SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED June 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11840
THE ALLSTATE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3871531
(State of Incorporation) (I.R.S. Employer Identification No.)
Allstate Plaza, Northbrook, Illinois 60062
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 847/402-5000
REGISTRANT HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND
(2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES /X/ NO
AS OF JULY 31, 1996, THE REGISTRANT HAD 444,836,536 COMMON SHARES, $.01
PAR VALUE, OUTSTANDING.
<PAGE>
THE ALLSTATE CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 1996
<TABLE>
<CAPTION>
<S> <C>
PART 1 - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements.
Condensed Consolidated Statements of Operations
for the Three- and Six-Months Ended June 30, 1996
and 1995 (unaudited). 1
Condensed Consolidated Statements of Financial
Position as of June 30, 1996 (unaudited)
and December 31, 1995. 2
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1996
and 1995 (unaudited). 3
Notes to Condensed Consolidated Financial
Statements (unaudited). 4
Independent Certified Public Accountants'
Review Report. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 8
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders. 22
Item 6. Exhibits and Reports of Form 8-K. 23
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE ALLSTATE CORPORATION AND SUBSIDIARY
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- --------- ----------
(Unaudited)
($ in millions except per share data)
<S> <C> <C> <C> <C>
REVENUES
Property-liability insurance premiums earned $ 4,650 $ 4,332 $ 9,194 $ 8,559
Life insurance premium income and contract charges 304 327 612 721
Net investment income 949 912 1,884 1,778
Realized capital gains 421 101 537 187
---------- ---------- --------- ----------
6,324 5,672 12,227 11,245
---------- ---------- --------- ----------
COSTS AND EXPENSES
Property-liability insurance claims and claims expense 3,529 3,449 7,216 6,653
Life insurance policy benefits 557 581 1,107 1,221
Amortization of deferred policy acquisition costs 573 505 1,137 1,010
Operating costs and expenses 601 604 1,159 1,151
Interest expense 22 21 45 36
---------- ---------- --------- ----------
5,282 5,160 10,664 10,071
---------- ---------- --------- ----------
GAIN ON SALE OF SUBSIDIARY'S STOCK - 159 - 159
INCOME FROM OPERATIONS BEFORE INCOME TAX
EXPENSE AND EQUITY IN NET INCOME
OF UNCONSOLIDATED SUBSIDIARY 1,042 671 1,563 1,333
INCOME TAX EXPENSE 286 165 389 315
---------- ---------- --------- ----------
INCOME BEFORE EQUITY IN NET INCOME OF
UNCONSOLIDATED SUBSIDIARY 756 506 1,174 1,018
EQUITY IN NET INCOME OF UNCONSOLIDATED SUBSIDIARY 8 13 14 43
---------- ---------- --------- ----------
NET INCOME $ 764 $ 519 $ 1,188 $1,061
========== ========== ========= ==========
NET INCOME PER SHARE $ 1.71 $ 1.15 $ 2.65 $ 2.36
========== ========== ========= ==========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 448.2 448.9 449.1 449.1
========== ========== ========= ==========
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
-1-
<PAGE>
THE ALLSTATE CORPORATION AND SUBSIDIARY
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
June 30, December 31,
($ in millions) 1996 1995
------------ ------------
<S> <C> <C>
Assets
Investments
Fixed income securities available for sale, at fair value
(amortized cost $44,539 and $41,907) $ 45,719 $ 45,272
Equity securities, at fair value (cost $4,048 and $4,716) 5,325 6,150
Mortgage loans 3,227 3,280
Real estate 735 786
Short-term 878 548
Other 486 469
------ -------
Total investments 56,370 56,505
Premium installment receivables, net 2,999 2,935
Deferred policy acquisition costs 2,375 2,004
Reinsurance recoverables, net 1,864 1,829
Property and equipment, net 714 724
Accrued investment income 748 750
Deferred income taxes 783 229
Cash 152 90
Other assets 1,046 1,154
Separate Accounts 4,613 3,809
---------- ---------
TOTAL ASSETS $ 71,664 $70,029
========== =========
LIABILITIES
Reserve for property-liability insurance
claims and claims expense $ 18,150 $17,687
Reserve for life insurance policy benefits 5,867 6,071
Contractholder funds 19,743 19,146
Unearned premiums 6,267 6,188
Claim payments outstanding 595 568
Other liabilities and accrued expenses 2,582 2,663
Short-term debt 231 -
Long-term debt 1,226 1,228
Separate Accounts 4,602 3,798
--------- ----------
TOTAL LIABILITIES 59,263 57,349
--------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 2 AND 4)
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, 25 million
shares authorized, none issued - -
Common stock, $.01 par value, 1 billion shares
authorized and 450 million issued, 445.5 million
and 447.5 miilion shares outstanding. 5 5
Additional capital paid-in 3,134 3,134
Unrealized net capital gains 1,444 2,636
Unrealized foreign currency translation adjustments 20 20
Retained income 8,259 7,261
Deferred ESOP expense (300) (300)
Treasury stock, at cost (4.5 million and 2.5 million shares) (161) (76)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 12,401 12,680
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 71,664 $70,029
========== ==========
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
-2-
<PAGE>
THE ALLSTATE CORPORATION AND SUBSIDIARY
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
--------------------------
($ in millions) 1996 1995
--------- -----------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,188 $ 1,061
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation, amortization and other non-cash items (11) (1)
Realized capital gains and losses (537) (187)
Gain on sale of subsidiary's stock - (159)
Interest credited to contractholder funds 589 582
Increase in policy benefit and other insurance reserves 392 528
Increase in unearned premiums 79 229
Increase in deferred policy acquisition costs (178) (170)
Increase in premium installment receivables, net (64) (515)
Increase in reinsurance recoverables, net (35) (261)
Change in deferred income taxes 85 (159)
Changes in other operating assets and liabilities 79 317
--------- ------
Net cash provided by operating activities 1,587 1,265
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales
Fixed income securities available for sale 5,257 2,980
Fixed income securities held to maturity - 9
Equity securities 2,305 1,265
Investment collections
Fixed income securities available for sale 1,872 929
Fixed income securities held to maturity - 415
Mortgage loans 180 64
Investment purchases
Fixed income securities available for sale (9,730) (6,485)
Fixed income securities held to maturity - (305)
Equity securities (1,089) (1,231)
Mortgage loans (137) (175)
Change in short-term investments, net (330) 138
Change in other investments, net 28 58
Purchases of property and equipment, net (60) (75)
--------- -------
Net cash used in investing activities (1,704) (2,413)
--------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of short-term debt, net 231 -
Proceeds from issuance of long-term debt - 357
Repayment of long-term debt (2) (2)
Repayment of demand note by Sears - 450
Proceeds from sale of subsidiary's stock - 784
Payment to Sears for transfer of ESOP obligation - (327)
Contractholder fund deposits 1,643 1,952
Contractholder fund withdrawals (1,438) (1,836)
Dividends paid (190) (175)
Change in treasury stock, net (85) (19)
Other 20 (16)
--------- --------
Net cash provided by financing activities 179 1,168
--------- --------
NET DECREASE IN CASH 62 20
CASH AT BEGINNING OF PERIOD 90 56
--------- -----------
CASH AT END OF PERIOD $ 152 $ 76
========= ===========
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
-3-
<PAGE>
THE ALLSTATE CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of The Allstate Corporation and its wholly owned subsidiary, Allstate
Insurance Company ("AIC"), a property-liability insurance company with various
property-liability and life insurance subsidiaries, including Allstate Life
Insurance Company (collectively referred to as the "Company" or "Allstate").
