SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 Number)
2775 Sanders Road, Northbrook, Illinois 60062
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 402-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, par value $0.01 New York Stock Exchange
per share (the "Common Stock") Chicago Stock Exchange
6.76% Exchangeable Notes New York Stock Exchange
Due April 15, 1998
7.95% Cumulative Quarterly New York Stock Exchange
Income Preferred Securities, Series A
(issued by a wholly-owned trust of the Registrant)
Securities registered pursuant to Section 12(g) of the Act: None
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On January 31, 1997, Registrant had 440,934,165 shares of Common Stock
outstanding. Of these, 371,691,259 shares, having an aggregate market value
(based on the closing price of these shares as reported in a summary of
composite transactions in The Wall Street Journal for stocks listed on the New
York Stock Exchange on January 31, 1997) of approximately $24.39 billion, were
owned by stockholders other than directors and executive officers of the
Registrant, The Savings and Profit Sharing Fund of Allstate Employees and any
person believed by the Registrant to beneficially own five percent or more of
Registrant's outstanding common shares.
Registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Documents Incorporated By Reference
Portions of the following documents are incorporated by reference as
follows:
Parts I and II of this Form 10-K incorporate by reference certain
information from the Registrant's 1996 Annual Report to Stockholders ("1996
Annual Report"). Part III of this Form 10-K incorporates by reference certain
information from the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held on May 20, 1997 (the "1997 Proxy Statement").
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Part I
Item 1. Business
- - ------ --------
The Allstate Corporation (the "Company") was incorporated under the
laws of the State of Delaware on November 5, 1992 to serve as the holding
company for Allstate Insurance Company ("AIC"). The Company's business is
conducted through AIC and AIC's subsidiaries (collectively, including the
Company, "Allstate"). Allstate is engaged, principally in the United States and
Canada, in the property-liability insurance and life insurance and annuity
businesses. Established in 1931 by Sears, Roebuck and Co. ("Sears"), Allstate is
the country's second largest property-liability insurer on the basis of 1995
statutory premiums written and is a major life insurer. Allstate's life
insurance and annuity operations are conducted through Allstate Life Insurance
Company ("ALIC"), a wholly-owned subsidiary of AIC, and through various ALIC
subsidiaries (collectively, "Allstate Life").
AIC's primary business is the sale of private passenger automobile and
homeowners insurance through its personal property and casualty unit, and in
1995 it maintained estimated national market shares in these lines of
approximately 12.2% and 11.8%, respectively. In order to focus on its core
strengths, during the second half of 1996 AIC sold (i) Northbrook Holdings, Inc.
and its wholly-owned subsidiaries (collectively, "Northbrook"), which wrote
commercial insurance through independent agents, (ii) its U.S.-based reinsurance
operations for policies written after 1984, and (iii) its London-based
reinsurance operations. As a result of these sales, Allstate's
property-liability operations consist of two principal areas of business:
personal property and casualty ("PP&C") and discontinued lines and coverages
("Discontinued Lines and Coverages"). PP&C, which has historically included only
the Company's personal property and casualty business, now includes the ongoing
commercial business written through the Allstate agent distribution channel.
Discontinued Lines and Coverages consists of business no longer written by
Allstate, including results from environmental, asbestos, and mass tort losses
and other commercial business in run-off, and the historical results of the
mortgage pool business and the businesses sold in 1996. Allstate markets its
products through a variety of distribution channels, with the core of its
property-liability distribution system being a broad-based network of
approximately 14,800 full-time Allstate employee agents (including life
specialists) and non-employee exclusive agents in the United States and Canada.
Allstate Life sells life insurance, annuity and group pension products.
Allstate Life distributes its products through Allstate agents (including life
specialists), banks, independent agents, brokers, Dean Witter Reynolds, Inc.
("Dean Witter") and direct response marketing.
Information regarding revenues, operating profit or loss and
identifiable assets attributable to each of the Company's identifiable business
segments is contained in note 15 of the Notes to Consolidated Financial
Statements at pages 86-88 of the 1996 Annual Report, incorporated herein by
reference in response to Item 8 hereof.
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RECENT DEVELOPMENTS
On November 12, 1996, the Company announced an expansion of its stock
repurchase program by an amount not to exceed $750,000,000 through the end of
1997, and announced that its subsidiary trusts intended to issue up to
$750,000,000 of trust preferred securities.
On November 25, 1996, Allstate Financing I, a wholly-owned trust of the
Company, issued $550,000,000 of 7.95% Cumulative Quarterly Income Preferred
Securities, Series A (the "QUIPS"). The QUIPS are guaranteed by the Company and
mature on December 31, 2026, subject to the Company's option to extend the
maturity to December 31, 2045. Allstate Financing I issued all of its common
securities to the Company for $17,010,325 in cash. On November 27, 1996,
Allstate Financing II, a wholly-owned trust of the Company, issued $200,000,000
of 7.83% Capital Securities (the "Capital Securities"). The Capital Securities
are guaranteed by the Company and mature on December 31, 2045. Allstate
Financing II issued all of its common securities to the Company for $6,186,000
in cash. The net proceeds of both offerings were loaned to the Company, which
issued subordinated debentures to the trusts bearing interest rates and maturity
schedules sufficient to enable the trusts to meet their payment obligations to
the security holders. The Company plans to use the proceeds of both offerings
for general corporate purposes, including the Company's stock repurchase
program.
On December 2, 1996, the California Earthquake Authority ("CEA")
commenced operations. The CEA will issue insurance policies providing coverage
for earthquake damage resulting from the movement of the earth as existing
policies issued by participating insurers, including Allstate, expire. See
"California Earthquakes" in the Management's Discussion and Analysis of
Financial Condition and Results of Operations at pages 37- 38 of the 1996 Annual
Report, incorporated herein by reference in response to Item 7 hereof.
RISK FACTORS AFFECTING ALLSTATE
In addition to the normal risks of business, Allstate is subject to
significant risk factors, including those applicable to it as a regulated
insurance company, such as: (i) the inherent uncertainty in the process of
establishing property-liability loss reserves, particularly reserves for the
cost of environmental, asbestos and mass tort claims, and the fact that ultimate
losses could materially exceed established loss reserves and have a material
adverse effect on results of operations and financial condition; (ii) the fact
that Allstate has experienced, and can be expected in the future to experience,
catastrophe losses which could have a material adverse impact on its financial
condition, results of operations and cash flow; (iii) the inherent uncertainty
in the process of establishing property-liability loss reserves due to the
change in loss payment patterns caused by new claims settlement practices; (iv)
the need for Allstate's insurance company subsidiaries to maintain appropriate
levels of statutory capital and surplus, particularly in light of continuing
scrutiny by rating organizations and state insurance regulatory authorities, and
to maintain acceptable financial strength or claims-paying ability ratings; (v)
the extensive regulation and supervision to which Allstate's insurance
subsidiaries
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are subject, various regulatory initiatives that may affect Allstate, and
regulatory and other legal actions involving Allstate; (vi) the Company's
primary reliance, as a holding company, on dividends from AIC to meet debt
payment obligations, and regulatory restrictions on AIC's ability to pay such
dividends; (vii) the adverse impact which increases in interest rates could have
on the value of Allstate's investment portfolio and on the attractiveness of
certain Allstate Life products; (viii) the need to adjust the effective duration
of the assets and liabilities of Allstate Life's operations in order to meet the
anticipated cash flow requirements of its policyholder obligations; and (ix) the
uncertainty involved in estimating the availability of reinsurance and the
collectibility of reinsurance recoverables.
ALLSTATE STRATEGY
Allstate's strategy is to focus on the profitable growth of its private
passenger automobile and homeowners insurance markets; to increase cross-sales
of its life insurance and annuity products to its automobile and homeowners
customer base through its agency force and to expand through the addition of new
distribution channels; to manage its catastrophe exposure; and to exploit
opportunities in the international markets by enhancing the operational
capabilities of its current foreign ventures and by commencing new ventures in
selected foreign markets. This strategy is designed to capitalize on: (1) the
strength of the Allstate name, (2) Allstate's network of full-time agents, (3)
Allstate's auto insurance capabilities, and (4) additional distribution channels
available to Allstate.
Allstate continues to pursue a strategy of growth in the segments of
markets which management believes will be profitable while limiting growth in
other markets. Allstate separates the voluntary personal auto insurance business
into two categories for underwriting purposes according to insurance risks: the
standard market and the non-standard market, and has determined its growth
strategy accordingly. Allstate is also pursuing a segmented growth strategy to
market its standard auto and homeowners insurance by geographic area. Allstate
is attempting to grow its standard auto business more rapidly in areas where the
regulatory climate is more conducive to attractive returns, and to reduce or
limit its homeowners exposure in areas where the risk of loss from catastrophes
is unacceptable in light of the returns provided. Allstate has developed its
segmented growth strategy with the assistance of proprietary databases, which
consist of marketing and other characteristics of various types of risks in the
standard automobile insurance market and the homeowners insurance market. As a
result, Allstate has identified over 180 local markets in various categories
ranging from markets in which it wishes to pursue aggressive growth for standard
auto and homeowners business to markets in which it wishes to reduce its
exposure. Allstate's process of designating geographic areas as growth and
limited growth is dynamic and may be revised as changes occur in the legal,
regulatory and economic environments in various areas, as catastrophe exposure
is reduced and as new products are introduced. Less than 6.0% of the United
States population reside in areas designated by Allstate as limited growth
markets for standard auto insurance, and approximately 20.0% of the population
reside in areas designated as limited or reduced markets for homeowners
insurance.
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The non-standard auto insurance market consists of insurance of persons
with no prior driving experience, or with a prior history of accidents or
violations, or owning high performance cars with high repair and replacement
costs or having other special needs. Allstate has achieved the leading market
share in this market. This has been a market in which Allstate has competed
successfully by capitalizing on an established distribution system, technology
and claims capabilities and by tailoring pricing and products to reach a broader
market. In May 1996 Allstate announced that it had reached agreement with All
Nation Insurance Co. to acquire the contracts of approximately 1,650 independent
agencies which sell non-standard auto insurance, and in September 1996 Allstate
announced that it had assumed the independent agent non-standard auto business
operations of Colonial Insurance Company of California, which includes contracts
with approximately 3,200 independent agencies. This business has been assigned
to Allstate's Deerbrook Insurance Company ("Deerbrook") subsidiary, which offers
non-standard automobile insurance through independent agents. Allstate plans to
continue to develop opportunities in this market.
Allstate Life has been successful in growing its business through the
development of new products, the establishment of new marketing arrangements,
and through the expanded marketing use of Allstate's database of existing
property-liability customers. Allstate Life's insurance and annuity products
also are marketed through Allstate agents (including life specialists),
independent agents, brokers, Dean Witter, banks and direct response marketing.
Specialized brokers are used to distribute group pension and structured
settlement products not offered by Allstate's agency force.
Allstate's agency force of approximately 14,100 full-time agents is at
the core of its PP&C distribution system. Allstate also uses over 2,500
independent agents to market insurance to individuals, mostly in rural markets
not served by Allstate agents, and over 5,500 independent agents appointed by
Deerbrook to market non-standard auto business. Allstate Life also has a direct
response marketing program which principally targets customers of credit card
issuers who prefer to purchase, through the mail or telephone, selected products
not offered by Allstate's agency force.
Allstate made substantial efforts in 1996 in the management of its
capital resources through reduction of catastrophe risk exposure. During 1996 it
took steps to reduce its exposure to hurricane risk in Florida and to earthquake
risk in California (See "Catastrophe Management," "Florida Hurricanes" and
"California Earthquakes" at pages 36-38 of the 1996 Annual Report, incorporated
herein by reference in response to Item 7 hereof). Allstate continues to seek
alternative sources for catastrophe reinsurance. During 1996 Allstate
repositioned its investment portfolio in order to lower its risk profile by
reducing the percentage of the portfolio in equity investments and by reducing
the duration of the fixed income portion of the portfolio. In addition, as noted
under "Recent Developments" above, Allstate has announced its intention to spend
up to $750,000,000 in repurchases of its common stock by December 31,1997.
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In November 1996, Allstate commenced the sale of private passenger auto
insurance in Germany through direct marketing. Allstate has also identified
other foreign areas as attractive markets for property-liability or life
insurance, and plans to pursue international opportunities as an avenue to grow
both its revenues and profitability. Allstate believes that it will take a
number of years before its new international strategies contribute significantly
to its financial results.
Allstate may also pursue selective acquisitions, partnerships, business
expansions, business start-ups, and divestitures, both in the United States and
internationally in the pursuit of its business strategy.
PROPERTY-LIABILITY INSURANCE
Allstate's property-liability insurance business consists of PP&C and
Discontinued Lines and Coverages. PP&C, which accounted for $18.0 billion (or
76%) of Allstate's 1996 statutory written premiums, writes primarily private
passenger automobile and homeowners insurance policies in 49 states, the
District of Columbia, Puerto Rico and in Canada. Operating in approximately
10,500 locations, Allstate agents produce more than 95% of PP&C's annual
statutory written premiums, with the balance generated by independent agents
largely in locations not currently served by Allstate agents. Discontinued Lines
and Coverages consists of business no longer written by Allstate, including
results from environmental, asbestos and mass tort losses and other commercial
insurance business in run-off, and the historical results of the mortgage pool
business and businesses sold in 1996.
PERSONAL PROPERTY AND CASUALTY - Principally engaged in private
passenger automobile and homeowners insurance, PP&C accounted for approximately
97% of Allstate's total property-liability premiums, as determined under
statutory accounting practices. Allstate was the country's second largest
personal property and casualty insurer for both private passenger automobile and
homeowners insurance in 1995. Although private passenger automobile and
homeowners insurance account for the majority of its business, PP&C also writes
coverages for product lines such as motorcycles, motor homes, renters,
condominium, residential and landlord, comprehensive personal liability, fire,
personal umbrella, recreational vehicle, mobile home, and boat owners. PP&C also
operates the Allstate Motor Club, an organization whose purpose is to aid its
members with travel plans and emergency road service.
The Company separates the voluntary personal auto insurance business
into two basic categories according to insurance risk; the standard market and
the non-standard market. The standard market consists of drivers who are
perceived to have low to average risk of loss expectancy. Allstate's growth in
the standard market was impacted by the Company's segmented growth strategy.
Allstate plans to increase its agency force, expand its advertising program and
offer new pricing structures in an attempt to increase its growth in the
standard automobile market in 1997.
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Allstate's growth in the non-standard market continues to be strong,
having exceeded 27% year-to-year over the period January 1, 1994 to December 31,
1996. Allstate had a countrywide market share of approximately 15% of the
non-standard market in 1995. Allstate's presence in this market, as well as the
standard market allows Allstate agents to offer insurance products to the vast
majority of drivers who apply for insurance. The non-standard market consists of
drivers who have higher-than-average risk profiles due to their driving records,
lack of prior insurance or the types of cars they own. PP&C has a refined price
structure and policy features which address the special needs of drivers in the
non-standard market. These policies are written at higher than standard rates.
Allstate writes policies covering these risks principally through AIC's
subsidiary, Allstate Indemnity Company. Deerbrook also writes non-standard
insurance through independent agencies. Allstate expects that while its growth
in the non-standard market will continue, its rate of growth in this market will
decline as the market matures.
As a condition of its license to do business in each state, Allstate,
like all other automobile insurers, is required to write or share the cost of
private passenger automobile insurance for higher risk individuals who would
otherwise be unable to obtain such insurance. The "involuntary" market, called
the "shared market," is governed by the applicable laws and regulations of each
state, and policies written in this market are generally written at higher than
standard rates. Allstate has generally experienced losses in its participation
in the shared market.
PP&C, in addition to writing insurance for standard homes, also insures
high value homes and non-standard homes, such as those with increased exposure
given their distance from fire protection services, and also insures risks in
the renters and condominium markets. In an attempt to improve the profitability
of its homeowners and other property business, in 1996 Allstate reorganized
and refocused the senior management of its property insurance operation, has
acted to reduce its catastrophe exposure and has implemented underwriting
standards, where permitted, for new business. These underwriting standards
include home inspections and an analysis of potential insureds' prior loss
history and financial stability. Allstate has targeted the homeowners insurance
business as a market with substantial profitable growth opportunities for the
Company.
Allstate, like its major competitors, does not rely on rating bureaus
in establishing prices for its personal property and casualty products. Instead
Allstate uses its proprietary database, which contains many years of its own
extensive underwriting and pricing experience. Accordingly, subject to
applicable state regulations, different prices are derived according to numerous
variables which apply to each specific risk, including, in the case of private
passenger automobile insurance, factors relating to the automobile (such as its
age, make and model) as well as factors relating to the insured (such as
previous driving record). In management's opinion, the extensive use and
analysis of this database, rather than rating bureaus, provides PP&C with the
basis for its market segmentation strategy to price risks accordingly. PP&C is
updating its nationwide profiles of the types of business it intends to pursue
and has
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standardized, subject to applicable state regulations, its underwriting
guidelines for standard auto nationwide in order to assure consistent treatment
of each type of customer profile.
Allstate has attempted to reduce its PP&C claims costs through
centralized claims administration, specialization and additional training of
claims personnel, and intensive and early investigation and attempted settlement
of claims. The Company has focused on claims involving alleged personal injury
in connection with collisions involving relatively minor impact. Commencing in
1996, the Company began the testing and training phase of redesigned claims
settlement processes for automobile physical damage claims.
As is true for the property-liability industry in general, because of
underwriting and policy issuance costs and commissions, first-year costs
attributable to PP&C's products are generally higher than for subsequent years.
Accordingly, customer retention is an important factor in the profitability of
PP&C's products, since policies that remain in force generally become more
profitable over time. Allstate customer retention rates in 1996 were
approximately the same as 1995.
The personal lines private passenger auto and homeowners businesses are
highly competitive. As of December 31, 1995 over 1,400 insurance companies were
in the market, with five groups of companies (State Farm, Allstate, Farmers,
Nationwide and USAA) writing approximately 46.7% of the private passenger
automobile premiums written and approximately 47.6% of the homeowners premiums
written in the United States. State Farm maintains the leading share in the
automobile and homeowners market and had approximately 21.6% of the automobile
market and 23.5% of the homeowners market in 1995. Together, State Farm and
Allstate had approximately one-third of each market in 1995.
AIC competes principally on the basis of its name recognition, scope of
distribution system, customer service, use of technology, product features and
breadth of product offerings and price. Additionally, extensive use of its
database to develop proprietary information gives AIC the ability to segment its
market and appropriately price risks.
Approximately $41 billion of industry personal lines premiums are
generated by independent agencies, and the remaining $85 billion of premiums are
generated by insurers placing their products directly with the consumer through
employee agents, independent contractor exclusive agents, direct response and
mail order. Allstate believes its full-time agency force of independent
contractor exclusive agents and employee agents provides it with an advantage in
distributing PP&C products. However, some competitors, operating with solely
exclusive agents who are independent contractors or distributing through direct
response or mail order marketing, or operating with non-exclusive independent
agents have also been able to operate effective distribution systems.
The great majority of Allstate's 14,800 agents (including life
specialists) are employee agents. In future years, Allstate expects that the
percentage of its agents who are independent
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contractor exclusive agents will increase substantially. In 1990, Allstate
instituted an exclusive agent contract under which persons are hired for an 18
month period during which they are trained as agents. Upon completion of the
period, Allstate offers contracts to some of the trainees to serve as
independent contractors who are exclusive agents for Allstate. Each person hired
since 1990 for eventual consideration as an Allstate agent has been hired on
this basis. In addition, employee agents who were hired prior to 1990 have been
permitted to convert to independent contractor exclusive agent status. During
1996 Allstate required the conversion of its California employee agents to
independent contractor exclusive agent status because of a California law which
might have required Allstate to increase the amounts of reimbursements for
California employee agent expenses to unacceptable levels. At December 31, 1996,
Exclusive Agents, including agents in training to become Exclusive Agents,
represented approximately 30% of Allstate agents.
CATASTROPHE EXPOSURE
Catastrophes are an inherent risk of the property-liability insurance
business which have contributed, and will continue to contribute, to material
year-to-year fluctuations in Allstate's results of operations and financial
position. The level of catastrophe loss experienced in any year cannot be
predicted and could be material to results of operations and financial position.
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. While
management believes the Company's catastrophe management strategies, described
below, will greatly reduce the probability of severe losses from catastrophes in
the future, the Company continues to be exposed to similar or greater
catastrophes (see "Risk Factors" and "Forward-Looking Statements" in this Form
10-K).
A "catastrophe" is defined by Allstate as an event that produces
pre-tax losses before reinsurance in excess of $1 million involving multiple
first party policyholders. Catastrophes are caused by various events, including
hurricanes, earthquakes, tornadoes, wind and hail storms, and fires. Although
catastrophes can cause losses in a variety of property-liability lines,
homeowners insurance has in the past generated the vast majority of
catastrophe-related claims. For Allstate, major areas of potential losses due to
hurricanes include major metropolitan centers near the eastern and gulf coasts
of the United States. Allstate's major areas of exposure to potential losses due
to earthquakes include population centers in and around Los Angeles and San
Francisco. Other areas in the United States in which Allstate is exposed to
potential losses from earthquakes include areas in the central United States
affected by the New Madrid fault system in the midwest and areas in and around
Seattle, Washington.
Although Allstate, consistent with industry practice, prices risks in
light of anticipated catastrophe exposure, the incidence and severity of
catastrophes is unpredictable. Due to the current unavailability of reinsurance
at rates acceptable to it, Allstate has limited amounts of reinsurance in place
to lower its exposure to losses from catastrophes affecting its property-
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liability business at this time, other than the $400 million of reinsurance in
Florida described below. However, Allstate continues to evaluate the reinsurance
market for appropriate coverage at acceptable rates and continues to pursue
other business strategies to lower its exposure to catastrophe losses.
Allstate has initiated strategies to limit, over time, subject to the
requirements of insurance laws and regulations and as limited by competitive
considerations, its insurance exposures in certain regions prone to catastrophe
occurrences. These strategies include limits on new business production,
limitations on certain policy coverages, increases in deductibles, policy
brokering and participation in catastrophe pools. In addition, Allstate has
requested and received rate increases in certain regions prone to catastrophes.
While management believes that its initiatives have reduced or will reduce
Allstate's exposure to catastrophes in certain geographic regions over time, the
extent of such reduction is uncertain and is constrained by state insurance laws
and regulations. For example, some states, such as Florida and New York, limit
the ability of insurers to non-renew policies. California requires that
earthquake coverage be offered upon policy renewal every second year. The states
in which Allstate faces its highest exposure -- California, Florida and New York
- - -- require rates to be approved by the regulator, thereby making it more
difficult to obtain adequate rates that reflect the catastrophe exposure.
Finally, all states have shared market mechanisms that provide insurance to
persons who are unable to obtain it in the voluntary market. Allstate's ability
to reduce its exposure to catastrophes may be offset by any increase in the
exposure through such shared market mechanisms. See "Regulation - Shared
Markets" below.
Allstate has used catastrophe simulation models in attempting to
estimate the probability and the levels of losses which may result from
catastrophes (Allstate also uses these models to assist its decisions concerning
pricing, underwriting and reinsuring risks in areas of catastrophe exposure).
These models are subject to uncertainties due to continual updating and revision
to reflect the most currently available information on climatology and
seismology, building codes, and policy demographics. Allstate believes that
improvements in the amount and types of information contained in these models
have improved its estimations of catastrophe exposures, as well as its ability
to estimate losses in the earlier stages of development. However, use of the
models has not enabled Allstate to predict the level of losses associated with a
specific catastrophe in the past, and the predictive value of such models with
regard to future catastrophes is subject to challenge. Nevertheless, the Company
believes that full implementation of the actions described below with respect to
Florida and California will reduce by April 30, 1998, the probability of its
maximum loss from any single hurricane in Florida or any single earthquake in
California of exceeding $1 billion to 1% or less, based on catastrophe
simulation models and data available to the Company.
The series of actions taken in Florida include increased deductibles,
various coverage changes and a 24.9% statewide homeowners policies premium
increase (accompanied by a moratorium on further rate increases by the Company
until January 1, 1999, except for recoupment of residual property market
assessments), the sale of renewal rights for up to 137,000
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homeowner policies to an unrelated insurance company, the formation of a
wholly-owned subsidiary to hold, sell and service the Company's approximately
675,000 remaining Florida property policies as such policies come up for
renewal, and the transfers, commencing April 16, 1997, of the wind damage
portion of approximately 50,000 to 60,000 property policies to the Florida
Windstorm Underwriting Association, a state pooling mechanism. In addition,
Allstate has obtained an excess reinsurance contract with an unaffiliated
reinsurer providing up to $400 million of reinsurance per occurrence, up to an
aggregate of $800 million, on Florida property policies for catastrophe losses
in excess of $1 billion. The reinsurance protection extends to December 31,
1999. Effective with Florida property policies up for renewal on and after
September 16, 1996, the Company discontinued its hurricane exposure non-renewal
program.
In December 1996 the CEA, a privately financed, publicly-managed state
agency created to provide coverage for earthquake damage resulting from earth
movements, commenced operations. Companies selling homeowners insurance in
California are required to offer earthquake insurance either directly or through
their participation in the CEA. Allstate chose to participate in the CEA and
recorded $150 million for the initial assessment and related expenses in the
third quarter of 1996. Allstate may be required to pay additional assessments to
the CEA during the first 12 years of the CEA's operation, contingent on the
capital level and aggregate losses recorded by the CEA. Under the CEA
legislation currently in effect, Allstate believes that these contingent
assessments will not exceed $700 million, based on its current share of the
California homeowners market. Commencing in January 1997, the earthquake
coverage provided by Allstate will be transferred to the CEA as Allstate's
policies come up for renewal.
Allstate continues to support passage of legislation in Congress such
as the Homeowner's Insurance Availability Act which could, if enacted, lessen
the impact to Allstate of catastrophic natural disasters such as hurricanes and
earthquakes. Allstate is a founding member of a newly-formed coalition whose
members include property insurers and insurance agents. This group is promoting
a measure that would provide federal reinsurance to state disaster plans. The
Company is unable to determine whether, or in what form, such proposed
legislation will be enacted or what the effect on the Company will be.
DISCONTINUED LINES AND COVERAGES
Allstate wrote excess and surplus lines coverages from 1972 to 1985
through its subsidiary, Northbrook Excess and Surplus Insurance Company
("NESCO"). NESCO wrote professional liability coverages for architects,
engineers, lawyers, and physicians, principally on claims-made coverage forms.
It also wrote substantial umbrella and excess liability coverages on an
occurrence basis, including medical and other products liability coverages, for
major United States corporations. In 1985, NESCO was merged into AIC with AIC
assuming all of the assets and liabilities of NESCO. Since the early 1980's,
Allstate has experienced significant increases in losses for years prior to 1980
arising out of NESCO's umbrella and excess liability coverage for large
corporations. Since the late 1980's, most of these losses have related to
environmental
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damages or asbestos-related damages or mass-tort settlements. AIC, as NESCO's
successor, has been involved, and continues to be involved, in coverage
litigation with NESCO insureds.
In addition to NESCO's activities, during the late 1960's and through
the early 1980's Allstate's reinsurance business unit wrote treaty and
facultative reinsurance covering general liability primary policies, including
policies for major producers of asbestos products. During approximately the same
period, Allstate's reinsurance business unit wrote reinsurance coverage on
liability policies with major United States corporations that have since become
involved in environmental and asbestos damage claims. Such companies may have
been involved with hazardous wastes in a variety of ways including as
manufacturers, haulers, dump site owners, or through a combination of these
activities. Allstate's reinsurance business unit has been involved and continues
to be involved in coverage litigation and arbitration with ceding companies and
their insureds involving liability for environmental and asbestos damages
claims. In 1986, Allstate ceased writing business with ceding companies which
tended to insure larger corporations with potential environmental and/or
asbestos damage exposures, and its underwriting focus was redirected toward
smaller, more regionalized insurers who focus on property and casualty coverages
and who have underwriting standards that are considered prudent by Allstate.
Also in 1986, the general liability policy form used by Allstate and others in
the property-liability industry was amended to introduce an "absolute pollution
exclusion," which excluded coverage for environmental damage claims, and to add
asbestos exclusions. Most general liability policies issued prior to 1987
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 claim risks assumed, as well
as primary commercial coverages written, for most policies written in 1986 and
all policies written after 1986.
Allstate's environmental and asbestos exposures are primarily limited
to policies written in periods prior to 1986 with the preponderance of the
losses emanating from policies written in the 1970's. New environmental and
asbestos claims, however, continue to be reported. Allstate has established
substantial reserves for the environmental and asbestos damage claims, and in
October 1996 announced that it had increased such reserves by $318 million,
including $60 million for mass tort exposures. Mass tort exposure primarily
relate to products liability claims, such as those for medical devices and other
products, and general liabilities. However, there are significant inherent
uncertainties in estimating the ultimate cost of these claims, as discussed
below. Further information regarding the foregoing is contained in "Property-
Liability Claims and Claims Expense Reserves" at pages 42-45 of the 1996 Annual
Report, incorporated herein by reference in response to Item 7 hereof. For
information regarding Superfund proposed legislation, see"Regulatory Initiatives
and Proposed Legislation" below.
On July 31, 1996 Allstate sold to St. Paul Fire & Marine Insurance
Company the
13
<PAGE>
commercial lines insurance business it operated through its Northbrook
subsidiaries, retaining certain commercial business in run-off. Under the
agreement, Allstate could be required to pay to St. Paul 50% of any deficiency
in excess of $25 million which should develop in the Northbrook companies
closing reserves by the fourth anniversary of closing, but not more than $100
million. If an excess in closing reserves should develop at such fourth
anniversary, Allstate would be entitled to receive 50% of such excess, but not
more than $50 million.
On September 16, 1996 Allstate sold its domestic reinsurance operations
to SCOR U.S. Corporation, and on November 15, 1996 sold its wholly-owned
subsidiary Allstate Reinsurance Company, Ltd. ("ARCO") a company with foreign
reinsurance operations, to QBE Insurance Group Limited ("QBE"). In connection
with the latter sale, Allstate agreed to reimburse QBE for 80% of any adverse
development in ARCO's reserves as of December 31, 1995, and QBE agreed to
reimburse Allstate for 70% of any favorable development in such reserves, such
reimbursements to be settled annually. Also, the parties are to review the
development of 1996 underwriting results for contracts in place at November 15,
1996, and are to settle annually to the extent that the combined ratio for such
contracts exceeds or is less than 110%.
On October 8, 1996, the Company announced that it had increased by $87
million the provision for future losses provided for the run-off of the mortgage
pool business, which had been retained in 1995 when the Company sold 70% of The
PMI Group, Inc. The increase in the provision was due primarily to revised loss
trend analysis based on continued weakness in economic conditions, including
real estate prices and unemployment, in Southern California. These and other
factors are considered in the periodic revaluation of the provision for future
losses in this business.
PROPERTY-LIABILITY INSURANCE CLAIMS AND CLAIMS EXPENSE RESERVES
Allstate establishes property-liability loss reserves to cover its
estimated ultimate liability for losses and loss adjustment expenses with
respect to reported claims and claims incurred but not yet reported as of the
end of each accounting period. In accordance with applicable insurance laws and
regulations and generally accepted accounting principles ("GAAP"), no reserves
are established until a loss occurs, including a loss from a catastrophe.
Underwriting results of the property-liability operations are significantly
influenced by estimates of property-liability claims and claims expense reserves
(see note 6 of the Notes to Consolidated Financial Statements at pages 74-77 of
the 1996 Annual Report, incorporated herein by reference in response to Item 8
hereof). These reserves are an accumulation of the estimated amounts necessary
to settle all outstanding claims, including claims which are incurred but not
reported, as of the reporting date. The reserve estimates are based on known
facts and on interpretations of circumstances, including Allstate's experience
with similar cases and historical trends involving claim payment patterns, loss
payments, pending levels of unpaid claims and product mix, as well as other
factors including court decisions, economic conditions and public attitudes. The
effects of inflation are implicitly considered in the reserving process. The
establishment of reserves, including reserves for catastrophes, is an inherently
uncertain process and the ultimate cost may vary materially
14
<PAGE>
from the recorded amounts. Allstate regularly updates its reserve estimates as
new facts become known and further events occur which may impact the resolution
of unsettled claims. Changes in prior year reserve estimates, which may be
material, are reflected in the results of operations in the period such changes
are determined to be needed.
Establishing net loss reserves for environmental, asbestos and mass
tort claims is subject to uncertainties that are greater than those presented by
other types of claims. Among the complications are lack of historical data, long
reporting delays, uncertainty as to the number and identity of insureds with
potential exposure, unresolved legal issues regarding policy coverage,
availability of reinsurance and the extent and timing of any such contractual
liability. The legal issues concerning the interpretation of various insurance
policy provisions and whether environmental, asbestos, and mass tort losses are,
or were ever intended to be covered, are complex. Courts have reached different
and sometimes inconsistent conclusions as to when losses are deemed to have
occurred and which policies provide coverage; what types of losses are covered;
whether there is an insured obligation to defend; how policy limits are
determined; how policy exclusions are applied and interpreted; and whether
clean-up costs represent insured property damage. Management believes these
issues are not likely to be resolved in the near future. See note 6 of the Notes
to Consolidated Financial Statements at pages 74-77 of the 1996 Annual Report,
incorporated herein by reference in response to Item 8 hereof.
On October 8, 1996 Allstate announced that it had strengthened its net
loss reserves for Discontinued Lines and Coverages by a total of $405 million,
based on the results of a study the Company had conducted of its environmental
liabilities as well as a comprehensive internal assessment of its asbestos and
other contractual liabilities related to other discontinued lines and coverages.
The Company increased its asbestos net loss reserves by $72 million, its
environmental net loss reserves by $172 million, its net loss reserves for mass
tort exposure and general liability by $60 million, and its reserves for future
insolvencies of reinsurers by $14 million. The October 8, 1996 announcement also
reflected an increase of $87 million in Allstate's provision for future losses
for the run-off of the mortgage pool business.
The following tables are summary reconciliations of the beginning and
ending property-liability insurance claims and claims expense reserve, displayed
individually for each of the last three years. The first table presents reserves
on a gross (before reinsurance) basis. The end of year gross reserve balances
are reflected in the Consolidated Statements of Financial Position on page 58 of
the 1996 Annual Report, incorporated herein by reference in response to Item 8
hereof. The second table presents reserves on a net (after reinsurance) basis.
The total net property-liability insurance claims and claims expense amounts are
reflected in the Consolidated Statements of Operations on page 57 of the 1996
Annual Report, incorporated herein by reference in response to Item 8 hereof.
15
<PAGE>
<TABLE>
<CAPTION>
Gross
($ in millions)
<S> <C> <C> <C>
Year Ended December 31,
------------------------------------------------
1996 1995 1994
-------------- --------------- -----------
Gross reserve for property-liability claims and claims expense,
beginning of year $ 17,687 $ 16,763 $ 15,521
Incurred claims and claims expense
Provision attributable to the current year 15,186 14,530 15,455
Decrease in provision attributable to prior years (338) (235) (634)
------- ------- -------
Total claims and claims expense 14,848 14,295 14,821
Claim payments
Claims and claims expense attributable to current year 8,073 8,490 8,898
Claims and claims expense attributable to prior years 5,711 4,881 4,681
Claims and claims expense attributable to disposition of operations 1,369 - -
------ ------ -------
Total payments 15,153 13,371 13,579
------ ------ -------
Gross reserve for property-liability claims and claims expense,
end of year 17,382 17,687 16,763
Less: ARCO reserve balances not subject to development (1) - 361 349
------ ------- -------
Gross reserve for property-liability claims and claims expense,
end of year as shown on 10-K loss reserve development table $ 17,382 $ 17,326 $ 16,414
====== ====== =======
<FN>
(1) ARCO was sold in 1996. In 1995 and 1994, loss development information for
ARCO (AIC's indirectly owned British reinsurance subsidiary) was not
available on a comparable basis. This information was not material ($97.7
million in gross claims and claims expense in 1995 and $85.8 million in
1995 gross payments) and was treated as attributable to current year.
</FN>
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Net
($ in millions)
<S> <C> <C> <C>
Year Ended December 31,
-------------------------------------------------
1996 1995 1994
-------------- --------------- ------------
Net reserve for property-liability claims and claims expense,
beginning of year $ 16,156 $ 15,406 $ 14,119
Incurred claims and claims expense
Provision attributable to the current year 14,823 14,113 15,241
Decrease in provision attributable to prior years (336) (425) (712)
------- ------- -------
Total claims and claims expense 14,487 13,688 14,529
Claim payments
Claims and claims expense attributable to current year 7,522 8,190 8,770
Claims and claims expense attributable to prior years 5,787 4,748 4,472
Claims and claims expense attributable to disposition of operations 1,736 - -
------- ------- -------
Total payments 15,045 12,938 13,242
------- ------- -------
Net reserve for property-liability claims and claims expense,
end of year 15,598 16,156 15,406
Less: ARCO reserve balances not subject to development (1) - 320 290
------- ------- -------
Net reserve for property-liability claims and claims expense,
end of year as shown on 10-K loss reserve development table (2) $ 15,598 $ 15,836 $ 15,116
======= ====== ======
<FN>
(1) ARCO was sold in 1996. In 1995 and 1994, loss development information for
ARCO (AIC's indirectly owned British reinsurance subsidiary) was not
available on a comparable basis. This information was not material ($76.5
million in claims and claims expense in 1995 and $45.7 million in 1995
payments) and was treated as attributable to current year.
(2) Reserves for claims and claim expense are net of reinsurance of $1.78
billion, $1.49 billion and $1.30 billion, at December 31, 1996, 1995 and
1994, respectively.
</FN>
</TABLE>
17
<PAGE>
The year-end 1996 gross reserves of $17.38 billion for
property-liability insurance claims and claims expense, as determined under
GAAP, were $1.96 billion more than the reserve balance of $15.42 billion
recorded on the basis of statutory accounting practices for reports provided to
state regulatory authorities. The principal difference is the reinsurance
recoverable from third parties totaling $1.78 billion that reduces reserves for
statutory reporting and is recorded as an asset for GAAP reporting. Additional
differences are caused by the reserves of the Canadian subsidiary which is not
included in the combined United States statutory statement.
The loss reserve development table below illustrates the change
over time of the net reserves established for property-liability insurance
claims and claims expense at the end of various calendar years. The first
section shows the reserves as originally reported at the end of stated year. The
second section, reading down, shows the cumulative amounts paid as of the end of
successive years with respect to that reserve liability.
The third section, reading down, shows retroactive reestimates of the original
recorded reserve as of the end of each successive year which is the result of
Allstate's expanded awareness of additional facts and circumstances that pertain
to the unsettled claims. The last section compares the latest reestimated
reserve to the reserve originally established, and indicates whether or not the
original reserve was adequate or inadequate to cover the estimated costs of
unsettled claims. The table also presents the gross reestimated liability as of
the end of the latest reestimation period, with separate disclosure of the
related reestimated reinsurance recoverable. This presentation appears for all
periods in which the income recognition provisions of Statement of Financial
Accounting Standards No. 113 have been applied.
18
<PAGE>
The loss reserve development table is cumulative and, therefore, ending balances
should not be added since the amount at the end of each calendar year includes
activity for both the current and prior years.
Loss Reserve Development
<TABLE>
<CAPTION>
($ in millions)
December 31, (1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Gross Reserves for
Property-liability
Insurance Claims $7,603 $8,793 $10,035 $10,962 $12,117 $13,136 $14,902 $15,209 $16,414 $17,326 $17,382
Deduct: Reinsurance
Recoverables 1,053 1,076 1,180 1,066 1,028 1,066 1,419 1,338 1,298 1,490 1,784
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net Reserve for
Property-liability Insurance
Claims and Claims Expense 6,550 7,717 8,855 9,896 11,089 12,070 13,483 13,871 15,116 15,836 15,598
- - ----------------------------
Paid (cumulative) as of:
- - -----------------------
One year later 2,658 3,074 3,516 4,295 4,558 4,550 4,955 4,472 4,748 5,787
Two years later 3,990 4,586 5,279 6,338 6,723 6,688 7,068 6,519 7,749
Three years later 4,833 5,564 6,433 7,584 8,010 7,935 8,283 8,273
Four years later 5,397 6,242 7,161 8,338 8,778 8,694 9,430
Five years later 5,802 6,694 7,611 8,824 9,279 9,508
Six years later 6,096 6,975 7,927 9,180 9,883
Seven years later 6,288 7,201 8,189 9,651
Eight years later 6,469 7,407 8,560
Nine years later 6,662 7,701
Ten years later 6,908
Reserve Reestimated as of:
- - -------------------------
End of year 6,550 7,717 8,855 9,896 11,089 12,070 13,483 13,871 15,116 15,836 15,598
One year later 6,790 7,824 8,891 10,312 11,367 11,990 13,081 13,159 14,691 15,500
Two years later 6,905 7,862 9,006 10,617 11,576 11,909 12,745 12,890 14,295
Three years later 6,987 7,979 9,323 10,990 11,680 11,905 12,735 12,832
Four years later 7,095 8,298 9,686 11,105 11,777 12,010 12,877
Five years later 7,390 8,687 9,817 11,245 11,954 12,322
Six years later 7,791 8,830 9,974 11,447 12,378
Seven years later 7,948 9,002 10,212 11,962
Eight years later 8,095 9,265 10,762
Nine years later 8,402 9,826
Ten years later 8,940
Initial net reserve in excess of
(less than) reestimated reserve:
- - -------------------------------
Amount ($2,390) ($2,109) ($1,907) ($2,066) ($1,289) ($252) $606 $1,039 $821 $336
Percent (36.5) (27.3) (21.5) (20.9) (11.6) (2.1) 4.5 7.5 5.4 2.1
Gross Reestimated Liability-Latest $14,644 $14,456 $15,788 $16,988
Reestimated Recoverable-Latest 1,767 1,624 1,493 1,488
-----------------------------------
Net Reestimated Liability-Latest 12,877 12,832 14,295 15,500
Gross Cumulative Excess (Deficiency) $258 $753 $626 $338
===================================
<FN>
(1) For 1990 through 1995, this loss reserve development table excludes ARCO
claims and claims expense, due to the unavailability of loss reserve
development information for these claims on a comparable basis. ARCO was
sold in 1996.
</FN>
</TABLE>
19
<PAGE>
As the table above illustrates, Allstate's net reserve for
property-liability insurance claims and claims expense at the end of 1995
developed favorably in 1996 by $336 million, compared to favorable development
of the gross reserves of $338 million. Net reserve development in 1995 and 1994
was more favorable than favorable gross reserve development in these years. This
relationship was due to the fact that Allstate's principal property-liability
lines, such as private passenger auto and homeowners, are not significantly
affected by reinsurance, whereas Discontinued Lines and Coverages, involve a
higher level of ceded reinsurance protection. The more favorable development in
the net reserves in 1995 and 1994 was due to higher anticipated reinsurance
cessions on increased reserve reestimates for Discontinued Lines and Coverages.
In 1996, following completion of a comprehensive review of available reinsurance
for Discontinued Lines and Coverages, the Company strengthened ceded loss
reserves. This strengthening offset the favorable effect of higher reinsurance
cessions related to increased reestimates of gross reserves for Discontinued
Lines and Coverages. See "Property-Liability Claims and Claims Expense Reserves"
on pages 42-46 of the 1996 Annual Report, incorporated herein by reference in
response to Item 7 hereof. For further discussion of the Company's reinsurance
programs, see "Property-Liability Reinsurance Ceded" on pages 45-46 of the 1996
Annual Report, incorporated herein by reference in response to Item 7 hereof.
The subsequent reduction in the net reserves established at December
31, 1995, 1994 and 1993 shown in the foregoing table reflects favorable severity
trends that the Company has experienced, as more fully discussed below. The
principal cause for the initial reserves established at the end of 1991, and all
previous years reflected in the table, needing to be increased over the time
frame in the above table is the cumulative adverse reserve development on
environmental and asbestos claims, virtually all of which relates to 1984 and
prior years. There are significant uncertainties in estimating the amount of
Allstate's environmental, asbestos damage and mass tort claims. Among the
complications are a lack of historical data, long reporting delays, uncertainty
as to the number and identity of insureds with potential exposure, and complex
unresolved legal issues regarding policy coverage and the extent and timing of
any such contractual liability. Courts have reached different and sometimes
inconsistent conclusions as to when the loss occurred and what policies provide
coverage; what claims are covered; whether there is an insured obligation to
defend; how policy limits are determined; how policy exclusions are applied and
interpreted; and whether clean-up costs represent insured property damage. These
issues are not likely to be resolved in the near future. As a result of these
issues, the ultimate cost of these claims may generate losses that vary
materially from the amount currently reserved.
During 1996, Allstate conducted a comprehensive reevalution of
Discontinued Lines and Coverages net loss reserves. As the industry has gained
experience evaluating environmental exposures some actuarial firms have
developed meaningful techniques and databases to estimate environmental
liabilities. Allstate gained access to complex databases developed by outside
experts to estimate the cost of liabilities for environmental claims. The
databases contained lists of known potentially responsible parties ("PRP"),
National Priority List ("NPL") sites, and the Environmental Protection Agency's
estimate of clean-up costs. Allstate's policy files were compared to the
databases, and factors to estimate growth of NPL sites, state sites, third party
claims, natural resource damage, probability of coverage, and PRP's being named
at future sites were applied to determine an estimate of the Company's potential
environmental loss. The Company also refined its own estimation techniques,
which were tested and validated by outside actuaries, to estimate environmental
and asbestos losses. Allstate used a combination of these resources, along with
an extensive internal review of its current claim exposures to estimate
environmental and asbestos reserves. The Company also performed an in-depth
analysis of its reinsurance
20
<PAGE>
recoverables and refined its process for estimating and identifying available
reinsurance since some reinsurers have become insolvent or Allstate has commuted
their agreements. In addition to environmental and asbestos exposures, the
Discontinued Lines and Coverages loss reserve re-evaluation also included an
assessment of current claims for mass tort exposures which primarily relate to
products liability claims, such as those for medical devices and other products,
and general liabilities. These studies and reevaluations resulted in Allstate's
actions to increase reserves as described in "Property-Liability Claims and
Claims Expense Reserves" at pages 42-46 of the 1996 Annual Report, incorporated
herein by reference in response to Item 7 hereof. While the Company believes the
improved actuarial techniques and databases described above have assisted in its
ability to estimate environmental, asbestos and mass tort net loss reserves,
these refinements may prove to be inadequate indicators of the extent of
probable loss. See note 6 of the Notes to the Consolidated Financial Statements
on pages 74-77 of the 1996 Annual Report, incorporated herein by reference in
response to Item 8 hereof.
21
<PAGE>
The following table is derived from the Loss Reserve Development table and
summarizes the effect of reserve reestimates, net of reinsurance, on calendar
year operations for the same ten-year period ended December 31, 1996. The total
of each column details the amount of reserve reestimates made in the indicated
calendar year and shows the accident years to which the reestimates are
applicable. The amounts in the total accident year column on the far right
represent the cumulative reserve reestimates for the indicated accident year(s).
Effect of Net Reserve Reestimates on
Calendar Year Operations
<TABLE>
<CAPTION>
($ IN MILLIONS) CALENDAR YEARS
--------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 TOTAL
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -----
BY ACCIDENT
- - ----------
YEAR
- - ----
1986 & PRIOR $240 $115 $82 $108 $295 $401 $157 $147 $307 $538 $2,390
1987 (8) (44) 9 24 (12) (14) 25 (44) 23 (41)
1988 (2) (2) (2) (26) (12) (15) (25) (11) (95)
1989 301 (12) 10 (16) (17) (36) (35) 195
1990 (27) (164) (11) (43) (25) (91) (361)
1991 (289) (185) (101) (72) (112) (759)
1992 (321) (332) (115) (170) (938)
1993 (376) (259) (200) (835)
1994 (156) (338) (494)
1995 60 60
--- --- --- --- --- ---- ---- ---- ---- ---- ----
TOTAL $240 $107 $36 $416 $278 $(80) $(402) $(712) $(425) $(336) $(878)
</TABLE>
Favorable calendar year reserve development in 1996, 1995 and 1994 was the
result of favorable severity trends in each of the three years, which more than
offset adverse development in Discontinued Lines and Coverages and increases to
reserves for claim expense which occurred in 1996. Adverse development of
accident year 1995 in 1996 was also due to previously mentioned increases to
reserves for claims expense.
The favorable severity trend during this three-year period was largely
due to lower than anticipated medical cost inflation for personal auto injury
claims and improvements in the Company's claim settlement processes. The
reduction in the anticipated medical cost inflation trend has emerged over time
as actual claim settlements validated the effect of the steady decline in the
rate of inflation. Although improvements in the Company's claim settlement
process has contributed to favorable severity development of personal injury
claims during the past three years, the new processes have caused an increase in
the number of claims outstanding. The Company expects the rate of increase to
continue to decline in 1997, however the number of outstanding claims may not be
reduced to levels previously reported due to an increase in the time required to
complete the new claim settlement processes. In addition, while the claim
settlement process changes are believed to have contributed to favorable
severity
22
<PAGE>
trends on closed claims, these changes introduce a greater degree of variability
in reserve estimates for the remaining outstanding claims at December 31, 1996.
Future reserve releases, if any, will depend on the continuation of the
favorable loss trends. See "Risk Factors Affecting Allstate," above.
LIFE AND ANNUITY
Allstate Life markets a broad line of life insurance, annuity and group
pension products countrywide, and accounted for approximately 22% of Allstate's
1996 statutory premiums. Life insurance includes traditional products such as
whole life and term life insurance, as well as universal life, variable life and
other interest-sensitive life products. Annuities include both deferred
annuities, such as variable annuities and fixed rate single premium deferred
annuities, and immediate annuities such as structured settlement annuities.
Allstate Life's group pension products include guaranteed investment contracts
and retirement annuities. In 1996, annuity premiums and deposits represented 57%
of Allstate Life's total statutory premiums and deposits.
Allstate Life competes principally on the basis of its name recognition,
scope of its distribution systems, customer service and focus, breadth of
product offerings, product features, its financial strength, claims-paying
ability ratings, and price, and with respect to variable life and annuity
products, management and investment performance of, and various investment
choices in, its Separate Account portfolio of funds.
Allstate Life reaches a broad market of potential insureds throughout
the United States through a variety of distribution channels including Allstate
agents, some of whom specialize in life insurance and annuity products, banks,
independent agents, brokers and direct response marketing. Allstate Life markets
individual and group life insurance, annuity and pension products through
Allstate agents, banks, independent agents, brokers and direct response
marketing. Products bearing the "Allstate Life Insurance Company" name are
generally sold by Allstate agents, specialized brokers, and through direct
marketing techniques, while other products, many of which are of similar types
to those bearing the "Allstate Life Insurance Company" name, are distributed
through independent insurance agents, brokers and banks. Allstate Life's
products are written by various ALIC subsidiaries and are sold under various
names in addition to "Allstate Life Insurance Company," including "Allstate Life
Insurance Company of New York," "Northbrook Life Insurance Company,""Glenbrook
Life and Annuity Company," "Lincoln Benefit Life Company" and "Surety Life
Insurance Company." Life insurance in force was $186 billion at December 31,
1996 and $163 billion at December 31, 1995. As of December 31, 1996, Allstate
Life had $33.6 billion of investments, including $5.6 billion of Separate
Account assets.
Northbrook Life Insurance Company has a strategic alliance with Dean
Witter for the marketing and distribution of Northbrook's life and annuity
products through Dean Witter's broker sales force. Glenbrook Life and Annuity
Company has also entered into marketing arrangements with banks for the sale of
life and annuity products, including an arrangement in 1995 with the AIM mutual
fund group under which AIM markets Glenbrook Life and Annuity Company variable
annuities. Allstate Life is committed to broadening its bank distribution
outlets in an effort to increase the sales of its annuity products, and to
participate in the market for life insurance products sold through banks.
23
<PAGE>
Although Allstate Life's management develops overall strategies and
utilizes certain services shared with AIC such as investment, finance,
information technology and legal services, the primary management of each
distribution channel is largely decentralized. Accordingly, management of each
distribution channel is primarily responsible for determining its own product
mix and designing products or product features appropriate for its target
market. Allstate Life believes that its range of distribution channels promotes
flexibility, extends market reach, reduces dependency on any one distribution
system, and allows Allstate Life to focus on distinct, generally non-overlapping
markets. In 1996 Allstate Life implemented a redesign of the processes under
which the sale of life insurance is made through Allstate's agency force, which
it believes has contributed, and will continue to contribute, to greater sales
of life insurance and annuities through this distribution channel. Sales of life
insurance and annuity products through the Allstate agency force increased by
almost 16% in 1996, following a 14% increase in sales in 1995. This was
attributed to Allstate Life's ability to focus more of the agents' time on life
insurance through sales management's commitment to life insurance and annuities
and through initial efforts in redesigning the sales processes. Allstate Life
continues to address the sales processes to further its goal of additional
increases in sales.
