UNITED STATES
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 JUNE 30, 2009

 

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 Number)

 

2775 Sanders Road, Northbrook, Illinois  60062

(Address of principal executive offices)          (Zip Code)

 

Registrant’s telephone number, including area code:  (847) 402-5000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

 

 

Yes

 X

 

No 

 

 

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

 

Yes

 

 

No 

 

 

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,”  “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

 

Yes

 

 

No 

   X

 

 

 

As of July 31, 2009, the registrant had 536,387,353 common shares, $.01 par value, outstanding.


 

THE ALLSTATE CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

June 30, 2009

 

PART I

 

FINANCIAL INFORMATION

 

PAGE

 

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three-Month and Six-Month Periods Ended June 30, 2009 and 2008 (unaudited)

 

1

 

 

 

 

 

 

 

Condensed Consolidated Statements of Financial Position as of June 30, 2009 (unaudited) and December 31, 2008

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2009 and 2008 (unaudited)

 

3

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

4

 

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

45

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

 

 

 

 

Highlights

 

46

 

 

Consolidated Net Income

 

47

 

 

Property-Liability Highlights

 

48

 

 

Allstate Protection Segment

 

52

 

 

Discontinued Lines and Coverages Segment

 

71

 

 

Property-Liability Investment Results

 

71

 

 

Allstate Financial Highlights

 

72

 

 

Allstate Financial Segment

 

73

 

 

Investment Highlights

 

81

 

 

Investments

 

81

 

 

Fair Value of Assets and Liabilities

 

108

 

 

Application of Critical Accounting Estimates

 

109

 

 

Deferred Taxes

 

111

 

 

Capital Resources and Liquidity Highlights

 

112

 

 

Capital Resources and Liquidity

 

112

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

118

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

119

 

 

 

 

 

Item 1A.

 

Risk Factors

 

119

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

120

 

 

 

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

120

 

 

 

 

 

Item 6.

 

Exhibits

 

121

 


 

PART I. FINANCIAL INFORMATION

 

ITEM I. FINANCIAL STATEMENTS

 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

($ in millions, except per share data)

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

2009

 

 

2008

 

 

2009

 

 

2008

 

 

 

(unaudited)

 

 

(unaudited)

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Property-liability insurance premiums earned

$

6,560

 

$

6,750

 

$

13,142

 

$

13,514

 

Life and annuity premiums and contract charges

 

494

 

 

471

 

 

978

 

 

923

 

Net investment income

 

1,108

 

 

1,412

 

 

2,284

 

 

2,938

 

Realized capital gains and losses:

 

 

 

 

 

 

 

 

 

 

 

 

Total other-than-temporary impairment losses

 

(471

)

 

(1,265

)

 

(1,196

)

 

(1,723

)

Portion of loss recognized in other comprehensive income

 

154

 

 

--

 

 

154

 

 

--

 

Net other-than-temporary impairment losses recognized in earnings

 

(317

)

 

(1,265

)

 

(1,042

)

 

(1,723

)

Sales and other realized capital gains and losses

 

645

 

 

50

 

 

1,011

 

 

(147

)

Total realized capital gains and losses

 

328

 

 

(1,215

)

 

(31

)

 

(1,870

)

 

 

8,490

 

 

7,418

 

 

16,373

 

 

15,505

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Property-liability insurance claims and claims expense

 

5,002

 

 

4,776

 

 

9,722

 

 

9,452

 

Life and annuity contract benefits

 

407

 

 

395

 

 

794

 

 

792

 

Interest credited to contractholder funds

 

561

 

 

563

 

 

1,140

 

 

1,187

 

Amortization of deferred policy acquisition costs

 

1,229

 

 

959

 

 

2,626

 

 

2,034

 

Operating costs and expenses

 

702

 

 

728

 

 

1,503

 

 

1,520

 

Restructuring and related charges

 

32

 

 

(5

)

 

77

 

 

(6

)

Interest expense

 

97

 

 

88

 

 

185

 

 

176

 

 

 

8,030

 

 

7,504

 

 

16,047

 

 

15,155

 

Gain (loss) on disposition of operations

 

1

 

 

--

 

 

4

 

 

(9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations before income tax expense (benefit)

 

461

 

 

(86

)

 

330

 

 

341

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

72

 

 

(111

)

 

215

 

 

(32

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

389

 

$

25

 

$

115

 

$

373

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share - Basic

$

0.72

 

$

0.05

 

$

0.21

 

$

0.67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares - Basic

 

539.8

 

 

551.8

 

 

539.3

 

 

556.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share - Diluted

$

0.72

 

$

0.05

 

$

0.21

 

$

0.67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares - Diluted

 

540.6

 

 

553.8

 

 

540.1

 

 

558.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

$

0.20

 

$

0.41

 

$

0.40

 

$

0.82

 

 

See notes to condensed consolidated financial statements.

 

1


 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

($ in millions, except par value data)

 

June 30,

 

 

December 31,

 

 

 

2009

 

 

2008

 

Assets

 

(unaudited)

 

 

 

 

Investments:

 

 

 

 

 

 

Fixed income securities, at fair value (amortized cost $79,890 and $77,104)

$

72,766

 

$

68,608

 

Equity securities, at fair value (cost $3,483 and $3,137)

 

3,297

 

 

2,805

 

Mortgage loans

 

9,406

 

 

10,229

 

Limited partnership interests

 

2,464

 

 

2,791

 

Short-term, at fair value (amortized cost $6,070 and $8,903)

 

6,070

 

 

8,906

 

Other

 

2,455

 

 

2,659

 

Total investments

 

96,458

 

 

95,998

 

Cash

 

667

 

 

415

 

Premium installment receivables, net

 

4,794

 

 

4,842

 

Deferred policy acquisition costs

 

8,228

 

 

8,542

 

Reinsurance recoverables, net

 

6,621

 

 

6,403

 

Accrued investment income

 

859

 

 

884

 

Deferred income taxes

 

2,710

 

 

3,794

 

Property and equipment, net

 

1,031

 

 

1,059

 

Goodwill

 

874

 

 

874

 

Other assets

 

2,656

 

 

3,748

 

Separate Accounts

 

8,193

 

 

8,239

 

Total assets

$

133,091

 

$

134,798

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Reserve for property-liability insurance claims and claims expense

$

19,271

 

$

19,456

 

Reserve for life-contingent contract benefits

 

12,835

 

 

12,881

 

Contractholder funds

 

53,999

 

 

58,413

 

Unearned premiums

 

9,755

 

 

10,024

 

