Edgar Filing: ALLSTATE CORP

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission file number 1-11840

THE ALLSTATE CORPORATION

(Exact name of registrant as specified in its charter)



	Delaware		36-3871531
	(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



	2775 Sanders Road, Northbrook, Illinois	60062
	(Address of principal executive offices)	(Zip Code)

(847) 402-5000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



	Yes X	No ___

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



	Yes X	No ___

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



Large accelerated filer	X	Accelerated filer	____

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

		Emerging growth company	____

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ____

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



	Yes	No X

As of April 17, 2018, the registrant had 351,488,825 common shares, $.01 par value, outstanding.

The Allstate Corporation

Index to Quarterly Report on Form 10-Q

March 31, 2018



Part I Financial Information		Page

Item 1. Financial Statements

	Condensed Consolidated Statements of Operations for the Three-Month Periods Ended March 31, 2018 and 2017 (unaudited)	1
	Condensed Consolidated Statements of Comprehensive Income for the Three-Month Periods Ended March 31, 2018 and 2017 (unaudited)	2
	Condensed Consolidated Statements of Financial Position as of March 31, 2018 (unaudited) and December 31, 2017	3
	Condensed Consolidated Statements of Shareholders’ Equity for the Three-Month Periods Ended March 31, 2018 and 2017 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 2018 and 2017 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
	Report of Independent Registered Public Accounting Firm	40

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

	Highlights	41
	Consolidated Net Income	44
	Property-Liability Operations	45
	Allstate Protection	48
	– Allstate brand	54
	– Esurance brand	59
	– Encompass brand	63
	Discontinued Lines and Coverages	67
	Service Businesses	69
	Allstate Life	71
	Allstate Benefits	74
	Allstate Annuities	76
	Investments	79
	Capital Resources and Liquidity	86
	Recent Developments	89
	Forward-Looking Statements	90

Item 4. Controls and Procedures		90

Part II Other Information
Item 1. Legal Proceedings		91
Item 1A. Risk Factors		91
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		91
Item 6. Exhibits		92

Condensed Consolidated Financial Statements

Part I. Financial Information

Item 1. Financial Statements

The Allstate Corporation and Subsidiaries

Condensed Consolidated Statements of Operations



($ in millions, except per share data)	Three months ended March 31,
($ in millions, except per share data)	2018			2017
	(unaudited)
Revenues
Property and casualty insurance premiums	$	8,286		$	7,959
Life premiums and contract charges	616			593
Other revenue	216			210
Net investment income	786			748
Realized capital gains and losses:
Total other-than-temporary impairment (“OTTI”) losses	—			(62		)
OTTI losses reclassified (from) to other comprehensive income	(1		)	3
Net OTTI losses recognized in earnings	(1		)	(59		)
Sales and valuation changes on equity investments and derivatives	(133		)	193
Total realized capital gains and losses	(134		)	134
Total Revenues	9,770			9,644

Costs and expenses
Property and casualty insurance claims and claims expense	5,149			5,416
Life contract benefits	504			474
Interest credited to contractholder funds	161			173
Amortization of deferred policy acquisition costs	1,273			1,169
Operating costs and expenses	1,355			1,307
Restructuring and related charges	22			10
Interest expense	83			85
Total costs and expenses	8,547			8,634

Gain on disposition of operations	1			2

Income from operations before income tax expense	1,224			1,012

Income tax expense	249			317

Net income	975			695

Preferred stock dividends	29			29

Net income applicable to common shareholders	$	946		$	666

Earnings per common share:
Net income applicable to common shareholders per common share - Basic	$	2.67		$	1.82
Weighted average common shares - Basic	354.1			365.7
Net income applicable to common shareholders per common share - Diluted	$	2.63		$	1.79
Weighted average common shares - Diluted	359.9			371.3
Cash dividends declared per common share	$	0.46		$	0.37

See notes to condensed consolidated financial statements.

First Quarter 2018 Form 10-Q 1

Condensed Consolidated Financial Statements

The Allstate Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income



($ in millions)	Three months ended March 31,
($ in millions)	2018			2017
	(unaudited)
Net income	$	975		$	695

Other comprehensive (loss) income, after-tax
Changes in:
Unrealized net capital gains and losses	(565		)	203
Unrealized foreign currency translation adjustments	(4		)	(3		)
Unrecognized pension and other postretirement benefit cost	23			19
Other comprehensive (loss) income, after-tax	(546		)	219

Comprehensive income	$	429		$	914

See notes to condensed consolidated financial statements.

