Allstate Reports 2008 Second Quarter Results
* Reuters is not responsible for the content in this press release.
Strong Underwriting Results Generate Profit Despite Record Second
Quarter Catastrophes and Investment Valuation Declines
NORTHBROOK, Ill.--(Business Wire)--
The Allstate Corporation (NYSE:ALL) today reported results for the
second quarter of 2008:
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Consolidated Highlights
Three Months Ended June 30,
----------------------------------
Change
----------------------------------
(in millions, except per share Est.
amounts and ratios) 2008 2007 $ Amt %
----------------------------------- ====== ====== ======== ===========
Consolidated revenues $7,418 $9,455 $(2,037) (21.5)
----------------------------------- ------ ------ -------- -----------
Net income 25 1,403 (1,378) (98.2)
----------------------------------- ------ ------ -------- -----------
Net income per diluted share 0.05 2.30 (2.25) (97.8)
----------------------------------- ------ ------ -------- -----------
Operating income(a) 683 1,072 (389) (36.3)
----------------------------------- ------ ------ -------- -----------
Operating income per diluted
share(a) 1.24 1.76 (0.52) (29.5)
----------------------------------- ------ ------ -------- -----------
Return on equity 10.2 25.0 -- (14.8) pts.
----------------------------------- ------ ------ -------- -----------
Operating income return on
equity(a) 15.1 23.1 -- (8.0) pts.
----------------------------------- ------ ------ -------- -----------
Book value per share 35.93 36.39 (0.46) (1.3)
----------------------------------- ------ ------ -------- -----------
Book value per share, excluding the
impact of unrealized net capital
gains and losses on fixed income
securities(a) 36.93 35.70 1.23 3.4
----------------------------------- ------ ------ -------- -----------
Catastrophe losses 698 433 265 61.2
----------------------------------- ------ ------ -------- -----------
Property-Liability combined ratio 94.4 87.6 -- 6.8 pts.
----------------------------------- ------ ------ -------- -----------
Property-Liability combined ratio
excluding the effect of
catastrophes and prior year
reserve reestimates ("underlying
combined ratio")(a) 84.1 84.1 -- -- pts.
----------------------------------- ------ ------ -------- -----------
*T
(a) Measures used in this release that are not based on accounting
principles generally accepted in the United States ("non-GAAP") are
defined and reconciled to the most directly comparable GAAP measure
and operating measures are defined in the "Definitions of Non-GAAP and
Operating Measures" section of this document.
"Our continued focus on profitability in our insurance operations
served us well during the quarter," said Thomas J. Wilson, chairman,
president and chief executive officer of The Allstate Corporation.
"This strategy generated solid operating profit despite record
catastrophe losses. This performance offset lower earnings in our
financial services operations and a shift in the accounting of
unrealized investment losses to realized losses for change in intent
write-downs largely resulting from expanded investment risk mitigation
programs."
Allstate's second quarter operating income of $683 million was
affected by $698 million in pre-tax catastrophe losses, the highest
level of second quarter catastrophe losses the Corporation has
recorded in its 77-year history. Operating income for the quarter was
$389 million lower than the prior year quarter due to higher
catastrophe losses and the absence of favorable reserve re-estimates.
Allstate's net income for the quarter was $25 million, reflecting the
impact of realized after-tax capital losses of $788 million and lower
operating income.
"Solid insurance operation results enabled us to maintain our
strength for customers and continue to return capital to
shareholders," Wilson added. During the quarter, Allstate repurchased
8.8 million shares for $434 million; $1.4 billion remains of the $2
billion share repurchase program which the Corporation expects to
complete in the first quarter of 2009. Earlier this week, Allstate
announced a quarterly dividend of forty-one cents ($0.41) on each
outstanding share of the Corporation's common stock.
Protection
During the quarter, Allstate's Property-Liability operations
benefitted from reduced claim frequency and moderate severity,
resulting in profitability levels better than expected for the full
year. For the quarter, the Property-Liability underlying combined
ratio, which excludes the effects of catastrophes and prior year
reserve re-estimates, was 84.1, significantly below the full-year
outlook of 87.0 to 89.0 provided in January.
Financial Services
Allstate Financial posted operating income of $118 million for the
quarter, a decline from $154 million in the prior year quarter due in
part to lower investment spreads and increased costs related to the
effort to reinvent retirement for consumers. "Our life insurance
products continued to perform well and our asset accumulation
retirement products had a good quarter with increased new business
returns," Wilson said. "Our challenge and opportunity in financial
services is increasing consistency in achieving desired results
quarter to quarter, especially in light of continued pressures on the
economy and investment markets."
Investments
Commenting on Allstate's investment portfolio, which generated
$1.4 billion in net investment income for the quarter, Wilson said:
"Our investment philosophy emphasizes diversified exposure, high
quality assets and continual attention to risk mitigation and return
optimization. This approach has helped us to minimize impairments in
the face of unprecedented market volatility. As market conditions
change, we will continue to adapt our risk and return strategies."
Reflecting its view that pressures on the economy and investment
markets will be prolonged, Allstate augmented risk mitigation and
return optimization programs in its investment portfolios. "We're
positioning our portfolio to further reduce our risk in certain market
segments and hedge against significant adverse developments," said
Allstate Chief Investment Officer Ric Simonson. The expanded programs
are strategically reducing exposure to certain real estate and
financial services-related asset classes and guarding against
significant adverse moves in equity valuations, interest rates and
credit spreads through macro-hedging. Two-thirds of the after-tax
realized losses ($557 million) Allstate incurred in the quarter are
related to change in intent write-downs resulting from this strategic
review of investments in certain sectors. "These strategic actions
largely affect assets that are current and continue to pay interest,
but we believe these steps better insulate our portfolio and provide
greater flexibility to take advantage of new opportunities in the
investment markets,"
Outlook
In light of positive first half 2008 performance, Allstate is
adjusting the outlook for its Property-Liability underlying combined
ratio, excluding the effect of catastrophes and prior year reserve
re-estimates. The Corporation now expects its underlying combined
ratio will be within 86.0 - 88.0 for the full year of 2008, an
improvement from the full-year outlook of 87.0 - 89.0 provided in
January.
PERFORMANCE HIGHLIGHTS
Consolidated
-- Consolidated revenues were $7.4 billion in the quarter, a
decline from $9.5 billion from the second quarter of 2007,
reflecting net realized capital losses in the current year
quarter compared to net realized capital gains in the second
quarter of 2007.
-- Operating income per diluted share was $1.24 in the quarter, a
decline of $0.52 from $1.76 in the second quarter of 2007,
reflecting higher catastrophe losses ($0.36 of the decline)
and the effects of lower favorable prior year non-catastrophe
reserve reestimates ($0.20 of the decline).
-- Net income per diluted share was $0.05 in the quarter, a
decline from $2.30 in the second quarter of 2007, reflecting
after-tax net realized capital losses in the current year
quarter compared to after-tax net realized capital gains in
the second quarter of 2007 ($1.78 decline, net of DAC) and
lower operating income ($0.52 decline).
BUSINESS HIGHLIGHTS
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(in millions, except Three months ended Six months ended
ratios) June 30, June 30,
---------------------- -----------------------
Est. % Est. %
2008 2007 Change 2008 2007 Change
------- ------ ------- ------- ------- -------
Property-Liability
Premiums written $6,803 $6,939 (2.0) $13,317 $13,548 (1.7)
Underwriting income(a) 378 845 (55.3) 786 1,891 (58.4)
Net income 439 1,230 (64.3) 942 2,579 (63.5)
Combined Ratio 94.4 87.6 6.8 pts 94.2 86.1 8.1 pts
Allstate Financial
Premiums and
deposits(a) $4,453 $2,887 54.2 $7,499 $5,515 36.0
Operating income 118 154 (23.4) 261 310 (15.8)
Net (loss) income (379) 200 -- (490) 364 --
Investments
Net investment income $1,412 $1,634 (13.6) $2,938 $3,205 (8.3)
Realized capital gains
and losses (1,215) 545 -- (1,870) 1,016 --
*T
Property-Liability
-- Property-Liability premiums written declined 2.0% in the
second quarter of 2008 from the second quarter of 2007. The
cost of the catastrophe reinsurance program was $223 million
in the second quarter of 2008 compared to $231 million in the
second quarter of 2007.
-- Allstate brand standard auto premiums written in the second
quarter of 2008 were comparable to the prior year quarter.
Contributing to this result were the following:
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-- 0.8% decrease in policies in force ("PIF")
-- 0.8 point decline in the six month renewal ratio to 89.1%
-- 1.4% increase in six month average premium before
reinsurance to $427
-- 6.7% decrease in new issued applications
*T
-- Allstate brand homeowners premiums written declined 0.8% in
the second quarter of 2008, compared to the prior year
quarter, primarily due to our catastrophe risk management
actions. Contributing to the overall change were the
following:
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-- 4.0% decrease in PIF
-- 1.0 point decline in the twelve month renewal ratio to
86.3%
-- 1.9% increase in twelve month average premium before
reinsurance to $867
-- 26.1% decrease in new issued applications
*T
-- We completed our 2008 catastrophe reinsurance program during
the second quarter with the acquisition of additional coverage
for hurricane catastrophe losses in Texas and four new
agreements for our exposure in Florida. Our program allows us
to continue to broadly offer protection products. As
previously announced, we expect the annualized cost of these
programs for the year beginning June 1, 2008 to be
approximately $660 million per year or $165 million per
quarter. For detailed information on our Allstate Protection
catastrophe reinsurance program, see:
http://media.corporate-ir.net/media_files/irol/93/93125/report
s2/all2q08reinsurance.pdf (Due to its length, this URL may
need to be copied/pasted into your Internet browser's address
field. Remove the extra space if one exists.)
-- Standard auto property damage frequencies decreased 4.2% and
bodily injury frequencies decreased 7.6% compared to the
second quarter of 2007, which may be in part due to a
reduction in the number of miles driven. Auto property damage
and bodily injury paid severities increased 2.6% and 7.1%,
respectively. The Allstate brand standard auto loss ratio
increased 3.6 points compared to the second quarter of 2007 to
67.1 in the second quarter of 2008, due to increased
catastrophe losses and the absence of favorable prior year
reserve reestimates.
-- Homeowners gross claim frequency, excluding catastrophes,
increased 13.7% compared to the second quarter of 2007 fueled
by non-catastrophe weather-related claim trends. Homeowners
paid severity, excluding catastrophes, increased 0.3% compared
to the second quarter of 2007. The Allstate brand homeowners
loss ratio increased 18.8 points compared to the second
quarter of 2007 to 86.5 in the second quarter of 2008, largely
attributable to higher catastrophes. The effect of catastrophe
losses on the Allstate brand homeowners loss ratio totaled
38.0 in the second quarter of 2008 compared to 21.6 in the
second quarter of 2007.
-- Catastrophe losses for the quarter totaled $698 million,
compared to $433 million in the second quarter of 2007,
impacting the combined ratio by 10.3 points in the quarter and
6.3 points in the second quarter of 2007. This increase was
primarily related to severe weather experienced across the
country, including tornado activity, resulting in 43
catastrophe events in the second quarter of 2008 compared to
34 in the second quarter of 2007. Catastrophe losses,
excluding prior year reserve reestimates, were $687 million in
the quarter compared to $383 million in the second quarter of
2007. Unfavorable reserve reestimates related to catastrophes
from prior years totaled $11 million in the quarter, impacting
the combined ratio by 0.1 point, compared to unfavorable
reserve reestimates related to catastrophes from prior years
of $50 million in the second quarter of 2007. The following
table presents the type and number of catastrophe losses.
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Three months ended June 30, Six months ended June 30,
--------------------------- ---------------------------
($ in Est. # # Est. # #
millions) 2008 Events 2007 Events 2008 Events 2007 Events
----- ------- ---- ------- ----- ------- ---- -------
Tornadoes $ 302 13 $ 93 5 $ 478 17 $ 140 10
Wind/Hail 382 27 248 28 597 45 294 36
Other,
including
prior year
reserve
reestimates 14 3 92 1 191 9 160 6
----- ------- ---- ------- ----- ------- ---- -------
Total
Catastrophe
losses $ 698 43 $ 433 34 $1,266 71 $ 594 52
===== ======= ==== ======= ===== ======= ==== =======
*T
-- Property-Liability prior year reserve reestimates for the
second quarter of 2008 were an unfavorable $9 million,
compared to favorable prior year reserve reestimates of $143
million in the second quarter of 2007.
-- Underwriting income was $378 million during the second quarter
of 2008 compared to $845 million in the same period of 2007.
The decrease was primarily due to higher catastrophe losses
and the absence of favorable prior year reserve reestimates.
-- Allstate expects the Property-Liability underlying combined
ratio will be within the range of 86.0 and 88.0 for the full
year 2008. The calculation of the underlying combined ratio
for the three months and six months ended June 30 is shown in
the table below. Favorable reserve reestimates are shown in
parenthesis.
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Three months ended Six months ended
June 30, June 30,
------------------ -----------------
Est. Est.
2008 2007 2008 2007
------------ ----- ----------- -----
Combined ratio excluding the
effect of catastrophes and prior
year reserve reestimates 84.1 84.1 84.9 84.1
Effect of catastrophe losses 10.3 6.3 9.4 4.4
Effect of prior year non-
catastrophe reserve reestimates -- (2.8) (0.1) (2.4)
------------ ----- ----------- -----
Combined ratio (GAAP) 94.4 87.6 94.2 86.1
============ ===== =========== =====
Effect of prior year catastrophe
reserve reestimates 0.1 0.7 0.9 0.4
============ ===== =========== =====
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Allstate Financial
-- Premiums and deposits in the second quarter of 2008 were $4.5
billion, an increase of 54.2% from the prior year quarter.
This increase is primarily due to issuances of institutional
products of $2.5 billion and a $380 million or 57.8% increase
in deposits on fixed deferred annuities during the second
quarter of 2008.
-- Operating income for the second quarter of 2008 was $118
million, $36 million lower than the prior year quarter. The
decline was primarily due to lower investment spread and
increased operating expenses partially offset by lower
amortization of deferred acquisition costs ("DAC") and higher
benefit spread. The decline in investment spreads was driven
by lower net investment income resulting primarily from lower
investment yields on floating rate assets, increased
short-term investment balances held to offset reduced
liquidity in some asset classes and lower investment balances
reflecting dividends paid by Allstate Life Insurance Company
in 2007.
-- Net loss for the second quarter of 2008 was $379 million
compared to net income of $200 million in the prior year
quarter. The decline was due to pre-tax net realized capital
losses of $965 million compared to pre-tax net realized
capital gains of $104 million in the prior year quarter and
lower operating income. Net realized capital losses were
driven by $776 million in losses on investment dispositions,
including change in intent write-downs and $199 million in
impairment write-downs, partially offset by an $8 million gain
in the valuation of derivative instruments and $2 million gain
in derivative settlements. For further information on
write-downs and the valuation of derivative instruments, see
the Realized Capital Gains and Losses Analysis section.
-- During the second quarter of 2008, we acquired in the
secondary market and retired a total of $1.14 billion of
institutional market deposits, that investors had elected to
non-extend their maturity date. In addition, $986 million have
been called and will be retired in July 2008. Total
non-extended institutional market deposits were $3.1 billion
as of June 30, 2008, all of which become due no later than the
end of the first quarter of 2009. We have accumulated, and
expect to maintain, short-term investments to retire these
obligations.
Investments
-- We developed additional risk mitigation and return
optimization programs in the second quarter in response to an
altered outlook for continued weakness in the U.S. financial
markets and economy. These programs comprise overall portfolio
protection ("macro-hedging") and potential future reductions
in certain real estate and financial-related market sectors.
These anticipated reductions resulted in our change in intent
to hold certain securities until their value recovers to
amortized cost or cost, resulting in the accounting
recognition of realized capital losses for the difference
between fair value and amortized cost or cost on these
securities ("change in intent write-downs"). A comprehensive
review identified specific investments that could be
significantly impacted by continued deterioration in the
economy. For further information on our risk mitigation and
return optimization programs, see the Investment Risk
Mitigation and Return Optimization Programs section.
-- Net investment income decreased 13.6% to $1.4 billion compared
to the prior year quarter. Property-Liability net investment
income decreased 16.6% to $431 million, compared to the prior
year quarter, due to decreased income on limited partnership
interests, lower average asset balances reflecting dividends
to the parent company and reduced portfolio yields. Allstate
Financial net investment income declined 12.4% to $943
million, compared to the prior year quarter, due to lower
yields on higher short-term securities balances, lower yields
on floating rate securities and lower average asset balances.
