THE ALLSTATE CORPORATION Page
2019 Highlights 34
Property-Liability Operations 38
Allstate Protection 41
- Allstate brand 48
- Esurance brand 52
- Encompass brand 55
Discontinued Lines and Coverages 58
Service Businesses 60
Claims and Claims Expense Reserves 62
Allstate Life 70
Allstate Benefits 75
Allstate Annuities 78
Investments 82
Market Risk 90
Capital Resources and Liquidity 94
Enterprise Risk and Return Management 101
Application of Critical Accounting Estimates 104
Regulation and Legal Proceedings 118
Pending Accounting Standards 118
The Allstate Corporation 33
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2019 Form 10-K
2019 Highlights 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 consolidated financial statements and related notes found under Item 8. contained herein. This section of this Form 10-K generally discusses 2019 and 2018 results and year-to-year comparisons between 2019 and 2018. Discussions of 2017 results and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in Management's Discussion and Analysis ("MD&A") in Part II, Item 7 of our annual report on Form 10-K for 2018, filedFebruary 15, 2019 , and the Company's Current Report on Form 8-K filed onMay 16, 2019 , Exhibit 99.1, reflecting the Company's 2018 Form 10-K with adjustments to Part II. Item 6., Item 7. and Item 8. for the Company's change in accounting principle for pension and other postretirement benefit plans. The most important factors we monitor to evaluate the financial condition and performance for our reportable segments and the Company include: • Allstate Protection: premium, policies in force ("PIF"), new business sales,
policy retention, price changes, claim frequency and severity, catastrophes,
loss ratio, expenses, underwriting results, and relative competitive
position.
• Service Businesses: revenues, premium written, PIF, adjusted net income and
net income.
• Allstate Life: premiums and contract charges, new business sales, PIF,
benefit spread, investment spread, expenses, adjusted net income and net
income.
• Allstate Benefits: premiums, new business sales, PIF, benefit ratio,
expenses, adjusted net income and net income.
• Allstate Annuities: investment spread, asset-liability matching, contract
benefits, expenses, adjusted net income, net income and invested assets.
• Investments: exposure to market risk, asset allocation, credit
quality/experience, total return, net investment income, cash flows, realized
capital gains and losses, unrealized capital gains and losses, stability of
long-term returns, and asset and liability duration.
• Financial condition: liquidity, parent holding company deployable assets,
financial strength ratings, operating leverage, debt levels, book value per
share and return on equity.
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"), amortization of deferred policy
acquisition costs ("DAC"), operating costs and expenses, restructuring and
related charges and amortization or impairment of purchased intangibles, as
determined using accounting principles generally accepted in the 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 ("MD&A").
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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2019 Form 10-K
Allstate Delivered on 2019 Operating Priorities (1)
Better Serve Enterprise Net Promoter Score increased with improvement at most
Customers businesses
Total policies in force reached 145.9 million, a 27.7% increase from
Grow Customer prior year
Base Property-Liability policies increased 1.3% from prior year to 33.7
millionAchieve Target Strong results in Property-Liability insurance with a combined ratio of
Returns on 92.0
Capital 21.7% return on average common shareholders' equity in 2019
Net investment income of $3.2 billion in 2019 reflects higher
Proactively market-based portfolio yields
Manage Performance-based results were below expectations, but long-term
Investments returns have been strong
Total return of 9.2% on $88.4 billion investmentportfolio in 2019
Build Accelerating Transformative Growth Plan
Long-Term
Growth Arity continued to expand telematics usage and capabilities
Platforms
Expanding Allstate Identity Protection
(1) 2020 operating priorities will remain consistent with the 2019 priorities.
Consolidated Net Income ($ in millions) [[Image Removed: chart-37b0421fa9755acd973.jpg]] Consolidated net income applicable to common shareholders increased$2.67 billion in 2019 compared to 2018, primarily due to net realized capital gains in 2019 compared to losses in 2018 from increased valuations on equity investments and higher underwriting income in Allstate Protection. Total Revenue ($ in millions) [[Image Removed: chart-25274de3f7265568a07.jpg]] Total revenue increased 12.2% in 2019 compared to 2018, driven by net realized capital gains in 2019 compared to losses in 2018 and a 5.7% increase in insurance premiums and contract charges. Insurance premiums increased in the following segments: Allstate Protection (Allstate and Esurance brands), Service Businesses (Allstate Protection Plans and Allstate Dealer Services), Allstate Life and Allstate Benefits. Net Investment Income ($ in millions) [[Image Removed: chart-71161410f7835ece8ea.jpg]] Net investment income decreased 2.5% in 2019 compared to 2018, primarily due to lower income from performance-based investment results, partially offset by higher income from the market-based portfolio.The Allstate Corporation 35
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2019 Form 10-K
Summarized financial results
Years Ended December 31,
($ in millions) 2019 2018 2017
Revenues
Property and casualty insurance premiums $ 36,076 $ 34,048 $ 32,300
Life premiums and contract charges 2,501 2,465 2,378
Other revenue 1,054 939 883
Net investment income 3,159 3,240 3,401
Realized capital gains and losses 1,885 (877 ) 445
Total revenues 44,675 39,815 39,407
Costs and expenses
Property and casualty insurance claims and claims
expense (23,976 ) (22,778 ) (21,847 )
Life contract benefits and interest credited to
contractholder funds (2,679 ) (2,627 ) (2,613 )
Amortization of deferred policy acquisition costs (5,533 ) (5,222 ) (4,784 )
Operating, restructuring and interest expenses (6,058 ) (5,993 ) (5,627 ) Pension and other postretirement remeasurement gains and losses
(114 ) (468 ) 217
Amortization of purchased intangibles (126 ) (105 ) (99 )
Impairment of goodwill and purchased intangibles (106 ) - (125 )
Total costs and expenses (38,592 ) (37,193 ) (34,878 )
Gain on disposition of operations 6 6 20 Income tax expense (1,242 ) (468 ) (995 ) Net income 4,847 2,160 3,554 Preferred stock dividends (169 ) (148 ) (116 ) Net income applicable to common shareholders$ 4,678 $
2,012
Segment Highlights Allstate Protection underwriting income totaled$2.91 billion in 2019, a 24.3% increase from$2.34 billion in 2018, primarily due to increased premiums earned and lower catastrophe losses, partially offset by higher non-catastrophe losses and amortization of DAC. Catastrophe losses were$2.56 billion in 2019 compared$2.86 billion in 2018. Premiums written increased 5.6% to$35.42 billion in 2019 compared to 2018. Service Businesses adjusted net income was$38 million in 2019 compared to$8 million in 2018. The improvement in 2019 was primarily due to growth of Allstate Protection Plans, favorable loss experience of both Allstate Protection Plans and Allstate Dealer 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. Total revenues increased 25.1% or$331 million to$1.65 billion in 2019 from$1.32 billion in 2018. Allstate Life adjusted net income was$261 million in 2019 compared to$295 million in 2018. The decrease was primarily due to higher amortization of DAC related to our annual review of assumptions and higher contract benefits, partially offset by higher premiums and net investment income, and lower operating costs and expenses. Premiums and contract charges totaled$1.34 billion in 2019, an increase of 2.1% from$1.32 billion in 2018. Allstate Benefits adjusted net income was$115 million in 2019 compared to$124 million in 2018. The decrease was primarily due to higher DAC amortization related primarily to the non-renewal of a large underperforming account and increased operating costs and expenses, partially offset by higher premiums. Premiums and contract charges totaled$1.15 billion in 2019, an increase of 0.9% from$1.14 billion in 2018. Allstate Annuities adjusted net income was$10 million in 2019 compared to$131 million in 2018. The decrease was primarily due to lower net investment income, partially offset by lower interest credited to contractholder funds. Net investment income decreased 16.3% to$917 million in 2019 from$1.10 billion in 2018. The decrease was primarily due to lower performance-based investment results, mainly from limited partnerships, and lower average investment balances.
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2019 Form 10-K
Financial Highlights
Investments totaled $88.36 billion as of December 31, 2019 , increasing from
$81.26 billion as of December 31, 2018 . Unrealized net capital gains totaled
$2.74 billion as of December 31, 2019 compared to net unrealized capital gains
of $33 million as of December 31, 2018 .
Shareholders' equity As of December 31, 2019 , shareholders' equity was $26.00
billion . This total included $2.30 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 $73.12 as of December 31, 2019 , an increase of 27.03% from
$57.56 as of December 31, 2018 .
Return on average common shareholders' equity For the twelve months ended
December 31, 2019 , net income applicable to common shareholders' return on the
average of beginning and ending period common shareholders' equity of 21.7%
increased by 11.7 points from 10.0% for the twelve months ended December 31,
2018 , primarily due to higher net income applicable to common shareholders,
partially offset by an increase in average common shareholders' equity.
Pension and other postretirement measurement gains and losses Pension and other
postretirement measurement losses were $114 million in 2019 compared to losses
of $468 million in 2018. The decrease was primarily related to favorable asset
performance compared to the expected return on plan assets, partially offset by
a decrease in the discount rate used to value the liabilities. See Note 17 of
the consolidated financial statements for further information.
The Allstate Corporation 37
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2019 Form 10-K Property-Liability
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 or impairment of purchased intangibles and
restructuring and related charges, less other revenue to premiums earned.
• Combined ratio: is 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 impairment of purchased intangibles on combined ratio: the ratio of
impairment 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.
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Property-Liability 2019 Form 10-K
Summarized financial data
($ in millions, except ratios) 2019 2018 2017
Premiums written $ 35,419 $ 33,555 $ 31,648
Revenues
Premiums earned $ 34,843 $ 32,950 $ 31,433
Other revenue 741 738 703
Net investment income 1,533 1,464 1,478
Realized capital gains and losses 1,470 (639 ) 401
Total revenues 38,587 34,513 34,015
Costs and expenses
Claims and claims expense (23,622 ) (22,435 ) (21,484 )
Amortization of DAC (4,649 ) (4,475 ) (4,205 )
Operating costs and expenses (4,420 ) (4,465 ) (4,164 )
Restructuring and related charges (38 ) (60 ) (78 )
Impairment of purchased intangibles (1) (51 ) - -
Total costs and expenses (32,780 ) (31,435 ) (29,931 )
Gain on disposition of operations - - 14 Income tax expense (1,196 ) (613 ) (1,285 ) Net income applicable to common shareholders$ 4,611 $ 2,465 $ 2,813 Underwriting income$ 2,804 $ 2,253 $ 2,205 Net investment income 1,533 1,464 1,478 Income tax expense on operations (887 ) (747 ) (1,187 ) Realized capital gains and losses, after-tax 1,161 (500 ) 272 Gain on disposition of operations, after-tax - - 9 Tax Legislation (expense) benefit - (5 ) 36
Net income applicable to common shareholders
Catastrophe losses Catastrophe losses, excluding reserve reestimates$ 2,509 $ 2,830 $ 3,246 Catastrophe reserve reestimates (2) 48 25 (18 ) Total catastrophe losses$ 2,557 $ 2,855
Non-catastrophe reserve reestimates (2) (176 ) (278 ) (487 ) Prior year reserve reestimates (2) (128 ) (253 ) (505 ) GAAP operating ratios Loss ratio 67.8 68.1 68.4 Expense ratio (3) 24.2 25.1 24.6 Combined ratio 92.0 93.2 93.0 Effect of catastrophe losses on combined ratio 7.3 8.7
10.3
Effect of prior year reserve reestimates on
combined ratio (0.3 ) (0.7 ) (1.6 )
Effect of catastrophe losses included in prior
year reserve reestimates on combined ratio 0.1 0.1 (0.1 )
Effect of restructuring and related charges on
combined ratio 0.1 0.2 0.2
Effect of impairment of purchased intangibles
(1) 0.1 - -
Effect of Discontinued Lines and Coverages on
combined ratio 0.4 0.3 0.3
(1) Our Transformative Growth Plan included a decision to reposition the
Allstate brand for broader customer access, resulting in a $51 million
impairment for the Esurance brand trade name. See the Esurance section of
this Item for further details.
(2) Favorable reserve reestimates are shown in parentheses.
(3) Other revenue is deducted from operating costs and expenses in the expense
ratio calculation.
The Allstate Corporation 39
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2019 Form 10-K Property-Liability
Net investment income increased 4.7% or$69 million in 2019 compared to 2018, due to higher income from market-based portfolios, partially offset by lower performance-based investment results, mainly from limited partnerships. 2019 performance-based investment results included lower valuations in the fourth quarter, on two private equity investments totaling$37 million . We increased the maturity profile of fixed income securities in our Property-Liability portfolio to a duration of 5.2 years as ofDecember 31, 2019 compared to 4.1 years as ofDecember 31, 2018 . Net investment income For the years ended December 31, ($ in millions) 2019 2018 2017 Fixed income securities$ 1,066 $ 943 $ 909 Equity securities 155 121 122 Mortgage loans 17 17 12 Limited partnership interests 296 378 432 Short-term investments 56 40 17 Other 107 123 100 Investment income, before expense 1,697 1,622 1,592 Investment expense (1) (2) (164 ) (158 ) (114 ) Net investment income$ 1,533 $ 1,464 $ 1,478
(1) Investment expense includes
expenses in 2019 and 2018, respectively. Investee level expenses include
depreciation and asset level operating expenses on directly held real estate
and other consolidated investments.
(2) Investment expense includes $27 million and $18 million related to theportion of reinvestment income on securities lending collateral paid to the
counterparties in 2019 and 2018, respectively.
Realized capital gains and losses Net realized capital gains in 2019, primarily related to increased valuation of equity investments and gains on sales of fixed income securities. Valuation of equity investments for 2019 includes$883 million of appreciation in the valuation of equity securities and$141 million of appreciation primarily related to certain limited partnerships where the underlying assets are predominately public equity securities. Net realized capital losses in 2018, primarily related to decreases in the valuation of equity investments and losses on sales of fixed income securities. Realized capital gains and losses For the years ended December 31, ($ in millions) 2019 2018 2017 Impairment write-downs$ (26 ) $ (5 ) $ (56 ) Change in intent write-downs - - (44 ) Net OTTI losses recognized in earnings (26 ) (5 ) (100 ) Sales 498 (148 ) 531 Valuation of equity investments 1,024 (522 ) - Valuation and settlements of derivative instruments (26 ) 36 (30 ) Realized capital gains and losses, pre-tax 1,470 (639 ) 401 Income tax (expense) benefit (309 ) 139 (129 )
Realized capital gains and losses, after-tax
(500 )
BeginningJanuary 1, 2018 , equity securities are reported at fair value with changes in fair value recognized in realized capital gains and losses. Limited partnerships previously reported using the cost method are reported at fair value with changes in fair value recognized in net investment income. As a result, 2017 net investment income and net realized capital gains and losses are not comparable to other periods presented. 40 www.allstate.com
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Allstate Protection 2019 Form 10-K
Allstate Protection Segment
Private passenger auto, homeowners, and other personal lines insurance products
are offered to consumers through agencies and directly through contact centers
and online. Our strategy is to position product offerings and distribution
channels to meet customers' needs and protect them from life's uncertainties.
For additional information on our strategy and outlook, see Part I, Item 1.
Business - Strategy and Segment Information.
Underwriting results
For the years ended December 31,
($ in millions) 2019 2018 2017
Premiums written $ 35,419 $ 33,555 $ 31,648
Premiums earned $ 34,843 $ 32,950 $ 31,433
Other revenue 741 738 703
Claims and claims expense (23,517 ) (22,348 ) (21,388 )
Amortization of DAC (4,649 ) (4,475 ) (4,205 )
Other costs and expenses (4,417 ) (4,462 ) (4,161 )
Restructuring and related charges (38 ) (60 ) (78 )
Impairment of purchased intangibles (51 ) - -
Underwriting income $ 2,912 $ 2,343 $ 2,304
Catastrophe losses $ 2,557 $ 2,855 $ 3,228
Underwriting income (loss) by line of business
Auto $ 1,688 $ 1,791 $ 1,437
Homeowners 914 483 689
Other personal lines (1) 224 110 141
Commercial lines 14 (83 ) (13 )
Other business lines (2) 75 49 51
Answer Financial (3 ) (7 ) (1 )
Underwriting income $ 2,912 $ 2,343 $ 2,304
(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. Ivantage provides agencies a solution for their
customers when coverage through Allstate brand underwritten products is not
available.
The Allstate Corporation 41
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2019 Form 10-K Allstate Protection
Changes in underwriting results from prior year by component and by line of business (1)
For the year ended
Auto Homeowners Other personal lines Commercial lines Allstate Protection (2)
($ in millions) 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018
Underwriting income
(loss) - prior year $ 1,791 $ 1,437 $ 483 $ 689 $ 110 $ 141 $ (83 ) $ (13 ) $ 2,343 $ 2,304
Changes in
underwriting income
(loss) from:
Increase (decrease)
premiums earned 1,218 1,092 395 207 53 58 227 160 1,893 1,517
Increase (decrease)
other revenue 1 30 - 3 (1 ) 4 - (2 ) 3 35
(Increase) decrease
incurred claims and
claims expense
("losses"):
Incurred losses,
excluding catastrophe
losses and reserve
reestimates (1,002 ) (642 ) (183 ) (263 ) 21 (72 ) (219 ) (138 ) (1,383 ) (1,115 )
Catastrophe losses,
excluding reserve
reestimates (33 ) 336 294 92 51 (13 ) 9 1 321 416
Catastrophe reserve
reestimates (22 ) 24 (1 ) (72 ) (1 ) 4 1 1 (23 ) (43 )
Non-catastrophe
reserve reestimates (110 ) (59 ) (50 ) (73 ) (14 ) 4 90 (90 ) (84 ) (218 )
Losses subtotal (1,167 ) (341 ) 60 (316 ) 57 (77 ) (119 ) (226 ) (1,169 ) (960 )
(Increase) decrease
expenses (155 ) (427 ) (24 ) (100 ) 5 (16 ) (11 ) (2 ) (158 ) (553 )
Underwriting income
(loss) $ 1,688 $ 1,791 $ 914 $ 483 $ 224 $ 110 $ 14 $ (83 ) $ 2,912 $ 2,343 (1) The 2019 column presents changes in 2019 compared to 2018. The 2018 column
presents changes in 2018 compared to 2017.
(2) Includes other business lines underwriting income of $75 million and $49 million in 2019 and 2018, respectively, and Answer Financial underwriting
loss of
Underwriting income increased 24.3% or
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Allstate Protection 2019 Form 10-K
Premiums written is the amount of premiums charged for policies issued during a
fiscal period. Premiums are considered earned and are included in the financial
results on a pro-rata basis over the policy period. The portion of premiums
written applicable to the unexpired term of the policies is recorded as unearned
premiums on our Consolidated Statements of Financial Position.
Premiums written and earned by line of business
For the years ended December 31,
($ in millions) 2019 2018 2017
Premiums written
Auto $ 24,462 $ 23,367 $ 22,042
Homeowners 8,165 7,698 7,350
Other personal lines 1,890 1,831 1,768
Subtotal - Personal lines 34,517 32,896 31,160
Commercial lines 902 659 488
Total premiums written $ 35,419 $ 33,555 $ 31,648
Reconciliation of premiums written to premiums
earned:
Increase in unearned premiums (614 ) (544 ) (258 )
Other 38 (61 ) 43
Total premiums earned $ 34,843 $ 32,950 $ 31,433
Auto $ 24,188 $ 22,970 $ 21,878
Homeowners 7,912 7,517 7,310
Other personal lines 1,861 1,808 1,750
Subtotal - Personal lines 33,961 32,295 30,938
Commercial lines 882 655 495
Total premiums earned $ 34,843 $ 32,950 $ 31,433 Auto insurance premiums written increased 4.7% or
Homeowners insurance premiums written increased 6.1% or$467 million in 2019 compared to 2018. Unearned premium balance and the time frame in which we expect to recognize these premiums as earned As of December 31, % earned after ($ in millions) 2019 2018 Three months Six months Nine months Twelve months Allstate brand: Auto$ 5,916 $ 5,635 70.9 % 96.4 % 99.1 % 100.0 % Homeowners 4,158 3,908 43.3 % 75.5 % 94.2 % 100.0 % Other personal lines 950 917 43.5 % 75.5 % 94.1 % 100.0 % Commercial lines 270 250 43.4 % 74.7 % 93.7 % 100.0 % Total Allstate brand 11,294 10,710 58.0 % 86.6 % 96.8 % 100.0 % Esurance brand: Auto 489 471 74.4 % 99.1 % 99.8 % 100.0 % Homeowners 62 53 43.4 % 75.6 % 94.2 % 100.0 % Other personal lines 2 2 43.6 % 75.5 % 94.2 % 100.0 % Total Esurance brand 553 526 70.8 % 96.3 % 99.1 % 100.0 % Encompass brand: Auto 276 275 44.1 % 75.9 % 94.3 % 100.0 % Homeowners 214 212 43.9 % 75.8 % 94.3 % 100.0 % Other personal lines 41 42 44.2 % 76.0 % 94.3 % 100.0 % Total Encompass brand 531 529 44.0 % 75.9 % 94.3 % 100.0 % Allstate Protection unearned premiums$ 12,378 $ 11,765 57.9 % 86.5 % 96.8 % 100.0 % The Allstate Corporation 43
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2019 Form 10-K Allstate Protection
Combined ratios by line of business
For the years ended December 31,
Loss ratio Expense ratio (1) Combined ratio
2019 2018 2017 2019 2018 2017 2019 2018 2017
Auto 68.2 66.8 68.5 24.8 25.4 24.9 93.0 92.2 93.4
Homeowners 65.1 69.4 67.0 23.3 24.2 23.6 88.4 93.6 90.6
Other personal lines 61.1 66.0 63.8 26.9 27.9 28.1 88.0 93.9 91.9
Commercial lines 81.3 91.3 75.1 17.1 21.4 27.5 98.4 112.7 102.6
Total 67.5 67.8 68.1 24.1 25.1 24.6 91.6 92.9 92.7
(1) Other revenue is deducted from operating costs and expenses in the expense
ratio calculation.
Loss ratios by line of business
For the years ended December 31,
Effect of catastrophe losses
on Effect of prior year reserve Effect of catastrophe losses included in prior
Loss ratio combined ratio reestimates on combined ratio year reserve reestimates on combined ratio
2019 2018 2017 2019 2018 2017 2019 2018 2017 2019 2018 2017
Auto 68.2 66.8 68.5 1.7 1.6 3.3 (1.4 ) (2.0 ) (2.3 ) (0.1 ) (0.2 ) (0.1 )
Homeowners 65.1 69.4 67.0 24.8 30.0 31.1 0.8 0.2 (1.7 ) 0.8 0.8 (0.1 )
Other
personal
lines 61.1 66.0 63.8 9.0 12.1 11.9 0.5 (0.4 ) 0.1 - - 0.2
Commercial
lines 81.3 91.3 75.1 1.4 3.4 4.8 1.9 16.5 3.9 (0.1 ) - 0.2
Total 67.5 67.8 68.1 7.3 8.7 10.3 (0.7 ) (1.0 ) (1.9 ) 0.1 0.1 (0.1 )
Catastrophe losses decreased 10.4% or $298 million in 2019 compared to 2018. We
define a "catastrophe" as an event that produces pre-tax losses before
reinsurance in excess of $1 million and involves multiple first party
policyholders, or a winter weather event that produces a number of claims in
excess of a preset, per-event threshold of average claims in a specific area,
occurring within a certain amount of time following the event. Catastrophes are
caused by various natural events including high winds, winter storms and
freezes, tornadoes, hailstorms, wildfires, tropical storms, tsunamis,
hurricanes, earthquakes and volcanoes. We are also exposed to man-made
catastrophic events, such as certain types of terrorism, wildfires or industrial
accidents. The nature and level of catastrophes in any period cannot be reliably
predicted.
Catastrophe losses in 2019 by the size of event
Claims Combined Average
Number and claims ratio catastrophe
($ in millions) of events expense impact loss per event
Size of catastrophe loss
Greater than $250 million 1 1.0 % $ 362 14.1 % 1.0 $ 362
$101 million to $250 million 2 1.8 342 13.4 1.0 171
$50 million to $100 million 9 8.2 662 25.9 1.9 74
Less than $50 million 98 89.0 1,143 44.7 3.3 12
Total 110 100.0 % 2,509 98.1 7.2 23
Prior year reserve reestimates 48 1.9 0.1
Total catastrophe losses $ 2,557 100.0 % 7.3
Catastrophe losses by the type of event
For the years ended December 31,
Number of Number of Number of
($ in millions) events 2019 events 2018 events 2017
Hurricanes/Tropical storms 3 $ 86 3 $ 200 3 $ 613
Tornadoes 6 551 3 17 3 100
Wind/Hail 91 1,721 99 1,752 93 1,973
Wildfires 4 28 10 745 10 536
Other events 6 123 2 116 2 24
Prior year reserve reestimates 48 25 (18 )
Total catastrophe losses 110 $ 2,557 117 $ 2,855 111 $ 3,228
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Allstate Protection 2019 Form 10-K
Catastrophe management
Historical catastrophe experience For the last ten years, the average annual
impact of catastrophes on our loss ratio was 8.3 points, but it has varied from
4.5 points to 14.7 points. The average annual impact of catastrophes on the
homeowners loss ratio for the last ten years was 26.8 points. 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
by our participation in various state facilities. For further discussion of
these facilities, see Note 14 of the consolidated financial statements. However,
the impact of these actions may be diminished by the growth in insured values,
and the effect of state insurance laws and regulations. In addition, in various
states we are required to participate in assigned risk plans, reinsurance
facilities and joint underwriting associations that provide insurance coverage
to individuals or entities that otherwise are unable to purchase such coverage
from private insurers. Because of our participation in these and other state
facilities such as wind pools, we may be exposed to losses that surpass the
capitalization of these facilities and to assessments from these facilities.
We have continued to take actions to maintain an appropriate level of exposure
to catastrophic events while continuing to meet the needs of our customers,
including the following:
• Continuing to limit or not offer new homeowners, manufactured home and
landlord package policy business in certain coastal geographies.
• Increased capacity in our brokerage platform for customers not offered an
Allstate policy.
• We began to write a limited number of homeowners policies in select areas of
- Continue to renew current policyholders and allow replacement policies for
existing customers who buy a new home or change their residence to rental
property
- Have decreased our overall homeowner exposures in California by more than
50% since 2007
- Write homeowners coverage through our excess and surplus lines carrier,
earthquake coverage (other than fire following earthquakes) that is
currently ceded via quota share reinsurance.
• In certain states, we have been ceding wind exposure related to insured
property located in wind pool eligible areas.
• Starting in the second quarter of 2017, we began writing a limited number of
homeowners policies in select areas of
existing customers who replace their currently-insured home with an
acceptable property. Encompass withdrew from property lines in
2009.
• Tropical cyclone deductibles are generally higher than all peril deductibles
and are in place for a large portion of coastal insured properties.
• Auto comprehensive damage coverage generally includes coverage for
flood-related loss. We have additional catastrophe exposure, beyond the
property lines, for auto customers who have purchased comprehensive damage
coverage.
• We offer a homeowners policy available in 43 states, Allstate House and
Home®, that provides options of coverage for roof damage, including graduated
coverage and pricing based on roof type and age. In 2019, premiums written
totaled $3.44 billion or 42.1% of homeowners premiums written compared to
$2.84 billion or 36.9% in 2018.
Hurricanes We consider the greatest areas of potential catastrophe losses due
to hurricanes generally to be major metropolitan centers in counties along the
eastern and gulf coasts of the United States . The average premium on a property
policy near these coasts is generally greater than in other areas. However,
average premiums are often not considered commensurate with the inherent risk of
loss. In addition, as explained in Note 14 of the consolidated financial
statements, in various states Allstate is subject to assessments from assigned
risk plans, reinsurance facilities and joint underwriting associations providing
insurance for wind related property losses.
We have addressed our risk of hurricane loss by, among other actions, purchasing
reinsurance for specific states and on a countrywide basis for our personal
lines property insurance in areas most exposed to hurricanes, limiting personal
homeowners, landlord package policy and manufactured home new business writings
in coastal areas in southern and eastern states, implementing tropical cyclone
deductibles where appropriate, and not offering continuing coverage on certain
policies in coastal counties in certain states. We continue to seek appropriate
returns for the risks we write. This may require further actions, similar to
those already taken, in geographies where we are not getting appropriate
returns. However, we may maintain or opportunistically increase our presence in
areas where adequate risk adjusted returns can be achieved.
Earthquakes We do not offer earthquake coverage in most states. We retain
approximately 22,000 PIF with earthquake coverage, primarily in Kentucky , due to
regulatory and other reasons. We purchase reinsurance in Kentucky and enter into
arrangements in many states to make earthquake coverage available through our
brokerage platform.
We continue to have exposure to earthquake risk on certain policies that do not
specifically exclude coverage for earthquake losses, including our auto
policies, and to fires following earthquakes. Allstate policyholders in
California are offered homeowners coverage through the California Earthquake
Authority ("CEA"), a privately-financed, publicly-managed state agency created
to provide insurance coverage for earthquake damage. Allstate is subject to
The Allstate Corporation 45
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2019 Form 10-K Allstate Protection
assessments from the CEA under certain circumstances as explained in Note 14 of the consolidated financial statements. While North Light writes property policies inCalifornia , which can include earthquake coverage, this coverage is 100% ceded via quota share reinsurance. Fires following earthquakes Under a standard homeowners policy we cover fire losses, including those caused by an earthquake. Actions taken related to our risk of loss from fires following earthquakes include restrictive underwriting guidelines inCalifornia for new business writings, purchasing reinsurance forKentucky personal lines property risks, and purchasing nationwide occurrence reinsurance, excludingFlorida . Wildfires Actions taken related to managing our risk of loss from wildfires include purchasing nationwide occurrence reinsurance, new and renewal inspection programs to identify and remediate wildfire risk as well as leveraging contemporary underwriting tools in select areas. While these programs are designed to mitigate risk, the exposure to wildfires still exists. We continue to manage our exposure and seek appropriate returns for the risks we write. To manage the exposure, this may require further actions, similar to those already taken, in geographies where we are not achieving appropriate returns. However, we may maintain or opportunistically increase our presence in areas where adequate risk adjusted returns can be achieved. Reinsurance A description of our current catastrophe reinsurance program appears in Note 10 of the consolidated financial statements.California wildfire subrogation PG&E Corporation and Pacific Gas and Electric Company (together, "PG&E") have reached agreements to resolve insurance subrogation and tort claimants' claims arising from the 2017Northern California wildfires and the 2018Camp Fire for$11 billion and$13.5 billion , respectively. Allstate is one of the insurance companies that is party to the agreement with subrogating insurers. PG&E has also reached agreement to settle claims of its bondholders. The settlements with insurers and tort claimants have been approved by the bankruptcy court overseeing PG&E's Chapter 11 case. The settlement with the bondholders has not yet been approved. All will be subject to confirmation of a Plan of Reorganization, which has not yet occurred. There remain other uncertainties with respect to the ultimate resolution of all claims, including the allocation of benefits among claimants and the amount of recovery, if any, that we may receive. Accordingly, we have not recorded any benefit related to the potential proceeds from the subrogation settlement agreement in the consolidated financial statements. We will continue to monitor this matter.
Expense ratio decreased 1.0 point in 2019 compared to 2018. Impact of specific costs and expenses on the expense ratio
For the years ended December 31,
2019 2018 2017
Amortization of DAC 13.4 13.6 13.4
Advertising expense 2.4 2.5 2.2
Other costs and expenses 8.1 8.8 8.8
Restructuring and related charges 0.1 0.2 0.2
Impairment of purchased intangibles 0.1 - - Total expense ratio 24.1 25.1 24.6 Deferred acquisition costs We establish a DAC asset for costs that are related directly to the successful acquisition of new or renewal insurance policies, principally agency remuneration and premium taxes. DAC is amortized to income over the period in which premiums are earned. DAC balance as ofDecember 31 by product type ($ in millions) 2019 2018 Auto$ 849 $ 845 Homeowners 600 599 Other personal lines 141 141 Commercial lines 34 33 Total DAC$ 1,624 $ 1,618 46 www.allstate.com
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Allstate Protection 2019 Form 10-K
The following table presents premiums written, PIF and underwriting income (loss) by line of business for Allstate brand, Esurance brand, Encompass brand and Allstate Protection as of or for the year endedDecember 31, 2019 . 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$ 21,936 67.9 %$ 1,986 94.0 %$ 540 52.9 %$ 24,462 69.1 % Homeowners 7,645 23.7 119 5.6 401 39.3 8,165 23.1 Other personal lines 1,803 5.6 8 0.4 79 7.8 1,890 5.3 Commercial lines 902 2.8 - - - - 902 2.5 Total$ 32,286 100.0 %$ 2,113 100.0 %$ 1,020 100.0 %$ 35,419 100.0 % Percent to total Allstate Protection 91.1 % 6.0 % 2.9 % 100.0 % PIF (thousands) Auto 20,398 65.4 % 1,515 90.9 % 493 61.4 % 22,406 66.5 % Homeowners 6,254 20.0 105 6.3 234 29.1 6,593 19.6 Other personal lines 4,344 13.9 46 2.8 76 9.5 4,466 13.2 Commercial lines 227 0.7 - - - - 227 0.7 Total 31,223 100.0 % 1,666 100.0 % 803 100.0 % 33,692 100.0 % Percent to total Allstate Protection 92.7 % 4.9 % 2.4 % 100.0 % Underwriting income (loss) Auto$ 1,727 58.5 %$ (47 ) (1 ) 109.4 %$ 8 114.3 %$ 1,688 58.0 % Homeowners 910 30.9 2 (4.7 ) 2 28.6 914 31.4 Other personal lines 225 7.6 2 (4.7 ) (3 ) (42.9 ) 224 7.6 Commercial lines 14 0.5 - - - - 14 0.5 Other business lines 75 2.5 - - - - 75 2.6 Answer Financial - - - - - - (3 ) (0.1 ) Total$ 2,951 100.0 %$ (43 ) 100.0 %$ 7 100.0 %$ 2,912 100.0 %
(1) Our Transformative Growth Plan included a decision to reposition the
Allstate brand for broader customer access, resulting in a
impairment for the Esurance brand trade name. See the Esurance section of
this Item for further details.
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
The Allstate Corporation 47
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2019 Form 10-K Allstate Protection: Allstate brand
[[Image Removed: allstatetagline.jpg]]
Allstate brand products are sold primarily through Allstate exclusive agencies
and serve customers who prefer local personalized advice and service and are
brand-sensitive. In 2019, the Allstate brand represented 91.1% of the Allstate
Protection segment's written premium. For additional information on our strategy
and outlook, see Part I, Item 1. Business - Strategy and Segment Information.
Underwriting results
For the years ended December 31,
($ in millions) 2019 2018 2017
Premiums written $ 32,286 $ 30,591 $ 28,885
Premiums earned $ 31,738 $ 30,058 $ 28,631
Other revenue 583 582 559
Claims and claims expense (21,178 ) (20,237 ) (19,273 )
Amortization of DAC (4,411 ) (4,242 ) (3,963 )
Other costs and expenses (3,748 ) (3,752 ) (3,497 )
Restructuring and related charges (33 ) (52 ) (70 )
Underwriting income $ 2,951 $ 2,357 $ 2,387
Catastrophe losses $ 2,391 $ 2,701 $ 2,985
Underwriting income (loss) by line of business
Auto $ 1,727 $ 1,788 $ 1,465
Homeowners 910 496 754
Other personal lines (1) 225 107 130
Commercial lines 14 (83 ) (13 )
Other business lines (2) 75 49 51
Underwriting income $ 2,951 $ 2,357 $ 2,387
(1) Other personal lines include renters, condominium, landlord and other
personal lines products.
(2) Other business lines represent Ivantage.
Changes in underwriting results from prior year by component (1)
For the years ended December 31 ,
($ in millions) 2019 2018
Underwriting income - prior year $ 2,357 $ 2,387
Changes in underwriting income (loss) from:
Increase (decrease) premiums earned 1,680 1,427
Increase (decrease) other revenue 1 23
(Increase) decrease incurred claims and claims
expense ("losses"):
Incurred losses, excluding catastrophe losses and
reserve reestimates (1,185 ) (1,022 )
Catastrophe losses, excluding reserve reestimates 337 311
Catastrophe reserve reestimates (27 ) (27 )
Non-catastrophe reserve reestimates (66 ) (226 )
Losses subtotal (941 ) (964 )
(Increase) decrease expenses (146 ) (516 )
Underwriting income $ 2,951 $ 2,357
(1) The 2019 column presents changes in 2019 compared to 2018. The 2018 column
presents changes in 2018 compared to 2017.
Underwriting income increased 25.2% or $594 million in 2019 compared to 2018,
primarily due to increased premiums earned and lower catastrophe losses,
partially offset by higher non-catastrophe losses and amortization of DAC.
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Allstate Protection: Allstate brand 2019 Form 10-K
Premiums written and earned by line of business
For the years ended December 31,
($ in millions) 2019 2018 2017
Premiums written
Auto $ 21,936 $ 20,991 $ 19,859
Homeowners (1) 7,645 7,199 6,865
Other personal lines 1,803 1,742 1,673
Subtotal - Personal lines 31,384 29,932 28,397
Commercial lines 902 659 488
Total $ 32,286 $ 30,591 $ 28,885
Premiums earned
Auto $ 21,680 $ 20,662 $ 19,676
Homeowners 7,403 7,025 6,811
Other personal lines 1,773 1,716 1,649
Subtotal - Personal lines 30,856 29,403 28,136
Commercial lines 882 655 495
Total $ 31,738 $ 30,058 $ 28,631
(1) The cost of our catastrophe reinsurance program increased $22 million to
$286 million in 2019 from $264 million in 2018. Catastrophe placement
premiums are recorded primarily in the Allstate brand and are a reduction of
premium. For a more detailed discussion on reinsurance, see the Claims and
Claims Expense Reserves section of the MD&A and Note 10 of the consolidated
financial statements.
Auto premium measures and statistics
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
PIF (thousands) 20,398 20,104 19,580 1.5 % 2.7 %
New issued applications
(thousands) 2,942 2,933 2,520 0.3 % 16.4 %
Average premium $ 586 $ 570 $ 550 2.8 % 3.6 %
Renewal ratio (%) 88.6 88.5 87.6 0.1 0.9
Approved rate changes:
Impact of rate changes ($ in
millions) $ 574 $ 215 $ 773 $ 359 $ (558 )
# of locations (1) 47 47 49 - (2 )
Total brand (%) 2.7 1.1 4.0 1.6 (2.9 )
Location specific (%) 4.6 2.9 6.0 1.7 (3.1 )
(1) Allstate brand operates in 50 states, D.C. and 5 Canadian provinces.
Auto insurance premiums written increased 4.5% or
PIF increased by 294 thousand policies compared to the prior year with increases in 33 states, including 6 of our largest 10 states. Homeowners premium measures and statistics
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
PIF (thousands) 6,254 6,186 6,088 1.1 % 1.6 %
New issued applications
(thousands) 848 826 733 2.7 % 12.7 %
Average premium $ 1,295 $ 1,231 $ 1,197 5.2 % 2.8 %
Renewal ratio (%) 88.3 88.0 87.3 0.3 0.7
Approved rate changes:
Impact of rate changes ($ in
millions) $ 239 $ 189 $ 122 $ 50 $ 67
# of locations (1) 39 40 30 (1 ) 10
Total brand (%) 3.2 2.7 1.8 0.5 0.9
Location specific (%) 5.1 4.3 3.7 0.8 0.6
(1) Allstate brand operates in 50 states, D.C., and 5 Canadian provinces.
Homeowners insurance premiums written increased 6.2% or $446 million in 2019
compared to 2018, primarily due to higher average premiums, including rate
changes and inflation in insured home valuations, and growth. PIF increased 68
thousand policies with increases in 31 states, including 6 of our largest 10
states.
Other personal lines premiums written increased 3.5% or
The Allstate Corporation 49
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2019 Form 10-K Allstate Protection: Allstate brand
Commercial lines premiums written increased 36.9% or$243 million in 2019 compared to 2018. The increase in 2019 was primarily due to expansion in our shared economy business, including growth in our current agreements and addition of new customers. Growth in premiums written is not reflected in growth in policies in force as the shared economy agreements typically reflect contracts that cover multiple drivers as opposed to individual drivers. Combined ratios by line of business For the years ended December 31, Loss ratio Expense ratio (1) Combined ratio 2019 2018 2017 2019 2018 2017 2019 2018 2017 Auto 67.3 65.9 67.9 24.7 25.4 24.7 92.0 91.3 92.6 Homeowners 64.9 69.3 66.0 22.8 23.6 22.9 87.7 92.9 88.9 Other personal lines 60.6 66.3 64.1 26.7 27.5 28.0 87.3 93.8 92.1 Commercial lines 81.3 91.3 75.1 17.1 21.4 27.5 98.4 112.7 102.6 Total 66.7 67.3 67.3 24.0 24.9 24.4 90.7 92.2 91.7
(1) Other revenue is deducted from operating costs and expenses in the expense
ratio calculation.
Loss ratios by line of business
For the
years ended
Effect of prior year reserve Effect of catastrophe losses included in
Loss ratio Effect of catastrophe losses reestimates prior year reserve reestimates
2019 2018 2017 2019 2018 2017 2019 2018 2017 2019 2018 2017
Auto 67.3 65.9 67.9 1.7 1.6 3.4 (1.5 ) (2.2 ) (2.4 ) (0.1 ) (0.2 ) (0.1 )
Homeowners 64.9 69.3 66.0 24.8 30.5 30.7 0.7 - (2.0 ) 0.8 0.8 (0.1 )
Other
personal
lines 60.6 66.3 64.1 9.2 12.3 12.2 0.6 0.5 0.7 0.1 (0.1 ) 0.2
Commercial
lines 81.3 91.3 75.1 1.4 3.4 4.8 1.9 16.5 3.9 (0.1 ) - 0.2
Total 66.7 67.3 67.3 7.5 9.0 10.4 (0.7 ) (1.1 ) (2.0 ) 0.1 - (0.1 )
Frequency and severity statistics, which are influenced by driving patterns,
inflation and other factors, are provided to describe the trends in loss costs
of the business. 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. For property damage claims, paid frequency trends reflect smaller differences as timing between opening and settlement is generally less. For bodily injury, gross frequency trends reflect emerging trends since the difference in timing between opening and settlement is much greater and gross frequency does not typically experience the same volatility in quarterly fluctuations 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 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. We use Digital Operating Centers to 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®. We are also leveraging virtual capabilities to handle property claims by estimating damage through video with Virtual Assist and aerial imagery using satellites, airplanes and drones. 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. Auto loss ratio increased 1.4 points in 2019 compared to 2018, primarily due to higher claim severity and lower favorable non-catastrophe prior
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Allstate Protection: Allstate brand 2019 Form 10-K
year reserve reestimates, partially offset by higher premiums earned and lower
claim frequency.
Property damage paid claim frequency decreased 2.2% in 2019 compared to 2018.
Property damage paid claim severities increased 6.5% in 2019 compared to 2018
due to the impact of higher costs to repair more sophisticated, newer model
vehicles, higher third-party subrogation demands and increased number of total
losses.
Bodily injury gross claim frequency decreased 1.8% in 2019 compared to 2018.
Bodily injury severity trends increased at a rate above medical care inflation
indices in 2019.
Homeowners loss ratio decreased 4.4 points in 2019 compared to 2018, primarily
due to lower catastrophes, increased premiums earned and improved claim
frequency, partially offset by increased claim severity. Paid claim frequency
excluding
catastrophe losses decreased 6.0% in 2019 compared to 2018. Paid claim severity
excluding catastrophe losses increased 11.8% in 2019 compared to 2018 as we
experienced increased claim severity in 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 year.
Other personal lines loss ratio decreased 5.7 points in 2019 compared to 2018,
primarily due to lower catastrophe losses and increased premiums earned.
Commercial lines loss ratio decreased 10.0 points in 2019 compared to 2018,
primarily due to increased premiums earned and lower unfavorable non-catastrophe
prior year reserve reestimates, partially offset by higher severity. Commercial
lines recorded losses related to the shared economy agreements are primarily
based on original pricing expectations given limited loss experience.
Impact of specific costs and expenses on the expense ratio
For the years ended December 31,
2019 2018 2017
Amortization of DAC 13.9 14.1 13.8
Advertising expense 2.2 2.2 2.0
Other costs and expenses 7.8 8.4 8.4
Restructuring and related charges 0.1 0.2 0.2
Total expense ratio 24.0 24.9 24.4
Expense ratio decreased 0.9 points in 2019 compared to 2018, primarily due to
lower agent incentive compensation and decreased operating expenses driven by
enterprise-wide cost reduction efforts. Amortization of DAC primarily includes
agent remuneration and premium taxes. Allstate agency total incurred base
commissions, variable compensation and bonuses in 2019 were lower than 2018.
Commercial lines expense ratio decreased 4.3 points in 2019 compared to 2018, primarily due to growth in our shared economy business, which has a lower expense ratio.
The Allstate Corporation 51
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2019 Form 10-K Allstate Protection: Esurance brand
[[Image Removed: esurancelogo1a25.jpg]]
Esurance brand products are sold directly to self-directed, brand-sensitive
consumers online and through contact centers. We manage the direct-to-customer
business based on its profitability over the lifetime of the customer
relationship. In 2019, the Esurance brand represented 6.0% of the Allstate
Protection segment's written premium. For additional information on our strategy
and outlook, see Part I, Item 1. Business - Strategy and Segment Information.
Underwriting results
For the years ended December 31,
($ in millions) 2019 2018 2017
Premiums written $ 2,113 $ 1,948 $ 1,728
Premiums earned $ 2,087 $ 1,869 $ 1,712
Other revenue 83 80 67
Claims and claims expense (1,650 ) (1,443 ) (1,329 )
Amortization of DAC (46 ) (43 ) (41 )
Other costs and expenses (465 ) (487 ) (462 )
Restructuring and related charges (1 ) (1 ) (3 )
Impairment of purchased intangibles (51 ) - -
Underwriting loss $ (43 ) $ (25 ) $ (56 )
Catastrophe losses $ 51 $ 52 $ 50
Underwriting income (loss) by line of business
Auto $ (47 ) $ (11 ) $ (37 )
Homeowners 2 (14 ) (20 )
Other personal lines 2 - 1
Underwriting loss $ (43 ) $ (25 ) $ (56 ) Changes in underwriting results from prior year by component (1)
For the years ended December 31 ,
($ in millions) 2019 2018
Underwriting income (loss) - prior year $ (25 ) $ (56 )
Changes in underwriting income (loss) from:
Increase (decrease) premiums earned 218 157
Increase (decrease) other revenue 3 13
(Increase) decrease incurred claims and claims
expense ("losses"):
Incurred losses, excluding catastrophe losses and
reserve reestimates (207 ) (110 )
Catastrophe losses, excluding reserve reestimates - 1
Catastrophe reserve reestimates 1 (3 )
Non-catastrophe reserve reestimates (1 ) (2 )
Losses subtotal (207 ) (114 )
(Increase) decrease expenses:
Expenses, excluding impairment of purchased
intangibles 19 (25 )
Impairment of purchased intangibles (51 ) -
Expenses subtotal (32 ) (25 )
Underwriting loss $ (43 ) $ (25 )
(1) The 2019 column presents changes in 2019 compared to 2018. The 2018 column
presents changes in 2018 compared to 2017.
Underwriting loss increased 72.0% or $18 million in 2019 compared to 2018,
primarily due to the impairment of purchased intangibles of $51 million for the
Esurance brand trade name as we integrate Esurance into the Allstate brand.
Excluding the impairment of purchased intangibles, Esurance underwriting income
totaled $8 million in 2019, an increase of $33 million from an underwriting loss
of $25 million in 2018. The improvement was primarily due to increased premiums
earned and lower operating expenses, partially offset by increased loss costs.
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Allstate Protection: Esurance brand 2019 Form 10-K
Premiums written and earned by line of business
For the years ended December 31,
($ in millions) 2019 2018 2017
Premiums written
Auto $ 1,986 $ 1,839 $ 1,641
Homeowners 119 101 79
Other personal lines 8 8 8
Total $ 2,113 $ 1,948 $ 1,728
Premiums earned
Auto $ 1,969 $ 1,771 $ 1,636
Homeowners 110 90 68
Other personal lines 8 8 8
Total $ 2,087 $ 1,869 $ 1,712 Auto premium measures and statistics
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
PIF (thousands) 1,515 1,488 1,352 1.8 % 10.1 %
New issued applications
(thousands) 593 633 484 (6.3 )% 30.8 %
Average premium $ 620 $ 605 $ 574 2.5 % 5.4 %
Renewal ratio (%) 82.8 83.3 81.5 (0.5 ) 1.8
Approved rate changes:
Impact of rate changes ($ in
millions) $ 92 $ 28 $ 78 $ 64 $ (50 )
# of locations (1) 30 30 39 - (9 )
Total brand (%) 5.0 1.8 4.8 3.2 (3.0 )
Location specific (%) 5.7 2.7 5.5 3.0 (2.8 )
(1) Esurance brand operates in 43 states.
Auto insurance premiums written increased 8.0% or$147 million in 2019 compared to 2018 due to higher average premium primarily due to rate changes approved and PIF growth, partially offset by a lower renewal ratio. PIF increased 1.8% or 27 thousand in 2019 compared to 2018. New issued applications decreased 6.3% in 2019 compared to 2018 due to lower advertising spend. Homeowners premium measures and statistics 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 PIF (thousands) 105 95 79 10.5 % 20.3 % New issued applications (thousands) 29 32 34 (9.4 )% (5.9 )% Average premium$ 1,055 $ 982 $ 917 7.4 % 7.1 % Renewal ratio (%) (1) 84.5 85.3 85.5 (0.8 ) (0.2 ) Approved rate changes: Impact of rate changes ($ in millions)$ 5 $ 2 $ 3 $ 3 $ (1 ) # of locations (2) 5 6 3 (1 ) 3 Total brand (%) 4.7 2.1 4.5 2.6 (2.4 ) Location specific (%) 17.1 6.9 18.5 10.2 (11.6 )
(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.
Homeowners insurance premiums written increased 17.8% or$18 million in 2019 compared to 2018 due to higher average premium primarily due to approved rate changes. As ofDecember 31, 2019 , Esurance continues to write homeowners insurance in
31 states with lower hurricane risk, contributing to lower average premium compared to the industry. PIF increased 10.5% or 10 thousand in 2019 compared to 2018.
The Allstate Corporation 53
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2019 Form 10-K Allstate Protection: Esurance brand
Combined ratios by line of business
For the years ended December 31,
Loss ratio Expense ratio (1) Combined ratio
2019 2018 2017 2019 2018 2017 2019 2018 2017
Auto 79.4 77.0 77.5 23.0 23.6 24.8 102.4 100.6 102.3
Homeowners 74.6 83.4 83.8 23.6 32.2 45.6 98.2 115.6 129.4
Total 79.1 77.2 77.6 23.0 24.1 25.7 102.1 101.3 103.3
(1) Other revenue is deducted from operating costs and expenses in the expense
ratio calculation.
Loss ratios by line of business
For the years ended December 31 ,
Effect of catastrophe
Effect of prior year losses included in prior
Loss ratio Effect of catastrophe losses reserve reestimates year reserve reestimates
2019 2018 2017 2019 2018 2017 2019 2018 2017 2019 2018 2017
Auto 79.4 77.0 77.5 1.2 1.5 2.1 0.1 0.1 0.1 - - -
Homeowners 74.6 83.4 83.8 24.6 27.8 23.5 0.9 2.2 (3.0 ) 0.9 2.2 (1.5 )
Total 79.1 77.2 77.6 2.4 2.8 2.9 0.1 0.2 (0.1 ) - 0.1 (0.1 )
Auto loss ratio increased 2.4 points in 2019 compared to 2018, primarily due to
higher claim severity and to a lesser extent higher frequency, partially offset
by higher premiums earned.
Homeowners loss ratio decreased 8.8 points in 2019 compared to 2018, primarily
due to lower frequency and higher premiums earned, partially offset by higher
claims severity.
Impact of specific costs and expenses on the expense ratio
For the years ended December 31,
2019 2018 2017
Amortization of DAC 2.2 2.3 2.4
Advertising expense 7.0 8.7 8.3
Amortization of purchased intangibles 0.1 0.1 0.2
Other costs and expenses 11.2 12.9
14.6
Restructuring and related charges - 0.1
0.2
Impairment of purchased intangibles 2.5 - - Total expense ratio 23.0 24.1 25.7 Expense ratio decreased 1.1 points in 2019 compared to 2018. Excluding the impairment of purchased intangibles, the expense ratio decreased by 3.6 points compared to 2018. Other costs and expenses, including salaries of telephone sales personnel and other underwriting costs related to customer acquisition, were 1.7 points lower in 2019 compared to 2018 reflecting continued implementation of digital self-service capabilities and premium growth.
Esurance uses a direct distribution model, therefore its primary acquisition-related costs are advertising as opposed to commissions. Esurance advertising expense ratio decreased 1.7 points in 2019 compared to 2018.
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Allstate Protection: Encompass brand 2019 Form 10-K
[[Image Removed: encompassa63.jpg]]
Encompass products are sold through independent agencies that serve
brand-neutral customers who prefer personal service and support from an
independent agent. In 2019, the Encompass brand represented 2.9% of the Allstate
Protection segment's written premium. For additional information on our strategy
and outlook, see Part I, Item 1. Business - Strategy and Segment Information.
Underwriting results
For the years ended December 31,
($ in millions) 2019 2018 2017
Premiums written $ 1,020 $ 1,016 $ 1,035
Premiums earned $ 1,018 $ 1,023 $ 1,090
Other revenue 5 5 6
Claims and claims expense (689 ) (668 ) (786 )
Amortization of DAC (192 ) (190 ) (201 )
Other costs and expenses (131 ) (145 ) (130 )
Restructuring and related charges (4 ) (7 ) (5 )
Underwriting income (loss) $ 7 $ 18 $ (26 )
Catastrophe losses $ 115 $ 102 $ 193
Underwriting income (loss) by line of business
Auto $ 8 $ 14 $ 9
Homeowners 2 1 (45 )
Other personal lines (3 ) 3 10
Underwriting income (loss) $ 7 $ 18 $ (26 ) Changes in underwriting results from prior year by component (1)
For the years ended December 31,
($ in millions) 2019 2018
Underwriting income (loss) - prior year $ 18 $ (26 )
Changes in underwriting income (loss) from:
Increase (decrease) premiums earned (5 ) (67 )
Increase (decrease) other revenue - (1 )
(Increase) decrease incurred claims and claims
expense ("losses"):
Incurred losses, excluding catastrophe losses and
reserve reestimates 9 17
Catastrophe losses, excluding reserve reestimates (16 ) 104
Catastrophes reserve reestimates 3 (13 )
Non-catastrophe reserve reestimates (17 ) 10
Losses subtotal (21 ) 118
(Increase) decrease expenses 15 (6 )
Underwriting income $ 7 $ 18
(1) The 2019 column presents changes in 2019 compared to 2018. The 2018 column
presents changes in 2018 compared to 2017.
Underwriting income decreased 61.1% or $11 million in 2019 compared to 2018,
primarily due to higher catastrophe losses and lower favorable non-catastrophe
prior year reestimates, partially offset by lower operating expenses.
The Allstate Corporation 55
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2019 Form 10-K Allstate Protection: Encompass brand
Premiums written and earned by line of business
For the years ended December 31,
($ in millions) 2019 2018 2017
Premiums written
Auto $ 540 $ 537 $ 542
Homeowners 401 398 406
Other personal lines 79 81 87
Total $ 1,020 $ 1,016 $ 1,035
Premiums earned
Auto $ 539 $ 537 $ 566
Homeowners 399 402 431
Other personal lines 80 84 93
Total $ 1,018 $ 1,023 $ 1,090 Auto premium measures and statistics
2019 2018 2017 2019 vs. 2018 2018 vs. 2017
PIF (thousands) 493 502 530 (1.8 )% (5.3 )%
New issued applications
(thousands) 82 76 52 7.9 % 46.2 %
Average premium $ 1,134 $ 1,118 $ 1,079 1.4 % 3.6 %
Renewal ratio (%) (1) 78.1 74.9 73.4 3.2 1.5
Approved rate changes:
Impact of rate changes ($ in
millions) $ 8 $ 13 $ 37 $ (5 ) $ (24 )
# of locations (2) 17 17 27 - (10 )
Total brand (%) 1.5 2.4 6.2 (0.9 ) (3.8 )
Location specific (%) 4.1 4.8 7.8 (0.7 ) (3.0 )
(1) Encompass announced a plan to exit business in
quarter of 2017 and previously announced a plan to exit business in North
Carolina in the first half of 2016, which impacted the renewal ratio.
Excluding
points in 2018 compared to 74.5 points in 2017.
(2) Encompass brand operates in 40 states and D.C.
Auto insurance premiums written increased 0.6% or$3 million in 2019 compared to 2018, primarily due to higher average premiums due to rate changes over the past 12 months, with the top 10 states representing approximately 70% of premiums written. PIF decreased 1.8% or 9 thousand in 2019 compared to 2018. Homeowners premium measure and statistics 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 PIF (thousands) 234 239 254 (2.1 )% (5.9 )% New issued applications (thousands) 42 37 30 13.5 % 23.3 % Average premium$ 1,795 $ 1,724 $ 1,684 4.1 % 2.4 % Renewal ratio (%) (1) 82.5 80.0 78.5 2.5 1.5 Approved rate changes: Impact of rate changes ($ in millions)$ 38 $ 20 $ 23 $ 18 $ (3 ) # of locations (2) 27 20 21 7 (1 ) Total brand (%) 9.2 4.7 4.8 4.5 (0.1 ) Location specific (%) 10.9 8.1 8.4 2.8 (0.3 )
(1) Encompass announced a plan to exit business in
quarter of 2017 and previously announced a plan to exit business in North
Carolina in the first half of 2016, which has impacted the renewal ratio.
Excluding
points in 2018 compared to 79.0 points in 2017.
(2) Encompass brand operates in 40 states and D.C.
Homeowners insurance premiums written increased 0.8% or
states representing approximately 70% of premiums written. PIF decreased 2.1% or 5 thousand in 2019 compared to 2018.
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Allstate Protection: Encompass brand 2019 Form 10-K
Combined ratios by line of business
For the years ended December 31,
Loss ratio Expense ratio (1) Combined ratio
2019 2018 2017 2019 2018 2017 2019 2018 2017
Auto 66.8 65.0 68.0 31.7 32.4 30.4 98.5 97.4 98.4
Homeowners 68.2 66.7 80.3 31.3 33.1 30.1 99.5 99.8 110.4
Other personal lines 71.3 60.7 59.1 32.5 35.7 30.1 103.8 96.4 89.2
Total 67.7 65.3 72.1 31.6 32.9 30.3 99.3 98.2 102.4
(1) Other revenue is deducted from operating costs and expenses in the expense
ratio calculation.
Loss ratios by line of business
For the years ended December 31,
Effect of prior year reserve Effect of catastrophe losses included in
Loss ratio Effect of catastrophe losses reestimates prior year reserve reestimates
2019 2018 2017 2019 2018 2017 2019 2018 2017 2019 2018 2017
Auto 66.8 65.0 68.0 1.9 1.1 2.1 (1.9 ) (1.9 ) (1.1 ) - (0.2 ) (0.2 )
Homeowners 68.2 66.7 80.3 25.1 22.1 40.1 3.7 3.3 0.5 2.5 3.0 -
Other
personal
lines 71.3 60.7 59.1 6.3 8.3 8.6 (2.5 ) (16.7 ) (10.8 ) (1.2 ) 1.2 -
Total 67.7 65.3 72.1 11.3 10.0 17.7 0.3 (1.1 ) (1.3 ) 0.9 1.2 (0.1 )
Auto loss ratio increased 1.8 points in 2019 compared to 2018, primarily due to increased claim severity and higher catastrophe losses, partially offset by favorable claim frequency.
Homeowners loss ratio increased 1.5 points in 2019 compared to 2018, primarily
due to higher catastrophe losses and unfavorable prior year reserve reestimates,
partially offset by lower non-catastrophe losses driven by favorable claim
frequency.
Impact of specific costs and expenses on the expense ratio
For the years ended December 31,
2019 2018 2017
Amortization of DAC 18.8 18.5 18.3
Advertising expense 0.2 0.2 0.2
Other costs and expenses 12.2 13.5 11.3
Restructuring and related charges 0.4 0.7 0.5
Total expense ratio 31.6 32.9 30.3
Expense ratio decreased 1.3 points in 2019 compared to 2018, primarily due to lower technology and employee-related costs.
The Allstate Corporation 57
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2019 Form 10-K Discontinued Lines and Coverages
Discontinued Lines and Coverages Segment
The Discontinued Lines and Coverages segment includes results from property and
casualty insurance coverage that primarily relates to policies written during
the 1960s through the mid-1980s. Our exposure to asbestos, environmental and
other discontinued lines claims arises principally from direct excess commercial
insurance, assumed reinsurance coverage, direct primary commercial insurance and
other businesses in run-off. For additional information on our strategy and
outlook, see Part I, Item 1. Business - Strategy and Segment Information.
Underwriting results
For the years ended December 31,
($ in millions) 2019 2018 2017
Claims and claims expense (1)
(3 ) (3 ) (3 )
Underwriting loss $ (108 ) $ (90 ) $ (99 )
(1) The cost of administering claims settlements totaled $11 million for all
periods presented.
Underwriting losses in 2019 primarily related to our annual reserve review using
established industry and actuarial best practices. The annual review resulted in
unfavorable reestimates of $95 million , including $28 million for asbestos
exposures, primarily related to new reported information and settlement
agreements, including bankruptcy proceedings; $36 million for environmental
exposures primarily related to the reporting of additional clean-up sites; $37
million for other exposures based on new reported information, partially offset
by a $6 million decrease in the allowance for future uncollectible reinsurance.
Underwriting losses in 2018 primarily related to our annual reserve review,
which resulted in unfavorable reestimates of $76 million , including $44 million
for asbestos exposures, $20 million for environmental exposures and $13 million
for other exposures, partially offset by a $1 million decrease in the allowance
for future uncollectible reinsurance.
Reserves for asbestos, environmental and other discontinued lines claims before and after the effects
of reinsurance
($ in millions) December 31, 2019 December 31, 2018
Asbestos claims
Gross reserves $ 1,172 $ 1,266
Reinsurance (362 ) (400 )
Net reserves 810 866
Environmental claims
Gross reserves 219 209
Reinsurance (40 ) (39 )
Net reserves 179 170
Other discontinued lines
Gross reserves 427 389
Reinsurance (51 ) (34 )
Net reserves 376 355
Total
Gross reserves 1,818 1,864
Reinsurance (453 ) (473 )
Net reserves $ 1,365 $ 1,391
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Discontinued Lines and Coverages 2019 Form 10-K
Reserves by type of exposure before and after the effects of reinsurance ($ in millions)
December 31, 2019 December 31, 2018
Direct excess commercial insurance
Gross reserves (1) $ 948 $ 973
Reinsurance (2) (332 ) (355 )
Net reserves 616 618
Assumed reinsurance coverage
Gross reserves (3) 606 625
Reinsurance (4) (53 ) (53 )
Net reserves 553 572Direct primary commercial insurance
Gross reserves (5) 169 171 Reinsurance (6) (54 ) (48 ) Net reserves 115 123 Other run-off business Gross reserves 15 19 Reinsurance (13 ) (16 ) Net reserves 2 3
Unallocated loss adjustment expenses
Gross reserves 80 76 Reinsurance (1 ) (1 ) Net reserves 79 75 Total Gross reserves 1,818 1,864 Reinsurance (453 ) (473 ) Net reserves $ 1,365 $ 1,391 (1) Gross reserves as ofDecember 31, 2019 comprised 68% case reserves and 32% incurred but not reported ("IBNR") reserves. Approximately 72% of the total gross case reserves are subject to settlement agreements. In 2019, total gross payments from case reserves were$122 million with approximately 83% attributable to settlements. Reserves as ofDecember 31, 2018 , comprised 67% case reserves and 33% IBNR reserves. (2) Ceded reserves as ofDecember 31, 2019 comprised 78% case reserves and 22% IBNR reserves. Approximately 79% of the total ceded case reserves are subject to settlement agreements. In 2019, reinsurance billings of ceded case reserves were$53 million with approximately 87% attributable to settlements. Reserves as ofDecember 31, 2018 , comprised 78% case reserves and 22% IBNR reserves. (3) Gross reserves as ofDecember 31, 2019 comprised 34% case reserves and 66% IBNR reserves. In 2019, total gross payments from case reserves were$43 million . Reserves as ofDecember 31, 2018 , comprised 34% case reserves and 66% IBNR reserves. (4) Ceded reserves as ofDecember 31, 2019 comprised 35% case reserves and 65% IBNR reserves. In 2019, reinsurance billings of ceded case reserves were$3 million . Reserves as ofDecember 31, 2018 , comprised 37% case reserves and 63% IBNR reserves. (5) Gross reserves as ofDecember 31, 2019 comprised 56% case reserves and 44% IBNR reserves. In 2019, total gross payments from case reserves were$15 million . Reserves as ofDecember 31, 2018 , comprised 58% case reserves and 42% IBNR reserves. (6) Ceded reserves as ofDecember 31, 2019 comprised 78% case reserves and 22% IBNR reserves. In 2019, reinsurance billings of ceded case reserves were$2 million . Reserves as ofDecember 31, 2018 , comprised 78% case reserves and 22% IBNR reserves. Total net reserves as ofDecember 31, 2019 , included$660 million or 48% of estimated IBNR reserves compared to$693 million or 50% of estimated IBNR reserves as ofDecember 31, 2018 . Total gross payments were$183 million and$156 million for 2019 and 2018, respectively, primarily related to payments on 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$49 million and$62 million for 2019 and 2018, respectively. See the Claims and Claims Expense Reserves section of this Item for a more detailed discussion. The Allstate Corporation 59
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2019 Form 10-K Service Businesses
Service Businesses Segment
[[Image Removed: servicebuslogs.jpg]]
Service Businesses comprise Allstate Protection Plans, Allstate Dealer Services,
Allstate Roadside Services, Arity and Allstate Identity Protection. In 2019,
Service Businesses represented 3.7% of total revenue, 72.6% of total PIF and
1.1% of total adjusted net income. We offer consumer product protection plans,
finance and insurance products (including vehicle service contracts, guaranteed
asset protection waivers, road hazard tire and wheel and paintless dent repair
protection), roadside assistance, device and mobile data collection services and
analytic solutions using automotive telematics information and identity
protection. For additional information on our strategy and outlook, see Part I,
Item 1. Business - Strategy and Segment Information.
Summarized financial information
For the years ended December 31,
($ in millions) 2019 2018 2017
Premiums written $ 1,535 $ 1,431 $ 1,094
Revenues
Premiums $ 1,233 $ 1,098 $ 867
Other revenue 188 82 66
Intersegment insurance premiums and service fees (1) 154 122 110
Net investment income 42 27 16
Realized capital gains and losses 32 (11 ) -
Total revenues 1,649 1,318 1,059
Costs and expenses
Claims and claims expense (363 ) (350 ) (369 )
Amortization of DAC (543 ) (463 ) (296 )
Operating costs and expenses (661 ) (505 ) (460 )
Restructuring and related charges (2) - (4 ) (13 )
Amortization of purchased intangibles (122 ) (94 ) (92 )
Impairment of purchased intangibles (55 ) - -
Total costs and expenses (1,744 ) (1,416 ) (1,230 )
Income tax benefit 18 19 194
Net (loss) income applicable to common shareholders
(79 )
Adjusted net income (loss)$ 38 $ 8$ (54 ) Realized capital gains and losses, after-tax 25 (9 ) - Amortization of purchased intangibles, after-tax (97 ) (74 ) (60 ) Impairment of purchased intangibles, after-tax (43 ) - - Tax Legislation (expense) benefit - (4 ) 137
Net (loss) income applicable to common shareholders
(79 ) $ 23
Allstate Protection Plans (3) $ 60 $ 23 $ (22 )
Allstate Dealer Services 26 15 (1 )
Allstate Roadside Services (15 ) (20 ) (17 )
Arity (7 ) (11 ) (14 )
Allstate Identity Protection (4) (26 ) 1 -
Adjusted net income (loss) $ 38 $ 8 $ (54 )
Allstate Protection Plans 99,632 68,588 38,719
Allstate Dealer Services 4,205 4,338 4,088
Allstate Roadside Services 599 663 699
Allstate Identity Protection 1,511 1,040 -
Policies in force as of
74,629 43,506
(1) Primarily related to Arity and Allstate Roadside Services and are eliminated
in our consolidated financial statements.
(2) 2018 related to organizational changes at Allstate Roadside Services and
2017 related to a one-time vendor contract termination.
