filings.toolsItem 8. Financial Statements and Supplementary Data
489K characters. Original on sec.gov · Markdown
Item 8. Financial Statements and Supplementary Data
| Consolidated Financial Statements | Page | ||
| Consolidated Statements of Operations | 120 | ||
| Consolidated Statements of Comprehensive Income | 121 | ||
| Consolidated Statements of Financial Position | 122 | ||
| Consolidated Statements of Shareholders’ Equity | 123 | ||
| Consolidated Statements of Cash Flows | 124 | ||
| Notes to Consolidated Financial Statements | |||
| Note 1 | General | 125 | |
| Note 2 | Summary of Significant Accounting Policies | 126 | |
| Note 3 | Acquisitions | 142 | |
| Note 4 | Reportable Segments | 142 | |
| Note 5 | Investments | 147 | |
| Note 6 | Fair Value of Assets and Liabilities | 155 | |
| Note 7 | Derivative Financial Instruments and Off-balance Sheet Financial Instruments | 162 | |
| Note 8 | Reserve for Property and Casualty Insurance Claims and Claims Expense | 168 | |
| Note 9 | Reserve for Life-Contingent Contract Benefits and Contractholder Funds | 174 | |
| Note 10 | Reinsurance and Indemnification | 178 | |
| Note 11 | Deferred Policy Acquisition and Sales Inducement Costs | 186 | |
| Note 12 | Capital Structure | 187 | |
| Note 13 | Company Restructuring | 190 | |
| Note 14 | Commitments, Guarantees and Contingent Liabilities | 191 | |
| Note 15 | Income Taxes | 197 | |
| Note 16 | Statutory Financial Information and Dividend Limitations | 199 | |
| Note 17 | Benefit Plans | 200 | |
| Note 18 | Equity Incentive Plans | 207 | |
| Note 19 | Supplemental Cash Flow Information | 209 | |
| Note 20 | Other Comprehensive Income | 209 | |
| Note 21 | Quarterly Results (unaudited) | 210 | |
| Report of Independent Registered Public Accounting Firm | 211 |
The Allstate Corporation 119
2019 Form 10-K Financial Statements
The Allstate Corporation and Subsidiaries
Consolidated Statements of Operations
| Years Ended December 31, | ||||||||||||
| ($ in millions, except per share data) | 2019 | 2018 | 2017 | |||||||||
| Revenues | ||||||||||||
| Property and casualty insurance premiums (net of reinsurance ceded and indemnification programs of $1,122, $1,016 and $971) | $ | 36,076 | $ | 34,048 | $ | 32,300 | ||||||
| Life premiums and contract charges (net of reinsurance ceded of $285, $290 and $303) | 2,501 | 2,465 | 2,378 | |||||||||
| Other revenue | 1,054 | 939 | 883 | |||||||||
| Net investment income | 3,159 | 3,240 | 3,401 | |||||||||
| Realized capital gains and losses: | ||||||||||||
| Total other-than-temporary impairment (“OTTI”) losses | (48 | ) | (13 | ) | (146 | ) | ||||||
| OTTI losses reclassified to (from) other comprehensive income ("OCI") | 1 | (1 | ) | (4 | ) | |||||||
| Net OTTI losses recognized in earnings | (47 | ) | (14 | ) | (150 | ) | ||||||
| Sales and valuation changes on equity investments and derivatives | 1,932 | (863 | ) | 595 | ||||||||
| Total realized capital gains and losses | 1,885 | (877 | ) | 445 | ||||||||
| Total revenues | 44,675 | 39,815 | 39,407 | |||||||||
| Costs and expenses | ||||||||||||
| Property and casualty insurance claims and claims expense (net of reinsurance ceded and indemnification programs of $524, $1,378 and $1,807) | 23,976 | 22,778 | 21,847 | |||||||||
| Life contract benefits (net of reinsurance ceded of $165, $240 and $179) | 2,039 | 1,973 | 1,923 | |||||||||
| Interest credited to contractholder funds (net of reinsurance ceded of $20, $24 and $25) | 640 | 654 | 690 | |||||||||
| Amortization of deferred policy acquisition costs | 5,533 | 5,222 | 4,784 | |||||||||
| Operating costs and expenses | 5,690 | 5,594 | 5,196 | |||||||||
| Pension and other postretirement remeasurement gains and losses | 114 | 468 | (217 | ) | ||||||||
| Restructuring and related charges | 41 | 67 | 96 | |||||||||
| Amortization of purchased intangibles | 126 | 105 | 99 | |||||||||
| Impairment of goodwill and purchased intangibles | 106 | — | 125 | |||||||||
| Interest expense | 327 | 332 | 335 | |||||||||
| Total costs and expenses | 38,592 | 37,193 | 34,878 | |||||||||
| Gain on disposition of operations | 6 | 6 | 20 | |||||||||
| Income from operations before income tax expense | 6,089 | 2,628 | 4,549 | |||||||||
| Income tax expense | 1,242 | 468 | 995 | |||||||||
| Net income | 4,847 | 2,160 | 3,554 | |||||||||
| Preferred stock dividends | 169 | 148 | 116 | |||||||||
| Net income applicable to common shareholders | $ | 4,678 | $ | 2,012 | $ | 3,438 | ||||||
| Earnings per common share: | ||||||||||||
| Net income applicable to common shareholders per common share - Basic | $ | 14.25 | $ | 5.78 | $ | 9.50 | ||||||
| Weighted average common shares - Basic | 328.2 | 347.8 | 362.0 | |||||||||
| Net income applicable to common shareholders per common share - Diluted | $ | 14.03 | $ | 5.70 | $ | 9.35 | ||||||
| Weighted average common shares - Diluted | 333.5 | 353.2 | 367.8 |
See notes to consolidated financial statements.
120 www.allstate.com
Financial Statements 2019 Form 10-K
The Allstate Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
| Years Ended December 31, | ||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Net income | $ | 4,847 | $ | 2,160 | $ | 3,554 | ||||||
| Other comprehensive income (loss), after-tax | ||||||||||||
| Changes in: | ||||||||||||
| Unrealized net capital gains and losses | 1,889 | (754 | ) | 319 | ||||||||
| Unrealized foreign currency translation adjustments | (10 | ) | (48 | ) | 45 | |||||||
| Unamortized pension and other postretirement prior service credit | (47 | ) | (59 | ) | (52 | ) | ||||||
| Other comprehensive income (loss), after-tax | 1,832 | (861 | ) | 312 | ||||||||
| Comprehensive income | $ | 6,679 | $ | 1,299 | $ | 3,866 |
See notes to consolidated financial statements.
The Allstate Corporation 121
2019 Form 10-K Financial Statements
The Allstate Corporation and Subsidiaries
Consolidated Statements of Financial Position
| December 31, | ||||||||
| ($ in millions, except par value data) | 2019 | 2018 | ||||||
| Assets | ||||||||
| Investments | ||||||||
| Fixed income securities, at fair value (amortized cost $56,293 and $57,134) | $ | 59,044 | $ | 57,170 | ||||
| Equity securities, at fair value (cost $6,568 and $4,489) | 8,162 | 5,036 | ||||||
| Mortgage loans | 4,817 | 4,670 | ||||||
| Limited partnership interests | 8,078 | 7,505 | ||||||
| Short-term, at fair value (amortized cost $4,256 and $3,027) | 4,256 | 3,027 | ||||||
| Other | 4,005 | 3,852 | ||||||
| Total investments | 88,362 | 81,260 | ||||||
| Cash | 338 | 499 | ||||||
| Premium installment receivables, net | 6,472 | 6,154 | ||||||
| Deferred policy acquisition costs | 4,699 | 4,784 | ||||||
| Reinsurance and indemnification recoverables, net | 9,211 | 9,565 | ||||||
| Accrued investment income | 600 | 600 | ||||||
| Property and equipment, net | 1,145 | 1,045 | ||||||
| Goodwill | 2,545 | 2,530 | ||||||
| Other assets | 3,534 | 3,007 | ||||||
| Separate Accounts | 3,044 | 2,805 | ||||||
| Total assets | $ | 119,950 | $ | 112,249 | ||||
| Liabilities | ||||||||
| Reserve for property and casualty insurance claims and claims expense | $ | 27,712 | $ | 27,423 | ||||
| Reserve for life-contingent contract benefits | 12,300 | 12,208 | ||||||
| Contractholder funds | 17,692 | 18,371 | ||||||
| Unearned premiums | 15,343 | 14,510 | ||||||
| Claim payments outstanding | 929 | 1,007 | ||||||
| Deferred income taxes | 1,154 | 425 | ||||||
| Other liabilities and accrued expenses | 9,147 | 7,737 | ||||||
| Long-term debt | 6,631 | 6,451 | ||||||
| Separate Accounts | 3,044 | 2,805 | ||||||
| Total liabilities | 93,952 | 90,937 | ||||||
| Commitments and Contingent Liabilities (Note 7, 8 and 14) | ||||||||
| Shareholders’ equity | ||||||||
| Preferred stock and additional capital paid-in, $1 par value, 25 million shares authorized, 92.5 thousand and 79.8 thousand shares issued and outstanding, $2,313 and $1,995 aggregate liquidation preference | 2,248 | 1,930 | ||||||
| Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 319 million and 332 million shares outstanding | 9 | 9 | ||||||
| Additional capital paid-in | 3,463 | 3,310 | ||||||
| Retained income | 48,074 | 44,033 | ||||||
| Deferred Employee Stock Ownership Plan (“ESOP”) expense | — | (3 | ) | |||||
| Treasury stock, at cost (581 million and 568 million shares) | (29,746 | ) | (28,085 | ) | ||||
| Accumulated other comprehensive income: | ||||||||
| Unrealized net capital gains and losses: | ||||||||
| Unrealized net capital gains and losses on fixed income securities with OTTI | 70 | 75 | ||||||
| Other unrealized net capital gains and losses | 2,094 | (51 | ) | |||||
| Unrealized adjustment to DAC, DSI and insurance reserves | (277 | ) | (26 | ) | ||||
| Total unrealized net capital gains and losses | 1,887 | (2 | ) | |||||
| Unrealized foreign currency translation adjustments | (59 | ) | (49 | ) | ||||
| Unamortized pension and other postretirement prior service credit | 122 | 169 | ||||||
| Total accumulated other comprehensive income ("AOCI") | 1,950 | 118 | ||||||
| Total shareholders’ equity | 25,998 | 21,312 | ||||||
| Total liabilities and shareholders’ equity | $ | 119,950 | $ | 112,249 |
See notes to consolidated financial statements.
122 www.allstate.com
Financial Statements 2019 Form 10-K
The Allstate Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Equity
| Years Ended December 31, | ||||||||||||
| ($ in millions, except per share data) | 2019 | 2018 | 2017 | |||||||||
| Preferred stock par value | $ | — | $ | — | $ | — | ||||||
| Preferred stock additional capital paid-in | ||||||||||||
| Balance, beginning of year | 1,930 | 1,746 | 1,746 | |||||||||
| Preferred stock issuance, net of issuance costs | 1,414 | 557 | — | |||||||||
| Preferred stock redemption | (1,096 | ) | (373 | ) | — | |||||||
| Balance, end of year | 2,248 | 1,930 | 1,746 | |||||||||
| Common stock par value | 9 | 9 | 9 | |||||||||
| Common stock additional capital paid-in | ||||||||||||
| Balance, beginning of year | 3,310 | 3,313 | 3,303 | |||||||||
| Forward contract on accelerated share repurchase agreement | 75 | (105 | ) | (45 | ) | |||||||
| Equity incentive plans activity | 78 | 102 | 55 | |||||||||
| Balance, end of year | 3,463 | 3,310 | 3,313 | |||||||||
| Retained income | ||||||||||||
| Balance, beginning of year | 44,033 | 41,579 | 39,009 | |||||||||
| Cumulative effect of change in accounting principle | 21 | 1,088 | — | |||||||||
| Net income | 4,847 | 2,160 | 3,554 | |||||||||
| Dividends on common stock (declared per share of $2.00, $1.84 and $1.48) | (658 | ) | (646 | ) | (540 | ) | ||||||
| Dividends on preferred stock | (169 | ) | (148 | ) | (116 | ) | ||||||
| Reclassification of tax effects due to change in accounting principle | — | — | (328 | ) | ||||||||
| Balance, end of year | 48,074 | 44,033 | 41,579 | |||||||||
| Deferred ESOP expense | ||||||||||||
| Balance, beginning of year | (3 | ) | (3 | ) | (6 | ) | ||||||
| Payments | 3 | — | 3 | |||||||||
| Balance, end of year | — | (3 | ) | (3 | ) | |||||||
| Treasury stock | ||||||||||||
| Balance, beginning of year | (28,085 | ) | (25,982 | ) | (24,741 | ) | ||||||
| Shares acquired | (1,810 | ) | (2,198 | ) | (1,423 | ) | ||||||
| Shares reissued under equity incentive plans, net | 149 | 95 | 182 | |||||||||
| Balance, end of year | (29,746 | ) | (28,085 | ) | (25,982 | ) | ||||||
| Accumulated other comprehensive income (loss) | ||||||||||||
| Balance, beginning of year | 118 | 1,889 | 1,249 | |||||||||
| Cumulative effect of change in accounting principle | — | (910 | ) | — | ||||||||
| Change in unrealized net capital gains and losses | 1,889 | (754 | ) | 319 | ||||||||
| Change in unrealized foreign currency translation adjustments | (10 | ) | (48 | ) | 45 | |||||||
| Change in unamortized pension and other postretirement prior service credit | (47 | ) | (59 | ) | (52 | ) | ||||||
| Reclassification of tax effects due to change in accounting principle | — | — | 328 | |||||||||
| Balance, end of year | 1,950 | 118 | 1,889 | |||||||||
| Total shareholders’ equity | $ | 25,998 | $ | 21,312 | $ | 22,551 |
See notes to consolidated financial statements.
The Allstate Corporation 123
2019 Form 10-K Financial Statements
The Allstate Corporation and Subsidiaries
Consolidated Statements of Cash Flows
| Years Ended December 31, | ||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Cash flows from operating activities | ||||||||||||
| Net income | $ | 4,847 | $ | 2,160 | $ | 3,554 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation, amortization and other non-cash items | 647 | 511 | 483 | |||||||||
| Realized capital gains and losses | (1,885 | ) | 877 | (445 | ) | |||||||
| Pension and other postretirement remeasurement gains and losses | 114 | 468 | (217 | ) | ||||||||
| Gain on disposition of operations | (6 | ) | (6 | ) | (20 | ) | ||||||
| Interest credited to contractholder funds | 640 | 654 | 690 | |||||||||
| Impairment of goodwill and purchased intangibles | 106 | — | 125 | |||||||||
| Changes in: | ||||||||||||
| Policy benefits and other insurance reserves | (508 | ) | 469 | 302 | ||||||||
| Unearned premiums | 801 | 915 | 463 | |||||||||
| Deferred policy acquisition costs | (85 | ) | (296 | ) | (214 | ) | ||||||
| Premium installment receivables, net | (299 | ) | (396 | ) | (131 | ) | ||||||
| Reinsurance recoverables, net | 320 | (656 | ) | (211 | ) | |||||||
| Income taxes | 487 | (380 | ) | (52 | ) | |||||||
| Other operating assets and liabilities | (50 | ) | 855 | (13 | ) | |||||||
| Net cash provided by operating activities | 5,129 | 5,175 | 4,314 | |||||||||
| Cash flows from investing activities | ||||||||||||
| Proceeds from sales | ||||||||||||
| Fixed income securities | 29,849 | 33,183 | 25,341 | |||||||||
| Equity securities | 5,277 | 6,859 | 6,504 | |||||||||
| Limited partnership interests | 756 | 764 | 1,125 | |||||||||
| Other investments | 303 | 533 | 274 | |||||||||
| Investment collections | ||||||||||||
| Fixed income securities | 2,570 | 3,466 | 4,194 | |||||||||
| Mortgage loans | 695 | 529 | 600 | |||||||||
| Other investments | 254 | 488 | 642 | |||||||||
| Investment purchases | ||||||||||||
| Fixed income securities | (31,317 | ) | (36,960 | ) | (31,145 | ) | ||||||
| Equity securities | (7,176 | ) | (5,936 | ) | (6,585 | ) | ||||||
| Limited partnership interests | (1,332 | ) | (1,679 | ) | (1,440 | ) | ||||||
| Mortgage loans | (844 | ) | (664 | ) | (646 | ) | ||||||
| Other investments | (666 | ) | (864 | ) | (999 | ) | ||||||
| Change in short-term investments, net | (767 | ) | (505 | ) | 2,610 | |||||||
| Change in other investments, net | 42 | (98 | ) | (30 | ) | |||||||
| Purchases of property and equipment, net | (433 | ) | (277 | ) | (299 | ) | ||||||
| Acquisition of operations | (18 | ) | (558 | ) | (1,356 | ) | ||||||
| Net cash used in investing activities | (2,807 | ) | (1,719 | ) | (1,210 | ) | ||||||
| Cash flows from financing activities | ||||||||||||
| Proceeds from issuance of long-term debt | 491 | 498 | — | |||||||||
| Redemption and repayment of long-term debt | (317 | ) | (400 | ) | — | |||||||
| Proceeds from issuance of preferred stock | 1,414 | 557 | — | |||||||||
| Redemption of preferred stock | (1,132 | ) | (385 | ) | — | |||||||
| Contractholder fund deposits | 996 | 1,010 | 1,025 | |||||||||
| Contractholder fund withdrawals | (1,662 | ) | (1,967 | ) | (1,890 | ) | ||||||
| Dividends paid on common stock | (653 | ) | (614 | ) | (525 | ) | ||||||
| Dividends paid on preferred stock | (134 | ) | (134 | ) | (116 | ) | ||||||
| Treasury stock purchases | (1,735 | ) | (2,303 | ) | (1,495 | ) | ||||||
| Shares reissued under equity incentive plans, net | 120 | 73 | 135 | |||||||||
| Other | 129 | 91 | (57 | ) | ||||||||
| Net cash used in financing activities | (2,483 | ) | (3,574 | ) | (2,923 | ) | ||||||
| Net (decrease) increase in cash | (161 | ) | (118 | ) | 181 | |||||||
| Cash at beginning of year | 499 | 617 | 436 | |||||||||
| Cash at end of year | $ | 338 | $ | 499 | $ | 617 |
See notes to consolidated financial statements.
124 www.allstate.com
Notes to Consolidated Financial Statements 2019 Form 10-K
Notes to Consolidated Financial Statements
| Note 1 | General |
Basis of presentation
The accompanying consolidated financial statements include the accounts of The Allstate Corporation (the “Corporation”) and its wholly owned subsidiaries, primarily Allstate Insurance Company (“AIC”), a property and casualty insurance company with various property and casualty and life and investment subsidiaries, including Allstate Life Insurance Company (“ALIC”) (collectively referred to as the “Company” or “Allstate”). These consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Legislation”) became effective, permanently reducing the U.S. corporate income tax rate from 35% to 21% beginning January 1, 2018. As a result, the corporate tax rate is not comparable between periods.
Nature of operations
Allstate is engaged, principally in the United States, in the property and casualty insurance and life insurance businesses. Allstate is one of the country’s largest personal property and casualty insurers and is organized into seven reportable segments: Allstate Protection, Discontinued Lines and Coverages, Service Businesses, Allstate Life, Allstate Benefits, Allstate Annuities, and Corporate and Other.
Allstate’s primary business is the sale of private passenger auto and homeowners insurance. The Company also offers several other personal property and casualty insurance products, select commercial property and casualty coverages, consumer product protection plans, device and mobile data collection services and analytic solutions using automotive telematics information, roadside assistance, finance and insurance products, life insurance, voluntary accident and health insurance and identity protection. Allstate primarily distributes its products through exclusive agencies, financial specialists, independent agencies and brokers, major retailers, contact centers and the internet.
Risks and uncertainties
Allstate has exposure to catastrophic events, including wind and hail, wildfires, tornadoes, hurricanes, tropical storms, earthquakes, volcanic eruptions, terrorism and industrial accidents.
Catastrophes, an inherent risk of the property and casualty insurance business, have contributed, and will continue to contribute, to material year-to-year fluctuations in the Company’s results of operations and financial position (see Note 8). The nature and level of catastrophic loss experienced in any period cannot be predicted and could be material to results of operations and financial position.
The Company considers the following categories and locations to be the greatest areas of potential catastrophe losses:
| • | Wildfires — California, Colorado, Arizona and Texas |
| • | Hurricanes — Major metropolitan centers in counties along the eastern and gulf coasts of the United States |
| • | Wind/Hail, Rain and Tornado — Texas, Illinois, Colorado and Georgia |
| • | Earthquakes and fires following earthquakes —Major metropolitan areas near fault lines in the states of California, Oregon, Washington, South Carolina, Missouri, Kentucky and Tennessee |
The Allstate Corporation 125
2019 Form 10-K Notes to Consolidated Financial Statements
| Note 2 | Summary of Significant Accounting Policies |
Investments
Fixed income securities include bonds, asset-backed securities (“ABS”) and mortgage-backed securities (“MBS”). MBS includes residential and commercial mortgage-backed securities that were previously disclosed separately. Fixed income securities, which may be sold prior to their contractual maturity, are designated as available-for-sale and are carried at fair value. The difference between amortized cost and fair value, net of deferred income taxes and related life and annuity deferred policy acquisition costs (“DAC”), deferred sales inducement costs (“DSI”) and reserves for life-contingent contract benefits, is reflected as a component of AOCI. Cash received from calls and make-whole payments is reflected as a component of proceeds from sales and cash received from maturities and pay-downs is reflected as a component of investment collections within the Consolidated Statements of Cash Flows.
Equity securities primarily include common stocks, exchange traded and mutual funds, non-redeemable preferred stocks and real estate investment trust equity investments. Certain exchange traded and mutual funds have fixed income securities as their underlying investments. Equity securities are carried at fair value. Equity securities without readily determinable or estimable fair values are measured using the measurement alternative, which is cost less impairment, if any, and adjustments resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. Due to the adoption of a new accounting standard for the recognition and measurement of financial assets and financial liabilities, the periodic change in fair value of equity securities is recognized within realized capital gains and losses on the Consolidated Statements of Operations effective January 1, 2018. As a result, 2017 net investment income and net realized capital gains and losses are not comparable to other periods presented.
Mortgage loans are carried at unpaid principal balances, 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.
Investments in limited partnership interests are primarily accounted for in accordance with the equity method of accounting (“EMA”) and include interests in private equity funds, real estate funds and other funds. Investments in limited partnership interests purchased prior to January 1, 2018, where the Company’s interest is so minor that it exercises virtually no influence over operating and financial policies, are accounted for at fair value primarily utilizing the net asset value (“NAV”) as a practical expedient to determine fair value.
Short-term investments, including money market funds, commercial paper, U.S. Treasury bills and other short-term investments, are carried at fair value. Other investments primarily consist of bank loans, policy loans, real estate, agent loans and derivatives. Bank
loans are primarily senior secured corporate loans and are carried at amortized cost. Policy loans are carried at unpaid principal balances. Real estate is carried at cost less accumulated depreciation. Agent loans are loans issued to exclusive Allstate agents and are carried at unpaid principal balances, net of valuation allowances. Derivatives are carried at fair value.
Investment income primarily consists of interest, dividends, income from limited partnership interests, rental income from real estate, and income from certain derivative transactions. Interest is recognized on an accrual basis using the effective yield method and dividends are recorded at the ex-dividend date. Interest income for ABS and MBS is determined considering estimated pay-downs, including prepayments, obtained from third-party data sources and internal estimates. Actual prepayment experience is periodically reviewed, and effective yields are recalculated when differences arise between the prepayments originally anticipated and the actual prepayments received and currently anticipated. For ABS and MBS of high credit quality with fixed interest rates, the effective yield is recalculated on a retrospective basis. For all others, the effective yield is recalculated on a prospective basis. Accrual of income is suspended for other-than-temporarily impaired fixed income securities when the timing and amount of cash flows expected to be received is not reasonably estimable. Accrual of income is suspended for mortgage loans, bank loans and agent loans that are in default or when full and timely collection of principal and interest payments is not probable. Cash receipts on investments on nonaccrual status are generally recorded as a reduction of carrying value. Income from limited partnership interests carried at fair value is recognized based upon the changes in fair value of the investee’s equity primarily determined using NAV. Income from EMA limited partnership interests is recognized based on the Company’s share of the partnerships’ earnings. Income from EMA limited partnership interests is generally recognized on a three month delay due to the availability of the related financial statements from investees.
Realized capital gains and losses include gains and losses on investment sales, write-downs in value due to other-than-temporary declines in fair value, adjustments to valuation allowances on mortgage loans and agent loans, valuation changes of equity investments, including equity securities and certain limited partnerships where the underlying assets are predominately public equity securities, and periodic changes in fair value and settlements of certain derivatives, including hedge ineffectiveness. Realized capital gains and losses on investment sales are determined on a specific identification basis.
Derivative and embedded derivative financial instruments
Derivative financial instruments include interest rate swaps, credit default swaps, futures (interest rate and equity), options (including swaptions), interest rate caps, warrants and rights, foreign currency swaps,
126 www.allstate.com
Notes to Consolidated Financial Statements 2019 Form 10-K
foreign currency forwards, total return swaps and certain investment risk transfer reinsurance agreements. Derivatives required to be separated from the host instrument and accounted for as derivative financial instruments (“subject to bifurcation”) are embedded in equity-indexed life and annuity contracts and reinsured variable annuity contracts.
All derivatives are accounted for on a fair value basis and reported as other investments, other assets, other liabilities and accrued expenses or contractholder funds. Embedded derivative instruments subject to bifurcation are also accounted for on a fair value basis and are reported together with the host contract. The change in fair value of derivatives embedded in life and annuity product contracts and subject to bifurcation is reported in life and annuity contract benefits or interest credited to contractholder funds. Cash flows from embedded derivatives subject to bifurcation and derivatives receiving hedge accounting are reported consistently with the host contracts and hedged risks, respectively, within the Consolidated Statements of Cash Flows. Cash flows from other derivatives are reported in cash flows from investing activities within the Consolidated Statements of Cash Flows.
When derivatives meet specific criteria, they may be designated as accounting hedges and accounted for as fair value, cash flow, foreign currency fair value or foreign currency cash flow hedges. The hedged item may be either all or a specific portion of a recognized asset, liability or an unrecognized firm commitment attributable to a particular risk for fair value hedges. At the inception of the hedge, the Company formally documents the hedging relationship and risk management objective and strategy. The documentation identifies the hedging instrument, the hedged item, the nature of the risk being hedged and the methodology used to assess the effectiveness of the hedging instrument in offsetting the exposure to changes in the hedged item’s fair value attributable to the hedged risk. For a cash flow hedge, this documentation includes the exposure to changes in the variability in cash flows attributable to the hedged risk. The Company does not exclude any component of the change in fair value of the hedging instrument from the effectiveness assessment. At each reporting date, the Company confirms that the hedging instrument continues to be highly effective in offsetting the hedged risk.
Fair value hedges The change in fair value of hedging instruments used in fair value hedges of investment assets or a portion thereof is reported in net investment income, together with the change in fair value of the hedged items. The change in fair value of hedging instruments used in fair value hedges of contractholder funds liabilities or a portion thereof is reported in interest credited to contractholder funds, together with the change in fair value of the hedged items. Accrued periodic settlements on swaps are reported together with the changes in fair value of the related swaps in net investment income or interest credited to contractholder funds. The amortized cost
for fixed income securities, the carrying value for mortgage loans or the carrying value of a designated hedged liability is adjusted for the change in fair value of the hedged risk.
Cash flow hedges For hedging instruments used in cash flow hedges, the changes in fair value of the derivatives are reported in AOCI. Amounts are reclassified to net investment income, realized capital gains and losses or interest expense as the hedged or forecasted transaction affects income. Accrued periodic settlements on derivatives used in cash flow hedges are reported in net investment income. The amount reported in AOCI for a hedged transaction is the cumulative gain or loss on the derivative instrument from inception of the hedge less gains or losses previously reclassified from AOCI into income. If the Company expects at any time that the loss reported in AOCI would lead to a net loss on the combination of the hedging instrument and the hedged transaction which may not be recoverable, a loss is recognized immediately in realized capital gains and losses. If an impairment loss is recognized on an asset or an additional obligation is incurred on a liability involved in a hedge transaction, any offsetting gain in AOCI is reclassified and reported together with the impairment loss or recognition of the obligation.
Termination of hedge accounting If, subsequent to entering into a hedge transaction, the derivative becomes ineffective (including if the hedged item is sold or otherwise extinguished, the occurrence of a hedged forecasted transaction is no longer probable or the hedged asset becomes other-than-temporarily impaired), the Company may terminate the derivative position. The Company may also terminate derivative instruments or redesignate them as non-hedge as a result of other events or circumstances. If the derivative instrument is not terminated when a fair value hedge is no longer effective, the future gains and losses recognized on the derivative are reported in realized capital gains and losses. When a fair value hedge is no longer effective, is redesignated as non-hedge or when the derivative has been terminated, the fair value gain or loss on the hedged asset, liability or portion thereof previously recognized in income while the hedge was in place and used to adjust the amortized cost of hedged fixed income securities, carrying value of hedged mortgage loans or carrying value of a hedged liability, is amortized over the remaining life of the hedged asset, liability or portion thereof, and reflected in net investment income or interest credited to contractholder funds beginning in the period that hedge accounting is no longer applied. If the hedged item in a fair value hedge is an asset that has become other-than-temporarily impaired, the adjustment made to the amortized cost for fixed income securities or the carrying value for mortgage loans is subject to the accounting policies applied to other-than-temporarily impaired assets.
When a derivative instrument used in a cash flow hedge of an existing asset or liability is no longer effective or is terminated, the gain or loss recognized on the derivative is reclassified from AOCI to income as the hedged risk impacts income. If the derivative
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instrument is not terminated when a cash flow hedge is no longer effective, future gains and losses recognized on the derivative are reported in realized capital gains and losses. When a derivative instrument used in a cash flow hedge of a forecasted transaction is terminated because it is probable the forecasted transaction will not occur, the gain or loss recognized on the derivative is immediately reclassified from AOCI to realized capital gains and losses in the period that hedge accounting is no longer applied.
Non-hedge derivative financial instruments For derivatives for which hedge accounting is not applied, the income statement effects, including fair value gains and losses and accrued periodic settlements, are reported either in realized capital gains and losses or in a single line item together with the results of the associated asset or liability for which risks are being managed.
Securities loaned
The Company’s business activities include securities lending transactions, which are used primarily to generate net investment income. The proceeds received in conjunction with securities lending transactions can be reinvested in short-term investments or fixed income securities. These transactions are short-term in nature, usually 30 days or less.
The Company receives cash collateral for securities loaned in an amount generally equal to 102% and 105% of the fair value of domestic and foreign securities, respectively, and records the related obligations to return the collateral in other liabilities and accrued expenses. The carrying value of these obligations approximates fair value because of their relatively short-term nature. The Company monitors the market value of securities loaned on a daily basis and obtains additional collateral as necessary under the terms of the agreements to mitigate counterparty credit risk. The Company maintains the right and ability to repossess the securities loaned on short notice.
Recognition of premium revenues and contract charges, and related benefits and interest credited
Property and casualty insurance premiums include premiums from personal lines policies, protection plans, other contracts (primarily finance and insurance products) and roadside assistance.
Personal lines insurance premiums are deferred and earned on a pro-rata basis over the terms of the policies, typically periods of six or twelve months.
Revenues related to protection plans, other contracts (primarily finance and insurance products) and roadside assistance are deferred and earned over the term of the contract in a manner that recognizes revenue as obligations under the contracts are performed. Revenues from these products are classified as premiums as the products are backed by insurance. Protection plans and finance and insurance premiums are recognized using a cost-based incurrence method over the term of the contracts, which is generally over one to five years. Roadside assistance premiums are recognized evenly over the
term of the contract as performance obligations are fulfilled.
The portion of premiums written applicable to the unexpired terms of the policies is recorded as unearned premiums. As of December 31, 2019, unearned premiums were $12.57 billion and $2.76 billion for Allstate Protection and Service Businesses, respectively. Premium installment receivables, net, represent premiums written and not yet collected, net of an allowance for uncollectible premiums. The Company regularly evaluates premium installment receivables and adjusts its valuation allowance as appropriate. The valuation allowance for uncollectible premium installment receivables was $90 million and $77 million as of December 31, 2019 and 2018, respectively.
Traditional life insurance products consist principally of products with fixed and guaranteed premiums and benefits, primarily term and whole life insurance products. Voluntary accident and health insurance products are expected to remain in force for an extended period and therefore are primarily classified as long-duration contracts. Premiums from these products are recognized as revenue when due from policyholders. Benefits are reflected in contract benefits and recognized over the life of the policy in relation to premiums.
Immediate annuities with life contingencies, including certain structured settlement annuities, provide benefits over a period that extends beyond the period during which premiums are collected. Premiums from these products are recognized as revenue when received at the inception of the contract. Benefits are recognized in relation to premiums with the establishment of a reserve. The change in reserve over time is recorded in contract benefits and primarily relates to accumulation at the discount rate and annuitant mortality. Profits from these policies come primarily from investment income, which is recognized over the life of the contract.
Interest-sensitive life contracts, such as universal life and single premium life, are insurance contracts whose terms are not fixed and guaranteed. The terms that may be changed include premiums paid by the contractholder, interest credited to the contractholder account balance and contract charges assessed against the contractholder account balance. Premiums from these contracts are reported as contractholder fund deposits. Contract charges consist of fees assessed against the contractholder account balance for the cost of insurance (mortality risk), contract administration and surrender of the contract prior to contractually specified dates. These contract charges are recognized as revenue when assessed against the contractholder account balance. Contract benefits include life-contingent benefit payments in excess of the contractholder account balance.
Contracts that do not subject the Company to significant risk arising from mortality or morbidity are referred to as investment contracts. Fixed annuities, including market value adjusted annuities, equity-indexed annuities and immediate annuities without life
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contingencies, are considered investment contracts. Consideration received for such contracts is reported as contractholder fund deposits. Contract charges for investment contracts consist of fees assessed against the contractholder account balance for maintenance, administration and surrender of the contract prior to contractually specified dates, and are recognized when assessed against the contractholder account balance.
Interest credited to contractholder funds represents interest accrued or paid on interest-sensitive life and investment contracts. Crediting rates for certain fixed annuities and interest-sensitive life contracts are adjusted periodically by the Company to reflect current market conditions subject to contractually guaranteed minimum rates. Crediting rates for indexed life and annuities are generally based on a specified interest rate index or an equity index, such as the Standard & Poor’s 500 Index (“S&P 500”). Interest credited also includes amortization of DSI expenses. DSI is amortized into interest credited using the same method used to amortize DAC.
Contract charges for variable life and variable annuity products consist of fees assessed against the contractholder account balances for contract maintenance, administration, mortality, expense and surrender of the contract prior to contractually specified dates. Contract benefits incurred for variable annuity products include guaranteed minimum death, income, withdrawal and accumulation benefits. Substantially all of the Company’s variable annuity business is ceded through reinsurance agreements and the contract charges and contract benefits related thereto are reported net of reinsurance ceded.
Other revenue
Other revenue represents fees collected from policyholders relating to premium installment payments, commissions on sales of non-proprietary products, sales of identity protection services, fee-based services and other revenue transactions. Other revenue is recognized when performance obligations are fulfilled.
Deferred policy acquisition and sales inducement costs
Costs that are related directly to the successful acquisition of new or renewal insurance policies and investment contracts are deferred and recorded as DAC. These costs are principally agency’s and brokers’ remuneration, premium taxes and certain underwriting expenses. DSI costs, which are deferred and recorded as other assets, relate to sales inducements offered on sales to new customers, principally on fixed annuity and interest-sensitive life contracts. These sales inducements are primarily in the form of additional credits to the customer’s account balance or enhancements to interest credited for a specified period which are in excess of the rates currently being credited to similar contracts without sales inducements. DSI is amortized into income using the same methodology and assumptions as DAC and is included in interest credited to contractholder funds. All other acquisition costs are expensed as incurred and included in operating costs and expenses.
For property and casualty insurance, DAC is amortized into income as premiums are earned, typically over periods of six or twelve months for personal lines policies or generally one to five years for protection plans and other contracts (primarily related to finance and insurance products), and is included in amortization of deferred policy acquisition costs. DAC associated with property and casualty insurance is periodically reviewed for recoverability and adjusted if necessary. Future investment income is considered in determining the recoverability of DAC.
For traditional life and voluntary accident and health insurance, DAC is amortized over the premium paying period of the related policies in proportion to the estimated revenues on such business. Assumptions used in the amortization of DAC and reserve calculations are established at the time the policy is issued and are generally not revised during the life of the policy. Any deviations from projected business in force resulting from actual policy terminations differing from expected levels and any estimated premium deficiencies may result in a change to the rate of amortization in the period such events occur. Generally, the amortization periods for these policies approximates the estimated lives of the policies. The Company periodically reviews the recoverability of DAC using actual experience and current assumptions. Prior to fourth quarter 2017, the Company evaluated traditional life insurance products and immediate annuities with life contingencies on an aggregate basis. In conjunction with the segment changes that occurred in the fourth quarter of 2017, traditional life insurance products, immediate annuities with life contingencies, and voluntary accident and health insurance products are reviewed individually. If actual experience and current assumptions are adverse compared to the original assumptions and a premium deficiency is determined to exist, any remaining unamortized DAC balance would be expensed to the extent not recoverable and the establishment of a premium deficiency reserve may be required for any remaining deficiency.
For interest-sensitive life insurance, DAC and DSI are amortized in proportion to the incidence of the total present value of gross profits, which includes both actual historical gross profits (“AGP”) and estimated future gross profits (“EGP”) expected to be earned over the estimated lives of the contracts. The amortization is net of interest on the prior period DAC balance using rates established at the inception of the contracts. Actual amortization periods generally range from 15-30 years; however, incorporating estimates of the rate of customer surrenders, partial withdrawals and deaths generally results in the majority of the DAC being amortized during the surrender charge period, which is typically 10-20 years for interest-sensitive life. The rate of DAC and DSI amortization is reestimated and adjusted by a cumulative charge or credit to income when there is a difference between the incidence of actual versus expected gross profits in a reporting period or when there is a change in total EGP. When DAC or DSI amortization or a component of gross profits for a quarterly period is potentially negative (which would result in an increase of the DAC
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or DSI balance) as a result of negative AGP, the specific facts and circumstances surrounding the potential negative amortization are considered to determine whether it is appropriate for recognition in the consolidated financial statements. Negative amortization is only recorded when the increased DAC or DSI balance is determined to be recoverable based on facts and circumstances. Recapitalization of DAC and DSI is limited to the originally deferred costs plus interest.
AGP and EGP primarily consist of the following components: contract charges for the cost of insurance less mortality costs and other benefits; investment income and realized capital gains and losses less interest credited; and surrender and other contract charges less maintenance expenses. The principal assumptions for determining the amount of EGP are mortality, persistency, expenses, investment returns, including capital gains and losses on assets supporting contract liabilities, interest crediting rates to contractholders, and the effects of any hedges. For products whose supporting investments are exposed to capital losses in excess of the Company’s expectations which may cause periodic AGP to become temporarily negative, EGP and AGP utilized in DAC and DSI amortization may be modified to exclude the excess capital losses.
The Company performs quarterly reviews of DAC and DSI recoverability for interest-sensitive life and fixed annuity contracts using current assumptions. If a change in the amount of EGP is significant, it could result in the unamortized DAC or DSI not being recoverable, resulting in a charge which is included as a component of amortization of deferred policy acquisition costs or interest credited to contractholder funds, respectively.
The DAC and DSI balances presented include adjustments to reflect the amount by which the amortization of DAC and DSI would increase or decrease if the unrealized capital gains or losses in the respective product investment portfolios were actually realized. The adjustments are recorded net of tax in AOCI. DAC, DSI and deferred income taxes determined on unrealized capital gains and losses and reported in AOCI recognize the impact on shareholders’ equity consistently with the amounts that would be recognized in the income statement on realized capital gains and losses.
Customers of the Company may exchange one insurance policy or investment contract for another offered by the Company, or make modifications to an existing investment, life or property and casualty contract issued by the Company. These transactions are identified as internal replacements for accounting purposes. Internal replacement transactions determined to result in replacement contracts that are substantially unchanged from the replaced contracts are accounted for as continuations of the replaced contracts. Unamortized DAC and DSI related to the replaced contracts continue to be deferred and amortized in connection with the replacement contracts. For interest-sensitive life and investment contracts, the EGP of the replacement contracts are
treated as a revision to the EGP of the replaced contracts in the determination of amortization of DAC and DSI. For traditional life and property and casualty insurance policies, any changes to unamortized DAC that result from replacement contracts are treated as prospective revisions. Any costs associated with the issuance of replacement contracts are characterized as maintenance costs and expensed as incurred. Internal replacement transactions determined to result in a substantial change to the replaced contracts are accounted for as an extinguishment of the replaced contracts, and any unamortized DAC and DSI related to the replaced contracts are eliminated with a corresponding charge to amortization of deferred policy acquisition costs or interest credited to contractholder funds, respectively.
The costs assigned to the right to receive future cash flows from certain business purchased from other insurers are also classified as DAC in the Consolidated Statements of Financial Position. The costs capitalized represent the present value of future profits expected to be earned over the lives of the contracts acquired. These costs are amortized as profits emerge over the lives of the acquired business and are periodically evaluated for recoverability. The present value of future profits was $39 million and $45 million as of December 31, 2019 and 2018, respectively. Amortization expense of the present value of future profits was $6 million, $2 million and $6 million in 2019, 2018 and 2017, respectively.
Reinsurance and Indemnification
Reinsurance In the normal course of business, the Company seeks to limit aggregate and single exposure to losses on large risks by purchasing reinsurance. The Company has also used reinsurance to effect the disposition of certain blocks of business. Reinsurance does not extinguish the Company’s primary liability under the policies written. Therefore, the Company regularly evaluates the financial condition of its reinsurers, including their activities with respect to claim settlement practices and commutations, and establishes allowances for uncollectible reinsurance as appropriate.
Indemnification The Company also participates in various indemnification mechanisms, including industry pools and facilities, which are backed by the financial resources of the property and casualty insurance company market participants. Indemnification recoverables are considered collectible based on the industry pool and facility enabling legislation.
