THE ALLSTATE CORPORATION Overview
The following discussion highlights significant factors influencing the consolidated financial position and results of operations ofThe Allstate Corporation (referred to in this document as "we," "our," "us," the "Company" or "Allstate"). It should be read in conjunction with the condensed consolidated financial statements and related notes thereto found under Part I. Item 1. contained herein, and with the discussion, analysis, consolidated financial statements and notes thereto in Part I. Item 1. and Part II. Item 7. and Item 8. ofThe Allstate Corporation annual report on Form 10-K for 2019, filedFebruary 21, 2020 . Further analysis of our insurance segments is provided in the Property-Liability Operations and Segment Results sections, including Allstate Protection and Discontinued Lines and Coverages, Service Businesses, Allstate Life, Allstate Benefits, and Allstate Annuities, of Management's Discussion and Analysis ("MD&A"). The segments are consistent with the way in which the chief operating decision maker reviews financial performance and makes decisions about the allocation of resources. The Novel Coronavirus Pandemic or COVID-19 ("Coronavirus") The Coronavirus resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which have included the implementation of travel restrictions, government-imposed shelter-in-place orders, quarantine periods, social distancing, and restrictions on large gatherings, have caused material disruption to businesses globally, resulting in increased unemployment, a recession and increased economic uncertainty. Some of the restrictions implemented to contain the pandemic have been relaxed, but reduced economic activity, limits on large gatherings and events and higher unemployment continue. Additionally, there is no way of predicting with certainty how long the pandemic might last, including the potential for restrictions being restored or new restrictions being implemented that could result in further economic volatility. We have been proactive in protecting the health and safety of our employees and agents, while delivering on our commitment to protect our customers. We executed business continuity plans, maximized work from home, developed exposure escalation protocols and a return to office framework. Depending on its length and severity, the Coronavirus and the related containment actions may significantly affect our results of operations, financial condition and liquidity, including sales of new and retention of existing policies, shared economy demand, severity costs, driving behavior and auto frequency, life insurance mortality and hospital and outpatient claim costs, annuity reserves, investment valuations and returns and increases in bad debt and credit allowance exposure. The magnitude and duration of the global pandemic and the impact of actions taken by governmental authorities, businesses and consumers to mitigate health risks create significant uncertainty. We will continue to closely monitor and proactively adapt to developments and changing conditions. Currently, it is not possible to reliably estimate the length and severity of the pandemic or its impact to our operations, but the effects could be material. A pandemic such as the Coronavirus and its impacts were contemplated in the risk factors set forth under "Item 1A. Risks Factors'' in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , including the risk factors titled "A large-scale pandemic, the occurrence of terrorism or military actions may have an adverse effect on our business" and "Conditions in the global economy and capital markets could adversely affect our business and results of operations". We have continued to support our customers during the Coronavirus pandemic as we: • Extended our Shelter-in-Place Payback of over$948 million to customers
through
accidents contributed favorably to our underwriting results;
this cost was accrued in first quarter 2020 and
second quarter 2020
• Offered the Allstate Special Payment plan to provide more flexible payment
options, including the option to delay payments
• Extended auto insurance coverage to customers using their personal vehicles to
deliver food, medicine and other goods for commercial purposes; coverage for
these activities is typically excluded
• Offered free Allstate Identity Protection to
31, 2020, regardless of whether they were already Allstate customers
• Increased the utilization of virtual tools such as QuickFoto Claim® and
Virtual Assist® to allow for a simple, fast and safe claims handling process
for customers and our employees
The following sections summarize some of the potential impacts of the Coronavirus on our operations, each of our segments and investments that may continue, emerge, evolve or accelerate into 2021. This list is not inclusive of all potential impacts and should not be treated as such. Within the MD&A we have included further disclosures related to the impacts of the Coronavirus on our second quarter and first six months of 2020 results.
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Allstate's operations • Availability and performance of third party vendors, including technology
development, car or home repair and marketing programs
• Increased regulatory restrictions on profitability, rate actions or claim
practices, potentially outside the scope of current policies
• Employee availability and productivity
• Cybersecurity risks related to remote workforce
Allstate Protection • Declines in auto new issued applications due to lower car sales and reductions
in consumer shopping for insurance
• Slower written premiums growth due to decreased consumer demand and fewer
filings for rate increases
• Lower miles and usage in shared economy products
• Lower auto accident frequency from reduced miles driven
• More competitive new business pricing
• Expanding the availability of our pay-per-mile insurance product, Milewise®
• Increased auto claim severity due to more severe accidents or higher
replacement parts inflation
• Increased exposure to allowances for uncollectible receivables
• Validity of statistical models given changes in underlying statistics such as
auto frequency or investment projections
• Agent availability and productivity
Service Businesses • Volatility in consumer spending and retail sales resulting from
shelter-in-place orders and increasing unemployment
• Reduced demand for Allstate Dealer Services products due to lower new and used
car sales
• Decline in claims in Allstate Dealer Services and Allstate Roadside Services
due to lower miles driven
• Decreased sales of Allstate Identity Protection products due to higher
unemployment
• Increased costs from Allstate Identity Protection providing free identity
protection to consumers through the end of the year
Allstate Life • Higher death benefit costs
• Decline in sales due to temporary underwriting restrictions placed on new
business; agents will be able to offer coverage to customers outside the new
guidelines through non-proprietary carriers
• Statutory reserving requirements could be increased due to low interest rates,
which could affect the amount of capital required to be maintained by our
insurance companies Allstate Benefits
• Decreased sports related and auto accident injury claims and fewer elective
surgeries reducing hospital product exposure, partially offset by increased
claim cost exposure for our hospital indemnity, accident, disability and life
products
• Decreased sales and increased policy lapses due to higher employee turnover,
business closures and employee layoffs and furloughs
Allstate Annuities • Lower performance-based investment income
• Higher reserves associated with prolonged low rate environment
• Higher reserves released on death of the insured for life-contingent immediate
annuities, which lowers contract benefits
• Statutory reserving requirements could be increased due to low interest rates,
which could affect the amount of capital required to be maintained by our
insurance companies
Investments
• Adverse impact on the market values, liquidity and valuations of fixed income
securities, equity securities and performance-based investments as well as
changes in the expected pace of funding performance-based and loan
commitments
• Fixed income securities in certain sectors such as energy, automotive, retail,
travel, lodging and airlines were more severely impacted than others in the
first quarter of 2020 and some continue to recover slower from the economic
downturn
• State and local government budgets may be strained by the costs of responding
to the Coronavirus and reduced tax revenues from lower economic activity which
may have an adverse impact on valuations and returns of our municipal bond
portfolio
• Volatility in future investment results due to capital market conditions,
including the pace of economic recovery, effectiveness of the fiscal and
monetary policy responses and uncertainty resulting from the ongoing pandemic
• Higher expected credit losses
Second Quarter 2020 Form 10-Q 49-------------------------------------------------------------------------------- Operating Priorities To achieve our goals in 2020, we are focused on the following priorities: • Better serve customers • Grow customer base • Achieve target returns on capital • Proactively manage investments • Build long-term growth platforms Transformative Growth Plan We have initiated a multi-year Transformative Growth Plan to increase personal property-liability market share. The plan has three components: expand customer access, enhance the customer value proposition and invest in marketing and technology while transforming Allstate agency distribution for effectiveness and efficiency. A key element of our strategy involves cost reductions we anticipate will result from streamlining and restructuring our sales, service, and administrative operations. Significant elements of the initiative remain under review but are expected to be finalized and approved and the related costs recognized later in the third quarter of 2020. As part of this plan, Esurance will be integrated into the Allstate brand in the second half of 2020 as we are repositioning the Allstate brand for broader customer access and leverage Esurance's direct distribution expertise. We continue to execute this plan as we manage through the impacts from the Coronavirus. Enhancing Strategic Position in the Independent Agent Channel OnJuly 7, 2020 , we announced a definitive agreement to acquire National General Holdings Corp. ("National General"), a predominantly personal lines insurance holding company serving a wide range of customer segments through a network of independent agents for property and casualty and accident and health products for approximately$4 billion in cash. National General had$5.6 billion of gross written premiums in 2019 and provides personal and commercial automobile, homeowners, umbrella, recreational vehicle, motorcycle, lender-placed property, supplemental health and other niche insurance products. Auto insurance represents approximately 60% of premium with a significant presence in the non-standard auto market. InDecember 2019 , we announced the integration of theAllstate Independent Agency and Encompass organizations to gain efficiencies and expand our presence in the independent agency channel. Upon completion of the transaction, these businesses will be integrated into National General, which will generate cost synergies. The transaction will more than double our size in the independent agency channel, increasing our market share in personal property-liability by over one percentage point and enhance our independent agent- facing technology. It will significantly expand our distribution footprint, leading us to be a top five personal lines carrier in the independent agency distribution channel. Additional expansion opportunities through independent agents also exist in standard auto and homeowners insurance by leveraging Allstate's expertise. The transaction is expected to close in early 2021, subject to regulatory approvals, a shareholder vote at National General and other customary closing conditions. See Note 3 of the condensed consolidated financial statements for further information. 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. Underwriting income is calculated as premiums earned and other revenue, less claims and claims expense ("losses"), Shelter-in-Place Payback expense, amortization of deferred policy acquisition costs ("DAC"), operating costs and expenses, amortization of purchased intangibles and restructuring and related charges, as determined using accounting principles generally accepted inthe United States of America ("GAAP"). We use this measure in our evaluation of results of operations to analyze the profitability of the Property-Liability insurance operations separately from investment results. Underwriting income is reconciled to net income applicable to common shareholders in the Property-Liability Operations section of Management's Discussion and Analysis. 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 deferred sales inducement costs ("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 intangible assets, 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
Adjusted net income is reconciled to net income applicable to common shareholders in the Service Businesses, Allstate Life, Allstate Benefits and Allstate Annuities Segment sections of MD&A.
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Highlights Consolidated net income ($ in millions) Q1 Q2 [[Image Removed: chart-63dd62354e985d848f7.jpg]] Consolidated net income applicable to common shareholders increased 49.1% to$1.22 billion in the second quarter of 2020 compared to the same period of 2019 primarily due to higher underwriting income in Allstate Protection and higher net realized capital gains, partially offset by Shelter-in-Place Payback and lower net investment income. Consolidated net income applicable to common shareholders decreased 16.6% to$1.74 billion in first six months of 2020 compared to the same period of 2019 primarily due to Shelter-in-Place Payback, lower net investment income and lower net realized capital gains, partially offset by higher underwriting income in Allstate Protection.
For the twelve months ended
Total revenue ($ in millions) [[Image Removed: chart-037f828143c95fa98a6.jpg]] Total revenue increased 0.5% to$11.20 billion in the second quarter of 2020 compared to the same prior year period, driven by higher net realized capital gains and a 2.6% increase in property and casualty insurance premiums earned, partially offset by lower net investment income. Total revenue decreased 3.9% to$21.27 billion in the first six months of 2020 compared to the same prior year period, driven by lower net investment income and lower realized capital gains, partially offset by a 3.8% increase in property and casualty insurance premiums earned. Insurance premiums earned increased in Allstate brand and Service Businesses (Allstate Protection Plans and Allstate Dealer Services). Net investment income ($ in millions) [[Image Removed: chart-355a34756cc15b249d4.jpg]] Net investment income decreased 56.6% to$409 million and 47.8% to$830 million in the second quarter and first six months of 2020, respectively, compared to the same prior year periods.
Performance-based investment income before expense decreased
Market-based investment income before expense decreased$78 million and$98 million in the second quarter and the first six months of 2020, respectively, compared to the same periods of 2019, primarily due to lower interest-bearing portfolio yields. Second Quarter 2020 Form 10-Q 51
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Summarized financial results
Three months ended June 30, Six months ended June 30,
($ in millions) 2020 2019 2020 2019
Revenues
Property and casualty insurance premiums
604 621 1,221 1,249
Other revenue 257 271 522 521
Net investment income 409 942 830 1,590
Realized capital gains (losses) 704 324 242 986
Total revenues 11,197 11,144 21,273 22,134
Costs and expenses
Property and casualty insurance claims and
claims expense (5,222 ) (6,356 ) (10,563 ) (12,176 )
Shelter-in-Place Payback expense (738 ) - (948 ) -
Life contract benefits and interest credited
to contractholder funds (697 ) (667 ) (1,330 ) (1,326 )
Amortization of deferred policy acquisition
costs (1,349 ) (1,362 ) (2,750 ) (2,726 )
Operating, restructuring and interest
expenses (1,544 ) (1,471 ) (3,029 ) (2,952 )
Pension and other postretirement
remeasurement gains (losses) (73 ) (125 ) (391 ) (140 )
Amortization of purchased intangibles (29 ) (32 ) (57 ) (64 )
Impairment of purchased intangibles - (55 ) - (55 )
Total costs and expenses (9,652 ) (10,068 ) (19,068 ) (19,439 )
Gain on disposition of operations 1 2 2 3 Income tax expense (296 ) (227 ) (408 ) (555 ) Net income 1,250 851 1,799 2,143 Preferred stock dividends (26 ) (30 ) (62 ) (61 )
Net income applicable to common shareholders
Segment highlights Allstate Protection underwriting income was$907 million in the second quarter of 2020, a$537 million increase from$370 million in the second quarter of 2019. The increase was primarily due to a decline in auto non-catastrophe losses and increased premiums earned, partially offset by Shelter-in-Place Payback expense. Underwriting income totaled$2.26 billion in the first six months of 2020, a$1.18 billion increase from$1.07 billion in the first six months of 2019, primarily due to lower auto non-catastrophe losses, increased premiums earned and lower catastrophe losses, partially offset by Shelter-in-Place Payback expense. Catastrophe losses were$1.19 billion and$1.40 billion in the second quarter and first six months of 2020, respectively, compared to$1.07 billion and$1.75 billion in the second quarter and first six months of 2019, respectively. Premiums written increased 1.4% to$9.17 billion in the second quarter of 2020 and 2.3% to$17.76 billion in the first six months of 2020 compared to the same periods of 2019. Service Businesses adjusted net income was$38 million in the second quarter of 2020 compared to$16 million in the second quarter of 2019. Adjusted net income was$75 million in the first six months of 2020 compared to$27 million in the first six months of 2019. The increase in both periods was primarily due to growth of Allstate Protection Plans and improved loss experience and lower expenses at Allstate Roadside Services, partially offset by higher operating expenses related to investing in Allstate Identity Protection growth. Total revenues increased 17.5% to$476 million in the second quarter of 2020 and 13.7% to$906 million in the first six months of 2020, compared to the same periods of 2019, primarily due to Allstate Protection Plans' growth through itsU.S. retail and international channels, partially offset by declines in revenue at Allstate Roadside Services. Allstate Life adjusted net income was$72 million in the second quarter of 2020 compared to$68 million in the second quarter of 2019. Adjusted net income was$152 million in the first six months of 2020 compared to$141 million in the first six months of 2019. The increase in both periods was primarily due to lower operating costs and expenses and lower amortization of DAC, partially offset by higher contract benefits. Premiums and contract charges increased 1.8% to$339 million in the second quarter of 2020 and 0.3% to$672 million in the first six months of 2020 compared to the same periods of 2019. Allstate Benefits adjusted net income was$5 million in the second quarter of 2020 compared to$37 million in the second quarter of 2019. Adjusted net income was$29 million in the first six months of 2020 compared to$68 million in the first six months of 2019. The decrease in both periods was primarily due to higher operating costs and expenses driven by a$41
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million, pre-tax, write-off of capitalized software costs associated with a billing system. Premiums and contract charges decreased 7.4% to$263 million in the second quarter of 2020 and 4.7% to$545 million in the first six months of 2020, compared to the same periods of 2019, primarily due to decreases in disability products, driven by the non-renewal of a large underperforming account in the fourth quarter of 2019 and decreased premium collections due to Coronavirus-related layoffs and furloughs. Allstate Annuities adjusted net loss was$111 million in the second quarter of 2020 and$250 million in the first six months of 2020 compared to adjusted net income of$52 million in the second quarter of 2019 and$27 million in the first six months of 2019, primarily due to lower net investment income. Net investment income decreased 77.7% to$66 million in the second quarter of 2020 and 76.7% to$113 million in the first six months of 2020, compared to the same periods of 2019, primarily due to lower performance-based investment results, mainly from limited partnerships, lower interest-bearing investment yields and lower average investment balances. Financial highlights Investments totaled$89.64 billion as ofJune 30, 2020 , increasing from$88.36 billion as ofDecember 31, 2019 . Shareholders' equity As ofJune 30, 2020 , shareholders' equity was$26.99 billion . This total included$3.63 billion in deployable assets at the parent holding company level comprising cash and investments that are generally saleable within one quarter. Book value per diluted common share (ratio of common shareholders' equity to total common shares outstanding and dilutive potential common shares outstanding) was$79.21 , an increase of 17.7% from$67.28 as ofJune 30, 2019 , and an increase of 8.3% from$73.12 as ofDecember 31, 2019 . Return on average common shareholders' equity For the twelve months endedJune 30, 2020 , return on common shareholders' equity was 18.2%, an increase of 7.0 points from 11.2% for the twelve months endedJune 30, 2019 . The increase was primarily due to higher net income applicable to common shareholders for the trailing twelve-month period endedJune 30, 2020 , partially offset by an increase in average common shareholders' equity. Pension and other postretirement remeasurement gains and losses We recorded pension and other postretirement remeasurement losses of$73 million and$391 million in the second quarter and first six months of 2020, respectively. The losses in both periods primarily related to a decrease in the discount rate and changes in actuarial assumptions, partially offset by favorable asset performance compared to the expected return on plan assets. See Note 13 of the condensed consolidated financial statements for further information. Adopted accounting standard EffectiveJanuary 1, 2020 , we adopted the measurement of credit losses on financial instruments accounting standard that primarily affected mortgage loans, bank loans and reinsurance recoverables. Subsequent to the adoption, we measure credit losses on financial instruments, including losses related to mortgage loans, bank loans and reinsurance recoverables, using the expected credit loss model. This model requires us to recognize an 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. See Note 1 of the condensed consolidated financial statements for additional details on the adopted accounting standard. Second Quarter 2020 Form
10-Q 53 -------------------------------------------------------------------------------- Property-Liability Operations
Property-Liability Operations Overview Property-Liability operations consist of two reportable segments: Allstate Protection and Discontinued Lines and Coverages. These segments are consistent with the groupings of financial information that management uses to evaluate performance and to determine the allocation of resources. We do not allocate Property-Liability 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 level for decision-making purposes. The table below includes GAAP operating ratios we use to measure our profitability. We believe that they enhance an investor's understanding of our profitability. They are calculated as follows: • Loss ratio: the ratio of claims and claims expense to premiums earned. Loss
ratios include the impact of catastrophe losses.
• Expense ratio: the ratio of amortization of DAC, operating costs and
expenses, amortization of purchased intangibles, restructuring and related
charges and Shelter-in-Place Payback expense, less other revenue to premiums
earned.
• Combined ratio: the sum of the loss ratio and the expense ratio. The
difference between 100% and the combined ratio represents underwriting income
as a percentage of premiums earned, or underwriting margin.
We have also calculated the following impacts of specific items on the GAAP operating ratios because of the volatility of these items between fiscal periods. • Effect of catastrophe losses on combined ratio: the ratio of catastrophe
losses included in claims and claims expense to premiums earned. This ratio
includes prior year reserve reestimates of catastrophe losses.
• Effect of prior year reserve reestimates on combined ratio: the ratio of
prior year reserve reestimates included in claims and claims expense to
premiums earned. This ratio includes prior year reserve reestimates of
catastrophe losses.
• Effect of amortization of purchased intangibles on combined ratio: the ratio
of amortization of purchased intangibles to premiums earned.
• Effect of restructuring and related charges on combined ratio: the ratio of
restructuring and related charges to premiums earned.
• Effect of Discontinued Lines and Coverages on combined ratio: the ratio of
claims and claims expense and operating costs and expenses in the
Discontinued Lines and Coverages segment to Property-Liability premiums
earned. The sum of the effect of Discontinued Lines and Coverages on the
combined ratio and the Allstate Protection combined ratio is equal to the
Property-Liability combined ratio.
