SCHEDULE 14A
INFORMATION
Proxy Statement
Pursuant to Section 14(a) of the Securities Exchange Act of
1934
Filed by the
Registrant x
Filed by a party
other than the registrant ¨
Check the appropriate
box:
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¨ Preliminary
proxy statement
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¨ Confidential,
for use of the Commission only (as permitted by Rule
14a-6(e)(2))
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x Definitive
proxy statement
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¨ Definitive
additional materials
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¨ Soliciting
material pursuant to Rule 14a-11(c) or Rule 14a-12
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The Allstate
Corporation
(Name of
Registrant as Specified In Its Charter)
N/A
(Name of Person(s)
Filing Proxy Statement if other than the Registrant)
Payment of filing fee
(check the appropriate box):
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¨ Fee computed
on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
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(1)
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Title of each class
of securities to which transaction applies:
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(2)
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Aggregate number of
securities to which transaction applies:
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(3)
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Per unit price or
other underlying value of transaction computed pursuant to Exchange Act
Rule 0-11 (set forth the amount on which the filing fee is calculated and
state how it was determined):
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(4)
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Proposed maximum
aggregate value of transaction:
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¨ Fee paid
previously with preliminary materials.
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¨ Check box if
any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2)
and identify the filing for which the offsetting fee was paid previously.
Identify the previous filing by registration statement number, or the form
or schedule and the date of its filing.
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(1)
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Amount previously
paid:
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(2)
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Form, Schedule or
Registration Statement No.:
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THE ALLSTATE
CORPORATION
2775 Sanders
Road
Northbrook, Illinois
60062-6127
March 27,
2000
Notice of Annual
Meeting and Proxy Statement
|
You are invited to attend Allstates
2000 annual meeting of stockholders to be held on Thursday, May 18, 2000.
The meeting will be held at 11 a.m. in the Bank One Auditorium, 1 Bank One
Plaza (located at Dearborn and Madison), Chicago, Illinois.
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Following this page are the
following:
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·
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Financial
information about Allstate and managements discussion and analysis
of Allstates operations and financial condition
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Also enclosed are the following:
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·
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A postage-paid
envelope
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·
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Allstates
1999 summary Annual Report
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Your vote is important. You may vote by
telephone, internet or mail. Please use one of these methods to vote
before the meeting even if you plan to attend the meeting.
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[Signature of
Edward M. Liddy]
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THE ALLSTATE
CORPORATION
2775 Sanders
Road
Northbrook, Illinois
60062-6127
March 27,
2000
Notice of Annual
Meeting of Stockholders
|
The annual meeting of stockholders of The
Allstate Corporation will be held at the Bank One Auditorium which is
located on the Plaza level of the Bank One building, 1 Bank One Plaza,
Chicago, Illinois on Thursday, May 18, 2000, at 11 a.m. for the following
purposes:
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1.
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To elect to the
Board of Directors thirteen directors to serve until the 2001 annual
meeting
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2.
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To ratify the
appointment of Deloitte & Touche LLP as Allstates independent
auditors for 2000
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3.
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To consider a
stockholder proposal for cumulative voting in elections of
directors
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4.
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To consider a
stockholder proposal for the endorsement of CERES principles
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In addition, any other business properly
presented may be acted upon at the meeting.
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Allstate began mailing this proxy statement
and proxy cards to its stockholders and to participants in its profit
sharing fund on March 27, 2000.
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[Signature of
Robert W. Pike]
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Table of
Contents
Proxy and Voting Information
Who is asking for
your vote and why
The annual meeting will be held only if a
majority of the outstanding common stock entitled to vote is represented at
the meeting. If you vote before the meeting or if you attend the meeting in
person, your shares will be counted for the purpose of determining whether
there is a quorum. To ensure that there will be a quorum, the Allstate Board
of Directors is requesting that you vote before the meeting and allow your
Allstate stock to be represented at the annual meeting by the proxies named
on the enclosed proxy card. Voting before the meeting will not prevent you
from voting in person at the meeting. If you vote in person at the meeting,
your previous vote will be automatically revoked.
Who can
vote
You are entitled to vote if you were a
stockholder of record at the close of business on March 20, 2000. On March
20, 2000, there were 751,791,781 Allstate common shares outstanding and
entitled to vote at the annual meeting.
How to
vote
If you hold your shares in your own name as a
record holder, you may instruct the proxies how to vote your shares in any
of the following ways:
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·
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By using the
toll-free telephone number printed on the proxy card
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·
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By using the
internet voting site listed on the proxy card
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·
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By signing and
dating the proxy card and mailing it in the enclosed postage-paid envelope
to The Allstate Corporation, c/o First Chicago Trust Company, a division
of EquiServe, P.O. Box 8010, Edison, NJ 08818-9007
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You may vote by telephone or internet 24 hours
a day, seven days a week. If you hold your shares through a broker, bank or
other nominee (in other words, in street name), you may vote
your shares by following the instructions they have provided.
How votes are
counted and discretionary voting authority of proxies
When you vote you may direct the proxies to
withhold your votes from particular director nominees and to vote for,
against, or abstain with respect to each of
the other proposals.
The thirteen nominees who receive the most
votes will be elected to the open directorships even if they get less than a
majority of the votes. For any other item to be voted on, more votes must be
cast for it than against it.
Abstention with respect to any of items 2
through 4 will be counted as shares present at the meeting and will have the
effect of a vote against the matter. Broker non-votes (that is, if the
broker holding your shares in street name does not vote with respect to a
proposal) and shares as to which proxy authority is withheld with respect to
a particular matter will not be counted as shares voted on the matter and
will have no effect on the outcome of the vote.
If you use the telephone, the internet or the
proxy card to allow your shares to be represented at the annual meeting by
the proxies but you do not give voting instructions, then the proxies will
vote your shares as follows on the four matters set forth in this proxy
statement:
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·
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For all of
the nominees for director listed in this proxy statement
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·
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For the
appointment of Deloitte & Touche LLP as Allstates independent
auditors for 2000
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Against the
stockholder proposal for cumulative voting in elections of
directors
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·
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Against the
stockholder proposal for CERES principles
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Other than the four items set forth in this
proxy statement, Allstate knows of no other matters to be brought before the
meeting. If you use the telephone, the internet or the proxy card to allow
your shares to be represented at the annual meeting, the proxies may vote
your shares in accordance with their judgment on any other matters presented
at the meeting.
How to change your
vote
Before your shares have been voted at the
annual meeting by the proxies, you may change or revoke your vote in the
following ways:
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·
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Voting again by
telephone, by internet or in writing
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·
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Attending the
meeting and voting your shares in person
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Unless you attend the meeting and vote your
shares in person, you should use the same method as when you first voted
telephone, internet or writing. That way, the inspectors of election
will be able to identify your latest vote.
If you hold your shares in street name and you
plan to attend the meeting, please bring documentation from the record
holder of your shares to demonstrate that you have the right to attend and
to personally vote your shares.
Confidentiality
All proxies, ballots and tabulations that
identify the vote of a particular stockholder are kept confidential, except
as necessary to allow the inspectors of election to certify the voting
results or to meet certain legal requirements. Representatives of First
Chicago Trust Company, a division of EquiServe, will act as the inspectors
of election and will count the votes. They are independent of Allstate and
its directors, officers and employees.
Comments written on proxy cards or ballots may
be provided to the Secretary of Allstate with the name and address of the
stockholder. The comments will be provided without reference to the vote of
the stockholder, unless the vote is mentioned in the comment or unless
disclosure of the vote is necessary to understand the comment. At Allstate
s request, the inspectors of election may provide Allstate with a list
of stockholders who have not voted and periodic status reports on the
aggregate vote. These status reports may include breakdowns of vote totals
by different types of stockholders, as long as Allstate is not able to
determine how a particular stockholder voted.
Profit Sharing
Participants
Participants in the Allstate profit sharing
fund will receive a voting instruction form instead of a proxy card to
provide their voting instructions to The Northern Trust, the profit sharing
fund trustee.
Election of
Directors
Except for F. Duane Ackerman, Mary Alice
Taylor and Judith A. Sprieser, each nominee was previously elected by the
stockholders at Allstates 1999 Annual Meeting on May 18, 1999, and has
served continuously as a director for the period succeeding the date of his
or her election. The terms of all directors will expire at this annual
meeting in May 2000. No person, other than the directors of Allstate acting
solely in that capacity, is responsible for the naming of the nominees. The
Board of Directors expects all nominees named in this proxy statement to be
available for election. If any nominee is not available, then the proxies
may vote for a substitute.
Information as to each nominee follows. Unless
otherwise indicated, each nominee has served for at least five years in the
business position currently or most recently held.
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F. Duane
Ackerman (Age 58)
Director since
October 1999
Chairman, President and Chief Executive
Officer since 1997 of BellSouth Corporation, a communications services
company. Mr. Ackerman previously served as President and Chief Executive
Officer of BellSouth Corporation from 1996 to 1997 and as Chief Operating
Officer and Vice Chairman from 1995 to 1996.
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James G.
Andress (Age 61)
Director since
1993
Chairman and Chief Executive Officer since
February 1997 of Warner Chilcott PLC, a pharmaceutical company. Mr.
Andress had been President, Chief Executive Officer and a director of
Warner Chilcott since 1996. Mr. Andress also served as its President and
Chief Executive Officer from November 1996 until 1998. Previously, Mr.
Andress was Co-Chief Executive Officer, Chief Operating Officer and
President of Information Resources, Inc. (IRI), a market
research and corporate software organization, from May 1994 until
September 1995. Mr. Andress is also a director of IRI, OptionCare, Inc.,
Sepracor, Inc., The Liposome Company, Inc. and Xoma
Corporation.
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Warren L.
Batts (Age 67)
Director since
1993
Chairman and Chief Executive Officer of
Tupperware Corporation, a consumer products company, from June 1996 until
his retirement in September 1997. He served as Chairman and Chief
Executive Officer of Premark International, Inc. from September 1986 to
June 1996 and as Chairman of the Board of Premark International, Inc.
until September 1997. He is also a director of Cooper Industries, Inc.,
The Derby Cycle Corporation, Sears, Roebuck and Co., and Sprint
Corporation.
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Edward A.
Brennan (Age 66)
Director since
1993
Chairman of the Board, President and Chief
Executive Officer of Sears, Roebuck and Co. from January 1986 until his
retirement in August 1995. Mr. Brennan is also a director of AMR
Corporation, Dean Foods Company, Minnesota Mining and Manufacturing
Company, Morgan Stanley Dean Witter & Co., The SABRE Group Holdings,
Inc., and Unicom Corporation.
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James M.
Denny (Age 67)
Director since
1993
Managing Director since September 1995 of
William Blair Capital Partners, a private equity fund. Mr. Denny served as
Vice Chairman of Sears, Roebuck and Co. from February 1992 until his
retirement in August 1995. He is also a director of ChoicePoint, Inc.,
GATX Corporation, and Gilead Sciences, Inc.
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W. James
Farrell (Age 57)
Director since
1999
Chairman since May 1996 and Chief Executive
Officer since September 1995 of Illinois Tool Works Inc., a manufacturer
of engineering and industrial components. Mr. Farrell served as President
of Illinois Tool Works from September 1994 to May 1996 and as Executive
Vice President from 1983 to 1994. He is also a director of Sears, Roebuck
and Co. and the Quaker Oats Company.
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Ronald T.
LeMay (Age 54)
Director since
1999
President and Chief Operating Officer since
October 1997 of Sprint Corporation, a global communications company. Mr.
LeMay was Chairman, President and Chief Executive Officer of Waste
Management, Inc., a provider of waste management services, from July 1997
to October 1997. Previously, Mr. LeMay was President and Chief Operating
Officer of Sprint from February 1996 to July 1997 and Vice Chairman from
April 1995 to February 1996. He was Chief Executive Officer of Sprint
Spectrum L.P. from March 1995 to September 1996, and President of Sprint
s Long Distance Division from October 1989 to March 1995. Mr. LeMay
is also as a director of Ceridian Corporation, Imation Corporation, Sprint
Corporation, Yellow Corporation, and Utilicorp.
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Edward M.
Liddy (Age 54)
Director since
1999
Chairman, President and Chief Executive
Officer of Allstate since January 1999. Mr. Liddy served as President and
Chief Operating Officer of Allstate from January 1995 until 1999. Before
joining Allstate, Mr. Liddy was Senior Vice President and Chief Financial
Officer of Sears, Roebuck and Co. He is also a director of The Kroger
Co.
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Michael A.
Miles (Age 60)
Director since
1993
Special Limited Partner since 1995 of
Forstmann Little & Co., an investment banking company. He is also a
director of Dell Computer Corporation, The Interpublic Group of Companies,
Inc., Morgan Stanley Dean Witter & Co., Sears, Roebuck and Co., and
Time Warner Inc.
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H. John
Riley, Jr. (Age 59)
Director since
1998
Chairman, President and Chief Executive
Officer since April 1996 of Cooper Industries Inc., a diversified
manufacturer of electrical products and tools and hardware. Mr. Riley had
served as President and Chief Executive Officer of Cooper since 1995 and
as President and Chief Operating Officer from 1992 to 1995. He is also a
director of Baker Hughes Inc.
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Joshua I.
Smith (Age 58)
Director since
1997
Chairman and Chief Executive Officer since
1978 of The MAXIMA Corporation, a provider of technology systems support
services. In June 1998, The MAXIMA Corporation filed a voluntary petition
for reorganization under Chapter 11 of the Bankruptcy Reform Act of 1978
in the United States Bankruptcy Court, District of Maryland. Mr. Smith is
also a director of Caterpillar, Inc. and FDX Corporation.
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Judith A.
Sprieser (Age 46)
Director since
July 1999
Executive Vice President since 1998 of Sara
Lee Corporation, a global consumer packaged goods company. Ms. Sprieser
served as Chief Financial Officer of Sara Lee Corporation from 1994 to
1998. Ms. Sprieser also serves as a director of The Chicago Network and
USG Corporation, and is a trustee of Northwestern University.
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Mary Alice
Taylor (Age 50)
Chairman and Chief Executive Officer of
HomeGrocer.com since September 1999, an internet e-commerce company. Ms.
Taylor was Corporate Executive Vice President of Citigroup, Inc. from
January 1997 until September 1999. Previously, Ms. Taylor was Senior Vice
President of Federal Express Corporation from June 1980 until December
1996. Ms. Taylor also serves as a director of Autodesk, Inc. and Dell
Computer Corporation. Ms. Taylor had previously served as a director of
Allstate from March 1996 until October 1998 when, because of her position
at Citigroup, Inc. and its merger with The Travelers Group in 1998,
she resigned from the Allstate board.
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Meetings of the Board and Board Committees
The Board held 8 meetings during 1999. Each
incumbent director attended at least 75% of the Board meetings and meetings
of committees of which he or she was a member. The following table
identifies the members of each committee of the Board and states the number
of meetings held by each such committee during 1999. A summary of each
committees functions and responsibilities follows the
table.
Director
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Audit
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Compensation and
Succession |
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Nominating and
Governance |
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F. Duane
Ackerman |
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ü |
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James G.
Andress |
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ü |
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ü |
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Warren L.
Batts |
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ü* |
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ü |
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Edward A.
Brennan |
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ü |
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ü* |
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James M.
Denny |
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ü |
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ü |
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W. James
Farrell |
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|
ü |
|
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Ronald T.
LeMay |
|
ü |
|
ü |
|
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Michael A.
Miles |
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ü* |
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ü |
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H. John Riley,
Jr. |
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ü |
|
ü |
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Joshua I.
Smith |
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ü |
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|
|
ü |
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Judith A.
Sprieser |
|
ü |
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Number of Meetings
in 1999 |
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4 |
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6 |
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2 |
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* Committee
Chair |
Audit Committee Functions:
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·
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Review Allstate
s annual financial statements, annual report on Form 10-K and annual
report to stockholders
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·
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Review
recommendations by the internal auditors and the independent auditors on
accounting matters and internal controls
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·
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Advise the Board on
the scope of audits
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·
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Review reports by
the internal auditors on managements compliance with law and with
Allstates policies on ethics and business conduct
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·
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Confer with the
General Counsel on the status of potentially material legal matters
affecting Allstates financial statements
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·
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Advise the Board on
the appointment of independent auditors
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May conduct
independent inquiries
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Compensation and Succession Committee
Functions:
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Recommend nominees
for certain officer positions
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·
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Administer Allstate
s executive compensation, stock option and benefit plans
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·
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Advise the Board on
the proxy statement and form of proxy for the annual meeting
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·
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Annual review of
management organization and succession plans for the senior officers of
each significant operating subsidiary
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Nominating and Governance Committee
Functions:
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·
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Recommend nominees
for election to the Board and its committees
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·
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Recommend nominees
for election as Chairman and Chief Executive Officer
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·
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Determine the
criteria for the assessment of the performance of the Board and administer
non-employee director compensation
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·
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Conduct periodic
reviews of the performance of the Chairman and Chief Executive
Officer
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·
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Advise the Board on
the proxy statement and form of proxy for the annual meeting
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·
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Advise the Board on
the establishment of guidelines on corporate governance
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·
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Advise the Board on
policies and practices on stockholder voting
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Compensation Committee Interlocks and Insider Participation
During 1999, the Compensation and Succession
Committee consisted of Warren L. Batts, Chairman, F. Duane Ackerman, James
G. Andress, Edward A. Brennan, W. James Farrell, Ronald T. LeMay and H. John
Riley, Jr. Mr. Ackerman was elected to the committee on November 3, 1999.
None is a current or former officer of Allstate or any of its subsidiaries.
There were no committee interlocks with other companies in 1999 within the
meaning of the Securities and Exchange Commissions proxy
rules.
Directors Compensation and Benefits
The following table lists the compensation and
benefits provided in 1999 to directors who are not employees of Allstate or
its affiliates (non-employee directors):
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Non-Employee
Directors Compensation and Benefits
|
|
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Cash
Compensation |
|
Equity
Compensation |
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Annual
Retainer Fee(a) |
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Grant of
Allstate
Shares(b) |
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Stock Option
for Allstate
Shares(c) |
|
|
|
|
|
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Board
Membership |
|
$25,000 |
|
1,000
shares |
|
3,000
shares |
Committee
Chairperson: |
|
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|
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Audit, Compensation
and Succession, Nominating and
Goverance Committees |
|
$
5,000 |
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|
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Committee
Members: |
|
|
|
|
|
|
Audit, Compensation
and Succession, Nominating and
Goverance Committees |
|
0
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(a)
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Under Allstate
s Deferred Compensation Plan for Directors, directors may elect to
defer directors fees to an account which generates earnings based
on:
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1. The market value
of and dividends on Allstates common shares (common share
equivalents)
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2. The average
interest rate payable on 90-day dealer commercial paper
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3. Standard &
Poors 500 Composite Stock Price Index (with dividends
reinvested)
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No director has
voting or investment powers in common share equivalents, which are payable
solely in cash. Subject to certain restrictions, amounts deferred under
the plan (together with earnings thereon) may be transferred between
accounts and are distributed in a lump sum or over a period not in excess
of ten years.
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(b)
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Granted each
December 1st under the Equity Incentive Plan for Non-Employee Directors
(the Equity Plan) and subject to restrictions on transfer
until the earliest of six months after grant, death or disability or
termination of service. Grants are accompanied by a cash payment to offset
the increase in the directors federal, state and local tax
liabilities (assuming the maximum prevailing individual tax rates)
resulting from the grant of shares. Directors who are elected to the board
between annual shareholder meetings are granted a pro-rated number of
Allstate shares on June 1st following the date of the directors
initial election.
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(c)
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Granted each June
1st at exercise prices equal to 100% of value on the date of grant.
Directors who are elected to the board between annual shareholder meetings
are granted an option for a pro-rated number of shares on the date of
their election at an exercise price equal to 100% of value on the date of
their election. The options become exercisable in three equal annual
installments, expire ten years after grant, and have a reload
feature. The reload feature permits payment of the exercise price by
tendering Allstate common stock, which in turn gives the option holder the
right to purchase the same number of shares tendered at a price equal to
the fair market value on the exercise date. The options permit the option
holder to exchange shares owned or have option shares withheld to satisfy
all or part of the exercise price. The vested portion of options may be
transferred to any immediate family member, to a trust for the benefit of
the director or immediate family members, or to a family limited
partnership.
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Security Ownership of Directors and Executive Officers
The following table sets forth certain
information as to shares of Allstate common stock beneficially owned by each
director and nominee, each executive officer named in the Summary
Compensation Table, and by all executive officers and directors of Allstate
as a group. Shares reported include shares held as nontransferable
restricted shares awarded under Allstates employee benefit plans,
subject to forfeiture under certain circumstances, and shares subject to
stock options exercisable on or prior to April 1, 2000. The percentage of
Allstate shares beneficially owned by any Allstate director or nominee or by
all directors and officers of Allstate as a group does not exceed 1%. Unless
indicated otherwise in the footnotes below, all shares are directly owned as
of January 31, 2000.
Name
|
|
Amount and
Nature of Beneficial
Ownership of Allstate Shares (a)
|
F. Duane
Ackerman |
|
11,029 |
|
James G.
Andress |
|
11,660 |
|
Warren L.
Batts |
|
24,350 |
|
Edward A.
Brennan |
|
282,152 |
(b) |
James M.
Denny |
|
140,596 |
(c) |
W. James
Farrell |
|
1,000 |
|
Ronald T.
LeMay |
|
1,750 |
(d) |
Edward M.
Liddy |
|
1,160,374 |
(e) |
Michael A.
Miles |
|
28,498 |
|
H. John Riley,
Jr. |
|
13,834 |
(f) |
Joshua I.
Smith |
|
7,250 |
(g) |
Judith A.
Sprieser |
|
560 |
|
Mary Alice
Taylor |
|
4,267 |
|
Robert W.
Gary |
|
476,403 |
(h) |
Louis G. Lower,
II |
|
313,489 |
(i) |
Casey J.
Sylla |
|
196,860 |
(j) |
Thomas J. Wilson,
II |
|
371,739 |
(k) |
All directors and
officers as a group |
|
4,522,045 |
(l) |
(a)
|
Each of the totals
for Messrs. Andress, Batts, Brennan, Denny and Miles includes 6,000
Allstate shares subject to option.
|
(b)
|
Does not include
36,894 shares held by Mr. Brennans spouse. Mr. Brennan disclaims
beneficial ownership of these shares.
|
(c)
|
Does not include
18,000 shares held by Northcote LLC, of which Mr. Dennys spouse is a
managing member. Also does not include 370 shares held in a trust of which
Mr. Denny is co-trustee. Mr. Denny disclaims beneficial ownership of these
shares.
|
(d)
|
Includes 250 shares
subject to option.
|
(e)
|
Includes 973,078
shares subject to option.
|
(f)
|
Includes 834 shares
subject to option. Also includes 10,000 shares purchased March 14,
2000.
|
(g)
|
Includes 3,750
shares subject to option.
|
(h)
|
Includes 451,622
shares subject to option. Does not include 100 shares held by Mr. Gary
s adult children; Mr. Gary disclaims beneficial ownership of these
shares.
|
(i)
|
Includes 265,290
shares subject to option.
|
(j)
|
Includes 183,529
shares subject to option.
|
(k)
|
Includes 356,227
shares subject to option.
|
(l)
|
Includes 3,527,196
shares subject to option.
|
Security Ownership of Certain Beneficial Owners
Title of
Class
|
|
Name and Address
of Beneficial Owner
|
|
Amount and
Nature of
Beneficial Ownership
|
|
Percent
of Class
|
Common |
|
Northern Trust
Corporation
50 S. LaSalle Street
Chicago, IL 60675 |
|
52,444,960 |
(a) |
|
6.7 |
% |
|
Common |
|
Capital Research
& Management Company
333 South Hope Street, 55th Floor
Los Angeles, CA 90071 |
|
46,445,000 |
(b) |
|
5.9 |
% |
(a)
|
As of December 31,
1999. Held by Northern Trust Corporation together with certain
subsidiaries (collectively Northern). Of such shares, Northern
holds 2,146,695 with sole voting power; 50,194,669 with shared voting
power; 3,021,312 with sole investment power; and 210,536 with shared
investment power. 48,897,997 of such shares are held by The Northern Trust
Company as trustee on behalf of participants in Allstates profit
sharing plan. Information is provided for reporting purposes only and
should not be construed as an admission of actual beneficial
ownership.
|
(b)
|
As of December 31,
1999 based on Form 13G reflecting sole investment power over shares, filed
by Capital Research and Management Company on February 14,
2000.
|
Ratification of
Appointment of Auditors
Item 2 is the ratification of the
recommendation of the Audit Committee and the Board that Deloitte &
Touche LLP be appointed auditors for 2000. Representatives of Deloitte &
Touche LLP will be present at the meeting, will be available to respond to
questions and may make a statement if they so desire.
The Board unanimously recommends that
stockholders vote for the ratification of the appointment of Deloitte
& Touche LLP as auditors for 2000 as proposed.
Stockholder
Proposal on Cumulative Voting
Mr. William E. Parker and Ms. Terri K. Parker,
544 Ygnacio Valley Road, Suite B, Walnut Creek, California 94596, registered
owners of 209.7 shares of Allstate common stock as of February 15, 2000,
have given notice of their intention to propose the following resolution at
the Annual Meeting. The proposal, as submitted, reads as
follows:
Resolved: That the
stockholders of The Allstate Corporation, assembled at the annual meeting in
person and by proxy, hereby request the Board of Directors to take steps
necessary to provide for cumulative voting in the election of directors,
which means each stockholder shall be entitled to as many votes as shall
equal the number of shares he or she owns multiplied by the number of
directors to be elected, and he or she may cast all of the votes for a
single candidate, or any two or more of them as he or she may see fit.
The following statement has been submitted in
support of the resolution:
At the 1998 Stockholders meeting of The
Allstate Corporation, this proposal received more than 95,000,000 votes, and
last year it received over 184,000,000 votes. This shows a strong interest
by the stockholders on the issue of corporate affairs and management
accountability.
We believe that the companys financial
performance is directly related to its corporate governance procedures and
policies.
In the past we pointed out that negative
events, like Criminal Investigations and the reopening of the earthquake
claims were not good for business.
The company is under investigation from the
Department of Labor with regard to the classification of agents as exempt or
non-exempt from the requirements of the Fair Labor Standards Act. In
addition, agents have asked the Department of Labor to investigate Allstate
s classification of its Exclusive Agency Independent Contractor
Program as an independent contractor program for purposes of the Fair Labor
Standards Act. Also the company is a defendant in lawsuits involving car
repairs which allege non-original manufacturers parts are inferior to
original equipment manufacturers parts.
Cumulative voting increases the possibility of
electing independent minded directors that will enforce managements
accountability to shareholders.
Corporations that have independent minded
directors can help foster improved financial performance and greater
stockholder wealth.
Management nominees to the board often bow to
the chairmans desires on business issues and executive pay without
question.
Currently, the companys Board of
Directors is composed entirely of management nominees. Cumulative voting
would aid in placing a check on management nominees by creating more
competitive elections. The National Bank Act provides for cumulative voting
for bank company boards. California law provides that all state pension and
state college funds, invested in shares must vote for cumulative voting.
Sears, Roebuck and Company, founded the Allstate Insurance Company in 1931
and adopted cumulative voting in 1906. The argument that the adoption of
cumulative voting will lead to the election of dissidents to the Board that
will only represent the special interests is misleading, because the
standards of fiduciary duty compel all directors to act in the best interest
of all shareholders. Directors who fail to respect the duties of loyalty
and/or care expose themselves to significant liability. We believe that
honest differences of opinion are good for a corporation. Dissent stimulates
debate, which leads to thoughtful action and deters complacency on the Board
of Directors.
Please vote yes on this resolution, or abstain
from voting, as a non vote is considered a no vote.
The Board
unanimously recommends that stockholders vote against this
proposal for the following reasons:
The General Corporation Law of Delaware, the
state in which Allstate is incorporated, allows cumulative voting only if it
is provided for in a corporations certificate of incorporation.
Allstates certificate of incorporation does not provide for cumulative
voting. Consequently, each director of Allstate must be elected by a
plurality of the votes of all shares present in person or represented by
proxy.
At present, Allstates entire Board must
stand for election each year, and Allstates By-Laws permit
stockholders to nominate candidates to serve as directors, subject to
compliance with the procedures provided in the By-Laws. The Board believes
that a change in the method of stockholder voting would be appropriate only
if another method would better serve the interests of the stockholders as a
whole. The Board believes that cumulative voting would empower a limited
group of stockholders with the ability to support only a special interest
group by electing one or more directors representing primarily the interests
of that group. The Board believes directors elected by this method may view
themselves as representatives of only the group that elected them. They may
feel obligated to represent that groups interests, regardless of
whether the furtherance of those interests would benefit all stockholders
generally. This would lead to the promotion of narrow interests rather than
those of stockholders at large. Election of directors by a plurality vote of
all voted shares is designed to produce a Board that views its
accountability as being to all stockholders.
The Board believes that cumulative voting
introduces the possibility of partisanship among Board members representing
particular groups of stockholders, which could destroy the ability of the
Board to work together. These factors could operate to the disadvantage of
Allstate and its stockholders. The present method of electing directors,
where each director is elected by a plurality vote of the shares held by all
stockholders, encourages the directors to administer the affairs of Allstate
for the benefit of all of its stockholders. The Board believes each director
should serve on the Board only if a plurality of shares held by all voting
stockholders elect the director to that position.
The percentage of shares that voted in favor
of the cumulative voting proposal actually declined in 1999. The number of
favorable votes cited to in the proposal does not take into account the
effect of the two-for-one stock split which occurred on July 1,
1998.
The Board is confident that this method will
continue to work successfully for the benefit of all stockholders. The Board
agrees that financial performance is driven in part by strong corporate
governance standards which is why it is continuing to cooperate fully with
the federal governments investigation of the 1994 Northridge,
California earthquake claims handling. To date, no criminal charges have
been brought against Allstate and we cannot yet determine the impact of
resolving the matter. Regarding the reopening of claims, Allstate has
resolved the vast majority of all Northridge claims and related litigation.
The pending lawsuits relating to the use of non-original equipment
manufacturer replacement parts are in various stages of development and the
outcome of these disputes is currently uncertain. Lastly, Allstate has
received confirmation from the Department of Labor that it does not intend
to pursue the matter of alleged Fair Labor Standards Act violations at this
time.
For the reasons stated above, the Board
recommends a vote against this proposal.
Stockholder
Proposal Relating to CERES Principles
Ms. Elizabeth R. Welsh, beneficial owner of 95
shares of Allstate common stock as of December 10, 1999, (shares held
through Trillium Asset Management Corporation, 711 Atlantic Avenue, Boston
Massachusetts 02111-2809) has given notice of her intention to propose the
following resolution at the Annual Meeting. The proposal, as submitted,
reads as follows:
ENDORSEMENT OF
THE CERES PRINCIPLES
FOR PUBLIC
ENVIRONMENTAL ACCOUNTABILITY
WHEREAS: Leaders of industry in the United
States now acknowledge their obligation to pursue superior environmental
performance and to disclose information about the performance to their
investors and other stakeholders.
The integrity, utility, and comparability of
environmental disclosure depend on using a common format, credible metrics,
and a set of generally accepted standards. This will enable investors to
assess environmental progress within and across industries.
The Coalition for Environmentally Responsible
Economies (CERES)a ten-year partnership between large investors,
environmental groups, and corporationshas established what we believe
is the most thorough and well-respected environmental disclosure form in the
United States. CERES has also taken the lead internationally, convening
major organizations together with the United Nations Environment Programme
in the Global Reporting Initiative, which has produced guidelines for
standardizing environmental disclosure worldwide.
Companies that endorse the CERES Principles
engage with stakeholders in transparent environmental management and agree
to a single set of consistent standard for environmental reporting. That
standard is set by the endorsing companies together with CERES.
The CERES Principles and CERES Report have
been adopted by leading firms in various industries: Arizona Public Service,
Bank America, BankBoston, Baxter International, Bethlehem Steel, Coca-Cola,
General Motors, Interface, ITT Industries, Northeast Utilities, Pennsylvania
Power and Light, and Polaroid, and Sun company.
We believe endorsing the CERES Principles
commits a company to the prudent oversight of its financial and physical
resources through: 1) protection of the biosphere; 2) sustainable use of
natural resources; 3) waste reduction; 4) energy conservation; 5) risk
reduction; 6) safe products/services; 7) environmental restoration; 8)
informing the public; 9) management commitment; 10) audits and reports. (The
full text of the CERES Principles and accompanying CERES Report form are
obtainable from CERES, 11 Arlington Street, Boston, Massachusetts 02116,
(617) 247-0700/ www.ceres.org.)
RESOLVED: Shareholders request that the
company endorse the CERES Principles as a reasonable and beneficial
component of their corporate commitment to be publicly accountable for
environmental performance.
SUPPORTING STATEMENT: Recent studies show that
the integration of environmental commitment into business operations
provides competitive advantage and improves long-term financial performance
for companies. In addition, the depth of a firms environmental
commitment and the quality with which it manages its environmental
performance are indicators of prudent foresight exercised by
management.
Given investors needs for credible
information about a firms environmental performance and given the
number of companies that have already endorsed the CERES Principles and
adopted its report format, it is a reasonable, widely accepted step for a
company to endorse these Principles if it wishes to demonstrate its
seriousness about superior environmental performance.
Your vote FOR this resolution serves the best
interests of our Company and its shareholders.
The Board unanimously recommends that
stockholders vote against this proposal for the following
reasons:
Allstate has long been committed to conducting
its business and operations in an environmentally sound manner and agrees,
in principle, with the objectives espoused by the CERES organization.
However, Allstates environmental efforts and commitments need to be
closely aligned with that of its stockholders as well as its policyholders
and their communities. The Board does not believe that the formal
endorsement of the CERES principles would effectively advance those
interests.
Allstates environmental efforts have
been underway for many years and reflect its commitment to operating in a
human-healthy and environmentally sound manner. Allstate locations engage in
recycling programs that include paper, newspaper, plastics, cans, cutting
blades, fluorescent lamps, fuel oil, solvents, automobile tires, coolants
and scrap metals. Allstate operates an energy-friendly vanpool program for
its home office employees. Allstates Tech-Cor research and training
facility works with auto manufacturers to develop innovative ways to make
cars more damage resistant, safe and cost-efficient.
Allstate prides itself on its history of
commitment to various community service programs. This commitment is
demonstrated through external partnerships, financial support and by
encouraging employee volunteerism. A few of the community-focused
organizations that Allstate supports include Americas Promise, the
Boys and Girls Clubs of America, the NeighborWorks Network, the All-America
Cities Awards and the National Council of LaRaza. In addition to its
community service investments, Allstate also manages its investment
portfolio with consideration given to environmental and community value
criteria.
Allstates commitment to human safety and
risk aversion lies at the very core of its business. We continuously strive
to promote awareness of issues aimed at accident- and injury-prevention and
safety. In this regard, we publish hundreds of safety-related pamphlets and
post an annual safety calendar of events on our website. Topics are targeted
to health and safety issues arising in any given monthfrom child
passenger safety month to alcohol awareness month to tornado, hurricane and
wildfire preparedness months.
Allstate has considered the CERES Principles
carefully and while it agrees with their fundamental objectives, the Board
does not recommend their formal endorsement. As a service business, we do
not feel it is appropriate to adopt mandatory principles that for us would
add administrative burden and an unnecessary financial drain. As an insurer,
Allstate must comply with the state laws of all fifty states as well as all
relevant federal laws. Adding the expense of compliance with the CERES
Principles as well as the payment of the organizations dues would not
be in the best interests of Allstate or its shareholders.
For the reasons stated above, the Board
recommends a vote against this proposal.
The following Summary Compensation Table sets
forth information on compensation earned in 1997, 1998 and 1999 by Mr. Liddy
(Allstates Chief Executive Officer since January 1, 1999) and by each
of Allstates four most highly compensated executive officers (with Mr.
Liddy, the named executives).
|
Summary Compensation Table
|
|
|
Annual
Compensation
|
|
Long-Term
Compensation
|
Name and
Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)(1)
|
|
Other Annual
Compensation
($)(2)
|
|
Awards
|
|
Payouts
|
|
All Other
Compensation
($)(6)
|
|
|
|
|
|
Restricted
Stock
Award(s)
($)(3)
|
|
Securities
Underlying
Options/SARs
(#)(4)
|
|
LTIP
Payouts
($)(5)
|
Edward M.
Liddy |
|
1999 |
|
890,000 |
|
538,873 |
|
13,218 |
|
0
|
|
400,000 |
|
2,468,250 |
|
7,292 |
(Chairman, President and |
|
1998 |
|
762,143 |
|
1,714,823 |
|
11,552 |
|
0
|
|
225,000 |
|
0
|
|
8,626 |
Chief Executive Officer) |
|
1997 |
|
709,167 |
|
1,595,625 |
|
306,765 |
|
849,912 |
|
177,952 |
|
1,027,032 |
|
8,626 |
|
Robert W.
Gary |
|
1999 |
|
518,100 |
|
219,896 |
|
19,168 |
|
0- |
|
105,000 |
|
1,222,004 |
|
7,124 |
(President of Personal |
|
1998 |
|
459,333 |
|
602,874 |
|
12,973 |
|
0
|
|
67,824 |
|
0
|
|
8,684 |
Property and Casualty) |
|
1997 |
|
414,667 |
|
544,251 |
|
13,270 |
|
315,053 |
|
52,762 |
|
512,204 |
|
8,684 |
|
Louis G. Lower,
II |
|
1999 |
|
458,700 |
|
409,213 |
|
94,044 |
|
0
|
|
50,000 |
|
1,204,088 |
|
7,081 |
(Chairman, Allstate |
|
1998 |
|
458,700 |
|
505,999 |
|
25,064 |
|
0
|
|
55,417 |
|
0
|
|
8,694 |
Life and Savings) |
|
1997 |
|
453,225 |
|
500,000 |
|
22,933 |
|
280,589 |
|
51,828 |
|
570,068 |
|
8,694 |
|
Casey J.
Sylla |
|
1999 |
|
409,200 |
|
494,632 |
|
3,688 |
|
0
|
|
137,662 |
|
811,230 |
|
7,142 |
(Chief Investment |
|
1998 |
|
386,000 |
|
362,913 |
|
3,742 |
|
0
|
|
35,511 |
|
0
|
|
8,569 |
Officer of Allstate |
|
1997 |
|
364,000 |
|
636,618 |
|
3,106 |
|
239,510 |
|
36,384 |
|
373,013 |
|
8,000 |
Insurance Company) |
|
Thomas J. Wilson,
II |
|
1999 |
|
458,700 |
|
409,213 |
|
79,589 |
|
0
|
|
165,340 |
|
930,864 |
|
6,998 |
(President, Allstate |
|
1998 |
|
405,100 |
|
510,001 |
|
2,393 |
|
0
|
|
53,850 |
|
0
|
|
8,646 |
Life and Savings) |
|
1997 |
|
383,333 |
|
468,375 |
|
634 |
|
301,776 |
|
38,934 |
|
384,738 |
|
8,646 |
|
(1)
|
Payments under
Allstates Annual Executive Incentive Compensation Plan and Allstate
s Annual Covered Employee Incentive Compensation Plan, received in
the year following performance.
|
|
(2)
|
The amount
attributed to Mr. Liddy in 1997 represents principally income tax benefit
rights payments under stock options granted to Mr. Liddy by Sears, Roebuck
and Co. and assumed by Allstate when it was spun off from Sears in June
1995. The amount reflected for Mr. Lower in 1999 includes $40,691
representing amounts paid for business related spousal travel expenses.
Similarly, the amount attributed to Mr. Wilson in 1999 includes $35,868
paid for business related spousal travel expenses. The remainder of the
amounts for each of the named executives represent tax gross-up payments
attributable to income taxes payable on certain travel benefits, tax
return preparation fees and financial planning.
|
|
(3)
|
The 1997 awards of
restricted stock became unrestricted on or before April 1,
1998.
|
|
(4)
|
The 1999 awards are
set forth below in detail in the table titled Option/SAR Grants in
1999. The number of shares listed for the 1997 awards were adjusted
for the 2-for-1 stock split in July 1998.
|
|
(5)
|
Payments under
Allstates Long-Term Executive Incentive Compensation Plan, received
in year following performance cycle.
|
|
(6)
|
Each of the named
executives participated in group term life insurance and in Allstate
s profit sharing plan, a qualified defined contribution plan
sponsored by Allstate. The amounts shown represent the premiums paid for
the group term life insurance by Allstate on behalf of each named
executive officer and the value of the allocations to each named executive
s account derived from employer matching contributions to the profit
sharing plan.
|
Option/SAR Grants in 1999
The following table is a summary of all
Allstate stock options granted to the named executives during 1999.
Individual grants are listed separately for each named executive. In
addition, this table shows the potential gain that could be realized if the
fair market value of Allstates common shares were not to appreciate,
or were to appreciate at either a five or ten percent annual rate over the
period of the option term:
|
|
Individual
Grants
|
|
Potential
Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation for
Option Term
|
|
Number of
Securities
Underlying
Options/SARs
Granted(1)
|
|
% of Total
Options/SARs
Granted to All
Employees in 1999
|
|
Exercise or
Base
Price ($/SH)
|
|
Expiration
Date
|
|
0%
|
|
5%($)
|
|
10%($)
|
Edward M.
Liddy |
|
400,000 |
|
|
5.39 |
|
35.00 |
|
8/12/09 |
|
0
|
|
$8,804,525 |
|
$22,312,394 |
|
Robert W.
Gary |
|
55,000 |
|
|
.74 |
|
39.19 |
|
1/4/09 |
|
0
|
|
$1,355,551 |
|
$
3,435,232 |
|
|
50,000 |
|
|
.67 |
|
35.00 |
|
8/12/09 |
|
0
|
|
$1,100,566 |
|
$
2,789,049 |
|
Louis G. Lower,
II |
|
50,000 |
|
|
.67 |
|
35.00 |
|
8/12/09 |
|
0
|
|
$1,100,566 |
|
$
2,789,049 |
|
Casey J.