The amounts reported as reinsurance and indemnification recoverables include amounts billed to reinsurers and indemnitors on losses paid as well as estimates of amounts expected to be recovered from reinsurers and indemnitors on insurance liabilities and contractholder funds that have not yet been paid. Reinsurance and indemnification recoverables on unpaid losses are estimated based upon assumptions consistent with those used in establishing the liabilities related to the underlying contracts. Insurance liabilities are reported gross of reinsurance and indemnification recoverables. Reinsurance and
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indemnification premiums are generally reflected in income in a manner consistent with the recognition of premiums on the associated contracts. For catastrophe coverage, the cost of reinsurance premiums is recognized ratably over the contract period to the extent coverage remains available.
Reinsurance and indemnification recoverables are recognized as an offset to gross reserves for property and casualty insurance claims and claims expense.
Goodwill
Goodwill represents the excess of amounts paid for acquiring businesses over the fair value of the net assets acquired, less any impairment of goodwill recognized. The Company’s goodwill reporting units are equivalent to its reportable segments, Allstate Protection, Service Businesses, Allstate Life and Allstate Benefits to which goodwill has been assigned.
| Goodwill by reporting unit | ||||||||
| As of December 31, | ||||||||
| ($ in millions) | 2019 | 2018 | ||||||
| Allstate Protection | $ | 810 | $ | 810 | ||||
| Service Businesses | 1,464 | 1,449 | ||||||
| Allstate Life | 175 | 175 | ||||||
| Allstate Benefits | 96 | 96 | ||||||
| Total | $ | 2,545 | $ | 2,530 |
Goodwill is recognized when acquired and allocated to reporting units based on which unit is expected to benefit from the synergies of the business combination. Goodwill is not amortized but is tested for impairment at least annually. The Company performs its annual goodwill impairment testing during the fourth quarter of each year based upon data as of the close of the third quarter. Goodwill impairment is measured and recognized as the amount by which a reporting unit’s carrying value, including goodwill, exceeds its fair value, not to exceed the carrying amount of goodwill allocated to the reporting unit. The Company also reviews goodwill for impairment whenever events or changes in circumstances, such as deteriorating or adverse market conditions, indicate that it is more likely than not that the carrying amount of the reporting unit including goodwill may exceed the fair value of the reporting unit. The goodwill impairment analysis is performed at the reporting unit level.
In fourth quarter 2017, the Company adopted new reportable segments, which required the Company to evaluate goodwill, including the allocation of goodwill to any new reporting units on a relative fair value basis. The reallocation was computed using fair values for the goodwill reporting units determined using discounted cash flow (“DCF”) calculations and market to book multiples derived from a peer company analysis. In conjunction with the reallocation of goodwill, the Company recognized $125 million of goodwill impairment related to the goodwill allocated to the Allstate Annuities reporting unit reflecting a market-based valuation. As of December 31, 2019 and 2018, the fair value of the Company’s reporting units exceeded their carrying values.
Intangible assets
Intangible assets (reported in other assets) consist of capitalized costs primarily related to acquired customer relationships, trade names and licenses, technology and other assets. The estimated useful lives of customer relationships, technology and other intangible assets are generally 10 years, 5 years and 7 years, respectively. Intangible assets are carried at cost less accumulated amortization. Amortization expense is calculated using an accelerated amortization method. Amortization expense on intangible assets was $126 million, $105 million and $99 million in 2019, 2018 and 2017, respectively.
| Amortization expense of intangible assets for the next five years and thereafter | ||||
| ($ in millions) | ||||
| 2020 | $ | 109 | ||
| 2021 | 91 | |||
| 2022 | 74 | |||
| 2023 | 60 | |||
| 2024 | 45 | |||
| Thereafter | 64 | |||
| Total amortization | $ | 443 |
Accumulated amortization on intangible assets was $633 million and $572 million as of December 31, 2019 and 2018, respectively. Trade names and licenses are considered to have an indefinite useful life and are reviewed for impairment at least annually or more frequent if circumstances arise that indicate an impairment may have occurred. An impairment is recognized if the carrying amount of the asset exceeds its estimated fair value.
| Intangible assets by type | ||||||||
| As of December 31, | ||||||||
| ($ in millions) | 2019 | 2018 | ||||||
| Customers relationships | $ | 419 | $ | 530 | ||||
| Trade names and licenses | 38 | 143 | ||||||
| Technology and other | 24 | 40 | ||||||
| Total | $ | 481 | $ | 713 |
During second quarter 2019, the Company made the decision to phase-out the use of the SquareTrade trade name in the United States and sell consumer protection plans under the Allstate Protection Plans name. The SquareTrade trade name will continue to be used outside of the United States. The change required an impairment evaluation of the indefinite-lived intangible asset recognized in the Service Businesses segment for SquareTrade’s trade name recorded when SquareTrade was acquired in 2017.
During fourth quarter 2019, the Company made the decision to integrate Esurance into the Allstate brand as part of the Transformative Growth Plan. This required an impairment evaluation of the indefinite-lived intangible asset recognized in the Allstate Protection segment for the Esurance trade name recorded when Esurance was acquired in 2011.
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As a result of these actions, the Company recognized total impairment charges of $106 million pre-tax during 2019.
Property and equipment
Property and equipment is carried at cost less accumulated depreciation. Included in property and equipment are capitalized costs related to computer software licenses and software developed for internal use. These costs generally consist of certain external payroll and payroll related costs. Property and equipment depreciation is calculated using 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. Depreciation expense is reported in operating costs and expenses. Accumulated depreciation on property and equipment was $2.60 billion and $2.41 billion as of December 31, 2019 and 2018, respectively. Depreciation expense on property and equipment was $326 million, $299 million and $290 million in 2019, 2018 and 2017, respectively. The Company reviews its property and equipment for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Income taxes
Income taxes are accounted for using the asset and liability method under which deferred tax assets and liabilities are recognized for temporary differences between the financial reporting and tax bases of assets and liabilities at the enacted tax rates. The principal assets and liabilities giving rise to such differences are DAC, unearned premiums, investments (including unrealized capital gains and losses) and insurance reserves. A deferred tax asset valuation allowance is established when it is more likely than not such assets will not be realized. The Company recognizes interest expense related to income tax matters in income tax expense and penalties in other expense.
Reserve for property and casualty insurance claims and claims expense
The reserve for property and casualty insurance claims and claims expense is the estimate of amounts necessary to settle all reported and unreported incurred claims for the ultimate cost of insured property and casualty losses, based upon the facts of each case and the Company’s 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 catastrophe losses, is an inherently uncertain and complex process. Reserve estimates are primarily derived using an actuarial estimation process in which historical loss patterns are applied to actual paid losses and reported losses (paid losses plus individual case reserves established by claim adjusters) for an accident or report year to create an estimate of how losses are likely to develop over time. Development factors are calculated quarterly and periodically throughout the year for data elements such as claims reported and settled, paid losses, and paid losses combined with case reserves. The
historical development patterns for these data elements are used as the assumptions to calculate reserve estimates, including the reserves for reported and unreported claims. Reserve estimates are regularly reviewed and updated, using the most current information available. Any resulting reestimates are reflected in current results of operations.
Reserve for life-contingent contract benefits
The reserve for life-contingent contract benefits payable under insurance policies, including traditional life insurance, life-contingent immediate annuities and voluntary accident and health insurance products, is computed on the basis of long-term actuarial assumptions of future investment yields, mortality, morbidity, policy 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 characteristics such as type of coverage, year of issue and policy duration. The assumptions are established at the time the policy is issued and are generally not changed during the life of the policy. The Company periodically reviews the adequacy of reserves using actual experience and current assumptions. If actual experience and current assumptions are adverse compared to the original assumptions and a premium deficiency is determined to exist, any remaining unamortized DAC balance would be expensed to the extent not recoverable and the establishment of a premium deficiency reserve may be required for any remaining deficiency. In 2019 and 2018, the Company’s reviews concluded that no premium deficiency adjustments were necessary. Prior to fourth quarter 2017, the Company evaluated traditional life insurance products and immediate annuities with life contingencies on an aggregate basis. In conjunction with the Company’s segment changes that occurred in the fourth quarter of 2017, traditional life insurance products, immediate annuities with life contingencies, and voluntary accident and health insurance are reviewed individually. The Company also reviews these policies for circumstances where projected profits would be recognized in early years followed by projected losses in later years. If this circumstance exists, the Company will accrue a liability, during the period of profits, to offset the losses at such time as the future losses are expected to commence using a method updated prospectively over time. To the extent that unrealized gains on fixed income securities would result in a premium deficiency if those gains were realized, the related increase in reserves for certain immediate annuities with life contingencies is recorded net of tax as a reduction of unrealized net capital gains included in AOCI.
Contractholder funds
Contractholder funds represent interest-bearing liabilities arising from the sale of products such as interest-sensitive life insurance and fixed annuities. Contractholder funds primarily comprise cumulative deposits received and interest credited to the contractholder less cumulative contract benefits, surrenders, withdrawals and contract charges for
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mortality or administrative expenses. Contractholder funds also include reserves for secondary guarantees on interest-sensitive life insurance and certain fixed annuity contracts and reserves for certain guarantees on reinsured variable annuity contracts.
Pension and other postretirement remeasurement gains and losses
Pension and other postretirement gains and losses represent the remeasurement of projected benefit obligation and plan assets, which are immediately recognized in earnings and are referred to as pension and other postretirement remeasurement gains and losses on the Consolidated Statements of Operations. The Company’s policy is to remeasure its pension and postretirement plans on a quarterly basis.
Differences between expected and actual returns and changes in assumptions affect our pension and other postretirement obligations, plan assets and expenses.
The primary factors contributing to pension and postretirement remeasurement gains and losses are:
| • Changes in the discount rate used to value pension and postretirement obligations as of the measurement date |
| • Differences between the expected and the actual return on plan assets |
| • Changes in demographic assumptions, including mortality and participant experience |
Pension and other postretirement service cost, interest cost, expected return on plan assets and amortization of prior service credits are allocated to the Company’s reportable segments. The pension and other postretirement remeasurement gains and losses are reported in the Corporate and Other segment.
Separate accounts
Separate accounts assets are carried at fair value. The assets of the separate accounts are legally segregated and available only to settle separate accounts contract obligations. Separate accounts liabilities represent the contractholders’ claims to the related assets and are carried at an amount equal to the separate accounts assets. Investment income and realized capital gains and losses of the separate accounts accrue directly to the contractholders and therefore are not included in the Company’s Consolidated Statements of Operations. Deposits to and surrenders and withdrawals from the separate accounts are reflected in separate accounts liabilities and are not included in consolidated cash flows.
Absent any contract provision wherein the Company provides a guarantee, variable annuity and variable life insurance contractholders bear the investment risk that the separate accounts’ funds may not meet their stated investment objectives. Substantially all of the Company’s variable annuity business was reinsured beginning in 2006.
Legal contingencies
The Company reviews its lawsuits, regulatory inquiries, and other legal proceedings on an ongoing basis. The Company establishes accruals for such
matters at management’s best estimate when the Company assesses that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company’s assessment of whether a loss is reasonably possible or probable is based on its assessment of the ultimate outcome of the matter following all appeals. The Company does not include potential recoveries in its estimates of reasonably possible or probable losses. Legal fees are expensed as incurred.
Long-term debt
Long-term debt includes senior notes, senior debentures, subordinated debentures and junior subordinated debentures issued by the Corporation. Unamortized debt issuance costs are reported in long-term debt and are amortized over the expected period the debt will remain outstanding.
Equity incentive plans
The Company has equity incentive plans under which the Company grants nonqualified stock options, restricted stock units and performance stock awards (“equity awards”) to certain employees and directors of the Company. The Company measures the fair value of equity awards at the award date and recognizes the expense over the shorter of the period in which the requisite service is rendered or retirement eligibility is attained. The expense for performance stock awards is adjusted each period to reflect the performance factor most likely to be achieved at the end of the performance period. The Company uses a binomial lattice model to determine the fair value of employee stock options.
Leases
The Company has certain operating leases for office facilities, computer and office equipment, and vehicles. The Company’s leases have remaining lease terms of 1 year to 10 years, some of which include options to extend the leases for up to 20 years, and some of which include options to terminate the leases within 60 days.
The Company determines if an arrangement is a lease at inception. Leases with an initial term less than one year are not recorded on the balance sheet and the lease costs for these leases are recorded as an expense on a straight-line basis over the lease term. Operating leases with terms greater than one year result in a lease liability recorded in other liabilities with a corresponding right-of-use (“ROU”) asset recorded in other assets. As of December 31, 2019, the Company had $586 million in lease liabilities and $483 million in ROU assets.
Operating lease liabilities are recognized at the commencement date based on the present value of future minimum lease payments over the lease term. ROU assets are recognized based on the corresponding lease liabilities adjusted for qualifying initial direct costs, prepaid or accrued lease payments and unamortized lease incentives. As most of the Company’s leases do not disclose the implicit interest rate, the Company uses collateralized incremental borrowing rates based on information available at
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lease commencement when determining the present value of future lease payments. The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease. Lease terms may include options to extend or terminate the lease which are incorporated into the Company’s measurements when it is reasonably certain that the Company will exercise the option.
Operating lease costs are recognized on a straight-line basis over the lease term and include interest expense on the lease liability and amortization of the ROU asset. Variable lease costs are expensed as incurred and include maintenance costs and real estate taxes. Lease costs are reported in operating costs and expenses and totaled $171 million, including $30 million of variable lease costs in 2019.
| Other information related to operating leases | |||
| As of December 31, 2019 | |||
| Weighted average remaining lease term (years) | 6 | ||
| Weighted average discount rate | 3.15 | % |
| Maturity of lease liabilities | ||||
| ($ in millions) | Operating leases | |||
| 2020 | $ | 133 | ||
| 2021 | 121 | |||
| 2022 | 102 | |||
| 2023 | 84 | |||
| 2024 | 67 | |||
| Thereafter | 137 | |||
| Total lease payments | $ | 644 | ||
| Less: interest | (58 | ) | ||
| Present value of lease liabilities | $ | 586 |
Off-balance sheet financial instruments
Commitments to invest, commitments to purchase private placement securities, commitments to extend loans, financial guarantees and credit guarantees have off-balance sheet risk because their contractual amounts are not recorded in the Company’s Consolidated Statements of Financial Position (see Notes 7 and 14).
Consolidation of variable interest entities (“VIEs”)
The Company consolidates VIEs when it is the primary beneficiary. A primary beneficiary is the variable interest holder in a VIE with both the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the VIE.
Foreign currency translation
The local currency of the Company’s foreign subsidiaries is deemed to be the functional currency of the country in which these subsidiaries 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 and losses from the translation of the net assets are recorded as unrealized foreign currency translation adjustments and included in AOCI. Changes in unrealized foreign currency translation adjustments are included in OCI. Gains and losses from foreign currency transactions are reported in operating costs and expenses and have not been material.
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Notes to Consolidated Financial Statements 2019 Form 10-K
Earnings per common share
Basic earnings per common share is computed using the weighted average number of common shares outstanding, including vested unissued participating restricted stock units. Diluted earnings per common share is computed using the weighted average number of common and dilutive potential common shares outstanding.
For the Company, dilutive potential common shares consist of outstanding stock options and unvested non-participating restricted stock units and contingently issuable performance stock awards. The effect of dilutive potential common shares does not include options with an anti-dilutive effect on earnings per common share because their exercise prices exceed the average market price of Allstate common shares during the period or for which the unrecognized compensation cost would have an anti-dilutive effect.
| Computation of basic and diluted earnings per common share | ||||||||||||
| For the years ended December 31, | ||||||||||||
| ($ in millions, except per share data) | 2019 | 2018 | 2017 | |||||||||
| Numerator: | ||||||||||||
| Net income | $ | 4,847 | $ | 2,160 | $ | 3,554 | ||||||
| Less: Preferred stock dividends | 169 | 148 | 116 | |||||||||
| Net income applicable to common shareholders (1) | $ | 4,678 | $ | 2,012 | $ | 3,438 | ||||||
| Denominator: | ||||||||||||
| Weighted average common shares outstanding | 328.2 | 347.8 | 362.0 | |||||||||
| Effect of dilutive potential common shares: | ||||||||||||
| Stock options | 3.2 | 3.6 | 4.3 | |||||||||
| Restricted stock units (non-participating) and performance stock awards | 2.1 | 1.8 | 1.5 | |||||||||
| Weighted average common and dilutive potential common shares outstanding | 333.5 | 353.2 | 367.8 | |||||||||
| Earnings per common share – Basic | $ | 14.25 | $ | 5.78 | $ | 9.50 | ||||||
| Earnings per common share – Diluted | $ | 14.03 | $ | 5.70 | $ | 9.35 | ||||||
| Anti-dilutive options excluded from diluted earnings per common share | 3.7 | 2.0 | 1.5 |
Adopted accounting standards
Accounting for Leases Effective January 1, 2019 the Company adopted new Financial Accounting Standards Board (“FASB”) guidance related to accounting for leases. Upon adoption of the guidance under the optional transition method that allows application of the transition provisions at the adoption date instead of the earliest period presented, the Company recorded a $585 million lease liability equal to the present value of lease payments and a $488 million ROU asset, which is the corresponding lease liability adjusted for qualifying accrued lease payments. The lease liability and ROU asset were reported as part of other liabilities and other assets on the Consolidated Statements of Financial Position. The impact of these changes at adoption had no impact on net income or shareholders’ equity. Prior periods were not restated under the new standard. The Company utilized the package of practical expedients permitted under the transition guidance which, among other things, did not require reassessment of existing contracts for the existence of a lease or reassessment of existing lease classifications.
Upon adoption, the new guidance required sellers in a sale-leaseback transaction to recognize the entire gain from the sale of an underlying asset at the time the sale is recognized rather than over the leaseback term. The carrying value of unrecognized gains on sale-leaseback transactions executed prior to January 1, 2019 was $21 million, after-tax, and was recorded as an increase to retained income at the date of adoption.
Accounting for Hedging Activities Effective January 1, 2019 the Company adopted new FASB guidance intended to better align hedge accounting with an organization’s risk management activities. The new guidance expands hedge accounting to nonfinancial and financial risk components and revises the measurement methodologies. Separate presentation of hedge ineffectiveness is eliminated with the intention to provide greater transparency to the full impact of hedging by requiring presentation of the results of the hedged item and hedging instrument in a single financial statement line item. In addition, the amendments were designed to reduce complexity by simplifying hedge effectiveness testing. The adoption had no impact on the Company’s results of operations or financial position.
Pending accounting standards
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued guidance which revises the credit loss recognition criteria for certain financial assets measured at amortized cost, including reinsurance recoverables. The new guidance replaces the existing incurred loss recognition model with an expected loss recognition model. The objective of the expected credit loss model is for a reporting entity to recognize its estimate of expected credit losses for affected financial assets in a valuation allowance that when deducted from the amortized cost basis of the related financial assets results in a net carrying value at the amount expected to be collected. The reporting
The Allstate Corporation 135
2019 Form 10-K Notes to Consolidated Financial Statements
entity must consider all relevant information available when estimating expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts over the life of an asset. Financial assets may be evaluated individually or on a pooled basis when they share similar risk characteristics. The measurement of credit losses for available-for-sale debt securities measured at fair value is not affected except that credit losses recognized are limited to the amount by which fair value is below amortized cost and the carrying value adjustment is recognized through a valuation allowance which may change over time but once recorded cannot subsequently be reduced to an amount below zero. The guidance is effective for reporting periods beginning after December 15, 2019, and for most affected instruments must be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to beginning retained income.
The Company’s implementation activities, which are being finalized, include review and validation of models, methodologies, data inputs and assumptions to be used to estimate expected credit losses. The implementation impacts relate primarily to the Company’s commercial mortgage loans, bank loans and reinsurance recoverables and are dependent on economic conditions and judgments at the date of adoption. Based on the economic conditions at the date of adoption and the balances at the reporting date, the Company estimates the application of the current expected credit loss requirements will result in total valuation allowances for credit losses of approximately $300 million, as of the date of adoption. After consideration of existing valuation allowances maintained prior to adoption of the new guidance, the Company expects to recognize a cumulative-effect decrease in retained income of approximately $100 million, after-tax, to adjust existing valuation allowances to the basis in the new requirements.
Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued amendments to modify certain disclosure requirements for defined benefit plans. Disclosure additions relate to the weighted-average interest crediting rates for cash balance plans and other plans with interest crediting rates and explanations for significant gains and losses related to changes in the benefit obligation during the reporting period. Disclosures to be removed include those that identify amounts that are expected to be reclassified out of AOCI and into the income statement in the coming year and the anticipated impact of a one-percentage point change in assumed health care cost trend rate on service and interest cost and on the accumulated benefit obligation. The amendments are effective for annual reporting periods beginning after December 15, 2020. The impacts of adoption are to the Company’s disclosures only.
Accounting for Long-Duration Insurance Contracts
In August 2018, the FASB issued guidance revising the accounting for certain long-duration insurance
contracts. The new guidance introduces material changes to the measurement of the Company’s reserves for traditional life, life-contingent immediate annuities and certain voluntary accident and health insurance products.
Under the new guidance, measurement assumptions, including those for mortality, morbidity and policy terminations, will be required to be reviewed and updated at least annually. The effect of updating measurement assumptions other than the discount rate are required to be measured on a retrospective basis and reported in net income. In addition, reserves under the new guidance are required to be discounted using an upper medium grade fixed income instrument yield required to be updated through OCI at each reporting date. Current GAAP requires reserves to utilize assumptions set at policy issuance unless updated current assumptions indicate that recorded reserves are deficient.
The new guidance also requires DAC and other capitalized balances currently amortized in proportion to premiums or gross profits to be amortized on a constant level basis over the expected term for all long-duration insurance contracts. DAC will not be subject to loss recognition testing but will be reduced when actual lapse experience exceeds expected experience. The new guidance will no longer require adjustments to DAC and deferred sales inducement costs (“DSI”) related to unrealized gains and losses on investment securities supporting the related business.
All market risk benefit product features will be measured at fair value with changes in fair value recorded in net income with the exception of changes in the fair value attributable to changes in the reporting entity’s own credit risk, which are required to be recognized in OCI. Substantially all of the Company’s market risk benefits are reinsured and therefore these impacts are not expected to be material to the Company.
The new guidance will be included in the comparable financial statements issued in reporting periods beginning after December 15, 2021, thereby requiring restatement of prior periods presented. Early adoption is permitted. The new guidance will be applied to affected contracts and DAC on the basis of existing carrying amounts at the earliest period presented or retrospectively using actual historical experience as of contract inception. The new guidance for market risk benefits is required to be adopted retrospectively.
The Company is evaluating the anticipated impacts of applying the new guidance to both retained income and AOCI. The requirements of the new guidance represent a material change from existing GAAP, however, the underlying economics of the business and related cash flows are unchanged. The Company is evaluating the specific impacts of adopting the new guidance and anticipates the financial statement impact of adopting the new guidance to be material, largely attributed to the impact of transitioning to a discount rate based on an upper-medium grade fixed income investment yield
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Notes to Consolidated Financial Statements 2019 Form 10-K
and updates to mortality assumptions. The Company expects the most significant impacts will occur in the run-off annuity segment. The revised accounting for DAC will be applied prospectively using the new model and any DAC effects existing in AOCI as a result of applying existing GAAP at the date of adoption will be reversed.
Simplifications to the Accounting for Income Taxes
In December 2019, the FASB issued amendments to simplify the accounting for income taxes. The amendments eliminate certain exceptions in the existing guidance including those related to intraperiod tax allocation and deferred tax liability recognition when changes in control of equity method and foreign subsidiary investments occur. The amendments require recognition of the effect of an enacted change in tax laws or rates in the interim period that includes the enactment date, provide an option to not allocate taxes to a legal entity that is not subject to tax as well as other minor changes. The amendments are effective for interim and annual reporting periods beginning after December 15, 2020. The new guidance specifies which amendments should be applied prospectively, retrospective to all periods presented or on a modified retrospective basis through a cumulative-effect adjustment to retained income as of the beginning of the year of adoption. The impact of adoption is not expected to be material to the Company’s results of operations or financial position.
Change in accounting principle
The Company changed its accounting principle for recognizing actuarial gains and losses and expected return on plan assets for its pension and other postretirement plans to a more preferable policy under U.S. GAAP. Under the new principle, remeasurement of
projected benefit obligation and plan assets are immediately recognized in earnings and are referred to as pension and other postretirement remeasurement gains and losses on the Consolidated Statements of Operations. Previously, actuarial gains and losses and differences between the expected and actual returns on plan assets were recognized as a component of AOCI, and were subject to amortization into earnings in future periods. This change has been applied on a retrospective basis. The Company’s policy is to remeasure its pension and postretirement plans on a quarterly basis.
The Company also changed its policy for recognizing expected returns on plan assets by eliminating the permitted accounting practice allowing the five-year smoothing of equity returns and moving to an unadjusted fair value method.
The Company believes that immediately recognizing remeasurement of projected benefit obligation and plan assets in earnings is preferable as it provides greater transparency of the Company’s economic obligations in accounting results and better aligns with fair value accounting principles by recognizing the effects of economic and interest rate changes on pension and other postretirement plan assets and liabilities in the year in which the gains and losses are incurred. These changes have been applied on a retrospective basis and as of January 1, 2017 resulted in a cumulative effect decrease to retained income of $1.58 billion, with a corresponding offset to AOCI and had no impact on total shareholders’ equity.
The impacts of the adjustments on the financial statements are summarized in the following tables.
| Consolidated Statements of Operations | ||||||||||||
| Previous accounting principle | Impact of change (1) | As reported | ||||||||||
| ($ in millions, except per share data) | Year Ended December 31, 2019 | |||||||||||
| Property and casualty insurance claims and claims expense | $ | 24,074 | $ | (98 | ) | $ | 23,976 | |||||
| Operating costs and expenses | 5,752 | (62 | ) | 5,690 | ||||||||
| Pension and other postretirement remeasurement gains and losses | — | 114 | 114 | |||||||||
| Restructuring and related charges | 41 | — | 41 | |||||||||
| Total costs and expenses | 38,638 | (46 | ) | 38,592 | ||||||||
| Income from operations before income tax expense | 6,043 | 46 | 6,089 | |||||||||
| Income tax expense | 1,232 | 10 | 1,242 | |||||||||
| Net income | 4,811 | 36 | 4,847 | |||||||||
| Net income applicable to common shareholders | $ | 4,642 | $ | 36 | $ | 4,678 | ||||||
| Earnings per common share: | ||||||||||||
| Net income applicable to common shareholders per common share - Basic | $ | 14.14 | $ | 0.11 | $ | 14.25 | ||||||
| Net income applicable to common shareholders per common share - Diluted | $ | 13.92 | $ | 0.11 | $ | 14.03 |
(1) The Company merged two of its pension plans, which had no impact on its financial statements as the Company remeasures pension plan assets and projected benefit obligations immediately in earnings on a quarterly basis. However, the plan merger increased the impact of change by $41 million for 2019, reflecting the shorter amortization period for losses deferred in AOCI from one of the merged plans that was required as part of the merger.
The Allstate Corporation 137
2019 Form 10-K Notes to Consolidated Financial Statements
| Consolidated Statements of Operations | ||||||||||||
| Previous accounting principle | Change in accounting principle | As adjusted | ||||||||||
| Year Ended December 31, 2018 | ||||||||||||
| Property and casualty insurance claims and claims expense | $ | 22,839 | $ | (61 | ) | $ | 22,778 | |||||
| Operating costs and expenses | 5,869 | (275 | ) | 5,594 | ||||||||
| Pension and other postretirement remeasurement gains and losses | — | 468 | 468 | |||||||||
| Restructuring and related charges | 83 | (16 | ) | 67 | ||||||||
| Total costs and expenses | 37,077 | 116 | 37,193 | |||||||||
| Income from operations before income tax expense | 2,744 | (116 | ) | 2,628 | ||||||||
| Income tax expense | 492 | (24 | ) | 468 | ||||||||
| Net income | 2,252 | (92 | ) | 2,160 | ||||||||
| Net income applicable to common shareholders | $ | 2,104 | $ | (92 | ) | $ | 2,012 | |||||
| Earnings per common share: | ||||||||||||
| Net income applicable to common shareholders per common share - Basic | $ | 6.05 | $ | (0.27 | ) | $ | 5.78 | |||||
| Net income applicable to common shareholders per common share - Diluted | $ | 5.96 | $ | (0.26 | ) | $ | 5.70 | |||||
| Year Ended December 31, 2017 | ||||||||||||
| Property and casualty insurance claims and claims expense | $ | 21,929 | $ | (82 | ) | $ | 21,847 | |||||
| Operating costs and expenses | 5,442 | (246 | ) | 5,196 | ||||||||
| Pension and other postretirement remeasurement gains and losses | — | (217 | ) | (217 | ) | |||||||
| Restructuring and related charges | 109 | (13 | ) | 96 | ||||||||
| Total costs and expenses | 35,436 | (558 | ) | 34,878 | ||||||||
| Income from operations before income tax expense | 3,991 | 558 | 4,549 | |||||||||
| Income tax expense | 802 | 193 | 995 | |||||||||
| Net income | 3,189 | 365 | 3,554 | |||||||||
| Net income applicable to common shareholders | $ | 3,073 | $ | 365 | $ | 3,438 | ||||||
| Earnings per common share: | ||||||||||||
| Net income applicable to common shareholders per common share - Basic | $ | 8.49 | $ | 1.01 | $ | 9.50 | ||||||
| Net income applicable to common shareholders per common share - Diluted | $ | 8.36 | $ | 0.99 | $ | 9.35 |
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Notes to Consolidated Financial Statements 2019 Form 10-K
| Consolidated Statements of Comprehensive Income | ||||||||||||
| Previous accounting principle | Impact of change | As reported | ||||||||||
| ($ in millions) | Year Ended December 31, 2019 | |||||||||||
| Net income | $ | 4,811 | $ | 36 | $ | 4,847 | ||||||
| Other comprehensive income (loss), after-tax | ||||||||||||
| Changes in: | ||||||||||||
| Unrealized net capital gains and losses | 1,889 | — | 1,889 | |||||||||
| Unrealized foreign currency translation adjustments | (4 | ) | (6 | ) | (10 | ) | ||||||
| Unrecognized pension and other postretirement benefit cost (1) | 141 | (188 | ) | (47 | ) | |||||||
| Other comprehensive income, after-tax | 2,026 | (194 | ) | 1,832 | ||||||||
| Comprehensive income | 6,837 | (158 | ) | 6,679 | ||||||||
| Year Ended December 31, 2018 | ||||||||||||
| Net income | $ | 2,252 | $ | (92 | ) | $ | 2,160 | |||||
| Other comprehensive income (loss), after-tax | ||||||||||||
| Changes in: | ||||||||||||
| Unrealized net capital gains and losses | (754 | ) | — | (754 | ) | |||||||
| Unrealized foreign currency translation adjustments | (55 | ) | 7 | (48 | ) | |||||||
| Unrecognized pension and other postretirement benefit cost (1) | (144 | ) | 85 | (59 | ) | |||||||
| Other comprehensive loss, after-tax | (953 | ) | 92 | (861 | ) | |||||||
| Comprehensive income | 1,299 | — | 1,299 | |||||||||
| Year Ended December 31, 2017 | ||||||||||||
| Net income | $ | 3,189 | $ | 365 | $ | 3,554 | ||||||
| Other comprehensive income (loss), after-tax | ||||||||||||
| Changes in: | ||||||||||||
| Unrealized net capital gains and losses | 319 | — | 319 | |||||||||
| Unrealized foreign currency translation adjustments | 47 | (2 | ) | 45 | ||||||||
| Unrecognized pension and other postretirement benefit cost (1) | 307 | (359 | ) | (52 | ) | |||||||
| Other comprehensive income, after-tax | 673 | (361 | ) | 312 | ||||||||
| Comprehensive income | 3,862 | 4 | 3,866 |
(1) Financial statement line item has been updated to “Unamortized pension and other postretirement prior service credit“.
| Consolidated Statements of Financial Position | |||||||||
| Previous accounting principle | Impact of change | As reported | |||||||
| ($ in millions) | December 31, 2019 | ||||||||
| Retained income | 49,713 | (1,639 | ) | 48,074 | |||||
| Unrealized foreign currency translation adjustments | (68 | ) | 9 | (59 | ) | ||||
| Unrecognized pension and other postretirement benefit cost (1) | (1,350 | ) | 1,472 | 122 | |||||
| Total AOCI | 469 | 1,481 | 1,950 | ||||||
| Total shareholders’ equity | 26,156 | (158 | ) | 25,998 | |||||
| December 31, 2018 | |||||||||
| Retained income | 45,708 | (1,675 | ) | 44,033 | |||||
| Unrealized foreign currency translation adjustments | (64 | ) | 15 | (49 | ) | ||||
| Unrecognized pension and other postretirement benefit cost (1) | (1,491 | ) | 1,660 | 169 | |||||
| Total AOCI | (1,557 | ) | 1,675 | 118 | |||||
| Total shareholders’ equity | 21,312 | — | 21,312 |
(1) Financial statement line item has been updated to “Unamortized pension and other postretirement prior service credit“.
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2019 Form 10-K Notes to Consolidated Financial Statements
| Consolidated Statements of Shareholders’ Equity | ||||||||||||
| ($ in millions) | Previous accounting principle | Impact of change | As reported | |||||||||
| Year Ended December 31, 2019 | ||||||||||||
| Retained income | ||||||||||||
| Balance, beginning of year | $ | 45,708 | $ | (1,675 | ) | $ | 44,033 | |||||
| Cumulative effect of change in accounting principle | 21 | — | 21 | |||||||||
| Net income | 4,811 | 36 | 4,847 | |||||||||
| Dividends on common stock (declared per share of $2.00) | (658 | ) | — | (658 | ) | |||||||
| Dividends on preferred stock | (169 | ) | — | (169 | ) | |||||||
| Balance, end of year | 49,713 | (1,639 | ) | 48,074 | ||||||||
| Accumulated other comprehensive income (loss) | ||||||||||||
| Balance, beginning of year | (1,557 | ) | 1,675 | 118 | ||||||||
| Cumulative effect of change in accounting principle | — | — | — | |||||||||
| Change in unrealized net capital gains and losses | 1,889 | — | 1,889 | |||||||||
| Change in unrealized foreign currency translation adjustments | (4 | ) | (6 | ) | (10 | ) | ||||||
| Change in unrecognized pension and other postretirement benefit cost (1) | 141 | (188 | ) | (47 | ) | |||||||
| Balance, end of year | $ | 469 | $ | 1,481 | $ | 1,950 | ||||||
| Year Ended December 31, 2018 | ||||||||||||
| Retained income | ||||||||||||
| Balance, beginning of year | $ | 43,162 | $ | (1,583 | ) | $ | 41,579 | |||||
| Cumulative effect of change in accounting principle | 1,088 | — | 1,088 | |||||||||
| Net income | 2,252 | (92 | ) | 2,160 | ||||||||
| Dividends on common stock (declared per share of $1.84) | (646 | ) | — | (646 | ) | |||||||
| Dividends on preferred stock | (148 | ) | — | (148 | ) | |||||||
| Balance, end of year | 45,708 | (1,675 | ) | 44,033 | ||||||||
| Accumulated other comprehensive income (loss) | ||||||||||||
| Balance, beginning of year | 306 | 1,583 | 1,889 | |||||||||
| Cumulative effect of change in accounting principle | (910 | ) | — | (910 | ) | |||||||
| Change in unrealized net capital gains and losses | (754 | ) | — | (754 | ) | |||||||
| Change in unrealized foreign currency translation adjustments | (55 | ) | 7 | (48 | ) | |||||||
| Change in unrecognized pension and other postretirement benefit cost (1) | (144 | ) | 85 | (59 | ) | |||||||
| Balance, end of year | (1,557 | ) | 1,675 | 118 | ||||||||
| Year Ended December 31, 2017 | ||||||||||||
| Retained income | ||||||||||||
| Balance, beginning of year | $ | 40,678 | $ | (1,669 | ) | $ | 39,009 | |||||
| Net income | 3,189 | 365 | 3,554 | |||||||||
| Dividends on common stock (declared per share of $1.48) | (540 | ) | — | (540 | ) | |||||||
| Dividends on preferred stock | (116 | ) | — | (116 | ) | |||||||
| Reclassification of tax effects due to change in accounting principle | (49 | ) | (279 | ) | (328 | ) | ||||||
| Balance, end of year | 43,162 | (1,583 | ) | 41,579 | ||||||||
| Accumulated other comprehensive income (loss) | ||||||||||||
| Balance, beginning of year | (416 | ) | 1,665 | 1,249 | ||||||||
| Change in unrealized net capital gains and losses | 319 | — | 319 | |||||||||
| Change in unrealized foreign currency translation adjustments | 47 | (2 | ) | 45 | ||||||||
| Change in unrecognized pension and other postretirement benefit cost (1) | 307 | (359 | ) | (52 | ) | |||||||
| Reclassification of tax effects due to change in accounting principle | 49 | 279 | 328 | |||||||||
| Balance, end of year | 306 | 1,583 | 1,889 |
(1) Financial statement line item has been updated to “Change in unamortized pension and other postretirement prior service credit”.
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Notes to Consolidated Financial Statements 2019 Form 10-K
| Consolidated Statements of Cash Flows | ||||||||||||
| Previous accounting principle | Impact of change | As reported | ||||||||||
| ($ in millions) | Year Ended December 31, 2019 | |||||||||||
| Cash flows from operating activities | ||||||||||||
| Net income | $ | 4,811 | $ | 36 | $ | 4,847 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Pension and other postretirement measurement gains and losses | — | 114 | 114 | |||||||||
| Income taxes | 477 | 10 | 487 | |||||||||
| Other operating assets and liabilities | 110 | (160 | ) | (50 | ) | |||||||
| Net cash provided by operating activities | $ | 5,129 | $ | — | $ | 5,129 | ||||||
| Year Ended December 31, 2018 | ||||||||||||
| Cash flows from operating activities | ||||||||||||
| Net income | $ | 2,252 | $ | (92 | ) | $ | 2,160 | |||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Pension and other postretirement measurement gains and losses | — | 468 | 468 | |||||||||
| Income taxes | (356 | ) | (24 | ) | (380 | ) | ||||||
| Other operating assets and liabilities | 1,207 | (352 | ) | 855 | ||||||||
| Net cash provided by operating activities | $ | 5,175 | $ | — | $ | 5,175 | ||||||
| Year Ended December 31, 2017 | ||||||||||||
| Cash flows from operating activities | ||||||||||||
| Net income | $ | 3,189 | $ | 365 | $ | 3,554 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Pension and other postretirement measurement gains and losses | — | (217 | ) | (217 | ) | |||||||
| Income taxes | (245 | ) | 193 | (52 | ) | |||||||
| Other operating assets and liabilities | 328 | (341 | ) | (13 | ) | |||||||
| Net cash provided by operating activities | $ | 4,314 | $ | — | $ | 4,314 |
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2019 Form 10-K Notes to Consolidated Financial Statements
| Note 3 | Acquisitions |
iCracked On February 12, 2019, the Company acquired iCracked Inc. (“iCracked”) which offers on-site, on-demand repair services for smartphones and tablets in North America, supporting Allstate Protection Plans' (formerly known as SquareTrade) operations. In conjunction with the iCracked acquisition, the Company recorded goodwill of $17 million.
PlumChoice On November 30, 2018, the Company acquired PlumChoice, Inc. (“PlumChoice”) for $30 million in cash to provide technical support services to Allstate Protection Plans' customers and small businesses. In conjunction with the PlumChoice acquisition, the Company recorded goodwill of $23 million.
Allstate Identity Protection On October 5, 2018, the Company acquired InfoArmor, Inc. (“InfoArmor”), a leading provider of identity protection in the employee benefits market, for $525 million in cash. InfoArmor primarily offers identity protection to employees and their family members through voluntary benefit programs at over 1,400 firms, including more than 100 of the Fortune 500 companies. Starting in the third quarter of 2019, the Company is reporting InfoArmor using the name Allstate Identity Protection.
In connection with the acquisition, the Company recorded goodwill of $318 million and intangible assets of $257 million. The intangible assets include $225 million and $32 million related to the acquired customer relationships and technology, respectively.
| Note 4 | Reportable Segments |
The Company’s chief operating decision maker reviews financial performance and makes decisions about the allocation of resources for the seven reportable segments. These segments are described below and align with the Company’s key product and service offerings.
Allstate Protection principally offers private passenger auto and homeowners insurance in the United States and Canada, with earned premiums accounting for 78.0% of Allstate’s 2019 consolidated revenues. Allstate Protection primarily operates in the U.S. (all 50 states and the District of Columbia (“D.C.”)) and Canada. For 2019, the top U.S. geographic locations for premiums earned by the Allstate Protection segment were Texas, California, New York and Florida. No other jurisdiction accounted for more than 5% of premium earned for Allstate Protection. Revenues from external customers generated outside the United States were $1.37 billion, $1.20 billion and $1.13 billion in 2019, 2018 and 2017, respectively.
Discontinued Lines and Coverages includes property and casualty insurance coverage that primarily relates to policies written during the 1960s through the mid-1980s. Our exposure to asbestos, environmental and other discontinued lines claims arises principally from direct excess commercial insurance, assumed reinsurance coverage, direct primary commercial insurance and other businesses in run-off.
Service Businesses comprise Allstate Protection Plans, Allstate Dealer Services, Allstate Roadside Services, Arity and Allstate Identity Protection. Service Businesses offer consumer product protection plans, finance and insurance products (including vehicle service contracts, guaranteed asset protection waivers, road hazard tire and wheel and paintless dent repair protection), roadside assistance, device and mobile data collection services and analytic solutions using automotive telematics information and identity protection. The Service Businesses primarily operate in the U.S., with certain businesses offering services in Europe, Canada, and Puerto Rico. Revenues from
external customers generated outside the United States relate to consumer product protection plans sold primarily in the European Union and were $95 million, $61 million and $35 million in 2019, 2018 and 2017, respectively.
Allstate Life offers traditional, interest-sensitive and variable life insurance products. Allstate Life primarily operates in the U.S. (all 50 states and D.C.). For 2019, the top geographic locations for statutory direct life insurance premiums were New York, California, Texas, Florida and Illinois. No other jurisdiction accounted for more than 5% of statutory direct life insurance premiums.
Allstate Benefits offers voluntary benefits products, including life, accident, critical illness, short-term disability and other health products. Allstate Benefits primarily operates in the U.S. (all 50 states and D.C.) and Canada. For 2019, the top geographic locations for statutory direct accident and health insurance premiums were Florida, Texas, North Carolina, New York and California. No other jurisdiction accounted for more than 5% of statutory direct accident and health insurance premiums. Revenues from external customers generated outside the United States relate to voluntary accident and health insurance sold in Canada and were not material.
Allstate Annuities consists primarily of deferred fixed annuities and immediate annuities (including standard and sub-standard structured settlements). This segment is in run-off.
