resulting in an
increase in the loss reserves. In addition, while the Company believes the
improved actuarial techniques and databases have assisted in its ability to
estimate environmental, asbestos and mass tort net loss reserves, these
refinements may subsequently prove to be inadequate indicators of the extent of
probable loss. Due to the uncertainties and factors described above, management
believes it is not practicable to develop a meaningful range for any such
additional net loss reserves that may be required.
5
THE ALLSTATE CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. REINSURANCE
Property-liability insurance premiums and life and annuity premiums and
contract charges are net of reinsurance ceded as follows:
Three Nine
Months Ended Months Ended
September 30, September 30,
------------- -------------
($ in millions)
1997 1996 1997 1996
---- ---- ---- ----
Property-liability premiums........................... $89 $119 $343 $404
Life and annuity premiums
and contract charges................................ 36 44 109 73
Property-liability insurance claims and claims expense and life and annuity
contract benefits are net of reinsurance recoveries as follows:
Three Nine
Months Ended Months Ended
September 30, September 30,
------------- -------------
($ in millions)
1997 1996 1997 1996
---- ---- ---- ----
Property-liability insurance
claims and claims expense.......................... $75 $11 $240 $200
Life and annuity contract
benefits............................................. 13 6 36 30
4. REGULATION AND LEGAL PROCEEDINGS
The Company's insurance businesses are subject to the effects of a changing
social, economic and regulatory environment. Public regulatory initiatives have
varied and have included efforts to restrict premium rates, restrict the
Company's ability to cancel policies, impose underwriting standards and expand
overall regulation. The ultimate changes and eventual effects, if any, of these
initiatives are uncertain.
Various legal and regulatory actions are currently pending that involve
Allstate and specific aspects of its conduct of business. In the opinion of
management, the ultimate liability, if any, in one or more of these actions in
excess of amounts currently reserved is not expected to have a material effect
on results of operations, liquidity or capital resources.
6
THE ALLSTATE CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. COMPANY OBLIGATED MANDATORY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS
In November 1996 Allstate Financing I ("AF I"), a wholly-owned subsidiary
of the Company, issued 22 million shares of 7.95 percent Quarterly Income
Preferred Securities ("QUIPS") at $25 per share. The sole assets of AF I are
$550 million of 7.95 percent Junior Subordinated Deferrable Interest Debentures
("QUIDS") issued by the Company. The QUIDS held by AF I will mature on December
31, 2026 and are redeemable by the Company in whole or in part beginning on
November 25, 2001, at which time the QUIPS are callable. Net proceeds from the
issuance of the QUIPS were used for general corporate purposes including the
Company's stock repurchase program. AF I may elect to extend the maturity of its
QUIPS to December 31, 2045.
In November 1996 Allstate Financing II ("AF II"), a wholly-owned
subsidiary of the Company, issued 200,000 shares of 7.83 percent preferred
securities ("trust preferred securities") at $1,000 per share. The sole assets
of AF II are $200 million of 7.83 percent Junior Subordinated Deferrable
Interest Debentures ("junior subordinated debentures") issued by the Company.
The junior subordinated debentures held by AF II will mature on December 1, 2045
and are redeemable by the Company in whole or in part beginning on December 1,
2006, at which time the trust preferred securities are callable. Net proceeds
from the issuance of the trust preferred securities were used for general
corporate purposes including the Company's stock repurchase program.
The obligations of the Company with respect to the QUIDS and junior
subordinated debentures constitute full and unconditional guarantees by the
Company of AF I's and AF II's obligations under the respective preferred
securities, including the payment of the liquidation or redemption price and any
accumulated and unpaid interest, but only to the extent of funds held by the
trusts. The preferred securities are classified in the Company's balance sheet
as company obligated mandatory redeemable preferred securities of subsidiary
trust (representing the minority interest in the trusts) at their face value and
redemption amount of $750 million. The preferred securities have a liquidation
value of $25 per share for the QUIPS and $1,000 per share for the trust
preferred securities. Dividends on the preferred securities are cumulative,
payable quarterly in arrears for the QUIPS and cumulative, payable semi-annually
in arrears for the trust preferred securities, and are deferrable at the
Company's option for up to five years. The Company cannot pay dividends on its
preferred and common stocks during such deferments. Dividends on the preferred
securities have been classified as minority interest in the statements of
operations.
7
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Shareholders of
The Allstate Corporation:
We have reviewed the accompanying condensed consolidated statement of financial
position of The Allstate Corporation and subsidiaries as of September 30, 1997,
and the related condensed consolidated statements of operations for the
three-month and nine-month periods ended September 30, 1997 and 1996, and the
condensed consolidated statements of cash flows for the nine-month periods ended
September 30, 1997 and 1996. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial position of The Allstate
Corporation and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended, not presented herein. In our report dated February 21,
1997, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated statement of financial position as of December 31, 1996
is fairly stated, in all material respects, in relation to the consolidated
statement of financial position from which it has been derived.
