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UNITED STATES
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, 1998
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 Chicago Stock Exchange
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 31, 1999, Registrant had 813,386,882 shares of common stock
outstanding. Approximately 754,000,000 of these shares, having an aggregate
market value (based on closing prices on January 29, 1999 reported in the New
York Stock Exchange Composite listing) of approximately $28.28 billion, were
owned by stockholders other than the Registrant's directors and executive
officers and Northern Trust Corporation, which is the trustee for The Savings
and Profit Sharing Fund of Allstate Employees.
The 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 18, 1999 (the "Proxy Statement").
TABLE OF CONTENTS
PART I PAGE
Item 1. Business..........................................................1
Recent Developments...........................................2
Risk Factors Affecting Allstate as an Insurer.................3
Allstate Strategy.............................................3
Property-Liability Insurance Business.........................6
Catastrophe Exposure and Catastrophe Management............9
Property-Liability Claims and Claims Expense Reserves.....12
Discontinued Lines and Coverages.............................20
Life and Savings Segment.....................................21
Year 2000....................................................22
Capital Requirements.........................................24
Investments..................................................25
Regulation...................................................25
Geographic Distribution of Insurance.........................30
Seasonality..................................................30
Employees....................................................30
Service Marks................................................30
Forward-Looking Statements...................................30
Executive Officers...........................................32
Item 2. Properties........................................................33
Item 3. Legal Proceedings.................................................33
Item 4. Submission of Matters to a Vote of Security Holders...............34
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholders
Matters...........................................................34
Item 6. Selected Financial Data...........................................34
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................35
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........35
Item 8. Financial Statements and Supplementary Data.......................35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.........................................35
i
PART III PAGE
Item 10. Directors and Executive Officers of the Registrant...............35
Item 11. Executive Compensation...........................................35
Item 12. Security Ownership of Certain Beneficial Owners and Management...36
Item 13. Certain Relationships and Related Transactions...................36
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...36
Signatures....................................................................37
Index to Financial Statement Schedules.......................................S-1
Exhibit Index................................................................E-1
ii
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 savings
businesses. Allstate is the country's second largest property-liability insurer
on the basis of 1997 statutory premiums written and is a major life insurer.
Allstate's life insurance and savings operations are conducted through Allstate
Life Insurance Company ("ALIC"), a wholly-owned subsidiary of AIC, and through
various ALIC subsidiaries ("Life and Savings").
Allstate's primary business is the sale of private passenger auto and
homeowners insurance. In 1997, Allstate maintained estimated national market
shares in these lines of approximately 12.3% and 11.3%, respectively. Allstate's
Property-Liability operations consist of two business segments: personal
property and casualty ("PP&C") and Discontinued Lines and Coverages. PP&C is
principally engaged in the sale of private passenger auto insurance and
homeowners insurance to individuals in both the United States and in other
countries. Discontinued Lines and Coverages consists of business no longer
written by Allstate. 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 15,500 exclusive agents (employee and
non-employee) in the United States and Canada, and over 3,000 independent agents
who offer Allstate products primarily in rural areas not served by Allstate
agents. Allstate also uses independent and specialized brokers to expand market
reach, including approximately 13,000 independent agents appointed to market
non-standard auto business.
Life and Savings markets a broad line of life insurance, savings and group
pension products. Life and Savings distributes its products through Allstate
agents (including life specialists), banks, independent agents and brokers and
through direct response marketing.
Allstate's Corporate and Other business segment is comprised of holding
company activities and certain non-insurance operations.
Information regarding the last three years' revenues and operating profit
or loss, and the last two years' identifiable assets attributable to each of
Allstate's four business segments is contained in note 15 of the Notes to
Consolidated Financial Statements on pages C-62 to C-64 of the Proxy Statement,
incorporated herein by reference in response to Item 8 hereof.
1
RECENT DEVELOPMENTS
On March 3, 1999, ALIC and Putnam Investments, a leading investment
management company, announced a joint venture to create and distribute a
co-branded variable insurance product line. A joint venture executive committee
consisting of executives from ALIC and Putnam will manage the partnership.
Putnam's portfolio managers will oversee the mutual fund investments and ALIC
will manage the insurance assets. The products will be distributed via Putnam's
wholesaling force, and through its partnerships with banks, broker-dealers and
financial advisors.
On February 12, 1999, the Company announced a Rights Agreement under which
shareholders of record on February 26, 1999 will receive a dividend distribution
of one preferred share purchase right (a "Right") on each outstanding share of
the Company's common stock. The Rights become exercisable ten days after it is
publicly announced that a person or group has acquired 15% or more of the
Company's common stock or ten business days after the beginning of a tender or
exchange offer to acquire 15% or more of the Company's common stock. Then the
Rights become exercisable at a price of $150 for a number of shares of the
Company's common stock having a market value equal to $300. The Company may
redeem the Rights at a price of $.01 per Right. The Rights expire on February
12, 2009. The Rights are intended to protect shareholders from unsolicited
takeover attempts that may unfairly pressure shareholders and deprive them of
the full value of their shares. Management is not aware of any such attempt at
this time.
On September 21, 1998, the Company's Board of Directors announced that
Jerry D. Choate, the Company's Chairman and Chief Executive Officer, would
retire at the end of 1998, and that Edward M. Liddy had been elected, effective
January 1, 1999, to replace Mr. Choate. Mr. Liddy had been the Company's
President and Chief Operating Officer since August 1994. As of January 1, 1999,
Mr. Liddy became the Company's Chairman, President and Chief Executive Officer.
During 1998, the Company received a charter from the Office of Thrift
Supervision to operate a federal savings bank, Allstate Federal Savings Bank
("AFSB"). AFSB offers electronic commerce services to AIC specifically for
pre-authorized payments of customers' premiums and other consumer transactions.
AFSB is also committed to investing $15 million annually in the redevelopment of
urban communities, and plans to form strategic alliances with community
organizations and other groups in connection with these investments. During
1999, AFSB plans to introduce personal trust, financial planning services and
other products based on customer needs and regulatory approvals.
2
RISK FACTORS AFFECTING ALLSTATE AS AN INSURER
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 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 Life and Savings 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 Life and
Savings' 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," below, 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 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 auto and homeowners insurance business; to improve customer retention
and to increase cross-sales of its products to its customer base; to manage its
catastrophe exposure; to expand its offering of Life and Savings products
through existing non-agency distribution channels and through the addition of
new distribution channels; and to seek opportunities in the international
markets. This
3
strategy is designed to capitalize on: (1) the strength of the Allstate name,
(2) Allstate's network of exclusive agents, (3) Allstate's auto and homeowners
insurance capabilities, and (4) additional distribution channels available to
Allstate.
Allstate is experiencing increased competition in both its PP&C and Life
and Savings segments. The increase in PP&C competition is due, in part, to
increased consolidation in the industry, to the entry of new companies to the
market attracted by historically high profit margins on auto insurance, and to
the expansion and redefinition of underwriting risk selection and tolerance by
many competitors. Increased competition in the Life and Savings segment is due,
in part, to demutualization and consolidation currently being experienced in
this industry. There is also a possibility of federal legislation that would
allow banks, securities firms and insurance companies to affiliate.
Allstate expects that the competitive pricing environment in the personal
property and casualty industry will put pressure on its premium growth and
profit margins, and plans to offset this pressure by initiating the following
actions to increase growth and to improve expense margins:
o implementing processes designed to control the cost of settling
homeowners claims;
o expanding its independent agent distribution channel with the intent
to grow standard, non-standard and homeowners premiums written;
o increasing sales of auto and homeowners related services such as auto
and home equity financing, and auto parts and labor warranties in
order to provide a more complete set of services to customers; and
o expanding its domestic and international presence through the
development of start-up operations, acquisitions, partnerships and
expanded distribution channels.
Allstate's marketing strategy for auto and homeowners insurance varies by
geographic area. Allstate is attempting to grow its auto business in the United
States more rapidly in states where the regulatory climate is more conducive to
attractive returns. 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, as catastrophe exposure is reduced and as new
insurance policies are approved and introduced. Allstate continuously monitors
its designated growth and limited growth areas and adjusts its actions,
including limiting premium growth, as necessary, to maintain acceptable
catastrophe exposure levels in these areas. As of December 31, 1998, the areas
designated as auto limited growth markets represent an insignificant percentage
of the total United States population. 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
4% of the United States population resides.