(3)
Protection Plans name in the
and iCracked on
(4)
Protection name was acquired on
60 www.allstate.com
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Service Businesses 2019 Form 10-K
Net loss applicable to common shareholders decreased 2.5% or$2 million in 2019 compared to 2018. 2019 results included a$55 million intangible asset impairment related to the change in trade name fromSquareTrade to Allstate Protection Plans. Adjusted net income increased$30 million in 2019 compared to 2018. The improvement in 2019 was primarily due to growth of Allstate Protection Plans, favorable loss experience of both Allstate Protection Plans and Allstate Dealer 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. Total revenues increased 25.1% or$331 million in 2019 compared to 2018, primarily due to Allstate Protection Plan's growth through itsU.S. retail and international channels, higher Allstate Identity Protection revenue due to its acquisition in fourth quarter 2018 and increased premiums earned on Allstate Dealer Services' vehicle service contracts. Premiums written increased 7.3% or$104 million in 2019 compared to 2018, primarily due to growth at Allstate Protection Plans and increased premiums written by Allstate Dealer Services, partially offset by declines in Allstate Roadside Services wholesale and retail business. PIF increased 42.0% or 31 million in 2019 compared to 2018 due to continued growth at Allstate Protection Plans. Intersegment premiums and service fees increased 26.2% or$32 million in 2019 compared to 2018, primarily related to increased auto connections and device sales through Arity's device and mobile data collection services and analytic solutions. Other revenue increased$106 million in 2019 compared to 2018, primarily due to the acquisition of Allstate Identity Protection and Allstate Protection Plans' acquisitions ofPlumChoice and iCracked. All of the revenue from these acquired businesses is reported as other revenue. See Note 3 of the consolidated financial statements for further details. Claims and claims expense increased 3.7% or$13 million in 2019 compared to 2018, primarily due to higher loss costs at Allstate Protection Plans driven by growth of the business, partially offset by improved loss experience at both Allstate Protection Plans and Allstate Dealer Services. Amortization of DAC increased 17.3% or$80 million in 2019 compared to 2018. The increase is in line with the growth experienced at Allstate Protection Plans and Allstate Dealer Services. Operating costs and expenses increased 30.9% or$156 million in 2019 compared to 2018, primarily due to the acquisitions of Allstate Identity Protection,PlumChoice and iCracked, product development costs, investments in growing Allstate Protection Plans and expanding Allstate Identity Protection. Amortization and impairment of purchased intangibles relates to the acquisitions of Allstate Protection Plans in 2017 and Allstate Identity Protection in 2018. We recognized$486 million and$257 million of intangible assets subject to amortization for Allstate Protection Plans and Allstate Identity Protection, respectively. We recorded amortization expense of$122 million in 2019 compared to$94 million in 2018. During 2019, we made the decision to phase-out the use of theSquareTrade trade name inthe United States and sell consumer protection plans under the Allstate Protection Plans name. TheSquareTrade trade name will continue to be used outside ofthe United States . This resulted in a$55 million impairment in 2019 of the intangible asset related to the trade name established in 2017 whenSquareTrade was acquired.The Allstate Corporation 61
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2019 Form 10-K Claims and Claims Expense Reserves
Claims and Claims Expense Reserves
Underwriting results are significantly influenced by estimates of claims and
claims expense reserves. For a description of our reserve process, see Note 8 of
the consolidated financial statements. Further, for a description of our
reserving policies and the potential variability in our reserve estimates, see
the Application of Critical Accounting Estimates section of the MD&A. These
reserves are an estimate of amounts necessary to settle all outstanding claims,
including IBNR claims, as of the reporting date.
The facts and circumstances leading to reestimates of reserves relate to changes
in claim activity and revisions to the development factors used to predict how
losses are likely to develop from the end of a reporting period until all claims
have been paid. Reestimates occur when actual losses differ from those predicted
by the estimated development factors used in prior reserve estimates.
We believe the net loss reserves exposures are appropriately established based
on available facts, technology, laws and regulations.
Total reserves, net of recoverables ("net reserves"), as of December 31 , by line of business
($ in millions) 2019 2018 2017
Allstate brand $ 17,809 $ 17,272 $ 16,826
Esurance brand 941 862 777
Encompass brand 646 691 758
Total Allstate Protection 19,396 18,825 18,361
Discontinued Lines and Coverages 1,365 1,391 1,407
Total Property-Liability 20,761 20,216 19,768
Service Businesses 39 52 86
Total net reserves $ 20,800 $ 20,268 $ 19,854
The year-end 2019 gross reserves of $27.71 billion for insurance claims and
claims expense were $8.34 billion more than the net reserve balance of $19.37
billion recorded on the basis of statutory accounting practices for reports
provided to state regulatory authorities. The principal differences are
recoverables from third parties totaling $6.91 billion , including $5.46 billion
of indemnification recoverables related to the Michigan Catastrophic Claims
Association ("MCCA"), that reduce reserves for statutory reporting, but are
recorded as assets for GAAP reporting, and a liability for the reserves of the
Canadian subsidiaries for $1.33 billion that are a component of our consolidated
reserves, but not included in our U.S. statutory reserves. The tables below show
net reserves representing the estimated cost of outstanding claims as they were
recorded at the beginning of years 2019, 2018 and 2017, and the effect of
reestimates in each year.
Net reserves
January 1 reserves
($ in millions) 2019 2018 2017
Allstate brand $ 17,272 $ 16,826 $ 16,108
Esurance brand 862 777 740
Encompass brand 691 758 749
Total Allstate Protection 18,825 18,361 17,597
Discontinued Lines and Coverages 1,391 1,407 1,445
Total Property-Liability 20,216 19,768 19,042
Service Businesses 52 86 24
Total net reserves $ 20,268 $ 19,854 $ 19,066
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Claims and Claims Expense Reserves 2019 Form 10-K
Impact of reserve reestimates by brand on combined ratio and net income applicable to common shareholders(1) (2)
2019 2018 2017
($ in millions, except Effect on Effect on Effect on
ratios) Reserve reestimate combined ratio Reserve reestimate combined ratio Reserve reestimate combined ratio
Allstate brand $ (239 ) (0.7 ) $ (332 ) (1.0 ) $ (585 ) (1.8 )
Esurance brand 3 - 3 - (2 ) -
Encompass brand 3 - (11 ) - (14 ) (0.1 )
Total Allstate
Protection (233 ) (0.7 ) (340 ) (1.0 ) (601 ) (1.9 )
Discontinued Lines and
Coverages 105 0.4 87 0.3 96 0.3
Total
Property-Liability (128 ) (0.3 ) (253 ) (0.7 ) (505 ) (1.6 )
Service Businesses (2 ) - (2 ) - 2 -
Total $ (130 ) $ (255 ) $ (503 )
Reserve reestimates,
after-tax $ (103 ) $ (201 ) $ (327 )
Consolidated net
income applicable to
common shareholders $ 4,678 $ 2,012 $ 3,438
Reserve reestimates as
a % impact on
consolidated net
income applicable to
common shareholders 2.2 % 10.0 % 9.5 %
Property-Liability
prior year reserve
reestimates included
in catastrophe losses $ 48 $ 25 $ (18 )
(1) Favorable reserve reestimates are shown in parentheses.
(2) Ratios are calculated using property and casualty premiums earned.
The following tables reflect the accident years to which the reestimates shown above are applicable. Favorable reserve reestimates are shown in parentheses. 2019 prior year reserve reestimates ($ in millions) 2014 & prior 2015 2016 2017 2018 Total Allstate brand$ (133 ) $ (44 ) $ (25 ) $ (96 ) $ 59 $ (239 ) Esurance brand (5 ) (2 ) (1 ) (3 ) 14 3 Encompass brand (2 ) 2 (2 ) 4 1 3 Total Allstate Protection (140 ) (44 ) (28 ) (95 ) 74 (233 ) Discontinued Lines and Coverages 105 - - - - 105 Total Property-Liability (35 ) (44 ) (28 ) (95 ) 74 (128 ) Service Businesses - - - - (2 ) (2 ) Total$ (35 ) $ (44 ) $ (28 ) $ (95 ) $ 72 $ (130 ) 2018 prior year reserve reestimates ($ in millions) 2013 & prior 2014 2015 2016 2017 Total Allstate brand$ (61 ) $ (50 ) $ (25 ) $ (146 ) $ (50 ) $ (332 ) Esurance brand (5 ) (6 ) 9 13 (8 ) 3 Encompass brand (12 ) (11 ) (15 ) 1 26 (11 ) Total Allstate Protection (78 ) (67 ) (31 ) (132 ) (32 ) (340 ) Discontinued Lines and Coverages 87 - - - - 87 Total Property-Liability 9 (67 ) (31 ) (132 ) (32 ) (253 ) Service Businesses - - - - (2 ) (2 ) Total $ 9$ (67 ) $ (31 ) $ (132 ) $ (34 ) $ (255 ) 2017 prior year reserve reestimates ($ in millions) 2012 & prior 2013 2014 2015 2016 Total Allstate brand $ 3$ (99 ) $ (103 ) $ (121 ) $ (265 ) $ (585 ) Esurance brand (3 ) (1 ) (12 ) 1 13 (2 ) Encompass brand (6 ) (1 ) (4 ) (1 ) (2 ) (14 ) Total Allstate Protection (6 ) (101 ) (119 ) (121 ) (254 ) (601 ) Discontinued Lines and Coverages 96 - - - - 96 Total Property-Liability 90 (101 ) (119 ) (121 ) (254 ) (505 ) Service Businesses - - - - 2 2 Total$ 90 $ (101 ) $ (119 ) $ (121 ) $ (252 ) $ (503 ) The Allstate Corporation 63
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2019 Form 10-K Claims and Claims Expense Reserves
Allstate Protection
The tables below show Allstate Protection net reserves representing the
estimated cost of outstanding claims as they were recorded at the beginning of
years 2019, 2018, and 2017, and the effect of reestimates in each year.
Net reserves by line
January 1 reserves
($ in millions) 2019 2018 2017
Auto $ 14,378 $ 14,051 $ 13,530
Homeowners 2,157 2,205 1,990
Other personal lines 1,489 1,489 1,456
Commercial lines 801 616 621
Total Allstate Protection $ 18,825 $ 18,361 $ 17,597
Impact of reserve reestimates by line on combined ratio and underwriting income
2019 2018 2017
($ in millions, Effect on Effect on Effect on
except ratios) Reserve reestimate combined ratio Reserve reestimate combined ratio Reserve reestimate combined ratio
Auto $ (323 ) (0.9 ) $ (455 ) (1.3 ) $ (490 ) (1.6 )
Homeowners 65 0.2 14 - (131 ) (0.4 )
Other personal lines 8 - (7 ) - 1 -
Commercial lines 17 - 108 0.3 19 0.1
Total Allstate
Protection $ (233 ) (0.7 ) $ (340 ) (1.0 ) $ (601 ) (1.9 )
Underwriting income $ 2,912 $ 2,343 $ 2,304
Reserve reestimates
as a % impact on
underwriting income 8.0 % 14.5 % 26.1 %
Prior year reserve reestimates are developed based on factors that are
calculated quarterly and periodically throughout the year for data elements such
as claims reported and settled, paid losses and paid losses combined with case
reserves. We use significant judgment and these data elements to make revisions
to loss development factors that predict how losses are likely to develop from
the end of a reporting period until all claims have been paid. When actual
development of these data elements is different than the historical development
pattern used in a prior period reserve estimate, reserves are revised as
actuarial studies validate new trends based on the indications of updated
development factor calculations. On-going claims organizational and process
changes that are occurring are considered within our estimation process.
Favorable reserve reestimates for auto in 2019 primarily related to continued
favorable personal lines auto injury coverage development, offset by
strengthening in our homeowners lines. Auto liability claims process changes
implemented in prior years, including a program requiring enhanced documentation
of injuries and related medical
treatments, have resulted in favorable severity trends compared to those
originally estimated as we continue to develop greater experience in settling
claims under these programs. The impact of these program changes continues to
moderate. Unfavorable results for homeowners lines in 2019 were primarily due
to catastrophe development being higher than anticipated in previous estimates.
Favorable reserve reestimates for auto in 2018 primarily related to continued
favorable personal lines auto injury coverage development, offset by
strengthening in our commercial lines and personal injury protection ("PIP")
coverage, including an unfavorable ruling against the insurance industry related
to Florida PIP. Unfavorable results for commercial lines in 2018 were primarily
due to non-catastrophe auto loss development being higher than anticipated in
previous estimates.
Estimating the ultimate cost of claims and claims expenses is an inherently
uncertain and complex process involving a high degree of judgment and is subject
to the evaluation of numerous variables.
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Claims and Claims Expense Reserves 2019 Form 10-K
Discontinued Lines and Coverages We conduct an annual review in the third quarter of each year to evaluate and establish asbestos, environmental and other discontinued lines reserves. Reserves are recorded in the reporting period in which they are determined. Using established industry and actuarial best practices and assuming no change in the
regulatory or economic environment, this detailed and comprehensive methodology determines reserves based on assessments of the characteristics of exposure (e.g. claim activity, potential liability, jurisdiction, products versus non-products exposure) presented by policyholders. Discontinued Lines and Coverages reserve reestimates
2019 2018 2017
January 1 January 1 January 1
($ in millions) reserves Reserve reestimate reserves Reserve reestimate reserves Reserve reestimate
Asbestos claims $ 866 $ 28 $ 884 $ 44 $ 912 $ 61
Environmental claims 170 36 166 20 179 10
Other discontinued lines 355 41 357 23 354 25
Total $ 1,391 $ 105 $ 1,407 $ 87 $ 1,445 $ 96
Underwriting loss $ (108 ) $ (90 ) $ (99 )
Reserve additions for asbestos in 2019 were primarily related to new reported
information and settlement agreements, including bankruptcy proceedings. Reserve
additions for asbestos in 2018 were primarily related to new reported
information, changes in our projections of reported claims and settlement
agreements, including bankruptcy proceedings.
Reserve additions for environmental in 2019 were primarily related to the
reporting of additional clean-up sites. Reserve additions for environmental in
2018 were primarily related to expected greater loss activity for future claims.
Reserves and claim activity before (Gross) and after (Net) the effects of reinsurance
2019 2018 2017
($ in millions, except
ratios) Gross Net Gross Net Gross Net
Asbestos claims
Beginning reserves $ 1,266 $ 866 $ 1,296 $ 884 $ 1,356 $ 912
Incurred claims and claims
expense 39 28 89 44 79 61
Claims and claims expense
paid (133 ) (84 ) (119 ) (62 ) (139 ) (89 )
Ending reserves $ 1,172 $ 810 $ 1,266 $ 866 $ 1,296 $ 884
Annual survival ratio 8.8 9.6 10.6 14.0 9.3 9.9
3-year survival ratio 9.0 10.3 9.1 9.7 9.2 8.9
Environmental claims
Beginning reserves $ 209 $ 170 $ 199 $ 166 $ 219 $ 179
Incurred claims and claims
expense 42 36 30 20 9 10
Claims and claims expense
paid (32 ) (27 ) (20 ) (16 ) (29 ) (23 )
Ending reserves $ 219 $ 179 $ 209 $ 170 $ 199 $ 166
Annual survival ratio 6.8 6.6 10.5 10.6 6.9 7.2
3-year survival ratio 8.1 8.1 8.4 8.2 6.9 6.9
Combined environmental and
asbestos claims
Annual survival ratio 8.4 8.9 10.6 13.3 8.9 9.4
3-year survival ratio 8.8 9.9 9.0 9.5 8.8 8.5
Percentage of IBNR in
ending reserves 48.8 % 49.6 % 52.7 %
The survival ratio is calculated by taking our ending reserves divided by payments made during the year. This is a commonly used but simplistic and imprecise approach to measuring the adequacy of asbestos and environmental reserve levels. Many factors, such as mix of business, level of coverage provided and settlement procedures have significant impacts on the amount of environmental and asbestos
claims and claims expense reserves, claim payments and the resultant ratio. As
payments result in corresponding reserve reductions, survival ratios can be
expected to vary over time. In 2019 and 2018, the asbestos and environmental net
3-year survival ratio increased due to lower claim payments associated with
settlement agreements.
The Allstate Corporation 65
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2019 Form 10-K Claims and Claims Expense Reserves
Net asbestos reserves by type of exposure and total reserve additions
December 31, 2019 December 31, 2018 December 31, 2017
Active Active Active
($ in millions) policy-holders Net reserves % of reserves policy-holders Net reserves % of reserves policy-holders Net reserves % of reserves
Direct policyholders:
Primary 58 $ 12 1 % 51 $ 12 1 % 48 $ 10 1 %
Excess 299 292 36 295 309 36 296 308 35
Total case reserves 357 304 37 346 321 37 344 318 36
Assumed reinsurance 127 16 138 16 117 13
IBNR 379 47 407 47 449 51
Total net reserves $ 810 100 % $ 866 100 % $ 884 100 %
Total reserve additions $ 28 $ 44 $ 61
At December 31, 2019 , there were 357 active policyholders with open asbestos
claims.
• Active policyholders increased by 11 in 2019, including 16 policyholders
reporting asbestos claims for the first time and the closing of all claims
for 5 policyholders.
• Active policyholders increased by 2 in 2018, including 13 policyholders
reporting asbestos
claims for the first time and the closing of all claims for 11 policyholders.
IBNR net reserves decreased $28 million as of December 31, 2019 compared to
December 31, 2018 . IBNR provides for reserve development of known claims and
future reporting of additional unknown claims from current policyholders and
ceding companies.
Claims counts for asbestos and environmental exposures
For the years ended December 31,
Number of claims 2019 2018 2017
Asbestos
Pending, beginning of year 6,440 6,659 6,883
New 332 427 406
Closed (551 ) (646 ) (630 )
Pending, end of year 6,221 6,440 6,659
Closed without payment 392 446 377
Environmental
Pending, beginning of year 3,229 3,351 3,399
New 273 335 375
Closed (323 ) (457 ) (423 )
Pending, end of year 3,179 3,229 3,351
Closed without payment 197 320 299
Reinsurance and indemnification programs We utilize reinsurance to reduce
exposure to catastrophe risk and manage capital, and to support the required
statutory surplus and the insurance financial strength ratings of certain
subsidiaries such as Castle Key Insurance Company ("CKIC") and Allstate New
Jersey Insurance Company ("ANJ"). We purchase significant reinsurance to manage
our aggregate countrywide exposure to an acceptable level. The price and terms
of reinsurance and the credit quality of the reinsurer are considered in the
purchase process, along with whether the price can be appropriately reflected in
the costs that are considered in setting future rates
charged to policyholders. We have also purchased reinsurance to mitigate
exposures in our long-tail liability lines, including environmental, asbestos
and other discontinued lines as well as our commercial lines, including shared
economy. We also participate in various indemnification mechanisms, including
state-based industry pool or facility programs mandating participation by
insurers offering certain coverage in their state and the federal government
National Flood Insurance Program ("NFIP"). See Note 10 of the consolidated
financial statements for additional details on these programs.
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Claims and Claims Expense Reserves 2019 Form 10-K
Reinsurance and indemnification recoverables, net of the allowance established for
uncollectible amounts
S&P Reinsurance or indemnification
financial recoverable on paid and unpaid
strength claims, net
($ in millions) rating (1) 2019 2018
Indemnification programs
State-based industry pool or facility programs
MCCA (2) N/A $ 5,499 $ 5,400
New Jersey Property-Liability Insurance
Guaranty Association ("PLIGA") N/A 446 461
North Carolina Reinsurance Facility N/A 78 86
Florida Hurricane Catastrophe Fund ("FHCF") N/A 52 104
Other 9 9
Federal Government - NFIP N/A 25 31
Subtotal 6,109 6,091
Catastrophe reinsurance recoverables
Renaissance Reinsurance Limited A+ 27 65
Swiss Reinsurance America Corporation AA- 15 39
Everest Reinsurance Company A+ 15 33
Other 179 416
Subtotal 236 553
Other reinsurance recoverables (3)
Lloyd's of London ("Lloyd's") (4) A+ 158 165
Aleka Insurance Inc. N/A 115 37
Westport Insurance Corporation AA- 55 60
TIG Insurance Company N/A 38 35
Other, including allowance for future
uncollectible recoverables 293 307
Subtotal 659 604
Total Property-Liability 7,004 7,248
Service Businesses 20 18
Total $ 7,024 $ 7,266 (1) N/A reflects no S&P Global Ratings ("S&P") rating available.
(2) As of
of reinsurance recoverable on paid claims, respectively, and
and
(3) Other reinsurance recoverables primarily relate to asbestos, environmental
and other liability exposures as well as commercial lines, including shared
economy.
(4) As of December 31, 2019 , case reserves for Lloyd's were 68% of the
reinsurance recoverable for unpaid claims.
Reinsurance and indemnification recoverables include an estimate of the amount
of insurance claims and claims expense reserves that are ceded under the terms
of the agreements, including incurred but not reported unpaid losses. We
calculate our ceded reinsurance and indemnification estimates based on the terms
of each applicable agreement, including an estimate of how IBNR losses will
ultimately be ceded under the agreement. We also consider other limitations and
coverage exclusions under our agreements. Accordingly, our estimate of
recoverables is subject to similar risks and uncertainties as our estimate of
reserves claims and claims expense. We believe the recoverables are
appropriately established; however, as our underlying reserves continue to
develop, the amount ultimately recoverable may vary from amounts currently
recorded. We regularly evaluate the reinsurers and the respective amounts of our
reinsurance recoverables, and a provision for uncollectible reinsurance
recoverables is recorded, if needed. The establishment of reinsurance
recoverables and the related allowance for
uncollectible reinsurance is also an inherently uncertain process involving
estimates. Changes in estimates could result in additional changes to the
Consolidated Statements of Operations.
Indemnification recoverables are considered collectible based on the industry
pool and facility enabling legislation and the Company has not had any credit
losses related to these programs and we do not anticipate losses in the
foreseeable future. We also have not experienced credit losses on our
catastrophe reinsurance programs, which include highly rated reinsurers.
The allowance for uncollectible reinsurance relates to other reinsurance
programs primarily related to our Discontinued Lines and Coverages segment. This
allowance was $60 million and $65 million as of December 31, 2019 and 2018,
respectively. The allowance is based upon our ongoing review of amounts
outstanding, length of collection periods, changes in reinsurer credit standing,
and other relevant factors. In addition, in the ordinary course of
The Allstate Corporation 67
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2019 Form 10-K Claims and Claims Expense Reserves
business, we may become involved in coverage disputes with certain of our
reinsurers that may ultimately result in lawsuits and arbitrations brought by or
against such reinsurers to determine the parties' rights and obligations under
the various reinsurance agreements. We employ dedicated specialists to manage
reinsurance collections and disputes. We also consider recent developments in
commutation activity between reinsurers and cedents, and recent trends in
arbitration and litigation outcomes in disputes between cedents and reinsurers
in seeking to maximize our reinsurance recoveries.
Adverse developments in the insurance industry have led to a decline in the
financial strength of some of our reinsurance carriers, causing amounts
recoverable from them and future claims ceded to them to be considered a higher
risk. There has also been consolidation activity in the industry, which causes
reinsurance risk across the industry to be concentrated among fewer companies.
For further details related to our reinsurance and indemnification recoverables,
see the Regulation section in Part I and Note 10 of the consolidated financial
statements.
Effects of reinsurance ceded and indemnification programs on our premiums earned and claims and claims
expense
For the years ended December 31,
($ in millions) 2019 2018 2017
Allstate Protection - Premiums
Indemnification programs
State-based industry pool or facility
programs
MCCA $ 89 $ 77 $ 73
PLIGA 8 9 9
FHCF 9 10 11
Other 85 90 108
Federal Government - NFIP 258 258 263
Catastrophe reinsurance 377 344 344
Other reinsurance programs 121 54 -
Total Allstate Protection 947 842 808
Discontinued Lines and Coverages - - -
Total Property-Liability 947 842 808
Service Businesses 175 174 163
Total effect on premiums earned $ 1,122 Allstate Protection - Claims Indemnification programs State-based industry pool or facility programs MCCA$ 208 $ 233 $ 410 PLIGA 3 (6 ) 3 FHCF 31 148 19 Other 67 90 89 Federal Government - NFIP 150 118 1,116 Catastrophe reinsurance (166 ) (1 ) 604 46 Other reinsurance programs 94 40 - Total Allstate Protection 387 1,227 1,683 Discontinued Lines and Coverages 39 57 35 Total Property-Liability 426 1,284 1,718 Service Businesses 98 94 89 Total effect on claims and claims expense$ 524 $ 1,378 $ 1,807 (1) Decline reflects reestimates in claims and claims expense related to the 2018Camp Fire . In 2019 and 2018, ceded premiums earned increased primarily due to increased activity within our shared economy business and catastrophe reinsurance premium rates. In 2019, ceded claims and claims expenses decreased$854 million , primarily due to lower amounts related to the catastrophe reinsurance program, partially offset by increased activity with our shared economy business. In 2018, ceded claims and claims expenses decreased$429 million , primarily due to higher amounts related to NFIP in 2017. Our claim reserve development experience is consistent with the MCCA's overall experience with reported and pending claims increasing in recent years. The MCCA has reported severity increasing with nearly 55% of reimbursements for attendant and residential care services. The Governor ofMichigan signed new legislation onMay 30, 2019 to reformMichigan's no-fault auto insurance system. For further discussion of these items, see Regulation, Indemnification Programs and Note 10 of the consolidated financial statements.
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Claims and Claims Expense Reserves 2019 Form 10-K
For the years ended December 31,
2019 2018 2017
($ in millions) Gross Net Gross Net Gross Net
Beginning reserves $ 5,975 $ 605 $ 5,799 $ 565 $ 5,443 $ 522
Incurred claims and claims
expense-current year 446 202 449 189 513 195
Incurred claims and claims
expense-prior years (16 ) 20 9 35 117 25
Claims and claims expense
paid-current year (1) (55 ) (53 ) (52 ) (51 ) (54 ) (53 )
Claims and claims expense paid-prior
years (1) (244 ) (127 ) (230 ) (133 ) (220 ) (124 )
Ending reserves (2) $ 6,106 $ 647 $ 5,975 $ 605 $ 5,799 $ 565
(1) Paid claims and claims expenses reported in the table for the current and
prior years, recovered from the MCCA totaled $119 million , $98 million and
$97 million in 2019, 2018 and 2017, respectively.
(2) Gross reserves for the year ended December 31, 2019 , comprise 85% case
reserves and 15% IBNR. Gross reserves for the year ended
comprise 88% case reserves and 12% IBNR. Gross reserves for the year ended
require member companies to report ultimate case reserves.
Pending MCCA claims differ from most personal lines insurance pending claims as other personal lines policies have coverage limits and incurred claims settle in shorter periods. Claims are considered pending as long as payments are continuing pursuant to an outstanding MCCA claim, which can be for a claimant's lifetime. Many of these injuries are catastrophic in nature, resulting in serious permanent disabilities that require attendant and residential care for periods that may span decades. A significant portion of the ultimate incurred claim reserves and the recoverables can be attributed to a small number of catastrophic claims that occurred more than five years ago and continue to pay lifetime benefits. Pending, new and closed claims forMichigan personal injury protection exposures For the years ended December 31, Number of claims (1) 2019 2018 2017 Pending, beginning of year 4,812 4,983 5,388 New 7,807 7,858 8,494 Closed (7,677 ) (8,029 ) (8,899 ) Pending, end of year 4,942 4,812 4,983 (1) Total claims includes those covered and not covered by the MCCA indemnification. As ofDecember 31, 2019 , approximately 1,600 of our pending claims have been reported to the MCCA, of which approximately 55% represents claims that occurred more than 5 years ago. There are 73 Allstate brand claims with reserves in excess of$15 million as ofDecember 31, 2019 , which comprise approximately 32% of the gross ending reserves in the table above. As a result, significant developments with a single claimant can result in volatility in prior year incurred claims. Intercompany reinsurance We enter into certain intercompany insurance and reinsurance transactions in order to maintain underwriting control and manage insurance risk among various legal entities. These reinsurance agreements have been approved by the appropriate regulatory authorities. All significant intercompany transactions have been eliminated in consolidation. Catastrophe reinsurance Our catastrophe reinsurance program is designed to address our exposure to catastrophes nationwide, utilizing our risk management methodology. Our program is designed to provide reinsurance protection for catastrophes resulting from multiple perils including hurricanes, windstorms, hail, tornadoes, earthquakes, wildfires, and fires following earthquakes. 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, while providing protection to our customers. We anticipate completing the placement of our 2020 nationwide catastrophe reinsurance program in the second quarter of 2020. We expect the program will be similar to our 2019 nationwide catastrophe reinsurance program but will evaluate opportunities to improve the economic terms and conditions. For further details of the existing 2019 program, see Note 10 of the consolidated financial statements. The Allstate Corporation 69
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2019 Form 10-K Allstate Life
Allstate Life Segment
Allstate Life offers traditional, interest-sensitive and variable life
insurance. In 2019, Allstate Life represented 4.4% of total revenue, 1.3% of
total PIF and 7.5% of total adjusted net income. Our target customers are middle
market consumers with family and financial protection needs. For additional
information on our strategy and outlook, see Part I, Item 1. Business - Strategy
and Segment Information.
Summarized financial information
For the years ended December 31,
($ in millions) 2019 2018 2017
Revenues
Premiums and contract charges $ 1,343 $ 1,315 $ 1,280
Other revenue 125 119 114
Net investment income 514 505 489
Realized capital gains and losses 1 (14 ) 5
Total revenues 1,983 1,925 1,888
Costs and expenses
Contract benefits (855 ) (809 ) (765 )
Interest credited to contractholder funds (299 ) (285 ) (282 )
Amortization of DAC (173 ) (132 ) (134 )
Operating costs and expenses (354 ) (361 ) (342 )
Restructuring and related charges (2 ) (3 ) (2 )
Total costs and expenses (1,683 ) (1,590 ) (1,525 )
Income tax (expense) benefit (53 ) (75 ) 226
Net income applicable to common shareholders
Adjusted net income$ 261 $ 295 $ 259 Realized capital gains and losses, after-tax - (11 ) 2 Valuation changes on embedded derivatives not hedged, after-tax (9 ) - - DAC and DSI amortization related to realized capital gains and losses and valuation changes on embedded derivatives not hedged, after-tax (5 ) (8 ) (10 ) Tax Legislation (expense) benefit - (16 ) 338
Net income applicable to common shareholders
Reserve for life-contingent contract benefits as of December 31$ 2,736 $
2,677
Contractholder funds as of December 31$ 7,805 $
7,656
Policies in force as ofDecember 31 by distribution channel (in thousands) Allstate agencies 1,816 1,831 1,822 Closed channels 107 114 123 Total 1,923 1,945 1,945 Net income applicable to common shareholders decreased 5.0% or$13 million in 2019 compared to 2018. 2018 results include a tax expense of$16 million related to the Tax Legislation. Adjusted net income decreased 11.5% or$34 million in 2019 compared to 2018, primarily due to higher amortization of DAC related to our annual review of assumptions and higher contract benefits, partially offset by higher premiums and net investment income, and lower operating costs and expenses. Premiums and contract charges increased 2.1% or$28 million in 2019 compared to 2018, primarily due to growth in traditional life insurance. Approximately 85% of Allstate Life's traditional life insurance premium relates to term life insurance products. Premiums and contract charges by product For the years ended December 31, ($ in millions) 2019 2018
2017
Traditional life insurance premiums$ 630 $ 600 $ 568 Accident and health insurance premiums 2 2 2 Interest-sensitive life insurance contract charges (1) 711 713 710 Premiums and contract charges$ 1,343 $ 1,315
(1) Contract charges related to the cost of insurance totaled
million and
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Allstate Life 2019 Form 10-K
Other revenue increased 5.0% or$6 million in 2019 compared to 2018, primarily due to higher gross dealer concessions earned on Allstate agencies' sales of non-proprietary fixed and variable annuities, and mutual funds. Contract benefits increased 5.7% or$46 million in 2019 compared to 2018, primarily due to higher claim experience on interest-sensitive life insurance, partially offset by a favorable change associated with the annual review of assumptions. Our annual review of assumptions in 2019 resulted in a$5 million decrease in reserves primarily for secondary guarantees on interest-sensitive life insurance due to utilizing more refined policy level information and assumptions. In 2018, the review resulted in a$1 million increase in reserves, primarily for secondary guarantees on interest-sensitive life insurance due to higher than anticipated policyholder persistency. 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 3.5% to$276 million in 2019 compared to$286 million in 2018, primarily due to higher claim experience on interest-sensitive life insurance, partially offset by growth in traditional life insurance premiums. Interest credited to contractholder funds increased 4.9% or$14 million in 2019 compared to 2018. Valuation changes on derivatives embedded in equity-indexed universal life contracts that are not hedged increased interest credited to contractholder funds by$11 million in 2019 compared to zero in 2018. Investment spread reflects the difference between net investment income and interest credited to contractholder funds ("investment spread") and is used to analyze the impact of net investment income and interest credited to contractholder funds on net income. Investment spread For the years ended December 31, ($ in millions) 2019 2018 2017 Investment spread before valuation changes on embedded derivatives not hedged$ 226 $ 220 $ 207 Valuation changes on derivatives embedded in equity-indexed universal life contracts that are not hedged (11 ) - - Total investment spread$ 215 $ 220 $ 207 Investment spread before valuation changes on embedded derivatives not hedged increased 2.7% in 2019 compared to 2018, primarily due to higher net investment income, partially offset by higher credited interest. Amortization of DAC increased 31.1% or$41 million in 2019 compared to 2018, primarily due to higher amortization acceleration for changes in assumptions, partially offset by lower gross profits on interest-sensitive life insurance. Components of amortization of DAC For the years ended December 31, ($ in millions) 2019 2018
2017
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$ 109 $ 117 $ 134 Amortization relating to realized capital gains and losses (1) and valuation changes on embedded derivatives that are not hedged 6 10 14 Amortization acceleration (deceleration) for changes in assumptions (''DAC unlocking'') 58 5 (14 ) Total amortization of DAC$ 173 $ 132 $ 134 (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.
Our annual comprehensive review of assumptions underlying estimated future gross profits for our interest-sensitive life contracts covers assumptions for mortality, persistency, expenses, investment returns, including capital gains and losses, interest crediting rates to policyholders, and the effect of any hedges. An assessment is made of future projections to ensure the reported DAC balances reflect current expectations. In 2019, the review resulted in an acceleration of DAC amortization (decrease to income) of$58 million . DAC amortization acceleration primarily related to the investment margin component of estimated gross profits and was due to lower projected future interest rates and investment returns compared to our previous expectations. The acceleration related to benefit margin was due to decreased projected interest rates that result in lower projected policyholder account values which increases benefits on guaranteed products and more refined policy level information and assumptions. In 2018, the review resulted in an acceleration of DAC amortization (decrease to income) of$5 million . DAC amortization acceleration primarily related to theThe Allstate Corporation 71
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2019 Form 10-K Allstate Life
investment margin component of estimated gross profits and was due to lower projected investment returns. This was partially offset by DAC amortization deceleration (increase to income) for changes in the
benefit margin due to a decrease in projected mortality. Changes in DAC
Traditional life and accident
($ in millions) and health Interest-sensitive life insurance Total
For the years ended December 31,
2019 2018 2019 2018 2019 2018
Balance, beginning of year $ 489 $ 465 $ 811 $ 687 $ 1,300 $ 1,152
Acquisition costs deferred 63 65 60 65 123 130
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 (1) (44 ) (41 ) (65 ) (76 ) (109 ) (117 )
Amortization relating to realized capital
gains and losses (1) and valuation changes on
embedded derivatives that are not hedged - - (6 ) (10 ) (6 ) (10 )
Amortization (acceleration) deceleration for
changes in assumptions ("DAC unlocking") (1) - - (58 ) (5 ) (58 ) (5 )
Effect of unrealized capital gains and losses
(2) - - (171 ) 150 (171 ) 150
Ending balance $ 508 $ 489 $ 571 $ 811 $ 1,079 $ 1,300
(1) Included as a component of amortization of DAC on the Consolidated
Statements of Operations.
(2) Represents the change in the DAC adjustment for unrealized capital gains and
losses. The DAC adjustment represents the amount by which the amortization
of DAC would increase or decrease if the unrealized gains and losses in the
respective product portfolios were realized.
Operating costs and expenses decreased 1.9% or$7 million in 2019 compared to 2018, primarily due to lower employee-related expenses, partially offset by higher commissions on non-proprietary product sales. Analysis of reserves and contractholder funds Reserve for life-contingent contract benefits For the years ended December 31, ($ in millions) 2019 2018 Traditional life insurance $ 2,612$ 2,539 Accident and health insurance 124 138 Reserve for life-contingent contract benefits $ 2,736$ 2,677 72 www.allstate.com
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Allstate Life 2019 Form 10-K
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
For the years ended December 31,
($ in millions) 2019 2018 2017
Contractholder funds, beginning balance $ 7,656 $ 7,608 $ 7,464
Deposits 949 965 973
Interest credited 298 284 282
Benefits, withdrawals and other adjustments
Benefits (233 ) (232 ) (241 )
Surrenders and partial withdrawals (261 ) (259 ) (254 )
Contract charges (702 ) (704 ) (704 )
Net transfers from separate accounts 10 6 4
Other adjustments (1) 88 (12 ) 84
Total benefits, withdrawals and other adjustments (1,098 ) (1,201 ) (1,111 ) Contractholder funds, ending balance
$ 7,805 $
7,656
(1) The table above illustrates the changes in contractholder funds, which are
presented gross of reinsurance recoverables on the 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 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 deposits decreased 1.7% in 2019 compared to 2018. The weighted average guaranteed crediting rate and weighted average current crediting rate for our interest-sensitive life insurance contracts, excluding variable life, are both 3.9% as ofDecember 31, 2019 . The Allstate
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2019 Form 10-K Allstate Life
Allstate Life reinsurance ceded In the normal course of business, we seek to limit aggregate and single exposure to losses on large risks by purchasing reinsurance. In addition, we have used reinsurance to effect the disposition of certain blocks of business. We retain primary liability as a direct insurer for all risks ceded to reinsurers. As ofDecember 31, 2019 , approximately 13% of our face amount of life insurance in force was reinsured. Reinsurance recoverables by reinsurer S&P financial strength Reinsurance
recoverable on paid and unpaid
rating (1) benefits
For the years ended December 31,
($ in millions) 2019 2018
RGA Reinsurance Company AA- $ 197 $ 210
Swiss Re Life and Health America,
Inc. AA- 155 156
Munich American Reassurance AA- 80 87
Transamerica Life Group AA- 75 76
Scottish Re (U.S.), Inc. (2) N/A 70 66
John Hancock Life & Health Insurance
Company AA- 50 53
Triton Insurance Company (3) N/A 43 45
American Health & Life Insurance Co.
(3) N/A 32 34
Lincoln National Life Insurance AA- 27 25
Security Life of Denver A+ 23 24
SCOR Global Life AA- 14 14
American United Life Insurance
Company AA- 11 13
Other (4) 17 20
Total $ 794 $ 823
(1) N/A reflects no S&P rating available.
(2) In December 2018 , the Delaware Insurance Commissioner placed Scottish Re
(
was placed in rehabilitation. We have been permitted to exercise certain
setoff rights while the parties address any potential disputes. See Note 10
of the consolidated financial statements for further details.
(3)
(4) As of
and
or better by S&P.
We continuously monitor the creditworthiness of reinsurers in order to determine our risk of recoverability on an individual and aggregate basis, and a provision for uncollectible reinsurance is recorded if needed. No amounts have been deemed unrecoverable in the three-years endedDecember 31, 2019 , except for an allowance related toScottish Re (U.S.), Inc. that was established in 2019. We enter into certain intercompany reinsurance transactions for the Allstate Life operations in order to maintain underwriting control and manage insurance risk among various legal entities. These reinsurance agreements have been approved by the appropriate regulatory authorities. All significant intercompany transactions have been eliminated in consolidation.
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Allstate Benefits 2019 Form 10-K
Allstate Benefits Segment
[[Image Removed: allstatebenefitslogoa12.jpg]]
Allstate Benefits offers voluntary benefits products, including life, accident,
critical illness, short-term disability and other health products. In 2019,
Allstate Benefits represented 2.8% of total revenue, 2.9% of total PIF and 3.3%
of total adjusted net income. Our target customers are middle market consumers
with family and financial protection needs. For additional information on our
strategy and outlook, see Part I, Item 1. Business - Strategy and Segment
Information.
Summarized financial information
For the years ended December 31,
($ in millions) 2019 2018 2017
Revenues
Premiums and contract charges $ 1,145 $ 1,135 $ 1,084
Net investment income 83 77 72
Realized capital gains and losses 12 (9 ) 1
Total revenues 1,240 1,203 1,157
Costs and expenses
Contract benefits (601 ) (595 ) (564 )
Interest credited to contractholder funds (34 ) (35 ) (35 )
Amortization of DAC (161 ) (145 ) (142 )
Operating costs and expenses (285 ) (278 ) (258 )
Restructuring and related charges - - (3 )
Total costs and expenses (1,081 ) (1,053 ) (1,002 )
Income tax expense (35 ) (32 ) (1 )
Net income applicable to common shareholders
Adjusted net income$ 115 $ 124 $ 100 Realized capital gains and losses, after-tax 9 (7 ) - DAC and DSI amortization related to realized capital gains and losses, after-tax - 1 - Tax Legislation benefit - - 54 Net income applicable to common shareholders$ 124 $ 118 $ 154 Benefit ratio (1) 52.5 52.4 52.0 Operating expense ratio (2) 24.9 24.5 23.8 Reserve for life-contingent contract benefits as of December 31$ 1,034 $
1,007
Contractholder funds as of December 31$ 915 $
898
Policies in force as ofDecember 31 (in thousands) 4,183 4,208 4,033
(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.
Net income applicable to common shareholders increased 5.1% or$6 million in 2019 compared to 2018. Adjusted net income decreased 7.3% or$9 million in 2019 compared to 2018, primarily due to higher DAC amortization related primarily to the non-renewal of a large underperforming account and increased operating costs and expenses, partially offset by higher premiums.
Premiums and contract charges increased 0.9% or
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2019 Form 10-K Allstate Benefits
Premiums and contract charges by product
For the years ended December 31,
($ in millions) 2019 2018 2017
Life $ 157 $ 155 $ 155
Accident 298 297 280
Critical illness 479 476 468
Short-term disability 107 108 102
Other health 104 99 79
Premiums and contract charges $ 1,145 $ 1,135 $ 1,084
New annualized premium sales (annualized premiums at initial customer enrollment) decreased 4.4% to$372 million in 2019 and decreased 12.4% to$389 million in 2018. The decrease in 2019 relates to increased competition and higher initial enrollments for certain accounts in the prior year. Contract benefits increased 1.0% or$6 million in 2019 compared to 2018, primarily due to higher claim experience on critical illness and disability products, partially offset by favorable mortality experience on life products. Benefit ratio increased to 52.5 in 2019 compared to 52.4 in 2018 due to higher claim experience on critical illness and disability products, partially offset by favorable mortality experience on life products and improved claims experience on other health products. Amortization of DAC increased 11.0% or$16 million in 2019 compared to 2018, primarily due to DAC amortization related to the non-renewal of a large underperforming account and an unfavorable adjustment associated with our annual review of assumptions. Our annual comprehensive review of assumptions underlying estimated future gross profits for our interest-sensitive life contracts resulted in an acceleration of DAC amortization (decrease to income) of$2 million in 2019 compared to a deceleration of DAC amortization (increase to income) of$4 million in 2018. Changes in DAC For the years ended ($ in millions) 2019 2018 Balance, beginning of year$ 549 $ 542 Acquisition costs deferred 142 150
Amortization of DAC before amortization relating to changes in assumptions (1)
(159 ) (150 )
Amortization relating to realized capital gains and losses (1) - 1
Amortization deceleration (acceleration) for changes in assumptions ("DAC unlocking") (1)
(2 ) 4
Effect of unrealized capital gains and losses (2) (3 ) 2
Ending balance $ 527 $ 549
(1) Included as a component of amortization of DAC on the Consolidated
Statements of Operations.
(2) Represents the change in the DAC adjustment for unrealized capital gains and
losses. The DAC adjustment represents the amount by which the amortization
of DAC would increase or decrease if the unrealized gains and losses in the
respective product portfolios were realized.
Operating costs and expenses
For the years ended December 31,
($ in millions) 2019 2018 2017
Non-deferrable commissions $ 104 $ 109 $ 98
General and administrative expenses 181 169 160
Total operating costs and expenses $ 285 $
278
Operating costs and expenses increased 2.5% or$7 million in 2019 compared to 2018, primarily due to higher technology and employee-related costs. Operating expense ratio increased to 24.9 in 2019 compared to 24.5 in 2018, primarily due to higher investment in technology. Analysis of reserves Reserve for life-contingent contract benefits For the years ended December 31, ($ in millions) 2019 2018 Traditional life insurance $ 285 $ 269 Accident and health insurance 749 738 Reserve for life-contingent contract benefits $ 1,034$ 1,007 76 www.allstate.com
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Allstate Benefits 2019 Form 10-K
Allstate Benefits reinsurance ceded
The vast majority of reinsurance relates to the disposition of long-term care
and other closed blocks of business several years ago. We retain primary
liability as a direct insurer for all risks ceded to reinsurers.
Reinsurance recoverables by reinsurer
S&P financial
strength Reinsurance recoverable on paid and unpaid
rating benefits
For the years ended December 31,
($ in millions) 2019 2018
Mutual of Omaha Insurance AA- $ 64 $ 71
General Re Life Corporation AA+ 18 19
Other (1) 6 5
Total $ 88 $ 95
(1) As of both December 31, 2019 and 2018, the other category includes $4
million of recoverables due from reinsurers rated A- or better by S&P.
We continuously monitor the creditworthiness of reinsurers in order to determine
our risk of recoverability on an individual and aggregate basis, and a provision
for uncollectible reinsurance is recorded if needed. No amounts have been deemed
unrecoverable in the three-years ended December 31, 2019 .
We enter into certain intercompany reinsurance transactions for the Allstate
Benefits operations in order to maintain underwriting control and manage
insurance risk among various legal entities. These reinsurance agreements have
been approved by the appropriate regulatory authorities. All significant
intercompany transactions have been eliminated in consolidation.
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2019 Form 10-K Allstate Annuities
Allstate Annuities Segment
Allstate Annuities consists primarily of deferred fixed annuities and immediate
fixed annuities (including standard and sub-standard structured settlements). In
2019, Allstate Annuities represented 2.9% of total revenue, 0.1% of total PIF
and 0.3% of total adjusted net income. We discontinued the sale of proprietary
annuities over an eight-year period from 2006 to 2014, reflecting our
expectations of declining returns. This segment is in run-off, and we manage it
with a focus on increasing economic value through our investment strategy. For
additional information on our strategy and outlook, see Part I, Item 1. Business
- Strategy and Segment Information.
Summarized financial information
For the years ended December 31,
($ in millions) 2019 2018 2017
Revenues
Contract charges $ 13 $ 15 $ 14
Net investment income 917 1,096 1,305
Realized capital gains and losses 346 (166 ) 44
Total revenues 1,276 945 1,363
Costs and expenses
Contract benefits (583 ) (569 ) (594 )
Interest credited to contractholder funds (307 ) (334 ) (373 )
Amortization of DAC (7 ) (7 ) (7 )
Operating costs and expenses (29 ) (31 ) (34 )
Restructuring and related charges (1 ) - -
Total costs and expenses (927 ) (941 ) (1,008 )
Gain on disposition of operations 6 6 6 Income tax (expense) benefit (73 ) 66 58
Net income applicable to common shareholders
Adjusted net income$ 10 $ 131 $ 205 Realized capital gains and losses, after-tax 274 (131 ) 28 Valuation changes on embedded derivatives not hedged, after-tax (6 ) 3 - Gain on disposition of operations, after-tax 4 4 4 Tax Legislation benefit - 69 182
Net income applicable to common shareholders
Reserve for life-contingent contract benefits as of December 31$ 8,530 $
8,524
Contractholder funds as of December 31$ 8,972 $
9,817
Policies in force as ofDecember 31 (in thousands) Deferred annuities 114 127 142 Immediate annuities 78 84 89 Total 192 211 231 Net income applicable to common shareholders increased$206 million in 2019 compared to 2018. 2018 results include a tax benefit of$69 million related to the Tax Legislation. Adjusted net income decreased$121 million in 2019 compared to 2018, primarily due to lower net investment income, partially offset by lower interest credited to contractholder funds. Net investment income decreased 16.3% or$179 million in 2019 compared to 2018, primarily due to lower performance-based investment results, mainly from limited partnerships, and lower average investment balances. 2019 performance-based investment results included lower valuations in the fourth quarter, on two private equity investments totaling$37 million . 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. 78 www.allstate.com
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Allstate Annuities 2019 Form 10-K
Net realized capital gains in 2019 primarily related to increased valuation of equity investments and gains on sales of fixed income securities. Net realized capital losses in 2018 primarily related to decreased valuation of equity investments and losses on sales of fixed income securities. Contract benefits increased 2.5% or$14 million in 2019 compared to 2018, primarily due to worse immediate annuity mortality experience, partially offset by lower implied interest on immediate annuities with life contingencies. Our annual review of assumptions in 2019 resulted in no adjustment to reserves for guaranteed benefits. In 2018, the review resulted in a$2 million increase in reserves primarily for guaranteed withdrawal benefits on equity-indexed annuities due to higher projected guaranteed benefits. As ofDecember 31, 2019 and 2018, our premium deficiency and profits followed by losses evaluations for our immediate annuities with life contingencies concluded that no adjustments were required to be recognized. For further detail on these evaluations, see Reserve for life-contingent contract benefits estimation in the Application of Critical Accounting Estimates section. 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$479 million and$492 million in 2019 and 2018, respectively. Total benefit spread was$(95) million and$(68) million in 2019 and 2018, respectively. Interest credited to contractholder funds decreased 8.1% or$27 million in 2019 compared to 2018, 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 in 2019 compared to a decrease of$3 million in 2018. Investment spread reflects the difference between net investment income and the sum of interest credited to contractholder funds and the implied interest on immediate annuities with life contingencies, which is included as a component of contract benefits and is used to analyze the impact of net investment income and interest credited to contractholders on net income. Investment spread For the years ended December 31, ($ in millions) 2019 2018 2017 Investment spread before valuation changes on embedded derivatives not hedged$ 139 $ 267 $ 432 Valuation changes on derivatives embedded in equity-indexed annuity contracts that are not hedged (8 ) 3 (1 ) Total investment spread$ 131 $ 270 $ 431 Investment spread before valuation changes on embedded derivatives not hedged decreased 47.9% or$128 million in 2019 compared to 2018, 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. Analysis of investment spread Weighted average Weighted average Weighted average investment yield interest crediting rate investment spreads 2019 2018 2017 2019 2018 2017 2019 2018 2017 Deferred fixed annuities 4.3 % 4.1 % 4.2 % 2.7 % 2.8 % 2.8 % 1.6 % 1.3 % 1.4 % Immediate fixed annuities with and without life contingencies 5.0 6.4 8.0 5.9 6.0 6.0 (0.9 ) 0.4 2.0 The Allstate Corporation 79
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2019 Form 10-K Allstate Annuities
The following table summarizes the weighted average guaranteed crediting rates and weighted average current crediting rates as ofDecember 31, 2019 for certain fixed annuities where management has the ability to change the crediting rate, subject to a contractual minimum. Other products, including equity-indexed, variable and immediate annuities totaling$4.12 billion of contractholder funds, have been excluded from the analysis because management does not have the ability to change the crediting rate or the minimum crediting rate is not considered meaningful in this context. Weighted average guaranteed crediting rates and weighted average current crediting rates Weighted average Weighted average guaranteed current crediting Contractholder ($ in millions) crediting rates rates funds Annuities with annual crediting rate resets 3.16 % 3.17 % $ 4,220 Annuities with multi-year rate guarantees (1): Resettable in next 12 months 1.73 2.89 116 Resettable after 12 months 2.22 2.63 518 (1) These contracts include interest rate guarantee periods, the majority of which are 5 years. Operating costs and expenses decreased 6.5% or$2 million in 2019 compared to 2018, primarily due to lower technology and employee-related costs. Analysis of reserves and contractholder funds Product liabilities For the years ended December 31, ($ in millions) 2019 2018 Immediate fixed annuities with life contingencies Sub-standard structured settlements and group pension terminations (1) $ 5,085$ 4,990 Standard structured settlements and SPIA (2) 3,367
3,425
Other 78 109 Reserve for life-contingent contract benefits $ 8,530
Deferred fixed annuities $ 6,499$ 7,156 Immediate fixed annuities without life contingencies 2,346 2,525 Other 127 136 Contractholder funds $ 8,972$ 9,817 (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.
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Allstate Annuities 2019 Form 10-K
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.
Changes in contractholder funds
For the years ended December 31,
($ in millions) 2019 2018 2017
Contractholder funds, beginning balance $ 9,817 $ 10,936 $ 11,915
Deposits 16 15 28
Interest credited 304 331 370
Benefits, withdrawals and other adjustments
Benefits (547 ) (587 ) (638 )
Surrenders and partial withdrawals (602 ) (854 ) (723 )
Contract charges (9 ) (9 ) (9 )
Net transfers from separate accounts - - 1
Other adjustments (1) (7 ) (15 ) (8 )
Total benefits, withdrawals and other adjustments (1,165 ) (1,465 ) (1,377 ) Contractholder funds, ending balance
$ 8,972 $
9,817
(1) The table above illustrates the changes in contractholder funds, which are
presented gross of reinsurance recoverables on the 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 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 8.6% in 2019, primarily due to the continued runoff of our deferred fixed annuity business. We discontinued the sale of proprietary annuities but still accept additional deposits on existing contracts. Surrenders and partial withdrawals decreased 29.5% or$252 million in 2019 compared to 2018. 2018 had elevated surrenders on fixed annuities resulting from an increased number of contracts reaching the 30-45 day period during which there is no surrender charge. The surrender and partial withdrawal rate on deferred fixed annuities, based on the beginning of year contractholder funds, was 9.2% in 2019 compared to 11.4% in 2018. Allstate Annuities reinsurance ceded We ceded substantially all of the risk associated with our variable annuity business toPrudential Insurance Company of America ("Prudential"). Our reinsurance recoverables from Prudential totaled$1.29 billion and$1.36 billion as ofDecember 31, 2019 and 2018, respectively. We also have reinsurance recoverables from other reinsurers of$17 million as of bothDecember 31, 2019 and 2018. We retain primary liability as a direct insurer for all risks ceded to reinsurers. We continuously monitor the creditworthiness of reinsurers in order to determine our risk of recoverability on an individual and aggregate basis, and a provision for uncollectible reinsurance is recorded if needed. No amounts have been deemed unrecoverable in the three-years endedDecember 31, 2019 . The Allstate
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2019 Form 10-K Investments
Investments
Overview and strategy The return on our investment portfolios is an important component of our ability to offer good value to customers, fund business improvements and create value for shareholders. Investment portfolios are held for Property-Liability, Service Businesses, Allstate Life, Allstate Benefits, Allstate Annuities, and Corporate and Other operations. While taking into consideration the investment portfolio in aggregate, management of the underlying portfolios is significantly influenced by the nature of each respective business and its corresponding liability profile. For each business, we identify a strategic asset allocation which considers both the nature of the liabilities and the risk and return characteristics of the various asset classes in which we invest. This allocation is informed by our long-term and market expectations, as well as other considerations such as risk appetite, portfolio diversification, duration, desired liquidity and capital. Within appropriate ranges relative to strategic allocations, tactical allocations are made in consideration of prevailing and potential future market conditions. We manage risks that involve uncertainty related to interest rates, credit spreads, equity returns and currency exchange rates. The Property-Liability portfolio emphasizes protection of principal and consistent income generation, within a total return framework. This approach has produced competitive returns over the long term and is designed to ensure financial strength and stability for paying claims, while maximizing economic value and surplus growth. Products with lower liquidity needs, such as auto insurance and discontinued lines and coverages, and capital create capacity to invest in less liquid higher yielding fixed income securities, performance-based investments such as limited partnerships and equity securities. Products with higher liquidity needs, such as homeowners insurance, are invested primarily in high quality liquid fixed income securities. The Service Businesses portfolio is focused on protection of principal and consistent income generation, within a total return framework. The portfolio is largely comprised of fixed income securities with a lesser allocation to equity securities and short-term investments. The Allstate Life portfolio is comprised of assets chosen to generate returns to support corresponding liabilities within an asset-liability framework that targets an appropriate return on capital. This portfolio is well diversified and primarily consists of longer duration fixed income securities and commercial mortgage loans. The Allstate Benefits portfolio is focused on protection of principal and consistent income generation while targeting an appropriate return on capital. The portfolio is largely comprised of fixed income securities and commercial mortgage loans with a small allocation to equity securities. The Allstate Annuities portfolio is managed to ensure the assets match the characteristics of the liabilities. For longer-term immediate annuity liabilities, we invest primarily in performance-based investments such as limited partnerships and equity securities. For shorter-term annuity liabilities, we invest primarily in fixed income securities and commercial mortgage loans with maturity profiles aligned with liability cash flow requirements. The Corporate and Other portfolio balances liquidity needs related to the corporate capital structure with the pursuit of returns. Within each segment, 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 strategy includes 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. Returns are impacted by a variety of factors including general macroeconomic and public market conditions as public benchmarks are often used in the valuation of underlying investments. Variability in earnings will also result from the performance of the underlying assets or business and the timing of sales of those investments. Earnings from the sales of investments may be recorded as net investment income or realized capital gains and losses. The portfolio, which primarily includes private equity and real estate with a majority being limited partnerships, is diversified across a number of characteristics, including managers or partners, vintage years, strategies, geographies (including international) and industry sectors or property types. These investments are generally illiquid in nature, often require specialized expertise, typically involve a third-party manager, and often enhance returns and income through transformation at the company or property level. A portion of these investments seek returns in markets or asset classes that are dislocated or special situations, primarily in private markets. Impact of Low Interest Rate Environment InJanuary 2020 , theFederal Open Market Committee ("FOMC") maintained the target range for federal funds rate at 1-1/2 percent to 1-3/4 percent and maintained their inflation target of 2 percent. TheFOMC noted that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions and inflation returning to the target of 2 percent. The path 82 www.allstate.com
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Investments 2019 Form 10-K
of the federal funds rate will depend on economic conditions and their impact on the economic outlook. Interest-bearing investments are comprised of fixed income securities, mortgage loans, short-term
investments and other investments, including bank and agent loans. Contractual maturities and yields of fixed income securities and mortgage loans for the next three years
Fixed income securities Mortgage loans
($ in millions) Carrying value Investment yield Carrying value Investment yield
2020 $ 3,239 3.6 % $ 58 4.8 %
2021 5,877 3.4 446 4.8
2022 6,107 3.3 460 4.3
Investing activity will continue to decrease our portfolio yield as long as
market yields remain below the current portfolio yield. In the Allstate
Annuities segment, the portfolio yield has been less impacted by reinvestment in
the current low interest rate environment than other portfolios because much of
the investment cash flows have been used to fund the managed reduction in
spread-based liabilities. The decline in market-based portfolio yield and
Allstate Annuities invested assets are expected to result in lower net
investment income in future periods.
Investments Outlook
We plan to focus on the following priorities:
• Enhance investment portfolio returns through use of a dynamic capital
allocation framework and focus on tax efficiency.
• Leverage our broad capabilities to shift the portfolio mix to earn higher
risk-adjusted returns on capital.
• Invest for the specific needs and characteristics of Allstate's businesses,
including its corresponding liability profile.
We continue to increase performance-based investments in our Property-Liability
portfolio, consistent with our ongoing strategy to have a greater proportion of
return derived from idiosyncratic asset or operating performance.
Invested assets and market-based income are expected to decline with reductions
in contractholder funds and income related to performance-based investments will
result in variability of earnings for the Allstate Annuities segment.
Portfolio composition and strategy by reporting segment (1)
As of
Allstate Allstate Corporate
($ in millions) Property-Liability Service Businesses Allstate Life Benefits Annuities and Other Total
Fixed income
securities (2) $ 33,299 $ 1,157 $ 8,061 $ 1,298 $ 13,984 $ 1,245 $ 59,044
Equity securities (3) 5,919 311 210 80 1,300 342 8,162
Mortgage loans 538 - 1,861 209 2,209 - 4,817
Limited partnership
interests 4,846 - - - 3,232 - 8,078
Short-term
investments (4) 2,186 76 396 44 815 739 4,256
Other 1,626 - 1,386 310 681 2 4,005
Total $ 48,414 $ 1,544 $ 11,914 $ 1,941 $ 22,221 $ 2,328 $ 88,362
Percent to total 54.9 % 1.7 % 13.5 % 2.2 % 25.1 % 2.6 % 100.0 %
Market-based $ 43,256 $ 1,544 $ 11,914 $ 1,941 $ 18,672 $ 2,326 $ 79,653
Performance-based 5,158 - - - 3,549 2 8,709
Total $ 48,414 $ 1,544 $ 11,914 $ 1,941 $ 22,221 $ 2,328 $ 88,362
(1) Balances reflect the elimination of related party investments between
segments.
(2) Fixed income securities are carried at fair value. Amortized cost basis 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 December 31, 2019 , was $1.59 billion in excess ofcost. These net gains were primarily concentrated in the consumer goods and
technology sectors and in domestic equity index funds.
(4) Short-term investments are carried at fair value.
Investments totaled $88.36 billion as of December 31, 2019 , increasing from
$81.26 billion as of December 31, 2018 , primarily due to higher fixed income and
equity valuations, positive investment and operating cash flows and issuance of
preferred stock and senior debt, partially offset by common share repurchases,
dividends paid to shareholders, net reductions in contractholder funds and
repayment of preferred stock and senior debt.
Beginning January 1, 2018 , equity securities are reported at fair value with
changes in fair value recognized in realized capital gains and losses. Limited
partnerships previously reported using the cost method are reported at fair
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2019 Form 10-K Investments
value with changes in fair value recognized in net investment income. As a
result, 2017 net investment income and net realized capital gains and losses are
not comparable to other periods presented.
Portfolio composition by investment strategy
As of December 31, 2019
($ in millions) Market-based Performance-based Total
Fixed income securities $ 58,950 $ 94 $ 59,044
Equity securities 7,822 340 8,162
Mortgage loans 4,817 - 4,817
Limited partnership interests 906 7,172 8,078
Short-term investments 4,256 - 4,256
Other 2,902 1,103 4,005
Total $ 79,653 $ 8,709 $ 88,362
Percent to total 90.1 % 9.9 % 100.0 %
Unrealized net capital gains and losses
Fixed income securities $ 2,751 $ - $ 2,751
Limited partnership interests - (4 ) (4 )
Other (3 ) - (3 )
Total $ 2,748 $ (4 ) $ 2,744
During 2019, strategic actions focused on optimizing portfolio yield, return and
risk in the low interest rate environment.
We continued to increase performance-based investments in the Property-Liability
portfolio.
We increased the maturity profile of fixed income securities in our
Property-Liability portfolio to a duration of 5.2 years, while maintaining
duration at 5.9 years and 4.5 years for the Allstate Life and Allstate Annuities
portfolios, respectively.
In the Allstate Annuities portfolio, invested assets and market-based income
declined with reductions in contractholder funds. Performance-based investments
and equity securities will continue to be allocated primarily to the longer-term
immediate annuity liabilities to reduce the risk that investment returns are
below levels required to meet their funding needs while shorter-term annuity
liabilities will be invested in market-based investments.
Fixed income securities by type
Fair value as of December 31,
($ in millions) 2019 2018
U.S. government and agencies $ 5,086 $ 5,517
Municipal 8,620 9,169
Corporate 43,078 40,158
Foreign government 979 747
Asset-backed securities ("ABS") 862 1,045
Mortgage-backed securities ("MBS") 419 534
Total fixed income securities $ 59,044 $ 57,170
Fixed income securities are rated by third-party credit rating agencies and/or
are internally rated. As of December 31, 2019 , 87.9% 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 thorough due diligence process which includes, but is
not limited to, an assessment of the credit quality, sector, structure and
liquidity risks of each issue.
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Investments 2019 Form 10-K
Fair value and unrealized net capital gains (losses) for fixed income securities by credit quality
As of December 31, 2019
Investment grade Below investment grade Total
Percent rated
Fair Unrealized gain Fair Unrealized gain Fair Unrealized gain investment
($ in millions) value (loss) value (loss) value (loss) grade
U.S. government
and agencies $ 5,086 $ 115 $ - $ - $ 5,086 $ 115 100.0 %
Municipal 8,569 546 51 (6 ) 8,620 540 99.4
Corporate
Public 27,777 1,356 3,103 122 30,880 1,478 90.0
Privately placed 8,581 391 3,617 119 12,198 510 70.3
Total Corporate 36,358 1,747 6,720 241 43,078 1,988 84.4
Foreign
government 972 11 7 - 979 11 99.3
ABS 791 1 71 1 862 2 91.8
MBS 123 3 296 92 419 95 29.4
Total fixed
income
securities $ 51,899 $ 2,423 $ 7,145 $ 328 $ 59,044 $ 2,751 87.9 %
Municipal bonds, including tax exempt and taxable securities, include general
obligations of state and local issuers and revenue bonds (including pre-refunded
bonds, which are bonds for which an irrevocable trust has been established to
fund the remaining payments of principal and interest).
Our practice for acquiring and monitoring municipal bonds is predominantly based
on the underlying credit quality of the primary obligor. We currently rely on
the primary obligor to pay all contractual cash flows and are not relying on
bond insurers for payments. As a result of downgrades in the insurers' credit
ratings, the ratings of the insured municipal bonds generally reflect the
underlying ratings of the primary obligor.
Corporate bonds include publicly traded and privately placed securities.
Privately placed securities primarily consist of corporate issued senior debt
securities that are directly negotiated with the borrower or are in unregistered
form.
Our portfolio of privately placed securities is diversified by issuer, industry
sector and country. The portfolio is made up of 478 issuers. Privately placed
corporate obligations may contain structural security features such as financial
covenants and call protections that provide investors greater protection against
credit deterioration, reinvestment risk or fluctuations in interest rates than
those typically found in publicly registered debt securities. Additionally,
investments in these securities are made after due diligence of the issuer,
typically including discussions with senior management and on-site visits to
company facilities. Ongoing monitoring includes direct periodic dialog with
senior management of the issuer and continuous monitoring of operating
performance and financial position. Every issue not rated by an independent
rating agency is internally rated with a formal rating affirmation at least once
a year.
Our corporate bonds portfolio includes $6.72 billion of below investment grade
bonds, $3.62 billion of which are privately placed. These securities are
diversified by issuer and industry sector. The below
investment grade corporate bonds portfolio is made up of 289 issuers. We employ
fundamental analyses of issuers and sectors along with macro and asset class
views to identify investment opportunities. This results in a portfolio with
broad exposure to the high yield market with an emphasis on idiosyncratic
positions reflective of our views of market conditions and opportunities.
Foreign government securities include 83.8% of Canadian governmental and
provincial securities (83.0% of which are held by our Canadian companies), 15.5%
backed by the U.S. government and 0.7% that are highly diversified in other
foreign governments.
ABS and MBS are structured securities that are primarily collateralized by
consumer or corporate borrowings and residential and commercial real estate
loans. The cash flows from the underlying collateral paid to the securitization
trust are generally applied in a pre-determined order and are designed so that
each security issued by the trust, typically referred to as a "class", qualifies
for a specific original rating.
For example, the "senior" portion or "top" of the capital structure, or rating
class, which would originally qualify for a rating of Aaa typically has priority
in receiving principal repayments on the underlying collateral and retains this
priority until the class is paid in full. In a sequential structure, underlying
collateral principal repayments are directed to the most senior rated Aaa class
in the structure until paid in full, after which principal repayments are
directed to the next most senior Aaa class in the structure until it is paid in
full. Senior Aaa classes generally share any losses from the underlying
collateral on a pro-rata basis after losses are absorbed by classes with lower
original ratings.
The payment priority and class subordination included in these securities serves
as credit enhancement for holders of the senior or top portions of the
structures. These securities continue to retain the payment priority features
that existed at the origination of the securitization trust. Other forms of
credit enhancement may include structural features
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2019 Form 10-K Investments
embedded in the securitization trust, such as overcollateralization, excess
spread and bond insurance. The underlying collateral may contain fixed interest
rates, variable interest rates (such as adjustable rate mortgages), or both
fixed and variable rate features.
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, broadly 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 equity investments. Exchange traded and mutual funds that have
fixed income securities as their underlying investments totaled $1.79 billion as
of December 31, 2019 , an increase of $1.39 billion compared to December 31,
2018 .
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. For further detail on our mortgage
loan portfolio, see Note 5 of the consolidated financial statements.
Limited partnership interests include $6.13 billion of private equity funds
interests, $1.04 billion of real estate funds interests and $906 million of
other funds interests as of December 31, 2019 . We have commitments to invest
additional amounts in limited partnership interests totaling $2.84 billion as of
December 31, 2019 .
Short-term investments primarily comprise money market funds, commercial paper,
U.S. Treasury bills and other short-term investments, including securities
lending collateral of $1.81 billion .
Other investments primarily comprise $1.20 billion of bank loans, $1.01 billion
of real estate, $894 million of policy loans, $666 million of agent loans (loans
issued to exclusive Allstate agents) and $140 million of derivatives as of
December 31, 2019 . For further detail on our use of derivatives, see Note 7 of
the consolidated financial statements.
