Allstate Reports 2007 Fourth Quarter and Year-End Results.Company Improved Financial Strength, Is Well Positioned for 2008 NORTHBROOK Northbrook, village (1990 pop. 32,308), Cook co., NE Ill., a suburb of Chicago; settled 1836. It was incorporated as Shermerville in 1901 and was reincorporated as Northbrook in 1923. , Ill. -- The Allstate This article is about the American insurance company. For the line of automobiles, see Allstate (automobile). The Allstate Corporation NYSE: ALL is the largest publicly held personal lines insurer in the United States. Corporation (NYSE NYSE See: New York Stock Exchange :ALL) today reported results for the fourth quarter of 2007 and for the year ended December December: see month. 31, 2007: [TABLE OMITTED] "Allstate's strategy and operating performance in 2007 delivered on our commitments, generated excellent results, and enabled us to strengthen our competitive position," said Thomas J. Wilson Thomas J. Wilson, 49, is president and chief executive officer of The Allstate Corporation and Allstate Insurance Company. Wilson is also a member of the corporations board of directors. Wilson currently lives in Chicago. , president and chief executive officer of The Allstate Corporation. For the year, revenues reached $36.8 billion and net income of $4.6 billion ($7.77 per diluted di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. share) was the second highest in Company history. The underlying Property-Liability combined ratio met the goal set for 2007; and return on equity was 21.2 percent, reflecting both the strong operating results and aggressive capital management. "Our team also delivered strong results in the fourth quarter despite increased catastrophe Catastrophe, from the Greek Καταστροφή (katastrephein), literally means "to turn" (strephein) "downwards" (kata-). losses and tumultuous investment markets," continued Wilson Wilson, city (1990 pop. 36,930), seat of Wilson co., E N.C., in a rich agricultural region; inc. 1849. It is a commercial and industrial center with a large tobacco market. Manufactures include textile goods (especially clothing), metal products, and processed foods. . Net income for the fourth quarter of 2007 was $760 million, down $453 million from the year earlier period, due to a higher underlying Property-Liability combined ratio, unfavorable prior year reserve reestimates and an increase in catastrophe losses. Consumer Focus "Our consumer-focused strategy enabled us to succeed in the market by offering innovative products and services that are reinventing protection for consumers," Wilson added. Allstate[R] Your Choice Auto Insurance (YCA YCA Yacht Club Argentino (Argentina) YCA Yamaha Corporation of America YCA Courtenay, British Columbia, Canada (Airport Code) YCA Yap Cooperative Association YCA YKK Corporation of America YCA Youth Concert Artists ) continued to add customers at a rate of more than 100,000 per month in the fourth quarter, bringing the total YCA policies sold since inception to 3.2 million. Allstate[R] Your Choice Home, the Company's unique homeowners insurance product, is now available in 15 states. Allstate's product offering for higher risk drivers, Allstate Blue(SM), is now available in 12 states and early production shows encouraging results. In addition, Allstate Green(SM), a new eco-friendly eco-friendly adj → ecológico eco-friendly adj → non nuisible à or qui ne nuit pas à l'environnement eco-friendly adj insurance option that offers consumers a convenient way to help the environment, is now available for consumers in Colorado Colorado, state, United States Colorado (kŏlərăd`ə, –răd`ō, –rä`dō), state, W central United States, one of the Rocky Mt. states. and Ohio. Operational Excellence "Maintaining a consistent focus on profitable growth resulted in excellent results for our Property-Liability business in 2007," Wilson said. "Our consumer focus enabled us to maintain pricing discipline in the face of tough competition, with average premiums increasing in our core lines." Margins for the year declined resulting in a combined ratio of 89.8, reflecting a smaller benefit from prior year reserve reestimates, higher catastrophe losses and higher loss costs. Increased loss costs represented about one third of the margin reduction and were due to increased frequency and severity of auto and homeowners claims. For the year, the combined ratio, excluding the effects of catastrophes and reserve reestimates, was 85.7, within the previously provided outlook range of 84.0 to 86.0. The combined ratio for the fourth quarter was 95.9 (88.6 excluding catastrophes and the effect of prior year reserve releases) reflecting the same trends as for the year. Also in the fourth quarter, expenses were up related to advertising, marketing and technology investments in product and service innovations. Allstate Financial continued to focus on improving returns, with new business returns increasing significantly over prior year, and leveraging both the Allstate branded property-liability customer base and its non-proprietary distribution relationships. Allstate Financial operating income Operating Income The profit realized from a business' own operations. Notes: This would not include income from things such as investments in other firms. Also referred to as operating profit or recurring profit. was $158 million for the quarter, up 11.3% from the fourth quarter of 2006. To optimize optimize - optimisation its capital position and leverage the diversification Diversification A risk management technique that mixes a wide variety of investments within a portfolio. It is designed to minimize the impact of any one security on overall portfolio performance. Notes: Diversification is possibly the greatest way to reduce