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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, 1997
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)
7.125% Senior Quarterly Interest Bonds New York Stock Exchange
Securities registered pursuant to Section 12(g)
of the Act: None
On January 30, 1998, Registrant had 422,722,298 shares of Common Stock
outstanding. Of these, approximately 350,000,000 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 30, 1998) of approximately $30.98
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, II and III of this Form 10-K incorporate by reference certain
information from the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held on May 19, 1998 (the "1998 Proxy Statement").
TABLE OF CONTENTS
PART I Page
Item 1. Business........................................................................................1
Recent Developments.........................................................................2
Risk Factors Affecting Allstate.............................................................2
Allstate Strategy...........................................................................3
Property-Liability Insurance Business.......................................................5
Discontinued Lines and Coverages...........................................................10
Life and Annuity Business..................................................................19
Capital Requirements.......................................................................20
Investments................................................................................21
Regulation.................................................................................22
Geographic Distribution of Insurance.......................................................26
Seasonality................................................................................26
Employees..................................................................................27
Service Marks..............................................................................27
Forward-Looking Statements.................................................................27
Executive Officers.........................................................................31
Item 2. Properties.....................................................................................32
Item 3. Legal Proceedings...............................................................................32
Item 4. Submission of Matters to a Vote of Security Holders.............................................33
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholders Matters..........................33
Item 6. Selected Financial Data........................................................................33
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................................34
Item 7A Quantitative and Qualitative Disclosures About Market Risk........................................34
Item 8. Financial Statements and Supplementary Data.....................................................34
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................................................34
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PART III Page
Item 10. Directors and Executive Officers of the Registrant.............................................34
Item 11. Executive Compensation.........................................................................34
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................35
Item 13. Certain Relationships and Related Transactions.................................................35
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................35
Signatures..................................................................................................36
Index to Financial Statement Schedules.....................................................................S-1
Exhibit Index..............................................................................................E-1
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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 principally 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 1996 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. In 1996 Allstate maintained estimated national market
shares in these lines of approximately 12.4% and 11.7%, respectively. 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 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, mortgage
pool business, and other commercial business in run-off, as well as the
historical results of the commercial and reinsurance businesses sold in 1996.
Allstate markets its products through a variety of distribution channels, with
the core of its PP&C distribution system being a broad-based network of
approximately 15,200 exclusive agents (employee and non-employee) in the United
States and Canada. Allstate also uses independent and specialized brokers to
expand market reach, including over 7,000 independent agents appointed to market
non-standard auto business.
Allstate Life sells life insurance, annuity and group pension products.
Allstate Life distributes its products through Allstate agents which include
life specialists, banks, independent agents, brokers 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 on pages A-55 and A-56 of the 1998 Proxy Statement, incorporated
herein by reference in response to Item 8 hereof.
1
RECENT DEVELOPMENTS
On January 27, 1998, the Company announced that it made a cash
offer to purchase all of the outstanding shares of Pembridge, Inc.,
("Pembridge") a Canadian auto insurer, for Cdn. $20 per share. The aggregate
cost of the shares would be approximately $275 million, based on U.S.-Canada
currency exchange rates on January 27, 1998. The offer is open for acceptance
through March 27, 1998, unless it is extended or withdrawn. The offer is
conditioned on the tender of at least 90% of the Pembridge shares and receipt of
required regulatory approvals.
On January 26, 1998, the Company announced that it filed an
application with the Office of Thrift Supervision for approval to operate a
federal savings bank. The business plan filed with the Company's application
focused on trust and cash management services.
On December 16, 1997, the Company issued $250,000,000 of 7
1/8% Senior Quarterly Interest Bonds ("QUIBS"). The QUIBS mature on December 15,
2097, subject to the Company's option to redeem the QUIBS in whole or in part on
or after December 19, 2002, at 100% of principal amount plus accrued interest to
the redemption date. The Company also has the right to shorten the maturity of
the QUIBS to the extent required to preserve the Company's ability to deduct
interest paid by it on the QUIBS. The proceeds of the offering were used for
general corporate purposes, including the Company's stock repurchase program.
On November 12, 1997, Allstate announced that it had sold its
interest in two Japanese insurance companies to its former joint venture
partner, The Saison Group.
On November 10, 1997, the Company announced formation of a new
subsidiary, Allstate New Jersey Insurance Company, a New Jersey insurance
corporation, to write automobile and homeowners insurance in New Jersey,
commencing January 1, 1998. The new subsidiary will serve as a replacement
carrier in New Jersey for Allstate Insurance Company and Allstate Indemnity
Company. This resolves the Company's application to withdraw from the
property-liability market in New Jersey.
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 an 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 flows; (iii) the inherent uncertainty
in the process of
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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
are subject, various regulatory and public 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 adverse impact to investment income
in low interest rate environments due to funds being reinvested in securities
yielding less than the average portfolio rate; (ix) 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 (x) the uncertainty involved in estimating the availability of
reinsurance and the collectibility of reinsurance recoverables.
See also "Forward-Looking Statements" in this Form 10-K for several
important factors that could cause the Company's actual results and experience,
with respect to forward-looking statements in this Form 10-K and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" incorporated herein in response to Item 7, to differ materially from
anticipated results or other expectations expressed in the Company's
forward-looking statements.
ALLSTATE STRATEGY
Allstate's strategy is to focus on the profitable growth of its private
passenger automobile and homeowners insurance business; to increase cross-sales
of its products to its customer base; to expand distribution through existing
non-agency distribution channels and through the addition of new distribution
channels; to manage its catastrophe exposure; to expand its offering of life and
annuity products; and to seek opportunities in the international markets. This
strategy is designed to capitalize on: (1) the strength of the Allstate name,
(2) Allstate's network of exclusive agents, (3) Allstate's auto insurance
capabilities, and (4) additional distribution channels available to Allstate.
Allstate's marketing strategy for standard auto and homeowners
insurance varies by geographic area. 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 attempting to grow its
standard auto business more rapidly in areas where the regulatory climate is
more conducive to attractive returns. 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
3
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 by capitalizing on
an established distribution system, technology and claims capabilities and by
tailoring pricing and products to reach a broader market. Allstate plans to
continue to develop opportunities in this market in part, by expanding its
independent agent distribution channel. Allstate is attempting to manage its
homeowners exposure on policies in areas where the potential loss from
catastrophes exceeds acceptable levels. 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 approved and
introduced. Less than 6% of the United States population reside in areas
designated by Allstate as standard auto limited growth markets. As a result of
Allstate's efforts to introduce policy changes and to purchase catastrophe
insurance coverage, the homeowners limited growth markets have been reduced to
areas where approximately 13% of the United States population resides.
Allstate Life has been growing its business through the development of
new customer focused products, the establishment of new marketing arrangements,
increased cross-sales of life and annuity products to existing Allstate
customers, offering a variety of competitive fee-based and spread based products
to satisfy customer preferences in various interest rate environments, and
leveraging existing scale to increase efficiency and effectiveness, in part,
through investments in technology and the consolidation of certain facilities.
Allstate Life's life insurance and annuity products are marketed through
Allstate agents (including life specialists), banks, independent agents, brokers
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 exclusive agency force of approximately 15,200 full-time
agents is at the core of its PP&C distribution system. Allstate also uses over
2,800 independent agents to market a full range of Allstate insurance products
to individuals, mostly in rural markets not served by Allstate agents, and over
7,000 independent agents appointed by Allstate's subsidiary, Deerbrook Insurance
Company ("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.
In 1997 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 and planned international businesses contribute significantly to its
financial results.
4
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 BUSINESS
Allstate's property-liability insurance business consists of PP&C and
Discontinued Lines and Coverages. PP&C, which accounted for $18.6 billion (or
79%) of Allstate's 1997 statutory written premiums, writes primarily private
passenger automobile and homeowners insurance policies in 49 states, the
District of Columbia and Canada. Since 1997 Allstate has also written private
passenger automobile insurance in Germany. Operating in approximately 11,300
locations, Allstate agents produce more than 94% 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, mortgage pool business and
other commercial insurance business in run-off, as well as the historical
results of the commercial and reinsurance businesses sold in 1996.