4
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. The standard market consists of drivers who meet criteria
indicating that they have low to average risk of loss expectancy. The
non-standard auto insurance market consists of drivers who have
higher-than-average risk profiles due to their driving records, to their lack of
prior insurance or to the types of cars they own. 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 claim handling 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.
Life and Savings 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 Savings products to existing Allstate
customers, offering a variety of competitive fee-based and interest-sensitive
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. Life and Savings' products are marketed
through Allstate agents (including life specialists), banks, independent agents
and brokers and through direct response marketing. Specialized brokers are used
to distribute group pension and structured settlement products not offered by
Allstate=s agency force. Life and Savings' direct response marketing program
principally targets customers of credit card issuers who prefer to purchase,
through the mail or telephone, selected products not offered by Allstate's
agency force.
Allstate's exclusive agency force of approximately 15,500 full-time agents
is at the core of its PP&C distribution system. Allstate also uses over 3,000
independent agents to market a full range of Allstate insurance products to
individuals, mostly in rural markets not served by Allstate agents, and
approximately 13,000 independent agents appointed by Allstate's subsidiary,
Deerbrook Insurance Company ("Deerbrook"), to market non-standard auto business.
Allstate's international operations have included the sale of auto
insurance in Canada for over 40 years. In 1997, Allstate commenced the sale of
private passenger auto insurance in Germany through direct response marketing.
Allstate plans similar direct response marketing of auto insurance in other
western European countries and in Japan. Allstate has also identified areas in
Asia and the Pacific Rim as attractive markets, principally for life insurance,
and plans to pursue these and other 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.
Allstate plans to pursue selective business start-ups, acquisitions,
partnerships, and expanded distribution channels, both in the United States and
internationally in the pursuit of its business strategy.
5
PROPERTY-LIABILITY INSURANCE BUSINESS
Allstate's Property-Liability insurance business consists of the PP&C and
Discontinued Lines and Coverages segments. PP&C, which accounted for $19.5
billion (or 78%) of Allstate's 1998 statutory written premiums, writes primarily
private passenger auto and homeowners insurance policies in 50 states, the
District of Columbia, Puerto Rico, Canada and Germany. Operating in
approximately 11,800 locations, Allstate agents produce more than 94.2% 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 insurance business and other commercial insurance business in
run-off, as well as the historical results of the commercial and reinsurance
businesses sold in 1996.
PP&C is principally engaged in private passenger auto and homeowners
insurance, and 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 auto and
homeowners insurance in 1997. Although private passenger auto and homeowners
insurance account for the majority of its business, PP&C also writes coverages
for product lines such as motorcycles, motor homes, mechanical breakdown,
renters, condominium, residential and landlord, comprehensive personal
liability, fire, personal umbrella, recreational vehicle, mobile home, boat
owners, parts and labor warranties and selected commercial property and casualty
coverages. PP&C also operates the AEI Group, Inc., whose principal subsidiary
Allstate Motor Club provides members with travel plans and emergency road
service. Allstate customers are also offered access to auto and home equity
loans provided by a third party.
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 meet certain
criteria which classify them as having low to average risk of loss expectancy.
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. Allstate's presence in the non-standard market as well as the
standard market allows Allstate agents to offer insurance products to the vast
majority of drivers who apply for insurance. 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 had a countrywide market share
of approximately 18.5% of the non-standard market in 1997.
As a condition of its license to do business in each state, Allstate, like
all other auto insurers, is required to write or share the cost of private
passenger auto insurance for higher risk
6
individuals who would otherwise be unable to obtain such insurance. This
"Involuntary," or "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 PP&C 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 auto
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.
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, evaluation and negotiation of
claims. During 1998, Allstate completed the implementation of redesigned claim
settlement procedures for auto physical damage claims. In addition, Allstate has
continued the design and testing of new procedures for personal injury claims
and for property claims involving fire and roof damage.
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 1998 for standard and
non-standard auto were approximately the same as in 1997. Retention rates for
homeowners increased slightly in 1998, having declined in 1997, due to the
adverse impact of Allstate's catastrophe management initiatives. These
initiatives are discussed below, under "Catastrophe Exposure." Homeowners'
retention improved significantly in Florida in 1998, after a decline in 1997 due
to the non-renewal and sale of renewal rights of certain homeowners' policies.
The personal lines private passenger auto and homeowners businesses are
highly
7
competitive. As of December 31, 1997 over 1,400 insurance companies were in the
market, with five groups of companies (State Farm, Allstate, Farmers, Nationwide
and Progressive) writing approximately 47% of the private passenger auto
premiums written. Approximately 48% of the homeowners premiums written in the
United States were written by five groups of companies (State Farm, Allstate,
Farmers, Nationwide and Travelers). State Farm maintains the leading share in
the auto and homeowners insurance market and had 20.5% of the auto market and
23.0% of the homeowners market in 1997. Together, State Farm and Allstate had
32.8% and 34.3%, respectively, of the total United States' auto and homeowners
market in 1997.
AIC competes principally on the basis of its name recognition, scope of
distribution system, customer service, use of technology, product features,
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.
In 1997, approximately $48 billion of industry personal lines premiums were
generated by independent agencies, and the remaining $95 billion of premiums
were 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 solely with 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.
Approximately one half of Allstate's approximately 15,500 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. With very limited exceptions, persons hired since
1990 for eventual consideration as Allstate agents have 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, 1998, independent contractor exclusive agents, including
agents in training to become independent contractor exclusive agents,
represented approximately 47% 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. Allstate has entered into an agreement
with the Internal Revenue Service which permits continuation of the employee
agent programs under specified conditions.
8
CATASTROPHE EXPOSURE AND CATASTROPHE MANAGEMENT
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, each of which
resulted in losses of approximately $2 billion. While management believes
Allstate's catastrophe management strategies, described below, have reduced the
severity of possible 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 PP&C 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 is now limited by its
participation in the California Earthquake Authority ("CEA"), 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 faults in and around
Seattle, Washington and Charleston, South Carolina.
Allstate has implemented initiatives to limit, over time, its insurance
exposures in certain regions prone to catastrophes, subject to the requirements
of insurance laws and regulations and as limited by competitive considerations.
These initiatives 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 continues to expand 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. See "Regulation -
Shared Markets" below.
Allstate formed Allstate Floridian Insurance Company (" Floridian") and
Allstate Floridian Indemnity Company ("AFI") which are operating to sell and
service residential property customers in Florida. Floridian entered into a
catastrophe reinsurance agreement with a non-affiliated entity which provides
access to 80% of $500 million of catastrophe reinsurance protection for any loss
in excess of approximately $1.00 billion, up to an aggregate limit of $800
million. In addition, Floridian has access to 90% of an estimated $950 million
of reimbursements of losses from the Florida Hurricane Catastrophe Fund
("FHCF").
9
The FHCF has the authority to issue bonds to pay its obligations to
participating insurers. The bonds issued by the FHCF are funded by assessments
on all property and casualty premiums written in the state, except workers'
compensation and accident and health insurance. These assessments are limited to
4% and are recoupable immediately through increases in policyholder rates. A
rate filing or any portion of a rate change attributable entirely to the
assessment is deemed approved when made to the Florida Department of Insurance
(the "Department"), subject to the Department's statutory authority to review
the "adequacy" of any rate at any time.
In addition to direct hurricane losses, Floridian and AFI are also subject
to assessments from the Florida Windstorm Underwriting Association ("FWUA") and
the Florida Property and Casualty Joint Underwriting Association ("FRPCJUA")
which are organizations created to provide coverage for catastrophic losses to
property owners unable to obtain coverage in the private market. Regular
assessments are levied on participating companies if the deficit in the calendar
year is less than or equal to 10% of the Florida property premiums industry-wide
for the year. An insurer may recoup a regular assessment through a surcharge to
policyholders subject to a cap on the amount that can be charged in any one
year. If the deficit exceeds 10%, the FWUA and/or FRPCJUA will fund the deficit
through the issuance of bonds. The costs of these bonds are then funded through
a regular assessment in the first year following the deficit and through
emergency assessments in subsequent years. Companies are required to collect
emergency assessments directly from the policyholders and remit these monies to
the organizations as they are collected. Participating companies are also
required to purchase any unsold bonds issued by the FWUA and/or FRPCJUA. The
insurer must file any recoupment surcharge with the Department at least 15 days
prior to imposing the surcharge on policies. The surcharge may be used
automatically after the expiration of the 15 days, unless the Department has
notified the insurer in writing that any of its calculations are incorrect.
While the Florida statutes are designed so that the ultimate cost is borne
by the policyholders, the exposure to assessments and availability of recoveries
may not offset one another in the insurers' financial statements due to timing
and to the possibility of policies not being renewed in subsequent years.