-- Net realized capital losses were $1.2 billion on a pre-tax
basis for the quarter, due to $1.1 billion of net losses
related to dispositions, including change in intent
write-downs, and $250 million of impairment write-downs,
partly offset by net gains totaling $123 million on the
settlement and valuation of derivative instruments.
-- Impairment write-downs totaled $250 million, comprised $205
million on fixed income securities, primarily related to
residential mortgages and other structured securities, and $37
million on equity securities. Over 95% of the fixed income
write-downs relate to impaired securities that were performing
in line with anticipated or contractual cash flows, but which
were written down primarily because of expected deterioration
in the performance of the underlying collateral. For further
information on the types of securities experiencing
write-downs, see the Realized Capital Gains and Losses
Analysis section.
-- Dispositions totaling $1.1 billion are comprised almost
entirely of losses related to our change in intent as a result
of our risk mitigation and return optimization programs,
strategic asset allocation and ongoing comprehensive reviews
of our portfolios. In the second quarter of the prior year,
dispositions resulted in net realized capital gains of $307
million, comprised $378 million of gains on sales and $71
million of losses related to change in intent write-downs. For
further information on the types of securities included in
dispositions, see the Realized Capital Gains and Losses
Analysis section.
-- Net realized capital gains on the valuation and settlement of
derivative instruments totaled $123 million for the quarter,
primarily comprised $114 million for the valuation of
previously established risk reduction programs. For further
information on the impact from the valuation and settlement of
derivatives, see the Realized Capital Gains and Losses
Analysis section.
-- Allstate's investment portfolios totaled $113.6 billion as of
June 30, 2008, a decline of $1.9 billion from the end of the
first quarter of 2008, due to unrealized net capital losses
and net realized capital losses.
-- The increase in unrealized net capital losses during the
second quarter of 2008 totaling $219 million was primarily
related to investment grade fixed income securities as the
yields supporting fair values increased, resulting from higher
risk free interest rates, partly offset by narrowing credit
spreads. This net increase in fixed income net unrealized
capital losses more than offset the realization of capital
losses on impairments and dispositions, including change in
intent write-downs, during the quarter. Total unrealized gains
and losses are shown in the table below.
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Est.
June 30, March 31, December 31,
(in millions) 2008 2008 2007
-------- --------- ------------
U.S. government and agencies $ 854 $ 1,026 $ 918
Municipal 32 342 720
Corporate (530) (204) 90
Foreign government 354 457 394
Mortgage-backed securities (1) (183) (210) (43)
Commercial mortgage-backed
securities(1) (388) (868) (308)
Asset-backed securities (1) (1,351) (1,463) (816)
Redeemable preferred stock (2) (3) 1
-------- --------- ------------
Fixed income securities (1,214) (923) 956
Equity securities 467 392 990
Derivatives (42) (39) (33)
-------- --------- ------------
Unrealized gains and losses $ (789) $ (570) $ 1,913
======== ========= ============
(1) For further information on our residential and commercial mortgage
loan portfolio, see the Securities Experiencing Illiquid Markets
section.
*T
-- Unrealized net capital losses on fixed income securities
totaled $1.2 billion as of June 30, 2008, comprised $3.6
billion in gross unrealized losses and $2.4 billion in gross
unrealized gains. Included in gross unrealized losses were
$1.1 billion of securities with a fair value below 70% of
amortized cost, or 1.4% of our fixed income portfolio at June
30, 2008. The percentage of fair value to amortized cost for
the remaining fixed income gross unrealized losses at June 30,
2008 are shown in the following table.
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% to total
Unrealized Fair fixed income
(in millions) (loss) gain value investments
----------- ------ ------------
Greater than 80% of amortized cost $ (1,950) $38,964 46.8%
70% to 80% of amortized cost (648) 1,986 2.4
Less than 70% of amortized cost (1,000) 1,150 1.4
----------- ------ ------------
Gross unrealized losses on fixed
income securities $ (3,598) $42,100 50.6
Gross unrealized gains on fixed
income securities 2,384 41,124 49.4
----------- ------ ------------
Net unrealized gains and losses on
fixed income securities $ (1,214) $83,224 100.0%
=========== ====== ============
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Included in the fixed income securities with a fair value less
than 70% of amortized cost were ABS RMBS, Alt-A and other CDOs with a
fair value totaling $910 million or 79.1% of the total securities with
a fair value less than 70% of amortized cost. We continue to believe
that the unrealized losses on these securities are not necessarily
predictive of the ultimate performance. The unrealized losses should
reverse over the remaining lives of the securities, including in the
absence of further deterioration in the collateral relative to our
positions in the securities' respective capital structures. For
further information on these securities, see the Securities
Experiencing Illiquid and Disrupted Markets and Other CDO sections.
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THE ALLSTATE CORPORATION
CONSOLIDATED AND SEGMENT HIGHLIGHTS
Three Months Ended
June 30,
------------------
($ in millions, except per
share amounts, return data Est. Percent
and ratios) 2008 2007 Change Change
---------- ------ ------- -------
Consolidated Highlights
Revenues $ 7,418 $9,455 $(2,037) (21.5)
Net income 25 1,403 (1,378) (98.2)
Operating income 683 1,072 (389) (36.3)
Income per diluted share
Net 0.05 2.30 (2.25) (97.8)
Operating 1.24 1.76 (0.52) (29.5)
Weighted average shares
outstanding (diluted) 552.9 608.8 (55.9) (9.2)
Net shares outstanding
Return on equity
Net income
Operating income
Book value per diluted share
Book value per diluted
share, excluding the impact
of unrealized net capital
gains and losses on fixed
income securities
Property-Liability
Highlights
Property-Liability premiums
written $ 6,803 $6,939 $ (136) (2.0)
Property-Liability revenues 6,943 7,776 (833) (10.7)
Net income 439 1,230 (791) (64.3)
Underwriting income 378 845 (467) (55.3)
Net investment income 431 517 (86) (16.6)
Operating income 592 947 (355) (37.5)
Catastrophe losses 698 433 265 61.2
Ratios:
Allstate Protection loss
ratio 70.7 63.2 - 7.5 pts.
Allstate Protection
expense ratio 23.7 24.3 - (0.6) pts.
---------- ------
Allstate Protection
combined ratio 94.4 87.5 - 6.9 pts.
Effect of Discontinued
Lines and Coverages on
combined ratio - 0.1 - (0.1) pts.
---------- ------
Property-Liability
combined ratio 94.4 87.6 - 6.8 pts.
Effect of catastrophe
losses on combined ratio 10.3 6.3 - 4.0 pts.
---------- ------
Property-Liability
combined ratio excluding
effect of catastrophes 84.1 81.3 - 2.8 pts.
Effect of prior year
reserve reestimates on
combined ratio 0.1 (2.1) - 2.2 pts.
Effect of catastrophe
losses included in prior
year reserve reestimates
on combined ratio (0.1) (0.7) - 0.6 pts.
---------- ------
Property-Liability
combined ratio excluding
effect of catastrophes
and prior year reserve
reestimates 84.1 84.1 - - pts.
========== ======
Allstate Financial
Highlights
Premiums and deposits $ 4,453 $2,887 $ 1,566 54.2
Allstate Financial revenues 449 1,634 (1,185) (72.5)
Realized capital gains and
losses (pre-tax) (965) 104 (1,069) -
Net (loss) income (379) 200 (579) -
Operating income 118 154 (36) (23.4)
Net income analysis
Benefit spread 127 122 5 4.1
Investment spread 242 264 (22) (8.3)
Investment Highlights
Net investment income $ 1,412 $1,634 $ (222) (13.6)
Realized capital gains and
losses (pre-tax) (1,215) 545 (1,760) -
Total investments
Six Months Ended
June 30,
------------------
($ in millions, except per
share amounts, return data Est. Percent
and ratios) 2008 2007 Change Change
-------- -------- ------- -------
Consolidated Highlights
Revenues $ 15,505 $ 18,786 $(3,281) (17.5)
Net income 373 2,898 (2,525) (87.1)
Operating income 1,430 2,269 (839) (37.0)
Income per diluted share
Net 0.67 4.71 (4.04) (85.8)
Operating 2.57 3.69 (1.12) (30.4)
Weighted average shares
outstanding (diluted) 557.2 615.2 (58.0) (9.4)
Net shares outstanding 545.6 587.7 (42.1) (7.2)
Return on equity
Net income 10.2 25.0 - (14.8) pts.
Operating income 15.1 23.1 - (8.0) pts.
Book value per diluted share 35.93 36.39 (0.46) (1.3)
Book value per diluted
share, excluding the impact
of unrealized net capital
gains and losses on fixed
income securities 36.93 35.70 1.23 3.4
Property-Liability
Highlights
Property-Liability premiums
written $ 13,317 $ 13,548 $ (231) (1.7)
Property-Liability revenues 13,983 15,517 (1,534) (9.9)
Net income 942 2,579 (1,637) (63.5)
Underwriting income 786 1,891 (1,105) (58.4)
Net investment income 901 1,008 (107) (10.6)
Operating income 1,221 2,009 (788) (39.2)
Catastrophe losses 1,266 594 672 113.1
Ratios:
Allstate Protection loss
ratio 69.9 62.2 - 7.7 pts.
Allstate Protection
expense ratio 24.2 24.2 - - pts.
-------- --------
Allstate Protection
combined ratio 94.1 86.4 - 7.7 pts.
Effect of Discontinued
Lines and Coverages on
combined ratio 0.1 (0.3) - 0.4 pts.
-------- --------
Property-Liability
combined ratio 94.2 86.1 - 8.1 pts.
Effect of catastrophe
losses on combined ratio 9.4 4.4 - 5.0 pts.
-------- --------
Property-Liability
combined ratio excluding
effect of catastrophes 84.8 81.7 - 3.1 pts.
Effect of prior year
reserve reestimates on
combined ratio 0.8 (2.0) - 2.8 pts.
Effect of catastrophe
losses included in prior
year reserve reestimates
on combined ratio (0.9) (0.4) - (0.5) pts.
-------- --------
Property-Liability
combined ratio excluding
effect of catastrophes
and prior year reserve
reestimates 84.9 84.1 - 0.8 pts.
======== ========
Allstate Financial
Highlights
Premiums and deposits $ 7,499 $ 5,515 $ 1,984 36.0
Allstate Financial revenues 1,484 3,190 (1,706) (53.5)
Realized capital gains and
losses (pre-tax) (1,397) 127 (1,524) -
Net (loss) income (490) 364 (854) -
Operating income 261 310 (49) (15.8)
Net income analysis
Benefit spread 238 232 6 2.6
Investment spread 495 528 (33) (6.3)
Investment Highlights
Net investment income $ 2,938 $ 3,205 $ (267) (8.3)
Realized capital gains and
losses (pre-tax) (1,870) 1,016 (2,886) -
Total investments 113,603 122,267 (8,664) (7.1)
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THE ALLSTATE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Six Months
Ended Ended
June 30, June 30,
-------------- ---------------
($ in millions,
except per share Est. Percent Est. Percent
data) 2008 2007 Change 2008 2007 Change
------- ----- ------- ------- ------ -------
Revenues
Property-liability
insurance premiums $ 6,750 $6,822 (1.1) $13,514 $13,628 (0.8)
Life and annuity
premiums and
contract charges 471 454 3.7 923 937 (1.5)
Net investment
income 1,412 1,634 (13.6) 2,938 3,205 (8.3)
Realized capital
gains and losses (1,215) 545 - (1,870) 1,016 -
------- ----- ------- ------
Total revenues 7,418 9,455 (21.5) 15,505 18,786 (17.5)
------- ----- ------- ------
Costs and expenses
Property-liability
insurance claims
and claims expense 4,776 4,317 10.6 9,452 8,434 12.1
Life and annuity
contract benefits 395 386 2.3 792 814 (2.7)
Interest credited to
contractholder
funds 563 673 (16.3) 1,187 1,322 (10.2)
Amortization of
deferred policy
acquisition costs 959 1,216 (21.1) 2,034 2,369 (14.1)
Operating costs and
expenses 728 734 (0.8) 1,520 1,461 4.0
Restructuring and
related charges (5) 4 - (6) 3 -
Interest expense 88 83 6.0 176 155 13.5
------- ----- ------- ------
Total costs and
expenses 7,504 7,413 1.2 15,155 14,558 4.1
------- ----- ------- ------
Gain (loss) on
disposition of
operations - 2 (100.0) (9) 2 -
------- ----- ------- ------
(Loss) income from
operations before
income tax (benefit)
expense (86) 2,044 (104.2) 341 4,230 (91.9)
Income tax (benefit)
expense (111) 641 (117.3) (32) 1,332 (102.4)
------- ----- ------- ------
Net income $ 25 $1,403 (98.2) $ 373 $ 2,898 (87.1)
======= ===== ======= ======
Net income per share
- Basic $ 0.05 $ 2.33 $ 0.67 $ 4.75
======= ===== ======= ======
Weighted average
shares - Basic 549.6 604.1 554.2 610.4
======= ===== ======= ======
Net income per share
- Diluted $ 0.05 $ 2.30 $ 0.67 $ 4.71
======= ===== ======= ======
Weighted average
shares - Diluted 552.9 608.8 557.2 615.2
======= ===== ======= ======
Cash dividends
declared per share $ 0.41 $ 0.38 $ 0.82 $ 0.76
======= ===== ======= ======
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THE ALLSTATE CORPORATION
CONTRIBUTION TO INCOME
Three Months Six Months
Ended Ended
June 30, June 30,
-------------- ---------------
($ in millions,
except per share Est. Percent Est. Percent
data) 2008 2007 Change 2008 2007 Change
------ ------ ------- ------- ------ -------
Contribution to
income
Operating income
before the impact
of restructuring
and related charges $ 680 $1,075 (36.7) $ 1,426 $2,271 (37.2)
Restructuring and
related charges,
after-tax (3) 3 - (4) 2 -
------ ------ ------- ------
Operating income 683 1,072 (36.3) 1,430 2,269 (37.0)
Realized capital
gains and losses,
after-tax (788) 352 - (1,213) 657 -
DAC and DSI
amortization
relating to
realized capital
gains and losses,
after-tax 134 (15) - 173 (15) -
Reclassification of
periodic
settlements and
accruals on non-
hedge derivative
instruments, after-
tax (4) (7) 42.9 (11) (15) 26.7
Gain (loss) on
disposition of
operations, after-
tax - 1 (100.0) (6) 2 -
------ ------ ------- ------
Net income $ 25 $1,403 (98.2) $ 373 $2,898 (87.1)
====== ====== ======= ======
Income per share -
Diluted
Operating income
before the impact
of restructuring
and related charges $ 1.23 $ 1.76 (30.1) $ 2.56 $ 3.69 (30.6)
Restructuring and
related charges,
after-tax (0.01) - - (0.01) - -
------ ------ ------- ------
Operating income 1.24 1.76 (29.5) 2.57 3.69 (30.4)
Realized capital
gains and losses,
after-tax (1.42) 0.58 - (2.18) 1.07 -
DAC and DSI
amortization
relating to
realized capital
gains and losses,
after-tax 0.24 (0.02) - 0.31 (0.02) -
Reclassification of
periodic
settlements and
accruals on non-
hedge derivative
instruments, after-
tax (0.01) (0.02) 50.0 (0.02) (0.03) 33.3
Gain (loss) on
disposition of
operations, after-
tax - - - (0.01) - -
------ ------ ------- ------
Net income $ 0.05 $ 2.30 (97.8) $ 0.67 $ 4.71 (85.8)
====== ====== ======= ======
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THE ALLSTATE CORPORATION
SEGMENT RESULTS
Three Months Six Months Ended
Ended June 30,
June 30,
---------------- ----------------
Est. Est.
