We also operate from approximately 415 administrative, data processing, claims handling and other support facilities in North America. In addition to our home office facilities, 825 thousand square feet are owned and 5.8 million square feet are leased.
Outside North America, we own one and lease three properties in Northern Ireland comprising approximately 223 thousand square feet. We also have three leased facilities in India for approximately 600 thousand square feet and two leased facilities in London for 7,182 square feet.
A discussion of strategy, including updates to the multi-year Transformative Growth initiative, can be found in Part 1, Item 1. Business.
•Allstate Life: premiums and contract charges, new business sales, PIF, benefit spread, investment spread, expenses, adjusted net income and net income.
•Allstate Benefits: premiums, new business sales, PIF, benefit ratio, expenses, adjusted net income and net income.
•Allstate Annuities: investment spread, asset-liability matching, contract benefits, expenses, adjusted net income, net income and invested assets.
The measure of segment profit or loss used in evaluating performance is underwriting income for the Allstate Protection and Discontinued Lines and Coverages segments and adjusted net income for the Protection Services, Allstate Life, Allstate Benefits, Allstate Annuities, and Corporate and Other segments.
Underwriting income is calculated as premiums earned and other revenue, less claims and claims expense (“losses”), Shelter-in-Place Payback expense, amortization of deferred policy acquisition costs (“DAC”), operating costs and expenses, restructuring and related charges and amortization or impairment of purchased intangibles, as determined using accounting principles generally accepted in the United States of America (“GAAP”). We use this measure in our evaluation of results of operations to analyze the profitability of the Property-Liability insurance operations separately from investment results. Underwriting income is reconciled to net income applicable to common shareholders in the Property-Liability Operations section of MD&A.
• Business combination expenses and the amortization or impairment of purchased intangible assets, after-tax
Adjusted net income is reconciled to net income applicable to common shareholders in the Protection Services, Allstate Life, Allstate Benefits and Allstate Annuities Segment sections of MD&A.
We have been proactive in protecting the health and safety of our employees and agents, while delivering on our commitment to protect our customers. We executed business continuity plans, maximized work from home, including the use of virtual tools to allow for safe claims handling, provided financial relief to employees experiencing financial hardship, developed exposure escalation protocols and a return to office framework.
The magnitude and duration of the global pandemic and the impact of actions taken by governmental authorities, businesses and consumers, including timing of vaccine distribution, to mitigate health risks create significant uncertainty. We will continue to closely monitor and proactively adapt to developments and changing conditions. Currently, it is not possible to reliably estimate the length and severity of the pandemic or its impact to our operations, but the effects could be material.
•Offered the Allstate Special Payment plan to provide more flexible payment options, including the option to delay payments
•Offered free Allstate Identity Protection to U.S. residents through December 31, 2020, regardless of whether they were already Allstate customers
The following sections summarize the potential impacts of the Coronavirus on our operations, each of our segments and investments that may continue, emerge, evolve or accelerate in 2021. This list is not inclusive of all potential impacts and should not be treated as such. Within the MD&A we have included further disclosures related to the impacts of the Coronavirus on our 2020 results.
•Increased regulatory restrictions on profitability, rate actions or claim practices, potentially outside the scope of current policies
•Slower written premiums growth and declines in auto new issued applications due to lower car sales
•Validity of statistical models given changes in underlying statistics such as auto frequency or investment projections
•Increased consumer spending and retail sales in Allstate Protection Plans resulting from shelter-in-place orders
•Decreased sales of Allstate Identity Protection products due to higher unemployment
•Increased costs from Allstate Identity Protection providing free identity protection to consumers through the end of 2020
•Decline in sales due to temporary underwriting restrictions placed on new business; agents are able to offer coverage to customers outside the new guidelines through non-proprietary carriers
•Higher reserves released on death of the insured for life-contingent immediate annuities, which lowers contract benefits
•Statutory reserving requirements could be increased due to low interest rates, which could affect the amount of capital required to be maintained by our insurance companies
•State and local government budgets may be strained by the costs of responding to the Coronavirus and reduced tax revenues from lower economic activity which may have an adverse impact on valuations and returns of our municipal bond portfolio
•Volatility in future investment results due to capital market conditions, including the pace of economic recovery, effectiveness of the fiscal and monetary policy responses and uncertainty resulting from the ongoing pandemic
Better Serve Customers Allstate acted quickly and led the industry in taking care of customers during the pandemic by providing two Shelter-In-Place Paybacks, financial flexibility through Special Payment Plans and offering free identity protection in 2020
Enterprise Net Promoter Score, which measures how likely customers are to recommend us, increased to 59.0 in 2020 compared to 58.6 in 2019
Grow Customer Base Consolidated policies in force reached 175.9 million, a 20.5% increase from prior year
Net investment income of $2.85 billion in 2020 was 9.7% below prior year reflecting lower reinvestment rates and reduced performance-based income
Build Long-Term Growth Platforms Allstate made substantial progress in building higher growth business models to increase personal property-liability market share under the Allstate brand
Allstate Protection Plans expanded its total addressable market through new accounts addressing furniture, appliances and international markets
Consolidated net income applicable to common shareholders increased 16.7% or $783 million to $5.46 billion in 2020 compared to 2019, primarily due to higher Allstate Protection underwriting income and higher Protection Services adjusted net income, partially offset by Shelter-in-Place Payback expense, lower net realized capital gains and lower net investment income.
For the twelve months ended December 31, 2020, return on common shareholders’ equity was 21.0% compared to 21.7% for the twelve months ended December 31, 2019.
Total revenue increased 0.3% to $44.79 billion in 2020 compared to 2019, driven by a 2.8% increase in property and casualty insurance premiums earned, partially offset by lower realized capital gains and lower net investment income. Insurance premiums increased in Allstate brand and Protection Services (Allstate Protection Plans and Allstate Dealer Services).
Property and casualty insurance premiums $ 37,073 $ 36,076 $ 34,048
Protection Services adjusted net income was $153 million in 2020 compared to $38 million in 2019. The improvement in 2020 was primarily due to growth of Allstate Protection Plans and improved profitability at Allstate Roadside, partially offset by investments at Allstate Identity Protection.
Allstate Life adjusted net income was $194 million in 2020 compared to $261 million in 2019. The decrease was primarily due to higher contract benefits due to mortality associated with the Coronavirus, partially offset by lower operating costs and expenses.
Allstate Benefits adjusted net income was $96 million in 2020 compared to $115 million in 2019. The decrease was primarily due to lower premiums and higher operating costs and expenses driven by a $41 million, pre-tax, write-off of capitalized software costs associated with a billing system in the second quarter of 2020, partially offset by lower contract benefits.
Premiums and contract charges totaled $1.09 billion in 2020, a decrease of 4.5% from $1.15 billion in 2019.
Allstate Annuities adjusted net loss was $53 million in 2020 compared to adjusted net income of $10 million in 2019, primarily due to lower net investment income, partially offset by lower contract benefits.
Net investment income decreased 17.0% to $761 million in 2020 from $917 million in 2019. The decrease was primarily due to a decline in market-based income driven by lower interest-bearing portfolio yields as well as lower performance-based investment results and lower average investment balances.
Book value per diluted common share (ratio of common shareholders’ equity to total common shares outstanding and dilutive potential common shares outstanding) was $91.50 as of December 31, 2020, an increase of 25.1% from $73.12 as of December 31, 2019.
Pension and other postretirement remeasurement gains and losses We recorded pension and other postretirement remeasurement gains of $51 million in 2020, primarily related to favorable asset performance compared to the expected return on plan assets, partially offset by a decrease in the discount rate and changes in actuarial assumptions. See Note 17 of the consolidated financial statements and Application of Critical Accounting Estimates section of the MD&A for further information.
•Expense ratio: the ratio of amortization of DAC, operating costs and expenses, amortization or impairment of purchased intangibles, restructuring and related charges and Shelter-in-Place Payback expense, less other revenue to premiums earned.
•Effect of catastrophe losses on combined ratio: the ratio of catastrophe losses included in claims and claims expense to premiums earned. This ratio includes prior year reserve reestimates of catastrophe losses.
•Effect of restructuring and related charges on combined ratio: the ratio of restructuring and related charges to premiums earned.
•Effect of Shelter-in-Place Payback expense on combined and expense ratios: the ratio of Shelter-in-Place Payback expense to premiums earned.
Catastrophe losses, excluding reserve reestimates $ 3,314 $ 2,509 $ 2,830
Effect of Shelter-in-Place Payback expense on combined and expense ratios 2.7 - -
Effect of Discontinued Lines and Coverages on combined ratio 0.4 0.4 0.3
(1)Auto and commercial lines customers received a Shelter-in-Place Payback due to the significant declines in the number of auto accidents caused by mandated stay-at-home orders, other pandemic containment actions and reduced economic activity.
(3)Restructuring and related charges in 2020 primarily related to Transformative Growth. See Note 13 of the consolidated financial statements for additional details.
Realized capital gains and losses Net realized capital gains in 2020 primarily related to gains on sales of fixed income securities. Net realized capital gains in 2019 primarily related to increased valuation of equity investments and gains on sales of fixed income securities.
Private passenger auto, homeowners, and other personal lines insurance products are offered to consumers through both exclusive and independent agents and directly through contact centers and online. Our strategy is to provide open access and choice of interaction, while offering affordable, simple and connected solutions to meet customers’ evolving 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.
(1)Other personal lines include renters, condominium, landlord and other personal lines products.
Underwriting income (loss) - prior year $ 1,688 $ 1,791 $ 914 $ 483 $ 224 $ 110 $ 14 $ (83) $ 2,912 $ 2,343
Increase (decrease) other revenue (11) 1 (2) - 5 (1) (1) - (5) 3
Incurred losses, excluding catastrophe losses and reserve reestimates 2,450 (1,002) (78) (183) 6 21 116 (219) 2,494 (1,383)
Catastrophe reserve reestimates 27 (22) 488 (1) 39 (1) (3) 1 551 (23)
(Increase) decrease expenses (75) (155) (33) (24) (33) 5 (15) (11) (162) (158)
(1)The 2020 column presents changes relative to 2019. The 2019 column presents changes relative to 2018.
Underwriting income increased 56.8% or $1.65 billion in 2020 compared to 2019, primarily due to lower auto non-catastrophe losses, increased premiums earned and favorable catastrophe reserve reestimates in personal lines homeowners driven by subrogation settlements, partially offset by Shelter-in-Place Payback expense and higher catastrophe losses.
Homeowners insurance premiums written increased 2.9% or $235 million in 2020 compared to 2019.
Homeowners 4,379 4,220 43.2 % 75.4 % 94.1 % 100.0 %
Other personal lines 1,001 952 43.3 % 75.3 % 94.1 % 100.0 %
Total Allstate brand 12,084 11,847 58.0 % 86.6 % 96.8 % 100.0 %
Total Encompass brand 504 531 44.0 % 75.8 % 94.2 % 100.0 %
Other personal lines 58.7 61.1 66.0 27.5 26.9 27.9 86.2 88.0 93.9
Commercial lines 82.4 81.3 91.3 22.3 17.1 21.4 104.7 98.4 112.7
(2)Restructuring and related charges in 2020 primarily related to Transformative Growth.
Other personal lines 58.7 61.1 66.0 10.4 9.0 12.1 (3.5) 0.5 (0.4) (2.0) - -
Total 60.4 67.5 67.8 7.9 7.3 8.7 (1.6) (0.7) (1.0) (1.4) 0.1 0.1
Catastrophe losses increased 9.9% or $254 million in 2020 compared to 2019. Catastrophe losses include approximately $495 million favorable subrogation settlements, which decreased the loss ratio by 1.4 points in 2020 compared to the same period of 2019. Excluding subrogation settlements, catastrophe losses increased approximately 30% or $750 million compared to 2019.
$101 million to $250 million 6 5.7 953 33.9 2.7 159
$50 million to $100 million 11 10.5 740 26.3 2.1 67
($ in millions) Number of events 2020 Number of events 2019 Number of events 2018
Hurricanes/Tropical storms 9 $ 1,001 3 $ 86 3 $ 200
Total catastrophe losses 105 $ 2,811 110 $ 2,557 117 $ 2,855
-Continue to renew current policyholders and allow replacement policies for existing customers who buy a new home or change their residence to rental property
than fire following earthquakes) that is currently ceded via quota share reinsurance.
•Starting in the second quarter of 2017, we began writing a limited number of homeowners policies in select areas of Florida and continue to support existing customers who replace their currently-insured home with an acceptable property. Encompass withdrew from property lines in Florida in 2009.
•Tropical cyclone deductibles are generally higher than all peril deductibles and are in place for a large portion of coastal insured properties.
•We offer a homeowners policy available in 43 states, Allstate House and Home®, that provides options of coverage for roof damage, including graduated coverage and pricing based on roof type and age. In 2020, premiums written totaled $3.92 billion or 46.7% of homeowners premiums written compared to $3.44 billion or 42.1% in 2019.
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
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 homeowner policyholders in California are offered coverage for damage caused by an earthquake 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.
Fires following earthquakes Under a standard homeowners policy we cover fire losses, including those caused by an earthquake. Actions taken related to our risk of loss from fires following earthquakes include restrictive underwriting guidelines in California for new business writings, purchasing reinsurance for Kentucky personal lines property risks, and purchasing nationwide occurrence reinsurance, excluding Florida.
Deferred acquisition costs We establish a DAC asset for costs that are related directly to the successful acquisition of new or renewal insurance policies, principally agent remuneration and premium taxes. DAC is amortized to income over the period in which premiums are earned.
The following table presents premiums written, PIF and underwriting income (loss) by line of business for Allstate brand, Encompass brand and Allstate Protection as of or for the year ended December 31, 2020. Detailed analysis of underwriting results, premiums written and earned, and the combined ratios, including loss and expense ratios, are discussed in the brand sections.
Premiums written Amount Percent to total brand Amount Percent to total brand Amount Percent to total
Total $ 34,796 100.0 % $ 972 100.0 % $ 35,768 100.0 %
Auto $ 3,404 75.8 % $ 40 53.3 % $ 3,444 75.4 %
Total $ 4,488 100.0 % $ 75 100.0 % $ 4,566 100.0 %
When analyzing premium measures and statistics for our brands the following calculations are used as described below.
•PIF: Policy counts are based on items rather than customers. A multi-car customer would generate multiple item (policy) counts, even if all cars were insured under one policy while Commercial lines PIF counts for shared economy agreements typically reflect contracts that cover multiple rather than individual drivers.
Allstate brand products are sold across multiple channels, including Allstate exclusive agents and direct (online or call centers). In 2020, the Allstate brand represented 97.3% 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.
(1)The cost of our catastrophe reinsurance program increased $35 million to $321 million in 2020 from $286 million in 2019. Catastrophe placement premiums are recorded primarily in the Allstate brand and are a reduction of premium. For a more detailed discussion on reinsurance, see the Claims and Claims Expense Reserves section of the MD&A and Note 10 of the consolidated financial statements.
Average premium $ 617 $ 603 $ 586 2.3 % 2.9 %
Auto insurance premiums written increased 0.8% or $181 million in 2020 compared to 2019, primarily due to an increase in average premium. During the second quarter through year-end 2020, growth in premiums written slowed significantly due to lower increases in average premium from fewer approved rate changes related to the Coronavirus.
PIF decreased 0.5% or 104 thousand policies as of December 31, 2020 compared to December 31, 2019 as higher PIF in Allstate brand, with increases in 20 states, including 3 of our largest 10 states, was offset by lower PIF in Esurance brand as advertising resources are redirected to Allstate brand.
New issued applications (thousands) 899 877 858 2.5 % 2.2 %
Average premium $ 1,328 $ 1,291 $ 1,226 2.9 % 5.3 %
Other personal lines premiums written increased 4.3% or $78 million in 2020 compared to 2019. The
Impact of Shelter-in-Place Payback expense - - - 3.8 - - 3.8 - -
(3)Relates to the Allstate Special Payment plan offered to customers as a result of the Coronavirus to provide more flexible payment options, including the option to delay payments. Approximately 70% of the higher bad debt expense was attributed to auto.
Auto 57.5 68.3 66.8 1.2 1.7 1.6 (0.5) (1.3) (2.0) (0.2) (0.1) (0.2)
Frequency and severity statistics, which are influenced by driving patterns, inflation and other factors, are provided to describe the trends in loss costs. Our reserving process incorporates changes in loss patterns, operational statistics and changes in claims reporting processes to determine our best estimate of recorded reserves. We use the following statistics to evaluate losses:
• Percent change in frequency or severity statistics is calculated as the amount of increase or decrease in the paid or gross claim frequency or severity in the current period compared to the same period in the prior year divided by the prior year paid or gross claim frequency or severity.
We have expanded our utilization of virtual claims processes in response to the Coronavirus. We are continuing to implement new technology and process improvements that provide continued loss cost accuracy, efficient processing and enhanced customer experiences that are simple, fast and produce high degrees of satisfaction.
•Digital Operating Centers handle auto physical damage claims countrywide utilizing our virtual estimation capabilities, which includes estimating damage with photos and video through the use of QuickFoto Claim® and Virtual Assist®.
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.
•Paid claims settlement rates as the low frequency environment creates capacity to settle claims faster
Property damage gross claim frequency decreased in 2020 compared to 2019 due to factors including:
Property damage paid claim severity increased in 2020 compared to 2019 due to factors including:
•Claims settled within days or weeks of the loss tend to be less complex and have lower severity, while higher severity property damage claims generally take longer to resolve.
