UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C.  20549

 

 

FORM 10-Q

 

ý  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005

 

OR

 

o  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 No.)
2775 Sanders Road
Northbrook, Illinois		60062
(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number, including area code:   847/402-5000

 

Indicate by check mark whether 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý                                    No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ý                                    No o

 

As of April 29, 2005, the registrant had 668,246,305 common shares, $.01 par value, outstanding.

 

 

THE ALLSTATE CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

March 31, 2005

 

PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Statements of Operations for the Three-Month Periods Ended March 31, 2005 and 2004 (unaudited)	1
	Condensed Consolidated Statements of Financial Position as of March 31, 2005 (unaudited) and December 31, 2004	2
	Condensed Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 2005 and 2004 (unaudited)	3
	Notes to Condensed Consolidated Financial Statements (unaudited)	4
	Report of Independent Registered Public Accounting Firm	18
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Highlights	19
	Property-Liability Highlights	20
	Allstate Protection Segment	22
	Discontinued Lines and Coverages Segment	30
	Property-Liability Investment Results	31
	Allstate Financial Highlights	31
	Allstate Financial Segment	32
	Investments	41
	Capital Resources and Liquidity	43
Item 4.	Controls and Procedures	46
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 6.	Exhibits	47

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

		Three Months Ended
		March 31,
(in millions, except per share data)		2005			2004
		(Unaudited)
Revenues
Property-liability insurance premiums earned		$	6,684		$	6,371
Life and annuity premiums and contract charges		521			496
Net investment income		1,384			1,274
Realized capital gains and losses		116			170
		8,705			8,311
Costs and expenses
Property-liability insurance claims and claims expense		4,063			3,986
Life and annuity contract benefits		411			395
Interest credited to contractholder funds		591			470
Amortization of deferred policy acquisition costs		1,196			1,055
Operating costs and expenses		800			733
Restructuring and related charges		18			11
Interest expense		84			74
		7,163			6,724
Loss on disposition of operations		(4		)	(3		)
Income from operations before income tax expense and cumulative effect of change in accounting principle, after-tax		1,538			1,584
Income tax expense		415			460
Income before cumulative effect of change in accounting principle, after-tax		1,123			1,124
Cumulative effect of change in accounting principle, after-tax		—			(175		)
Net income		$	1,123		$	949
Earnings per share:
Net income per share - basic		$	1.66		$	1.35
Weighted average shares - basic		677.7			704.5
Net income per share - diluted		$	1.64		$	1.34
Weighted average shares - diluted		683.1			709.2

 

See notes to condensed consolidated financial statements.

 

1

 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

		March 31,			December 31,
(in millions except par value data)		2005			2004
		(Unaudited)
Assets
Investments
Fixed income securities, at fair value (amortized cost $93,024 and $90,657)		$	96,695		$	95,715
Equity securities, at fair value (cost $4,618 and $4,566)		5,749			5,895
Mortgage loans		8,161			7,856
Short-term		4,427			4,133
Other		1,851			1,931
Total investments		116,883			115,530
Cash		339			414
Premium installment receivables, net		4,810			4,721
Deferred policy acquisition costs		5,375			4,968
Reinsurance recoverables, net		4,307			4,323
Accrued investment income		1,093			1,014
Property and equipment, net		1,013			1,018
Goodwill		825			825
Other assets		2,734			2,535
Separate Accounts		14,087			14,377
Total assets		$	151,466		$	149,725
Liabilities
Reserve for property-liability insurance claims and claims expense		$	18,958		$	19,338
Reserve for life-contingent contract benefits		12,131			11,754
Contractholder funds		57,494			55,709
Unearned premiums		9,810			9,932
Claim payments outstanding		718			787
Other liabilities and accrued expenses		11,332			9,842
Deferred income taxes		256			829
Short-term debt		75			43
Long-term debt		5,280			5,291
Separate Accounts		14,087			14,377
Total liabilities		130,141			127,902
Commitments and Contingent Liabilities (Note 6)
Shareholders’ Equity
Preferred stock, $1 par value, 25 million shares authorized, none issued		—			—
Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 672 million and 683 million shares outstanding		9			9
Additional capital paid-in		2,763			2,685
Retained income		24,950			24,043
Deferred compensation expense		(152		)	(157		)
Treasury stock, at cost (228 million and 217 million shares)		(7,980		)	(7,372		)
Accumulated other comprehensive income:
Unrealized net capital gains and losses		2,111			2,988
Unrealized foreign currency translation adjustments		13			16
Minimum pension liability adjustment		(389		)	(389		)
Total accumulated other comprehensive income		1,735			2,615
Total shareholders’ equity		21,325			21,823
Total liabilities and shareholders’ equity		$	151,466		$	149,725

 

See notes to condensed consolidated financial statements.

 

2

 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Three Months Ended
		March 31,
(in millions)		2005			2004
		(Unaudited)
Cash flows from operating activities
Net income		$	1,123		$	949
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other non-cash items		(19		)	8
Realized capital gains and losses		(116		)	(170		)
Loss on disposition of operations		4			3
Cumulative effect of change in accounting principle		—			175
Interest credited to contractholder funds		591			470
Changes in:
Policy benefits and other insurance reserves		(281		)	(117		)
Unearned premiums		(120		)	(41		)
Deferred policy acquisition costs		(12		)	(79		)
Premium installment receivables		(91		)	(122		)
Reinsurance recoverables		15			91
Income taxes payable		286			259
Other operating assets and liabilities		10			(68		)
Net cash provided by operating activities		1,390			1,358
Cash flows from investing activities
Proceeds from sales
Fixed income securities		5,223			3,880
Equity securities		1,071			800
Investment collections
Fixed income securities		1,345			1,406
Mortgage loans		160			191
Investment purchases
Fixed income securities		(8,275		)	(7,372		)
Equity securities		(1,162		)	(832		)
Mortgage loans		(494		)	(431		)
Change in short-term investments, net		44			(30		)
Change in other investments, net		25			(46		)
Purchases of property and equipment, net		(57		)	(34		)
Net cash used in investing activities		(2,120		)	(2,468		)
Cash flows from financing activities
Change in short-term debt, net		32			22
Proceeds from issuance of long-term debt		—			3
Repayment of long-term debt		(6		)	—
Contractholder fund deposits		3,393			2,856
Contractholder fund withdrawals		(1,971		)	(1,559		)
Dividends paid		(192		)	(169		)
Treasury stock purchases		(707		)	(168		)
Other		106			75
Net cash provided by financing activities		655			1,060
Net decrease in cash		(75		)	(50		)
Cash at beginning of period		414			366
Cash at end of period		$	339		$	316

 

See notes to condensed consolidated financial statements.