• Effect of Shelter-in-Place Payback expense on combined and expense ratios:
the ratio of Shelter-in-Place Payback expense to premiums earned.
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Property-Liability Operations
Summarized financial data
Three months ended June
30, Six months ended
($ in millions, except ratios) 2020 2019 2020 2019
Premiums written $ 9,172 $ 9,043 $ 17,764 $ 17,370
Revenues
Premiums earned $ 8,863 $ 8,681 $ 17,744 $ 17,188
Other revenue 182 190 363 366
Net investment income 178 471 380 762
Realized capital gains (losses) 382 256 279 753
Total revenues 9,605 9,598 18,766 19,069
Costs and expenses
Claims and claims expense (5,139 ) (6,272 ) (10,390 ) (12,002 )
Shelter-in-Place Payback expense (1) (738 ) - (948 ) -
Amortization of DAC (1,149 ) (1,163 ) (2,316 ) (2,327 )
Operating costs and expenses (2) (1,107 ) (1,060 ) (2,192 ) (2,131 )
Restructuring and related charges (8 ) (9 ) (12 ) (27 )
Total costs and expenses (8,141 ) (8,504 ) (15,858 ) (16,487 )
Income tax expense (292 ) (231 ) (574 ) (537 )
Net income applicable to common shareholders $ 1,172 $ 863 $ 2,334 $ 2,045
Underwriting income $ 904 $ 367 $ 2,249 $ 1,067
Net investment income 178 471 380 762
Income tax expense on operations (209 ) (179 ) (512 ) (381 )
Realized capital gains (losses), after-tax 299 204 217 597
Net income applicable to common shareholders
Catastrophe losses Catastrophe losses, excluding reserve reestimates$ 1,161 $ 1,069 $ 1,392 $ 1,696 Catastrophe reserve reestimates (3) (4) 25 3 5 56 Total catastrophe losses$ 1,186 $
1,072
Non-catastrophe reserve reestimates (3) (35 ) (86 ) (7 ) (127 ) Prior year reserve reestimates (3) (10 ) (83 ) (2 ) (71 ) GAAP operating ratios Loss ratio 58.0 72.3 58.5 69.8 Expense ratio (5) 31.8 23.5 28.8 24.0 Combined ratio 89.8 95.8 87.3 93.8 Effect of catastrophe losses on combined ratio 13.4 12.3 7.9 10.2 Effect of prior year reserve reestimates on combined ratio (0.1 ) (0.9 ) (0.1 ) (0.4 ) Effect of catastrophe losses included in prior year reserve reestimates on combined ratio 0.3 - - 0.3 Effect of restructuring and related charges on combined ratio 0.1 0.1 0.1 0.2 Effect of Discontinued Lines and Coverages on combined ratio - 0.1 - - Effect of Shelter-in-Place Payback expense on combined and expense ratios 8.3 - 5.3 - (1) Due to the significant declines in the number of auto accidents caused by
mandated stay-at-home orders, other pandemic containment actions and reduced
economic activity, auto and commercial lines customers received a
Shelter-in-Place Payback of
first quarter of 2020 and
2020.
(2) As a result of the Coronavirus, we offered the Allstate Special Payment plan
to provide more flexible payment options, including the option to delay
payments to customers, resulting in increased bad debt expense of
million and
respectively. This increase added 0.5 points and 0.3 points to the expense
ratio for the second quarter and first six months of 2020, respectively.
(3) Favorable reserve reestimates are shown in parentheses. (4) 2019 includes$5 million and$20 million of reinstatement reinsurance premiums incurred during the period related to the 2018Camp Fire in the three and six months endedJune 30, 2019 , respectively. (5) Other revenue is deducted from operating costs and expenses in the expense ratio calculation. Second Quarter 2020 Form
10-Q 55 -------------------------------------------------------------------------------- Property-Liability Operations
Net investment income decreased 62.2% or$293 million in the second quarter of 2020 and decreased 50.1% or$382 million in the first six months of 2020 compared to the same periods of 2019, due to lower performance-based investment results, mainly from limited partnerships, and a decline in market-based income due to lower interest-bearing portfolio yields. Net investment income Three months ended June 30, Six months ended June 30, ($ in millions) 2020 2019 2020 2019 Fixed income securities$ 275 $ 265 $ 542 $ 524 Equity securities 16 49 22 72 Mortgage loans 6 4 12 8 Limited partnership interests (117 ) 152 (194 ) 158 Short-term investments 2 16 11 31 Other 25 27 50 53 Investment income, before expense 207 513 443 846 Investment expense (1) (2) (29 ) (42 ) (63 ) (84 ) Net investment income$ 178 $ 471 $ 380 $ 762
(1) Investment expense includes
expenses in the second quarter of 2020 and 2019, respectively, and
million and
respectively. Investee level expenses include asset level operating expenses
on directly held real estate and other consolidated investments. Beginning
is reported as realized capital gains or losses.
(2) Investment expense includes zero and
reinvestment income on securities lending collateral paid to the
counterparties in the second quarter of 2020 and 2019, respectively, and
million and
respectively.
Realized capital gains and losses Net realized capital gains in the second quarter primarily related to increases in the valuation of equity securities and gains on sales of fixed income securities. Valuation of equity investments for the three months endedJune 30, 2020 includes$201 million of appreciation in the valuation of equity securities and$17 million of appreciation primarily related to certain limited partnerships where the underlying assets are predominately public equity securities. Net realized capital gains in the first six months of 2020 primarily related to gains on sales of fixed income securities, partially offset by decreases in the valuation of equity securities. Valuation of equity investments for the six months endedJune 30, 2020 includes$230 million of declines in the valuation of equity securities and$64 million of declines in value primarily related to certain limited partnerships where the underlying assets are predominately public equity securities. Realized capital gains (losses) Three months ended June 30, Six months ended June 30, ($ in millions) 2020 2019 2020 2019 Sales (1)$ 150 $ 107 $ 516 $ 208 Credit losses (2) - (10 ) (35 ) (17 ) Valuation of equity investments 218 141 (294 ) 594 Valuation and settlements of derivative instruments 14 18 92 (32 ) Realized capital gains (losses), pre-tax 382 256 279 753 Income tax expense (83 ) (52 ) (62 ) (156 )
Realized capital gains (losses), after-tax
204
(1) Beginning
level expenses is reported as realized capital gains or losses.
(2) Due to the adoption of the measurement of credit losses on financialinstruments accounting standard, realized capital losses previously reported
as other-than-temporary impairment write-downs are now presented as credit
losses.
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Allstate Protection Segment Results
Allstate Protection Segment
Underwriting results
Three months ended June 30, Six months ended June 30,
($ in millions) 2020 2019 2020 2019
Premiums written $ 9,172 $ 9,043 $ 17,764 $ 17,370
Premiums earned $ 8,863 $ 8,681 $ 17,744 $ 17,188
Other revenue 182 190 363 366
Claims and claims expense (5,137 ) (6,269 ) (10,386 ) (11,997 )
Shelter-in-Place Payback expense (738 ) - (948 ) -
Amortization of DAC (1,149 ) (1,163 ) (2,316 ) (2,327 )
Other costs and expenses (1,106 ) (1,060 ) (2,190 ) (2,130 )
Restructuring and related charges (8 ) (9 ) (12 ) (27 )
Underwriting income $ 907 $ 370 $ 2,255 $ 1,073
Catastrophe losses $ 1,186 $ 1,072 $ 1,397 $ 1,752
Underwriting income (loss) by line of business
Auto $ 999 $ 401 $ 1,655 $ 911
Homeowners (140 ) (88 ) 441 54
Other personal lines (1) 43 47 134 80
Commercial lines (11 ) (7 ) (6 ) -
Other business lines (2) 16 18 30 29
Answer Financial - (1 ) 1 (1 )
Underwriting income $ 907 $ 370 $ 2,255 $ 1,073
(1) Other personal lines include renters, condominium, landlord and other
personal lines products.
(2) Other business lines primarily represent Ivantage, a general agency for
Allstate exclusive agencies and reflects revenue and direct operatingexpenses of the business. Ivantage provides agencies a solution for their
customers when coverage through Allstate brand underwritten products is not
available.
Second Quarter 2020 Form10-Q 57 -------------------------------------------------------------------------------- Segment Results Allstate Protection
Changes in underwriting results from prior year by component and by line of business (1)
Three months ended
Auto Homeowners Other personal lines Commercial lines Allstate Protection (2)
($ in millions) 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019
Underwriting income
(loss) - prior period $ 401 $ 399 $ (88 ) $ 15 $ 47 $ 65 $ (7 ) $ (36 ) $ 370 $ 458
Changes in underwriting
income (loss) from:
Increase (decrease)
premiums earned 138 330 95 94 16 7 (67 ) 61 182 492
Increase (decrease) other
revenue (6 ) - (1 ) - 1 1 - 1 (8 ) 6
(Increase) decrease
incurred claims and
claims expense
("losses"):
Incurred losses,
excluding catastrophe
losses and reserve
reestimates 1,204 (265 ) 2 (41 ) 9 - 83 (62 ) 1,298 (368 )
Catastrophe losses,
excluding reserve
reestimates 57 (14 ) (119 ) (176 ) (26 ) (13 ) (4 ) - (92 ) (203 )
Catastrophe reserve
reestimates - 1 (16 ) 33 (5 ) 3 (1 ) - (22 ) 37
Non-catastrophe reserve
reestimates (50 ) (54 ) (3 ) (10 ) 8 (16 ) (7 ) 32 (52 ) (48 )
Losses subtotal 1,211 (332 ) (136 ) (194 ) (14 ) (26 ) 71 (30 ) 1,132 (582 )
Shelter-in-Place Payback
expense (734 ) - - - - - (4 ) - (738 ) -
(Increase) decrease
expenses (11 ) 4 (10 ) (3 ) (7 ) - (4 ) (3 ) (31 ) (4 )
Underwriting income
(loss) $ 999 $ 401 $ (140 ) $ (88 ) $ 43 $ 47 $ (11 ) $ (7 ) $ 907 $ 370
Six months ended June 30,
Auto Homeowners Other personal lines Commercial lines Allstate Protection (2)
2020 2019 2020 2019 2020 2019 2020 2019 2020 2019
Underwriting income
(loss) - prior period $ 911 $ 1,016 $ 54 $ 356 $ 80 $ 115 $ - $ (42 ) $ 1,073 $ 1,466
Changes in underwriting
income (loss) from:
Increase (decrease)
premiums earned 362 669 198 181 28 22 (32 ) 108 556 980
Increase (decrease) other
revenue (2 ) 3 (1 ) - 2 1 - - (3 ) 8
(Increase) decrease losses: Incurred losses, excluding catastrophe losses and reserve reestimates 1,334 (533 ) (14 ) (90 ) 5 8 52 (112 ) 1,377 (727 ) Catastrophe losses, excluding reserve reestimates 110 (60 ) 183 (376 )
14 (39 ) (3 ) 2 304 (473 )
Catastrophe reserve
reestimates 8 (25 ) 38 21 8 (8 ) (3 ) - 51 (12 )
Non-catastrophe reserve
reestimates (125 ) (74 ) 3 (19 ) 8 (18 ) (7 ) 48 (121 ) (63 )
Losses subtotal 1,327 (692 ) 210 (464 ) 35 (57 ) 39 (62 ) 1,611 (1,275 )
Shelter-in-Place Payback
expense (944 ) - - - - - (4 ) - (948 ) -
(Increase) decrease expenses 1 (85 ) (20 ) (19 ) (11 ) (1 ) (9 ) (4 ) (34 ) (106 ) Underwriting income (loss)$ 1,655 $ 911 $ 441 $ 54 $ 134 $ 80 $ (6 ) $ -$ 2,255 $ 1,073
(1) The 2020 column presents changes relative to 2019. The 2019 column presents
changes relative to 2018.
(2) Includes other business lines and Answer Financial.
Underwriting income increased $537 million in the second quarter of 2020
compared to the second quarter of 2019 primarily due to a decline in auto
non-catastrophe losses and increased premiums earned, partially offset by
Shelter-in-Place Payback expense. Underwriting income increased $1.18 billion in
the first six months of 2020 compared to the first six months of 2019, primarily
due to lower auto non-catastrophe losses, increased premiums earned and lower
catastrophe losses, partially offset by Shelter-in-Place Payback expense.
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Allstate Protection Segment Results
Premiums written is the amount of premiums charged for policies issued during a fiscal period. Premiums are considered earned and are included in the financial results on a pro-rata basis over the policy period. The portion of premiums written applicable to the unexpired term of the policies is recorded as unearned premiums on our Condensed Consolidated Statements of Financial Position. Premiums written and earned by line of business ($ in millions) Three months ended June 30, Six months ended June 30, Premiums written 2020 2019 2020 2019 Auto$ 6,190 $ 6,087 $ 12,399 $ 12,134 Homeowners 2,284 2,219 4,016 3,895 Other personal lines 528 501 958 920 Subtotal - Personal lines 9,002 8,807 17,373 16,949 Commercial lines 170 236 391 421 Total premiums written$ 9,172 $ 9,043 $ 17,764 $ 17,370 Reconciliation of premiums written to premiums earned: (Increase) decrease in unearned premiums (349 ) (384 ) 21 (205 ) Other 40 22 (41 ) 23 Total premiums earned$ 8,863 $ 8,681 $ 17,744 $ 17,188 Auto$ 6,173 $ 6,035 $ 12,327 $ 11,965 Homeowners 2,053 1,958 4,091 3,893 Other personal lines 478 462 949 921 Subtotal - Personal lines 8,704 8,455 17,367 16,779 Commercial lines 159 226 377 409 Total premiums earned$ 8,863 $ 8,681 $ 17,744 $ 17,188
Combined ratios by line of business
Loss ratio Expense ratio (1) Combined ratio
2020 2019 2020 2019 2020 2019
Three months ended June 30 ,
Auto 48.0 69.2 35.8 24.2 83.8 93.4
Impact of Shelter-in-Place Payback - - 11.9 - 11.9 -
Homeowners 84.8 82.0 22.0 22.5 106.8 104.5
Other personal lines 64.9 64.1 26.1 25.7 91.0 89.8
Commercial lines 78.6 86.7 28.3 16.4 106.9 103.1 Impact of Shelter-in-Place Payback - - 2.5 - 2.5
-
Total 58.0 72.2 31.8 23.5 89.8 95.7 Impact of Shelter-in-Place Payback - - 8.3 - 8.3
-
Impact of Allstate Special Payment
plan bad debt expense (2) - - 0.5 - 0.5 -
Six months ended June 30 ,
Auto 55.1 67.8 31.5 24.6 86.6 92.4
Impact of Shelter-in-Place Payback - - 7.7 - 7.7 -
Homeowners 66.9 75.7 22.3 22.9 89.2 98.6
Other personal lines 59.7 65.2 26.2 26.1 85.9 91.3
Commercial lines 78.5 81.9 23.1 18.1 101.6 100.0 Impact of Shelter-in-Place Payback - - 1.1 - 1.1
-
Total 58.5 69.8 28.8 24.0 87.3 93.8 Impact of Shelter-in-Place Payback - - 5.3 - 5.3
-
Impact of Allstate Special Payment
plan bad debt expense (2) - - 0.3 - 0.3 -
(1) Other revenue is deducted from operating costs and expenses in the expense
ratio calculation.
(2) Relates to the Allstate Special Payment plan offered to customers as a
result of the Coronavirus to provide more flexible payment options,including the option to delay payments. Approximately 70% of the higher bad
debt expense was attributed to auto.
Second Quarter 2020 Form10-Q 59 -------------------------------------------------------------------------------- Segment Results Allstate Protection
Loss ratios by line of business
Effect of
catastrophe
losses included
in prior year
Effect of Effect of prior year reserve
Loss ratio catastrophe losses reserve reestimates reestimates
2020 2019 2020 2019 2020 2019 2020 2019
Three months ended June 30 ,
Auto 48.0 69.2 2.2 3.2 (0.9 ) (1.7 ) (0.1 ) (0.1 )
Homeowners 84.8 82.0 46.4 41.8 1.1 0.2 1.3 0.6
Other personal lines 64.9 64.1 18.6 12.6 (0.4 ) 0.2 0.4 (0.6 )
Commercial lines 78.6 86.7 5.7 1.8 13.2 5.7 1.3 0.4
Total 58.0 72.2 13.4 12.3 (0.1 ) (1.0 ) 0.3 -
Six months ended June 30 ,
Auto 55.1 67.8 1.2 2.2 (0.3 ) (1.3 ) (0.1 ) (0.1 )
Homeowners 66.9 75.7 27.8 34.8 0.4 1.5 0.5 1.5
Other personal lines 59.7 65.2 10.7 13.5 (0.8 ) 0.9 (0.2 ) 0.7
Commercial lines 78.5 81.9 2.9 1.2 7.2 4.2 0.8 -
Total 58.5 69.8 7.9 10.2 (0.1 ) (0.4 ) - 0.3
Catastrophe losses increased 10.6% or $114 million in the second quarter of 2020
compared to the second quarter of 2019 and decreased 20.3% or $355 million in
first six months of 2020 compared to the first six months of 2019. We define a
"catastrophe" as an event that produces pre-tax losses before reinsurance in
excess of $1 million and involves multiple first party policyholders, or a
winter weather event that produces a number of claims in excess of a preset,
per-event threshold of average claims in a specific area, occurring within a
certain amount of time following the event. Catastrophes are caused by various
natural events including high winds, winter storms and freezes, tornadoes,
hailstorms, wildfires, tropical storms, tsunamis, hurricanes, earthquakes and
volcanoes. We are also exposed to man-made catastrophic events, such as certain
types of terrorism, civil unrest or industrial accidents. The nature and level
of catastrophes in any period cannot be reliably predicted.
Loss estimates are generally based on claim adjuster inspections and the
application of historical loss development factors. Our loss estimates are
calculated in accordance with the coverage provided by our policies. Auto
policyholders generally have coverage for physical damage due to flood if they
have purchased optional auto comprehensive coverage. Our homeowners policies
specifically exclude coverage for losses caused by flood.
Over time, we have limited our aggregate insurance exposure to catastrophe
losses in certain regions of the country that are subject to high levels of
natural catastrophes, limited by our participation in various state facilities.
California wildfire subrogation subsequent event
On July 1, 2020 , PG&E Corporation and Pacific Gas and Electric Company
(together, "PG&E") funded a subrogation trust to resolve claims arising from the
2017 Northern California wildfires and the 2018 Camp Fire . We expect to
recognize a favorable impact of approximately $400 million to $450 million ,
pre-tax, net of expenses and adjustments to reinsurance, in the third quarter
2020, which will be reflected as prior year catastrophe reserve reestimates. See
Note 8 of the condensed consolidated financial statements for additional
details.
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Allstate Protection Segment Results
Catastrophe losses by the size of event
Three months ended June 30, 2020
Combined Average
Number Claims and ratio catastrophe
($ in millions) of events claims expense impact loss per eventSize of catastrophe loss Greater than$250 million - - % $ - - % - $ -$101 million to$250 million 3 12.5 473 39.9 5.3 158$50 million to$100 million 6 25.0 375 31.6 4.2 63 Less than$50 million 15 62.5 297 25.0 3.4 20 Total 24 100.0 % 1,145 96.5 12.9 48 Prior year reserve reestimates 25 2.1 0.3 Prior quarter reserve reestimates 16 1.4 0.2 Total catastrophe losses$ 1,186 100.0 % 13.4 Six months ended June 30, 2020 Combined Average Number Claims and ratio catastrophe of events claims expense impact loss per event Size of catastrophe loss Greater than$250 million - - % $ - - % - $ -$101 million to$250 million 3 8.3 473 33.9 2.7 158$50 million to$100 million 8 22.2 498 35.6 2.8 62 Less than$50 million 25 69.5 421 30.1 2.4 17 Total 36 100.0 % 1,392 99.6 7.9 39 Prior year reserve reestimates 5 0.4 - Total catastrophe losses$ 1,397 100.0 % 7.9
Catastrophe losses by the type of event
Three months ended June 30 ,
Six months ended
Number Number Number Number
of of of of
($ in millions) events 2020 events 2019 events
2020 events 2019
Hurricanes/Tropical
storms - $ - - $ - - $ - - $ -
Tornadoes - - 3 305 2 39 4 320
Wind/Hail 23 1,141 34 776 31 1,340 49 1,256
Wildfires - - - - 1 2 - -
Other events 1 4 - - 2 11 6 120
Prior year reserve
reestimates 25 3 5 56
Prior quarter
reserve reestimates 16 (12 ) - -
Total catastrophe
losses 24 $ 1,186 37 $ 1,072 36 $ 1,397 59 $ 1,752
Catastrophe reinsurance Our current catastrophe reinsurance program supports our
risk tolerance framework that targets less than a 1% likelihood of annual
aggregate catastrophe losses from hurricanes and earthquakes, net of
reinsurance, exceeding $2 billion . Our program provides reinsurance protection
for catastrophes resulting from multiple perils, including hurricanes,
windstorms, hail, tornadoes, fires following earthquakes, earthquakes and
wildfires.
