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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11840
THE ALLSTATE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3871531
(State of Incorporation) (I.R.S. Employer Identification Number)
2775 Sanders Road, Northbrook, Illinois 60062
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 402-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, par value $0.01 New York Stock Exchange
per share (the "Common Stock") Chicago Stock Exchange
6.76% Exchangeable Notes New York Stock Exchange
Due April 15, 1998
7.95% Cumulative Quarterly New York Stock Exchange
Income Preferred Securities, Series A
(issued by a wholly-owned trust of the Registrant)
Securities registered pursuant to Section 12(g) of the Act: None
On January 31, 1997, Registrant had 440,934,165 shares of Common Stock
outstanding. Of these, 371,691,259 shares, having an aggregate market value
(based on the closing price of these shares as reported in a summary of
composite transactions in The Wall Street Journal for stocks listed on the New
York Stock Exchange on January 31, 1997) of approximately $24.39 billion, were
owned by stockholders other than directors and executive officers of the
Registrant, The Savings and Profit Sharing Fund of Allstate Employees and any
person believed by the Registrant to beneficially own five percent or more of
Registrant's outstanding common shares.
Registrant (1) 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Documents Incorporated By Reference
Portions of the following documents are incorporated by reference as
follows:
Parts I and II of this Form 10-K incorporate by reference certain
information from the Registrant's 1996 Annual Report to Stockholders ("1996
Annual Report"). Part III of this Form 10-K incorporates by reference certain
information from the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held on May 20, 1997 (the "1997 Proxy Statement").
2
Part I
Item 1. Business
- - ------ --------
The Allstate Corporation (the "Company") was incorporated under the
laws of the State of Delaware on November 5, 1992 to serve as the holding
company for Allstate Insurance Company ("AIC"). The Company's business is
conducted through AIC and AIC's subsidiaries (collectively, including the
Company, "Allstate"). Allstate is engaged, principally in the United States and
Canada, in the property-liability insurance and life insurance and annuity
businesses. Established in 1931 by Sears, Roebuck and Co. ("Sears"), Allstate is
the country's second largest property-liability insurer on the basis of 1995
statutory premiums written and is a major life insurer. Allstate's life
insurance and annuity operations are conducted through Allstate Life Insurance
Company ("ALIC"), a wholly-owned subsidiary of AIC, and through various ALIC
subsidiaries (collectively, "Allstate Life").
AIC's primary business is the sale of private passenger automobile and
homeowners insurance through its personal property and casualty unit, and in
1995 it maintained estimated national market shares in these lines of
approximately 12.2% and 11.8%, respectively. In order to focus on its core
strengths, during the second half of 1996 AIC sold (i) Northbrook Holdings, Inc.
and its wholly-owned subsidiaries (collectively, "Northbrook"), which wrote
commercial insurance through independent agents, (ii) its U.S.-based reinsurance
operations for policies written after 1984, and (iii) its London-based
reinsurance operations. As a result of these sales, Allstate's
property-liability operations consist of two principal areas of business:
personal property and casualty ("PP&C") and discontinued lines and coverages
("Discontinued Lines and Coverages"). PP&C, which has historically included only
the Company's personal property and casualty business, now includes the ongoing
commercial business written through the Allstate agent distribution channel.
Discontinued Lines and Coverages consists of business no longer written by
Allstate, including results from environmental, asbestos, and mass tort losses
and other commercial business in run-off, and the historical results of the
mortgage pool business and the businesses sold in 1996. Allstate markets its
products through a variety of distribution channels, with the core of its
property-liability distribution system being a broad-based network of
approximately 14,800 full-time Allstate employee agents (including life
specialists) and non-employee exclusive agents in the United States and Canada.
Allstate Life sells life insurance, annuity and group pension products.
Allstate Life distributes its products through Allstate agents (including life
specialists), banks, independent agents, brokers, Dean Witter Reynolds, Inc.
("Dean Witter") and direct response marketing.
Information regarding revenues, operating profit or loss and
identifiable assets attributable to each of the Company's identifiable business
segments is contained in note 15 of the Notes to Consolidated Financial
Statements at pages 86-88 of the 1996 Annual Report, incorporated herein by
reference in response to Item 8 hereof.
3
RECENT DEVELOPMENTS
On November 12, 1996, the Company announced an expansion of its stock
repurchase program by an amount not to exceed $750,000,000 through the end of
1997, and announced that its subsidiary trusts intended to issue up to
$750,000,000 of trust preferred securities.
On November 25, 1996, Allstate Financing I, a wholly-owned trust of the
Company, issued $550,000,000 of 7.95% Cumulative Quarterly Income Preferred
Securities, Series A (the "QUIPS"). The QUIPS are guaranteed by the Company and
mature on December 31, 2026, subject to the Company's option to extend the
maturity to December 31, 2045. Allstate Financing I issued all of its common
securities to the Company for $17,010,325 in cash. On November 27, 1996,
Allstate Financing II, a wholly-owned trust of the Company, issued $200,000,000
of 7.83% Capital Securities (the "Capital Securities"). The Capital Securities
are guaranteed by the Company and mature on December 31, 2045. Allstate
Financing II issued all of its common securities to the Company for $6,186,000
in cash. The net proceeds of both offerings were loaned to the Company, which
issued subordinated debentures to the trusts bearing interest rates and maturity
schedules sufficient to enable the trusts to meet their payment obligations to
the security holders. The Company plans to use the proceeds of both offerings
for general corporate purposes, including the Company's stock repurchase
program.
On December 2, 1996, the California Earthquake Authority ("CEA")
commenced operations. The CEA will issue insurance policies providing coverage
for earthquake damage resulting from the movement of the earth as existing
policies issued by participating insurers, including Allstate, expire. See
"California Earthquakes" in the Management's Discussion and Analysis of
Financial Condition and Results of Operations at pages 37- 38 of the 1996 Annual
Report, incorporated herein by reference in response to Item 7 hereof.
RISK FACTORS AFFECTING ALLSTATE
In addition to the normal risks of business, Allstate is subject to
significant risk factors, including those applicable to it as a regulated
insurance company, such as: (i) the inherent uncertainty in the process of
establishing property-liability loss reserves, particularly reserves for the
cost of environmental, asbestos and mass tort claims, and the fact that ultimate
losses could materially exceed established loss reserves and have a material
adverse effect on results of operations and financial condition; (ii) the fact
that Allstate has experienced, and can be expected in the future to experience,
catastrophe losses which could have a material adverse impact on its financial
condition, results of operations and cash flow; (iii) the inherent uncertainty
in the process of establishing property-liability loss reserves due to the
change in loss payment patterns caused by new claims settlement practices; (iv)
the need for Allstate's insurance company subsidiaries to maintain appropriate
levels of statutory capital and surplus, particularly in light of continuing
scrutiny by rating organizations and state insurance regulatory authorities, and
to maintain acceptable financial strength or claims-paying ability ratings; (v)
the extensive regulation and supervision to which Allstate's insurance
subsidiaries
4
are subject, various regulatory initiatives that may affect Allstate, and
regulatory and other legal actions involving Allstate; (vi) the Company's
primary reliance, as a holding company, on dividends from AIC to meet debt
payment obligations, and regulatory restrictions on AIC's ability to pay such
dividends; (vii) the adverse impact which increases in interest rates could have
on the value of Allstate's investment portfolio and on the attractiveness of
certain Allstate Life products; (viii) the need to adjust the effective duration
of the assets and liabilities of Allstate Life's operations in order to meet the
anticipated cash flow requirements of its policyholder obligations; and (ix) the
uncertainty involved in estimating the availability of reinsurance and the
collectibility of reinsurance recoverables.
ALLSTATE STRATEGY
Allstate's strategy is to focus on the profitable growth of its private
passenger automobile and homeowners insurance markets; to increase cross-sales
of its life insurance and annuity products to its automobile and homeowners
customer base through its agency force and to expand through the addition of new
distribution channels; to manage its catastrophe exposure; and to exploit
opportunities in the international markets by enhancing the operational
capabilities of its current foreign ventures and by commencing new ventures in
selected foreign markets. This strategy is designed to capitalize on: (1) the
strength of the Allstate name, (2) Allstate's network of full-time agents, (3)
Allstate's auto insurance capabilities, and (4) additional distribution channels
available to Allstate.
Allstate continues to pursue a strategy of growth in the segments of
markets which management believes will be profitable while limiting growth in
other markets. Allstate separates the voluntary personal auto insurance business
into two categories for underwriting purposes according to insurance risks: the
standard market and the non-standard market, and has determined its growth
strategy accordingly. Allstate is also pursuing a segmented growth strategy to
market its standard auto and homeowners insurance by geographic area. Allstate
is attempting to grow its standard auto business more rapidly in areas where the
regulatory climate is more conducive to attractive returns, and to reduce or
limit its homeowners exposure in areas where the risk of loss from catastrophes
is unacceptable in light of the returns provided. Allstate has developed its
segmented growth strategy with the assistance of proprietary databases, which
consist of marketing and other characteristics of various types of risks in the
standard automobile insurance market and the homeowners insurance market. As a
result, Allstate has identified over 180 local markets in various categories
ranging from markets in which it wishes to pursue aggressive growth for standard
auto and homeowners business to markets in which it wishes to reduce its
exposure. Allstate's process of designating geographic areas as growth and
limited growth is dynamic and may be revised as changes occur in the legal,
regulatory and economic environments in various areas, as catastrophe exposure
is reduced and as new products are introduced. Less than 6.0% of the United
States population reside in areas designated by Allstate as limited growth
markets for standard auto insurance, and approximately 20.0% of the population
reside in areas designated as limited or reduced markets for homeowners
insurance.
5
The non-standard auto insurance market consists of insurance of persons
with no prior driving experience, or with a prior history of accidents or
violations, or owning high performance cars with high repair and replacement
costs or having other special needs. Allstate has achieved the leading market
share in this market. This has been a market in which Allstate has competed
successfully by capitalizing on an established distribution system, technology
and claims capabilities and by tailoring pricing and products to reach a broader
market. In May 1996 Allstate announced that it had reached agreement with All
Nation Insurance Co. to acquire the contracts of approximately 1,650 independent
agencies which sell non-standard auto insurance, and in September 1996 Allstate
announced that it had assumed the independent agent non-standard auto business
operations of Colonial Insurance Company of California, which includes contracts
with approximately 3,200 independent agencies. This business has been assigned
to Allstate's Deerbrook Insurance Company ("Deerbrook") subsidiary, which offers
non-standard automobile insurance through independent agents. Allstate plans to
continue to develop opportunities in this market.
Allstate Life has been successful in growing its business through the
development of new products, the establishment of new marketing arrangements,
and through the expanded marketing use of Allstate's database of existing
property-liability customers. Allstate Life's insurance and annuity products
also are marketed through Allstate agents (including life specialists),
independent agents, brokers, Dean Witter, banks and direct response marketing.
Specialized brokers are used to distribute group pension and structured
settlement products not offered by Allstate's agency force.
Allstate's agency force of approximately 14,100 full-time agents is at
the core of its PP&C distribution system. Allstate also uses over 2,500
independent agents to market insurance to individuals, mostly in rural markets
not served by Allstate agents, and over 5,500 independent agents appointed by
Deerbrook to market non-standard auto business. Allstate Life also has a direct
response marketing program which principally targets customers of credit card
issuers who prefer to purchase, through the mail or telephone, selected products
not offered by Allstate's agency force.
Allstate made substantial efforts in 1996 in the management of its
capital resources through reduction of catastrophe risk exposure. During 1996 it
took steps to reduce its exposure to hurricane risk in Florida and to earthquake
risk in California (See "Catastrophe Management," "Florida Hurricanes" and
"California Earthquakes" at pages 36-38 of the 1996 Annual Report, incorporated
herein by reference in response to Item 7 hereof). Allstate continues to seek
alternative sources for catastrophe reinsurance. During 1996 Allstate
repositioned its investment portfolio in order to lower its risk profile by
reducing the percentage of the portfolio in equity investments and by reducing
the duration of the fixed income portion of the portfolio. In addition, as noted
under "Recent Developments" above, Allstate has announced its intention to spend
up to $750,000,000 in repurchases of its common stock by December 31,1997.
6
In November 1996, Allstate commenced the sale of private passenger auto
insurance in Germany through direct marketing. Allstate has also identified
other foreign areas as attractive markets for property-liability or life
insurance, and plans to pursue international opportunities as an avenue to grow
both its revenues and profitability. Allstate believes that it will take a
number of years before its new international strategies contribute significantly
to its financial results.
Allstate may also pursue selective acquisitions, partnerships, business
expansions, business start-ups, and divestitures, both in the United States and
internationally in the pursuit of its business strategy.
PROPERTY-LIABILITY INSURANCE
Allstate's property-liability insurance business consists of PP&C and
Discontinued Lines and Coverages. PP&C, which accounted for $18.0 billion (or
76%) of Allstate's 1996 statutory written premiums, writes primarily private
passenger automobile and homeowners insurance policies in 49 states, the
District of Columbia, Puerto Rico and in Canada. Operating in approximately
10,500 locations, Allstate agents produce more than 95% of PP&C's annual
statutory written premiums, with the balance generated by independent agents
largely in locations not currently served by Allstate agents. Discontinued Lines
and Coverages consists of business no longer written by Allstate, including
results from environmental, asbestos and mass tort losses and other commercial
insurance business in run-off, and the historical results of the mortgage pool
business and businesses sold in 1996.
PERSONAL PROPERTY AND CASUALTY - Principally engaged in private
passenger automobile and homeowners insurance, PP&C accounted for approximately
97% of Allstate's total property-liability premiums, as determined under
statutory accounting practices. Allstate was the country's second largest
personal property and casualty insurer for both private passenger automobile and
homeowners insurance in 1995. Although private passenger automobile and
homeowners insurance account for the majority of its business, PP&C also writes
coverages for product lines such as motorcycles, motor homes, renters,
condominium, residential and landlord, comprehensive personal liability, fire,
personal umbrella, recreational vehicle, mobile home, and boat owners. PP&C also
operates the Allstate Motor Club, an organization whose purpose is to aid its
members with travel plans and emergency road service.
The Company separates the voluntary personal auto insurance business
into two basic categories according to insurance risk; the standard market and
the non-standard market. The standard market consists of drivers who are
perceived to have low to average risk of loss expectancy. Allstate's growth in
the standard market was impacted by the Company's segmented growth strategy.
Allstate plans to increase its agency force, expand its advertising program and
offer new pricing structures in an attempt to increase its growth in the
standard automobile market in 1997.
7
Allstate's growth in the non-standard market continues to be strong,
having exceeded 27% year-to-year over the period January 1, 1994 to December 31,
1996. Allstate had a countrywide market share of approximately 15% of the
non-standard market in 1995. Allstate's presence in this market, as well as the
standard market allows Allstate agents to offer insurance products to the vast
majority of drivers who apply for insurance. The non-standard market consists of
drivers who have higher-than-average risk profiles due to their driving records,
lack of prior insurance or the types of cars they own. PP&C has a refined price
structure and policy features which address the special needs of drivers in the
non-standard market. These policies are written at higher than standard rates.