Deloitte & Touche LLP
Chicago, Illinois
November 13, 1997
8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,
1997 AND 1996
The following discussion highlights significant factors influencing results of
operations and changes in financial position of The Allstate Corporation (the
"Company" or "Allstate"). It should be read in conjunction with the condensed
consolidated financial statements and notes thereto found under Part I. Item 1
and with the discussion and analysis found under Part 2. Item 7 of The Allstate
Corporation Annual Report on Form 10-K for 1996.
CONSOLIDATED REVENUES
Three Months Ended Nine Months Ended
September 30, September 30,
($ in millions) 1997 1996 1997 1996
---- ---- ---- ----
Property-liability insurance
premiums......................................... $4,685 $4,598 $13,877 $13,792
Life and annuity premiums and
contract charges...........................................356 338 1,077 950
Net investment income........................................995 958 2,906 2,842
Realized capital gains and
losses.....................................................348 121 776 658
--- --- --- ---
Total revenues............................................$6,384 $6,015 $18,636 $18,242
===== ===== ====== ======
Consolidated revenues for the third quarter and first nine months of 1997
increased 6.1% and 2.2%, respectively, reflecting higher realized capital gains
and increases in property-liability premiums and life and annuity contract
charges. Growth in property-liability premiums for the three and nine-month
periods were adversely impacted by the ongoing implementation of the Company's
catastrophe management initiatives and the absence of premium related to
businesses sold in 1996.
CONSOLIDATED NET INCOME
Net income for the third quarter of 1997 was $824 million, or $1.89 per
share, compared with $292 million, or 65 cents per share, for the same period of
1996, due to increased property-liability underwriting income and higher
realized capital gains. Property-liability underwriting income benefited from
lower catastrophe losses and favorable frequency (rate of claim occurrence) and
severity (average cost per claim) loss trends. Last year, special actions taken
in the third quarter resulted in a decrease to net income of $248 million
after-tax, or 56 cents per share. These actions included an increase to net loss
reserves for discontinued lines and coverages, an assessment for participation
in the California Earthquake Authority (CEA), and a revision in the Company's
policy for capitalizing deferred acquisition costs. Net income was also impacted
by a net after-tax loss on the disposition of operations of $55 million.
Net income for the first nine months of 1997 was $2.23 billion, or $5.09
per share, compared with $1.48 billion, or $3.30 per share, for the same period
of 1996. The results for the first nine months of 1997 were favorably impacted
by increased property-liability underwriting income which benefited from lower
catastrophe losses and favorable claim frequencies and auto injury coverage
claim severities.
9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,1997
AND 1996
PROPERTY-LIABILITY OPERATIONS
OVERVIEW
The Company's property-liability operations consists of two principal areas
of business: personal property and casualty ("PP&C") and discontinued lines and
coverages ("Discontinued Lines and Coverages"). PP&C is principally engaged in
the sale of private passenger automobile and homeowners insurance. Discontinued
Lines and Coverages consists of business no longer written by Allstate.
Underwriting results for each of the property-liability areas of business
are discussed separately beginning on page 12.
The following table sets forth certain unaudited summarized financial data
and key operating ratios for the Company's property-liability operations for the
three-month and nine-month periods ended September 30, 1997 and 1996.
Three Months Ended Nine Months Ended
September 30, September 30,
($ in millions) 1997 1996 1997 1996
---- ---- ---- ----
Premiums written................................... $4,881 $4,798 $14,158 14,063
===== ===== ====== ======
Premiums earned.................................... $4,685 $4,598 $13,877 $13,792
Claims and claims expense.......................... 3,395 3,825 10,137 11,041
Operating costs and expenses....................... 1,045 894 3,050 2,952
----- ----- ----- -----
Underwriting income (loss)......................... 245 (121) 690 (201)
California Earthquake
Authority assessment ............................. - 150 - 150
Net investment income ............................. 463 439 1,324 1,306
Realized capital gains and
losses, after-tax................................ 193 77 418 405
Loss on disposition of operations, after tax ......
- (55) - (55)
Income tax (benefit)expense on
operations....................................... 195 (4) 539 119
--- ----- ----- -----
Income before equity in net
income of unconsolidated
subsidiary........................................ 706 194 1,893 1,186
Equity in net income of
unconsolidated subsidiary......................... 9 7 26 21
- ----- ----- -----
Net income......................................... $ 715 $ 201 $1,919 $1,207
=== ===== ===== =====
Catastrophe losses................................. $ 121 $ 304 $ 352 $ 815
=== ===== ===== =====
Operating ratios
Claims and claims expense
("loss") ratio.................................. 72.5 83.2 73.0 80.1
Expense ratio.................................... 22.3 19.4 22.0 21.4
---- ---- ----- -----
Combined ratio................................... 94.8 102.6 95.0 101.5
==== ===== ===== =====
Effect of catastrophe losses
on combined ratio............................... 2.6 6.6 2.5 5.9
=== ==== ===== =====
10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,1997
AND 1996
NET INVESTMENT INCOME AND REALIZED CAPITAL GAINS
Pretax net investment income increased $24 million to $463 million for the
third quarter and grew $18 million to $1.32 billion for the nine-month period
ended September 30, 1997. Higher investment balances, the result of positive
cash flows from operations net of the effect of businesses sold, were partially
offset by lower investment yields. The lower investment yields are due, in part,
to the investment of proceeds from calls and maturities and the investment of
positive cash flows from operations in securities yielding less than the average
portfolio rate. In low interest rate environments, funds from maturing
investments may be reinvested at interest rates substantially lower than those
which prevailed when the funds were previously invested. The sale of the
commercial and reinsurance operations in the second half of 1996 reduced
investments by $1.59 billion.