Corporate and Other comprises holding company activities and certain non-insurance operations, including expenses associated with strategic initiatives.
Allstate Protection and Discontinued Lines and Coverages segments comprise Property-Liability. The Company does not allocate investment income, realized capital gains and losses, or assets to the Allstate Protection and Discontinued Lines and Coverages segments. Management reviews assets at the Property-Liability, Service Businesses, Allstate Life,
142 www.allstate.com
Notes to Consolidated Financial Statements 2019 Form 10-K
Allstate Benefits, Allstate Annuities, and Corporate and Other levels for decision-making purposes.
The accounting policies of the reportable segments are the same as those described in Note 2. The effects of intersegment transactions are eliminated in the consolidated results. For segment results, services provided by Service Businesses to Allstate Protection are not eliminated as management considers those transactions in assessing the results of the respective segments.
Measuring segment profit or loss
The measure of segment profit or loss used in evaluating performance is underwriting income for the Allstate Protection and Discontinued Lines and Coverages segments and adjusted net income for the Service Businesses, Allstate Life, Allstate Benefits, Allstate Annuities, and Corporate and Other segments. A reconciliation of these measures to net income applicable to common shareholders is provided below.
Underwriting income is calculated as premiums earned and other revenue, less claims and claims expenses (“losses”), amortization of DAC, operating costs and expenses, restructuring and related charges and amortization or impairment of purchased intangibles as determined using GAAP.
Adjusted net income is net income applicable to common shareholders, excluding:
| • Realized capital gains and losses, after-tax, except for periodic settlements and accruals on non-hedge derivative instruments, which are reported with realized capital gains and losses but included in adjusted net income |
| • Pension and other postretirement remeasurement gains and losses, after-tax |
| • Valuation changes on embedded derivatives not hedged, after-tax |
| • Amortization of DAC and DSI, to the extent they resulted from the recognition of certain realized capital gains and losses or valuation changes on embedded derivatives not hedged, after-tax |
| • Business combination expenses and the amortization or impairment of purchased intangibles, after-tax |
| • Gain (loss) on disposition of operations, after-tax |
| • Adjustments for other significant non-recurring, infrequent or unusual items, when (a) the nature of the charge or gain is such that it is reasonably unlikely to recur within two years, or (b) there has been no similar charge or gain within the prior two years |
The Allstate Corporation 143
2019 Form 10-K Notes to Consolidated Financial Statements
| Reportable segments revenue information | ||||||||||||
| For the years ended December 31, | ||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Property-Liability | ||||||||||||
| Insurance premiums | ||||||||||||
| Auto | $ | 24,188 | $ | 22,970 | $ | 21,878 | ||||||
| Homeowners | 7,912 | 7,517 | 7,310 | |||||||||
| Other personal lines | 1,861 | 1,808 | 1,750 | |||||||||
| Commercial lines | 882 | 655 | 495 | |||||||||
| Allstate Protection | 34,843 | 32,950 | 31,433 | |||||||||
| Discontinued Lines and Coverages | — | — | — | |||||||||
| Total Property-Liability insurance premiums | 34,843 | 32,950 | 31,433 | |||||||||
| Other revenue | 741 | 738 | 703 | |||||||||
| Net investment income | 1,533 | 1,464 | 1,478 | |||||||||
| Realized capital gains and losses | 1,470 | (639 | ) | 401 | ||||||||
| Total Property-Liability | 38,587 | 34,513 | 34,015 | |||||||||
| Service Businesses | ||||||||||||
| Consumer product protection plans | 633 | 503 | 295 | |||||||||
| Roadside assistance | 238 | 263 | 268 | |||||||||
| Finance and insurance products | 362 | 332 | 304 | |||||||||
| Intersegment premiums and service fees (1) | 154 | 122 | 110 | |||||||||
| Other revenue | 188 | 82 | 66 | |||||||||
| Net investment income | 42 | 27 | 16 | |||||||||
| Realized capital gains and losses | 32 | (11 | ) | — | ||||||||
| Total Service Businesses | 1,649 | 1,318 | 1,059 | |||||||||
| Allstate Life | ||||||||||||
| Traditional life insurance premiums | 630 | 600 | 568 | |||||||||
| Accident and health insurance premiums | 2 | 2 | 2 | |||||||||
| Interest-sensitive life insurance contract charges | 711 | 713 | 710 | |||||||||
| Other revenue | 125 | 119 | 114 | |||||||||
| Net investment income | 514 | 505 | 489 | |||||||||
| Realized capital gains and losses | 1 | (14 | ) | 5 | ||||||||
| Total Allstate Life | 1,983 | 1,925 | 1,888 | |||||||||
| Allstate Benefits | ||||||||||||
| Traditional life insurance premiums | 43 | 44 | 42 | |||||||||
| Accident and health insurance premiums | 988 | 980 | 928 | |||||||||
| Interest-sensitive life insurance contract charges | 114 | 111 | 114 | |||||||||
| Net investment income | 83 | 77 | 72 | |||||||||
| Realized capital gains and losses | 12 | (9 | ) | 1 | ||||||||
| Total Allstate Benefits | 1,240 | 1,203 | 1,157 | |||||||||
| Allstate Annuities | ||||||||||||
| Fixed annuities contract charges | 13 | 15 | 14 | |||||||||
| Net investment income | 917 | 1,096 | 1,305 | |||||||||
| Realized capital gains and losses | 346 | (166 | ) | 44 | ||||||||
| Total Allstate Annuities | 1,276 | 945 | 1,363 | |||||||||
| Corporate and Other | ||||||||||||
| Net investment income | 70 | 71 | 41 | |||||||||
| Realized capital gains and losses | 24 | (38 | ) | (6 | ) | |||||||
| Total Corporate and Other | 94 | 33 | 35 | |||||||||
| Intersegment eliminations (1) | (154 | ) | (122 | ) | (110 | ) | ||||||
| Consolidated revenues | $ | 44,675 | $ | 39,815 | $ | 39,407 |
(1) Intersegment insurance premiums and service fees are primarily related to Arity and Allstate Roadside Services and are eliminated in the consolidated financial statements.
144 www.allstate.com
Notes to Consolidated Financial Statements 2019 Form 10-K
| Reportable segments financial performance | ||||||||||||
| For the years ended December 31, | ||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Property-Liability | ||||||||||||
| Allstate Protection | $ | 2,912 | $ | 2,343 | $ | 2,304 | ||||||
| Discontinued Lines and Coverages | (108 | ) | (90 | ) | (99 | ) | ||||||
| Total underwriting income | 2,804 | 2,253 | 2,205 | |||||||||
| Net investment income | 1,533 | 1,464 | 1,478 | |||||||||
| Income tax expense on operations | (887 | ) | (747 | ) | (1,187 | ) | ||||||
| Realized capital gains and losses, after-tax | 1,161 | (500 | ) | 272 | ||||||||
| Gain on disposition of operations, after-tax | — | — | 9 | |||||||||
| Tax Legislation (expense) benefit | — | (5 | ) | 36 | ||||||||
| Property-Liability net income applicable to common shareholders | 4,611 | 2,465 | 2,813 | |||||||||
| Service Businesses | ||||||||||||
| Adjusted net income (loss) | 38 | 8 | (54 | ) | ||||||||
| Realized capital gains and losses, after-tax | 25 | (9 | ) | — | ||||||||
| Amortization of purchased intangibles, after-tax | (97 | ) | (74 | ) | (60 | ) | ||||||
| Impairment of purchased intangibles, after-tax | (43 | ) | — | — | ||||||||
| Tax Legislation (expense) benefit | — | (4 | ) | 137 | ||||||||
| Service Businesses net (loss) income applicable to common shareholders | (77 | ) | (79 | ) | 23 | |||||||
| Allstate Life | ||||||||||||
| Adjusted net income | 261 | 295 | 259 | |||||||||
| Realized capital gains and losses, after-tax | — | (11 | ) | 2 | ||||||||
| Valuation changes on embedded derivatives not hedged, after-tax | (9 | ) | — | — | ||||||||
| DAC and DSI amortization related to realized capital gains and losses and valuation changes on embedded derivatives not hedged, after-tax | (5 | ) | (8 | ) | (10 | ) | ||||||
| Tax Legislation (expense) benefit | — | (16 | ) | 338 | ||||||||
| Allstate Life net income applicable to common shareholders | 247 | 260 | 589 | |||||||||
| Allstate Benefits | ||||||||||||
| Adjusted net income | 115 | 124 | 100 | |||||||||
| Realized capital gains and losses, after-tax | 9 | (7 | ) | — | ||||||||
| DAC and DSI amortization related to realized capital gains and losses, after-tax | — | 1 | — | |||||||||
| Tax Legislation benefit | — | — | 54 | |||||||||
| Allstate Benefits net income applicable to common shareholders | 124 | 118 | 154 | |||||||||
| Allstate Annuities | ||||||||||||
| Adjusted net income | 10 | 131 | 205 | |||||||||
| Realized capital gains and losses, after-tax | 274 | (131 | ) | 28 | ||||||||
| Valuation changes on embedded derivatives not hedged, after-tax | (6 | ) | 3 | — | ||||||||
| Gain on disposition of operations, after-tax | 4 | 4 | 4 | |||||||||
| Tax Legislation benefit | — | 69 | 182 | |||||||||
| Allstate Annuities net income applicable to common shareholders | 282 | 76 | 419 | |||||||||
| Corporate and Other | ||||||||||||
| Adjusted net loss | (438 | ) | (406 | ) | (320 | ) | ||||||
| Realized capital gains and losses, after-tax | 19 | (30 | ) | (4 | ) | |||||||
| Pension and other postretirement remeasurement gains and losses, after-tax | (90 | ) | (370 | ) | 141 | |||||||
| Goodwill impairment | — | — | (125 | ) | ||||||||
| Business combination expenses, after-tax | — | (7 | ) | (14 | ) | |||||||
| Tax Legislation expense | — | (15 | ) | (238 | ) | |||||||
| Consolidated and Other net loss applicable to common shareholders | (509 | ) | (828 | ) | (560 | ) | ||||||
| Consolidated net income applicable to common shareholders | $ | 4,678 | $ | 2,012 | $ | 3,438 |
The Allstate Corporation 145
2019 Form 10-K Notes to Consolidated Financial Statements
| Additional significant financial performance data | ||||||||||||
| For the years ended December 31, | ||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Amortization of DAC | ||||||||||||
| Property-Liability | $ | 4,649 | $ | 4,475 | $ | 4,205 | ||||||
| Service Businesses | 543 | 463 | 296 | |||||||||
| Allstate Life | 173 | 132 | 134 | |||||||||
| Allstate Benefits | 161 | 145 | 142 | |||||||||
| Allstate Annuities | 7 | 7 | 7 | |||||||||
| Consolidated | $ | 5,533 | $ | 5,222 | $ | 4,784 | ||||||
| Income tax expense (benefit) | ||||||||||||
| Property-Liability | $ | 1,196 | $ | 613 | $ | 1,285 | ||||||
| Service Businesses | (18 | ) | (19 | ) | (194 | ) | ||||||
| Allstate Life | 53 | 75 | (226 | ) | ||||||||
| Allstate Benefits | 35 | 32 | 1 | |||||||||
| Allstate Annuities | 73 | (66 | ) | (58 | ) | |||||||
| Corporate and Other | (97 | ) | (167 | ) | 187 | |||||||
| Consolidated | $ | 1,242 | $ | 468 | $ | 995 |
Interest expense is primarily incurred in the Corporate and Other segment. Capital expenditures for long-lived assets are generally made in Property-Liability as the Company does not allocate assets to the Allstate Protection and Discontinued Lines and Coverages segments. A portion of these long-lived assets are used by entities included in the Service Businesses, Allstate Life, Allstate Benefits, Allstate Annuities and Corporate and Other segments and, accordingly, are charged to expenses in proportion to their use.
| Reportable segment total assets and investments (1) | ||||||||
| As of December 31, | ||||||||
| ($ in millions) | 2019 | 2018 | ||||||
| Assets | ||||||||
| Property-Liability | $ | 67,243 | $ | 61,947 | ||||
| Service Businesses | 5,746 | 5,473 | ||||||
| Allstate Life | 14,771 | 13,613 | ||||||
| Allstate Benefits | 2,915 | 2,822 | ||||||
| Allstate Annuities | 26,914 | 26,798 | ||||||
| Corporate and Other | 2,361 | 1,596 | ||||||
| Consolidated | $ | 119,950 | $ | 112,249 | ||||
| Investments | ||||||||
| Property-Liability | $ | 48,414 | $ | 43,634 | ||||
| Service Businesses | 1,544 | 1,203 | ||||||
| Allstate Life | 11,914 | 10,809 | ||||||
| Allstate Benefits | 1,941 | 1,809 | ||||||
| Allstate Annuities | 22,221 | 22,336 | ||||||
| Corporate and Other | 2,328 | 1,469 | ||||||
| Consolidated | $ | 88,362 | $ | 81,260 |
| (1) | The balances reflect the elimination of related party investments between segments. |
146 www.allstate.com
Notes to Consolidated Financial Statements 2019 Form 10-K
| Note 5 | Investments |
| Amortized cost, gross unrealized gains (losses) and fair value for fixed income securities | ||||||||||||||||
| Amortized cost | Gross unrealized | Fair value | ||||||||||||||
| ($ in millions) | Gains | Losses | ||||||||||||||
| December 31, 2019 | ||||||||||||||||
| U.S. government and agencies | $ | 4,971 | $ | 141 | $ | (26 | ) | $ | 5,086 | |||||||
| Municipal | 8,080 | 551 | (11 | ) | 8,620 | |||||||||||
| Corporate | 41,090 | 2,035 | (47 | ) | 43,078 | |||||||||||
| Foreign government | 968 | 16 | (5 | ) | 979 | |||||||||||
| ABS | 860 | 8 | (6 | ) | 862 | |||||||||||
| MBS | 324 | 96 | (1 | ) | 419 | |||||||||||
| Total fixed income securities | $ | 56,293 | $ | 2,847 | $ | (96 | ) | $ | 59,044 | |||||||
| December 31, 2018 | ||||||||||||||||
| U.S. government and agencies | $ | 5,386 | $ | 137 | $ | (6 | ) | $ | 5,517 | |||||||
| Municipal | 8,963 | 249 | (43 | ) | 9,169 | |||||||||||
| Corporate | 40,557 | 491 | (890 | ) | 40,158 | |||||||||||
| Foreign government | 739 | 13 | (5 | ) | 747 | |||||||||||
| ABS | 1,049 | 6 | (10 | ) | 1,045 | |||||||||||
| MBS | 440 | 97 | (3 | ) | 534 | |||||||||||
| Total fixed income securities | $ | 57,134 | $ | 993 | $ | (957 | ) | $ | 57,170 |
| Scheduled maturities for fixed income securities | ||||||||
| As of December 31, 2019 | ||||||||
| ($ in millions) | Amortized cost | Fair value | ||||||
| Due in one year or less | $ | 3,214 | $ | 3,239 | ||||
| Due after one year through five years | 24,108 | 24,781 | ||||||
| Due after five years through ten years | 18,194 | 19,177 | ||||||
| Due after ten years | 9,593 | 10,566 | ||||||
| 55,109 | 57,763 | |||||||
| ABS and MBS | 1,184 | 1,281 | ||||||
| Total | $ | 56,293 | $ | 59,044 |
Actual maturities may differ from those scheduled as a result of calls and make-whole payments by the issuers. ABS and MBS are shown separately because of the potential for prepayment of principal prior to contractual maturity dates.
| Net investment income | ||||||||||||
| For the years ended December 31, | ||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Fixed income securities | $ | 2,175 | $ | 2,077 | $ | 2,078 | ||||||
| Equity securities | 206 | 170 | 174 | |||||||||
| Mortgage loans | 220 | 217 | 206 | |||||||||
| Limited partnership interests | 471 | 705 | 889 | |||||||||
| Short-term investments | 102 | 73 | 30 | |||||||||
| Other | 262 | 272 | 236 | |||||||||
| Investment income, before expense | 3,436 | 3,514 | 3,613 | |||||||||
| Investment expense | (277 | ) | (274 | ) | (212 | ) | ||||||
| Net investment income | $ | 3,159 | $ | 3,240 | $ | 3,401 |
The Allstate Corporation 147
2019 Form 10-K Notes to Consolidated Financial Statements
| Realized capital gains (losses) by asset type | ||||||||||||
| For the years ended December 31, | ||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Fixed income securities | $ | 461 | $ | (237 | ) | $ | 94 | |||||
| Equity securities | 1,210 | (594 | ) | 255 | ||||||||
| Mortgage loans | — | 2 | 1 | |||||||||
| Limited partnership interests | 200 | (101 | ) | 132 | ||||||||
| Derivatives | (15 | ) | 46 | (46 | ) | |||||||
| Other | 29 | 7 | 9 | |||||||||
| Realized capital gains and losses | $ | 1,885 | $ | (877 | ) | $ | 445 |
| Realized capital gains (losses) by transaction type | ||||||||||||
| For the years ended December 31, | ||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Impairment write-downs | $ | (47 | ) | $ | (14 | ) | $ | (102 | ) | |||
| Change in intent write-downs | — | — | (48 | ) | ||||||||
| Net OTTI losses recognized in earnings | (47 | ) | (14 | ) | (150 | ) | ||||||
| Sales | 575 | (215 | ) | 641 | ||||||||
| Valuation of equity investments (1) | 1,372 | (691 | ) | — | ||||||||
| Valuation and settlements of derivative instruments | (15 | ) | 43 | (46 | ) | |||||||
| Realized capital gains and losses | $ | 1,885 | $ | (877 | ) | $ | 445 |
| (1) | Includes valuation of equity securities and certain limited partnership interests where the underlying assets are predominately public equity securities. |
Sales of fixed income securities resulted in gross gains of $607 million, $120 million and $737 million and gross losses of $132 million, $347 million and $276 million during 2019, 2018 and 2017, respectively.
The following table presents the net pre-tax appreciation (decline) recognized in net income of equity securities and limited partnership interests carried at fair value that are still held as of December 31, 2019 and 2018, respectively.
| Net appreciation (decline) recognized in net income | ||||||||
| For the years ended December 31, | ||||||||
| ($ in millions) | 2019 | 2018 | ||||||
| Equity securities | $ | 1,073 | $ | (261 | ) | |||
| Limited partnership interests carried at fair value | 149 | 249 | ||||||
| Total | $ | 1,222 | $ | (12 | ) |
| OTTI losses by asset type | ||||||||||||||||||||||||||||||||||||
| For the years ended December 31, | ||||||||||||||||||||||||||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||
| Gross | Included in OCI | Net | Gross | Included in OCI | Net | Gross | Included in OCI | Net | ||||||||||||||||||||||||||||
| Fixed income securities: | ||||||||||||||||||||||||||||||||||||
| Municipal | $ | (2 | ) | $ | 2 | $ | — | $ | — | $ | — | $ | — | $ | (1 | ) | $ | (3 | ) | $ | (4 | ) | ||||||||||||||
| Corporate | (5 | ) | (2 | ) | (7 | ) | (4 | ) | 2 | (2 | ) | (9 | ) | 3 | (6 | ) | ||||||||||||||||||||
| ABS | (4 | ) | — | (4 | ) | (1 | ) | (2 | ) | (3 | ) | (1 | ) | (2 | ) | (3 | ) | |||||||||||||||||||
| MBS | (4 | ) | 1 | (3 | ) | (4 | ) | (1 | ) | (5 | ) | (11 | ) | (2 | ) | (13 | ) | |||||||||||||||||||
| Total fixed income securities | (15 | ) | 1 | (14 | ) | (9 | ) | (1 | ) | (10 | ) | (22 | ) | (4 | ) | (26 | ) | |||||||||||||||||||
| Equity securities | — | — | — | — | — | — | (86 | ) | — | (86 | ) | |||||||||||||||||||||||||
| Mortgage loans | — | — | — | — | — | — | (1 | ) | — | (1 | ) | |||||||||||||||||||||||||
| Limited partnership interests | (6 | ) | — | (6 | ) | (3 | ) | — | (3 | ) | (32 | ) | — | (32 | ) | |||||||||||||||||||||
| Other | (27 | ) | — | (27 | ) | (1 | ) | — | (1 | ) | (5 | ) | — | (5 | ) | |||||||||||||||||||||
| OTTI losses | $ | (48 | ) | $ | 1 | $ | (47 | ) | $ | (13 | ) | $ | (1 | ) | $ | (14 | ) | $ | (146 | ) | $ | (4 | ) | $ | (150 | ) |
148 www.allstate.com
Notes to Consolidated Financial Statements 2019 Form 10-K
| OTTI losses included in AOCI at the time of impairment for fixed income securities which were not included in earnings (1) | ||||||||
| As of December 31, | ||||||||
| ($ in millions) | 2019 | 2018 | ||||||
| Municipal | $ | (7 | ) | $ | (5 | ) | ||
| Corporate | — | (2 | ) | |||||
| ABS | (10 | ) | (10 | ) | ||||
| MBS | (56 | ) | (69 | ) | ||||
| Total | $ | (73 | ) | $ | (86 | ) |
| (1) | The amounts exclude $161 million and $180 million as of December 31, 2019 and 2018, respectively, of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date. |
| Rollforward of the cumulative credit losses recognized in earnings for fixed income securities held | ||||||||||||
| As of December 31, | ||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Beginning balance | $ | (204 | ) | $ | (226 | ) | $ | (318 | ) | |||
| Additional credit loss for securities previously other-than-temporarily impaired | (10 | ) | (7 | ) | (18 | ) | ||||||
| Additional credit loss for securities not previously other-than-temporarily impaired | (4 | ) | (3 | ) | (8 | ) | ||||||
| Reduction in credit loss for securities disposed or collected | 32 | 30 | 116 | |||||||||
| Change in credit loss due to accretion of increase in cash flows | — | 2 | 2 | |||||||||
| Ending balance | $ | (186 | ) | $ | (204 | ) | $ | (226 | ) |
The Company uses its best estimate of future cash flows expected to be collected from the fixed income security, discounted at the security’s original or current effective rate, as appropriate, to calculate a recovery value and determine whether a credit loss exists. The determination of cash flow estimates is inherently subjective, and methodologies may vary depending on facts and circumstances specific to the security. All reasonably available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable assumptions and forecasts, are considered when developing the estimate of cash flows expected to be collected. That information generally includes, but is not limited to, the remaining payment terms of the security, prepayment speeds, foreign exchange rates, the financial condition and future earnings potential of the issue or issuer, expected defaults, expected recoveries, the value of underlying collateral, vintage, geographic concentration of underlying collateral, available reserves or escrows, current subordination levels, third-party guarantees and other credit
enhancements. Other information, such as industry analyst reports and forecasts, sector credit ratings, financial condition of the bond insurer for insured fixed income securities, and other market data relevant to the realizability of contractual cash flows, may also be considered. The estimated fair value of collateral will be used to estimate recovery value if the Company determines that the security is dependent on the liquidation of collateral for ultimate settlement. If the estimated recovery value is less than the amortized cost of the security, a credit loss exists and an OTTI for the difference between the estimated recovery value and amortized cost is recorded in earnings. The portion of the unrealized loss related to factors other than credit remains classified in AOCI. If the Company determines that the fixed income security does not have sufficient cash flow or other information to estimate a recovery value for the security, the Company may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings.
The Allstate Corporation 149
2019 Form 10-K Notes to Consolidated Financial Statements
| Unrealized net capital gains and losses included in AOCI | ||||||||||||||||
| ($ in millions) | Fair value | Gross unrealized | Unrealized net gains (losses) | |||||||||||||
| December 31, 2019 | Gains | Losses | ||||||||||||||
| Fixed income securities | $ | 59,044 | $ | 2,847 | $ | (96 | ) | $ | 2,751 | |||||||
| Short-term investments | 4,256 | — | — | — | ||||||||||||
| Derivative instruments | — | — | (3 | ) | (3 | ) | ||||||||||
| EMA limited partnerships (1) | (4 | ) | ||||||||||||||
| Unrealized net capital gains and losses, pre-tax | 2,744 | |||||||||||||||
| Amounts recognized for: | ||||||||||||||||
| Insurance reserves (2) | (126 | ) | ||||||||||||||
| DAC and DSI (3) | (224 | ) | ||||||||||||||
| Amounts recognized | (350 | ) | ||||||||||||||
| Deferred income taxes | (507 | ) | ||||||||||||||
| Unrealized net capital gains and losses, after-tax | $ | 1,887 | ||||||||||||||
| December 31, 2018 | ||||||||||||||||
| Fixed income securities | $ | 57,170 | $ | 993 | $ | (957 | ) | $ | 36 | |||||||
| Short-term investments | 3,027 | — | — | — | ||||||||||||
| Derivative instruments | — | — | (3 | ) | (3 | ) | ||||||||||
| EMA limited partnerships | — | |||||||||||||||
| Unrealized net capital gains and losses, pre-tax | 33 | |||||||||||||||
| Amounts recognized for: | ||||||||||||||||
| Insurance reserves | — | |||||||||||||||
| DAC and DSI | (33 | ) | ||||||||||||||
| Amounts recognized | (33 | ) | ||||||||||||||
| Deferred income taxes | (2 | ) | ||||||||||||||
| Unrealized net capital gains and losses, after-tax | $ | (2 | ) |
| (1) | Unrealized net capital gains and losses for limited partnership interests represent the Company’s share of EMA limited partnerships’ OCI. Fair value and gross unrealized gains and losses are not applicable. |
| (2) | The insurance reserves adjustment represents the amount by which the reserve balance would increase if the net unrealized gains in the applicable product portfolios were realized and reinvested at lower interest rates, resulting in a premium deficiency. This adjustment primarily relates to structured settlement annuities with life contingencies (a type of immediate fixed annuities). |
| (3) | The DAC and DSI adjustment balance represents the amount by which the amortization of DAC and DSI would increase or decrease if the unrealized gains or losses in the respective product portfolios were realized. |
| Change in unrealized net capital gains (losses) | ||||||||||||
| For the years ended December 31, | ||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Fixed income securities | $ | 2,715 | $ | (1,431 | ) | $ | 204 | |||||
| Equity securities (1) | — | — | 651 | |||||||||
| Derivative instruments | — | (2 | ) | (3 | ) | |||||||
| EMA limited partnerships | (4 | ) | (1 | ) | 5 | |||||||
| Total | 2,711 | (1,434 | ) | 857 | ||||||||
| Amounts recognized for: | ||||||||||||
| Insurance reserves | (126 | ) | 315 | (315 | ) | |||||||
| DAC and DSI | (191 | ) | 163 | (50 | ) | |||||||
| Amounts recognized | (317 | ) | 478 | (365 | ) | |||||||
| Deferred income taxes | (505 | ) | 202 | 117 | ||||||||
| Increase (decrease) in unrealized net capital gains and losses, after-tax | $ | 1,889 | $ | (754 | ) | $ | 609 |
| (1) | Upon adoption of the recognition and measurement accounting standard on January 1, 2018, $1.16 billion of pre-tax unrealized net capital gains for equity securities were reclassified from AOCI to retained income. |
Portfolio monitoring
The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed income security whose carrying value may be other-than-temporarily impaired.
For each fixed income security in an unrealized loss position, the Company assesses whether management with the appropriate authority has made the decision to sell or whether it is more likely than not the Company will be required to sell the security before recovery of the amortized cost basis for reasons such
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as liquidity, contractual or regulatory purposes. If a security meets either of these criteria, the security’s decline in fair value is considered other than temporary and is recorded in earnings.
If the Company has not made the decision to sell the fixed income security and it is not more likely than not the Company will be required to sell the fixed income security before recovery of its amortized cost basis, the Company evaluates whether it expects to receive cash flows sufficient to recover the entire amortized cost basis of the security. The Company calculates the estimated recovery value by discounting the best estimate of future cash flows at the security’s original or current effective rate, as appropriate, and compares this to the amortized cost of the security. If the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the fixed income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss related to other factors recognized in OCI.
The Company’s portfolio monitoring process includes a quarterly review of all securities to identify
instances where the fair value of a security compared to its amortized cost is below established thresholds. The process also includes the monitoring of other impairment indicators such as ratings, ratings downgrades and payment defaults. The securities identified, in addition to other securities for which the Company may have a concern, are evaluated for potential OTTI using all reasonably available information relevant to the collectability or recovery of the security. Inherent in the Company’s evaluation of OTTI for these securities are assumptions and estimates about the financial condition and future earnings potential of the issue or issuer. Some of the factors that may be considered in evaluating whether a decline in fair value is other than temporary are: 1) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; 2) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity; and 3) the length of time and extent to which the fair value has been less than amortized cost.
| Gross unrealized losses and fair value by type and length of time held in a continuous unrealized loss position | ||||||||||||||||||||||||||
| Less than 12 months | 12 months or more | |||||||||||||||||||||||||
| ($ in millions) | Number of issues | Fair value | Unrealized losses | Number of issues | Fair value | Unrealized losses | Total unrealized losses | |||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||
| Fixed income securities | ||||||||||||||||||||||||||
| U.S. government and agencies | 31 | $ | 1,713 | $ | (26 | ) | 10 | $ | 26 | $ | — | $ | (26 | ) | ||||||||||||
| Municipal | 307 | 576 | (9 | ) | 1 | 14 | (2 | ) | (11 | ) | ||||||||||||||||
| Corporate | 186 | 1,392 | (20 | ) | 65 | 485 | (27 | ) | (47 | ) | ||||||||||||||||
| Foreign government | 55 | 412 | (4 | ) | 6 | 102 | (1 | ) | (5 | ) | ||||||||||||||||
| ABS | 36 | 193 | (2 | ) | 23 | 160 | (4 | ) | (6 | ) | ||||||||||||||||
| MBS | 27 | 15 | — | 123 | 14 | (1 | ) | (1 | ) | |||||||||||||||||
| Total fixed income securities | 642 | $ | 4,301 | $ | (61 | ) | 228 | $ | 801 | $ | (35 | ) | $ | (96 | ) | |||||||||||
| Investment grade fixed income securities | 581 | $ | 3,878 | $ | (41 | ) | 185 | $ | 594 | $ | (20 | ) | $ | (61 | ) | |||||||||||
| Below investment grade fixed income securities | 61 | 423 | (20 | ) | 43 | 207 | (15 | ) | (35 | ) | ||||||||||||||||
| Total fixed income securities | 642 | $ | 4,301 | $ | (61 | ) | 228 | $ | 801 | $ | (35 | ) | $ | (96 | ) | |||||||||||
| December 31, 2018 | ||||||||||||||||||||||||||
| Fixed income securities | ||||||||||||||||||||||||||
| U.S. government and agencies | 11 | $ | 55 | $ | — | 38 | $ | 364 | $ | (6 | ) | $ | (6 | ) | ||||||||||||
| Municipal | 943 | 1,633 | (10 | ) | 1,147 | 1,554 | (33 | ) | (43 | ) | ||||||||||||||||
| Corporate | 1,736 | 19,243 | (543 | ) | 645 | 8,374 | (347 | ) | (890 | ) | ||||||||||||||||
| Foreign government | 7 | 20 | (1 | ) | 27 | 412 | (4 | ) | (5 | ) | ||||||||||||||||
| ABS | 64 | 454 | (5 | ) | 28 | 161 | (5 | ) | (10 | ) | ||||||||||||||||
| MBS | 169 | 37 | — | 197 | 52 | (3 | ) | (3 | ) | |||||||||||||||||
| Total fixed income securities | 2,930 | $ | 21,442 | $ | (559 | ) | 2,082 | $ | 10,917 | $ | (398 | ) | $ | (957 | ) | |||||||||||
| Investment grade fixed income securities | 2,348 | $ | 17,485 | $ | (331 | ) | 2,021 | $ | 10,626 | $ | (360 | ) | $ | (691 | ) | |||||||||||
| Below investment grade fixed income securities | 582 | 3,957 | (228 | ) | 61 | 291 | (38 | ) | (266 | ) | ||||||||||||||||
| Total fixed income securities | 2,930 | $ | 21,442 | $ | (559 | ) | 2,082 | $ | 10,917 | $ | (398 | ) | $ | (957 | ) |
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| Gross unrealized losses by unrealized loss position and credit quality as of December 31, 2019 | ||||||||||||
| ($ in millions) | Investment grade | Below investment grade | Total | |||||||||
| Fixed income securities with unrealized loss position less than 20% of amortized cost (1) (2) | $ | (48 | ) | $ | (27 | ) | $ | (75 | ) | |||
| Fixed income securities with unrealized loss position greater than or equal to 20% of amortized cost (3) (4) | (13 | ) | (8 | ) | (21 | ) | ||||||
| Total unrealized losses | $ | (61 | ) | $ | (35 | ) | $ | (96 | ) |
| (1) | Below investment grade fixed income securities include $14 million that have been in an unrealized loss position for less than twelve months. |
| (2) | Related to securities with an unrealized loss position less than 20% of amortized cost, the degree of which suggests that these securities do not pose a high risk of being other-than-temporarily impaired. |
| (3) | No below investment grade fixed income securities have been in an unrealized loss position for a period of twelve or more consecutive months. |
| (4) | Evaluated based on factors such as discounted cash flows and the financial condition and near-term and long-term prospects of the issue or issuer and were determined to have adequate resources to fulfill contractual obligations. |
Investment grade is defined as a security having a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A or BBB from S&P Global Ratings (“S&P”), a comparable rating from another nationally recognized rating agency, or a comparable internal rating if an externally provided rating is not available. Market prices for certain securities may have credit spreads which imply higher or lower credit quality than the current third-party rating. Unrealized losses on investment grade securities are principally related to an increase in market yields which may include increased risk-free interest rates and/or wider credit spreads since the time of initial purchase. The unrealized losses are expected to reverse as the securities approach maturity.
ABS and MBS in an unrealized loss position were evaluated based on actual and projected collateral losses relative to the securities’ positions in the respective securitization trusts, security specific expectations of cash flows, and credit ratings. This evaluation also takes into consideration credit enhancement, measured in terms of (i) subordination from other classes of securities in the trust that are contractually obligated to absorb losses before the class of security the Company owns, and (ii) the expected impact of other structural features embedded in the securitization trust beneficial to the class of securities the Company owns, such as overcollateralization and excess spread. Municipal bonds in an unrealized loss position were evaluated based on the underlying credit quality of the primary obligor, obligation type and quality of the underlying assets.
As of December 31, 2019, the Company has not made the decision to sell and it is not more likely than not the Company will be required to sell fixed income
securities with unrealized losses before recovery of the amortized cost basis.
Limited partnerships
Investments in limited partnership interests include interests in private equity funds, real estate funds and other funds. As of December 31, 2019 and 2018, the carrying value of EMA limited partnerships totaled $6.26 billion and $5.73 billion, respectively, and limited partnerships carried at fair value totaled $1.81 billion and $1.78 billion, respectively. Principal factors influencing carrying value appreciation or decline include operating performance, comparable public company earnings multiples, capitalization rates and the economic environment. For equity method limited partnerships, the Company recognizes an impairment loss when evidence demonstrates that the loss is other than temporary. Evidence of a loss in value that is other than temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment. Changes in fair value limited partnerships are recorded through net investment income and therefore are not tested for impairment.
Mortgage loans
The Company’s mortgage loans are commercial mortgage loans collateralized by a variety of commercial real estate property types located across the United States and totaled, net of valuation allowance, $4.82 billion and $4.67 billion as of December 31, 2019 and 2018, respectively. Substantially all of the commercial mortgage loans are non-recourse to the borrower.
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| Principal geographic distribution of commercial real estate exceeding 5% of the mortgage loans portfolio | ||||||
| As of December 31, | ||||||
| (% of mortgage loan portfolio carrying value) | 2019 | 2018 | ||||
| Texas | 16.9 | % | 14.9 | % | ||
| California | 15.1 | 16.4 | ||||
| Illinois | 7.1 | 7.8 | ||||
| Florida | 6.4 | 6.1 | ||||
| New Jersey | 5.6 | 6.8 | ||||
| North Carolina | 4.5 | 5.1 |
| Types of properties collateralizing the mortgage loan portfolio | ||||||
| As of December 31, | ||||||
| (% of mortgage loan portfolio carrying value) | 2019 | 2018 | ||||
| Apartment complex | 36.8 | % | 34.4 | % | ||
| Office buildings | 22.6 | 24.5 | ||||
| Warehouse | 16.8 | 15.8 | ||||
| Retail | 13.4 | 14.4 | ||||
| Other | 10.4 | 10.9 | ||||
| Total | 100.0 | % | 100.0 | % |
| Contractual maturities of the mortgage loan portfolio | ||||||||||
| As of December 31, 2019 | ||||||||||
| ($ in millions) | Number of loans | Carrying value | Percent | |||||||
| 2020 | 9 | $ | 58 | 1.2 | % | |||||
| 2021 | 36 | 446 | 9.3 | |||||||
| 2022 | 28 | 460 | 9.5 | |||||||
| 2023 | 52 | 776 | 16.1 | |||||||
| Thereafter | 161 | 3,077 | 63.9 | |||||||
| Total | 286 | $ | 4,817 | 100.0 | % |
Mortgage loans are evaluated for impairment on a specific loan basis through a quarterly credit monitoring process and review of key credit quality indicators. Mortgage loans are considered impaired when it is probable that the Company will not collect the contractual principal and interest. Valuation allowances are established for impaired loans to reduce the carrying value to the fair value of the collateral less costs to sell or the present value of the loan’s expected future repayment cash flows discounted at the loan’s original effective interest rate. Impaired mortgage loans may not have a valuation allowance when the fair value of the collateral less costs to sell is higher than the carrying value. Valuation allowances are adjusted for subsequent changes in the fair value of the collateral less costs to sell or present value of the loan’s expected future repayment cash flows. Mortgage loans are charged off against their corresponding valuation allowances when there is no reasonable expectation of recovery. The impairment evaluation is non-statistical in respect to
the aggregate portfolio but considers facts and circumstances attributable to each loan. It is not considered probable that additional impairment losses, beyond those identified on a specific loan basis, have been incurred as of December 31, 2019.
Accrual of income is suspended for mortgage loans that are in default or when full and timely collection of principal and interest payments is not probable. Cash receipts on mortgage loans on nonaccrual status are generally recorded as a reduction of carrying value.
Debt service coverage ratio is considered a key credit quality indicator when mortgage loans are evaluated for impairment. Debt service coverage ratio represents the amount of estimated cash flows from the property available to the borrower to meet principal and interest payment obligations. Debt service coverage ratio estimates are updated annually or more frequently if conditions are warranted based on the Company’s credit monitoring process.
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| Carrying value of non-impaired mortgage loans summarized by debt service coverage ratio distribution | ||||||||||||||||||||||||
| As of December 31, | ||||||||||||||||||||||||
| ($ in millions) | 2019 | 2018 | ||||||||||||||||||||||
| Debt Service Coverage Ratio Distribution | Fixed rate mortgage loans | Variable rate mortgage loans | Total | Fixed rate mortgage loans | Variable rate mortgage loans | Total | ||||||||||||||||||
| Below 1.0 | $ | 13 | $ | 32 | $ | 45 | $ | 6 | $ | 31 | $ | 37 | ||||||||||||
| 1.0 - 1.25 | 225 | — | 225 | 273 | — | 273 | ||||||||||||||||||
| 1.26 - 1.50 | 1,219 | 18 | 1,237 | 1,192 | — | 1,192 | ||||||||||||||||||
| Above 1.50 | 3,264 | 38 | 3,302 | 3,063 | 101 | 3,164 | ||||||||||||||||||
| Total non-impaired mortgage loans | $ | 4,721 | $ | 88 | $ | 4,809 | $ | 4,534 | $ | 132 | $ | 4,666 |
Mortgage loans with a debt service coverage ratio below 1.0 that are not considered impaired primarily relate to instances where the borrower has the financial capacity to fund the revenue shortfalls from the properties for the foreseeable term, the decrease
in cash flows from the properties is considered temporary, or there are other risk mitigating circumstances such as additional collateral, escrow balances or borrower guarantees.
| Net carrying value of impaired mortgage loans | ||||||||
| As of December 31, | ||||||||
| ($ in millions) | 2019 | 2018 | ||||||
| Impaired mortgage loans with a valuation allowance | $ | 8 | $ | 4 | ||||
| Impaired mortgage loans without a valuation allowance | — | — | ||||||
| Total impaired mortgage loans | $ | 8 | $ | 4 | ||||
| Valuation allowance on impaired mortgage loans | $ | 3 | $ | 3 |
The average balance of impaired loans was $5 million, $4 million and $7 million during 2019, 2018 and 2017, respectively.
| Rollforward of the valuation allowance on impaired mortgage loans | ||||||||||||
| For the years ended December 31, | ||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Beginning balance | $ | 3 | $ | 3 | $ | 3 | ||||||
| Net increase in valuation allowance | — | — | 1 | |||||||||
| Charge offs | — | — | (1 | ) | ||||||||
| Ending balance | $ | 3 | $ | 3 | $ | 3 |
Payments on all mortgage loans were current as of December 31, 2019, 2018 and 2017.
Municipal bonds
The Company maintains a diversified portfolio of municipal bonds, including tax exempt and taxable securities, which totaled $8.62 billion and $9.17 billion as of December 31, 2019 and 2018, respectively.
The municipal bond portfolio includes general obligations of state and local issuers and revenue bonds (including pre-refunded bonds, which are bonds for which an irrevocable trust has been established to fund the remaining payments of principal and interest).
| Principal geographic distribution of municipal bond issuers exceeding 5% of the portfolio | ||||||
| As of December 31, | ||||||
| (% of municipal bond portfolio carrying value) | 2019 | 2018 | ||||
| Texas | 12.7 | % | 12.3 | % | ||
| California | 8.6 | 7.4 | ||||
| Colorado | 5.8 | 4.0 | ||||
| Washington | 5.5 | 6.2 | ||||
| New York | 3.7 | 5.6 |
Short-term investments
Short-term investments, including money market funds, commercial paper, U.S. Treasury bills and other short-term investments, are carried at fair value. As of December 31, 2019 and 2018, the fair value of short-term investments totaled $4.26 billion and $3.03 billion, respectively.
