•Total revenues reached a record $35.38 billion, an increase of 4.3% compared to last year.
(1)Allstate brand statistic excludes business written by Allstate Canada. Allstate brand non-standard auto new business premiums declined during 2005 due to lower new business production as agencies continued to focus on our standard auto business. Declines in Allstate brand renewal business premiums during 2005 and 2004 were primarily due to lower renewal PIF and average premium. Renewal PIF decreased because new business production in prior periods was insufficient to make up for an inherently low renewal ratio in this business. The decline in average premium during 2005 when compared to 2004 is due to mix of business and a decrease in rates. In 2004, the increase in average premium declined due to the decrease in rate activity.
(1)Represents the impact in the states where rate changes were approved during 2005 as a percentage of total countrywide prior year-end premiums written.
Allstate Protection generated underwriting income of $2.47 billion during 2004 compared to $1.90 billion in 2003. The increase in underwriting income was the result of increased premiums earned, declines in auto and homeowners claim frequency excluding catastrophes and favorable reserve reestimates related to prior years, partially offset by higher catastrophe losses, increased operating costs and expenses and increased current year claim severity.
We consider the greatest areas of potential catastrophe losses due to hurricanes to generally be major metropolitan centers in counties along the eastern and gulf coasts of the United States. Policies in force attributable to counties along the eastern and gulf coasts, including the entire state of Florida, represented approximately 25% of total homeowners policies in force during 2005. Generally, the average premium on a property policy near these coasts is greater than other areas.
Hurricane Katrina made initial landfall in Florida on August 25, 2005 and again in the states of Louisiana, Mississippi and Alabama on August 29, 2005.
business in 2004. The increase in accident, health and other premiums was primarily attributable to higher underwriting retention.
Amortization of DAC and DSI, excluding amortization related to realized capital gains and losses, increased 9.4% in 2005 compared to 2004 as a result of higher gross margin. DAC and DSI amortization related to realized capital gains and losses, after-tax, increased $14 million in 2005 compared to 2004 primarily due to increased realized capital gains on investments supporting certain fixed annuities.
Net income was favorably impacted in 2005 and 2004 by adjustments of prior years' tax liabilities totaling $19 million and $3 million, respectively.
•We plan to reinvigorate sales through the Allstate exclusive agencies by further tailoring products for our customers and making it easier for our agents to distribute Allstate Financial products.
As a result of tactical decisions in each of the portfolios, we may sell securities during the period in which fair value has declined below amortized cost for fixed income securities or cost for equity securities. Portfolio reviews, which include identifying securities that are other than temporarily impaired and recognizing impairment on securities in an unrealized loss position for which we do not have the intent and ability to hold until recovery, are conducted regularly. For more information, see the Portfolio Monitoring section of the MD&A.
Municipal bonds, including tax-exempt and taxable securities, totaled $26.74 billion and 96.6% were rated investment grade at December 31, 2005. Approximately 64.5% of the municipal bond portfolio was insured by seven bond insurers and accordingly have a Moody's equivalent rating of Aaa or Aa. The municipal bond portfolio at December 31, 2005 consisted of approximately 3,500 issues from approximately 2,500 issuers. The largest exposure to a single issuer was approximately 1% of the municipal bond portfolio. Corporate entities were the ultimate obligors of approximately 8.9% of the municipal bond portfolio.
Based upon the information and assumptions we used at December 31, 2005, we estimate that a 10% immediate unfavorable change in each of the foreign currency exchange rates that we are exposed to would decrease the value of our foreign currency denominated instruments by approximately $110 million, compared with an estimated $102 million decrease at December 31, 2004. The selection of a
Amounts recorded for pension cost and minimum pension liabilities are significantly affected by fluctuations in the returns on plan assets and the amortization of unrecognized actuarial gains and losses. Plan assets sustained net losses in prior periods primarily due to declines in equity markets. These asset losses, combined with all other unrecognized actuarial gains and losses, resulted in amortization of net actuarial loss (and additional net periodic pension cost) of $135 million in 2005 and $121 million in 2004. We anticipate that the unrealized loss for our pension plans will exceed 10% of the greater of the projected benefit obligations or the market-related value of assets during the foreseeable future, resulting in additional amortization and net periodic pension cost.
Property-Liability Lower operating cash flows of the Property-Liability business in 2005, compared to 2004, were primarily due to increased claim payments, partially offset by increased premiums and collections of reinsurance and other recoverables related to catastrophes. Claim payments increased as a result of Hurricanes Katrina, Rita and Wilma. Higher operating cash flows of the Property-Liability business in 2004 were primarily due to increased underwriting income despite catastrophe losses in 2004 and contributions made to our defined benefit pension plans in 2004.