Realized capital gains after-tax for the third quarter of 1997 were $193
million compared with $77 million for the same period in 1996. For the first
nine months of 1997, realized capital gains after-tax were $418 million compared
with $405 million for the comparable period in 1996. At September 30, 1997 the
property-liability operations had $1.90 billion of unrealized capital gains on
equity securities versus $1.35 billion at December 31, 1996. Fluctuations in
realized capital gains and losses are largely a function of the timing of sales
decisions reflecting management's view of individual securities and overall
market conditions.
OTHER DEVELOPMENTS
The Company announced on November 10, 1997 that it is establishing a new
company devoted to serving insurance consumers in New Jersey. The new company,
called Allstate New Jersey Insurance Company ("ANJ"), is scheduled to begin
offering coverage to customers effective January 1, 1998. ANJ will serve as a
replacement carrier for Allstate Insurance Company ("AIC") and Allstate
Indemnity Company in New Jersey. This resolves the Company's application to
withdraw from the property-liability market in New Jersey.
11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,1997
AND 1996
UNDERWRITING RESULTS
PP&C - Underwriting results and key operating ratios for the Company's
personal property and casualty insurance area of business for the three-month
and nine-month periods ended September 30, 1997 and 1996 are summarized in the
following table.
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
($ in millions) 1997 1996 1997 1996
---- ---- ---- ----
Premiums written............................ $4,881 $4,651 $14,157 $13,480
===== ===== ====== ======
Premiums earned............................. $4,686 $4,459 $13,876 $13,164
Claims and claims expense................... 3,403 3,410 10,140 10,159
Operating costs and expenses................ 1,037 837 3,034 2,720
----- ----- ----- -----
Underwriting income......................... $ 246 $ 212 $ 702 $ 285
=== ===== ===== ======
Catastrophe losses.......................... $ 121 $ 303 $ 352 $ 808
=== ===== ===== =====
Operating ratios
Claims and claims expense
("loss") ratio........................... 72.6 76.5 73.1 77.2
Expense ratio............................. 22.1 18.8 21.9 20.6
---- ---- ---- ----
Combined ratio............................ 94.7 95.3 95.0 97.8
==== ==== ==== ====
Effect of catastrophe losses
on combined ratio........................ 2.6 6.8 2.5 6.1
=== === === ===
PP&C provides primarily private-passenger auto and homeowners insurance to
individuals. PP&C also includes the ongoing commercial business written through
the Allstate agent distribution channel. The Company separates the voluntary
personal auto insurance business into two categories for underwriting purposes
according to insurance risks: the standard market and the non-standard market.
The standard market consists of drivers who meet certain criteria which classify
them as having low to average risk of loss expectancy. The non-standard market
consists of drivers who have higher-than-average risk profiles due to their
driving records, lack of prior insurance or the types of vehicles they own.
These policies are generally written at rates higher than standard auto rates.
The Company is pursuing segmented marketing growth strategies with respect
to geographic areas in the standard auto and homeowners markets. It is
attempting to grow standard auto business more rapidly in areas where the
regulatory climate is more conducive to attractive returns and is reducing or
limiting its homeowners business exposure in areas where the risk of loss from
catastrophes does not provide appropriate returns. The process of designating
geographic areas as growth and limited growth markets is dynamic and may be
revised as changes occur in the legal, regulatory and economic environments, as
catastrophe exposure is reduced and as new products are approved. Less than 6.0%
of the total United States population reside in areas currently designated by
the Company as standard auto limited growth markets. The Company is attempting
to reduce or limit homeowners growth in areas where approximately 14.0% of the
United States population reside. Allstate is pursuing a growth strategy in the
non-standard auto market throughout most of
12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,
1997 AND 1996
the United States. The Company plans to expand its distribution channel by
increasing its use of independent agents to write non-standard auto business.
PP&C premiums written for the third quarter increased 4.9% over the third
quarter of 1996. For the first nine months of 1997, PP&C premiums written
increased 5.0% over the comparable period for 1996. Standard auto premiums
written increased 4.9% to $2.76 billion for the third quarter of 1997, compared
with $2.63 billion for the same period in 1996. For the nine-month period ending
September 30, 1997, standard auto premiums grew 3.9% to $8.10 billion from $7.80
billion in 1996. Both increases are due to higher average premium and to a
lesser extent, by the number of policies in force. Average premium increases
were primarily attributable to a shift to newer and more expensive autos and, to
a lesser extent, rate increases. Rate increases are based in part on indicated
loss trends and are generally limited by regulatory and competitive
considerations.