($ in millions, except ratios) 2008 2007 2008 2007
------- ------- ------- -------
Property-Liability
Premiums written $ 6,803 $ 6,939 $13,317 $13,548
======= ======= ======= =======
Premiums earned $ 6,750 $ 6,822 $13,514 $13,628
Claims and claims expense 4,776 4,317 9,452 8,434
Amortization of deferred policy
acquisition costs 1,000 1,032 2,011 2,056
Operating costs and expenses 601 623 1,271 1,243
Restructuring and related charges (5) 5 (6) 4
------- ------- ------- -------
Underwriting income 378 845 786 1,891
------- ------- ------- -------
Net investment income 431 517 901 1,008
Periodic settlements and accruals
on non-hedge derivative
instruments - - 1 -
Income tax expense on operations 217 415 467 890
------- ------- ------- -------
Operating income 592 947 1,221 2,009
Realized capital gains and
losses, after-tax (153) 283 (278) 570
Reclassification of periodic
settlements and accruals on non-
hedge derivative instruments,
after-tax - - (1) -
------- ------- ------- -------
Net income $ 439 $ 1,230 $ 942 $ 2,579
======= ======= ======= =======
Catastrophe losses $ 698 $ 433 $ 1,266 $ 594
======= ======= ======= =======
Operating ratios:
Claims and claims expense ratio 70.8 63.3 70.0 61.9
Expense ratio 23.6 24.3 24.2 24.2
------- ------- ------- -------
Combined ratio 94.4 87.6 94.2 86.1
======= ======= ======= =======
Effect of catastrophe losses on
combined ratio 10.3 6.3 9.4 4.4
======= ======= ======= =======
Effect of prior year reserve
reestimates on combined ratio 0.1 (2.1) 0.8 (2.0)
======= ======= ======= =======
Effect of catastrophe losses
included in prior year reserve
reestimate on combined ratio 0.1 0.7 0.9 0.4
======= ======= ======= =======
Effect of Discontinued Lines
and Coverages on combined
ratio - 0.1 0.1 (0.3)
======= ======= ======= =======
Allstate Financial
Premiums and deposits $ 4,453 $ 2,887 $ 7,499 $ 5,515
======= ======= ======= =======
Investments $72,504 $77,113 $72,504 $77,113
======= ======= ======= =======
Premiums and contract charges $ 471 $ 454 $ 923 $ 937
Net investment income 943 1,076 1,958 2,126
Periodic settlements and accruals
on non-hedge derivative
instruments 7 12 16 24
Contract benefits 395 386 792 814
Interest credited to
contractholder funds 599 670 1,229 1,319
Amortization of deferred policy
acquisition costs 130 164 247 293
Operating costs and expenses 125 95 243 200
Restructuring and related charges - (1) - (1)
Income tax expense on operations 54 74 125 152
------- ------- ------- -------
Operating income 118 154 261 310
Realized capital gains and
losses, after-tax (627) 67 (908) 82
DAC and DSI amortization relating
to realized capital gains and
losses, after-tax 134 (15) 173 (15)
Reclassification of periodic
settlements and accruals on non-
hedge derivative instruments,
after-tax (4) (7) (10) (15)
Gain (loss) on disposition of
operations, after-tax - 1 (6) 2
------- ------- ------- -------
Net (loss) income $ (379) $ 200 $ (490) $ 364
======= ======= ======= =======
Corporate and Other
Net investment income $ 38 $ 41 $ 79 $ 71
Operating costs and expenses 90 99 182 173
Income tax benefit on operations (25) (29) (51) (52)
------- ------- ------- -------
Operating loss (27) (29) (52) (50)
Realized capital gains and
losses, after-tax (8) 2 (27) 5
------- ------- ------- -------
Net loss $ (35) $ (27) $ (79) $ (45)
======= ======= ======= =======
Consolidated net income $ 25 $ 1,403 $ 373 $ 2,898
======= ======= ======= =======
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THE ALLSTATE CORPORATION
UNDERWRITING RESULTS BY AREA OF BUSINESS
Three
Months Six Months
Ended Ended
June 30, June 30,
------------ --------------
($ in millions, except Est. Percent Est. Percent
ratios) 2008 2007 Change 2008 2007 Change
----- ----- ------- ------ ------ -------
Property-Liability
Underwriting Summary
Allstate Protection $ 381 $ 850 (55.2) $ 796 $ 1,856 (57.1)
Discontinued Lines and
Coverages (3) (5) 40.0 (10) 35 (128.6)
----- ----- ------ ------
Underwriting income $ 378 $ 845 (55.3) $ 786 $ 1,891 (58.4)
===== ===== ====== ======
Allstate Protection
Underwriting Summary
Premiums written $6,803 $6,939 (2.0) $13,317 $13,548 (1.7)
===== ===== ====== ======
Premiums earned $6,750 $6,822 (1.1) $13,514 $13,628 (0.8)
Claims and claims
expense 4,774 4,314 10.7 9,445 8,473 11.5
Amortization of
deferred policy
acquisition costs 1,000 1,032 (3.1) 2,011 2,056 (2.2)
Operating costs and
expenses 600 621 (3.4) 1,268 1,239 2.3
Restructuring and
related charges (5) 5 - (6) 4 -
----- ----- ------ ------
Underwriting income $ 381 $ 850 (55.2) $ 796 $ 1,856 (57.1)
===== ===== ====== ======
Catastrophe losses $ 698 $ 433 61.2 $ 1,266 $ 594 113.1
===== ===== ====== ======
Operating ratios:
Claims and claims
expense ratio 70.7 63.2 69.9 62.2
Expense ratio 23.7 24.3 24.2 24.2
----- ----- ------ ------
Combined ratio 94.4 87.5 94.1 86.4
===== ===== ====== ======
Effect of catastrophe
losses on combined
ratio 10.3 6.3 9.4 4.4
===== ===== ====== ======
Effect of restructuring
and related charges on
combined ratio (0.1) 0.1 - -
===== ===== ====== ======
Discontinued Lines and
Coverages Underwriting
Summary
Premiums written $ - $ - - $ - $ - -
===== ===== ====== ======
Premiums earned $ - $ - - $ - $ - -
Claims and claims
expense 2 3 (33.3) 7 (39) 117.9
Operating costs and
expenses 1 2 (50.0) 3 4 (25.0)
----- ----- ------ ------
Underwriting (loss)
income $ (3) $ (5) 40.0 $ (10) $ 35 (128.6)
===== ===== ====== ======
Effect of Discontinued
Lines and Coverages on
the Property-Liability
combined ratio - 0.1 0.1 (0.3)
===== ===== ====== ======
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THE ALLSTATE CORPORATION
PROPERTY-LIABILITY PREMIUMS WRITTEN BY MARKET SEGMENT
Three Months Six Months
Ended Ended
June 30, June 30,
------------ --------------
Est. Percent Est. Percent
($ in millions) 2008 2007 Change 2008 2007 Change
----- ----- ------- ------ ------ -------
Allstate brand
Standard auto $3,957 $3,956 - $ 8,034 $ 8,007 0.3
Non-standard auto 261 300 (13.0) 535 621 (13.8)
Involuntary auto 17 22 (22.7) 33 44 (25.0)
Commercial lines 173 199 (13.1) 340 393 (13.5)
Homeowners 1,531 1,543 (0.8) 2,716 2,756 (1.5)
Other personal lines 423 422 0.2 794 787 0.9
----- ----- ------ ------
6,362 6,442 (1.2) 12,452 12,608 (1.2)
Encompass brand
Standard auto 272 297 (8.4) 542 563 (3.7)
Non-standard auto 11 18 (38.9) 23 39 (41.0)
Involuntary auto 3 5 (40.0) 6 11 (45.5)
Homeowners 129 147 (12.2) 242 270 (10.4)
Other personal lines 26 30 (13.3) 52 57 (8.8)
----- ----- ------ ------
441 497 (11.3) 865 940 (8.0)
----- ----- ------ ------
Allstate Protection 6,803 6,939 (2.0) 13,317 13,548 (1.7)
Discontinued Lines and
Coverages - - - - - -
----- ----- ------ ------
Property-Liability $6,803 $6,939 (2.0) $13,317 $13,548 (1.7)
===== ===== ====== ======
Allstate Protection
Standard auto $4,229 $4,253 (0.6) $ 8,576 $ 8,570 0.1
Non-standard auto 272 318 (14.5) 558 660 (15.5)
Involuntary auto 20 27 (25.9) 39 55 (29.1)
Commercial lines 173 199 (13.1) 340 393 (13.5)
Homeowners 1,660 1,690 (1.8) 2,958 3,026 (2.2)
Other personal lines 449 452 (0.7) 846 844 0.2
----- ----- ------ ------
$6,803 $6,939 (2.0) $13,317 $13,548 (1.7)
===== ===== ====== ======
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THE ALLSTATE CORPORATION
PROPERTY-LIABILITY
ANNUAL IMPACT OF NET RATE CHANGES APPROVED ON PREMIUMS WRITTEN (1) (6)
Three Months Ended
June 30, 2008 (Est.)
-------------------------------
State
Number of Countrywide Specific
States (%) (2) (%) (3)
--------- ----------- ---------
Allstate brand
Standard auto (4) 15 (0.4) (1.2)
Non-standard auto (7) 5 (0.2) (7.7)
Homeowners (5) 16 0.7 2.3
Encompass brand
Standard auto 9 0.8 3.4
Non-standard auto - - -
Homeowners (7) 13 0.9 4.5
Six Months Ended
June 30, 2008 (Est.)
-------------------------------
State
Number of Countrywide Specific
States (%) (2) (%) (3)
--------- ----------- ---------
Allstate brand
Standard auto (4) 23 0.4 0.9
Non-standard auto (7) 7 - 0.4
Homeowners (5) 23 2.0 4.9
Encompass brand
Standard auto 24 1.1 2.5
Non-standard auto - - -
Homeowners (7) 17 1.4 6.6
(1) Rate increases that are indicated based on a loss trend analysis
to achieve a targeted return will continue to be pursued in all
locations and for all products. Rate changes include changes
approved based on our net cost of reinsurance. These rate changes
do not reflect initial rates filed for insurance subsidiaries
initially writing new business. Based on historical premiums
written in those states, rate changes approved for the three
month and six month periods ending June 30, 2008, are estimated
to total $(10) million and $212 million, respectively.
(2) Represents the impact in the states where rate changes were
approved during 2008 as a percentage of total countrywide prior
year-end premiums written.
(3) Represents the impact in the states where rate changes were
approved during 2008 as a percentage of total prior year-end
premiums written in those states.
(4) Excluding the impact of a 15.9% rate reduction in California
related to an order effective in April 2008, the Allstate brand
standard auto rate change is 5.5% on a state specific basis and
1.3% on a countrywide basis for the three months ended June 30,
2008 and 5.4% on a state specific basis and 2.2% on a countrywide
basis for the six months ended June 30, 2008. We estimate that
this rate decrease will have an impact of $135 million on
premiums written and $85 million on underwriting income during
the remainder of 2008.
(5) Excluding the impact of a 3.0% rate reduction in Texas related to
a resolution reached in the second quarter of 2008, the Allstate
brand homeowners rate change is 3.3% on a state specific basis
and 1.0% on a countrywide basis for the three months ended June
30, 2008 and 5.7% on a state specific basis and 2.3% on a
countrywide basis for the six months ended June 30, 2008. We
estimate that this rate decrease will have an impact of $7
million on premiums written and $1 million on underwriting income
during the remainder of 2008.
(6) During July 2008, we received an order to reduce Allstate brand
homeowners rates in the state of California by 28.5%. We estimate
that this rate decrease will have an impact of $88 million on
premiums written and $15 million on underwriting income during
the remainder of 2008.
(7) Includes Washington, D.C.
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THE ALLSTATE CORPORATION
ALLSTATE PROTECTION MARKET SEGMENT ANALYSIS
Three Months Ended June 30,
------------------------------------------------
($ in millions, Est. Est. Est. Est.
except ratios) 2008 2007 2008 2007 2008 2007 2008 2007
------ ------ ----- ---- ------ ---- ----- ----
Effect of
Catastrophe
Losses
Premiums Loss Ratio on the Loss Expense
Earned (2) Ratio Ratio
-------------- ---------- ----------- ----------
Allstate brand
Standard auto $ 4,014 $ 3,986 67.1 63.5 2.1 1.3 23.5 24.2
Non-standard auto 270 316 60.0 59.2 1.1 0.6 22.6 23.7
Homeowners 1,420 1,437 86.5 67.7 38.0 21.6 21.2 23.3
Other (1) 593 606 63.1 57.4 5.9 6.6 26.8 25.1
------ ------
Total Allstate
brand 6,297 6,345 70.8 63.6 10.5 6.4 23.2 24.1
Encompass brand
Standard auto 278 283 65.8 57.2 1.8 0.7 27.7 26.9
Non-standard auto 12 20 83.3 80.0 - - 25.0 25.0
Homeowners 129 139 72.9 55.4 23.3 16.5 31.8 30.2
Other (1) 34 35 88.2 62.9 5.9 5.7 26.5 25.7
------ ------
Total Encompass
brand 453 477 70.0 58.0 8.2 5.7 28.7 27.7
------ ------
Allstate Protection $ 6,750 $ 6,822 70.7 63.2 10.3 6.3 23.7 24.3
====== ======
Six Months Ended June 30,
------------------------------------------------
($ in millions, Est. Est. Est. Est.
except ratios) 2008 2007 2008 2007 2008 2007 2008 2007
------ ------ ----- ---- ------ ---- ----- ----
Effect of
Catastrophe
Losses
Premiums Loss Ratio on the Loss Expense
Earned (2) Ratio Ratio
-------------- ---------- ----------- ----------
Allstate brand
Standard auto $ 8,025 $ 7,937 66.3 63.6 1.7 0.8 23.8 23.8
Non-standard auto 548 638 62.6 59.7 0.9 0.3 23.2 22.7
Homeowners 2,846 2,875 83.3 61.4 33.8 15.0 22.9 24.1
Other (1) 1,185 1,217 66.4 58.7 7.9 5.1 27.4 25.6
------ ------
Total Allstate
brand 12,604 12,667 70.0 62.4 9.5 4.4 23.9 24.0
Encompass brand
Standard auto 558 567 58.4 61.0 1.1 0.5 27.1 26.7
Non-standard auto 26 42 76.9 78.6 - - 30.8 23.8
Homeowners 262 281 69.1 52.3 21.0 10.7 31.3 29.6
Other (1) 64 71 150.0 57.7 6.3 4.2 28.1 25.4
------ ------
Total Encompass
brand 910 961 68.4 59.0 7.1 3.7 28.5 27.3
------ ------
Allstate Protection $13,514 $13,628 69.9 62.2 9.4 4.4 24.2 24.2
====== ======
(1) Other includes commercial lines, condominium, renters, involuntary
auto and other personal lines.
(2) Loss Ratio comparisons are impacted by the relative level of prior
year reserve reestimates. Please refer to the "Effect of Pre-tax
Prior Year Reserve Reestimates on the Combined Ratio" table for
detailed reserve reestimate information.
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THE ALLSTATE CORPORATION
PROPERTY-LIABILITY
EFFECT OF PRE-TAX PRIOR YEAR RESERVE REESTIMATES ON THE COMBINED RATIO
Three Months Ended June 30,
---------------------------
Effect of
Pre-tax
Reserve
Reestimates
Pre-tax Reserve on the
Reestimates Combined
(1) Ratio
--------------- -----------
Est. Est.
($ in millions, except ratios) 2008 2007 2008 2007
-------- ----- ----- -----
Auto $ (13) $(146) (0.2) (2.2)
Homeowners 18 25 0.3 0.4
Other 2 (26) - (0.4)
-------- ----- ----- -----
Allstate Protection (2) 7 (147) 0.1 (2.2)
Discontinued Lines and Coverages 2 4 - 0.1
-------- ----- ----- -----
Property-Liability $ 9 $(143) 0.1 (2.1)
======== ===== ===== =====
Allstate brand $ (2) $(113) - (1.7)
Encompass brand 9 (34) 0.1 (0.5)
-------- ----- ----- -----
Allstate Protection (2) $ 7 $(147) 0.1 (2.2)
======== ===== ===== =====
Six Months Ended June 30,
---------------------------
Effect of
Pre-tax
Reserve
Reestimates
Pre-tax Reserve on the
Reestimates Combined
(1) Ratio
--------------- -----------
Est. Est.
($ in millions, except ratios) 2008 2007 2008 2007
-------- ----- ----- -----
Auto $ (67) $(212) (0.5) (1.6)
Homeowners 96 22 0.7 0.2
Other 74 (44) 0.5 (0.3)
-------- ----- ----- -----
Allstate Protection (2) 103 (234) 0.7 (1.7)
Discontinued Lines and Coverages 7 (38) 0.1 (0.3)
-------- ----- ----- -----
Property-Liability $ 110 $(272) 0.8 (2.0)
======== ===== ===== =====
Allstate brand $ 94 $(192) 0.7 (1.4)
Encompass brand 9 (42) - (0.3)
-------- ----- ----- -----
Allstate Protection (2) $ 103 $(234) 0.7 (1.7)
======== ===== ===== =====
(1) Favorable reserve reestimates are shown in parentheses.
(2) Unfavorable reserve reestimates included in catastrophe losses
totaled $11 million and $50 million in the three months ended
June 30, 2008 and June 30, 2007, respectively, and $128 million
and $44 million in the six months ended June 30, 2007 and 2008,
respectively.