Other investments
Other investments primarily consist of bank loans, real estate, policy loans, agent loans and derivatives. Bank loans are primarily senior secured corporate loans and are carried at amortized cost. Policy loans are carried at unpaid principal balances. Real estate is carried at cost less accumulated depreciation. Agent
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loans are loans issued to exclusive Allstate agents and are carried at unpaid principal balances, net of valuation allowances and unamortized deferred fees or costs. Derivatives are carried at fair value.
| Other investments by asset type | ||||||||
| ($ in millions) | December 31, 2019 | December 31, 2018 | ||||||
| Bank loans | $ | 1,204 | $ | 1,350 | ||||
| Real estate | 1,005 | 791 | ||||||
| Policy loans | 894 | 891 | ||||||
| Agent loans | 666 | 620 | ||||||
| Derivatives and other | 236 | 200 | ||||||
| Total | $ | 4,005 | $ | 3,852 |
Concentration of credit risk
As of December 31, 2019, the Company is not exposed to any credit concentration risk of a single issuer and its affiliates greater than 10% of the Company’s shareholders’ equity, other than the U.S. government and its agencies.
Securities loaned
The Company’s business activities include securities lending programs with third parties, mostly large banks. As of December 31, 2019 and 2018, fixed income and equity securities with a carrying value of $1.74 billion and $1.40 billion, respectively, were on loan under these agreements. Interest income on collateral, net of fees, was $5 million, $4 million and $7 million in 2019, 2018 and 2017, respectively.
Other investment information
Included in fixed income securities are below investment grade assets totaling $7.15 billion and $5.23 billion as of December 31, 2019 and 2018, respectively.
As of December 31, 2019, fixed income securities and short-term investments with a carrying value of $147 million were on deposit with regulatory authorities as required by law.
As of December 31, 2019, the carrying value of fixed income securities and other investments that were non-income producing was $40 million.
| Note 6 | Fair Value of Assets and Liabilities |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Assets and liabilities recorded on the Consolidated Statements of Financial Position at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows:
Level 1: Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access.
Level 2: Assets and liabilities whose values are based on the following:
| (a) | Quoted prices for similar assets or liabilities in active markets; |
| (b) | Quoted prices for identical or similar assets or liabilities in markets that are not active; or |
| (c) | Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability. |
Level 3: Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Unobservable inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the assets and liabilities.
The availability of observable inputs varies by instrument. In situations where fair value is based on internally developed pricing models or inputs that are unobservable in the market, the determination of fair value requires more judgment. The degree of judgment exercised by the Company in determining fair value is typically greatest for instruments categorized in Level 3. In many instances, valuation inputs used to measure fair value fall into different levels of the fair value hierarchy. The category level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments.
The Company is responsible for the determination of fair value and the supporting assumptions and methodologies. The Company gains assurance that assets and liabilities are appropriately valued through
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the execution of various processes and controls designed to ensure the overall reasonableness and consistent application of valuation methodologies, including inputs and assumptions, and compliance with accounting standards. For fair values received from third parties or internally estimated, the Company’s processes and controls are designed to ensure that the valuation methodologies are appropriate and consistently applied, the inputs and assumptions are reasonable and consistent with the objective of determining fair value, and the fair values are accurately recorded. For example, on a continuing basis, the Company assesses the reasonableness of individual fair values that have stale security prices or that exceed certain thresholds as compared to previous fair values received from valuation service providers or brokers or derived from internal models. The Company performs procedures to understand and assess the methodologies, processes and controls of valuation service providers. In addition, the Company may validate the reasonableness of fair values by comparing information obtained from valuation service providers or brokers to other third-party valuation sources for selected securities. The Company performs ongoing price validation procedures such as back-testing of actual sales, which corroborate the various inputs used in internal models to market observable data. When fair value determinations are expected to be more variable, the Company validates them through reviews by members of management who have relevant expertise and who are independent of those charged with executing investment transactions.
The Company has two types of situations where investments are classified as Level 3 in the fair value hierarchy:
| (1) | Specific inputs significant to the fair value estimation models are not market observable. This primarily occurs in the Company’s use of broker quotes to value certain securities where the inputs have not been corroborated to be market observable, and the use of valuation models that use significant non-market observable inputs. |
| (2) | Quotes continue to be received from independent third-party valuation service providers and all significant inputs are market observable; however, there has been a significant decrease in the volume and level of activity for the asset when compared to normal market activity such that the degree of market observability has declined to a point where categorization as a Level 3 measurement is considered appropriate. The indicators considered in determining whether a significant decrease in the volume and level of activity for a specific asset has occurred include the level of new issuances in the primary market, trading volume in the secondary market, the level of credit spreads over historical levels, applicable bid-ask spreads, and price consensus among market participants and other pricing sources. |
Certain assets are not carried at fair value on a recurring basis, including investments such as mortgage loans, bank loans, agent loans and policy loans. Accordingly, such investments are only included
in the fair value hierarchy disclosure when the investment is subject to remeasurement at fair value after initial recognition and the resulting remeasurement is reflected in the consolidated financial statements.
In determining fair value, the Company principally uses the market approach which generally utilizes market transaction data for the same or similar instruments. To a lesser extent, the Company uses the income approach which involves determining fair values from discounted cash flow methodologies. For the majority of Level 2 and Level 3 valuations, a combination of the market and income approaches is used.
Summary of significant inputs and valuation techniques for Level 2 and Level 3 assets and liabilities measured at fair value on a recurring basis
Level 2 measurements
| • | Fixed income securities: |
U.S. government and agencies, municipal, c**orporate - public and foreign government: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.
Corporate - privately placed: Privately placed are valued using a discounted cash flow model that is widely accepted in the financial services industry and uses market observable inputs and inputs derived principally from, or corroborated by, observable market data. The primary inputs to the discounted cash flow model include an interest rate yield curve, as well as published credit spreads for similar assets in markets that are not active that incorporate the credit quality and industry sector of the issuer.
Corporate - privately placed also includes redeemable preferred stock that are valued using quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, underlying stock prices and credit spreads.
ABS and MBS: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, collateral performance, and credit spreads. Certain ABS are valued based on non-binding broker quotes whose inputs have been corroborated to be market observable. Residential MBS include prepayment speeds as a primary input for valuation.
| • | Equity securities: The primary inputs to the valuation include quoted prices or quoted net asset values for identical or similar assets in markets that are not active. |
| • | Short-term: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads. |
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| • | Other investments: Free-standing exchange listed derivatives that are not actively traded are valued based on quoted prices for identical instruments in markets that are not active. |
Over-the-counter (“OTC”) derivatives, including interest rate swaps, foreign currency swaps, total return swaps, foreign exchange forward contracts, certain options and certain credit default swaps, are valued using models that rely on inputs such as interest rate yield curves, implied volatilities, index price levels, currency rates, and credit spreads that are observable for substantially the full term of the contract. The valuation techniques underlying the models are widely accepted in the financial services industry and do not involve significant judgment.
Level 3 measurements
| • | Fixed income securities: |
Municipal: Comprise municipal bonds that are not rated by third-party credit rating agencies. The primary inputs to the valuation of these municipal bonds include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields and credit spreads. Also included are municipal bonds valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable and municipal bonds in default valued based on the present value of expected cash flows.
Corporate - public and privately placed, ABS and MBS: Primarily valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable. Other inputs for corporate fixed income securities include an interest rate yield curve, as well as published credit spreads for similar assets that incorporate the credit quality and industry sector of the issuer.
| • | Equity securities: The primary inputs to the valuation include quoted prices or quoted net asset values for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements. |
| • | Short-term: For certain short-term investments, amortized cost is used as the best estimate of fair value. |
| • | Other investments: Certain OTC derivatives, such as interest rate caps, certain credit default swaps and certain options (including swaptions), are valued using models that are widely accepted in the financial services industry. These are categorized as Level 3 as a result of the significance of non-market observable inputs such as volatility. Other primary inputs include interest rate yield curves and credit spreads. |
| • | Contractholder funds: Derivatives embedded in certain life and annuity contracts are valued internally using models widely accepted in the financial services industry that determine a single best estimate of fair value for the embedded derivatives within a block of contractholder liabilities. The models primarily use stochastically determined cash flows based on the contractual elements of embedded derivatives, projected option cost and applicable market data, such as interest rate yield curves and equity index volatility assumptions. These are categorized as Level 3 as a result of the significance of non-market observable inputs. |
Investments excluded from the fair value hierarchy
Limited partnerships carried at fair value, which do not have readily determinable fair values, use NAV provided by the investees and are excluded from the fair value hierarchy. These investments are generally not redeemable by the investees and generally cannot be sold without approval of the general partner. The Company receives distributions of income and proceeds from the liquidation of the underlying assets of the investees, which usually takes place in years 4-9 of the typical contractual life of 10-12 years. As of December 31, 2019, the Company has commitments to invest $492 million in these limited partnership interests.
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| Assets and liabilities measured at fair value | ||||||||||||||||||||
| As of December 31, 2019 | ||||||||||||||||||||
| ($ in millions) | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Counterparty and cash collateral netting | Total | |||||||||||||||
| Assets | ||||||||||||||||||||
| Fixed income securities: | ||||||||||||||||||||
| U.S. government and agencies | $ | 4,689 | $ | 397 | $ | — | $ | 5,086 | ||||||||||||
| Municipal | — | 8,558 | 62 | 8,620 | ||||||||||||||||
| Corporate - public | — | 30,819 | 61 | 30,880 | ||||||||||||||||
| Corporate - privately placed | — | 12,084 | 114 | 12,198 | ||||||||||||||||
| Foreign government | — | 979 | — | 979 | ||||||||||||||||
| ABS | — | 797 | 65 | 862 | ||||||||||||||||
| MBS | — | 379 | 40 | 419 | ||||||||||||||||
| Total fixed income securities | 4,689 | 54,013 | 342 | 59,044 | ||||||||||||||||
| Equity securities | 7,407 | 384 | 371 | 8,162 | ||||||||||||||||
| Short-term investments | 1,940 | 2,291 | 25 | 4,256 | ||||||||||||||||
| Other investments: Free-standing derivatives | — | 180 | — | (40 | ) | 140 | ||||||||||||||
| Separate account assets | 3,044 | — | — | 3,044 | ||||||||||||||||
| Other assets | 1 | — | — | 1 | ||||||||||||||||
| Total recurring basis assets | 17,081 | 56,868 | 738 | (40 | ) | 74,647 | ||||||||||||||
| Total assets at fair value | $ | 17,081 | $ | 56,868 | $ | 738 | $ | (40 | ) | $ | 74,647 | |||||||||
| % of total assets at fair value | 22.9 | % | 76.2 | % | 1.0 | % | (0.1 | )% | 100.0 | % | ||||||||||
| Investments reported at NAV | 1,814 | |||||||||||||||||||
| Total | $ | 76,461 | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Contractholder funds: Derivatives embedded in life and annuity contracts | $ | — | $ | — | $ | (462 | ) | $ | (462 | ) | ||||||||||
| Other liabilities: Free-standing derivatives | — | (84 | ) | — | $ | 12 | (72 | ) | ||||||||||||
| Total recurring basis liabilities | $ | — | $ | (84 | ) | $ | (462 | ) | $ | 12 | $ | (534 | ) | |||||||
| % of total liabilities at fair value | — | % | 15.7 | % | 86.5 | % | (2.2 | )% | 100.0 | % |
158 www.allstate.com
Notes to Consolidated Financial Statements 2019 Form 10-K
| Assets and liabilities measured at fair value | ||||||||||||||||||||
| As of December 31, 2018 | ||||||||||||||||||||
| ($ in millions) | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Counterparty and cash collateral netting | Total | |||||||||||||||
| Assets | ||||||||||||||||||||
| Fixed income securities: | ||||||||||||||||||||
| U.S. government and agencies | $ | 5,085 | $ | 432 | $ | — | $ | 5,517 | ||||||||||||
| Municipal | — | 9,099 | 70 | 9,169 | ||||||||||||||||
| Corporate - public | — | 29,200 | 70 | 29,270 | ||||||||||||||||
| Corporate - privately placed | — | 10,798 | 90 | 10,888 | ||||||||||||||||
| Foreign government | — | 747 | — | 747 | ||||||||||||||||
| ABS | — | 976 | 69 | 1,045 | ||||||||||||||||
| MBS | — | 508 | 26 | 534 | ||||||||||||||||
| Total fixed income securities | 5,085 | 51,760 | 325 | 57,170 | ||||||||||||||||
| Equity securities | 4,364 | 331 | 341 | 5,036 | ||||||||||||||||
| Short-term investments | 1,338 | 1,659 | 30 | 3,027 | ||||||||||||||||
| Other investments: Free-standing derivatives | — | 139 | 1 | $ | (23 | ) | 117 | |||||||||||||
| Separate account assets | 2,805 | — | — | 2,805 | ||||||||||||||||
| Other assets | 2 | — | — | 2 | ||||||||||||||||
| Total recurring basis assets | $ | 13,594 | $ | 53,889 | $ | 697 | $ | (23 | ) | $ | 68,157 | |||||||||
| % of total assets at fair value | 19.9 | % | 79.1 | % | 1.0 | % | — | % | 100.0 | % | ||||||||||
| Investments reported at NAV | 1,779 | |||||||||||||||||||
| Total | $ | 69,936 | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Contractholder funds: Derivatives embedded in life and annuity contracts | $ | — | $ | — | $ | (224 | ) | $ | (224 | ) | ||||||||||
| Other liabilities: Free-standing derivatives | (1 | ) | (62 | ) | — | $ | 6 | (57 | ) | |||||||||||
| Total recurring basis liabilities | $ | (1 | ) | $ | (62 | ) | $ | (224 | ) | $ | 6 | $ | (281 | ) | ||||||
| % of total liabilities at fair value | 0.3 | % | 22.1 | % | 79.7 | % | (2.1 | )% | 100.0 | % |
| Quantitative information about the significant unobservable inputs used in Level 3 fair value measurements | ||||||||||||
| ($ in millions) | Fair value | Valuation technique | Unobservable input | Range | Weighted average | |||||||
| December 31, 2019 | ||||||||||||
| Derivatives embedded in life and annuity contracts – Equity-indexed and forward starting options | $ | (430 | ) | Stochastic cash flow model | Projected option cost | 1.0 - 4.2% | 2.67% | |||||
| December 31, 2018 | ||||||||||||
| Derivatives embedded in life and annuity contracts – Equity-indexed and forward starting options | $ | (185 | ) | Stochastic cash flow model | Projected option cost | 1.0 - 2.2% | 1.74% |
The embedded derivatives are equity-indexed and forward starting options in certain life and annuity products that provide customers with interest crediting rates based on the performance of the S&P 500. If the projected option cost increased (decreased), it would result in a higher (lower) liability fair value.
As of December 31, 2019 and 2018, Level 3 fair value measurements of fixed income securities total $342 million and $325 million, respectively, and include $50 million and $105 million, respectively, of securities valued based on non-binding broker quotes where the inputs have not been corroborated to be market
observable and $36 million and $44 million, respectively, of municipal fixed income securities that are not rated by third-party credit rating agencies. As the Company does not develop the Level 3 fair value unobservable inputs for these fixed income securities, they are not included in the table above. However, an increase (decrease) in credit spreads for fixed income securities valued based on non-binding broker quotes would result in a lower (higher) fair value, and an increase (decrease) in the credit rating of municipal bonds that are not rated by third-party credit rating agencies would result in a higher (lower) fair value.
The Allstate Corporation 159
2019 Form 10-K Notes to Consolidated Financial Statements
| Rollforward of Level 3 assets and liabilities held at fair value during the year ended December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2018 | Total gains (losses) included in: | Transfers | Balance as of December 31, 2019 | |||||||||||||||||||||||||||||||||||||
| ($ in millions) | Net income | OCI | Into Level 3 | Out of Level 3 | Purchases | Sales | Issues | Settlements | ||||||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||||||||||
| Fixed income securities: | ||||||||||||||||||||||||||||||||||||||||
| Municipal | $ | 70 | $ | 1 | $ | 4 | $ | — | $ | (5 | ) | $ | — | $ | (5 | ) | $ | — | $ | (3 | ) | $ | 62 | |||||||||||||||||
| Corporate - public | 70 | — | 3 | 30 | (113 | ) | 86 | (11 | ) | — | (4 | ) | 61 | |||||||||||||||||||||||||||
| Corporate - privately placed | 90 | (1 | ) | 2 | 43 | (2 | ) | 4 | (13 | ) | — | (9 | ) | 114 | ||||||||||||||||||||||||||
| ABS | 69 | 1 | (1 | ) | 76 | (210 | ) | 159 | (22 | ) | — | (7 | ) | 65 | ||||||||||||||||||||||||||
| MBS | 26 | — | (2 | ) | 9 | — | 9 | — | — | (2 | ) | 40 | ||||||||||||||||||||||||||||
| Total fixed income securities | 325 | 1 | 6 | 158 | (330 | ) | 258 | (51 | ) | — | (25 | ) | 342 | |||||||||||||||||||||||||||
| Equity securities | 341 | 30 | — | — | — | 82 | (82 | ) | — | — | 371 | |||||||||||||||||||||||||||||
| Short-term investments | 30 | — | — | — | — | 35 | (40 | ) | — | — | 25 | |||||||||||||||||||||||||||||
| Free-standing derivatives, net | 1 | (1 | ) | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Total recurring Level 3 assets | 697 | 30 | 6 | 158 | (330 | ) | 375 | (173 | ) | — | (25 | ) | 738 | |||||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||||||||||
| Contractholder funds: Derivatives embedded in life and annuity contracts | (224 | ) | (61 | ) | — | (175 | ) | — | — | — | (16 | ) | 14 | (462 | ) | |||||||||||||||||||||||||
| Total recurring Level 3 liabilities | $ | (224 | ) | $ | (61 | ) | $ | — | $ | (175 | ) | $ | — | $ | — | $ | — | $ | (16 | ) | $ | 14 | $ | (462 | ) |
| Total Level 3 gains (losses) included in net income for the year ended December 31, 2019 | ||||||||||||||||||||
| ($ in millions) | Net investment income | Realized capital gains and losses | Life contract benefits | Interest credited to contractholder funds | Total | |||||||||||||||
| Components of net income | $ | (2 | ) | $ | 32 | $ | 7 | $ | (68 | ) | $ | (31 | ) |
| Rollforward of Level 3 assets and liabilities held at fair value during the year ended December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2017 | Total gains (losses) included in: | Transfers | Balance as of December 31, 2018 | |||||||||||||||||||||||||||||||||||||
| ($ in millions) | Net income | OCI | Into Level 3 | Out of Level 3 | Purchases | Sales | Issues | Settlements | ||||||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||||||||||
| Fixed income securities: | ||||||||||||||||||||||||||||||||||||||||
| Municipal | $ | 101 | $ | 1 | $ | (2 | ) | $ | — | $ | (26 | ) | $ | 10 | $ | (8 | ) | $ | — | $ | (6 | ) | $ | 70 | ||||||||||||||||
| Corporate - public | 108 | — | (3 | ) | 17 | (21 | ) | 10 | (38 | ) | — | (3 | ) | 70 | ||||||||||||||||||||||||||
| Corporate - privately placed | 224 | (1 | ) | (3 | ) | 20 | (119 | ) | 22 | (5 | ) | — | (48 | ) | 90 | |||||||||||||||||||||||||
| ABS | 147 | — | 2 | 42 | (159 | ) | 160 | (97 | ) | — | (26 | ) | 69 | |||||||||||||||||||||||||||
| MBS | 26 | — | — | — | — | 1 | — | — | (1 | ) | 26 | |||||||||||||||||||||||||||||
| Total fixed income securities | 606 | — | (6 | ) | 79 | (325 | ) | 203 | (148 | ) | — | (84 | ) | 325 | ||||||||||||||||||||||||||
| Equity securities | 210 | 37 | — | — | — | 109 | (15 | ) | — | — | 341 | |||||||||||||||||||||||||||||
| Short-term investments | 20 | — | — | — | — | 55 | (45 | ) | — | — | 30 | |||||||||||||||||||||||||||||
| Free-standing derivatives, net | 1 | — | — | — | — | — | — | — | — | 1 | ||||||||||||||||||||||||||||||
| Total recurring Level 3 assets | $ | 837 | $ | 37 | $ | (6 | ) | $ | 79 | $ | (325 | ) | $ | 367 | $ | (208 | ) | $ | — | $ | (84 | ) | $ | 697 | ||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||||||||||
| Contractholder funds: Derivatives embedded in life and annuity contracts | $ | (286 | ) | $ | 58 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (2 | ) | $ | 6 | $ | (224 | ) | |||||||||||||||||
| Total recurring Level 3 liabilities | $ | (286 | ) | $ | 58 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (2 | ) | $ | 6 | $ | (224 | ) |
| Total Level 3 gains (losses) included in net income for the year ended December 31, 2018 | ||||||||||||||||||||
| ($ in millions) | Net investment income | Realized capital gains and losses | Life contract benefits | Interest credited to contractholder funds | Total | |||||||||||||||
| Components of net income | $ | — | $ | 37 | $ | (5 | ) | $ | 63 | $ | 95 |
160 www.allstate.com
Notes to Consolidated Financial Statements 2019 Form 10-K
| Rollforward of Level 3 assets and liabilities held at fair value during the year ended December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2016 | Total gains (losses) included in: | Transfers | Balance as of December 31, 2017 | |||||||||||||||||||||||||||||||||||||
| ($ in millions) | Net income | OCI | Into Level 3 | Out of Level 3 | Purchases | Sales | Issues | Settlements | ||||||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||||||||||
| Fixed income securities: | ||||||||||||||||||||||||||||||||||||||||
| Municipal | $ | 125 | $ | (1 | ) | $ | 7 | $ | — | $ | (6 | ) | $ | 8 | $ | (29 | ) | $ | — | $ | (3 | ) | $ | 101 | ||||||||||||||||
| Corporate - public | 78 | — | — | 4 | (30 | ) | 60 | — | — | (4 | ) | 108 | ||||||||||||||||||||||||||||
| Corporate - privately placed | 263 | 8 | (2 | ) | 30 | (49 | ) | 44 | (30 | ) | — | (40 | ) | 224 | ||||||||||||||||||||||||||
| ABS | 69 | — | 6 | 60 | (280 | ) | 322 | — | — | (30 | ) | 147 | ||||||||||||||||||||||||||||
| MBS | 23 | — | — | — | — | 6 | — | — | (3 | ) | 26 | |||||||||||||||||||||||||||||
| Total fixed income securities | 558 | 7 | 11 | 94 | (365 | ) | 440 | (59 | ) | — | (80 | ) | 606 | |||||||||||||||||||||||||||
| Equity securities | 163 | 13 | 4 | — | (4 | ) | 48 | (14 | ) | — | — | 210 | ||||||||||||||||||||||||||||
| Short-term investments | 15 | — | — | — | — | 45 | (40 | ) | — | — | 20 | |||||||||||||||||||||||||||||
| Free-standing derivatives, net | (2 | ) | 3 | — | — | — | — | — | — | — | 1 | |||||||||||||||||||||||||||||
| Other assets | 1 | (1 | ) | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Total recurring Level 3 assets | $ | 735 | $ | 22 | $ | 15 | $ | 94 | $ | (369 | ) | $ | 533 | $ | (113 | ) | $ | — | $ | (80 | ) | $ | 837 | |||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||||||||||
| Contractholder funds: Derivatives embedded in life and annuity contracts | $ | (290 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (2 | ) | $ | 6 | $ | (286 | ) | |||||||||||||||||
| Total recurring Level 3 liabilities | $ | (290 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (2 | ) | $ | 6 | $ | (286 | ) |
| Total Level 3 gains (losses) included in net income for the year ended December 31, 2017 | ||||||||||||||||||||
| ($ in millions) | Net investment income | Realized capital gains and losses | Life contract benefits | Interest credited to contractholder funds | Total | |||||||||||||||
| Components of net income | $ | 19 | $ | 4 | $ | 9 | $ | (10 | ) | $ | 22 |
Transfers between level categorizations may occur due to changes in the availability of market observable inputs, which generally are caused by changes in market conditions such as liquidity, trading volume or bid-ask spreads. Transfers between level categorizations may also occur due to changes in the valuation source, including situations where a fair value quote is not provided by the Company’s independent third-party valuation service provider resulting in the price becoming stale or replaced with a broker quote whose inputs have not been corroborated to be market observable. This situation will result in the transfer of a security into Level 3. Transfers in and out of level categorizations are reported as having occurred at the beginning of the quarter in which the transfer occurred. Therefore, for all transfers into Level 3, all realized and changes in unrealized gains and losses in the quarter of transfer are reflected in the Level 3 rollforward table.
There were no transfers between Level 1 and Level 2 during 2019, 2018 or 2017.
Transfers into Level 3 during 2019, 2018 and 2017 included situations where a quote was not provided by
the Company’s independent third-party valuation service provider and as a result the price was stale or had been replaced with a broker quote where the inputs had not been corroborated to be market observable resulting in the security being classified as Level 3. Transfers into Level 3 during 2019 also included derivatives embedded in equity-indexed universal life contracts due to refinements in the valuation modeling resulting in an increase in significance of non-market observable inputs.
Transfers out of Level 3 during 2019, 2018 and 2017 included situations where a broker quote was used in the prior period and a quote became available from the Company’s independent third-party valuation service provider in the current period. A quote utilizing the new pricing source was not available as of the prior period, and any gains or losses related to the change in valuation source for individual securities were not significant.
The Allstate Corporation 161
2019 Form 10-K Notes to Consolidated Financial Statements
| Valuation changes included in net income for Level 3 assets and liabilities held as of | ||||||||||||
| December 31, | ||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Assets | ||||||||||||
| Fixed income securities: | ||||||||||||
| Municipal | $ | 1 | $ | — | $ | (3 | ) | |||||
| Corporate | — | — | 1 | |||||||||
| Total fixed income securities | 1 | — | (2 | ) | ||||||||
| Equity securities | 6 | 36 | 13 | |||||||||
| Free-standing derivatives, net | (1 | ) | — | — | ||||||||
| Other assets | — | — | (1 | ) | ||||||||
| Total recurring Level 3 assets | $ | 6 | $ | 36 | $ | 10 | ||||||
| Liabilities | ||||||||||||
| Contractholder funds: Derivatives embedded in life and annuity contracts | $ | (61 | ) | $ | 58 | $ | — | |||||
| Total recurring Level 3 liabilities | (61 | ) | 58 | — | ||||||||
| Total included in net income | $ | (55 | ) | $ | 94 | $ | 10 | |||||
| Components of net income | ||||||||||||
| Net investment income | $ | (2 | ) | $ | — | $ | 19 | |||||
| Realized capital gains and losses | 8 | 36 | (8 | ) | ||||||||
| Life contract benefits | 7 | (5 | ) | 9 | ||||||||
| Interest credited to contractholder funds | (68 | ) | 63 | (10 | ) | |||||||
| Total included in net income | $ | (55 | ) | $ | 94 | $ | 10 |
| Carrying values and fair value estimates of financial instruments not carried at fair value | ||||||||||||||||||
| ($ in millions) | December 31, 2019 | December 31, 2018 | ||||||||||||||||
| Financial assets | Fair value level | Carrying value | Fair value | Carrying value | Fair value | |||||||||||||
| Mortgage loans | Level 3 | $ | 4,817 | $ | 5,012 | $ | 4,670 | $ | 4,703 | |||||||||
| Bank loans | Level 3 | 1,204 | 1,185 | 1,350 | 1,298 | |||||||||||||
| Agent loans | Level 3 | 666 | 664 | 620 | 617 | |||||||||||||
| Financial liabilities | ||||||||||||||||||
| Contractholder funds on investment contracts | Level 3 | 8,438 | 9,158 | 9,250 | 9,665 | |||||||||||||
| Long-term debt | Level 2 | 6,631 | 7,738 | 6,451 | 6,708 | |||||||||||||
| Liability for collateral | Level 2 | $ | 1,829 | $ | 1,829 | $ | 1,458 | $ | 1,458 |
| Note 7 | Derivative Financial Instruments and Off-balance Sheet Financial Instruments |
The Company uses derivatives for risk reduction and to increase investment portfolio returns through asset replication. Risk reduction activity is focused on managing the risks with certain assets and liabilities arising from the potential adverse impacts from changes in risk-free interest rates, changes in equity market valuations, increases in credit spreads and foreign currency fluctuations.
Asset replication refers to the “synthetic” creation of assets through the use of derivatives. The Company replicates fixed income securities using a combination of a credit default swap, index total return swap, or a foreign currency forward contract and one or more highly rated fixed income securities, primarily investment grade host bonds, to synthetically replicate the economic characteristics of one or more cash market securities. The Company replicates equity securities using futures, index total return swaps, and options to increase equity exposure.
Property-Liability may use interest rate swaps, swaptions, futures and options to manage the interest rate risks of existing investments. These instruments are utilized to change the duration of the portfolio in order to offset the economic effect that interest rates would otherwise have on the fair value of its fixed income securities. Fixed income index total return swaps are used to offset valuation losses in the fixed income portfolio during periods of declining market values. Credit default swaps are typically used to mitigate the credit risk within the Property-Liability fixed income portfolio. Equity index total return swaps, futures and options are used by Property-Liability to offset valuation losses in the equity portfolio during periods of declining equity market values. In addition, equity futures are used to hedge the market risk related to deferred compensation liability contracts. Forward contracts are primarily used by Property-Liability to hedge foreign currency risk associated with
162 www.allstate.com
Notes to Consolidated Financial Statements 2019 Form 10-K
holding foreign currency denominated investments and foreign operations.
Asset-liability management is a risk management practice that is principally employed by Allstate Life and Allstate Annuities to balance the respective interest-rate sensitivities of its assets and liabilities. Depending upon the attributes of the assets acquired and liabilities issued, derivative instruments such as interest rate swaps, caps, swaptions and futures are utilized to change the interest rate characteristics of existing assets and liabilities to ensure the relationship is maintained within specified ranges and to reduce exposure to rising or falling interest rates. Fixed income index total return swaps are used to offset valuation losses in the portfolio during periods of declining market values. Credit default swaps are typically used to mitigate the credit risk within the Allstate Life and Allstate Annuities fixed income portfolios. Futures and options are used for hedging the equity exposure contained in equity indexed life and annuity product contracts that offer equity returns to contractholders. In addition, the Company uses equity index total return swaps, options and futures to offset valuation losses in the equity portfolio during periods of declining equity market values. Foreign currency swaps and forwards are primarily used to reduce the foreign currency risk associated with holding foreign currency denominated investments.
The Company also has derivatives embedded in non-derivative host contracts that are required to be separated from the host contracts and accounted for at fair value with changes in fair value of embedded derivatives reported in net income. The Company’s primary embedded derivatives are equity options in life and annuity product contracts, which provide returns linked to equity indices to contractholders.
When derivatives meet specific criteria, they may be designated as accounting hedges and accounted for as fair value, cash flow, foreign currency fair value or foreign currency cash flow hedges. The Company designates certain investment risk transfer reinsurance agreements as fair value hedges when the hedging instrument is highly effective in offsetting the risk of changes in the fair value of the hedged item. The fair value of the hedged liability is reported in contractholder funds in the Consolidated Statements of Financial Position. The impact from results of the fair value hedge is reported in interest credited to
contractholder funds in the Consolidated Statements of Operations.
The notional amounts specified in the contracts are used to calculate the exchange of contractual payments under the agreements and are generally not representative of the potential for gain or loss on these agreements. However, the notional amounts specified in credit default swaps where the Company has sold credit protection represent the maximum amount of potential loss, assuming no recoveries.
Fair value, which is equal to the carrying value, is the estimated amount that the Company would receive or pay to terminate the derivative contracts at the reporting date. The carrying value amounts for OTC derivatives are further adjusted for the effects, if any, of enforceable master netting agreements and are presented on a net basis, by counterparty agreement, in the Consolidated Statements of Financial Position.
For those derivatives which qualify and have been designated as fair value accounting hedges, net income includes the changes in the fair value of both the derivative instrument and the hedged risk. For cash flow hedges, gains and losses are amortized from AOCI and are reported in net income in the same period the forecasted transactions being hedged impact net income.
Non-hedge accounting is generally used for “portfolio” level hedging strategies where the terms of the individual hedged items do not meet the strict homogeneity requirements to permit the application of hedge accounting. For non-hedge derivatives, net income includes changes in fair value and accrued periodic settlements, when applicable. With the exception of non-hedge derivatives used for asset replication and non-hedge embedded derivatives, all of the Company’s derivatives are evaluated for their ongoing effectiveness as either accounting hedge or non-hedge derivative financial instruments on at least a quarterly basis.
Fair value hedges The Company had one derivative designated as a fair value hedge as of December 31, 2019 and 2018.
Cash flow hedges The Company had no derivatives designated as a cash flow hedge as of December 31, 2019 and 2018.
The Allstate Corporation 163
2019 Form 10-K Notes to Consolidated Financial Statements
| Summary of the volume and fair value positions of derivative instruments as of December 31, 2019 | ||||||||||||||||||||
| Volume (1) | ||||||||||||||||||||
| ($ in millions, except number of contracts) | Balance sheet location | Notional amount | Number of contracts | Fair value, net | Gross asset | Gross liability | ||||||||||||||
| Asset derivatives | ||||||||||||||||||||
| Derivatives designated as fair value accounting hedging instruments | ||||||||||||||||||||
| Other | Other assets | $ | 2 | n/a | $ | — | $ | — | $ | — | ||||||||||
| Derivatives not designated as accounting hedging instruments | ||||||||||||||||||||
| Interest rate contracts | ||||||||||||||||||||
| Futures | Other assets | — | 3,668 | — | — | — | ||||||||||||||
| Equity and index contracts | ||||||||||||||||||||
| Options | Other investments | — | 5,539 | 140 | 140 | — | ||||||||||||||
| Futures | Other assets | — | 1,533 | 1 | 1 | — | ||||||||||||||
| Total return index contracts | ||||||||||||||||||||
| Total return swap agreements - fixed income | Other investments | 56 | n/a | 1 | 1 | — | ||||||||||||||
| Credit default contracts | ||||||||||||||||||||
| Credit default swaps – buying protection | Other investments | 17 | n/a | — | — | — | ||||||||||||||
| Subtotal | 73 | 10,740 | 142 | 142 | — | |||||||||||||||
| Total asset derivatives | $ | 75 | 10,740 | $ | 142 | $ | 142 | $ | — | |||||||||||
| Liability derivatives | ||||||||||||||||||||
| Derivatives not designated as accounting hedging instruments | ||||||||||||||||||||
| Interest rate contracts | ||||||||||||||||||||
| Interest rate cap agreements | Other liabilities & accrued expenses | $ | 34 | n/a | $ | — | $ | — | $ | — | ||||||||||
| Futures | Other liabilities & accrued expenses | — | 1,089 | — | — | — | ||||||||||||||
| Equity and index contracts | ||||||||||||||||||||
| Options | Other liabilities & accrued expenses | — | 5,400 | (68 | ) | — | (68 | ) | ||||||||||||
| Futures | Other liabilities & accrued expenses | — | 3 | — | — | — | ||||||||||||||
| Total return index contracts | ||||||||||||||||||||
| Total return swap agreements - fixed income | Other liabilities & accrued expenses | 119 | n/a | — | — | — | ||||||||||||||
| Total return swap agreements - equity index | Other liabilities & accrued expenses | 187 | n/a | 11 | 11 | — | ||||||||||||||
| Foreign currency contracts | ||||||||||||||||||||
| Foreign currency forwards | Other liabilities & accrued expenses | 745 | n/a | 19 | 28 | (9 | ) | |||||||||||||
| Embedded derivative financial instruments | ||||||||||||||||||||
| Guaranteed accumulation benefits | Contractholder funds | 161 | n/a | (18 | ) | — | (18 | ) | ||||||||||||
| Guaranteed withdrawal benefits | Contractholder funds | 205 | n/a | (14 | ) | — | (14 | ) | ||||||||||||
| Equity-indexed and forward starting options in life and annuity product contracts | Contractholder funds | 1,791 | n/a | (430 | ) | — | (430 | ) | ||||||||||||
| Credit default contracts | ||||||||||||||||||||
| Credit default swaps – buying protection | Other liabilities & accrued expenses | 152 | n/a | (7 | ) | — | (7 | ) | ||||||||||||
| Credit default swaps – selling protection | Other liabilities & accrued expenses | 9 | n/a | — | — | — | ||||||||||||||
| Total liability derivatives | 3,403 | 6,492 | (507 | ) | $ | 39 | $ | (546 | ) | |||||||||||
| Total derivatives | $ | 3,478 | 17,232 | $ | (365 | ) |
| (1) | Volume for OTC and cleared derivative contracts is represented by their notional amounts. Volume for exchange traded derivatives is represented by the number of contracts, which is the basis on which they are traded. (n/a = not applicable) |
164 www.allstate.com
Notes to Consolidated Financial Statements 2019 Form 10-K
| Summary of the volume and fair value positions of derivative instruments as of December 31, 2018 | ||||||||||||||||||||
| Volume | ||||||||||||||||||||
| ($ in millions, except number of contracts) | Balance sheet location | Notional amount | Number of contracts | Fair value, net | Gross asset | Gross liability | ||||||||||||||
| Asset derivatives | ||||||||||||||||||||
| Derivatives not designated as accounting hedging instruments | ||||||||||||||||||||
| Interest rate contracts | ||||||||||||||||||||
| Interest rate cap agreements | Other investments | $ | 6 | n/a | $ | — | $ | — | $ | — | ||||||||||
| Futures | Other assets | — | 1,330 | 1 | 1 | — | ||||||||||||||
| Equity and index contracts | ||||||||||||||||||||
| Options | Other investments | — | 11,131 | 115 | 115 | — | ||||||||||||||
| Futures | Other assets | — | 1,453 | 1 | 1 | — | ||||||||||||||
| Total return index contracts | ||||||||||||||||||||
| Total return swap agreements - fixed income | Other investments | 7 | n/a | — | — | — | ||||||||||||||
| Total return swap agreements - equity index | Other investments | 61 | n/a | (2 | ) | — | (2 | ) | ||||||||||||
| Foreign currency contracts | ||||||||||||||||||||
| Foreign currency forwards | Other investments | 258 | n/a | 10 | 11 | (1 | ) | |||||||||||||
| Credit default contracts | ||||||||||||||||||||
| Credit default swaps – buying protection | Other investments | 136 | n/a | (1 | ) | 2 | (3 | ) | ||||||||||||
| Other contracts | ||||||||||||||||||||
| Other | Other assets | 2 | n/a | — | — | — | ||||||||||||||
| Total asset derivatives | $ | 470 | 13,914 | $ | 124 | $ | 130 | $ | (6 | ) | ||||||||||
| Liability derivatives | ||||||||||||||||||||
| Derivatives not designated as accounting hedging instruments | ||||||||||||||||||||
| Interest rate contracts | ||||||||||||||||||||
| Interest rate cap agreements | Other liabilities & accrued expenses | $ | 31 | n/a | $ | 1 | $ | 1 | $ | — | ||||||||||
| Futures | Other liabilities & accrued expenses | — | 1,300 | (1 | ) | — | (1 | ) | ||||||||||||
| Equity and index contracts | ||||||||||||||||||||
| Options and futures | Other liabilities & accrued expenses | — | 10,956 | (50 | ) | — | (50 | ) | ||||||||||||
| Total return index contracts | ||||||||||||||||||||
| Total return swap agreements - fixed income | Other liabilities & accrued expenses | 38 | n/a | (1 | ) | — | (1 | ) | ||||||||||||
| Total return swap agreements - equity index | Other liabilities & accrued expenses | 71 | n/a | (4 | ) | — | (4 | ) | ||||||||||||
| Foreign currency contracts | ||||||||||||||||||||
| Foreign currency forwards | Other liabilities & accrued expenses | 341 | n/a | 10 | 11 | (1 | ) | |||||||||||||
| Embedded derivative financial instruments | ||||||||||||||||||||
| Guaranteed accumulation benefits | Contractholder funds | 169 | n/a | (25 | ) | — | (25 | ) | ||||||||||||
| Guaranteed withdrawal benefits | Contractholder funds | 210 | n/a | (14 | ) | — | (14 | ) | ||||||||||||
| Equity-indexed and forward starting options in life and annuity product contracts | Contractholder funds | 1,770 | n/a | (185 | ) | — | (185 | ) | ||||||||||||
| Credit default contracts | ||||||||||||||||||||
| Credit default swaps – buying protection | Other liabilities & accrued expenses | 40 | n/a | — | — | — | ||||||||||||||
| Credit default swaps – selling protection | Other liabilities & accrued expenses | 5 | n/a | — | — | — | ||||||||||||||
| Total liability derivatives | 2,675 | 12,256 | (269 | ) | $ | 12 | $ | (281 | ) | |||||||||||
| Total derivatives | $ | 3,145 | 26,170 | $ | (145 | ) |
The Allstate Corporation 165
2019 Form 10-K Notes to Consolidated Financial Statements
| Gross and net amounts for OTC derivatives (1) | ||||||||||||||||||||||||
| Offsets | ||||||||||||||||||||||||
| ($ in millions) | Gross amount | Counter- party netting | Cash collateral (received) pledged | Net amount on balance sheet | Securities collateral (received) pledged | Net amount | ||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||
| Asset derivatives | $ | 40 | $ | (39 | ) | $ | (1 | ) | $ | — | $ | — | $ | — | ||||||||||
| Liability derivatives | (16 | ) | 39 | (27 | ) | (4 | ) | — | (4 | ) | ||||||||||||||
| December 31, 2018 | ||||||||||||||||||||||||
| Asset derivatives | $ | 25 | $ | (18 | ) | $ | (5 | ) | $ | 2 | $ | — | $ | 2 | ||||||||||
| Liability derivatives | (12 | ) | 18 | (12 | ) | (6 | ) | — | (6 | ) |
| (1) | All OTC derivatives are subject to enforceable master netting agreements. |
| Gains (losses) from valuation and settlements reported on derivatives not designated as accounting hedges | ||||||||||||||||||||
| ($ in millions) | Realized capital gains (losses) | Life contract benefits | Interest credited to contractholder funds | Operating costs and expenses | Total gain (loss) recognized in net income on derivatives | |||||||||||||||
| 2019 | ||||||||||||||||||||
| Interest rate contracts | $ | 51 | $ | — | $ | — | $ | — | $ | 51 | ||||||||||
| Equity and index contracts | (116 | ) | — | 63 | 40 | (13 | ) | |||||||||||||
| Embedded derivative financial instruments | — | 7 | (70 | ) | — | (63 | ) | |||||||||||||
| Foreign currency contracts | 8 | — | — | — | 8 | |||||||||||||||
| Credit default contracts | (8 | ) | — | — | — | (8 | ) | |||||||||||||
| Total return swaps - fixed income | 14 | — | — | — | 14 | |||||||||||||||
| Total return swaps - equity index | 36 | — | — | — | 36 | |||||||||||||||
| Total | $ | (15 | ) | $ | 7 | $ | (7 | ) | $ | 40 | $ | 25 | ||||||||
| 2018 | ||||||||||||||||||||
| Interest rate contracts | $ | (2 | ) | $ | — | $ | — | $ | — | $ | (2 | ) | ||||||||
| Equity and index contracts | 21 | — | (24 | ) | (21 | ) | (24 | ) | ||||||||||||
| Embedded derivative financial instruments | — | (5 | ) | 67 | — | 62 | ||||||||||||||
| Foreign currency contracts | 29 | — | — | (1 | ) | 28 | ||||||||||||||
| Credit default contracts | 2 | — | — | — | 2 | |||||||||||||||
| Total return swaps - fixed income | (1 | ) | — | — | — | (1 | ) | |||||||||||||
| Total return swaps - equity index | (6 | ) | — | — | — | (6 | ) | |||||||||||||
| Total | $ | 43 | $ | (5 | ) | $ | 43 | $ | (22 | ) | $ | 59 | ||||||||
| 2017 | ||||||||||||||||||||
| Equity and index contracts | $ | (15 | ) | $ | — | $ | 47 | $ | 28 | $ | 60 | |||||||||
| Embedded derivative financial instruments | — | 9 | (6 | ) | — | 3 | ||||||||||||||
| Foreign currency contracts | (27 | ) | — | — | 6 | (21 | ) | |||||||||||||
| Credit default contracts | (4 | ) | — | — | — | (4 | ) | |||||||||||||
| Total | $ | (46 | ) | $ | 9 | $ | 41 | $ | 34 | $ | 38 |
The Company manages its exposure to credit risk by utilizing highly rated counterparties, establishing risk control limits, executing legally enforceable master netting agreements (“MNAs”) and obtaining collateral where appropriate. The Company uses MNAs for OTC derivative transactions that permit either party to net payments due for transactions and collateral is either pledged or obtained when certain predetermined exposure limits are exceeded. As of December 31, 2019, counterparties pledged $31 million in collateral to the Company, and the Company pledged $3 million in cash and securities to counterparties which includes $3 million of collateral posted under MNAs for contracts
containing credit-risk contingent provisions that are in a liability position.