The establishment of reserve and contractholder fund liabilities in
recognition of Allstate's future benefit obligations under life and annuity
policies and other Allstate Life products are discussed in note 2 of the Notes
to the Consolidated Financial Statements on pages 62-65 of the 1996 Annual
Report, incorporated herein by reference in response to Item 8 hereof.
The market for financial services, including the various types of life
insurance and annuities sold by Allstate Life, is highly competitive. As of
December 31, 1996, there were approximately 800 groups of life insurance
companies in the United States, most of which offer one or more products similar
to those offered by Allstate Life and many of which use similar marketing
techniques. Based on information contained in statements filed with insurance
departments, in 1995 approximately 50% of the life insurance and annuity
premiums and deposits were sold by 15 groups of companies. Allstate Life ranked
19th based on life insurance and annuity premiums and deposits and based on
statutory admitted assets. Banks and savings and loan associations in certain
jurisdictions compete with Allstate Life in the sale of life insurance products.
In addition, because certain life insurance and annuity products include a
savings or investment component, competition also comes from brokerage firms,
investment advisors and mutual funds as well as from banks and other financial
institutions. Despite a large number of life company acquisitions in recent
years, the life insurance and annuity market continues to be highly fragmented
and competitive.
CAPITAL REQUIREMENTS
The capacity for Allstate's growth in premiums, like that of other
insurance companies, is in part a function of its operating leverage. Operating
leverage for property-liability insurance companies is measured by the ratio of
net premiums written to statutory surplus. Ratios in excess of 3 to 1 are
considered outside the usual range by insurance regulators and rating agencies.
AIC's premium to surplus ratio declined to 1.6 to 1 at December 31, 1996 from
1.9 to 1 at December 31, 1995. The principal cause of the change was an increase
in statutory surplus (i.e., the excess of assets permitted by Illinois to be
taken into account over all liabilities) resulting from net income and gains on
securities, including investments in
24
<PAGE>
affiliates and sales of businesses, on a statutory basis. Maintaining
appropriate levels of statutory surplus is considered important by Allstate's
management, state insurance regulatory authorities, and the agencies that rate
insurers' claims-paying abilities and financial strength. In early 1996, A.M.
Best upgraded Allstate's claims-paying ability rating to A from A-.
Failure to maintain certain levels of statutory capital and surplus
could result in increased scrutiny or, in some cases, action taken by state
regulatory authorities and/or rating agencies. Increased public and regulatory
concerns regarding the financial stability of participants in the insurance
industry have resulted in greater emphasis being placed by policyholders upon
insurance company ratings and have created, particularly with respect to certain
life insurance products, some measure of competitive advantage for insurance
carriers with higher ratings. Failure to maintain claims-paying and financial
strength ratings could negatively affect the Company's competitiveness.
The National Association of Insurance Commissioners ("NAIC") has adopted
a standard for assessing the solvency of insurance companies, which is referred
to as risk-based capital ("RBC"). The requirement consists of a formula for
determining each insurer's RBC and a model law specifying regulatory actions if
an insurer's RBC falls below specified levels. The RBC formula for life
insurance companies establishes capital requirements relating to insurance risk,
business risk, asset risk and interest rate risk. The RBC formula for
property-liability companies includes asset and credit risk, but places more
emphasis on underwriting factors for reserving and pricing. At December 31,
1996, RBC for each of Allstate's significant property-liability and life
insurance companies exceeded the required capital levels. See "Capital
Resources" on pages 50- 51 of the 1996 Annual Report, incorporated herein by
reference in response to Item 7 hereof.
Allstate enters into certain intercompany insurance and reinsurance
transactions for its property-liability and life and annuity operations.
Allstate enters into these transactions in order to maintain underwriting
control and spread insurance risk among various legal entities. These
reinsurance agreements have been approved by the appropriate regulatory
authorities. All material intercompany transactions are eliminated in the
Company's consolidated financial statements.
INVESTMENTS
Allstate follows a strategy to manage its exposure to market risk.
Market risk is the risk that the Company will incur losses due to adverse
changes in market rates and prices. The Company's primary market risk exposures
are to changes in interest rates and equity prices. The Company does not
currently have material exposures to either commodity price or foreign currency
exchange risk. However, currency risk exposures may increase in the future as
the Company expands its international operations and investments in foreign
stocks and bonds. The Company seeks to earn returns that enhance its ability to
offer competitive rates and prices to customers while contributing to attractive
and stable profits and long term capital growth for the Company. Accordingly,
the Company's investment decisions and objectives are a function of the
underlying risks and product profiles of each primary business operation. The
property-liability overall market risk management objective is to maximize total
after-tax return on capital while considering the risks in the fixed income and
equity markets such as duration, credit, liquidity and tax risks. In order to
support competitive credited rates and earn stable profits, Allstate Life
adheres to a
25
<PAGE>
basic philosophy of matching assets with related liabilities to limit interest
rate risk, while maintaining adequate liquidity and a prudent and diversified
level of credit risk.
During the second quarter of 1996, Allstate repositioned its
property-liability portfolio, reducing the duration of its fixed income assets
by decreasing the proportion of tax-exempt long-term securities and increasing
its investment in intermediate-term taxable securities. Allstate also sold a
portion of its equity portfolio and invested the proceeds in fixed income
securities. The sales of Allstate's commercial insurance and reinsurance
businesses in 1996 (see "Discontinued Lines and Coverages," above) have reduced
the base of assets available for investment by Allstate by $1.6 billion.
At December 31, 1996, 100% of Allstate's fixed income securities and
equity securities in its portfolio were designated as "available for sale" and
carried in the Company's financial statements at fair value. While the Company
generally holds its fixed income securities for the long term, management
classifies these fixed income securities as available for sale to maximize the
Company's flexibility in responding to changes in market conditions. Changes in
the fair value of these securities, net of deferred income taxes and deferred
acquisition costs and benefit reserve adjustments on certain life insurance
products, are reflected as a separate component of shareholders' equity. For
discussion of the composition of the Company's investment portfolio, see
"Investments" on pages 52-56 of the 1996 Annual Report, incorporated herein by
reference in response to Item 7 hereof, and Note 4 of the Notes to the
Consolidated Financial Statements on pages 67-70 of the 1996 Annual Report,
incorporated herein by reference in response to Item 8 hereof.
REGULATION
Allstate is subject to extensive regulation and supervision in the
jurisdictions in which it does business. This regulation has a substantial
effect on the business of Allstate, primarily on Allstate's personal lines
property-liability business. This regulatory oversight includes, for example,
matters relating to licensing and examination, rate setting, trade practices,
policy forms, limitations on the nature and amount of certain investments,
claims practices, mandated participation in shared markets and guaranty funds,
reserve adequacy, insurer solvency, transactions with affiliates, the amount of
dividends that may be paid, and restrictions on underwriting standards. For
discussion of statutory financial information, see note 12 of the Notes to
Consolidated Financial Statements on pages 82-83 of the 1996 Annual Report,
incorporated herein by reference in response to Item 8 hereof; and for
discussion of regulatory contingencies, see note 9 of the Notes to Consolidated
Financial Statements on pages 79-80 of the 1996 Annual Report, incorporated
herein by reference in response to Item 8 hereof.
LIMITATIONS ON DIVIDENDS BY INSURANCE SUBSIDIARIES - The Company is a
legal entity separate and distinct from its subsidiaries. As a holding company
with no other business operations, its primary sources of cash to meet its
obligations, including principal and interest payments with respect to
indebtedness, are dividends and other statutorily permitted payments from AIC.
AIC, as a domiciliary of Illinois, is subject to the Illinois insurance laws and
regulations. In Illinois, a domestic stock insurer may, without prior regulatory
approval, pay ordinary dividends from statutory surplus which at the time of
declaration is not less than the minimum required for the kind of insurance
business that such company is authorized to conduct. Under the Illinois
Insurance Code, AIC's surplus following any transaction with affiliates or
dividends, including distributions to its shareholder or other security holders,
must be
26
<PAGE>
reasonable in relation to AIC's outstanding liabilities and must be adequate to
meet its financial needs. The Illinois Insurance Code allows "extraordinary
dividends" to be paid after thirty days notice to the Illinois Insurance
Department, unless disapproved or sooner approved during such thirty day period.
"Extraordinary dividends" for these purposes are defined as any dividend or
distribution which together with any other dividend or distribution made within
the preceding 12 months exceeds the greater of (i) 10% of the insurance
company's statutory surplus as of the preceding December 31, or (ii) its
statutory net income for the year ended on the preceding December 31. The
maximum amount of dividends that AIC can distribute during 1997 without prior
approval of the Illinois Department of Insurance is $2.2 billion. If insurance
regulators determine that payment of a dividend or any other payments to an
affiliate (such as payments under a tax sharing agreement, payments for employee
or other services, or payments pursuant to a surplus note) would, because of the
financial condition of the paying insurance company or otherwise be hazardous to
such insurance company's policyholders or creditors, the regulators may block
such payments that would otherwise be permitted without prior approval.
HOLDING COMPANY REGULATION - The Company and AIC are currently insurance
holding companies subject to regulation throughout jurisdictions in which
Allstate's insurance subsidiaries do business. Certain of AIC's subsidiaries and
companies in which AIC holds a minority equity interest are property-liability
and life insurance companies organized under the respective insurance codes of
California, Florida, Illinois, Nebraska, New York, Texas and Utah. The insurance
codes in such states contain similar provisions (subject to certain variations)
to the effect that the acquisition or change of "control" of a domestic insurer
or of any person that controls a domestic insurer cannot be consummated without
the prior approval of the relevant insurance regulator. In general, a
presumption of "control" arises from the ownership, control, possession with the
power to vote or possession of proxies with respect to 10% or more of the voting
securities of a domestic insurer or of a person that controls a domestic
insurer. In Florida, regulatory approval must be obtained prior to the
acquisition of 5% or more of the voting securities of a domestic stock insurer
or of a controlling company. In addition, certain state insurance laws contain
provisions that require pre-acquisition notification to state agencies of a
change in control with respect to a non-domestic insurance company admitted in
that state. While such pre-acquisition notification statutes do not authorize
the state agency to disapprove the change of control, such statutes do authorize
certain remedies, including the issuance of a cease and desist order with
respect to the non-domestic admitted insurer if certain conditions exist, such
as undue market concentration. Thus, any transaction involving the acquisition
of 10% or more (5% in Florida) of the Company's common stock would generally
require prior approval by the state insurance departments in California,
Florida, Illinois, Nebraska, New York, Texas and Utah and would require the
pre-acquisition notification in those states which have adopted pre-acquisition
notification provisions and wherein Allstate's insurance subsidiaries are
admitted to transact business. Such approval requirements may deter, delay or
prevent certain transactions affecting the ownership of the Company's common
stock.
RATE REGULATION - Most states have insurance laws requiring that
property-liability rate schedules, policy or coverage forms, and other
information be filed with the state's regulatory authority. In many cases, such
rates and/or policy forms must be approved prior to use. While they vary from
state to state, the objectives of the rating laws are generally the same: a rate
must be adequate, not excessive, and not unfairly discriminatory.
27
<PAGE>
Property-liability insurers are generally unable to effect rate
increases with respect to a coverage until sometime after the costs associated
with such coverage have increased. The speed at which an insurer can change
rates in response to the competition or to increasing costs depends, in part, on
whether the rating laws are administered as (i) prior approval, (ii)
file-and-use, or (iii) use-and-file laws. In states having prior approval laws,
a rate must be approved by the regulator before it may be used by the insurer.
In states having file-and-use laws, the insurer does not have to wait for the
regulator's approval to use a rate, but the rate must be filed with the
regulatory authority prior to being used. A use-and-file law requires an insurer
to file rates within a certain period of time after the insurer begins using the
rates. Approximately one half of the states, including California and New York,
have prior approval laws. States such as Florida, Illinois and Michigan have
both use-and-file and file-and-use laws or regulations, depending upon the line
of coverage. Under all three types of rating systems, the regulator has the
authority to disapprove the rate subsequent to its filing.
State regulators have broad discretion in judging whether an insurer's
rate or proposed rate is adequate, not excessive and not unfairly
discriminatory. An insurer's ability to adjust its rates in response to
competition or to increasing costs is often dependent on an insurer's ability to
demonstrate to the regulator that its rates or proposed rates meet the
objectives of the rate making laws. In those states that significantly restrict
an insurer's discretion in selecting the business that it wants to write, an
insurer can manage its risk of loss by charging a price that matches the cost of
providing the insurance. In those states that significantly restrict an
insurer's ability to charge a price that matches the cost of providing the
insurance, the insurer can manage its risk of loss by being more selective in
the type of business it writes. When a state significantly restricts both
underwriting and pricing, it becomes more difficult for an insurer to manage its
profitability.
Changes in Allstate's claim settlement process which may have
contributed to favorable severity trends on closed personal injury claims in
1994, 1995 and 1996, and to a slowing of loss payments and an increase in the
number of outstanding claims, may require Allstate to actuarially adjust loss
information used in its rate application process.
From time to time, the private passenger automobile insurance industry
has come under pressure from state regulators, legislators and special interest
groups to reduce, freeze or set rates at levels that do not, in Allstate's
management's view, correspond with underlying costs. Some of this activity can
result in legislation and/or regulations which adversely affect the
profitability of Allstate's automobile insurance line of business in various
states. Adverse legislative and regulatory activity constraining Allstate's
ability to adequately price insurance coverage may occur in the future. Similar
pressures have been experienced regarding rates for homeowners insurance, as
regulators in catastrophe prone states struggle to identify an acceptable
methodology to price for catastrophe exposure. The impact of the insurance
regulation environment on Allstate's results of operations in the future is not
predictable.
SHARED MARKETS - As a condition of its license to do business in various
states, Allstate is required to participate in mandatory property-liability
shared market mechanisms or pooling arrangements, which provide various
insurance coverages to individuals or other entities that otherwise are unable
to purchase such coverage voluntarily provided by private insurers. In addition,
some states require automobile insurers to participate in reinsurance pools for
claims that exceed a certain amount. Currently, there are no mandatory pooling
mechanisms applicable to Allstate Life, except for guaranty fund assessments.
The
28
<PAGE>
participation by Allstate in such shared markets or pooling mechanisms is
generally in amounts related to the amount of Allstate's direct writings for the
type of coverage written by the specific pooling mechanism in the applicable
state. Allstate incurred an underwriting loss from participation in such
mechanisms, mandatory pools and underwriting associations of $68 million, $134
million and $109 million in 1996, 1995 and 1994, respectively. The amount of
future losses or assessments from the personal and commercial lines shared
market mechanisms and pooling arrangements described above cannot be predicted
with certainty. Although it is possible that future losses or assessments from
such mechanisms and pooling arrangements could have a material adverse effect on
results of operations, the Company does not expect future losses or assessments
to have a material adverse effect on its financial condition or results of
operations.
GUARANTY FUNDS - Failures of certain large insurers in recent years have
increased solvency concerns of regulators. Under state insurance guaranty fund
laws, insurers doing business in a state can be assessed, up to prescribed
limits, for certain obligations of insolvent insurance companies to
policyholders and claimants. Allstate's expenses with respect to such guaranty
funds for the years 1996, 1995 and 1994 were $35 million, $26 million and $56
million, respectively.
INVESTMENT REGULATION - Allstate is subject to state laws and
regulations that require diversification of its investment portfolio and limit
the amount of investments in certain investment categories. Failure to comply
with these laws and regulations would cause non-conforming investments to be
treated as non- admitted assets for purposes of measuring statutory surplus and,
in some instances, would require divestiture. As of December 31, 1996,
Allstate's investment portfolio complied with such laws and regulations in all
material respects.
REGULATORY INITIATIVES AND PROPOSED LEGISLATION - The state insurance
regulatory framework has during recent years come under increased federal
scrutiny, and certain state legislatures have considered or enacted laws that
alter and, in many cases, increase state authority to regulate insurance
companies and insurance holding company systems. Further, the NAIC and state
insurance regulators are re-examining existing laws and regulations,
specifically focusing on insurance company investments, issues relating to the
solvency of insurance companies, interpretations of existing laws and the
development of new laws. In addition, Congress and certain federal agencies have
investigated the condition of the insurance industry in the United States to
determine whether to promulgate federal regulation. Allstate is unable to
predict whether any state or federal legislation will be enacted to change the
nature or scope of regulation of the insurance industry, or what effect any such
legislation would have on the Company.
Environmental pollution clean-up is the subject of both federal and
state regulation. By some estimates, there are thousands of potential waste
sites subject to clean-up. The insurance industry is involved in extensive
litigation regarding coverage issues. The Comprehensive Environmental Response
Compensation and Liability Act of 1980 ("Superfund") and comparable state
statutes ("mini-Superfund") govern the clean-up and restoration by "Potentially
Responsible Parties" ("PRP's"). Superfund and the mini-Superfunds (Environmental
Clean-up Laws or "ECLs") establish a mechanism to pay for clean-up of waste
sites if PRP's fail to do so, and to assign liability to PRP's. The extent of
liability to be allocated to a PRP is dependent on a variety of factors.
Further, the number of waste sites subject to clean-up is unknown. Very few
sites have been subject to clean-up to date. The extent of clean-up necessary
and the assignment of liability has not been established. The insurance
industry, including Allstate, are disputing
29
<PAGE>
many such claims. Key coverage issues include whether Superfund response costs
are considered damages under the policies, trigger of coverage, applicability of
pollution exclusions, the potential for joint and several liability and
definition of an occurrence. Similar coverage issues exist for clean-up and
waste sites not covered under Superfund. To date, courts have been inconsistent
in their rulings on these issues. Allstate's exposure to liability with regard
to its insureds which have been, or may be, named as PRPs is uncertain. See
"Discontinued Lines and Coverages", above. Superfund reform proposals have been
introduced in Congress, including a proposal introduced in the current session,
but none has been enacted at the date of this publication. There can be no
assurance that any Superfund reform legislation will be enacted or that any such
legislation will provide for a fair, effective and cost-efficient system for
settlement of Superfund related claims.
Proposed federal legislation which would permit banks greater
participation in the insurance business could, if enacted, present an increased
level of competition for the sale of insurance products. In addition, while
current federal income tax law permits the tax-deferred accumulation of earnings
on the premiums paid by an annuity owner and holders of certain savings-oriented
life insurance products, no assurance can be given that future tax law will
continue to allow such tax deferrals. If such deferrals were not allowed,
consumer demand for the affected products, including those sold by Allstate
Life, would be substantially reduced. In addition, proposals to lower the
federal income tax rates through a form of flat tax or otherwise could have, if
enacted, a negative impact on the demand for such products.
GEOGRAPHIC DISTRIBUTION OF INSURANCE
Allstate, through a variety of companies, is authorized to sell
property-liability and life insurance in all 50 states, the District of
Columbia, Puerto Rico and Canada. To a limited extent, Allstate is engaged,
through affiliates, in the insurance business in Germany, Japan and the Republic
of Korea. The following tabulation reflects, in percentages, the principal
geographic distribution of statutory premiums earned for the property-liability
insurance business and statutory premiums for the life insurance business for
the year ended December 31, 1996:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NY CA FL IL PA MI NJ MD TX GA NC OH Total
-- -- -- -- -- -- -- -- -- -- -- -- -----
Property-
Liability 12.7 10.6 9.7 5.2 5.1 4.6 4.3 3.6 3.1 3.0 2.7 2.6 67.2
CA FL NE MA TX PA IL NJ MI NY CO OH Total
-- -- -- -- -- -- -- -- -- -- -- -- -----
Life 13.9 8.7 6.4 5.5 5.4 5.3 5.1 3.8 3.7 2.9 2.6 2.6 65.9
</TABLE>
No other jurisdiction accounted for more than 2.6% of the statutory
premiums for property-liability insurance or life insurance.
30
<PAGE>
In 1991, Allstate announced its decision to withdraw from the
property-liability market in New Jersey, but its application has been suspended
until December 31, 1997 by agreement between Allstate and New Jersey insurance
authorities. In the meantime, Allstate has continued to write insurance in New
Jersey. Although it is licensed to do so, Allstate is not currently writing
private passenger automobile or homeowners insurance in Massachusetts.
SEASONALITY
Although the insurance business generally is not seasonal, claims and
claims expense for the property-liability insurance operations tend to be higher
for periods of severe or inclement weather.
EMPLOYEES
At December 31, 1996, Allstate employed approximately 48,200 people.
SERVICE MARKS
The names "Allstate" and "Allstate Life," the slant "A" Allstate
logo, the slogan "You're in Good Hands With Allstate" and the graphic "Good
Hands" design logo which features cupped hands holding an automobile and a
house, and the "Northbrook" logo design are used extensively in Allstate's
businesses. Allstate's rights in the United States to the names "Allstate" and
"Allstate Life," the Allstate and Northbrook logos, the "Good Hands" slogan and
the "Good Hands" symbol continue so long as Allstate continues to exercise those
rights. These service marks are the subject of numerous renewable United States
and foreign service mark registrations. The Company believes that these service
marks are material to the business of Allstate.
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<PAGE>
Executive Officers of the Registrant
The following tabulation sets forth the names of the executive
officers of the Company, their current ages, the positions with Allstate held by
them, and the dates of their first election as officers:
Executive Officers of the Registrant
The following tabulation sets forth the names of the executive
officers of the Company, their current ages, the positions with Allstate held by
them, and the dates of their first election as officers:
<TABLE>
<CAPTION>
Date First
Elected
Name Age Position and Offices Held Officer
- - ---- --- ------------------------- -------
<S> <C> <C>
Jerry D. Choate*........58 Chairman and Chief Executive
Officer of the Company and AIC 1983
Joan M. Crockett........46 Senior Vice President
of AIC 1994
Edward J. Dixon.........53 Senior Vice President of AIC 1988
Robert W. Gary..........58 Senior Vice President of AIC 1986
Steven L. Groot.........47 Senior Vice President of AIC 1988
Edward M. Liddy.........51 President and Chief Operating
Officer of the Company and AIC 1994
Louis G. Lower, II......51 President of ALIC 1982
Michael J. McCabe.......51 Senior Vice President of AIC 1980
Ronald D. McNeil........44 Senior Vice President of AIC 1994
Robert W. Pike..........55 Vice President, Secretary and
General Counsel of the Company;
Senior Vice President, Secretary
and General Counsel of AIC 1978
Francis W. Pollard......54 Senior Vice President and
Chief Information Officer
of AIC 1984
Casey J. Sylla..........53 Senior Vice President and 1995
Chief Investment Officer of AIC
Rita P. Wilson..........50 Senior Vice President of AIC 1988
Thomas J. Wilson........39 Vice President and Chief Financial
Officer of the Company;
Senior Vice President and
Chief Financial Officer
of AIC 1995
Edward W. Young.........56 Senior Vice President
of AIC 1984
<FN>
- - ----------------
* Also a director of the Company
</FN>
</TABLE>
32
<PAGE>
No family relationships exist among the above-named individuals.
Each of the officers named above was elected to serve in the office
indicated until the first meeting of the Board of Directors following the annual
meeting of stockholders in 1996 and until his or her successor is elected and
qualified or until such officer resigns.
With the exception of officers E. Liddy, R. Wilson, T. Wilson, and C.
Sylla, the above officers have held the positions set forth in the above
tabulation for at least the last five years or have served Allstate in various
executive or administrative capacities for at least that length of time. Prior
to his election on August 10, 1994 to the position indicated above, Mr. Liddy
served Sears in a financial officer capacity since April 1988, and was Sears
Senior Vice President and Chief Financial Officer since February 1992. Prior to
his election on January 1, 1995 to the position indicated above, T. Wilson
served as Sears Vice President, Strategy and Analysis from 1993 until December
31, 1994, and prior to that served as a managing director for Dean Witter from
1986 to 1993. Prior to his election on July 5, 1995 to the position indicated
above, Mr. Sylla served as a Senior Vice President for Northwestern Mutual Life
Insurance Company from 1992 to 1995, and served as President of an investment
management firm from 1989 to 1992. R Wilson was elected to her current position
effective May 1, 1996. Prior to that, and since November 1994 she had served as
Senior Vice President-Corporate Communications, for Ameritech Corporation. From
September 1990 until November 1994 R. Wilson was Senior Vice President of
Allstate Insurance Company.
Item 2. Properties
- - ------ ----------
Allstate's home office complex is located in Northbrook, Illinois.
The complex consists of 10 buildings of approximately 1.96 million square feet
of office space on a 204.39 acre site.
The Northbrook complex serves as the headquarters for PP&C and ALIC.
Allstate's field business operations are conducted substantially
from 17 offices located principally in metropolitan areas throughout the United
States and Canada. Allstate also has approximately 250 claim service offices,
sales facilities at approximately 10,500 locations, and approximately 650
automobile damage inspection locations, most of which are located at claim
service offices and sales facilities.
Allstate's home office complex and most major offices are owned.
Other facilities are leased, in almost all cases for terms of not more than five
years. The Company believes its properties and facilities are adequate and
suited to Allstate's current operations.
Item 3. Legal Proceedings
- - ------ -----------------
Various other 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. See
note 9 to the Consolidated Financial Statements on pages 79-80 of the 1996
Annual Report, incorporated herein by reference in response to Item 8 hereof.
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<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
- - ------ ---------------------------------------------------
None
Part II
Item 5. Market for Registrant's Common Equity and Related
- - ------ -------------------------------------------------
Stockholder Matters
-------------------
There were 218,987 record holders of the Company's common stock as of
March 21, 1997. Other information concerning this Item 5 is incorporated by
reference to "Shareholder Information" on the inside back cover of the 1996
Annual Report.
Item 6. Selected Financial Data
- - ------ -----------------------
Incorporated by reference to "11-Year Summary of Selected Financial
Data" on pages 32-33 of the 1996 Annual Report.
Item 7. Management's Discussion and Analysis of Financial
- - ------ -------------------------------------------------
Condition and Results of Operations
-----------------------------------
Incorporated by reference to the "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on pages 34-56 of the 1996
Annual Report.
FORWARD-LOOKING STATEMENTS
The statements contained in the "Management's Discussion and Analysis
of Financial Condition and Results of Operations" portion of the 1996 Annual
Report, which portion has been incorporated herein by reference in response to
Item 7 hereof, that are not historical information are forward-looking
statements that are based on management's estimates, assumptions and
projections. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor under The Securities Act of 1933 and The Securities Exchange Act of
1934 for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company notes several important factors that could cause the
Company's actual results and experience with respect to forward-looking
statements to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements:
34
<PAGE>
1. Exposure to Catastrophe Losses - Management believes that the strategies
--------------------------------
implemented by the Company to manage its exposure to catastrophes will greatly
reduce the probability of severe losses in the future, that the implementation
of certain described actions taken in Florida will reduce the Company's exposure
to losses from hurricanes in that state, and that the Company's exposure to
earthquake losses in California has been significantly reduced due to the
introduction of the mini-earthquake policy which has higher deductibles,
eliminates coverage for most non- dwelling structures and limits personal
contents coverage, and will be further reduced as a result of the creation of
the CEA (see "Catastrophe Losses," "Catastrophe Management," "Florida
Hurricanes" and "California Earthquakes" at pages 36-38 of the 1996 Annual
Report and "Catastrophe Exposure" in this Form 10-K). These beliefs are based in
part on the efficacy of the techniques and the accuracy of the data used by the
Company to predict the probability of catastrophes and the extent of losses to
the Company resulting from catastrophes. Catastrophes may occur in the future
which indicate that such techniques do not accurately predict the Company's
losses from catastrophes, and the probability and extent of such losses to the
Company may differ materially from that which would have been predicted by such
techniques and data.
Management's expectation that the operations of the CEA will
significantly reduce Allstate's exposure to earthquake exposure in California in
the future depends in part on the CEA functioning as planned. The Company could
be exposed to the threat or reality of additional material assessments beyond
the $700 million noted under "California Earthquakes" at pages 37- 38 of the
1996 Annual Report and "Catastrophe Exposure" in this Form 10-K if the
California legislature should decide, in the future, to revise the formula and
impose such additional assessments.
As noted under "Catastrophe Management" at pages 36-38 of the 1996
Annual Report and "Catastrophe Exposure" in this Form 10-K, there are areas of
the United States, other than Florida and California, in which the Company
remains exposed to the possibility of sustaining material losses from
catastrophes due to hurricanes and earthquakes. These other areas of potential
losses due to hurricanes include major metropolitan centers near the eastern and
gulf coasts of the United States; and other areas in the United States with
exposure to potential earthquake losses include areas surrounding the New Madrid
fault system in the Midwest and faults in and surrounding Seattle, Washington.
2. Personal Injury Severity Trends - The references to favorable personal injury
-------------------------------
severity trends which management believes may be due in part to the redesign of
the Company's bodily injury claim processes (see "PP&C Underwriting Results" at
pages 39-40 of the 1996 Annual Report and "Property-Liability Insurance Claims
and Claims Expense Reserves" in this Form 10-K) reflect statistical data for the
periods indicated. As additional statistical data for these periods becomes
available as claims are settled, new estimates of average personal injury
severities will be developed and may be materially higher or lower than the
current estimates. Moreover, the recent favorable trends may be reversed in the
future because of the increased costs of settlements and adverse judgments in
cases which proceed to litigation. In the meantime, however, the current data of
reduced personal injury severities may influence state insurance regulators to
deny Allstate rate increases which could reduce the growth of the Company's
revenues.
35
<PAGE>
Management has stated (see "Property-Liability Claims and Claims
Expense Reserves," at pages 42-46 of the 1996 Annual Report and
"Property-Liability Insurance Claims and Claims Expense Reserves" in this Form
10-K) that although the redesign of the claims processes for personal injury
claims has resulted in an increased number of claims outstanding, the rate of
increase in such outstanding claims has declined and the Company believes the
rate of increase will continue to decline in 1997. This supposition is based on
statistical records of less than a year's duration and continuation of normal
frequency trends. The statistics on outstanding personal injury claims in 1997
could indicate an acceleration of the rate of such claims pending which would
increase the uncertainty associated with the statistical methods used to
establish reserves.
3. Increase in Property-Liability Net Investment Income - Management expects
-------------------------------------------------------
that net investment income from its property-liability operations will increase
in 1997, but not at as high a rate as the 7.9% increase in pretax net investment
income in 1996 over 1995 (see "Net Investment Income and Realized Capital
Gains," at pages 35-36 of the 1996 Annual Report). Any increase in net
investment income will be highly dependent on the interest rate environment
that exists in 1997.
4. Liquidity of Allstate Life Portfolio - Management believes that the assets in
------------------------------------
the Allstate Life portfolio are sufficiently liquid to meet future obligations
to life insurance and annuity policyholders in various interest rate scenarios
(see "Liquidity" at pages 51-52 of the 1996 Annual Report). However, an
unexpected increase in surrenders and withdrawals, coupled with a significant
increase in interest rates could make it difficult for Allstate Life to
liquidate a sufficient portion of its portfolio to meet such obligations and
also maintain its risk-based capital at acceptable levels.
5. Contingent Payment for Potential Deficiency in Northbrook Reserves - As
-----------------------------------------------------------------------
stated in "Discontinued Lines and Coverages Underwriting Summary," at pages
41-42 of the 1996 Annual Report, the agreement under which Allstate sold the
Northbrook companies to St. Paul in 1996 contains a provision which could
require Allstate to pay St. Paul up to $100 million should Northbrook's reserves
as of July 31, 1996 be determined, as of July 31, 2000, to have been
understated. Management does not expect that it will be required to make a
payment to St. Paul based on current trends, conditions and claim settlement
processes. The establishment of appropriate reserves, including Northbrook's
reserves, is an inherently uncertain process. Accordingly, the Company could be
required to pay as much as $100 million to St. Paul when the July 31, 2000
calculation is agreed to, if the reserves should develop unfavorably.
6. Availability of Company's Line of Credit - The Company maintains a $1.50
-------------------------------------------
billion, five-year revolving line of credit as a potential source of funds to
meet short-term liquidity requirements. In order to borrow on the line of
credit, AIC is required to maintain a specified statutory surplus level and the
Allstate debt to equity ratio (as defined in the credit agreement) must not
exceed a designated level. Under "Capital Resources" on pages 50-51 of the 1996
Annual Report, the Company's states that its management expects to continue to
meet such borrowing requirements in the future. The ability of AIC and Allstate
to meet these requirements is dependent upon the economic well-being of AIC.
Should AIC sustain significant losses from catastrophes, its and Allstate's
ability to continue to meet the credit agreement requirements would be lessened.
Consequently, Allstate's
36
<PAGE>
right to draw upon the line of credit could be diminished or eliminated during a
period when it would be most in need of financial resources.
Item 8. Financial Statements and Supplementary Data
- - ------ -------------------------------------------
The consolidated financial statements of the Company, including the
notes to such statements, and other information on pages 57-88 of the 1996
Annual Report are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on
- - ------ ------------------------------------------------
Accounting and Financial Disclosure
-----------------------------------
None
Part III
Item 10. Directors and Executive Officers of the Registrant
- - ------- --------------------------------------------------
Certain information regarding directors of the Company is
incorporated herein by reference to the descriptions under "Election of
Directors" in the 1997 Proxy Statement.
Information regarding executive officers of the Company is
incorporated herein by reference to Item 1 of this Report under the caption
"Executive Officers of the Registrant" in Part I hereof.
Item 11. Executive Compensation
- - ------- ----------------------
Information regarding executive compensation is incorporated by
reference to the material under the captions "Directors' Compensation and
Benefits," "Executive Compensation," "Stock Options," "Pension Plans," and
"Employment Contracts, Termination of Employment and Change-in-Control
Arrangements" in the 1997 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and
- - ------- ---------------------------------------------------
Management
----------
Information regarding security ownership of certain beneficial
owners and management is incorporated herein by reference to the material under
the headings "Security
37
<PAGE>
Ownership of Directors and Executive Officers" and "Security Ownership of
Certain Beneficial Owners" in the 1997 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
- - ------- ----------------------------------------------
Information regarding certain relationships and related transactions
is incorporated herein by reference to the material under the headings "Certain
Relationships and Related Transactions" in the 1997 Proxy Statement.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
- - ------- -------------------------------------------------------
Form 8-K
--------
(a) 1 and 2 An "Index to Financial Statements and Financial
Statement Schedules" has been filed as a part of this Report
beginning on page S-1 hereof.
(a) 3 Exhibits:
An "Exhibit Index" has been filed as a part of this Report
beginning on page E-1 hereof and is incorporated herein by
reference.
(b) Reports on Form 8-K:
Registrant filed a Current Report on Form 8-K dated October 8,
1996 (Items 5 and 7).
Registrant filed a Current Report on Form 8-K on December 6,
1996 (Item 7) to file exhibits in connection with the
registration of Allstate Financing I.
Registrant filed a Current Report on Form 8-K on December 6,
1996 (Item 7) to file exhibits in connection with the
registration of Allstate Financing II.
38
<PAGE>
SIGNATURES
Pursuant to the Requirements of Section 13 of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE ALLSTATE CORPORATION
(Registrant)
s/Samuel H. Pilch
-----------------
By: Samuel H. Pilch
Controller
(Principal Accounting
Officer)
March 25, 1997
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- - --------- ----- ----
<S> <C> <C> <C>
s/ Jerry D. Choate Chairman and Chief )
- - ------------------
Jerry D. Choate Executive Officer )
and a Director )
(Principal Executive )
Officer) )
March 25, 1997
s/ Thomas J. Wilson Vice President and )
- - -------------------
Thomas J. Wilson Chief Financial )
Officer )
(Principal Financial )
Officer) )
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- - --------- ----- ----
<S> <C> <C> <C>
s/James G. Andress Director )
- - ------------------
James G. Andress
s/Warren L. Batts Director )
- - -----------------
Warren L. Batts
Director )
- - -----------------
Edward A. Brennan
s/James M. Denny Director )
- - ----------------
James M. Denny
Director )
- - --------------------
Christopher F. Edley March 25, 1997
s/Michael A. Miles Director )
- - ------------------
Michael A. Miles
s/Nancy C. Reynolds Director )
- - -------------------
Nancy C. Reynolds
s/Joshua I. Smith
- - ----------------- Director )
Joshua I. Smith
Director )
- - -----------------
Mary Alice Taylor
</TABLE>
40
<PAGE>
THE ALLSTATE CORPORATION
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
The following consolidated financial statements, notes thereto and related
information of The Allstate Corporation are incorporated herein by reference to
the Company's 1996 Annual Report.
<S> <C>
Page*
----
Consolidated Statements of Operations** 57
Consolidated Statements of Financial Position** 58
Consolidated Statements of Shareholders' Equity ** 59
Consolidated Statements of Cash Flows** 60
Notes to Consolidated Financial Statements** 61
Quarterly Results** 88
Common Stock Market Information and Dividend Highlights*** 93
The following additional financial statement schedules and independent auditors'
report and consent are furnished herewith pursuant to the requirements of Form
10-K.
The Allstate Corporation Page
- - ------------------------ ----
Schedules required to be filed under the provisions of Regulation S-X Article 7:
Schedule I Summary of Investments - Other than Investments in Related
Parties S-2
Schedule II Condensed Financial Information of The Allstate Corporation
(Registrant) S-3
Schedule III Supplementary Insurance Information S-8
Schedule IV Reinsurance S-9
Schedule V Valuation and Qualifying Accounts S-10
Schedule VI Supplemental Information Concerning Consolidated Property - S-11
Casualty Insurance Operations
Independent Auditors' Report S-12
Independent Auditors' Consent S-13
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the Consolidated
Financial Statements or in notes thereto.
<FN>
* Refers to page number in Company's 1996 Annual Report.
** Incorporated by reference in Item 8 herein.
*** Incorporated by reference in Item 5 herein.
</FN>
</TABLE>
S-1
<PAGE>
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
($ in millions)
Statement of
Financial
Fair Position
Type of Investment Cost Value Carrying Value
- - ------------------ ---- ----- --------------
<S> <C> <C> <C>
Fixed Income Securities, Available for Sale
Bonds:
United States Government and government agencies
and authorities......................................................... $ 3,101 $ 3,339 $ 3,339
States, municipalities and political subdivisions......................... 13,705 14,493 14,493
Foreign governments....................................................... 325 337 337
Public utilities.......................................................... 2,733 2,935 2,935
Convertibles and bonds with warrants attached............................. 448 482 482
All other corporate bonds ................................................ 16,225 16,832 16,832
Mortgage-backed securities................................................... 8,434 8,592 8,592
Redeemable preferred stocks.................................................. 86 85 85
------ ------- -------
Total fixed income securities............................................. 45,057 $47,095 47,095
------ ====== ------
Equity securities:
Common stocks:
Public utilities.......................................................... 258 $ 326 326
Banks, trusts and insurance companies..................................... 249 433 433
Industrial, miscellaneous and all other................................... 2,877 4,154 4,154
Nonredeemable preferred stocks............................................... 614 648 648
------ ------ ------
Total equity securities................................................... 3,998 $ 5,561 5,561
------ ====== ------
Mortgage loans on real estate................................................... 3,146 3,146
Real estate(1).................................................................. 738 738
Policy loans.................................................................... 489 489
Other long-term investments..................................................... 22 22
Short-term investments.......................................................... 1,278 1,278
-------- ------
Total investments......................................................... $ 54,728 $58,329
====== ======
<FN>
(1) Includes real estate acquired in satisfaction of debt of $286 million.
</FN>
</TABLE>
S-2
<PAGE>
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
($ in millions)
Year Ended
December 31,
---------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES
Investment income, less investment expense......................... $ 10 $ 6 $ 1
EXPENSES
Interest expense.................................................... 71 65 59
Other operating expenses............................................ 8 8 3
----- ----- -----
79 73 62
----- ----- -----
Loss from operations before income tax benefit and equity in net
income of subsidiaries.............................................. (69) (67) (61)
Income tax benefit..................................................... (31) (26) (22)
---- ----- -----
Loss from operations before equity in net income of subsidiaries....... (38) (41) (39)
Equity in net income of subsidiaries................................... 2,113 1,945 523
----- ----- -----
Net income.......................................................... $ 2,075 $ 1,904 $ 484
===== ===== =====
See accompanying notes to condensed financial information and notes to
Consolidated Financial Statements incorporated herein by reference.
</TABLE>
S-3
<PAGE>
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
($ in millions) December 31,
------------------------
1996 1995
------ ------
<S> <C> <C>
ASSETS
Investment in subsidiaries.......................................... $14,777 $13,793
Short-term investments.............................................. 582 39
Receivable from subsidiaries........................................ 152 -
Other assets........................................................ 99 66
------ -------
TOTAL ASSETS................................................... $15,610 $13,898
====== ======
LIABILITIES
Short-term debt..................................................... $ 152 $ -
Long-term debt...................................................... 1,207 1,207
Payable to subsidiaries............................................. 773 -
Other liabilities................................................... 26 11
------ -------
TOTAL LIABILITIES.............................................. 2,158 1,218
------ ------
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value; 25 million shares
authorized, none issued............................................ - -
Common stock, $.01 par value; 1.0 billion shares authorized;
450 million shares issued; 442 million and 448 million shares
outstanding....................................................... 5 5
Additional capital paid-in.......................................... 3,133 3,134
Unrealized net capital gains........................................ 2,003 2,636
Unrealized foreign currency translation adjustments................. 21 20
Retained income..................................................... 8,958 7,261
Deferred ESOP expense .............................................. (280) (300)
Treasury stock, at cost (8.5 million and 2.5 million shares)........ (388) (76)
------- ----
TOTAL SHAREHOLDERS' EQUITY..................................... 13,452 12,680
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................... $15,610 $13,898
====== ======
</TABLE>
See accompanying notes to condensed financial information and notes to
Consolidated Financial Statements incorporated herein by reference.
S-4
<PAGE>
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
($ in millions)
Year Ended
December 31,
---------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................. $2,075 $1,904 $ 484
Adjustments to reconcile net income to
net cash provided by operating activities
Equity in net income of subsidiaries.......................... (2,113) (1,945) ( 523)
Dividends received from subsidiaries.......................... 525 455 349
Changes in other operating assets and liabilities............ ( 5) 11 6
----- ----- -----
Net cash provided by operating activities.................. 482 425 316
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital contribution to subsidiary.................................. (23) - -
Change in short-term investments, net.............................. (543) (27) 24
------ ----- -----
Net cash (used in) provided by investing activities......... (566) (27) 24
------ ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of short-term debt, net...................... 152 - -
Transfers to subsidiaries through intercompany loan
agreement, net................................................... (152) - -
Proceeds from issuance of long-term debt............................ - 357 -
Proceeds from borrowings from subsidiaries.......................... 773 - -
Payment to Sears for transfer of ESOP............................... - (327) -
Dividends paid...................................................... (378) (350) (324)
Treasury stock purchases ........................................... (336) (60) (16)
Other............................................................... 25 (18) -
----- ----- -----
Net cash used in financing activities....................... 84 (398) (340)
----- ----- -----
Cash at end of year.................................................. $ - $ - $ -
===== ===== ======
See accompanying notes to condensed financial information and notes to
Consolidated Financial Statements incorporated herein by reference.
</TABLE>
S-5
<PAGE>
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
1. BASIS OF PRESENTATION
The financial statements of the registrant should be read in conjunction with
the Consolidated Financial Statements and notes thereto included in The Allstate
Corporation 1996 Annual Report to Shareholders.
2. DEBT
Long-term and short-term debt of the Registrant consists of the following:
<TABLE>
<CAPTION>
($ in millions) At December 31,
---------------
1996 1995
---- ----
<S> <C> <C>
5.875% Notes, due 1998................................................. $ 300 $ 300
6.75% Notes, due 2003.................................................. 300 300
7.5% Debentures, due 2013.............................................. 250 250
6.76% ACES, due 1998................................................... 357 357
------ ------
Total Long-term debt................................................... $1,207 $1,207
Short-term debt........................................................ 152 -
------ ------
Total debt........................................................ $1,359 $1,207
===== =====
</TABLE>
Information regarding the ACES is incorporated by reference to footnote 8 "Debt"
on pages 78 and 79 of the 1996 Annual Report.
In early 1996, the Registrant commenced a commercial paper program to cover its
short-term cash needs. The majority of the proceeds from the issuance of the
commercial paper have been loaned to a subsidiary through an intercompany loan
agreement and used for general corporate purposes.
The Registrant maintains a bank line credit of $1.5 billion which expires on
December 20, 2001. The bank line provides for loans at a spread above
prevailing referenced interest rates. The Registrant pays commitment fees
in connection with the line of credit. As of December 31, 1996, no amounts were
outstanding under the bank line of credit.
The Registrant paid $67 million, $61 million and $59 million of interest on debt
in 1996, 1995 and 1994, respectively.
S-6
<PAGE>
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
(CONTINUED)
3. PAYABLE TO SUBSIDIARIES
In November 1996, the Registrant borrowed $750 million from its subsidiary
trusts at a weighted-average interest rate of 7.92%. These borrowings consist of
$550 million and $200 million of debentures which mature in 2026 and 2045,
respectively, and are redeemable by the Registrant in whole or in part beginning
in 2001 and 2006, respectively. The maturity of the $550 million debenture may
be extended to 2045. The Registrant recorded $6 million of interest expense in
1996, related to these borrowings.
S-7
<PAGE>
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------
RESERVES
($ IN MILLIONS) FOR CLAIMS,
DEFERRED CLAIMS
POLICY EXPENSE
ACQUISITION AND POLICY UNEARNED
SEGMENT COSTS BENEFITS PREMIUMS
- - --------------------------------------------- ------ ---------- --------
<S> <C> <C> <C>
1996
Property-liability operations
PP&C................................... $ 777 $13,909 $ 6,070
Discontinued lines and coverages....... - 3,473 2
---- ------ -----
Total property-liability operations.. 777 17,382 6,072
Life operations.......................... 1,837 26,407 102
Corporate and other eliminations......... - - -
----- ------ -----
Total.............................. $ 2,614 $43,789 $ 6,174
===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
($ IN MILLIONS) PREMIUM CLAIMS, AMORTIZATION
REVENUE CLAIMS OF OTHER PREMIUMS
AND NET EXPENSE POLICY OPERATING WRITTEN
CONTRACT INVESTMENT AND POLICY ACQUISITION COSTS AND (EXCLUDING
SEGMENT CHARGES INCOME (1) BENEFITS COSTS EXPENSES LIFE)
- - --------------------------------------------- --------- ------------ ---------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
1996
Property-liability operations
PP&C................................... $17,708 n/a $13,574 $ 1,947 $ 1,771 $17,978
Discontinued lines and coverages....... 658 n/a 913 116 130 608
------ ------ ------ ----- ------ ------
Total property-liability operations.. 18,366 1,758 14,487 2,063 1,901 18,586
Life operations.......................... 1,336 2,045 2,312 203 308 173
Corporate and other eliminations......... - 10 - - (2) -
------ ------ ------ ----- ----- ------
Total.............................. $19,702 $ 3,813 $16,799 $ 2,266 $ 2,207 $18,759
====== ===== ====== ===== ===== ======
<FN>
(1) A single investment portfolio supports the Property-Liability segment.
</FN>
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------
RESERVES
($ IN MILLIONS) FOR CLAIMS,
DEFERRED CLAIMS
POLICY EXPENSE
ACQUISITION AND POLICY UNEARNED
SEGMENT COSTS BENEFITS PREMIUMS
- - --------------------------------------------- ------ ---------- --------
<S> <C> <C> <C>
1995
Property-liability operations
PP&C................................... $ 532 $12,841 $ 5,661
Discontinued lines and coverages...... 72 4,846 469
----- ------ ------
Total property-liability operations.. 604 17,687 6,130
Life operations.......................... 1,400 25,217 58
Corporate and other eliminations......... - - -
----- ------ -----
Total.............................. $ 2,004 $42,904 $ 6,188
===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
($ IN MILLIONS) PREMIUM CLAIMS, AMORTIZATION
REVENUE CLAIMS OF OTHER PREMIUMS
AND NET EXPENSE POLICY OPERATING WRITTEN
CONTRACT INVESTMENT AND POLICY ACQUISITION COSTS AND (EXCLUDING
SEGMENT CHARGES INCOME (1) BENEFITS COSTS EXPENSES LIFE)
- - --------------------------------------------- --------- ------------ ---------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
1995
- - ----
Property-liability operations
PP&C................................... $16,524 n/a $12,648 $ 1,768 $ 1,808 $16,941
Discontinued lines and coverages...... 1,016 n/a 1,040 191 148 1,024
------ ------ ------ ----- ----- ------
Total property-liability operations.. 17,540 1,630 13,688 1,959 1,956 17,965
Life operations.......................... 1,368 1,992 2,381 184 290 180
Corporate and other eliminations......... - 5 - - 1 -
------- ------ ------ ----- ------ ------
Total.............................. $18,908 $ 3,627 $16,069 $ 2,143 $ 2,247 $18,145
====== ===== ====== ===== ===== ======
<FN>
(1) A single investment portfolio supports the Property-Liability segment.
</FN>
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------
RESERVES
($ IN MILLIONS) FOR CLAIMS,
DEFERRED CLAIMS
POLICY EXPENSE
ACQUISITION AND POLICY UNEARNED
SEGMENT COSTS BENEFITS PREMIUMS
- - --------------------------------------------- ------ ---------- --------
<S> <C> <C> <C>
1994
- - ----
Property-liability operations
PP&C................................... $ 447 $12,120 $5,223
Discontinued lines and coverages...... 76 4,643 484
----- ------ -----
Total property-liability operations. 523 16,763 5,707
Life operations.......................... 1,525 23,198 45
Corporate and other eliminations ........ - - -
----- ------ -----
Total.............................. $2,048 $39,961 $5,752
===== ====== =====
<FN>
(1) A single investment portfolio supports the Property-liability segment.
</FN>
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
($ IN MILLIONS) PREMIUM CLAIMS, AMORTIZATION
REVENUE CLAIMS OF OTHER PREMIUMS
AND NET EXPENSE POLICY OPERATING WRITTEN
CONTRACT INVESTMENT AND POLICY ACQUISITION COSTS AND (EXCLUDING
SEGMENT CHARGES INCOME (1) BENEFITS COSTS EXPENSES LIFE)
- - --------------------------------------------- --------- ------------ ---------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
1994
- - ----
Property-liability operations
PP&C................................... $15,452 n/a $13,563 $ 1,661 $ 1,812 $15,635
Discontinued lines and coverages...... 1,061 n/a 966 175 205 1,104
------ ----- ------ ----- ----- ------
Total property-liability operations. 16,513 1,515 14,529 1,836 2,017 16,739
Life operations.......................... 1,053 1,827 2,031 169 190 170
Corporate and other eliminations ........ - 1 - - 3 -
----- ----- ----- ----- ----- ------
Total.............................. $17,566 $3,343 $16,560 $ 2,005 $ 2,210 $16,909
===== ===== ===== ===== ===== ======
<FN>
(1) A single investment portfolio supports the Property-liability segment.
</FN>
</TABLE>
S-8
<PAGE>
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
<TABLE>
<CAPTION>
($ IN MILLIONS) PERCENT OF
CEDED TO ASSUMED AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------ --------- ---------- ------ --------
YEAR ENDED DECEMBER 31, 1996
- - ----------------------------
<S> <C> <C> <C> <C> <C>
Life insurance in force........................ $219,453 $33,232 $ 124 $186,345 0.1%
======= ====== ===== =======
Premiums and contract charges
Life insurance............................... $ 1,163 $ 94 $ - $ 1,069 - %
Accident-health insurance.................... 252 2 17 267 6.4%
Property-liability insurance................. 18,487 479 358 18,366 1.9%
------ --- --- ------
Total premiums and contract charges........ $ 19,902 $ 575 $ 375 $ 19,702 1.9%
====== ===== ===== =======
YEAR ENDED DECEMBER 31, 1995
- - ----------------------------
Life insurance in force........................ $176,615 $14,057 $ 140 $162,698 0.1%
======= ====== ===== =======
Premiums and contract charges
Life insurance............................... $ 1,164 $ 43 $ - $ 1,121 -%
Accident-health insurance.................... 240 4 11 247 4.5%
Property-liability insurance................. 17,178 524 886 17,540 5.1%
------ ---- ---- ------
Total premiums and contract charges........ $ 18,582 $ 571 $ 897 $ 18,908 4.7%
======= ======= ====== =======
YEAR ENDED DECEMBER 31, 1994
- - ----------------------------
Life insurance in force........................ $153,905 $11,649 $ 129 $142,385 0.1%
======= ====== ===== =======
Premiums and contract charges
Life insurance............................... $ 868 $ 34 $ - $ 834 -%
Accident-health insurance.................... 224 14 9 219 4.1%
Property-liability insurance................. 16,177 549 885 16,513 5.4%
------ ---- ---- -------
Total premiums and contract charges........ $ 17,269 $ 597 $ 894 $ 17,566 5.1%
======= ====== ===== ========
</TABLE>
S-9
<PAGE>
THE ALLSTATE CORPORATION AND SUBSIDIARIES
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
---------------------------------------
($ IN MILLIONS)
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ADDITIONS DEDUCTIONS(1) OF PERIOD
- - -------------------------------------------- --------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996
- - ----------------------------
Allowance for estimated losses on mortgage loans and real estate $100 $31 $55 $76
Allowance for reinsurance recoverable 246 18 101 163
Allowance for premium installment receivable 30 111 85 57
YEAR ENDED DECEMBER 31, 1995
- - ----------------------------
Allowance for estimated losses on mortgage loans and real estate $ 97 $53 $50 $100
Allowance for reinsurance recoverable 126 133 13 246
Allowance for premium installment receivables - 63 33 30
YEAR ENDED DECEMBER 31, 1994
- - ----------------------------
Allowance for estimated losses on mortgage loans $ 93 $65 $61 $ 97
Allowance for reinsurance recoverable 110 26 10 126
<FN>
(1) Deductions in allowance for estimated losses on mortgage loans represent
amounts transferred to real estate. Deductions in allowance for
reinsurance recoverable represent write-offs, net of recoveries, of
amounts determined to be uncollectible.
