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ALL > SEC Filings for ALL > Form 10-K on 20-Feb-2014All Recent SEC Filings

Show all filings for ALLSTATE CORP

Form 10-K for ALLSTATE CORP


20-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Page Overview 29 2013 Highlights 30 Consolidated Net Income 31 Impact of Low Interest Rate Environment 31 Application of Critical Accounting Estimates 33 Property-Liability 2013 Highlights 45 Property-Liability Operations 45 Allstate Protection Segment 47 Discontinued Lines and Coverages Segment 60 Property-Liability Investment Results 61 Property-Liability Claims and Claims Expense Reserves 62 Allstate Financial 2013 Highlights 72 Allstate Financial Segment 73 Investments 2013 Highlights 83 Investments 84 Market Risk 93 Pension Plans 96 Goodwill 98 Capital Resources and Liquidity 2013 Highlights 99 Capital Resources and Liquidity 100 Enterprise Risk and Return Management 107 Regulation and Legal Proceedings 108 Pending Accounting Standards 108


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OVERVIEW

The following discussion highlights significant factors influencing the consolidated financial position and results of operations of The Allstate Corporation (referred to in this document as "we," "our," "us," the "Company" or "Allstate"). It should be read in conjunction with the 5-year summary of selected financial data, consolidated financial statements and related notes found under Part II. Item 6. and Item 8. contained herein. Further analysis of our insurance segments is provided in the Property-Liability Operations (which includes the Allstate Protection and the Discontinued Lines and Coverages segments) and in the Allstate Financial Segment sections of Management's Discussion and Analysis ("MD&A"). The segments are consistent with the way in which we use financial information to evaluate business performance and to determine the allocation of resources. Resources are allocated by the chief operating decision maker and performance is assessed for Allstate Protection, Discontinued Lines and Coverages and Allstate Financial. Allstate Protection performance and resources are managed by a committee of senior officers of the segment.

Allstate is focused on the following priorities in 2014:


grow insurance policies in force;
maintain the underlying combined ratio;
proactively manage investments to generate attractive risk adjusted returns;
modernize the operating model; and
build long-term growth platforms.

The most important factors we monitor to evaluate the financial condition and performance of our company include:


For Allstate Protection: premium, the number of policies in force ("PIF"), new business sales, retention, price changes, claim frequency (rate of claim occurrence per policy in force) and severity (average cost per claim), catastrophes, loss ratio, expenses, underwriting results, and relative competitive position.
For Allstate Financial: benefit and investment spread, asset-liability matching, amortization of deferred policy acquisition costs ("DAC"), expenses, operating income, net income, new business sales, invested assets, and premiums and contract charges.
For Investments: exposure to market risk, credit quality/experience, total return, net investment income, cash flows, realized capital gains and losses, unrealized capital gains and losses, stability of long-term returns, and asset and liability duration.
For financial condition: liquidity, parent holding company level of deployable assets, financial strength ratings, operating leverage, debt leverage, book value per share, and return on equity.

Summary of Results:


Consolidated net income available to common shareholders was $2.26 billion in 2013 compared to $2.31 billion in 2012 and $787 million in 2011. The decrease in 2013 compared to 2012 was primarily due to higher net income available to common shareholders from Property-Liability and the curtailment gain reported in Corporate and Other being more than offset by the estimated loss on disposition related to the pending LBL sale recorded in Allstate Financial and the loss on extinguishment of debt and settlement charges reported in Corporate and Other. The increase in 2012 compared to 2011 was primarily due to higher net income available to common shareholders from Property-Liability, partially offset by lower net income available to common shareholders from Allstate Financial. Net income available to common shareholders per diluted common share was $4.81, $4.68 and $1.50 in 2013, 2012 and 2011, respectively.
Allstate Protection had underwriting income of $2.36 billion in 2013 compared to $1.25 billion in 2012 and an underwriting loss of $857 million in 2011. The increase in 2013 compared to 2012 was primarily due to increases in underwriting income in homeowners, other personal lines and auto resulting from decreased catastrophe losses. The underwriting income in 2012 compared to the underwriting loss in 2011 was primarily due to underwriting income in homeowners and other personal lines in 2012 compared to underwriting losses in 2011, partially offset by a decrease in auto underwriting income. The Allstate Protection combined ratio was 91.5, 95.3 and 103.3 in 2013, 2012 and 2011, respectively. Underwriting income (loss), a measure not based on accounting principles generally accepted in the United States of America ("GAAP"), is defined in the Property-Liability Operations section of the MD&A.
Allstate Financial net income available to common shareholders was $95 million in 2013 compared to $541 million in 2012 and $590 million in 2011. The decrease in 2013 compared to 2012 was primarily due to the estimated loss on disposition related to the pending LBL sale. The decrease in 2012 compared to 2011 was primarily due to net realized capital losses in 2012 compared to net realized capital gains in 2011, lower net


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investment income and higher life and annuity contract benefits, partially offset by decreased interest credited to contractholder funds and lower amortization of DAC.