•The reduction in new claims due to lower frequency, as described above, led to an increase in the proportion of more complex, higher severity paid claims to total paid claims.
•Higher costs to repair more sophisticated newer model vehicles, higher third-party subrogation demands and increased costs associated with total losses.
Bodily injury gross claim frequency was consistent with trends noted in property damage. Bodily injury severity trends increased at a rate above medical care inflation indices in 2020.
Homeowners loss ratio increased 2.5 points in 2020 compared to 2019, primarily due to higher catastrophe losses and increased claim severity, partially offset by favorable catastrophe reserve reestimates driven by subrogation settlements, increased premiums earned and improved claim frequency.
Commercial lines loss ratio increased 1.1 points in 2020 compared to 2019, primarily due to decreased premiums earned, higher claim severity and higher losses related to an underperforming account that was not renewed, partially offset by a decline in non-catastrophe losses driven by favorable auto frequency related to the Coronavirus.
Expense ratio increased 2.7 points in 2020 compared to 2019, reflecting Shelter-in-Place Payback expense, higher restructuring charges related to Transformative Growth and bad debt expense. Excluding Shelter-in-Place Payback expense, higher restructuring charges related to Transformative Growth, bad debt expense and impairment of purchased intangibles in 2019, the expense ratio decreased 0.7 points in 2020 compared to 2019, primarily due to lower operating expenses and agent compensation, partially offset by an increase in advertising costs.
New issued applications (thousands) 60 82 76 (26.8) % 7.9 %
Average premium $ 1,156 $ 1,134 $ 1,118 1.9 % 1.4 %
Auto insurance premiums written decreased 5.9% or $32 million in 2020 compared to 2019, primarily due to decreased new issued applications and lower retention, partially offset by higher average premiums, with the top 10 states representing approximately 70% of premiums written.
New issued applications (thousands) 34 42 37 (19.0) % 13.5 %
Impact of Shelter-in-Place Payback expense - - - 2.1 - - 2.1 - -
Auto 56.8 66.8 65.0 1.3 1.9 1.1 1.0 (1.9) (1.9) (0.4) - (0.2)
Homeowners 62.1 68.2 66.7 20.7 25.1 22.1 (9.3) 3.7 3.3 (9.8) 2.5 3.0
(1)2020 includes approximately $45 million of favorable reserve reestimates related to subrogation settlements, which primarily impacted homeowners. See Note 8 of the consolidated financial statements for additional details.
(1)Restructuring and related charges in 2020 primarily related to the Transformative Growth.
Reserve reestimates in 2020 primarily related to new reported information, court decisions and policy buyback settlements for asbestos exposures and higher than expected reported losses for environmental and other discontinued lines exposures. Reserve reestimates in 2019 primarily related to new reported information and settlement agreements, including bankruptcy proceedings, impacting asbestos and other discontinued lines and additional environmental clean-up sites.
We believe that our reserves are appropriately established based on available facts, technology, laws, regulations, and assessments of other pertinent factors and characteristics of exposure (e.g., claim activity, potential liability, jurisdiction, products versus non-products exposure) presented by individual policyholders, assuming no change in the legal, legislative or economic environment. However, as we progress with the resolution of disputed claims in the courts and arbitrations and with negotiations and settlements, our reported losses may be more variable.
Percentage of gross and ceded reserves by case and incurred but not reported (“IBNR”)
(2)Approximately 75% of ceded case reserves as of December 31, 2020 are subject to settlement agreements.
Total net reserves as of December 31, 2020, included $695 million or 49% of estimated IBNR reserves compared to $660 million or 48% of estimated IBNR reserves as of December 31, 2019.
over the next several years as qualified claims are submitted by these insureds.
Protection Services comprise Allstate Protection Plans, Allstate Dealer Services, Allstate Roadside, Arity and Allstate Identity Protection. In 2020, Protection Services represented 4.3% of total revenue, 77.5% of total PIF and 3.3% of total adjusted net income. We offer consumer product protection plans, finance and insurance products (including vehicle service contracts, guaranteed asset protection waivers, road hazard tire and wheel and paintless dent repair protection), roadside assistance, device and mobile data collection services and analytic solutions using automotive telematics information and identity protection. For additional information on our strategy and outlook, see Part I, Item 1. Business - Strategy and Segment Information.
Policies in force as of December 31 (in thousands) 136,272 105,947 74,629
Total revenues increased 16.6% or $273 million in 2020 compared to 2019, primarily due to Allstate Protection Plan’s growth through its U.S. retail and international channels, partially offset by declines in revenue at Allstate Roadside.
Operating costs and expenses decreased 1.5% or $10 million in 2020 compared to 2019, primarily due to lower operating costs at Allstate Roadside, partially offset by expenses associated with continued growth at Allstate Protection Plans.
The year-end 2020 gross reserves of $27.61 billion for insurance claims and claims expense were $8.48 billion more than the net reserve balance of $19.13 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 $7.03 billion, including $5.61 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 $1.35 billion that are a component of our consolidated reserves, but not included in our U.S. statutory reserves.
Property-Liability prior year reserve reestimates included in catastrophe losses $ (503) $ 48 $ 25
($ in millions) 2015 & prior 2016 2017 2018 2019 Total
Allstate brand $ (58) $ 46 $ (162) $ (348) $ (12) $ (534)
($ in millions) 2014 & prior 2015 2016 2017 2018 Total
Total $ (35) $ (44) $ (28) $ (95) $ 72 $ (130)
The tables below show Allstate Protection net reserves representing the estimated cost of outstanding claims as they were recorded at the beginning of years 2020, 2019, and 2018, and the effect of reestimates in each year.
($ in millions, except ratios) Reserve reestimate Effect on combined ratio Reserve reestimate Effect on combined ratio Reserve reestimate Effect on combined ratio
Favorable reserve reestimates for auto in 2019 primarily related to continued favorable personal lines auto injury coverage development, offset by strengthening in our homeowners lines. Auto liability claims process changes implemented in prior years, including a program requiring enhanced documentation of injuries and related medical treatments, resulted in favorable severity trends compared to those originally estimated as we developed greater experience in settling claims under these programs. Unfavorable results for homeowners lines in 2019 were primarily due to catastrophe development being higher than anticipated in previous estimates.
($ in millions) January 1 reserves Reserve reestimate January 1 reserves Reserve reestimate January 1 reserves Reserve reestimate
Asbestos claims $ 810 $ 78 $ 866 $ 28 $ 884 $ 44
Total $ 1,365 $ 141 $ 1,391 $ 105 $ 1,407 $ 87
Claims and claims expense paid (100) (61) (133) (84) (119) (62)
Beginning reserves $ 219 $ 179 $ 209 $ 170 $ 199 $ 166
Incurred claims and claims expense 49 44 42 36 30 20
Ending reserves $ 249 $ 206 $ 219 $ 179 $ 209 $ 170
Percentage of IBNR in ending reserves 50.3 % 48.8 % 49.6 %
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 2020 and 2019, the asbestos and environmental net 3-year survival ratio increased due to lower claim payments associated with settlement agreements.
Total net reserves $ 827 100 % $ 810 100 % $ 866 100 %
At December 31, 2020, there were 362 active policyholders with open asbestos claims.
•Active policyholders increased by 5 in 2020, including 8 policyholders reporting asbestos claims for the first time and the closing of all claims for 3 policyholders.
charged to policyholders. We have also purchased reinsurance to mitigate exposures in our long-tail liability lines, including environmental, asbestos and other discontinued lines as well as our commercial lines, including shared economy. We also participate in various indemnification mechanisms, including state-based industry pool or facility programs mandating
(2)As of December 31, 2020 and 2019, MCCA includes $34 million and $39 million of reinsurance recoverable on paid claims, respectively, and $5.61 billion and $5.46 billion of reinsurance recoverable on unpaid claims, respectively.
Reinsurance and indemnification recoverables include an estimate of the amount of insurance claims and claims expense reserves that are ceded under the terms of the agreements, including IBNR unpaid losses. We calculate our ceded reinsurance and indemnification estimates based on the terms of each applicable agreement, including an estimate of how IBNR losses will ultimately be ceded under the agreement. We also consider other limitations and coverage exclusions under our agreements. Accordingly, our estimate of recoverables is subject to similar risks and uncertainties as our estimate of reserves claims and claims expense. We believe the recoverables are appropriately established; however,
Indemnification recoverables are considered collectible based on the industry pool and facility
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.
See Note 2 of the consolidated financial statements for a description of the methodology utilized to calculate the allowance for reinsurance recoverables.
Total effect on premiums earned $ 1,141 $ 1,122 $ 1,016
(1)Decline reflects reestimates in claims and claims expense related subrogation settlements.
Our claim reserve development experience in 2020 is consistent with the prior two years as gross reserves have increased between 2-3% each year. The Governor of Michigan signed new legislation on May 30, 2019 to reform Michigan’s no-fault auto insurance system. For further discussion of these items, see Regulation, Indemnification Programs and Note 10 of the consolidated financial statements.
Incurred claims and claims expense-prior years 107 65 (16) 20 9 35
(1)Paid claims and claims expenses reported in the table for the current and prior years, recovered from the MCCA totaled $103 million, $119 million and $98 million in 2020, 2019 and 2018, respectively.
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.
(1)Total claims includes those covered and not covered by the MCCA indemnification.
As of December 31, 2020, approximately 1,500 of our pending claims have been reported to the MCCA, of which approximately 60% represents claims that occurred more than 5 years ago. There are 68 Allstate brand claims with reserves in excess of $15 million as of December 31, 2020, which comprise approximately 29% of the gross ending reserves in the table above. As a result, significant developments with a single claimant can result in volatility in prior year incurred claims.
We anticipate completing the placement of our 2021 nationwide catastrophe reinsurance program in the second quarter of 2021. We expect the program will be similar to our 2020 nationwide catastrophe reinsurance program, but will evaluate opportunities to improve the economic terms and conditions. We are also evaluating opportunities to include National General, which was acquired on January 4, 2021, into the program. For further details of the existing 2020 program, see Note 10 of the consolidated financial statements.
Allstate Life consists of traditional, interest-sensitive and variable life insurance. In 2020, Allstate Life represented 4.4% of total revenue, 1.1% of total PIF and 4.2% of total adjusted net income. Our target customers are middle market consumers with family and financial protection needs.
Contractholder funds as of December 31 $ 8,013 $ 7,805 $ 7,656
Net income applicable to common shareholders decreased 35.6% or $88 million in 2020 compared to 2019.
underwriting. While these restrictions are in place, we expect sales to slow. Allstate agents and exclusive financial specialists are able to offer coverage to customers outside these guidelines through nonproprietary carriers.
Other revenue decreased 3.2% or $4 million in 2020 compared to 2019, primarily due to lower gross dealer concessions earned on Allstate agents’ or exclusive financial specialists’ sales of non-proprietary products.
Investment spread reflects the difference between net investment income and interest credited to contractholder funds (“investment spread”) and is used to analyze the impact of net investment income and interest credited to contractholder funds on net income.
Valuation changes on derivatives embedded in equity-indexed universal life contracts that are not hedged (43) (11) -
Amortization of DAC before amortization relating to realized capital gains and losses, valuation changes on embedded derivatives that are not hedged and changes in assumptions $ 78 $ 109 $ 117
Our annual comprehensive review of assumptions underlying estimated future gross profits for our interest-sensitive life contracts covers assumptions for mortality, persistency, expenses, investment returns, including capital gains and losses, interest crediting rates to policyholders, and the effect of any hedges. An assessment is made of future projections to ensure the reported DAC balances reflect current expectations.
In 2020, the review resulted in an acceleration of DAC amortization (decrease to income) of $81 million. DAC amortization acceleration primarily related to the investment margin component of estimated gross profits and was due to lower projected future interest rates and investment returns compared to our previous expectations. This was partially offset by DAC
amortization deceleration (increase to income) for changes in the expense margin due to a decrease in projected expenses.
In 2019, the review resulted in an acceleration of DAC amortization of $58 million. DAC amortization acceleration primarily related to the investment margin component of estimated gross profits and was due to lower projected future interest rates and investment returns compared to our previous expectations. The acceleration related to benefit margin was due to decreased projected interest rates that result in lower projected policyholder account values which increases benefits on guaranteed products and more refined policy level information and assumptions.
($ in millions) Traditional life and accident and health Interest-sensitive life insurance Total
Operating costs and expenses decreased 7.1% or $25 million in 2020 compared to 2019, primarily due to lower employee-related, marketing and technology costs.
Contractholder deposits decreased 3.0% in 2020 compared to 2019. The weighted average guaranteed crediting rate and weighted average current crediting rate for our interest-sensitive life insurance contracts, excluding variable life, are both 3.8% as of December 31, 2020.
We retain primary liability as a direct insurer for all risks ceded to reinsurers. As of December 31, 2020, approximately 12% of our face amount of life insurance in force was reinsured.
(4)As of December 31, 2020 and 2019, the other category includes $11 million and $12 million, respectively, of recoverables due from reinsurers rated A- or better by S&P.
(5)Due to the adoption of the measurement of credit losses on financial instruments accounting standard, prior valuation allowance is now presented as an allowance for expected credit losses.
We enter into certain intercompany reinsurance transactions for the Allstate Life operations in order to maintain underwriting control and manage insurance risk among various legal entities. These reinsurance agreements have been approved by the appropriate regulatory authorities. All significant intercompany transactions have been eliminated in consolidation.
Reserve for life-contingent contract benefits as of December 31 $ 1,028 $ 1,034 $ 1,007
Net income applicable to common shareholders decreased 16.9% or $21 million in 2020 compared to 2019.
New annualized premium sales (annualized premiums at initial customer enrollment) decreased 24.5% to $281 million in 2020. The decrease in 2020 relates to the impact of the Coronavirus and increased competition.
Contract benefits decreased 14.1% or $85 million in 2020 compared to 2019, primarily due to lower reported claim experience on critical illness, disability and accident products, driven by limited activities and deferral of non-essential medical procedures from the Coronavirus and the non-renewal of a large underperforming account in the fourth quarter of 2019.
Amortization of DAC increased 9.9% or $16 million in 2020 compared to 2019, primarily due to an unfavorable adjustment associated with our annual review of assumptions.
Our annual comprehensive review of assumptions underlying estimated future gross profits for our interest-sensitive life contracts resulted in an acceleration of DAC amortization (decrease to income) of $28 million or 5.8% of the unamortized DAC asset balance in 2020 compared to $2 million in 2019. In both 2020 and 2019, DAC amortization acceleration primarily related to lower projected investment returns, partially offset by favorable projected mortality.
Operating expense ratio increased to 29.4 in 2020 compared to 24.9 in 2019, primarily due to a $41 million, pre-tax, software write-off.
We enter into certain intercompany reinsurance transactions for the Allstate Benefits operations in order to maintain underwriting control and manage insurance risk among various legal entities. These reinsurance agreements have been approved by the appropriate regulatory authorities. All significant intercompany transactions have been eliminated in consolidation.
Allstate Annuities consists primarily of deferred fixed annuities and immediate fixed annuities (including standard and sub-standard structured settlements). In 2020, Allstate Annuities represented 2.3% of total revenue and 0.1% of total PIF. 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.
Our annual review of assumptions in 2020 also resulted in a $5 million increase in reserves primarily for guaranteed withdrawal benefits on equity-indexed annuities due to higher projected guaranteed benefits. In 2019, the review resulted in no adjustment to reserves for guaranteed benefits.
Net investment income decreased 17.0% or $156 million in 2020 compared to 2019, primarily due to a decline in market-based income driven by lower interest-bearing portfolio yields as well as lower performance-based investment results and lower average investment balances.
Valuation changes on derivatives embedded in equity-indexed annuity contracts that are not hedged increased interest credited to contractholder funds by $3 million in 2020 compared to an increase of $8 million in 2019. These valuation changes are primarily driven by changes in interest rates.
Valuation changes on derivatives embedded in equity-indexed annuity contracts that are not hedged (3) (8) 3
Annuities with annual crediting rate resets 3.17 % 3.17 % $ 3,950
Contractholder funds decreased 7.0% in 2020, primarily due to the continued runoff of our deferred fixed annuity business. We discontinued the sale of annuities but still accept additional deposits on existing contracts.
The Property-Liability portfolio emphasizes protection of principal and consistent income generation, within a total return framework. This approach has produced competitive returns over the long term and is designed to ensure financial strength and stability for paying claims, while maximizing economic value and surplus growth. Products with lower liquidity needs, such as auto insurance and discontinued lines and coverages, and capital create capacity to invest in less liquid higher yielding fixed income securities, performance-based investments such as limited partnerships and equity securities. Products with higher liquidity needs, such as homeowners insurance, are invested primarily in high quality liquid fixed income securities.
The Allstate Benefits portfolio is focused on protection of principal and consistent income generation while targeting an appropriate return on capital. The portfolio is largely comprised of fixed income securities and commercial mortgage loans with a small allocation to equity securities.
The Allstate Annuities portfolio is managed to ensure the assets match the characteristics of the liabilities. For longer-term immediate annuity liabilities,
we invest primarily in performance-based investments such as limited partnerships and equity securities. For shorter-term annuity liabilities, we invest primarily in fixed income securities and commercial mortgage loans with maturity profiles aligned with liability cash flow requirements.
The pending sale of ALIC and certain affiliates is expected to decrease Allstate Life, Allstate Annuities and total consolidated portfolios by approximately 85%, 80% and 30%, respectively.