Claim payments outstanding

 

813

 

 

790

 

Other liabilities and accrued expenses

 

6,469

 

 

6,663

 

Long-term debt

 

6,658

 

 

5,659

 

Separate Accounts

 

8,193

 

 

8,239

 

Total liabilities

 

117,993

 

 

122,125

 

 

 

 

 

 

 

 

Commitments and Contingent Liabilities (Note 11)

 

 

 

 

 

 

Equity

 

 

 

 

 

 

Preferred stock, $1 par value, 25 million shares authorized, none issued

 

--

 

 

--

 

Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 536 million and 536 million shares outstanding

 

9

 

 

9

 

Additional capital paid-in

 

3,144

 

 

3,130

 

Retained income

 

30,969

 

 

30,207

 

Deferred ESOP expense

 

(47

)

 

(49

)

Treasury stock, at cost (364 million and 364 million shares)

 

(15,835

)

 

(15,855

)

Accumulated other comprehensive income:

 

 

 

 

 

 

Unrealized net capital gains and losses:

 

 

 

 

 

 

Unrealized net capital losses on fixed income securities with OTTI

 

(380

)

 

--

 

Other unrealized net capital gains and losses

 

(4,374

)

 

(5,767

)

Unrealized adjustment to DAC, DSI and insurance reserves

 

2,642

 

 

2,029

 

Total unrealized net capital gains and losses

 

(2,112

)

 

(3,738

)

Unrealized foreign currency translation adjustments

 

17

 

 

5

 

Unrecognized pension and other postretirement benefit cost

 

(1,077

)

 

(1,068

)

Total accumulated other comprehensive loss

 

(3,172

)

 

(4,801

)

Total shareholders’ equity

 

15,068

 

 

12,641

 

Noncontrolling interest

 

30

 

 

32

 

Total equity

 

15,098

 

 

12,673

 

Total liabilities and equity

$

133,091

 

$

134,798

 

 

See notes to condensed consolidated financial statements.

 

2


 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

($ in millions)

 

Six Months Ended
June 30,

 

 

 

2009

 

 

2008

 

 

 

(unaudited)

 

Cash flows from operating activities

 

 

 

 

 

 

Net income

$

115

 

$

373

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation, amortization and other non-cash items

 

(86

)

 

(141

)

Realized capital gains and losses

 

31

 

 

1,870

 

(Gain) loss on disposition of operations

 

(4

)

 

9

 

Interest credited to contractholder funds

 

1,140

 

 

1,187

 

Changes in:

 

 

 

 

 

 

Policy benefits and other insurance reserves

 

(148

)

 

(146

)

Unearned premiums

 

(283

)

 

(179

)

Deferred policy acquisition costs

 

548

 

 

(269

)

Premium installment receivables, net

 

55

 

 

(12

)

Reinsurance recoverables, net

 

(133

)

 

51

 

Income taxes

 

1,359

 

 

(361

)

Other operating assets and liabilities

 

(112

)

 

(83

)

Net cash provided by operating activities

 

2,482

 

 

2,299

 

Cash flows from investing activities

 

 

 

 

 

 

Proceeds from sales:

 

 

 

 

 

 

Fixed income securities

 

8,856

 

 

14,113

 

Equity securities

 

3,547

 

 

5,106

 

Limited partnership interests

 

214

 

 

214

 

Mortgage loans

 

141

 

 

204

 

Other investments

 

262

 

 

163

 

Investment collections:

 

 

 

 

 

 

Fixed income securities

 

2,658

 

 

2,144

 

Mortgage loans

 

598

 

 

399

 

Other investments

 

65

 

 

69

 

Investment purchases:

 

 

 

 

 

 

Fixed income securities

 

(12,424

)

 

(9,430

)

Equity securities

 

(4,207

)

 

(5,155

)

Limited partnership interests

 

(268

)

 

(599

)

Mortgage loans

 

(14

)

 

(438

)

Other investments

 

(41

)

 

(75

)

Change in short-term investments, net

 

3,167

 

 

(6,604

)

Change in other investments, net

 

(80

)

 

(274

)

Disposition (acquisition) of operations

 

12

 

 

(120

)

Purchases of property and equipment, net

 

(104

)

 

(98

)

Net cash provided by (used in) investing activities

 

2,382

 

 

(381

)

Cash flows from financing activities

 

 

 

 

 

 

Change in short-term debt, net

 

--

 

 

18

 

Proceeds from issuance of long-term debt

 

1,000

 

 

--

 

Repayment of long-term debt

 

(1

)

 

--

 

Contractholder fund deposits

 

2,450

 

 

7,035

 

Contractholder fund withdrawals

 

(7,736

)

 

(7,441

)

Dividends paid

 

(327

)

 

(444

)

Treasury stock purchases

 

(3

)

 

(865

)

Shares reissued under equity incentive plans, net

 

--

 

 

13

 

Excess tax benefits on share-based payment arrangements

 

(6

)

 

2

 

Other

 

11

 

 

90

 

Net cash used in financing activities

 

(4,612

)

 

(1,592

)

Net increase in cash

 

252

 

 

326

 

Cash at beginning of period

 

415

 

 

422

 

Cash at end of period

$

667

 

$

748

 

 

See notes to condensed consolidated financial statements.

 

3


 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.  General

 

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 investment subsidiaries, including Allstate Life Insurance Company (“ALIC”) (collectively referred to as the “Company” or “Allstate”).

 

The condensed consolidated financial statements and notes as of June 30, 2009, and for the three-month and six-month periods ended June 30, 2009 and 2008 are unaudited.  The condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals), which are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods.  These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.  The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

 

To conform to the 2009 presentation, certain amounts in the prior year condensed consolidated financial statements and notes have been reclassified.

 

Subsequent events were evaluated through August 5, 2009, the date the consolidated financial statements were issued.

 

Adopted accounting standards

 

Financial Accounting Standards Board (“FASB”) Staff Position No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP FAS 115-2”)

 

In April 2009, the FASB issued FSP FAS 115-2 which amends Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS No. 115”), to provide recognition guidance for debt securities classified as available-for-sale and subject to other-than-temporary impairment (“OTTI”) guidance.  If the fair value of a debt security is less than its amortized cost basis at the reporting date, an entity shall assess whether the impairment is an OTTI.  When an entity intends to sell an impaired security or more likely than not will be required to sell an impaired security before recovery of its amortized cost basis, an OTTI is recognized in earnings.  If the entity does not expect to recover the entire amortized cost basis of an impaired security, even if it does not intend to sell the security and it is not more likely than not that it would be required to sell the security before recovery of its amortized cost basis, the entity must consider, based upon an estimate of the present value of cash flows expected to be collected on the debt security as compared to its amortized cost basis, whether a credit loss exists.  The portion of the total OTTI related to a credit loss shall be recognized in earnings while the portion of the total OTTI related to factors other than credit shall be recognized in other comprehensive income (“OCI”).  The statement of operations is required to present the total OTTI with an offset for the amount of the total OTTI that is recognized in OCI.  The statement disclosing accumulated other comprehensive income (“AOCI”) is required to separately present amounts recognized for debt securities for which a portion of an OTTI has been recognized in earnings.