The condensed consolidated financial statements and notes as of June 30,
1996 and for the three-month and six-month periods ended June 30, 1996 and 1995
are unaudited. The condensed consolidated financial statements reflect all
adjustments (consisting only of normal recurring accruals) which are, in the
opinion of management, necessary for the fair presentation of the financial
position, results of operations and cash flows for the interim periods. These
condensed consolidated financial statements and notes should be read in
conjunction with the consolidated financial statements and notes thereto
included in The Allstate Corporation Annual Report to Shareholders and Annual
Report on Form 10-K for 1995. The results of operations for the interim periods
should not be considered indicative of results to be expected for the full year.
2. RESERVE FOR PROPERTY-LIABILITY INSURANCE CLAIMS AND CLAIMS EXPENSE
The Company establishes reserves for claims and claims expense on reported
and unreported claims of insured losses. These reserve estimates are based on
known facts and interpretation of circumstances, including the Company's
experience with similar cases and historical trends involving claim payment
patterns, loss payments, pending levels of unpaid claims, product mix, and
uncollectible reinsurance balances, as well as other factors including court
decisions, economic conditions and public attitudes.
The establishment of appropriate reserves, including reserves for
catastrophes, is an inherently uncertain process. Allstate regularly updates its
reserve estimates as new facts become known and further events occur which may
impact the resolution of unsettled claims. Changes in prior year reserve
estimates, which may be material, are reflected in the results of operations in
the period such changes are determined to be needed.
Catastrophes are an inherent risk of the property-liability insurance
business which have contributed, and will continue to contribute, to material
year-to-year fluctuations in the Company's results of operations and financial
position. The level of catastrophe losses experienced in any year cannot be
predicted and could be material to the results of operations and financial
position. The Company has experienced two severe catastrophes in the last five
years resulting in losses of $2.33 billion relating to Hurricane Andrew (net of
reinsurance) and $1.72 billion relating to the Northridge earthquake. The
Company is exposed to similar or greater catastrophes in the future.
Reserves for environmental and asbestos claims are comprised of reserves
for reported claims, incurred but not reported claims and related expenses.
Establishing reserves for these types of losses is subject to uncertainties
-4-
<PAGE>
that are greater than those presented by other types of claims. Among the
complications are the lack of historical data, long reporting delays,
uncertainty as to the number and identity of insureds with potential exposure,
unresolved legal issues regarding policy coverage, and the extent and timing of
any such contractual liability. Management believes these issues are not likely
to be resolved in the near future.
In 1986, the general liability policy form used by Allstate and others in
the property-liability industry was amended to introduce an "absolute pollution
exclusion," which excluded coverage for environmental damage claims and added an
asbestos exclusion. Most general liability policies issued prior to 1986 contain
annual aggregate limits for products liability coverage, and policies issued
after 1986 also have an annual aggregate limit as to all coverages. Allstate's
experience to date is that these policy form changes have effectively limited
its exposure to environmental and asbestos claims risks assumed as well as
primary commercial coverages written subsequent to 1986. Allstate's reserves,
net of reinsurance recoverables of $630 million and $647 million, for
environmental and asbestos claims were $1.06 billion and $1.02 billion at June
30, 1996 and December 31, 1995, respectively.
Management believes its reserves for environmental and asbestos coverage
are appropriately established based on available facts, technology, laws and
regulations. However, due to the inconsistencies of court coverage decisions,
plaintiffs' expanded theories of liability, the risks inherent in major
litigation and other uncertainties, the ultimate cost of these claims may vary
materially from the amounts currently recorded, resulting in an increase in the
loss reserves. Due to the uncertainties and factors described above, management
believes it is not practicable to develop a meaningful range for any such
additional reserves that may be required.
Allstate is currently studying alternate processes for estimating
environmental exposures using external databases and modeling techniques
developed by independent experts. The Company is evaluating whether this
information may be useful in estimating its environmental exposures. The
potential impact to recorded reserves and reinsurance recoverables, if any, is
unknown. The establishment of the appropriate reserves is an inherently
uncertain process. Allstate will update its reserve estimates as new facts
become known and further events occur which may impact the resolution of
unsettled claims.
-5-
<PAGE>
3. REINSURANCE
Property-liability insurance premiums and life insurance premium income and
contract charges are net of reinsurance ceded as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
($ in millions)
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Property-liability claims and
claims expense................................... $147 $137 $285 $262
Life insurance premium income and
contract charges................................. 16 12 29 25
</TABLE>
Property-liability insurance claims and claims expense and life insurance
policy benefits are net of reinsurance recoveries as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
($ in millions)
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Property-liability claims and
claims expense.................................. $93 $273 $189 $354
Life insurance policy benefits
and contract charges............................ 6 5 24 11
</TABLE>
4. REGULATION AND LEGAL PROCEEDINGS
The Company's insurance businesses are subject to the effects of a changing
social, economic and regulatory environment. Public and regulatory initiatives
have varied and have included efforts to restrict premium rates, restrict the
Company's ability to cancel policies, impose underwriting standards and expand
overall regulation. The ultimate changes and eventual effects, if any, of these
initiatives are uncertain.
Various legal and regulatory actions are currently pending that involve
Allstate and specific aspects of its conduct of business. In the opinion of
management, the ultimate liability, if any, in one or more of these actions in
excess of amounts currently reserved is not expected to have a material effect
on results of operations, liquidity or capital resources.
-6-
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Shareholders of
The Allstate Corporation:
We have reviewed the accompanying condensed consolidated statement of financial
position of The Allstate Corporation and subsidiary as of June 30, 1996, and the
related condensed consolidated statements of operations for the three-month and
six-month periods ended June 30, 1996 and 1995, and the condensed consolidated
statements of cash flows for the six-month periods ended June 30, 1996 and 1995.