A number of capital management actions were completed in 2013, including refinancing long-term debt through a tender offer and new issuances to take advantage of low interest rates and the issuance of preferred stock that allows for more financial flexibility. Consolidated shareholders' equity increased to $21.48 billion as of December 31, 2013 from $20.58 billion as of December 31, 2012.

2013 HIGHLIGHTS


Consolidated net income available to common shareholders was $2.26 billion in 2013 compared to $2.31 billion in 2012. Net income available to common shareholders per diluted common share was $4.81 in 2013 compared to $4.68 in 2012.
Property-Liability net income available to common shareholders was $2.75 billion in 2013 compared to $1.97 billion in 2012.
The Property-Liability combined ratio was 92.0 in 2013 compared to 95.5 in 2012.
Allstate Financial net income available to common shareholders was $95 million in 2013 compared to $541 million in 2012.
On July 17, 2013, we entered into a definitive agreement with Resolution Life Holdings, Inc. to sell Lincoln Benefit Life Company ("LBL"), LBL's life insurance business generated through independent master brokerage agencies, and all of LBL's deferred fixed annuity and long-term care insurance business for $600 million subject to certain adjustments as of the closing date. The estimated loss on disposition of $521 million, after-tax, was recorded in 2013.
Total revenues were $34.51 billion in 2013 compared to $33.32 billion in 2012.
Property-Liability premiums earned totaled $27.62 billion in 2013, an increase of 3.3% from $26.74 billion in 2012.
Investments totaled $81.16 billion as of December 31, 2013, decreasing from $97.28 billion as of December 31, 2012. Investments classified as held for sale totaled $11.98 billion as of December 31, 2013. Net investment income was $3.94 billion in 2013, a decrease of 1.7% from $4.01 billion in 2012.
Net realized capital gains were $594 million in 2013 compared to $327 million in 2012.
Book value per diluted common share (ratio of common shareholders' equity to total common shares outstanding and dilutive potential common shares outstanding) was $45.31 as of December 31, 2013, an increase of 6.9% from $42.39 as of December 31, 2012.
For the twelve months ended December 31, 2013, return on the average of beginning and ending period common shareholders' equity was 11.0%, a decrease of 0.9 points from 11.9% for the twelve months ended December 31, 2012.
As of December 31, 2013, shareholders' equity was $21.48 billion. This total included $2.56 billion in deployable assets at the parent holding company level.
In July 2013, we announced changes to our employee pension and other postretirement benefit offerings. The remeasurement of pension and other postretirement benefit obligations related to the changes resulted in a $658 million increase to accumulated other comprehensive income and a curtailment gain of $118 million, after-tax. In addition, settlement losses of $150 million, after-tax, were recognized due to the level of lump sum benefit payments made during 2013.
In 2013, we repurchased $1.90 billion of long-term debt, issued $2.30 billion of long-term debt and issued $807.5 million of preferred stock. We recognized a loss on extinguishment of debt of $319 million, after-tax, in 2013.


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CONSOLIDATED NET INCOME

($ in millions)                                          2013        2012        2011
Revenues
Property-liability insurance premiums                  $  27,618   $  26,737   $  25,942
Life and annuity premiums and contract charges             2,352       2,241       2,238
Net investment income                                      3,943       4,010       3,971
Realized capital gains and losses:
Total other-than-temporary impairment losses                (207 )      (239 )      (563 )
Portion of loss recognized in other comprehensive
income                                                        (8 )         6         (33 )


Net other-than-temporary impairment losses
recognized in earnings                                      (215 )      (233 )      (596 )
Sales and other realized capital gains and
losses                                                       809         560       1,099


Total realized capital gains and losses                      594         327         503


Total revenues                                            34,507      33,315      32,654
Costs and expenses
Property-liability insurance claims and claims
expense                                                  (17,911 )   (18,484 )   (20,161 )
Life and annuity contract benefits                        (1,917 )    (1,818 )    (1,761 )
Interest credited to contractholder funds                 (1,278 )    (1,316 )    (1,645 )
Amortization of deferred policy acquisition costs         (4,002 )    (3,884 )    (3,971 )
Operating costs and expenses                              (4,387 )    (4,118 )    (3,739 )
Restructuring and related charges                            (70 )       (34 )       (44 )
Loss on extinguishment of debt                              (491 )         -           -
Interest expense                                            (367 )      (373 )      (367 )


Total costs and expenses                                 (30,423 )   (30,027 )   (31,688 )
(Loss) gain on disposition of operations                    (688 )        18          (7 )
Income tax expense                                        (1,116 )    (1,000 )      (172 )


