UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

/X/  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2010

 

OR

 

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission file number 1-11840

 

THE ALLSTATE CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

36-3871531

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

2775 Sanders Road, Northbrook, Illinois  

  60062

(Address of principal executive offices)         

(Zip Code)

 

(847) 402-5000

(Registrant’s telephone number, including area code)

 

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   X  

 

No      

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   X  

 

No      

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,”  “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   X  

 

Accelerated filer                          

 

 

 

Non-accelerated filer            (Do not check if a smaller reporting company)

 

Smaller reporting company         

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes      

 

No   X  

 

As of July 30, 2010, the registrant had 538,068,662 common shares, $.01 par value, outstanding.

 



 

THE ALLSTATE CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

June 30, 2010

 

PART I

FINANCIAL INFORMATION

PAGE

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three-Month and Six-Month Periods Ended June 30, 2010 and 2009 (unaudited)

1

 

 

 

 

Condensed Consolidated Statements of Financial Position as of June 30, 2010 (unaudited) and December 31, 2009

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2010 and 2009 (unaudited)

3

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

4

 

 

 

 

Report of Independent Registered Public Accounting Firm

47

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

Highlights

48

 

Consolidated Net Income

49

 

Property-Liability Highlights

50

 

Allstate Protection Segment

54

 

Discontinued Lines and Coverages Segment

64

 

Property-Liability Investment Results

65

 

Allstate Financial Highlights

66

 

Allstate Financial Segment

66

 

Investments Highlights

73

 

Investments

73

 

Capital Resources and Liquidity Highlights

99

 

Capital Resources and Liquidity

99

 

 

 

Item 4.

Controls and Procedures

103

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

104

 

 

 

Item 1A.

Risk Factors

104

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

104

 

 

 

Item 6.

Exhibits

105

 



 

PART I. FINANCIAL INFORMATION

 

ITEM 1.   FINANCIAL STATEMENTS

 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

($ in millions, except per share data)

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

2010

 

2009

 

2010

 

2009

 

 

(unaudited)

 

(unaudited)

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Property-liability insurance premiums

$

6,513

 

$

6,560

 

$

13,016

 

$

13,142

 

Life and annuity premiums and contract charges

 

545

 

 

494

 

 

1,089

 

 

978

 

Net investment income

 

1,049

 

 

1,108

 

 

2,099

 

 

2,284

 

Realized capital gains and losses:

 

 

 

 

 

 

 

 

 

 

 

 

Total other-than-temporary impairment losses

 

(288

)

 

(471

)

 

(538

)

 

(1,196

)

Portion of loss recognized in other comprehensive income

 

(18

)

 

154

 

 

(23

)

 

154

 

Net other-than-temporary impairment losses recognized in earnings

 

(306

)

 

(317

)

 

(561

)

 

(1,042

)

Sales and other realized capital gains and losses

 

(145

)

 

645

 

 

(238

)

 

1,011

 

Total realized capital gains and losses

 

(451

)

 

328

 

 

(799

)

 

(31

)

 

 

7,656

 

 

8,490

 

 

15,405

 

 

16,373

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Property-liability insurance claims and claims expense

 

4,714

 

 

5,002

 

 

9,506

 

 

9,722

 

Life and annuity contract benefits

 

485

 

 

407

 

 

927

 

 

794

 

Interest credited to contractholder funds

 

450

 

 

561

 

 

913

 

 

1,140

 

Amortization of deferred policy acquisition costs

 

949

 

 

1,229

 

 

1,963

 

 

2,626

 

Operating costs and expenses

 

789

 

 

702

 

 

1,618

 

 

1,503

 

Restructuring and related charges

 

13

 

 

32

 

 

24

 

 

77

 

Interest expense

 

92

 

 

97

 

 

184

 

 

185

 

 

 

7,492

 

 

8,030

 

 

15,135

 

 

16,047

 

Gain on disposition of operations

 

2

 

 

1

 

 

3

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations before income tax expense

 

166

 

 

461

 

 

273

 

 

330

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

21

 

 

72

 

 

8

 

 

215

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

145

 

$

389

 

$

265

 

$

115

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share - Basic

$

0.27

 

$

0.72

 

$

0.49

 

$

0.21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares - Basic

 

540.7

 

 

539.8

 

 

540.4

 

 

539.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share - Diluted

$

0.27

 

$

0.72

 

$

0.49

 

$

0.21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares - Diluted

 

543.0

 

 

540.6

 

 

542.4

 

 

540.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

$

0.20

 

$

0.20

 

$

0.40

 

$

0.40

 

 

See notes to condensed consolidated financial statements.

 

1



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

($ in millions, except par value data)

 

June 30,

 

December 31,

 

 

2010

 

2009

Assets

 

(unaudited)

 

 

 

Investments:

 

 

 

 

 

 

Fixed income securities, at fair value (amortized cost $81,425 and $81,243)

$

81,925

 

$

78,766

 

Equity securities, at fair value (cost $3,356 and $4,845)

 

3,254

 

 

5,024

 

Mortgage loans

 

7,173

 

 

7,935

 

Limited partnership interests

 

3,119

 

 

2,744

 

Short-term, at fair value (amortized cost $2,414 and $3,056)

 

2,414

 

 

3,056

 

Other

 

2,058

 

 

2,308

 

Total investments

 

99,943

 

 

99,833

 

Cash

 

711

 

 

612

 

Premium installment receivables, net

 

4,830

 

 

4,839

 

Deferred policy acquisition costs

 

5,003

 

 

5,470

 

Reinsurance recoverables, net

 

6,537

 

 

6,355

 

Accrued investment income

 

851

 

 

864

 

Deferred income taxes

 

1,301

 

 

1,870

 

Property and equipment, net

 

935

 

 

990

 

Goodwill

 

874

 

 

875

 

Other assets

 

1,822

 