Allstate entered into a three-year excess of loss reinsurance contract
covering property policies in the northeastern portion of the United States
("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 limit of $1.00 billion over a three-year contract
period. The deductibles on residential property policies in New York are being
converted to include a hurricane deductible that is triggered by hurricane
10
winds greater than 100 miles per hour, and at December 31, 1998, this conversion
process was 40% complete.
Allstate participates in the CEA, a privately-financed, publicly-managed
state agency created to provide coverage for earthquake damage. Insurers selling
homeowner insurance in California are required to offer earthquake insurance to
their customers either through their company or by participation in the CEA. All
of Allstate's traditional earthquake policies and mini-earthquake policies have
been either (i) renewed into the CEA, or (ii) not renewed in accordance with
customer requests. 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 underwritten by the CEA.
Approximately $700 million of the capital needed to create the CEA was
obtained from assessments of participating insurance companies. In 1996,
Allstate's pretax assessment, including related expenses, was approximately $150
million. Should losses arising from an earthquake cause a deficit in the CEA,
additional capital needed to operate the CEA will be obtained through
assessments of participating insurance companies, reinsurance and bond issuances
funded by policyholder assessments. Participating insurers are required to fund
a second assessment, not to exceed $2.15 billion, if the capital of the CEA
falls below $350 million. Participating insurers are required to fund a third
assessment, not to exceed $1.43 billion, if the aggregate CEA earthquake losses
exceed $5.81 billion or the capital of the CEA falls below $350 million. At
December 31, 1998, the CEA's capital balance was approximately $432 million. If
the CEA assesses its member insurers for any amount, the amount of future
assessments on members is reduced by the amounts previously assessed. To date,
the CEA has not assessed member insurers beyond the initial assessment. The
authority of the CEA to assess participating insurers expires when it has
completed twelve years of operation. At the end of 1998, the CEA had completed
two years of operation. All future assessments to participating CEA insurers are
based on their CEA insurance market share as of December 31 of the preceding
year. Assuming its current CEA market share does not materially change, Allstate
does not expect its portion of these additional contingent assessments, if any,
to exceed $540 million, as the likelihood of an earthquake causing losses in
excess of the CEA industry capacity of $5.81 billion is less than .2%.
Management believes Allstate's exposure to earthquake losses in California has
been significantly reduced as a result of its participation in the CEA.
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 coalition whose members include
property insurers and insurance agents. This group is promoting a measure that
would provide federal reinsurance to state disaster plans. Proposed legislation,
H.R. 21, was introduced at the beginning of the 106th Congress and was referred
to the House Banking and Financial Services Committee. Allstate is unable to
determine whether, or in what form, such proposed legislation could be enacted
or any resulting effect on Allstate.
11
PROPERTY-LIABILITY CLAIMS AND CLAIMS EXPENSE RESERVES
Allstate establishes property-liability loss reserves to cover its
estimated ultimate liability for losses and loss adjustment expenses with
respect to reported claims and claims incurred but not yet reported as of the
end of each accounting period. In accordance with applicable insurance laws and
regulations and generally accepted accounting principles ("GAAP"), no specific
claim reserves are established until a loss occurs, including a loss from a
catastrophe. Underwriting results of the two Property-Liability segments 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 C-48 to C-51 of the 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. These 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.
The Company, in the normal course of business, may supplement its claims
and underwriting processes by utilizing third party adjusters, appraisers,
engineers, inspectors, other professionals and information sources to assess and
settle catastrophe and non-catastrophe related claims.
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 these 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 C-48 to C-51 of the Proxy Statement,
12
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 reserves,
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 C-32 of the 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 C-30 of the Proxy Statement, incorporated herein by reference in response
to Item 8 hereof.
13
GROSS
($ in millions)
Year Ended December 31,
------------------------------------
1998 1997 1996
--------- --------- ---------
Gross reserve for property-liability claims and claims expense,
beginning of year $ 17,403 $ 17,382 $ 17,687
Acquisitions 96 0 0
--------- --------- ---------
Total gross reserve adjusted 17,499 17,382 17,687
Incurred claims and claims expense
Provision attributable to the current year 14,614 14,268 15,186
Decrease in provision attributable to prior years (695) (618) (338)
--------- --------- ---------
Total claims and claims expense 13,919 13,650 14,848
Claim payments
Claims and claims expense attributable to current year 8,909 8,300 8,073
Claims and claims expense attributable to prior years 5,628 5,329 5,711
Claims and claims expense attributable to disposition of operations 0 0 1,369
--------- --------- ---------
Total payments 14,537 13,629 15,153
--------- --------- ---------
Gross reserve for property-liability claims and claims expense,
end of year as shown on 10-K loss reserve development table $ 16,881 $ 17,403 $ 17,382
========= ========= =========
NET
($ in millions)
Year Ended December 31,
----------------------------------
1998 1997 1996
--------- --------- ---------
Net reserve for property-liability claims and claims expense,
beginning of year $ 15,773 $ 15,598 $ 16,156
Acquisitions 58 0 0
--------- --------- ---------
Total net reserves adjusted 15,831 15,598 16,156
Incurred claims and claims expense
Provision attributable to the current year 14,301 14,013 14,823
Decrease in provision attributable to prior years (700) (677) (336)
--------- --------- ---------
Total claims and claims expense 13,601 13,336 14,487
Claim payments
Claims and claims expense attributable to current year 8,521 8,148 7,522
Claims and claims expense attributable to prior years 5,488 5,013 5,787
Claims and claims expense attributable to disposition of operations 0 0 1,736
--------- --------- ---------
Total payments 14,009 13,161 15,045
--------- --------- ---------
Net reserve for property-liability claims and claim expense,
end of year as shown on 10-K loss reserve development table (1) $ 15,423 $ 15,773 $ 15,598
========= ========= =========
(1) Reserves for claims and claims expense are net of reinsurance of $1.46 billion, $1.63 billion and $1.78 billion,
at December 31, 1998, 1997 and 1996, respectively.
The year-end 1998 gross reserves of $16.88 billion for property-liability
insurance claims and claims expense, as determined under GAAP, were $1.90
billion more than the reserve balance of $14.98 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 $1.46 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 international subsidiaries which are 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 1997
developed favorably in 1998 by $700 million, compared to favorable development
of the gross reserves of $695 million. Net reserve development in 1998 and 1997
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 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 C-10 to C-14 of
the 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 C-13 and C-14 of the 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 the 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.
16
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)
--------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Gross Reserves for
Unpaid Claims and
Claims Expense $10,035 $10,962 $12,117 $13,136 $14,902 $15,209 $16,414 $17,326 $17,382 $17,403 $16,881
Deduct: Reinsurance
Recoverable 1,180 1,066 1,028 1,066 1,419 1,338 1,298 1,490 1,784 1,630 1,458
----- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Reserve For Unpaid
Claims and Claims Expense $8,855 $9,896 $11,089 $12,070 $13,483 $13,871 $15,116 $15,836 $15,598 $15,773 $15,423
- -------------------------
Paid (cumulative) as of:
- ------------------------
One year later 3,516 4,295 4,558 4,550 4,955 4,472 4,748 5,787 5,013 5,488
Two years later 5,279 6,338 6,723 6,688 7,068 6,519 7,749 8,232 7,952
Three years later 6,433 7,584 8,010 7,935 8,283 8,273 9,247 10,083
Four years later 7,161 8,338 8,778 8,694 9,430 9,140 10,400
Five years later 7,611 8,824 9,279 9,508 9,985 9,849
Six years later 7,927 9,180 9,883 9,907 10,467
Seven years later 8,189 9,651 10,196 10,284
Eight years later 8,560 9,921 10,512
Nine years later 8,803 10,206
Ten years later 9,065
Reserve Reestimated as of:
- --------------------------
End of year 8,855 9,896 11,089 12,070 13,483 13,871 15,116 15,836 15,598 15,773 15,423
One year later 8,891 10,312 11,367 11,990 13,081 13,159 14,691 15,500 14,921 15,073
Two years later 9,006 10,617 11,576 11,909 12,745 12,890 14,295 14,917 14,450
Three years later 9,323 10,990 11,680 11,905 12,735 12,832 13,928 14,700
Four years later 9,686 11,105 11,777 12,010 12,877 12,617 13,835
Five years later 9,817 11,245 11,954 12,322 12,830 12,585
Six years later 9,974 11,447 12,378 12,395 12,895
Seven years later 10,212 11,962 12,503 12,499
Eight years later 10,762 12,091 12,612
Nine years later 10,896 12,216
Ten years later 11,022
Initial reserve in excess of (less than) reestimated reserve:
- -------------------------------
Amount ($2,167) ($2,320) ($1,523) ($429) $588 $1,286 $1,281 $1,136 $1,148 $700
Percent (24.5%) (23.4%) (13.7%) (3.6%) 4.4% 9.3% 8.5% 7.2% 7.4% 4.4%
Gross Reestimated Liability-Latest $14,723 $14,274 $15,394 $16,238 $16,267 $16,708
Reestimated Recoverable-Latest 1,828 1,689 1,559 1,538 1,817 1,635
-----------------------------------------------------
Net Reestimated Liability-Latest $12,895 $12,585 $13,835 $14,700 $14,450 $15,073
Gross Cumulative Excess (Deficiency) $179 $935 $1,020 $1,088 $1,115 $695
=====================================================
(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.
