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 MARCH 31, 1996
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.)
Allstate Plaza, 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 BYSECTION 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 APRIL 30, 1996, THE REGISTRANT HAD 446,223,256
COMMON SHARES, $.01 PAR VALUE, OUTSTANDING.
THE ALLSTATE CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
MARCH 31, 1996
PART 1 - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements.
Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 1996
and 1995 (unaudited). 1
Condensed Consolidated Statements of Financial
Position as of March 31, 1996 (unaudited) and
December 31, 1995. 2
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1996
and 1995 (unaudited). 3
Notes to Condensed Consolidated Financial
Statements (unaudited). 4
Independent Certified Public Accountants'
Review Report. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 21
-1-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE ALLSTATE CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
-------------------------------
1996 1995
-------------- --------------
(Unaudited)
($ in millions except per share data)
Revenues
Property-liability insurance premiums earned 4,544 4,227
Life insurance premium income and contract charges 308 394
Net investment income 935 866
Realized capital gains and losses 116 86
------ ------
5,903 5,573
------ ------
Costs and expenses
Property-liability insurance claims and claims expense 3,687 3,204
Life insurance policy benefits 550 640
Amortization of deferred policy acquisition costs 564 505
Operating costs and expenses 558 547
Interest expense 23 15
------ ------
5,382 4,911
------ ------
Income from operations before income tax
expense and equity in net income
of unconsolidated subsidiary 521 662
Income tax expense 103 150
------ ------
Income before equity in net income of
unconsolidated subsidiary 418 512
Equity in net income of unconsolidated subsidiary 6 30
------ ------
Net income 424 542
====== ======
Net Income per share 0.94 1.21
====== ======
Weighted average common and common
equivalent shares outstanding 449.8 449.2
====== ======
See notes to condensed consolidated financial statements.
-2-
THE ALLSTATE CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
March 31, December 31,
($ in millions) 1996 1995
(Unaudited)
Assets
Investments
Fixed income securities available for sale, at fair value
(amortized cost $42,326 and $41,907) 44,029 45,272
Equity securities, at fair value (cost $4,604 and $4,716) 6,165 6,150
Mortgage loans 3,268 3,280
Real estate 774 786
Short-term 1,261 548
Other 476 469
------ ------
Total investments 55,973 56,505
Premium installment receivables, net 2,940 2,935
Deferred policy acquisition costs 2,200 2,004
Reinsurance recoverables, net 1,818 1,829
Property and equipment, net 720 724
Accrued investment income 771 750
Deferred income taxes 609 229
Cash 43 90
Other assets 1,074 1,154
Separate Accounts 4,251 3,809
------ ------
Total assets 70,399 70,029
====== ======
Liabilities
Reserve for property-liability insurance
claims and claims expense 18,001 17,687
Reserve for life insurance policy benefits 5,865 6,071
Contractholder funds 19,384 19,146
Unearned premiums 6,134 6,188
Claim payments outstanding 601 568
Other liabilities and accrued expenses 2,604 2,663
Short-term debt 112 0
Long-term debt 1,228 1,228
Separate Accounts 4,240 3,798
------ ------
Total liabilities 58,169 57,349
------ ------
Commitments and Contingent Liabilities (Notes 2 and 4)
Shareholders' equity
Preferred stock, $1 par value, 25 million
shares authorized, none issued 0 0
Common stock, $.01 par value, 1 billion shares
authorized and 450 million issued, 446.7 million
and 447.5 miilion shares outstanding. 5 5
Additional capital paid-in 3,134 3,134
Unrealized net capital gains 1,888 2,636
Unrealized foreign currency translation adjustments 20 20
Retained income 7,590 7,261
Deferred ESOP expense (300) (300)
Treasury stock, at cost (3.2 million and 2.5 million shares) (107) (76)
------- -------
Total shareholders' equity 12,230 12,680
------- -------
Total liabilities and shareholders' equity 70,399 70,029
======= =======
See notes to condensed consolidated financial statements.