 

1,872

 

Separate Accounts

 

8,003

 

 

9,072

 

Total assets

$

130,810

 

$

132,652

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Reserve for property-liability insurance claims and claims expense

$

19,434

 

$

19,167

 

Reserve for life-contingent contract benefits

 

13,483

 

 

12,910

 

Contractholder funds

 

49,443

 

 

52,582

 

Unearned premiums

 

9,684

 

 

9,822

 

Claim payments outstanding

 

733

 

 

742

 

Other liabilities and accrued expenses

 

6,054

 

 

5,726

 

Long-term debt

 

5,909

 

 

5,910

 

Separate Accounts

 

8,003

 

 

9,072

 

Total liabilities

 

112,743

 

 

115,931

 

 

 

 

 

 

 

 

Commitments and Contingent Liabilities (Note 10)

 

 

 

 

 

 

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, 538 million and 537 million shares outstanding

 

9

 

 

9

 

Additional capital paid-in

 

3,155

 

 

3,172

 

Retained income

 

31,552

 

 

31,492

 

Deferred ESOP expense

 

(44

)

 

(47

)

Treasury stock, at cost (362 million and 363 million shares)

 

(15,760

)

 

(15,828

)

Accumulated other comprehensive income:

 

 

 

 

 

 

Unrealized net capital gains and losses:

 

 

 

 

 

 

Unrealized net capital losses on fixed income securities with OTTI

 

(332

)

 

(441

)

Other unrealized net capital gains and losses

 

588

 

 

(1,072

)

Unrealized adjustment to DAC, DSI and insurance reserves

 

72

 

 

643

 

Total unrealized net capital gains and losses

 

328

 

 

(870

)

Unrealized foreign currency translation adjustments

 

43

 

 

46

 

Unrecognized pension and other postretirement benefit cost

 

(1,244

)

 

(1,282

)

Total accumulated other comprehensive loss

 

(873

)

 

(2,106

)

Total shareholders’ equity

 

18,039

 

 

16,692

 

Noncontrolling interest

 

28

 

 

29

 

Total equity

 

18,067

 

 

16,721

 

Total liabilities and equity

$

130,810

 

$

132,652

 

 

See notes to condensed consolidated financial statements.

 

2



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

($ in millions)

 

Six Months Ended
June 30,

 

 

2010

 

2009

Cash flows from operating activities

 

(unaudited)

Net income

$

265

 

$

115

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation, amortization and other non-cash items

 

26

 

 

(86

)

Realized capital gains and losses

 

799

 

 

31

 

Gain on disposition of operations

 

(3

)

 

(4

)

Interest credited to contractholder funds

 

913

 

 

1,140

 

Changes in:

 

 

 

 

 

 

Policy benefits and other insurance reserves

 

306

 

 

(148

)

Unearned premiums

 

(135

)

 

(283

)

Deferred policy acquisition costs

 

(70

)

 

548

 

Premium installment receivables, net

 

9

 

 

55

 

Reinsurance recoverables, net

 

(206

)

 

(133

)

Income taxes

 

74

 

 

1,359

 

Other operating assets and liabilities

 

116

 

 

(112

)

Net cash provided by operating activities

 

2,094

 

 

2,482

 

Cash flows from investing activities

 

 

 

 

 

 

Proceeds from sales

 

 

 

 

 

 

Fixed income securities

 

9,114

 

 

8,856

 

Equity securities

 

3,046

 

 

3,547

 

Limited partnership interests

 

278

 

 

214

 

Mortgage loans

 

44

 

 

141

 

Other investments

 

62

 

 

262

 

Investment collections

 

 

 

 

 

 

Fixed income securities

 

2,391

 

 

2,658

 

Mortgage loans

 

638

 

 

598

 

Other investments

 

44

 

 

65

 

Investment purchases

 

 

 

 

 

 

Fixed income securities

 

(11,900

)

 

(12,424

)

Equity securities

 

(1,501

)

 

(4,207

)

Limited partnership interests

 

(616

)

 

(268

)

Mortgage loans

 

(10

)

 

(14

)

Other investments

 

(79

)

 

(41

)

Change in short-term investments, net

 

439

 

 

3,167

 

Change in other investments, net

 

(128

)

 

(80

)

Disposition of operations

 

--

 

 

12

 

Purchases of property and equipment, net

 

(69

)

 

(104

)

Net cash provided by investing activities

 

1,753

 

 

2,382

 

Cash flows from financing activities

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

--

 

 

1,000

 

Repayment of long-term debt

 

(1

)

 

(1

)

Contractholder fund deposits

 

1,567

 

 

2,450

 

Contractholder fund withdrawals

 

(5,112

)

 

(7,736

)

Dividends paid

 

(215

)

 

(327

)

Treasury stock purchases

 

(5

)

 

(3

)

Shares reissued under equity incentive plans, net

 

25

 

 

--

 

Excess tax benefits on share-based payment arrangements

 

(4

)

 

(6

)

Other

 

(3

)

 

11

 

Net cash used in financing activities

 

(3,748

)

 

(4,612

)

Net increase in cash

 

99

 

 

252

 

Cash at beginning of period

 

612

 

 

415

 

Cash at end of period

$

711

 

$

667

 

 

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 June 30, 2010, and for the three-month and six-month periods ended June 30, 2010 and 2009 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, 2009.  The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

 

Adopted accounting standards

 

Disclosures about Fair Value Measurements

 

In January 2010, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance which expands disclosure requirements relating to fair value measurements.  The guidance adds requirements for disclosing amounts of and reasons for significant transfers into and out of Levels 1 and 2 and requires gross rather than net disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements.  The guidance also provides clarification that fair value measurement disclosures are required for each class of assets and liabilities.  Disclosures about the valuation techniques and inputs used to measure fair value for measurements that fall in either Level 2 or Level 3 are also required.  The Company adopted the provisions of the new guidance as of March 31, 2010, except for disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements, which are required for fiscal years beginning after December 15, 2010.  Disclosures are not required for earlier periods presented for comparative purposes.  The new guidance affects disclosures only; and therefore, the adoption had no impact on the Company’s results of operations or financial position.