These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial position of The Allstate
Corporation and subsidiary as of December 31, 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the year then
ended, not presented herein. In our report dated March 1, 1996, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated statement
of financial position as of December 31, 1995 is fairly stated, in all material
respects, in relation to the consolidated statement of financial position from
which it has been derived.
Deloitte & Touche LLP
Chicago, Illinois
August 14, 1996
-7-
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND
SIX-MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
The following discussion highlights significant factors influencing results
of operations and changes in financial position of The Allstate Corporation (the
"Company" or "Allstate"). It should be read in conjunction with the condensed
consolidated financial statements and notes thereto found under Part I. Item 1
along with the discussion and analysis found under Part 2. Item 7 of The
Allstate Corporation Annual Report on Form 10-K for the year ended December 31,
1995.
CONSOLIDATED OPERATIONS
Consolidated revenues for the second quarter of 1996 increased 11.5% to
$6.32 billion from $5.67 billion for the same period last year reflecting a $320
million increase in net realized capital gains, a $318 million increase in
property-liability earned premiums, a $37 million increase in net investment
income, and a $23 million decrease in life premium and contract charges.
Consolidated revenues for the first half of 1996 increased 8.7% to $12.23
billion from $11.24 billion for the same period in 1995 reflecting a $635
million increase in property-liability earned premiums, a $350 million increase
in net realized capital gains, a $106 million increase in net investment income,
and a $109 million decrease in life premium and contract charges. The increase
in net realized capital gains for the three-month and six-month periods reflect
the repositioning of the property-liability investment portfolio (see
Investments). Revenue results for the Company's primary insurance segments are
discussed further in the following sections.
Net income for the second quarter of 1996 was $764 million, or $1.71 per
share, compared with $519 million, or $1.15 per share, for the same period of
1995. The increase in 1996 was due to higher net realized capital gains,
primarily caused by the repositioning of the property-liability investment
portfolio (see Investments) and increased underwriting income and net investment
income in the property-liability business. Net income for the first half of 1996
was $1.19 billion, or $2.65 per share, compared with $1.06 billion, or $2.36 per
share, for the same period of 1995. The results for the first half of 1996 were
impacted by higher net realized capital gains caused by the repositioning of the
property-liability investment portfolio, increased operating income of the life
business and increased net investment income of the property-liability business
which was partially offset by higher underwriting losses. Net income for the
second quarter and first half of 1995 included a $93 million after-tax gain from
the sale of 70% of The PMI Group, Inc..
-8-
<PAGE>
PROPERTY-LIABILITY OPERATIONS
OVERVIEW
The Company's property-liability operations include personal property and
casualty ("PP&C"), commercial property and casualty and reinsurance ("Business
Insurance"), and discontinued lines and coverages, consisting of excess and
surplus lines, environmental and asbestos losses from reinsurance assumed, and
the run-off of the mortgage pool business, no longer written by Allstate
("Discontinued Lines and Coverages").
Underwriting results for each of the property-liability segments are
discussed separately beginning on page 12.
The following table sets forth certain unaudited summarized financial data
and key operating ratios for the Company's property-liability operations for the
three-month and six-month periods ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
($ in millions) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Premiums written...................................... $4,772 $4,544 $9,265 $8,785
===== ===== ===== =====
Premiums earned....................................... $4,650 $4,332 $9,194 $8,559
Claims and claims expense............................. 3,529 3,449 7,216 6,653
Other costs and expenses.............................. 1,052 993 2,058 1,936
----- ----- ----- -----
Underwriting (loss) income ........................... 69 (110) (80) (30)
Net investment income ................................ 440 414 867 793
Realized capital gains and
losses, after-tax.................................... 252 52 328 96
Gain on sale of subsidiary's
stock, after-tax..................................... - 93 - 93
Income tax expense on operations...................... 104 28 123 108
--- ----- ----- -----
Income before equity in net
income of unconsolidated
subsidiary........................................... 657 421 992 844
Equity in net income of
unconsolidated subsidiary............................ 8 13 14 43
--- ----- ----- ----
Net income............................................ $ 665 $ 434 $1,006 $ 887
=== ===== ===== ====
Catastrophe losses.................................... $ 279 $ 365 $ 511 $ 536
=== ===== ===== ====
Operating ratios......................................
Claims and claims expense
("loss") ratio..................................... 75.9 79.6 78.5 77.8
Expense ratio....................................... 22.6 22.9 22.4 22.6
---- ----- ----- -----
Combined ratio...................................... 98.5 102.5 100.9 100.4
==== ===== ===== =====
Effect of catastrophe losses
on combined ratio.................................. 6.0 8.4 5.6 6.3
=== ===== ===== =====
</TABLE>
-9-
<PAGE>
NET INVESTMENT INCOME AND REALIZED CAPITAL GAINS
Pretax net investment income increased 6.3% and 9.3% for the three-month
and six-month periods of 1996, respectively, compared with the same periods in
1995. For the second quarter the increase was due to increases in invested
assets as a result of positive cash flows from operations being partially offset
by a slight decline in the portfolio yield. The increase for the year was due to
growth in invested assets, including proceeds received from The PMI Group, Inc.
and Sears Distribution transactions in the second quarter of 1995 and positive
cash flows from operations, partially offset by a slight decline in the
portfolio yield.
Realized capital gains after-tax for the second quarter of 1996 were $252
million compared with $52 million for the same period in 1995. For the first
half of 1996, realized capital gains after-tax were $328 million compared with
$96 million for the comparable period in 1995. During the first quarter of 1996,
the Company reassessed the market risk associated with its property-liability
fixed income and equity securities portfolios. As a result, during the second
quarter the Company reduced its investment in equity securities and sold a
portion of its long-term fixed income securities for its property-liability
operations. Approximately $234 million of capital gains after-tax were realized
as a result of this repositioning. The proceeds from the repositioning were
reinvested in intermediate-term fixed income securities (see Investments).
Fluctuations in realized capital gains and losses are largely a function of
timing of sales decisions reflecting management's view of individual securities
and overall market conditions.
CATASTROPHE LOSSES
Catastrophes are an inherent risk of the property-liability insurance
business which have contributed, and will continue to contribute, to material
year-to-year fluctuations in Allstate's results of operations and financial
position. The level of catastrophe losses experienced in any year cannot be
predicted and could be material to the Company's results of operations and
financial position. The Company has experienced two severe catastrophes in the
last five years which resulted in losses of $2.33 billion related to Hurricane
Andrew (net of reinsurance) and $1.72 billion related to the Northridge
earthquake. The Company is exposed to similar or greater catastrophes in the
future.