These reinsurance agreements are part of our catastrophe management strategy,
which is intended to provide our shareholders an acceptable return on the risks
assumed in our property business, and to reduce variability of earnings, while
providing protection to our customers.
Second Quarter 2020 Form 10-Q 61 -------------------------------------------------------------------------------- Segment Results Allstate Protection
During the second quarter of 2020, we completed theFlorida component of the program that is designed to address the distinct needs of our separately capitalized companies in that state. Our 2020 Florida program provides coverage up to$633 million of loss less a$20 million retention. TheFlorida program includes reinsurance agreements placed with the traditional market, theFlorida Hurricane Catastrophe Fund ("FHCF"), and theInsurance Linked Securities ("ILS") market as follows: • The traditional market placement comprises$295 million of reinsurance limits for losses to personal lines property inFlorida arising out of multiple perils. The Excess contract, which forms a part of the traditional market placement, with$264 million of limits, subject to a$20 million retention, provides coverage for perils not covered by the FHCF contracts, which only cover hurricanes. • The FHCF contracts provide approximately$118 million of limits for qualifying losses to personal lines property inFlorida caused by storms theNational Hurricane Center declares to be hurricanes. • The ILS placement provides$200 million of reinsurance limits for qualifying losses to personal lines property inFlorida caused by a named storm event, a severe weather event, an earthquake event, a fire event, a volcanic eruption event, or a meteorite impact event. For a complete summary of the 2020 reinsurance placement, please read this in conjunction with the discussion and analysis in Part I. Item 2. Management's Discussion and Analysis - Allstate Protection Segment Results, Catastrophe Reinsurance of The Allstate Corporation Form 10-Q for the quarterly period endedMarch 31, 2020 . The total cost of our property catastrophe reinsurance program during the second quarter and first six months of 2020 was$105 million and$204 million , respectively, compared to$100 million and$188 million in the second quarter and first six months of 2019, respectively. The increases were due to increases in Nationwide Program costs due to program expansion for aggregate losses, growth in policies and increased rate pressure. Expense ratio increased 8.3 points and 4.8 points in the second quarter and first six months of 2020, respectively, compared to the same periods of 2019, primarily due to the Coronavirus, resulting in the Shelter-in-Place Payback expense and higher bad debt expense related to the Allstate Special Payment plan. Excluding the Shelter-in-Place Payback expense and higher bad debt expense, the expense ratio decreased 0.5 points in the second quarter of 2020 compared to the second quarter of 2019 and decreased 0.8 points in the first six months of 2020 compared to the first six months of 2019. Impact of specific costs and expenses on the expense ratio Three months ended June 30, Six months ended June 30, 2020 2019 2020 2019 Amortization of DAC 13.0 13.4 13.1 13.6 Advertising expense 2.4 2.2 2.3 2.2 Other costs and expenses 7.5 7.8 7.7 8.0 Restructuring and related charges 0.1 0.1
0.1 0.2
Subtotal 23.0 23.5 23.2 24.0 Shelter-in-Place Payback expense 8.3 - 5.3 - Allstate Special Payment plan bad debt expense 0.5 - 0.3 - Total expense ratio 31.8 23.5 28.8 24.0
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Allstate Protection Segment Results
Reserve reestimates were favorable in the second quarter and first six months of 2020 and primarily related to favorable non-catastrophe and catastrophe reserve reestimates in personal lines auto, partially offset by strengthening in homeowners related to catastrophe reestimates and in commercial lines auto reserves. Total reserves, net of reinsurance (estimated cost of outstanding claims) as ofJanuary 1 , by line of business ($ in millions) 2020 2019 Auto$ 14,728 $ 14,378 Homeowners 2,138 2,157 Other personal lines 1,458 1,489 Commercial lines 1,072 801 Total Allstate Protection$ 19,396 $ 18,825 Reserve reestimates Three months ended June 30, Six months ended June 30, Reserve Effect on Reserve Effect on reestimate (1) combined ratio (2) reestimate (1) combined ratio (2) ($ in millions, except ratios) 2020 2019 2020 2019 2020 2019 2020 2019 Auto$ (54 ) $ (104 ) (0.6 ) (1.2 )$ (41 ) $ (158 ) (0.3 ) (0.9 ) Homeowners 23 4 0.3 - 16 57 0.1 0.4 Other personal lines (2 ) 1 - - (8 ) 8 - - Commercial lines 21 13 0.2 0.2 27 17 0.1 0.1 Total Allstate Protection$ (12 ) $ (86 ) (0.1 ) (1.0 )$ (6 ) $ (76 ) (0.1 ) (0.4 ) Allstate brand$ (12 ) $ (83 ) (0.1 ) (1.0 )$ (5 ) $ (81 ) (0.1 ) (0.4 ) Esurance brand 1 - - - 2 3 - - Encompass brand (1 ) (3 ) - - (3 ) 2 - - Total Allstate Protection$ (12 ) $ (86 ) (0.1 ) (1.0 )$ (6 ) $ (76 ) (0.1 ) (0.4 )
(1) Favorable reserve reestimates are shown in parentheses.
(2) Ratios are calculated using Allstate Protection premiums earned.
Second Quarter 2020 Form 10-Q 63 -------------------------------------------------------------------------------- Segment Results Allstate Protection
The following table presents premiums written, policies in force ("PIF") and
underwriting income (loss) by line of business for Allstate brand, Esurance
brand, Encompass brand and Allstate Protection as of or for the six months ended
June 30, 2020 . Detailed analysis of underwriting results, premiums written and
earned, and the combined ratios, including loss and expense ratios, are
discussed in the brand sections.
Premiums written, policies in force and underwriting income (loss)
($ in millions) Allstate brand Esurance brand Encompass brand Allstate Protection
Percent to Percent to Percent to Percent to
Premiums written Amount total brand Amount total brand Amount total brand Amount total
Auto $ 11,146 68.7 % $ 999 93.9 % $ 254 52.4 % $ 12,399 69.8 %
Homeowners 3,762 23.2 61 5.7 193 39.8 4,016 22.6
Other personal lines 916 5.7 4 0.4 38 7.8 958 5.4
Commercial lines 391 2.4 - - - - 391 2.2
Total $ 16,215 100.0 % $ 1,064 100.0 % $ 485 100.0 % $ 17,764 100.0 %
Percent to total
Allstate Protection 91.3 % 6.0 % 2.7 % 100.0 %
PIF (thousands)
Auto 20,464 65.3 % 1,514 90.8 % 473 61.3 % 22,451 66.5 %
Homeowners 6,284 20.1 107 6.4 225 29.1 6,616 19.6
Other personal lines 4,369 13.9 46 2.8 74 9.6 4,489 13.3
Commercial lines 221 0.7 - - - - 221 0.6
Total 31,338 100.0 % 1,667 100.0 % 772 100.0 % 33,777 100.0 %
Percent to total
Allstate Protection 92.8 % 4.9 % 2.3 % 100.0 %
Underwriting income
(loss)
Auto $ 1,546 72.1 % $ 79 86.8 % $ 30 150.0 % $ 1,655 73.4 %
Homeowners 437 20.4 11 12.1 (7 ) (35.0 ) 441 19.6
Other personal lines 136 6.4 1 1.1 (3 ) (15.0 ) 134 6.0
Commercial lines (6 ) (0.3 ) - - - - (6 ) (0.3 )
Other business lines 30 1.4 - - - - 30 1.3
Answer Financial - - - - - - 1 -
Total $ 2,143 100.0 % $ 91 100.0 % $ 20 100.0 % $ 2,255 100.0 %
When analyzing premium measures and statistics for all three brands the following calculations are used as described below. • PIF: Policy counts are based on items rather than customers. A multi-car
customer would generate multiple item (policy) counts, even if all cars were
insured under one policy while Commercial lines PIF counts for shared economy
agreements typically reflect contracts that cover multiple rather than
individual drivers.
• New issued applications: Item counts of automobile or homeowner insurance
applications for insurance policies that were issued during the period,
regardless of whether the customer was previously insured by another Allstate
Protection brand. Allstate brand includes automobiles added by existing
customers when they exceed the number allowed (currently 10) on a policy.
• Average premium-gross written ("average premium"): Gross premiums written
divided by issued item count. Gross premiums written include the impacts from
discounts, surcharges and ceded reinsurance premiums and exclude the impacts
from mid-term premium adjustments and premium refund accruals. Average
premiums represent the appropriate policy term for each line. Allstate and
Esurance brand policy terms are 6 months for auto and 12 months for
homeowners. Encompass brand policy terms are generally 12 months for auto and
homeowners.
• Renewal ratio: Renewal policy item counts issued during the period, based on
contract effective dates, divided by the total policy item counts issued 6
months prior for auto (generally 12 months prior for Encompass brand) or 12
months prior for homeowners.
• Approved rate changes: Based on historical premiums written in locations
where the brands operate, not including rate plan enhancements (such as the
introduction of discounts and surcharges that result in no change in the
overall rate level) and initial rates filed for insurance subsidiaries
initially writing business in a location. Includes rate changes approved
based on our net cost of reinsurance. The rate change percentages are
calculated using approved rate changes during the period as a percentage of:
- Total brand premiums written
- Premiums written in respective locations with rate changes
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Allstate Protection: Allstate brand Segment Results
[[Image Removed: allstatebrandcolora49.jpg]]Underwriting results
Three months ended June 30, Six months ended June 30,
($ in millions) 2020 2019 2020 2019
Premiums written $ 8,391 $ 8,262 $ 16,215 $ 15,806
Premiums earned $ 8,087 $ 7,902 $ 16,193 $ 15,654
Other revenue 141 151 280 286
Claims and claims expense (4,685 ) (5,683 ) (9,404 ) (10,853 )
Shelter-in-Place Payback expense (664 ) - (852 ) -
Amortization of DAC (1,090 ) (1,103 ) (2,197 ) (2,208 )
Other costs and expenses (953 ) (891 ) (1,867 ) (1,785 )
Restructuring and related charges (7 ) (9 ) (10 ) (25 )
Underwriting income $ 829 $ 367 $ 2,143 $ 1,069
Catastrophe losses $ 1,109 $ 1,021 $ 1,305 $ 1,665
Underwriting income (loss) by line of business
Auto $ 894 $ 387 $ 1,546 $ 899
Homeowners (118 ) (79 ) 437 63
Other personal lines (1) 48 48 136 78
Commercial lines (11 ) (7 ) (6 ) -
Other business lines (2) 16 18 30 29
Underwriting income $ 829 $ 367 $ 2,143 $ 1,069
(1) Other personal lines include renters, condominium, landlord and other
personal lines products.
(2) Other business lines primarily represent Ivantage.
Changes in underwriting results from prior year by component (1)
Three months ended June 30, Six months ended June 30,
($ in millions) 2020 2019 2020 2019
Underwriting income (loss) - prior period
463$ 1,069 $ 1,464 Changes in underwriting income (loss) from: Increase (decrease) premiums earned 185 432 539 855 Increase (decrease) other revenue (10 ) 8 (6 ) 7 (Increase) decrease incurred claims and claims expense ("losses"): Incurred losses, excluding catastrophe losses and reserve reestimates 1,129 (292 ) 1,204 (590 ) Catastrophe losses, excluding reserve reestimates (60 ) (224 ) 321 (486 ) Catastrophe reserve reestimates (28 ) 40 39 (13 ) Non-catastrophe reserve reestimates (43 ) (49 ) (115 ) (58 ) Losses subtotal 998 (525 ) 1,449 (1,147 ) Shelter-in-Place Payback expense (664 ) - (852 ) - (Increase) decrease expenses (47 ) (11 ) (56 ) (110 ) Underwriting income$ 829 $ 367 $ 2,143 $ 1,069
(1) The 2020 column presents changes in 2020 compared to 2019. The 2019 column
presents changes in 2019 compared to 2018.
Underwriting income increased$462 million in the second quarter of 2020 compared to the second quarter of 2019, primarily due to a decline in auto non-catastrophe losses and increased premiums, partially offset by Shelter-in-Place Payback expense. Underwriting income increased$1.07 billion in the first six months of 2020 compared to the first six months of 2019, primarily due to lower auto non-catastrophe losses, increased earned premiums and lower catastrophe losses, partially offset by Shelter-in-Place Payback expense. Second Quarter 2020 Form
10-Q 65 -------------------------------------------------------------------------------- Segment Results Allstate Protection: Allstate brand
Premiums written and earned by line of business ($ in millions) Three months ended June 30, Six months ended June 30, Premiums written 2020 2019 2020 2019 Auto $ 5,572$ 5,472 $ 11,146 $ 10,867 Homeowners (1) 2,144 2,076 3,762 3,641 Other personal lines 505 478 916 877 Subtotal - Personal lines 8,221 8,026 15,824 15,385 Commercial lines 170 236 391 421 Total $ 8,391$ 8,262 $ 16,215 $ 15,806 Premiums earned Auto $ 5,547$ 5,404 $ 11,079 $ 10,725 Homeowners 1,924 1,832 3,831 3,643 Other personal lines 457 440 906 877 Subtotal - Personal lines 7,928 7,676 15,816 15,245 Commercial lines 159 226 377 409 Total $ 8,087$ 7,902 $ 16,193 $ 15,654
(1) The cost of our catastrophe reinsurance program increased
million in the second quarter of 2020 from
of 2019 and increased
2020 from
placement premiums are recorded primarily in the Allstate brand and are a
reduction of premium. For a more detailed discussion on reinsurance, see
Note 9 of the condensed consolidated financial statements.
Auto premium measures and
statistics
Three months ended June 30, Six months ended June 30,
2020 2019 Change 2020 2019 Change
PIF (thousands) 20,464 20,301 0.8 % 20,464 20,301 0.8 %
New issued applications
(thousands) 751 755 (0.5 )% 1,502 1,495 0.5 %
Average premium $ 594 $ 581 2.2 % $ 596 $ 579 2.9 %
Renewal ratio (%) 88.1 88.8 (0.7 ) 88.1 88.8 (0.7 )
Approved rate changes:
Impact of rate changes ($ in
millions) $ 26 $ 177 $ (151 ) $ 111 $ 297 $ (186 )
Number of locations (1) 14 20 (6 ) 23 29 (6 )
Total brand (%) 0.1 0.8 (0.7 ) 0.5 1.4 (0.9 )
Location specific (%) 0.4 3.4 (3.0 ) 1.6 3.9 (2.3 )
(1) Allstate brand operates in 50 states, the
Canadian provinces.
Auto insurance premiums written increased 1.8% or$100 million in the second quarter of 2020 compared to the second quarter of 2019 and increased 2.6% or$279 million in the first six months of 2020 compared to the first six months of 2019, primarily due to an increase in average premium and policy growth. During the second quarter of 2020, we noted growth in premiums written slowed significantly due to lower increases in average premium from less approved rate and a decline in new issued applications, both related to the Coronavirus. PIF increased 0.8% or 163 thousand to 20,464 thousand as ofJune 30, 2020 compared toJune 30, 2019 with increases in 28 states, including 5 of our largest 10 states. Homeowners premium measures and statistics Three months ended June 30, Six months ended June 30, 2020 2019 Change 2020 2019 Change PIF (thousands) 6,284 6,221 1.0 % 6,284 6,221 1.0 % New issued applications (thousands) 224 229 (2.2 )% 423 426 (0.7 )% Average premium $ 1,328$ 1,295 2.5 %$ 1,322 $ 1,283 3.0 % Renewal ratio (%) 87.3 88.2 (0.9 ) 87.5 88.3 (0.8 ) Approved rate changes: Impact of rate changes ($ in millions) $ 11$ 8 $ 3 $ 110$ 163 $ (53 ) Number of locations (1) 5 4 1 20 24 (4 ) Total brand (%) 0.1 0.1 - 1.4 2.2 (0.8 ) Location specific (%) 3.4 5.1 (1.7 ) 4.1 5.4 (1.3 ) (1) Allstate brand operates in 50 states, theDistrict of Columbia and 5 Canadian provinces.
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Allstate Protection: Allstate brand Segment Results
Homeowners insurance premiums written increased 3.3% or$68 million in the second quarter of 2020 compared to the second quarter of 2019 and increased 3.3% or$121 million in the first six months of 2020 compared to the first six months of 2019, primarily due to higher average premiums, including rate changes and inflation in insured home valuations, and policy growth. Homeowners PIF increased in 29 states, including 6 of our largest 10 states, as ofJune 30, 2020 compared toJune 30, 2019 . Other personal lines premiums written increased 5.6% or$27 million in the second quarter of 2020 compared to the second quarter of 2019 and increased 4.4% or$39 million in the first six months of 2020 compared to the first six months of 2019. The increase in both periods was primarily due to an increase in condominiums, personal umbrella and boat insurance premiums. Commercial lines premiums written decreased 28.0% or$66 million in the second quarter of 2020 compared to the second quarter of 2019 and decreased 7.1% or$30 million in the first six months of 2020 compared to the first six months of 2019. The decrease in both periods was primarily due to lower miles and utilization in our shared economy business related to the impacts of the Coronavirus. PIF for the shared economy agreements typically reflect contracts that cover multiple insureds as opposed to individual insureds. Combined ratios by line of business Loss ratio Expense
ratio (1) Combined ratio
2020 2019 2020 2019 2020 2019
Three months ended June 30 ,
Auto 47.7 68.4 36.2 24.4 83.9 92.8
Impact of Shelter-in-Place Payback - - 11.9 - 11.9 -
Homeowners 84.5 82.3 21.6 22.0 106.1 104.3
Other personal lines 63.7 63.9 25.8 25.2 89.5 89.1
Commercial lines 78.6 86.7 28.3 16.4 106.9 103.1
Impact of Shelter-in-Place Payback - - 2.5 - 2.5 -
Total 57.9 71.9 31.8 23.5 89.7 95.4
Impact of Shelter-in-Place Payback - - 8.2 - 8.2 -
Impact of Allstate Special Payment plan
bad debt expense (2) - - 0.5 - 0.5 -
Six months ended June 30 ,
Auto 54.3 67.0 31.7 24.6 86.0 91.6
Impact of Shelter-in-Place Payback - - 7.7 - 7.7 -
Homeowners 66.6 75.8 22.0 22.5 88.6 98.3
Other personal lines 58.9 65.3 26.1 25.8 85.0 91.1
Commercial lines 78.5 81.9 23.1 18.1 101.6 100.0
Impact of Shelter-in-Place Payback - - 1.1 - 1.1 -
Total 58.1 69.3 28.7 23.9 86.8 93.2
Impact of Shelter-in-Place Payback - - 5.3 - 5.3 -
Impact of Allstate Special Payment plan
bad debt expense (2) - - 0.3 - 0.3 -
(1) Other revenue is deducted from operating costs and expenses in the expense
ratio calculation.
(2) Relates to the Allstate Special Payment plan offered to customers as a
result of the Coronavirus to provide more flexible payment options,including the option to delay payments. Approximately 70% of the higher bad
debt expense was attributed to auto.