Principally engaged in private passenger automobile and homeowners
insurance, PP&C accounted for substantially all of Allstate's total
property-liability statutory premiums. Allstate was the country's second largest
personal property and casualty insurer for both private passenger automobile and
homeowners insurance in 1996. 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, boat owners and selected
commercial property and casualty coverages. 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 had a countrywide market share of approximately 17.3% of the
non-standard market in 1996. 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
5
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. Allstate has targeted the homeowners
insurance business as a market with substantial profitable growth opportunities
for the Company as the implementation of catastrophe management initiatives
allows the Company to re-enter certain homeowners markets.
Allstate, unlike the majority of its 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.
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 settlement of
claims. The Company has focused on claims involving alleged personal injury in
connection with collisions involving relatively minor impact. During 1997
Allstate continued the testing of redesigned claim settlement procedures for
auto physical damage claims. As these procedures are implemented during 1998,
Allstate will focus on the consistency and accuracy of estimating claim losses.
As is true for the property-liability industry in general, 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 1997 for
standard and non-standard auto were approximately the same as in 1996. Retention
rates for
6
homeowners declined in 1997, having been adversely impacted by Allstate's
catastrophe management initiatives. These initiatives are discussed below, under
"Catastrophe Exposure."
The personal lines private passenger auto and homeowners businesses are
highly competitive. As of December 31, 1996 over 1,400 insurance companies were
in the market, with five groups of companies (State Farm, Allstate, Farmers,
Nationwide and USAA) writing approximately 47% of the private passenger
automobile premiums written and approximately 48% of the homeowners premiums
written in the United States. State Farm maintains the leading share in the
automobile and homeowners market and had 21.4% of the automobile market and
23.4% of the homeowners market in 1996. Together, State Farm and Allstate had
34.1% of the total United State's auto and homeowners market in 1996.
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, appropriately price risks and cross-sell its products within its
customer base.
Approximately $45 billion of industry personal lines premiums are
generated by independent agencies, and the remaining $91 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 exclusive agency force 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.
A majority of Allstate's 15,200 exclusive agents are employee agents.
In future years, Allstate expects that the percentage of its agents who are
independent contractor exclusive agents will increase substantially. In 1990,
Allstate instituted an independent contractor 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. At December 31, 1997, independent contractor exclusive agents,
including agents in training to become independent contractor exclusive agents,
represented approximately 40% of Allstate agents. Allstate has a strategic
initiative intended to improve agencies' productivity to sell to and to service
customers and to align local processes, programs and policies, including workers
classification, with Allstate objectives. The Company is negotiating an
agreement with the Department of Treasury, Internal Revenue Service, to ensure
continuation of the employee agent program.
7
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.
Allstate has experienced two severe catastrophes in recent years which resulted
in losses of $2.33 billion relating to Hurricane Andrew (net of reinsurance) and
$1.75 billion relating to the Northridge earthquake. While management believes
Allstate's catastrophe management strategies, described below, will greatly
reduce the severity of future losses, Allstate continues to be exposed to
similar or greater catastrophes (see ARisk Factors" and AForward-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 exposure to potential earthquake losses in
California are now limited by its participation in the California Earthquake
Authority, as described below. Other areas in the United States in which
Allstate is exposed to potential losses from earthquakes include areas in the
central United States surrounding 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. Allstate continues
to evaluate alternative business strategies to more effectively manage its
exposure to catastrophe losses in these and other areas.
Allstate has implemented 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 and has expanded its use of deductibles 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. 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
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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 in its decisions
concerning pricing, underwriting and reinsuring risks in areas of catastrophe
exposure). These models are subject to uncertainties due to continual updating
and revisions 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, Allstate
believes that the programs described below have significantly reduced the
probable maximum loss from hurricanes in Florida or in the Northeastern portion
of the United States ("Northeast") and earthquakes in California.
The question of the magnitude of potential impacts of global climate
change will be a continuing source of discussion. However, the Intergovernmental
Panel on Climate Change reported that there is a discernible human influence on
the climate change being observed. In light of this, Allstate continues to
explore and analyze credible scientific evidence, including, but not limited to,
the impact of climate change, that may affect Allstate's potential exposure
under its insurance policies.
During 1997, the Company continued implementation of its plan to
reorganize its Florida property business in order to reduce its exposure to
hurricane losses. The Allstate Floridian Insurance Company ("Floridian") was
formed in 1996, to sell and service Allstate's Florida property policies.
Existing Allstate property policies were transferred to Floridian as the
policies were renewed. By the end of 1997, Allstate transferred substantially
all of its property policies to Floridian. The remaining property policies will
be transferred in 1998. Floridian entered into catastrophe reinsurance
agreements with a non-affiliated entity which provides access to 80% of $500
million of catastrophe reinsurance protection in excess of $1.00 billion, up to
an aggregate limit of $800 million through 1999. In addition, Floridian has
access to over 90% of an estimated $600 million of reinsurance from the Florida
Hurricane Catastrophe Fund. Also, in 1996 and 1997, Allstate non-renewed 156,000
Florida property policies with annual premiums of $90 million, completing its
agreement to sell renewal rights to Clarendon National Insurance Company.
Allstate has entered into a three-year excess of loss reinsurance
contract covering property policies in the Northeast, effective June 1, 1997.
The reinsurance program provides up to 95% of $500 million of reinsurance
protection for catastrophe losses in excess of an estimated $750 million
retention subject to an annual limit of $500 million and an aggregate policy
limit of $1.00 billion.
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In late 1996 the California Earthquake Authority ("CEA") commenced
operation. The CEA is a privately-financed, publicly-managed state agency
created to provide coverage for earthquake damage resulting from seismic events.
Insurers selling homeowner insurance in California are required to offer
earthquake insurance to their customers either through their company or
participation in the CEA. By the end of 1997, all of Allstate's traditional
earthquake policies and mini-earthquake policies were renewed into the CEA or
the customer decided to non-renew their earthquake insurance. Allstate's
homeowners policy will continue to include coverages for losses caused by
explosions, theft, glass breakage and fires following an earthquake, which are
not written by the CEA.
Approximately $700 million of funds needed to create the CEA were
obtained from assessments of participating insurance companies. In 1996
Allstate's pretax assessment, including related expenses, was approximately $150
million. Additional funds needed to operate the CEA will be obtained through
assessments of participating insurance companies, reinsurance and bond issuances
funded by policyholder assessments. Allstate may be assessed in the future
depending on the funding level of the CEA. All future assessments to
participating CEA insurers are based on homeowners insurance market share as of
December 31 of the preceding year. Allstate does not expect its portion of these
additional contingent assessments, if needed in 1998, to exceed $700 million
assuming its current market share does not materially change.
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. On
February 9, 1998, the House Banking Subcommittee on Housing and Community
Opportunity submitted the Homeowner's Insurance Availability Act to the House
Banking Committee. The Company is unable to determine whether, or in what form,
such proposed legislation could be enacted or what the effect on the Company
would 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 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
10
damages, 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 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 added
asbestos exclusions. Most general liability policies issued prior to 1987
contain annual aggregate limits for 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 for
mass tort exposures. Mass tort exposures primarily relate to 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 AProperty-Liability Claims and Claims Expense
Reserves" on pages A-10 to A-13 of the 1998 Proxy Statement, incorporated herein
by reference in response to Item 7 hereof. For information regarding Superfund
proposed legislation, see "Regulatory Initiatives and Proposed Legislation"
below.
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
11
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
on pages A-42 to A-45 of the 1998 Proxy Statement, 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 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 and collectibility 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 on pages A-42 to A-45 of the 1998
Proxy Statement, incorporated herein by reference in response to Item 8 hereof.