Catastrophe losses for the second quarter of 1996 were $279 million
compared to $365 million for the same period of 1995. Second quarter 1995 losses
included $200 million from the Dallas hail storms. For the first half of 1996,
catastrophe losses were $511 million versus $536 million for the same period in
1995.
The establishment of appropriate reserves for catastrophes that have
occurred, as for all property-liability claims, is an inherently uncertain
process. Catastrophe reserve estimates are regularly reviewed and updated, using
the most current information. Any resulting adjustments, which may be material,
are reflected in current year operations.
-10-
<PAGE>
CATASTROPHE MANAGEMENT
Allstate has initiated strategies to limit, over time, its insurance
exposures in certain regions prone to catastrophe occurrences, subject to the
requirements of insurance laws and regulations and as limited by competitive
considerations. These strategies include reductions in policies in force in
catastrophe prone areas and limitations on certain policy coverages. In
addition, Allstate has requested rate increases in catastrophe prone areas.
On July 26, 1996, the Company received approval from the Florida Department
of Insurance on key components of the Company's plan to reorganize its Florida
property business in order to reduce its exposure to hurricanes. Under the plan,
Allstate will sell the renewal rights to approximately 137,000 policies to
Clarendon National Insurance Company. Allstate will record an after-tax loss of
approximately $30 million as a result of the sale. In addition, the Company has
formed Allstate Floridian Insurance Company ("Floridian") which will retain
approximately 675,000 remaining Florida Allstate property policies, primarily
homeowners customers. Floridian will have access to approximately $400 million
of reinsurance from non-affiliated entities. The plan will be implemented with
renewal policies effective November 1, 1996. The Company has also agreed to
suspend the non-renewal of policies in certain counties with effective dates of
September 16, 1996 and later. The Department of Insurance also approved certain
coverage modifications and a 22% statewide average increase in the Company's
homeowners insurance rates. The Company continues to seek approval to transfer
the wind damage portion of approximately 67,000 Allstate property policies to
the Florida Windstorm Underwriting Association. Management believes these
actions will reduce its exposure to catastrophes in Florida.
In California, Allstate has limited policy coverages and received selective
rate increases. During the second quarter of 1996, Allstate began issuing a
revised earthquake policy ("mini-policy")in California. The mini-policy
increases deductibles on dwelling and contents coverages, limits contents and
additional living expense coverages, and eliminates coverage for most
non-dwelling structures. The issuance of the mini-policy reduces Allstate's
earthquake exposure in the state of California. During the quarter, proposed
legislation was introduced in the California legislature to create the
California Earthquake Authority (the "CEA"). The proposed legislation failed to
obtain the votes needed for passage. The Company supports the CEA legislation
and expects it to be reconsidered in the California Senate in August. Allstate
is unable to predict whether, or in what form, the CEA legislation will be
enacted and is pursuing other alternatives to manage its earthquake exposure in
California.
In addition to the above, the Company continues to evaluate the reinsurance
market for appropriate coverage at acceptable rates, the financial markets, and
other business strategies to lower its exposure to catastrophic losses.
While management believes that these actions have reduced or will reduce
the Company's exposure to catastrophes in Florida and California, the extent of
future reductions is uncertain.
-11-
<PAGE>
UNDERWRITING RESULTS
PP&C - Underwriting results and key operating ratios for the Company's
personal property and casualty insurance segment for the three-month and
six-month periods ended June 30, 1996 and 1995 are summarized in the following
table.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
($ in millions) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Premiums written.................................... $ 4,413 $ 4,158 $ 8,576 $ 8,058
===== ===== ====== ======
Premiums earned..................................... $ 4,278 $ 3,972 8,468 7,861
Claims and claims expense........................... 3,223 3,117 6,577 6,007
Other costs and expenses............................ 925 879 1,819 1,719
--- ---- ------ ------
Underwriting income(loss)........................... $ 130 $ (24) $ 72 $ 135
=== ===== ====== ======
Catastrophe losses.................................. $ 272 $ 350 $ 494 $ 516
=== ==== ====== ======
Operating ratios....................................
Claims and claims expense
("loss") ratio................................... 75.3 78.5 77.7 76.4
Expense ratio..................................... 21.6 22.1 21.5 21.9
---- ---- ---- ----
Combined ratio.................................... 96.9 100.6 99.2 98.3
==== ===== ==== ====
Effect of catastrophe losses
on combined ratio............................... 6.4 8.8 5.8 6.6
=== === === ===
</TABLE>
PP&C primarily sells private-passenger auto and homeowners insurance to
individuals. The Company separates the voluntary personal auto insurance
business into two categories according to insurance risks: the standard market
and the non-standard market. The standard market consists of drivers who are
perceived to have low to average risk of loss expectancy. The non-standard
market consists of drivers who have higher-than-average risk profiles due to
their driving records or the types of cars they own. These policies are written
at rates higher than standard auto rates. PP&C is pursuing a segmented growth
strategy with respect to geographic areas, attempting to grow more rapidly in
areas where risk of loss from catastrophes and the regulatory climate are more
conducive to attractive returns and limiting growth in markets that do not
provide appropriate returns.
PP&C premiums written for the second quarter increased 6.1% over the second
quarter of 1995. For the first half of 1996, PP&C premiums written increased
6.4% over the comparable period for 1995. The Company's long term goals for
premium written exceed the current increases. Standard auto premiums written
increased 3.0% to $2.58 billion for the second quarter of 1996, compared with
$2.51 billion for the same period in 1995. For the six-month period ending June
30, 1996, standard auto premiums increased 2.6% to $5.16 billion from $5.03
billion in 1995. The growth in standard auto premiums written for both the
three-month and six-month periods was driven primarily by an increase in
policies in force (unit sales) and to a lesser extent average premiums. The
growth in policies in force was primarily due to increases in renewal business
and, was generally achieved in markets that management believes will be
profitable, partially offset by a decline in policies in some of those markets
that management believes do not provide appropriate returns. Average premium
-12-
<PAGE>
increases were primarily attributable to a shift to newer and more expensive
autos and, to a lesser extent, rate increases which in general are limited by
regulatory and competitive factors.
Non-standard auto premiums written increased 25.6% to $667 million in the
second quarter of 1996, from $531 million for the same period in 1995. For the
six-month period non-standard auto premiums written increased 28.0% to $1.31
billion compared with $1.02 billion for 1995. The increase for both periods is
driven by an increase in policies in force and, to a lesser extent, average
premiums. The increase in policies in force is due to increases in both new and
renewal business.
