Use these links to rapidly review the document INDEX TO QUARTERLY REPORT ON F0RM 10–Q
UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
Commission file number 1-11840
THE ALLSTATE CORPORATION (Exact name of registrant as specified in its charter)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 847/402-5000
REGISTRANT HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
Yes /x/ No / /
AS OF JULY 31, 2001, THE REGISTRANT HAD 719,000,464 COMMON SHARES, $.01 PAR VALUE, OUTSTANDING.
THE ALLSTATE CORPORATION INDEX TO QUARTERLY REPORT ON F0RM 10-Q June 30, 2001
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS THE ALLSTATE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to condensed consolidated financial statements.
1
THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
2
THE ALLSTATE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
3
THE ALLSTATE CORPORATION AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of The Allstate Corporation and its wholly owned subsidiaries, primarily Allstate Insurance Company, a property-liability insurance company with various property-liability and life and investment subsidiaries, including Allstate Life Insurance Company (collectively referred to as the "Company" or "Allstate").
The condensed consolidated financial statements and notes as of June 30, 2001, and for the three month and six month periods ended June 30, 2001 and 2000 are unaudited. The condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods. These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in Appendix D of the Notice of Annual Meeting and Proxy Statement dated March 26, 2001. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.
New accounting standards
The Company adopted the provisions of Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", as of January 1, 2001. The impact of SFAS No. 133 and SFAS No. 138 (the "statements") to the Company was a loss of $9 million, after-tax, and is reflected as a cumulative effect of a change in accounting principle on the Condensed Consolidated Statements of Operations. The Company also recorded a cumulative after-tax increase of $5 million in Accumulated other comprehensive income.
The statements require that all derivatives be recognized on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through Net income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through Net income or recognized in Accumulated other comprehensive income until the hedged item is recognized in Net income. The Company elected to adopt the provisions of the statements with respect to embedded derivative financial instruments to all such instruments held at January 1, 2001.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method. Under SFAS No. 142, goodwill and separately identified intangible assets with indefinite lives will no longer be amortized but reviewed annually (or more frequently if impairment indicators arise) for impairment. Separately identified intangible assets not deemed to have indefinite lives will continue to be amortized over their useful lives. SFAS No. 142 applies to all goodwill and intangible assets acquired after June 30, 2001. For goodwill and intangible assets acquired prior to July 1, 2001, Allstate is required to adopt SFAS No. 142 effective January 1, 2002.
Allstate is currently evaluating the effect that adopting SFAS Nos. 141 and 142 will have on its results of operations and financial position.
2. Acquisition and Dispositions
On May 8, 2001, the Company completed the acquisition of Sterling Collision Centers Inc. ("Sterling"). Sterling operates a network of 40 collision repair stores in seven states and nine metropolitan areas. The transaction was accounted for as a purchase and the excess of the acquisition cost over the fair value of Sterling's net assets acquired of $90 million was recorded as goodwill.
4
On June 20, 2001, the Company announced that it had entered into an agreement to sell its direct auto insurance business in Germany and Italy to Direct Line, the London based insurance subsidiary of The Royal Bank of Scotland.
On June 29, 2001, the Company disposed of its operations in Indonesia and the Philippines through a sale and purchase agreement with The Prudential Assurance Company Limited ("Prudential"), where Prudential acquired Allstate's holdings in Pt Asuransi Jiwa Allstate, Indonesia and Allstate Life Insurance Company of the Philippines. Allstate recognized a loss of $10 million ($6 million after-tax) on the sale. These dispositions are consistent with the Company's strategy to focus its efforts on business in North America.
3. Earnings per share
Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share is computed based on the weighted average number of common and dilutive potential common shares outstanding. For Allstate, dilutive potential common shares consist of outstanding stock options and, in 2000, shares issuable under its mandatorily redeemable preferred securities.
5
The computations of basic and diluted earnings per share are presented in the following table.
Options to purchase 200,067 and 15,828,301 Allstate common shares, with exercise prices ranging from $43.00 to $50.72 and $25.88 to $50.72, were outstanding at June 30, 2001 and June 30, 2000, respectively, but were not included in the computation of diluted earnings per share for the three month periods ended June 30, 2001 and 2000 since inclusion of these options would have an anti-dilutive effect as the options' exercise prices exceeded the average market price of Allstate common shares in the three month periods. Options to purchase 8,731,944 and 16,078,713 Allstate common shares, with exercise prices ranging from $41.31 to $50.72 and $23.72 to $50.72, were outstanding at June 30, 2001 and 2000, respectively, and not included in the six month period computations of diluted earnings per share due to anti-dilutive effects.
6
4. Reserve for Property-Liability Insurance Claims and Claims Expense
The Company establishes reserves for claims and claims expense on reported and unreported claims of insured losses. These reserve estimates are based on known facts and interpretations of circumstances, internal factors including the Company's experience with similar cases, historical trends involving claim payment patterns, loss payments, pending levels of unpaid claims, loss control programs and product mix. In addition, the reserve estimates are influenced by external factors including court decisions, economic conditions and public attitudes. The Company, in the normal course of business, may also supplement its claims processes by utilizing third party adjusters, appraisers, engineers, inspectors, other professionals and information sources to assess and settle catastrophe and non-catastrophe claims. The effects of inflation are implicitly considered in the reserving process.
The establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain process. Allstate regularly updates its reserve estimates as new facts become known and further events occur which may impact the resolution of unsettled claims. Changes in prior year reserve estimates, which may be material, are reflected in the results of operations in the period such changes are determinable.
Catastrophic events and weather-related losses (wind, hail, lightning, freeze and flood events not meeting the Company's criteria to be declared a catastrophe) are an inherent risk of the property-liability insurance business that have contributed to, and will continue to contribute to, material period-to-period fluctuations in the Company's results of operations and financial position. The level of catastrophic events and weather-related losses experienced in any period cannot be predicted and could be material to results of operations and financial position.
Management believes that the reserve for claims and claims expense, net of reinsurance recoverables, at June 30, 2001, is appropriately established in the aggregate and adequate to cover the ultimate net cost of reported and unreported claims arising from losses which had occurred by that date.
