The Company participates in the mandatory coverage provided by the TWIA, for losses relating to hurricane activity. Amounts assessed to each company are allocated based upon its proportion of business written. In September 2008, TWIA assessed the Company $66 million for losses relating to Hurricane Ike. The assessment was based on 2007 direct voluntary writings in the State of Texas. The Company expects to recoup $35 million of the assessment via premium tax offsets over a five year period. $7 million of the total recoupable amount was realized via premium tax offsets in 2009. The remaining $31 million of the assessment was eligible for cession under the Company's reinsurance program. The TWIA board has not indicated the likelihood of any possible future assessments to insurers at this time. However, assessments from the TWIA for a particular quarter or annual period may be material to the results of operations and cash flows, but not the financial position of the Company. Management believes Allstate's exposure to losses in Texas has been significantly reduced as a result of its participation in the TWIA.
Under state insurance guaranty fund laws, insurers doing business in a state can be assessed, up to prescribed limits, for certain obligations of insolvent insurance companies to policyholders and claimants. Amounts assessed to each company are typically related to its proportion of business written in each state. The Company's policy is to accrue assessments as the related written premium upon which the assessment is based is written, subsequent to the occurrence of a formal determination of insolvency. As of December 31, 2009 and 2008, the liability balance included in other liabilities and accrued expenses was $106 million and $118 million, respectively. The related premium tax offsets included in other assets were $28 million and $29 million as of December 31, 2009 and 2008, respectively.
As a condition of maintaining its licenses to write personal property and casualty insurance in various states, the Company is required to participate in assigned risk plans, reinsurance facilities and joint underwriting associations that provide various types of insurance coverage to individuals or entities that otherwise are unable to purchase such coverage from private insurers. Underwriting results related to these arrangements, which tend to be adverse, have been immaterial to the Company's results of operations.
as measured by the amount of the aggregate initial investment, was $160 million at December 31, 2009. The obligations associated with these fixed income securities expire at various dates during the next five years.
The Company provides residual value guarantees on Company leased automobiles. If all outstanding leases were terminated effective December 31, 2009, the Company's maximum obligation pursuant to these guarantees, assuming the automobiles have no residual value, would be $11 million at December 31, 2009. The remaining term of each residual value guarantee is equal to the term of the underlying lease that ranges from less than one year to three years. Historically, the Company has not made any material payments pursuant to these guarantees.
The aggregate liability balance related to all guarantees was not material as of December 31, 2009.
The Company is subject to changing social, economic and regulatory conditions. 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, 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 agent and broker compensation, and otherwise expand overall regulation of insurance products and the insurance industry. 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.
•These matters raise difficult and complicated factual and legal issues and are subject to many uncertainties and complexities, including the underlying facts of each matter; novel legal issues; variations between jurisdictions in which matters are being litigated, heard, or investigated; differences in applicable laws and
There is a nationwide putative class action pending against Allstate that challenges Allstate's use of a vendor's automated database in valuing total loss automobiles. To a large degree, this lawsuit mirrors similar lawsuits filed against other carriers in the industry. Plaintiffs allege that Allstate systematically underpays first party total loss vehicle claims. The plaintiffs are seeking actual and punitive damages. The lawsuit is in the discovery stage and Allstate is vigorously defending it.
remanded the cases to the trial court for additional discovery, and directed that the cases be reassigned to another trial court judge.
•A putative nationwide class action has also been filed by former employee agents alleging various violations of ERISA, including a worker classification issue. These plaintiffs are challenging certain amendments to the Agents Pension Plan and are seeking to have exclusive agent independent contractors treated as employees for benefit purposes. This matter was dismissed with prejudice by the trial court, was the subject of further proceedings on appeal, and was reversed and remanded to the trial court in 2005. In June 2007, the court granted the Company's motion to dismiss the case. Following plaintiffs' filing of a notice of appeal, the U.S. Court of Appeals for the Third Circuit issued an order in December 2007 stating that the notice of appeal was not taken from a final order within the meaning of the federal law and thus not appealable at this time. In March 2008, the Third Circuit decided that the appeal should not summarily be dismissed and that the question of whether the matter is appealable at this time will be addressed by the Third Circuit along with the merits of the appeal. In July 2009, the Third Circuit vacated the decision which granted the Company's motion to dismiss the case, remanded the case to the trial court for additional discovery, and directed that the case be reassigned to another trial court judge. In all of these various matters, plaintiffs seek compensatory and punitive damages, and equitable relief. Allstate has been vigorously defending these lawsuits and other matters related to its agency program reorganization.