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 A-26
of the 1998 Proxy Statement, 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 A-25
of the 1998 Proxy Statement, incorporated herein by reference in response to
Item 8 hereof.
12
GROSS
($ IN MILLIONS)
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
----------- ----------- -----------
GROSS RESERVE FOR PROPERTY-LIABILITY CLAIMS AND CLAIMS EXPENSE,
BEGINNING OF YEAR $ 17,382 $ 17,687 $ 16,763
INCURRED CLAIMS AND CLAIMS EXPENSE
PROVISION ATTRIBUTABLE TO THE CURRENT YEAR 14,268 15,186 14,530
DECREASE IN PROVISION ATTRIBUTABLE TO PRIOR YEARS (618) (338) (235)
----------- ----------- -----------
TOTAL CLAIMS AND CLAIMS EXPENSE 13,650 14,848 14,295
CLAIM PAYMENTS
CLAIMS AND CLAIMS EXPENSE ATTRIBUTABLE TO CURRENT 8,300 8,073 8,490
YEAR
CLAIMS AND CLAIMS EXPENSE ATTRIBUTABLE TO PRIOR YEARS 5,329 5,711 4,881
CLAIMS AND CLAIMS EXPENSE ATTRIBUTABLE TO DISPOSITION OF 0 1,369 0
OPERATIONS
----------- ----------- -----------
TOTAL PAYMENTS 13,629 15,153 13,371
----------- ----------- -----------
GROSS RESERVE FOR PROPERTY-LIABILITY CLAIMS AND CLAIMS EXPENSE,
END OF YEAR 17,403 17,382 17,687
LESS: ARCO RESERVE BALANCES NOT SUBJECT TO DEVELOPMENT 0 0 361
(1)
----------- ----------- -----------
GROSS RESERVE FOR PROPERTY-LIABILITY CLAIMS AND CLAIMS EXPENSE,
END OF YEAR AS SHOWN ON 10-K LOSS RESERVE $ 17,403 $ 17,382 $ 17,326
DEVELOPMENT TABLE
=========== =========== ===========
(1) ARCO WAS SOLD IN 1996. IN 1995, LOSS DEVELOPMENT INFORMATION FOR ARCO
(AIC'S INDIRECTLY OWNED BRITISH REINSURANCE SUBSIDIARY) IS NOT AVAILABLE
ON A COMPARABLE BASIS. THIS INFORMATION IS NOT MATERIAL ($97.7 MILLION IN
GROSS CLAIMS AND CLAIMS EXPENSE IN 1995 AND $85.8 MILLION IN 1995 GROSS
PAYMENTS), AND WAS TREATED AS ATTRIBUTABLE TO CURRENT YEAR.
13
NET
($ IN MILLIONS)
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
----------- ---------- -----------
NET RESERVE FOR PROPERTY-LIABILITY CLAIMS AND CLAIMS
EXPENSE,
BEGINNING OF YEAR $ 15,598 $ 16,156 $ 15,406
INCURRED CLAIMS AND CLAIMS EXPENSE
PROVISION ATTRIBUTABLE TO THE CURRENT YEAR 14,013 14,823 14,113
DECREASE IN PROVISION ATTRIBUTABLE TO PRIOR YEARS (677) (336) (425)
----------- ---------- -----------
TOTAL CLAIMS AND CLAIMS EXPENSE 13,336 14,487 13,688
CLAIM PAYMENTS
CLAIMS AND CLAIMS EXPENSE ATTRIBUTABLE TO CURRENT YEAR 8,148 7,522 8,190
CLAIMS AND CLAIMS EXPENSE ATTRIBUTABLE TO PRIOR YEARS 5,013 5,787 4,748
CLAIMS AND CLAIMS EXPENSE ATTRIBUTABLE TO DISPOSITION OF 0 1,736 0
OPERATIONS
----------- ---------- -----------
TOTAL PAYMENTS 13,161 15,045 12,938
----------- ---------- -----------
NET RESERVE FOR PROPERTY-LIABILITY CLAIMS AND CLAIMS
EXPENSE,
END OF YEAR 15,773 15,598 16,156
LESS: ARCO RESERVE BALANCES NOT SUBJECT TO DEVELOPMENT (1) 0 0 320
----------- ---------- -----------
NET RESERVE FOR PROPERTY-LIABILITY CLAIMS AND CLAIMS
EXPENSE,
END OF YEAR AS SHOWN ON 10-K LOSS RESERVE DEVELOPMENT $ 15,773 $ 15,598 $ 15,836
TABLE (2)
=========== ========== ===========
(1) ARCO WAS SOLD IN 1996. IN 1995, LOSS DEVELOPMENT INFORMATION FOR ARCO
(AIC'S INDIRECTLY OWNED BRITISH REINSURANCE SUBSIDIARY) IS NOT AVAILABLE
ON A COMPARABLE BASIS. THIS INFORMATION IS 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 CLAIMS EXPENSE ARE NET OF REINSURANCE OF $1.63
BILLION, $1.78 BILLION AND $1.53 BILLION, AT DECEMBER 31, 1997, 1996 AND
1995, RESPECTIVELY.
14
The year-end 1997 gross reserves of $17.40 billion for
property-liability insurance claims and claims expense, as determined under
GAAP, were $1.80 billion more than the reserve balance of $15.60 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 $1.63 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.
As the tables above illustrate, Allstate's net reserve for
property-liability insurance claims and claims expense at the end of 1996
developed favorably in 1997 by $677 million, compared to favorable development
of the gross reserves of $618 million. Net reserve development in 1996 and 1995
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, were not significantly
affected by reinsurance, whereas Discontinued Lines and Coverages involved a
higher level of ceded reinsurance protection. The more favorable development in
the net reserves in 1996 and 1995 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 decreased ceded loss reserves.
This decrease 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 A-10 to
A-13 of the 1998 Proxy Statement, 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 A-12 and A-13 of the 1998
Proxy Statement, incorporated herein by reference in response to Item 7 hereof.
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.
15
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)
--------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
---- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----
Gross Reserves for
Unpaid Claims and
Claims Expense $8,793 $10,035 $10,962 $12,117 $13,136 $14,902 $15,209 $16,414 $17,326 $17,382 $17,403
Deduct: Reinsurance
Recoverable 1,076 1,180 1,066 1,028 1,066 1,419 1,338 1,298 1,490 1,784 1,630
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
Reserve For Unpaid
Claims and Claims Expense $7,717 $8,855 $9,896 $11,089 $12,070 $13,483 $13,871 $15,116 $15,836 $15,598 $15,773
- - -------------------------
Paid (cumulative) as of:
- - ------------------------
One year later 3,074 3,516 4,295 4,558 4,550 4,955 4,472 4,748 5,787 5,013
Two years later 4,586 5,279 6,338 6,723 6,688 7,068 6,519 7,749 8,232
Three years later 5,564 6,433 7,584 8,010 7,935 8,283 8,273 9,247
Four years later 6,242 7,161 8,338 8,778 8,694 9,430 9,140
Five years later 6,694 7,611 8,824 9,279 9,508 9,985
Six years later 6,975 7,927 9,180 9,883 9,907
Seven years later 7,201 8,189 9,651 10,196
Eight years later 7,407 8,560 9,921
Nine years later 7,701 8,803
Ten years later 7,932
Reserve Reestimated as of:
- - --------------------------
End of year 7,717 8,855 9,896 11,089 12,070 13,483 13,871 15,116 15,836 15,598 15,773
One year later 7,824 8,891 10,312 11,367 11,990 13,081 13,159 14,691 15,500 14,921
Two years later 7,862 9,006 10,617 11,576 11,909 12,745 12,890 14,295 14,917
Three years later 7,979 9,323 10,990 11,680 11,905 12,735 12,832 13,928
Four years later 8,298 9,686 11,105 11,777 12,010 12,877 12,617
Five years later 8,687 9,817 11,245 11,954 12,322 12,830
Six years later 8,830 9,974 11,447 12,378 12,395
Seven years later 9,002 10,212 11,962 12,503
Eight years later 9,265 10,762 12,091
Nine years later 9,826 10,896
Ten years later 9,963
Initial reserve in excess of
(less than) restimated reserve:
- - -------------------------------
Amount ($2,246) ($2,041) ($2,195) ($1,414) ($325) $653 $1,254 $1,188 $919 $677
Percent (29.1%) (23.0%) (22.2%) (12.8%) (2.7%) 4.8% 9.0% 7.9% 5.8% 4.3%
Gross Reestimated $14,574 $14,236 $15,427 $16,424 $16,764
Liability-Latest
Reestimated Recoverable-Latest 1,744 1,619 1,499 1,507 1,843
----------------------------------------
Net Reestimated Liability-Latest $12,830 $12,617 $13,928 $14,917 $14,921
Gross Cumulative Excess(Deficiency) $328 $973 $987 $902 $618
========================================
(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.