</FN>
</TABLE>
S-10
<PAGE>
THE ALLSTATE CORPORATION AND SUBSIDIARY
SCHEDULE VI
SUPPLEMENTAL INFORMATION CONCERNING CONSOLIDATED
PROPERTY-CASUALTY INSURANCE OPERATIONS
<TABLE>
<CAPTION>
($ IN MILLIONS) DECEMBER 31,
-------------------------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Deferred policy acquisition costs..................................... $ 777 $ 604 $ 523
Reserves for unpaid claims and claim adjustments...................... 17,382 17,687 16,763
Unearned premiums..................................................... 6,072 6,130 5,707
($ IN MILLIONS) YEAR ENDED DECEMBER 31,
-------------------------------------------------
1996 1995 1994
------ ------ ------
Earned premiums....................................................... $18,366 $17,540 $16,513
Net investment income................................................. 1,758 1,630 1,515
Claims and claims adjustment expense incurred
Current year........................................................ 14,823 14,113 15,241
Prior year.......................................................... (336) (425) (712)
Amortization of deferred policy acquisition costs..................... 2,063 1,959 1,836
Paid claims and claims adjustment expense............................. 15,045 12,938 13,242
Premiums written...................................................... 18,586 17,965 16,739
</TABLE>
S-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
The Allstate Corporation
We have audited the consolidated financial statements of The Allstate
Corporation and subsidiaries as of December 31, 1996 and 1995, and for each of
the three years in the period ended December 31, 1996, and have issued our
report thereon dated February 21, 1997; such consolidated financial statements
and report are included in The Allstate Corporation 1996 Annual Report to
Stockholders and are incorporated herein by reference. Our audits also included
the financial statement schedules of The Allstate Corporation and subsidiaries,
listed in the Index at Item 14 (a) 2. These financial statement schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
Chicago, Illinois
February 21, 1997
S-12
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-88540 and 333-10857 on Form S-3 and Registration Statement Nos. 33-77928,
33-93758, 33-93760, 33-93762, 33-99132, 33-99136, 33-99138, 333-04919, 333-16129
and 333-23309 on Form S-8 of The Allstate Corporation of our reports dated
February 21, 1997, appearing in or incorporated by reference in this Annual
Report on Form 10-K of The Allstate Corporation for the year ended December 31,
1996.
Chicago, Illinois
March 25, 1997
S-13
<PAGE>
EXHIBIT INDEX
The Allstate Corporation Form 10-K
For the Year Ended December 31, 1996
Exhibit Sequential
No. Document Description Page No.
- - ------- -------------------- ----------
3.(a) Restated Certificate of Incorporation
of The Allstate Corporation as amended
effective August 18, 1995.
Incorporated by reference to Exhibit 3
to the Company's Quarterly Report on
Form 10-Q for the quarter ended
September 30, 1995**
3.(b) By-Laws as amended effective June 29,
1995. Incorporated by reference to
the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1995.**
4. Registrant hereby agrees to furnish to the
Commission, upon request, with the instruments
defining the rights of holders of each issue of
long-term debt of the Registrant and its consolidated
subsidiaries.
10.1 Master Agreement for Systems
Operations Services, dated as
of November 30, 1992, between
Allstate Insurance Company and
Advantis, a New York general
partnership. Incorporated by
reference to Exhibit 10.5 to
Registration Statement No. 33-59676.
E-1
<PAGE>
Exhibit Sequential
No. Document Description Page No.
- - ------- -------------------- ----------
10.2 Human Resources Allocation Agreement,
dated as of May 27, 1993, among Sears,
Roebuck and Co., The Allstate Corporation
and Allstate Insurance Company.
Incorporated by reference to Exhibit
10.14 to Registration Statement
No. 33-59676.
10.3 IPO Related Intercompany Agreement,
dated as of May 29, 1993, between The
Allstate Corporation and Sears, Roebuck
and Co. Incorporated by reference to
Exhibit 10.15 to Registration Statement
No. 33-59676.
10.4 Tax Sharing Agreement dated May 14, 1993
between Sears, Roebuck and Co. and its
subsidiaries. Incorporated by reference
to Exhibit 10.6 to Amendment No. 3 to
Registration Statement No. 33-59676.
10.5 Separation Agreement dated February 20,
1995 between Sears, Roebuck and Co.
and the Company. Incorporated by
reference to Exhibit 10(a) to the
Company's Current Report on Form 8-K
dated February 22, 1995.**
10.6 Marketing File Separation Agreement
dated February 20, 1995 between Sears,
Roebuck and Co. and the Company.
Incorporated by reference to Exhibit
10(b) to the Company's Current Report
on Form 8-K dated February 22, 1995.**
E-2
<PAGE>
Exhibit Sequential
No. Document Description Page No.
- - ------- -------------------- ----------
10.7 Research Services Agreement dated
February 20, 1995 between Sears,
Roebuck and Co. and the Company.
Incorporated by reference to Exhibit
10(c) to the Company's Current
Report on Form 8-K dated February 22,
1995.**
10.8 Supplemental Tax Sharing Agreement
dated January 27, 1995 between Sears,
Roebuck and Co. and the Company.
Incorporated by reference to Exhibit
10(d) to the Company's Current Report
on Form 8-K dated February 22, 1995.**
10.9 Supplemental Human Resources Allocation
Agreement dated January 27, 1995 between
Incorporated by reference to
Exhibit 10(e) to the Company's
Current Report on Form 8-K dated
February 22, 1995.**
10.10 Profit Sharing and Employee Stock
Ownership Plan Allocation Agreement
dated January 27, 1995 between Sears,
Roebuck and Co. and the Company.
Incorporated by reference to Exhibit
10(f) to the Company's Current Report
on Form 8-K dated February 22, 1995.**
10.11* Allstate Insurance Company Supplemental
Retirement Income Plan, as amended and
restated effective January 1, 1996.
Incorporated by reference to Exhibit 10.11
to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995.**
10.12* The Allstate Corporation Equity
Incentive Plan for Non-Employee
Directors, as amended and restated
on November 12, 1996.
E-3
<PAGE>
Exhibit Sequential
No. Document Description Page No.
- - ------- -------------------- ----------
10.13* The Allstate Corporation
Amended and Restated Deferred
Compensation Plan for Non-Employee
Directors. Incorporated by
reference to Exhibit 4 to
Registration Statement
No. 333-16129
10.14* The Allstate Corporation Annual
Executive Incentive Compensation
Plan. Incorporated by reference
to Appendix A to the Company's
Proxy Statement dated March 31,
1994.**
10.15* The Allstate Corporation Long-Term
Executive Incentive Compensation
Plan. Incorporated by reference to
Appendix B to the Company's Proxy
Statement dated March 31, 1994.**
10.16* The Allstate Corporation Equity
Incentive Plan, as amended and restated
on November 12, 1996.
10.17* Form of stock option under the
Equity Incentive Compensation Plan.
Incorporated by reference to
Exhibit 10.18 to the Company's
Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.**
10.18* Form of restricted stock grant under the Equity
Incentive Plan.
10.19* The Allstate Corporation Deferred
Compensation Plan as amended and
restated effective January 1, 1996.
Incorporated by reference to
Exhibit 4 to the Company's
Registration Statement No. 33-99136.
10.20* The Allstate Corporation Employees
Replacement Stock Plan, as amended
and restated on November 12, 1996.
E-4
<PAGE>
Exhibit Sequential
No. Document Description Page No.
- - ------- -------------------- ----------
10.21* Form of stock option under the
Replacement Stock Plan.
Incorporated by reference to
Exhibit 10.21 to the Company's
Annual Report on Form 10-K for
the fiscal year ended
December 31, 1995.**
10.22* Form of restricted stock grant under
the Replacement Stock Plan.
Incorporated by reference to
Exhibit 10.22 to the Company's
Annual Report on Form 10-K for
the fiscal year ended
December 31, 1995.**
10.23* Retirement agreement dated August 9,
1994 between Wayne E. Hedien and the
Company. Incorporated by reference
to the Company's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1994.**
11 Computation of Earnings per
Common Share.
12 Computation of Earnings to Fixed
Charges Ratio.
13 Portions of The Allstate Corporation
1996 Annual Report incorporated by
reference into Part I or Part II of
the Registrant's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1996.
21 Subsidiaries of the Registrant.
23 Independent Auditors' Consent.
E-5
<PAGE>
Exhibit Sequential
No. Document Description Page No.
- - ------- -------------------- ----------
27 Financial Data schedule, submitted
electronically to the Securities and
Exchange Commission for information
only and not filed.
- - --------------------
* A management contract or compensatory plan or arrangement.
** SEC File No. 1-11840
E-6
<PAGE>
Exhibit 11
The Allstate Corporation and Subsidiaries
Computation of Earnings Per Common Share
<TABLE>
<CAPTION>
(In millions, except for per share data) Twelve Months Ended December 31,
-------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net Income $2,075 $1,904 $484
======== ======== ======
Primary earnings per common share computation:
Weighted average number of common shares (1) 445.4 448.5 449.8
Assumed exercise of dilutive stock options 2.8 1.0 -
---------- ---------- --------
Adjusted weighted number of common shares outstanding 448.2 449.5 449.8
========== ========== ========
Primary net income per share $4.63 $4.24 $1.08
=========== =========== =========
Fully diluted earnings per common share computation:
Weighted average number of common shares (1) 445.4 448.5 449.8
Assumed exercise of dilutive stock options 3.5 2.6 -
---------- ---------- --------
Adjusted weighted number of common shares outstanding 448.9 451.1 449.8
========== ========== ========
Fully diluted net income per share $4.62 $4.22 $1.08
=========== =========== =========
<FN>
(1) Common shares held as treasury shares were 8.5 million, 2.5 million
and .6 million at December 31, 1996, 1995 and 1994, respectively.
</FN>
</TABLE>
E-7
<PAGE>
THE ALLSTATE CORPORATION
COMPUTATION OF EARNINGS TO FIXED CHARGES RATIO
<TABLE>
<CAPTION>
Exhibit 12
For the Year Ended December 31,
--------------------------------------------------------
(In millions) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
1. Income (loss) from continuing operations
before income taxes and cumulative
effect of accounting changes, equity
in net income of unconsolidated
subsidiary, and dividends on preferred
securities of subsidiary trust $2,669 $2,421 $120 $1,282 ($1,528)
2. Equity in income of 100% owned subsidiary - 49 107 94 103
3. Dividends from less than 50% owned subsidiary 2 2 - - -
------ ------ ---- ------ -----
4. Income(loss) from continuing operations
before income taxes and cumulative effect
of accounting changes $2,671 $2,472 $227 $1,376 ($1,425)
----- ----- --- ----- -----
Fixed Charges:
5. Interest of indebtedness $ 76 $ 72 $ 60 $ 81 $ -
6. Interest factor of annual rental expense 71 90 95 96 92
---- ---- ---- ---- ----
7. Total fixed charges (5+6) $ 147 $162 $155 $177 $92
---- ---- ---- ---- ---
8. Dividends on redeemable preferred securities 6 - - - -
9. Total fixed charges and dividends on
redeemable preferred securities $ 153 $ 162 $ 155 $ 177 $ 92
---- ---- ---- ----- ---
10. Income (loss) from continuing operations
before income taxes, cumulative effect of
accounting changes and fixed charges (1+4) $2,818 $2,634 $382 $1,553 ($1,333)
===== ===== === ===== =====
11. Ratio of earnings to fixed charges 18.4X 16.3X 2.5X 8.8X (B)
==== ==== === ===
12. Interest credited to contractholder funds $1,196 $1,191 $1,079 $1,104 $1,164
13. Total fixed charges including dividends on
redeemable preferred securities and interest
credited to contractholder funds (9+12) $1,349 $1,353 $1,234 $1,281 $1,256
------ ------ ------ ------ -----
14. Income (loss) from continuing operations
before income taxes, cumulative effect of
accounting changes and fixed charges
including interest credited to
investment contracts (4+7+12) $4,014 $3,825 $1,461 $2,657 ($169)
===== ===== ===== ===== ====
15. Ratio of earnings to fixed charges, including
interest credited to investment contracts 3.0X 2.8X 1.2X 2.1X (C)
=== === === ===
<FN>
(A) The Company has authority to issue up to 25,000,000 shares of preferred
sock, par value $1.00 per share; however, there are currently no shares
outstanding and the Company does not have a preferred stock dividend
obligation. Therefore, the Ratio of Earnings to Fixed Charges and Preferred
Stock Dividends is equal to the Ratio of Earnings to Fixed Charges and is
not disclosed separately. Certain items have been reclassified to conform
with the current presentation.
(B) For purposes of this computation, earnings consist of income(loss) from
continuing operations before income taxes plus fixed charges. Fixed charges
consist of interest expense, amortization of financing costs, that portion
of rental expense that is representative of the interest factor and
dividends on redeemable preferred securities. Earnings of the year ended
December 3, 1992 were not sufficient to cover fixed charges by $1,425
million. The loss from 1992 resulted primarily from the impact of Hurricane
Andrew which caused pre-tax losses after reinsurance of $2.5 billion.
excluding losses from Hurricane Andrew, the 1992 ratio was 12.7x.
(C) For purposes of this computation, earnings consist of income (loss) from
continuing operations before income taxes plus fixed charges. Fixed charges
consist of interest expense (including interest credited to investment
contracts), amortization of financing costs, that portion of rental expense
that is representative of the interest factor and dividends on redeemable
preferred securities. Earnings for the year ended December 31, 1992 were
not sufficient to cover fixed charges by $1,425 million. The loss in 1992
resulted primarily from the impact of Hurricane Andrew which caused pre-tax
losses after reinsurance of $2.5 billion. Excluding losses from Hurricane
Andrew, the 1992 ratio was 1.9x.
</FN>
</TABLE>
E-8
EXHIBIT 10.12
THE ALLSTATE CORPORATION
EQUITY INCENTIVE PLAN FOR NON-EMPLOYEE DIRECTORS
AS AMENDED AND RESTATED ON NOVEMBER 12, 1996
I. PURPOSE.
The purpose of The Allstate Corporation Equity Incentive Plan for
Non-Employee Directors (the "Plan") is to promote the interests of The Allstate
Corporation (the "Company") by providing an inducement to obtain and retain the
services of qualified persons as members of the Company's Board of Directors
(the "Board") and to align more closely the interests of such persons with the
interests of the Company's stockholders by providing a significant portion of
the compensation provided to such persons in the form of equity securities of
the Company.
II. ADMINISTRATION.
The Plan shall be administered by the Committee. The Committee shall
have full power to construe and interpret the Plan and Shares and Options
granted hereunder, to establish and amend rules for its administration and to
correct any defect or omission and to reconcile any inconsistency in the Plan or
in any Share or Option granted hereunder to the extent the Committee deems
desirable to carry the Plan or any Share or Option granted hereunder into
effect. Any decisions of the Committee in the administration of the Plan shall
be final and conclusive. The Committee may authorize any one or more of its
members, the secretary of the Committee or any officer of the Company to execute
and deliver documents on behalf of the Committee. Each member of the Committee,
and, to the extent provided by the Committee, any other person to whom duties or
powers shall be delegated in connection with the Plan, shall incur no liability
with respect to any action taken or omitted to be take in connection with the
Plan and shall be fully protected in relying in good faith upon the advice of
counsel, to the fullest extent permitted under applicable law.
III. ELIGIBILITY.
Each Non-Employee Director shall be eligible to participate in the
Plan.
IV. LIMITATION ON AGGREGATE SHARES.
A. Maximum Number of Shares. The aggregate maximum number of Shares
that may be granted pursuant to the Plan or issued upon exercise of Options
granted pursuant to the Plan shall be 300,000 shares. Such maximum number of
Shares is subject to adjustment under the provisions of Section IV.B. The Shares
to be granted or issued upon exercise of Options may be authorized but unissued
Shares or Shares previously issued which have been reacquired by the Company. In
the event any Option or Reload Option shall, for any reason, terminate or expire
or be surrendered without having been exercised in full, the Shares subject to
such Option or Reload Option but not
A-1
<PAGE>
purchased thereunder shall be available for future Options or Reload Options to
be granted under the Plan.
B. Adjustment. The maximum number of Shares referred to in Section IV.A of
----------
the Plan, the number of Shares granted pursuant to Section VI of the Plan, the
number of Options granted pursuant to Section VII of the Plan, and the option
price and the number of Shares which may be purchased under any outstanding
Option granted under Section VII of the Plan shall be proportionately adjusted
for any increase or decrease in the number of issued and outstanding Shares as
the result of (i) the declaration and payment of a dividend payable in Common
Stock, or the division of the Common Stock outstanding at the date hereof (or
the date of the grant of any such outstanding Option, as applicable) into a
greater number of Shares without the receipt of consideration therefor by the
Company, or any other increase in the number of such Shares of the Company
outstanding at the date hereof (or the date of the grant of any such outstanding
Option, as applicable) which is effective without the receipt of consideration
therefor by the Company (exclusive of any Shares granted by the Company to
employees of the Company or any of its Subsidiaries without receipt of separate
consideration by the Company), or (ii) the consolidation of the Shares
outstanding at the date hereof (or the date of the grant of any such outstanding
Option, as applicable) into a smaller number of Shares without the payment of
consideration thereof by the Company, or any other decrease in the number of
such Shares outstanding at the date hereof (or the date of the grant of any such
outstanding Option, as applicable) effected without the payment of consideration
by the Company; provided, however, that the total option price for all Shares
which may be purchased upon the exercise of any Option granted pursuant to the
Plan (computed by multiplying the number of Shares originally purchasable
thereunder, reduced by the number of such Shares which have theretofore been
purchased thereunder, by the original option price per share before any of the
adjustments herein provided for) shall not be changed.
In the event of a change in the Common Stock as presently constituted
which is limited to a change of the Company's authorized shares with a par value
into the same number of shares with a different par value or without par value,
the shares resulting from any such change will be deemed to be the Common Stock
within the meaning of this Plan and no adjustment will be required pursuant to
this Section IV.B.
The foregoing adjustments shall be made by the Committee, whose
determination in that respect shall be final, binding and conclusive. Except as
expressly provided in this Section IV.B, a Non-Employee Director shall have no
rights by reason of any subdivision or consolidation of shares of stock of any
class or the payment of any stock dividend or any other increase or decrease in
the number of shares of stock of any class.
V. DEFINITIONS.
The following terms shall have the meanings set forth below when used
herein:
"Code" means the Internal Revenue Code of 1986, as amended.
A-2
<PAGE>
"Committee" means the Compensation and Nominating Committee of the
---------
Board, any successor committee of the Board performing similar functions or, in
the absence of such a committee, the Board.
"Common Stock" means the Common Stock, par value $.01 per share, of
------------
the Company.
"Disability" means a mental or physical condition which, in the opinion
----------
of the Committee, renders a Non-Employee Director unable or incompetent to carry
out his or her duties as a member of the Board and which is expected to be
permanent or for an indefinite duration.
"Election Shares" means any Shares issued to a Non-Employee Director
----------------
pursuant to the election of such person to receive such Shares in lieu of cash
compensation made in accordance with Section VIII.B.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"Fair Market Value" of any Share means, as of any applicable date, the
-----------------
mean between the high and low prices of the Shares as reported on the New York
Stock Exchange-Composite Tape, or if no such reported sale of the Shares shall
have occurred on such date, on the next succeeding date on which there was such
a reported sale.
"Initial Election Date" means, for each Non-Employee Director, the
----------------------
later to occur of (i) the date the Plan is approved and adopted by the Company's
stockholders pursuant to Section XIII of the Plan, and (ii) the date of such
member's initial election or appointment to the Board.
"Non-Employee Director" means each member of the Board who is not an
----------------------
officer or employee of the Company or any of its Subsidiaries.
"Option" means an option to purchase shares of Common Stock.
------
"Shares" means shares of Common Stock.
------
"Subsidiary" means any partnership, corporation, association, limited
----------
liability company, joint stock company, trust, joint venture, unincorporated
organization or other business entity of which (i) if a corporation, a majority
of the total voting power of shares of stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or indirectly, by
the Company or one or more of the other Subsidiaries of the Company or a
combination thereof, or (ii) if a partnership, association, limited liability
company, joint stock company, trust, joint venture, unincorporated organization
or other business entity, a majority of the partnership or other similar equity
ownership interest thereof is at the time owned or controlled, directly or
indirectly, by the Company or one or more Subsidiaries of the Company or a
combination thereof. For purposes hereof, the Company or a Subsidiary shall be
deemed to have a majority ownership interest in a partnership, association,
A-3
<PAGE>
limited liability company, joint stock company, trust, joint venture,
unincorporated organization or other business entity if the Company or such
Subsidiary shall be allocated a majority of partnership, association, limited
liability company, joint stock company, trust, joint venture, unincorporated
organization or other business entity gains or losses or shall be or control the
managing director, the trustee, the manager or the general partner of such
partnership, association, limited liability company, joint stock company, trust,
joint venture, unincorporated organization or other business entity.
VI. FORMULA RESTRICTED STOCK GRANTS FOR NON-EMPLOYEE DIRECTORS.
A. Annual Grant of Shares. Beginning December 1, 1996, on December 1 of
----------------------
each year 500 Shares shall automatically be granted to each Non-Employee
Director serving on the Board on such date who has served in such capacity since
June 1 of such year. If any person serving as a Non- Employee Director on June 1
of any year ceases to serve as a director of the Company prior to December 1 of
such year, such director shall be automatically granted on his or her last day
of service a number of Shares equal to (i) 500 multiplied by (ii) a fraction,
the numerator of which is the number of full calendar months such Non-Employee
Director has served on the Board during the period beginning on such June 1 and
ending on such director's last date of service and the denominator of which is
6.
B. Grant for Newly Appointed Directors. If after June 1, 1996 a
---------------------------------------
Non-Employee Director is initially elected or appointed to the Board effective
on any date other than June 1, such Non- Employee Director shall automatically
be granted, on the June 1 following the date he or she joins the Board (or such
earlier date as he or she ceases to serve as a director), a number of Shares
equal to (i) 500 multiplied by (ii) a fraction, the numerator of which is the
number of full calendar months such Non-Employee Director has served on the
Board during the period beginning on the date such director joined the Board and
ending on the following May 31 (or such earlier date as he or she ceases to
serve as a director) and the denominator of which is 6; provided that such
fraction shall in no event be greater than one.
C. Transition Grant for Existing Directors. Subject to stockholder
-----------------------------------------
approval and adoption pursuant to Section XIII of the Plan, on May 31, 1996,
each Non-Employee Director who was serving on the Board on March 12, 1996 shall
be automatically granted a number of Shares equal to (i) 200 multiplied by (ii)
a fraction, the numerator of which is the number of full calendar months of
service by such Non-Employee Director during the period beginning on the later
of (a) such director's last anniversary date for service on the Board and (b)
the date such director first attained the status of Non-Employee Director and
ending on May 31, 1996 (or such earlier date as such director ceases to serve as
a director) and the denominator of which is 12.
D. Rounding of Share Amounts. To the extent that application of the
-------------------------
the foregoing formulas would result in fractional Shares being issuable, such
Non-Employee Director shall be granted a number of Shares equal to the nearest
whole number of Shares.
E. Payment for Estimated Taxes. In addition, the Company shall pay to
---------------------------
each Non-Employee Director, in cash, as soon as practicable after each issuance
of Shares pursuant to this
A-4
<PAGE>
Section VI, an amount equal to the estimated increase in such Non-Employee
Director's federal, state and local tax liabilities as a result of such grant of
Shares, assuming the maximum statutory tax rates applicable to such Non-Employee
Director.
F. Restrictions. The Non-Employee Directors shall have no rights as a
------------
shareholder with respect to any Shares to be granted pursuant to this Section VI
prior to the time such Shares are granted. Upon such grant, the Shares shall be
represented by a stock certificate registered in the name of the holder. The
Shares granted pursuant to this Section VI shall be fully vested, but shall be
subject to certain restrictions during the six month period following the date
of grant (the "Restriction Period"). The holder shall have the right to enjoy
-------------------
all shareholder rights during the Restriction Period (including the right to
vote the Shares and the right to receive any cash or other dividends paid in
respect thereof) with the exception that (i) the holder may not sell, transfer,
pledge or assign the Shares during the Restriction Period, and (ii) the Company
shall retain custody of the certificates representing the Shares during the
Restriction Period.
All restrictions shall lapse and the holder of the Shares shall be
entitled to the delivery of a stock certificate or certificates representing the
Shares (and to the removal of any restrictive legend set forth on such
certificates) upon the earliest of (i) six months from the date of grant of such
Shares, (ii) the date of the holder's death or Disability, and (iii) the date on
which the holder is no longer serving as a director of the Company.
VII. FORMULA STOCK OPTION GRANTS FOR NON-EMPLOYEE DIRECTORS.
A. Annual Grant of Options. On June 1 of each year, beginning June 1,
-----------------------
1996, Options to purchase 1,500 Shares shall automatically be granted to each
Non-Employee Director serving on the Board on such date. If any such
Non-Employee Director will be required to retire (pursuant to the policies of
the Board) during the 12 month period beginning on the date of any grant (or if
any such Non-Employee Director has notified the Board that he or she intends to
resign from the Board for any reason during the 12 month period beginning on the
date of any grant), such director shall instead be granted on June 1 of the
relevant year Options to purchase a number of Shares equal to (i) 1,500,
multiplied by (ii) a fraction, the numerator of which is the number of full
- - --------------
calendar months such Non-Employee Director will serve on the Board during the
period beginning on such June 1 and ending on such director's last date of
service and the denominator of which is 12.
B. Grant for Newly Appointed Directors. If after June 1, 1996 a
---------------------------------------
Non-Employee Director is initially elected or appointed to the Board effective
on any date other than June 1, such Non- Employee Director shall automatically
be granted, on the date he or she joins the Board, Options to purchase a number
of Shares equal to (i) 1,500, multiplied by (ii) a fraction, the numerator of
which is the number of full calendar months such Non-Employee Director will
serve on the Board during the period beginning on the date such director joins
the Board and ending on the following May 31 and the denominator of which is 12.
C. Option Exercise Price. The exercise price per Share for each
---------------------
Option shall be 100% of the Fair Market Value of a Share on the date of grant,
subject to Section IV.B.
A-5
<PAGE>
D. Term of Options. Each Option shall be exercisable for ten
---------------
years after the date of grant, subject to Section VII.F.
E. Conditions and Limitations on Exercise.
--------------------------------------
(i) Vesting. Each Option shall vest in three equal
-------
installments on the first, second and third anniversaries of the date
of grant. Upon a Non-Employee Director's mandatory retirement pursuant
to the policies of the Board, the unvested portions of any outstanding
Options held by such Non-Employee Director shall fully vest. Upon the
termination of a Non-Employee Director's tenure for any other reason,
the unvested portions of any outstanding Options shall expire and no
Options granted to such Non-Employee Director shall vest after the
termination of such director's tenure on the Board.
(ii) Exercise. Each Option shall be exercisable in one or
--------
more installments and shall not be exercisable for less than 100
Shares, unless the exercise represents the entire remaining exercisable
balance of a grant or grants. Each Option shall be exercised by
delivery to the Company of written notice of intent to purchase a
specific number of Shares subject to the Option. The option price of
any Shares as to which an Option shall be exercised shall be paid in
full at the time of the exercise. Payment may, at the election of the
Non-Employee Director, be made in any one or any combination of the
following forms:
(a) check or wire transfer of funds in such form
as may be satisfactory to the Committee;
(b) delivery of Shares valued at their Fair Market
Value on the date of exercise or, if the date of exercise is
not a business day, the next succeeding business day;
(c) through simultaneous sale through a broker of
unrestricted Shares acquired on exercise, as permitted under
Regulation T of the Federal Reserve Board; or
(d) by authorizing the Company in his or her written
notice of exercise to withhold from issuance a number of
Shares issuable upon exercise of such Option which, when
multiplied by the Fair Market Value of Common Stock on the
date of exercise (or, if the date of exercise is not a
business day, the next succeeding business day), is equal to
the aggregate exercise price payable with respect to the
Option so exercised.
In the event a Non-Employee Director elects to pay the exercise price
payable with respect to an Option pursuant to clause (b) above, (i) only a whole
number of Share(s) (and not fractional Shares) may be tendered in payment, (ii)
such Non-Employee Director must present evidence acceptable to the Company that
he or she has owned any such Shares tendered in payment of the exercise price
(and that such Shares tendered have not been subject to any substantial risk of
forfeiture) for at least six months prior to the date of exercise, and (iii) the
certificate(s) for all such
A-6
<PAGE>
Shares tendered in payment of the exercise price must be accompanied by duly
executed instruments of transfer in a form acceptable to the Company. When
payment of the Option exercise price is made by the tender of Shares, the
difference, if any, between the aggregate exercise price payable with respect to
the Option being exercised and the Fair Market Value of the Share(s) tendered in
payment (plus any applicable taxes) shall be paid by check or wire transfer of
funds. No Non- Employee Director may tender Shares having a Fair Market Value
exceeding the aggregate exercise price payable with respect to the Option being
exercised.
In the event a Non-Employee Director elects to pay the exercise price
payable with respect to an Option pursuant to clause (d) above, (i) only a whole
number of Share(s) (and not fractional Shares) may be withheld in payment and
(ii) such Non-Employee Director must present evidence acceptable to the Company
that he or she has owned a number of Shares at least equal to the number of
Shares to be withheld in payment of the exercise price (and that such owned
Shares have not been subject to any substantial risk of forfeiture) for at least
six months prior to the date of exercise. When payment of the Option exercise
price is made by the withholding of Shares, the difference, if any, between the
aggregate exercise price payable with respect to the Option being exercised and
the Fair Market Value of the Share(s) withheld in payment (plus any applicable
taxes) shall be paid by check or wire transfer of funds. No Non-Employee
Director may authorize the withholding of Shares having a Fair Market Value
exceeding the aggregate exercise price payable with respect to the Option being
exercised. Any withheld Shares shall no longer be issuable under such Option.
F. Additional Provisions.
---------------------
(i) Accelerated Expiration of Options Upon Termination of
-------------------------------------------------------
Directorship. Upon the termination of a Non-Employee Director's tenure
------------
for any reason, each outstanding vested and previously unexercised
Option shall expire three months after the date of such termination;
provided that (a) upon the termination of a Non-Employee Director's
tenure as a result of death or Disability, each outstanding vested and
previously unexercised Option shall expire two years after the date of
his or her termination as a director, and (b) upon the mandatory
retirement of a Non-Employee Director pursuant to the policies of the
Board, each outstanding vested and previously unexercised Option shall
expire five years after the date of his or her termination as a
director. In no event shall the provisions of this Section VII.F
operate to extend the original expiration date of any Option.
(ii) Sale of the Company. In the event of a merger of the
--------------------
Company with or into another corporation constituting a change of
control of the Company, a sale of all or substantially all of the
Company's assets or a sale of a majority of the Company's outstanding
voting securities (a "Sale of the Company"), the Options may be assumed
by the successor corporation or a parent of such successor corporation
or substantially equivalent options may be substituted by the successor
corporation or a parent of such successor corporation, and if the
successor corporation does not assume the Options or substitute
options, then all outstanding and unvested Options shall become
immediately exercisable and all outstanding Options shall terminate if
not exercised as of the date of the Sale of the Company (or other
prescribed period of time). The Company shall provide at least 30 days
prior written notice of the Sale of the Company to the holders of all
outstanding Options, which notice shall state
A-7
<PAGE>
whether (a) the Options will be assumed by the successor corporation or
substantially equivalent options will be substituted by the successor
corporation, or (b) the Options are thereafter vested and exercisable
and will terminate if not exercised as of the date of the Sale of the
Company (or other prescribed period of time).
(iii) Liquidation or Dissolution. In the event of the
----------------------------
liquidation or dissolution of the Company, Options shall terminate
immediately prior to the liquidation or dissolution.
G. Grant of Reload Options. A Non-Employee Director who exercises all
-----------------------
or any portion of an Option by the tender or withholding of Shares which have a
Fair Market Value equal to not less than 100% of the exercise price for such
Options (the "Exercised Options") shall be granted, subject to Section IV, an
------------------
additional option (a "Reload Option") for a number of Shares equal to the sum of
-------------
the number of Shares tendered or withheld in payment of the exercise price for
the Exercised Options.
Reload Options shall be subject to the following terms and conditions:
(i) the grant date for each Reload Option shall be the
date of exercise of the Exercised Option to which it relates;
(ii) subject to clause (iii) below, the Reload Option may be
exercised at any time during the unexpired term of the Exercised Option
(subject to earlier termination thereof as provided in the Plan); and
(iii) the other terms of the Reload Option shall be the same
as the terms of the Exercised Option to which it relates and shall be
subject to the provisions of the Plan, except that (a) the option price
shall be the Fair Market Value of the Shares on the grant date of the
Reload Option, (b) no Reload Option may be exercised within six months
from the grant date thereof, and (c) no other Reload Option shall be
granted upon exercise of such Reload Option.
H. Non-Qualified Stock Options. All Options granted under the Plan
---------------------------
shall be non-qualified options not entitled to special tax treatment under Code
Section 422, as may be amended from time to time.
VIII. ELECTION TO RECEIVE STOCK IN LIEU OF CASH COMPENSATION.
A. General. A Non-Employee Director may elect to reduce the cash
-------
compensation otherwise payable for services to be rendered by him or her as a
director for any period beginning on June 1 and continuing to the following May
31 (or such other period for which cash compensation is payable to Non-Employee
Directors pursuant to the policies of the Board), beginning June 1, 1996 and to
receive in lieu thereof Shares as provided in this Section VIII.
B. Election. By the later of (i) the date of the Company's annual
--------
meeting of stockholders next preceding the June 1 to which such election relates
(but in no event less than five
A-8
<PAGE>
business days prior to such June 1) and (ii) such Non-Employee Director's
Initial Election Date, each Non-Employee Director may make an irrevocable
election to receive, in lieu of all or a specified percentage (which percentage
shall be in 10% increments) of the cash compensation to which such director
would otherwise be entitled as a member of the Board and any committee thereof
(including the annual retainer fee and any meeting or other fees payable for
services on the Board or any committee thereof, but excluding any reimbursement
for out-of-pocket expenses) for the year beginning the following June 1 (or such
other period for which cash compensation is payable to such Non-Employee
Director pursuant to the policies of the Board), an equivalent value in Shares
granted in accordance with this Section VIII. An election shall be effective (i)
if made in accordance with clause (i) of the preceding sentence, beginning on
the June 1 following such election; and (ii) if made on such Non-Employee
Director's Initial Election Date, immediately.
Each such election shall (i) be in writing in a form prescribed by the
Company, (ii) specify the amount of cash compensation to be received in the form
of Election Shares (expressed as a percentage of the compensation otherwise
payable in cash), and (iii) be delivered to the Secretary of the Company. Such
election may not be revoked or changed thereafter except as to compensation for
services to be rendered in any 12 month period beginning on any June 1 at least
six months following such revocation or new election.
C. Issuance of Common Stock. If a Non-Employee Director elects pursuant
------------------------
to Section VIII.B above to receive Shares, there shall be issued to such
director promptly following each subsequent June 1 for which such election is
effective (or promptly following the first day of such other period for which
such election is effective) a number of Shares equal to the amount of
compensation otherwise payable for the 12 month period beginning on such June 1
(or the other period for which such election is effective) divided by the Fair
Market Value of the Shares on such June 1 (or on the first day of such other
period). To the extent that the application of the foregoing formula would
result in fractional shares of Common Stock being issuable, cash will be paid to
the Non-Employee Director in lieu of such fractional Shares based upon the Fair
Market Value of such fractional Share.
D. Compliance with Exchange Act. The election to receive Election
-------------------------------
Shares is intended to comply in all respects with Rule 16b-3(d)(1) promulgated
under Section 16(b) of the Exchange Act such that the issuance of Election
Shares under the Plan on a grant date occurring at least six months after the
election shall be exempt from Section 16(b) of the Exchange Act.
E. Grant Date. The grant date for each Election Share for the Non-
----------
Employee Director electing such option shall be the first day of the period
to which such election relates and is effective.
IX. MISCELLANEOUS PROVISIONS.
A. Rights of Non-Employee Directors. No Non-Employee Director shall
--------------------------------
be entitled under the Plan to voting rights, dividends or other rights of a
stockholder prior to the issuance of Common Stock. Neither the Plan nor any
action taken hereunder shall be construed as giving any Non-Employee Director
any right to be retained in the service of the Company.
A-9
<PAGE>
B. Limitations on Transfer and Exercise. All Options granted under the
------------------------------------
Plan shall not be transferable by the Non-Employee Director, other than by will
or the laws of descent and distribution or pursuant to a qualified domestic
relations order, as defined by ss.1 et seq, of the Code, Title I of ERISA or the
rules and regulations thereunder, and shall be exercisable during the Non-
Employee Director's lifetime only by such Non-Employee Director or by such
Non-Employee Director's guardian or other legal representative.
C. Compliance with Laws. No shares of Common Stock shall be issued
---------------------
hereunder unless counsel for the Company shall be satisfied that such issuance
will be in compliance with applicable federal, state, local and foreign
securities, securities exchange and other applicable laws and requirements. Each
Share granted pursuant to Section VI or Section VIII and each Option granted
pursuant to Section VII shall be subject to the requirement that if at any time
the Committee shall determine, in its discretion, that the listing, registration
or qualification of the Shares granted or subject to the Option upon any
securities exchange or under any state or federal securities or other law or
regulation, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition to or in connection with the granting of
such Share, such Option or the issuance or purchase of Shares thereunder, no
such Share may be issued and no Option may be exercised or paid in Common Stock,
in whole or in part, unless such listing, registration, qualification, consent
or approval shall have been effected or obtained free of any conditions not
acceptable to the Committee. The holder of such Share or Option will supply the
Company with such certificates, representations and information as the Company
shall request and shall otherwise cooperate with the Company in obtaining such
listing, registration, qualification, consent or approval. The Committee may at
any time impose any limitations upon the sale of a Share or the exercise of an
Option or the sale of the Common Stock issued upon exercise of an Option that,
in the Committee's discretion, are necessary or desirable in order to comply
with Section 16(b) of the Exchange Act and the rules and regulations thereunder.
The Committee may at any time impose additional limitations, or may amend or
delete the existing limitations, upon the exercise of Options by the tender or
withholding of Shares in accordance with Section VII.E (including an amendment
or deletion of the related ownership period for Shares specified in such
Section), if such additional, amended or deleted limitations are necessary,
desirable or no longer required (as the case may be) to remain in compliance
with applicable accounting pronouncements relating to the treatment of the plan
as a fixed plan for accounting purposes.
D. Payment of Withholding Tax. Whenever Shares are to be issued
-----------------------------
pursuant to Section VI or Section VIII of the Plan or upon exercise of Options
issued pursuant to Section VII of the Plan, the Company shall be entitled to
require as a condition of delivery (i) that the participant remit an amount
sufficient to satisfy all federal, state and local withholding tax requirements
related thereto, (ii) the withholding of Shares due to the participant under the
Plan with a Fair Market Value equal to such amount, or (iii) any combination of
the foregoing.
E. Expenses. The expenses of the Plan shall be borne by the Company
--------
and its Subsidiaries.
F. Deemed Acceptance, Ratification and Consent. By accepting any
-------------------------------------------
Common Stock hereunder or other benefit under the Plan, each Non-Employee
Director and each person claiming
A-10
<PAGE>
under or through him or her shall be conclusively deemed to have indicated his
or her acceptance and ratification of, and consent to, any action taken under
the Plan by the Company, the Board or the Committee.
G. Securities Act Registration. The Company shall use its best
-----------------------------
efforts to cause to be filed under the Securities Act of 1933, as amended, a
registration statement covering the Shares issued, and issuable upon exercise of
options granted, under the Plan.
H. Governing Law. The provisions of the Plan shall be governed by and
-------------
construed in accordance with the laws of the State of Delaware.
I. Election Shares. Pending the grant of Election Shares hereunder,
----------------
all compensation earned by a Non-Employee Director with respect to which an
election to receive the grant of Election Shares pursuant to Section VIII.B has
been made shall be the property of such director and shall be paid to him or
her in cash in the event that Election Shares are not granted by the Company
hereunder.
J. Headings; Construction. Headings are given to the sections of the
----------------------
Plan solely as a convenience to facilitate reference. Such headings, numbering
and paragraphing shall not in any case be deemed in any way material or relevant
to the construction of the Plan or any provisions hereof. The use of the
singular shall also include within its meaning the plural, where appropriate,
and vice versa.
XI. AMENDMENT.
The Plan may be amended at any time and from time to time by resolution
of the Board as the Board shall deem advisable; provided, however, that no
-------- -------
amendment shall become effective without stockholder approval if such
stockholder approval is required by law, rule or regulation. No amendment of the
Plan shall materially and adversely affect any right of any participant with
respect to any Options or Shares theretofore granted under the Plan without such
participant's written consent, except for any modifications required to maintain
compliance with any federal or state statute or regulation.
XII. TERMINATION.
The Plan shall terminate upon the earlier of the following dates or
events to occur:
(i) upon the adoption of a resolution of the Board terminating
the Plan; and
(ii) ten years from the date the Plan is initially approved
and adopted by the stockholders of the Company in accordance with
Article XIII.
Except as specifically provided herein, no termination of the Plan
shall materially and adversely affect any of the rights or obligations of any
person without his or her consent with respect to any Options or Shares
theretofore granted under the Plan.
A-11
<PAGE>
XIII. STOCKHOLDER APPROVAL AND ADOPTION.
The Plan was originally adopted by the Board on March 12, 1996 and was
approved and adopted at a meeting of the stockholders of the Company held on May
21, 1996. The Plan was amended and restated by the Board at a meeting held on
November 12, 1996.
A-12
EXHIBIT 10.16
THE ALLSTATE CORPORATION
EQUITY INCENTIVE PLAN
AS AMENDED AND RESTATED ON NOVEMBER 12, 1996
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<PAGE>
TABLE OF CONTENTS
-----------------
PAGE
1. Purpose.............................................................1
2. Definitions.........................................................1
3. Scope of the Plan...................................................3
(a) Number of Shares Available For Delivery Under the Plan.....3
(b) Effect of Expiration or Termination........................3
(c) Treasury Stock.............................................3
(d) Committee Discretion to Cancel Options.....................3
4. Administration......................................................4
(a) Committee Administration...................................4
(b) Board Reservation and Delegation...........................4
(c) Committee Authority........................................4
(d) Committee Determinations Final.............................5
5. Eligibility.........................................................5
6. Conditions to Grants................................................6
(a) General Conditions.........................................6
(b) Grant of Options and Option Price..........................6
(c) Grant of Incentive Stock Options...........................6
(d) Grant of Reload Options....................................7
(e) Grant of Shares of Restricted Stock........................8
(f) Grant of Unrestricted Stock................................10
7. Non-transferability.................................................10
8. Exercise ...........................................................11
(a) Exercise of Options........................................11
(b) Special Rules for Section 16 Grantees......................12
(c) Permissible Shares Issued..................................12
9. Loans and Guarantees................................................13
10. Notification under Section 83(b)....................................13
11. Mandatory Withholding Taxes.........................................13
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<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
12. Elective Share Withholding..........................................14
13. Termination of Employment...........................................14
(a) Restricted Stock...........................................14
(b) Other Awards...............................................14
(c) Maximum Extension..........................................15
14. Equity Incentive Plans of Foreign Subsidiaries......................15
15. Substituted Awards..................................................15
16. Securities Law Matters..............................................16
17. No Funding Required.................................................16
18. No Employment Rights................................................16
19. Rights as a Stockholder.............................................16
20. Nature of Payments..................................................17
21. Non-Uniform Determinations..........................................17
22. Adjustments.........................................................17
23. Amendment of the Plan...............................................17
24. Termination of the Plan.............................................17
25. No Illegal Transactions.............................................18
26. Controlling Law.....................................................18
27. Severability........................................................18
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<PAGE>
The Plan. The Company established The Allstate Corporation
--------
Equity Incentive Plan (as set forth herein and from time to time amended, the
"Plan"), effective June 2, 1993. Amendments to the Plan were approved by the
Company's stockholders on May 19, 1994. On March 9, 1995, the Board of Directors
approved amendments to the Plan, subject to the approval of the Company's
stockholders of such amendments and of an amendment to increase the Company's
authorized Common Stock to 1,000,000,000 shares, and subject to the occurrence
of the proposed Distribution described in the Proxy Statement dated February 21,
1995 of Sears, Roebuck and Co. On May 21, 1996, and subsequently on November 12,
1996 the Plan was further amended and restated.
1. Purpose. The primary purpose of the Plan is to provide a means by which
-------
key employees of the Company and its Subsidiaries can acquire and maintain stock
ownership, thereby strengthening their commitment to the success of the Company
and its Subsidiaries and their desire to remain employed by the Company and its
Subsidiaries. The Plan also is intended to attract and retain key employees and
to provide such employees with additional incentive and reward opportunities
designed to encourage them to enhance the profitable growth of the Company and
its Subsidiaries.
2. Definitions. As used in the Plan, terms defined parenthetically
-----------
immediately after their use shall have the respective meanings provided by such
definitions and the terms set forth below shall have the following meanings
(such meanings to be equally applicable to both the singular and plural forms of
the terms defined):
(a) "Award" means options, shares of restricted Stock, or shares of
unrestricted Stock granted under the Plan.
(b) "Award Agreement" means the written agreement by which an Award is
evidenced.
(c) "Board" means the board of directors of the Company.
(d) "Committee" means the committee of the Board appointed pursuant to
Article 4.
(e) "Company" means The Allstate Corporation, a Delaware corporation.
(f) "Disability" means, as relates to the exercise of an incentive stock
option after Termination of Employment, a permanent and total disability within
the meaning of Section 22(e)(3) of the Internal Revenue Code, and for all other
purposes, a mental or physical condition which, in the opinion of the Committee,
renders a Grantee unable or incompetent to carry out the job responsibilities
which such Grantee held or the duties to which such Grantee was assigned at the
time the disability was incurred, and which is expected to be permanent or for
an indefinite duration.
(g) "Effective Date" means the date described in the first paragraph of
the Plan.
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<PAGE>
(h) "Fair Market Value" of the Stock means, as of any applicable date
(other than on the Effective Date) the mean between the high and low prices of
the Stock as reported on the New York Stock Exchange Composite Tape, or if no
such reported sale of the Stock shall have occurred on such date, on the next
preceding date on which there was such a reported sale, provided, however, that
-------- -------
if the Stock is acquired and sold in a simultaneous sale pursuant to the
provisions of Article 8(a)(iv), Fair Market Value means the price received upon
such sale. Solely as of the effective date of the IPO, Fair Market Value of the
Stock means the price to the public pursuant to the form of final prospectus
used in connection with the IPO, as indicated on the cover page of such
prospectus or otherwise.
(i) "Grant Date" means the date of grant of an Award determined in
accordance with Article 6.
(j) "Grantee" means an individual who has been granted an Award.
(k) "Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended, and regulations and rulings thereunder. References to a particular
section of the Internal Revenue Code shall include references to successor
provisions.
(l) "IPO" means such term as defined in the first paragraph of the Plan.
(m) "Minimum Consideration" means the $.01 par value per share or such
larger amount determined pursuant to resolution of the Board to be capital
within the meaning of Section 154 of the Delaware General Corporation Law.
(n) "1934 Act" means the Securities Exchange Act of 1934, as amended.
(o) "Option Price" means the per share purchase price of (i) Stock
subject to an option or (ii) restricted Stock subject to an option.
(p) [deleted]
(q) "Plan" has the meaning set forth in the introductory paragraph.
(r) "Reload Option" has the meaning specified in Article 6(d).
(s) "Retirement" means a Termination of Employment occurring on or
after an individual attains age 65, or a Termination of Employment approved by
the Company as an early retirement; provided that in the case of a Section
16 Grantee, such early retirement must be approved by the Committee.
(t) "SEC" means the Securities and Exchange Commission.
-2-
<PAGE>
(u) "Section 16 Grantee" means a person subject to potential liability
with respect to equity securities of the Company under Section 16(b) of the 1934
Act.
(v) "Stock" means common stock of the Company, par value $.01 per share.
(x) "Subsidiary" means a corporation as defined in Section 424(f) of the
Internal Revenue Code, with the Company being treated as the employer
corporation for purposes of this definition.
(y) "10% Owner" means a person who owns stock (including stock treated
as owned under Section 424(d) of the Internal Revenue Code) possessing more than
10% of the Voting Power of the Company.
(z) "Termination of Employment" occurs the first day on which an
individual is for any reason no longer employed by the Company or any of its
Subsidiaries, or with respect to an individual who is an employee of a
Subsidiary, the first day on which the Company no longer owns voting securities
possessing at least 50% of the Voting Power of such Subsidiary.
(aa) "Voting Power" means the combined voting power of the
then-outstanding voting securities entitled to vote generally in the election of
directors.
3. Scope of the Plan.
-----------------
(a) Number of Shares Available For Delivery Under the Plan. A maximum of
------------------------------------------------------
20,000,000 shares of Stock may be awarded under the Plan. Awards may be made
from authorized but unissued shares of Stock or from Treasury Stock. No more
than an aggregate of 1,800,000 shares of the aforesaid 20,000,000 shares of
Stock may be granted under Article 6(e) and (f). No more than 900,000 shares of
Stock may be granted as stock options to any employee during the duration of the
Plan.
(b) Effect of Expiration or Termination. If and to the extent an Award ,
-----------------------------------
other than an Award granted under Article 6(e) or (f),shall expire or terminate
for any reason without having been exercised in full (including, without
limitation, a cancellation and regrant of an option pursuant to Article
4(c)(vii)), or shall be forfeited, without, in either case, the Grantee having
enjoyed any of the benefits of stock ownership, the shares of Stock associated
with such Award shall become available for other Awards. Except in the case of a
Reload Option granted to a Section 16 Grantee, the grant of a Reload Option
shall not reduce the number of shares of Stock available for other Awards.
(c) Treasury Stock. The Committee shall have the authority to cause the
--------------
Company to purchase from time to time shares of Stock to be held as treasury
shares and used for or in connection with Awards.
(d) Committee Discretion to Cancel Options. The Committee may, in its
--------------------------------------
discretion, elect at any time, should it determine it is in the best interest of
the Company's stockholders to cancel any
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<PAGE>
options granted hereunder, to cancel all or any of the options granted hereunder
and pay the holders of any such options an amount (payable in such proportion as
the Committee may determine in cash or in Stock (valued at the Fair Market Value
of a share of Stock on the date of cancellation of such option)) equal to the
number of shares of Stock subject to such cancelled option, multiplied by the
amount (if any) by which the Fair Market Value of Stock on the date of
cancellation of the option exceeds the Option Price; provided that if the
Committee should determine that not making payment of such amount to the holders
of such option upon the cancellation would be in the best interests of
stockholders of the Company (ignoring in such determination the cost of such
payment and considering only other matters), the Committee may void options
granted hereunder and declare that no payment shall be made to the holders of
such options.
4. Administration.
--------------
(a) Committee Administration. Subject to Article 4(b), the Plan shall be
------------------------
administered by the Committee, which shall consist of not less than two persons
appointed by the Board, who are directors of the Company and not employees of
the Company or any of its Subsidiaries. Membership on the Committee shall be
subject to such limitations (including, if appropriate, a change in the minimum
number of members of the Committee) as the Board deems appropriate to permit
transactions pursuant to the Plan to be exempt from potential liability under
Section 16(b) of the 1934 Act and to comply with Section 162 (m) of the Internal
Revenue Code.