Unrealized net capital gains (losses)
As of December 31,
($ in millions) 2019 2018
U.S. government and agencies $ 115 $ 131
Municipal 540 206
Corporate 1,988 (399 )
Foreign government 11 8
ABS 2 (4 )
MBS 95 94
Fixed income securities 2,751 36
Derivatives (3 ) (3 )
Equity method of accounting ("EMA") limited partnerships (4 ) -
Unrealized net capital gains and losses, pre-tax$ 2,744 $ 33 86 www.allstate.com
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Investments 2019 Form 10-K
Fixed income portfolio monitoring is a comprehensive process to identify and evaluate each security that may be other-than-temporarily impaired. The process includes a quarterly review of all securities to identify instances where the fair value of a security compared to its amortized cost is below established thresholds. The process also includes the monitoring of other impairment indicators such as ratings, ratings downgrades and payment defaults. The securities identified, in addition to other securities for which we may have a concern, are evaluated for potential other-than-temporary impairment using all reasonably available information relevant to the collectability or recovery of the security. Inherent in our evaluation of other-than-temporary impairment for these fixed income securities are assumptions and estimates about the financial condition and future earnings potential of the issue or issuer. Some of the factors that may be considered in evaluating whether a decline in fair value is other than temporary are: 1) Financial condition, near-term and long-term prospects of the issue or
issuer, including relevant industry specific market conditions and trends,
geographic location and implications of rating agency actions and offering
prices
2) Specific reasons that a security is in an unrealized loss position, including
overall market conditions which could affect liquidity
3) Length of time and extent to which the fair value has been less than
amortized cost or cost. All investments in an unrealized loss position as of
determining whether declines in value were other than temporary.
Gross unrealized gains (losses) on fixed income securities
As of December 31,
($ in millions) 2019 2018
Gross unrealized gains $ 2,847 $ 993
Gross unrealized losses (96 ) (957 )
Unrealized net capital gains and losses
Fixed income valuations increased primarily due to a decrease in risk-free interest rates and tighter credit spreads. Gross unrealized gains (losses) on fixed income securities by type
As of December 31, 2019
Amortized Gross unrealized
($ in millions) cost Gains Losses Fair value
Corporate $ 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
(96 )
The consumer goods, utilities and capital goods sectors comprise 28%, 13% and 12%, respectively, of the carrying value of our corporate fixed income securities portfolio as ofDecember 31, 2019 . The banking, energy and utilities sectors comprise 30%, 30% and 13%, respectively, of the gross unrealized losses of our corporate fixed income securities portfolio as ofDecember 31, 2019 . 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. As ofDecember 31, 2019 , we have not made the decision to sell and it is not more likely than not we will be required to sell fixed income securities with unrealized losses before recovery of the amortized cost basis. The Allstate
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2019 Form 10-K Investments
Net investment income
For the years ended December 31,
($ in millions) 2019 2018 2017
Fixed income securities $ 2,175 $ 2,077 $ 2,078
Equity securities 206 170 174
Mortgage loans 220 217 206
Limited partnership interests 471 705 889
Short-term investments 102 73 30
Other 262 272 236
Investment income, before expense 3,436 3,514 3,613
Investment expense (1) (2) (277 ) (274 ) (212 )
Net investment income $ 3,159 $ 3,240 $ 3,401
Market-based $ 2,893 $ 2,734 $ 2,661
Performance-based 543 780 952
Investment income, before expense
(1) Investment expense includes$81 million ,$71 million and$40 million of investee level expenses in 2019, 2018 and 2017, respectively, and has
increased compared to prior year, primarily due to growth in real estate
investments. Investee level expenses include depreciation and asset level
operating expenses on directly held real estate and other consolidated
investments.
(2) Investment expense includes
to the portion of reinvestment income on securities lending collateral paid
to the counterparties in 2019, 2018 and 2017, respectively.
Net investment income decreased 2.5% or
For the years ended December 31,
($ in millions) 2019 2018 2017
Limited partnerships
Private equity $ 330 $ 582 $ 725
Real estate 138 123 164
Performance-based - limited partnerships 468 705 889
Non-limited partnerships
Private equity 9 9 19
Real estate 66 66 44
Performance-based - non-limited partnerships 75 75 63
Total
Private equity 339 591 744
Real estate 204 189 208
Total performance-based $ 543 $ 780 $ 952
Investee level expenses (1) $ (74 ) $ (64 ) $ (35 ) (1) Investee level expenses include depreciation and asset level operating
expenses reported in investment expense.
Performance-based investment income decreased 30.4% or$237 million in 2019 compared to 2018, primarily due to lower asset appreciation related to private equity investments and lower valuations in the fourth quarter, on two private equity investments totaling $74 million. Performance-based investment results and income can vary significantly between periods and are influenced by economic conditions, equity market performance, comparable public company earnings multiples, capitalization rates, operating performance of the underlying investments and the timing of asset sales.
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Investments 2019 Form 10-K
Components of realized capital gains (losses) and the related tax effect
For the year December 31,
($ in millions) 2019 2018 2017
Impairment write-downs:
Fixed income securities $ (14 ) $ (10 ) $ (26 )
Equity securities - - (38 )
Mortgage loans - - (1 )
Limited partnership interests (6 ) (3 ) (32 )
Other investments (27 ) (1 ) (5 )
Total impairment write-downs (47 ) (14 ) (102 )
Change in intent write-downs - - (48 )
Net OTTI losses recognized in earnings (47 ) (14 ) (150 )
Sales 575 (215 ) 641
Valuation of equity investments - appreciation
(decline):
Equity securities 1,210 (594 ) -
Limited partnerships (1) 162 (97 ) -
Total valuation of equity investments 1,372 (691 ) -
Valuation and settlements of derivative
instruments (15 ) 43 (46 )
Realized capital gains and losses, pre-tax 1,885 (877 ) 445
Income tax (expense) benefit (397 ) 189 (147 )
Realized capital gains and losses, after-tax $ 1,488 $ (688 ) $ 298
Market-based $ 1,750 $ (946 ) $ 486
Performance-based 135 69 (41 )Realized capital gains and losses, pre-tax $ 1,885 $ (877 ) $ 445
(1) Relates to limited partnerships where the underlying assets are
predominately public equity securities.
Realized capital gains in 2019 related primarily to increased valuation of equity investments and gains on sales of fixed income securities. Impairment write-downs in 2019 and 2018 related to investment-specific circumstances. Sales in 2019 related primarily to fixed income securities in connection with ongoing portfolio management, as well as gains from limited partnerships. Sales in 2018 related primarily to fixed income securities in connection with ongoing portfolio management. Valuation and settlements of derivative instruments in 2019 primarily comprised losses on equity options and futures used for risk management, partially offset by gains on interest rate futures and total return swaps used for asset replication due to increases in equity indices. 2018 primarily comprised gains on foreign currency contracts due to the strengthening of theU.S. dollar and gains on equity options used for risk management due to a decrease in equity indices, partially offset by losses on total return swaps and equity options and futures used for asset replication due to decreases in equity indices. Realized capital gains (losses) for performance-based investments For the years ended December 31, ($ in millions) 2019 2018 2017 Impairment write-downs $ (6 ) $ (3 ) $ (32 ) Sales 103 7 15 Valuation of equity investments 31 36 - Valuation and settlements of derivative instruments 7 29 (24 ) Total performance-based $ 135 $ 69 $ (41 ) Realized capital gains for performance-based investments in 2019 primarily related to gains on sales of investments in directly held real estate, a gain on the sale of a limited partnership and increased valuation of equity investments. 2018 primarily related to increased valuation of equity investments and gains on valuation and settlements of derivative instruments. The Allstate
Corporation 89
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2019 Form 10-K Market Risk
Market Risk Market risk is the risk that we will incur losses due to adverse changes in interest rates, credit spreads, equity prices, commodity prices or currency exchange rates. Adverse changes to these rates and prices may occur due to changes in fiscal policy, the economic climate, the liquidity of a market or market segment, insolvency or financial distress of key market makers or participants or changes in market perceptions of credit worthiness and/or risk tolerance. Our primary market risk exposures are to changes in interest rates, credit spreads and equity prices. We also have direct and indirect exposure to commodity price changes through our diversified investments in timber, agriculture, infrastructure and energy primarily held in limited partnership interests and consolidated subsidiaries. The active management of market risk is integral to our results of operations. We may use the following approaches to manage exposure to market risk within defined tolerance ranges: 1) Rebalancing existing asset or liability portfolios
2) Changing the type of investments purchased in the future
3) Using derivative instruments to modify the market risk characteristics of
existing assets and liabilities or assets expected to be purchased
Overview In formulating and implementing guidelines for investing funds, we seek
to earn attractive risk-adjusted returns that enhance our ability to offer
competitive rates and prices to customers while contributing to stable profits
and long-term capital growth. Accordingly, our investment decisions and
objectives are informed by the underlying risks and product profiles. Investment
policies define the overall framework for managing market and other investment
risks, including accountability and controls over risk management activities.
Subsidiaries that conduct investment activities follow policies that have been
approved by their respective boards of directors and which specify the
investment limits and strategies that are appropriate given the liquidity,
surplus, product profile and regulatory requirements of the subsidiary.
Executive oversight of investment activities is conducted primarily through the
subsidiaries' boards of directors and legal entity investment committees. The
Enterprise Risk and Return Council ("ERRC") oversees the aggregate risk of
Allstate and its subsidiaries. Working in conjunction with the board or the
investment committee of each subsidiary, as applicable, the ERRC evaluates the
risk tolerance of each subsidiary and determines the aggregate risk tolerance of
the enterprise.
For life and annuity products, the asset-liability management ("ALM") policies
further define the overall framework for managing market and investment risks
and are approved by the subsidiaries' respective boards of directors. ALM
focuses on strategies to enhance yields, mitigate market risks and optimize
capital to improve profitability and returns while incorporating future expected
cash requirements to repay liabilities. These ALM policies specify limits,
ranges and/or targets for investments that best meet
business objectives in light of the unique demands and characteristics of the
product liabilities and are intended to result in a prudent, methodical and
effective adjudication of market risk and return.
We use widely-accepted quantitative and qualitative approaches to measure,
monitor and manage market risk. We evaluate our market risk exposure using
multiple measures including but not limited to:
• Duration, a measure of the price sensitivity of assets and liabilities to
changes in interest rates
• Value-at-risk, a statistical estimate of the probability that the change in
fair value of a portfolio will exceed a certain amount over a given time horizon
• Scenario analysis, an estimate of the potential changes in the fair value of a
portfolio that could occur under hypothetical market conditions defined by
changes to multiple market risk factors: interest rates, credit spreads, equity
prices or currency exchange rates
• Sensitivity analysis, an estimate of the potential changes in the fair value
of a portfolio that could occur using hypothetical shocks to a market risk
factor.
The selection of measures used in our sensitivity analysis should not be construed as our prediction of future market events, but only as an illustration of the potential effect of such an event.
In general, we establish investment portfolio asset allocation and market risk limits based upon a combination of these measures. The asset allocation limits place restrictions on the total funds that may be invested within an asset class. Comprehensive day-to-day management of market risk within defined tolerance ranges occurs as portfolio managers buy and sell within their respective markets based upon the acceptable boundaries established by investment policies. Although we apply a similar overall philosophy to market risk, the underlying business frameworks and the accounting and regulatory environments may differ between our products and therefore affect investment decisions and risk parameters. Interest rate risk is the risk that we will incur a loss due to adverse changes in interest rates relative to the characteristics of our interest-bearing assets and liabilities. Interest rate risk includes risks related to changes inU.S. Treasury yields and other key risk-free reference yields. This risk arises from many of our primary activities, as we invest substantial funds in interest-sensitive assets and issue interest-sensitive liabilities. Changes in interest rates can have favorable and unfavorable effects on our results. For example, increases in rates can improve investment income, but decrease the fair value of our fixed income securities portfolio and increase policyholder surrenders requiring us to liquidate assets. Decreases in rates could increase the fair value of our fixed income securities portfolio while decreasing investment income due to reinvesting at lower market yields and accelerating pay-downs and prepayments of certain investments. For our corporate debt, we monitor market interest rates and evaluate refinancing opportunities
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Market Risk 2019 Form 10-K
as maturity dates approach. To mitigate this risk, we ladder the maturity dates
of our debt. For our noncumulative perpetual preferred stock, we monitor market
dividend rates and evaluate opportunities to redeem or refinance on or after
specified dates. For further detail regarding our debt and our preferred stock,
see Note 12 of the consolidated financial statements and the Capital Resources
and Liquidity section of this Item.
We manage the interest rate risk in our assets relative to the interest rate
risk in our liabilities and our assessment of overall economic and capital risk.
One of the measures used to quantify this exposure is duration. The difference
in the duration of our assets relative to our liabilities is our duration gap.
To calculate the duration gap between assets and liabilities, we project asset
and liability cash flows and calculate their net present value using a risk-free
market interest rate adjusted for credit quality, sector attributes, liquidity
and other specific risks. Duration is calculated by revaluing these cash flows
at alternative interest rates and determining the percentage change in aggregate
fair value. The cash flows used in this calculation include the expected
maturity and repricing characteristics of our derivative financial instruments,
all other financial instruments, and certain other items including, unearned
premiums, claims and claims expense reserves, annuity liabilities and other
interest-sensitive liabilities.
The projections include assumptions (based upon historical market experience and
our experience) that reflect the effect of changing interest rates on the
prepayment, lapse, leverage and/or option features of instruments, where
applicable. The preceding assumptions relate primarily to callable municipal and
corporate bonds, fixed rate single and flexible premium deferred annuities,
mortgage-backed securities and municipal housing bonds. Additionally, the
calculations include assumptions regarding the renewal of property and casualty
products.
As of December 31, 2019, the difference between our asset and liability duration
was a (1.48) gap compared to a (1.16) gap as of December 31, 2018. The
calculation excludes traditional and interest-sensitive life insurance and
accident and health insurance products that are not considered financial
instruments. A negative duration gap indicates that the fair value of our
liabilities is more sensitive to interest rate movements than the fair value of
our assets, while a positive duration gap indicates that the fair value of our
assets is more sensitive to interest rate movements than the fair value of our
liabilities. Due to the relatively short duration of our property and casualty
liabilities, primarily related to auto and homeowners claims, the investments
generally maintain a positive duration gap between assets and liabilities. In
contrast, for our annuity products the duration gap may be positive or negative
as the assets and liabilities vary based on the characteristics of the products
in-force and investing activity. As of December 31, 2019, property and casualty
products had a positive duration gap while annuity products had a negative
duration gap.
To reduce the risk that investment returns are below levels required to meet the
funding needs of certain liabilities, we are executing our performance-based
strategy that supplements market risk with idiosyncratic risk. We are using
these investments, in addition to public equity securities, to support a portion
of our property and casualty products and long-term annuity liabilities.
Shorter-term annuity liabilities will continue to be invested in market-based
investments to generate cash flows that will fund future claims, benefits and
expenses, and that will earn stable returns across a wide variety of interest
rate and economic scenarios. Performance-based investments and public equity
securities are generally not interest-bearing; accordingly, using them to
support interest-bearing liabilities contributes toward a negative duration gap.
Interest rate shock analysis (1)
As of December 31,
($ in millions) 2019
2018
Increase in fair value of the assets net of liabilities (2) $ 1,209 $ 889 (1) Represents an immediate, parallel increase of 100 basis points based on
information and assumptions used in the duration calculations and market
interest rates as of December 31, 2019.
(2) Estimate excludes traditional and interest-sensitive life insurance andaccident and health insurance products that are not considered financial
instruments. The assets supporting these products totaled $12.14 billion and
$11.07 billion as of December 31, 2019 and 2018, respectively. Based on
assumptions described above, these assets would decrease in value by $649
million as of December 31, 2019 compared to a decrease of $593 million as of
December 31, 2018.
To the extent that conditions differ from the assumptions we used in these
calculations, duration and rate shock measures could be significantly impacted.
Additionally, our calculations assume the current relationship between
short-term and long-term interest rates (the term structure of interest rates)
will remain constant over time. As a result, these calculations may not fully
capture the effect of non-parallel changes in the term structure of interest
rates and/or large changes in interest rates.
Credit spread risk is the risk that we will incur a loss due to adverse changes
in credit spreads ("spreads"). Credit spread is the additional yield on fixed
income securities and loans above the risk-free rate (typically referenced as
the yield on U.S. Treasury securities) that market participants require to
compensate them for assuming credit, liquidity and/or prepayment risks. The
magnitude of the spread will depend on the likelihood that a particular issuer
will default. This risk arises from many of our primary activities, as we invest
substantial funds in spread-sensitive fixed income assets. We manage the spread
risk in our assets. One of the measures used to quantify this exposure is spread
duration. Spread duration measures the price sensitivity of the assets to
changes in spreads. For example, if spreads increase 100 basis points, the fair
value of an asset exhibiting a
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2019 Form 10-K Market Risk
spread duration of 5 is expected to decrease in value by 5%. Spread duration is calculated similarly to interest rate duration. As of December 31, 2019, the spread duration was 4.60 compared to 4.28 as of December 31, 2018. Credit spread shock analysis (1)
As of December 31,
($ in millions) 2019 2018
Decrease in net fair value of the assets (2) $ 2,877 $ 2,493
(1) Represents an immediate, parallel increase of 100 basis points across all
asset classes, industry sectors and credit ratings based on information and
assumptions used in the spread duration calculations and market interest
rates as of December 31, 2019.
(2) Reflects effects of tactical positions that include the use of credit
default swaps to manage spread risk.
Equity price risk is the risk that we will incur losses due to adverse changes
in the general levels of the markets.
Equity investments As of December 31, 2019, we held $7.28 billion in equity
securities, excluding those with fixed income securities as their underlying
investments, and limited partnership interests where the underlying assets are
predominately public equity securities, compared to $5.29 billion as of
December 31, 2018. 80.4% of the common stocks and other investments with public
equity risk supported property and casualty products as of December 31, 2019,
compared to 73.2% as of December 31, 2018. As of December 31, 2019, these
investments had an equity market portfolio beta of 1.02, compared to a beta of
1.00 as of December 31, 2018. Beta represents a widely used methodology to
describe, quantitatively, an investment's market risk characteristics relative
to an index such as the Standard & Poor's 500 Composite Price Index ("S&P 500").
Change in S&P 500 by 10%
As of December 31,
($ in millions) 2019 2018
Change in net fair value of equity investments $ 742 $ 527
We periodically use put options to reduce equity price risk or call options to
adjust our equity risk profile. Put options provide an offset to declines in
equity market values below a targeted level, while call options provide
participation in equity market appreciation above a targeted level. Options can
expire, terminate early or the option can be exercised. If the equity index does
not fall below the put's strike price or rise above the call's strike price, the
maximum loss on purchased puts and calls is limited to the amount of the premium
paid.
Limited partnership interests As of December 31, 2019, we held $7.17 billion in
limited partnership interests excluding those limited partnership interests
where the underlying assets are predominately public equity securities compared
to $6.86 billion as of December 31, 2018. 56.7% of the limited partnership
interests supported property and casualty products as of December 31, 2019,
compared to 53.9% as of December 31, 2018. These investments are primarily
comprised of private equity and real estate funds. These investments are
idiosyncratic in nature and a greater portion of the return is derived from
asset operating performance. They are not actively traded, and valuation changes
typically reflect the performance of the underlying asset.
Change in private market valuations by 10%
As of December 31,
($ in millions) 2019
2018
Change in net fair value of limited partnership interests $ 717 $
686
For limited partnership interests, quarterly changes in fair values may not be highly correlated to equity indices in the short-term and changes in value of these investments are generally recognized on a three-month delay due to the availability of the related investee financial statements. The illustrations noted above may not reflect our actual experience if the future composition of the portfolio (hence its beta) and correlation relationships differ from the historical relationships. Separate Accounts As of December 31, 2019 and 2018, we had separate account assets related to variable annuity and variable life contracts with account values totaling $3.04 billion and $2.81 billion, respectively. Equity risk exists for contract charges based on separate account balances and guarantees for death and/or income benefits provided by our variable products. In 2006, we disposed of substantially all of the variable annuity business through reinsurance agreements withThe Prudential Insurance Company of America , a subsidiary of Prudential Financial Inc. and therefore mitigated this aspect of our risk. Equity risk for our variable life business relates to contract charges and policyholder benefits. Total variable life contract charges, including reinsurance assumed, for 2019 and 2018 were $45 million and $44 million, respectively. Separate account liabilities related to variable life contracts were $85 million and $68 million as of December 31, 2019 and 2018, respectively. Equity-indexed Life and Annuity Liabilities As of December 31, 2019 and 2018, we had $1.92 billion and $1.83 billion, respectively, in equity-indexed life and annuity liabilities that provide customers with interest crediting rates based on the performance of the S&P 500. We hedge the majority of the risk associated with these liabilities using equity-indexed options and futures and eurodollar futures, maintaining risk within specified value-at-risk limits.
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Market Risk 2019 Form 10-K
Foreign currency exchange rate risk is the risk that we will incur economic losses due to adverse changes in foreign currency exchange rates. This risk primarily arises from our foreign equity investments, including common stocks, limited partnership interests, and our Canadian,Northern Ireland and Indian operations. We use foreign currency derivative contracts to partially offset this risk. As of December 31, 2019, we had $2.80 billion in foreign currency denominated equity investments, including the impact of foreign currency derivative contracts, $1.08 billion net investment in our foreign subsidiaries, primarily related to our Canadian operations, and $113 million in unhedged non-U.S. dollar fixed income securities. These amounts were $2.10 billion, $860 million, and $96 million, respectively, as of December 31, 2018.
Change in foreign currency exchange rates (1)
As of December 31,
($ in millions) 2019
2018
Decrease in value of foreign currency denominated instruments $ 402 $
306
(1) Represents a 10% immediate unfavorable change in each of the foreign
currency exchange rates to which we are exposed based on information and
assumptions used, including the impact of foreign currency derivative
contracts.
The modeling technique we use to report our currency exposure does not take into
account correlation among foreign currency exchange rates. Even though we
believe it is very unlikely that all of the foreign currency exchange rates that
we are exposed to would simultaneously decrease by 10%, we nonetheless stress
test our portfolio under this and other hypothetical extreme adverse market
scenarios. Our actual experience may differ from these results because of
assumptions we have used or because significant liquidity and market events
could occur that we did not foresee.
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2019 Form 10-K 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
As of December 31,
($ in millions) 2019 2018 2017
Preferred stock, common stock, treasury stock,
retained income and other shareholders' equity
items $ 24,048 $ 21,194 $ 20,662
Accumulated other comprehensive (loss) income 1,950 118 1,889
Total shareholders' equity 25,998 21,312 22,551
Debt 6,631 6,451 6,350
Total capital resources $ 32,629 $ 27,763 $ 28,901
Ratio of debt to shareholders' equity 25.5 % 30.3 % 28.2 %
Ratio of debt to capital resources 20.3 % 23.2 % 22.0 %
Shareholders' equity increased in 2019, primarily due to net income, increased net unrealized capital gains on investments and issuance of preferred stock, partially offset by common share repurchases and dividends paid to shareholders. In 2019, we paid dividends of $653 million and $134 million related to our common and preferred shares, respectively. Shareholders' equity decreased in 2018, primarily due to decreased net unrealized capital gains on investments, common share repurchases and dividends paid to shareholders, partially offset by net income and issuance of preferred stock. Common share repurchases As of December 31, 2019, there was $259 million remaining on the $3.00 billion common share repurchase program. In January 2020, we completed the $3.00 billion share repurchase program that commenced in November 2018. On February 6, 2020, the Board authorized a new $3.00 billion common share repurchase program that is expected to be completed by the end of 2021. In November 2019, we entered into an ASR agreement withGoldman Sachs & Co. LLC ("Goldman Sachs") to purchase $500 million of our outstanding common stock. Under the ASR agreement, we paid $500 million upfront and initially acquired 4.0 million shares. The ASR agreement settled on January 8, 2020, and we repurchased a total of 4.6 million shares at an average price of $109.51. During 2019, we repurchased 16.4 million common shares for $1.81 billion. The common share repurchases were completed through open market transactions and ASR agreements. Since 1995, we have acquired 724 million shares of our common stock at a cost of $35.18 billion, primarily as part of various stock repurchase programs. We have reissued 144 million common shares since 1995, primarily associated with our equity incentive plans, the 1999 acquisition ofAmerican Heritage Life Investment Corporation and the 2001 redemption of certain mandatorily redeemable preferred securities. Since 1995, total common shares outstanding has decreased by 580 million shares or 64.5%, primarily due to our repurchase programs. Common shareholder dividends On January 2, 2019, April 1, 2019, July 1, 2019, and October 1, 2019, we paid common shareholder dividends of $0.46, $0.50, $0.50 and $0.50, respectively. On November 15, 2019, we declared a common shareholder dividend of $0.50, payable on January 2, 2020. On February 20, 2020, we declared a common shareholder dividend of $0.54, payable on April 1, 2020. Issuance and redemption of preferred stock On August 8, 2019, we issued 46,000 shares of 5.100% Fixed Rate Noncumulative Perpetual Preferred Stock, Series H for gross proceeds of $1.15 billion. On October 15, 2019, we redeemed all 5,400 shares of our Fixed Rate Noncumulative Perpetual Preferred Stock, Series D, all 29,900 shares of our Fixed Rate Noncumulative Perpetual Preferred Stock, Series E, and all 10,000 shares of our Fixed Rate Noncumulative Perpetual Preferred Stock, Series F and the corresponding depository shares for $1.13 billion. On November 8, 2019, we issued 12,000 shares of 4.750% Fixed Rate Noncumulative Perpetual Preferred Stock, Series I for gross proceeds of $300 million. On January 15, 2020, we redeemed all 11,500 shares of Fixed Rate Noncumulative Preferred Stock, Series A and the corresponding depositary shares for $288 million. For additional details on these transactions, see Note 12 of the consolidated financial statements. Issuance and repayment of debt On June 10, 2019, we issued $500 million of 3.850% Senior Notes due 2049. Interest on the Senior Notes is payable semi-annually in arrears on February 10 and August 10 of each year, beginning on February 10, 2020. The Senior Notes are redeemable at any time at the applicable redemption price prior to the maturity date. The proceeds of this issuance are used for general corporate purposes. On May 16, 2019, we repaid $317 million of 7.450% Senior Notes, Series B, at maturity. 94 www.allstate.com
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Capital Resources and Liquidity 2019 Form 10-K
Financial ratings and strength
Senior long-term debt, commercial paper and insurance financial strength ratings
As of December 31, 2019
S&P Global
Moody's Ratings A.M. Best
The Allstate Corporation (debt) A3 A- a
AMB-1+
Allstate Insurance Company (insurance financial strength) Aa3 AA-
A+
Allstate Life Insurance Company (insurance financial strength) A2 A+
A+
Allstate Assurance Company (insurance financial strength) A2 N/A
A+
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. In May 2019,A.M. Best affirmedThe Allstate Corporation's debt and short-term issuer ratings of a and AMB-1+, respectively, and the insurer financial strength ratings of A+ forAllstate Insurance Company ("AIC"),Allstate Life Insurance Company ("ALIC"), andAllstate Assurance Company ("AAC"). The outlook for the ratings is stable. In July 2019, Moody's affirmedThe Allstate Corporation's debt and short-term issuer ratings of A3 and P-2, respectively, and the insurance financial strength rating of Aa3 for AIC. Moody's downgraded ALIC and AAC insurance financial strength ratings to A2 from A1 reflecting Moody's shift to a more standard single rating level positive adjustment for subsidiary company ratings. The outlook for the ratings is stable. In December 2019, S&P Global affirmedThe Allstate Corporation's debt and short-term issuer ratings of A- and A-2, respectively, and the insurance financial strength ratings of AA- for AIC and A+ for ALIC. The outlook for the ratings is stable. We have distinct and separately capitalized groups of subsidiaries licensed to sell property and casualty insurance that maintain separate group ratings. The ratings of these groups are influenced by the risks that relate specifically to each group. Many mortgage companies require property owners to have insurance from an insurance carrier with a secure financial strength rating from an accredited rating agency. In May 2019,A.M. Best affirmed the A rating of ANJ, which writes auto and homeowners insurance, and the A+ rating of North Light, our excess and surplus lines carrier. The outlook for the ANJ rating and North Light rating is stable. ANJ also has a Financial Stability Rating® of A" from Demotech, which was affirmed in November 2019. In March 2019,A.M. Best upgraded the CKIC, which underwrites personal lines property insurance inFlorida , rating to B+. CKIC also has a Financial Stability Rating of A' from Demotech that was affirmed in November 2019. ANJ, North Light and CKIC do not have support agreements with AIC. Allstate's domestic property and casualty and life insurance subsidiaries prepare their statutory-basis financial statements in conformity with accounting practices prescribed or permitted by the insurance department of the applicable state of domicile. Statutory surplus is a measure that is often used as a basis for determining dividend paying capacity, operating leverage and premium growth capacity, and it is also reviewed by rating agencies in determining their ratings. The property and casualty business is comprised of 29 insurance companies, each of which has individual company dividend limitations. As of December 31, 2019, total statutory surplus is $20.40 billion compared to $18.15 billion as of December 31, 2018. Property and casualty subsidiaries surplus was $16.19 billion as of December 31, 2019, compared to $14.33 billion as of December 31, 2018. Life insurance subsidiaries surplus was $4.21 billion as of December 31, 2019, compared to $3.82 billion as of December 31, 2018. TheNational Association of Insurance Commissioners ("NAIC") has developed financial relationships or tests known as the Insurance Regulatory Information System to assist state insurance regulators in monitoring the financial condition of insurance companies and identifying companies that require special attention or actions by state insurance regulators. The NAIC analyzes financial data provided by insurance companies using prescribed ratios, each with defined "usual ranges". Additional regulatory scrutiny may occur if a company's ratios fall outside the usual ranges for four or more of the ratios. Our domestic insurance companies have no significant departure from these ranges. The Allstate
Corporation 95
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2019 Form 10-K Capital Resources and Liquidity
Liquidity sources and uses Our potential sources and uses of funds principally
include the following activities below.
Activities for potential sources of funds
Property- Service Allstate Allstate Allstate Corporate
Liability Businesses Life Benefits Annuities and Other
Receipt of insurance premiums ü ü ü ü
Recurring service fees ü ü ü Contractholder fund deposits ü ü ü Reinsurance and indemnification program ü ü ü ü ü recoveries Receipts of principal, interest and dividends on ü ü ü
ü ü ü investments Sales of investments ü ü ü ü ü ü Funds from securities lending, commercial paper and ü ü ü ü line of credit agreements Intercompany loans ü ü ü ü ü ü Capital contributions from ü ü ü ü ü ü
parent
Dividends or return of ü ü ü ü ü ü capital from subsidiaries Tax refunds/settlements ü ü ü ü ü ü Funds from periodic issuance ü of additional securities Receipt of intercompany settlements related to ü employee benefit plans
Activities for potential uses of funds
Property- Service Allstate Allstate Allstate Corporate
Liability Businesses Life Benefits Annuities and Other
Payment of claims and related
expenses ü ü
Payment of contract benefits, ü ü ü
surrenders and withdrawals
Reinsurance cessions and
indemnification program ü ü ü ü ü
payments
Operating costs and expenses ü ü ü ü ü ü
Purchase of investments ü ü ü ü ü ü
Repayment of securities
lending, commercial paper and ü ü ü ü
line of credit agreements
Payment or repayment of ü ü ü ü ü ü
intercompany loans
Capital contributions to ü ü ü ü ü
subsidiaries ü
Dividends or return of
capital to ü ü ü ü ü ü
shareholders/parent company
Tax payments/settlements ü ü ü ü ü ü
Common share repurchases ü
Debt service expenses and ü ü
repayment
Payments related to employee ü ü ü ü ü ü
benefit plans
Payments for acquisitions ü ü ü ü ü ü
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.
As of December 31, 2019, we held $12.79 billion of cash, U.S. government and
agencies fixed income securities, and public equity securities (excluding
non-redeemable preferred stocks and foreign equities) which, under normal market
conditions, we would
expect to be able to liquidate within one week. In addition, we regularly
estimate how much of the total portfolio, which includes high quality corporate
fixed income and municipal holdings, can be reasonably liquidated within one
quarter. These estimates are subject to considerable uncertainty associated with
evolving market conditions. As of December 31, 2019, cash and estimated
liquidity available within one quarter, under normal market conditions and at
current market prices, was $27.25 billion.
Certain remote events and circumstances could constrain our liquidity. Those
events and circumstances include, for example, a catastrophe resulting in
extraordinary losses, a downgrade in our senior long-term debt ratings to
non-investment grade
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Capital Resources and Liquidity 2019 Form 10-K
status, or a downgrade in AIC's or ALIC's financial strength ratings. The rating agencies also consider the interdependence of our individually rated entities; therefore, a rating change in one entity could potentially affect the ratings of other related entities.The Allstate 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 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 At the parent holding company level, we have deployable assets totaling $2.30 billion as of December 31, 2019, comprising cash and investments that are generally saleable within one quarter. Deployable assets increased by the proceeds from the Preferred Stock, Series I issuance, which were subsequently used for the Series A redemption that occurred on January 15, 2020. The substantial earnings capacity of the operating subsidiaries is the primary source of capital generation for the Corporation. The payment of dividends by AIC toThe Allstate Corporation is limited byIllinois insurance law to formula amounts based on statutory net income and statutory surplus, as well as the timing and amount of dividends paid in the preceding twelve months. 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 $3.73 billion, less dividends paid during the preceding twelve months measured at that point in time. Notification and approval of intercompany lending activities are also required by theIllinois Department of Insurance for those transactions that exceed formula amounts based on statutory admitted assets and statutory surplus. These holding company assets and subsidiary dividends provide funds for the parent company's fixed charges and other corporate purposes. Intercompany dividends were paid in 2019, 2018 and 2017 between the following companies: AIC, Allstate Insurance Holdings, LLC ("AIH"), the Corporation, ALIC, American Heritage Life Insurance Company ("AHL") and Allstate Financial Insurance Holdings Corporation ("AFIHC"). Intercompany dividends ($ in millions) 2019 2018 2017 AIC to AIH $ 2,732 $ 2,874 $ 1,555 AIH to the Corporation 2,747 2,897 1,613 ALIC to AIC 75 250 600 AHL to AFIHC 80 55 70 AFIHC to the Corporation 50 - - 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 December 31, 2019, we satisfied all of the tests with no current restrictions on the payment of preferred stock dividends. There were no capital contributions paid by the Corporation to AIC or capital contributions by AIC to ALIC in 2019, 2018 or 2017. 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 2019, we did not defer interest payments on the subordinated debentures. Additional resources to support liquidity are as follows: • The Corporation has access to a commercial paper facility with a borrowing
limit of $1.00 billion to cover short-term cash needs. As of December 31,
2019, there were no balances outstanding and therefore the remaining
borrowing capacity was $1.00 billion.
• 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
The Allstate Corporation 97
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2019 Form 10-K Capital Resources and Liquidity
under the facility. This facility contains an increase provision that would allow up to an additional $500 million of borrowing. 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 15.9% as of December 31, 2019. 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 2019.
• 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 581 million shares of treasury stock as of December 31,
2019), 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.
Liquidity exposure Contractholder funds were $17.69 billion as of December 31, 2019. Contractholder funds by contractual withdrawal provisions ($ in millions) December 31, 2019 Percent to total Not subject to discretionary withdrawal $ 2,718 15.4 %
Subject to discretionary withdrawal with adjustments: Specified surrender charges (1)
4,760 26.9
Market value adjustments (2) 808 4.6
Subject to discretionary withdrawal without adjustments (3) 9,406 53.1
Total contractholder funds (4) $ 17,692 100.0 %
(1) Includes $1.46 billion of liabilities with a contractual surrender charge of
less than 5% of the account balance.
(2) $369 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. $168 million of
these contracts have their 30-45 day window period in 2020.
(3) 89% of these contracts have a minimum interest crediting rate guarantee of
3% or higher.
(4) Includes $698 million of contractholder funds on variable annuities
reinsured to The Prudential Insurance Company of America , a subsidiary of
Prudential Financial Inc., in 2006.
Retail life and annuity products may be surrendered by customers for a variety
of reasons. Reasons unique to individual customers include a current or
unexpected need for cash or a change in life insurance coverage needs. Other key
factors that may impact the likelihood of customer surrender include the level
of the contract surrender charge, the length of time the contract has been in
force, distribution channel, market interest rates, equity market conditions and
potential tax implications.
In addition, the propensity for retail life insurance policies to lapse is lower
than it is for fixed annuities because of the need for the insured to be
re-underwritten upon policy replacement.
The surrender and partial withdrawal rate on deferred fixed annuities and
interest-sensitive life insurance products, based on the beginning of year
contractholder funds, was 6.0% in 2019 and 7.2% in 2018. We strive to promptly
pay customers who request cash surrenders; however, statutory regulations
generally provide up to six months in most states to fulfill surrender requests.
Our asset-liability management practices enable us to manage the differences
between the cash flows generated by our investment portfolio and the expected
cash flow requirements of our life insurance and annuity product obligations.
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Capital Resources and Liquidity 2019 Form 10-K
Contractual obligations and commitments Our contractual obligations as of
December 31, 2019, and the payments due by period are shown in the following
table.
Contractual obligations and payments due by period
As of December 31, 2019
Less than 1 Over 3 years
($ in millions) Total year 1 to 3 years to 5 years Over 5 years
Liabilities for collateral (1) $ 1,829 $ 1,829 $ - $ - $ -
Contractholder funds (2) 35,751 2,058 3,903 3,561 26,229
Reserve for life-contingent contract
benefits (2) 38,446 1,449 2,642 2,424 31,931
Long-term debt (3) 13,869 316 872 1,335 11,346
Operating leases (4) 644 133 223 151 137
Unconditional purchase obligations (4) 590 192 239 109 50
Defined benefit pension plans and other
postretirement benefit plans (4)(5) 967 47 111 115 694
Reserve for property and casualty
insurance claims and claims expense (6) 27,712 12,317 8,707 3,085 3,603
Other liabilities and accrued expenses
(7)(8) 5,320 5,025 266 17 12
Net unrecognized tax benefits (9) 70 58 12 - -
Total contractual cash obligations $ 125,198 $ 23,424 $
16,975 $ 10,797 $ 74,002
(1) Liabilities for collateral are typically fully secured with cash or
short-term investments. We manage our short-term liquidity position to
ensure the availability of a sufficient amount of liquid assets to
extinguish short-term liabilities as they come due in the normal course of
business, including utilizing potential sources of liquidity as disclosed
previously.
(2) Contractholder funds represent interest-bearing liabilities arising from the
sale of products such as interest-sensitive life and fixed annuities,
including immediate annuities without life contingencies. The reserve for
life-contingent contract benefits relates primarily to traditional life
insurance, immediate annuities with life contingencies and voluntary
accident and health insurance. These amounts reflect the present value of
estimated cash payments to be made to contractholders and policyholders.
Certain of these contracts, such as immediate annuities without life
contingencies, involve payment obligations where the amount and timing of
the payment are essentially fixed and determinable. These amounts relate to
(i) policies or contracts where we are currently making payments and will
continue to do so and (ii) contracts where the timing of a portion or all of
the payments has been determined by the contract. Other contracts, such as
interest-sensitive life, fixed deferred annuities, traditional life
insurance and voluntary accident and health insurance, involve payment
obligations where a portion or all of the amount and timing of future
payments is uncertain. For these contracts, we are not currently making
payments and will not make payments until (i) the occurrence of an insurable
event such as death or illness or (ii) the occurrence of a payment
triggering event such as the surrender or partial withdrawal on a policy or
deposit contract, which is outside of our control. For immediate annuities
with life contingencies, the amount of future payments is uncertain since
payments will continue as long as the annuitant lives. We have estimated the
timing of payments related to these contracts based on historical experience
and our expectation of future payment patterns. Uncertainties relating to
these liabilities include mortality, morbidity, expenses, customer lapse and
withdrawal activity, estimated additional deposits for interest-sensitive
life contracts, and renewal premium for life policies, which may
significantly impact both the timing and amount of future payments. Such
cash outflows reflect adjustments for the estimated timing of mortality,
retirement, and other appropriate factors, but are undiscounted with respect
to interest. As a result, the sum of the cash outflows shown for all years
in the table exceeds the corresponding liabilities of $17.69 billion for
contractholder funds and $12.30 billion for reserve for life-contingent
contract benefits as included in the Consolidated Statements of Financial
Position as of December 31, 2019. The liability amount in the Consolidated
Statements of Financial Position reflects the discounting for interest as
well as adjustments for the timing of other factors as described above.
Future premium collections are not included in the amounts presented in the
table above.
(3) Amount differs from the balance presented on the Consolidated Statements of
Financial Position as of December 31, 2019, because the long-term debt
amount above includes interest and excludes debt issuance costs.
(4) Our payment obligations relating to operating leases, unconditional purchase
obligations and pension and other postretirement benefits ("OPEB")
contributions are managed within the structure of our intermediate to
long-term liquidity management program.
(5) The pension plans' obligations in the next 12 months represent our planned
contributions to certain unfunded non-qualified plans where the benefit
obligation exceeds the assets, and the remaining years' contributions are
projected based on the average remaining service period using the current
underfunded status of the plans. The OPEB plans' obligations are estimated
based on the expected benefits to be paid. These liabilities are discounted
with respect to interest, and as a result the sum of the cash outflows shown
for all years in the table exceeds the corresponding liability amount of
$534 million included in other liabilities and accrued expenses on the
Consolidated Statements of Financial Position.
(6) Reserve for property and casualty insurance claims and claims expense is an
estimate of amounts necessary to settle all outstanding claims, including
claims that have been IBNR as of the balance sheet date. We have estimated
the timing of these payments based on our historical experience and our
expectation of future payment patterns. However, the timing of these
payments may vary significantly from the amounts shown above, especially for
IBNR claims. The ultimate cost of losses may vary materially from recorded
amounts that are our best estimates.
(7) Other liabilities primarily include accrued expenses and certain benefit
obligations and claim payments and other checks outstanding. Certain of
these long-term liabilities are discounted with respect to interest, as a
result, the sum of the cash outflows shown for all years in the table may
exceed the corresponding liability amount.
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2019 Form 10-K Capital Resources and Liquidity
(8) Balance sheet liabilities not included in the table above include unearned
and advance premiums of $16.13 billion and gross deferred tax liabilities of
$2.35 billion. These items were excluded as they do not meet the definition
of a contractual liability as we are not contractually obligated to pay
these amounts to third parties. Rather, they represent an accounting
mechanism that allows us to present our financial statements on an accrual
basis. In addition, other liabilities of $280 million were not included in
the table above because they did not represent a contractual obligation or
the amount and timing of their eventual payment was sufficiently uncertain.
(9) Net unrecognized tax benefits represent our potential future obligation to
the taxing authority for a tax position that was not recognized in the
consolidated financial statements. We believe it is reasonably possible that
a decrease of up to $58 million in unrecognized tax benefits may occur
within the next twelve months due to
obligation may be for an amount different than what we have accrued.
Contractual commitments and periods in which commitments expire
As of December 31, 2019
Less than 1 Over 3 years
($ in millions) Total year 1 to 3 years to 5 years Over 5 years
Other commitments - conditional $ 205 $ 91 $ 46 $ 8 $ 60
Other commitments - unconditional 2,889 284 250 385 1,970
Total commitments $ 3,094 $ 375 $ 296 $ 393 $ 2,030
Contractual commitments represent investment commitments such as private
placements, limited partnership interests and other loans. Limited partnership
interests are typically funded over the commitment period which is shorter than
the contractual expiration date of the partnership and as a result, the actual
timing of the funding may vary.
We have agreements in place for services we conduct, generally at cost, between
subsidiaries relating to insurance, reinsurance, loans and capitalization. All
material intercompany transactions have been appropriately eliminated in
consolidation. Intercompany transactions among insurance subsidiaries and
affiliates have been approved by the appropriate departments of insurance as
required.
For a more detailed discussion of our off-balance sheet arrangements, see Note 7
of the consolidated financial statements.
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Enterprise Risk and Return Management 2019 Form 10-K
Enterprise Risk and Return Management
In addition to the normal risks of the business, Allstate is subject to
significant risks as an insurer and a provider of other products and services.
These risks are discussed in more detail in the Risk Factors section of this
document. We regularly identify, measure, manage, monitor and report all
significant risks. Major categories of enterprise risk are strategic, insurance,
investment, financial, operational and culture.
Allstate manages these risks through an Enterprise Risk and Return Management
("ERRM") framework that includes governance, processes, culture, and activities
that are performed on an integrated, enterprise-wide basis, following our risk
and return principles. Our legal and capital structures are designed to manage
capital and solvency on a legal entity basis. Our risk-return principles define
how we operate and guide risk and return decision making. These principles state
that our priority is to maintain a strong foundation by protecting solvency,
complying with laws and acting with integrity. Building upon this foundation, we
strive to build strategic value and optimize risk and return.
[[Image Removed: errmv2.jpg]]
Governance ERRM governance includes board oversight, an executive management
committee, and enterprise and market-facing business chief risk officers.
• The Allstate Corporation Board of Directors ("Allstate Board") has overall
responsibility for oversight of Management's design and implementation of
ERRM.
• The Risk and Return Committee ("RRC") of the Allstate Board oversees
effectiveness of the ERRM program, governance structure and risk-related
decision-making, while focusing on the Company's overall risk profile.
• The Audit Committee oversees the effectiveness of internal controls over
financial reporting, disclosure controls and procedures as well as
management's risk control framework and cybersecurity program.
• The ERRC, directs ERRM by establishing risk and return targets, determining
economic capital levels and monitoring integrated strategies and actions from
an enterprise risk and return perspective.
The ERRC consists of Allstate's chief executive officer, vice chair, chief financial officer, chief risk officer and other senior leaders. • Other key committees work with the ERRC to direct ERRM activities, including
the Operating Committee, the Operational Risk Council, the Information
Security Council, the Corporate Asset Liability Committee, liability
governance committees, and investment committees.
Key risks are assessed and reported through comprehensive ERRM reports prepared
for senior management and the RRC. The risk summary report communicates
alignment of Allstate's risk profile with risk and return principles while
providing a perspective on risk position. Discussion promotes active engagement
with management and the RRC. Internal controls over key risks are managed and
reported to senior management and the Audit Committee of the Company through a
semiannual risk control dashboard. Annually, we review risks related to the
strategic plan, operating plan, and incentive compensation programs with the
Allstate Board.
The Allstate Corporation 101
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2019 Form 10-K Enterprise Risk and Return Management
Framework We apply these principles using an integrated ERRM framework that focuses on assessment, transparency and dialogue. Our framework provides a comprehensive view of risks and is used by senior management and business managers to drive risk-return based decisions. We continually validate and improve our ERRM practices by benchmarking and obtaining external perspectives. Management and the ERRC rely on internal and external perspectives to determine an appropriate level of target economic capital. Internal perspectives include enterprise solvency and volatility assessments, stress scenarios, model assumptions, and management judgment. External considerations include NAIC risk-based capital as well as S&P's, Moody's, andA.M. Best's capital adequacy measurement. Our economic capital reflects management's view of the aggregate level of capital necessary to satisfy stakeholder interests, manage Allstate's risk profile and maintain financial strength. The impact of strategic initiatives on enterprise risk is evaluated through the economic capital framework. The NAIC has adopted the Risk Management and Own Risk and Solvency Assessment Model Act ("ORSA Model Act"), which has been enacted by our insurance subsidiaries' domiciliary states. The ORSA Model Act requires that insurers maintain a risk management framework and conduct an internal own risk and solvency assessment of the insurer's material risks in normal and stressed environments. Results of the assessment are filed annually. Allstate's risk appetite is measured through our economic capital framework. The enterprise risk appetite is cascaded into individual risk limits which set boundaries on the amount of risk we are willing to accept from one specific risk category before escalating for further management discussion and action. Risk limits are established based upon expected returns, volatility, potential tail losses, and impact on the enterprise portfolio. To effectively operate within risk limits and for risk-return optimization, business units establish risk limits and capital targets specific to their businesses. Allstate's risk management strategies adapt to changes in business and market environments. Process Our ERRM framework establishes a basis for transparency and dialogue across the enterprise and for continuous learning by embedding our risk and return management culture of identifying, assessing, managing, monitoring and reporting risks within the organization. Allstate designs business and enterprise strategies that seek to optimize risk-adjusted returns on capital. Risks are managed at both the legal entity and enterprise level. A summary of our process to manage each of our major risk categories follows: Strategic risk and return management addresses loss associated with inadequate or flawed business planning or strategy setting, including product mix, mergers or acquisitions and market positioning, and unexpected changes within the market or regulatory environment in which Allstate operates. This includes reputational risk, which is the potential for negative publicity regarding a company's conduct or business practices to adversely impact its profitability, operations, consumer base, or require costly litigation and other defensive measures. We manage strategic risk through the Allstate Board and senior management strategy reviews that include a risk and return assessment of our strategic plans and ongoing monitoring of our strategic actions, key assumptions and the external competitive environment. Using the ERRM framework, Allstate designs strategies that seek to optimize risk-adjusted returns on economic capital for risk types including interest rate risk, credit risk, equity investments, including those with idiosyncratic return potential, auto profitability, and growing property exposure. Insurance risk and return management addresses fluctuations in the timing, frequency, and severity of benefits, expenses, and premiums relative to the return expectations inclusive of systemic risk, concentration of insurance exposures, policy terms, reinsurance coverage, and claims handling practices. Insurance risk exposures include our operating results and financial condition, claims frequency and severity, catastrophes and severe weather, and mortality and morbidity risk. Insurance risk exposures are measured and monitored with different approaches including: • Stochastic methods: measures and monitors risks such as natural catastrophes
and severe weather. We develop probabilistic estimates of risk based on our
exposures, historical observed volatility and/or industry-recognized models
in the case of catastrophe risk.
• Scenario analysis: measures and monitors risks and estimated losses due to
extreme but plausible insurance-related events such as multiple hurricanes
and/or wildfires. Scenarios evaluated include combined multiple event
scenarios across risk categories and time periods, considering the effects of
macroeconomic conditions.
Investment risk and return management addresses financial loss due to changes in
the valuations of assets held in the Allstate investment portfolio, as well as
liability valuation within the Life and Annuity business. Such losses may be
caused by macro developments, such as changes to interest rates, credit spreads,
and equity price levels, or could be specific to individual investments in the
portfolio. These losses can encompass both daily market volatility and permanent
impairments of capital due to credit defaults and equity write-downs.
Investment risk exposures include interest rate risk, credit spread risk, equity
price risk and foreign currency exchange rate risk.
Investment risk exposures are measured and monitored in a number of ways
including:
• Sensitivity analysis: measures the impact from a unit change in a market risk
input.
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Enterprise Risk and Return Management 2019 Form 10-K
• Stochastic and probabilistic estimation of potential losses: combinesportfolio risk exposures with historical or recent market volatilities and
correlations to assess the potential range of future investment results.
• Scenario analysis: measures material adverse outcomes such as shock scenarios
applied to credit, public and private equity markets.
Some of the stress scenarios are a combination of multiple scenarios across risk
categories and over multiple time periods, considering the effects of
macroeconomic conditions.
Financial risk and return management addresses the risk of insufficient cash
flows to meet corporate or policyholder needs, risk of inadequate aggregate
capital or capital within any subsidiary, inability to access capital markets,
credit risk that arises when an external party fails to meet a contractual
obligation such as reinsurance for ceded claims, or risk associated with a
business counterparty default.
We actively manage our capital and liquidity levels in light of changing market,
economic, and business conditions. Our capital position, capital generation
capacity, and targeted risk profile provide strategic and financial flexibility.
We generally assess solvency on a statutory accounting basis, but also consider
holding company capital and liquidity needs. Current enterprise capital, which
exceeds economic targeted levels, is based on a combination of statutory surplus
and deployable assets at the parent holding company level.
Operational risk and return management addresses loss as a result of the failure
of people, processes, systems or culture. Operational risk exposures include
human capital, privacy, regulatory compliance, ethics, fraud, system
availability, cybersecurity, data quality, disaster recovery and business
continuity.
Operational risk is managed at the enterprise and market-facing business levels,
through an integrated Operational Risk and Return Management ("ORRM") program,
with resources throughout the enterprise identifying, measuring, monitoring,
managing, and reporting on operational risks at a detailed level.
From time to time, we engage independent advisors to assess and consult on
operational risks. We also perform assessments of the quality of our operational
risk program and identify opportunities to strengthen our internal controls.
[[Image Removed: new.jpg]] Culture risk and return management addresses the
potential for loss of stakeholder value from a suboptimal work environment,
missed opportunities, or ineffective risk management practices. Allstate defines
organization culture as a self-sustaining system of shared values, principles
and priorities that shape beliefs, drive behavior and influence decision-making
within an organization.
Culture is managed based on a set of core cultural elements that have been
established as a basis for assessment and measurement. Results of culture risk
assessment are reported to the ERRC and RRC throughout the year.
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2019 Form 10-K Application of Critical Accounting Estimates
Application of Critical Accounting Estimates The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the consolidated financial statements. The most critical estimates, presented in the order they appear in the Consolidated Statements of Financial Position, include those used in determining: • Fair value of financial assets
• Impairment of fixed income securities
• Deferred policy acquisition costs amortization
• Evaluation of goodwill for impairment
• Reserve for property and casualty insurance claims and claims expense
estimation
• Reserve for life-contingent contract benefits estimation
• [[Image Removed: new.jpg]] Pension and other postretirement plans net costs
and assumptions
In making these determinations, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to our businesses and operations. It is reasonably likely that changes in these estimates could occur from period to period and result in a material impact on our consolidated financial statements. A summary of each of these critical accounting estimates follows. For a more detailed discussion of the effect of these estimates on our consolidated financial statements, and the judgments and assumptions related to these estimates, see the referenced sections of this document. For a more detailed summary of our significant accounting policies, see the notes to the consolidated financial statements. Fair value of financial assets Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We are responsible for the determination of fair value of financial assets and the supporting assumptions and methodologies. We use independent third-party valuation service providers, broker quotes and internal pricing methods to determine fair values. We obtain or calculate only one single quote or price for each financial instrument. Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of proprietary models, produce valuation information in the form of a single fair value for individual fixed income and other securities for which a fair value has been requested under the terms of our agreements. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, liquidity spreads, currency rates, and other information, as applicable. Credit and liquidity spreads are typically implied from completed transactions and transactions of comparable securities. Valuation service providers also use proprietary discounted cash flow models that are widely accepted in the financial services industry and similar to those used by other market participants to value the same financial instruments. The valuation models take into account, among other things, market observable information as of the measurement date, as described above, as well as the specific attributes of the security being valued including its term, interest rate, credit rating, industry sector, and where applicable, collateral quality and other issue or issuer specific information. Executing valuation models effectively requires seasoned professional judgment and experience. For certain equity securities, valuation service providers provide market quotations for completed transactions on the measurement date. In cases where market transactions or other market observable data is limited, the extent to which judgment is applied varies inversely with the availability of market observable information. For certain of our financial assets measured at fair value, where our valuation service providers cannot provide fair value determinations, we obtain a single non-binding price quote from a broker familiar with the security who, similar to our valuation service providers, may consider transactions or activity in similar securities among other information. The brokers providing price quotes are generally from the brokerage divisions of financial institutions with market making, underwriting and distribution expertise regarding the security subject to valuation. The fair value of certain financial assets, including privately placed corporate fixed income securities and free-standing derivatives, for which our valuation service providers or brokers do not provide fair value determinations, is developed using valuation methods and models widely accepted in the financial services industry. Our internal pricing methods are primarily based on models using discounted cash flow methodologies that develop a single best estimate of fair value. Our models generally incorporate inputs that we believe are representative of inputs other market participants would use to determine fair value of the same instruments, including yield curves, quoted market prices of comparable securities or instruments, published credit spreads, and other applicable market data as well as instrument-specific characteristics that include, but are not limited to, coupon rates, expected cash flows, sector of the issuer, and call provisions. Because judgment is required in developing the fair values of these financial assets, they may differ from the amount actually received to sell an asset in an orderly transaction between market participants at the measurement date. Moreover, the use of different valuation assumptions may have a material effect on the financial assets' fair values.
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For most of our financial assets measured at fair value, all significant inputs
are based on or corroborated by market observable data, and significant
management judgment does not affect the periodic determination of fair value.
The determination of fair value using discounted cash flow models involves
management judgment when significant model inputs are not based on or
corroborated by market observable data. However, where market observable data is
available, it takes precedence, and as a result, no range of reasonably likely
inputs exists from which the basis of a sensitivity analysis could be
constructed.
We gain assurance that our financial assets are appropriately valued through the
execution of various processes and controls designed to ensure the overall
reasonableness and consistent application of valuation methodologies, including
inputs and assumptions, and compliance with accounting standards. For fair
values received from third parties or internally estimated, our processes and
controls are designed to ensure that the valuation methodologies are appropriate
and consistently applied, the inputs and assumptions are reasonable and
consistent with the objective of determining fair value, and the fair values are
accurately recorded. For example, on a continuing basis, we assess the
reasonableness of individual fair values that have stale security prices or that
exceed certain thresholds as compared to previous fair values received from
valuation service providers or brokers or derived from internal models. We
perform procedures to understand and assess the methodologies, processes and
controls of valuation service providers.
In addition, we may validate the reasonableness of fair values by comparing
information obtained from valuation service providers or brokers to other
third-party valuation sources for selected securities. We perform ongoing price
validation procedures such as back-testing of actual sales, which corroborate
the various inputs used in internal models to market observable data. When fair
value determinations are expected to be more variable, we validate them through
reviews by members of management who have relevant expertise and who are
independent of those charged with executing investment transactions.
We also perform an analysis to determine whether there has been a significant
decrease in the volume and level of activity for the asset when compared to
normal market activity, and if so, whether transactions may not be orderly.
Among the indicators we consider in determining whether a significant decrease
in the volume and level of market activity for a specific asset has occurred
include the level of new issuances in the primary market, trading volume in the
secondary market, level of credit spreads over historical levels, bid-ask
spread, and price consensuses among market participants and sources. If evidence
indicates that prices are based on transactions that are not orderly, we place
little, if any, weight on the transaction price and will estimate fair value
using an internal model. As of December 31, 2019 and 2018, we did not adjust
fair values provided by our valuation service providers or brokers or substitute
them with an internal model for such securities.
Fixed income, equity securities and short-term investments by source of fair value
determination
December 31, 2019
Percent
($ in millions) Fair value to total
Fair value based on internal sources $ 2,611 3.7 %
Fair value based on external sources (1) 68,851 96.3
Total $ 71,462 100.0 %
(1) Includes $373 million that are valued using broker quotes and $269 million
that are valued using quoted prices or quoted net asset values from deal
sponsors.
For additional detail on fair value measurements, see Note 6 of the consolidated
financial statements.
Impairment of fixed income securities For fixed income securities classified as
available-for-sale, the difference between fair value and amortized cost, net of
certain other items and deferred income taxes (as disclosed in Note 5 of the
consolidated financial statements), is reported as a component of AOCI on the
Consolidated Statements of Financial Position and is not reflected in the
operating results of any period until reclassified to net income upon the
consummation of a transaction with an unrelated third party or when a write-down
is recorded due to an other-than-temporary decline in fair value. We have a
comprehensive portfolio monitoring process to identify and evaluate each fixed
income security whose carrying value may be other-than-temporarily impaired.
For each fixed income security in an unrealized loss position, we assess whether
management with the
appropriate authority has made the decision to sell or whether it is more likely
than not we will be required to sell the security before recovery of the
amortized cost basis for reasons such as liquidity, contractual or regulatory
purposes. If a security meets either of these criteria, the security's decline
in fair value is considered other than temporary and is recorded in earnings.
If we have not made the decision to sell the fixed income security and it is not
more likely than not we will be required to sell the fixed income security
before recovery of its amortized cost basis, we evaluate whether we expect to
receive cash flows sufficient to recover the entire amortized cost basis of the
security. We use our best estimate of future cash flows expected to be collected
from the fixed income security, discounted at the security's original or current
effective rate, as appropriate, to calculate a recovery value and determine
whether a credit loss exists. The determination of cash flow estimates is
inherently subjective, and methodologies may vary depending on
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2019 Form 10-K Application of Critical Accounting Estimates
facts and circumstances specific to the security. All reasonably available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable assumptions and forecasts, is considered when developing the estimate of cash flows expected to be collected. That information generally includes, but is not limited to, the remaining payment terms of the security, prepayment speeds, foreign exchange rates, the financial condition and future earnings potential of the issue or issuer, expected defaults, expected recoveries, the value of underlying collateral, vintage, geographic concentration, available reserves or escrows, current subordination levels, third-party guarantees and other credit enhancements. Other information, such as industry analyst reports and forecasts, sector credit ratings, financial condition of the bond insurer for insured fixed income securities, and other market data relevant to the realizability of contractual cash flows, may also be considered. The estimated fair value of collateral will be used to estimate recovery value if we determine that the security is dependent on the liquidation of collateral for ultimate settlement. If the estimated recovery value is less than the amortized cost of the security, a credit loss exists and an other-than-temporary impairment for the difference between the estimated recovery value and amortized cost is recorded in earnings. The portion of the unrealized loss related to factors other than credit remains classified in AOCI. If we determine that the fixed income security does not have sufficient cash flow or other information to estimate a recovery value for the security, we may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings. Once assumptions and estimates are made, any number of changes in facts and circumstances could cause us to subsequently determine that a fixed income security is other-than-temporarily impaired, including: 1) general economic conditions that are worse than previously forecast or that have a greater adverse effect on a particular issuer or industry sector than originally estimated; 2) changes in the facts and circumstances related to a particular issue or issuer's ability to meet all of its contractual obligations; and 3) changes in facts and circumstances that result in management's decision to sell or result in our assessment that it is more likely than not we will be required to sell before recovery of the amortized cost basis. Changes in assumptions, facts and circumstances could result in additional charges to earnings in future periods to the extent that losses are realized. The charge to earnings, while potentially significant to net income, would not have a significant effect on shareholders' equity, since our fixed income securities are designated as available-for-sale and carried at fair value and as a result, any related unrealized loss, net of deferred income taxes and related DAC, deferred sales inducement costs and reserves for life-contingent contract benefits, would already be reflected as a component of AOCI in shareholders' equity. The determination of the amount of other-than-temporary impairment is an inherently subjective process based on periodic evaluations of the factors described above. Such evaluations and assessments are revised as conditions change and new information becomes available. We update our evaluations regularly and reflect changes in other-than-temporary impairments in our results of operations as such evaluations are revised. The use of different methodologies and assumptions in the determination of the amount of other-than-temporary impairments may have a material effect on the amounts recognized and presented within the consolidated financial statements. For additional detail on investment impairments, see Note 5 of the consolidated financial statements. Deferred policy acquisition costs amortization We incur significant costs in connection with acquiring insurance policies and investment contracts. In accordance with GAAP, costs that are related directly to the successful acquisition of new or renewal insurance policies and investment contracts are deferred and recorded as an asset on the Consolidated Statements of Financial Position. DAC related to property and casualty contracts is amortized into income as premiums are earned, typically over periods of six or twelve months for personal lines policies or generally one to five years for protection plans and other contracts (primarily related to finance and insurance products). DAC related to traditional life and voluntary accident and health insurance is amortized over the premium paying period of the related policies in proportion to the estimated revenues on such business. Significant assumptions relating to estimated premiums, investment returns, as well as mortality, persistency and expenses to administer the business are established at the time the policy is issued and are generally not revised during the life of the policy. The assumptions for determining the timing and amount of DAC amortization are consistent with the assumptions used to calculate the reserve for life-contingent contract benefits. Any deviations from projected business in force resulting from actual policy terminations differing from expected levels and any estimated premium deficiencies may result in a change to the rate of amortization in the period such events occur. Generally, the amortization periods for these policies approximate the estimated lives of the policies. The recovery of DAC is dependent upon the future profitability of the business. We periodically review the adequacy of reserves and recoverability of DAC using actual experience and current assumptions. We evaluate our traditional life insurance products, immediate annuities with life contingencies, and voluntary accident and health insurance products individually. In the event actual experience and current assumptions are adverse compared to the original assumptions and a premium deficiency is determined to exist, any remaining unamortized DAC balance must be expensed to the extent not recoverable and a premium deficiency reserve may be required if the remaining DAC balance is insufficient to absorb the deficiency. In 2019 and
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Application of Critical Accounting Estimates 2019 Form 10-K
2018, our reviews concluded that no premium deficiency adjustments were
necessary. For additional detail on reserve adequacy, see the Reserve for
life-contingent contract benefits estimation section.
DAC related to interest-sensitive life insurance is amortized in proportion to
the incidence of the total present value of gross profits, which includes both
actual historical gross profits ("AGP") and estimated future gross profits
("EGP") expected to be earned over the estimated lives of the contracts. The
amortization is net of interest on the prior period DAC balance using rates
established at the inception of the contracts. Actual amortization periods
generally range from 15-30 years; however, incorporating estimates of the rate
of customer surrenders, partial withdrawals and deaths generally results in the
majority of the DAC being amortized during the surrender charge period, which is
typically 10-20 years for interest-sensitive life. The rate of DAC amortization
is reestimated and adjusted by a cumulative charge or credit to income when
there is a difference between the incidence of actual versus expected gross
profits in a reporting period or when there is a change in total EGP.
AGP and EGP primarily consist of the following components: contract charges for
the cost of insurance less mortality costs and other benefits (benefit margin);
investment income and realized capital gains and losses less interest credited
(investment margin); and surrender and other contract charges less maintenance
expenses (expense margin). The principal assumptions for determining the amount
of EGP are mortality, persistency, expenses, investment returns, including
capital gains and losses on assets supporting contract liabilities, interest
crediting rates to contractholders, and the effects of any hedges. These
assumptions are reasonably likely to have the greatest impact on the amount of
DAC amortization. Changes in these assumptions can be offsetting and we are
unable to reasonably predict their future movements or offsetting impacts over
time.
Each reporting period, DAC amortization is recognized in proportion to AGP for
that period adjusted for interest on the prior period DAC balance.
This amortization process includes an assessment of AGP compared to EGP, the
actual amount of business remaining in force and realized capital gains and
losses on investments supporting the product liability. The impact of realized
capital gains and losses on amortization of DAC depends upon which product
liability is supported by the assets that give rise to the gain or loss. If the
AGP is greater than EGP in the period, but the total EGP is unchanged, the
amount of DAC amortization will generally increase, resulting in a current
period decrease to earnings. The opposite result generally occurs when the AGP
is less than the EGP in the period, but the total EGP is unchanged. However,
when DAC amortization or a component of gross profits for a quarterly period is
potentially negative (which would result in an increase of the DAC balance) as a
result of negative AGP, the specific facts and circumstances surrounding the
potential negative amortization are considered to determine whether it is
appropriate for recognition in the consolidated financial statements. Negative
amortization is only recorded when the increased DAC balance is determined to be
recoverable based on facts and circumstances. For products whose supporting
investments are exposed to capital losses in excess of our expectations which
may cause periodic AGP to become temporarily negative, EGP and AGP utilized in
DAC amortization may be modified to exclude the excess capital losses.
Annually, we review and update the assumptions underlying the projections of
EGP, including mortality, persistency, expenses, investment returns, comprising
investment income and realized capital gains and losses, interest crediting
rates and the effect of any hedges, using our experience and industry
experience. At each reporting period, we assess whether any revisions to
assumptions used to determine DAC amortization are required. These reviews and
updates may result in amortization acceleration or deceleration, which are
referred to as "DAC unlocking". If the update of assumptions causes total EGP to
increase, the rate of DAC amortization will generally decrease, resulting in a
current period increase to earnings. A decrease to earnings generally occurs
when the assumption update causes the total EGP to decrease.
Effect on DAC amortization of changes in assumptions relating to gross profit components
For the years ended December 31,
($ in millions) 2019 2018
Investment margin $ 23 $ 10
Benefit margin 38 (11 )
Expense margin (1 ) 2
Net acceleration $ 60 $ 1
In 2019, DAC amortization acceleration for changes in the investment margin component of EGP was due to lower projected future interest rates and investment returns compared to our previous expectations. The acceleration related to benefit margin was due to decreased projected interest rates that result in lower projected policyholder account values which increases benefits on guaranteed products and more refined policy level information and assumptions.
In 2018, DAC amortization acceleration for changes in the investment margin
component of EGP related to interest-sensitive life insurance and was due to
lower projected investment returns. The deceleration related to benefit margin
primarily related to interest-sensitive life insurance and was due to a decrease
in projected mortality.
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2019 Form 10-K Application of Critical Accounting Estimates
The following table displays the sensitivity of reasonably likely changes in assumptions included in the gross profit components of investment margin or
benefit margin to amortization of the DAC balance as of December 31, 2019. ($ in millions)
Increase/(reduction)
Increase in future investment margins of 25 basis points $ 52 Decrease in future investment margins of 25 basis points
(57)
Decrease in future life mortality by 1% $ 14
Increase in future life mortality by 1% (14)
Any potential changes in assumptions discussed above are measured without
consideration of correlation among assumptions. Therefore, it would be
inappropriate to add them together in an attempt to estimate overall variability
in amortization.