16
The subsequent reduction in the net reserves established at December
31, 1996, 1995 and 1994 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, asbestos and mass tort claims, virtually all of which relates to
1984 and prior years. There are significant uncertainties in estimating the
amount of Allstate's environmental, asbestos 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 gained access to complex databases developed by
outside experts to estimate the cost of liabilities for environmental claims.
Allstate's policy files were compared to the databases to determine an estimate
of the Company's potential environmental loss. The Company also refined its own
estimation techniques 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 recoverables.
During the third quarter of 1996, based upon the Company's re-evaluation, loss
reserves for environmental and asbestos exposures, net of reinsurance, were
increased by $172 million and $72 million, respectively. These studies and
re-evaluations resulted in Allstate's actions to increase reserves as described
in AProperty-Liability Claims and Claims Expense Reserves" on pages A-10 to A-13
of the 1998 Proxy Statement, incorporated herein by reference in response to
Item 7 hereof. In 1997, Allstate updated its evaluations of environmental,
asbestos and mass tort reserves. This updated evaluation did not result in any
change in recorded net loss reserves. While Allstate believes the improved
actuarial techniques and databases described above have assisted in its ability
to estimate environmental, asbestos and mass tort net loss reserves, these
refinements may prove to be inadequate indicators of the extent of probable
loss. See note 6 of the Notes to the Consolidated Financial Statements on pages
A-42 to A-45 of the 1998 Proxy Statement, incorporated herein by reference in
response to Item 8 hereof.
17
The following table is derived from the Loss Reserve Development table
and summarizes the effect of reserve reestimates, net of reinsurance, on
calendar year operations for the same ten-year period ended December 31, 1997.
The total of each column details the amount of reserve reestimates made in the
indicated calendar year and shows the accident years to which the reestimates
are applicable. The amounts in the total accident year column on the far right
represent the cumulative reserve reestimates for the indicated accident year(s).
Effect of Net Reserve Reestimates on
Calendar Year Operations
($ in millions)
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 TOTAL
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -----
BY ACCIDENT
YEAR
1987 & PRIOR $107 $38 $117 $319 $389 $143 $172 $263 $561 $137 $2,246
1988 (2) (2) (2) (26) (12) (15) (25) (11) (4) (99)
1989 301 (12) 10 (16) (17) (36) (35) (4) 191
1990 (27) (164) (11) (43) (25) (91) (4) (365)
1991 (289) (185) (101) (72) (112) (52) (811)
1992 (321) (332) (115) (170) (120) (1,058)
1993 (376) (259) (200) (168) (1,003)
1994 (156) (338) (152) (646)
1995 60 (216) (156)
1996 (94) (94)
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ------
TOTAL $107 $36 $416 $278 ($80) ($402) ($712) ($425) ($336) ($677) ($1,795)
==== === ==== ==== ===== ====== ====== ====== ====== ====== ========
Favorable calendar year reserve development in 1992 through 1997 was the
result of favorable severity trends in each of the six years, which more than
offset adverse development in Discontinued Lines and Coverages.
The favorable severity trend during this six-year period was largely due
to lower than anticipated medical cost inflation for personal auto injury
claims. Improvements in the Company's claim settlement processes are also
believed to have contributed to favorable development in 1995, 1996 and 1997.
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 have 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 rate of increase has declined in 1996 and
1997, and the Company expects the rate of increase to stabilize in 1998. However
the number of outstanding claims may not be reduced to levels previously
reported. In addition, while the claim settlement process changes are believed
to have contributed to favorable severity trends on closed claims, these changes
introduce a greater degree of variability in reserve estimates for the remaining
outstanding claims at December 31, 1997. Future reserve releases, if any, will
depend on the continuation of the favorable loss trends. See "Risk Factors
Affecting Allstate" and "Forward-Looking Statements" in this Form 10-K.
18
LIFE AND ANNUITY BUSINESS
Allstate Life markets a broad line of life insurance, annuity and group
pension products. 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. The assets and liabilities relating to flexible premium deferred
variable annuities, variable life and certain guaranteed investment contracts
are legally segregated and reflected as assets and liabilities of the Separate
Accounts. In 1997, annuity premiums and deposits represented 62% 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 markets individual and group life insurance, annuity and
group pension products and reaches a broad market of potential customers
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.
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, net of reinsurance, was $194
billion at December 31, 1997 and $186 billion at December 31, 1996. As of
December 31, 1997, Allstate Life had $37.3 billion of investments, including
$7.6 billion of Separate Account assets.
Northbrook Life Insurance Company has a strategic alliance with Dean
Witter Reynolds, Inc., a wholly-owned subsidiary of Morgan Stanley, Dean Witter,
Discover & Co. ("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
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.
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
19
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.
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 A-30 to A-33 of the 1998 Proxy
Statement, 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, 1997, there were approximately 900 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 1996 approximately 50% of the life insurance and annuity
premiums and deposits were written by 24 groups of companies. Allstate Life
ranked 20th based on statutory 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 1.4 to 1 at December 31, 1997 from
1.6 to 1 at December 31, 1996. 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
unrealized gains on securities, including investments in affiliates, 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.
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
20
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,
1997, RBC for each of Allstate's significant property-liability and life
insurance companies exceeded the required capital levels. See "Capital
Resources" on pages A-18 to A-21 of the 1998 Proxy Statement, 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, although the Company also has certain
exposures to changes in equity prices and foreign currency exchange rates. The
active management of market risk is integral to the Company's operations. The
Company may use the following tools to manage its exposure to market risk within
defined tolerance ranges: 1) rebalance its existing asset or liability
portfolios, 2) change the character of future investments purchased or 3) use
derivatives to modify the market risk characteristics of existing assets and
liabilities or assets expected to be purchased. 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.
At December 31, 1997, Allstate's entire fixed income securities and
equity securities portfolios 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
A-21 to A-23 of the 1998 Proxy Statement,
21
incorporated herein by reference in response to Item 7 hereof, and Note 4 of the
Notes to the Consolidated Financial Statements on pages A-35 to A-38 of the 1998
Proxy Statement, 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 page A-50 of the 1998 Proxy Statement,
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 A-47 and A-48 of the 1998 Proxy Statement,
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 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 1998 without prior
approval of the Illinois Department of Insurance is $2.6 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 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 and ALIC's
subsidiaries are property-liability and life insurance companies organized under
the respective insurance codes of California, Florida, Illinois, Nebraska, New
York and Texas. The
22
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 and Texas 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.
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
23
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 maintain its profitability.
Changes in Allstate's claim settlement process which may have
contributed to favorable severity trends on closed personal injury claims in
1995, 1996 and 1997, and to a slowing of loss payments and an increase in the
number of outstanding claims, will 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
regulatory 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 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 gain or (loss) from participation in
such mechanisms, mandatory pools and underwriting associations of $1 million,
($68) million and ($134) million in 1997, 1996 and 1995, respectively. The
amount of future gains or 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 gains and
losses or assessments from such mechanisms and pooling arrangements could have a
material effect on results of operations, the Company does not expect them to
have a material 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 1997, 1996 and 1995 were $44 million, $35 million and $26
million, respectively. See "Pending Accounting Standards" on page A-24 of the
1998 Proxy Statement, incorporated herein by reference in response to Item 7
hereof.