(b) Board Reservation and Delegation. The Board may, in its discretion,
--------------------------------
reserve to itself or delegate to another committee of the Board any or all of
the authority and responsibility of the Committee with respect to Awards to
Grantees who are not Section 16 Grantees at the time any such delegated
authority or responsibility is exercised. Such other committee may consist of
one or more directors who may, but need not be, officers or employees of the
Company or of any of its Subsidiaries. To the extent that the Board has reserved
to itself or delegated the authority and responsibility of the Committee to such
other committee, all references to the Committee in the Plan shall be to such
other committee.
(c) Committee Authority. The Committee shall have full and final
-------------------
authority, in its sole and absolute discretion, but subject to the express
provisions of the Plan, as follows:
(i) to grant Awards,
(ii) to determine (A) when Awards may be granted, and (B)
whether or not specific Awards shall be identified with other specific
Awards, and if so, whether they shall be exercisable cumulatively with,
or alternatively to, such other specific Awards,
(iii) to interpret the Plan and to make all determinations
necessary or advisable for the administration of the Plan,
(iv) to prescribe, amend, and rescind rules and regulations
relating to the Plan,
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<PAGE>
including, without limitation, rules with respect to the exercisability
and nonforfeitability of Awards upon the Termination of Employment of a
Grantee,
(v) to determine the terms and provisions of the Award
Agreements, which need not be identical and, with the consent of the
Grantee, to modify any such Award Agreement at any time,
(vi) to cancel options in accordance with the provision of
Section 3(d),
(vii) except as provided in Section 4(c)(vi) hereof, to cancel,
with the consent of the Grantee, outstanding Awards, and to grant new
Awards in substitution thereof,
(viii) to accelerate the exercisability of, and to accelerate or
waive any or all of the restrictions and conditions applicable to, any
Award,
(ix) to authorize foreign Subsidiaries to adopt plans as
provided in Article 14,
(x) to make such adjustments or modifications to Awards
to Grantees working outside the United States as are necessary and
advisable to fulfill the purposes of the Plan,
(xi) to authorize any action of or make any determination by the
Company as the Committee shall deem necessary or advisable for carrying
out the purposes of the Plan,
(xii) to make appropriate adjustments to, cancel or continue
Awards in accordance with Article 22, and
(xiii) to impose such additional conditions, restrictions, and
limitations upon the grant, exercise or retention of Awards as the
Committee may, before or concurrently with the grant thereof, deem
appropriate, including, without limitation, requiring simultaneous
exercise of related identified Awards, and limiting the percentage of
Awards which may from time to time be exercised by a Grantee.
(d) Committee Determinations Final. The determination of the Committee
------------------------------
on all matters relating to the Plan or any Award Agreement shall be conclusive
and final. No member of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any Award.
5. Eligibility. Awards may be granted to any employee of the Company or
-----------
any of its Subsidiaries. In selecting the individuals to whom Awards may be
granted, as well as in determining the number of shares of Stock subject to, and
the other terms and conditions applicable to, each Award, the Committee shall
take into consideration such factors as it deems relevant in promoting the
purposes of the Plan.
-5-
<PAGE>
6. Conditions to Grants.
--------------------
(a) General Conditions.
------------------
(i) The Grant Date of an Award shall be the date on which the
Committee grants the Award or such later date as specified in advance by
the Committee.
(ii) The term of each Award (subject to Articles 6(c) and 6(d)
with respect to incentive stock options and Reload Options,
respectively) shall be a period of not more than 12 years from the Grant
Date, and shall be subject to earlier termination as herein provided.
(iii) A Grantee may, if otherwise eligible, be granted
additional Awards in any combination.
(iv) The Committee may grant Awards with terms and conditions
which differ among the Grantees thereof. To the extent not set forth in
the Plan, the terms and conditions of each Award shall be set forth in
an Award Agreement.
(b) Grant of Options and Option Price. The Committee may, in its
-------------------------------------
discretion, grant options (which may be options to acquire unrestricted Stock or
restricted Stock) to any employee eligible under Article 5 to receive Awards. No
later than the Grant Date of any option, the Committee shall determine the
Option Price; provided that the Option Price shall, except as provided in
subsection (c) below and in Article 15, not be less than 100% of the Fair Market
Value of the Stock on the Grant Date.
(c) Grant of Incentive Stock Options. At the time of the grant of any
----------------------------------
option, the Committee may designate that such option shall be made subject to
additional restrictions to permit it to qualify as an "incentive stock option"
under the requirements of Section 422 of the Internal Revenue Code. Any option
designated as an incentive stock option:
(i) shall have an Option Price of (A) not less than 100% of the
Fair Market Value of the Stock on the Grant Date or (B) in the case of a
10% Owner, not less than 110% of the Fair Market Value of the Stock on
the Grant Date;
(ii) shall have a term of not more than 10 years (five years, in
the case of a 10% Owner) from the Grant Date, and shall be subject to
earlier termination as provided herein or in the applicable Award
Agreement;
(iii) shall not have an aggregate Fair Market Value (determined
for each incentive stock option at its Grant Date) of Stock with respect
to which incentive stock options are exercisable for the first time by
such Grantee during any calendar year (under the Plan and any other
employee stock option plan of the Grantee's employer or any parent or
subsidiary thereof ("Other Plans")), determined in accordance with the
provisions of Section 422 of the Internal
-6-
<PAGE>
Revenue Code, which exceeds $100,000 (the "$100,000 Limit");
(iv) shall, if the aggregate Fair Market Value of Stock
(determined on the Grant Date) with respect to all incentive stock
options previously granted under the Plan and any Other Plans ("Prior
Grants") and any incentive stock options under such grant (the "Current
Grant") which are exercisable for the first time during any calendar
year would exceed the $100,000 Limit, be exercisable as follows:
(A) the portion of the Current Grant exercisable for
the first time by the Grantee during any calendar year which
would be, when added to any portions of any Prior Grants
exercisable for the first time by the Grantee during such
calendar year with respect to stock which would have an
aggregate Fair Market Value (determined as of the respective
Grant Date for such options) in excess of the $100,000 Limit
shall, notwithstanding the terms of the Current Grant, be
exercisable for the first time by the Grantee in the first
subsequent calendar year or years in which it could be
exercisable for the first time by the Grantee when added to all
Prior Grants without exceeding the $100,000 Limit; and
(B) if, viewed as of the date of the Current Grant, any
portion of a Current Grant could not be exercised under the
provisions of the immediately preceding sentence during any
calendar year commencing with the calendar year in which it is
first exercisable through and including the last calendar year
in which it may by its terms be exercised, such portion of the
Current Grant shall not be an incentive stock option, but shall
be exercisable as a separate option at such date or dates as are
provided in the Current Grant;
(v) shall be granted within 10 years from the earlier of the
date the Plan is adopted or the date the Plan is approved by the
stockholders of the Company; and
(vi) shall require the Grantee to notify the Committee of any
disposition of any Stock issued pursuant to the exercise of the
incentive stock option under the circumstances described in Section
421(b) of the Internal Revenue Code (relating to certain disqualifying
dispositions), within 10 days of such disposition.
Notwithstanding the foregoing and Article 4(c)(v), the Committee may take any
action with respect to any option, including but not limited to an incentive
stock option, without the consent of the Grantee, in order to prevent such
option from being treated as an incentive stock option.
(d) Grant of Reload Options. The Committee may provide in an Award
------------------------
Agreement that a Grantee who exercises all or any portion of an option for
shares of Stock which have a Fair Market Value equal to not less than 100% of
the Option Price for such options ("Exercised Options") and who paid the Option
Price with shares of Stock shall be granted, subject to Article 3, an additional
option ("Reload Option") for a number of shares of stock equal to the sum
("Reload Number") of
-7-
<PAGE>
the number of shares of Stock tendered or withheld in payment of the Option
Price for the Exercised Options plus, if so provided by the Committee, the
number of shares of Stock, if any, retained by the Company in connection with
the exercise of the Exercised Options to satisfy any federal, state or local tax
withholding requirements.
Reload Options shall be subject to the following terms and conditions:
(i) the Grant Date for each Reload Option shall be the date of
exercise of the Exercised Option to which it relates;
(ii) subject to Article 6(d)(iii) below, the Reload Option may
be exercised at any time during the unexpired term of the Exercised
Option (subject to earlier termination thereof as provided in the Plan
and in the applicable Award Agreement); and
(iii) the terms of the Reload Option shall be the same as the
terms of the Exercised Option to which it relates, except that (A) the
Option Price shall be the Fair Market Value of the Stock on the Grant
Date of the Reload Option and (B) no Reload Option may be exercised
within one year from the Grant Date thereof.
(e) Grant of Shares of Restricted Stock.
-----------------------------------
(i) The Committee may, in its discretion, grant shares of
restricted Stock to any employee eligible under Article 5 to receive
Awards.
(ii) Before the grant of any shares of restricted Stock, the
Committee shall determine, in its discretion:
(A) whether the certificates for such shares shall be
delivered to the Grantee or held (together with a stock power
executed in blank by the Grantee) in escrow by the Secretary of
the Company until such shares become nonforfeitable or are
forfeited,
(B) the per share purchase price of such shares, which
may be zero provided, however, that
(1) the per share purchase price of all such
shares (other than treasury shares) shall not be less
than the Minimum Consideration for each such share; and
(2) if such shares are to be granted to a
Section 16 Grantee, the per share purchase price of any
such shares shall also be at least 50% of the Fair
Market Value of the Stock on the Grant Date unless such
shares are granted for no monetary consideration (in
which case treasury shares are to be delivered) or with
a purchase price per share equal to the Minimum
Consideration for the
-8-
<PAGE>
Stock, and
(C) the restrictions applicable to such grant;
(iii) Payment of the purchase price (if greater than zero) for
shares of restricted Stock shall be made in full by the Grantee before
the delivery of such shares and, in any event, no later than 10 days
after the Grant Date for such shares. Such payment may, at the election
of the Grantee, be made in any one or any combination of the following:
(A) cash,
(B) Stock valued at its Fair Market Value on the date
of payment or, if the date of payment is not a business day, the
next succeeding business day, or
(C) with the approval of the Committee, shares of
restricted Stock, each valued at the Fair Market Value of a
share of Stock on the date of payment or, if the date of payment
is not a business day, the next succeeding business day
provided, however, that, in the case of payment in Stock or restricted
Stock,
(1) the use of Stock or restricted Stock in
payment of such purchase price by a Section 16 Grantee
is subject to (i) the availability of an exemption of
such use of stock from potential liability under
Section 16(b) of the 1934 Act, or (ii) the
inapplicability of such Section;
(2) in the discretion of the Committee and to
the extent permitted by law, payment may also be made
in accordance with Article 9; and
(3) if the purchase price for restricted Stock
("New Restricted Stock") is paid with shares of
restricted Stock ("Old Restricted Stock"), the
restrictions applicable to the New Restricted Stock
shall be the same as if the Grantee had paid for the
New Restricted Stock in cash unless, in the judgment of
the Committee, the Old Restricted Stock was subject to
a greater risk of forfeiture, in which case a number of
shares of New Restricted Stock equal to the number of
shares of Old Restricted Stock tendered in payment for
New Restricted Stock may in the discretion of the
Committee be subject to the same restrictions as the
Old Restricted Stock, determined immediately before
such payment.
(iv) The Committee may, but need not, provide that all or any
portion of a Grantee's Award of restricted Stock shall be forfeited
(A) except as otherwise specified in the Award
Agreement, upon the
-9-
<PAGE>
Grantee's Termination of Employment within a specified time
period after the Grant Date, or
(B) if the Company or the Grantee does not achieve
specified performance goals within a specified time period after
the Grant Date and before the Grantee's Termination of
Employment, or
(C) upon failure to satisfy such other restrictions as
the Committee may specify in the Award Agreement.
(v) If a share of restricted Stock is forfeited, then
(A) the Grantee shall be deemed to have resold such
share of restricted Stock to the Company at the lesser of (1)
the purchase price paid by the Grantee (such purchase price
shall be deemed to be zero dollars ($0) if no purchase price was
paid) or (2) the Fair Market Value of a share of Stock on the
date of such forfeiture;
(B) the Company shall pay to the G rantee the amount
determined under clause (A) of this sentence as soon as is
administratively practical; and
(C) such share of restricted Stock shall cease to be
outstanding, and shall no longer confer on the Grantee thereof
any rights as a stockholder of the Company, from and after the
date of the Company's tender of the payment specified in clause
(B) of this sentence, whether or not such tender is accepted by
the Grantee.
(vi) Any share of restricted Stock shall bear an appropriate
legend specifying that such share is non-transferable and subject to the
restrictions set forth in the Plan. If any shares of restricted Stock
become nonforfeitable, the Company shall cause certificates for such
shares to be issued or reissued without such legend and delivered to the
Grantee or, at the request of the Grantee, shall cause such shares to be
credited to a brokerage account specified by the Grantee.
(f) Grant of Unrestricted Stock. The Committee may, in its
---------------------------
discretion, grant shares of unrestricted Stock to any employee eligible
under Article 5 to receive Awards.
7. Non-transferability. Except as otherwise provided in the terms of a
-------------------
specific grant, each Award (other than unrestricted Stock) granted hereunder
shall by its terms not be assignable or transferable other than by will or the
laws of descent and distribution and may be exercised, during the Grantee's
lifetime, only by the Grantee. Each share of restricted Stock shall be
non-transferable until such share becomes nonforfeitable. Notwithstanding the
foregoing, the Grantee may, to the extent provided in the Plan and in a manner
specified by the Committee, (a) designate in writing a beneficiary to exercise
his options after the Grantee's death, and (b) transfer an option (other than an
incentive stock option) to a revocable, inter vivos trust as to which the
-10-
<PAGE>
Grantee is both the settlor and the trustee.
8. Exercise.
--------
(a) Exercise of Options. Subject to Articles 4(c)(vii), 14 and 17, and
-------------------
such terms and conditions as the Committee may impose, each option shall be
exercisable in one or more installments commencing not earlier than the first
anniversary of the Grant Date of such option. Options shall not be exercisable
for twelve months following a hardship distribution that is subject to Treasury
Regulation ss. 1.401(k)-1(d)(2)(iv)(B)(4), except to the extent permitted
thereunder. Options shall not be exercisable for less than 25 shares of Stock
unless the exercise represents the entire remaining balance of a grant or
grants. Each option shall be exercised by delivery to the Company of written
notice of intent to purchase a specific number of shares of Stock or restricted
Stock subject to the option. The Option Price of any shares of Stock or
restricted Stock as to which an option shall be exercised shall be paid in full
at the time of the exercise. Payment may, at the election of the Grantee, be
made in any one or any combination of the following forms:
(i) check in such form as may be satisfactory to the Committee,
(ii) Stock valued at its Fair Market Value on the date of
exercise or, if the date of exercise is not a business day, the next
succeeding business day,
(iii) with the approval of the Committee, shares of restricted
Stock, each valued at the Fair Market Value of a share of Stock on the
date of exercise or, if the date of exercise is not a business day, the
next succeeding business day,
(iv) through simultaneous sale through a broker of shares of
unrestricted Stock acquired on exercise, as permitted under Regulation T
of the Federal Reserve Board, or
(v) by authorizing the Company in his or her written notice of
exercise to withhold from issuance a number of shares of Stock issuable
upon exercise of such option which, when multiplied by the Fair Market
Value of Common Stock on the date of exercise (or, if the date of
exercise is not a business day, the next succeeding business day), is
equal to the aggregate Option Price payable with respect to the option
so exercised.
In the event a Grantee elects to pay the Option Price payable with
respect to an option pursuant to clause (ii) above, (A) only a whole number of
share(s) of Stock (and not fractional shares of Stock) may be tendered in
payment, (B) such Grantee must present evidence acceptable to the Company that
he or she has owned any such shares of Stock tendered in payment of the Option
Price (and that such shares of Stock tendered have not been subject to any
substantial risk of forfeiture) for at least six months prior to the date of
exercise, and (C) Stock must be delivered to the Company. Delivery may, at the
election of the Grantee, be made either by (I) delivery of the certificate(s)
for all such shares of Stock tendered in payment of the Option Price,
accompanied by duly executed instruments of transfer in a form acceptable to the
Company, or (II) direction to the Grantee's broker
-11-
<PAGE>
to transfer, by book entry, such shares of Stock from a brokerage account of the
Grantee to a brokerage account specified by the Company. When payment of the
Option Price is made by tender of Stock, the difference, if any, between the
aggregate Option Price payable with respect to the option being exercised and
the Fair Market Value of the share(s) of Stock tendered in payment (plus any
applicable taxes) shall be paid by check. No Grantee may tender shares of Stock
having a Fair Market Value exceeding the aggregate Option Price payable with
respect to the Option being exercised
In the event a Grantee elects to pay the Option Price payable with
respect to an option pursuant to clause (v) above, (A) only a whole number of
share(s) of Stock (and not fractional shares of Stock) may be withheld in
payment and (B) such Grantee must present evidence acceptable to the Company
that he or she has owned a number of shares of Stock at least equal to the
number of shares of Stock to be withheld in payment of the Option Price (and
that such owned shares of Stock have not been subject to any substantial risk of
forfeiture) for at least six months prior to the date of exercise. When payment
of the Option Price is made by the withholding of shares of Stock, the
difference, if any, between the aggregate Option Price payable with respect to
the option being exercised and the Fair Market Value of the share(s) of Stock
withheld in payment (plus any applicable taxes) shall be paid by check. No
Grantee may authorize the withholding of shares of Stock having a Fair Market
Value exceeding the aggregate Option Price payable with respect to the option
being exercised. Any withheld shares of Stock shall no longer be issuable under
such option.
If restricted Stock ("Tendered Restricted Stock") is used to pay the
Option Price for Stock, then a number of shares of Stock acquired on exercise of
the option equal to the number of shares of Tendered Restricted Stock shall be
subject to the same restrictions as the Tendered Restricted Stock, determined as
of the date of exercise of the option. If the Option Price for restricted Stock
is paid with Tendered Restricted Stock, and if the Committee determines that the
restricted Stock acquired on exercise of the option is subject to restrictions
("Greater Restrictions") that cause it to have a greater risk of forfeiture than
the Tendered Restricted Stock, then notwithstanding the preceding sentence, all
the restricted Stock acquired on exercise of the option shall be subject to such
Greater Restrictions.
Shares of unrestricted Stock acquired by a Grantee on exercise of an
option shall be delivered to the Grantee or, at the request of the Grantee,
shall be credited directly to a brokerage account specified by the Grantee.
(b) Special Rules for Section 16 Grantees. Subject to Article 15, no
---------------------------------------
option shall be exercisable by a Section 16 Grantee during the first six months
after its Grant Date, if such exercise (or the sale of shares received upon
exercise) would result in the loss of an exemption for a grant under Section
16(b) of the 1934 Act.
(c) Permissible Shares Issued. No shares of Stock shall be issued
-------------------------
hereunder upon option exercise except shares of Stock available under Article
3(a). EACH GRANTEE, BY ACCEPTANCE OF AN AWARD, WAIVES ALL RIGHTS TO SPECIFIC
PERFORMANCE OR INJUNCTIVE OR OTHER EQUITABLE RELIEF AND
-12-
<PAGE>
ACKNOWLEDGES THAT HE HAS AN ADEQUATE REMEDY AT LAW IN THE FORM OF DAMAGES.
9. Loans and Guarantees. The Committee may, in its discretion:
--------------------
(a) allow a Grantee to defer payment to the Company of all or any
portion of (i) the Option Price of an option, (ii) the purchase price of a share
of restricted Stock, or (iii) any taxes associated with a benefit hereunder
which is not a cash benefit at the time such benefit is so taxable, or
(b) cause the Company to guarantee a loan from a third party to the
Grantee, in an amount equal to all or any portion of such Option Price, purchase
price, or any related taxes.
Any such payment deferral or guarantee by the Company pursuant to this Article 9
shall be, on a secured or unsecured basis, for such periods, at such interest
rates, and on such other terms and conditions as the Committee may determine.
Notwithstanding the foregoing, a Grantee shall not be entitled to defer the
payment of such Option Price, purchase price, or any related taxes unless the
Grantee (i) enters into a binding obligation to pay the deferred amount and (ii)
except with respect to treasury shares, pays upon exercise of an option or grant
of shares of restricted Stock, as the case may be, an amount equal to or greater
than the aggregate Minimum Consideration therefor. If the Committee has
permitted a payment deferral or caused the Company to guarantee a loan pursuant
to this Article 9, then the Committee may, in its discretion, require the
immediate payment of such deferred amount or the immediate release of such
guarantee upon the Grantee's Termination of Employment or if the Grantee sells
or otherwise transfers the Grantee's shares of Stock purchased pursuant to such
deferral or guarantee.
10. Notification under Section 83(b). The Committee may, on the Grant Date
--------------------------------
or any later date, prohibit a Grantee from making the election described below.
If the Committee has not prohibited such Grantee from making such election, and
the Grantee shall, in connection with the exercise of any option, or the grant
of any share of restricted Stock, make the election permitted under Section
83(b) of the Internal Revenue Code (i.e., an election to include in such
Grantee's gross income in the year of transfer the amounts specified in Section
83(b) of the Internal Revenue Code), such Grantee shall notify the Company of
such election within 10 days of filing notice of the election with the Internal
Revenue Service, in addition to any filing and notification required pursuant to
regulations issued under the authority of Section 83(b) of the Internal Revenue
Code.
11. Mandatory Withholding Taxes.
---------------------------
(a) Whenever under the Plan, cash or shares of Stock are to be delivered
upon exercise or payment of an Award or upon a share of restricted Stock
becoming nonforfeitable, or any other event with respect to rights and benefits
hereunder, the Company shall be entitled to require as a condition of delivery
(i) that the Grantee remit an amount sufficient to satisfy all federal, state,
and local withholding tax requirements related thereto, (ii) the withholding of
such sums from compensation otherwise due to the Grantee or from any shares of
Stock due to the Grantee under the Plan or (iii) any combination of the
foregoing.
-13-
<PAGE>
(b) If any disqualifying disposition described in Article 6(c)(vi) is
made with respect to shares of Stock acquired under an incentive stock option
granted pursuant to the Plan or any election described in Article 10 is made,
then the person making such disqualifying disposition or election shall remit to
the Company an amount sufficient to satisfy all federal, state, and local
withholding taxes thereby incurred; provided that, in lieu of or in addition to
the foregoing, the Company shall have the right to withhold such sums from
compensation otherwise due to the Grantee or from any shares of Stock due to the
Grantee under the Plan.
12. Elective Share Withholding.
--------------------------
(a) Subject to the prior approval of the Committee and to Article 12(b),
a Grantee may elect the withholding ("Share Withholding") by the Company of a
portion of the shares of Stock otherwise deliverable to such Grantee upon the
exercise or payment of an Award or upon a share of restricted Stock's becoming
nonforfeitable (each a "Taxable Event") having a Fair Market Value equal to
(i) the minimum amount necessary to satisfy required federal,
state, or local withholding tax liability attributable to the Taxable
Event; or
(ii) with the Committee's prior approval, a greater amount, not
to exceed the estimated total amount of such Grantee's tax liability
with respect to the Taxable Event.
(b) Each Share Withholding election by a Grantee shall be subject
to the following restrictions:
(i) any Grantee's election shall be subject to the Committee's
right to revoke its approval of Share Withholding by such Grantee at any
time before the Grantee's election if the Committee has reserved the
right to do so at the time of its approval;
(ii) if the Grantee is a Section 16 Grantee, such Grantee's
election shall be subject to the disapproval of the Committee at any
time, whether or not the Committee has reserved the right to do so; and
(iii) the Grantee's election must be made before the date (the
"Tax Date") on which the amount of tax to be withheld is determined.
13. Termination of Employment.
-------------------------
(a) Restricted Stock. Except as otherwise provided by the Committee
----------------
on or after the Grant Date, a Grantee's shares of restricted Stock that are
forfeitable shall be forfeited upon the Grantee's Termination of Employment.
(b) Other Awards. If a Grantee has a Termination of Employment,
------------
then, unless otherwise
-14-
<PAGE>
provided in the Grant Agreement, any unexercised option to the extent
exercisable on the date of the Grantee's Termination of Employment may be
exercised by the Grantee, in whole or in part, at any time within three months
following such Termination of Employment, except that
(i) if the Grantee's Termination of Employment is on
account of Disability, then any unexercised option to the extent
exercisable at the date of such Termination of Employment, may be
exercised, in whole or in part, by the Grantee at any time within two
years after the date of such Termination of Employment; and
(ii) if the Grantee's Termination of Employment is on
account of Retirement, then any unexercised option to the extent
exercisable at the date of such Termination of Employment, may be
exercised, in whole or in part, by the Grantee at any time within five
years after the date of such Termination of Employment; and
(iii) if the Grantee's Termination of Employment is
caused by the death of the Grantee or if the Grantee's death occurs
during the period following Termination of Employment during which the
option would be exercisable under the preceding clause of Article 13(b)
or under Article 13(b)(i) or (ii), then any unexercised option to the
extent exercisable on the date of the Grantee's death, may be exercised,
in whole or in part, at any time within two years after the Grantee's
death by the Grantee's personal representative or by the person to whom
the option is transferred by will or the applicable laws of descent and
distribution.
(c) Maximum Extension. Notwithstanding the foregoing, no Award shall be
-----------------
exercisable beyond the maximum term permitted under the original Award Agreement
unless the Committee explicitly extends such original term, in which case such
term shall not be extended beyond the maximum term permitted by the Plan.
14. Equity Incentive Plans of Foreign Subsidiaries. The Committee may
-------------------------------------------------
authorize any foreign Subsidiary to adopt a plan for granting Awards ("Foreign
Equity Incentive Plan"). All awards granted under such Foreign Equity Incentive
Plans shall be treated as grants under the Plan. Such Foreign Equity Incentive
Plans shall have such terms and provisions as the Committee permits not
inconsistent with the provisions of the Plan and which may be more restrictive
than those contained in the Plan. Awards granted under such Foreign Equity
Incentive Plans shall be governed by the terms of the Plan except to the extent
that the provisions of the Foreign Equity Incentive Plans are more restrictive
than the terms of the Plan, in which case such terms of the Foreign Equity
Incentive Plans shall control.
15. Substituted Awards. The Committee may grant substitute awards for any
-------------------
cancelled Award granted under this Plan or any plan of any entity acquired by
the Company or any of its Subsidiaries in accordance with this Article 15. If
the Committee cancels any Award (granted under this Plan, or any plan of any
entity acquired by the Company or any of its Subsidiaries), and a new Award is
substituted therefor, then the Committee may, in its discretion, determine the
terms and
-15-
<PAGE>
conditions of such new Award, and may provide that the Grant Date of the
cancelled Award shall be the date used to determine the earliest date or dates
for exercising the new substituted Award under Article 8 hereof so that the
Grantee may exercise the substituted Award at the same time as if the Grantee
had held the substituted Award since the Grant Date of the cancelled Award.
16. Securities Law Matters.
----------------------
(a) If the Committee deems necessary to comply with the Securities Act
of 1933, the Committee may require a written investment intent representation by
the Grantee and may require that a restrictive legend be affixed to certificates
for shares of Stock.
(b) If based upon the opinion of counsel for the Company, the Committee
determines that the exercise or nonforfeitability of, or delivery of benefits
pursuant to, any Award could violate any applicable provision of (i) federal or
state securities law or regulations or (ii) the listing requirements of any
national securities exchange on which are listed any of the Company's equity
securities, then the Committee may postpone any such exercise, nonforfeitability
or delivery, as the case may be, but the Company shall use its best efforts to
cause such exercise, nonforfeitability or delivery to comply with all such
provisions at the earliest practicable date.
17. No Funding Required. Benefits payable under the Plan to any person
-------------------
shall be paid directly by the Company. The Company shall not be required to
fund, or otherwise segregate assets to be used for payment of, benefits under
the Plan.
18. No Employment Rights. Neither the establishment of the Plan, nor the
---------------------
granting of any Award shall be construed to (a) give any Grantee the right to
remain employed by the Company or any of its Subsidiaries or to any benefits not
specifically provided by the Plan or (b) in any manner modify the right of the
Company or any of its Subsidiaries to modify, amend, or terminate any of its
employee benefit plans.
19. Rights as a Stockholder. A Grantee shall not, by reason of any Award
------------------------
(other than restricted Stock) have any right as a stockholder of the Company
with respect to the shares of Stock which may be deliverable upon exercise or
payment of such Award until such shares have been delivered to him. Shares of
restricted Stock held by a Grantee or held in escrow by the Secretary of the
Company shall confer on the Grantee all rights of a stockholder of the Company,
except as otherwise provided in the Plan or the Award Agreement. The Committee,
in its discretion, at the time of grant of restricted Stock, may permit or
require the payment of cash dividends thereon to be deferred and, if the
Committee so determines, reinvested in additional restricted Stock to the extent
shares are available under Article 3, or otherwise reinvested in Stock. Stock
dividends, deferred cash dividends and dividends in the form of property other
than cash, issued with respect to restricted Stock shall, unless otherwise
provided in the Award Agreement, be treated as additional shares of restricted
Stock that are subject to the same restrictions and other terms as apply to the
shares with respect to which such dividends are issued. The Committee may, in
its discretion, provide for crediting and payment of interest on deferred cash
dividends.
-16-
<PAGE>
20. Nature of Payments. Any and all grants, payments of cash, or
--------------------
deliveries of shares of Stock hereunder shall constitute special incentive
payments to the Grantee and shall not be taken into account in computing the
amount of salary or compensation of the Grantee for the purposes of determining
any pension, retirement, death or other benefits under (a) any pension,
retirement, profit-sharing, bonus, life insurance or other employee benefit plan
of the Company or any of its Subsidiaries or (b) any agreement between the
Company or any Subsidiary, on the one hand, and the Grantee, on the other hand,
except as such plan or agreement shall otherwise expressly provide.
21. Non-Uniform Determinations. Neither the Committee's nor the Board's
---------------------------
determinations under the Plan need be uniform and may be made by the Committee
or the Board selectively among persons who receive, or are eligible to receive,
Awards (whether or not such persons are similarly situated). Without limiting
the generality of the foregoing, the Committee shall be entitled, among other
things, to make non-uniform and selective determinations, to enter into
non-uniform and selective Award Agreements as to (a) the identity of the
Grantees, (b) the terms and provisions of Awards, and (c) the treatment, under
Article 13, of Terminations of Employment.
22. Adjustments. The Committee may make such provision with respect to
-----------
Awards, including without limitation, equitable adjustment of
(a) the aggregate numbers of shares of Stock available under Articles
3(a) and 3(b),
(b) the number of shares of Stock or shares of restricted Stock
covered by an Award, and
(c) the Option Price, or
the termination or continuation of an Award as it may determine to be
appropriate and equitable to reflect a stock dividend, stock split, reverse
stock split, share combination, recapitalization, merger, consolidation,
acquisition of property or shares, separation, spin-off, reorganization, stock
rights offering, liquidation, or similar event, of or by the Company.
23. Amendment of the Plan. The Board may from time to time in its
-----------------------
discretion amend or modify the Plan without the approval of the stockholders of
the Company, except as such stockholder approval may be required (a) to permit
transactions in Stock pursuant to the Plan to be exempt from potential liability
under Section 16(b) of the 1934 Act, (b) to permit the Company to deduct, in
computing its income tax liability pursuant to the provisions of the Internal
Revenue Code, compensation resulting from Awards, (c) to retain incentive stock
option treatment under Section 422 of the Internal Revenue Code, or (d) under
the listing requirements of any securities exchange on which are listed any of
the Company's equity securities.
24. Termination of the Plan. The Plan shall terminate on the tenth (10th)
-----------------------
anniversary of the Effective Date or at such earlier time as the Board may
determine. Any termination, whether in whole or in part, shall not affect (a)
any Award then outstanding under the Plan, or (b) the Company's ability to make
adjustments to or cancel or continue Awards in accordance with Article 22.
-17-
<PAGE>
25. No Illegal Transactions. The Plan and all Awards granted pursuant to
------------------------
it are subject to all laws and regulations of any governmental authority which
may be applicable thereto; and notwithstanding any provision of the Plan or any
Award, Grantees shall not be entitled to exercise Awards or receive the benefits
thereof and the Company shall not be obligated to deliver any Stock or pay any
benefits to a Grantee if such exercise, delivery, receipt or payment of benefits
would constitute a violation by the Grantee or the Company of any provision of
any such law or regulation.
26. Controlling Law. The law of the State of Delaware except its law with
---------------
respect to choice of l aw, shall be c ontrolling in all matters relating to or
arising out of the Plan or any Award.
27. Severability. If all or any part of the Plan is declared by any court
------------
or governmental authority to be unlawful or invalid, such unlawfulness or
invalidity shall not serve to invalidate any portion of the Plan not declared to
be unlawful or invalid. Any Article or part of an Article so declared to be
unlawful or invalid shall, if possible, be construed in a manner which will give
effect to the terms of such Article or part of an Article to the fullest extent
possible while remaining lawful and valid.
-18-
EXHIBIT 10.18
THE ALLSTATE CORPORATION
ALLSTATE PLAZA
NORTHBROOK, ILLINOIS 60062
Date:
EMPLOYEE NAME
ADDRESS
CITY, STATE ZIP CODE
1. Grant of Restricted Stock.
-------------------------
Pursuant to action taken by the Board of Directors of The Allstate
Corporation (the "Company") and the Compensation and Nominating
Committee (the "Committee"), under The Allstate Corporation Equity
Incentive Plan (the "Plan"), the terms of which are specifically
incorporated herein by reference, you are hereby granted # shares of
restricted Stock of the Company, upon and subject to the provisions and
conditions hereinafter set forth.
Your shares of restricted Stock shall be exchangeable for shares of
unrestricted common Stock of the Company and certificates shall be
issued to you in one installment of ____ shares on _____,_____. Shares
of restricted Stock may not be sold, transferred, pledged or otherwise
assigned and shall, except to the extent exchangeable for shares of
unrestricted common stock of the Company as hereinafter provided or as
otherwise provided by the Committee after the date of this grant, be
automatically cancelled upon your Termination of Employment with the
Company and its wholly-owned subsidiaries. You must sign this Agreement
and "Stock Power" form and return them to The Allstate Corporation,
Stock Option Office, 2775 Sanders Road, Northbrook, Illinois, 60062 in
order to comply with the terms of this grant.
Until your shares of restricted Stock become unrestricted as set forth
above, no certificates for your restricted Stock will be issued to you,
and your shares of restricted Stock will be evidenced by certificates
held by or on behalf of the Company, in book-entry form, or otherwise,
as determined by the Company. As a holder of shares of restricted
Stock, you are otherwise entitled to all the rights (including voting
and dividend rights) of a holder of an equivalent number of shares of
unrestricted common Stock of the Company.
2. Tax Withholding.
---------------
Under existing laws and regulations, in general, the fair market value
of the shares granted hereunder on the date such shares become
exchangeable for shares of unrestricted common Stock of the Company
will be subject to federal income tax at ordinary rates and to social
security tax and their respective withholding requirements, and may be
subject to state and local taxes and withholding requirements. The
payment of all federal, state and local taxes is your personal
responsibility. However, the Company, at its discretion, shall be
entitled to require as a condition of delivery of a share of Stock upon
a share of restricted Stock becoming nonforfeitable that (I) you pay to
the Company an amount sufficient to satisfy all federal, state
<PAGE>
and local withholding tax requirements, (ii) an amount sufficient to
satisfy all federal, state and local withholding tax requirements be
withheld by the Company from compensation otherwise due to you or from
any shares due to you under the Plan, or (iii) a combination of (I) and
(ii).
3. Adjustments.
-----------
The Committee may make provision, including but not limited to
equitable adjustments in the number of shares of restricted Stock
covered by this Award or for the termination or continuation of this
Award as it may determine to be appropriate and equitable to reflect
any stock dividend, stock split, reverse stock split, share
combination, recapitalization, merger, consolidation, acquisition of
property or shares, separation, spin-off, reorganization, stock rights
offering, liquidation, or similar event of the Company.
4. Changes in Law.
--------------
The Company reserves and shall have the right, by written notice to
you, to change the provisions of the Award in any manner that it may
deem necessary or advisable to carry out the purpose of its grant as a
result of any change in applicable laws or regulations or any future
law, regulation, ruling or judicial decision; provided that any such
change shall be applicable only to shares for which payment shall not
then have been made as herein provided.
5. Severability.
------------
If all or any part if this Award is declared by any court or
governmental authority to be unlawful or invalid, such unlawfulness or
invalidity shall not serve to invalidate any portion of this Agreement
not declared to be unlawful or invalid. Any part of this Agreement so
declared to be unlawful or invalid shall, if possible, be construed in
a manner which will give effect to the terms or such part to the
fullest extent possible while remaining lawful and valid.
6. Definitions.
-----------
Unless otherwise specified, all capitalized terms herein shall have the
same meaning as such terms have in the Plan.
Jerry D. Choate
Chairman and Chief Executive Officer
THE ALLSTATE CORPORATION
You must sign and return one copy of this Agreement in the envelope provided. By
doing so, you are indicating your acceptance of this Award and the terms of this
Agreement and the Plan.
- - --------------------------------------------
Employee Signature
- - --------------------------------------------
<PAGE>
Date
STOCK POWER
FOR VALUE received, I hereby sell, assign and transfer unto The Allstate
Corporation __________ shares of The Allstate Corporation Common Stock, par
value $.01, awarded to me on ____________ under The Allstate Corporation Equity
Incentive Plan and represented by the within Certificate, and do hereby
irrevocably constitute and appoint the Secretary or any Assistant Secretary of
The Allstate Corporation as attorney to transfer the said stock on the books of
The Allstate Corporation, with full power of substitution in the premises.
Dated: _____________
-------------------------------
Signature
EXHIBIT 10.20
THE ALLSTATE CORPORATION
EMPLOYEES REPLACEMENT STOCK PLAN
As Amended and Restated on November 12, 1996
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE
----
1. Purpose............................................................1
2. Definitions........................................................1
3. Scope of the Plan..................................................5
(a) Number of Shares Available Under Plan.....................5
(b) Expired or Terminated Awards not Available................6
(c) Treasury Stock............................................6
4. Administration.....................................................6
(a) Committee Administration..................................6
(b) Board Reservation and Delegation..........................6
(c) Committee Authority.......................................6
(d) Committee Determinations Final............................7
5. Eligibility........................................................7
6. Awards.............................................................8
(a) In General................................................8
(b) Options and Reload Options................................8
(c) Stock Appreciation Rights.................................10
(d) Restricted Stock..........................................10
7. Non-transferability................................................12
8. Exercise...........................................................12
(a) Exercise of Replacement Options...........................12
(b) Exercise of Replacement Stock Appreciation Rights.........13
(c) Special Rules for Section 16 Grantees.....................13
9. Notification under Section 83(b)...................................13
10. Withholding Taxes..................................................13
(a) Mandatory Withholding.....................................13
(b) Elective Share Withholding................................14
11. Termination of Employment..........................................15
(a) Restricted Stock..........................................15
(b) Other Awards..............................................15
-i-
<PAGE>
TABLE OF CONTENTS
-----------------
(CONTINUED)
PAGE
----
12. Securities Law Matters.............................................15
13. No Funding Required................................................16
14. No Employment Rights...............................................16
15. Rights as a Stockholder............................................16
16. Nature of Payments.................................................16
17. Non-Uniform Determinations.........................................16
18. Adjustments........................................................17
19. Amendment of the Plan..............................................17
20. Termination of the Plan............................................17
21. No Illegal Transactions............................................17
22. Controlling Law....................................................17
23. Severability.......................................................18
-ii-
<PAGE>
The Plan. The Allstate Corporation ("Company") hereby establishes The
--------
Allstate Corporation Employees Replacement Stock Plan (as set forth herein and
from time to time amended, the "Plan"), subject to approval by the Company's
stockholders at the 1995 Annual Meeting of Stockholders and subject to the
occurrence of the Distribution, as defined hereinafter, to be effective on the
Distribution Date, as defined hereinafter ("Effective Date").
1. Purpose. The purpose of the Plan is to provide continuation of
-------
benefits and opportunities provided to former participants in any of the Sears
Plans, which benefits and opportunities were lost, terminated, forfeited,
cancelled (with or without consent of the grantee) or reduced as a result of the
Distribution, by providing for the grant of substitute Awards hereunder.
2. Definitions.
-----------
As used in the Plan, terms defined parenthetically immediately after
their use shall have the respective meanings provided by such definitions and
the terms set forth below shall have the following meanings (such meanings to be
equally applicable to both the singular and plural forms of the terms defined):
(a) "Allstate Group Grantee" means any individual who is employed on
the Distribution Date or who, immediately prior to his most recent Termination
of Employment prior to the Distribution Date, was employed by The Allstate
Corporation or any Allstate Affiliate, as defined in the Separation Agreement,
except The PMI Group, Inc. ("PMI") or any of PMI's subsidiaries.
(b) "Award" means an option, share of restricted Stock, or stock
appreciation right granted under the Plan.
(c) "Award Agreement" means the w ritten agreement by which an Award is
evidenced.
(d) "Board" means the Board of Directors of the Company.
(e) "Change of Control" means any of the following occurring more than
five business days after the Distribution:
(i) the acquisition by any person or group of beneficial
ownership of any of the Stock or the Voting Power of the Company, which
acquisition results in such person or group having beneficial ownership
of 20% or more of either the then-outstanding Stock or Voting Power of
the Company, except that (A) no such person or group shall be deemed to
own beneficially (1) any securities acquired directly from the Company
pursuant to a written agreement with the Company, (2) any securities
held by the Company or a Subsidiary or any employee benefit plan (or
any related trust) of the Company or a Subsidiary, or (3) any
securities acquired directly from any Grantee, except securities
acquired in transactions effected through the facilities of a
registered
<PAGE>
national securities exchange or any automated quotation system of the
National Association of Securities Dealers, Inc., and (B) no Change of
Control shall be deemed to have occurred solely by reason of any such
acquisition by a corporation with respect to which, after such
acquisition, more than 60% of both the then-outstanding common shares
of such corporation and the Voting Power of such corporation are then
beneficially owned, directly or indirectly, by the persons who were the
beneficial owners of the Stock and Voting Power of the Company
immediately before such acquisition in substantially the same
proportion as their ownership, immediately before such acquisition, of
the then-outstanding Stock or the Voting Power of the Company, as the
case may be;
(ii) individuals who, as of the Effective Date, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided that any individual who becomes
a director after the Effective Date whose election, or nomination for
election by the Company's stockholders, was approved by a vote of at
least two-thirds of the directors then comprising the Incumbent Board
shall be considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such individual
whose initial assumption of office is in connection with an actual or
threatened election contest relating to the election of the directors
of the Company (as such terms are used in Rule 14a-11 under the 1934
Act); or
(iii) approval by the stockholders of the Company of (A) a merger,
reorganization or consolidation with respect to which the individuals
and entities who were the respective beneficial owners of the Stock and
Voting Power of the Company immediately before such merger,
reorganization or consolidation do not, after such merger,
reorganization or consolidation, beneficially own, directly or
indirectly, more than 60% of, respectively, the then outstanding common
shares and the Voting Power of the corporation resulting from such
merger, reorganization or consolidation, (B) a liquidation or
dissolution of the Company or (C) the sale or other disposition of all
or substantially all of the assets of the Company; provided, however,
that for the purposes of this clause (iii), the votes of all Section 16
Grantees shall be disregarded in determining whether stockholder
approval has been obtained.
For purposes of this definition, "person" means such term as used in SEC Rule
13d-5(b) under the 1934 Act, "beneficial owner" means such term as defined in
SEC Rule 13d-3 under the 1934 Act, and "group" means such term as defined in
Section 13(d) of the 1934 Act.
Notwithstanding the foregoing, (a) a Change of Control shall be deemed
not to have occurred with respect to any Section 16 Grantee if such Section 16
Grantee is, by agreement (written or otherwise), a participant on such Section
16 Grantee's own behalf in a transaction which causes the Change of Control to
occur; and (b) the Distribution shall not be deemed to be a Change in Control.
-2-
<PAGE>
(f) "Change of Control Value" means the Fair Market Value of a share
of Stock on the date of receipt of notice of exercise of a limited stock
appreciation right issued to replace a limited stock appreciation right granted
under a Sears Plan.
(g) "Committee" means the committee of the Board appointed pursuant to
Article 4.
(h) "Company" means The Allstate Corporation, a Delaware corporation.
(i) "Distribution" means the distribution by Sears to holders of Sears
common shares of all of the shares of Stock owned by it.
(j) "Distribution Date" means the date to be determined by the board
of directors of Sears, as of which the Distribution shall be effected.
(k) "Effective Date" means the date described in the first paragraph of
the Plan.
(l) "Fair Market Value" of any security of the Company or any other
issuer (other than Fair Market Value of Stock as of the Distribution Date and
Fair Market Value of a Sears common share as of the Distribution Date) means, as
of any applicable date:
(i) if the security is listed for trading on the New York Stock
Exchange, the mean between the high and low prices of the security as
reported on the New York Stock Exchange Composite Tape, or if no such
reported sale of the security shall have occurred on such date, on the
next preceding date on which there was such a reported sale, or
(ii) if the security is not so listed, but is listed on another
national securities exchange or authorized for quotation on the
National Association of Securities Dealers Inc.'s NASDAQ National
Market ("NASDAQ/NM"), the closing price, regular way, of the security
on such exchange or NASDAQ/NM, as the case may be, or if no such
reported sale of the security shall have occurred on such date, on the
next preceding date on which there was such a reported sale, or
(iii) if the security is not listed for trading on a national
securities exchange or authorized for quotation on NASDAQ/NM, the
average of the closing bid and asked prices as reported by the National
Association of Securities Dealers Automated Quotation System ("NASDAQ")
or, if no such prices shall have been so reported for such date, on the
next preceding date for which such prices were so reported, or
(iv) if the security is not listed for trading on a national
securities exchange or authorized for quotation on NASDAQ/NM or NASDAQ,
the fair market value of the security as determined in good faith by
the Committee.
-3-
<PAGE>
Notwithstanding paragraphs (i) through (iv) above, "Fair Market Value" of a
Sears common share as of the Distribution Date shall be the sum of the average
of the high and low per share prices, regular way, of such share as reported on
the New York Stock Exchange Composite Tape on each of the five business days
beginning on and including the tenth business day preceding the record date
associated with the Distribution ("Record Date"), on which there was a reported
sale of such stock, divided by five (or, if less, the number of such days on
which there was such a reported sale); and "Fair Market Value" of Stock as of
the Distribution Date shall be the sum of the average of the high and low per
share prices, regular way, of the Stock as reported on the New York Stock
Exchange Composite Tape on each of the five business days beginning on and
including the tenth business day preceding the Record Date, on which there was a
reported sale of such stock divided by five (or, if less, the number of such
days on which there was such a reported sale).
(m) "Grant Date" means, except as provided in Article 6, the date on
which the Committee grants the Award or such later date as specified in advance
by the Committee.
(n) "Grantee" means an individual who has been granted an Award.
(o) "Internal Revenue Code" means the Internal Revenue Code of 1986,
as amended, and regulations and rulings thereunder. References to a particular
section of the Internal Revenue Code shall include references to successor
provisions.
(p) "Minimum Consideration" means the $.01 par value per share of the
Stock or such larger amount determined pursuant to resolution of the Board to be
capital within the meaning of Section 154 of the Delaware General Corporation
Law.
(q) "1934 Act" means the Securities Exchange Act of 1934, as amended.
(r) "Option Price" means the per share purchase price of Stock subject
to an option.
(s) "Plan" has the meaning set forth in the introductory paragraph.
(t) "Reload Option" has the meaning set forth in Article 6(b)(ii).
(u) "Retirement" means a Termination of Employment occurring on or
after an individual attains age 65, or a Termination of Employment after an
individual attains age 55 approved by Allstate Insurance Company as an early
retirement, provided that in the case of a Section 16 Grantee, such early
retirement must be approved by the Committee.
(v) "Sears" means Sears, Roebuck and Co., a New York corporation.
(w) "Sears Option" means an option granted under a Sears Plan.
-4-
<PAGE>
(x) "Sears Plans" means the following plans of Sears: the 1994
Employees Stock Plan, the 1990 Employees Stock Plan, the 1986 Employees Stock
Plan, the 1982 Employees Stock Plan, the 1978 Employees Stock Plan and the 1979
Incentive Compensation Plan.
(y) "Sears Restricted Stock" means restricted shares granted under a
Sears Plan.
(z) "Sears SAR" means a stock appreciation right, limited stock
appreciation right or tax benefit right granted under a Sears Plan.
(aa) "SEC" means the Securities and Exchange Commission.
(bb) "Section 16 Grantee" means a person subject to potential liability
with respect to equity securities of the Company under Section 16(b) of the 1934
Act.
(cc) "Separation Agreement" means the separation agreement between
Sears and the Company dated as of January ___, 1995.
(dd) "Stock" means common stock of the Company, par value $.01 per
share.
(ee) "Subsidiary" means a corporation as defined in Section 424(f) of
the Internal Revenue Code, with the Company being treated as the employer
corporation for purposes of this definition.
(ff) "10% Owner" means a person who owns stock (including stock treated
as owned under Section 424(d) of the Internal Revenue Code) possessing more than
10% of the total combined voting power of all classes of stock of the Company.
(gg) "Termination of Employment" occurs as of the first day on which an
individual is for any reason no longer employed by the Company or any of its
Subsidiaries, or with respect to an individual who is an employee of a
Subsidiary, the first day on which the Company no longer, directly or
indirectly, owns voting securities possessing at least 50% of the aggregate
Voting Power of such Subsidiary.
(hh) "Voting Power" of a corporation or other entity means the combined
voting power of the then-outstanding voting securities of such corporation or
other entity entitled to vote generally in the election of directors.
3. Scope of the Plan.
-----------------
(a) Number of Shares Available Under Plan. An aggregate number of
---------------------------------------
shares of Stock is hereby made available and is reserved for delivery on account
of the exercise of Awards and payment of benefits in connection with Awards
equal to the number of shares of Stock determined pursuant to the formulas set
forth in Article 6 to be required to replace awards
-5-
<PAGE>
under the Sears Plans; provided that in no event shall the aggregate number of
such shares of Stock exceed 4,500,000 shares of Stock. Subject to the foregoing
limits, shares of uthorized but unissued Stock or shares of Stock held as
treasury shares by the Company may be used for or in connection with Awards.
(b) Expired or Terminated Awards not Available. If and to the extent
------------------------------------------
an Award shall expire or terminate for any reason without having been exercised
in full, or shall be forfeited, regardless of whether, in either case, the
Grantee enjoyed any of the benefits of stock ownership, the shares of Stock
(including restricted Stock) and stock appreciation rights associated with such
Award shall not become available for other Awards.
(c) Treasury Stock. The Committee shall have the authority to cause
---------------
the Company to purchase from time to time shares of Stock to be held as treasury
shares and used for or in connection with Awards.
4. Administration.
--------------
(a) Committee Administration. Subject to Article 4(b), the Plan shall
------------------------
be administered by the Committee, which shall consist of not less than three
persons who are appointed by the Board, who are directors of the Company and not
employees of the Company or any of its affiliates. Membership on the Committee
shall be subject to such limitations (including, if appropriate, a change in the
minimum number of members of the Committee) as the Board deems appropriate to
permit transactions pursuant to the Plan to be (1) exempt from potential
liability under Section 16(b) of the 1934 Act, and Rule 16b-3 pursuant thereto,
as in effect both before and after September 1, 1995, or such other date as the
SEC shall determine, and (2) exempt from limitations on deductibility under
Section 162(m) of the Internal Revenue Code.
(b) Board Reservation and Delegation. The Board may, in its
------------------------------------
discretion, reserve to itself or delegate to another committee of the Board any
or all of the authority and responsibility of the Committee with respect to
Awards to Grantees who are not Section 16 Grantees at the time any such
delegated authority or responsibility is exercised. Such other committee may
consist of one or more directors who may, but need not, be officers or employees
of the Company or of any of its Subsidiaries. To the extent that the Board has
reserved to itself or delegated the authority and responsibility of the
Committee to such other committee, all references to the Committee in the Plan
shall be to the Board or such other committee, as the case may be.