For additional detail related to DAC, see the Allstate Life Segment section of
the MD&A.
Evaluation of goodwill for impairment Goodwill represents the excess of amounts
paid for acquiring businesses over the fair value of the net assets acquired,
less any impairment of goodwill recognized. Goodwill is recognized when acquired
and allocated to reporting units based on which unit is expected to benefit from
the synergies of the business combination. Our goodwill reporting units are
equivalent to our reportable segments: Allstate Protection, Service Businesses,
Allstate Life and Allstate Benefits to which goodwill has been assigned.
Upon acquisition, the purchase price of the acquired business is assumed to be
its fair value. Subsequently, we estimate the fair value of our businesses in
each goodwill reporting unit, utilizing a combination of widely accepted
valuation techniques including a stock price and market capitalization analysis,
discounted cash flow ("DCF") calculations and an estimate of a business's fair
value using market to book multiples derived from peer company analysis. The
stock price and market capitalization analysis takes into consideration the
quoted market price of our outstanding common stock and includes a control
premium, derived from relevant historical acquisition activity, in determining
the estimated fair value of the consolidated entity before allocating that fair
value to individual reporting units. The DCF analysis utilizes long term
assumptions for revenues, investment income, benefits, claims, other operating
expenses and income taxes to produce projections of both income and cash flows
available for dividends that are present valued using the weighted average cost
of capital. Market to book multiples represent the mean market to book multiple
for selected peer companies with operations similar to our goodwill reporting
units to which the multiple is applied. The outputs from these methods are
weighted based on the nature of the business and the relative amount of market
observable assumptions supporting the estimates. The computed values are then
weighted to reflect the fair value estimate based on the specific attributes of
each goodwill reporting unit.
Estimating the fair value of reporting units is a subjective process that
involves the use of significant estimates by management. Changes in market
inputs
or other events impacting the fair value of these businesses, including discount
rates, operating results, investment returns, strategies and growth rate
assumptions, among other factors, could result in goodwill impairments,
resulting in a charge to income. Certain of our goodwill reporting units are
comprised of a combination of legacy and acquired businesses and as a result
have substantial internally generated and unrecognized intangibles and fair
values that significantly exceed their carrying values. Our Service Businesses
goodwill reporting unit is more heavily comprised of newly acquired businesses
and as a result does not have a significant excess of fair value over its
carrying value attributable to internally generated unrecognized intangibles.
Therefore, this reporting unit may be more susceptible to potential future
goodwill impairment based on changes to growth or margin assumptions.
The most significant assumptions utilized in the determination of the estimated
fair value of the Service Businesses reporting unit are the earnings growth rate
and discount rate. The growth rate utilized in our fair value estimates is
consistent with our plans to grow these businesses more rapidly over the
near-term with more moderated growth rates in later years.
The discount rate, which is consistent with the weighted average cost of capital
expected by a market participant, is based upon industry specific required rates
of return, including consideration of both debt and equity components of the
capital structure. Our discount rate may be impacted by changes in the risk-free
rate, cost of debt, equity risk premium and entity specific risks.
Changes in our growth assumptions, including the risk of loss of key customers,
or adverse changes in the discount rates could result in a decline in fair value
and result in a goodwill impairment charge.
Reserve for property and casualty insurance claims and claims expense estimation
Reserves are established to provide for the estimated costs of paying claims and
claims expenses under insurance policies we have issued. Underwriting results
are significantly influenced by estimates of property and casualty insurance
claims and claims expense reserves. These reserves are an estimate of amounts
necessary to settle all outstanding claims, including IBNR, as of the financial
statement date.
Characteristics of reserves Reserves are established independently of business
segment management for each business segment and line of business based on
estimates of the ultimate cost to
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Application of Critical Accounting Estimates 2019 Form 10-K
settle claims, less losses that have been paid. The significant lines of
business are auto, homeowners, and other personal lines for Allstate Protection,
and asbestos, environmental, and other discontinued lines for Discontinued Lines
and Coverages. Allstate Protection's claims are typically reported promptly with
relatively little reporting lag between the date of occurrence and the date the
loss is reported. Auto and homeowners liability losses generally take an average
of about two years to settle, while auto physical damage, homeowners property
and other personal lines have an average settlement time of less than one year.
Discontinued Lines and Coverages involve long-tail losses, such as those related
to asbestos and environmental claims, which often involve substantial reporting
lags and extended times to settle.
Reserves are the difference between the estimated ultimate cost of losses
incurred and the amount of paid losses as of the reporting date. Reserves are
estimated for both reported and unreported claims, and include estimates of all
expenses associated with processing and settling all incurred claims. We update
most of our reserve estimates quarterly and as new information becomes available
or as events emerge that may affect the resolution of unsettled claims. Changes
in prior reserve estimates (reserve reestimates), which may be material, are
determined by comparing updated estimates of ultimate losses to prior estimates,
with the differences recorded as property and casualty insurance claims and
claims expense in the Consolidated Statements of Operations in the period such
changes are determined. Estimating the ultimate cost of claims and claims
expenses is an inherently uncertain and complex process involving a high degree
of judgment and is subject to the evaluation of numerous variables.
The actuarial methods used to develop reserve estimates Reserve estimates are
derived by using several different actuarial estimation methods that are
variations on one primary actuarial technique. The actuarial technique is known
as a "chain ladder" estimation process in which historical loss patterns are
applied to actual paid losses and reported losses (paid losses plus individual
case reserves established by claim adjusters) for an accident year or a report
year to create an estimate of how losses are likely to develop over time. An
accident year refers to classifying claims based on the year in which the claims
occurred. A report year refers to classifying claims based on the year in which
the claims are reported. Both classifications are used to prepare estimates of
required reserves for payments to be made in the future. The key assumptions
affecting our reserve estimates comprise data elements including claim counts,
paid losses, case reserves, and development factors calculated with this data.
See Discontinued and Lines and Coverages reserve estimates section for specific
disclosures of industry and actuarial best practices for this segment.
In the chain ladder estimation technique, a ratio (development factor) is
calculated which compares current period results to results in the prior period
for
each accident year. A multi-year average development factor, based on historical
results, is usually multiplied by the current period experience to estimate the
development of losses of each accident year into the next time period. The
development factors for the future time periods for each accident year are
compounded over the remaining future periods to calculate an estimate of
ultimate losses for each accident year. The implicit assumption of this
technique is that an average of historical development factors is predictive of
future loss development, as the significant size of our experience database
achieves a high degree of statistical credibility in actuarial projections of
this type. The effects of inflation are implicitly considered in the reserving
process, the implicit assumption being that a multi-year average development
factor includes an adequate provision. The development factor estimation
methodology may require modification when data changes due to changing claim
reporting practices, changing claim settlement patterns, external regulatory or
financial influences, or contractual coverage changes. In these situations,
actuarial estimation techniques are applied to appropriately modify the "chain
ladder" assumptions. These actuarial techniques are necessary to analyze the
effects of changing loss data to develop modified development factor selections.
The actuarial estimation techniques include exclusion of unusual losses or
aberrations and adjustment of historical data to present conditions.
Actuarially modified patterns of development are calculated with the adjusted
historical data. Actuarial judgment is then applied to make appropriate
development factor assumptions needed to develop a best estimate of gross
ultimate losses. These developments are discussed further in the Allstate brand
loss ratio disclosures in the Allstate Protection Segment and the Claims and
Claims Expense Reserves sections of the MD&A.
How reserve estimates are established and updated Reserve estimates are
developed at a very detailed level, and the results of these numerous
micro-level best estimates are aggregated to form a consolidated reserve
estimate. For example, over one thousand actuarial estimates of the types
described above are prepared each quarter to estimate losses for each line of
insurance, major components of losses (such as coverages and perils), major
states or groups of states and for reported losses and IBNR. The actuarial
methods described above are used to analyze the settlement patterns of claims by
determining the development factors for specific data elements that are
necessary components of a reserve estimation process. Development factors are
calculated quarterly and periodically throughout the year for data elements such
as claim counts reported and settled, paid losses, and paid losses combined with
case reserves. The calculation of development factors from changes in these data
elements also impacts claim severity trends. The historical development patterns
for these data elements are used as the assumptions to calculate reserve
estimates.
Often, several different estimates are prepared for each detailed component,
incorporating alternative
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2019 Form 10-K Application of Critical Accounting Estimates
analyses of changing claim settlement patterns and other influences on losses,
from which we select our best estimate for each component, occasionally
incorporating additional analyses and actuarial judgment, as described above.
These micro-level estimates are not based on a single set of assumptions.
Actuarial judgments that may be applied to these components of certain
micro-level estimates generally do not have a material impact on the
consolidated level of reserves. Moreover, this detailed micro-level process does
not permit or result in a compilation of a company-wide roll up to generate a
range of needed loss reserves that would be meaningful. Based on our review of
these estimates, our best estimate of required reserves for each
state/line/coverage component is recorded for each accident year, and the
required reserves for each component are summed to create the reserve balance
carried on our Consolidated Statements of Financial Position.
Reserves are reestimated quarterly and periodically throughout the year, by
combining historical results with current actual results to calculate new
development factors. This process continuously incorporates the historic and
latest actual trends, and other underlying changes in the data elements used to
calculate reserve estimates. New development factors are likely to differ from
previous development factors used in prior reserve estimates because actual
results
(claims reported or settled, losses paid, or changes to case reserves) occur
differently than the implied assumptions contained in the previous development
factor calculations. If claims reported, paid losses, or case reserve changes
are greater or less than the levels estimated by previous development factors,
reserve reestimates increase or decrease. When actual development of these data
elements is different than the historical development pattern used in a prior
period reserve estimate, a new reserve is determined. The difference between
indicated reserves based on new reserve estimates and recorded reserves (the
previous estimate) is the amount of reserve reestimate and is recognized as an
increase or decrease in claims and claims expense in the Consolidated Statements
of Operations. Total net reserve reestimates, after-tax, favorable impact on net
income applicable to common shareholders were 2.2%, 10.0% and 9.5% in 2019, 2018
and 2017, respectively. The 3-year average of net reserve reestimates as a
percentage of total reserves was a favorable 2.1% for Allstate Protection, an
unfavorable 6.9% for Discontinued Lines and Coverages and a favorable 1.1% for
Service Businesses, each of these results being consistent within a reasonable
actuarial tolerance for the respective businesses. A more detailed discussion of
reserve reestimates is presented in the Claims and Claims Expense Reserves
section of the MD&A.
Net claims and claims expense reserves by segment and line of business
As of December 31,
($ in millions) 2019 2018 2017
Allstate Protection
Auto $ 14,728 $ 14,378 $ 14,051
Homeowners 2,138 2,157 2,205
Other lines 2,530 2,290 2,105
Total Allstate Protection 19,396 18,825 18,361
Discontinued Lines and Coverages
Asbestos 810 866 884
Environmental 179 170 166
Other discontinued lines 376 355 357
Total Discontinued Lines and Coverages 1,365 1,391 1,407
Total Service Businesses 39 52 86
Total net claims and claims expense reserves $ 20,800 $ 20,268 $ 19,854
Allstate Protection reserve estimate Factors affecting reserve estimates Reserve estimates are developed based on the processes and historical development trends described above. These estimates are considered in conjunction with known facts and interpretations of circumstances and factors including our experience with similar cases, actual claims paid, historical trends involving claim payment patterns and pending levels of unpaid claims, loss management programs, product mix and contractual terms, changes in law and regulation, judicial decisions, and economic conditions. When we experience changes of the type previously mentioned, we may need to apply actuarial judgment in the determination and selection of development factors considered more reflective of the new trends, such as combining shorter or longer periods of historical results with current actual results to produce development factors based on two-year, three-year, or longer development periods to reestimate our reserves. For example, if a legal change is expected to have a significant impact on the development of claim severity for a coverage which is part of a particular line of insurance in a specific state, actuarial judgment is applied to determine appropriate development factors that will most accurately reflect the expected impact on that specific estimate. Another example would be when a change in economic conditions is expected to affect the cost of repairs to damaged autos or property for a particular line, coverage, or state, actuarial judgment is applied to determine appropriate development factors to use in the reserve estimate that will most accurately reflect the expected impacts on severity development.
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As claims are reported, for certain liability claims of sufficient size and
complexity, the field adjusting staff establishes case reserve estimates of
ultimate cost, based on their assessment of facts and circumstances related to
each individual claim. For other claims which occur in large volumes and settle
in a relatively short time frame, it is not practical or efficient to set case
reserves for each claim, and a statistical case reserve is set for these claims
based on estimation techniques described above. In the normal course of
business, we may also supplement our claims processes by utilizing third-party
adjusters, appraisers, engineers, inspectors, and other professionals and
information sources to assess and settle catastrophe and non-catastrophe related
claims.
Historically, the case reserves set by the field adjusting staff have not proven
to be an entirely accurate estimate of the ultimate cost of claims. To provide
for this, a development reserve is estimated using the processes described above
and allocated to pending claims as a supplement to case reserves. Typically, the
case, including statistical case, and supplemental development reserves comprise
about 90% of total reserves.
Another major component of reserves is IBNR, which comprises about 10% of total
reserves. IBNR can be a small percentage of reserves for relatively short-term
claims, such as auto physical damage claims, or a large percentage of reserves
for claims that have uncertain payout requirements over a long period of time,
such as auto injury and MCCA claims. All major components of reserves are
affected by changes in claim frequency as well as claim severity.
Generally, the initial reserves for a new accident year are established based on
actual claim frequency and severity assumptions for different business segments,
lines and coverages based on historical relationships to relevant inflation
indicators. Reserves for prior accident years are statistically determined using
processes described above. Changes in auto claim frequency may result from
changes in mix of business, the rate of distracted driving, miles driven or
other macroeconomic factors. Changes in auto current year claim severity are
generally influenced by inflation in the medical and auto repair sectors of the
economy and the effectiveness and efficiency of our claim practices. We mitigate
these effects through various loss management programs. Injury claims are
affected largely by medical cost inflation while physical damage claims are
affected largely by auto repair cost inflation and used car prices. For auto
physical damage coverages, we monitor our rate of increase in average cost per
claim against the auto maintenance, repair, parts and equipment price indices.
We believe our claim settlement initiatives, such as improvements to the claim
review and settlement process, the use of special investigative units to detect
fraud and handle suspect claims, litigation management and defense strategies,
as well as various other loss management initiatives underway, contribute to the
mitigation of injury and physical damage severity trends.
Changes in homeowners current year claim severity are generally influenced by
inflation in the cost
of building materials, the cost of construction and property repair services,
the cost of replacing home furnishings and other contents, the types of claims
that qualify for coverage, deductibles, other economic and environmental factors
and the effectiveness and efficiency of our claim practices. We employ various
loss management programs to mitigate the effect of these factors.
As loss experience for the current year develops for each type of loss, it is
monitored relative to initial assumptions until it is judged to have sufficient
statistical credibility. From that point in time and forward, reserves are
reestimated using statistical actuarial processes to reflect the impact actual
loss trends have on development factors incorporated into the actuarial
estimation processes. Statistical credibility is usually achieved by the end of
the first calendar year; however, when trends for the current accident year
exceed initial assumptions sooner, they are usually determined to be credible,
and reserves are increased accordingly.
The very detailed processes for developing reserve estimates, and the lack of a
need and existence of a common set of assumptions or development factors, limits
aggregate reserve level testing for variability of data elements. However, by
applying standard actuarial methods to consolidated historic accident year loss
data for major loss types, comprising auto injury losses, auto physical damage
losses and homeowner losses, we develop variability analyses consistent with the
way we develop reserves by measuring the potential variability of development
factors, as described in the section titled "Potential Reserve Estimate
Variability" below.
Causes of reserve estimate uncertainty Since reserves are estimates of unpaid
portions of claims and claims expenses that have occurred, including IBNR
losses, the establishment of appropriate reserves, including reserves for
catastrophe losses, requires regular reevaluation and refinement of estimates to
determine our ultimate loss estimate.
At each reporting date, the highest degree of uncertainty in estimates for most
of our losses from ongoing businesses arise from claims remaining to be settled
for the current accident year and the most recent preceding accident year. The
greatest degree of uncertainty exists in the current accident year because the
current accident year contains the greatest proportion of losses that have not
been reported or settled but must be estimated as of the current reporting date.
Most of these losses relate to damaged property such as automobiles and homes,
and medical care for injuries from accidents. During the first year after the
end of an accident year, a large portion of the total losses for that accident
year are settled. When accident year losses paid through the end of the first
year following the initial accident year are incorporated into updated actuarial
estimates, the trends inherent in the settlement of claims emerge more clearly.
Consequently, this is the point in time at which we tend to make our largest
reestimates of losses for an accident year. After the second year, the losses
that we pay for an accident year typically relate
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2019 Form 10-K Application of Critical Accounting Estimates
to claims that are more difficult to settle, such as those involving serious injuries or litigation. Private passenger auto insurance provides a good illustration of the uncertainty of future loss estimates: our typical annual percentage payout of reserves remaining at December 31 for an accident year is approximately 45% in the first year after the end of the accident year, 20% in the second year, 15% in the third year, 10% in the fourth year, and the remaining 10% thereafter. Reserves for catastrophe losses Catastrophe losses are an inherent risk of the property and casualty insurance industry that have contributed, and will continue to contribute, to potentially material year-to-year fluctuations in our results of operations and financial position. 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, hurricanes, earthquakes and volcanoes. We are also exposed to man-made catastrophic events, such as certain types of terrorism or industrial accidents. The nature and level of catastrophes in any period cannot be reliably predicted. The estimation of claims and claims expense reserves for catastrophe losses also comprises estimates of losses from reported claims and IBNR, primarily for damage to property. In general, our estimates for catastrophe reserves are based on claim adjuster inspections and the application of historical loss development factors as described above. However, depending on the nature of the catastrophe, the estimation process can be further complicated. For example, for hurricanes, complications could include the inability of insureds to promptly report losses, limitations placed on claims adjusting staff affecting their ability to inspect losses, determining whether losses are covered by our homeowners policy (generally for damage caused by wind or wind driven rain) or specifically excluded coverage caused by flood, estimating additional living expenses, and assessing the impact of demand surge, exposure to mold damage, and the effects of numerous other considerations, including the timing of a catastrophe in relation to other events, such as at or near the end of a financial reporting period, which can affect the availability of information needed to estimate reserves for that reporting period. In these situations, we may need to adapt our practices to accommodate these circumstances in order to determine a best estimate of our losses from a catastrophe. For example, to complete estimates for certain areas affected by catastrophes not yet inspected by our claims adjusting staff, or where we believed our historical loss development factors were not predictive, we rely on analysis of actual claim notices received compared to total PIF, as well as visual, governmental and third-party information, including aerial photos, using satellites, aircrafts and drones, area observations, and data on wind speed and flood depth to the extent available. Potential reserve estimate variability The aggregation of numerous micro-level estimates for each business segment, line of insurance, major components of losses (such as coverages and perils), and major states or groups of states for reported losses and IBNR forms the reserve liability recorded in the Consolidated Statements of Financial Position. Because of this detailed approach to developing our reserve estimates, there is not a single set of assumptions that determines our reserve estimates at the consolidated level. Given the numerous micro-level estimates for reported losses and IBNR, management does not believe the processes that we follow will produce a statistically credible or reliable actuarial reserve range that would be meaningful. Reserve estimates, by their very nature, are very complex to determine and subject to significant judgment, and do not represent an exact determination for each outstanding claim. Accordingly, as actual claims, paid losses, and/or case reserve results emerge, our estimate of the ultimate cost to settle will be different than previously estimated. To develop a statistical indication of potential reserve variability within reasonably likely possible outcomes, an actuarial technique (stochastic modeling) is applied to the countrywide consolidated data elements for paid losses and paid losses combined with case reserves separately for injury losses, auto physical damage losses, and homeowners losses excluding catastrophe losses. Based on the combined historical variability of the development factors calculated for these data elements, an estimate of the standard error or standard deviation around these reserve estimates is calculated within each accident year for the last twelve years for each type of loss. The variability of these reserve estimates within one standard deviation of the mean (a measure of frequency of dispersion often viewed to be an acceptable level of accuracy) is believed by management to represent a reasonable and statistically probable measure of potential variability. Based on our products and coverages, historical experience, the statistical credibility of our extensive data and stochastic modeling of actuarial chain ladder methodologies used to develop reserve estimates, we estimate that the potential variability of our Allstate Protection reserves, excluding reserves for catastrophe losses, within a reasonable probability of other possible outcomes, may be approximately plus or minus 4%, or plus or minus $800 million in net income applicable to common shareholders. A lower level of variability exists for auto injury losses, which comprise approximately 80% of reserves, due to their relatively stable development patterns over a longer duration of time required to settle claims. Other types of losses, such as auto physical damage, homeowners losses and other personal lines losses, which comprise about 20% of reserves, tend to have greater variability but are settled in a much shorter period of time. Although this evaluation reflects most reasonably likely outcomes, it is possible the final outcome may fall below or above these amounts. Historical variability of reserve 112 www.allstate.com
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estimates is reported in the Claims and Claims Expense Reserves section of the MD&A. Reserves forMichigan andNew Jersey unlimited personal injury protection Claims and claims expense reserves include reserves forMichigan mandatory unlimited personal injury protection coverage to insureds involved in qualifying motor vehicle accidents. The administration of this program is through the MCCA, a state-mandated, non-profit association of which all insurers actively writing automobile coverage inMichigan are members. The process employed to estimate MCCA covered losses involves a number of activities including the comprehensive review and interpretation of MCCA actuarial reports, other MCCA members' reports and our personal injury protection loss trends which have increased in severity over time. A significant portion of incurred claim reserves can be attributed to a small number of catastrophic claims and thus a large portion of the recoverable is similarly concentrated. We conduct comprehensive claim file reviews to develop case reserve type estimates of specific claims, which inform our view of future claim development and longevity of claimants. Each year, we update the actuarial estimate of our ultimate reserves and recoverables. We report our paid and unpaid claims based on MCCA requirements. The MCCA develops its own reserving estimates based on its own reserve methodologies, which may not align with our estimations. The MCCA does not provide member companies with its estimate of a company's claim costs. We continue to update each comprehensive claim file case reserve estimate when there is a significant change in the status of the claimant, or once every three years if there have been no significant changes. We provide similar personal injury protection coverage inNew Jersey for auto policies issued or renewed inNew Jersey prior to 1991 that is administered by PLIGA. We use similar actuarial estimating techniques as for the MCCA exposures to estimate loss reserves for unlimited personal injury protection coverage for policies covered by PLIGA. We continue to update our estimates for these claims as the status of claimant's changes. However, unlimited coverage was no longer offered after 1991; therefore, no new claimants are being added. Reserve estimates are confidential and proprietary and by their nature are very complex to determine and subject to significant judgments. Reserve estimates do not represent an exact determination for each outstanding claim. Claims may be subject to litigation. As actual claims, paid losses and/or case reserve results emerge, our estimate of the ultimate cost to settle may be materially greater or less than previously estimated amounts. For additional information related to indemnification recoverables, see Item 1 - Regulation, Indemnification Programs and Note 10 of the consolidated financial statements. Adequacy of reserve estimates We believe our net claims and claims expense reserves are appropriately established based on available methodologies, facts, technology, laws and regulations. We calculate and record a single best reserve estimate, in conformance with generally accepted actuarial standards and practices, for each line of insurance, its components (coverages and perils) and state, for reported losses and for IBNR losses, and as a result we believe that no other estimate is better than our recorded amount. Due to the uncertainties involved, the ultimate cost of losses may vary materially from recorded amounts, which are based on our best estimates. Discontinued Lines and Coverages reserve estimates Characteristics of Discontinued Lines exposure Our exposure to asbestos, environmental and other discontinued lines claims arise principally from assumed reinsurance coverage written during the 1960s through the mid-1980s, including reinsurance on primary insurance written on largeU.S. companies, and from direct excess commercial insurance written from 1972 through 1985, including substantial excess general liability coverages on largeU.S. companies. Additional exposure stems from direct primary commercial insurance written during the 1960s through the mid-1980s. Asbestos claims relate primarily to bodily injuries asserted by claimants who were exposed to asbestos or products containing asbestos. Environmental claims relate primarily to pollution and related clean-up costs. Other discontinued lines exposures primarily relate to general liability and product liability mass tort claims, such as those for medical devices and other products, workers' compensation claims and claims for various other coverage exposures other than asbestos and environmental. In 1986, the general liability policy form used by us and others in the property and casualty industry was amended to introduce an "absolute pollution exclusion," which excluded coverage for environmental damage claims, and to add an asbestos exclusion. Most general liability policies issued prior to 1987 contain annual aggregate limits for product liability coverage. General liability policies issued in 1987 and thereafter contain annual aggregate limits for product liability coverage and annual aggregate limits for all coverages. Our experience to date is that these policy form changes have limited the extent of our exposure to environmental and asbestos claim risks. Our exposure to liability for asbestos, environmental and other discontinued lines losses manifests differently depending on whether it arises from assumed reinsurance coverage, direct excess commercial insurance or direct primary commercial insurance. The direct insurance coverage we provided that covered asbestos, environmental and other discontinued lines was substantially "excess" in nature. Direct excess commercial insurance and reinsurance involve coverage written by us for specific layers of protection above retentions and other insurance plans. The nature of excess coverage and reinsurance provided to other insurers limits our exposure to loss to specific layers of protection in excess of policyholder retention on primary insurance The Allstate
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2019 Form 10-K Application of Critical Accounting Estimates
plans. Our exposure is further limited by the significant reinsurance that we
had purchased on our direct excess business.
Our assumed reinsurance business involved writing generally small participations
in other insurers' reinsurance programs. The reinsured losses in which we
participate may be a proportion of all eligible losses or eligible losses in
excess of defined retentions. The majority of our assumed reinsurance exposure,
approximately 85%, is for excess of loss coverage, while the remaining 15% is
for pro-rata coverage.
Our direct primary commercial insurance business did not include coverage to
large asbestos manufacturers. This business comprises a cross section of
policyholders engaged in many diverse business sectors throughout the country.
How reserve estimates are established and updated We conduct an annual review in
the third quarter to evaluate, establish and adjust as necessary, asbestos,
environmental and other discontinued lines reserves. Changes to reserves are
recorded in the reporting period in which they are determined. Using established
industry and actuarial best practices and assuming no change in the regulatory
or economic environment, this detailed and comprehensive methodology determines
asbestos reserves based on assessments of the characteristics of exposure (i.e.
claim activity, potential liability, jurisdiction, products versus non-products
exposure) presented by individual policyholders, and determines environmental
reserves based on assessments of the characteristics of exposure (i.e.
environmental damages, respective shares of liability of potentially responsible
parties, appropriateness and cost of remediation) to pollution and related
clean-up costs. The number and cost of these claims are affected by advertising
by trial lawyers seeking asbestos plaintiffs, and entities with asbestos
exposure seeking bankruptcy protection as a result of asbestos liabilities,
initially causing a delay in the reporting of claims, often followed by an
acceleration and an increase in claims and claims expenses as settlements occur.
After evaluating our insureds' probable liabilities for asbestos and/or
environmental claims, we evaluate our insureds' coverage programs for such
claims. We consider our insureds' total available insurance coverage, including
the coverage we issued. We also consider relevant judicial interpretations of
policy language and applicable coverage defenses or determinations, if any.
Evaluation of both the insureds' estimated liabilities and our exposure to the
insureds depends heavily on an analysis of the relevant legal issues and
litigation environment. This analysis is conducted by our specialized claims
adjusting staff and legal counsel. Based on these evaluations, case reserves are
established by claims adjusting staff and actuarial analysis is employed to
develop an IBNR reserve, which includes estimated potential reserve development
and claims that have occurred but have not been reported. As of December 31,
2019 and 2018, IBNR was 49% and 50%, respectively, of combined net asbestos and
environmental reserves.
For both asbestos and environmental reserves, we also evaluate our historical
direct net loss and expense paid and incurred experience to assess any emerging
trends, fluctuations or characteristics suggested by the aggregate paid and
incurred activity.
Other Discontinued Lines and Coverages
Characteristics of other exposures Other mass torts includes direct excess
commercial and reinsurance general liability coverage provided for cumulative
injury losses other than asbestos and environmental. Workers' compensation and
commercial and other include run-off from discontinued direct primary, direct
excess commercial and reinsurance commercial insurance operations of various
coverage exposures other than asbestos and environmental. Reserves are based on
considerations similar to those described above, as they relate to the
characteristics of specific individual coverage exposures.
Reserves for other discontinued lines
As of December 31,
($ in millions) 2019 2018
Other mass torts $ 177 $ 148
Workers' compensation 66 69
Commercial and other 133 138
Other discontinued lines $ 376 $ 355
Potential reserve estimate variability Establishing Discontinued Lines and
Coverages net loss reserves for asbestos, environmental and other discontinued
lines claims is subject to uncertainties that are much greater than those
presented by other types of property and casualty claims. Among the
complications are lack of historical data, long reporting delays, uncertainty as
to the number and identity of insureds with potential exposure and unresolved
legal issues regarding policy coverage; unresolved legal issues regarding the
determination, availability and timing of exhaustion of policy limits;
plaintiffs' evolving and expanding theories
of liability; availability and collectability of recoveries from reinsurance;
retrospectively determined premiums and other contractual agreements; estimates
of the extent and timing of any contractual liability; the impact of bankruptcy
protection sought by various asbestos producers and other asbestos defendants;
and other uncertainties. There are also complex legal issues concerning the
interpretation of various insurance policy provisions and whether those losses
are covered, or were ever intended to be covered, and could be recoverable
through retrospectively determined premium, reinsurance or
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Application of Critical Accounting Estimates 2019 Form 10-K
other contractual agreements. Courts have reached different and sometimes
inconsistent conclusions as to when losses are deemed to have occurred and which
policies provide coverage; what types of losses are covered; whether there is an
insurer obligation to defend; how policy limits are determined; how policy
exclusions and conditions are applied and interpreted; and whether clean-up
costs represent insured property damage. Our reserves for asbestos and
environmental exposures could be affected by tort reform, class action
litigation, and other potential legislation and judicial decisions.
Environmental exposures could also be affected by a change in the existing
federal Superfund law and similar state statutes. There can be no assurance that
any reform legislation will be enacted or that any such legislation will provide
for a fair, effective and cost-efficient system for settlement of asbestos or
environmental claims. We believe these issues are not likely to be resolved in
the near future, and the ultimate costs may vary materially from the amounts
currently recorded resulting in material changes in loss reserves. Historical
variability of reserve estimates is demonstrated in the Claims and Claims
Expense Reserves section of the MD&A.
Adequacy of reserve estimates Management believes its net loss reserves for
asbestos, environmental and other discontinued lines exposures are appropriately
established based on available facts, technology, laws, regulations, and
assessments of other pertinent factors and characteristics of exposure (i.e.
claim activity, potential liability, jurisdiction, products versus non-products
exposure) presented by individual policyholders, assuming no change in the
legal, legislative or economic environment. Due to the uncertainties and factors
described above, management believes it is not practicable to develop a
meaningful range for any such additional net loss reserves that may be required.
Further discussion of reserve estimates For further discussion of these
estimates and quantification of the impact of reserve estimates, reserve
reestimates and assumptions, see Notes 8 and 14 of the consolidated financial
statements and the Claims and Claims Expense Reserves section of the MD&A.
Reserve for life-contingent contract benefits estimation Due to the long-term
nature of traditional life insurance, life-contingent immediate annuities and
voluntary accident and health insurance products, benefits are payable over many
years; accordingly, the reserves are calculated as the present value of future
expected benefits to be paid, reduced by the present value of future expected
net premiums. Long-term actuarial assumptions of future investment yields,
mortality, morbidity, policy terminations and expenses are used when
establishing the reserve for life-contingent contract benefits payable under
these insurance policies. These assumptions, which for traditional life
insurance are applied using the net level
premium method, include provisions for adverse deviation and generally vary by
characteristics such as type of coverage, year of issue and policy duration.
Future investment yield assumptions are determined based upon prevailing
investment yields as well as estimated reinvestment yields. Mortality, morbidity
and policy termination assumptions are based on our experience and industry
experience. Expense assumptions include the estimated effects of inflation and
expenses to be incurred beyond the premium-paying period. These assumptions are
established at the time the policy is issued, are consistent with assumptions
for determining DAC amortization for these policies, and are generally not
changed during the policy coverage period. However, if actual experience emerges
in a manner that is significantly adverse relative to the original assumptions,
adjustments to DAC or reserves may be required resulting in a charge to earnings
which could have a material effect on our operating results and financial
condition.
We periodically review the adequacy of reserves and recoverability of DAC 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, any remaining unamortized DAC balance
must be expensed to the extent not recoverable and the establishment of a
premium deficiency reserve may be required.
We evaluate our traditional life insurance products, immediate annuities with
life contingencies, and voluntary accident and health insurance individually. In
2019 and 2018, our reviews concluded that no premium deficiency adjustments were
necessary. As of December 31, 2019, traditional life insurance and accident and
health insurance both have a substantial sufficiency.
As of December 31, 2019, there is marginal sufficiency in the evaluation of
immediate annuities with life contingencies which has been adversely impacted
primarily by sub-standard structured settlement mortality expectations, where
annuitants are living longer than originally anticipated, and the impact of
interest rates, which are lower than originally anticipated and are expected to
remain low for an extended period. The sufficiency represents approximately 3%
of applicable reserves for Allstate Annuities as of December 31, 2019.
Additional reserves may be required in future periods if mortality and interest
rates continue to develop in a manner that results in a premium deficiency.
The following table displays the sensitivity of permanent changes in the future
investment yield assumption included in the annuity premium deficiency
evaluation to the sufficiency balance as of December 31, 2019.
Change in sufficiency as
Increase/(reduction) a percentage of
($ in millions) in sufficiency applicable reserves
Increase in future investment yields
of 25 basis points $200 3%
Decrease in future investment yields
of 25 basis points $(211) (3)%
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2019 Form 10-K Application of Critical Accounting Estimates
We also review these policies for circumstances where projected profits would be
recognized in early years followed by projected losses in later years. In 2019
and 2018, our reviews concluded that there were no projected losses following
projected profits in each long-term projection.
We will continue to monitor the experience of our traditional life insurance and
immediate annuities. We periodically complete comprehensive mortality studies
for our structured settlement annuities with life contingencies to determine
whether annuitants are living for a longer period than originally estimated. We
anticipate that investment and reinvestment yields, mortality, and policy
terminations are the factors that would be most likely to require premium
deficiency adjustments to reserves or related DAC. Mortality rates and
investment and reinvestment yields are the factors that would be most likely to
require a profits followed by losses liability accrual.
For further detail on the reserve for life-contingent contract benefits, see
Note 9 of the consolidated financial statements.
Pension and other postretirement plans net costs and assumptions Our defined
benefit pension plans cover most full-time employees, certain part-time
employees and employee-agents. Benefits are based primarily on a cash balance
formula; however, certain participants have a significant portion of their
benefits attributable to a former final average pay formula. 88% of the
projected benefit obligation ("PBO") of our primary qualified employee plan is
related to the former final average pay formula. See Note 17 of the consolidated
financial statements for a discussion of these plans and their effect on the
consolidated financial statements.
Our pension and other postretirement benefit costs are calculated using various
actuarial assumptions and methodologies. These assumptions include discount
rates, health care cost trend rates, inflation, expected returns on plan assets,
mortality and other factors. The assumptions utilized in recording the
obligations under our pension plans represent our best estimates and we believe
they are reasonable based on information as to historical experience and
performance as well as other factors that might cause future expectations to
differ from past trends.
Net costs for our defined benefit plans are recognized on the Consolidated
Statements of Operations and consist of two elements: 1) costs comprised of
service and interest costs, expected return of plan assets and amortization of
prior service credit which are reported in property and casualty claims and
claims expense, operating costs and expenses, net investment income and, if
applicable, restructuring charges and 2) remeasurement gains and losses
comprised of changes in actuarial assumptions and the difference between actual
and expected returns on plan assets which are recognized immediately in earnings
as part of pension and other postretirement remeasurement gains and losses.
We recognize expected returns on plan assets using an unadjusted fair value
method. Our policy is to remeasure our pension and postretirement plans on a
quarterly basis. We immediately recognize remeasurement of projected benefit
obligation and plan assets in earnings as it provides greater transparency of
our economic obligations in accounting results and better aligns the recognition
of the effects of economic and interest rate changes on pension and other
postretirement plan assets and liabilities in the year in which the gains and
losses are incurred.
Differences in actual experience or changes in assumptions affect our pension
and other postretirement obligations, plan assets and expenses. The primary
factors contributing to pension and postretirement remeasurement gains and
losses are 1) changes in the discount rate used to value pension and
postretirement obligations as of the measurement date, 2) differences between
the expected and the actual return on plan assets, 3) changes in demographic
assumptions, including mortality and participant experience.
Pension and other postretirement service cost, interest cost, expected return on
plan assets and amortization of prior service credits are allocated to our
reportable segments. The pension and other postretirement remeasurement gains
and losses are reported in the Corporate and Other segment.
Impact of assumption changes to net cost for pension and other postretirement
plans Due to changes in assumptions and the difference between actual and
expected returns on plan assets as described below, we recognized pension and
other postretirement remeasurement losses of $114 million in 2019 compared to
$468 million in 2018.
The discount rate is based on rates at which expected pension benefits
attributable to past employee service could effectively be settled on a present
value basis at the measurement date. We develop the assumed discount rate by
utilizing the weighted average yield of a theoretical dedicated portfolio
derived from non-callable bonds and bonds with a make-whole provision available
in the Bloomberg corporate bond universe having ratings of at least "AA" by S&P
or at least "Aa" by Moody's on the measurement date with cash flows that match
expected plan benefit requirements. Significant changes in discount rates, such
as those caused by changes in the credit spreads, yield curve, the mix of bonds
available in the market, the duration of selected bonds and expected benefit
payments, may result in volatility in pension cost. The weighted average
discount rate used to measure the benefit obligation decreased to 3.31% in 2019
compared to 4.31% in 2018. Pension and other postretirement remeasurement losses
due to declines in the weighted average discount rate were $633 million in 2019
compared to gains of $392 million in 2018.
The expected long-term rate of return on plan assets reflects the average rate
of earnings expected on plan assets. While this rate reflects long-term
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assumptions and is consistent with long-term historical returns, sustained
changes in the market or changes in the mix of plan assets may lead to revisions
in the assumed long-term rate of return on plan assets that may result in
variability of pension cost. Differences between the actual return on plan
assets and the expected long-term rate of return on plan assets are immediately
recognized through earnings upon remeasurement. Short-term asset performance can
differ significantly from the expected rate of return, especially in volatile
markets. In 2019, the actual return on plan assets compared to our expected
return was a gain of $832 million compared to a loss of $727 million in 2018.
The improvement was primarily due to strong equity market performance and
declines in interest rates which increased the fair value of our fixed income
investments.
We complete periodic evaluations of demographic information and historical
experience that affects our pension and other postretirement obligations to
identify any required changes to long-term actuarial
assumptions and methodologies. Demographic assumptions affect both our pension
and postretirement plans and include elements such as retirement rates and
participation rates in our postretirement programs, among other factors. These
actuarial assumption updates affect our pension and other postretirement
obligations and are incorporated into our best estimates of these assumptions.
Actuarial assumption updates that affect our pension and other postretirement
obligations resulted in remeasurement losses of $313 million in 2019 compared to
losses of $133 million in 2018.
The assumed health care trend rate represents the rate at which health care
costs are assumed to increase and is based on historical and expected
experience. Assumed health care cost trend rates have a significant effect on
the amounts reported for the postretirement health care plans. An increase in
the trend rate would increase our obligation and expense.
Sensitivity of assumption changes included in the calculation of net cost as of December 31, 2019
Basis/percentage Increase (decrease) to net
($ in millions) point change cost
+100 basis
Pension plans discount rate points $ (842 )
-100 basis
points 1,045
+100 basis
Expected long-term rate of return on assets points (59 )
-100 basis
points 59
Postretirement plans assumed health care cost +1% 27
trend rate -1% (23 )
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2019 Form 10-K
Regulation and Legal Proceedings We are subject to extensive regulation and we are involved in various legal and regulatory actions, all of which have an effect on specific aspects of our business. For a detailed discussion of the legal and regulatory actions in which we are involved, see Note 14 of the consolidated financial statements. Pending Accounting Standards There are several pending accounting standards that we have not implemented because the implementation date has not yet occurred. For a discussion of these pending standards, see Note 2 of the consolidated financial statements. The effect of implementing certain accounting standards on our financial results and financial condition is often based in part on market conditions at the time of implementation of the standard and other factors we are unable to determine prior to implementation. For this reason, we are sometimes unable to estimate the effect of certain pending accounting standards until the relevant authoritative body finalizes these standards or until we implement them.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk Information required for Item 7A is incorporated by reference to the material under the caption "Market Risk" in Part II, Item 7 of this report.
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2019 Form 10-K
Item 8. Financial Statements and Supplementary Data Consolidated Financial Statements
Page
Consolidated Statements of Operations
120
Consolidated Statements of Comprehensive Income
121
Consolidated Statements of Financial Position
122
Consolidated Statements of Shareholders' Equity
123
Consolidated Statements of Cash Flows
124
Notes to Consolidated Financial Statements Note 1 General
125
Note 2 Summary of Significant Accounting Policies
126
Note 3 Acquisitions
142
Note 4 Reportable Segments
142
Note 5 Investments
147
Note 6 Fair Value of Assets and Liabilities
155
Note 7 Derivative Financial Instruments and Off-balance Sheet
162
Financial Instruments Note 8 Reserve for Property and Casualty Insurance Claims and Claims 168
Expense
Note 9 Reserve for Life-Contingent Contract Benefits and
174
Contractholder Funds
Note 10 Reinsurance and Indemnification 178
Note 11 Deferred Policy Acquisition and Sales Inducement Costs
186
Note 12 Capital Structure
187
Note 13 Company Restructuring
190
Note 14 Commitments, Guarantees and Contingent Liabilities
191
Note 15 Income Taxes
197
Note 16 Statutory Financial Information and Dividend Limitations 199 Note 17 Benefit Plans
200
Note 18 Equity Incentive Plans
207
Note 19 Supplemental Cash Flow Information
209
Note 20 Other Comprehensive Income
209
Note 21 Quarterly Results (unaudited)
210
Report of Independent Registered Public Accounting Firm 211
The Allstate Corporation 119
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2019 Form 10-K Financial Statements
The Allstate Corporation and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31,
($ in millions, except per share data) 2019 2018 2017
Revenues
Property and casualty insurance premiums (net
of reinsurance ceded and indemnification
programs of $1,122, $1,016 and $971) $ 36,076 $ 34,048 $ 32,300
Life premiums and contract charges (net of
reinsurance ceded of $285, $290 and $303) 2,501 2,465 2,378
Other revenue 1,054 939 883
Net investment income 3,159 3,240 3,401
Realized capital gains and losses:
Total other-than-temporary impairment ("OTTI")
losses (48 ) (13 ) (146 )
OTTI losses reclassified to (from) other
comprehensive income ("OCI") 1 (1 ) (4 )
Net OTTI losses recognized in earnings (47 ) (14 ) (150 )
Sales and valuation changes on equity
investments and derivatives 1,932 (863 ) 595
Total realized capital gains and losses 1,885 (877 ) 445
Total revenues 44,675 39,815 39,407
Costs and expenses
Property and casualty insurance claims and
claims expense
(net of reinsurance ceded and indemnification
programs of $524, $1,378 and $1,807) 23,976 22,778 21,847
Life contract benefits (net of reinsurance ceded of $165, $240 and $179) 2,039 1,973
1,923
Interest credited to contractholder funds (net of reinsurance ceded of $20, $24 and $25) 640 654 690 Amortization of deferred policy acquisition costs 5,533 5,222
4,784
Operating costs and expenses 5,690 5,594
5,196
Pension and other postretirement remeasurement gains and losses 114 468 (217 ) Restructuring and related charges 41 67 96 Amortization of purchased intangibles 126 105 99 Impairment of goodwill and purchased intangibles 106 - 125 Interest expense 327 332 335 Total costs and expenses 38,592 37,193 34,878 Gain on disposition of operations 6 6 20 Income from operations before income tax expense 6,089 2,628 4,549 Income tax expense 1,242 468 995 Net income 4,847 2,160 3,554 Preferred stock dividends 169 148 116
Net income applicable to common shareholders $ 4,678 $ 2,012
$ 3,438
Earnings per common share: Net income applicable to common shareholders per common share - Basic $ 14.25 $ 5.78 $ 9.50 Weighted average common shares - Basic 328.2 347.8
362.0
Net income applicable to common shareholders
per common share - Diluted $ 14.03 $ 5.70 $ 9.35
Weighted average common shares - Diluted 333.5 353.2 367.8
See notes to consolidated financial statements.
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Financial Statements 2019 Form 10-K
The Allstate Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31,
($ in millions) 2019 2018 2017
Net income $ 4,847 $ 2,160 $ 3,554
Other comprehensive income (loss), after-tax
Changes in:
Unrealized net capital gains and losses 1,889 (754 ) 319
Unrealized foreign currency translation
adjustments (10 ) (48 ) 45
Unamortized pension and other postretirement
prior service credit (47 ) (59 ) (52 )
Other comprehensive income (loss), after-tax 1,832 (861 ) 312
Comprehensive income $ 6,679 $ 1,299 $ 3,866
See notes to consolidated financial statements.
The AllstateCorporation 121
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2019 Form 10-K Financial Statements
The Allstate Corporation and Subsidiaries
Consolidated Statements of Financial Position
December 31,
($ in millions, except par value data) 2019 2018
Assets
Investments
Fixed income securities, at fair value (amortized cost $56,293 and $57,134)
$ 59,044 $ 57,170
Equity securities, at fair value (cost $6,568 and $4,489) 8,162 5,036
Mortgage loans 4,817 4,670
Limited partnership interests 8,078 7,505Short-term, at fair value (amortized cost $4,256 and $3,027) 4,256
3,027
Other 4,005 3,852
Total investments 88,362 81,260
Cash 338 499
Premium installment receivables, net 6,472 6,154
Deferred policy acquisition costs 4,699
4,784
Reinsurance and indemnification recoverables, net 9,211 9,565 Accrued investment income 600 600 Property and equipment, net 1,145 1,045 Goodwill 2,545 2,530 Other assets 3,534 3,007 Separate Accounts 3,044 2,805 Total assets $ 119,950 $ 112,249 Liabilities Reserve for property and casualty insurance claims and claims expense $ 27,712 $ 27,423 Reserve for life-contingent contract benefits 12,300 12,208 Contractholder funds 17,692 18,371 Unearned premiums 15,343 14,510 Claim payments outstanding 929
1,007
Deferred income taxes 1,154
425
Other liabilities and accrued expenses 9,147 7,737 Long-term debt 6,631 6,451 Separate Accounts 3,044 2,805 Total liabilities 93,952 90,937
Commitments and Contingent Liabilities (Note 7, 8 and 14) Shareholders' equity Preferred stock and additional capital paid-in, $1 par value, 25 million shares authorized, 92.5 thousand and 79.8 thousand shares issued and outstanding, $2,313 and $1,995 aggregate liquidation preference
2,248 1,930
Common stock, $.01 par value, 2.0 billion shares authorized
and 900 million issued, 319 million and 332 million shares
outstanding 9 9
Additional capital paid-in 3,463 3,310
Retained income 48,074 44,033
Deferred Employee Stock Ownership Plan ("ESOP") expense - (3 )
Treasury stock, at cost (581 million and 568 million shares) (29,746 ) (28,085 )
Accumulated other comprehensive income:
Unrealized net capital gains and losses:
Unrealized net capital gains and losses on fixed income
securities with OTTI 70 75
Other unrealized net capital gains and losses 2,094 (51 ) Unrealized adjustment to DAC, DSI and insurance reserves (277 ) (26 ) Total unrealized net capital gains and losses 1,887 (2 ) Unrealized foreign currency translation adjustments (59
) (49 ) Unamortized pension and other postretirement prior service credit
122 169
Total accumulated other comprehensive income ("AOCI") 1,950 118
Total shareholders' equity 25,998
21,312
Total liabilities and shareholders' equity $ 119,950 $ 112,249
See notes to consolidated financial statements.
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Financial Statements 2019 Form 10-K
The Allstate Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years Ended December 31,
($ in millions, except per share data) 2019 2018 2017
Preferred stock par value $ - $ - $ - Preferred stock additional capital paid-in Balance, beginning of year 1,930 1,746
1,746
Preferred stock issuance, net of issuance costs 1,414 557 - Preferred stock redemption (1,096 ) (373 ) - Balance, end of year 2,248 1,930 1,746 Common stock par value 9 9 9 Common stock additional capital paid-in Balance, beginning of year 3,310 3,313
3,303
Forward contract on accelerated share repurchase agreement 75 (105 ) (45 ) Equity incentive plans activity 78 102 55 Balance, end of year 3,463 3,310 3,313 Retained income Balance, beginning of year 44,033 41,579 39,009 Cumulative effect of change in accounting principle 21 1,088 - Net income 4,847 2,160
3,554
Dividends on common stock (declared per share of $2.00, $1.84 and $1.48) (658 ) (646 ) (540 ) Dividends on preferred stock (169 ) (148 ) (116 ) Reclassification of tax effects due to change in accounting principle - - (328 ) Balance, end of year 48,074 44,033 41,579 Deferred ESOP expense Balance, beginning of year (3 ) (3 ) (6 ) Payments 3 - 3 Balance, end of year - (3 ) (3 ) Treasury stock Balance, beginning of year (28,085 ) (25,982 ) (24,741 ) Shares acquired (1,810 ) (2,198 ) (1,423 ) Shares reissued under equity incentive plans, net 149 95 182 Balance, end of year (29,746 ) (28,085 ) (25,982 ) Accumulated other comprehensive income (loss) Balance, beginning of year 118 1,889
1,249
Cumulative effect of change in accounting
principle - (910 ) -
Change in unrealized net capital gains and
losses 1,889 (754 ) 319
Change in unrealized foreign currency
translation adjustments (10 ) (48 ) 45
Change in unamortized pension and other
postretirement prior service credit (47 ) (59 ) (52 )
Reclassification of tax effects due to change
in accounting principle - - 328
Balance, end of year 1,950 118 1,889
Total shareholders' equity $ 25,998 $ 21,312 $ 22,551
See notes to consolidated financial statements.
The Allstate Corporation 123
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2019 Form 10-K Financial Statements
The Allstate Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
($ in millions) 2019 2018 2017
Cash flows from operating activities
Net income $ 4,847 $ 2,160 $ 3,554
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization and other non-cash
items 647 511 483
Realized capital gains and losses (1,885 ) 877 (445 )
Pension and other postretirement remeasurement
gains and losses 114 468 (217 )
Gain on disposition of operations (6 ) (6 ) (20 )
Interest credited to contractholder funds 640 654 690
Impairment of goodwill and purchased
intangibles 106 - 125
Changes in:
Policy benefits and other insurance reserves (508 ) 469 302
Unearned premiums 801 915 463
Deferred policy acquisition costs (85 ) (296 ) (214 )
Premium installment receivables, net (299 ) (396 ) (131 )
Reinsurance recoverables, net 320 (656 ) (211 )
Income taxes 487 (380 ) (52 )
Other operating assets and liabilities (50 ) 855 (13 )
Net cash provided by operating activities 5,129 5,175 4,314
Cash flows from investing activities
Proceeds from sales
Fixed income securities 29,849 33,183 25,341
Equity securities 5,277 6,859 6,504
Limited partnership interests 756 764 1,125
Other investments 303 533 274
Investment collections
Fixed income securities 2,570 3,466 4,194
Mortgage loans 695 529 600
Other investments 254 488 642
Investment purchases
Fixed income securities (31,317 ) (36,960 ) (31,145 )
Equity securities (7,176 ) (5,936 ) (6,585 )
Limited partnership interests (1,332 ) (1,679 ) (1,440 )
Mortgage loans (844 ) (664 ) (646 )
Other investments (666 ) (864 ) (999 )
Change in short-term investments, net (767 ) (505 ) 2,610
Change in other investments, net 42 (98 ) (30 )
Purchases of property and equipment, net (433 ) (277 ) (299 )
Acquisition of operations (18 ) (558 ) (1,356 )
Net cash used in investing activities (2,807 ) (1,719 ) (1,210 )
Cash flows from financing activities
Proceeds from issuance of long-term debt 491 498 -
Redemption and repayment of long-term debt (317 ) (400 ) -
Proceeds from issuance of preferred stock 1,414 557 -
Redemption of preferred stock (1,132 ) (385 ) -
Contractholder fund deposits 996 1,010 1,025
Contractholder fund withdrawals (1,662 ) (1,967 ) (1,890 )
Dividends paid on common stock (653 ) (614 ) (525 )
Dividends paid on preferred stock (134 ) (134 ) (116 )
Treasury stock purchases (1,735 ) (2,303 ) (1,495 )
Shares reissued under equity incentive plans,
net 120 73 135
Other 129 91 (57 )
Net cash used in financing activities (2,483 ) (3,574 ) (2,923 )
Net (decrease) increase in cash (161 ) (118 ) 181
Cash at beginning of year 499 617 436
Cash at end of year $ 338 $ 499 $ 617
See notes to consolidated financial statements.
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Notes to Consolidated Financial Statements 2019 Form 10-K
Notes to Consolidated Financial Statements
Note 1 General
Basis of presentation
The accompanying consolidated financial statements include the accounts of The
Allstate Corporation (the "Corporation") and its wholly owned subsidiaries,
primarily Allstate Insurance Company ("AIC"), a property and casualty insurance
company with various property and casualty and life and investment subsidiaries,
including Allstate Life Insurance Company ("ALIC") (collectively referred to as
the "Company" or "Allstate"). These consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America ("GAAP"). All significant intercompany accounts and
transactions have been eliminated.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 ("Tax Legislation")
became effective, permanently reducing the U.S. corporate income tax rate from
35% to 21% beginning January 1, 2018. As a result, the corporate tax rate is not
comparable between periods.
Nature of operations
Allstate is engaged, principally in the United States, in the property and
casualty insurance and life insurance businesses. Allstate is one of the
country's largest personal property and casualty insurers and is organized into
seven reportable segments: Allstate Protection, Discontinued Lines and
Coverages, Service Businesses, Allstate Life, Allstate Benefits, Allstate
Annuities, and Corporate and Other.
Allstate's primary business is the sale of private passenger auto and homeowners
insurance. The Company also offers several other personal property and casualty
insurance products, select commercial property and casualty coverages, consumer
product protection plans, device and mobile data collection services and
analytic solutions using automotive telematics information, roadside assistance,
finance and insurance products, life insurance, voluntary accident and health
insurance and identity protection. Allstate primarily distributes its products
through exclusive agencies, financial specialists, independent agencies and
brokers, major retailers, contact centers and the internet.
Risks and uncertainties
Allstate has exposure to catastrophic events, including wind and hail,
wildfires, tornadoes, hurricanes, tropical storms, earthquakes, volcanic
eruptions, terrorism and industrial accidents.
Catastrophes, an inherent risk of the property and casualty insurance business,
have contributed, and will continue to contribute, to material year-to-year
fluctuations in the Company's results of operations and financial position (see
Note 8). The nature and level of catastrophic loss experienced in any period
cannot be predicted and could be material to results of operations and financial
position.
The Company considers the following categories and locations to be the greatest
areas of potential catastrophe losses:
• Wildfires - California, Colorado, Arizona and Texas
• Hurricanes - Major metropolitan centers in counties along the eastern and
gulf coasts of the United States
• Wind/Hail, Rain and Tornado - Texas, Illinois, Colorado and Georgia
• Earthquakes and fires following earthquakes -Major metropolitan areas near
fault lines in the states of California, Oregon, Washington, South Carolina,
Missouri, Kentucky and Tennessee
The Allstate Corporation 125
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2019 Form 10-K Notes to Consolidated Financial Statements
Note 2 Summary of Significant Accounting Policies
Investments
Fixed income securities include bonds, asset-backed securities ("ABS") and
mortgage-backed securities ("MBS"). MBS includes residential and commercial
mortgage-backed securities that were previously disclosed separately. Fixed
income securities, which may be sold prior to their contractual maturity, are
designated as available-for-sale and are carried at fair value. The difference
between amortized cost and fair value, net of deferred income taxes and related
life and annuity deferred policy acquisition costs ("DAC"), deferred sales
inducement costs ("DSI") and reserves for life-contingent contract benefits, is
reflected as a component of AOCI. Cash received from calls and make-whole
payments is reflected as a component of proceeds from sales and cash received
from maturities and pay-downs is reflected as a component of investment
collections within the Consolidated Statements of Cash Flows.
Equity securities primarily include common stocks, exchange traded and mutual
funds, non-redeemable preferred stocks and real estate investment trust equity
investments. Certain exchange traded and mutual funds have fixed income
securities as their underlying investments. Equity securities are carried at
fair value. Equity securities without readily determinable or estimable fair
values are measured using the measurement alternative, which is cost less
impairment, if any, and adjustments resulting from observable price changes in
orderly transactions for the identical or similar investment of the same issuer.
Due to the adoption of a new accounting standard for the recognition and
measurement of financial assets and financial liabilities, the periodic change
in fair value of equity securities is recognized within realized capital gains
and losses on the Consolidated Statements of Operations effective January 1,
2018. As a result, 2017 net investment income and net realized capital gains and
losses are not comparable to other periods presented.
Mortgage loans are carried at unpaid principal balances, net of unamortized
premium or discount and valuation allowances. Valuation allowances are
established for impaired loans when it is probable that contractual principal
and interest will not be collected.
Investments in limited partnership interests are primarily accounted for in
accordance with the equity method of accounting ("EMA") and include interests in
private equity funds, real estate funds and other funds. Investments in limited
partnership interests purchased prior to January 1, 2018, where the Company's
interest is so minor that it exercises virtually no influence over operating and
financial policies, are accounted for at fair value primarily utilizing the net
asset value ("NAV") as a practical expedient to determine fair value.
Short-term investments, including money market funds, commercial paper, U.S.
Treasury bills and other short-term investments, are carried at fair value.
Other investments primarily consist of bank loans, policy loans, real estate,
agent loans and derivatives. Bank
loans are primarily senior secured corporate loans and are carried at amortized
cost. Policy loans are carried at unpaid principal balances. Real estate is
carried at cost less accumulated depreciation. Agent loans are loans issued to
exclusive Allstate agents and are carried at unpaid principal balances, net of
valuation allowances. Derivatives are carried at fair value.
Investment income primarily consists of interest, dividends, income from limited
partnership interests, rental income from real estate, and income from certain
derivative transactions. Interest is recognized on an accrual basis using the
effective yield method and dividends are recorded at the ex-dividend date.
Interest income for ABS and MBS is determined considering estimated pay-downs,
including prepayments, obtained from third-party data sources and internal
estimates. Actual prepayment experience is periodically reviewed, and effective
yields are recalculated when differences arise between the prepayments
originally anticipated and the actual prepayments received and currently
anticipated. For ABS and MBS of high credit quality with fixed interest rates,
the effective yield is recalculated on a retrospective basis. For all others,
the effective yield is recalculated on a prospective basis. Accrual of income is
suspended for other-than-temporarily impaired fixed income securities when the
timing and amount of cash flows expected to be received is not reasonably
estimable. Accrual of income is suspended for mortgage loans, bank loans and
agent loans that are in default or when full and timely collection of principal
and interest payments is not probable. Cash receipts on investments on
nonaccrual status are generally recorded as a reduction of carrying value.
Income from limited partnership interests carried at fair value is recognized
based upon the changes in fair value of the investee's equity primarily
determined using NAV. Income from EMA limited partnership interests is
recognized based on the Company's share of the partnerships' earnings. Income
from EMA limited partnership interests is generally recognized on a three month
delay due to the availability of the related financial statements from
investees.
Realized capital gains and losses include gains and losses on investment sales,
write-downs in value due to other-than-temporary declines in fair value,
adjustments to valuation allowances on mortgage loans and agent loans, valuation
changes of equity investments, including equity securities and certain limited
partnerships where the underlying assets are predominately public equity
securities, and periodic changes in fair value and settlements of certain
derivatives, including hedge ineffectiveness. Realized capital gains and losses
on investment sales are determined on a specific identification basis.
Derivative and embedded derivative financial instruments
Derivative financial instruments include interest rate swaps, credit default
swaps, futures (interest rate and equity), options (including swaptions),
interest rate caps, warrants and rights, foreign currency swaps,
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Notes to Consolidated Financial Statements 2019 Form 10-K
foreign currency forwards, total return swaps and certain investment risk
transfer reinsurance agreements. Derivatives required to be separated from the
host instrument and accounted for as derivative financial instruments ("subject
to bifurcation") are embedded in equity-indexed life and annuity contracts and
reinsured variable annuity contracts.
All derivatives are accounted for on a fair value basis and reported as other
investments, other assets, other liabilities and accrued expenses or
contractholder funds. Embedded derivative instruments subject to bifurcation are
also accounted for on a fair value basis and are reported together with the host
contract. The change in fair value of derivatives embedded in life and annuity
product contracts and subject to bifurcation is reported in life and annuity
contract benefits or interest credited to contractholder funds. Cash flows from
embedded derivatives subject to bifurcation and derivatives receiving hedge
accounting are reported consistently with the host contracts and hedged risks,
respectively, within the Consolidated Statements of Cash Flows. Cash flows from
other derivatives are reported in cash flows from investing activities within
the Consolidated Statements of Cash Flows.
When derivatives meet specific criteria, they may be designated as accounting
hedges and accounted for as fair value, cash flow, foreign currency fair value
or foreign currency cash flow hedges. The hedged item may be either all or a
specific portion of a recognized asset, liability or an unrecognized firm
commitment attributable to a particular risk for fair value hedges. At the
inception of the hedge, the Company formally documents the hedging relationship
and risk management objective and strategy. The documentation identifies the
hedging instrument, the hedged item, the nature of the risk being hedged and the
methodology used to assess the effectiveness of the hedging instrument in
offsetting the exposure to changes in the hedged item's fair value attributable
to the hedged risk. For a cash flow hedge, this documentation includes the
exposure to changes in the variability in cash flows attributable to the hedged
risk. The Company does not exclude any component of the change in fair value of
the hedging instrument from the effectiveness assessment. At each reporting
date, the Company confirms that the hedging instrument continues to be highly
effective in offsetting the hedged risk.
Fair value hedges The change in fair value of hedging instruments used in fair
value hedges of investment assets or a portion thereof is reported in net
investment income, together with the change in fair value of the hedged items.
The change in fair value of hedging instruments used in fair value hedges of
contractholder funds liabilities or a portion thereof is reported in interest
credited to contractholder funds, together with the change in fair value of the
hedged items. Accrued periodic settlements on swaps are reported together with
the changes in fair value of the related swaps in net investment income or
interest credited to contractholder funds. The amortized cost
for fixed income securities, the carrying value for mortgage loans or the
carrying value of a designated hedged liability is adjusted for the change in
fair value of the hedged risk.
Cash flow hedges For hedging instruments used in cash flow hedges, the changes
in fair value of the derivatives are reported in AOCI. Amounts are reclassified
to net investment income, realized capital gains and losses or interest expense
as the hedged or forecasted transaction affects income. Accrued periodic
settlements on derivatives used in cash flow hedges are reported in net
investment income. The amount reported in AOCI for a hedged transaction is the
cumulative gain or loss on the derivative instrument from inception of the hedge
less gains or losses previously reclassified from AOCI into income. If the
Company expects at any time that the loss reported in AOCI would lead to a net
loss on the combination of the hedging instrument and the hedged transaction
which may not be recoverable, a loss is recognized immediately in realized
capital gains and losses. If an impairment loss is recognized on an asset or an
additional obligation is incurred on a liability involved in a hedge
transaction, any offsetting gain in AOCI is reclassified and reported together
with the impairment loss or recognition of the obligation.
Termination of hedge accounting If, subsequent to entering into a hedge
transaction, the derivative becomes ineffective (including if the hedged item is
sold or otherwise extinguished, the occurrence of a hedged forecasted
transaction is no longer probable or the hedged asset becomes
other-than-temporarily impaired), the Company may terminate the derivative
position. The Company may also terminate derivative instruments or redesignate
them as non-hedge as a result of other events or circumstances. If the
derivative instrument is not terminated when a fair value hedge is no longer
effective, the future gains and losses recognized on the derivative are reported
in realized capital gains and losses. When a fair value hedge is no longer
effective, is redesignated as non-hedge or when the derivative has been
terminated, the fair value gain or loss on the hedged asset, liability or
portion thereof previously recognized in income while the hedge was in place and
used to adjust the amortized cost of hedged fixed income securities, carrying
value of hedged mortgage loans or carrying value of a hedged liability, is
amortized over the remaining life of the hedged asset, liability or portion
thereof, and reflected in net investment income or interest credited to
contractholder funds beginning in the period that hedge accounting is no longer
applied. If the hedged item in a fair value hedge is an asset that has become
other-than-temporarily impaired, the adjustment made to the amortized cost for
fixed income securities or the carrying value for mortgage loans is subject to
the accounting policies applied to other-than-temporarily impaired assets.
When a derivative instrument used in a cash flow hedge of an existing asset or
liability is no longer effective or is terminated, the gain or loss recognized
on the derivative is reclassified from AOCI to income as the hedged risk impacts
income. If the derivative
The Allstate Corporation 127
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2019 Form 10-K Notes to Consolidated Financial Statements
instrument is not terminated when a cash flow hedge is no longer effective, future gains and losses recognized on the derivative are reported in realized capital gains and losses. When a derivative instrument used in a cash flow hedge of a forecasted transaction is terminated because it is probable the forecasted transaction will not occur, the gain or loss recognized on the derivative is immediately reclassified from AOCI to realized capital gains and losses in the period that hedge accounting is no longer applied. Non-hedge derivative financial instruments For derivatives for which hedge accounting is not applied, the income statement effects, including fair value gains and losses and accrued periodic settlements, are reported either in realized capital gains and losses or in a single line item together with the results of the associated asset or liability for which risks are being managed. Securities loaned The Company's business activities include securities lending transactions, which are used primarily to generate net investment income. The proceeds received in conjunction with securities lending transactions can be reinvested in short-term investments or fixed income securities. These transactions are short-term in nature, usually 30 days or less. The Company receives cash collateral for securities loaned in an amount generally equal to 102% and 105% of the fair value of domestic and foreign securities, respectively, and records the related obligations to return the collateral in other liabilities and accrued expenses. The carrying value of these obligations approximates fair value because of their relatively short-term nature. The Company monitors the market value of securities loaned on a daily basis and obtains additional collateral as necessary under the terms of the agreements to mitigate counterparty credit risk. The Company maintains the right and ability to repossess the securities loaned on short notice. Recognition of premium revenues and contract charges, and related benefits and interest credited Property and casualty insurance premiums include premiums from personal lines policies, protection plans, other contracts (primarily finance and insurance products) and roadside assistance. Personal lines insurance premiums are deferred and earned on a pro-rata basis over the terms of the policies, typically periods of six or twelve months. Revenues related to protection plans, other contracts (primarily finance and insurance products) and roadside assistance are deferred and earned over the term of the contract in a manner that recognizes revenue as obligations under the contracts are performed. Revenues from these products are classified as premiums as the products are backed by insurance. Protection plans and finance and insurance premiums are recognized using a cost-based incurrence method over the term of the contracts, which is generally over one to five years. Roadside assistance premiums are recognized evenly over the term of the contract as performance obligations are fulfilled. The portion of premiums written applicable to the unexpired terms of the policies is recorded as unearned premiums. As of December 31, 2019, unearned premiums were $12.57 billion and $2.76 billion for Allstate Protection and Service Businesses, respectively. Premium installment receivables, net, represent premiums written and not yet collected, net of an allowance for uncollectible premiums. The Company regularly evaluates premium installment receivables and adjusts its valuation allowance as appropriate. The valuation allowance for uncollectible premium installment receivables was $90 million and $77 million as of December 31, 2019 and 2018, respectively. Traditional life insurance products consist principally of products with fixed and guaranteed premiums and benefits, primarily term and whole life insurance products. Voluntary accident and health insurance products are expected to remain in force for an extended period and therefore are primarily classified as long-duration contracts. Premiums from these products are recognized as revenue when due from policyholders. Benefits are reflected in contract benefits and recognized over the life of the policy in relation to premiums. Immediate annuities with life contingencies, including certain structured settlement annuities, provide benefits over a period that extends beyond the period during which premiums are collected. Premiums from these products are recognized as revenue when received at the inception of the contract. Benefits are recognized in relation to premiums with the establishment of a reserve. The change in reserve over time is recorded in contract benefits and primarily relates to accumulation at the discount rate and annuitant mortality. Profits from these policies come primarily from investment income, which is recognized over the life of the contract. Interest-sensitive life contracts, such as universal life and single premium life, are insurance contracts whose terms are not fixed and guaranteed. The terms that may be changed include premiums paid by the contractholder, interest credited to the contractholder account balance and contract charges assessed against the contractholder account balance. Premiums from these contracts are reported as contractholder fund deposits. Contract charges consist of fees assessed against the contractholder account balance for the cost of insurance (mortality risk), contract administration and surrender of the contract prior to contractually specified dates. These contract charges are recognized as revenue when assessed against the contractholder account balance. Contract benefits include life-contingent benefit payments in excess of the contractholder account balance. Contracts that do not subject the Company to significant risk arising from mortality or morbidity are referred to as investment contracts. Fixed annuities, including market value adjusted annuities, equity-indexed annuities and immediate annuities without life
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Notes to Consolidated Financial Statements 2019 Form 10-K
contingencies, are considered investment contracts. Consideration received for
such contracts is reported as contractholder fund deposits. Contract charges for
investment contracts consist of fees assessed against the contractholder account
balance for maintenance, administration and surrender of the contract prior to
contractually specified dates, and are recognized when assessed against the
contractholder account balance.