Allstate writes policies covering these risks principally through AIC's
subsidiary, Allstate Indemnity Company. Deerbrook also writes non-standard
insurance through independent agencies. Allstate expects that while its growth
in the non-standard market will continue, its rate of growth in this market will
decline as the market matures.
As a condition of its license to do business in each state, Allstate,
like all other automobile insurers, is required to write or share the cost of
private passenger automobile insurance for higher risk individuals who would
otherwise be unable to obtain such insurance. The "involuntary" market, called
the "shared market," is governed by the applicable laws and regulations of each
state, and policies written in this market are generally written at higher than
standard rates. Allstate has generally experienced losses in its participation
in the shared market.
PP&C, in addition to writing insurance for standard homes, also insures
high value homes and non-standard homes, such as those with increased exposure
given their distance from fire protection services, and also insures risks in
the renters and condominium markets. In an attempt to improve the profitability
of its homeowners and other property business, in 1996 Allstate reorganized
and refocused the senior management of its property insurance operation, has
acted to reduce its catastrophe exposure and has implemented underwriting
standards, where permitted, for new business. These underwriting standards
include home inspections and an analysis of potential insureds' prior loss
history and financial stability. Allstate has targeted the homeowners insurance
business as a market with substantial profitable growth opportunities for the
Company.
Allstate, like its major competitors, does not rely on rating bureaus
in establishing prices for its personal property and casualty products. Instead
Allstate uses its proprietary database, which contains many years of its own
extensive underwriting and pricing experience. Accordingly, subject to
applicable state regulations, different prices are derived according to numerous
variables which apply to each specific risk, including, in the case of private
passenger automobile insurance, factors relating to the automobile (such as its
age, make and model) as well as factors relating to the insured (such as
previous driving record). In management's opinion, the extensive use and
analysis of this database, rather than rating bureaus, provides PP&C with the
basis for its market segmentation strategy to price risks accordingly. PP&C is
updating its nationwide profiles of the types of business it intends to pursue
and has
8
standardized, subject to applicable state regulations, its underwriting
guidelines for standard auto nationwide in order to assure consistent treatment
of each type of customer profile.
Allstate has attempted to reduce its PP&C claims costs through
centralized claims administration, specialization and additional training of
claims personnel, and intensive and early investigation and attempted settlement
of claims. The Company has focused on claims involving alleged personal injury
in connection with collisions involving relatively minor impact. Commencing in
1996, the Company began the testing and training phase of redesigned claims
settlement processes for automobile physical damage claims.
As is true for the property-liability industry in general, because of
underwriting and policy issuance costs and commissions, first-year costs
attributable to PP&C's products are generally higher than for subsequent years.
Accordingly, customer retention is an important factor in the profitability of
PP&C's products, since policies that remain in force generally become more
profitable over time. Allstate customer retention rates in 1996 were
approximately the same as 1995.
The personal lines private passenger auto and homeowners businesses are
highly competitive. As of December 31, 1995 over 1,400 insurance companies were
in the market, with five groups of companies (State Farm, Allstate, Farmers,
Nationwide and USAA) writing approximately 46.7% of the private passenger
automobile premiums written and approximately 47.6% of the homeowners premiums
written in the United States. State Farm maintains the leading share in the
automobile and homeowners market and had approximately 21.6% of the automobile
market and 23.5% of the homeowners market in 1995. Together, State Farm and
Allstate had approximately one-third of each market in 1995.
AIC competes principally on the basis of its name recognition, scope of
distribution system, customer service, use of technology, product features and
breadth of product offerings and price. Additionally, extensive use of its
database to develop proprietary information gives AIC the ability to segment its
market and appropriately price risks.
Approximately $41 billion of industry personal lines premiums are
generated by independent agencies, and the remaining $85 billion of premiums are
generated by insurers placing their products directly with the consumer through
employee agents, independent contractor exclusive agents, direct response and
mail order. Allstate believes its full-time agency force of independent
contractor exclusive agents and employee agents provides it with an advantage in
distributing PP&C products. However, some competitors, operating with solely
exclusive agents who are independent contractors or distributing through direct
response or mail order marketing, or operating with non-exclusive independent
agents have also been able to operate effective distribution systems.
The great majority of Allstate's 14,800 agents (including life
specialists) are employee agents. In future years, Allstate expects that the
percentage of its agents who are independent
9
contractor exclusive agents will increase substantially. In 1990, Allstate
instituted an exclusive agent contract under which persons are hired for an 18
month period during which they are trained as agents. Upon completion of the
period, Allstate offers contracts to some of the trainees to serve as
independent contractors who are exclusive agents for Allstate. Each person hired
since 1990 for eventual consideration as an Allstate agent has been hired on
this basis. In addition, employee agents who were hired prior to 1990 have been
permitted to convert to independent contractor exclusive agent status. During
1996 Allstate required the conversion of its California employee agents to
independent contractor exclusive agent status because of a California law which
might have required Allstate to increase the amounts of reimbursements for
California employee agent expenses to unacceptable levels. At December 31, 1996,
Exclusive Agents, including agents in training to become Exclusive Agents,
represented approximately 30% of Allstate agents.
CATASTROPHE EXPOSURE
Catastrophes are an inherent risk of the property-liability insurance
business which have contributed, and will continue to contribute, to material
year-to-year fluctuations in Allstate's results of operations and financial
position. The level of catastrophe loss experienced in any year cannot be
predicted and could be material to results of operations and financial position.
The Company has experienced two severe catastrophes in the last five years
resulting in losses of $2.33 billion relating to Hurricane Andrew (net of
reinsurance) and $1.72 billion relating to the Northridge earthquake. While
management believes the Company's catastrophe management strategies, described
below, will greatly reduce the probability of severe losses from catastrophes in
the future, the Company continues to be exposed to similar or greater
catastrophes (see "Risk Factors" and "Forward-Looking Statements" in this Form
10-K).
A "catastrophe" is defined by Allstate as an event that produces
pre-tax losses before reinsurance in excess of $1 million involving multiple
first party policyholders. Catastrophes are caused by various events, including
hurricanes, earthquakes, tornadoes, wind and hail storms, and fires. Although
catastrophes can cause losses in a variety of property-liability lines,
homeowners insurance has in the past generated the vast majority of
catastrophe-related claims. For Allstate, major areas of potential losses due to
hurricanes include major metropolitan centers near the eastern and gulf coasts
of the United States. Allstate's major areas of exposure to potential losses due
to earthquakes include population centers in and around Los Angeles and San
Francisco. Other areas in the United States in which Allstate is exposed to
potential losses from earthquakes include areas in the central United States
affected by the New Madrid fault system in the midwest and areas in and around
Seattle, Washington.
Although Allstate, consistent with industry practice, prices risks in
light of anticipated catastrophe exposure, the incidence and severity of
catastrophes is unpredictable. Due to the current unavailability of reinsurance
at rates acceptable to it, Allstate has limited amounts of reinsurance in place
to lower its exposure to losses from catastrophes affecting its property-
10
liability business at this time, other than the $400 million of reinsurance in
Florida described below. However, Allstate continues to evaluate the reinsurance
market for appropriate coverage at acceptable rates and continues to pursue
other business strategies to lower its exposure to catastrophe losses.
Allstate has initiated strategies to limit, over time, subject to the
requirements of insurance laws and regulations and as limited by competitive
considerations, its insurance exposures in certain regions prone to catastrophe
occurrences. These strategies include limits on new business production,
limitations on certain policy coverages, increases in deductibles, policy
brokering and participation in catastrophe pools. In addition, Allstate has
requested and received rate increases in certain regions prone to catastrophes.
While management believes that its initiatives have reduced or will reduce
Allstate's exposure to catastrophes in certain geographic regions over time, the
extent of such reduction is uncertain and is constrained by state insurance laws
and regulations. For example, some states, such as Florida and New York, limit
the ability of insurers to non-renew policies. California requires that
earthquake coverage be offered upon policy renewal every second year. The states
in which Allstate faces its highest exposure -- California, Florida and New York
- - -- require rates to be approved by the regulator, thereby making it more
difficult to obtain adequate rates that reflect the catastrophe exposure.
Finally, all states have shared market mechanisms that provide insurance to
persons who are unable to obtain it in the voluntary market. Allstate's ability
to reduce its exposure to catastrophes may be offset by any increase in the
exposure through such shared market mechanisms. See "Regulation - Shared
Markets" below.
Allstate has used catastrophe simulation models in attempting to
estimate the probability and the levels of losses which may result from
catastrophes (Allstate also uses these models to assist its decisions concerning
pricing, underwriting and reinsuring risks in areas of catastrophe exposure).
These models are subject to uncertainties due to continual updating and revision
to reflect the most currently available information on climatology and
seismology, building codes, and policy demographics. Allstate believes that
improvements in the amount and types of information contained in these models
have improved its estimations of catastrophe exposures, as well as its ability
to estimate losses in the earlier stages of development. However, use of the
models has not enabled Allstate to predict the level of losses associated with a
specific catastrophe in the past, and the predictive value of such models with
regard to future catastrophes is subject to challenge. Nevertheless, the Company
believes that full implementation of the actions described below with respect to
Florida and California will reduce by April 30, 1998, the probability of its
maximum loss from any single hurricane in Florida or any single earthquake in
California of exceeding $1 billion to 1% or less, based on catastrophe
simulation models and data available to the Company.
The series of actions taken in Florida include increased deductibles,
various coverage changes and a 24.9% statewide homeowners policies premium
increase (accompanied by a moratorium on further rate increases by the Company
until January 1, 1999, except for recoupment of residual property market
assessments), the sale of renewal rights for up to 137,000
11
homeowner policies to an unrelated insurance company, the formation of a
wholly-owned subsidiary to hold, sell and service the Company's approximately
675,000 remaining Florida property policies as such policies come up for
renewal, and the transfers, commencing April 16, 1997, of the wind damage
portion of approximately 50,000 to 60,000 property policies to the Florida
Windstorm Underwriting Association, a state pooling mechanism. In addition,
Allstate has obtained an excess reinsurance contract with an unaffiliated
reinsurer providing up to $400 million of reinsurance per occurrence, up to an
aggregate of $800 million, on Florida property policies for catastrophe losses
in excess of $1 billion. The reinsurance protection extends to December 31,
1999. Effective with Florida property policies up for renewal on and after
September 16, 1996, the Company discontinued its hurricane exposure non-renewal
program.
In December 1996 the CEA, a privately financed, publicly-managed state
agency created to provide coverage for earthquake damage resulting from earth
movements, commenced operations. Companies selling homeowners insurance in
California are required to offer earthquake insurance either directly or through
their participation in the CEA. Allstate chose to participate in the CEA and
recorded $150 million for the initial assessment and related expenses in the
third quarter of 1996. Allstate may be required to pay additional assessments to
the CEA during the first 12 years of the CEA's operation, contingent on the
capital level and aggregate losses recorded by the CEA. Under the CEA
legislation currently in effect, Allstate believes that these contingent
assessments will not exceed $700 million, based on its current share of the
California homeowners market. Commencing in January 1997, the earthquake
coverage provided by Allstate will be transferred to the CEA as Allstate's
policies come up for renewal.
Allstate continues to support passage of legislation in Congress such
as the Homeowner's Insurance Availability Act which could, if enacted, lessen
the impact to Allstate of catastrophic natural disasters such as hurricanes and
earthquakes. Allstate is a founding member of a newly-formed coalition whose
members include property insurers and insurance agents. This group is promoting
a measure that would provide federal reinsurance to state disaster plans. The
Company is unable to determine whether, or in what form, such proposed
legislation will be enacted or what the effect on the Company will be.
DISCONTINUED LINES AND COVERAGES
Allstate wrote excess and surplus lines coverages from 1972 to 1985
through its subsidiary, Northbrook Excess and Surplus Insurance Company
("NESCO"). NESCO wrote professional liability coverages for architects,
engineers, lawyers, and physicians, principally on claims-made coverage forms.
It also wrote substantial umbrella and excess liability coverages on an
occurrence basis, including medical and other products liability coverages, for
major United States corporations. In 1985, NESCO was merged into AIC with AIC
assuming all of the assets and liabilities of NESCO. Since the early 1980's,
Allstate has experienced significant increases in losses for years prior to 1980
arising out of NESCO's umbrella and excess liability coverage for large
corporations. Since the late 1980's, most of these losses have related to
environmental
12
damages or asbestos-related damages or mass-tort settlements. AIC, as NESCO's
successor, has been involved, and continues to be involved, in coverage
litigation with NESCO insureds.
In addition to NESCO's activities, during the late 1960's and through
the early 1980's Allstate's reinsurance business unit wrote treaty and
facultative reinsurance covering general liability primary policies, including
policies for major producers of asbestos products. During approximately the same
period, Allstate's reinsurance business unit wrote reinsurance coverage on
liability policies with major United States corporations that have since become
involved in environmental and asbestos damage claims. Such companies may have
been involved with hazardous wastes in a variety of ways including as
manufacturers, haulers, dump site owners, or through a combination of these
activities. Allstate's reinsurance business unit has been involved and continues
to be involved in coverage litigation and arbitration with ceding companies and
their insureds involving liability for environmental and asbestos damages
claims. In 1986, Allstate ceased writing business with ceding companies which
tended to insure larger corporations with potential environmental and/or
asbestos damage exposures, and its underwriting focus was redirected toward
smaller, more regionalized insurers who focus on property and casualty coverages
and who have underwriting standards that are considered prudent by Allstate.
Also 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 to add
asbestos exclusions. Most general liability policies issued prior to 1987
contain annual aggregate limits for products liability coverage, and policies
issued after 1986 also have an annual aggregate limit as to 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, as well
as primary commercial coverages written, for most policies written in 1986 and
all policies written after 1986.
Allstate's environmental and asbestos exposures are primarily limited
to policies written in periods prior to 1986 with the preponderance of the
losses emanating from policies written in the 1970's. New environmental and
asbestos claims, however, continue to be reported. Allstate has established
substantial reserves for the environmental and asbestos damage claims, and in
October 1996 announced that it had increased such reserves by $318 million,
including $60 million for mass tort exposures. Mass tort exposure primarily
relate to products liability claims, such as those for medical devices and other
products, and general liabilities. However, there are significant inherent
uncertainties in estimating the ultimate cost of these claims, as discussed
below. Further information regarding the foregoing is contained in "Property-
Liability Claims and Claims Expense Reserves" at pages 42-45 of the 1996 Annual
Report, incorporated herein by reference in response to Item 7 hereof. For
information regarding Superfund proposed legislation, see"Regulatory Initiatives
and Proposed Legislation" below.
On July 31, 1996 Allstate sold to St. Paul Fire & Marine Insurance
Company the
13
commercial lines insurance business it operated through its Northbrook
subsidiaries, retaining certain commercial business in run-off. Under the
agreement, Allstate could be required to pay to St. Paul 50% of any deficiency
in excess of $25 million which should develop in the Northbrook companies
closing reserves by the fourth anniversary of closing, but not more than $100
million. If an excess in closing reserves should develop at such fourth
anniversary, Allstate would be entitled to receive 50% of such excess, but not
more than $50 million.