(c) Committee Authority. The Committee shall have full and final
-------------------
authority, in its discretion, but subject to the express provisions of the Plan,
as follows:
(i) to grant Awards on or after the Distribution Date as described
in Article 6,
-6-
<PAGE>
(ii) to determine (A) when Awards may be granted, and (B) whether
or not specific Awards shall be identified with other specific Awards,
and if so, whether they shall be exercisable cumulatively with, or
alternatively to, such other specific Awards,
(iii) to interpret the Plan and to make all determinations
necessary or advisable for the administration of the Plan,
(iv) to prescribe, amend, and rescind rules and regulations
relating to the Plan, including, without limitation, rules with respect
to the exercisability and nonforfeitability of Awards upon the
Termination of Employment of a Grantee,
(v) to determine the terms and provisions of the Award
Agreements, which need not be identical and, with the consent (to the
extent required by the Plan) of the Grantee, to modify any such
Award Agreement at any time,
(vi) to accelerate the exercisability of, and to accelerate or
waive any or all of the restrictions and conditions applicable to, any
Award,
(vii) to make such adjustments or modifications to Awards to
Grantees working outside the United States as are necessary and
advisable to fulfill the purposes of the Plan, and
(viii) to impose such additional conditions, restrictions, and
limitations upon the grant, exercise or retention of Awards as the
Committee may, before or concurrently with the grant thereof, deem
appropriate, including, without limitation, requiring simultaneous
exercise of related identified Awards, and limiting the percentage of
Awards which may from time to time be exercised by a Grantee.
The Committee shall have full and final authority to authorize any
action or make any determination as the Committee shall deem necessary or
advisable for carrying out the purposes of the Plan, including to correct any
defect, supply any omission and reconcile any inconsistency between the Plan and
the awards under the Sears Plans the Plan is intended to replace.
(d) Committee Determinations Final. The determination of the
----------------------------------
Committee on all matters relating to the Plan or any Award Agreement shall be
conclusive and final. No member of the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any Award.
5. Eligibility. Awards may be granted to any employee or former
-----------
employee (or to the estate of a deceased employee) of the Company or any of its
Subsidiaries to replace any awards granted to such employee, former employee or
deceased employee under a Sears Plan
-7-
<PAGE>
which were terminated, forfeited, cancelled or reduced (with or without the
consent of the Grantee) in connection with the Distribution.
6. Awards.
------
(a) In General. In accordance with its powers under the Plan, the
----------
Committee may grant replacement Awards, including options (including Reload
Options), replacement stock appreciation rights (including replacement stock
appreciation rights replacing limited stock appreciation rights and tax benefit
rights) and replacement restricted stock in accordance with Article 6 to
preserve those opportunities and benefits of Allstate Group Grantees which were
terminated, forfeited, cancelled, or reduced in connection with the
Distribution, provided that no Grantee shall be granted Awards under the Plan
with respect to more than 675,000 shares of Stock.
(b) Options and Reload Options.
--------------------------
(i) Grant of Replacement Options. Subject to Article 3(a), the
-----------------------------
Committee may grant options ("Replacement Options") under the Plan to
each Allstate Group Grantee who holds unexercised Sears Options
(whether or not nonforfeitable) at the Distribution Date; provided that
such Allstate Group Grantee's right to exercise any Sears Options has
been forfeited or cancelled in connection with the Distribution. The
Award Agreement with respect to such Replacement Options shall provide
that the Grantee may exercise a Replacement Option at the same time as
he would have been able to exercise the Sears Option it replaces,
subject to Article 8(c), if applicable.
(A) The Option Price for a Replacement Option shall
be determined by the following formula; provided that in no event
shall the Option Price be less than the Minimum Consideration:
Option Price = A x B
-----
C
Any fraction of a cent shall be rounded down to the next full cent.
(B) The number of shares of Stock for which the
Replacement Option is exercisable shall be determined in
accordance with the following formula:
Number of shares = C x D
-----
B
Any fractional share shall be rounded up to the next full share.
(C) In the foregoing formulas,
-8-
<PAGE>
"A" is the option exercise price for a Sears Option being
replaced,
"B" is the Fair Market Value of a share of Stock as of
the Distribution Date,
"C" is the Fair Market Value of a Sears common share as
of the Distribution Date, and
"D" is the number of Sears common shares for which the
Sears Option being replaced is exercisable.
(D) Each Replacement Option shall have the same terms
and conditions (other than the Option Price and the number of
shares of Stock, but including any provision for Reload Options)
as, and not give the Grantee any benefits he did not have, under
the corresponding Sears Option.
(ii) Grant of Reload Options. The Committee may, subject to
------------------------
Article 3, grant a Reload Option to any Grantee of a Replacement Option
whose Replaced Sears Option included a reload option for Sears shares.
For purposes of the Plan, a "Reload Option" shall mean an option to
purchase a number of shares of Stock granted in connection with the
exercise of the Grantee's Replacement Option (the "Exercised Options")
upon the payment of the Option Price for such Exercised Options with
shares of Stock which have a Fair Market Value equal to not less than
100% of the Option Price for such Exercised Options. The Reload Option
with respect to an Exercised Option shall be for a number of shares of
Stock equal to the number of shares of Stock tendered to exercise the
Exercised Options plus, if so provided by the Committee, the number of
shares of Stock, if any, retained by the Company in connection with the
exercise of the Exercised Options to satisfy any federal, state, or
local tax withholding requirements. Reload Options shall be subject to
the following terms and conditions:
(A) the Grant Date for each Reload Option shall be
the date of exercise of the Exercised Option to which it relates;
(B) the Reload Option may be exercised at any time
during the unexpired term of the Replacement Option to which it
relates (subject to earlier termination thereof as provided in
the Plan and in the applicable Award Agreement); and
(C) the terms of the Reload Option shall be the same
as the terms of the Exercised Option to which it relates, except
that (1) the Option Price shall be the Fair Market Value of the
Stock on the Grant Date of the Reload Option and (2) no Reload
Option may be exercised within one year from the Grant Date
thereof.
-9-
<PAGE>
(c) Stock Appreciation Rights.
-------------------------
(i) Grant of Replacement SARs. The Committee may grant stock
---------------------------
appreciation rights ("Replacement SARs") under the Plan to each
Allstate Group Grantee who holds unexercised limited stock appreciation
rights, and tax benefit rights (whether or not nonforfeitable) under
the Sears Plans; provided that such Allstate Group Grantee's right to
exercise any Sears SARs has been forfeited or cancelled in connection
with the Distribution. Replacement SARs granted in replacement of Sears
SARs identified with Sears Options shall be equal in number to, and
shall be identified with the Replacement Options granted in replacement
of such Sears Options. The Award Agreement with respect to such
Replacement SARs shall provide that the Grantee may exercise a
Replacement SAR at the same time as if the Grantee had held the
Replacement SAR since the grant date of the Sears SAR it replaces,
subject to the limitations of Article 8(c), if applicable.
(ii) Benefit for Replacement Limited Stock Appreciation Rights.
-----------------------------------------------------------
The benefit for each Replacement SAR granted in replacement of a
limited stock appreciation right ("Replacement LSAR") identified with a
Sears Option shall be equal to the difference between the Change of
Control Value of a share of Stock on the date of exercise of such
Replacement SAR and the Option Price of the related Replacement Option.
(iii) Benefit for Replacement Tax Benefit Rights. The benefit
-------------------------------------------
for each Replacement SAR granted in replacement of a tax benefit right
("Replacement Tax Benefit Right") identified with a Sears Option shall
be equal to the then applicable maximum statutory federal income tax
rate for corporations (subject to any limitations thereon contained in
the tax benefit right being replaced), multiplied by the amount of
compensation, if any, realized by the Grantee for federal income tax
purposes upon exercise of the related Replacement Option.
(iv) Terms and Conditions of Replacement SARs. Each Replacement
----------------------------------------
SAR shall have the same terms and conditions (except as provided above
in this Article 6(c)) as, and not give the Grantee greater rights than,
the corresponding Sears SAR.
(d) Restricted Stock.
----------------
(i) Replacement Restricted Stock. The Committee may grant shares
----------------------------
of restricted Stock ("Replacement Restricted Stock") under the Plan to
each Allstate Group Grantee whose Sears Restricted Stock is forfeited
or cancelled in connection with the Distribution. The Award Agreement
with respect to such Replacement Restricted Stock shall provide that
such Replacement Restricted Stock shall become nonforfeitable at the
same time that the Sears Restricted Stock it replaces would have become
nonforfeitable, subject to the limitations of Article 8(c), if
applicable.
-10-
<PAGE>
(A) The Grantee's basis in the Replacement Restricted
Stock (i.e. the amount of consideration, if any, that shall be
deemed to have been paid by the Grantee for the Replacement
Restricted Stock) shall be determined by the following formula:
E x B
-----
C
The Grantee shall not be required to pay additional
consideration for the grant of Replacement Restricted Stock,
except that the Minimum Consideration shall be paid for any
shares of restricted Stock that are not treasury shares.
(B) The number of shares of Replacement Restricted
Stock to be granted shall be determined by the following formula:
Number of shares = F x C
-----
B
Any fractional share shall be rounded up to the next full share.
(C) In the foregoing formulas,
"B" is the Fair Market Value of a share of
Stock as of the Distribution Date,
"C" is the Fair Market Value of a Sears
common share as of the Distribution Date,
"E" is the Grantee's average per share basis,
if any, in the Sears Restricted Stock
being replaced, and
"F" is the number of shares of Sears
Restricted Stock being replaced.
(D) Each share of Replacement Restricted Stock shall
be substantially the same terms and conditions other than the
number of shares and the amount of the Grantee's basis therein)
as, and shall not give the Grantee any benefits which he did not
have, under the corresponding Sears Restricted Stock, except
as otherwise provided by the Committee.
-11-
<PAGE>
(ii) Additional Conditions for Restricted Stock.
------------------------------------------
(A) The Committee may provide that any share of
restricted Stock shall be held (together with a stock power
executed in blank by the Grantee) in escrow by the Secretary of
the Company until such shares become nonforfeitable or are
forfeited or may make such other arrangements for the holding of
shares of restricted stock as it deems appropriate.
(B) If a share of restricted Stock is forfeited such
share of restricted Stock shall cease to be outstanding, and
shall no longer confer on the Grantee thereof any rights as a
stockholder of the Company.
(C) Any share of restricted Stock shall bear an
appropriate legend specifying that such share is non-transferable
and subject to the restrictions set forth in the Plan. If any
shares of restricted Stock become nonforfeitable, the Company
shall cause certificates for such shares to be issued or reissued
without such legend and delivered to the Grantee or, at the
request of the Grantee, shall cause such shares to be credited to
a brokerage account specified by the Grantee.
7. Non-transferability. Each Award (other than restricted Stock)
-------------------
granted hereunder shall by its terms not be assignable or transferable other
than by will or the laws of descent and distribution and may be exercised,
during the Grantee's lifetime, only by the Grantee. Each share of restricted
Stock shall be non-transferable until such share becomes nonforfeitable.
Notwithstanding the foregoing, the Grantee may, to the extent provided in the
Plan and in a manner specified by the Committee, (a) designate in writing a
beneficiary to exercise his options after the Grantee's death, and (b) transfer
an option, or stock appreciation right to a revocable, inter vivos trust as to
which the Grantee is both the settlor and the trustee.
8. Exercise.
--------
Exercise of Replacement Options. Subject to Articles 4 and 6, (i)
-------------------------------
each Replacement Option shall be exercisable in one or more installments
commencing not earlier than the first anniversary of the grant date of the Sears
Option it replaces, (ii) options shall not be exercisable for twelve months
following a hardship distribution that is subject to Treasury Regulation ss.
1.401(k)-1(d)(2)(iv)(B)(4), (iii) each option shall be exercised by delivery to
the Company of written notice of intent to purchase a specific number of shares
of Stock subject to the option, (iv) the Option Price of any shares of Stock as
to which an option shall be exercised shall be paid in full at the time of the
exercise, and (v) payment may be made in either one or any combination of the
following, as provided in the Award Agreement:
-12-
<PAGE>
(I) cash, or
(II) Stock that has been held for at least six months, valued
at the Fair Market Value on the date of exercise.
Shares of Stock acquired by a Grantee on exercise of an option shall be
delivered to the Grantee or, at the request of the Grantee, shall be credited
directly to a brokerage account specified by the Grantee.
(b) Exercise of Replacement Stock Appreciation Rights. Subject to
----------------------------------------------------
Articles 4(c)(vi) and 6, (i) each stock appreciation right shall be exercisable
not earlier than the first anniversary of the grant date of the Sears stock
appreciation right it replaces, to the extent the option with which it is
identified, if any, may be exercised, (ii) replacement LSARs shall become fully
exercisable upon the occurrence of a Change of Control and shall be exercisable
for a period of sixty days thereafter, (iii) replacement SARs shall be exercised
by delivery to the Company of written notice of intent to exercise a specific
number of Replacement SARs, and (iv) unless otherwise provided in the applicable
Award Agreement, the exercise of stock appreciation rights which are identified
with shares subject to an option shall result in the cancellation or forfeiture
of such option to the extent of such exercise.
(c) Special Rules for Section 16 Grantees. Subject to Article 6, no
--------------------------------------
stock appreciation right or option shall be exercisable by a Section 16 Grantee
during the first six months after its Grant Date, except as exempted from
Section 16(b) of the 1934 Act.
(d) Notification under Section 83(b). The Committee may, on the Grant
--------------------------------
Date or any later date, prohibit a Grantee from making the election described
below. If the Committee has not prohibited such Grantee from making such
election, and the Grantee, in connection with the exercise of any option, or the
grant of any share of restricted Stock, makes the election permitted under
Section 83(b) of the Internal Revenue Code to include in such Grantee's gross
income in the year of transfer the amounts specified in Section 83(b) of the
Internal Revenue Code, such Grantee shall notify the Company of such election
within 10 days of filing notice of such election.
10. Withholding Taxes.
-----------------
(a) Mandatory Withholding.
---------------------
(i) Whenever under the Plan, cash or shares of Stock are to be
delivered upon exercise or payment of an Award or upon a share of
restricted Stock becoming nonforfeitable, or any other event with
respect to rights and benefits hereunder, the Company shall be entitled
to require as a condition of delivery (A) that the Grantee remit an
amount sufficient to satisfy all federal, state, and local withholding
tax requirements related thereto, (B) the withholding of such sums from
compensation
-13-
<PAGE>
otherwise due to the Grantee or from any shares of Stock due to the
Grantee under the Plan or (C) any combination of the foregoing.
(ii) If any election described in Article 9 is made, then the person
making such election shall remit to the Company an amount sufficient to
satisfy all federal, state, and local withholding taxes thereby
incurred; provided that, in lieu of or in addition to the foregoing,
the Company shall have the right to withhold such sums from
compensation otherwise due to the Grantee or from any shares of Stock
due to the Grantee under the Plan.
(b) Elective Share Withholding.
--------------------------
(i) To the extent provided under the terms of the Sears Option or
Sears Restricted Stock Award which it replaces, and subject to the
prior approval of the Committee and to Article 10(b)(ii) below, a
Grantee may elect the withholding ("Share Withholding") by the Company
of a portion of the shares of Stock otherwise deliverable to such
Grantee upon the exercise or payment of an Award or upon a share of
restricted Stock's becoming nonforfeitable (each a "Taxable Event")
having a Fair Market Value equal to
(A) the minimum amount necessary to satisfy required
federal, state, or local withholding tax liability attributable
to the Taxable Event; or
(B) with the Committee's prior approval, a greater
amount, not to exceed the estimated total amount of such
Grantee's tax liability with respect to the Taxable Event.
(ii) Each Share Withholding election by a Grantee shall be subject
to the following restrictions:
(A) any Grantee's election shall be subject to the
Committee's right to revoke its approval of Share Withholding by
such Grantee at any time before the Grantee's election if the
Committee has reserved the right to do so at the time of its
approval;
(B) if the Grantee is a Section 16 Grantee, such
Grantee's election shall be subject to the disapproval of the
Committee at any time, whether or not the Committee has reserved
the right to do so; and
(C) the Grantee's election must be made before the date
(the "Tax Date") on which the amount of tax to be withheld is
determined.
-14-
<PAGE>
11. Termination of Employment.
-------------------------
(a) Restricted Stock. Except as otherwise provided by the Committee
----------------
on or after the Grant Date, a Grantee's shares of restricted Stock that are
forfeitable shall be forfeited upon the Grantee's Termination of Employment.
(b) Other Awards. Unless otherwise provided in the Award Agreement,
------------
any unexercised option or stock appreciation right, to the extent exercisable on
the date of the Grantee's Termination of Employment, may be exercised, in whole
or in part, at any time within three months after the Grantee's Termination of
Employment, except that
(i) if the Grantee's Termination of Employment is caused by the
death of the Grantee, or if the Grantee's death occurs during the
period following Termination of Employment during which the option or
stock appreciation right would be exercisable under the preceding
clause of Article 11(b) or under Article 11(b)(ii), then any
unexercised option or stock appreciation rights, to the extent
exercisable on the date of the Grantee's death, may be exercised, in
whole or in part, at any time within two years after the Grantee's
death by the Grantee's personal representative or by the person to whom
the option or stock appreciation rights are transferred by will or the
applicable laws of descent and distribution; and
(ii) if the Grantee's Termination of Employment is on account of
Retirement, then any unexercised option or stock appreciation rights,
to the extent exercisable on the date of such Termination of
Employment, may be exercised, in whole or in part, at any time within
two years after such Termination of Employment.
(c) The foregoing provisions of this Article 11 shall not extend the
unexpired term of any Award.
12. Securities Law Matters.
----------------------
(a) If the Committee deems necessary to comply with the Securities
Act of 1933, the Committee may require a written investment intent
representation by the Grantee and may require that a restrictive legend be
affixed to certificates for shares of Stock.
(b) If, based upon the opinion of counsel for the Company, the
Committee determines that the exercise, nonforfeitability of, or delivery of
benefits pursuant to, any Award would violate any applicable provision of (i)
federal or state securities law or regulations or (ii) the listing requirements
of any national securities exchange on which are listed any of the Company's
equity securities, then the Committee may postpone any such exercise,
nonforfeitability or delivery, as the case may be, but the Company shall use its
best efforts to cause such exercise, nonforfeitability or delivery to comply
with all such provisions at the earliest practicable date.
-15-
<PAGE>
13. No Funding Required. Benefits payable under the Plan to any
---------------------
person shall be paid directly by the Company. The Company shall not be required
to fund or otherwise segregate assets to be used for payment of benefits under
the Plan.
14. No Employment Rights. Neither the establishment of the Plan nor
---------------------
the granting of any Award shall be construed to (a) give any Grantee the right
to remain employed by the Company or any of its Subsidiaries or to any benefits
not specifically provided by the Plan or (b) alter in any manner the right of
the Company or any of its Subsidiaries to modify, amend, or terminate any of its
employee benefit plans.
15. Rights as a Stockholder. A Grantee shall not, by reason of any
------------------------
Award (other than restricted Stock) have any right as a stockholder of the
Company with respect to the shares of Stock which may be deliverable upon
exercise or payment of such Award until such Stock has been delivered to him.
Shares of restricted Stock held by a Grantee or held in escrow by the Secretary
of the Company shall confer on the Grantee all rights of a stockholder of the
Company, except as otherwise provided in the Plan or Award Agreement. Subject to
Article 6, the Committee may, in its discretion, at the time of grant of
restricted Stock, permit or require the payment of cash dividends thereon to be
reinvested in additional restricted Stock to the extent shares are available
under Article 3, or otherwise reinvested in Stock. Stock dividends and deferred
cash dividends with respect to restricted Stock shall be subject to the same
restrictions and other terms as apply to the shares with respect to which such
dividends are issued. Subject to Article 6, the Committee may, in its
discretion, provide for crediting and payment of interest on deferred cash
dividends.
16. Nature of Payments. Any and all grants, payments of cash, or
-------------------
deliveries of shares of Stock hereunder shall constitute special incentive
payments to the Grantee and shall not be taken into account in computing the
amount of salary or compensation of the Grantee for the purposes of determining
any pension, retirement, death or other benefits under (a) any pension,
retirement, profit-sharing, bonus, life insurance or other employee benefit plan
of the Company or any of its Subsidiaries or (b) any agreement between the
Company or any Subsidiary, on the one hand, and the Grantee, on the other hand,
except as such plan or agreement shall otherwise expressly provide.
17. Non-Uniform Determinations. The Committee and the Board may make
--------------------------
nonuniform determinations under the Plan and may make determinations selectively
among persons who receive, or are eligible to receive, Awards (whether or not
such persons are similarly situated). Without limiting the generality of the
foregoing, the Committee shall be entitled, among other things, to make
non-uniform and selective determinations, to enter into non-uniform and
selective Award Agreements as to (a) the identity of the Grantees, (b) the terms
and provisions of Awards, and (c) the treatment, under Article 11, of
Terminations of Employment.
-16-
<PAGE>
18. Adjustments. Subject to Article 6, the Committee shall make
-----------
equitable adjustment of
(a) the aggregate numbers of shares of Stock available under
Articles 3(a) and 3(b),
(b) the number of shares of Stock, shares of restricted Stock
or stock appreciation rights covered by an Award,
(c) the Option Price,
(d) the Fair Market Value of Stock to be used to determine the
amount of the benefit payable upon exercise of stock appreciation
rights, and
(e) all other appropriate matters,
to reflect any stock dividend, stock split, reverse stock split, share
combination, recapitalization, merger, consolidation, acquisition of property or
shares, separation, spin-off, reorganization, stock rights offering, liquidation
or similar event of or by the Company.
19. Amendment of the Plan. The Board may from time to time in its
-----------------------
discretion amend or modify the Plan without the approval of the stockholders of
the Company, except as such stockholder approval may be required (a) to permit
transactions in Stock pursuant to the Plan to be exempt from potential liability
under Section 16(b) of the 1934 Act, (b) to permit the Company to deduct, in
computing its income tax liability pursuant to the provisions of the Internal
Revenue Code, compensation resulting from Awards, or (c) under the listing
requirements of any national securities exchange on which are listed any of the
Company's equity securities.
20. Termination of the Plan. The Plan shall terminate on the tenth
------------------------
(10th) anniversary of the Effective Date or at such earlier time as the Board
may determine. Any termination, whether in whole or in part, shall not affect
any Award then outstanding under the Plan.
21. No Illegal Transactions. The Plan and all Awards granted pursuant
-----------------------
to it are subject to all laws and regulations of any governmental authority
which may be applicable thereto; and notwithstanding any provision of the Plan
or any Award, Grantees shall not be entitled to exercise Awards or receive the
benefits thereof and the Company shall not be obligated to deliver any Stock or
pay any benefits to a Grantee if such exercise, delivery, receipt or payment of
benefits would constitute a violation by the Grantee or the Company of any
provision of any such law or regulation.
22. Controlling Law. The law of the State of Delaware, except its
---------------
law with respect to choice of law, shall be controlling in all matters relating
to the Plan.
-17-
<PAGE>
23. Severability. If all or any part of the Plan is declared by any
------------
court or governmental authority to be unlawful or invalid, such unlawfulness or
invalidity shall not invalidate any portion of the Plan not declared to be
unlawful or invalid. Any Article or part of an Article so declared to be
unlawful or invalid shall, if possible, be construed in a manner which will give
effect to the terms of such Article or part of an Article to the fullest extent
possible while remaining lawful and valid.
-18-
EXHIBIT 13
SHAREHOLDER INFORMATION
CORPORATE HEADQUARTERS/HOME OFFICE
The Allstate Corporation
2775 Sanders Road
Northbrook, IL 60062-6127
(847) 402-5000
http://www.allstate.com
ANNUAL MEETING
All shareholders are cordially invited to attend the annual meeting of The
Allstate Corporation:
Tuesday - May 20, 1997 - 1:30 p.m.
Chicago Botanic Garden
1000 Lake-Cook Road
Glencoe, IL
Holders of common stock of record at the close of business on March 21, 1997,
are entitled to vote at the meeting. A notice of meeting, proxy statement and
proxy were mailed to shareholders with this annual report.
TRANSFER AGENT/SHAREHOLDER RECORDS
For information or assistance regarding individual stock records, dividend
reinvestment plan and voluntary cash payments, dividend checks, direct deposit
of dividend payments, or stock certificates, please call (800) 355-5191, or
write:
Harris Trust and Savings Bank
Shareholder Services Division
P.O. Box A3504
Chicago, IL 60690-9502
Please use the following address for items sent by courier or overnight mail:
Harris Trust and Savings Bank
Shareholder Services Division
311 West Monroe Street
11th Floor
Chicago, IL 60606-4607
INVESTOR INQUIRIES
Investor Relations
The Allstate Corporation
3075 Sanders Road
Northbrook, IL 60062-7127
(800) 416-8803
COMMON STOCK AND DIVIDEND INFORMATION
<TABLE>
<CAPTION>
HIGH LOW CLOSE DIVIDENDS DECLARED
------------------------------------------------
1996
- - --------------------
<S> <C> <C> <C> <C>
First quarter 46 37 3/8 42 .2125
Second quarter 46 1/2 37 3/8 45 5/8 .2125
Third quarter 49 3/4 40 7/8 49 1/4 .2125
Fourth quarter 60 7/8 48 3/4 57 7/8 .2125
------------------------------------------------
1995
- - --------------------
First quarter 29 23 1/2 28 3/4 .195
Second quarter 31 7/8 28 1/8 29 5/8 .195
Third quarter 37 1/4 29 1/4 35 3/8 .195
Fourth quarter 42 3/8 33 5/8 41 1/8 .195
------------------------------------------------
</TABLE>
Stock price ranges are from the New York Stock Exchange composite listing.
at February 14, 1997, there were 220,201 shareholders of record.
FORM 10-K, OTHER REPORTS
Shareholders may receive, without charge, a copy of The Allstate Corporation's
Form 10-K annual report, filed with the Securities and Exchange Commission, for
the year ended Dec. 31, 1996, by contacting:
Investor Relations
The Allstate Corporation
3075 Sanders Road
Northbrook, IL 60062-7127
(800) 416-8803
STOCK EXCHANGE LISTING
The Allstate Corporation's common stock is listed on the New York Stock
Exchange under the trading symbol ALL. Common stock is also listed on the
Chicago Stock Exchange.
INDEPENDENT AUDITORS
Deloitte &Touche LLP
Two Prudential Plaza
180 North Stetson Avenue
Chicago, IL 60601-6779
MEDIA INQUIRIES
Allstate Media Relations
2775 Sanders Road
Northbrook, IL 60062-6127
(847) 402-5600
"The Good Hands People" and "You're In Good Hands With Allstate" are registered
service marks of Allstate Insurance Company.
<PAGE>
<TABLE>
FINANCIAL SECTION
ALLSTATE - 31
CONTENTS
<S> <C>
11-year summary of selected financial data..................................32
management's discussion and analysis........................................34
consolidated statements of operations.......................................57
consolidated statements of financial position...............................58
consolidated statements of shareholders' equity.............................59
consolidated statements of cash flows.......................................60
notes to consolidated financial statements..................................61
independent auditor's report................................................89
report of management........................................................90
board of directors..........................................................91
senior management team......................................................92
shareholder information.....................................................93
</TABLE>
NET INCOME DIVIDENDS MARKET VALUE
PER COMMON SHARE PER COMMON SHARE PER COMMON SHARE
1994 $1.08 1994 $0.72 1994 $23.75
1995 $4.24 1995 $0.78 1995 $41.13
1996 $4.63 1996 $0.85 1996 $57.88
<PAGE>
11-year summary of selected financial data
32 - ALLSTATE
<TABLE>
<CAPTION>
($ in millions except per share data) 1996 1995 1994
- - ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONSOLIDATED OPERATING RESULTS
- - ---------------------------------------------------------------------------------------------
Insurance premiums and contract charges $19,702 $18,908 $17,566
Net investment income 3,813 3,627 3,343
Realized capital gains and losses 784 258 200
Total revenues 24,299 22,793 21,109
Operating income (loss), net of tax 1,600 1,587 268
Realized capital gains and losses, net of tax 510 168 130
Equity in net income (loss) of unconsolidated subsidiary 29 56 86
Income (loss) from continuing operations 2,075 1,904 484
Gain (loss) from discontinued operations, net of tax - - -
Cumulative effect of changes in accounting - - -
Net income (loss) 2,075 1,904 484
Earnings (loss) per share
Income (loss) before cumulative effect of changes in
accounting 4.63 4.24 1.08
Cumulative effect of changes in accounting - - -
Net income (loss) 4.63 4.24 1.08
Dividends declared per share 0.85 0.78 0.72
CONSOLIDATED FINANCIAL POSITION
- - ---------------------------------------------------------------------------------------------
Investments $58,329 $56,505 $47,227
Total assets 74,508 70,029 60,988
Reserves for claims and life-contingent contract benefits
and contractholder funds 43,789 42,904 39,961
Debt 1,386 1,228 869
Shareholders' equity 13,452 12,680 8,426
Shareholders' equity per share 30.47 28.34 18.73
PROPERTY-LIABILITY OPERATIONS
- - ---------------------------------------------------------------------------------------------
Premiums written $18,586 $17,965 $16,739
Premiums earned 18,366 17,540 16,513
Net investment income 1,758 1,630 1,515
Operating income (loss), net of tax 1,266 1,301 81
Realized capital gains and losses, net of tax 490 158 145
Equity in net income (loss) of unconsolidated subsidiary 29 56 86
Income (loss) before cumulative effect of changes in
accounting 1,725 1,608 312
Net income (loss) 1,725 1,608 312
Operating ratios
Claims and claims expense ("loss") ratio 78.9 78.1 88.0
Expense ratio 21.6 22.3 23.3
Combined ratio 100.5 100.4 111.3
LIFE AND ANNUITY OPERATIONS
- - ---------------------------------------------------------------------------------------------
Premiums and contract charges $1,336 $1,368 $1,053
Net investment income 2,045 1,992 1,827
Operating income, net of tax 368 327 226
Realized capital gains and losses, net of tax 20 10 (15
Income from continuing operations before cumulative
effect of changes in accounting 388 337 211
Net income (loss) 388 337 211
Statutory premiums and deposits 5,157 4,874 4,539
Investments including Separate Accounts 33,588 31,065 26,197
=============================================================================================
</TABLE>
Operating income (loss), net of tax is "Income before dividends on
preferred securities and equity in net income of unconsolidated
subsidiary" excluding realized capital gains (losses) and gain (loss) on
disposition of operations, net of tax. - Consolidated financial position for
1993 and thereafter are not comparable to prior years due to adoption of new
accounting rules for debt and equity securities. - Earnings (loss) per share
is presented pro forma for 1993 and 1992 and is not applicable prior to 1992.
<PAGE>
11-year summary of selected financial data
ALLSTATE - 33
<TABLE>
<CAPTION>
($ in millions except per share data) 1993 1992 1991 1990 1989 1988 1987 1986
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATING RESULTS
- - ------------------------------------------------------------------------------------------------------------------------------------
Insurance premiums and contract charges $17,118 $16,670 $16,215 $15,342 $14,251 $12,870 $11,306 $9,384
Net investment income 3,269 3,153 2,954 2,528 2,195 1,745 1,364 1,124
Realized capital gains and losses 215 161 4 182 224 185 273 151
Total revenues 20,602 19,984 19,173 18,052 16,670 14,800 12,943 10,659
Operating income (loss), net of tax 1,083 (718) 662 518 626 784 896 633
Realized capital gains and losses, net of tax 140 106 3 118 148 122 180 109
Equity in net income (loss) of unconsolidated subsidiary 79 112 58 54 41 8 (31) 2
Income (loss) from continuing operations 1,302 (500) 723 690 815 914 1,045 744
Gain (loss) from discontinued operations, net of tax - - - 11 - (146) (99) (6)
Cumulative effect of changes in accounting - (325) - - - 185 - -
Net income (loss) 1,302 (825) 723 701 815 953 946 738
Earnings (loss) per share
Income (loss) before cumulative effect of changes in
accounting 2.99 (1.16)
Cumulative effect of changes in accounting - (0.75)
Net income (loss) 2.99 (1.91)
Dividends declared per share 0.36
CONSOLIDATED FINANCIAL POSITION
- - ------------------------------------------------------------------------------------------------------------------------------------
Investments $47,932 $40,971 $38,213 $32,972 $28,144 $24,334 $18,940 $15,315
Total assets 58,994 51,817 47,173 41,246 35,369 30,817 25,406 21,257
Reserves for claims and life-contingent contract benefits
and contractholder funds 37,275 35,776 31,576 27,058 22,193 18,370 14,106 10,986
Debt 850 1,800 - - - - - -
Shareholders' equity 10,300 5,383 8,151 7,127 6,793 6,213 5,525 5,107
Shareholders' equity per share 22.89 17.04
PROPERTY-LIABILITY OPERATIONS
- - ------------------------------------------------------------------------------------------------------------------------------------
Premiums written $16,292 $15,774 $15,107 $14,572 $13,385 $12,271 $10,980 $9,442
Premiums earned 16,039 15,542 15,018 14,176 13,039 11,908 10,485 8,798
Net investment income 1,406 1,420 1,350 1,254 1,212 1,063 953 836
Operating income (loss), net of tax 963 (867) 475 355 481 665 798 538
Realized capital gains and losses, net of tax 146 166 24 108 132 114 161 93
Equity in net income (loss) of unconsolidated subsidiary 79 112 58 54 41 8 (31) 3
Income (loss) before cumulative effect of changes in 1,188 (589) 557 517 654 787 928 633
accounting
Net income (loss) 1,188 (900) 557 517 654 982 928 633
Operating ratios
Claims and claims expense ("loss") ratio 79.7 97.4 83.3 85.7 82.8 80.5 80.6 82.1
Expense ratio 23.5 24.0 24.8 24.5 24.7 24.1 24.3 24.1
Combined ratio 103.2 121.4 108.1 110.2 107.5 104.6 104.9 106.2
LIFE AND ANNUITY OPERATIONS
- - ------------------------------------------------------------------------------------------------------------------------------------
Premiums and contract charges $1,079 $1,128 $1,197 $1,166 $1,212 $962 $821 $586
Net investment income 1,858 1,733 1,604 1,274 983 682 411 288
Operating income, net of tax 169 149 187 163 145 119 99 95
Realized capital gains and losses, net of tax (6) (60) (21) 10 16 8 19 16
Income from continuing operations before cumulative
effect of changes in accounting 163 89 166 173 161 127 118 111
Net income (loss) 163 75 166 184 161 (29) 18 105
Statutory premiums and deposits 4,086 3,851 4,222 4,252 3,276 3,447 2,294 1,629
Investments including Separate Accounts 24,909 21,829 19,050 15,732 11,787 9,435 6,412 4,279
====================================================================================================================================
</TABLE>
- - - Shareholders' equity is presented pro forma for 1992 reflecting the
formation of The Allstate Corporation - Net income (loss) and financial
position for 1992 and thereafter are not comparable to prior years due to
adoption of new accounting rules for postretirement and postemployment
benefits. - Net income for 1988 reflects adoption of new income tax
accounting rules.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
34 - ALLSTATE
THE FOLLOWING DISCUSSION HIGHLIGHTS SIGNIFICANT FACTORS INFLUENCING RESULTS
OF OPERATIONS AND FINANCIAL POSITION OF THE ALLSTATE CORPORATION (THE
"COMPANY" OR "ALLSTATE"). IT SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ON PAGES 57
THROUGH 88 AND THE 11-YEAR SUMMARY OF SELECTED FINANCIAL DATA ON PAGES 32
AND 33.
ANALYSIS OF THE COMPANY'S TWO PRINCIPAL INSURANCE SEGMENTS IS PROVIDED IN
PROPERTY-LIABILITY OPERATIONS AND LIFE AND ANNUITY OPERATIONS BEGINNING ON
PAGES 35 AND 46, RESPECTIVELY.
================================================================================
1996 ACCOMPLISHMENTS
- - -Several actions were taken to significantly reduce exposure to catastrophes
in Florida and California.
- - -The Company sold its Northbrook, Reinsurance and ARCO operations.
- - -The Company issued $750 million of trust preferred securities. The proceeds
were used for general corporate purposes, including the Company's stock
repurchase program.
- - -In late 1996, the Company's board of directors approved the expansion of its
stock repurchase program by an amount not to exceed $750 million through the
end of 1997.
<TABLE>
<CAPTION>
CONSOLIDATED REVENUES
For the year ended December 31,
($ in millions) 1996 1995 1994
=========================================================================================
<S> <C> <C> <C>
Property-liability insurance premiums $18,366 $17,540 $16,513
Life and annuity premiums
and contract charges 1,336 1,368 1,053
Net investment income 3,813 3,627 3,343
Realized capital gains and losses 784 258 200
--------------------------------------------
Total revenues $24,299 $22,793 $21,109
============================================
</TABLE>
CONSOLIDATED NET INCOME Net income for 1996, increased to $2.08 billion, or
$4.63 per share, from $1.90 billion, or $4.24 per share in 1995, which in
turn increased from $484 million, or $1.08 per share in 1994. Net income for
each of the periods was impacted by the following items:
- - --------------------------------------------------------------------------------
1996
- - - Increased property-liability premiums;
- - - Favorable property-liability auto severity trends;
- - - Increased realized capital gains from the repositioning of the
property-liability investment portfolio, and favorable investment
performance and market conditions;
- - - Improved Allstate Life operating income resulting from growth in new
business and favorable mortality margins; and
- - - $318 million pre-tax charge to strengthen discontinued lines and
coverages net loss reserves.
- - --------------------------------------------------------------------------------
1995
- - - Increased revenue growth in both property-liability and Allstate Life;
- - - Lower property-liability loss and expense ratios;
- - - Improved Allstate Life mortality margins and operating expenses; and
- - - Gain of $93 million after-tax on the sale of 70% of PMI Group.
- - --------------------------------------------------------------------------------
1994
- - - $1.06 billion after-tax in losses from the Northridge earthquake;
- - - $100 million after-tax charge for the cost of an early retirement program;
- - - Favorable trends in property-liability claim severity and expense
reductions; and
- - - Improved Allstate Life operating income.
<PAGE>
ALLSTATE - 35
- - --------------------------------------------------------------------------------
PROPERTY-LIABILITY 1996 HIGHLIGHTS
- - - Property-liability premiums written increased 3.5% in 1996,
as 27.3% growth in non-standard auto offset the absence of
premium from the Northbrook, Reinsurance and ARCO
operations following their sale.
- - - Property-liability combined ratio increased slightly to
100.5 from 100.4 as improvements in the expense ratio
were partially offset by increases in the loss ratio.
- - - Property-liability net income increased to $1.73 billion in
1996 from $1.61 billion in 1995.
- - --------------------------------------------------------------------------------
PROPERTY-LIABILITY OPERATIONS
OVERVIEW In order to focus primarily on its core strengths, the Company sold
Northbrook Holdings, Inc. and its wholly owned subsidiaries (collectively
"Northbrook"), its U.S.-based reinsurance operations for policies written after
1984 ("Reinsurance") and its London-based reinsurance operations, Allstate
Reinsurance Co., Limited ("ARCO") during the second half of 1996. Subsequent to
the dispositions, Allstate's property-liability operations consists of two
principal areas of business: personal property and casualty ("PP&C") and
discontinued lines and coverages ("Discontinued Lines and Coverages"). PP&C,
which has historically included only the Company's personal property and
casualty business, now includes the ongoing commercial business written through
the Allstate agent distribution channel. Discontinued Lines and Coverages
consists of business no longer written by Allstate, including results from
environmental, asbestos and mass tort losses and other commercial business in
run-off, and the historical results of the mortgage pool business and businesses
sold in 1996.
Underwriting results for each of the property-liability lines of business
are discussed separately beginning on page 38.
Summarized financial data and key operating ratios for Allstate's property-
liability operations are presented in the following table.
<TABLE>
<CAPTION>
($ in millions) 1996 1995 1994
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums written $18,586 $17,965 $16,739
=========================
Premiums earned $18,366 $17,540 $16,513
Claims and claims expense 14,487 13,688 14,529
Operating costs and expenses 3,964 3,915 3,721
Early retirement program - - 132
-----------------------
Underwriting loss (85) (63) (1,869)
California Earthquake Authority assessment 150 - -
Net investment income 1,758 1,630 1,515
Realized capital gains and losses, after-tax 490 158 145
(Loss) gain on disposition of operations, after-tax (60) 93 -
Income tax expense (benefit) on operations 257 266 (435)
Income before equity in net income of
unconsolidated subsidiary 1,696 1,552 226
Equity in net income of unconsolidated subsidiary 29 56 86
Net income $ 1,725 $ 1,608 $312
=========================
Catastrophe losses $ 991 $ 934 $ 1,988
Operating ratios =========================
Claims and claims expense ("loss") ratio 78.9 78.1 88.0
Expense ratio 21.6 22.3 23.3
-------------------------
Combined ratio 100.5 100.4 111.3
=========================
Effect of catastrophe losses on combined ratio 5.4 5.3 12.0
=========================
</TABLE>
NET INVESTMENT INCOME AND REALIZED CAPITAL GAINS Pretax net investment
income increased 7.9% in 1996 and 7.6% in 1995. The increases in net
investment income were primarily due to higher investment balances.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
36 - ALLSTATE
In low interest rate environments, funds from maturing investments may
be reinvested at substantially lower interest rates than the rates which
prevailed when the funds were previously invested.
Realized capital gains net of tax for 1996 were $490 million compared
with $158 million in 1995. The increase was primarily due to the sale of
tax-exempt long-term fixed income and equity securities, in order to reduce
the market risk (principally interest rate sensitivity and equity price risk)
associated with property-liability's fixed income and equity securities
investment portfolios. The proceeds from the repositioning were reinvested in
taxable intermediate-term fixed income securities. Favorable investment
performance and market conditions also contributed to the 1996 increase.
Realized capital gains net of tax increased 9.0% in 1995, as compared to 1994
as increased sales of equity securities were partially offset by writedowns
on fixed income and equity securities. Year-to-year fluctuations in realized
capital gains are largely a function of the timing of sales decisions
reflecting management's view of individual securities and overall market
conditions.
The Company expects the rate of increase in property-liability net
investment income to be lower in 1997 as a result of the Northbrook,
Reinsurance and ARCO sales. These sales resulted in a net reduction of
property-liability investments of approximately $1.59 billion.
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
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. While management believes the
Company's catastrophe management strategies, described below, will greatly
reduce the probability of severe losses in the future, the Company continues
to be exposed to similar or greater catastrophes.
The establishment of appropriate reserves for catastrophes, 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 operations.
CATASTROPHE MANAGEMENT Allstate has implemented strategies to limit, over
time, subject to the requirements of insurance laws and regulations and as
limited by competitive considerations, its insurance exposures in certain
regions prone to catastrophes. These strategies include limits on new
business production, limitations on certain policy coverages, increases in
deductibles, policy brokering and participation in catastrophe pools. In
addition, Allstate has requested and received rate increases in certain
regions prone to catastrophes. During 1996, the Company made substantial
progress in Florida and California in reducing its exposure to catastrophes.
Allstate continues to support passage of legislation in Congress such as
the Homeowner's Insurance Availability Act which could, if enacted, lessen
the impact to Allstate of catastrophic natural disasters such as hurricanes
and earthquakes. Allstate is a founding member of a newly-formed coalition
whose members include property insurers and insurance agents. This group is
promoting a measure that would provide federal reinsurance to state disaster
plans. The Company is unable to determine whether, or in what form, such
proposed legislation will be enacted or what the effect on the Company will
be.
For Allstate, major areas of potential losses due to hurricanes include
major metropolitan centers near the eastern and gulf coasts of the United
States. The major areas of exposure to potential losses due to earthquakes in
California include population centers in and around Los Angeles and San
Francisco. Other areas in the United States with exposure to potential
earthquake losses include areas surrounding the New Madrid fault system in
the midwest and faults in and surrounding Seattle, Washington. Allstate
continues to evaluate business strategies and options in the reinsurance
market for appropriate coverage at acceptable rates and the financial markets
to more effectively manage its exposure to catastrophe losses in these and
other areas.
<PAGE>
ALLSTATE - 37
Florida Hurricanes Over the last several years the Company has
non-renewed policies as a means of reducing exposure to catastrophes. During
1996, approval was received 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 hurricane losses. As part of this plan,
the Company has discontinued its policy non-renewal program and taken the
following additional actions.
- - - Allstate Floridian Insurance Company ("Floridian") was formed to sell and
service Allstate's Florida property policies. Effective mid-September
1996, all new Florida property policies were written by Floridian.
Existing Allstate property policies, which expire after October 31, 1996,
are being transferred to Floridian as the policies are renewed.
- - - Floridian entered into catastrophe reinsurance agreements with a
non-affiliated entity which provides approximately $400 million of
catastrophe reinsurance protection.
- - - Allstate entered into an agreement with Clarendon National Insurance
Company ("Clarendon") to sell the renewal rights of up to 137,000 Florida
property policies and as a result may non-renew up to 170,000 policies.
Beginning with policies expiring after November 14, 1996, Allstate will no
longer provide coverage for these policies as they expire over the next
twelve months. In connection with the sale of the renewal rights of these
policies, the Company recognized an after-tax loss of $24 million in 1996.
The Company expects annual written premiums to decrease by approximately
$106 million as a result of this sale.
- - - Effective September 17, 1996, for new business, and November 1, 1996, for
renewal business, Florida property policies contained increased
deductibles, certain coverage modifications and a 24.9% statewide average
increase in premium rates. Except for the possibility of recouping certain
assessments for deficits in the residual property markets, the Company has
agreed to not increase property premium rates until January 1999.
- - - Beginning April 16, 1997, as certain policies renew, the Company will
transfer the wind damage portion of between 50,000 and 60,000 Allstate
property policies to the Florida Windstorm Underwriting Association.
Management believes as these actions are implemented, the Company's
exposure to hurricane losses will be substantially reduced in Florida,
however, premium growth will also be impacted.
California Earthquakes On December 2, 1996, the California Earthquake
Authority ("CEA") commenced operations. The CEA is a privately-financed,
publicly-managed state agency created to provide coverage for earthquake
damage resulting from the movement of the earth. Insurers selling homeowners
insurance in California are required to offer earthquake insurance to their
customers either through their company or participation in the CEA. Beginning
January 20, 1997, Allstate's traditional earthquake policies and
mini-earthquake policies ("Mini-policy") began transferring to the CEA; this
transfer will continue over the next year as these policies expire. Beginning
late in the second quarter of 1996, Allstate's traditional earthquake
policies were renewed as Mini-policies. The Mini-policy has higher
deductibles, eliminates coverage for most non-dwelling structures and limits
personal contents coverage, thereby significantly reducing Allstate's
exposure to earthquake losses in California from what it was at the time of
the Northridge earthquake in 1994.
Approximately $700 million of capital needed to create the CEA was
obtained from assessments of participating insurance companies. Assessments
were based on an insurer's proportionate market share of earthquake coverage
in the state. Allstate's pretax assessment, including related expenses, was
approximately $150 million.
Additional capital needed to operate the CEA will be obtained through
assessments of participating insurance companies, reinsurance and bond
issuances funded by policyholder assessments. Allstate may be assessed in the
future depending on the capital level of the CEA.
- - - Participating insurers are required to fund a second assessment, not to
exceed $2.10 billion in total, if the capital of the CEA falls below
$350 million.
- - - Participating insurers are required to fund a third assessment, after
recovery of reinsurance and bond issuances, of up to $1.40 billion, if
aggregate earthquake losses exceed $5.60 billion or the CEA's capital
falls below $350 million.
- - - The authority of the CEA to assess participating insurers expires when
the CEA has completed twelve years of operation.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
38 - ALLSTATE
- - - All assessments to participating CEA insurers are based on earthquake
insurance market share, as of December 31 of the preceding year.
Earthquake insurance market share is based on the percent of earthquake
premium written by the CEA for which the insurer has written the
underlying property policy.
- - - The aggregate amount of insurer assessments may change annually to
reflect the market share of insurers entering and withdrawing from the CEA.
- - - Allstate does not expect its portion of these additional contingent
assessments, if needed, to exceed $700 million, assuming its current
earthquake insurance market share does not materially change.
Management believes Allstate's exposure to earthquake losses in
California will be significantly reduced in the future as a result of the
CEA. However, the Company continues to be directly exposed to earthquake
losses in California through January 1998 until all policies expire and are
rewritten by the CEA. The Company's homeowners policy will continue to
include coverages for losses caused by explosions, theft, glass breakage and
fires following an earthquake, which are not written by the CEA. The Company
will non-renew approximately $117 million in earthquake premiums written over
the next year.
DISPOSITIONS The 1996 net loss on dispositions is comprised of the following
after-tax gains and losses:
- - - $51 million gain from the sale of Northbrook;
- - - $9 million gain from the sale of Reinsurance;
- - - $24 million loss from the sale of renewal rights of certain Florida
homeowners policies to Clarendon;
- - - $41 million loss from the sale of ARCO; and
- - - $55 million loss due to an increase in the provision for future losses
established in connection with Allstate's decision to exit the mortgage
guaranty insurance business.
The sale of certain Florida policy renewal rights to Clarendon is
discussed in Catastrophe Management. The sales of Northbrook, Reinsurance,
ARCO and the increase in the provision for future losses established for
mortgage guaranty business are discussed in detail in the Discontinued Lines
and Coverages underwriting summary beginning on page 41.
In 1995, the Company sold 70% of the common stock of the PMI Group, Inc.
("PMI Group"), a wholly owned subsidiary in an initial public offering. A
gain of $93 million after-tax was realized.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------
PERSONAL PROPERTY AND CASUALTY (PP&C) UNDERWRITING SUMMARY
($ in millions) 1996 1995 1994
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums written $17,978 $16,941 $15,635
==========================
Premiums earned $17,708 $16,524 $15,452
Claims and claims expense 13,574 12,648 13,563
Operating costs and expenses 3,718 3,576 3,368
Early retirement program - - 105
--------------------------
Underwriting income (loss) $ 416 $ 300 $(1,584)
==========================
Catastrophe losses $ 983 $ 905 $ 1,959
Operating ratios ==========================
Claims and claims expense ("loss") ratio 76.7 76.5 87.8
Expense ratio 21.0 21.6 22.5
--------------------------
Combined ratio 97.7 98.1 110.3
==========================
Effects of catastrophe losses on combined ratio 5.6 5.5 12.7
==========================
</TABLE>
PP & C PREMIUMS WRITTEN BY LINE
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
($ in millions) 1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Standard auto $9,611 $10,127 $10,389
Non-standard auto 1,681 2,165 2,756
Homeowners 2,715 2,915 3,042
Other 1,628 1,734 1,791
------- ------- -------
Total $15,635 $16,941 $17,978
======= ======= =======
</TABLE>
PP&C PREMIUMS PP&C provides primarily private-passenger auto and homeowners
insurance to individuals. The Company separates the voluntary personal auto
insurance business into two categories for underwriting purposes according to
insurance risks: the standard market and the non-standard market. The
standard market consists of drivers who meet certain criteria which classify
them as having low to average risk of loss expectancy. The non-standard market
<PAGE>
ALLSTATE - 39
consists of drivers who have higher-than-average risk profiles due to
their driving records, lack of prior insurance or the types of cars they own.
These policies are written at rates higher than standard auto rates.
The standard auto and homeowners markets are pursuing a segmented growth
marketing strategy with respect to geographic areas. Standard auto is
attempting to grow more rapidly in areas where the regulatory climate is more
conducive to attractive returns. Homeowners is attempting to reduce or limit
its exposure in areas where the risk of loss from catastrophes does not
provide appropriate returns. The process to designate geographic areas as
growth and limited growth is dynamic and may be revised as changes occur in
the legal, regulatory and economic environments, as catastrophe exposure is
reduced and as new products are approved. Less than 6.0% of the total United
States population reside in areas designated as standard auto limited growth
markets. The Company is attempting to reduce or limit homeowners growth in
areas where approximately 20.0% of the United States population reside.
Standard auto premiums written increased 2.6% in 1996 to $10.39 billion,
from $10.13 billion in 1995, primarily due to increases in renewal policies
in force and average premiums. The increase in policies in force was
achieved in markets designated for growth and was partially offset by a
slight decline in policies in force in limited growth markets. Average
premium increases were primarily attributable to a shift to newer and more
expensive autos, and to a lesser extent, rate increases. Rate increases
generally are limited by regulatory and competitive factors. Standard auto
premiums written increased 5.4% in 1995, from $9.61 billion in 1994,
primarily due to increases in both the number of policies in force and
average premiums. The growth in policies in force was due to increases in
both new and renewal business and was achieved in markets designated for
growth, partially offset by a decline in policies in force in limited growth
markets.
Non-standard auto premiums written increased 27.3% in 1996, to $2.76
billion from $2.17 billion in 1995, which in turn increased 28.8% over 1994
premiums of $1.68 billion. For both periods, the increase was driven by an
increase in policies in force and, to a lesser extent, average premiums. The
increase in policies in force were driven primarily by new business growth,
which is due, in part, to the introduction of non-standard auto products in
new markets. The increases in average premiums were primarily due to rate
increases.