 

FSP FAS 115-2 expands the disclosure requirements of SFAS No. 115 (for both debt and equity securities) and requires a more detailed, risk-oriented breakdown of security types and related information, and requires that the annual disclosures be made for interim periods.  In addition, new disclosures are required about significant inputs used in determining credit losses as well as a rollforward of credit losses each period.  FSP FAS 115-2 is effective for interim periods ending after June 15, 2009.  The disclosures are not required for earlier periods presented for comparative purposes.  FSP FAS 115-2 applies to existing and new investments held as of the beginning of the interim period of adoption.

 

The Company adopted the provisions of FSP FAS 115-2 as of April 1, 2009.  The adoption resulted in the reclassification of $1.15 billion of previously recorded OTTI write-downs from retained income to unrealized capital losses.  The cumulative effect of adoption, net of related deferred policy acquisition costs (“DAC”), deferred sales inducements (“DSI”) and tax adjustments, was an increase in retained income of $863 million and a decrease in unrealized net capital gains and losses of $578 million, with a net benefit to equity of $285 million.  The benefit to

 

4


 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

equity resulted from a decrease in a deferred tax asset valuation allowance.  The adoption did not have an impact on the Company’s Condensed Consolidated Statement of Operations.

 

FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS 157-4”)

 

In April 2009, the FASB issued FSP FAS 157-4, which amends SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), to provide additional guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased.  Guidance on identifying circumstances that indicate a transaction is not orderly is also provided.  If it is concluded that there has been a significant decrease in the volume and level of market activity for an asset or liability in relation to normal market activity, transaction or quoted prices may not be determinative of fair value and further analysis of transaction or quoted prices may be necessary.  A significant adjustment to transaction or quoted prices may be necessary to estimate fair value under the current market conditions.  Determination of whether a transaction is orderly is based on the weight of relevant evidence.

 

The disclosure requirements of SFAS No. 157 are expanded to include the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs during the quarterly reporting period.  Disclosures of assets and liabilities measured at fair value are to be presented by major security type.  FSP FAS 157-4 does not require disclosures for earlier periods presented for comparative purposes.  FSP FAS 157-4 is effective for interim periods ending after June 15, 2009. Revisions resulting from a change in valuation technique or its application shall be accounted for as a change in accounting estimate and disclosed, along with the total effect of the change in valuation technique and related inputs, if practicable, by major category. The Company adopted the provisions of FSP FAS 157-4 as of April 1, 2009.  The adoption of FSP FAS 157-4 had no effect on the Company’s results of operations or financial position.

 

FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1 and APB 28-1”)

 

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, which amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements; and amends Accounting Principles Board Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information for interim reporting periods.  FSP FAS 107-1 and APB 28-1 is effective for interim periods ending after June 15, 2009.  The disclosures are not required for earlier periods presented for comparative purposes. The Company adopted the provisions of FSP FAS 107-1 and APB 28-1 for second quarter 2009 with required disclosures in Note 5. FSP FAS 107-1 and APB 28-1 affects disclosures only and therefore the adoption had no impact on the Company’s results of operations or financial position.

 

SFAS No. 141(R), Business Combinations (“SFAS No. 141R”)

 

In December 2007, the FASB issued SFAS No. 141R which replaces SFAS No. 141, Business Combinations (“SFAS No. 141”). In April 2009, the FASB issued FSP No. FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (“FSP FAS 141(R)-1”), which clarifies SFAS No. 141R by addressing application issues raised by preparers, auditors and the legal profession.  Among other things, SFAS No. 141R and the related FSP broaden the scope of SFAS No. 141 to include all transactions where an acquirer obtains control of one or more other businesses; retains the guidance to recognize intangible assets separately from goodwill; requires, with limited exceptions, that all assets acquired and liabilities assumed, including certain of those that arise from contingencies, be measured at their acquisition date fair values; requires most acquisition and restructuring-related costs to be expensed as incurred; requires that step acquisitions, once control is acquired, be recorded at the full amounts of the fair values of the identifiable assets, liabilities and the noncontrolling interest in the acquiree; and replaces the reduction of asset values and recognition of negative goodwill with a requirement to recognize a gain in earnings.  The provisions of SFAS No. 141R and FSP FAS 141(R)-1 are effective for fiscal years beginning after December 15, 2008 and are to be applied prospectively only.  Early adoption is not permitted.  The Company will apply the provisions of SFAS No. 141R to any business combinations effective subsequent to January 1, 2009.

 

5


 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51 (“SFAS No. 160”)

 

In December 2007, the FASB issued SFAS No. 160 which clarifies that a noncontrolling interest in a subsidiary is that portion of the subsidiary’s equity that is attributable to owners of the subsidiary other than its parent or parent’s affiliates.  Noncontrolling interests are required to be reported as equity in the consolidated financial statements and as such, net income will include amounts attributable to both the parent and the noncontrolling interest with disclosure of the amounts attributable to each on the face of the consolidated statements of operations, if material.  SFAS No. 160 requires that all changes in a parent’s ownership interest in a subsidiary when control of the subsidiary is retained, be accounted for as equity transactions.  In contrast, when control over a subsidiary is relinquished and the subsidiary is deconsolidated, SFAS No. 160 requires a parent to recognize a gain or loss in net income as well as provide certain associated expanded disclosures.  SFAS No. 160 is effective as of the beginning of a reporting entity’s first fiscal year beginning after December 15, 2008.  SFAS No. 160 requires prospective application as of the beginning of the fiscal year in which the standard is initially applied, except for the presentation and disclosure requirements which are to be applied retrospectively for all periods presented.  The adoption of SFAS No. 160 resulted in $32 million of noncontrolling interest being reclassified from total liabilities to total equity on the December 31, 2008 Condensed Consolidated Statement of Financial Position presented.  The adoption did not have a material effect on the Company’s results of operations.