Performance-based strategy seeks to deliver attractive risk-adjusted returns and supplement market risk with idiosyncratic risk. Returns are impacted by a variety of factors including general macroeconomic and public market conditions as public benchmarks are often used in the valuation of underlying investments. Variability in earnings will also result from the performance of the underlying assets or business and the timing of sales of those investments. Earnings from the sales of investments may be recorded as net investment income or realized capital gains and losses. The portfolio, which primarily includes private equity and real estate with a majority being limited partnerships, is diversified across a number of characteristics, including managers or partners, vintage years, strategies, geographies (including international) and industry sectors or property types. These investments are generally illiquid in nature, often require specialized expertise, typically involve a third-party manager, and often enhance returns and income through transformation at the company or property level. A portion of these investments seek returns in markets or asset classes that are dislocated or special situations, primarily in private markets.
Some of the restrictions implemented to contain the pandemic have been relaxed, but reduced economic activity, limits on large gatherings and events and higher unemployment continue. Additionally, there is no way of predicting with certainty how long the pandemic might last, including the potential for restrictions being restored or new restrictions being implemented that could result in further economic volatility.
In January 2021, the Federal Open Market Committee (“FOMC”) maintained the target range for federal funds rate at 0 percent to 1/4 percent. The FOMC noted that the ongoing public health crisis will continue to weigh on economic activity, employment and inflation and poses considerable risks to the economic outlook. The FOMC expects to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.
($ in millions) Carrying value Investment yield Carrying value Investment yield
Investing activity will continue to decrease our portfolio yield as long as market yields remain below the current portfolio yield. Any decline in market-based portfolio yield is expected to result in lower net investment income in future periods. Interest-bearing investments are comprised of fixed income securities, mortgage loans, short-term investments and other investments, including bank and agent loans.
In the Allstate Annuities segment, the decline in the portfolio yield has been partially mitigated because a portion of the investment cash flows have been used to fund the managed reduction in spread-based liabilities. The decline in market-based portfolio yield and Allstate Annuities invested assets are expected to result in lower net investment income in future periods.
•Invest for the specific needs and characteristics of Allstate’s businesses, including its corresponding liability profile.
Total $ 50,134 $ 1,822 $ 12,406 $ 2,012 $ 22,291 $ 5,572 $ 94,237
(2)Fixed income securities are carried at fair value. Amortized cost, net for these securities was $36.52 billion, $1.51 billion, $8.05 billion, $1.36 billion, $13.37 billion, $642 million and $61.45 billion for Property-Liability, Protection Services, Allstate Life, Allstate Benefits, Allstate Annuities, Corporate and Other, and in total, respectively.
monitoring procedures for fixed income securities are based on a due diligence process which includes, but is not limited to, an assessment of the credit quality, sector, structure and liquidity risks of each issue.
Fair value and unrealized net capital gains (losses) for fixed income securities by credit rating
U.S. government and agencies $ - $ - $ - $ - $ 3,222 $ 93
Corporate bonds include publicly traded and privately placed securities. Privately placed securities primarily consist of corporate issued senior debt securities that are negotiated with the borrower or are issued by public entities in unregistered form.
Our portfolio of privately placed securities is diversified by issuer, industry sector and country. The portfolio is made up of 561 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 dialogue 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. Liquidity of securities issued by public entities in unregistered form is similar to public debt markets.
ABS includes collateralized debt obligations, consumer and other ABS. Credit risk is managed by monitoring the performance of the underlying collateral. Many of the securities in the ABS portfolio have credit enhancement with features such as overcollateralization, subordinated structures, reserve funds, guarantees or insurance.
Limited partnership interests include $6.13 billion of interests in private equity funds, $1.07 billion of interests in real estate funds and $410 million of interests in other funds as of December 31, 2020. We have commitments to invest additional amounts in limited partnership interests totaling $2.93 billion as of December 31, 2020.
Short-term investments primarily comprise money market funds, commercial paper, U.S. Treasury bills and other short-term investments, including securities lending collateral of $1.24 billion.
Other investments primarily comprise $1.02 billion of bank loans, $974 million of real estate, $754 million of policy loans, $631 million of agent loans (loans issued to exclusive Allstate agents) and $204 million of derivatives as of December 31, 2020. For further detail on our use of derivatives, see Note 7 of the consolidated financial statements.
In general, the gross unrealized losses are related to an increase in market yields, which may include increased risk-free interest rates and wider credit spreads since the time of initial purchase.
Cost Over (under) cost Fair value Cost Over (under) cost Fair value
Energy $ 112 $ 6 $ 118 $ 275 $ 15 $ 290
Total equity securities $ 3,853 $ 857 $ 4,710 $ 6,568 $ 1,594 $ 8,162
(1)Other is comprised of REITs, communications, financial services, banking, consumer goods and technology sectors.
(1)Beginning January 1, 2020, depreciation previously included in investee level expenses is reported as realized capital gains or losses.
Net investment income decreased 9.7% or $306 million in 2020 compared to 2019, primarily due to a decline in market-based income driven by lower interest-bearing portfolio yields and lower performance-based results, primarily from limited partnerships.
Performance-based investment income decreased 25.8% or $140 million in 2020 compared to 2019, due to lower valuations of real estate and private equity investments, partially offset by net gains on sales of underlying investments.
Realized capital gains and losses, after-tax $ 1,063 $ 1,488 $ (688)
(3)Relates to limited partnerships where the underlying assets are predominately public equity securities.
Sales in 2020 related primarily to fixed income securities in connection with ongoing portfolio management. Sales in 2019 related primarily to fixed income securities in connection with ongoing portfolio management, as well as gains from limited partnerships.
Valuation and settlements of derivative instruments in 2020 primarily comprised gains on interest rate futures used for asset replication and equity futures used for risk management due to a decrease in indices in first quarter 2020,
Realized capital gains for performance-based investments in 2020 primarily related to increased valuation of equity investments and gains on sales of real estate investments, partially offset by losses on valuation and settlement of derivative instruments. 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.
Market risk is the risk that we will incur losses due to adverse changes in interest rates, credit spreads, equity prices, commodity prices or currency exchange rates. Adverse changes to these rates and prices may occur due to changes in fiscal policy, the economic climate, the liquidity of a market or market segment, insolvency or financial distress of key market makers or participants or changes in market perceptions of credit worthiness or risk tolerance. Our primary market risk exposures are to changes in interest rates, credit spreads and equity prices. We also have direct and indirect exposure to commodity price changes through our diversified investments in timber, agriculture, infrastructure and energy primarily held in limited partnership interests and consolidated subsidiaries.
3)Using derivative instruments to modify the market risk characteristics of existing assets and liabilities or assets expected to be purchased
• Duration, a measure of the price sensitivity of assets and liabilities to changes in interest rates
• Scenario analysis, an estimate of the potential changes in the fair value of a portfolio that could occur under hypothetical market conditions defined by changes to multiple market risk factors: interest rates, credit spreads, equity prices or currency exchange rates
The selection of measures used in our sensitivity analysis should not be construed as our prediction of future market events, but only as an illustration of the potential effect of such an event.
Interest rate risk is the risk that we will incur a loss due to adverse changes in interest rates relative to the characteristics of our interest-bearing assets and liabilities. Interest rate risk includes risks related to changes in U.S. Treasury yields and other key risk-free reference yields. This risk arises from many of our primary activities, as we invest substantial funds in interest-sensitive assets and issue interest-sensitive liabilities. Changes in interest rates can have favorable and unfavorable effects on our results. For example, increases in rates can improve investment income, but decrease the fair value of our fixed income securities portfolio and increase policyholder surrenders requiring us to liquidate assets. Decreases in rates could increase the fair value of our fixed income securities portfolio while decreasing investment
income due to reinvesting at lower market yields and accelerating pay-downs and prepayments of certain investments.
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, 2020, the difference between our asset and liability duration was a (2.11) gap compared to a (1.48) gap as of December 31, 2019. 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
(1)Represents an immediate, parallel increase of 100 basis points based on information and assumptions used in the duration calculations and market interest rates as of December 31, 2020.
(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 $12.58 billion and $12.14 billion as of December 31, 2020 and 2019, respectively. Based on assumptions described above, these assets would decrease in value by $673 million as of December 31, 2020 compared to a decrease of $649 million as of December 31, 2019.
risk in our assets. One of the measures used to quantify this exposure is spread duration. Spread duration measures the price sensitivity of the assets to changes in spreads. For example, if spreads increase 100 basis points, the fair value of an asset exhibiting a spread duration of 5 is expected to decrease in value by 5%.
(1)Represents an immediate, parallel increase of 100 basis points across all asset classes, industry sectors and credit ratings based on information and assumptions used in the spread duration calculations and market interest rates as of December 31, 2020.
(2)Reflects effects of tactical positions that include the use of credit default swaps to manage spread risk.
Equity price risk is the risk that we will incur losses due to adverse changes in the general levels of the markets.
We periodically use put options to reduce equity price risk or call options to adjust our equity risk profile. Put options provide an offset to declines in equity market values below a targeted level, while call options provide participation in equity market appreciation above a targeted level. Options can expire, terminate early or the option can be exercised. If the equity index does not fall below the put’s strike price or rise above the call’s strike price, the maximum loss on purchased puts and calls is limited to the amount of the premium paid.
Separate Accounts As of December 31, 2020 and 2019, we had separate account assets related to variable annuity and variable life contracts with account values totaling $3.34 billion and $3.04 billion, respectively. Equity risk exists for contract charges based on separate account balances and guarantees for death or income benefits provided by our variable products.
In 2006, we disposed of substantially all of the variable annuity business through reinsurance agreements with The Prudential Insurance Company of America, a subsidiary of Prudential Financial Inc. and therefore mitigated this aspect of our risk. Equity risk for our variable life business relates to contract charges and policyholder benefits. Total variable life contract charges, including reinsurance assumed, for 2020 and 2019 were $46 million and $45 million, respectively. Separate account liabilities related to variable life contracts were $109 million and $85 million as of December 31, 2020 and 2019, respectively.
Foreign currency exchange rate risk is the risk that we will incur economic losses due to adverse changes in foreign currency exchange rates. This risk primarily arises from our foreign equity investments, including common stocks, limited partnership interests, and our Canada, Northern Ireland and India operations. We use foreign currency derivative contracts to partially offset this risk.
Decrease in value of foreign currency denominated instruments $ 329 $ 402
(1)Represents a 10% immediate unfavorable change in each of the foreign currency exchange rates to which we are exposed based on information and assumptions used, including the impact of foreign currency derivative contracts.
Ratio of debt to shareholders’ equity 25.9 % 25.5 % 30.3 %
In September 2020, we entered into an accelerated share repurchase agreement (“ASR agreement”) with Goldman Sachs & Co. LLC (“Goldman Sachs”) to purchase $750 million of our outstanding common stock. Under the ASR agreement, we paid $750 million upfront and initially acquired 7.0 million shares. The ASR agreement settled on January 12, 2021, and we repurchased a total of 7.8 million shares at an average price of $96.21. After the completion of the ASR, there was $1.45 billion remaining on the $3.00 billion common share repurchase program.
Since 1995, we have acquired 742 million shares of our common stock at a cost of $36.93 billion, primarily as part of various stock repurchase programs. We have reissued 148 million common shares since 1995, primarily associated with our equity incentive plans, the 1999 acquisition of American Heritage Life Investment Corporation and the 2001 redemption of certain mandatorily redeemable preferred securities. Since 1995, total common shares outstanding has decreased by 594 million shares or 66.2%, primarily due to our repurchase programs.
Common shareholder dividends On January 2, 2020, April 1, 2020, July 1, 2020, and October 1, 2020, we paid common shareholder dividends of $0.50, $0.54, $0.54 and $0.54, respectively. On November 18, 2020, we declared a common shareholder dividend of $0.54, payable on January 4, 2021.
The Allstate Corporation (the “Corporation”) and Allstate Insurance Company (“AIC”) In June 2020, A.M. Best affirmed the Corporation’s debt and short-term issuer ratings of a and AMB-1+, respectively, and the insurance financial strength rating of A+ for AIC. The outlook for the ratings is stable.
In July 2020, S&P affirmed the Corporation’s debt and short-term issuer ratings of A- and A-2, respectively, and the insurance financial strength rating of AA- for AIC. The outlook for the ratings is stable.
In January 2021, Moody’s affirmed the Corporation’s debt and short-term issuer ratings of A3 and P-2, respectively, and the insurance financial strength rating of Aa3 for AIC. The outlook for the ratings is stable.
Payment or repayment of intercompany loans ü ü ü ü ü ü
Short-term contractual obligations are typically settled with cash or short-term investments and operating cash flows. Most of these obligations are paid within one year. These include unconditional purchase obligations, other liabilities and accrued expenses, including liabilities for collateral and operating leases, and net unrecognized tax benefits.
We actively manage our financial position and liquidity levels in light of changing market, economic, and business conditions. Liquidity is managed at both the entity and enterprise level across the Company and is assessed on both base and stressed level liquidity needs. We believe we have sufficient liquidity to meet these needs. Additionally, we have existing intercompany agreements in place that facilitate liquidity management across the Company to enhance flexibility.
As of December 31, 2020, we held $7.44 billion of cash, U.S. government and agencies fixed income securities, and public equity securities which we would expect to be able to liquidate within one week. 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, 2020, cash and estimated liquidity available within one quarter, under normal market conditions and at current market prices, was $26.77 billion.
The payment of dividends by AIC to The Allstate Corporation is limited by Illinois insurance law to formula amounts based on statutory net income and statutory surplus, as well as the timing and amount of dividends paid in the preceding twelve months. Based on the greater of 2020 statutory net income or 10% of statutory surplus, the maximum amount of dividends that AIC will be able to pay, without prior Illinois Department of Insurance approval, at a given point in time in 2021 is estimated at $5.95 billion, less dividends paid during the preceding twelve months measured at that point in time. Notification and approval of intercompany lending activities are also required by the Illinois Department of Insurance for those transactions that exceed formula amounts based on statutory admitted assets and statutory surplus.
•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 596 million shares of treasury stock as of December 31, 2020), preferred stock, depositary shares, warrants, stock purchase contracts, stock purchase units and securities of trust subsidiaries. The specific terms of any securities we issue under this registration statement will be provided in the applicable prospectus supplements.
Defined benefit pension plans and other postretirement benefit plans (“OPEB”) Pension plan obligations within the next 12 months represent our planned contributions to certain unfunded non-qualified plans where the benefit obligation exceeds the assets. Obligations beyond 12 months are projected based on the average remaining service period using the current underfunded status of the plans. The OPEB plans’ obligations are estimated based on the expected benefits to be paid. See Note 17 of the consolidated financial statements for further information.
(1)Includes $1.62 billion of liabilities with a contractual surrender charge of less than 5% of the account balance.
(2)$294 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.
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 5.1% in 2020 and 6.0% in 2019. 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.
In addition to the normal risks of the business, Allstate is subject to significant risks as an insurer and a provider of other products and services. These risks are discussed in more detail in the Risk Factors section of this document.
Allstate manages these risks through an Enterprise Risk and Return Management (“ERRM”) framework that includes governance, processes, culture, and activities that are performed on an integrated, enterprise-wide basis, following our risk and return principles. Our legal and capital structures are designed to manage capital and solvency on a legal entity basis. Our risk-return principles define how we operate and guide risk and return decision making. These principles state that our priority is to maintain a strong foundation by protecting solvency, complying with laws and acting with integrity. Building upon this foundation, we strive to build strategic value and optimize risk and return.
•The Allstate Corporation Board of Directors (“Allstate Board”) has overall responsibility for oversight of Management’s design and implementation of ERRM.
•The Risk and Return Committee (“RRC”) of the Allstate Board oversees effectiveness of the ERRM program, governance structure and risk-related decision-making, while focusing on the Company’s overall risk profile.
•The Audit Committee oversees the effectiveness of internal controls over financial reporting, disclosure controls and procedures as well as
•The Enterprise Risk and Return Council (“ERRC”), directs ERRM by establishing risk and return targets, determining economic capital levels and monitoring integrated strategies and actions from an enterprise risk and return perspective. The ERRC consists of Allstate’s chief executive officer, vice chair, chief financial officer, chief risk officer and other senior leaders.
•Other key committees work with the ERRC to direct ERRM activities, including the Operating Committee, the Operational Risk Council, the Information Security Council, the Corporate Asset Liability Committee, liability governance committees, and investment committees.
Key risks are assessed and reported through comprehensive ERRM reports prepared for senior management and the RRC. The risk summary report communicates alignment of Allstate’s risk profile with risk and return principles while providing a perspective on risk position. Discussion promotes active engagement with management and the RRC. Internal controls over key risks are managed and reported to senior management and the Audit Committee of the Company through a semiannual risk control dashboard. Annually, we review risks related to the strategic plan, operating plan and incentive compensation programs with the Allstate Board.
We manage strategic risk through the Allstate Board and senior management strategy reviews that include a risk and return assessment of our strategic plans and ongoing monitoring of our strategic actions, key assumptions and the external competitive environment. Using the ERRM framework, Allstate designs strategies that seek to optimize risk-adjusted returns on economic capital for risk types including interest rate risk, credit risk, equity investments, including those with idiosyncratic return potential, auto profitability and growing property exposure.
Insurance risk and return management addresses fluctuations in the timing, frequency and severity of benefits, expenses, and premiums relative to the return expectations inclusive of systemic risk, concentration of insurance exposures, policy terms, reinsurance coverage, and claims handling practices.
•Stochastic methods: measures and monitors risks such as natural catastrophes and severe weather. We develop probabilistic estimates of risk based on our exposures, historical observed volatility or industry-recognized models in the case of catastrophe risk.