In New Mexico, Allstate is defending a certified class action challenging the method by which Allstate discloses installment fees. The class members are limited to New Mexico policyholders based on the trial court's acceptance of plaintiffs' amended complaint. The plaintiffs contend that installment fees must be disclosed on the insurance policy itself, which would include the declarations page, because the fees allegedly meet the legal definition of "premium". Plaintiffs seek repayment of installment fees since October 1996.
One or more of these matters could have an adverse effect on the Company's operating results or cash flows for a particular quarterly or annual period. However, based on information currently known to it, management believes that the ultimate outcome of all matters described in this "Other Matters" subsection, in excess of amounts currently reserved, if any, as they are resolved over time is not likely to have a material effect on the operating results, cash flows or financial position of the Company.
On April 16, 2009, Allstate received the Service Employees International Union ("SEIU") Pension Plans Master Trust's shareholder demand for board action concerning the Company's past executive compensation practices. The Company believes that as many as 28 other companies may have received similar letters from the SEIU. The SEIU correspondence has been referred to Allstate's Board of Directors for its consideration and disposition.
Allstate's reserves for asbestos claims were $1.18 billion and $1.23 billion, net of reinsurance recoverables of $600 million and $704 million, at December 31, 2009 and 2008, respectively. Reserves for environmental claims were $198 million and $195 million, net of reinsurance recoverables of $49 million and $56 million, at December 31, 2009 and 2008, respectively. Approximately 62% and 64% of the total net asbestos and environmental reserves at December 31, 2009 and 2008, respectively, were for incurred but not reported estimated losses.
There are no permitted practices utilized as of December 31, 2009.
As of December 31, 2008, the commissioner of the Illinois Department of Insurance permitted AIC and ALIC to admit deferred tax assets that were expected to be realized within three years of the balance sheet date limited to 15% of statutory capital and surplus, instead of deferred tax assets that were expected to be realized within one year of the balance sheet date limited to 10% of statutory capital and surplus. This accounting practice increased statutory capital and surplus by $365 million at December 31, 2008 over what it would have been had the permitted practice not been allowed.
The ability of the Company to pay dividends is dependent on business conditions, income, cash requirements of the Company, receipt of dividends from AIC and other relevant factors. The payment of shareholder dividends by AIC
The increase of $382 million in the pension net actuarial loss during 2009 is related to a decrease in the discount rate partially offset by higher than expected returns. The majority of the $2.44 billion net actuarial pension benefit losses not yet recognized as a component of net periodic pension cost in 2009 reflects the effect of unfavorable equity market conditions on the value of the pension plan assets in prior years, and to a lesser extent decreases in the discount rate. The decrease of $134 million in the OPEB net actuarial gain during 2009 is primarily related to a decrease in the discount rate. The decrease of $226 million in the OPEB prior service cost is primarily related to an amendment of the medical plan for Medicare-eligible retirees.
Items not yet recognized as a component of net periodic cost - December 31, 2009
The PBO, ABO and fair value of plan assets for the Company's pension plans with an ABO in excess of plan assets were $4.99 billion, $4.28 billion, and $3.85 billion, respectively as of December 31, 2009, and $4.57 billion, $3.93 billion, and $3.40 billion, respectively as of December 31, 2008. Included in the accrued benefit cost of the pension benefits are certain unfunded non-qualified plans with accrued benefit costs of $156 million and $198 million for 2009 and 2008, respectively.
Net actuarial loss (gain) for October 31 - December 31, 2007
Weighted average assumptions used to determine net pension cost and net postretirement benefit cost for the years ended December 31 are:
The weighted average health care cost trend rate used in measuring the accumulated postretirement benefit cost is 7.50% for 2010, gradually declining to 5.0% in 2015 and remaining at that level thereafter.
The following table presents the fair values of pension plan assets as of December 31, 2009.
(3)Hedge funds held by the pension plans primarily comprised fund of funds investments in diversified pools of capital across funds with underlying strategies such as convertible arbitrage, equity market neutral, fixed income arbitrage, global macro, commodity trading advisors, long short equity, short biased equity, and event driven strategies. The investments in hedge funds are primarily combined with U.S. equity index futures as a strategy to replicate U.S. equity exposure, which provides additional yield while maintaining approximately the same risk exposure as holding a portfolio of U.S. equity securities.