17
The subsequent reduction in the net reserves established since December 31,
1993 shown in the foregoing table reflects favorable severity trends that the
Company has experienced, as more fully discussed below. The principal cause for
the initial reserves established at the end of 1991, and all previous years
reflected in the table, needing to be increased over the time frame in the above
table is the cumulative adverse reserve development on environmental, 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, complex unresolved legal issues
regarding policy coverage, availability of reinsurance 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.
Allstate has 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
has 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 has also performed in-depth analysis of its reinsurance
recoverables. During 1996, based upon the Company's re-evaluation, loss reserves
for environmental and asbestos exposures, net of reinsurance, were increased by
$172 million and $72 million, respectively. These studies and re-evaluations
resulted in Allstate's actions to increase reserves as described in
AProperty-Liability Claims and Claims Expense Reserves" on pages C-10 to C-14 of
the Proxy Statement, incorporated herein by reference in response to Item 7
hereof. Allstate updates its evaluations of environmental, asbestos and mass
tort reserves annually. While Allstate believes the improved actuarial
techniques and databases described above have assisted in its ability to
estimate environmental, asbestos and mass tort net loss reserves, these
refinements may prove to be inadequate indicators of the extent of probable
loss. See note 6 of the Notes to the Consolidated Financial Statements on pages
C-48 to C-51 of the Proxy Statement, incorporated herein by reference in
response to Item 8 hereof.
18
The following table is derived from the Loss Reserve Development table and
summarizes the effect of reserve reestimates, net of reinsurance, on calendar
year operations for the same ten-year period ended December 31, 1998. The total
of each column details the amount of reserve reestimates made in the indicated
calendar year and shows the accident years to which the reestimates are
applicable. The amounts in the total accident year column on the far right
represent the cumulative reserve reestimates for the indicated accident year(s).
Effect of Net Reserve Reestimates on
Calendar Year Operations
($ in millions )
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 TOTAL
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -----
BY ACCIDENT
YEAR
1988 & PRIOR $36 $115 $317 $363 $131 $157 $238 $550 $134 $126 $2,167
1989 301 (12) 10 (16) (17) (36) (35) (5) (1) 189
1990 (27) (164) (11) (43) (25) (91) (4) (16) (381)
1991 (289) (185) (101) (72) (112) (52) (5) (816)
1992 (321) (332) (115) (170) (120) (39) (1,097)
1993 (376) (259) (200) (168) (97) (1,100)
1994 (156) (338) (152) (61) (707)
1995 60 (216) (124) (280)
1996 (94) (254) (348)
1997 (229) (229)
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ------
TOTAL $36 $416 $278 ($80) ($402) ($712) ($425) ($336) ($677) ($700) ($2,602)
===== ==== ==== ===== ====== ====== ====== ====== ====== ====== ========
Favorable calendar year reserve development in 1992 through 1998 was the
result of favorable severity trends in each of the seven years, which more than
offset adverse development in Discontinued Lines and Coverages.
The favorable severity trend during this seven-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 since 1995. 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. 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, 1998. Future reserve releases, if any, are
expected to be adversely impacted by anticipated increases in medical cost
inflation rates. See ARisk Factors Affecting Allstate" and "Forward-Looking
Statements" in this Form 10-K.
19
DISCONTINUED LINES AND COVERAGES
An Allstate subsidiary wrote excess and surplus lines coverages from 1972
to 1985, including professional liability coverages, principally on claims-made
coverage forms. The subsidiary also wrote substantial umbrella and excess
liability coverages on an occurrence basis, including medical and other product
liability coverages, for major United States corporations. In 1985, the
subsidiary was merged into AIC with AIC assuming all of its assets and
liabilities. Since the early 1980's, Allstate has experienced significant
increases in losses for years prior to 1980 arising out of the subsidiary's
umbrella and excess liability coverage for large corporations. Since the late
1980's, most of these losses have related to environmental damages,
asbestos-related damages or mass-tort settlements. AIC continues to be involved
in coverage litigation with the subsidiary's insureds.
In addition, 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
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 product 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 product 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 C-10 to C-14 of the 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.
20
LIFE AND SAVINGS BUSINESS
Life and Savings markets a broad line of life insurance, savings 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. Savings products include both deferred
annuities, such as variable annuities and fixed rate single premium deferred
annuities, flexible premium deferred annuities and immediate annuities such as
structured settlement annuities. Life and Savings' group pension products
include guaranteed investment contracts and retirement annuities. The assets and
liabilities relating to flexible premium deferred variable annuities, variable
life, variable universal life and certain guaranteed investment contracts are
legally segregated and reflected as assets and liabilities of the Separate
Accounts. In 1998, annuity premiums and deposits represented 56% of Life and
Savings' total statutory premiums and deposits.
Life and Savings 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.
Life and Savings markets individual and group life insurance, savings and
group pension products and reaches a broad market of potential customers
throughout the United States and in other countries through Allstate agents
(including life specialists), banks, independent agents and brokers and through
direct response marketing. Products bearing the "Allstate Life Insurance
Company" name are generally sold by Allstate agents, specialized brokers, and
through direct marketing techniques. Other products, many of which are of
similar types to those bearing the "Allstate Life Insurance Company" name but
which bear other brand names, are distributed through independent insurance
agents, brokers, banks and direct marketing techniques. Life insurance in force,
net of reinsurance, was $202 billion at December 31, 1998 and $194 billion at
December 31, 1997. As of December 31, 1998, Life and Savings had $41.86 billion
of investments, including $10.10 billion of Separate Account assets.
ALIC subsidiary Northbrook Life Insurance Company ("Northbrook") has a strategic
alliance with Dean Witter Reynolds, Inc., a wholly-owned subsidiary of Morgan
Stanley Dean Witter & Co. ("Dean Witter") for the marketing and distribution of
Northbrook's life and annuity products through Dean Witter's broker sales force.
ALIC subsidiary Glenbrook Life and Annuity Company has also entered into
marketing arrangements with banks and brokers 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. In 1998
Glenbrook Life and Annuity also began distributing a no-load variable annuity
product through direct marketing. Life and Savings is committed to broadening
its bank and broker 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 currently benefits from
agreements with financial services entities who market and distribute its
products, change in control of these non-affiliated entities with which Allstate
has alliances could have a detrimental effect on Life and Savings sales. See
21
"Recent Developments," above, concerning the joint venture between ALIC and
Putnam Investments to sell variable insurance products.
Life and Savings utilizes certain services shared with AIC such as
investment, finance, information technology and legal services. Although Life
and Savings' management develops overall strategies for its business, the
primary management of each distribution channel is largely decentralized.
Accordingly, management of each distribution channel is primarily responsible
for determining its own product mix and product features appropriate for its
target market. Life and Savings believes that its range of distribution channels
promotes flexibility, extends market reach, reduces dependency on any one
distribution system, and allows Life and Savings 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 Life and Savings products are discussed in Note 2 of the
Notes to the Consolidated Financial Statements on pages C-36 to C-40 of the
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 Life and Savings, is highly competitive. As of
December 31, 1998, there were approximately 830 groups of life insurance
companies in the United States, most of which offer one or more products similar
to those offered by Life and Savings and many of which use similar marketing
techniques. Based on information contained in statements filed with insurance
departments, in 1997 approximately 68% of the life insurance and annuity
premiums and deposits were written by 25 groups of companies. Life and Savings
ranked 13th based on ordinary life insurance in force and 20th based on
statutory admitted assets. Banks and savings and loan associations in certain
jurisdictions compete with Life and Savings 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.