 

3

 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.              General

 

Basis of presentation

 

The accompanying condensed consolidated financial statements include the accounts of The Allstate Corporation and its wholly owned subsidiaries, primarily Allstate Insurance Company (“AIC”), a property-liability insurance company with various property-liability and life and investment subsidiaries, including Allstate Life Insurance Company (“ALIC”) (collectively referred to as the “Company” or “Allstate”).

 

The condensed consolidated financial statements and notes as of March 31, 2005, and for the three-month periods ended March 31, 2005 and 2004 are unaudited.  The condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals), which are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods.  These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.  The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

 

To conform to the 2005 presentation, certain amounts in the prior years’ condensed consolidated financial statements and notes have been reclassified.

 

Non-cash investment exchanges and modifications, which primarily reflect refinancings of fixed income securities and mergers completed with equity securities, totaled $5 million and $34 million for the three months ended March 31, 2005 and 2004, respectively.

 

Adopted accounting standard

 

Financial Accounting Standards Board Staff Position Nos. FAS 106-1 and FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP FAS 106-1” and “FSP FAS 106-2”)

 

In May 2004, the FASB issued FSP FAS 106-2, which supercedes FSP FAS 106-1, to provide guidance on accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“Act”).  FSP FAS 106-2, which the Company adopted in the third quarter of 2004, requires reporting entities that elected deferral under FSP FAS 106-1 and are able to determine if their plans are actuarially equivalent to recognize the impact of the Act no later than the first interim or annual reporting period beginning after June 15, 2004.  In January 2005, the Center for Medicare and Medicaid Services issued the final regulations for the Act including the determination of actuarial equivalence.  In the first quarter of 2005, the Company determined that its plans are actuarially equivalent. As a result of the subsidy provided by the Act, the accumulated postretirement benefit obligation (“APBO”) was reduced by $115 million for benefits attributable to past service and the estimated annual net periodic postretirement benefit cost for 2005 will be reduced by $17 million, of which $8 million is amortization of the actuarial experience gain attributable to past service, $4 million is a reduction of current period service cost, and $5 million is the reduction in interest cost on the APBO.

 

Pending accounting standards

 

Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”)

 

In December 2004, the FASB issued SFAS No. 123R, which revises SFAS No. 123 and supersedes APB 25.   SFAS No. 123R eliminates an entity’s ability to account for share-based payments using APB 25 and requires all such transactions be accounted for using a fair value based method.  In addition, although it does not require use of a binomial lattice model, SFAS No. 123R indicates that a binomial lattice model may be more effective in valuing employee stock options than the Black-Scholes model, which was primarily developed to value publicly traded options.   In the first quarter of 2005, the Company began using a binomial lattice model  in place of the Black-Scholes model to determine the fair value of employee stock options.  In April 2005, the Securities and Exchange Commission deferred the effective date of SFAS

 

4

 

No. 123R from the first interim or annual period beginning after June 15, 2005 to the next fiscal year beginning after June 15, 2005.  SFAS No. 123R is not expected to have a material impact on the Company’s Condensed Consolidated Statements of Operations or Financial Position.

 

FSP EITF Issue 03-1-a, “Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP EITF Issue 03-1-a”).

 

In September 2004, the FASB issued proposed FSP EITF 03-1-a to address the application of paragraph 16 of Emerging Issues Task Force Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF Issue 03-1”) to debt securities that are impaired because of increases in interest rates, and/or sector spreads.  Thereafter, in connection with its decision to defer the effective date of paragraphs 10–20 of EITF 03-1 through the issuance of FSP EITF 03-1-1, “Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP EITF Issue 03-1-1”), the FASB requested from its constituents comments on the issues set forth in FSP EITF 03-1-a and the issues that arose during the comment letter process for FSP EITF 03-1-b, “Effective Date of Paragraph 16 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”.

 

Due to the uncertainty as to how the outstanding issues will be resolved, the Company is unable to determine the impact of adopting paragraphs 10-20 of EITF 03-1 until final implementation guidance is issued.  Adoption of paragraphs 10-20 of EITF 03-1 may have a material impact on the Company’s Condensed Consolidated Statements of Operations but is not expected to have a material impact on the Company’s Condensed Consolidated Statements of Financial Position as fluctuations in fair value are already recorded in accumulated other comprehensive income.

 

2.              Earnings per share

 

Basic earnings per share is computed based on the weighted average number of common shares outstanding.  Diluted earnings per share is computed based on weighted average number of common and dilutive potential common shares outstanding.  For Allstate, dilutive potential common shares consist of the common shares underlying outstanding stock options and restricted stock units.

 

5

 

The computation of basic and diluted earnings per share are presented in the following table.