Non-standard auto premiums written increased 12.6% to $807 million in the
third quarter of 1997, from $717 million for the same period in 1996. For the
nine-month period, non-standard auto premiums written increased 17.6% to $2.38
billion compared with $2.03 billion for 1996. The increase for both periods was
driven by an increase in renewal policies in force and, to a lesser extent,
average premium. The growth in non-standard auto written premiums has slowed
from prior quarters primarily due to the imposition of higher down payment
requirements which began in May 1997 and are designed to improve retention and
decrease expenses related to the collection of premium. The rate of growth is
expected to continue to gradually decline as the non-standard auto market
matures.
Homeowners premiums written for the three-month period ended September 30,
1997 was $854 million, an increase of 2.3% over third quarter 1996 premiums of
$835 million, reflecting higher average premium and to a lesser extent, the
number of new policies in force. For the first nine months of 1997 homeowners
premiums written were $2.28 billion, a slight decrease compared with the same
period of 1996. The decrease is primarily due to the impacts of the Company's
catastrophe management initiatives in California, Florida, and the Northeastern
portion of the United States. Excluding California and Florida, homeowners
premiums written increased 6.9% and 5.6% for the three-month and nine-month
periods ended September 30, 1997, respectively. As a result of the California
Earthquake Authority formation this year, the Company will non-renew
approximately $117 million of property premiums related to earthquake coverage,
$23 million and $89 million of which occurred in the three-month and nine-month
periods, respectively, ended September 30, 1997. The decrease in premiums due to
the non-renewal of earthquake coverage was partially offset by increased
premiums resulting from Allstate's re-entry into the California property market.
Florida homeowners premiums decreased approximately $22 million and $64 million
for the three-month and nine-month periods of 1997 as lower premiums resulting
from the sale of renewal rights to Clarendon National Insurance Company, the
purchase of catastrophe reinsurance, policy deductible modifications, and the
transfer of the wind damage portion of property policies in Florida to the
Florida Windstorm Underwriting Association were partially offset by rate
increases.
13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,
1997 AND 1996
For the third quarter of 1997, PP&C had underwriting income of $246 million
compared with underwriting income of $212 million for the same period in 1996.
The improved underwriting results were primarily due to lower catastrophe
losses, increased auto average earned premiums, favorable frequency and
favorable auto injury coverage claim severity trends. Auto injury coverage claim
severities continued to trend favorably compared to relevant medical cost
indices. Auto physical damage coverage claim severities increased slightly over
the prior year, driven by moderate inflationary pressure.
For the first nine months of 1997, PP&C had underwriting income of $702
million compared with $285 million for the comparable period of 1996. The
improved underwriting results for the first nine months of 1997 were primarily
due to lower catastrophe losses, increased auto average earned premiums, and
favorable loss frequency and auto claim severities. Auto injury coverage claim
severities continued to trend favorably compared to relevant medical cost
indices. Auto physical damage coverage claim severities increased slightly over
the prior year, driven by moderate inflationary pressure.
CATASTROPHE LOSSES AND CATASTROPHE MANAGEMENT
Catastrophe losses for the third quarter of 1997 were $121 million compared
with $304 million for the same period in 1996. For the first nine months of
1997, catastrophe losses were $352 million versus $815 million for the same
period in 1996. In 1996 catastrophe losses were impacted by first quarter snow
and ice storms in the eastern portion of the United States.
Allstate has implemented strategies intended to limit, over time, subject
to the requirements of insurance laws and regulations and as limited by
competitive considerations, its insurance exposures in certain regions prone to
catastrophes. These strategies include limits on new business production,
limitations on certain policy coverages, increases in deductibles, policy
brokering, reinsurance, and participation in catastrophe pools. In addition,
Allstate has requested and received rate increases in certain regions prone to
catastrophes. The Company continues to make substantial progress in reducing its
exposure to catastrophes in California, Florida, and the Northeast as strategies
initiated in 1996 and 1997 continue to be implemented.
Allstate has entered into a three-year excess reinsurance contract covering
property policies in the Northeastern portion of the United States, effective
June 1, 1997. The reinsurance program provides up to 95% of $500 million of
reinsurance protection for catastrophe losses in excess of an estimated $750
million retention subject to a limit of $500 million in any one year and an
aggregate limit of $1.0 billion over the three-year contract period.
For Allstate, major areas of potential losses due to hurricanes include
major metropolitan centers near the eastern and gulf coasts of the United
States. The major areas of exposure to potential losses due to earthquakes in
California include population centers in and around Los Angeles and San
Francisco. Other areas in the United States with significant exposure to
potential earthquake losses include areas surrounding the New Madrid fault
system in the Midwest and faults in and surrounding Seattle, Washington.
Allstate will continue to evaluate business strategies and options in the
reinsurance market for appropriate coverage at acceptable rates and the
14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,
1997 AND 1996
financial markets, to more effectively manage its exposure to catastrophe losses
in these and other areas.