24
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, 1997,
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 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 both the
House of Representatives and the Senate of the current Congress, but none has
been enacted at the date of this filing. Allstate will support federal
legislation which provides for the resolution of Superfund related claims
against insurers at a cost which is fair and affordable to insurers, and which
fosters similar state legislation for hazardous waste cleanup at sites covered
by state law only. 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.
25
New and proposed federal and state regulation and legislation would
allow banks greater participation in securities and insurance businesses. If
these proposals are enacted or promulgated, they would present an increased
level of competition for the sale of Allstate Life's life and annuity products.
Furthermore, the market for deferred annuities and interest-sensitive life
insurance is enhanced by the tax incentives available under current law. Any
legislative change which lessen these incentives are likely to negatively impact
the demand for these products.
Enacted and pending state legislation to permit mutual insurance
companies to convert to a hybrid structure known as a mutual holding company
could have a number of significant effects on the Company by (1) increasing
industry competition through consolidation caused by mergers and acquisitions
related to the new corporate form of business; (2) increasing competition in
capital markets; and (3) reopening stock-mutual company disagreements related to
such issues as taxation disparity between mutual and stock insurance companies.
GEOGRAPHIC DISTRIBUTION OF INSURANCE
Allstate, through a variety of companies, is authorized to sell
property-liability and life insurance in 50 states, the District of Columbia,
Puerto Rico and Canada. To a limited extent, Allstate is engaged, through
subsidiaries and joint ventures, in the insurance business in Germany, Indonesia
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, 1997:
NY CA FL PA IL MI NJ MD GA NC OH TX LA Total
-- -- -- -- -- -- -- -- -- -- -- -- -- -----
Property-
Liability 13.0 9.4 7.8 5.3 5.2 4.8 4.5 3.7 3.1 2.8 2.8 2.6 2.6 67.6
CA FL NE IL MA TX PA MI NJ Total
-- -- -- -- -- -- -- -- -- -----
Life 13.6 9.7 8.3 5.7 5.1 4.9 4.9 3.6 3.1 58.9
No other jurisdiction accounted for more than 2.5% of the
statutory premiums for property-liability insurance or for life insurance.
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, 1997, Allstate employed approximately 51,400 people.
26
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.
FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-K and in the Management's
Discussion and Analysis portion of the 1998 Proxy Statement, 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:
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 and the
Northeast United States will reduce the Company's exposure to losses from
catastrophes in those areas, and that the Company's exposure to earthquake
losses in California has been significantly reduced as a result of its
participation in the CEA (see ACatastrophe Exposure" in this Form 10-K and
"Catastrophe Losses and Catastrophe Management" in the 1998 Proxy
Statement). These beliefs are based in part on the efficacy of the
techniques and the accuracy of the data used by the Company which are
designed to predict the probability of catastrophes and the extent of losses
to the Company resulting from catastrophes. Catastrophic events may occur in
the future which indicate that such techniques and data 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.
As noted under "Catastrophe Exposure" in this Form 10-K and
"Catastrophe Losses and Catastrophe Management" in the 1998 Proxy Statement,
there are other areas of the United States, beside Florida, the Northeast coast
and California, in which the Company remains exposed to the possibility of
sustaining material losses from catastrophes due to hurricanes and earthquakes.
27
These other areas of potential losses due to hurricanes include major
metropolitan centers near the eastern and gulf coasts of the United States.
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. Allstate continues to
evaluate alternative business strategies to more effectively manage its
exposure to catastrophe losses in these and other areas.
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
AProperty-Liability Insurance Claims and Claims Expense Reserves" and "Rate
Regulation" in this Form 10-K, and APP&C Underwriting Results" in the 1998
Proxy Statement) reflect statistical data for the periods indicated. Such
data for a following period or periods could well indicate that average
personal injury severities have materially increased in such subsequent
period or periods. 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.
The Company has stated (see "Property-Liability Insurance Claims and Claims
Expense Reserves" in this Form 10-K, and "Property-Liability Claims and
Claims Expenses Reserves" in the 1998 Proxy Statement) 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 will stabilize in 1998. 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 1998 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.
Management has stated (see "Property-Liability Claims and Claims Expenses
Reserves" in the 1998 Proxy Statement) that it does not anticipate unusually
large payments and commutations of environmental and asbestos claims in 1998
that would impact the survival ratio of such claims to the same degree as in
1997. Despite management's anticipation, the amount of environmental and/or
asbestos claims in 1998 could in fact equal or exceed the 1997 level, with a
corresponding adverse impact on the survival ratio for either or both of
these types of claims.
3. Decrease in Property-Liability Net Investment Income - The Company expects
to experience lower investment yields due, in part, to the reinvestment of
proceeds from calls and maturities and the investment of positive cash flows
from operations in securities yielding less than the average portfolio
rates, given the current low interest rate environment (see "Investment
Outlook" in the 1998 Proxy Statement). Any decrease in net investment income
will be highly dependent on the interest rate environment that exists in
1998.
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 and annuity policyholders in various interest rate
scenarios (see ALiquidity" in the 1998 Proxy Statement). However, an
unexpected increase in surrenders and withdrawals, coupled with a sharp
increase in interest rates could make it difficult for
28
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. Year 2000 Issues - The Company presently believes that it will be able to
timely resolve the Year 2000 issues affecting its computer operations and
that the cost of addressing such matters will not have a material impact on
Allstate's current financial position, liquidity or results of operations.
However, the extent to which the computer operations of the Company's
external counterparties and suppliers are adversely affected could, in
turn, affect the Company's ability to communicate with such counterparties
and suppliers and could materially affect the Company's results of
operations in any period or periods.
6. Expected Growth in Homeowner Premiums - Management believes an opportunity
exists to grow homeowners premiums as the implementation of catastrophe
management initiatives allows the Company to re-enter certain homeowners
markets (see "PP&C Outlook" in the 1998 Proxy Statement). Actions of
Allstate's competitors in the homeowners markets could cause Allstate's
share of these markets to remain stable or to decline.
7. Expected Growth in Allstate Life Premiums and Earnings - Allstate Life
expects to grow premiums and increase earnings in 1998 through continued
accelerated customer-focused product development, expanding market reach by
partnering with new carriers in the bank and broker distribution channels,
offering a variety of competitive fee-based and spread-based products to
satisfy customer preferences in various interest rate environments and
leveraging existing scale to produce efficiency and effectiveness gains, in
part through investments in technology (see "Allstate Life Outlook" in the
1998 Proxy Statement). Actions of Allstate's competitors and the interest
rate environment that exists in 1998 could cause Allstate Life's premium
growth or earnings to remain stables or to decline.
8. Availability of Company's Line of Credit - The Company maintains a $1.50
billion, five-year revolving line of credit and a $50 million one-year
revolving line of credit as potential sources 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 and Liquidity" in the 1998 Proxy
Statement, the Company states that 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 requirement
would be lessened. Consequently, Allstate's 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.
9. Cash for Debt Repayments and Purchase of Pembridge - Under the "Capital
Resources and Liquidity" in the 1998 Proxy Statement, the Company has
stated it has adequate borrowing capacity and cash flows from operations to
fund the purchase of Pembridge, Inc. and to retire certain maturing
securities. Should AIC sustain significant losses from catastrophes, its
and Allstate's ability to meet these funding requirements would be
lessened.