Homeowners premiums written in 1996 increased 4.4% to $3.04 billion from
$2.92 billion in 1995, which in turn increased 7.4% over 1994 premiums of
$2.72 billion. For both periods, the increases in premiums were primarily due
to higher average premiums and a small increase in policies in force. The
higher average premiums are primarily due to rate increases in
catastrophe exposure areas, principally Florida in 1996 and California in
1995, 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 reductions in policies in certain areas prone to
catastrophes. The reduced rate of increase in homeowners premiums in 1996 was
impacted by catastrophe management initiatives in California, including a
policy which offers higher deductibles and significantly reduces and in some
cases eliminates certain coverages, thereby reducing the Company's exposure
to earthquake losses while lowering premiums. In November 1996, after the
introduction of the CEA, the Company returned to writing new homeowners
policies in California.
PP&C COMBINED RATIO
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Excluding catastrophes 97.6 92.6 92.1
Total including catastrophes 110.3 98.1 97.7
</TABLE>
PP&C UNDERWRITING RESULTS Underwriting income increased to $416 million from
$300 million for 1995. The increase was primarily due to increased premium,
and favorable auto claim severity (average cost per claim) and expense
trends, which were partially offset by an increase in loss frequency trends
(rate of claim occurrence) and catastrophe losses. Catastrophe losses for
1996 were $983 million compared with $905 million for 1995 and $1.96 billion
in 1994. Underwriting income in 1995 improved from a loss of $1.58 billion in
1994, primarily due to lower catastrophe losses, premium growth and favorable
loss and expense trends. The favorable loss trends in 1995 were primarily due
to an improvement in standard auto and homeowners claim frequency and
improved claim severity in auto injury coverages, partially offset by
unfavorable trends in auto physical damage claim severities.
Changes in auto claim severity are generally influenced by inflation in
the medical services and auto repair sectors of the economy and Company loss
control programs. Injury claims are
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (CONTINUED)
40 - ALLSTATE
affected by medical cost inflation while physical damage claims are
affected largely by auto repair cost inflation and used car costs. Management
believes that favorable injury coverage severity trends in 1996 and 1995 are
due, in part, to the Company's bodily injury loss initiatives and economic
trends. The Company's bodily injury loss initiatives include the centralization
of claim functions to facilitate the consistent application of evaluation and
claim settlement processes, using state-of-the-art practices and systems. Soft
tissue injuries (minor strains and sprains), which result from low or moderate
impact collisions, are thoroughly investigated and aggressively defended.
Special investigative units are used to detect fraud and handle suspect claims.
While the Company's injury coverage severity declined in 1996 from 1995 and
1994, it also trended favorably as compared to the medical cost inflation index
and the industry.
For physical damage coverages, PP&C monitors its rate of increase in
average cost per claim against the Body Work price index and the Used Car price
index. The Company's 1996 and 1995 rates of increase in physical damage
coverage severity were higher than the benchmark indices, but improved from the
prior year, and were consistent with industry trends. During 1996, the Company
began the testing and training phase of redesigned claim settlement processes
for auto physical damage claims.
During 1996, lower loss costs due to reduced auto injury frequencies
were more than offset by an increase in auto physical damage and homeowners
frequencies. The increase in frequencies is primarily the result of severe
winter storms in the first quarter. Non-standard auto claim frequencies
increased in 1996 and 1995 from the prior years, consistent with new business
growth. During 1995, standard auto claim frequencies decreased slightly for
physical damage coverages. The improvement in physical damage claim frequencies
for 1995 resulted from favorable trends in the first quarter due to milder
winter weather. Claim frequency for homeowners coverages, excluding claims
related to catastrophes, decreased in 1995 and 1994, while claim severity
increased.
As a result of a study of the issues affecting the homeowners business
and as a means of improving homeowners contribution to underwriting income,
underwriting standards for the majority of new business were changed to
include home inspections and an analysis of potential insureds' prior loss
history, as well as financial stability.
The improvement in the 1996 expense ratio was the result of a benefit
due to a change in the components of acquisition costs deferred, which were
partially offset by increased charges due to investments in technology. The
Company changed the components of the acquisition costs deferred to include all
forms of agent remuneration, which vary directly with premium production in
order to more appropriately match the costs of acquiring business to the related
revenue, and to increase the consistency of accounting for agent remuneration
despite differing contractual agreements with agents.
The additional costs deferred consist primarily of employer payroll
taxes, benefits and the agents' office expense allowance, which is reimbursed
based on the percent of premiums written. Previously, only commissions paid to
agents and agency managers, premium taxes and inspection report costs were
deferred. This change had a favorable impact to 1996 underwriting income of
$111 million or .6 points in the expense ratio. The expense ratio declined to
21.0 in 1996 from 22.5 in 1994, as management improved efficiency and
controlled the growth of back-office operation expenses. The Company expects to
increase its investment in technology and other initiatives to support the
growth of the Company, improve efficiencies and control expenses.
PP&C OUTLOOK
- - - The reduced rate of increase in 1996 standard auto premiums written, as
compared to 1995, reflects, in part, the impact of PP&C's segmented
growth marketing strategy. The Company is pursuing various initiatives
in growth markets, including increasing its agent force, expanding its
advertising program and offering new pricing structures to increase the
growth of Allstate's standard auto premium in 1997.
- - - In early 1997, California standard auto rates will decrease by
approximately 7.0% as new policies are written and existing policies
are renewed. This decrease is due primarily to changes in the
regulatory environment in California and favorable loss trends.
<PAGE>
ALLSTATE - 41
- - - PP&C intends to grow non-standard auto premiums written in 1997 by
introducing new products into new markets and expanding distribution
channels. However, the rate of growth in non-standard auto premiums is
expected to gradually decline as the market matures.
- - - PP&C expects the rate of growth in homeowners premiums to decline in
1997. Increases in premiums due to new business growth, the Company's
re-entry into the California property market and the Florida rate
increase will be partially offset by reduced premiums due to the sale
of Florida property policy renewal rights to Clarendon, the transfer of
the wind portion of certain Florida property policies to the Florida
Windstorm Underwriting Association and the transfer of California
earthquake policies to the CEA.
- - - During 1997, the Company plans to expand its domestic and international
presence through the development of start-up operations, acquisitions
or partnerships.
<TABLE>
- - --------------------------------------------------------------------------------
DISCONTINUED LINES AND COVERAGES UNDERWRITING SUMMARY
($ in millions) 1996 1995 1994
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Underwriting loss $501 $363 $285
================
</TABLE>
Discontinued Lines and Coverages consists of business no longer written
by Allstate, including results from environmental, asbestos and mass tort
losses and other commercial business in run-off, and the historical results
of the mortgage pool business and businesses sold in 1996. Results have been
restated for 1995 and 1994 to reflect the historical results of businesses
sold in 1996.
During 1996, the Company concluded a comprehensive re-evaluation of
Discontinued Lines and Coverages net loss reserves, including the process for
estimating and identifying available reinsurance, which resulted in an
increase in net loss reserves of $318 million. The increase in net loss
reserves consisted of several components, including a $244 million increase
in environmental and asbestos net loss reserves, a $60 million increase in
net loss reserves for mass tort exposures and a $14 million increase in the
provision for future insolvencies of reinsurers. See the discussion in
"Property-Liability Claims and Claims Expense Reserves" section, which
follows.
On July 31, 1996, Allstate completed the sale of Northbrook to St. Paul
Fire & Marine Insurance Company ("St. Paul"). Northbrook writes commercial
insurance through its subsidiaries using independent agents. Allstate received
gross proceeds of $189 million and recognized a gain of $18 million ($51
million after-tax) on the sale. The proceeds and gain are subject to a purchase
price adjustment, expected to be finalized in 1997. In connection with the
sale, Allstate entered into an agreement with St. Paul whereby Allstate and St.
Paul will share in any development of the closing net loss reserves of
Northbrook. The Company does not expect unfavorable reserve development based
on current trends, conditions and claim settlement processes. Premiums written
for Northbrook through July 31, 1996, included in the results of operations for
the year ended December 31, 1996, were $295 million. As a result of the sale,
the Company's reserve for claims and claims expenses, net of reinsurance, was
reduced by $1.01 billion and investments were reduced by $973 million. See Note
3 to the consolidated financial statements.
On September 16, 1996, the Company completed the sale of Reinsurance to
SCOR U.S. Corporation ("SCOR"). The transaction consisted of the sale of
certain non-insurance assets, non-insurance liabilities and renewal rights, and
a reinsurance transaction for the insurance liabilities. The Company received
gross proceeds of $152 million as a result of the sale and will realize a $79
million gain ($58 million after-tax). The Company recognized the portion of the
gain, $15 million ($9 million after-tax), related to the sale of the renewal
rights in 1996. The remaining $64 million gain ($49 million after-tax) was
deferred and will be amortized through underwriting income over the reserve
run-off period, approximately five years, in accordance with retroactive
reinsurance accounting principles.
On November 15, 1996, Allstate completed the sale of the common stock
of ARCO to QBE Insurance Group Limited of Sydney, Australia. The Company
received proceeds of
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
42 - ALLSTATE
$37 million and recognized a $40 million loss ($41 million after-tax) on the
sale. See Note 3 to the consolidated financial statements.
Premiums written for Reinsurance and ARCO, included in the results of
operations for the year ended December 31, 1996, were $316 million. As a
result of the Reinsurance and ARCO sales, the Company's investments were
reduced by $617 million.
During 1996, the Company increased by $87 million ($55 million
after-tax) the provision for future losses provided for the run-off of the
mortgage pool business which is included in the loss on disposition of
operations line of the statement of operations. The original provision of
$119 million ($80 million after-tax) was established in 1995 in connection
with Allstate's decision to exit the mortgage guaranty insurance business.
The increase was due primarily to revised loss trend analyses based on
continued weakness in economic conditions, including real estate prices and
unemployment in Southern California where this business is highly
concentrated. This business continues to be affected by these economic
conditions, as well as interest rate volatility or a combination of such
factors. These factors are considered in the periodic re-evaluation of the
provision for future losses.
- - -------------------------------------------------------------------------------
PROPERTY-LIABILITY CLAIMS AND CLAIMS EXPENSE RESERVES
Underwriting results of the property-liability operations are significantly
influenced by estimates of property-liability claims and claims expense
reserves (see Note 6 to the consolidated financial statements). These
reserves are an accumulation of the estimated amounts necessary to settle all
outstanding claims, including claims that are incurred but not reported
("IBNR"), as of the reporting date. These reserve estimates are based on
known facts and interpretation of circumstances, including Allstate's
experience with similar cases and historical trends involving claim payment
patterns, loss payments, pending levels of unpaid claims and product mix, as
well as other factors including court decisions, economic conditions and
public attitudes. The effects of inflation are implicitly considered in the
reserving process. The establishment of 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.
The following table summarizes changes in Allstate's estimate of prior year
reserves in 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Reserve increase (decrease)
($ in millions) 1996 1995 1994
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserve re-estimates due to:
Environmental and asbestos claims $ 335 $ 82 $ 80
All other property-liability claims (671) (507) (792)
--------------------------------------
Pretax reserve decrease $(336) $(425) $(712)
======================================
Loss development information related to ARCO is not included in the table
above.
</TABLE>
Favorable calendar year reserve development in 1996, 1995 and 1994 was
the result of favorable severity trends in each of the three years, which
more than offset adverse development in Discontinued Lines and Coverages and
increases to reserves for claim expense which occurred in 1996. The favorable
severity trend during this three-year period was largely due to lower than
anticipated medical cost inflation for personal auto injury claims and
improvements in the Company's claim settlement processes. The reduction in
the anticipated medical cost inflation trend has emerged over time as actual
claim settlements validated the effect of the
<PAGE>
ALLSTATE - 43
steady decline in the rate of inflation. Although improvements in the Company's
claim settlement process have contributed to favorable severity development of
personal injury claims during the past three years, the new processes have
caused an increase in the number of claims outstanding. The Company expects the
rate of increase in claims outstanding to continue to decline in 1997, however,
the number of outstanding claims may not be reduced to levels previously
reported due to an increase in the time required to complete the new claim
settlement processes. In addition, while the claim settlement process changes
are believed to have contributed to favorable severity trends on closed claims,
these changes introduce a greater degree of variability in reserve estimates
for the remaining outstanding claims at December 31, 1996. Future reserve
releases, if any, will depend on the continuation of the favorable loss trends.
Allstate's exposure to environmental, asbestos and mass tort claims stem
principally from excess and surplus business written from 1972-1985, including
substantial excess and surplus general liability coverages on Fortune 500
companies, and reinsurance coverage written during the 1960s through the 1980s,
including reinsurance on primary insurance written on large U.S. companies.
Mass tort exposures primarily relate to product liability claims, such as those
for medical devices and other products, and general liabilities. Establishing
net loss reserves for environmental, asbestos and mass tort claims is subject
to uncertainties that are greater than those presented by other types of
claims. Among the complications are lack of historical data, long reporting
delays, uncertainty as to the number and identity of insureds with potential
exposure, unresolved legal issues regarding policy coverage, availability of
reinsurance and the extent and timing of any such contractual liability. The
legal issues concerning the interpretation of various insurance policy
provisions and whether environmental, asbestos and mass tort losses are, or
were ever intended to be covered, are complex. Courts have reached different
and sometimes inconsistent conclusions as to when losses are deemed to have
occurred and which policies provide coverage; what types of losses are covered;
whether there is an insured obligation to defend; how policy limits are
determined; how policy exclusions are applied and interpreted; and whether
clean-up costs represent insured property damage. Management believes these
issues are not likely to be resolved in the near future.
As the industry has gained experience evaluating environmental and
asbestos exposures, some actuarial firms have developed techniques and
databases which were helpful in refining the Company's estimation techniques.
During 1996, Allstate conducted a comprehensive re-evaluation of Discontinued
Lines and Coverages net loss reserves. The Company also performed an in-depth
analysis of its reinsurance recoverables and refined its process for estimating
and identifying available reinsurance since some reinsurers have become
insolvent or Allstate has commuted their agreements. During the third quarter
of 1996, based upon the Company's re-evaluation, loss reserves, net of
reinsurance, for environmental and asbestos exposures were increased by $172
million and $72 million, respectively.
In 1986, the general liability policy form used by Allstate and others in
the property-liability industry was amended to introduce an "absolute pollution
exclusion," which excluded coverage for environmental damage claims and added
an asbestos exclusion. Most general liability policies issued prior to 1987
contain annual aggregate limits for products liability coverage, and policies
issued after 1986 also have an annual aggregate limit as to all coverages.
Allstate's experience to date is that these policy form changes have
effectively limited its exposure to environmental and asbestos claim risks
assumed, as well as primary commercial coverages written, for most policies
written in 1986 and all policies written after 1986.
The table on the next page summarizes reserves and claim activity for
environmental and asbestos claims before (Gross) and after (Net) the effects
of reinsurance for the past three years. Included in the table below is the
survival ratio, which is calculated as ending reserves divided by claims and
claims expense paid.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
44 - ALLSTATE
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------
($ in millions) Gross Net Gross Net Gross Net
- - -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ENVIRONMENTAL CLAIMS
- - -------------------------------------------------------------------------------
Beginning reserves $944 $520 $940 $447 $916 $442
Businesses sold (11) (9) - - - -
Uncollectible reinsurance allocation - - - 61 - -
------------------------------------
Beginning reserves-adjusted 933 511 940 508 916 442
Incurred claims and claims expense 69 255 65 59 68 48
Claims and claims expense paid (55) (44) (61) (47) (44) (43)
------------------------------------
Ending reserves $947 $722 $944 $520 $940 $447
=====================================
Survival ratio-environmental claims 17.2 16.4 15.5 11.1 21.4 10.4
ASBESTOS CLAIMS
- - --------------------------------------------------------------------------------
Beginning reserves $724 $501 $800 $504 $806 $520
Businesses sold (16) (12) - - - -
Uncollectible reinsurance allocation - - - 43 - -
------------------------------------
Beginning reserves-adjusted 708 489 800 547 806 520
Incurred claims and claims expense 161 80 22 23 71 32
Claims and claims expense paid (95) (59) (98) (69) (77) (48)
-------------------------------------
Ending reserves $774 $510 $724 $501 $800 $504
=====================================
Survival ratio-asbestos claims 8.1 8.6 7.4 7.3 10.4 10.5
Survival ratio-environmental and
asbestos combined 11.5 12.0 10.5 8.8 14.4 10.4
</TABLE>
Beginning in 1995, the allowance for uncollectible reinsurance balances
was added to the table above. Comparable amounts are not available for 1994.
Pending claims for environmental and asbestos exposures totaled
approximately 16,075, 18,250 and 18,080 at December 31, 1996, 1995 and 1994,
respectively. Approximately 1,345 pending claims were transferred as a result
of the Northbrook and Reinsurance sales. Approximately 2,140, 3,060 and 3,160
new claims were reported during 1996, 1995 and 1994, respectively.
Approximately 2,970, 2,890 and 2,420 claims were closed during 1996, 1995 and
1994, respectively, of which approximately 2,300, 2,100 and 1,630 claims were
settled without payment. Approximately 63%, 56% and 57% of the total net
environmental and asbestos reserves at December 31, 1996, 1995 and 1994,
respectively, represents IBNR.
Allstate's reserves for environmental coverages could be affected by the
existing federal Superfund law and similar state statutes. Superfund reform
proposals have been introduced in Congress, including a proposal introduced
in the current session, but none have been adopted at the date of this
publication. There can be no assurance that any Superfund reform legislation
will be enacted or that any such legislation will provide for a fair,
effective and cost-efficient system for settlement of Superfund related
claims. Management is unable to determine the effect, if any, that such
legislation will have on results of operations or financial position.
In addition to environmental and asbestos exposures, the Discontinued
Lines and Coverages net loss reserve studies also included an assessment of
current claims for mass tort exposures. Based on the re-evaluation, loss
reserves for mass tort exposures were increased in the third quarter of 1996
by $60 million, net of reinsurance. This increase includes the reallocation
of $103 million of general liability net loss reserves between 1985 and
subsequent accident years to pre-1985 accident years.
Management believes its net loss reserves for environmental, asbestos
and mass tort exposures 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. In addition, while the Company
believes the improved actuarial techniques and databases have assisted in its
ability to estimate environmental, asbestos and mass tort net loss reserves,
these refinements may subsequently prove to be inadequate indicators of the
<PAGE>
ALLSTATE - 45
extent of probable loss. Due to the uncertainties and factors described,
management believes it is not practicable to develop a meaningful range for
any such additional net loss reserves that may be required.
PROPERTY-LIABILITY REINSURANCE CEDED The Company acquires reinsurance
to limit aggregate and single exposures on large risks. Additionally, in
connection with the sale to SCOR (see Note 3 to the consolidated financial
statements) in 1996, Allstate entered into a reinsurance agreement for the
post-1984 reinsurance liabilities. Allstate has purchased reinsurance primarily
to mitigate losses arising from long-tail liability lines, including
environmental, asbestos and mass tort exposures. These reinsurance arrangements
have not had a material effect on Allstate's liquidity or capital resources.
Allstate has entered into a three-year excess reinsurance contract covering
Florida property policies, effective January 1, 1997, which provides up to $400
million of reinsurance protection for catastrophe losses in excess of $1.00
billion, up to an aggregate limit of $800 million. The Company continues to
have primary liability as a direct insurer for risks reinsured.
The following table summarizes the impact of reinsurance activity on
Allstate's reserve for claims and claims expense and incurred claims and
claims expense.
<TABLE>
<CAPTION>
For the year ended
at December 31, 1996 December 31, 1996
----------------------------------------------------------------------------
Gross claims Reinsurance Reinsurance Ceded As % of
And claims recoverable recoverable claims and gross claims
expense On unpaid as % of total claims and claims
($ in millions) reserves claims, net gross reserves expense expense
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Pools, associations
and facilities $ 797 $ 544 3.1% $297 2.0%
Environmental and
asbestos 1,721 489 2.8 (105) (0.7)
Disposition of
operations--SCOR 381 381 2.2 - -
Other(1) 14,483 370 2.2 169 1.1
-----------------------------------------------------------------------
Total property-liability $17,382 $1,784 10.3% $361 2.4%
=======================================================================
(1) Composed primarily of reinsurance related to Discontinued Lines and Coverages. Also includes reinsurance related
to PP&C.
</TABLE>
Reinsurance has been placed with insurance companies based on the
evaluation of the financial security of the reinsurer, terms of coverage and
price. Recent developments in the insurance industry have resulted in
environmental, asbestos and mass tort exposures being segregated into separate
legal entities with dedicated capital. These actions have been supported by
regulatory bodies in certain cases. The Company is unable to determine the
impact, if any, that these developments will have on the collectibility of
reinsurance recoverables in the future. The Company has a recoverable from
Lloyd's of London of $127 million and $189 million at December 31, 1996 and
1995, respectively. Lloyd's of London implemented a restructuring plan in 1996
to solidify its capital base and to segregate claims for years before 1993.
The impact, if any, of the restructuring on the collectibility of the
recoverable from Lloyd's of London is uncertain at this time. The recoverable
from Lloyd's of London is spread among thousands of investors (Names) who have
unlimited liability. Excluding pools, associations and facilities, no other
amount due or estimated due from any one reinsurer was in excess of $78
million and $79 million at December 31, 1996 and 1995, respectively.
Estimating amounts of reinsurance recoverable is also impacted by the
uncertainties involved in the establishment of loss reserves. Management
believes the recoverables are appropriately established; however, as the
Company's underlying reserves continue to develop, the amount ultimately
recoverable may vary from amounts currently recorded. The reinsurers and
amounts recoverable therefrom are regularly evaluated by the Company and a
provision for uncollectible reinsurance is recorded. The pretax provisions
for uncollectible reinsurance were $18 million, $133 million and $26 million
in 1996, 1995 and 1994, respectively. The increase
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
46 - ALLSTATE
in the provision for 1995 was primarily due to an increase in
uncollectible reinsurance related to reserve increases for breast implant,
environmental and asbestos claims. The allowance for uncollectible reinsurance
was $163 million and $246 million at December 31, 1996 and 1995, respectively.
Allstate enters into certain intercompany insurance and reinsurance
transactions for the property-liability and life and annuity operations.
Allstate enters into these transactions as a sound and prudent business
practice in order to maintain underwriting control and spread insurance risk
among various legal entities. These reinsurance agreements have been approved
by the appropriate regulatory authorities. All material intercompany
transactions have been eliminated in consolidation.
- - --------------------------------------------------------------------------------
LIFE AND ANNUITY HIGHLIGHTS
- - -Variable annuity sales increased 187.1%, equity-indexed annuity sales
increased 202.4% and life insurance sales increased 14.7%.
- - -Statutory premiums and deposits increased 5.8% largely as a result of the
ongoing introduction of new products and product features, despite the
decline in the overall market for fixed annuities.
- - -Operating income increased 12.5% and net income increased 15.1% due to growth
in investments and improved profitability on both new and existing business.
- - -Investments, including Separate Account assets, increased 8.1%.
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIFE AND ANNUITY OPERATIONS
($ in millions) 1996 1995 1994
- - --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory premiums and deposits $ 5,157 $ 4,874 $ 4,539
=========================
Investments $28,037 $27,256 $23,397
Separate Account assets 5,551 3,809 2,800
-------------------------
Investments, including Separate Account assets $33,588 $31,065 $26,197
=========================
Premiums and contract charges $ 1,336 $ 1,368 $ 1,053
Net investment income 2,045 1,992 1,827
Policy benefits 2,313 2,381 2,031
Operating costs and expenses 511 475 492
Early retirement program - - 22
-------------------------
Income from operations 557 504 335
Income tax expense on operations 189 177 109
-------------------------
Net operating income 368 327 226
Realized capital gains and losses, after tax 20 10 (15)
-------------------------
Net income $ 388 $ 337 $ 211
=========================
</TABLE>
STATUTORY PREMIUMS AND DEPOSITS BY LINE
[GRAPH APPEARS HERE]
Life and Annuity Statutory Premiums by Line
<TABLE>
<CAPTION>
($ in millions) 1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Annuity products $2,288 $2,694 $2,958
Life products 1,056 1,153 1,323
Group pension 1,195 1,027 876
------ ------ ------
Total $4,539 $4,874 $5,157
====== ====== ======
</TABLE>
LIFE AND ANNUITY PREMIUMS, DEPOSITS AND CONTRACT CHARGES The life and
annuity operations of Allstate ("Allstate Life") markets a broad line of life
insurance, annuity and group pension products through a combination of
Allstate agents including life specialists, banks, independent agencies,
brokers and direct response marketing.
Statutory premiums and deposits, which include premiums and deposits for
all products, increased by $283 million or 5.8% in 1996 and $335 million or
7.4% in 1995. The following table presents statutory premiums and deposits by
product line.
<TABLE>
<CAPTION>
($ in millions) 1996 1995 1994
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Life products
Universal $ 778 $ 660 $ 616
Traditional 307 271 227
Other 238 222 213
Annuity products
Fixed 1,755 2,275 1,745
Variable 1,203 419 543
Group pension products 876 1,027 1,195
----------------------
Total $5,157 $4,874 $4,539
======================
</TABLE>
<PAGE>
ALLSTATE - 47
Increases in annuity and life insurance sales were partially offset by
decreases in group pension product sales in 1996 and 1995. Growth in
universal and traditional life product sales was achieved through independent
agencies and Allstate agents during 1996 and 1995. The interest rate
environment in late 1995 and 1996 made variable annuity products more
attractive than fixed annuity products. Increased sales of variable annuities
through banks, brokers and independent agencies fueled increased annuity
deposits in 1996. Equity-indexed annuity products, introduced in late 1995,
continued to grow in volume in 1996 to $254 million.
Life and annuity premiums and contract charges under generally accepted
accounting principles ("GAAP") decreased 2.3% in 1996 and increased 29.9% in
1995. Under GAAP, revenues exclude deposits on most annuities and premiums on
universal life insurance policies. While premiums on traditional life
products and contract charges on universal life policies and variable annuity
products continued to grow in 1996, these increases were more than offset by
decreases in sales of structured settlement annuities with life contingencies
and group pension retirement annuities. The increase in 1995 was due
primarily to increased sales of structured settlement annuities with life
contingencies, traditional life and group pension retirement annuities, as
well as growth in contract charges on universal life and annuity products.
GAAP premium and contract charges will vary with the mix of products sold
during the period.
LIFE AND ANNUITY NET INVESTMENT INCOME Pretax net investment income
increased 2.7% in 1996 compared to 1995, primarily due to a 5.6% growth in
investments, excluding Separate Account assets and unrealized gains on fixed
income securities. The additional investment income earned on the higher base
of investments is somewhat offset by lower yields on fixed income securities,
as the positive cash flows from operating and financing activities were
invested in securities yielding less than the average portfolio rate. Pretax
net investment income increased 9.0% in 1995 compared to 1994, primarily due
to a 7.0% increase in investments, excluding Separate Account assets and
unrealized gains and losses on fixed income securities.
In low interest rate environments, funds from maturing investments may
be reinvested at substantially lower interest rates than which prevailed when
the funds were previously invested.
REALIZED CAPITAL GAINS AND LOSSES Net realized capital gains increased in
1996, primarily due to reduced writedowns on impaired investments including
mortgage loans and privately-placed securities. This improvement was
partially offset by decreased gains on pre-payments and sales of fixed income
securities. Net capital gains were realized in 1995 as compared to net
capital losses in 1994. The increase in capital gains reflects reduced
mortgage loan losses and increased gains on pre-payments of privately-placed
securities.
LIFE AND ANNUITY OPERATING INCOME Net operating income increased 12.5% in
1996 and 44.7% in 1995. The increase in 1996 is largely the result of growth
in statutory premiums and deposits driven by growth in new business.
Profitability improvements resulted from favorable mortality margins on both
new and existing business. Also contributing to increased profitability was
the decrease of amortization expense relating to deferred policy acquisition
costs. The increase in 1995 net operating income was due to growth in
investments, higher margins and lower operating expenses, which consisted
primarily of a favorable $10 million after-tax adjustment to policy
acquisition costs and a $24 million after-tax reduction in accrued guaranty
fund assessments.
- - -------------------------------------------------------------------------------
LIFE AND ANNUITY OUTLOOK
- - - Allstate Life expects to continue to outpace the industry premium and
earnings growth rate in 1997 through:
- increased cross-sales of life and annuity products to existing Allstate
customers,
- expanded market reach through banks' and brokers' distribution channels, and
- continued accelerated, market- and customer-focused product development.
- - - Management is committed to increasing back-office productivity by creating
operational efficiencies.
- - - In 1997, competitive pressures are expected to continue in the life and
annuity industry, due in a large part to the current interest rate
environment. Allstate Life closely monitors the market spreads on
interest-sensitive products, and takes appropriate actions such as revising
credited interest rates or adjusting the mix of assets.
Operating Income
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
($ in millions) 1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Life and Annuity
Operating Income $ 226 $ 327 $ 368
====== ====== ======
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
48 - ALLSTATE
- - - The level of pension product sales, including guaranteed investment contracts,
will continue to be based on Allstate Life's assessment of market
opportunities.
- - --------------------------------------------------------------------------------
MARKET RISK
Market risk is the risk that the Company will incur losses due to adverse
changes in market rates and prices. The Company's primary market risk
exposures are to changes in interest rates and equity prices. The Company
does not currently have material exposures to either commodity price or
foreign currency exchange risk. However, currency risk exposures may increase
in the future as the Company expands its international operations and
investments in foreign stocks and bonds.
The active management of market risk is integral to the Company's
operations. The Company may use the following tools to manage its exposure to
market risk within defined tolerance ranges: 1) rebalance its existing asset
or liability portfolios, 2) change the character of future investments
purchased or 3) use derivatives to modify the interest rate or equity
characteristics of existing assets and liabilities or assets expected to be
purchased. (See the derivative financial instruments section in "Investments"
and Note 5 to the consolidated financial statements for a more detailed
discussion of these products.)
CORPORATE OVERSIGHT The Company generates substantial investable funds from
its two primary business operations, property-liability and life and annuity.
In formulating and implementing policies for investing new and existing
funds, the Company seeks to earn returns that enhance its ability to offer
competitive rates and prices to customers while contributing to attractive
and stable profits and long-term capital growth for the Company. Accordingly,
the Company's investment decisions and objectives are a function of the
underlying risks and product profiles of each primary business operation.
The Company, through the Boards of Directors of its operating
subsidiaries, administers and oversees investment risk management processes
primarily through two entities: the Investment Committee and the Credit and Risk
Management Committee ("CRMC"). The Investment Committee provides executive
oversight of investment activities. The CRMC is a subcommittee of the Investment
Committee consisting of both senior corporate officers and senior managers who
are responsible for the day-to-day management of market risk. The CRMC meets
semi-monthly to provide detailed oversight of investment risk, including market
risk.
The Company has investment guidelines that define the overall framework
for managing market and other investment risks, including the accountabilities
and controls over these activities. In addition, the Company has entity specific
investment policies that, among other things, delineate the investment
strategies that are appropriate given each entity's liquidity and surplus
requirements.
As set forth in the investment guidelines and policies, the Company
limits its exposure to market risk primarily through the establishment and
approval of asset allocation and duration limits (where duration is a measure
of the sensitivity of the fair value of assets or liabilities to changes in
interest rates). These limits consider the structure and duration of
liabilities, capital position, and Company performance objectives, among
other things, in an attempt to optimize the Company's risk-return and
cost-benefit trade-offs. As risk management methodologies continue to
increase in sophistication, the Company's primary tools for managing market
risk exposures will likely change.
As appropriate, the Company also uses value-at-risk and stress testing
to monitor and control market risk exposures. Value-at-risk measures the
potential loss in fair value that could arise from adverse movements in the
market over a time interval using historical volatilities and correlations
between markets. Stress tests measure downside risk to fair value and
earnings over longer time intervals for adverse economic scenarios.
The day-to-day management of market risk within defined tolerance ranges
occurs as portfolio managers buy and sell within their respective markets
based upon the acceptable boundaries established by the asset allocation,
duration and other limits, including but not limited to credit and liquidity.
Although the Company applies a common overall governance approach to
market risk where appropriate, the underlying asset-liability frameworks and
accounting and regulatory environments differ markedly between
property-liability and life and annuity operations. These
<PAGE>
ALLSTATE - 49
differing frameworks affect each operation's investment decisions and market
risk management objectives.
PROPERTY-LIABILITY OPERATIONS The primary business of the property-liability
operations is the sale of private-passenger auto and homeowners insurance. In
the management of investments supporting this business, property-liability
adheres to an investment strategy that combines the goals of ensuring the
safety of funds under management and adequate liquidity, providing high and
stable after-tax returns, and providing long-term capital growth.
Accordingly, property-liability's overall market risk management
objective is to maximize total after-tax return on capital while considering
the risks in the fixed income and equity markets such as duration, credit,
liquidity and tax risk. An optimization process is used for this purpose and
assists in determining the allocation of investments between different asset
classes. This process considers, among other things, asset and liability
structures, cash flows from new business, catastrophe exposures, correlation
among risk sources (if any), operating leverage and tax effects.
In determining the most appropriate duration for its assets,
property-liability periodically measures the duration of its liabilities in
several contexts. To achieve higher levels of operating income and to reflect
the economic impact of high policy renewal rates, the Company permits a
duration mismatch between assets and related liabilities within a defined
tolerance range. During the first half of 1996, 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), property-liability reduced its investment in long-term fixed income
securities and sold treasury futures to effectively reduce the duration of
certain assets.
At December 31, 1996, property-liability had approximately $4.29 billion
in common stocks and $441 million in other equity investments. The largest
equity exposure for property-liability is to declines in the Standard &
Poor's 500 Composite Price Index ("S&P 500"), as its common stock portfolio
tracks relatively close to the S&P 500.
LIFE AND ANNUITY OPERATIONS Allstate Life offers a variety of annuities
including fixed rate single and flexible premium deferred annuities and
single premium immediate annuities, including structured settlement
annuities, guaranteed investment contracts and pension retirement annuities.
For such products, Allstate Life seeks to invest premiums and deposits to
create future cash flows that will fund future claims, benefits and expenses,
and earn stable margins.
In order to support competitive credited rates and earn stable profits,
Allstate Life adheres to a basic philosophy of matching assets with related
liabilities to limit interest rate risk, while maintaining adequate liquidity
and a prudent and diversified level of credit risk.
The primary tools for managing investment portfolios in relation to
liabilities are simulation models (including cash flow and duration
analysis), asset allocation models and periodic analysis of portfolio
composition compared to specifications. Allstate Life calculates effective
durations of assets and liabilities and monitors quarterly whether the
asset-liability duration gap is within desired tolerances. In aggregate,
Allstate Life's annuity asset and liability effective durations are matched
within acceptable ranges at December 31, 1996. Allstate Life uses interest
rate swaps, futures, forwards, caps and floors to reduce the interest rate
risk resulting from duration mismatches between assets and liabilities. In
addition, Allstate Life uses financial futures to hedge the interest rate
risk related to anticipatory investment purchases and sales.
At December 31, 1996, Allstate Life had approximately $354 million in
equity-indexed annuities which provide customers with contractually
guaranteed participation in price appreciation of the S&P 500. Allstate Life
purchases equity-indexed options to hedge the price appreciation component of
equity-indexed annuities. Apart from these options, Allstate Life purchases
equity-indexed options to participate in equity market appreciation while
limiting downside exposure and seeking to maximize return on capital.
At December 31, 1996, Allstate Life had approximately $488 million in
common stocks and $342 million in other equity investments. Allstate Life
decreased its exposure to common stocks during 1996 through a combination of
sales and futures hedges. In addition, during the first quarter of 1997
Allstate Life sold approximately $100 million in hedged common stock
investments and concurrently closed-out of its related futures positions.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
50 - ALLSTATE
LIQUIDITY AND CAPITAL RESOURCES
The following table presents selected information relevant to the Company's
liquidity and capital resources.
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------
($ in millions) December 31, 1996 1995
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total investments and cash $58,445 $56,595
Equity securities 5,561 6,150
Fixed income securities maturing in
less than one year 1,518 1,881
Short-term investments and cash 1,394 638
Short-term debt 152 -
Long-term debt 1,234 1,228
Minority interest in mandatorily redeemable
preferred stock of subsidiary 750 -
Shareholders' equity 13,452 12,680
</TABLE>
CAPITAL RESOURCES In November 1996, Allstate issued $750 million of trust
preferred securities due no later than 2045, $550 million at 7.95% and $200
million at 7.83%. The Company will use the net proceeds for general corporate
purposes, including the stock repurchase program (see Note 10 to the
consolidated financial statements).
In early 1996, Allstate initiated a commercial paper program with an
authorized borrowing limit of up to $1.00 billion to cover its short-term
cash needs. The majority of the proceeds from the issuance of the commercial
paper have been used by the insurance operations for general corporate
purposes. At December 31, 1996, the Company had outstanding commercial paper
borrowings of $152 million with a weighted average interest rate of 5.74%.
During 1996, the Company purchased 6.7 million shares of its common
stock, for its treasury, at an average cost per share of $50.19.
During 1996, Allstate Insurance Company ("AIC") received gross proceeds
of $378 million in connection with the sales of Northbrook, Reinsurance and
ARCO. Proceeds from the sales of these operations will be used for general
corporate purposes.
In April 1995, the Company and AIC raised $1.12 billion through its
initial public offering of PMI Group and the issuance of the 6.76%
Exchangeable Notes due April 15, 1998.
In connection with the Sears, Roebuck and Co. ("Sears") distribution of
its ownership interest in the Company, AIC received from Sears $450 million
due on a demand collateral note, and the Company paid Sears $327 million in
return for a note from the Allstate ESOP for a like principal amount and
50.0% of the unallocated shares (see Note 13 to the consolidated financial
statements).
The Company maintains a $1.50 billion, five-year revolving line of
credit as a potential source of funds to meet short-term liquidity
requirements. The line of credit expires December 20, 2001 and allows for
borrowings by The Allstate Corporation, AIC and Allstate Life Insurance
Company. In order to borrow on the line of credit, AIC is required to
maintain a specified statutory surplus level and the Company's debt to equity
ratio (as defined in the agreement) must not exceed a designated level. These
requirements are currently being met and management expects to continue to
meet them in the future. There were no borrowings under the line of credit
during 1996. Total borrowings under the combined commercial paper program and
line of credit are limited to $1.50 billion.
At December 31, 1996, under a shelf registration statement filed with
the Securities and Exchange Commission, the Company may issue up to $750
million of debt securities, preferred stock or debt warrants.
The capacity for Allstate's growth in premiums, like that of other
insurers, is in part a function of its operating leverage. Operating leverage
for property-liability companies is measured by the ratio of net premiums
written to statutory surplus. Ratios in excess of 3 to 1 are
considered outside the usual range by insurance regulators and rating
agencies. AIC's premium to surplus ratio was 1.6x and 1.9x at December 31,
1996 and 1995, respectively.
The National Association of Insurance Commissioners ("NAIC") has a
standard for assessing the solvency of insurance companies, which is referred
to as risk-based capital ("RBC").
<PAGE>
ALLSTATE - 51
The requirement consists of a formula for determining each insurer's RBC and
a model law specifying regulatory actions if an insurer's RBC falls below
specified levels. The RBC formula for property-liability companies includes
asset and credit risk but places more emphasis on underwriting factors for
reserving and pricing. The RBC formula for life insurance companies
establishes capital requirements relating to insurance risk, business risk,
asset risk and interest rate risk. At December 31, 1996, RBC for each of the
Company's individual property-liability and life and annuity companies was
significantly above levels that would require regulatory action.
FINANCIAL RATINGS AND STRENGTH The following table summarizes the Company's
and its major subsidiaries, debt and commercial paper ratings and the
insurance claims-paying ratings from various agencies at December 31, 1996.
<TABLE>
<CAPTION>
Standard
Moody's & Poor's A.M. Best
- - ----------------------------------------------------------------------------
<S> <C> <C> <C>
The Allstate Corporation (debt) A2 A *
The Allstate Corporation (commercial paper) P-1 A-1 *
Allstate Insurance Company
(claims-paying ability) Aa3 AA A
Allstate Life Insurance Company
(claims-paying ability) Aa3 AA+ A+
*not rated by the agency
</TABLE>
LIQUIDITY The Allstate Corporation is a holding company which owns AIC. The
Company's principal sources of funds are dividend payments from AIC,
intercompany borrowings and funds that may be raised periodically from the
issuance of additional debt, including commercial paper or stock. The payment
of dividends by AIC is subject to certain limitations imposed by insurance
laws of the State of Illinois (see Note 12 to the consolidated financial
statements). The Company's principal uses of funds are the payment of
dividends to shareholders, share repurchases, intercompany lendings to its
insurance affiliates, debt service and additional investments in insurance
operations.
The principal sources of funds for the property-liability insurance
operations are premiums, collections of principal and income from the
investment portfolio and intercompany loans from The Allstate Corporation.
The principal uses of funds by the property-liability operations are the
payment of claims and related expenses, operating expenses and dividends to
The Allstate Corporation, the purchase of investments and the repayment of
intercompany loans.
The Company's property-liability operations typically generate
substantial positive cash flow from operations as a result of most premiums
being received in advance of the time when claim payments are required. These
positive operating cash flows, along with that portion of the investment
portfolio that is held in cash and highly liquid securities, commercial paper
borrowings and the Company's line of credit have met, and are expected to
continue to meet the liquidity requirements of the property-liability
operations. Catastrophe claims, the timing and amount of which are inherently
unpredictable, may create increased liquidity requirements for the
property-liability operations of the Company.
The principal sources of funds for Allstate Life are premiums, deposits,
collections of principal and income from the investment portfolio and capital
contributions from AIC, its parent. The primary uses of these funds are to
purchase investments, and pay policyholder claims, benefits, contract
maturities and surrenders, operating costs and dividends to AIC.
Fixed income securities represent 82.3% of Allstate Life's total
investments. The maturity structure of these securities are managed to meet
the anticipated cash flow requirements of the underlying liabilities. A
portion of Allstate Life's diversified product portfolio, primarily fixed
deferred annuities and universal life insurance policies, is subject to
discretionary surrender and withdrawal by customers. Total surrenders and
withdrawals for Allstate Life were $1.57 billion, $1.73 billion and $1.44
billion in 1996, 1995 and 1994, respectively. The increase in 1995 was
primarily due to a higher level of customer surrenders in the first half of
the year on older fixed rate annuities on which the surrender charge period
had expired. Management took actions in 1995, including raising renewal
crediting rates, in order to slow the surrender rate
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
52 - ALLSTATE
on these annuities. Accordingly, the rate of surrenders and withdrawals on
these products decreased beginning in the second half of 1995 and continued
through 1996, contributing to the lower rate of surrenders and withdrawals in
1996. Allstate Life expects the dollar amount of surrenders and withdrawals
to increase in the future, as the blocks of interest-sensitive life and
annuity products continue to grow and as in-force policies and contracts age.
However, an increase in the level of surrenders relative to total
contractholder account balances is not anticipated unless there is a sharp
and sustained increase in interest rates which may create increased liquidity
requirements. Management believes its assets are sufficiently liquid to meet
future obligations to its life and annuity policyholders, under various
interest rate scenarios.
The following table summarizes liabilities for interest-sensitive life
and annuity products by their contractual surrender provisions at December
31, 1996. Approximately 11.0% of these liabilities are subject to
discretionary withdrawal without adjustment.
<TABLE>
<CAPTION>
($in millions)
- - ----------------------------------------------------------------
<S> <C>
Not subject to discretionary withdrawal $10,188
Subject to discretionary withdrawal with adjustments:
Specified surrender charges (1) 10,442
Market value 1,402
-------
22,032
Subject to discretionary withdrawal without adjustments 2,753
-------
Total $24,785
=======
(1) Includes $2.55 billion of liabilities with a contractual surrender charge
of less than 5.0% of the account balance.
</TABLE>
The following table sets forth the weighted average investment yield and
the weighted average interest credit rates during the years ended December
31, 1996 and 1995 for Allstate Life's interest-sensitive life products
(excluding variable life), fixed rate contracts (which include guaranteed
investment contracts, structured settlement annuities and group pension
retirement annuities) and flexible rate contracts (which include all other
annuities except variable annuities).
<TABLE>
Weighted average Weighted average
investment yield interest credit rate
1996 1995 1996 1995
- - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-sensitive life products 7.8% 8.1% 5.9% 6.0%
Fixed rate contracts 8.5% 8.7% 7.6% 7.7%
Flexible rate contracts 7.7% 8.1% 5.8% 5.9%
- - --------------------------------------------------------------------------------
</TABLE>
INVESTMENTS
The composition of the investment portfolio at December 31, 1996 is presented
in the table below (see Notes 2 and 4 to the consolidated financial
statements for investment accounting policies and additional information).
<TABLE>
<CAPTION>
Property-liability Allstate Life Total
-----------------------------------------------------------
Percent Percent Percent
($ in millions) to total to total to total
- - -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed income securities $24,019 80.8% $23,076 82.3% $47,095 80.7%
Equity securities 4,731 15.9 830 3.0 5,561 9.5
Mortgage loans 77 .3 3,069 10.9 3,146 5.4
Real estate 449 1.5 289 1.0 738 1.3
Short-term 416 1.4 280 1.0 1,278 2.2
Other 18 .1 493 1.8 511 .9
---------------------------------------------------------
Total $29,710 100.0% $28,037 100.0% $58,329 100.0%
=========================================================
</TABLE>
<PAGE>
ALLSTATE - 53
Property-liability investments increased $500 million to $29.71 billion
at December 31, 1996, as the investment of positive cash flows generated from
operating activities was partially offset by a $642 million decrease in the
unrealized net capital gains on equity and fixed income securities and the
transfer of $1.59 billion of investments related to the sale of Northbrook,
Reinsurance and ARCO.
Allstate Life investments increased $781 million to $28.04 billion at
December 31, 1996 as the investment of positive cash flows generated from
operating activities was partially offset by a $557 million decrease in the
unrealized net capital gains on equity and fixed income securities.
FIXED INCOME SECURITIES Allstate's fixed income securities portfolio
consists of tax-exempt municipal bonds, publicly-traded corporate bonds,
privately-placed securities, mortgage-backed securities, asset-backed
securities, foreign government bonds, redeemable preferred stock and U.S.
government bonds. Allstate generally holds its fixed income securities for
the long term, but has classified all of these securities as available for
sale to allow maximum flexibility in portfolio management. At December 31,
1996, net unrealized capital gains on the fixed income securities portfolio
totaled $2.04 billion compared to $3.37 billion as of December 31, 1995. The
decrease in the unrealized gain position is primarily attributable to rising
interest rates. As of December 31, 1996, approximately 71.0% of the
consolidated fixed income securities portfolio was invested in taxable fixed
income securities.
Nearly 94.0% of the Company's fixed income securities portfolio is rated
investment grade, which is defined by the Company as a security having an
NAIC rating of 1 or 2, a Moody's rating of Aaa, Aa, A or Baa, or a comparable
Company internal rating. The quality mix of Allstate's fixed income
securities portfolio at December 31, 1996 is presented below.
<TABLE>
<CAPTION>
($ in millions)
Moody's equivalent Percent
NAIC ratings description Fair value of total
---------------------------------------------------------------------------
<S> <C> <C> <C>
1 Aaa/Aa/A $35,242 74.8%
2 Baa 9,020 19.1
3 Ba 1,737 3.7
4 B 932 2.0
5 Caa or lower 130 .3
6 In or near default 34 .1
------------------------
$47,095 100.0%
========================
</TABLE>
Included among the securities that are rated below investment grade are
both public and private high yield bonds and securities that were purchased
at investment grade but have since been downgraded. The Company mitigates the
credit risk of investing in below investment grade fixed income securities by
limiting these investments to 7.0% of the total fixed income securities and
through diversification of the portfolio.
Over 30% of the Company's fixed income portfolio, at December 31, 1996,
is invested in municipal bonds of which 94% are rated as investment grade.
The municipal bond portfolio consisted of approximately 9,100 issues from
nearly 2,400 issuers. The largest exposure to a single issuer is $217
million.
As of December 31, 1996, the fixed income securities portfolio contained
$10.36 billion of privately-placed corporate obligations, compared with $9.57
billion at December 31, 1995. The benefits of privately-placed securities as
compared to public securities are generally higher yields, improved cash flow
predictability through pro-rata sinking funds on many bonds, and a
combination of covenant and call protection features designed to better
protect the holder against losses resulting from credit deterioration,
reinvestment risk and fluctuations in interest rates. The relative
disadvantages of privately-placed securities as compared to public securities
include reduced liquidity and in some cases limited access to information.
Over 83% of the privately-placed securities are rated as investment grade by
either the NAIC or the Company's internal ratings. The Company determines the
fair value of privately-placed fixed income securities based on discounted
cash flows using current interest rates for similar securities.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
54 - ALLSTATE
At December 31, 1996 and 1995, $8.59 billion and $7.28 billion,
respectively of the fixed income portfolio were invested in mortgage-backed
securities ("MBS"). At December 31, 1996, principally all of the MBS were
investment grade and approximately 80% have underlying collateral that is
guaranteed by U.S. government entities, thus credit risk was minimal.
MBS, however, are subject to interest rate risk as the duration and
ultimate realized yield are affected by the rate of repayment of the
underlying mortgages. Allstate attempts to limit interest rate risk by
purchasing MBS whose cost does not significantly exceed par value, and with
repayment protection to provide a more certain cash flow to Allstate. At
December 31, 1996, the amortized cost of the MBS portfolio was below par
value by $199 million and over 40% of the MBS portfolio was invested in
planned amortization class bonds. This type of MBS is repaid over a
predetermined time period, which is guaranteed to be met under most
circumstances.
The fixed income securities portfolio contained $2.69 billion and $1.66
billion of asset-backed securities ("ABS") at December 31, 1996 and 1995,
respectively. ABS are subject to many of the same risks as MBS, but to a
lesser degree because of the nature of the underlying assets. Allstate
attempts to mitigate these risks by primarily investing in highly-rated,
publicly-traded, intermediate term ABS at or below par value. At December 31,
1996, the amortized cost of the ABS portfolio was below par value by $15
million. Over 50% of the Company's ABS are invested in securitized credit
card receivables. The remainder of the portfolio is backed by securitized
home equity, manufactured housing and auto loans.
Allstate closely monitors its fixed income portfolio for declines in
value that are other than temporary. Securities are placed on non-accrual
status when they are in default or when the receipt of interest payments is
in doubt.
MORTGAGE LOANS AND REAL ESTATE Allstate's $3.15 billion investment in
mortgage loans at December 31, 1996 is comprised primarily of loans secured
by first mortgages on developed commercial real estate, and is primarily held
in the life and annuity operations. Geographical and property type
diversification are key considerations used to manage Allstate's mortgage
loan risk.
Allstate closely monitors its commercial mortgage loan portfolio on a
loan-by-loan basis. Loans with an estimated collateral value less than the
loan balance, as well as loans with other characteristics indicative of
higher than normal credit risk, are reviewed by financial and investment
management at least quarterly for purposes of establishing valuation
allowances and placing loans on non-accrual status. The underlying collateral
values are based upon discounted property cash flow projections, which are
updated as conditions change or at least annually.
In 1996, $489 million of commercial mortgage loans were contractually
due. Of these, 43.2% were paid as due, 46.2% were refinanced at prevailing
market terms, .5% were restructured, 1.4% were foreclosed or are in the
process of foreclosure, and 8.7% were in the process of refinancing or
restructuring discussions. For contractual maturities of the commercial
mortgage loan portfolio as of December 31, 1996 for loans that were not in
foreclosure, see Note 4 to the consolidated financial statements. Allstate
expects to continue to extend the maturity of certain maturing loans at
prevailing interest rates where the borrower is unable to obtain financing
elsewhere. Depending on the interest rate environment, some loans may not be
able to be extended at prevailing market rates.
Allstate's $738 million of real estate investments at December 31, 1996
is comprised of $452 million of real estate acquired directly as an investment
and $286 million of property acquired through foreclosure or deed in lieu of
foreclosure. As of December 31, 1996, $104 million of foreclosed real estate
properties were considered held for investment and the Company had an active
plan or intent to sell $182 million.
<PAGE>
ALLSTATE - 55
EQUITY SECURITIES AND SHORT-TERM The Company's equity securities portfolio
decreased $589 million to $5.56 billion at December 31, 1996 compared to
1995. To reduce exposure to equity market risk in the property-liability
investment portfolio, the Company decreased its holdings of equity securities
in 1996. The proceeds from the sale were reinvested in taxable
intermediate-term fixed income securities.
The Company's short-term investment portfolio was $1.28 billion and $548
million at December 31, 1996 and 1995, respectively. Allstate invests
available cash balances primarily in taxable short-term securities having a
final maturity date or redemption date of one year or less. The increase in
the short-term portfolio in 1996 is due, in part, to the receipt of proceeds
from the issuance of the trust preferred securities.
DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments include
swaps, futures, forwards and options, including caps and floors. The Company
primarily uses derivative financial instruments to reduce its exposure to
market risk (principally interest rate and equity price risk), in conjunction
with asset/liability management, in its life and annuity operations. The
Company does not hold or issue these instruments for trading purposes. The
Company is exposed to credit-related losses in the event of nonperformance by
counterparties to derivative financial instruments. However, such
nonperformance is not expected because the Company utilizes highly rated
counterparties, establishes risk control limits and maintains ongoing
monitoring procedures.
The following table summarizes the notional amounts, weighted average
interest rates by expected (contractual) maturities and fair values for the
Company's interest rate swap, cap and floor agreements. Notional amounts are
used to calculate the exchange of contractual payments under the agreements.
Weighted average floating rates on interest rate swap agreements are based on
the contractual interest rates in effect at December 31, 1996 and therefore,
may differ substantially from the weighted average floating rates the Company
will actually pay and receive on these agreements.
<TABLE>
<CAPTION>
At December 31, 1996
- - --------------------------------------------------------------------------------------------------------
0-1 >1-2 >2-3 >3-4 >4-5 After 5 Fair
($ in millions) year years years years years years Total value
- - --------------------------------------------------------------------------------------------------------
INTEREST RATE SWAP AGREEMENTS(1)
- - ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Notional amount)
Pay floating rate, receive fixed rate $ 57 $ 67 $ 101 $ 81 $ 72 $120 $ 498 $18
Weighted average pay rate 5.6% 5.6% 5.6% 5.6% 5.6% 5.7% 5.6%
Weighted average receive rate 7.5% 7.6% 6.6% 6.6% 7.3% 7.2% 7.1%
Pay fixed rate, receive floating rate - - $ 10 - $ 28 $319 $ 357 $(2)
Weighted average pay rate - - 7.0% - 6.1% 6.5% 6.5%
Weighted average receive rate - - 5.6% - 5.6% 5.6% 5.6%
Pay floating rate, receive floating rate - $ 60 - $ 7 - - $ 67 $(1)
Weighted average pay rate - 5.7% - 5.7% - - 5.7%
Weighted average receive rate - 5.8% - 5.9% - - 5.8%
INTEREST RATE CAP AGREEMENTS(2)
- - ------------------------------------------
Notional amount $ 6 $ 439 $1,188 $ 85 $232 $181 $2,131 $ 4
Weighted average strike price 10.7% 8.4% 9.4% 8.5% 9.2% 10.7% 9.2%
INTEREST RATE FLOOR AGREEMENTS(3)
- - ------------------------------------------
Notional amount - $ 20 - $ 8 $ 30 $200 $ 258 $ 2
Weighted average strike price - 6.9% - 6.5% 6.5% 3.3% 4.0%
(1) The floating rate side of substantially all interest rate swap agreements is referenced to one- three- or six-month
LIBOR. At December 31, 1996, the one-, three- and six-month LIBOR rates were 5.5%, 5.6% and 5.6%, respectively.
(2) Substantially all interest rate cap agreements are referenced to one- and three-month LIBOR and five-year Constant Maturity
Swap. At December 31, 1996, the five-year Constant Maturity Swap rate was 6.5%.
(3) Substantially all of the interest rate floor agreements are referenced to one-month LIBOR or five-year Constant Maturity
Treasury. At December 31, 1996, the five-year Constant Maturity Treasury rate was 6.6%.
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
56 - ALLSTATE
All of the Company's financial futures contracts outstanding at
December 31, 1996 mature within one year. Based upon notional amounts
outstanding at December 31, 1996, approximately 60.0% of the Company's options
contracts (excluding interest rate caps and floors) mature within one year. The
remaining 40.0% mature from one to five years.
- - --------------------------------------------------------------------------------
OTHER DEVELOPMENTS
The initial draft of the NAIC's codification of statutory accounting
practices will be distributed in March 1997 for a six-month public exposure
period. Finalization of the codification is expected to occur in late 1997 or
early 1998, with implementation tentatively planned for January 1, 1999. Due
to the possible changes resulting from the public exposure of the
codification, the potential impact to statutory surplus is not determinable
at this time.
- - --------------------------------------------------------------------------------
PENDING ACCOUNTING STANDARD
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers of Financial Assets and Extinguishments of Liabilities." This
standard distinguishes between transfers of financial assets as sales versus
financing transactions based upon relinquishment of control and addresses the
accounting for securitizations, securities lending, repurchase agreements and
insubstance defeasance transactions. The requirements of this statement that
were effective on January 1, 1997 were adopted and are not expected to have a
material impact on the results of operations or financial position of the
Company.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
ALLSTATE - 57
<TABLE>
<CAPTION>
Year ended December 31,
($ in millions except per share data) 1996 1995 1994
- - -----------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
- - ---------------------------------------
Property-liability insurance premiums
(net of reinsurance ceded of $479,
$524 and $549) $18,366 $17,540 $16,513
Life and annuity premiums and contract
charges (net of reinsurance ceded of
$96, $47 and $48) 1,336 1,368 1,053
Net investment income 3,813 3,627 3,343
Realized capital gains and losses 784 258 200
------- ------- -------
24,299 22,793 21,109
------- ------- -------
COSTS AND EXPENSES
- - ---------------------------------------
Property-liability insurance claims and
claims expense (net of reinsurance
recoveries of $361, $607 and $292) 14,487 13,688 14,529
Life and annuity contract benefits
(net of reinsurance recoveries of
$43, $18 and $29) 2,313 2,381 2,031
Amortization of deferred policy
acquisition costs 2,266 2,143 2,005
Operating costs and expenses 2,207 2,247 2,210
California Earthquake Authority
assessment 150 - -
Early retirement program - - 154
Interest expense 76 72 60
------- ------- -------
21,499 20,531 20,989
------- ------- -------
(Loss) gain on disposition of operations (131) 159 -
INCOME FROM OPERATIONS BEFORE
INCOME TAX EXPENSE (BENEFIT),
DIVIDENDS ON PREFERRED SECURITIES,
AND EQUITY IN NET INCOME OF
UNCONSOLIDATED SUBSIDIARY 2,669 2,421 120
- - ---------------------------------------
INCOME TAX EXPENSE (BENEFIT) 619 573 (278)
- - -----------------------------------------------------------------------
INCOME BEFORE DIVIDENDS ON PREFERRED
SECURITIES AND EQUITY IN NET INCOME
OF UNCONSOLIDATED SUBSIDIARY 2,050 1,848 398
- - ---------------------------------------
DIVIDENDS ON PREFERRED SECURITIES
OF SUBSIDIARY TRUSTS (4) - -
- - ---------------------------------------
EQUITY IN NET INCOME OF
UNCONSOLIDATED SUBSIDIARY 29 56 86
- - -----------------------------------------------------------------------
NET INCOME $ 2,075 $ 1,904 $ 484
=======================================================================
EARNINGS PER SHARE
- - ---------------------------------------
Net income $4.63 $4.24 $ 1.08
===========================
Weighted average common and common
equivalent shares outstanding 448.2 449.5 449.8
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
58 - ALLSTATE
<TABLE>
<CAPTION>
December 31,
($ in millions) 1996 1995
- - --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- - -------------------------------------------------------------
Investments
Fixed income securities, at fair value
(amortized cost $45,057 and $41,907) $47,095 $45,272
Equity securities, at fair value (cost $3,999 and $4,716) 5,561 6,150
Mortgage loans 3,146 3,280
Real estate 738 786
Short-term 1,278 548
Other 511 469
----------------
Total investments 58,329 56,505
Premium installment receivables, net 2,691 2,935
Deferred policy acquisition costs 2,614 2,004
Reinsurance recoverables, net 2,147 1,829
Property and equipment, net 714 724
Accrued investment income 715 750
Deferred income taxes 232 229
Cash 116 90
Other assets 1,399 1,154
Separate Accounts 5,551 3,809
----------------
Total assets $74,508 $70,029
================
LIABILITIES
- - -------------------------------------------------------------
Reserve for property-liability insurance
claims and claims expense $17,382 $17,687
Reserve for life-contingent contract benefits 6,287 6,071
Contractholder funds 20,120 19,146
Unearned premiums 6,174 6,188
Claim payments outstanding 594 568
Other liabilities and accrued expenses 2,824 2,663
Debt 1,386 1,228
Separate Accounts 5,539 3,798
----------------
Total liabilities 60,306 57,349
COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 3, 5, 6 AND 9)
- - -------------------------------------------------------------
MANDATORILY REDEEMABLE PREFERRED SECURITIES
OF SUBSIDIARY TRUSTS 750 -
- - -------------------------------------------------------------
SHAREHOLDERS' EQUITY
- - -------------------------------------------------------------
Preferred stock, $1 par value, 25 million
shares authorized, none issued - -
Common stock, $.01 par value, 1.0 billion shares
authorized and 450 million issued, 442 million
and 448 million shares outstanding 5 5
Additional capital paid-in 3,133 3,134
Unrealized net capital gains 2,003 2,636
Unrealized foreign currency translation adjustments 21 20
Retained income 8,958 7,261
Deferred ESOP expense (280) (300)
Treasury stock, at cost (8.5 million and 2.5 million shares) (388) (76)
----------------
Total shareholders' equity 13,452 12,680
----------------
Total liabilities and shareholders' equity $74,508 $70,029
=================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ALLSTATE - 59
<TABLE>
<CAPTION>
Year ended December 31,
($ in millions) 1996 1995 1994
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK $ - $ - $ -
- - ---------------------------------------------------------------------------------------------------------
COMMON STOCK 5 5 5
- - ---------------------------------------------------------------------------------------------------------
ADDITIONAL CAPITAL PAID-IN
- - ----------------------------------------------------------
Balance, beginning of year 3,134 3,124 3,095
Interest on note receivable from Sears, net of tax - 7 27
Other (1) 3 2
------------------------------------------
Balance, end of year 3,133 3,134 3,124
------------------------------------------
UNREALIZED NET CAPITAL GAINS
- - ----------------------------------------------------------
Balance, beginning of year 2,636 40 2,090
Net (decrease) increase (633) 2,596 (2,050)
------------------------------------------
Balance, end of year 2,003 2,636 40
------------------------------------------
UNREALIZED FOREIGN CURRENCY
TRANSLATION ADJUSTMENTS
- - ----------------------------------------------------------
Balance, beginning of year 20 16 13
Net increase 1 4 3
------------------------------------------
Balance, end of year 21 20 16
------------------------------------------
RETAINED INCOME
- - ----------------------------------------------------------
Balance, beginning of year 7,261 5,707 5,547
Net income 2,075 1,904 484
Dividends (378) (350) (324)
------------------------------------------
Balance, end of year 8,958 7,261 5,707
------------------------------------------
DEFERRED ESOP EXPENSE
- - ----------------------------------------------------------
Balance, beginning of year (300) -
Payment to Sears for transfer of ESOP - (327)
Reduction 20 27
------------------------------------------
Balance, end of year (280) (300)
------------------------------------------
TREASURY STOCK
- - ----------------------------------------------------------
Balance, beginning of year (76) (16) -
Shares acquired (336) (69) (16)
Shares reissued 24 9 -
------------------------------------------
Balance, end of year (388) (76) (16)
------------------------------------------
NOTE RECEIVABLE FROM SEARS
- - ----------------------------------------------------------
Balance, beginning of year - (450) (450)
Payment received - 450 -
------------------------------------------
Balance, end of year - - (450)
------------------------------------------
Total shareholders' equity $13,452 $12,680 $8,426
==========================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
60 - ALLSTATE
<TABLE>
<CAPTION>
Year ended December 31,
($ in millions) 1996 1995 1994
- - -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
- - -----------------------------------------------------
Net income $2,075 $1,904 $484
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, amortization and other
non-cash items (19) (3) 47
Realized capital gains and losses (784) (258) (200)
Loss (gain) on disposition of operations 131 (159) -
Early retirement program - - 154
Interest credited to contractholder funds 1,196 1,191 1,079
Increase in policy benefit and other
insurance reserves 1,004 721 1,090
Increase in unearned premiums 259 436 200
Increase in deferred policy acquisition costs (565) (343) (264)
Change in premium installment receivables 57 (676) (297)
Change in reinsurance recoverables (435) 24 23
Change in deferred income taxes 250 122 (192)
Changes in other operating assets and liabilities (133) (231) 163
------------------------------------
Net cash provided by operating activities 3,036 2,728 2,287
------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
- - -----------------------------------------------------
Proceeds from sales
Fixed income securities 11,213 7,559 5,205
Equity securities 3,624 2,025 1,915
Investment collections
Fixed income securities 4,370 3,161 3,930
Mortgage loans 557 325 399
Investment purchases
Fixed income securities (20,056) (14,454) (11,171)
Equity securities (2,153) (2,267) (2,315)
Mortgage loans (438) (467) (221)
Change in short-term investments, net (764) 171 (79)
Change in other investments, net 12 52 (40)
Proceeds from disposition of operations 378 - -
Purchases of property and equipment, net (126) (106) (123)
------------------------------------
Net cash used in investing activities (3,383) (4,001) (2,500)
------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
- - -----------------------------------------------------
Proceeds from issuance of short-term debt, net 152 - -
Proceeds from issuance of long-term debt 9 361 19
Repayment of long-term debt (3) (2) -
Contractholder fund deposits 3,036 3,637 3,475
Contractholder fund withdrawals (2,861) (3,168) (2,956)
Proceeds from issuance of trust preferred securities 750 - -
Dividends paid (378) (350) (324)
Treasury stock purchases (336) (69) (16)
Repayment of demand note by Sears - 450 -
Proceeds from the sale of subsidiary's stock - 784 -
Payment to Sears for transfer of ESOP - (327) -
Other 4 (9) -
------------------------------------
Net cash provided by financing activities 373 1,307 198
------------------------------------
NET INCREASE (DECREASE) IN CASH 26 34 (15)
- - -----------------------------------------------------
CASH AT BEGINNING OF YEAR 90 56 71
- - -------------------------------------------------------------------------------------------
CASH AT END OF YEAR $116 $90 $56
===========================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALLSTATE - 61
- - --------------------------------------------------------------------------------
1. GENERAL
BASIS OF PRESENTATION The accompanying consolidated financial statements
include the accounts of The Allstate Corporation and its wholly owned
subsidiaries, primarily Allstate Insurance Company ("AIC"), a
property-liability insurance company with various property-liability and life
and annuity subsidiaries, including Allstate Life Insurance Company ("ALIC")
(collectively referred to as the "Company" or "Allstate"). On June 30, 1995,
Sears, Roebuck and Co. ("Sears") distributed its 80.3% ownership in The
Allstate Corporation to Sears common shareholders through a tax-free dividend
(the "Distribution"). These consolidated financial statements have been
prepared in conformity with generally accepted accounting principles. All
significant intercompany accounts and transactions have been eliminated.
To conform with the 1996 presentation, certain items in the prior years'
financial statements and notes have been reclassified.
NATURE OF OPERATIONS Allstate is engaged, principally in the United States
and Canada, in the property-liability insurance and life and annuity
businesses. Allstate's primary business is the sale of private passenger
automobile and homeowners insurance, but the Company also sells life
insurance, annuity and group pension products, and selected commercial
property and casualty coverages including automobile insurance, property
insurance, and general liability insurance.
Allstate's personal property and casualty ("PP&C") business, is
principally engaged in private passenger automobile and homeowners insurance,
writing approximately 76% of Allstate's total premiums, as determined under
statutory accounting practices. Allstate was the country's second largest
personal property and casualty insurer for both private passenger automobile
and homeowners insurance in 1995.
Allstate has exposure to catastrophes, which 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 condition. The Company also has
exposure to environmental and asbestos claims, and mass tort exposures (see
Note 6).
ALIC markets a broad line of life insurance, annuity and group pension
products countrywide, accounting for approximately 22% of Allstate's 1996
statutory premiums, which include premiums and deposits for all products.
Life insurance includes traditional products such as whole life and term life
insurance, as well as universal life and other interest-sensitive life
products. Annuities include deferred annuities, such as variable annuities
and fixed rate single and flexible premium annuities, and immediate annuities
such as structured settlement annuities. ALIC's group pension products include
guaranteed investment contracts and retirement annuities. In 1996, annuity
premiums and deposits represented approximately 57% of ALIC's total statutory
premiums and deposits.
ALIC monitors economic and regulatory developments which have the
potential to impact its business. There continues to be proposed federal
legislation and regulation that would allow banks greater participation in
securities and insurance businesses, which could present an increased level
of competition for sales of ALIC's annuity contracts. Furthermore, the market
for deferred annuities and interest-sensitive life insurance businesses which
is enhanced by the tax incentives available under current law. Any legislative
changes which lessen these incentives is likely to negatively impact the
market for these products.
Allstate, through a variety of affiliated companies, is authorized to
sell property-liability and life and annuity products in all 50 states, the
District of Columbia, Puerto Rico and Canada. The top geographic locations
for statutory premiums earned for the property-liability insurance business
are New York, California, Florida, Illinois and Pennsylvania, and for the
life and annuity business are California, Florida, Nebraska, Massachusetts,
Texas, Pennsylvania and Illinois for the year ended December 31, 1996. No
other jurisdiction accounted for more than 5% of statutory premiums for
property-liability or life and annuity.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
62 - ALLSTATE
Allstate distributes the majority of its property-liability products
through approximately 14,100 Allstate agents, primarily employee and
non-employee exclusive agents, but also utilizes independent agents and
specialized brokers to expand market reach including over 5,500 independent
agents appointed to market non-standard auto business. ALIC distributes its
products using a combination of Allstate agents including life specialists,
banks, independent agents, brokers and direct response marketing.
- - --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS Fixed income securities include bonds, redeemable preferred
stocks, and mortgage-backed and asset-backed securities. All fixed income
securities are carried at fair value and may be sold prior to their
contractual maturity ("available for sale"). The difference between amortized
cost and fair value, net of deferred income taxes, certain life deferred
policy acquisition costs and reserves for life and annuity policy benefits,
is reflected as a component of shareholders' equity. Provisions are
recognized for declines in the value of fixed income securities that are
other than temporary. Such writedowns are included in realized capital gains
and losses.
Equity securities include common and non-redeemable preferred stocks,
and real estate investment trusts which are carried at fair value. The
difference between cost and fair value of equity securities, less deferred
income taxes, is reflected as a component of shareholders' equity.
Mortgage loans are carried at outstanding principal balance, net of
unamortized premium or discount and valuation allowances. Valuation
allowances are established for impaired loans when it is probable that
contractual principal and interest will not be collected. Valuation
allowances for impaired loans reduce the carrying value to the fair value of
the collateral or the present value of the loan's expected future repayment
cash flows discounted at the loan's original effective interest rate.
Valuation allowances on loans not considered to be impaired are established
based on consideration of the underlying collateral, borrower financial
strength, current and expected market conditions, and other factors.
Real estate investments, including real estate acquired through
foreclosure and held for investment, are accounted for by the equity method.
Real estate for which the Company has an active plan to sell is carried at
depreciated cost, net of valuation allowances. These allowances reduce the
carrying value of properties to be sold to their estimated fair value less
selling costs.
Short-term investments are carried at cost which approximates fair
value. Other investments, which consist primarily of policy loans, are
carried at the unpaid principal balances.
Investment income consists primarily of interest and dividends. Interest
is recognized on an accrual basis and dividends are recorded on the date of
declaration. Interest income on mortgage-backed and asset-backed securities
is determined on the effective yield method, based on estimated principal
repayments. Accrual of income is suspended for fixed income securities and
mortgage loans that are in default or when the receipt of interest payments
is in doubt. Realized capital gains and losses are determined on a specific
identification basis.
DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments include
swaps, futures, forwards, and options, including caps and floors. When
derivatives meet specific criteria they may be designated as accounting
hedges and accounted for on either a fair value, deferral or accrual basis,
depending upon the nature of the hedge strategy, the method used to account
for the hedged item and the derivative used. Derivatives that are not
designated as accounting hedges are accounted for on a fair value basis.
If, subsequent to entering into a hedge transaction, the derivative
becomes ineffective (including if the hedged item is sold or otherwise
extinguished or the occurrence of a hedged anticipatory transaction is no
longer probable), the Company terminates the derivative position. Gains and
losses on these terminations are reported in realized capital gains and
losses in the period they occur. The Company may also terminate derivatives
as a result of other events or circumstances. Gains and losses on these
terminations are either deferred and amortized over the remaining life of the
hedged item or are reported in shareholders' equity, consistent with the
accounting for the hedged item.
<PAGE>
ALLSTATE - 63
Fair Value Accounting Under fair value accounting, realized and
unrealized gains and losses on derivatives are recognized in either earnings
or shareholders' equity when they occur.
The Company accounts for interest rate swaps, certain equity-indexed
options, equity futures and foreign currency swaps and forwards as hedges on
a fair value basis when criteria are met. When the Company uses swaps or
options as hedging instruments, the derivative must reduce the primary market
risk exposure (e.g., interest rate risk or equity price risk) of the hedged
item in conjunction with the specific hedge strategy; be designated as a
hedge at the inception of the transaction; and have a notional amount and
term that does not exceed the carrying value and expected maturity,
respectively, of the hedged item. In addition, options must have a reference
index (e.g., three-month LIBOR) that is the same as, or highly correlated
with, the reference index of the hedged item.
When the Company uses futures or forward contracts as hedging
instruments, the derivative must reduce the primary market risk exposure on
an enterprise basis in conjunction with the hedge strategy; be designated as
a hedge at the inception of the transaction; and be highly correlated with
the fair value of, or interest income or expense associated with, the hedged
item at inception and throughout the hedge period.
Changes in fair values of these derivatives are reported net of tax in
shareholders' equity, exclusive of interest accruals. Accrued interest
receivable and payable on swaps are reported in net investment income.
Premiums paid for equity-indexed options are reported as equity securities
and amortized to net investment income over the lives of the agreements.
The Company also has the following derivatives that are accounted for on
a fair value basis but which are not designated as accounting hedges: 1)
Certain interest rate futures contracts reported as other assets, where
changes in fair value are reported in realized capital gains and losses; 2)
Certain equity-indexed options, where changes in fair value are reported in
shareholders' equity and premiums paid are reported as equity securities and
amortized to realized capital gains and losses over the lives of the
agreements; and 3) Commodity swaps reported as accrued investment income,
where changes in fair value are reported in net investment income.
Deferral Accounting Under deferral accounting, gains and losses on
derivatives are deferred on the statement of financial position and
recognized in earnings in conjunction with earnings on the hedged item. The
Company accounts for interest rate futures as hedges using deferral
accounting for anticipatory investment purchases and sales when the criteria
for futures (discussed above) are met. In addition, anticipated transactions
must be probable of occurrence and their significant terms and
characteristics identified.
Changes in fair values of these derivatives are initially deferred as
other liabilities and accrued expenses. Once the anticipated transaction
occurs, the deferred gains or losses are considered part of the cost basis of
the asset and reported net of tax in shareholders' equity or recognized as a
gain or loss from disposition of the asset, as appropriate. The Company
reports initial margin deposits on futures in short-term investments. Fees
and commissions paid on these derivatives are also deferred as an adjustment
to the carrying value of the hedged item.
Accrual Accounting Under accrual accounting, interest income or expense
related to the derivative is accrued and recorded as an adjustment to the
interest income or expense on the hedged item. The Company accounts for
interest rate caps and floors as hedges on an accrual basis when the criteria
for options (discussed above) are met.
Premiums paid for these derivatives are reported as investments and
amortized to net investment income over the lives of the agreements.
RECOGNITION OF PREMIUM REVENUES AND CONTRACT CHARGES Property-liability
premiums are deferred and earned on a pro rata basis over the terms of the
policies. The portion of premiums written applicable to the unexpired terms
of the policies is recorded as unearned premiums. Premiums for traditional
life insurance are recognized as revenue when due. Accident and disability
premiums are earned on a pro rata basis over the policy period. Revenues on
universal life-type contracts are comprised of contract charges and fees, and
are recognized when assessed against the policyholder account balance.
Revenues on investment contracts include contract charges and fees for
contract administration and surrenders. These revenues are recognized when
levied against the contract balances. Gross premium in excess of the net
premium on limited payment contracts are deferred and recognized over the
contract period.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
64 - ALLSTATE
DEFERRED POLICY ACQUISITION COSTS Certain costs of acquiring
property-liability insurance business, principally agents' remuneration,
premium taxes and inspection report costs are deferred and amortized to
income as premiums are earned. Effective July 1, 1996, the Company changed
the components of property-liability acquisition costs deferred to include
all forms of agent remuneration which vary directly with premium production.
This change was made to more appropriately match the costs of acquiring
business to the related premium revenue and to increase the consistency of
accounting for agent remuneration despite differing contractual agreements
with agents. Future investment income is considered in determining the
recoverability of deferred policy acquisition costs.
Certain costs of acquiring life and annuity business, principally
agents' remuneration, premium taxes, certain underwriting costs and direct
mail solicitation expenses are deferred and amortized to income. For
traditional life insurance, limited payment contracts and accident and
disability insurance, these costs are amortized in proportion to the estimated
revenues on such business. For universal life-type and investment contracts,
the costs are amortized in relation to the present value of estimated gross
profits on such business. Changes in the amount or timing of estimated gross
profits will result in adjustments in the cumulative amortization of these
costs. To the extent that unrealized gains or losses on fixed income securities
carried at fair value would result in an adjustment of deferred policy
acquisition costs had those gains or losses actually been realized, the
related unamortized deferred policy acquisition costs are recorded as a
reduction of the unrealized gains or losses included in shareholders' equity.
PROPERTY AND EQUIPMENT Property and equipment is carried at cost less
accumulated depreciation. Depreciation is provided on the straight-line
method over the estimated useful lives of the assets, generally 3 to 10 years
for equipment and 40 years for real property. Accumulated depreciation on
property and equipment was $1.08 billion and $999 million at December 31,
1996 and 1995, respectively. Depreciation expense on property and equipment
was $132 million, $151 million and $160 million for the years ended December
31, 1996, 1995 and 1994, respectively. The Company reviews its property and
equipment for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable.
INCOME TAXES The income tax provision is calculated under the liability
method. Deferred tax assets and liabilities are recorded based on the
difference between the financial statement and tax bases of assets and
liabilities and enacted tax regulations. The principal assets and
liabilities giving rise to such differences are insurance reserves, unearned
premiums, deferred policy acquisition costs, and property and equipment.
Deferred income taxes also arise from unrealized capital gains and losses on
equity securities and fixed income securities carried at fair value,
unrealized foreign currency translation adjustments and alternative minimum
tax credit carryforwards.
SEPARATE ACCOUNTS The Company issues flexible premium deferred variable
annuity, variable life and certain guaranteed investment contracts, the
assets and liabilities of which are legally segregated and reflected in the
accompanying consolidated statements of financial position as assets and
liabilities of the Separate Accounts. The assets of the Separate Accounts are
carried at fair value. Investment income and realized capital gains and
losses of the Separate Accounts accrue directly to the contractholders and,
therefore, are not included in the Company's consolidated statements of
operations. Revenues to the Company from the Separate Accounts consist of
contract maintenance fees, administration fees, and mortality and expense
risk charges. The Company's participation in the Separate Accounts is carried
at the fair value of its ownership interest in the net assets of the Separate
Accounts.
RESERVES FOR CLAIMS AND CLAIMS EXPENSE AND LIFE-CONTINGENT CONTRACT BENEFITS
The property-liability reserve for claims and claims expense is the estimated
amount necessary to settle both reported and unreported claims of insured
property-liability losses, based upon the facts in each case and the
Company's experience with similar cases. Estimated amounts of salvage and
subrogation are deducted from the reserve for claims and claims expense. The
establishment of appropriate reserves, including reserves for catastrophes,
is an inherently
<PAGE>
ALLSTATE - 65
uncertain process. Reserve estimates are regularly reviewed
and updated, using the most current information available. Any resulting
adjustments are reflected in current operations (see Note 6). These
adjustments may be material.
The reserve for life-contingent contract benefits, which relates to
traditional life insurance, group retirement annuities and structured
settlement annuities with life contingencies, disability insurance and
accident insurance, is computed on the basis of assumptions as to future
investment yields, mortality, morbidity, terminations and expenses. These
assumptions, which for traditional life insurance are applied using the net
level premium method, include provisions for adverse deviation and generally
vary by such characteristics as type of coverage, year of issue and policy
duration. Reserve interest rates ranged from 4.0% to 11.3% during 1996.
To the extent that unrealized gains on available for sale securities would
result in a premium deficiency had those gains actually been realized, the
related increase in reserves is recorded as a reduction of the unrealized
gains included in shareholders' equity.
CONTRACTHOLDER FUNDS Contractholder funds arise from the issuance of
individual or group contracts that include an investment component, including
most annuity, universal life and guaranteed investment contracts. Payments
received are recorded as interest-bearing liabilities. Contractholder funds
are equal to deposits received and interest credited to the benefit of the
contractholder less withdrawals, mortality charges and administrative
expenses.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS Commitments to invest, commitments
to extend mortgage loans and financial guarantees have only off-balance-sheet
risk because their contractual amounts are not recorded in the Company's
consolidated statements of financial position.
The Company's exposure to losses stemming from credit guarantees is
limited to the carrying value of the underlying fixed income securities.
EARNINGS PER SHARE Earnings per share is computed based on the weighted
average number of common and common equivalent shares (dilutive stock
options) outstanding.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
- - --------------------------------------------------------------------------------
3. DISPOSITIONS
In July 1996, Allstate completed the sale of Northbrook Holdings, Inc. and
its wholly owned subsidiaries (collectively "Northbrook") to St. Paul Fire &
Marine Insurance Company ("St. Paul"). Northbrook writes commercial insurance
through its subsidiaries using independent agents. Allstate received gross
proceeds of $189 million and recognized a gain of $18 million ($51 million
after-tax) on the sale. The proceeds and gain are subject to a purchase price
adjustment, expected to be finalized in 1997. In connection with the sale,
Allstate entered into an agreement with St. Paul whereby Allstate and St.
Paul will share in any development of the closing net loss reserves of
Northbrook to be settled as of July 31, 2000. Under the agreement, if the
development of ultimate net loss reserves exceeds net loss reserves at
closing by more than $25 million, Allstate will be required to pay St. Paul a
portion of the difference, limited to $100 million. If the development of
ultimate net loss reserves is less than net loss reserves at closing, St. Paul
will be required to pay Allstate a portion of the difference not to exceed
$50 million. The Company does not expect unfavorable reserve development
based on current trends, conditions and claim settlement processes. As a
result of the sale, the Company's liability for claims and claims expense net
of reinsurance was reduced by $1.01 billion and investments were reduced by
$973 million.
In September 1996, the Company completed the sale of Allstate's
U.S.-based reinsurance operations for policies written after 1984
("Reinsurance") to SCOR U.S. Corporation ("SCOR"). The transaction consisted
of the sale of certain non-insurance assets, non-insurance liabilities and
renewal rights and a reinsurance transaction for the insurance liabilities.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
66 - ALLSTATE
The Company received gross proceeds of $152 million as a result of the sale
and will realize a $79 million gain ($58 million after-tax). The Company
recognized the portion of the gain, $15 million ($9 million after-tax), related
to the sale of the renewal rights in 1996. The remaining $64 million gain ($49
million after-tax) was deferred and will be amortized through underwriting
income over the reserve run-off period, approximately five years, in accordance
with retroactive reinsurance accounting principles.
In November 1996, Allstate completed the sale of the common stock of its
London-based reinsurance operations, Allstate Reinsurance Co. Limited
("ARCO") to QBE Insurance Group Limited of Sydney, Australia ("QBE"). The
Company received proceeds of $37 million and recognized a $40 million loss
($41 million after-tax) on the sale. In connection with the sale, Allstate
entered into an agreement with QBE whereby 80% of any ultimate adverse
development on ARCO's December 31, 1995 net loss reserves will be reimbursed
to QBE by Allstate. QBE will reimburse Allstate for 70% of any ultimate
favorable net loss development. Development will be settled annually. At the
closing, in addition to the $37 million cash proceeds, QBE deposited
approximately $20 million in escrow related to this agreement, representing a
contingent purchase payment. If 1996 net loss development is favorable,
Allstate will receive the $20 million escrow deposit in addition to 70% of
any redundancy. Allstate would report this as a purchase price adjustment in
1997. If 1996 net loss development is unfavorable, the amount held in escrow
will be used to satisfy any of Allstate's obligation, with the excess, if
any, paid to Allstate. In addition, the development of accident year 1996
underwriting results for QBE is limited to a combined ratio of 110 for
contracts in place as of the closing date to be reviewed and settled
annually.
Allstate entered into an agreement with Clarendon National Insurance
Company to sell the renewal rights of up to 137,000 Florida property policies
and as a result may non-renew up to 170,000 policies. Beginning with policies
expiring after November 14, 1996, Allstate will no longer provide coverage
for these policies as they expire over the next twelve months. In connection
with the sale of the renewal rights of these policies, the Company recognized
a loss of $37 million ($24 million after-tax) in 1996.
In 1995, the Company sold 70% of the common stock of The PMI Group, Inc.
("PMI Group"), a wholly owned subsidiary, in an initial public offering.
Proceeds from the sale approximated $784 million, and a gain of $159 million
($93 million after-tax) was realized. Included in the determination of the
gain was a provision for future losses on the run-off of the mortgage pool
business of $119 million ($80 million after-tax). During 1996, the Company
increased by $87 million ($55 million after-tax) the provision for future
losses provided for the run-off of the mortgage pool business which is
included in the loss on disposition of operations. The increase was due
primarily to revised loss trend analyses based on continued weakness in
economic conditions, including real estate prices and unemployment in
Southern California where this business is highly concentrated. This business
continues to be affected by these economic conditions, as well as interest
rate volatility or a combination of such factors. These factors are
considered in the periodic re-evaluation of the provision for future losses.
Concurrent with the PMI Group common stock offering, the Company issued
10.5 million of Automatically Convertible Equity Securities ("ACES") in the
form of 6.76% Exchangeable Notes due April 15, 1998 which are mandatorily
exchangeable into shares of common stock of PMI Group, subject to the
Company's right to deliver cash in lieu of such shares (see Note 8).
The Company currently owns approximately 31% of PMI Group. The Company's
equity in net income of PMI Group was $29 million, $56 million and $86
million for 1996, 1995 and 1994, respectively. The Company's investment in
PMI Group, which is included in other assets in the consolidated statements
of financial position, had a net book value of $305 million and $262 million
at December 31, 1996 and 1995, respectively. The fair value of the Company's
investment in PMI Group at December 31, 1996 was $581 million. See Note 8 for
discussion of ACES terms.
<PAGE>
ALLSTATE - 67
- - --------------------------------------------------------------------------------
4. INVESTMENTS
FAIR VALUES The amortized cost, gross unrealized gains and losses, and fair
value for fixed income securities are as follows:
<TABLE>
<CAPTION>
Gross unrealized
Amortized ----------------------- Fair
($ in millions) cost Gains (Losses) value
- - -------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1996
- - -----------------------------------------
<S> <C> <C> <C> <C>
U.S. government and agencies $ 3,101 $ 250 $ (12) $ 3,339
Municipal 13,705 832 (44) 14,493
Corporate 16,748 896 (86) 17,558
Foreign government 325 13 (1) 337
Mortgage-backed securities 8,434 216 (58) 8,592
Asset-backed securities 2,658 37 (4) 2,691
Redeemable preferred stock 86 - (1) 85
-------------------------------------------------------
Total fixed income securities $45,057 $2,244 $(206) $47,095
=======================================================
AT DECEMBER 31, 1995
- - -----------------------------------------
U.S. government and agencies $ 2,443 $ 445 $ (19) $ 2,869
Municipal 15,900 1,405 (29) 17,276
Corporate 14,437 1,213 (44) 15,606
Foreign government 453 10 (3) 460
Mortgage-backed securities 6,946 358 (22) 7,282
Asset-backed securities 1,606 52 (1) 1,657
Redeemable preferred stock 122 1 (1) 122
-------------------------------------------------------
Total fixed income securities $41,907 $3,484 $(119) $45,272
=======================================================
</TABLE>
SCHEDULED MATURITIES The scheduled maturities for fixed income securities are
as follows at December 31, 1996:
<TABLE>
<CAPTION>
Amoritzed Fair
($ in millions) cost value
- - --------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 1,486 $ 1,518
Due after one year through five years 8,719 9,079
Due after five years through ten years 9,304 9,668
Due after ten years 14,456 15,547
-------------------------------
33,965 35,812
Mortgage-backed and asset-backed securities 11,092 11,283
-------------------------------
Total $45,057 $47,095
================================
</TABLE>
Actual maturities may differ from those scheduled as a result of
prepayments by the issuers.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
68 - ALLSTATE
NET INVESTMENT INCOME
<TABLE>
<CAPTION>
Year ended December 31,
($ in millions) 1996 1995 1994
- - -------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed income securities $3,302 $3,105 $2,864
Equity securities 118 139 132
Mortgage loans 291 303 320
Other 172 146 100
-----------------------
Investment income, before expense 3,883 3,693 3,416
Investment expense 70 66 73
-----------------------
Net investment income $3,813 $3,627 $3,343
=======================
</TABLE>
REALIZED CAPITAL GAINS AND LOSSES
<TABLE>
<CAPTION>
Year ended December 31,
($ in millions) 1996 1995 1994
- - ----------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed income securities $ 40 $ 30 $ 31
Equity securities 784 274 238
Other investments (40) (46) (69)
---------------------
Realized capital gains and losses 784 258 200
Income taxes 274 90 70
---------------------
Realized capital gains and losses, after tax $510 $168 $130
=====================
</TABLE>
Proceeds from sales of investments in fixed income securities were
$11.21 billion, $7.56 billion and $5.21 billion in 1996, 1995 and 1994,
respectively. Gross gains of $205 million, $144 million and $132 million and
gross losses of $146 million, $103 million and $105 million were realized on
sales of fixed income securities during 1996, 1995 and 1994, respectively.
UNREALIZED NET CAPITAL GAINS Unrealized net capital gains on fixed income
and equity securities included in shareholders' equity at December 31, 1996
are as follows:
<TABLE>
<CAPTION>
Cost/ Gross unrealized Unrealized
amortized Fair ----------------- net
($ in millions) cost value Gains (Losses) gains
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed income securities $45,057 $47,095 $2,244 $(206) $2,038
Equity securities 3,999 5,561 1,639 (77) 1,562
------------------------------------------------
Total $49,056 $52,656 $3,883 $(283) 3,600
======================================
Deferred income taxes, deferred
policy acquisition costs and other (1,597)
------
Unrealized net capital gains $2,003
======
</TABLE>
At December 31, 1995, equity securities had gross unrealized gains of
$1.51 billion and gross unrealized losses of $75 million.
CHANGE IN UNREALIZED NET CAPITAL GAINS
<TABLE>
<CAPTION>
Year ended December 31,
($ in millions) 1996 1995 1994
- - ------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed income securities $ (1,327) $ 4,061 $(3,028)
Equity securities 128 874 (355)
------------------------------------
Total (1,199) 4,935 (3,383)
Deferred income taxes, deferred policy
acquisition costs and other 566 (2,339) 1,333
------------------------------------
Change in unrealized net capital gains $ (633) $ 2,596 $(2,050)
====================================
</TABLE>
<PAGE>
ALLSTATE - 69
INVESTMENT LOSS PROVISIONS AND VALUATION ALLOWANCES Pretax provisions for
investment losses, principally relating to other than temporary declines in
value on fixed income securities and equity securities, and valuation
allowances on mortgage loans, were $196 million, $207 million and $92 million
in 1996, 1995 and 1994, respectively. Valuation allowances on real estate
were $11 million and $25 million at December 31, 1996 and 1995, respectively.
MORTGAGE LOAN IMPAIRMENT A mortgage loan is impaired when it is probable
that the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement. The components of impaired loans at
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
($ in millions) 1996 1995
- - --------------------------------------------------------------
<S> <C> <C>
Impaired loans
With valuation allowances $182 $183
Less: valuation allowances (50) (52)
Without valuation allowances 38 62
---------------
Net carrying value of impaired loans $170 $193
===============
</TABLE>
The net carrying value of impaired loans at December 31, 1996 and 1995
was comprised of $115 million and $158 million, respectively, measured at the
fair value of the collateral, and $55 million and $35 million, respectively,
measured at the present value of the loan's expected future cash flows
discounted at the loan's effective interest rate. Impaired loans without
valuation allowances include collateral dependent loans where the fair value
of the collateral is greater than the recorded investment in the loans.
Activity in the valuation allowance for all mortgage loans for the years
ended December 31, 1996 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
($ in millions) 1996 1995
- - -------------------------------------------
<S> <C> <C>
Balance at January 1 $75 $92
Additions 27 25
Direct write-downs (37) (42)
---------------
Balance at December 31 $65 $75
===============
</TABLE>
Included in the table above is $15 million and $23 million of valuation
allowances on loans not considered to be impaired at December 31, 1996 and
1995, respectively.
Interest income is recognized on a cash basis for impaired loans carried
at the fair value of the collateral, beginning at the time of impairment. For
other impaired loans, interest is accrued based on the net carrying value.
The Company recognized interest income of $22 million and $25 million on
impaired loans during 1996 and 1995, respectively, of which $20 million and
$21 million was received in cash during 1996 and 1995, respectively. The
average balance of impaired loans was $203 million and $209 million during
1996 and 1995, respectively.
INVESTMENT CONCENTRATION FOR MUNICIPAL BOND AND COMMERCIAL MORTGAGE
PORTFOLIOS AND OTHER INVESTMENT INFORMATION The Company maintains a
diversified portfolio of municipal bonds. The largest concentrations in the
portfolio are presented below. Except for the following, holdings in no other
state exceeded 4.4% of the portfolio at December 31, 1996:
<TABLE>
<CAPTION>
At December 31,
(% of municipal bond portfolio carrying value) 1996 1995
- - -------------------------------------------------------------------
<S> <C> <C>
California 11.1% 10.4%
Texas 10.9 10.9
Illinois 9.8 9.7
New York 9.1 7.8
Florida 6.4 6.1
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
70 - ALLSTATE
The Company's mortgage loans are collateralized by a variety of
commercial real estate property types located throughout the United States.
Substantially all of the commercial mortgage loans are non-recourse to the
borrower. The states with the largest portion of the commercial mortgage loan
portfolio are listed below. Except for the following, holdings in no other
state exceeded 4.9% of the portfolio at December 31, 1996:
<TABLE>
<CAPTION>
At December 31,
(% of commercial mortgage portfolio carrying value) 1996 1995
- - ----------------------------------------------------------------------------
<S> <C> <C>
California 22.1% 21.0%
New York 9.1 9.2
Illinois 6.9 5.8
Pennsylvania 6.7 6.6
Florida 5.4 6.1
</TABLE>
The types of properties collateralizing the commercial mortgage loans
are as follows:
<TABLE>
At December 31,
(% of commercial mortgage portfolio carrying value) 1996 1995
- - -------------------------------------------------------------------------
<S> <C> <C>
Retail 35.8% 41.0%
Office buildings 22.1 17.5
Warehouse 17.6 19.3
Apartment complex 16.3 13.9
Industrial 2.1 2.5
Other 6.1 5.8
----------------
100.0% 100.0%
================
</TABLE>
The contractual maturities of the commercial mortgage loan portfolio as
of December 31, 1996, for loans that were not in foreclosure are as follows:
<TABLE>
<CAPTION>
No. of Carrying
($ in millions) loans value Percent
- - ------------------------------------------
<S> <C> <C> <C>
1997 88 $ 352 11.3%
1998 70 412 13.2
1999 54 262 8.4
2000 74 449 14.5
2001 61 281 9.0
Thereafter 266 1,357 43.6
----------------------
Total 613 $3,113 100.0%
======================
</TABLE>
At December 31, 1996, the carrying value of investments, excluding
equity securities, that were non-income producing during 1996 was $26
million.
At December 31, 1996, fixed income securities with a carrying value of
$351 million were on deposit with regulatory authorities as required by law.
- - -----------------------------------------------------------------------------
5. FINANCIAL INSTRUMENTS
In the normal course of business, the Company invests in various financial
assets, incurs various financial liabilities and enters into agreements
involving derivative financial instruments and other off-balance-sheet
financial instruments. The fair value estimates of financial instruments
presented below are not necessarily indicative of the amounts the Company
might pay or receive in actual market transactions. Potential taxes and other
transaction costs have not been considered in estimating fair value. The
disclosures that follow do not reflect the fair value of the Company as a
whole since a number of the Company's significant assets (including deferred
policy acquisition costs, property and equipment, reinsurance recoverables
and deferred income
<PAGE>
ALLSTATE - 71
taxes) and liabilities (including property-liability, and
traditional life and universal life-type insurance reserves) are not
considered financial instruments and are not carried at fair value. Other
assets and liabilities considered financial instruments, premium installment
receivables, accrued investment income, cash and claim payments outstanding
are generally of a short-term nature. It is assumed that their carrying value
approximates fair value.
FINANCIAL ASSETS
<TABLE>
<CAPTION>
At December 31,
($ in millions) 1996 1995
- - ---------------------------------------------------------------------
Carrying Fair Carrying Fair
value value value value
- - ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed income securities $47,095 $47,095 $45,272 $45,272
Equity securities 5,561 5,561 6,150 6,150
Mortgage loans 3,146 3,221 3,280 3,435
Short-term investments 1,278 1,278 548 548
Policy loans 489 489 447 447
Separate Accounts 5,551 5,551 3,809 3,809
</TABLE>
Carrying value and fair value include the effects of derivative financial
instruments where applicable.
Fair values for fixed income securities are based on quoted market
prices where available. Non-quoted securities are valued based on discounted
cash flows using current interest rates for similar securities. Equity
securities are valued based principally on quoted market prices. Mortgage
loans are valued based on discounted contractual cash flows. Discount rates
are selected using current rates at which similar loans would be made to
borrowers with similar characteristics, using similar properties as
collateral. Loans that exceed 100% loan-to-value are valued at the estimated
fair value of the underlying collateral. Short-term investments are highly
liquid investments with maturities of less than one year whose carrying value
approximates fair value.
The carrying value of policy loans approximates its fair value. Assets
of the Separate Accounts are carried in the consolidated statements of
financial position at fair value.
FINANCIAL LIABILITIES AND TRUST PREFERRED SECURITIES
<TABLE>
<CAPTION>
At December 31,
($ in millions) 1996 1995
- - --------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
value value value value
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Contractholder funds on
investment contracts $16,501 $16,284 $15,568 $15,626
Short-term debt 152 152 - -
Long-term debt 1,234 1,375 1,228 1,331
Separate Accounts 5,539 5,539 3,798 3,798
Mandatorily redeemable preferred
securities of subsidiary trusts 750 747 - -
</TABLE>
The fair value of contractholder funds on investment contracts is based
on the terms of the underlying contracts. Reserves on investment contracts
with no stated maturities (single premium and flexible premium deferred
annuities) are valued at the account balance less surrender charges. The fair
value of immediate annuities and annuities without life contingencies with
fixed terms is estimated using discounted cash flow calculations based on
interest rates currently offered for contracts with similar terms and
durations. Short-term debt is valued at carrying value due to its short-term
nature. The fair value of long-term debt and trust preferred securities is
based on quoted market prices. Separate Accounts liabilities are carried at
the fair value of the underlying assets.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
72 - ALLSTATE
DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments include
swaps, futures, forwards and options, including caps and floors. The Company
primarily uses derivative financial instruments to reduce its exposure to
market risk (principally interest rate and equity price risk), in conjunction
with asset/liability management, in its life and annuity operations. The
Company does not hold or issue these instruments for trading purposes. The
following table summarizes the contract or notional amount, credit exposure,
fair value and carrying value of the Company's derivative financial
instruments:
<TABLE>
<CAPTION>
At December 31,
($ in millions) 1996 1995
- - ------------------------------------------------------------------------- ----------------------------------------------
Carrying Carrying
Contract/ value Contract/ value
notional Credit Fair assets/ notional Credit Fair assets/
amount exposure value (liabilities) amount exposure value (liabilities)
- - ------------------------------------------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST RATE CONTRACTS
- - -----------------------
Interest rate
swap agreements
Pay floating rate,
receive fixed rate $ 498 $ 19 $ 18 $ 18 $ 545 $ 35 $ 35 $34
Pay fixed rate,
receive floating rate 357 - (2) (2) 172 - (4) (1)
Pay floating rate,
receive floating rate 67 - (1) (1) 84 - (1) (1)
Financial futures and
forward contracts 655 7 7 6 374 4 4 (8)
Interest rate cap and
floor agreements 2,389 6 6 7 371 4 4 4
--------------------------------------------------------------------------------------------
Total interest
rate contracts 3,966 32 28 28 1,546 43 38 28
EQUITY AND COMMODITY
CONTRACTS
---------
Commodity swap
agreements 152 4 4 4 122 12 12 12
Financial futures 122 2 2 2 203 - - 5
Options and warrants 691 149 149 149 402 88 88 75
--------------------------------------------------------------------------------------------
Total equity and
commodity contracts 965 155 155 155 727 100 100 92
FOREIGN CURRENCY
CONTRACTS
---------
Foreign currency
swap agreements 20 - (3) (3) 27 1 (3) -
Foreign currency
forward contracts 34 - - - - - - -
--------------------------------------------------------------------------------------------
Total foreign
currency contracts 54 - (3) (3) 27 1 (3) -
--------------------------------------------------------------------------------------------
Total derivative
financial instruments $4,985 $187 $180 $180 $2,300 $144 $135 $120
=============================================================================================
Credit exposure includes the effects of legally enforceable master netting agreements.
Credit exposure and fair value include accrued interest where applicable.
Carrying value is representative of deferred gains and losses, unamortized premium, or accrued interest,
depending on the accounting for the derivative financial instrument.
</TABLE>
The contract or notional amounts are used to calculate the exchange of
contractual payments under the agreements and are not representative of the
potential for gain or loss on these agreements.
<PAGE>
ALLSTATE - 73
Credit exposure represents the Company's potential loss if all of the
counterparties failed to perform under the contractual terms of the contracts
and all collateral, if any, became worthless. This exposure is represented by
the fair value of contracts with a positive fair value at the reporting date
reduced by the effect, if any, of master netting agreements.
The Company manages its exposure to credit risk by utilizing highly
rated counterparties, establishing risk control limits, executing legally
enforceable master netting agreements and obtaining collateral where
appropriate. To date, the Company has not incurred any losses on derivative
financial instruments due to counterparty nonperformance.
Fair value is the estimated amount that the Company would receive (pay)
to terminate or assign the contracts at the reporting date, thereby taking
into account the current unrealized gains or losses of open contracts. Dealer
and exchange quotes are available for the Company's derivatives.
Interest rate swap agreements involve the exchange, at specified
intervals, of interest payments calculated by reference to an underlying
notional amount. The Company generally enters into swap agreements to change
the interest rate characteristics of existing assets to more closely match
the interest rate characteristics of the corresponding liabilities. The
Company did not record any material deferred gains or losses on swaps in
1996, 1995 or 1994.
The Company did not realize any material gains or losses on swap
terminations in 1996, 1995 or 1994. The Company paid a weighted average
floating interest rate of 6.3% and received a weighted average fixed interest
rate of 7.1% in 1996. The Company paid a weighted average fixed interest rate
of 6.4% and received a weighted average floating interest rate of 6.5% in
1996.
Financial futures and forward contracts are commitments to either
purchase or sell designated financial instruments at a future date for a
specified price or yield. They may be settled in cash or through delivery. As
part of its asset/liability management, the Company generally utilizes
futures and forward contracts to manage its market risk related to fixed
income securities, equity securities and anticipatory investment purchases
and sales. Futures and forwards used as hedges of anticipatory transactions
pertain to identified transactions which are probable to occur and are
generally completed within 90 days. Futures contracts have limited
off-balance-sheet credit risk as they are executed on organized exchanges and
require security deposits, as well as the daily cash settlement of margins.
Interest rate cap and floor agreements give the holder the right to
receive at a future date, the amount, if any, by which a specified market
interest rate exceeds the fixed cap rate or falls below the fixed floor rate,
applied to a notional amount. The Company purchases interest rate cap and
floor agreements to reduce its exposure to rising or falling interest rates
relative to certain existing assets and liabilities in conjunction with
asset/liability management.
Commodity swap agreements involve the exchange of floating-rate interest
payments for the total return on a commodity index. The Company enters into
commodity swap transactions to mitigate market risk on the fixed income and
equity securities owned.
Equity linked option contracts provide returns based on a specified
equity index applied to the option's notional amount. The Company purchases
equity linked options to achieve equity appreciation or to reduce the market
risk associated with certain annuity contracts. Where required,
counterparties post collateral to minimize credit risk. Debt warrants provide
the right to purchase a specified new issue of debt at a predetermined price.
The Company purchases debt warrants to protect against long-term call risk.