 

SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133 (“SFAS No. 161”)

 

In March 2008, the FASB issued SFAS No. 161, which amends and expands the disclosure requirements for derivatives currently accounted for in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”). The new disclosures are designed to enhance the understanding of how and why an entity uses derivative instruments and how derivative instruments affect an entity’s financial position, results of operations, and cash flows.  The standard requires, on a quarterly basis, quantitative disclosures about the potential cash outflows associated with the triggering of credit-risk-contingent features, if any; tabular disclosures about the classification and fair value amounts of derivative instruments reported in the statement of financial position; disclosure of the location and amount of gains and losses on derivative instruments reported in the statement of operations; and qualitative information about how and why an entity uses derivative instruments and how derivative instruments and related hedged items affect the entity’s financial statements.  SFAS No. 161 is effective for fiscal periods beginning after November 15, 2008, and is to be applied on a prospective basis only.  SFAS No. 161 affects disclosures only and therefore the adoption had no impact on the Company’s results of operations or financial position (see Note 6).

 

FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”)

 

In June 2008, the FASB issued FSP EITF 03-6-1, clarifying that non-forfeitable instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method described in FASB Statement No. 128, Earnings Per Share.  The two-class method is an earnings allocation formula that treats participating securities as having the same rights to earnings as available to common shareholders.  The provisions of this FASB staff position are effective for reporting periods ending after December 15, 2008.  The adoption of FSP EITF 03-6-1 impacted previously reported basic and diluted earnings per share amounts as follows: changed from $(1.71) to $(1.70) for the three months ended September 30, 2008, changed from $(2.11) to $(2.10) for the three months ended December 31, 2008, and changed from $(3.07) to $(3.06) for the year ended December 31, 2008.  The basic and diluted earnings per share amounts for other 2008 periods were unchanged.

 

Pending accounting standards

 

FSP No. FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (“FSP FAS 132(R)-1”)

 

In January 2009, the FASB issued FSP FAS 132(R)-1 which amends SFAS No. 132(R), Employers’ Disclosures about Pensions and Other Postretirement Benefits, to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan.  Since plan assets measured at fair value are reported net of benefit obligations in an employer’s statements of financial position, the disclosures are intended to increase transparency surrounding the types of assets and associated risks in the benefit plans.  FSP FAS 132(R)-1 requires companies to disclose information about how investment allocation decisions are made in the plans, the fair value of

 

6


 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

each major category of plan assets at each annual reporting date for each plan separately, information that would enable users to assess the assumptions and valuation techniques used in the development of the fair value measurements at the reporting date, and information that provides an understanding of significant concentrations of risk in plan assets.  FSP FAS 132(R)-1 is effective for fiscal years ending after December 15, 2009.  The disclosures are not required for earlier periods that are presented for comparative purposes and earlier application is permitted.  FSP FAS 132(R)-1 affects disclosures and therefore implementation will not impact the Company’s results of operations or financial position.

 

SFAS No. FAS 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”)

 

In June 2009, the FASB issued SFAS No. 167 which amends FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities (“FIN 46R”), to require an entity to perform a qualitative analysis to determine whether the entity holds a controlling financial interest (i.e., primary beneficiary (“PB”)) in a variable interest entity (“VIE”).  The analysis identifies the PB of a VIE as the entity that has both the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.  Additional amendments include the requirement to perform ongoing reassessments of FIN 46R to determine whether the entity is the PB of a VIE and the elimination of the quantitative approach for determining the PB of a VIE.  SFAS No. 167 is effective for fiscal years ending after December 15, 2009 with early application prohibited.  The Company is in the process of evaluating the impact of adoption on the Company’s results of operations or financial position.

 

2.  Earnings per share

 

Basic earnings per share is computed based on the weighted average number of common shares outstanding.  Diluted earnings per share is computed based on the weighted average number of common and dilutive potential common shares outstanding.  For Allstate, dilutive potential common shares consist of outstanding stock options and restricted stock units.

 

The computation of basic and diluted earnings per share is presented in the following table.

 

 

($ in millions, except per share data)

 

Three months ended
June 30,

 

 

Six months ended
June 30,

 

 

 

2009

 

 

2008

 

 

2009

 

 

2008

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

389

 

$

25

 

$

115

 

$

373

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

539.8

 

 

551.8

 

 

539.3

 

 

556.3

 

Effect of dilutive potential common shares:
Stock options

 

0.8

 

 

2.0

 

 

0.8

 

 

2.0

 

Weighted average common and dilutive potential common shares outstanding

 

540.6

 

 

553.8

 

 

540.1

 

 

558.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - Basic:

$

0.72

 

$

0.05

 

$

0.21

 

$

0.67

 

Earnings per share - Diluted:

$

0.72

 

$

0.05

 

$

0.21

 

$

0.67

 

 

The effect of dilutive potential common shares does not include the effect of options with an anti-dilutive effect on earnings per share because their exercise prices exceed the average market price of Allstate common shares during the period or for which the unrecognized compensation cost would have an anti-dilutive effect.  Options to purchase 26.4 million and 17.6 million Allstate common shares, with exercise prices ranging from $26.69 to $64.53 and $48.01 to $65.38, were outstanding at June 30, 2009 and 2008, respectively, but were not included in the computation of diluted earnings per share for the three-month periods.  Options to purchase 26.8 million and 17.6 million Allstate common shares, with exercise prices ranging from $26.69 to $64.53 and $48.01 to $65.38, were outstanding at June 30, 2009 and 2008, respectively, but were not included in the computation of diluted earnings per share for the six-month periods.

 

7


 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.  Supplemental Cash Flow Information

 

Non-cash investment exchanges, including modifications of certain fixed income securities, mortgage loans and other investments, as well as mergers completed with equity securities and limited partnerships, totaled $156 million and $20 million for the six-month periods ended June 30, 2009 and 2008, respectively.