www.allstate.com

Condensed Consolidated Financial Statements

The Allstate Corporation and Subsidiaries

Condensed Consolidated Statements of Financial Position



($ in millions, except par value data)	March 31, 2018			December 31, 2017
Assets	(unaudited)
Investments
Fixed income securities, at fair value (amortized cost $56,209 and $57,525)	$	56,674		$	58,992
Equity securities, at fair value (cost $5,928 and $5,461)	6,986			6,621
Mortgage loans	4,679			4,534
Limited partnership interests	7,434			6,740
Short-term, at fair value (amortized cost $3,424 and $1,944)	3,424			1,944
Other	4,092			3,972
Total investments	83,289			82,803
Cash	450			617
Premium installment receivables, net	5,856			5,786
Deferred policy acquisition costs	4,409			4,191
Reinsurance recoverables, net	8,916			8,921
Accrued investment income	576			569
Property and equipment, net	1,060			1,072
Goodwill	2,189			2,181
Other assets	3,230			2,838
Separate Accounts	3,314			3,444
Total assets	$	113,289		$	112,422
Liabilities
Reserve for property and casualty insurance claims and claims expense	$	26,115		$	26,325
Reserve for life-contingent contract benefits	12,333			12,549
Contractholder funds	19,139			19,434
Unearned premiums	13,448			13,473
Claim payments outstanding	865			875
Deferred income taxes	725			782
Other liabilities and accrued expenses	7,226			6,639
Long-term debt	6,847			6,350
Separate Accounts	3,314			3,444
Total liabilities	90,012			89,871
Commitments and Contingent Liabilities (Note 12)
Shareholders’ equity
Preferred stock and additional capital paid-in, $1 par value, 25 million shares authorized, 95.2 thousand and 72.2 thousand shares issued and outstanding, $2,380 and $1,805 aggregate liquidation preference	2,303			1,746
Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 352 million and 355 million shares outstanding	9			9
Additional capital paid-in	3,367			3,313
Retained income	45,031			43,162
Deferred ESOP expense	(3		)	(3		)
Treasury stock, at cost (548 million and 545 million shares)	(26,280		)	(25,982		)
Accumulated other comprehensive income:
Unrealized net capital gains and losses:
Unrealized net capital gains and losses on fixed income securities with OTTI	84			85
Other unrealized net capital gains and losses	283			1,981
Unrealized adjustment to DAC, DSI and insurance reserves	(180		)	(404		)
Total unrealized net capital gains and losses	187			1,662
Unrealized foreign currency translation adjustments	(13		)	(9		)
Unrecognized pension and other postretirement benefit cost	(1,324		)	(1,347		)
Total accumulated other comprehensive income (“AOCI”)	(1,150		)	306
Total shareholders’ equity	23,277			22,551
Total liabilities and shareholders’ equity	$	113,289		$	112,422

See notes to condensed consolidated financial statements.

First Quarter 2018 Form 10-Q 3

Condensed Consolidated Financial Statements

The Allstate Corporate and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity



($ in millions)	Three months ended March 31,
($ in millions)	2018			2017
	(unaudited)
Preferred stock par value	$	—		$	—

Preferred stock additional capital paid-in
Balance, beginning of period	1,746			1,746
Preferred stock issuance	557			—
Preferred stock additional capital paid-in	2,303			1,746

Common stock	9			9

Additional capital paid-in
Balance, beginning of period	3,313			3,303
Forward contract on accelerated share repurchase agreement	45			—
Equity incentive plans activity	9			(18		)
Balance, end of period	3,367			3,285

Retained income
Balance, beginning of period	43,162			40,678
Cumulative effect of change in accounting principle	1,088			—
Net income	975			695
Dividends on common stock	(165		)	(136		)
Dividends on preferred stock	(29		)	(29		)
Balance, end of period	45,031			41,208

Deferred ESOP expense	(3		)	(6		)

Treasury stock
Balance, beginning of period	(25,982		)	(24,741		)
Shares acquired	(333		)	(249		)
Shares reissued under equity incentive plans, net	35			103
Balance, end of period	(26,280		)	(24,887		)

Accumulated other comprehensive income
Balance, beginning of period	306			(416		)
Cumulative effect of change in accounting principle	(910		)	—
Change in unrealized net capital gains and losses	(565		)	203
Change in unrealized foreign currency translation adjustments	(4		)	(3		)
Change in unrecognized pension and other postretirement benefit cost	23			19
Balance, end of period	(1,150		)	(197		)
Total shareholders’ equity	$	23,277		$	21,158

See notes to condensed consolidated financial statements.