Sylla |
|
40,000 |
|
|
.54 |
|
39.19 |
|
1/4/09 |
|
0
|
|
$
985,855 |
|
$
2,498,351 |
|
|
6,642 |
(2) |
|
.09 |
|
37.91 |
|
7/26/05 |
|
0
|
|
$
92,516 |
|
$
212,218 |
|
|
91,020 |
|
|
1.23 |
|
35.00 |
|
8/12/09 |
|
0
|
|
$2,003,470 |
|
$
5,077,185 |
|
Thomas J. Wilson,
II |
|
50,000 |
|
|
.67 |
|
39.19 |
|
1/4/09 |
|
0
|
|
$1,232,319 |
|
$
3,122,938 |
|
|
115,340 |
|
|
1.55 |
|
35.00 |
|
8/12/09 |
|
0
|
|
$2,538,785 |
|
$
6,433,779 |
(1)
|
These options are
exercisable in three or four equal annual installments, were granted with
an exercise price equal to or higher than the fair market value of Allstate
s common shares on the date of grant, expire ten years from the date
of grant, and include tax withholding rights and a reload
feature. Tax withholding rights permit the option holder to elect to have
shares withheld to satisfy federal, state and local tax withholding
requirements. The reload feature permits payment of the exercise price by
tendering Allstate common stock, which in turn gives the option holder the
right to purchase the same number of shares tendered, at a price equal to
the fair market value on the exercise date. The options permit the option
holder to exchange shares owned or to have option shares withheld to
satisfy all or part of the exercise price. The vested portions of all the
options may be transferred to any immediate family member, to a trust for
the benefit of the executive or immediate family members or to a family
limited partnership.
|
(2)
|
Options granted to
replace shares tendered in exercise of options under the reload
feature.
|
Option Exercises in 1999 and Option Values on December 31,
1999
The following table shows Allstate stock
options that were exercised during 1999 and the number of shares and the
value of grants outstanding as of December 31, 1999 for each named
executive:
|
|
Shares
Acquired
on Exercise (#)
|
|
Value
Realized ($)
|
|
Number of
Securities
Underlying Unexercised
Options/SARs at
12/31/99(#)
|
|
Value of
Unexercised
In-The-Money
Options/SARs at
12/31/99($)(1)
|
|
|
|
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
Edward M.
Liddy |
|
-0- |
|
-0- |
|
961,412 |
|
628,066 |
|
8,638,811 |
|
-0- |
Robert W.
Gary |
|
-0- |
|
-0- |
|
451,622 |
|
-0- |
|
1,946,201 |
|
-0- |
Louis G. Lower,
II |
|
-0- |
|
-0- |
|
264,284 |
|
108,195 |
|
1,784,094 |
|
-0- |
Casey J.
Sylla |
|
16,575 |
|
376,523 |
|
171,315 |
|
176,423 |
|
1,033,190 |
|
-0- |
Thomas J. Wilson,
II |
|
-0- |
|
-0- |
|
343,727 |
|
218,705 |
|
3,097,636 |
|
-0- |
(1)
|
Value is based on
the closing price of Company common stock ($24.00) on December 31, 1999,
minus the exercise price.
|
Long-Term Executive Incentive Compensation Plans
|
LONG-TERM
INCENTIVE PLANS AWARDS IN LAST FISCAL YEAR
|
Name
|
|
Number of
Shares, Units or
Other Rights($)(a)
|
|
Performance
or
Other Period
Until Payout
|
|
Estimated Future
Payouts Under
Non-Stock Price-Based Plans($)(b)
|
|
|
|
Threshold
|
|
Target
|
|
Maximum(c)
|
Edward M.
Liddy |
|
2,759,000 |
|
1/1/99-12/31/01 |
|
689,750 |
|
2,759,000 |
|
7,242,375 |
Robert W.
Gary |
|
518,100 |
|
1/1/99-12/31/01 |
|
129,525 |
|
518,100 |
|
1,360,013 |
Louis G. Lower,
II |
|
458,700 |
|
1/1/99-12/31/01 |
|
114,675 |
|
458,700 |
|
1,204,088 |
Casey J.
Sylla |
|
327,360 |
|
1/1/99-12/31/01 |
|
81,840 |
|
327,360 |
|
859,320 |
Thomas J. Wilson,
II |
|
458,700 |
|
1/1/99-12/31/01 |
|
114,675 |
|
458,700 |
|
1,204,088 |
|
(a)
|
Awards represent
potential cash incentive to be paid upon achievement of threshold, target
or maximum performance objectives.
|
|
(b)
|
Target awards are
set for participants at the beginning of each cycle based on a percentage
of aggregate salary during the cycle. Actual awards are based on each
participants actual salary earned during the cycle. In years in
which performance cycles overlap, 50% of the participants salaries
are applied to each cycle. If threshold level performance (80% of goal)
were achieved, the awards would be 25% of the participants target
award. If maximum level of performance (125% of goal) or greater were
achieved, the award would be 263% of the participants target award.
The performance goal for the 1999-2001 cycle is based solely on return on
average equity which is subject to adjustment, in specific calibrations,
depending on the relative performance of the Company with respect to its
operating earnings per share growth as compared with the performance of an
identified peer group, the S&P Property & Casualty Index, with
respect to such goal.
|
|
(c)
|
Up to $3.5 million
of any individual award opportunity may be paid from The Allstate
Corporation Long-Term Executive Incentive Compensation Plan. The
remainder, if any, will be paid under an arrangement subject to Board
approval.
|
The following table indicates the estimated
total annual benefits payable to the named executives upon retirement under
the specified compensation and years of service classifications, pursuant to
the combined current benefit formulas of the Allstate Retirement Plan and
the unfunded Supplemental Retirement Income Plan. The Supplemental
Retirement Income Plan will pay the portion of the benefits shown below
which exceeds Internal Revenue Code limits or is based on compensation in
excess of Internal Revenue Code limits. Benefits are computed on the basis
of a participants years of credited service (generally limited to 28)
and average annual compensation over the participants highest five
successive calendar years of earnings out of the ten years immediately
preceding retirement. Only annual salary and annual bonus amounts as
reflected in the Summary Compensation Table are considered annual
compensation in determining retirement benefits.
Annual retirement benefits are generally
payable monthly and benefits accrued from January 1, 1978 through December
31, 1988 are reduced by a portion of a participants estimated social
security benefits. Effective January 1, 1989 the retirement benefit
calculation was integrated with the employees social security wage
base. Benefits shown below are based on retirement at age 65 and selection
of a straight life annuity.
As of December 31, 1999, Messrs. Liddy and
Wilson had 12 and 7 years, respectively, of combined Allstate/Sears service
and Messrs. Gary, Lower and Sylla had 38, 23 and 4 years of service,
respectively, with Allstate. As a result of their prior Sears service, a
portion of Mr. Liddys and Mr. Wilsons retirement benefits will
be paid from the Sears Plan. Allstate has agreed to provide Mr. Liddy with
enhanced pension benefits when he reaches 60. The enhanced benefit will be
calculated based on the existing pension formula assuming an additional five
years of age and five years of service. This enhancement will be phased out
at a rate of 20% a year.
Years of
Service
|
Remuneration
|
|
15
|
|
20
|
|
25
|
|
30
|
|
35
|
|
$1,000,000 |
|
$
327,000 |
|
$
436,000 |
|
$
545,000 |
|
$
610,000 |
|
$
610,000 |
|
$1,500,000 |
|
$
492,000 |
|
$
656,000 |
|
$
820,000 |
|
$
918,000 |
|
$
918,000 |
|
|
$2,000,000 |
|
$
657,000 |
|
$
876,000 |
|
$1,095,000 |
|
$1,226,000 |
|
$1,226,000 |
|
$2,500,000 |
|
$
822,000 |
|
$1,096,000 |
|
$1,370,000 |
|
$1,534,000 |
|
$1,534,000 |
|
|
$3,000,000 |
|
$
987,000 |
|
$1,316,000 |
|
$1,645,000 |
|
$1,842,000 |
|
$1,842,000 |
|
$3,500,000 |
|
$1,152,000 |
|
$1,536,000 |
|
$1,920,000 |
|
$2,150,000 |
|
$2,150,000 |
|
|
$4,000,000 |
|
$1,317,000 |
|
$1,756,000 |
|
$2,195,000 |
|
$2,458,000 |
|
$2,458,000 |
|
Termination of Employment and Change-in-Control Arrangements
Mr. Gary
In November 1999, Allstate agreed to accept
Mr. Garys request to retire effective as of December 31, 1999. In
recognition of Mr. Garys 38 years of dedicated service, Allstate
agreed to accelerate the vesting of Mr. Garys outstanding options.
Allstate also agreed to pay Mr. Gary an amount equal to one years
salary in consideration for Mr. Garys commitment not to enter into an
employment or consulting arrangement with an Allstate competitor for a
one-year period following his departure from Allstate.
Mr. Lower
In January 2000, Mr. Lower announced his
intention to retire. In recognition of his many years of service, Allstate
agreed to accelerate the vesting of Mr. Lowers outstanding options and
agreed to pay Mr. Lower an enhanced retirement benefit based on 3 years and
5 months of additional age and service credit.
Mr. Sylla
In July 1995, Allstate agreed to provide Mr.
Sylla or his beneficiary a basic retirement or death benefit if his
employment is terminated within 5 years of July 26, 1995 (Mr. Syllas
date of hire) for any reason other than termination pursuant to Allstate
s written policy. The amount of the benefit would be calculated under
the Allstate retirement plan, assuming Mr. Sylla had 5 years of service
under the plan, and would be reduced by Mr. Syllas actual years of
service. The agreement terminates no later than July 26, 2000.
Change in Control Arrangements
In 1999, the Board approved agreements with
the named executives that provide for severance and other benefits upon a
change of control involving Allstate. In general, a change of
control is one or more of the following events: 1) any person acquires more
than 20% of Allstate common stock; 2) certain changes are made to the
composition of the Board; or 3) certain transactions occur that result in
Allstate stockholders owning 70% or less of the surviving corporations
stock.
Under these agreements, severance benefits
would be payable if an executives employment is terminated by Allstate
without cause or by the executive for good reason as
defined in the agreements during the three-year period following such event.
Good reason includes a termination of employment by a named executive for
any reason during the 13th month after a change of control. Allstate
believes these agreements encourage retention of its executives and enable
them to focus on managing the Companys business thereby more directly
aligning management and shareholder interests in the event of a
transaction.
The principal benefits include: 1) pro-rated
annual incentive award and long-term incentive award (both at target) for
the year of termination of employment; 2) a payment equal to three times the
sum of the executives base salary, target annual incentive award and
target annualized long-term incentive award; 3) continuation of certain
welfare benefits for three years; 4) an enhanced retirement benefit; and 5)
reimbursement (on an after-tax basis) of any resulting excise taxes. In
addition, all unvested stock options would become exercisable, all
restricted stock would vest and nonqualified deferred compensation account
balances would become payable.
Compensation and Succession Committee Report
Allstates Compensation and Succession
Committee, which is composed entirely of independent, non-employee
directors, administers Allstates executive compensation program. The
purposes of the program are to:
|
·
|
Link executives
goals with stockholders interests
|
|
·
|
Attract and retain
talented management
|
|
·
|
Reward annual and
long-term performance
|
In 1996, the Committee created stock ownership
goals for executives at the vice president level and above. The goals are
for these executives to own, within five years, common stock worth a
multiple of base salary, ranging from one times salary to up to three times
salary for the Chairman, President and Chief Executive Officer. In 1997, the
Committee weighted the compensation opportunities for executive officers,
including each of the named executives, more heavily towards compensation
payable upon the attainment of specified performance objectives and
compensation in the form of Allstate common stock. In 1999, the Committee
increased the target award levels for common stock awards for executive
officers, including each of the named executives.
Allstate executives can receive three types of
compensation, each of which is described in more detail below:
|
·
|
Annual cash
compensation
|
|
·
|
Long-term cash
compensation
|
|
·
|
Long-term equity
compensation
|
Annual Compensation
Annual cash compensation includes base salary
and annual incentive awards.
Base salaries of Allstate executives are set
by the Committee at a level designed to be competitive in the U.S. insurance
industry. At least annually, the Committee reviews a report based on data
prepared by independent compensation consultants comparing Allstates
base salary levels for its executives with base salaries paid to executives
in comparable positions at other companies in the peer group of large U.S.
public insurance companies. The Committee attempts to set Allstate base
salaries at the median level of the peer group.
Annual incentive awards are designed to
provide certain employees, including each of the named executives, with a
cash award based on the achievement of annual performance objectives. These
objectives are approved by the Committee prior to the end of the first
quarter of the relevant year. Threshold, target and maximum benchmarks are
set for each objective. Each award opportunity is based on that individual
s potential contribution to the achievement of a particular objective
and is stated as a specified percentage of base salary for the year. For
1999, no award was payable with respect to an objective if the threshold
level of performance was not attained. In addition, no award would be
payable if Allstate sustained a net loss for the year.
Annual incentive awards are paid in March of
the year following the year of performance, after the Committee has
certified attainment of the objectives. The Committee has the authority to
adjust the amount of awards but, with respect to the chief executive officer
and the other named executives, has no authority to increase any award above
the amount specified for the level of performance achieved with respect to
the relevant objective.
For 1999, 75% of Mr. Liddys annual
incentive cash award was based on an operating earnings per share objective.
The other 25% was based on a revenue growth objective for the personal
property and casualty segment and the life and savings segment.
For 1999, 50% of the annual incentive cash
awards for the other named executives was based on one or more performance
objectives related to their particular business units. Another 30% was based
on achievement of the corporate goals for operating earnings per share and
revenue growth. The remaining 20% was based on individual performance
priorities.
Allstate met the threshold level of
performance on the operating earnings per share objective. On average, the
business units achieved slightly less than the target level of performance
for their objectives. Allstate did not meet the threshold level of revenue
growth for the personal property and casualty segment. However, it achieved
the maximum level of revenue growth for the life and savings segment. The
investment department also achieved the maximum level of performance on its
objectives.
Long-Term Cash Compensation
Long-term incentive cash awards are designed
to provide certain employees, including each of the named executives, with a
cash award based on the achievement of a performance objective over a
three-year period. The objective is established by the Committee at the
beginning of the three-year cycle. Threshold, target and maximum levels of
performance are established on which individual award opportunities are
based, stated as a specified percentage of aggregate base salary over the
period. A new cycle commences every two years. In years in which performance
cycles overlap, 50% of participants salaries are applied to each
cycle. The awards will be adjusted, in specific calibrations, by up to 50%,
depending on Allstates performance as compared to the performance of a
group of peer companies over the same period. The Committee must certify in
writing the attainment of the objective before awards may be paid. Awards
are payable in March of the year following the end of the cycle.
Long-term incentive cash awards for the
1997-1999 cycle were paid in March 2000. In this cycle the objective for all
participants, including the named executives, was the achievement of a
specified return on average equity. The maximum level of performance was
achieved on this objective, as well as the maximum level of performance as
measured against the peer group. Payments to each of the named executives
for the 1997-1999 cycle are set forth under the LTIP Payouts
column of the Summary Compensation Table.
The current cycle for long-term incentive cash
awards covers the years 1999-2001. In this cycle the objective for all
participants, including the named executives, is the achievement of a
specified return on average equity. For this cycle, the Committee determined
that the peer calibration should be based on growth in operating earnings
per share and that the peer group of companies would be the Standard &
Poors Property & Casualty Index. This change is intended to more
closely link long-term cash compensation to shareholder value.
Long-Term Equity Compensation
The Equity Incentive Plan provides for the
grant of stock options and restricted or unrestricted common stock of
Allstate to plan participants.
In January 1999, the Committee granted stock
options to a select group of executives, including some named executives, to
recognize an increase in the level of their responsibility occasioned by the
transition of the Chief Executive Officer.
In August 1999, the Committee granted stock
options to a number of key Allstate employees, including each of the named
executives. The size of each named executives grant was based on a
specified percentage of his base salary and the Committees assessment
of his performance. All stock option grants under this plan have been made
in the form of nonqualified stock options at exercise prices equal to 100%
of the fair market value of Allstate common stock on the date of grant.
These options are not fully-exercisable until four years or, in some cases,
three years after the date of grant and expire in ten years. The vested
portions of options may be transferred to immediate family members, to
trusts for the benefit of the executive or immediate family members or to a
family limited partnership.
Chief Executive Officer Compensation
In 1999, approximately 12% of Mr. Liddys
total compensation opportunity was base salary. The remaining 88% was
variable compensation that was at risk and tied to Allstates business
results.
Mr. Liddys previous increase in base
salary was in November 1998 and reflected his being named Allstates
Chairman, President and Chief Executive Officer. In February 2000, Mr. Liddy
s base salary was increased 7.9% to $960,000. This 15-month interval
of increase aligns with normal review cycles for Allstates executive
officers.
For 1999, 75% of Mr. Liddys annual cash
incentive award was based upon the achievement of an operating earnings per
share objective and 25% was based on the achievement of revenue growth
objectives. Allstate met the threshold level of performance for the
operating earnings per share objective; did not meet the threshold on the
property and casualty revenue growth objective; and achieved the maximum
level on the life and savings revenue growth objective. The payout was
calculated accordingly.
Mr. Liddys 1997-1999 long-term cash
award was based on Allstates achievement of the maximum return on
average equity objective as well as the maximum level of performance as
measured against the relevant peer group.
On August 12, 1999, the Committee awarded Mr.
Liddy a stock option under the Equity Incentive Plan for 400,000 shares. The
Committee used the Black-Scholes valuation formula to determine the amount
of this award, which was based on a specified percentage of Mr. Liddys
1999 base salary.
Mr. Liddys 1999 base salary, annual
incentive cash award, long-term incentive cash award and stock option grant
follow the policies and plan provisions described above. Amounts paid and
granted under these policies and plans are disclosed in the Summary
Compensation Table.
Limit on Tax Deductible Compensation
Under Section 162(m) of the Internal Revenue
Code, Allstate cannot deduct compensation paid in any year to certain
executives in excess of $1,000,000, unless it is performance-based. The
Committee continues to emphasize performance-based compensation for
executives and this is expected to minimize the effect of Section 162(m).
However, the Committee believes that its primary responsibility is to
provide a compensation program that attracts, retains and rewards the
executive talent that is necessary to Allstates success. Consequently,
in any year the Committee may authorize compensation in excess of $1,000,000
that is not performance-based. The Committee recognizes that the loss of a
tax deduction may be unavoidable in these circumstances.
Compensation and
Succession Committee
Warren L. Batts
(Chairman)
F. Duane
Ackerman
James G.
Andress
H. John Riley,
Jr.
|
|
Edward A.
Brennan
W. James
Farrell
Ronald T.
LeMay
|
|
The following performance graph compares the
performance of Allstates common stock during the five-year period from
December 31, 1994 through December 31, 1999 with the performance of the S
&P 500 index and the S&P Property-Casualty Insurance Index. The
graph plots the changes in value of an initial $100 investment over the
indicated time periods, assuming all dividends are reinvested
quarterly.
COMPARISON OF
TOTAL RETURN
December 31, 1994
to December 31, 1999
Allstate v.
Published Indices
|
|
12/31/94
|
|
12/31/95
|
|
12/31/96
|
|
12/31/97
|
|
12/31/98
|
|
12/31/99
|
Allstate |
|
100.00 |
|
$176.44 |
|
$251.95 |
|
$398.16 |
|
$343.52 |
|
$220.05 |
S&P
500 |
|
100.00 |
|
$137.12 |
|
$168.22 |
|
$223.90 |
|
$287.35 |
|
$347.36 |
S&P
Prop./Cas. |
|
100.00 |
|
$134.96 |
|
$164.37 |
|
$233.92 |
|
$212.78 |
|
$154.71 |
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act
of 1934, as amended, requires Allstates officers, directors and
persons who beneficially own more than ten percent of a registered class of
Allstates equity securities to file reports of securities ownership
and changes in such ownership with the SEC.
Based solely upon a review of copies of such
reports, or written representations that all such reports were timely filed,
Allstate believes that each of its officers, directors and greater than
ten-percent beneficial owners complied with all Section 16(a) filing
requirements applicable to them during 1999.
The Northern Trust Company maintains banking
relationships, including credit lines, with Allstate and various of its
subsidiaries, in addition to performing services for the profit sharing
plan. In 1999, revenues received by Northern Trust for cash management
activities, trustee, custodian, credit lines and other services for all such
entities were approximately $947,123.
Stockholder Proposal For Year 2001 Annual Meeting
Proposals which stockholders intend to be
included in Allstates proxy material for presentation at the annual
meeting of stockholders in the year 2001 must be received by the Secretary
of Allstate, Robert W. Pike, The Allstate Corporation, 2775 Sanders Road,
Suite F8, Northbrook, Illinois 60062-6127 by November 27, 2000, and must
otherwise comply with rules promulgated by the Securities and Exchange
Commission in order to be eligible for inclusion in the proxy material for
the 2001 annual meeting.
If a stockholder desires to bring business
before the meeting which is not the subject of a proposal meeting the SEC
proxy rule requirements for inclusion in the proxy statement, the
stockholder must follow procedures outlined in Allstates By-Laws in
order to personally present the proposal at the meeting. A copy of these
procedures is available upon request from the Secretary of Allstate. One of
the procedural requirements in the By-Laws is timely notice in writing of
the business the stockholder proposes to bring before the meeting. Notice of
business proposed to be brought before the 2001 annual meeting must be
received by the Secretary of Allstate no earlier than January 18, 2001 and
no later than February 17, 2001 to be presented at the meeting. The notice
must describe the business proposed to be brought before the meeting, the
reasons for bringing it, any material interest of the stockholder in the
business, the stockholders name and address and the number of shares
of Allstate stock beneficially owned by the stockholder. It should be noted
that these By-law procedures govern proper submission of business to be put
before a stockholder vote at the annual meeting.
Under Allstates By-Laws, if a
stockholder wants to nominate a person for election to the Board at Allstate
s annual meeting, the stockholder must provide advance notice to
Allstate. Notice of stockholder nominations for election at the 2001 annual
meeting must be received by the Secretary, The Allstate Corporation, 2775
Sanders Road, Suite F8, Northbrook, Illinois 60062-6127, no earlier than
January 18, 2001 and no later than February 17, 2001. With respect to the
proposed nominee, the notice must set forth the name, age, principal
occupation, number of shares of Allstate stock beneficially owned and
business and residence address. With respect to the stockholder proposing to
make the nomination, the notice must set forth the name, address and number
of shares of Allstate stock beneficially owned. A copy of these By-law
provisions is available from the Secretary of Allstate upon
request.
Alternatively, a stockholder may propose an
individual to the Nominating and Governance Committee for its consideration
as a nominee for election to the Board by writing to the office of the
Secretary, The Allstate Corporation, 2775 Sanders Road, Suite F-8,
Northbrook, Illinois 60062-6127.
Officers and other employees of Allstate and
its subsidiaries may solicit proxies by mail, personal interview, telephone,
telex, facsimile, or electronic means. None of these individuals will
receive special compensation for these services which will be performed in
addition to their regular duties, and some of them may not necessarily
solicit proxies. Allstate has also made arrangements with brokerage firms,
banks, nominees and other fiduciaries to forward proxy solicitation
materials for shares held of record by them to the beneficial owners of such
shares. Allstate will reimburse them for reasonable out-of-pocket expenses.
Corporate Investors Communications, Inc., 111 Commerce Road,
Carlstadt, New Jersey 07072 will assist in the distribution of proxy
solicitation materials, for a fee estimated at $7,500 plus out-of-pocket
expenses. Allstate will pay the cost of all proxy solicitation.
|
[Signature of
Robert W. Pike]
|
11-Year Summary of Selected Financial Data
($ in millions
except per share data) |
|
1999 |
|
1998 |
|
1997 |
|
1996 |
|
Consolidated
Operating Results |
|
|
|
|
|
|
|
|
Insurance premiums
and contract charges |
|
$21,735 |
|
$20,826 |
|
$20,106 |
|
$19,702 |
Net investment
income |
|
4,112 |
|
3,890 |
|
3,861 |
|
3,813 |
Realized capital
gains and losses |
|
1,112 |
|
1,163 |
|
982 |
|
784 |
Total
revenues |
|
26,959 |
|
25,879 |
|
24,949 |
|
24,299 |
Operating income
(loss) |
|
2,082 |
|
2,573 |
|
2,429 |
|
1,600 |
Realized capital
gains and losses, after-tax |
|
691 |
|
694 |
|
638 |
|
510 |
Equity in net
income of unconsolidated subsidiary |
|
|
|
10 |
|
34 |
|
29 |
Income (loss) from
continuing operations |
|
2,720 |
|
3,294 |
|
3,105 |
|
2,075 |
Gain (loss) from
discontinued operations, after-tax |
|
|
|
|
|
|
|
|
Cumulative effect
of changes in accounting principle |
|
|
|
|
|
|
|
|
Net income
(loss) |
|
2,720 |
|
3,294 |
|
3,105 |
|
2,075 |
Earnings (loss) per
share: |
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
Income (loss) before cumulative
effect of changes in accounting |
|
3.38 |
|
3.94 |
|
3.56 |
|
2.31 |
Cumulative effect of changes in
accounting |
|
|
|
|
|
|
|
|
Net income (loss) |
|
3.38 |
|
3.94 |
|
3.56 |
|
2.31 |
Basic: |
|
|
|
|
|
|
|
|
Income (loss) before cumulative
effect of changes in accounting |
|
3.40 |
|
3.96 |
|
3.58 |
|
2.33 |
Cumulative effect of changes in
accounting |
|
|
|
|
|
|
|
|
Net income (loss) |
|
3.40 |
|
3.96 |
|
3.58 |
|
2.33 |
Dividends declared
per share |
|
0.60 |
|
0.54 |
|
0.48 |
|
0.43 |
|
Consolidated
Financial Position |
|
|
|
|
|
|
|
|
Investments |
|
$69,645 |
|
$66,525 |
|
$62,548 |
|
$58,329 |
Total
assets |
|
98,119 |
|
87,691 |
|
80,918 |
|
74,508 |
Reserves for claims
and claims expense and life-contingent contract
benefits and contractholder funds |
|
50,610 |
|
45,615 |
|
44,874 |
|
43,789 |
Debt |
|
2,851 |
|
1,746 |
|
1,696 |
|
1,386 |
Mandatorily
redeemable preferred securities of subsidiary trusts |
|
964 |
|
750 |
|
750 |
|
750 |
Shareholders
equity |
|
16,601 |
|
17,240 |
|
15,610 |
|
13,452 |
Shareholders
equity per diluted share |
|
21.05 |
|
21.00 |
|
18.28 |
|
15.14 |
|
Property-Liability Operations |
|
|
|
|
|
|
|
|
Premiums
written |
|
$20,389 |
|
$19,515 |
|
$18,789 |
|
$18,586 |
Premiums
earned |
|
20,112 |
|
19,307 |
|
18,604 |
|
18,366 |
Net investment
income |
|
1,761 |
|
1,723 |
|
1,746 |
|
1,758 |
Operating income
(loss) |
|
1,717 |
|
2,211 |
|
2,079 |
|
1,266 |
Realized capital
gains and losses, after-tax |
|
609 |
|
514 |
|
511 |
|
490 |
Equity in net
income of unconsolidated subsidiary |
|
|
|
10 |
|
34 |
|
29 |
Income (loss)
before cumulative effect of changes in accounting |
|
2,312 |
|
2,760 |
|
2,670 |
|
1,725 |
Net income
(loss) |
|
2,312 |
|
2,760 |
|
2,670 |
|
1,725 |
Operating
ratios |
|
|
|
|
|
|
|
|
Claims and claims expense (loss) ratio |
|
73.0 |
|
70.4 |
|
71.7 |
|
78.9 |
Expense ratio |
|
24.4 |
|
22.8 |
|
22.3 |
|
21.6 |
Combined ratio |
|
97.4 |
|
93.2 |
|
94.0 |
|
100.5 |
|
Life and Savings
Operations |
|
|
|
|
|
|
|
|
Premiums and
contract charges |
|
$
1,623 |
|
$
1,519 |
|
$
1,502 |
|
$
1,336 |
Net investment
income |
|
2,260 |
|
2,115 |
|
2,085 |
|
2,045 |
Operating
income |
|
384 |
|
392 |
|
377 |
|
368 |
Realized capital
gains and losses, after-tax |
|
101 |
|
158 |
|
123 |
|
20 |
Income from
continuing operations before cumulative effect of changes in
accounting |
|
485 |
|
550 |
|
497 |
|
388 |
Net
income |
|
485 |
|
550 |
|
497 |
|
388 |
Statutory premiums
and deposits |
|
8,497 |
|
5,902 |
|
4,946 |
|
5,157 |
Investments
including Separate Accounts |
|
48,301 |
|
41,863 |
|
37,341 |
|
33,588 |
|
*Operating income
(loss) is Income before dividends on preferred securities and equity
in net income of unconsolidated subsidiary excluding realized capital
gains and losses, after-tax, and gain (loss) on disposition of operations,
after-tax. *The supplemental operating income (loss) information presented
above allows for a more complete analysis of results of operations. The net
effect of gains and losses have been excluded due to their volatility
between periods and because such data are often excluded when evaluating the
overall financial performance of insurers. Operating income (loss) should
not be considered as a substitute for any GAAP measure of performance. Our
method of calculating operating income (loss) may be different from the
method used by other companies and therefore comparability may be
limited.
1995 |
|
1994 |
|
1993 |
|
1992 |
|
1991 |
|
1990 |
|
1989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$18,908 |
|
$17,566 |
|
|
$17,118 |
|
|
$16,670 |
|
|
$16,215 |
|
|
$15,342 |
|
$14,251 |
3,627 |
|
3,343 |
|
|
3,269 |
|
|
3,153 |
|
|
2,954 |
|
|
2,528 |
|
2,195 |
258 |
|
200 |
|
|
215 |
|
|
161 |
|
|
4 |
|
|
182 |
|
224 |
22,793 |
|
21,109 |
|
|
20,602 |
|
|
19,984 |
|
|
19,173 |
|
|
18,052 |
|
16,670 |
1,587 |
|
268 |
|
|
1,083 |
|
|
(718 |
) |
|
662 |
|
|
518 |
|
626 |
168 |
|
130 |
|
|
140 |
|
|
106 |
|
|
3 |
|
|
118 |
|
148 |
56 |
|
86 |
|
|
79 |
|
|
112 |
|
|
58 |
|
|
54 |
|
41 |
1,904 |
|
484 |
|
|
1,302 |
|
|
(500 |
) |
|
723 |
|
|
690 |
|
815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
(325 |
) |
|
|
|
|
|
|
|
1,904 |
|
484 |
|
|
1,302 |
|
|
(825 |
) |
|
723 |
|
|
701 |
|
815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.12 |
|
0.54 |
|
|
1.49 |
|
|
(0.58 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.38 |
) |
|
|
|
|
|
|
|
2.12 |
|
0.54 |
|
|
1.49 |
|
|
(0.96 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.12 |
|
0.54 |
|
|
1.49 |
|
|
(0.58 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.38 |
) |
|
|
|
|
|
|
|
2.12 |
|
0.54 |
|
|
1.49 |
|
|
(0.96 |
) |
|
|
|
|
|
|
|
0.39 |
|
0.36 |
|
|
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$56,505 |
|
$47,227 |
|
|
$47,932 |
|
|
$40,971 |
|
|
$38,213 |
|
|
$32,972 |
|
$28,144 |
70,029 |
|
60,988 |
|
|
58,994 |
|
|
51,817 |
|
|
47,173 |
|
|
41,246 |
|
35,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,904 |
|
39,961 |
|
|
37,275 |
|
|
35,776 |
|
|
31,576 |
|
|
27,058 |
|
22,193 |
1,228 |
|
869 |
|
|
850 |
|
|
1,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,680 |
|
8,426 |
|
|
10,300 |
|
|
5,383 |
|
|
8,151 |
|
|
7,127 |
|
6,793 |
14.09 |
|
9.37 |
|
|
11.45 |
|
|
8.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$17,965 |
|
$16,739 |
|
|
$16,292 |
|
|
$15,774 |
|
|
$15,107 |
|
|
$14,572 |
|
$13,385 |
17,540 |
|
16,513 |
|
|
16,039 |
|
|
15,542 |
|
|
15,018 |
|
|
14,176 |
|
13,039 |
1,630 |
|
1,515 |
|
|
1,406 |
|
|
1,420 |
|
|
1,350 |
|
|
1,254 |
|
1,212 |
1,301 |
|
81 |
|
|
963 |
|
|
(867 |
) |
|
475 |
|
|
355 |
|
481 |
158 |
|
145 |
|
|
146 |
|
|
166 |
|
|
24 |
|
|
108 |
|
132 |
56 |
|
86 |
|
|
79 |
|
|
112 |
|
|
58 |
|
|
54 |
|
41 |
1,608 |
|
312 |
|
|
1,188 |
|
|
(589 |
) |
|
557 |
|
|
517 |
|
654 |
1,608 |
|
312 |
|
|
1,188 |
|
|
(900 |
) |
|
557 |
|
|
517 |
|
654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78.1 |
|
88.0 |
|
|
79.7 |
|
|
97.4 |
|
|
83.3 |
|
|
85.7 |
|
82.8 |
22.3 |
|
23.3 |
|
|
23.5 |
|
|
24.0 |
|
|
24.8 |
|
|
24.5 |
|
24.7 |
100.4 |
|
111.3 |
|
|
103.2 |
|
|
121.4 |
|
|
108.1 |
|
|
110.2 |
|
107.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1,368 |
|
$
1,053 |
|
|
$
1,079 |
|
|
$
1,128 |
|
|
$
1,197 |
|
|
$
1,166 |
|
$
1,212 |
1,992 |
|
1,827 |
|
|
1,858 |
|
|
1,733 |
|
|
1,604 |
|
|
1,274 |
|
983 |
327 |
|
226 |
|
|
169 |
|
|
149 |
|
|
187 |
|
|
163 |
|
145 |
10 |
|
(15 |
) |
|
(6 |
) |
|
(60 |
) |
|
(21 |
) |
|
10 |
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
337 |
|
211 |
|
|
163 |
|
|
89 |
|
|
166 |
|
|
173 |
|
161 |
337 |
|
211 |
|
|
163 |
|
|
75 |
|
|
166 |
|
|
184 |
|
161 |
4,874 |
|
4,539 |
|
|
4,086 |
|
|
3,851 |
|
|
4,222 |
|
|
4,252 |
|
3,276 |
31,065 |
|
26,197 |
|
|
24,909 |
|
|
21,829 |
|
|
19,050 |
|
|
15,732 |
|
11,787 |
|
*Consolidated
financial position for 1993 and thereafter are not comparable to prior years
due to adoption of new accounting rules for debt and equity securities. *Per
share amounts for years prior to 1998 have been restated for a 2-for-1 stock
split in 1998. *Shareholders equity is presented pro forma for 1992
reflecting the formation of The Allstate Corporation. *Net income (loss) and
financial position for 1992 and thereafter are not comparable to prior years
due to adoption of new accounting rules for postretirement and
postemployment benefits. *Earnings (loss) per share is presented pro forma
for 1993 and 1992 and is not applicable prior to 1992.
Managements Discussion and Analysis
of Financial
Condition and Results of Operations
The following discussion highlights
significant factors influencing the consolidated results of operations and
financial position of The Allstate Corporation (the Company or
Allstate). It should be read in conjunction with the
consolidated financial statements and related notes appearing on pages
A-33
through A-72 and the 11-year summary of selected financial data on pages
A-2
and
A-3
. Further analysis of the Companys insurance segments is provided in
Property-Liability Operations (which includes the Personal Property and
Casualty (PP&C) and Discontinued Lines and Coverages
segments) and Life and Savings Operations (which represents the Life and
Savings segment) beginning on pages
A-5
and
A-15
, respectively. The segments are defined based upon the components of the
Company for which financial information is used internally to evaluate
segment performance and determine the allocation of
resources.
1999
HIGHLIGHTS
|
·
|
Announced a
strategic initiative to provide customers with access to Allstate sales
and service through the Internet and call centers. The intent of this
initiative is to aggressively expand selling and customer service
capabilities, by combining ease of access with the expertise and local
presence of an Allstate agency.
|
|
·
|
Completed the
acquisition of the personal lines auto and homeowners insurance business
of CNA Financial Corporation (CNA personal lines) and the
acquisition of American Heritage Life Investment Corporation (AHL
), which provide the Company a strong presence in the independent
agency and workplace marketing distribution channels,
respectively.
|
|
·
|
Established an
alliance with Putnam Investments which generated additional Life and
Savings sales of $832 million during the year.
|
|
·
|
Expanded the
existing $2 billion share repurchase program by an additional $2
billion. The combined $4 billion program is expected to be completed by
December 31, 2000.
|
Consolidated
revenues
For the years
ended December 31, |
|
1999
|
|
1998
|
|
1997
|
($ in
millions) |
Property-Liability
insurance premiums |
|
$20,112 |
|
$19,307 |
|
$18,604 |
Life and Savings
premiums and contract charges |
|
1,623 |
|
1,519 |
|
1,502 |
Net investment
income |
|
4,112 |
|
3,890 |
|
3,861 |
Realized capital
gains and losses |
|
1,112 |
|
1,163 |
|
982 |
|
|
|
|
|
|
|
Total
revenues |
|
$26,959 |
|
$25,879 |
|
$24,949 |
|
|
|
|
|
|
|
Consolidated revenues increased 4.2% in 1999
due primarily to higher Property-Liability earned premiums and revenues from
acquisitions. Consolidated revenues increased 3.7% in 1998 due to higher
Property-Liability earned premiums and realized capital gains.
Consolidated net
income
For the years
ended December 31, |
|
1999
|
|
1998
|
|
1997
|
($ in millions
except per share data) |
|
Net
income |
|
$2,720 |
|
$3,294 |
|
$3,105 |
Net income per
share (Basic) |
|
3.40 |
|
3.96 |
|
3.58 |
Net income per
share (Diluted) |
|
3.38 |
|
3.94 |
|
3.56 |
Cash dividends
declared per share |
|
.60 |
|
.54 |
|
.48 |
Realized capital
gains and losses, net of tax |
|
691 |
|
694 |
|
638 |
Restructuring and
acquisition related charges, net of tax |
|
116 |
|
|
|
|
1999 over
1998
Net income decreased 17.4% due primarily to
decreased operating results including the impact of restructuring charges
and the affect of acquisitions. Net income per diluted share decreased 14.2%
in 1999 as the decline in net income was partially offset by the effects of
share repurchases.
1998 over
1997
Net income for 1998 increased 6.1% as a result
of increased operating results and realized capital gains. Net income per
diluted share increased 10.7% due to increased net income and the positive
impacts of share repurchases.
PROPERTY-LIABILITY 1999 HIGHLIGHTS
|
·
|
Property-Liability
premiums written increased 4.5% in 1999, as a result of the acquisition of
CNA personal lines business and increases in policies in
force.
|
|
·
|
Property-Liability
underwriting income decreased to $527 million compared to $1.30 billion in
1998, as earned premium growth was offset by unfavorable loss costs,
restructuring and acquisition related charges and increased operating
expenses.
|
|
·
|
Completed the
acquisition of CNA personal lines.
|
|
·
|
Announced a series
of strategic initiatives to expand selling and service capabilities to
customers.
|
|
·
|
Commenced a
restructuring plan to reduce expenses and to finance strategic
initiatives.
|
|
·
|
Commenced a
reorganization of the multiple employee agency programs to a single
exclusive agency independent contractor program.
|
PROPERTY-LIABILITY
OPERATIONS
Overview
The Companys Property-Liability operations
consist of two business segments: PP&C and Discontinued Lines and
Coverages. PP&C is principally engaged in the sale of property and
casualty insurance, primarily private passenger auto and homeowners
insurance to individuals in the United States, and to a lesser extent, other
countries. Discontinued Lines and Coverages represents business no longer
written by Allstate, and includes the results from environmental, asbestos
and other mass tort exposures and other commercial lines of business in
run-off. This segment also included mortgage pool insurance business, which
the Company exited in 1999. Such groupings of financial information are
consistent with that used internally for evaluating segment performance and
determining the allocation of resources.
Underwriting results for each segment are
discussed separately beginning on page
A-6
. Summarized financial data and key operating ratios for Allstates
Property-Liability operations for the years ended December 31, are presented
in the following table.
($ in millions
except ratios) |
|
1999
|
|
1998
|
|
1997
|
Premiums
written |
|
$20,389 |
|
|
$19,515 |
|
$18,789 |
|
|
|
|
|
|
|
|
Premiums
earned |
|
$20,112 |
|
|
$19,307 |
|
$18,604 |
Claims and claims
expense |
|
14,679 |
|
|
13,601 |
|
13,336 |
Operating costs and
expenses |
|
4,833 |
|
|
4,402 |
|
4,145 |
Restructuring
charges |
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting
income |
|
527 |
|
|
1,304 |
|
1,123 |
Net investment
income |
|
1,761 |
|
|
1,723 |
|
1,746 |
Realized capital
gains and losses, after-tax |
|
609 |
|
|
514 |
|
511 |
Gain (loss) on
disposition of operations, after-tax |
|
(14 |
) |
|
25 |
|
46 |
Income tax expense
on operations |
|
571 |
|
|
816 |
|
790 |
|
|
|
|
|
|
|
|
Income before
equity in net income of unconsolidated subsidiary |
|
2,312 |
|
|
2,750 |
|
2,636 |
Equity in net
income of unconsolidated subsidiary |
|
|
|
|
10 |
|
34 |
|
|
|
|
|
|
|
|
Net
income |
|
$
2,312 |
|
|
$
2,760 |
|
$
2,670 |
|
|
|
|
|
|
|
|
Catastrophe
losses |
|
$
816 |
|
|
$
780 |
|
$
365 |
|
|
|
|
|
|
|
|
Operating
ratios |
|
|
|
|
|
|
|
Claims and claims expense (
loss) ratio |
|
73.0 |
|
|
70.4 |
|
71.7 |
Expense ratio |
|
24.4 |
|
|
22.8 |
|
22.3 |
|
|
|
|
|
|
|
|
Combined ratio |
|
97.4 |
|
|
93.2 |
|
94.0 |
|
|
|
|
|
|
|
|
Effect of catastrophe losses on
combined ratio |
|
4.1 |
|
|
4.0 |
|
2.0 |
|
|
|
|
|
|
|
|
Effect of restructuring and
acquisition related charges on combined
ratio |
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
PERSONAL PROPERTY
AND CASUALTY (PP&C) SEGMENT
In 1999, the Company announced a series of
strategic initiatives to aggressively expand selling and service
capabilities to its customers. These initiatives include creating a platform
that will provide consumers with sales and service capabilities through the
Internet and call centers, as well as through locally established Allstate
agencies. Other initiatives include the introduction of new competitive
pricing and underwriting techniques, new agency and claim technology and
enhanced marketing and advertising. The Company believes successful
implementation of the initiatives will result in selling and customer
service advantages in an increasingly competitive marketplace.