Second Quarter 2020 Form10-Q 67 -------------------------------------------------------------------------------- Segment Results Allstate Protection: Allstate brand
Loss ratios by line of business
Effect of
catastrophe
losses included
in prior year
Effect of Effect of prior year reserve
Loss ratio catastrophe losses reserve reestimates reestimates
2020 2019 2020 2019 2020 2019 2020 2019
Three months ended June 30 ,
Auto 47.7 68.4 2.2 3.3 (0.9 ) (1.7 ) (0.1 ) (0.1 )
Homeowners 84.5 82.3 46.3 42.6 1.1 (0.1 ) 1.4 0.3
Other personal lines 63.7 63.9 18.8 13.0 (0.5 ) (0.2 ) 0.4 (0.6 )
Commercial lines 78.6 86.7 5.7 1.8 13.2 5.7 1.3 0.4
Total 57.9 71.9 13.7 13.0 (0.2 ) (1.0 ) 0.3 -
Six months ended June 30 ,
Auto 54.3 67.0 1.2 2.3 (0.4 ) (1.4 ) (0.1 ) -
Homeowners 66.6 75.8 27.7 35.5 0.5 1.2 0.6 1.3
Other personal lines 58.9 65.3 10.8 13.8 (0.7 ) 1.0 (0.3 ) 0.7
Commercial lines 78.5 81.9 2.9 1.2 7.2 4.2 0.8 -
Total 58.1 69.3 8.1 10.7 - (0.5 ) 0.1 0.3
Frequency and severity statistics, which are influenced by driving patterns,
inflation and other factors, are provided to describe the trends in loss costs.
Our reserving process incorporates changes in loss patterns, operational
statistics and changes in claims reporting processes to determine our best
estimate of recorded reserves. We use the following statistics to evaluate
losses:
• Paid claim frequency (1) is calculated as annualized notice counts closed with
payment in the period divided by the average of PIF with the applicable coverage
during the period.
• Gross claim frequency (1) is calculated as annualized notice counts received
in the period divided by the average of PIF with the applicable coverage during
the period. Gross claim frequency includes all actual notice counts, regardless
of their current status (open or closed) or their ultimate disposition (closed
with a payment or closed without payment).
• Paid claim severity is calculated by dividing the sum of paid losses and loss
expenses by claims closed with a payment during the period.
• Percent change in frequency or severity statistics is calculated as the amount
of increase or decrease in the paid or gross claim frequency or severity in the
current period compared to the same period in the prior year divided by the
prior year paid or gross claim frequency or severity.
(1) Frequency statistics exclude counts associated with catastrophe events.
Paid claim frequency trends will often differ from gross claim frequency trends due to differences in the timing of when notices are received and when claims are settled. • Paid frequency trends for property damage claims reflect smaller differences
as timing between opening and settlement is generally less.
• Gross frequency trends for bodily injury reflect emerging trends since the
difference in timing between opening and settlement is much greater and gross
frequency does not typically experience the same quarterly fluctuations as
seen in paid frequency
• In evaluating frequency, we typically rely upon paid frequency trends for
physical damage coverages such as property damage and gross frequency for
casualty coverages such as bodily injury to provide an indicator of emerging
trends in overall claim frequency while also providing insights for our
analysis of severity.
We have expanded our utilization of virtual claims processes in response to the Coronavirus. We are continuing to implement new technology and process improvements that provide continued loss cost accuracy, efficient processing and enhanced customer experiences that are simple, fast and produce high degrees of satisfaction. • Digital Operating Centers handle auto physical damage claims countrywide
utilizing our virtual estimation capabilities, which includes estimating
damage with photos and video through the use of QuickFoto Claim® and Virtual
Assist®
• Virtual Assist and aerial imagery using satellites, airplanes and drones
handle property claims by estimating damage through video
These organizational and process changes impact frequency and severity statistics as changes in claim opening and closing practices and shifts in timing, if any, can impact comparisons to prior periods.
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Allstate Protection: Allstate brand Segment Results
Auto loss ratio decreased 20.7 points and 12.7 points in the second quarter and
first six months of 2020, respectively, compared to the same periods of 2019,
primarily due to a decline in non-catastrophe losses driven by favorable
frequency, higher premiums
earned and lower catastrophe losses, partially offset by increased severity and
less favorable non-catastrophe prior year reserve reestimates compared to the
prior period.
Auto frequency and severity statistics
Three months
ended June 30, Six months ended
(% change year-over-year) 2020 June 30, 2020
Auto property damage:
Gross claim frequency (46.4 )% (29.4 )%
Paid claim frequency (37.8 ) (20.6 )
Paid claim severity 20.1 12.7
Bodily injury gross claim frequency (49.2 ) (30.5 )
Coronavirus may positively or negatively impact frequency and severity statistics including: • Impacts of shelter-in-place restrictions, social distancing requirements,
limits on large gatherings and events, and restrictions on non-essential
businesses as these become more or less strict
• Changes in unemployment levels
• Changes in commuting activity and utilization of public transportation
• Changes in paid claims settlement rates as the low frequency environment
creates capacity to settle claims faster
• Changes in mix of claim types due to changes in driving behavior (e.g., speed,
time of day)
• Labor and part cost variability
• Changes in limits purchased
• Cadence of routine automobile maintenance
• Court system variability in both timing and magnitude of claim settlement
Property damage gross and paid claim frequency decreased in the second quarter and the first six months of 2020 compared to the same periods of 2019 due to factors including: • Declines in auto miles driven related to the Coronavirus
• Gross claim frequency declined by 34.6% in
reflecting an increase in miles driven compared to April and
shelter-in-place restrictions were lifted in several states
Property damage paid claim severities increased in the second quarter and first six months of 2020 compared to the same periods of 2019 due to factors including: • The timing of payments on property damage claims significantly impacted the
average paid severity as the mix of claims paid in the second quarter of 2020
shifted to older claims as there were fewer new claims reported
- Claims settled within days or weeks of the loss tend to be less complex and
have lower severity, while the higher severity property damage claims
generally take longer to resolve
• Continued impact of higher costs to repair more sophisticated newer model
vehicles and higher third-party subrogation demands
Bodily injury gross claim frequency decreased in the second quarter and first
six months of 2020 compared to the same periods of 2019, consistent with the
trends noted in property damage. Bodily injury severity trends increased at a
rate above medical care inflation indices in 2020.
Second Quarter 2020 Form 10-Q 69 -------------------------------------------------------------------------------- Segment Results Allstate Protection: Allstate brand
Homeowners loss ratio increased 2.2 points in the second quarter of 2020
compared to the second quarter of 2019, primarily due to higher catastrophe
losses and increased claim severity, partially offset by increased premiums
earned and improved claim frequency. Homeowners loss ratio decreased 9.2 points
in the first six months of 2020 compared to the first six months of 2019,
primarily due to lower catastrophes losses, increased premiums earned and
improved claim frequency, partially offset by increased claim severity. Gross
and paid claim frequency excluding catastrophe losses decreased 8.7% and 12.4%,
respectively, in the second quarter of 2020 and decreased 10.8% and 11.6%,
respectively, in the first six months of 2020 compared to the same periods of
2019. Paid claim severity excluding catastrophe losses increased 9.4% and 12.8%
in the second quarter and first six months of 2020, respectively, compared to
the same periods of 2019, as we experienced increased claim severity in
wind/hail, fire and water perils. Homeowner paid claim severity can be impacted
by
both the mix of perils and the magnitude of specific losses paid during
the quarter.
Other personal lines loss ratio decreased 0.2 points in the second quarter of
2020 compared to the second quarter of 2019, primarily due to increased premiums
earned and lower non-catastrophe losses, partially offset by higher catastrophe
losses. Other personal lines loss ratio decreased 6.4 points in first six months
of 2020 compared to the first six months of 2019, primarily due to increased
premiums earned and lower catastrophe losses.
Commercial lines loss ratio decreased 8.1 points and 3.4 points in the second
quarter and first six months of 2020, respectively, compared to the same periods
of 2019, primarily due to a decline in non-catastrophe losses driven by
favorable frequency related to the Coronavirus, partially offset by decreased
premiums earned and higher claim severity.
Impact of specific costs and expenses on the
expense ratio
Three months ended June
30, Six months ended June 30,
2020 2019 2020 2019
Amortization of DAC 13.5 14.1 13.5 14.1
Advertising expense 2.2 1.9 2.1 1.9
Other costs and expenses 7.3 7.4 7.4 7.7
Restructuring and related charges 0.1 0.1 0.1 0.2
Subtotal 23.1 23.5 23.1 23.9 Shelter-in-Place Payback expense 8.2 - 5.3 - Allstate Special Payment plan bad debt expense 0.5 - 0.3 - Total expense ratio 31.8 23.5 28.7 23.9 Expense ratio increased 8.3 points and 4.8 points in the second quarter and first six months of 2020, respectively, compared to the same periods of 2019, primarily due to the Coronavirus, resulting in the Shelter-in-Place Payback expense and higher bad debt expense related to the Allstate Special Payment plan. Excluding the Shelter-in-Place Payback expense and higher bad debt expense, the expense ratio decreased 0.4 points and 0.8 points in the second quarter and first six months of 2020, respectively, compared to the same periods of 2019, primarily due to lower agent compensation and operating expenses, partially offset by higher advertising costs. Amortization of DAC primarily includes agent remuneration and premium taxes. Allstate agency total incurred base commissions, variable compensation and bonuses in total in the second quarter and first six months of 2020 were lower than the same periods of 2019.
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Allstate Protection: Esurance brand Segment Results
[[Image Removed: esurancelogo1a36.jpg]]Underwriting results
Three months ended June 30, Six months ended June 30,
($ in millions) 2020 2019 2020 2019
Premiums written $ 518 $ 503 $ 1,064 $ 1,062
Premiums earned $ 523 $ 525 $ 1,042 $ 1,027
Other revenue 23 20 46 40
Claims and claims expense (298 ) (419 ) (671 ) (803 )
Shelter-in-Place Payback expense (58 ) - (75 ) -
Amortization of DAC (11 ) (12 ) (22 ) (23 )
Other costs and expenses (107 ) (117 ) (228 ) (241 )
Restructuring and related charges - - (1 ) -
Underwriting income (loss) $ 72 $ (3 ) $ 91 $ -
Catastrophe losses $ 18 $ 25 $ 21 $ 31
Underwriting income (loss) by line of business Auto $ 73 $ 8 $ 79 $ 7 Homeowners (1 ) (11 ) 11 (7 ) Other personal lines - - 1 - Underwriting income (loss) $ 72 $
(3 ) $ 91 $ -
Changes in underwriting results from prior year by component (1)
Three months ended June 30, Six months ended June 30,
($ in millions) 2020 2019 2020 2019
Underwriting income (loss) - prior period $ (3 ) $ (9 ) $ - $ (6 )
Changes in underwriting income (loss) from:
Increase (decrease) premiums earned (2 ) 62 15 131
Increase (decrease) other revenue 3 - 6 -
(Increase) decrease incurred claims and
claims expense ("losses"):
Incurred losses, excluding catastrophe
losses and reserve reestimates 117 (60 ) 123 (117 )
Catastrophe losses, excluding reserve
reestimates 5 5 8 2
Catastrophe reserve reestimates 2 (1 ) 2 (1 )
Non-catastrophe reserve reestimates (3 ) 1 (1 ) (2 )
Losses subtotal 121 (55 ) 132 (118 )
Shelter-in-Place Payback expense (58 ) - (75 ) -
(Increase) decrease expenses 11 (1 ) 13 (7 )
Underwriting income (loss) $ 72 $ (3 ) $ 91 $ -
(1) The 2020 column presents changes in 2020 compared to 2019. The 2019 column
presents changes in 2019 compared to 2018.
Underwriting income was$72 million in the second quarter of 2020 compared to a loss of$3 million in the second quarter of 2019 due to lower loss costs and operating expenses, partially offset by Shelter-in-Place Payback expense in 2020. Underwriting income increased$91 million in the first six months of 2020 primarily due to lower loss costs and operating expenses and increased premiums earned, partially offset by Shelter-in-Place Payback expense compared to the first six months of 2019. Second Quarter 2020 Form
10-Q 71 -------------------------------------------------------------------------------- Segment Results Allstate Protection: Esurance brand
Premiums written and earned by line of business
Three months ended June
($ in millions) 30, Six months ended June 30,
Premiums written 2020 2019 2020 2019
Auto $ 482 $ 469 $ 999 $ 1,001
Homeowners 34 32 61 57
Other personal lines 2 2 4 4
Total $ 518 $ 503 $ 1,064 $ 1,062
Premiums earned
Auto $ 491 $ 496 $ 978 $ 971
Homeowners 30 27 60 52
Other personal lines 2 2 4 4
Total $ 523 $ 525 $ 1,042 $ 1,027 Auto premium measures and statistics
Three months ended June 30, Six months ended June 30,
2020 2019 Change 2020 2019 Change
PIF (thousands) 1,514 1,548 (2.2 )% 1,514 1,548 (2.2 )%
New issued applications
(thousands) 117 145 (19.3 )% 247 325 (24.0 )%
Average premium $ 653 $ 611 6.9 % $ 642 $ 619 3.7 %
Renewal ratio (%) 83.4 84.0 (0.6 ) 82.7 84.0 (1.3 )
Approved rate changes:
Impact of rate changes ($ in
millions) $ 3 $ 42 $ (39 ) $ 53 $ 54 $ (1 )
Number of locations (1) 1 6 (5 ) 11 15 (4 )
Total brand (%) 0.1 2.4 (2.3 ) 2.7 3.0 (0.3 )
Location specific (%) 6.6 5.3 1.3 7.2 5.0 2.2
(1) Esurance brand operates in 43 states.
Auto insurance premiums written increased 2.8% or$13 million in the second quarter of 2020 compared to the second quarter of 2019 primarily due to higher average premium, partially offset by fewer new issued applications and lower renewal ratio. Auto insurance premiums written decreased 0.2% or$2 million in the first six months of 2020 compared to the first six months of 2019, primarily due to lower renewal ratio and fewer new issued applications, partially offset by higher average premium. PIF decreased 2.2% or 34 thousand to 1,514 thousand as ofJune 30, 2020 compared toJune 30, 2019 . New issued applications decreased 19.3% and 24.0% in the second quarter and first six months of 2020, respectively, compared to the same periods of 2019, due to rate increases approved in 2019 and 2020 adversely impacting the close ratio, lower advertising and impacts of the Coronavirus. Homeowners premium measures and statistics Three months endedJune 30 ,
Six months ended
2020 2019 Change 2020 2019 Change
PIF (thousands) 107 101 5.9 % 107 101 5.9 %
New issued applications
(thousands) 6 7 (14.3 )% 11 14 (21.4 )%
Average premium $ 1,093 $ 1,063 2.8 % $ 1,088 $ 1,045 4.1 %
Renewal ratio (%) (1) 84.7 85.5 (0.8 ) 84.3 85.2 (0.9 )
Approved rate changes:
Impact of rate changes ($ in
millions) $ - $ 3 $ (3 ) $ - $ 5 $ (5 )
Number of locations (2) - 2 (2 ) - 4 (4 )
Total brand (%) - 2.7 (2.7 ) - 4.7 (4.7 )
Location specific (%) - 19.9 (19.9 ) - 19.1 (19.1 )
(1) Esurance's renewal ratios exclude the impact of risk related cancellations.
Customers can enter into a policy without a physical inspection. During the
underwriting review period, a number of policies may be canceled if upon
inspection the condition is unsatisfactory.
(2) Esurance brand operates in 31 states.
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Allstate Protection: Esurance brand Segment Results
Homeowners insurance premiums written increased 6.3% or$2 million in the second quarter of 2020 compared to the second quarter of 2019 and increased 7.0% or$4 million in the first six months of 2020 compared to the first six months of 2019 due to PIF growth and higher average premium. As ofJune 30, 2020 , Esurance continues to write homeowners insurance in 31 states with lower hurricane risk, contributing to lower average premium compared to the industry. PIF increased 5.9% or 6 thousand to 107 thousand as ofJune 30, 2020 compared toJune 30, 2019 . Combined ratios by line of business Loss ratio Expense ratio (1) Combined ratio 2020 2019 2020 2019 2020 2019 Three months endedJune 30 , Auto 55.4 78.0 29.7 20.4 85.1 98.4 Impact of Shelter-in-Place Payback - - 11.8 - 11.8 - Homeowners 83.3 114.8 20.0 25.9 103.3 140.7 Total 57.0 79.8 29.2 20.8 86.2 100.6 Impact of Shelter-in-Place Payback - - 11.1 - 11.1 - Six months endedJune 30 , Auto 64.5 77.7 27.4 21.6 91.9 99.3 Impact of Shelter-in-Place Payback - - 7.7 - 7.7 - Homeowners 63.4 88.5 18.3 25.0 81.7 113.5 Total 64.4 78.2 26.9 21.8 91.3 100.0 Impact of Shelter-in-Place Payback - - 7.2 - 7.2 -
(1) Other revenue is deducted from operating costs and expenses in the expense
ratio calculation.
Loss ratios by line of business
Effect of catastrophe
losses included in
Effect of Effect of prior year prior year reserve
Loss ratio catastrophe losses reserve reestimates reestimates
2020 2019 2020 2019 2020 2019 2020 2019
Three months ended June 30 ,
Auto 55.4 78.0 1.4 2.0 0.2 (0.2 ) - 0.2
Homeowners 83.3 114.8 36.6 55.5 - 3.7 - 3.7
Total 57.0 79.8 3.4 4.8 0.2 - - 0.4
Six months ended June 30 ,
Auto 64.5 77.7 0.8 1.3 0.4 0.4 - 0.1
Homeowners 63.4 88.5 21.7 34.6 (3.3 ) - - 1.9
Total 64.4 78.2 2.0 3.0 0.2 0.3 - 0.2
Auto loss ratio decreased 22.6 points and 13.2 points in the second quarter and
first six months of 2020, respectively, compared to the same periods of 2019,
primarily due to lower claim frequency and higher average premium, partially
offset by higher claim severity.
Homeowners loss ratio decreased 31.5 points and 25.1 points in the second
quarter and first six months of 2020, respectively, compared to the same periods
of 2019, primarily due to higher average premium, favorable claims frequency and
lower catastrophe losses.
Second Quarter 2020 Form10-Q 73 -------------------------------------------------------------------------------- Segment Results Allstate Protection: Esurance brand
Impact of specific costs and expenses on the
expense ratio
Three months ended June
30, Six months ended June 30,
2020 2019 2020 2019
Amortization of DAC 2.1 2.4 2.1 2.2
Advertising expense 5.9 7.4 7.2 7.8
Amortization of purchased intangibles 0.2 - 0.1 0.1
Other costs and expenses 9.3 11.0 9.8 11.7
Restructuring and related charges - - 0.1 -
Subtotal 17.5 20.8 19.3 21.8
Shelter-in-Place Payback expense 11.1 - 7.2 -
Allstate Special Payment plan bad debt
expense (1) 0.6 - 0.4 -
Total expense ratio 29.2 20.8 26.9 21.8
(1) Relates to the Allstate Special Payment plan offered to customers as a
result of the Coronavirus to provide more flexible payment options,
including the option to delay payments.
Expense ratio increased 8.4 points and 5.1 points in the second quarter and
first six months of 2020, respectively, compared to the same periods of 2019,
primarily due to the Coronavirus, resulting in the Shelter-in-Place Payback
expense and higher bad debt expense related to the Allstate Special Payment
plan.
Excluding the impact of Shelter-in-Place Payback expense and higher bad debt
expense, the expense ratio decreased 3.3 points and 2.5 points in the second
quarter and first six months of 2020, respectively, compared to the same periods
of 2019.
Other costs and expenses, including sales personnel and other underwriting costs
related to customer acquisition, were 1.7 points and 1.9 points lower in the
second quarter and first six months of 2020, respectively, compared to the same
periods of 2019, reflecting continued implementation of digital self-service
capabilities and a reduction in operating expenses as part of the integration of
Esurance into the Allstate brand.
Esurance uses a direct distribution model, therefore its primary
acquisition-related costs are advertising as opposed to commissions. The
Esurance advertising expense ratio decreased 1.5 points and 0.6 points in the
second quarter and first six months of 2020, respectively, compared to the same
periods of 2019, due to lower Esurance branded advertising expenses in
anticipation of utilizing the Allstate brand with Esurance's current
distribution capabilities.