 

Consolidation of Variable Interest Entities

 

In June 2009, the FASB issued new accounting guidance which requires an entity to perform a qualitative analysis to determine whether it holds a controlling financial interest (i.e., is a primary beneficiary) in a variable interest entity (“VIE”).  The analysis identifies the primary beneficiary of a VIE as the entity that has both the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the VIE.  The Company adopted the new guidance as of January 1, 2010.  The adoption resulted in the consolidation of four VIEs for which the Company concluded it is the primary beneficiary as of January 1, 2010.

 

Two of the consolidated VIEs hold investments managed by Allstate Investment Management Company (“AIMCO”), a subsidiary of the Company.  Consolidation as of January 1, 2010 resulted in an increase in total assets of $696 million, an increase in total liabilities of $679 million, an increase in retained income of $7 million and an increase in noncontrolling interest of $10 million.  During the first quarter of 2010, the Company sold substantially all its variable interests in these two VIEs.  As a result, the Company deconsolidated the VIEs as of March 26, 2010.  The Condensed Consolidated Statement of Operations for the six months ended June 30, 2010 reflects the effect of the consolidation for the portion of the period the Company was the primary beneficiary, which was not material.

 

The adoption also resulted in the consolidation of two insurance company affiliates, Allstate Texas Lloyds and Allstate County Mutual Insurance Company, that underwrite homeowners and auto insurance polices, respectively, and reinsure all of their net business to AIC.  Consolidation as of January 1, 2010 resulted in an increase in total assets of $38 million, an increase in total liabilities of $34 million, an increase in retained income of $3 million and an increase in unrealized net capital gains and losses of $1 million.

 

4



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In the normal course of investing activities, the Company invests in variable interests issued by VIEs.  These variable interests include structured investments such as asset-backed securities, commercial mortgage-backed securities and residential mortgage-backed securities as well as limited partnerships, special purpose entities and trusts.  For these variable interests, the Company concluded it is not the primary beneficiary due to the amount of the Company’s interest in the VIEs and the Company’s lack of power to direct the activities that are most significant to the economic performance of the VIEs.  The Company’s maximum exposure to loss on these interests is limited to the amount of the Company’s investment, including future funding commitments, as applicable.

 

Pending accounting standards

 

Embedded Credit Derivatives Scope Exception

 

In March 2010, the FASB issued accounting guidance that clarifies the scope exception for embedded credit derivative features related to the transfer of credit risk in the form of subordination of one financial instrument to another. The guidance addresses how to determine which embedded credit derivative features, including those in collateralized debt obligations and synthetic collateralized debt obligations, are considered to be embedded derivatives that should not be analyzed for potential bifurcation and separate accounting under the existing accounting guidance for embedded derivatives.  The guidance is effective for fiscal quarters beginning after June 15, 2010.  The Company will be required to bifurcate the credit default swaps embedded in synthetic collateralized debt obligations purchased after January 1, 2007.  The amortized cost and fair value of the synthetic collateralized debt obligations subject to the guidance is $100 million and $48 million, respectively, as of June 30, 2010.  Prospectively, the periodic changes in fair value of the embedded credit derivatives will be recorded in net income.  The adoption of this guidance on July 1, 2010 is not expected to have a material impact on the Company’s results of operations or financial position.

 

Consolidation Analysis Considering Investments Held through Separate Accounts

 

In April 2010, the FASB issued guidance clarifying that an insurer is not required to combine interests in investments held in a qualifying separate account with its interests in the same investments held in the general account when performing a consolidation evaluation.   The guidance is effective for fiscal years and interim periods beginning after December 15, 2010 with early adoption permitted.  The adoption of this guidance is not expected to have a material impact on the Company’s results of operations or financial position.

 

2.  Earnings per share

 

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

 

5



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

($ in millions, except per share data)

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

2010

 

2009

 

2010

 

2009

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

145

 

$

389

 

$

265

 

$

115

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

540.7

 

 

539.8

 

 

540.4

 

 

539.3

 

Effect of dilutive potential common shares:

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

2.1

 

 

0.8

 

 

2.0

 

 

0.8

 

Restricted stock units (non-participating)

 

0.2

 

 

--

 

 

--

 

 

--

 

Weighted average common and dilutive potential common shares outstanding

 

543.0

 

 

540.6

 

 

542.4

 

 

540.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - Basic

$

0.27

 

$

0.72

 

$

0.49

 

$

0.21

 

Earnings per share - Diluted

$

0.27

 

$

0.72

 

$

0.49

 

$

0.21

 

 

The effect of dilutive potential common shares does not include the effect of options with an anti-dilutive effect on earnings per share because their exercise prices exceed the average market price of Allstate common shares during the period or for which the unrecognized compensation cost would have an anti-dilutive effect.  Options to purchase 27.7 million and 26.4 million Allstate common shares, with exercise prices ranging from $28.52 to $62.84 and $26.69 to $64.53, were outstanding at June 30, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share for the three-month periods.  Options to purchase 26.1 million and 26.8 million Allstate common shares, with exercise prices ranging from $27.36 to $64.53 and $26.69 to $64.53, were outstanding at June 30, 2010 and 2009, respectively, but were not included in the computation of diluted earnings per share for the six-month periods.

 

3.  Supplemental Cash Flow Information

 

Non-cash investment exchanges, including modifications of certain mortgage loans, fixed income securities, and other investments, as well as mergers completed with equity securities and limited partnerships, totaled $353 million and $156 million for the six months ended June 30, 2010 and 2009, respectively.