On September 16, 1996 Allstate sold its domestic reinsurance operations
to SCOR U.S. Corporation, and on November 15, 1996 sold its wholly-owned
subsidiary Allstate Reinsurance Company, Ltd. ("ARCO") a company with foreign
reinsurance operations, to QBE Insurance Group Limited ("QBE"). In connection
with the latter sale, Allstate agreed to reimburse QBE for 80% of any adverse
development in ARCO's reserves as of December 31, 1995, and QBE agreed to
reimburse Allstate for 70% of any favorable development in such reserves, such
reimbursements to be settled annually. Also, the parties are to review the
development of 1996 underwriting results for contracts in place at November 15,
1996, and are to settle annually to the extent that the combined ratio for such
contracts exceeds or is less than 110%.
On October 8, 1996, the Company announced that it had increased by $87
million the provision for future losses provided for the run-off of the mortgage
pool business, which had been retained in 1995 when the Company sold 70% of The
PMI Group, Inc. The increase in the provision was due primarily to revised loss
trend analysis based on continued weakness in economic conditions, including
real estate prices and unemployment, in Southern California. These and other
factors are considered in the periodic revaluation of the provision for future
losses in this business.
PROPERTY-LIABILITY INSURANCE CLAIMS AND CLAIMS EXPENSE RESERVES
Allstate establishes property-liability loss reserves to cover its
estimated ultimate liability for losses and loss adjustment expenses with
respect to reported claims and claims incurred but not yet reported as of the
end of each accounting period. In accordance with applicable insurance laws and
regulations and generally accepted accounting principles ("GAAP"), no reserves
are established until a loss occurs, including a loss from a catastrophe.
Underwriting results of the property-liability operations are significantly
influenced by estimates of property-liability claims and claims expense reserves
(see note 6 of the Notes to Consolidated Financial Statements at pages 74-77 of
the 1996 Annual Report, incorporated herein by reference in response to Item 8
hereof). These reserves are an accumulation of the estimated amounts necessary
to settle all outstanding claims, including claims which are incurred but not
reported, as of the reporting date. The reserve estimates are based on known
facts and on interpretations of circumstances, including Allstate's experience
with similar cases and historical trends involving claim payment patterns, loss
payments, pending levels of unpaid claims and product mix, as well as other
factors including court decisions, economic conditions and public attitudes. The
effects of inflation are implicitly considered in the reserving process. The
establishment of reserves, including reserves for catastrophes, is an inherently
uncertain process and the ultimate cost may vary materially
14
from the recorded amounts. 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 determined to be needed.
Establishing net loss reserves for environmental, asbestos and 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 environmental, asbestos, and mass tort 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 insured obligation to defend; how policy limits are
determined; how policy exclusions 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. See note 6 of the Notes
to Consolidated Financial Statements at pages 74-77 of the 1996 Annual Report,
incorporated herein by reference in response to Item 8 hereof.
On October 8, 1996 Allstate announced that it had strengthened its net
loss reserves for Discontinued Lines and Coverages by a total of $405 million,
based on the results of a study the Company had conducted of its environmental
liabilities as well as a comprehensive internal assessment of its asbestos and
other contractual liabilities related to other discontinued lines and coverages.
The Company increased its asbestos net loss reserves by $72 million, its
environmental net loss reserves by $172 million, its net loss reserves for mass
tort exposure and general liability by $60 million, and its reserves for future
insolvencies of reinsurers by $14 million. The October 8, 1996 announcement also
reflected an increase of $87 million in Allstate's provision for future losses
for the run-off of the mortgage pool business.
The following tables are summary reconciliations of the beginning and
ending property-liability insurance claims and claims expense reserve, displayed
individually for each of the last three years. The first table presents reserves
on a gross (before reinsurance) basis. The end of year gross reserve balances
are reflected in the Consolidated Statements of Financial Position on page 58 of
the 1996 Annual Report, incorporated herein by reference in response to Item 8
hereof. The second table presents reserves on a net (after reinsurance) basis.
The total net property-liability insurance claims and claims expense amounts are
reflected in the Consolidated Statements of Operations on page 57 of the 1996
Annual Report, incorporated herein by reference in response to Item 8 hereof.
15
Gross
($ in millions)
Year Ended December 31,
------------------------------------------------
1996 1995 1994
-------------- --------------- -----------
Gross reserve for property-liability claims and claims expense,
beginning of year $ 17,687 $ 16,763 $ 15,521
Incurred claims and claims expense
Provision attributable to the current year 15,186 14,530 15,455
Decrease in provision attributable to prior years (338) (235) (634)
------- ------- -------
Total claims and claims expense 14,848 14,295 14,821
Claim payments
Claims and claims expense attributable to current year 8,073 8,490 8,898
Claims and claims expense attributable to prior years 5,711 4,881 4,681
Claims and claims expense attributable to disposition of operations 1,369 - -
------ ------ -------
Total payments 15,153 13,371 13,579
------ ------ -------
Gross reserve for property-liability claims and claims expense,
end of year 17,382 17,687 16,763
Less: ARCO reserve balances not subject to development (1) - 361 349
------ ------- -------
Gross reserve for property-liability claims and claims expense,
end of year as shown on 10-K loss reserve development table $ 17,382 $ 17,326 $ 16,414
====== ====== =======
(1) ARCO was sold in 1996. In 1995 and 1994, loss development information for
ARCO (AIC's indirectly owned British reinsurance subsidiary) was not
available on a comparable basis. This information was not material ($97.7
million in gross claims and claims expense in 1995 and $85.8 million in
1995 gross payments) and was treated as attributable to current year.
16
Net
($ in millions)
Year Ended December 31,
-------------------------------------------------
1996 1995 1994
-------------- --------------- ------------
Net reserve for property-liability claims and claims expense,
beginning of year $ 16,156 $ 15,406 $ 14,119
Incurred claims and claims expense
Provision attributable to the current year 14,823 14,113 15,241
Decrease in provision attributable to prior years (336) (425) (712)
------- ------- -------
Total claims and claims expense 14,487 13,688 14,529
Claim payments
Claims and claims expense attributable to current year 7,522 8,190 8,770
Claims and claims expense attributable to prior years 5,787 4,748 4,472
Claims and claims expense attributable to disposition of operations 1,736 - -
------- ------- -------
Total payments 15,045 12,938 13,242
------- ------- -------
Net reserve for property-liability claims and claims expense,
end of year 15,598 16,156 15,406
Less: ARCO reserve balances not subject to development (1) - 320 290
------- ------- -------
Net reserve for property-liability claims and claims expense,
end of year as shown on 10-K loss reserve development table (2) $ 15,598 $ 15,836 $ 15,116
======= ====== ======
(1) ARCO was sold in 1996. In 1995 and 1994, loss development information for
ARCO (AIC's indirectly owned British reinsurance subsidiary) was not
available on a comparable basis. This information was not material ($76.5
million in claims and claims expense in 1995 and $45.7 million in 1995
payments) and was treated as attributable to current year.
(2) Reserves for claims and claim expense are net of reinsurance of $1.78
billion, $1.49 billion and $1.30 billion, at December 31, 1996, 1995 and
1994, respectively.
17
The year-end 1996 gross reserves of $17.38 billion for
property-liability insurance claims and claims expense, as determined under
GAAP, were $1.96 billion more than the reserve balance of $15.42 billion
recorded on the basis of statutory accounting practices for reports provided to
state regulatory authorities. The principal difference is the reinsurance
recoverable from third parties totaling $1.78 billion that reduces reserves for
statutory reporting and is recorded as an asset for GAAP reporting. Additional
differences are caused by the reserves of the Canadian subsidiary which is not
included in the combined United States statutory statement.
The loss reserve development table below illustrates the change
over time of the net reserves established for property-liability insurance
claims and claims expense at the end of various calendar years. The first
section shows the reserves as originally reported at the end of stated year. The
second section, reading down, shows the cumulative amounts paid as of the end of
successive years with respect to that reserve liability.
The third section, reading down, shows retroactive reestimates of the original
recorded reserve as of the end of each successive year which is the result of
Allstate's expanded awareness of additional facts and circumstances that pertain
to the unsettled claims. The last section compares the latest reestimated
reserve to the reserve originally established, and indicates whether or not the
original reserve was adequate or inadequate to cover the estimated costs of
unsettled claims. The table also presents the gross reestimated liability as of
the end of the latest reestimation period, with separate disclosure of the
related reestimated reinsurance recoverable. This presentation appears for all
periods in which the income recognition provisions of Statement of Financial
Accounting Standards No. 113 have been applied.
18
The loss reserve development table is cumulative and, therefore, ending balances
should not be added since the amount at the end of each calendar year includes
activity for both the current and prior years.
Loss Reserve Development
($ in millions)
December 31, (1)
-----------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Gross Reserves for
Property-liability
Insurance Claims $7,603 $8,793 $10,035 $10,962 $12,117 $13,136 $14,902 $15,209 $16,414 $17,326 $17,382
Deduct: Reinsurance
Recoverables 1,053 1,076 1,180 1,066 1,028 1,066 1,419 1,338 1,298 1,490 1,784
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net Reserve for
Property-liability Insurance
Claims and Claims Expense 6,550 7,717 8,855 9,896 11,089 12,070 13,483 13,871 15,116 15,836 15,598
- - ----------------------------
Paid (cumulative) as of:
- - -----------------------
One year later 2,658 3,074 3,516 4,295 4,558 4,550 4,955 4,472 4,748 5,787
Two years later 3,990 4,586 5,279 6,338 6,723 6,688 7,068 6,519 7,749
Three years later 4,833 5,564 6,433 7,584 8,010 7,935 8,283 8,273
Four years later 5,397 6,242 7,161 8,338 8,778 8,694 9,430
Five years later 5,802 6,694 7,611 8,824 9,279 9,508
Six years later 6,096 6,975 7,927 9,180 9,883
Seven years later 6,288 7,201 8,189 9,651
Eight years later 6,469 7,407 8,560
Nine years later 6,662 7,701
Ten years later 6,908
Reserve Reestimated as of:
- - -------------------------
End of year 6,550 7,717 8,855 9,896 11,089 12,070 13,483 13,871 15,116 15,836 15,598
One year later 6,790 7,824 8,891 10,312 11,367 11,990 13,081 13,159 14,691 15,500
Two years later 6,905 7,862 9,006 10,617 11,576 11,909 12,745 12,890 14,295
Three years later 6,987 7,979 9,323 10,990 11,680 11,905 12,735 12,832
Four years later 7,095 8,298 9,686 11,105 11,777 12,010 12,877
Five years later 7,390 8,687 9,817 11,245 11,954 12,322
Six years later 7,791 8,830 9,974 11,447 12,378
Seven years later 7,948 9,002 10,212 11,962
Eight years later 8,095 9,265 10,762
Nine years later 8,402 9,826
Ten years later 8,940
Initial net reserve in excess of
(less than) reestimated reserve:
- - -------------------------------
Amount ($2,390) ($2,109) ($1,907) ($2,066) ($1,289) ($252) $606 $1,039 $821 $336
Percent (36.5) (27.3) (21.5) (20.9) (11.6) (2.1) 4.5 7.5 5.4 2.1
Gross Reestimated Liability-Latest $14,644 $14,456 $15,788 $16,988
Reestimated Recoverable-Latest 1,767 1,624 1,493 1,488
-----------------------------------
Net Reestimated Liability-Latest 12,877 12,832 14,295 15,500
Gross Cumulative Excess (Deficiency) $258 $753 $626 $338
===================================
(1) For 1990 through 1995, this loss reserve development table excludes ARCO
claims and claims expense, due to the unavailability of loss reserve
development information for these claims on a comparable basis. ARCO was
sold in 1996.
19
As the table above illustrates, Allstate's net reserve for
property-liability insurance claims and claims expense at the end of 1995
developed favorably in 1996 by $336 million, compared to favorable development
of the gross reserves of $338 million. Net reserve development in 1995 and 1994
was more favorable than favorable gross reserve development in these years. This
relationship was due to the fact that Allstate's principal property-liability
lines, such as private passenger auto and homeowners, are not significantly
affected by reinsurance, whereas Discontinued Lines and Coverages, involve a
higher level of ceded reinsurance protection. The more favorable development in
the net reserves in 1995 and 1994 was due to higher anticipated reinsurance
cessions on increased reserve reestimates for Discontinued Lines and Coverages.
In 1996, following completion of a comprehensive review of available reinsurance
for Discontinued Lines and Coverages, the Company strengthened ceded loss
reserves. This strengthening offset the favorable effect of higher reinsurance
cessions related to increased reestimates of gross reserves for Discontinued
Lines and Coverages. See "Property-Liability Claims and Claims Expense Reserves"
on pages 42-46 of the 1996 Annual Report, incorporated herein by reference in
response to Item 7 hereof. For further discussion of the Company's reinsurance
programs, see "Property-Liability Reinsurance Ceded" on pages 45-46 of the 1996
Annual Report, incorporated herein by reference in response to Item 7 hereof.
The subsequent reduction in the net reserves established at December
31, 1995, 1994 and 1993 shown in the foregoing table reflects favorable severity
trends that the Company has experienced, as more fully discussed below. The
principal cause for the initial reserves established at the end of 1991, and all
previous years reflected in the table, needing to be increased over the time
frame in the above table is the cumulative adverse reserve development on
environmental and asbestos claims, virtually all of which relates to 1984 and
prior years. There are significant uncertainties in estimating the amount of
Allstate's environmental, asbestos damage and mass tort claims. Among the
complications are a lack of historical data, long reporting delays, uncertainty
as to the number and identity of insureds with potential exposure, and complex
unresolved legal issues regarding policy coverage and the extent and timing of
any such contractual liability. Courts have reached different and sometimes
inconsistent conclusions as to when the loss occurred and what policies provide
coverage; what claims are covered; whether there is an insured obligation to
defend; how policy limits are determined; how policy exclusions are applied and
interpreted; and whether clean-up costs represent insured property damage. These
issues are not likely to be resolved in the near future. As a result of these
issues, the ultimate cost of these claims may generate losses that vary
materially from the amount currently reserved.