www.allstate.com

Condensed Consolidated Financial Statements

The Allstate Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows



($ in millions)	Three months ended March 31,
($ in millions)	2018			2017
Cash flows from operating activities	(unaudited)
Net income	$	975		$	695
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other non-cash items	122			119
Realized capital gains and losses	134			(134		)
Gain on disposition of operations	(1		)	(2		)
Interest credited to contractholder funds	161			173
Changes in:
Policy benefits and other insurance reserves	(364		)	183
Unearned premiums	(204		)	(248		)
Deferred policy acquisition costs	10			14
Premium installment receivables, net	(58		)	(19		)
Reinsurance recoverables, net	(12		)	11
Income taxes	181			284
Other operating assets and liabilities	(318		)	(219		)
Net cash provided by operating activities	626			857
Cash flows from investing activities
Proceeds from sales
Fixed income securities	10,619			7,083
Equity securities	1,138			2,601
Limited partnership interests	53			210
Other investments	76			24
Investment collections
Fixed income securities	583			1,029
Mortgage loans	46			223
Other investments	122			174
Investment purchases
Fixed income securities	(9,789		)	(8,800		)
Equity securities	(1,535		)	(2,383		)
Limited partnership interests	(415		)	(268		)
Mortgage loans	(192		)	(86		)
Other investments	(330		)	(219		)
Change in short-term investments, net	(1,533		)	1,572
Change in other investments, net	(27		)	(10		)
Purchases of property and equipment, net	(62		)	(74		)
Acquisition of operations	(5		)	(1,356		)
Net cash used in investing activities	(1,251		)	(280		)
Cash flows from financing activities
Proceeds from issuance of long-term debt	498			—
Proceeds from issuance of preferred stock	558			—
Contractholder fund deposits	253			257
Contractholder fund withdrawals	(492		)	(483		)
Dividends paid on common stock	(132		)	(122		)
Dividends paid on preferred stock	(29		)	(29		)
Treasury stock purchases	(270		)	(264		)
Shares reissued under equity incentive plans, net	10			67
Other	62			3
Net cash provided by (used in) financing activities	458			(571		)
Net (decrease) increase in cash	(167		)	6
Cash at beginning of period	617			436
Cash at end of period	$	450		$	442

See notes to condensed consolidated financial statements.

First Quarter 2018 Form 10-Q 5

Notes to Condensed Consolidated Financial Statements

The Allstate Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)



Note 1	General

Basis of presentation

The accompanying condensed consolidated financial statements include the accounts of The Allstate Corporation (the “Corporation”) and its wholly owned subsidiaries, primarily Allstate Insurance Company (“AIC”), a property and casualty insurance company with various property and casualty and life and investment subsidiaries, including Allstate Life Insurance Company (“ALIC”) (collectively referred to as the “Company” or “Allstate”). These condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

The condensed consolidated financial statements and notes as of March 31, 2018 and for the three month periods ended March 31, 2018 and 2017 are unaudited. The condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods. These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2017. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year. All significant intercompany accounts and transactions have been eliminated.

Adopted accounting standards

Recognition and Measurement of Financial Assets and Financial Liabilities

Effective January 1, 2018, the Company adopted new Financial Accounting Standards Board (“FASB”) guidance requiring equity investments, including equity securities and limited partnership interests not accounted for under the equity method of accounting or that do not result in consolidation to be measured at fair value with changes in fair value recognized in net income. The guidance clarifies that an entity should evaluate the realizability of deferred tax assets related to available-for-sale fixed income securities in combination with the entity’s other deferred tax assets. The Company’s adoption of the new FASB guidance included adoption of the relevant elements of Technical Corrections and Improvements to Financial Instruments, issued in February 2018.

Upon adoption of the new guidance on January 1, 2018, $1.16 billion of pre-tax unrealized net capital gains for equity securities were reclassified from AOCI to retained income. The after-tax change in accounting for equity securities did not affect the Company’s total shareholders’ equity and the unrealized net capital

gains reclassified to retained income will never be recognized in net income.

Upon adoption of the new guidance on January 1, 2018, the carrying value of cost method limited partnership interests increased $224 million, pre-tax to fair value. The after-tax cumulative-effect increase in retained income of $177 million increased the Company’s shareholders’ equity but will never be recognized in net income thereby negatively impacting calculations of returns on equity.

Revenue from Contracts with Customers

Effective January 1, 2018, the Company adopted new FASB guidance which revises the criteria for revenue recognition. Insurance contracts are excluded from the scope of the new guidance. The Company’s principal activities impacted by the new guidance are those related to the issuance of protection plans for consumer products and automobiles and service contracts that provide roadside assistance. Under the guidance, the transaction price is attributed to underlying performance obligations in the contract and revenue is recognized as the entity satisfies performance obligations and transfers control of a good or service to the customer. Incremental costs of obtaining a contract may be capitalized to the extent the entity expects to recover those costs.

Adoption of the guidance on January 1, 2018 under the modified retrospective approach resulted in the recognition of an immaterial after-tax net cumulative effect increase to the beginning balance of retained income. In addition to the net cumulative effect, the Company also recorded in the statement of financial position an increase of approximately $160 million pre-tax in unearned premiums with a corresponding $160 million pre-tax increase in DAC for protection plans sold directly to retailers for which SquareTrade is deemed to be the principal in the transaction. These impacts offset fully and did not impact retained income at the date of adoption.

Presentation of Net Periodic Pension and Postretirement Benefits Costs

Effective January 1, 2018, the Company adopted new FASB guidance requiring identification, on the statement of operations or in disclosures, the line items in which the components of net periodic pension and postretirement benefits costs are presented. The new guidance permits only the service cost component to be eligible for capitalization where applicable. The adoption had no impact on the Company’s results of operations or financial position.