 

		Three months ended March 31,
(in millions, except per share data)		2005			2004
Numerator (applicable to common shareholders):
Income before cumulative effect of change in accounting principle, after-tax		$	1,123		$	1,124
Cumulative effect of change in accounting principle, after-tax		—			(175		)
Net income applicable to common shareholders		$	1,123		$	949
Denominator:
Weighted average common shares outstanding		677.7			704.5
Effect of potential dilutive securities:
Stock options		5.1			4.7
Restricted stock units		0.3			—
Weighted average common and dilutive potential common shares outstanding		683.1			709.2
Earnings per share–Basic:
Income before cumulative effect of change in accounting principle, after-tax		$	1.66		$	1.60
Cumulative effect of change in accounting principle, after-tax		—			(0.25		)
Net income applicable to common shareholders		$	1.66		$	1.35
Earnings per share–Diluted:
Income before cumulative effect of change in accounting principle, after-tax		$	1.64		$	1.59
Cumulative effect of change in accounting principle, after-tax		—			(0.25		)
Net income applicable to common shareholders		$	1.64		$	1.34

 

Options to purchase 3.6 million and 4.2 million Allstate common shares, with an exercise price of $52.57 and exercise prices ranging from $45.29 to $50.72, were outstanding at March 31, 2005 and 2004, respectively, but were not included in the computation of diluted earnings per share for the three-month periods ended March 31, 2005 and 2004 since inclusion of these options would have an anti-dilutive effect as the options’ exercise prices exceeded the average market price of Allstate common shares in the three-month period.

 

3.              Reserve for Property-Liability Insurance Claims and Claims Expense

 

The Company establishes reserves for claims and claims expense on reported and unreported claims of insured losses.  These reserve estimates are based on known facts and interpretations of circumstances and internal factors including the Company’s experience with similar cases, historical trends involving claim payment patterns, loss payments, pending levels of unpaid claims, loss management programs and product mix.  In addition, the reserve estimates are influenced by external factors including law changes, court decisions, changes to regulatory requirements, economic conditions, and public attitudes.  The Company, in the normal course of business, may also supplement its claims processes by utilizing third party adjusters, appraisers, engineers, inspectors, other professionals and information sources to assess and settle catastrophe and non-catastrophe related claims.  The effects of inflation are implicitly considered in the reserving process.

 

Because reserves are estimates of losses that have occurred, including incurred but not reported (“IBNR”) losses, the establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain and complex process.  The ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimates.  The Company regularly updates its reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims.  Changes in prior year reserve estimates, which may be material, are reflected in the results of operations in the period such changes are determinable.

 

6

 

Management believes that the reserve for claims and claims expense, net of reinsurance recoverables, at March 31, 2005 is appropriately established in the aggregate and adequate to cover the ultimate net cost of reported and unreported claims arising from losses which had occurred by that date.

 

4.              Reinsurance

 

Property-liability insurance premiums and life and annuity premiums and contract charges are net of the following reinsurance ceded:

 

		Three months ended March 31,
(in millions)		2005			2004
Property-liability insurance premiums earned		$	123		$	86
Life and annuity premiums and contract charges		168			162

 

Property-liability insurance claims and claims expense and life and annuity contract benefits are net of the following reinsurance recoveries:

 

		Three months ended March 31,
(in millions)		2005			2004
Property-liability insurance claims and claims expense		$	210		$	43
Life and annuity contract benefits		167			93

 

5.              Company Restructuring

 

The Company undertakes various initiatives to reduce expenses and/or increase productivity.  These programs generally involve a reduction in staffing levels, and in certain cases, office closures.  Restructuring and related charges include employee termination and relocation benefits, and post-exit rent expenses in connection with these programs, and a non-cash charge resulting from pension benefit payments made to agents in connection with the 1999 reorganization of Allstate’s multiple agency programs to a single exclusive agency program.

 

The following table illustrates the inception to date change in the restructuring liability at March 31, 2005:

 

(in millions)		Employee costs			Exit costs			Total liability
Liability at inception		$	45		$	17		$	62
Payments applied against the liability		(31		)	(12		)	(43		)
Liability at March 31, 2005		$	14		$	5		$	19

 

The payments applied against the liability for employee costs primarily reflect severance costs, and the payments for exit costs generally consist of post-exit rent expenses and contract termination penalties.

 

7

 

6.              Guarantees and Contingent Liabilities

 

Florida hurricane assessments

 

Allstate Floridian Insurance Company and its subsidiaries are subject to assessments from Citizens Property Insurance Corporation (“Citizens”), which was created by the state of Florida to provide insurance to property owners unable to obtain coverage in the private insurance market.  Citizens, at the discretion and direction of its Board of Directors (“Citizens Board”), can levy a regular assessment on participating companies for a deficit in any calendar year up to the greater of 10% of the deficit or 10% of Florida property premiums industry-wide for the prior year.  An insurer may recoup a regular assessment through a surcharge to policyholders.  In order to recoup its Citizens regular assessment, an insurer must file for a policy surcharge with the Florida Department of Insurance at least fifteen days prior to imposing the surcharge on policies.  If a deficit remains after the regular assessment, Citizens can also fund the remaining deficit by issuing bonds.  The costs of these bonds are then funded through emergency assessments in subsequent years.  Companies are required to collect the emergency assessments directly from residential property policyholders and remit them to Citizens as they are collected.  Participating companies are obligated to purchase any unsold bonds issued by Citizens.

 

Citizens is designed so that the ultimate cost is borne by policyholders, however the exposure to assessments and the availability of recoupments may not offset each other.  Moreover, even if they do offset each other, they may not offset each other in the same fiscal period’s financial statements due to the ultimate timing of the assessments and recoupments, as well as the possibility of policies not being renewed in subsequent years.

 

Citizens reported higher losses from the hurricanes that struck Florida in the third quarter of 2004 and a deficit for the 2004 plan year.  When the Citizens Board met on April 21, 2005, they accepted the external audit results and declared a deficit; however, they have taken no action to levy an assessment.  Instead, they have deferred a decision on whether to assess until a determination is made as to whether any appropriations are going to be received from the state of Florida.  In its legislative session scheduled to end May 6, 2005, the state of Florida is expected to consider if an appropriation will be made to offset or eliminate the deficit and the need for an assessment, and therefore, any potential appropriation is not estimable.