Impacts of catastrophes and our catastrophe management strategy may adversely affect premium growth
The Company consolidates VIEs when it is the primary beneficiary of a VIE. A primary beneficiary has a variable interest that will absorb a majority of the expected losses if they occur or receive a majority of the entity's expected returns, or both (see Note 11).
beginning after June 15, 2005 to the next fiscal year beginning after June 15, 2005. SFAS No. 123R is not expected to have a material effect on the results of operations or financial position of the Company.
The Company participates in securities lending programs with third parties, mostly large brokerage firms. At December 31, 2005 and 2004, fixed income securities with a carrying value of $3.26 billion and $2.89 billion, respectively, were on loan under these agreements. In return, the Company receives cash that it invests and includes in short-term investments and fixed income securities, with an offsetting liability recorded in other liabilities and accrued expenses to account for the Company's obligation to return the collateral. Interest income on collateral, net of fees, was $8 million, $6 million and $6 million, for the years ended December 31, 2005, 2004 and 2003, respectively.
The net impact to pretax income includes the settlements for derivatives, including the accrued periodic settlements, as well as changes in the fair value of freestanding and embedded derivatives. For those derivatives which qualify for fair value hedge accounting, it also includes the changes in the fair value of the hedged risk, and therefore reflects any hedging ineffectiveness. For cash flow hedges, gains and losses amortized from accumulated other comprehensive income are included. For embedded derivatives in convertibles and equity-indexed notes subject to bifurcation, accretion income related to the host instrument has also been included.
The Company had 900 million shares of issued common stock of which 646 million shares were outstanding and 254 million shares were held in treasury as of December 31, 2005. In 2005, the Company repurchased 44 million shares at an average cost of $56.03 and reissued 8 million shares under equity incentive plans.
The Company leases certain office facilities and computer equipment. Total rent expense for all leases was $354 million, $367 million and $367 million in 2005, 2004 and 2003, respectively.
The Company is also subject to assessments from the Louisiana Citizens Property Insurance Corporation ("LA Citizens"). 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. LA Citizens had a financial deficit due to losses incurred from the hurricanes that struck Louisiana during 2005, and therefore levied an assessment to participating companies. The Company paid its share of this regular assessment totaling $34 million, and the entire amount is expected to be recouped. This assessment does not represent the maximum regular industry assessment available to LA Citizens for the 2005 calendar year, and therefore the Company may be assessed up to an additional $12 million. If a deficit remains after the regular assessment, LA Citizens can also fund any remaining deficit through emergency assessments in the current and subsequent years. Companies are required to collect the emergency assessments directly from residential property policyholders and remit to LA Citizens as collected. In addition, LA Citizens may issue bonds to further fund a deficit.
As a result of the recognition of the subsidy provided by the Medicare Prescription Drug, Improvement and Modernization Act of 2003, the Company's APBO was reduced by $115 million in 2005 for benefits attributable to past service and the Company's net periodic postretirement benefit cost for 2005 was reduced by $17 million, of which $8 million was amortization of the actuarial experience gain attributable to past service, $4 million was a reduction of current period service cost, and $5 million was the reduction in interest cost on the APBO (see Note 2).
The weighted average health care cost trend rate used in measuring the accumulated postretirement benefit cost is 9.20% for 2006, gradually declining to 5.50% in 2010 and remaining at that level thereafter.
There was no minimum funding requirement under the IRC for the tax qualified pension plans as of December 31, 2005. The Company currently plans to contribute $129 million to its pension plans in 2006. This plan is subject to revision at the discretion of management.
Employees of the Company, with the exception of those employed by the Company's international subsidiaries and Sterling, are eligible to become members of The Savings and Profit Sharing Fund of Allstate Employees ("Allstate Plan"). The Company's contributions are based on the Company's matching obligation and performance. The Allstate Plan includes an ESOP to pre-fund a portion of the Company's anticipated contribution. In connection with the Allstate Plan, the Company has a note from the ESOP with a principal balance of $54 million at December 31, 2005. The ESOP note has a fixed interest rate of
(1)As a result of the third quarter 2005 net loss, weighted average dilutive potential common shares outstanding resulting from stock options and restricted stock units totaling 5.6 million were not included in the computation of diluted earnings per share for the third quarter of 2005 since inclusion of these securities would have an anti-dilutive effect. In the absence of the net loss, weighted average common and dilutive potential common shares outstanding would have totaled 660.4 million.