Catastrophes are an inherent risk of the property-liability insurance
business which have contributed, and will continue to contribute, to material
year-to-year fluctuations in Allstate's results of operations and financial
position. The level of catastrophe losses experienced in any year cannot be
predicted and could be material to the Company's results of operations and
financial position. The Company has experienced two individual catastrophes in
the last five years which resulted in losses over $1.00 billion ($2.33 billion
related to Hurricane Andrew and $1.75 billion related to the Northridge
earthquake). While management believes the ongoing implementation of the
Company's catastrophe management strategies will greatly reduce the probability
of individual losses over $1.00 billion in the future, the Company continues to
be exposed to similar or greater catastrophes.
The establishment of appropriate reserves for catastrophes, as for all
property-liability claims, is an inherently uncertain process. Catastrophe
reserve estimates are regularly reviewed and updated, using the most current
information. Any resulting adjustments, which may be material, are reflected in
current year operations.
DISCONTINUED LINES AND COVERAGES - Discontinued Lines and Coverages consists of
business no longer written by Allstate, including results from environmental,
asbestos and mass tort losses and other commercial business in run-off, and the
commercial and reinsurance businesses sold in 1996.
Underwriting results for the Company's Discontinued Lines and Coverages
area of business for the three-month and nine-month periods ended September 30,
1997 and 1996 are summarized below.
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
($ in millions) 1997 1996 1997 1996
---- ---- ---- ----
Underwriting loss........... $(1) $(333) $(12) $(486)
=== ===== ==== =====
Underwriting losses in both the three-month and nine-month periods ended
September 30, 1996 were primarily related to additional environmental and
asbestos claims being reported and continued reevaluation and adjustment of the
estimated ultimate cost of settling these claims. During the third quarter of
1996, net loss reserves for Discontinued Lines and Coverages were increased by a
total of $318 million pre-tax, based on the results of a study the Company had
conducted of its environmental liabilities as well as a comprehensive internal
assessment of its asbestos and other discontinued lines and coverages.
15
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,
1997 AND 1996
LIFE AND ANNUITY OPERATIONS
The life and annuity operations of Allstate ("Allstate Life") market a
broad line of life insurance, annuity and group pension products through a
combination of Allstate agents, including life specialists, banks, independent
agencies, brokers and direct response marketing.
The following table sets forth certain summarized financial data for
Allstate Life's operations and investments at or for the three-month and
nine-month periods ended September 30, 1997 and 1996.
Three Months Ended Nine Months Ended
September 30, September 30,
($ in millions) 1997 1996 1997 1996
---- ---- ---- ----
Statutory premiums and deposits.................. $ 1,106 $ 1,149 $ 3,569 $ 3,798
======== ======== ======== ========
Investments...................................... $29,360 $27,305 $29,360 $27,305
Separate Account assets.......................... 7,332 4,940 7,332 4,940
----- ----- ----- -----
Investments including Separate
Account assets................................. $36,692 $32,245 $36,692 $32,245
======= ======= ======= =======
Premiums and contract charges.................... $ 356 $ 338 $ 1,077 $ 950
Net investment income............................ 526 516 1,564 1,531
Contract benefits................................ 584 578 1,765 1,685
Operating costs and expenses..................... 147 129 444 375
------- ------- ------- -------
Income from operations........................... 151 147 432 421
Income tax on operations......................... 52 49 148 143
------- ------- ------- -------
Operating Income................................. 99 98 284 278
Realized capital gains and
losses, after-tax................................ 33 2 86 23
Loss on disposition of
operations, after-tax............................ (5) - (5) -
-------- -------- -------- --------
Net income....................................... $ 127 $ 100 $ 365 $ 301
======== ======== ======== ========
Statutory premiums and deposits, which include premiums and deposits for
all products, decreased 3.7% and 6.0% for the three-month and nine-month periods
ended September 30, 1997, respectively, compared to the same periods in 1996.
The following table presents statutory premiums and deposits by product
line.
Three Months Ended Nine Months Ended
September 30, September 30,
($ in millions) 1997 1996 1997 1996
---- ---- ---- ----
Life products
Universal............. $ 184 $ 183 $ 540 $ 537
Traditional........... 76 61 225 212
Other................. 62 61 175 177
Annuity products
Fixed................. 373 426 1,182 1,337
Variable.............. 373 293 1,065 846
Group pension products.. 38 125 382 689
------ ------ ------ -----
Total................... $1,106 $1,149 $3,569 $3,798
====== ====== ====== ======
For the quarter and nine month periods, increased sales of variable annuity
products were more than offset by decreased sales of group pension and fixed
16
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,1997
AND 1996
annuity products. The interest rate environment continues to make variable
annuity products more attractive than fixed annuity products. The level of
pension product sales continues to be based on Allstate Life's assessment of
market opportunities.
Life and annuity premiums and contract charges under generally accepted
accounting principles ("GAAP") increased 5.3% in the third quarter and 13.3% for
the first nine months. Under GAAP, revenues exclude deposits on most annuities
and premiums on universal life insurance policies. The increase for the quarter
was attributable to increased sales of structured settlement annuities with life
contingencies and growth in contract charges on variable annuities and universal
life products, partially offset by a decrease in sales of traditional life
products. For the nine-month period, the increase was the result of increased
sales of structured settlement annuities with life contingencies, growth in
contract charges on universal life products and variable annuities, and
increased sales of traditional life products. GAAP premium and contract charges
will vary with the mix of products sold during the period.