Interest credited to contractholder funds represents interest accrued or paid on
interest-sensitive life and investment contracts. Crediting rates for certain
fixed annuities and interest-sensitive life contracts are adjusted periodically
by the Company to reflect current market conditions subject to contractually
guaranteed minimum rates. Crediting rates for indexed life and annuities are
generally based on a specified interest rate index or an equity index, such as
the Standard & Poor's 500 Index ("S&P 500"). Interest credited also includes
amortization of DSI expenses. DSI is amortized into interest credited using the
same method used to amortize DAC.
Contract charges for variable life and variable annuity products consist of fees
assessed against the contractholder account balances for contract maintenance,
administration, mortality, expense and surrender of the contract prior to
contractually specified dates. Contract benefits incurred for variable annuity
products include guaranteed minimum death, income, withdrawal and accumulation
benefits. Substantially all of the Company's variable annuity business is ceded
through reinsurance agreements and the contract charges and contract benefits
related thereto are reported net of reinsurance ceded.
Other revenue
Other revenue represents fees collected from policyholders relating to premium
installment payments, commissions on sales of non-proprietary products, sales of
identity protection services, fee-based services and other revenue transactions.
Other revenue is recognized when performance obligations are fulfilled.
Deferred policy acquisition and sales inducement costs
Costs that are related directly to the successful acquisition of new or renewal
insurance policies and investment contracts are deferred and recorded as DAC.
These costs are principally agency's and brokers' remuneration, premium taxes
and certain underwriting expenses. DSI costs, which are deferred and recorded as
other assets, relate to sales inducements offered on sales to new customers,
principally on fixed annuity and interest-sensitive life contracts. These sales
inducements are primarily in the form of additional credits to the customer's
account balance or enhancements to interest credited for a specified period
which are in excess of the rates currently being credited to similar contracts
without sales inducements. DSI is amortized into income using the same
methodology and assumptions as DAC and is included in interest credited to
contractholder funds. All other acquisition costs are expensed as incurred and
included in operating costs and expenses.
For property and casualty insurance, DAC is amortized into income as premiums
are earned, typically over periods of six or twelve months for personal lines
policies or generally one to five years for protection plans and other contracts
(primarily related to finance and insurance products), and is included in
amortization of deferred policy acquisition costs. DAC associated with property
and casualty insurance is periodically reviewed for recoverability and adjusted
if necessary. Future investment income is considered in determining the
recoverability of DAC.
For traditional life and voluntary accident and health insurance, DAC is
amortized over the premium paying period of the related policies in proportion
to the estimated revenues on such business. Assumptions used in the amortization
of DAC and reserve calculations are established at the time the policy is issued
and are generally not revised during the life of the policy. Any deviations from
projected business in force resulting from actual policy terminations differing
from expected levels and any estimated premium deficiencies may result in a
change to the rate of amortization in the period such events occur. Generally,
the amortization periods for these policies approximates the estimated lives of
the policies. The Company periodically reviews the recoverability of DAC using
actual experience and current assumptions. Prior to fourth quarter 2017, the
Company evaluated traditional life insurance products and immediate annuities
with life contingencies on an aggregate basis. In conjunction with the segment
changes that occurred in the fourth quarter of 2017, traditional life insurance
products, immediate annuities with life contingencies, and voluntary accident
and health insurance products are reviewed individually. If actual experience
and current assumptions are adverse compared to the original assumptions and a
premium deficiency is determined to exist, any remaining unamortized DAC balance
would be expensed to the extent not recoverable and the establishment of a
premium deficiency reserve may be required for any remaining deficiency.
For interest-sensitive life insurance, DAC and DSI are amortized in proportion
to the incidence of the total present value of gross profits, which includes
both actual historical gross profits ("AGP") and estimated future gross profits
("EGP") expected to be earned over the estimated lives of the contracts. The
amortization is net of interest on the prior period DAC balance using rates
established at the inception of the contracts. Actual amortization periods
generally range from 15-30 years; however, incorporating estimates of the rate
of customer surrenders, partial withdrawals and deaths generally results in the
majority of the DAC being amortized during the surrender charge period, which is
typically 10-20 years for interest-sensitive life. The rate of DAC and DSI
amortization is reestimated and adjusted by a cumulative charge or credit to
income when there is a difference between the incidence of actual versus
expected gross profits in a reporting period or when there is a change in total
EGP. When DAC or DSI amortization or a component of gross profits for a
quarterly period is potentially negative (which would result in an increase of
the DAC
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2019 Form 10-K Notes to Consolidated Financial Statements
or DSI balance) as a result of negative AGP, the specific facts and circumstances surrounding the potential negative amortization are considered to determine whether it is appropriate for recognition in the consolidated financial statements. Negative amortization is only recorded when the increased DAC or DSI balance is determined to be recoverable based on facts and circumstances. Recapitalization of DAC and DSI is limited to the originally deferred costs plus interest. AGP and EGP primarily consist of the following components: contract charges for the cost of insurance less mortality costs and other benefits; investment income and realized capital gains and losses less interest credited; and surrender and other contract charges less maintenance expenses. The principal assumptions for determining the amount of EGP are mortality, persistency, expenses, investment returns, including capital gains and losses on assets supporting contract liabilities, interest crediting rates to contractholders, and the effects of any hedges. For products whose supporting investments are exposed to capital losses in excess of the Company's expectations which may cause periodic AGP to become temporarily negative, EGP and AGP utilized in DAC and DSI amortization may be modified to exclude the excess capital losses. The Company performs quarterly reviews of DAC and DSI recoverability for interest-sensitive life and fixed annuity contracts using current assumptions. If a change in the amount of EGP is significant, it could result in the unamortized DAC or DSI not being recoverable, resulting in a charge which is included as a component of amortization of deferred policy acquisition costs or interest credited to contractholder funds, respectively. The DAC and DSI balances presented include adjustments to reflect the amount by which the amortization of DAC and DSI would increase or decrease if the unrealized capital gains or losses in the respective product investment portfolios were actually realized. The adjustments are recorded net of tax in AOCI. DAC, DSI and deferred income taxes determined on unrealized capital gains and losses and reported in AOCI recognize the impact on shareholders' equity consistently with the amounts that would be recognized in the income statement on realized capital gains and losses. Customers of the Company may exchange one insurance policy or investment contract for another offered by the Company, or make modifications to an existing investment, life or property and casualty contract issued by the Company. These transactions are identified as internal replacements for accounting purposes. Internal replacement transactions determined to result in replacement contracts that are substantially unchanged from the replaced contracts are accounted for as continuations of the replaced contracts. Unamortized DAC and DSI related to the replaced contracts continue to be deferred and amortized in connection with the replacement contracts. For interest-sensitive life and investment contracts, the EGP of the replacement contracts are treated as a revision to the EGP of the replaced contracts in the determination of amortization of DAC and DSI. For traditional life and property and casualty insurance policies, any changes to unamortized DAC that result from replacement contracts are treated as prospective revisions. Any costs associated with the issuance of replacement contracts are characterized as maintenance costs and expensed as incurred. Internal replacement transactions determined to result in a substantial change to the replaced contracts are accounted for as an extinguishment of the replaced contracts, and any unamortized DAC and DSI related to the replaced contracts are eliminated with a corresponding charge to amortization of deferred policy acquisition costs or interest credited to contractholder funds, respectively. The costs assigned to the right to receive future cash flows from certain business purchased from other insurers are also classified as DAC in the Consolidated Statements of Financial Position. The costs capitalized represent the present value of future profits expected to be earned over the lives of the contracts acquired. These costs are amortized as profits emerge over the lives of the acquired business and are periodically evaluated for recoverability. The present value of future profits was $39 million and $45 million as of December 31, 2019 and 2018, respectively. Amortization expense of the present value of future profits was $6 million, $2 million and $6 million in 2019, 2018 and 2017, respectively. Reinsurance and Indemnification Reinsurance In the normal course of business, the Company seeks to limit aggregate and single exposure to losses on large risks by purchasing reinsurance. The Company has also used reinsurance to effect the disposition of certain blocks of business. Reinsurance does not extinguish the Company's primary liability under the policies written. Therefore, the Company regularly evaluates the financial condition of its reinsurers, including their activities with respect to claim settlement practices and commutations, and establishes allowances for uncollectible reinsurance as appropriate. Indemnification The Company also participates in various indemnification mechanisms, including industry pools and facilities, which are backed by the financial resources of the property and casualty insurance company market participants. Indemnification recoverables are considered collectible based on the industry pool and facility enabling legislation. The amounts reported as reinsurance and indemnification recoverables include amounts billed to reinsurers and indemnitors on losses paid as well as estimates of amounts expected to be recovered from reinsurers and indemnitors on insurance liabilities and contractholder funds that have not yet been paid. Reinsurance and indemnification recoverables on unpaid losses are estimated based upon assumptions consistent with those used in establishing the liabilities related to the underlying contracts. Insurance liabilities are reported gross of reinsurance and indemnification recoverables. Reinsurance and
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Notes to Consolidated Financial Statements 2019 Form 10-K
indemnification premiums are generally reflected in income in a manner
consistent with the recognition of premiums on the associated contracts. For
catastrophe coverage, the cost of reinsurance premiums is recognized ratably
over the contract period to the extent coverage remains available.
Reinsurance and indemnification recoverables are recognized as an offset to
gross reserves for property and casualty insurance claims and claims expense.
Goodwill
Goodwill represents the excess of amounts paid for acquiring businesses over the
fair value of the net assets acquired, less any impairment of goodwill
recognized. The Company's goodwill reporting units are equivalent to its
reportable segments, Allstate Protection, Service Businesses, Allstate Life and
Allstate Benefits to which goodwill has been assigned.
Goodwill by reporting unit
As of December 31,
($ in millions) 2019 2018
Allstate Protection $ 810 $ 810
Service Businesses 1,464 1,449
Allstate Life 175 175
Allstate Benefits 96 96
Total $ 2,545 $ 2,530
Goodwill is recognized when acquired and allocated to reporting units based on
which unit is expected to benefit from the synergies of the business
combination. Goodwill is not amortized but is tested for impairment at least
annually. The Company performs its annual goodwill impairment testing during the
fourth quarter of each year based upon data as of the close of the third
quarter. Goodwill impairment is measured and recognized as the amount by which a
reporting unit's carrying value, including goodwill, exceeds its fair value, not
to exceed the carrying amount of goodwill allocated to the reporting unit. The
Company also reviews goodwill for impairment whenever events or changes in
circumstances, such as deteriorating or adverse market conditions, indicate that
it is more likely than not that the carrying amount of the reporting unit
including goodwill may exceed the fair value of the reporting unit. The goodwill
impairment analysis is performed at the reporting unit level.
In fourth quarter 2017, the Company adopted new reportable segments, which
required the Company to evaluate goodwill, including the allocation of goodwill
to any new reporting units on a relative fair value basis. The reallocation was
computed using fair values for the goodwill reporting units determined using
discounted cash flow ("DCF") calculations and market to book multiples derived
from a peer company analysis. In conjunction with the reallocation of goodwill,
the Company recognized $125 million of goodwill impairment related to the
goodwill allocated to the Allstate Annuities reporting unit reflecting a
market-based valuation. As of December 31, 2019 and 2018, the fair value of the
Company's reporting units exceeded their carrying values.
Intangible assets
Intangible assets (reported in other assets) consist of capitalized costs
primarily related to acquired customer relationships, trade names and licenses,
technology and other assets. The estimated useful lives of customer
relationships, technology and other intangible assets are generally 10 years, 5
years and 7 years, respectively. Intangible assets are carried at cost less
accumulated amortization. Amortization expense is calculated using an
accelerated amortization method. Amortization expense on intangible assets was
$126 million, $105 million and $99 million in 2019, 2018 and 2017, respectively.
Amortization expense of intangible assets for the next five years and thereafter
($ in millions)
2020 $ 109
2021 91
2022 74
2023 60
2024 45
Thereafter 64
Total amortization $ 443
Accumulated amortization on intangible assets was $633 million and $572 million
as of December 31, 2019 and 2018, respectively. Trade names and licenses are
considered to have an indefinite useful life and are reviewed for impairment at
least annually or more frequent if circumstances arise that indicate an
impairment may have occurred. An impairment is recognized if the carrying amount
of the asset exceeds its estimated fair value.
Intangible assets by type
As of December 31,
($ in millions) 2019 2018
Customers relationships $ 419 $ 530
Trade names and licenses 38 143
Technology and other 24 40
Total $ 481 $ 713
During second quarter 2019, the Company made the decision to phase-out the use
of the SquareTrade trade name in the United States and sell consumer protection
plans under the Allstate Protection Plans name. The SquareTrade trade name will
continue to be used outside of the United States. The change required an
impairment evaluation of the indefinite-lived intangible asset recognized in the
Service Businesses segment for SquareTrade's trade name recorded when
SquareTrade was acquired in 2017.
During fourth quarter 2019, the Company made the decision to integrate Esurance
into the Allstate brand as part of the Transformative Growth Plan. This required
an impairment evaluation of the indefinite-lived intangible asset recognized in
the Allstate Protection segment for the Esurance trade name recorded when
Esurance was acquired in 2011.
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2019 Form 10-K Notes to Consolidated Financial Statements
As a result of these actions, the Company recognized total impairment charges of $106 million pre-tax during 2019. Property and equipment Property and equipment is carried at cost less accumulated depreciation. Included in property and equipment are capitalized costs related to computer software licenses and software developed for internal use. These costs generally consist of certain external payroll and payroll related costs. Property and equipment depreciation is calculated using the straight-line method over the estimated useful lives of the assets, generally 3 to 10 years for equipment and 40 years for real property. Depreciation expense is reported in operating costs and expenses. Accumulated depreciation on property and equipment was $2.60 billion and $2.41 billion as of December 31, 2019 and 2018, respectively. Depreciation expense on property and equipment was $326 million, $299 million and $290 million in 2019, 2018 and 2017, respectively. The Company reviews its property and equipment for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Income taxes Income taxes are accounted for using the asset and liability method under which deferred tax assets and liabilities are recognized for temporary differences between the financial reporting and tax bases of assets and liabilities at the enacted tax rates. The principal assets and liabilities giving rise to such differences are DAC, unearned premiums, investments (including unrealized capital gains and losses) and insurance reserves. A deferred tax asset valuation allowance is established when it is more likely than not such assets will not be realized. The Company recognizes interest expense related to income tax matters in income tax expense and penalties in other expense. Reserve for property and casualty insurance claims and claims expense The reserve for property and casualty insurance claims and claims expense is the estimate of amounts necessary to settle all reported and unreported incurred claims for the ultimate cost of insured property and casualty losses, based upon the facts of each case and the Company's experience with similar cases. Estimated amounts of salvage and subrogation are deducted from the reserve for claims and claims expense. The establishment of appropriate reserves, including reserves for catastrophe losses, is an inherently uncertain and complex process. Reserve estimates are primarily derived using an actuarial estimation process in which historical loss patterns are applied to actual paid losses and reported losses (paid losses plus individual case reserves established by claim adjusters) for an accident or report year to create an estimate of how losses are likely to develop over time. Development factors are calculated quarterly and periodically throughout the year for data elements such as claims reported and settled, paid losses, and paid losses combined with case reserves. The historical development patterns for these data elements are used as the assumptions to calculate reserve estimates, including the reserves for reported and unreported claims. Reserve estimates are regularly reviewed and updated, using the most current information available. Any resulting reestimates are reflected in current results of operations. Reserve for life-contingent contract benefits The reserve for life-contingent contract benefits payable under insurance policies, including traditional life insurance, life-contingent immediate annuities and voluntary accident and health insurance products, is computed on the basis of long-term actuarial assumptions of future investment yields, mortality, morbidity, policy terminations and expenses. These assumptions, which for traditional life insurance are applied using the net level premium method, include provisions for adverse deviation and generally vary by characteristics such as type of coverage, year of issue and policy duration. The assumptions are established at the time the policy is issued and are generally not changed during the life of the policy. The Company periodically reviews the adequacy of reserves using actual experience and current assumptions. If actual experience and current assumptions are adverse compared to the original assumptions and a premium deficiency is determined to exist, any remaining unamortized DAC balance would be expensed to the extent not recoverable and the establishment of a premium deficiency reserve may be required for any remaining deficiency. In 2019 and 2018, the Company's reviews concluded that no premium deficiency adjustments were necessary. Prior to fourth quarter 2017, the Company evaluated traditional life insurance products and immediate annuities with life contingencies on an aggregate basis. In conjunction with the Company's segment changes that occurred in the fourth quarter of 2017, traditional life insurance products, immediate annuities with life contingencies, and voluntary accident and health insurance are reviewed individually. The Company also reviews these policies for circumstances where projected profits would be recognized in early years followed by projected losses in later years. If this circumstance exists, the Company will accrue a liability, during the period of profits, to offset the losses at such time as the future losses are expected to commence using a method updated prospectively over time. To the extent that unrealized gains on fixed income securities would result in a premium deficiency if those gains were realized, the related increase in reserves for certain immediate annuities with life contingencies is recorded net of tax as a reduction of unrealized net capital gains included in AOCI. Contractholder funds Contractholder funds represent interest-bearing liabilities arising from the sale of products such as interest-sensitive life insurance and fixed annuities. Contractholder funds primarily comprise cumulative deposits received and interest credited to the contractholder less cumulative contract benefits, surrenders, withdrawals and contract charges for
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Notes to Consolidated Financial Statements 2019 Form 10-K
mortality or administrative expenses. Contractholder funds also include reserves
for secondary guarantees on interest-sensitive life insurance and certain fixed
annuity contracts and reserves for certain guarantees on reinsured variable
annuity contracts.
Pension and other postretirement remeasurement gains and losses
Pension and other postretirement gains and losses represent the remeasurement of
projected benefit obligation and plan assets, which are immediately recognized
in earnings and are referred to as pension and other postretirement
remeasurement gains and losses on the Consolidated Statements of Operations. The
Company's policy is to remeasure its pension and postretirement plans on a
quarterly basis.
Differences between expected and actual returns and changes in assumptions
affect our pension and other postretirement obligations, plan assets and
expenses.
The primary factors contributing to pension and postretirement remeasurement
gains and losses are:
• Changes in the discount rate used to value pension and postretirement
obligations as of the measurement date
• Differences between the expected and the actual return on plan assets
• Changes in demographic assumptions, including mortality and participant
experience
Pension and other postretirement service cost, interest cost, expected return on
plan assets and amortization of prior service credits are allocated to the
Company's reportable segments. The pension and other postretirement
remeasurement gains and losses are reported in the Corporate and Other segment.
Separate accounts
Separate accounts assets are carried at fair value. The assets of the separate
accounts are legally segregated and available only to settle separate accounts
contract obligations. Separate accounts liabilities represent the
contractholders' claims to the related assets and are carried at an amount equal
to the separate accounts assets. Investment income and realized capital gains
and losses of the separate accounts accrue directly to the contractholders and
therefore are not included in the Company's Consolidated Statements of
Operations. Deposits to and surrenders and withdrawals from the separate
accounts are reflected in separate accounts liabilities and are not included in
consolidated cash flows.
Absent any contract provision wherein the Company provides a guarantee, variable
annuity and variable life insurance contractholders bear the investment risk
that the separate accounts' funds may not meet their stated investment
objectives. Substantially all of the Company's variable annuity business was
reinsured beginning in 2006.
Legal contingencies
The Company reviews its lawsuits, regulatory inquiries, and other legal
proceedings on an ongoing basis. The Company establishes accruals for such
matters at management's best estimate when the Company assesses that it is
probable that a loss has been incurred and the amount of the loss can be
reasonably estimated. The Company's assessment of whether a loss is reasonably
possible or probable is based on its assessment of the ultimate outcome of the
matter following all appeals. The Company does not include potential recoveries
in its estimates of reasonably possible or probable losses. Legal fees are
expensed as incurred.
Long-term debt
Long-term debt includes senior notes, senior debentures, subordinated debentures
and junior subordinated debentures issued by the Corporation. Unamortized debt
issuance costs are reported in long-term debt and are amortized over the
expected period the debt will remain outstanding.
Equity incentive plans
The Company has equity incentive plans under which the Company grants
nonqualified stock options, restricted stock units and performance stock awards
("equity awards") to certain employees and directors of the Company. The Company
measures the fair value of equity awards at the award date and recognizes the
expense over the shorter of the period in which the requisite service is
rendered or retirement eligibility is attained. The expense for performance
stock awards is adjusted each period to reflect the performance factor most
likely to be achieved at the end of the performance period. The Company uses a
binomial lattice model to determine the fair value of employee stock options.
Leases
The Company has certain operating leases for office facilities, computer and
office equipment, and vehicles. The Company's leases have remaining lease terms
of 1 year to 10 years, some of which include options to extend the leases for up
to 20 years, and some of which include options to terminate the leases within 60
days.
The Company determines if an arrangement is a lease at inception. Leases with an
initial term less than one year are not recorded on the balance sheet and the
lease costs for these leases are recorded as an expense on a straight-line basis
over the lease term. Operating leases with terms greater than one year result in
a lease liability recorded in other liabilities with a corresponding
right-of-use ("ROU") asset recorded in other assets. As of December 31, 2019,
the Company had $586 million in lease liabilities and $483 million in ROU
assets.
Operating lease liabilities are recognized at the commencement date based on the
present value of future minimum lease payments over the lease term. ROU assets
are recognized based on the corresponding lease liabilities adjusted for
qualifying initial direct costs, prepaid or accrued lease payments and
unamortized lease incentives. As most of the Company's leases do not disclose
the implicit interest rate, the Company uses collateralized incremental
borrowing rates based on information available at
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2019 Form 10-K Notes to Consolidated Financial Statements
lease commencement when determining the present value of future lease payments.
The Company has lease agreements with lease and non-lease components, which are
accounted for as a single lease. Lease terms may include options to extend or
terminate the lease which are incorporated into the Company's measurements when
it is reasonably certain that the Company will exercise the option.
Operating lease costs are recognized on a straight-line basis over the lease
term and include interest expense on the lease liability and amortization of the
ROU asset. Variable lease costs are expensed as incurred and include maintenance
costs and real estate taxes. Lease costs are reported in operating costs and
expenses and totaled $171 million, including $30 million of variable lease costs
in 2019.
Other information related to operating leases
As of
December 31, 2019
Weighted average remaining lease term (years) 6
Weighted average discount rate 3.15 %
Maturity of lease liabilities
($ in millions) Operating leases
2020 $ 133
2021 121
2022 102
2023 84
2024 67
Thereafter 137
Total lease payments $ 644
Less: interest (58 )
Present value of lease liabilities $ 586
Off-balance sheet financial instruments
Commitments to invest, commitments to purchase private placement securities,
commitments to extend loans, financial guarantees and credit guarantees have
off-balance sheet risk because their contractual amounts are not recorded in the
Company's Consolidated Statements of Financial Position (see Notes 7 and 14).
Consolidation of variable interest entities ("VIEs")
The Company consolidates VIEs when it is the primary beneficiary. A primary
beneficiary is the variable interest holder in a VIE with both the power to
direct the activities of the VIE that most significantly impact the economic
performance of the VIE and the obligation to absorb losses, or the right to
receive benefits, that could potentially be significant to the VIE.
Foreign currency translation
The local currency of the Company's foreign subsidiaries is deemed to be the
functional currency of the country in which these subsidiaries operate. The
financial statements of the Company's foreign subsidiaries are translated into
U.S. dollars at the exchange rate in effect at the end of a reporting period for
assets and liabilities and at average exchange rates during the period for
results of operations.
The unrealized gains and losses from the translation of the net assets are
recorded as unrealized foreign currency translation adjustments and included in
AOCI. Changes in unrealized foreign currency translation adjustments are
included in OCI. Gains and losses from foreign currency transactions are
reported in operating costs and expenses and have not been material.
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Notes to Consolidated Financial Statements 2019 Form 10-K
Earnings per common share
Basic earnings per common share is computed using the weighted average number of
common shares outstanding, including vested unissued participating restricted
stock units. Diluted earnings per common share is computed using the weighted
average number of common and dilutive potential common shares outstanding.
For the Company, dilutive potential common shares consist of outstanding stock
options and unvested non-participating restricted stock units and contingently
issuable performance stock awards. The effect of dilutive potential common
shares does not include options with an anti-dilutive effect on earnings per
common share because their exercise prices exceed the average market price of
Allstate common shares during the period or for which the unrecognized
compensation cost would have an anti-dilutive effect.
Computation of basic and diluted earnings per common share
For the years ended December 31,
($ in millions, except per share data) 2019 2018 2017
Numerator:
Net income $ 4,847 $ 2,160 $ 3,554
Less: Preferred stock dividends 169 148 116
Net income applicable to common shareholders (1) $ 4,678 $ 2,012 $ 3,438
Denominator:
Weighted average common shares outstanding 328.2 347.8 362.0 Effect of dilutive potential common shares: Stock options 3.2 3.6 4.3 Restricted stock units (non-participating) and performance stock awards 2.1 1.8 1.5 Weighted average common and dilutive potential common shares outstanding 333.5
353.2 367.8
Earnings per common share - Basic $ 14.25 $ 5.78 $ 9.50 Earnings per common share - Diluted $ 14.03 $
5.70 $ 9.35
Anti-dilutive options excluded from diluted
earnings per common share 3.7 2.0 1.5
Adopted accounting standards
Accounting for Leases Effective January 1, 2019 the Company adopted new
Financial Accounting Standards Board ("FASB") guidance related to accounting for
leases. Upon adoption of the guidance under the optional transition method that
allows application of the transition provisions at the adoption date instead of
the earliest period presented, the Company recorded a $585 million lease
liability equal to the present value of lease payments and a $488 million ROU
asset, which is the corresponding lease liability adjusted for qualifying
accrued lease payments. The lease liability and ROU asset were reported as part
of other liabilities and other assets on the Consolidated Statements of
Financial Position. The impact of these changes at adoption had no impact on net
income or shareholders' equity. Prior periods were not restated under the new
standard. The Company utilized the package of practical expedients permitted
under the transition guidance which, among other things, did not require
reassessment of existing contracts for the existence of a lease or reassessment
of existing lease classifications.
Upon adoption, the new guidance required sellers in a sale-leaseback transaction
to recognize the entire gain from the sale of an underlying asset at the time
the sale is recognized rather than over the leaseback term. The carrying value
of unrecognized gains on sale-leaseback transactions executed prior to January
1, 2019 was $21 million, after-tax, and was recorded as an increase to retained
income at the date of adoption.
Accounting for Hedging Activities Effective January 1, 2019 the Company adopted
new FASB guidance intended to better align hedge accounting with an
organization's risk management activities. The new guidance expands hedge
accounting to nonfinancial and financial risk components and revises the
measurement methodologies. Separate presentation of hedge ineffectiveness is
eliminated with the intention to provide greater transparency to the full impact
of hedging by requiring presentation of the results of the hedged item and
hedging instrument in a single financial statement line item. In addition, the
amendments were designed to reduce complexity by simplifying hedge effectiveness
testing. The adoption had no impact on the Company's results of operations or
financial position.
Pending accounting standards
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued guidance which revises the credit loss recognition
criteria for certain financial assets measured at amortized cost, including
reinsurance recoverables. The new guidance replaces the existing incurred loss
recognition model with an expected loss recognition model. The objective of the
expected credit loss model is for a reporting entity to recognize its estimate
of expected credit losses for affected financial assets in a valuation allowance
that when deducted from the amortized cost basis of the related financial assets
results in a net carrying value at the amount expected to be collected. The
reporting
The Allstate Corporation 135
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2019 Form 10-K Notes to Consolidated Financial Statements
entity must consider all relevant information available when estimating expected
credit losses, including details about past events, current conditions, and
reasonable and supportable forecasts over the life of an asset. Financial assets
may be evaluated individually or on a pooled basis when they share similar risk
characteristics. The measurement of credit losses for available-for-sale debt
securities measured at fair value is not affected except that credit losses
recognized are limited to the amount by which fair value is below amortized cost
and the carrying value adjustment is recognized through a valuation allowance
which may change over time but once recorded cannot subsequently be reduced to
an amount below zero. The guidance is effective for reporting periods beginning
after December 15, 2019, and for most affected instruments must be adopted using
a modified retrospective approach, with a cumulative effect adjustment recorded
to beginning retained income.
The Company's implementation activities, which are being finalized, include
review and validation of models, methodologies, data inputs and assumptions to
be used to estimate expected credit losses. The implementation impacts relate
primarily to the Company's commercial mortgage loans, bank loans and reinsurance
recoverables and are dependent on economic conditions and judgments at the date
of adoption. Based on the economic conditions at the date of adoption and the
balances at the reporting date, the Company estimates the application of the
current expected credit loss requirements will result in total valuation
allowances for credit losses of approximately $300 million, as of the date of
adoption. After consideration of existing valuation allowances maintained prior
to adoption of the new guidance, the Company expects to recognize a
cumulative-effect decrease in retained income of approximately $100 million,
after-tax, to adjust existing valuation allowances to the basis in the new
requirements.
Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued amendments to modify certain disclosure
requirements for defined benefit plans. Disclosure additions relate to the
weighted-average interest crediting rates for cash balance plans and other plans
with interest crediting rates and explanations for significant gains and losses
related to changes in the benefit obligation during the reporting period.
Disclosures to be removed include those that identify amounts that are expected
to be reclassified out of AOCI and into the income statement in the coming year
and the anticipated impact of a one-percentage point change in assumed health
care cost trend rate on service and interest cost and on the accumulated benefit
obligation. The amendments are effective for annual reporting periods beginning
after December 15, 2020. The impacts of adoption are to the Company's
disclosures only.
Accounting for Long-Duration Insurance Contracts
In August 2018, the FASB issued guidance revising the accounting for certain
long-duration insurance
contracts. The new guidance introduces material changes to the measurement of
the Company's reserves for traditional life, life-contingent immediate annuities
and certain voluntary accident and health insurance products.
Under the new guidance, measurement assumptions, including those for mortality,
morbidity and policy terminations, will be required to be reviewed and updated
at least annually. The effect of updating measurement assumptions other than the
discount rate are required to be measured on a retrospective basis and reported
in net income. In addition, reserves under the new guidance are required to be
discounted using an upper medium grade fixed income instrument yield required to
be updated through OCI at each reporting date. Current GAAP requires reserves to
utilize assumptions set at policy issuance unless updated current assumptions
indicate that recorded reserves are deficient.
The new guidance also requires DAC and other capitalized balances currently
amortized in proportion to premiums or gross profits to be amortized on a
constant level basis over the expected term for all long-duration insurance
contracts. DAC will not be subject to loss recognition testing but will be
reduced when actual lapse experience exceeds expected experience. The new
guidance will no longer require adjustments to DAC and deferred sales inducement
costs ("DSI") related to unrealized gains and losses on investment securities
supporting the related business.
All market risk benefit product features will be measured at fair value with
changes in fair value recorded in net income with the exception of changes in
the fair value attributable to changes in the reporting entity's own credit
risk, which are required to be recognized in OCI. Substantially all of the
Company's market risk benefits are reinsured and therefore these impacts are not
expected to be material to the Company.
The new guidance will be included in the comparable financial statements issued
in reporting periods beginning after December 15, 2021, thereby requiring
restatement of prior periods presented. Early adoption is permitted. The new
guidance will be applied to affected contracts and DAC on the basis of existing
carrying amounts at the earliest period presented or retrospectively using
actual historical experience as of contract inception. The new guidance for
market risk benefits is required to be adopted retrospectively.
The Company is evaluating the anticipated impacts of applying the new guidance
to both retained income and AOCI. The requirements of the new guidance represent
a material change from existing GAAP, however, the underlying economics of the
business and related cash flows are unchanged. The Company is evaluating the
specific impacts of adopting the new guidance and anticipates the financial
statement impact of adopting the new guidance to be material, largely attributed
to the impact of transitioning to a discount rate based on an upper-medium grade
fixed income investment yield
136 www.allstate.com
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Notes to Consolidated Financial Statements 2019 Form 10-K
and updates to mortality assumptions. The Company expects the most significant impacts will occur in the run-off annuity segment. The revised accounting for DAC will be applied prospectively using the new model and any DAC effects existing in AOCI as a result of applying existing GAAP at the date of adoption will be reversed. Simplifications to the Accounting for Income Taxes In December 2019, the FASB issued amendments to simplify the accounting for income taxes. The amendments eliminate certain exceptions in the existing guidance including those related to intraperiod tax allocation and deferred tax liability recognition when changes in control of equity method and foreign subsidiary investments occur. The amendments require recognition of the effect of an enacted change in tax laws or rates in the interim period that includes the enactment date, provide an option to not allocate taxes to a legal entity that is not subject to tax as well as other minor changes. The amendments are effective for interim and annual reporting periods beginning after December 15, 2020. The new guidance specifies which amendments should be applied prospectively, retrospective to all periods presented or on a modified retrospective basis through a cumulative-effect adjustment to retained income as of the beginning of the year of adoption. The impact of adoption is not expected to be material to the Company's results of operations or financial position. Change in accounting principle The Company changed its accounting principle for recognizing actuarial gains and losses and expected return on plan assets for its pension and other postretirement plans to a more preferable policy under U.S. GAAP. Under the new principle, remeasurement of projected benefit obligation and plan assets are immediately recognized in earnings and are referred to as pension and other postretirement remeasurement gains and losses on the Consolidated Statements of Operations. Previously, actuarial gains and losses and differences between the expected and actual returns on plan assets were recognized as a component of AOCI, and were subject to amortization into earnings in future periods. This change has been applied on a retrospective basis. The Company's policy is to remeasure its pension and postretirement plans on a quarterly basis. The Company also changed its policy for recognizing expected returns on plan assets by eliminating the permitted accounting practice allowing the five-year smoothing of equity returns and moving to an unadjusted fair value method. The Company believes that immediately recognizing remeasurement of projected benefit obligation and plan assets in earnings is preferable as it provides greater transparency of the Company's economic obligations in accounting results and better aligns with fair value accounting principles by recognizing the effects of economic and interest rate changes on pension and other postretirement plan assets and liabilities in the year in which the gains and losses are incurred. These changes have been applied on a retrospective basis and as of January 1, 2017 resulted in a cumulative effect decrease to retained income of $1.58 billion, with a corresponding offset to AOCI and had no impact on total shareholders' equity. The impacts of the adjustments on the financial statements are summarized in the following tables.
Consolidated Statements of Operations
Previous
accounting Impact of change
principle (1) As reported
($ in millions, except per share data) Year Ended December 31, 2019
Property and casualty insurance claims and claims
expense $ 24,074 $ (98 ) $ 23,976
Operating costs and expenses 5,752 (62 ) 5,690
Pension and other postretirement remeasurement
gains and losses - 114 114
Restructuring and related charges 41 - 41
Total costs and expenses 38,638 (46 ) 38,592
Income from operations before income tax expense 6,043 46 6,089
Income tax expense 1,232 10 1,242
Net income 4,811 36 4,847Net income applicable to common shareholders $ 4,642 $
36 $ 4,678
Earnings per common share: Net income applicable to common shareholders per common share - Basic $ 14.14 $ 0.11 $ 14.25 Net income applicable to common shareholders per common share - Diluted $ 13.92 $
0.11 $ 14.03
(1) The Company merged two of its pension plans, which had no impact on its
financial statements as the Company remeasures pension plan assets and projected
benefit obligations immediately in earnings on a quarterly basis. However, the
plan merger increased the impact of change by $41 million for 2019, reflecting
the shorter amortization period for losses deferred in AOCI from one of the
merged plans that was required as part of the merger.
The Allstate Corporation 137
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2019 Form 10-K Notes to Consolidated Financial Statements
Consolidated Statements of Operations
Previous
accounting Change in accounting
principle principle As adjusted
Year Ended December 31, 2018
Property and casualty insurance claims and claims
expense $ 22,839 $ (61 ) $ 22,778
Operating costs and expenses 5,869 (275 ) 5,594
Pension and other postretirement remeasurement
gains and losses - 468 468
Restructuring and related charges 83 (16 ) 67
Total costs and expenses 37,077 116 37,193
Income from operations before income tax expense 2,744 (116 ) 2,628
Income tax expense 492 (24 ) 468
Net income 2,252 (92 ) 2,160Net income applicable to common shareholders $ 2,104 $
(92 ) $ 2,012
Earnings per common share:
Net income applicable to common shareholders per
common share - Basic $ 6.05 $ (0.27 ) $ 5.78
Net income applicable to common shareholders per
common share - Diluted $ 5.96 $ (0.26 ) $ 5.70
Year Ended December 31, 2017
Property and casualty insurance claims and claims
expense $ 21,929 $ (82 ) $ 21,847
Operating costs and expenses 5,442 (246 ) 5,196
Pension and other postretirement remeasurement
gains and losses - (217 ) (217 )
Restructuring and related charges 109 (13 ) 96
Total costs and expenses 35,436 (558 ) 34,878
Income from operations before income tax expense 3,991 558 4,549
Income tax expense 802 193 995
Net income 3,189 365 3,554Net income applicable to common shareholders $ 3,073 $
365 $ 3,438
Earnings per common share: Net income applicable to common shareholders per common share - Basic $ 8.49 $ 1.01 $ 9.50 Net income applicable to common shareholders per common share - Diluted $ 8.36 $ 0.99 $ 9.35 138 www.allstate.com
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Notes to Consolidated Financial Statements 2019 Form 10-K
Consolidated Statements of Comprehensive Income
Previous accounting
principle Impact of change As reported
($ in millions) Year Ended December 31, 2019
Net income $ 4,811 $ 36 $ 4,847
Other comprehensive income (loss), after-tax
Changes in:
Unrealized net capital gains and losses 1,889 - 1,889
Unrealized foreign currency translation
adjustments (4 ) (6 ) (10 )
Unrecognized pension and other postretirement
benefit cost (1) 141 (188 ) (47 )
Other comprehensive income, after-tax 2,026 (194 ) 1,832
Comprehensive income 6,837 (158 ) 6,679
Year Ended December 31, 2018
Net income $ 2,252 $ (92 ) $ 2,160
Other comprehensive income (loss), after-tax
Changes in:
Unrealized net capital gains and losses (754 ) - (754 )
Unrealized foreign currency translation
adjustments (55 ) 7 (48 )
Unrecognized pension and other postretirement
benefit cost (1) (144 ) 85 (59 )
Other comprehensive loss, after-tax (953 ) 92 (861 )
Comprehensive income 1,299 - 1,299
Year Ended December 31, 2017
Net income $ 3,189 $ 365 $ 3,554
Other comprehensive income (loss), after-tax
Changes in:
Unrealized net capital gains and losses 319 - 319
Unrealized foreign currency translation
adjustments 47 (2 ) 45
Unrecognized pension and other postretirement
benefit cost (1) 307 (359 ) (52 )
Other comprehensive income, after-tax 673 (361 ) 312
Comprehensive income 3,862 4 3,866
(1) Financial statement line item has been updated to "Unamortized pension and
other postretirement prior service credit".
Consolidated Statements of Financial Position
Previous
accounting Impact of
principle change As reported
($ in millions) December 31, 2019
Retained income 49,713 (1,639 ) 48,074
Unrealized foreign currency translation
adjustments (68 ) 9 (59 )
Unrecognized pension and other postretirement
benefit cost (1) (1,350 ) 1,472 122
Total AOCI 469 1,481 1,950
Total shareholders' equity 26,156 (158 ) 25,998
December 31, 2018
Retained income 45,708 (1,675 ) 44,033
Unrealized foreign currency translation
adjustments (64 ) 15 (49 )
Unrecognized pension and other postretirement
benefit cost (1) (1,491 ) 1,660 169
Total AOCI (1,557 ) 1,675 118
Total shareholders' equity 21,312 - 21,312
(1) Financial statement line item has been updated to "Unamortized pension and other postretirement prior service credit".
The Allstate Corporation 139
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2019 Form 10-K Notes to Consolidated Financial Statements
Consolidated Statements of Shareholders' Equity
Previous
accounting
($ in millions) principle Impact of change As reported
Year Ended December 31, 2019
Retained income
Balance, beginning of year $ 45,708 $ (1,675 ) $ 44,033
Cumulative effect of change in accounting
principle 21 - 21
Net income 4,811 36 4,847
Dividends on common stock (declared per share of
$2.00) (658 ) - (658 )
Dividends on preferred stock (169 ) - (169 )
Balance, end of year 49,713 (1,639 ) 48,074
Accumulated other comprehensive income (loss)
Balance, beginning of year (1,557 ) 1,675 118
Cumulative effect of change in accounting
principle - - -
Change in unrealized net capital gains and losses 1,889 - 1,889
Change in unrealized foreign currency translation
adjustments (4 ) (6 ) (10 )
Change in unrecognized pension and other
postretirement benefit cost (1) 141 (188 ) (47 )
Balance, end of year $ 469 $ 1,481 $ 1,950
Year Ended December 31, 2018
Retained income
Balance, beginning of year $ 43,162 $ (1,583 ) $ 41,579
Cumulative effect of change in accounting
principle 1,088 - 1,088
Net income 2,252 (92 ) 2,160
Dividends on common stock (declared per share of
$1.84) (646 ) - (646 )
Dividends on preferred stock (148 ) - (148 )
Balance, end of year 45,708 (1,675 ) 44,033
Accumulated other comprehensive income (loss)
Balance, beginning of year 306 1,583 1,889
Cumulative effect of change in accounting
principle (910 ) - (910 )
Change in unrealized net capital gains and losses (754 ) - (754 )
Change in unrealized foreign currency translation
adjustments (55 ) 7 (48 )
Change in unrecognized pension and other
postretirement benefit cost (1) (144 ) 85 (59 )
Balance, end of year (1,557 ) 1,675 118
Year Ended December 31, 2017
Retained income
Balance, beginning of year $ 40,678 $ (1,669 ) $ 39,009
Net income 3,189 365 3,554
Dividends on common stock (declared per share of
$1.48) (540 ) - (540 )
Dividends on preferred stock (116 ) - (116 )
Reclassification of tax effects due to change in
accounting principle (49 ) (279 ) (328 )
Balance, end of year 43,162 (1,583 ) 41,579
Accumulated other comprehensive income (loss)
Balance, beginning of year (416 ) 1,665 1,249
Change in unrealized net capital gains and losses 319 - 319
Change in unrealized foreign currency translation
adjustments 47 (2 ) 45
Change in unrecognized pension and other
postretirement benefit cost (1) 307 (359 ) (52 )
Reclassification of tax effects due to change in
accounting principle 49 279 328
Balance, end of year 306 1,583 1,889
(1) Financial statement line item has been updated to "Change in unamortized pension and other postretirement prior service credit".
140 www.allstate.com
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Notes to Consolidated Financial Statements 2019 Form 10-K
Consolidated Statements of Cash Flows
Previous accounting
principle Impact of change As reported
($ in millions) Year Ended December 31, 2019
Cash flows from operating activities
Net income $ 4,811 $ 36 $ 4,847
Adjustments to reconcile net income to net cash
provided by operating activities:
Pension and other postretirement measurement gains
and losses - 114 114
Income taxes 477 10 487
Other operating assets and liabilities 110 (160 ) (50 )
Net cash provided by operating activities $ 5,129 $ - $ 5,129
Year Ended December 31, 2018
Cash flows from operating activities
Net income $ 2,252 $ (92 ) $ 2,160
Adjustments to reconcile net income to net cash
provided by operating activities:
Pension and other postretirement measurement gains
and losses - 468 468
Income taxes (356 ) (24 ) (380 )
Other operating assets and liabilities 1,207 (352 ) 855
Net cash provided by operating activities $ 5,175 $ - $ 5,175
Year Ended December 31, 2017
Cash flows from operating activities
Net income $ 3,189 $ 365 $ 3,554
Adjustments to reconcile net income to net cash
provided by operating activities:
Pension and other postretirement measurement gains
and losses - (217 ) (217 )
Income taxes (245 ) 193 (52 )
Other operating assets and liabilities 328 (341 ) (13 )
Net cash provided by operating activities $ 4,314 $ - $ 4,314
The Allstate Corporation 141
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2019 Form 10-K Notes to Consolidated Financial Statements
Note 3 Acquisitions
iCracked On February 12, 2019, the Company acquired iCracked Inc. ("iCracked")
which offers on-site, on-demand repair services for smartphones and tablets in
North America, supporting Allstate Protection Plans' (formerly known as
SquareTrade) operations. In conjunction with the iCracked acquisition, the
Company recorded goodwill of $17 million.
PlumChoice On November 30, 2018, the Company acquired PlumChoice, Inc.
("PlumChoice") for $30 million in cash to provide technical support services to
Allstate Protection Plans' customers and small businesses. In conjunction with
the PlumChoice acquisition, the Company recorded goodwill of $23 million.
Allstate Identity Protection On October 5, 2018, the Company acquired InfoArmor,
Inc. ("InfoArmor"), a leading provider of identity protection in the employee
benefits market, for $525 million in cash. InfoArmor primarily offers identity
protection to employees and their family members through voluntary benefit
programs at over 1,400 firms, including more than 100 of the Fortune 500
companies. Starting in the third quarter of 2019, the Company is reporting
InfoArmor using the name Allstate Identity Protection.
In connection with the acquisition, the Company recorded goodwill of $318
million and intangible assets of $257 million. The intangible assets include
$225 million and $32 million related to the acquired customer relationships and
technology, respectively.
Note 4 Reportable Segments
The Company's chief operating decision maker reviews financial performance and
makes decisions about the allocation of resources for the seven reportable
segments. These segments are described below and align with the Company's key
product and service offerings.
Allstate Protection principally offers private passenger auto and homeowners
insurance in the United States and Canada, with earned premiums accounting for
78.0% of Allstate's 2019 consolidated revenues. Allstate Protection primarily
operates in the U.S. (all 50 states and the District of Columbia ("D.C.")) and
Canada. For 2019, the top U.S. geographic locations for premiums earned by the
Allstate Protection segment were Texas, California, New York and Florida. No
other jurisdiction accounted for more than 5% of premium earned for Allstate
Protection. Revenues from external customers generated outside the United States
were $1.37 billion, $1.20 billion and $1.13 billion in 2019, 2018 and 2017,
respectively.
Discontinued Lines and Coverages includes property and casualty insurance
coverage that primarily relates to policies written during the 1960s through the
mid-1980s. Our exposure to asbestos, environmental and other discontinued lines
claims arises principally from direct excess commercial insurance, assumed
reinsurance coverage, direct primary commercial insurance and other businesses
in run-off.
Service Businesses comprise Allstate Protection Plans, Allstate Dealer Services,
Allstate Roadside Services, Arity and Allstate Identity Protection. Service
Businesses offer consumer product protection plans, finance and insurance
products (including vehicle service contracts, guaranteed asset protection
waivers, road hazard tire and wheel and paintless dent repair protection),
roadside assistance, device and mobile data collection services and analytic
solutions using automotive telematics information and identity protection. The
Service Businesses primarily operate in the U.S., with certain businesses
offering services in Europe, Canada, and Puerto Rico. Revenues from
external customers generated outside the United States relate to consumer
product protection plans sold primarily in the European Union and were $95
million, $61 million and $35 million in 2019, 2018 and 2017, respectively.
Allstate Life offers traditional, interest-sensitive and variable life insurance
products. Allstate Life primarily operates in the U.S. (all 50 states and D.C.).
For 2019, the top geographic locations for statutory direct life insurance
premiums were New York, California, Texas, Florida and Illinois. No other
jurisdiction accounted for more than 5% of statutory direct life insurance
premiums.
Allstate Benefits offers voluntary benefits products, including life, accident,
critical illness, short-term disability and other health products. Allstate
Benefits primarily operates in the U.S. (all 50 states and D.C.) and Canada. For
2019, the top geographic locations for statutory direct accident and health
insurance premiums were Florida, Texas, North Carolina, New York and California.
No other jurisdiction accounted for more than 5% of statutory direct accident
and health insurance premiums. Revenues from external customers generated
outside the United States relate to voluntary accident and health insurance sold
in Canada and were not material.
Allstate Annuities consists primarily of deferred fixed annuities and immediate
annuities (including standard and sub-standard structured settlements). This
segment is in run-off.
Corporate and Other comprises holding company activities and certain
non-insurance operations, including expenses associated with strategic
initiatives.
Allstate Protection and Discontinued Lines and Coverages segments comprise
Property-Liability. The Company does not allocate investment income, realized
capital gains and losses, or assets to the Allstate Protection and Discontinued
Lines and Coverages segments. Management reviews assets at the
Property-Liability, Service Businesses, Allstate Life,
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Notes to Consolidated Financial Statements 2019 Form 10-K
Allstate Benefits, Allstate Annuities, and Corporate and Other levels for
decision-making purposes.
The accounting policies of the reportable segments are the same as those
described in Note 2. The effects of intersegment transactions are eliminated in
the consolidated results. For segment results, services provided by Service
Businesses to Allstate Protection are not eliminated as management considers
those transactions in assessing the results of the respective segments.
Measuring segment profit or loss
The measure of segment profit or loss used in evaluating performance is
underwriting income for the Allstate Protection and Discontinued Lines and
Coverages segments and adjusted net income for the Service Businesses, Allstate
Life, Allstate Benefits, Allstate Annuities, and Corporate and Other segments. A
reconciliation of these measures to net income applicable to common shareholders
is provided below.
Underwriting income is calculated as premiums earned and other revenue, less
claims and claims expenses ("losses"), amortization of DAC, operating costs and
expenses, restructuring and related charges and amortization or impairment of
purchased intangibles as determined using GAAP.
Adjusted net income is net income applicable to common shareholders, excluding:
• Realized capital gains and losses, after-tax, except for periodic settlements
and accruals on non-hedge derivative instruments, which are reported with
realized capital gains and losses but included in adjusted net income
• Pension and other postretirement remeasurement gains and losses, after-tax
• Valuation changes on embedded derivatives not hedged, after-tax
• Amortization of DAC and DSI, to the extent they resulted from the recognition
of certain realized capital gains and losses or valuation changes on embedded
derivatives not hedged, after-tax
• Business combination expenses and the amortization or impairment of purchased
intangibles, after-tax
• Gain (loss) on disposition of operations, after-tax
• Adjustments for other significant non-recurring, infrequent or unusual items,
when (a) the nature of the charge or gain is such that it is reasonably unlikely
to recur within two years, or (b) there has been no similar charge or gain
within the prior two years
The Allstate Corporation 143
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2019 Form 10-K Notes to Consolidated Financial Statements
Reportable segments revenue information
For the years ended December 31,
($ in millions) 2019 2018 2017
Property-Liability
Insurance premiums
Auto $ 24,188 $ 22,970 $ 21,878
Homeowners 7,912 7,517 7,310
Other personal lines 1,861 1,808 1,750
Commercial lines 882 655 495
Allstate Protection 34,843 32,950 31,433
Discontinued Lines and Coverages - - -
Total Property-Liability insurance premiums 34,843 32,950 31,433
Other revenue 741 738 703
Net investment income 1,533 1,464 1,478
Realized capital gains and losses 1,470 (639 ) 401
Total Property-Liability 38,587 34,513 34,015
Service Businesses
Consumer product protection plans 633 503 295
Roadside assistance 238 263 268
Finance and insurance products 362 332 304
Intersegment premiums and service fees (1) 154 122 110
Other revenue 188 82 66
Net investment income 42 27 16
Realized capital gains and losses 32 (11 ) -
Total Service Businesses 1,649 1,318 1,059
Allstate Life
Traditional life insurance premiums 630 600 568
Accident and health insurance premiums 2 2 2
Interest-sensitive life insurance contract charges 711 713 710
Other revenue 125 119 114
Net investment income 514 505 489
Realized capital gains and losses 1 (14 ) 5
Total Allstate Life 1,983 1,925 1,888
Allstate Benefits
Traditional life insurance premiums 43 44 42
Accident and health insurance premiums 988 980 928
Interest-sensitive life insurance contract charges 114 111 114
Net investment income 83 77 72
Realized capital gains and losses 12 (9 ) 1
Total Allstate Benefits 1,240 1,203 1,157
Allstate Annuities
Fixed annuities contract charges 13 15 14
Net investment income 917 1,096 1,305
Realized capital gains and losses 346 (166 ) 44
Total Allstate Annuities 1,276 945 1,363
Corporate and Other
Net investment income 70 71 41
Realized capital gains and losses 24 (38 ) (6 )
Total Corporate and Other 94 33 35
Intersegment eliminations (1) (154 ) (122 ) (110 )
Consolidated revenues $ 44,675 $ 39,815 $ 39,407
(1) Intersegment insurance premiums and service fees are primarily related to Arity and Allstate Roadside Services and are eliminated in the consolidated financial statements.
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Notes to Consolidated Financial Statements 2019 Form 10-K
Reportable segments financial performance
For the years ended December 31,
($ in millions) 2019 2018 2017
Property-Liability
Allstate Protection $ 2,912 $ 2,343 $ 2,304
Discontinued Lines and Coverages (108 ) (90 ) (99 )
Total underwriting income 2,804 2,253 2,205
Net investment income 1,533 1,464 1,478
Income tax expense on operations (887 ) (747 ) (1,187 )
Realized capital gains and losses, after-tax 1,161 (500 ) 272
Gain on disposition of operations, after-tax - - 9
Tax Legislation (expense) benefit - (5 ) 36
Property-Liability net income applicable to common
shareholders 4,611 2,465 2,813
Service Businesses
Adjusted net income (loss) 38 8 (54 )
Realized capital gains and losses, after-tax 25 (9 ) -
Amortization of purchased intangibles, after-tax (97 ) (74 ) (60 )
Impairment of purchased intangibles, after-tax (43 ) - -
Tax Legislation (expense) benefit - (4 ) 137
Service Businesses net (loss) income applicable to
common shareholders (77 ) (79 ) 23
Allstate Life
Adjusted net income 261 295 259
Realized capital gains and losses, after-tax - (11 ) 2
Valuation changes on embedded derivatives not
hedged, after-tax (9 ) - -
DAC and DSI amortization related to realized
capital gains and losses and valuation changes on
embedded derivatives not hedged, after-tax (5 ) (8 ) (10 )
Tax Legislation (expense) benefit - (16 ) 338
Allstate Life net income applicable to common
shareholders 247 260 589
Allstate Benefits
Adjusted net income 115 124 100
Realized capital gains and losses, after-tax 9 (7 ) -
DAC and DSI amortization related to realized
capital gains and losses, after-tax - 1 -
Tax Legislation benefit - - 54
Allstate Benefits net income applicable to common
shareholders 124 118 154
Allstate Annuities
Adjusted net income 10 131 205
Realized capital gains and losses, after-tax 274 (131 ) 28
Valuation changes on embedded derivatives not
hedged, after-tax (6 ) 3 -
Gain on disposition of operations, after-tax 4 4 4
Tax Legislation benefit - 69 182
Allstate Annuities net income applicable to common
shareholders 282 76 419
Corporate and Other
Adjusted net loss (438 ) (406 ) (320 )
Realized capital gains and losses, after-tax 19 (30 ) (4 )
Pension and other postretirement remeasurement
gains and losses, after-tax (90 ) (370 ) 141
Goodwill impairment - - (125 )
Business combination expenses, after-tax - (7 ) (14 )
Tax Legislation expense - (15 ) (238 )
Consolidated and Other net loss applicable to
common shareholders (509 ) (828 ) (560 )
Consolidated net income applicable to common
shareholders $ 4,678 $ 2,012 $ 3,438
The Allstate Corporation 145
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2019 Form 10-K Notes to Consolidated Financial Statements
Additional significant financial
performance data
For the years ended December 31,
($ in millions) 2019 2018 2017
Amortization of DAC
Property-Liability $ 4,649 $ 4,475 $ 4,205
Service Businesses 543 463 296
Allstate Life 173 132 134
Allstate Benefits 161 145 142
Allstate Annuities 7 7 7
Consolidated $ 5,533 $ 5,222 $ 4,784
Income tax expense (benefit)
Property-Liability $ 1,196 $ 613 $ 1,285
Service Businesses (18 ) (19 ) (194 )
Allstate Life 53 75 (226 )
Allstate Benefits 35 32 1
Allstate Annuities 73 (66 ) (58 )
Corporate and Other (97 ) (167 ) 187
Consolidated $ 1,242 $ 468 $ 995
Interest expense is primarily incurred in the Corporate and Other segment.
Capital expenditures for long-lived assets are generally made in
Property-Liability as the Company does not allocate assets to the Allstate
Protection and Discontinued Lines and Coverages segments. A portion of these
long-lived assets are used by entities included in the Service Businesses,
Allstate Life, Allstate Benefits, Allstate Annuities and Corporate and Other
segments and, accordingly, are charged to expenses in proportion to their use.
Reportable segment total assets and investments (1)
As of December 31,
($ in millions) 2019 2018
Assets
Property-Liability $ 67,243 $ 61,947
Service Businesses 5,746 5,473
Allstate Life 14,771 13,613
Allstate Benefits 2,915 2,822
Allstate Annuities 26,914 26,798
Corporate and Other 2,361 1,596
Consolidated $ 119,950 $ 112,249
Investments
Property-Liability $ 48,414 $ 43,634
Service Businesses 1,544 1,203
Allstate Life 11,914 10,809
Allstate Benefits 1,941 1,809
Allstate Annuities 22,221 22,336
Corporate and Other 2,328 1,469
Consolidated $ 88,362 $ 81,260
(1) The balances reflect the elimination of related party investments between
segments.
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Notes to Consolidated Financial Statements 2019 Form 10-K
Note 5 Investments
Amortized cost, gross unrealized gains (losses) and fair value for fixed income securities
Amortized Gross unrealized Fair
($ in millions) cost Gains Losses value
December 31, 2019
U.S. government and agencies $ 4,971 $ 141 $ (26 ) $ 5,086
Municipal 8,080 551 (11 ) 8,620
Corporate 41,090 2,035 (47 ) 43,078
Foreign government 968 16 (5 ) 979
ABS 860 8 (6 ) 862
MBS 324 96 (1 ) 419
Total fixed income securities $ 56,293 $ 2,847 $ (96 ) $ 59,044
December 31, 2018
U.S. government and agencies $ 5,386 $ 137 $ (6 ) $ 5,517
Municipal 8,963 249 (43 ) 9,169
Corporate 40,557 491 (890 ) 40,158
Foreign government 739 13 (5 ) 747
ABS 1,049 6 (10 ) 1,045
MBS 440 97 (3 ) 534
Total fixed income securities $ 57,134 $ 993 $ (957 ) $ 57,170
Scheduled maturities for fixed income securities
As of December 31, 2019
Amortized Fair
($ in millions) cost value
Due in one year or less $ 3,214 $ 3,239
Due after one year through five years 24,108 24,781
Due after five years through ten years 18,194 19,177
Due after ten years 9,593 10,566
55,109 57,763
ABS and MBS 1,184 1,281
Total $ 56,293 $ 59,044
Actual maturities may differ from those scheduled as a result of calls and
make-whole payments by the issuers. ABS and MBS are shown separately because of
the potential for prepayment of principal prior to contractual maturity dates.
Net investment income
For the years ended December 31,
($ in millions) 2019 2018 2017
Fixed income securities $ 2,175 $ 2,077 $ 2,078
Equity securities 206 170 174
Mortgage loans 220 217 206
Limited partnership interests 471 705 889
Short-term investments 102 73 30
Other 262 272 236
Investment income, before expense 3,436 3,514 3,613
Investment expense (277 ) (274 ) (212 )
Net investment income $ 3,159 $ 3,240 $ 3,401
The Allstate Corporation 147
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2019 Form 10-K Notes to Consolidated Financial Statements
Realized capital gains (losses) by asset type
For the years ended December 31,
($ in millions) 2019 2018 2017
Fixed income securities $ 461 $ (237 ) $ 94
Equity securities 1,210 (594 ) 255
Mortgage loans - 2 1
Limited partnership interests 200 (101 ) 132
Derivatives (15 ) 46 (46 )
Other 29 7 9Realized capital gains and losses $ 1,885 $ (877 ) $ 445
Realized capital gains (losses) by transaction type
For the years ended December 31,
($ in millions) 2019 2018 2017
Impairment write-downs $ (47 ) $ (14 ) $ (102 )
Change in intent write-downs - - (48 )
Net OTTI losses recognized in earnings (47 ) (14 ) (150 )
Sales 575 (215 ) 641
Valuation of equity investments (1) 1,372 (691 ) -
Valuation and settlements of derivative instruments (15 ) 43 (46 )
Realized capital gains and losses $ 1,885 $ (877 ) $ 445
(1) Includes valuation of equity securities and certain limited partnership
interests where the underlying assets are predominately public equity
securities.
Sales of fixed income securities resulted in gross gains of $607 million, $120
million and $737 million and gross losses of $132 million, $347 million and $276
million during 2019, 2018 and 2017, respectively.
The following table presents the net pre-tax appreciation (decline) recognized
in net income of equity securities and limited partnership interests carried at
fair value that are still held as of December 31, 2019 and 2018, respectively.
Net appreciation (decline) recognized in net income
For the years ended December 31,
($ in millions) 2019 2018
Equity securities $ 1,073 $ (261 )
Limited partnership interests carried at fair value 149 249
Total $ 1,222 $ (12 )
OTTI losses by asset type
For the years ended December 31,
($ in millions) 2019 2018 2017
Gross Included in OCI Net Gross Included in OCI Net Gross Included in OCI Net
Fixed income
securities:
Municipal $ (2 ) $ 2 $ - $ - $ - $ - $ (1 ) $ (3 ) $ (4 )
Corporate (5 ) (2 ) (7 ) (4 ) 2 (2 ) (9 ) 3 (6 )
ABS (4 ) - (4 ) (1 ) (2 ) (3 ) (1 ) (2 ) (3 )
MBS (4 ) 1 (3 ) (4 ) (1 ) (5 ) (11 ) (2 ) (13 )
Total fixed
income
securities (15 ) 1 (14 ) (9 ) (1 ) (10 ) (22 ) (4 ) (26 )
Equity
securities - - - - - - (86 ) - (86 )
Mortgage loans - - - - - - (1 ) - (1 )
Limited
partnership
interests (6 ) - (6 ) (3 ) - (3 ) (32 ) - (32 )
Other (27 ) - (27 ) (1 ) - (1 ) (5 ) - (5 )
OTTI losses $ (48 ) $ 1 $ (47 ) $ (13 ) $ (1 ) $ (14 ) $ (146 ) $ (4 ) $ (150 )
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Notes to Consolidated Financial Statements 2019 Form 10-K
OTTI losses included in AOCI at the time of impairment for fixed income securities which were not included in
earnings (1)
As of December 31,
($ in millions) 2019 2018
Municipal $ (7 ) $ (5 )
Corporate - (2 )
ABS (10 ) (10 )
MBS (56 ) (69 )
Total $ (73 ) $ (86 )
(1) The amounts exclude $161 million and $180 million as of December 31, 2019
and 2018, respectively, of net unrealized gains related to changes in
valuation of the fixed income securities subsequent to the impairment
measurement date.
Rollforward of the cumulative credit losses recognized in earnings for fixed income
securities held
As of December 31,
($ in millions) 2019 2018 2017
Beginning balance $ (204 ) $ (226 ) $ (318 )
Additional credit loss for securities previously
other-than-temporarily impaired (10 ) (7 ) (18 )
Additional credit loss for securities not
previously other-than-temporarily impaired (4 ) (3 ) (8 )
Reduction in credit loss for securities disposed
or collected 32 30 116
Change in credit loss due to accretion of increase
in cash flows - 2 2
Ending balance $ (186 ) $ (204 ) $ (226 )
The Company uses its best estimate of future cash flows expected to be collected
from the fixed income security, discounted at the security's original or current
effective rate, as appropriate, to calculate a recovery value and determine
whether a credit loss exists. The determination of cash flow estimates is
inherently subjective, and methodologies may vary depending on facts and
circumstances specific to the security. All reasonably available information
relevant to the collectability of the security, including past events, current
conditions, and reasonable and supportable assumptions and forecasts, are
considered when developing the estimate of cash flows expected to be collected.
That information generally includes, but is not limited to, the remaining
payment terms of the security, prepayment speeds, foreign exchange rates, the
financial condition and future earnings potential of the issue or issuer,
expected defaults, expected recoveries, the value of underlying collateral,
vintage, geographic concentration of underlying collateral, available reserves
or escrows, current subordination levels, third-party guarantees and other
credit
enhancements. Other information, such as industry analyst reports and forecasts,
sector credit ratings, financial condition of the bond insurer for insured fixed
income securities, and other market data relevant to the realizability of
contractual cash flows, may also be considered. The estimated fair value of
collateral will be used to estimate recovery value if the Company determines
that the security is dependent on the liquidation of collateral for ultimate
settlement. If the estimated recovery value is less than the amortized cost of
the security, a credit loss exists and an OTTI for the difference between the
estimated recovery value and amortized cost is recorded in earnings. The portion
of the unrealized loss related to factors other than credit remains classified
in AOCI. If the Company determines that the fixed income security does not have
sufficient cash flow or other information to estimate a recovery value for the
security, the Company may conclude that the entire decline in fair value is
deemed to be credit related and the loss is recorded in earnings.
The Allstate Corporation 149
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2019 Form 10-K Notes to Consolidated Financial Statements
Unrealized net capital gains and losses included in AOCI ($ in millions)
Fair Gross unrealized Unrealized net gains
December 31, 2019 value Gains Losses (losses)
Fixed income securities $ 59,044 $ 2,847 $ (96 ) $ 2,751
Short-term investments 4,256 - - -
Derivative instruments - - (3 ) (3 )
EMA limited partnerships (1) (4 )
Unrealized net capital gains and
losses, pre-tax 2,744
Amounts recognized for:
Insurance reserves (2) (126 )
DAC and DSI (3) (224 )
Amounts recognized (350 )
Deferred income taxes (507 )
Unrealized net capital gains and
losses, after-tax $ 1,887
December 31, 2018
Fixed income securities $ 57,170 $ 993 $ (957 ) $ 36
Short-term investments 3,027 - - -
Derivative instruments - - (3 ) (3 )
EMA limited partnerships -
Unrealized net capital gains and
losses, pre-tax 33
Amounts recognized for:
Insurance reserves -
DAC and DSI (33 )
Amounts recognized (33 )
Deferred income taxes (2 )
Unrealized net capital gains and
losses, after-tax $ (2 )
(1) Unrealized net capital gains and losses for limited partnership interests
represent the Company's share of EMA limited partnerships' OCI. Fair value
and gross unrealized gains and losses are not applicable.
(2) The insurance reserves adjustment represents the amount by which the reserve
balance would increase if the net unrealized gains in the applicable product
portfolios were realized and reinvested at lower interest rates, resulting
in a premium deficiency. This adjustment primarily relates to structured
settlement annuities with life contingencies (a type of immediate fixed
annuities).
(3) The DAC and DSI adjustment balance represents the amount by which theamortization of DAC and DSI would increase or decrease if the unrealized
gains or losses in the respective product portfolios were realized.
Change in unrealized net capital gains (losses)
For the years ended December 31,
($ in millions) 2019 2018 2017
Fixed income securities $ 2,715 $ (1,431 ) $ 204
Equity securities (1) - - 651
Derivative instruments - (2 ) (3 )
EMA limited partnerships (4 ) (1 ) 5
Total 2,711 (1,434 ) 857
Amounts recognized for:
Insurance reserves (126 ) 315 (315 )
DAC and DSI (191 ) 163 (50 )
Amounts recognized (317 ) 478 (365 )
Deferred income taxes (505 ) 202 117
Increase (decrease) in unrealized net capital
gains and losses, after-tax $ 1,889 $ (754 ) $ 609
(1) Upon adoption of the recognition and measurement accounting standard on
January 1, 2018, $1.16 billion of pre-tax unrealized net capital gains for
equity securities were reclassified from AOCI to retained income.
Portfolio monitoring The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed income security whose carrying value may be other-than-temporarily impaired. For each fixed income security in an unrealized loss position, the Company assesses whether management with the appropriate authority has made the decision to sell or whether it is more likely than not the Company will be required to sell the security before recovery of the amortized cost basis for reasons such
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Notes to Consolidated Financial Statements 2019 Form 10-K
as liquidity, contractual or regulatory purposes. If a security meets either of
these criteria, the security's decline in fair value is considered other than
temporary and is recorded in earnings.