We actively manage our capital and liquidity levels in light of changing market, economic and business conditions. Our capital position, capital generation capacity, and targeted risk profile provide strategic and financial flexibility.
From time to time, we engage independent advisors to assess and consult on operational risks. We also perform assessments of the quality of our operational risk program and identify opportunities to strengthen our internal controls.
Culture risk and return management addresses the potential for loss of stakeholder value from a suboptimal work environment, missed opportunities, or ineffective risk management practices. Allstate defines organization culture as a self-sustaining system of shared values, principles and priorities that shape beliefs, drive behavior and influence decision-making within an organization.
•Reserve for property and casualty insurance claims and claims expense estimation
processes and controls of valuation service providers. In addition, we may validate the reasonableness of fair values by comparing information obtained from valuation service providers or brokers to other third-party valuation sources for selected securities. We perform ongoing price validation procedures such as back-testing of actual sales, which corroborate the various inputs used in internal models to market observable data. When fair value determinations are expected to be more variable, we validate them through reviews by members of management who have relevant expertise and who are independent of those charged with executing investment transactions.
We also perform an analysis to determine whether there has been a significant decrease in the volume and level of activity for the asset when compared to normal market activity, and if so, whether transactions may not be orderly. Among the indicators we consider in determining whether a significant decrease in the volume and level of market activity for a specific asset has occurred include the level of new issuances in the primary market, trading volume in the secondary market, level of credit spreads over historical levels, bid-ask spread, and price consensuses among market participants and sources. If evidence indicates that prices are based on transactions that are not orderly, we place little, if any, weight on the transaction price and will estimate fair value using an internal model. As of December 31, 2020 and 2019, we did not adjust fair values provided by our valuation service providers or brokers or substitute them with an internal model for such securities.
appropriate authority has made the decision to sell or whether it is more likely than not we will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes. If a security meets either of these criteria, any existing credit loss allowance would be written-off against the amortized cost basis of the asset along with any remaining unrealized losses, with the incremental losses recorded in earnings.
DAC related to property and casualty contracts is amortized into income as premiums are earned, typically over periods of six or twelve months for personal lines policies or generally one to five years for protection plans and other contracts (primarily related to finance and insurance products).
DAC related to interest-sensitive life insurance is amortized in proportion to the incidence of the total present value of gross profits, which includes both actual historical gross profits (“AGP”) and estimated future gross profits (“EGP”) expected to be earned over the estimated lives of the contracts. The amortization is net of interest on the prior period DAC balance using rates established at the inception of the contracts. Actual amortization periods generally range from 15-30 years; however, incorporating estimates of the rate of customer surrenders, partial withdrawals and deaths generally results in the majority of the DAC being amortized during the surrender charge period, which is typically 10-20 years for interest-sensitive life. The rate of DAC amortization is reestimated and adjusted by a cumulative charge or credit to income when there is a difference between the incidence of actual versus expected gross profits in a reporting period or when there is a change in total EGP.
and circumstances surrounding the potential negative amortization are considered to determine whether it is appropriate for recognition in the consolidated financial statements. Negative amortization is only recorded when the increased DAC balance is determined to be recoverable based on facts and circumstances. For products whose supporting investments are exposed to capital losses in excess of our expectations which may cause periodic AGP to become temporarily negative, EGP and AGP utilized in DAC amortization may be modified to exclude the excess capital losses.
The following table displays the sensitivity of reasonably likely changes in assumptions included in the gross profit components of investment margin or
benefit margin to amortization of the DAC balance as of December 31, 2020.
Increase in future investment margins of 25 basis points $ 54
For additional detail related to DAC, see the Allstate Life Segment section of the MD&A.
Evaluation of goodwill for impairment Goodwill represents the excess of amounts paid for acquiring businesses over the fair value of the net assets acquired, less any impairment of goodwill recognized. Goodwill is recognized when acquired and allocated to reporting units based on which unit is expected to benefit from the synergies of the business combination. Our goodwill reporting units are equivalent to our reportable segments: Allstate Protection, Protection Services, Allstate Life and Allstate Benefits to which goodwill has been assigned.
Upon acquisition, the purchase price of the acquired business is assumed to be its fair value. Subsequently, we estimate the fair value of our businesses in each goodwill reporting unit, utilizing a combination of widely accepted valuation techniques including a stock price and market capitalization analysis, discounted cash flow (“DCF”) calculations and an estimate of a business’s fair value using market to book multiples derived from peer company analysis. The stock price and market capitalization analysis takes into consideration the quoted market price of our outstanding common stock and includes a control premium, derived from relevant historical acquisition activity, in determining the estimated fair value of the consolidated entity before allocating that fair value to individual reporting units. The DCF analysis utilizes long term assumptions for revenues, investment income, benefits, claims, other operating expenses and income taxes to produce projections of both income and cash flows available for dividends that are present valued using the weighted average cost of capital. Market to book multiples represent the mean market to book multiple for selected peer companies with operations similar to our goodwill reporting units to which the multiple is applied. The outputs from these methods are weighted based on the nature of the business and the relative amount of market observable assumptions supporting the estimates. The computed values are then weighted to reflect the fair value estimate based on the specific attributes of each goodwill reporting unit.
settle claims, less losses that have been paid. The significant lines of business are auto, homeowners, and other personal lines for Allstate Protection, and asbestos, environmental, and other discontinued lines for Discontinued Lines and Coverages. Allstate Protection’s claims are typically reported promptly with relatively little reporting lag between the date of occurrence and the date the loss is reported. Auto and homeowners liability losses generally take an average of about two years to settle, while auto physical damage, homeowners property and other personal lines have an average settlement time of less than one year. Discontinued Lines and Coverages involve long-tail losses, such as those related to asbestos and environmental claims, which often involve substantial reporting lags and extended times to settle.
The actuarial methods used to develop reserve estimates Reserve estimates are derived by using several different actuarial estimation methods that are variations on one primary actuarial technique. The actuarial technique is known as a “chain ladder” estimation process in which historical loss patterns are applied to actual paid losses and reported losses (paid losses plus individual case reserves established by claim adjusters) for an accident year or a report year to create an estimate of how losses are likely to develop over time. An accident year refers to classifying claims based on the year in which the claims occurred. A report year refers to classifying claims based on the year in which the claims are reported. Both classifications are used to prepare estimates of required reserves for payments to be made in the future. The key assumptions affecting our reserve estimates comprise data elements including claim counts, paid losses, case reserves, and development factors calculated with this data.
Often, several different estimates are prepared for each detailed component, incorporating alternative
(claims reported or settled, losses paid, or changes to case reserves) occur differently than the implied assumptions contained in the previous development factor calculations. If claims reported, paid losses, or case reserve changes are greater or less than the levels estimated by previous development factors, reserve reestimates increase or decrease. When actual development of these data elements is different than the historical development pattern used in a prior period reserve estimate, a new reserve is determined. The difference between indicated reserves based on new reserve estimates and recorded reserves (the previous estimate) is the amount of reserve reestimate and is recognized as an increase or decrease in claims and claims expense in the Consolidated Statements of Operations. Total net reserve reestimates, after-tax, favorable impact on net income applicable to common shareholders were 6.3%, 2.2% and 10.0% in 2020, 2019 and 2018, respectively. The 3-year average of net reserve reestimates as a percentage of total reserves was a favorable 2.0% for Allstate Protection, an unfavorable 8.0% for Discontinued Lines and Coverages and a favorable 4.1% for Protection Services, each of these results being consistent within a reasonable actuarial tolerance for the respective businesses. A more detailed discussion of reserve reestimates is presented in the Claims and Claims Expense Reserves section of the MD&A.
Total net claims and claims expense reserves $ 20,577 $ 20,800 $ 20,268
Factors affecting reserve estimates Reserve estimates are developed based on the processes and historical development trends described above. These estimates are considered in conjunction with known facts and interpretations of circumstances and factors including our experience with similar cases, actual claims paid, historical trends involving claim payment patterns and pending levels of unpaid claims, loss management programs, product mix and contractual terms, changes in law and regulation, judicial decisions, and economic conditions. When we experience changes of the type previously mentioned, we may need to apply actuarial judgment in the determination and selection of development factors considered more reflective of the new trends, such as combining shorter or longer periods of historical results with current actual results to produce development factors based
•The Coronavirus has had a significant impact on driving patterns and auto frequency that may lead to historical development trends being less predictive of future loss development, potentially creating additional reserve variability.
•If a legal change is expected to have a significant impact on the development of claim severity for a coverage which is part of a particular line of insurance in a specific state, actuarial judgment is applied to determine appropriate development factors that will most accurately reflect the expected impact on that specific estimate.
Causes of reserve estimate uncertainty Since reserves are estimates of unpaid portions of claims and claims expenses that have occurred, including IBNR losses, the establishment of appropriate reserves, including reserves for catastrophe losses, requires regular reevaluation and refinement of estimates to determine our ultimate loss estimate.
At each reporting date, the highest degree of uncertainty in estimates for most of our losses from ongoing businesses arise from claims remaining to be settled for the current accident year and the most recent preceding accident year. The greatest degree of uncertainty exists in the current accident year because the current accident year contains the greatest proportion of losses that have not been reported or settled but must be estimated as of the current reporting date. Most of these losses relate to damaged property such as automobiles and homes, and medical care for injuries from accidents. During the first year after the end of an accident year, a large portion of the total losses for that accident year are settled. When accident year losses paid through the end of the first year following the initial accident year
are incorporated into updated actuarial estimates, the trends inherent in the settlement of claims emerge more clearly. Consequently, this is the point in time at which we tend to make our largest reestimates of losses for an accident year. After the second year, the losses that we pay for an accident year typically relate to claims that are more difficult to settle, such as those involving serious injuries or litigation. Private passenger auto insurance provides a good illustration of the uncertainty of future loss estimates: our typical annual percentage payout of reserves remaining at December 31 for an accident year is approximately 45% in the first year after the end of the accident year, 20% in the second year, 15% in the third year, 10% in the fourth year, and the remaining 10% thereafter.
To develop a statistical indication of potential reserve variability within reasonably likely possible outcomes, an actuarial technique (stochastic modeling) is applied to the countrywide consolidated data elements for paid losses and paid losses combined with case reserves separately for injury losses, auto physical damage losses, and homeowners losses excluding catastrophe losses. Based on the combined historical variability of the development factors calculated for these data elements, an estimate of the standard error or standard deviation around these reserve estimates is calculated within each accident year for the last twelve years for each type of loss. The variability of these reserve estimates within one standard deviation of the mean (a measure of frequency of dispersion often viewed to be an acceptable level of accuracy) is believed by management to represent a reasonable and statistically probable measure of potential variability. Based on our products and coverages, historical experience, the statistical credibility of our extensive data and stochastic modeling of actuarial chain ladder methodologies used to develop reserve estimates, we estimate that the potential variability of our Allstate Protection reserves, excluding reserves for catastrophe losses, within a reasonable probability of other possible outcomes, may be approximately plus or minus 4%, or plus or minus $800 million in net income applicable to common shareholders. A lower level of variability exists for auto injury losses, which comprise approximately 80% of reserves, due to their relatively stable development patterns over a longer duration of time required to settle claims. Other types of losses, such as auto physical damage, homeowners losses and
other personal lines losses, which comprise about 20% of reserves, tend to have greater variability but are settled in a much shorter period of time. Although this evaluation reflects most reasonably likely outcomes, it is possible the final outcome may fall below or above these amounts. Historical variability of reserve estimates is reported in the Claims and Claims Expense Reserves section of the MD&A.
Reserve estimates are confidential and proprietary and by their nature are very complex to determine and subject to significant judgments. Reserve estimates do not represent an exact determination for each outstanding claim. Claims may be subject to litigation. As actual claims, paid losses and case reserve results emerge, our estimate of the ultimate cost to settle may be materially greater or less than previously estimated amounts.
Adequacy of reserve estimates We believe our net claims and claims expense reserves are appropriately established based on available methodologies, facts, technology, laws and regulations. We calculate and record a single best reserve estimate, in conformance with generally accepted actuarial standards and practices, for each line of insurance, its components (coverages and perils) and state, for reported losses and for IBNR losses, and as a result we believe that no other estimate is better than our recorded amount. Due to the uncertainties involved, the ultimate cost of losses may vary materially from recorded amounts, which are based on our best estimates.
Our exposure to liability for asbestos, environmental and other discontinued lines losses manifests differently depending on whether it arises from assumed reinsurance coverage, direct excess commercial insurance or direct primary commercial insurance. The direct insurance coverage we provided that covered asbestos, environmental and other discontinued lines was substantially “excess” in nature.
After evaluating our insureds’ probable liabilities for asbestos and 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, 2020 and 2019, IBNR was 50% and 49%, respectively, of combined net asbestos and environmental reserves.
reserve estimates is demonstrated in the Claims and Claims Expense Reserves section of the MD&A.
We periodically review the adequacy of reserves and recoverability of DAC using actual experience and current assumptions. In the event actual experience and current assumptions are adverse compared to the original assumptions and a premium deficiency is determined to exist, any remaining unamortized DAC
balance must be expensed to the extent not recoverable and the establishment of a premium deficiency reserve may be required.
We evaluate our traditional life insurance products, immediate annuities with life contingencies, and voluntary accident and health insurance individually.
In the third quarter of 2020, the premium deficiency evaluation of our immediate annuities with life contingencies resulted in a premium deficiency reserve (“PDR”) of $225 million, pre-tax. Our long-term investment yield assumption was lowered, which resulted in the prior sufficiency changing to a deficiency. The deficiency was recognized as an increase in the reserve for life contingent contract benefits. The original assumptions used to establish reserves were updated to reflect current assumptions, and the primary changes included mortality expectations, where annuitants are living longer than originally anticipated, and long-term investment yields. As of December 31, 2020, our reviews concluded that no additional premium deficiency adjustments were necessary for our immediate annuities with life contingencies.
As of December 31, 2020, traditional life insurance and accident and health insurance both have a substantial sufficiency. In 2019, our reviews concluded that no premium deficiency adjustments were necessary.
We also review these policies for circumstances where projected profits would be recognized in early years followed by projected losses in later years. In 2020 and 2019, our reviews concluded that there were no projected losses following projected profits in each long-term projection.
We will continue to monitor the experience of our traditional life insurance and immediate annuities. We periodically complete comprehensive mortality studies for our structured settlement annuities with life contingencies to determine whether annuitants are living for a longer period than originally estimated. We anticipate that investment and reinvestment yields, mortality, and policy terminations are the factors that would be most likely to require premium deficiency adjustments to reserves or related DAC. Mortality rates and investment and reinvestment yields are the factors that would be most likely to require a profits followed by losses liability accrual.
remeasurement. Short-term asset performance can differ significantly from the expected rate of return, especially in volatile markets. In 2020, the actual return on plan assets was higher than the expected return primarily due to a decline in interest rates which increased the fair value of our fixed income investments and strong equity market performance. In 2019, the actual return on plan assets was higher than the expected return due to strong equity market performance and declines in interest rates which increased the fair value of our fixed income investments.
Sensitivity of assumption changes included in the calculation of net cost as of December 31, 2020
Note 9 Reserve for Life-Contingent Contract Benefits and Contractholder Funds 177
Property and casualty insurance premiums (net of reinsurance ceded and indemnification programs of $1,141, $1,122 and $1,016)
(net of reinsurance ceded and indemnification programs of $530, $524 and $1,378)
Life contract benefits (net of reinsurance ceded of $155, $165 and $240)
Fixed income securities, at fair value (amortized cost, net $61,451 and $56,293)
Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 304 million and 319 million shares outstanding
Change in unrealized net capital gains and losses 1,293 1,889 (754)
Change in unamortized pension and other postretirement prior service credit 9 (47) (59)
Allstate is engaged, principally in the United States, in the property and casualty insurance and life insurance businesses. Allstate is one of the country’s largest personal property and casualty insurers and is organized into seven reportable segments: Allstate Protection, Discontinued Lines and Coverages, Protection Services (previously Service Businesses), Allstate Life, Allstate Benefits, Allstate Annuities, and Corporate and Other.
Allstate’s primary business is the sale of private passenger auto and homeowners insurance. The Company also offers several other personal property and casualty insurance products, select commercial property and casualty coverages, consumer product protection plans, device and mobile data collection services and analytic solutions using automotive telematics information, roadside assistance, finance and insurance products, life insurance, voluntary accident and health insurance and identity protection. Allstate primarily distributes its products through exclusive agents, financial specialists, independent agents and brokers, major retailers, contact centers and the internet.
Catastrophes, an inherent risk of the property and casualty insurance business, have contributed, and will continue to contribute, to material year-to-year fluctuations in the Company’s results of operations and financial position (see Note 8). The nature and level of catastrophic loss experienced in any period cannot be
predicted and could be material to results of operations and financial position.
The Company considers the following categories and locations to be the greatest areas of potential catastrophe losses:
The magnitude and duration of the global pandemic and the impact of actions taken by governmental authorities, businesses and consumers, including timing of vaccine distribution, to mitigate health risks create significant uncertainty. The Company will continue to closely monitor and proactively adapt to developments and changing conditions. Currently, it is not possible to reliably estimate the length and severity of the pandemic or its impact to the Company’s operations, but the effects could be material and may continue, emerge, evolve or accelerate in 2021.