The Company has not incurred any losses on derivative financial instruments due to counterparty nonperformance. Other derivatives, including futures and certain option contracts, are traded on organized exchanges which require margin deposits and guarantee the execution of trades, thereby mitigating any potential credit risk.
166 www.allstate.com
Notes to Consolidated Financial Statements 2019 Form 10-K
Counterparty credit exposure represents the Company’s potential loss if all of the counterparties concurrently fail to perform under the contractual terms of the contracts and all collateral, if any, becomes worthless.
This exposure is measured by the fair value of OTC derivative contracts with a positive fair value at the reporting date reduced by the effect, if any, of legally enforceable master netting agreements.
| OTC derivatives counterparty credit exposure by counterparty credit rating | ||||||||||||||||||||||||||||||
| ($ in millions) | 2019 | 2018 | ||||||||||||||||||||||||||||
| Rating (1) | Number of counter-parties | Notional amount (2) | Credit exposure (2) | Exposure, net of collateral (2) | Number of counter-parties | Notional amount (2) | Credit exposure (2) | Exposure, net of collateral (2) | ||||||||||||||||||||||
| A+ | 6 | 868 | 29 | — | 3 | 643 | 19 | 1 | ||||||||||||||||||||||
| A | — | — | — | — | 2 | 121 | 1 | — | ||||||||||||||||||||||
| Total | 6 | $ | 868 | $ | 29 | $ | — | 5 | $ | 764 | $ | 20 | $ | 1 |
| (1) | Allstate uses the lower of S&P’s or Moody’s long-term debt issuer ratings. |
| (2) | Only OTC derivatives with a net positive fair value are included for each counterparty. |
For certain exchange traded and cleared derivatives, margin deposits are required as well as daily cash settlements of margin accounts. As of December 31, 2019, the Company pledged $48 million in the form of margin deposits.
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 the Company currently holds, as these instruments may become less valuable due to adverse changes in market conditions. To limit this risk, the Company’s senior management has established risk control limits. In addition, changes in fair value of the derivative financial instruments that the Company uses for risk management purposes are generally offset by the change in the fair value or cash flows of the hedged risk component of the related assets, liabilities or forecasted transactions.
Certain of the Company’s derivative instruments contain credit-risk-contingent termination events, cross-default provisions and credit support annex agreements. Credit-risk-contingent termination events
allow the counterparties to terminate the derivative agreement or a specific trade on certain dates if AIC’s, ALIC’s or Allstate Life Insurance Company of New York’s (“ALNY”) financial strength credit ratings by Moody’s or S&P fall below a certain level. Credit-risk-contingent cross-default provisions allow the counterparties to terminate the derivative agreement if the Company defaults by pre-determined threshold amounts on certain debt instruments. Credit-risk-contingent credit support annex agreements specify the amount of collateral the Company must post to counterparties based on AIC’s, ALIC’s or ALNY’s financial strength credit ratings by Moody’s or S&P, or in the event AIC, ALIC or ALNY are no longer rated by either Moody’s or S&P.
The following summarizes the fair value of derivative instruments with termination, cross-default or collateral credit-risk-contingent features that are in a liability position as of December 31, as well as the fair value of assets and collateral that are netted against the liability in accordance with provisions within legally enforceable MNAs.
| ($ in millions) | 2019 | 2018 | ||||||
| Gross liability fair value of contracts containing credit-risk-contingent features | $ | 16 | $ | 11 | ||||
| Gross asset fair value of contracts containing credit-risk-contingent features and subject to MNAs | (11 | ) | (5 | ) | ||||
| Collateral posted under MNAs for contracts containing credit-risk-contingent features | (3 | ) | (2 | ) | ||||
| Maximum amount of additional exposure for contracts with credit-risk-contingent features if all features were triggered concurrently | $ | 2 | $ | 4 |
Off-balance sheet financial instruments
| Contractual amounts of off balance sheet financial instruments | ||||||||
| As of December 31, | ||||||||
| ($ in millions) | 2019 | 2018 | ||||||
| Commitments to invest in limited partnership interests | $ | 2,837 | $ | 3,028 | ||||
| Private placement commitments | 68 | 47 | ||||||
| Other loan commitments | 189 | 233 |
In the preceding table, 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 in limited partnership interests represent agreements to acquire new or additional participation in certain limited partnership
The Allstate Corporation 167
2019 Form 10-K Notes to Consolidated Financial Statements
investments. The Company enters into these agreements in the normal course of business. Because the investments in limited partnerships are not actively traded, it is not practical to estimate the fair value of these commitments.
Private placement commitments represent commitments to purchase private placement debt and private equity securities at a future date. The Company enters into these agreements in the normal course of business. The fair value of the debt commitments generally cannot be estimated on the date the commitment is made as the terms and conditions of the underlying private placement securities are not yet final. Because the private equity securities are not actively traded, it is not practical to estimate fair value of the commitments.
Other loan commitments are agreements to lend to a borrower provided there is no violation of any condition established in the contract. The Company enters into these agreements to commit to future loan fundings at predetermined interest rates. Commitments have either fixed or varying expiration dates or other termination clauses. The fair value of these commitments is insignificant.
| Note 8 | Reserve for Property and Casualty Insurance Claims and Claims Expense |
The Company establishes reserves for claims and claims expense on reported and unreported claims of insured losses. The Company’s reserving process takes into account known facts and interpretations of circumstances and factors including the Company’s experience with similar cases, actual claims paid, historical trends involving claim payment patterns and pending levels of unpaid claims, loss management programs, product mix and contractual terms, changes in law and regulation, judicial decisions, and economic conditions. In the normal course of business, the Company may also supplement its claims processes by utilizing third-party adjusters, appraisers, engineers, inspectors, and 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.
Because reserves are estimates of unpaid portions of losses that have occurred, including incurred but not
reported (“IBNR”) losses, the establishment of appropriate reserves, including reserves for catastrophes, Discontinued Lines and Coverages and reinsurance and indemnification recoverables, is an inherently uncertain and complex process. The ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimates. The highest degree of uncertainty is associated with reserves for losses incurred in the current reporting period as it contains the greatest proportion of losses that have not been reported or settled. The Company regularly updates its reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in prior year reserve estimates, which may be material, are reported in property and casualty insurance claims and claims expense in the Consolidated Statements of Operations in the period such changes are determined.
| Rollforward of reserve for property and casualty insurance claims and claims expense | ||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Balance as of January 1 | $ | 27,423 | $ | 26,325 | $ | 25,250 | ||||||
| Less recoverables (1) | (7,155 | ) | (6,471 | ) | (6,184 | ) | ||||||
| Net balance as of January 1 | 20,268 | 19,854 | 19,066 | |||||||||
| SquareTrade acquisition as of January 3, 2017 | — | — | 17 | |||||||||
| Incurred claims and claims expense related to: | ||||||||||||
| Current year | 24,106 | 23,033 | 22,350 | |||||||||
| Prior years | (130 | ) | (255 | ) | (503 | ) | ||||||
| Total incurred | 23,976 | 22,778 | 21,847 | |||||||||
| Claims and claims expense paid related to: | ||||||||||||
| Current year | (15,160 | ) | (14,877 | ) | (14,112 | ) | ||||||
| Prior years | (8,284 | ) | (7,487 | ) | (6,964 | ) | ||||||
| Total paid | (23,444 | ) | (22,364 | ) | (21,076 | ) | ||||||
| Net balance as of December 31 | 20,800 | 20,268 | 19,854 | |||||||||
| Plus recoverables | 6,912 | 7,155 | 6,471 | |||||||||
| Balance as of December 31 | $ | 27,712 | $ | 27,423 | $ | 26,325 |
(1) Recoverables comprises reinsurance and indemnification recoverables. See Note 10 for further details.
168 www.allstate.com
Notes to Consolidated Financial Statements 2019 Form 10-K
| Reconciliation of total claims and claims expense incurred and paid by coverage | December 31, 2019 | |||||||
| ($ in millions) | Incurred | Paid | ||||||
| Allstate Protection | ||||||||
| Auto insurance - liability coverage | $ | 9,142 | $ | (8,419 | ) | |||
| Auto insurance - physical damage coverage | 5,576 | (5,570 | ) | |||||
| Homeowners insurance | 4,625 | (4,616 | ) | |||||
| Total auto and homeowners insurance | 19,343 | (18,605 | ) | |||||
| Other personal lines | 1,024 | (1,059 | ) | |||||
| Commercial lines | 648 | (404 | ) | |||||
| Service Businesses | 297 | (311 | ) | |||||
| Discontinued Lines and Coverages | 91 | (121 | ) | |||||
| Unallocated loss adjustment expenses (“ULAE”) | 2,687 | (2,585 | ) | |||||
| Claims incurred and paid from before 2015 | (97 | ) | (444 | ) | ||||
| Other | (17 | ) | 85 | |||||
| Total | $ | 23,976 | $ | (23,444 | ) |
Incurred claims and claims expense represents the sum of paid losses, claim adjustment expenses and reserve changes in the calendar year. This expense includes losses from catastrophes of $2.56 billion, $2.86 billion and $3.23 billion in 2019, 2018 and 2017, respectively, net of recoverables. Catastrophes are an inherent risk of the property and casualty insurance business that have contributed to, and will continue to contribute to, material year-to-year fluctuations in the Company’s results of operations and financial position.
The Company calculates and records a single best reserve estimate for losses from catastrophes, in conformance with generally accepted actuarial standards. As a result, management believes that no other estimate is better than the recorded amount. Due to the uncertainties involved, including the factors described above, the ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimates. Accordingly, management believes that it is not practical to develop a meaningful range for any such changes in losses incurred.
| Prior year reserve reestimates included in claims and claims expense (1) | ||||||||||||||||||||||||||||||||||||
| Twelve months ended December 31, | ||||||||||||||||||||||||||||||||||||
| ($ in millions) | Non-catastrophe losses | Catastrophe losses | Total | |||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||
| Auto (2) | $ | (306 | ) | $ | (416 | ) | $ | (475 | ) | $ | (17 | ) | $ | (39 | ) | $ | (15 | ) | $ | (323 | ) | $ | (455 | ) | $ | (490 | ) | |||||||||
| Homeowners | (1 | ) | (51 | ) | (124 | ) | 66 | 65 | (7 | ) | 65 | 14 | (131 | ) | ||||||||||||||||||||||
| Other personal lines | 8 | (6 | ) | (2 | ) | — | (1 | ) | 3 | 8 | (7 | ) | 1 | |||||||||||||||||||||||
| Commercial lines | 18 | 108 | 18 | (1 | ) | — | 1 | 17 | 108 | 19 | ||||||||||||||||||||||||||
| Discontinued Lines and Coverages (3) | 105 | 87 | 96 | — | — | — | 105 | 87 | 96 | |||||||||||||||||||||||||||
| Service Businesses | (2 | ) | (2 | ) | 2 | — | — | — | (2 | ) | (2 | ) | 2 | |||||||||||||||||||||||
| Total prior year reserve reestimates | $ | (178 | ) | $ | (280 | ) | $ | (485 | ) | $ | 48 | $ | 25 | $ | (18 | ) | $ | (130 | ) | $ | (255 | ) | $ | (503 | ) |
| (1) | Favorable reserve reestimates are shown in parentheses. |
| (2) | Non-catastrophe results related to continued favorable personal lines auto injury coverage development. |
| (3) | The Company’s 2019 annual reserve review, using established industry and actuarial best practices, resulted in unfavorable reestimates of $95 million. |
The Allstate Corporation 169
2019 Form 10-K Financial Statements
The following presents information about incurred and paid claims development as of December 31, 2019, net of recoverables, as well as the cumulative number of reported claims and the total of IBNR reserves plus expected development on reported claims included in the net incurred claims amounts. See Note 2 for the accounting policy and methodology for determining reserves for claims and claims expense, including both reported and IBNR claims. The cumulative number of reported claims is identified by coverage and excludes reported claims for industry pools and facilities where information is not available. The information about incurred and paid claims development for the 2015 to 2019 years, and the average annual percentage payout of incurred claims by age as of December 31, 2019, is presented as required supplementary information.
Auto insurance – liability coverage
| ($ in millions, except number of reported claims) | Incurred claims and allocated claim adjustment expenses, net of recoverables | IBNR reserves plus expected development on reported claims | Cumulative number of reported claims | ||||||||||||||||||||||||||||
| For the years ended December 31, | Prior year reserve reestimates | As of December 31, 2019 | |||||||||||||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||||||||||
| Accident year | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||||||||||||
| 2015 | $ | 8,763 | $ | 8,733 | $ | 8,677 | $ | 8,617 | $ | 8,578 | $ | (39 | ) | $ | 519 | 2,383,853 | |||||||||||||||
| 2016 | — | 9,030 | 8,833 | 8,732 | 8,683 | (49 | ) | 988 | 2,399,890 | ||||||||||||||||||||||
| 2017 | — | — | 8,457 | 8,389 | 8,305 | (84 | ) | 1,777 | 2,214,254 | ||||||||||||||||||||||
| 2018 | — | — | — | 8,727 | 8,708 | (19 | ) | 3,093 | 2,169,753 | ||||||||||||||||||||||
| 2019 | — | — | — | — | 9,333 | 5,838 | 2,108,919 | ||||||||||||||||||||||||
| Total | $ | 43,607 | $ | (191 | ) | ||||||||||||||||||||||||||
| Reconciliation to total prior year reserve reestimates recognized by line | |||||||||||||||||||||||||||||||
| Prior year reserve reestimates for pre-2015 accident years | (56 | ) | |||||||||||||||||||||||||||||
| Prior year reserve reestimates for ULAE | 14 | ||||||||||||||||||||||||||||||
| Other | (1 | ) | |||||||||||||||||||||||||||||
| Total prior year reserve reestimates | $ | (234 | ) | ||||||||||||||||||||||||||||
| Cumulative paid claims and allocated claims adjustment expenses, net of recoverables | |||||||||||||||||||||||||||||||
| For the years ended December 31, | |||||||||||||||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||||||||||
| Accident year | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||||||||||||
| 2015 | $ | 3,524 | $ | 5,837 | $ | 6,883 | $ | 7,565 | $ | 8,059 | |||||||||||||||||||||
| 2016 | — | 3,485 | 5,768 | 6,849 | 7,695 | ||||||||||||||||||||||||||
| 2017 | — | — | 3,149 | 5,330 | 6,528 | ||||||||||||||||||||||||||
| 2018 | — | — | — | 3,229 | 5,615 | ||||||||||||||||||||||||||
| 2019 | — | — | — | — | 3,495 | ||||||||||||||||||||||||||
| Total | $ | 31,392 | |||||||||||||||||||||||||||||
| All outstanding liabilities before 2015, net of recoverables | 1,274 | ||||||||||||||||||||||||||||||
| Liabilities for claims and claim adjustment expenses, net of recoverables | $ | 13,489 |
| Average annual percentage payout of incurred claims by age, net of recoverables, as of December 31, 2019 | |||||||||||||||
| 1 year | 2 years | 3 years | 4 years | 5 years | |||||||||||
| Auto insurance – liability coverage | 40.0 | % | 27.2 | % | 12.9 | % | 8.2 | % | 4.9 | % |
170 www.allstate.com
Notes to Consolidated Financial Statements 2019 Form 10-K
Auto insurance – physical damage coverage
| ($ in millions, except number of reported claims) | Incurred claims and allocated claim adjustment expenses, net of recoverables | IBNR reserves plus expected development on reported claims | Cumulative number of reported claims | ||||||||||||||||||||||||||||
| For the years ended December 31, | Prior year reserve reestimates | As of December 31, 2019 | |||||||||||||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||||||||||
| Accident year | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||||||||||||
| 2015 | $ | 4,653 | $ | 4,681 | $ | 4,669 | $ | 4,660 | $ | 4,656 | $ | (4 | ) | $ | 2 | 4,390,288 | |||||||||||||||
| 2016 | — | 5,125 | 5,052 | 5,025 | 5,020 | (5 | ) | 5 | 4,431,735 | ||||||||||||||||||||||
| 2017 | — | — | 5,119 | 5,037 | 5,025 | (12 | ) | (2 | ) | 4,236,640 | |||||||||||||||||||||
| 2018 | — | — | — | 5,216 | 5,154 | (62 | ) | 17 | 4,306,335 | ||||||||||||||||||||||
| 2019 | — | — | — | — | 5,659 | 244 | 4,312,306 | ||||||||||||||||||||||||
| Total | $ | 25,514 | $ | (83 | ) | ||||||||||||||||||||||||||
| Reconciliation to total prior year reserve reestimates recognized by line | |||||||||||||||||||||||||||||||
| Prior year reserve reestimates for pre-2015 accident years | (4 | ) | |||||||||||||||||||||||||||||
| Prior year reserve reestimates for ULAE | (2 | ) | |||||||||||||||||||||||||||||
| Other | — | ||||||||||||||||||||||||||||||
| Total prior year reserve reestimates | $ | (89 | ) | ||||||||||||||||||||||||||||
| Cumulative paid claims and allocated claims adjustment expenses, net of recoverables | |||||||||||||||||||||||||||||||
| For the years ended December 31, | |||||||||||||||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||||||||||
| Accident year | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||||||||||||
| 2015 | $ | 4,507 | $ | 4,672 | $ | 4,658 | $ | 4,655 | $ | 4,654 | |||||||||||||||||||||
| 2016 | — | 4,887 | 5,031 | 5,019 | 5,016 | ||||||||||||||||||||||||||
| 2017 | — | — | 4,845 | 5,036 | 5,027 | ||||||||||||||||||||||||||
| 2018 | — | — | — | 4,968 | 5,137 | ||||||||||||||||||||||||||
| 2019 | — | — | — | — | 5,414 | ||||||||||||||||||||||||||
| Total | $ | 25,248 | |||||||||||||||||||||||||||||
| All outstanding liabilities before 2015, net of recoverables | 7 | ||||||||||||||||||||||||||||||
| Liabilities for claims and claim adjustment expenses, net of recoverables | $ | 273 |
| Average annual percentage payout of incurred claims by age, net of recoverables, as of December 31, 2019 | |||||||||||||||
| 1 year | 2 years | 3 years | 4 years | 5 years | |||||||||||
| Auto insurance – physical damage coverage | 97.0 | % | 3.0 | % | (0.2 | )% | — | % | — | % |
The Allstate Corporation 171
2019 Form 10-K Financial Statements
Homeowners insurance
| ($ in millions, except number of reported claims) | Incurred claims and allocated claim adjustment expenses, net of recoverables | IBNR reserves plus expected development on reported claims | Cumulative number of reported claims | ||||||||||||||||||||||||||||
| For the years ended December 31, | Prior year reserve reestimates | As of December 31, 2019 | |||||||||||||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||||||||||
| Accident year | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||||||||||||
| 2015 | $ | 3,558 | $ | 3,611 | $ | 3,553 | $ | 3,537 | $ | 3,520 | $ | (17 | ) | $ | 36 | 721,328 | |||||||||||||||
| 2016 | — | 3,959 | 3,993 | 3,955 | 3,951 | (4 | ) | 77 | 813,728 | ||||||||||||||||||||||
| 2017 | — | — | 4,475 | 4,617 | 4,612 | (5 | ) | 177 | 907,218 | ||||||||||||||||||||||
| 2018 | — | — | — | 4,747 | 4,851 | 104 | 340 | 807,012 | |||||||||||||||||||||||
| 2019 | — | — | — | — | 4,547 | 1,233 | 721,434 | ||||||||||||||||||||||||
| Total | $ | 21,481 | $ | 78 | |||||||||||||||||||||||||||
| Reconciliation to total prior year reserve reestimates recognized by line | |||||||||||||||||||||||||||||||
| Prior year reserve reestimates for pre-2015 accident years | (36 | ) | |||||||||||||||||||||||||||||
| Prior year reserve reestimates for ULAE | 23 | ||||||||||||||||||||||||||||||
| Other | — | ||||||||||||||||||||||||||||||
| Total prior year reserve reestimates | $ | 65 | |||||||||||||||||||||||||||||
| Cumulative paid claims and allocated claims adjustment expenses, net of recoverables | |||||||||||||||||||||||||||||||
| For the years ended December 31, | |||||||||||||||||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||||||||||
| Accident year | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||||||||||||
| 2015 | $ | 2,586 | $ | 3,296 | $ | 3,399 | $ | 3,458 | $ | 3,484 | |||||||||||||||||||||
| 2016 | — | 2,947 | 3,678 | 3,809 | 3,874 | ||||||||||||||||||||||||||
| 2017 | — | — | 3,227 | 4,246 | 4,435 | ||||||||||||||||||||||||||
| 2018 | — | — | — | 3,489 | 4,511 | ||||||||||||||||||||||||||
| 2019 | — | — | — | — | 3,314 | ||||||||||||||||||||||||||
| Total | $ | 19,618 | |||||||||||||||||||||||||||||
| All outstanding liabilities before 2015, net of recoverables | 126 | ||||||||||||||||||||||||||||||
| Liabilities for claims and claim adjustment expenses, net of recoverables | $ | 1,989 |
| Average annual percentage payout of incurred claims by age, net of recoverables, as of December 31, 2019 | |||||||||||||||
| 1 year | 2 years | 3 years | 4 years | 5 years | |||||||||||
| Homeowners insurance | 74.5 | % | 18.9 | % | 3.1 | % | 1.4 | % | 0.7 | % |
172 www.allstate.com
Notes to Consolidated Financial Statements 2019 Form 10-K
| Reconciliation of the net incurred and paid claims development tables above to the reserve for property and casualty insurance claims and claims expense | ||||
| ($ in millions) | As of December 31, 2019 | |||
| Net outstanding liabilities | ||||
| Allstate Protection | ||||
| Auto insurance - liability coverage | $ | 13,489 | ||
| Auto insurance - physical damage coverage | 273 | |||
| Homeowners insurance | 1,989 | |||
| Other personal lines | 1,326 | |||
| Commercial lines | 1,010 | |||
| Service Businesses | 36 | |||
| Discontinued Lines and Coverages (1) | 1,286 | |||
| ULAE | 1,391 | |||
| Net reserve for property and casualty insurance claims and claims expense | 20,800 | |||
| Recoverables | ||||
| Allstate Protection | ||||
| Auto insurance - liability coverage | 5,891 | |||
| Auto insurance - physical damage coverage | 3 | |||
| Homeowners insurance | 214 | |||
| Other personal lines | 160 | |||
| Commercial lines | 130 | |||
| Service Businesses | 13 | |||
| Discontinued Lines and Coverages | 452 | |||
| ULAE | 49 | |||
| Total recoverables | 6,912 | |||
| Gross reserve for property and casualty insurance claims and claims expense | $ | 27,712 |
| (1) | Discontinued Lines and Coverages includes business in run-off with most of the claims related to accident years more than 30 years ago. IBNR reserves represent $660 million of the total reserves as of December 31, 2019. |
Management believes that the reserve for property and casualty insurance claims and claims expense, net of recoverables, 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 the date of the Consolidated Statements of Financial Position based on available facts, technology, laws and regulations.
Allstate’s reserves for asbestos claims were $810 million and $866 million, net of reinsurance recoverables of $362 million and $400 million, as of December 31, 2019 and 2018, respectively. Reserves for environmental claims were $179 million and $170 million, net of reinsurance recoverables of $40 million and $39 million, as of December 31, 2019 and 2018, respectively. For further discussion of asbestos and environmental reserves, see Note 14.
The Allstate Corporation 173
2019 Form 10-K Notes to Consolidated Financial Statements
| Note 9 | Reserve for Life-Contingent Contract Benefits and Contractholder Funds |
| Reserve for life-contingent contract benefits | ||||||||
| As of December 31, | ||||||||
| ($ in millions) | 2019 | 2018 | ||||||
| Immediate fixed annuities: | ||||||||
| Structured settlement annuities | $ | 6,840 | $ | 6,701 | ||||
| Other immediate fixed annuities | 1,612 | 1,714 | ||||||
| Traditional life insurance | 2,897 | 2,808 | ||||||
| Accident and health insurance | 873 | 876 | ||||||
| Other | 78 | 109 | ||||||
| Total reserve for life-contingent contract benefits | $ | 12,300 | $ | 12,208 |
| Key assumptions generally used in calculating the reserve for life-contingent contract benefits | ||||||
| Product | Mortality | Interest rate | Estimation method | |||
| Structured settlement annuities | U.S. population with projected calendar year improvements; mortality rates adjusted for each impaired life based on reduction in life expectancy | Interest rate assumptions range from 3.8% to 7.5% | Present value of contractually specified future benefits | |||
| Other immediate fixed annuities | 1983 group annuity mortality table with internal modifications; 1983 individual annuity mortality table; Annuity 2000 mortality table with internal modifications; Annuity 2000 mortality table; 1983 individual annuity mortality table with internal modifications | Interest rate assumptions range from 0.3% to 9.0% | Present value of expected future benefits based on historical experience | |||
| Traditional life insurance | Actual company experience plus loading | Interest rate assumptions range from 2.5% to 11.3% | Net level premium reserve method using the Company’s withdrawal experience rates; includes reserves for unpaid claims | |||
| Accident and health insurance | Actual company experience plus loading | Interest rate assumptions range from 3.0% to 7.0% | Unearned premium; additional contract reserves for mortality risk and unpaid claims | |||
| Other: Variable annuity guaranteed minimum death benefits (1) | Annuity 2012 mortality table with internal modifications | Interest rate assumptions range from 2.0% to 5.8% | Projected benefit ratio applied to cumulative assessments |
| (1) | In 2006, the Company disposed of substantially all of its variable annuity business through reinsurance agreements with The Prudential Insurance Company of America, a subsidiary of Prudential Financial, Inc. (collectively “Prudential”). |
The Company records an adjustment to the reserve for life-contingent contract benefits that represents the amount by which the reserve balance would increase if the net unrealized gains in the applicable product investment portfolios were realized and reinvested at current lower interest rates, resulting in a premium deficiency. The offset to this liability is recorded as a reduction of the unrealized net capital gains included in AOCI. This liability was $126 million and zero as of December 31, 2019 and 2018, respectively.
| Contractholder funds | ||||||||
| As of December 31, | ||||||||
| ($ in millions) | 2019 | 2018 | ||||||
| Interest-sensitive life insurance | $ | 8,384 | $ | 8,229 | ||||
| Investment contracts: | ||||||||
| Fixed annuities | 8,845 | 9,681 | ||||||
| Other investment contracts | 463 | 461 | ||||||
| Total contractholder funds | $ | 17,692 | $ | 18,371 |
174 www.allstate.com
Notes to Consolidated Financial Statements 2019 Form 10-K
| Key contract provisions of contractholder funds | ||||
| Product | Interest rate | Withdrawal/surrender charges | ||
| Interest-sensitive life insurance | Interest rates credited range from 0.0% to 10.0% for equity-indexed life (whose returns are indexed to the S&P 500) and 1.0% to 6.0% for all other products | Either a percentage of account balance or dollar amount grading off generally over 20 years | ||
| Fixed annuities | Interest rates credited range from 0.5% to 7.5% for immediate annuities; (8.0)% to 10.0% for equity-indexed annuities (whose returns are indexed to the S&P 500); and 0.1% to 6.0% for all other products | Either a declining or a level percentage charge generally over ten years or less. Additionally, approximately 12.0% of fixed annuities are subject to market value adjustment for discretionary withdrawals | ||
| Other investment contracts: Guaranteed minimum income, accumulation and withdrawal benefits on variable (1) and fixed annuities and secondary guarantees on interest-sensitive life insurance and fixed annuities | Interest rates used in establishing reserves range from 1.7% to 10.3% | Withdrawal and surrender charges are based on the terms of the related interest-sensitive life insurance or fixed annuity contract |
| (1) | In 2006, the Company disposed of substantially all of its variable annuity business through reinsurance agreements with Prudential. |
| Contractholder funds activity | ||||||||||||
| For the years ended December 31, | ||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Balance, beginning of year | $ | 18,371 | $ | 19,434 | $ | 20,260 | ||||||
| Deposits | 1,091 | 1,109 | 1,130 | |||||||||
| Interest credited | 636 | 650 | 687 | |||||||||
| Benefits | (791 | ) | (844 | ) | (901 | ) | ||||||
| Surrenders and partial withdrawals | (884 | ) | (1,135 | ) | (999 | ) | ||||||
| Contract charges | (825 | ) | (824 | ) | (826 | ) | ||||||
| Net transfers from separate accounts | 10 | 6 | 5 | |||||||||
| Other adjustments | 84 | (25 | ) | 78 | ||||||||
| Balance, end of year | $ | 17,692 | $ | 18,371 | $ | 19,434 |
The Company offered various guarantees to variable annuity contractholders. In 2006, the Company disposed of substantially all of its variable annuity business through reinsurance agreements with Prudential. Liabilities for variable contract guarantees related to death benefits are included in the reserve for life-contingent contract benefits and the liabilities related to the income, withdrawal and accumulation benefits are included in contractholder funds. All liabilities for variable contract guarantees are reported on a gross basis on the balance sheet with a corresponding reinsurance recoverable asset for those contracts subject to reinsurance.
Absent any contract provision wherein the Company guarantees either a minimum return or account value upon death, a specified contract anniversary date, partial withdrawal or annuitization, variable annuity and variable life insurance contractholders bear the investment risk that the separate accounts’ funds may not meet their stated investment objectives. The account balances of variable annuity contracts’ separate accounts with guarantees included $2.68 billion and $2.47 billion of equity, fixed income and balanced mutual funds and $253 million and $245 million of money market mutual funds as of December 31, 2019 and 2018, respectively.
The Allstate Corporation 175
2019 Form 10-K Notes to Consolidated Financial Statements
The table below presents information regarding the Company’s variable annuity contracts with guarantees. The Company’s variable annuity contracts may offer more than one type of guarantee in each contract; therefore, the sum of amounts listed exceeds the total account balances of variable annuity contracts’ separate accounts with guarantees.
| ($ in millions) | As of December 31, | |||||||
| 2019 | 2018 | |||||||
| In the event of death | ||||||||
| Separate account value | $ | 2,928 | $ | 2,711 | ||||
| Net amount at risk (1) | $ | 373 | $ | 605 | ||||
| Average attained age of contractholders | 71 years | 71 years | ||||||
| At annuitization (includes income benefit guarantees) | ||||||||
| Separate account value | $ | 848 | $ | 778 | ||||
| Net amount at risk (2) | $ | 173 | $ | 264 | ||||
| Weighted average waiting period until annuitization options available | None | None | ||||||
| For cumulative periodic withdrawals | ||||||||
| Separate account value | $ | 190 | $ | 190 | ||||
| Net amount at risk (3) | $ | 13 | $ | 16 | ||||
| Accumulation at specified dates | ||||||||
| Separate account value | $ | 123 | $ | 129 | ||||
| Net amount at risk (4) | $ | 15 | $ | 26 | ||||
| Weighted average waiting period until guarantee date | 4 years | 4 years |
| (1) | Defined as the estimated current guaranteed minimum death benefit in excess of the current account balance as of the balance sheet date. |
| (2) | Defined as the estimated present value of the guaranteed minimum annuity payments in excess of the current account balance. |
| (3) | Defined as the estimated current guaranteed minimum withdrawal balance (initial deposit) in excess of the current account balance as of the balance sheet date. |
| (4) | Defined as the estimated present value of the guaranteed minimum accumulation balance in excess of the current account balance. |
The liability for death and income benefit guarantees is equal to a benefit ratio multiplied by the cumulative contract charges earned, plus accrued interest less contract excess guarantee benefit payments. The benefit ratio is calculated as the estimated present value of all expected contract excess guarantee benefits divided by the present value of all expected contract charges. The establishment of reserves for these guarantees requires the projection of future fund values, mortality, persistency and customer benefit utilization rates. These assumptions are periodically reviewed and updated. For guarantees related to death benefits, benefits represent the projected excess guaranteed minimum death benefit payments. For guarantees related to income benefits, benefits represent the present value of the minimum guaranteed annuitization benefits in excess of the projected account balance at the time of annuitization.
Projected benefits and contract charges used in determining the liability for certain guarantees are developed using models and stochastic scenarios that are also used in the development of estimated expected gross profits. Underlying assumptions for the liability related to income benefits include assumed future annuitization elections based on factors such as the extent of benefit to the potential annuitant, eligibility conditions and the annuitant’s attained age. The liability for guarantees is re-evaluated periodically, and adjustments are made to the liability balance through a charge or credit to life and annuity contract benefits.
Guarantees related to the majority of withdrawal and accumulation benefits are considered to be derivative financial instruments; therefore, the liability for these benefits is established based on its fair value.
176 www.allstate.com
Notes to Consolidated Financial Statements 2019 Form 10-K
| Summary of liabilities for guarantees | ||||||||||||||||
| ($ in millions) | Liability for guarantees related to death benefits and interest-sensitive life products | Liability for guarantees related to income benefits | Liability for guarantees related to accumulation and withdrawal benefits | Total | ||||||||||||
| Balance, December 31, 2018 (1) | $ | 308 | $ | 39 | $ | 97 | $ | 444 | ||||||||
| Less reinsurance recoverables | 111 | 35 | 39 | 185 | ||||||||||||
| Net balance as of December 31, 2018 | 197 | 4 | 58 | 259 | ||||||||||||
| Incurred guarantee benefits | 18 | — | 12 | 30 | ||||||||||||
| Paid guarantee benefits | (3 | ) | — | — | (3 | ) | ||||||||||
| Net change | 15 | — | 12 | 27 | ||||||||||||
| Net balance as of December 31, 2019 | 212 | 4 | 70 | 286 | ||||||||||||
| Plus reinsurance recoverables | 81 | 20 | 32 | 133 | ||||||||||||
| Balance, December 31, 2019 (2) | $ | 293 | $ | 24 | $ | 102 | $ | 419 | ||||||||
| Balance, December 31, 2017 (3) | $ | 262 | $ | 29 | $ | 79 | $ | 370 | ||||||||
| Less reinsurance recoverables | 87 | 25 | 34 | 146 | ||||||||||||
| Net balance as of December 31, 2017 | 175 | 4 | 45 | 224 | ||||||||||||
| Incurred guarantee benefits | 24 | — | 13 | 37 | ||||||||||||
| Paid guarantee benefits | (2 | ) | — | — | (2 | ) | ||||||||||
| Net change | 22 | — | 13 | 35 | ||||||||||||
| Net balance as of December 31, 2018 | 197 | 4 | 58 | 259 | ||||||||||||
| Plus reinsurance recoverables | 111 | 35 | 39 | 185 | ||||||||||||
| Balance, December 31, 2018 (1) | $ | 308 | $ | 39 | $ | 97 | $ | 444 |
| (1) | Included in the total liability balance as of December 31, 2018 are reserves for variable annuity death benefits of $109 million, variable annuity income benefits of $36 million, variable annuity accumulation benefits of $25 million, variable annuity withdrawal benefits of $14 million and other guarantees of $260 million. |
| (2) | Included in the total liability balance as of December 31, 2019 are reserves for variable annuity death benefits of $78 million, variable annuity income benefits of $21 million, variable annuity accumulation benefits of $18 million, variable annuity withdrawal benefits of $14 million and other guarantees of $288 million. |
| (3) | Included in the total liability balance as of December 31, 2017 are reserves for variable annuity death benefits of $85 million, variable annuity income benefits of $26 million, variable annuity accumulation benefits of $22 million, variable annuity withdrawal benefits of $12 million and other guarantees of $225 million. |
The Allstate Corporation 177
2019 Form 10-K Notes to Consolidated Financial Statements
| Note 10 | Reinsurance and Indemnification |
| Effects of reinsurance and indemnification on property and casualty premiums written and earned and life premiums and contract charges | ||||||||||||
| For the years ended December 31, | ||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Property and casualty insurance premiums written | ||||||||||||
| Direct | $ | 37,976 | $ | 35,895 | $ | 33,685 | ||||||
| Assumed | 95 | 99 | 64 | |||||||||
| Ceded | (1,117 | ) | (1,008 | ) | (1,007 | ) | ||||||
| Property and casualty insurance premiums written, net of recoverables | $ | 36,954 | $ | 34,986 | $ | 32,742 | ||||||
| Property and casualty insurance premiums earned | ||||||||||||
| Direct | $ | 37,104 | $ | 34,977 | $ | 33,221 | ||||||
| Assumed | 94 | 87 | 50 | |||||||||
| Ceded | (1,122 | ) | (1,016 | ) | (971 | ) | ||||||
| Property and casualty insurance premiums earned, net of recoverables | $ | 36,076 | $ | 34,048 | $ | 32,300 | ||||||
| Life premiums and contract charges | ||||||||||||
| Direct | $ | 2,074 | $ | 2,001 | $ | 1,894 | ||||||
| Assumed | 712 | 754 | 787 | |||||||||
| Ceded | (285 | ) | (290 | ) | (303 | ) | ||||||
| Life premiums and contract charges, net of recoverables | $ | 2,501 | $ | 2,465 | $ | 2,378 |
Property and casualty reinsurance and indemnification recoverables
Total amounts recoverable from reinsurers and indemnitors as of December 31, 2019 and 2018 were $7.02 billion and $7.27 billion, respectively, including $112 million and $111 million, respectively, related to property and casualty losses paid by the Company and billed to reinsurers and indemnitors, and $6.91 billion and $7.15 billion, respectively, estimated by the Company with respect to ceded or indemnifiable unpaid losses (including IBNR), which are not billable until the losses are paid. The allowance for uncollectible reinsurance was $60 million and $65 million as of December 31, 2019 and 2018, respectively, primarily related to reinsurance recoverables arising from the Discontinued Lines and Coverages segment. Indemnification recoverables are considered collectible based on the industry pool and facility enabling legislation.
Property and casualty programs are grouped by the following characteristics:
| 1. | Indemnification programs - industry pools, facilities or associations that are governed by state insurance statutes or regulations or the federal government. |
| 2. | Catastrophe reinsurance programs - reinsurance protection for catastrophe exposure nationwide and by specific states, as applicable. |
| 3. | Other reinsurance programs - reinsurance protection for asbestos, environmental and other liability exposures as well as commercial lines, including shared economy. |
Property and casualty reinsurance is in place for the Allstate Protection, Discontinued Lines and Coverages and Service Businesses segments. The Company purchases reinsurance after evaluating the financial condition of the reinsurer as well as the terms and price of coverage.
Indemnification programs
The Company participates in state-based industry pools or facilities mandating participation by insurers offering certain coverage in their state, including the Michigan Catastrophic Claims Association (“MCCA”), the New Jersey Property-Liability Insurance Guaranty Association (“PLIGA”), the North Carolina Reinsurance Facility (“NCRF”) and the Florida Hurricane Catastrophe Fund (“FHCF”). When the Company pays qualifying claims under the coverage indemnified by a state’s pool or facility, the Company is reimbursed for the qualifying claim losses or expenses. Each state pool or facility may assess participating companies to collect sufficient amounts to meet its total indemnification requirements. The enabling legislation for each state’s pool or facility compels the pool or facility only to indemnify participating companies for qualifying claim losses or expenses; the state pool or facility does not underwrite the coverage or take on the ultimate risk of the indemnified business. As a pass through, these pools or facilities manage the receipt of assessments paid by participating companies and payment of indemnified amounts for covered claims presented by participating companies. The Company has not had any credit losses related to these indemnification programs.
State-based industry pools or facilities
Michigan Catastrophic Claims Association The MCCA is a statutory indemnification mechanism for
178 www.allstate.com
Notes to Consolidated Financial Statements 2019 Form 10-K
member insurers’ qualifying personal injury protection claims paid for the unlimited lifetime medical benefits above the applicable retention level for qualifying injuries from automobile, motorcycle and commercial vehicle accidents. Indemnification recoverables on paid and unpaid claims, including IBNR, as of December 31, 2019 and 2018 include $5.50 billion and $5.40 billion, respectively, from the MCCA for its indemnification obligation.
The MCCA is funded by annually assessing participating member companies actively writing motor vehicle coverage in Michigan on a per vehicle basis that is currently $220 per vehicle insured. The MCCA’s calculation of the annual assessment is based upon the total of members’ actuarially determined present value of expected payments on lifetime claims by all persons expected to be catastrophically injured in that year and ultimately qualify for MCCA reimbursement, its operating expenses, and adjustments for the amount of excesses or deficiencies in prior assessments. The assessment is incurred by the Company as policies are written and recovered as a component of premiums from the Company’s customers.
The MCCA indemnifies qualifying claims of all current and former member companies (whether or not actively writing motor vehicle coverage in Michigan) for qualifying claims and claims expenses incurred while the member companies were actively writing the mandatory personal injury protection coverage in Michigan. Member companies actively writing automobile coverage in Michigan include the MCCA annual assessments in determining the level of premiums to charge insureds in the state.