YEAR 2000
The Company is heavily dependent upon complex computer systems for all
phases of its operations, including customer service, insurance processing,
underwriting, loss reserving, investments and other enterprise systems. Since
many of the Company's older computer software programs recognize only the last
two digits of the year in any date, some software may fail to operate properly
in or after the year 1999, if the software is not reprogrammed, remediated, or
replaced ("Year 2000"). Also, many systems and equipment that are not typically
thought of as computer-related (referred to as "non-IT") contain embedded
hardware or software that may have a Year 2000 sensitive component. Allstate
believes that many of its counterparties and suppliers also have Year 2000
issues and non-IT issues which could affect the Company.
In 1995, the Company commenced a plan consisting of four phases which are
intended to mitigate and/or prevent the adverse affects of the Year 2000 issues
on its systems: 1) inventory and assessment of
22
affected systems and equipment, 2) remediation and compliance of systems and
equipment through strategies that include the replacement or enhancement of
existing systems, upgrades to operating systems already covered by maintenance
agreements and modifications to existing systems to make them Year 2000
compliant, 3) testing of systems using clock-forward testing for both current
and future dates and for dates which trigger specific processing, and 4)
contingency planning which will address possible adverse scenarios and the
potential financial impact to the Company's results of operations, liquidity or
financial position.
The Company believes that the first three steps of this plan, assessment,
remediation and testing, including clock-forward testing which is being
performed on the Company's systems and non-IT, are mostly complete for the
Company's critical systems. In April 1998, the Company announced its main
premium application system, ALERT, which manages more than 20 million auto and
homeowners policies is Year 2000 compliant. The Company is relying on other
remediation techniques for its midrange and personal computer environments, and
certain mainframe applications.
Certain investment processing systems, midrange computers and personal
computer environments are planned to be remediated by the middle of 1999, and
some systems and non-IT related to discontinued or non-critical functions of the
Company are planned to be abandoned by the end of 1999.
The Company is currently in the process of identifying key processes and
developing contingency plans in the event that the systems supporting these key
processes are not Year 2000 compliant at the end of 1999. Management believes
these contingency plans should be completed by mid-1999. Until these plans are
complete, management is unable to determine an estimate of the most reasonably
possible worst case scenario due to issues relating to the Year 2000.
In addition, the Company is actively working with its major external
counterparties and suppliers to assess their compliance efforts and the
Company's exposure to both their Year 2000 issues and non-IT issues. This
assessment has included the solicitation of external counterparties and
suppliers, evaluating responses received and testing third party interfaces and
interactions to determine compliance. Currently the Company has solicited
approximately 1,500 and has received responses from approximately 75% of its
counterparties and suppliers. Allstate will continue its efforts to solicit
responses on Year 2000 compliance from these parties. The majority of these
responses have stated that the counterparties and suppliers believe that they
will be Year 2000 compliant and that no transactions will be affected. However,
some key vendors have not provided affirmative responses to date. The Company
has also decided to test certain interfaces and interactions to gain additional
assurance on third party compliance. If key vendors are unable to meet the Year
2000 requirement, Allstate is preparing contingency plans that will allow the
Company to continue to sell its products and to service its customers.
Management believes these contingency plans should be completed by mid-1999. The
Company currently does not have sufficient information to determine whether or
not all of its external counterparties and suppliers will be Year 2000 ready.
The Company is currently assessing the level of Year 2000 risk
associated with certain personal lines policies that have been issued. To date,
no changes have been made in coverages provided by the Company's personal auto
and homeowners lines policies to specifically exclude coverage for Year 2000
23
related claims. This does not mean that all losses, or any particular type of
loss, that might be related to the Year 2000 will be covered. Rather, all claims
will continue to be evaluated on a case-by-case basis to determine whether
coverage is available for a particular loss in accordance with the applicable
terms and conditions of the policy in force.
The Company also has investments which have been publicly and privately
placed. The Company may be exposed to the risk that the issuers of these
investments will be adversely impacted by Year 2000 issues. The Company assesses
the impact which Year 2000 issues have on the Company's investments as part of
due diligence for proposed new investments and in its ongoing review of all
current portfolio holdings. Any recommended actions with respect to individual
investments are determined by taking into account the potential impact of Year
2000 on the issuer. Contingency plans are being created for any securities held
whose issuer is determined to not be Year 2000 compliant.
The Company presently believes that it will resolve the Year 2000 issue in
a timely manner. Year 2000 costs are expensed as incurred, therefore the
majority of expenses related to this project have been incurred as of December
31, 1998. The Company estimates that approximately $125 million in costs will be
incurred between the years of 1995 and 2000. These amounts include costs
directly related to fixing Year 2000 issues, such as modifying software and
hiring Year 2000 solution providers. These amounts also include costs incurred
to replace certain non-compliant systems which would not have been otherwise
replaced.
CAPITAL REQUIREMENTS
The capacity for Allstate's premium growth, 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 was 1.4 to 1 at December 31, 1998 and 1997. 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 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 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
24
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 risks, but
places more emphasis on underwriting factors for reserving and pricing. At
December 31, 1998, RBC for each of Allstate's domestic insurance companies
exceeded the required capital levels. See "Capital Resources" on pages C-19 and
C-20 of the 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 Savings segments. 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 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 derivative
instruments 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, 1998, 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 C-22 to C-24
of the Proxy Statement, incorporated herein by reference in response to Item 7
hereof, and Note 4 of the Notes to the Consolidated Financial Statements on
pages C-41 to C-44 of the 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 PP&C segment. 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,
25
claims practices, mandated participation in shared markets and guaranty funds,
reserve adequacy, insurer solvency, transactions with affiliates, the amount of
dividends that may be paid, and restrictions on underwriting standards. For
discussion of statutory financial information, see note 12 of the Notes to
Consolidated Financial Statements on pages C-57 and C-58 of the 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 C-52 to C-55 of the 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 1999 without prior
approval of the Illinois Department of Insurance is $2.96 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 Arizona, Florida, Illinois, Nebraska, New York
and Texas. The insurance codes in such states contain similar provisions
(subject to certain variations) to the effect that the acquisition or change of
"control" of a domestic insurer or of any person that controls a domestic
insurer cannot be consummated without the prior approval of the relevant
insurance regulator. In general, a presumption of "control" arises from the
ownership, control, possession with the power to vote or possession of proxies
with respect to 10% or more of the voting securities of a domestic insurer or of
a person that controls a domestic insurer. In Florida, regulatory approval must
be obtained prior to the acquisition of 5% or more of the voting securities of a
domestic stock insurer or of a controlling company. In addition, certain state
insurance laws contain provisions that require pre-acquisition notification to
state agencies of a change in control with respect to a non-domestic insurance
company admitted in that state.
26
hile 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 Arizona, 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 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 bodily injury claims since 1995, 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.
27
From time to time, the private passenger auto 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 auto 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. Underwriting
results related to these organizations have been immaterial to the results of
operations.
GUARANTY FUNDS - 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 related to these funds have been immaterial. See "Pending
Accounting Standards" on page C-27 of the Proxy Statement, incorporated herein
by reference in response to Item 7 hereof.
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, 1998, 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. 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")
28
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,
is 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 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.
New and proposed federal and state regulation and legislation would allow
banks greater participation in securities and insurance businesses. Depending on
the form in which these proposals are enacted or promulgated, they could present
an increased level of competition for the sale of Life and Savings products.
Furthermore, the market for deferred annuities and interest-sensitive life
insurance is enhanced by the tax incentives available under current law. Any
legislative changes which would 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, and (2) increasing competition in capital
markets.
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, in 1998 Allstate was also engaged,
through subsidiaries and joint ventures, in the insurance business in Germany,
Indonesia and the Republic of Korea. In 1999, Allstate expects to sell insurance
in Japan, Italy and the Philippines. The following tabulation reflects, in
percentages, the principal geographic distribution of statutory premiums earned
for the Property-Liability segments and statutory premiums for the Life and
Savings segment for the year ended December 31, 1998:
29
NY CA TX FL NJ PA IL MI MD Total
-- -- -- -- -- -- -- -- -- -----
Property-
Liability 11.0 9.5 9.0 7.9 5.0 5.0 4.0 3.5 3.1 58.0
PA IL NE MA OH CA NJ FL TX MI Total
-- -- -- -- -- -- -- -- -- -- -----
Life
13.0 11.8 11.6 10.6 6.8 5.3 5.0 4.3 3.5 3.3 75.2
No other jurisdiction accounted for more than 3% of the statutory premiums
for the Property-Liability or Life and Savings segments.