 

Liabilities for collateral received in conjunction with the Company’s securities lending and over-the-counter (“OTC”) derivatives are reported in other liabilities and accrued expenses or other investments in the Condensed Consolidated Statements of Financial Position.  The accompanying cash flows are included in cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows along with the activities resulting from management of the proceeds, which are as follows:

 

($ in millions)

 

Six months ended
June 30,

 

 

2010

 

2009

Net change in proceeds managed

 

 

 

 

 

 

Net change in short-term investments

$

211

 

$

(530

)

Operating cash flow provided (used)

 

211

 

 

(530

)

Net change in cash

 

2

 

 

--

 

Net change in proceeds managed

$

213

 

$

(530

)

 

 

 

 

 

 

 

Net change in liabilities

 

 

 

 

 

 

Liabilities for collateral, beginning of year

$

(658

)

$

(340

)

Liabilities for collateral, end of period

 

(445

)

 

(870

)

Operating cash flow (used) provided

$

(213

)

$

530

 

 

6



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.  Investments

 

Fair values

 

The amortized cost, gross unrealized gains and losses and fair value for fixed income securities are as follows:

 

($ in millions)

 

Amortized

 

Gross unrealized

 

Fair

 

 

cost

 

Gains

 

Losses

 

value

At June 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

$

8,673

 

$

512

 

$

--

 

$

9,185

 

Municipal

 

18,760

 

 

663

 

 

(574

)

 

18,849

 

Corporate

 

34,490

 

 

1,929

 

 

(484

)

 

35,935

 

Foreign government

 

2,902

 

 

362

 

 

(12

)

 

3,252

 

Residential mortgage-backed securities (“RMBS”)

 

9,915

 

 

228

 

 

(1,182

)

 

8,961

 

Commercial mortgage-backed securities (“CMBS”)

 

2,685

 

 

47

 

 

(600

)

 

2,132

 

Asset-backed securities (“ABS”)

 

3,962

 

 

85

 

 

(475

)

 

3,572

 

Redeemable preferred stock

 

38

 

 

1

 

 

--

 

 

39

 

Total fixed income securities

$

81,425

 

$

3,827

 

$

(3,327

)

$

81,925

 

At December 31, 2009

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

$

7,333

 

$

219

 

$

(16

)

$

7,536

 

Municipal

 

21,683

 

 

537

 

 

(940

)

 

21,280

 

Corporate

 

32,770

 

 

1,192

 

 

(847

)

 

33,115

 

Foreign government

 

2,906

 

 

306

 

 

(15

)

 

3,197

 

RMBS

 

9,487

 

 

130

 

 

(1,630

)

 

7,987

 

CMBS

 

3,511

 

 

30

 

 

(955

)

 

2,586

 

ABS

 

3,514

 

 

62

 

 

(550

)

 

3,026

 

Redeemable preferred stock

 

39

 

 

1

 

 

(1

)

 

39

 

Total fixed income securities

$

81,243

 

$

2,477

 

$

(4,954

)

$

78,766

 

 

Scheduled maturities

 

The scheduled maturities for fixed income securities are as follows at June 30, 2010:

 

($ in millions)

 

Amortized

 

Fair

 

 

cost

 

value

Due in one year or less

$

2,800

 

$

2,830

 

Due after one year through five years

 

23,730

 

 

24,574

 

Due after five years through ten years

 

15,391

 

 

16,471

 

Due after ten years

 

25,627

 

 

25,517

 

 

 

67,548

 

 

69,392

 

RMBS and ABS

 

13,877

 

 

12,533

 

Total

$

81,425

 

$

81,925

 

 

Actual maturities may differ from those scheduled as a result of prepayments by the issuers.  Because of the potential for prepayment on RMBS and ABS, they are not categorized by contractual maturity.  CMBS are categorized by contractual maturity because they generally are not subject to prepayment risk.

 

7



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Net investment income

 

Net investment income is as follows:

 

($ in millions)

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

2010

 

2009

 

2010

 

2009

Fixed income securities

$

955

 

$

993

 

$

1,914

 

$

2,035

 

Equity securities

 

25

 

 

19

 

 

46

 

 

35

 

Mortgage loans

 

99

 

 

131

 

 

203

 

 

268

 

Limited partnership interests

 

7

 

 

4

 

 

13

 

 

7

 

Short-term investments

 

2

 

 

6

 

 

4

 

 

19

 

Other

 

6

 

 

(4

)

 

7

 

 

(3

)

Investment income, before expense

 

1,094

 

 

1,149

 

 

2,187

 

 

2,361

 

Investment expense

 

(45

)

 

(41

)

 

(88

)

 

(77

)

Net investment income

$

1,049

 

$

1,108

 

$

2,099

 

$

2,284

 

 

Realized capital gains and losses

 

Realized capital gains and losses by security type are as follows:

 

($ in millions)

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

2010

 

2009

 

2010

 

2009

Fixed income securities

$

(188

)

$

15

 

$

(324

)

$

122

 

Equity securities

 

45

 

 

27

 

 

59

 

 

(136

)

Mortgage loans

 

(28

)

 

(16

)

 

(53

)

 

(48

)

Limited partnership interests

 

26

 

 

(84

)

 

5

 

 

(423

)

Derivatives

 

(308

)

 

420

 

 

(493

)

 

515

 

Other

 

2

 

 

(34

)

 

7

 

 

(61

)

Realized capital gains and losses

$

(451

)

$

328

 

$

(799

)

$

(31

)

 

Realized capital gains and losses by transaction type are as follows:

 

($ in millions)

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

2010

 

2009

 

2010

 

2009

Impairment write-downs

$

(239

)

$

(291

)

$

(462

)

$

(911

)

Change in intent write-downs

 

(67

)

 

(26

)

 

(99

)

 

(131

)

Net OTTI losses recognized in earnings

 

(306

)

 

(317

)

 

(561

)

 

(1,042

)

Sales

 

145

 

 

263

 

 

233

 

 

681

 

Valuation of derivative instruments

 

(283

)

 

367

 

 

(438

)

 

470

 

Settlements of derivative instruments

 

(27

)

 

52

 

 

(57

)

 

40

 

EMA limited partnership income

 

20

 

 

(37

)

 

24

 

 

(180

)

Realized capital gains and losses

$

(451

)

$

328

 

$

(799

)

$

(31

)

 

Gross gains of $144 million and $297 million and gross losses of $113 million and $77 million were realized on sales of fixed income securities during the three months ended June 30, 2010 and 2009, respectively.  Gross gains of $286 million and $777 million and gross losses of $187 million and $159 million were realized on sales of fixed income securities during the six months ended June 30, 2010 and 2009, respectively.