Summarized financial data and key operating
ratios for Allstates PP&C segment for the years ended December 31,
are presented in the following table.
($ in millions
except ratios) |
|
1999
|
|
1998
|
|
1997
|
Premiums
written |
|
$20,381 |
|
$19,516 |
|
$18,787 |
|
|
|
|
|
|
|
Premiums
earned |
|
$20,103 |
|
$19,307 |
|
$18,600 |
Claims and claims
expense |
|
14,642 |
|
13,572 |
|
13,333 |
Other costs and
expenses |
|
4,812 |
|
4,380 |
|
4,126 |
Restructuring
charges |
|
73 |
|
|
|
|
|
|
|
|
|
|
|
Underwriting
income |
|
$
576 |
|
$ 1,355 |
|
$ 1,141 |
|
|
|
|
|
|
|
Catastrophe
losses |
|
$
816 |
|
$
780 |
|
$
365 |
|
|
|
|
|
|
|
Operating
ratios |
|
Claims and claims expense (
loss) ratio |
|
72.8 |
|
70.3 |
|
71.7 |
Expense ratio |
|
24.3 |
|
22.7 |
|
22.2 |
|
|
|
|
|
|
|
Combined ratio |
|
97.1 |
|
93.0 |
|
93.9 |
|
|
|
|
|
|
|
Effect of catastrophe losses on
combined ratio |
|
4.1 |
|
4.0 |
|
2.0 |
|
|
|
|
|
|
|
PP&C premiums PP&C sells primarily private
passenger auto and homeowners insurance to individuals through the exclusive
Allstate agency channel, and in 1999 with the acquisition of CNA personal
lines, an expanded independent agency channel. The Company has historically
separated the voluntary personal auto insurance business into two categories
for underwriting purposes: the standard market and the non-standard market.
Generally, standard auto customers are expected to have lower risks of loss
than non-standard customers. The Company distinguishes between these risk
categories using factors unique to each customer such as the driving records
of the various drivers on the policy, the existence of prior insurance
coverage, the type of car owned or the customers financial stability.
The Company is implementing a refined pricing program that uses its
underwriting experience for these factors to price auto coverage for each
customer using a unique tier-based pricing model. Tier-based pricing allows
a much broader range of premiums to be offered to customers within the two
existing categories of risks. As a result, management believes that
tier-based pricing will allow the Company to compete more effectively and
operate more profitably. The Companys ability to implement these
strategies is generally subject to regulatory approval. Currently,
management expects to implement these strategies in approximately 15 states
during 2000 and the remaining states in 2001, or as the strategy receives
regulatory approval in each state. The Companys underwriting strategy
for homeowners is to target customers whose risk of loss provides the best
opportunity for profitable growth. This includes managing exposure on
policies in areas where the potential loss from catastrophes exceeds
acceptable levels.
The Companys marketing strategy is to
provide sales and service to new and existing customers in the distribution
channel of their choice. With the implementation of its strategic
initiatives, the Company will provide products in four major channels of
distribution. Customers will be able to access Allstate products through
exclusive agencies, call centers and the Internet, which will provide
consistent pricing and enhanced customer service. CNA personal lines and
Deerbrook Insurance Company products will be accessible through independent
agencies. Management expects the execution of this strategy, in conjunction
with the execution of new underwriting and pricing strategies, to improve
the opportunity for profitable growth.
Standard auto premiums written
increased 2.8% in 1999, to $11.44 billion, from $11.13 billion in 1998, due
primarily to the acquisition of CNA personal lines during the fourth quarter
of 1999 and a 1.9% increase in the
number of policies in force, offset by a 1.1% decrease in average premiums per
policy. Standard auto premiums written increased 2.6% in 1998, from $10.85
billion in 1997, due primarily to an increase in the number of renewal
policies in force and higher average premiums.
Average premium decreases in 1999 were caused
by competitive rate pressures due, in part, to increased consolidation in
the industry and competitors expanding and redefining their underwriting
risk selection and tolerance, favorable loss trends in recent years and
regulatory activities in some states. (See the discussion of regulatory
actions in New Jersey below.) Increases in average premiums in 1998 were
primarily attributable to a shift to newer and more expensive autos, and to
a lesser extent, rate increases. The Company expects premium growth to
continue to be limited by the competitive environment and the implementation
of new underwriting and pricing guidelines.
Excluding standard auto premiums written in
New Jersey, standard auto premiums written increased approximately 4.8% in
1999 as compared to 1998. Since the implementation of regulated rate and
coverage reductions in the state of New Jersey in March 1999, the Company
has experienced decreased premiums in the state, but also expects to see
corresponding improvement in future loss experience. While the impacts of
the rate reductions on premiums written will generally be fully realized in
the first quarter of 2000, impacts of coverage reductions on losses will not
be fully determinable until 2001.
Non-standard auto premiums written
increased 3.3% in 1999, to $3.46 billion, from $3.35 billion in 1998.
The increase was due to a 4.4% increase in the number of new policies in
force, primarily due to the expansion of non-standard auto into the states
of California and South Carolina, and additional independent agency
appointments during the year. This increase was partially offset by a 2.8%
decline in average premiums due to decreases in rates and a shift to
policyholders selecting less coverage. In 1998, non-standard auto premiums
written increased 6.0%, from $3.16 billion in 1997, due to an increase in
the number of renewal policies in force and, to a lesser extent, higher
average premiums. Management believes non-standard auto premiums written for
1999 and 1998 were adversely impacted by competitive pressures. In addition,
the introduction of new administrative requirements which were intended to
improve retention and decrease expenses related to the collection of
premiums, also negatively impacted the 1998 results.
Management is implementing programs to address
the emergence of adverse profitability trends in non-standard auto. These
programs include additional down payment requirements, new underwriting
guidelines and new rating plans, and are expected to adversely impact
written premium growth in the near term while improving profitability in the
future. The Company has filed, or plans to file additional rate increases
during 2000.
Homeowners premiums written increased 9.2%
in 1999, to $3.51 billion, from $3.21 billion in 1998. Homeowners premiums
written increased 7.8% in 1998, from $2.98 billion in 1997. Increases in
1999 were due to impacts from the acquisition of CNA personal lines during
the fourth quarter of 1999, and increases of 3.1% in policies in force and
2.0% in average premium. The increase in premiums written in 1998 was due to
an increase in the number of policies in force combined with higher average
premiums. Higher average premiums were due to increases in rates and insured
values in both years. The Company has filed, or plans to file additional
rate increases during 2000.
PP&C
underwriting results Underwriting income
decreased to $576 million in 1999 from $1.36 billion in 1998. The decrease
was due primarily to increases in premiums earned being more than offset by
the impacts of increased loss costs and the restructuring and acquisition
related charges incurred. Loss costs increased during 1999 due to increased
auto claim frequency (rate of claim occurrence) and auto and homeowners
claim severity (average cost per claim). Underwriting income increased in
1998 from $1.14 billion in 1997, due to increased premiums earned, favorable
claim frequency and favorable auto injury claim severity, partially offset
by increased catastrophe losses and increased homeowners claim severity.
Catastrophe losses for 1999 were $816 million compared with $780 million and
$365 million in 1998 and 1997, respectively.
Changes in claim severity are generally
influenced by inflation in the medical and auto repair sectors of the
economy. The Company mitigates these effects through various loss control
programs. Injury claims are affected largely by medical cost inflation while
physical damage claims are affected largely by auto repair cost inflation
and used car prices. Increases in injury claim severity experienced during
1999 were due in part to medical cost
inflationary pressures and were consistent with relevant medical cost indices.
Management believes the Companys claim settlement initiatives, such as
special investigative units used to detect fraud and handle suspect claims,
are contributing to the positive 1999 and 1998 injury severity trends.
Management believes severity may continue to be adversely affected as
inflationary pressures on medical costs outweigh the benefit of claim
settlement initiatives aimed at reducing claim severity.
For physical damage coverage, the Company
monitors its rate of increase in average cost per claim against the Body
Work price index and the Used Car price index. In 1999 and 1998, the Company
s physical damage coverage severity was consistent with prior years,
whereas related indices increased slightly during the year. Management
believes that the 1999 and 1998 results were largely impacted by the
application of enhanced claim settlement practices for auto physical damage
claims.
The restructuring charge incurred during 1999
was the result of implementing the cost reduction program announced on
November 10, 1999. The impact of the charge on the PP&C segment was $73
million, or $48 million after-tax, and related specifically to the
elimination of certain employee positions, the consolidation of operations
and facilities and the reorganization of its multiple employee agency
programs to a single exclusive agency independent contractor program. See
Note 11 to the consolidated financial statements for a more detailed
discussion of these charges.
Based on information developed from the
post-closing review of the acquired CNA personal lines business, the Company
recorded an acquisition charge of $58 million, or $37 million after-tax,
relating to different estimates of loss and loss expense reserves and asset
valuation allowances. The pretax charge is reflected in Claims and claims
expense and Other costs and expenses.
The 1999 and 1998 expense ratios increased
compared to prior years due primarily to the Companys investment in
various initiatives, such as increased advertising and technology, which are
intended to expand the business.
PP&C
catastrophe losses and catastrophe management Catastrophes are an
inherent risk of the property-liability insurance industry which have
contributed, and will continue to contribute, to potentially material
year-to-year fluctuations in Allstates results of operations and
financial position. A catastrophe is defined by Allstate as an
event that produces pre-tax losses before reinsurance in excess of $1
million, and involves multiple first party policyholders. Catastrophes are
caused by various events including, but not limited to, earthquakes,
wildfires, tornadoes, hailstorms, hurricanes, tropical storms, high winds
and winter storms.
The level of catastrophic losses experienced
in any year cannot be predicted and could potentially be material to results
of operations and financial position. While management believes the Company
s catastrophe management initiatives, described below, have reduced
the magnitude of possible future losses, the Company continues to be exposed
to catastrophes that may materially impact the Companys results of
operations and financial position.
The establishment of appropriate reserves for
losses incurred from catastrophes, as for all outstanding Property-Liability
claims, is an inherently uncertain process. Catastrophe reserve estimates
are regularly reviewed and updated, using the most current information and
estimation techniques. Any resulting adjustments, which may be material, are
reflected in current operations.
Allstate has limited, over time, its aggregate
insurance exposures in certain regions prone to catastrophes. These limits
include restrictions on the amount and location of new business production,
limitations on the availability of certain policy coverages, policy
brokering and increased participation in catastrophe pools. Allstate has
also requested and received rate increases and has expanded its use of
increased hurricane and earthquake deductibles in certain regions prone to
catastrophes. During 1999, the Company continued to make progress in
reducing its exposure to catastrophes in the northeastern United States (
Northeast). However, the initiatives are somewhat mitigated by
requirements of state insurance laws and regulations, as well as by
competitive considerations.
Allstate continues to support the enactment of
federal legislation that would reduce the impact to Allstate of catastrophic
natural disasters, such as earthquakes and hurricanes. Allstate is a
founding member of a coalition, the
Home Insurance Federation of America, whose members include property insurers
and insurance agents. The group is promoting measures in Congress that would
enable insurers and other eligible parties, including state disaster plans,
to purchase catastrophic-level reinsurance from the federal government. In
1999, the House Committee on Banking and Financial Services voted to refer a
bill, H.R. 21, the Homeowners Insurance Availability Act, to the full
House of Representatives for further consideration. H.R. 21 was not acted
upon by the House during its 1999 session. A comparable bill, S. 1361,
Natural Disaster Protection and Insurance Act of 1999, is pending in the
Senate Commerce, Science and Transportation Committee. Allstate cannot
predict whether this natural disaster legislation will be enacted or the
effect on Allstate if it were enacted.
For Allstate, areas of potential catastrophe
losses due to hurricanes include major metropolitan centers near the eastern
and gulf coasts of the United States. Exposure to potential earthquake
losses in California is limited by the Companys participation in the
California Earthquake Authority (CEA). Other areas in the United
States with exposure to potential earthquake losses include areas
surrounding the New Madrid fault system in the Midwest and faults in and
surrounding Seattle, Washington and Charleston, South Carolina. Allstate
continues to evaluate alternative business strategies to more effectively
manage its exposure to catastrophe losses in these and other
areas.
Florida Hurricanes
Allstate Floridian Insurance Company (Floridian) and
Allstate Floridian Indemnity Company (AFI) sell and service
Florida residential property policies. Floridian has access to reimbursement
from the Florida Hurricane Catastrophe Fund (FHCF) for 90% of
hurricane losses in excess of approximately the first $255 million for each
storm, up to an aggregate of $900 million (90% of approximately $1.00
billion) in a single hurricane season, and $1.23 billion total reimbursement
over all hurricane seasons.
The FHCF has the authority to issue bonds to
pay its obligations to participating insurers. The bonds issued by the FHCF
are funded by assessments on all property and casualty premiums written in
the state, except workers compensation and accident and health
insurance. These assessments are limited to 4% in the first year of
assessment, and up to a total of 6% for assessments in the second and
subsequent years. Assessments are recoupable immediately through increases
in policyholder rates. A rate filing or any portion of a rate change
attributable entirely to the assessment is deemed approved when made with
the State of Florida Department of Insurance (the Department),
subject to the Departments statutory authority to review the
adequacy of any rate at any time.
In addition to direct hurricane losses,
Floridian and AFI are also subject to assessments from the Florida Windstorm
Underwriting Association (FWUA) and the Florida Residential
Property and Casualty Joint Underwriting Association (FRPCJUA),
which are organizations created to provide coverage for catastrophic losses
to property owners unable to obtain coverage in the private market. Regular
assessments are levied on participating companies if the deficit in the
calendar year is less than or equal to 10% of Florida property premiums
industry-wide for that year. An insurer may recoup a regular assessment
through a surcharge to policyholders subject to a cap on the amount that can
be charged in any one year. If the deficit exceeds 10%, the FWUA and/or
FRPCJUA will fund the deficit through the issuance of bonds. The costs of
these bonds are then funded through a regular assessment in the first year
following the deficit and emergency assessments in subsequent years.
Companies are required to collect the emergency assessments directly from
the policyholder and remit these monies to the organizations as they are
collected. Participating companies are obligated to purchase any unsold
bonds issued by the FWUA and/or FRPCJUA. The insurer must file any
recoupment surcharge with the Department at least 15 days prior to imposing
the surcharge on any policies. The surcharge may be used automatically after
the expiration of the 15 days, unless the Department has notified the
insurer in writing that any of its calculations are incorrect.
While the statutes are designed so that the
ultimate cost is borne by the policyholders, the exposure to assessments and
availability of recoveries may not offset each other in the financial
statements due to timing and the possibility of policies not being renewed
in subsequent years.
Northeast Hurricanes
The Company has a three-year excess of loss reinsurance contract
covering property policies in the Northeast, effective June 1, 1997. The
reinsurance program provides up to 95% of $500 million of reinsurance
protection for catastrophe losses in excess of an estimated $750 million
retention subject to a limit of $500 million in any one year and an
aggregate limit of $1.00 billion over the three-year contract period. To
limit insurance exposure to catastrophe losses, deductibles on residential
property policies in the New York metropolitan area now include a hurricane
deductible that is triggered by hurricane winds greater than 100 miles per
hour.
California Earthquakes
Allstate participates in the CEA which is a privately-financed,
publicly-managed state agency created to provide insurance coverage for
earthquake damage. Insurers selling homeowners insurance in California are
required to offer earthquake insurance to their customers either through
their company or by participation in the CEA. The Companys homeowners
policy continues to include coverages for losses caused by explosions,
theft, glass breakage and fires following an earthquake, which are not
underwritten by the CEA.
Should losses arising from an earthquake cause
a deficit in the CEA, additional capital needed to operate the CEA would be
obtained through assessments of participating insurance companies, payments
received under reinsurance agreements and bond issuances funded by future
policyholder assessments. Participating insurers are required to fund an
assessment, not to exceed $2.15 billion, if the capital of the CEA falls
below $350 million. Participating insurers are required to fund a second
assessment, not to exceed $1.43 billion, if aggregate CEA earthquake losses
exceed $5.86 billion or the capital of the CEA falls below $350 million. At
December 31, 1999, the CEAs capital balance was approximately $485
million. If the CEA assesses its member insurers for any amount, the amount
of future assessments on members is reduced by the amounts previously
assessed. To date, the CEA has not assessed member insurers beyond the
startup assessment issued to participating insurers in 1996. The authority
of the CEA to assess participating insurers expires when it has completed
twelve years of operation. All future assessments to participating CEA
insurers are based on their CEA insurance market share as of December 31 of
the preceding year. As of December 31, 1999, the Company had 25.7% of the
CEA market share. Assuming its current CEA market share does not materially
change, Allstate does not expect its portion of these additional contingent
assessments, if any, to exceed $553 million, as the likelihood of an event
exceeding the CEA claims paying capacity of $5.86 billion is remote.
Management believes Allstates exposure to earthquake losses in
California has been significantly reduced as a result of its participation
in the CEA.
PP&C
Outlook
|
·
|
The competitive
environment has caused Allstate and other participants in the industry to
implement auto insurance rate decreases during 1999 and in prior years.
Management expects to see a stabilization of rates beginning in 2000, as
many competitors have publicly indicated their intentions to file rate
increases during the year. Planned rate changes and the Companys new
pricing and underwriting strategies may also adversely impact premium
revenues while intending to improve profitability.
|
|
·
|
The Company expects
to incur additional restructuring and related expenses of approximately
$100 million throughout 2000. The costs will be incurred as employee
positions are eliminated, as the transition to a single exclusive agency
independent contractor program proceeds, and to a lesser extent, as
operations and facilities are consolidated. These costs will be incurred
as part of a larger initiative to reduce expenses by $600 million to
finance the new strategic initiatives. The Company estimates it will
invest approximately $300 million in capital expenditures over the next
two years, and will spend approximately $700 million in systems
development and implementation costs, rollout costs and advertising for
the new strategy over the next two years.
|
|
·
|
The Company
implemented a program to transition from multiple employee agency programs
to a single exclusive agency independent contractor program, as part of
its restructuring initiative. This program is intended to service agencies
and customers more efficiently and cost-effectively. With this program,
the Company expects transitioning agents to select one of three
alternatives: i) conversion to an exclusive agency independent contractor;
ii) conversion to an exclusive agency independent contractor and sale of
an economic interest in their existing business; or iii) separation from
the Company either through a voluntary separation or retirement. If a
substantial number of transitioning agents do not convert to the new
contract or if converting agents have a decline in productivity, adverse
impacts to premiums could be experienced. Currently, the Company believes
these impacts will not be material.
|
|
·
|
The Company has
experienced favorable trends in injury severity that are expected to be
adversely impacted by inflationary increases in medical costs in the
future.
|
|
·
|
Federal legislation
has been passed that eliminates many federal and state law barriers to
affiliations among banks, securities firms, insurers and other financial
service providers. The impact this may have on the PP&C segment is
unknown at this time.
|
DISCONTINUED
LINES AND COVERAGES SEGMENT
Summarized underwriting results for the years
ended December 31, for the Discontinued Lines and Coverages segment are
presented in the following table.
($ in
millions) |
|
1999
|
|
1998
|
|
1997
|
Total underwriting
loss |
|
$49 |
|
$51 |
|
$18 |
|
|
|
|
|
|
|
Discontinued Lines and Coverages consists of
business no longer written by Allstate, including results from
environmental, asbestos and other mass tort exposures and other commercial
business in run-off. This segment also included mortgage pool insurance
business, which the Company exited in 1999.
During 1999, the Company strengthened its net
asbestos reserves by $346 million, which was partially offset by the
reduction of net reserves for environmental and other losses of $155 million
and the release of a reserve held as a provision for future losses on the
run-off of the mortgage pool business of $114 million. The strengthening of
net asbestos reserves and the release of net environmental and other
reserves was primarily the result of the Companys annual assessment of
these liabilities completed during the third quarter of the year. The
release of the provision for future losses on the mortgage pool business was
the result of a recapture, by The PMI Group, Inc., of the reinsured business
and all related assets and future liabilities of the mortgage pool
business.
PROPERTY-LIABILITY
NET INVESTMENT INCOME AND REALIZED CAPITAL GAINS
Pretax net
investment income Net investment income increased
in 1999 after decreasing in 1998 as compared to 1997. In 1999, positive cash
flows from operations, assets acquired with the CNA personal lines business
and increases in income from partnership interests, were partially offset by
dividends paid to The Allstate Corporation and lower investment yields.
Despite recent increases in interest rates, current investment yields are
still lower than average portfolio yields, therefore funds from called or
maturing investments were generally reinvested at lower yields resulting in
reduced investment income. If interest rates continue to rise, this trend
may reverse over time. The decrease in 1998 was primarily due to higher
investment balances being offset by the impact of lower investment
yields.
Realized capital
gains and losses after-tax Realized capital gains
and losses, after-tax were $609 million in 1999 compared to $514 million in
1998 and $511 million in 1997. Increased realized gains in 1999 were largely
the result of the timing of sales decisions reflecting managements
decision on positioning the portfolio, as well as assessments of individual
securities and overall market conditions. Realized gains in 1998 were
impacted by gains on the sale of a majority of the Companys real
estate property portfolio, partially offset by a decrease in gains on the
sales of securities due to less favorable market conditions.
Investment
Outlook
|
·
|
Investment income
growth for the Property-Liability operations will continue to be adversely
impacted by dividends paid to The Allstate Corporation and lower yields as
funds from called or maturing investments are reinvested at lower
yields.
|
PROPERTY-LIABILITY
CLAIMS AND CLAIMS EXPENSE RESERVES
Underwriting results of the Companys two
Property-Liability segments are significantly influenced by estimates of
property-liability claims and claims expense reserves (see Note 7 to the
consolidated financial statements). These reserves are an accumulation of
the estimated amounts necessary to settle all outstanding claims, including
claims which are incurred but not reported (IBNR), as of the
reporting date. These reserve estimates are based on known facts and
circumstances, internal factors including Allstates experience with
similar cases, historical trends involving claim payment patterns, loss
payments, pending levels of unpaid claims and product mix. In addition, the
reserve estimates are also influenced by external factors including court
decisions, economic conditions and public attitudes. The Company, in the
normal course of business, may also supplement its claims processes by
utilizing third party adjusters, appraisers, engineers, inspectors, other
professionals and information sources to assess and settle catastrophe and
non-catastrophe related claims. The effects of inflation are implicitly
considered in the reserving process.
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 necessary.
Changes in Allstates estimate of prior
year net loss reserves at December 31 are summarized in the following
table.
($ in
millions) |
|
1999
|
|
1998
|
|
1997
|
Reserve
re-estimates due to: |
|
Environmental and asbestos
claims |
|
$254 |
|
|
$100 |
|
|
$
|
|
All other property-liability
claims |
|
(841 |
) |
|
(800 |
) |
|
(677 |
) |
|
|
|
|
|
|
|
|
|
|
Pretax reserve
decrease |
|
$(587 |
) |
|
$(700 |
) |
|
$(677 |
) |
|
|
|
|
|
|
|
|
|
|
Favorable calendar year reserve development in
1999, 1998 and 1997 was the result of favorable injury severity trends, as
compared to the Companys anticipated trends, in each of the three
years. In 1999 and 1998, this favorable development more than offset adverse
developments in environmental, asbestos and other mass tort reserves. The
favorable injury severity trend during this three-year period was largely
due to moderate medical cost inflation mitigated by the Companys loss
control programs. The impacts of the moderate medical cost inflation trend
have developed over time as actual claim settlements validate the effect of
the rate of inflation. While the claim settlement process changes are
believed to have contributed to favorable severity trends on closed claims,
these changes introduce a greater degree of variability in reserve estimates
for the remaining outstanding claims at December 31, 1999. Future reserve
development releases, if any, are expected to be adversely impacted by
anticipated increases in medical cost inflation rates.
Allstates exposure to environmental,
asbestos and other mass tort claims stem principally from excess and surplus
business written from 1972 through 1985, including substantial excess and
surplus general liability coverages on Fortune 500 companies and reinsurance
coverage written during the 1960s through the 1980s, including reinsurance
on primary insurance written on large United States companies. Other mass
tort exposures primarily relate to product liability claims, such as those
for medical devices and other products, and general liabilities.
In 1986, the general liability policy form
used by Allstate and others in the property-liability industry was amended
to introduce an absolute pollution exclusion, which excluded
coverage for environmental damage claims and added an asbestos exclusion.
Most general liability policies issued prior to 1987 contain annual
aggregate limits for product liability coverage, and policies issued after
1986 also have an annual aggregate limit on all coverages. Allstates
experience to date is that these policy form changes have effectively
limited its exposure to environmental and asbestos claim risks.
Establishing net loss reserves for
environmental, asbestos and other mass tort claims is subject to
uncertainties that are greater than those presented by other types of
claims. Among the complications are lack of historical data, long reporting
delays, uncertainty as to the number and identity of insureds with potential
exposure, unresolved legal issues regarding policy coverage, availability of
reinsurance and the extent and timing of any such contractual liability. The
legal issues concerning the interpretation of various insurance policy
provisions and whether those losses are, or were ever intended to be
covered, are complex. Courts have reached different and sometimes
inconsistent conclusions as to when losses are deemed to have occurred and
which policies provide coverage; what types of losses are covered; whether
there is an insured obligation to defend; how policy limits are determined;
how policy exclusions are applied and interpreted; and whether clean-up
costs represent insured property damage. Management believes these issues
are not likely to be resolved in the near future.
The table below summarizes reserves and claim
activity for environmental and asbestos claims before (Gross) and after
(Net) the effects of reinsurance for the past three years.
|
|
1999
|
|
1998
|
|
1997
|
($ in
millions) |
|
Gross
|
|
Net
|
|
Gross
|
|
Net
|
|
Gross
|
|
Net
|
ENVIRONMENTAL
CLAIMS |
Beginning
reserves |
|
$
840 |
|
|
$641 |
|
|
$885 |
|
|
$685 |
|
|
$
947 |
|
|
$722 |
|
Incurred claims and
claims expense |
|
(109 |
) |
|
(96 |
) |
|
21 |
|
|
|
|
|
|
|
|
|
|
Claims and claims
expense paid |
|
(66 |
) |
|
(39 |
) |
|
(66 |
) |
|
(44 |
) |
|
(62 |
) |
|
(37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
reserves |
|
$
665 |
|
|
$506 |
|
|
$840 |
|
|
$641 |
|
|
$
885 |
|
|
$685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Survival ratio
environmental claims |
|
10.1 |
|
|
13.0 |
|
|
12.7 |
|
|
14.6 |
|
|
14.3 |
|
|
18.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASBESTOS
CLAIMS |
Beginning
reserves |
|
$
686 |
|
|
$459 |
|
|
$605 |
|
|
$417 |
|
|
$
774 |
|
|
$510 |
|
Incurred claims and
claims expense |
|
447 |
|
|
350 |
|
|
225 |
|
|
100 |
|
|
|
|
|
|
|
Claims and claims
expense paid |
|
(86 |
) |
|
(51 |
) |
|
(144 |
) |
|
(58 |
) |
|
(169 |
) |
|
(93 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
reserves |
|
$1,047 |
|
|
$758 |
|
|
$686 |
|
|
$459 |
|
|
$ 605 |
|
|
$417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Survival ratio
asbestos claims |
|
12.2 |
|
|
14.9 |
|
|
4.8 |
|
|
7.9 |
|
|
3.6 |
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Survival ratio
environmental and asbestos combined |
|
11.3 |
|
|
14.0 |
|
|
7.3 |
|
|
10.8 |
|
|
6.5 |
|
|
8.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The survival ratio is calculated by taking the
Companys ending reserves divided by payments made during the year. The
survival ratio, however, is an extremely simplistic approach to measuring
the adequacy of environmental and asbestos reserve levels. Many factors,
such as mix of business, level of coverage provided and settlement
procedures have significant impacts on the amount of environmental and
asbestos claims and claims expense reserves, ultimate payments thereof and
the resultant ratio. As payments result in corresponding reserve reductions,
survival ratios can be expected to vary over time. In 1999, the
environmental survival ratio decreased due to reduced reserve levels. In
1999 and 1998, the asbestos survival ratio increased due to increased
reserve levels and a decline in payments.
Pending, new, total closed and closed without
payment claims for environmental and asbestos exposures for the years ended
December 31, are summarized in the following table.
Number of
Claims |
|
1999
|
|
1998
|
|
1997
|
Pending, beginning
of year |
|
16,027 |
|
|
15,965 |
|
|
16,075 |
|
New |
|
2,991 |
|
|
2,032 |
|
|
1,728 |
|
Total
closed |
|
(3,154 |
) |
|
(1,970 |
) |
|
(1,838 |
) |
|
|
|
|
|
|
|
|
|
|
Pending, end of
year |
|
15,864 |
|
|
16,027 |
|
|
15,965 |
|
|
|
|
|
|
|
|
|
|
|
Closed without
payment |
|
2,357 |
|
|
1,460 |
|
|
1,311 |
|
|
|
|
|
|
|
|
|
|
|
Approximately 59%, 58% and 57% of the total
net environmental and asbestos reserves at December 31, 1999, 1998 and 1997,
respectively, represents IBNR.
Allstates reserves for environmental
exposures could be affected by the existing federal Superfund law and
similar state statutes. There can be no assurance that any Superfund reform
legislation will be enacted or that any such legislation will provide for a
fair, effective and cost-efficient system for settlement of Superfund
related claims. Management is unable to determine the effect, if any, that
such legislation will have on results of operations or financial
position.
Management believes its net loss reserves for
environmental, asbestos and other mass tort exposures are appropriately
established based on available facts, technology, laws and regulations.
However, due to the inconsistencies of court coverage decisions, plaintiffs
expanded theories of liability, the risks inherent in major
litigation and other uncertainties, the ultimate cost of these claims may
vary materially from the amounts currently
recorded, resulting in an increase in loss reserves. In addition, while the
Company believes the improved actuarial techniques and databases have
assisted in its ability to estimate environmental, asbestos and other mass
tort net loss reserves, these refinements may subsequently prove to be
inadequate indicators of the extent of probable losses. Due to the
uncertainties and factors described above, management believes it is not
practicable to develop a meaningful range for any such additional net loss
reserves that may be required.
Property-Liability
reinsurance ceded The Company purchases
reinsurance to limit aggregate and single exposures on large risks. Allstate
has purchased reinsurance primarily to mitigate losses arising from
catastrophes and long-tail liability lines, including environmental,
asbestos and other mass tort exposures. The Company retains primary
liability as a direct insurer for all risks reinsured. In connection with
the Companys acquisition of CNA personal lines, Allstate and CNA
entered into a four-year aggregate stop loss reinsurance agreement. The
Company currently has a reinsurance recoverable from CNA on unpaid losses of
$147 million that is subject to the reinsurance agreement. Allstate also has
access to reimbursement provided by the FHCF for 90% of hurricane losses in
excess of approximately the first $255 million for each storm, up to an
aggregate of $900 million (90% of approximately $1.00 billion) in a single
hurricane season, and $1.23 billion total reimbursement over all hurricane
seasons. Allstate also entered into a three-year excess of loss reinsurance
contract covering property policies in the Northeast, effective June 1,
1997. The reinsurance program provides up to 95% of $500 million of
reinsurance protection for catastrophe losses in excess of an estimated $750
million retention subject to a limit of $500 million in any one year and an
aggregate limit of $1.00 billion over the three-year contract period.
Additionally, in connection with the sale of the Companys reinsurance
business to SCOR U.S. Corporation in 1996, Allstate entered into a
reinsurance agreement for the post-1984 reinsurance liabilities. These
reinsurance arrangements have not had a material effect on Allstates
liquidity or capital resources.
The impact of reinsurance activity on Allstate
s reserve for claims and claims expense at December 31, 1999 is
summarized in the following table.
($ in
millions) |
|
Gross claims
and claims
expense reserves
|
|
Reinsurance
recoverable on
unpaid claims, net
|
Mandatory pools
& facilities |
|
$
969 |
|
$
662 |
Environmental &
asbestos |
|
1,712 |
|
448 |
Other |
|
15,133 |
|
543 |
|
|
|
|
|
Total
property-liability |
|
$17,814 |
|
$1,653 |
|
|
|
|
|
Reinsurance has been placed with insurance
companies after an evaluation of the financial security of the reinsurer, as
well as the terms and price of coverage. Developments in the insurance
industry have often led to the segregation of environmental, asbestos and
other mass tort exposures into separate legal entities with dedicated
capital. These actions have been supported by regulatory bodies in certain
cases. The Company is unable to determine the impact, if any, that these
developments will have on the collectibility of reinsurance recoverables in
the future. The Company had amounts recoverable from Lloyds of London
of $89 million and $99 million at December 31, 1999 and 1998, respectively.
Lloyds of London implemented a restructuring plan in 1996 to solidify
its capital base and to segregate claims for years prior to 1993. The
impact, if any, of the restructuring on the collectibility of the
recoverable from Lloyds of London is uncertain at this time. The
recoverable from Lloyds of London syndicates is spread among thousands
of investors who have unlimited liability. Excluding mandatory pools and
facilities and the CNA recoverable on unpaid losses, no other amount due or
estimated to be due from any one property-liability reinsurer was in excess
of $85 million and $84 million at December 31, 1999 and 1998,
respectively.
Estimating amounts of reinsurance recoverables
is also impacted by the uncertainties involved in the establishment of loss
reserves. Management believes the recoverables are appropriately
established; however, as the Companys underlying reserves continue to
develop, the amount ultimately recoverable may vary from amounts currently
recorded. The reinsurers and amounts recoverable therefrom are regularly
evaluated by the Company and a provision for uncollectible reinsurance is
recorded, if needed. The allowance for uncollectible reinsurance was $111
million and $141 million at December 31, 1999 and 1998,
respectively.
Allstate enters into certain intercompany
insurance and reinsurance transactions for the Property-Liability and Life
and Savings operations. Allstate enters into these transactions as a sound
and prudent business practice in order to maintain underwriting control and
spread insurance risk among various legal entities. These reinsurance
agreements have been approved by the appropriate regulatory authorities. All
significant intercompany transactions have been eliminated in
consolidation.
LIFE AND SAVINGS
1999 HIGHLIGHTS
|
·
|
Statutory premiums
and deposits increased 44.0% to $8.50 billion in 1999.
|
|
·
|
An alliance with
Putnam Investments, commenced in May 1999, generated sales of $832
million.
|
|
·
|
Separate Accounts
assets increased 37.2% driven by 60.4% growth in variable annuity product
sales, as well as strong performance in the underlying funds.
|
|
·
|
Completed the
acquisition of AHL, giving the Company a strong presence in the workplace
marketing distribution channel.
|
|
·
|
Income from
operations decreased 2.0% as higher profitability on life products and
variable annuities was offset by the impacts of restructuring and
acquisition related charges.
|
|
·
|
Net income
decreased 11.8% due primarily to decreased realized capital gains and
lower operating income.
|
LIFE AND SAVINGS OPERATIONS
($ in
millions) |
|
1999
|
|
1998
|
|
1997
|
Statutory premiums
and deposits |
|
$ 8,497 |
|
$ 5,902 |
|
$ 4,946 |
|
|
|
|
|
|
|
|
|
Investments |
|
$34,444 |
|
$31,765 |
|
$29,759 |
|
Separate Accounts
assets |
|
13,857 |
|
10,098 |
|
7,582 |
|
|
|
|
|
|
|
|
|
Investments,
including Separate Accounts assets |
|
$48,301 |
|
$41,863 |
|
$37,341 |
|
|
|
|
|
|
|
|
|
GAAP
Premiums |
|
$
891 |
|
$
889 |
|
$
955 |
|
Contract
charges |
|
732 |
|
630 |
|
547 |
|
Net investment
income |
|
2,260 |
|
2,115 |
|
2,085 |
|
Contract
benefits |
|
1,318 |
|
1,225 |
|
1,248 |
|
Credited
interest |
|
1,260 |
|
1,190 |
|
1,167 |
|
Operating costs and
expenses |
|
706 |
|
623 |
|
602 |
|
Restructuring
charges |
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
before tax |
|
591 |
|
596 |
|
570 |
|
Income tax
expense |
|
207 |
|
204 |
|
193 |
|
|
|
|
|
|
|
|
|
Operating
income
(1)
|
|
384 |
|
392 |
|
377 |
|
Realized capital
gains and losses, after-tax
(2)
|
|
101 |
|
158 |
|
123 |
|
Loss on disposition
of operations, after-tax |
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
Net
income |
|
$
485 |
|
$
550 |
|
$
497 |
|
|
|
|
|
|
|
|
|
(1)
|
The supplemental
operating information presented above allows for a more complete analysis
of results of operations. The net effects of gains and losses have been
excluded due to the volatility between periods and because such data is
often excluded when evaluating the overall financial performance of
insurers. Operating income should not be considered as a substitute for
any GAAP measure of performance. Our method of calculating operating
income may be different from the method used by other companies and
therefore comparability may be limited.
|
(2)
|
Net of the effect
of related amortization of deferred policy acquisition costs in 1999 and
1998.
|
Life and Savings
statutory premiums, deposits and contract charges
Life and Savings markets primarily life insurance, savings and group
pension products. Life insurance products consist of traditional products,
including term and whole life, interest-sensitive life, immediate annuities
with life contingencies, variable life and indexed life insurance. Savings
products include deferred annuities and immediate annuities without life
contingencies. Group pension products include contracts with fixed or
indexed rates and fixed terms, such as guaranteed investment contracts,
funding agreements and deferred and immediate annuities, or retirement
annuities. The segment also uses several brand identities. Generally,
Allstate brand products are sold through exclusive agencies, specialized
brokers and direct response marketing. Other brands such as Glenbrook Life
and Annuity, Northbrook Life, Lincoln Benefit Life and American Heritage
Life sell products through both exclusive and independent agencies,
securities firms, banks and direct response marketing. The products offered
in each brand are of similar types, with the exception of American Heritage
Life, which includes health and disability insurance in addition to life and
annuity products.
Statutory premiums and deposits, which include
premiums and deposits for all products, are used to analyze sales trends.
The following table summarizes statutory premiums and deposits by product
line.
($ in
millions) |
|
1999
|
|
1998
|
|
1997
|
Life
products |
|
|
Interest-sensitive |
|
$
777 |
|
$
821 |
|
$
804 |
Traditional |
|
367 |
|
325 |
|
317 |
Other |
|
534 |
|
241 |
|
188 |
|
|
|
|
|
|
|
Total life products |
|
1,678 |
|
1,387 |
|
1,309 |
Annuity
products |
|
|
Variable |
|
2,647 |
|
1,650 |
|
1,427 |
Fixed |
|
2,497 |
|
1,629 |
|
1,638 |
Group pension
products |
|
1,675 |
|
1,236 |
|
572 |
|
|
|
|
|
|
|
Total |
|
$8,497 |
|
$5,902 |
|
$4,946 |
|
|
|
|
|
|
|
Total statutory premiums and deposits
increased 44.0% in 1999, as compared to 1998. Statutory premiums on life
products increased 21.0% due to an increase in term life products with
higher face amounts, and correspondingly higher premiums, sales of a new
bank-owned life product, and the acquisition of AHL. In 1999, sales of
variable annuities increased 60.4% over 1998, primarily driven by $832
million of sales from the alliance with Putnam Investments which began in
May of 1999. Fixed annuities grew 53.3% in 1999 through the introduction of
new products and new marketing partnerships in the independent agency and
banking distribution channels, and the acquisition of AHL. Additional
statutory premiums on group pension products were generated during the year
primarily through the sale of funding agreements. Period to period
fluctuations in sales of group pension products, including funding
agreements, are largely due to managements actions based on the
assessment of market opportunities.
In 1998, statutory premiums and deposits
increased 19.3% from 1997 due to an increase of 15.6% in variable annuity
deposits impacted by strong sales in the securities firms, bank and
independent agency channels. Sales of interest-sensitive life and
traditional life products through Allstate agencies and independent agencies
also contributed to the growth.
Life and Savings sales during 1999 continued
to move toward products with greater sales volumes and lower profit margins.
In addition, the current interest rate environment and strong stock market
conditions continue to fuel strong growth in the fixed and variable annuity
product lines. Through the use of multiple distribution channels and a wide
range of product offerings, Life and Savings is well positioned to meet
changing customer needs.
Life and Savings
GAAP premiums and contract charges Under
generally accepted accounting principles (GAAP), premiums
represent revenue generated from traditional life products with significant
mortality risk. Revenues for interest-sensitive life insurance and fixed and
variable annuity contracts, for which deposits are treated as liabilities,
are reflected as contract charges. Immediate annuities may be purchased with
a life contingency whereby the mortality risk is a significant factor. For
this reason the GAAP revenues generated on these contracts are recognized as
premiums. The following table summarizes GAAP premiums and contract
charges.