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, 1998, Allstate employed approximately 53,000 people.
SERVICE MARKS
The names "Allstate" and "Allstate Life," the slant "A" Allstate logo, the
slogan "You're in Good Hands With Allstate" and the graphic "Good Hands" design
logo which features cupped hands holding an automobile and a house, and the
"Northbrook" logo design are used extensively in Allstate's businesses.
Allstate's rights in the United States to the names "Allstate" and "Allstate
Life", the Allstate and Northbrook logos, the "Good Hands" slogan and the "Good
Hands" symbol continue so long as Allstate continues to exercise those rights.
These service marks are the subject of numerous renewable United States and
foreign service mark registrations. The Company believes that these service
marks are material to the business of Allstate.
FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-K 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, Allstate notes several important
factors that could cause its actual results and experience with respect to
forward-looking statements to differ materially from the anticipated results or
other expectations expressed in Allstate's forward-looking statements:
1. Exposure to Catastrophe Losses - Allstate believes that:
o the strategies implemented by it to manage its exposure to
catastrophes have reduced the probability of
30
severe losses in the future;
o the implementation of certain described actions taken in Florida and
the Northeast will reduce Allstate's exposure to losses from
catastrophes in those areas;
o Allstate's exposure to earthquake losses in California has been
significantly reduced as a result of its participation in the CEA (see
"Catastrophe Exposure and Catastrophe Management," above).
Factors that could cause actual catastrophe losses to be materially greater than
currently anticipated by Allstate include that fact that its beliefs are based
in part on the efficacy of the techniques and the accuracy of the data used by
Allstate and the CEA which are designed to predict the probability of
catastrophes and the extent of losses to Allstate and the CEA resulting from
catastrophes. Catastrophic events may occur in the future which indicate that
such techniques and data do not accurately predict Allstate's or the CEA's
losses from catastrophes, and the probability and extent of such losses to
Allstate and the CEA may differ materially from that which would have been
predicted by such techniques and data.
2. ENVIRONMENTAL AND ASBESTOS RISKS - Allstate believes that changes to
insurance policies have effectively limited its exposure to losses from
environmental and asbestos for most policies written in 1986 and all policies
written after 1986 ( see "Discontinued Lines and Coverages," above). Factors
that could cause Allstate to sustain materially greater losses from these
policies include the possibility that future judicial decisions could be adverse
to it. That is, interpretation of provisions in insurance policies is a complex
process, and courts have reached different and sometimes inconsistent
conclusions concerning liability under these policies. Consequently, Allstate's
experience to date may not be an accurate predictor of future experience
concerning its possible exposure to losses under these policies.
3. BODILY INJURY SEVERITY TRENDS - The references to favorable severity trends,
which management believes may be due in part to lower than anticipated medical
cost inflation for personal auto injury claims and to improvements in Allstate's
claim settlement processes (see "Property-Liability Claims and Claims Expense
Reserves," above), reflect statistical data for the periods indicated. Such data
for a future period or periods could well indicate that 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 severities may influence state
insurance regulators to deny Allstate rate increases which could reduce the
growth of its revenues.
4. YEAR 2000 ISSUES - Allstate believes that it will be able to timely resolve
the Year 2000 issues affecting its computer operations and that the costs
incurred between the years 1995-2000 in resolving these issues will be
approximately $125 million (see "Year 2000," above). However, the extent to
which the computer operations of Allstate's external counterparties and
suppliers are adversely affected could, in turn, affect Allstate's ability to
communicate with such counterparties and suppliers, could increase the cost of
resolving the Year 2000 issues and could materially affect Allstate's results of
operations in any future period or periods.
31
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
Edward M. Liddy*........53 Chairman, President and Chief Executive 1994
Officer of the Company and AIC
Richard I. Cohen........54 Senior Vice President of AIC 1989
(PP&C Claim Service Unit)
Joan M. Crockett........48 Senior Vice President
of AIC (Human Resources) 1994
Edward J. Dixon.........55 Senior Vice President of AIC 1988
(PP&C Field Operations)
Robert W. Gary..........60 Senior Vice President of AIC 1986
President, PP&C Unit)
Steven L. Groot.........49 Senior Vice President of AIC 1988
(President, International Unit)
Louis G. Lower, II......53 Chairman, ALIC 1982
Michael J. McCabe.......53 Senior Vice President of AIC 1980
(Marketing and Brand Development)
Ronald D. McNeil........46 Senior Vice President of AIC 1994
(PP&C, Property Operations)
Robert W. Pike..........57 Vice President, Secretary and 1978
General Counsel of the Company;
Executive Vice President,
Secretary and General Counsel
of AIC
Samuel H. Pilch ........52 Controller of the Company; Group 1995
Vice President and Controller
of AIC
Francis W. Pollard......56 Senior Vice President and 1984
Chief Information Officer
of AIC
Casey J. Sylla..........55 Vice President and Acting Chief Financial 1995
Officer of the Company; Senior Vice
President, Chief Investment Officer and
Acting Chief Financial Officer of AIC
Rita P. Wilson..........52 Senior Vice President of AIC 1988
(President, Allstate Indemnity)
Thomas J. Wilson........41 President, ALIC 1995
No family relationships exist among the above-named individuals.
___________________
*Also a director of the Company
32
Each of the Company and AIC officers named above may be removed from office
at any time, with or without cause, by the Board of Directors of the Company, in
the case of Company positions, and by the Board of Directors of AIC, in the case
of AIC positions.
With the exception of Messrs. Liddy, T. Wilson, Sylla and Pilch, 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 five years. Prior to his election on
January 1, 1999 to the position stated above, Mr. Liddy served as the Company's
and AIC's President and Chief Operating Officer since August 1994, and before
that as Senior Vice President and Chief Financial Officer of Sears, Roebuck and
Co. since February 1992. Prior to his election on January 1, 1999 to the
position stated above, T. Wilson served as the Company's and AIC's Chief
Financial Officer since January 1, 1995 and prior to that as Sears' Vice
President, Strategy and Analysis since 1993. Prior to his election on January 1,
1999 to the position stated above, Mr. Sylla was AIC's Senior Vice President and
Chief Investment Officer since July 5, 1995. Before coming to Allstate, Mr.
Sylla served as a Senior Vice President for Northwestern Mutual Life Insurance
Company from 1992 to 1995. Before his election on January 18, 1999 to the
position stated above, Mr. Pilch served as Controller of the Company and AIC
since 1995, and prior to that as Vice President of The Travelers Corporation
since 1989.
ITEM 2. PROPERTIES
Allstate's home office complex is located in Northbrook, Illinois. The
complex consists of 11 building complexes providing approximately 2 million
square feet of office space on a 185 acre site. The Northbrook complex serves as
the headquarters for AIC and ALIC.
Allstate's field business operations are conducted substantially from 17
major offices located principally in metropolitan areas throughout the United
States and Canada. Allstate also has approximately 270 claim service offices,
sales facilities at approximately 11,600 locations, and approximately 850
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 the conduct of its 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
Consolidated Financial Statements on pages C-52 to C-55 of the Proxy Statement
incorporated herein by reference in response to Item 8 hereof.
33
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There were 184,332 record holders of the Company's common stock as of
February 18, 1999. 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 1998 and 1997. Stock
prices and dividends have been adjusted to reflect the 2-for-1 split of the
Company's common stock in July 1998:
Dividends
High Low Close declared
1998
First quarter 49 3/16 40 15/16 45 31/32 .135
Second quarter 50 1/8 44 1/8 45 25/32 .135
Third quarter 52 3/8 36 1/16 41 1/2 .135
Fourth quarter 48 3/8 37 38 1/2 .135
-------------------------------------------------------------------------------------------
1997
First quarter 34 1/8 28 1/8 29 11/16 .12
Second quarter 38 1/2 29 5/16 36 1/2 .12
Third quarter 40 9/16 35 15/32 40 3/16 .12
Fourth quarter 47 3/16 38 15/32 45 1/4 .12
-------------------------------------------------------------------------------------------
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 C-2 and C-3 of the Proxy Statement.
34
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 C-4 to C-29 of the Proxy
Statement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference to the "Market Risk" discussion on pages C-16 to
C-19 of the Proxy Statement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, including the notes
to such statements on pages C-30 to C-65 of the Proxy Statement and the
information under "Quarterly Results" on page C-65 of the 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 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-
35
Control Arrangements" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference to the material under the
headings "Security Ownership of Directors and Executive Officers" and "Security
Ownership of Certain Beneficial Owners" in the 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 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:
None.