 

Liabilities for collateral received in conjunction with the Company’s securities lending and over-the-counter (“OTC”) derivatives and for funds received from the Company’s security repurchase business activities are reported in other liabilities and accrued expenses or other investments in the Condensed Consolidated Statements of Financial Position.  The accompanying cash flows are included in cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows along with the activities resulting from management of the proceeds, which are as follows:

 

($ in millions)

 

Six months ended
June 30,

 

 

 

2009

 

 

2008

 

Net change in proceeds managed

 

 

 

 

 

 

Net change in fixed income securities

$

--

 

$

399

 

Net change in short-term investments

 

(530

)

 

82

 

Operating cash flow (used) provided

$

(530

)

$

481

 

 

 

 

 

 

 

 

Net change in liabilities

 

 

 

 

 

 

Liabilities for collateral and security repurchase, beginning of year

$

(340

)

$

(3,461

)

Liabilities for collateral and security repurchase, end of period

 

(870

)

 

(2,980

)

Operating cash flow provided (used)

$

530

 

$

(481

)

 

8


 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.  Investments

 

Fair values

 

The amortized cost, gross unrealized gains and losses and fair value for fixed income securities are as follows:

 

($ in millions)

 

Amortized

 

Gross unrealized

 

Fair

 

 

 

cost

 

Gains

 

Losses

 

value

 

At June 30, 2009

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

$

3,932

$

 261

$

(8

)

$

 4,185

 

Municipal

 

24,122

 

481

 

(1,506

)

 

23,097

 

Corporate

 

31,488

 

649

 

(2,199

)

 

29,938

 

Foreign government

 

2,479

 

271

 

(27

)

 

2,723

 

Residential mortgage-backed securities (“RMBS”)

 

9,663

 

102

 

(2,262

)

 

7,503

 

Commercial mortgage-backed securities (“CMBS”)

 

4,983

 

19

 

(1,765

)

 

3,237

 

Asset-backed securities (“ABS”)

 

3,185

 

17

 

(1,151

)

 

2,051

 

Redeemable preferred stock

 

38

 

1

 

(7

)

 

32

 

Total fixed income securities

$

79,890

$

 1,801

$

(8,925

)

$

 72,766

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2008

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

$

3,272

$

963

$

(1

)

$

 4,234

 

Municipal

 

23,565

 

467

 

(2,184

)

 

21,848

 

Corporate

 

31,040

 

463

 

(3,876

)

 

27,627

 

Foreign government

 

2,206

 

544

 

(75

)

 

2,675

 

RMBS

 

8,010

 

93

 

(1,538

)

 

6,565

 

CMBS

 

5,840

 

10

 

(2,004

)

 

3,846

 

ABS

 

3,135

 

5

 

(1,353

)

 

1,787

 

Redeemable preferred stock

 

36

 

--

 

(10

)

 

26

 

Total fixed income securities

$

 77,104

$

 2,545

$

(11,041

)

$

68,608

 

 

Scheduled maturities

 

The scheduled maturities for fixed income securities are as follows at June 30, 2009:

 

($ in millions)

 

Amortized

 

 

Fair

 

 

 

cost

 

 

value

 

Due in one year or less

$

2,777

 

$

2,786

 

Due after one year through five years

 

18,607

 

 

18,604

 

Due after five years through ten years

 

14,457

 

 

14,300

 

Due after ten years

 

31,201

 

 

27,522

 

 

 

67,042

 

 

63,212

 

Residential mortgage- and asset-backed securities

 

12,848

 

 

9,554

 

Total

$

79,890

 

$

72,766

 

 

Actual maturities may differ from those scheduled as a result of prepayments by the issuers.  Because of the potential for prepayment on residential mortgage- and asset-backed securities, they are not categorized by contractual maturity.  The commercial mortgage-backed securities are categorized by contractual maturity because they generally are not subject to prepayment risk.

 

9


 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Net investment income

 

Net investment income is as follows:

 

($ in millions)

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

2009

 

2008

 

2009

 

2008

Fixed income securities

$

993

 

$

1,197

 

$

2,035

 

$

2,476

 

Equity securities

 

19

 

 

31

 

 

35

 

 

63

 

Mortgage loans

 

131

 

 

156

 

 

268

 

 

316

 

Limited partnership interests

 

4

 

 

30

 

 

7

 

 

90

 

Other

 

2

 

 

56

 

 

16

 

 

122

 

Investment income, before expense

 

1,149

 

 

1,470

 

 

2,361

 

 

3,067

 

Investment expense

 

(41

)

 

(58

)

 

(77

)

 

(129

)

Net investment income

$

1,108

 

$

1,412

 

$

2,284

 

$

2,938

 

 

Realized capital gains and losses

 

Realized capital gains and losses by security type are as follows:

 

($ in millions)

 

Three months ended
June 30,

 

 

Six months ended
June 30,

 

 

 

2009

 

 

2008

 

 

2009

 

 

2008

 

Fixed income securities

$

15

 

$

(1,137

)

$

122

 

$

(1,495

)

Equity securities

 

27

 

 

(151

)

 

(136

)

 

(109

)

Mortgage loans

 

(16

)

 

(38

)

 

(48

)

 

(37

)

Limited partnership interests

 

(84

)

 

(6

)

 

(423

)

 

(5

)

Derivatives

 

420

 

 

125

 

 

515

 

 

(206

)

Other

 

(34

)

 

(8

)

 

(61

)

 

(18

)

Realized capital gains and losses

$

328

 

$

(1,215

)

$

(31

)

$

(1,870

)

 

10


 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Realized capital gains and losses by transaction type are as follows:

 

($ in millions)

 

Three months ended
June 30,

 

 

Six months ended
June 30,

 

 

 

2009

 

 

2008

 

 

2009

 

 

2008

 

Impairment write-downs (1)

$

(291

)

$

(250

)

$

(911

)

$

(665

)

Change in intent write-downs (2)

 

(26

)

 

(1,015

)

 

(131

)

 

(1,058

)

Net OTTI losses recognized in earnings

 

(317

)

 

(1,265

)

 

(1,042

)

 

(1,723

)

Sales

 

263

 

 

(73

)

 

681

 

 

30

 

Valuation of derivative instruments

 

367

 

 

40

 

 

470

 

 

(285

)

Settlements of derivative instruments

 

52

 

 

83

 

 

40

 

 

108

 

EMA LP income (3)

 

(37

)

 

--

 

 

(180

)

 

--

 

Realized capital gains and losses

$

328

 

$

(1,215

)

$

(31

)

$

(1,870

)

 


(1)

Beginning April 1, 2009 for fixed income securities, impairment write-downs reflect the credit loss component of issue specific other-than-temporary declines in fair value where the amortized cost basis is not expected to be entirely recovered. For periods prior to April 1, 2009 for fixed income securities and all periods for equity securities, impairment write-downs reflect issue specific other-than-temporary declines in fair value, including instances where the Company could not reasonably assert that the recovery period would be temporary.

 

 

(2)

Beginning April 1, 2009 for fixed income securities, change in intent write-downs reflect instances where the Company has made a decision to sell the security or it is more likely than not the Company will be required to sell the security before recovery of its amortized cost basis. For periods prior to April 1, 2009 for fixed income securities and all periods for equity securities, change in intent write-downs reflect instances where the Company could not assert a positive intent to hold until recovery.