($ in
millions) |
|
1999
|
|
1998
|
|
1997
|
Premiums |
|
|
Traditional
life |
|
$
342 |
|
$
316 |
|
$
319 |
Immediate annuities
with life contingencies |
|
240 |
|
305 |
|
347 |
Other |
|
309 |
|
268 |
|
289 |
|
|
|
|
|
|
|
Total premiums |
|
891 |
|
889 |
|
955 |
Contract
Charges |
|
|
Interest-sensitive
life |
|
527 |
|
474 |
|
430 |
Variable
annuities |
|
177 |
|
130 |
|
96 |
Other |
|
28 |
|
26 |
|
21 |
|
|
|
|
|
|
|
Total contract
charges |
|
732 |
|
630 |
|
547 |
|
|
|
|
|
|
|
Total Premiums and Contract
Charges |
|
$1,623 |
|
$1,519 |
|
$1,502 |
|
|
|
|
|
|
|
In 1999, total premiums were consistent with
1998 as higher traditional life premiums were offset by lower sales of
immediate annuities with life contingencies. Traditional life premiums
increased due to an increase in term life products with higher face amounts,
and correspondingly higher premiums, and an increase in renewal policies in
force. The types of immediate annuities sold may fluctuate significantly
from year to year, which impacts premiums reported. Other premiums increased
during 1999 due to the acquisition of AHL. Premiums decreased 6.9% in 1998
primarily due to lower sales of immediate annuities with life
contingencies.
Total contract charges increased 16.2% during
1999 as compared to 1998 due to higher variable annuity and
interest-sensitive life contract charges. Interest-sensitive life contract
charges increased primarily due to higher mortality charges as policyholders
age. Variable annuity contract charges increased primarily due to increases
in account value inforce, which was approximately $12.94 billion during 1999
compared to $9.15 billion in 1998, or an increase of 41.3%. Variable annuity
account values are increased by sales and market performance, which is
offset by surrenders, withdrawals and benefit payments, during each year.
During 1999, sales added $1.90 billion and market performance added $2.07
billion to the account value. This was offset by $1.13 billion in
surrenders, withdrawals and benefit payments. In 1998 the account values
increased $1.80 billion due to sales and $1.25 billion in market
performance, offset by $966 million in surrenders, withdrawals and benefit
payments. As variable annuity account values are impacted directly by market
performance, total variable annuity contract charges, which are calculated
as a percentage of each annuity account value, will fluctuate during the
year.
Life and Savings
net investment income Net investment income
increased 6.9% and 1.4% in 1999 and 1998, respectively. Increases in both
years were due to higher investment balances, partially offset by lower
portfolio yields. Investments, excluding Separate Accounts assets and
unrealized gains on fixed income securities, grew 16.0% and 6.1% in 1999 and
1998, respectively. In 1999, the increase was due to increased premiums and
contract charges, and also the impacts of the acquisition of AHL. Despite
recent increases in interest rates, current investment yields are still
lower than average portfolio yields, therefore funds from maturing
investments were generally reinvested at lower yields resulting in reduced
investment income. If interest rates continue to rise, this trend may
reverse over time.
Life and Savings
realized capital gains and losses Realized
capital gains and losses decreased in 1999 as compared to 1998, as 1998
capital gains reflected the sale of real estate and certain fixed income
securities during the year. In 1998, realized capital gains increased over
1997, due primarily to the sales of equity-linked securities, real estate
and pre-payments of fixed income securities.
Life and Savings
operating income Operating income decreased 2.0%
in 1999, as increased investment margins and contract charges were offset by
less favorable mortality margins, higher expenses and the impacts of the
restructuring and acquisition related charges. The 1998 operating income
increased 4.0% as compared to 1997 due to higher investment and mortality
margins, offset by increased expenses.
Investment margin, which represents the excess
of investment income earned over interest credited to policyholders and
contractholders, increased 8.8% due to increases in asset balances from new
sales. The difference between average investment yields and interest
credited during the year remained relatively constant with the prior year.
In 1998, the investment margins increased due to new sales, partly offset by
a slight decrease in the average investment yield. The weighted average
investment yield and the weighted average interest crediting rates during
1999, 1998 and 1997 are in the following table.
|
|
Weighted
average
investment yield
|
|
Weighted
average
interest crediting rate
|
|
|
1999
|
|
1998
|
|
1997
|
|
1999
|
|
1998
|
|
1997
|
Interest-sensitive
life products |
|
7.5 |
% |
|
7.8 |
% |
|
7.8 |
% |
|
5.5 |
% |
|
5.8 |
% |
|
5.8 |
% |
Fixed rate
contracts |
|
8.0 |
|
|
8.3 |
|
|
8.4 |
|
|
7.3 |
|
|
7.5 |
|
|
7.5 |
|
Flexible rate
contracts |
|
7.3 |
|
|
7.6 |
|
|
7.7 |
|
|
5.2 |
|
|
5.6 |
|
|
5.7 |
|
Fixed rate contracts include funding
agreements, immediate annuities and group pension products, while flexible
rate contracts include all other fixed annuities.
Mortality margin, which represents premiums
and cost of insurance charges in excess of related policy benefits,
decreased 9.0% during 1999. The decrease, which negatively impacts operating
income, was the result of a return to
an expected level of claims and average claim size as compared to favorable
mortality results in 1998. The 1998 favorable margin was due to an increase
in life insurance inforce and fewer claims.
Increased expenses during 1999 and 1998 are
due to additional investments in technology.
The restructuring charge incurred during 1999
was the result of the cost reduction program announced on November 10, 1999.
The impact of the charge on the Life and Savings segment totaled $8 million,
or $5 million after-tax, and related primarily to the elimination of
employee positions. See Note 11 to the consolidated financial statements for
a more detailed discussion of these charges.
Based on information developed from the
post-closing review of the acquired AHL business, the Company recorded an
acquisition charge of $32 million, or $26 million after-tax, primarily
relating to different estimates of loss reserves and asset valuation
allowances. The pretax charge is reflected in Contract charges, Contract
benefits and Operating costs and expenses.
Life and Savings
Outlook
|
·
|
Life and Savings
product growth will continue to be driven by a focus on multiple channels
of distribution and multiple products. With this focus management plans
to:
|
|
*
|
Emphasize alliance
partners, Putnam Investments, Morgan Stanley Dean Witter and PNC
Bank;
|
|
*
|
Perform ongoing
market assessments to capture opportunities for group pension and
immediate annuity products;
|
|
*
|
Develop the
Allstate Financial Advisor initiative, which includes implementing
financial planning services for customers;
|
|
*
|
Utilize a funding
agreement program;
|
|
*
|
Continue
wholesaling activities; and
|
|
*
|
Expand its Internet
presence.
|
|
·
|
Consistent with the
marketplace, Life and Savings sales continued to move towards lower profit
margin products, such as term life and variable annuities. These lower
profit margin products require a higher volume of business to increase the
Life and Savings operating results. Life and Savings achieved this
increased volume in 1999 and expects product growth to
continue.
|
|
·
|
Benefits derived
from investments in technology, distribution systems and restructuring are
expected to contribute to profitability.
|
|
·
|
The Company is
currently experiencing increased competition in the Life and Savings
segment. This competition is expected to continue and therefore increase
the need to reduce costs of distribution and increase economies of scale
in order to compete with larger traditional insurance companies, as well
as non-traditional competitors, such as banks and securities firms.
Federal legislation has also been passed that eliminates many federal and
state law barriers to affiliations among banks, securities firms, insurers
and other financial service providers. The impact this may have on the
Life and Savings segment is unknown at this time.
|
Market risk is the risk that the Company will
incur losses due to adverse changes in equity, interest, commodity, or
currency exchange rates and prices. The Companys primary market risk
exposures are to changes in interest rates, although the Company also has
certain exposures to changes in equity prices and foreign currency exchange
rates.
The active management of market risk is
integral to the Companys results of operations. The Company may use
the following approaches to manage its exposure to market risk within
defined tolerance ranges: 1) rebalance its existing asset or liability
portfolios, 2) change the character of future investments purchased or 3)
use derivative instruments to modify the market risk characteristics of
existing assets and liabilities or assets expected to be
purchased. The derivative financial instruments section in Investments
and Note 6 to the consolidated financial statements provides a more
detailed discussion of these instruments.
Corporate Oversight
The Company generates substantial investable
funds from its primary business operations, Property-Liability and Life and
Savings. In formulating and implementing policies for investing new and
existing funds, the Company seeks to earn returns that enhance its ability
to offer competitive rates and prices to customers while contributing to
attractive and stable profits and long-term capital growth for the Company.
Accordingly, the Companys investment decisions and objectives are a
function of the underlying risks and product profiles of each primary
business operation.
The Company administers and oversees the
investment risk management processes primarily through the Boards of
Directors and Investment Committees of its operating subsidiaries, and the
Credit and Risk Management Committee (CRMC). The Boards of
Directors and Investment Committees provide executive oversight of
investment activities. The CRMC is a senior management committee consisting
of the Chief Investment Officer, the Investment Risk Manager, and other
investment officers who are responsible for the day-to-day management of
market risk. The CRMC meets at least monthly to provide detailed oversight
of investment risk, including market risk.
The Company has investment guidelines that
define the overall framework for managing market and other investment risks,
including the accountabilities and controls over these activities. In
addition, the Company has specific investment policies for each of its
affiliates that delineate the investment limits and strategies that are
appropriate given each entitys liquidity, surplus, product, and
regulatory requirements.
The Company manages its exposure to market
risk through asset allocation limits, duration limits, value-at-risk limits,
through the use of simulation and, as appropriate, stress tests. Asset
allocation limits place restrictions on the aggregate fair value which may
be invested within an asset class. The Company has duration limits on the
Property-Liability and Life and Savings investment portfolios, and, as
appropriate, on individual components of these portfolios. These duration
limits place restrictions on the amount of interest rate risk which may be
taken. Value-at-risk limits the potential loss in fair value that could
arise from adverse movements in the fixed income, equity, and currency
markets over a time interval based on historical volatilities and
correlations between market risk factors. Simulation and stress tests
measure downside risk to fair value and earnings over longer time intervals
and/or for adverse market scenarios.
The day-to-day management of market risk
within defined tolerance ranges occurs as portfolio managers buy and sell
within their respective markets based upon the acceptable boundaries
established by the asset allocation, duration and other limits, including
but not limited to credit and liquidity.
Although the Company applies a common overall
governance approach to market risk where appropriate, the underlying
asset-liability frameworks and accounting and regulatory environments differ
markedly between Property-Liability and Life and Savings operations. These
differing frameworks affect each operations investment decisions and
risk parameters.
Interest Rate Risk
Interest rate risk is the risk that the Company
will incur economic losses due to adverse changes in interest rates. This
risk arises from many of the Companys primary activities, as the
Company invests substantial funds in interest-sensitive assets and also has
certain interest-sensitive liabilities, primarily in its Life and Savings
operations.
The Company manages the interest rate risk
inherent in its assets relative to the interest rate risk inherent in its
liabilities. One of the measures the Company uses to quantify this exposure
is duration. Duration measures the sensitivity of the fair value of assets
and liabilities to changes in interest rates. For example, if interest rates
increase 1%, the fair value of an asset with a duration of 5 years is
expected to decrease in value by approximately 5%. At December 31, 1999, the
difference between the Companys asset and liability duration was
approximately 0.62 years, versus a 0.11 year gap at December 31, 1998. This
positive duration gap indicates that the fair value of the Companys
assets is somewhat more sensitive to interest rate movements than the fair
value of its liabilities.
The major portion of the Companys
duration gap is determined by its Property-Liability operations, with the
primary liabilities of these operations being auto and homeowners claims. In
the management of investments supporting this business, Property-Liability
adheres to an objective of maximizing total after-tax return on capital and
earnings while ensuring the safety of funds under management and adequate
liquidity. This objective generally results in a duration mismatch between
Property-Liabilitys assets and liabilities within a defined tolerance
range.
Life and Savings seeks to invest premiums and
deposits to generate future cash flows that will fund future claims,
benefits and expenses, and earn stable margins across a wide variety of
interest rate and economic scenarios. In order to achieve this objective and
limit its exposure to interest rate risk, Life and Savings adheres to a
philosophy of managing the duration of assets and related liabilities. Life
and Savings uses interest rate swaps, futures, forwards, caps and floors to
reduce the interest rate risk resulting from duration mismatches between
assets and liabilities. In addition, Life and Savings uses financial futures
to hedge the interest rate risk related to anticipatory purchases and sales
of investments and product sales to customers.
To calculate duration, the Company projects
asset and liability cash flows, and discounts them to a net present value
basis using a risk-free market rate adjusted for credit quality, sector
attributes, liquidity and other specific risks. Duration is calculated by
revaluing these cash flows at an alternative level of interest rates, and
determining the percentage change in fair value from the base case. The cash
flows used in the model reflect the expected maturity and repricing
characteristics of the Companys derivative financial instruments, all
other financial instruments (as depicted in Note 6 to the consolidated
financial statements), and certain non-financial instruments including
unearned premiums, Property-Liability claims and claims expense reserves and
interest-sensitive annuity liabilities. The projections include assumptions
(based upon historical market and Company specific experience) reflecting
the impact of changing interest rates on the prepayment, lapse, leverage
and/or option features of instruments, where applicable. Such assumptions
relate primarily to mortgage-backed securities, collateralized mortgage
obligations, municipal housing bonds, callable municipal and corporate
obligations, and fixed rate single and flexible premium deferred annuities.
Additionally, the projections incorporate certain assumptions regarding the
renewal of Property-Liability policies.
Based upon the information and assumptions the
Company uses in its duration calculation and interest rates in effect at
December 31, 1999, management estimates that a 100 basis point immediate,
parallel increase in interest rates (rate shock) would decrease
the net fair value of its assets and liabilities identified above by
approximately $779 million, versus $660 million at December 31, 1998. In
addition, there are $3.10 billion of assets supporting life insurance
products which are not financial instruments and have not been included in
the above analysis. This amount has decreased from the $3.32 billion in
assets reported for December 31, 1998. According to the duration
calculation, in the event of a 100 basis point immediate increase in
interest rates, these assets would decrease in value by $131 million,
comparable to a decrease of $123 million reported for December 31, 1998. The
selection of a 100 basis point immediate parallel increase in interest rates
should not be construed as a prediction by the Companys management of
future market events, but rather, is intended to illustrate the potential
impact of such an event.
To the extent that actual results differ from
the assumptions utilized, the Companys duration and rate shock
measures could be significantly impacted. Additionally, the Companys
calculation assumes that the current relationship between short-term and
long-term interest rates (the term structure of interest rates) will remain
constant over time. As a result, these calculations may not fully capture
the impact of non-parallel changes in the term structure of interest rates
and/or large changes in interest rates.
Equity Price
Risk Equity price risk is the risk that the
Company will incur economic losses due to adverse changes in a particular
stock or stock index. At December 31, 1999, the Company had approximately
$5.38 billion in common stocks and $1.89 billion in other equity investments
(including primarily convertible securities and private equity securities).
Approximately 94% and 56% of these totals, respectively, represented
invested assets of the Property-Liability operations. At December 31, 1998,
the Company had $4.90 billion in common stocks and $1.90 billion in other
equity investments, and approximately 95% and 58%, respectively, represented
invested assets of the Property-Liability operations.
In addition to the above, at December 31, 1999
and December 31, 1998, Life and Savings had $1.25 billion and $823 million,
respectively, in equity-indexed annuity liabilities which provide customers
with contractually guaranteed participation in price appreciation of the
Standard & Poors 500 Composite Price Index (S&P 500
). Life and Savings hedges the risk associated with the price
appreciation component of the equity-indexed annuity liabilities through the
purchase of equity-indexed options, futures, and futures options and
eurodollar futures (the hedging portfolio). Any tracking error
is maintained within specified value-at-risk limits. In addition to the
options
purchased to hedge these annuity liabilities, Life and Savings has purchased
equity-indexed options as a means to diversify overall portfolio
risk.
The Companys largest equity exposure is
to declines in the S&P 500. As of December 31, 1999, the Companys
portfolio of equity instruments has a beta of approximately 0.87. Beta
represents a widely accepted methodology to describe, in mathematical terms,
an investments market risk characteristic. For example, if the S&P
500 decreases by 10%, management estimates that the fair value of its equity
portfolio will decrease by approximately 8.7%. Likewise, if the S&P 500
increases by 10%, management estimates that the fair value of its equity
portfolio will increase by approximately 8.7%. At December 31, 1998, the
Companys equity portfolio had a beta of 0.89.
Based upon the information and assumptions the
Company uses in its beta calculation and in effect at December 31, 1999,
management estimates that an immediate decrease in the S&P 500 of 10%
would decrease the net fair value of the Companys assets and
liabilities identified above by approximately $630 million, versus $603
million at December 31, 1998. The selection of a 10% immediate decrease in
the S&P 500 should not be construed as a prediction by the Company
s management of future market events, but rather, is intended to
illustrate the potential impact of such an event.
Beta was measured by regressing the monthly
stock price movements of the equity portfolio against movements in the S
&P 500 over a three year historical period. Portfolio beta was also
measured for the domestic equity portfolio by weighting individual stock
betas by the market value of the holding in the portfolio. The two
approaches to calculating portfolio beta yielded virtually identical
results. Since beta is historically based, projecting future price
volatility using this method involves an inherent assumption that historical
volatility and correlation relationships will remain stable. Therefore, the
results noted above may not reflect the Companys actual experience if
future volatility and correlation relationships differ from such historical
relationships.
Foreign Currency
Exchange Rate Risk Foreign currency risk is the
risk that the Company will incur economic losses due to adverse changes in
foreign currency exchange rates. This risk arises from the Companys
foreign equity investments and its international operations. The Company
also has certain fixed income securities that are denominated in foreign
currencies; however, the Company uses derivatives to hedge the foreign
currency risk of these securities (both interest payments and the final
maturity payment). At December 31, 1999, the Company had approximately $1.18
billion in foreign currency denominated equity securities and an additional
$520 million net investment in foreign subsidiaries. These amounts have
increased from $886 million and $472 million, respectively, as of December
31, 1998. The increase in equity securities is due to
increases in public equity holdings. Approximately 94% of the total of these
two sources of currency exposure represents invested assets of the
Property-Liability operations. This percentage has increased from 89% as of
December 31, 1998.
Based upon the information and assumptions in
effect at December 31, 1999, management estimates that, holding everything
else constant, a 10% immediate unfavorable change in each of the foreign
currency exchange rates to which the Company is exposed would decrease the
net fair value of its foreign currency denominated instruments (identified
above) by approximately $170 million, versus $136 million at December 31,
1998. The selection of a 10% immediate decrease in all currency exchange
rates should not be construed as a prediction by the Companys
management of future market events, but rather, is intended to illustrate
the potential impact of such an event. The Companys currency exposure
is well diversified across 32 countries, modestly decreased from 44
countries at December 31, 1998. The largest individual exposures at December
31, 1999 are to Canada (26%) and Japan (22%). The largest individual
exposures at December 31, 1998 were to Canada (30%) and Japan (12%). The
Companys primary regional exposure is to Western Europe with
approximately 47%, versus 50% at December 31, 1998.
The modeling technique the Company uses to
calculate its currency exposure does not take into account correlation among
foreign currency exchange rates, or correlation among various markets (i.e.,
the foreign exchange, equity and fixed-income markets). Even though the
Company believes it to be unlikely that all of the foreign currency exchange
rates to which it is exposed would simultaneously decrease by 10%, the
Company finds it meaningful to stress test its portfolio under
this and other hypothetical extreme adverse market scenarios. The Company
s actual experience may differ from the results noted above due to the
correlation assumptions utilized, or if events occur that were not included
in the methodology, such as significant liquidity or market
events.
CAPITAL RESOURCES
AND LIQUIDITY
Capital
resources Allstates capital resources
consist of shareholders equity, mandatorily redeemable preferred
securities and debt, representing funds deployed or available to be deployed
to support business operations. The following table summarizes our capital
resources at the end of the last three years:
($ in
millions) |
|
1999
|
|
1998
|
|
1997
|
Common stock and
retained earnings |
|
$15,256 |
|
|
$14,284 |
|
|
$12,825 |
|
Accumulated other
comprehensive income |
|
1,345 |
|
|
2,956 |
|
|
2,785 |
|
|
|
|
|
|
|
|
|
|
|
Total shareholders
equity |
|
16,601 |
|
|
17,240 |
|
|
15,610 |
|
Mandatorily
redeemable preferred securities |
|
964 |
|
|
750 |
|
|
750 |
|
Debt |
|
2,851 |
|
|
1,746 |
|
|
1,696 |
|
|
|
|
|
|
|
|
|
|
|
Total capital
resources |
|
$20,416 |
|
|
$19,736 |
|
|
$18,056 |
|
|
|
|
|
|
|
|
|
|
|
Ratio of debt to
total capital resources
(1)
|
|
16.3 |
% |
|
10.7 |
% |
|
11.5 |
% |
(1)
|
When analyzing the
Companys ratio of debt to total capital resources, various formulas
are used. In this presentation, debt includes 50% of mandatorily
redeemable preferred securities.
|
Shareholders
equity Shareholders equity decreased in
1999, as net income was offset by share repurchases and a decline in
unrealized capital gains. Shareholders equity increased in 1998
primarily as a result of net income.
Since 1995, the Company has repurchased 156
million shares of its common stock at a cost of $5.43 billion as part of
stock repurchase programs totaling $7.83 billion. The remaining programs are
expected to be completed by December 31, 2000. The Company has reissued 43.6
million shares, including 34.1 million shares used to fund the AHL
acquisition during 1999.
Mandatorily
redeemable preferred securities The balance of
mandatorily redeemable preferred securities increased in 1999, as the
outstanding mandatorily redeemable preferred securities FELINE PRIDES
originally issued by AHL, were consolidated into the Companys
results upon acquisition. FELINE PRIDES, consist of a unit with a stated
amount of $50 comprising i) a stock purchase contract under which the holder
will purchase from the Company on August 16, 2000, a number of Allstate
common shares equal to a specified rate, and ii) a beneficial ownership of a
6.75% trust preferred security representing a preferred undivided beneficial
interest in the assets of AHL Financing (the Trust), a Delaware
statutory business trust. The assets of the Trust are 6.75% debentures due
August 16, 2002. Under a shelf registration statement filed with the
Securities and Exchange Commission (SEC) in February 2000, the
Company may issue up to 7,398,387 shares of Allstate common stock upon
settlement of the purchase contracts of the FELINE PRIDES.
Debt
Consolidated debt increased in 1999, due to an increase in
short-term debt, the issuance of $750 million of 7.20% Senior Notes due 2009
and the issuance of a $75 million, 10-year note to CNA Financial Corporation
(CNA). The proceeds from the 7.20% Senior Note issuance were
used for general corporate purposes, including stock
repurchases.
Consolidated debt increased in 1998, the
result of increased short-term debt and the issuance of $250 million of
6.75% senior debentures due 2018 and $250 million of 6.90% senior debentures
due 2038. The net proceeds were used to fund the maturity of $300 million of
5.875% notes due June 15, 1998, and for general corporate purposes. These
increases were offset by the conversion of $357 million of 6.76%
Automatically Convertible Equity Securities into approximately 8.6 million
common shares of The PMI Group, Inc. held by Allstate.
The Company has access to additional borrowing
as follows:
|
·
|
Allstate has a
commercial paper program with an authorized borrowing limit of up to $1.00
billion to cover its short-term cash needs. At December 31, 1999, the
Company had outstanding commercial paper borrowings of $594 million with a
weighted average interest rate of 5.86%.
|
|
·
|
Allstate maintains
two credit facilities totaling $1.55 billion as a potential source of
funds to meet short-term liquidity requirements, including a $1.50
billion, five-year revolving line of credit expiring in 2001 and a $50
million, one-year revolving line of credit expiring in 2000. In order to
borrow on the five-year line of credit, Allstate Insurance Company (
AIC), a wholly owned subsidiary of the Company, is required to
maintain a specified statutory surplus level, and the Companys debt to
equity ratio (as defined in the agreement) must not exceed a designated
level. These requirements are currently being met and management expects
to continue to meet them in the future. There were no borrowings under
these lines of credit during 1999. Total borrowings under the combined
commercial paper program and the Allstate lines of credit are limited to
$1.55 billion.
|
|
·
|
AHL maintains three
lines of credit totaling $92 million as a potential source of funds to
meet short-term liquidity requirements. At December 31, 1999, $71 million
was outstanding on these lines with a weighted average interest rate of
6.47%.
|
|
·
|
At December 31,
1999, under a shelf registration statement filed with the SEC in August
1998, the Company may issue up to an additional $1.25 billion of debt
securities, preferred stock or debt warrants.
|
Capital
Transactions
|
·
|
On October 1, 1999,
the Company completed the acquisition of the personal lines auto and
homeowners insurance business of CNA. At closing, AIC made a cash payment
of $140 million to CNA for: i) certain assets of CNA used in connection
with that business; ii) access to the CNA agency distribution channel;
iii) infrastructure and employees of the business; iv) renewal rights to
the in-force business; and v) an option to acquire certain licensed
companies of CNA in the future. AIC will pay a license fee to CNA for the
use of certain of CNAs trademarks and access to the CNA personal
lines distribution channel for a period of up to six years. The license
fee will be based on a percentage of the aggregate premiums produced by
independent agents appointed by CNA personal lines prior to the
acquisition date. At closing, Allstate also issued a $75 million, 10-year
note to CNA, the principal repayment of which at maturity is contingent
upon certain profitability measures of the acquired business. The maximum
amount of principal which would have to be paid is $85 million and the
minimum amount is $65 million. In addition, as consideration for entering
into a 100% indemnity reinsurance agreement with CNA to reinsure the
in-force policy obligations of the business, AIC received cash of
approximately $1.2 billion and other assets.
|
|
·
|
On October 31,
1999, Allstate acquired all of the outstanding shares of AHL pursuant to a
merger agreement for $32.25 per share in cash and Allstate common stock,
in a transaction valued at $1.1 billion. AHL specializes in selling life,
health and disability insurance to individuals through their workplaces.
In order to fund the equity component of the consideration, the Company
reissued 34.1 million shares of Allstate common stock held in treasury to
AHL shareholders. The remaining $87 million portion of the consideration
was funded with cash.
|
|
·
|
In connection with
the acquisition of AHL, Allstate assumed AHLs obligations under the
outstanding mandatorily redeemable preferred securities originally issued
by AHL and the Trust.
|
|
·
|
On April 14, 1998,
the Company completed the purchase of Pembridge Inc. (Pembridge
) for approximately $275 million. Pembridge primarily sells
non-standard auto insurance in Canada through its wholly-owned subsidiary,
Pafco Insurance Company.
|
Financial ratings
and strength The following table summarizes the
Companys and its major subsidiaries debt and commercial paper
ratings and the insurance claims-paying ratings from various agencies at
December 31, 1999.
|
|
Moody
s
|
|
Standard
& Poors
|
|
A.M.
Best
|
The Allstate
Corporation (debt) |
|
A 1 |
|
A+ |
|
|
|
|
The Allstate
Corporation (commercial paper) |
|
P-1 |
|
A-1 |
|
|
|
|
Allstate Insurance
Company (claims-paying ability) |
|
Aa2 |
|
AA |
|
|
A |
+ |
Allstate Life
Insurance Company (claims-paying ability) |
|
Aa2 |
|
AA |
+ |
|
A |
+ |
American Heritage
Life Insurance Company (claims-paying ability) |
|
Aa3 |
|
AA |
|
|
A |
+ |
The Companys and its major subsidiaries
ratings are influenced by many factors including the amount of
financial leverage (i.e. debt), exposure to risks such as catastrophes, as
well as the current level of operating leverage.
Operating leverage for property-liability companies is measured by the ratio
of net premiums written to statutory surplus and serves as an indicator of
the Companys premium growth capacity. Ratios in excess of 3 to 1 are
considered outside the usual range by insurance regulators and rating
agencies. AICs premium to surplus ratio was 1.5x and 1.4x at December
31, 1999 and 1998, respectively.
The National Association of Insurance
Commissioners (NAIC) has a standard for assessing the solvency
of insurance companies, which is referred to as risk-based capital (RBC
). The requirement consists of a formula for determining each insurer
s RBC and a model law specifying regulatory actions if an insurer
s RBC falls below specified levels. The RBC formula for
property-liability companies includes asset and credit risks but places more
emphasis on underwriting factors for reserving and pricing. The RBC formula
for life insurance companies establishes capital requirements relating to
insurance, business, asset and interest rate risks. At December 31, 1999,
RBC for each of the Companys domestic insurance companies was
significantly above levels that would require regulatory
actions.
Liquidity
The Allstate Corporation is a holding company whose
principal operating subsidiaries include AIC and AHL. The Companys
principal sources of funds are dividend payments from AIC, intercompany
borrowings, funds from the settlement of Company benefit plans and funds
that may be raised periodically from the issuance of additional debt,
including commercial paper, or stock. The payment of dividends by AIC is
limited by Illinois insurance law, to formula amounts based on statutory net
income and statutory surplus, as well as the timing and amount of dividends
paid in the preceding twelve months. In the twelve month period beginning
January 1, 1999, AIC paid dividends of $2.96 billion, the maximum amount
allowed based on the 1998 formula amounts. Based on 1999 statutory net
income, the maximum amount of dividends AIC will be able to pay without
prior Illinois Department of Insurance approval at a given point in time
beginning in May 2000 is $1.96 billion, less dividends paid during the
preceding twelve months measured at that point in time. The Companys
principal uses of funds are the payment of dividends to shareholders, share
repurchases, intercompany lending to its insurance affiliates, debt service,
additional investments in its subsidiary affiliates and
acquisitions.
The principal sources of funds for the
Property-Liability operations are premiums, reinsurance, collections of
principal, interest and dividends from the investment portfolio, and
intercompany loans or equity investments from The Allstate Corporation. The
principal uses of funds by the Property-Liability operations are the payment
of claims and related expenses, operating expenses, dividends to The
Allstate Corporation, the purchase of investments, the repayment of
intercompany loans and the settlement of Company benefit plans.
The Companys Property-Liability
operations typically generate substantial positive cash flows from
operations as a result of most premiums being received in advance of the
time when claim payments are required. These positive operating cash flows,
along with that portion of the investment portfolio that is held in cash and
highly liquid securities, commercial paper borrowings and the Companys
lines of credit have met, and are expected to continue to meet, the
liquidity requirements of the Property-Liability operations. Catastrophe
claims, the timing and amount of which are inherently unpredictable, may
create increased liquidity requirements for the Property-Liability
operations of the Company.
The principal sources of funds for Life and
Savings are premiums, deposits, collection of principal, interest and
dividends from the investment portfolio, and capital contributions from AIC,
its parent. The primary uses of these funds are to purchase investments and
pay policyholder claims, benefits, contract maturities, contract surrenders
and withdrawals, operating costs, and dividends to AIC.
The maturity structure of Life and Savings
fixed income securities, which represent 81.6% of Life and Savings
total investments, is managed to meet the anticipated cash flow
requirements of the underlying liabilities. A portion of Life and Savings
diversified product portfolio, primarily fixed deferred annuity and
interest-sensitive life insurance products, is subject to discretionary
surrender and withdrawal by contractholders. Total surrender and withdrawal
amounts for Life and Savings were $2.78 billion, $2.11 billion and $1.90
billion in 1999, 1998 and 1997, respectively. As Life and Savings
interest-sensitive life policies and annuity contracts in force grow and
age, the dollar amount of surrenders and withdrawals could increase, as
experienced in 1999 and 1998. While the overall amount of surrenders may
increase in the future, a significant increase in the level of surrenders
relative to total
contractholder account balances is not anticipated. Management believes the
assets are sufficiently liquid to meet future obligations to the Life and
Savings contractholders under various interest rate scenarios.
The following table summarizes liabilities for
interest-sensitive Life and Savings products by their contractual withdrawal
provisions at December 31, 1999. Approximately 11.2% of these liabilities
are subject to discretionary withdrawal without adjustment.
($ in
millions) |
|
1999
|
Not subject to
discretionary withdrawal |
|
$10,624 |
Subject to
discretionary withdrawal with adjustments: |
|
Specified surrender
charges
(1)
|
|
14,223 |
Market value |
|
2,473 |
Subject to
discretionary withdrawal without adjustments |
|
3,463 |
|
|
|
Total |
|
$30,783 |
|
|
|
(1)
|
Includes $5.79
billion of liabilities with a contractual surrender charge of less than 5%
of the account balance.
|
INVESTMENTS
The composition of the investment portfolio at
December 31, 1999 is presented in the table below (see Notes 2 and 5 to the
consolidated financial statements for investment accounting policies and
additional information).
|
|
Property-Liability
|
|
Life and
Savings
|
|
Corporate
and Other
|
|
Total
|
($ in
millions) |
|
|
|
Percent
to total
|
|
|
|
Percent
to total
|
|
|
|
Percent
to total
|
|
|
|
Percent
to total
|
Fixed income
securities
(1)
|
|
$25,405 |
|
77.1 |
% |
|
$28,106 |
|
81.6 |
% |
|
$1,775 |
|
78.6 |
% |
|
$55,286 |
|
79.4 |
% |
Equity
securities |
|
6,113 |
|
18.6 |
|
|
624 |
|
1.8 |
|
|
1 |
|
|
|
|
6,738 |
|
9.7 |
|
Mortgage
loans |
|
187 |
|
0.6 |
|
|
3,881 |
|
11.3 |
|
|
|
|
|
|
|
4,068 |
|
5.8 |
|
Short-term |
|
1,227 |
|
3.7 |
|
|
713 |
|
2.1 |
|
|
482 |
|
21.4 |
|
|
2,422 |
|
3.5 |
|
Other |
|
11 |
|
|
|
|
1,120 |
|
3.2 |
|
|
|
|
|
|
|
1,131 |
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$32,943 |
|
100.0 |
% |
|
$34,444 |
|
100.0 |
% |
|
$2,258 |
|
100.0 |
% |
|
$69,645 |
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Fixed income
securities are carried at fair value. Amortized cost for these securities
was $25.47 billion, $27.94 billion and $1.88 billion for
Property-Liability, Life and Savings and Corporate and Other,
respectively.
|
Total investments increased to $69.65 billion
at December 31, 1999 from $66.53 billion at December 31, 1998.
Property-Liability investments were $32.94 billion at December 31, 1999 as
compared to $33.73 billion at December 31, 1998, as amounts invested from
positive cash flows generated from operations and additional assets acquired
with the CNA personal lines, were offset by dividends paid to The Allstate
Corporation during the year and declines in unrealized positions on fixed
income securities.
Life and Savings investments increased to
$34.44 billion at December 31, 1999, from $31.77 billion at December 31,
1998. The increase in Life and Savings investments was primarily due to
amounts invested from positive cash flows generated from operations and
additional investments acquired with AHL, partially offset by decreased
unrealized capital gains on fixed income and equity securities.
Fixed income
securities Allstates fixed income
securities portfolio consists of tax-exempt municipal bonds, publicly traded
corporate bonds, privately-placed securities, mortgage-backed securities,
asset-backed securities, foreign government bonds, redeemable preferred
stock and U.S. government bonds. Allstate generally holds its fixed income
securities to maturity, but has classified all of these securities as
available for sale to allow maximum flexibility in portfolio management. At
December 31, 1999, unrealized net capital losses on the fixed income
securities portfolio totaled $7 million compared to an unrealized gain of
$3.61 billion as of December 31, 1998. The decrease in the unrealized gain
position is primarily attributable to an increase in interest rates at the
end of the year. As of December 31, 1999, 68.9% of the consolidated fixed
income securities portfolio was invested in taxable securities.
At December 31, 1999, 93.7% of the Company
s fixed income securities portfolio was rated investment grade, which
is defined by the Company as a security having an NAIC rating of 1 or 2, a
Moodys rating of Aaa, Aa, A or Baa, or a comparable Company internal
rating. The quality mix of Allstates fixed income securities portfolio
at December 31, 1999 is presented in the following table.
($ in
millions) |
|
|
|
|
|
|
NAIC
ratings
|
|
Moodys
equivalent description
|
|
Fair
value
|
|
Percent to
total
|
1 |
|
Aaa/Aa/A |
|
$
42,697 |
|
77.2 |
% |
2 |
|
Baa |
|
9,135 |
|
16.5 |
|
3 |
|
Ba |
|
1,867 |
|
3.4 |
|
4 |
|
B |
|
1,241 |
|
2.2 |
|
5 |
|
Caa or
lower |
|
261 |
|
.5 |
|
6 |
|
In or near
default |
|
85 |
|
.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 55,286 |
|
100.0 |
% |
|
|
|
|
|
|
|
|
Included among the securities that are rated
below investment grade are both public and privately-placed high-yield bonds
and securities that were purchased at investment grade but have since been
downgraded. The Company mitigates the credit risk of investing in below
investment grade fixed income securities by limiting the percentage of these
investments that can be carried in its portfolio, and through
diversification of the portfolio. Based on these limits, a minimum of 93% of
the Companys fixed income securities portfolio will be investment
grade.
Over 34% of the Companys fixed income
securities portfolio at December 31, 1999 was invested in municipal bonds of
which 92.2% are rated as investment grade. The municipal bond portfolio
consisted of approximately 6,000 issues from nearly 2,000 issuers. The
largest exposure to a single issuer was less than 1.0% of the
portfolio.
As of December 31, 1999, the fixed income
securities portfolio contained $8.62 billion of privately-placed corporate
obligations, compared with $9.69 billion at December 31, 1998. The benefits
of privately-placed securities as compared to public securities are
generally higher yields, improved cash flow predictability through pro-rata
sinking funds on many bonds, and a combination of covenant and call
protection features designed to better protect the holder against losses
resulting from credit deterioration, reinvestment risk and fluctuations in
interest rates. A relative disadvantage of privately-placed securities as
compared to public securities is reduced liquidity. At December 31, 1999,
91.3% of the privately-placed securities were rated as investment grade by
either the NAIC or the Companys internal ratings. The Company
determines the fair value of privately-placed fixed income securities based
on discounted cash flows using current interest rates for similar
securities.
At December 31, 1999 and 1998, $7.88 billion
of the fixed income securities portfolio was invested in mortgage-backed
securities (MBS). The MBS portfolio consists primarily of
securities which were issued by or have underlying collateral that is
guaranteed by U.S. government agencies or sponsored entities, thus
minimizing credit risk.
The MBS portfolio is subject to interest rate
risk since the price volatility and ultimate realized yield are affected by
the rate of repayment of the underlying mortgages. Allstate attempts to
limit interest rate risk on these securities by investing a portion of the
portfolio in securities that provide prepayment protection. At December 31,
1999, over 33% of the MBS portfolio was invested in planned amortization
class bonds.
The fixed income securities portfolio
contained $3.90 billion and $4.25 billion of asset-backed securities (
ABS) at December 31, 1999 and 1998, respectively. The ABS
portfolio is subject to credit and interest rate risk. Credit risk is
mitigated by monitoring the performance of the collateral. Approximately 51%
of all securities are rated in the highest rating category by one or more
credit rating agencies. Interest rate risk is similar to the risks posed by
MBS, however to a lesser degree because of the nature of the underlying
assets. Over 45% of the Companys ABS are invested in securitized
credit card receivables. The remainder of the portfolio is backed by
securitized home equity, manufactured housing and auto loans.
Allstate closely monitors its fixed income
securities portfolio for declines in value that are other than temporary.
Securities are placed on non-accrual status when they are in default or when
the receipt of interest payments is in doubt.
Mortgage loans
and real estate Allstates $4.07 billion
investment in mortgage loans at December 31, 1999 is comprised primarily of
loans secured by first mortgages on developed commercial real estate, and is
primarily held in the Life and Savings operations. Geographical and property
type diversification are key considerations used to manage Allstates
mortgage loan risk.
Allstate closely monitors its commercial
mortgage loan portfolio on a loan-by-loan basis. Loans with an estimated
collateral value less than the loan balance, as well as loans with other
characteristics indicative of higher than normal credit risk, are reviewed
by financial and investment management at least quarterly for purposes of
establishing valuation allowances and placing loans on non-accrual status.
The underlying collateral values are based upon discounted property cash
flow projections, which are updated as conditions change or at least
annually.
During 1998, the Company sold the majority of
its real estate properties but continues to hold equity interests in several
publicly traded real estate investment trusts and private securities which
are classified as equity securities.
Equity securities
and short-term investments The Companys
equity securities portfolio was $6.74 billion at December 31, 1999 compared
to $6.42 billion in 1998. The increase can be attributed to general market
appreciation.
The Companys short-term investment
portfolio was $2.42 billion and $2.48 billion at December 31, 1999 and 1998,
respectively. Allstate invests available cash balances primarily in taxable
short-term securities having a final maturity date or redemption date of one
year or less.
YEAR
2000
In 1995, the Company commenced a four phase
plan which included reprogramming, remediating or replacing computer systems
and equipment which may have failed to operate properly in or after the year
1999, due to the inability of the systems and equipment to recognize the
last two digits of the year in any date (Year 2000). Because of
the comprehensiveness of this plan, and its timely completion, the Company
has experienced no material impacts on its results of operations, liquidity
or financial position due to the Year 2000 issue. The Company expects to
incur total costs related to this plan of $109 million between the years of
1995 and 2000. These costs are expensed as incurred.
The Company is also potentially exposed to
Year 2000 risks associated with certain personal lines policies that have
been issued. While coverage may exist for some Year 2000 related losses
under Allstates personal auto or homeowners insurance policies, many
Year 2000 related losses will not be covered by these policies. Losses
incurred due to mere failures of personal electronic devices to function as
intended by their manufacturer or distributor, or as expected by the
policyholder, are not the type of losses which would be covered by the
Companys personal auto or homeowners insurance policies. Such product
failures are considered to be product warranty issues best addressed between
the policyholder and the manufacturer or distributor of the products.