Goodwill Impairment

In January 2017, the FASB issued guidance to simplify the accounting for goodwill impairment which removes the second step of the goodwill impairment

www.allstate.com

Notes to Condensed Consolidated Financial Statements

test that requires a hypothetical purchase price allocation. Under the new guidance, goodwill impairment will be measured and recognized as the amount by which a reporting unit’s carrying value, including goodwill, exceeds its fair value, not to exceed the carrying amount of goodwill allocated to the reporting unit. The revised guidance does not affect a reporting entity’s ability to first assess qualitative factors by reporting unit to determine whether to perform the quantitative goodwill impairment test. The guidance is to be applied on a prospective basis, with the effects, if any, recognized in net income in the period of adoption. The Company elected to early adopt the new guidance as of January 1, 2018. The adoption had no impact on the Company’s results of operations or financial position.

Changes to significant accounting policies

Investments

Changes were made to the Company’s Significant Accounting Policies upon adoption of new FASB guidance related to the recognition and measurement of financial assets. Equity securities primarily include common stocks, exchange traded and mutual funds, non-redeemable preferred stocks and real estate investment trust equity investments. Equity securities are carried at fair value. Equity securities without readily determinable or estimable fair values are measured using the measurement alternative which is cost less impairment, if any, and adjustments resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. The periodic change in fair value of equity securities is recognized within realized capital gains and losses on the Condensed Consolidated Statements of Operations effective January 1, 2018.

Investments in limited partnership interests include interests in private equity funds, real estate funds and other funds. Where the Company’s interest is so minor that it exercises virtually no influence over operating and financial policies, investments in limited partnership interests purchased prior to January 1, 2018 are accounted for at fair value primarily utilizing the net asset value as a practical expedient (“NAV”) to determine fair value. All other investments in limited partnership interests, including those purchased subsequent to January 1, 2018, are accounted for in accordance with the equity method of accounting (“EMA”).

Investment income from limited partnership interests carried at fair value is recognized based upon the changes in fair value of the investee’s equity primarily determined using NAV. Income from EMA limited partnership interests is recognized based on the Company’s share of the partnerships’ earnings. Income from EMA limited partnership interests is generally recognized on a three month delay due to the availability of the related financial statements.

Recognition of Revenue

Revenues related to protection plans, other contracts (primarily finance and insurance products) and roadside assistance are deferred and earned over

the term of the contract in a manner that recognizes revenue as obligations under the contracts are performed. Revenues from these products are classified as premiums as the products are backed by insurance. Protection plans and finance and insurance premiums are recognized using a cost-based incurrence method. Roadside assistance premiums are recognized evenly over the term of the contract as performance obligations are fulfilled.

Tax Reform

On December 22, 2017, Public Law 115-97, known as the Tax Cuts and Jobs Act of 2017 (“Tax Legislation”) became effective, permanently reducing the U.S. corporate income tax rate from 35% to 21% beginning January 1, 2018. As a result, the corporate tax rate is not comparable between periods.

Pending accounting standards

Accounting for Leases

In February 2016, the FASB issued guidance revising the accounting for leases. Under the new guidance, lessees will be required to recognize a right-of-use asset and lease liability for all leases other than those that meet the definition of a short-term lease. The lease liability will be equal to the present value of lease payments. A right-of-use asset will be based on the lease liability adjusted for qualifying initial direct costs. Recognition of the lease liability and right-of-use asset will result in an increase in total assets and liabilities in the Condensed Consolidated Statement of Financial Position. The expense of operating leases under the new guidance will be recognized in the income statement on a straight-line basis by adjusting the amortization of the right-of-use asset to produce a straight-line expense when combined with the interest expense on the lease liability. For finance leases, the expense components are computed separately and produce greater up-front expense compared to operating leases as interest expense on the lease liability is higher in early years and the right-of-use asset is amortized on a straight-line basis. Lease classification will be based on criteria similar to those currently applied. The accounting model for lessors will be similar to the current model with modifications to reflect definition changes for components such as initial direct costs. Lessors will continue to classify leases as operating, direct financing, or sales-type. The guidance is effective for reporting periods beginning after December 15, 2018, using a modified retrospective approach applied at the beginning of the earliest period presented. The FASB has exposed for comment an optional simplified transition approach that would allow application of the transition provisions at the effective date instead of the earliest date presented. The Company is in the process of evaluating the impact of adoption, which is not expected to be material to the Company’s results of operations or financial position.

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued guidance which revises the credit loss recognition criteria for certain

First Quarter 2018 Form 10-Q 7

Notes to Condensed Consolidated Financial Statements

financial assets measured at amortized cost, including reinsurance recoverables. The new guidance replaces the existing incurred loss recognition model with an expected loss recognition model. The objective of the expected credit loss model is for the reporting entity to recognize its estimate of expected credit losses for affected financial assets in a valuation allowance deducted from the amortized cost basis of the related financial assets that results in presenting the net carrying value of the financial assets at the amount expected to be collected. The reporting entity must consider all relevant information available when estimating expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts over the life of an asset. Financial assets may be evaluated individually or on a pooled basis when they share similar risk characteristics. The measurement of credit losses for available-for-sale debt securities measured at fair value is not affected except that credit losses recognized are limited to the amount by which fair value is below amortized cost and the carrying value adjustment is recognized through a valuation allowance and not as a direct write-down. The guidance is effective for reporting periods beginning after December 15, 2019, and for most affected instruments must be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to beginning retained income. The Company is in the process of evaluating the impact of adoption.