Homeowners premiums written for the three-month period ended June 30, 1996
were $804 million, an increase of 4.1% over second quarter 1995 premiums of $772
million. For the first half of 1996 homeowners premiums written were $1.45
billion an increase of 6.8% over the same period of 1995. For the quarter and
first half of 1996, the increase is attributable to higher average premiums and
increases in renewal policies in force. The higher average premiums are
primarily due to rate increases in catastrophe exposure areas, principally
Florida, and the effect of policy provisions which adjust for inflation. Growth
in policies in force, is primarily occurring in areas targeted for growth and is
partially offset by policy reductions in certain catastrophe exposure areas.
For the second quarter of 1996, PP&C had underwriting income of $130
million compared with an underwriting loss of $24 million for the same period in
1995. The underwriting income was primarily due to growth in premiums, lower
catastrophes, favorable loss trends in auto injury coverage claim severities
(average cost per claim) and an improved expense ratio which was partially
offset by unfavorable loss frequency trends (rate of claim occurrences). Auto
physical damage coverage claim severities increased over prior year, driven by
moderate inflationary pressure. Both the auto injury and auto physical damage
claim severities trended favorably as compared to relevant medical cost and
repair cost indexes.
For the first six months of 1996, PP&C had underwriting income of $72
million compared with $135 million for the comparable period of 1995. The
increase in weather-related losses from the first quarter of 1996 more than
offset increased premium revenue and favorable auto injury coverage claim
severity trends.
Management believes the favorable injury coverage severity trends are partially
attributable to the redesign of its claim processes. The redesign includes
making a more focused effort to efficiently settle claims involving Allstate
customers and uninsured motorists, ensuring all claims are evaluated and settled
consistently using best practices across the country, increasing investigation
of minor accidents that result from low- or moderate-impact collisions and
aggressively defending lawsuits. The Company is also implementing redesigned
processes for auto physical damage claims.
On May 1, 1996 the Company converted its approximately 1,400 California
employee agency force to Allstate's Exclusive Agent independent contractor
program (non-employee). Under the terms of the program, the agents will continue
to write business exclusively for Allstate. Exclusive Agents are
-13-
<PAGE>
paid a higher commission than employee agents, but the impact to the Company of
this conversion is not expected to be material because the increased commission
is offset by the elimination of certain benefits, expenses and payroll
taxes. From a financial statement standpoint, the higher commission rate is
capitalized and expensed over the period in which the related premium is earned.
Annual expenses eligible for deferral under the existing deferred policy
acquisition cost methodology increased by approximately $30 million due to the
conversion of the California agents. The 1996 income statement will be
favorably impacted by approximately $6 million after-tax as a result of
deferral of additional commission expenses.
BUSINESS INSURANCE - Business Insurance writes selected commercial property
and casualty insurance primarily for small- to medium-sized businesses,
including auto, property, general liability, package policies combining property
and general liability coverages, and workers' compensation insurance. Business
Insurance also reinsures primarily smaller regional insurers who focus on
property and casualty coverages and who have underwriting standards considered
prudent by Allstate. This business has been written through Allstate agents,
independent agents appointed by Northbrook Property and Casualty Insurance
Company and brokers appointed by Allstate Reinsurance.
On July 31, 1996, the Company sold its Northbrook operations to St. Paul
Fire & Marine Insurance Company. Northbrook writes commercial auto, multi-peril,
workers' compensation, and inland marine through independent agents. The gain
from the transaction, which will be recorded in the third quarter, is not
expected to be material. In addition, the Company has reached an agreement to
sell its U.S.-based reinsurance operations to SCOR U.S. Corporation. This
transaction is expected to be closed by the end of the third quarter. The
Company is continuing to review its strategic options for ARCO, a U.K.-based
wholly owned reinsurance subsidiary of AIC, which reinsures risks in the United
Kingdom, Continental Europe, Middle East and Far East.
The Northbrook and U.S.-based reinsurance operations constitute over half of the
business within the Business Insurance segment. Premiums written were $413
million and $481 million for the first half of 1996 and 1995, respectively for
the Northbrook and U.S.-based reinsurance operations which represented 59.9% and
65.5% of Business Insurance premiums written during the respective periods.
Second quarter 1996 premiums written were $207 million as compared with $248
million for the same period in 1995 for the Northbrook and U.S.-based
reinsurance operations. As a result, the Business Insurance premiums written
will be substantially reduced beginning in the third quarter. Upon completion of
these sales the Company will continue to sell business insurance products
through its Allstate agents and foreign-based reinsurance operations.
-14-
<PAGE>
Underwriting results and key operating ratios for the Company's Business
Insurance segment for the three-month and six-month periods ended June 30, 1996
and 1995 are summarized in the following table.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
($ in millions) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Premiums written............................................. $359 $386 $689 $734
=== === === ===
Premiums earned.............................................. $372 $360 $726 $704
Claims and claims expense.................................... 238 271 524 544
Other costs and expenses..................................... 125 113 235 217
--- --- --- ---
Underwriting income (loss)................................... $ 9 $(24) $(33) $(57)
= ==== ==== ====
Catastrophe losses........................................... $ 7 $ 15 $ 17 $ 20
= == === ===
Operating ratios.............................................
Claims and claims expense ("loss")
ratio..................................................... 64.0 75.3 72.2 77.2
Expense ratio.............................................. 33.6 31.4 32.4 30.9
---- ---- ----- -----
Combined ratio............................................. 97.6 106.7 104.6 108.1
==== ===== ===== =====
Effect of catastrophe losses on
combined ratio............................................ 1.9 4.1 2.3 2.8
=== === === ===
</TABLE>
Premiums written decreased 7.0% and 6.1% for the three-month and six-month
periods of 1996 compared with the same periods in 1995. The decline in both
periods was driven primarily by lower premiums in the Northbrook and Reinsurance
operations partially offset by an increase in premiums written by Allstate
agents. For the first half of 1996, premiums written were impacted by decreases
in package policies, reinsurance, and voluntary workers' compensation lines as
compared to the same period in 1995.
The second quarter combined ratio of 97.6 improved 9.1 points over the same
period last year. For the first six months of 1996 the combined ratio of 104.6
improved 3.5 points as compared with last year. The decrease in the loss ratio
for both the three-month and six-month periods of 1996 was primarily due to
favorable loss trends and lower catastrophes. The increase in the expense ratio
for the second quarter and first six months of 1996 is primarily the result of
increased expenses in the Reinsurance business.
-15-
<PAGE>
DISCONTINUED LINES AND COVERAGES - Discontinued Lines and Coverages consist of
excess and surplus insurance lines (including environmental and asbestos losses)
which Allstate stopped writing in 1985, environmental and asbestos losses from
reinsurance assumed, which management believes were generally excluded from the
primary insurer's policy coverage beginning in 1986 and the run-off losses from
the mortgage pool business.