However, certain other types of Year 2000-related losses may be covered
under the Companys policies, depending upon the particular
circumstances of the loss and the type of policy in force at the time of
loss. Some of the Companys homeowners policies, for instance, provide
significantly broader protection than others, and therefore may provide
coverage for certain types of losses. The Company also is exposed to Year
2000 risks associated with certain commercial policies that have been
issued. Since the commercial business written by the Company is not material
to the overall results of operations of the Company, management believes
that Year 2000-related losses associated with these lines do not pose a
material risk to the Company. However, with respect to both personal lines
and commercial policies, in determining whether coverage exists in any
particular circumstance, all facts of the loss as well as the applicable
policy terms, conditions and exclusions will be reviewed. The Company
currently does not expect the impacts of such losses, if any, on its results
of operations, liquidity or financial position to be material.
REGULATION AND
LEGAL PROCEEDINGS
Regulation
The Companys insurance businesses are subject to
the effects of changing social, economic and regulatory environments. Public
and regulatory initiatives have varied and have included efforts to adversely
influence and restrict premium rates, restrict the Companys ability to
cancel policies, impose underwriting standards and expand overall
regulation. The ultimate changes and eventual effects, if any, of these
initiatives are uncertain.
Legal proceedings
Allstate and plaintiffs representatives
have agreed to settle certain civil suits filed in California, including a
class action, related to the 1994 Northridge, California earthquake. The
class action settlement received final approval from the Superior Court of
the State of California for the County of Los Angeles on June 11, 1999. The
plaintiffs in these civil suits challenged licensing and engineering
practices of certain firms Allstate retained and alleged that Allstate
systematically pressured engineering firms to improperly alter their reports
to reduce the loss amounts paid to some insureds with earthquake claims.
Under the terms of the settlement, Allstate sent notice to approximately
11,500 homeowner customers inviting them to participate in a
court-administered program which may allow for review of their claims by an
independent engineer and an independent adjusting firm to ensure that they
have been adequately compensated for all structural damage from the 1994
Northridge earthquake covered under the terms of their Allstate policies. It
is anticipated that approximately 2,500 of these customers will ultimately
participate in this independent review process. Allstate has agreed to
retain an independent consultant to review, among other things, Allstate
s practices and procedures for handling catastrophe claims, and has
helped fund a charitable foundation devoted to consumer education on loss
prevention and consumer protection and other insurance issues. The Company
does not expect that the effect of the proposed settlement will exceed the
amounts currently reserved. During August 1999, a group of objectors filed
an appeal from the order approving the settlement. That appeal is
pending.
In April 1998, Federal Bureau of Investigation
agents executed search warrants at three Allstate offices for documents
relating to the handling of certain claims for losses resulting from the
Northridge earthquake. Allstate is cooperating with the investigation, which
is being directed by the United States Attorneys Office for the
Central District of California. At present, the Company cannot determine the
impact of resolving the investigation.
For the past five years, the Company has been
distributing to certain PP&C claimants, documents regarding the claims
process and the role that attorneys may play in that process. Suits
challenging the use of these documents have been filed against the Company,
including purported class action suits. In addition to these suits, the
Company has received inquires from states attorneys general, bar
associations and departments of insurance. In certain states, the Company
continues to use these documents after agreeing to make certain
modifications. The Company is vigorously defending its rights to use these
documents. The outcome of these disputes is currently uncertain.
There are currently several state and
nationwide putative class action lawsuits pending in various state courts
seeking actual and punitive damages from Allstate alleging breach of
contract and fraud because of its specification of aftermarket (non-original
equipment manufacturer) replacement parts in the repair of insured vehicles.
Plaintiffs in these suits allege that aftermarket parts are not of
like kind and quality as required by the insurance policies. The
lawsuits are in various stages of development with no class action having
been certified. The outcome of these disputes is currently
uncertain.
Allstate is defending lawsuits, including two
putative class actions, regarding worker classification. Two suits relate to
the classification of California exclusive agents as independent
contractors. These suits were filed after Allstates reorganization of
its California agency programs in 1996. The plaintiffs, among other things,
seek a determination that they have been treated as employees
notwithstanding agent contracts that specify that they are independent
contractors for all purposes. Another suit relates to the classification of
staff working in agency offices. In this putative class action, plaintiffs
seek damages under the Employee Retirement Income Security Act and the
Racketeer Influenced and Corrupt Organizations Act alleging that 10,000
agency secretaries were terminated as employees by Allstate and rehired by
agencies through outside staffing vendors for the purpose of avoiding the
payment of employee benefits. Allstate is vigorously defending these
lawsuits. The outcome of these disputes is currently uncertain.
Various other legal and regulatory actions are
currently pending that involve Allstate and specific aspects of its conduct
of business, including some related to the Northridge earthquake, and like
other members of the insurance industry, the Company is the target of an
increasing number of class action lawsuits. These class actions are based on
a variety of issues including insurance and claim settlement practices. At
this time, based on their present status, it is the opinion of management
that the ultimate liability, if any, in one or more of these other actions
in excess of amounts currently reserved is not expected to have a material
effect on the results of operations, liquidity or financial position of the
Company.
Shared Markets
As a condition of its license to do business in
various states, the Company is required to participate in mandatory
property-liability shared market mechanisms or pooling arrangements, which
provide various insurance coverages to individuals or other entities that
otherwise are unable to purchase such coverage voluntarily provided by
private insurers. Underwriting results related to these organizations have
been immaterial to the results of operations.
Guaranty Funds
Under state insurance guaranty fund laws,
insurers doing business in a state can be assessed, up to prescribed limits,
for certain obligations of insolvent insurance companies to policyholders
and claimants. The Companys expenses related to these funds have been
immaterial.
OTHER
DEVELOPMENTS
|
·
|
The NAIC has
approved a January 1, 2001 implementation date for newly developed
statutory accounting principles (codification). Each company,
however, must adhere to the implementation date adopted by their state of
domicile. Forty-nine states have indicated their intention to adopt the
codification as of January 1, 2001. States continue to review codification
requirements to determine if revisions to existing state laws and
regulations are necessary. The implementation of codification is not
expected to have a material impact on the statutory surplus of the Company
s insurance subsidiaries.
|
PENDING ACCOUNTING
STANDARDS
In June 1999, the Financial Accounting
Standards Board (FASB) delayed the effective date of Statement
of Financial Accounting Standard (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities.
SAFS No. 133 replaces existing pronouncements and practices with a single,
integrated accounting framework for derivatives and hedging activities. This
statement requires that all derivatives be recognized on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities or firm
commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. Additionally, the change in
fair value of a derivative which is not effective as a hedge will be
immediately recognized in earnings. The delay was effected through the
issuance of SFAS No. 137, which extends the effective date of SFAS No. 133
requirements to fiscal years beginning after June 15, 2000. As such, the
Company expects to adopt the provisions of SFAS No. 133 as of January 1,
2001. The impact of this statement is dependent upon the Companys
derivative positions and market conditions existing at the date of adoption.
Based on existing interpretations of the requirements of SFAS No. 133, the
impact of adoption is not expected to be material to the results of
operations or financial position of the Company.
FORWARD-LOOKING
STATEMENTS AND RISK FACTORS AFFECTING ALLSTATE
This document contains forward-looking
statements that anticipate results based on managements plans
that are subject to uncertainty. These statements are made subject to the
safe-harbor provisions of the Private Securities Litigation Reform Act of
1995.
Forward-looking statements do not relate
strictly to historical or current facts and may be identified by their use
of words like plans, expects, will,
anticipates, estimates, intends,
believes and other words with similar meanings. These statements
may address, among other things, our strategy for growth, product
development, regulatory approvals, market position, expenses, financial
results and reserves. Forward-looking statements are based on management
s current expectations of future events. We cannot guarantee that any
forward-looking statement will be accurate. However, we believe that our
forward-looking statements are based on reasonable, current expectations and
assumptions. We assume no obligation to update any forward-looking
statements as a result of new information or future events or
developments.
If the expectations or assumptions underlying
our forward-looking statements prove inaccurate or if risks or uncertainties
arise, actual results could differ materially from those communicated in our
forward-looking statements. In addition to the normal risks of business,
Allstate is subject to significant risk factors, including those listed
below which apply to it as an insurance business.
|
·
|
The implementation
of Allstates multi-access distribution model involves risks and
uncertainties that could have a material adverse effect on Allstates
results of operations, liquidity or financial position. More specifically,
the following factors could affect Allstates ability to successfully
implement various aspects of its new multi-access distribution
model:
|
|
The success
of Allstates proposed direct response call centers may be adversely
affected by the limited pool of individuals suited and trained to do such
work in any geographic area, particularly in light of the current low
unemployment rate. The absence of seasoned staff could be a factor
impeding the training of staff and the roll-out of the call centers
because they represent a new initiative by Allstate involving virtually
all new hires.
|
|
Allstate
s reorganization of its multiple employee agency programs into a
single exclusive agency independent contractor program may have a
temporary negative impact on written premium. As the reorganization
proceeds, many agents will be deciding whether to convert to independent
contractor status and remain with Allstate; to convert to independent
contractor status and sell their economic interest in their book of
businesses to an Allstate-approved buyer; or to retire or otherwise
voluntarily separate from Allstate. The distractions of this decision
making process and the possible departure of some agents may lead to
decreased sales. In addition, possible litigation regarding the
reorganization could diminish the gains in efficiency and
cost-effectiveness that Allstate expects to realize from the transition to
one program.
|
|
Allstate
s reorganization of its multiple employee agency programs into a
single exclusive agency independent contractor program, as well as its
plans to sell and service its products through direct response call
centers and the Internet, are dependent upon its ability to adapt current
computer systems and to develop and implement new systems.
|
|
·
|
There is inherent
uncertainty in the process of establishing property-liability loss
reserves, particularly reserves for the cost of environmental, asbestos
and other mass tort claims. This uncertainty arises from a number of
factors, including ongoing interpretation of insurance policy provisions
by courts, inconsistent decisions in lawsuits regarding coverage and
expanded theories of liability. In addition, on-going changes in claims
settlement practices can lead to changes in loss payment patterns.
Moreover, while management believes that improved actuarial techniques and
databases have assisted in estimating environmental, asbestos and other
mass tort net loss reserves, these refinements may subsequently prove to
be inadequate indicators of the extent of probable loss. Consequently,
ultimate losses could materially exceed established loss reserves and have
a material adverse effect on our results of operations, liquidity or
financial position.
|
|
·
|
Allstate has
experienced, and continues to expect to experience, catastrophe losses.
While we believe that our catastrophe management initiatives have reduced
the magnitude of possible future losses, Allstate continues to be exposed
to catastrophes that could have a material adverse impact on results of
operations, liquidity or financial position. Catastrophic events in the
future may indicate that the techniques and data that are used to predict
the probability of catastrophes and the extent of the resulting losses are
inaccurate.
|
|
·
|
Changes in market
interest rates can have adverse effects on Allstates investment
portfolio, investment income and product sales. Increases in market
interest rates have an adverse impact on the value of the investment
portfolio by decreasing capital gains. In addition, increases in market
interest rates as compared to rates offered on some of the Life and
Savings segments products make those products less attractive and
therefore decrease sales. Declining market interest rates have an adverse
impact on Allstates investment income as Allstate invests positive
cash flows from operations and reinvests proceeds from maturing and called
investments in new investments yielding less than the portfolios
average rate. Despite recent increases, current market interest rates are
lower than the Allstate portfolio average rate.
|
|
·
|
In order to meet
the anticipated cash flow requirements of its obligations to
policyholders, from time to time Allstate adjusts the effective duration
of the assets and liabilities of the Life and Savings segments
investment portfolio. Those adjustments may have an impact on the value of
the investment portfolio and on investment income.
|
|
·
|
The insurance
business is subject to extensive regulationparticularly at the state
level. Many of these restrictions affect Allstates ability to
operate and grow its businesses in a profitable manner. In particular, the
PP&C segments implementation of a tiered-based pricing model for
its private passenger auto business is subject to state regulation of auto
insurance rates.
|
|
·
|
Recently, the
competitive pricing environment for private passenger auto insurance has
put pressure on the PP&C segments premium growth and profit
margins. Allstates management believes that this pressure is abating
and that industry participants may begin to raise auto insurance rates in
2000. However, because Allstates PP&C segments loss ratio
compares favorably to the industry, state regulatory authorities may
resist our efforts to raise rates or to maintain them at current
levels.
|
|
·
|
Allstate is a
holding company with no significant business operations of its own.
Consequently, to a large extent, its ability to pay dividends and meet its
debt payment obligations is dependent on dividends from its subsidiaries,
primarily AIC.
|
|
·
|
State insurance
regulatory authorities require insurance companies to maintain specified
levels of statutory capital and surplus. In addition, competitive
pressures require Allstates subsidiaries to maintain financial
strength or claims-paying ability ratings. These restrictions affect
Allstates ability to pay shareholder dividends and use its capital
in other ways.
|
|
·
|
There is
uncertainty involved in estimating the availability of reinsurance and the
collectibility of reinsurance recoverables. This uncertainty arises from a
number of factors, including segregation by the industry generally of
reinsurance exposure into separate legal entities.
|
|
·
|
The Life and
Savings segment distributes some of its products under agreements with
other financial services entities. Termination of such agreements due to
changes in control of these non-affiliated entities could have a
detrimental effect on the segments sales. This risk may be increased
due to the recent enactment of the Gramm-Leach-Bliley Act of 1999, which
eliminates many federal and state law barriers to affiliations among
banks, securities firms, insurers and other financial service
providers.
|
|
·
|
In November 1999,
Allstate announced a program to reduce expenses by approximately $600
million, to be fully realized beginning in 2001. These expense reductions
are dependent on the elimination of certain employee positions, the
consolidation of Allstates operations and facilities, and the
reorganization of its multiple employee agency programs to a single
exclusive agency independent contractor program. The savings are to be
invested in technology, competitive pricing and advertising.
|
|
·
|
Allstate maintains
a $1.50 billion, five-year revolving line of credit and a $50 million
one-year revolving line of credit as potential sources of funds to meet
short-term liquidity requirements. In order to borrow on the five-year
line of credit, AIC is required to maintain a specified statutory surplus
level and the Allstate debt to equity ratio (as defined in the credit
agreement) must not exceed a designated level. The ability of Allstate and
AIC to meet the requirements is dependent upon their financial condition.
If AIC were to sustain significant losses from catastrophes, Allstate and
AICs ability to borrow on the lines of credit could be diminished or
eliminated during a period when they might be most in need of capital
resources and liquidity.
|
|
·
|
Changes in the
severity of claims have an impact on the profitability of Allstates
business. Changes in injury claim severity are driven primarily by
inflation in the medical sector of the economy. Changes in auto physical
damage claim severity are driven primarily by inflation in auto repair
costs and used car prices.
|
|
·
|
For its
non-standard auto insurance business, Allstate is implementing programs to
address the emergence of adverse profitability trends. These programs
include additional down-payment requirements, new underwriting guidelines
and new rating plans. Allstate expects these programs to have a temporary
adverse impact on written premium growth; however, they should improve
profitability over time.
|
|
·
|
A number of enacted
and pending legislative measures may lead to increased consolidation and
increased competition in the financial services industry. At the federal
level, these measures include the recently enacted Gramm-Leach-Bliley Act
of 1999, which eliminates many federal and state law barriers to
affiliations among banks, securities firms, insurers and other financial
service providers. At the state level, these measures include legislation
to permit mutual insurance companies to convert to a hybrid structure
known as a mutual holding company, thereby allowing insurance companies
owned by their policyholders to become stock insurance companies owned
(through one or more intermediate holding companies) at least 51% by their
policyholders and potentially up to 49% by stockholders. Also several
large mutual life insurers have used or are expected to use existing state
laws and regulations governing the conversion of mutual insurance
companies into stock insurance companies (demutualization). These measures
may also increase competition for capital among financial service
providers.
|
|
·
|
Deferred annuities
and interest-sensitive life insurance products receive favorable
policyholder taxation under current tax laws and regulations. Any
legislative or regulatory changes that adversely alter this treatment are
likely to negatively affect the demand for these products.
|
|
·
|
Due to legislative
and regulatory reform of the auto insurance system in New Jersey that
included regulated rate reductions and coverage changes effective for new
policies written and renewals processed on and after March 22, 1999,
Allstate New Jersey Insurance Company, a wholly owned Allstate subsidiary,
experienced decreased average premiums in 1999. Management expects that
these reforms will also lead to improved loss experience in the future.
However, it is possible that losses may increase or that any decrease in
losses will not be commensurate with the reductions in
premiums.
|
|
·
|
The adoptions of
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities is not expected to be material to the results of
operations of the Company. However, the impact is dependent upon market
conditions and our investment portfolio existing at the date of adoption,
which for Allstate will be January 1, 2001.
|
|
·
|
Additional risk
factors regarding market risk are incorporated by reference to the
discussion of Market Risk beginning on page
A-18
of the Proxy Statement.
|
THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Year Ended
December 31,
|
|
|
1999
|
|
1998
|
|
1997
|
(in millions
except per share data) |
|
|
Revenues |
|
|
|
|
|
|
|
|
|
Property-liability
insurance premiums (net of reinsurance ceded of $389, $433 and
$366) |
|
$20,112 |
|
|
$19,307 |
|
|
$18,604 |
|
Life and annuity
premiums and contract charges (net of reinsurance ceded of $260,
$178 and $194) |
|
1,623 |
|
|
1,519 |
|
|
1,502 |
|
Net investment
income |
|
4,112 |
|
|
3,890 |
|
|
3,861 |
|
Realized capital
gains and losses |
|
1,112 |
|
|
1,163 |
|
|
982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
26,959 |
|
|
25,879 |
|
|
24,949 |
|
|
|
|
|
|
|
|
|
|
|
Costs and
expenses |
|
|
|
|
|
|
|
|
|
Property-liability
insurance claims and claims expense (net of reinsurance recoveries
of $567, $318 and $314) |
|
14,679 |
|
|
13,601 |
|
|
13,336 |
|
Life and annuity
contract benefits (net of reinsurance recoveries of $179, $50 and
$49) |
|
2,578 |
|
|
2,415 |
|
|
2,415 |
|
Amortization of
deferred policy acquisition costs |
|
3,282 |
|
|
3,021 |
|
|
2,789 |
|
Operating costs and
expenses |
|
2,313 |
|
|
2,066 |
|
|
1,937 |
|
Restructuring
charges |
|
81 |
|
|
|
|
|
|
|
Interest
expense |
|
129 |
|
|
118 |
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
23,062 |
|
|
21,221 |
|
|
20,577 |
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposition
of operations |
|
10 |
|
|
87 |
|
|
62 |
|
|
Income from
operations before income tax expense, dividends on preferred
securities, and equity in net income of unconsolidated
subsidiary |
|
3,907 |
|
|
4,745 |
|
|
4,434 |
|
|
Income tax
expense |
|
1,148 |
|
|
1,422 |
|
|
1,324 |
|
|
|
|
|
|
|
|
|
|
|
Income before
dividends on preferred securities and equity in net income of
unconsolidated subsidiary |
|
2,759 |
|
|
3,323 |
|
|
3,110 |
|
|
Dividends on
preferred securities of subsidiary trusts |
|
(39 |
) |
|
(39 |
) |
|
(39 |
) |
|
Equity in net
income of unconsolidated subsidiary |
|
|
|
|
10 |
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
$
2,720 |
|
|
$
3,294 |
|
|
$
3,105 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per
share: |
|
|
|
|
|
|
|
|
|
Net Income per share
basic |
|
$
3.40 |
|
|
$
3.96 |
|
|
$
3.58 |
|
|
|
|
|
|
|
|
|
|
|
Net Income per share
diluted |
|
$
3.38 |
|
|
$
3.94 |
|
|
$
3.56 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average
sharesbasic |
|
800.2 |
|
|
832.2 |
|
|
867.9 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average
sharesdiluted |
|
803.8 |
|
|
836.6 |
|
|
872.8 |
|
|
|
|
|
|
|
|
|
|
|
See notes to
consolidated financial statements.
THE ALLSTATE
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
Year Ended
December 31,
|
|
|
1999
|
|
1998
|
|
1997
|
($ in
millions) |
Net
income |
|
$
2,720 |
|
|
$3,294 |
|
|
$3,105 |
|
|
Other
comprehensive income, after-tax |
|
|
|
|
|
|
|
|
|
Changes
in: |
|
|
|
|
|
|
|
|
|
Unrealized net capital gains and
losses |
|
(1,625 |
) |
|
173 |
|
|
818 |
|
Unrealized foreign currency
translation adjustments |
|
14 |
|
|
(2 |
) |
|
(57 |
) |
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss), after-tax |
|
(1,611 |
) |
|
171 |
|
|
761 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income |
|
$
1,109 |
|
|
$3,465 |
|
|
$3,866 |
|
|
|
|
|
|
|
|
|
|
|
See notes to
consolidated financial statements.
THE ALLSTATE
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
|
|
December
31,
|
|
|
1999
|
|
1998
|
($ in millions
except par value data) |
|
|
|
|
Assets |
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
Fixed income securities, at fair
value (amortized cost $55,293 and $49,946) |
|
$55,286 |
|
|
$53,560 |
|
Equity securities, at fair value
(cost $4,565 and $4,231) |
|
6,738 |
|
|
6,421 |
|
Mortgage loans |
|
4,068 |
|
|
3,458 |
|
Short-term |
|
2,422 |
|
|
2,477 |
|
Other |
|
1,131 |
|
|
609 |
|
|
|
|
|
|
|
|
Total investments |
|
69,645 |
|
|
66,525 |
|
|
Cash |
|
254 |
|
|
258 |
|
Premium installment
receivables, net |
|
3,927 |
|
|
3,082 |
|
Deferred policy
acquisition costs |
|
4,119 |
|
|
3,096 |
|
Reinsurance
recoverables, net |
|
2,209 |
|
|
1,932 |
|
Accrued investment
income |
|
812 |
|
|
751 |
|
Deferred income
taxes |
|
211 |
|
|
|
|
Property and
equipment, net |
|
916 |
|
|
803 |
|
Other
assets |
|
2,169 |
|
|
1,146 |
|
Separate
Accounts |
|
13,857 |
|
|
10,098 |
|
|
|
|
|
|
|
|
Total assets |
|
$98,119 |
|
|
$87,691 |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
Reserve for
property-liability insurance claims and claims expense |
|
$17,814 |
|
|
$16,881 |
|
Reserve for
life-contingent contract benefits |
|
7,597 |
|
|
7,601 |
|
Contractholder
funds |
|
25,199 |
|
|
21,133 |
|
Unearned
premiums |
|
7,671 |
|
|
6,425 |
|
Claim payments
outstanding |
|
860 |
|
|
778 |
|
Other liabilities
and accrued expenses |
|
4,705 |
|
|
4,578 |
|
Deferred income
taxes |
|
|
|
|
461 |
|
Short-term
debt |
|
665 |
|
|
393 |
|
Long-term
debt |
|
2,186 |
|
|
1,353 |
|
Separate
Accounts |
|
13,857 |
|
|
10,098 |
|
|
|
|
|
|
|
|
Total liabilities |
|
80,554 |
|
|
69,701 |
|
|
|
|
|
|
|
|
|
Commitments and
Contingent Liabilities (Notes 6, 7 and 12) |
|
|
|
|
|
|
|
Mandatorily
Redeemable Preferred Securities of Subsidiary Trusts |
|
964 |
|
|
750 |
|
|
Shareholders
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, 787
million
and 818 million shares outstanding |
|
9 |
|
|
9 |
|
Additional capital
paid-in |
|
2,664 |
|
|
3,102 |
|
Retained
income |
|
16,728 |
|
|
14,490 |
|
Deferred ESOP
expense |
|
(216 |
) |
|
(252 |
) |
Treasury stock, at
cost (113 million and 82 million shares) |
|
(3,929 |
) |
|
(3,065 |
) |
Accumulated other
comprehensive income: |
|
|
|
|
|
|
Unrealized net capital
gains |
|
1,369 |
|
|
2,994 |
|
Unrealized foreign currency
translation adjustments |
|
(24 |
) |
|
(38 |
) |
|
|
|
|
|
|
|
Total accumulated other comprehensive
income |
|
1,345 |
|
|
2,956 |
|
|
|
|
|
|
|
|
Total shareholders
equity |
|
16,601 |
|
|
17,240 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders
equity |
|
$98,119 |
|
|
$87,691 |
|
|
|
|
|
|
|
|
See notes to
consolidated financial statements.
THE ALLSTATE
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|
|
December
31,
|
($ in millions
except per share data) |
|
1999
|
|
1998
|
|
1997
|
|
Common
stock |
|
$
9 |
|
|
$
9 |
|
|
$
9 |
|
|
Additional
capital paid-in |
Balance, beginning
of year |
|
3,102 |
|
|
3,116 |
|
|
3,129 |
|
Shares reissued for
AHL acquisition |
|
(423 |
) |
|
|
|
|
|
|
Equity incentive
plans activity |
|
(15 |
) |
|
(14 |
) |
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, end of
year |
|
2,664 |
|
|
3,102 |
|
|
3,116 |
|
|
|
|
|
|
|
|
|
|
|
Retained
income |
Balance, beginning
of year |
|
14,490 |
|
|
11,646 |
|
|
8,958 |
|
Net
income |
|
2,720 |
|
|
3,294 |
|
|
3,105 |
|
Dividends ($.60,
$.54 and $.48 per share) |
|
(482 |
) |
|
(450 |
) |
|
(417 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, end of
year |
|
16,728 |
|
|
14,490 |
|
|
11,646 |
|
|
|
|
|
|
|
|
|
|
|
Deferred ESOP
expense |
Balance, beginning
of year |
|
(252 |
) |
|
(281 |
) |
|
(280 |
) |
Reduction
(addition) |
|
36 |
|
|
29 |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, end of
year |
|
(216 |
) |
|
(252 |
) |
|
(281 |
) |
|
|
|
|
|
|
|
|
|
|
Treasury
stock |
|
|
|
Balance, beginning
of year |
|
(3,065 |
) |
|
(1,665 |
) |
|
(388 |
) |
Shares
acquired |
|
(2,173 |
) |
|
(1,489 |
) |
|
(1,358 |
) |
Shares reissued for
AHL acquisition |
|
1,240 |
|
|
|
|
|
|
|
Shares reissued
under equity incentive plans |
|
69 |
|
|
89 |
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of
year |
|
(3,929 |
) |
|
(3,065 |
) |
|
(1,665 |
) |
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income |
|
|
|
Balance, beginning
of year |
|
2,956 |
|
|
2,785 |
|
|
2,024 |
|
Change in
unrealized foreign currency translation adjustments |
|
14 |
|
|
(2 |
) |
|
(57 |
) |
Change in
unrealized net capital gains and losses |
|
(1,625 |
) |
|
173 |
|
|
818 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of
year |
|
1,345 |
|
|
2,956 |
|
|
2,785 |
|
|
|
|
|
|
|
|
|
|
|
Total shareholders
equity |
|
$16,601 |
|
|
$17,240 |
|
|
$15,610 |
|
|
|
|
|
|
|
|
|
|
|
See notes to
consolidated financial statements.
THE ALLSTATE
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Year Ended
December 31,
|
($ in
millions) |
|
1999
|
|
1998
|
|
1997
|
|
Cash flows from
operating activities |
Net
income |
|
$
2,720 |
|
|
$
3,294 |
|
|
$ 3,105 |
|
Adjustments to
reconcile net income to net cash provided by operating
activities |
Depreciation, amortization and other non-cash items |
|
(17 |
) |
|
(22 |
) |
|
(22 |
) |
Realized capital gains and losses |
|
(1,112 |
) |
|
(1,163 |
) |
|
(982 |
) |
Gain on disposition of operations |
|
(10 |
) |
|
(87 |
) |
|
(62 |
) |
Interest credited to contractholder funds |
|
1,362 |
|
|
1,247 |
|
|
1,209 |
|
Changes in: |
Policy benefit and other
insurance reserves |
|
(706 |
) |
|
(716 |
) |
|
(73 |
) |
Unearned premiums |
|
70 |
|
|
137 |
|
|
59 |
|
Deferred policy acquisition
costs |
|
(245 |
) |
|
(311 |
) |
|
(304 |
) |
Premium installment
receivables |
|
(156 |
) |
|
(86 |
) |
|
(73 |
) |
Reinsurance
recoverables |
|
(69 |
) |
|
154 |
|
|
99 |
|
Income taxes payable |
|
58 |
|
|
44 |
|
|
261 |
|
Other operating assets and
liabilities |
|
372 |
|
|
400 |
|
|
125 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities |
|
2,267 |
|
|
2,891 |
|
|
3,342 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from
investing activities |
Proceeds from
sales |
|
|
|
Fixed income securities |
|
21,679 |
|
|
13,634 |
|
|
12,924 |
|
Equity securities |
|
9,633 |
|
|
4,909 |
|
|
3,657 |
|
Real estate |
|
|
|
|
813 |
|
|
144 |
|
Investment
collections |
|
|
|
Fixed income securities |
|
5,356 |
|
|
6,700 |
|
|
6,597 |
|
Mortgage loans |
|
453 |
|
|
440 |
|
|
600 |
|
Investment
purchases |
|
|
|
Fixed income securities |
|
(31,094 |
) |
|
(21,870 |
) |
|
(21,788 |
) |
Equity securities |
|
(8,849 |
) |
|
(3,999 |
) |
|
(3,515 |
) |
Mortgage loans |
|
(969 |
) |
|
(875 |
) |
|
(449 |
) |
Change in
short-term investments, net |
|
454 |
|
|
(610 |
) |
|
427 |
|
Change in other
investments, net |
|
(34 |
) |
|
(95 |
) |
|
(105 |
) |
Acquisitions, net
of cash received |
|
971 |
|
|
(275 |
) |
|
|
|
Proceeds from
disposition of operations |
|
|
|
|
49 |
|
|
138 |
|
Purchases of
property and equipment, net |
|
(212 |
) |
|
(188 |
) |
|
(150 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities |
|
(2,612 |
) |
|
(1,367 |
) |
|
(1,520 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from
financing activities |
|
|
|
Change in
short-term debt, net |
|
202 |
|
|
181 |
|
|
47 |
|
Proceeds from
issuance of long-term debt |
|
833 |
|
|
513 |
|
|
263 |
|
Repayment of
long-term debt |
|
|
|
|
(300 |
) |
|
|
|
Contractholder fund
deposits |
|
5,593 |
|
|
3,275 |
|
|
2,657 |
|
Contractholder fund
withdrawals |
|
(3,684 |
) |
|
(3,306 |
) |
|
(3,076 |
) |
Dividends
paid |
|
(471 |
) |
|
(443 |
) |
|
(323 |
) |
Treasury stock
purchases |
|
(2,173 |
) |
|
(1,489 |
) |
|
(1,358 |
) |
Other |
|
41 |
|
|
83 |
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing
activities |
|
341 |
|
|
(1,486 |
) |
|
(1,718 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase
(decrease) in cash |
|
(4 |
) |
|
38 |
|
|
104 |
|
Cash at
beginning of year |
|
258 |
|
|
220 |
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
Cash at end of
year |
|
$
254 |
|
|
$
258 |
|
|
$
220 |
|
|
|
|
|
|
|
|
|
|
|
See notes to
consolidated financial statements.
Notes to Consolidated Financial Statements
1.
General
Basis of
presentation
The accompanying 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 savings subsidiaries, including Allstate Life Insurance Company (
ALIC) (collectively referred to as the Company or
Allstate). These consolidated financial statements have been
prepared in conformity with generally accepted accounting principles. All
significant intercompany accounts and transactions have been
eliminated.
To conform with the 1999 presentation, certain
amounts in the prior years financial statements and notes have been
reclassified.
Nature of
operations
Allstate is engaged, principally in the United
States and Canada, in the property-liability and life and savings
businesses. Allstates primary business is the sale of private
passenger auto and homeowners insurance. The Company also sells life
insurance, savings and group pension products, and selected commercial
property and casualty coverages.
Allstates personal property and casualty
(PP&C) segment is principally engaged in private passenger
auto and homeowners insurance, writing approximately 71% of Allstates
total 1999 premiums as determined under statutory accounting practices.
Allstate was the countrys second largest insurer for both private
passenger auto and homeowners insurance in 1998.
Allstate has exposure to catastrophes, which
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 Companys results of operations and financial
condition. The Company also has exposure to environmental and asbestos
claims and other mass tort exposures (see Note 7).
Allstates life and savings (Life
and Savings) segment markets a broad line of life insurance, savings
and group pension products countrywide, accounting for approximately 29% of
Allstates 1999 statutory premiums, which include premiums and deposits
for all products. Life insurance consists of traditional products, including
term and whole life, interest-sensitive life, immediate annuities with life
contingencies, variable life and indexed life insurance. Savings products
include deferred annuities and immediate annuities without life
contingencies. Group pension savings products include contracts with fixed
or indexed rates and fixed terms, such as guaranteed investment contracts
and funding agreements, and deferred and immediate annuities, or retirement
annuities. In 1999, annuity premiums and deposits represented approximately
61% of Life and Savings total statutory premiums and deposits.
The Company monitors economic and regulatory
developments which have the potential to impact its business. Recently
enacted federal legislation will allow for banks and other financial
organizations to have greater participation in the securities and insurance
businesses. This legislation may present an increased level of competition
for sales of the Companys products. Furthermore, the market for
deferred annuities and interest-sensitive life insurance is enhanced by the
tax incentives available under current law. Any legislative changes which
lessen these incentives are likely to negatively impact the demand for these
products.
Additionally, traditional demutualizations of
mutual insurance companies and enacted and pending state legislation to
permit mutual insurance companies to convert to a hybrid structure known as
a mutual holding company could have a number of significant effects on the
Company by (1) increasing industry competition through consolidation caused
by mergers and acquisitions related to the new corporate form of business;
and (2) increasing competition in the capital markets.
Allstate, through a variety of companies, is
authorized to sell property-liability and life and savings products in all
50 states, the District of Columbia and Puerto Rico. The Company is also
authorized to sell certain insurance products in various foreign countries.
The top geographic locations for statutory premiums earned by the PP&C
segment were New York, California, Florida, Texas and Pennsylvania for the
year ended December 31, 1999. Top geographic locations for statutory
premiums and deposits by the Life and Savings segment were California,
Florida,
Illinois and Pennsylvania for the year ended December 31, 1999. No other
jurisdiction accounted for more than 5% of statutory premiums for PP&C
or Life and Savings. Allstate distributes the majority of its PP&C
products through over 15,500 Allstate agents, primarily non-employee
exclusive agents, but also utilizes independent agents and specialized
brokers to expand market reach including over 20,000 independent agents
appointed to sell auto and homeowners insurance. Life and Savings
distributes its products using Allstate agents, which include life
specialists and financial advisors, as well as banks, independent agents,
securities firms and through direct response and worksite marketing methods.
Although the Company currently benefits from agreements with financial
services entities who market and distribute its products, change in control
of these non-affiliated entities with which the Company has alliances could
negatively impact Life and Savings sales.
2. Summary
of Significant Accounting Policies
Investments
Fixed income securities include bonds,
mortgage-backed and asset-backed securities, and redeemable preferred
stocks. All fixed income securities are carried at fair value and may be
sold prior to their contractual maturity (available for sale).
The difference between amortized cost and fair value, net of deferred income
taxes, certain life and annuity deferred policy acquisition costs, and
certain reserves for life contingent contract benefits, is reflected as a
component of Shareholders equity. Provisions are recognized for
declines in the value of fixed income securities that are other than
temporary. Such writedowns are included in Realized capital gains and
losses.
Equity securities include common and
non-redeemable preferred stocks, and real estate investment trusts which are
carried at fair value. The difference between cost and fair value of equity
securities, less deferred income taxes, is reflected as a component of
Shareholders equity.
Mortgage loans are carried at outstanding
principal balance, net of unamortized premium or discount and valuation
allowances. Valuation allowances are established for impaired loans when it
is probable that contractual principal and interest will not be collected.
Valuation allowances for impaired loans reduce the carrying value to the
fair value of the collateral or the present value of the loans
expected future repayment cash flows discounted at the loans original
effective interest rate. Valuation allowances on loans not considered to be
impaired are established based on consideration of the underlying
collateral, borrower financial strength, current and expected market
conditions, and other factors.
Short-term investments are carried at cost or
amortized cost which approximates fair value, and includes collateral
received in connection with securities lending activities. Other
investments, which consist primarily of policy loans, are carried at the
unpaid principal balances.
Investment income consists primarily of
interest and dividends. Interest is recognized on an accrual basis and
dividends are recorded at the ex-dividend date. Interest income on
mortgage-backed and asset-backed securities is determined on the effective
yield method, based on estimated principal repayments. Accrual of income is
suspended for fixed income securities and mortgage loans that are in default
or when the receipt of interest payments is in doubt. Realized capital gains
and losses are determined on a specific identification basis.
Derivative
financial instruments
Derivative financial instruments include
swaps, futures, forwards, and options, including caps and floors. When
derivatives meet specific criteria they may be designated as accounting
hedges and accounted for on either a fair value, deferral, or accrual basis,
depending upon the nature of the hedge strategy, the method used to account
for the hedged item and the derivative used. Derivatives that are not
designated as accounting hedges are accounted for on a fair value
basis.
If, subsequent to entering into a hedge
transaction, the derivative becomes ineffective (including if the hedged
item is sold or otherwise extinguished or the occurrence of a hedged
anticipatory transaction is no longer probable), the Company terminates the
derivative position. Gains and losses on these terminations are reported in
realized capital gains and losses in the period they occur. The Company may
also terminate derivatives as a result of other events or circumstances.
Gains and losses on these terminations are deferred and amortized over the
remaining life of either the hedge or the hedged item, whichever is
shorter.
Fair value accounting
Under fair value accounting, realized and unrealized gains and losses
on derivatives are recognized in either earnings or Shareholders
equity when they occur.
The Company accounts for certain of its
interest rate swaps, certain equity-indexed options, certain equity-indexed
futures, and foreign currency swaps and forwards as hedges on a fair value
basis when specific criteria are met. For swaps or options, the derivative
must reduce the primary market risk exposure (e.g., interest rate risk,
equity price risk or foreign currency risk) of the hedged item in
conjunction with the specific hedge strategy; be designated as a hedge at
the inception of the transaction; and have a notional amount and term that
does not exceed the carrying value and expected maturity, respectively, of
the hedged item. In addition, options must have a reference index (e.g., S
&P 500) that is the same as, or highly correlated with, the reference
index of the hedged item. For futures or forward contracts, the derivative
must reduce the primary market risk exposure on an enterprise or transaction
basis in conjunction with the hedge strategy; be designated as a hedge at
the inception of the transaction; and be highly correlated with the fair
value of, or interest income or expense associated with, the hedged item at
inception and throughout the hedge period.
For such interest rate swaps, equity-indexed
options, foreign currency swaps, and forwards, changes in fair value are
reported net of tax in Shareholders equity, exclusive of interest
accruals. Changes in fair value of certain equity-indexed options and
certain equity-indexed futures are reflected as an adjustment of the hedged
item. Accrued interest receivable and payable on swaps are reported in Net
investment income. Premiums paid for certain equity-indexed options are
reported as Equity securities and amortized to Net investment income over
the lives of the agreements.
The Company also has certain derivatives that
are used for risk management purposes for which hedge accounting is not
applied and are therefore accounted for on a fair value basis. These
derivatives primarily consist of equity-indexed instruments and certain
interest rate futures. Based upon certain interest rate or equity price risk
reduction strategies, gains and losses on these derivatives are recognized
in Net investment income, Realized capital gains and losses or Life and
annuity contract benefits during the period on a current basis.
Deferral Accounting
Under deferral accounting, gains and losses on derivatives are
deferred and recognized in earnings in conjunction with earnings on the
hedged item. The Company accounts for interest rate futures and certain
foreign currency forwards as hedges using deferral accounting for
anticipatory investment purchases, sales and capital infusions, when the
criteria for futures and forwards (discussed above) are met. In addition,
anticipated transactions must be probable of occurrence and their
significant terms and characteristics identified.
Changes in fair values of these derivatives
are initially deferred and reported as Other liabilities and accrued
expenses. Once the anticipated transaction occurs, the deferred gains or
losses are considered part of the cost basis of the asset and reported net
of tax in Shareholders equity or recognized as a gain or loss from
disposition of the asset, as appropriate. The Company reports initial margin
deposits on futures in Short-term investments. Fees and commissions paid on
these derivatives are also deferred as an adjustment to the carrying value
of the hedged item.
Accrual Accounting
Under accrual accounting, interest income or expense related to the
derivative is accrued and recorded as an adjustment to the interest income
or expense on the hedged item. The Company accounts for certain interest
rate swaps, caps and floors, and certain foreign currency swaps as hedges on
an accrual basis when the criteria for swaps or options (discussed above)
are met.
Premiums paid for interest rate caps and
floors are reported as investments and amortized to Net investment income
over the lives of the agreements.
Recognition of
premium revenues and contract charges
Property-liability premiums are deferred and
earned on a pro rata basis over the terms of the policies. The portion of
premiums written applicable to the unexpired terms of the policies is
recorded as Unearned premiums. Premiums for traditional life insurance and
certain life-contingent annuities are recognized as revenue when due.
Revenues on interest-sensitive life contracts consist of fees assessed
against the contractholder account balance for cost of insurance (mortality
risk), contract administration and surrender charges. Revenues on investment
contracts include contract charges and fees for contract administration and
surrenders. These revenues are recognized when levied against the contract
balance. Gross premium in excess of the net premium on limited payment
contracts are deferred and recognized over the contract period.
Deferred policy
acquisition costs
Certain costs which vary with and are
primarily related to acquiring property-liability insurance business,
principally agents remuneration, premium taxes and inspection costs,
are deferred and amortized to income as premiums are earned. Future
investment income is considered in determining the recoverability of
deferred policy acquisition costs.