 

As a result of the timing and uncertain outcome of these potential decisions, the Company is not in a position to estimate or accrue a liability for a potential assessment from Citizens. Based on currently available information regarding the amount of the estimated deficiency and the Company’s market share, the Company believes that its maximum loss exposure to a regular assessment is $45 million pre-tax  ($29 million after-tax and $0.04 per diluted share), which would be recorded when approved by the Citizens Board.  This assessment would then be recouped through subsequent billing to insureds in addition to their premium.  These recoupments will be recorded in the financial statements as they are billed.

 

8

 

Shared markets

 

As a condition of maintaining its licenses to write personal property and casualty insurance in various states, the Company is required to participate in assigned risk plans, reinsurance facilities and joint underwriting associations that provide various types of insurance coverage to individuals or entities that otherwise are unable to purchase such coverage from private insurers.  Underwriting results related to these arrangements, which tend to be adverse, have been immaterial to the results of operations.

 

Guarantees

 

The Company provides residual value guarantees on Company leased automobiles.  If all outstanding leases were terminated effective March 31, 2005, the Company’s maximum obligation pursuant to these guarantees, assuming the automobiles have no residual value, would be $19 million at March 31, 2005.  The remaining term of each residual value guarantee is equal to the term of the underlying lease that range from less than one year to three years.  Historically, the Company has not made any material payments pursuant to these guarantees.

 

The Company owns certain fixed income securities that obligate the Company to exchange credit risk or to forfeit principal due, depending on the nature or occurrence of specified credit events for the referenced entities.  In the event all such specified credit events were to occur, the Company’s maximum amount at risk on these fixed income securities, as measured by their par value was $148 million at March 31, 2005.  The obligations associated with these fixed income securities expire at various times during the next seven years.

 

Lincoln Benefit Life Company (“LBL”), a wholly owned subsidiary of ALIC, has issued universal life insurance contracts to third parties who finance the premium payments on the universal life insurance contracts through a commercial paper program.  LBL has issued a repayment guarantee on the outstanding commercial paper balance that is fully collateralized by the cash surrender value of the universal life insurance contracts.  At March 31, 2005, the amount due under the commercial paper program is $301 million and the cash surrender value of the policies is $307 million.  The repayment guarantee expires April 30, 2006.

 

In the normal course of business, the Company provides standard indemnifications to counterparties in contracts in connection with numerous transactions, including acquisitions and divestitures.  The types of indemnifications typically provided include indemnifications for breaches of representations and warranties, taxes and certain other liabilities, such as third party lawsuits.  The indemnification clauses are often standard contractual terms and were entered into in the normal course of business based on an assessment that the risk of loss would be remote.  The terms of the indemnifications vary in duration and nature.  In many cases, the maximum obligation is not explicitly stated and the contingencies triggering the obligation to indemnify have not occurred and are not expected to occur.  Consequently, the maximum amount of the obligation under such indemnifications is not determinable.  Historically, the Company has not made any material payments pursuant to these obligations.

 

The aggregate liability balance related to all guarantees was not material as of March 31, 2005.

 

Regulation

 

The Company is subject to changing social, economic and regulatory conditions.  Recent state and federal regulatory initiatives and proceedings have included efforts to influence and restrict premium rates in a manner adverse to insurers, require premium refunds to policyholders, restrict the ability of insurers to cancel or non-renew policies, limit insurers’ ability to impose underwriting standards, impose additional regulations regarding agent and broker compensation and otherwise expand overall regulation of insurance products and the insurance industry.  The ultimate changes and eventual effects of these initiatives on the Company’s business, if any, are uncertain.

 

9

 

Legal and regulatory proceedings and inquiries

 

Background

 

The Company and certain of its subsidiaries are named as defendants in a number of lawsuits and other legal proceedings arising out of various aspects of its business.  As background to the “Proceedings” sub-section below, please note the following:

 

•                  These matters raise difficult and complicated factual and legal issues and are subject to many uncertainties and complexities, including but not limited to, the underlying facts of each matter, novel legal issues, variations between jurisdictions in which matters are being litigated, differences in applicable laws and judicial interpretations, the length of time before many of these matters might be resolved by settlement or through litigation and, in some cases, the timing of their resolutions relative to other similar cases brought against other companies, the fact that many of these matters are putative class actions in which a class has not been certified and in which the purported class may not be clearly defined, the fact that many of these matters involve multi-state class actions in which the applicable law(s) for the claims at issue is in dispute and therefore unclear, and the current challenging legal environment faced by large corporations and insurance companies.

 

•                  In these matters, plaintiffs seek a variety of remedies including equitable relief in the form of injunctive and other remedies and monetary relief in the form of contractual and extra-contractual damages.  In some cases, the monetary damages sought include punitive or treble damages or are not specified.  Often more specific information beyond the type of relief sought is not available because plaintiffs have not requested more specific relief in their court pleadings.  In those cases where plaintiffs have made a specific demand for monetary damages, they often specify damages just below a jurisdictional limit regardless of the facts of the case.  This represents the maximum they can seek without risking removal from state court to federal court.  In our experience, monetary demands in plaintiffs’ court pleadings bear little relation to the ultimate loss, if any, to the Company.

 

•                  For the reasons specified above, it is not possible to make meaningful estimates of the amount or range of loss that could result from these matters at this time.  The Company reviews these matters on an on-going basis and follows the provisions of SFAS No. 5, “Accounting for Contingencies” when making accrual and disclosure decisions.  When assessing reasonably possible and probable outcomes, the Company bases its decisions on its assessment of the ultimate outcome following all appeals.

 

•                  In the opinion of the Company’s management, while some of these matters may be material to the Company’s operating results for any particular period if an unfavorable outcome results, none will have a material adverse effect on the consolidated financial condition of the Company.