-3-
THE ALLSTATE CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
------------------
($ in millions) 1996 1995
(Unaudited)
Cash flows from operating activities
Net income 424 542
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation, amortization and other non-cash items (8) 0
Realized capital gains and losses (116) (86)
Interest credited to contractholder funds 304 286
Increase in policy benefit and other insurance reserves 233 117
Change in unearned premiums (54) 10
Increase in deferred policy acquisition costs (60) (75)
Increase in premium installment receivables, net (5) (261)
Change in reinsurance recoverables, net 11 (11)
Change in deferred income taxes 21 (44)
Changes in other operating assets and liabilities 272 131
------ -----
Net cash provided by operating activities 1,022 609
------ -----
Cash flows from investing activities
Proceeds from sales
Fixed income securities available for sale 2,265 1,278
Fixed income securities held to maturity 0 9
Equity securities 807 768
Investment collections
Fixed income securities available for sale 757 435
Fixed income securities held to maturity 0 201
Mortgage loans 74 41
Investment purchases
Fixed income securities available for sale (3,651) (2,460)
Fixed income securities held to maturity 0 (122)
Equity securities (565) (741)
Mortgage loans (66) (65)
Change in short-term investments, net (713) 230
Change in other investments, net 4 27
Purchases of property and equipment, net (32) (31)
------- -------
Net cash used in investing activities (1,120) (430)
------- -------
Cash flows from financing activities
Proceeds from issuance of short-term debt, net 112 0
Contractholder fund deposits 834 986
Contractholder fund withdrawals (769) (1,072)
Dividends paid (95) (88)
Change in treasury stock, net (31) (8)
------- -------
Net cash provided (used) by financing activities 51 (182)
------- -------
Net decrease in cash (47) (3)
Cash at beginning of period 90 56
-------- -------
Cash at end of period 43 53
======== =======
See notes to condensed consolidated financial statements.
4
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 subsidiary, Allstate
Insurance Company ("AIC"), a property-liability insurance company with various
property-liability and life insurance subsidiaries, including Allstate Life
Insurance Company (collectively referred to as the "Company" or "Allstate").
The condensed consolidated financial statements and notes as of March 31,
1996 and for the three-month periods ended March 31, 1996 and 1995 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 1995. The results of operations for the interim periods
should not be considered indicative of results to be expected for the full year.
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, product mix, and
uncollectible reinsurance balances, 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 losses experienced in any year cannot be
predicted and could be material to the results of operations and financial
position. The Company has experienced two severe catastrophes in the last five
years resulting in losses of $2.33 billion relating to Hurricane Andrew (net of
reinsurance) and $1.72 billion relating to the Northridge earthquake. The
Company is exposed to similar or greater catastrophes in the future.
Reserves for environmental and asbestos claims are comprised of reserves for
reported claims, incurred but not reported claims and related expenses.
Establishing reserves for these types of losses is subject to uncertainties that
are greater than those presented by other types of claims. Among the
5
complications are the 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, and the extent and timing of
any such contractual liability. 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 1986 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 subsequent to 1986. Allstate's reserves,
net of reinsurance recoverables of $640 million and $647 million, for
environmental and asbestos claims were $1.04 million and $1.02 billion at March
31, 1996 and December 31, 1995, respectively.
Management believes its reserves for environmental and asbestos coverage are
appropriately established based on available facts, technology, laws and
regulations. However, due to the inconsistencies of court coverage decisions,
plaintiffs' expanded theories of liability, the risks inherent in major
litigation and other uncertainties, the ultimate cost of these claims may vary
materially from the amounts currently recorded, resulting in an increase in the
loss reserves. Due to the uncertainties and factors described above, management
believes it is not practicable to develop a meaningful range for any such
additional reserves that may be required.
The Company is aware of developing databases which may be useful in estimating
environmental liabilities. Allstate is evaluating whether this information could
enhance its current analysis of these exposures.
3. REINSURANCE
Property-liability insurance premiums and life insurance premium income and
contract charges are net of reinsurance ceded as follows:
Three
Months Ended
March 31,
($ in millions)
1996 1995
Property-liability premiums....................................... $138 $125
Life insurance premium income and contract charges................ 13 13
6
Property-liability insurance claims and claims expense and life insurance
policy benefits are net of reinsurance recoveries as follows:
Three
Months Ended
March 31,
($ in millions)
1996 1995
Property-liability premiums claims and claims expense............. $96 $81
Life insurance policy benefits................................ 18 13
4. REGULATION AND LEGAL PROCEEDINGS
The Company's insurance businesses are subject to the effects of a changing
social, economic and regulatory environment. Public and 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.
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 subsidiary as of March 31, 1996, and
the related condensed consolidated statements of operations and cash flows for
the three-month periods ended March 31, 1996 and 1995. 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 subsidiary as of December 31, 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the year then
ended, not presented herein. In our report dated March 1, 1996, 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, 1995 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
May 13, 1996
8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 1996 AND 1995
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
along with the discussion and analysis found under Part 2. Item 7 of The
Allstate Corporation Annual Report on Form 10-K.