As required for member companies by the MCCA, the Company reports covered paid and unpaid claims to the MCCA when estimates of loss for a reported claim are expected to exceed the retention level, the claims involve certain types of severe injuries, or there are litigation demands received suggesting the claim value exceeds certain thresholds. The retention level is adjusted upward every other MCCA fiscal year by the lesser of 6% or the increase in the Consumer Price Index. The retention level will be $580 thousand per claim for the fiscal two-years ending June 30, 2021 compared to $555 thousand per claim for the fiscal two-years ending June 30, 2019.
The MCCA is obligated to fund the ultimate liability of member companies’ qualifying claims and claim expenses. The MCCA does not underwrite the insurance coverage or hold any underwriting risk.
The MCCA indemnifies members as qualifying claims are paid and billed by members to the MCCA. Unlimited lifetime covered losses result in significant levels of ultimate incurred claim reserves being recorded by member companies along with offsetting indemnification recoverables. Disputes with claimants over coverage on certain reported claims can result in additional losses, which may be recoverable from the MCCA, excluding litigation expenses. There is currently no method by which insurers are able to
obtain the benefit of managed care programs to reduce claims costs through the MCCA.
The MCCA annual assessments fund current operations and member company reimbursements. The MCCA prepares statutory-basis financial statements in conformity with accounting practices prescribed or permitted by the State of Michigan Department of Insurance and Financial Services (“MI DOI”). The MI DOI has granted the MCCA a statutory permitted practice that expires in June 30, 2022 to discount its liabilities for loss and loss adjustment expense. As of June 30, 2019, the date of its most recent annual financial report, the MCCA had cash and invested assets of $21.83 billion and an accumulated surplus of $1.28 billion. The permitted practice reduced the accumulated deficit by $39.64 billion.
New Jersey Property-Liability Insurance Guaranty Association PLIGA serves as the statutory administrator of the Unsatisfied Claim and Judgment Fund (“UCJF”), Workers’ Compensation Security Fund and the New Jersey Surplus Lines Insurance Guaranty Fund.
In addition to its insolvency protection responsibilities, PLIGA reimburses insurers for unlimited excess medical benefits (“EMBs”) paid in connection with personal injury protection claims in excess of $75,000 for policies issued or renewed prior to January 1, 1991, and limited EMB claims in excess of $75,000 and capped at $250,000 for policies issued or renewed on or after January 1, 1991, to December 31, 2003.
A significant portion of the incurred claim reserves and the recoverables can be attributed to a small number of catastrophic claims. Assessments paid to PLIGA for the EMB program totaled $8.1 million in 2019. The amounts of paid and unpaid recoverables as of December 31, 2019 and 2018 were $446 million and $461 million, respectively.
PLIGA annually assesses all admitted property and casualty insurers writing covered lines in New Jersey for PLIGA indemnification and expenses. PLIGA assessments may be recouped as a surcharge on premiums collected. PLIGA does not ultimately retain underwriting risk as it assesses member companies for their expected qualifying losses to provide funding for payment of its indemnification obligation to member companies for their actual losses. As a pass through, PLIGA facilitates these transactions of receipt of assessments paid by member companies and payment to member companies for covered claims presented by them for indemnification. As of December 31, 2018, the date of its most recent annual financial report, PLIGA had a fund balance of $250 million.
As statutory administrator of the UCJF, PLIGA provides compensation to qualified claimants for personal injury protection, bodily injury, or death caused by private passenger automobiles operated by uninsured or “hit and run” drivers. The UCJF also provides private passenger pedestrian personal injury protection benefits when no other coverage is available.
The Allstate Corporation 179
2019 Form 10-K Notes to Consolidated Financial Statements
PLIGA annually collects a UCJF assessment from all admitted property and casualty insurers writing motor vehicle liability insurance in New Jersey for UCJF indemnification and expenses. UCJF assessments can be expensed as losses recoverable in rates as appropriate. As of December 31, 2018, the date of its most recent annual financial report, the UCJF fund had a balance of $41 million.
North Carolina Reinsurance Facility The NCRF provides automobile liability insurance to drivers that insurers are not otherwise willing to insure. All insurers licensed to write automobile insurance in North Carolina are members of the NCRF. Premiums, losses and expenses are assigned to the NCRF. North Carolina law allows the NCRF to recoup operating losses for certain insureds through a surcharge to policyholders. As of September 30, 2019, the NCRF reported a deficit of $110 million in members’ equity. The NCRF implemented a loss recoupment surcharge on all private passenger and commercial fleet policies effective October 1, 2019, through September 30, 2020. Member companies are assessed the recoupment surcharge. The loss recoupment surcharge will be adjusted on October 1, 2020 and discontinued once losses are recovered. The NCRF results are shared by the member companies in proportion to their respective North Carolina automobile liability writings. For the fiscal quarter ending September 30, 2019, net income was $105 million, including $1.10 billion of earned premiums, $271 million of certain private passenger auto risk recoupment and $137 million of member loss recoupments. As of December 31, 2019, the NCRF recoverables on paid claims is $9.4 million and recoverables on unpaid claims is $69.1 million. Paid recoverable balances, if covered, are typically settled within sixty days of monthly filing.
Florida Hurricane Catastrophe Fund Allstate subsidiaries Castle Key Insurance Company (“CKIC”) and Castle Key Indemnity Company (“CKI”, and together with CKIC, “Castle Key”) participate in the mandatory coverage provided by the FHCF and therefore have access to reimbursement for certain qualifying Florida hurricane losses from the FHCF. Castle Key has exposure to assessments and pays annual premiums to the FHCF for this reimbursement protection. The FHCF has the authority to issue bonds to pay its obligations to participating insurers in excess of its capital balances. Payment of these bonds is funded by emergency assessments on all property and casualty premiums in the state, except workers’ compensation, medical malpractice, accident and health insurance and policies written under the National Flood Insurance Program (“NFIP”). The FHCF emergency assessments are limited to 6% of premiums per year beginning the first year in which reimbursements require bonding, and up to a total of 10% of premiums per year for assessments in the second and subsequent years, if required to fund additional bonding. The FHCF issued $2.00 billion in pre-event bonds in 2013 to build its capacity to reimburse member companies’ claims. The FHCF plans to fund these pre-event bonds through current FHCF cash flows. Pursuant to an Order issued by the Florida Office of Insurance Regulation (“FL OIR”), the
emergency assessment is zero for all policies issued or renewed on or after January 1, 2015.
Annual premiums earned and paid under the FHCF agreement were $9 million, $10 million and $11 million in 2019, 2018 and 2017, respectively. Qualifying losses were $33 million, $143 million and $19 million in 2019, 2018 and 2017, respectively. The Company has access to reimbursement provided by the FHCF for 90% of qualifying personal property losses that exceed its current retention of $52 million for the two largest hurricanes and $17 million for other hurricanes, up to a maximum total of $145 million, effective from June 1, 2019 to May 31, 2020. The amounts recoverable from the FHCF totaled $52 million and $104 million as of December 31, 2019 and 2018, respectively.
Federal Government - National Flood Insurance Program NFIP is a program administered by the Federal Emergency Management Agency (“FEMA”) whereby the Company sells and services NFIP flood insurance policies as an agent of FEMA and receives fees for its services. The Company is fully indemnified for claims and claim expenses and does not retain any ultimate risk for the indemnified business. The federal government is obligated to pay all claims and certain allocated loss adjustment expenses in accordance with the arrangement.
Congressional authorization for the NFIP is periodically evaluated and may be subjected to freezes, including when the federal government experiences a shutdown. FEMA has a NFIP reinsurance program to manage the future exposure of the NFIP through the transfer of risk to private reinsurance companies and capital market investors. Congress is evaluating the funding of the program as well as considering reforms to the program that would be incorporated in legislation to reauthorize the NFIP.
The amounts recoverable as of December 31, 2019 and 2018 were $25 million and $31 million, respectively. Premiums earned under the NFIP include $258 million, $258 million and $263 million in 2019, 2018 and 2017, respectively. Qualifying losses incurred include $150 million, $118 million and $1.12 billion in 2019, 2018 and 2017, respectively.
Catastrophe reinsurance
The Company’s reinsurance program is designed to provide reinsurance protection for catastrophes resulting from multiple perils including hurricanes, windstorms, hail, tornadoes, earthquakes, wildfires, and fires following earthquakes.
| • | The majority of the Company’s program comprises multi-year contracts, primarily placed in the traditional reinsurance market, such that generally one-third of the program is renewed every year. |
| • | Coverage is generally purchased on a broad geographic, product line and multiple peril loss basis. |
| • | The Company purchases reinsurance from traditional reinsurance companies as well as the insurance linked securities market. |
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| • | Florida property and New Jersey property and auto are each covered by separate agreements, as the risk of loss is different and the Company’s subsidiaries operating in these states are separately capitalized. |
The Company has not experienced credit losses on its catastrophe reinsurance programs. The Company ceded premiums earned of $376 million, $343 million and $344 million under catastrophe reinsurance agreements in 2019, 2018 and 2017, respectively. The Company has the following catastrophe reinsurance agreements in effect as of December 31, 2019:
The Nationwide Excess Catastrophe Reinsurance Program (the “Nationwide Program”) provides $4.86 billion of reinsurance coverage subject to a $500 million retention and is subject to the amount of reinsurance placed in each of its nine layers.
Per Occurrence and Aggregate Excess Agreements, include occurrence coverage in contracts from both the traditional reinsurance and insurance linked securities (“ILS”) markets, while aggregate protection is included in two contracts supported by the ILS market. The agreements provide multi-line catastrophe coverage in every state except Florida, where coverage is only provided for personal lines automobile.
Layer 1 through Layer 5 - Per Occurrence Excess Agreement For the June 1, 2019 to May 31, 2020 term, coverage for each of layers one through five is placed in the traditional reinsurance market with each layer comprising three contracts. Each contract provides one-third of 95% of the total layer limit expiring May 31, 2020, May 31, 2021 and May 31, 2022, respectively. One-third of the limit provided by each of layers one through five includes coverage for New Jersey. Two-thirds of the limit provided by each of layers one through five also includes coverage for the Company’s commercial lines property and automobile catastrophe losses. The contracts for each of layers one through five include one reinstatement of limits per year, with premium required. Reinsurance premiums are subject to redetermination for exposure changes on an annual basis.
Layer 6 – Per Occurrence Excess Agreement The layer six contract placed in the traditional reinsurance market contains comparable contract terms and conditions as layers one through five, with New Jersey and commercial lines property and automobile catastrophe losses included in the definition of subject loss. The layer six contract provides a $324 million limit, is 95% placed, and expires May 31, 2022. This contract contains a variable reset option, which the ceding entities may elect to invoke at each anniversary and which allows for the annual adjustment of the attachment and exhaustion level within specified limits. The layer six contract contains one reinstatement of limits over its seven-year term with premium required. As of July 1, 2019, a reinstatement of limits has not been executed under this contract. Reinsurance premiums for this contract are subject to redetermination for exposure changes on an annual basis.
Layer 7 – Per Occurrence Excess and Aggregate Agreements The seventh layer consists of four contracts:
| • | Seven-Year Term |
| • | 2019-1 Excess Catastrophe Reinsurance |
| • | Wrap Fill Excess Catastrophe Reinsurance |
| • | 2017-1 Excess Catastrophe Reinsurance |
Seven-Year Term Contract, which is placed in the traditional reinsurance market contains comparable contract terms and conditions as layer six. The contract provides a $446 million limit and is 29.37% placed, and expires May 31, 2022. The contract contains a variable reset option which allows for the annual adjustment of the attachment and exhaustion level within specified limits. The variable reset option requires a premium adjustment. The contract contains one reinstatement of limits over its seven-year term with premium required. Reinsurance premiums for all contracts are subject to redetermination for exposure changes on an annual basis.
2019-1 Excess Catastrophe Reinsurance Contract reinsures personal lines property and automobile excess losses in 49 states and the District of Columbia, excluding Florida, caused by named storms, earthquakes and fire following earthquakes, severe weather, wildfires, and other naturally occurring or man-made events declared to be a catastrophe by the Company. This contract is placed with Sanders Re II Ltd. which obtained funding from the ILS market to collateralize the contract’s limit. The contract reinsures business located in the covered territory and arising out of covered events. The contract’s risk period began April 1, 2019 and terminates on March 31, 2023. The contract provides a $400 million limit and is 75% placed, during its four-year term which can be used on a per occurrence or an annual aggregate basis. For a qualifying loss occurrence, the contract provides 75% of $400 million in reinsurance limits in excess of a minimum $2.75 billion retention for the April 1, 2019 to March 31, 2020 period. The New Jersey Excess Catastrophe Agreement, layer six, the Seven-Year Term Contract for layer seven, and the 5% co-participation inure to the benefit of this contract for events that exceed the retention. As a result, while those layers are fully intact, the contract would begin to pay subject losses in excess of $3.07 billion.
The contract also provides an annual aggregate limit of 75% of $400 million in reinsurance limits between a $3.54 billion to $3.94 billion layer subject to an annual retention of $3.54 billion. For each annual period beginning April 1, the Company declared catastrophes occurring during such annual period can be aggregated to erode the aggregate retention and qualify for coverage under the aggregate limit. Reinsurance recoveries from and including layers one through seven of the Nationwide Program and the New Jersey Excess Catastrophe Agreement inure to the benefit of the annual aggregate layer.
Reinsurance recoveries collected under the per occurrence limit of this contract are not eligible for cession under the annual aggregate limit of this
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contract. Reinsurance recoveries for all loss occurrences and annual aggregate losses qualifying for coverage during the contract’s four-year risk period are limited to the Company’s ultimate net loss from covered events and subject to the contract’s $400 million limit, 75% placed. The contract contains a variable reset option, which the ceding entities may invoke for risk periods subsequent to the first risk period and which allows for the annual adjustment of the contract’s attachment and exhaustion levels within specified limits.
Wrap Fill Excess Catastrophe Reinsurance Contract provides a $200 million limit in excess of a minimum $2.75 billion retention, is 100% placed in the traditional market, and expires March 31, 2020. This layer is structured to cover gaps around the traditional Seven-Year Term Contract and the Sanders Re II Ltd. 2019-1 contract. The contract provides additional gap coverage as the layer shifts down in attachment, subject to the $2.75 billion minimum retention level as lower layer limits are exhausted. A retention co-participation of 5% for a layer of $1.61 billion in excess of $2.75 billion is deemed in place and inures to the benefit of this contract. Recoveries from contracts in layers six and seven, with the exception of Sanders Re Ltd. 2017-1, inure to the benefit of this contract, as this multiple peril contract provides coverage for perils and subject business not reinsured in portions of layers seven. While those layers are fully intact, the contract would begin to pay subject losses in excess of $3.07 billion. This contract does not include a reinstatement of limits.
2017-1 Excess Catastrophe Reinsurance Contract reinsures personal lines property and automobile excess losses in 49 states and the District of Columbia, excluding the State of Florida, caused by named storms, earthquakes and fire following earthquakes, severe thunderstorms, winter storms, volcanic eruptions, and meteorite impacts. This contract is placed with Sanders Re Ltd., which obtained funding from the ILS market to collateralize the contract’s limit. The contract reinsures actual losses to personal lines property business located in the covered territory and arising out of a covered event. Amounts payable for automobile losses are based on insured industry losses as reported by Property Claim Services (“PCS”) and further adjusted to account for the Company’s auto exposures in reinsured areas. Reinsurance recoveries under the contract are limited to the Company’s ultimate net loss from a covered event subject to the contract’s limit. The contract’s risk period began March 31, 2017 and terminates on November 30, 2021. The contract provides a $375 million limit in excess of $2.75 billion retention. The New Jersey Excess Catastrophe Agreement, layer six, the Seven-Year Term Contract for layer seven, the Wrap Fill contract, and the 5% co-participation inure to the benefit of this contract for events that exceed the retention. As a result, while those layers are fully intact, the contract would begin to pay subject losses in excess of $3.69 billion.
The contract contains a variable reset option, which the ceding entities may invoke for risk periods subsequent to the first risk period and which allows for
the annual adjustment of the contract’s attachment and exhaustion levels within specified limits. The variable reset option requires a premium adjustment. The contract does not include a reinstatement of limits.
To summarize the order of operations and inuring protection for the seventh layer for an occurrence loss, for losses below $3.40 billion, the portion of the seventh layer placed in the traditional market would not be enacted. Once the sixth layer is exhausted, the co-participation of 5% would apply and then the 2019-1 Excess Catastrophe Reinsurance contract and Wrap Fill contract, dependent on the subject business contributing to the per occurrence loss. For losses greater than the $3.40 billion retention, the portions of the seventh layer placed in the traditional market would apply first as they inure to the benefit of the portions of the seventh layer placed in the ILS market. This would be followed by the co-participation of 5%, the 2019-1 Excess Catastrophe Reinsurance Contract, the Wrap Fill, and the 2017-1 Excess Catastrophe Reinsurance Contract, dependent on the per occurrence loss.
Layer 8 – Per Occurrence Excess Agreement – Gap Fill Excess Catastrophe Reinsurance Contract provides a $219 million limit in excess of a $2.75 billion retention, is 100% placed in the traditional market, and expires May 31, 2020. The contract provides additional gap coverage as the layer shifts down to the $2.75 billion retention level as lower layers are exhausted. A retention co-participation of 5% for a layer of $1.61 billion in excess of $2.75 billion is deemed in place and inures to the benefit of this contract. Recoveries from contracts in layers six and seven inure to the benefit of this contract, as this multiple peril contract provides coverage for perils and subject business not reinsured in portions of layers seven. While all inuring contracts are fully in place, this contract would begin to cover an occurrence subject loss in excess of $4.13 billion. This contract does not include a reinstatement of limits.
Layer 9 – Per Occurrence and Aggregate Excess Agreement – 2018-1 Excess Catastrophe Reinsurance Contract reinsures personal lines property and automobile excess catastrophe losses in 49 states and the District of Columbia, excluding the State of Florida, caused by named storms, earthquakes and fire following earthquakes, severe weather, wildfires, and other naturally occurring or man-made events declared to be a catastrophe by the Company. This contract is placed with Sanders Re Ltd., which obtained funding from the ILS market to collateralize the contract’s limit. The contract reinsures business located in the covered territory and arising out of a covered event. The contract’s risk period began April 1, 2018 and terminates on March 31, 2022. The contract provides one limit of $500 million during its four-year term, which can be used on a per occurrence or aggregate basis. For each qualifying loss occurrence, the contract provides 100% of $500 million in reinsurance limits, between a $4.36 billion to $4.86 billion layer for the April 1, 2019 to March 31, 2020 period.
The contract also provides an aggregate limit of 100% of $500 million in reinsurance limits between a
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$3.94 billion to $4.44 billion. For each annual period beginning April 1, the Company declared catastrophes occurring during such annual period can be aggregated to erode the aggregate retention and qualify for coverage under the aggregate limit. Reinsurance recoveries from and including layers one through seven of the Nationwide Program and the New Jersey Excess Catastrophe Agreement inure to the benefit of the annual aggregate layer.
Reinsurance recoveries collected under the per occurrence limit of this contract are not eligible for cession under the aggregate limit of this contract. Reinsurance recoveries for all loss occurrences and aggregate losses qualifying for coverage during the contract’s four-year risk period are limited to the Company’s ultimate net loss from covered events and subject to the contract’s $500 million limit. The contract does not include a reinstatement of limits.
Other catastrophe reinsurance programs – The following programs are designed separately from the Nationwide Program to address distinct exposures in certain states and markets.
The Company has a separate reinsurance program designed to cover personal lines property policies in Florida written through Castle Key, its separately capitalized wholly-owned subsidiaries.
Florida Excess Catastrophe Reinsurance Agreement comprises five contracts, as described below, which reinsures Castle Key for personal lines property excess catastrophe losses in Florida. For the June 1, 2019 to May 31, 2020 term, the agreement includes two contracts placed in the traditional market, Castle Key’s reimbursement contracts with the Florida Hurricane Catastrophe Fund (“Mandatory FHCF contracts”), and the Sanders Re 2017-2 Contract (“Sanders Re 2017-2”) placed in the ILS markets.
Below FHCF Contract reinsures personal lines property excess catastrophe losses caused by multiple perils in Florida. The contract provides three separate limits of $34 million in excess of a $20 million retention, each occurrence, and is 100% placed. The contract includes two reinstatements of limits. The first reinstatement of limits is prepaid and the second or final reinstatement requires additional premium. Only the portion of the limit utilized to indemnify losses from an event mandatorily reinstates; the remaining reinstatement limit remains available and will be used as future events erode the per occurrence contract limit. Reinsurance premium is subject to redetermination for exposure changes.
Mandatory FHCF Contracts indemnify qualifying personal lines property losses caused by storms the National Hurricane Center declares to be hurricanes. The contracts provide $151 million of limits in excess of a $54 million provisional retention and are 90% placed (or $136 million in excess of a $54 million provisional retention), and also include reimbursement of up to 10% of eligible loss adjustment expenses, which is part of and not in addition to the reinsurance limit provided, with no reinstatement of limits. For each of the two largest hurricanes, the provisional retention is $54 million and a retention equal to one-third of that
amount, or approximately $18 million, is applicable to all other hurricanes for the season beginning June 1, 2019. The limit and retention of the Mandatory FHCF Contracts are subject to remeasurement based on June 30, 2019 exposure data. In addition, the FHCF’s retention is subject to adjustment upward or downward to an actual retention based on exposures submitted to the FHCF by all participants.
Excess contract reinsures personal lines property excess catastrophe losses caused by multiple perils in Florida. The contract is a two-year term contract effective June 1, 2018 to May 31, 2020 and provides $249 million of reinsurance limits each contract year. For the June 1, 2019 to May 31, 2020 term, the contract provides one limit of $249 million in excess of a $20 million retention and is 100% placed. Recoveries from the Below FHCF contract and Mandatory FHCF contracts inure to the benefit of this contract. The contract provides reinsurance limits above the Mandatory FHCF Contracts, for CKIC’s and CKI’s 10% co-participation in the Mandatory FHCF Contracts, and for loss occurrences not subject to reimbursement under the Mandatory FHCF Contracts which only reinsure losses arising out of hurricanes. The contract does not include a reinstatement of limits. Reinsurance premium is subject to redetermination for exposure changes.
Sanders Re 2017-2 is a three-year term contract with a risk period effective June 1, 2017 through May 31, 2020. It reinsures qualifying personal lines property losses caused by a named storm event, a severe thunderstorm event, an earthquake event, a wildfire event, a volcanic eruption event, or a meteorite impact event in Florida as events declared by various reporting agencies, including PCS and as defined in the contract. Should PCS cease to report on severe thunderstorms, then such event will be deemed a severe thunderstorm event if Castle Key has assigned a catastrophe code to such severe thunderstorm. Sanders Re obtained funding from the ILS market to provide collateral equal to the contract’s limit.
The contract provides limits of $200 million in excess of a $20 million retention and in excess of “stated reinsurance” and is 100% placed. For the June 1, 2019 to May 31, 2020 risk period, stated reinsurance is defined to include the Below FHCF contract, the Mandatory FHCF contracts, which are deemed to exhaust due to loss occurrences subject to the non-FHCF contracts, and the Excess contract. Stated reinsurance is deemed to be provided on a multiple peril basis under the terms of the non-FHCF contracts and includes an erosion feature, which provides that upon the exhaustion of a portion of the stated reinsurance, coverage under the Sanders Re contract shall be concurrently placed above and contiguous to the unexhausted portion of the stated reinsurance, if any. The Sanders Re 2017-2 contract contains a variable reset option, which Castle Key may invoke for risk periods subsequent to the first risk period and which allows for the annual adjustment of the contract’s attachment and exhaustion levels. The variable reset option requires a premium adjustment.
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The contract does not contain a reinstatement of limits.
The Company’s New Jersey, Kentucky, Florida and Southeast States and California reinsurance agreements are described below.
New Jersey Excess Catastrophe Reinsurance Agreement comprises two existing contracts and a newly placed contract that reinsures personal lines property and automobile excess catastrophe losses in New Jersey caused by multiple perils. The placed contracts effective June 1, 2018 and June 1, 2019 include coverage for commercial lines property and automobile (physical damage only) catastrophe losses.
The contracts expire May 31, 2020, May 31, 2021 and May 31, 2022, and provide 31.67%, 31.67% and 31.66%, respectively, of $400 million of limits in excess of a $145 million retention, a $150 million retention, and a $150 million retention, respectively. Each contract includes one reinstatement of limits per contract year with premium due. The reinsurance premium and retention are subject to redetermination for exposure changes on an annual basis.
Kentucky Earthquake Excess Catastrophe Reinsurance Contract is a three-year contract that reinsures personal lines property losses in Kentucky caused by earthquakes and fire following earthquakes. The contract expires May 31, 2020 and provides three limits of $28 million in excess of a $2 million retention, with two limits available in any one contract year, and is 95% placed. The reinsurance premium and retention are not subject to redetermination for exposure changes.
Florida and Southeast Auto Aggregate Excess Catastrophe Contract is a one-year term contract effective June 1, 2019 to May 31, 2020. This contract provides a single reinsurance limit at 80% of $250 million, subject to a $250 million aggregate retention, for catastrophe losses to personal lines and commercial lines automobile business (physical damage only) arising out of multiple perils and provided such losses arise out of a company declared catastrophe and result in a qualifying loss in the State of Florida. For these qualifying catastrophe events, coverage is also provided for losses to personal lines and commercial lines automobile business (physical damage only) in Alabama, Georgia, Louisiana, Mississippi, North Carolina, and/or South Carolina. The contract does not include a reinstatement of limits.
Excess & Surplus (E&S) Earthquake Contract is a three-year contract that reinsures personal lines property catastrophe losses in California caused by the peril of earthquakes and is insured by the Company’s excess and surplus lines insurer. The contract reinsures only shake damage resulting from the earthquake peril. The contract is effective July 1, 2018 and expires June 30, 2021, both days inclusive, and provides reinsurance on a 100% quota share basis with
no retention. The contract allows for cession of policies providing earthquake coverage as long as the total amount of in-force building limits provided by those policies does not exceed $400 million. This $400 million cap limits the policies that are covered by the reinsurance contract and not the amount of loss eligible for cession, which includes losses to dwellings, other structures, personal property and additional living expenses on policies covered by this program. As of December 31, 2019, the $400 million cap which serves to limit cessions to the contract has not been exceeded.
Other reinsurance programs
The Company’s other reinsurance programs relate to asbestos, environmental, and other liability exposures and commercial lines, including shared economy. These programs include reinsurance recoverables of $158 million and $165 million from Lloyd’s of London as of December 31, 2019 and 2018, respectively. Excluding Lloyd’s of London, the largest reinsurance recoverable balance the Company had outstanding was $115 million and $37 million from Aleka Insurance Inc. as of December 31, 2019 and 2018, respectively.
Lloyd’s of London, through the creation of Equitas Limited (“Equitas”), implemented a restructuring to solidify its capital base and to segregate claims for years prior to 1993. In 2007, Berkshire Hathaway’s subsidiary, National Indemnity Company, assumed responsibility for the Equitas’ claim liabilities through a loss portfolio transfer reinsurance agreement and continues to runoff the Equitas’ claims.
Life and annuity reinsurance recoverables
The Company reinsures certain life insurance and annuity risks to other insurers primarily under yearly renewable term, coinsurance, modified coinsurance and coinsurance with funds withheld agreements. These agreements result in a passing of the agreed-upon percentage of risk to the reinsurer in exchange for negotiated reinsurance premium payments. Modified coinsurance and coinsurance with funds withheld are similar to coinsurance, except that the cash and investments that support the liability for contract benefits are not transferred to the assuming company and settlements are made on a net basis between the companies.
For certain term life insurance policies issued prior to October 2009, the Company ceded up to 90% of the mortality risk depending on the year of policy issuance under coinsurance agreements to a pool of fourteen unaffiliated reinsurers. Effective October 2009, mortality risk on term business is ceded under yearly renewable term agreements under which the Company cedes mortality in excess of its retention, which is consistent with how the Company generally reinsures its permanent life insurance business.
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| Retention limits by period of policy issuance | ||
| Period | Retention limits | |
| April 2015 through current | Single life: $2 million per life Joint life: no longer offered | |
| April 2011 through March 2015 | Single life: $5 million per life, $3 million age 70 and over, and $10 million for contracts that meet specific criteria Joint life: $8 million per life, and $10 million for contracts that meet specific criteria | |
| July 2007 through March 2011 | $5 million per life, $3 million age 70 and over, and $10 million for contracts that meet specific criteria | |
| September 1998 through June 2007 | $2 million per life, in 2006 the limit was increased to $5 million for instances when specific criteria were met | |
| August 1998 and prior | Up to $1 million per life |
In addition, the Company has used reinsurance to effect the disposition of certain blocks of business. The Company had reinsurance recoverables of $1.29 billion and $1.36 billion as of December 31, 2019 and
2018, respectively, due from Prudential related to the disposal of substantially all of its variable annuity business that was effected through reinsurance agreements.
| Amounts ceded to Prudential | ||||||||||||
| As of December 31, | ||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Premiums and contract charges | $ | 65 | $ | 72 | $ | 76 | ||||||
| Contract benefits | 4 | 87 | 7 | |||||||||
| Interest credited to contractholder funds | 19 | 20 | 20 | |||||||||
| Operating costs and expenses | 12 | 14 | 15 |
As of December 31, 2019 and 2018, the Company had reinsurance recoverables of $112 million and $118 million, respectively, due from subsidiaries of Citigroup (Triton Insurance and American Health and Life Insurance) and Scottish Re (U.S.), Inc. in connection with the disposition of substantially all of the direct response distribution business in 2003.
As of December 31, 2019, the Company had $70 million of reinsurance recoverables, net of an allowance for estimated uncollectible amounts, related to Scottish Re (U.S.), Inc. On December 14, 2018, the Delaware Insurance Commissioner placed Scottish Re (U.S.), Inc. under regulatory supervision. On March 6, 2019, the Chancery Court of the State of Delaware entered a Rehabilitation and Injunction Order (the “Rehabilitation Order”) in response to a petition filed by the Insurance Commissioner (the “Petition”). Pursuant to the Petition, it is expected that Scottish Re (U.S.), Inc. will submit a Plan of Rehabilitation. The Company joined in a joint motion filed on behalf of several affected parties asking the court to allow a specified amount of offsetting claim payments and losses against premiums remitted to Scottish Re (U.S.), Inc. The Company also filed a separate motion related to the reimbursement of claim payments where Scottish
Re (U.S.), Inc. is also acting as administrator. The Court has not yet ruled on either of these motions. In the interim, the Company and several other affected parties have been permitted to exercise certain setoff rights while the parties address any potential disputes. The Company continues to monitor Scottish Re (U.S.), Inc. for future developments and will reevaluate its allowance for uncollectible amounts as new information becomes available.
The Company is the assuming reinsurer for Lincoln Benefit Life Company’s (“LBL’s”) life insurance business sold through the Allstate agency channel and LBL’s payout annuity business in force prior to the sale of LBL on April 1, 2014. Under the terms of the reinsurance agreement, the Company is required to have a trust with assets greater than or equal to the statutory reserves ceded by LBL to the Company, measured on a monthly basis. As of December 31, 2019, the trust held $6.25 billion of investments, which are reported in the Consolidated Statement of Financial Position.
As of December 31, 2019, the gross life insurance in force was $449.20 billion of which $74.02 billion was ceded to the unaffiliated reinsurers.
| Reinsurance recoverables on paid and unpaid benefits | ||||||||
| As of December 31, | ||||||||
| ($ in millions) | 2019 | 2018 | ||||||
| Annuities | $ | 1,305 | $ | 1,381 | ||||
| Life insurance | 749 | 776 | ||||||
| Other | 133 | 142 | ||||||
| Total | $ | 2,187 | $ | 2,299 |
As of both December 31, 2019 and 2018, approximately 93% of the reinsurance recoverables are due from companies rated A- or better by S&P.
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| Note 11 | Deferred Policy Acquisition and Sales Inducement Costs |
| Deferred policy acquisition costs activity | ||||||||||||
| For the years ended December 31, | ||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Balance, beginning of year | $ | 4,784 | $ | 4,191 | $ | 3,954 | ||||||
| SquareTrade acquisition | — | — | 66 | |||||||||
| Acquisition costs deferred | 5,622 | 5,663 | 5,001 | |||||||||
| Amortization charged to income | (5,533 | ) | (5,222 | ) | (4,784 | ) | ||||||
| Effect of unrealized gains and losses | (174 | ) | 152 | (46 | ) | |||||||
| Balance, end of year | $ | 4,699 | $ | 4,784 | $ | 4,191 |
| Deferred sales inducement costs activity (1) | ||||||||||||
| For the years ended December 31, | ||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Balance, beginning of year | $ | 34 | $ | 36 | $ | 40 | ||||||
| Amortization charged to income | (5 | ) | (4 | ) | (4 | ) | ||||||
| Effect of unrealized gains and losses | (2 | ) | 2 | — | ||||||||
| Balance, end of year | $ | 27 | $ | 34 | $ | 36 |
| (1) | Deferred sales inducement costs primarily relate to fixed annuities and interest-sensitive life contracts and are recorded as part of other assets on the Consolidated Statements of Financial Position. |
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| Note 12 | Capital Structure |
| Total debt outstanding | ||||||||
| As of December 31, | ||||||||
| ($ in millions) | 2019 | 2018 | ||||||
| 7.450% Senior Notes, due 2019 (1) | $ | — | $ | 317 | ||||
| Floating Rate Senior Notes, due 2021(1) | 250 | 250 | ||||||
| Floating Rate Senior Notes, due 2023 (1) | 250 | 250 | ||||||
| 3.150% Senior Notes, due 2023 (1) | 500 | 500 | ||||||
| Due after one year through five years | 1,000 | 1,317 | ||||||
| 3.280% Senior Notes, due 2026 (1) | 550 | 550 | ||||||
| Due after five years through ten years | 550 | 550 | ||||||
| 6.125% Senior Notes, due 2032 (1) | 159 | 159 | ||||||
| 5.350% Senior Notes due 2033 (1) | 323 | 323 | ||||||
| 5.550% Senior Notes due 2035 (1) | 546 | 546 | ||||||
| 5.950% Senior Notes, due 2036 (1) | 386 | 386 | ||||||
| 6.900% Senior Debentures, due 2038 | 165 | 165 | ||||||
| 5.200% Senior Notes, due 2042 (1) | 62 | 62 | ||||||
| 4.500% Senior Notes, due 2043 (1) | 500 | 500 | ||||||
| 4.200% Senior Notes, due 2046 (1) | 700 | 700 | ||||||
| 3.850% Senior Notes, due 2049 | 500 | — | ||||||
| 5.100% Subordinated Debentures, due 2053 | 500 | 500 | ||||||
| 5.750% Subordinated Debentures, due 2053 | 800 | 800 | ||||||
| 6.500% Junior Subordinated Debentures, due 2067 | 500 | 500 | ||||||
| Due after ten years | 5,141 | 4,641 | ||||||
| Long-term debt total principal | 6,691 | 6,508 | ||||||
| Debt issuance costs | (60 | ) | (57 | ) | ||||
| Total long-term debt | 6,631 | 6,451 | ||||||
| Short-term debt (2) | — | — | ||||||
| Total debt | $ | 6,631 | $ | 6,451 |
| (1) | Senior Notes, with the exception of Senior Floating Notes (as defined below), are subject to redemption at the Company’s option in whole or in part at any time at the greater of either 100% of the principal amount plus accrued and unpaid interest to the redemption date or the discounted sum of the present values of the remaining scheduled payments of principal and interest and accrued and unpaid interest to the redemption date. |
| (2) | The Company classifies any borrowings which have a maturity of twelve months or less at inception as short-term debt. |
| Debt maturities for each of the next five years and thereafter | ||||
| ($ in millions) | ||||
| 2020 | $ | — | ||
| 2021 | 250 | |||
| 2022 | — | |||
| 2023 | 750 | |||
| 2024 | — | |||
| Thereafter | 5,691 | |||
| Total long-term debt principal | $ | 6,691 |
On May 16, 2019, the Company repaid $317 million of 7.450% Senior Notes, Series B, at maturity.
On June 10, 2019, the Company issued $500 million of 3.850% Senior Notes due 2049. Interest on the Senior Notes is payable semi-annually in arrears on February 10 and August 10 of each year, beginning on February 10, 2020. The Senior Notes are redeemable at any time at the applicable redemption price prior to
the maturity date. The proceeds of this issuance are used for general corporate purposes.
The Subordinated Debentures may be redeemed (i) in whole at any time or in part from time to time on or after January 15, 2023 for the 5.100% Subordinated Debentures and August 15, 2023 for the 5.750% Subordinated Debentures at their principal amount plus accrued and unpaid interest to, but excluding, the date of redemption; provided that if the Subordinated Debentures are not redeemed in whole, at least $25 million aggregate principal amount must remain outstanding, or (ii) in whole, but not in part, prior to January 15, 2023 for the 5.100% Subordinated Debentures and August 15, 2023 for the 5.750% Subordinated Debentures, within 90 days after the occurrence of certain tax and rating agency events, at their principal amount or, if greater, a make-whole redemption price, plus accrued and unpaid interest to, but excluding, the date of redemption. The 5.750% Subordinated Debentures have this make-whole redemption price provision only when a reduction of equity credit assigned by a rating agency has occurred.
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Interest on the 5.100% Subordinated Debentures is payable quarterly at the stated fixed annual rate to January 14, 2023, or any earlier redemption date, and then at an annual rate equal to the three-month LIBOR plus 3.165%. Interest on the 5.750% Subordinated Debentures is payable semi-annually at the stated fixed annual rate to August 14, 2023, or any earlier redemption date, and then quarterly at an annual rate equal to the three-month LIBOR plus 2.938%. The Company may elect to defer payment of interest on the Subordinated Debentures for one or more consecutive interest periods that do not exceed five years. During a deferral period, interest will continue to accrue on the Subordinated Debentures at the then-applicable rate and deferred interest will compound on each interest payment date. If all deferred interest on the Subordinated Debentures is paid, the Company can again defer interest payments.
As of December 31, 2019, the Company had outstanding $500 million of Series A 6.500% Fixed-to-Floating Rate Junior Subordinated Debentures (“Debentures”). The scheduled maturity date for the Debentures is May 15, 2057 with a final maturity date of May 15, 2067. The Debentures may be redeemed (i) in whole or in part, at any time on or after May 15, 2037 at the principal amount plus accrued and unpaid interest to the date of redemption, or (ii) in certain circumstances, in whole or in part, prior to May 15, 2037 at the principal amount plus accrued and unpaid interest to the date of redemption or, if greater, a make-whole price.
Interest on the Debentures is payable semi-annually at the stated fixed annual rate to May 15, 2037, and then payable quarterly at an annual rate equal to the three-month LIBOR plus 2.120%. The Company may elect at one or more times to defer payment of interest on the Debentures for one or more consecutive interest periods that do not exceed 10 years. Interest compounds during such deferral periods at the rate in effect for each period. The interest deferral feature obligates the Company in certain circumstances to issue common stock or certain other types of securities if it cannot otherwise raise sufficient funds to make the required interest payments. The Company has reserved 75 million shares of its authorized and unissued common stock to satisfy this obligation.
The continuation of LIBOR on the current basis is not guaranteed after 2021 and LIBOR may be discontinued or modified by 2021. The Subordinated Debentures allow for the use of an alternative benchmark if LIBOR is no longer available.
The terms of the Company’s outstanding subordinated debentures prohibit the Company from declaring or paying any dividends or distributions on common or preferred stock or redeeming, purchasing, acquiring, or making liquidation payments on common stock or preferred stock if the Company has elected to defer interest payments on the subordinated debentures, subject to certain limited exceptions.
In connection with the issuance of the Debentures, the Company entered into a replacement capital
covenant (“RCC”). This covenant was not intended for the benefit of the holders of the Debentures and could not be enforced by them. Rather, it was for the benefit of holders of one or more other designated series of the Company’s indebtedness (“covered debt”), currently the 5.750% Subordinated Debentures due 2053. Pursuant to the RCC, the Company has agreed that it will not repay, redeem, or purchase the Debentures on or before May 15, 2067 (or such earlier date on which the RCC terminates by its terms) unless, subject to certain limitations, the Company has received net cash proceeds in specified amounts from the sale of common stock or certain other qualifying securities. The promises and covenants contained in the RCC will not apply if (i) S&P upgrades the Company’s issuer credit rating to A or above, (ii) the Company redeems the Debentures due to a tax event, (iii) after notice of redemption has been given by the Company and a market disruption event occurs preventing the Company from raising proceeds in accordance with the RCC, or (iv) the Company repurchases or redeems up to 10% of the outstanding principal of the Debentures in any one-year period, provided that no more than 25% will be so repurchased, redeemed or purchased in any ten-year period.
The RCC terminates in 2067. The RCC will terminate prior to its scheduled termination date if (i) the Debentures are no longer outstanding and the Company has fulfilled its obligations under the RCC or it is no longer applicable, (ii) the holders of a majority of the then-outstanding principal amount of the then-effective series of covered debt consent to agree to the termination of the RCC, (iii) the Company does not have any series of outstanding debt that is eligible to be treated as covered debt under the RCC, (iv) the Debentures are accelerated as a result of an event of default, (v) certain rating agency or change in control events occur, (vi) S&P, or any successor thereto, no longer assigns a solicited rating on senior debt issued or guaranteed by the Company, or (vii) the termination of the RCC would have no effect on the equity credit provided by S&P with respect to the Debentures. An event of default, as defined by the supplemental indenture, includes default in the payment of interest or principal and bankruptcy proceedings.
To manage short-term liquidity, the Company maintains a commercial paper program and a credit facility as a potential source of funds. These include a $1.00 billion unsecured revolving credit facility and a commercial paper program with a borrowing limit of $1.00 billion. In April 2016, the Company extended the maturity date of the facility to April 2021. This facility contains an increase provision that would allow up to an additional $500 million of borrowing. This facility has a financial covenant requiring the Company not to exceed a 37.5% debt to capitalization ratio as defined in the agreement. Although the right to borrow under the facility is not subject to a minimum rating requirement, the costs of maintaining the facility and borrowing under it are based on the ratings of the Company’s senior unsecured, unguaranteed long-term debt. The total amount outstanding at any point in time under the combination of the commercial paper
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program and the credit facility cannot exceed the amount that can be borrowed under the credit facility. No amounts were outstanding under the credit facility as of December 31, 2019 or 2018. The Company had no commercial paper outstanding as of December 31, 2019 or 2018.
The Company paid $312 million, $330 million and $332 million of interest on debt in 2019, 2018 and 2017, respectively.
The Company had $389 million and $260 million of investment-related debt that is reported in other liabilities and accrued expenses as of December 31, 2019 and 2018, respectively.