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Allstate Protection: Encompass brand Segment Results
[[Image Removed: encompassaa26.jpg]]
Underwriting results
Three months ended June 30, Six months ended June 30,
($ in millions) 2020 2019 2020 2019
Premiums written $ 263 $ 278 $ 485 $ 502
Premiums earned $ 253 $ 254 $ 509 $ 507
Other revenue 1 1 2 2
Claims and claims expense (154 ) (167 ) (311 ) (341 )
Shelter-in-Place Payback expense (16 ) - (21 ) -
Amortization of DAC (48 ) (48 ) (97 ) (96 )
Other costs and expenses (29 ) (33 ) (61 ) (65 )
Restructuring and related charges (1 ) - (1 ) (2 )
Underwriting income $ 6 $ 7 $ 20 $ 5
Catastrophe losses $ 59 $ 26 $ 71 $ 56
Underwriting income (loss) by line of business
Auto $ 32 $ 6 $ 30 $ 5
Homeowners (21 ) 2 (7 ) (2 )
Other personal lines (5 ) (1 ) (3 ) 2
Underwriting income $ 6 $ 7 $ 20 $ 5
Changes in underwriting results from prior year by component (1)
Three months ended June 30, Six months ended June 30,
($ in millions) 2020 2019 2020 2019
Underwriting income (loss) - prior period $ 7 $ 5 $ 5 $ 11
Changes in underwriting loss from:
Increase (decrease) premiums earned (1 ) (2 ) 2 (6 )
Increase (decrease) other revenue - (1 ) - (1 )
(Increase) decrease incurred claims and
claims expense ("losses"):
Incurred losses, excluding catastrophe
losses and reserve reestimates 52 (16 ) 50 (20 )
Catastrophe losses, excluding reserve
reestimates (37 ) 16 (25 ) 11
Catastrophe reserve reestimates 4 (2 ) 10 2
Non-catastrophe reserve reestimates (6 ) - (5 ) (3 )
Losses subtotal 13 (2 ) 30 (10 )
Shelter-in-Place Payback expense (16 ) - (21 ) -
(Increase) decrease expenses 3 7 4 11
Underwriting income $ 6 $ 7 $ 20 $ 5 (1) The 2020 column presents changes in 2020 compared to 2019. The 2019 column
presents changes in 2019 compared to 2018.
Underwriting income decreased 14.3% or$1 million in the second quarter of 2020 primarily due to higher catastrophe losses and Shelter-in-Place Payback expense, partially offset by lower auto and homeowners non-catastrophe losses compared to the second quarter of 2019. Underwriting income increased$15 million in the first six months of 2020 compared to the first six months of 2019, primarily due to lower auto and homeowners non-catastrophe losses, partially offset by Shelter-in-Place Payback expense and higher catastrophe losses in 2020. Second Quarter 2020 Form
10-Q 75 -------------------------------------------------------------------------------- Segment Results Allstate Protection: Encompass brand
Premiums written and earned by line of business
Three months ended June
($ in millions) 30, Six months ended June 30,
2020 2019 2020 2019
Premiums written
Auto $ 136 $ 146 $ 254 $ 266
Homeowners 106 111 193 197
Other personal lines 21 21 38 39
Total $ 263 $ 278 $ 485 $ 502
Premiums earned
Auto $ 135 $ 135 $ 270 $ 269
Homeowners 99 99 200 198
Other personal lines 19 20 39 40
Total $ 253 $ 254 $ 509 $ 507 Auto premium measures and statistics
Three months ended June 30, Six months ended June 30,
2020 2019 Change 2020 2019 Change
PIF (thousands) 473 497 (4.8 )% 473 497 (4.8 )%
New issued applications
(thousands) 14 22 (36.4 )% 30 42 (28.6 )%
Average premium $ 1,166 $ 1,130 3.2 % $ 1,164 $ 1,132 2.8 %
Renewal ratio (%) 76.5 78.1 (1.6 ) 76.9 77.9 (1.0 )
Approved rate changes:
Impact of rate changes ($ in
millions) $ (1 ) $ - $ (1 ) $ (1 ) $ 2 $ (3 )
Number of locations (1) 2 1 1 7 4 3
Total brand (%) (0.1 ) - (0.1 ) (0.1 ) 0.5 (0.6 )
Location specific (%) (1.9 ) (2 ) 3.6 (5.5 ) (0.6 ) 4.5 (5.1 )
(1) Encompass brand operates in 40 states and the
(2) Primarily related to rate declines in
rates related to the Coronavirus.
Auto insurance premiums written decreased 6.8% or
new business in the quarter and lower retention, partially offset by higher average premiums, with the top 10 states representing approximately 70% of premiums written. PIF decreased 4.8% or 24 thousand to 473 thousand as ofJune 30, 2020 compared toJune 30, 2019 . Homeowners premium measure and statistics Three months endedJune 30 ,
Six months ended
2020 2019 Change 2020 2019 Change
PIF (thousands) 225 236 (4.7 )% 225 236 (4.7 )%
New issued applications
(thousands) 8 12 (33.3 )% 16 21 (23.8 )%
Average premium $ 1,901 $ 1,782 6.7 % $ 1,891 $ 1,775 6.5 %
Renewal ratio (%) 80.5 82.5 (2.0 ) 81.1 82.3 (1.2 )
Approved rate changes:
Impact of rate changes ($ in
millions) $ 3 $ 6 $ (3 ) $ 10 $ 12 $ (2 )
Number of locations (1) 6 8 (2 ) 10 11 (1 )
Total brand (%) 0.7 1.4 (0.7 ) 2.5 2.8 (0.3 )
Location specific (%) 6.3 6.5 (0.2 ) 10.0 8.1 1.9
(1) Encompass brand operates in 40 states and the District of Columbia .
Homeowners insurance premiums written decreased 4.5% or $5 million in the second
quarter of 2020 compared to the second quarter of 2019 and decreased 2.0% or $4
million in the first six months of 2020 compared to the first six months of
2019,
primarily due to decreased new issued applications and lower retention,
partially offset by higher average premiums due to rate changes over the past 12
months, with the top 10 states representing approximately 70% of premiums
written. PIF decreased 4.7% or 11 thousand to 225 thousand as of June 30, 2020
compared to June 30, 2019 .
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Allstate Protection: Encompass brand Segment Results
Combined ratios by line of business
Loss ratio Expense ratio (1) Combined ratio
2020 2019 2020 2019 2020 2019
Three months ended June 30 ,
Auto 34.1 64.5 42.2 31.1 76.3 95.6
Impact of Shelter-in-Place Payback - - 11.9 - 11.9 -
Homeowners 90.9 66.7 30.3 31.3 121.2 98.0
Other personal lines 94.7 70.0 31.6 35.0 126.3 105.0
Total 60.9 65.7 36.7 31.5 97.6 97.2
Impact of Shelter-in-Place Payback - - 6.3 - 6.3 -
Six months ended June 30 ,
Auto 50.4 66.2 38.5 31.9 88.9 98.1
Impact of Shelter-in-Place Payback - - 7.8 - 7.8 -
Homeowners 72.5 69.7 31.0 31.3 103.5 101.0
Other personal lines 76.9 62.5 30.8 32.5 107.7 95.0
Total 61.1 67.3 35.0 31.7 96.1 99.0
Impact of Shelter-in-Place Payback - - 4.1 - 4.1 -
(1) Other revenue is deducted from operating costs and expenses in the expense
ratio calculation.
Loss ratios by line of business
Effect of
catastrophe losses
included in prior
Effect of Effect of prior year year reserve
Loss ratio catastrophe losses reserve reestimates reestimates
2020 2019 2020 2019 2020 2019 2020 2019
Three months ended June 30 ,
Auto 34.1 64.5 3.0 2.2 (0.8 ) (6.6 ) - -
Homeowners 90.9 66.7 52.5 22.2 - 4.0 - 4.0
Other personal lines 94.7 70.0 15.8 5.0 - 10.0 - -
Total 60.9 65.7 23.3 10.2 (0.4 ) (1.2 ) - 1.6
Six months endedJune 30 , Auto 50.4 66.2 1.5 2.2 - (3.4 ) (0.4 ) - Homeowners 72.5 69.7 31.5 23.7 (0.5 ) 6.0 (0.5 ) 4.0 Other personal lines 76.9 62.5 10.2 7.5 (5.1 ) (2.5 ) - - Total 61.1 67.3 13.9 11.0 (0.5 ) 0.4 (0.4 ) 1.6 Auto loss ratio decreased 30.4 points and 15.8 points in the second quarter and first six months of 2020, respectively, compared to the same periods of 2019, primarily due to lower claim frequency, partially offset by increased claim severity. Homeowners loss ratio increased 24.2 points and 2.8 points in the second quarter and first six months of 2020, respectively, compared to the same periods of 2019, primarily due to higher catastrophe losses, partially offset by lower non-catastrophe claim frequency. Second Quarter 2020 Form
10-Q 77 -------------------------------------------------------------------------------- Segment Results Allstate Protection: Encompass brand
Impact of specific costs and expenses on the expense ratio
Three months ended
June 30, Six months ended June 30,
2020 2019 2020 2019
Amortization of DAC 18.9 18.9 19.1 18.9
Advertising expense 0.4 0.4 0.2 0.2
Other costs and expenses 10.7 12.2 11.4 12.2
Restructuring and related charges 0.4 - 0.2 0.4
Subtotal 30.4 31.5 30.9 31.7 Shelter-in-Place Payback expense 6.3 - 4.1 - Total expense ratio 36.7 31.5 35.0 31.7 Expense ratio increased 5.2 points and 3.3 points in the second quarter and first six months of 2020, respectively, compared to the same periods of 2019, primarily due to Shelter-in-Place Payback expense. Excluding the Shelter-in-Place Payback expense, the expense ratio decreased 1.1 points and 0.8 points in the second quarter and first six months of 2020, respectively, compared to the same periods of 2019, primarily due to lower technology and employee-related costs.
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Discontinued Lines and Coverages Segment Results
Discontinued Lines and Coverages Segment
Underwriting results
Three months ended June 30, Six months ended June 30,
($ in millions) 2020 2019 2020 2019
Claims and claims expense $ (2 ) $ (3 ) $ (4 ) $ (5 )
Operating costs and expenses (1 ) - (2 ) (1 )
Underwriting loss $ (3 ) $ (3 ) $ (6 ) $ (6 )
Reserves for asbestos, environmental and other discontinued lines claims before and after the effects
of reinsurance
($ in millions) June 30, 2020 December 31, 2019
Asbestos claims
Gross reserves $ 1,126 $ 1,172
Reinsurance (347 ) (362 )
Net reserves 779 810
Environmental claims
Gross reserves 209 219
Reinsurance (38 ) (40 )
Net reserves 171 179
Other discontinued lines
Gross reserves 417 427
Reinsurance (47 ) (51 )
Net reserves 370 376
Total
Gross reserves 1,752 1,818
Reinsurance (432 ) (453 )
Net reserves $ 1,320 $ 1,365
Reserves by type of exposure before and after the effects of reinsurance ($ in millions)
June 30, 2020 December 31, 2019
Direct excess commercial insurance
Gross reserves $ 908 $ 948
Reinsurance (317 ) (332 )
Net reserves 591 616
Assumed reinsurance coverage
Gross reserves 607 606
Reinsurance (54 ) (53 )
Net reserves 553 553
Direct primary commercial insurance
Gross reserves 146 169
Reinsurance (50 ) (54 )
Net reserves 96 115
Other run-off business
Gross reserves 11 15
Reinsurance (10 ) (13 )
Net reserves 1 2
Unallocated loss adjustment expenses
Gross reserves 80 80
Reinsurance (1 ) (1 )
Net reserves 79 79
Total
Gross reserves 1,752 1,818
Reinsurance (432 ) (453 )
Net reserves $ 1,320 $ 1,365
Second Quarter 2020 Form10-Q 79 -------------------------------------------------------------------------------- Segment Results Discontinued Lines and Coverages
Percentage of gross and ceded reserves by case and incurred but not reported ("IBNR")
June 30, 2020 December 31, 2019
Case IBNR Case IBNR
Direct excess commercial insurance
Gross reserves (1) 78 % 22 % 68 % 32 %
Ceded (2) 87 13 78 22
Assumed reinsurance coverage
Gross reserves 37 63 34 66
Ceded 39 61 35 65
Direct primary commercial insurance
Gross reserves 54 46 56 44
Ceded 78 22 78 22
(1) Approximately 67% of gross case reserves as of
settlement agreements.
(2) Approximately 75% of ceded case reserves as of
settlement agreements.
Gross payments from case reserves by type of exposure ($ in millions)
Three months ended June 30, Six months ended June 30,
2020 2019 2020 2019
Direct excess commercial insurance
Gross (1) $ 9 $ 28 $ 38 $ 54
Ceded (2) (3 ) (10 ) (14 ) (21 )
Assumed reinsurance coverage
Gross 13 9 22 18
Ceded (1 ) - (2 ) (1 )
Direct primary commercial insurance
Gross 1 7 3 10
Ceded - (1 ) (1 ) (1 )
(1) In the second quarter and first six months 49% and 78% of 2020 payments
related to settlement agreements.
(2) In the second quarter and first six months 57% and 82% of 2020 payments
related to settlement agreements.
Total net reserves as of June 30, 2020 , included $569 million or 43% of
estimated IBNR reserves compared to $660 million or 48% of estimated IBNR
reserves as of December 31, 2019 .
Total gross payments were $23 million and $64 million for the second quarter and
first six months of 2020, respectively. Payments for the second quarter of 2020
primarily related to asbestos claims. Payments for the first six months of 2020
primarily related to
settlement agreements reached with several insureds on large claims, mainly
asbestos related losses, where the scope of coverages has been agreed upon. The
claims associated with these settlement agreements are expected to be
substantially paid out over the next several years as qualified claims are
submitted by these insureds. Reinsurance collections were $19 million and $32
million for the second quarter and first six months of 2020, respectively.
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Service Businesses Segment Results
Service Businesses Segment
[[Image Removed: servicebuslogsa04.jpg]]
Summarized financial information
Three months ended June 30, Six months ended June 30,
($ in millions) 2020 2019 2020 2019
Premiums written $ 467 $ 350 $ 846 $ 718
Revenues
Premiums $ 360 $ 305 $ 714 $ 600
Other revenue 51 48 103 95
Intersegment insurance premiums and service
fees (1) 35 33 73 66
Net investment income 11 10 21 19
Realized capital gains (losses) 19 9 (5 ) 17
Total revenues 476 405 906 797
Costs and expenses
Claims and claims expense (85 ) (86 ) (177 ) (178 )
Amortization of DAC (160 ) (134 ) (313 ) (261 )
Operating costs and expenses (163 ) (158 ) (324 ) (309 )
Restructuring and related charges (3 ) 1 (3 ) 1
Amortization of purchased intangibles (26 ) (31 ) (53 ) (62 )
Impairment of purchased intangibles - (55 ) - (55 )
Total costs and expenses (437 ) (463 ) (870 ) (864 )
Income tax (expense) benefit (7 ) 12 (7 ) 15
Net income (loss) applicable to common
shareholders $ 32 $ (46 ) $ 29 $ (52 )
Adjusted net income $ 38 $ 16 $ 75 $ 27
Realized capital gains (losses), after-tax 15 6 (4 ) 13
Amortization of purchased intangibles,
after-tax (21 ) (25 ) (42 ) (49 )
Impairment of purchased intangibles,
after-tax - (43 ) - (43 )
Net income (loss) applicable to common
shareholders $ 32 $ (46 ) $ 29 $ (52 )
Allstate Protection Plans $ 35 $ 19 $ 69 $ 33
Allstate Dealer Services 8 7 15 13
Allstate Roadside Services 2 (3 ) 4 (9 )
Arity (3 ) (1 ) (6 ) (3 )
Allstate Identity Protection (4 ) (6 ) (7 ) (7 )
Adjusted net income $ 38 $ 16 $ 75 $ 27
Allstate Protection Plans 120,301 83,968
Allstate Dealer Services 4,101 4,253
Allstate Roadside Services 562 635
Allstate Identity Protection 2,312 1,260
Policies in force as of June 30 (in
thousands) 127,276 90,116
(1) Primarily related to Arity and Allstate Roadside Services and are eliminated
in our condensed consolidated financial statements.
Net income (loss) applicable to common shareholders increased$78 million in the second quarter of 2020 compared to the second quarter of 2019 and increased$81 million in the first six months of 2020 compared to the first six months of 2019. Both periods of 2019 included of a$55 million intangible impairment related to theSquareTrade trade name that occurred in the second quarter of 2019. Adjusted net income increased$22 million in the second quarter of 2020 compared to the second quarter of 2019 and increased$48 million in the first six months of 2020 compared to the first six months of 2019. The increase in both periods was primarily due to growth of Allstate Protection Plans and improved loss experience and lower expenses at Allstate Roadside Services, partially offset by higher operating expenses related to investing in growth and developing new products and distribution channels for Allstate Protection Plans and Allstate Identity Protection. Second Quarter 2020 Form
10-Q 81 -------------------------------------------------------------------------------- Segment Results Service Businesses
Total revenues increased 17.5% or$71 million in the second quarter of 2020 compared to the second quarter of 2019 and increased 13.7% or$109 million in the first six months of 2020 compared to the first six months of 2019. The increase in both periods was primarily due to Allstate Protection Plans' growth through itsU.S. retail and international channels, partially offset by declines in revenue at Allstate Roadside Services. Premiums written increased 33.4% or$117 million in the second quarter of 2020 compared to the second quarter of 2019 and increased 17.8% or$128 million in the first six months of 2020 compared to the first six months of 2019. The increase in both periods was primarily due to growth at Allstate Protection Plans. PIF increased 41.2% or 37 million to 127 million as ofJune 30, 2020 compared toJune 30, 2019 due to continued growth at Allstate Protection Plans. Intersegment premiums and service fees increased 6.1% or$2 million in the second quarter of 2020 compared to the second quarter of 2019 and increased 10.6% or$7 million in the first six months of 2020 compared to the first six months of 2019. The increase in both periods was primarily related to increased auto connections and device sales through Arity's device and mobile data collection services and analytic solutions. Other revenue increased 6.3% or$3 million in the second quarter of 2020 compared to the second quarter of 2019 and increased 8.4% or$8 million in the first six months of 2020 compared to the first six months of 2019. The increase in both periods was primarily due to increased sales at Allstate Identity Protection. Claims and claims expense decreased 1.2% or$1 million in the second quarter 2020 compared to the second quarter of 2019 and decreased 0.6% or$1 million in the first six months of 2020 compared to the first six months of 2019. The decrease in both periods was primarily due to lower losses at Allstate Roadside Services and Allstate Dealer Services due to declines in auto miles driven related to the Coronavirus, partially offset by higher levels of claims at Allstate Protection Plans driven by growth of the business. Amortization of DAC increased 19.4% or$26 million in the second quarter of 2020 compared to the second quarter of 2019 and increased 19.9% or$52 million in the first six months of 2020 compared to the first six months of 2019. The increase is driven by the growth experienced at Allstate Protection Plans. Operating costs and expenses increased 3.2% or$5 million in the second quarter of 2020 compared to the second quarter of 2019 and increased 4.9% or$15 million in the first six months of 2020 compared to the first six months of 2019. The increase in both periods was primarily due to investments in growing Allstate Protection Plans and expanding Allstate Identity Protection, partially offset by lower operating costs at Allstate Roadside Services. Amortization of purchased intangibles relates to the acquisitions of Allstate Protection Plans in 2017 and Allstate Identity Protection in 2018. We recorded amortization expense of$26 million and$53 million in the second quarter and first six months of 2020, respectively, compared to$31 million and$62 million in the second quarter and first six months of 2019, respectively.