CONSOLIDATED OPERATIONS
Consolidated revenues for the first quarter of 1996 increased 5.9% to $5.9
billion from $5.57 billion for the same period last year reflecting a $317
million increase in property-liability insurance premiums earned, an $86 million
decrease in life insurance premium income and contract charges, a $69 million
increase in net investment income, and a $30 million increase in net realized
capital gains. The increase in insurance premiums earned for the three-month
period reflects the growth in sales of the Company's core property-liability
auto and homeowners products. Revenue results for the Company's primary
insurance segments are discussed further in the following sections.
Net income for the quarter was $424 million, or $.94 per share, compared
with $542 million, or $1.21 per share, for the first quarter of 1995. Profits
from increased property-liability revenues and improved life operating income
were offset by higher losses caused by the severe winter weather experienced
during the first quarter of 1996 as compared to the relatively mild weather
during the first quarter of 1995.
9
PROPERTY-LIABILITY OPERATIONS
OVERVIEW
The Company's property-liability operations includes personal property and
casualty ("PP&C"), commercial property and casualty and reinsurance ("Business
Insurance"), and discontinued lines and coverages, consisting of excess and
surplus lines, environmental and asbestos losses from reinsurance assumed, and
the run-off of the mortgage pool business, no longer written by Allstate
("Discontinued Lines and Coverages").
Underwriting results for each of the property-liability segments are
discussed separately beginning on page 12.
The following table sets forth certain unaudited summarized financial data
and key operating ratios for the Company's property-liability operations for the
three-month periods ended March 31, 1996 and 1995.
Three Months Ended
March 31,
($ in millions) 1996 1995
---- ----
Premiums written............................................ $4,493 $4,241
===== =====
Premiums earned............................................. $4,544 $4,227
Claims and claims expense................................... 3,687 3,204
Other costs and expenses.................................... 1,006 943
----- -----
Underwriting (loss) income ................................. (149) 80
Net investment income ...................................... 427 379
Realized capital gains and losses, after-tax................ 76 44
Income tax expense on operations............................ 19 80
----- -----
Income before equity in net income of
unconsolidated subsidiary................................. 335 423
Equity in net income of unconsolidated subsidiary........... 6 30
----- -----
Net income.................................................. $ 341 $ 453
===== =====
Catastrophe losses.......................................... $ 232 $ 171
===== =====
Operating ratios............................................
Claims and claims expense ("loss") ratio.................. 81.2 75.8
Expense ratio............................................. 22.1 22.3
----- -----
Combined ratio............................................ 103.3 98.1
===== =====
Effect of catastrophe losses on combined ratio............ 5.1 4.0
===== =====
10
NET INVESTMENT INCOME AND REALIZED CAPITAL GAINS
Pretax net investment income increased 12.7% for the first quarter of 1996
compared to the same period in 1995. The increase was due to growth in
investment balances, principally from proceeds received from the PMI Group and
Sears Distribution transactions in the second quarter of 1995, and positive cash
flows from operations.
Realized capital gains and losses after-tax increased 72.7% for the first
quarter of 1996, compared to the same period of 1995, due to increased sales of
equity securities as the Company took advantage of favorable market conditions.
Fluctuations in realized capital gains and losses are largely a function of
timing of sales decisions reflecting management's view of individual securities
and overall market conditions.
The Company has been assessing the interest rate and market rate risk
associated with its property-liability fixed income and equity securities
portfolios. As a result, the Company has decided to reduce over time, subject to
market conditions, its investment in equity securities. As a result of
repositioning the portfolio, the Company expects to recognize capital gains
starting in the second quarter of 1996 (see "Investments").
CATASTROPHE LOSSES
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 severe catastrophes in the
last five years which resulted in losses of $2.33 billion related to Hurricane
Andrew (net of reinsurance) and $1.72 billion related to the Northridge
earthquake. The Company is exposed to similar or greater catastrophes in the
future.
Catastrophe losses for the first quarter of 1996 were $232 million compared
to $171 million for the same period of 1995. The increase is primarily due to
losses caused by snow and ice storms experienced in the eastern portion of the
United States during the first quarter of 1996.
The establishment of appropriate reserves for catastrophes that have
occurred, 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.