Accounting for Hedging Activities

In August 2017, the FASB issued amendments intended to better align hedge accounting with an organization’s risk management activities. The

amendments expand hedge accounting for nonfinancial and financial risk components and revise the measurement methodologies to better align with an organization’s risk management activities. Separate presentation of hedge ineffectiveness is eliminated to provide greater transparency of the full impact of hedging by requiring presentation of the results of the hedged item and hedging instrument in a single financial statement line item. In addition, the amendments reduce complexity by simplifying the manner in which assessments of hedge effectiveness may be performed. The guidance is effective for reporting periods beginning after December 15, 2018. The presentation and disclosure guidance is effective on a prospective basis. The impact of adoption is not expected to be material to the Company’s results of operations or financial position.

Other revenue presentation

Concurrent with the adoption of new FASB guidance on revenue from contracts with customers and the Company’s objective of providing more information related to revenues for our Services Businesses, the Company revised the presentation of total revenue to include other revenue. Previously, components of other revenue were presented within operating costs and expenses and primarily represent fees collected from policyholders relating to premium installment payments, commissions on sales of non-proprietary products, fee-based services and other revenue transactions. Other revenue is recognized when performance obligations are fulfilled. Prior periods have been reclassified to conform to current separate presentation of other revenue.



Note 2	Earnings per Common Share

Basic earnings per common share is computed using the weighted average number of common shares outstanding, including vested unissued participating restricted stock units. Diluted earnings per common share is computed using the weighted average number

of common and dilutive potential common shares outstanding. For the Company, dilutive potential common shares consist of outstanding stock options and unvested non-participating restricted stock units and contingently issuable performance stock awards.



Computation of basic and diluted earnings per common share
($ in millions, except per share data)	Three months ended March 31,
($ in millions, except per share data)	2018		2017
Numerator:
Net income	$	975	$	695
Less: Preferred stock dividends	29		29
Net income applicable to common shareholders⁽¹⁾	$	946	$	666

Denominator:
Weighted average common shares outstanding	354.1		365.7
Effect of dilutive potential common shares:
Stock options	4.1		4.2
Restricted stock units (non-participating) and performance stock awards	1.7		1.4
Weighted average common and dilutive potential common shares outstanding	359.9		371.3

Earnings per common share - Basic	$	2.67	$	1.82
Earnings per common share - Diluted	$	2.63	$	1.79


⁽¹⁾	Net income applicable to common shareholders is net income less preferred stock dividends.

www.allstate.com

Notes to Condensed Consolidated Financial Statements

The effect of dilutive potential common shares does not include the effect of options with an anti-dilutive effect on earnings per common share because their exercise prices exceed the average market price of Allstate common shares during the period or for which the unrecognized compensation cost would have an anti-dilutive effect.

Options to purchase 1.0 million and 2.8 million Allstate common shares, with exercise prices ranging from $86.61 to $102.84 and $67.81 to $81.86, were outstanding for the three-month periods ended March 31, 2018 and 2017, respectively, but were not included in the computation of diluted earnings per common share in those periods.



Note 3	Acquisition

On January 3, 2017, the Company acquired SquareTrade Holding Company, Inc. (“SquareTrade”), a consumer product protection plan provider that distributes through many of America’s major retailers and Europe’s mobile operators, for $1.4 billion in cash. SquareTrade is a provider of consumer electronics and appliance protection plans covering products including TVs, smartphones and computers. This acquisition broadens Allstate’s unique product offerings to better meet consumers’ needs.

In connection with the acquisition, the Company recorded goodwill of $1.10 billion, commissions paid to retailers (reported in deferred policy acquisition costs) of $66 million, other intangible assets (reported in other assets) of $555 million, contractual liability

insurance policy premium expenses (reported in other assets) of $205 million, unearned premiums of $389 million and net deferred income tax liability of $138 million. These amounts reflect re-measurement adjustments to the fair value of the opening balance sheet assets and liabilities.

Of the $555 million assigned to other intangible assets, $465 million is attributable to acquired customer relationships. The $555 million assigned to other intangible assets also included $69 million assigned to the SquareTrade trade name which is considered to have an indefinite useful life. The amortization expense of intangible assets for the three months ended March 31, 2018 and 2017 was $21 million and $23 million, respectively.

First Quarter 2018 Form 10-Q 9

Notes to Condensed Consolidated Financial Statements



Note 4	Reportable Segments



Reportable segments revenue information
($ in millions)	Three months ended March 31,
($ in millions)	2018			2017
Property-Liability
Insurance premiums
Auto	$	5,591		$	5,388
Homeowners	1,848			1,815
Other personal lines	444			431
Commercial lines	136			125
Allstate Protection	8,019			7,759
Discontinued Lines and Coverages	—			—
Total property-liability insurance premiums	8,019			7,759
Other revenue	174			167
Net investment income	337			308
Realized capital gains and losses	(95		)	135
Total Property-Liability	8,435			8,369