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Allstate Life Segment Results
Allstate Life Segment
Summarized financial information
Three months ended June 30, Six months ended June 30,
($ in millions) 2020 2019 2020 2019
Revenues
Premiums and contract charges$ 339 $ 333 $ 672 $ 670 Other revenue 24 33 56 60 Net investment income 123 125 251 252 Realized capital gains (losses) 19 1 (12 ) (4 ) Total revenues 505 492 967 978 Costs and expenses Contract benefits (238 ) (216 ) (450 ) (430 ) Interest credited to contractholder funds (114 ) (70 ) (170 ) (142 ) Amortization of DAC (4 ) (29 ) (38 ) (57 ) Operating costs and expenses (75 ) (91 ) (159 ) (182 ) Restructuring and related charges (2 ) (1 ) (3 ) (1 ) Total costs and expenses (433 ) (407 ) (820 ) (812 ) Income tax expense (8 ) (18 ) (19 ) (32 )
Net income applicable to common shareholders $ 64 $
67
Adjusted net income $ 72 $ 68$ 152 $ 141 Realized capital gains (losses), after-tax 16 - (9 ) (4 ) Valuation changes on embedded derivatives not hedged, after-tax (35 ) - (23 ) - DAC and DSI amortization related to realized capital gains and losses and valuation changes on embedded derivatives not hedged, after-tax 11 (1 ) 8 (3 )
Net income applicable to common shareholders $ 64 $
67
Reserve for life-contingent contract benefits as ofJune 30
Contractholder funds as ofJune 30
Policies in force as ofJune 30 by distribution channel (in thousands) Allstate agencies 1,789 1,822 Closed channels 103 111 Total 1,892 1,933 Net income applicable to common shareholders decreased 4.5% or$3 million in the second quarter of 2020 and decreased 4.5% or$6 million in the first six months of 2020 compared to the same periods of 2019. Adjusted net income increased 5.9% or$4 million in the second quarter of 2020 and increased 7.8% or$11 million in the first six months of 2020 compared the same periods of 2019, primarily due to lower operating costs and expenses and lower amortization of DAC, partially offset by higher contract benefits. Premiums and contract charges increased 1.8% or$6 million in the second quarter of 2020 and increased 0.3% or$2 million in the first six months of 2020 compared to the same periods of 2019, primarily due to higher premiums from traditional life insurance, partially offset by lower contract charges on interest- sensitive life insurance from a decline in business in force. EffectiveMarch 31, 2020 , in light of uncertainty around the impacts of the Coronavirus, we implemented temporary underwriting restrictions on new life insurance applications. We are approving standard and preferred rate classes only, with a maximum issue age of 69, and suspended sales of our simplified issue term life product that does not require underwriting. While these restrictions are in place, we expect sales to slow. Allstate agents and exclusive financial specialists are able to offer coverage to customers outside these guidelines through non-proprietary carriers. Second Quarter 2020 Form
10-Q 83 -------------------------------------------------------------------------------- Segment Results Allstate Life
Premiums and contract charges by product
Three months ended June 30, Six months ended June 30,
($ in millions) 2020 2019 2020 2019
Traditional life insurance premiums $ 164 $ 156 $ 317 $ 310
Accident and health insurance premiums 1 1 1 1
Interest-sensitive life insurance contract
charges (1) 174 176 354 359
Premiums and contract charges $ 339 $ 333 $ 672
(1) Contract charges related to the cost of insurance totaled
million and
respectively.
Other revenue decreased 27.3% or$9 million in the second quarter of 2020 and decreased 6.7% or$4 million in the first six months of 2020 compared to the same periods of 2019, primarily due to lower gross dealer concessions earned on Allstate agents' sales of non-proprietary fixed and variable annuities. Contract benefits increased 10.2% or$22 million in the second quarter of 2020 and increased 4.7% or$20 million in the first six months of 2020 compared to the same periods of 2019, primarily due to higher claim experience related to Coronavirus on both interest-sensitive and traditional life insurance. Estimated Coronavirus claims, net of reinsurance and reserve releases, totaled$25 million and$26 million in the second quarter and first six months of 2020, respectively. Benefit spread reflects our mortality and morbidity results using the difference between premiums and contract charges earned for the cost of insurance and contract benefits ("benefit spread"). Benefit spread decreased 17.2% to$53 million in the second quarter of 2020 and decreased 8.3% to$122 million in the first six months of 2020 compared to the same periods in 2019, primarily due to higher claim experience on both interest-sensitive and traditional life insurance, partially offset by growth in traditional life premiums. Interest credited to contractholder funds increased 62.9% or$44 million in the second quarter of 2020 and increased 19.7% or$28 million in the first six months of 2020 compared to the same periods of 2019. Valuation changes on derivatives embedded in equity-indexed universal life contracts that are not hedged increased interest credited to contractholder funds by$43 million and$29 million in the second quarter and first six months of 2020 compared to zero in both of the same periods of 2019. These valuation changes are primarily driven by changes in interest rates. Investment spread reflects the difference between net investment income and interest credited to contractholder funds ("investment spread") and is used to analyze the impact of net investment income and interest credited to contractholder funds on net income. Investment spread Three months ended June 30, Six months ended June 30, ($ in millions) 2020 2019 2020 2019 Investment spread before valuation changes on embedded derivatives not hedged $ 52 $ 55$ 110 $ 110 Valuation changes on derivatives embedded in equity-indexed universal life contracts that are not hedged (43 ) - (29 ) - Total investment spread $ 9 $ 55 $ 81$ 110 Investment spread before valuation changes on embedded derivatives not hedged decreased 5.5% or$3 million in the second quarter of 2020 compared to the same period of 2019, primarily due to lower net investment income. Investment spread before valuation changes on embedded derivatives not hedged in the first six months of 2020 was comparable to the first six months of 2019. Amortization of DAC decreased 86.2% or$25 million in the second quarter of 2020 and decreased 33.3% or$19 million in the first six months of 2020 compared to the same periods of 2019, primarily due to lower gross profits on interest-sensitive life insurance from lower benefit spread.
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Allstate Life Segment Results
Components of amortization of DAC
Three months ended June 30, Six months ended June 30,
($ in millions) 2020 2019 2020 2019
Amortization of DAC before amortization
relating to realized capital gains and
losses, valuation changes on embedded
derivatives that are not hedged and changes
in assumptions $ 18 $ 27 $ 48 $ 53
Amortization relating to realized capital
gains and losses (1) and valuation changes
on embedded derivatives that are not hedged (14 ) 2 (10 ) 4
Amortization acceleration for changes in
assumptions (''DAC unlocking'') - - - -
Total amortization of DAC $ 4 $ 29 $ 38 $ 57 (1) The impact of realized capital gains and losses on amortization of DAC is
dependent upon the relationship between the assets that give rise to the
gain or loss and the product liability supported by the assets. Fluctuations
result from changes in the impact of realized capital gains and losses on
actual and expected gross profits.
Operating costs and expenses decreased 17.6% or $16 million in the second
quarter of 2020 and decreased 12.6% or $23 million in the first six months of
2020 compared to the same periods of 2019, primarily due to lower
employee-related expenses and lower commissions on non-proprietary product
sales.
Analysis of reserves and contractholder funds
Reserve for life-contingent contract benefits
($ in millions) June 30, 2020 December 31, 2019
Traditional life insurance $ 2,609 $ 2,612
Accident and health insurance 120 124Reserve for life-contingent contract benefits $ 2,729 $
2,736
Contractholder funds represent interest-bearing liabilities arising from the
sale of products such as interest-sensitive life insurance. The balance of
contractholder funds is equal to the cumulative deposits received and interest
credited to the contractholder less cumulative contract benefits, surrenders,
withdrawals and contract charges for mortality or administrative expenses.
Change in contractholder funds
Three months ended June 30, Six months ended June 30,
($ in millions) 2020 2019 2020 2019
Contractholder funds, beginning balance $ 7,754 $ 7,686 $ 7,805 $ 7,656
Deposits 229 242 460 476
Interest credited 114 70 170 142
Benefits, withdrawals and other adjustments
Benefits (51 ) (63 ) (114 ) (124 )
Surrenders and partial withdrawals (46 ) (63 ) (117 ) (133 )
Contract charges (175 ) (174 ) (350 ) (350 )
Net transfers from separate accounts - 4 2 6
Other adjustments (1) 32 9 1 38
Total benefits, withdrawals and other adjustments (240 ) (287 ) (578 ) (563 )
Contractholder funds, ending balance $ 7,857 $
7,711
(1) The table above illustrates the changes in contractholder funds, which are
presented gross of reinsurance recoverables on the Condensed Consolidated
Statements of Financial Position. The table above is intended to supplement
our discussion and analysis of revenues, which are presented net of
reinsurance on the Condensed Consolidated Statements of Operations. As a
result, the net change in contractholder funds associated with products
reinsured is reflected as a component of the other adjustments line.
Second Quarter 2020 Form10-Q 85 -------------------------------------------------------------------------------- Segment Results Allstate Benefits
Allstate Benefits Segment
[[Image Removed: allbenefitsgradver4proposa58.jpg]]Summarized financial information
Three months ended June 30, Six months ended June 30,
($ in millions) 2020 2019 2020 2019
Revenues
Premiums and contract charges$ 263 $ 284 $ 545 $ 572 Net investment income 20 21 40 40 Realized capital gains (losses) 11 2 (3 ) 6 Total revenues 294 307 582 618 Costs and expenses Contract benefits (123 ) (143 ) (264 ) (288 ) Interest credited to contractholder funds (9 ) (8 ) (18 ) (17 ) Amortization of DAC (35 ) (35 ) (80 ) (78 ) Operating costs and expenses (110 ) (71 ) (185 ) (142 ) Restructuring and related charges (1 ) - (1 ) - Total costs and expenses (278 ) (257 ) (548 ) (525 ) Income tax expense (4 ) (11 ) (8 ) (20 )
Net income applicable to common shareholders $ 12 $
39 $ 26
Adjusted net income $ 5 $ 37 $ 29$ 68 Realized capital gains (losses), after-tax 7 2 (3 ) 5
Net income applicable to common shareholders $ 12 $
39 $ 26$ 73 Benefit ratio (1) 46.8 50.4 48.4 50.3 Operating expense ratio (2) 41.8 25.0 33.9 24.8 Reserve for life-contingent contract benefits as ofJune 30
Contractholder funds as ofJune 30
Policies in force as ofJune 30 (in thousands) 4,410 (3) 4,296 (1) Benefit ratio is calculated as contract benefits divided by premiums and contract charges. (2) Operating expense ratio is calculated as operating costs and expenses divided by premiums and contract charges.
(3) Includes approximately 220 thousand policies that we estimate will lapse,
after the extended grace periods expire in the third quarter of 2020,
primarily due to Coronavirus-related layoffs and furloughs.
Net income applicable to common shareholders decreased 69.2% or$27 million in the second quarter of 2020 and decreased 64.4% or$47 million in the first six months of 2020 compared to the same periods of 2019. Adjusted net income decreased 86.5% or$32 million in the second quarter of 2020 and decreased 57.4% or$39 million in the first six months of 2020 compared to the same periods of 2019, primarily due to higher operating costs and expenses driven by a$41 million , pre-tax, write-off of capitalized software costs associated with a billing system. Premiums and contract charges decreased 7.4% or$21 million in the second quarter of 2020 and decreased 4.7% or$27 million in the first six months of 2020 compared to the same periods of 2019, primarily due to decreases in disability products, driven by the non-renewal of a large underperforming account in the fourth quarter of 2019 and decreased premium collections due to Coronavirus-related layoffs and furloughs.
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Allstate Benefits Segment Results
Premiums and contract charges by product
Three months ended June 30, Six months ended June 30,
($ in millions) 2020 2019 2020 2019
Life $ 38 $ 38 $ 76 $ 76
Accident 69 74 142 150
Critical illness 115 120 237 242
Short-term disability 17 27 37 53
Other health 24 25 53 51
Premiums and contract charges $ 263 $ 284 $ 545
Contract benefits decreased 14.0% or$20 million in the second quarter of 2020 and decreased 8.3% or$24 million in the first six months of 2020 compared to the same periods of 2019, primarily due to lower reported claim experience on health, critical illness and disability products, likely reflecting shelter-in-place orders, deferral of non-essential medical procedures and the non-renewal of a large underperforming account in the fourth quarter of 2019, partially offset by higher mortality experience on life products from the Coronavirus. Benefit ratio decreased to 46.8 and 48.4 in the second quarter and the first six months of 2020, respectively, compared to 50.4 and 50.3 in the same periods of 2019, primarily due to lower reported claim experience on critical illness and other health products likely reflecting shelter-in-place orders and deferral of non-essential medical procedures, partially offset by higher mortality experience on life products from the Coronavirus. Operating costs and expenses Three months ended June 30, Six months ended June 30, ($ in millions) 2020 2019 2020 2019 Non-deferrable commissions $ 25$ 26 $ 51$ 52 General and administrative expenses 85 45 134 90 Total operating costs and expenses $ 110 $
71 $ 185
Operating costs and expenses increased 54.9% or
Operating expense ratio increased to 41.8 and 33.9 in the second quarter and the first six months of 2020, respectively, compared to 25.0 and 24.8 in the same periods of 2019, primarily due to a$41 million , pre-tax, write-off of capitalized software costs associated with a billing system. Analysis of reserves Reserve for life-contingent contract benefits ($ in millions) June 30, 2020 December 31, 2019 Traditional life insurance $ 292 $ 285 Accident and health insurance 743 749
Reserve for life-contingent contract benefits $ 1,035 $
1,034
Second Quarter 2020 Form10-Q 87 -------------------------------------------------------------------------------- Segment Results Allstate Annuities
Allstate Annuities Segment
Summarized financial information
Three months ended June 30, Six months ended June 30,
($ in millions) 2020 2019 2020 2019
Revenues
Contract charges $ 2 $ 4 $ 4 $ 7
Net investment income 66 296 113 486
Realized capital gains (losses) 245 48 (24 ) 204
Total revenues 313 348 93 697
Costs and expenses
Contract benefits (136 ) (152 ) (284 ) (290 )
Interest credited to contractholder funds (77 ) (78 ) (144 ) (159 )
Amortization of DAC (1 ) (1 ) (3 ) (3 )
Operating costs and expenses (7 ) (8 ) (13 ) (15 )
Total costs and expenses (221 ) (239 ) (444 ) (467 )
Gain on disposition of operations 1 2 2 3
Income tax (expense) benefit (15 ) (23 ) 78 (48 )
Net income (loss) applicable to common
shareholders $ 78 $ 88 $ (271 ) $ 185
Adjusted net (loss) income $ (111 ) $ 52 $ (250 ) $ 27
Realized capital gains (losses), after-tax 194 37 (19 ) 161
Valuation changes on embedded derivatives
not hedged, after-tax (6 ) (2 ) (4 ) (5 )
Gain on disposition of operations, after-tax 1 1 2 2
Net income (loss) applicable to common
shareholders $ 78 $
88
Reserve for life-contingent contract benefits as ofJune 30
Contractholder funds as ofJune 30
Policies in force as ofJune 30 (in thousands) Deferred annuities 109 120 Immediate annuities 76 81 Total 185 201 Net income applicable to common shareholders decreased 11.4% or$10 million in the second quarter of 2020 compared to the second quarter of 2019. Net loss applicable to common shareholders was$271 million in the first six months of 2020 compared to net income of$185 million in the same period of 2019. Adjusted net loss was$111 million in the second quarter of 2020 and$250 million in the first six months of 2020 compared to adjusted net income of$52 million in the second quarter of 2019 and$27 million in the first six months of 2019, primarily due to lower net investment income. Net investment income decreased 77.7% or$230 million in the second quarter of 2020 and decreased 76.7% or$373 million in the first six months of 2020 compared to the same periods of 2019, primarily due to lower performance-based investment results, mainly from limited partnerships, lower interest-bearing investment yields and lower average investment balances. The investment portfolio supporting immediate annuities is managed to ensure the assets match the characteristics of the liabilities and provide the long-term returns needed to support this business. To better match the long-term nature of our immediate annuities, we use performance-based investments in which we have ownership interests, and a greater proportion of return is derived from idiosyncratic asset or operating performance. Performance-based income can vary significantly between periods and is influenced by economic conditions, equity market performance, comparable public company earnings multiples, capitalization rates, operating performance of the underlying investments and the timing of asset sales. Net realized capital gains in the second quarter of 2020 primarily related to increased valuation of equity investments. Net realized capital losses in the first six months of 2020 primarily related to decreased valuation of equity investments. Net realized capital gains in both the second quarter and the first six months of 2019 primarily related to increased valuation of equity investments and gains on sales of fixed income securities.
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Allstate Annuities Segment Results
Contract benefits decreased 10.5% or$16 million in the second quarter of 2020 compared to the second quarter of 2019, primarily due to immediate annuity mortality experience that was favorable in comparison to the prior year period. Contract benefits decreased 2.1% or$6 million in the first six months of 2020 compared to the same period of 2019, primarily due to lower implied interest on immediate annuities with life contingencies. We periodically review the adequacy of reserves for immediate annuities with life contingencies using actual experience and current assumptions. In the event actual experience and current assumptions are adverse compared to the original assumptions and a premium deficiency is determined to exist, the establishment of a premium deficiency reserve is required. Long-term investment yield assumptions are sensitive to changes in interest rates. During the second quarter of 2020, our reviews concluded that no premium deficiency adjustments were necessary although immediate annuities with life contingencies had marginal sufficiency. During third quarter 2020, we will conduct our annual actuarial assumption review. As part of this process, we will evaluate long-term interest rate and other capital market assumptions as well as other items such as mortality and persistency expectations. Benefit spread reflects our mortality results using the difference between contract charges earned and contract benefits excluding the portion related to the implied interest on immediate annuities with life contingencies. This implied interest totaled$115 million and$233 million in the second quarter and first six months of 2020, respectively, compared to$119 million and$240 million in the same periods of 2019. Total benefit spread was$(20) million and$(48) million in the second quarter and first six months of 2020, respectively, compared to$(31) million and$(46) million in same periods of 2019. Interest credited to contractholder funds decreased 1.3% or$1 million in the second quarter of 2020 and decreased 9.4% or$15 million in the first six months of 2020 compared to the same periods of 2019, primarily due to lower average contractholder funds. Valuation changes on derivatives embedded in equity-indexed annuity contracts that are not hedged increased interest credited to contractholder funds by$8 million and$5 million in the second quarter and first six months of 2020, respectively, compared to an increase of$3 million and$6 million in the same periods of 2019. These valuation changes are primarily driven by changes in interest rates. Investment spread reflects the difference between net investment income and the sum of interest credited to contractholder funds and the implied interest on immediate annuities with life contingencies, which is included as a component of contract benefits and is used to analyze the impact of net investment income and interest credited to contractholders on net income. Investment spread Three months ended June 30, Six months ended June 30, ($ in millions) 2020 2019 2020 2019 Investment spread before valuation changes on embedded derivatives not hedged$ (118 ) $ 102 $ (259 )$ 93 Valuation changes on derivatives embedded in equity-indexed annuity contracts that are not hedged (8 ) (3 ) (5 ) (6 ) Total investment spread$ (126 ) $ 99 $ (264 )$ 87 Investment spread before valuation changes on embedded derivatives not hedged decreased$220 million in the second quarter of 2020 and decreased$352 million in the first six months of 2020 compared to the same periods of 2019, primarily due to lower investment income, mainly from limited partnership interests, partially offset by lower interest credited to contractholder funds.
To further analyze investment spreads, the following table summarizes the weighted average investment yield on assets supporting product liabilities, interest crediting rates and investment spreads. Investment spreads may vary significantly between periods due to the variability in investment income, particularly for immediate fixed annuities where the investment portfolio includes performance-based investments.
Second Quarter 2020 Form 10-Q 89 -------------------------------------------------------------------------------- Segment Results Allstate Annuities
Analysis of investment spread
Three months ended June 30,
Weighted average Weighted average Weighted average
investment yield interest crediting rate investment spreads
2020 2019 2020 2019 2020 2019
Deferred fixed
annuities 3.9 % 4.5 % 2.7 % 2.7 % 1.2 % 1.8 %
Immediate fixed
annuities with and
without life
contingencies (0.2 ) 7.3 5.8 5.9 (6.0 ) 1.4
Six months ended June 30,
Weighted average Weighted average Weighted average
investment yield interest crediting rate investment spreads
2020 2019 2020 2019 2020 2019
Deferred fixed
annuities 4.1 % 4.3 % 2.7 % 2.7 % 1.4 % 1.6 %
Immediate fixed
annuities with and
without life
contingencies (0.6 ) 5.4 5.8 5.9 (6.4 ) (0.5 )
Operating costs and expenses decreased 12.5% or $1 million in the second quarter
of 2020 and decreased 13.3% or $2 million in the first six months of 2020
compared to the same periods of 2019, primarily due to lower technology and
employee-related costs. In July 2020 , we entered into an agreement to transition
the servicing of annuities to a third-party administrator. The migration is
expected to be completed by mid-2022.