Pretax net investment income increased 1.9% and 2.2% for the three-month
and nine-month periods ending September 30, 1997, respectively, compared with
the same periods in 1996. The increases are primarily the result of a $1.23
billion, or 4.7% increase in investments, at September 30, 1997 when compared
with the prior year, excluding Separate Account assets and unrealized gains on
fixed income securities. The additional investment income earned on the higher
base of investments was slightly offset by lower yields. The lower investment
yields are due, in part, to the investment of proceeds from calls and maturities
and the investment of positive cash flows from operations in securities yielding
less than the average portfolio rate. In low interest rate environments, funds
from maturing investments may be reinvested at interest rates substantially
lower than those which prevailed when the funds were previously invested.
Operating income increased slightly during the third quarter and increased
2.2% during the first nine months of 1997 compared to the same periods in 1996.
For the quarter, growth in investment margins were slightly offset by less
favorable mortality margins for both the life and annuity businesses. For the
nine-month period, growth in investment margins and favorable life mortality
margins were offset by increased expenses related to deferred policy acquisition
costs.
Net realized capital gains after tax were $33 million and $86 million for
the three-month and the nine-month periods, respectively, and arose principally
from the sale of equity securities and from the receipt of premiums related to
the prepayment of privately-placed corporate fixed income obligations.
LIQUIDITY AND CAPITAL RESOURCES
Capital Resources
The Company has a commercial paper program under which it may borrow up to
$1.00 billion for short-term cash needs. At September 30, 1997, the Company had
outstanding commercial paper of $235 million with a weighted-average interest
rate of 5.82%.
17
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,1997
AND 1996
The Company maintains two credit facilities totaling $1.55 billion as a
potential source of funds to meet short-term liquidity requirements. A $1.50
billion, five-year revolving line of credit, expiring December 20, 2001 and a
$50 million, one-year revolving line of credit, expiring April 14, 1998. During
the nine months ended September 30, 1997, there were no borrowings under these
credit facilities. Total borrowings under the combined commercial paper program
and the Company's credit facilities are limited to $1.55 billion.
During the third quarter of 1997, the Company purchased approximately 3.9
million shares of its common stock for its treasury, at a cost of $292 million.
At September 30, 1997, the Company held approximately 20 million shares of
treasury stock with an average cost per share of $59.87. During the third
quarter of 1997, the Company completed the expanded stock repurchase program of
$750 million initiated in the fourth quarter of 1996. In August of 1997, the
company announced an additional $2.0 billion stock repurchase program to be
completed on or before December 31, 1998.
The ability of the Company to pay dividends is dependent on business
conditions, income, cash requirements of the Company, receipt of dividends from
AIC and other relevant factors. The payment of shareholder dividends by AIC
without the prior approval of the state insurance regulator is limited to
formula amounts based on net income and capital and surplus, determined in
accordance with statutory accounting practices, as well as the timing and amount
of dividends paid in the preceding twelve months. The maximum amount of
dividends that AIC could distribute during 1997 without prior approval of the
Illinois Department of Insurance was $2.2 billion. At September 1997, AIC has
approximately $800 million of dividend paying capacity remaining.
Financial Ratings and Strength
The following table summarizes the Company and its major subsidiaries debt
ratings, which was upgraded in the third quarter of 1997 by Moody's and
Standard & Poor's rating agencies.
Moody's Standard & Poor's
The Allstate Corporation (debt) A1 A1+
Allstate Insurance Company
(claim-paying ability) Aa2 AA
Allstate Life Insurance Company
(claim-paying ability) Aa2 AA+
LIQUIDITY
Surrenders and withdrawals for Allstate Life were $520 million and $1.42
billion for the three-month and nine-month periods ending September 30, 1997,
compared to $385 million and $1.15 billion, for the same periods in 1996. As the
Company's interest-sensitive life and annuity contracts in-force grow and age,
the dollar amount of surrenders and withdrawals could increase.
Cash transactions relating to derivative financial instruments are included
in the Consolidated Statements of Cash Flows. Amounts settled under derivative
contracts are primarily shown as part of cash flows from investing activities in
accordance with the underlying item.
18
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,1997
AND 1996
INVESTMENTS
The composition of the investment portfolio at September 30, 1997, at
financial statement carrying values, is presented in the table below.
Property-liability Allstate Life Total
------------------ ------------- -----
Fixed income
securities (1) .................. $25,060 79.7% $24,530 83.5% $49,590 80.3%
Equity securities ................ 5,521 17.5 872 3.0 6,393 10.4
Mortgage loans.................... 109 .3 2,929 10.0 3,038 4.9
Real estate....................... 449 1.4 271 .9 720 1.2
Short-term ....................... 361 1.0 236 .8 597 1.0
Other............................. 18 .1 522 1.8 540 .9
------ ----- ------ ----- ------ ----
Total............................ $31,518 100.0% $29,360 100.0% $60,878 98.7
Investments of Parent(2) 795 1.3
--- ---
Total......................... $61,673 100.0%
====== =====
(1) Fixed income securities are carried at fair value. Amortized cost for these
securities was $23.93 billion and $22.95 billion for property-liability and life
and annuity operations, respectively.