Allstate's exposure to environmental, asbestos and other mass tort claims stems principally from excess and surplus business written from 1972 through 1985, including substantial excess and surplus general liability coverages on Fortune 500 companies, and reinsurance coverage written during the 1960s through the 1980s, including reinsurance on primary insurance written on large United States companies. Additional, although less material, exposure stems from direct commercial insurance written for small to medium-size companies. Other mass tort exposures primarily relate to general liability and product liability claims, such as those for medical devices and other products.
In 1986, the general liability policy form used by Allstate and others in the property-liability industry was amended to introduce an "absolute pollution exclusion," which excluded coverage for environmental damage claims and added an asbestos exclusion. Most general liability policies issued prior to 1987 contain annual aggregate limits for product liability coverage, and policies issued after 1986 also have an annual aggregate limit on all coverages. Allstate's experience to date is that these policy form changes have effectively limited its exposure to environmental and asbestos claim risks assumed.
Establishing net loss reserves for environmental, asbestos and other mass tort claims is subject to uncertainties that are greater than those presented by other types of claims. Among the complications are lack of historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure, unresolved legal issues regarding policy coverage, availability of reinsurance and the extent and timing of any such contractual liability. The legal issues concerning the interpretation of various insurance policy provisions and whether those losses are, or were ever intended to be covered, are complex. Courts have reached different and sometimes inconsistent conclusions as to when losses are deemed to have occurred and which policies provide coverage; what types of losses are covered; whether there is an insurer obligation to defend; how policy limits are determined; how policy exclusions and
7
conditions are applied and interpreted; and whether clean-up costs represent insured property damage. Management believes these issues are not likely to be resolved in the near future.
Allstate's reserve for environmental and asbestos claims were $1,012 million and $1,071 million, net of reinsurance recoverables of $334 million and $359 million at June 30, 2001 and December 31, 2000, respectively. Approximately 59% and 58% of the total net environmental and asbestos reserve at June 30, 2001 and December 31, 2000, respectively, are for incurred but not reported ("IBNR") estimated losses.
Management believes its net loss reserve for environmental, asbestos and other mass tort claims are appropriately established based on available facts, technology, laws and regulations. However, due to the inconsistencies of court coverage decisions, plaintiffs' expanded theories of liability, the risks inherent in major litigation and other uncertainties, the ultimate cost of these claims may vary materially from the amounts currently recorded, resulting in an increase in the loss reserve. In addition, while the Company believes that improved actuarial techniques and databases have assisted in its ability to estimate environmental, asbestos and other mass tort 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 reserve that may be required.
5. Reinsurance
Property-liability insurance premiums and life and annuity premiums and contract charges are net of the following reinsurance ceded:
Property-liability insurance claims and claims expense and life and annuity contract benefits are net of the following reinsurance recoveries:
6. Regulation and Legal Proceedings
Regulation
The Company's insurance businesses are subject to the effects of a changing social, economic and regulatory environment. Public and regulatory initiatives have varied and have included efforts to adversely influence and restrict premium rates, restrict the Company's ability to cancel policies, impose underwriting standards and expand overall regulation. The ultimate changes and eventual effects, if any, of these initiatives are uncertain.
8
Legal Proceedings
Allstate and plaintiffs' representatives have settled certain civil suits related to the 1994 Northridge, California earthquake, including a class action. An appeal of the judgment approving the settlement of the class action was dismissed by the California Court of Appeal but objectors have recently filed a Petition for Review with the California Supreme Court. The plaintiffs in this action challenged licensing and engineering practices of certain firms that Allstate retained and alleged that Allstate systematically and improperly pressured engineering firms to alter their reports to reduce the loss amounts paid to some insureds with earthquake claims. The settlement agreement calls for a review of the claims of qualifying class members by independent structural/geotechnical engineers and independent claims adjusters. Of the approximately 11,500 class members, less than a third indicated an interest in participating in the independent review process and, after a detailed review of the claims files, only about 20% of the class has been cleared for participation. The review process is underway and has resulted in the closing of some claims for an immaterial amount. In June 2001 an accelerated resolution option for claims in the independent review process received court approval. Under that option, any eligible insureds electing to participate will be paid $22,000 in full satisfaction of their claims, in lieu of further participation in the independent review process. The Company is not required to, but retains the right to, proceed with this option even if less than the agreed-upon minimum of 1,866 insureds select it. On the basis of the court approval of the accelerated resolution option, the Company strengthened its reserves in the second quarter of 2001. In the opinion of management, the ultimate financial exposure in excess of amounts currently reserved is not expected to have a material effect on the results of operations, liquidity or financial position of the Company.
For the past several years, the Company has been distributing to certain Personal Property and Casualty ("PP&C") claimants documents regarding the claims process and the role that attorneys may play in that process. Suits challenging the use of these documents have been filed against the Company, including purported class action suits. In addition to these suits, the Company has received inquires from states' attorneys general, bar associations and departments of insurance. The Company has continued to use these documents after agreeing to make certain modifications in some states. The Company is vigorously defending its rights to use these documents. The outcome of these disputes is currently uncertain.
There are currently a number of state and nationwide putative class action lawsuits pending in various state and federal courts seeking actual and punitive damages from Allstate alleging breach of contract and fraud because of its specification of after-market (non-original equipment manufacturer) replacement parts in the repair of insured vehicles. To a large degree, these lawsuits mirror similar lawsuits filed against other carriers in the industry. Plaintiffs in these suits allege that after-market parts are not "of like kind and quality" as required by the insurance policies. The lawsuits are in various stages of development. The Company is vigorously defending these lawsuits. The outcome of these disputes is currently uncertain.
The Company has pending several state and nationwide class action lawsuits in various state and federal courts seeking actual and punitive damages from Allstate alleging breach of contract and fraud for failing to pay inherent diminished value to insureds under a collision, comprehensive, or uninsured motorist property damage provision of an auto policy. To a large degree, these lawsuits mirror similar lawsuits filed against other carriers in the industry. Inherent diminished value is defined by plaintiffs as the difference between the market value of the insured automobile before an accident and the market value after repair. Plaintiffs allege that they are entitled to the payment of inherent diminished value under the terms of the contract. These lawsuits are in various stages of development. A class has been certified in only one case, a multi-state class action. The Company is vigorously defending these lawsuits. The outcome of these disputes is currently uncertain.