11
CATASTROPHE MANAGEMENT
Allstate has initiated strategies to limit, over time, its insurance
exposures in certain regions prone to catastrophe occurrences, subject to the
requirements of insurance laws and regulations and as limited by competitive
considerations. These strategies include a reduction of policies in force,
requests for rate increases and the introduction of certain limitations on
policy coverages. For example, in Florida, Allstate has declined to renew some
policies for property coverages and has requested and received selective rate
increases. In California, Allstate has placed limitations on policy coverages
and received selective rate increases. In addition, Allstate began issuing a
revised earthquake policy ("mini-policy")in California on May 1, 1996. The
mini-policy increases deductibles on dwelling coverage, limits contents and
living expense coverage, and eliminates coverage for most non-dwelling
structures. The issuance of the mini-policy, upon renewal of existing earthquake
policies, will reduce Allstate's earthquake exposure in the state of California.
Allstate has no reinsurance in place to lower its exposure to catastrophe
losses on personal lines business at this time. However, Allstate continues to
evaluate the reinsurance market for appropriate coverage at acceptable rates,
the financial markets, and other business strategies to lower its exposure to
catastrophic losses.
Proposed legislation has been introduced in the California legislature to
create the California Earthquake Authority (the "CEA"), an entity which if
approved, would assume earthquake exposure from member companies upon renewal of
their earthquake policies, beginning no later than January 1997, and pay for
losses through assessment of participating insurers, reinsurance and from
funding provided by the capital markets. The amount of Allstate's initial
assessment to fund the CEA is expected to be approximately $150 million.
Allstate would be obligated to pay an additional assessment, not expected to
exceed $750 million, in the event that the initial capitalization and retained
earnings of the CEA are exhausted by claim payments. The Internal Revenue
Service recently withdrew a favorable ruling concerning the tax exempt status of
the fund to be provided under the CEA legislation, and several reinsurers have
withdrawn commitments to support the funding. Consequently, the Company is
unable to predict the extent to which the CEA, if enacted, will reduce the
Company's exposure to losses from earthquakes in California.
Recent legislation in Florida has extended the moratorium on property
insurance nonrenewals to June 1999. However, the legislation also provides
methods for insurers to manage their catastrophe exposure, including permission
to transfer certain coverages to another insurer, to increase deductibles and
reduce coverages in certain cases and, to transfer windstorm coverage under
certain circumstances to the Florida Windstorm Underwriting Association.
While management believes that these actions have reduced or will reduce the
Company's exposure to catastrophes in certain geographic regions, the extent of
future reductions is uncertain.
12
UNDERWRITING RESULTS
PP&C - Underwriting results and key operating ratios for the Company's
personal property and casualty insurance segment for the three-month periods
ended March 31, 1996 and 1995 are summarized in the following table.
Three Months Ended
March 31,
($ in millions) 1996 1995
---- ----
Premiums written............................................ $ 4,163 $ 3,900
====== ======
Premiums earned............................................. $ 4,190 $ 3,889
Claims and claims expense................................... 3,354 2,889
Other costs and expenses.................................... 894 841
------ ------
Underwriting (loss) income ................................. $ (58) $ 159
======= ======
Catastrophe losses.......................................... $ 222 $ 166
====== ======
Operating ratios............................................
Claims and claims expense ("loss") ratio.................. 80.1 74.3
Expense ratio............................................. 21.3 21.6
-------- --------
Combined ratio............................................ 101.4 95.9
======== ========
Effect of catastrophe losses on combined ratio............ 5.3 4.3
=== ===
PP&C primarily sells private-passenger auto and homeowners insurance to
individuals. The Company separates the voluntary personal auto insurance
business into two categories according to insurance risks: the standard market
and the non-standard market. The standard market consists of drivers who are
perceived to have 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 or the types of cars they own. These policies are written
at rates higher than standard auto rates.
PP&C premiums written increased 6.7% for the three-month period ended March
31, 1996, over the comparable period in 1995. Standard auto premiums written
increased 2.2% to $2.58 billion in the first quarter of 1996, from $2.53 billion
for the same three-month period in 1995. The increase in standard auto premiums
written was due to increases in both average premium and policies in force (unit
sales). Average premium increases were primarily attributable to a shift to
newer and more expensive autos and, to a lesser extent, rate increases. The
growth in policies in force was due to increases in new and renewal business
and, was generally achieved in markets that management believes will be
profitable, partially offset by a decline in premiums written in some of those
markets that management believes do not provide appropriate returns.
13
Non-standard auto premiums written increased 30.5% to $642 million in the
first quarter of 1996, from $492 million for the same period in 1995. The
increase is driven by an increase in policies in force and, to a lesser extent,
average premium. The increase in policies in force is due to increases in both
new and renewal business.