 

Proceedings

 

There are two active nationwide class action lawsuits against Allstate regarding its specification of after-market (non-original equipment manufacturer) replacement parts in the repair of insured vehicles.  One of these suits alleges that the specification of such parts constitutes breach of contract and fraud, and this suit mirrors to a large degree lawsuits filed against other carriers in the industry.  These plaintiffs allege that after-market parts are not “of like kind and quality” as required by the insurance policy, and they are seeking actual and punitive damages.  The Company has been vigorously defending this lawsuit, but its outcome is uncertain.  In the second lawsuit, plaintiffs allege that Allstate and three co-defendants have violated federal antitrust laws by conspiring to manipulate the price of auto physical damage coverages in such a way that not all savings realized by the use of aftermarket parts are passed on to the policyholders.  These plaintiffs seek actual and treble damages.  In November 2002, a nationwide class was certified in this case.  The defendants filed a petition to appeal the class certification. The Eleventh Circuit Court of Appeals did not reach the question of class certification, but ruled in favor of the defendants and ordered the lower court to dismiss the case on the grounds that under the McCarran-Ferguson Act, the defendants’ alleged actions are not covered by the federal antitrust laws.  The plaintiffs filed a motion for reconsideration and a subsequent motion for en

 

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banc reconsideration (appeal to be heard by the Eleventh Circuit in full, not just a panel of judges from the Eleventh Circuit), both of which were denied.  The Company is awaiting further actions, if any, by the plaintiffs.

 

There are several statewide and nationwide class action lawsuits pending against Allstate alleging that its failure to pay “inherent diminished value” to insureds under the collision, comprehensive, uninsured motorist property damage, or auto property damage liability provisions of auto policies constitutes breach of contract and fraud.  Plaintiffs define “inherent diminished value” as the difference between the market value of the insured automobile before an accident and the market value after repair.  Plaintiffs allege that they are entitled to the payment of inherent diminished value under the terms of the policy.  To a large degree, these lawsuits mirror similar lawsuits filed against other carriers in the industry.  These lawsuits are pending in various state and federal courts, and they are in various stages of development.  Classes have been certified in only two cases.  Both are multi-state class actions.  A trial in one of these multi-state class action cases involving collision and comprehensive coverage concluded on April 29, 2004, with a jury verdict in favor of the Company.   The plaintiffs made a motion for a new trial, which was denied, and have now filed an appeal from the judgment.   In the other certified class action lawsuit, which involves uninsured motorist property damage coverage, the appellate court has granted the Company’s petition for review of the order of certification.  The Company has been vigorously defending all of these lawsuits and, since 1998, has been implementing policy language in more than 40 states reaffirming that its collision and comprehensive coverages do not include diminished value claims.  The outcome of these disputes remains uncertain.

 

There are a number of state and nationwide class action lawsuits pending in various state courts challenging the legal propriety of Allstate’s medical bill review processes on a number of grounds, including, among other things, the manner in which Allstate determines reasonableness and necessity.  One nationwide class action has been certified.  These lawsuits, which to a large degree mirror similar lawsuits filed against other carriers in the industry, allege these processes result in a breach of the insurance policy as well as fraud.  Plaintiffs seek monetary damages in the form of contractual and extra-contractual damages.  The Company denies those allegations and has been vigorously defending these lawsuits.  The outcome of these disputes is currently uncertain.

 

A number of nationwide and statewide putative class actions are pending against Allstate, which challenge Allstate’s use of certain automated database vendors in valuing total loss automobiles.  To a large degree, these lawsuits mirror similar lawsuits filed against other carriers in the industry.  Plaintiffs allege that flaws in these databases result in valuations to the detriment of insureds.  The plaintiffs are seeking actual and punitive damages. The lawsuits are in various stages of development and Allstate has been vigorously defending them, but the outcome of these disputes is currently uncertain.

 

The Company is defending a putative nationwide class action that alleges that the Company discriminates against non-Caucasian policyholders, through underwriting and rate-making practices including the use of credit by charging them higher premiums.  The Company is also defending a putative statewide class action challenging its use of credit under certain state insurance statutes.  The plaintiffs in these cases seek monetary and equitable relief, including actual and punitive damages and injunctive relief.  The Company removed the statewide class action to Federal Court. The Fifth Circuit Court of Appeals has recently affirmed the trial court’s denial of the plaintiff’s motion to remand to state court.  The Company denies these allegations and has been vigorously defending these lawsuits.  The outcome of these disputes is currently uncertain.

 

Allstate is defending various lawsuits involving worker classification issues.  These lawsuits include a number of putative class actions and one certified class action challenging the overtime exemption claimed by the Company under the Fair Labor Standards Act or state wage and hour laws.  In these cases, plaintiffs seek monetary relief, such as penalties and liquidated damages, and non-monetary relief, such as injunctive relief and an accounting.  These class actions mirror similar lawsuits filed against other carriers in the industry and other employers, some of which have been settled recently.   In the one certified class action against Allstate, the trial court found Allstate liable.  Allstate believes it should prevail on appeal.  However, before Allstate can appeal the liability issue, the case must first proceed to a jury trial on damages.  The trial is currently scheduled to begin on June 13, 2005 and could last for six to eight weeks or more.  But, the trial may also be postponed.  A putative nationwide class action filed by former employee agents also includes

 

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a worker classification issue; these agents are challenging certain amendments to the Agents Pension Plan and are seeking to have exclusive agent independent contractors treated as employees for benefit purposes.  This matter was dismissed with prejudice by the trial court, was the subject of further proceedings on appeal, and has been reversed and remanded to the trial court in April 2005.  Allstate has been vigorously defending these and various other worker classification lawsuits.  The outcome of these disputes is currently uncertain.