the risk. benefits of the enterprise, Allstate Financial paid dividends of $657 million in the fourth quarter, bringing total dividends paid by Allstate Financial to its parent companies in 2007 to $742 million. New sales of financial products by Allstate exclusive agencies(a) increased to $2.9 billion in 2007, a 13.8 percent increase from 2006. "Our disciplined investment approach generated solid returns and shielded the portfolio from significant losses in a tumultuous market," Wilson said. Net investment income for the year was $6.44 billion; $1.63 billion of that was earned in the fourth quarter. Investments generated substantial capital gains of $1.24 billion for the year, including $98 million in the fourth quarter, with strong equity portfolio performance more than offsetting losses in the fixed income portfolio. Capital Management In 2007, Allstate repurchased 61 million common shares for $3.55 billion, representing nearly 10 percent of shares outstanding at the beginning of the year. In the fourth quarter, 10.9 million shares were repurchased for $579 million. As of December 31, 2007, $240 million remained under the current $4.0 billion repurchase re·pur·chase tr.v. re·pur·chased, re·pur·chas·ing, re·pur·chas·es To buy (something) again. n. The act of buying something that one previously sold or owned. Noun 1. program, which is expected to be complete in the first quarter of 2008. Dividends of $0.38 per share were paid in the fourth quarter, bringing total shareholder dividends for the year to $901 million. People "The Allstate team again outperformed the industry in 2007," said Wilson, who marked the end of his first year as chief executive officer and his 13th year with the Company. "We fulfilled ful·fill also ful·fil tr.v. ful·filled, ful·fill·ing, ful·fills also ful·fils 1. To bring into actuality; effect: fulfilled their promises. 2. the Good Hands promise to thousands of our customers in Southern California Southern California, also colloquially known as SoCal, is the southern portion of the U.S. state of California. Centered on the cities of Los Angeles and San Diego, Southern California is home to nearly 24 million people and is the nation's second most populated region, , helping them recover from one of the state's costliest natural disasters. We also continued to reinvent re·in·vent tr.v. re·in·vent·ed, re·in·vent·ing, re·in·vents 1. To make over completely: "She reinvented Indian cooking to fit a Western kitchen and a Western larder" protection and retirement for the consumer by launching several new innovative products. We kept our commitment to shareholders by meeting our combined ratio outlook for the year, generating solid growth in book value per share and attractive returns on equity. In keeping with our commitment to our employees, we're sharing the Company's success with non-bonus eligible employees through a profit sharing profit sharing, arrangement by which employees receive, in addition to their wages, a share of the net profits of a business. The purpose is to give them an incentive to increase their output through enhanced morale, less wasteful use of materials, better care of match of $1.42 for every $1.00 they contributed to the Allstate Profit Sharing Fund. Outlook "Our four operational priorities of consumer focus, enterprise risk and return optimization optimization Field of applied mathematics whose principles and methods are used to solve quantitative problems in disciplines including physics, biology, engineering, and economics. , operational excellence and aggressive capital management will continue to deliver excellent returns and help us continue to outperform Outperform An analyst recommendation meaning a stock is expected to do slightly better than the market return. Notes: Exact definitions vary by brokerage, but in general this rating is better than neutral and worse than buy or strong buy. the industry in 2008. "We expect our Property-Liability combined ratio, excluding the effects of catastrophes and prior year reserve reestimates, will be within the range of 87.0 to 89.0 for 2008," Wilson concluded. BUSINESS HIGHLIGHTS [TABLE OMITTED] Property-Liability * Property-Liability premiums written declined 0.7% from the fourth quarter of 2006, reflecting growth in standard auto and a decline in homeowners due to catastrophe management actions including the increased cost of the catastrophe reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. program. The cost of the catastrophe reinsurance program was $222 million in the fourth quarter of 2007 compared to $209 million in the fourth quarter of 2006. Excluding the cost of the catastrophe reinsurance program, premiums written decreased 0.5%. * Allstate brand standard auto premiums written grew 1.5% in the fourth quarter of 2007 compared to the prior year quarter. Contributing to the overall change were the following: [TABLE OMITTED] [TABLE OMITTED] * Allstate brand homeowners premiums written declined 1.3% in the fourth quarter of 2007, compared to the prior year quarter, primarily due to our catastrophe risk management actions. Excluding the cost of the catastrophe reinsurance program, Allstate brand homeowners premiums written decreased 0.1% in the fourth quarter of 2007 when compared to the prior year quarter. Contributing to the overall change were the following: [TABLE OMITTED] [TABLE OMITTED] * During January 2008, we completed the renewal of our catastrophe reinsurance agreements countrywide coun·try·wide adv. & adj. Throughout a whole country; nationwide: launched a fundraising campaign countrywide; a countrywide search. Adj. 1. , except for Florida. We expect to place contracts for the state of Florida later this year. We estimate that the total annualized annualized Of or