Homeowners premiums written for the first quarter were $647 million, an
increase of 10.2% over 1995 premiums of $587 million. The increase is
attributable to a higher average premium and a small increase in policies in
force. The higher average premiums are primarily due to rate increases in
catastrophe exposure areas, principally California and Florida, and the effect
of policy provisions which adjust for inflation. Growth in policies in force,
which is primarily occurring in areas targeted for growth, is partially offset
by policy reductions in certain catastrophe exposure areas.
For the first quarter of 1996, PP&C had an underwriting loss of $58 million
versus underwriting income of $159 million for the first quarter of 1995. The
underwriting loss was primarily due to higher catastrophe and other losses
related to severe weather. These more than offset growth in premiums and a lower
expense ratio. The increase in weather related losses caused an increase in auto
and homeowners claim frequency (rate of claim occurrence). Auto injury and
physical damage claim severities increased over prior year, driven by moderate
inflationary pressure. Both trended favorably as compared to relevant medical
cost and repair cost indexes.
14
BUSINESS INSURANCE - Business Insurance writes selected commercial property
and casualty insurance primarily for small- to medium-sized businesses,
including auto, property, general liability, package policies combining property
and general liability coverages, and workers' compensation insurance. Business
Insurance also reinsures primarily smaller regional insurers who focus on
property and casualty coverages and who have underwriting standards considered
prudent by Allstate. This business is written through Allstate agents,
independent agents appointed by Northbrook Property and Casualty Insurance
Company and brokers appointed by Allstate Reinsurance.
Underwriting results and key operating ratios for the Company's business
insurance segment for the three-month periods ended March 31, 1996 and 1995 are
summarized in the following table.
Three Months Ended
March 31,
($ in millions) 1996 1995
---- ----
Premiums written.................................................... $330 $348
=== ===
Premiums earned..................................................... $354 $344
Claims and claims expense........................................... 286 273
Other costs and expenses............................................ 110 104
--- ---
Underwriting(loss).................................................. $(42) $(33)
==== ====
Catastrophe losses.................................................. $ 10 $ 5
=== ===
Operating ratios....................................................
Claims and claims expense ("loss") ratio.......................... 80.8 79.2
Expense ratio..................................................... 31.1 30.4
----- -----
Combined ratio.................................................... 111.9 109.6
===== =====
Effect of catastrophe losses on combined ratio.................... 2.8 1.5
=== ===
Premiums written decreased 5.2% from the same period last year as a small
increase in commercial auto premiums written was more than offset by a 15%
decrease in reinsurance premiums. The decrease in reinsurance premiums written
was primarily caused by competitive pressures.
The combined ratio of 111.9 was 2.3 points higher than the same period last
year driven by both loss ratio and expense ratio increases. The increase in the
loss ratio was primarily due to the impact of the severe winter weather on both
catastrophe losses and, to a lesser extent, commercial auto lines' loss
experience. The increase in the expense ratio is primarily due to an increase in
expenses in the reinsurance business.
On April 17, 1996 Allstate announced it is conducting a strategic review of
two of its Business Insurance operations; Northbrook Property and Casualty
Insurance Company, which writes business through independent agents, and
Allstate Reinsurance, which writes business through appointed brokers. The main
objective of the review is to define the role and future contribution of these
operations to Allstate's long-term strategic focus on its core strengths in the
personal lines property-casualty and life insurance businesses. Management is
considering several strategic options including, but not limited to, continuing
to implement the long-term moderate growth and profitability strategies of each
business and seeking qualified buyers. The review is expected to be completed by
mid-year 1996.
15
DISCONTINUED LINES AND COVERAGES - Discontinued lines and coverages consist
of excess and surplus insurance lines (including environmental and asbestos
losses) which Allstate stopped writing in 1985, environmental and asbestos
losses from reinsurance assumed, which management believes were generally
excluded from the primary insurer's policy coverage beginning in 1986 and the
run-off losses from the mortgage pool business.
Underwriting results for the Company's discontinued lines and coverages segment
for the three-month periods ended March 31, 1996 and 1995 are summarized in the
following table.
Three Months Ended
March 31,
($ in millions) 1996 1995
---- ----
Underwriting loss from excess and surplus insurance lines and environmental
and asbestos losses from reinsurance
assumed........................................ $(49) $(36)
Underwriting loss from mortgage pool business.. 0 (10)
--- ----
Total underwriting loss $(49) $(46)
==== ====
The underwriting losses from excess and surplus insurance lines and
environmental and asbestos losses from reinsurance assumed were due primarily to
additional claims being reported and continued reevaluation and adjustment of
the estimated ultimate cost of settling these claims.
