Our home office complex is owned and located in Northbrook, Illinois. As of December 31, 2019, the home office complex consists of several buildings totaling 1.9 million square feet of office space on a 186-acre site.
Outside North America, we own one and lease three properties in Northern Ireland comprising approximately 220 thousand square feet. We also have two leased facilities in India for approximately 434 thousand square feet and two leased facilities in London for 7,182 square feet.
The following discussion highlights significant factors influencing the consolidated financial position and results of operations of The 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, filed February 15, 2019, and the Company’s Current Report on Form 8-K filed on May 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.
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 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 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.
Catastrophe losses were $2.56 billion in 2019 compared $2.86 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.
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.
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.
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.
Investment expense includes $51 million and $45 million of investee level 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.
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.
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 2019 column presents changes in 2019 compared to 2018. The 2018 column presents changes in 2018 compared to 2017.
Auto insurance premiums written increased 4.7% or $1.10 billion in 2019 compared to 2018.
Homeowners insurance premiums written increased 6.1% or $467 million in 2019 compared to 2018.
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.
Write homeowners coverage through our excess and surplus lines carrier, North Light Specialty Insurance Company (“North Light”), which includes earthquake coverage (other than fire following earthquakes) that is currently ceded via quota share reinsurance.
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.
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
assessments from the CEA under certain circumstances as explained in Note 14 of the consolidated financial statements. While North Light writes property policies in California, which can include earthquake coverage, this coverage is 100% ceded via quota share reinsurance.
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 2017 Northern California wildfires and the 2018 Camp 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.
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 ended December 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.
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:
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.
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.
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.
(1) The 2019 column presents changes in 2019 compared to 2018. The 2018 column presents changes in 2018 compared to 2017.
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.
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 of December 31, 2019, Esurance continues to write homeowners insurance in
PIF increased 10.5% or 10 thousand in 2019 compared to 2018.
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.
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.
Encompass announced a plan to exit business in Massachusetts in the second 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 Massachusetts and North Carolina, the renewal ratios were 76.5 points in 2018 compared to 74.5 points in 2017.
approximately 70% of premiums written. PIF decreased 1.8% or 9 thousand in 2019 compared to 2018.
Encompass announced a plan to exit business in Massachusetts in the second 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 Massachusetts and North Carolina, the renewal ratios were 80.8 points in 2018 compared to 79.0 points in 2017.
states representing approximately 70% of premiums written. PIF decreased 2.1% or 5 thousand in 2019 compared to 2018.
Other revenue is deducted from operating costs and expenses in the expense ratio calculation.
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.
Expense ratio decreased 1.3 points in 2019 compared to 2018, primarily due to lower technology and employee-related costs.
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.
(1) Gross reserves as of December 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 of December 31, 2018, comprised 67% case reserves and 33% IBNR reserves.
(3) Gross reserves as of December 31, 2019 comprised 34% case reserves and 66% IBNR reserves. In 2019, total gross payments from case reserves were $43 million. Reserves as of December 31, 2018, comprised 34% case reserves and 66% IBNR reserves.
(6) Ceded reserves as of December 31, 2019 comprised 78% case reserves and 22% IBNR reserves. In 2019, reinsurance billings of ceded case reserves were $2 million. Reserves as of December 31, 2018, comprised 78% case reserves and 22% IBNR reserves.
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.
2018 related to organizational changes at Allstate Roadside Services and 2017 related to a one-time vendor contract termination.
InfoArmor, which sells identity protection plans using the Allstate Identity Protection name was acquired on October 5, 2018.
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 from SquareTrade 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.
Other revenue increased $106 million in 2019 compared to 2018, primarily due to the acquisition of Allstate Identity Protection and Allstate Protection Plans' acquisitions of PlumChoice 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.
During 2019, we 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. This resulted in a $55 million impairment in 2019 of the intangible asset related to the trade name established in 2017 when SquareTrade was acquired.
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.
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.
Reserve reestimates as a % impact on consolidated net income applicable to common shareholders
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.
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.
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.
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.
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
Other reinsurance recoverables primarily relate to asbestos, environmental and other liability exposures as well as commercial lines, including shared economy.