During 1996, Allstate conducted a comprehensive reevalution of
Discontinued Lines and Coverages net loss reserves. As the industry has gained
experience evaluating environmental exposures some actuarial firms have
developed meaningful techniques and databases to estimate environmental
liabilities. Allstate gained access to complex databases developed by outside
experts to estimate the cost of liabilities for environmental claims. The
databases contained lists of known potentially responsible parties ("PRP"),
National Priority List ("NPL") sites, and the Environmental Protection Agency's
estimate of clean-up costs. Allstate's policy files were compared to the
databases, and factors to estimate growth of NPL sites, state sites, third party
claims, natural resource damage, probability of coverage, and PRP's being named
at future sites were applied to determine an estimate of the Company's potential
environmental loss. The Company also refined its own estimation techniques,
which were tested and validated by outside actuaries, to estimate environmental
and asbestos losses. Allstate used a combination of these resources, along with
an extensive internal review of its current claim exposures to estimate
environmental and asbestos reserves. The Company also performed an in-depth
analysis of its reinsurance
20
recoverables and refined its process for estimating and identifying available
reinsurance since some reinsurers have become insolvent or Allstate has commuted
their agreements. In addition to environmental and asbestos exposures, the
Discontinued Lines and Coverages loss reserve re-evaluation also included an
assessment of current claims for mass tort exposures which primarily relate to
products liability claims, such as those for medical devices and other products,
and general liabilities. These studies and reevaluations resulted in Allstate's
actions to increase reserves as described in "Property-Liability Claims and
Claims Expense Reserves" at pages 42-46 of the 1996 Annual Report, incorporated
herein by reference in response to Item 7 hereof. While the Company believes the
improved actuarial techniques and databases described above have assisted in its
ability to estimate environmental, asbestos and mass tort net loss reserves,
these refinements may prove to be inadequate indicators of the extent of
probable loss. See note 6 of the Notes to the Consolidated Financial Statements
on pages 74-77 of the 1996 Annual Report, incorporated herein by reference in
response to Item 8 hereof.
21
The following table is derived from the Loss Reserve Development table and
summarizes the effect of reserve reestimates, net of reinsurance, on calendar
year operations for the same ten-year period ended December 31, 1996. The total
of each column details the amount of reserve reestimates made in the indicated
calendar year and shows the accident years to which the reestimates are
applicable. The amounts in the total accident year column on the far right
represent the cumulative reserve reestimates for the indicated accident year(s).
Effect of Net Reserve Reestimates on
Calendar Year Operations
($ IN MILLIONS) CALENDAR YEARS
--------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 TOTAL
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -----
BY ACCIDENT
- - ----------
YEAR
- - ----
1986 & PRIOR $240 $115 $82 $108 $295 $401 $157 $147 $307 $538 $2,390
1987 (8) (44) 9 24 (12) (14) 25 (44) 23 (41)
1988 (2) (2) (2) (26) (12) (15) (25) (11) (95)
1989 301 (12) 10 (16) (17) (36) (35) 195
1990 (27) (164) (11) (43) (25) (91) (361)
1991 (289) (185) (101) (72) (112) (759)
1992 (321) (332) (115) (170) (938)
1993 (376) (259) (200) (835)
1994 (156) (338) (494)
1995 60 60
--- --- --- --- --- ---- ---- ---- ---- ---- ----
TOTAL $240 $107 $36 $416 $278 $(80) $(402) $(712) $(425) $(336) $(878)
Favorable calendar year reserve development in 1996, 1995 and 1994 was the
result of favorable severity trends in each of the three years, which more than
offset adverse development in Discontinued Lines and Coverages and increases to
reserves for claim expense which occurred in 1996. Adverse development of
accident year 1995 in 1996 was also due to previously mentioned increases to
reserves for claims expense.
The favorable severity trend during this three-year period was largely
due to lower than anticipated medical cost inflation for personal auto injury
claims and improvements in the Company's claim settlement processes. The
reduction in the anticipated medical cost inflation trend has emerged over time
as actual claim settlements validated the effect of the steady decline in the
rate of inflation. Although improvements in the Company's claim settlement
process has contributed to favorable severity development of personal injury
claims during the past three years, the new processes have caused an increase in
the number of claims outstanding. The Company expects the rate of increase to
continue to decline in 1997, however the number of outstanding claims may not be
reduced to levels previously reported due to an increase in the time required to
complete the new claim settlement processes. In addition, while the claim
settlement process changes are believed to have contributed to favorable
severity
22
trends on closed claims, these changes introduce a greater degree of variability
in reserve estimates for the remaining outstanding claims at December 31, 1996.
Future reserve releases, if any, will depend on the continuation of the
favorable loss trends. See "Risk Factors Affecting Allstate," above.
LIFE AND ANNUITY
Allstate Life markets a broad line of life insurance, annuity and group
pension products countrywide, and accounted for approximately 22% of Allstate's
1996 statutory premiums. Life insurance includes traditional products such as
whole life and term life insurance, as well as universal life, variable life and
other interest-sensitive life products. Annuities include both deferred
annuities, such as variable annuities and fixed rate single premium deferred
annuities, and immediate annuities such as structured settlement annuities.
Allstate Life's group pension products include guaranteed investment contracts
and retirement annuities. In 1996, annuity premiums and deposits represented 57%
of Allstate Life's total statutory premiums and deposits.
Allstate Life competes principally on the basis of its name recognition,
scope of its distribution systems, customer service and focus, breadth of
product offerings, product features, its financial strength, claims-paying
ability ratings, and price, and with respect to variable life and annuity
products, management and investment performance of, and various investment
choices in, its Separate Account portfolio of funds.
Allstate Life reaches a broad market of potential insureds throughout
the United States through a variety of distribution channels including Allstate
agents, some of whom specialize in life insurance and annuity products, banks,
independent agents, brokers and direct response marketing. Allstate Life markets
individual and group life insurance, annuity and pension products through
Allstate agents, banks, independent agents, brokers and direct response
marketing. Products bearing the "Allstate Life Insurance Company" name are
generally sold by Allstate agents, specialized brokers, and through direct
marketing techniques, while other products, many of which are of similar types
to those bearing the "Allstate Life Insurance Company" name, are distributed
through independent insurance agents, brokers and banks. Allstate Life's
products are written by various ALIC subsidiaries and are sold under various
names in addition to "Allstate Life Insurance Company," including "Allstate Life
Insurance Company of New York," "Northbrook Life Insurance Company,""Glenbrook
Life and Annuity Company," "Lincoln Benefit Life Company" and "Surety Life
Insurance Company." Life insurance in force was $186 billion at December 31,
1996 and $163 billion at December 31, 1995. As of December 31, 1996, Allstate
Life had $33.6 billion of investments, including $5.6 billion of Separate
Account assets.
Northbrook Life Insurance Company has a strategic alliance with Dean
Witter for the marketing and distribution of Northbrook's life and annuity
products through Dean Witter's broker sales force. Glenbrook Life and Annuity
Company has also entered into marketing arrangements with banks for the sale of
life and annuity products, including an arrangement in 1995 with the AIM mutual
fund group under which AIM markets Glenbrook Life and Annuity Company variable
annuities. Allstate Life is committed to broadening its bank distribution
outlets in an effort to increase the sales of its annuity products, and to
participate in the market for life insurance products sold through banks.
23
Although Allstate Life's management develops overall strategies and
utilizes certain services shared with AIC such as investment, finance,
information technology and legal services, the primary management of each
distribution channel is largely decentralized. Accordingly, management of each
distribution channel is primarily responsible for determining its own product
mix and designing products or product features appropriate for its target
market. Allstate Life believes that its range of distribution channels promotes
flexibility, extends market reach, reduces dependency on any one distribution
system, and allows Allstate Life to focus on distinct, generally non-overlapping
markets. In 1996 Allstate Life implemented a redesign of the processes under
which the sale of life insurance is made through Allstate's agency force, which
it believes has contributed, and will continue to contribute, to greater sales
of life insurance and annuities through this distribution channel. Sales of life
insurance and annuity products through the Allstate agency force increased by
almost 16% in 1996, following a 14% increase in sales in 1995. This was
attributed to Allstate Life's ability to focus more of the agents' time on life
insurance through sales management's commitment to life insurance and annuities
and through initial efforts in redesigning the sales processes. Allstate Life
continues to address the sales processes to further its goal of additional
increases in sales.
The establishment of reserve and contractholder fund liabilities in
recognition of Allstate's future benefit obligations under life and annuity
policies and other Allstate Life products are discussed in note 2 of the Notes
to the Consolidated Financial Statements on pages 62-65 of the 1996 Annual
Report, incorporated herein by reference in response to Item 8 hereof.
The market for financial services, including the various types of life
insurance and annuities sold by Allstate Life, is highly competitive. As of
December 31, 1996, there were approximately 800 groups of life insurance
companies in the United States, most of which offer one or more products similar
to those offered by Allstate Life and many of which use similar marketing
techniques. Based on information contained in statements filed with insurance
departments, in 1995 approximately 50% of the life insurance and annuity
premiums and deposits were sold by 15 groups of companies. Allstate Life ranked
19th based on life insurance and annuity premiums and deposits and based on
statutory admitted assets. Banks and savings and loan associations in certain
jurisdictions compete with Allstate Life in the sale of life insurance products.
In addition, because certain life insurance and annuity products include a
savings or investment component, competition also comes from brokerage firms,
investment advisors and mutual funds as well as from banks and other financial
institutions. Despite a large number of life company acquisitions in recent
years, the life insurance and annuity market continues to be highly fragmented
and competitive.
CAPITAL REQUIREMENTS
The capacity for Allstate's growth in premiums, like that of other
insurance companies, is in part a function of its operating leverage. Operating
leverage for property-liability insurance companies is measured by the ratio of
net premiums written to statutory surplus. Ratios in excess of 3 to 1 are
considered outside the usual range by insurance regulators and rating agencies.
AIC's premium to surplus ratio declined to 1.6 to 1 at December 31, 1996 from
1.9 to 1 at December 31, 1995. The principal cause of the change was an increase
in statutory surplus (i.e., the excess of assets permitted by Illinois to be
taken into account over all liabilities) resulting from net income and gains on
securities, including investments in
24
affiliates and sales of businesses, on a statutory basis. Maintaining
appropriate levels of statutory surplus is considered important by Allstate's
management, state insurance regulatory authorities, and the agencies that rate
insurers' claims-paying abilities and financial strength. In early 1996, A.M.
Best upgraded Allstate's claims-paying ability rating to A from A-.
Failure to maintain certain levels of statutory capital and surplus
could result in increased scrutiny or, in some cases, action taken by state
regulatory authorities and/or rating agencies. Increased public and regulatory
concerns regarding the financial stability of participants in the insurance
industry have resulted in greater emphasis being placed by policyholders upon
insurance company ratings and have created, particularly with respect to certain
life insurance products, some measure of competitive advantage for insurance
carriers with higher ratings. Failure to maintain claims-paying and financial
strength ratings could negatively affect the Company's competitiveness.
The National Association of Insurance Commissioners ("NAIC") has adopted
a standard for assessing the solvency of insurance companies, which is referred
to as risk-based capital ("RBC"). The requirement consists of a formula for
determining each insurer's RBC and a model law specifying regulatory actions if
an insurer's RBC falls below specified levels. The RBC formula for life
insurance companies establishes capital requirements relating to insurance risk,
business risk, asset risk and interest rate risk. The RBC formula for
property-liability companies includes asset and credit risk, but places more
emphasis on underwriting factors for reserving and pricing. At December 31,
1996, RBC for each of Allstate's significant property-liability and life
insurance companies exceeded the required capital levels. See "Capital
Resources" on pages 50- 51 of the 1996 Annual Report, incorporated herein by
reference in response to Item 7 hereof.
Allstate enters into certain intercompany insurance and reinsurance
transactions for its property-liability and life and annuity operations.
Allstate enters into these transactions in order to maintain underwriting
control and spread insurance risk among various legal entities. These
reinsurance agreements have been approved by the appropriate regulatory
authorities. All material intercompany transactions are eliminated in the
Company's consolidated financial statements.
INVESTMENTS
Allstate follows a strategy to manage its exposure to market risk.
Market risk is the risk that the Company will incur losses due to adverse
changes in market rates and prices. The Company's primary market risk exposures
are to changes in interest rates and equity prices. The Company does not
currently have material exposures to either commodity price or foreign currency
exchange risk. However, currency risk exposures may increase in the future as
the Company expands its international operations and investments in foreign
stocks and bonds. The Company seeks to earn returns that enhance its ability to
offer competitive rates and prices to customers while contributing to attractive
and stable profits and long term capital growth for the Company. Accordingly,
the Company's investment decisions and objectives are a function of the
underlying risks and product profiles of each primary business operation. The
property-liability overall market risk management objective is to maximize total
after-tax return on capital while considering the risks in the fixed income and
equity markets such as duration, credit, liquidity and tax risks. In order to
support competitive credited rates and earn stable profits, Allstate Life
adheres to a
25
basic philosophy of matching assets with related liabilities to limit interest
rate risk, while maintaining adequate liquidity and a prudent and diversified
level of credit risk.
During the second quarter of 1996, Allstate repositioned its
property-liability portfolio, reducing the duration of its fixed income assets
by decreasing the proportion of tax-exempt long-term securities and increasing
its investment in intermediate-term taxable securities. Allstate also sold a
portion of its equity portfolio and invested the proceeds in fixed income
securities. The sales of Allstate's commercial insurance and reinsurance
businesses in 1996 (see "Discontinued Lines and Coverages," above) have reduced
the base of assets available for investment by Allstate by $1.6 billion.
At December 31, 1996, 100% of Allstate's fixed income securities and
equity securities in its portfolio were designated as "available for sale" and
carried in the Company's financial statements at fair value. While the Company
generally holds its fixed income securities for the long term, management
classifies these fixed income securities as available for sale to maximize the
Company's flexibility in responding to changes in market conditions. Changes in
the fair value of these securities, net of deferred income taxes and deferred
acquisition costs and benefit reserve adjustments on certain life insurance
products, are reflected as a separate component of shareholders' equity. For
discussion of the composition of the Company's investment portfolio, see
"Investments" on pages 52-56 of the 1996 Annual Report, incorporated herein by
reference in response to Item 7 hereof, and Note 4 of the Notes to the
Consolidated Financial Statements on pages 67-70 of the 1996 Annual Report,
incorporated herein by reference in response to Item 8 hereof.
REGULATION
Allstate is subject to extensive regulation and supervision in the
jurisdictions in which it does business. This regulation has a substantial
effect on the business of Allstate, primarily on Allstate's personal lines
property-liability business. This regulatory oversight includes, for example,
matters relating to licensing and examination, rate setting, trade practices,
policy forms, limitations on the nature and amount of certain investments,
claims practices, mandated participation in shared markets and guaranty funds,
reserve adequacy, insurer solvency, transactions with affiliates, the amount of
dividends that may be paid, and restrictions on underwriting standards. For
discussion of statutory financial information, see note 12 of the Notes to
Consolidated Financial Statements on pages 82-83 of the 1996 Annual Report,
incorporated herein by reference in response to Item 8 hereof; and for
discussion of regulatory contingencies, see note 9 of the Notes to Consolidated
Financial Statements on pages 79-80 of the 1996 Annual Report, incorporated
herein by reference in response to Item 8 hereof.
LIMITATIONS ON DIVIDENDS BY INSURANCE SUBSIDIARIES - The Company is a
legal entity separate and distinct from its subsidiaries. As a holding company
with no other business operations, its primary sources of cash to meet its
obligations, including principal and interest payments with respect to
indebtedness, are dividends and other statutorily permitted payments from AIC.