The Company is aware of developing databases which may be useful in
estimating environmental liabilities. Allstate is evaluating whether this
information could enhance its current analysis of these exposures.
In the second quarter of 1995, in keeping with Allstate's decision to exit
the mortgage guaranty insurance business, the Company established an after-tax
provision of $80 million for future losses on the run-off of the mortgage pool
business. As a result, losses from the mortgage pool business have not impacted
underwriting results since the first quarter of 1995 and are not expected to
materially impact future operating results. However, this business, which is
highly concentrated in southern California, could be impacted by economic
recessions, falling housing values, rising unemployment rates, interest rate
volatility or a combination of such factors.
16
LIFE OPERATIONS
Allstate Life markets a broad line of life insurance, annuity and group pension
products through a combination of Allstate agents, banks and other financial
institutions, independent brokers and direct response marketing.
The following table sets forth certain summarized financial data for the
Company's life insurance operations and invested assets at or for the
three-month periods ended March 31, 1996 and 1995.
Three Months Ended
March 31,
($ in millions) 1996 1995
---- ----
Statutory premiums and deposits............................... $ 1,313 $ 1,290
====== ======
Invested assets (1)........................................... $25,863 $24,186
Separate Account assets (1)................................... 4,251 2,938
------ -----
Invested assets including Separate Account assets............. $30,114 $27,124
====== ======
Premium income and contract charges........................... $ 308 $ 394
Net investment income .......................... ............. 507 487
Policy benefits and expenses.................................. 672 748
------ ------
Income from operations........................................ 143 133
Income tax expense on operations.............................. 49 46
-------- ------
Net operating income.......................................... 94 87
Realized capital gains and losses, after-tax... 0 12
------ ------
Net income.................................................... $ 94 $ 99
====== ======
(1) Fixed income securities are included in invested assets in the table above
at amortized cost and are carried at fair market value in the statement of
financial position. Separate Accounts are included at fair value in both the
table above and the statement of financial position.
Life insurance statutory premiums and deposits increased 1.8% in the first
quarter of 1996 compared with the same period last year. Higher sales of pension
and life products were offset by lower sales of individual annuities.
Premium income and contract charges under generally accepted accounting
principles ("GAAP") decreased 21.8%, as higher contract charges were more than
offset by lower sales of structured settlement annuities with life
contingencies. Under GAAP, revenues will vary with the mix of products sold
during the period because they exclude deposits on most annuities and premiums
on universal life insurance policies.
Pretax net investment income increased by 4.1% in the first quarter of 1996
from the comparable 1995 period primarily due to the $1.68 billion increase in
invested assets. The overall portfolio yield declined slightly, as proceeds from
calls and maturities as well as new premiums and deposits were reinvested in
securities yielding less than the average portfolio rate.
Net operating income increased 8% during the first quarter of 1996 compared
with the prior year, primarily due to higher mortality margins and growth in
assets, partially offset by higher operating expenses. First quarter 1995
operating expenses reflected a one-time, after-tax benefit of $10 million
17
related to a reduced rate of amortization of deferred policy acquisition costs,
due to favorable universal life insurance persistency.
First quarter of 1996 realized capital gains, primarily from the sale of
equity securities, were completely offset by writedowns of fixed income and
equity securities. Net realized after-tax capital gains for the same period of
1995 were $12 million.
LIQUIDITY AND CAPITAL RESOURCES
Shareholders' equity decreased $450 million to $12.23 billion at March 31,
1996 versus $12.68 billion at December 31, 1995. The decrease is primarily due
to a decrease of $748 million in unrealized net capital gains (see
"Investments"), which more than offset net income for the period of $424
million. The decrease in unrealized net capital gains is primarily due to the
effect of rising interest rates on the value of the fixed income portfolio.
The Company maintains a line of credit of $1.5 billion as a source of
potential funds to meet short-term liquidity requirements. During the three
months ended March 31, 1996, there were no borrowings under this line of
credit.
In early 1996 the Company launched a commercial paper program. The majority
of the proceeds from the issuance of the commercial paper has been used by the
insurance operations for general operating purposes. As of March 31, 1996, the
Company had outstanding commercial paper borrowings of $112 million. Total
borrowings under the combined commercial paper program and line of credit are
limited to $1.5 billion.
During the first quarter of 1996, the Company purchased shares of its common
stock, for its treasury, at an average cost per share of $41.62, to provide for
the future exercise of employee stock options. At March 31, 1996, the Company
held 3,228,837 shares of treasury stock with an average cost per share of
$33.10.