(5)Other net plan assets represent interest and dividends receivable and net receivables related to settlements of investment transactions, such as purchases and sales.
There was no required cash contribution necessary to satisfy the minimum funding requirement under the IRC for the tax qualified pension plans as of December 31, 2009. The Company currently plans to contribute $340 million to its pension plans in 2010.
Estimated future benefit payments expected to be paid in the next 10 years, based on the assumptions used to measure the Company's benefit obligation at December 31, 2009 are presented in the table below. Effective January 1,
Employees of the Company, with the exception of those employed by the Company's international subsidiaries and Sterling Collision Centers ("Sterling") subsidiary, are eligible to become members of the Allstate 401(k) Savings Plan ("Allstate Plan"). The Company's contributions are based on the Company's matching obligation and certain performance measures. The Company is responsible for funding its anticipated contribution to the Allstate Plan, and may, at the discretion of management, use the ESOP to pre-fund certain portions. In connection with the Allstate Plan, the Company has a note from the ESOP with a principal balance of $22 million at December 31, 2009. The ESOP note has a fixed interest rate of 7.9% and matures in 2019. The Company records dividends on the ESOP shares in retained income and all the shares held by the ESOP are included in basic and diluted weighted average common shares outstanding.
The Company's contribution to the Allstate Plan was $78 million, $48 million and $124 million in 2009, 2008 and 2007, respectively. These amounts were reduced by the ESOP benefit computed for the years ended December 31 as follows:
Allstate has profit sharing plans for eligible employees of its Canadian insurance subsidiaries and Sterling. Profit sharing expense for these plans was $6 million, $2 million and $8 million in 2009, 2008 and 2007, respectively.
The Company currently has two equity incentive plans that permit it to grant nonqualified stock options, incentive stock options, restricted or unrestricted shares of the Company's stock and restricted stock units to certain employees and directors of the Company. The total compensation expense related to equity awards was $74 million, $85 million and $90 million and the total income tax benefits were $25 million, $29 million and $30 million for the years ended December 31, 2009, 2008 and 2007, respectively. Total cash received from the exercise of options was $3 million, $33 million and $109 million for the years ended December 31, 2009, 2008 and 2007, respectively. Total tax benefit realized on options exercised and stock unrestricted was $3 million, $12 million and $43 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Options are granted under the plans at exercise prices equal to the fair value of the Company's common stock on the applicable grant date. The options granted under the Allstate plans generally vest ratably over a four-year period. For directors, vesting is generally over a three-year period. The options granted may be exercised once vested and will expire ten years after the date of grant unless the employee or director retires. After retirement, employee stock options vest as scheduled. For directors, vesting accelerates to the date of retirement. When the options become vested, they may be exercised on or before the earlier of the option expiration date or the fifth anniversary of the employee's or director's retirement. Restricted stock and restricted stock units generally vest and unrestrict in full on the fourth anniversary of the grant date, except for directors which vest immediately and unrestrict immediately after leaving the board. The awards are subject to forfeiture upon termination. For terminations due to retirement, shares continue to unrestrict as provided for in the original grant.
A total of 71.0 million shares of common stock were authorized to be used for awards under the plans, subject to adjustment in accordance with the plans' terms. At December 31, 2009, 25.1 million shares were reserved and remained available for future issuance under these plans. The Company uses its treasury shares for these issuances.
The weighted average grant date fair value of options granted was $5.74, $9.98 and $16.08 during the years ended December 31, 2009, 2008 and 2007, respectively. The intrinsic value, which is the difference between the fair value and the exercise price, of options exercised was $428 thousand, $9 million and $68 million during the years ended December 31, 2009, 2008 and 2007, respectively. The total fair value of options vested was $491 thousand, zero and $57 million during the years ended December 31, 2009, 2008 and 2007, respectively.
The changes in restricted stock and restricted stock units are shown in the following table for the year ended December 31, 2009.
•(amortization) accretion of DAC and DSI, to the extent they resulted from the recognition of certain realized capital gains and losses,
Summarized revenue data for each of the Company's business segments for the years ended December 31 are as follows:
As discussed in Note 2 to the consolidated financial statements, the Company changed its recognition and presentation for other-than-temporary impairments of debt securities in 2009.