Underwriting results for the Company's Discontinued Lines and Coverages
segment for the three-month and six-month periods ended June 30, 1996 and 1995
are summarized in the following table.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
($ in millions) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Underwriting income (loss) from excess and surplus
insurance lines and environmental and asbestos losses
from reinsurance assumed................................. $(70) $(62) $(119) $(98)
Underwriting income (loss) from mortgage pool business... - - - (10)
--- ------ ----- ----
Total underwriting income (loss)...................... $(70) $(62) $(119) $(108)
==== ==== ===== =====
</TABLE>
The underwriting losses from excess and surplus insurance lines and
environmental and asbestos losses from reinsurance assumed were due primarily to
additional claims being reported and continued reevaluation and adjustment of
the estimated ultimate cost of settling these claims.
Allstate is currently studying alternate processes for estimating
environmental exposures using external databases and modeling techniques
developed by independent experts. The Company is evaluating whether this
information may be useful in estimating its environmental exposures. The
potential impact to recorded reserves and reinsurance recoverables, if any, is
unknown. The establishment of the appropriate reserves is an inherently
uncertain process. Allstate will update its reserve estimates as new facts
become known and further events occur which may impact the resolution of
unsettled claims.
In the second quarter of 1995, in connection with Allstate's decision to
exit the mortgage guaranty insurance business, the Company established an
after-tax provision for future losses on the run-off of the mortgage pool
business. As a result, losses from the mortgage pool business have not impacted
underwriting results since the first quarter of 1995. However, this business,
which is highly concentrated in southern California, could be impacted by
economic recessions, falling housing values, rising unemployment rates, interest
rate volatility or a combination of such factors. These factors are considered
in the periodic reevaluation of the provision for future losses.
-16-
<PAGE>
LIFE OPERATIONS
Allstate Life markets a broad line of life insurance, annuity and group
pension products through a combination of Allstate agents, banks and other
financial institutions, independent brokers and direct response marketing.
The following table sets forth certain summarized financial data for the
Company's life insurance operations and invested assets at or for the
three-month and six-month periods ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
($ in millions) 1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statutory premiums and deposits........................... $ 1,336 $ 1,256 $ 2,649 $ 2,546
===== ===== ===== ======
Invested assets(1)........................................ $26,213 $24,649 $26,213 $24,649
Separate Account assets (1)............................... 4,613 3,178 4,613 3,178
----- ----- ------ ------
Invested assets including Separate
Account assets........................................... $30,826 $27,827 $30,826 $27,827
====== ====== ====== ======
Premium income and contract
charges.................................................. $ 304 $ 327 $ 612 $ 721
Net investment income..................................... 508 495 1,015 982
Policy benefits and expenses.............................. 681 694 1,353 1,442
--- --- ------ ------
Income from operations.................................... 131 128 274 261
Income tax expense on operations.......................... 45 43 94 89
-- --- ------ ------
Net operating income..................................... 86 85 180 172
Realized capital gains and losses,
after-tax................................................ 21 13 21 25
------ ------ ------ ------
Net income................................................ $ 107 $ 98 $ 201 $ 197
=== === ====== ======
<FN>
(1) Fixed income securities are included in invested assets in the table above
at amortized cost and are carried at fair value in the statements of financial
position. Separate Accounts are included at fair value in both the table above
and the statements of financial position.
</FN>
</TABLE>
Life insurance statutory premiums and deposits increased 6.4% and 4.0% for
the quarter and first six months of 1996, respectively, primarily due to
increases in sales of new annuity and life products, which were partially offset
by decreases in sales of fixed annuity and group pension products for the
quarter. Sales of new products including proprietary variable annuities, indexed
annuities, fee-based group pension and individual life, were partially offset by
decreases in fixed annuity sales for the comparable six-month period in 1995.
Premium income and contract charges under generally accepted accounting
principles ("GAAP") decreased 7.0% in the second quarter and 15.1% for the first
six months. The decreases were primarily the result of maintaining margins on
new business, which lead to lower sales of life contingent annuities. Increases
in traditional life sales, contract charges on universal life products, and
fee-based product revenues were more than offset by decreases in sales of life
contingent annuities. Under GAAP, revenues vary with the mix of products sold
during the period because they exclude deposits on most annuities and premiums
on universal life insurance policies.
-17-
<PAGE>
Pre-tax net investment income increased 2.6% and 3.4% for the three-month
and six-month periods of 1996 respectively, compared with the same periods in
1995, primarily due to the $1.56 billion increase in invested assets for the
first half of 1996. The overall portfolio yield declined slightly, as proceeds
from calls and maturities as well as new premiums and deposits were invested in
securities yielding less than the average portfolio rate.
Net operating income increased slightly during the second quarter, and
increased 4.7% for the first six months of 1996. The increases were due to
higher volume and margins on policies in force. The 1995 results were also
favorably impacted by lower operating expenses due to a reduced rate of
amortization of deferred policy acquisition costs, due to favorable universal
life insurance persistency, which had a one time favorable after-tax impact of
$l0 million in the first quarter of 1995.
Net realized capital gains after-tax increased to $21 million in the second
quarter of 1996, primarily due to higher gains on sales of equity securities.
Net realized capital gains decreased for the first six months of 1996 as
compared to the same period in 1995, as higher gains on the sales of equity
securities were more than offset by increased writedowns on fixed income and
equity securities.
LIQUIDITY AND CAPITAL RESOURCES
Shareholders' equity decreased $279 million to $12.4 billion at June 30,
1996 versus $12.68 billion at December 31, 1995 as net income for the period was
more than offset by a decrease in unrealized net capital gains (see
"Investments"). The decrease in unrealized net capital gains is primarily due to
the effect of rising interest rates on the value of the fixed income securities
portfolio.
The Company maintains a line of credit of $1.5 billion as a source of
potential funds to meet short-term liquidity requirements. During the six months
ended June 30, 1996, there were no borrowings under this line of credit.
In early 1996 the Company launched a commercial paper program. The majority
of the proceeds from the issuance of the commercial paper has been used by the
insurance operations for general operating purposes. As of June 30, 1996, the
Company had outstanding commercial paper borrowings of $231 million. Total
borrowings under the combined commercial paper program and line of credit are
limited to $1.5 billion.
During the second quarter of 1996, the Company purchased 1,410,679 shares
of its common stock, for its treasury, at an average cost per share of $40.60,
to provide for the future exercise of employee stock options. At June 30, 1996,
the Company held 4,544,368 shares of treasury stock with an average cost per
share of $35.39.