29
EXECUTIVE OFFICERS
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
Name Age Position and Offices Held Elected Officer
- - ---- --- ------------------------- ---------------
Jerry D. Choate*........59 Chairman and Chief Executive
Officer of the Company and AIC 1983
Richard I. Cohen........53 Senior Vice President of AIC 1989
(PP&C Claim Service Unit)
Joan M. Crockett........47 Senior Vice President
of AIC (Human Resources) 1994
Edward J. Dixon.........54 Senior Vice President of AIC 1988
(Chairman, Allstate Automobile and
Fire Insurance Company - Japan)
Robert W. Gary..........59 Senior Vice President of AIC 1986
(President, PP&C Unit)
Steven L. Groot.........48 Senior Vice President of AIC 1988
(President, Allstate Indemnity Company)
Edward M. Liddy.........52 President and Chief Operating
Officer of the Company and AIC 1994
Louis G. Lower, II......52 President of ALIC 1982
Michael J. McCabe.......52 Senior Vice President of AIC 1980
(Marketing and Brand Development)
Ronald D. McNeil........45 Senior Vice President of AIC 1994
(PP&C Unit, Property)
Robert W. Pike..........56 Vice President, Secretary and
General Counsel of the Company;
Senior Vice President, Secretary
and General Counsel of AIC 1978
Francis W. Pollard......55 Senior Vice President and
Chief Information Officer
of AIC 1984
Casey J. Sylla..........54 Senior Vice President and 1995
Chief Investment Officer of AIC
Rita P. Wilson..........51 Senior Vice President of AIC 1988
(Corporate Relations)
Thomas J. Wilson........40 Vice President and Chief Financial
Officer of the Company;
Senior Vice President and
Chief Financial Officer
of AIC 1995
Edward W. Young.........57 Senior Vice President
of AIC (President, International 1984
and Specialty Lines Unit)
- - -----------------------
*Also a director of the Company
30
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 1997 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 AIC.
Item 2. Properties
- - ------ ----------
Allstate's home office complex is located in Northbrook, Illinois.
The complex consists of 11 buildings of approximately 2 million square feet of
office space on a 185 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 260 claim service offices,
sales facilities at approximately 11,300 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 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 Allstate's financial position or results of operations. See note 9 to
the
31
Consolidated Financial Statements on pages A-47 and A-48 of the 1998 Proxy
Statement incorporated herein by reference in response to Item 8 hereof.
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 213,792 record holders of the Company=s common stock as of
February 17, 1998. The principal market for the Company's common stock is the
New York Stock Exchange. The Company's common stock is also listed on the
Chicago Stock Exchange. Set forth below are the high and low prices of, and cash
dividends declared for, the Company's common stock during 1997 and 1996:
HIGH LOW CLOSE DIVIDENDS
DECLARED
-----------------------------------------------------------------------------------------
1997
First quarter 68 1/4 56 1/4 59 3/8 .24
Second quarter 77 58 5/8 73 .24
Third quarter 81 1/8 70 15/16 80 3/8 .24
Fourth quarter 94 3/8 76 15/16 90 1/2 .24
-----------------------------------------------------------------------------------------
1996
First quarter 46 37 3/8 42 .2125
Second quarter 46 1/2 37 3/8 45 5/8 .2125
Third quarter 49 3/4 40 7/8 49 1/4 .2125
Fourth quarter 60 7/8 48 3/4 57 7/8 .2125
-----------------------------------------------------------------------------------------
Stock price ranges are from the New York Stock Exchange Composite
Listing.
Item 6. Selected Financial Data
- - ------ -----------------------
Incorporated by reference to "11-Year Summary of Selected Financial
Data" on pages A-2 and A-3 of the 1998 Proxy Statement.
32
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 A-4 to A-24 of the
1998 Proxy Statement.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- - ------- ----------------------------------------------------------
Incorporated by reference to the "Market Risk" discussion on pages
A-15 to A-18 of the 1998 Proxy Statement.
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 A-25 to A-56 of the
1998 Proxy Statement and the information under "Quarterly Results" on page A-56
of the 1998 Proxy Statement 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" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
1998 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 1998 Proxy Statement.
33
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 Ownership of Directors and Executive Officers" and "Security
Ownership of Certain Beneficial Owners" in the 1998 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 heading "Certain
Transactions" in the 1998 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 on December 19,
1997 (Items 5 and 7).
34
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 10, 1998
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 10, 1998
s/ Thomas J. Wilson Vice President and )
Thomas J. Wilson Chief Financial )
Officer )
(Principal Financial )
Officer) )
35
Signature Title Date
- - --------- ----- ----
_______________ Director )
James G. Andress
s/Warren L. Batts Director )
- - -----------------
Warren L. Batts
s/Edward A. Brennan Director )
- - -------------------
Edward A. Brennan
March 10, 1998
______________ Director )
James M. Denny
______________ Director )
Michael A. Miles
s/Joshua I. Smith Director )
- - -----------------
Joshua I. Smith
s/Mary Alice Taylor Director )
- - -------------------
Mary Alice Taylor
36
THE ALLSTATE CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1997
The following consolidated financial statements, notes thereto and related
information of The Allstate Corporation are incorporated herein by reference to
the Company's 1998 Proxy Statement.
Page*
----
Consolidated Statements of Operations ** A-25
Consolidated Statements of Financial Position ** A-26
Consolidated Statements of Shareholders' Equity ** A-27
Consolidated Statements of Cash Flows ** A-28
Notes to the Consolidated Financial Statements A-29
Quarterly Results ** A-56
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-7
Schedule IV Reinsurance S-8
Schedule V Valuation and Qualifying Accounts S-9
Schedule VI Supplementary Information Concerning
Consolidated Property-Casualty S-10
Insurance Operations
Independent Auditors' Report S-11
Independent Auditors' Consent S-12
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 1998 Proxy Statement.
** Incorporated by reference in Item 8 herein.
S-1
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
($ IN MILLIONS)
FAIR CARRYING
COST VALUE VALUE
---- ----- -----
Type of Investment
- - ------------------
Fixed Income Securities, Available for Sale:
Bonds:
United States government, government
agencies and authorities................................ $ 3,117 $ 3,677 $ 3,677
States, municipalities and political subdivisions............ 15,357 16,439 16,439
Foreign governments.......................................... 596 597 597
Public utilities............................................. 2,621 2,903 2,903
Convertibles and bonds with warrants attached................ 546 617 617
All other corporate bonds.................................... 13,181 13,984 13,984
Mortgage-backed securities...................................... 8,264 8,559 8,559
Asset-backed securities......................................... 3,948 3,996 3,996
Redeemable preferred stocks..................................... 85 88 88
-- -- --
Total fixed income securities 47,715 50,860 50,860
------ ====== ------
Equity Securities:
Common Stocks:
Public utilities............................................ 314 461 461
Banks, trusts and insurance companies....................... 448 673 673
Industrial, miscellaneous and all other..................... 3,159 4,874 4,874
Nonredeemable preferred stocks.................................. 666 757 757
--- ----- -----
Total equity securities..................................... 4,587 $ 6,765 6,765
----- ===== -----
Mortgage loans on real estate........................................ 3,002 3,002
Real estate(1) ...................................................... 686 686
Policy loans......................................................... 527 527
Other long-term investments.......................................... 21 21
Short-term investments............................................... 687 687
--- ---
Total Investments.......................................... $57,225 $62,548
====== ======
(1) Includes $234 million of real estate acquired in satisfaction of debt.
S-2
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
($ IN MILLIONS) YEAR ENDED
DECEMBER 31,
--------------------------- -----
1997 1996 1995
---- ---- ----
REVENUES
Investment income, less investment expense............................. $ 30 $ 10 $ 6
Realized capital gains................................................. 5 - -
Other income........................................................... 208 29 15
--- --- ---
243 39 21
EXPENSES
Interest expense....................................................... 158 100 80
Other operating expenses............................................... 6 8 8
--- --- ---
164 108 88
--- --- ---
Income (loss) from operations before income tax benefit and equity
.......in net income of subsidiaries...................................... 79 (69) (67)
Income tax benefit........................................................ (42) (31) (26)
---- ---- ----
Income (loss) before equity in net income of subsidiaries................. 121 (38) (41)
Equity in net income of subsidiaries...................................... 2,984 2,113 1,945
----- ----- -----
Net income............................................................. $3,105 $2,075 $1,904
===== ===== =====
See accompanying notes to condensed financial information and notes to
Consolidated Financial Statements incorporated herein by reference.