36
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 26, 1999
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/ EDWARD M. LIDDY Chairman, President and
Edward M. Liddy Chief Executive Officer )
and a Director )
(Principal Executive )
Officer) )
)
March 26, 1999
S/CASEY J. SYLLA Vice President and
Casey J. Sylla Acting Chief Financial )
Officer )
(Principal Financial )
Officer) )
37
SIGNATURE TITLE DATE
S/ JAMES G. ANDRESS Director )
James G. Andress
S/WARREN L. BATTS Director )
Warren L. Batts
S/EDWARD A. BRENNAN Director )
Edward A. Brennan
S/ JAMES M. DENNY Director ) March 26, 1999
James M. Denny
S/RONALD T. LEMAY Director )
Ronald T. LeMay
S/MICHAEL A. MILES Director )
Michael A. Miles
S/H. JOHN RILEY, JR. Director )
H. John Riley, Jr.
S/JOSHUA I. SMITH Director )
Joshua I. Smith
37
THE ALLSTATE CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Year Ended December 31, 1998
The following consolidated financial statements, notes thereto and related
information of The Allstate Corporation are incorporated herein by reference to
the Company's Proxy Statement.
PAGE*
Consolidated Statements of Operations ** C-30
Consolidated Statements of Comprehensive Income ** C-31
Consolidated Statements of Financial Position ** C-32
Consolidated Statements of Shareholders' Equity ** C-33
Consolidated Statements of Cash Flows ** C-34
Notes to the Consolidated Financial Statements** C-35
Quarterly Results ** C-65
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 Allowance 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 the Company's 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, 1998
($ in millions)
Cost Fair Carrying
---- Value Value
TYPE OF INVESTMENT ----- -----
Fixed Income Securities, Available for Sale:
Bonds:
United States government, government
agencies and authorities................................ $3,171 $3,960 $3,960
States, municipalities and political subdivisions............ 17,589 18,771 18,771
Foreign governments.......................................... 625 653 653
Public utilities............................................. 2,809 3,134 3,134
Convertibles and bonds with warrants attached................ 552 654 654
All other corporate bonds.................................... 13,147 13,991 13,991
Mortgage-backed securities...................................... 7,612 7,879 7,879
Asset-backed securities......................................... 4,197 4,251 4,251
Redeemable preferred stocks..................................... 244 267 267
------ ------ ------
Total fixed income securities............................... 49,946 $53,560 53,560
------ ======= ------
Equity Securities:
Common Stocks:
Public utilities............................................ 223 374 374
Banks, trusts and insurance companies....................... 325 492 492
Industrial, miscellaneous and all other..................... 3,219 5,027 5,027
Nonredeemable preferred stocks.................................. 464 528 528
----- ----- -----
Total equity securities..................................... 4,231 $6,421 6,421
----- ====== -----
Mortgage loans on real estate........................................ 3,458 3,458
Policy loans......................................................... 569 569
Other long-term investments.......................................... 40 40
Short-term investments............................................... 2,477 2,477
------ ------
Total Investments.......................................... $60,721 $66,525
======= =======
S-2
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
($ in millions) Year Ended
December 31,
---------------------------- ----
1998 1997 1996
---- ---- ----
REVENUES
Investment income, less investment expense............................. $ 52 $ 30 $ 10
Realized capital gains................................................. 32 5 -
Other income........................................................... 149 208 29
--- --- ---
233 243 39
EXPENSES
Interest expense....................................................... 192 158 100
Other operating expenses............................................... 10 6 8
--- --- ---
202 164 108
Gain on disposition of operations..................................... 49 - -
--- --- ---
Income (loss) from operations before income tax benefit and equity
in net income of subsidiaries........................................... 80 79 (69)
Income tax benefit........................................................ (24) (42) (31)
Income (loss) before equity in net income of subsidiaries................. 104 121 (38)
----- ----- -----
Equity in net income of subsidiaries...................................... 3,190 2,984 2,113
----- ----- -----
Net income............................................................. 3,294 3,105 2,075
----- ----- -----
OTHER COMPREHENSIVE INCOME, NET OF TAX
Changes in:
Unrealized gains and losses.......................................... 173 818 (633)
Foreign currency translation adjustments............................. (2) (57) 1
----- ----- -----
Other comprehensive income........................................... 171 761 (632)
----- ----- -----
Comprehensive income................................................. $3,465 $3,866 $1,443
====== ====== ======
See accompanying notes to condensed financial information and notes to Consolidated Financial Statements
incorporated herein by reference.
S-3
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE II (CONTINUED)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF FINANCIAL POSITION
>
($ in millions)
December 31,
----------------------
1998 1997
---- ----
ASSETS
Investments in subsidiaries............................................ $ 18,720 $ 17,041
Investments
Fixed income securities, at fair value (amortized cost $484 and $419) 484 426
Short-term........................................................... 430 85
------ ------
Total investments.................................................... 914 511
Receivable from subsidiaries........................................... 563 441
Dividends receivable from subsidiaries................................. - 110
Other assets........................................................... 81 97
------- ------
TOTAL ASSETS......................................................... $ 20,278 $ 18,200
======= ======
LIABILITIES
Short-term debt........................................................ $ 393 $ 199
Long-term debt......................................................... 1,300 1,457
Payable to subsidiaries................................................ 1,182 773
Dividends payable to shareholders...................................... 111 103
Other liabilities...................................................... 52 58
----- -----
TOTAL LIABILITIES.................................................... 3,038 2,590
----- ------
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, 25 million shares authorized,
none issued........................................................
Common stock, $.01 par value, 1.0 billion shares authorized
and 900 million issued; 818 million and 850 million shares
outstanding........................................................ 9 9
Additional capital paid-in............................................. 3,102 3,116
Retained income........................................................ 14,490 11,646
Deferred ESOP expense.................................................. (252) (281)
Treasury stock, at cost (82 million and 50 million shares)............. (3,065) (1,665)
Accumulated other comprehensive income:
Unrealized net capital gains..................................... 2,994 2,821
Unrealized foreign currency translation adjustments.............. (38) (36)
------ ------
Total accumulated other comprehensive income....................... 2,956 2,785
------ ------
TOTAL SHAREHOLDERS' EQUITY........................................... 17,240 15,610
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................... $ 20,278 $ 18,200
======= =======
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,
---------------------------------
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income................................................................ $3,294 $3,105 $2,075
Adjustments to reconcile net income to net cash provided by operating
activities
Equity in net income of subsidiaries................................. (3,190) (2,984) (2,113)
Realized capital gains.............................................. (32) (5) -
Gain on disposition of operations.................................... (49) - -
Dividends received from subsidiaries................................. 1,497 623 525
Changes in other operating assets and liabilities.................... 197 (233) (5)
----- ----- -----
Net cash provided by operating activities.......................... 1,717 506 482
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investments..................................... 1,332 789 -
Investment purchases................................................... (1,019) (363) -
Capital contribution to subsidiaries................................... (225) - (23)
Change in short-term investments, net.................................. (335) 427 (543)
Proceeds from disposition of operations............................... 49 - -
Acquisition of subsidiary............................................. (275) - -
------ ----- -----
Net cash provided by (used in) investing activities................ (473) 853 (566)
------ ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Change in short-term debt, net......................................... 181 47 152
Transfers to subsidiaries through intercompany loan agreement, net..... (181) (47) (152)
Repayment of long-term debt............................................ (300) - -
Proceeds from issuance of long-term debt............................... 500 250 -
Proceeds from borrowings from subsidiaries............................. 405 - 773
Dividends paid to shareholders......................................... (443) (323) (378)
Treasury stock purchases............................................... (1,489) (1,358) (336)
Other.................................................................. 83 72 25
------- ------- ----
Net cash provided by (used in) financing activities................ (1,244) (1,359) 84
------- ------- ----
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 1999 Proxy Statement.
The long-term and short-term debt and credit lines presented in Note 8 "Debt" on
page C-52 of the 1999 Proxy Statement, with the exception of the Floating Rate
Notes, are direct obligations of the Registrant.
To conform with the 1998 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 of interest expense in
1998 and 1997, respectively, related to these borrowings.
3..OTHER INCOME
Other income primarily represents income from the settlement of certain employee
benefits of its subsidiaries, mainly profit sharing obligations. The 1997 amount
includes settlements for prior years.
4. GAIN ON DISPOSITION OF OPERATIONS
The gain on disposition of operations in 1998 was in connection with the
conversion of 6.76% Automatically Convertible Equity Securities ("ACES") into
shares of The PMI Group, Inc. common stock.