Surrenders and withdrawals for the life operations were $386 million for the
first three months of 1996 compared with $629 million in 1995. The decrease is
attributable to management actions taken in 1995 to slow the surrender rate,
which included raising renewal crediting rates.
Cash from operating activities increased $413 million from the prior year
first quarter, due to increases in cash collected from underwriting activities
and investment income. Cash at the end of the period decreased as cash from
operations and financing activities were invested primarily, in fixed income
securities and short term investments.
18
INVESTMENTS
Total investments decreased to $55.97 billion at March 31, 1996 from $56.51
billion at December 31, 1995. Property-liability investments decreased $52
million to $29.16 billion at March 31, 1996 from $29.21 billion at December 31,
1995. Life investments at March 31, 1996, decreased $496 million to $26.76
billion from $27.26 billion at December 31, 1995. The decrease in investments
was primarily attributable to a decrease of $756 million and $906 million in the
unrealized gain on the fixed income securities portfolio for property-liability
and life, respectively. These decreases were due to the effect of rising
interest rates which offset increases in amounts invested from positive cash
flows generated from operations, and an increase in the unrealized gains of the
equity securities portfolio.
The composition of the investment portfolio at March 31, 1996, at financial
statement carrying values, is presented in the table below.
Property-Liability Life Total
Fixed income securities (1) $22,594 77.5% $21,435 80.2% $44,029 78.6%
Equity securities 5,423 18.6 742 2.8 6,165 11.0
Mortgage loans 59 .2 3,209 12.0 3,268 5.8
Real estate 435 1.5 339 1.3 774 1.4
Short-term 630 2.1 576 2.1 1,261 2.3
Other 17 .1 459 1.6 476 .9
------ ----- ------ ----- ------ ----
Total $29,158 100.0% $26,760 100.0% $55,973 100.0%
====== ===== ====== ===== ====== =====
(1) Fixed income securities are carried at fair value. Amortized cost for these
securities was $21.79 billion and $20.54 billion for property-liability and life
operations, respectively.
Over 94% of the fixed income securities portfolio is rated "investment
grade", which is defined by the Company as a security having an NAIC rating of 1
or 2, a Moody's rating of Aaa, Aa, A or Baa, or a comparable Company internal
rating.
The Company uses derivative financial instruments to reduce its exposure to
market and interest rate risk on its invested assets, as well as to improve
asset/liability management. 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, established risk control limits, and maintains ongoing
monitoring procedures. Beginning in the first quarter of 1996, the Company
increased its use of interest rate cap agreements to hedge the interest rate
risk associated with certain single premium deferred annuity products. There
have been no significant changes in the risk profile of the Company's
derivative portfolio since December 31, 1995.
The Company has been assessing the interest rate and market risk associated
with its property-liability fixed income and equity securities portfolios. As a
result, the Company has decided to reduce over time, subject to market
conditions, its investment in equity securities. As a result of repositioning
the portfolio, the Company expects to recognize capital gains beginning in the
second quarter of 1996. The proceeds from the sales, combined with positive
19
cash flow from operations will be invested in shorter duration fixed income
securities.
FIXED INCOME SECURITIES
Allstate monitors the quality of its fixed income portfolio, in part, by
categorizing certain investments as problem, restructured or potential problem.
Problem fixed income securities are securities in default with respect to
principal and/or interest and/or securities issued by companies that went into
bankruptcy subsequent to acquisition of the security. Restructured fixed income
securities have modified terms and conditions that were not at current market
rates or terms at the time of the restructuring. Potential problem fixed income
securities are current with respect to contractual principal and/or interest,
but because of other facts and circumstances, management has serious doubts
regarding the borrower's ability to pay future interest and principal which
causes management to believe these securities may be classified as problem
or restructured in the future.
The following table summarizes problem, restructured and potential problem
fixed income securities at March 31, 1996 and December 31, 1995.
March 31, December 31,
($ in millions) 1996 1995
---- ----
Problem....................................................... $103 $126
Restructured ................................................. 8 6
Potential problem ............................................ 133 149
--- ---
Total net carrying value.................................... $244 $281
==== ====
COMMERCIAL MORTGAGE LOANS
Allstate monitors the quality of its mortgage loans by categorizing certain
loans as problem, restructured or potential problem. Problem commercial mortgage
loans are loans that are in foreclosure, loans for which a principal or interest
payment is over 60 days past due, or are current with respect to interest
payments, but considered in-substance foreclosed. Restructured commercial
mortgage loans have modified terms and conditions that were not at current
market rates or terms at the time of the restructuring. Potential problem
commercial mortgage loans are current with respect to interest payments, or less
than 60 days delinquent as to contractual principal and/or interest payments,
but because of other facts and circumstances, management has serious doubts
regarding the borrower's ability to pay future interest and principal which
causes management to believe these loans may be classified as problem or
restructured in the future.