Service Businesses
Consumer product protection plans	123			59
Roadside assistance	64			68
Finance and insurance products	80			73
Intersegment premiums and service fees ⁽¹⁾	29			28
Other revenue	16			16
Net investment income	5			3
Realized capital gains and losses	(4		)	—
Total Service Businesses	313			247

Allstate Life
Traditional life insurance premiums	146			140
Interest-sensitive life insurance contract charges	181			181
Other revenue	26			27
Net investment income	122			120
Realized capital gains and losses	(3		)	1
Total Allstate Life	472			469

Allstate Benefits
Traditional life insurance premiums	9			9
Accident and health insurance premiums	248			232
Interest-sensitive life insurance contract charges	29			28
Net investment income	19			17
Realized capital gains and losses	(2		)	—
Total Allstate Benefits	303			286

Allstate Annuities
Fixed annuities contract charges	3			3
Net investment income	290			289
Realized capital gains and losses	(29		)	(2		)
Total Allstate Annuities	264			290

Corporate and Other
Net investment income	13			11
Realized capital gains and losses	(1		)	—

Total Corporate and Other	12			11
Intersegment eliminations ⁽¹⁾	(29		)	(28		)
Consolidated revenues	$	9,770		$	9,644

⁽¹⁾ Intersegment insurance premiums and service fees are primarily related to Arity and Allstate Roadside Services and are eliminated in the condensed consolidated financial statements.

www.allstate.com

Notes to Condensed Consolidated Financial Statements



Reportable segments financial performance
	Three months ended March 31,
($ in millions)	2018			2017
Property-Liability
Allstate Protection	$	962		$	550
Discontinued Lines and Coverages	(3		)	(2		)
Total underwriting income	959			548
Net investment income	337			308
Income tax expense on operations	(268		)	(268		)
Realized capital gains and losses, after-tax	(75		)	89
Property-Liability net income applicable to common shareholders	953			677

Service Businesses
Adjusted net loss	(5		)	(10		)
Realized capital gains and losses, after-tax	(3		)	—
Amortization of purchased intangible assets, after-tax	(16		)	(15		)
Service Businesses net loss applicable to common shareholders	(24		)	(25		)

Allstate Life
Adjusted net income	69			59
Realized capital gains and losses, after-tax	(2		)	1
DAC and DSI amortization related to realized capital gains and losses, after-tax	(2		)	(3		)
Allstate Life net income applicable to common shareholders	65			57

Allstate Benefits
Adjusted net income	28			22
Realized capital gains and losses, after-tax	(2		)	—
Allstate Benefits net income applicable to common shareholders	26			22

Allstate Annuities
Adjusted net income	35			29
Realized capital gains and losses, after-tax	(23		)	(2		)
Valuation changes on embedded derivatives not hedged, after-tax	4			—
Gain on disposition of operations, after-tax	1			2
Allstate Annuities net income applicable to common shareholders	17			29

Corporate and Other
Adjusted net loss	(90		)	(81		)
Realized capital gains and losses, after-tax	(1		)	—
Business combination expenses, after-tax	—			(13		)
Corporate and Other net loss applicable to common shareholders	(91		)	(94		)

Consolidated net income applicable to common shareholders	$	946		$	666

First Quarter 2018 Form 10-Q 11

Notes to Condensed Consolidated Financial Statements



Note 5	Investments



Amortized cost, gross unrealized gains and losses and fair value for fixed income securities
($ in millions)	Amortized cost		Gross unrealized					Fair value
($ in millions)	Amortized cost		Gains		Losses			Fair value
March 31, 2018
U.S. government and agencies	$	3,373	$	50	$	(17	)	$	3,406
Municipal	8,404		257		(92		)	8,569
Corporate	41,699		763		(611		)	41,851
Foreign government	968		21		(10		)	979
Asset-backed securities (“ABS”)	1,196		11		(10		)	1,197
Residential mortgage-backed securities (“RMBS”)	453		100		(3		)	550
Commercial mortgage-backed securities (“CMBS”)	95		6		(2		)	99
Redeemable preferred stock	21		2		—			23
Total fixed income securities	$	56,209	$	1,210	$	(745	)	$	56,674

December 31, 2017
U.S. government and agencies	$	3,580	$	56	$	(20	)	$	3,616
Municipal	8,053		311		(36		)	8,328
Corporate	42,996		1,234		(204		)	44,026
Foreign government	1,005		27		(11		)	1,021
ABS	1,266		13		(7		)	1,272
RMBS	480		101		(3		)	578
CMBS	124		6		(2		)	128
Redeemable preferred stock	21		2		—			23
Total fixed income securities	$	57,525	$	1,750	$	(283	)	$	58,992



Scheduled maturities for fixed income securities
($ in millions)	As of March 31, 2018
($ in millions)	Amortized cost		Fair value
Due in one year or less	$	4,629	$	4,627
Due after one year through five years	28,201		28,199
Due after five years through ten years	16,363		16,220
Due after ten years	5,272		5,782
	54,465		54,828
ABS, RMBS and CMBS	1,744		1,846
Total	$	56,209	$	56,674

Actual maturities may differ from those scheduled as a result of calls and make-whole payments by the issuers. ABS, RMBS and CMBS are shown separately because of the potential for prepayment of principal prior to contractual maturity dates.