AIC, as a domiciliary of Illinois, is subject to the Illinois insurance laws and
regulations. In Illinois, a domestic stock insurer may, without prior regulatory
approval, pay ordinary dividends from statutory surplus which at the time of
declaration is not less than the minimum required for the kind of insurance
business that such company is authorized to conduct. Under the Illinois
Insurance Code, AIC's surplus following any transaction with affiliates or
dividends, including distributions to its shareholder or other security holders,
must be
26
reasonable in relation to AIC's outstanding liabilities and must be adequate to
meet its financial needs. The Illinois Insurance Code allows "extraordinary
dividends" to be paid after thirty days notice to the Illinois Insurance
Department, unless disapproved or sooner approved during such thirty day period.
"Extraordinary dividends" for these purposes are defined as any dividend or
distribution which together with any other dividend or distribution made within
the preceding 12 months exceeds the greater of (i) 10% of the insurance
company's statutory surplus as of the preceding December 31, or (ii) its
statutory net income for the year ended on the preceding December 31. The
maximum amount of dividends that AIC can distribute during 1997 without prior
approval of the Illinois Department of Insurance is $2.2 billion. If insurance
regulators determine that payment of a dividend or any other payments to an
affiliate (such as payments under a tax sharing agreement, payments for employee
or other services, or payments pursuant to a surplus note) would, because of the
financial condition of the paying insurance company or otherwise be hazardous to
such insurance company's policyholders or creditors, the regulators may block
such payments that would otherwise be permitted without prior approval.
HOLDING COMPANY REGULATION - The Company and AIC are currently insurance
holding companies subject to regulation throughout jurisdictions in which
Allstate's insurance subsidiaries do business. Certain of AIC's subsidiaries and
companies in which AIC holds a minority equity interest are property-liability
and life insurance companies organized under the respective insurance codes of
California, Florida, Illinois, Nebraska, New York, Texas and Utah. The insurance
codes in such states contain similar provisions (subject to certain variations)
to the effect that the acquisition or change of "control" of a domestic insurer
or of any person that controls a domestic insurer cannot be consummated without
the prior approval of the relevant insurance regulator. In general, a
presumption of "control" arises from the ownership, control, possession with the
power to vote or possession of proxies with respect to 10% or more of the voting
securities of a domestic insurer or of a person that controls a domestic
insurer. In Florida, regulatory approval must be obtained prior to the
acquisition of 5% or more of the voting securities of a domestic stock insurer
or of a controlling company. In addition, certain state insurance laws contain
provisions that require pre-acquisition notification to state agencies of a
change in control with respect to a non-domestic insurance company admitted in
that state. While such pre-acquisition notification statutes do not authorize
the state agency to disapprove the change of control, such statutes do authorize
certain remedies, including the issuance of a cease and desist order with
respect to the non-domestic admitted insurer if certain conditions exist, such
as undue market concentration. Thus, any transaction involving the acquisition
of 10% or more (5% in Florida) of the Company's common stock would generally
require prior approval by the state insurance departments in California,
Florida, Illinois, Nebraska, New York, Texas and Utah and would require the
pre-acquisition notification in those states which have adopted pre-acquisition
notification provisions and wherein Allstate's insurance subsidiaries are
admitted to transact business. Such approval requirements may deter, delay or
prevent certain transactions affecting the ownership of the Company's common
stock.
RATE REGULATION - Most states have insurance laws requiring that
property-liability rate schedules, policy or coverage forms, and other
information be filed with the state's regulatory authority. In many cases, such
rates and/or policy forms must be approved prior to use. While they vary from
state to state, the objectives of the rating laws are generally the same: a rate
must be adequate, not excessive, and not unfairly discriminatory.
27
Property-liability insurers are generally unable to effect rate
increases with respect to a coverage until sometime after the costs associated
with such coverage have increased. The speed at which an insurer can change
rates in response to the competition or to increasing costs depends, in part, on
whether the rating laws are administered as (i) prior approval, (ii)
file-and-use, or (iii) use-and-file laws. In states having prior approval laws,
a rate must be approved by the regulator before it may be used by the insurer.
In states having file-and-use laws, the insurer does not have to wait for the
regulator's approval to use a rate, but the rate must be filed with the
regulatory authority prior to being used. A use-and-file law requires an insurer
to file rates within a certain period of time after the insurer begins using the
rates. Approximately one half of the states, including California and New York,
have prior approval laws. States such as Florida, Illinois and Michigan have
both use-and-file and file-and-use laws or regulations, depending upon the line
of coverage. Under all three types of rating systems, the regulator has the
authority to disapprove the rate subsequent to its filing.
State regulators have broad discretion in judging whether an insurer's
rate or proposed rate is adequate, not excessive and not unfairly
discriminatory. An insurer's ability to adjust its rates in response to
competition or to increasing costs is often dependent on an insurer's ability to
demonstrate to the regulator that its rates or proposed rates meet the
objectives of the rate making laws. In those states that significantly restrict
an insurer's discretion in selecting the business that it wants to write, an
insurer can manage its risk of loss by charging a price that matches the cost of
providing the insurance. In those states that significantly restrict an
insurer's ability to charge a price that matches the cost of providing the
insurance, the insurer can manage its risk of loss by being more selective in
the type of business it writes. When a state significantly restricts both
underwriting and pricing, it becomes more difficult for an insurer to manage its
profitability.
Changes in Allstate's claim settlement process which may have
contributed to favorable severity trends on closed personal injury claims in
1994, 1995 and 1996, and to a slowing of loss payments and an increase in the
number of outstanding claims, may require Allstate to actuarially adjust loss
information used in its rate application process.
From time to time, the private passenger automobile insurance industry
has come under pressure from state regulators, legislators and special interest
groups to reduce, freeze or set rates at levels that do not, in Allstate's
management's view, correspond with underlying costs. Some of this activity can
result in legislation and/or regulations which adversely affect the
profitability of Allstate's automobile insurance line of business in various
states. Adverse legislative and regulatory activity constraining Allstate's
ability to adequately price insurance coverage may occur in the future. Similar
pressures have been experienced regarding rates for homeowners insurance, as
regulators in catastrophe prone states struggle to identify an acceptable
methodology to price for catastrophe exposure. The impact of the insurance
regulation environment on Allstate's results of operations in the future is not
predictable.
SHARED MARKETS - As a condition of its license to do business in various
states, Allstate is required to participate in mandatory property-liability
shared market mechanisms or pooling arrangements, which provide various
insurance coverages to individuals or other entities that otherwise are unable
to purchase such coverage voluntarily provided by private insurers. In addition,
some states require automobile insurers to participate in reinsurance pools for
claims that exceed a certain amount. Currently, there are no mandatory pooling
mechanisms applicable to Allstate Life, except for guaranty fund assessments.
The
28
participation by Allstate in such shared markets or pooling mechanisms is
generally in amounts related to the amount of Allstate's direct writings for the
type of coverage written by the specific pooling mechanism in the applicable
state. Allstate incurred an underwriting loss from participation in such
mechanisms, mandatory pools and underwriting associations of $68 million, $134
million and $109 million in 1996, 1995 and 1994, respectively. The amount of
future losses or assessments from the personal and commercial lines shared
market mechanisms and pooling arrangements described above cannot be predicted
with certainty. Although it is possible that future losses or assessments from
such mechanisms and pooling arrangements could have a material adverse effect on
results of operations, the Company does not expect future losses or assessments
to have a material adverse effect on its financial condition or results of
operations.
GUARANTY FUNDS - Failures of certain large insurers in recent years have
increased solvency concerns of regulators. Under state insurance guaranty fund
laws, insurers doing business in a state can be assessed, up to prescribed
limits, for certain obligations of insolvent insurance companies to
policyholders and claimants. Allstate's expenses with respect to such guaranty
funds for the years 1996, 1995 and 1994 were $35 million, $26 million and $56
million, respectively.
INVESTMENT REGULATION - Allstate is subject to state laws and
regulations that require diversification of its investment portfolio and limit
the amount of investments in certain investment categories. Failure to comply
with these laws and regulations would cause non-conforming investments to be
treated as non- admitted assets for purposes of measuring statutory surplus and,
in some instances, would require divestiture. As of December 31, 1996,
Allstate's investment portfolio complied with such laws and regulations in all
material respects.
REGULATORY INITIATIVES AND PROPOSED LEGISLATION - The state insurance
regulatory framework has during recent years come under increased federal
scrutiny, and certain state legislatures have considered or enacted laws that
alter and, in many cases, increase state authority to regulate insurance
companies and insurance holding company systems. Further, the NAIC and state
insurance regulators are re-examining existing laws and regulations,
specifically focusing on insurance company investments, issues relating to the
solvency of insurance companies, interpretations of existing laws and the
development of new laws. In addition, Congress and certain federal agencies have
investigated the condition of the insurance industry in the United States to
determine whether to promulgate federal regulation. Allstate is unable to
predict whether any state or federal legislation will be enacted to change the
nature or scope of regulation of the insurance industry, or what effect any such
legislation would have on the Company.
Environmental pollution clean-up is the subject of both federal and
state regulation. By some estimates, there are thousands of potential waste
sites subject to clean-up. The insurance industry is involved in extensive
litigation regarding coverage issues. The Comprehensive Environmental Response
Compensation and Liability Act of 1980 ("Superfund") and comparable state
statutes ("mini-Superfund") govern the clean-up and restoration by "Potentially
Responsible Parties" ("PRP's"). Superfund and the mini-Superfunds (Environmental
Clean-up Laws or "ECLs") establish a mechanism to pay for clean-up of waste
sites if PRP's fail to do so, and to assign liability to PRP's. The extent of
liability to be allocated to a PRP is dependent on a variety of factors.
Further, the number of waste sites subject to clean-up is unknown. Very few
sites have been subject to clean-up to date. The extent of clean-up necessary
and the assignment of liability has not been established. The insurance
industry, including Allstate, are disputing
29
many such claims. Key coverage issues include whether Superfund response costs
are considered damages under the policies, trigger of coverage, applicability of
pollution exclusions, the potential for joint and several liability and
definition of an occurrence. Similar coverage issues exist for clean-up and
waste sites not covered under Superfund. To date, courts have been inconsistent
in their rulings on these issues. Allstate's exposure to liability with regard
to its insureds which have been, or may be, named as PRPs is uncertain. See
"Discontinued Lines and Coverages", above. Superfund reform proposals have been
introduced in Congress, including a proposal introduced in the current session,
but none has been enacted at the date of this publication. There can be no
assurance that any Superfund reform legislation will be enacted or that any such
legislation will provide for a fair, effective and cost-efficient system for
settlement of Superfund related claims.
Proposed federal legislation which would permit banks greater
participation in the insurance business could, if enacted, present an increased
level of competition for the sale of insurance products. In addition, while
current federal income tax law permits the tax-deferred accumulation of earnings
on the premiums paid by an annuity owner and holders of certain savings-oriented
life insurance products, no assurance can be given that future tax law will
continue to allow such tax deferrals. If such deferrals were not allowed,
consumer demand for the affected products, including those sold by Allstate
Life, would be substantially reduced. In addition, proposals to lower the
federal income tax rates through a form of flat tax or otherwise could have, if
enacted, a negative impact on the demand for such products.
GEOGRAPHIC DISTRIBUTION OF INSURANCE
Allstate, through a variety of companies, is authorized to sell
property-liability and life insurance in all 50 states, the District of
Columbia, Puerto Rico and Canada. To a limited extent, Allstate is engaged,
through affiliates, in the insurance business in Germany, Japan and the Republic
of Korea. The following tabulation reflects, in percentages, the principal
geographic distribution of statutory premiums earned for the property-liability
insurance business and statutory premiums for the life insurance business for
the year ended December 31, 1996:
NY CA FL IL PA MI NJ MD TX GA NC OH Total
-- -- -- -- -- -- -- -- -- -- -- -- -----
Property-
Liability 12.7 10.6 9.7 5.2 5.1 4.6 4.3 3.6 3.1 3.0 2.7 2.6 67.2
CA FL NE MA TX PA IL NJ MI NY CO OH Total
-- -- -- -- -- -- -- -- -- -- -- -- -----
Life 13.9 8.7 6.4 5.5 5.4 5.3 5.1 3.8 3.7 2.9 2.6 2.6 65.9
No other jurisdiction accounted for more than 2.6% of the statutory
premiums for property-liability insurance or life insurance.
30
In 1991, Allstate announced its decision to withdraw from the
property-liability market in New Jersey, but its application has been suspended
until December 31, 1997 by agreement between Allstate and New Jersey insurance
authorities. In the meantime, Allstate has continued to write insurance in New
Jersey. Although it is licensed to do so, Allstate is not currently writing
private passenger automobile or homeowners insurance in Massachusetts.
SEASONALITY
Although the insurance business generally is not seasonal, claims and
claims expense for the property-liability insurance operations tend to be higher
for periods of severe or inclement weather.
EMPLOYEES
At December 31, 1996, Allstate employed approximately 48,200 people.
SERVICE MARKS
The names "Allstate" and "Allstate Life," the slant "A" Allstate
logo, the slogan "You're in Good Hands With Allstate" and the graphic "Good
Hands" design logo which features cupped hands holding an automobile and a
house, and the "Northbrook" logo design are used extensively in Allstate's
businesses. Allstate's rights in the United States to the names "Allstate" and
"Allstate Life," the Allstate and Northbrook logos, the "Good Hands" slogan and
the "Good Hands" symbol continue so long as Allstate continues to exercise those
rights. These service marks are the subject of numerous renewable United States
and foreign service mark registrations. The Company believes that these service
marks are material to the business of Allstate.
31
Executive Officers of the Registrant
The following tabulation sets forth the names of the executive
officers of the Company, their current ages, the positions with Allstate held by
them, and the dates of their first election as officers:
Executive Officers of the Registrant
The following tabulation sets forth the names of the executive
officers of the Company, their current ages, the positions with Allstate held by
them, and the dates of their first election as officers:
Date First
Elected
Name Age Position and Offices Held Officer
- - ---- --- ------------------------- -------
Jerry D. Choate*........58 Chairman and Chief Executive
Officer of the Company and AIC 1983
Joan M. Crockett........46 Senior Vice President
of AIC 1994
Edward J. Dixon.........53 Senior Vice President of AIC 1988
Robert W. Gary..........58 Senior Vice President of AIC 1986
Steven L. Groot.........47 Senior Vice President of AIC 1988
Edward M. Liddy.........51 President and Chief Operating
Officer of the Company and AIC 1994
Louis G. Lower, II......51 President of ALIC 1982
Michael J. McCabe.......51 Senior Vice President of AIC 1980
Ronald D. McNeil........44 Senior Vice President of AIC 1994
Robert W. Pike..........55 Vice President, Secretary and
General Counsel of the Company;
Senior Vice President, Secretary
and General Counsel of AIC 1978
Francis W. Pollard......54 Senior Vice President and
Chief Information Officer
of AIC 1984
Casey J. Sylla..........53 Senior Vice President and 1995
Chief Investment Officer of AIC
Rita P. Wilson..........50 Senior Vice President of AIC 1988
Thomas J. Wilson........39 Vice President and Chief Financial
Officer of the Company;
Senior Vice President and
Chief Financial Officer
of AIC 1995
Edward W. Young.........56 Senior Vice President
of AIC 1984
- - ----------------
* Also a director of the Company
32
No family relationships exist among the above-named individuals.