 

The Company is defending certain matters relating to the Company’s agency program reorganization announced in 1999.  These matters include a lawsuit filed in December 2001 by the U.S. Equal Employment Opportunity Commission (“EEOC”) alleging retaliation under federal civil rights laws, a class action filed in August 2001 by former employee agents alleging retaliation and age discrimination under the Age Discrimination in Employment Act, breach of contract and ERISA violations, and a lawsuit filed in October 2004 by the EEOC alleging age discrimination with respect to a policy limiting the rehire of agents affected by the agency program reorganization. The Company is also defending another action, in which a class was certified in June 2004, filed by former employee agents who terminated their employment prior to the agency program reorganization.  These plaintiffs have asserted claims under ERISA, and are seeking benefits provided in connection with the reorganization.    In late March 2004, in the first EEOC lawsuit and class action lawsuit, the trial court issued a memorandum and order that, among other things, certified classes of agents, including a mandatory class of agents who had signed a release, for purposes of effecting the court’s declaratory judgment that the release is voidable at the option of the release signer.  The court also ordered that an agent who voids the release must return to Allstate “any and all benefits received by the [agent] in exchange for signing the release.”  The court also “concluded that, on the undisputed facts of record, there is no basis for claims of age discrimination.”  The EEOC and plaintiffs have asked the court to clarify and/or reconsider its memorandum and order.  The case otherwise remains pending.   A putative nationwide class action has also been filed by former employee agents alleging various violations of ERISA.  This matter was dismissed with prejudice by the trial court, was the subject of further proceedings on appeal, and has been reversed and remanded to the trial court in April 2005.   In these matters, plaintiffs seek compensatory and punitive damages, and equitable relief.  Allstate has been vigorously defending these lawsuits and other matters related to its agency program reorganization.  In addition, Allstate has been defending certain matters relating to its life agency program reorganization announced in 2000.  These matters have been the subject of an investigation by the EEOC with respect to allegations of age discrimination and retaliation and conciliation discussions between Allstate and the EEOC.   The outcome of these disputes is currently uncertain.

 

The Company is defending a number of lawsuits brought by plaintiffs challenging trading restrictions the Company adopted in an effort to limit market-timing activity in its variable annuity sub-accounts.  In one case, plaintiffs’ motion for summary judgment on their breach of contract claims was granted and the matter will proceed to trial on damages.  In these various lawsuits, plaintiffs seek a variety of remedies including monetary and equitable relief. The Company has been vigorously defending these matters, but their outcome is currently uncertain.

 

Other Matters

 

The Company and some of its subsidiaries have received interrogatories and demands for information from regulatory and enforcement authorities relating to various insurance products and practices. The areas of inquiry include variable annuity market timing, late trading and the issuance of funding agreements backing medium-term notes.  The Company and some of its subsidiaries have also received interrogatories and demands for information from authorities seeking information relevant to on-going investigations into the possible violation of antitrust or insurance laws by unnamed parties and, in particular, seeking information as to whether any person engaged in activities for the purpose of price fixing, market allocation, or bid rigging.  The Company believes that these inquiries are similar to those made to many financial services companies as part of industry-wide investigations by various authorities into the practices, policies and procedures relating to insurance and financial services products.  The Company and its subsidiaries have responded and will continue to respond to these inquiries.

 

Various other legal and regulatory actions are currently pending that involve the Company and specific aspects of its conduct of business.  Like other members of the insurance industry, the Company is the target of a number of class action lawsuits and other types of proceedings, some of which involve claims for substantial or

 

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indeterminate amounts.  These actions are based on a variety of issues and target a range of the Company’s practices.  The outcome of these disputes is currently unpredictable.  However, at this time, based on their present status, it is the opinion of management that the ultimate liability, if any, in one or more of the actions described in this “Other Matters” subsection in excess of amounts currently reserved is not expected to have a material effect on the results of operations, liquidity or financial condition of the Company.

 

Asbestos and environmental

 

Allstate’s reserves for asbestos claims were $1.39 billion and $1.46 billion, net of reinsurance recoverables of $885 million and $963 million at March 31, 2005 and December 31, 2004, respectively.  Reserves for environmental claims were $227 million and $232 million, net of reinsurance recoverables of $48 million and $49 million at March 31, 2005 and December 31, 2004, respectively.  Approximately 62% of the total net asbestos and environmental reserves at both March 31, 2005 and December 31, 2004 were for incurred but not reported estimated losses.

 

Management believes its net loss reserves for environmental, asbestos and other discontinued lines exposures are appropriately established based on available facts, technology, laws and regulations.  However, due to the inconsistencies of court coverage decisions, unresolved legal issues regarding policy coverage, unresolved legal issues regarding the determination, availability and timing of exhaustion of policy limits, plaintiffs’ evolving and expanded theories of liability, the risks inherent in major litigation, availability and collectibility of recoveries from reinsurance, retrospectively determined premiums and other contractual agreements, and estimating the extent and timing of any contractual liability, and other uncertainties, the ultimate cost of these claims may vary materially from the amounts currently recorded, resulting in an increase in loss reserves.  In addition, while the Company believes that improved actuarial techniques and databases have assisted in its ability to estimate asbestos, environmental, and other discontinued lines net loss reserves, these refinements may subsequently prove to be inadequate indicators of the extent of probable losses.  Due to the uncertainties and factors described above, management believes it is not practicable to develop a meaningful range for any such additional net loss reserves that may be required.

 

7.              Components of Net Periodic Pension and Postretirement Benefit Costs

 

The components of net periodic cost for the Company’s pension and postretirement benefit plans for the three months ended March 31 are as follows:

 

		Pension benefits						Postretirement benefits
(in millions)		2005			2004			2005			2004
Service cost (1)		$	63		$	39		$	12		$	7
Interest cost		71			66			17			18
Expected return on plan assets		(78		)	(72		)	—			—
Amortization of:
Prior service costs		(1		)	—			—			—
Net loss		33			29			4			3
Settlement loss		9			11			—			—
Net periodic cost		$	97		$	73		$	33		$	28

 

(1)          In the three months ended March 31, 2005, the Company recognized $19 million and $4 million pretax for pension and postretirement benefits, respectively, related to a non-recurring increase in liability for future benefits of a discontinued benefit plan.