S-3
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE II (CONTINUED)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF FINANCIAL POSITION
($ IN MILLIONS)
DECEMBER 31,
----------------------
1997 1996
---- ----
ASSETS
Investments in subsidiaries............................................ $17,041 $14,777
Investments
Fixed income securities, at fair value (amortized cost $419)......... 426 -
Short-term........................................................... 85 582
-- ---
Total investments.................................................... 511 582
Receivable from subsidiaries........................................... 441 152
Dividends receivable from subsidiaries................................. 110 -
Other assets........................................................... 97 99
------ ------
TOTAL ASSETS......................................................... $18,200 $15,610
====== ======
LIABILITIES
Short-term debt........................................................ $ 199 $ 152
Long-term debt......................................................... 1,457 1,207
Payable to subsidiaries................................................ 773 773
Dividends payable to shareholders...................................... 103 10
Other liabilities...................................................... 58 16
----- -----
TOTAL LIABILITIES.................................................... 2,590 2,158
----- -----
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, 25 million shares authorized,
none issued........................................................
Common stock, $.01 par value, 1.0 billion shares authorized and 450 million
issued; 425 million and 442 million shares
outstanding........................................................ 5 5
Additional capital paid-in............................................. 3,120 3,133
Unrealized net capital gains........................................... 2,821 2,003
Unrealized foreign currency translation adjustments.................... (36) 21
Retained income........................................................ 11,646 8,958
Deferred ESOP expense.................................................. (281) (280)
Treasury stock, at cost (25 million and 8 million shares).............. (1,665) (388)
------- -----
TOTAL SHAREHOLDERS' EQUITY........................................... 15,610 13,452
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................... $18,200 $15,610
====== ======
See accompanying notes to condensed financial information and notes to
Consolidated Financial Statements incorporated herein by reference.
S-4
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE II (CONTINUED)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
($ IN MILLIONS) YEAR ENDED
DECEMBER 31,
----------------------------------
1997 1996 1995
------ ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income................................................................ $3,105 $2,075 $1,904
Adjustments to reconcile net income to net cash provided by operating
activities
Equity in net income of subsidiaries................................. (2,984) (2,113) (1,945)
Realized capital gains.............................................. (5) - -
Dividends received from subsidiaries................................. 623 525 455
Changes in other operating assets and liabilities.................... (233) (5) 11
----- ----- -----
Net cash provided by operating activities.......................... 506 482 425
---- --- ---
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of fixed income securities......................... 789 - -
Investment purchases of fixed income securities........................ (363) - -
Capital contribution to subsidiaries................................... - (23) -
Change in short-term investments, net.................................. 427 (543) (27)
---- ----- ----
Net cash provided by (used in) investing activities................ 853 (566) (27)
---- ----- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Change in short-term debt, net......................................... 47 152 -
Transfers to subsidiaries through intercompany loan agreement,
........net............................................................ (47) (152) -
Proceeds from issuance of long-term debt............................... 250 - 357
Proceeds from borrowings from subsidiaries - 773 -
Payment to Sears for transfer of ESOP.................................. - - (327)
Dividends paid to shareholders......................................... (323) (378) (350)
Treasury stock purchases............................................... (1,358) (336) (60)
Other.................................................................. 72 25 (18)
----- ---- ----
Net cash provided by (used in) financing activities................ (1,359) 84 (398)
----- ---- -----
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 (CONTINUED)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
1. GENERAL
The financial statements of the Registrant should be read in conjunction with
the Consolidated Financial Statements and notes thereto included in The Allstate
Corporation 1998 Proxy Statement.
The long-term and short-term debt and credit lines presented in Note 8 "Debt" on
page A-46 of the 1998 Proxy Statement, with the exception of the Floating Rate
Notes, are direct obligations of the Registrant.
To conform with the 1997 presentation, certain amounts in the prior years'
financial statements and notes have been reclassified.
2. RECEIVABLE AND PAYABLE TO SUBSIDIARIES
The majority of the proceeds from the issuance of the commercial paper have been
loaned to subsidiaries through an intercompany loan agreement and used for
general purposes.
In 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 $59 million and $6 million of
interest expense in 1997 and 1996, respectively, related to these borrowings.
3. OTHER INCOME
In 1997, the Company reinstituted its practice related to the settlement of
certain employee benefits of its subsidiaries, mainly profit sharing
obligations.
4. SUPPLEMENTAL DISCLOSURES OF NON CASH INVESTING ACTIVITY AND CASH FLOW
INFORMATION
During 1997, the Registrant received a $768 million dividend from a subsidiary
in the form of fixed income securities.
The Registrant paid $144 million, $87 million and $70 million of interest on
debt in 1997, 1996 and 1995, respectively.
S-6
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
($ IN MILLIONS) AT DECEMBER 31,
----------------------------------------
RESERVES
FOR CLAIMS,
CLAIMS
DEFERRED EXPENSE
POLICY AND
ACQUISITION CONTRACT
SEGMENT COSTS BENEFITS UNEARNED
----- --------
PREMIUMS
--------
- - ------------------------------------
1997
- - ----
Property-liability operations
PP&C................................ $ 844 $14,408 $6,168
Discontinued lines and
coverages......................... - 2,995 1
---- ------ -----
Total property-liability............ 844 17,403 6,169
Life and annuity operations........... 1,982 27,471 64
Corporate and other eliminations...... - - -
------ ------ -----
Total................................. $2,826 $44,874 $6,233
===== ====== =====
($ IN MILLIONS) FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
CLAIMS,
PREMIUM CLAIMS AMORTIZATION
REVENUE EXPENSE OF OTHER PREMIUMS
AND NET AND POLICY OPERATING WRITTEN
SEGMENT CONTRACT INVESTMENT CONTRACT ACQUISITION COSTS AND (EXCLUDING
CHARGES INCOME (1) BENEFITS COSTS EXPENSES LIFE)
------- ---------- -------- ----- -------- -----
- - ------------------------------------
1997
- - ----
Property-liability operations
PP&C................................ $18,600 $13,333 $2,491 $1,635 $18,787
Discontinued lines and
coverages......................... 4 3 - 19 2
------ ------ ----- ----- ------
Total property-liability............ 18,604 1,746 13,336 2,491 1,654 18,789
Life and annuity operations........... 1,502 2,085 2,415 298 302 132
Corporate and other eliminations...... - 30 - - (19) -
------ ----- ------ ----- ----- ------
Total................................. $20,106 $3,861 $15,751 $2,789 $1,937 $18,921
====== ===== ====== ===== ===== ======
(1) A single investment portfolio supports the Property-liability segment.
($ IN MILLIONS) AT DECEMBER 31,
----------------------------------------
RESERVES
FOR CLAIMS,
CLAIMS
DEFERRED EXPENSE
POLICY AND
ACQUISITION CONTRACT
SEGMENT COSTS BENEFITS UNEARNED
----- --------
PREMIUMS
--------
- - ------------------------------------
1996
- - ----
Property-liability operations
PP&C................................ $ 777 $13,909 $6,070
Discontinued lines and
coverages......................... - 3,473 2
----- ------ -----
Total property-liability............ 777 17,382 6,072
Life and annuity operations........... 1,837 26,407 102
Corporate and other eliminations...... - - -
----- ------ -----
Total................................. $2,614 $43,789 $6,174
===== ====== =====
($ IN MILLIONS) FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
CLAIMS,
PREMIUM CLAIMS AMORTIZATION
REVENUE EXPENSE OF OTHER PREMIUMS
AND NET AND POLICY OPERATING WRITTEN
SEGMENT CONTRACT INVESTMENT CONTRACT ACQUISITION COSTS AND (EXCLUDING
CHARGES INCOME (1) BENEFITS COSTS EXPENSES LIFE)
------- ---------- -------- ----- -------- -----
- - ------------------------------------
1996
- - ----
Property-liability operations
PP&C................................ $17,708 $13,574 $2,023 $1,676 $17,978
Discontinued lines and
coverages......................... 658 913 116 130 608
------ - ------ ----- ----- ------
Total property-liability............ 18,366 1,758 14,487 2,139 1,806 18,586
Life and annuity operations........... 1,336 2,045 2,312 203 308 173
Corporate and other eliminations...... - 10 - - (2) -
------ ----- ------ ----- ----- ------
Total................................. $19,702 $3,813 $16,799 $2,342 $2,112 $18,759
====== ===== ====== ===== ===== ======
(1) A single investment portfolio supports the Property-liability segment.