(2)Represents fixed income securities of $774 million, resulting from a
dividend received from AIC and short-term investments of $21 million of The
Allstate Corporation.
Total investments increased to $61.67 billion at September 30, 1997 from
$58.33 billion at December 31, 1996. Property-liability investments increased
$1.81 billion to $31.52 billion at September 30, 1997 from $29.71 billion at
December 31, 1996. Allstate Life investments at September 30, 1997, increased
$1.32 billion to $29.36 billion from $28.04 billion at December 31, 1996. The
increase in investments was primarily attributable to amounts invested from
positive cash flows generated from operations and increased unrealized capital
gains of $1.36 billion on fixed income and equity securities.
The Company's fixed income securities portfolio is 94.0% rated investment
grade. Investment grade is defined by the Company as a security having an NAIC
rating of 1 or 2, a Moody's rating of Aaa, Aa, A or Baa, or a comparable Company
internal rating.
The Company primarily uses derivative financial instruments to reduce its
exposure to market risk (principally interest rate and equity price risk) in
conjunction with asset/liability management in its life and annuity operations.
The Company does not hold or issue these instruments for trading purposes. The
Company is exposed to credit-related losses in the event of nonperformance by
counterparties to financial instruments. However, such nonperformance is not
expected because the Company utilizes highly-rated counterparties, establishes
risk control limits and measures, and maintains ongoing monitoring procedures.
There have been no significant changes in the risk profile of the Company's
derivative portfolio since December 31, 1996.
During the quarter, the Company initiated a strategic review of its real
estate investment portfolio to determine the best way to own, manage and operate
these properties.
19
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,1997
AND 1996
PENDING ACCOUNTING STANDARDS
In January 1997, the Securities and Exchange Commission issued Financial
Reporting Release No. 48 ("FRR 48") "Disclosure of Accounting Policies for
Derivative Financial Instruments and Derivative Commodity Instruments and
Disclosure of Quantitative and Qualitative Information about Market Risk
Inherent in Derivative Financial Instruments, Other Financial Instruments, and
Derivative Commodity Instruments".
Effective in the second quarter of 1997, FRR 48 requires additional
disclosures in the footnotes to the financial statements about the Company's
accounting policies for derivative financial instruments. The Company
substantially adopted this requirement at December 31, 1996. In addition, FRR 48
requires annual disclosure of quantitative and qualitative information about the
market risk inherent in the Company's market risk sensitive instruments,
including but not limited to, equity and fixed income securities and derivative
financial instruments. The quantitative and qualitative disclosures are
effective for the Company's year-end 1997 reporting.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share" and SFAS
No. 129 "Disclosure of Information about Capital Structure".
SFAS No. 128 is intended to simplify the existing procedures of computing
earnings per share ("EPS") currently prescribed by Accounting Principles Board
("APB") Opinion No. 15, "Earnings Per Share". This standard eliminates the
concept of primary EPS and requires dual presentation of basic and diluted EPS.
Diluted EPS defined by SFAS No. 128 is similar to primary EPS prescribed by APB
Opinion No. 15. The requirements of this statement will be adopted in December
1997 and are not expected to materially impact the Company's earnings per share
calculation.
SFAS No. 129 clarifies the disclosure requirements related to the type and
nature of securities contained in an entity's capital structure. The Company is
presently in compliance with the requirements of SFAS No. 129 which becomes
effective December 31, 1997.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income" and SFAS No. 131 "Disclosures About Segments of
an Enterprise and Related Information".
SFAS No. 130 requires the presentation of comprehensive income in the
financial statements. Comprehensive income is a measurement of all changes in
equity that result from transactions and other economic events other than
transactions with stockholders. The requirements of this statement will be
adopted effective January 1, 1998.
SFAS No. 131 redefines how segments are determined and requires additional
segment disclosures for both annual and quarterly reporting. Under this
statement, segments are determined using the "management approach" for financial
statement reporting. The management approach is based on the way an enterprise
makes operating decisions and assesses performance of its businesses. The
requirements of this statement will be adopted effective December 31, 1998.
20
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30,1997
AND 1996
FORWARD-LOOKING STATEMENTS
The statements contained in this Management's Discussion and Analysis that
are not historical information are forward-looking statements that are based on
management's estimates, assumptions and projections. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor under The Securities Act of
1933 and The Securities Exchange Act of 1934 for forward-looking statements. In
order to comply with the terms of the safe harbor, the Company notes several
important factors that could cause the Company's actual results and experience
with respect to forward-looking statements to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements:
1. The references to favorable frequency (rate of claim occurrence) and severity
(average cost per claim) trends compared with the third quarter of 1996 (see
"Consolidated Net Income" at page 9 and "Underwriting Results" at page 14) and
the reference to auto injury claim severities for the first nine months of
1997 continuing to trend favorably compared to relevant medical cost indices
(see "Underwriting Results" at page 14) reflect statistical data for the periods
indicated. Such data for a following period or periods could indicate that such
trends have reversed or that average severities have outpaced medical cost
indices in such subsequent period or periods.