Each of the officers named above was elected to serve in the office
indicated until the first meeting of the Board of Directors following the annual
meeting of stockholders in 1996 and until his or her successor is elected and
qualified or until such officer resigns.
With the exception of officers E. Liddy, R. Wilson, T. Wilson, and C.
Sylla, the above officers have held the positions set forth in the above
tabulation for at least the last five years or have served Allstate in various
executive or administrative capacities for at least that length of time. Prior
to his election on August 10, 1994 to the position indicated above, Mr. Liddy
served Sears in a financial officer capacity since April 1988, and was Sears
Senior Vice President and Chief Financial Officer since February 1992. Prior to
his election on January 1, 1995 to the position indicated above, T. Wilson
served as Sears Vice President, Strategy and Analysis from 1993 until December
31, 1994, and prior to that served as a managing director for Dean Witter from
1986 to 1993. Prior to his election on July 5, 1995 to the position indicated
above, Mr. Sylla served as a Senior Vice President for Northwestern Mutual Life
Insurance Company from 1992 to 1995, and served as President of an investment
management firm from 1989 to 1992. R Wilson was elected to her current position
effective May 1, 1996. Prior to that, and since November 1994 she had served as
Senior Vice President-Corporate Communications, for Ameritech Corporation. From
September 1990 until November 1994 R. Wilson was Senior Vice President of
Allstate Insurance Company.
Item 2. Properties
- - ------ ----------
Allstate's home office complex is located in Northbrook, Illinois.
The complex consists of 10 buildings of approximately 1.96 million square feet
of office space on a 204.39 acre site.
The Northbrook complex serves as the headquarters for PP&C and ALIC.
Allstate's field business operations are conducted substantially
from 17 offices located principally in metropolitan areas throughout the United
States and Canada. Allstate also has approximately 250 claim service offices,
sales facilities at approximately 10,500 locations, and approximately 650
automobile damage inspection locations, most of which are located at claim
service offices and sales facilities.
Allstate's home office complex and most major offices are owned.
Other facilities are leased, in almost all cases for terms of not more than five
years. The Company believes its properties and facilities are adequate and
suited to Allstate's current operations.
Item 3. Legal Proceedings
- - ------ -----------------
Various other legal and regulatory actions are currently pending
that involve Allstate and specific aspects of its conduct of business. In the
opinion of management, the ultimate liability, if any, in one or more of these
actions, in excess of amounts currently reserved is not expected to have a
material effect on results of operations, liquidity or capital resources. See
note 9 to the Consolidated Financial Statements on pages 79-80 of the 1996
Annual Report, incorporated herein by reference in response to Item 8 hereof.
33
Item 4. Submission of Matters to a Vote of Security Holders
- - ------ ---------------------------------------------------
None
Part II
Item 5. Market for Registrant's Common Equity and Related
- - ------ -------------------------------------------------
Stockholder Matters
-------------------
There were 218,987 record holders of the Company's common stock as of
March 21, 1997. Other information concerning this Item 5 is incorporated by
reference to "Shareholder Information" on the inside back cover of the 1996
Annual Report.
Item 6. Selected Financial Data
- - ------ -----------------------
Incorporated by reference to "11-Year Summary of Selected Financial
Data" on pages 32-33 of the 1996 Annual Report.
Item 7. Management's Discussion and Analysis of Financial
- - ------ -------------------------------------------------
Condition and Results of Operations
-----------------------------------
Incorporated by reference to the "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on pages 34-56 of the 1996
Annual Report.
FORWARD-LOOKING STATEMENTS
The statements contained in the "Management's Discussion and Analysis
of Financial Condition and Results of Operations" portion of the 1996 Annual
Report, which portion has been incorporated herein by reference in response to
Item 7 hereof, that are not historical information are forward-looking
statements that are based on management's estimates, assumptions and
projections. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor under The Securities Act of 1933 and The Securities Exchange Act of
1934 for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company notes several important factors that could cause the
Company's actual results and experience with respect to forward-looking
statements to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements:
34
1. Exposure to Catastrophe Losses - Management believes that the strategies
--------------------------------
implemented by the Company to manage its exposure to catastrophes will greatly
reduce the probability of severe losses in the future, that the implementation
of certain described actions taken in Florida will reduce the Company's exposure
to losses from hurricanes in that state, and that the Company's exposure to
earthquake losses in California has been significantly reduced due to the
introduction of the mini-earthquake policy which has higher deductibles,
eliminates coverage for most non- dwelling structures and limits personal
contents coverage, and will be further reduced as a result of the creation of
the CEA (see "Catastrophe Losses," "Catastrophe Management," "Florida
Hurricanes" and "California Earthquakes" at pages 36-38 of the 1996 Annual
Report and "Catastrophe Exposure" in this Form 10-K). These beliefs are based in
part on the efficacy of the techniques and the accuracy of the data used by the
Company to predict the probability of catastrophes and the extent of losses to
the Company resulting from catastrophes. Catastrophes may occur in the future
which indicate that such techniques do not accurately predict the Company's
losses from catastrophes, and the probability and extent of such losses to the
Company may differ materially from that which would have been predicted by such
techniques and data.
Management's expectation that the operations of the CEA will
significantly reduce Allstate's exposure to earthquake exposure in California in
the future depends in part on the CEA functioning as planned. The Company could
be exposed to the threat or reality of additional material assessments beyond
the $700 million noted under "California Earthquakes" at pages 37- 38 of the
1996 Annual Report and "Catastrophe Exposure" in this Form 10-K if the
California legislature should decide, in the future, to revise the formula and
impose such additional assessments.
As noted under "Catastrophe Management" at pages 36-38 of the 1996
Annual Report and "Catastrophe Exposure" in this Form 10-K, there are areas of
the United States, other than Florida and California, in which the Company
remains exposed to the possibility of sustaining material losses from
catastrophes due to hurricanes and earthquakes. These other areas of potential
losses due to hurricanes include major metropolitan centers near the eastern and
gulf coasts of the United States; and other areas in the United States with
exposure to potential earthquake losses include areas surrounding the New Madrid
fault system in the Midwest and faults in and surrounding Seattle, Washington.
2. Personal Injury Severity Trends - The references to favorable personal injury
-------------------------------
severity trends which management believes may be due in part to the redesign of
the Company's bodily injury claim processes (see "PP&C Underwriting Results" at
pages 39-40 of the 1996 Annual Report and "Property-Liability Insurance Claims
and Claims Expense Reserves" in this Form 10-K) reflect statistical data for the
periods indicated. As additional statistical data for these periods becomes
available as claims are settled, new estimates of average personal injury
severities will be developed and may be materially higher or lower than the
current estimates. Moreover, the recent favorable trends may be reversed in the
future because of the increased costs of settlements and adverse judgments in
cases which proceed to litigation. In the meantime, however, the current data of
reduced personal injury severities may influence state insurance regulators to
deny Allstate rate increases which could reduce the growth of the Company's
revenues.
35
Management has stated (see "Property-Liability Claims and Claims
Expense Reserves," at pages 42-46 of the 1996 Annual Report and
"Property-Liability Insurance Claims and Claims Expense Reserves" in this Form
10-K) that although the redesign of the claims processes for personal injury
claims has resulted in an increased number of claims outstanding, the rate of
increase in such outstanding claims has declined and the Company believes the
rate of increase will continue to decline in 1997. This supposition is based on
statistical records of less than a year's duration and continuation of normal
frequency trends. The statistics on outstanding personal injury claims in 1997
could indicate an acceleration of the rate of such claims pending which would
increase the uncertainty associated with the statistical methods used to
establish reserves.
3. Increase in Property-Liability Net Investment Income - Management expects
-------------------------------------------------------
that net investment income from its property-liability operations will increase
in 1997, but not at as high a rate as the 7.9% increase in pretax net investment
income in 1996 over 1995 (see "Net Investment Income and Realized Capital
Gains," at pages 35-36 of the 1996 Annual Report). Any increase in net
investment income will be highly dependent on the interest rate environment
that exists in 1997.
4. Liquidity of Allstate Life Portfolio - Management believes that the assets in
------------------------------------
the Allstate Life portfolio are sufficiently liquid to meet future obligations
to life insurance and annuity policyholders in various interest rate scenarios
(see "Liquidity" at pages 51-52 of the 1996 Annual Report). However, an
unexpected increase in surrenders and withdrawals, coupled with a significant
increase in interest rates could make it difficult for Allstate Life to
liquidate a sufficient portion of its portfolio to meet such obligations and
also maintain its risk-based capital at acceptable levels.
5. Contingent Payment for Potential Deficiency in Northbrook Reserves - As
-----------------------------------------------------------------------
stated in "Discontinued Lines and Coverages Underwriting Summary," at pages
41-42 of the 1996 Annual Report, the agreement under which Allstate sold the
Northbrook companies to St. Paul in 1996 contains a provision which could
require Allstate to pay St. Paul up to $100 million should Northbrook's reserves
as of July 31, 1996 be determined, as of July 31, 2000, to have been
understated. Management does not expect that it will be required to make a
payment to St. Paul based on current trends, conditions and claim settlement
processes. The establishment of appropriate reserves, including Northbrook's
reserves, is an inherently uncertain process. Accordingly, the Company could be
required to pay as much as $100 million to St. Paul when the July 31, 2000
calculation is agreed to, if the reserves should develop unfavorably.
6. Availability of Company's Line of Credit - The Company maintains a $1.50
-------------------------------------------
billion, five-year revolving line of credit as a potential source of funds to
meet short-term liquidity requirements. In order to borrow on the line of
credit, AIC is required to maintain a specified statutory surplus level and the
Allstate debt to equity ratio (as defined in the credit agreement) must not
exceed a designated level. Under "Capital Resources" on pages 50-51 of the 1996
Annual Report, the Company's states that its management expects to continue to
meet such borrowing requirements in the future. The ability of AIC and Allstate
to meet these requirements is dependent upon the economic well-being of AIC.
Should AIC sustain significant losses from catastrophes, its and Allstate's
ability to continue to meet the credit agreement requirements would be lessened.
Consequently, Allstate's
36
right to draw upon the line of credit could be diminished or eliminated during a
period when it would be most in need of financial resources.
Item 8. Financial Statements and Supplementary Data
- - ------ -------------------------------------------
The consolidated financial statements of the Company, including the
notes to such statements, and other information on pages 57-88 of the 1996
Annual Report are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on
- - ------ ------------------------------------------------
Accounting and Financial Disclosure
-----------------------------------
None
Part III
Item 10. Directors and Executive Officers of the Registrant
- - ------- --------------------------------------------------
Certain information regarding directors of the Company is
incorporated herein by reference to the descriptions under "Election of
Directors" in the 1997 Proxy Statement.
Information regarding executive officers of the Company is
incorporated herein by reference to Item 1 of this Report under the caption
"Executive Officers of the Registrant" in Part I hereof.
Item 11. Executive Compensation
- - ------- ----------------------
Information regarding executive compensation is incorporated by
reference to the material under the captions "Directors' Compensation and
Benefits," "Executive Compensation," "Stock Options," "Pension Plans," and
"Employment Contracts, Termination of Employment and Change-in-Control
Arrangements" in the 1997 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and
- - ------- ---------------------------------------------------
Management
----------
Information regarding security ownership of certain beneficial
owners and management is incorporated herein by reference to the material under
the headings "Security
37
Ownership of Directors and Executive Officers" and "Security Ownership of
Certain Beneficial Owners" in the 1997 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
- - ------- ----------------------------------------------
Information regarding certain relationships and related transactions
is incorporated herein by reference to the material under the headings "Certain
Relationships and Related Transactions" in the 1997 Proxy Statement.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
- - ------- -------------------------------------------------------
Form 8-K
--------
(a) 1 and 2 An "Index to Financial Statements and Financial
Statement Schedules" has been filed as a part of this Report
beginning on page S-1 hereof.
(a) 3 Exhibits:
An "Exhibit Index" has been filed as a part of this Report
beginning on page E-1 hereof and is incorporated herein by
reference.
(b) Reports on Form 8-K:
Registrant filed a Current Report on Form 8-K dated October 8,
1996 (Items 5 and 7).
Registrant filed a Current Report on Form 8-K on December 6,
1996 (Item 7) to file exhibits in connection with the
registration of Allstate Financing I.
Registrant filed a Current Report on Form 8-K on December 6,
1996 (Item 7) to file exhibits in connection with the
registration of Allstate Financing II.
38
SIGNATURES
Pursuant to the Requirements of Section 13 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.
THE ALLSTATE CORPORATION
(Registrant)
s/Samuel H. Pilch
-----------------
By: Samuel H. Pilch
Controller
(Principal Accounting
Officer)
March 25, 1997
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
- - --------- ----- ----
s/ Jerry D. Choate Chairman and Chief )
- - ------------------
Jerry D. Choate Executive Officer )
and a Director )
(Principal Executive )
Officer) )
March 25, 1997
s/ Thomas J. Wilson Vice President and )
- - -------------------
Thomas J. Wilson Chief Financial )
Officer )
(Principal Financial )
Officer) )
39
Signature Title Date
- - --------- ----- ----
s/James G. Andress Director )
- - ------------------
James G. Andress
s/Warren L. Batts Director )
- - -----------------
Warren L. Batts
Director )
- - -----------------
Edward A. Brennan
s/James M. Denny Director )
- - ----------------
James M. Denny
Director )
- - --------------------
Christopher F. Edley March 25, 1997
s/Michael A. Miles Director )
- - ------------------
Michael A. Miles
s/Nancy C. Reynolds Director )
- - -------------------
Nancy C. Reynolds
s/Joshua I. Smith
- - ----------------- Director )
Joshua I. Smith
Director )
- - -----------------
Mary Alice Taylor
40
THE ALLSTATE CORPORATION
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1996
The following consolidated financial statements, notes thereto and related
information of The Allstate Corporation are incorporated herein by reference to
the Company's 1996 Annual Report.
Page*
----
Consolidated Statements of Operations** 57
Consolidated Statements of Financial Position** 58
Consolidated Statements of Shareholders' Equity ** 59
Consolidated Statements of Cash Flows** 60
Notes to Consolidated Financial Statements** 61
Quarterly Results** 88
Common Stock Market Information and Dividend Highlights*** 93
The following additional financial statement schedules and independent auditors'
report and consent are furnished herewith pursuant to the requirements of Form
10-K.
The Allstate Corporation Page
- - ------------------------ ----
Schedules required to be filed under the provisions of Regulation S-X Article 7:
Schedule I Summary of Investments - Other than Investments in Related
Parties S-2
Schedule II Condensed Financial Information of The Allstate Corporation
(Registrant) S-3
Schedule III Supplementary Insurance Information S-8
Schedule IV Reinsurance S-9
Schedule V Valuation and Qualifying Accounts S-10
Schedule VI Supplemental Information Concerning Consolidated Property - S-11
Casualty Insurance Operations
Independent Auditors' Report S-12
Independent Auditors' Consent S-13
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the Consolidated
Financial Statements or in notes thereto.