($ IN MILLIONS) AT DECEMBER 31,
----------------------------------------
RESERVES
FOR CLAIMS,
CLAIMS
DEFERRED EXPENSE
POLICY AND
ACQUISITION CONTRACT
SEGMENT COSTS BENEFITS UNEARNED
----- --------
PREMIUMS
--------
- - ------------------------------------
1995
- - ----
Property-liability operations
PP&C................................ $ 532 $12,841 $5,661
Discontinued lines and
coverages......................... 72 4,846 469
----- ------ -----
Total property-liability............ 604 17,687 6,130
Life and annuity operations........... 1,400 25,217 58
Corporate and other eliminations...... - - -
-------- ------ -----
Total................................. $2,004 $42,904 $6,188
===== ====== =====
($ IN MILLIONS) FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
CLAIMS,
PREMIUM CLAIMS AMORTIZATION
REVENUE EXPENSE OF OTHER PREMIUMS
AND NET AND POLICY OPERATING WRITTEN
SEGMENT CONTRACT INVESTMENT CONTRACT ACQUISITION COSTS AND (EXCLUDING
CHARGES INCOME (1) BENEFITS COSTS EXPENSES LIFE)
------- ---------- -------- ----- -------- -----
- - ------------------------------------
1995
- - ----
Property-liability operations
PP&C................................ $16,524 $12,648 $1,768 $1,808 $16,941
Discontinued lines and
coverages......................... 1,016 1,040 191 148 1,024
------ - ------ ----- ----- ------
Total property-liability............ 17,540 1,630 13,688 1,959 1,956 17,965
Life and annuity 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 $18,145
====== ===== ====== ===== ===== ======
(1) A single investment portfolio supports the Property-liability segment.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
($ IN MILLIONS)
PERCENT OF
CEDED TO ASSUMED FROM AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------ --------- --------- ------ ------
YEAR ENDED DECEMBER 31, 1997
Life insurance in force................... $ 247,048 $ 52,760 $ 144 $194,432 0.1%
======== ======= ===== =======
Premiums and contract charges:
Life insurance........................... $ 1,401 $ 165 $ - $ 1,236 -%
Accident-health insurance............. 274 29 21 266 7.9%
Property-liability insurance........... 18,872 366 98 18,604 0.5%
------ --- -- ------
Total premiums and contract charges. $ 20,547 $ 560 $ 119 $ 20,106 0.6%
========= ========= ===== ========
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....................... 17,540 524 524 17,540 3.0%
------ --- --- ------
Total premiums and contract charges. $ 18,944 $ 571 $ 535 $ 18,908 2.8%
======== ========= === ========
S-8
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE V - VALUATION ALLOWANCE 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, 1997
Allowance for estimated losses on
mortgage loans and real estate....... $ 76 $ (21) $ 16 $ 39
Allowance for reinsurance recoverable 163 - 16 147
Allowance for premium installment
receivable.......................... 57 109 105 61
YEAR ENDED DECEMBER 31, 1996
Allowance for estimated losses on
mortgage loans and real estate....... 100 14 38 76
Allowance for reinsurance recoverable 246 18 101 163
Allowance for premium installment
receivable.......................... 30 112 85 57
YEAR ENDED DECEMBER 31, 1995
Allowance for estimated losses on
mortgage loans and real estate....... 97 50 47 100
Allowance for reinsurance recoverable 126 133 13 246
Allowance for premium installment
receivable.......................... - 63 33 30
(1) Deductions in allowance for estimated losses on mortgage loans include
amounts transferred to real estate. Deductions in allowance for
reinsurance recovered represent write-offs, net of recoveries, of amounts
determined to be uncollectible.
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE VI -SUPPLEMENTARY INFORMATION CONCERNING CONSOLIDATED
PROPERTY-CASUALTY INSURANCE OPERATIONS
($ IN MILLIONS)
AT DECEMBER 31,
---------------------------------
1997 1996 1995
---- ---- ----
Deferred policy acquisition costs......................... $ 844 $ 777 $ 604
Reserves for unpaid claims and claim adjustments.......... 17,403 17,382 17,687
Unearned premiums......................................... 6,169 6,072 6,130
($ IN MILLIONS)
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---- ---- ----
Earned premiums........................................... $ 18,604 $ 18,366 $ 17,540
Net investment income..................................... 1,746 1,758 1,630
Claims and claims adjustment expense incurred
Current year........................................... 14,013 14,823 14,113
Prior years............................................ (677) (336) (425)
Amortization of deferred policy acquisition costs......... 2,491 2,139 1,959
Paid claims and claims adjustment expense................. 13,161 15,045 12,938
Premiums written.......................................... 18,789 18,586 17,965
S-10
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, 1997 and 1996, and for each of
the three years in the period ended December 31, 1997, and have issued our
report thereon dated February 20, 1998; such consolidated financial statements
and report are included in The Allstate Corporation 1998 Proxy Statement to
Stockholders and are incorporated herein by reference. Our audits also include
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.
Deloitte & Touche LLP
Chicago, Illinois
February 20, 1998
S-11
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-88540, 333-10857 and 333-34583 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, 333-23309, 333-40283, 333-40285 and 333-40289 on Form S-8 of The
Allstate Corporation of our reports dated February 20, 1998, appearing in or
incorporated by reference in this Annual Report on Form 10-K of The Allstate
Corporation for the year ended December 31, 1997.
Deloitte & Touche LLP
Chicago, Illinois
March 25, 1998
S-12
EXHIBIT INDEX
The Allstate Corporation Form 10-K
For the Year Ended December 31, 1997
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.
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.
E-1
Exhibit Sequential
No. Document Description Page No.
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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.**
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 Sears,
Roebuck and Co. and the Company. Incorporated by
reference to Exhibit 10(e) to the Company's
Current Report on Form 8-K dated
February 22, 1995.**
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Exhibit Sequential
No. Document Description Page No.
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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 Deferred
Compensation Plan, as amended and
restated effective November 11, 1997.
10.13* The Allstate Corporation
Amended and Restated Deferred
Compensation Plan for Non-Employee
Directors, as amended and restated
as of February 5, 1997.
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 August 14, 1997.
Incorporated by reference to Exhibit
4(c) to the Company's Registration
Statement No. 333-34583.
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.**
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Exhibit Sequential
No. Document Description Page No.
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10.18* Form of restricted stock grant
under the Equity Incentive 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, 1996.**
10.19* The Allstate Corporation Equity
Incentive Plan for Non-Employee
Directors as amended and restated on
August 14, 1997. Incorporated by
reference to Exhibit 4(e) to the
Company's Registration Statement
No. 333-34583
10.20* The Allstate Corporation Employees
Replacement Stock Plan, as amended
and restated on August 14, 1997.
Incorporated by reference to
Exhibit 4(d) to the Company's
Registration Statement No. 333-34583.
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.**
11 Computation of Earnings per
Common Share.
12 Computation of Earnings to Fixed
Charges Ratio.
21 Subsidiaries of the Registrant.
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Exhibit Sequential
No. Document Description Page No.
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23 Independent Auditors' Consent.
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-5