 

 

(3)

Beginning in the fourth quarter of 2008, income from limited partnership interests accounted for utilizing the equity method of accounting (“EMA LP”) is reported in realized capital gains and losses. EMA LP income for periods prior to the fourth quarter of 2008 is reported in net investment income.

 

Gross gains of $298 million and $114 million and gross losses of $78 million and $152 million were realized on sales of fixed income securities during the three months ended June 30, 2009 and 2008, respectively.  Gross gains of $948 million and $269 million and gross losses of $330 million and $288 million were realized on sales of fixed income securities during the six months ended June 30, 2009 and 2008, respectively.

 

Other-than-temporary impairment losses by asset type are as follows:

 

($ in millions)

 

Three months ended
June 30, 2009

 

Six months ended
June 30, 2009

 

 

  Gross

 

 

 Included
 in OCI

 

 

  Net

 

 

  Gross

 

 

 Included
 in OCI

 

 

  Net

 

Fixed income securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal

$

(36

)

$

4

 

$

(32

)

$

(86

)

$

4

 

 

(82

)

Corporate

 

(37

)

 

(9

)

 

(46

)

 

(92

)

 

(9

)

 

(101

)

Foreign government

 

--

 

 

--

 

 

--

 

 

(17

)

 

--

 

 

(17

)

RMBS

 

(213

)

 

151

 

 

(62

)

 

(259

)

 

151

 

 

(108

)

CMBS

 

(43

)

 

(1

)

 

(44

)

 

(52

)

 

(1

)

 

(53

)

ABS

 

(37

)

 

9

 

 

(28

)

 

(175

)

 

9

 

 

(166

)

Total fixed income securities

 

(366

)

 

154

 

 

(212

)

 

(681

)

 

154

 

 

(527

)

Equity securities

 

(32

)

 

--

 

 

(32

)

 

(186

)

 

--

 

 

(186

)

Mortgage loans

 

(15

)

 

--

 

 

(15

)

 

(49

)

 

--

 

 

(49

)

Limited partnership interests

 

(46

)

 

--

 

 

(46

)

 

(243

)

 

--

 

 

(243

)

Other

 

(12

)

 

--

 

 

(12

)

 

(37

)

 

--

 

 

(37

)

Other-than-temporary impairment losses

$

(471

)

$

154

 

$

(317

)

$

(1,196

)

$

154

 

$

(1,042

)

 

11


 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The total amount of other-than-temporary impairment losses included in accumulated other comprehensive income for fixed income securities at June 30, 2009, which were not included in earnings, are presented in the following table.  The amount excludes $101 million of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.

 

($ in millions)

 

 

 

Municipal

$

(4

)

Corporate

 

(94

)

RMBS

 

(399

)

CMBS

 

(63

)

ABS

 

(125

)

Total

$

(685

)

 

A rollforward of the amount related to credit losses for fixed income securities recognized in earnings is presented in the following table.

 

($ in millions)

 

 

 

Beginning balance of cumulative credit loss for securities held at April 1, 2009

$

(1,357

)

Additional credit loss for securities previously other-than-temporarily impaired

 

(44

)

Additional credit loss for securities not previously other-than-temporarily impaired

 

(148

)

Reduction in credit loss for securities disposed or collected

 

43

 

Reduction in credit loss for securities other-than-temporarily impaired to fair value

 

--

 

Change in credit loss due to accretion of increase in cash flows and time value of cash flows for securities previously other-than-temporarily impaired

 

--

 

Ending balance at June 30, 2009

$

(1,506

)

 

The Company uses its best estimate of future cash flows expected to be collected from the fixed income security discounted at the security’s effective rate prior to impairment to calculate a recovery value and determine whether a credit loss exists.  The determination of cash flow estimates is inherently subjective and methodologies may vary depending on circumstances specific to the security.  All reasonably available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable assumptions and forecasts, are considered when developing the estimate of cash flows expected to be collected.  That information generally includes, but may not be limited to, the remaining payment terms of the security, prepayment speeds, foreign exchange rates, the financial condition of the issuer(s), expected defaults, expected recoveries, the value of the underlying collateral and current subordination levels, vintage, geographic concentration, available reserves or escrows, third party guarantees and other credit enhancements.  Additionally, other information, such as industry analyst reports and forecasts, sector credit ratings, financial condition of the bond insurer for insured fixed income securities, and other market data relevant to the collectability of the security may also be considered.  The estimated fair value of collateral may be used to estimate recovery value if the Company determines that the security is dependent on the liquidation of collateral for recovery.  If the estimated recovery value is less than the amortized cost of the security, a credit loss exists and an other-than-temporary impairment for the difference between the estimated recovery value and amortized cost is recorded in earnings.  If the Company determines that the fixed income security does not have sufficient cash flow or other information to determine a recovery value for the security, the Company may conclude that the entire decline in fair value is deemed to be credit related and is recorded in earnings.   The unrealized loss deemed to be related to factors other than credit remains classified in OCI.

 

12


 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Unrealized net capital gains and losses

 

Unrealized net capital gains and losses included in accumulated other comprehensive income are as follows:

 

($ in millions)

 

Fair

 

Gross unrealized

 

Unrealized net

 

At June 30, 2009

 

value

 

Gains

 

Losses

 

gains (losses)

 

Fixed income securities (1)

 

$

72,766

 

$

1,801

 

$

(8,925

)

 $

(7,124

)

Equity securities

 

3,297

 

162

 

(348

)

(186

)

Short-term investments

 

6,070

 

--

 

--

 

--

 

Derivative instruments(2)

 

(13

)

5

 

(20

)

(15

)

Unrealized net capital gains and losses, pre-tax

 

 

 

 

 

 

 

(7,325

)

Amounts recognized for:

 

 

 

 

 

 

 

 

 

Insurance reserves (3)

 

 

 

 

 

 

 

--

 

DAC and DSI (4)

 

 

 

 

 

 

 

4,064

 

Amounts recognized

 

 

 

 

 

 

 

4,064

 

Deferred income taxes

 

 

 

 

 

 

 

1,149

 

Unrealized net capital gains and losses, after-tax

 

 

 

 

 

 

 

 $

(2,112

)

 


(1)

Unrealized net capital gains and losses for fixed income securities comprise $(584) million related to unrealized net capital losses on fixed income securities with OTTI and $(6,540) million related to other unrealized net capital gains and losses.

 

 

(2)

Included in the fair value of derivative securities are $(5) million classified as assets and $8 million classified as liabilities.

