The Company calculates benefit obligations based upon generally accepted actuarial methodologies using the PBO for pension plans and the APBO for other postretirement plans. Pursuant to the adoption of SFAS No. 158 as described in Note 2, the determination of pension costs and other postretirement obligations as of December 31, 2008 are determined using a December 31 measurement date. For December 31, 2007 and prior periods, an October 31 measurement date was utilized. 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 formula and assumptions as to future compensation levels. 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 annual contributions at a level that is in accordance with regulations under the Internal Revenue Code ("IRC") and generally accepted actuarial principles. The Company's postretirement benefits plans are not funded.
The increase of $1.26 billion in the pension net actuarial loss during 2008 is related to asset returns being less than expected returns partially offset by an increase in the discount rate. The majority of the $2.06 billion net actuarial pension benefit losses not yet recognized as a component of net periodic pension cost in 2008 reflects the effect of unfavorable equity market conditions on the value of the pension plan assets, and to a lesser extent decreases in the discount rate in prior years. The increase of $161 million in the OPEB net actuarial gain during 2008 is primarily related to an increase in the discount rate and favorable claims experience.
Items not yet recognized as a component of net periodic cost-January 1, 2008
The accumulated benefit obligation ("ABO") for all defined benefit pension plans was $3.93 billion and $4.42 billion at December 31, 2008 and 2007, 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 $4.57 billion, $3.93 billion, and $3.40 billion, respectively as of December 31, 2008, and $175 million, $175 million, and $5 million, respectively as of December 31, 2007. Included in the accrued benefit cost of the pension benefits are certain unfunded non-qualified plans with accrued benefit costs of $198 million and $170 million for 2008 and 2007, respectively.
Effects of changing the measurement date pursuant to SFAS No. 158:
The components of net periodic cost for all plans for the years ended December 31 are as follows:
Weighted average assumptions used to determine benefit obligations at December 31 are listed in the following table. Assumptions for December 31, 2008 are based on a December 31 measurement date. Assumptions for December 31, 2007 and prior are based on an October 31 measurement date.
The weighted average health care cost trend rate used in measuring the accumulated postretirement benefit cost is 8.0% for 2009, gradually declining to 5.0% in 2015 and remaining at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement health care plans. A one percentage-point increase in assumed health care cost trend rates would increase the total of the service and interest cost components of net periodic benefit cost of other postretirement benefits and the APBO by $6 million and $46 million, respectively. A one percentage-point decrease in assumed health care cost trend rates would decrease the total of the service and interest cost components of net periodic benefit cost of other postretirement benefits and the APBO by $5 million and $42 million, respectively.
The pension plans target percentage of plan assets and the actual percentage of plan assets, by asset category at December 31 are as follows:
Pension plan assets did not include any of the Company's common stock at December 31, 2008. At December 31, 2007, pension plan assets included $11 million of the Company's common stock.
There was no required cash contribution necessary to satisfy the minimum funding requirement under the IRC for the tax qualified pension plans as of December 31, 2008. The Company currently plans to contribute $292 million to its pension plans in 2009.
The Company contributed $40 million and $45 million to the postretirement benefit plans in 2008 and 2007, respectively. Contributions by participants were $37 million and $41 million in 2008 and 2007.
Employees of the Company, with the exception of those employed by the Company's international subsidiaries and Sterling Collision Centers ("Sterling") subsidiary, are eligible to become members of The Savings and Profit Sharing Fund of Allstate Employees ("Allstate Plan"). The Company's contributions are based on the Company's matching obligation and certain performance measures. The Company is responsible for funding its anticipated contribution to the Allstate Plan, and may, at the discretion of management, use the ESOP to pre-fund certain portions. In connection with the Allstate Plan, the Company has a note from the ESOP with a principal balance of $22 million at December 31, 2008. The ESOP note has a fixed interest rate of 7.9% and matures in 2019. 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 $48 million, $124 million and $127 million in 2008, 2007 and 2006, respectively. These amounts were reduced by the ESOP benefit computed for the years ended December 31 as follows:
Allstate has profit sharing plans for eligible employees of its Canadian insurance subsidiaries and Sterling. Profit sharing expense for these plans was $2 million, $8 million and $9 million in 2008, 2007 and 2006, respectively.
A total of 49.6 million shares of common stock were originally authorized to be used for awards under the plans, subject to adjustment in accordance with the plans' terms. At December 31, 2008, 12.7 million shares were reserved and remained available for future issuance under these plans. The Company uses its treasury shares for these issuances.
The changes in restricted stock and restricted stock units are shown in the following table for the year ended December 31, 2008.
Allstate Protection sells principally private passenger auto and homeowners insurance in the United States and Canada. Revenues from external customers generated outside the United States were $665 million, $668 million and $614 million for the years ended December 31, 2008, 2007 and 2006, respectively. The Company evaluates the results of this segment based upon underwriting results.
Allstate Financial sells life insurance, retirement and investment products and voluntary accident and health insurance to individual and institutional customers. The principal individual products are fixed annuities; interest-sensitive, traditional and variable life insurance; and voluntary accident and health insurance. The principal institutional product is funding agreements backing medium-term notes issued to institutional and individual investors. Banking products and services are also offered to customers through the Allstate Bank. Revenues from external customers generated outside the United States were immaterial with respect to Allstate Financial total revenues for the years ended December 31, 2008, 2007 and 2006. The Company evaluates the results of this segment based upon operating income.
The accounting policies of the business segments are the same as those described in Note 2. The effects of certain inter-segment transactions are excluded from segment performance evaluation and therefore eliminated in the segment results.
The measure of segment profit or loss used by Allstate's management in evaluating performance is underwriting income (loss) for the Allstate Protection and Discontinued Lines and Coverages segments and operating income (loss) for Allstate Financial and Corporate and Other segments. A reconciliation of these measures to net income is provided below.
DAC and DSI accretion relating to realized capital gains and losses, after-tax
We have audited the accompanying Consolidated Statements of Financial Position of The Allstate Corporation and subsidiaries (the "Company") as of December 31, 2008 and 2007, and the related Consolidated Statements of Operations, Comprehensive Income, Shareholders' Equity, and Cash Flows for each of the three years in the period ended December 31, 2008. We also have audited the Company's internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Allstate Corporation and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, 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, 2008, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.