Fixed income securities include bonds, asset-backed securities (“ABS”) and mortgage-backed securities (“MBS”). MBS includes residential and commercial mortgage-backed securities. Fixed income securities, which may be sold prior to their contractual maturity, are designated as available-for-sale (“AFS”) and are carried at fair value. The difference between amortized cost, net of credit loss allowances (“amortized cost, net”) 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. The Company excludes accrued interest receivable from the amortized cost basis of its AFS fixed income securities. 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.
Short-term investments, including money market funds, commercial paper, U.S. Treasury bills and other
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 generally recalculated on a prospective basis. Net investment income for AFS fixed income securities includes the impact of accreting the credit loss allowance for the time value of money. Accrual of income is suspended for 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. Accrued income receivable is monitored for recoverability and when not expected to be collected is written off through net investment income. Cash receipts on investments on nonaccrual status are generally recorded as a reduction of amortized cost. 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.
All derivatives are accounted for on a fair value basis and reported as other investments, other assets, other liabilities and accrued expenses or contractholder funds. Embedded derivative instruments subject to bifurcation are also accounted for on a fair value basis and are reported together with the host contract. The change in fair value of derivatives embedded in life and annuity product contracts and subject to bifurcation is reported in life and annuity contract benefits or interest credited to contractholder funds. Cash flows from embedded derivatives subject to bifurcation and derivatives receiving hedge accounting are reported consistently with the host contracts and hedged risks, respectively, within the Consolidated Statements of Cash Flows. Cash flows from other derivatives are reported in cash flows from investing activities within the Consolidated Statements of Cash Flows.
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
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.
The Company receives cash collateral for securities loaned in an amount generally equal to 102% and 105% of the fair value of domestic and foreign securities, respectively, and records the related obligations to return the collateral in other liabilities and accrued expenses. The carrying value of these obligations approximates fair value because of their relatively short-term nature. The Company monitors the market value of securities loaned on a daily basis and obtains additional collateral as necessary under the terms of the agreements to mitigate counterparty credit risk. The Company maintains the right and ability to repossess the securities loaned on short notice.
Revenues related to protection plans, other contracts (primarily finance and insurance products) and roadside assistance are deferred and earned over the term of the contract in a manner that recognizes revenue as obligations under the contracts are performed. Revenues from these products are classified as premiums as the products are backed by insurance. Protection plans and finance and insurance premiums are recognized using a cost-based incurrence method over the term of the contracts, which is generally over one to five years. Roadside
assistance premiums are recognized evenly over the term of the contract as performance obligations are fulfilled.
The portion of premiums written applicable to the unexpired terms of the policies is recorded as unearned premiums.
For the year ended December 31, 2020, the Company recognized $1.11 billion of Property and casualty insurance premiums for Protection Services that were included in the unearned premium balance as of December 31, 2019.
The increase in the provision for credit losses primarily related to customer enrollment in the Allstate Special Payment plan implemented in response to the Coronavirus, starting in March 2020.
Contract charges for variable life and variable annuity products consist of fees assessed against the contractholder account balances for contract maintenance, administration, mortality, expense and
Other revenue represents fees collected from policyholders relating to premium installment payments, commissions on sales of non-proprietary products, sales of identity protection services, fee-based services and other revenue transactions. Other revenue is recognized when performance obligations are fulfilled.
Costs that are related directly to the successful acquisition of new or renewal insurance policies and investment contracts are deferred and recorded as DAC. These costs are principally agent and broker remuneration, premium taxes and certain underwriting expenses. DSI costs, which are deferred and recorded as other assets, relate to sales inducements offered on sales to new customers, principally on fixed annuity and interest-sensitive life contracts. These sales inducements are primarily in the form of additional credits to the customer’s account balance or enhancements to interest credited for a specified period which are in excess of the rates currently being credited to similar contracts without sales inducements. DSI is amortized into income using the same methodology and assumptions as DAC and is included in interest credited to contractholder funds. All other acquisition costs are expensed as incurred and included in operating costs and expenses.
policies. The Company periodically reviews the recoverability of DAC using actual experience and current assumptions. Traditional life insurance products, immediate annuities with life contingencies, and voluntary accident and health insurance products are reviewed individually. If actual experience and current assumptions are adverse compared to the original assumptions and a premium deficiency is determined to exist, any remaining unamortized DAC balance would be expensed to the extent not recoverable and the establishment of a premium deficiency reserve may be required for any remaining deficiency.
The property and casualty recoverable evaluation considers the credit rating of the reinsurer, the period over which the reinsurance recoverable balances are expected to be recovered and other relevant factors including historical experience of reinsurer failures. Reinsurers in liquidation or in default status are evaluated individually using the Company’s historical liquidation recovery assumptions and any other relevant information available including the most recent public information related to the financial condition or liquidation status of the reinsurer.
For life reinsurance recoverables, the Company uses a probability of default and loss given default model developed independently of the Company to estimate current expected credit losses. The life reinsurance recoverable evaluation utilizes factors including historical industry factors based on the probability of liquidation, and incorporates current loss given default factors reflective of the industry.
The Company monitors the credit ratings of reinsurer counterparties and evaluates the circumstances surrounding credit rating changes as inputs into its credit loss assessments. Uncollectible reinsurance recoverable balances are written off against the allowances when there is no reasonable expectation of recovery.
The changes in the allowances are reported in property and casualty insurance claims and claims expense and life contract benefits.
Indemnification The Company also participates in various indemnification mechanisms, including industry pools and facilities, which are reimbursement
mechanisms that assess participating insurers for expected insured claims, reimburse participating insurers for qualifying paid claims and permit participating insurers to recoup amounts assessed directly from insureds. Indemnification recoverables are backed by the financial resources of the property and casualty insurance company market participants.
Goodwill represents the excess of amounts paid for acquiring businesses over the fair value of the net assets acquired, less any impairment of goodwill recognized. The Company’s goodwill reporting units are equivalent to its reportable segments, Allstate Protection, Protection Services, Allstate Life and Allstate Benefits to which goodwill has been assigned.
Accumulated amortization on intangible assets was $751 million and $633 million as of December 31, 2020 and 2019, 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.
Contractholder funds represent interest-bearing liabilities arising from the sale of products such as interest-sensitive life insurance and fixed annuities. Contractholder funds primarily comprise cumulative deposits received and interest credited to the contractholder less cumulative contract benefits, surrenders, withdrawals and contract charges for
Pension and other postretirement gains and losses represent the remeasurement of projected benefit obligation and plan assets, which are immediately recognized in earnings and are referred to as pension and other postretirement remeasurement gains and losses on the Consolidated Statements of Operations. The Company’s policy is to remeasure its pension and postretirement plans on a quarterly basis.
• Differences between the expected and the actual return on plan assets
Separate accounts assets are carried at fair value. The assets of the separate accounts are legally segregated and available only to settle separate accounts contract obligations. Separate accounts liabilities represent the contractholders’ claims to the related assets and are carried at an amount equal to the separate accounts assets. Investment income and realized capital gains and losses of the separate accounts accrue directly to the contractholders and therefore are not included in the Company’s Consolidated Statements of Operations. Deposits to and surrenders and withdrawals from the separate accounts are reflected in separate accounts liabilities and are not included in consolidated cash flows.
The Company reviews its lawsuits, regulatory inquiries, and other legal proceedings on an ongoing basis. The Company establishes accruals for such
The Company has equity incentive plans under which it grants nonqualified stock options, restricted stock units and performance stock awards (“equity awards”) to certain employees and directors of the Company. The Company measures the fair value of equity awards at the grant date and recognizes the expense over the shorter of the period in which the requisite service is rendered or retirement eligibility is attained. The expense for performance stock awards with no market condition is adjusted each period to reflect the performance factor most likely to be achieved at the end of the performance period. The
The Company carries an allowance for expected credit losses for all financial assets measured at amortized cost on the Consolidated Statements of Financial Position. The Company considers past events, current conditions, and reasonable and supportable forecasts in estimating an allowance for credit losses. The Company also carries a credit loss allowance for fixed income securities where applicable and, when amortized cost is reported, it is net of credit loss allowances. For additional information, refer to the Investments, Reinsurance, Indemnification or Recognition of premium revenues and contract charges, topics of this section.
The Company has certain operating leases for office facilities, computer and office equipment, and vehicles. The Company’s leases have remaining lease terms of 1 year to 9 years, some of which include options to extend the leases for up to 20 years, and some of which include options to terminate the leases within 60 days.
The Company determines if an arrangement is a lease at inception. Leases with an initial term less than one year are not recorded on the balance sheet and the lease costs for these leases are recorded as an expense on a straight-line basis over the lease term.
Operating 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 $166 million and $171 million, including $30 million of variable lease costs in both 2020 and 2019.
The local currency of the Company’s foreign subsidiaries is deemed to be the functional currency of the country in which these subsidiaries operate. The financial statements of the Company’s foreign subsidiaries are translated into U.S. dollars at the exchange rate in effect at the end of a reporting period for assets and liabilities and at average exchange rates during the period for results of operations.
Upon adoption of the guidance, the Company recorded a total allowance for expected credit losses of $289 million, pre-tax. After consideration of existing valuation allowances maintained prior to adopting the new guidance, the Company increased its valuation allowances for credit losses to conform to the new requirements which resulted in recognizing a cumulative effect decrease in retained income of $88 million, after-tax, at the date of adoption.
The measurement of credit losses for AFS fixed income securities measured at fair value is not affected except that credit losses recognized are limited to the amount by which fair value is below amortized cost and the credit loss adjustment is recognized through a valuation allowance which may change over time but once recorded cannot subsequently be reduced to an amount below zero. Previously these credit loss adjustments were recorded as other-than-temporary impairments and were not reversed once recorded.
Under the new guidance, measurement assumptions, including those for mortality, morbidity and policy terminations, will be required to be reviewed and updated at least annually. The effect of updating measurement assumptions other than the discount rate are required to be measured on a retrospective
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 anticipates the financial statement impact of adopting the new guidance to be material with respect to Allstate Life Insurance Company of New York’s (“ALNY”) run-off annuity business, largely attributed to the impact of transitioning to a discount rate based on an upper-medium grade fixed income investment yield.
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 eliminated.
Simplifications to the Accounting for Income Taxes In December 2019, the FASB issued amendments to simplify the accounting for income taxes. The amendments eliminate certain exceptions in the existing guidance including those related to intraperiod tax allocation and deferred tax liability recognition when a subsidiary meets the criteria to apply the equity method of accounting. 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, retrospectively 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.
On September 30, 2020, National General's shareholders voted to approve the definitive agreement.
On November 19, 2020, the Company issued $600 million of 0.750% Senior Notes due 2025 and $600 million of 1.450% Senior Notes due 2030 to partially fund the acquisition.
The transaction closed on January 4, 2021 and National General shareholders received $32.00 per share in cash from the Company, plus a closing dividend of $2.50 per share, providing $34.50 in total value per share.
Due to the limited time since the closing date, the initial accounting for the acquisition is incomplete. As a result, the Company is unable to provide amounts recognized as of the closing date for the major classes of assets acquired and liabilities assumed. The Company will include this information in its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021.
iCracked On February 12, 2019, the Company acquired iCracked Inc. (“iCracked”) which offers on-site, on-demand repair services for smartphones and tablets in North America, supporting Allstate Protection Plans' (formerly known as SquareTrade) operations. In conjunction with the iCracked acquisition, the Company recorded goodwill of $17 million.
In the first quarter of 2021, the assets and liabilities of the business will be reclassified as held-for-sale and results will be presented as discontinued operations. This change will be applied on a retrospective basis.
Allstate Protection principally offers private passenger auto and homeowners insurance in the United States and Canada, with earned premiums accounting for 79.4% of Allstate’s 2020 consolidated revenues. Allstate Protection primarily operates in the U.S. (all 50 states and the District of Columbia (“D.C.”)) and Canada. For 2020, the top U.S. geographic locations for premiums earned by the Allstate Protection segment were Texas, California, New York and Florida. No other jurisdiction accounted for more than 5% of premium earned for Allstate Protection. Revenues from external customers generated outside the United States were $1.57 billion, $1.37 billion and $1.20 billion in 2020, 2019 and 2018, respectively.
Protection Services comprise Allstate Protection Plans, Allstate Dealer Services, Allstate Roadside, Arity and Allstate Identity Protection. Protection Services offer consumer product protection plans, finance and insurance products (including vehicle service contracts, guaranteed asset protection waivers, road hazard tire and wheel and paintless dent repair protection), roadside assistance, device and mobile data collection services and analytic solutions using automotive telematics information and identity protection. Protection Services primarily operate in the U.S. and Canada, with Allstate Protection Plans also offering services in Europe and Japan. Revenues from external customers generated outside the United States relate to consumer product protection plans sold primarily in
the European Union and were $188 million, $95 million and $61 million in 2020, 2019 and 2018, respectively.
Allstate Benefits offers voluntary benefits products, including life, accident, critical illness, hospital, short-term disability and other health products. Allstate Benefits primarily operates in the U.S. (all 50 states and D.C.) and Canada. For 2020, the top geographic locations for statutory direct accident and health insurance premiums were Florida, Texas, North Carolina, and California. No other jurisdiction accounted for more than 5% of statutory direct accident and health insurance premiums. Revenues from external customers generated outside the United States relate to voluntary accident and health insurance sold in Canada and were not material.
Allstate Annuities consists primarily of deferred fixed annuities and immediate annuities (including standard and sub-standard structured settlements). This segment is in run-off.
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, Protection Services, Allstate Life, Allstate Benefits, Allstate Annuities, and Corporate and Other levels for decision-making purposes.
The measure of segment profit or loss used in evaluating performance is underwriting income for the Allstate Protection and Discontinued Lines and Coverages segments and adjusted net income for the Protection Services, Allstate Life, Allstate Benefits, Allstate Annuities, and Corporate and Other segments. A reconciliation of these measures to net income applicable to common shareholders is provided below.
• Amortization of DAC and DSI, to the extent they resulted from the recognition of certain realized capital gains and losses or valuation changes on embedded derivatives that are not hedged, after-tax
(2)Other revenue is primarily related to Allstate Identity Protection, Allstate Dealer Services, and Allstate Protection Plans.
DAC and DSI amortization related to realized capital gains and losses and valuation changes on embedded derivatives that are not hedged, after-tax 8 (5) (8)
DAC and DSI amortization related to realized capital gains and losses, after-tax - - 1
Valuation changes on embedded derivatives that are not hedged, after-tax (2) (6) 3
Pension and other postretirement remeasurement gains (losses), after-tax 39 (90) (370)
Reportable segment total assets, investments and deferred policy acquisition costs (1)
(1)The balances reflect the elimination of related party investments between segments.
Total fixed income securities $ 56,293 $ 2,847 $ (96) $ 59,044
(2)Includes valuation of equity securities and certain limited partnership interests where the underlying assets are predominately public equity securities.
Fixed income securities $ 59,044 $ 2,847 $ (96) $ 2,751
Mortgage loans The Company’s mortgage loans are commercial mortgage loans collateralized by a variety of commercial real estate property types located across the United States and totaled $4.08 billion and $4.82 billion, net of credit loss allowance, as of December 31, 2020 and 2019, respectively. Substantially all of the commercial mortgage loans are non-recourse to the borrower.
Private equity $ 4,417 $ 1,708 $ 6,125 $ 4,463 $ 1,668 $ 6,131
Total $ 5,785 $ 1,824 $ 7,609 $ 6,264 $ 1,814 $ 8,078
Municipal bonds The Company maintains a diversified portfolio of municipal bonds, including tax exempt and taxable securities, which totaled $9.59 billion and $8.62 billion as of December 31, 2020 and 2019, respectively.
The municipal bond portfolio includes general obligations of state and local issuers and revenue bonds (including pre-refunded bonds, which are bonds for which an irrevocable trust has been established to fund the remaining payments of principal and interest).
Short-term investments Short-term investments, including money market funds, commercial paper, U.S. Treasury bills and other short-term investments, are carried at fair value. As of December 31, 2020 and 2019, the fair value of short-term investments totaled $7.80 billion and $4.26 billion, respectively.
Other investments Other investments primarily consist of bank loans, real estate, policy loans, agent loans and derivatives. Bank loans are primarily senior secured corporate loans and are carried at amortized cost, net. 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 amortized cost, net. Derivatives are carried at fair value.
Securities loaned The Company’s business activities include securities lending programs with third parties, mostly large banks. As of December 31, 2020 and 2019, fixed income and equity securities with a carrying value of $1.19 billion and $1.74 billion, respectively, were on loan under these agreements. Interest income on collateral, net of fees, was $3 million, $5 million and $4 million in 2020, 2019 and 2018, respectively.
Fixed income securities The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed income security that may require a credit loss allowance.
If the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the fixed income security, a credit loss allowance is recorded in earnings for the shortfall in expected cash flows; however, the amortized cost, net of the credit loss allowance, may not be lower than the fair value of the security. The portion of the unrealized loss related to factors other than credit remains classified in AOCI. If the Company determines that the fixed income security does not have sufficient cash flow or other information to estimate a recovery value for the security, the Company may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings.
(1)Allowance for fixed income securities as of December 31, 2020 comprised $1 million and $2 million of corporate bonds and ABS, respectively.
U.S. government and agencies 23 $ 185 $ (1) - $ - $ - $ (1)
Total fixed income securities 642 $ 4,301 $ (61) 228 $ 801 $ (35) $ (96)
Below investment grade fixed income securities 61 423 (20) 43 207 (15) (35)
Investment grade is defined as a security having a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A or BBB from S&P Global Ratings (“S&P”), a comparable rating from another nationally recognized rating agency, or a comparable internal rating if an externally provided rating is not available. Market prices for certain securities may have credit spreads which imply higher or lower credit quality than the current third-party rating. Unrealized losses on investment grade securities are principally related to an increase in market yields which may include increased risk-free interest rates or wider credit spreads since the time of initial purchase. The unrealized losses are expected to reverse as the securities approach maturity.