Certain costs which vary with and are
primarily related to acquiring life and savings business, principally agents
remuneration, premium taxes, certain underwriting costs and direct
mail solicitation expenses, are deferred and amortized to income. For
traditional life insurance and limited payment contracts, these costs are
amortized in proportion to the estimated revenues on such business. For
interest sensitive life and investment contracts, the costs are amortized in
relation to the present value of estimated gross profits on such business
over the estimated lives of the contract periods. Changes in the amount or
timing of estimated gross profits will result in adjustments in the
cumulative amortization of these costs. To the extent that unrealized gains
or losses on fixed income securities carried at fair value would result in
an adjustment of deferred policy acquisition costs had those gains or losses
actually been realized, the related unamortized deferred policy acquisition
costs are recorded as a reduction of the unrealized gains or losses included
in Shareholders equity.
The fair value of acquired life and savings
blocks of business, representing the present value of future profits from
such blocks of business, is also classified as deferred policy acquisition
costs. Present value of future profits is amortized over the life of the
blocks of business using current crediting rates. To the extent that
unrealized gains or losses on securities carried at fair value would result
in an adjustment of present value of future profits had those gains or
losses actually been realized, the related unamortized present value of
future profits are recorded as a reduction of the unrealized gains or losses
included in Shareholders equity.
Reinsurance
recoverable
In the normal course of business, the Company
seeks to limit aggregate and single exposure to losses on large risks by
purchasing reinsurance from other insurers (see Note 9). The amounts
reported in the Consolidated statements of financial position include
amounts billed to reinsurers on losses paid as well as estimates of amounts
expected to be recovered from reinsurers on incurred losses that have not
yet been paid. Reinsurance recoverables on unpaid losses are estimated based
upon assumptions consistent with those used in establishing the liabilities
related to the underlying reinsured contract. Insurance liabilities are
reported gross of reinsurance recoverables. Prepaid reinsurance premiums are
deferred and reflected in income in a manner consistent with the recognition
of premiums on the reinsured contracts. Reinsurance does not extinguish the
Companys primary liability under the policies written and therefore
reinsurers and amounts recoverable therefrom are regularly evaluated by the
Company and allowances for uncollectible reinsurance are established as
appropriate.
Goodwill
Goodwill represents the excess of amounts paid
for acquiring businesses over the fair value of the net assets acquired. The
Company amortizes goodwill using a straight-line method over the period in
which the expected benefits from an acquisition will be realized, generally
20 to 30 years. The Company reviews goodwill for impairment whenever events
or changes in circumstances indicate that the carrying amounts may not be
recoverable. Goodwill is classified in Other assets in the Consolidated
statements of financial position.
Property and
equipment
Property and equipment is carried at cost less
accumulated depreciation. In 1998, the Company began capitalizing costs
related to computer software developed for internal use during the
application development stage of software development projects. These costs
generally consist of certain external, payroll and payroll related costs.
Depreciation is provided on the straight-line method over the estimated
useful lives of the assets, generally 3 to 10 years for equipment and 40
years for real property. Accumulated depreciation on property and equipment
was $1.25 billion and $1.17 billion at December 31, 1999 and 1998,
respectively. Depreciation expense on property and equipment was $167
million, $154 million and $123 million for the years ended December 31,
1999, 1998 and 1997, respectively. The Company reviews its property and
equipment for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable.
Income
taxes
The income tax provision is calculated under
the liability method. Deferred tax assets and liabilities are recorded based
on the difference between the financial statement and tax bases of assets
and liabilities at the enacted tax rates. The principal assets and
liabilities giving rise to such differences are insurance reserves, unearned
premiums, deferred policy acquisition costs, and property and equipment.
Deferred income taxes also arise from unrealized capital gains and losses on
equity securities and fixed income securities carried at fair value, and
unrealized foreign currency translation adjustments.
Separate
Accounts
The Company issues deferred variable
annuities, variable life contracts and certain guaranteed investment
contracts, the assets and liabilities of which are legally segregated and
recorded as assets and liabilities of the Separate Accounts. Absent any
guarantees wherein the Company contractually guarantees either a minimum
return or account value to the beneficiaries of the contractholders in the
form of a death benefit, variable annuity and variable life contractholders
bear the investment risk that the Separate Accounts funds may not meet
their stated investment objectives.
The assets of the Separate Accounts are
carried at fair value. Separate Account liabilities represent the
contractholders claim to the related assets and are carried at the
fair value of the assets. In the event that the asset value of certain
contractholder accounts is projected to be below the value guaranteed by the
Company, a liability is established through a charge to earnings. Investment
income and realized capital gains and losses of the Separate Accounts accrue
directly to the contractholders and therefore, are not included in the
Companys Consolidated statements of operations. Revenues to the
Company from the Separate Accounts consist of contract maintenance and
administration fees, and mortality, surrender and expense risk
charges.
Reserves for
claims and claims expense and life-contingent contract
benefits
The property-liability reserve for claims and
claims expense is the estimated amount necessary to settle both reported and
unreported claims of insured property-liability losses, based upon the facts
in each case and the Companys experience with similar cases. Estimated
amounts of salvage and subrogation are deducted from the reserve for claims
and claims expense. The establishment of appropriate reserves, including
reserves for catastrophes, is an inherently uncertain process. Reserve
estimates are regularly reviewed and updated, using the most current
information available. Any resulting adjustments are reflected in current
operations (see Note 7). These adjustments may be material.
The reserve for life-contingent contract
benefits, which relates to traditional life insurance, group retirement
annuities and immediate annuities with life contingencies is computed on the
basis of assumptions as to future investment yields, mortality, morbidity,
terminations and expenses. These assumptions, which for traditional life
insurance are applied using the net level premium method, include provisions
for adverse deviation and generally vary by such characteristics as type of
coverage, year of issue and policy duration. Detailed reserve assumptions
and reserve interest rates for Life and Savings products are outlined in
Note 8. To the extent that unrealized gains on fixed income securities would
result in a premium deficiency had those gains actually been realized, the
related increase in reserves is recorded as a reduction of the unrealized
gains included in Shareholders equity.
Contractholder
funds
Contractholder funds arise from the issuance
of individual or group policies and contracts that include an investment
component, including most fixed annuities, interest-sensitive life policies
and certain other investment contracts. Deposits received are recorded as
interest-bearing liabilities. Contractholder funds are equal to deposits
received net of commissions and interest credited to the benefit of the
contractholder less withdrawals, mortality charges and administrative
expenses. Detailed information on crediting rates and surrender and
withdrawal protection on contractholder funds are outlined in Note
8.
Off-balance-sheet
financial instruments
Commitments to invest, commitments to extend
mortgage loans and financial guarantees have only off-balance-sheet risk
because their contractual amounts are not recorded in the Companys
Consolidated statements of financial position. The contractual amounts and
fair values of these instruments are presented in Note 6.
Foreign currency
translation
The Company has subsidiaries in foreign
countries where the local currency is deemed to be the functional currency
in which these entities operate. The financial statements of the Company
s foreign subsidiaries are translated into U.S. dollars at the
exchange rate in effect at the end of a reporting period for assets and
liabilities and at average exchange rates during the period for results of
operations. The unrealized gains or losses from the translation of the net
assets are recorded as unrealized foreign currency translation adjustments,
and included in Accumulated other comprehensive income in the Consolidated
statements of financial position. Changes in unrealized foreign currency
translation adjustments are included in Other comprehensive income. Gains
and losses from foreign currency transactions are reported in Operating
costs and expenses and have not been significant.
Use of
estimates
The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
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 shares
issuable under its mandatorily redeemable preferred securities (see Note
10). Earnings per share and weighted average shares for 1997 have been
retroactively adjusted to reflect a two-for-one stock split paid on July 1,
1998. The computation of basic and diluted earnings per share for the years
ended December 31 are presented in the following table.
(in millions,
except per share data) |
|
1999
|
|
1998
|
|
1997
|
Numerator: |
Net income applicable to common
shareholders |
|
$2,720 |
|
$3,294 |
|
$3,105 |
|
|
|
|
|
|
|
Denominator: |
Weighted average common shares
outstanding |
|
800.2 |
|
832.2 |
|
867.9 |
Effect of potential dilutive
securities: |
Stock options |
|
3.0 |
|
4.4 |
|
4.9 |
Shares issuable under FELINE PRIDES contract
(1)
|
|
.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
3.6 |
|
4.4 |
|
4.9 |
|
|
|
|
|
|
|
Weighted average
common and dilutive potential common shares
outstanding |
|
803.8 |
|
836.6 |
|
872.8 |
|
|
|
|
|
|
|
Earnings per
share: |
Basic |
|
$
3.40 |
|
$
3.96 |
|
$
3.58 |
Diluted |
|
3.38 |
|
3.94 |
|
3.56 |
Options to purchase 11.1 million Allstate
common shares, with exercise prices ranging from $34.38 to $50.72, were
outstanding at December 31, 1999 but were not included in the computation of
diluted earnings per share since inclusion of those options would have an
anti-dilutive effect as the options exercise prices exceed the average
market price of Allstate common shares in 1999. Outstanding options excluded
from diluted earnings per share computations due to anti-dilutive effects at
December 31, 1998 and 1997 were insignificant.
New accounting
standards
In 1999, the Company adopted Statement of
Position (SOP) 97-3, Accounting by Insurance and Other
Enterprises for Insurance-related Assessments. The SOP provides
guidance concerning when to recognize a liability for insurance-related
assessments and how those liabilities should be measured. Specifically,
insurance-related assessments should be recognized as liabilities when all
of the following criteria have been met: 1) an assessment has
been imposed or it is probable that an assessment will be imposed, 2) the
event obligating an entity to pay an assessment has occurred and 3) the
amount of the assessment can be reasonably estimated. Adoption of this
statement was not material to the Companys results of operations or
financial position.
Pending accounting
standards
In June 1999, the Financial Accounting
Standards Board (FASB) delayed the effective date of Statement
of Financial Accounting Standard (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133 replaces existing pronouncements and practices with a single,
integrated accounting framework for derivatives and hedging activities. This
statement requires that all derivatives be recognized on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. Additionally, the change in
fair value of a derivative which is not effective as a hedge will be
immediately recognized in earnings. The delay was effected through the
issuance of SFAS No. 137, which extends the SFAS No. 133 requirements to
fiscal years beginning after June 15, 2000. As such, the Company expects to
adopt the provisions of SFAS No. 133 as of January 1, 2001. The impact of
this statement is dependent upon the Companys derivative positions and
market conditions existing at the date of adoption. Based on existing
interpretations of the requirements of SFAS No. 133, the impact of adoption
is not expected to be material to the results of operations or financial
position of the Company.
3. Acquisitions
and Dispositions
Acquisition of CNA
personal lines
On October 1, 1999, Allstate completed the
acquisition of the personal lines auto and homeowners insurance business (
CNA personal lines) of CNA Financial Corporation (CNA
). At closing, AIC made a cash payment of $140 million to CNA for: i)
certain assets of CNA personal lines used in connection with that business;
ii) access to the CNA personal lines agency distribution channel; iii)
infrastructure and employees of the business; iv) renewal rights to the
in-force business; and v) an option to acquire certain licensed companies of
CNA in the future. The acquisition was also in part effected through a 100%
indemnity reinsurance agreement, whereby CNA provided cash and other assets
equal to the reserves and other liabilities associated with CNA personal
lines as of the closing date. The transaction was accounted for as a
purchase and the excess of the acquisition cost over the fair value of the
CNA personal lines net assets acquired of $218 million was recorded as
goodwill and will be amortized on a straight-line basis over twenty years.
The results of CNA personal lines were included in the Companys
consolidated results from the October 1, 1999 acquisition date. AIC also
will pay a license fee to CNA for the use of certain of CNAs
trademarks and access to the CNA personal lines distribution channel for a
period of up to six years that is contingent upon the amount of premiums
written by independent agents appointed by CNA personal lines prior to the
acquisition date. These license fees will be expensed as incurred. At
closing, Allstate also issued a $75 million, 10-year note to CNA (see Note
10), the principal repayment of which at maturity is contingent upon certain
profitability measures of the acquired business.
In the fourth quarter of 1999, the Company
conducted a review of the statement of financial position of the acquired
CNA personal lines business, which included assessing the appropriateness of
the carrying value of certain non-financial assets and liabilities and asset
allowances based on the application of Allstates accounting policies
and estimation techniques. Based on information developed from this
post-closing review, Allstate recorded a $58 million pretax charge ($37
million after-tax) relating to different estimates of loss and loss expense
reserves and asset valuation allowances. The pretax charge is reflected in
the Consolidated statement of operations in Property-liability insurance
claims and claims expense ($47 million) and Operating costs and expenses
($11 million).
Acquisition of
AHL
Effective October 31, 1999, Allstate acquired
all of the outstanding shares of American Heritage Life Investment
Corporation (AHL) pursuant to a merger agreement for $32.25 per
share in cash and Allstate common stock, in a transaction valued at $1.1
billion. AHL specializes in selling life, health and disability insurance to
individuals
through their workplaces. In connection with the acquisition, Allstate assumed
AHLs obligations under the outstanding mandatorily redeemable
preferred securities issued by AHL and AHL Financing (the Trust
), a Delaware statutory business trust (see Note 10). In order to fund
the equity component of the consideration, the Company reissued 34.1 million
shares of Allstate common stock held in treasury to AHL shareholders. The
remaining $87 million of consideration was funded with cash. The transaction
was accounted for as a purchase and the excess of the acquisition cost over
the fair value of AHLs net assets acquired of $838 million was
recorded as goodwill and will be amortized on a straight-line basis over
thirty years. The results of AHL were included in the Companys
consolidated results from the October 31, 1999 acquisition date.
In the fourth quarter of 1999, the Company
conducted a review of the statement of financial position of AHL, which
included assessing the appropriateness of the carrying value of certain
non-financial assets and liabilities and asset allowances based on the
application of Allstates accounting policies and estimation
techniques. Based on information developed from this post-closing review,
Allstate recorded a $32 million pretax charge ($26 million after-tax)
relating to different estimates of loss reserves and asset valuation
allowances. The pretax charge is reflected in the Consolidated statement of
operations in Life and annuity premiums and contract charges ($3 million),
Life and annuity contract benefits ($26 million) and Operating costs and
expenses ($3 million).
Other acquisitions
and dispositions
In 1998, the Company acquired all of the
outstanding common stock of Pembridge Inc. for approximately $275 million.
Pembridge primarily sells non-standard auto insurance in Canada.
In 1998, the Company disposed of its remaining
interest in The PMI Group, Inc. (PMI Group) through the
conversion of $357 million of 6.76% Automatically Convertible Equity
Securities (ACES) into approximately 8.6 million shares of PMI
Group and through additional sales on the open market. A gain of $87 million
($56 million after-tax) was recognized on the conversion.
In 1997, the Company sold its ownership
interests in two Japanese joint ventures to The Saison Group, its joint
venture partner. Allstate received gross proceeds of $105 million and
recognized a gain of $70 million ($48 million after-tax) on the
sale.
4.
Supplemental Disclosure of Non-Cash Flow Information
Acquisitions and
dispositions
In 1999, Allstate acquired the assets of CNA
personal lines, AHL and other businesses using cash and common stock and by
assuming liabilities and mandatorily redeemable preferred securities. In
1998, the Company disposed of its remaining interest in PMI Group through
the conversion of the ACES (see Note 3). The following is a summary of the
effects of these transactions on Allstates consolidated financial
position.
($ in
millions) |
|
1999
|
Acquisitions: |
Fair value of assets
acquired |
|
$
6,201 |
|
Fair value of liabilities
assumed |
|
(4,904 |
) |
Fair value of mandatorily
redeemable preferred securities |
|
(214 |
) |
Common shares issued |
|
(817 |
) |
|
|
|
|
Cash paid |
|
266 |
|
Cash received |
|
(1,237 |
) |
|
|
|
|
Net cash received |
|
$
971 |
|
|
|
|
|
|
|
|
1998
|
Dispositions: |
Conversion of ACES
to common shares of The PMI Group Inc. |
|
$
357 |
|
|
|
|
|
5.
Investments
Fair
values
The amortized cost, gross unrealized gains and
losses, and fair value for fixed income securities are as
follows:
|
|
|
|
Gross
Unrealized
|
($ in
millions) |
|
Amortized
cost
|
|
Gains
|
|
Losses
|
|
Fair
value
|
At December 31,
1999 |
|
U.S. government and
agencies |
|
$
3,075 |
|
$
229 |
|
$
(31 |
) |
|
$
3,273 |
Municipal |
|
19,071 |
|
450 |
|
(549 |
) |
|
18,972 |
Corporate |
|
20,229 |
|
557 |
|
(556 |
) |
|
20,230 |
Foreign
government |
|
741 |
|
16 |
|
(25 |
) |
|
732 |
Mortgage-backed
securities |
|
7,974 |
|
89 |
|
(177 |
) |
|
7,886 |
Asset-backed
securities |
|
3,941 |
|
8 |
|
(54 |
) |
|
3,895 |
Redeemable
preferred stock |
|
262 |
|
42 |
|
(6 |
) |
|
298 |
|
|
|
|
|
|
|
|
|
|
Total fixed income
securities |
|
$55,293 |
|
$1,391 |
|
$(1,398 |
) |
|
$55,286 |
|
|
|
|
|
|
|
|
|
|
At December 31,
1998 |
|
U.S. government and
agencies |
|
$
3,171 |
|
$
794 |
|
$
(5 |
) |
|
$
3,960 |
Municipal |
|
17,589 |
|
1,198 |
|
(16 |
) |
|
18,771 |
Corporate |
|
16,508 |
|
1,387 |
|
(116 |
) |
|
17,779 |
Foreign
government |
|
625 |
|
35 |
|
(7 |
) |
|
653 |
Mortgage-backed
securities |
|
7,612 |
|
270 |
|
(3 |
) |
|
7,879 |
Asset-backed
securities |
|
4,197 |
|
64 |
|
(10 |
) |
|
4,251 |
Redeemable
preferred stock |
|
244 |
|
23 |
|
|
|
|
267 |
|
|
|
|
|
|
|
|
|
|
Total fixed income
securities |
|
$49,946 |
|
$3,771 |
|
$
(157 |
) |
|
$53,560 |
|
|
|
|
|
|
|
|
|
|
Scheduled
maturities
The scheduled maturities for fixed income
securities are as follows at December 31, 1999:
($ in
millions) |
|
Amortized
cost
|
|
Fair
value
|
Due in one year or
less |
|
$
1,369 |
|
$
1,372 |
Due after one year
through five years |
|
9,025 |
|
9,101 |
Due after five
years through ten years |
|
11,935 |
|
11,744 |
Due after ten
years |
|
21,049 |
|
21,288 |
|
|
|
|
|
|
|
43,378 |
|
43,505 |
Mortgage- and
asset-backed securities |
|
11,915 |
|
11,781 |
|
|
|
|
|
Total |
|
$55,293 |
|
$55,286 |
|
|
|
|
|
Actual maturities may differ from those
scheduled as a result of prepayments by the issuers.
Net investment
income
Year ended
December 31, |
|
1999
|
|
1998
|
|
1997
|
($ in
millions) |
Fixed income
securities |
|
$3,569 |
|
$3,458 |
|
$3,455 |
Equity
securities |
|
207 |
|
160 |
|
142 |
Mortgage
loans |
|
291 |
|
261 |
|
270 |
Other |
|
142 |
|
109 |
|
70 |
|
|
|
|
|
|
|
Investment income, before
expense |
|
4,209 |
|
3,988 |
|
3,937 |
Investment expense |
|
97 |
|
98 |
|
76 |
|
|
|
|
|
|
|
Net investment income |
|
$4,112 |
|
$3,890 |
|
$3,861 |
|
|
|
|
|
|
|
Realized capital
gains and losses
Year ended
December 31, |
|
1999
|
|
1998
|
|
1997
|
($ in
millions) |
Fixed income
securities |
|
$
(76 |
) |
|
$258 |
|
$195 |
|
Equity
securities |
|
1,005 |
|
|
640 |
|
794 |
|
Other
investments |
|
183 |
|
|
265 |
|
(7 |
) |
|
|
|
|
|
|
|
|
|
Realized capital gains and
losses |
|
1,112 |
|
|
1,163 |
|
982 |
|
Income taxes |
|
397 |
|
|
422 |
|
344 |
|
|
|
|
|
|
|
|
|
|
Realized capital gains and
losses, after-tax |
|
$
715 |
|
|
$741 |
|
$638 |
|
|
|
|
|
|
|
|
|
|
Excluding calls and prepayments, gross gains
of $389 million, $277 million and $250 million and gross losses of $383
million, $95 million and $153 million were realized on sales of fixed income
securities during 1999, 1998 and 1997, respectively.
Unrealized net
capital gains
Unrealized net capital gains on fixed income
and equity securities included in shareholders equity at December 31,
1999 are as follows:
|
|
|
|
|
|
Gross
unrealized |
|
|
($ in
millions) |
|
Cost/
amortized cost
|
|
Fair
value
|
|
Gains
|
|
Losses
|
|
Unrealized
net gains
|
Fixed income
securities |
|
$55,293 |
|
$55,286 |
|
$1,391 |
|
$(1,398 |
) |
|
$
(7 |
) |
Equity
securities |
|
4,565 |
|
6,738 |
|
2,333 |
|
(160 |
) |
|
2,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$59,858 |
|
$62,024 |
|
$3,724 |
|
$(1,558 |
) |
|
2,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income
taxes, deferred policy
acquisition costs and other |
|
|
|
|
|
|
|
|
|
|
(797 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net
capital gains |
|
|
|
|
|
|
|
|
|
|
$1,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 1998, equity securities had
gross unrealized gains of $2.3 billion and gross unrealized losses of $109
million.
Change in
unrealized net capital gains
Year ended
December 31, |
|
1999
|
|
1998
|
|
1997
|
($ in
millions) |
|
Fixed income
securities |
|
$(3,621 |
) |
|
$442 |
|
|
$1,134 |
Equity
securities |
|
(17 |
) |
|
39 |
|
|
589 |
|
|
|
|
|
|
|
|
|
Total |
|
(3,638 |
) |
|
481 |
|
|
1,723 |
Deferred income
taxes, deferred policy acquisition costs and other |
|
2,013 |
|
|
(308 |
) |
|
(905) |
|
|
|
|
|
|
|
|
|
Increase (decrease)
in unrealized net capital gains |
|
$(1,625 |
) |
|
$173 |
|
|
$
818 |
|
|
|
|
|
|
|
|
|
Investment loss
provisions and valuation allowances
Pretax provisions for investment losses,
principally relating to other than temporary declines in value of fixed
income securities and equity securities, and valuation allowances on
mortgage loans were $72 million, $105 million and $80 million in 1999, 1998
and 1997, respectively.
Mortgage loan
impairment
A mortgage loan is impaired when it is
probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement.
The components of impaired loans at December
31 are as follows:
($ in
millions) |
|
1999
|
|
1998
|
Impaired
loans |
|
|
|
|
|
|
With valuation
allowances |
|
$25 |
|
|
$35 |
|
Less: valuation
allowances |
|
(7 |
) |
|
(9 |
) |
Without valuation
allowances |
|
11 |
|
|
36 |
|
|
|
|
|
|
|
|
Net carrying value of impaired
loans |
|
$29 |
|
|
$62 |
|
|
|
|
|
|
|
|
The net carrying value of impaired loans at
December 31, 1999 and 1998 comprised $22 million and $60 million,
respectively, measured at the fair value of the collateral, and $7 million
and $2 million, respectively, measured at the present value of the loan
s expected future cash flows discounted at the loans effective
interest rate. Impaired loans without valuation allowances include
collateral dependent loans where the fair value of the collateral is greater
than the recorded investment in the loans.
Interest income is recognized on a cash basis
for impaired loans carried at the fair value of the collateral, beginning at
the time of impairment. For other impaired loans, interest is accrued based
on the net carrying value. The Company recognized interest income of $2
million, $5 million and $8 million on impaired loans during 1999, 1998 and
1997, respectively, of which $2 million, $5 million and $7 million was
received in cash during 1999, 1998 and 1997, respectively. The average
balance of impaired loans was $43 million, $53 million and $103 million
during 1999, 1998 and 1997, respectively.
Valuation allowances for mortgage loans at
December 31, 1999, 1998 and 1997, were $14 million, $15 million and $32
million, respectively. For the years ended December 31, 1999, 1998 and 1997,
direct write-downs of mortgage loan valuation allowances against mortgage
loan gross carrying amounts were $0, $1 million and $8 million,
respectively. For the years ended December 31, 1999, 1998 and 1997, net
reductions to mortgage loan valuation allowances, which are reported in
Realized capital gains and losses, were $1 million, $16 million and $25
million, respectively.
Investment
concentration for municipal bond and commercial mortgage portfolios and
other investment information
The Company maintains a diversified portfolio
of municipal bonds. The largest concentrations in the portfolio are
presented below. Except for the following, holdings in no other state
exceeded 5% of the portfolio at December 31, 1999:
(% of municipal
bond portfolio carrying value) |
|
1999
|
|
1998
|
Texas |
|
14.0 |
% |
|
12.7 |
% |
Illinois |
|
10.7 |
|
|
11.1 |
|
New York |
|
10.1 |
|
|
10.0 |
|
Pennsylvania |
|
5.6 |
|
|
6.3 |
|
California |
|
5.0 |
|
|
5.4 |
|
The Companys mortgage loans are
collateralized by a variety of commercial real estate property types located
throughout the United States. Substantially all of the commercial mortgage
loans are non-recourse to the borrower. The states with the largest portion
of the commercial mortgage loan portfolio are listed below. Except for the
following, holdings in no other state exceeded 5% of the portfolio at
December 31, 1999:
(% of commercial
mortgage portfolio carrying value) |
|
1999
|
|
1998
|
California |
|
19.6 |
% |
|
22.7 |
% |
Florida |
|
9.2 |
|
|
5.5 |
|
Illinois |
|
7.7 |
|
|
8.1 |
|
New York |
|
7.0 |
|
|
8.7 |
|
Texas |
|
5.9 |
|
|
5.1 |
|
New
Jersey |
|
5.4 |
|
|
3.9 |
|
The types of properties collateralizing the
commercial mortgage loans at December 31, are as follows:
(% of commercial
mortgage portfolio carrying value) |
|
1999
|
|
1998
|
Office
buildings |
|
33.0 |
% |
|
28.6 |
% |
Retail |
|
26.9 |
|
|
29.7 |
|
Apartment
complex |
|
16.7 |
|
|
16.9 |
|
Warehouse |
|
16.0 |
|
|
16.4 |
|
Industrial |
|
2.2 |
|
|
2.5 |
|
Other |
|
5.2 |
|
|
5.9 |
|
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
100.0 |
% |
|
|
|
|
|
|
|
The contractual maturities of the commercial
mortgage loan portfolio as of December 31, 1999, for loans that were not in
foreclosure are as follows:
($ in
millions) |
|
Number
of loans
|
|
Carrying
value
|
|
Percent
|
2000 |
|
42 |
|
$
257 |
|
6.4 |
% |
2001 |
|
53 |
|
259 |
|
6.4 |
|
2002 |
|
65 |
|
279 |
|
6.9 |
|
2003 |
|
74 |
|
309 |
|
7.6 |
|
2004 |
|
59 |
|
299 |
|
7.4 |
|
Thereafter |
|
634 |
|
2,643 |
|
65.3 |
|
|
|
|
|
|
|
|
|
Total |
|
927 |
|
$4,046 |
|
100.0 |
% |
|
|
|
|
|
|
|
|
In 1999, $208 million of commercial mortgage
loans were contractually due. Of these, 81.8% were paid as due, 14.5% were
refinanced at prevailing market terms, 1.5% were foreclosed or are in the
process of foreclosure, and 2.2% were in the process of refinancing or
restructuring discussions.
At December 31, 1999, the carrying value of
investments, excluding equity securities, that were non-income producing
during 1999 was $4 million.
At December 31, 1999, fixed income securities
with a carrying value of $280 million were on deposit with regulatory
authorities as required by law.
6.
Financial Instruments
In the normal course of business, the Company
invests in various financial assets, incurs various financial liabilities
and enters into agreements involving derivative financial instruments and
other off-balance-sheet financial instruments. The fair value estimates of
financial instruments presented below are not necessarily indicative of the
amounts the Company might pay or receive in actual market transactions.
Potential taxes and other transaction costs have not been considered in
estimating fair value. The disclosures that follow do not reflect the fair
value of the Company as a whole since a number of the Companys
significant assets (including deferred policy acquisition costs, property
and equipment and reinsurance recoverables) and liabilities (including
property-liability, traditional life and interest sensitive life insurance
reserves, and deferred income taxes) are not considered financial
instruments and are not carried at fair value. Other assets and liabilities
considered financial instruments such as premium installment receivables,
accrued investment income, cash and claim payments outstanding are generally
of a short-term nature. Their carrying values are deemed to approximate fair
value.
Financial
assets
The carrying value and fair value of financial
assets at December 31, are as follows:
|
|
1999
|
|
1998
|
|
|
Carrying
value
|
|
Fair
value
|
|
Carrying
value
|
|
Fair
value
|
($ in
millions) |
|
|
Fixed income
securities |
|
$55,286 |
|
$55,286 |
|
$53,560 |
|
$53,560 |
Equity
securities |
|
6,738 |
|
6,738 |
|
6,421 |
|
6,421 |
Mortgage
loans |
|
4,068 |
|
3,973 |
|
3,458 |
|
3,664 |
Short-term
investments |
|
2,422 |
|
2,422 |
|
2,477 |
|
2,477 |
Policy
loans |
|
1,090 |
|
1,090 |
|
569 |
|
569 |
Separate
Accounts |
|
13,857 |
|
13,857 |
|
10,098 |
|
10,098 |
Carrying value and
fair value includes the effects of derivative financial instruments where
applicable.
Fair values for fixed income securities are
based on quoted market prices where available. Non-quoted securities are
valued based on discounted cash flows using current interest rates for
similar securities. Equity securities are valued based principally on quoted
market prices. Mortgage loans are valued based on discounted contractual
cash flows. Discount rates are selected using current rates at which similar
loans would be made to borrowers with similar characteristics, using similar
properties as collateral. Loans that exceed 100% loan-to-value are valued at
the estimated fair value of the underlying collateral. Short-term
investments are highly liquid investments with maturities of less than one
year whose carrying value are deemed to approximate fair value.
The carrying value of policy loans are deemed
to approximate fair value. Separate Accounts assets are carried in the
Consolidated statements of financial position at fair value based on quoted
market prices.
Financial
liabilities and trust preferred securities
The carrying value and fair value of financial
liabilities and trust preferred securities at December 31, are as
follows:
|
|
1999
|
|
1998
|
|
|
Carrying
value
|
|
Fair
value
|
|
Carrying
value
|
|
Fair
value
|
($ in
millions) |
|
|
Contractholder
funds on investment contracts |
|
$19,790 |
|
$19,122 |
|
$16,757 |
|
$16,509 |
Short-term
debt |
|
665 |
|
665 |
|
393 |
|
393 |
Long-term
debt |
|
2,186 |
|
2,045 |
|
1,353 |
|
1,417 |
Separate
Accounts |
|
13,857 |
|
13,857 |
|
10,098 |
|
10,098 |
Mandatorily
redeemable preferred securities of
subsidiary trusts |
|
964 |
|
852 |
|
750 |
|
795 |
The fair value of contractholder funds on
investment contracts is based on the terms of the underlying contracts.
Reserves on investment contracts with no stated maturities (single premium
and flexible premium deferred annuities) are valued at the account balance
less surrender charges. The fair value of immediate annuities and annuities
without life contingencies with fixed terms is estimated using discounted
cash flow calculations based on interest rates currently offered for
contracts with similar terms and durations. Short-term debt is valued at
carrying value due to its short-term nature. The fair value of long-term
debt and trust preferred securities is based on quoted market prices or in
certain cases, determined using discounted cash flow calculations based on
interest rates of comparable instruments. Separate Accounts liabilities are
carried at the fair value of the underlying assets.
Derivative
financial instruments
Derivative financial instruments include
swaps, futures, forwards and options, including caps and floors. The Company
primarily uses derivative financial instruments to reduce its exposure to
market risk (principally interest rate, equity price and foreign currency
risk) and in conjunction with asset/liability management, in its Life and
Savings segment. The Company does not hold or issue these instruments for
trading purposes.
The following table summarizes the contract or
notional amount, credit exposure, fair value and carrying value of the
Companys derivative financial instruments at December 31, as
follows:
|
|
1999
|
|
1998
|
($ in
millions) |
|
Contract/
notional
amount
|
|
Credit
exposure
|
|
Fair
value
|
|
Carrying
value
assets/
(liabilities)
|
|
Contract/
notional
amount
|
|
Credit
exposure
|
|
Fair
value
|
|
Carrying
value
assets/
(liabilities)
|
Interest rate
contracts |
|
|
Interest rate swap
agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay floating rate, receive fixed
rate |
|
$
409 |
|
$
9 |
|
$
7 |
|
|
$
3 |
|
|
$
474 |
|
$
14 |
|
$
30 |
|
|
$
24 |
|
Pay fixed rate, receive floating
rate |
|
1,170 |
|
37 |
|
37 |
|
|
19 |
|
|
965 |
|
|
|
(32 |
) |
|
(17 |
) |
Pay floating rate, receive
floating |
|
71 |
|
|
|
|
|
|
|
|
|
73 |
|
|
|
(1 |
) |
|
|
|
Financial futures
and forward contracts |
|
3,029 |
|
2 |
|
2 |
|
|
6 |
|
|
911 |
|
1 |
|
1 |
|
|
1 |
|
Interest rate cap
and floor agreements |
|
1,861 |
|
4 |
|
4 |
|
|
2 |
|
|
3,049 |
|
2 |
|
2 |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest rate
contracts |
|
6,540 |
|
52 |
|
50 |
|
|
30 |
|
|
5,472 |
|
17 |
|
|
|
|
11 |
|
|
Equity and other
contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options, financial
futures and warrants |
|
1,198 |
|
117 |
|
99 |
|
|
99 |
|
|
780 |
|
206 |
|
206 |
|
|
206 |
|
|
Foreign currency
contracts |
|
|
Foreign currency
swap agreements |
|
566 |
|
|
|
(1 |
) |
|
|
|
|
109 |
|
|
|
(3 |
) |
|
(3 |
) |
Foreign currency
forward contracts |
|
813 |
|
|
|
(1 |
) |
|
(1 |
) |
|
534 |
|
|
|
(4 |
) |
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total foreign
currency contracts |
|
1,379 |
|
|
|
(2 |
) |
|
(1 |
) |
|
643 |
|
|
|
(7 |
) |
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative
financial instruments |
|
$9,117 |
|
$169 |
|
$147 |
|
|
$128 |
|
|
$6,895 |
|
$223 |
|
$199 |
|
|
$210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit exposure
includes the effects of legally enforceable master netting
agreements.
Credit exposure
and fair value include accrued interest where applicable.
Carrying value is
representative of deferred gains and losses, unamortized premium, accrued
interest and/or unrealized gains and losses depending on the accounting for
the derivative financial instrument.
The contract or notional amounts are used to
calculate the exchange of contractual payments under the agreements and are
not representative of the potential for gain or loss on these
agreements.
Credit exposure represents the Companys
potential loss if all of the counterparties failed to perform under the
contractual terms of the contracts and all collateral, if any, became
worthless. This exposure is measured by the fair value of contracts with a
positive fair value at the reporting date reduced by the effect, if any, of
master netting agreements.
The Company manages its exposure to credit
risk by utilizing highly rated counterparties, establishing risk control
limits, executing legally enforceable master netting agreements and
obtaining collateral where appropriate. To date, the Company has not
incurred any losses on derivative financial instruments due to counterparty
nonperformance.
Fair value is the estimated amount that the
Company would receive (pay) to terminate or assign the contracts at the
reporting date, thereby taking into account the current unrealized gains or
losses of open contracts. Dealer and exchange quotes are used to value the
Companys derivatives.
Interest rate swap agreements involve
the exchange, at specified intervals, of interest payments calculated by
reference to an underlying notional amount. The Company generally enters
into swap agreements to change the interest rate characteristics of existing
assets to more closely match the interest rate characteristics of the
corresponding liabilities.
The Company did not record any material
deferred gains or losses on swaps nor realize any material gains or losses
on swap terminations in 1999, 1998 or 1997.
The Company paid a weighted average floating
interest rate of 5.3% and 5.6% and received a weighted average fixed
interest rate of 7.1% and 6.8% in 1999 and 1998, respectively. The Company
paid a weighted average fixed interest rate of 5.7% and 6.5% and received a
weighted average floating interest rate of 5.0% and 6.0% in 1999 and 1998,
respectively.
Financial futures and forward contracts
are commitments to either purchase or sell designated financial instruments
at a future date for a specified price or yield. They may be settled in cash
or through delivery. As part of its asset/liability management, the Company
generally utilizes futures and forward contracts to manage its market risk
related to fixed income securities, equity securities, certain annuity
contracts and anticipatory investment purchases and sales. Futures and
forwards used as hedges of anticipatory transactions pertain to identified
transactions which are probable to occur and are generally completed within
90 days. Futures contracts have limited off-balance-sheet credit risk as
they are executed on organized exchanges and require security deposits, as
well as the daily cash settlement of margins.
Interest rate cap and floor agreements
give the holder the right to receive at a future date, the amount, if any,
by which a specified market interest rate exceeds the fixed cap rate or
falls below the fixed floor rate, applied to a notional amount. The Company
purchases interest rate cap and floor agreements to reduce its exposure to
rising or falling interest rates relative to certain existing assets and
liabilities in conjunction with asset/liability management.
Equity-indexed option contracts and
equity-indexed financial futures provide returns based on a specified
equity index applied to the instruments notional amount. The Company
utilizes these instruments to achieve equity appreciation, to reduce the
market risk associated with certain annuity contracts and for other risk
management purposes. Where required, counterparties post collateral to
minimize credit risk.
Debt warrants provide the right to
purchase a specified new issue of debt at a predetermined price. The Company
purchases debt warrants to protect against long-term call risk.
Foreign currency contracts involve the
future exchange or delivery of foreign currency on terms negotiated at the
inception of the contract. The Company enters into these agreements
primarily to manage the currency risk associated with investing in
securities and issuing obligations which are denominated in foreign
currencies.
Market risk is the risk that the Company will
incur losses due to adverse changes in market rates and prices. Market risk
exists for all of the derivative financial instruments that the Company
currently holds, as these instruments may become less valuable due to
adverse changes in market conditions. The Company mitigates this risk
through established risk control limits set by senior management. In
addition, the change in the value of the Companys derivative financial
instruments designated as hedges is generally offset by the change in the
value of the related assets and liabilities.
Off-balance-sheet
financial instruments
A summary of the contractual amounts and fair
values of off-balance-sheet financial instruments at December 31,
follows:
($ in
millions) |
|
1999
|
|
1998
|
|
|
Contractual
amount
|
|
Fair
value
|
|
Contractual
amount
|
|
Fair
value
|
Commitments to
invest |
|
$316 |
|
$
|
|
$353 |
|
$
|
Commitments to
extend mortgage loans |
|
96 |
|
1 |
|
87 |
|
1 |
Financial
guarantees |
|
11 |
|
1 |
|
11 |
|
1 |
Credit
guarantees |
|
89 |
|
|
|
93 |
|
|
Except for credit guarantees, the contractual
amounts represent the amount at risk if the contract is fully drawn upon,
the counterparty defaults and the value of any underlying security becomes
worthless. Unless noted otherwise, the Company does not require collateral
or other security to support off-balance-sheet financial instruments with
credit risk.
Commitments to invest generally represent
commitments to acquire financial interests or instruments. The Company
enters into these agreements to allow for additional participation in
certain limited partnership investments. Because the equity investments in
the limited partnerships are not actively traded, it is not practicable to
estimate the fair value of these commitments.
Commitments to extend mortgage loans are
agreements to lend to a borrower provided there is no violation of any
condition established in the contract. The Company enters these agreements
to commit to future loan fundings at
a predetermined interest rate. Commitments generally have fixed expiration
dates or other termination clauses. Commitments to extend mortgage loans,
which are secured by the underlying properties, are valued based on
estimates of fees charged by other institutions to make similar commitments
to similar borrowers.
Financial guarantees represent conditional
commitments to repurchase notes from a creditor upon default of the debtor.
The Company enters into these agreements primarily to provide financial
support for certain equity investees. Financial guarantees are valued based
on estimates of payments that may occur over the life of the
guarantees.
Credit guarantees written represent
conditional commitments to exchange identified AAA or AA rated credit risk
for identified A rated credit risk upon bankruptcy or other event of default
of the referenced credits. The Company receives fees, which are reported in
Net investment income over the lives of the commitments, for assuming the
referenced credit risk. The Company enters into these transactions in order
to achieve higher yields than if the referenced credits were directly
owned.
The Companys maximum amount at risk,
assuming bankruptcy or other default of the referenced credits and the value
of the referenced credits becomes worthless, is the fair value of the
identified AAA or AA rated securities. The identified AAA or AA rated
securities had a fair value of $88 million at December 31, 1999. The Company
includes the impact of credit guarantees in its analysis of credit risk, and
the referenced credits were current with respect to their contractual terms
at December 31, 1999.
7.
Reserve for Property-Liability Insurance Claims and Claims
Expense
As described in Note 2, the Company
establishes reserves for claims and claims expense on reported and
unreported claims of insured losses. These reserve estimates are based on
known facts and interpretation of circumstances, including the Company
s experience with similar cases and historical trends involving claim
payment patterns, loss payments, pending levels of unpaid claims and product
mix, as well as other factors including court decisions, economic conditions
and public attitudes. The effects of inflation are implicitly considered in
the reserving process. The Company, in the normal course of business, may
also supplement its claims processes by utilizing third party adjusters,
appraisers, engineers, inspectors, other professionals and information
sources to assess and settle catastrophe and non-catastrophe
claims.