 

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8.              Equity Incentive Plans

 

The following table illustrates the effect on net income and earnings per share as if the fair value based method, adopted prospectively by the Company on January 1, 2003, had been applied to all outstanding and unvested options in each period.

 

		Three months ended March 31,
(in millions, except per share data)		2005			2004
Net income, as reported		$	1,123		$	949
Add: Employee stock option expense included in reported net income, after-tax (1)		10			3
Deduct: Total employee stock option expense determined under fair value based method for all awards, after-tax		(14		)	(9		)
Pro forma net income		$	1,119		$	943
Earnings per share—Basic:
As reported		$	1.66		$	1.35
Pro forma		1.65			1.34
Earnings per share—Diluted:
As reported		$	1.64		$	1.34
Pro forma		1.64			1.33

 

(1)          In the three months ended March 31, 2005, the Company recognized a total of $10 million after-tax related to the acceleration of deferred compensation expense on unvested stock awards granted to retirement eligible employees which continue to vest upon retirement, including $5 million after-tax on unvested stock options (included in the table above) and $5 million after-tax on restricted stock.

 

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9.              Business Segments

 

Summarized revenue data for each of the Company’s business segments are as follows:

 

		Three months ended March 31,
(in millions)		2005			2004
Revenues
Property-Liability
Property-liability insurance premiums earned
Standard auto		$	3,992		$	3,786
Non-standard auto		459			517
Auto		4,451			4,303
Homeowners		1,564			1,428
Other		667			639
Allstate Protection		6,682			6,370
Discontinued Lines and Coverages		2			1
Total property-liability insurance premiums earned		6,684			6,371
Net investment income		436			424
Realized capital gains and losses		113			191
Total Property-Liability		7,233			6,986
Allstate Financial
Life and annuity premiums and contract charges
Traditional life		72			76
Immediate annuities with life contingencies		73			77
Accident and health and other		104			93
Total life and annuity premiums		249			246
Interest-senstive life		190			176
Fixed annuities		17			14
Variable annuities		65			60
Total contract charges		272			250
Total life and annuity premiums and contract charges		521			496
Net investment income		918			821
Realized capital gains and losses		1			(23		)
Total Allstate Financial		1,440			1,294
Corporate and Other
Service fees		2			3
Net investment income		30			29
Realized capital gains and losses		2			2
Total Corporate and Other before reclassification of service fees		34			34
Reclassification of service fees (1)		(2		)	(3		)
Total Corporate and Other		32			31
Consolidated Revenues		$	8,705		$	8,311

 

(1)          For presentation in the Condensed Consolidated Statements of Operations, service fees of the Corporate and Other segment are reclassified to operating costs and expenses.

 

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Summarized financial performance data for each of the Company’s reportable segments are as follows:

 

		Three months ended March 31,
(In millions)		2005			2004
Income before cumulative effect of change in accounting principle, after-tax
Property-Liability
Underwriting income (loss)
Allstate Protection		$	990		$	870
Discontinued Lines and Coverages		(9		)	(5		)
Total underwriting income		981			865
Net investment income		436			424
Income tax expense on operations		398			377
Realized capital gains and losses, after-tax		78			132
Property-Liability income before cumulative effect of change in accounting principle, after-tax		1,097			1,044
Allstate Financial
Life and annuity premiums and contract charges		521			496
Net investment income		918			821
Periodic settlements and accruals on non-hedge derivative financial instruments		19			6
Contract benefits and interest credited to contractholder funds		977			864
Operating costs and expenses and amortization of deferred policy acquisition costs		275			262
Income tax expense on operations		57			65
Operating income		149			132
Realized capital gains and losses, after-tax		1			(14		)
Deferred policy acquisition costs and deferred sales inducements amortization relating to realized capital gains and losses, after-tax		(61		)	(10		)
Non-recurring increase in liability for future benefits, after-tax (1)		(22		)	—
Reclassification of periodic settlements and accruals on non-hedge financial instruments, after-tax		(12		)	(4		)
Loss on disposition of operations, after-tax		(2		)	(2		)
Allstate Financial income before cumulative effect of change in accounting principle, after-tax		53			102
Corporate and Other
Service fees (2)		2			3
Net investment income		30			29
Operating costs and expenses		88			80
Income tax benefit on operations		(28		)	(24		)
Operating loss		(28		)	(24		)
Realized capital gains and losses, after-tax		1			2
Corporate and Other loss before cumulative effect of change in accounting principle, after-tax		(27		)	(22		)
Consolidated income before cumulative effect of change in accounting principle, after-tax		$	1,123		$	1,124

 

(1)          The non-recurring increase in liability for future benefits is for a discontinued plan (see Note 7 for impact to pension and postretirement benefits).

 

(2)          For presentation in the Condensed Consolidated Statements of Operations, service fees of the Corporate and Other segment are reclassified to operating costs and expenses.

 

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10.       Other Comprehensive Income

 

The components of other comprehensive income (loss) on a pretax and after-tax basis are as follows:

 

		Three months ended March 31,
		2005									2004
(in millions)		Pretax			Tax			After- tax			Pretax			Tax			After- tax
Unrealized net holding gains (losses) arising during the period		$	(1,336	)	$	467		$	(869	)	$	635		$	(222	)	$	413
Less: reclassification adjustments		13			(5		)	8			169			(59		)	110
Unrealized net capital gains (losses)		(1,349		)	472			(877		)	466			(163		)	303
Unrealized foreign currency translation adjustments		(5		)	2			(3		)	(2		)	1			(1		)
Other comprehensive income (loss)		$	(1,354	)	$	474		(880		)	$	464		$	(162	)	302
Net income								1,123									949
Comprehensive income								$	243								$	1,251

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

The Allstate Corporation:

 

We have reviewed the accompanying condensed consolidated statement of financial position of The Allstate Corporation and subsidiaries (the “Company”) as of March 31, 2005, and the related condensed consolidated statements of operations and cash flows for the three-month periods ended March 31, 2005 and 2004.  These interim financial statements are the responsibility of the Company’s management.