As of December 31, 2020, the Company has not made the decision to sell and it is not more likely than not the Company will be required to sell fixed income securities with unrealized losses before recovery of the amortized cost basis.
Loans are evaluated on a pooled basis when they share similar risk characteristics. The Company monitors loans through a quarterly credit monitoring process to determine when they no longer share similar risk characteristics and are to be evaluated individually when estimating credit losses.
Accrual of income is suspended for loans that are in default or when full and timely collection of principal and interest payments is not probable. Accrued income receivable is monitored for recoverability and when not expected to be collected is written off through net investment income. Cash receipts on
loans on non-accrual status are generally recorded as a reduction of amortized cost.
Accrued interest is excluded from the amortized cost of loans and is reported within the accrued investment income line of the Consolidated Statements of Financial Position. As of December 31, 2020, accrued interest totaled $15 million, $4 million and $2 million for mortgage loans, bank loans and agent loans, respectively.
amortized cost. An alternative approach may be utilized to estimate credit losses using the present value of the loan’s expected future repayment cash flows discounted at the loan’s current effective interest rate.
Individual loan credit loss allowances are adjusted for subsequent changes in the fair value of the collateral less costs to sell, when applicable, or present value of the loan’s expected future repayment cash flows.
Debt service coverage ratio is considered a key credit quality indicator when mortgage loan credit loss allowances are estimated. Debt service coverage ratio represents the amount of estimated cash flow from the property available to the borrower to meet principal and interest payment obligations. Debt service coverage ratio estimates are updated annually or more frequently if conditions are warranted based on the Company’s credit monitoring process.
($ in millions) 2015 and prior 2016 2017 2018 2019 Current Total Total
1.0 - 1.25 133 27 36 70 48 24 338 225
1.26 - 1.50 378 41 144 187 333 6 1,089 1,237
Amortized cost before allowance $ 1,563 $ 464 $ 463 $ 630 $ 880 $ 142 $ 4,142 $ 4,820
borrower guarantees. Payments on all mortgage loans were current as of December 31, 2020, 2019 and 2018. During the fourth quarter of 2020, the Company sold $234 million of mortgage loans, net of a $17 million credit loss allowance, resulting in a net realized capital loss of $4 million.
Bank loans amortized cost by credit rating and year of origination
As of December 31, 2020, 85% of agent loans balance represents the top three highest credit quality categories. The allowance for agent loans totaled $5 million as of December 31, 2020 and did not change from January 1, 2020.
(b)Quoted prices for identical or similar assets or liabilities in markets that are not active; or
periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments.
The Company is responsible for the determination of fair value and the supporting assumptions and methodologies. The Company gains assurance that assets and liabilities are appropriately valued through the execution of various processes and controls designed to ensure the overall reasonableness and consistent application of valuation methodologies, including inputs and assumptions, and compliance with accounting standards. For fair values received from third parties or internally estimated, the Company’s processes and controls are designed to ensure that the valuation methodologies are appropriate and consistently applied, the inputs and assumptions are reasonable and consistent with the objective of determining fair value, and the fair values are accurately recorded. For example, on a continuing basis, the Company assesses the reasonableness of individual fair values that have stale security prices or that exceed certain thresholds as compared to previous fair values received from valuation service providers or brokers or derived from internal models. The Company performs procedures to understand and assess the methodologies, processes and controls of valuation service providers. In addition, the Company may validate the reasonableness of fair values by comparing information obtained from valuation service providers or brokers to other third-party valuation sources for selected securities. The Company performs ongoing price validation procedures such as back-testing of actual sales, which corroborate the various inputs used in internal models to market observable data. When fair value determinations are expected to be more variable, the Company validates them through reviews by members of management who have relevant expertise and who are independent of those charged with executing investment transactions.
the 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.
•Short-term: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.
•Other investments: Free-standing exchange listed derivatives that are not actively traded are valued based on quoted prices for identical instruments in markets that are not active.
•Short-term: For certain short-term investments, amortized cost is used as the best estimate of fair value.
Contractholder funds: Derivatives embedded in life and annuity contracts $ - $ - $ (516) $ (516)
% of total liabilities at fair value - % 23.8 % 80.4 % (4.2) % 100.0 %
U.S. government and agencies $ 4,689 $ 397 $ - $ 5,086
Total assets at fair value $ 17,081 $ 56,868 $ 738 $ (40) $ 74,647
% of total liabilities at fair value - % 15.7 % 86.5 % (2.2) % 100.0 %
Quantitative information about the significant unobservable inputs used in Level 3 fair value measurements
Derivatives embedded in life and annuity contracts - Equity-indexed and forward starting options $ (430) Stochastic cash flow model Projected option cost 1.0% - 4.2%
As of December 31, 2020 and 2019, Level 3 fair value measurements of fixed income securities total $379 million and $342 million, respectively, and include $93 million and $50 million, respectively, of securities valued based on non-binding broker quotes where the inputs have not been corroborated to be market
observable and $35 million and $36 million, respectively, of municipal fixed income securities that are not rated by third-party credit rating agencies. As the Company does not develop the Level 3 fair value unobservable inputs for these fixed income securities, they are not included in the table above. However, an increase (decrease) in credit spreads for fixed income securities valued based on non-binding broker quotes would result in a lower (higher) fair value, and an increase (decrease) in the credit rating of municipal bonds that are not rated by third-party credit rating agencies would result in a higher (lower) fair value.
($ in millions) Net income OCI Into Level 3 Out of Level 3 Purchases Sales Issues Settlements
ABS 65 - (1) 54 (49) 48 (32) - (28) 57
MBS 40 1 (2) - - 11 (7) - (16) 27
Total recurring Level 3 liabilities $ (462) $ (43) $ - $ - $ - $ - $ - $ (34) $ 23 $ (516)
Components of net income $ (23) $ 23 $ (1) $ (42) $ (43)
ABS 69 1 (1) 76 (210) 159 (22) - (7) 65
Total fixed income securities 325 1 6 158 (330) 258 (51) - (25) 342
Free-standing derivatives, net 1 (1) - - - - - - - -
Total recurring Level 3 assets 697 30 6 158 (330) 375 (173) - (25) 738
Contractholder funds: Derivatives embedded in life and annuity contracts (224) (61) - (175) - - - (16) 14 (462)
Total gains (losses) included in: Transfers Balance as of December 31, 2018
Short-term investments 20 - - - - 55 (45) - - 30
Total recurring Level 3 liabilities $ (286) $ 58 $ - $ - $ - $ - $ - $ (2) $ 6 $ (224)
Transfers out of Level 3 during 2020, 2019 and 2018 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.
Total recurring Level 3 assets $ (2) $ 6 $ 36
Contractholder funds: Derivatives embedded in life and annuity contracts $ (43) $ (61) $ 58
Total included in net income $ (45) $ (55) $ 94
Changes in unrealized net capital gains and losses reported in OCI (1)
Contractholder funds on investment contracts Level 3 $ 7,795 $ 9,089 $ 8,438 $ 9,158
for as fair value, cash flow, foreign currency fair value or foreign currency cash flow hedges. The Company designates certain investment risk transfer reinsurance agreements as fair value hedges when the hedging instrument is highly effective in offsetting the risk of changes in the fair value of the hedged item. The fair value of the hedged liability is reported in contractholder funds in the Consolidated Statements of Financial Position. The impact from results of the fair value hedge is reported in interest credited to contractholder funds in the Consolidated Statements of Operations.
For those derivatives which qualify and have been designated as fair value accounting hedges, net income includes the changes in the fair value of both the derivative instrument and the hedged risk. For cash flow hedges, gains and losses are amortized from AOCI and are reported in net income in the same period the forecasted transactions being hedged impact net income.
Other embedded derivative financial instruments Other investments 750 n/a - - -
Total asset derivatives $ 2,009 4,440 $ 206 $ 218 $ (12)
Interest rate cap agreements Other liabilities & accrued expenses $ 19 n/a $ - $ - $ -
Futures Other liabilities & accrued expenses n/a 730 - - -
Options Other liabilities & accrued expenses n/a 2,712 (110) - (110)
Total return swap agreements - fixed income Other liabilities & accrued expenses 50 n/a - - -
Foreign currency forwards Other liabilities & accrued expenses 367 n/a (13) 2 (15)
Credit default swaps - selling protection Other liabilities & accrued expenses 5 n/a - - -
(1)Volume for OTC and cleared derivative contracts is represented by their notional amounts. Volume for exchange traded derivatives is represented by the number of contracts, which is the basis on which they are traded. (n/a = not applicable)
Other Other assets $ 2 n/a $ - $ - $ -
Futures Other liabilities & accrued expenses n/a 1,089 - - -
Foreign currency forwards Other liabilities & accrued expenses 745 n/a 19 28 (9)
Asset derivatives $ 16 $ (14) $ (1) $ 1 $ - $ 1
Total return swaps - fixed income 1 - - - 1
Total return swaps - equity index 4 - - - 4
Total $ 53 $ (1) $ (31) $ 29 $ 50
Total $ (15) $ 7 $ (7) $ 40 $ 25
Total return swaps - fixed income (1) - - - (1)
(1)Allstate uses the lower of S&P’s or Moody’s long-term debt issuer ratings.
Certain of the Company’s derivative transactions contain credit-risk-contingent termination events and cross-default provisions. Credit-risk-contingent termination events allow the counterparties to terminate the derivative agreement or a specific trade on certain dates if AIC’s 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.
Gross liability fair value of contracts containing credit-risk-contingent features $ 27 $ 16
Gross asset fair value of contracts containing credit-risk-contingent features and subject to MNAs (9) (11)
Corporate debt $ - $ - $ - $ - $ 9 $ 9 $ -
Total $ - $ - $ - $ - $ 9 $ 9 $ -
In selling protection with CDS, the Company sells credit protection on an identified single name, a basket of names in a first-to-default (“FTD”) structure or credit derivative index (“CDX”) that is generally investment grade, and in return receives periodic premiums through expiration or termination of the agreement. With single name CDS, this premium or credit spread generally corresponds to the difference between the yield on the reference entity’s public fixed maturity cash instruments and swap rates at the time the agreement is executed. With a FTD basket, because of the additional credit risk inherent in a basket of named reference entities, the premium generally corresponds to a high proportion of the sum of the credit spreads of the names in the basket and the correlation between the names. CDX is utilized to take a position on multiple (generally 125) reference entities. Credit events are typically defined as bankruptcy, failure to pay, or restructuring, depending on the nature of the reference entities. If a credit event occurs, the Company settles with the counterparty, either through physical settlement or cash settlement. In a physical settlement, a reference asset is delivered by the buyer
Commitments to invest in limited partnership interests $ 2,933 $ 2,837
unconditionally cancellable, the Company recognizes a credit loss allowance on such commitments. Commitments have either fixed or varying expiration dates or other termination clauses. The fair value of these commitments is insignificant.
Note 8 Reserve for Property and Casualty Insurance Claims and Claims Expense
When the Company experiences changes in the mix or type of claims or changing claim settlement patterns, it may need to apply actuarial judgment in the determination and selection of development factors to be more reflective of the new trends. For example, the Coronavirus has had a significant impact on driving patterns and auto frequency that may lead to historical development trends being less predictive of future loss development, potentially creating additional reserve variability. Generally, the initial reserves for a new accident year are established based on actual claim frequency and severity assumptions for different business segments, lines and coverages based on historical relationships to relevant inflation indicators. Reserves for prior accident years are statistically determined using several different actuarial estimation methods. Changes in auto claim frequency may result from changes in mix of business, the rate of distracted driving, miles driven or other macroeconomic factors. Changes in auto current year claim severity are generally influenced by inflation in the medical and auto repair sectors of the economy and the effectiveness and efficiency of claim practices. The Company mitigates these effects through various loss management programs. When such changes in claim data occur, actuarial judgment is used to determine appropriate development factors to establish reserves.
As part of the reserving process, the Company may also supplement its claims processes by utilizing third-party adjusters, appraisers, engineers, inspectors, and other professionals and information sources to assess and settle catastrophe and non-catastrophe related claims. The effects of inflation are implicitly considered in the reserving process.
Because reserves are estimates of unpaid portions of losses that have occurred, including incurred but not reported (“IBNR”) losses, the establishment of appropriate reserves, including reserves for catastrophes, Discontinued Lines and Coverages and reinsurance and indemnification recoverables, is an inherently uncertain and complex process. The ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimates.
The highest degree of uncertainty is associated with reserves for losses incurred in the initial reporting period as it contains the greatest proportion of losses that have not been reported or settled. The Company also has uncertainty in the Discontinued Lines and Coverages reserves that are based on events long since passed and are complicated by lack of historical data, legal interpretations, unresolved legal issues and legislative intent based on establishment of facts.
The Company regularly updates its reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in prior year reserve estimates, which may be material, are reported in property and casualty insurance claims and claims expense in the Consolidated Statements of Operations in the period such changes are determined.
Balance as of January 1 $ 27,712 $ 27,423 $ 26,325
Auto $ (63) $ (306) $ (416) $ (44) $ (17) $ (39) $ (107) $ (323) $ (455)
Other personal lines (27) 8 (6) (39) - (1) (66) 8 (7)
Commercial lines 34 18 108 2 (1) - 36 17 108
(2)The Company’s 2020 annual reserve review, using established industry and actuarial best practices, resulted in unfavorable reestimates of $132 million.
In the third quarter of 2020, the Company recognized favorable prior year catastrophe reserve reestimates of approximately $495 million, net of expenses and adjustments to reinsurance, related to two subrogation settlements, which is reflected as a reduction of claims and claims expense in the Consolidated Statements of Operations.
On July 1, 2020, PG&E emerged from Chapter 11 and funded the subrogation trust from which distributions will be made to the insurers. Insurers have five years from the effective date of the Plan of Reorganization to submit proof of paid losses to the trust prior to the final distribution.
Southern California Edison settlement On September 14, 2020, Southern California Edison reached a $1.16 billion settlement agreement with insurance companies, resolving all insurance subrogation claims arising from the December 2017 Thomas and Koenigstein Wildfires and January 2018 Montecito Mudslides litigation. Allstate was party to the agreement and recognized a favorable impact of approximately $45 million. The Company has received substantially all distributions from the trust for its expected recovery.
Subsequent event On January 22, 2021, Southern California Edison reached a $2.20 billion settlement agreement with insurance companies, resolving subrogation claims arising from the Woolsey wildfire. Allstate is party to the agreement and expects to recognize a favorable impact of approximately $110 million in the first quarter of 2021.
The following presents information about incurred and paid claims development as of December 31, 2020, 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 2016 to 2020 years, and the average annual percentage payout of incurred claims by age as of December 31, 2020, is presented as required supplementary information.
IBNR reserves plus expected development on reported claims Cumulative number of reported claims
2016 $ 5,128 $ 5,054 $ 5,027 $ 5,023 $ 5,022 $ (1) $ 5 4,432,048
2016 $ 3,961 $ 3,995 $ 3,958 $ 3,953 $ 3,948 $ (5) $ 43 814,026
Liabilities for claims and claim adjustment expenses, net of recoverables $ 2,104
Reconciliation of the net incurred and paid claims development tables above to the reserve for property and casualty insurance claims and claims expense
(1) For further discussion of asbestos and environmental reserves, see Note 14.
Structured settlement annuities Actual company experience with projected calendar year improvements
Other immediate fixed annuities Actual company experience with projected calendar year improvements
Actual company experience plus loading Interest rate assumptions range from 2.5% to 11.3%
Annuity 2012 mortality table with internal modifications Interest rate assumptions range from 1.4% to 5.8%
In the third quarter of 2020, the premium deficiency evaluation of the Company’s immediate annuities with life contingencies resulted in a premium deficiency reserve of $225 million, pre-tax. The long-term investment yield assumption was lowered, which resulted in the prior sufficiency changing to a deficiency. The deficiency was recognized as an increase in the reserve for life contingent contract benefits. The original assumptions used to establish reserves were updated to reflect current assumptions, and the primary changes included mortality expectations, where annuitants are living longer than originally anticipated, and long-term investment yields. In 2019, the Company’s reviews concluded that no premium deficiency adjustments were necessary.
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 $496 million and $126 million as of December 31, 2020 and 2019, respectively.
Fixed annuities Interest rates credited range from 0.5% to 7.5% for immediate annuities; (8.0)% to 9.0% for equity-indexed annuities (whose returns are indexed to the S&P 500); and 0.1% to 5.0% for all other products
Either a declining or a level percentage charge generally over ten years or less. Additionally, approximately 11.0% of fixed annuities are subject to market value adjustment for discretionary withdrawals
Absent any contract provision wherein the Company guarantees either a minimum return or account value upon death, a specified contract anniversary date, partial withdrawal or annuitization, variable annuity and variable life insurance contractholders bear the investment risk that the separate accounts’ funds may not meet their stated investment objectives. The account balances of variable annuity contracts’ separate accounts with guarantees included $2.96 billion and $2.68 billion of equity, fixed income and balanced mutual funds and $238 million and $253 million of money market mutual funds as of December 31, 2020 and 2019, respectively.
(1)Defined as the estimated current guaranteed minimum death benefit in excess of the current account balance as of the balance sheet date.
(3)Defined as the estimated current guaranteed minimum withdrawal balance (initial deposit) in excess of the current account balance as of the balance sheet date.