* Refers to page number in Company's 1996 Annual Report.
** Incorporated by reference in Item 8 herein.
*** Incorporated by reference in Item 5 herein.
S-1
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
($ in millions)
Statement of
Financial
Fair Position
Type of Investment Cost Value Carrying Value
- - ------------------ ---- ----- --------------
Fixed Income Securities, Available for Sale
Bonds:
United States Government and government agencies
and authorities......................................................... $ 3,101 $ 3,339 $ 3,339
States, municipalities and political subdivisions......................... 13,705 14,493 14,493
Foreign governments....................................................... 325 337 337
Public utilities.......................................................... 2,733 2,935 2,935
Convertibles and bonds with warrants attached............................. 448 482 482
All other corporate bonds ................................................ 16,225 16,832 16,832
Mortgage-backed securities................................................... 8,434 8,592 8,592
Redeemable preferred stocks.................................................. 86 85 85
------ ------- -------
Total fixed income securities............................................. 45,057 $47,095 47,095
------ ====== ------
Equity securities:
Common stocks:
Public utilities.......................................................... 258 $ 326 326
Banks, trusts and insurance companies..................................... 249 433 433
Industrial, miscellaneous and all other................................... 2,877 4,154 4,154
Nonredeemable preferred stocks............................................... 614 648 648
------ ------ ------
Total equity securities................................................... 3,998 $ 5,561 5,561
------ ====== ------
Mortgage loans on real estate................................................... 3,146 3,146
Real estate(1).................................................................. 738 738
Policy loans.................................................................... 489 489
Other long-term investments..................................................... 22 22
Short-term investments.......................................................... 1,278 1,278
-------- ------
Total investments......................................................... $ 54,728 $58,329
====== ======
(1) Includes real estate acquired in satisfaction of debt of $286 million.
S-2
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
($ in millions)
Year Ended
December 31,
---------------------------------------
1996 1995 1994
---- ---- ----
REVENUES
Investment income, less investment expense......................... $ 10 $ 6 $ 1
EXPENSES
Interest expense.................................................... 71 65 59
Other operating expenses............................................ 8 8 3
----- ----- -----
79 73 62
----- ----- -----
Loss from operations before income tax benefit and equity in net
income of subsidiaries.............................................. (69) (67) (61)
Income tax benefit..................................................... (31) (26) (22)
---- ----- -----
Loss from operations before equity in net income of subsidiaries....... (38) (41) (39)
Equity in net income of subsidiaries................................... 2,113 1,945 523
----- ----- -----
Net income.......................................................... $ 2,075 $ 1,904 $ 484
===== ===== =====
See accompanying notes to condensed financial information and notes to
Consolidated Financial Statements incorporated herein by reference.
S-3
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF FINANCIAL POSITION
($ in millions) December 31,
------------------------
1996 1995
------ ------
ASSETS
Investment in subsidiaries.......................................... $14,777 $13,793
Short-term investments.............................................. 582 39
Receivable from subsidiaries........................................ 152 -
Other assets........................................................ 99 66
------ -------
TOTAL ASSETS................................................... $15,610 $13,898
====== ======
LIABILITIES
Short-term debt..................................................... $ 152 $ -
Long-term debt...................................................... 1,207 1,207
Payable to subsidiaries............................................. 773 -
Other liabilities................................................... 26 11
------ -------
TOTAL LIABILITIES.............................................. 2,158 1,218
------ ------
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value; 25 million shares
authorized, none issued............................................ - -
Common stock, $.01 par value; 1.0 billion shares authorized;
450 million shares issued; 442 million and 448 million shares
outstanding....................................................... 5 5
Additional capital paid-in.......................................... 3,133 3,134
Unrealized net capital gains........................................ 2,003 2,636
Unrealized foreign currency translation adjustments................. 21 20
Retained income..................................................... 8,958 7,261
Deferred ESOP expense .............................................. (280) (300)
Treasury stock, at cost (8.5 million and 2.5 million shares)........ (388) (76)
------- ----
TOTAL SHAREHOLDERS' EQUITY..................................... 13,452 12,680
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................... $15,610 $13,898
====== ======
See accompanying notes to condensed financial information and notes to
Consolidated Financial Statements incorporated herein by reference.
S-4
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
($ in millions)
Year Ended
December 31,
---------------------------------------
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................. $2,075 $1,904 $ 484
Adjustments to reconcile net income to
net cash provided by operating activities
Equity in net income of subsidiaries.......................... (2,113) (1,945) ( 523)
Dividends received from subsidiaries.......................... 525 455 349
Changes in other operating assets and liabilities............ ( 5) 11 6
----- ----- -----
Net cash provided by operating activities.................. 482 425 316
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital contribution to subsidiary.................................. (23) - -
Change in short-term investments, net.............................. (543) (27) 24
------ ----- -----
Net cash (used in) provided by investing activities......... (566) (27) 24
------ ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of short-term debt, net...................... 152 - -
Transfers to subsidiaries through intercompany loan
agreement, net................................................... (152) - -
Proceeds from issuance of long-term debt............................ - 357 -
Proceeds from borrowings from subsidiaries.......................... 773 - -
Payment to Sears for transfer of ESOP............................... - (327) -
Dividends paid...................................................... (378) (350) (324)
Treasury stock purchases ........................................... (336) (60) (16)
Other............................................................... 25 (18) -
----- ----- -----
Net cash used in financing activities....................... 84 (398) (340)
----- ----- -----
Cash at end of year.................................................. $ - $ - $ -
===== ===== ======
See accompanying notes to condensed financial information and notes to
Consolidated Financial Statements incorporated herein by reference.
S-5
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
1. BASIS OF PRESENTATION
The financial statements of the registrant should be read in conjunction with
the Consolidated Financial Statements and notes thereto included in The Allstate
Corporation 1996 Annual Report to Shareholders.
2. DEBT
Long-term and short-term debt of the Registrant consists of the following:
($ in millions) At December 31,
---------------
1996 1995
---- ----
5.875% Notes, due 1998................................................. $ 300 $ 300
6.75% Notes, due 2003.................................................. 300 300
7.5% Debentures, due 2013.............................................. 250 250
6.76% ACES, due 1998................................................... 357 357
------ ------
Total Long-term debt................................................... $1,207 $1,207
Short-term debt........................................................ 152 -
------ ------
Total debt........................................................ $1,359 $1,207
===== =====
Information regarding the ACES is incorporated by reference to footnote 8 "Debt"
on pages 78 and 79 of the 1996 Annual Report.
In early 1996, the Registrant commenced a commercial paper program to cover its
short-term cash needs. The majority of the proceeds from the issuance of the
commercial paper have been loaned to a subsidiary through an intercompany loan
agreement and used for general corporate purposes.
The Registrant maintains a bank line credit of $1.5 billion which expires on
December 20, 2001. The bank line provides for loans at a spread above
prevailing referenced interest rates. The Registrant pays commitment fees
in connection with the line of credit. As of December 31, 1996, no amounts were
outstanding under the bank line of credit.
The Registrant paid $67 million, $61 million and $59 million of interest on debt
in 1996, 1995 and 1994, respectively.
S-6
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
(CONTINUED)
3. PAYABLE TO SUBSIDIARIES
In November 1996, the Registrant borrowed $750 million from its subsidiary
trusts at a weighted-average interest rate of 7.92%. These borrowings consist of
$550 million and $200 million of debentures which mature in 2026 and 2045,
respectively, and are redeemable by the Registrant in whole or in part beginning
in 2001 and 2006, respectively. The maturity of the $550 million debenture may
be extended to 2045. The Registrant recorded $6 million of interest expense in
1996, related to these borrowings.
S-7
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
AT DECEMBER 31,
-------------------------------------------
RESERVES
($ IN MILLIONS) FOR CLAIMS,
DEFERRED CLAIMS
POLICY EXPENSE
ACQUISITION AND POLICY UNEARNED
SEGMENT COSTS BENEFITS PREMIUMS
- - --------------------------------------------- ------ ---------- --------
1996
Property-liability operations
PP&C................................... $ 777 $13,909 $ 6,070
Discontinued lines and coverages....... - 3,473 2
---- ------ -----
Total property-liability operations.. 777 17,382 6,072
Life operations.......................... 1,837 26,407 102
Corporate and other eliminations......... - - -
----- ------ -----
Total.............................. $ 2,614 $43,789 $ 6,174
===== ====== =====
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
($ IN MILLIONS) PREMIUM CLAIMS, AMORTIZATION
REVENUE CLAIMS OF OTHER PREMIUMS
AND NET EXPENSE POLICY OPERATING WRITTEN
CONTRACT INVESTMENT AND POLICY ACQUISITION COSTS AND (EXCLUDING
SEGMENT CHARGES INCOME (1) BENEFITS COSTS EXPENSES LIFE)
- - --------------------------------------------- --------- ------------ ---------- ------- --------- ------
1996
Property-liability operations
PP&C................................... $17,708 n/a $13,574 $ 1,947 $ 1,771 $17,978
Discontinued lines and coverages....... 658 n/a 913 116 130 608
------ ------ ------ ----- ------ ------
Total property-liability operations.. 18,366 1,758 14,487 2,063 1,901 18,586
Life operations.......................... 1,336 2,045 2,312 203 308 173
Corporate and other eliminations......... - 10 - - (2) -
------ ------ ------ ----- ----- ------
Total.............................. $19,702 $ 3,813 $16,799 $ 2,266 $ 2,207 $18,759
====== ===== ====== ===== ===== ======
(1) A single investment portfolio supports the Property-Liability segment.
AT DECEMBER 31,
----------------------------------------
RESERVES
($ IN MILLIONS) FOR CLAIMS,
DEFERRED CLAIMS
POLICY EXPENSE
ACQUISITION AND POLICY UNEARNED
SEGMENT COSTS BENEFITS PREMIUMS
- - --------------------------------------------- ------ ---------- --------
1995
Property-liability operations
PP&C................................... $ 532 $12,841 $ 5,661
Discontinued lines and coverages...... 72 4,846 469
----- ------ ------
Total property-liability operations.. 604 17,687 6,130
Life operations.......................... 1,400 25,217 58
Corporate and other eliminations......... - - -
----- ------ -----
Total.............................. $ 2,004 $42,904 $ 6,188
===== ====== =====
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
($ IN MILLIONS) PREMIUM CLAIMS, AMORTIZATION
REVENUE CLAIMS OF OTHER PREMIUMS
AND NET EXPENSE POLICY OPERATING WRITTEN
CONTRACT INVESTMENT AND POLICY ACQUISITION COSTS AND (EXCLUDING
SEGMENT CHARGES INCOME (1) BENEFITS COSTS EXPENSES LIFE)
- - --------------------------------------------- --------- ------------ ---------- ------- --------- ------
1995
- - ----
Property-liability operations
PP&C................................... $16,524 n/a $12,648 $ 1,768 $ 1,808 $16,941
Discontinued lines and coverages...... 1,016 n/a 1,040 191 148 1,024
------ ------ ------ ----- ----- ------
Total property-liability operations.. 17,540 1,630 13,688 1,959 1,956 17,965
Life operations.......................... 1,368 1,992 2,381 184 290 180
Corporate and other eliminations......... - 5 - - 1 -
------- ------ ------ ----- ------ ------
Total.............................. $18,908 $ 3,627 $16,069 $ 2,143 $ 2,247 $18,145
====== ===== ====== ===== ===== ======
(1) A single investment portfolio supports the Property-Liability segment.
AT DECEMBER 31,
----------------------------------------
RESERVES
($ IN MILLIONS) FOR CLAIMS,
DEFERRED CLAIMS
POLICY EXPENSE
ACQUISITION AND POLICY UNEARNED
SEGMENT COSTS BENEFITS PREMIUMS
- - --------------------------------------------- ------ ---------- --------
1994
- - ----
Property-liability operations
PP&C................................... $ 447 $12,120 $5,223
Discontinued lines and coverages...... 76 4,643 484
----- ------ -----
Total property-liability operations. 523 16,763 5,707
Life operations.......................... 1,525 23,198 45
Corporate and other eliminations ........ - - -
----- ------ -----
Total.............................. $2,048 $39,961 $5,752
===== ====== =====
(1) A single investment portfolio supports the Property-liability segment.
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
($ IN MILLIONS) PREMIUM CLAIMS, AMORTIZATION
REVENUE CLAIMS OF OTHER PREMIUMS
AND NET EXPENSE POLICY OPERATING WRITTEN
CONTRACT INVESTMENT AND POLICY ACQUISITION COSTS AND (EXCLUDING
SEGMENT CHARGES INCOME (1) BENEFITS COSTS EXPENSES LIFE)
- - --------------------------------------------- --------- ------------ ---------- ------- --------- ------
1994
- - ----
Property-liability operations
PP&C................................... $15,452 n/a $13,563 $ 1,661 $ 1,812 $15,635
Discontinued lines and coverages...... 1,061 n/a 966 175 205 1,104
------ ----- ------ ----- ----- ------
Total property-liability operations. 16,513 1,515 14,529 1,836 2,017 16,739
Life operations.......................... 1,053 1,827 2,031 169 190 170
Corporate and other eliminations ........ - 1 - - 3 -
----- ----- ----- ----- ----- ------
Total.............................. $17,566 $3,343 $16,560 $ 2,005 $ 2,210 $16,909
===== ===== ===== ===== ===== ======
(1) A single investment portfolio supports the Property-liability segment.