Foreign currency contracts involve the exchange or delivery of
currencies. The Company enters into these agreements to manage the currency
risk associated with foreign securities owned.
Market risk is the risk that the Company will incur losses due to
adverse changes in market rates and prices. Market risk exists for all of the
derivative financial instruments that the Company currently holds, as these
instruments may become less valuable due to adverse changes in market
conditions. The Company mitigates this risk through established risk limits
set by senior management. In addition, the change in the value of the
Company's derivative financial instruments designated as hedges are generally
offset by the change in the value of the related assets and liabilities.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTNUED)
74 - ALLSTATE
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS A summary of the contractual amounts
and fair values of off-balance-sheet financial instruments follows:
<TABLE>
<CAPTION>
At December 31,
($ in millions) 1996 1995
- - -------------------------------------------------------------------------------
Contractual Fair Contractual Fair
amount value amount value
- - -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commitments to invest $294 $ - $223 $ -
Commitments to extend mortgage loans 72 1 88 1
Financial guarantees 25 (4) 28 (7)
Credit guarantees 100 - 50 -
</TABLE>
Except for credit guarantees, the contractual amounts represent the
amount at risk if the contract is fully drawn upon, the counterparty defaults
and the value of any underlying security becomes worthless. Unless noted
otherwise, the Company does not require collateral or other security to support
off-balance-sheet financial instruments with credit risk.
Commitments to invest generally represent commitments to make equity
investments in various limited partnerships. The Company enters these
agreements to allow for additional participation in certain investments.
Because the equity investments in limited partnerships are not actively traded,
it is not practicable to estimate the fair value of these commitments.
Commitments to extend mortgage loans are agreements to lend to a
customer provided there is no violation of any condition established in the
contract. The Company enters these agreements to commit to future loan fundings
at a predetermined interest rate. Commitments generally have fixed expiration
dates or other termination clauses. Commitments to extend mortgage loans, which
are secured by the underlying properties, are valued based on estimates of fees
charged by other institutions to make similar commitments to similar borrowers.
Financial guarantees represent conditional commitments to repurchase
notes from a creditor upon default of the debtor. The Company enters into these
agreements primarily to provide financial support for certain equity investees.
Financial guarantees are valued based on estimates of payments that may occur
over the life of the guarantees.
Credit guarantees represent conditional commitments to exchange
identified AAA or AA rated credit risk for identified A rated credit risk upon
bankruptcy or other event of default of the referenced credits. The Company
receives fees for assuming the referenced credit risks, which are reported in
net investment income when earned over the lives of the commitments. The
Company enters into these transactions in order to achieve higher yields than
if the referenced credits were directly owned.
The Company's maximum amount at risk, assuming bankruptcy
or other default of the referenced credits and the value of the referenced
credits become worthless, is the fair value of the identified AAA or AA rated
securities. The identified AAA or AA rated securities had a fair value
of $102 million at December 31, 1996. The Company includes the impact of
credit guarantees in its analysis of credit risk, and the referenced credits
were current with respect to their contractual terms at December 31, 1996.
6. RESERVE FOR PROPERTY-LIABILITY INSURANCE CLAIMS AND CLAIMS EXPENSE
As described in Note 2, the Company establishes reserves for claims and
claims expense on reported and unreported claims of insured losses. These
reserve estimates are based on known facts and interpretation of
circumstances, including the Company's experience with similar cases and
historical trends involving claim payment patterns, loss payments, pending
levels of unpaid claims and product mix, as well as other factors including
court decisions, economic conditions and public attitudes.
<PAGE>
ALLSTATE - 75
The establishment of appropriate reserves, including reserves for
catastrophes, is an inherently uncertain process. Allstate regularly updates
its reserve estimates as new facts become known and further events occur
which may impact the resolution of unsettled claims. Changes in prior year
reserve estimates, which may be material, are reflected in the results of
operations in the period such changes are determined to be needed.
Activity in the reserve for property-liability insurance claims and claims
expense is summarized as follows:
<TABLE>
<CAPTION>
($ in millions) 1996 1995 1994
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 $17,687 $16,763 $15,521
Less reinsurance recoverables 1,531 1,357 1,402
-----------------------------------
Net balance at January 1 16,156 15,406 14,119
Incurred claims and claims expense related to: -----------------------------------
Current year 14,823 14,113 15,241
Prior years (336) (425) (712)
----------------------------------
Total incurred 14,487 13,688 14,529
Claims and claims expense paid related to: ----------------------------------
Current year 7,522 8,190 8,770
Prior years 5,787 4,748 4,472
Disposition of operations 1,736 - -
----------------------------------
Total paid 15,045 12,938 13,242
----------------------------------
Net balance at December 31 15,598 16,156 15,406
Plus reinsurance recoverables 1,784 1,531 1,357
-----------------------------------
Balance at December 31(1) $17,382 $17,687 $16,763
===================================
(1) Loss development information for ARCO (Allstate's wholly owned British reinsurance subsidiary which was sold in 1996) is
not available on a comparable basis. This information is not material ($77 million in net claims and claims expense in 1995 and $48
million in net payments in 1995), and was treated as attributable to the current year.
</TABLE>
Incurred claims and claims expense includes losses from catastrophes of
$991 million, $934 million and $1.99 billion in 1996, 1995 and 1994,
respectively. 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. As of December 31, 1996, Allstate had no reinsurance
in place to lower its exposure to catastrophe losses on personal lines
business. The Company entered into a three-year excess reinsurance contract
covering Florida property policies, effective January 1, 1997, which provides
up to $400 million of catastrophe reinsurance protection in excess of $1.00
billion, up to an aggregate limit of $800 million.
The level of catastrophe loss experienced in any year cannot be
predicted and could be material to results of operations and financial
position. For Allstate, major areas of potential losses due to hurricanes
include major metropolitan centers near the eastern and gulf coasts of the
United States. The major areas of exposure to potential losses due to
earthquakes in California include population centers in and around Los
Angeles and San Francisco. Other areas in the United States with exposure to
potential earthquake losses include areas surrounding the New Madrid fault
system in the midwest and faults in and surrounding Seattle, Washington.
Management believes that the reserve for claims and claims expense at
December 31, 1996 is appropriately established in the aggregate and adequate
to cover the ultimate net cost of reported and unreported claims arising from
losses which had occurred by that date.
Favorable calendar year reserve development in 1996, 1995 and 1994 was
the result of favorable severity trends (average cost per claim) in each
of the three years, which more than offset adverse development in
Discontinued Lines and Coverages and increases to reserves for claims expense
which occurred in 1996. The favorable severity trend during this three-year
period was largely due to lower than anticipated medical cost inflation for
personal auto injury claims and improvements in the Company's claim
settlement processes. The reduction in the anticipated medical cost inflation
trend has emerged over time as actual claim settlements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
76 - ALLSTATE
validated the effect of the steady decline in the rate of inflation. Although
improvements in the Company's claim settlement process have contributed to
favorable severity development of personal injury claims during the past three
years, the new processes have caused an increase in the number of claims
outstanding. The Company expects the rate of increase in claims outstanding to
continue to decline in 1997; however, the number of outstanding claims may not
be reduced to levels previously reported due to an increase in the time
required to complete the new claim settlement processes. In addition, while
the claim settlement process changes are believed to have contributed to
favorable severity trends on closed claims, these changes introduce a greater
degree of variability in reserve estimates for the remaining outstanding
claims at December 31, 1996. Future reserve releases, if any, will depend on
the continuation of the favorable loss trends.
Allstate's exposure to environmental, asbestos and mass tort claims stem
principally from excess and surplus business written from 1972-1985,
including substantial excess and surplus general liability coverages on
Fortune 500 companies, and reinsurance coverage written during the 1960s
through the 1980s, including reinsurance on primary insurance written on
large U.S. companies. Mass tort exposures relate primarily to products
liability claims, such as those for medical devices and other products, and
general liabilities. Establishing net loss reserves for environmental,
asbestos and mass tort claims is subject to uncertainties that are greater
than those presented by other types of claims. Among the complications are a
lack of historical data, long reporting delays, uncertainty as to the number
and identity of insureds with potential exposure, unresolved legal issues
regarding policy coverage, availability of reinsurance and the extent and
timing of any such contractual liability. The legal issues concerning the
interpretation of various insurance policy provisions and whether these
losses are, or were ever intended to be covered, are complex. Courts have
reached different and sometimes inconsistent conclusions as to when losses
are deemed to have occurred and which policies provide coverage; what types
of losses are covered; whether there is an insured obligation to defend; how
policy limits are determined; how policy exclusions are applied and
interpreted; and whether environmental and asbestos clean-up costs represent
insured property damage. Management believes these issues are not likely to
be resolved in the near future.
As the industry has gained experience evaluating environmental
exposures, some actuarial firms have developed techniques and databases to
estimate environmental liabilities. Allstate gained access to complex
databases developed by outside experts to estimate the cost of
liabilities for environmental claims. The databases contained lists of known
potentially responsible parties ("PRP"), National Priority List ("NPL")
sites, and the Environmental Protection Agency's estimates of clean-up costs.
Allstate's policy files were compared to the databases, and factors to
estimate growth of NPL sites, state sites, third party claims, natural
resource damage, probability of coverage, and PRP's being named at future
sites were applied to determine an estimate of the Company's potential
environmental loss. The Company also refined its own estimation techniques,
which were tested and validated by outside actuaries, to estimate environmental
and asbestos losses. Allstate used a combination of these resources, along with
an extensive internal review of its current claim exposures to estimate
environmental and asbestos reserves. The Company also performed an in-depth
analysis of its reinsurance recoverables and refined its process for
estimating and identifying available reinsurance since some reinsurers have
become insolvent or Allstate has commuted their agreements. During the third
quarter of 1996, based upon the Company's re-evaluation, loss reserves, net of
reinsurance for environmental and asbestos exposures were increased by
$172 million and $72 million, respectively.
In addition to environmental and asbestos exposures, the studies also
included an assessment of current claims for mass tort exposures. Based on
the re-evaluation, loss reserves for mass tort exposures increased in the
third quarter of 1996 by $60 million, net of reinsurance recoverables. This
increase includes the reallocation of $103 million of general liability net
loss reserves between 1985 and subsequent accident years to pre-1985 accident
years.
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
<PAGE>
ALLSTATE - 77
issued prior to 1987 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 claim risks assumed, as well as primary commercial
coverages written, for most policies written in 1986 and all policies written
after 1986.
Reserves for environmental claims were $722 million and $520 million,
net of reinsurance recoverables of $225 million and $424 million at December
31, 1996 and 1995, respectively. Reserves for asbestos claims were $510
million and $501 million, net of reinsurance recoverables of $264 million and
$223 million at December 31, 1996 and 1995, respectively. Approximately 64%
and 56% of the total net environmental and asbestos reserves at December 31,
1996 and 1995, respectively, represents IBNR. The survival ratios (ending
reserves divided by claims and claims expense paid) for net environmental and
asbestos reserves at December 31, 1996 and 1995, were 12.0 and 8.8,
respectively.
Management believes its net loss reserves for environmental, asbestos
and mass tort exposures 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. In addition, while the Company
believes the improved actuarial techniques and databases have assisted in its
ability to estimate environmental, asbestos and mass tort net loss reserves,
these refinements may subsequently prove to be inadequate indicators of the
extent of probable loss. Due to the uncertainties and factors described
above, management believes it is not practicable to develop a meaningful
range for any such additional net loss reserves that may be required.
- - --------------------------------------------------------------------------------
7. REINSURANCE
The Company acquires reinsurance to limit aggregate and single exposures on
large risks. Additionally, in connection with the sale to SCOR in 1996 (see
Note 3), Allstate entered into a reinsurance agreement for the post-1984
reinsurance liabilities. The Company continues to have primary liability as a
direct insurer for risks reinsured. This footnote should be read in connection
with Note 6, Reserve for Property-Liability Insurance Claims and Claims
Expense. The effects of reinsurance on premiums written and earned are as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
($ in millions) 1996 1995 1994
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
PROPERTY-LIABILITY PREMIUMS WRITTEN
- - -----------------------------------------
Direct $18,748 $17,598 $16,395
Assumed 382 903 899
Ceded (544) (536) (555)
----------------------------------
Property-liability premiums written,
net of reinsurance $18,586 $17,965 $16,739
===================================
PROPERTY-LIABILITY PREMIUMS EARNED
- - -----------------------------------------
Direct $18,487 $17,178 $16,177
Assumed 358 886 885
Ceded (479) (524) (549)
-----------------------------------
Property-liability premiums earned,
net of reinsurance $18,366 $17,540 $16,513
===================================
LIFE AND ANNUITY PREMIUMS AND
CONTRACT CHARGES
- - -----------------------------------------
Direct $1,415 $1,404 $1,092
Assumed 17 11 9
Ceded (96) (47) (48)
------------------------------------
Life and annuity premiums and contract
charges, net of reinsurance $1,336 $1,368 $1,053
====================================
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
78 - ALLSTATE
The recoverable amounts at December 31, 1996 and 1995 include $190
million and $156 million, respectively, related to losses paid by the Company
and billed to reinsurers, and $1.96 billion and $1.67 billion, respectively,
estimated by the Company with respect to ceded unpaid losses (including IBNR)
which are not billable until the losses are paid. The 1996 balance includes
$489 million related to ceded unpaid losses on environmental and asbestos
loss reserves. Amounts recoverable from pools, associations and facilities
included above were $586 million and $387 million at December 31, 1996 and 1995,
respectively. Recent developments in the insurance industry have resulted in
environmental, asbestos and mass tort exposures being segregated into separate
legal entities with dedicated capital. These actions have been supported by
regulatory bodies in certain cases. The Company is unable to determine the
impact, if any, that these developments will have on the collectibility of
reinsurance recoverables in the future. The Company has a recoverable from
Lloyd's of London of $127 million and $189 million at December 31, 1996 and
1995, respectively. Lloyd's of London implemented a restructuring plan in 1996
to solidify its capital base and to segregate claims for years before 1993. The
impact, if any, of the restructuring on the collectibility of the recoverable
from Lloyd's of London is uncertain at this time. The recoverable from Lloyd's
of London is spread among thousands of investors (Names), who have unlimited
liability. Excluding pools, associations and facilities, no other amount due or
estimated due from any one property-liability reinsurer was in excess of $78
million and $79 million at December 31, 1996 and 1995, respectively.
Estimating amounts of reinsurance recoverable is also impacted by the
uncertainties involved in the establishment of loss reserves. Management
believes the recoverables are appropriately established; however, as the
Company's underlying reserves continue to develop, the amount ultimately
recoverable may vary from amounts currently recorded. The reinsurers and amounts
recoverable therefrom are regularly evaluated by the Company and a provision for
uncollectible reinsurance is recorded. The pretax provisions for uncollectible
reinsurance were $18 million, $133 million and $26 million in 1996, 1995 and
1994, respectively. The increase in the provision for 1995 was primarily due to
an increase in uncollectible reinsurance related to reserve increases for breast
implant and environmental and asbestos claims. The allowance for uncollectible
reinsurance was $163 million and $246 million at December 31, 1996 and 1995,
respectively.
8. DEBT
Long-term and short-term debt consists of the following:
<TABLE>
<CAPTION>
At December 31,
($ in millions) 1996 1995
-----------------------------------------------------------------------------
<S> <C> <C>
5.875% Notes, due 1998 $300 $300
6.75% Notes, due 2003 300 300
7.5% Debentures, due 2013 250 250
Floating rate notes, due 2009 to 2011 27 21
6.76% ACES, due 1998 357 357
----------------
Total long-term debt 1,234 1,228
Short-term debt 152 -
----------------
Total debt $1,386 $1,228
================
</TABLE>
The ACES were issued in 1995 at a principal amount of $34.00 per
security, which was equal to the initial public offering price of the common
stock of PMI Group, resulting in net proceeds of $341 million. At maturity,
the principal amount of each exchangeable note will be mandatorily exchanged
by the Company into a number of shares of PMI Group common stock, or at the
Company's option, cash with an equal value in lieu of such shares. The number
of such shares or the amount of such cash exchanged at maturity of the ACES
will be based on the average market price of PMI Group common stock on the 20
days immediately prior to maturity. If the Company elects to deliver shares
of PMI Group common stock at maturity, the Company's holdings of 10.5 million
of PMI Group common shares will be reduced to
<PAGE>
ALLSTATE - 79
between zero (if the average market price of PMI Group common shares is
at or below $34.00), and approximately 1.9 million shares (if the average
market price of PMI Group common shares is at or above $41.50). At December 31,
1996, the fair value of the ACES was $496 million. At December 31, 1996, the
closing price of PMI Group common shares was $55.375.
The Company maintains a bank line of credit totaling $1.50 billion,
which expires on December 20, 2001. The bank line provides for loans at a
spread above prevailing referenced interest rates. The Company pays
commitment fees in connection with the line of credit. As of December 31,
1996, no amounts were outstanding under the bank line of credit.
The Company paid $64 million, $62 million and $59 million of interest on
debt in 1996, 1995 and 1994, respectively.
The weighted average interest rates of outstanding short-term debt at
December 31, 1996 was 5.7%.
- - --------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENT LIABILITIES
LEASES The Company leases certain office facilities and computer equipment.
Total rent expense for all leases was $220 million, $270 million and $281
million in 1996, 1995 and 1994, respectively. Minimum rental commitments
under noncancelable operating leases with an initial or remaining term of
more than one year as of December 31, 1996 are as follows:
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ in millions)
Year ended December 31,
- - --------------------------------------------------------------------------------
<S> <C>
1997 $204
1998 174
1999 111
2000 46
2001 37
Thereafter 77
----
$649
====
</TABLE>
CALIFORNIA EARTHQUAKE AUTHORITY On December 2, 1996, the California
Earthquake Authority ("CEA") commenced operations. The CEA is a
privately-financed, publicly-managed state agency created to provide coverage
for earthquake damage resulting from the movement of the earth. Insurers
selling homeowners insurance in California are required to offer earthquake
insurance to their customers either through their company or participation in
the CEA. Beginning January 20, 1997, Allstate's traditional earthquake
policies and mini-earthquake policies ("Mini-policy") began transferring to
the CEA; this transfer will continue over the next year as these policies
expire. Beginning late in the second quarter of 1996, Allstate's
traditional earthquake policies were renewed as Mini-policies. The
Mini-policy has higher deductibles, eliminates coverage for most non-dwelling
structures and limits personal contents coverage, thereby significantly
reducing Allstate's exposure to earthquake losses in California from what it
was at the time of the Northridge earthquake in 1994.
Approximately $700 million of capital needed to create the CEA was
obtained from assessments of participating insurance companies. Assessments
were based on an insurer's proportionate share of earthquake coverage in the
state. Allstate's pretax assessment, including related expenses, was
approximately $150 million.
Additional capital needed to operate the CEA will be obtained through
assessments of participating insurance companies, reinsurance and bond
issuances funded by policyholder assessments. Allstate may be assessed in the
future depending on the capital level of the CEA. Participating insurers are
required to fund a second assessment, not to exceed $2.10 billion in total,
if the capital of the CEA drops below $350 million. Participating insurers
are required to fund a third assessment, after recovery of reinsurance and
bond issuances, of up to $1.40 billion, if aggregate earthquake losses exceed
$5.60 billion or the CEA's capital falls below $350 million. The authority of
the CEA to assess participating insurers expires when the CEA has completed
twelve years of operation. All assessments to participating CEA insurers are
based
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
80 - ALLSTATE
on earthquake insurance market share, as of December 31 of the
preceding year. Earthquake insurance market share is based on the percent of
earthquake premium written by the CEA for which the insurer has written the
underlying property policy. The aggregate amount of insurer assessments may
change annually to reflect the market share of insurers entering and
withdrawing from the CEA. Allstate does not expect its portion of these
additional contingent assessments, if needed, to exceed $700 million, assuming
its current earthquake insurance market share does not materially change.
PMI RUNOFF SUPPORT AGREEMENT The Company has certain limited rights and
obligations under a capital support agreement ("Runoff Support Agreement")
with PMI Mortgage Insurance Company ("PMI"), the primary operating subsidiary
of PMI Group (see Note 3). Under the Runoff Support Agreement, the Company
would be required to pay claims on PMI policies written prior to October 28,
1994 if PMI fails certain financial covenants and fails to pay such claims.
In the event any amounts are so paid, the Company would receive a
commensurate amount of preferred stock or subordinated debt of PMI Group or
PMI. The Runoff Support Agreement also restricts PMI's ability to write new
business and pay dividends under certain circumstances. Management does not
believe this agreement will have a material adverse effect on results of
operations or financial position of the Company.
REGULATION AND LEGAL PROCEEDINGS The Company's insurance businesses are
subject to the effects of a changing social, economic and regulatory
environment. Public regulatory initiatives have varied and have included
efforts to restrict premium rates, restrict the Company's ability to cancel
policies in connection with management of catastrophe exposure, impose
underwriting standards and expand overall regulation. The ultimate changes
and eventual effects, if any, of these initiatives are uncertain.
Various other 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.
- - --------------------------------------------------------------------------------
10. MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS
In November 1996, Allstate Financing I ("AF I"), a wholly owned subsidiary
trust of the Company, issued 22 million shares of 7.95% Cumulative Quarterly
Income Preferred Securities, Series A ("QUIPS"), at $25 per share. Proceeds
of $550 million from the issuance of the QUIPS will be used for general
corporate purposes including the Company's stock repurchase program. The
QUIPS are callable beginning November 25, 2001, and mature on December 31,
2026, however, the Company may elect to extend their maturity to December 31,
2045.
In November 1996, Allstate Financing II ("AF II"), a wholly owned
subsidiary trust of the Company, issued 200,000 shares of 7.83% Capital
Securities ("Capital Securities") at $1,000 per share. Proceeds of $200
million from the issuance of the Capital Securities will be used for general
corporate purposes including the Company's stock repurchase program. The
Capital Securities are callable beginning December 1, 2006, and mature on
December 1, 2045.
The Company has guaranteed AF I's and AF II's obligations under the
respective securities issued including the payment of the liquidation or
redemption price, and any accumulated and unpaid interest, but only to the
extent of funds held by the trusts. The securities are classified in the
Company's statement of financial position as mandatorily redeemable preferred
securities of subsidiary trusts (representing the minority interest in the
trusts) at their face value and redemption amount of $750 million. The
securities have a liquidation value of $25 per share for the QUIPS and $1,000
per share for the Capital Securities. Dividends on the securities are
cumulative, payable quarterly in arrears for the QUIPS and cumulative, payable
semi-annually in arrears for the Capital Securities, and are deferrable at the
Company's option for up to five years. The Company cannot pay dividends on its
preferred and common stocks during such deferments. Dividends for the QUIPS
and Capital Securities have been classified as dividends on preferred
securities of subsidiary trusts in the statement of operations.
<PAGE>
ALLSTATE - 81
- - --------------------------------------------------------------------------------
11. INCOME TAXES
Consolidated federal income tax returns are filed by the Company and its
eligible subsidiaries. Tax liabilities and benefits realized by the
consolidated group are allocated as generated by the respective entities.
Prior to the Distribution, the Company and all of its domestic
subsidiaries (the "Allstate Group") joined with Sears and its domestic
business units (the "Sears Group") in the filing of a consolidated federal
income tax return (the "Sears Tax Group") and were parties to a federal
income tax allocation agreement (the "Tax Sharing Agreement"). Under the Tax
Sharing Agreement, the Company paid to or received from the Sears Group the
amount, if any, by which the Sears Tax Group's federal income tax liability
was affected by virtue of inclusion of the Allstate Group in the consolidated
federal income tax return. Effectively, this resulted in the Company's annual
income tax provision being computed as if the Company filed a separate
return, except that items such as net operating losses, capital losses,
alternative minimum tax ("AMT"), AMT credits, foreign tax credits or similar
items, which might not be recognized in a separate return, were allocated
according to the Tax Sharing Agreement.
The Allstate Group and Sears Group have entered into an agreement which
governs their respective rights and obligations with respect to federal
income taxes for all periods prior to the Distribution ("Consolidated Tax
Years"). The agreement provides that all Consolidated Tax Years will continue
to be governed by the Tax Sharing Agreement with respect to the Company's
federal income tax liability.
The components of the deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
At December 31,
($ in millions) 1996 1995
- - ------------------------------------------------------------------------------------------------
DEFERRED ASSETS
- - ------------------------------------------------------------------------------------------------
<S> <C> <C>
Discount on loss reserves $ 578 $ 715
Unearned premium reserves 430 462
Life and annuity reserves 453 412
Alternative minimum tax credit carryforwards 229 316
Other postretirement benefits 226 225
Other assets 431 329
----------------
Total deferred assets 2,347 2,459
DEFERRED LIABILITIES ----------------
- - --------------------------------------------
Policy acquisition costs (778) (654)
Unrealized net capital gains 1,067) (1,400)
Pension (97) (48)
Depreciation (16) (27)
Other liabilities (157) (101)
----------------
Total deferred liabilities (2,115) (2,230)
----------------
Net deferred asset $ 232 $ 229
================
</TABLE>
Although realization is not assured, management believes it is more
likely than not that all of the deferred tax asset will be realized based on the
assumption that historical levels of income will be achieved.
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
($ in millions) 1996 1995 1994
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $407 $454 $ (84)
Deferred 212 119 (194)
-------------------------------
Total income tax expense (benefit) $619 $573 $(278)
===============================
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
82 - ALLSTATE
The Company paid income taxes of $371 million and $463 million in 1996
and 1995, respectively, and recovered income taxes of $166 million in 1994.
The Company had an income tax (liability) recoverable of $(15) million and $7
million at December 31, 1996 and 1995, respectively. The Internal Revenue
Service ("IRS") has completed its review of AIC's and ALIC's tax returns for
all years through 1985 and 1990, respectively. Any adjustments that may
result from the IRS examination of tax returns are not expected to have a
material impact on the financial statements of the Company.
A reconciliation of the statutory federal income tax rate to the
effective income tax rate on income from operations is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
-------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Tax-exempt income (11.2) (13.6) (280.0)
Dividends received deduction (.9) (1.1) (17.2)
Net change in tax reserves .6 1.5 24.8
Other (.3) 1.8 5.7
----------------------------
Effective income tax (benefit) rate 23.2% 23.6% (231.7)%
============================
</TABLE>
Prior to January 1, 1984, ALIC was entitled to exclude certain amounts
from taxable income and accumulate such amounts in a "policyholder surplus"
account. The balance in this account at December 31, 1996, approximately $82
million, will result in taxes payable of $29 million if distributed by ALIC to
the Company. No provision for taxes has been made as ALIC has no plan to
distribute amounts from this account. No further additions to the account are
allowed under the Tax Reform Act of 1984.
- - --------------------------------------------------------------------------------
12. STATUTORY FINANCIAL INFORMATION
The following table reconciles consolidated net income and shareholders'
equity as reported herein in conformity with generally accepted accounting
principles with combined statutory net income and capital and surplus of AIC,
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities:
<TABLE>
<CAPTION>
Net income Shareholders' equity
Year ended December 31, At December 31,
--------------------------------------------------------------------------------------------------
($ in millions) 1996 1995 1994 1996 1995
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance per generally accepted
accounting principles $2,075 $1,904 $484 $13,452 $12,680
Corporate transactions 38 40 39 1,316 1,102
Unrealized gain/loss on
fixed income securities - - - (1,599) (2,800)
Deferred policy acquisition costs (161) (80) (49) (2,614) (2,004)
Deferred income taxes 152 145 (215) (232) (229)
Note receivable from Sears - 11 41 - -
Other postretirement and
postemployment benefits (143) (7) (2) 334 490
Undistributed net income
of certain subsidiaries (250) (297) (207) - -
Financial statement impact
of dispositions 220 370 (86) 296 195
Non-admitted assets and
statutory reserves - - - (85) (91)
Early retirement program - (19) 26 - 7
Other 40 8 (24) 147 59
--------------------------------------------------------------------------------------------------
Balance per statutory
accounting practices $1,971 $2,075 $ 7 $11,015 $ 9,409
==================================================================================================
</TABLE>
<PAGE>
ALLSTATE - 83
PERMITTED STATUTORY ACCOUNTING PRACTICES AIC and each of its domestic
property-liability and life and annuity subsidiaries prepare their statutory
financial statements in accordance with accounting principles and practices
prescribed or permitted by the insurance department of the applicable state
of domicile. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners ("NAIC"),
as well as state laws, regulations and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices
not so prescribed. Certain domestic subsidiaries of the Company follow
permitted statutory accounting practices which differ from those prescribed
by regulatory authorities. The use of such permitted statutory accounting
practices does not have a significant impact on statutory surplus.
The NAIC has authorized a project to codify statutory accounting
practices. The timing of the finalization and subsequent adoption of these
recommendations by the NAIC is not expected to occur until late 1997 or early
1998, with implementation tentatively planned for January 1, 1999. The impact
to statutory surplus is not determinable at this time.
DIVIDENDS The ability of the Company to pay dividends is dependent on business
conditions, income, cash requirements of the Company, receipt of dividends from
AIC and other relevant factors. The payment of shareholder dividends by AIC
without the prior approval of the state insurance regulator is limited to
formula amounts based on net income and capital and surplus, determined in
accordance with statutory accounting practices, as well as the timing and
amount of dividends paid in the preceding twelve months. The maximum amount of
dividends that AIC can distribute during 1997 without prior approval of the
Illinois Department of Insurance is $2.22 billion.
- - --------------------------------------------------------------------------------
13. BENEFIT PLANS
PENSION PLANS Defined benefit pension plans cover domestic and Canadian
full-time employees and certain part-time employees. Benefits under the
pension plans are based upon the employee's length of service, average annual
compensation and estimated social security retirement benefits. The Company's
funding policy for the pension plans is to make annual contributions in
accordance with accepted actuarial cost methods.
A summary of the components of net periodic pension expense for all plans
follows:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------
Year ended December 31,
($ in millions) 1996 1995 1994
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the year $129 $103 $131
Interest cost on projected benefit obligation 208 197 187
Actual return on plan assets (397) (391) 2
Net amortization and deferral 208 188 (211)
------------------------
Total pension expense $148 $ 97 $109
========================
</TABLE>
Net periodic pension expense in 1996 and 1995 includes settlement
charges of $6 million and $21 million, respectively, as a result of retirees
selecting lump sum distributions. Included in net periodic pension expense
in 1995 are curtailment charges of $8 million and special termination
benefits of $12 million related to a voluntary early retirement program.
Assumptions used in the determination of pension obligations and assets
were:
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average discount rate 7.75% 7.50% 9.00%
Rate of increase in compensation levels 4.50-5.00 4.50-5.00 5.50
Expected long-term rate of return on
plan assets 9.50 9.50 9.50
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
84 - ALLSTATE
The plans' funded status is as follows:
<TABLE>
<CAPTION>
At December 31,
($ in millions) 1996 1995
- - --------------------------------------------------------------------------------------------------------------
Assets exceed Accumulated Assets exceed Accumulated
accumulated benefits accumulated benefits
benefits exceed assets benefits exceed assets
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligations
Vested benefit obligation $2,083 $ 47 $2,100 $ 59
===============================================================
Accumulated benefit obligation $2,237 $ 52 $2,253 $ 61
===============================================================
Projected benefit obligation $2,810 $ 77 $2,837 $ 84
Plan assets at fair value 2,650 - 2,481 -
---------------------------------------------------------------
Excess of projected benefit
obligation over plan assets (160) (77) (356) (84)
Unrecognized net loss 353 33 586 45
Unrecognized prior service cost (47) (8) (53) (21)
Unrecognized transitional asset (12) - (22) -
---------------------------------------------------------------
Prepaid (accrued) pension cost $ 134 $(52) $ 155 $(60)
===============================================================
</TABLE>
Plan assets at December 31, 1996 and 1995 were composed primarily of
common stocks and long-term corporate and U.S. government obligations.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company provides certain
health care and life insurance benefits for retired employees. Qualified
employees may become eligible for these benefits if they retire in accordance
with the Company's established retirement policy and are continuously insured
under the Company's group plans or other approved plans for 10 or more years
prior to retirement. The Company shares the cost of the retiree medical
benefits with retirees based on years of service, with the Company's share
being subject to a 5% limit on annual medical cost inflation after
retirement. The Company's postretirement benefit plans currently are not
funded. The Company has the right to modify or terminate these plans.
Postretirement benefit expense is comprised of the following:
<TABLE>
<CAPTION>
Year ended December 31,
($ in millions) 1996 1995 1994
- - ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the year $14 $16 $23
Interest cost on accumulated postretirement
benefit obligation 47 52 45
Net amortization and deferral 1 - 2
------------------------
Postretirement benefit expense $62 $68 $70
========================
</TABLE>
The status of the plans is as follows:
<TABLE>
<CAPTION>
At December 31,
($ in millions) 1996 1995
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees $352 $360
Fully eligible active plan participants 121 112
Other active plan participants 147 174
-------------
Accumulated postretirement benefit obligation 620 646
Unrecognized gain (loss) 63 (8)
--------------
Accrued postretirement benefit cost $683 $638
==============
</TABLE>
<PAGE>
ALLSTATE - 85
The weighted average health care cost trend rate used in measuring the
accumulated postretirement benefit cost was 7% for 1997, gradually declining
to 5% in 2002 and remaining at that level thereafter. A one percentage point
increase in the assumed health care cost trend rate for each year would
increase the accumulated postretirement benefit obligation by $18 million and
would increase the postretirement benefit expense by $3 million. The weighted
average discount rate used in determining the accumulated postretirement
benefit obligation was 7.75% and 7.50% in 1996 and 1995, respectively.
PROFIT SHARING FUND Employees of the Company and its domestic subsidiaries
are also eligible to become members of The Savings and Profit Sharing Fund of
Allstate Employees ("Allstate Plan"). The Company contributions are based on
the Company's matching obligation and performance. The Allstate Plan includes
an Employee Stock Ownership Plan ("Allstate ESOP") to pre-fund a portion of
the Company's anticipated contribution. The Allstate Plan and the Allstate
ESOP split from The Savings and Profit Sharing Fund of Sears Employees
("Sears Plan") on the date of the Distribution. In connection with this, the
Company paid Sears $327 million, and in return received a note from the
Allstate ESOP for a like principal amount and 50% of the unallocated shares.
The Company will make net contributions to the Allstate ESOP annually in the
amount necessary to allow the Allstate ESOP to fund interest and principal
payments on the note after considering the dividends paid on ESOP shares,
which are available for debt service.
The Company's defined contribution to the Allstate Plan was $66 million
in both 1996 and 1995. These amounts were reduced by the ESOP benefit
computed as follows:
<TABLE>
<CAPTION>
Year ended December 31,
($ in millions) 1996 1995
- - ----------------------------------------------------------------------------
<S> <C> <C>
Interest expense recognized by ESOP $ 29 $ 15
Less dividends accrued on ESOP shares (19) (9)
Cost of shares allocated 20 27
------------------
30 33
Reduction of defined contribution due to ESOP 65 51
------------------
ESOP benefit $(35) $(18)
==================
</TABLE>
Net profit sharing expense was $31 million and $48 million for 1996 and
1995, respectively.
The Company contributed $26 million and $6 million to the ESOP in 1996
and 1995, respectively. At December 31, 1996, the total committed to be
released, allocated and unallocated ESOP shares were 1.2 million, 1.6 million
and 16.7 million, respectively.
The costs to the Company prior to the Distribution and the split from
the Sears Plan were $25 million in 1994.
- - --------------------------------------------------------------------------------
14. STOCK OPTION PLANS
The Company has two equity incentive plans which provide the Company the
authority to grant nonqualified stock options, incentive stock options, and
restricted or unrestricted shares of the Company's stock to certain employees
and directors of the Company. A maximum of 20,300,000 shares of common stock
will be subject to awards under the plans, subject to adjustment in
accordance with the plans' terms.
Options are granted under the plans at exercise prices equal to the fair
value of the Company's common stock on the applicable grant date. The options
granted will vest ratably over a three-year period. The options granted may be
exercised when vested and will expire ten years after the date of grant.
At the Distribution date, all Sears options and restricted Sears common
shares held by current and former employees of the Company were canceled.
Concurrently, the Company adopted the Employees Replacement Stock Plan under
which the holders of such canceled awards were granted substantially similar
awards relating to the Company's common stock. The replacement
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
86 - ALLSTATE
awards consisted of options to purchase approximately 1,000,000 shares of common
stock and grants of approximately 183,000 shares of restricted stock.
Changes in stock options were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
weighted average
(thousands of shares) 1996 exercise price 1995 1994
- - -----------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning balance 6,912 $26.22 3,011 2,669
Granted 785 44.83 4,373 461
Exercised (679) 25.18 (137) -
Canceled or expired (124) 29.32 (335) (119)
------------------------------------
Ending balance 6,894 $28.40 6,912 3,011
====================================
Exercisable 3,886 $24.89 2,655 884
</TABLE>
The weighted average fair value (at grant date) per option granted
during 1996 is $13.12. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions used for grants in 1996; dividend
yield of 1.9%; volatility factor of 23%; risk-free interest rate of 6.21%;
and expected life of seven years.
Information on the range of exercise prices for options outstanding
as of December 31, 1996 is as follows:
<TABLE>
<CAPTION>
(thousands of shares) Options outstanding Options exercisable
- - ------------------------------------------------------------------------------------------------
Weighted
Number Weighted average Number Weighted
Range of outstanding at average remaining exercisable at average
exercise prices 12/31/96 exercise price contractual life 12/31/96 exercise price
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$10.72-$25.92 2,198 $21.59 7 years 1,400 $19.30
$27.00-$57.38 4,696 31.58 8 years 2,486 28.04
------------------------------------------------------------------------
$10.72-$57.38 6,894 $28.40 8 years 3,886 $24.89
========================================================================
</TABLE>
The Company has adopted the financial disclosure provisions of Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" with respect to its employee plan. The Company
applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its employee equity incentive plan.
Accordingly, no compensation cost has been recognized for its employee plans
as the exercise price of the options equals the market price at the grant
date. The effect of recording compensation cost for the Company's stock-based
compensation plans based on SFAS No. 123's fair value method results in net
income and earnings per share that are not materially different from amounts
reported.
- - -------------------------------------------------------------------------------
15. BUSINESS SEGMENTS
The Company's two business segments are property-liability insurance and life
and annuity. The property-liability segment has two areas of business. PP&C
insurance provides primarily private-passenger auto and homeowners insurance
to individuals. Discontinued lines and coverages consist of business no longer
written by Allstate, including losses from environmental, asbestos and mass
tort, and other commercial business in run-off, as well as the historical
results of the mortgage pool business and businesses sold in 1996. Segment
results have been restated for 1995 and 1994 to reflect the dispositions during
1996. The life and annuity segment consists of a broad line of life,
annuity and group pension products.
<PAGE>
ALLSTATE - 87
Summarized financial data for each of the Company's business segments
is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
($ in millions) 1996 1995 1994
- - ---------------------------------------------------------------------------------------------
REVENUES
- - ------------------------------------------------------
<S> <C> <C> <C>
Property-liability operations
PP&C $17,708 $16,524 $15,452
Discontinued lines and coverages 658 1,016 1,061
-------------------------------------
Total premiums earned 18,366 17,540 16,513
Net investment income 1,758 1,630 1,515
Realized capital gains and losses 753 243 223
-------------------------------------
Total property-liability 20,877 19,413 18,251
Life and annuity operations
Premiums and contract charges 1,336 1,368 1,053
Net investment income 2,045 1,992 1,827
Realized capital gains and losses 31 15 (23)
-------------------------------------
Total life and annuity 3,412 3,375 2,857
Corporate 10 5 1
-------------------------------------
Total $24,299 $22,793 $21,109
=====================================
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAX
EXPENSE, DIVIDENDS ON PREFERRED SECURITIES AND
EQUITY IN NET INCOME OF UNCONSOLIDATED SUBSIDIARY (1)
- - ------------------------------------------------------
Property-liability operations--underwriting (loss) income
PP&C $ 416 $ 300 $(1,584)
Discontinued lines and coverages (501) (363) (285)
-------------------------------------
Total property-liability--underwriting loss (85) (63) (1,869)
California Earthquake Authority assessment (150) - -
Net investment income 1,758 1,630 1,515
Realized capital gains and losses 753 243 223
(Loss) gain on disposition of operations (131) 159 -
-------------------------------------
Total property-liability 2,145 1,969 (131)
Life and annuity operations 587 518 312
Corporate (63) (66) (61)
-------------------------------------
Total $ 2,669 $ 2,421 $ 120
NET INCOME (LOSS) (1) =====================================
- - ------------------------------------------------------
Property-liability operations (2) $ 1,725 $ 1,608 $ 312
Life and annuity operations 388 337 211
Corporate (38) (41) (39)
-------------------------------------
Total $ 2,075 $ 1,904 $ 484
=====================================
</TABLE>
(1) The 1994 results reflect an after-tax charge of $100 million ($154 million
pretax) for an early retirement program. Of the total charge $86 million
($132 million pretax) was allocated to the property-liability segment and $14
million ($22 million pretax) to the life and annuity segment.
(2) Includes equity in net income of unconsolidated subsidiary of $29 million,
$56 million and $86 million in 1996, 1995 and 1994, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
88 - ALLSTATE
<TABLE>
<CAPTION>
Year ended December 31,
($ in millions) 1996 1995 1994
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CAPITAL EXPENDITURES
- - -----------------------------------------------------------------------
Property-liability operations $ 126 $ 129 $ 122
Life and annuity operations 12 5 7
Corporate - - -
---------------------------
Total $ 138 $ 134 $ 129
===========================
ASSETS
- - -----------------------------------------------------------------------
Property-liability operations $37,950 $37,081 $32,230
Life and annuity operations 35,904 32,842 28,716
Corporate 654 106 42
---------------------------
Total $74,508 $70,029 $60,988
===========================
- - --------------------------------------------------------------------------------------------------------
</TABLE>
16. QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
($ in millions except First quarter Second quarter Third quarter Fourth quarter
per share data) 1996 1995 1996 1995 1996 1995 1996 1995
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $5,903 $5,573 $6,324 $5,671 $6,015 $5,699 $6,057 $5,850
=========================================================================================================
Net income $ 424 $ 542 $ 764 $ 519 $ 292 $ 446 $ 595 $ 397
=========================================================================================================
EARNINGS PER SHARE
- - ------------------
Net income $ 0.94 $ 1.21 $ 1.71 $ 1.15 $ 0.65 $ 1.00 $ 1.33 $ 0.88
=========================================================================================================
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
ALLSTATE - 89
TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF THE ALLSTATE CORPORATION:
We have audited the accompanying Consolidated Statements of Financial
Position of The Allstate Corporation and subsidiaries as of December 31, 1996
and 1995, and the related Consolidated Statements of Operations, Shareholders'
Equity and Cash Flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of The Allstate Corporation
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
- - -------------------------
Deloitte & Touche LLP
Chicago, Illinois
February 21, 1997
<PAGE>
REPORT OF MANAGEMENT
90 - ALLSTATE
Management is responsible for the integrity and objectivity of the
accompanying financial statements, including the financial analysis and all
other information in this annual report. The financial statements have been
prepared in conformity with generally accepted accounting principles and
include amounts based upon management's informed estimates and judgements.
Management believes that these statements present fairly the Company's
financial position and results of operations and that the other information
contained in the annual report is consistent with the financial statements.
Management maintains a system of internal controls designed to provide
reasonable assurance that assets are safeguarded from unauthorized use or
disposition and that transactions are properly authorized, executed and
recorded. The concept of reasonable assurance is based on the premise that
the cost of internal controls should not exceed the benefits derived. The
system of internal accounting controls includes the selection and training of
qualified personnel, the appropriate division of responsibilities, and
written policies and procedures, including a code of conduct. The Company's
comprehensive internal audit program is designed for continual evaluation of
the effectiveness of its system of internal controls and measures adherence
to established policies and procedures.
Deloitte & Touche LLP, independent auditors, have audited the financial
statements of the Company and their report appears on page 89. Their audit
includes a study and evaluation of the Company's control environment,
accounting systems and control procedures. The independent and internal
auditors advise management of the results of their reviews and make
recommendations to improve the system of internal controls. Management
evaluates the audit recommendations and takes appropriate action.
The Audit Committee of the Board of Directors is comprised entirely of
directors who are not employees of the Company. The committee reviews audit
plans, internal control reports, financial reports and related matters and
meets regularly with the Company's management and independent and internal
auditors. The independent and internal auditors advise the committee of any
significant matters resulting from their work and have free access to the
committee without management being present.
/s/Jerry D. Choate /s/Thomas J. Wilson
- - ------------------------------------ -----------------------------------------
Jerry D. Choate Thomas J. Wilson
Chairman and Chief Executive Officer Vice President and Chief Financial
Officer
/s/Edward M. Liddy /s/Samuel H. Pilch
- - ------------------------------------ -----------------------------------------
Edward M. Liddy Samuel H. Pilch
President and Chief Operating Officer Controller
<PAGE>
THE ALLSTATE CORPORATION BOARD OF DIRECTORS
ALLSTATE - 91
James G. Andress
President and
Chief Executive Officer
Warner Chilcott PLC
Warren L. Batts
Chairman and
Chief Executive Officer
Tupperware Corporation
Edward A. Brennan
Former Chairman,
President and
Chief Executive Officer
Sears, Roebuck and Co.
Jerry D. Choate
Chairman and
Chief Executive Officer
Allstate Insurance
Company
James M. Denny
Managing Director
William Blair
Capital Partners, L.L.C.
Christopher F. Edley
President Emeritus
United Negro College
Fund, Inc.
Michael A. Miles
Special Limited Partner
Forstmann Little & Co.
Nancy C. Reynolds
Senior Consultant
The Wexler Group
Joshua I. Smith
Chairman and
Chief Executive Officer
The MAXIMA Corporation
Mary Alice Taylor
Executive Vice President-
Operations
Citicorp
EXHIBIT 21
Subsidiaries of the Registrant
------------------------------
WHOLLY-OWNED SUBSIDIARIES
(Listed by direct owner of stock)
THE ALLSTATE CORPORATION
Allstate Insurance Company (Illinois)
ALLSTATE INSURANCE COMPANY (Subsidiary of The Allstate Corporation)
AEI Group, Inc. (Delaware)
Allstate Holdings, Inc. (Delaware)
Allstate Indemnity Company (Illinois)
Allstate International Inc. (Delaware)
Allstate Investment Management Company (Delaware)
Allstate Life Insurance Company (Illinois)
Allstate Property and Casualty Insurance Company (Illinois)
Allstate Texas Lloyd's, Inc. (Texas)
Barrington Reinsurance Company, Ltd. (Bermuda)
Deerbrook Insurance Company (Illinois)
Forestview Mortgage Insurance Co. (California)
Forty Fifth & Main Redevelopment Corp. (Missouri)
General Underwriters Agency, Inc. (Illinois)
Omnitrust Merging Corp. (Delaware)
Tech-Cor, Inc. (Delaware)
The Northbrook Corporation (Nebraska)
ALLSTATE HOLDINGS, INC. (Subsidiary of Allstate Insurance Company)
Allstate Floridian Insurance Company (Illinois)
ALLSTATE LIFE INSURANCE COMPANY (Subsidiary of Allstate Insurance Company)
Allstate Insurance Company of Canada (Canada)
Allstate Life Financial Services, Inc. (Delaware)
Allstate Life Insurance Company of New York (New York)
1
<PAGE>
Allstate Settlement Corporation (Delaware)
Glenbrook Life and Annuity Company (Illinois)
Glenbrook Life Insurance Company (Illinois)
Laughlin Group Holdings, Inc. (Delaware)
Lincoln Benefit Life Company (Nebraska)
Northbrook Life Insurance Company (Illinois)
Surety Life Insurance Company (Utah)
AEI GROUP, INC. (Subsidiary of Allstate Insurance Company)
Allstate Motor Club, Inc. (Delaware)
Direct Marketing Center, Inc. (Delaware)
Enterprises Services Corporation (Delaware)
Rescue Express, Inc. (Delaware)
Roadway Protection Auto Club, Inc. (Delaware)
ALLSTATE INTERNATIONAL INC. (Subsidiary of Allstate Insurance Company)
Karelian Timber Associates, Inc. (Delaware)
Allstate International Holding GmbH (Germany)
KARELIAN TIMBER ASSOCIATES, INC. (Subsidiary of Allstate International Inc.)
Karelian Timber Associates, Ltd. (U.K.)
ALLSTATE INSURANCE COMPANY OF CANADA (Subsidiary of Allstate Life
Insurance Company)
Allstate Life Insurance Company of Canada (Canada)
LAUGHLIN GROUP HOLDINGS, INC. (Subsidiary of Allstate Life Insurance Company)
Bank Insurance Services, LLC (Oregon)
Florence Financial Services, Inc. (Alabama)
Investor Financial Services, Inc. (Nevada)
Laughlin Analytics, Inc. (Oregon)
Laughlin Direct Advantage Agency, Inc. (Delaware)
Laughlin Educational Services, Inc. (Oregon)
Laughlin Group Advisors, Inc. (Oregon)
Lee Financial Services, Inc. (Illinois)
2
<PAGE>
Lifemark Financial and Insurance Agency, LLC (New York)
Lifemark Financial & Insurance Services, Inc.(California)
Lifemark Insurance Services of California, Inc. (California)
Provest Insurance Services, Inc. (Indiana)
Provest Insurance Services, Inc. (Kentucky)
Provest Insurance Services, Inc. (Pennsylvania)
Security Financial Network, Inc. (Florida)
Security Financial Network, Inc. (Georgia)
The Laughlin Group, Inc. (Oregon)
LINCOLN BENEFIT LIFE COMPANY (Subsidiary of Allstate Life Insurance Company)
Lincoln Benefit Financial Services, Inc.(Delaware)
ALLSTATE INTERNATIONAL HOLDING GMBH
Allstate Direct Versicherungs-Aktiengesellschaft
JOINT OWNERSHIP
Truswal Systems Corporation (Delaware)
100% owned by Omnitrust Merging Corp. and
Allstate Insurance Company
Truswal Systems of Canada, Ltd (Canada)
100% owned by Truswal Systems Corporation
3
<PAGE>
LESS THAN WHOLLY-OWNED SUBSIDIARIES(50% OR MORE)
After Six Holding Corporation (Delaware)
After Six Ltd. (Delaware)
Allstate Automobile and Fire Insurance Company, Ltd. (Japan)
A.S. Licensing (Delaware)
Cardiologic Systems, Inc. (Delaware)
FCOA Acquisition Corp. (Delaware)
Loan Guarantee Investment Corporation (Delaware)
NSI Management, Inc. L.P.S. (Delaware)
Saison Life Insurance Company, Ltd. (Japan)
Samshin Allstate Life Insurance Company, Ltd.(South Korea)
Saugatuck II Cellular Investment Corp. (Delaware)
Science Center Associates (Maryland)
Scripps Center Associates (California)
Tramed (Russia)
Allstate County Mutual Insurance Company (Texas)
Allstate Texas Lloyd's (Texas)
Fallowfield Developers Limited Partnership
(Pennsylvania)
HNG Storage Co. (Texas)
4
<PAGE>
Heard Energy Corp. (Delaware)
Quantitative Data Systems, Inc.(California)
Quantitative Data Systems, L.P. (California)
Washington Business Park Associates (Illinois)
5
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ALLSTATE CORPORATION FINANCIAL STATEMENTS INCLUDED IN SUCH COMPANY'S
ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 899051
<NAME> THE ALLSTATE CORPORATION
<MULTIPLIER> 1,000,000
<CURRENCY> U. S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 47095
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 5561
<MORTGAGE> 3146
<REAL-ESTATE> 738
<TOTAL-INVEST> 58329
<CASH> 116
<RECOVER-REINSURE> 2147
<DEFERRED-ACQUISITION> 2614
<TOTAL-ASSETS> 74508
<POLICY-LOSSES> 23669
<UNEARNED-PREMIUMS> 6174
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 20120
<NOTES-PAYABLE> 1386
0
0
<COMMON> 5
<OTHER-SE> 13447
<TOTAL-LIABILITY-AND-EQUITY> 74508
19702
<INVESTMENT-INCOME> 3813
<INVESTMENT-GAINS> 784
<OTHER-INCOME> 0
<BENEFITS> 16800
<UNDERWRITING-AMORTIZATION> 2266
<UNDERWRITING-OTHER> 2207
<INCOME-PRETAX> 2669
<INCOME-TAX> 619
<INCOME-CONTINUING> 2075
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2075
<EPS-PRIMARY> 4.63
<EPS-DILUTED> 4.62
<RESERVE-OPEN> 16156
<PROVISION-CURRENT> 14823
<PROVISION-PRIOR> 336
<PAYMENTS-CURRENT> 7522
<PAYMENTS-PRIOR> 5787
<RESERVE-CLOSE> 15598
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