As of December 31, 2019, case reserves for Lloyd’s were 68% of the reinsurance recoverable for unpaid claims.
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.
Decline reflects reestimates in claims and claims expense related to the 2018 Camp 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
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.
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.
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.
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.
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.
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.
Valuation changes on derivatives embedded in equity-indexed universal life contracts that are not hedged
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.
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 the
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
As of December 31, 2019 and 2018, the other category includes $12 million and $9 million, respectively, of recoverables due from reinsurers rated A- or better by S&P.
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.
Premiums and contract charges increased 0.9% or $10 million in 2019 compared to 2018, primarily related to growth in hospital indemnity (included in other health), critical illness and life products.
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.
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.
Operating costs and expenses increased 2.5% or $7 million in 2019 compared to 2018, primarily due to higher technology and employee-related costs.
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.
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.
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.
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.
Operating costs and expenses decreased 6.5% or $2 million in 2019 compared to 2018, primarily due to lower technology and employee-related costs.
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.
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.
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.
Contractual maturities and yields of fixed income securities and mortgage loans for the next three years
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.
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.
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.
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).
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.
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
Equity securities primarily include common stocks, exchange traded and mutual funds, non-redeemable preferred stocks and real estate
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.
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.
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.
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 December 31, 2019 were included in our portfolio monitoring process for determining whether declines in value were other than temporary.
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 of December 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 of December 31, 2019.
Net investment income decreased 2.5% or $81 million in 2019 compared to 2018, primarily due to lower performance-based results, primarily from limited partnerships, partially offset by higher market-based income.
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.
Realized capital gains in 2019 related primarily to increased valuation of equity investments and gains on sales of fixed income securities.
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 the U.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 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.
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
For our corporate debt, we monitor market interest rates and evaluate refinancing opportunities
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.
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.
Increase in fair value of the assets net of liabilities (2)
Estimate excludes traditional and interest-sensitive life insurance and accident 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.
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.
Reflects effects of tactical positions that include the use of credit default swaps to manage spread risk.
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.
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.
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.
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.
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.
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 May 16, 2019, we repaid $317 million of 7.450% Senior Notes, Series B, at maturity.
In May 2019, A.M. Best affirmed The Allstate Corporation’s debt and short-term issuer ratings of a and AMB-1+, respectively, and the insurer financial strength ratings of A+ for Allstate Insurance Company (“AIC”), Allstate Life Insurance Company (“ALIC”), and Allstate Assurance Company (“AAC”). The outlook for the ratings is stable.
In July 2019, Moody’s affirmed The 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 affirmed The 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.
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 in Florida, 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.
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.
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.
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.
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”).
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 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.
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.
Includes $1.46 billion of liabilities with a contractual surrender charge of less than 5% of the account balance.
$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.
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.
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.
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.
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 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.
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.
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.
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.
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.
Scenario analysis: measures material adverse outcomes such as shock scenarios applied to credit, public and private equity markets.
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.
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.
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.
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 each fixed income security in an unrealized loss position, we assess whether management with the
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
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.
The determination of the amount of other-than-temporary impairment is an inherently subjective
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
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.
Each reporting period, DAC amortization is recognized in proportion to AGP for that period adjusted for interest on the prior period DAC balance.
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.
benefit margin to amortization of the DAC balance as of December 31, 2019.
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.
Estimating the fair value of reporting units is a subjective process that involves the use of significant estimates by management. Changes in market inputs
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.
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.
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.
Changes in homeowners current year claim severity are generally influenced by inflation in the cost
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.
estimates is reported in the Claims and Claims Expense Reserves section of the MD&A.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
Sensitivity of assumption changes included in the calculation of net cost as of December 31, 2019
Property and casualty insurance premiums (net of reinsurance ceded and indemnification programs of $1,122, $1,016 and $971)
Life premiums and contract charges (net of reinsurance ceded of $285, $290 and $303)
Fixed income securities, at fair value (amortized cost $56,293 and $57,134)
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
Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 319 million and 332 million shares outstanding
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.
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.
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.