Net investment income
($ in millions)	Three months ended March 31,
($ in millions)	2018			2017
Fixed income securities	$	508		$	518
Equity securities	34			44
Mortgage loans	51			55
Limited partnership interests ⁽¹⁾⁽²⁾	180			120
Short-term investments	12			6
Other	66			56
Investment income, before expense	851			799
Investment expense	(65		)	(51		)
Net investment income	$	786		$	748


⁽¹⁾	Due to the adoption of the recognition and measurement accounting standard, limited partnerships previously reported using the cost method are now reported at fair value with changes in fair value recognized in net investment income.


⁽²⁾	Includes net investment income of $103 million for EMA limited partnership interests and $77 million for limited partnership interests carried at fair value for the three months ended March 31, 2018.

www.allstate.com

Notes to Condensed Consolidated Financial Statements



Realized capital gains and losses by asset type
($ in millions)	Three months ended March 31,
($ in millions)	2018			2017
Fixed income securities	$	(43	)	$	5
Equity securities	(93		)	106
Limited partnership interests	10			40
Derivatives	(8		)	(15		)
Other	—			(2		)
Realized capital gains and losses	$	(134	)	$	134



Realized capital gains and losses by transaction type
($ in millions)	Three months ended March 31,
($ in millions)	2018			2017
Impairment write-downs ⁽¹⁾	$	(1	)	$	(43	)
Change in intent write-downs ⁽¹⁾	—			(16		)
Net OTTI losses recognized in earnings	(1		)	(59		)
Sales ⁽¹⁾	(42		)	208
Valuation of equity investments ⁽¹⁾	(83		)	—
Valuation and settlements of derivative instruments	(8		)	(15		)
Realized capital gains and losses	$	(134	)	$	134


⁽¹⁾	Due to the adoption of the recognition and measurement accounting standard, equity securities are reported at fair value with changes in fair value recognized in valuation of equity investments and are no longer included in impairment write-downs, change in intent write-downs and sales.

Gross gains of $45 million and gross losses of $87 million were realized on sales of fixed income securities during the three months ended March 31, 2018. Gross gains of $235 million and gross losses of $75 million were realized on sales of fixed income and equity securities during the three months ended March 31, 2017.



Valuation changes included in net income for investments still held as of March 31, 2018
($ in millions)	Three months ended March 31, 2018
Equity securities	$	(49	)
Limited partnership interests carried at fair value	78
Total valuation changes	$	29



OTTI losses by asset type
($ in millions)	Three months ended March 31, 2018								Three months ended March 31, 2017
($ in millions)	Gross		Included in OCI			Net			Gross			Included in OCI			Net
Fixed income securities:
Corporate	$	—	$	—		$	—		$	(9	)	$	3		$	(6	)
RMBS	—		—			—			(1		)	(3		)	(4		)
CMBS	—		(1		)	(1		)	(6		)	3			(3		)
Total fixed income securities	—		(1		)	(1		)	(16		)	3			(13		)
Equity securities ⁽¹⁾	—		—			—			(36		)	—			(36		)
Limited partnership interests ⁽¹⁾ (2)	—		—			—			(7		)	—			(7		)
Other	—		—			—			(3		)	—			(3		)
OTTI losses	$	—	$	(1	)	$	(1	)	$	(62	)	$	3		$	(59	)


⁽¹⁾	Due to the adoption of the recognition and measurement accounting standard, equity securities and limited partnerships previously reported using the cost method are now reported at fair value with changes in fair value recognized in net income and are no longer included in the table above.

The total amount of OTTI losses included in AOCI at the time of impairment for fixed income securities, which were not included in earnings, are presented in the following table. The amounts exclude $202 million and $208 million as of March 31, 2018 and

December 31, 2017, respectively, of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.

First Quarter 2018 Form 10-Q 13

Notes to Condensed Consolidated Financial Statements



OTTI losses included in AOCI at the time of impairment for fixed income securities
($ in millions)	March 31, 2018			December 31, 2017
Municipal	$	(5	)	$	(5	)
ABS	(12		)	(15		)
RMBS	(74		)	(77		)
CMBS	(4		)	(4		)
Total	$	(95	)	$	(101	)



Rollforward of the cumulative credit losses recognized in earnings for fixed income securities held as of
($ in millions)	March 31,
($ in millions)	2018			2017
Beginning balance	$	(226	)	$	(318	)
Additional credit loss for securities previously other-than-temporarily impaired	(1		)	(8		)
Additional credit loss for securities not previously other-than-temporarily impaired	—			(5		)
Reduction in credit loss for securities disposed or collected	15			37
Ending balance	$	(212	)	$	(294	)