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THE ALLSTATE CORPORATION
ALLSTATE FINANCIAL PREMIUMS AND DEPOSITS
Three
Months Six Months
Ended Ended
June 30, June 30,
------------ ------------
Est. Percent Est. Percent
($ in millions) 2008 2007 Change 2008 2007 Change
----- ----- ------- ----- ----- -------
Life Products
Interest-sensitive
life $ 356 $ 356 - $ 720 $ 718 0.3
Traditional 99 90 10.0 188 182 3.3
Other 99 92 7.6 200 181 10.5
----- ----- ----- -----
554 538 3.0 1,108 1,081 2.5
Annuities
Indexed annuities 151 171 (11.7) 284 312 (9.0)
Fixed deferred
annuities 1,037 657 57.8 1,553 1,137 36.6
----- ----- ----- -----
Sub-total 1,188 828 43.5 1,837 1,449 26.8
Fixed immediate
annuities 85 101 (15.8) 152 253 (39.9)
----- ----- ----- -----
1,273 929 37.0 1,989 1,702 16.9
Institutional Products
Funding agreements
backing medium-term
notes (1) 2,498 1,300 92.2 4,158 2,500 66.3
Bank Deposits 128 120 6.7 244 232 5.2
----- ----- ----- -----
Total $4,453 $2,887 54.2 $7,499 $5,515 36.0
===== ===== ===== =====
(1) During the second quarter of 2008, Allstate Financial acquired in
the secondary market and retired $1.14 billion of its outstanding
extendible securities that had elected to non-extend.
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THE ALLSTATE CORPORATION
ALLSTATE FINANCIAL ANALYSIS OF NET INCOME
Three Months
Ended Six Months Ended
June 30, June 30,
------------- ----------------
Est. Percent Est. Percent
($ in millions) 2008 2007 Change 2008 2007 Change
----- ------ ------- ------- ------- -------
Benefit spread
Premiums $ 211 $ 210 0.5 $ 409 $ 452 (9.5)
Cost of insurance
contract charges
(1) 173 159 8.8 345 318 8.5
Contract benefits
excluding the
implied interest
on immediate
annuities with
life contingencies
(2) (257) (247) (4.0) (516) (538) 4.1
----- ------ ------- -------
Benefit spread 127 122 4.1 238 232 2.6
----- ------ ------- -------
Investment spread
Net investment
income 943 1,076 (12.4) 1,958 2,126 (7.9)
Implied interest on
immediate
annuities with
life contingencies
(2) (138) (139) 0.7 (276) (276) -
Interest credited
to contractholder
funds (563) (673) 16.3 (1,187) (1,322) 10.2
----- ------ ------- -------
Investment spread 242 264 (8.3) 495 528 (6.3)
----- ------ ------- -------
Surrender charges and
contract maintenance
expense fees (1) 87 85 2.4 169 167 1.2
Realized capital
gains and losses (965) 104 - (1,397) 127 -
Amortization of
deferred policy
acquisition costs 41 (184) 122.3 (23) (313) 92.7
Operating costs and
expenses (125) (95) (31.6) (243) (200) (21.5)
Restructuring and
related charges - 1 (100.0) - 1 (100.0)
(Loss) gain on
disposition of
operations - 2 (100.0) (9) 2 -
Income tax benefit
(expense) on
operations 214 (99) - 280 (180) -
----- ------ ------- -------
Net (loss) income $(379) $ 200 - $ (490) $ 364 -
===== ====== ======= =======
Benefit spread by
product group
Life insurance $ 134 $ 128 4.7 $ 263 $ 246 6.9
Annuities (7) (6) (16.7) (25) (14) (78.6)
----- ------ ------- -------
Benefit spread $ 127 $ 122 4.1 $ 238 $ 232 2.6
===== ====== ======= =======
Investment spread by
product group
Annuities $ 132 $ 129 2.3 $ 247 $ 258 (4.3)
Life insurance 15 14 7.1 34 33 3.0
Institutional
products 16 20 (20.0) 43 45 (4.4)
Bank 4 4 - 9 8 12.5
Net investment
income on
investments
supporting capital 75 97 (22.7) 162 184 (12.0)
----- ------ ------- -------
Investment spread $ 242 $ 264 (8.3) $ 495 $ 528 (6.3)
===== ====== ======= =======
(1) Reconciliation of
contract charges
Cost of insurance
contract charges $ 173 $ 159 8.8 $ 345 $ 318 8.5
Surrender charges
and contract
maintenance
expense fees 87 85 2.4 169 167 1.2
----- ------ ------- -------
Total contract
charges $ 260 $ 244 6.6 $ 514 $ 485 6.0
===== ====== ======= =======
(2) Reconciliation of
contract benefits
Contract benefits
excluding the
implied interest
on immediate
annuities with
life contingencies $(257) $ (247) (4.0) $ (516) $ (538) 4.1
Implied interest on
immediate
annuities with
life contingencies (138) (139) 0.7 (276) (276) -
----- ------ ------- -------
Total contract
benefits $(395) $ (386) (2.3) $ (792) $ (814) 2.7
===== ====== ======= =======
*T
-0-
*T
THE ALLSTATE CORPORATION
INVESTMENT RESULTS
Three Months
Ended Six Months Ended
June 30, June 30,
--------------- ------------------
Est. Est.
($ in millions) 2008 2007 2008 2007
------- ------ -------- --------
NET INVESTMENT INCOME
Fixed income securities:
Tax-exempt $ 242 $ 244 $ 482 $ 488
Taxable 955 1,130 1,994 2,232
Equity securities 31 34 63 61
Mortgage loans 156 146 316 289
Limited partnership interests 30 86 90 156
Short-term 54 61 94 110
Other 2 46 28 91
------- ------ -------- --------
Investment income 1,470 1,747 3,067 3,427
Less: Investment expense 58 113 129 222
------- ------ -------- --------
Net investment income $ 1,412 $1,634 $ 2,938 $ 3,205
======= ====== ======== ========
REALIZED CAPITAL GAINS AND LOSSES
(PRE-TAX)
Investment write-downs $ (250) $ (8) $ (665) $ (13)
Dispositions (1,088) 307 (1,028) 757
Valuation of derivative
instruments 40 199 (285) 187
Settlements of derivative
instruments 83 47 108 85
------- ------ -------- --------
Realized capital gains and
losses (pre-tax) $(1,215) $ 545 $ (1,870) $ 1,016
======= ====== ======== ========
June 30, Dec. 31,
INVESTMENTS 2008
(Est.) 2007
-------- --------
Fixed income securities
Available for sale, at fair
value
Tax-exempt $ 18,935 $ 19,038
Taxable 64,289 75,413
-------- --------
Total fixed income securities 83,224 94,451
Equity securities, at fair value 4,664 5,257
Mortgage loans 10,629 10,830
Limited partnership interests (1) 2,890 2,501
Short-term 9,639 3,058
Other 2,557 2,883
-------- --------
Total Investments $113,603 $118,980
======== ========
FIXED INCOME SECURITIES BY TYPE
U.S. government and agencies $ 4,131 $ 4,421
Municipal 24,418 25,307
Corporate 33,691 38,467
Asset-backed securities 6,126 8,679
Commercial mortgage-backed
securities 6,036 7,617
Mortgage-backed securities 6,089 6,959
Foreign government 2,676 2,936
Redeemable preferred stock 57 65
-------- --------
Total fixed income securities $ 83,224 $ 94,451
======== ========
FIXED INCOME SECURITIES BY CREDIT
QUALITY
NAIC Rating Moody's Equivalent
1 Aaa/Aa/A $ 61,501 $ 71,458
2 Baa 17,559 18,361
3 Ba 2,690 2,904
4 B 1,001 1,296
5 Caa or lower 419 378
6 In or near default 54 54
-------- --------
Total $ 83,224 $ 94,451
======== ========
AMORTIZED COST
Fixed income securities
Available for sale, at
amortized cost
Tax-exempt $ 18,752 $ 18,393
Taxable 65,686 75,102
-------- --------
Total fixed income securities 84,438 93,495
Equity securities, at cost $ 4,197 $ 4,267
(1) We have commitments to invest in additional limited partnerships
totaling $2.0 billion at June 30, 2008.
*T
-0-
*T
THE ALLSTATE CORPORATION
COMPONENTS OF REALIZED CAPITAL GAINS AND LOSSES (PRE-TAX)
Three Months Ended June 30, 2008 (Est.)
----------------------------------------
($ in millions) Property- Allstate Corporate
Liability Financial and Other Total
--------- --------- --------- -------
Investment write-downs $ (51) $ (199) $ - $ (250)
Dispositions (1) (300) (776) (12) (1,088)
Valuation of derivative
instruments 32 8 - 40
Settlements of derivative
instruments 81 2 - 83
--------- --------- --------- -------
Total $ (238) $ (965) $ (12) $(1,215)
========= ========= ========= =======
Six Months Ended June 30, 2008 (Est.)
----------------------------------------
Property- Allstate Corporate
Liability Financial and Other Total
--------- --------- --------- -------
Investment write-downs $ (226) $ (408) $ (31) $ (665)
Dispositions (176) (842) (10) (1,028)
Valuation of derivative
instruments (91) (194) - (285)
Settlements of derivative
instruments 61 47 - 108
--------- --------- --------- -------
Total $ (432) $ (1,397) $ (41) $(1,870)
========= ========= ========= =======
Three Months Ended June 30, 2007
----------------------------------------
Property- Allstate Corporate
Liability Financial and Other Total
--------- --------- --------- -------
Investment write-downs $ (4) $ (4) $ - $ (8)
Dispositions 352 (49) 4 307
Valuation of derivative
instruments 64 135 - 199
Settlements of derivative
instruments 25 22 - 47
--------- --------- --------- -------
Total $ 437 $ 104 $ 4 $ 545
========= ========= ========= =======
Six Months Ended June 30, 2007
----------------------------------------
Property- Allstate Corporate
Liability Financial and Other Total
--------- --------- --------- -------
Investment write-downs $ (8) $ (5) $ - $ (13)
Dispositions 763 (14) 8 757
Valuation of derivative
instruments 72 115 - 187
Settlements of derivative
instruments 54 31 - 85
--------- --------- --------- -------
Total $ 881 $ 127 $ 8 $ 1,016
========= ========= ========= =======
(1) In the second quarter of 2008, the Company recognized $1.1 billion
of losses related to a change in our intent to hold certain
securities with unrealized losses until they recover in value.
The change in our intent was due to risk mitigation and ongoing
comprehensive reviews of the Property-Liability and Allstate
Financial portfolios and enterprise asset allocation of the
Property-Liability portfolio. The Company identified $8.2 billion
of securities, which we did not have the intent to hold until
recovery to achieve these objectives; this includes $3.3 billion
related to our risk mitigation and return optimization programs.
For further information on the types of securities included in
dispositions, see the Realized Capital Gains and Losses Analysis
section.
*T
-0-
*T
THE ALLSTATE CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
June 30, December 31,
($ in millions, except par value data) 2008 (Est.) 2007
----------- ------------
Assets
Investments
Fixed income securities, at fair value
(amortized cost $84,438 and $93,495) $ 83,224 $ 94,451
Equity securities, at fair value (cost
$4,197 and $4,267) 4,664 5,257
Mortgage loans 10,629 10,830
Limited partnership interests 2,890 2,501
Short-term (1) 9,639 3,058
Other 2,557 2,883
----------- ------------
Total investments (2) (3) 113,603 118,980
Cash 748 422
Premium installment receivables, net 4,906 4,879
Deferred policy acquisition costs 6,630 5,768
Reinsurance recoverables, net 5,798 5,817
Accrued investment income 968 1,050
Deferred income taxes 1,333 467
Property and equipment, net 1,017 1,062
Goodwill 875 825
Other assets 2,517 2,209
Separate Accounts 12,438 14,929
----------- ------------
Total assets $ 150,833 $ 156,408
=========== ============
Liabilities
Reserve for property-liability insurance
claims and claims expense $ 18,863 $ 18,865
Reserve for life-contingent contract
benefits 12,965 13,212
Contractholder funds 62,419 61,975
Unearned premiums 10,266 10,409
Claim payments outstanding 833 748
Other liabilities and accrued expenses 7,682 8,779
Short-term debt 18 -
Long-term debt 5,640 5,640
Separate Accounts 12,438 14,929
----------- ------------
Total liabilities 131,124 134,557
----------- ------------
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,
546 million and 563 million shares
outstanding 9 9
Additional capital paid-in 3,096 3,052
Retained income 32,701 32,796
Deferred ESOP expense (49) (55)
Treasury stock, at cost (354 million and
337 million shares) (15,420) (14,574)
Accumulated other comprehensive income:
Unrealized net capital gains and losses
(4) (274) 888
Unrealized foreign currency translation
adjustments 65 79
Net funded status of pension and other
postretirement benefit obligation (419) (344)
----------- ------------
Total accumulated other comprehensive
(loss) income (628) 623
----------- ------------
Total shareholders' equity 19,709 21,851
----------- ------------
Total liabilities and shareholders'
equity $ 150,833 $ 156,408
=========== ============
(1) Increases in the short term balance reflect actions taken to
offset reduced liquidity in some asset classes and the maturity
of institutional market deposits.
(2) Total investments include $36,877 for Property-Liability, $72,504
for Allstate Financial and $4,222 for Corporate and Other
investments at June 30, 2008. Total investments include $40,905
for Property-Liability, $74,256 for Allstate Financial and $3,819
for Corporate and Other investments at December 31, 2007.
(3) Pre-tax unrealized net capital gains and losses at June 30, 2008
and December 31, 2007 include net gains and losses on fixed
income securities of $(1,214) million and $956 million,
respectively; net gains and losses on equity securities of $467
million and $990 million, respectively; and net gains and losses
on derivative instruments of $(42) million and $(33) million,
respectively.
(4) After-tax unrealized net capital gains and losses at June 30, 2008
and December 31, 2007 include net gains and losses on fixed
income securities $(550) million and $266 million, respectively;
net gains and losses on equity securities of $304 million and
$644 million, respectively; and net gains and losses on
derivative instruments of $28 million and $(22) million,
respectively.
*T
Investments
Investment Risk Mitigation and Return Optimization Programs
We developed additional risk mitigation and return optimization
programs in the second quarter of 2008 in response to an altered
outlook for continued weakness in the U.S. financial markets and
economy including continued volatility in the financial markets,
continued reduced liquidity in certain asset classes and further
unfavorable economic trends. In addition, the potential for systemic
investment supply and demand imbalances has remained above normal due
to the deteriorating credit strength of financial institutions. The
risk mitigation and return optimization programs are designed to
protect certain portions of our investment portfolio from significant
decreases in value resulting from extreme adverse movements in
risk-free interest rates, credit spreads, and equity market
valuations. They consist of overall portfolio protection
(macro-hedging) and potential future reductions in certain real estate
and financial-related market sectors. These actions will position us
to take advantage of market opportunities and also will help protect
our investment portfolio from the continued turmoil in the financial
markets. These programs augment earlier actions to reduce investments
in real estate and other market sectors as well as to mitigate
exposures to risk free interest rate spikes. We will monitor the
progress of these programs as market and economic conditions continue
to develop and will adapt our decisions as appropriate.
We have begun to implement the macro-hedging program using
derivatives to partially mitigate the potential adverse impacts from
potential future increases in risk free interest rates, increases in
credit spreads, and negative equity market valuations. The interest
rate component is being integrated with the current program, to
protect a certain portion of fixed income securities if interest rates
increase above a targeted maximum level, for example in excess of 150
basis points. The equity hedge will be designed to protect the equity
portfolio from significant equity market valuation declines below a
targeted level using a collar whereby we give up returns above a
certain level. For example, if equity market valuation declines fall
below 25% the equity hedge protects valuations, and with a collar we
give up returns in excess of 20%. Another component of the
macro-hedging program is less comprehensive since these derivatives
are less effective and efficient and partially mitigates municipal
bond interest rate risk and some general market credit spread risk.
The cost of the macro-hedging program for one year is currently
estimated to be approximately $85 million. The provisions of the
macro-hedging program and its estimated cost will be dependent upon
market conditions at the time of entering into the applicable
contracts.
A comprehensive review identified specific investments that could
be significantly impacted by continued deterioration in the economy
including certain real estate and financial-related market sectors
that may be sold. This includes a portion of our residential and
commercial real estate securities including securities collateralized
by residential and commercial mortgage loans, mortgage loans and
securities issued by financial institutions. As a result, we have
change in intent write-downs on securities with a fair value of
approximately $3.2 billion at June 30, 2008. Accordingly,
approximately $857 million of realized capital losses were recognized
in the second quarter net income related to our change in intent
write-downs, with minimal net impact on shareholders' equity as these
investments were carried at fair value with unrealized losses
reflected within accumulated other comprehensive income at March 31,
2008.