 

 

(3)

The insurance reserves adjustment represents the amount by which the reserve balance would increase if the net unrealized gains in the applicable product portfolios were realized and reinvested at current lower interest rates, resulting in a premium deficiency. Although the Company evaluates premium deficiencies on the combined performance of our life insurance and immediate annuities with life contingencies, the adjustment primarily relates to structured settlement annuities with life contingencies, in addition to annuity buy-outs and certain payout annuities with life contingencies.

 

 

(4)

The DAC and DSI adjustment represents the amount by which the amortization of DAC and DSI would increase or decrease if the unrealized gains or losses in the respective product portfolios were realized.

 

 

 

Fair

 

Gross unrealized

 

Unrealized net

 

At December 31, 2008

 

value

 

Gains

 

Losses

 

gains (losses)

 

Fixed income securities

 

$

68,608

 

$

2,545

 

$

(11,041

)

 $

(8,496

)

Equity securities

 

2,805

 

112

 

(444

)

(332

)

Short-term investments

 

8,906

 

4

 

(1

)

3

 

Derivative instruments (1)

 

15

 

25

 

(14

)

11

 

Unrealized net capital gains and losses, pre-tax

 

 

 

 

 

 

 

(8,814

)

Amounts recognized for:

 

 

 

 

 

 

 

 

 

Insurance reserves

 

 

 

 

 

 

 

(378

)

DAC and DSI

 

 

 

 

 

 

 

3,500

 

Amounts recognized

 

 

 

 

 

 

 

3,122

 

Deferred income taxes

 

 

 

 

 

 

 

1,954

 

Unrealized net capital gains and losses, after-tax

 

 

 

 

 

 

 

 $

(3,738

)

 


(1)   Included in the fair value of derivative securities are $4 million classified as assets and $(11) million classified as liabilities.

 

13


 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Change in unrealized net capital gains and losses

 

The change in unrealized net capital gains and losses for the six months ended June 30, 2009 is as follows:

 

($ in millions)

 

 

 

 

 

 

 

Fixed income securities

$

1,372

 

Equity securities

 

146

 

Short-term investments

 

(3

)

Derivative instruments

 

(26

)

Total

 

1,489

 

Amounts recognized for:

 

 

 

Insurance reserves

 

378

 

DAC and DSI

 

564

 

Increase in amounts recognized

 

942

 

Deferred income taxes

 

(805

)

Increase in unrealized net capital gains and losses

$

1,626

 

 

Portfolio monitoring

 

The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed income and equity security whose carrying value may be other-than-temporarily impaired.

 

For each fixed income security in an unrealized loss position, the Company assesses whether management with the appropriate authority has made a decision to sell or whether it is more likely than not the Company will be required to sell for reasons such as liquidity, contractual or regulatory purposes before recovery of the amortized cost basis.  If a security meets either of these criteria, the security’s decline in fair value is deemed other than temporary and is recorded in earnings.

 

If the Company has not made the decision to sell the fixed income security and it is not more likely than not the Company will be required to sell the fixed income security before recovery of its amortized cost basis, the Company evaluates if it expects to receive cash flows sufficient to recover the entire amortized cost basis of the security by comparing the estimated recovery value calculated by discounting the best estimate of future cash flows at the security’s effective rate prior to impairment with the amortized cost of the security.  If the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the fixed income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss attributed to other factors recognized in OCI.

 

For equity securities, the Company considers various factors, including whether the Company has the intent and ability to hold the equity security for a period of time sufficient to recover its cost basis.  Where the Company lacks the intent and ability to hold to recovery, or believes the recovery period is extended, the equity security’s decline in fair value is considered other than temporary and is recorded in earnings.

 

Our portfolio monitoring process includes a quarterly review of all securities using a screening process to identify situations where the fair value, compared to amortized cost for fixed income securities and cost for equity securities, is below established thresholds for certain time periods, or which are identified through other monitoring criteria such as ratings, ratings downgrades or payment defaults.  The securities identified, as well as others for which the Company may have a concern, are evaluated for potential other-than-temporary impairment using all reasonably available information relevant to the collectability or recovery of the security.  Inherent in the Company’s evaluation of other-than-temporary impairment for these fixed income and equity securities are assumptions and estimates about the financial condition of the issue or issuer and its future earnings potential.  Some of the factors considered in evaluating whether a decline in fair value is other than temporary are: 1) the length of time and extent to which the fair value has been less than amortized cost for fixed income securities, or cost for equity securities; 2) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry conditions and trends, geographic location and implications of rating agency actions and offering prices; and 3) the specific reasons that a security is in a significant unrealized loss position, including market conditions which could affect liquidity.

 

14


 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes the gross unrealized losses and fair value of fixed income and equity securities by the length of time that individual securities have been in a continuous unrealized loss position.

 

($ in millions)

 

Less than 12 months (1)

 

12 months or more (1)

 

Total

 

 

 

Number

 

Fair

 

Unrealized

 

 

Number

 

Fair

 

Unrealized

 

 

unrealized

 

 

 

of issues

 

value

 

losses

 

 

of issues

 

value

 

losses

 

 

losses

 

At June 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

11

$

619

$

(8

)

 

--

$

--

$

--

 

$

(8

)

Municipal

 

1,677

 

7,923

 

(701

)

 

760

 

3,322

 

(805

)

 

(1,506

)

Corporate

 

638

 

6,413

 

(619

)

 

776

 

8,050

 

(1,580

)

 

(2,199

)

Foreign government

 

47

 

517

 

(21

)

 

14

 

59

 

(6

)

 

(27

)

RMBS

 

615

 

1,373

 

(112

)

 

465

 

2,587

 

(2,150

)

 

(2,262

)

CMBS

 

106

 

935

 

(309

)

 

329

 

2,089

 

(1,456

)

 

(1,765

)

ABS

 

31

 

237

 

(54

)

 

214

 

1,403

 

(1,097

)

 

(1,151

)

Redeemable preferred stock

 

1

 

3

 

(2

)

 

2

 

17

 

(5

)

 

(7

)

Total fixed income securities (2)

 

3,126

 

18,020

 

(1,826

)

 

2,560

 

17,527

 

(7,099

)

 

(8,925

)

Equity securities

 

209

 

1,247

 

(313

)

 

20

 

110

 

(35

)

 

(348

)

Total fixed income and equity securities

 

3,335

$

19,267

$

(2,139

)

 

2,580

$

17,637

$

(7,134

)

$

(9,273

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment grade fixed income securities

 