If the Company has not made the decision to sell the fixed income security and
it is not more likely than not the Company will be required to sell the fixed
income security before recovery of its amortized cost basis, the Company
evaluates whether it expects to receive cash flows sufficient to recover the
entire amortized cost basis of the security. The Company calculates the
estimated recovery value by discounting the best estimate of future cash flows
at the security's original or current effective rate, as appropriate, and
compares this to the amortized cost of the security. If the Company does not
expect to receive cash flows sufficient to recover the entire amortized cost
basis of the fixed income security, the credit loss component of the impairment
is recorded in earnings, with the remaining amount of the unrealized loss
related to other factors recognized in OCI.
The Company's portfolio monitoring process includes a quarterly review of all
securities to identify
instances where the fair value of a security compared to its amortized cost is
below established thresholds. The process also includes the monitoring of other
impairment indicators such as ratings, ratings downgrades and payment defaults.
The securities identified, in addition to other securities for which the Company
may have a concern, are evaluated for potential OTTI using all reasonably
available information relevant to the collectability or recovery of the
security. Inherent in the Company's evaluation of OTTI for these securities are
assumptions and estimates about the financial condition and future earnings
potential of the issue or issuer. Some of the factors that may be considered in
evaluating whether a decline in fair value is other than temporary are: 1) the
financial condition, near-term and long-term prospects of the issue or issuer,
including relevant industry specific market conditions and trends, geographic
location and implications of rating agency actions and offering prices; 2) the
specific reasons that a security is in an unrealized loss position, including
overall market conditions which could affect liquidity; and 3) the length of
time and extent to which the fair value has been less than amortized cost.
Gross unrealized losses and fair value by type and length of time held in a continuous unrealized loss position
Less than 12 months 12 months or more
Number Number
of of Total unrealized
($ in millions) issues Fair value Unrealized losses issues Fair value Unrealized losses losses
December 31, 2019
Fixed income securities
U.S. government and agencies 31 $ 1,713 $ (26 ) 10 $ 26 $ - $ (26 )
Municipal 307 576 (9 ) 1 14 (2 ) (11 )
Corporate 186 1,392 (20 ) 65 485 (27 ) (47 )
Foreign government 55 412 (4 ) 6 102 (1 ) (5 )
ABS 36 193 (2 ) 23 160 (4 ) (6 )
MBS 27 15 - 123 14 (1 ) (1 )
Total fixed income securities 642 $ 4,301 $ (61 ) 228 $ 801 $ (35 ) $ (96 )
Investment grade fixed income
securities 581 $ 3,878 $ (41 ) 185 $ 594 $ (20 ) $ (61 )
Below investment grade fixed
income securities 61 423 (20 ) 43 207 (15 ) (35 )
Total fixed income securities 642 $ 4,301 $ (61 ) 228 $ 801 $ (35 ) $ (96 )
December 31, 2018
Fixed income securities
U.S. government and agencies 11 $ 55 $ - 38 $ 364 $ (6 ) $ (6 )
Municipal 943 1,633 (10 ) 1,147 1,554 (33 ) (43 )
Corporate 1,736 19,243 (543 ) 645 8,374 (347 ) (890 )
Foreign government 7 20 (1 ) 27 412 (4 ) (5 )
ABS 64 454 (5 ) 28 161 (5 ) (10 )
MBS 169 37 - 197 52 (3 ) (3 )Total fixed income securities 2,930 $ 21,442 $ (559 ) 2,082 $ 10,917 $
(398 ) $ (957 )
Investment grade fixed income
securities 2,348 $ 17,485 $ (331 ) 2,021 $ 10,626 $ (360 ) $ (691 )
Below investment grade fixed
income securities 582 3,957 (228 ) 61 291 (38 ) (266 )
Total fixed income securities 2,930 $ 21,442 $ (559 ) 2,082 $ 10,917 $ (398 ) $ (957 )
The Allstate Corporation 151
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2019 Form 10-K Notes to Consolidated Financial Statements
Gross unrealized losses by unrealized loss position and credit quality as of December 31, 2019
Investment
($ in millions) grade Below investment grade Total
Fixed income securities with unrealized
loss position less than 20% of amortized
cost (1) (2) $ (48 ) $ (27 ) $ (75 )
Fixed income securities with unrealized
loss position greater than or equal to
20% of amortized cost (3) (4) (13 ) (8 ) (21 )
Total unrealized losses $ (61 ) $ (35 ) $ (96 )
(1) Below investment grade fixed income securities include $14 million that have
been in an unrealized loss position for less than twelve months.
(2) Related to securities with an unrealized loss position less than 20% of
amortized cost, the degree of which suggests that these securities do not
pose a high risk of being other-than-temporarily impaired.
(3) No below investment grade fixed income securities have been in an unrealized
loss position for a period of twelve or more consecutive months.
(4) Evaluated based on factors such as discounted cash flows and the financial
condition and near-term and long-term prospects of the issue or issuer and
were determined to have adequate resources to fulfill contractual
obligations.
Investment grade is defined as a security having a rating of Aaa, Aa, A or Baa
from Moody's, a rating of AAA, AA, A or BBB from S&P Global Ratings ("S&P"), a
comparable rating from another nationally recognized rating agency, or a
comparable internal rating if an externally provided rating is not available.
Market prices for certain securities may have credit spreads which imply higher
or lower credit quality than the current third-party rating. Unrealized losses
on investment grade securities are principally related to an increase in market
yields which may include increased risk-free interest rates and/or wider credit
spreads since the time of initial purchase. The unrealized losses are expected
to reverse as the securities approach maturity.
ABS and MBS in an unrealized loss position were evaluated based on actual and
projected collateral losses relative to the securities' positions in the
respective securitization trusts, security specific expectations of cash flows,
and credit ratings. This evaluation also takes into consideration credit
enhancement, measured in terms of (i) subordination from other classes of
securities in the trust that are contractually obligated to absorb losses before
the class of security the Company owns, and (ii) the expected impact of other
structural features embedded in the securitization trust beneficial to the class
of securities the Company owns, such as overcollateralization and excess spread.
Municipal bonds in an unrealized loss position were evaluated based on the
underlying credit quality of the primary obligor, obligation type and quality of
the underlying assets.
As of December 31, 2019, the Company has not made the decision to sell and it is
not more likely than not the Company will be required to sell fixed income
securities with unrealized losses before recovery of the amortized cost basis.
Limited partnerships
Investments in limited partnership interests include interests in private equity
funds, real estate funds and other funds. As of December 31, 2019 and 2018, the
carrying value of EMA limited partnerships totaled $6.26 billion and $5.73
billion, respectively, and limited partnerships carried at fair value totaled
$1.81 billion and $1.78 billion, respectively. Principal factors influencing
carrying value appreciation or decline include operating performance, comparable
public company earnings multiples, capitalization rates and the economic
environment. For equity method limited partnerships, the Company recognizes an
impairment loss when evidence demonstrates that the loss is other than
temporary. Evidence of a loss in value that is other than temporary may include
the absence of an ability to recover the carrying amount of the investment or
the inability of the investee to sustain a level of earnings that would justify
the carrying amount of the investment. Changes in fair value limited
partnerships are recorded through net investment income and therefore are not
tested for impairment.
Mortgage loans
The Company's mortgage loans are commercial mortgage loans collateralized by a
variety of commercial real estate property types located across the United
States and totaled, net of valuation allowance, $4.82 billion and $4.67 billion
as of December 31, 2019 and 2018, respectively. Substantially all of the
commercial mortgage loans are non-recourse to the borrower.
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Notes to Consolidated Financial Statements 2019 Form 10-K
Principal geographic distribution of commercial real estate exceeding 5% of the mortgage loans portfolio
As of December 31,
(% of mortgage loan portfolio carrying value) 2019 2018
Texas 16.9 % 14.9 %
California 15.1 16.4
Illinois 7.1 7.8
Florida 6.4 6.1
New Jersey 5.6 6.8
North Carolina 4.5 5.1
Types of properties collateralizing the mortgage loan portfolio
As of December 31,
(% of mortgage loan portfolio carrying value) 2019 2018
Apartment complex 36.8 % 34.4 %
Office buildings 22.6 24.5
Warehouse 16.8 15.8
Retail 13.4 14.4
Other 10.4 10.9
Total 100.0 % 100.0 %
Contractual maturities of the mortgage loan portfolio
As of December 31, 2019
($ in millions) Number of loans Carrying value Percent
2020 9 $ 58 1.2 %
2021 36 446 9.3
2022 28 460 9.5
2023 52 776 16.1
Thereafter 161 3,077 63.9
Total 286 $ 4,817 100.0 %
Mortgage loans are evaluated for impairment on a specific loan basis through a
quarterly credit monitoring process and review of key credit quality indicators.
Mortgage loans are considered impaired when it is probable that the Company will
not collect the contractual principal and interest. Valuation allowances are
established for impaired loans to reduce the carrying value to the fair value of
the collateral less costs to sell or the present value of the loan's expected
future repayment cash flows discounted at the loan's original effective interest
rate. Impaired mortgage loans may not have a valuation allowance when the fair
value of the collateral less costs to sell is higher than the carrying value.
Valuation allowances are adjusted for subsequent changes in the fair value of
the collateral less costs to sell or present value of the loan's expected future
repayment cash flows. Mortgage loans are charged off against their corresponding
valuation allowances when there is no reasonable expectation of recovery. The
impairment evaluation is non-statistical in respect to
the aggregate portfolio but considers facts and circumstances attributable to
each loan. It is not considered probable that additional impairment losses,
beyond those identified on a specific loan basis, have been incurred as of
December 31, 2019.
Accrual of income is suspended for mortgage loans that are in default or when
full and timely collection of principal and interest payments is not probable.
Cash receipts on mortgage loans on nonaccrual status are generally recorded as a
reduction of carrying value.
Debt service coverage ratio is considered a key credit quality indicator when
mortgage loans are evaluated for impairment. Debt service coverage ratio
represents the amount of estimated cash flows from the property available to the
borrower to meet principal and interest payment obligations. Debt service
coverage ratio estimates are updated annually or more frequently if conditions
are warranted based on the Company's credit monitoring process.
The Allstate Corporation 153
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2019 Form 10-K Notes to Consolidated Financial Statements
Carrying value of non-impaired mortgage loans summarized by debt service coverage ratio distribution
As of December 31,
($ in millions) 2019 2018
Fixed rate
Debt Service Coverage mortgage Variable rate Fixed rate Variable rate
Ratio Distribution loans mortgage loans Total mortgage loans mortgage loans Total
Below 1.0 $ 13 $ 32 $ 45 $ 6 $ 31 $ 37
1.0 - 1.25 225 - 225 273 - 273
1.26 - 1.50 1,219 18 1,237 1,192 - 1,192
Above 1.50 3,264 38 3,302 3,063 101 3,164
Total non-impaired
mortgage loans $ 4,721 $ 88 $ 4,809 $ 4,534 $ 132 $ 4,666
Mortgage loans with a debt service coverage ratio below 1.0 that are not
considered impaired primarily relate to instances where the borrower has the
financial capacity to fund the revenue shortfalls from the properties for the
foreseeable term, the decrease
in cash flows from the properties is considered temporary, or there are other
risk mitigating circumstances such as additional collateral, escrow balances or
borrower guarantees.
Net carrying value of impaired mortgage loans
As of December 31,
($ in millions) 2019 2018
Impaired mortgage loans with a valuation allowance $ 8 $ 4
Impaired mortgage loans without a valuation allowance - -
Total impaired mortgage loans $ 8 $ 4
Valuation allowance on impaired mortgage loans $ 3 $ 3
The average balance of impaired loans was $5 million, $4 million and $7 million
during 2019, 2018 and 2017, respectively.
Rollforward of the valuation allowance on impaired mortgage loans
For the years ended December 31,
($ in millions) 2019 2018 2017
Beginning balance $ 3 $ 3 $ 3
Net increase in valuation allowance - - 1
Charge offs - - (1 )
Ending balance $ 3 $ 3 $ 3
Payments on all mortgage loans were current as of December 31, 2019, 2018 and
2017.
Municipal bonds
The Company maintains a diversified portfolio of municipal bonds, including tax
exempt and taxable securities, which totaled $8.62 billion and $9.17 billion as
of December 31, 2019 and 2018, respectively.
The municipal bond portfolio includes general obligations of state and local
issuers and revenue bonds (including pre-refunded bonds, which are bonds for
which an irrevocable trust has been established to fund the remaining payments
of principal and interest).
Principal geographic distribution of municipal bond issuers exceeding 5% of the portfolio
As of December 31,
(% of municipal bond portfolio carrying value) 2019 2018
Texas 12.7 % 12.3 %
California 8.6 7.4
Colorado 5.8 4.0
Washington 5.5 6.2
New York 3.7 5.6
Short-term investments
Short-term investments, including money market funds, commercial paper, U.S.
Treasury bills and other short-term investments, are carried at fair value. As
of December 31, 2019 and 2018, the fair value of short-term investments totaled
$4.26 billion and $3.03 billion, respectively.
Other investments
Other investments primarily consist of bank loans, real estate, policy loans,
agent loans and derivatives. Bank loans are primarily senior secured corporate
loans and are carried at amortized cost. Policy loans are carried at unpaid
principal balances. Real estate is carried at cost less accumulated
depreciation. Agent
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Notes to Consolidated Financial Statements 2019 Form 10-K
loans are loans issued to exclusive Allstate agents and are carried at unpaid principal balances, net of valuation allowances and unamortized deferred fees or costs. Derivatives are carried at fair value. Other investments by asset type ($ in millions) December 31, 2019 December 31, 2018 Bank loans $ 1,204 $ 1,350 Real estate 1,005 791 Policy loans 894 891 Agent loans 666 620 Derivatives and other 236 200 Total $ 4,005 $ 3,852 Concentration of credit risk As of December 31, 2019, the Company is not exposed to any credit concentration risk of a single issuer and its affiliates greater than 10% of the Company's shareholders' equity, other than the U.S. government and its agencies. Securities loaned The Company's business activities include securities lending programs with third parties, mostly large banks. As of December 31, 2019 and 2018, fixed income and equity securities with a carrying value of $1.74 billion and $1.40 billion, respectively, were on loan under these agreements. Interest income on collateral, net of fees, was $5 million, $4 million and $7 million in 2019, 2018 and 2017, respectively. Other investment information Included in fixed income securities are below investment grade assets totaling $7.15 billion and $5.23 billion as of December 31, 2019 and 2018, respectively. As of December 31, 2019, fixed income securities and short-term investments with a carrying value of $147 million were on deposit with regulatory authorities as required by law. As of December 31, 2019, the carrying value of fixed income securities and other investments that were non-income producing was $40 million. Note 6 Fair Value of Assets and Liabilities Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Assets and liabilities recorded on the Consolidated Statements of Financial Position at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows: Level 1: Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access. Level 2: Assets and liabilities whose values are based on the following: (a) Quoted prices for similar assets or liabilities in active markets;
(b) Quoted prices for identical or similar assets or liabilities in markets that
are not active; or
(c) Valuation models whose inputs are observable, directly or indirectly, for
substantially the full term of the asset or liability.
Level 3: Assets and liabilities whose values are based on prices or valuation
techniques that require inputs that are both unobservable and significant to the
overall fair value measurement. Unobservable inputs reflect the Company's
estimates of the assumptions that market participants would use in valuing the
assets and liabilities.
The availability of observable inputs varies by instrument. In situations where
fair value is based on internally developed pricing models or inputs that are
unobservable in the market, the determination of fair value requires more
judgment. The degree of judgment exercised by the Company in determining fair
value is typically greatest for instruments categorized in Level 3. In many
instances, valuation inputs used to measure fair value fall into different
levels of the fair value hierarchy. The category level in the fair value
hierarchy is determined based on the lowest level input that is significant to
the fair value measurement in its entirety. The Company uses prices and inputs
that are current as of the measurement date, including during periods of market
disruption. In periods of market disruption, the ability to observe prices and
inputs may be reduced for many instruments.
The Company is responsible for the determination of fair value and the
supporting assumptions and methodologies. The Company gains assurance that
assets and liabilities are appropriately valued through
The Allstate Corporation 155
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2019 Form 10-K Notes to Consolidated Financial Statements
the execution of various processes and controls designed to ensure the overall reasonableness and consistent application of valuation methodologies, including inputs and assumptions, and compliance with accounting standards. For fair values received from third parties or internally estimated, the Company's processes and controls are designed to ensure that the valuation methodologies are appropriate and consistently applied, the inputs and assumptions are reasonable and consistent with the objective of determining fair value, and the fair values are accurately recorded. For example, on a continuing basis, the Company assesses the reasonableness of individual fair values that have stale security prices or that exceed certain thresholds as compared to previous fair values received from valuation service providers or brokers or derived from internal models. The Company performs procedures to understand and assess the methodologies, processes and controls of valuation service providers. In addition, the Company may validate the reasonableness of fair values by comparing information obtained from valuation service providers or brokers to other third-party valuation sources for selected securities. The Company performs ongoing price validation procedures such as back-testing of actual sales, which corroborate the various inputs used in internal models to market observable data. When fair value determinations are expected to be more variable, the Company validates them through reviews by members of management who have relevant expertise and who are independent of those charged with executing investment transactions. The Company has two types of situations where investments are classified as Level 3 in the fair value hierarchy: (1) Specific inputs significant to the fair value estimation models are not
market observable. This primarily occurs in the Company's use of broker
quotes to value certain securities where the inputs have not been
corroborated to be market observable, and the use of valuation models that
use significant non-market observable inputs.
(2) Quotes continue to be received from independent third-party valuation service
providers and all significant inputs are market observable; however, there
has been a significant decrease in the volume and level of activity for the
asset when compared to normal market activity such that the degree of market
observability has declined to a point where categorization as a Level 3
measurement is considered appropriate. The indicators considered in
determining whether a significant decrease in the volume and level of
activity for a specific asset has occurred include the level of new issuances
in the primary market, trading volume in the secondary market, the level of
credit spreads over historical levels, applicable bid-ask spreads, and price
consensus among market participants and other pricing sources.
Certain assets are not carried at fair value on a recurring basis, including investments such as mortgage loans, bank loans, agent loans and policy loans. Accordingly, such investments are only included in the fair value hierarchy disclosure when the investment is subject to remeasurement at fair value after initial recognition and the resulting remeasurement is reflected in the consolidated financial statements. In determining fair value, the Company principally uses the market approach which generally utilizes market transaction data for the same or similar instruments. To a lesser extent, the Company uses the income approach which involves determining fair values from discounted cash flow methodologies. For the majority of Level 2 and Level 3 valuations, a combination of the market and income approaches is used. Summary of significant inputs and valuation techniques for Level 2 and Level 3 assets and liabilities measured at fair value on a recurring basis Level 2 measurements • Fixed income securities: U.S. government and agencies, municipal, corporate - public and foreign government: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads. Corporate - privately placed: Privately placed are valued using a discounted cash flow model that is widely accepted in the financial services industry and uses market observable inputs and inputs derived principally from, or corroborated by, observable market data. The primary inputs to the discounted cash flow model include an interest rate yield curve, as well as published credit spreads for similar assets in markets that are not active that incorporate the credit quality and industry sector of the issuer. Corporate - privately placed also includes redeemable preferred stock that are valued using quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, underlying stock prices and credit spreads. ABS and MBS: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, collateral performance, and credit spreads. Certain ABS are valued based on non-binding broker quotes whose inputs have been corroborated to be market observable. Residential MBS include prepayment speeds as a primary input for valuation. • Equity securities: The primary inputs to the valuation include quoted prices
or quoted net asset values for identical or similar assets in markets that
are not active.
• Short-term: The primary inputs to the valuation include quoted prices for
identical or similar assets in markets that are not active, contractual cash
flows, benchmark yields and credit spreads.
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Notes to Consolidated Financial Statements 2019 Form 10-K
• Other investments: Free-standing exchange listed derivatives that are notactively traded are valued based on quoted prices for identical instruments
in markets that are not active.
Over-the-counter ("OTC") derivatives, including interest rate swaps, foreign
currency swaps, total return swaps, foreign exchange forward contracts, certain
options and certain credit default swaps, are valued using models that rely on
inputs such as interest rate yield curves, implied volatilities, index price
levels, currency rates, and credit spreads that are observable for substantially
the full term of the contract. The valuation techniques underlying the models
are widely accepted in the financial services industry and do not involve
significant judgment.
Level 3 measurements
• Fixed income securities:
Municipal: Comprise municipal bonds that are not rated by third-party credit
rating agencies. The primary inputs to the valuation of these municipal bonds
include quoted prices for identical or similar assets in markets that exhibit
less liquidity relative to those markets supporting Level 2 fair value
measurements, contractual cash flows, benchmark yields and credit spreads. Also
included are municipal bonds valued based on non-binding broker quotes where the
inputs have not been corroborated to be market observable and municipal bonds in
default valued based on the present value of expected cash flows.
Corporate - public and privately placed, ABS and MBS: Primarily valued based on
non-binding broker quotes where the inputs have not been corroborated to be
market observable. Other inputs for corporate fixed income securities include an
interest rate yield curve, as well as published credit spreads for similar
assets that incorporate the credit quality and industry sector of the issuer.
• Equity securities: The primary inputs to the valuation include quoted prices
or quoted net asset values for identical or similar assets in markets that
exhibit less liquidity relative to those markets supporting Level 2 fair
value measurements.
• Short-term: For certain short-term investments, amortized cost is used as the
best estimate of fair value.
• Other investments: Certain OTC derivatives, such as interest rate caps,
certain credit default swaps and certain options (including swaptions), are
valued using models that are widely accepted in the financial services
industry. These are categorized as Level 3 as a result of the significance of
non-market observable inputs such as volatility. Other primary inputs include
interest rate yield curves and credit spreads.
• Contractholder funds: Derivatives embedded in certain life and annuity
contracts are valued internally using models widely accepted in the financial
services industry that determine a single best estimate of fair value for the
embedded derivatives within a block of contractholder liabilities. The models
primarily use stochastically determined cash flows based on the contractual
elements of embedded derivatives, projected option cost and applicable market
data, such as interest rate yield curves and equity index volatility
assumptions. These are categorized as Level 3 as a result of the significance
of non-market observable inputs.
Investments excluded from the fair value hierarchy
Limited partnerships carried at fair value, which do not have readily
determinable fair values, use NAV provided by the investees and are excluded
from the fair value hierarchy. These investments are generally not redeemable by
the investees and generally cannot be sold without approval of the general
partner. The Company receives distributions of income and proceeds from the
liquidation of the underlying assets of the investees, which usually takes place
in years 4-9 of the typical contractual life of 10-12 years. As of December 31,
2019, the Company has commitments to invest $492 million in these limited
partnership interests.
The Allstate Corporation 157
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2019 Form 10-K Notes to Consolidated Financial Statements
Assets and liabilities measured at fair value
As of December 31, 2019
Quoted prices in
active markets for Significant other Significant
identical assets observable inputs unobservable inputs Counterparty and cash
($ in millions) (Level 1) (Level 2) (Level 3) collateral netting Total
Assets
Fixed income securities:
U.S. government and
agencies $ 4,689 $ 397 $ - $ 5,086
Municipal - 8,558 62 8,620
Corporate - public - 30,819 61 30,880
Corporate - privately
placed - 12,084 114 12,198
Foreign government - 979 - 979
ABS - 797 65 862
MBS - 379 40 419
Total fixed income
securities 4,689 54,013 342 59,044
Equity securities 7,407 384 371 8,162
Short-term investments 1,940 2,291 25 4,256
Other investments:
Free-standing derivatives - 180 - (40 ) 140
Separate account assets 3,044 - - 3,044
Other assets 1 - - 1
Total recurring basis
assets 17,081 56,868 738 (40 ) 74,647
Total assets at fair value $ 17,081 $ 56,868 $ 738 $ (40 ) $ 74,647
% of total assets at fair
value 22.9 % 76.2 % 1.0 % (0.1 )% 100.0 %
Investments reported at NAV 1,814
Total $ 76,461
Liabilities
Contractholder funds:
Derivatives embedded in
life and annuity contracts $ - $ - $ (462 ) $ (462 )
Other liabilities:
Free-standing derivatives - (84 ) - $ 12 (72 )
Total recurring basis
liabilities $ - $ (84 ) $ (462 ) $ 12 $ (534 )
% of total liabilities at
fair value - % 15.7 % 86.5 % (2.2 )% 100.0 %
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Notes to Consolidated Financial Statements 2019 Form 10-K
Assets and liabilities measured at fair value
As of December 31, 2018
Quoted prices in
active markets for Significant other Significant
identical assets observable inputs unobservable inputs Counterparty and cash
($ in millions) (Level 1) (Level 2) (Level 3) collateral netting Total
Assets
Fixed income securities:
U.S. government and
agencies $ 5,085 $ 432 $ - $ 5,517
Municipal - 9,099 70 9,169
Corporate - public - 29,200 70 29,270
Corporate - privately
placed - 10,798 90 10,888
Foreign government - 747 - 747
ABS - 976 69 1,045
MBS - 508 26 534
Total fixed income
securities 5,085 51,760 325 57,170
Equity securities 4,364 331 341 5,036
Short-term investments 1,338 1,659 30 3,027
Other investments:
Free-standing derivatives - 139 1 $ (23 ) 117
Separate account assets 2,805 - - 2,805
Other assets 2 - - 2
Total recurring basis
assets $ 13,594 $ 53,889 $ 697 $ (23 ) $ 68,157
% of total assets at fair
value 19.9 % 79.1 % 1.0 % - % 100.0 %
Investments reported at NAV 1,779
Total $ 69,936
Liabilities
Contractholder funds:
Derivatives embedded in
life and annuity contracts $ - $ - $ (224 ) $ (224 )
Other liabilities:
Free-standing derivatives (1 ) (62 ) - $ 6 (57 )
Total recurring basis
liabilities $ (1 ) $ (62 ) $ (224 ) $ 6 $ (281 )
% of total liabilities at
fair value 0.3 % 22.1 % 79.7 % (2.1 )% 100.0 %
Quantitative information about the significant unobservable inputs used in Level 3 fair value
measurements
Valuation Unobservable Weighted
($ in millions) Fair value technique input Range average
December 31, 2019
Derivatives embedded in life and $ (430 ) Stochastic Projected
1.0 - 4.2% 2.67%
annuity contracts - cash flow option cost
Equity-indexed and forward model
starting options
December 31, 2018
Derivatives embedded in life and $ (185 ) Stochastic Projected
1.0 - 2.2% 1.74%
annuity contracts - cash flow option cost
Equity-indexed and forward model
starting options
The embedded derivatives are equity-indexed and forward starting options in
certain life and annuity products that provide customers with interest crediting
rates based on the performance of the S&P 500. If the projected option cost
increased (decreased), it would result in a higher (lower) liability fair value.
As of December 31, 2019 and 2018, Level 3 fair value measurements of fixed
income securities total $342 million and $325 million, respectively, and include
$50 million and $105 million, respectively, of securities valued based on
non-binding broker quotes where the inputs have not been corroborated to be
market
observable and $36 million and $44 million, respectively, of municipal fixed
income securities that are not rated by third-party credit rating agencies. As
the Company does not develop the Level 3 fair value unobservable inputs for
these fixed income securities, they are not included in the table above.
However, an increase (decrease) in credit spreads for fixed income securities
valued based on non-binding broker quotes would result in a lower (higher) fair
value, and an increase (decrease) in the credit rating of municipal bonds that
are not rated by third-party credit rating agencies would result in a higher
(lower) fair value.
The Allstate Corporation 159
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2019 Form 10-K Notes to Consolidated Financial Statements
Rollforward of Level 3 assets and liabilities held at fair value during the year ended December 31, 2019
Balance as of Total gains (losses) included in: Transfers Balance as of
($ in millions) December 31, 2018 Net income OCI Into Level 3 Out of Level 3 Purchases Sales Issues Settlements December 31, 2019
Assets
Fixed income
securities:
Municipal $ 70 $ 1 $ 4 $ - $ (5 ) $ - $ (5 ) $ - $ (3 ) $ 62
Corporate - public 70 - 3 30 (113 ) 86 (11 ) - (4 ) 61
Corporate - privately
placed 90 (1 ) 2 43 (2 ) 4 (13 ) - (9 ) 114
ABS 69 1 (1 ) 76 (210 ) 159 (22 ) - (7 ) 65
MBS 26 - (2 ) 9 - 9 - - (2 ) 40
Total fixed income
securities 325 1 6 158 (330 ) 258 (51 ) - (25 ) 342
Equity securities 341 30 - - - 82 (82 ) - - 371
Short-term investments 30 - - - - 35 (40 ) - - 25
Free-standing
derivatives, net 1 (1 ) - - - - - - - -
Total recurring Level
3 assets 697 30 6 158 (330 ) 375 (173 ) - (25 ) 738
Liabilities
Contractholder funds:
Derivatives embedded
in life and annuity
contracts (224 ) (61 ) - (175 ) - - - (16 ) 14 (462 )
Total recurring
Level 3 liabilities $ (224 ) $ (61 ) $ - $ (175 ) $ - $ - $ - $ (16 ) $ 14 $ (462 )
Total Level 3 gains (losses) included in net income for the year ended December 31, 2019
Realized Interest credited
capital gains Life contract to contractholder
($ in millions) Net investment income and losses benefits funds TotalComponents of net income $ (2 ) $ 32 $ 7 $ (68 ) $ (31 )
Rollforward of Level 3 assets and liabilities held at fair value during the year ended December 31, 2018
Total gains (losses) included in: Transfers Balance as of
Balance as of Out of December 31, 2018
($ in millions) December 31, 2017 Net income OCI Into Level 3 Level 3 Purchases Sales Issues Settlements
Assets
Fixed income
securities:
Municipal $ 101 $ 1 $ (2 ) $ - $ (26 ) $ 10 $ (8 ) $ - $ (6 ) $ 70
Corporate - public 108 - (3 ) 17 (21 ) 10 (38 ) - (3 ) 70
Corporate - privately
placed 224 (1 ) (3 ) 20 (119 ) 22 (5 ) - (48 ) 90
ABS 147 - 2 42 (159 ) 160 (97 ) - (26 ) 69
MBS 26 - - - - 1 - - (1 ) 26
Total fixed income
securities 606 - (6 ) 79 (325 ) 203 (148 ) - (84 ) 325
Equity securities 210 37 - - - 109 (15 ) - - 341
Short-term
investments 20 - - - - 55 (45 ) - - 30
Free-standing
derivatives, net 1 - - - - - - - - 1
Total recurring Level
3 assets $ 837 $ 37 $ (6 ) $ 79 $ (325 ) $ 367 $ (208 ) $ - $ (84 ) $ 697
Liabilities
Contractholder funds:
Derivatives embedded
in life and annuity
contracts $ (286 ) $ 58 $ - $ - $ - $ - $ - $ (2 ) $ 6 $ (224 )
Total recurring
Level 3 liabilities $ (286 ) $ 58 $ - $ - $ - $ - $ - $ (2 ) $ 6 $ (224 )
Total Level 3 gains (losses) included in net income for the year ended December 31, 2018
Realized Interest credited
Net investment capital gains to contractholder
($ in millions) income and losses Life contract benefits funds Total
Components of net
income $ - $ 37 $ (5 ) $ 63 $ 95
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Notes to Consolidated Financial Statements 2019 Form 10-K
Rollforward of Level 3 assets and liabilities held at fair value during the year ended December 31, 2017
Total gains (losses) included in: Transfers
Balance as of Out of Balance as of
($ in millions) December 31, 2016 Net income OCI Into Level 3 Level 3 Purchases Sales Issues
Settlements December 31, 2017 Assets Fixed income securities: Municipal $ 125 $ (1 ) $ 7 $ - $ (6 ) $ 8 $ (29 ) $ - $ (3 ) $ 101 Corporate - public 78 - - 4 (30 ) 60 - - (4 ) 108 Corporate - privately placed 263 8 (2 ) 30 (49 ) 44 (30 ) - (40 ) 224 ABS 69 - 6 60 (280 ) 322 - - (30 ) 147 MBS 23 - - - - 6 - - (3 ) 26 Total fixed income securities 558 7 11 94 (365 ) 440 (59 ) - (80 ) 606 Equity securities 163 13 4 - (4 ) 48 (14 ) - - 210 Short-term investments 15 - - - - 45 (40 ) - - 20 Free-standing derivatives, net (2 ) 3 - - - - - - - 1 Other assets 1 (1 ) - - - - - - - - Total recurring Level 3 assets $ 735 $ 22 $ 15 $ 94 $ (369 ) $ 533 $ (113 ) $ - $ (80 ) $ 837 Liabilities Contractholder funds: Derivatives embedded in life and annuity contracts $ (290 ) $ - $ - $ - $ - $ - $ - $ (2 ) $ 6 $ (286 ) Total recurring Level 3 liabilities $ (290 ) $ - $ - $ - $ - $ - $ - $ (2 ) $ 6 $ (286 )
Total Level 3 gains (losses) included in net income for the year ended December 31, 2017
Realized Interest credited
Net investment capital gains Life contract to contractholder
($ in millions) income and losses benefits funds Total
Components of net
income $ 19 $ 4 $ 9 $ (10 ) $ 22
Transfers between level categorizations may occur due to changes in the
availability of market observable inputs, which generally are caused by changes
in market conditions such as liquidity, trading volume or bid-ask spreads.
Transfers between level categorizations may also occur due to changes in the
valuation source, including situations where a fair value quote is not provided
by the Company's independent third-party valuation service provider resulting in
the price becoming stale or replaced with a broker quote whose inputs have not
been corroborated to be market observable. This situation will result in the
transfer of a security into Level 3. Transfers in and out of level
categorizations are reported as having occurred at the beginning of the quarter
in which the transfer occurred. Therefore, for all transfers into Level 3, all
realized and changes in unrealized gains and losses in the quarter of transfer
are reflected in the Level 3 rollforward table.
There were no transfers between Level 1 and Level 2 during 2019, 2018 or 2017.
Transfers into Level 3 during 2019, 2018 and 2017 included situations where a
quote was not provided by
the Company's independent third-party valuation service provider and as a result
the price was stale or had been replaced with a broker quote where the inputs
had not been corroborated to be market observable resulting in the security
being classified as Level 3. Transfers into Level 3 during 2019 also included
derivatives embedded in equity-indexed universal life contracts due to
refinements in the valuation modeling resulting in an increase in significance
of non-market observable inputs.
Transfers out of Level 3 during 2019, 2018 and 2017 included situations where a
broker quote was used in the prior period and a quote became available from the
Company's independent third-party valuation service provider in the current
period. A quote utilizing the new pricing source was not available as of the
prior period, and any gains or losses related to the change in valuation source
for individual securities were not significant.
The Allstate Corporation 161
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2019 Form 10-K Notes to Consolidated Financial Statements
Valuation changes included in net income for Level 3 assets and liabilities held as of
December 31,
($ in millions) 2019 2018 2017
Assets
Fixed income securities:
Municipal $ 1 $ - $ (3 )
Corporate - - 1
Total fixed income securities 1 - (2 )
Equity securities 6 36 13
Free-standing derivatives, net (1 ) - -
Other assets - - (1 )
Total recurring Level 3 assets $ 6 $ 36 $ 10
Liabilities
Contractholder funds: Derivatives embedded in
life and annuity contracts $ (61 ) $ 58 $ -
Total recurring Level 3 liabilities (61 ) 58 -
Total included in net income $ (55 ) $ 94 $ 10
Components of net income
Net investment income $ (2 ) $ - $ 19
Realized capital gains and losses 8 36 (8 )
Life contract benefits 7 (5 ) 9
Interest credited to contractholder funds (68 ) 63 (10 )
Total included in net income $ (55 ) $ 94 $ 10
Carrying values and fair value estimates of financial instruments not carried at fair value
($ in millions) December 31, 2019 December 31, 2018
Fair
value Carrying Fair Carrying Fair
Financial assets level value value value value
Mortgage loans Level 3 $ 4,817 $ 5,012 $ 4,670 $ 4,703
Bank loans Level 3 1,204 1,185 1,350 1,298
Agent loans Level 3 666 664 620 617
Financial liabilities
Contractholder funds on
investment contracts Level 3 8,438 9,158 9,250 9,665
Long-term debt Level 2 6,631 7,738 6,451 6,708
Liability for collateral Level 2 $ 1,829 $ 1,829 $ 1,458 $ 1,458
Note 7 Derivative Financial Instruments and Off-balance Sheet Financial Instruments
The Company uses derivatives for risk reduction and to increase investment portfolio returns through asset replication. Risk reduction activity is focused on managing the risks with certain assets and liabilities arising from the potential adverse impacts from changes in risk-free interest rates, changes in equity market valuations, increases in credit spreads and foreign currency fluctuations. Asset replication refers to the "synthetic" creation of assets through the use of derivatives. The Company replicates fixed income securities using a combination of a credit default swap, index total return swap, or a foreign currency forward contract and one or more highly rated fixed income securities, primarily investment grade host bonds, to synthetically replicate the economic characteristics of one or more cash market securities. The Company replicates equity securities using futures, index total return swaps, and options to increase equity exposure. Property-Liability may use interest rate swaps, swaptions, futures and options to manage the interest rate risks of existing investments. These instruments are utilized to change the duration of the portfolio in order to offset the economic effect that interest rates would otherwise have on the fair value of its fixed income securities. Fixed income index total return swaps are used to offset valuation losses in the fixed income portfolio during periods of declining market values. Credit default swaps are typically used to mitigate the credit risk within the Property-Liability fixed income portfolio. Equity index total return swaps, futures and options are used by Property-Liability to offset valuation losses in the equity portfolio during periods of declining equity market values. In addition, equity futures are used to hedge the market risk related to deferred compensation liability contracts. Forward contracts are primarily used by Property-Liability to hedge foreign currency risk associated with 162 www.allstate.com
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Notes to Consolidated Financial Statements 2019 Form 10-K
holding foreign currency denominated investments and foreign operations.
Asset-liability management is a risk management practice that is principally
employed by Allstate Life and Allstate Annuities to balance the respective
interest-rate sensitivities of its assets and liabilities. Depending upon the
attributes of the assets acquired and liabilities issued, derivative instruments
such as interest rate swaps, caps, swaptions and futures are utilized to change
the interest rate characteristics of existing assets and liabilities to ensure
the relationship is maintained within specified ranges and to reduce exposure to
rising or falling interest rates. Fixed income index total return swaps are used
to offset valuation losses in the portfolio during periods of declining market
values. Credit default swaps are typically used to mitigate the credit risk
within the Allstate Life and Allstate Annuities fixed income portfolios. Futures
and options are used for hedging the equity exposure contained in equity indexed
life and annuity product contracts that offer equity returns to contractholders.
In addition, the Company uses equity index total return swaps, options and
futures to offset valuation losses in the equity portfolio during periods of
declining equity market values. Foreign currency swaps and forwards are
primarily used to reduce the foreign currency risk associated with holding
foreign currency denominated investments.
The Company also has derivatives embedded in non-derivative host contracts that
are required to be separated from the host contracts and accounted for at fair
value with changes in fair value of embedded derivatives reported in net income.
The Company's primary embedded derivatives are equity options in life and
annuity product contracts, which provide returns linked to equity indices to
contractholders.
When derivatives meet specific criteria, they may be designated as accounting
hedges and accounted for as fair value, cash flow, foreign currency fair value
or foreign currency cash flow hedges. The Company designates certain investment
risk transfer reinsurance agreements as fair value hedges when the hedging
instrument is highly effective in offsetting the risk of changes in the fair
value of the hedged item. The fair value of the hedged liability is reported in
contractholder funds in the Consolidated Statements of Financial Position. The
impact from results of the fair value hedge is reported in interest credited to
contractholder funds in the Consolidated Statements of Operations.
The notional amounts specified in the contracts are used to calculate the
exchange of contractual payments under the agreements and are generally not
representative of the potential for gain or loss on these agreements. However,
the notional amounts specified in credit default swaps where the Company has
sold credit protection represent the maximum amount of potential loss, assuming
no recoveries.
Fair value, which is equal to the carrying value, is the estimated amount that
the Company would receive or pay to terminate the derivative contracts at the
reporting date. The carrying value amounts for OTC derivatives are further
adjusted for the effects, if any, of enforceable master netting agreements and
are presented on a net basis, by counterparty agreement, in the Consolidated
Statements of Financial Position.
For those derivatives which qualify and have been designated as fair value
accounting hedges, net income includes the changes in the fair value of both the
derivative instrument and the hedged risk. For cash flow hedges, gains and
losses are amortized from AOCI and are reported in net income in the same period
the forecasted transactions being hedged impact net income.
Non-hedge accounting is generally used for "portfolio" level hedging strategies
where the terms of the individual hedged items do not meet the strict
homogeneity requirements to permit the application of hedge accounting. For
non-hedge derivatives, net income includes changes in fair value and accrued
periodic settlements, when applicable. With the exception of non-hedge
derivatives used for asset replication and non-hedge embedded derivatives, all
of the Company's derivatives are evaluated for their ongoing effectiveness as
either accounting hedge or non-hedge derivative financial instruments on at
least a quarterly basis.
Fair value hedges The Company had one derivative designated as a fair value
hedge as of December 31, 2019 and 2018.
Cash flow hedges The Company had no derivatives designated as a cash flow hedge
as of December 31, 2019 and 2018.
The Allstate Corporation 163
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2019 Form 10-K Notes to Consolidated Financial Statements
Summary of the volume and fair value positions of derivative instruments as of December 31, 2019
Volume (1)
($ in millions, except Balance sheet Notional Number of Fair value, Gross
number of contracts) location amount contracts net asset Gross liability
Asset derivatives
Derivatives designated as fair value accounting
hedging instruments
Other Other assets $ 2 n/a $ - $ - $ -
Derivatives not designated as accounting hedging
instruments
Interest rate contracts
Futures Other assets - 3,668 - - -
Equity and index contracts
Options Other investments - 5,539 140 140 -
Futures Other assets - 1,533 1 1 -
Total return index
contracts
Total return swap
agreements - fixed income Other investments 56 n/a 1 1 -
Credit default contracts
Credit default swaps -
buying protection Other investments 17 n/a - - -
Subtotal 73 10,740 142 142 -
Total asset derivatives $ 75 10,740 $ 142 $ 142 $ -
Liability derivatives
Derivatives not designated as accounting hedging
instruments
Interest rate contracts
Interest rate cap Other liabilities &
agreements accrued expenses $ 34 n/a $ - $ - $ -
Other liabilities &
Futures accrued expenses - 1,089 - - -Equity and index contracts
Other liabilities &
Options accrued expenses - 5,400 (68 ) - (68 )
Other liabilities &
Futures accrued expenses - 3 - - -
Total return index
contracts
Total return swap Other liabilities &
agreements - fixed income accrued expenses 119 n/a - - -
Total return swap Other liabilities &
agreements - equity index accrued expenses 187 n/a 11 11 -
Foreign currency contracts
Other liabilities &
Foreign currency forwards accrued expenses 745 n/a 19 28 (9 )
Embedded derivative financial instruments
Guaranteed accumulation
benefits Contractholder funds 161 n/a (18 ) - (18 )
Guaranteed withdrawal
benefits Contractholder funds 205 n/a (14 ) - (14 )
Equity-indexed and forward
starting options in life
and annuity product
contracts Contractholder funds 1,791 n/a (430 ) - (430 )
Credit default contracts
Credit default swaps - Other liabilities &
buying protection accrued expenses 152 n/a (7 ) - (7 )
Credit default swaps - Other liabilities &
selling protection accrued expenses 9 n/a - - -
Total liability derivatives 3,403 6,492 (507 ) $ 39 $ (546 )
Total derivatives $ 3,478 17,232 $ (365 )
(1) Volume for OTC and cleared derivative contracts is represented by their
notional amounts. Volume for exchange traded derivatives is represented by
the number of contracts, which is the basis on which they are traded. (n/a =
not applicable)
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Notes to Consolidated Financial Statements 2019 Form 10-K
Summary of the volume and fair value positions of derivative instruments as of December 31, 2018
Volume
($ in millions, except Balance sheet Notional Number of Fair value,
number of contracts) location amount contracts net Gross asset Gross liability
Asset derivatives
Derivatives not designated as accounting
hedging instruments
Interest rate contracts
Interest rate cap
agreements Other investments $ 6 n/a $ - $ - $ -
Futures Other assets - 1,330 1 1 -
Equity and index
contracts
Options Other investments - 11,131 115 115 -
Futures Other assets - 1,453 1 1 -
Total return index
contracts
Total return swap Other investments
agreements - fixed income 7 n/a - - -
Total return swap Other investments
agreements - equity index 61 n/a (2 ) - (2 )
Foreign currency
contracts
Foreign currency forwards Other investments 258 n/a 10 11 (1 )
Credit default contracts
Credit default swaps -
buying protection Other investments 136 n/a (1 ) 2 (3 )
Other contracts
Other Other assets 2 n/a - - -
Total asset derivatives $ 470 13,914 $ 124 $ 130 $ (6 )
Liability derivatives
Derivatives not designated as accounting
hedging instruments
Interest rate contracts
Interest rate cap Other liabilities &
agreements accrued expenses $ 31 n/a $ 1 $ 1 $ -
Other liabilities &
Futures accrued expenses - 1,300 (1 ) - (1 )
Equity and index
contracts
Other liabilities &
Options and futures accrued expenses - 10,956 (50 ) - (50 )
Total return index
contracts
Total return swap Other liabilities &
agreements - fixed income accrued expenses 38 n/a (1 ) - (1 )
Total return swap Other liabilities &
agreements - equity index accrued expenses 71 n/a (4 ) - (4 )
Foreign currency
contracts
Other liabilities &
Foreign currency forwards accrued expenses 341 n/a 10 11 (1 )
Embedded derivative financial instruments
Guaranteed accumulation
benefits Contractholder funds 169 n/a (25 ) - (25 )
Guaranteed withdrawal
benefits Contractholder funds 210 n/a (14 ) - (14 )
Equity-indexed and
forward starting options
in life and annuity
product contracts Contractholder funds 1,770 n/a (185 ) - (185 )
Credit default contracts
Credit default swaps - Other liabilities &
buying protection accrued expenses 40 n/a - - -
Credit default swaps - Other liabilities &
selling protection accrued expenses 5 n/a - - -
Total liability
derivatives 2,675 12,256 (269 ) $ 12 $ (281 )
Total derivatives $ 3,145 26,170 $ (145 )
The Allstate Corporation 165
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2019 Form 10-K Notes to Consolidated Financial Statements
Gross and net amounts for OTC derivatives (1)
Offsets
Cash Securities
Counter- collateral Net collateral
Gross party (received) amount on (received) Net
($ in millions) amount netting pledged balance sheet pledged amount
December 31, 2019
Asset derivatives $ 40 $ (39 ) $ (1 ) $ - $ - $ -
Liability derivatives (16 ) 39 (27 ) (4 ) - (4 )
December 31, 2018
Asset derivatives $ 25 $ (18 ) $ (5 ) $ 2 $ - $ 2
Liability derivatives (12 ) 18 (12 ) (6 ) - (6 )
(1) All OTC derivatives are subject to enforceable master netting agreements.
Gains (losses) from valuation and settlements reported on derivatives not designated as accounting hedges
Total gain
(loss)
Realized recognized in
capital gains Life contract Interest credited to Operating costs and net income on
($ in millions) (losses) benefits contractholder funds expenses derivatives
2019
Interest rate contracts $ 51 $ - $ - $ - $ 51
Equity and index contracts (116 ) - 63 40 (13 )
Embedded derivative financial
instruments - 7 (70 ) - (63 )
Foreign currency contracts 8 - - - 8
Credit default contracts (8 ) - - - (8 )
Total return swaps - fixed income 14 - - - 14
Total return swaps - equity index 36 - - - 36
Total $ (15 ) $ 7 $ (7 ) $ 40 $ 25
2018
Interest rate contracts $ (2 ) $ - $ - $ - $ (2 )
Equity and index contracts 21 - (24 ) (21 ) (24 )
Embedded derivative financial
instruments - (5 ) 67 - 62
Foreign currency contracts 29 - - (1 ) 28
Credit default contracts 2 - - - 2
Total return swaps - fixed income (1 ) - - - (1 )
Total return swaps - equity index (6 ) - - - (6 )
Total $ 43 $ (5 ) $ 43 $ (22 ) $ 59
2017
Equity and index contracts $ (15 ) $ - $ 47 $ 28 $ 60
Embedded derivative financial
instruments - 9 (6 ) - 3
Foreign currency contracts (27 ) - - 6 (21 )
Credit default contracts (4 ) - - - (4 )
Total $ (46 ) $ 9 $ 41 $ 34 $ 38
The Company manages its exposure to credit risk by utilizing highly rated
counterparties, establishing risk control limits, executing legally enforceable
master netting agreements ("MNAs") and obtaining collateral where appropriate.
The Company uses MNAs for OTC derivative transactions that permit either party
to net payments due for transactions and collateral is either pledged or
obtained when certain predetermined exposure limits are exceeded. As of
December 31, 2019, counterparties pledged $31 million in collateral to the
Company, and the Company pledged $3 million in cash and securities to
counterparties which includes $3 million of collateral posted under MNAs for
contracts
containing credit-risk contingent provisions that are in a liability position.
The Company has not incurred any losses on derivative financial instruments due
to counterparty nonperformance. Other derivatives, including futures and certain
option contracts, are traded on organized exchanges which require margin
deposits and guarantee the execution of trades, thereby mitigating any potential
credit risk.
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Notes to Consolidated Financial Statements 2019 Form 10-K
Counterparty credit exposure represents the Company's potential loss if all of the counterparties concurrently fail to perform under the contractual terms of the contracts and all collateral, if any, becomes worthless.
This exposure is measured by the fair value of OTC derivative contracts with a positive fair value at the reporting date reduced by the effect, if any, of legally enforceable master netting agreements.
OTC derivatives counterparty credit exposure by counterparty credit rating ($ in millions)
2019 2018
Number of Notional amount Exposure, net of Number of Notional amount Exposure, net of
Rating (1) counter-parties (2) Credit exposure (2) collateral (2) counter-parties (2) Credit exposure (2) collateral (2)
A+ 6 868 29 - 3 643 19 1
A - - - - 2 121 1 -
Total 6 $ 868 $ 29 $ - 5 $ 764 $ 20 $ 1
(1) Allstate uses the lower of S&P's or Moody's long-term debt issuer ratings.
(2) Only OTC derivatives with a net positive fair value are included for each
counterparty.
For certain exchange traded and cleared derivatives, margin deposits are required as well as daily cash settlements of margin accounts. As of December 31, 2019, the Company pledged $48 million in the form of margin deposits.
Market risk is the risk that the Company will incur losses due to adverse
changes in market rates and prices. Market risk exists for all of the derivative
financial instruments the Company currently holds, as these instruments may
become less valuable due to adverse changes in market conditions. To limit this
risk, the Company's senior management has established risk control limits. In
addition, changes in fair value of the derivative financial instruments that the
Company uses for risk management purposes are generally offset by the change in
the fair value or cash flows of the hedged risk component of the related assets,
liabilities or forecasted transactions.
Certain of the Company's derivative instruments contain credit-risk-contingent
termination events, cross-default provisions and credit support annex
agreements. Credit-risk-contingent termination events
allow the counterparties to terminate the derivative agreement or a specific
trade on certain dates if AIC's, ALIC's or Allstate Life Insurance Company of
New York's ("ALNY") financial strength credit ratings by Moody's or S&P fall
below a certain level. Credit-risk-contingent cross-default provisions allow the
counterparties to terminate the derivative agreement if the Company defaults by
pre-determined threshold amounts on certain debt instruments.
Credit-risk-contingent credit support annex agreements specify the amount of
collateral the Company must post to counterparties based on AIC's, ALIC's or
ALNY's financial strength credit ratings by Moody's or S&P, or in the event AIC,
ALIC or ALNY are no longer rated by either Moody's or S&P.
The following summarizes the fair value of derivative instruments with
termination, cross-default or collateral credit-risk-contingent features that
are in a liability position as of December 31, as well as the fair value of
assets and collateral that are netted against the liability in accordance with
provisions within legally enforceable MNAs.
($ in millions) 2019 2018
Gross liability fair value of contracts containing credit-risk-contingent features
$ 16 $ 11
Gross asset fair value of contracts containing credit-risk-contingent features and subject to MNAs (11 )
(5 ) Collateral posted under MNAs for contracts containing credit-risk-contingent features
(3 ) (2 ) Maximum amount of additional exposure for contracts with credit-risk-contingent features if all features were triggered concurrently
$ 2 $ 4
Off-balance sheet financial instruments
Contractual amounts of off balance sheet financial instruments
As of December 31,
($ in millions) 2019
2018
Commitments to invest in limited partnership interests $ 2,837 $ 3,028
Private placement commitments 68 47
Other loan commitments 189 233
In the preceding table, the contractual amounts represent the amount at risk if
the contract is fully drawn upon, the counterparty defaults and the value of any
underlying security becomes worthless. Unless noted otherwise, the Company does
not require
collateral or other security to support off-balance sheet financial instruments
with credit risk.
Commitments to invest in limited partnership interests represent agreements to
acquire new or additional participation in certain limited partnership
The Allstate Corporation 167
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2019 Form 10-K Notes to Consolidated Financial Statements
investments. The Company enters into these agreements in the normal course of
business. Because the investments in limited partnerships are not actively
traded, it is not practical to estimate the fair value of these commitments.
Private placement commitments represent commitments to purchase private
placement debt and private equity securities at a future date. The Company
enters into these agreements in the normal course of business. The fair value of
the debt commitments generally cannot be estimated on the date the commitment is
made as the terms and conditions of the underlying private placement securities
are not yet final. Because the private equity securities are not actively
traded, it is not practical to estimate fair value of the commitments.
Other loan commitments are agreements to lend to a borrower provided there is no
violation of any condition established in the contract. The Company enters into
these agreements to commit to future loan fundings at predetermined interest
rates. Commitments have either fixed or varying expiration dates or other
termination clauses. The fair value of these commitments is insignificant.
Note 8 Reserve for Property and Casualty Insurance Claims and Claims Expense
The Company establishes reserves for claims and claims expense on reported and
unreported claims of insured losses. The Company's reserving process takes into
account known facts and interpretations of circumstances and factors including
the Company's experience with similar cases, actual claims paid, historical
trends involving claim payment patterns and pending levels of unpaid claims,
loss management programs, product mix and contractual terms, changes in law and
regulation, judicial decisions, and economic conditions. In the normal course of
business, the Company may also supplement its claims processes by utilizing
third-party adjusters, appraisers, engineers, inspectors, and other
professionals and information sources to assess and settle catastrophe and
non-catastrophe related claims. The effects of inflation are implicitly
considered in the reserving process.
Because reserves are estimates of unpaid portions of losses that have occurred,
including incurred but not
reported ("IBNR") losses, the establishment of appropriate reserves, including
reserves for catastrophes, Discontinued Lines and Coverages and reinsurance and
indemnification recoverables, is an inherently uncertain and complex process.
The ultimate cost of losses may vary materially from recorded amounts, which are
based on management's best estimates. The highest degree of uncertainty is
associated with reserves for losses incurred in the current reporting period as
it contains the greatest proportion of losses that have not been reported or
settled. The Company regularly updates its reserve estimates as new information
becomes available and as events unfold that may affect the resolution of
unsettled claims. Changes in prior year reserve estimates, which may be
material, are reported in property and casualty insurance claims and claims
expense in the Consolidated Statements of Operations in the period such changes
are determined.
Rollforward of reserve for property and casualty insurance claims and claims expense
($ in millions) 2019 2018 2017
Balance as of January 1 $ 27,423 $ 26,325 $ 25,250
Less recoverables (1) (7,155 ) (6,471 ) (6,184 )
Net balance as of January 1 20,268 19,854 19,066
SquareTrade acquisition as of January 3, 2017 - - 17
Incurred claims and claims expense related to:
Current year 24,106 23,033 22,350
Prior years (130 ) (255 ) (503 )
Total incurred 23,976 22,778 21,847
Claims and claims expense paid related to:
Current year (15,160 ) (14,877 ) (14,112 )
Prior years (8,284 ) (7,487 ) (6,964 )
Total paid (23,444 ) (22,364 ) (21,076 )
Net balance as of December 31 20,800 20,268 19,854
Plus recoverables 6,912 7,155 6,471
Balance as of December 31 $ 27,712 $ 27,423 $ 26,325
(1) Recoverables comprises reinsurance and indemnification recoverables. See Note 10 for further details.
168 www.allstate.com
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Notes to Consolidated Financial Statements 2019 Form 10-K
Reconciliation of total claims and claims expense incurred and paid by coverage December 31, 2019 ($ in millions) Incurred
Paid
Allstate Protection
Auto insurance - liability coverage $ 9,142 $ (8,419 )
Auto insurance - physical damage coverage 5,576 (5,570 )
Homeowners insurance 4,625 (4,616 )
Total auto and homeowners insurance 19,343 (18,605 )
Other personal lines 1,024 (1,059 )
Commercial lines 648 (404 )
Service Businesses 297 (311 )
Discontinued Lines and Coverages 91 (121 )
Unallocated loss adjustment expenses ("ULAE") 2,687 (2,585 )
Claims incurred and paid from before 2015 (97 ) (444 )
Other (17 ) 85
Total $ 23,976 $ (23,444 )
Incurred claims and claims expense represents the sum of paid losses, claim
adjustment expenses and reserve changes in the calendar year. This expense
includes losses from catastrophes of $2.56 billion, $2.86 billion and $3.23
billion in 2019, 2018 and 2017, respectively, net of recoverables. Catastrophes
are an inherent risk of the property and casualty insurance business that have
contributed to, and will continue to contribute to, material year-to-year
fluctuations in the Company's results of operations and financial position.
The Company calculates and records a single best reserve estimate for losses
from catastrophes, in conformance with generally accepted actuarial standards.
As a result, management believes that no other estimate is better than the
recorded amount. Due to the uncertainties involved, including the factors
described above, the ultimate cost of losses may vary materially from recorded
amounts, which are based on management's best estimates. Accordingly, management
believes that it is not practical to develop a meaningful range for any such
changes in losses incurred.
Prior year reserve reestimates included in claims and claims expense (1)
Twelve months ended December 31,
($ in millions) Non-catastrophe losses Catastrophe losses Total
2019 2018 2017 2019 2018 2017 2019 2018 2017
Auto (2) $ (306 ) $ (416 ) $ (475 ) $ (17 ) $ (39 ) $ (15 ) $ (323 ) $ (455 ) $ (490 )
Homeowners (1 ) (51 ) (124 ) 66 65 (7 ) 65 14 (131 )
Other personal lines 8 (6 ) (2 ) - (1 ) 3 8 (7 ) 1
Commercial lines 18 108 18 (1 ) - 1 17 108 19
Discontinued Lines
and Coverages (3) 105 87 96 - - - 105 87 96
Service Businesses (2 ) (2 ) 2 - - - (2 ) (2 ) 2
Total prior year
reserve reestimates $ (178 ) $ (280 ) $ (485 ) $ 48 $ 25 $ (18 ) $ (130 ) $ (255 ) $ (503 )
(1) Favorable reserve reestimates are shown in parentheses.
(2) Non-catastrophe results related to continued favorable personal lines auto
injury coverage development.
(3) The Company's 2019 annual reserve review, using established industry and
actuarial best practices, resulted in unfavorable reestimates of $95
million.
The Allstate Corporation 169
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2019 Form 10-K Financial Statements
The following presents information about incurred and paid claims development as
of December 31, 2019, net of recoverables, as well as the cumulative number of
reported claims and the total of IBNR reserves plus expected development on
reported claims included in the net incurred claims amounts. See Note 2 for the
accounting policy and methodology for determining reserves for claims and claims
expense, including both reported and IBNR claims. The cumulative number of
reported claims is identified by coverage and excludes reported claims for
industry pools and facilities where information is not available. The
information about incurred and paid claims development for the 2015 to 2019
years, and the average annual percentage payout of incurred claims by age as of
December 31, 2019, is presented as required supplementary information.
Auto insurance - liability coverage
($ in
millions, Cumulative
except IBNR reserves number of
number of plus expected reported
reported development on claims
claims) Incurred claims and allocated claim adjustment expenses, net of recoverables reported claims
For the years ended December 31,
(unaudited) (unaudited) (unaudited) (unaudited)
Accident Prior year reserve
year 2015 2016 2017 2018 2019 reestimates As of December 31, 2019
2015 $ 8,763 $ 8,733 $ 8,677 $ 8,617 $ 8,578 $ (39 ) $ 519 2,383,853
2016 - 9,030 8,833 8,732 8,683 (49 ) 988 2,399,890
2017 - - 8,457 8,389 8,305 (84 ) 1,777 2,214,254
2018 - - - 8,727 8,708 (19 ) 3,093 2,169,753
2019 - - - - 9,333 5,838 2,108,919
Total $ 43,607 $ (191 ) Reconciliation to total prior year reserve reestimates recognized by line Prior year reserve reestimates for pre-2015 accident years
(56 )
Prior year reserve reestimates for ULAE 14
Other (1 )
Total prior year reserve reestimates $ (234 )
Cumulative paid claims and allocated claims adjustment
expenses, net of recoverables
For the years ended December 31,
(unaudited) (unaudited) (unaudited) (unaudited)
Accident
year 2015 2016 2017 2018 2019
2015 $ 3,524 $ 5,837 $ 6,883 $ 7,565 $ 8,059
2016 - 3,485 5,768 6,849 7,695
2017 - - 3,149 5,330 6,528
2018 - - - 3,229 5,615
2019 - - - - 3,495
Total $ 31,392
All outstanding liabilities before 2015, net of recoverables 1,274
Liabilities for claims and claim adjustment expenses, net of recoverables
$ 13,489
Average annual percentage payout of incurred claims by age, net of recoverables, as of December 31,
2019
1 year 2 years 3 years 4 years 5 years
Auto insurance - liability
coverage 40.0 % 27.2 % 12.9 % 8.2 % 4.9 %
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Notes to Consolidated Financial Statements 2019 Form 10-K
Auto insurance - physical damage coverage
($ in
millions,
except IBNR reserves plus Cumulative
number of expected number of
reported development on reported
claims) Incurred claims and allocated claim adjustment expenses, net of recoverables reported claims claims
For the years ended December 31,
(unaudited) (unaudited) (unaudited) (unaudited)
Accident Prior year reserve
year 2015 2016 2017 2018 2019 reestimates As of December 31, 2019
2015 $ 4,653 $ 4,681 $ 4,669 $ 4,660 $ 4,656 $ (4 ) $ 2 4,390,288
2016 - 5,125 5,052 5,025 5,020 (5 ) 5 4,431,735
2017 - - 5,119 5,037 5,025 (12 ) (2 ) 4,236,640
2018 - - - 5,216 5,154 (62 ) 17 4,306,335
2019 - - - - 5,659 244 4,312,306
Total $ 25,514 $ (83 )Reconciliation to total prior year reserve reestimates recognized by line Prior year reserve reestimates for pre-2015 accident years
(4 )
Prior year reserve reestimates for ULAE (2 )
Other -
Total prior year reserve reestimates $ (89 )
Cumulative paid claims and allocated claims adjustment expenses, net of recoverables
For the years ended December 31,
(unaudited) (unaudited) (unaudited) (unaudited)
Accident
year 2015 2016 2017 2018 2019
2015 $ 4,507 $ 4,672 $ 4,658 $ 4,655 $ 4,654
2016 - 4,887 5,031 5,019 5,016
2017 - - 4,845 5,036 5,027
2018 - - - 4,968 5,137
2019 - - - - 5,414
Total $ 25,248
All outstanding liabilities before 2015, net of recoverables 7
Liabilities for claims and claim adjustment expenses, net of recoverables
$ 273
Average annual percentage payout of incurred claims by age, net of recoverables, as of December 31, 2019
1 year 2 years 3 years 4 years 5 years
Auto insurance - physical damage
coverage 97.0 % 3.0 % (0.2 )% - % - %
The Allstate Corporation 171
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2019 Form 10-K Financial Statements
Homeowners insurance
($ in
millions,
except IBNR reserves Cumulative
number of plus expected number of
reported development on reported
claims) Incurred claims and allocated claim adjustment expenses, net of recoverables reported claims claims
For the years ended December 31,
(unaudited) (unaudited) (unaudited) (unaudited)
Accident Prior year reserve
year 2015 2016 2017 2018 2019 reestimates As of December 31, 2019
2015 $ 3,558 $ 3,611 $ 3,553 $ 3,537 $ 3,520 $ (17 ) $ 36 721,328
2016 - 3,959 3,993 3,955 3,951 (4 ) 77 813,728
2017 - - 4,475 4,617 4,612 (5 ) 177 907,218
2018 - - - 4,747 4,851 104 340 807,012
2019 - - - - 4,547 1,233 721,434
Total $ 21,481 $ 78Reconciliation to total prior year reserve reestimates recognized by line Prior year reserve reestimates for pre-2015 accident years
(36 )
Prior year reserve reestimates for ULAE 23
Other -
Total prior year reserve reestimates $ 65
Cumulative paid claims and allocated claims adjustment
expenses, net of recoverables
For the years ended December 31,
(unaudited) (unaudited) (unaudited) (unaudited)
Accident
year 2015 2016 2017 2018 2019
2015 $ 2,586 $ 3,296 $ 3,399 $ 3,458 $ 3,484
2016 - 2,947 3,678 3,809 3,874
2017 - - 3,227 4,246 4,435
2018 - - - 3,489 4,511
2019 - - - - 3,314
Total $ 19,618
All outstanding liabilities before 2015, net of recoverables 126
Liabilities for claims and claim adjustment expenses, net of recoverables
$ 1,989
Average annual percentage payout of incurred claims by age, net of recoverables, as of December 31, 2019
1 year 2 years 3 years 4 years 5 years
Homeowners insurance 74.5 % 18.9 % 3.1 % 1.4 % 0.7 %
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Notes to Consolidated Financial Statements 2019 Form 10-K
Reconciliation of the net incurred and paid claims development tables above to the reserve for property and casualty insurance claims and claims expense ($ in millions)
As of December 31, 2019
Net outstanding liabilities
Allstate Protection
Auto insurance - liability coverage $ 13,489
Auto insurance - physical damage coverage 273 Homeowners insurance 1,989 Other personal lines 1,326 Commercial lines 1,010 Service Businesses 36 Discontinued Lines and Coverages (1)
1,286
ULAE
1,391
Net reserve for property and casualty insurance claims and claims expense 20,800 Recoverables Allstate Protection Auto insurance - liability coverage
5,891
Auto insurance - physical damage coverage 3 Homeowners insurance 214 Other personal lines 160 Commercial lines 130 Service Businesses 13 Discontinued Lines and Coverages 452 ULAE 49 Total recoverables 6,912
Gross reserve for property and casualty insurance claims and claims expense
$ 27,712
(1) Discontinued Lines and Coverages includes business in run-off with most of
the claims related to accident years more than 30 years ago. IBNR reserves
represent $660 million of the total reserves as of December 31, 2019.
Management believes that the reserve for property and casualty insurance claims
and claims expense, net of recoverables, is appropriately established in the
aggregate and adequate to cover the ultimate net cost of reported and unreported
claims arising from losses which had occurred by the date of the Consolidated
Statements of Financial Position based on available facts, technology, laws and
regulations.
Allstate's reserves for asbestos claims were $810 million and $866 million, net
of reinsurance recoverables of $362 million and $400 million, as of December 31,
2019 and 2018, respectively. Reserves for environmental claims were $179 million
and $170 million, net of reinsurance recoverables of $40 million and $39
million, as of December 31, 2019 and 2018, respectively. For further discussion
of asbestos and environmental reserves, see Note 14.
The Allstate Corporation 173
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2019 Form 10-K Notes to Consolidated Financial Statements
Note 9 Reserve for Life-Contingent Contract Benefits and Contractholder Funds
Reserve for life-contingent contract benefits
As of December 31,
($ in millions) 2019 2018
Immediate fixed annuities:
Structured settlement annuities $ 6,840 $ 6,701
Other immediate fixed annuities 1,612 1,714 Traditional life insurance 2,897 2,808 Accident and health insurance 873 876 Other 78 109
Total reserve for life-contingent contract benefits $ 12,300 $ 12,208
Key assumptions generally used in calculating the reserve for life-contingent
contract benefits
Product Mortality Interest rate Estimation method
Structured U.S. population with Interest rate Present value of
settlement projected calendar year assumptions range contractually
annuities improvements; mortality from 3.8% to 7.5% specified future
rates adjusted for each benefits
impaired life based on
reduction in life
expectancy
Other immediate 1983 group annuity Interest rate Present value of
fixed annuities mortality table with assumptions range expected future
internal modifications; from 0.3% to 9.0% benefits based on
1983 individual annuity historical
mortality table; Annuity experience
2000 mortality table
with internal
modifications; Annuity
2000 mortality table;
1983 individual annuity
mortality table with
internal modifications
Traditional life Actual company Interest rate Net level premium
insurance experience plus loading assumptions range reserve method
from 2.5% to using the
11.3% Company's
withdrawal
experience rates;
includes reserves
for unpaid claims
Accident and Actual company Interest rate Unearned premium;
health insurance experience plus loading assumptions range additional
from 3.0% to 7.0% contract reserves
for mortality
risk and unpaid
claims
Other: Annuity 2012 mortality Interest rate Projected benefit
Variable annuity table with internal assumptions range ratio applied to
guaranteed minimum modifications from 2.0% to 5.8% cumulative
death benefits (1) assessments
(1) In 2006, the Company disposed of substantially all of its variable annuity
business through reinsurance agreements with The Prudential Insurance
Company of America, a subsidiary of Prudential Financial, Inc. (collectively
"Prudential").