There are a number of state and nationwide class action lawsuits pending in various state courts challenging the legal propriety of Allstate's medical bill review processes on a number of grounds, including, among other things, the manner in which Allstate determines reasonableness and necessity. Only
9
one statewide class action has been certified, on a conditional basis. These lawsuits, which to a large degree mirror similar lawsuits filed against other carriers in the industry, allege these processes result in a breach of the insurance policy as well as fraud. The Company denies those allegations and is vigorously defending both its processes and these lawsuits. The outcome of these disputes is currently uncertain.
Three nationwide and two statewide putative class actions are pending against Allstate which challenge Allstate's use of certain automated database vendors in valuing total loss automobiles. To a large degree, these lawsuits mirror similar lawsuits filed against other carriers in the industry. Plaintiffs allege that flaws in these databases result in valuations to the detriment of insureds. The plaintiffs are seeking actual and punitive damages. The lawsuits are in various stages of development and Allstate is vigorously defending them, but the outcome of these disputes is currently uncertain.
Allstate is or has been defending various lawsuits involving worker classification issues. Examples of these lawsuits include a class action, filed after Allstate's reorganization of its California agent programs in 1996, whereby among other things, the plaintiffs sought a determination that they had been treated as employees notwithstanding agent contracts that specify that they are independent contractors for all purposes. The court determined in this case that the agents are independent contractors, which led to the dismissal of the suit. That dismissal is currently on appeal. Other examples are two putative class actions challenging the overtime exemption claimed by the Company under the Fair Labor Standards Act or state wage and hour laws. These class actions mirror similar lawsuits filed recently against other employers. Another example involves the worker classification of staff working in agencies. In this putative class action, plaintiffs seek damages under the Employee Retirement Income Security Act ("ERISA") and the Racketeer Influenced and Corrupt Organizations Act alleging that 10,000 agency secretaries were terminated as employees by Allstate and rehired by agencies through outside staffing vendors for the purpose of avoiding the payment of employee benefits. Allstate has been vigorously defending these and various other worker classification lawsuits. The outcome of these disputes is currently uncertain.
The Company is also defending certain matters relating to the Company's agency reorganization program announced in 1999. These matters include investigations by the U.S. Department of Labor and the U.S. Equal Employment Opportunity Commission with respect to allegations of ERISA violations, age discrimination and retaliation. A putative class action has also been filed alleging various violations of ERISA, breach of contract and age discrimination. Allstate is cooperating fully with these agency investigations and will continue to vigorously defend these and other claims related to its agency reorganization program. The outcome of these disputes is currently uncertain.
Various other legal and regulatory actions are currently pending that involve Allstate and specific aspects of its conduct of business. Like other members of the insurance industry, the Company is the target of an increasing number of class action lawsuits and other types of litigation, some of which involve claims for substantial and/or indeterminate amounts (including punitive and treble damages) and the outcomes of which are unpredictable. This litigation is based on a variety of issues including insurance, claim settlement and worker classification practices. However, at this time, based on their present status, it is the opinion of management that the ultimate liability, if any, in one or more of these other actions in excess of amounts currently reserved is not expected to have a material effect on the results of operations, liquidity or financial position of the Company.
Shared markets
As a condition of its license to do business in various states, the Company is required to participate in mandatory property-liability shared market mechanisms or pooling arrangements including reinsurance, which provide various insurance coverages to individuals or other entities that otherwise are unable to purchase such coverage voluntarily provided by private insurers. Underwriting results related to these organizations, which tend to be adverse to the Company, have been immaterial to the results of operations.
10
7. Business Segments
Summarized financial performance data for each of the Company's reportable segments for the three months and six months ended June 30, are as follows:
11
Summarized revenue data for each of the Company's business segments for the three months and six months ended June 30, are as follows:
12
8. Comprehensive Income
The components of other comprehensive income on a pretax and after-tax basis for the three months and six months ended June 30, are as follows:
13
9. Company Restructuring
On November 10, 1999, the Company announced a series of strategic initiatives to aggressively expand its selling and service capabilities. The Company also announced a program to reduce current annual expenses by approximately $600 million. The reduction in expenses comes from field realignment, the reorganization of employee agents to a single exclusive agency independent contractor program, the closing of a field support center and four regional offices, and reduced employee related expenses and professional services as a result of reductions in force, attrition and consolidations. The reduction in employees was estimated as approximately 4,000 non-agent positions, exclusive of selected hires to staff new initiatives, across all employment grades and categories by the end of 2000, or approximately 10% of the Company's non-agent work force. In addition, the Company continues to pursue other expense reduction actions.
As a result of the cost reduction program, Allstate established a $69 million restructuring liability during the fourth quarter of 1999 for certain employee termination costs and qualified exit costs. The employee termination costs accrued as part of the restructuring reserve primarily reflected severance and the incremental cost of enhanced post-retirement benefits. The exit costs accrued primarily related to lease termination and post-exit rent expenses. As a result of additional actions, the Company has experienced similar costs since that date.
14
The following table illustrates the inception to date change in the restructuring liability at June 30, 2001:
The payments applied against the restructuring liability for employee costs primarily reflect severance. Payments applied for exit costs generally have consisted of post-exit rent expenses and contract termination penalties. Increases in the liability incurred during the year are due to estimates of additional severance and other exit costs.
As of June 30, 2001, approximately 2,350 non-agent employees have been involuntarily terminated and approximately 1,640 non-agent positions have been eliminated through net attrition pursuant to the restructuring plan. As of June 30, 2001, approximately 2,400 agents have terminated their agency relationship with the Company at their election pursuant to the plan to reorganize exclusive agents to a single independent contractor program.
An additional $59 million of pretax restructuring related costs ($38 million after-tax), net of related non-cash settlement and curtailment accounting gains as required under SFAS No. 88 and SFAS No. 106 on Allstate's retirement plans in the amount of $168 million, were expensed as incurred during 2000. The gross expenses recognized primarily consisted of agent separation and reorganization costs, retention bonuses and termination costs not qualifying for accrual at the time of the restructuring plan adoption.
The non-cash retirement plans' settlement and curtailment gains, as required in conformity with generally accepted accounting principles, were recorded in 2000 in connection with the reorganization of agents to a single independent contractor program, and the termination of non-agent employees. The $168 million accounting gain includes a settlement gain of $7 million resulting from the accelerated recognition of deferred net actuarial gains that arose due to the favorable investment experience and demographic changes in the retirement plans and a curtailment gain of $161 million due to the accelerated recognition of unrecognized prior service cost and the reduction in the projected benefit obligation as a result of agents separating from the Company.