5. SUPPLEMENTAL DISCLOSURES OF NON CASH INVESTING ACTIVITY AND CASH FLOW
INFORMATION
The Registrant received dividends of $707 million and $768 million from a
subsidiary in the form of fixed income securities in 1998 and 1997,
respectively.
The Registrant paid $178 million, $144 million and $87 million of interest on
debt in 1998, 1997 and 1996, respectively.
S-6
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
($ in millions) At December 31,
--------------------------------------
Reserves
Claims
Deferred Expense
Policy and
Acquisition Contract Unearned
Segment Costs Benefits Premiums
- ------------------------------------- ---- -------- ----------
1998
- ----
Property-Liability operations
PP&C.................................. $ 915 $ 14,297 $ 6,376
Discontinued Lines and Coverages...... - 2,584 1
------ -------- -------
Total Property-Liability.............. 915 16,881 6,377
Life and Savings operations............. 2,181 28,734 48
Corporate and Other..................... - - -
------- -------- -------
Total................................... $ 3,096 $ 45,615 $ 6,425
======= ======== =======
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 Savings operations........... 1,982 27,471 64
Corporate and Other .................. - - -
------ ------- ------
Total................................. $2,826 $44,874 $6,233
====== ======= ======
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 Savings operations........... 1,837 26,407 102
Corporate and Other .................. - - -
------ ------- ------
Total................................. $2,614 $43,789 $6,174
====== ======= =======
S-7
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
($ in millions) For the Year Ended December 31,
--------------------------------------------------------------------------------
Claims,
Premium Claims Amortization
Revenue Expense of Other Premiums
and Net and Contract Policy Operating Written
Contract Investment Benefits Acquisition Costs and (Excluding
Segment Charges Income (1) Costs Expenses Life)
- ------------------------------------- ---- -------- -------- ------- ---------- ---------
1998
- ----
Property-Liability operations
PP&C.................................. $ 19,307 $ 13,572 $ 2,644 $ 1,735 $ 19,516
Discontinued Lines and Coverages...... - 29 - 22 (1)
------ ------ ------- ------- --------
Total Property-Liability.............. 19,307 $ 1,723 13,601 2,644 1,757 19,515
Life and Savings operations............. 1,519 2,115 2,415 377 315 136
Corporate and Other..................... - 52 - - (6) -
------- -------- ------- -------- ------- --------
Total................................... $ 20,826 $ 3,890 $ 16,016 $ 3,021 $ 2,066 $ 19,651
========= ======== ======== ======= ======= ========
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 Savings operations........... 1,502 2,085 2,415 298 302 132
Corporate and Other .................. - 30 - - (19) -
-------- ----- ------ ------ ------ -------
Total................................. $20,106 $3,861 $15,751 $2,789 $1,937 $18,921
======= ====== ======= ====== ====== =======
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 Savings operations........... 1,336 2,045 2,312 203 308 173
Corporate and Other .................. - 10 - - (2) -
------ ------- ------ ------- ------ -------
Total................................. $19,702 $3,813 $16,799 $2,342 $2,112 $18,759
======= ====== ======= ====== ====== =======
(1) A single investment portfolio supports the Property-liability segment.
S-7
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
($ in millions)
Percent
of
Ceded to Assumed from Amount
Gross Other Other Net Assuamed
Amount Companies Companies Amount to Net
YEAR ENDED DECEMBER 31, 1998 ------ --------- ----------- ------ --------
Life insurance in force................... $ 276,029 $ 73,769 $ 6 $ 202,267 0.0%
========= ========= ========== =========
Premiums and contract charges:
Life insurance.......................... $ 1,430 $ 174 $ 6 $ 1,262 0.4%
Accident-health insurance............... 238 4 23 257 8.9%
Property-liability insurance........... 19,666 433 74 19,307 0.4%
--------- --------- ---------- ---------
Total premiums and contract charges. $ 21,334 $ 611 $ 103 $ 20,826 0.5%
========== ========= ========== =========
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 0.0%
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%
========= ======== ========== =========
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, 1998
Allowance for estimated losses on
mortgage loans and real estate........ $ 39 $ (16) $ 8 $ 15
Allowance for reinsurance recoverable.... 147 -
6 141
Allowance for premium installment 61 86 54
receivable . 93
Allowance for deferred tax assets 12 21 33
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 57 109 105 61
receivable..........................
Allowance for deferred tax assets - 12 12
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
(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.
S-9
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE VI - SUPPLEMENTARY INFORMATION CONCERNING
CONSOLIDATED PROPERTY-CASUALTY INSURANCE OPERATIONS
($ in millions)
At December 31,
---------------------------------
1998 1997 1996
---- ---- ----
Deferred policy acquisition costs......................... $ 915 $ 844 $ 777
Reserves for unpaid claims and claim adjustments.......... 16,881 17,403 17,382
Unearned premiums......................................... 6,377 6,169 6,072
($ in millions)
Year Ended December 31,
---------------------------------
1998 1997 1996
---- ---- ----
Earned premiums........................................... $19,307 $18,604 $18,366
Net investment income..................................... 1,723 1,746 1,758
Claims and claims adjustment expense incurred
Current year........................................... 14,301 14,013 14,823
Prior years............................................ (700) (677) (336)
Amortization of deferred policy acquisition costs......... 2,644 2,491 2,139
Paid claims and claims adjustment expense................. 14,009 13,161 15,045
Premiums written.......................................... 19,515 18,789 18,586
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, 1998 and 1997, and for each of
the three years in the period ended December 31, 1998, and have issued our
report thereon dated February 19, 1999; such consolidated financial statements
and report are included in The Allstate Corporation 1999 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 19, 1999
S-11
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-61817 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 19, 1999, appearing in or
incorporated by reference in this Annual Report on Form 10-K of The Allstate
Corporation for the year ended December 31, 1998.
Deloitte & Touche LLP
Chicago, Illinois
March 24, 1999
S-12
EXHIBIT INDEX
The Allstate Corporation Form 10-K
For the Year Ended December 31, 1998
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**
By-Laws as amended effective June 29,1995.
3.(b) Incorporated by reference to the Company's
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.
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.
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 Form 10-K report
for 1995.**
10.12* The Allstate Corporation Deferred
Compensation Plan, as amended and
restated effective November 11, 1997.
Incorporated by reference to Exhibit
to the Company's Form 10-K
report for 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. Incorporated
by reference to Exhibit 10.13 to the
Company's Form 10-K report for 1997.**
10.14* The Allstate Corporation Annual
Executive Incentive Compensation
Plan, as amended and restated as of
March 9, 1999.
10.15* The Allstate Corporation Long-Term
Executive Incentive Compensation
Plan, as amended and restated as of
March 9, 1999.
10.16* The Allstate Corporation Equity
Incentive Plan, as amended and
restated on November 10, 1998.
10.17* Form of stock option under the
Equity Incentive Compensation Plan.
Incorporated by reference to
Exhibit 10.18 to the Company's
Form 10-K report for 1995.**
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EXHIBIT SEQUENTIAL
NO. DOCUMENT DESCRIPTION PAGE NO.
10.18* Form of restricted stock grant
under the Equity Incentive Plan.
Incorporated by reference to
Exhibit 10.18 to the Company's
Form 10-K report for 1996.**
10.19* The Allstate Corporation Equity
Incentive Plan for Non-Employee
Directors as amended and restated on
November 10, 1998.
10.20* The Allstate Corporation Employees
Replacement Stock Plan, as amended
and restated on November 10, 1998.
10.21* Form of stock option under the
Replacement Stock Plan.
Incorporated by reference to
Exhibit 10.21 to the Company=s
Form 10-K report for 1995.**
10.22* Form of restricted stock grant
under the Replacement Stock Plan.
Incorporated by reference to
Exhibit 10.22 to the Company's
Form 10-K for 1995.**
10.23* The Allstate Corporation Annual
Covered Employee Incentive
Compensation Plan as amended and
restated as of March 9, 1999.
11 Computation of Earnings per
Common Share.
12 Computation of Earnings to Fixed
Charges Ratio.
21 Subsidiaries of the Registrant.
23 Independent Auditors' Consent.
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NO. DOCUMENT DESCRIPTION PAGE NO.
27 Financial Data schedule, submitted
electronically to the Securities and
Exchange Commission for information
only and not filed.
------------------
* A management contract or compensatory plan or arrangement.
** SEC File No. 1-11840
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