The establishment of appropriate reserves,
including reserves for catastrophes, is an inherently uncertain process.
Allstate regularly updates its reserve estimates as new facts become known
and further events occur which may impact the resolution of unsettled
claims. Changes in prior year reserve estimates, which may be material, are
reflected in the results of operations in the period such changes are
determinable.
Activity in the reserve for property-liability
insurance claims and claims expense is summarized as follows:
($ in
millions) |
|
1999
|
|
1998
|
|
1997
|
Balance at January
1 |
|
$16,881 |
|
|
$17,403 |
|
|
$17,382 |
|
Less reinsurance
recoverables |
|
1,458 |
|
|
1,630 |
|
|
1,784 |
|
|
|
|
|
|
|
|
|
|
|
Net balance at
January 1 |
|
15,423 |
|
|
15,773 |
|
|
15,598 |
|
Acquisitions |
|
1,023 |
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net
balance |
|
16,446 |
|
|
15,831 |
|
|
15,598 |
|
Incurred claims and
claims expense related to: |
Current year |
|
15,266 |
|
|
14,301 |
|
|
14,013 |
|
Prior years |
|
(587 |
) |
|
(700 |
) |
|
(677 |
) |
|
|
|
|
|
|
|
|
|
|
Total incurred |
|
14,679 |
|
|
13,601 |
|
|
13,336 |
|
Claims and claims
expense paid related to: |
Current year |
|
9,349 |
|
|
8,521 |
|
|
8,148 |
|
Prior years |
|
5,615 |
|
|
5,488 |
|
|
5,013 |
|
|
|
|
|
|
|
|
|
|
|
Total paid |
|
14,964 |
|
|
14,009 |
|
|
13,161 |
|
Net balance at
December 31 |
|
16,161 |
|
|
15,423 |
|
|
15,773 |
|
Plus reinsurance
recoverables |
|
1,653 |
|
|
1,458 |
|
|
1,630 |
|
|
|
|
|
|
|
|
|
|
|
Balance at December
31 |
|
$17,814 |
|
|
$16,881 |
|
|
$17,403 |
|
|
|
|
|
|
|
|
|
|
|
Incurred claims and claims expense represents
the sum of paid losses and reserve changes in the calendar year. This
expense includes losses from catastrophes of $816 million, $780 million and
$365 million in 1999, 1998 and 1997, respectively. A catastrophe
is defined by Allstate as an event that produces pre-tax losses before
reinsurance in excess of $1 million, and involves multiple first party
policyholders. 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 Companys results of
operations and financial position.
The level of catastrophic loss experienced in
any year cannot be predicted and could be material to results of operations
and financial position. For Allstate, areas of potential catastrophe losses
due to hurricanes include major metropolitan centers near the eastern and
gulf coasts of the United States. Exposure to potential earthquake losses in
California is limited by the Companys participation in the California
Earthquake Authority (CEA). Other areas in the United States
with exposure to potential earthquake losses include areas surrounding the
New Madrid fault system in the Midwest and faults in and surrounding
Seattle, Washington and Charleston, South Carolina. Allstate continues to
evaluate alternative business strategies to more effectively manage its
exposure to catastrophe losses in these and other areas.
As part of Allstates catastrophe
management strategy, the Company purchases reinsurance to limit aggregate
losses from large catastrophic insured events. Effective June 1, 1997, the
Company entered into a three-year excess of loss reinsurance contract
covering property policies in the northeastern portion of the United States.
The reinsurance program provides up to 95% of $500 million of reinsurance
protection for catastrophe losses in excess of an estimated $750 million
retention subject to a limit of $500 million in any one year and an
aggregate limit of $1.00 billion over the three-year contract period. In
addition, the Company has access to reimbursement provided by the Florida
Hurricane Catastrophe Fund (FHCF) for 90% of hurricane losses in
Florida in excess of approximately the first $255 million for each storm, up
to an aggregate of $900 million (90% of approximately $1.00 billion) in a
single hurricane season, and $1.23 billion total reimbursement over all
hurricane seasons.
At the closing of Allstates October 1,
1999 acquisition of CNA personal lines, Allstate assumed $1.02 billion of
loss reserves (closing reserves), net of reinsurance, on
policies written prior to the acquisition date. Concurrent with the closing,
Allstate and CNA entered into a four-year aggregate stop-loss agreement.
Pursuant to the agreement, CNA will indemnify Allstate for upward loss
development of the closing reserves in an amount equal to 80% of the first
$40 million of development, and 90% of all losses in excess of $40 million.
The agreement expires on October 1, 2003 at which time a final settlement
between Allstate and CNA will be made for any closing reserve deficiency (or
redundancy) not yet settled. In connection with a review of the statement of
financial position of CNA personal lines (see Note 3), the Company increased
the net loss reserves of the CNA personal lines business acquired by $47
million in the fourth quarter of 1999.
Management believes that the reserve for
claims and claims expense, net of reinsurance recoverables, at December 31,
1999 is appropriately established in the aggregate and adequate to cover the
ultimate net cost of reported and unreported claims arising from losses
which had occurred by that date.
Favorable calendar year reserve development in
1999, 1998 and 1997 was the result of favorable injury severity trends as
compared to the Companys anticipated trends, in each of the three
years. For 1999 and 1998, this favorable development more than offset
adverse development in Discontinued Lines and Coverages (described in Note
17). The favorable injury severity trend during this three-year period was
largely due to moderate medical cost inflation mitigated by the Company
s loss control programs. The impacts of the moderate medical cost
inflation trend have emerged over time as actual claim settlements validate
the effect of the rate of inflation. In addition, while the claim settlement
process changes are believed to have contributed to favorable severity
trends on closed claims, these changes introduce a greater degree of
variability in reserve estimates for the remaining outstanding claims at
December 31, 1999. Future reserve development releases, if any, are expected
to be adversely impacted by expected increases in medical cost inflation
rates.
Allstates exposure to environmental,
asbestos and other mass tort claims stem principally from excess and surplus
business written from 1972 through 1985, including substantial excess and
surplus general liability coverages on Fortune 500 companies, and
reinsurance coverage written during the 1960s through the 1980s, including
reinsurance on primary insurance written on large U.S. companies. Other mass
tort exposures primarily relate to product liability claims, such as those
for medical devices and other products, and general liabilities.
In 1986, the general liability policy form
used by Allstate and others in the property-liability industry was amended
to introduce an absolute pollution exclusion, which excluded
coverage for environmental damage claims and added an asbestos exclusion.
Most general liability policies issued prior to 1987 contain annual
aggregate limits for product liability coverage, and policies issued after
1986 also have an annual aggregate limit on all coverages. Allstates
experience to date is that these policy form changes have effectively
limited its exposure to environmental and asbestos claim risks.
Establishing net loss reserves for
environmental, asbestos and other mass tort claims is subject to
uncertainties that are greater than those presented by other types of
claims. Among the complications are lack of historical data, long reporting
delays, uncertainty as to the number and identity of insureds with potential
exposure, unresolved legal issues regarding policy coverage, availability of
reinsurance and the extent and timing of any such contractual liability. The
legal issues concerning the interpretation of various insurance policy
provisions and whether those losses are, or were ever intended to be
covered, are complex. Courts have reached different and sometimes
inconsistent conclusions as to when losses are deemed to have occurred and
which policies provide coverage; what types of losses are covered; whether
there is an insured obligation to defend; how policy limits are determined;
how policy exclusions are applied and interpreted; and whether clean-up
costs represent insured property damage. Management believes these issues
are not likely to be resolved in the near future.
In 1999, the Company completed an annual
assessment of its environmental, asbestos and other mass tort exposures.
This assessment resulted in a strengthening of net asbestos reserves of $346
million, and a $155 million release of net environmental and other reserves.
Allstates reserves for environmental claims were $506 million and $641
million, net of reinsurance recoverables of $159 million and $199 million at
December 31, 1999 and 1998, respectively. Reserves for asbestos claims were
$758 million and $459 million, net of reinsurance recoverables of $289
million and $227 million at December 31, 1999 and 1998, respectively.
Approximately 59% and 58% of the total net environmental and asbestos
reserves at December 31, 1999 and 1998, respectively, are for incurred but
not reported (IBNR) estimated losses. The survival ratios
(ending reserves divided by claims and claims expense paid) for net
environmental and asbestos reserves at December 31, 1999 and 1998, were 14.0
and 10.8, respectively. In 1999, the survival ratio increased primarily as
the result of increased asbestos reserve levels. Management believes its net
loss reserves for environmental, asbestos and other mass tort claims are
appropriately established based on available facts, technology, laws and
regulations. However, due to the inconsistencies of court coverage
decisions, plaintiffs expanded theories of liability, the risks
inherent in major litigation and other uncertainties, the ultimate cost of
these claims may vary materially from the amounts currently recorded,
resulting in an increase in the loss reserves. In addition, while the
Company believes the improved actuarial techniques and databases have
assisted in its ability to estimate environmental, asbestos and other mass
tort net loss reserves, these refinements may subsequently prove to be
inadequate indicators of the extent of probable losses. Due to the
uncertainties and factors described above, management believes it is not
practicable to develop a meaningful range for any such additional net loss
reserves that may be required.
8.
Reserve for Life-Contingent Contract Benefits and Contractholder
Funds
At December 31, the Reserve for
life-contingent contract benefits consists of the following:
($ in
millions) |
|
1999
|
|
1998
|
Immediate
annuities: |
Structured settlement
annuities |
|
$4,254 |
|
$4,694 |
Other immediate
annuities |
|
1,525 |
|
1,669 |
Traditional
life |
|
1,701 |
|
1,125 |
Other |
|
117 |
|
113 |
|
|
|
|
|
Total life-contingent contract
benefits |
|
$7,597 |
|
$7,601 |
|
|
|
|
|
The assumptions for mortality generally
utilized in calculating reserves include, the U.S. population with projected
calendar year improvements and age setbacks for impaired lives for
structured settlement annuities; the 1983 group annuity mortality table for
other immediate annuities; and actual company experience plus loading for
traditional life. Interest rate assumptions vary from 3.5% to 11.7% for
immediate annuities and 4.0% to 11.3% for traditional life. Other estimation
methods used include the present value of contractually fixed future
benefits for structured settlement annuities, the present value of expected
future benefits based on historical experience for other immediate annuities
and the net level premium reserve method using the Companys withdrawal
experience rates for traditional life.
Premium deficiency reserves are established,
if necessary, and have been recorded for certain immediate annuities with
life contingencies to the extent the unrealized gains on fixed income
securities would result in a premium deficiency had those gains actually
been realized. A liability of $65 million and $933 million is included in
the Reserve for life-contingent contract benefits with respect to this
deficiency for the years ended December 31, 1999 and 1998, respectively. The
decrease in this liability in 1999 reflects declines in unrealized capital
gains on fixed income securities.
At December 31, Contractholder funds consists
of the following:
($ in
millions) |
|
1999
|
|
1998
|
Interest-sensitive
life |
|
$
5,872 |
|
$
4,395 |
Fixed
annuities: |
Immediate annuities |
|
1,751 |
|
1,641 |
Deferred annuities |
|
13,060 |
|
10,874 |
Guaranteed
investment contracts |
|
2,953 |
|
3,233 |
Other investment
contracts |
|
1,563 |
|
990 |
|
|
|
|
|
Total contractholder
funds |
|
$25,199 |
|
$21,133 |
|
|
|
|
|
Contractholder funds are equal to deposits
received net of commissions and interest credited to the benefit of the
contractholder less withdrawals, mortality charges and administrative
expenses. Interest rates credited range from 4.0% to 8.5% for
interest-sensitive life contracts; 3.5% to 10.0% for immediate annuities;
1.6% to 26.2% for deferred annuities (which include equity-indexed annuities
that are hedged, see Note 2 and Note 6); 4.9% to 9.9% for guaranteed
investment contracts and 5.3% to 6.6% for other investment contracts.
Withdrawal and surrender charge protection includes: i) for
interest-sensitive life, either a percentage of account balance or dollar
amount grading off generally over 20 years; and, ii) for deferred annuities
not subject to a market value adjustment, either a declining or level
percentage charge generally over nine years or less. Approximately 10% of
deferred annuities are subject to a market value adjustment.
9.
Reinsurance
The Company purchases reinsurance to limit
aggregate and single losses on large risks. The Company continues to have
primary liability as a direct insurer for risks reinsured. The information
presented herein should be read in connection with Note 7. Estimating
amounts of reinsurance recoverable is also impacted by many of the
uncertainties involved in the establishment of loss reserves.
The effects of reinsurance on premiums written
and earned for the year ended December 31, are as follows:
($ in
millions) |
|
1999
|
|
1998
|
|
1997
|
Property-liability premiums written |
|
|
|
Direct |
|
$20,228 |
|
|
$19,878 |
|
|
$19,075 |
|
Assumed |
|
531 |
|
|
63 |
|
|
102 |
|
Ceded |
|
(370 |
) |
|
(426 |
) |
|
(388 |
) |
|
|
|
|
|
|
|
|
|
|
Property-liability premiums
written, net of reinsurance |
|
$20,389 |
|
|
$19,515 |
|
|
$18,789 |
|
|
|
|
|
|
|
|
|
|
|
Property-liability premiums earned |
|
|
|
Direct |
|
$19,977 |
|
|
$19,666 |
|
|
$18,872 |
|
Assumed |
|
524 |
|
|
74 |
|
|
98 |
|
Ceded |
|
(389 |
) |
|
(433 |
) |
|
(366 |
) |
|
|
|
|
|
|
|
|
|
|
Property-liability premiums
earned, net of reinsurance |
|
$20,112 |
|
|
$19,307 |
|
|
$18,604 |
|
|
|
|
|
|
|
|
|
|
|
Life and annuity
premiums and contract charges |
|
|
|
Direct |
|
$
1,849 |
|
|
$
1,668 |
|
|
$
1,675 |
|
Assumed |
|
34 |
|
|
29 |
|
|
21 |
|
Ceded |
|
(260 |
) |
|
(178 |
) |
|
(194 |
) |
|
|
|
|
|
|
|
|
|
|
Life and annuity premiums and
contract charges,
net of reinsurance |
|
$
1,623 |
|
|
$
1,519 |
|
|
$
1,502 |
|
|
|
|
|
|
|
|
|
|
|
The amounts recoverable from reinsurers at
December 31, 1999 and 1998 include $110 million and $244 million,
respectively, related to property-liability losses paid by the Company and
billed to reinsurers, and $1.65 billion and $1.46 billion, respectively,
estimated by the Company with respect to ceded unpaid losses (including
IBNR) which are not billable until the losses are paid. Amounts recoverable
from mandatory pools and facilities included above were $698 million and
$637 million at December 31, 1999 and 1998, respectively. Recent
developments in the insurance industry have often led to the segregation of
environmental, asbestos and other mass tort exposures into separate legal
entities with dedicated capital. These actions have been supported by
regulatory bodies in certain cases. The Company is unable to determine the
impact, if any, that these developments will have on the collectibility of
reinsurance recoverables in the future. The Company had amounts recoverable
from Lloyds of London of $89 million and $99 million at December 31,
1999 and 1998, respectively. Lloyds of London implemented a
restructuring plan in 1996 to solidify its capital base and to segregate
claims for years before 1993. The impact, if any, of the restructuring on
the collectibility of the recoverable from Lloyds of London is
uncertain at this time. The recoverable from Lloyds of London
syndicates is spread among thousands of investors who have unlimited
liability.
In connection with the Companys
acquisition of CNA personal lines, Allstate and CNA entered into a four-year
aggregate stop loss agreement (see Note 7). The Company currently has a
recoverable from CNA on unpaid losses of $147 million that is subject to the
stop loss agreement. Excluding mandatory pools and facilities, and the CNA
recoverable on unpaid losses, no other amount due or estimated to be due
from any one property-liability reinsurer was in excess of $85 million and
$84 million at December 31, 1999 and 1998, respectively.
The Company also purchases reinsurance in its
Life and Savings segment, primarily to limit mortality risk on certain term
life policies. The risk of reinsurance uncollectibility on Life and Savings
recoverables is mitigated by an absence of high concentrations with
individual reinsurers.
Management believes the recoverables are
appropriately established; however, as the Companys underlying
reserves continue to develop, the amount ultimately recoverable may vary
from amounts currently recorded. The reinsurers and amounts recoverable
therefrom are regularly evaluated by the Company and a provision for
uncollectible reinsurance is recorded, if needed. There was a $3 million
recovery of previous provisions for reinsurance in 1999 and there were no
provisions for uncollectible reinsurance in 1998 and 1997. The allowance for
uncollectible reinsurance was $111 million and $141 million at December 31,
1999 and 1998, respectively.
10.
Capital Structure
Debt
Outstanding
Total debt outstanding at December 31,
consists of the following:
($ in
millions) |
|
1999
|
|
1998
|
6.75% Notes, due
2003 |
|
$
300 |
|
$
300 |
7.20% Senior Notes,
due 2009 |
|
750 |
|
|
6.915%
Equity-Linked Note, due 2009 |
|
75 |
|
|
7.50% Debentures,
due 2013 |
|
250 |
|
250 |
6.75% Debentures,
due 2018 |
|
250 |
|
250 |
6.90% Debentures,
due 2038 |
|
250 |
|
250 |
7.125% Debentures,
due 2097 |
|
250 |
|
250 |
Floating rate
notes, due 2009 to 2014 |
|
61 |
|
53 |
|
|
|
|
|
Total long-term debt |
|
2,186 |
|
1,353 |
Short-term debt and
bank borrowings |
|
665 |
|
393 |
|
|
|
|
|
Total debt |
|
$2,851 |
|
$1,746 |
|
|
|
|
|
In November 1999, the Company issued $750
million of 7.20% senior notes due 2009, the net proceeds of which were used
for general corporate purposes including share repurchases. In addition, a
$75 million, 6.915% equity-linked note was issued in connection with the
Companys 1999 acquisition of CNA personal lines. The principal
repayment on the note at maturity is contingent upon certain profitability
measures of the acquired CNA personal lines business. The maximum amount of
principal which would have to be paid is $85 million and the
minimum is $65 million. The 7.125% Debentures due in 2097 are subject to
redemption at the Companys option in whole or in part beginning in
2002 at 100% of the principal amount plus accrued interest to the redemption
date. The Company also has the right to shorten the maturity of the 7.125%
Debentures to the extent required to preserve the Companys ability to
deduct interest paid on the debentures.
To manage short-term liquidity, Allstate
issues commercial paper and may draw on existing credit facilities. The
Company maintains two credit facilities as a potential source of funds for
The Allstate Corporation, AIC and ALIC. These include a $1.50 billion,
five-year revolving line of credit, expiring in 2001 and a $50 million,
one-year revolving line of credit expiring in 2000. In order to borrow from
the five-year line of credit, AIC is required to maintain a specified
statutory surplus level and the Companys debt to equity ratio (as
defined in the agreement) must not exceed a designated level. In addition,
the Company has three credit facilities available to provide up to $92
million in funds for short-term liquidity purposes for the AHL operations.
The Company pays commitment fees in connection with these lines of credit.
As of December 31, 1999, $71 million of borrowings were outstanding under
the AHL credit lines and no amounts were outstanding under the Company
s $1.50 billion and $50 million bank lines of credit. The weighted
average interest rates of outstanding short-term debt at December 31, 1999
and 1998 were 5.8% and 5.3%, respectively. The Company paid $114 million,
$104 million and $87 million of interest on debt in 1999, 1998 and 1997,
respectively.
The Company filed a shelf registration
statement with the Securities and Exchange Commission (SEC) in
August 1998, under which up to $2 billion of debt securities, preferred
stock or debt warrants may be issued. As of December 31, 1999, $750 million
of securities have been issued under the registration statement.
Mandatorily
Redeemable Preferred Securities of Subsidiary Trusts
In 1996, Allstate Financing I (AF I
), a wholly owned subsidiary trust of the Company, issued 22 million
shares of 7.95% Quarterly Income Preferred Securities (QUIPS) at
$25 per share. The sole assets of AF I are $550 million of 7.95% Junior
Subordinated Deferrable Interest Debentures (QUIDS) issued by
the Company. The QUIDS held by AF I will mature on December 31, 2026 and are
redeemable by the Company at a liquidation value of $25 per share in whole
or in part beginning on November 25, 2001, at which time the QUIPS are
callable. AF I may elect to extend the maturity of its QUIPS to December 31,
2045. Dividends on the QUIPS are cumulative, payable quarterly in arrears,
and are deferrable at the Companys option for up to 5
years.
In 1996, Allstate Financing II (AF II
), a wholly owned subsidiary trust of the Company, issued 200,000
shares of 7.83% preferred securities (trust preferred securities
) at $1,000 per share. The sole assets of AF II are $200 million of
7.83% Junior Subordinated Deferrable Interest Debentures (junior
subordinated debentures) issued by the Company. The junior
subordinated debentures held by AF II will mature on December 1, 2045 and
are redeemable by the Company at a liquidation value of $1,000 per share in
whole or in part beginning on December 1, 2006, at which time the trust
preferred securities are callable. Dividends on the trust preferred
securities are cumulative, payable semi-annually in arrears, and are
deferrable at the Companys option for up to 5 years.
In connection with the Companys 1999
acquisition of AHL, Allstate assumed AHLs obligations under the
outstanding mandatorily redeemable preferred securities issued by AHL and
AHL Financing, a wholly owned subsidiary trust of AHL. The mandatorily
redeemable preferred securities represent FELINE PRIDES, which consist of a
unit with a stated amount of $50 comprising i) a stock purchase contract
under which the holder will purchase from the Company on August 16, 2000, a
number of Allstate common shares equal to a specified rate and ii)
beneficial ownership of a 6.75% trust preferred security representing a
preferred undivided beneficial interest in the assets of AHL Financing. The
sole assets of AHL Financing are 6.75% subordinated debentures due August
16, 2002 with a principal amount of $107 million for which the Company and
AHL are co-obligors. Dividends on the FELINE PRIDES are cumulative, payable
quarterly in arrears at a stated annual rate of 6.75%, and are deferrable
until the August 16, 2002 maturity date. Each unit of FELINE PRIDES also
pays a 1.75% annual yield enhancement, payable quarterly until the August
16, 2000 settlement of the stock purchase contract component.
The obligations of the Company with respect to
the QUIDS, junior subordinated debentures and AHL subordinated debentures
constitute full and unconditional guarantees by the Company of AF Is,
AF IIs and AHL Financings obligations under the respective
preferred securities, including the payment of the liquidation or redemption
price and any accumulated and unpaid interest and yield enhancements, but
only to the extent of funds held by the trusts. The preferred securities are
classified in the Companys Consolidated statements of financial
position as Mandatorily Redeemable Preferred Securities of Subsidiary Trusts
(representing the minority interest in the trusts). The QUIPS and trust
preferred securities are recorded at their redemption amounts of $550
million and $200 million, respectively. The FELINE PRIDES are recorded at
their fair value at the date of acquisition of $214 million as required by
purchase accounting rules. The fair value exceeded the redemption amount by
$110 million. Allstate will be prohibited from paying dividends on its
preferred and common stock, or repurchasing capital stock if the Company
elects to defer dividend payments on these preferred securities. Dividends
on the preferred securities have been classified as minority interest in the
Consolidated statements of operations. The total yield enhancements to be
paid on FELINE PRIDES units over the stock purchase contract were charged to
Shareholders equity at the time of issuance and therefore periodic
yield enhancements are not reflected in the Consolidated statements of
operations.
Capital
stock
The Company has 900 million shares of issued
common stock of which 787 million was outstanding and 113 million was held
in treasury as of December 31, 1999. In 1999, the Company repurchased 67
million shares at an average cost of $32.38 pursuant to authorized share
repurchase programs of which, 34.1 million were reissued pursuant to the AHL
acquisition. On August 16, 2000, Allstate will issue common shares to settle
the Companys obligation under the stock purchase contract unit
embedded in the FELINE PRIDES. The number of shares issued will be based on
an applicable settlement rate multiplied by the 2,070,000 units of FELINE
PRIDES outstanding. The settlement rate will depend on whether the holders
of the FELINE PRIDES elect to settle the stock purchase contract in cash or
through the put of their beneficial interest in the trust preferred
securities. If settled in cash, the number of shares issued will be based on
a settlement rate of 3.5741; if holders elect to settle through the put of
their beneficial interest in the trust preferred securities, the applicable
settlement rate will be 3.5687. Under a shelf registration statement filed
with the SEC in February 2000, the Company may issue up to 7,398,387 shares
of Allstate common stock upon settlement of the FELINE PRIDES stock purchase
contracts.
Shareholder Rights
Agreement
On February 12, 1999, the Company announced a
Rights Agreement under which shareholders of record on February 26, 1999
received a dividend distribution of one share purchase right (a Right
) on each outstanding share of the Companys common stock. The
Rights become exercisable ten days after it is publicly announced that a
person or group has acquired 15% or more of the Companys common stock
or ten business days after the beginning of a tender or exchange offer to
acquire 15% or more of the Companys common stock. The Rights then
become exercisable at a price of $150 for a number of shares of the Company
s common stock having a market value equal to $300. The Company may
redeem the Rights at a price of $.01 per Right. The Rights expire on
February 12, 2009. The Rights are intended to protect shareholders from
unsolicited takeover attempts that may unfairly pressure shareholders and
deprive them of the full value of their shares.
11. Company
Restructuring
On November 10, 1999, the Company announced a
series of strategic initiatives to aggressively expand its selling and
service capabilities. The Company also announced that it is implementing a
program to reduce expenses by approximately $600 million. The reduction in
expenses will come from field realignment, the reorganization of employee
agents to a single exclusive agency independent contractor program, the
closing of a field support center and four regional offices, and from
reduced employee related expenses and professional services as a result of
reductions in force, attrition and consolidations. The reduction will result
in the elimination of approximately 4,000 current non-agent positions,
across all employment grades and categories by the end of 2000, or
approximately 10% of the Companys non-agent work force.
These cost reductions are part of a larger
initiative to redeploy the cost savings to finance new initiatives including
investments in direct access and Internet channels for new sales and service
capabilities, new competitive pricing, new agent and claim technology and
enhanced marketing and advertising. As the result of the cost reduction
program, Allstate recorded restructuring and related charges of $81 million
pretax ($53 million after-tax) during the fourth quarter of 1999. The costs
recognized primarily relate to the elimination of positions, the
consolidation of operations and facilities and the transition of multiple
employee agency programs to a single exclusive agency independent contractor
program. All restructuring actions are anticipated to be completed by the
end of 2000.
The pretax restructuring and other related
charges accrued in the fourth quarter of 1999 comprised $59 million for
employee termination benefits including the cost of incremental
post-retirement benefits offered and $10 million for lease termination costs
including post-exit rent expenses and asset impairments resulting from the
restructuring decision. An additional $12 million of pretax restructuring
related costs, primarily consisting of agent separation costs, were expensed
as incurred during the fourth quarter of 1999. These charges are recorded in
the 1999 Consolidated statement of operations as Restructuring charges
. The Company anticipates that additional pretax restructuring related
charges of approximately $100 million will be expensed as incurred
throughout 2000 for agent conversion costs, retention and relocation
bonuses, consulting and legal fees, training expenses and other
miscellaneous costs. As of December 31, 1999, 192 employees have been
terminated pursuant to the restructuring plan and no payments have been
applied against the restructuring liability for employee termination
benefits, lease termination costs or post-exit rent expenses.
12. Commitments
and Contingent Liabilities
Leases
The Company leases certain office facilities
and computer equipment. Total rent expense for all leases was $370 million,
$292 million and $256 million in 1999, 1998 and 1997,
respectively.
Minimum rental commitments under noncancelable
operating leases with an initial or remaining term of more than one year as
of December 31, are as follows:
($ in
millions) |
|
1999
|
2000 |
|
$273 |
2001 |
|
223 |
2002 |
|
129 |
2003 |
|
77 |
2004 |
|
49 |
Thereafter |
|
112 |
|
|
|
|
|
$863 |
|
|
|
California
Earthquake Authority (CEA)
Allstate participates in the CEA, which is a
privately-financed, publicly-managed state agency created to provide
insurance coverage for earthquake damage. Insurers selling homeowners
insurance in California are required to offer earthquake insurance to their
customers either through their company or participation in the CEA. The
Companys homeowners policy continues to include coverages for losses
caused by explosions, theft, glass breakage and fires following an
earthquake, which are not underwritten by the CEA.
Should losses arising from an earthquake cause
a deficit in the CEA, additional capital needed to operate the CEA would be
obtained through assessments of participating insurance companies, payments
received under reinsurance agreements and bond issuances funded by future
policyholder assessments. Participating insurers are required to fund an
assessment, not to exceed $2.15 billion, if the capital of the CEA falls
below $350 million. Participating insurers are required to fund a second
assessment, not to exceed $1.43 billion, if aggregate CEA earthquake losses
exceed $5.86 billion or the capital of the CEA falls below $350 million. At
December 31, 1999, the CEAs capital balance was approximately $485
million. If the CEA assesses its member insurers for any amount, the amount
of future assessments on members is reduced by the amounts previously
assessed. To date, the CEA has not assessed member insurers beyond the
start-up assessment issued to participating insurers in 1996. The authority
of the CEA to assess participating insurers expires when it has completed
twelve years of operation. All future assessments to participating CEA
insurers are based on their CEA insurance market share, as of December 31 of
the preceding year. As of December 31, 1999, the Company had a 25.7% CEA
market share. Assuming its current CEA market share does not materially
change, Allstate does not expect its portion of these additional contingent
assessments, if any, to exceed $553 million, as the likelihood of an event
exceeding the CEA claims paying capacity of $5.86 billion is
remote.
Florida hurricane
assessments
In Florida, the Company is subject to
assessments from the Florida Windstorm Underwriting Association (FWUA
) and the Florida Residential Property and Casualty Joint Underwriting
Association (FRPCJUA), which are organizations created to
provide coverage for catastrophic losses to property owners unable to obtain
coverage in the private market. Regular assessments are levied on
participating companies if the deficit in the calendar year is less than or
equal to 10% of Florida property premiums industry-wide for that year. An
insurer may recoup a regular assessment through a surcharge to policyholders
subject to a cap on the amount that can be charged in any one year. If the
deficit exceeds 10%, the FWUA and/or FRPCJUA will fund the deficit through
the issuance of bonds. The costs of these bonds are then funded through a
regular assessment in the first year following the deficit and emergency
assessments in subsequent years. Companies are required to collect the
emergency assessments directly from the policyholder and remit these monies
to the organizations as they are collected. Participating companies are
obligated to purchase any unsold bonds issued by the FWUA and/or FRPCJUA.
The insurer must file any recoupment surcharge with the Florida Department
of Insurance (the Department) at least 15 days prior to imposing
the surcharge on any policies. The surcharge may be used automatically after
the expiration of the 15 days, unless the Department has notified the
insurer in writing that any of its calculations are incorrect.
The Company is also subject to assessments
from the FHCF, which has the authority to issue bonds to pay its obligations
to participating insurers. The bonds issued by the FHCF are funded by
assessments on all property and casualty premiums written in the state,
except workers compensation and accident and health insurance. These
assessments are limited to 4% in the first year of assessment, and up to a
total of 6% for assessments in the second and subsequent years. Assessments
are recoupable immediately through increases in policyholder rates. A rate
filing or any portion of a rate change attributable entirely to the
assessment is deemed approved when made with the Department, subject to the
Departments statutory authority to review the adequacy of
any rate at any time.
While the statutes are designed so that the
ultimate cost is borne by the policyholders, the exposure to assessments and
the availability of recoveries may not offset each other in the financial
statements due to timing and the possibility of policies not being renewed
in subsequent years.
Shared
markets
As a condition of its license to do business
in various states, the Company is required to participate in mandatory
property-liability shared market mechanisms or pooling arrangements, which
provide various insurance coverages to individuals or other entities that
otherwise are unable to purchase such coverage voluntarily provided by
private insurers. Underwriting results related to these organizations have
been immaterial to the results of operations.
Guaranty
funds
Under state insurance guaranty fund laws,
insurers doing business in a state can be assessed, up to prescribed limits,
for certain obligations of insolvent insurance companies to policyholders
and claimants. The Companys expenses related to these funds have been
immaterial.
Northbrook sale
agreement
In connection with the sale of Northbrook
Holdings, Inc. and its wholly owned subsidiaries (collectively
Northbrook) in 1996 to St. Paul Fire & Marine Insurance
Company (St. Paul), Allstate entered into an agreement with St.
Paul whereby Allstate and St. Paul will share in any development of the
closing net loss reserves of Northbrook, which will be settled as of July
31, 2000. The development of the closing net loss reserves has been
favorable to date and the Company does not expect the ultimate settlement of
the closing net loss reserves to vary materially from recorded
amounts.
PMI Runoff Support
Agreement
The Company has certain limited rights and
obligations under a capital support agreement (Runoff Support Agreement
) with PMI Mortgage Insurance Company (PMI), the primary
operating subsidiary of PMI Group (see Note 3). Under the Runoff Support
Agreement, the Company would be required to pay claims on PMI policies
written prior to October 28, 1994 if PMI fails certain financial covenants
and fails to pay such claims. In the event
any amounts are so paid, the Company would receive a commensurate amount of
preferred stock or subordinated debt of PMI Group or PMI. The Runoff Support
Agreement also restricts PMIs ability to write new business and pay
dividends under certain circumstances. Management does not believe this
agreement will have a material adverse effect on results of operations,
liquidity or financial position of the Company.
Regulation
The Companys insurance businesses are
subject to the effects of changing social, economic and regulatory
environments. Public and regulatory initiatives have varied and have
included efforts to adversely influence and restrict premium rates, restrict
the Companys ability to cancel policies, impose underwriting standards
and expand overall regulation. The ultimate changes and eventual effects, if
any, of these initiatives are uncertain.
Legal
proceedings
Allstate and plaintiffs representatives
have agreed to settle certain civil suits filed in California, including a
class action, related to the 1994 Northridge, California earthquake. The
settlement received final approval from the Superior Court of the State of
California for the County of Los Angeles on June 11, 1999. The plaintiffs in
these civil suits challenged licensing and engineering practices of certain
firms Allstate retained and alleged that Allstate systematically pressured
engineering firms to improperly alter their reports to reduce the loss
amounts paid to some insureds with earthquake claims. Under the terms of the
settlement, Allstate sent notice to approximately 11,500 homeowners
insurance customers inviting them to participate in a court-administered
program which may allow for review of their claims by an independent
engineer and an independent adjusting firm to ensure that they have been
compensated for all structural damage from the 1994 Northridge earthquake
covered under the terms of their Allstate policies. It is anticipated that
approximately 2,500 of these customers will ultimately participate in this
independent review process. Allstate has agreed to retain an independent
consultant to review, among other things, Allstates practices and
procedures for handling catastrophe claims, and has helped fund a charitable
foundation devoted to consumer education on loss prevention and consumer
protection and other insurance issues. The Company does not expect that the
effect of the proposed settlement will exceed the amounts currently
reserved. During August 1999, a group of objectors filed an appeal from the
order approving the settlement. That appeal is pending.
In April 1998, Federal Bureau of Investigation
agents executed search warrants at three Allstate offices for documents
relating to the handling of certain claims for losses resulting from the
Northridge earthquake. Allstate is cooperating with the investigation, which
is being directed by the United States Attorneys Office for the
Central District of California. At present, the Company cannot determine the
impact of resolving the investigation.
For the past five years, the Company has been
distributing to certain PP&C claimants, documents regarding the claims
process and the role that attorneys may play in that process. Suits
challenging the use of these documents have been filed against the Company,
including purported class action suits. In addition to these suits, the
Company has received inquires from states attorneys general, bar
associations and departments of insurance. In certain states, the Company
has continued to use these documents after agreeing to make certain
modifications. The Company is vigorously defending its rights to use these
documents. The outcome of these disputes is currently uncertain.
There are currently several state and
nationwide putative class action lawsuits pending in various state courts
seeking actual and punitive damages from Allstate alleging breach of
contract and fraud because of its specification of after-market
(non-original equipment manufacturer ) replacement parts in the repair of
insured vehicles. Plaintiffs in these suits allege that after-market parts
are not of like kind and quality as required by the insurance
policies. The lawsuits are in various stages of development with no class
action having been certified. The outcome of these disputes is currently
uncertain.
Allstate is defending lawsuits, including two
putative class actions, regarding worker classification. Two suits relate to
the classification of California exclusive agents as independent
contractors. These suits were filed after Allstates reorganization of
its California agency programs in 1996. The plaintiffs, among other things,
seek a determination that they have been treated as employees
notwithstanding agent contracts that specify that they are independent
contractors for all purposes. Another suit relates to the classification of
staff working in agency offices. In this putative class action, plaintiffs
seek damages under the Employee Retirement Income Security Act and the
Racketeer Influenced and Corrupt Organizations Act alleging that 10,000
agency secretaries were terminated as employees by Allstate and rehired by
agencies through outside staffing vendors for the purpose of avoiding the
payment of employee benefits. Allstate is vigorously defending these
lawsuits. The outcome of these disputes is currently uncertain.
Various other legal and regulatory actions are
currently pending that involve Allstate and specific aspects of its conduct
of business, including some related to the Northridge earthquake, and like
other members of the insurance industry, the Company is the target of an
increasing number of class action lawsuits. These class actions are based on
a variety of issues including insurance and claim settlement practices. At
this time, based on their present status, it is the opinion of management
that the ultimate liability, if any, in one or more of these other actions
in excess of amounts currently reserved is not expected to have a material
effect on the results of operations, liquidity or financial position of the
Company.
13. Income
Taxes
A consolidated federal income tax return is
filed by the Company and its eligible domestic subsidiaries. Tax liabilities
and benefits realized by the consolidated group are allocated as generated
by the respective entities. Tax liabilities and benefits of ineligible
domestic subsidiaries are computed separately based on taxable income of the
individual subsidiary, and reported on separate federal tax
returns.
Prior to June 30, 1995, the Company was a
subsidiary of Sears, Roebuck & Co. (Sears) and, with its
eligible domestic subsidiaries, was included in the Sears consolidated
federal income tax return and federal income tax allocation agreement.
Effective June 30, 1995, the Company and Sears entered into a new tax
sharing agreement, which governs their respective rights and obligations
with respect to federal income taxes for all periods during which the
Company was a subsidiary of Sears, including the treatment of audits of tax
returns for such periods.
The Internal Revenue Service (IRS)
has completed its review of the Companys federal income tax returns
through the 1993 tax year. Any adjustments that may result from IRS
examinations of tax returns are not expected to have a material impact on
the financial position, liquidity or results of operations of the
Company.
The components of the deferred income tax
assets and liabilities at December 31, are as follows:
($ in
millions) |
|
1999
|
|
1998
|
Deferred
assets |
|
|
|
|
|
|
Discount on loss
reserves |
|
$
531 |
|
|
$
620 |
|
Unearned premium
reserves |
|
565 |
|
|
472 |
|
Life and annuity
reserves |
|
606 |
|
|
589 |
|
Other
postretirement benefits |
|
231 |
|
|
229 |
|
Other
assets |
|
348 |
|
|
455 |
|
|
|
|
|
|
|
|
Total deferred assets |
|
2,281 |
|
|
2,365 |
|
|
Deferred
liabilities |
|
|
|
|
|
|
Deferred policy
acquisition costs |
|
(1,086 |
) |
|
(942 |
) |
Unrealized net
capital gains |
|
(736 |
) |
|
(1,610 |
) |
Pension |
|
(101 |
) |
|
(120 |
) |
Other
liabilities |
|
(147 |
) |
|
(154 |
) |
|
|
|
|
|
|
|
Total deferred
liabilities |
|
(2,070 |
) |
|
(2,826 |
) |
|
|
|
|
|
|
|
Net deferred asset
(liability) |
|
$
211 |
|
|
$
(461 |
) |
|
|
|
|
|
|
|
Although realization is not assured,
management believes it is more likely than not that the deferred tax assets,
net of valuation allowances, will be realized based on the assumption that
certain levels of income will be achieved. The Company has established
valuation allowances for deferred tax assets of certain international
operations, due to a lack of evidence that such assets would be realized.
The total amount of the valuation allowance reducing deferred tax assets was
$58 million and $33 million at December 31, 1999 and 1998,
respectively.
The components of income tax expense for the
year ended December 31, are as follows:
($ in
millions) |
|
1999
|
|
1998
|
|
1997
|
Current |
|
$
967 |
|
$1,429 |
|
|
$1,136 |
Deferred |
|
181 |
|
(7 |
) |
|
188 |
|
|
|
|
|
|
|
|
Total income tax
expense |
|
$1,148 |
|
$1,422 |
|
|
$1,324 |
|
|
|
|
|
|
|
|
The Company paid income taxes of $1.06
billion, $1.34 billion and $975 million in 1999, 1998 and 1997,
respectively. The Company had a current income tax liability of $97 million
and $226 million at December 31, 1999 and 1998, respectively.
A reconciliation of the statutory federal
income tax rate to the effective income tax rate on income from operations
for the year ended December 31, is as follows:
|
|
1999
|
|
1998
|
|
1997
|
Statutory federal
income tax rate |
|
35.0 |
% |
|
35.0 |
% |
|
35.0 |
% |
Tax-exempt
income |
|
(7.7 |
) |
|
(6.1 |
) |
|
(6.2 |
) |
Dividends received
deduction |
|
(.6 |
) |
|
(.7 |
) |
|
(.5 |
) |
Other |
|
2.7 |
|
|
1.8 |
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
Effective income
tax rate |
|
29.4 |
% |
|
30.0 |
% |
|
29.9 |
% |
|
|
|
|
|
|
|
|
|
|
Prior to January l, 1984, ALIC and certain
other life insurance subsidiaries included in the Life and Savings segment
were entitled to exclude certain amounts from taxable income and accumulate
such amounts in a policyholder surplus account. The balance in
this account at December 31, 1999, approximately $105 million, will result
in federal income taxes payable of $37 million if distributed by these
companies. No provision for taxes has been made as the Companys
affected subsidiaries have no plan to distribute amounts from this account.