As a result of agent separations relating to the agent reorganization plan, the pension plan made benefit payments of approximately $480 million to terminating agents.
The Company does not anticipate that further charges related to the restructuring program will be material to Allstate's results of operations.
15
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Shareholders ofThe Allstate Corporation:
We have reviewed the accompanying condensed consolidated statement of financial position of The Allstate Corporation and subsidiaries as of June 30, 2001, and the related condensed consolidated statements of operations for the three-month and six-month periods ended June 30, 2001 and 2000, and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2001 and 2000. These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated statement of financial position of The Allstate Corporation and subsidiaries as of December 31, 2000, and the related consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows for the year then ended, not presented herein. In our report dated February 23, 2001, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 2000 is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived.
Deloitte & Touche LLP
Chicago, IllinoisAugust 10, 2001
16
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
The following discussion highlights significant factors influencing results of operations and changes in financial position of The Allstate Corporation (the "Company" or "Allstate"). It should be read in conjunction with the condensed consolidated financial statements and notes thereto found under Part I. Item 1. contained herein and with the discussion, analysis, consolidated financial statements and notes thereto in Part I. Item 1. and Part II. Item 7. and Item 8. of The Allstate Corporation Annual Report on Form 10-K for 2000 and in Appendix D of the Notice of Annual Meeting and Proxy Statement dated March 26, 2001.
CONSOLIDATED REVENUES
Consolidated revenues for the second quarter of 2001 increased 0.3% over the same period of 2000 and decreased 0.9% for the six months ended June 30, 2001 from the first six months of 2000. Fluctuations in both periods reflect higher net investment income and life and annuity premiums and contract charges, offset to varying extents by realized capital losses. Also, increased Property-liability premiums during both periods were due to increased premiums from Allstate-branded products, partially offset by the effects of actions taken to improve the profitability of the Ivantage business, which includes the EncompassSM Insurance and DeerbrookSM Insurance brand names.
CONSOLIDATED NET INCOME
Net income for the second quarter of 2001 decreased 63.4% compared to the same period of 2000, reflecting higher catastrophe losses, increased loss costs and varying market conditions in the financial services sector compared to the prior year second quarter. Net income in the first six months of 2001 decreased 34.5% compared to the first six months of 2000, due to increased loss costs and varying market conditions in the financial services sector. Net income per diluted share in the second quarter of 2001 decreased 62.3% compared to the same period of 2000 and decreased 32.1% for the six months ended June 30, 2001 compared to the first six months of 2000. Fluctuations in both periods reflect lower net income, partially offset by the accretive effect of the share repurchase program.
17
PROPERTY-LIABILITY OPERATIONS
Overview
The Company's Property-Liability operations consist of two business segments: Personal Property and Casualty ("PP&C") and Discontinued Lines and Coverages. PP&C is principally engaged in the sale of property and casualty insurance, primarily private passenger auto and homeowners insurance, to individuals in the United States and Canada. Discontinued Lines and Coverages represents business no longer written by Allstate and includes the results from environmental, asbestos and other mass tort exposures, and certain commercial and other businesses in run-off. Such groupings of financial information are consistent with those used internally for evaluating segment performance and determining the allocation of resources.
Summarized financial data and key operating ratios for Allstate's Property-Liability operations are presented in the following table.
Underwriting Results
PP&C The Company continues to execute a series of strategic initiatives, which were initiated in 1999, to aggressively expand customer selling and service capabilities. These initiatives include rolling out The Good HandsSM Network, implementing Strategic Risk Management ("SRM"), installing new agency and claim technology, and introducing enhanced marketing and advertising. The Company believes
18
successful execution of these initiatives will result in customer selling and service advantages and improved profitability in an increasingly competitive marketplace.
Summarized underwriting results and key operating ratios for Allstate's PP&C segment are presented in the following table.
19
PP&C sells primarily private passenger auto and homeowners insurance to individuals through exclusive Allstate agencies and independent agencies. The Allstate-brand strategy is to provide sales and service to new and existing customers in the distribution channels of their choice. A major part of this strategy is The Good Hands Network, a multi-access platform that integrates the Internet, Customer Information Centers ("CICs") and local exclusive Allstate agencies. As the Company proceeds with its state-by-state rollout of The Good Hands Network, it has observed that customers continue to rely primarily on Allstate's agents to complete their insurance purchases, while the Internet and CICs have been accessed primarily for quotes, information and service. To align with customer preferences, the Company is adjusting the services being offered on the network, the pace for introducing the network and its advertising. Allstate will continue to monitor customer expectations and behaviors and will adjust its plans accordingly.
PP&C's Ivantage division focuses on selling through independent agencies. Since the acquisition of Encompass in the fourth quarter of 1999, the strategy for this division has been focused on profit improvement actions for both Encompass and Deerbrook.
The Company generally separates the voluntary personal auto insurance business into two categories for underwriting and pricing purposes: the standard market and the non-standard market. Generally, standard auto customers are expected to have lower risks of loss than non-standard auto customers.
In 2001 PP&C continues the implementation of SRM, which is a tier-based pricing, underwriting and marketing program that enhances the Company's competitiveness with those customers who, based on the Company's determination, will potentially provide the best profitability over their lifetime with the Company, characterized as high lifetime value. The factors SRM uses to place each auto customer into a risk category include, for example, the number of years of continuous coverage with a prior insurer, prior bodily injury liability limits and financial stability. Management intends to continue to refine and implement SRM as the regulatory review process is completed, additional analysis is performed and new factors are introduced. To date, a majority of the markets where SRM has been implemented have experienced increased agent productivity and increased percentages of customers with multiple policies.
The Company's strategy for homeowners is to target customers whose risk of loss provides the best opportunity for profitable growth. Because homeowners is less price-sensitive than the private passenger auto business, new business growth attributable to SRM will occur more gradually in this line of business than in the auto insurance business. The factors SRM uses to place each homeowners customer into a risk category include, for example, prior claim activity and financial stability. The homeowners strategy also includes managing exposure on policies in areas where the potential loss from catastrophes exceeds acceptable levels.