Analysis of reserves and contractholder funds
Product liabilities
($ in millions) June 30, 2020 December 31, 2019
Immediate fixed annuities with life
contingencies:
Sub-standard structured settlements and group
pension terminations (1) $ 5,231 $ 5,085
Standard structured settlements and SPIA (2) 3,361 3,367
Other 115 78
Reserve for life-contingent contract benefits $ 8,707 $
8,530
Deferred fixed annuities $ 6,225 $ 6,499
Immediate fixed annuities without life
contingencies 2,260 2,346
Other 168 127
Contractholder funds $ 8,653 $ 8,972
(1) Comprises structured settlement annuities for annuitants with severe
injuries or other health impairments which increased their expected
mortality rate at the time the annuity was issued ("sub-standard structured
settlements") and group annuity contracts issued to sponsors of terminated
pension plans.
(2) Comprises structured settlement annuities for annuitants with standard life
expectancy ("standard structured settlements") and single premium immediate
annuities ("SPIA") with life contingencies.
Contractholder funds represent interest-bearing liabilities arising from the sale of products such as fixed annuities. The balance of contractholder funds is equal to the cumulative deposits received and interest credited to the contractholder less cumulative contract benefits, surrenders, withdrawals and contract charges for mortality or administrative expenses.
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Allstate Annuities Segment Results
Changes in contractholder funds
Three months ended June 30, Six months ended June 30,
($ in millions) 2020 2019 2020 2019
Contractholder funds, beginning balance $ 8,773 $ 9,571 $ 8,972 $ 9,817
Deposits 6 4 10 9
Interest credited 76 78 143 158
Benefits, withdrawals and other adjustments
Benefits (121 ) (135 ) (260 ) (276 )
Surrenders and partial withdrawals (97 ) (150 ) (248 ) (331 )
Contract charges (2 ) (2 ) (4 ) (4 )
Net transfers from separate accounts - - - (1 )
Other adjustments (1) 18 (19 ) 40 (25 )
Total benefits, withdrawals and other adjustments (202 ) (306 ) (472 ) (637 )
Contractholder funds, ending balance $ 8,653 $
9,347
(1) The table above illustrates the changes in contractholder funds, which are
presented gross of reinsurance recoverables on the Condensed Consolidated
Statements of Financial Position. The table above is intended to supplement
our discussion and analysis of revenues, which are presented net of
reinsurance on the Condensed Consolidated Statements of Operations. As a
result, the net change in contractholder funds associated with products
reinsured is reflected as a component of the other adjustments line.
Contractholder funds decreased 1.4% and 3.6% in the second quarter and first six months of 2020, respectively, primarily due to the continued runoff of our deferred fixed annuity business. We discontinued the sale of annuities but still accept additional deposits on existing contracts. Surrenders and partial withdrawals decreased 35.3% or$53 million in the second quarter of 2020 and decreased 25.1% or$83 million in the first six months of 2020 compared to the same periods of 2019. The annualized surrender and partial withdrawal rate on deferred fixed annuities, based on the beginning of year contractholder funds, was 8.4% in the first six months of 2020 compared to 10.1% in the first six months of 2019. Second Quarter 2020 Form
10-Q 91 -------------------------------------------------------------------------------- Investments
Investments
Portfolio composition and strategy by reporting segment (1)
June 30, 2020
Allstate Allstate Corporate and
($ in millions) Property-Liability Service Businesses Allstate Life Benefits Annuities Other Total
Fixed income
securities (2) $ 37,866 $ 1,549 $ 8,336 $ 1,383 $ 14,078 $ 1,236 $ 64,448
Equity securities (3) 2,093 132 172 73 1,402 340 4,212
Mortgage loans, net 604 - 1,797 201 2,172 - 4,774
Limited partnership
interests 4,092 - - - 2,848 1 6,941
Short-term
investments (4) 1,868 89 441 73 763 2,110 5,344
Other, net 1,648 - 1,326 299 643 2 3,918
Total $ 48,171 $ 1,770 $ 12,072 $ 2,029 $ 21,906 $ 3,689 $ 89,637
Percent to total 53.7 % 2.0 % 13.5 % 2.3 % 24.4 % 4.1 % 100.0 %
Market-based $ 43,151 $ 1,770 $ 12,072 $ 2,029 $ 18,725 $ 3,687 $ 81,434
Performance-based 5,020 - - - 3,181 2 8,203
Total $ 48,171 $ 1,770 $ 12,072 $ 2,029 $ 21,906 $ 3,689 $ 89,637
(1) Balances reflect the elimination of related party investments between
segments.
(2) Fixed income securities are carried at fair value. Amortized cost, net for
these securities was
billion,
Property-Liability, Service Businesses, Allstate Life, Allstate Benefits,
Allstate Annuities, Corporate and Other, and in total, respectively.
(3) Equity securities are carried at fair value. The fair value of equity
securities held as of
These net gains were primarily concentrated in the technology, consumer
goods and banking sectors. Equity securities include
with underlying investments in fixed income securities as of
(4) Short-term investments are carried at fair value.
Investments totaled$89.64 billion as ofJune 30, 2020 , increasing from$88.36 billion as ofDecember 31, 2019 , primarily due to higher fixed income valuations and positive operating cash flows, partially offset by common share repurchases, dividends paid to shareholders, lower equity valuations and net reductions in contractholder funds. Portfolio composition by investment strategy We utilize two primary strategies to manage risks and returns and to position our portfolio to take advantage of market opportunities while attempting to mitigate adverse effects. As strategies and market conditions evolve, the asset allocation may change, or assets may be moved between strategies. Market-based strategies include investments primarily in public fixed income and equity securities. It seeks to deliver predictable earnings aligned to business needs and take advantage of short-term opportunities primarily through public and private fixed income investments and public equity securities. Performance-based strategy seeks to deliver attractive risk-adjusted returns and supplement market risk with idiosyncratic risk primarily through investments in private equity and real estate. Low interest rate environment InJune 2020 , theFederal Open Market Committee ("FOMC") maintained the target range for federal funds at 0 percent to 1/4 percent. TheFOMC noted that the ongoing public health crisis will weigh heavily on economic activity, employment and inflation in the near term and poses considerable risks to the economic outlook over the medium term. In light of these developments, theFOMC expects to maintain this target range until it is confident that the economy has stabilized and is on track to achieve its maximum employment and price stability goals. Investing activity will continue to decrease our portfolio yield as long as market yields remain below the current portfolio yield. Any decline in market-based portfolio yield is expected to result in lower net investment income in future periods. Interest-bearing investments are comprised of fixed income securities, mortgage loans, short-term investments and other investments, including bank and agent loans. Coronavirus impacts Ongoing uncertainty related to the future path of the pandemic has and may continue to create market volatility that impacted the valuations, liquidity, prospects and risks of fixed income securities, equity securities and performance-based investments, primarily limited partnership interests, during the first six months of 2020. Fixed income securities in certain sectors such as energy, automotive, retail, travel, lodging and airlines were more severely impacted than others in the first quarter of 2020 and some continue to recover slower from the economic downturn. Although fixed income and equity security values generally increased in the second quarter, future investment results will depend on developments, including the duration and spread of the outbreak, preventive measures to combat the spread of the virus, and capital market conditions, including the pace of economic recovery and effectiveness of the fiscal and monetary policy responses.
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Investments
The ongoing impact of the Coronavirus on financial markets and the overall economy remain uncertain. Some of the restrictions implemented to contain the pandemic have been relaxed, but reduced economic activity, limits on large gatherings and events and higher unemployment continue. Additionally, there is no way of predicting with certainty how long the pandemic might last, including the potential for restrictions being restored or new restrictions being implemented that could result in further economic volatility.
Portfolio composition by investment strategy
June 30, 2020
($ in millions) Market-based Performance-based Total
Fixed income securities $ 64,344 $ 104 $ 64,448
Equity securities 3,886 326 4,212
Mortgage loans, net 4,774 - 4,774
Limited partnership interests 254 6,687 6,941
Short-term investments 5,344 - 5,344
Other, net 2,832 1,086 3,918
Total $ 81,434 $ 8,203 $ 89,637
Percent to total 90.8 % 9.2 % 100.0 %
Unrealized net capital gains and losses
Fixed income securities $ 3,914 $ - $ 3,914
Limited partnership interests - (8 ) (8 )
Short-term investments 1 - 1
Other (3 ) - (3 )
Total $ 3,912 $ (8 ) $ 3,904 Fixed income securities by type
Fair value as of
($ in millions) June 30, 2020 December 31, 2019
U.S. government and agencies $ 3,519 $ 5,086
Municipal 9,285 8,620
Corporate 49,740 43,078
Foreign government 961 979
Asset-backed securities ("ABS") 759 862
Mortgage-backed securities ("MBS") 184 419
Total fixed income securities $ 64,448 $ 59,044
Fixed income securities are rated by third-party credit rating agencies and/or
are internally rated. As of June 30, 2020 , 88.9% of the consolidated fixed
income securities portfolio was rated investment grade, which 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, a comparable rating from another nationally recognized rating
agency, or a comparable internal rating if an externally provided rating is not
available. Credit ratings below these designations are considered lower credit
quality or below investment grade, which includes high yield bonds. Market
prices for certain securities may have credit spreads which imply higher or
lower credit quality than the current third-party rating. Our initial investment
decisions and ongoing monitoring procedures for fixed income securities are
based on a due diligence process which includes, but is not limited to, an
assessment of the credit quality, sector, structure, and liquidity risks of each
issue.
Second Quarter 2020 Form10-Q 93 -------------------------------------------------------------------------------- Investments
Fair value and unrealized net capital gains (losses) for fixed income securities by credit rating
June 30, 2020
A and above BBB BB
Fair Unrealized Fair Unrealized Fair Unrealized
($ in millions) value gain (loss) value gain (loss) value gain (loss)
U.S. government and
agencies $ 3,519 $ 207 $ - $ - $ - $ -
Municipal 8,910 674 311 31 8 -
Corporate
Public 15,231 1,221 17,573 1,174 2,611 35
Privately placed 4,523 331 5,470 270 2,171 (3 )
Total corporate 19,754 1,552 23,043 1,444 4,782 32
Foreign government 945 45 10 1 6 -
ABS 654 (7 ) 10 (3 ) 20 (4 )
MBS 60 3 52 - 8 -
Total fixed income
securities $ 33,842 $ 2,474 $ 23,426 $ 1,473 $ 4,824 $ 28
B CCC and lower Total
Fair Unrealized Fair Unrealized Fair Unrealized
value gain (loss) value gain (loss) value gain (loss)
U.S. government and
agencies $ - $ - $ - $ - $ 3,519 $ 207
Municipal 11 - 45 1 9,285 706
Corporate
Public 542 (27 ) 54 (8 ) 36,011 2,395
Privately placed 1,380 (28 ) 185 (22 ) 13,729 548
Total corporate 1,922 (55 ) 239 (30 ) 49,740 2,943
Foreign government - - - - 961 46
ABS 13 (2 ) 62 (4 ) 759 (20 )
MBS 4 - 60 29 184 32
Total fixed income
securities $ 1,950 $ (57 ) $ 406 $ (4 ) $ 64,448 $ 3,914
Municipal bonds, including tax-exempt and taxable securities, include general
obligations of state and local issuers and revenue bonds.
Corporate bonds include publicly traded and privately placed securities.
Privately placed securities primarily consist of corporate issued senior debt
securities that are negotiated with the borrower or are in unregistered form.
ABS includes collateralized debt obligations, consumer and other ABS. Credit
risk is managed by monitoring the performance of the underlying collateral. Many
of the securities in the ABS portfolio have credit enhancement with features
such as overcollateralization, subordinated structures, reserve funds,
guarantees and/or insurance.
MBS includes residential mortgage-backed securities ("RMBS") and commercial
mortgage-backed securities ("CMBS"). RMBS is subject to interest rate risk, but
unlike other fixed income securities, is additionally subject to prepayment risk
from the underlying residential mortgage loans. RMBS consists of a U.S. Agency
portfolio having collateral issued or guaranteed by U.S. government agencies and
a non-agency portfolio consisting of securities collateralized by Prime, Alt-A
and Subprime loans. CMBS investments are primarily traditional conduit
transactions collateralized by commercial mortgage loans and typically are
diversified across property types and geographical area.
Equity securities primarily include common stocks, exchange traded and mutual
funds, non-redeemable preferred stocks and real estate investment trust ("REIT")
equity investments. Certain exchange traded and mutual funds have fixed income
securities as their underlying investments.
Mortgage loans mainly comprise loans secured by first mortgages on developed
commercial real estate. Key considerations used to manage our exposure include
property type and geographic diversification.
Types of properties collateralizing the mortgage loan portfolio
(% of mortgage loan portfolio carrying value) June 30, 2020
Apartment complex 38.0 %
Office buildings 22.1
Warehouse 15.1
Retail 12.5
Other 12.3
Total 100.0 %
For further detail on our mortgage loan portfolio, see Note 5 of the condensed consolidated financial statements.
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Investments
Limited partnership interests include$5.58 billion of interests in private equity funds,$1.11 billion of interests in real estate funds and$254 million of interests in other funds as ofJune 30, 2020 . We have commitments to invest additional amounts in limited partnership interests totaling$2.73 billion as ofJune 30, 2020 . Private equity limited partnerships by sector (% of carrying value)June 30, 2020 Industrial 17.7 % Consumer staples 12.1 Utilities 10.7 Consumer discretionary 10.1 Information technology 9.7 Healthcare 9.1 Other 30.6 Total 100.0 % Real estate limited partnerships by sector (% of carrying value)June 30, 2020 Industrial 28.3 % Residential 26.7 Office 13.2 Other 31.8 Total 100.0 % Other investments include$986 million of direct investments in real estate as ofJune 30, 2020 . Direct real estate investments by sector (% of carrying value)June 30, 2020 Residential 42.8 % Industrial 16.1 Retail 14.2 Timber 10.5 Agriculture 9.8 Other 6.6 Total 100.0 %
Unrealized net capital gains (losses)
June 30, December 31,
($ in millions) 2020 2019
U.S. government and agencies $ 207 $ 115
Municipal 706 540
Corporate 2,943 1,988
Foreign government 46 11
ABS (20 ) 2
MBS 32 95
Fixed income securities 3,914 2,751
Short-term investments 1 -
Derivatives (3 ) (3 )
EMA limited partnerships (8 )
(4 )
Unrealized net capital gains and losses, pre-tax
Gross unrealized gains (losses) on fixed income securities
June 30, December 31,
($ in millions) 2020 2019
Gross unrealized gains $ 4,229 $ 2,847
Gross unrealized losses (315 ) (96 )
Unrealized net capital gains and losses
Second Quarter 2020 Form 10-Q 95 -------------------------------------------------------------------------------- Investments
Gross unrealized gains (losses) on fixed income securities by type and sector
June 30, 2020
Amortized Gross unrealized Fair
($ in millions) cost, net Gains Losses value
Corporate:
Consumer goods
Cyclical
Gaming, lodging and leisure $ 522 $ 14 $ (13 ) $ 523
Automotive 1,757 72 (6 ) 1,823
Retailers 1,168 114 (1 ) 1,281
Restaurants 485 38 (1 ) 522
Other 1,124 54 (12 ) 1,166
Total cyclical 5,056 292 (33 ) 5,315
Non-cyclical 7,962 576 (19 ) 8,519
Total consumer goods 13,018 868 (52 ) 13,834
Energy
Midstream 1,645 77 (25 ) 1,697
Independent/upstream 285 16 (23 ) 278
Integrated 501 49 - 550
Other 242 14 (3 ) 253
Total energy 2,673 156 (51 ) 2,778
Transportation
Airlines 331 1 (39 ) 293
Railroad and other 1,640 174 (8 ) 1,806
Total transportation 1,971 175 (47 ) 2,099
Financial services
Finance companies 569 10 (37 ) 542
Life insurance 957 54 (1 ) 1,010
Other 1,408 89 (3 ) 1,494
Total financial services 2,934 153 (41 ) 3,046
Banking 5,532 295 (24 ) 5,803
Capital goods 5,282 339 (20 ) 5,601
Basic industry 2,230 143 (14 ) 2,359
Utilities 5,986 569 (13 ) 6,542
Communications 3,308 263 (12 ) 3,559
Other 259 7 (6 ) 260
Technology 3,604 259 (4 ) 3,859
Total corporate fixed income
portfolio 46,797 3,227 (284 ) 49,740
U.S. government and agencies 3,312 208 (1 ) 3,519
Municipal 8,579 712 (6 ) 9,285
Foreign government 915 46 - 961
ABS 779 4 (24 ) 759
MBS 152 32 - 184
Total fixed income securities $ 60,534 $ 4,229 $ (315 ) $ 64,448 96 [[Image Removed: allstatelogohandsa82.jpg]] www.allstate.com --------------------------------------------------------------------------------
Investments
Gross unrealized gains (losses) on fixed income securities by type and sector
December 31, 2019
Amortized Gross unrealized Fair
($ in millions) cost Gains Losses value
Corporate:
Consumer goods
Cyclical
Gaming, lodging and leisure $ 596 $ 28 $ - $ 624
Automotive 1,463 42 (1 ) 1,504
Retailers 920 52 - 972
Restaurants 390 19 - 409
Other 1,056 49 (3 ) 1,102
Total cyclical 4,425 190 (4 ) 4,611
Non-cyclical 7,112 316 (1 ) 7,427
Total consumer goods 11,537 506 (5 ) 12,038
Energy
Midstream 1,570 77 (4 ) 1,643
Independent/upstream 422 19 (10 ) 431
Integrated 406 32 - 438
Other 237 11 - 248
Total energy 2,635 139 (14 ) 2,760
Transportation
Airlines 418 12 - 430
Railroad and other 1,613 120 - 1,733
Total transportation 2,031 132 - 2,163
Financial services
Finance companies 582 24 - 606
Life insurance 725 30 - 755
Other 1,169 53 (2 ) 1,220
Total financial services 2,476 107 (2 ) 2,581
Banking 4,610 143 (14 ) 4,739
Capital goods 4,945 229 (1 ) 5,173
Basic industry 1,897 114 (2 ) 2,009
Utilities 5,197 385 (6 ) 5,576
Communications 2,721 158 (2 ) 2,877
Other 276 10 - 286
Technology 2,765 112 (1 ) 2,876
Total corporate fixed income
portfolio 41,090 2,035 (47 ) 43,078
U.S. government and agencies 4,971 141 (26 ) 5,086
Municipal 8,080 551 (11 ) 8,620
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
In general, the gross unrealized losses are 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. Similarly, gross unrealized gains
reflect a decrease in market yields since the time of initial purchase.
Second Quarter 2020 Form 10-Q 97 -------------------------------------------------------------------------------- Investments
Equity securities by sector
June 30, 2020 December 31, 2019
Fair Over (under) Fair
($ in millions) Cost Over (under) cost value Cost cost value
Capital goods $ 168 $ (18 ) $ 150 $ 331 $ 91 $ 422
Energy 115 (8 ) 107 275 15 290
Utilities 56 4 60 116 38 154
Transportation 41 6 47 81 32 113
Basic industry 48 14 62 135 40 175
Other (1) 1,303 342 1,645 2,526 1,062 3,588
Funds
Bonds 1,339 21 1,360 1,727 62 1,789
Equities 747 34 781 1,377 254 1,631
Total funds 2,086 55 2,141 3,104 316 3,420
Total equity securities $ 3,817 $ 395 $ 4,212 (1) Other is comprised of REITs, communications, financial services, banking,
consumer goods and technology sectors.