S-8
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
($ IN MILLIONS) PERCENT OF
CEDED TO ASSUMED AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------ --------- ---------- ------ --------
YEAR ENDED DECEMBER 31, 1996
- - ----------------------------
Life insurance in force........................ $219,453 $33,232 $ 124 $186,345 0.1%
======= ====== ===== =======
Premiums and contract charges
Life insurance............................... $ 1,163 $ 94 $ - $ 1,069 - %
Accident-health insurance.................... 252 2 17 267 6.4%
Property-liability insurance................. 18,487 479 358 18,366 1.9%
------ --- --- ------
Total premiums and contract charges........ $ 19,902 $ 575 $ 375 $ 19,702 1.9%
====== ===== ===== =======
YEAR ENDED DECEMBER 31, 1995
- - ----------------------------
Life insurance in force........................ $176,615 $14,057 $ 140 $162,698 0.1%
======= ====== ===== =======
Premiums and contract charges
Life insurance............................... $ 1,164 $ 43 $ - $ 1,121 -%
Accident-health insurance.................... 240 4 11 247 4.5%
Property-liability insurance................. 17,178 524 886 17,540 5.1%
------ ---- ---- ------
Total premiums and contract charges........ $ 18,582 $ 571 $ 897 $ 18,908 4.7%
======= ======= ====== =======
YEAR ENDED DECEMBER 31, 1994
- - ----------------------------
Life insurance in force........................ $153,905 $11,649 $ 129 $142,385 0.1%
======= ====== ===== =======
Premiums and contract charges
Life insurance............................... $ 868 $ 34 $ - $ 834 -%
Accident-health insurance.................... 224 14 9 219 4.1%
Property-liability insurance................. 16,177 549 885 16,513 5.4%
------ ---- ---- -------
Total premiums and contract charges........ $ 17,269 $ 597 $ 894 $ 17,566 5.1%
======= ====== ===== ========
S-9
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
---------------------------------------
($ IN MILLIONS)
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ADDITIONS DEDUCTIONS(1) OF PERIOD
- - -------------------------------------------- --------- -------- --------- ---------- ---------
Year Ended December 31, 1996
- - ----------------------------
Allowance for estimated losses on mortgage loans and real estate $100 $31 $55 $76
Allowance for reinsurance recoverable 246 18 101 163
Allowance for premium installment receivable 30 111 85 57
YEAR ENDED DECEMBER 31, 1995
- - ----------------------------
Allowance for estimated losses on mortgage loans and real estate $ 97 $53 $50 $100
Allowance for reinsurance recoverable 126 133 13 246
Allowance for premium installment receivables - 63 33 30
YEAR ENDED DECEMBER 31, 1994
- - ----------------------------
Allowance for estimated losses on mortgage loans $ 93 $65 $61 $ 97
Allowance for reinsurance recoverable 110 26 10 126
(1) Deductions in allowance for estimated losses on mortgage loans represent
amounts transferred to real estate. Deductions in allowance for
reinsurance recoverable represent write-offs, net of recoveries, of
amounts determined to be uncollectible.
S-10
THE ALLSTATE CORPORATION AND SUBSIDIARY
SCHEDULE VI
SUPPLEMENTAL INFORMATION CONCERNING CONSOLIDATED
PROPERTY-CASUALTY INSURANCE OPERATIONS
($ IN MILLIONS) DECEMBER 31,
-------------------------------------------------
1996 1995 1994
------ ------ ------
Deferred policy acquisition costs..................................... $ 777 $ 604 $ 523
Reserves for unpaid claims and claim adjustments...................... 17,382 17,687 16,763
Unearned premiums..................................................... 6,072 6,130 5,707
($ IN MILLIONS) YEAR ENDED DECEMBER 31,
-------------------------------------------------
1996 1995 1994
------ ------ ------
Earned premiums....................................................... $18,366 $17,540 $16,513
Net investment income................................................. 1,758 1,630 1,515
Claims and claims adjustment expense incurred
Current year........................................................ 14,823 14,113 15,241
Prior year.......................................................... (336) (425) (712)
Amortization of deferred policy acquisition costs..................... 2,063 1,959 1,836
Paid claims and claims adjustment expense............................. 15,045 12,938 13,242
Premiums written...................................................... 18,586 17,965 16,739
S-11
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
The Allstate Corporation
We have audited the consolidated financial statements of The Allstate
Corporation and subsidiaries as of December 31, 1996 and 1995, and for each of
the three years in the period ended December 31, 1996, and have issued our
report thereon dated February 21, 1997; such consolidated financial statements
and report are included in The Allstate Corporation 1996 Annual Report to
Stockholders and are incorporated herein by reference. Our audits also included
the financial statement schedules of The Allstate Corporation and subsidiaries,
listed in the Index at Item 14 (a) 2. These financial statement schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
Chicago, Illinois
February 21, 1997
S-12
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-88540 and 333-10857 on Form S-3 and Registration Statement Nos. 33-77928,
33-93758, 33-93760, 33-93762, 33-99132, 33-99136, 33-99138, 333-04919, 333-16129
and 333-23309 on Form S-8 of The Allstate Corporation of our reports dated
February 21, 1997, appearing in or incorporated by reference in this Annual
Report on Form 10-K of The Allstate Corporation for the year ended December 31,
1996.
Chicago, Illinois
March 25, 1997
S-13
EXHIBIT INDEX
The Allstate Corporation Form 10-K
For the Year Ended December 31, 1996
Exhibit Sequential
No. Document Description Page No.
- - ------- -------------------- ----------
3.(a) Restated Certificate of Incorporation
of The Allstate Corporation as amended
effective August 18, 1995.
Incorporated by reference to Exhibit 3
to the Company's Quarterly Report on
Form 10-Q for the quarter ended
September 30, 1995**
3.(b) By-Laws as amended effective June 29,
1995. Incorporated by reference to
the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1995.**
4. Registrant hereby agrees to furnish to the
Commission, upon request, with the instruments
defining the rights of holders of each issue of
long-term debt of the Registrant and its consolidated
subsidiaries.
10.1 Master Agreement for Systems
Operations Services, dated as
of November 30, 1992, between
Allstate Insurance Company and
Advantis, a New York general
partnership. Incorporated by
reference to Exhibit 10.5 to
Registration Statement No. 33-59676.
E-1
Exhibit Sequential
No. Document Description Page No.
- - ------- -------------------- ----------
10.2 Human Resources Allocation Agreement,
dated as of May 27, 1993, among Sears,
Roebuck and Co., The Allstate Corporation
and Allstate Insurance Company.
Incorporated by reference to Exhibit
10.14 to Registration Statement
No. 33-59676.
10.3 IPO Related Intercompany Agreement,
dated as of May 29, 1993, between The
Allstate Corporation and Sears, Roebuck
and Co. Incorporated by reference to
Exhibit 10.15 to Registration Statement
No. 33-59676.
10.4 Tax Sharing Agreement dated May 14, 1993
between Sears, Roebuck and Co. and its
subsidiaries. Incorporated by reference
to Exhibit 10.6 to Amendment No. 3 to
Registration Statement No. 33-59676.
10.5 Separation Agreement dated February 20,
1995 between Sears, Roebuck and Co.
and the Company. Incorporated by
reference to Exhibit 10(a) to the
Company's Current Report on Form 8-K
dated February 22, 1995.**
10.6 Marketing File Separation Agreement
dated February 20, 1995 between Sears,
Roebuck and Co. and the Company.
Incorporated by reference to Exhibit
10(b) to the Company's Current Report
on Form 8-K dated February 22, 1995.**
E-2
Exhibit Sequential
No. Document Description Page No.
- - ------- -------------------- ----------
10.7 Research Services Agreement dated
February 20, 1995 between Sears,
Roebuck and Co. and the Company.
Incorporated by reference to Exhibit
10(c) to the Company's Current
Report on Form 8-K dated February 22,
1995.**
10.8 Supplemental Tax Sharing Agreement
dated January 27, 1995 between Sears,
Roebuck and Co. and the Company.
Incorporated by reference to Exhibit
10(d) to the Company's Current Report
on Form 8-K dated February 22, 1995.**
10.9 Supplemental Human Resources Allocation
Agreement dated January 27, 1995 between
Incorporated by reference to
Exhibit 10(e) to the Company's
Current Report on Form 8-K dated
February 22, 1995.**
10.10 Profit Sharing and Employee Stock
Ownership Plan Allocation Agreement
dated January 27, 1995 between Sears,
Roebuck and Co. and the Company.
Incorporated by reference to Exhibit
10(f) to the Company's Current Report
on Form 8-K dated February 22, 1995.**
10.11* Allstate Insurance Company Supplemental
Retirement Income Plan, as amended and
restated effective January 1, 1996.
Incorporated by reference to Exhibit 10.11
to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995.**
10.12* The Allstate Corporation Equity
Incentive Plan for Non-Employee
Directors, as amended and restated
on November 12, 1996.
E-3
Exhibit Sequential
No. Document Description Page No.
- - ------- -------------------- ----------
10.13* The Allstate Corporation
Amended and Restated Deferred
Compensation Plan for Non-Employee
Directors. Incorporated by
reference to Exhibit 4 to
Registration Statement
No. 333-16129
10.14* The Allstate Corporation Annual
Executive Incentive Compensation
Plan. Incorporated by reference
to Appendix A to the Company's
Proxy Statement dated March 31,
1994.**
10.15* The Allstate Corporation Long-Term
Executive Incentive Compensation
Plan. Incorporated by reference to
Appendix B to the Company's Proxy
Statement dated March 31, 1994.**
10.16* The Allstate Corporation Equity
Incentive Plan, as amended and restated
on November 12, 1996.
10.17* Form of stock option under the
Equity Incentive Compensation Plan.
Incorporated by reference to
Exhibit 10.18 to the Company's
Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.**
10.18* Form of restricted stock grant under the Equity
Incentive Plan.
10.19* The Allstate Corporation Deferred
Compensation Plan as amended and
restated effective January 1, 1996.
Incorporated by reference to
Exhibit 4 to the Company's
Registration Statement No. 33-99136.
10.20* The Allstate Corporation Employees
Replacement Stock Plan, as amended
and restated on November 12, 1996.
E-4
Exhibit Sequential
No. Document Description Page No.
- - ------- -------------------- ----------
10.21* Form of stock option under the
Replacement Stock Plan.
Incorporated by reference to
Exhibit 10.21 to the Company's
Annual Report on Form 10-K for
the fiscal year ended
December 31, 1995.**
10.22* Form of restricted stock grant under
the Replacement Stock Plan.
Incorporated by reference to
Exhibit 10.22 to the Company's
Annual Report on Form 10-K for
the fiscal year ended
December 31, 1995.**
10.23* Retirement agreement dated August 9,
1994 between Wayne E. Hedien and the
Company. Incorporated by reference
to the Company's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1994.**
11 Computation of Earnings per
Common Share.
12 Computation of Earnings to Fixed
Charges Ratio.
13 Portions of The Allstate Corporation
1996 Annual Report incorporated by
reference into Part I or Part II of
the Registrant's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1996.
21 Subsidiaries of the Registrant.
23 Independent Auditors' Consent.
E-5
Exhibit Sequential
No. Document Description Page No.
- - ------- -------------------- ----------
27 Financial Data schedule, submitted
electronically to the Securities and
Exchange Commission for information
only and not filed.
- - --------------------
* A management contract or compensatory plan or arrangement.
** SEC File No. 1-11840
E-6
Exhibit 11
The Allstate Corporation and Subsidiaries
Computation of Earnings Per Common Share
(In millions, except for per share data) Twelve Months Ended December 31,
-------------------------------------------------
1996 1995 1994
---- ---- ----
Net Income $2,075 $1,904 $484
======== ======== ======
Primary earnings per common share computation:
Weighted average number of common shares (1) 445.4 448.5 449.8
Assumed exercise of dilutive stock options 2.8 1.0 -
---------- ---------- --------
Adjusted weighted number of common shares outstanding 448.2 449.5 449.8
========== ========== ========
Primary net income per share $4.63 $4.24 $1.08
=========== =========== =========
Fully diluted earnings per common share computation:
Weighted average number of common shares (1) 445.4 448.5 449.8
Assumed exercise of dilutive stock options 3.5 2.6 -
---------- ---------- --------
Adjusted weighted number of common shares outstanding 448.9 451.1 449.8
========== ========== ========
Fully diluted net income per share $4.62 $4.22 $1.08
=========== =========== =========
(1) Common shares held as treasury shares were 8.5 million, 2.5 million
and .6 million at December 31, 1996, 1995 and 1994, respectively.
E-7
THE ALLSTATE CORPORATION
COMPUTATION OF EARNINGS TO FIXED CHARGES RATIO
Exhibit 12
For the Year Ended December 31,
--------------------------------------------------------
(In millions) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
1. Income (loss) from continuing operations
before income taxes and cumulative
effect of accounting changes, equity
in net income of unconsolidated
subsidiary, and dividends on preferred
securities of subsidiary trust $2,669 $2,421 $120 $1,282 ($1,528)
2. Equity in income of 100% owned subsidiary - 49 107 94 103
3. Dividends from less than 50% owned subsidiary 2 2 - - -
------ ------ ---- ------ -----
4. Income(loss) from continuing operations
before income taxes and cumulative effect
of accounting changes $2,671 $2,472 $227 $1,376 ($1,425)
----- ----- --- ----- -----
Fixed Charges:
5. Interest of indebtedness $ 76 $ 72 $ 60 $ 81 $ -
6. Interest factor of annual rental expense 71 90 95 96 92
---- ---- ---- ---- ----
7. Total fixed charges (5+6) $ 147 $162 $155 $177 $92
---- ---- ---- ---- ---
8. Dividends on redeemable preferred securities 6 - - - -
9. Total fixed charges and dividends on
redeemable preferred securities $ 153 $ 162 $ 155 $ 177 $ 92
---- ---- ---- ----- ---
10. Income (loss) from continuing operations
before income taxes, cumulative effect of
accounting changes and fixed charges (1+4) $2,818 $2,634 $382 $1,553 ($1,333)
===== ===== === ===== =====
11. Ratio of earnings to fixed charges 18.4X 16.3X 2.5X 8.8X (B)
==== ==== === ===
12. Interest credited to contractholder funds $1,196 $1,191 $1,079 $1,104 $1,164
13. Total fixed charges including dividends on
redeemable preferred securities and interest
credited to contractholder funds (9+12) $1,349 $1,353 $1,234 $1,281 $1,256
------ ------ ------ ------ -----
14. Income (loss) from continuing operations
before income taxes, cumulative effect of
accounting changes and fixed charges
including interest credited to
investment contracts (4+7+12) $4,014 $3,825 $1,461 $2,657 ($169)
===== ===== ===== ===== ====
15. Ratio of earnings to fixed charges, including
interest credited to investment contracts 3.0X 2.8X 1.2X 2.1X (C)
=== === === ===
(A) The Company has authority to issue up to 25,000,000 shares of preferred
sock, par value $1.00 per share; however, there are currently no shares
outstanding and the Company does not have a preferred stock dividend
obligation. Therefore, the Ratio of Earnings to Fixed Charges and Preferred
Stock Dividends is equal to the Ratio of Earnings to Fixed Charges and is
not disclosed separately. Certain items have been reclassified to conform
with the current presentation.
(B) For purposes of this computation, earnings consist of income(loss) from
continuing operations before income taxes plus fixed charges. Fixed charges
consist of interest expense, amortization of financing costs, that portion
of rental expense that is representative of the interest factor and
dividends on redeemable preferred securities. Earnings of the year ended
December 3, 1992 were not sufficient to cover fixed charges by $1,425
million. The loss from 1992 resulted primarily from the impact of Hurricane
Andrew which caused pre-tax losses after reinsurance of $2.5 billion.
excluding losses from Hurricane Andrew, the 1992 ratio was 12.7x.
(C) For purposes of this computation, earnings consist of income (loss) from
continuing operations before income taxes plus fixed charges. Fixed charges
consist of interest expense (including interest credited to investment
contracts), amortization of financing costs, that portion of rental expense
that is representative of the interest factor and dividends on redeemable
preferred securities. Earnings for the year ended December 31, 1992 were
not sufficient to cover fixed charges by $1,425 million. The loss in 1992
resulted primarily from the impact of Hurricane Andrew which caused pre-tax
losses after reinsurance of $2.5 billion. Excluding losses from Hurricane
Andrew, the 1992 ratio was 1.9x.
E-8