During 2018, the Company filed a universal shelf registration statement with the Securities and Exchange Commission (“SEC”) that expires in 2021.
The registration statement covers an unspecified amount of securities and can be used to issue debt securities, common stock, preferred stock, depositary shares, warrants, stock purchase contracts, stock purchase units and securities of trust subsidiaries.
Common stock The Company had 900 million shares of issued common stock of which 319 million shares were outstanding and 581 million shares were held in treasury as of December 31, 2019. In 2019, the Company acquired 16 million shares at an average cost of $110.37 and reissued 3 million net shares under equity incentive plans.
Preferred stock All outstanding preferred stock represents noncumulative perpetual preferred stock with a $1.00 par value per share and a liquidation preference of $25,000 per share.
| Total preferred stock outstanding | |||||||||||||||||||||||||||||||||||||||||
| As of December 31, | Aggregate liquidation preference ($ in millions) | Dividend per depository share (1) | Aggregate dividend payment ($ in millions) | ||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | Dividend rate | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||
| Series A | 11,500 | 11,500 | $ | 287.5 | $ | 287.5 | 5.625 | % | $ | 1.41 | $ | 1.41 | $ | 1.41 | $ | 16 | $ | 16 | $ | 16 | |||||||||||||||||||||
| Series C | — | — | — | — | 6.750 | % | — | 1.69 | 1.69 | — | 26 | (2) | 26 | ||||||||||||||||||||||||||||
| Series D | — | 5,400 | — | 135.0 | 6.625 | % | 1.66 | 1.66 | 1.66 | 9 | (2) | 9 | 9 | ||||||||||||||||||||||||||||
| Series E | — | 29,900 | — | 747.5 | 6.625 | % | 1.66 | 1.66 | 1.66 | 49 | (2) | 49 | 49 | ||||||||||||||||||||||||||||
| Series F | — | 10,000 | — | 250.0 | 6.250 | % | 1.56 | 1.56 | 1.56 | 16 | (2) | 16 | 16 | ||||||||||||||||||||||||||||
| Series G | 23,000 | 23,000 | 575.0 | 575.0 | 5.625 | % | 1.41 | 1.41 | — | 32 | 18 | — | |||||||||||||||||||||||||||||
| Series H | 46,000 | — | 1,150.0 | — | 5.100 | % | 1.28 | — | — | 12 | — | — | |||||||||||||||||||||||||||||
| Series I | 12,000 | — | 300.0 | — | 4.750 | % | 1.19 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Total | 92,500 | 79,800 | $ | 2,313 | $ | 1,995 | $ | 134 | (2) | $ | 134 | (2) | $ | 116 |
| (1) | Each depositary share represents a 1/1,000th interest in a share of preferred stock. |
| (2) | Excludes $37 million and $13 million in 2019 and 2018, respectively, related to original issuance costs in preferred stock dividends on the Consolidated Statements of Operations and Consolidated Statements of Shareholders’ Equity as a result of the preferred stock redemptions. |
On August 8, 2019, the Company issued 46,000 shares of 5.100% Fixed Rate Noncumulative Perpetual Preferred Stock, Series H, par value $1.00 per share and liquidation preference $25,000 per share, for gross proceeds of $1.15 billion.
On October 15, 2019, the Company redeemed all 5,400 shares of its Fixed Rate Noncumulative Perpetual Preferred Stock, Series D, par value $1.00 per share and liquidation preference $25,000 per share, all 29,900 shares of its Fixed Rate Noncumulative Perpetual Preferred Stock, Series E, par value $1.00 per share and liquidation preference $25,000 per share, all 10,000 shares of its Fixed Rate Noncumulative Perpetual Preferred Stock, Series F, par value $1.00 per share and liquidation preference $25,000 per share, and the corresponding depositary shares. The total redemption payment was $1.13 billion, using the proceeds from the issuance of the Fixed Rate Noncumulative Perpetual Preferred Stock, Series H. In 2019, the Company recognized $37 million of original issuance costs in preferred stock dividends on the Consolidated Statements of Operations and Consolidated Statements of Shareholders’ Equity as a result of the preferred stock redemptions.
On November 8, 2019, the Company issued 12,000 shares of 4.750% Fixed Rate Noncumulative Perpetual Preferred Stock, Series I, par value $1.00 per share and liquidation preference $25,000 per share, for gross proceeds of $300 million.
Subsequent event On January 15, 2020, the Company redeemed all 11,500 shares of its Fixed Rate Noncumulative Preferred Stock, Series A, par value $1.00 per share and liquidation preference $25,000 per share and the corresponding depositary shares. The total redemption payment was $288 million, using the proceeds from the issuance of the Fixed Rate Noncumulative Perpetual Preferred Stock, Series I. In the first quarter of 2020, the Company will recognize $10 million of original issuance costs in preferred stock dividends on the Consolidated Statements of Operations and Consolidated Statements of Shareholders’ Equity as a result of the preferred stock redemption.
The preferred stock ranks senior to the Company’s common stock with respect to the payment of dividends and liquidation rights. The Company will pay dividends on the preferred stock on a noncumulative
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basis only when, as and if declared by the Company’s board of directors (or a duly authorized committee of the board) and to the extent that the Company has legally available funds to pay dividends. If dividends are declared on the preferred stock, they will be payable quarterly in arrears at an annual fixed rate. Dividends on the preferred stock are not cumulative. Accordingly, in the event dividends are not declared on the preferred stock for payment on any dividend payment date, then those dividends will cease to be payable. If the Company has not declared a dividend before the dividend payment date for any dividend period, the Company has no obligation to pay dividends for that dividend period, whether or not dividends are declared for any future dividend period. No dividends may be paid or declared on the Company’s common stock and no shares of the Company’s common stock may be repurchased unless the full dividends for the latest completed dividend period on the preferred stock have been declared and paid or provided for.
The Company is prohibited from declaring or paying dividends on its Series G preferred stock in excess of the amount of net proceeds from an issuance of common stock taking place within 90 days before a dividend declaration date if, on that dividend declaration date, either: (1) the risk-based capital ratios of the largest U.S. property-casualty insurance subsidiaries that collectively account for 80% or more of the net written premiums of U.S. property-casualty insurance business on a weighted average basis were less than 175% of their company action level risk-based capital as of the end of the most recent year; or (2) consolidated net income for the four-quarter period ending on the preliminary quarter end test date (the quarter that is two quarters prior to the most recently completed quarter) is zero or negative and consolidated shareholders’ equity (excluding AOCI, and subject to certain other adjustments relating to changes in U.S. GAAP) as of each of the preliminary quarter test date and the most recently completed quarter has declined by 20% or more from its level as measured at the end of the benchmark quarter (the date that is ten quarters prior to the most recently completed quarter). If the Company fails to satisfy either of these tests on any dividend declaration date,
the restrictions on dividends will continue until the Company is able again to satisfy the test on a dividend declaration date. In addition, in the case of a restriction arising under (2) above, the restrictions on dividends will continue until consolidated shareholders’ equity (excluding AOCI, and subject to certain other adjustments relating to changes in U.S. GAAP) has increased, or has declined by less than 20%, in either case as compared to its level at the end of the benchmark quarter for each dividend payment date as to which dividend restrictions were imposed.
The preferred stock does not have voting rights except with respect to certain changes in the terms of the preferred stock, in the case of certain dividend nonpayments, certain other fundamental corporate events, mergers or consolidations and as otherwise provided by law. If and when dividends have not been declared and paid in full for at least six quarterly dividend periods or their equivalent (whether or not consecutive), the authorized number of directors then constituting our board of directors will be increased by two. The holders of the preferred stock, together with the holders of all other affected classes and series of voting parity stock, voting as a single class, will be entitled to elect the two additional members of the board of directors of the Company, subject to certain conditions. The board of directors shall at no time have more than two preferred stock directors.
The preferred stock is perpetual and has no maturity date. The preferred stock is redeemable at the Company’s option in whole or in part, on or after April 15, 2023 for Series G, October 15, 2024 for Series H and January 15, 2025 for Series I at a redemption price of $25,000 per share of preferred stock, plus declared and unpaid dividends. Prior to April 15, 2023 for Series G, October 15, 2024 for Series H and January 15, 2025 for Series I, the preferred stock is redeemable at the Company’s option, in whole but not in part, within 90 days of the occurrence of certain regulatory capital event at a redemption price equal to $25,000 or $25,500 per share or a certain rating agency event at a redemption price equal to $25,000 or $25,500 per share, plus declared and unpaid dividends for Series G and for Series H and I, respectively.
| Note 13 | Company Restructuring |
The Company undertakes various programs to reduce expenses. These programs generally involve a reduction in staffing levels, and in certain cases, office closures. Restructuring and related charges primarily include the following costs related to these programs:
| • | Employee - severance and relocation benefits |
| • | Exit - contract termination penalties |
The expenses related to these activities are included in the Consolidated Statements of Operations as restructuring and related charges, and totaled $41 million, $67 million and $96 million in 2019, 2018 and 2017, respectively. Restructuring expenses in 2019 primarily related to realignment of certain employees to centralized talent centers as well as claims reorganization initiatives.
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| Restructuring activity during the period | ||||||||||||
| ($ in millions) | Employee costs | Exit costs | Total liability | |||||||||
| Restructuring liability as of December 31, 2018 | $ | 29 | $ | 15 | $ | 44 | ||||||
| Expense incurred | 43 | 7 | 50 | |||||||||
| Adjustments to liability | (9 | ) | — | (9 | ) | |||||||
| Payments and non-cash pension settlements | (49 | ) | (14 | ) | (63 | ) | ||||||
| Restructuring liability as of December 31, 2019 | $ | 14 | $ | 8 | $ | 22 |
As of December 31, 2019, the cumulative amount incurred to date for active programs related to employee severance, relocation benefits and post-exit
rent expenses totaled $112 million for employee costs and $12 million for exit costs.
| Note 14 | Commitments, Guarantees and Contingent Liabilities |
Shared markets and state facility assessments
The Company is required to participate in assigned risk plans, reinsurance facilities and joint underwriting associations in various states that provide insurance coverage to individuals or entities that otherwise are unable to purchase such coverage from private insurers.
The Company routinely reviews its exposure to assessments from these plans, facilities and government programs. Underwriting results related to these arrangements, which tend to be adverse, have been immaterial to the Company’s results of operations. Because of the Company’s participation, it may be exposed to losses that surpass the capitalization of these facilities and/or assessments from these facilities.
Florida Citizens Castle Key is subject to assessments from Citizens Property Insurance Corporation in the state of Florida (“FL Citizens”), which was initially created by the state of Florida to provide insurance to property owners unable to obtain coverage in the private insurance market. FL Citizens, at the discretion and direction of its Board of Governors (“FL Citizens Board”), can levy a regular assessment on assessable insurers and assessable insureds for a deficit in any calendar year up to a maximum of the greater of: 2% of the projected deficit or 2% of the aggregate statewide direct written premium for the prior calendar year. The base of assessable insurers includes all property and casualty premiums in the state, except workers’ compensation, medical malpractice, accident and health insurance and policies written under the NFIP. An insurer may recoup a regular assessment through a surcharge to policyholders. In order to recoup this assessment, an insurer must file for a policy surcharge with the FL OIR at least fifteen days prior to imposing the surcharge on policies. If a deficit remains after the regular assessment, FL Citizens can also levy emergency assessments in the current and subsequent years. Companies are required to collect the emergency assessments directly from residential property policyholders and remit to FL Citizens as collected. Currently, the emergency assessment is zero for all policies issued or renewed on or after July 1, 2015.
Louisiana Citizens Louisiana Citizens Property Insurance Corporation (“LA Citizens”) can levy a regular
assessment on participating companies for a deficit in any calendar year up to a maximum of the greater of 10% of the calendar year deficit or 10% of Louisiana direct property premiums industry-wide for the prior calendar year. If the plan year deficit exceeds the amount that can be recovered through Regular Assessments, LA Citizens may fund the remaining deficit by issuing revenue assessment bonds in the capital markets. LA Citizens then declares Emergency Assessments each year to provide debt service on the bonds until they are retired. Companies writing assessable lines must surcharge their policyholders Emergency Assessments in the percentage established annually by LA Citizens and must remit amounts collected to the bond trustee on a quarterly basis. Emergency assessments to pay off bonds issued in 2007 for the hurricanes of 2005 will continue until 2025.
Facilities such as FL Citizens and LA Citizens are generally designed so that the ultimate cost is borne by policyholders; however, the exposure to assessments from these facilities and the availability of recoupments or premium rate increases may not offset each other in the Company’s financial statements. Moreover, even if they do offset each other, they may not offset each other in financial statements for the same fiscal period due to the ultimate timing of the assessments and recoupments or premium rate increases, as well as the possibility of policies not being renewed in subsequent years.
California Earthquake Authority Exposure to certain potential losses from earthquakes in California is limited by the Company’s participation in the California Earthquake Authority (“CEA”), which provides insurance for California earthquake losses. The CEA 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 Company’s homeowners policies continue to include coverages for losses caused by explosions, theft, glass breakage and fires following an earthquake, which are not underwritten by the CEA.
As of October 31, 2019, the CEA’s capital balance was approximately $6.01 billion. Should losses arising from an earthquake cause a deficit in the CEA, an
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additional $721 million would be obtained from the proceeds of revenue bonds the CEA may issue, an existing $8.26 billion reinsurance layer, $1.0 billion from policyholders surcharge, and finally, if needed, assessments on participating insurance companies. Participating insurers are required to pay an assessment, currently estimated not to exceed $1.66 billion, if the capital of the CEA falls below $350 million. Within the limits previously described, the assessment could be intended to restore the CEA’s capital to a level of $350 million. There is no provision that allows insurers to recover assessments through a premium surcharge or other mechanism. The CEA’s projected aggregate claim paying capacity is $17.65 billion as of October 31, 2019 and if an event were to result in claims greater than its capacity, affected policyholders may be paid a prorated portion of their covered losses, paid on an installment basis, or no payments may be made if the claim paying capacity of the CEA is insufficient.
All future assessments on participating CEA insurers are based on their CEA insurance market share as of December 31 of the preceding year. As of December 31, 2018, the Company’s market share was 9.8%. The Company does not expect its market share to materially change. At this level, the Company’s maximum possible CEA assessment would be $162 million during 2020. These amounts are re-evaluated by the board of directors of the CEA on an annual basis. Accordingly, assessments from the CEA for a particular quarter or annual period may be material to the results of operations and cash flows, but not the financial position of the Company. Management believes the Company’s exposure to earthquake losses in California has been significantly reduced as a result of its participation in the CEA.
Texas Windstorm Insurance Association The Company participates as a member of the Texas Windstorm Insurance Association (“TWIA”), which provides wind and hail property coverage to coastal risks unable to procure coverage in the voluntary market. Wind and hail coverage is written on a TWIA-issued policy. TWIA follows a funding structure first utilizing currently available funds set aside from current and prior years. Under the current law, to the extent losses exceed premiums received from policyholders, TWIA utilizes a combination of reinsurance, TWIA issued securities, as well as member and policyholder assessments to fund loss payments.
During 2019, the TWIA Board announced assessments primarily related to Hurricane Harvey for which the Company’s share was $12 million. These costs were recorded in property and casualty insurance claims and claims expense as catastrophe losses on the Consolidated Statements of Operations. Any assessments from TWIA for a particular quarter or annual period may be material to the results of operations and cash flows, but not to the financial position of the Company.
Texas Fair Plan Association The Company participates as a member of the Texas Fair Plan Association (“FAIR Plan”), which provides residential property insurance to inland areas designated as
underserved by the Commissioner of Insurance and the applicant(s) are unable to procure coverage in the voluntary market. The FAIR Plan issues insurance policies, like an insurance company, and it also functions as a pooling mechanism that allocates premiums, claims and expenses back to the insurance industry. As a result of the losses incurred related to Hurricane Harvey, in 2017 the FAIR Plan Board unanimously voted to approve its first ever member assessment of which the Company’s share was $8 million based on total direct premium written in Texas. Insurers are permitted to recover the assessment through either a premium surcharge applied to existing customers over a three-year period or increased rates, but the ability to fully recover the assessment may be impacted by market conditions or other factors.
North Carolina Joint Underwriters Association The North Carolina Joint Underwriters Association (“NCJUA”) was created to provide property insurance for properties (other than the state’s beach and coastal areas) that insurers are not otherwise willing to insure. All insurers licensed to write property insurance in North Carolina are members of the NCJUA. Premiums, losses and expenses of the NCJUA are shared by the member companies in proportion to their respective North Carolina property insurance writings. Member companies participate in plan deficits or surpluses based on their participation ratios, which are determined annually. The Company had a $5 million receivable from the NCJUA at December 31, 2019 representing our participation in the NCJUA’s deficit of $29 million for all open years.
North Carolina Insurance Underwriting Association The North Carolina Insurance Underwriting Association (“NCIUA”) provides windstorm and hail coverage as well as homeowners policies for properties located in the state’s beach and coastal areas that insurers are not otherwise willing to insure. All insurers licensed to write residential and commercial property insurance in North Carolina are members of the NCIUA. Members are assessed in proportion to their North Carolina residential and commercial property insurance writings, which is determined annually and varies by coverage, for plan deficits. As of December 31, 2019, the NCIUA had a surplus of $439 million. No member company is entitled to the distribution of any portion of the Association’s surplus. The Company does not recognize any interest related to this surplus. Legislation in 2009 capped insurers’ assessments for losses incurred in any calendar year at $1.00 billion. Subsequent to an industry assessment of $1.00 billion, if the plan continues to require funding, it may authorize insurers to assess a 10% catastrophe recovery charge on each property insurance policy statewide to be remitted to the plan.
Other programs The Company is also subject to assessments by the NCRF and the FHCF, which are described in Note 10.
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
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insurance companies to policyholders and claimants. Amounts assessed to each company are typically related to its proportion of business written in each state. The Company’s policy is to accrue assessments when the entity for which the insolvency relates has met its state of domicile’s statutory definition of insolvency, the amount of the loss is reasonably estimable and the related premium upon which the assessment is based is written. In most states, the definition is met with a declaration of financial insolvency by a court of competent jurisdiction. In certain states there must also be a final order of liquidation. Since most states allow a credit against premium or other state related taxes for assessments, an asset is recorded based on paid and accrued assessments for the amount the Company expects to recover on the respective state’s tax return and is realized over the period allowed by each state. As of December 31, 2019 and 2018, the liability balance included in other liabilities and accrued expenses was $13 million and $12 million, respectively. The related premium tax offsets included in other assets were $15 million and $16 million as of December 31, 2019 and 2018, respectively.
Guarantees
In the normal course of business, the Company provides standard indemnifications to contractual counterparties in connection with numerous transactions, including acquisitions and divestitures. The types of indemnifications typically provided include indemnifications for breaches of representations and warranties, taxes and certain other liabilities, such as third-party lawsuits. The indemnification clauses are often standard contractual terms and are entered into in the normal course of business based on an assessment that the risk of loss would be remote. The terms of the indemnifications vary in duration and nature. In many cases, the maximum obligation is not explicitly stated and the contingencies triggering the obligation to indemnify have not occurred and are not expected to occur. Consequently, the maximum amount of the obligation under such indemnifications is not determinable. Historically, the Company has not made any material payments pursuant to these obligations.
Related to the sale of Lincoln Benefit Life Company on April 1, 2014, ALIC agreed to indemnify Resolution Life Holdings, Inc. in connection with certain representations, warranties and covenants of ALIC, and certain liabilities specifically excluded from the transaction, subject to specific contractual limitations regarding ALIC’s maximum obligation. Management does not believe these indemnifications will have a material effect on results of operations, cash flows or financial position of the Company.
The aggregate liability balance related to all guarantees was not material as of December 31, 2019.
Regulation and compliance
The Company is subject to extensive laws, regulations, administrative directives, and regulatory actions. From time to time, regulatory authorities or
legislative bodies seek to influence and restrict premium rates, require premium refunds to policyholders, require reinstatement of terminated policies, prescribe rules or guidelines on how affiliates compete in the marketplace, restrict the ability of insurers to cancel or non-renew policies, require insurers to continue to write new policies or limit their ability to write new policies, limit insurers’ ability to change coverage terms or to impose underwriting standards, impose additional regulations regarding agency and broker compensation, regulate the nature of and amount of investments, impose fines and penalties for unintended errors or mistakes, impose additional regulations regarding cybersecurity and privacy, and otherwise expand overall regulation of insurance products and the insurance industry. In addition, the Company is subject to laws and regulations administered and enforced by federal agencies, international agencies, and other organizations, including but not limited to the SEC, the Financial Industry Regulatory Authority, the U.S. Equal Employment Opportunity Commission, and the U.S. Department of Justice. The Company has established procedures and policies to facilitate compliance with laws and regulations, to foster prudent business operations, and to support financial reporting. The Company routinely reviews its practices to validate compliance with laws and regulations and with internal procedures and policies. As a result of these reviews, from time to time the Company may decide to modify some of its procedures and policies. Such modifications, and the reviews that led to them, may be accompanied by payments being made and costs being incurred. The ultimate changes and eventual effects of these actions on the Company’s business, if any, are uncertain.
Legal and regulatory proceedings and inquiries
The Company and certain subsidiaries are involved in a number of lawsuits, regulatory inquiries, and other legal proceedings arising out of various aspects of its business.
Background These matters raise difficult and complicated factual and legal issues and are subject to many uncertainties and complexities, including the underlying facts of each matter; novel legal issues; variations between jurisdictions in which matters are being litigated, heard, or investigated; changes in assigned judges; differences or developments in applicable laws and judicial interpretations; judges reconsidering prior rulings; the length of time before many of these matters might be resolved by settlement, through litigation, or otherwise; adjustments with respect to anticipated trial schedules and other proceedings; developments in similar actions against other companies; the fact that some of the lawsuits are putative class actions in which a class has not been certified and in which the purported class may not be clearly defined; the fact that some of the lawsuits involve multi-state class actions in which the applicable law(s) for the claims at issue is in dispute and therefore unclear; and the challenging legal environment faced by corporations and insurance companies.
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The outcome of these matters may be affected by decisions, verdicts, and settlements, and the timing of such decisions, verdicts, and settlements, in other individual and class action lawsuits that involve the Company, other insurers, or other entities and by other legal, governmental, and regulatory actions that involve the Company, other insurers, or other entities. The outcome may also be affected by future state or federal legislation, the timing or substance of which cannot be predicted.
In the lawsuits, plaintiffs seek a variety of remedies which may include equitable relief in the form of injunctive and other remedies and monetary relief in the form of contractual and extra-contractual damages. In some cases, the monetary damages sought may include punitive or treble damages. Often specific information about the relief sought, such as the amount of damages, is not available because plaintiffs have not requested specific relief in their pleadings. When specific monetary demands are made, they are often set just below a state court jurisdictional limit in order to seek the maximum amount available in state court, regardless of the specifics of the case, while still avoiding the risk of removal to federal court. In Allstate’s experience, monetary demands in pleadings bear little relation to the ultimate loss, if any, to the Company.
In connection with regulatory examinations and proceedings, government authorities may seek various forms of relief, including penalties, restitution, and changes in business practices. The Company may not be advised of the nature and extent of relief sought until the final stages of the examination or proceeding.
Accrual and disclosure policy The Company reviews its lawsuits, regulatory inquiries, and other legal proceedings on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. The Company establishes accruals for such matters at management’s best estimate when the Company assesses that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company does not establish accruals for such matters when the Company does not believe both that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company’s assessment of whether a loss is reasonably possible, or probable, is based on its assessment of the ultimate outcome of the matter following all appeals. The Company does not include potential recoveries in its estimates of reasonably possible or probable losses. Legal fees are expensed as incurred.
The Company continues to monitor its lawsuits, regulatory inquiries, and other legal proceedings for further developments that would make the loss contingency both probable and estimable, and accordingly accruable, or that could affect the amount of accruals that have been previously established. There may continue to be exposure to loss in excess of any amount accrued. Disclosure of the nature and amount of an accrual is made when there have been sufficient legal and factual developments such that the
Company’s ability to resolve the matter would not be impaired by the disclosure of the amount of accrual.
When the Company assesses it is reasonably possible or probable that a loss has been incurred, it discloses the matter. When it is possible to estimate the reasonably possible loss or range of loss above the amount accrued, if any, for the matters disclosed, that estimate is aggregated and disclosed. Disclosure is not required when an estimate of the reasonably possible loss or range of loss cannot be made.
For certain of the matters described below in the “Claims related proceedings” and “Other proceedings” subsections, the Company is able to estimate the reasonably possible loss or range of loss above the amount accrued, if any. In determining whether it is possible to estimate the reasonably possible loss or range of loss, the Company reviews and evaluates the disclosed matters, in conjunction with counsel, in light of potentially relevant factual and legal developments.
These developments may include information learned through the discovery process, rulings on dispositive motions, settlement discussions, information obtained from other sources, experience from managing these and other matters, and other rulings by courts, arbitrators or others. When the Company possesses sufficient appropriate information to develop an estimate of the reasonably possible loss or range of loss above the amount accrued, if any, that estimate is aggregated and disclosed below. There may be other disclosed matters for which a loss is probable or reasonably possible, but such an estimate is not possible. Disclosure of the estimate of the reasonably possible loss or range of loss above the amount accrued, if any, for any individual matter would only be considered when there have been sufficient legal and factual developments such that the Company’s ability to resolve the matter would not be impaired by the disclosure of the individual estimate.
The Company currently estimates that the aggregate range of reasonably possible loss in excess of the amount accrued, if any, for the disclosed matters where such an estimate is possible is zero to $75 million, pre-tax. This disclosure is not an indication of expected loss, if any. Under accounting guidance, an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely” and an event is “remote” if “the chance of the future event or events occurring is slight.” This estimate is based upon currently available information and is subject to significant judgment and a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimate will change from time to time, and actual results may vary significantly from the current estimate. The estimate does not include matters or losses for which an estimate is not possible. Therefore, this estimate represents an estimate of possible loss only for certain matters meeting these criteria. It does not represent the Company’s maximum possible loss exposure. Information is provided below regarding the nature of all of the disclosed matters and, where specified, the amount, if any, of plaintiff claims associated with these loss contingencies.
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Notes to Consolidated Financial Statements 2019 Form 10-K
Due to the complexity and scope of the matters disclosed in the “Claims related proceedings” and “Other proceedings” subsections below and the many uncertainties that exist, the ultimate outcome of these matters cannot be predicted and in the Company’s judgment, a loss, in excess of amounts accrued, if any, is not probable. In the event of an unfavorable outcome in one or more of these matters, the ultimate liability may be in excess of amounts currently accrued, if any, and may be material to the Company’s operating results or cash flows for a particular quarterly or annual period. However, based on information currently known to it, management believes that the ultimate outcome of all matters described below, as they are resolved over time, is not likely to have a material effect on the financial position of the Company.
Claims related proceedings The Company is managing various disputes in Florida that raise challenges to the Company’s practices, processes, and procedures relating to claims for personal injury protection benefits under Florida auto policies. Medical providers continue to pursue litigation under various theories that challenge the amounts that the Company pays under the personal injury protection benefits. There are pending putative class actions and litigation involving individual plaintiffs. The Company is vigorously asserting both procedural and substantive defenses to these lawsuits.
Other proceedings The stockholder derivative actions described below are disclosed pursuant to SEC disclosure requirements for these types of matters. The putative class action alleging violations of the federal securities laws is disclosed because it involves similar allegations to those made in the stockholder derivative actions.
Biefeldt / IBEW Consolidated Action. Two separately filed stockholder derivative actions have been consolidated into a single proceeding that is pending in the Circuit Court for Cook County, Illinois, Chancery Division. The original complaint in the first-filed of those actions, Biefeldt v. Wilson, et al., was filed on August 3, 2017, in that court by a plaintiff alleging that she is a stockholder of the Company. On June 29, 2018, the court granted defendants’ motion to dismiss that complaint for failure to make a pre-suit demand on the Allstate Board before instituting the suit, but granted the plaintiff permission to file an amended complaint. The original complaint in IBEW Local No. 98 Pension Fund v. Wilson, et al., was filed on April 12, 2018, in the same court by another plaintiff alleging to be a stockholder of the Company. After the court issued its dismissal decision in the Biefeldt action, the plaintiffs agreed to consolidate the two actions and filed a consolidated amended complaint naming the Company’s chairman, president and chief executive officer, its former president, and certain present or former members of the board of directors. In that complaint, the plaintiffs allege that the directors and officer defendants breached their fiduciary duties to the Company in connection with allegedly material misstatements or omissions concerning the Company’s automobile insurance claim frequency statistics and the reasons for a claim frequency increase for Allstate
brand auto insurance between October 2014 and August 3, 2015. The factual allegations are substantially similar to those at issue in In re The Allstate Corp. Securities Litigation. The plaintiffs further allege that a senior officer and several outside directors engaged in stock option exercises allegedly while in possession of material nonpublic information. The plaintiffs seek, on behalf of the Company, an unspecified amount of damages and various forms of equitable relief. Defendants moved to dismiss the consolidated complaint on September 24, 2018 for failure to make a demand on the Allstate Board. On May 14, 2019, the court granted the defendants’ motion to dismiss the complaint, but allowed the plaintiffs leave to file a second consolidated amended complaint by June 11, 2019. On June 3, 2019, the plaintiffs filed a motion to stay the action, or in the alternative defer the filing of the second consolidated amended complaint, to allow the plaintiffs to conduct an inspection of the Company’s books and records. The parties reached a compromise by which the Company produced certain board materials and the deadline for the plaintiffs to file the second consolidated amended complaint was extended. On September 17, 2019, the plaintiffs filed a second consolidated amended complaint. Defendants moved to dismiss the complaint on November 1, 2019 for failure to make a demand on the Allstate Board.
In Sundquist v. Wilson, et al., another plaintiff alleging to be a stockholder of the Company filed a stockholder derivative complaint in the United States District Court for the Northern District of Illinois on May 21, 2018. The plaintiff seeks, on behalf of the Company, an unspecified amount of damages and various forms of equitable relief. The complaint names as defendants the Company’s chairman, president and chief executive officer, its former president, its former chief financial officer, who is now the Company’s vice chairman, and certain present or former members of the board of directors.
The complaint alleges breaches of fiduciary duty based on allegations similar to those asserted in In re The Allstate Corp. Securities Litigation as well as state law “misappropriation” claims based on stock option transactions by the Company’s chairman, president and chief executive officer, its former chief financial officer, who is now the Company’s vice chairman, and certain members of the board of directors. Defendants moved to dismiss and/or stay the complaint on August 7, 2018. On December 4, 2018, the court granted the defendants’ motion and stayed the case pending the resolution of the consolidated Biefeldt/IBEW matter.
Mims v. Wilson, et al., is an additional stockholder derivative action filed on February 12, 2020 in the United States District Court for the Northern District of Illinois. The plaintiff seeks, on behalf of the Company, an unspecified amount of damages and various forms of equitable relief. The complaint names as defendants the Company’s chairman, president and chief executive officer, its former president, its former chief financial officer, who is now the Company’s vice chairman, and certain present or former members of the board of directors. The complaint alleges breaches
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of fiduciary duty and unjust enrichment based on allegations similar to those asserted in In re The Allstate Corp. Securities Litigation.
In re The Allstate Corp. Securities Litigation is a certified class action filed on November 11, 2016 in the United States District Court for the Northern District of Illinois against the Company and two of its officers asserting claims under the federal securities laws. Plaintiffs allege that they purchased Allstate common stock during the class period and suffered damages as the result of the conduct alleged. Plaintiffs seek an unspecified amount of damages, costs, attorney’s fees, and other relief as the court deems appropriate. Plaintiffs allege that the Company and certain senior officers made allegedly material misstatements or omissions concerning claim frequency statistics and the reasons for a claim frequency increase for Allstate brand auto insurance between October 2014 and August 3, 2015.
Plaintiffs’ further allege that a senior officer engaged in stock option exercises during that time allegedly while in possession of material nonpublic information about Allstate brand auto insurance claim frequency. The Company, its chairman, president and chief executive officer, and its former president are the named defendants. After the court denied their motion to dismiss on February 27, 2018, defendants answered the complaint, denying plaintiffs’ allegations that there was any misstatement or omission or other misconduct. On June 22, 2018, plaintiffs filed their motion for class certification, which was fully briefed as of January 11, 2019. On September 12, 2018, the court allowed the lead plaintiffs to amend their complaint to add the City of Providence Employee Retirement System as a proposed class representative.
The amended complaint was filed the same day. On March 26, 2019, the court granted plaintiffs’ motion for class certification and certified a class consisting of all persons who purchased Allstate common stock between October 29, 2014 and August 3, 2015. On April 9, 2019, defendants filed with the Seventh Circuit Court of Appeals a petition for permission to appeal this ruling pursuant to Federal Rule of Civil Procedure 23 (f) and the Court of Appeals granted that petition on April 25, 2019. The appeal was fully briefed as of July 31, 2019, and the Seven Circuit Court of Appeals heard oral argument on September 18, 2019.
Asbestos and environmental
Management believes its net loss reserves for asbestos, environmental and other discontinued lines exposures are appropriately established based on available facts, technology, laws and regulations. However, establishing net loss reserves for asbestos, environmental and other discontinued lines claims is subject to uncertainties that are much greater than those presented by other types of claims. The ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimate. Among the complications are lack of historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure and unresolved legal issues regarding policy
coverage; unresolved legal issues regarding the determination, availability and timing of exhaustion of policy limits; plaintiffs’ evolving and expanding theories of liability; availability and collectability of recoveries from reinsurance; retrospectively determined premiums and other contractual agreements; estimates of the extent and timing of any contractual liability; the impact of bankruptcy protection sought by various asbestos producers and other asbestos defendants; and other uncertainties.
There are also complex legal issues concerning the interpretation of various insurance policy provisions and whether those losses are covered, or were ever intended to be covered, and could be recoverable through retrospectively determined premium, reinsurance or other contractual agreements. 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 insurer obligation to defend; how policy limits are determined; how policy exclusions and conditions are applied and interpreted; and whether clean-up costs represent insured property damage. Further, insurers and claims administrators acting on behalf of insurers are increasingly pursuing evolving and expanding theories of reinsurance coverage for asbestos and environmental losses. Adjudication of reinsurance coverage is predominately decided in confidential arbitration proceedings which may have limited precedential or predictive value further complicating management’s ability to estimate probable loss for reinsured asbestos and environmental claims. Management believes these issues are not likely to be resolved in the near future, and the ultimate costs may vary materially from the amounts currently recorded resulting in material changes in loss reserves. In addition, while the Company believes that improved actuarial techniques and databases have assisted in its ability to estimate asbestos, environmental, and other discontinued lines 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.
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| Note 15 | Income Taxes |
The Company and its domestic subsidiaries file a consolidated federal income tax return. Tax liabilities and benefits realized by the consolidated group are allocated as generated by the respective entities.
Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. Deferred tax assets and liabilities are adjusted through income tax expense as changes in tax laws or rates are enacted.
Regulatory tax examinations The Internal Revenue Service (“IRS”) is currently examining the Company’s 2015 and 2016 federal income tax returns and is expected to complete its exam by mid-2020. The 2017 and 2018 audit cycle is expected to begin
mid-2020. The 2013 and 2014 federal income tax return audit is complete through the exam phase and the Company has reached a tentative agreement on one outstanding issue, pending final review by the Joint Committee of Taxation expected in 2020. Any adjustments that may result from IRS examinations of the Company’s tax returns are not expected to have a material effect on the consolidated financial statements.
Unrecognized tax benefits The Company recognizes tax positions in the consolidated financial statements only when it is more likely than not that the position will be sustained on examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized on settlement. A liability is established for differences between positions taken in a tax return and amounts recognized in the consolidated financial statements.
| Reconciliation of the change in the amount of unrecognized tax benefits | ||||||||||||
| For the years ended December 31, | ||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Balance – beginning of year | $ | 70 | $ | 55 | $ | 10 | ||||||
| Increase for tax positions taken in a prior year | — | 3 | 34 | |||||||||
| Increase for tax positions taken in the current year | — | 12 | 11 | |||||||||
| Balance – end of year | $ | 70 | $ | 70 | $ | 55 |
The Company believes it is reasonably possible that a decrease of up to $58 million in unrecognized tax benefits may occur within the next twelve months due to IRS settlements.
| Components of the deferred income tax assets and liabilities | ||||||||
| As of December 31, | ||||||||
| ($ in millions) | 2019 | 2018 | ||||||
| Deferred tax assets | ||||||||
| Unearned premium reserves | $ | 642 | $ | 594 | ||||
| Pension | 197 | 192 | ||||||
| Accrued compensation | 147 | 145 | ||||||
| Discount on loss reserves | 78 | 67 | ||||||
| Other postretirement benefits | 49 | 45 | ||||||
| Net operating loss carryover | 26 | 50 | ||||||
| Other assets | 54 | 57 | ||||||
| Total deferred tax assets | 1,193 | 1,150 | ||||||
| Deferred tax liabilities | ||||||||
| DAC | (847 | ) | (854 | ) | ||||
| Unrealized net capital gains | (507 | ) | (2 | ) | ||||
| Investments | (567 | ) | (278 | ) | ||||
| Life and annuity reserves | (222 | ) | (194 | ) | ||||
| Intangible assets | (98 | ) | (145 | ) | ||||
| Other liabilities | (106 | ) | (102 | ) | ||||
| Total deferred tax liabilities | (2,347 | ) | (1,575 | ) | ||||
| Net deferred tax liability | $ | (1,154 | ) | $ | (425 | ) |
Although realization is not assured, management believes it is more likely than not that the deferred tax assets will be realized based on the Company’s assessment that the deductions ultimately recognized for tax purposes will be fully utilized. As of December 31, 2019, the Company has U.S. federal and foreign net operating loss carryforwards of $93 million and $29 million, respectively.
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The provisions of the Tax Cuts and Jobs Act of 2017 eliminated the 20-year carryforward period and made it indefinite for federal net operating losses generated in tax years after December 31, 2017. For such amounts generated prior to 2018, the 20-year carryforward period continues to apply.
| Components of the net operating loss carryforwards as of December 31, 2019 | ||||||||||||
| ($ in millions) | 20-Year Carryforward Expires in 2025-2037 | Indefinite Carryforward Period | Total | |||||||||
| US Federal | $ | 72 | $ | 21 | $ | 93 | ||||||
| Foreign | — | 29 | 29 | |||||||||
| Total | $ | 72 | $ | 50 | $ | 122 |
| Components of income tax expense | ||||||||||||
| For the years ended December 31, | ||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Current | $ | 991 | $ | 704 | $ | 1,018 | ||||||
| Deferred | 251 | (236 | ) | (23 | ) | |||||||
| Total income tax expense | $ | 1,242 | $ | 468 | $ | 995 |
The Company paid income taxes of $648 million, $731 million and $968 million in 2019, 2018 and 2017, respectively.
The Company had a current income tax payable of $124 million and a current tax receivable of $124 million as of December 31, 2019 and 2018, respectively.
| Reconciliation of the statutory federal income tax rate to the effective income tax rate | ||||||||||||||||||
| For the years ended December 31, | ||||||||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||||||||
| Income before income taxes | $ | 6,089 | $ | 2,628 | $ | 4,549 | ||||||||||||
| Statutory federal income tax rate on income from operations | 1,279 | 21.0 | % | 552 | 21.0 | % | 1,592 | 35.0 | % | |||||||||
| Tax credits | (33 | ) | (0.5 | ) | (34 | ) | (1.3 | ) | (59 | ) | (1.3 | ) | ||||||
| Share-based payments | (24 | ) | (0.4 | ) | (16 | ) | (0.6 | ) | (63 | ) | (1.4 | ) | ||||||
| Tax-exempt income | (27 | ) | (0.4 | ) | (24 | ) | (0.9 | ) | (32 | ) | (0.7 | ) | ||||||
| State income taxes | 41 | 0.7 | 27 | 1.0 | 21 | 0.5 | ||||||||||||
| Tax Legislation benefit | — | — | (29 | ) | (1.1 | ) | (509 | ) | (11.2 | ) | ||||||||
| Non-deductible goodwill impairment | — | — | — | — | 44 | 1.0 | ||||||||||||
| Other | 6 | — | (8 | ) | (0.3 | ) | 1 | — | ||||||||||
| Effective income tax rate on income from operations | $ | 1,242 | 20.4 | % | $ | 468 | 17.8 | % | $ | 995 | 21.9 | % |
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Notes to Consolidated Financial Statements 2019 Form 10-K
| Note 16 | Statutory Financial Information and Dividend Limitations |
Allstate’s domestic property and casualty and life insurance subsidiaries prepare their statutory-basis financial statements in conformity 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.
All states require domiciled insurance companies to prepare statutory-basis financial statements in conformity with the NAIC Accounting Practices and Procedures Manual, subject to any deviations prescribed or permitted by the applicable insurance commissioner and/or director. Statutory accounting practices differ from GAAP primarily since they require charging policy acquisition and certain sales inducement costs to expense as incurred, establishing life insurance reserves based on different actuarial assumptions, and valuing certain investments and establishing deferred taxes on a different basis.
| Statutory net income (loss) and capital and surplus of Allstate’s domestic insurance subsidiaries | ||||||||||||||||||||
| Net income (loss) | Capital and surplus | |||||||||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | 2019 | 2018 | |||||||||||||||
| Amounts by major business type: | ||||||||||||||||||||
| Property and casualty insurance | $ | 3,989 | $ | 2,939 | $ | 3,050 | $ | 16,192 | $ | 14,328 | ||||||||||
| Life insurance, annuities and voluntary accident and health insurance | 422 | 465 | 327 | 4,208 | 3,819 | |||||||||||||||
| Amount per statutory accounting practices | $ | 4,411 | $ | 3,404 | $ | 3,377 | $ | 20,400 | $ | 18,147 |
Dividend Limitations
There are no regulatory restrictions that limit the payment of dividends by the Corporation, except those generally applicable to corporations incorporated in Delaware. Dividends are payable only out of certain components of shareholders’ equity as permitted by Delaware law. However, the ability of the Corporation 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 Illinois Department of Insurance (“IL DOI”) is limited to formula amounts based on net income and capital and surplus, determined in conformity with statutory accounting practices, as well as the timing and amount of dividends paid in the preceding twelve months. AIC paid dividends of $2.73 billion in 2019. The maximum amount of dividends AIC will be able to pay without prior IL DOI approval at a given point in time during 2020 is $3.73 billion, less dividends paid during the preceding twelve months measured at that point in time. The payment of a dividend in excess of this amount requires 30 days advance written notice to the IL DOI. The dividend is deemed approved, unless the IL DOI disapproves it within the 30 day notice period. Additionally, any dividend must be paid out of unassigned surplus excluding unrealized appreciation from investments, which for AIC totaled $12.09 billion as of December 31, 2019, and cannot result in capital and surplus being less than the minimum amount required by law.