 

8



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Other-than-temporary impairment losses by asset type are as follows:

 

($ in millions)

 

Three months ended
June 30, 2010

 

Six months ended
June 30, 2010

 

 

Gross

 

Included
in OCI

 

Net

 

Gross

 

Included
in OCI

 

Net

Fixed income securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal

$

(68

)

$

4

 

$

(64

)

$

(105

)

$

4

 

$

(101

)

Corporate

 

(6

)

 

(1

)

 

(7

)

 

(53

)

 

2

 

 

(51

)

RMBS

 

(124

)

 

5

 

 

(119

)

 

(212

)

 

(2

)

 

(214

)

CMBS

 

(17

)

 

(11

)

 

(28

)

 

(43

)

 

(11

)

 

(54

)

ABS

 

(6

)

 

(15

)

 

(21

)

 

(9

)

 

(16

)

 

(25

)

Total fixed income securities

 

(221

)

 

(18

)

 

(239

)

 

(422

)

 

(23

)

 

(445

)

Equity securities

 

(31

)

 

--

 

 

(31

)

 

(37

)

 

--

 

 

(37

)

Mortgage loans

 

(28

)

 

--

 

 

(28

)

 

(47

)

 

--

 

 

(47

)

Limited partnership interests

 

(8

)

 

--

 

 

(8

)

 

(32

)

 

--

 

 

(32

)

Other-than-temporary impairment losses

$

(288

)

$

(18

)

$

(306

)

$

(538

)

$

(23

)

$

(561

)

 

 

 

Three months ended
June 30, 2009

 

Six months ended
June 30, 2009

 

 

Gross

 

Included
in OCI

 

Net

 

Gross

 

Included
in OCI

 

Net

Fixed income securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal

$

(36

)

$

4

 

$

(32

)

$

(86

)

$

4

 

$

(82

)

Corporate

 

(37

)

 

(9

)

 

(46

)

 

(92

)

 

(9

)

 

(101

)

Foreign government

 

--

 

 

--

 

 

--

 

 

(17

)

 

--

 

 

(17

)

RMBS

 

(213

)

 

151

 

 

(62

)

 

(259

)

 

151

 

 

(108

)

CMBS

 

(43

)

 

(1

)

 

(44

)

 

(52

)

 

(1

)

 

(53

)

ABS

 

(37

)

 

9

 

 

(28

)

 

(175

)

 

9

 

 

(166

)

Total fixed income securities

 

(366

)

 

154

 

 

(212

)

 

(681

)

 

154

 

 

(527

)

Equity securities

 

(32

)

 

--

 

 

(32

)

 

(186

)

 

--

 

 

(186

)

Mortgage loans

 

(15

)

 

--

 

 

(15

)

 

(49

)

 

--

 

 

(49

)

Limited partnership interests

 

(46

)

 

--

 

 

(46

)

 

(243

)

 

--

 

 

(243

)

Other

 

(12

)

 

--

 

 

(12

)

 

(37

)

 

--

 

 

(37

)

Other-than-temporary impairment losses

$

(471

)

$

154

 

$

(317

)

$

(1,196

)

$

154

 

$

(1,042

)

 

The total amount of other-than-temporary impairment losses included in accumulated other comprehensive income for fixed income securities, which were not included in earnings, are presented in the following table.  The amount excludes $279 million and $192 million as of June 30, 2010 and December 31, 2009, respectively, of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.

 

($ in millions)

 

June 30,
2010

 

December 31,
2009

Municipal

$

(13

)

$

(10

)

Corporate

 

(51

)

 

(51

)

RMBS

 

(559

)

 

(594

)

CMBS

 

(94

)

 

(127

)

ABS

 

(73

)

 

(89

)

Total

$

(790

)

$

(871

)

 

9



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Rollforwards of the cumulative credit losses recognized in earnings for fixed income securities held as of the end of the period are as follows:

 

($ in millions)

 

 

Three months ended
June 30,

 

 

Six months ended
June 30,

 

 

 

2010

 

 

2009

 

 

2010

 

 

2009

Beginning balance

 

$

(1,236

)

 

$

--

 

 

$

(1,187

)

 

$

--

 

Beginning balance of cumulative credit loss for securities held at April 1, 2009

 

 

--

 

 

 

(1,357

)

 

 

--

 

 

 

(1,357

)

Additional credit loss for securities previously other-than-temporarily impaired

 

 

(101

)

 

 

(44

)

 

 

(180

)

 

 

(44

)

Additional credit loss for securities not previously other-than-temporarily impaired

 

 

(71

)

 

 

(148

)

 

 

(172

)

 

 

(148

)

Reduction in credit loss for securities disposed or collected

 

 

95

 

 

 

43

 

 

 

226

 

 

 

43

 

Reduction in credit loss for securities other-than-temporarily impaired to fair value

 

 

1

 

 

 

--

 

 

 

1

 

 

 

--

 

Change in credit loss due to accretion of increase in cash flows and time value of cash flows for securities previously other-than-temporarily impaired

 