Surrenders and withdrawals for the life operations were $379 million and
$765 million for the three-month and six-months periods ending June 30, 1996,
compared to $460 million and $1.09 billion in the respective 1995 periods. The
decreases are attributable to management actions taken in 1995 to slow the
surrender rate, which included raising renewal crediting rates.
-18-
<PAGE>
INVESTMENTS
Total investments were $56.37 billion at June 30, 1996 a decrease from
$56.51 billion at December 31, 1995. Property-liability investments increased
$316 million to $29.53 billion at June 30, 1996 from $29.21 billion at December
31, 1995. The increase in the property-liability investment portfolio is
primarily due to positive cash flows generated from operating activities
partially offset by a decrease of $1.15 billion in the unrealized gain on the
fixed income and equity security portfolios. Life investments at June 30, 1996,
decreased $447 million to $26.81 billion from $27.26 billion at December 31,
1995 as increased invested balances from positive cash flows generated from
operations were more than offset by a decrease of $1.21 billion in the
unrealized gain on the fixed income securities portfolio. These decreases in
unrealized gains in the fixed income portfolio were due to the effect of rising
interest rates.
The composition of the investment portfolio at June 30, 1996, at financial
statement carrying values, is presented in the table below.
<TABLE>
<CAPTION>
Property-liability Life Total
------------------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Fixed income
securities (1) ................. $24,115 81.7% $21,604 80.7% $45,719 81.1%
Equity securities................ 4,564 15.5 761 2.8 5,325 9.4
Mortgage loans................... 50 .2 3,177 11.9 3,227 5.7
Real estate...................... 429 1.4 306 1.1 735 1.3
Short-term....................... 350 1.2 493 1.8 878 1.6
Other............................ 18 - 468 1.7 486 .9
------ ----- ------ ----- ------ ----
Total......................... $29,526 100.0% $26,809 100.0% $56,370 100.0%
====== ===== ====== ===== ====== =====
<FN>
(1) Fixed income securities are carried at fair value. Amortized cost for these
securities were $23.53 billion and $21.01 billion for property-liability and
life operations, respectively.
</FN>
</TABLE>
Over 94% of the fixed income securities portfolio is rated "investment
grade", which is defined by the Company as a security having an NAIC rating of 1
or 2, a Moody's rating of Aaa, Aa, A or Baa, or a comparable Company internal
rating.
The Company uses derivative financial instruments to reduce its exposure to
market and interest rate risk on its invested assets, as well as to improve
asset/liability management. The Company does not hold or issue these instruments
for trading purposes. The Company is exposed to credit-related losses in the
event of nonperformance by counterparties to financial instruments. However,
such nonperformance is not expected because the Company utilizes highly rated
counterparties, established risk control limits, and maintains ongoing
monitoring procedures. In the first half of 1996, the Company increased its use
of interest rate cap and floor agreements to hedge the interest rate risk
associated with certain deferred annuity products sold in the Life operations.
-19-
<PAGE>
In order to more closely align the interest rate sensitivity of its
property-liability assets and liabilities (and thereby decrease the Company's
exposure to interest rate risk), during the first half of 1996 the Company
reduced its investment in long-term fixed income securities. In order to reduce
exposure to equity market risk in the property-liability investment portfolio,
the Company decreased its equity position. The proceeds from these sales were
reinvested in intermediate-term fixed income securities. In addition, the
Company used futures contracts to further reduce the interest rate risk of the
property-liability fixed income portfolio, thereby more closely aligning the
interest rate sensitivity of assets and liabilities.
There have been no significant changes in the risk profile of the Company's
derivative portfolio since December 31, 1995.
FIXED INCOME SECURITIES
Allstate monitors the quality of its fixed income securities portfolio, in
part, by categorizing certain investments as problem, restructured or potential
problem. Problem fixed income securities are securities in default with respect
to principal or interest or securities issued by companies that went into
bankruptcy subsequent to acquisition of the security. Restructured fixed income
securities have modified terms and conditions that were not at current market
rates or terms at the time of the restructuring. Potential problem fixed income
securities are current with respect to contractual principal or interest, but
because of other facts and circumstances, management has serious doubts
regarding the borrower's ability to pay future interest and principal which
causes management to believe these securities may be classified as problem or
restructured in the future.
The following table summarizes problem, restructured and potential problem
fixed income securities at June 30, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
June 30, December 31,
($ in millions) 1996 1995
---- ----
<S> <C> <C>
Problem.................................................................... $118 $126
Restructured .............................................................. 8 6
Potential problem ......................................................... 97 149
-- ---
Total net carrying value................................................. $223 $281
==== ====
</TABLE>
COMMERCIAL MORTGAGE LOANS
Allstate monitors the quality of its mortgage loans by categorizing certain
loans as problem, restructured or potential problem. Problem commercial mortgage
loans are loans that are in foreclosure, loans for which a principal or interest
payment is over 60 days past due, or are current with respect to interest
payments, but considered in-substance foreclosed. Restructured commercial
mortgage loans have modified terms and conditions that were not at current
market rates or terms at the time of the restructuring. Potential problem
commercial mortgage loans include loans which are current with respect to
interest payments, or loans which are less than 60 days delinquent as to
-20-
<PAGE>
contractual principal or interest payments, but because of other facts and
circumstances, management has serious doubts regarding the borrower's ability to
pay future interest and principal which causes management to believe these loans
may be classified as problem or restructured in the future.
The following table summarizes the net carrying values of problem,
restructured and potential problem commercial mortgage loans at June 30, 1996
and December 31, 1995.
<TABLE>
<CAPTION>
June 30, December 31,
($ in millions) 1996 1995
---- ----
<S> <C> <C>
Problem.................................................................... $137 $104
Restructured .............................................................. 160 143
Potential problem ......................................................... 91 147
-- ---
Total net carrying value................................................. $388 $394
=== ===
Valuation allowances....................................................... $ 82 $ 75
=== ===
Valuation allowances as a percent of gross carrying
value (1) ............................................................... 17.4% 16.0%
<FN>
(1)Calculated as total valuation allowances divided by the gross carrying value,
which is the total net carrying value plus the valuation allowances.
</FN>
</TABLE>
The net carrying value of problem, restructured and potential problem loans
decreased slightly during the six-month period. Problem loans experienced a net
increase during the first six months due to loans moving from potential problem
and restructured to problem. Restructured loans also experienced an increase due
to the movement of some loans from the problem to the restructured category.
The carrying value of impaired loans as of June 30, 1996, and December 31,
1995 was $246 million and $193 million, respectively.
In the six months ended June 30, 1996, $336 million of commercial mortgage
loans were contractually due. Of these, 22.2% were paid as due, 41.0% were
refinanced at prevailing market terms, and 36.8% are currently in the process of
refinancing or restructuring discussions.