relating to a variable that has been mathematically converted to a yearly rate. Inflation and interest rates are generally annualized since it is on this basis that these two variables are ordinarily stated and compared. cost of all reinsurance programs for the year beginning June 1, 2008 will be approximately $660 million per year or $165 million per quarter, including an estimate for reinsurance coverage in Florida. This is compared to approximately $900 million per year for our total annualized cost for the year beginning June 1, 2007, or an estimated annualized cost decrease of $240 million beginning June 1, 2008. The estimated decrease is due in part to our reduced exposure in Florida following our non-renewal activities over the past year. We continue to attempt to capture our reinsurance cost in premium rates as allowed by state regulatory authorities Noun 1. regulatory authority - a governmental agency that regulates businesses in the public interest regulatory agency administrative body, administrative unit - a unit with administrative responsibilities . We are currently involved in proceedings regarding homeowners insurance rates and our ability to capture these reinsurance costs in various states including California California (kăl'ĭfôr`nyə), most populous state in the United States, located in the Far West; bordered by Oregon (N), Nevada and, across the Colorado River, Arizona (E), Mexico (S), and the Pacific Ocean (W). , Florida and Texas. For detailed information on our catastrophe reinsurance program, see http://media.corporate-ir.net/media_files/irol/93/93125/report s2/all_4q07_reinsurance.pdf (Due to its length, this URL URL in full Uniform Resource Locator Address of a resource on the Internet. The resource can be any type of file stored on a server, such as a Web page, a text file, a graphics file, or an application program. may need to be copied/pasted into your Internet Internet Publicly accessible computer network connecting many smaller networks from around the world. It grew out of a U.S. Defense Department program called ARPANET (Advanced Research Projects Agency Network), established in 1969 with connections between computers at the browser's address field. Remove the extra space if one exists.). * Standard auto property damage frequencies increased 2.8% while bodily injury gross claim frequencies decreased 2.8% compared to the fourth quarter of 2006. Auto property damage and bodily injury paid severities increased 2.2% and 9.3%, respectively. The Allstate brand standard auto loss ratio increased 5.3 points compared to the fourth quarter of 2006 to 70.3 in the fourth quarter of 2007, due to the absence of favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. reserve reestimates, and higher frequencies and current year severities. * Homeowner gross claim frequency excluding catastrophes increased 4.6% compared to the fourth quarter of 2006. Homeowners severity excluding catastrophes increased 7.9% compared to the fourth quarter of 2006. The Allstate brand homeowners loss ratio increased 22.1 points compared to the fourth quarter of 2006 to 74.8 in the fourth quarter of 2007, due to higher catastrophes and higher frequencies and current year severity. The effect of catastrophe losses on the Allstate brand homeowners loss ratio totaled 28.4 in the fourth quarter of 2007 compared to 16.5 in the fourth quarter of 2006. * Property-Liability prior year reserve reestimates for the fourth quarter of 2007 were an unfavorable $48 million, compared to favorable prior year reserve reestimates of $184 million in the fourth quarter of 2006. The unfavorable prior year reserve reestimates for the quarter were primarily related to catastrophes totaling $26 million, as discussed below, and Discontinued dis·con·tin·ue v. dis·con·tin·ued, dis·con·tin·u·ing, dis·con·tin·ues v.tr. 1. To stop doing or providing (something); end or abandon: Lines and Coverages totaling $16 million. * Catastrophe losses for the quarter totaled $472 million, compared to $279 million in the fourth quarter of 2006. This increase was primarily due to $318 million in catastrophe losses related to the Southern California wildfires in October. Catastrophe losses, excluding prior year reserve reestimates, were $446 million in the quarter compared to $279 million in the fourth quarter of 2006, impacting the combined ratio by 6.6 points in the quarter and 4.1 points in the fourth quarter of 2006. Unfavorable reserve reestimates related to catastrophes from prior years totaled $26 million in the quarter. There were no reserve reestimates included in catastrophe losses in the fourth quarter of 2006. The prior year reserve reestimates in the 2007 fourth quarter were primarily attributable to increased loss reserves for reopened claims arising from litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute. When a person begins a civil lawsuit, the person enters into a process called litigation. filed in conjunction with a Louisiana Louisiana (ləwē'zēăn`ə, l  ē'–), state in the S central United States. It is bounded by Mississippi, with the Mississippi R. deadline for filing suits related to Hurricane Katrina  Editing of this page by unregistered or newly registered users is currently disabled due to vandalism. .