Paid and due from reinsurers and indemnitors $ 101 $ 112
2.Catastrophe reinsurance programs - reinsurance protection for catastrophe exposure nationwide and by specific states, as applicable.
3.Other reinsurance programs - reinsurance protection for asbestos, environmental and other liability exposures as well as commercial lines, including shared economy.
Property and casualty reinsurance is in place for the Allstate Protection, Discontinued Lines and Coverages and Protection Services segments. The Company purchases reinsurance after evaluating the financial condition of the reinsurer as well as the terms and price of coverage.
The Company participates in state-based industry pools or facilities mandating participation by insurers offering certain coverage in their state, including the Michigan Catastrophic Claims Association (“MCCA”), the New Jersey Property-Liability Insurance Guaranty Association (“PLIGA”), the North Carolina Reinsurance Facility (“NCRF”) and the Florida Hurricane Catastrophe Fund (“FHCF”). When the Company pays qualifying claims under the coverage indemnified by a state’s pool or facility, the Company is reimbursed for the qualifying claim losses or expenses. Each state pool or facility may assess participating companies to collect sufficient amounts to meet its total indemnification requirements. The enabling legislation for each state’s pool or facility compels the pool or facility only to indemnify participating companies for qualifying claim losses or expenses; the state pool or facility does not underwrite the coverage or take on the ultimate risk of the indemnified business. As a pass through, these pools or facilities manage the receipt of assessments paid by participating companies and payment of indemnified amounts for covered claims presented by participating companies. The Company has not had any credit losses related to these indemnification programs.
Michigan Catastrophic Claims Association The MCCA is a statutory indemnification mechanism for member insurers’ qualifying personal injury protection claims paid for the unlimited lifetime medical benefits above the applicable retention level for qualifying injuries from automobile, motorcycle and commercial vehicle accidents. Indemnification recoverables on paid and unpaid claims, including IBNR, as of December 31, 2020 and 2019 include $5.65 billion and $5.50 billion, respectively, from the MCCA for its indemnification obligation.
The MCCA is funded by annually assessing participating member companies actively writing motor vehicle coverage in Michigan on a per vehicle basis that is currently $100 per vehicle insured. The MCCA’s calculation of the annual assessment is based upon the total of members’ actuarially determined present value of expected payments on lifetime claims by all persons expected to be catastrophically injured in that year and ultimately qualify for MCCA reimbursement, its operating expenses, and adjustments for the amount of excesses or deficiencies in prior assessments. The MCCA has also included its calculation of the impacts of the auto insurance reforms which have begun to phase in since their passage in June 2019, including the personal injury protection medical fee schedule that becomes effective July 2, 2021. The assessment is incurred by the Company as policies are written and recovered as a component of premiums from the Company’s customers.
As required for member companies by the MCCA, the Company reports covered paid and unpaid claims to the MCCA when estimates of loss for a reported claim are expected to exceed the retention level, the claims involve certain types of severe injuries, or there are litigation demands received suggesting the claim value exceeds certain thresholds. The retention level is adjusted upward every other MCCA fiscal year by the lesser of 6% or the increase in the Consumer Price Index. The retention level will be $600 thousand per claim for the fiscal two-years ending June 30, 2022 compared to $580 thousand per claim for the fiscal two-years ending June 30, 2020.
The MCCA indemnifies members as qualifying claims are paid and billed by members to the MCCA. Unlimited lifetime covered losses result in significant levels of ultimate incurred claim reserves being recorded by member companies along with offsetting indemnification recoverables. Disputes with claimants over coverage on certain reported claims can result in additional losses, which may be recoverable from the MCCA, excluding litigation expenses. There is currently no method by which insurers are able to obtain the benefit of managed care programs to reduce claims costs through the MCCA.
statements in conformity with accounting practices prescribed or permitted by the State of Michigan Department of Insurance and Financial Services (“MI DOI”). The MI DOI has granted the MCCA a statutory permitted practice that expires in June 30, 2022 to discount its liabilities for loss and loss adjustment expense. As of June 30, 2020, the date of its most recent annual financial report, the MCCA had cash and invested assets of $23.41 billion and an accumulated surplus of $2.44 billion. The permitted practice reduced the accumulated deficit by $34.73 billion.
A significant portion of the incurred claim reserves and the recoverables can be attributed to a small number of catastrophic claims. Assessments paid to PLIGA for the EMB program totaled $7 million in 2020. The amounts of paid and unpaid recoverables as of December 31, 2020 and 2019 were $389 million and $446 million, respectively.
PLIGA annually collects a UCJF assessment from all admitted property and casualty insurers writing motor vehicle liability insurance in New Jersey for UCJF indemnification and expenses. UCJF assessments can be expensed as losses recoverable in rates as
appropriate. As of December 31, 2019, the date of its most recent annual financial report, the UCJF fund had a balance of $50 million.
North Carolina Reinsurance Facility The NCRF provides automobile liability insurance to drivers that insurers are not otherwise willing to insure. All insurers licensed to write automobile insurance in North Carolina are members of the NCRF. Premiums, losses and expenses are assigned to the NCRF. North Carolina law allows the NCRF to recoup operating losses for certain insureds through a surcharge to policyholders. As of September 30, 2020, the NCRF reported a deficit of $125 million in members’ equity. The NCRF implemented a loss recoupment surcharge on all private passenger and commercial fleet policies effective October 1, 2020, through September 30, 2021. Member companies are assessed the recoupment surcharge. The loss recoupment surcharge will be adjusted on October 1, 2021 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 year ending September 30, 2020, net loss was $15 million, including $1.10 billion of earned premiums, $170 million of certain private passenger auto risk recoupment and $69.7 million of member loss recoupments. As of December 31, 2020, the NCRF recoverables on paid claims is $8.6 million and recoverables on unpaid claims is $58.4 million. Paid recoverable balances, if covered, are typically settled within sixty days of monthly filing.
Florida Hurricane Catastrophe Fund Allstate subsidiaries Castle Key Insurance Company (“CKIC”) and Castle Key Indemnity Company (“CKI”, and together with CKIC, “Castle Key”) participate in the mandatory coverage provided by the FHCF and therefore have access to reimbursement for certain qualifying Florida hurricane losses from the FHCF. Castle Key has exposure to assessments and pays annual premiums to the FHCF for this reimbursement protection. The FHCF has the authority to issue bonds to pay its obligations to participating insurers in excess of its capital balances. Payment of these bonds is funded by emergency assessments on all property and casualty premiums in the state, except workers’ compensation, medical malpractice, accident and health insurance and policies written under the National Flood Insurance Program (“NFIP”). The FHCF emergency assessments are limited to 6% of premiums per year beginning the first year in which reimbursements require bonding, and up to a total of 10% of premiums per year for assessments in the second and subsequent years, if required to fund additional bonding. The FHCF issued $2.00 billion in pre-event bonds in 2013 to build its capacity to reimburse member companies’ claims. The FHCF plans to fund these pre-event bonds through current FHCF cash flows. Pursuant to an Order issued by the Florida Office of Insurance Regulation, the emergency assessment is zero for all policies issued or renewed on or after January 1, 2015.
Annual premiums earned and paid under the FHCF agreement were $9 million, $9 million and $10 million in
2020, 2019 and 2018, respectively. Qualifying losses were $15 million, $33 million and $143 million in 2020, 2019 and 2018, respectively. The Company has access to reimbursement provided by the FHCF for 90% of qualifying personal property losses that exceed its current retention of $58 million for the two largest hurricanes and $19 million for other hurricanes, up to a maximum total of $146 million, effective from June 1, 2020 to May 31, 2021. The amounts recoverable from the FHCF totaled $32 million and $52 million as of December 31, 2020 and 2019, respectively.
•A portion of New Jersey personal lines property and automobile remains covered by a separate standalone agreement.
The Company’s current catastrophe reinsurance program supports the Company’s risk tolerance framework that targets less than a 1% likelihood of annual aggregate catastrophe losses from hurricanes and earthquakes, excluding other catastrophe losses and, net of reinsurance, exceeding $2 billion.
The program includes coverage for losses to personal lines property, personal lines automobile, commercial lines property or commercial lines automobile arising out of multiple perils, in addition to hurricanes and earthquakes. These reinsurance agreements are part of the catastrophe management strategy, which is intended to provide shareholders an acceptable return on the risks assumed in the property business, and to reduce variability of earnings, while providing protection to customers. The Company has the following catastrophe reinsurance agreements in effect as of December 31, 2020.
The June 1, 2020 Nationwide Excess Catastrophe Reinsurance Program (the “Nationwide Program”) provides coverage up to $4.98 billion of loss less a $500 million retention, and is subject to the percentage of reinsurance placed in each of its agreements. Personal lines property business in the state of Florida is excluded from this program. New Jersey personal lines property and automobile are covered under portions of this program, in addition to a separate standalone agreement. Separate reinsurance agreements address the distinct needs of separately capitalized legal entities. The Nationwide Program includes reinsurance agreements with both the traditional and insurance linked securities (“ILS”) markets as described below:
•The traditional market placement provides limits totaling $3.00 billion for losses arising out of multiple perils and is comprised of $2.25 billion of limits with 1 annual reinstatement of limits; two contracts combining $462 million of limits with one reinstatement of limits over a seven-year term; and two single-year term contracts combining $284 million of limits with no reinstatements.
•ILS placements provide $1.53 billion of reinsurance limits for qualifying losses in all states except Florida caused by “Named Peril Basis” events with no reinstatement of the limits. ILS placements are comprised of $150 million and $375 million placements providing occurrence only coverage; and $100 million, $400 million and $500 million placements providing occurrence and aggregate protection. Allstate declared catastrophes to personal lines property and automobile business can be aggregated to erode the aggregate retention and qualify for coverage under the aggregate limit. Recoveries are limited to our ultimate net loss from the reinsured event.
The New Jersey standalone agreement comprises two contracts that reinsure personal lines property and automobile catastrophe losses caused by multiple perils in New Jersey and provides 63% of $400 million
of limits in excess of provisional retentions of $150 million. Each contract includes one annual reinstatement of limits. The New Jersey contracts inure to portions of the Nationwide Program.
The Kentucky earthquake agreement comprises a three-year term contract that reinsures personal lines property losses caused by earthquakes and fire following earthquakes in Kentucky and provides $28 million of limits, 95% placed, in excess of a $2 million retention.
The 2020 Florida program provides coverage up to $633 million of loss less a $20 million retention. The Florida program includes reinsurance agreements placed with the traditional market, the Florida Hurricane Catastrophe Fund (“FHCF”), and the Insurance Linked Securities (“ILS”) market as follows:
• The ILS placement provides $200 million of reinsurance limits for qualifying losses to personal lines property in Florida caused by a named storm event, a severe weather event, an earthquake event, a fire event, a volcanic eruption event, or a meteorite impact event.
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 $166 million and $158 million from Lloyd’s of London as of December 31, 2020 and 2019, respectively. Excluding Lloyd’s of London, the largest reinsurance recoverable balance the Company had outstanding was $165 million and $115 million from Aleka Insurance Inc. as of December 31, 2020 and 2019, respectively.
Joint life: $8 million per life, and $10 million for contracts that meet specific criteria
July 2007 through March 2011 $5 million per life, $3 million age 70 and over, and $10 million for contracts that meet specific criteria
September 1998 through June 2007 $2 million per life, in 2006 the limit was increased to $5 million for instances when specific criteria were met
In addition, the Company has used reinsurance to effect the disposition of certain blocks of business. The Company had reinsurance recoverables of $1.28 billion and $1.29 billion as of December 31, 2020 and 2019, respectively, due from Prudential related to the disposal of substantially all of its variable annuity business that was effected through reinsurance agreements.
As of December 31, 2020 and 2019, the Company had $66 million and $73 million of reinsurance recoverables related to Scottish Re (U.S.), Inc. On December 14, 2018, the Delaware Insurance Commissioner placed Scottish Re (U.S.), Inc. under regulatory supervision. On March 6, 2019, the Chancery Court of the State of Delaware entered a Rehabilitation and Injunction Order (the “Rehabilitation Order”) in response to a petition filed by the Insurance Commissioner (the “Petition”).
The Company joined in a joint motion filed on behalf of several affected parties asking the court to allow a specified amount of offsetting claim payments and losses against premiums remitted to Scottish Re (U.S.), Inc. The Company also filed a separate motion related to the reimbursement of claim payments where Scottish Re (U.S.), Inc. is also acting as administrator. The Court has not yet ruled on either of these motions. In the interim, the Company and several other affected parties have been permitted to exercise certain setoff rights while the parties address any potential disputes. On June 30, 2020, pursuant to the Petition, Scottish Re (U.S.), Inc. submitted a proposed Plan of Rehabilitation (“Plan”) for consideration by the Court. On November 2, 2020, the Court issued a Third Amended Order to Show Cause scheduling a hearing on the Petition and Plan for May 25, 2021. The Company continues to monitor Scottish Re (U.S.), Inc. for future developments and will reevaluate its allowance for expected credit losses 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, 2020, the trust held $6.29 billion of investments, which are reported in the Consolidated Statement of Financial Position.
(1)Deferred sales inducement costs primarily relate to fixed annuities and interest-sensitive life contracts and are recorded as part of other assets on the Consolidated Statements of Financial Position.
Interest on the 5.100% Subordinated Debentures is payable quarterly at the stated fixed annual rate to January 14, 2023, or any earlier redemption date, and then at an annual rate equal to the three-month LIBOR plus 3.165%. Interest on the 5.750% Subordinated Debentures is payable semi-annually at the stated fixed annual rate to August 14, 2023, or any earlier redemption date, and then quarterly at an annual rate equal to the three-month LIBOR plus 2.938%. The Company may elect to defer payment of interest on the Subordinated Debentures for one or more consecutive interest periods that do not exceed five years. During a deferral period, interest will continue to accrue on the Subordinated Debentures at the then-applicable rate and deferred interest will compound on each interest payment date. If all deferred interest on the Subordinated Debentures is paid, the Company can again defer interest payments.
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.
In connection with the issuance of the Debentures, the Company entered into a replacement capital covenant (“RCC”). This covenant was not intended for the benefit of the holders of the Debentures and could not be enforced by them. Rather, it was for the benefit of holders of one or more other designated series of the Company’s indebtedness (“covered debt”), currently the 5.750% Subordinated Debentures due 2053. Pursuant to the RCC, the Company has agreed that it will not repay, redeem, or purchase the Debentures on or before May 15, 2067 (or such earlier date on which the RCC terminates by its terms) unless, subject to certain limitations, the Company has received net cash proceeds in specified amounts from the sale of common stock or certain other qualifying securities. The promises and covenants contained in the RCC will not apply if (i) S&P upgrades the Company’s issuer credit rating to A or above, (ii) the Company redeems the Debentures due to a tax event, (iii) after notice of redemption has been given by the Company and a market disruption event occurs preventing the Company from raising proceeds in accordance with the RCC, or (iv) the Company repurchases or redeems up to 10% of the outstanding principal of the Debentures in any one-year period, provided that no more than 25% will be so repurchased, redeemed or purchased in any ten-year period.
The administrator of LIBOR has announced it will consult on its intention to cease the publication of the one week and two month U.S. dollar (“USD”) LIBOR settings immediately following the LIBOR publication on December 31, 2021, and the remaining USD LIBOR settings immediately following the LIBOR publication on June 30, 2023. The Subordinated Debentures and the 2023 Floating Rate Senior Notes allow for the use of an alternative methodology to determine the interest rate if LIBOR is no longer available.
The Company paid $311 million, $312 million and $330 million of interest on debt in 2020, 2019 and 2018, respectively.
Common stock The Company had 900 million shares of issued common stock of which 304 million shares were outstanding and 596 million shares were held in treasury as of December 31, 2020. In 2020, the Company acquired 17 million shares at an average cost of $97.54 and reissued 3 million net shares under equity incentive plans.
Series A - 11,500 $ - $ 287.5 5.625 % $ - $ 1.41 $ 1.41 $ 4 (2)
Series F - - - - 6.250 % - 1.56 1.56 - 16 (2)
Series H 46,000 46,000 1,150.0 1,150.0 5.100 % 1.28 1.28 - 59 12 -
Series I 12,000 12,000 300.0 300.0 4.750 % 1.19 1.19 - 13 - -
Total 81,000 92,500 $ 2,025 $ 2,313 $ 108 $ 134 (2)
(1)Each depositary share represents a 1/1,000th interest in a share of preferred stock.
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 recognized $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.
completed quarter) is zero or negative and consolidated shareholders’ equity (excluding AOCI, and subject to certain other adjustments relating to changes in U.S. GAAP) as of each of the preliminary quarter test date and the most recently completed quarter has declined by 20% or more from its level as measured at the end of the benchmark quarter (the date that is ten quarters prior to the most recently completed quarter). If the Company fails to satisfy either of these tests on any dividend declaration date, the restrictions on dividends will continue until the Company is able again to satisfy the test on a dividend declaration date. In addition, in the case of a restriction arising under (2) above, the restrictions on dividends will continue until consolidated shareholders’ equity (excluding AOCI, and subject to certain other adjustments relating to changes in U.S. GAAP) has increased, or has declined by less than 20%, in either case as compared to its level at the end of the benchmark quarter for each dividend payment date as to which dividend restrictions were imposed.
The expenses related to these activities are included in the Consolidated Statements of Operations as restructuring and related charges and totaled $259 million, $41 million and $67 million in 2020, 2019 and 2018, respectively.