 

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

 

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial position of The Allstate Corporation and subsidiaries as of December 31, 2004, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the year then ended, not presented herein.  In our report dated February 24, 2005, which report includes an explanatory paragraph as to changes in the Company’s method of accounting for certain nontraditional long-duration contracts and separate accounts in 2004, method of accounting for stock-based compensation, embedded derivatives in modified coinsurance agreements and variable interest entities in 2003 and method of accounting for goodwill and other intangible assets in 2002, we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 2004 is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived.

 

 

/s/ Deloitte & Touche LLP
Chicago, Illinois
May 3, 2005

 

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Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2005 AND 2004

 

OVERVIEW

 

The following discussion highlights significant factors influencing the consolidated financial position and results of operations of The Allstate Corporation (referred to in this document as “we”, “our”, “us”, the “Company” or “Allstate”). It should be read in conjunction with the condensed consolidated financial statements and notes thereto found under Part I. Item 1. contained herein, and with the discussion, analysis, consolidated financial statements and notes thereto in Part I. Item 1. and Part II. Item 7. and Item 8. of The Allstate Corporation Annual Report on Form 10-K for 2004.  Analysis of our insurance segments is provided in Property-Liability Operations (which includes the Allstate Protection and the Discontinued Lines and Coverages segments) and in the Allstate Financial Segment (which represents the Allstate Financial segment) sections of Management’s Discussion and Analysis (“MD&A”). The segments are consistent with the way in which we use financial information to evaluate business performance and to determine the allocation of resources.

 

HIGHLIGHTS

 

•             Net income per diluted share increased 22.4% to $1.64 in the first quarter of 2005 from $1.34 in the first quarter of 2004.  Net income per diluted share before cumulative effect of change in accounting principle, after-tax of ($0.25) increased 3.1% to $1.64 in the first quarter of 2005 from $1.59 in the first quarter of 2004.

•             Total revenues increased by $394 million or 4.7% to $8.71 billion in the first quarter of 2005 from $8.31 billion in the first quarter of 2004.

•             Property-Liability premiums earned increased $313 million or 4.9% to $6.68 billion in the first quarter of 2005 from $6.37 billion in the first quarter of 2004.  Growth in policies in force (“PIF”) from March 31, 2004 to March 31, 2005 for the core Allstate brand standard auto and homeowners was 4.9% and 6.0%, respectively, and total Allstate brand PIF increased 3.5%.  The Allstate brand standard auto and homeowners renewal ratio increased 0.3 points and 0.7 points, respectively, in the first quarter of 2005 compared to the first quarter of 2004.  The PIF and renewal ratio results exclude impacts from Allstate Canada.

•             The Property-Liability combined ratio improved 1.1 points to 85.3 in the first quarter of 2005.

•             Allstate Financial investments increased 2.1% as of March 31, 2005 compared to December 31, 2004 due primarily to contractholder deposits.

•             Net realized capital gains were $116 million in the first quarter of 2005 compared to $170 million in the first quarter of 2004.

•             Return on equity improved 0.5 point to 15.6% for the twelve months ended March 31, 2005 compared to 15.1% for the twelve months ended March 31, 2004.

 

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CONSOLIDATED NET INCOME

 

		Three Months Ended March 31,
(in millions)		2005			2004
Revenues
Property-liability insurance premiums		$	6,684		$	6,371
Life and annuity premiums and contract charges		521			496
Net investment income		1,384			1,274
Realized capital gains and losses		116			170
Total revenues		8,705			8,311
Costs and expenses
Property-liability insurance claims and claims expense		(4,063		)	(3,986		)
Life and annuity contract benefits		(411		)	(395		)
Interest credited to contractholder funds		(591		)	(470		)
Amortization of deferred policy acquisition costs		(1,196		)	(1,055		)
Operating costs and expenses		(800		)	(733		)
Restructuring and related charges		(18		)	(11		)
Interest expense		(84		)	(74		)
Total costs and expenses		(7,163		)	(6,724		)
Loss on disposition of operations		(4		)	(3		)
Income tax expense		(415		)	(460		)
Cumulative effect of change in accounting principle, after-tax		—			(175		)
Net income		$	1,123		$	949
Property-Liability		$	1,097		$	1,044
Allstate Financial		53			(73		)
Corporate and Other		(27		)	(22		)
Net income		$	1,123		$	949

 

PROPERTY-LIABILITY HIGHLIGHTS

 

•                  Premiums written increased 3.9% in the first quarter of 2005 over the first quarter of 2004 primarily due to increases in the Allstate brand standard auto and homeowners PIF and average premiums.  Allstate brand standard auto and homeowners new business premiums written decreased 2.3% and 3.5%, respectively, in the first quarter of 2005 over the same period of 2004, excluding the impacts of Allstate Canada.  Allstate brand standard auto and homeowners premiums written increased 5.3% and 8.4%, respectively, in the first quarter of 2005 over the same period of 2004.  Premiums written is an operating measure that is defined and reconciled to premiums earned on page 23.

•             Underwriting income for Property-Liability was $981 million in the first quarter of 2005 compared to $865 million in the first quarter of 2004 due to higher premiums earned, favorable claim frequencies excluding catastrophes, and favorable Allstate Protection reserve reestimates related to prior years, partially offset by higher catastrophe losses and increased severity of current year claims.  The combined ratio improved 1.1 points to 85.3 in the first quarter of 2005.  Underwriting income, a measure that is not based on generally accepted accounting principles (“GAAP”), is defined on page 21.

•             Catastrophe losses in the first quarter of 2005 totaled $164 million compared to $102 million in the same period of 2004.  The effect of catastrophe losses on the loss ratio was 2.5 and 1.6 points in the first quarter of 2005 and 2004, respectively.  No adjustments were made to our previous estimate of losses related to hurricanes Charley, Frances, Ivan and Jeanne, which occurred in the third quarter of 2004.

 

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