Earthquakes and fires following earthquakes -Major metropolitan areas near fault lines in the states of California, Oregon, Washington, South Carolina, Missouri, Kentucky and Tennessee
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.
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 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,
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
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
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
The primary factors contributing to pension and postretirement remeasurement gains and losses are:
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
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.
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.
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.
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.
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
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.
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.
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
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.
(1) Financial statement line item has been updated to “Change in unamortized pension and other postretirement prior service credit”.
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.
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 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 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,
Allstate Benefits, Allstate Annuities, and Corporate and Other levels for decision-making purposes.
• Business combination expenses and the amortization or impairment of purchased intangibles, after-tax
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.
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
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.
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.
Fixed income securities with unrealized loss position greater than or equal to 20% of amortized cost (3) (4)
Below investment grade fixed income securities include $14 million that have been in an unrealized loss position for less than twelve months.
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.
No below investment grade fixed income securities have been in an unrealized loss position for a period of twelve or more consecutive months.
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
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.
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
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.
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.
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.
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.
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.
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.
Total Level 3 gains (losses) included in net income for the year ended December 31, 2019
Total Level 3 gains (losses) included in net income for the year ended December 31, 2018
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.
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.
Valuation changes included in net income for Level 3 assets and liabilities held as of
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
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.
Cash flow hedges The Company had no derivatives designated as a cash flow hedge as of December 31, 2019 and 2018.
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
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.
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.
Commitments to invest in limited partnership interests represent agreements to acquire new or additional participation in certain limited partnership
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.
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.
Prior year reserve reestimates included in claims and claims expense (1)
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.
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.
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 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.
Interest rates credited range from 0.0% to 10.0% for equity-indexed life (whose returns are indexed to the S&P 500) and 1.0% to 6.0% for all other products
Interest rates credited range from 0.5% to 7.5% for immediate annuities; (8.0)% to 10.0% for equity-indexed annuities (whose returns are indexed to the S&P 500); and 0.1% to 6.0% for all other products
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.
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 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.
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.
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.
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 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.
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.
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
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.
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.
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 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.
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.
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.
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.
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 both December 31, 2019 and 2018, approximately 93% of the reinsurance recoverables are due from companies rated A- or better by S&P.
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
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.
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
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 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.
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 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.
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.
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 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:
As of December 31, 2019, the cumulative amount incurred to date for active programs related to employee severance, relocation benefits and post-exit
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.
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.
Under state insurance guaranty fund laws, insurers doing business in a state can be assessed, up to prescribed limits, for certain obligations of insolvent
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.
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.
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
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.
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.
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
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.
Components of the net operating loss carryforwards as of December 31, 2019
Statutory net income (loss) and capital and surplus of Allstate’s domestic insurance subsidiaries
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.
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.
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 funded status is recorded within other liabilities and accrued expenses on the Consolidated Statements of Financial Position.
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.
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.
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
investment policy. Pension plan assets are regularly monitored for compliance with these limits and other risk limits specified in the investment policies.
The actual percentage of plan assets for equity securities includes 1% of private equity investments in both 2019 and 2018 that are subject to the limited partnership interests target allocation and none and 4% of fixed income mutual funds in 2019 and 2018, respectively, that are subject to the fixed income securities target allocation.
Securities lending collateral reinvestment of $258 million and $208 million is excluded from the table above in 2019 and 2018, respectively.
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 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
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.
Estimated future benefit payments expected to be paid in the next 10 years
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 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 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.
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.
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.
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.
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”).
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.
Our principal audit procedures related to the reserve for property and casualty insurance claims and claims expense included the following:
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.
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.
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.
We tested the effectiveness of controls over management’s premium deficiency reserve and GPV and PFBL analysis, including those over the Company’s selection of assumptions.
With the assistance of our actuarial specialists, we evaluated the reasonableness of assumptions and their incorporation into the projection model used by the Company to perform its premium deficiency reserve analysis by:
With the assistance of our actuarial specialists, we evaluated the aggregate cash flows generated through the Company’s premium deficiency reserve testing for evidence of potential PFBL scenarios that would require the accrual of additional reserves to cover such future losses.