Under state insurance laws, insurance companies are required to maintain paid up capital of not less than the minimum capital requirement applicable to the types of insurance they are authorized to write. Insurance companies are also subject to risk-based capital (“RBC”) requirements adopted by state
insurance regulators. A company’s “authorized control level RBC” is calculated using various factors applied to certain financial balances and activity. Companies that do not maintain adjusted statutory capital and surplus at a level in excess of the company action level RBC, which is two times authorized control level RBC, are required to take specified actions. Company action level RBC is significantly in excess of the minimum capital requirements. Total adjusted statutory capital and surplus and authorized control level RBC of AIC were $19.57 billion and $3.04 billion, respectively, as of December 31, 2019. Most of the Corporation’s insurance subsidiaries are subsidiaries of and/or reinsure all of their business to AIC, including ALIC. AIC’s subsidiaries are included as a component of AIC’s total statutory capital and surplus.
The amount of restricted net assets, as represented by the Corporation’s investment in its insurance subsidiaries, was $28.93 billion as of December 31, 2019.
Intercompany transactions
Notification and approval of intercompany lending activities is also required by the IL DOI for transactions that exceed a level that is based on a formula using statutory admitted assets and statutory surplus.
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| Note 17 | Benefit Plans |
Pension and other postretirement plans
Defined benefit pension plans cover most full-time employees, certain part-time employees and employee-agents. Benefits under the pension plans are based upon the employee’s length of service, eligible annual compensation and, prior to January 1, 2014, either a cash balance or final average pay formula. A cash balance formula applies to all eligible employees hired after August 1, 2002. Eligible employees hired before August 1, 2002 chose between the cash balance formula and the final average pay formula. In July 2013, the Company amended its primary plans effective January 1, 2014 to introduce a new cash balance formula to replace the previous formulas (including the final average pay formula and the previous cash balance formula) under which eligible employees accrue benefits. The Company merged two of its qualified pension plans effective March 31, 2019.
The Company also provides a medical coverage subsidy for eligible employees hired before January 1, 2003, including their eligible dependents, when they retire and certain life insurance benefits for eligible retirees (“postretirement benefits”). In July 2013, the Company amended the plan to eliminate the life insurance benefits effective January 1, 2014 for current eligible employees and effective January 1, 2016 for eligible retirees who retired after 1989. The Company continues to pay life insurance premiums for certain retiree plaintiffs subject to a court order requiring it to do so until such time as their lawsuit seeking to keep their life insurance benefits intact is resolved. Qualified employees may become eligible for a medical subsidy if they retire in accordance with the terms of the applicable plans and are continuously insured under the Company’s group plans or other approved plans in accordance with the plan’s participation requirements. The Company shares the cost of retiree medical
benefits with non Medicare-eligible retirees based on years of service, with the Company’s share being subject to a 5% limit on future annual medical cost inflation after retirement. For Medicare-eligible retirees, the Company provides a fixed Company contribution based on years of service and other factors, which is not subject to adjustments for inflation.
The Company has reserved the right to modify or terminate its benefit plans at any time and for any reason.
Obligations and funded status
The Company calculates benefit obligations based upon generally accepted actuarial methodologies using the projected benefit obligation (“PBO”) for pension plans and the accumulated postretirement benefit obligation (“APBO”) for other postretirement plans. Pension costs and other postretirement obligations are determined using a December 31 measurement date. The benefit obligations represent the actuarial present value of all benefits attributed to employee service rendered as of the measurement date. The PBO is measured using the pension benefit formulas and assumptions. A plan’s funded status is calculated as the difference between the benefit obligation and the fair value of plan assets. The Company’s funding policy for the pension plans is to make contributions at a level in accordance with regulations under the Internal Revenue Code (“IRC”) and generally accepted actuarial principles. The Company’s other postretirement benefit plans are not funded.
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| Change in projected benefit obligation, plan assets and funded status | ||||||||||||||||
| As of December 31, | ||||||||||||||||
| Pension benefits | Postretirement benefits | |||||||||||||||
| ($ in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Change in projected benefit obligation | ||||||||||||||||
| Benefit obligation, beginning of year | $ | 6,224 | $ | 6,815 | $ | 375 | $ | 386 | ||||||||
| Service cost | 117 | 110 | 8 | 7 | ||||||||||||
| Interest cost | 240 | 255 | 14 | 15 | ||||||||||||
| Participant contributions | — | — | 15 | 13 | ||||||||||||
| Actuarial losses (gains) | 927 | (255 | ) | 19 | (4 | ) | ||||||||||
| Benefits paid | (356 | ) | (646 | ) | (39 | ) | (35 | ) | ||||||||
| Translation adjustment and other | (13 | ) | (55 | ) | 5 | (7 | ) | |||||||||
| Benefit obligation, end of year | $ | 7,139 | $ | 6,224 | $ | 397 | $ | 375 | ||||||||
| Change in plan assets | ||||||||||||||||
| Fair value of plan assets, beginning of year | $ | 5,299 | $ | 6,284 | ||||||||||||
| Actual return on plan assets | 1,235 | (300 | ) | |||||||||||||
| Employer contribution | 27 | 16 | ||||||||||||||
| Benefits paid | (356 | ) | (646 | ) | ||||||||||||
| Translation adjustment and other | (13 | ) | (55 | ) | ||||||||||||
| Fair value of plan assets, end of year | $ | 6,192 | $ | 5,299 | ||||||||||||
| Funded status (1) | $ | (947 | ) | $ | (925 | ) | $ | (397 | ) | $ | (375 | ) | ||||
| Amounts recognized in AOCI | ||||||||||||||||
| Unamortized pension and other postretirement prior service credit | $ | (142 | ) | $ | (198 | ) | $ | (13 | ) | $ | (16 | ) |
| (1) | The funded status is recorded within other liabilities and accrued expenses on the Consolidated Statements of Financial Position. |
| Changes in items not yet recognized as a component of net cost for pension and other postretirement plans | ||||||||
| ($ in millions) | Pension benefits | Postretirement benefits | ||||||
| Items not yet recognized as a component of net cost – December 31, 2018 | $ | (198 | ) | $ | (16 | ) | ||
| Prior service credit amortized to net cost | 56 | 3 | ||||||
| Items not yet recognized as a component of net cost – December 31, 2019 | $ | (142 | ) | $ | (13 | ) |
The prior service credit is recognized as a component of net cost for pension and other postretirement plans amortized over the average remaining service period of active employees expected to receive benefits. The prior service credit that will be amortized to net cost for pension and postretirement plans in 2020 is estimated to be $56 million and $3 million, respectively.
The accumulated benefit obligation (“ABO”) for all defined benefit pension plans was $7.02 billion and $6.15 billion as of December 31, 2019 and 2018, respectively. The ABO is the actuarial present value of all benefits attributed by the pension benefit formula
to employee service rendered at the measurement date. However, it differs from the PBO due to the exclusion of an assumption as to future compensation levels.
The PBO, ABO and fair value of plan assets for the Company’s pension plans with an ABO in excess of plan assets were $6.73 billion, $6.62 billion and $5.79 billion, respectively, as of December 31, 2019 and $5.99 billion, $5.93 billion and $5.07 billion, respectively, as of December 31, 2018. Included in the accrued benefit cost of the pension benefits are certain unfunded non-qualified plans with accrued benefit costs of $137 million and $135 million for 2019 and 2018, respectively.
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2019 Form 10-K Notes to Consolidated Financial Statements
| Components of net cost (benefit) for pension and other postretirement plans | ||||||||||||||||||||||||||||||||||||
| For the years ended December 31, | ||||||||||||||||||||||||||||||||||||
| Pension benefits | Postretirement benefits | Total Pension and Postretirement Benefits | ||||||||||||||||||||||||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||
| Service cost | $ | 117 | $ | 110 | $ | 111 | $ | 8 | $ | 7 | $ | 8 | $ | 125 | $ | 117 | $ | 119 | ||||||||||||||||||
| Interest cost | 240 | 255 | 254 | 14 | 15 | 15 | 254 | 270 | 269 | |||||||||||||||||||||||||||
| Expected return on plan assets | (403 | ) | (427 | ) | (419 | ) | — | — | — | (403 | ) | (427 | ) | (419 | ) | |||||||||||||||||||||
| Amortization of prior service credit | (56 | ) | (56 | ) | (56 | ) | (3 | ) | (21 | ) | (25 | ) | (59 | ) | (77 | ) | (81 | ) | ||||||||||||||||||
| Costs and expenses | (102 | ) | (118 | ) | (110 | ) | 19 | 1 | (2 | ) | (83 | ) | (117 | ) | (112 | ) | ||||||||||||||||||||
| Remeasurement of projected benefit obligation | 927 | (255 | ) | 406 | 19 | (4 | ) | 8 | 946 | (259 | ) | 414 | ||||||||||||||||||||||||
| Remeasurement of plan assets | (832 | ) | 727 | (631 | ) | — | — | — | (832 | ) | 727 | (631 | ) | |||||||||||||||||||||||
| Remeasurement gains and losses | 95 | 472 | (225 | ) | 19 | (4 | ) | 8 | 114 | 468 | (217 | ) | ||||||||||||||||||||||||
| Total net (benefit) cost | $ | (7 | ) | $ | 354 | $ | (335 | ) | $ | 38 | $ | (3 | ) | $ | 6 | $ | 31 | $ | 351 | $ | (329 | ) |
The service cost component is the actuarial present value of the benefits attributed by the plans’ benefit formula to services rendered by the employees during the period.
Interest cost is the increase in the PBO in the period due to the passage of time at the discount rate. Interest cost fluctuates as the discount rate changes and is also impacted by the related change in the size of the PBO.
The expected return on plan assets is determined as the product of the expected long-term rate of return on plan assets and the fair value of plan assets.
Pension and other postretirement service cost, interest cost, expected return on plan assets and
amortization of prior service credit are reported in property and casualty insurance claims and claims expense, operating costs and expenses, net investment income and (if applicable) restructuring and related charges on the Consolidated Statements of Operations.
Remeasurement gains and losses relate to changes in discount rates, the differences between actual return on plan assets and the expected long-term rate of return on plan assets, and differences between actual plan experience and actuarial assumptions.
| Weighted average assumptions used to determine net pension cost and net postretirement benefit cost | ||||||||||||||||||
| For the years ended December 31, | ||||||||||||||||||
| Pension benefits | Postretirement benefits | |||||||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||
| Discount rate | 3.70 | % | 4.06 | % | 3.96 | % | 3.61 | % | 3.95 | % | 3.91 | % | ||||||
| Expected long-term rate of return on plan assets | 7.34 | 7.33 | 7.32 | n/a | n/a | n/a |
| Weighted average assumptions used to determine benefit obligations | ||||||||||||
| For the years ended December 31, | ||||||||||||
| Pension benefits | Postretirement benefits | |||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||
| Discount rate | 3.31 | % | 4.31 | % | 3.27 | % | 4.22 | % |
The weighted average health care cost trend rate used in measuring the accumulated postretirement benefit cost is 7.0% for 2020, gradually declining to 4.5% in 2035 and remaining at that level thereafter.
Pension plan assets In general, the Company’s pension plan assets are managed in accordance with investment policies approved by pension investment committees. The purpose of the policies is to ensure the plans’ long-term ability to meet benefit obligations by prudently investing plan assets and Company contributions, while taking into consideration regulatory and legal requirements and current market conditions. The investment policies are reviewed periodically and specify target plan asset allocation by asset category. In addition, the policies specify various
asset allocation and other risk limits. The target asset allocation takes the plans’ funding status into consideration, among other factors, including anticipated demographic changes or liquidity requirements that may affect the funding status such as the potential impact of lump sum settlements as well as existing or expected market conditions. In general, the allocation has a lower overall investment risk when a plan is in a stronger funded status position since there is less economic incentive to take risk to increase the expected returns on the plan assets. The pension plans’ asset exposure within each asset category is tracked against widely accepted established benchmarks for each asset class with limits on variation from the benchmark established in the
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Notes to Consolidated Financial Statements 2019 Form 10-K
investment policy. Pension plan assets are regularly monitored for compliance with these limits and other risk limits specified in the investment policies.
| Weighted average target asset allocation and actual percentage of plan assets by asset category | ||||||||
| As of December 31, 2019 | ||||||||
| Target asset allocation (1) | Actual percentage of plan assets | |||||||
| Pension plan’s asset category | 2019 | 2019 | 2018 | |||||
| Equity securities (2) | 37 - 55% | 50 | % | 47 | % | |||
| Fixed income securities | 37 - 48% | 38 | 41 | |||||
| Limited partnership interests | 1 - 15% | 10 | 9 | |||||
| Short-term investments and other | — | 2 | 3 | |||||
| Total without securities lending (3) | 100 | % | 100 | % |
| (1) | The target asset allocation considers risk-based exposure while the actual percentage of plan assets utilizes a financial reporting view excluding exposure provided through derivatives. |
| (2) | The actual percentage of plan assets for equity securities includes 1% of private equity investments in both 2019 and 2018 that are subject to the limited partnership interests target allocation and none and 4% of fixed income mutual funds in 2019 and 2018, respectively, that are subject to the fixed income securities target allocation. |
| (3) | Securities lending collateral reinvestment of $258 million and $208 million is excluded from the table above in 2019 and 2018, respectively. |
The target asset allocation for an asset category may be achieved either through direct investment holdings, through replication using derivative instruments (e.g., futures or swaps) or net of hedges using derivative instruments to reduce exposure to an asset category. The net notional amount of derivatives used for replication and non-hedging strategies is limited to 115% of total plan assets. Market performance of the different asset categories may, from time to time, cause deviation from the target
asset allocation. The asset allocation mix is reviewed on a periodic basis and rebalanced to bring the allocation within the target ranges.
Outside the target asset allocation, the pension plans participate in a securities lending program to enhance returns. As of December 31, 2019, U.S. government fixed income securities and U.S. equity securities are lent out and cash collateral is invested in short-term investments.
The Allstate Corporation 203
2019 Form 10-K Notes to Consolidated Financial Statements
| Fair values of pension plan assets as of December 31, 2019 | ||||||||||||||||
| ($ in millions) | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Balance as of December 31, 2019 | ||||||||||||
| Equity securities | $ | 216 | $ | 45 | $ | — | $ | 261 | ||||||||
| Fixed income securities: | ||||||||||||||||
| U.S. government and agencies | 237 | 1,096 | — | 1,333 | ||||||||||||
| Corporate | — | 1,060 | — | 1,060 | ||||||||||||
| Short-term investments | 128 | 252 | — | 380 | ||||||||||||
| Free-standing derivatives: | ||||||||||||||||
| Assets | — | 5 | — | 5 | ||||||||||||
| Liabilities | (2 | ) | (17 | ) | — | (19 | ) | |||||||||
| Total plan assets at fair value | $ | 579 | $ | 2,441 | $ | — | 3,020 | |||||||||
| % of total plan assets at fair value | 19.2 | % | 80.8 | % | — | % | 100.0 | % | ||||||||
| Investments measured using the net asset value practical expedient | 3,418 | |||||||||||||||
| Securities lending obligation (1) | (272 | ) | ||||||||||||||
| Derivatives counterparty and cash collateral netting | 9 | |||||||||||||||
| Other net plan assets (2) | 17 | |||||||||||||||
| Total reported plan assets | $ | 6,192 |
| (1) | The securities lending obligation represents the plan’s obligation to return securities lending collateral received under a securities lending program. The terms of the program allow both the plan and the counterparty the right and ability to redeem/return the securities loaned on short notice. Due to its relatively short-term nature, the outstanding balance of the obligation approximates fair value. |
| (2) | Other net plan assets represent cash and cash equivalents, interest and dividends receivable and net receivables related to settlements of investment transactions, such as purchases and sales. |
| Fair values of pension plan assets as of December 31, 2018 | ||||||||||||||||
| ($ in millions) | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Balance as of December 31, 2018 | ||||||||||||
| Equity securities | $ | 51 | $ | 265 | $ | — | $ | 316 | ||||||||
| Fixed income securities: | ||||||||||||||||
| U.S. government and agencies | 172 | 509 | — | 681 | ||||||||||||
| Corporate | — | 1,479 | 5 | 1,484 | ||||||||||||
| Short-term investments | 122 | 198 | — | 320 | ||||||||||||
| Free-standing derivatives: | ||||||||||||||||
| Assets | — | 19 | — | 19 | ||||||||||||
| Liabilities | — | (11 | ) | — | (11 | ) | ||||||||||
| Total plan assets at fair value | $ | 345 | $ | 2,459 | $ | 5 | 2,809 | |||||||||
| % of total plan assets at fair value | 12.3 | % | 87.5 | % | 0.2 | % | 100.0 | % | ||||||||
| Investments measured using the net asset value practical expedient | 2,687 | |||||||||||||||
| Securities lending obligation | (222 | ) | ||||||||||||||
| Derivatives counterparty and cash collateral netting | (6 | ) | ||||||||||||||
| Other net plan assets | 31 | |||||||||||||||
| Total reported plan assets | $ | 5,299 |
The fair values of pension plan assets are estimated using the same methodologies and inputs as those used to determine the fair values for the respective asset category of the Company. These methodologies and inputs are disclosed in Note 6.
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Notes to Consolidated Financial Statements 2019 Form 10-K
| Rollforward of Level 3 plan assets during December 31, 2019 | ||||||||||||||||||||||||
| Actual return on plan assets: | ||||||||||||||||||||||||
| ($ in millions) | Balance as of December 31, 2018 | Relating to assets sold during the period | Relating to assets still held at the reporting date | Purchases, sales and settlements, net | Net transfers in and/or (out) of Level 3 | Balance as of December 31, 2019 | ||||||||||||||||||
| Equity securities | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
| Fixed income securities: | ||||||||||||||||||||||||
| Corporate | 5 | — | — | (5 | ) | — | — | |||||||||||||||||
| Total Level 3 plan assets | $ | 5 | $ | — | $ | — | $ | (5 | ) | $ | — | $ | — |
| Rollforward of Level 3 plan assets during December 31, 2018 | ||||||||||||||||||||||||
| Actual return on plan assets: | ||||||||||||||||||||||||
| ($ in millions) | Balance as of December 31, 2017 | Relating to assets sold during the period | Relating to assets still held at the reporting date | Purchases, sales and settlements, net | Net transfers in and/or (out) of Level 3 | Balance as of December 31, 2018 | ||||||||||||||||||
| Equity securities | $ | 29 | $ | — | $ | 3 | $ | — | $ | (32 | ) | $ | — | |||||||||||
| Fixed income securities: | ||||||||||||||||||||||||
| Corporate | 10 | — | — | (5 | ) | — | 5 | |||||||||||||||||
| Total Level 3 plan assets | $ | 39 | $ | — | $ | 3 | $ | (5 | ) | $ | (32 | ) | $ | 5 |
| Rollforward of Level 3 plan assets during December 31, 2017 | ||||||||||||||||||||||||
| Actual return on plan assets: | ||||||||||||||||||||||||
| ($ in millions) | Balance as of December 31, 2016 | Relating to assets sold during the period | Relating to assets still held at the reporting date | Purchases, sales and settlements, net | Net transfers in and/or (out) of Level 3 | Balance as of December 31, 2017 | ||||||||||||||||||
| Equity securities | $ | — | $ | — | $ | — | $ | 29 | $ | — | $ | 29 | ||||||||||||
| Fixed income securities: | ||||||||||||||||||||||||
| Corporate | 10 | — | — | — | — | 10 | ||||||||||||||||||
| Total Level 3 plan assets | $ | 10 | $ | — | $ | — | $ | 29 | $ | — | $ | 39 |
The expected long-term rate of return on plan assets reflects the average rate of earnings expected on plan assets. The Company’s assumption for the expected long-term rate of return on plan assets is reviewed annually giving consideration to appropriate financial data including, but not limited to, the plan asset allocation, forward-looking expected returns for the period over which benefits will be paid, historical returns on plan assets and other relevant market data. Given the long-term forward-looking nature of this assumption, the actual returns in any one year do not immediately result in a change. In giving consideration to the targeted plan asset allocation, the Company evaluated returns using the same sources it has used historically which include: historical average asset class returns from an independent nationally recognized vendor of this type of data blended together using the asset allocation policy weights for the Company’s pension plans; asset class return forecasts from a large global independent asset management firm that specializes in providing multi-asset class investment fund products which were blended together using the asset allocation policy weights; and expected portfolio returns from a proprietary simulation methodology of a widely recognized external investment consulting firm
that performs asset allocation and actuarial services for corporate pension plan sponsors. This same methodology has been applied on a consistent basis each year. All of these were consistent with the Company’s weighted average long-term rate of return on plan assets assumption of 7.34% used for 2019 and an estimate of 7.08% that will be used for 2020. As of the 2019 measurement date, the arithmetic average of the annual actual return on plan assets for the most recent 10 and 5 years was 10.0% and 9.6%, respectively.
Cash flows There was no required cash contribution necessary to satisfy the minimum funding requirement under the IRC for the tax qualified pension plan for the year ended December 31, 2019.
The Company currently plans to contribute $25 million to its unfunded non-qualified plans and zero and $4 million to its primary and other qualified funded pension plans, respectively, in 2020.
The Company contributed $24 million and $22 million to the postretirement benefit plans in 2019 and 2018, respectively. Contributions by participants were $15 million and $13 million in 2019 and 2018, respectively.
The Allstate Corporation 205
2019 Form 10-K Notes to Consolidated Financial Statements
| Estimated future benefit payments expected to be paid in the next 10 years | ||||||||
| As of December 31, 2019 | ||||||||
| ($ in millions) | Pension benefits | Postretirement benefits | ||||||
| 2020 | $ | 600 | $ | 23 | ||||
| 2021 | 629 | 24 | ||||||
| 2022 | 636 | 26 | ||||||
| 2023 | 634 | 27 | ||||||
| 2024 | 626 | 27 | ||||||
| 2025-2029 | 2,401 | 136 | ||||||
| Total benefit payments | $ | 5,526 | $ | 263 |
Allstate 401(k) Savings Plan
Employees of the Company, with the exception of those employed by the Company’s international, SquareTrade, InfoArmor and Esurance subsidiaries, are eligible to become members of the Allstate 401(k) Savings Plan (“Allstate Plan”). The Company’s contributions are based on the Company’s matching obligation. The Company is responsible for funding its anticipated contribution to the Allstate Plan, and has used the remaining ESOP shares to pre-fund a portion of the contribution. In connection with the Allstate Plan, the Company had a note from the ESOP. On
December 31, 2019, the note matured and the remaining principal balance of $2 million was repaid. The Company records dividends on the ESOP shares in retained income and all the shares held by the ESOP are included in basic and diluted weighted average common shares outstanding.
The Company’s contribution to the Allstate Plan was $93 million, $89 million and $81 million in 2019, 2018 and 2017, respectively. These amounts were reduced by the ESOP benefit.
| ESOP benefit | ||||||||||||
| For the years December 31, | ||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Interest expense recognized by ESOP | $ | — | $ | — | $ | — | ||||||
| Less: dividends accrued on ESOP shares | (1 | ) | (1 | ) | (1 | ) | ||||||
| Cost of shares allocated | 3 | — | 3 | |||||||||
| Compensation expense | 2 | (1 | ) | 2 | ||||||||
| Reduction of defined contribution due to ESOP | 43 | 1 | 38 | |||||||||
| ESOP benefit | $ | (41 | ) | $ | (2 | ) | $ | (36 | ) |
The Company made $2 million, zero and $1 million in contributions to the ESOP in 2019, 2018 and 2017, respectively. As of December 31, 2019, there were 0.4 million, 39 million and zero of the remaining ESOP shares that have been committed to be released, allocated and unallocated, respectively.
Allstate’s Canadian, SquareTrade, Esurance and Answer Financial subsidiaries sponsor defined contribution plans for their eligible employees. Expense for these plans was $15 million, $15 million and $12 million in 2019, 2018 and 2017, respectively. Effective January 1, 2020, Answer Financial employees will be included in the Allstate Plan.
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Notes to Consolidated Financial Statements 2019 Form 10-K
| Note 18 | Equity Incentive Plans |
The Company currently has equity incentive plans under which the Company grants nonqualified stock options, restricted stock units and performance stock awards to certain employees and directors of the Company. The total compensation expense related to equity awards was $105 million, $125 million and $106 million and the total income tax benefits were $17 million, $22 million and $22 million for 2019, 2018 and 2017, respectively. Total cash received from the exercise of options was $154 million, $92 million and $178 million for 2019, 2018 and 2017, respectively. Total tax benefit realized on options exercised and the release of stock restrictions was $43 million, $28 million and $96 million for 2019, 2018 and 2017, respectively.
The Company records compensation expense related to awards under these plans over the shorter of the period in which the requisite service is rendered or retirement eligibility is attained. Compensation expense for performance share awards is based on the probable number of awards expected to vest using the performance level most likely to be achieved at the end of the performance period. As of December 31, 2019, total unrecognized compensation cost related to all nonvested awards was $79 million, of which $29 million related to nonqualified stock options which is expected to be recognized over the weighted average vesting period of 1.68 years, $21 million related to restricted stock units which is expected to be recognized over the weighted average vesting period of 1.69 years and $29 million related to performance stock awards which is expected to be recognized over the weighted average vesting period of 1.55 years.
Options are granted to employees with exercise prices equal to the closing share price of the Company’s common stock on the applicable grant date. Options granted to employees on or after February 18, 2014 vest ratably over a three-year period. Options granted prior to February 18, 2014 vest 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversaries of the grant date. Vesting is subject to continued service, except for employees who are retirement eligible and in certain other limited circumstances. Options may be exercised once vested and will expire no later than ten years after the date of grant.
Restricted stock units for directors vest immediately and convert into shares of stock on the earlier of the day of the third anniversary of the grant
date or the date the director’s service terminates, unless a deferred period of restriction is elected. Restricted stock units granted to directors prior to June 1, 2016 convert upon leaving the board. Restricted stock units granted to employees on or after February 18, 2014 vest on the day prior to the third anniversary of the grant date. Restricted stock units granted to employees subsequently convert into shares of stock on the day of the respective anniversary of the grant date. Vesting is subject to continued service, except for employees who are retirement eligible and in certain other limited circumstances.
Performance stock awards vest into shares of stock on the day prior to the third anniversary of the grant date. Vesting of the number of performance stock awards earned based on the attainment of performance goals for each of the performance periods is subject to continued service, except for employees who are retirement eligible and in certain other limited circumstances. Performance stock awards subsequently convert into shares of stock in full the day of the third anniversary of the grant date.
Since 2001, a total of 110.8 million shares of common stock were authorized to be used for awards under the plans, subject to adjustment in accordance with the plans’ terms. As of December 31, 2019, 24.0 million shares were reserved and remained available for future issuance under these plans. The Company uses its treasury shares for these issuances.
The fair value of each option grant is estimated on the date of grant using a binomial lattice model. The Company uses historical data to estimate option exercise and employee termination within the valuation model. In addition, separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from the output of the binomial lattice model and represents the period of time that options granted are expected to be outstanding. The expected volatility of the price of the underlying shares is implied based on traded options and historical volatility of the Company’s common stock. The expected dividends were based on the current dividend yield of the Company’s stock as of the date of the grant. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
| Option grant assumptions | |||||||||
| 2019 | 2018 | 2017 | |||||||
| Weighted average expected term | 5.8 years | 5.7 years | 6.1 years | ||||||
| Expected volatility | 15.6 - 28.9% | 15.6 - 30.7% | 15.7 - 32.7% | ||||||
| Weighted average volatility | 18.4 | % | 19.8 | % | 21.0 | % | |||
| Expected dividends | 1.9 - 2.2% | 1.5 - 2.2% | 1.4 - 1.9% | ||||||
| Weighted average expected dividends | 2.2 | % | 2.0 | % | 1.9 | % | |||
| Risk-free rate | 1.3 - 2.7% | 1.3 - 3.2% | 0.5 - 2.5% |
The Allstate Corporation 207
2019 Form 10-K Notes to Consolidated Financial Statements
| Summary of option activity | |||||||||||||
| For the year ended December 31, 2019 | |||||||||||||
| Number (in 000s) | Weighted average exercise price | Aggregate intrinsic value (in 000s) | Weighted average remaining contractual term (years) | ||||||||||
| Outstanding as of January 1, 2019 | 11,730 | $ | 65.82 | ||||||||||
| Granted | 2,802 | 92.66 | |||||||||||
| Exercised | (2,622 | ) | 58.70 | ||||||||||
| Forfeited | (235 | ) | 89.20 | ||||||||||
| Expired | (4 | ) | 31.78 | ||||||||||
| Outstanding as of December 31, 2019 | 11,671 | 73.40 | $ | 455,691 | 6.3 | ||||||||
| Outstanding, net of expected forfeitures | 11,547 | 73.20 | 453,268 | 6.3 | |||||||||
| Outstanding, exercisable (“vested”) | 6,744 | 60.81 | 348,285 | 4.8 |
The weighted average grant date fair value of options granted was $14.96, $17.03 and $14.60 during 2019, 2018 and 2017, respectively. The intrinsic value, which is the difference between the fair value and the exercise price, of options exercised was $114 million, $72 million and $199 million during 2019, 2018 and 2017, respectively.
| Changes in restricted stock units | |||||||
| For the year ended December 31, 2019 | |||||||
| Number (in 000s) | Weighted average grant date fair value | ||||||
| Nonvested as of January 1, 2019 | 957 | $ | 74.58 | ||||
| Granted | 271 | 92.97 | |||||
| Vested | (308 | ) | 62.89 | ||||
| Forfeited | (43 | ) | 84.75 | ||||
| Nonvested as of December 31, 2019 | 877 | 83.87 |
The fair value of restricted stock units is based on the market value of the Company’s stock as of the date of the grant. The market value in part reflects the payment of future dividends expected. The weighted average grant date fair value of restricted stock units granted was $92.97, $93.16 and $80.12 during 2019, 2018 and 2017, respectively. The total fair value of restricted stock units vested was $29 million, $47 million and $58 million during 2019, 2018 and 2017, respectively.
| Changes in performance stock awards | |||||||
| For the year ended December 31, 2019 | |||||||
| Number (in 000s) | Weighted average grant date fair value | ||||||
| Nonvested as of January 1, 2019 | 1,248 | $ | 77.35 | ||||
| Granted | 415 | 92.49 | |||||
| Adjustment for performance achievement | 267 | 62.32 | |||||
| Vested | (702 | ) | 62.32 | ||||
| Forfeited | (47 | ) | 87.83 | ||||
| Nonvested as of December 31, 2019 | 1,181 | 87.78 |
The change in performance stock awards comprises those initially granted in 2019 and the adjustment to previously granted performance stock awards for performance achievement. The fair value of performance stock awards is based on the market value of the Company’s stock as of the date of the grant. The market value in part reflects the payment of future dividends expected. The weighted average grant date fair value of performance stock awards granted was $92.49, $92.88 and $78.47 during 2019, 2018 and 2017, respectively. The total fair value of performance stock awards vested was $65 million, $15 million and $17 million during 2019, 2018 and 2017, respectively.
The Company recognizes all tax effects related to share-based payments at settlement or expiration through the income statement.
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Notes to Consolidated Financial Statements 2019 Form 10-K
| Note 19 | Supplemental Cash Flow Information |
Non-cash investing activities include $198 million, $94 million and $106 million related to mergers and exchanges completed with equity securities, fixed income securities and limited partnerships, and modifications of certain mortgage loans and other investments in 2019, 2018 and 2017, respectively.
Non-cash financing activities include $50 million, $32 million and $43 million related to the issuance of Allstate common shares for vested equity awards in 2019, 2018 and 2017, respectively. Non-cash financing activities also include $90 million related to debt acquired in conjunction with purchases of investments in 2017.
Cash flows used in operating activities in the Consolidated Statements of Cash Flows include cash paid for operating leases related to amounts included
in the measurement of lease liabilities of $155 million for the twelve months ended December 31, 2019. Non-cash operating activities include $604 million related to ROU assets obtained in exchange for lease obligations, including $488 million related to the adoption of new guidance related to accounting for leases, for the twelve months ended December 31, 2019.
Liabilities for collateral received in conjunction with the Company’s securities lending program and OTC and cleared derivatives are reported in other liabilities and accrued expenses or other investments. The accompanying cash flows are included in cash flows from operating activities in the Consolidated Statements of Cash Flows along with the activities resulting from management of the proceeds as follows:
| For the years ended December 31, | ||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Net change in proceeds managed | ||||||||||||
| Net change in fixed income securities | $ | 80 | $ | 234 | $ | 259 | ||||||
| Net change in short-term investments | (451 | ) | (568 | ) | (255 | ) | ||||||
| Operating cash flow (used) provided | (371 | ) | (334 | ) | 4 | |||||||
| Net change in cash | — | — | 1 | |||||||||
| Net change in proceeds managed | $ | (371 | ) | $ | (334 | ) | $ | 5 | ||||
| Net change in liabilities | ||||||||||||
| Liabilities for collateral, beginning of year | $ | (1,458 | ) | $ | (1,124 | ) | $ | (1,129 | ) | |||
| Liabilities for collateral, end of year | (1,829 | ) | (1,458 | ) | (1,124 | ) | ||||||
| Operating cash flow provided (used) | $ | 371 | $ | 334 | $ | (5 | ) |
| Note 20 | Other Comprehensive Income |
| Components of other comprehensive income (loss) on a pre-tax and after-tax basis | ||||||||||||||||||||||||||||||||||||
| For the years ended December 31, | ||||||||||||||||||||||||||||||||||||
| ($ in millions) | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||
| Pre-tax | Tax | After-tax | Pre-tax | Tax | After-tax | Pre-tax | Tax | After-tax | ||||||||||||||||||||||||||||
| Unrealized net holding gains and losses arising during the period, net of related offsets | $ | 2,807 | $ | (592 | ) | $ | 2,215 | $ | (1,142 | ) | $ | 241 | $ | (901 | ) | $ | 866 | $ | (304 | ) | $ | 562 | ||||||||||||||
| Less: reclassification adjustment of realized capital gains and losses | 413 | (87 | ) | 326 | (186 | ) | 39 | (147 | ) | 374 | (131 | ) | 243 | |||||||||||||||||||||||
| Unrealized net capital gains and losses | 2,394 | (505 | ) | 1,889 | (956 | ) | 202 | (754 | ) | 492 | (173 | ) | 319 | |||||||||||||||||||||||
| Unrealized foreign currency translation adjustments | (13 | ) | 3 | (10 | ) | (61 | ) | 13 | (48 | ) | 69 | (24 | ) | 45 | ||||||||||||||||||||||
| Unamortized pension and other postretirement prior service credit | (59 | ) | 12 | (47 | ) | (77 | ) | 18 | (59 | ) | (80 | ) | 28 | (52 | ) | |||||||||||||||||||||
| Other comprehensive income (loss) | $ | 2,322 | $ | (490 | ) | $ | 1,832 | $ | (1,094 | ) | $ | 233 | $ | (861 | ) | $ | 481 | $ | (169 | ) | $ | 312 |
The Allstate Corporation 209
2019 Form 10-K Notes to Consolidated Financial Statements
| Note 21 | Quarterly Results (unaudited) |
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||||||||||||||||||
| ($ in millions, except per share data) | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||
| Revenues | $ | 10,990 | $ | 9,770 | $ | 11,144 | $ | 10,099 | $ | 11,069 | $ | 10,465 | $ | 11,472 | $ | 9,481 | ||||||||||||||||
| Net income (loss) applicable to common shareholders | 1,261 | 977 | 821 | 678 | 889 | 942 | 1,707 | (585 | ) | |||||||||||||||||||||||
| Earnings per common share - Basic | 3.79 | 2.76 | 2.47 | 1.94 | 2.71 | 2.72 | 5.32 | (1.71 | ) | |||||||||||||||||||||||
| Earnings per common share - Diluted | 3.74 | 2.71 | 2.44 | 1.91 | 2.67 | 2.68 | 5.23 | (1.71 | ) |
The Company changed its accounting principle for recognizing actuarial gains and losses and expected return on plan assets for its pension and other postretirement plans to a more preferable policy under U.S. GAAP. See Note 2 for discussion of the change in accounting principle and further information regarding the impact of the change on the consolidated financial statements.
| Impact of change | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||||||||||||||||||
| ($ in millions, except per share data) | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||
| Revenues | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
| Net income (loss) applicable to common shareholders | 5 | 31 | (69 | ) | 41 | (140 | ) | 109 | 240 | (273 | ) | |||||||||||||||||||||
| Earnings per common share - Basic | 0.01 | 0.09 | (0.21 | ) | 0.12 | (0.43 | ) | 0.31 | 0.75 | (0.80 | ) | |||||||||||||||||||||
| Earnings per common share - Diluted | 0.02 | 0.08 | (0.20 | ) | 0.11 | (0.42 | ) | 0.31 | 0.73 | (0.80 | ) |
210 www.allstate.com
2019 Form 10-K
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
The Allstate Corporation
Northbrook, Illinois 60062
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying Consolidated Statements of Financial Position of The Allstate Corporation and subsidiaries (the “Company”) as of December 31, 2019 and 2018, 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, 2019, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principles
As discussed in Note 2 to the financial statements, the Company elected during 2019 to change its principles of accounting for recognizing pension and other postretirement benefit plan costs. The Company adopted this change on a retrospective basis. Also discussed in Note 2 to the financial statements, the Company changed its presentation and method of accounting for the recognition and measurement of financial assets and financial liabilities on January 1, 2018, due to the adoption of FASB Accounting Standards Update No. 2016-01, Financial Instruments - Overall (Subtopic 825-10).
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A. Controls and Procedures. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
The Allstate Corporation 211
2019 Form 10-K
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Reserve for Property and Casualty Insurance Claims and Claims Expense - Refer to Notes 2 and 8 to the Financial Statements
Critical Audit Matter Description
The Company establishes reserves for property and casualty insurance claims and claims expense on reported and unreported claims of insured losses. Using established industry and actuarial best practices as well as the Company’s historical claims experience, the reserve for property and casualty insurance claims and claims expense is estimated based on (i) claims reported, (ii) claims incurred but not reported, and (iii) projections of claim payments to be made in the future.
Given the subjectivity of estimating claims incurred but not reported and projections of claim payments to be made in the future, particularly those with payout requirements over a longer period of time, the related audit effort in evaluating the reserve for property and casualty insurance claims and claims expense required a high degree of auditor judgment and an increased extent of effort, including involvement of our actuarial specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the reserve for property and casualty insurance claims and claims expense included the following:
| • | We tested the effectiveness of controls related to the reserve for property and casualty insurance claims and claims expense, including those over the Company’s estimates and projections. |
| • | We evaluated the methods and assumptions used by the Company to estimate the reserve for property and casualty insurance claims and claims expense by: |
| ◦ | Testing the underlying data that served as the basis for the actuarial analysis, including historical claims, to test that the inputs to the actuarial estimate were complete and accurate. |
| ◦ | Comparing the Company’s prior year assumptions of expected development and ultimate loss to actual losses incurred during the year to assess the reasonableness of those assumptions, including consideration of potential bias, in the determination of the reserve for property and casualty claims and claims expense. |
| ◦ | With the assistance of our actuarial specialists, we developed independent estimates for the reserve for property and casualty insurance claims and claims expense, utilizing loss data and industry claim development factors, and compared our estimates to management’s estimates. |
212 www.allstate.com
2019 Form 10-K
Premium Deficiency Reserve for Life-Contingent Immediate Annuities - Refer to Notes 2 and 9 to the Financial Statements.
Critical Audit Matter Description
Due to the long-term nature of life-contingent immediate annuities, benefits are payable over many years. The Company establishes reserves as the present value of future expected benefits to be paid, reduced by the present value of future expected net premiums. Long-term actuarial assumptions of future investment yields and mortality are used when establishing the reserve. These assumptions are established at the time the policy is issued and are generally not changed during the life of the policy. The Company periodically performs a gross premium valuation (“GPV”) analysis to review the adequacy of reserves using actual experience and current assumptions. If actual experience and current assumptions are adverse compared to the original assumptions and a premium deficiency is determined to exist, any remaining unamortized deferred acquisition costs (“DAC”) balance would be expensed to the extent not recoverable and the establishment of a premium deficiency reserve may be required for any remaining deficiency. As of December 31, 2019, the Company’s GPV analysis indicated that reserves for these policies were sufficient and therefore, the Company has not established a premium deficiency reserve.
The Company also reviews these policies for circumstances where projected profits would be recognized in early years followed by projected losses in later years through a profits followed by losses (“PFBL”) analysis. If this circumstance exists, the Company will accrue a liability, during the period of profits, to offset the losses at such time as the future losses are expected to commence using a method updated prospectively over time. As of December 31, 2019, the Company’s PFBL analysis did not indicate periods of profits followed by periods of losses and therefore, the Company has not established a PFBL reserve.
Given the subjectivity involved in selecting the current assumptions for projected investment yields and mortality, and the sensitivity of the estimate to these assumptions, the related audit effort in evaluating the premium deficiency reserve and PFBL analysis for life-contingent immediate annuities required a high degree of auditor judgment and an increased extent of effort, including involvement of our actuarial specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the premium deficiency reserve, including the GPV and PFBL analysis for life-contingent immediate annuities, included the following:
| • | We tested the effectiveness of controls over management’s premium deficiency reserve and GPV and PFBL analysis, including those over the Company’s selection of assumptions. |
| • | With the assistance of our actuarial specialists, we evaluated the reasonableness of assumptions and their incorporation into the projection model used by the Company to perform its premium deficiency reserve analysis by: |
| ◦ | Testing the underlying data that served as the basis for the assumptions setting and the underlying data used in the projection model to ensure the inputs were complete and accurate. |
| ◦ | Comparing mortality assumptions selected to actual historical experience. |
| ◦ | Comparing projected investment yields selected to historical portfolio returns, evaluating for consistency with current investment portfolio yields and the Company’s long-term reinvestment strategy, and comparing to independently obtained market data. |
| • | With the assistance of our actuarial specialists, we independently calculated the gross premium valuation reserves from the Company’s projection model for a sample of contracts and compared our estimates to management’s estimates. |
| • | With the assistance of our actuarial specialists, we evaluated the aggregate cash flows generated through the Company’s premium deficiency reserve testing for evidence of potential PFBL scenarios that would require the accrual of additional reserves to cover such future losses. |
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
February 21, 2020
We have served as the Company's auditor since 1992.
The Allstate Corporation 213
2019 Form 10-K
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