At June 30, 2008, our exposure to residential and commercial real
estate is approximately $28.1 billion, comprised primarily of
mortgage-backed securities ("MBS"), commercial mortgage-backed
securities ("CMBS"), asset-backed residential mortgage-backed
securities ("ABS RMBS"), asset-backed collateralized debt obligations
("ABS CDO") and mortgage loans. Our exposure to financial-related
market sectors totaled approximately $11 billion at June 30, 2008, and
includes fixed income and equity holdings in banks, brokerages,
finance companies and insurance.
Any funds raised from the eventual disposition of these securities
will be invested in accordance with our asset-liability management
strategies and the initial stage of our enhanced enterprise-wide asset
allocation ("EAA") strategy. These strategies identify risks and
return needs across the Corporation and consider cross-correlation
impacts in determining an efficient mix of assets for the enterprise
as a whole. The work associated with these strategies is ongoing, and
implementation will occur as market opportunities arise. Under
conditions we find favorable, an increase in municipal bond and
foreign equity exposures comprise the initial state of our EAA
strategy. To the extent markets remain unstable, we will invest in
high quality, lower risk investments over the short-term. Net
investment income from potential reinvested funds may be lower as
proceeds invested at current yields could be lower than the yields on
the investments written-down.
Securities Experiencing Illiquid and Disrupted Markets
During the second quarter of 2008, certain financial markets
continued to experience price declines due to market and liquidity
disruptions. We experienced this illiquidity and disruption
particularly in our prime residential mortgage-backed securities
("Prime"), Alt-A residential mortgage-backed securities ("Alt-A"),
commercial real estate collateralized debt obligations ("CRE CDO"),
ABS RMBS and ABS CDO portfolios. These portfolios totaled $5.3
billion, or less than 5% of our total investments at June 30, 2008.
Certain other asset-backed and real estate-backed securities markets
experienced illiquidity, but to a lesser degree.
We determine the fair values of securities comprising these
illiquid portfolios by obtaining information from an independent
third-party valuation service provider and brokers. We confirmed the
reasonableness of the fair value of these portfolios as of June 30,
2008 by analyzing available market information including, but not
limited to, collateral quality, anticipated cash flows, credit
enhancements, default rates, loss severities, securities' relative
position within their respective capital structures, and credit
ratings from statistical rating agencies.
Impairments for the second quarter of 2008 included write-downs on
our Alt-A totaling $2 million, CRE CDO totaling $39 million, ABS RMBS
totaling $137 million and ABS CDO totaling $3 million. Dispositions,
including change in intent write-downs, included losses on our Alt-A
totaling $96 million, CRE CDO totaling $248 million and ABS RMBS
totaling $185 million.
Unrealized net capital losses as of June 30, 2008 included $61
million on the Prime, $134 million on the Alt-A and $680 million on
the ABS RMBS. Unrealized net capital gains as of June 30, 2008
included $4 million on the CRE CDO and $2 million of ABS CDO. We
continue to believe that the unrealized losses on these securities are
not necessarily predictive of the ultimate performance of the
underlying collateral. In the absence of further deterioration in the
collateral relative to our positions in the securities' respective
capital structures, which could be other-than-temporary, the
unrealized losses should reverse over the remaining lives of the
securities.
Information about certain of our collateralized securities and
their financial ratings is presented in the table below.
-0-
*T
Est.
Fair
value
at
June
30, % to Total Ba or
(in millions) 2008 Investments Aaa Aa A Baa lower
------ ----------- ------ ------ ----- ---- ------
Mortgage-backed
securities
U.S. Agency $4,160 3.7% 100.0% -- -- -- --
Prime 976 0.9 84.8 15.2% -- -- --
Alt-A 948 0.8 95.3 3.7 0.4% -- 0.6
Other 5 -- -- 100.0 -- -- --
------ -----------
Total Mortgage-
backed
securities $6,089 5.4%
====== ===========
Commercial
mortgage-backed
securities $5,660 5.0% 81.2 13.2 4.0 1.4% 0.2
CRE CDO 376 0.3 38.3 28.4 24.5 8.8 --
------ -----------
Total
Commercial
mortgage-
backed
securities $6,036 5.3%
====== ===========
Asset-backed
securities
ABS RMBS $2,974 2.6% 52.1 27.6 10.3 6.4 3.6%
ABS CDO 14 -- -- -- -- -- 100.0
------ -----------
Total asset-
backed
securities
collateralized
by sub-prime
residential
mortgage loans 2,988 2.6
Other
collateralized
debt obligations 1,652 1.5 35.2 26.4 27.4 8.3 2.7
Other asset-backed
securities 1,486 1.3 47.3 16.7 23.5 8.9 3.6
------ -----------
Total Asset-
backed
securities $6,126 5.4%
====== ===========
*T
The cash flows of the underlying mortgages or collateral for MBS,
CRE CDO and ABS are generally applied in a pre-determined order and
are designed so that each security issued qualifies for a specific
original rating. The security issue is typically referred to as the
"class". For example, the "senior" portion or "top" of the capital
structure which would originally qualify for a rating of AAA is
referred to as the "AAA class" and typically has priority in receiving
the principal repayments on the underlying mortgages. In addition, the
portion of the capital structure originally rated AAA may be further
divided into multiple sub-classes, "super senior", "senior", "senior
support" for Prime and Alt-A MBS issues, and "first", "second",
"third" for ABS RMBS issues where the principal repayments are
typically paid sequentially (i.e., all of the underlying mortgage
principal repayments are received by the first originally rated AAA
class in the structure until it is paid in full, then all of the
underlying mortgage principal repayments are received by the second
originally rated AAA class in the structure until it is paid in full).
Although securities within the various AAA classes are paid
sequentially, they typically share any losses on a pro-rata basis
after losses are absorbed by classes with lower original ratings or
what may be referred to as more "junior" or "subordinate" securities
in the capital structure. The underlying mortgages have fixed interest
rates, variable interest rates (such as adjustable rate mortgages
("ARM")) or are hybrid meaning that they contain features of both
fixed and variable rate mortgages.
Prime are collateralized by residential mortgage loans issued to
prime borrowers. Prime primarily comprise fixed rate, seasoned
mortgages, originally in the AAA class of the capital structure.
Changes during the second quarter of 2008 in Prime and characteristics
of the portfolio:
-- $564 million or 58.0% were issued during 2005, 2006 and 2007.
-- We collected $33 million of principal repayments consistent
with the expected cash flows.
-- We sold $154 million upon which we recognized a loss of $3
million.
-- $15 million of change in intent write-downs were recorded.
-- Fair value represents 94.1% of the amortized cost of these
securities.
-- Fixed rate mortgages comprise 73% of our Prime holdings and
85% of our Prime holdings are in the AAA class.
-- The following table shows our portfolio by vintage, based upon
our participation in the capital structure.
-0-
*T
($ in millions) Vintage Year
-----------------------------
Capital structure Pre- Fair Amortized Unrealized
classification 2007 2006 2005 2005 Value Cost (1) Gain/Loss
----- ----- ----- ----- ----- --------- ----------
AAA - Fixed rate
Super Senior $ -- $ 58 $ -- $ 48 $ 106 $ 109 $ (3)
Senior 37 60 121 240 458 487 (29)
----- ----- ----- ----- ----- --------- ----------
37 118 121 288 564 596 (32)
----- ----- ----- ----- ----- --------- ----------
AAA - Hybrid
Super Senior 17 5 76 12 110 122 (12)
Senior 20 -- 17 105 142 149 (7)
Senior Support -- -- 12 -- 12 16 (4)
----- ----- ----- ----- ----- --------- ----------
37 5 105 117 264 287 (23)
----- ----- ----- ----- ----- --------- ----------
AA - Fixed rate
Super Senior -- -- -- 7 7 8 (1)
Senior 141 -- -- -- 141 146 (5)
----- ----- ----- ----- ----- --------- ----------
141 -- -- 7 148 154 (6)
----- ----- ----- ----- ----- --------- ----------
Total $ 215 $ 123 $ 226 $ 412 $ 976 $ 1,037 $ (61)
===== ===== ===== ===== ===== ========= ==========
(1) Amortized cost includes other-than temporary impairment charges,
as applicable.
*T
Alt-A can be issued by trusts backed by pools of residential
mortgages with either fixed or variable interest rates. The mortgage
pools can include residential mortgage loans issued to borrowers with
stronger credit profiles than sub-prime borrowers, but who do not
qualify for prime financing terms due to high loan-to-value ratios or
limited supporting documentation. Changes during the second quarter of
2008 in our Alt-A holdings and characteristics of the portfolio:
-- $733 million or 77.3% of the Alt-A holdings were issued during
2005, 2006 and 2007.
-- We collected $42 million of principal repayments consistent
with the expected cash flows.
-- We sold $43 million upon which we recognized a loss of $15
million.
-- $2 million of impairment write-downs were recorded due to
further expected deterioration in the performance of the
underlying collateral. In addition, $96 million of change in
intent write-downs were recorded.
-- Fair value represents 87.6% of the amortized cost of these
securities. Alt-A securities with a fair value less than 70%
of amortized cost totaled $69 million, with unrealized losses
of $69 million.
-- The following table shows our portfolio by vintage, based upon
our participation in the capital structure.
-0-
*T
($ in millions) Vintage Year
-----------------------------
Capital structure Pre- Fair Amortized Unrealized
classification 2007 2006 2005 2005 Value Cost (1) Gain/Loss
----- ----- ----- ----- ----- --------- ----------
AAA - Fixed rate
Super Senior $ -- $ 48 $ 46 $ -- $ 94 $ 104 $ (10)
Senior 34 136 103 159 432 469 (37)
Senior Support 49 7 -- -- 56 55 1
----- ----- ----- ----- ----- --------- ----------
83 191 149 159 582 628 (46)
----- ----- ----- ----- ----- --------- ----------
AAA - Hybrid
Super Senior -- 28 3 -- 31 39 (8)
Senior -- -- 12 12 24 28 (4)
Senior Support 9 4 19 9 41 54 (13)
----- ----- ----- ----- ----- --------- ----------
9 32 34 21 96 121 (25)
----- ----- ----- ----- ----- --------- ----------
AAA - Option
Adjustable Rate
Mortgage
Super Senior 21 -- 33 -- 54 54 --
Senior -- -- 10 -- 10 10 --
Senior Support 47 29 3 9 88 142 (54)
Super Senior - Mid 32 27 6 8 73 79 (6)
----- ----- ----- ----- ----- --------- ----------
100 56 52 17 225 285 (60)
----- ----- ----- ----- ----- --------- ----------
AA - Option
Adjustable Rate
Mortgage
Senior Support -- 8 5 -- 13 13 --
Subordinate -- -- 4 18 22 20 2
----- ----- ----- ----- ----- --------- ----------
-- 8 9 18 35 33 2
----- ----- ----- ----- ----- --------- ----------
A and lower
Other -- 9 1 -- 10 15 (5)
----- ----- ----- ----- ----- --------- ----------
-- 9 1 -- 10 15 (5)
----- ----- ----- ----- ----- --------- ----------
Total $ 192 $ 296 $ 245 $ 215 $948 $ 1,082 $ (134)
===== ===== ===== ===== ===== ========= ==========
(1) Amortized cost includes other-than temporary impairment charges,
as applicable.
*T
CRE CDO are investments secured primarily by commercial
mortgage-backed securities and other commercial mortgage debt
obligations. These securities are generally less liquid and have a
higher risk profile than other commercial mortgage-backed securities.
Changes during the second quarter of 2008 in our CRE CDO holdings and
characteristics of the portfolio:
-- $268 million or 71.3% of the CRE CDO holdings were issued
during 2005, 2006 and 2007.
-- We collected $2 million of principal repayments consistent
with the expected cash flows.
-- We sold $27 million recognizing a loss of $22 million.
-- $39 million of impairment write-downs were recorded during the
second quarter of 2008. In addition, $248 million of change in
intent write-downs were recorded.
-- As of June 30, 2008, net unrealized gain on CRE CDO totaled $4
million.
-- Fair value represents 101.1% of the amortized cost of these
securities.
-- The following table shows our portfolio by vintage, based upon
our participation in the capital structure.
-0-
*T
($ in millions) Vintage Year
-----------------------------
Capital structure/ Pre- Fair Amortized Unrealized
Current rating 2007 2006 2005 2005 Value Cost (1) Gain/Loss
----- ----- ----- ----- ----- --------- ----------
AAA $ 18 $ 34 $ 42 $ 50 $144 $ 143 $ 1
AA 3 69 10 25 107 104 3
A 18 27 14 33 92 92 --
BBB 6 19 8 -- 33 33 --
----- ----- ----- ----- ----- --------- ----------
Total $ 45 $ 149 $ 74 $108 $376 $ 372 $ 4
===== ===== ===== ===== ===== ========= ==========
*T
ABS RMBS includes securities that are collateralized by mortgage
loans issued to borrowers that cannot qualify for Prime or Alt-A
financing terms due in part to weak or limited credit history. Changes
during the second quarter of 2008 in our ABS RMBS holdings and
characteristics of the portfolio:
-- $2.4 billion or 81.9% were issued during 2005, 2006 and 2007,
with 59.8% of these securities rated Aaa, 21.0% rated Aa, 7.6%
rated A and 11.6% rated Baa or lower.
-- We collected $185 million of principal repayments consistent
with the expected cash flows.
-- We sold $40 million upon which we recognized a loss of $3
million.
-- $137 million of impairment write-downs were recorded due to
expected deterioration in the performance of the underlying
collateral. In addition, $185 million of change in intent
write-downs were recorded.
-- As of June 30, 2008, net unrealized losses on ABS RMBS totaled
$680 million.
-- Fair value represents 81.4% of the amortized cost of these
securities. ABS RMBS securities with a fair value less than
70% of amortized cost totaled $451 million, with unrealized
losses of $460 million.
-- The following table presents our non-insured and insured ABS
RMBS at June 30, 2008 by Moody's equivalent rating.
-0-
*T
($ in millions) Fair Amortized Unrealized
Value Cost (1) Gain/Loss
------ --------- ----------
Non-Insured
Aaa $1,473 $1,549 $(76)
Aa 664 843 (179)
A 185 287 (102)
Baa 65 90 (25)
Ba or Lower 37 43 (6)
------ --------- ----------
Total Non-Insured ABS RMBS
$2,424 $2,812 $(388)
------ --------- ----------
Insured
Aaa $75 $111 $(36)
Aa 157 206 (49)
A 122 208 (86)
Baa 125 221 (96)
Ba or Lower 71 96 (25)
------ --------- ----------
Total Insured ABS RMBS
550 842 (292)
------ --------- ----------
Total ABS RMBS $2,974 $3,654 $(680)
====== ========= ==========
(1) Amortized cost includes other-than temporary impairment charges,
as applicable.
*T
When buying ABS RMBS securities from 2006 and 2007 vintages, we
concentrated our holdings in securities that were senior or at the top
of the structure and that were generally within the first three AAA
sub-classes of the capital structure, as it was expected that, in the
unlikely event of losses in the underlying collateral, these
sub-classes within the AAA class would likely either be paid in full
or receive substantial principal repayments before underlying mortgage
losses would breach that level. However, when the underlying mortgage
product was fixed-rate in nature, which we assessed to have stronger
underwriting origination standards than variable rate collateral, we
invested somewhat lower in the capital structure, such as securities
below the first three AAA sub-classes. The vast majority of our
investment in either of these vintages was concentrated within
originally rated AAA or AA securities.
The above table includes approximately ($2.3) billion of
non-insured ABS RMBS, representing 86.6% of amortized cost, which are
collateralized primarily by first lien residential mortgage loans. The
following table includes first lien non-insured ABS RMBS by vintage,
the interest rate characteristics of the underlying mortgage product
and our participation in the capital structure, which is supplemental
information to the $2.4 billion of non-insured ABS RMBS provided in
the table above.