The Company records an adjustment to the reserve for life-contingent contract
benefits that represents the amount by which the reserve balance would increase
if the net unrealized gains in the applicable product investment portfolios were
realized and reinvested at current lower interest rates, resulting in a premium
deficiency. The offset to this liability is recorded as a reduction of the
unrealized net capital gains included in AOCI. This liability was $126 million
and zero as of December 31, 2019 and 2018, respectively.
Contractholder funds
As of December 31,
($ in millions) 2019 2018
Interest-sensitive life insurance $ 8,384 $ 8,229
Investment contracts:
Fixed annuities 8,845 9,681
Other investment contracts 463 461
Total contractholder funds $ 17,692 $ 18,371
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Notes to Consolidated Financial Statements 2019 Form 10-K
Key contract provisions of contractholder funds
Withdrawal/surrender
Product Interest rate charges
Interest-sensitive life Interest rates credited Either a percentage of
insurance range from 0.0% to 10.0% for account balance or dollar
equity-indexed life (whose amount grading off
returns are indexed to the generally over 20 years
S&P 500) and 1.0% to 6.0%
for all other products
Fixed annuities Interest rates credited Either a declining or a
range from 0.5% to 7.5% for level percentage charge
immediate annuities; (8.0)% generally over ten years
to 10.0% for equity-indexed or less. Additionally,
annuities (whose returns are approximately 12.0% of
indexed to the S&P 500); and fixed annuities are
0.1% to 6.0% for all other subject to market value
products adjustment for
discretionary withdrawals
Other investment Interest rates used in Withdrawal and surrender
contracts: establishing reserves range charges are based on the
Guaranteed minimum from 1.7% to 10.3% terms of the related
income, accumulation and interest-sensitive life
withdrawal benefits on insurance or fixed
variable (1) and fixed annuity contract
annuities and secondary
guarantees on
interest-sensitive life
insurance and fixed
annuities
(1) In 2006, the Company disposed of substantially all of its variable annuity
business through reinsurance agreements with Prudential.
Contractholder funds activity
For the years ended December 31,
($ in millions) 2019 2018 2017
Balance, beginning of year $ 18,371 $ 19,434 $ 20,260
Deposits 1,091 1,109 1,130
Interest credited 636 650 687
Benefits (791 ) (844 ) (901 )
Surrenders and partial withdrawals (884 ) (1,135 ) (999 )
Contract charges (825 ) (824 ) (826 )
Net transfers from separate accounts 10 6 5
Other adjustments 84 (25 ) 78
Balance, end of year $ 17,692 $ 18,371 $ 19,434
The Company offered various guarantees to variable annuity contractholders. In
2006, the Company disposed of substantially all of its variable annuity business
through reinsurance agreements with Prudential. Liabilities for variable
contract guarantees related to death benefits are included in the reserve for
life-contingent contract benefits and the liabilities related to the income,
withdrawal and accumulation benefits are included in contractholder funds. All
liabilities for variable contract guarantees are reported on a gross basis on
the balance sheet with a corresponding reinsurance recoverable asset for those
contracts subject to reinsurance.
Absent any contract provision wherein the Company guarantees either a minimum
return or account value upon death, a specified contract anniversary date,
partial withdrawal or annuitization, variable annuity and variable life
insurance contractholders bear the investment risk that the separate accounts'
funds may not meet their stated investment objectives. The account balances of
variable annuity contracts' separate accounts with guarantees included $2.68
billion and $2.47 billion of equity, fixed income and balanced mutual funds and
$253 million and $245 million of money market mutual funds as of December 31,
2019 and 2018, respectively.
The Allstate Corporation 175
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2019 Form 10-K Notes to Consolidated Financial Statements
The table below presents information regarding the Company's variable annuity
contracts with guarantees. The Company's variable annuity contracts may offer
more than one type of guarantee in each contract; therefore, the sum of amounts
listed exceeds the total account balances of variable annuity contracts'
separate accounts with guarantees.
($ in millions) As of December 31,
2019 2018
In the event of death
Separate account value $ 2,928 $ 2,711
Net amount at risk (1) $ 373 $ 605
Average attained age of contractholders 71 years 71 years At annuitization (includes income benefit guarantees) Separate account value
$ 848 $ 778
Net amount at risk (2) $ 173 $ 264 Weighted average waiting period until annuitization options available
None None
For cumulative periodic withdrawals
Separate account value $ 190 $ 190
Net amount at risk (3) $ 13 $ 16
Accumulation at specified dates
Separate account value $ 123 $ 129
Net amount at risk (4) $ 15 $ 26
Weighted average waiting period until guarantee date 4 years 4 years
(1) Defined as the estimated current guaranteed minimum death benefit in excess
of the current account balance as of the balance sheet date.
(2) Defined as the estimated present value of the guaranteed minimum annuity
payments in excess of the current account balance.
(3) Defined as the estimated current guaranteed minimum withdrawal balance(initial deposit) in excess of the current account balance as of the balance
sheet date.
(4) Defined as the estimated present value of the guaranteed minimum
accumulation balance in excess of the current account balance.
The liability for death and income benefit guarantees is equal to a benefit ratio multiplied by the cumulative contract charges earned, plus accrued interest less contract excess guarantee benefit payments. The benefit ratio is calculated as the estimated present value of all expected contract excess guarantee benefits divided by the present value of all expected contract charges. The establishment of reserves for these guarantees requires the projection of future fund values, mortality, persistency and customer benefit utilization rates. These assumptions are periodically reviewed and updated. For guarantees related to death benefits, benefits represent the projected excess guaranteed minimum death benefit payments. For guarantees related to income benefits, benefits represent the present value of the minimum guaranteed annuitization benefits in excess of the projected account balance at the time of annuitization. Projected benefits and contract charges used in determining the liability for certain guarantees are developed using models and stochastic scenarios that are also used in the development of estimated expected gross profits. Underlying assumptions for the liability related to income benefits include assumed future annuitization elections based on factors such as the extent of benefit to the potential annuitant, eligibility conditions and the annuitant's attained age. The liability for guarantees is re-evaluated periodically, and adjustments are made to the liability balance through a charge or credit to life and annuity contract benefits. Guarantees related to the majority of withdrawal and accumulation benefits are considered to be derivative financial instruments; therefore, the liability for these benefits is established based on its fair value.
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Notes to Consolidated Financial Statements 2019 Form 10-K
Summary of liabilities for guarantees
Liability for guarantees
related to death Liability for Liability for
benefits and guarantees guarantees related
interest-sensitive life related to income to accumulation and
($ in millions) products benefits withdrawal benefits Total
Balance, December 31, 2018
(1) $ 308 $ 39 $ 97 $ 444
Less reinsurance
recoverables 111 35 39 185
Net balance as of December
31, 2018 197 4 58 259
Incurred guarantee
benefits 18 - 12 30
Paid guarantee benefits (3 ) - - (3 )
Net change 15 - 12 27
Net balance as of December
31, 2019 212 4 70 286
Plus reinsurance
recoverables 81 20 32 133
Balance, December 31, 2019
(2) $ 293 $ 24 $ 102 $ 419
Balance, December 31, 2017
(3) $ 262 $ 29 $ 79 $ 370
Less reinsurance
recoverables 87 25 34 146
Net balance as of December
31, 2017 175 4 45 224
Incurred guarantee
benefits 24 - 13 37
Paid guarantee benefits (2 ) - - (2 )
Net change 22 - 13 35
Net balance as of December
31, 2018 197 4 58 259
Plus reinsurance
recoverables 111 35 39 185
Balance, December 31, 2018
(1) $ 308 $ 39 $ 97 $ 444
(1) Included in the total liability balance as of December 31, 2018 are reserves
for variable annuity death benefits of $109 million, variable annuity income
benefits of $36 million, variable annuity accumulation benefits of $25
million, variable annuity withdrawal benefits of $14 million and other
guarantees of $260 million.
(2) Included in the total liability balance as of December 31, 2019 are reserves
for variable annuity death benefits of $78 million, variable annuity income
benefits of $21 million, variable annuity accumulation benefits of $18
million, variable annuity withdrawal benefits of $14 million and other
guarantees of $288 million.
(3) Included in the total liability balance as of December 31, 2017 are reserves
for variable annuity death benefits of $85 million, variable annuity income
benefits of $26 million, variable annuity accumulation benefits of $22
million, variable annuity withdrawal benefits of $12 million and other
guarantees of $225 million.
The Allstate Corporation 177
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2019 Form 10-K Notes to Consolidated Financial Statements
Note 10 Reinsurance and Indemnification
Effects of reinsurance and indemnification on property and casualty premiums written and earned and life premiums and contract charges
For the years ended December 31,
($ in millions) 2019 2018 2017
Property and casualty insurance premiums
written
Direct $ 37,976 $ 35,895 $ 33,685
Assumed 95 99 64
Ceded (1,117 ) (1,008 ) (1,007 )
Property and casualty insurance premiums
written, net of recoverables $ 36,954 $ 34,986 $ 32,742
Property and casualty insurance premiums earned Direct $ 37,104 $ 34,977 $ 33,221 Assumed 94 87 50 Ceded (1,122 ) (1,016 ) (971 ) Property and casualty insurance premiums earned, net of recoverables $ 36,076 $
34,048 $ 32,300
Life premiums and contract charges
Direct $ 2,074 $ 2,001 $ 1,894
Assumed 712 754 787
Ceded (285 ) (290 ) (303 )
Life premiums and contract charges, net of
recoverables $ 2,501 $ 2,465 $ 2,378
Property and casualty reinsurance and indemnification recoverables
Total amounts recoverable from reinsurers and indemnitors as of December 31,
2019 and 2018 were $7.02 billion and $7.27 billion, respectively, including $112
million and $111 million, respectively, related to property and casualty losses
paid by the Company and billed to reinsurers and indemnitors, and $6.91 billion
and $7.15 billion, respectively, estimated by the Company with respect to ceded
or indemnifiable unpaid losses (including IBNR), which are not billable until
the losses are paid. The allowance for uncollectible reinsurance was $60 million
and $65 million as of December 31, 2019 and 2018, respectively, primarily
related to reinsurance recoverables arising from the Discontinued Lines and
Coverages segment. Indemnification recoverables are considered collectible based
on the industry pool and facility enabling legislation.
Property and casualty programs are grouped by the following characteristics:
1. Indemnification programs - industry pools, facilities or associations that
are governed by state insurance statutes or regulations or the federal
government.
2. Catastrophe reinsurance programs - reinsurance protection for catastrophe
exposure nationwide and by specific states, as applicable.
3. Other reinsurance programs - reinsurance protection for asbestos,environmental and other liability exposures as well as commercial lines,
including shared economy.
Property and casualty reinsurance is in place for the Allstate Protection,
Discontinued Lines and Coverages and Service Businesses segments. The Company
purchases reinsurance after evaluating the financial condition of the reinsurer
as well as the terms and price of coverage.
Indemnification programs
The Company participates in state-based industry pools or facilities mandating
participation by insurers offering certain coverage in their state, including
the Michigan Catastrophic Claims Association ("MCCA"), the New Jersey
Property-Liability Insurance Guaranty Association ("PLIGA"), the North Carolina
Reinsurance Facility ("NCRF") and the Florida Hurricane Catastrophe Fund
("FHCF"). When the Company pays qualifying claims under the coverage indemnified
by a state's pool or facility, the Company is reimbursed for the qualifying
claim losses or expenses. Each state pool or facility may assess participating
companies to collect sufficient amounts to meet its total indemnification
requirements. The enabling legislation for each state's pool or facility compels
the pool or facility only to indemnify participating companies for qualifying
claim losses or expenses; the state pool or facility does not underwrite the
coverage or take on the ultimate risk of the indemnified business. As a pass
through, these pools or facilities manage the receipt of assessments paid by
participating companies and payment of indemnified amounts for covered claims
presented by participating companies. The Company has not had any credit losses
related to these indemnification programs.
State-based industry pools or facilities
Michigan Catastrophic Claims Association The MCCA is a statutory indemnification
mechanism for
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Notes to Consolidated Financial Statements 2019 Form 10-K
member insurers' qualifying personal injury protection claims paid for the
unlimited lifetime medical benefits above the applicable retention level for
qualifying injuries from automobile, motorcycle and commercial vehicle
accidents. Indemnification recoverables on paid and unpaid claims, including
IBNR, as of December 31, 2019 and 2018 include $5.50 billion and $5.40 billion,
respectively, from the MCCA for its indemnification obligation.
The MCCA is funded by annually assessing participating member companies actively
writing motor vehicle coverage in Michigan on a per vehicle basis that is
currently $220 per vehicle insured. The MCCA's calculation of the annual
assessment is based upon the total of members' actuarially determined present
value of expected payments on lifetime claims by all persons expected to be
catastrophically injured in that year and ultimately qualify for MCCA
reimbursement, its operating expenses, and adjustments for the amount of
excesses or deficiencies in prior assessments. The assessment is incurred by the
Company as policies are written and recovered as a component of premiums from
the Company's customers.
The MCCA indemnifies qualifying claims of all current and former member
companies (whether or not actively writing motor vehicle coverage in Michigan)
for qualifying claims and claims expenses incurred while the member companies
were actively writing the mandatory personal injury protection coverage in
Michigan. Member companies actively writing automobile coverage in Michigan
include the MCCA annual assessments in determining the level of premiums to
charge insureds in the state.
As required for member companies by the MCCA, the Company reports covered paid
and unpaid claims to the MCCA when estimates of loss for a reported claim are
expected to exceed the retention level, the claims involve certain types of
severe injuries, or there are litigation demands received suggesting the claim
value exceeds certain thresholds. The retention level is adjusted upward every
other MCCA fiscal year by the lesser of 6% or the increase in the Consumer Price
Index. The retention level will be $580 thousand per claim for the fiscal
two-years ending June 30, 2021 compared to $555 thousand per claim for the
fiscal two-years ending June 30, 2019.
The MCCA is obligated to fund the ultimate liability of member companies'
qualifying claims and claim expenses. The MCCA does not underwrite the insurance
coverage or hold any underwriting risk.
The MCCA indemnifies members as qualifying claims are paid and billed by members
to the MCCA. Unlimited lifetime covered losses result in significant levels of
ultimate incurred claim reserves being recorded by member companies along with
offsetting indemnification recoverables. Disputes with claimants over coverage
on certain reported claims can result in additional losses, which may be
recoverable from the MCCA, excluding litigation expenses. There is currently no
method by which insurers are able to
obtain the benefit of managed care programs to reduce claims costs through the
MCCA.
The MCCA annual assessments fund current operations and member company
reimbursements. The MCCA prepares statutory-basis financial statements in
conformity with accounting practices prescribed or permitted by the State of
Michigan Department of Insurance and Financial Services ("MI DOI"). The MI DOI
has granted the MCCA a statutory permitted practice that expires in June 30,
2022 to discount its liabilities for loss and loss adjustment expense. As of
June 30, 2019, the date of its most recent annual financial report, the MCCA had
cash and invested assets of $21.83 billion and an accumulated surplus of $1.28
billion. The permitted practice reduced the accumulated deficit by $39.64
billion.
New Jersey Property-Liability Insurance Guaranty Association PLIGA serves as the
statutory administrator of the Unsatisfied Claim and Judgment Fund ("UCJF"),
Workers' Compensation Security Fund and the New Jersey Surplus Lines Insurance
Guaranty Fund.
In addition to its insolvency protection responsibilities, PLIGA reimburses
insurers for unlimited excess medical benefits ("EMBs") paid in connection with
personal injury protection claims in excess of $75,000 for policies issued or
renewed prior to January 1, 1991, and limited EMB claims in excess of $75,000
and capped at $250,000 for policies issued or renewed on or after January 1,
1991, to December 31, 2003.
A significant portion of the incurred claim reserves and the recoverables can be
attributed to a small number of catastrophic claims. Assessments paid to PLIGA
for the EMB program totaled $8.1 million in 2019. The amounts of paid and unpaid
recoverables as of December 31, 2019 and 2018 were $446 million and $461
million, respectively.
PLIGA annually assesses all admitted property and casualty insurers writing
covered lines in New Jersey for PLIGA indemnification and expenses. PLIGA
assessments may be recouped as a surcharge on premiums collected. PLIGA does not
ultimately retain underwriting risk as it assesses member companies for their
expected qualifying losses to provide funding for payment of its indemnification
obligation to member companies for their actual losses. As a pass through, PLIGA
facilitates these transactions of receipt of assessments paid by member
companies and payment to member companies for covered claims presented by them
for indemnification. As of December 31, 2018, the date of its most recent annual
financial report, PLIGA had a fund balance of $250 million.
As statutory administrator of the UCJF, PLIGA provides compensation to qualified
claimants for personal injury protection, bodily injury, or death caused by
private passenger automobiles operated by uninsured or "hit and run" drivers.
The UCJF also provides private passenger pedestrian personal injury protection
benefits when no other coverage is available.
The Allstate Corporation 179
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2019 Form 10-K Notes to Consolidated Financial Statements
PLIGA annually collects a UCJF assessment from all admitted property and
casualty insurers writing motor vehicle liability insurance in New Jersey for
UCJF indemnification and expenses. UCJF assessments can be expensed as losses
recoverable in rates as appropriate. As of December 31, 2018, the date of its
most recent annual financial report, the UCJF fund had a balance of $41 million.
North Carolina Reinsurance Facility The NCRF provides automobile liability
insurance to drivers that insurers are not otherwise willing to insure. All
insurers licensed to write automobile insurance in North Carolina are members of
the NCRF. Premiums, losses and expenses are assigned to the NCRF. North Carolina
law allows the NCRF to recoup operating losses for certain insureds through a
surcharge to policyholders. As of September 30, 2019, the NCRF reported a
deficit of $110 million in members' equity. The NCRF implemented a loss
recoupment surcharge on all private passenger and commercial fleet policies
effective October 1, 2019, through September 30, 2020. Member companies are
assessed the recoupment surcharge. The loss recoupment surcharge will be
adjusted on October 1, 2020 and discontinued once losses are recovered. The NCRF
results are shared by the member companies in proportion to their respective
North Carolina automobile liability writings. For the fiscal quarter ending
September 30, 2019, net income was $105 million, including $1.10 billion of
earned premiums, $271 million of certain private passenger auto risk recoupment
and $137 million of member loss recoupments. As of December 31, 2019, the NCRF
recoverables on paid claims is $9.4 million and recoverables on unpaid claims is
$69.1 million. Paid recoverable balances, if covered, are typically settled
within sixty days of monthly filing.
Florida Hurricane Catastrophe Fund Allstate subsidiaries Castle Key Insurance
Company ("CKIC") and Castle Key Indemnity Company ("CKI", and together with
CKIC, "Castle Key") participate in the mandatory coverage provided by the FHCF
and therefore have access to reimbursement for certain qualifying Florida
hurricane losses from the FHCF. Castle Key has exposure to assessments and pays
annual premiums to the FHCF for this reimbursement protection. The FHCF has the
authority to issue bonds to pay its obligations to participating insurers in
excess of its capital balances. Payment of these bonds is funded by emergency
assessments on all property and casualty premiums in the state, except workers'
compensation, medical malpractice, accident and health insurance and policies
written under the National Flood Insurance Program ("NFIP"). The FHCF emergency
assessments are limited to 6% of premiums per year beginning the first year in
which reimbursements require bonding, and up to a total of 10% of premiums per
year for assessments in the second and subsequent years, if required to fund
additional bonding. The FHCF issued $2.00 billion in pre-event bonds in 2013 to
build its capacity to reimburse member companies' claims. The FHCF plans to fund
these pre-event bonds through current FHCF cash flows. Pursuant to an Order
issued by the Florida Office of Insurance Regulation ("FL OIR"), the
emergency assessment is zero for all policies issued or renewed on or after
January 1, 2015.
Annual premiums earned and paid under the FHCF agreement were $9 million, $10
million and $11 million in 2019, 2018 and 2017, respectively. Qualifying losses
were $33 million, $143 million and $19 million in 2019, 2018 and 2017,
respectively. The Company has access to reimbursement provided by the FHCF for
90% of qualifying personal property losses that exceed its current retention of
$52 million for the two largest hurricanes and $17 million for other hurricanes,
up to a maximum total of $145 million, effective from June 1, 2019 to May 31,
2020. The amounts recoverable from the FHCF totaled $52 million and $104 million
as of December 31, 2019 and 2018, respectively.
Federal Government - National Flood Insurance Program NFIP is a program
administered by the Federal Emergency Management Agency ("FEMA") whereby the
Company sells and services NFIP flood insurance policies as an agent of FEMA and
receives fees for its services. The Company is fully indemnified for claims and
claim expenses and does not retain any ultimate risk for the indemnified
business. The federal government is obligated to pay all claims and certain
allocated loss adjustment expenses in accordance with the arrangement.
Congressional authorization for the NFIP is periodically evaluated and may be
subjected to freezes, including when the federal government experiences a
shutdown. FEMA has a NFIP reinsurance program to manage the future exposure of
the NFIP through the transfer of risk to private reinsurance companies and
capital market investors. Congress is evaluating the funding of the program as
well as considering reforms to the program that would be incorporated in
legislation to reauthorize the NFIP.
The amounts recoverable as of December 31, 2019 and 2018 were $25 million and
$31 million, respectively. Premiums earned under the NFIP include $258 million,
$258 million and $263 million in 2019, 2018 and 2017, respectively. Qualifying
losses incurred include $150 million, $118 million and $1.12 billion in 2019,
2018 and 2017, respectively.
Catastrophe reinsurance
The Company's reinsurance program is designed to provide reinsurance protection
for catastrophes resulting from multiple perils including hurricanes,
windstorms, hail, tornadoes, earthquakes, wildfires, and fires following
earthquakes.
• The majority of the Company's program comprises multi-year contracts,
primarily placed in the traditional reinsurance market, such that generally
one-third of the program is renewed every year.
• Coverage is generally purchased on a broad geographic, product line and
multiple peril loss basis.
• The Company purchases reinsurance from traditional reinsurance companies as
well as the insurance linked securities market.
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Notes to Consolidated Financial Statements 2019 Form 10-K
• Florida property and New Jersey property and auto are each covered byseparate agreements, as the risk of loss is different and the Company's
subsidiaries operating in these states are separately capitalized.
The Company has not experienced credit losses on its catastrophe reinsurance
programs. The Company ceded premiums earned of $376 million, $343 million and
$344 million under catastrophe reinsurance agreements in 2019, 2018 and 2017,
respectively. The Company has the following catastrophe reinsurance agreements
in effect as of December 31, 2019:
The Nationwide Excess Catastrophe Reinsurance Program (the "Nationwide Program")
provides $4.86 billion of reinsurance coverage subject to a $500 million
retention and is subject to the amount of reinsurance placed in each of its nine
layers.
Per Occurrence and Aggregate Excess Agreements, include occurrence coverage in
contracts from both the traditional reinsurance and insurance linked securities
("ILS") markets, while aggregate protection is included in two contracts
supported by the ILS market. The agreements provide multi-line catastrophe
coverage in every state except Florida, where coverage is only provided for
personal lines automobile.
Layer 1 through Layer 5 - Per Occurrence Excess Agreement For the June 1, 2019
to May 31, 2020 term, coverage for each of layers one through five is placed in
the traditional reinsurance market with each layer comprising three contracts.
Each contract provides one-third of 95% of the total layer limit expiring
May 31, 2020, May 31, 2021 and May 31, 2022, respectively. One-third of the
limit provided by each of layers one through five includes coverage for New
Jersey. Two-thirds of the limit provided by each of layers one through five also
includes coverage for the Company's commercial lines property and automobile
catastrophe losses. The contracts for each of layers one through five include
one reinstatement of limits per year, with premium required. Reinsurance
premiums are subject to redetermination for exposure changes on an annual basis.
Layer 6 - Per Occurrence Excess Agreement The layer six contract placed in the
traditional reinsurance market contains comparable contract terms and conditions
as layers one through five, with New Jersey and commercial lines property and
automobile catastrophe losses included in the definition of subject loss. The
layer six contract provides a $324 million limit, is 95% placed, and expires May
31, 2022. This contract contains a variable reset option, which the ceding
entities may elect to invoke at each anniversary and which allows for the annual
adjustment of the attachment and exhaustion level within specified limits. The
layer six contract contains one reinstatement of limits over its seven-year term
with premium required. As of July 1, 2019, a reinstatement of limits has not
been executed under this contract. Reinsurance premiums for this contract are
subject to redetermination for exposure changes on an annual basis.
Layer 7 - Per Occurrence Excess and Aggregate Agreements The seventh layer consists of four contracts: • Seven-Year Term
• 2019-1 Excess Catastrophe Reinsurance
• Wrap Fill Excess Catastrophe Reinsurance
• 2017-1 Excess Catastrophe Reinsurance
Seven-Year Term Contract, which is placed in the traditional reinsurance market
contains comparable contract terms and conditions as layer six. The contract
provides a $446 million limit and is 29.37% placed, and expires May 31, 2022.
The contract contains a variable reset option which allows for the annual
adjustment of the attachment and exhaustion level within specified limits. The
variable reset option requires a premium adjustment. The contract contains one
reinstatement of limits over its seven-year term with premium required.
Reinsurance premiums for all contracts are subject to redetermination for
exposure changes on an annual basis.
2019-1 Excess Catastrophe Reinsurance Contract reinsures personal lines property
and automobile excess losses in 49 states and the District of Columbia,
excluding Florida, caused by named storms, earthquakes and fire following
earthquakes, severe weather, wildfires, and other naturally occurring or
man-made events declared to be a catastrophe by the Company. This contract is
placed with Sanders Re II Ltd. which obtained funding from the ILS market to
collateralize the contract's limit. The contract reinsures business located in
the covered territory and arising out of covered events. The contract's risk
period began April 1, 2019 and terminates on March 31, 2023. The contract
provides a $400 million limit and is 75% placed, during its four-year term which
can be used on a per occurrence or an annual aggregate basis. For a qualifying
loss occurrence, the contract provides 75% of $400 million in reinsurance limits
in excess of a minimum $2.75 billion retention for the April 1, 2019 to March
31, 2020 period. The New Jersey Excess Catastrophe Agreement, layer six, the
Seven-Year Term Contract for layer seven, and the 5% co-participation inure to
the benefit of this contract for events that exceed the retention. As a result,
while those layers are fully intact, the contract would begin to pay subject
losses in excess of $3.07 billion.
The contract also provides an annual aggregate limit of 75% of $400 million in
reinsurance limits between a $3.54 billion to $3.94 billion layer subject to an
annual retention of $3.54 billion. For each annual period beginning April 1, the
Company declared catastrophes occurring during such annual period can be
aggregated to erode the aggregate retention and qualify for coverage under the
aggregate limit. Reinsurance recoveries from and including layers one through
seven of the Nationwide Program and the New Jersey Excess Catastrophe Agreement
inure to the benefit of the annual aggregate layer.
Reinsurance recoveries collected under the per occurrence limit of this contract
are not eligible for cession under the annual aggregate limit of this
The Allstate Corporation 181
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2019 Form 10-K Notes to Consolidated Financial Statements
contract. Reinsurance recoveries for all loss occurrences and annual aggregate
losses qualifying for coverage during the contract's four-year risk period are
limited to the Company's ultimate net loss from covered events and subject to
the contract's $400 million limit, 75% placed. The contract contains a variable
reset option, which the ceding entities may invoke for risk periods subsequent
to the first risk period and which allows for the annual adjustment of the
contract's attachment and exhaustion levels within specified limits.
Wrap Fill Excess Catastrophe Reinsurance Contract provides a $200 million limit
in excess of a minimum $2.75 billion retention, is 100% placed in the
traditional market, and expires March 31, 2020. This layer is structured to
cover gaps around the traditional Seven-Year Term Contract and the Sanders Re II
Ltd. 2019-1 contract. The contract provides additional gap coverage as the layer
shifts down in attachment, subject to the $2.75 billion minimum retention level
as lower layer limits are exhausted. A retention co-participation of 5% for a
layer of $1.61 billion in excess of $2.75 billion is deemed in place and inures
to the benefit of this contract. Recoveries from contracts in layers six and
seven, with the exception of Sanders Re Ltd. 2017-1, inure to the benefit of
this contract, as this multiple peril contract provides coverage for perils and
subject business not reinsured in portions of layers seven. While those layers
are fully intact, the contract would begin to pay subject losses in excess of
$3.07 billion. This contract does not include a reinstatement of limits.
2017-1 Excess Catastrophe Reinsurance Contract reinsures personal lines property
and automobile excess losses in 49 states and the District of Columbia,
excluding the State of Florida, caused by named storms, earthquakes and fire
following earthquakes, severe thunderstorms, winter storms, volcanic eruptions,
and meteorite impacts. This contract is placed with Sanders Re Ltd., which
obtained funding from the ILS market to collateralize the contract's limit. The
contract reinsures actual losses to personal lines property business located in
the covered territory and arising out of a covered event. Amounts payable for
automobile losses are based on insured industry losses as reported by Property
Claim Services ("PCS") and further adjusted to account for the Company's auto
exposures in reinsured areas. Reinsurance recoveries under the contract are
limited to the Company's ultimate net loss from a covered event subject to the
contract's limit. The contract's risk period began March 31, 2017 and terminates
on November 30, 2021. The contract provides a $375 million limit in excess of
$2.75 billion retention. The New Jersey Excess Catastrophe Agreement, layer six,
the Seven-Year Term Contract for layer seven, the Wrap Fill contract, and the 5%
co-participation inure to the benefit of this contract for events that exceed
the retention. As a result, while those layers are fully intact, the contract
would begin to pay subject losses in excess of $3.69 billion.
The contract contains a variable reset option, which the ceding entities may
invoke for risk periods subsequent to the first risk period and which allows for
the annual adjustment of the contract's attachment and exhaustion levels within
specified limits. The variable reset option requires a premium adjustment. The
contract does not include a reinstatement of limits.
To summarize the order of operations and inuring protection for the seventh
layer for an occurrence loss, for losses below $3.40 billion, the portion of the
seventh layer placed in the traditional market would not be enacted. Once the
sixth layer is exhausted, the co-participation of 5% would apply and then the
2019-1 Excess Catastrophe Reinsurance contract and Wrap Fill contract, dependent
on the subject business contributing to the per occurrence loss. For losses
greater than the $3.40 billion retention, the portions of the seventh layer
placed in the traditional market would apply first as they inure to the benefit
of the portions of the seventh layer placed in the ILS market. This would be
followed by the co-participation of 5%, the 2019-1 Excess Catastrophe
Reinsurance Contract, the Wrap Fill, and the 2017-1 Excess Catastrophe
Reinsurance Contract, dependent on the per occurrence loss.
Layer 8 - Per Occurrence Excess Agreement - Gap Fill Excess Catastrophe
Reinsurance Contract provides a $219 million limit in excess of a $2.75 billion
retention, is 100% placed in the traditional market, and expires May 31, 2020.
The contract provides additional gap coverage as the layer shifts down to the
$2.75 billion retention level as lower layers are exhausted. A retention
co-participation of 5% for a layer of $1.61 billion in excess of $2.75 billion
is deemed in place and inures to the benefit of this contract. Recoveries from
contracts in layers six and seven inure to the benefit of this contract, as this
multiple peril contract provides coverage for perils and subject business not
reinsured in portions of layers seven. While all inuring contracts are fully in
place, this contract would begin to cover an occurrence subject loss in excess
of $4.13 billion. This contract does not include a reinstatement of limits.
Layer 9 - Per Occurrence and Aggregate Excess Agreement - 2018-1 Excess
Catastrophe Reinsurance Contract reinsures personal lines property and
automobile excess catastrophe losses in 49 states and the District of Columbia,
excluding the State of Florida, caused by named storms, earthquakes and fire
following earthquakes, severe weather, wildfires, and other naturally occurring
or man-made events declared to be a catastrophe by the Company. This contract is
placed with Sanders Re Ltd., which obtained funding from the ILS market to
collateralize the contract's limit. The contract reinsures business located in
the covered territory and arising out of a covered event. The contract's risk
period began April 1, 2018 and terminates on March 31, 2022. The contract
provides one limit of $500 million during its four-year term, which can be used
on a per occurrence or aggregate basis. For each qualifying loss occurrence, the
contract provides 100% of $500 million in reinsurance limits, between a $4.36
billion to $4.86 billion layer for the April 1, 2019 to March 31, 2020 period.
The contract also provides an aggregate limit of 100% of $500 million in
reinsurance limits between a
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Notes to Consolidated Financial Statements 2019 Form 10-K
$3.94 billion to $4.44 billion. For each annual period beginning April 1, the
Company declared catastrophes occurring during such annual period can be
aggregated to erode the aggregate retention and qualify for coverage under the
aggregate limit. Reinsurance recoveries from and including layers one through
seven of the Nationwide Program and the New Jersey Excess Catastrophe Agreement
inure to the benefit of the annual aggregate layer.
Reinsurance recoveries collected under the per occurrence limit of this contract
are not eligible for cession under the aggregate limit of this contract.
Reinsurance recoveries for all loss occurrences and aggregate losses qualifying
for coverage during the contract's four-year risk period are limited to the
Company's ultimate net loss from covered events and subject to the contract's
$500 million limit. The contract does not include a reinstatement of limits.
Other catastrophe reinsurance programs - The following programs are designed
separately from the Nationwide Program to address distinct exposures in certain
states and markets.
The Company has a separate reinsurance program designed to cover personal lines
property policies in Florida written through Castle Key, its separately
capitalized wholly-owned subsidiaries.
Florida Excess Catastrophe Reinsurance Agreement comprises five contracts, as
described below, which reinsures Castle Key for personal lines property excess
catastrophe losses in Florida. For the June 1, 2019 to May 31, 2020 term, the
agreement includes two contracts placed in the traditional market, Castle Key's
reimbursement contracts with the Florida Hurricane Catastrophe Fund ("Mandatory
FHCF contracts"), and the Sanders Re 2017-2 Contract ("Sanders Re 2017-2")
placed in the ILS markets.
Below FHCF Contract reinsures personal lines property excess catastrophe losses
caused by multiple perils in Florida. The contract provides three separate
limits of $34 million in excess of a $20 million retention, each occurrence, and
is 100% placed. The contract includes two reinstatements of limits. The first
reinstatement of limits is prepaid and the second or final reinstatement
requires additional premium. Only the portion of the limit utilized to indemnify
losses from an event mandatorily reinstates; the remaining reinstatement limit
remains available and will be used as future events erode the per occurrence
contract limit. Reinsurance premium is subject to redetermination for exposure
changes.
Mandatory FHCF Contracts indemnify qualifying personal lines property losses
caused by storms the National Hurricane Center declares to be hurricanes. The
contracts provide $151 million of limits in excess of a $54 million provisional
retention and are 90% placed (or $136 million in excess of a $54 million
provisional retention), and also include reimbursement of up to 10% of eligible
loss adjustment expenses, which is part of and not in addition to the
reinsurance limit provided, with no reinstatement of limits. For each of the two
largest hurricanes, the provisional retention is $54 million and a retention
equal to one-third of that
amount, or approximately $18 million, is applicable to all other hurricanes for
the season beginning June 1, 2019. The limit and retention of the Mandatory FHCF
Contracts are subject to remeasurement based on June 30, 2019 exposure data. In
addition, the FHCF's retention is subject to adjustment upward or downward to an
actual retention based on exposures submitted to the FHCF by all participants.
Excess contract reinsures personal lines property excess catastrophe losses
caused by multiple perils in Florida. The contract is a two-year term contract
effective June 1, 2018 to May 31, 2020 and provides $249 million of reinsurance
limits each contract year. For the June 1, 2019 to May 31, 2020 term, the
contract provides one limit of $249 million in excess of a $20 million retention
and is 100% placed. Recoveries from the Below FHCF contract and Mandatory FHCF
contracts inure to the benefit of this contract. The contract provides
reinsurance limits above the Mandatory FHCF Contracts, for CKIC's and CKI's 10%
co-participation in the Mandatory FHCF Contracts, and for loss occurrences not
subject to reimbursement under the Mandatory FHCF Contracts which only reinsure
losses arising out of hurricanes. The contract does not include a reinstatement
of limits. Reinsurance premium is subject to redetermination for exposure
changes.
Sanders Re 2017-2 is a three-year term contract with a risk period effective
June 1, 2017 through May 31, 2020. It reinsures qualifying personal lines
property losses caused by a named storm event, a severe thunderstorm event, an
earthquake event, a wildfire event, a volcanic eruption event, or a meteorite
impact event in Florida as events declared by various reporting agencies,
including PCS and as defined in the contract. Should PCS cease to report on
severe thunderstorms, then such event will be deemed a severe thunderstorm event
if Castle Key has assigned a catastrophe code to such severe thunderstorm.
Sanders Re obtained funding from the ILS market to provide collateral equal to
the contract's limit.
The contract provides limits of $200 million in excess of a $20 million
retention and in excess of "stated reinsurance" and is 100% placed. For the June
1, 2019 to May 31, 2020 risk period, stated reinsurance is defined to include
the Below FHCF contract, the Mandatory FHCF contracts, which are deemed to
exhaust due to loss occurrences subject to the non-FHCF contracts, and the
Excess contract. Stated reinsurance is deemed to be provided on a multiple peril
basis under the terms of the non-FHCF contracts and includes an erosion feature,
which provides that upon the exhaustion of a portion of the stated reinsurance,
coverage under the Sanders Re contract shall be concurrently placed above and
contiguous to the unexhausted portion of the stated reinsurance, if any. The
Sanders Re 2017-2 contract contains a variable reset option, which Castle Key
may invoke for risk periods subsequent to the first risk period and which allows
for the annual adjustment of the contract's attachment and exhaustion levels.
The variable reset option requires a premium adjustment.
The Allstate Corporation 183
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2019 Form 10-K Notes to Consolidated Financial Statements
The contract does not contain a reinstatement of limits.
The Company's New Jersey, Kentucky, Florida and Southeast States and California
reinsurance agreements are described below.
New Jersey Excess Catastrophe Reinsurance Agreement comprises two existing
contracts and a newly placed contract that reinsures personal lines property and
automobile excess catastrophe losses in New Jersey caused by multiple perils.
The placed contracts effective June 1, 2018 and June 1, 2019 include coverage
for commercial lines property and automobile (physical damage only) catastrophe
losses.
The contracts expire May 31, 2020, May 31, 2021 and May 31, 2022, and provide
31.67%, 31.67% and 31.66%, respectively, of $400 million of limits in excess of
a $145 million retention, a $150 million retention, and a $150 million
retention, respectively. Each contract includes one reinstatement of limits per
contract year with premium due. The reinsurance premium and retention are
subject to redetermination for exposure changes on an annual basis.
Kentucky Earthquake Excess Catastrophe Reinsurance Contract is a three-year
contract that reinsures personal lines property losses in Kentucky caused by
earthquakes and fire following earthquakes. The contract expires May 31, 2020
and provides three limits of $28 million in excess of a $2 million retention,
with two limits available in any one contract year, and is 95% placed. The
reinsurance premium and retention are not subject to redetermination for
exposure changes.
Florida and Southeast Auto Aggregate Excess Catastrophe Contract is a one-year
term contract effective June 1, 2019 to May 31, 2020. This contract provides a
single reinsurance limit at 80% of $250 million, subject to a $250 million
aggregate retention, for catastrophe losses to personal lines and commercial
lines automobile business (physical damage only) arising out of multiple perils
and provided such losses arise out of a company declared catastrophe and result
in a qualifying loss in the State of Florida. For these qualifying catastrophe
events, coverage is also provided for losses to personal lines and commercial
lines automobile business (physical damage only) in Alabama, Georgia, Louisiana,
Mississippi, North Carolina, and/or South Carolina. The contract does not
include a reinstatement of limits.
Excess & Surplus (E&S) Earthquake Contract is a three-year contract that
reinsures personal lines property catastrophe losses in California caused by the
peril of earthquakes and is insured by the Company's excess and surplus lines
insurer. The contract reinsures only shake damage resulting from the earthquake
peril. The contract is effective July 1, 2018 and expires June 30, 2021, both
days inclusive, and provides reinsurance on a 100% quota share basis with
no retention. The contract allows for cession of policies providing earthquake
coverage as long as the total amount of in-force building limits provided by
those policies does not exceed $400 million. This $400 million cap limits the
policies that are covered by the reinsurance contract and not the amount of loss
eligible for cession, which includes losses to dwellings, other structures,
personal property and additional living expenses on policies covered by this
program. As of December 31, 2019, the $400 million cap which serves to limit
cessions to the contract has not been exceeded.
Other reinsurance programs
The Company's other reinsurance programs relate to asbestos, environmental, and
other liability exposures and commercial lines, including shared economy. These
programs include reinsurance recoverables of $158 million and $165 million from
Lloyd's of London as of December 31, 2019 and 2018, respectively. Excluding
Lloyd's of London, the largest reinsurance recoverable balance the Company had
outstanding was $115 million and $37 million from Aleka Insurance Inc. as of
December 31, 2019 and 2018, respectively.
Lloyd's of London, through the creation of Equitas Limited ("Equitas"),
implemented a restructuring to solidify its capital base and to segregate claims
for years prior to 1993. In 2007, Berkshire Hathaway's subsidiary, National
Indemnity Company, assumed responsibility for the Equitas' claim liabilities
through a loss portfolio transfer reinsurance agreement and continues to runoff
the Equitas' claims.
Life and annuity reinsurance recoverables
The Company reinsures certain life insurance and annuity risks to other insurers
primarily under yearly renewable term, coinsurance, modified coinsurance and
coinsurance with funds withheld agreements. These agreements result in a passing
of the agreed-upon percentage of risk to the reinsurer in exchange for
negotiated reinsurance premium payments. Modified coinsurance and coinsurance
with funds withheld are similar to coinsurance, except that the cash and
investments that support the liability for contract benefits are not transferred
to the assuming company and settlements are made on a net basis between the
companies.
For certain term life insurance policies issued prior to October 2009, the
Company ceded up to 90% of the mortality risk depending on the year of policy
issuance under coinsurance agreements to a pool of fourteen unaffiliated
reinsurers. Effective October 2009, mortality risk on term business is ceded
under yearly renewable term agreements under which the Company cedes mortality
in excess of its retention, which is consistent with how the Company generally
reinsures its permanent life insurance business.
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Notes to Consolidated Financial Statements 2019 Form 10-K
Retention limits by period of policy issuance
Period Retention limits
April 2015 through current Single life: $2 million per life
Joint life: no longer offered
April 2011 through March 2015 Single life: $5 million per life,
$3 million age 70 and over, and
$10 million for contracts that meet
specific criteria
Joint life: $8 million per life, and
$10 million for contracts that meet
specific criteria
July 2007 through March 2011 $5 million per life, $3 million age 70
and over, and $10 million for contracts
that meet specific criteria
September 1998 through June 2007 $2 million per life, in 2006 the limit
was increased to $5 million for
instances when specific criteria were
met
August 1998 and prior Up to $1 million per life
In addition, the Company has used reinsurance to effect the disposition of certain blocks of business. The Company had reinsurance recoverables of $1.29 billion and $1.36 billion as of December 31, 2019 and
2018, respectively, due from Prudential related to the disposal of substantially
all of its variable annuity business that was effected through reinsurance
agreements.
Amounts ceded to Prudential
As of December 31,
($ in millions) 2019 2018 2017
Premiums and contract charges $ 65 $ 72 $ 76
Contract benefits 4 87 7
Interest credited to contractholder funds 19 20 20
Operating costs and expenses 12 14 15
As of December 31, 2019 and 2018, the Company had reinsurance recoverables of
$112 million and $118 million, respectively, due from subsidiaries of Citigroup
(Triton Insurance and American Health and Life Insurance) and Scottish Re
(U.S.), Inc. in connection with the disposition of substantially all of the
direct response distribution business in 2003.
As of December 31, 2019, the Company had $70 million of reinsurance
recoverables, net of an allowance for estimated uncollectible amounts, related
to Scottish Re (U.S.), Inc. On December 14, 2018, the Delaware Insurance
Commissioner placed Scottish Re (U.S.), Inc. under regulatory supervision. On
March 6, 2019, the Chancery Court of the State of Delaware entered a
Rehabilitation and Injunction Order (the "Rehabilitation Order") in response to
a petition filed by the Insurance Commissioner (the "Petition"). Pursuant to
the Petition, it is expected that Scottish Re (U.S.), Inc. will submit a Plan of
Rehabilitation. The Company joined in a joint motion filed on behalf of several
affected parties asking the court to allow a specified amount of offsetting
claim payments and losses against premiums remitted to Scottish Re (U.S.), Inc.
The Company also filed a separate motion related to the reimbursement of claim
payments where Scottish
Re (U.S.), Inc. is also acting as administrator. The Court has not yet ruled on
either of these motions. In the interim, the Company and several other affected
parties have been permitted to exercise certain setoff rights while the parties
address any potential disputes. The Company continues to monitor Scottish Re
(U.S.), Inc. for future developments and will reevaluate its allowance for
uncollectible amounts as new information becomes available.
The Company is the assuming reinsurer for Lincoln Benefit Life Company's
("LBL's") life insurance business sold through the Allstate agency channel and
LBL's payout annuity business in force prior to the sale of LBL on April 1,
2014. Under the terms of the reinsurance agreement, the Company is required to
have a trust with assets greater than or equal to the statutory reserves ceded
by LBL to the Company, measured on a monthly basis. As of December 31, 2019, the
trust held $6.25 billion of investments, which are reported in the Consolidated
Statement of Financial Position.
As of December 31, 2019, the gross life insurance in force was $449.20 billion
of which $74.02 billion was ceded to the unaffiliated reinsurers.
Reinsurance recoverables on paid and unpaid benefits
As of December 31,
($ in millions) 2019 2018
Annuities $ 1,305 $ 1,381
Life insurance 749 776
Other 133 142
Total $ 2,187 $ 2,299
As of both December 31, 2019 and 2018, approximately 93% of the reinsurance recoverables are due from companies rated A- or better by S&P.
The Allstate Corporation 185
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2019 Form 10-K Notes to Consolidated Financial Statements
Note 11 Deferred Policy Acquisition and Sales Inducement Costs
Deferred policy acquisition costs activity
For the years ended December 31,
($ in millions) 2019 2018 2017
Balance, beginning of year $ 4,784 $ 4,191 $ 3,954
SquareTrade acquisition - - 66
Acquisition costs deferred 5,622 5,663 5,001
Amortization charged to income (5,533 ) (5,222 ) (4,784 )
Effect of unrealized gains and losses (174 ) 152 (46 )
Balance, end of year $ 4,699 $ 4,784 $ 4,191
Deferred sales inducement costs activity (1)
For the years ended December 31,
($ in millions) 2019 2018 2017
Balance, beginning of year $ 34 $ 36 $ 40
Amortization charged to income (5 ) (4 ) (4 )
Effect of unrealized gains and losses (2 ) 2 -
Balance, end of year $ 27 $ 34 $ 36
(1) Deferred sales inducement costs primarily relate to fixed annuities and
interest-sensitive life contracts and are recorded as part of other assets
on the Consolidated Statements of Financial Position.
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Notes to Consolidated Financial Statements 2019 Form 10-K
Note 12 Capital Structure
Total debt outstanding
As of December 31,
($ in millions) 2019 2018
7.450% Senior Notes, due 2019 (1) $ - $ 317
Floating Rate Senior Notes, due 2021(1) 250 250
Floating Rate Senior Notes, due 2023 (1) 250 250
3.150% Senior Notes, due 2023 (1) 500 500
Due after one year through five years 1,000 1,317
3.280% Senior Notes, due 2026 (1) 550 550
Due after five years through ten years 550 550
6.125% Senior Notes, due 2032 (1) 159 159
5.350% Senior Notes due 2033 (1) 323 323
5.550% Senior Notes due 2035 (1) 546 546
5.950% Senior Notes, due 2036 (1) 386 386
6.900% Senior Debentures, due 2038 165 165
5.200% Senior Notes, due 2042 (1) 62 62
4.500% Senior Notes, due 2043 (1) 500 500
4.200% Senior Notes, due 2046 (1) 700 700
3.850% Senior Notes, due 2049 500 -
5.100% Subordinated Debentures, due 2053 500 500
5.750% Subordinated Debentures, due 2053 800 800
6.500% Junior Subordinated Debentures, due 2067 500 500 Due after ten years
5,141 4,641
Long-term debt total principal 6,691 6,508
Debt issuance costs (60 ) (57 )
Total long-term debt 6,631 6,451
Short-term debt (2) - -
Total debt $ 6,631 $ 6,451
(1) Senior Notes, with the exception of Senior Floating Notes (as defined
below), are subject to redemption at the Company's option in whole or in
part at any time at the greater of either 100% of the principal amount plus
accrued and unpaid interest to the redemption date or the discounted sum of
the present values of the remaining scheduled payments of principal and
interest and accrued and unpaid interest to the redemption date.
(2) The Company classifies any borrowings which have a maturity of twelve months
or less at inception as short-term debt.
Debt maturities for each of the next five years
and thereafter
($ in millions)
2020 $ -
2021 250
2022 -
2023 750
2024 -
Thereafter 5,691
Total long-term debt principal $ 6,691
On May 16, 2019, the Company repaid $317 million of 7.450% Senior Notes, Series
B, at maturity.
On June 10, 2019, the Company issued $500 million of 3.850% Senior Notes due
2049. Interest on the Senior Notes is payable semi-annually in arrears on
February 10 and August 10 of each year, beginning on February 10, 2020. The
Senior Notes are redeemable at any time at the applicable redemption price prior
to
the maturity date. The proceeds of this issuance are used for general corporate
purposes.
The Subordinated Debentures may be redeemed (i) in whole at any time or in part
from time to time on or after January 15, 2023 for the 5.100% Subordinated
Debentures and August 15, 2023 for the 5.750% Subordinated Debentures at their
principal amount plus accrued and unpaid interest to, but excluding, the date of
redemption; provided that if the Subordinated Debentures are not redeemed in
whole, at least $25 million aggregate principal amount must remain outstanding,
or (ii) in whole, but not in part, prior to January 15, 2023 for the 5.100%
Subordinated Debentures and August 15, 2023 for the 5.750% Subordinated
Debentures, within 90 days after the occurrence of certain tax and rating agency
events, at their principal amount or, if greater, a make-whole redemption price,
plus accrued and unpaid interest to, but excluding, the date of redemption. The
5.750% Subordinated Debentures have this make-whole redemption price provision
only when a reduction of equity credit assigned by a rating agency has occurred.
The Allstate Corporation 187
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2019 Form 10-K Notes to Consolidated Financial Statements
Interest on the 5.100% Subordinated Debentures is payable quarterly at the
stated fixed annual rate to January 14, 2023, or any earlier redemption date,
and then at an annual rate equal to the three-month LIBOR plus 3.165%. Interest
on the 5.750% Subordinated Debentures is payable semi-annually at the stated
fixed annual rate to August 14, 2023, or any earlier redemption date, and then
quarterly at an annual rate equal to the three-month LIBOR plus 2.938%. The
Company may elect to defer payment of interest on the Subordinated Debentures
for one or more consecutive interest periods that do not exceed five years.
During a deferral period, interest will continue to accrue on the Subordinated
Debentures at the then-applicable rate and deferred interest will compound on
each interest payment date. If all deferred interest on the Subordinated
Debentures is paid, the Company can again defer interest payments.
As of December 31, 2019, the Company had outstanding $500 million of Series A
6.500% Fixed-to-Floating Rate Junior Subordinated Debentures ("Debentures"). The
scheduled maturity date for the Debentures is May 15, 2057 with a final maturity
date of May 15, 2067. The Debentures may be redeemed (i) in whole or in part, at
any time on or after May 15, 2037 at the principal amount plus accrued and
unpaid interest to the date of redemption, or (ii) in certain circumstances, in
whole or in part, prior to May 15, 2037 at the principal amount plus accrued and
unpaid interest to the date of redemption or, if greater, a make-whole price.
Interest on the Debentures is payable semi-annually at the stated fixed annual
rate to May 15, 2037, and then payable quarterly at an annual rate equal to the
three-month LIBOR plus 2.120%. The Company may elect at one or more times to
defer payment of interest on the Debentures for one or more consecutive interest
periods that do not exceed 10 years. Interest compounds during such deferral
periods at the rate in effect for each period. The interest deferral feature
obligates the Company in certain circumstances to issue common stock or certain
other types of securities if it cannot otherwise raise sufficient funds to make
the required interest payments. The Company has reserved 75 million shares of
its authorized and unissued common stock to satisfy this obligation.
The continuation of LIBOR on the current basis is not guaranteed after 2021 and
LIBOR may be discontinued or modified by 2021. The Subordinated Debentures allow
for the use of an alternative benchmark if LIBOR is no longer available.
The terms of the Company's outstanding subordinated debentures prohibit the
Company from declaring or paying any dividends or distributions on common or
preferred stock or redeeming, purchasing, acquiring, or making liquidation
payments on common stock or preferred stock if the Company has elected to defer
interest payments on the subordinated debentures, subject to certain limited
exceptions.
In connection with the issuance of the Debentures, the Company entered into a
replacement capital
covenant ("RCC"). This covenant was not intended for the benefit of the holders
of the Debentures and could not be enforced by them. Rather, it was for the
benefit of holders of one or more other designated series of the Company's
indebtedness ("covered debt"), currently the 5.750% Subordinated Debentures due
2053. Pursuant to the RCC, the Company has agreed that it will not repay,
redeem, or purchase the Debentures on or before May 15, 2067 (or such earlier
date on which the RCC terminates by its terms) unless, subject to certain
limitations, the Company has received net cash proceeds in specified amounts
from the sale of common stock or certain other qualifying securities. The
promises and covenants contained in the RCC will not apply if (i) S&P upgrades
the Company's issuer credit rating to A or above, (ii) the Company redeems the
Debentures due to a tax event, (iii) after notice of redemption has been given
by the Company and a market disruption event occurs preventing the Company from
raising proceeds in accordance with the RCC, or (iv) the Company repurchases or
redeems up to 10% of the outstanding principal of the Debentures in any one-year
period, provided that no more than 25% will be so repurchased, redeemed or
purchased in any ten-year period.
The RCC terminates in 2067. The RCC will terminate prior to its scheduled
termination date if (i) the Debentures are no longer outstanding and the Company
has fulfilled its obligations under the RCC or it is no longer applicable,
(ii) the holders of a majority of the then-outstanding principal amount of the
then-effective series of covered debt consent to agree to the termination of the
RCC, (iii) the Company does not have any series of outstanding debt that is
eligible to be treated as covered debt under the RCC, (iv) the Debentures are
accelerated as a result of an event of default, (v) certain rating agency or
change in control events occur, (vi) S&P, or any successor thereto, no longer
assigns a solicited rating on senior debt issued or guaranteed by the Company,
or (vii) the termination of the RCC would have no effect on the equity credit
provided by S&P with respect to the Debentures. An event of default, as defined
by the supplemental indenture, includes default in the payment of interest or
principal and bankruptcy proceedings.
To manage short-term liquidity, the Company maintains a commercial paper program
and a credit facility as a potential source of funds. These include a $1.00
billion unsecured revolving credit facility and a commercial paper program with
a borrowing limit of $1.00 billion. In April 2016, the Company extended the
maturity date of the facility to April 2021. This facility contains an increase
provision that would allow up to an additional $500 million of borrowing. This
facility has a financial covenant requiring the Company not to exceed a 37.5%
debt to capitalization ratio as defined in the agreement. Although the right to
borrow under the facility is not subject to a minimum rating requirement, the
costs of maintaining the facility and borrowing under it are based on the
ratings of the Company's senior unsecured, unguaranteed long-term debt. The
total amount outstanding at any point in time under the combination of the
commercial paper
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Notes to Consolidated Financial Statements 2019 Form 10-K
program and the credit facility cannot exceed the amount that can be borrowed
under the credit facility. No amounts were outstanding under the credit facility
as of December 31, 2019 or 2018. The Company had no commercial paper outstanding
as of December 31, 2019 or 2018.
The Company paid $312 million, $330 million and $332 million of interest on debt
in 2019, 2018 and 2017, respectively.
The Company had $389 million and $260 million of investment-related debt that is
reported in other liabilities and accrued expenses as of December 31, 2019 and
2018, respectively.
During 2018, the Company filed a universal shelf registration statement with the
Securities and Exchange Commission ("SEC") that expires in 2021.
The registration statement covers an unspecified amount of securities and can be
used to issue debt securities, common stock, preferred stock, depositary shares,
warrants, stock purchase contracts, stock purchase units and securities of trust
subsidiaries.
Common stock The Company had 900 million shares of issued common stock of which
319 million shares were outstanding and 581 million shares were held in treasury
as of December 31, 2019. In 2019, the Company acquired 16 million shares at an
average cost of $110.37 and reissued 3 million net shares under equity incentive
plans.
Preferred stock All outstanding preferred stock represents noncumulative
perpetual preferred stock with a $1.00 par value per share and a liquidation
preference of $25,000 per share.
Total preferred stock outstanding
Aggregate liquidation
preference Aggregate dividend payment ($ in
As of December 31, ($ in millions)
Dividend per depository share (1) millions)
2019 2018 2019 2018 Dividend rate 2019 2018 2017 2019 2018 2017
Series A 11,500 11,500 $ 287.5 $ 287.5 5.625 % $ 1.41 $ 1.41 $ 1.41 $ 16 $ 16 $ 16
Series C - - - - 6.750 % - 1.69 1.69 - 26 (2) 26
Series D - 5,400 - 135.0 6.625 % 1.66 1.66 1.66 9 (2) 9 9
Series E - 29,900 - 747.5 6.625 % 1.66 1.66 1.66 49 (2) 49 49
Series F - 10,000 - 250.0 6.250 % 1.56 1.56 1.56 16 (2) 16 16
Series G 23,000 23,000 575.0 575.0 5.625 % 1.41 1.41 - 32 18 -
Series H 46,000 - 1,150.0 - 5.100 % 1.28 - - 12 - -
Series I 12,000 - 300.0 - 4.750 % 1.19 - - - - -
Total 92,500 79,800 $ 2,313 $ 1,995 $ 134 (2) $ 134 (2) $ 116
(1) Each depositary share represents a 1/1,000th interest in a share of
preferred stock.
(2) Excludes $37 million and $13 million in 2019 and 2018, respectively, related
to original issuance costs in preferred stock dividends on the Consolidated
Statements of Operations and Consolidated Statements of Shareholders' Equity
as a result of the preferred stock redemptions.
On August 8, 2019, the Company issued 46,000 shares of 5.100% Fixed Rate
Noncumulative Perpetual Preferred Stock, Series H, par value $1.00 per share and
liquidation preference $25,000 per share, for gross proceeds of $1.15 billion.
On October 15, 2019, the Company redeemed all 5,400 shares of its Fixed Rate
Noncumulative Perpetual Preferred Stock, Series D, par value $1.00 per share and
liquidation preference $25,000 per share, all 29,900 shares of its Fixed Rate
Noncumulative Perpetual Preferred Stock, Series E, par value $1.00 per share and
liquidation preference $25,000 per share, all 10,000 shares of its Fixed Rate
Noncumulative Perpetual Preferred Stock, Series F, par value $1.00 per share and
liquidation preference $25,000 per share, and the corresponding depositary
shares. The total redemption payment was $1.13 billion, using the proceeds from
the issuance of the Fixed Rate Noncumulative Perpetual Preferred Stock, Series
H. In 2019, the Company recognized $37 million of original issuance costs in
preferred stock dividends on the Consolidated Statements of Operations and
Consolidated Statements of Shareholders' Equity as a result of the preferred
stock redemptions.
On November 8, 2019, the Company issued 12,000 shares of 4.750% Fixed Rate
Noncumulative Perpetual Preferred Stock, Series I, par value $1.00 per share and
liquidation preference $25,000 per share, for gross proceeds of $300 million.
Subsequent event On January 15, 2020, the Company redeemed all 11,500 shares of
its Fixed Rate Noncumulative Preferred Stock, Series A, par value $1.00 per
share and liquidation preference $25,000 per share and the corresponding
depositary shares. The total redemption payment was $288 million, using the
proceeds from the issuance of the Fixed Rate Noncumulative Perpetual Preferred
Stock, Series I. In the first quarter of 2020, the Company will recognize $10
million of original issuance costs in preferred stock dividends on the
Consolidated Statements of Operations and Consolidated Statements of
Shareholders' Equity as a result of the preferred stock redemption.
The preferred stock ranks senior to the Company's common stock with respect to
the payment of dividends and liquidation rights. The Company will pay dividends
on the preferred stock on a noncumulative
The Allstate Corporation 189
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2019 Form 10-K Notes to Consolidated Financial Statements
basis only when, as and if declared by the Company's board of directors (or a duly authorized committee of the board) and to the extent that the Company has legally available funds to pay dividends. If dividends are declared on the preferred stock, they will be payable quarterly in arrears at an annual fixed rate. Dividends on the preferred stock are not cumulative. Accordingly, in the event dividends are not declared on the preferred stock for payment on any dividend payment date, then those dividends will cease to be payable. If the Company has not declared a dividend before the dividend payment date for any dividend period, the Company has no obligation to pay dividends for that dividend period, whether or not dividends are declared for any future dividend period. No dividends may be paid or declared on the Company's common stock and no shares of the Company's common stock may be repurchased unless the full dividends for the latest completed dividend period on the preferred stock have been declared and paid or provided for. The Company is prohibited from declaring or paying dividends on its Series G preferred stock in excess of the amount of net proceeds from an issuance of common stock taking place within 90 days before a dividend declaration date if, on that dividend declaration date, either: (1) the risk-based capital ratios of the largest U.S. property-casualty insurance subsidiaries that collectively account for 80% or more of the net written premiums of U.S. property-casualty insurance business on a weighted average basis were less than 175% of their company action level risk-based capital as of the end of the most recent year; or (2) consolidated net income for the four-quarter period ending on the preliminary quarter end test date (the quarter that is two quarters prior to the most recently completed quarter) is zero or negative and consolidated shareholders' equity (excluding AOCI, and subject to certain other adjustments relating to changes in U.S. GAAP) as of each of the preliminary quarter test date and the most recently completed quarter has declined by 20% or more from its level as measured at the end of the benchmark quarter (the date that is ten quarters prior to the most recently completed quarter). If the Company fails to satisfy either of these tests on any dividend declaration date, the restrictions on dividends will continue until the Company is able again to satisfy the test on a dividend declaration date. In addition, in the case of a restriction arising under (2) above, the restrictions on dividends will continue until consolidated shareholders' equity (excluding AOCI, and subject to certain other adjustments relating to changes in U.S. GAAP) has increased, or has declined by less than 20%, in either case as compared to its level at the end of the benchmark quarter for each dividend payment date as to which dividend restrictions were imposed. The preferred stock does not have voting rights except with respect to certain changes in the terms of the preferred stock, in the case of certain dividend nonpayments, certain other fundamental corporate events, mergers or consolidations and as otherwise provided by law. If and when dividends have not been declared and paid in full for at least six quarterly dividend periods or their equivalent (whether or not consecutive), the authorized number of directors then constituting our board of directors will be increased by two. The holders of the preferred stock, together with the holders of all other affected classes and series of voting parity stock, voting as a single class, will be entitled to elect the two additional members of the board of directors of the Company, subject to certain conditions. The board of directors shall at no time have more than two preferred stock directors. The preferred stock is perpetual and has no maturity date. The preferred stock is redeemable at the Company's option in whole or in part, on or after April 15, 2023 for Series G, October 15, 2024 for Series H and January 15, 2025 for Series I at a redemption price of $25,000 per share of preferred stock, plus declared and unpaid dividends. Prior to April 15, 2023 for Series G, October 15, 2024 for Series H and January 15, 2025 for Series I, the preferred stock is redeemable at the Company's option, in whole but not in part, within 90 days of the occurrence of certain regulatory capital event at a redemption price equal to $25,000 or $25,500 per share or a certain rating agency event at a redemption price equal to $25,000 or $25,500 per share, plus declared and unpaid dividends for Series G and for Series H and I, respectively. Note 13 Company Restructuring The Company undertakes various programs to reduce expenses. These programs generally involve a reduction in staffing levels, and in certain cases, office closures. Restructuring and related charges primarily include the following costs related to these programs: • Employee - severance and relocation benefits
• Exit - contract termination penalties
The expenses related to these activities are included in the Consolidated Statements of Operations as restructuring and related charges, and totaled $41 million, $67 million and $96 million in 2019, 2018 and 2017, respectively. Restructuring expenses in 2019 primarily related to realignment of certain employees to centralized talent centers as well as claims reorganization initiatives.
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Notes to Consolidated Financial Statements 2019 Form 10-K
Restructuring activity during the period ($ in millions) Employee costs Exit costs Total liability Restructuring liability as of December 31, 2018 $ 29 $ 15 $ 44 Expense incurred 43 7 50 Adjustments to liability (9 ) - (9 ) Payments and non-cash pension settlements (49 ) (14 ) (63 )
Restructuring liability as of December 31, 2019 $ 14 $
8 $ 22
As of December 31, 2019, the cumulative amount incurred to date for active programs related to employee severance, relocation benefits and post-exit
rent expenses totaled $112 million for employee costs and $12 million for exit
costs.
Note 14 Commitments, Guarantees and Contingent Liabilities
Shared markets and state facility assessments
The Company is required to participate in assigned risk plans, reinsurance
facilities and joint underwriting associations in various states that provide
insurance coverage to individuals or entities that otherwise are unable to
purchase such coverage from private insurers.
The Company routinely reviews its exposure to assessments from these plans,
facilities and government programs. Underwriting results related to these
arrangements, which tend to be adverse, have been immaterial to the Company's
results of operations. Because of the Company's participation, it may be exposed
to losses that surpass the capitalization of these facilities and/or assessments
from these facilities.
Florida Citizens Castle Key is subject to assessments from Citizens Property
Insurance Corporation in the state of Florida ("FL Citizens"), which was
initially created by the state of Florida to provide insurance to property
owners unable to obtain coverage in the private insurance market. FL Citizens,
at the discretion and direction of its Board of Governors ("FL Citizens Board"),
can levy a regular assessment on assessable insurers and assessable insureds for
a deficit in any calendar year up to a maximum of the greater of: 2% of the
projected deficit or 2% of the aggregate statewide direct written premium for
the prior calendar year. The base of assessable insurers includes all property
and casualty premiums in the state, except workers' compensation, medical
malpractice, accident and health insurance and policies written under the NFIP.
An insurer may recoup a regular assessment through a surcharge to policyholders.
In order to recoup this assessment, an insurer must file for a policy surcharge
with the FL OIR at least fifteen days prior to imposing the surcharge on
policies. If a deficit remains after the regular assessment, FL Citizens can
also levy emergency assessments in the current and subsequent years. Companies
are required to collect the emergency assessments directly from residential
property policyholders and remit to FL Citizens as collected. Currently, the
emergency assessment is zero for all policies issued or renewed on or after July
1, 2015.
Louisiana Citizens Louisiana Citizens Property Insurance Corporation
("LA Citizens") can levy a regular
assessment on participating companies for a deficit in any calendar year up to a
maximum of the greater of 10% of the calendar year deficit or 10% of Louisiana
direct property premiums industry-wide for the prior calendar year. If the plan
year deficit exceeds the amount that can be recovered through Regular
Assessments, LA Citizens may fund the remaining deficit by issuing revenue
assessment bonds in the capital markets. LA Citizens then declares Emergency
Assessments each year to provide debt service on the bonds until they are
retired. Companies writing assessable lines must surcharge their policyholders
Emergency Assessments in the percentage established annually by LA Citizens and
must remit amounts collected to the bond trustee on a quarterly basis. Emergency
assessments to pay off bonds issued in 2007 for the hurricanes of 2005 will
continue until 2025.
Facilities such as FL Citizens and LA Citizens are generally designed so that
the ultimate cost is borne by policyholders; however, the exposure to
assessments from these facilities and the availability of recoupments or premium
rate increases may not offset each other in the Company's financial statements.
Moreover, even if they do offset each other, they may not offset each other in
financial statements for the same fiscal period due to the ultimate timing of
the assessments and recoupments or premium rate increases, as well as the
possibility of policies not being renewed in subsequent years.
California Earthquake Authority Exposure to certain potential losses from
earthquakes in California is limited by the Company's participation in the
California Earthquake Authority ("CEA"), which provides insurance for California
earthquake losses. The CEA is a privately-financed, publicly-managed state
agency created to provide insurance coverage for earthquake damage. Insurers
selling homeowners insurance in California are required to offer earthquake
insurance to their customers either through their company or by participation in
the CEA. The Company's homeowners policies continue to include coverages for
losses caused by explosions, theft, glass breakage and fires following an
earthquake, which are not underwritten by the CEA.