2,826

$

16,587

$

(1,442

)

 

2,063

$

14,923

$

(4,918

)

$

(6,360

)

Below investment grade fixed income securities

 

300

 

1,433

 

(384

)

 

497

 

2,604

 

(2,181

)

 

(2,565

)

Total fixed income securities

 

3,126

$

18,020

$

(1,826

)

 

2,560

$

17,527

$

(7,099

)

$

(8,925

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

5

$

230

$

(1

)

 

--

$

--

$

--

 

$

(1

)

Municipal

 

2,648

 

11,981

 

(1,983

)

 

117

 

598

 

(201

)

 

(2,184

)

Corporate

 

1,632

 

14,827

 

(2,050

)

 

448

 

4,504

 

(1,826

)

 

(3,876

)

Foreign government

 

58

 

349

 

(63

)

 

3

 

13

 

(12

)

 

(75

)

RMBS

 

465

 

1,875

 

(457

)

 

317

 

1,685

 

(1,081

)

 

(1,538

)

CMBS

 

295

 

2,729

 

(797

)

 

179

 

899

 

(1,207

)

 

(2,004

)

ABS

 

81

 

551

 

(124

)

 

181

 

1,092

 

(1,229

)

 

(1,353

)

Redeemable preferred stock

 

3

 

17

 

(10

)

 

1

 

1

 

--

 

 

(10

)

Total fixed income securities

 

5,187

 

32,559

 

(5,485

)

 

1,246

 

8,792

 

(5,556

)

 

(11,041

)

Equity securities

 

325

 

1,897

 

(398

)

 

10

 

53

 

(46

)

 

(444

)

Total fixed income and equity securities

 

5,512

$

34,456

$

(5,883

)

 

1,256

$

8,845

$

(5,602

)

$

(11,485

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment grade fixed income securities

 

4,687

$

30,484

$

(4,813

)

 

1,081

$

7,988

$

(4,961

)

$

(9,774

)

Below investment grade fixed income securities

 

500

 

2,075

 

(672

)

 

165

 

804

 

(595

)

 

(1,267

)

Total fixed income securities

 

5,187

$

32,559

$

(5,485

)

 

1,246

$

8,792

$

(5,556

)

$

(11,041

)

 


(1)

The aging of unrealized losses, and therefore the time period category of aging, as of June 30, 2009 was reset to the historical point of impairment for securities impacted by the adoption of FSP FAS 115-2. December 31, 2008 balances have not been restated.

 

 

(2)

Unrealized losses resulting from factors other than credit on fixed income securities with other-than-temporary impairments for which the Company has recorded a credit loss in earnings total $99 million for the less than 12 month category and $511 million for the 12 months or greater category.

 

As of June 30, 2009, $2.20 billion of unrealized losses are related to securities with an unrealized loss position less than 20% of cost or amortized cost, the degree of which suggests that these securities do not pose a high risk of being other-than-temporarily impaired.  Of the $2.20 billion, $1.86 billion are related to unrealized losses on investment grade fixed income securities.  Investment grade is defined as a security having a rating from the NAIC of 1 or 2; a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A or BBB from Standard & Poor’s (“S&P”), Fitch or Dominion, or aaa, aa, a or bbb from A.M. Best; or a comparable internal rating if an externally provided rating is not available.  Unrealized losses on investment grade securities are principally related to rising interest rates or changes in credit spreads since the securities were acquired.

 

As of June 30, 2009, the remaining $7.07 billion of unrealized losses are related to securities in unrealized loss positions greater than or equal to 20% of cost or amortized cost.  Of the $7.07 billion, $2.32 billion are related to

 

15


 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

below investment grade fixed income securities and $246 million are related to equity securities.  Of these amounts, $1.22 billion of the below investment grade fixed income securities had been in an unrealized loss position for a period of twelve or more consecutive months as of June 30, 2009.  Unrealized losses on below investment grade securities are principally related to rising interest rates or changes in credit spreads.  Unrealized losses on equity securities are primarily related to equity market fluctuations.  The other securities comprising the $4.50 billion of unrealized losses were evaluated based on factors such as the financial condition and near-term and long-term prospects of the issuer and were determined to have adequate resources to fulfill contractual obligations, such as recent financings or bank loans, cash flows from operations, collateral or the position of a subsidiary with respect to its parent’s bankruptcy.

 

Unrealized losses on residential mortgage-backed, asset-backed and commercial mortgage-backed holdings were evaluated based on credit ratings, as well as the performance of the underlying collateral relative to the securities’ positions in the securities’ respective capital structure.  The unrealized losses on residential mortgage-backed and asset-backed securities were evaluated with credit enhancements from bond insurers where applicable.  The unrealized losses on municipal bonds that had credit enhancements from bond insurers were evaluated on the quality of the underlying security.  These investments were determined to have adequate resources to fulfill contractual obligations.

 

As of June 30, 2009, the Company did not have the intent to sell and it is not more likely than not the Company will be required to sell fixed income securities with unrealized losses before recovery of the amortized cost basis.  As of June 30, 2009, the Company had the intent and ability to hold the equity securities with unrealized losses for a period of time sufficient for them to recover.

 

Limited partnership impairment

 

As of June 30, 2009 and December 31, 2008, equity-method limited partnership interests totaled $1.40 billion and $1.56 billion, respectively.  The Company recognizes a loss in value for equity-method investments when evidence demonstrates that it is other-than-temporarily impaired.  Evidence of a loss in value that is other than temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment.  The Company did not have any write-downs for the three months ended June 30, 2009 and 2008 related to equity-method limited partnership interests. The Company had write-downs of $10 million and $8 million for the six months ended June 30, 2009 and 2008, respectively, related to equity-method limited partnership interests.

 

As of June 30, 2009 and December 31, 2008, the carrying value for cost-method limited partnership interests was $1.07 billion and $1.23 billion, respectively, which primarily included limited partnership interests in fund investments.  The fair value for cost-method investments is estimated to be equivalent to the reported net asset value of the underlying funds.  To determine if an other-than-temporary impairment has occurred, the Company evaluates whether an impairment indicator has occurred in the period that may have a significant adverse effect on the carrying value of the investment.  Impairment indicators may include: actual recent cash flows received being significantly less than expected cash flows; reduced valuations based on financing completed at a lower value; completed sale of a material underlying investment at a price significantly lower than expected; significantly reduced valuations of the investments held by limited partnerships; or any other recent adverse events since the last financial statements received that might affect the fair value of the investee’s capital.  Additionally, the Company uses a screening process to identify those investments whose net asset value