-0-
*T
($ in millions) 2007
--------------------------------
Total Total
Capital structure classification Variable Fixed Fair Amortized
Rate Rate Value Cost (1)
------------------------------------- -------- ----- ------ ----------
First or Second AAA class $ 131 $ 42 $ 173 $ 181
Third AAA class 17 -- 17 17
Fourth AAA class -- -- -- --
Last cash flow AAA class 15 -- 15 15
Other AAA (2) 25 138 163 164
-------- ----- ------ ----------
Total AAA 188 180 368 377
AA 5 90 95 215
A -- 6 6 10
BBB -- -- -- --
-------- ----- ------ ----------
Total First Lien Non-Insured ABS
RMBS
$ 193 $ 276 $ 469 $ 602
======== ===== ====== ==========
($ in millions) 2006
--------------------------------
Total Total
Capital structure classification Variable Fixed Fair Amortized
Rate Rate Value Cost (1)
------------------------------------- -------- ----- ------ ----------
First or Second AAA class $ 422 $ 19 $ 441 $ 464
Third AAA class 186 65 251 280
Fourth AAA class -- -- -- --
Last cash flow AAA class 22 7 29 43
Other AAA (2) 4 88 92 97
-------- ----- ------ ----------
Total AAA 634 179 813 884
AA 5 18 23 38
A -- 5 5 7
BBB -- 1 1 2
-------- ----- ------ ----------
Total First Lien Non-Insured ABS
RMBS
$ 639 $ 203 $ 842 $ 931
======== ===== ====== ==========
($ in millions) 2005
--------------------------------
Total Total
Capital structure classification Variable Fixed Fair Amortized
Rate Rate Value Cost (1)
------------------------------------- -------- ----- ------ ----------
First or Second AAA class $ 31 $ 7 $ 38 $ 39
Third AAA class 18 43 61 62
Fourth AAA class -- -- -- --
Last cash flow AAA class 28 17 45 45
Other AAA (2) 56 95 151 155
-------- ----- ------ ----------
Total AAA 133 162 295 301
AA 190 33 223 279
A 2 12 14 22
BBB -- -- -- --
-------- ----- ------ ----------
Total First Lien Non-Insured ABS
RMBS
$ 325 $ 207 $ 532 $ 602
======== ===== ====== ==========
*T
-0-
*T
($ in millions) Pre-2005
--------------------------------
Total Total
Capital structure classification Variable Fixed Fair Amortized
Rate Rate Value Cost (1)
-------- ----- ------ ----------
First or Second AAA class $ -- $ -- $ -- $ --
Third AAA class 4 -- 4 4
Fourth AAA class -- -- -- --
Last cash flow AAA class 15 12 27 27
Other AAA (2) -- 26 26 29
-------- ----- ------ ----------
Total AAA 19 38 57 60
AA 259 47 306 339
A 83 10 93 122
BBB -- -- -- --
-------- ----- ------ ----------
Total First Lien Non-Insured ABS
RMBS
$ 361 $ 95 $ 456 $ 521
======== ===== ====== ==========
($ in millions) Total
--------------------------------
Total Total
Capital structure Variable Fixed Fair Amortized Unrealized
classification Rate Rate Value Cost (1) Gain/Loss
-------- ----- ------ ---------- ----------
First or Second AAA class $ 584 $ 68 $ 652 $ 684 $ (32)
Third AAA class 225 108 333 363 (30)
Fourth AAA class -- -- -- -- --
Last cash flow AAA class 80 36 116 130 (14)
Other AAA (2) 85 347 432 445 (13)
-------- ----- ------ ---------- ----------
Total AAA 974 559 1,533 1,622 (89)
AA 459 188 647 871 (224)
A 85 33 118 161 (43)
BBB -- 1 1 2 (1)
-------- ----- ------ ---------- ----------
Total First Lien Non-
Insured ABS RMBS
$1,518 $781 $2,299 $2,656 $ (357)
======== ===== ====== ========== ==========
(1) Amortized cost includes other-than temporary impairment charges,
as applicable.
(2) Includes primarily pass-through securities and "NAS" bonds. NAS
bonds are typically locked out from receiving principal prepayments
for a specified period of time after which they receive prepayment
allocations according to a specified formula.
*T
We also own approximately $125 million of second lien non-insured
securities, representing 85.9% of amortized cost Approximately $62
million, or 49.6%, of this portfolio are 2006 and 2007 vintage years.
The following table shows our insured ABS RMBS portfolio at June
30, 2008 by bond insurer and vintage year for first lien and second
lien collateral.
-0-
*T
($ in millions) Vintage Year Total
----------------------- ---------------
Pre- Fair Amortized Unrealized
2007 2006 2005 2005 Value Cost (1) Gain/Loss
----- ----- ----- ----- ----- --------- ----------
First Lien:
FGIC $ 21 $ 10 $ 14 $12 $ 57 $ 80 $ (23)
AMBAC -- 6 54 4 64 84 (20)
MBIA -- -- 7 -- 7 7 --
FSA 28 -- 6 -- 34 34 --
CIFG -- 6 -- -- 6 6 --
----- ----- ----- ----- ----- --------- ----------
Total First
Lien 49 22 81 16 168 211 (43)
Second Lien:
FGIC 9 88 51 -- 148 249 (101)
AMBAC 11 46 3 24 84 112 (28)
MBIA 99 12 -- 2 113 193 (80)
FSA 19 9 -- -- 28 63 (35)
XLCA 9 -- -- -- 9 14 (5)
----- ----- ----- ----- ----- --------- ----------
Total Second
Lien 147 155 54 26 382 631 (249)
----- ----- ----- ----- ----- --------- ----------
Total Insured ABS
RMBS $ 196 $ 177 $ 135 $42 $550 $842 $ (292)
===== ===== ===== ===== ===== ========= ==========
(1) Amortized cost includes other-than temporary
impairment charges, as applicable.
*T
ABS CDO are securities collateralized by a variety of residential
mortgage-backed securities and other securities, which may include
sub-prime RMBS. Changes during the second quarter of 2008 in our ABS
CDO holdings and characteristics of this portfolio:
-- $3 million of impairment write-downs were recorded due to
expected deterioration in the performance of the underlying
collateral.
-- As of June 30, 2008, unrealized gains on ABS CDO totaled $2
million.
-- Fair value represents 116.7% of the amortized cost of these
securities.
Other CDO
Other CDO totaled $1.7 billion and 97.3% are rated investment
grade at June 30, 2008. Other CDO consist primarily of obligations
secured by high yield and investment grade corporate credits including
$1.0 billion of collateralized loan obligations; $193 million of
synthetic CDOs; $158 million of primarily bank trust preferred CDOs;
$108 million of market value CDOs; $44 million of CDOs that invest in
other CDOs ("CDO squared"); and $30 million of collateralized bond
obligations. As of June 30, 2008, net unrealized losses on the other
CDO was $574 million. Other CDO with a fair value less than 70% of
amortized cost totaled $390 million, or 24.2% of the total Other CDO
at June 30, 2008, with unrealized losses of $335 million.
Insured Municipal
Approximately $12.6 billion or 51.7% of our municipal bond
portfolio is insured by bond insurers. Our practices for acquiring and
monitoring municipal bonds primarily are based on the quality of the
underlying security. As of June 30, 2008, we believe the valuations
already reflected a decline in the value of the insurance, and further
such declines if any, are not expected to be material. While the
valuation of these holdings may be temporarily impacted by negative
and rapidly changing market developments, we continue to have the
intent and ability to hold the bonds and expect to receive all of the
contractual cash flows. As of June 30, 2008, 32.8% of our insured
municipal bond portfolio was insured by MBIA, Inc. ("MBIA"), 25.2% by
Ambac Financial Group, Inc. ("AMBAC"), 18.7% by Financial Security
Assurance Inc. ("FSA") and 18.1% by Financial Guarantee Insurance
Company ("FGIC"). In addition, we hold securities totaling $17 million
that were directly issued by these bond insurers.
Direct Exposure to Fannie Mae and Freddie Mac at June 30, 2008
-0-
*T
($ in millions) Fannie Mae Freddie Mac Total
---------- ----------- -----
Fixed Income Securities:
Fair Value $ 425 $ 180 $ 605
Net Unrealized Capital Gains (Losses) 15 (4) 11
Equity Securities:
Fair Value $ 77 $ 51 $ 128
Net Unrealized Capital Gains (Losses) (7) (6) (13)
*T
Auction Rate Securities
Included in our municipal bond portfolio at June 30, 2008 are $2.0
billion of auction rate securities ("ARS") that have long-term stated
maturities, with the interest rate reset based on auctions every 7, 28
or 35 days depending on the specific security. This is compared to a
balance of ARS at March 31, 2008 of $2.2 billion, with the decline
representing primarily redemptions during the second quarter of 2008.
Our holdings primarily have a Moody's equivalent rating of Aaa. During
the second quarter of 2008, all of our ARS holdings experienced failed
auctions and we received the failed auction rate or, for those which
contain maximum reset rate formulas, we received the contractual
maximum rate. We anticipate that failed auctions may persist and most
of our holdings will continue to pay the failed auction rate or, for
those that contain maximum rate reset formulas, the maximum rate.
Due to a further deterioration in liquidity for the segment of the
ARS market backed by student loans, certain market observable data
utilized for valuation purposes became unavailable during the second
quarter of 2008. As a result, as of June 30, 2008, $1.9 billion or
95.5% of our total ARS holdings were valued using a discounted cash
flow model; a valuation method that is widely accepted in the
financial services industry. Certain inputs to the valuation model
that are significant to the overall valuation and not market
observable included: estimates of future coupon rates if auction
failures continue, maturity assumptions, and illiquidity premium. As a
result of the reliance on certain non-market observable inputs, the
portion of the ARS portfolio backed by student loans are classified as
a Level 3 measurement under Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements" for the period ended June
30, 2008. These same securities were classified as Level 2
measurements for the period ended March 31, 2008. Our ARS holdings
that are not backed by student loans have a fair value equal to their
corresponding par value based on market observable inputs and,
therefore, continue to have a Level 2 classification.
-0-
*T
Fair Value
($ in millions) June 30, 2008 (est.) % to total ARS
-------------------- --------------
Valued at par (Level 2) $ 89 4.4%
Valued using a cash flow model
(Level 3)(1) 1,921 95.6
-------------------- --------------
Total ARS $ 2,010 100.0%
==================== ==============
(1) Level 3 ARS have an amortized cost of $2.0 billion; fair value
represents 97.0% of amortized cost.
*T
Limited partnership interests
Limited partnership interests consists of investments in private
equity/debt funds, real estate funds and hedge funds. The overall
limited partnership interests portfolio is well diversified across a
number of metrics including fund sponsors, vintage years, strategies,
geography (including international), and company/property types.
Descriptions of holdings at June 30, 2008 follow.
-- Private equity/debt funds - Approximately 43% or $1.2 billion
of the limited partnership interests comprised private
equity/debt funds diversified across the following fund types:
buyout, mezzanine, distressed security, and secondary
offerings. Private/equity debt funds were spread across 75
sponsors and 106 individual funds. The largest exposure to any
single private equity/debt fund was $39 million.
-- Real estate funds - Approximately 30% or $878 million of the
limited partnership interests comprised real estate funds
diversified across a variety of strategies including
opportunistic, value-add platforms, distressed property, and
property/market specific. Real estate funds were spread across
34 sponsors and 79 individual funds. The largest exposure to
any single real estate fund was $44 million.
-- Hedge funds - Approximately 27% or $779 million of the limited
partnership interests comprised hedge funds with the majority
invested with fund of funds advisors. Hedge funds were spread
across 9 sponsors and 160 individual funds. The largest
exposure to any single hedge fund was $26 million.
The Company's aggregate limited partnership exposure represented
2.5% and 2.1% of total invested assets as of June 30, 2008 and
December 31, 2007, respectively. Income from limited partnership
interest was $30 million for the second quarter of 2008 versus $86
million for the same quarter period in 2007. The decline being
primarily related to reduced income from both real estate funds and
hedge funds as capital market deleveraging has slowed the pace at
which portfolio holdings are being sold.
Realized Capital Gains and Losses Analysis
The net realized capital losses in the quarter were the result of
$250 million in impairment write-downs and $1.1 billion in net
realized capital losses from dispositions, nearly all from changes in
intent write-downs, partially offset by $123 million of net realized
capital gains related to the settlement and valuation of derivatives.
Income recognition is discontinued on impairment write-downs until
such time as we recover our cost. Income recognition continues on
securities with change in intent write-downs, and any discount is
accreted back to par over the expected life of the security.
Impairment write-downs comprised $205 million from fixed income
securities, $37 million from equity securities, $7 million from
limited partnership interests and $1 million from other investments.
The fixed income securities write-downs were primarily related to
residential mortgages and other structured securities. $198 million,
or 96.6%, of the fixed income security write-downs relate to impaired
securities that were performing in line with anticipated or
contractual cash flows, but which were written down primarily because
of further expected deterioration in the performance of the underlying
collateral. For these securities, there have been no defaults or
defaults that have occurred in classes lower in the capital structure.
$7 million of the fixed income security write-downs are primarily
related to securities experiencing a significant departure from
anticipated residual cash flows, however, we believe they retain
economic value. Notwithstanding our intent and ability to hold such
securities indefinitely, we concluded that we could not reasonably
assert that the recovery period would be temporary.
Impairment write-downs and cash received on these investments for
the three months ended June 30, 2008 were as follows:
-0-
*T
Cash received in the
three months ended
Impairment at June June 30, 3008
($ in millions) 30, 2008 (est.) (est.)
------------------ --------------------
Performing in accordance
with anticipated or
contractual cash flows
Alt-A $ (2) $ --
ABS RMBS (133) 6
ABS CDO (3) --
CMBS/CRE CDO (39) 2
Corporate - Bond insurer (17) --
Other (4) 1
------------------ --------------------
Subtotal (198) 9
Departure from anticipated
or contractual cash flows
ABS RMBS (4) 1
Corporate - Food
manufacturer (3) --
------------------ --------------------
Subtotal (7) 1
------------------ --------------------
Total fixed income
securities $ (205) $ 10
================== ====================
Total equity securities $ (37) $ 66
================== ====================
Total limited partnership
interests $ (7) $ --
================== ====================
Total other investments $ (1) $ --
================== ====================
*T
Dispositions comprised net realized losses on fixed income of $932
million, equity of $114 million, mortgage loans of $38 million and
other investments of $7 million, partly offset by net realized gains
on derivatives of $2 million and limited partnerships of $1 million.
Further details of dispositions for the three months ended June 30,
2008 (est.) were as follows:
-0-
*T
Net
realized
SFAS 157 Fair capital
Criteria Security Type Level Value loss
-------- ------ ---------
Risk Mitigation
Targeted reductions in CRE CDO 3 $376 $(248)
commercial real estate
exposure where it is CMBS 2 235 (95)
anticipated that future 3 32 (32)
downside risk remains.
Considerations included Mortgage loans 3 281 (33)
position held in the
capital structure, vintage
year, illiquidity and
deteriorating fundamentals.
Targeted reductions in Prime 2 165 (15)
residential real estate
where management believes Alt-A 3 321 (96)
there is a risk of future
material declines in price ABS RMBS 3 824 (185)
in the event of continued
deterioration in the
economy. Considerations
included position held in
the capital structure,
projected performance of
the collateral, and
expected internal rates of
return.
Targeted reductions in Financial Sector 1 2 --
financial sector exposure 2 862 (131)
included securities issued 3 12 --
by certain regional banks
and certain large financial
institutions.
Other 2 175 (20)
3 25 (2)
------ ---------
Total Risk Mitigation $3,310 (857)
Individual Identification 2,449 (158)
EAA 2,387 (71)
Other 50 --
------ ---------
Total change in intent write-downs $8,196 (1,086)
======
Sales (2)
---------
Total Dispositions, change in intent write-downs $(1,088)
=========
*T
Net realized capital gains on the valuation and settlement of
derivative instruments totaled $123 million for the second quarter of
2008, primarily comprised $114 million for risk reduction programs.
Gains from the risk reduction programs, primarily in our duration
management programs, were related to changing interest rates and
credit spreads as rates declined during the period.
The table below presents the realized capital gains and losses
(pre-tax) on the valuation and settlement of derivative instruments
shown by underlying exposure and derivative strategy for the three
months ended June 30, 2008.
-0-
*T
($ in millions) Second Quarter
2008
2008 2007 Explanations
----------------- ----------------------------- ----- ----------------
Valuation Settlements Total Total
---------- ------------ ----- -----
Risk reduction
-----------------
Property- Net short
Liability interest rate
Portfolio derivatives are
duration $ - $ 51 $ 51 $ 19 used to offset
management the effects of
changing
interest rates
on a portion of
Property-
Liability fixed
income
portfolio which
are reported in
unrealized net
capital gains
in OCI. The
contracts are
daily cash
settled and can
be exited any
time for
minimal
additional
cost. The
second quarter
2008 gain
resulted from
increasing
interest rates.
Unrealized
losses on the
fixed income
portfolio
caused by the
increasing
interest rates
partially
offset these
amounts.