Net income                                                 2,280       2,306         787


Preferred stock dividends                                    (17 )         -           -


Net income available to common shareholders            $   2,263   $   2,306   $     787




Property-Liability                                     $   2,754   $   1,968   $     403
Allstate Financial                                            95         541         590
Corporate and Other                                         (586 )      (203 )      (206 )


Net income available to common shareholders            $   2,263   $   2,306   $     787

IMPACT OF LOW INTEREST RATE ENVIRONMENT

Despite the increase in interest rates during 2013, our current reinvestment yields are generally lower than the overall portfolio income yield, primarily for our investments in fixed income securities and commercial mortgage loans. At the December 2013 meeting, the Federal Reserve Board announced its decision to reduce the amount of its purchases of both longer-term Treasury and agency mortgage-backed securities in the open market. The Federal Open Market Committee also reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens and stated that it now anticipates that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal. We anticipate that interest rates will continue to increase but remain below historic averages and the portfolio income yield for some period. We also expect capital markets to remain volatile.

Deferred annuity contracts with fixed and guaranteed crediting rates, or floors that limit crediting rate reductions, are adversely impacted by a prolonged low interest rate environment since we may not be able to reduce crediting rates sufficiently to maintain investment spreads. Financial results of long duration products that do not have stated crediting


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rate guarantees but for which underlying assets may have to be reinvested at interest rates that are lower than portfolio rates, such as structured settlements and term life insurance, may also be adversely impacted.

The following table summarizes the weighted average guaranteed crediting rates and weighted average current crediting rates as of December 31, 2013 for certain fixed annuities and interest-sensitive life contracts where management has the ability to change the crediting rate, subject to a contractual minimum. Other products, including equity-indexed, variable and immediate annuities, equity-indexed and variable life, and institutional products totaling $6.39 billion of contractholder funds, have been excluded from the analysis because management does not have the ability to change the crediting rate or the minimum crediting rate is not considered meaningful in this context.

                                            Weighted      Weighted
                                             average       average
                                           guaranteed      current
                                            crediting     crediting     Contractholder
($ in millions)                               rates         rates           funds
Annuities with annual crediting rate
resets                                            2.93 %        2.93 %   $        6,653
Annuities with multi-year rate
guarantees (1):
Resettable in next 12 months                      1.01          4.18              1,227
Resettable after 12 months                        1.26          3.46              2,479
Interest-sensitive life insurance                 4.01          4.15              7,556


--------------------------------------------------------------------------------
    (1)


These contracts include interest rate guarantee periods which are typically 5 or 6 years.

Investing activity will continue to decrease our portfolio yield as long as market yields remain below the current portfolio yield. In the Allstate Financial segment, the portfolio yield has been less impacted by reinvestment in the current low interest rate environment, as much of the investment cash flows have been used to fund the managed reduction in spread-based liabilities. The declines in both invested assets and portfolio yield are expected to result in lower net investment income in future periods.

For the Allstate Financial Segment, we expect approximately 4.4% of the amortized cost of fixed income securities not subject to prepayment and approximately 7.8% of commercial mortgage loans to mature in 2014. Allstate Financial has $25.77 billion of such fixed income securities and $4.29 billion of such commercial mortgage loans as of December 31, 2013. Additionally, for asset-backed securities ("ABS"), residential mortgage-backed securities ("RMBS") and commercial mortgage-backed securities ("CMBS") that have the potential for prepayment and are therefore not categorized by contractual maturity, we received periodic principal payments of $1.41 billion in 2013. To the extent portfolio cash flows are reinvested, the average pre-tax investment yield of 5.5% is expected to decline due to lower market yields. These amounts exclude assets classified as held for sale.

For the Property-Liability segment, we expect approximately 4.4% of the amortized cost of fixed income securities not subject to prepayment to mature in 2014. Property-Liability has $25.33 billion of such assets as of December 31, 2013. Additionally, for ABS, RMBS and CMBS securities that have the potential for prepayment and are therefore not categorized by contractual maturity, we received periodic principal payments of $528 million in 2013. We have been shortening the maturity profile of the fixed income securities in this segment to make the portfolio less sensitive to a future rise in interest rates. This approach to reducing interest rate risk results in realized capital gains, but will contribute to lower portfolio yields as sales proceeds are invested at lower market yields. The average pre-tax investment yield of 4.0% is expected to decline due to reinvesting at lower market yields.

In order to mitigate the unfavorable impact that the current interest rate environment has on investment results, we are:


Managing our exposure to interest rate risk by maintaining a shorter maturity profile in the Property-Liability portfolio.
Shifting the portfolio mix to have less reliance on investments whose returns come primarily from interest payments to investments in which we have ownership interests and a greater proportion of return is derived from idiosyncratic operating or market performance including equities and real estate.
Investing to the specific needs and characteristics of Allstate's businesses.