No further additions to the account have been permitted since the Tax Reform
Act of 1984.
14. Statutory
Financial Information
The following table reconciles consolidated
net income for the year ended December 31, and shareholders equity at
December 31, as reported herein in conformity with generally accepted
accounting principles with total statutory net income and capital and
surplus of Allstates domestic insurance subsidiaries, determined in
accordance with statutory accounting practices prescribed or permitted by
insurance regulatory authorities:
|
|
Net
income
|
|
Shareholders
equity
|
($ in
millions) |
|
1999
|
|
1998
|
|
1997
|
|
1999
|
|
1998
|
Balance per
generally accepted accounting principles |
|
$2,720 |
|
|
$3,294 |
|
|
$3,105 |
|
|
$16,601 |
|
|
$17,240 |
|
Parent company and
undistributed net income of certain subsidiaries |
|
97 |
|
|
(76 |
) |
|
(125 |
) |
|
670 |
|
|
897 |
|
Unrealized
gain/loss on fixed income securities |
|
|
|
|
|
|
|
|
|
|
(114 |
) |
|
(2,670 |
) |
Deferred policy
acquisition costs |
|
(254 |
) |
|
(312 |
) |
|
(279 |
) |
|
(3,747 |
) |
|
(3,023 |
) |
Deferred income
taxes |
|
152 |
|
|
(26 |
) |
|
389 |
|
|
(161 |
) |
|
482 |
|
Employee
benefits |
|
(69 |
) |
|
27 |
|
|
(77 |
) |
|
263 |
|
|
288 |
|
Financial statement
impact of acquisitions/dispositions |
|
(152 |
) |
|
256 |
|
|
(81 |
) |
|
(918 |
) |
|
174 |
|
Reserves and
non-admitted assets |
|
36 |
|
|
92 |
|
|
99 |
|
|
181 |
|
|
99 |
|
Other |
|
(201 |
) |
|
129 |
|
|
(126 |
) |
|
108 |
|
|
(86 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance per
statutory accounting practices |
|
$2,329 |
|
|
$3,384 |
|
|
$2,905 |
|
|
$12,883 |
|
|
$13,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances by major
business type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property-Liability |
|
$2,012 |
|
|
$2,998 |
|
|
$2,533 |
|
|
$10,132 |
|
|
$10,976 |
|
Life and Savings |
|
317 |
|
|
386 |
|
|
372 |
|
|
2,751 |
|
|
2,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance per
statutory accounting practices |
|
$2,329 |
|
|
$3,384 |
|
|
$2,905 |
|
|
$12,883 |
|
|
$13,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Property-Liability statutory capital and
surplus balances above exclude wholly-owned subsidiaries included in the
Life and Savings segment.
Permitted
statutory accounting practices
AIC and each of its domestic
property-liability and life and savings subsidiaries prepare their statutory
financial statements in accordance with accounting practices prescribed or
permitted by the insurance department of the applicable state of domicile.
Prescribed statutory accounting practices include a variety of publications
of the National Association of Insurance Commissioners (NAIC),
as well as state laws, regulations and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices
not so prescribed. Certain domestic subsidiaries of the Company follow
permitted statutory accounting practices which differ from
those prescribed by regulatory authorities. The use of such permitted
statutory accounting practices does not have a significant impact on
statutory surplus or statutory net income.
The NAICs codification initiative has
produced a comprehensive guide of statutory accounting principles, which the
Company will implement in January 2001. The requirements are not expected to
have a material impact on the statutory surplus of the Companys
insurance subsidiaries.
Dividends
The ability of the Company to pay dividends is
dependent on business conditions, income, cash requirements of the Company,
receipt of dividends from AIC and other relevant factors. The payment of
shareholder dividends by AIC without the prior approval of the state
insurance regulator is limited to formula amounts based on net income and
capital and surplus, determined in accordance with statutory accounting
practices, as well as the timing and amount of dividends paid in the
preceding twelve months.
In the twelve-month period beginning January
1, 1999, AIC paid dividends of $2.96 billion, the maximum amount allowed
under Illinois insurance law without the approval of the Illinois Department
of Insurance (IL Department) based on 1998 formula amounts.
Based on 1999 AIC statutory net income, the maximum amount of dividends AIC
will be able to pay without prior IL Department approval at a given point in
time beginning in May 2000 is $1.96 billion, less dividends paid during the
preceding twelve months measured at that point in time.
Risk-based
capital
The NAIC has a standard for assessing the
solvency of insurance companies, which is referred to as risk-based capital (
RBC). The requirement consists of a formula for determining each
insurers RBC and a model law specifying regulatory actions if an
insurers RBC falls below specified levels. At December 31, 1999, RBC
for each of the Companys domestic insurance subsidiaries was
significantly above levels that would require regulatory
actions.
15. Benefit
Plans
Pension and other
postretirement plans
Defined benefit pension plans cover most
domestic full-time and certain part-time employees, as well as Canadian
full-time employees and certain part-time employees. Benefits under the
pension plans are based upon the employees length of service, average
annual compensation and estimated social security retirement benefits. The
Companys funding policy for the pension plans is to make annual
contributions in accordance with accepted actuarial cost
methods.
The Company also provides certain health care
and life insurance benefits for retired employees. Qualified employees may
become eligible for these benefits if they retire in accordance with the
Companys established retirement policy and are continuously insured
under the Companys group plans or other approved plans for ten or more
years prior to retirement. The Company shares the cost of the retiree
medical benefits with retirees based on years of service, with the Company
s share being subject to a 5% limit on annual medical cost inflation
after retirement. The Companys postretirement benefit plans currently
are not funded. The Company has the right to modify or terminate these
plans.
The components of net periodic benefit cost
for all plans for the year ended December 31, are as follows:
|
|
Pension
benefits
|
|
Postretirement
benefits
|
($ in
millions) |
|
1999
|
|
1998
|
|
1997
|
|
1999
|
|
1998
|
|
1997
|
Service
cost |
|
$155 |
|
|
$155 |
|
|
$131 |
|
|
$14 |
|
|
$18 |
|
$13 |
|
Interest
cost |
|
245 |
|
|
237 |
|
|
220 |
|
|
49 |
|
|
48 |
|
47 |
|
Expected return on
plan assets |
|
(358 |
) |
|
(267 |
) |
|
(245 |
) |
|
|
|
|
|
|
|
|
Amortization of
prior service costs |
|
(6 |
) |
|
(5 |
) |
|
(6 |
) |
|
(2 |
) |
|
|
|
|
|
Amortization of
unrecognized transition
obligation |
|
(2 |
) |
|
(8 |
) |
|
(8 |
) |
|
|
|
|
|
|
|
|
Settlement charge
(benefit) |
|
(43 |
) |
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
Special termination
benefits |
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
Recognized net
actuarial loss (gain) |
|
2 |
|
|
26 |
|
|
18 |
|
|
(3 |
) |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic
benefit cost (benefit) |
|
$
(7 |
) |
|
$138 |
|
|
$116 |
|
|
$64 |
|
|
$66 |
|
$59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in net periodic pension benefit
cost in 1999 was due to continued strong investment returns on plan assets,
which have been mostly due to favorable returns on equity securities. These
favorable investment returns are expected to continue to decrease pension
costs in the future. Net periodic pension benefit cost may include
settlement charges or benefits as a result of retirees selecting lump sum
distributions. Settlements are expected to increase in the future if the
number of eligible participants deciding to receive distributions and the
amount of their benefits increases.
In 1999, net periodic pension benefit cost
includes a settlement benefit primarily relating to the conversion of
Allstate employee agents to an independent contractor program. Settlement
and or curtailment accounting treatment may be triggered in 2000 relating to
the reorganization of agents to one program or as the result of other
circumstances.
The special termination benefits included in
net periodic other post-retirement benefit cost in 1999 reflect the
incremental cost of lowering the minimum eligible retirement age
requirements for certain agent programs. This action is part of the Company
s 1999 restructuring plan (see Note 11), and accordingly, the special
termination benefits are also included in Allstates current
restructuring reserve.
The Company calculates benefit obligations
based upon actuarial methodologies using the projected benefit obligation
for pension plans and the accumulated postretirement benefit obligation for
other postretirement plans.
The changes in benefit obligations for all
plans for the year ended December 31, are as follows:
|
|
Pension
benefits
|
|
Postretirement
benefits
|
($ in
millions) |
|
1999
|
|
1998
|
|
1999
|
|
1998
|
Change in
benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation,
beginning of year |
|
$3,413 |
|
|
$3,334 |
|
|
$702 |
|
|
$678 |
|
Service
cost |
|
155 |
|
|
155 |
|
|
14 |
|
|
18 |
|
Interest
cost |
|
245 |
|
|
237 |
|
|
49 |
|
|
48 |
|
Participant
contributions |
|
|
|
|
|
|
|
8 |
|
|
7 |
|
Plan
amendments |
|
|
|
|
|
|
|
9 |
|
|
(28 |
) |
Actuarial (gain)
loss |
|
(479 |
) |
|
(5 |
) |
|
(48 |
) |
|
15 |
|
Benefits
paid |
|
(419 |
) |
|
(304 |
) |
|
(44 |
) |
|
(36 |
) |
Settlement
charges |
|
53 |
|
|
|
|
|
|
|
|
|
|
Translation
adjustment |
|
1 |
|
|
(4 |
) |
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation,
end of year |
|
$2,969 |
|
|
$3,413 |
|
|
$691 |
|
|
$702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension plan assets at December 31, 1999 and
1998 comprise primarily equity securities and long-term corporate and U.S.
government obligations. The Companys other postretirement benefit
plans currently are not funded.
The change in pension plan assets for the year
ended December 31, are as follows:
|
|
Pension
benefits
|
($ in
millions) |
|
1999
|
|
1998
|
Change in plan
assets |
|
|
|
|
|
|
Fair value of plan
assets, beginning of year |
|
$3,761 |
|
|
$3,056 |
|
Actual return on
plan assets |
|
405 |
|
|
865 |
|
Employer
contribution |
|
38 |
|
|
151 |
|
Benefits
paid |
|
(419 |
) |
|
(304 |
) |
Translation
adjustment |
|
1 |
|
|
(7 |
) |
|
|
|
|
|
|
|
Fair value of plan
assets, end of year |
|
$3,786 |
|
|
$3,761 |
|
|
|
|
|
|
|
|
Benefits paid include lump sum distributions,
a portion of which may trigger settlement accounting treatment.
The plans funded status, which are
calculated as the difference between the projected benefit obligation and
plan assets for pension benefits, and the difference between the accumulated
benefit obligation and plan assets for other postretirement benefits, are as
follows:
|
|
Pension
benefits
|
|
Postretirement
benefits
|
($ in
millions) |
|
1999
|
|
1998
|
|
1999
|
|
1998
|
Funded
status |
|
$817 |
|
|
$349 |
|
|
$(691 |
) |
|
$(702 |
) |
Unamortized prior
service cost |
|
(20 |
) |
|
(28 |
) |
|
(23 |
) |
|
(29 |
) |
Unamortized
transition obligation |
|
6 |
|
|
4 |
|
|
|
|
|
|
|
Unrecognized net
actuarial gain |
|
(593 |
) |
|
(164 |
) |
|
(63 |
) |
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid (accrued)
benefit cost |
|
$210 |
|
|
$161 |
|
|
$(777 |
) |
|
$(748 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The $429 million change in the unrecognized
net actuarial pension gain in 1999 reflects a higher discount rate
assumption used in determining the projected benefit obligation. Allstate
amortizes its excess unrecognized net actuarial gains over the average
remaining service period of active employees expected to receive benefits.
Included in the prepaid benefit cost of the pension benefits are plans with
aggregate accumulated benefit obligations in excess of the aggregate fair
value of plan assets in the amount of $48 million and $54 million for 1999
and 1998, respectively.
Assumptions used in the determination of the
projected pension benefit obligation and plan assets at December 31, which
were based on an October 31 measurement date, were:
|
|
1999
|
|
1998
|
|
1997
|
Weighted average
discount rate |
|
8.00 |
% |
|
7.25 |
% |
|
7.25 |
% |
Rate of increase in
compensation levels |
|
4.00
5.00 |
|
|
4.00
5.00 |
|
|
4.50
5.00 |
|
Expected long-term
rate of return on plan assets |
|
9.50 |
|
|
9.50 |
|
|
9.50 |
|
The weighted average health care cost trend
rate used in measuring the accumulated postretirement benefit cost was 6.10%
for 1999, gradually declining to 5.00% in 2002 and remaining at that level
thereafter. The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 8.00% and 7.25% in 1999
and 1998, respectively. Assumed health care cost trend rates have a
significant effect on the amounts reported for the postretirement health
care plans.
A one percentage-point increase in assumed
health care cost trend rates would increase the total of the service and
interest cost components of net periodic benefit cost of other
postretirement benefits, and the accumulated postretirement benefit
obligation by $2 million and $16 million, respectively. A one
percentage-point decrease in assumed health care cost trend rates would
decrease the total of the service and interest cost components of net
periodic benefit cost of other postretirement benefits, and the accumulated
postretirement benefit obligation by $7 million and $59 million,
respectively.
Profit sharing
plans
Employees of the Company and its domestic
subsidiaries, with the exception of AHL, are also eligible to become members
of The Savings and Profit Sharing Fund of Allstate Employees (Allstate
Plan). The Company contributions are based on the Companys
matching obligation and performance. The Allstate Plan includes an Employee
Stock Ownership Plan (ESOP) to pre-fund a portion of the Company
s anticipated contribution. In connection with the Allstate Plan, the
Company has a note from the Allstate ESOP with a current principal balance
of $202 million. The ESOP note has a fixed interest rate of 7.9% and matures
in 2019.
The Companys defined contribution to the
Allstate Plan was $80 million, $168 million and $159 million in 1999, 1998
and 1997, respectively.
These amounts were reduced by the ESOP benefit
computed for the year ended December 31, as follows:
($ in
millions) |
|
1999
|
|
1998
|
|
1997
|
Interest expense
recognized by ESOP |
|
$17 |
|
|
$
21 |
|
|
$
25 |
|
Less dividends
accrued on ESOP shares |
|
(23 |
) |
|
(22 |
) |
|
(20 |
) |
Cost of shares
allocated |
|
30 |
|
|
38 |
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
24 |
|
|
37 |
|
|
35 |
|
Reduction of
defined contribution due to ESOP |
|
79 |
|
|
167 |
|
|
158 |
|
|
|
|
|
|
|
|
|
|
|
ESOP
benefit |
|
$(55 |
) |
|
$(130 |
) |
|
$(123 |
) |
|
|
|
|
|
|
|
|
|
|
Net profit sharing expense relating to the
Allstate Plan was $25 million, $38 million and $36 million for 1999, 1998
and 1997, respectively. The Company contributed $60 million, $45 million and
$7 million to the ESOP in 1999, 1998 and 1997, respectively. At December 31,
1999, total committed to be released, allocated and unallocated ESOP shares
were 3.3 million, 13.5 million and 22.2 million, respectively.
Allstate also has profit sharing plans for
eligible employees of its Canadian insurance subsidiaries as well as for
employees of AHL. Profit sharing expense for these plans is not
significant.
16. Equity
Incentive Plans
The Company has two equity incentive plans
which provide the Company the authority to grant nonqualified stock options,
incentive stock options, and restricted or unrestricted shares of the Company
s stock to certain employees and directors of the Company. A maximum
of 41.1 million shares of common stock will be subject to awards under the
plans, subject to adjustment in accordance with the plans terms. At
December 31, 1999 and 1998, 12.2 million and 19.8 million shares,
respectively, were reserved for future issuance under these plans. To date,
the Company has not issued incentive stock options or unrestricted shares,
and grants of restricted stock have been insignificant.
Options are granted under the plans at
exercise prices equal to the fair value of the Companys common stock
on the applicable grant date. Effective with the 1999 acquisition of AHL,
fixed stock options of Allstate were exchanged for options outstanding under
the previously outstanding AHL plan. The basis for the option exchange was
equal to the share conversion ratio pursuant to the merger agreement. The
options granted under the Allstate plans vest ratably over a three or
four-year period. The options granted may be exercised when vested and will
expire ten years after the date of grant.
The change in stock options for the year ended
December 31, were as follows:
(thousands of
shares) |
|
1999
|
|
Weighted
average
exercise
price
|
|
1998
|
|
Weighted
average
exercise
price
|
|
1997
|
|
Weighted
average
exercise
price
|
Beginning
balance |
|
14,297 |
|
|
$24.29 |
|
13,533 |
|
|
$18.92 |
|
13,788 |
|
|
$14.20 |
Granted |
|
6,155 |
|
|
35.22 |
|
2,862 |
|
|
42.64 |
|
2,626 |
|
|
36.68 |
AHL options
exchanged |
|
1,284 |
|
|
15.00 |
|
|
|
|
|
|
|
|
|
|
Exercised |
|
(1,095 |
) |
|
14.56 |
|
(1,993 |
) |
|
45.64 |
|
(2,708 |
) |
|
12.27 |
Canceled or
expired |
|
(261 |
) |
|
38.21 |
|
(105 |
) |
|
34.41 |
|
(173 |
) |
|
16.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance |
|
20,380 |
|
|
27.32 |
|
14,297 |
|
|
24.29 |
|
13,533 |
|
|
18.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable |
|
11,646 |
|
|
$21.03 |
|
9,678 |
|
|
$17.46 |
|
7,886 |
|
|
$13.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
fair value
(at grant date) for options
granted during the year |
|
$
9.70 |
|
|
|
|
$
12.25 |
|
|
|
|
$
11.39 |
|
|
|
The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions for grants in 1999, 1998 and
1997; dividend yield of 1.7%, 1.3% and 1.5%, respectively; volatility factor
of 23%; risk-free interest rate of 5.99%, 5.33% and 6.01%, respectively; and
expected life of seven years.
Information on the range of exercise prices
for options outstanding as of December 31, 1999 is as follows:
(thousands
of shares) |
|
Options
outstanding
|
|
Options
exercisable
|
Range of
exercise prices |
|
Number
outstanding
at 12/31/99
|
|
Weighted
average
exercise
price
|
|
Weighted
average
remaining
contractual
life
|
|
Number
exercisable
at 12/31/99
|
|
Weighted
average
exercise price
|
$ 5.36
$15.85 |
|
7,451 |
|
$13.62 |
|
4.95
years |
|
7,256 |
|
$13.64 |
$17.04
$27.91 |
|
1,698 |
|
21.36 |
|
7.12
years |
|
1,465 |
|
21.88 |
$28.69
$39.34 |
|
8,410 |
|
35.53 |
|
8.98
years |
|
1,781 |
|
36.54 |
$40.09
$50.72 |
|
2,821 |
|
42.61 |
|
8.35
years |
|
1,144 |
|
42.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
20,380 |
|
27.32 |
|
7.27
years |
|
11,646 |
|
21.03 |
|
|
|
|
|
|
|
|
|
|
|
The Company has adopted the financial
disclosure provisions of SFAS No. 123, Accounting for Stock-Based
Compensation with respect to its employee plan. The Company applies
Accounting Principles Board Opinion No. 25 and related Interpretations in
accounting for its employee equity incentive plans. Accordingly, no
compensation cost has been recognized for its employee plan as the exercise
price of the options equals the market price at the grant date. Furthermore,
no compensation cost was recognized on the exchange of AHL fixed stock
options for Allstate replacement options in 1999 since these options are not
considered to be new option grants for measurement purposes.
The effect of recording compensation cost for
the Companys employee stock-based compensation plan based on SFAS No.
123s fair value method would have reduced net income and earnings per
share by the following pro forma amounts:
($ in millions,
except per share data) |
|
1999
|
|
1998
|
|
1997
|
Net
income: |
|
|
|
|
|
|
As reported |
|
$2,720 |
|
$3,294 |
|
$3,105 |
Pro forma |
|
2,702 |
|
3,281 |
|
3,094 |
Earnings per share
basic: |
|
|
|
|
|
|
As reported |
|
3.40 |
|
3.96 |
|
3.58 |
Pro forma |
|
3.38 |
|
3.94 |
|
3.56 |
Earnings per share
diluted: |
|
|
|
|
|
|
As reported |
|
3.38 |
|
3.94 |
|
3.56 |
Pro forma |
|
3.36 |
|
3.92 |
|
3.55 |
17. Business
Segments
Allstate management is organized around
products and services, and this structure is considered in the
identification of its four reportable segments. These segments and their
respective operations are as follows:
|
Personal
Property and Casualty (PP&C) sells primarily private
passenger auto and homeowners insurance to individuals in both the United
States and in other countries. Revenues generated outside the United
States were immaterial with respect to PP&Cs total revenues for
the years ended December 31, 1999, 1998 and 1997, respectively. The
Company evaluates the results of this segment based upon premium growth
and underwriting results.
|
|
Discontinued
Lines and Coverages consists of business no longer written by
Allstate, including results from environmental, asbestos and other mass
tort exposures, the mortgage pool insurance business exited in 1999 and
other commercial business in run-off. This segment also includes the
historical results of the commercial and reinsurance businesses sold in
1996. The Company evaluates the results of this segment based upon
underwriting results.
|
|
Life and
Savings markets a broad line of life insurance, savings and group
pension products in the United States and in other countries. Life
insurance products primarily include traditional life, including term and
whole-life, and interest-sensitive life insurance. Savings products
consist of fixed annuity products, including indexed, market value
adjusted and structured settlement annuities, as well as variable
annuities. Revenues generated outside the United States were immaterial
with respect to Life and Savings total revenues for the years ended
December 31, 1999, 1998 and 1997, respectively. The Company evaluates the
results of this segment based upon invested asset growth, face amounts of
policies in force and net income.
|
|
Corporate and
Other comprises holding company activities and certain non-insurance
operations.
|
PP&C and Discontinued Lines and Coverages
together comprise Property-Liability. The Company does not allocate
Property-Liability investment income, realized capital gains and losses, or
assets to the PP&C and Discontinued Lines and Coverages segments.
Management reviews assets at the Property-Liability, Life and Savings, and
Corporate and Other levels for decision making purposes.
The accounting policies of the business
segments are the same as those described in Note 2. The effects of certain
intersegment transactions are excluded from segment performance evaluation
and therefore eliminated in the segment results.
Summarized revenue data for each of the Company
s business segments for the year ended December 31, are as
follows:
($ in
millions) |
|
1999 |
|
1998 |
|
1997 |
Revenues |
|
|
|
|
|
|
|
Property-Liability |
|
|
|
|
|
|
|
Premiums
earned |
|
|
|
|
|
|
|
PP&C |
|
$20,103 |
|
|
$19,307 |
|
$18,600 |
Discontinued Lines and Coverages |
|
9 |
|
|
|
|
4 |
|
|
|
|
|
|
|
|
Total premiums earned |
|
20,112 |
|
|
19,307 |
|
18,604 |
Net investment
income |
|
1,761 |
|
|
1,723 |
|
1,746 |
Realized capital
gains and losses |
|
948 |
|
|
806 |
|
787 |
|
|
|
|
|
|
|
|
Total
Property-Liability |
|
22,821 |
|
|
21,836 |
|
21,137 |
Life and
Savings |
|
|
|
|
|
|
|
Premiums and
contract charges |
|
1,623 |
|
|
1,519 |
|
1,502 |
Net investment
income |
|
2,260 |
|
|
2,115 |
|
2,085 |
Realized capital
gains and losses |
|
193 |
|
|
325 |
|
190 |
|
|
|
|
|
|
|
|
Total Life and
Savings |
|
4,076 |
|
|
3,959 |
|
3,777 |
Corporate and
Other |
|
|
|
|
|
|
|
Net investment
income |
|
91 |
|
|
52 |
|
30 |
Realized capital
gains and losses |
|
(29 |
) |
|
32 |
|
5 |
|
|
|
|
|
|
|
|
Total Corporate and
Other |
|
62 |
|
|
84 |
|
35 |
|
|
|
|
|
|
|
|
Consolidated Revenues |
|
$26,959 |
|
|
$25,879 |
|
$24,949 |
|
|
|
|
|
|
|
|
Summarized financial performance data for each
of the Companys reportable segments for the year ended December 31,
are as follows:
($ in
millions) |
|
1999
|
|
1998
|
|
1997
|
Income from
operations before income |
|
|
|
|
|
|
|
taxes and other
items |
|
|
|
|
|
|
|
Property-Liability |
|
|
|
|
|
|
|
|
Underwriting income
(loss) |
|
|
|
|
|
|
|
|
PP&C |
|
$
576 |
|
|
$1,355 |
|
$1,141 |
|
Discontinued Lines and Coverages |
|
(49 |
) |
|
(51) |
|
(18 |
) |
|
|
|
|
|
|
|
|
|
Total underwriting income |
|
527 |
|
|
1,304 |
|
1,123 |
|
Net investment income |
|
1,761 |
|
|
1,723 |
|
1,746 |
|
Realized capital gains and losses |
|
948 |
|
|
806 |
|
787 |
|
Gain on disposition of operations |
|
10 |
|
|
38 |
|
67 |
|
|
|
|
|
|
|
|
|
|
Property-Liability income from operations before income
taxes and equity in net
income of unconsolidated
subsidiary |
|
3,246 |
|
|
3,871 |
|
3,723 |
|
Life and
Savings |
|
|
|
|
|
|
|
|
Premiums and contract charges |
|
1,623 |
|
|
1,519 |
|
1,502 |
|
Net investment income |
|
2,260 |
|
|
2,115 |
|
2,085 |
|
Realized capital gains and losses |
|
193 |
|
|
325 |
|
190 |
|
Contract benefits |
|
2,578 |
|
|
2,415 |
|
2,415 |
|
Operating costs and expenses |
|
751 |
|
|
695 |
|
602 |
|
Loss on disposition of operations |
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
Life and Savings income from operations before income
taxes |
|
747 |
|
|
849 |
|
755 |
|
Corporate and
Other |
|
|
|
|
|
|
|
|
Net investment income |
|
91 |
|
|
52 |
|
30 |
|
Realized capital gains and losses |
|
(29 |
) |
|
32 |
|
5 |
|
Operating costs and expenses |
|
148 |
|
|
108 |
|
79 |
|
Gain on disposition of operations |
|
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and Other income (loss) from operations before
income taxes and dividends
on preferred securities |
|
(86) |
|
|
25 |
|
(44) |
|
|
|
|
|
|
|
|
|
|
Consolidated income from
operations before income
taxes and other items |
|
$3,907 |
|
|
$4,745 |
|
$4,434 |
|
|
|
|
|
|
|
|
|
|
Additional significant financial performance
data for each of the Companys reportable segments for the year ended
December 31, are as follows:
($ in
millions) |
|
1999
|
|
1998
|
|
1997
|
Amortization of
deferred policy acquisition costs |
|
|
|
|
|
|
|
|
PP&C |
|
$2,908 |
|
|
$2,644 |
|
$2,491 |
|
Discontinued Lines
and Coverages |
|
|
|
|
|
|
|
|
Life and
Savings |
|
374 |
|
|
377 |
|
298 |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$3,282 |
|
|
$3,021 |
|
$2,789 |
|
|
|
|
|
|
|
|
|
|
Income tax
expense |
|
|
|
|
|
|
|
|
Property-Liability |
|
$
934 |
|
|
$1,121 |
|
$1,087 |
|
Life and
Savings |
|
262 |
|
|
299 |
|
258 |
|
Corporate and
Other |
|
(48 |
) |
|
2 |
|
(21 |
) |
|
|
|
|
|
|
|
|
|
Consolidated |
|
$1,148 |
|
|
$1,422 |
|
$1,324 |
|
|
|
|
|
|
|
|
|
|
Interest expense is primarily incurred in the
Corporate and Other segment. Capital expenditures for long-lived assets are
generally made at the Property-Liability level. A portion of these
long-lived assets are utilized by entities included in the Life and Savings
and Corporate and Other segments, and accordingly, are charged expenses in
proportion to their use.
Summarized data for total assets and
investments for each of the Companys reportable segments as of
December 31, are as follows:
At December
31, |
|
1999
|
|
1998
|
($ in
millions) |
Assets |
|
|
|
|
Property-Liability |
|
$41,416 |
|
$41,662 |
Life and
Savings |
|
53,200 |
|
44,947 |
Corporate and
Other |
|
3,503 |
|
1,082 |
|
|
|
|
|
Consolidated |
|
$98,119 |
|
$87,691 |
|
|
|
|
|
|
Investments |
|
|
|
|
Property-Liability |
|
$32,943 |
|
$33,733 |
Life and
Savings |
|
34,444 |
|
31,765 |
Corporate and
Other |
|
2,258 |
|
1,027 |
|
|
|
|
|
Consolidated |
|
$69,645 |
|
$66,525 |
|
|
|
|
|
18. Other
Comprehensive Income
The components of other comprehensive income
on a pretax and after-tax basis for the year ended December 31, are as
follows:
|
|
1999
|
|
1998
|
|
1997
|
($ in
millions) |
|
Pretax
|
|
Tax
|
|
After-
tax
|
|
Pretax
|
|
Tax
|
|
After-
tax
|
|
Pretax
|
|
Tax
|
|
After-
tax
|
Unrealized
capital gains and losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses)
arising during
the period |
|
$(1,507 |
) |
|
$527 |
|
|
$
(980 |
) |
|
$1,195 |
|
|
$(418 |
) |
|
$777 |
|
|
$2,147 |
|
|
$(751 |
) |
|
$1,396 |
|
Less: reclassification
adjustments |
|
993 |
|
|
(348 |
) |
|
645 |
|
|
929 |
|
|
(325 |
) |
|
604 |
|
|
889 |
|
|
(311 |
) |
|
578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net
capital gains (losses) |
|
(2,500 |
) |
|
875 |
|
|
(1,625 |
) |
|
266 |
|
|
(93 |
) |
|
173 |
|
|
1,258 |
|
|
(440 |
) |
|
818 |
|
Unrealized
foreign currency
translation adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign currency
translation
adjustments arising
during the
period |
|
22 |
|
|
(8 |
) |
|
14 |
|
|
(3 |
) |
|
1 |
|
|
(2 |
) |
|
(131 |
) |
|
46 |
|
|
(85 |
) |
Less: reclassification
adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43 |
) |
|
15 |
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign
currency translation
adjustments |
|
22 |
|
|
(8 |
) |
|
14 |
|
|
(3 |
) |
|
1 |
|
|
(2 |
) |
|
(88 |
) |
|
31 |
|
|
(57 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
income |
|
$(2,478 |
) |
|
$867 |
|
|
$(1,611 |
) |
|
$
263 |
|
|
$
(92 |
) |
|
$171 |
|
|
$1,170 |
|
|
$(409 |
) |
|
$
761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19. Quarterly
Results (unaudited)
|
|
First
quarter
|
|
Second
quarter
|
|
Third
quarter
|
|
Fourth
quarter
|
($ in millions
except per share data) |
|
1999
|
|
1998
|
|
1999
|
|
1998
|
|
1999
|
|
1998
|
|
1999
|
|
1998
|
Revenues |
|
$6,807 |
|
$6,450 |
|
$6,592 |
|
$6,539 |
|
$6,551 |
|
$6,436 |
|
$7,009 |
|
$6,454 |
Net
income |
|
1,035 |
|
936 |
|
770 |
|
885 |
|
490 |
|
713 |
|
425 |
|
760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per
share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
1.27 |
|
1.11 |
|
.96 |
|
1.06 |
|
.63 |
|
.87 |
|
.54 |
|
.93 |
Diluted |
|
1.27 |
|
1.10 |
|
.95 |
|
1.05 |
|
.62 |
|
.86 |
|
.54 |
|
.93 |
Independent Auditors Report
TO THE BOARD OF
DIRECTORS AND
SHAREHOLDERS OF
THE ALLSTATE CORPORATION:
We have audited the accompanying Consolidated
Statements of Financial Position of The Allstate Corporation and
subsidiaries as of December 31, 1999 and 1998, and the related Consolidated
Statements of Operations, Comprehensive Income, Shareholders Equity
and Cash Flows for each of the three years in the period ended December 31,
1999. These financial statements are the responsibility of the Company
s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with
generally accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial
statements present fairly, in all material respects, the financial position
of The Allstate Corporation and subsidiaries as of December 31, 1999 and
1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles.
[signature of
Deloitte & Touche LLP]
Chicago,
Illinois
February 25,
2000
[X] |
Please mark your
votes as in this example. |
2469
|
The proxies are directed to vote as specified below and in their
judgment on all other matters coming before the meeting. Except as specified
to the contrary below, the shares represented by this proxy will be voted
FOR all nominees listed on the reverse side, FOR Item 2 and AGAINST Items 3
and 4.
The Board of
Directors recommends a vote FOR all nominees listed and FOR Item
2. |
The Board of
Directors recommends a vote AGAINST Items 3 and 4.
|
|
FOR
|
WITHHELD
|
|
FOR
|
AGAINST
|
ABSTAIN
|
|
FOR
|
AGAINST
|
ABSTAIN
|
1. Election of
directors. |
[_]
|
[_]
|
2. Appointment
of Deloitte & Touche LLP
as independent auditors for 2000. |
[_]
|
[_]
|
[_]
|
3. Provide
cumulative voting
for Board of Directors. |
[_]
|
[_]
|
[_]
|
For, except vote
withheld from the following nominee(s):
|
|
|
|
|
4. Endorse
CERES Principles. |
[_]
|
[_]
|
[_]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Please sign exactly
as name appears hereon. Joint Owners should each sign. Where applicable,
indicate official position or representative capacity. |
|
|
|
|
|
|
|
SIGNATURE(S)
DATE |
°
FOLD AND DETACH HERE
°
The Allstate
Corporation stockholders can now vote their shares over the telephone or the
Internet. This eliminates the need to return the proxy card.
To vote your shares
over the telephone or the Internet you must have your proxy card and Social
Security Number available. The Control Number that appears in the box above,
just below the perforation, must be used in order to vote by telephone or
over the Internet. These systems can be accessed 24 hours a day, seven days
a week up until the day prior to the meeting.
1.
|
To vote over the
telephone:
|
|
On a touch-tone
telephone call 1-877-PRX-VOTE (1-877-779-8683).
|
2.
|
To vote over the
Internet:
|
|
Log on to the
Internet and go to the web site http://www.eproxyvote.com/all.
|
Your vote over the
telephone or the Internet instructs the proxies in the same manner as if you
marked, signed, dated and returned your proxy card.
If you choose to vote
your shares over the telephone or the Internet, there is no need for you to
mail back your proxy card.
Your vote is
important. Thank you for voting.
THE ALLSTATE
CORPORATION
This Proxy is
Solicited on behalf of the Board of Directors
for the Annual
Meeting to be Held May 18, 2000
The undersigned
hereby appoints WARREN L. BATTS, EDWARD A. BRENNAN, JAMES M. DENNY, MICHAEL
A. MILES, H. JOHN RILEY, JR., and JOSHUA I. SMITH and each of them, or if
more than one is present and acting then a majority thereof, proxies, with
full power of substitution and revocation, to vote the shares of The
Allstate Corporation which the undersigned is entitled to vote at the annual
meeting of stockholders, and at any adjournment thereof, with all the powers
the undersigned would possess if personally present, including authority to
vote on the matters shown on the reverse in the manner directed, and upon
any other matter which may properly come before the meeting. Receipt is
acknowledged of The Allstate Corporations 1999 Summary Annual Report
to stockholders and Notice and Proxy Statement for the 2000 Annual Meeting.
Except as specified on the reverse side, the shares represented by this
proxy will be voted FOR all nominees listed below, FOR Item 2 and AGAINST
Items 3 and 4. The undersigned hereby revokes any proxy previously given to
vote such shares at the meeting or at any adjournment.
|
Nominees: (01) F.
Duane Ackerman, (02) James G. Andress, (03) Warren L. Batts, (04) Edward
A. Brennan,
|
|
(05) James M.
Denny, (06) W. James Farrell, (07) Ronald T. LeMay, (08) Edward M. Liddy,
(09) Michael A. Miles,
|
|
(10) H. John Riley,
Jr., (11) Joshua I. Smith, (12) Judith A. Sprieser and (13) Mary Alice
Taylor.
|
You are encouraged to
specify your choices by marking the appropriate boxes (SEE REVERSE SIDE) but
you need not mark any boxes if you wish to vote in accordance with the Board
of Directors recommendations. Also see reverse side for instructions to vote
your shares over the telephone or the Internet.
PLEASE MARK, SIGN,
DATE AND MAIL THE PROXY CARD PROMPTLY
USING THE ENCLOSED
ENVELOPE
(Continued and to
be signed on reverse side.)
°
FOLD AND DETACH HERE
°
[X] |
Please mark your
votes as in this example. |
3009
|
The Trustee is directed to vote as specified below and in its
discretion on all other matters coming before the meeting. Except as
specified to the contrary below, the shares represented by this voting
instruction form will be voted FOR all nominees listed on the reverse side,
FOR Item 2 and AGAINST Items 3 and 4.
The Board of
Directors recommends a vote FOR all nominees listed and FOR Item
2.
|
The Board of
Directors recommends a vote AGAINST Items 3 and 4.
|
|
FOR |
WITHHELD |
|
FOR |
AGAINST
|
ABSTAIN
|
|
FOR |
AGAINST |
ABSTAIN
|
1. Election of
directors. |
[_] |
[_]
|
2. Appointment
of Deloitte & Touche LLP
as independent auditors for 2000. |
[_] |
[_]
|
[_]
|
3. Provide
cumulative voting
for Board of Directors. |
[_] |
[_]
|
[_]
|
For, except vote
withheld from the
following nominee(s):
|
|
|
|
|
4. Endorse
CERES
Principles. |
[_] |
[_]
|
[_]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Please sign exactly
as name appears hereon. |
|
|
|
|
|
|
|
SIGNATURE(S)
DATE |
|
|
|
|
°
FOLD AND DETACH HERE
°
Participants in The
Savings and Profit Sharing Fund of Allstate Employees (the Fund)
can now vote their shares of stock of The Allstate Corporation over the
telephone or the Internet. This eliminates the need to return this voting
instruction form.
To vote your shares
over the telephone or the Internet you must have your voting instruction
form and Social Security Number available. The Voter Control Number that
appears in the box above, just below the perforation, must be used in order
to vote by telephone or over the Internet. These systems can be accessed 24
hours a day, seven days a week up until the day prior to the
meeting.
1.
|
To vote over the
telephone:
|
|
On a touch-tone
telephone call 1-877-PRX-VOTE (1-877-779-8683).
|
2.
|
To vote over the
Internet:
|
|
Log on to the
Internet and go to the web site http://www.eproxyvote.com/all.
|
Your vote over the
telephone or the Internet instructs the trustee for the Fund in the same
manner as if you marked, signed, dated and returned your voting instruction
form.
If you choose to vote
your shares over the telephone or the Internet, there is no need for you to
mail back your voting instruction form.
Your vote is
important. Thank you for voting.
THE ALLSTATE
CORPORATION
VOTING INSTRUCTION
FORM
This card constitutes
voting instructions by the undersigned to The Northern Trust Company (the
Trustee), trustee of the trust maintained under The Savings and
Profit Sharing Fund of Allstate Employees (the Fund) for all
shares votable by the undersigned and held of record by the Trustee. First
Chicago Trust Company, a division of EquiServe, as agent for the Trustee,
will tabulate all Fund voting instruction forms received prior to the 2000
Annual Meeting of The Allstate Corporation to be held on May 18, 2000.
EXCEPT AS SPECIFIED ON THE REVERSE SIDE, THE SHARES REPRESENTED BY THIS
VOTING INSTRUCTION FORM ARE HEREBY INSTRUCTED TO BE VOTED BY THE TRUSTEE
FOR ALL NOMINEES LISTED BELOW, FOR ITEM 2 AND
AGAINST ITEMS 3 AND 4.
|
Nominees: (01) F.
Duane Ackerman, (02) James G. Andress, (03) Warren L. Batts, (04) Edward
A. Brennan,
|
|
(05) James M.
Denny, (06) W. James Farrell, (07) Ronald T. LeMay, (08) Edward M. Liddy,
(09) Michael A. Miles,
|
|
(10) H. John Riley,
Jr., (11) Joshua I. Smith, (12) Judith A. Sprieser and (13) Mary Alice
Taylor.
|
THE PROXY FOR
WHICH YOUR INSTRUCTIONS ARE REQUESTED IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS. You are encouraged to specify your choices by marking the
appropriate boxes (SEE REVERSE SIDE) but you need not mark any boxes if you
wish to vote in accordance with the Board of Directors recommendations.
Please mark, sign, date and mail this voting instruction form in the
enclosed business reply envelope or, if you prefer, see reverse side for
instructions to vote your shares over the Internet or by phone.
PLEASE MARK, SIGN,
DATE AND MAIL THE VOTING INSTRUCTION FORM PROMPTLY
USING THE ENCLOSED
ENVELOPE
(Continued and to
be signed on reverse side.)
°
FOLD AND DETACH HERE
°
TRUSTEES VOTING
PROCEDURES
If there are any Fund
shares votable for which instructions are not timely received, and as
respects all unallocated shares held by the Fund, the Trustee will vote such
shares as follows: if the Trustee receives timely voting instructions for at
least 50% of the votable shares, then all such nonvoted shares and
unallocated shares shall be voted in the same proportion and in the same
manner as the shares for which timely instructions have been received,
unless to do so would be inconsistent with the Trustees duties. If the
Trustee receives voting instructions with regard to less than 50% of the
votable shares, the Trustee shall vote all unvoted and unallocated shares in
its sole discretion. Discretionary authority will not be used in connection
with voting on adjournment of the meeting in order to solicit further
proxies. The undersigned hereby revokes any voting instruction previously
given to vote such shares at the meeting or at any adjournment.