Interest rate 8 - 8 - Interest rate
spike exposure swaptions
contracts
acquired in the
second half of
2007 with
approximately
one-year terms
that provide an
offset to
declining fixed
income market
values
resulting from
potential
rising interest
rates. The
contracts
protect $21.5
billion of
notional
principal by
limiting the
decline in
value to $1.5
billion for an
increase in
risk-free rates
greater than
approximately
150 basis
points above
those in effect
at inception of
the contracts.
The second
quarter 2008
gain resulted
from increasing
interest rates.
If interest
rates do not
increase above
the strike
rate, the
maximum
remaining
potential loss
in 2008 is
limited to the
remaining
unrecognized
cost of $15
million at June
30, 2008.
Hedging (2) 25 23 7 Short S&P
unrealized futures were
gains on equity primarily used
securities to protect
unrealized
gains on our
equity
securities
portfolio
reported in
unrealized net
capital gains
in accumulated
OCI. The
results offset
the decline in
our unrealized
gains on equity
securities as
equity markets
declined in the
second quarter.
Foreign currency 4 1 5 -
contracts
Allstate
Financial
Duration gap 17 9 26 36 Interest rate
management caps, floors
and swaps are
used by
Allstate
Financial to
align interest-
rate
sensitivities
of its assets
and
liabilities.
The contracts
settle based on
differences
between current
market rates
and a
contractually
specified fixed
rate through
expiration. The
change in
valuation
reflects the
changing value
of expected
future
settlements,
which may vary
over the period
of the
contracts. The
gain should be
offset in
unrealized loss
in OCI. The
second quarter
2008 gain
resulted from
increasing
interest rates.
Anticipatory - (14) (14) 10 Futures are used
hedging to protect
investment
spread from
interest rate
changes during
mismatches in
the timing of
cash flows
between product
sales and the
related
investment
activity. The
contracts are
cash settled
daily and can
be exited at
any time for a
minimal
additional
cost. If the
cash flow
mismatches are
such that a
positive net
investment
position is
being hedged,
there is an
offset for the
related
investments
unrealized gain
or loss in OCI.
Second quarter
2008 amounts
reflect
increases in
risk-free
interest rates
on a net long
position as
liability
issuances
exceeded asset
acquisitions.
Hedging of 4 3 7 13 Interest rate
interest rate caps used to
exposure in hedge the
annuity effect of
contracts changing
crediting rates
that are
indexed to
changes in
treasury rates
on certain
annuity
contracts. The
change in
valuation
reflects the
changing value
of expected
future
settlements
including the
underlying cost
to hedge the
treasury-rate
index feature.
The offset to
the product
hedging cost is
reflected in
the base
crediting rates
on the
underlying
annuity
policies, which
is reported in
credited
interest. The
value of
expected future
settlements and
the associated
value of future
credited
interest, which
is reportable
in future
periods when
incurred,
increased due
to rising
interest rates.
Hedging - 2 2 -
unrealized
gains on equity
indexed notes
Hedge 5 - 5 10 The hedge
ineffectiveness ineffectiveness
of $5 million
includes $150
million in
realized
capital gains
on swaps that
were offset by
$145 million in
realized
capital losses
on the hedged
risk.
Other 3 (2) 1 4
--------- ----------- ---- ----
Total Risk
reduction $ 39 $ 75 $ 114 $ 99
Income generation
-----------------
Asset Credit default
replication - swaps are used
credit exposure to replicate
fixed income
Property- securities and
Liability $ 2 $ 6 $ 8 $ (1) to complement
Allstate the cash market
Financial (3) 2 (1) - when credit
--------- ----------- ---- ---- exposure to
Total (1) 8 7 (1) certain issuers
is not
available or
when the
derivative
alternative is
less expensive
than the cash
market
alternative.
The credit
default swaps
typically have
five-year terms
for which we
receive
periodic
premiums
through
expiration.
Valuation gains
and losses will
reverse if
allowed to
expire. The
changes in
valuation are
due to
narrowing
credit spreads,
and would only
be converted to
cash upon
disposition or
a default on an
underlying
credit
obligation.
Asset
replication -
equity exposure
Property-
Liability - - - 12
*T
-0-
*T
($ in Second Quarter 2008 Explanations
millions) 2008 2007
-------------------------------- -------------------------------------
Valua- Settle-
tion ments Total Total
------ ------- ----- -----
Commodity
deriva-
tives -
Property-
Liability
- - - 2
------ ------- ----- -----
------ ------- ----- -----
Total
Income
gener-
ation $(1) $8 $7 $13
------ ------- ----- -----
Accounting
------------
Equity Equity indexed notes are fixed
indexed income securities that contain
notes - $(19) $- $(19) $62 embedded equity options. The
Allstate changes in valuation of the
Financial embedded equity indexed call
options are reported in
realized capital gains and
losses. The results generally
track the performance of
underlying equity indices.
Valuation gains and losses are
converted into cash upon sale
or maturity. In the event the
economic value of the options
is not realized, we will
recover the par value if held
to maturity. Fair value
exceeded par value by $28
million at June 30, 2008. The
following table compares the
June 30, 2008 holdings and
March 31, 2008 holdings.
($ in June
mill- 30, March 31,
ions) 2008 Change 2008
------------------------
Par
value $800 $- $800
========================
Amor-
tized
cost of
host
con-
tract $507 $7 $500
Fair
value
of
equity
indexed
call
option 317 (19) 336
------------------------
Total
amor-
tized
cost $824 $(12) $836
========================
Total
Fair
value $828 $(37) $865
========================
Unreal-
ized
gain /
loss $4 $(25) $29
Conversion
options in
fixed
income
securities
Property-
Liability 18 - 18 46
Allstate Convertible bonds are fixed
Financial 3 - 3 26 income securities that contain
embedded options. Changes in
valuation of the embedded
option are reported in realized
capital gains and losses. The
results generally track the
performance of underlying
equity indices. Valuation gains
and losses are converted into
cash upon our election to sell
these securities. In the event
the economic value of the
options is not realized, we
will recover the par value if
held to maturity. Fair value
exceeded par value by $46
million at June 30, 2008. The
following table compares the
June 30, 2008 holdings and
March 31, 2008 holdings.
------ ------- ----- -----
($ in Change
mill- due
Total 21 - 21 72 ions) to
Change Net
June in Sale March
30, Fair Acti- 31,
2008 Value vity 2008
------------------------
Par
value $1,162 $- $(69)$1,231
========================
Amor-
tized
cost of
host
con-
tract $818 $4 $(42) $856
Fair
value
of
conver-
sion
option 379 21 $(13) 371
------------------------
Total
amor-
tized
cost $1,197 $25 $(55)$1,227
========================
Total
Fair
value $1,208 $5 $(47)$1,250
========================
Unreal-
ized
gain /
loss $11 $(20) $8 $23
------ ------- ----- -----
Total
Accounting $2 $- $2 $134
------ ------- ----- -----
Total $40 $83 $123 $246
====== ======= ===== =====
*T
The breakout by operating segment for realized capital gains and
losses from derivatives for the three months and six months ended June
30, 2008 and 2007, respectively, were as follows:
-0-
*T
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
($ in millions) Est. Est.
2008 2007 2008 2007
---------- ------ -------- ------
Property-Liability $ 113 $ 89 $ (30) $ 126
Allstate Financial 10 157 (147) 146
Corporate and Other -- -- -- --
---------- ------ -------- ------
Total $ 123 $ 246 $ (177) $ 272
========== ====== ======== ======
*T
SFAS 157 Level 3
SFAS 157 Level 3 reflects financial assets and financial
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. These inputs may reflect our estimates
of the assumptions that market participants would use in valuing the
financial assets and financial liabilities.
The balance of our SFAS Level 3 investments at June 30, 2008 are
reflected in the following table. This information on Level 3
investments and related fair values, unrealized gains (losses) and
second quarter 2008 change in intent write-downs is supplemental as
these details have been reported in previous analysis.
-0-
*T
($ in millions) Second
quarter
change
Net in
Est. unrealized intent
Fair gains write-
value (losses) downs
------ ----------- ---------
Fixed income securities:
Corporate $ 610 $ 3 $ --
Corporate Privately Placed 11,413 (32) (3)
Municipal 968 (12) --
Municipal - Auction rate securities 1,921 (59) --
ABS RMBS 2,974 (680) (185)
Alt-A 948 (134) (96)
Other CDO 1,652 (574) --
ABS CDO 14 2 --
CRE CDO 376 4 (248)
CMBS 208 (36) (32)
Preferred Stock 1 -- --
MBS 26 (2) --
Foreign Government 5 -- --
ABS - Credit card and auto loans 298 (16) --
Other ABS 873 (82) --
------ ----------- ---------
Total fixed income securities 22,287 (1,618) (564)
------ ----------- ---------
Equity securities:
U.S. Equities 40 2 --
International Equities 26 -- --
Other 9 1 --
Other investments:
Free Standing Derivatives 59 -- --
Sub-total Level 3 recurring 22,421 (1,615) (564)
----------- ---------
Non-recurring basis 282 -- (34)
------ ----------- ---------
Total Level 3 Investments $22,703 $ (1,615) $ (598)
====== =========== =========
*T
Non-recurring investments include mortgage loans, limited
partnership interests and other investments at fair value due to our
change in intent at June 30, 2008.
Transfers into and out of SFAS 157 Level 3 during the second
quarter are attributable to a change in the availability of market
observable information for individual securities within the respective
categories, including ARS. For more information on our ARS and their
SFAS 157 Level classification, see the ARS section.
Definitions of GAAP Operating Ratios and Impacts of Specific Items
on the GAAP Operating Ratios
Claims and claims expense ("loss") ratio is the ratio of claims
and claims expense to premiums earned. Loss ratios include the impact
of catastrophe losses.
Expense ratio is the ratio of amortization of DAC, operating costs
and expenses and restructuring and related charges to premiums earned.
Combined ratio is the ratio of claims and claims expense,
amortization of DAC, operating costs and expenses and restructuring
and related charges to premiums earned. The combined ratio is the sum
of the loss ratio and the expense ratio. The difference between 100%
and the combined ratio represents underwriting income (loss) as a
percentage of premiums earned.
Effect of Discontinued Lines and Coverages on combined ratio is
the ratio of claims and claims expense and other costs and expenses in
the Discontinued Lines and Coverages segment to Property-Liability
premiums earned. The sum of the effect of Discontinued Lines and
Coverages on the combined ratio and the Allstate Protection combined
ratio is equal to the Property-Liability combined ratio.
Effect of catastrophe losses on combined ratio is the percentage
of catastrophe losses included in claims and claims expenses to
premiums earned. This ratio includes prior year reserve reestimates.
Effect of prior year reserve reestimates on combined ratio is the
percentage of prior year reserve reestimates included in claims and
claims expense to premiums earned. This ratio includes prior year
reserve reestimates of catastrophe losses.
Effect of restructuring and related charges on combined ratio is
the percentage of restructuring and related charges to premiums
earned.
Definitions of Non-GAAP and Operating Measures
We believe that investors' understanding of Allstate's performance
is enhanced by our disclosure of the following non-GAAP financial
measures. Our methods of calculating these measures may differ from
those used by other companies and therefore comparability may be
limited.
Operating income is net income, excluding:
-- realized capital gains and losses, after-tax, except for
periodic settlements and accruals on non-hedge derivative
instruments, which are reported with realized capital gains
and losses but included in operating income,
-- amortization of DAC and DSI, to the extent they resulted from
the recognition of certain realized capital gains and losses,
-- gain (loss) on disposition of operations, after-tax, and
-- adjustments for other significant non-recurring, infrequent or
unusual items, when (a) the nature of the charge or gain is
such that it is reasonably unlikely to recur within two years,
or (b) there has been no similar charge or gain within the
prior two years.
Net income is the GAAP measure that is most directly comparable to
operating income.
We use operating income as an important measure to evaluate our
results of operations. We believe that the measure provides investors
with a valuable measure of the Company's ongoing performance because
it reveals trends in our insurance and financial services business
that may be obscured by the net effect of realized capital gains and
losses, gain (loss) on disposition of operations and adjustments for
other significant non-recurring, infrequent or unusual items. Realized
capital gains and losses and gain (loss) on disposition of operations
may vary significantly between periods and are generally driven by
business decisions and external economic developments such as capital
market conditions, the timing of which is unrelated to the insurance
underwriting process. Consistent with our intent to protect results or
earn additional income, operating income includes periodic settlements
and accruals on certain derivative instruments that are reported in
realized capital gains and losses because they do not qualify for
hedge accounting or are not designated as hedges for accounting
purposes. These instruments are used for economic hedges and to
replicate fixed income securities, and by including them in operating
income, we are appropriately reflecting their trends in our
performance and in a manner consistent with the economically hedged
investments, product attributes (e.g. net investment income and
interest credited to contractholder funds) or replicated investments.
Non-recurring items are excluded because, by their nature, they are
not indicative of our business or economic trends. Accordingly,
operating income excludes the effect of items that tend to be highly
variable from period to period and highlights the results from ongoing
operations and the underlying profitability of our business. A
byproduct of excluding these items to determine operating income is
the transparency and understanding of their significance to net income
variability and profitability while recognizing these or similar items
may recur in subsequent periods. Operating income is used by
management along with the other components of net income to assess our
performance. We use adjusted measures of operating income and
operating income per diluted share in incentive compensation.
Therefore, we believe it is useful for investors to evaluate net
income, operating income and their components separately and in the
aggregate when reviewing and evaluating our performance. We note that
investors, financial analysts, financial and business media
organizations and rating agencies utilize operating income results in
their evaluation of our and our industry's financial performance and
in their investment decisions, recommendations and communications as
it represents a reliable, representative and consistent measurement of
the industry and the Company and management's performance. We note
that the price to earnings multiple commonly used by insurance
investors as a forward-looking valuation technique uses operating
income as the denominator. Operating income should not be considered
as a substitute for net income and does not reflect the overall
profitability of our business.
The following table reconciles operating income and net income
(loss) for the three months and six months ended June 30, 2008 and
2007.
-0-
*T
For the three months ended
June 30, Property-Liability Allstate Financial
------------------ ------------------
($ in millions, except per Est. Est.
share data) 2008 2007 2008 2007
--------- ------- ---------- ------
Operating income $ 592 $ 947 $ 118 $ 154
Realized capital gains and
losses (238) 437 (965) 104
Income tax benefit (expense) 85 (154) 338 (37)
--------- ------- ---------- ------
Realized capital gains and
losses, after-tax (153) 283 (627) 67
DAC and DSI amortization
relating to realized capital
gains and losses, after-tax -- -- 134 (15)
Reclassification of periodic
settlements and accruals on
non-hedge derivative
instruments, after-tax -- -- (4) (7)
(Loss) gain on disposition of
operations, after-tax -- -- -- 1
--------- ------- ---------- ------
Net income (loss) $ 439 $ 1,230 $ (379) $ 200
========= ======= ========== ======
For the three months ended June 30, Consolidated Per diluted share
-------------- -----------------
($ in millions, except per share Est. Est.
data) 2008 2007 2008 2007
------- ----- --------- ------
Operating income $ 683 $1,072 $ 1.24 $ 1.76
Realized capital gains and losses (1,215) 545
Income tax benefit (expense) 427 (193)
------- -----
Realized capital gains and losses,
after-tax (788) 352 (1.42) 0.58
DAC and DSI amortization relating
to realized capital gains and
losses, after-tax 134 (15) 0.24 (0.02)
Reclassification of periodic
settlements and accruals on non-
hedge derivative instruments,
after-tax (4) (7) (0.01) (0.02)
(Loss) gain on disposition of
operations, after-tax -- 1 -- --
------- ----- --------- ------
Net income (loss) $ 25 $1,403 $ 0.05 $ 2.30
======= ===== ========= ======
*T
-0-
*T
For the six months ended June
30, Property-Liability Allstate Financial
------------------ ------------------
($ in millions, except per Est. Est.
share data) 2008 2007 2008 2007
-------- -------- --------- -------
Operating income $ 1,221 $ 2,009 $ 261 $ 310
Realized capital gains and
losses (432) 881 (1,397) 127
Income tax benefit (expense) 154 (311) 489 (45)
-------- -------- --------- -------
Realized capital gains and
losses, after-tax (278) 570 (908) 82
DAC and DSI amortization
relating to realized capital
gains and losses, after-tax -- -- 173 (15)
Reclassification of periodic
settlements and accruals on
non-hedge derivative
instruments, after-tax (1) -- (10) (15)
(Loss) gain on disposition
of operations, after-tax -- -- (6) 2
-------- -------- --------- -------
Net income (loss) $ 942 $ 2,579 $ (490) $ 364
======== ======== ========= =======
For the six months ended June 30, Consolidated Per diluted share
--------------- -----------------
($ in millions, except per share Est. Est.
data) 2008 2007 2008 2007
------- ------ --------- ------
Operating income $ 1,430 $2,269 $ 2.57 $ 3.69
Realized capital gains and losses (1,870) 1,016
Income tax benefit (expense) 657 (359)
------- ------
Realized capital gains and losses,
after-tax (1,213) 657 (2.18) 1.07
DAC and DSI amortization relating
to realized capital gains and
losses, after-tax 173 (15) 0.31 (0.02)
Reclassification of periodic
settlements and accruals on non-
hedge derivative instruments,
after-tax (11) (15) (0.02) (0.03)
(Loss) gain on disposition of
operations, after-tax (6) 2 (0.01) --
------- ------ --------- ------
Net income (loss) $ 373 $2,898 $ 0.67 $ 4.71
======= ====== ========= ======
*T
Underwriting income (loss) is calculated as premiums earned, less
claims and claims expense ("losses"), amortization of DAC, operating
costs and expenses and restructuring and related charges as determined
using GAAP. Management uses this measure in its evaluation of the
results of operations to analyze the profitability of our
Property-Liability insurance operations separately from investment
results. It is also an integral component of incentive compensation.