As of October 31, 2019, the CEA's capital balance was approximately $6.01
billion. Should losses arising from an earthquake cause a deficit in the CEA, an
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2019 Form 10-K Notes to Consolidated Financial Statements
additional $721 million would be obtained from the proceeds of revenue bonds the
CEA may issue, an existing $8.26 billion reinsurance layer, $1.0 billion from
policyholders surcharge, and finally, if needed, assessments on participating
insurance companies. Participating insurers are required to pay an assessment,
currently estimated not to exceed $1.66 billion, if the capital of the CEA falls
below $350 million. Within the limits previously described, the assessment could
be intended to restore the CEA's capital to a level of $350 million. There is no
provision that allows insurers to recover assessments through a premium
surcharge or other mechanism. The CEA's projected aggregate claim paying
capacity is $17.65 billion as of October 31, 2019 and if an event were to result
in claims greater than its capacity, affected policyholders may be paid a
prorated portion of their covered losses, paid on an installment basis, or no
payments may be made if the claim paying capacity of the CEA is insufficient.
All future assessments on participating CEA insurers are based on their CEA
insurance market share as of December 31 of the preceding year. As of
December 31, 2018, the Company's market share was 9.8%. The Company does not
expect its market share to materially change. At this level, the Company's
maximum possible CEA assessment would be $162 million during 2020. These amounts
are re-evaluated by the board of directors of the CEA on an annual basis.
Accordingly, assessments from the CEA for a particular quarter or annual period
may be material to the results of operations and cash flows, but not the
financial position of the Company. Management believes the Company's exposure to
earthquake losses in California has been significantly reduced as a result of
its participation in the CEA.
Texas Windstorm Insurance Association The Company participates as a member of
the Texas Windstorm Insurance Association ("TWIA"), which provides wind and hail
property coverage to coastal risks unable to procure coverage in the voluntary
market. Wind and hail coverage is written on a TWIA-issued policy. TWIA follows
a funding structure first utilizing currently available funds set aside from
current and prior years. Under the current law, to the extent losses exceed
premiums received from policyholders, TWIA utilizes a combination of
reinsurance, TWIA issued securities, as well as member and policyholder
assessments to fund loss payments.
During 2019, the TWIA Board announced assessments primarily related to Hurricane
Harvey for which the Company's share was $12 million. These costs were recorded
in property and casualty insurance claims and claims expense as catastrophe
losses on the Consolidated Statements of Operations. Any assessments from TWIA
for a particular quarter or annual period may be material to the results of
operations and cash flows, but not to the financial position of the Company.
Texas Fair Plan Association The Company participates as a member of the Texas
Fair Plan Association ("FAIR Plan"), which provides residential property
insurance to inland areas designated as
underserved by the Commissioner of Insurance and the applicant(s) are unable to
procure coverage in the voluntary market. The FAIR Plan issues insurance
policies, like an insurance company, and it also functions as a pooling
mechanism that allocates premiums, claims and expenses back to the insurance
industry. As a result of the losses incurred related to Hurricane Harvey, in
2017 the FAIR Plan Board unanimously voted to approve its first ever member
assessment of which the Company's share was $8 million based on total direct
premium written in Texas. Insurers are permitted to recover the assessment
through either a premium surcharge applied to existing customers over a
three-year period or increased rates, but the ability to fully recover the
assessment may be impacted by market conditions or other factors.
North Carolina Joint Underwriters Association The North Carolina Joint
Underwriters Association ("NCJUA") was created to provide property insurance for
properties (other than the state's beach and coastal areas) that insurers are
not otherwise willing to insure. All insurers licensed to write property
insurance in North Carolina are members of the NCJUA. Premiums, losses and
expenses of the NCJUA are shared by the member companies in proportion to their
respective North Carolina property insurance writings. Member companies
participate in plan deficits or surpluses based on their participation ratios,
which are determined annually. The Company had a $5 million receivable from the
NCJUA at December 31, 2019 representing our participation in the NCJUA's deficit
of $29 million for all open years.
North Carolina Insurance Underwriting Association The North Carolina Insurance
Underwriting Association ("NCIUA") provides windstorm and hail coverage as well
as homeowners policies for properties located in the state's beach and coastal
areas that insurers are not otherwise willing to insure. All insurers licensed
to write residential and commercial property insurance in North Carolina are
members of the NCIUA. Members are assessed in proportion to their North Carolina
residential and commercial property insurance writings, which is determined
annually and varies by coverage, for plan deficits. As of December 31, 2019, the
NCIUA had a surplus of $439 million. No member company is entitled to the
distribution of any portion of the Association's surplus. The Company does not
recognize any interest related to this surplus. Legislation in 2009 capped
insurers' assessments for losses incurred in any calendar year at $1.00 billion.
Subsequent to an industry assessment of $1.00 billion, if the plan continues to
require funding, it may authorize insurers to assess a 10% catastrophe recovery
charge on each property insurance policy statewide to be remitted to the plan.
Other programs The Company is also subject to assessments by the NCRF and the
FHCF, which are described in Note 10.
Guaranty funds
Under state insurance guaranty fund laws, insurers doing business in a state can
be assessed, up to prescribed limits, for certain obligations of insolvent
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Notes to Consolidated Financial Statements 2019 Form 10-K
insurance companies to policyholders and claimants. Amounts assessed to each
company are typically related to its proportion of business written in each
state. The Company's policy is to accrue assessments when the entity for which
the insolvency relates has met its state of domicile's statutory definition of
insolvency, the amount of the loss is reasonably estimable and the related
premium upon which the assessment is based is written. In most states, the
definition is met with a declaration of financial insolvency by a court of
competent jurisdiction. In certain states there must also be a final order of
liquidation. Since most states allow a credit against premium or other state
related taxes for assessments, an asset is recorded based on paid and accrued
assessments for the amount the Company expects to recover on the respective
state's tax return and is realized over the period allowed by each state. As of
December 31, 2019 and 2018, the liability balance included in other liabilities
and accrued expenses was $13 million and $12 million, respectively. The related
premium tax offsets included in other assets were $15 million and $16 million as
of December 31, 2019 and 2018, respectively.
Guarantees
In the normal course of business, the Company provides standard indemnifications
to contractual counterparties in connection with numerous transactions,
including acquisitions and divestitures. The types of indemnifications typically
provided include indemnifications for breaches of representations and
warranties, taxes and certain other liabilities, such as third-party lawsuits.
The indemnification clauses are often standard contractual terms and are entered
into in the normal course of business based on an assessment that the risk of
loss would be remote. The terms of the indemnifications vary in duration and
nature. In many cases, the maximum obligation is not explicitly stated and the
contingencies triggering the obligation to indemnify have not occurred and are
not expected to occur. Consequently, the maximum amount of the obligation under
such indemnifications is not determinable. Historically, the Company has not
made any material payments pursuant to these obligations.
Related to the sale of Lincoln Benefit Life Company on April 1, 2014, ALIC
agreed to indemnify Resolution Life Holdings, Inc. in connection with certain
representations, warranties and covenants of ALIC, and certain liabilities
specifically excluded from the transaction, subject to specific contractual
limitations regarding ALIC's maximum obligation. Management does not believe
these indemnifications will have a material effect on results of operations,
cash flows or financial position of the Company.
The aggregate liability balance related to all guarantees was not material as of
December 31, 2019.
Regulation and compliance
The Company is subject to extensive laws, regulations, administrative
directives, and regulatory actions. From time to time, regulatory authorities or
legislative bodies seek to influence and restrict premium rates, require premium
refunds to policyholders, require reinstatement of terminated policies,
prescribe rules or guidelines on how affiliates compete in the marketplace,
restrict the ability of insurers to cancel or non-renew policies, require
insurers to continue to write new policies or limit their ability to write new
policies, limit insurers' ability to change coverage terms or to impose
underwriting standards, impose additional regulations regarding agency and
broker compensation, regulate the nature of and amount of investments, impose
fines and penalties for unintended errors or mistakes, impose additional
regulations regarding cybersecurity and privacy, and otherwise expand overall
regulation of insurance products and the insurance industry. In addition, the
Company is subject to laws and regulations administered and enforced by federal
agencies, international agencies, and other organizations, including but not
limited to the SEC, the Financial Industry Regulatory Authority, the U.S. Equal
Employment Opportunity Commission, and the U.S. Department of Justice. The
Company has established procedures and policies to facilitate compliance with
laws and regulations, to foster prudent business operations, and to support
financial reporting. The Company routinely reviews its practices to validate
compliance with laws and regulations and with internal procedures and policies.
As a result of these reviews, from time to time the Company may decide to modify
some of its procedures and policies. Such modifications, and the reviews that
led to them, may be accompanied by payments being made and costs being incurred.
The ultimate changes and eventual effects of these actions on the Company's
business, if any, are uncertain.
Legal and regulatory proceedings and inquiries
The Company and certain subsidiaries are involved in a number of lawsuits,
regulatory inquiries, and other legal proceedings arising out of various aspects
of its business.
Background These matters raise difficult and complicated factual and legal
issues and are subject to many uncertainties and complexities, including the
underlying facts of each matter; novel legal issues; variations between
jurisdictions in which matters are being litigated, heard, or investigated;
changes in assigned judges; differences or developments in applicable laws and
judicial interpretations; judges reconsidering prior rulings; the length of time
before many of these matters might be resolved by settlement, through
litigation, or otherwise; adjustments with respect to anticipated trial
schedules and other proceedings; developments in similar actions against other
companies; the fact that some of the lawsuits are putative class actions in
which a class has not been certified and in which the purported class may not be
clearly defined; the fact that some of the lawsuits involve multi-state class
actions in which the applicable law(s) for the claims at issue is in dispute and
therefore unclear; and the challenging legal environment faced by corporations
and insurance companies.
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2019 Form 10-K Notes to Consolidated Financial Statements
The outcome of these matters may be affected by decisions, verdicts, and settlements, and the timing of such decisions, verdicts, and settlements, in other individual and class action lawsuits that involve the Company, other insurers, or other entities and by other legal, governmental, and regulatory actions that involve the Company, other insurers, or other entities. The outcome may also be affected by future state or federal legislation, the timing or substance of which cannot be predicted. In the lawsuits, plaintiffs seek a variety of remedies which may include equitable relief in the form of injunctive and other remedies and monetary relief in the form of contractual and extra-contractual damages. In some cases, the monetary damages sought may include punitive or treble damages. Often specific information about the relief sought, such as the amount of damages, is not available because plaintiffs have not requested specific relief in their pleadings. When specific monetary demands are made, they are often set just below a state court jurisdictional limit in order to seek the maximum amount available in state court, regardless of the specifics of the case, while still avoiding the risk of removal to federal court. In Allstate's experience, monetary demands in pleadings bear little relation to the ultimate loss, if any, to the Company. In connection with regulatory examinations and proceedings, government authorities may seek various forms of relief, including penalties, restitution, and changes in business practices. The Company may not be advised of the nature and extent of relief sought until the final stages of the examination or proceeding. Accrual and disclosure policy The Company reviews its lawsuits, regulatory inquiries, and other legal proceedings on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. The Company establishes accruals for such matters at management's best estimate when the Company assesses that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company does not establish accruals for such matters when the Company does not believe both that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company's assessment of whether a loss is reasonably possible, or probable, is based on its assessment of the ultimate outcome of the matter following all appeals. The Company does not include potential recoveries in its estimates of reasonably possible or probable losses. Legal fees are expensed as incurred. The Company continues to monitor its lawsuits, regulatory inquiries, and other legal proceedings for further developments that would make the loss contingency both probable and estimable, and accordingly accruable, or that could affect the amount of accruals that have been previously established. There may continue to be exposure to loss in excess of any amount accrued. Disclosure of the nature and amount of an accrual is made when there have been sufficient legal and factual developments such that the Company's ability to resolve the matter would not be impaired by the disclosure of the amount of accrual. When the Company assesses it is reasonably possible or probable that a loss has been incurred, it discloses the matter. When it is possible to estimate the reasonably possible loss or range of loss above the amount accrued, if any, for the matters disclosed, that estimate is aggregated and disclosed. Disclosure is not required when an estimate of the reasonably possible loss or range of loss cannot be made. For certain of the matters described below in the "Claims related proceedings" and "Other proceedings" subsections, the Company is able to estimate the reasonably possible loss or range of loss above the amount accrued, if any. In determining whether it is possible to estimate the reasonably possible loss or range of loss, the Company reviews and evaluates the disclosed matters, in conjunction with counsel, in light of potentially relevant factual and legal developments. These developments may include information learned through the discovery process, rulings on dispositive motions, settlement discussions, information obtained from other sources, experience from managing these and other matters, and other rulings by courts, arbitrators or others. When the Company possesses sufficient appropriate information to develop an estimate of the reasonably possible loss or range of loss above the amount accrued, if any, that estimate is aggregated and disclosed below. There may be other disclosed matters for which a loss is probable or reasonably possible, but such an estimate is not possible. Disclosure of the estimate of the reasonably possible loss or range of loss above the amount accrued, if any, for any individual matter would only be considered when there have been sufficient legal and factual developments such that the Company's ability to resolve the matter would not be impaired by the disclosure of the individual estimate. The Company currently estimates that the aggregate range of reasonably possible loss in excess of the amount accrued, if any, for the disclosed matters where such an estimate is possible is zero to $75 million, pre-tax. This disclosure is not an indication of expected loss, if any. Under accounting guidance, an event is "reasonably possible" if "the chance of the future event or events occurring is more than remote but less than likely" and an event is "remote" if "the chance of the future event or events occurring is slight." This estimate is based upon currently available information and is subject to significant judgment and a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimate will change from time to time, and actual results may vary significantly from the current estimate. The estimate does not include matters or losses for which an estimate is not possible. Therefore, this estimate represents an estimate of possible loss only for certain matters meeting these criteria. It does not represent the Company's maximum possible loss exposure. Information is provided below regarding the nature of all of the disclosed matters and, where specified, the amount, if any, of plaintiff claims associated with these loss contingencies.
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Notes to Consolidated Financial Statements 2019 Form 10-K
Due to the complexity and scope of the matters disclosed in the "Claims related
proceedings" and "Other proceedings" subsections below and the many
uncertainties that exist, the ultimate outcome of these matters cannot be
predicted and in the Company's judgment, a loss, in excess of amounts accrued,
if any, is not probable. In the event of an unfavorable outcome in one or more
of these matters, the ultimate liability may be in excess of amounts currently
accrued, if any, and may be material to the Company's operating results or cash
flows for a particular quarterly or annual period. However, based on information
currently known to it, management believes that the ultimate outcome of all
matters described below, as they are resolved over time, is not likely to have a
material effect on the financial position of the Company.
Claims related proceedings The Company is managing various disputes in Florida
that raise challenges to the Company's practices, processes, and procedures
relating to claims for personal injury protection benefits under Florida auto
policies. Medical providers continue to pursue litigation under various theories
that challenge the amounts that the Company pays under the personal injury
protection benefits. There are pending putative class actions and litigation
involving individual plaintiffs. The Company is vigorously asserting both
procedural and substantive defenses to these lawsuits.
Other proceedings The stockholder derivative actions described below are
disclosed pursuant to SEC disclosure requirements for these types of matters.
The putative class action alleging violations of the federal securities laws is
disclosed because it involves similar allegations to those made in the
stockholder derivative actions.
Biefeldt / IBEW Consolidated Action. Two separately filed stockholder derivative
actions have been consolidated into a single proceeding that is pending in the
Circuit Court for Cook County, Illinois, Chancery Division. The original
complaint in the first-filed of those actions, Biefeldt v. Wilson, et al., was
filed on August 3, 2017, in that court by a plaintiff alleging that she is a
stockholder of the Company. On June 29, 2018, the court granted defendants'
motion to dismiss that complaint for failure to make a pre-suit demand on the
Allstate Board before instituting the suit, but granted the plaintiff permission
to file an amended complaint. The original complaint in IBEW Local No. 98
Pension Fund v. Wilson, et al., was filed on April 12, 2018, in the same court
by another plaintiff alleging to be a stockholder of the Company. After the
court issued its dismissal decision in the Biefeldt action, the plaintiffs
agreed to consolidate the two actions and filed a consolidated amended complaint
naming the Company's chairman, president and chief executive officer, its former
president, and certain present or former members of the board of directors. In
that complaint, the plaintiffs allege that the directors and officer defendants
breached their fiduciary duties to the Company in connection with allegedly
material misstatements or omissions concerning the Company's automobile
insurance claim frequency statistics and the reasons for a claim frequency
increase for Allstate
brand auto insurance between October 2014 and August 3, 2015. The factual
allegations are substantially similar to those at issue in In re The Allstate
Corp. Securities Litigation. The plaintiffs further allege that a senior officer
and several outside directors engaged in stock option exercises allegedly while
in possession of material nonpublic information. The plaintiffs seek, on behalf
of the Company, an unspecified amount of damages and various forms of equitable
relief. Defendants moved to dismiss the consolidated complaint on September 24,
2018 for failure to make a demand on the Allstate Board. On May 14, 2019, the
court granted the defendants' motion to dismiss the complaint, but allowed the
plaintiffs leave to file a second consolidated amended complaint by June 11,
2019. On June 3, 2019, the plaintiffs filed a motion to stay the action, or in
the alternative defer the filing of the second consolidated amended complaint,
to allow the plaintiffs to conduct an inspection of the Company's books and
records. The parties reached a compromise by which the Company produced certain
board materials and the deadline for the plaintiffs to file the second
consolidated amended complaint was extended. On September 17, 2019, the
plaintiffs filed a second consolidated amended complaint. Defendants moved to
dismiss the complaint on November 1, 2019 for failure to make a demand on the
Allstate Board.
In Sundquist v. Wilson, et al., another plaintiff alleging to be a stockholder
of the Company filed a stockholder derivative complaint in the United States
District Court for the Northern District of Illinois on May 21, 2018. The
plaintiff seeks, on behalf of the Company, an unspecified amount of damages and
various forms of equitable relief. The complaint names as defendants the
Company's chairman, president and chief executive officer, its former president,
its former chief financial officer, who is now the Company's vice chairman, and
certain present or former members of the board of directors.
The complaint alleges breaches of fiduciary duty based on allegations similar to
those asserted in In re The Allstate Corp. Securities Litigation as well as
state law "misappropriation" claims based on stock option transactions by the
Company's chairman, president and chief executive officer, its former chief
financial officer, who is now the Company's vice chairman, and certain members
of the board of directors. Defendants moved to dismiss and/or stay the complaint
on August 7, 2018. On December 4, 2018, the court granted the defendants' motion
and stayed the case pending the resolution of the consolidated Biefeldt/IBEW
matter.
Mims v. Wilson, et al., is an additional stockholder derivative action filed on
February 12, 2020 in the United States District Court for the Northern District
of Illinois. The plaintiff seeks, on behalf of the Company, an unspecified
amount of damages and various forms of equitable relief. The complaint names as
defendants the Company's chairman, president and chief executive officer, its
former president, its former chief financial officer, who is now the Company's
vice chairman, and certain present or former members of the board of directors.
The complaint alleges breaches
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2019 Form 10-K Notes to Consolidated Financial Statements
of fiduciary duty and unjust enrichment based on allegations similar to those asserted in In re The Allstate Corp. Securities Litigation. In re The Allstate Corp. Securities Litigation is a certified class action filed on November 11, 2016 in the United States District Court for the Northern District of Illinois against the Company and two of its officers asserting claims under the federal securities laws. Plaintiffs allege that they purchased Allstate common stock during the class period and suffered damages as the result of the conduct alleged. Plaintiffs seek an unspecified amount of damages, costs, attorney's fees, and other relief as the court deems appropriate. Plaintiffs allege that the Company and certain senior officers made allegedly material misstatements or omissions concerning claim frequency statistics and the reasons for a claim frequency increase for Allstate brand auto insurance between October 2014 and August 3, 2015. Plaintiffs' further allege that a senior officer engaged in stock option exercises during that time allegedly while in possession of material nonpublic information about Allstate brand auto insurance claim frequency. The Company, its chairman, president and chief executive officer, and its former president are the named defendants. After the court denied their motion to dismiss on February 27, 2018, defendants answered the complaint, denying plaintiffs' allegations that there was any misstatement or omission or other misconduct. On June 22, 2018, plaintiffs filed their motion for class certification, which was fully briefed as of January 11, 2019. On September 12, 2018, the court allowed the lead plaintiffs to amend their complaint to add the City of Providence Employee Retirement System as a proposed class representative. The amended complaint was filed the same day. On March 26, 2019, the court granted plaintiffs' motion for class certification and certified a class consisting of all persons who purchased Allstate common stock between October 29, 2014 and August 3, 2015. On April 9, 2019, defendants filed with the Seventh Circuit Court of Appeals a petition for permission to appeal this ruling pursuant to Federal Rule of Civil Procedure 23 (f) and the Court of Appeals granted that petition on April 25, 2019. The appeal was fully briefed as of July 31, 2019, and the Seven Circuit Court of Appeals heard oral argument on September 18, 2019. Asbestos and environmental Management believes its net loss reserves for asbestos, environmental and other discontinued lines exposures are appropriately established based on available facts, technology, laws and regulations. However, establishing net loss reserves for asbestos, environmental and other discontinued lines claims is subject to uncertainties that are much greater than those presented by other types of claims. The ultimate cost of losses may vary materially from recorded amounts, which are based on management's best estimate. Among the complications are lack of historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure and unresolved legal issues regarding policy coverage; unresolved legal issues regarding the determination, availability and timing of exhaustion of policy limits; plaintiffs' evolving and expanding theories of liability; availability and collectability of recoveries from reinsurance; retrospectively determined premiums and other contractual agreements; estimates of the extent and timing of any contractual liability; the impact of bankruptcy protection sought by various asbestos producers and other asbestos defendants; and other uncertainties. There are also complex legal issues concerning the interpretation of various insurance policy provisions and whether those losses are covered, or were ever intended to be covered, and could be recoverable through retrospectively determined premium, reinsurance or other contractual agreements. Courts have reached different and sometimes inconsistent conclusions as to when losses are deemed to have occurred and which policies provide coverage; what types of losses are covered; whether there is an insurer obligation to defend; how policy limits are determined; how policy exclusions and conditions are applied and interpreted; and whether clean-up costs represent insured property damage. Further, insurers and claims administrators acting on behalf of insurers are increasingly pursuing evolving and expanding theories of reinsurance coverage for asbestos and environmental losses. Adjudication of reinsurance coverage is predominately decided in confidential arbitration proceedings which may have limited precedential or predictive value further complicating management's ability to estimate probable loss for reinsured asbestos and environmental claims. Management believes these issues are not likely to be resolved in the near future, and the ultimate costs may vary materially from the amounts currently recorded resulting in material changes in loss reserves. In addition, while the Company believes that improved actuarial techniques and databases have assisted in its ability to estimate asbestos, environmental, and other discontinued lines net loss reserves, these refinements may subsequently prove to be inadequate indicators of the extent of probable losses. Due to the uncertainties and factors described above, management believes it is not practicable to develop a meaningful range for any such additional net loss reserves that may be required.
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Notes to Consolidated Financial Statements 2019 Form 10-K
Note 15 Income Taxes
The Company and its domestic subsidiaries file a consolidated federal income tax
return. Tax liabilities and benefits realized by the consolidated group are
allocated as generated by the respective entities.
Deferred income taxes result from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements
that will result in taxable or deductible amounts in future years. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in years in which those temporary differences are expected to be
recovered or settled. Deferred tax assets and liabilities are adjusted through
income tax expense as changes in tax laws or rates are enacted.
Regulatory tax examinations The Internal Revenue Service ("IRS") is currently
examining the Company's 2015 and 2016 federal income tax returns and is expected
to complete its exam by mid-2020. The 2017 and 2018 audit cycle is expected to
begin
mid-2020. The 2013 and 2014 federal income tax return audit is complete through
the exam phase and the Company has reached a tentative agreement on one
outstanding issue, pending final review by the Joint Committee of Taxation
expected in 2020. Any adjustments that may result from IRS examinations of the
Company's tax returns are not expected to have a material effect on the
consolidated financial statements.
Unrecognized tax benefits The Company recognizes tax positions in the
consolidated financial statements only when it is more likely than not that the
position will be sustained on examination by the relevant taxing authority based
on the technical merits of the position. A position that meets this standard is
measured at the largest amount of benefit that will more likely than not be
realized on settlement. A liability is established for differences between
positions taken in a tax return and amounts recognized in the consolidated
financial statements.
Reconciliation of the change in the amount of unrecognized tax benefits
For the years ended December 31,
($ in millions) 2019 2018 2017
Balance - beginning of year $ 70 $ 55 $ 10
Increase for tax positions taken in a prior
year - 3 34
Increase for tax positions taken in the
current year - 12 11
Balance - end of year $ 70 $ 70 $ 55
The Company believes it is reasonably possible that a decrease of up to $58
million in unrecognized tax benefits may occur within the next twelve months due
to IRS settlements.
Components of the deferred income tax assets and liabilities
As of December 31,
($ in millions) 2019 2018
Deferred tax assets
Unearned premium reserves $ 642 $ 594
Pension 197 192
Accrued compensation 147 145
Discount on loss reserves 78 67
Other postretirement benefits 49 45
Net operating loss carryover 26 50
Other assets 54 57
Total deferred tax assets 1,193 1,150
Deferred tax liabilities
DAC (847 ) (854 )
Unrealized net capital gains (507 ) (2 )
Investments (567 ) (278 )
Life and annuity reserves (222 ) (194 )
Intangible assets (98 ) (145 )
Other liabilities (106 ) (102 )
Total deferred tax liabilities (2,347 ) (1,575 )
Net deferred tax liability $ (1,154 ) $ (425 )
Although realization is not assured, management believes it is more likely than
not that the deferred tax assets will be realized based on the Company's
assessment that the deductions ultimately recognized for tax purposes will be
fully utilized. As of December 31, 2019, the Company has U.S. federal and
foreign net operating loss carryforwards of $93 million and $29 million,
respectively.
The Allstate Corporation 197
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2019 Form 10-K Notes to Consolidated Financial Statements
The provisions of the Tax Cuts and Jobs Act of 2017 eliminated the 20-year carryforward period and made it indefinite for federal net operating losses generated in tax years after December 31, 2017. For such amounts generated prior to 2018, the 20-year carryforward period continues to apply. Components of the net operating loss carryforwards as of December 31, 2019
20-Year
Carryforward Indefinite
Expires in Carryforward
($ in millions) 2025-2037 Period Total
US Federal $ 72 $ 21 $ 93
Foreign - 29 29
Total $ 72 $ 50 $ 122
Components of income tax expense
For the years ended December 31,
($ in millions) 2019 2018 2017
Current $ 991 $ 704 $ 1,018
Deferred 251 (236 ) (23 )
Total income tax expense $ 1,242 $ 468 $ 995
The Company paid income taxes of $648 million, $731 million and $968 million in
2019, 2018 and 2017, respectively.
The Company had a current income tax payable of $124 million and a current tax
receivable of $124 million as of December 31, 2019 and 2018, respectively.
Reconciliation of the statutory federal income tax rate to the effective income tax rate
For the years ended December 31,
($ in millions) 2019 2018 2017
Income before income taxes $ 6,089 $ 2,628 $ 4,549
Statutory federal income tax rate
on income from operations 1,279 21.0 % 552 21.0 % 1,592 35.0 %
Tax credits (33 ) (0.5 ) (34 ) (1.3 ) (59 ) (1.3 )
Share-based payments (24 ) (0.4 ) (16 ) (0.6 ) (63 ) (1.4 )
Tax-exempt income (27 ) (0.4 ) (24 ) (0.9 ) (32 ) (0.7 )
State income taxes 41 0.7 27 1.0 21 0.5
Tax Legislation benefit - - (29 ) (1.1 ) (509 ) (11.2 )
Non-deductible goodwill
impairment - - - - 44 1.0
Other 6 - (8 ) (0.3 ) 1 -
Effective income tax rate on
income from operations $ 1,242 20.4 % $ 468 17.8 % $ 995 21.9 %
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Notes to Consolidated Financial Statements 2019 Form 10-K
Note 16 Statutory Financial Information and Dividend Limitations
Allstate's domestic property and casualty and life insurance subsidiaries
prepare their statutory-basis financial statements in conformity with accounting
practices prescribed or permitted by the insurance department of the applicable
state of domicile. Prescribed statutory accounting practices include a variety
of publications of the National Association of Insurance Commissioners ("NAIC"),
as well as state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed.
All states require domiciled insurance companies to prepare statutory-basis
financial statements in conformity with the NAIC Accounting Practices and
Procedures Manual, subject to any deviations prescribed or permitted by the
applicable insurance commissioner and/or director. Statutory accounting
practices differ from GAAP primarily since they require charging policy
acquisition and certain sales inducement costs to expense as incurred,
establishing life insurance reserves based on different actuarial assumptions,
and valuing certain investments and establishing deferred taxes on a different
basis.
Statutory net income (loss) and capital and surplus of Allstate's domestic insurance subsidiaries
Net income (loss) Capital and surplus
($ in millions) 2019 2018 2017 2019 2018
Amounts by major business type:
Property and casualty insurance $ 3,989 $ 2,939 $ 3,050 $ 16,192 $ 14,328
Life insurance, annuities and voluntary
accident and health insurance 422 465 327 4,208 3,819
Amount per statutory accounting
practices $ 4,411 $ 3,404 $ 3,377 $ 20,400 $ 18,147
Dividend Limitations
There are no regulatory restrictions that limit the payment of dividends by the
Corporation, except those generally applicable to corporations incorporated in
Delaware. Dividends are payable only out of certain components of shareholders'
equity as permitted by Delaware law. However, the ability of the Corporation to
pay dividends is dependent on business conditions, income, cash requirements of
the Company, receipt of dividends from AIC and other relevant factors.
The payment of shareholder dividends by AIC without the prior approval of the
Illinois Department of Insurance ("IL DOI") is limited to formula amounts based
on net income and capital and surplus, determined in conformity with statutory
accounting practices, as well as the timing and amount of dividends paid in the
preceding twelve months. AIC paid dividends of $2.73 billion in 2019. The
maximum amount of dividends AIC will be able to pay without prior IL DOI
approval at a given point in time during 2020 is $3.73 billion, less dividends
paid during the preceding twelve months measured at that point in time. The
payment of a dividend in excess of this amount requires 30 days advance written
notice to the IL DOI. The dividend is deemed approved, unless the IL DOI
disapproves it within the 30 day notice period. Additionally, any dividend must
be paid out of unassigned surplus excluding unrealized appreciation from
investments, which for AIC totaled $12.09 billion as of December 31, 2019, and
cannot result in capital and surplus being less than the minimum amount required
by law.
Under state insurance laws, insurance companies are required to maintain paid up
capital of not less than the minimum capital requirement applicable to the types
of insurance they are authorized to write. Insurance companies are also subject
to risk-based capital ("RBC") requirements adopted by state
insurance regulators. A company's "authorized control level RBC" is calculated
using various factors applied to certain financial balances and activity.
Companies that do not maintain adjusted statutory capital and surplus at a level
in excess of the company action level RBC, which is two times authorized control
level RBC, are required to take specified actions. Company action level RBC is
significantly in excess of the minimum capital requirements. Total adjusted
statutory capital and surplus and authorized control level RBC of AIC were
$19.57 billion and $3.04 billion, respectively, as of December 31, 2019. Most of
the Corporation's insurance subsidiaries are subsidiaries of and/or reinsure all
of their business to AIC, including ALIC. AIC's subsidiaries are included as a
component of AIC's total statutory capital and surplus.
The amount of restricted net assets, as represented by the Corporation's
investment in its insurance subsidiaries, was $28.93 billion as of December 31,
2019.
Intercompany transactions
Notification and approval of intercompany lending activities is also required by
the IL DOI for transactions that exceed a level that is based on a formula using
statutory admitted assets and statutory surplus.
The Allstate Corporation 199
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2019 Form 10-K Notes to Consolidated Financial Statements
Note 17 Benefit Plans
Pension and other postretirement plans
Defined benefit pension plans cover most full-time employees, certain part-time
employees and employee-agents. Benefits under the pension plans are based upon
the employee's length of service, eligible annual compensation and, prior to
January 1, 2014, either a cash balance or final average pay formula. A cash
balance formula applies to all eligible employees hired after August 1, 2002.
Eligible employees hired before August 1, 2002 chose between the cash balance
formula and the final average pay formula. In July 2013, the Company amended its
primary plans effective January 1, 2014 to introduce a new cash balance formula
to replace the previous formulas (including the final average pay formula and
the previous cash balance formula) under which eligible employees accrue
benefits. The Company merged two of its qualified pension plans effective March
31, 2019.
The Company also provides a medical coverage subsidy for eligible employees
hired before January 1, 2003, including their eligible dependents, when they
retire and certain life insurance benefits for eligible retirees
("postretirement benefits"). In July 2013, the Company amended the plan to
eliminate the life insurance benefits effective January 1, 2014 for current
eligible employees and effective January 1, 2016 for eligible retirees who
retired after 1989. The Company continues to pay life insurance premiums for
certain retiree plaintiffs subject to a court order requiring it to do so until
such time as their lawsuit seeking to keep their life insurance benefits intact
is resolved. Qualified employees may become eligible for a medical subsidy if
they retire in accordance with the terms of the applicable plans and are
continuously insured under the Company's group plans or other approved plans in
accordance with the plan's participation requirements. The Company shares the
cost of retiree medical
benefits with non Medicare-eligible retirees based on years of service, with the
Company's share being subject to a 5% limit on future annual medical cost
inflation after retirement. For Medicare-eligible retirees, the Company provides
a fixed Company contribution based on years of service and other factors, which
is not subject to adjustments for inflation.
The Company has reserved the right to modify or terminate its benefit plans at
any time and for any reason.
Obligations and funded status
The Company calculates benefit obligations based upon generally accepted
actuarial methodologies using the projected benefit obligation ("PBO") for
pension plans and the accumulated postretirement benefit obligation ("APBO") for
other postretirement plans. Pension costs and other postretirement obligations
are determined using a December 31 measurement date. The benefit obligations
represent the actuarial present value of all benefits attributed to employee
service rendered as of the measurement date. The PBO is measured using the
pension benefit formulas and assumptions. A plan's funded status is calculated
as the difference between the benefit obligation and the fair value of plan
assets. The Company's funding policy for the pension plans is to make
contributions at a level in accordance with regulations under the Internal
Revenue Code ("IRC") and generally accepted actuarial principles. The Company's
other postretirement benefit plans are not funded.
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Notes to Consolidated Financial Statements 2019 Form 10-K
Change in projected benefit obligation, plan assets and funded status
As of December 31,
Pension Postretirement
benefits benefits
($ in millions) 2019 2018 2019 2018
Change in projected benefit obligation
Benefit obligation, beginning of year $ 6,224 $ 6,815 $ 375 $ 386
Service cost 117 110 8 7
Interest cost 240 255 14 15
Participant contributions - - 15 13
Actuarial losses (gains) 927 (255 ) 19 (4 )
Benefits paid (356 ) (646 ) (39 ) (35 )
Translation adjustment and other (13 ) (55 ) 5 (7 )
Benefit obligation, end of year $ 7,139 $ 6,224 $ 397 $ 375
Change in plan assets Fair value of plan assets, beginning of year $ 5,299 $ 6,284 Actual return on plan assets 1,235 (300 ) Employer contribution 27 16 Benefits paid (356 ) (646 ) Translation adjustment and other (13 ) (55 )
Fair value of plan assets, end of year $ 6,192 $ 5,299
Funded status (1) $ (947 ) $ (925 ) $
(397 ) $ (375 )
Amounts recognized in AOCI Unamortized pension and other postretirement prior service credit $ (142 ) $ (198 ) $
(13 ) $ (16 )
(1) The funded status is recorded within other liabilities and accrued expenses
on the Consolidated Statements of Financial Position.
Changes in items not yet recognized as a component of net cost for pension and other postretirement plans ($ in millions)
Pension benefits Postretirement benefits Items not yet recognized as a component of net cost - December 31, 2018
$ (198 ) $ (16 )
Prior service credit amortized to net cost 56 3
Items not yet recognized as a component of net cost -
December 31, 2019 $ (142 ) $ (13 )
The prior service credit is recognized as a component of net cost for pension
and other postretirement plans amortized over the average remaining service
period of active employees expected to receive benefits. The prior service
credit that will be amortized to net cost for pension and postretirement plans
in 2020 is estimated to be $56 million and $3 million, respectively.
The accumulated benefit obligation ("ABO") for all defined benefit pension plans
was $7.02 billion and $6.15 billion as of December 31, 2019 and 2018,
respectively. The ABO is the actuarial present value of all benefits attributed
by the pension benefit formula
to employee service rendered at the measurement date. However, it differs from
the PBO due to the exclusion of an assumption as to future compensation levels.
The PBO, ABO and fair value of plan assets for the Company's pension plans with
an ABO in excess of plan assets were $6.73 billion, $6.62 billion and $5.79
billion, respectively, as of December 31, 2019 and $5.99 billion, $5.93 billion
and $5.07 billion, respectively, as of December 31, 2018. Included in the
accrued benefit cost of the pension benefits are certain unfunded non-qualified
plans with accrued benefit costs of $137 million and $135 million for 2019 and
2018, respectively.
The Allstate Corporation 201
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2019 Form 10-K Notes to Consolidated Financial Statements
Components of net cost (benefit) for pension and other postretirement plans
For the years ended December 31,
Pension benefits Postretirement benefits Total Pension and Postretirement Benefits
($ in millions) 2019 2018 2017 2019 2018 2017 2019 2018 2017
Service cost $ 117 $ 110 $ 111 $ 8 $ 7 $ 8 $ 125 $ 117 $ 119
Interest cost 240 255 254 14 15 15 254 270 269
Expected return on
plan assets (403 ) (427 ) (419 ) - - - (403 ) (427 ) (419 )
Amortization of prior
service credit (56 ) (56 ) (56 ) (3 ) (21 ) (25 ) (59 ) (77 ) (81 )
Costs and expenses (102 ) (118 ) (110 ) 19 1 (2 ) (83 ) (117 ) (112 )
Remeasurement of
projected benefit
obligation 927 (255 ) 406 19 (4 ) 8 946 (259 ) 414
Remeasurement of plan
assets (832 ) 727 (631 ) - - - (832 ) 727 (631 )
Remeasurement gains
and losses 95 472 (225 ) 19 (4 ) 8 114 468 (217 )
Total net (benefit)
cost $ (7 ) $ 354 $ (335 ) $ 38 $ (3 ) $ 6 $ 31 $ 351 $ (329 )
The service cost component is the actuarial present value of the benefits
attributed by the plans' benefit formula to services rendered by the employees
during the period.
Interest cost is the increase in the PBO in the period due to the passage of
time at the discount rate. Interest cost fluctuates as the discount rate changes
and is also impacted by the related change in the size of the PBO.
The expected return on plan assets is determined as the product of the expected
long-term rate of return on plan assets and the fair value of plan assets.
Pension and other postretirement service cost, interest cost, expected return on
plan assets and
amortization of prior service credit are reported in property and casualty
insurance claims and claims expense, operating costs and expenses, net
investment income and (if applicable) restructuring and related charges on the
Consolidated Statements of Operations.
Remeasurement gains and losses relate to changes in discount rates, the
differences between actual return on plan assets and the expected long-term rate
of return on plan assets, and differences between actual plan experience and
actuarial assumptions.
Weighted average assumptions used to determine net pension cost and net postretirement benefit cost
For the years ended December 31,
Pension benefits Postretirement benefits
($ in millions) 2019 2018 2017 2019 2018 2017
Discount rate 3.70 % 4.06 % 3.96 % 3.61 % 3.95 % 3.91 %
Expected long-term rate of
return on plan assets 7.34 7.33 7.32 n/a n/a n/a
Weighted average assumptions used to determine benefit obligations
For the years ended December 31,
Pension benefits Postretirement benefits
2019 2018 2019 2018
Discount rate 3.31 % 4.31 % 3.27 % 4.22 %
The weighted average health care cost trend rate used in measuring the
accumulated postretirement benefit cost is 7.0% for 2020, gradually declining to
4.5% in 2035 and remaining at that level thereafter.
Pension plan assets In general, the Company's pension plan assets are managed in
accordance with investment policies approved by pension investment committees.
The purpose of the policies is to ensure the plans' long-term ability to meet
benefit obligations by prudently investing plan assets and Company
contributions, while taking into consideration regulatory and legal requirements
and current market conditions. The investment policies are reviewed periodically
and specify target plan asset allocation by asset category. In addition, the
policies specify various
asset allocation and other risk limits. The target asset allocation takes the
plans' funding status into consideration, among other factors, including
anticipated demographic changes or liquidity requirements that may affect the
funding status such as the potential impact of lump sum settlements as well as
existing or expected market conditions. In general, the allocation has a lower
overall investment risk when a plan is in a stronger funded status position
since there is less economic incentive to take risk to increase the expected
returns on the plan assets. The pension plans' asset exposure within each asset
category is tracked against widely accepted established benchmarks for each
asset class with limits on variation from the benchmark established in the
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Notes to Consolidated Financial Statements 2019 Form 10-K
investment policy. Pension plan assets are regularly monitored for compliance
with these limits and other risk limits specified in the investment policies.
Weighted average target asset allocation and actual percentage of plan assets by asset category
As of December 31, 2019
Target asset
allocation (1) Actual percentage of plan assets
Pension plan's asset category 2019 2019 2018
Equity securities (2) 37 - 55% 50 % 47 %
Fixed income securities 37 - 48% 38 41
Limited partnership interests 1 - 15% 10 9
Short-term investments and other - 2 3
Total without securities lending (3) 100 % 100 %
(1) The target asset allocation considers risk-based exposure while the actual
percentage of plan assets utilizes a financial reporting view excluding
exposure provided through derivatives.
(2) The actual percentage of plan assets for equity securities includes 1% of
private equity investments in both 2019 and 2018 that are subject to thelimited partnership interests target allocation and none and 4% of fixed
income mutual funds in 2019 and 2018, respectively, that are subject to the
fixed income securities target allocation.
(3) Securities lending collateral reinvestment of $258 million and $208 million
is excluded from the table above in 2019 and 2018, respectively.
The target asset allocation for an asset category may be achieved either through
direct investment holdings, through replication using derivative instruments
(e.g., futures or swaps) or net of hedges using derivative instruments to reduce
exposure to an asset category. The net notional amount of derivatives used for
replication and non-hedging strategies is limited to 115% of total plan assets.
Market performance of the different asset categories may, from time to time,
cause deviation from the target
asset allocation. The asset allocation mix is reviewed on a periodic basis and
rebalanced to bring the allocation within the target ranges.
Outside the target asset allocation, the pension plans participate in a
securities lending program to enhance returns. As of December 31, 2019, U.S.
government fixed income securities and U.S. equity securities are lent out and
cash collateral is invested in short-term investments.
The Allstate Corporation 203
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2019 Form 10-K Notes to Consolidated Financial Statements
Fair values of pension plan assets as of December 31, 2019
Quoted prices in
active markets Significant other Significant
for identical observable inputs unobservable inputs Balance as of December
($ in millions) assets (Level 1) (Level 2) (Level 3) 31, 2019
Equity securities $ 216 $ 45 $ - $ 261
Fixed income securities:
U.S. government and
agencies 237 1,096 - 1,333
Corporate - 1,060 - 1,060
Short-term investments 128 252 - 380
Free-standing
derivatives:
Assets - 5 - 5
Liabilities (2 ) (17 ) - (19 )
Total plan assets at fair
value $ 579 $ 2,441 $ - 3,020
% of total plan assets at
fair value 19.2 % 80.8 % - % 100.0 %
Investments measured
using the net asset value
practical expedient 3,418
Securities lending
obligation (1) (272 )
Derivatives counterparty
and cash collateral
netting 9
Other net plan assets (2) 17
Total reported plan
assets $ 6,192
(1) The securities lending obligation represents the plan's obligation to return
securities lending collateral received under a securities lending program.
The terms of the program allow both the plan and the counterparty the right
and ability to redeem/return the securities loaned on short notice. Due to
its relatively short-term nature, the outstanding balance of the obligation
approximates fair value.
(2) Other net plan assets represent cash and cash equivalents, interest and
dividends receivable and net receivables related to settlements of
investment transactions, such as purchases and sales.
Fair values of pension plan assets as of December 31, 2018
Quoted prices in
active markets Significant other Significant
for identical observable inputs unobservable inputs Balance as of December
($ in millions) assets (Level 1) (Level 2) (Level 3) 31, 2018
Equity securities $ 51 $ 265 $ - $ 316
Fixed income securities:
U.S. government and
agencies 172 509 - 681
Corporate - 1,479 5 1,484
Short-term investments 122 198 - 320
Free-standing
derivatives:
Assets - 19 - 19
Liabilities - (11 ) - (11 )
Total plan assets at fair
value $ 345 $ 2,459 $ 5 2,809
% of total plan assets at
fair value 12.3 % 87.5 % 0.2 % 100.0 %
Investments measured
using the net asset value
practical expedient 2,687
Securities lending
obligation (222 )
Derivatives counterparty
and cash collateral
netting (6 )
Other net plan assets 31
Total reported plan
assets $ 5,299
The fair values of pension plan assets are estimated using the same methodologies and inputs as those used to determine the fair values for the respective asset category of the Company. These methodologies and inputs are disclosed in Note 6.
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Notes to Consolidated Financial Statements 2019 Form 10-K
Rollforward of Level 3 plan assets during December 31, 2019
Actual return on plan assets:
Relating to
Balance as of Relating to assets assets still Purchases, sales Net transfers in Balance as of
December 31, sold during the held at the and settlements, and/or (out) of December 31,
($ in millions) 2018 period reporting date net Level 3 2019
Equity
securities $ - $ - $ - $ - $ - $ -
Fixed income
securities:
Corporate 5 - - (5 ) - -
Total Level 3
plan assets $ 5 $ - $ - $ (5 ) $ - $ -
Rollforward of Level 3 plan assets during December 31, 2018
Actual return on plan assets:
Relating to Net transfers
Balance as of Relating to assets assets still Purchases, sales in and/or Balance as of
December 31, sold during the held at the and settlements, (out) of December 31,
($ in millions) 2017 period reporting date net Level 3 2018
Equity
securities $ 29 $ - $ 3 $ - $ (32 ) $ -
Fixed income
securities:
Corporate 10 - - (5 ) - 5
Total Level 3
plan assets $ 39 $ - $ 3 $ (5 ) $ (32 ) $ 5
Rollforward of Level 3 plan assets during December 31, 2017
Actual return on plan assets:
Relating to Purchases,
Balance as of Relating to assets assets still sales and Net transfers in Balance as of
December 31, sold during the held at the settlements, and/or (out) of December 31,
($ in millions) 2016 period reporting date net Level 3 2017
Equity
securities $ - $ - $ - $ 29 $ - $ 29
Fixed income
securities:
Corporate 10 - - - - 10
Total Level 3
plan assets $ 10 $ - $ - $ 29 $ - $ 39
The expected long-term rate of return on plan assets reflects the average rate
of earnings expected on plan assets. The Company's assumption for the expected
long-term rate of return on plan assets is reviewed annually giving
consideration to appropriate financial data including, but not limited to, the
plan asset allocation, forward-looking expected returns for the period over
which benefits will be paid, historical returns on plan assets and other
relevant market data. Given the long-term forward-looking nature of this
assumption, the actual returns in any one year do not immediately result in a
change. In giving consideration to the targeted plan asset allocation, the
Company evaluated returns using the same sources it has used historically which
include: historical average asset class returns from an independent nationally
recognized vendor of this type of data blended together using the asset
allocation policy weights for the Company's pension plans; asset class return
forecasts from a large global independent asset management firm that specializes
in providing multi-asset class investment fund products which were blended
together using the asset allocation policy weights; and expected portfolio
returns from a proprietary simulation methodology of a widely recognized
external investment consulting firm
that performs asset allocation and actuarial services for corporate pension plan
sponsors. This same methodology has been applied on a consistent basis each
year. All of these were consistent with the Company's weighted average long-term
rate of return on plan assets assumption of 7.34% used for 2019 and an estimate
of 7.08% that will be used for 2020. As of the 2019 measurement date, the
arithmetic average of the annual actual return on plan assets for the most
recent 10 and 5 years was 10.0% and 9.6%, respectively.
Cash flows There was no required cash contribution necessary to satisfy the
minimum funding requirement under the IRC for the tax qualified pension plan for
the year ended December 31, 2019.
The Company currently plans to contribute $25 million to its unfunded
non-qualified plans and zero and $4 million to its primary and other qualified
funded pension plans, respectively, in 2020.
The Company contributed $24 million and $22 million to the postretirement
benefit plans in 2019 and 2018, respectively. Contributions by participants were
$15 million and $13 million in 2019 and 2018, respectively.
The Allstate Corporation 205
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2019 Form 10-K Notes to Consolidated Financial Statements
Estimated future benefit payments expected to be paid in the next 10 years
As of December 31, 2019
Postretirement
($ in millions) Pension benefits benefits
2020 $ 600 $ 23
2021 629 24
2022 636 26
2023 634 27
2024 626 27
2025-2029 2,401 136
Total benefit payments $ 5,526 $ 263
Allstate 401(k) Savings Plan
Employees of the Company, with the exception of those employed by the Company's
international, SquareTrade, InfoArmor and Esurance subsidiaries, are eligible to
become members of the Allstate 401(k) Savings Plan ("Allstate Plan"). The
Company's contributions are based on the Company's matching obligation. The
Company is responsible for funding its anticipated contribution to the Allstate
Plan, and has used the remaining ESOP shares to pre-fund a portion of the
contribution. In connection with the Allstate Plan, the Company had a note from
the ESOP. On
December 31, 2019, the note matured and the remaining principal balance of $2
million was repaid. The Company records dividends on the ESOP shares in retained
income and all the shares held by the ESOP are included in basic and diluted
weighted average common shares outstanding.
The Company's contribution to the Allstate Plan was $93 million, $89 million and
$81 million in 2019, 2018 and 2017, respectively. These amounts were reduced by
the ESOP benefit.
ESOP benefit
For the years December 31,
($ in millions) 2019 2018 2017
Interest expense recognized by ESOP $ - $ - $ -
Less: dividends accrued on ESOP shares (1 ) (1 ) (1 )
Cost of shares allocated 3 - 3
Compensation expense 2 (1 ) 2
Reduction of defined contribution due to ESOP 43 1 38
ESOP benefit $ (41 ) $ (2 ) $ (36 )
The Company made $2 million, zero and $1 million in contributions to the ESOP in 2019, 2018 and 2017, respectively. As of December 31, 2019, there were 0.4 million, 39 million and zero of the remaining ESOP shares that have been committed to be released, allocated and unallocated, respectively.
Allstate's Canadian, SquareTrade, Esurance and Answer Financial subsidiaries sponsor defined contribution plans for their eligible employees. Expense for these plans was $15 million, $15 million and $12 million in 2019, 2018 and 2017, respectively. Effective January 1, 2020, Answer Financial employees will be included in the Allstate Plan.
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Notes to Consolidated Financial Statements 2019 Form 10-K
Note 18 Equity Incentive Plans
The Company currently has equity incentive plans under which the Company grants
nonqualified stock options, restricted stock units and performance stock awards
to certain employees and directors of the Company. The total compensation
expense related to equity awards was $105 million, $125 million and $106 million
and the total income tax benefits were $17 million, $22 million and $22 million
for 2019, 2018 and 2017, respectively. Total cash received from the exercise of
options was $154 million, $92 million and $178 million for 2019, 2018 and 2017,
respectively. Total tax benefit realized on options exercised and the release of
stock restrictions was $43 million, $28 million and $96 million for 2019, 2018
and 2017, respectively.
The Company records compensation expense related to awards under these plans
over the shorter of the period in which the requisite service is rendered or
retirement eligibility is attained. Compensation expense for performance share
awards is based on the probable number of awards expected to vest using the
performance level most likely to be achieved at the end of the performance
period. As of December 31, 2019, total unrecognized compensation cost related to
all nonvested awards was $79 million, of which $29 million related to
nonqualified stock options which is expected to be recognized over the weighted
average vesting period of 1.68 years, $21 million related to restricted stock
units which is expected to be recognized over the weighted average vesting
period of 1.69 years and $29 million related to performance stock awards which
is expected to be recognized over the weighted average vesting period of
1.55 years.
Options are granted to employees with exercise prices equal to the closing share
price of the Company's common stock on the applicable grant date. Options
granted to employees on or after February 18, 2014 vest ratably over a
three-year period. Options granted prior to February 18, 2014 vest 50% on the
second anniversary of the grant date and 25% on each of the third and fourth
anniversaries of the grant date. Vesting is subject to continued service, except
for employees who are retirement eligible and in certain other limited
circumstances. Options may be exercised once vested and will expire no later
than ten years after the date of grant.
Restricted stock units for directors vest immediately and convert into shares of
stock on the earlier of the day of the third anniversary of the grant
date or the date the director's service terminates, unless a deferred period of
restriction is elected. Restricted stock units granted to directors prior to
June 1, 2016 convert upon leaving the board. Restricted stock units granted to
employees on or after February 18, 2014 vest on the day prior to the third
anniversary of the grant date. Restricted stock units granted to employees
subsequently convert into shares of stock on the day of the respective
anniversary of the grant date. Vesting is subject to continued service, except
for employees who are retirement eligible and in certain other limited
circumstances.
Performance stock awards vest into shares of stock on the day prior to the third
anniversary of the grant date. Vesting of the number of performance stock awards
earned based on the attainment of performance goals for each of the performance
periods is subject to continued service, except for employees who are retirement
eligible and in certain other limited circumstances. Performance stock awards
subsequently convert into shares of stock in full the day of the third
anniversary of the grant date.
Since 2001, a total of 110.8 million shares of common stock were authorized to
be used for awards under the plans, subject to adjustment in accordance with the
plans' terms. As of December 31, 2019, 24.0 million shares were reserved and
remained available for future issuance under these plans. The Company uses its
treasury shares for these issuances.
The fair value of each option grant is estimated on the date of grant using a
binomial lattice model. The Company uses historical data to estimate option
exercise and employee termination within the valuation model. In addition,
separate groups of employees that have similar historical exercise behavior are
considered separately for valuation purposes. The expected term of options
granted is derived from the output of the binomial lattice model and represents
the period of time that options granted are expected to be outstanding. The
expected volatility of the price of the underlying shares is implied based on
traded options and historical volatility of the Company's common stock. The
expected dividends were based on the current dividend yield of the Company's
stock as of the date of the grant. The risk-free rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant.
Option grant assumptions
2019 2018 2017
Weighted average expected term 5.8 years 5.7 years 6.1 years
Expected volatility 15.6 - 28.9% 15.6 - 30.7% 15.7 - 32.7%
Weighted average volatility 18.4 % 19.8 % 21.0 %
Expected dividends 1.9 - 2.2% 1.5 - 2.2% 1.4 - 1.9%
Weighted average expected dividends 2.2 % 2.0 % 1.9 %
Risk-free rate 1.3 - 2.7% 1.3 - 3.2% 0.5 - 2.5%
The Allstate Corporation 207
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2019 Form 10-K Notes to Consolidated Financial Statements
Summary of option activity
For the year ended December 31, 2019
Weighted
average
Aggregate remaining
Number Weighted average intrinsic value contractual
(in 000s) exercise price (in 000s) term (years)
Outstanding as of January
1, 2019 11,730 $ 65.82
Granted 2,802 92.66
Exercised (2,622 ) 58.70
Forfeited (235 ) 89.20
Expired (4 ) 31.78
Outstanding as of
December 31, 2019 11,671 73.40 $ 455,691 6.3
Outstanding, net of
expected forfeitures 11,547 73.20 453,268 6.3
Outstanding, exercisable
("vested") 6,744 60.81 348,285 4.8
The weighted average grant date fair value of options granted was $14.96, $17.03
and $14.60 during 2019, 2018 and 2017, respectively. The intrinsic value, which
is the difference between the fair value and the exercise price, of options
exercised was $114 million, $72 million and $199 million during 2019, 2018 and
2017, respectively.
Changes in restricted stock units
For the year ended December 31, 2019
Number Weighted average grant
(in 000s) date fair value
Nonvested as of January 1, 2019 957 $ 74.58
Granted 271 92.97
Vested (308 ) 62.89
Forfeited (43 ) 84.75
Nonvested as of December 31, 2019 877 83.87
The fair value of restricted stock units is based on the market value of the
Company's stock as of the date of the grant. The market value in part reflects
the payment of future dividends expected. The weighted average grant date fair
value of restricted stock units granted was $92.97, $93.16 and $80.12 during
2019, 2018 and 2017, respectively. The total fair value of restricted stock
units vested was $29 million, $47 million and $58 million during 2019, 2018 and
2017, respectively.
Changes in performance stock awards
For the year ended December 31, 2019
Number Weighted average grant
(in 000s) date fair value
Nonvested as of January 1, 2019 1,248 $ 77.35
Granted 415 92.49
Adjustment for performance achievement 267 62.32
Vested (702 ) 62.32
Forfeited (47 ) 87.83
Nonvested as of December 31, 2019 1,181 87.78
The change in performance stock awards comprises those initially granted in 2019
and the adjustment to previously granted performance stock awards for
performance achievement. The fair value of performance stock awards is based on
the market value of the Company's stock as of the date of the grant. The market
value in part reflects the payment of future dividends expected. The weighted
average grant date fair value of performance stock awards granted was $92.49,
$92.88 and $78.47 during 2019, 2018 and 2017, respectively. The total fair value
of performance stock awards vested was $65 million, $15 million and $17 million
during 2019, 2018 and 2017, respectively.
The Company recognizes all tax effects related to share-based payments at
settlement or expiration through the income statement.
208 www.allstate.com
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Notes to Consolidated Financial Statements 2019 Form 10-K
Note 19 Supplemental Cash Flow Information
Non-cash investing activities include $198 million, $94 million and $106 million
related to mergers and exchanges completed with equity securities, fixed income
securities and limited partnerships, and modifications of certain mortgage loans
and other investments in 2019, 2018 and 2017, respectively.
Non-cash financing activities include $50 million, $32 million and $43 million
related to the issuance of Allstate common shares for vested equity awards in
2019, 2018 and 2017, respectively. Non-cash financing activities also include
$90 million related to debt acquired in conjunction with purchases of
investments in 2017.
Cash flows used in operating activities in the Consolidated Statements of Cash
Flows include cash paid for operating leases related to amounts included
in the measurement of lease liabilities of $155 million for the twelve months
ended December 31, 2019. Non-cash operating activities include $604 million
related to ROU assets obtained in exchange for lease obligations, including $488
million related to the adoption of new guidance related to accounting for
leases, for the twelve months ended December 31, 2019.
Liabilities for collateral received in conjunction with the Company's securities
lending program and OTC and cleared derivatives are reported in other
liabilities and accrued expenses or other investments. The accompanying cash
flows are included in cash flows from operating activities in the Consolidated
Statements of Cash Flows along with the activities resulting from management of
the proceeds as follows:
For the years ended December 31,
($ in millions) 2019 2018 2017
Net change in proceeds managed
Net change in fixed income securities $ 80 $ 234 $ 259
Net change in short-term investments (451 ) (568 ) (255 )
Operating cash flow (used) provided (371 ) (334 ) 4
Net change in cash - - 1
Net change in proceeds managed $ (371 ) $ (334 ) $ 5
Net change in liabilities Liabilities for collateral, beginning of year $ (1,458 ) $ (1,124 ) $ (1,129 ) Liabilities for collateral, end of year (1,829 ) (1,458 ) (1,124 ) Operating cash flow provided (used) $ 371 $ 334
$ (5 )
Note 20 Other Comprehensive Income
Components of other comprehensive income (loss) on a pre-tax and after-tax basis
For the years ended December 31,
($ in millions) 2019 2018 2017
Pre-tax Tax After-tax Pre-tax Tax After-tax Pre-tax Tax After-tax
Unrealized net holding
gains and losses arising
during the period, net of
related offsets $ 2,807 $ (592 ) $ 2,215 $ (1,142 ) $ 241 $ (901 ) $ 866 $ (304 ) $ 562
Less: reclassification
adjustment of realized
capital gains and losses 413 (87 ) 326 (186 ) 39 (147 ) 374 (131 ) 243
Unrealized net capital
gains and losses 2,394 (505 ) 1,889 (956 ) 202 (754 ) 492 (173 ) 319
Unrealized foreign
currency translation
adjustments (13 ) 3 (10 ) (61 ) 13 (48 ) 69 (24 ) 45
Unamortized pension and
other postretirement
prior service credit (59 ) 12 (47 ) (77 ) 18 (59 ) (80 ) 28 (52 )
Other comprehensive
income (loss) $ 2,322 $ (490 ) $ 1,832 $ (1,094 ) $ 233 $ (861 ) $ 481 $ (169 ) $ 312
The Allstate Corporation 209
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2019 Form 10-K Notes to Consolidated Financial Statements
Note 21 Quarterly Results (unaudited)
First Quarter Second Quarter Third Quarter Fourth Quarter
($ in millions, except
per share data) 2019 2018 2019 2018 2019 2018 2019 2018
Revenues $ 10,990 $ 9,770 $ 11,144 $ 10,099 $ 11,069 $ 10,465 $ 11,472 $ 9,481
Net income (loss)
applicable to common
shareholders 1,261 977 821 678 889 942 1,707 (585 )
Earnings per common
share - Basic 3.79 2.76 2.47 1.94 2.71 2.72 5.32 (1.71 )
Earnings per common
share - Diluted 3.74 2.71 2.44 1.91 2.67 2.68 5.23 (1.71 )
The Company changed its accounting principle for recognizing actuarial gains and
losses and expected return on plan assets for its pension and other
postretirement plans to a more preferable policy under U.S. GAAP. See Note 2 for
discussion of the change in accounting principle and further information
regarding the impact of the change on the consolidated financial statements.
Impact of change First Quarter Second Quarter Third Quarter Fourth Quarter
($ in millions, except
per share data) 2019 2018 2019 2018 2019 2018 2019 2018
Revenues $ - $ - $ - $ - $ - $ - $ - $ -
Net income (loss)
applicable to common
shareholders 5 31 (69 ) 41 (140 ) 109 240 (273 )
Earnings per common
share - Basic 0.01 0.09 (0.21 ) 0.12 (0.43 ) 0.31 0.75 (0.80 )
Earnings per common
share - Diluted 0.02 0.08 (0.20 ) 0.11 (0.42 ) 0.31 0.73 (0.80 )
210 www.allstate.com
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2019 Form 10-K
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
The Allstate Corporation
Northbrook, Illinois 60062
Opinions on the Financial Statements and Internal Control over Financial
Reporting
We have audited the accompanying Consolidated Statements of Financial Position
of The Allstate Corporation and subsidiaries (the "Company") as of December 31,
2019 and 2018, the related Consolidated Statements of Operations, Comprehensive
Income, Shareholders' Equity, and Cash Flows for each of the three years in the
period ended December 31, 2019, and the related notes and the schedules listed
in the Index at Item 15 (collectively referred to as the "financial
statements"). We also have audited the Company's internal control over financial
reporting as of December 31, 2019, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO").
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2019 and 2018, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2019, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2019, based on
criteria established in Internal Control - Integrated Framework (2013) issued by
the COSO.
Change in Accounting Principles
As discussed in Note 2 to the financial statements, the Company elected during
2019 to change its principles of accounting for recognizing pension and other
postretirement benefit plan costs. The Company adopted this change on a
retrospective basis. Also discussed in Note 2 to the financial statements, the
Company changed its presentation and method of accounting for the recognition
and measurement of financial assets and financial liabilities on January 1,
2018, due to the adoption of FASB Accounting Standards Update No. 2016-01,
Financial Instruments - Overall (Subtopic 825-10).
Basis for Opinions
The Company's management is responsible for these financial statements, for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Item 9A. Controls and Procedures. Our
responsibility is to express an opinion on these financial statements and an
opinion on the Company's internal control over financial reporting based on our
audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) ("PCAOB") and are required to be
independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess
the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures to respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements. Our audits also included evaluating
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial statements. Our
audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
The Allstate Corporation 211
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2019 Form 10-K
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the
current-period audit of the financial statements that were communicated or
required to be communicated to the audit committee and that (1) relate to
accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on
the financial statements, taken as a whole, and we are not, by communicating the
critical audit matters below, providing separate opinions on the critical audit
matters or on the accounts or disclosures to which they relate.
Reserve for Property and Casualty Insurance Claims and Claims Expense - Refer to
Notes 2 and 8 to the Financial Statements
Critical Audit Matter Description
The Company establishes reserves for property and casualty insurance claims and
claims expense on reported and unreported claims of insured losses. Using
established industry and actuarial best practices as well as the Company's
historical claims experience, the reserve for property and casualty insurance
claims and claims expense is estimated based on (i) claims reported, (ii) claims
incurred but not reported, and (iii) projections of claim payments to be made in
the future.
Given the subjectivity of estimating claims incurred but not reported and
projections of claim payments to be made in the future, particularly those with
payout requirements over a longer period of time, the related audit effort in
evaluating the reserve for property and casualty insurance claims and claims
expense required a high degree of auditor judgment and an increased extent of
effort, including involvement of our actuarial specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the reserve for property and casualty
insurance claims and claims expense included the following:
• We tested the effectiveness of controls related to the reserve for
property and casualty insurance claims and claims expense, including those
over the Company's estimates and projections.
• We evaluated the methods and assumptions used by the Company to estimate
the reserve for property and casualty insurance claims and claims expense
by:
• Testing the underlying data that served as the basis for the
actuarial analysis, including historical claims, to test that the
inputs to the actuarial estimate were complete and accurate.
• Comparing the Company's prior year assumptions of expected
development and ultimate loss to actual losses incurred during the
year to assess the reasonableness of those assumptions, including
consideration of potential bias, in the determination of the reserve
for property and casualty claims and claims expense.
• With the assistance of our actuarial specialists, we developed
independent estimates for the reserve for property and casualty
insurance claims and claims expense, utilizing loss data and
industry claim development factors, and compared our estimates to
management's estimates.
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2019 Form 10-K
Premium Deficiency Reserve for Life-Contingent Immediate Annuities - Refer to
Notes 2 and 9 to the Financial Statements.
Critical Audit Matter Description
Due to the long-term nature of life-contingent immediate annuities, benefits are
payable over many years. The Company establishes reserves as the present value
of future expected benefits to be paid, reduced by the present value of future
expected net premiums. Long-term actuarial assumptions of future investment
yields and mortality are used when establishing the reserve. These assumptions
are established at the time the policy is issued and are generally not changed
during the life of the policy. The Company periodically performs a gross premium
valuation ("GPV") analysis to review the adequacy of reserves using actual
experience and current assumptions. If actual experience and current assumptions
are adverse compared to the original assumptions and a premium deficiency is
determined to exist, any remaining unamortized deferred acquisition costs
("DAC") balance would be expensed to the extent not recoverable and the
establishment of a premium deficiency reserve may be required for any remaining
deficiency. As of December 31, 2019, the Company's GPV analysis indicated that
reserves for these policies were sufficient and therefore, the Company has not
established a premium deficiency reserve.
The Company also reviews these policies for circumstances where projected
profits would be recognized in early years followed by projected losses in later
years through a profits followed by losses ("PFBL") analysis. If this
circumstance exists, the Company will accrue a liability, during the period of
profits, to offset the losses at such time as the future losses are expected to
commence using a method updated prospectively over time. As of December 31,
2019, the Company's PFBL analysis did not indicate periods of profits followed
by periods of losses and therefore, the Company has not established a PFBL
reserve.
Given the subjectivity involved in selecting the current assumptions for
projected investment yields and mortality, and the sensitivity of the estimate
to these assumptions, the related audit effort in evaluating the premium
deficiency reserve and PFBL analysis for life-contingent immediate annuities
required a high degree of auditor judgment and an increased extent of effort,
including involvement of our actuarial specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the premium deficiency reserve,
including the GPV and PFBL analysis for life-contingent immediate annuities,
included the following:
• We tested the effectiveness of controls over management's premium
deficiency reserve and GPV and PFBL analysis, including those over the
Company's selection of assumptions.
• With the assistance of our actuarial specialists, we evaluated thereasonableness of assumptions and their incorporation into the projection
model used by the Company to perform its premium deficiency reserve
analysis by:
• Testing the underlying data that served as the basis for the
assumptions setting and the underlying data used in the projection
model to ensure the inputs were complete and accurate.• Comparing mortality assumptions selected to actual historical experience.
• Comparing projected investment yields selected to historical
portfolio returns, evaluating for consistency with current
investment portfolio yields and the Company's long-termreinvestment
strategy, and comparing to independently obtained market data.
• With the assistance of our actuarial specialists, we independently
calculated the gross premium valuation reserves from the Company'sprojection model for a sample of contracts and compared our estimates to
management's estimates.
• With the assistance of our actuarial specialists, we evaluated theaggregate cash flows generated through the Company's premium deficiency
reserve testing for evidence of potential PFBL scenarios that would
require the accrual of additional reserves to cover such future losses.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
February 21, 2020
We have served as the Company's auditor since 1992.
The Allstate Corporation 213
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2019 Form 10-K
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