20
The following table summarizes the net carrying values of problem,
restructured and potential problem commercial mortgage loans at March 31, 1996
and December 31, 1995.
March 31, December 31,
($ in millions) 1996 1995
---- ----
Problem....................................................... $125 $104
Restructured ................................................. 137 143
Potential problem ............................................ 115 147
--- ---
Total net carrying value.................................... $377 $394
=== ===
Valuation allowances.......................................... $ 76 $ 75
=== ===
Valuation allowances as a percent of gross carrying value (1).
16.7% 16.0%
(1) Calculated as total valuation allowances divided by the gross carrying
value, which is the total net carrying value plus the valuation allowances.
The net carrying value of problem, restructured and potential problem loans
decreased during the three-month period, due to foreclosures as well as
improvements in circumstances surrounding certain loans. Problem loans
experienced a net increase during the first three months due to loans moving
from potential problem and restructured to problem.
The carrying value of impaired loans as of March 31, 1996, and December 31,
1995 was $200 million and $193 million, respectively.
In the three months ended March 31, 1996, $140 million of commercial
mortgage loans were contractually due. Of these, 17.1% were paid as due, 54.5%
were refinanced at prevailing market terms, and 28.4% are currently in the
process of refinancing or restructuring discussions.
PENDING ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" which encourages entities to adopt a fair value based
method of accounting for compensation cost of employee stock compensation plans.
The statement allows an entity to continue the application of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees",
however, pro forma disclosures of net income and earnings per share, as if the
fair value based method of accounting defined by this statement had been
applied, are required. The disclosure requirements of this statement will be
adopted in December 1996 and are expected to be immaterial. Results of
operations and financial position will not be affected by the adoption of this
statement.
-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) Report 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)
May 13, 1996 By /s/Samuel H. Pilch
Samuel H. Pilch
Controller
(Principal Accounting Officer
and duly authorized Officer of Registrant)
E-1
EXHIBIT INDEX
THE ALLSTATE CORPORATION
QUARTER ENDED MARCH 31, 1996
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.
10 The Allstate Corporation Equity Incentive Plan
for Non-Employee Directors. Incorporated by
reference to Appendix A to the Company's Proxy
Statement dated March 30, 1996.
11 Computation of earnings per common share for
The Allstate Corporation and consolidated
subsidiary.
15 Acknowledgment of awareness from Deloitte &
Touche LLP, dated May 13, 1996, 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-2
Exhibit 11
THE ALLSTATE CORPORATION AND SUBSIDIARY
COMPUTATION OF EARNINGS PER COMMON SHARE
($ in millions, except for per share data) Three Months Ended March 31,
----------------------------------------
1996 1995
---- ----
Net Income $424 $542
==== ====
Primary earnings per common share computation:
Weighted average number of common shares 447.2 449.2
Assumed exercise of dilutive stock options 2.6 0
----- -----
Adjusted weighted number of common shares outstanding 449.8 449.2
=== ===
Primary net income per share $0.94 $1.21
=== ===
Fully diluted earnings per common share computation:
Weighted average number of common shares 447.2 449.2
Assumed exercise of dilutive stock options 2.6 0.3
----- ----
Adjusted weighted number of common shares outstanding 449.8 449.5
=== ===
Fully diluted net income per share $0.94 $1.21
==== ====
E-3
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 subsidiary for the quarters ended
March 31, 1996 and 1995, as indicated in our report dated May 13, 1996; because
we did not perform an audit, we expressed no opinion on that information.
We are aware that our report referred above, which is included in your Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996, is incorporated by
reference in Registration Statement Nos. 33-60420, 33-69568 and 33-88540 on Form
S-3 and Registration Statement Nos. 33-77928, 33-93758, 33-93760, 33-93762,
33-99132, 33-99136 and 33-99138 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
May 13, 1996
7
1,000,000
U.S. Dollars
3-MOS
DEC-31-1995
JAN-01-1996
MAR-31-1996
1
44,029
0
0
6,165
3,268
774
55,973
43
1,818
2,200
70,399
23,866
6,134
0
19,384
1,228
0
0
5
12,225
70,399
4,852
935
116
0
4,237
564
558
521
103
424
0
0
0
424
.94
.94
0
0
0
0
0
0
0