20
Homeowners premiums are earned over the policy period, typically twelve months. Losses including losses from catastrophic events and weather-related losses (wind, hail, lightning, freeze and flood events not meeting the Company's criteria to be declared a catastrophe) are also accrued on an occurrence basis within the policy period. However, homeowners product pricing, is typically intended to establish acceptable long-term returns, as determined by management, over a period of years. Accordingly, in any reporting period, loss experience from catastrophic events and weather-related losses may contribute to earnings performance negatively or positively, relative to the expectations incorporated into the product pricing. Accordingly, the homeowners line of business is more capital intensive than other personal lines of business.
The Company is currently executing a range of actions to mitigate adverse homeowners trends, such as product, underwriting and rating changes and loss management initiatives which are intended to improve the profitability of this business. The effect on premiums of any ultimate actions is currently not estimable.
Premiums written by line for the PP&C segment are presented in the following table.
Standard auto premiums written increased 3.9% to $3.25 billion in the second quarter of 2001, from $3.12 billion for the same three month period in 2000, and during the first six months of 2001, standard auto premiums increased 3.8% as compared to the first six months of last year. Excluding the impact of Ivantage, the Allstate-brand products' standard auto premiums increased 4.8% in the second quarter of 2001 compared to the same three month period in 2000, and 4.9% in the first six months of 2001 over the first six months of last year. The increase is due to a 3.2% increase in the number of new and renewal policies in force. Average premium per policy also added to this increase with 2.1% growth in the second quarter over the second quarter of last year, and 1.7% growth in the first six months of 2001 over the same period last year. Ivantage premiums decreased 3.8% in the second quarter of 2001 and 5.7% in the first six months of 2001 when compared to the same periods of 2000. These decreases were attributable to decreased new and renewal policies in force, partially offset by increased average premium per policy.
Increases in standard auto average premium per policy were due to rate actions taken in both the Allstate-brand and Ivantage during 2000 and the first half of 2001, and also due to Allstate-brand policyholders generally selecting additional coverage. The Allstate-brand received approval for standard auto rate changes, some in connection with the implementation of SRM, in 20 states during the first half of 2001 with a projected average premium written increase in those states of 2.8% on an annual basis. Ivantage received approval for standard auto rate changes in 19 states during the first half of 2001 with a projected average premium written increase in those states of 0.9% on an annual basis.
Non-standard auto premiums written decreased 10.2% to $722 million in the second quarter of 2001, from $804 million for the same period in 2000, and 14.6% during the first six months of 2001 as compared to the first six months of 2000. Excluding the impact of Ivantage, the Allstate-brand non-standard auto premiums decreased 5.4% in the second quarter of 2001 compared to the same three month period in 2000, and 10.3% in the first six months of 2001, over the first six months of last year. The decrease is due to a 19.5% decrease in the number of new and renewal policies in force. A 6.9% increase in average premium
21
per policy in the second quarter of 2001 over the second quarter of last year and a 5.7% increase in the first six months of 2001 over the first six months of last year partially offset lower policies in force. Ivantage premiums decreased 80.4% in the second quarter of 2001 and 78.3% in the first six months of 2001 when compared to the same periods of 2000. These decreases were attributable to an 81.2% decrease in policies in force. A 15.5% increase in average premium per policy in the second quarter over the second quarter of last year and an 8.7% increase in the first six months of 2001 over the first six months of last year partially offset lower policies in force.
Decreases in non-standard auto premiums during the first half of 2001 were primarily due to the implementation of programs to address adverse profitability trends for both the Allstate-brand and Ivantage. These programs vary by state and include changes such as additional premium down payment requirements, tightening underwriting requirements, rate increases, non-renewing policies where permitted and certain other administrative changes. The adverse impact of these programs on non-standard written premium growth is expected to moderate in the second half of 2001, while positioning the Company for improved profitability. As a result of the actions taken in this line, the frequency of losses has decreased. The Company will continue to implement SRM for non-standard auto policies, subject to the regulatory review process, as well as internal monitoring of the performance and profitability of the SRM factors. The involuntary business written by shared markets generally increases when the underwriting standards used by the Company and other participants in the non-standard auto industry lead them to write less non-standard auto insurance business.
Increases in non-standard auto average premium per policy were due to rate actions taken for both the Allstate-brand and Ivantage during 2000 and the first half of 2001. The Allstate-brand received approval for non-standard auto rate changes, some in connection with the implementation of SRM, in 23 states during the first half of 2001 with a projected average premium written increase in those states of 9.1% on an annual basis. Ivantage received approval for non-standard auto rate changes in 10 states during the first half of 2001 with a projected average premium written increase in those states of 8.5% on an annual basis.
Homeowners premiums written increased 5.6% to $1.16 billion in the second quarter of 2001, from $1.10 billion for the same three month period in 2000, and during the first six months of 2001, homeowners premiums increased 6.4% as compared to the first six months of last year. Excluding the impact of Ivantage, in the second quarter of 2001, Allstate-brand homeowners premiums increased 6.1% compared to the same three month period in 2000, and 6.5% in the first six months of 2001, over the first six months of last year. The increase is due to a 2.1% increase in the number of new and renewal policies in force. Average premium per policy also added to this increase with 4.2% growth in the second quarter of 2001 over the second quarter of last year, and 4.1% growth in the first six months of 2001 over the same period last year. Ivantage premiums increased 2.4% in the second quarter of 2001 and 5.1% in the first six months of 2001 when compared to the same periods of 2000. These increases were attributable to increased average premium per policy and partially offset by decreased policies in force.
Increases in homeowners average premium per policy were due to rate actions taken for both the Allstate-brand and Ivantage during 2000 and the first half of 2001. The Allstate-brand received approval for homeowners rate changes, some in connection with the implementation of SRM, in 14 states during the first half of 2001 with a projected average premium written increase in those states of 10.6% on an annual basis. Ivantage received approval for homeowners rate changes in 18 states during the first half of 2001 with a projected average premium written increase in those states of 3.1% on an annual basis.