 

3

 

 

 

--

 

 

 

3

 

 

 

--

 

Ending balance

 

$

(1,309

)

 

$

(1,506

)

 

$

(1,309

)

 

$

(1,506

)

 

The Company uses its best estimate of future cash flows expected to be collected from the fixed income security discounted at the security’s original or current effective rate, as appropriate, to calculate a recovery value and determine whether a credit loss exists.  The determination of cash flow estimates is inherently subjective and methodologies may vary depending on facts and circumstances specific to the security.  All reasonably available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable assumptions and forecasts, are considered when developing the estimate of cash flows expected to be collected.  That information generally includes, but is not limited to, the remaining payment terms of the security, prepayment speeds, foreign exchange rates, the financial condition of the issue or issuer(s), expected defaults, expected recoveries, the value of underlying collateral and current subordination levels, vintage, geographic concentration, available reserves or escrows, third party guarantees and other credit enhancements.  Additionally, other information, such as industry analyst reports and forecasts, sector credit ratings, financial condition of the bond insurer for insured fixed income securities, and other market data relevant to the realizability of contractual cash flows, may also be considered.  The estimated fair value of collateral may be used to estimate recovery value if the Company determines that the security is dependent on the liquidation of collateral for ultimate settlement.  If the estimated recovery value is less than the amortized cost of the security, a credit loss exists and an other-than-temporary impairment for the difference between the estimated recovery value and amortized cost is recorded in earnings.  The portion of the unrealized loss related to factors other than credit remains classified in OCI.  If the Company determines that the fixed income security does not have sufficient cash flow or other information to determine a recovery value for the security, the Company may conclude that the entire decline in fair value is deemed to be credit related and is recorded in earnings.

 

10



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Unrealized net capital gains and losses

 

Unrealized net capital gains and losses included in accumulated other comprehensive income are as follows:

 

($ in millions)

 

Fair

 

Gross unrealized

 

Unrealized net

At June 30, 2010

 

value

 

Gains

 

Losses

 

gains (losses)

Fixed income securities (1)

$

81,925

$

3,827

$

(3,327)

 

$

500 

Equity securities

 

3,254

 

165

 

(267)

 

 

(102)

Short-term investments

 

2,414

 

--

 

-- 

 

 

-- 

Derivative instruments (2)

 

7

 

10

 

(8)

 

 

Unrealized net capital gains and losses, pre-tax

 

 

 

 

 

 

 

 

400 

Amounts recognized for:

 

 

 

 

 

 

 

 

 

Insurance reserves (3)

 

 

 

 

 

 

 

 

(292)

DAC and DSI (4)

 

 

 

 

 

 

 

 

403 

Amounts recognized

 

 

 

 

 

 

 

 

111 

Deferred income taxes

 

 

 

 

 

 

 

 

(183)

Unrealized net capital gains and losses, after-tax

 

 

 

 

 

 

 

$

328 

 


(1)    Unrealized net capital gains and losses for fixed income securities as of June 30, 2010 comprises $(510) million related to unrealized net capital losses on fixed income securities with OTTI and $1,010 million related to other unrealized net capital gains and losses.

(2)    Included in the fair value of derivative securities are $5 million classified as assets and $(2) million classified as liabilities.

(3)    The insurance reserves adjustment represents the amount by which the reserve balance would increase if the net unrealized gains in the applicable product portfolios were realized and reinvested at current lower interest rates, resulting in a premium deficiency.  Although the Company evaluates premium deficiencies on the combined performance of life insurance and immediate annuities with life contingencies, the adjustment primarily relates to structured settlement annuities with life contingencies, in addition to annuity buy-outs and certain payout annuities with life contingencies.

(4)    The DAC and DSI adjustment balance represents the amount by which the amortization of DAC and DSI would increase or decrease if the unrealized gains or losses in the respective product portfolios were realized.

 

 

 

Fair

 

Gross unrealized

 

Unrealized net

At December 31, 2009

 

value

 

Gains

 

Losses

 

gains (losses)

Fixed income securities (1)

$

78,766 

$

2,477

$

(4,954)

 

$

(2,477)

Equity securities

 

5,024 

 

381

 

(202)

 

 

179 

Short-term investments

 

3,056 

 

--

 

-- 

 

 

-- 

Derivative instruments (2)

 

(20)

 

2

 

(25)

 

 

(23)

Unrealized net capital gains and losses, pre-tax

 

 

 

 

 

 

 

 

(2,321)

Amounts recognized for:

 

 

 

 

 

 

 

 

 

Insurance reserves

 

 

 

 

 

 

 

 

-- 

DAC and DSI

 

 

 

 

 

 

 

 

990 

Amounts recognized

 

 

 

 

 

 

 

 

990 

Deferred income taxes

 

 

 

 

 

 

 

 

461 

Unrealized net capital gains and losses, after-tax

 

 

 

 

 

 

 

$

(870)

 


(1)    Unrealized net capital gains and losses for fixed income securities as of December 31, 2009 comprises $(679) million related to unrealized net capital losses on fixed income securities with OTTI and $(1,798) million related to other unrealized net capital gains and losses.

(2)    Included in the fair value of derivative securities are $(2) million classified as assets and $18 million classified as liabilities.

 

11



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Change in unrealized net capital gains and losses

 

The change in unrealized net capital gains and losses for the six months ended June 30, 2010 is as follows:

 

($ in millions)

 

 

 

 

 

 

 

Fixed income securities

$

2,977

 

Equity securities

 

(281

)

Derivative instruments

 

25

 

Total

 

2,721

 

 

 

 

 

Amounts recognized for:

 

 

 

Insurance reserves

 

(292

)

DAC and DSI

 

(587

)

Decrease in amounts recognized

 

(879

)

Deferred income taxes

 

(644

)

Increase in unrealized net capital gains and losses

$

1,198

 

 

Portfolio monitoring

 

The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed income and equity security whose carrying value may be other-than-temporarily impaired.