The Company uses its best estimate of future cash flows expected to be collected from the fixed income security, discounted at the security’s original or current effective rate, as appropriate, to calculate a recovery value and determine whether a credit loss exists. The determination of cash flow estimates is inherently subjective and methodologies may vary depending on facts and circumstances specific to the security. All reasonably available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable assumptions and forecasts, are considered when developing the estimate of cash flows expected to be collected. That information generally includes, but is not limited to, the remaining payment terms of the security, prepayment speeds, foreign exchange rates, the financial condition and future earnings potential of the issue or issuer, expected defaults, expected recoveries, the value of underlying collateral, vintage, geographic concentration of underlying collateral, available reserves or escrows, current subordination levels, third party guarantees and other credit

enhancements. Other information, such as industry analyst reports and forecasts, sector credit ratings, financial condition of the bond insurer for insured fixed income securities, and other market data relevant to the realizability of contractual cash flows, may also be considered. The estimated fair value of collateral will be used to estimate recovery value if the Company determines that the security is dependent on the liquidation of collateral for ultimate settlement. If the estimated recovery value is less than the amortized cost of the security, a credit loss exists and an OTTI for the difference between the estimated recovery value and amortized cost is recorded in earnings. The portion of the unrealized loss related to factors other than credit remains classified in AOCI. If the Company determines that the fixed income security does not have sufficient cash flow or other information to estimate a recovery value for the security, the Company may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings.

www.allstate.com

Notes to Condensed Consolidated Financial Statements



Unrealized net capital gains and losses included in AOCI
($ in millions)	Fair value		Gross unrealized					Unrealized net gains (losses)
March 31, 2018	Fair value		Gains		Losses			Unrealized net gains (losses)
Fixed income securities	$	56,674	$	1,210	$	(745	)	$	465
Short-term investments	3,424		—		—			—
Derivative instruments ⁽¹⁾	2		2		(3		)	(1		)
EMA limited partnerships ⁽²⁾								1
Unrealized net capital gains and losses, pre-tax								465
Amounts recognized for:
Insurance reserves ⁽³⁾								(119		)
DAC and DSI ⁽⁴⁾								(109		)
Amounts recognized								(228		)
Deferred income taxes								(50		)
Unrealized net capital gains and losses, after-tax								$	187


⁽¹⁾	Included in the fair value of derivative instruments is $2 million classified as liabilities.


⁽²⁾	Unrealized net capital gains and losses for limited partnership interests represent the Company’s share of EMA limited partnerships’ other comprehensive income. Fair value and gross unrealized gains and losses are not applicable.


⁽³⁾	The insurance reserves adjustment represents the amount by which the reserve balance would increase if the net unrealized gains in the applicable product portfolios were realized and reinvested at current lower interest rates, resulting in a premium deficiency. This adjustment primarily relates to structured settlement annuities with life contingencies (a type of immediate fixed annuities).


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



Unrealized net capital gains and losses included in AOCI
($ in millions)	Fair value		Gross unrealized					Unrealized net gains (losses)
December 31, 2017	Fair value		Gains		Losses			Unrealized net gains (losses)
Fixed income securities	$	58,992	$	1,750	$	(283	)	$	1,467
Equity securities	6,621		1,172		(12		)	1,160
Short-term investments	1,944		—		—			—
Derivative instruments ⁽¹⁾	2		2		(3		)	(1		)
EMA limited partnerships								1
Unrealized net capital gains and losses, pre-tax								2,627
Amounts recognized for:
Insurance reserves								(315		)
DAC and DSI								(196		)
Amounts recognized								(511		)
Deferred income taxes								(454		)
Unrealized net capital gains and losses, after-tax								$	1,662

⁽¹⁾Included in the fair value of derivative instruments is $2 million classified as liabilities.



Change in unrealized net capital gains and losses
($ in millions)	Three months ended March 31, 2018
Fixed income securities	$	(1,002	)
Equity securities ⁽¹⁾	—
Total	(1,002		)
Amounts recognized for:
Insurance reserves	196
DAC and DSI	87
Amounts recognized	283
Deferred income taxes	154
Decrease in unrealized net capital gains and losses, after-tax	$	(565	)

⁽¹⁾Upon adoption of the recognition and measurement accounting standard on January 1, 2018, $1.16 billion of pre-tax unrealized net capital gains for equity securities were reclassified from AOCI to retained income. See Note 1 of the condensed consolidated financial statements.

First Quarter 2018 Form 10-Q 15

Notes to Condensed Consolidated Financial Statements

Portfolio monitoring

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

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

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

For fixed income securities managed by third parties, either the Company has contractually retained its decision-making authority as it pertains to selling securities that are in an unrealized loss position or it recognizes any unrealized loss at the end of the period through a charge to earnings.

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

www.allstate.com

Notes to Condensed Consolidated Financial Statements



Gross unrealized losses and fair value by type and length of time held in a continuous unrealized loss position
($ in millions)	Less than 12 months						12 months or more						Total unrealized losses
($ in millions)	Number of issues	Fair value		Unrealized losses			Number of issues	Fair value		Unrealized losses			Total unrealized losses
March 31, 2018
Fixed income securities
U.S. government and agencies	57	$	1,514	$	(16	)	13	$	74	$	(1	)	$	(17	)
Municipal	2,535	4,626		(74		)	160	323		(18		)	(92		)
Corporate	1,656	22,720		(458		)	199	3,006		(153		)	(611		)
Foreign government	43	531		(9		)	4	39		(1