For the second quarter of 2001, PP&C experienced an underwriting loss of $340 million compared to an underwriting loss of $49 million in the second quarter of 2000. For the six month period ended June 30, 2001, PP&C experienced an underwriting loss of $225 million compared to an underwriting loss of $27 million for the first half of last year. Underwriting losses increased in the second quarter of 2001 due to increased loss costs and higher catastrophe losses from multiple storms, whereas underwriting loss increases in the first six months of 2001 were driven primarily by increased loss costs, when compared to the same periods in the prior year. Loss costs were impacted by higher homeowners claim frequency and
22
increased claim severity stemming from inflationary pressures in medical and repair costs. These trends were partially offset by lower auto claim frequency due primarily to improvements in non-standard auto as a result of the Company's profitability actions in this line. The Company is currently executing a range of actions to mitigate the adverse auto and homeowners trends, such as product, claim, underwriting and rating changes, which are intended to improve the profitability of this business.
Catastrophe Losses and Catastrophe Management Catastrophe losses for the second quarter of 2001 were $537 million compared with $367 million for the same period in 2000. For the first half of 2001, catastrophe losses were $619 million compared to $749 million for the same period last year. The level of catastrophe losses experienced in any period cannot be predicted and could be material to results of operations and financial position.
Allstate has limited, over time, its aggregate insurance exposures in certain regions prone to catastrophes. These limits include restrictions on the amount and location of new business production, limitations on the availability of certain policy coverages, policy brokering and increased participation in catastrophe pools. Allstate has also requested and received rate increases and has expanded its use of increased hurricane and earthquake deductibles in certain regions prone to catastrophes. However, the initiatives are somewhat mitigated by requirements of state insurance laws and regulations, as well as by competitive considerations.
For Allstate, areas of potential catastrophe losses due to hurricanes include major metropolitan centers near the eastern and gulf coasts of the United States. Allstate Floridian Insurance Company ("Floridian") and Allstate Floridian Indemnity Company ("AFI") sell and service Allstate's Florida residential property policies, and have access to reimbursements on certain qualifying Florida hurricanes and exposure to assessments from the Florida Hurricane Catastrophe Fund. In addition, Floridian and AFI are subject to assessments from the Florida Windstorm Underwriting Association and the Florida Property and Casualty Joint Underwriting Association, organizations created to provide coverage for catastrophic losses to property owners unable to obtain coverage in the private insurance market. The Company has also mitigated its ultimate exposure to hurricanes through policy brokering; an example includes the Company's brokering of insurance coverage for hurricanes in Hawaii to a non-affiliated company.
Exposure to certain potential losses from earthquakes in California is limited by the Company's participation in the California Earthquake Authority ("CEA"), which provides insurance for California earthquake losses. Other areas in the United States where Allstate faces exposure to potential earthquake losses include areas surrounding the New Madrid fault system in the Midwest and faults in and surrounding Seattle, Washington and Charleston, South Carolina. Allstate continues to evaluate alternative business strategies to more effectively manage its exposure to catastrophe losses in these and other areas.
While management believes the Company's catastrophe management initiatives have reduced the potential magnitude of possible future losses, the Company continues to be contingently responsible for assessments by the CEA and various Florida facilities, and to be exposed to catastrophes that may materially impact results of operations and financial position. For example, the Company's historical catastrophe experience includes losses relating to Hurricane Andrew in 1992 totaling $2.26 billion and the Northridge earthquake of 1994 totaling $1.99 billion ($90 million of which was recorded in the second quarter of 2001). The next largest hurricane experienced by the Company was Hurricane Hugo in 1989 with losses totaling 11.2% of Hurricane Andrew's losses, and the next largest earthquake experienced by the Company was the San Francisco earthquake of 1989 with losses totaling 7.6% of the Northridge earthquake's losses. Additionally, since 1990 the aggregate impact of catastrophes on the Company's loss ratio was 6.0%; excluding losses from Hurricane Andrew, California earthquakes and Hawaii hurricanes during that period, the aggregate impact of all other catastrophes on the Company's loss ratio was 3.8%. The establishment of appropriate reserves for losses incurred from catastrophes, as for all outstanding property-liability claims, is an inherently uncertain process. Catastrophe reserve estimates are regularly reviewed and updated, using the most current information and estimation techniques. Any resulting adjustments, which may be material, are reflected in current operations.
The Company, in the normal course of business, may also supplement its claims processes by utilizing third party adjusters, appraisers, engineers, inspectors, other professionals and information sources to assess and settle catastrophe and non-catastrophe related claims.
23
Discontinued Lines and Coverages Summarized underwriting results for the Discontinued Lines and Coverages segment are presented in the following table.
Discontinued Lines and Coverages consists of business no longer written by Allstate, including results from environmental, asbestos and other mass tort exposures, and certain commercial and other businesses in run-off.
Net Investment Income and After-tax Realized Capital Gains and Losses
Net Investment Income Property-Liability net investment income was $436 million in the second quarter of 2001, consistent with $439 million in the second quarter of last year. For the first six months of 2001, net investment income increased to $902 million from $863 million in the same period last year. Fluctuations in both periods were due to increased income from partnership interests, offset by reduced asset balances due to dividends paid by Allstate Insurance Company ("AIC") to The Allstate Corporation. Average portfolio yields in the second quarter and year to date periods of 2001 were comparable to the prior year.
After-tax Realized Capital Gains and Losses Property-Liability after-tax realized capital losses for the second quarter of 2001 were $11 million compared to after-tax realized capital gains of $91 million for the same period in 2000. The decrease was due to market conditions impacting portfolio trading in the normal course of business and investment write-downs, partially offset by after-tax realized capital gains of $18 million resulting from the valuation of certain derivative instruments. During the first half of 2001, after-tax realized capital gains were $6 million compared to $210 million in the first six months of last year. This decrease was due to market conditions impacting portfolio trading in the normal course of business, investment write-downs and an after-tax realized capital loss of $18 million from the valuation of certain derivative instruments. The valuation of certain derivative instruments is due to new accounting policies adopted in the first quarter of 2001 related to the Statements of Financial Accounting Standards Nos. 133 and 138. Additionally, period-to-period fluctuations in realized capital gains and losses are largely the result of the timing of sales reflecting management's decision on the positioning of the investment portfolio, as well as assessments of individual securities and overall market conditions.
ALLSTATE FINANCIAL OPERATIONS
Allstate Financial markets life insurance and investment products. Life insurance products consist of interest-sensitive life, traditional term and whole life, immediate annuities with life contingencies, variable life, indexed life, credit life and accident and health insurance. Investment products include deferred annuities, immediate annuities without life contingencies, structured settlements and institutional products, including guaranteed investment contracts and funding agreements.