It is useful for investors to evaluate the components of income
separately and in the aggregate when reviewing performance. Net income
is the most directly comparable GAAP measure. Underwriting income
(loss) should not be considered as a substitute for net income and
does not reflect the overall profitability of our business. A
reconciliation of Property-Liability underwriting income (loss) to net
income is provided in the Segment Results table.
Combined ratio excluding the effect of catastrophes is a non-GAAP
ratio, which is computed as the difference between two GAAP operating
ratios: the combined ratio and the effect of catastrophes on the
combined ratio. The most directly comparable GAAP measure is the
combined ratio. We believe that this ratio is useful to investors and
it is used by management to reveal the trends in our
Property-Liability business that may be obscured by catastrophe
losses. These catastrophe losses cause our loss trends to vary
significantly between periods as a result of their incidence of
occurrence and magnitude and can have a significant impact on the
combined ratio. We believe it is useful for investors to evaluate
these components separately and in the aggregate when reviewing our
underwriting performance. The combined ratio excluding the effect of
catastrophes should not be considered a substitute for the combined
ratio and does not reflect the overall underwriting profitability of
our business. A reconciliation of combined ratio excluding the effect
of catastrophes to combined ratio is provided in the
Property-Liability Highlights section of the Consolidated and Segments
Highlights table.
Combined ratio excluding the effect of catastrophes and prior year
reserve reestimates ("underlying combined ratio") is a non-GAAP ratio,
which is computed as the difference between three GAAP operating
ratios: the combined ratio, the effect of catastrophes on the combined
ratio and the effect of prior year reserve reestimates on the combined
ratio. The most directly comparable GAAP measure is the combined
ratio. We believe that this ratio is useful to investors and it is
used by management to reveal the trends in our Property-Liability
business that may be obscured by catastrophe losses and prior year
reserve reestimates. These catastrophe losses cause our loss trends to
vary significantly between periods as a result of their incidence of
occurrence and magnitude and can have a significant impact on the
combined ratio. Prior year reserve reestimates are caused by
unexpected loss development on historical reserves. We believe it is
useful for investors to evaluate these components separately and in
the aggregate when reviewing our underwriting performance. We also
provide it to facilitate a comparison to our outlook on the 2008
combined ratio excluding the effect of catastrophe losses and prior
year reserve reestimates. The combined ratio excluding the effect of
catastrophes and prior year reserve reestimates should not be
considered a substitute for the combined ratio and does not reflect
the overall underwriting profitability of our business. A
reconciliation of the combined ratio excluding the effect of
catastrophes and prior year reserve reestimates to combined ratio is
provided in the Property-Liability Highlights section of the
Consolidated and Segments Highlights table.
In this press release, we provide our outlook on the 2008 combined
ratio excluding the effect of catastrophe losses and prior year
reserve reestimates. A reconciliation of this measure to the combined
ratio is not possible on a forward-looking basis because it is not
possible to provide a reliable forecast of catastrophes. Future prior
year reserve reestimates are expected to be zero because reserves are
determined based on our best estimate of ultimate loss reserves as of
the reporting date.
Operating income return on equity is a ratio that uses a non-GAAP
measure. It is calculated by dividing the rolling 12-month operating
income by the average of shareholders' equity at the beginning and at
the end of the 12-months, after excluding the effect of unrealized net
capital gains and losses. Return on equity is the most directly
comparable GAAP measure. We use operating income as the numerator for
the same reasons we use operating income, as discussed above. We use
average shareholders' equity excluding the effect of unrealized net
capital gains and losses for the denominator as a representation of
shareholder's equity primarily attributable to the Company's earned
and realized business operations because it eliminates the effect of
items that are unrealized and vary significantly between periods due
to external economic developments such as capital market conditions
like changes in equity prices and interest rates, the amount and
timing of which are unrelated to the insurance underwriting process.
We use it to supplement our evaluation of net income and return on
equity because it excludes the effect of items that tend to be highly
variable from period to period. We believe that this measure is useful
to investors and that it provides a valuable tool for investors when
considered along with net income return on equity because it
eliminates the effect of items that can fluctuate significantly from
period to period and that are driven by economic developments, the
magnitude and timing of which are generally not influenced by
management: the after-tax effects of realized and unrealized net
capital gains and losses, and the cumulative effect of change in
accounting principle. In addition, it eliminates non-recurring items
that are not indicative of our ongoing business or economic trends. A
byproduct of excluding the items noted above to determine operating
income return on equity from return on equity is the transparency and
understanding of their significance to return on equity variability
and profitability while recognizing these or similar items may recur
in subsequent periods. Therefore, we believe it is useful for
investors to have operating income return on equity and return on
equity when evaluating our performance. We note that investors,
financial analysts, financial and business media organizations and
rating agencies utilize operating income return on equity results in
their evaluation of our and our industry's financial performance and
in their investment decisions, recommendations and communications as
it represents a reliable, representative and consistent measurement of
the industry and the Company and management's utilization of capital.
Operating income return on equity should not be considered as a
substitute for return on equity and does not reflect the overall
profitability of our business.
The following table shows the reconciliation.
-0-
*T
($ in millions) For the twelve
months ended
June 30,
--------------
Est.
2008 2007
------ ------
Return on equity
Numerator:
Net income $ 2,111 $ 5,269
====== ======
Denominator:
Beginning shareholders' equity $21,560 $20,605
Ending shareholders' equity 19,709 21,560
Average shareholders' equity $20,635 $21,083
====== ======
Return on equity 10.2% 25.0%
====== ======
*T
-0-
*T
For the twelve
months ended
June 30,
--------------
Est.
2008 2007
------ ------
Operating income return on equity
Numerator:
Operating income $ 3,024 $ 4,581
====== ======
Denominator:
Beginning shareholders' equity $21,560 $20,605
Unrealized net capital gains 1,430 1,093
------ ------
Adjusted beginning shareholders' equity 20,130 19,512
Ending shareholders' equity 19,709 21,560
Unrealized net capital gains and losses (274) 1,430
------ ------
Adjusted ending shareholders' equity 19,983 20,130
Average adjusted shareholders' equity $20,057 $19,821
====== ======
Operating income return on equity 15.1% 23.1%
====== ======
*T
Book value per share, excluding the impact of unrealized net
capital gains and losses on fixed income securities, is a ratio that
uses a non-GAAP measure. It is calculated by dividing shareholders'
equity after excluding the impact of unrealized net capital gains and
losses on fixed income securities and related DAC and life insurance
reserves by total shares outstanding plus dilutive potential shares
outstanding. Book value per share is the most directly comparable GAAP
measure.
We use the trend in book value per share, excluding unrealized net
capital gains and losses on fixed income securities, in conjunction
with book value per share to identify and analyze the change in net
worth attributable to management efforts between periods. We believe
the non-GAAP ratio is useful to investors because it eliminates the
effect of items that can fluctuate significantly from period to period
and are generally driven by economic developments, primarily capital
market conditions, the magnitude and timing of which are generally not
influenced by management, and we believe it enhances understanding and
comparability of performance by highlighting underlying business
activity and profitability drivers. We note that book value per share,
excluding unrealized net capital gains and losses on fixed income
securities, is a measure commonly used by insurance investors as a
valuation technique. Book value per share, excluding unrealized net
capital gains and losses on fixed income securities, should not be
considered as a substitute for book value per share, and does not
reflect the recorded net worth of our business. The following table
shows the reconciliation.
-0-
*T
As of
June 30,
--------------
Est.
2008 2007
------ ------
($ in millions, except per share data)
Book value per share
Numerator:
Shareholders' equity $19,709 $21,560
====== ======
Denominator:
Shares outstanding and dilutive potential shares
outstanding 548.6 592.4
====== ======
Book value per share $ 35.93 $ 36.39
====== ======
Book value per share, excluding the impact of
unrealized net capital gains and losses on fixed
income securities
Numerator:
Shareholders' equity $19,709 $21,560
Unrealized net capital gains and losses on fixed
income securities (550) 414
------ ------
Adjusted shareholders' equity $20,259 $21,146
====== ======
Denominator:
Shares outstanding and dilutive potential shares
outstanding 548.6 592.4
====== ======
Book value per share, excluding the impact of
unrealized net capital gains and losses on fixed
income securities $ 36.93 $ 35.70
====== ======
*T
Operating Measures
We believe that investors' understanding of Allstate's performance
is enhanced by our disclosure of the following operating financial
measures. Our method of calculating these measures may differ from
those used by other companies and therefore comparability may be
limited.
Premiums written is the amount of premiums charged for policies
issued during a fiscal period. Premiums earned is a GAAP measure.
Premiums are considered earned and are included in financial results
on a pro-rata basis over the policy period. The portion of premiums
written applicable to the unexpired terms of the policies is recorded
as unearned premiums on our Consolidated Statements of Financial
Position. A reconciliation of premiums written to premiums earned is
presented in the following table.
-0-
*T
Three Months Six Months
Ended Ended
June 30, June 30,
-------------- --------------
($ in millions) Est. Est.
2008 2007 2008 2007
------ ------ ------ ------
Premiums written $6,803 $6,939 $13,317 $13,548
(Increase) decrease in Property-
Liability unearned premiums (154) (125) 140 78
Other(1) 101 8 57 2
------ ------ ------ ------
Premiums earned $6,750 $6,822 $13,514 $13,628
====== ====== ====== ======
(1) The three months and six months ended June 30, 2008 includes $49
million in unearned premiums related to the acquisition of
Partnership Marketing Group.
*T
Premiums and deposits is an operating measure that we use to
analyze production trends for Allstate Financial sales. It includes
premiums on insurance policies and annuities and all deposits and
other funds received from customers on deposit-type products including
the net new deposits of Allstate Bank, which we account for under GAAP
as increases to liabilities rather than as revenue.
The following table illustrates where premiums and deposits are
reflected in the consolidated financial statements.
-0-
*T
Three Months
Ended Six Months Ended
June 30, June 30,
---------------- ----------------
($ in millions) Est. Est.
2008 2007 2008 2007
------- ------- ------- -------
Total premiums and deposits $ 4,453 $ 2,887 $ 7,499 $ 5,515
Deposits to contractholder funds (4,211) (2,646) (7,035) (5,009)
Deposits to separate accounts (33) (34) (66) (67)
Change in unearned premiums and
other adjustments 2 3 11 13
------- ------- ------- -------
Life and annuity premiums (1) $ 211 $ 210 $ 409 $ 452
======= ======= ======= =======
(1) Life and annuity contract charges in the amount of est. $260
million and $244 million for the three months ended June 30, 2008 and
2007, respectively, and est. $514 million and $485 million for the
six months ended June 30, 2008 and 2007, respectively, which are also
revenues recognized for GAAP, have been excluded from the table
above, but are a component of the Consolidated Statements of
Operations line item life and annuity premiums and contract charges.
*T
New sales of financial products by Allstate exclusive agencies is
an operating measure that we use to quantify the current year sales of
financial products by the Allstate Agency proprietary distribution
channel. New sales of financial products by Allstate exclusive
agencies includes sales of Allstate Financial products such as annual
premiums on new life insurance policies, annual premiums on Allstate
Workplace Division products, premiums and deposits on fixed annuities,
net new deposits in the Allstate Bank, sales of Allstate
Financial-issued variable annuities, and sales of products by
non-affiliated issuers such as mutual funds and Prudential-issued
variable annuities. New sales of financial products by Allstate
exclusive agencies exclude renewal premiums on life insurance
policies. New sales of financial products by Allstate exclusive
agencies for the three months and six months ended June 30, 2008 and
2007 are presented in the following table.
-0-
*T
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
($ in millions) Est. Est.
2008 2007 2008 2007
--------- ------- ------- -------
Allstate Financial products
(excluding variable annuities) $ 304 $ 253 $ 528 $ 458
Allstate Financial variable
annuities 6 9 11 20
Non-affiliated products 395 469 759 848
--------- ------- ------- -------
Total $ 705 $ 731 $ 1,298 $ 1,326
========= ======= ======= =======
*T
Forward-Looking Statements and Risk Factors
This press release contains forward-looking statements about our
outlook for the combined ratio excluding the effect of catastrophes
and prior year reserve reestimates for 2008; projected impacts of
premium rate reductions in the states of California and Texas on our
premiums written and underwriting income; our expectations for
write-downs in our Prime, Alt-A, CRE CDO, ABS RMBS, ABS CDO and other
CDO securities portfolios; the impact on the value of our portfolios
of a rating downgrade by a bond insurer; our expectation for
anticipated or contractual cash flows in our Prime, Alt-A, ABS RMBS,
ABS CDO, other CDO and corporate securities portfolios; the design,
cost, and expected impact of risk mitigation and return optimization
programs and enterprise-wide asset allocation actions that we are
taking with respect to our investment portfolio; and about the
reversal of unrealized net capital losses on fixed income securities.
These statements are subject to the Private Securities Litigation
Reform Act of 1995 and are based on management's estimates,
assumptions and projections. Actual results may differ materially from
those projected based on the risk factors described below.
-- Premiums written and premiums earned, the denominator of the
combined ratio excluding the effect of catastrophes and prior
year reserve reestimates for 2008 and a component of
underwriting income, may be materially less than projected.
Our ability to capture the costs of our catastrophe
reinsurance program through rate increases may not be entirely
successful due to regulatory restrictions or policyholder
attrition resulting in a lower amount of insurance in force.
-- Auto and homeowners frequencies or severities may be higher
than anticipated levels due to unexpected trends or events
such as severe weather. Inflation in the medical sector of the
economy, auto repair costs, auto parts prices, used car
prices, building materials and home furnishings may drive
increases in claims expenses.
-- Changes in mortgage delinquency or recovery rates, agency
ratings, bond insurer strength or rating, the quality of
service provided by service providers and the anticipated or
contractual cash flows on securities in our Prime, ABS RMBS,
ABS CDO, Alt-A, CRE CDO, other CDO and corporate securities
portfolios, as well as the effects of bond insurer strength on
the value of our municipal bond portfolio, could lead us to
reconsider our payment outlook and determine that write-downs
are appropriate in the future.
-- The cost and impact of our investment portfolio risk
mitigation and return optimization programs and enterprise
asset allocation actions, as well as our unrealized net
capital losses on fixed income securities, may be adversely
affected by unexpected developments in the investment markets.
We undertake no obligation to publicly correct or update any
forward-looking statements. This press release contains unaudited
financial information.
The Allstate Corporation (NYSE:ALL) is the nation's largest
publicly held personal lines insurer. Widely known through the "You're
In Good Hands With Allstate(R)" slogan, Allstate is reinventing
protection and retirement to help individuals in approximately 17
million households protect what they have today and better prepare for
tomorrow. Customers can access Allstate products and services such as
auto insurance and homeowners insurance through approximately 14,700
exclusive Allstate agencies and financial representatives in the U.S.
and Canada, or in select states at allstate.com and 1-800 Allstate(R).
Encompass(R) and Deerbrook(R) Insurance brand property and casualty
products are sold exclusively through independent agents. The Allstate
Financial Group provides life insurance, supplemental accident and
health insurance, annuity, banking and retirement products designed
for individual, institutional and worksite customers that are
distributed through Allstate agencies, independent agencies, financial
institutions and broker-dealers. Customers can also access information
about Allstate Financial Group products and services at
myallstatefinancial.com.
The Allstate Corporation
Rich Halberg, 847-402-5600
Media Relations
Robert Block or Larry Moews, 847-402-2800
Investor Relations
Copyright Business Wire 2008
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