Net investment income
Three months ended June 30, Six months ended June 30,
($ in millions) 2020 2019 2020 2019
Fixed income securities $ 531 $ 543 $ 1,056 $ 1,081
Equity securities 31 68 37 98
Mortgage loans 51 54 111 107
Limited partnership interests (220 ) 254 (412 ) 263
Short-term investments 2 26 19 52
Other 62 67 125 130
Investment income, before expense 457 1,012 936 1,731
Investment expense (1) (2) (48 ) (70 ) (106 ) (141 )
Net investment income $ 409 $ 942 $ 830 $ 1,590
Market-based 655 733 1,330 1,428
Performance-based (198 ) 279 (394 ) 303
Investment income, before expense $ 457 $
1,012
(1) Investment expense includes
expenses in the second quarter of 2020 and 2019, respectively and
million and
respectively. Investee level expenses include asset level operating expenses
on directly held real estate and other consolidated investments. Beginning
is reported as realized capital gains or losses.
(2) Investment expense includes zero and
reinvestment income on securities lending collateral paid to the
counterparties in the second quarter of 2020 and 2019, respectively, and
million and
respectively.
Net investment income decreased 56.6% or$533 million in the second quarter of 2020 and decreased 47.8% or$760 million in the first six months of 2020 compared to the same periods of 2019, primarily due to lower performance-based investment results, mainly from limited partnership interests, and a decline in market-based income due to lower interest-bearing portfolio yields.
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Investments
Performance-based investment income
Three months ended June 30, Six months ended June 30,
($ in millions) 2020 2019 2020 2019
Limited partnerships
Private equity $ (213 ) $ 216 $ (412 ) $ 211
Real estate (7 ) 38 - 50
Performance-based - limited partnerships (220 ) 254 (412 ) 261
Non-limited partnerships
Private equity 4 10 (17 ) 13
Real estate 18 15 35 29
Performance-based - non-limited partnerships 22 25 18 42
Total
Private equity (209 ) 226 (429 ) 224
Real estate 11 53 35 79
Total performance-based income before
investee level expenses $ (198 ) $ 279 $ (394 ) $ 303
Investee level expenses (1) (13 ) (18 ) (25 ) (36 )
Total performance-based income $ (211 ) $
261
(1) Investee level expenses include asset level operating expenses reported in
investment expense. Beginning
included in investee level expenses is reported as realized capital gains or
losses.
Performance-based investment income decreased$472 million and$686 million in the second quarter and the first six months of 2020, respectively, compared to the same periods of 2019, primarily due to lower valuations of private equity investments. In consideration of intervening events in the first quarter of 2020, where information was available to enable updated estimates, we recognized declines in the value of limited partnership interests during the three months endedMarch 31, 2020 . This included updating publicly traded investments held within limited partnerships to theirMarch 31, 2020 values, which reduced income by$52 million . Additionally,$195 million of valuation increases reported in the fourth quarter 2019 partnership financial statements were excluded from income due to the equity market decline inMarch 2020 . In the second quarter of 2020, we re-established the one-quarter lag for performance-based investments. Due to the proactive actions taken in the first quarter of 2020, performance-based investment income was$240 million higher in the second quarter of 2020 as this amount of the decline in valuations was recognized in the first quarter of 2020. Performance-based investment results and income can vary significantly between periods and are influenced by economic conditions, equity market performance, comparable public company earnings multiples, capitalization rates, operating performance of the underlying investments and the timing of asset sales. Second Quarter 2020 Form
10-Q 99 -------------------------------------------------------------------------------- Investments
Components of realized capital gains (losses) and the related tax effect
Three months ended June 30, Six months ended June 30,
($ in millions) 2020 2019 2020 2019
Sales (1) $ 179 $ 117 $ 567 $ 212
Credit losses (2)
Fixed income securities (4 ) (9 ) (8 ) (11 )
Mortgage Loans - - (41 ) -
Limited partnership interests (3 ) (2 ) (10 ) (3 )
Other investments (3 ) (4 ) (30 ) (15 )
Total credit losses (10 ) (15 ) (89 ) (29 )
Valuation of equity investments -
appreciation (decline):
Equity securities 480 178 (270 ) 731
Limited partnerships (3) 37 22 (72 ) 96
Total valuation of equity investments 517 200 (342 ) 827
Valuation and settlements of derivative
instruments 18 22 106 (24 )
Realized capital gains (losses), pre-tax 704 324 242 986
Income tax expense (150 ) (68 ) (54 ) (206 )
Realized capital gains (losses), after-tax
256$ 188 $ 780 Market-based 690 287 197 892 Performance-based 14 37 45 94
Realized capital gains (losses), pre-tax
324
(1) Beginning
level expenses is reported as realized capital gains or losses.
(2) Due to the adoption of the measurement of credit losses on financialinstruments accounting standard, realized capital losses previously reported
as other-than-temporary impairment write-downs are now presented as credit
losses.
(3) Relates to limited partnerships where the underlying assets are
predominately public equity securities.
Realized capital gains in the second quarter of 2020 related primarily to
increased valuation of equity investments and gains on sales of fixed income
securities. Realized capital gains in the first six months of 2020 related
primarily to gains on sales of fixed income securities, partially offset by
lower valuation of equity investments in the first quarter.
Sales in the second quarter and the first six months of 2020 related primarily
to fixed income securities in connection with ongoing portfolio management.
Valuation and settlements of derivative instruments in the second quarter of
2020 primarily comprised of gains on replication using credit default swaps and
fixed income total return swaps, partially offset by losses on foreign currency
contracts due to the weakening of the U.S. dollar. Valuation and settlements of
derivative instruments in the first six months of 2020 primarily comprised of
gains on interest rate futures used to increase asset duration, foreign currency
contracts due to the strengthening of the U.S. dollar, and equity futures used
for risk management due to a decrease in indices, partially offset by losses on
interest rate futures used for risk management.
Realized capital gains (losses) for performance-based investments
Three months ended June 30, Six months ended June 30,
($ in millions) 2020 2019 2020 2019
Sales (1) $ (8 ) $ 31 $ 2 $ 60
Credit losses (2) (5 ) (2 ) (13 ) (3 )
Valuation of equity investments 32 2 25 27
Valuation and settlements of derivative
instruments (5 ) 6 31 10
Total performance-based $ 14 $ 37 $ 45 $ 94 (1) Beginning
level expenses is reported as realized capital gains or losses.
(2) Due to the adoption of the measurement of credit losses on financialinstruments accounting standard, realized capital losses previously reported
as other-than-temporary impairment write-downs are now presented as credit
losses.
Realized capital gains for performance-based investments in the second quarter of 2020, primarily related to increased valuation of equity investments. Realized capital gains for performance-based investments in the first six months of 2020, primarily related to valuation and settlements of derivative instruments.
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Capital Resources and Liquidity
Capital Resources and Liquidity Capital resources consist of shareholders' equity and debt, representing funds deployed or available to be deployed to support business operations or for general corporate purposes. Capital resources ($ in millions) June 30, 2020 December 31, 2019 Preferred stock, common stock, treasury stock, retained income and other shareholders' equity items$ 24,358 $
24,048
Accumulated other comprehensive income 2,628 1,950 Total shareholders' equity 26,986 25,998 Debt 6,634 6,631 Total capital resources$ 33,620 $ 32,629 Ratio of debt to shareholders' equity 24.6 % 25.5 % Ratio of debt to capital resources 19.7
20.3
Shareholders' equity increased in the first six months of 2020, primarily due to net income and increased unrealized capital gains on investments, partially offset by common share repurchases, dividends paid to shareholders and redemption of preferred stock. In the six months endedJune 30, 2020 , we paid dividends of$331 million and$56 million related to our common and preferred shares, respectively. Debt maturities$250 million of floating rate senior notes are scheduled to mature inMarch 2021 . We do not have any scheduled debt maturities in 2020. Debt maturities for each of the next five years and thereafter (excluding issuance costs) ($ in millions) 2020 $ - 2021 250 2022 - 2023 750 2024 - 2025 - Thereafter 5,691 Total long-term debt principal$ 6,691 Common share repurchases As ofJune 30, 2020 , there was$2.36 billion remaining on the$3.00 billion common share repurchase program that is expected to be completed by the end of 2021. During the first six months of 2020, we repurchased 8.7 million common shares, or 2.7% of total common shares outstanding atDecember 31, 2019 , for$902 million . Common shareholder dividends OnJanuary 2, 2020 andApril 1, 2020 , we paid common shareholder dividends of$0.50 and$0.54 , respectively. OnMay 19, 2020 andJuly 16, 2020 , we declared a common shareholder dividend of$0.54 and$0.54 payable onJuly 1, 2020 andOctober 1, 2020 , respectively. Financial ratings and strength Our ratings are influenced by many factors including our operating and financial performance, asset quality, liquidity, asset/liability management, overall portfolio mix, financial leverage (i.e., debt), exposure to risks such as catastrophes and the current level of operating leverage. The preferred stock and subordinated debentures are viewed as having a common equity component by certain rating agencies and are given equity credit up to a pre-determined limit in our capital structure as determined by their respective methodologies. These respective methodologies consider the existence of certain terms and features in the instruments such as the noncumulative dividend feature in the preferred stock. InJune 2020 ,A.M. Best affirmedThe Allstate Corporation's (the "Corporation's") debt and short-term issuer ratings of a and AMB-1+, respectively, and the insurance financial strength ratings of A+ forAllstate Insurance Company ("AIC"),Allstate Life Insurance Company ("ALIC") andAllstate Assurance Company . The outlook for the ratings is stable. InJuly 2020 , S&P affirmed the Corporation's debt and short-term issuer ratings of A- and A-2, respectively, and the insurance financial strength rating of AA- for AIC. The outlook for the ratings is stable. EffectiveJune 25, 2020 , we are no longer requesting a rating from S&P for ALIC, which was rated A+ with a stable outlook at the time of the withdrawal. There have been no changes to our ratings from Moody's sinceDecember 31, 2019 . Liquidity sources and uses We actively manage our financial position and liquidity levels in light of changing market, economic and business conditions. Liquidity is managed at both the entity and enterprise level across the Company and is assessed on both base and stressed level liquidity needs. We believe we have sufficient liquidity to meet these needs. Additionally, we have existing intercompany agreements in place that facilitate liquidity management across the Company to enhance flexibility. The Corporation is party to an Amended and Restated Intercompany Liquidity Agreement ("Liquidity Agreement") with certain subsidiaries, which include but are not limited to ALIC and AIC. The Liquidity Agreement allows for short-term advances of funds to be made between parties for liquidity and other general corporate purposes. The Liquidity Agreement does not establish a commitment to advance funds on the part of any party. ALIC and AIC each serve as a Second Quarter 2020 Form
10-Q 101 -------------------------------------------------------------------------------- Capital Resources and Liquidity
lender and borrower, certain other subsidiaries serve only as borrowers, and the Corporation serves only as a lender. AIC also has a capital support agreement with ALIC. Under the capital support agreement, AIC is committed to providing capital to ALIC to maintain an adequate capital level. The maximum amount of potential funding under each of these agreements is $1.00 billion. In addition to the Liquidity Agreement, the Corporation also has an intercompany loan agreement with certain of its subsidiaries, which include, but are not limited to, AIC and ALIC. The amount of intercompany loans available to the Corporation's subsidiaries is at the discretion of the Corporation. The maximum amount of loans the Corporation will have outstanding to all its eligible subsidiaries at any given point in time is limited to $1.00 billion. The Corporation may use commercial paper borrowings, bank lines of credit and securities lending to fund intercompany borrowings. Parent company capital capacity Parent holding company deployable assets totaled $3.63 billion as of June 30, 2020, primarily comprised of cash and investments that are generally saleable within one quarter. The substantial earnings capacity of the operating subsidiaries is the primary source of capital generation for the Corporation. As of June 30, 2020, we held $7.53 billion of cash,U.S. government and agencies fixed income securities, and public equity securities which we would expect to be able to liquidate within one week. Intercompany dividends were paid in the first six months of 2020 between the following companies: AIC, Allstate Insurance Holdings, LLC ("AIH") and the Corporation. Intercompany dividends ($ in millions) June 30, 2020 AIC to AIH $ 2,879 AIH to the Corporation 2,879 Based on the greater of 2019 statutory net income or 10% of statutory surplus, the maximum amount of dividends that AIC will be able to pay, without prior Illinois Department of Insurance approval, at a given point in time in 2020 is estimated at $3.73 billion, less dividends paid during the preceding twelve months measured at that point in time. As of June 30, 2020, we paid dividends of $2.88 billion and the remaining amount of $854 million will become available for payment throughout the remainder of the year. Dividends may not be paid or declared on our common stock and shares of common stock may not be repurchased unless the full dividends for the latest completed dividend period on our preferred stock have been declared and paid or provided for. We are prohibited from declaring or paying dividends on our Series G preferred stock if we fail to meet specified capital adequacy, net income or shareholders' equity levels, except out of the net proceeds of common stock issued during the 90 days prior to the date of declaration. As of June 30, 2020, we satisfied all the requirements with no current restrictions on the payment of preferred stock dividends. The terms of our outstanding subordinated debentures also prohibit us from declaring or paying any dividends or distributions on our common or preferred stock or redeeming, purchasing, acquiring, or making liquidation payments on our common stock or preferred stock if we have elected to defer interest payments on the subordinated debentures, subject to certain limited exceptions. In the first six months of 2020, we did not defer interest payments on the subordinated debentures. Additional resources to support liquidity are as follows: • The Corporation, AIC and ALIC have access to a $1.00 billion unsecured
revolving credit facility that is available for short-term liquidity
requirements. The maturity date of this facility is April 2021. The facility
is fully subscribed among 11 lenders with the largest commitment being $115
million. The commitments of the lenders are several and no lender is
responsible for any other lender's commitment if such lender fails to make a
loan under the facility. This facility contains an increase provision that
would allow up to an additional $500 million of borrowing, subject to the
lenders' commitment. This facility has a financial covenant requiring that we
not exceed a 37.5% debt to capitalization ratio as defined in the agreement.
This ratio was 15.8% as of June 30, 2020. 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
our senior unsecured, unguaranteed long-term debt. There were no borrowings
under the credit facility during 2020.
• The Corporation has access to the commercial paper market for short-term
borrowings up to $1.00 billion. The combined total amount outstanding at any
one point from commercial paper borrowings and the credit facility cannot
exceed the amount that can be borrowed under the credit facility. As of
June 30, 2020, there were no commercial paper borrowings outstanding.
• The Corporation has access to a universal shelf registration statement with
the Securities and Exchange Commission that expires in 2021. We can use this
shelf registration to issue an unspecified amount of debt securities, common
stock (including 587 million shares of treasury stock as of June 30, 2020),
preferred stock, depositary shares, warrants, stock purchase contracts, stock
purchase units and securities of trust subsidiaries. The specific terms of
any securities we issue under this registration statement will be provided in
the applicable prospectus supplements.
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Capital Resources and Liquidity
Liquidity exposure Contractholder funds were $17.40 billion as of June 30, 2020. Contractholder funds by contractual withdrawal provisions
Percent
($ in millions) June 30, 2020 to total Not subject to discretionary withdrawal $ 2,651 15.2 %
Subject to discretionary withdrawal with adjustments: Specified surrender charges (1)
4,852 27.9
Market value adjustments (2) 741 4.3
Subject to discretionary withdrawal without adjustments (3) 9,152 52.6
Total contractholder funds $ 17,396 100.0 %
(1) Includes $1.70 billion of liabilities with a contractual surrender charge of
less than 5% of the account balance.
(2) $318 million of the contracts with market value adjusted surrenders have a
30-45 day period at the end of their initial and subsequent interest rate
guarantee periods (which are typically 1, 5, 7 or 10 years) during which
there is no surrender charge or market value adjustment.
(3) 90% of these contracts have a minimum interest crediting rate guarantee of
3% or higher.
Retail life and annuity products may be surrendered by customers for a variety
of reasons. Reasons unique to individual customers include a current or
unexpected need for cash or a change in life insurance coverage needs. Other key
factors that may impact the likelihood of customer surrender include the level
of the contract surrender charge, the length of time the contract has been in
force, distribution channel, market interest rates, equity market conditions and
potential tax implications.
In addition, the propensity for retail life insurance policies to lapse is lower
than it is for fixed annuities because of the need for the insured to be
re-underwritten upon policy replacement.
The annualized surrender and partial withdrawal rate on deferred fixed annuities
and interest-sensitive life insurance products, based on the beginning of year
contractholder funds, was 5.8% and 6.4% in the first six months of 2020 and
2019, respectively. We strive to promptly pay customers who request cash
surrenders; however, statutory regulations generally provide up to six months in
most states to fulfill surrender requests.
Our asset-liability management practices enable us to manage the differences
between the cash flows generated by our investment portfolio and the expected
cash flow requirements of our life insurance and annuity product obligations.
Second Quarter 2020 Form 10-Q 103-------------------------------------------------------------------------------- Forward-Looking Statements This report contains "forward-looking statements" that anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. These statements are made subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements do not relate strictly to historical or current facts and may be identified by their use of words like "plans," "seeks," "expects," "will," "should," "anticipates," "estimates," "intends," "believes," "likely," "targets" and other words with similar meanings. We believe these statements are based on reasonable estimates, assumptions and plans. If the estimates, assumptions or plans underlying the forward-looking statements prove inaccurate or if other risks or uncertainties arise, actual results could differ materially from those communicated in these forward-looking statements. Factors that could cause actual results to differ materially from those expressed in, or implied by, the forward-looking statements include risks related to: Insurance and Financial Risks (1) unexpected increases in claim frequency and severity; (2) catastrophes and severe weather events; (3) limitations in analytical models used for loss cost estimates; (4) price competition and changes in underwriting standards; (5) actual claims costs exceeding current reserves; (6) market risk and declines in credit quality of our investment portfolio; (7) our subjective determination of fair value and the amount of realized capital losses recorded for impairments of our investments; (8) the impact of changes in market interest rates or performance-based investment returns on our annuity business; (9) the impact of changes in reserve estimates and amortization of deferred acquisition costs on our life, benefits and annuity businesses; (10) our participation in indemnification programs, including state industry pools and facilities; (11) our ability to mitigate the capital impact associated with statutory reserving and capital requirements; (12) a downgrade in financial strength ratings; (13) changes in tax laws; Business, Strategy and Operations (14) competition in the insurance industry and new or changing technologies; (15) implementation of our Transformative Growth Plan; (16) our catastrophe management strategy; (17) restrictions on our subsidiaries' ability to pay dividends; (18) restrictions under terms of certain of our securities on our ability to pay dividends or repurchase our stock; (19) the availability of reinsurance at current level and prices; (20) counterparty risk related to reinsurance; (21) acquisitions and divestitures of businesses; (22) intellectual property infringement, misappropriation and third-party claims; Macro, Regulatory and Risk Environment (23) conditions in the global economy and capital and credit markets; (24) a large scale pandemic, such as the Novel Coronavirus Pandemic or COVID-19 and its impacts, or occurrence of terrorism or military actions; (25) the failure in cyber or other information security controls, or the occurrence of events unanticipated in our disaster recovery processes and business continuity planning; (26) changing climate and weather conditions; (27) restrictive regulations and regulatory reforms, including limitations on rate increases and requirements to underwrite business and participate in loss sharing arrangements; (28) losses from legal and regulatory actions; (29) changes in or the application of accounting standards; (30) loss of key vendor relationships or failure of a vendor to protect our data or confidential, proprietary and personal information; (31) our ability to attract, develop and retain key personnel, including availability and productivity of employees during the Coronavirus; and (32) misconduct or fraudulent acts by employees, agents and third parties. Additional information concerning these and other factors may be found in our filings with the Securities and Exchange Commission, including the "Risk Factors" section in our most recent annual report on Form 10-K. Forward - looking statements speak only as of the date on which they are made, and we assume no obligation to update or revise any forward-looking statement. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, the principal executive officer and the principal financial officer concluded that our disclosure controls and procedures are effective in providing reasonable assurance that material information required to be disclosed in our reports filed with or submitted to the Securities and Exchange Commission under the Securities Exchange Act is made known to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control over Financial Reporting. During the fiscal quarter ended June 30, 2020, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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