The segment uses several brand identities. Generally, Allstate brand products are sold through Allstate agencies, specialized brokers, Putnam distributors and workplace and direct response marketing. Other brands such as Glenbrook Life, Northbrook Life and Lincoln Benefit Life sell products through both Allstate and independent agencies, financial institutions such as securities firms and banks and direct response marketing.
24
Summarized financial data for the Allstate Financial segment is presented in the following table.
25
Operating Results
Statutory Premiums and Deposits Statutory premiums and deposits, which include premiums and deposits for all products, are used to analyze sales trends. The following table summarizes statutory premiums and deposits by product line.
Total statutory premiums and deposits decreased 9.2% in the second quarter of 2001, compared to the second quarter of 2000, and 7.0% in the first six months of 2001, compared to the same period in the prior year. Decreases in statutory premiums during both periods were the result of declining sales of variable and fixed annuities, partially offset by increased sales of institutional products. Sales of variable and fixed annuities decreased 32.6% and 11.1%, respectively, in the second quarter of 2001, and 25.5% and 22.7%, respectively, in the first half of 2001 compared to the same periods in the prior year. These decreases were primarily due to declining market conditions, as volatile markets generally influence sales of investment products. Increased sales of institutional products were generated during the first and second quarters of 2001 primarily through the sale of funding agreements to entities issuing medium-term notes. Period to period fluctuations in sales of institutional products, including funding agreements, are largely due to management's assessment of market opportunities.
GAAP Premiums and Contract Charges Under GAAP, premiums represent revenue generated from traditional life products with significant mortality or morbidity risk. Revenues for interest-sensitive life insurance and other products that are largely investment-related, for which deposits are treated as liabilities, are reflected as contract charges. Immediate annuities may be purchased with a life contingency whereby the mortality risk is a significant factor; therefore revenues generated on these contracts are recognized as GAAP premiums.
26
The following table summarizes GAAP premiums and contract charges.
For the second quarter of 2001, total premiums increased 21.4% to $357 million, and for the first six months of 2001, total premiums increased 3.7% to $651 million, compared to the same periods last year. The increases in both periods were due to increased sales of traditional life policies. The second quarter increase also reflects higher sales of immediate annuities with life contingencies. Sales of immediate annuities may fluctuate from period to period due to market conditions, and between annuities sold with and without life contingencies and therefore, due to the GAAP reporting treatment of annuities with life contingencies, GAAP premium may fluctuate accordingly.
Total contract charges increased 0.9% during the second quarter of 2001, and 2.4% during the first six months of the year, as compared to the same periods of 2000. The increases in both periods were due to increases in other contract charges, which includes variable life and fixed annuity contracts, and increased contract charges on variable annuities. Contract charges on variable annuity products are generally calculated as a percentage of each account value and therefore are impacted by market fluctuations. Increased variable annuity contract charges in the second quarter of 2001 were due to higher asset balances resulting from sales in the last twelve months and market appreciation. Increased variable annuity contract charges in the first six months of 2001 were due to higher asset balances resulting from sales in the last twelve months, partially offset by the impacts of market declines over the period.
Operating Income Operating income decreased 17.9% to $119 million in the second quarter of 2001 as compared to the second quarter of 2000. This decrease was due to higher operating expenses, partially offset by the investment margin. In the first half of 2001, operating income decreased 9.6% to $246 million as compared to operating income of $272 in the first half of 2000. This decrease was due to higher operating expenses and adverse mortality, partially offset by the investment margin.
Investment margin, which represents the excess of investment income earned over interest credited to policyholders and contractholders, increased 4.4% during the current year second quarter as compared to the prior year second quarter, and 11.4% in the first six months of 2001 compared to the first six months of 2000. These increases were due primarily to increases in asset balances from new sales, not to increases in the difference between average investment yields and interest credited; the difference between average investment yields and interest credited during the quarter was comparable to the same period in 2000.
Mortality margin, which represents premiums and cost of insurance charges in excess of related policy benefits, decreased 0.9% during the second quarter of 2001 as compared to the second quarter of 2000. During the first six months of 2001, the mortality margin decreased 7.7% as compared to the first half of 2000. The decreases, which negatively impact operating income, were the result of more favorable
27
mortality results experienced in the first half of 2000, partially offset by increased premiums and cost of insurance charges, as noted above.
Operating expenses increased 12.0% in the second quarter of 2001 to $242 million, compared to $216 million in the second quarter of 2000, and 9.7% in the first half of 2001 to $487 million, compared to $444 million in the first half of 2000. These increases were due to the additional marketing and distribution expenses to support growth initiatives.
Net Investment Income Allstate Financial net investment income increased 11.1% in the second quarter of 2001 and 13.0% in the first half of 2001 as compared with the same periods last year, due to higher investment balances from increased cash flows from operations and increased income from partnership interests in both periods. Investment balances at June 30, 2001, excluding Separate Accounts and unrealized gains on fixed income securities, grew 14.7% when compared to the June 30, 2000 balance. Average portfolio yields in the second quarter and year to date period of 2001 were comparable to the prior year.
After-tax Realized Capital Gains and Losses For the three month period ended June 30, 2001, Allstate Financial after-tax realized capital losses were $35 million compared to after-tax realized capital losses of $44 million for second quarter of 2000. The increase was due to gains on portfolio trading in the normal course of business and after-tax realized capital gains of $10 million resulting from the valuation of certain derivative instruments, partially offset by market conditions impacting investment write-downs. For the six months ended June 30, 2001, after-tax realized capital losses were $87 million, compared to after-tax realized capital losses of $40 million for the first half of 2000. This decrease was due to market conditions impacting investment write-downs and an after-tax realized capital loss of $25 million from the valuation of certain derivative instruments. The valuation of certain derivative instruments is due to new accounting policies adopted in the first quarter of 2001 related to the Statements of Financial Accounting Standards Nos. 133 and 138. Additionally, period-to-period fluctuations in realized capital gains and losses are largely the result of the timing of sales reflecting management's decision on the positioning of the investment portfolio, as well as assessments of individual securities and overall market conditions.