 

For each fixed income security in an unrealized loss position, the Company assesses whether management with the appropriate authority has made a decision to sell or whether it is more likely than not the Company will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes.  If a security meets either of these criteria, the security’s decline in fair value is other than temporary and is recorded in earnings.

 

If the Company has not made the decision to sell the fixed income security and it is not more likely than not the Company will be required to sell the fixed income security before recovery of its amortized cost basis, the Company evaluates if it expects to receive cash flows sufficient to recover the entire amortized cost basis of the security by comparing the estimated recovery value, calculated by discounting the best estimate of future cash flows at the security’s original or current effective rate, as appropriate, to the amortized cost of the security.  If the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the fixed income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss related to other factors recognized in OCI.

 

For equity securities, the Company considers various factors, including whether the Company has the intent and ability to hold the equity security for a period of time sufficient to recover its cost basis.  Where the Company lacks the intent and ability to hold to recovery, or believes the recovery period is extended, the equity security’s decline in fair value is considered other than temporary and is recorded in earnings.  For equity securities managed by a third party, the Company has contractually retained its decision making authority as it pertains to selling equity securities that are in an unrealized loss position.

 

The Company’s portfolio monitoring process includes a quarterly review of all securities through a screening process which identifies instances where the fair value compared to amortized cost (for fixed income securities) and cost (for equity securities) is below established thresholds.  The screening process also includes the monitoring of other criteria such as ratings, ratings downgrades and payment defaults.  The securities identified, in addition to other securities for which the Company may have a concern, are evaluated for potential other-than-temporary impairment using all reasonably available information relevant to the collectability or recovery of the security.  Inherent in the Company’s evaluation of other-than-temporary impairment for these fixed income and equity securities are assumptions and estimates about the financial condition of the issue or issuer and its future earnings potential.  Some of the factors considered in evaluating whether a decline in fair value is other than temporary are: 1) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; 2) the specific reasons that a security is in a significant unrealized loss position, including overall market conditions which could affect liquidity; and 3) the length of time and extent to which the fair value has been less than amortized cost or cost.

 

12



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes the gross unrealized losses and fair value of fixed income and equity securities by the length of time that individual securities have been in a continuous unrealized loss position.

 

($ in millions)

 

Less than 12 months

 

12 months or more

 

Total

 

 

Number

 

Fair

 

Unrealized

 

Number

 

Fair

 

Unrealized

 

unrealized

 

 

of issues

 

value

 

losses

 

of issues

 

value

 

losses

 

losses

At June 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

6

$

185

$

--

 

 

1

$

2

$

--

 

$

--

 

Municipal

 

234

 

1,004

 

(23

)

 

627

 

4,017

 

(551

)

 

(574

)

Corporate

 

259

 

2,484

 

(94

)

 

248

 

3,258

 

(390

)

 

(484

)

Foreign government

 

10

 

160

 

(10

)

 

4

 

29

 

(2

)

 

(12

)

RMBS

 

203

 

796

 

(11

)

 

435

 

2,368

 

(1,171

)

 

(1,182

)

CMBS

 

7

 

71

 

(2

)

 

176

 

1,170

 

(598

)

 

(600

)

ABS

 

51

 

559

 

(20

)

 

146

 

1,256

 

(455

)

 

(475

)

Redeemable preferred stock

 

2

 

21

 

--

 

 

--

 

--

 

--

 

 

--

 

Total fixed income securities (1)

 

772

 

5,280

 

(160

)

 

1,637

 

12,100

 

(3,167

)

 

(3,327

)

Equity securities

 

2,498

 

1,901

 

(254

)

 

4

 

60

 

(13

)

 

(267

)

Total fixed income and equity securities

 

3,270

$

7,181

$

(414

)

 

1,641

$

12,160

$

(3,180

)

$

(3,594

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment grade fixed income securities

 

619

$

4,424

$

(145

)

 

1,175

$

9,257

$

(1,630

)

$

(1,775

)

Below investment grade fixed income securities

 

153

 

856

 

(15

)

 

462

 

2,843

 

(1,537

)

 

(1,552

)

Total fixed income securities

 

772

$

5,280

$

(160

)

 

1,637

$

12,100

$

(3,167

)

$

(3,327

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

38

$

3,523

$

(16

)

 

--

$

--

$

--

 

$

(16

)

Municipal

 

761

 

3,646

 

(123

)

 

747

 

5,024

 

(817

)

 

(940

)

Corporate

 

399

 

5,072

 

(178

)

 

421

 

5,140

 

(669

)

 

(847

)

Foreign government

 

50

 

505

 

(15

)

 

1

 

1

 

--

 

 

(15

)

RMBS

 

387

 

1,092

 

(23

)

 

453

 

2,611

 

(1,607

)

 

(1,630

)

CMBS

 

25

 

232

 

(4

)

 

259

 

1,790

 

(951

)

 

(955

)

ABS

 

39

 

352

 

(20

)

 

173

 

1,519

 

(530

)

 

(550

)

Redeemable preferred stock

 

1

 

--

 

--

 

 

1

 

21

 

(1

)

 

(1

)

Total fixed income securities (1)

 

1,700

 

14,422

 

(379

)

 

2,055

 

16,106

 

(4,575

)

 

(4,954

)

Equity securities

 

1,665

 

1,349

 

(113

)

 

28

 

450

 

(89

)

 

(202

)

Total fixed income and equity securities

 

3,365

$

15,771

$

(492

)

 

2,083

$

16,556

$

(4,664

)

$

(5,156

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment grade fixed income securities

 

1,587

$

13,891

$

(293

)

 

1,561

$

13,127

$

(2,848

)

$

(3,141

)

Below investment grade fixed income securities

 

113

 

531

 

(86

)

 

494

 

2,979

 

(1,727

)

 

(1,813

)

Total fixed income securities

 

1,700

$

14,422

$

(379

)

 

2,055

$

16,106

$

(4,575

)

$

(4,954

)

 


(1)   Gross unrealized losses resulting from factors other than credit on fixed income securities with other-than-temporary impairments for which the Company has recorded a credit loss in earnings total $5 million for the less than 12 month category and $603 million for the 12 months or greater category as of June 30, 2010 and $20 million for the less than 12 month category and $729 million for the 12 months or greater category as of December 31, 2009.