We expect volatility in accumulated other comprehensive income resulting from changes in unrealized net capital gains and losses and unrecognized pension cost.

These topics are discussed in more detail in the respective sections of the MD&A.


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APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the consolidated financial statements. The most critical estimates include those used in determining:


Fair value of financial assets
Impairment of fixed income and equity securities
Deferred policy acquisition costs amortization
Reserve for property-liability insurance claims and claims expense estimation
Reserve for life-contingent contract benefits estimation

In making these determinations, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to our businesses and operations. It is reasonably likely that changes in these estimates could occur from period to period and result in a material impact on our consolidated financial statements.

A brief summary of each of these critical accounting estimates follows. For a more detailed discussion of the effect of these estimates on our consolidated financial statements, and the judgments and assumptions related to these estimates, see the referenced sections of this document. For a complete summary of our significant accounting policies, see the notes to the consolidated financial statements.

Fair value of financial assets Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We are responsible for the determination of fair value of financial assets and the supporting assumptions and methodologies. We use independent third-party valuation service providers, broker quotes and internal pricing methods to determine fair values. We obtain or calculate only one single quote or price for each financial instrument.

Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of proprietary models, produce valuation information in the form of a single fair value for individual fixed income and other securities for which a fair value has been requested under the terms of our agreements. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, liquidity spreads, currency rates, and other information, as applicable. Credit and liquidity spreads are typically implied from completed transactions and transactions of comparable securities. Valuation service providers also use proprietary discounted cash flow models that are widely accepted in the financial services industry and similar to those used by other market participants to value the same financial instruments. The valuation models take into account, among other things, market observable information as of the measurement date, as described above, as well as the specific attributes of the security being valued including its term, interest rate, credit rating, industry sector, and where applicable, collateral quality and other issue or issuer specific information. Executing valuation models effectively requires seasoned professional judgment and experience. For certain equity securities, valuation service providers provide market quotations for completed transactions on the measurement date. In cases where market transactions or other market observable data is limited, the extent to which judgment is applied varies inversely with the availability of market observable information.

For certain of our financial assets measured at fair value, where our valuation service providers cannot provide fair value determinations, we obtain a single non-binding price quote from a broker familiar with the security who, similar to our valuation service providers, may consider transactions or activity in similar securities among other information. The brokers providing price quotes are generally from the brokerage divisions of leading financial institutions with market making, underwriting and distribution expertise regarding the security subject to valuation.

The fair value of certain financial assets, including privately placed corporate fixed income securities, auction rate securities ("ARS") backed by student loans, equity-indexed notes, and certain free-standing derivatives, for which our valuation service providers or brokers do not provide fair value determinations, is determined using valuation methods and models widely accepted in the financial services industry. Our internal pricing methods are primarily based on models using discounted cash flow methodologies that develop a single best estimate of fair value. Our models generally incorporate inputs that we believe are representative of inputs other market participants would use to determine fair value of the same instruments, including yield curves, quoted market prices of comparable securities, published credit spreads, and other applicable market data as well as instrument-specific characteristics that include, but are not limited to, coupon rates, expected cash flows, sector of the issuer, and call provisions. Judgment is required


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in developing these fair values. As a result, the fair value of these financial assets may differ from the amount actually received to sell an asset in an orderly transaction between market participants at the measurement date. Moreover, the use of different valuation assumptions may have a material effect on the financial assets' fair values.

For most of our financial assets measured at fair value, all significant inputs are based on or corroborated by market observable data and significant management judgment does not affect the periodic determination of fair value. The determination of fair value using discounted cash flow models involves management judgment when significant model inputs are not based on or corroborated by market observable data. However, where market observable data is available, it takes precedence, and as a result, no range of reasonably likely inputs exists from which the basis of a sensitivity analysis could be constructed.

We gain assurance that our financial assets are appropriately valued through the execution of various processes and controls designed to ensure the overall reasonableness and consistent application of valuation methodologies, including inputs and assumptions, and compliance with accounting standards. For fair values received from third parties or internally estimated, our processes and controls are designed to ensure that the valuation methodologies are appropriate and consistently applied, the inputs and assumptions are reasonable and consistent with the objective of determining fair value, and the fair values are accurately recorded. For example, on a continuing basis, we assess the reasonableness of individual fair values that have stale security prices or that exceed certain thresholds as compared to previous fair values received from valuation service providers or brokers or derived from internal models. We perform procedures to understand and assess the methodologies, processes and controls of valuation service providers. In addition, we may validate the reasonableness of fair values by comparing information obtained from valuation service providers or brokers to other third party valuation sources for selected securities. We perform ongoing price validation procedures such as back-testing of actual sales, which corroborate the various inputs used in internal models to . . .

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