CAPITAL RESOURCES AND LIQUIDITY
Capital Resources Allstate's capital resources consist of shareholders' equity, mandatorily redeemable preferred securities and debt, representing funds deployed or available to be deployed to support business operations. These resources are summarized in the following table.
28
Shareholders' Equity Shareholders' equity increased $119 million in the first six months of 2001 when compared to year-end 2000, as net income was partially offset by share repurchases and dividends paid to shareholders. During the first half of 2001, the Company acquired 7.6 million shares of its stock at a cost of $304 million primarily as part of the current $2.00 billion stock repurchase program. This program was 81.8% complete at June 30, 2001.
Debt Consolidated debt at June 30, 2001 increased compared to December 31, 2000 due primarily to a $35 million increase in short-term borrowings outstanding.
The Company has access to additional borrowing as follows:
Financial Ratings and Strength The Company's and its major subsidiaries' debt, commercial paper and financial strength ratings are influenced by many factors including the amount of financial leverage (i.e. debt) and exposure to risks, such as catastrophes, as well as the current level of operating leverage.
In the first quarter of 2001, A.M. Best affirmed its financial strength ratings and assigned The Allstate Corporation's senior long term debt a rating of a+, and commercial paper program a rating of AMB-1. All other ratings remained unchanged during the first half of 2001.
Liquidity The Allstate Corporation is a holding company whose principal operating subsidiaries include AIC and American Heritage Life Investment Corporation. The Company's principal sources of funds are dividend payments from AIC, inter-company borrowings, funds from the settlement of Company benefit plans and funds that may be raised periodically from the issuance of additional debt, including commercial paper, or stock.
The payment of dividends by AIC 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 2000 statutory net income, the maximum amount of dividends AIC is able to pay without prior Illinois Department of Insurance approval at a given point in time is $1.69 billion, less dividends paid during the preceding twelve months measured at that point in time. In the twelve-month period beginning July 31, 2000, AIC paid dividends of $1.12 billion. Notification and approval of inter-company lending activities is also required by the Illinois Department of Insurance for those transactions which exceed formula amounts based on statutory admitted assets and statutory surplus.
29
The Company's principal uses of funds are the payment of dividends to shareholders, share repurchases, inter-company lending to its insurance subsidiaries, debt service, additional investments in its subsidiaries and acquisitions.
Total surrender and withdrawal amounts for Allstate Financial decreased during the second quarter of 2001 to $709 million, compared to $1.07 billion in the second quarter of 2000, due primarily to the impact of market conditions. As Allstate Financial's interest-sensitive life policies and annuity contracts in force grow and age, the dollar amount of surrenders and withdrawals could increase. While the overall amount of surrenders may increase in the future, a significant increase in the level of surrenders relative to total contractholder account balances is not anticipated.
INVESTMENTS
The composition of the investment portfolio at June 30, 2001, is presented in the following table.
Total investments increased to $78.38 billion at June 30, 2001 from $74.48 billion at December 31, 2000. Property-Liability investments were $32.78 billion at June 30, 2001 compared to $32.96 billion at December 31, 2000. This decrease was due to decreased amounts invested from positive cash flows generated from operations and decreased unrealized gains in both the fixed income and equity securities. Allstate Financial investments at June 30, 2001, increased to $44.32 billion from $40.25 billion at December 31, 2000. This increase was attributable to amounts invested from positive cash flows generated from operations and increased unrealized capital gains on fixed income securities, partially offset by decreased unrealized capital gains on equity securities. Generally, when market interest rates decrease, as they did in the first half of 2001, unrealized gains on fixed income securities increase.
Approximately 93.8% of the Company's fixed income securities portfolio is rated investment grade, which is defined by the Company as a security having an NAIC rating of 1 or 2, a Moody's rating of Aaa, Aa, A or Baa, or a comparable Company internal rating.
OTHER DEVELOPMENTS
30
wider range of consumer banking products and services such as savings accounts, certificates of deposit and insured money market accounts.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS AFFECTING ALLSTATE
This document contains "forward-looking statements" that anticipate results based on management's plans that are subject to uncertainty. These statements are made subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements do not relate strictly to historical or current facts and may be identified by their use of words like "plans," "expects," "will," "anticipates," "estimates," "intends," "believes," "likely" and other words with similar meanings. These statements may address, among other things, the Company's strategy for growth, product development, regulatory approvals, market position, expenses, financial results and reserves. Forward-looking statements are based on management's current expectations of future events. The Company cannot guarantee that any forward-looking statement will be accurate. However, management believes that our forward-looking statements are based on reasonable, current expectations and assumptions. We assume no obligation to update any forward-looking statements as a result of new information or future events or developments.
If the expectations or assumptions underlying the forward-looking statements prove inaccurate or if risks or uncertainties arise, actual results could differ materially from those communicated in these forward-looking statements. In addition to the normal risks of business, Allstate is subject to significant risk factors, including those listed below which apply to it as an insurance business.
31
on the PP&C segment's premium growth and profit margins, and because Allstate's PP&C segment's loss ratio compares favorably to the industry, state regulatory authorities may resist our efforts to raise rates.
32
have a material adverse effect on our results of operations, liquidity or financial position.
33
34
PART II. Other Information
Item 1. Legal Proceedings
The discussion "Regulation and Legal Proceedings" in Part I, Item 1, Note 6 of this Form 10-Q is incorporated herein by reference. That discussion updates the discussion "Regulation and Legal Proceedings" beginning on page D-29 of Allstate's Notice of Annual Meeting and Proxy Statement dated March 26, 2001.
Item 4. Submission of Matters to a Vote of Security Holders
On May 15, 2001, Allstate held its annual meeting of stockholders. Thirteen directors were elected for terms expiring at the 2002 annual meeting of stockholders. In addition, the stockholders ratified the appointment of Deloitte & Touche LLP as independent auditors for 2001, and approved the 2001 Equity Incentive Plan. The stockholders did not approve stockholder proposals regarding cumulative voting in the election of directors and endorsement of the CERES principles.
Election of Directors.
Ratify appointment of Deloitte & Touche as the Company's auditors for 2001.
Approval of 2001 Equity Incentive Plan.
Stockholder proposal for cumulative voting in the election of directors.
35
Stockholder proposal for endorsement of CERES principles.
Item 6. Exhibits
An Exhibit Index has been filed as part of this report on Page E-1.
36
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
37
E–1