Employee costs of this program include severance and employee benefits primarily impacting claims, sales, service and support functions. Exit costs reflect real estate costs primarily related to accelerated amortization of right of use assets and related leasehold improvements at facilities to be vacated.
Restructuring liability as of December 31, 2019 $ 14 $ 8 $ 22
Restructuring liability as of December 31, 2020 $ 72 $ - $ 72
As of December 31, 2020, the cumulative amount incurred to date for active programs related to employee severance, relocation benefits and exit expenses totaled $223 million for employee costs and $52 million for exit costs.
The Company is required to participate in assigned risk plans, reinsurance facilities and joint underwriting associations in various states that provide insurance coverage to individuals or entities that otherwise are unable to purchase such coverage from private insurers.
The Company routinely reviews its exposure to assessments from these plans, facilities and government programs. Underwriting results related to these arrangements, which tend to be adverse, have been immaterial to the Company’s results of operations in the last three years. Because of the Company’s participation, it may be exposed to losses that surpass the capitalization of these facilities or assessments from these facilities.
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.
As of October 31, 2020, the CEA’s capital balance was approximately $6.00 billion. Should losses arising from an earthquake cause a deficit in the CEA, an additional $1.10 billion would be obtained from the proceeds of revenue bonds the CEA may issue, an existing $9.50 billion reinsurance layer, $1.00 billion from policy surcharge, and finally, if needed, assessments on participating insurance companies. Participating insurers are required to pay an assessment, currently estimated not to exceed $1.70 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 $19.30 billion as of October 31, 2020 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.
Texas Windstorm Insurance Association The Company participates as a member of the Texas Windstorm Insurance Association (“TWIA”), which provides wind and hail property coverage to coastal risks unable to procure coverage in the voluntary market. Wind and hail coverage is written on a TWIA-issued policy. TWIA follows a funding structure first utilizing currently available funds set aside from current and prior years. Under the current law, to the
During 2020, the TWIA Board announced additional assessments primarily related to Hurricane Harvey for which the Company’s share was $1 million. These costs were recorded in property and casualty insurance claims and claims expense as catastrophe losses on the Consolidated Statements of Operations. Any assessments from TWIA for a particular quarter or annual period may be material to the results of operations and cash flows, but not to the financial position of the Company.
Texas Fair Plan Association The Company participates as a member of the Texas Fair Plan Association (“FAIR Plan”), which provides residential property insurance to inland areas designated as underserved by the Commissioner of Insurance and the applicant(s) are unable to procure coverage in the voluntary market. The FAIR Plan issues insurance policies, like an insurance company, and it also functions as a pooling mechanism that allocates premiums, claims and expenses back to the insurance industry. As a result of the losses incurred related to Hurricane Harvey, in 2017 the FAIR Plan Board unanimously voted to approve its first ever member assessment of which the Company’s share was $8 million based on total direct premium written in Texas. Insurers are permitted to recover the assessment through either a premium surcharge applied to existing customers over a three-year period or increased rates, but the ability to fully recover the assessment may be impacted by market conditions or other factors.
North Carolina Joint Underwriters Association The North Carolina Joint Underwriters Association (“NCJUA”) was created to provide property insurance for properties (other than the state’s beach and coastal areas) that insurers are not otherwise willing to insure. All insurers licensed to write property insurance in North Carolina are members of the NCJUA. Premiums, losses and expenses of the NCJUA are shared by the member companies in proportion to their respective North Carolina property insurance writings. Member companies participate in plan deficits or surpluses based on their participation ratios, which are determined annually. The Company had a $6 million receivable from the NCJUA at December 31, 2020 representing our participation in the NCJUA’s surplus of $33 million for all open years.
North Carolina Insurance Underwriting Association The North Carolina Insurance Underwriting Association (“NCIUA”) provides windstorm and hail coverage as well as homeowners policies for properties located in the state’s beach and coastal areas that insurers are not otherwise willing to insure. All insurers licensed to write residential and commercial property insurance in North Carolina are members of the NCIUA. Members are assessed in proportion to their North Carolina residential and commercial property insurance writings, which is determined annually and varies by coverage, for plan deficits. As of December 31, 2020,
Historically, the Company has not made any material payments pursuant to these obligations.
The aggregate liability balance related to all guarantees was not material as of December 31, 2020.
The Company is subject to extensive laws, regulations, administrative directives, and regulatory actions. From time to time, regulatory authorities or legislative bodies seek to influence and restrict premium rates, require premium refunds to policyholders, require reinstatement of terminated policies, prescribe rules or guidelines on how affiliates compete in the marketplace, restrict the ability of insurers to cancel or non-renew policies, require insurers to continue to write new policies or limit their ability to write new policies, limit insurers’ ability to change coverage terms or to impose underwriting standards, impose additional regulations regarding agency and broker compensation, regulate the nature of and amount of investments, impose fines and penalties for unintended errors or mistakes, impose additional regulations regarding cybersecurity and privacy, and otherwise expand overall regulation of insurance products and the insurance industry. In addition, the Company is subject to laws and regulations administered and enforced by federal agencies, international agencies, and other organizations, including but not limited to the SEC, the Financial Industry Regulatory Authority, the U.S. Equal Employment Opportunity Commission, and the U.S. Department of Justice. The Company has established procedures and policies to facilitate compliance with laws and regulations, to foster prudent business operations, and to support financial reporting. The Company routinely reviews its practices to validate compliance with laws and regulations and with internal procedures and policies. As a result of these reviews, from time to time the Company may decide to modify some of its procedures and policies. Such modifications, and the reviews that led to them, may be accompanied by payments being made and costs being incurred. The ultimate changes and eventual effects of these actions on the Company’s business, if any, are uncertain.
Accrual and disclosure policy The Company reviews its lawsuits, regulatory inquiries, and other legal proceedings on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. The Company establishes accruals for such matters at management’s best estimate when the Company assesses that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company does not establish accruals for such matters when the Company does not believe both that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company’s assessment of whether a loss is reasonably possible, or probable, is based on its assessment of the ultimate outcome of the matter following all appeals. The Company does not include potential recoveries in its estimates of reasonably possible or probable losses. Legal fees are expensed as incurred.
Claims related proceedings The Company is managing various disputes in Florida that raise challenges to the Company’s practices, processes, and procedures relating to claims for personal injury protection benefits under Florida auto policies. Medical providers continue to pursue litigation under various theories that challenge the amounts that the Company pays under the personal injury protection coverage, seeking additional benefit payments, as well as applicable interest, penalties and fees. There are two pending class actions, Pierce v. Allstate Insurance Company, et al. (Broward County, Fla. filed August 2013), the class settlement of which has received final approval, and Revival Chiropractic v. Allstate Insurance Company, et al. (M.D. Fla. filed January 2019), where the court denied class certification and plaintiff’s request to file a renewed motion for class certification. The Company is also defending litigation involving individual plaintiffs. The Company is vigorously asserting both procedural and substantive defenses to these lawsuits.
The Company is defending putative class actions in various courts that raise challenges to the Company’s depreciation practices in homeowner property claims. In these lawsuits, plaintiffs generally allege that, when calculating actual cash value, the costs of “non-materials” such as labor, general contractor’s overhead and profit, and sales tax should not be subject to depreciation. The Company is currently defending the following lawsuits on this issue: Perry v. Allstate Indemnity Company, et al. (N.D. Ohio filed May 2016); Lado v. Allstate Vehicle and Property Insurance Company (S.D. Ohio filed March 2020); Maniaci v. Allstate Insurance Company (N.D. Ohio filed March 2020); Ferguson-Luke et al. v. Allstate Property and Casualty Insurance Company (N.D. Ohio
The Company is defending putative class actions pending in multiple states alleging that the Company underpays total loss vehicle physical damage claims on auto policies. The allegedly systematic underpayments result from one or more of the following theories: (a) the third party valuation tool used by the Company as part of a comprehensive adjustment process is allegedly flawed, biased, or contrary to applicable law; (b) the Company allegedly does not pay sales tax, title fees, registration fees, and/or other specified fees that are allegedly mandatory under policy language or state legal authority; or (c) after paying for the value of the loss vehicle, then the Company allegedly is not entitled to retain the residual salvage value, and the Company allegedly must pay salvage value to the owner (or if the loss vehicle is retained by the owner, then the Company allegedly may not apply any offset for the salvage value).
None of the courts in any of the pending matters has ruled on class certification.
Biefeldt / IBEW Consolidated Action. Two separately filed stockholder derivative actions have been consolidated into a single proceeding that is pending in the Circuit Court for Cook County, Illinois, Chancery Division. The original complaint in the first-filed of those actions, Biefeldt v. Wilson, et al., was filed on August 3, 2017, in that court by a plaintiff alleging that she is a stockholder of the Company. On June 29, 2018, the court granted defendants’ motion to dismiss that complaint for failure to make a pre-suit demand on the Allstate Board but granted plaintiff permission to file an amended complaint. The original complaint in IBEW Local No. 98 Pension Fund v. Wilson, et al., was filed on April 12, 2018, in the same court by another plaintiff alleging to be a stockholder of the Company. After the court issued its dismissal decision in the Biefeldt action, plaintiffs agreed to consolidate the two actions and filed a consolidated amended complaint naming as defendants the Company’s chairman, president and chief executive officer, its former president, and certain present or former members of the board of directors. In that complaint, plaintiffs allege that the directors and officer defendants breached their fiduciary duties to the Company in connection with allegedly material misstatements or omissions concerning the Company’s automobile insurance claim frequency statistics and the reasons for a claim frequency increase for Allstate brand auto insurance between October 2014 and August 3, 2015. The factual allegations are substantially similar to those at issue in In re The Allstate Corp. Securities Litigation. Plaintiffs further allege that a senior officer and several outside directors engaged in stock option exercises allegedly while in possession of material nonpublic information. Plaintiffs seek, on behalf of the Company, an unspecified amount of damages and various forms of equitable relief. Defendants moved to dismiss the consolidated complaint on September 24, 2018 for failure to make a demand on the Allstate Board. On May 14, 2019, the court granted defendants’ motion to dismiss the complaint, but allowed plaintiffs leave to file a second consolidated amended complaint which they filed on September 17, 2019. Defendants moved to dismiss the complaint on November 1, 2019 for failure to make a demand on the Allstate Board. The court subsequently requested supplemental briefing on the motion which concluded on February 1, 2021. A ruling is expected at a status conference scheduled for February 24, 2021.
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. The court allowed the lead plaintiffs to amend their complaint to add the City of Providence Employee Retirement System as a proposed class representative and on September 12, 2018, the amended complaint was filed. On March 26, 2019, the court granted plaintiffs’ motion for class certification and certified a class consisting of all persons who purchased Allstate common stock between October 29, 2014 and August 3, 2015. On April 9, 2019, defendants filed with the U.S. Court of Appeals for the Seventh Circuit a petition for permission to appeal this ruling and the Seventh Circuit granted that petition on April 25, 2019. On July 16, 2020, the Seventh Circuit vacated the class certification order and remanded the matter for further consideration by the district court. Discovery in this matter concluded on October 5, 2020. On December 21, 2020, the district court again granted plaintiffs’ motion for class certification and certified a class consisting of all persons who purchased Allstate common stock between October 29, 2014 and August 3, 2015. On January 4, 2021, defendants filed with the Seventh Circuit a petition for permission to appeal this ruling. The petition was denied on January 28, 2021.
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.
Company’s 2013 through 2016 federal income tax returns. The 2017 and 2018 audit cycle is expected to begin in the first quarter of 2021. Any adjustments that may result from IRS examinations of the Company’s tax returns are not expected to have a material effect on the consolidated financial statements.
The provisions of the Tax Cuts and Jobs Act of 2017 eliminated the 20-year carryforward period and made it indefinite for federal net operating losses generated in tax years after December 31, 2017. For such amounts generated prior to 2018, the 20-year carryforward period continues to apply.
Reconciliation of the statutory federal income tax rate to the effective income tax rate
Effective income tax rate on income from operations $ 1,383 19.9 % $ 1,242 20.4 % $ 468 17.8 %
Allstate’s domestic property and casualty and life insurance subsidiaries prepare their statutory-basis financial statements in conformity with accounting practices prescribed or permitted by the insurance department of the applicable state of domicile. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (“NAIC”), as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed.
All states require domiciled insurance companies to prepare statutory-basis financial statements in conformity with the NAIC Accounting Practices and Procedures Manual, subject to any deviations prescribed or permitted by the applicable insurance commissioner or director. Statutory accounting practices differ from GAAP primarily since they require charging policy acquisition and certain sales inducement costs to expense as incurred, establishing life insurance reserves based on different actuarial assumptions, and valuing certain investments and establishing deferred taxes on a different basis.
Property and casualty insurance $ 6,232 $ 3,989 $ 2,939 $ 17,128 $ 16,192
Life insurance, annuities and voluntary accident and health insurance 14 422 465 4,255 4,208
Amount per statutory accounting practices $ 6,246 $ 4,411 $ 3,404 $ 21,383 $ 20,400
Under state insurance laws, insurance companies are required to maintain paid up capital of not less than the minimum capital requirement applicable to the types of insurance they are authorized to write. Insurance companies are also subject to risk-based capital (“RBC”) requirements adopted by state insurance regulators. A company’s “authorized control
level RBC” is calculated using various factors applied to certain financial balances and activity. Companies that do not maintain adjusted statutory capital and surplus at a level in excess of the company action level RBC, which is two times authorized control level RBC, are required to take specified actions. Company action level RBC is significantly in excess of the minimum capital requirements. Total adjusted statutory capital and surplus and authorized control level RBC of AIC were $20.54 billion and $2.92 billion, respectively, as of December 31, 2020. Most of the Corporation’s insurance subsidiaries are subsidiaries of or reinsure all of their business to AIC, including ALIC. AIC’s subsidiaries are included as a component of AIC’s total statutory capital and surplus.
The amount of restricted net assets, as represented by the Corporation’s investment in its insurance subsidiaries, was $31.03 billion as of December 31, 2020.
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 September 2020, the Company announced it will eliminate the medical coverage subsidy effective January 1, 2021 for employees who are not eligible to retire as of December 31, 2020.
Benefit obligation, beginning of year $ 7,139 $ 6,224 $ 397 $ 375
Fair value of plan assets, end of year $ 6,987 $ 6,192
(1)The funded status is recorded within other liabilities and accrued expenses on the Consolidated Statements of Financial Position.
Items not yet recognized as a component of net cost - December 31, 2019 $ (142) $ (13)
The prior service credit is recognized as a component of net cost for pension and other postretirement plans amortized over the average remaining service period of active employees expected to receive benefits. The prior service credit that will be amortized to net cost for pension and postretirement plans in 2021 is estimated to be $50 million and $25 million, respectively.
($ in millions) 2020 2019 2018 2020 2019 2018 2020 2019 2018
Interest cost 210 240 255 11 14 15 221 254 270
Amortization of prior service credit (54) (56) (56) (10) (3) (21) (64) (59) (77)
Curtailment losses (gains) 10 - - (8) - - 2 - -
Costs and expenses (144) (102) (118) (3) 19 1 (147) (83) (117)
Remeasurement (gains) losses (73) 95 472 22 19 (4) (51) 114 468
The service cost component is the actuarial present value of the benefits attributed by the plans’ benefit formula to services rendered by the employees during the period.
Interest cost is the increase in the PBO in the period due to the passage of time at the discount rate.
The weighted average health care cost trend rate used in measuring the accumulated postretirement benefit cost is 6.8% for 2021, gradually declining to 4.5% in 2035 and remaining at that level thereafter.
Weighted average target asset allocation and actual percentage of plan assets by asset category
(1)The target asset allocation considers risk-based exposure while the actual percentage of plan assets utilizes a financial reporting view excluding exposure provided through derivatives.
(2)The actual percentage of plan assets for equity securities includes zero and 1% of private equity investments in 2020 and 2019, respectively, that are subject to the limited partnership interests target allocation and 1% and zero of fixed income mutual funds in 2020 and 2019, respectively, that are subject to the fixed income securities target allocation.
(3)Securities lending collateral reinvestment of $101 million and $258 million is excluded from the table above in 2020 and 2019, respectively.
Outside the target asset allocation, the pension plans participate in a securities lending program to enhance returns. As of December 31, 2020, fixed income and equity securities are lent out and cash collateral is invested in short-term investments.
Total plan assets at fair value $ 469 $ 2,651 $ 2 3,122
% of total plan assets at fair value 15.0 % 84.9 % 0.1 % 100.0 %
(2)Other net plan assets represent cash and cash equivalents, interest and dividends receivable and net receivables related to settlements of investment transactions, such as purchases and sales.
Fair values of pension plan assets as of December 31, 2019
($ in millions) Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs
Total plan assets at fair value $ 579 $ 2,441 $ - 3,020
The fair values of pension plan assets are estimated using the same methodologies and inputs as those used to determine the fair values for the respective asset category of the Company. These methodologies and inputs are disclosed in Note 6.
($ in millions) Balance as of December 31, 2018 Relating to assets sold during the period Relating to assets still held at the reporting date Purchases, sales and settlements, net Net transfers in (out) of Level 3 Balance as of December 31, 2019
Corporate $ 5 $ - $ - $ (5) $ - $ -
Total Level 3 plan assets $ 5 $ - $ - $ (5) $ - $ -
($ in millions) Balance as of December 31, 2017 Relating to assets sold during the period Relating to assets still held at the reporting date Purchases, sales and settlements, net Net transfers in (out) of Level 3 Balance as of December 31, 2018
Equity securities $ 29 $ - $ 3 $ - $ (32) $ -