2. Under "Catastrophe Losses and Catastrophe Management" at page 14, the Company
states that it has made "substantial progress" in reducing its exposures to
catastrophes in California, Florida, and the Northeast. This progress is based
in part on the efficacy of the techniques and the accuracy of the data used by
the Company to predict the probability of catastrophes and the extent of losses
to the Company resulting from catastrophes. Catastrophes may occur in the future
which indicate that such techniques do not accurately predict the Company's
losses from catastrophes, and the probability and extent of such losses to the
Company may differ materially from that which would have been predicted by such
techniques and data.
3. Under "Investments" at page 19, the Company states that it does not expect
nonperformance by counterparties to derivative financial instrument due to
various controls utilized by the Company. Nevertheless, severe changes in
economic conditions, natural disasters or war could contribute to or cause a
significant number of the counterparties to these derivative financial
instruments to fail to perform in the future.
See, generally, the Company's 1996 Annual Report on Form 10-K (the "1996 10-K")
for other important risk factors which may affect the results of operations and
financial condition of the Company. For those risk factors affecting the Company
as a regulated insurance holding company, see "Risk Factors Affecting Allstate"
at pages 4-5 of the 1996 10-K.
21
PART II. Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
An Exhibit Index has been filed as part of this Report on
Page E-1.
(b) Reports on Form 8-K.
None.
22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Allstate Corporation
(Registrant)
November 13, 1997
By /s/Samuel H. Pilch
------------------
Samuel H. Pilch
Controller
(Principal Accounting Officer
and duly authorized Officer of
Registrant)
23
EXHIBIT INDEX
THE ALLSTATE CORPORATION
QUARTER ENDED September 30, 1997
--------------------------------
Sequentially
Exhibit No. Description Numbered Page
- ---------- ------------ -------------
4 Registrant hereby agrees to furnish the Commission,
upon request, with the instruments defining the rights
of holders of each issue of long-term debt of the
Registrant and its consolidated subsidiary.
11 Computation of earnings per common share for
The Allstate Corporation and consolidated subsidiary.
15 Acknowledgment of awareness from Deloitte & Touche LLP,
dated November 13, 1997, concerning unaudited interim
financial information.
27 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information
only and not filed.
E-1
Exhibit 11
THE ALLSTATE CORPORATION AND SUBSIDIARY
COMPUTATION OF EARNINGS PER COMMON SHARE
($ in millions, except for per share data) Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------- -----------------------------------
1997 1996 1997 1996
---------------- ---------------- --------------- ---------------
Net Income $824 $292 $2,234 $1,480
================ ================ =============== ===============
Primary earnings per common share computation:
Weighted average number of common shares 432.8 444.7 435.9 446.0
Assumed exercise of dilutive stock options 2.9 2.7 2.8 2.7
---------------- ---------------- --------------- ---------------
Adjusted weighted number of common
shares outstanding 435.7 447.4 438.7 448.7
================ ================ =============== ===============
Primary net income per share $1.89 $0.65 $5.09 $3.30
================ ================ =============== ===============
Fully diluted earnings per common share computation:
Weighted average number of common shares 432.8 444.7 435.9 446.0
Assumed exercise of dilutive stock options 3.0 3.0 3.0 3.0
---------------- ---------------- --------------- ---------------
Adjusted weighted number of common
shares outstanding 435.8 447.7 438.9 449.0
================ ================ =============== ===============
Fully diluted net income per share $1.89 $0.65 $5.09 $3.30
================ ================ =============== ===============
E-2
EXHIBIT 15
To the Board of Directors and Shareholders of
The Allstate Corporation:
We have reviewed, in accordance with standards established by the American
Institute of Certified Public Accountants, the unaudited interim financial
information of The Allstate Corporation and subsidiaries for the three-month and
six-month periods ended September 30, 1997 and 1996, as indicated in our report
dated November 13, 1997; because we did not perform an audit, we expressed no
opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, is
incorporated by reference in Registration Statement Nos. 33-88540, 333-10857 and
333-34583 on Form S-3 and Registration Statement Nos. 33-77928, 33-93758,
33-93760, 33-93762, 33-99132, 33-99136, 33-99138, 333-04919, 333-16129, and
333-23309 on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
Deloitte & Touche LLP
Chicago, Illinois
November 13, 1997
E-3
7
899051
THE ALLSTATE CORPORATION
1,000,000
U.S DOLLARS
9-MOS
DEC-31-1996
JAN-01-1997
SEP-30-1997
1
0
0
50364
6393
3038
720
61673
167
2146
2795
79990
24285
6335
0
20302
1473
0
0
5
15292
79900
14954
2906
776
0
11902
2060
1493
3173
936
2237
0
0
0
2234
5.09
5.09
0
0
0
0
0
0
0