PENDING ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" which encourages entities to adopt a fair value based method of
accounting for compensation cost of employee stock compensation plans. The
statement allows an entity to continue the application of accounting prescribed
by APB Opinion No. 25, "Accounting for Stock Issued to Employees", however, pro
forma disclosures of net income and earnings per share, as if the fair value
based method of accounting defined by this statement had been applied, are
required. The disclosure requirements of this statement will be adopted in
December 1996 and are expected to be immaterial. Results of operations and
financial position will not be affected by the adoption of this statement.
-21-
<PAGE>
PART II. Other Information
-----------------
Item 4. Submission of Matters to a Vote of Security Holders.
On May 21, 1996, the Company held its annual meeting of
stockholders at the Chicago Botanic Garden in Glencoe, Illinois.
Ten directors were elected for terms expiring at the 1997
annual meeting of stockholders. The stockholders approved the recommendation
that Deloitte & Touche be appointed auditors for 1996, and approved adoption of
the Company's Equity Incentive Plan for Non-Employee Directors.
<TABLE>
<CAPTION>
Election of directors
- ---------------------
<S> <C> <C>
Name Votes For Votes Withheld
---------------- ----------- --------------
James G. Andress 395,069,475 1,892,547
Warren L. Batts 395,181,461 1,780,561
Edward A. Brennan 394,112,412 2,849,610
Jerry D. Choate 395,053,031 1,908,991
James M. Denny 395,115,994 1,846,028
Christopher F. Edley 395,042,339 1,919,683
William E. LaMothe 395,133,487 1,828,535
Michael A. Miles 395,063,540 1,898,482
Nancy C. Reynolds 395,045,235 1,916,787
Mary Alice Taylor 394,981,189 1,980,833
</TABLE>
<TABLE>
<CAPTION>
Approval of Deloitte & Touche as Auditors for 1996
--------------------------------------------------
<S> <C> <C> <C>
Votes For Votes Against Abstentions
----------- ------------- -----------
394,412,075 1,041,083 1,508,864
</TABLE>
<TABLE>
<CAPTION>
Approval of Adoption of Equity Incentive Plan for Non-Employee Directors
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Votes For Votes Against Abstentions Broker Non-Votes
- ----------- ------------- ----------- ----------------
363,253,289 29,426,535 4,282,198 -0-
</TABLE>
-22-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
An Exhibit Index has been filed as part of this Report on Page
E-1.
(b) Reports on Form 8-K.
None
-23-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Allstate Corporation
(Registrant)
August 14, 1996 By /s/Samuel H. Pilch
------------------
Samuel H. Pilch
Controller
(Principal Accounting Officer
and duly authorized Officer of Registrant)
-24-
<PAGE>
EXHIBIT INDEX
THE ALLSTATE CORPORATION
QUARTER ENDED JUNE 30, 1996
--------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Sequentially
Exhibit No. Description Numbered Page
- ---------- ----------- -------------
4 Registrant hereby agrees to furnish the Commission, upon request,
with the instruments defining the rights of holders of each issue of
long-term debt of the Registrant and its consolidated subsidiary.
11 Computation of earnings per common share for
The Allstate Corporation and consolidated subsidiary.
15 Acknowledgment of awareness from Deloitte & Touche LLP, dated August
13, 1996, concerning unaudited interim financial information.
27 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information
only and not filed.
</TABLE>
E-1
<PAGE>
Exhibit 11
THE ALLSTATE CORPORATION AND SUBSIDIARY
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
($ in millions, except for per share data) Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- ------------------------------
1996 1995 1996 1995
-------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Net Income $764 $519 $1,188 $1,061
============== ============== ============= ============
Primary earnings per common share computation:
Weighted average number of common shares 445.8 448.9 446.6 449.1
Assumed exercise of dilutive stock options 2.4 0.5 2.5 0.3
-------------- -------------- ------------- ------------
Adjusted weighted number of common shares outstanding 448.2 449.4 449.1 449.4
============== ============== ============= ============
Primary net income per share $1.71 $1.15 $2.65 $2.36
============== ============== ============= ============
Fully diluted earnings per common share computation:
Weighted average number of common shares 445.8 448.9 446.6 449.1
Assumed exercise of dilutive stock options 2.8 0.5 2.8 0.5
-------------- -------------- ------------- ------------
Adjusted weighted number of common shares outstanding 448.6 449.4 449.4 449.6
============== ============== ============= ============
Fully diluted net income per share $1.70 $1.15 $2.64 $2.36
============== ============== ============= ============
</TABLE>
E-2
<PAGE>
EXHIBIT 15
To the Board of Directors and Shareholders of
The Allstate Corporation:
We have reviewed, in accordance with standards established by the American
Institute of Certified Public Accountants, the unaudited interim financial
information of The Allstate Corporation and subsidiary for the three-month and
six-month periods ended June 30, 1996 and 1995, as indicated in our report dated
August 14, 1996; because we did not perform an audit, we expressed no opinion on
that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, is
incorporated by reference in Registration Statement Nos. 33-60420, 33-69568 and
33-88540 on Form S-3 and Registration Statement Nos. 33-77928, 33-93758,
33-93760, 33-93762, 33-99132, 33-99136, 33-99138, and 333-04919 on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
Deloitte & Touche LLP
Chicago, Illinois
August 14, 1996
E-3
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE ALLSTATE CORPORATION FINANCIAL STATEMENTS INCULDED IN SUCH
COMPANY'S QUARTERLY REPORT FOR THE QUARTER ENDED JUNE 30, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000899051
<NAME> THE ALLSTATE CORPORATION
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 45719
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 5325
<MORTGAGE> 3227
<REAL-ESTATE> 735
<TOTAL-INVEST> 56370
<CASH> 152
<RECOVER-REINSURE> 1864
<DEFERRED-ACQUISITION> 2375
<TOTAL-ASSETS> 71664
<POLICY-LOSSES> 24017
<UNEARNED-PREMIUMS> 6267
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 19743
<NOTES-PAYABLE> 1226
0
0
<COMMON> 5
<OTHER-SE> 12396
<TOTAL-LIABILITY-AND-EQUITY> 71664
9806
<INVESTMENT-INCOME> 1884
<INVESTMENT-GAINS> 537
<OTHER-INCOME> 0
<BENEFITS> 8323
<UNDERWRITING-AMORTIZATION> 1137
<UNDERWRITING-OTHER> 1159
<INCOME-PRETAX> 1563
<INCOME-TAX> 389
<INCOME-CONTINUING> 1188
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1188
<EPS-PRIMARY> 2.65
<EPS-DILUTED> 2.64
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