 

As of June 30, 2010, $1.01 billion of unrealized losses are related to securities with an unrealized loss position less than 20% of amortized cost or cost, the degree of which suggests that these securities do not pose a high risk of being other-than-temporarily impaired.  Of the $1.01 billion, $666 million are related to unrealized losses on investment grade fixed income securities.  Investment grade is defined as a security having a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A or BBB from S&P, Fitch, Dominion or Realpoint, a rating of aaa, aa, a or bbb from A.M. Best, or a comparable internal rating if an externally provided rating is not available.  Unrealized losses on investment grade securities are principally related to rising interest rates or widening credit spreads since the securities were acquired.

 

As of June 30, 2010, the remaining $2.58 billion of unrealized losses are related to securities in unrealized loss positions greater than or equal to 20% of amortized cost or cost.  Investment grade securities comprising $1.11 billion of these unrealized losses were evaluated based on factors such as discounted cash flows and the financial condition and near-term and long-term prospects of the issue or issuer and were determined to have adequate

 

13



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

resources to fulfill contractual obligations, such as recent financings or bank loans, cash flows from operations, collateral or the position of a subsidiary with respect to its parent’s bankruptcy.  Of the $2.58 billion, $1.37 billion are related to below investment grade fixed income securities and $98 million are related to equity securities.  Of these amounts, $1.30 billion of the below investment grade fixed income securities had been in an unrealized loss position for a period of twelve or more consecutive months as of June 30, 2010.  Unrealized losses on below investment grade securities are principally related to RMBS, CMBS and ABS and were the result of wider credit spreads resulting from larger risk premiums since the time of initial purchase, largely due to macroeconomic conditions and credit market deterioration, including the impact of declining residential and commercial real estate valuations.

 

RMBS, CMBS and ABS securities in an unrealized loss position were evaluated based on discounted cash flows and credit ratings, as well as the performance of the underlying collateral relative to the securities’ positions in the respective securitization trusts.  The evaluation for RMBS and ABS in an unrealized loss position also takes into consideration credit enhancements from bond insurers, where applicable.  Municipal bonds in an unrealized loss position were evaluated based on the quality of the underlying security, taking into consideration credit enhancements from bond insurers, where applicable.  Unrealized losses on equity securities are primarily related to equity market fluctuations.

 

As of June 30, 2010, the Company has not made a decision to sell and it is not more likely than not the Company will be required to sell fixed income securities with unrealized losses before recovery of the amortized cost basis.  As of June 30, 2010, the Company had the intent and ability to hold the equity securities with unrealized losses for a period of time sufficient for them to recover.

 

Limited partnership impairment

 

As of June 30, 2010 and December 31, 2009, the carrying value of equity method limited partnership interests totaled $1.90 billion and $1.64 billion, respectively.  The Company recognizes an impairment loss for equity method investments when evidence demonstrates that it is other-than-temporarily impaired.  Evidence of a loss in value that is other than temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment.  The Company had write-downs of $1 million for the three months ended June 30, 2010 and had no write-downs for the three months ended June 30, 2009 related to equity method limited partnership interests.  The Company had write-downs of $1 million and $10 million for the six months ended June 30, 2010 and 2009, respectively, related to equity-method limited partnership interests.

 

As of June 30, 2010 and December 31, 2009, the carrying value for cost method limited partnership interests was $1.22 billion and $1.10 billion, respectively.  To determine if an other-than-temporary impairment has occurred, the Company evaluates whether an impairment indicator has occurred in the period that may have a significant adverse effect on the carrying value of the investment.  Impairment indicators may include: actual recent cash flows received being significantly less than expected cash flows; reduced valuations based on financing completed at a lower value; completed sale of a material underlying investment at a price significantly lower than expected; significantly reduced valuations of the investments held by limited partnerships; or any other adverse events since the last financial statements received that might affect the fair value of the investee’s capital.  Additionally, the Company uses a screening process to identify those investments whose net asset value is below established thresholds for certain periods of time, as well as investments that are performing below expectations, for further impairment consideration.  If a cost method limited partnership is deemed other-than-temporarily impaired, the carrying value is written down to fair value, generally estimated to be equivalent to the reported net asset value of the underlying funds.  The Company had write-downs of $7 million and $46 million for the three months ended June 30, 2010 and 2009, respectively, and write-downs of $31 million and $233 million for the six months ended June 30, 2010 and 2009, respectively, related to cost method investments that were other-than-temporarily impaired.

 

5.  Fair Value of Assets and Liabilities

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available.  Assets and liabilities recorded on the Condensed

 

14



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Consolidated Statements of Financial Position at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows:

 

Level 1:  Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access.

 

Level 2:  Assets and liabilities whose values are based on the following:

 

(a)  Quoted prices for similar assets or liabilities in active markets;

 

(b)  Quoted prices for identical or similar assets or liabilities in markets that are not active; or

 

(c)  Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.

 

Level 3:  Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.  Unobservable inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the assets and liabilities.

 

The availability of observable inputs varies by instrument.  In situations where fair value is based on internally developed pricing models or inputs that are unobservable in the market, the determination of fair value requires more judgment.  The degree of judgment exercised by the Company in determining fair value is typically greatest for instruments categorized in Level 3.  In many instances, valuation inputs used to measure fair value fall into different l