* Underwriting income Underwriting income For an insurance company, the difference between the premiums earned and the costs of settling claims. was $276 million during the fourth quarter of 2007 compared to $978 million in the same period of 2006. The decrease was due to a higher underlying combined ratio, the unfavorable change in prior year reserve reestimates and higher catastrophe losses. * The Property-Liability combined ratio was impacted by catastrophe losses and prior year reserve reestimates. The impacts for the three months and twelve months ended December 31 are shown in the table below. [TABLE OMITTED] * Our outlook for the Property-Liability 2008 combined ratio excluding the effect of catastrophe losses and prior year reserve reestimates is in the range of 87.0 to 89.0. This outlook is based on various assumptions, the most important of which are listed below: [TABLE OMITTED] Allstate Financial * Premiums and deposits in the fourth quarter of 2007 were $1.81 billion, a decrease of 19.3% from the prior year quarter. This decline was due to the fact that there were no deposits on institutional products during the fourth quarter of 2007 compared to $500 million in the fourth quarter of 2006. Sales of our institutional products vary from period to period based on management's assessment of market conditions. * Operating income for the fourth quarter of 2007 was $158 million, $16 million higher than the prior year quarter primarily due to increased income on limited partnership interests, increased contract charges and an energy tax credit which reduced income tax expense. * Net income for the fourth quarter of 2007 was $31 million, $117 million below the prior year quarter. The decline was due to higher realized capital losses and a loss on disposition of operations. Higher net capital losses were driven by $95 million in investment write-downs and a $120 million decline in the valuation of derivative instruments Derivative instruments Contracts such as options and futures whose price is derived from the price of an underlying financial asset. , including investments in equity-linked notes and economic hedges of interest rate risk. Investments * Allstate's investment portfolios totaled $118.98 billion as of December 31, 2007, a decline of $2.15 billion from the third quarter of 2007, primarily due to lower funds associated with collateral received in conjunction with securities lending Securities Lending When a brokerage lends securities owned by its clients to short sellers. Notes: This allows brokers to create additional revenue (commissions) on the short sale transaction. and other activities, which declined $1.05 billion, and lower net unrealized gains Unrealized Gain A profit that results from holding on to an asset rather than cashing it in and using the funds. Notes: Let's say you own a stock that has doubled, but you haven't sold it yet. This is said to be an unrealized gain. . * The decrease in net unrealized gains during the fourth quarter of 2007 was related primarily to unrealized losses Unrealized Loss A loss that results from holding onto an asset rather than cashing it in and officially taking the loss. Notes: Let's say you own a stock that is down 50%, but you haven't sold it to realize the loss yet. This is said to be an unrealized loss. on investment grade fixed income securities, resulting from widening credit spreads and credit exposure related to certain collateralized securities more than offsetting the effects of declining interest rates, and sales of equity securities with net realized gains Realized Gain A gain resulting from selling an asset at a price higher than the original purchase price. Notes: There may be tax consequences for a realized profit. totaling $351 million. Total unrealized gains and losses are shown in the table below. [TABLE OMITTED] * Net investment income increased 4.0% to $1.63 billion compared to the prior year quarter. Property-Liability net investment income increased 3.8% to $490 million, compared to the prior year quarter, benefiting from increased income on limited partnership interests and increased portfolio yields when compared to the same period in the prior year. Allstate Financial net investment income rose 2.6% to $1.09 billion, compared to the prior year quarter, including increased income from limited partnership interests. * Net realized capital gains were $98 million on a pre-tax basis for the quarter, primarily due to $384 million of net gains related to dispositions, including $332 million of gains related to equity securities in the Property-Liability portfolio, and $6 million of net gains related to the settlement of derivative instruments. Partially offsetting realized capital gains were $166 million of net losses related to valuations of derivative instruments primarily due to changes in underlying interest rates and $126 million of investment write-downs, including $20 million relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc asset-backed residential mortgage-backed securities Residential mortgage-backed securities (RMBS) are a type of bond commonly issued in American security markets. They are a type of Mortgage-backed security which are backed by mortgages on residential rather than commercial real estate. and $62 million relating to asset-backed collateralized debt obligations Collateralized Debt Obligation (CDO) A general inclusive term which covers Collateralized Bond Obligations, Collateralized Loan Obligations, and Collateralized Mortgage Obligations, . Approximately $53 million or 31.8% of the losses related to the valuations of derivative instruments relate to economic hedging instruments that support investments whose valuation changes are reported in shareholders' equity Shareholders' Equity A firms' total assets minus its total liabilities. Equivalently, it is share capital plus retained earnings minus treasury shares. Shareholders' equity is the amount by which a company is financed through common and preferred shares. . [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] [TABLE OMITTED] Residential and Commercial Mortgage-Backed and Other Asset-Backed Securities Asset-backed security A security that is collateralized by loans, leases, receivables, or installment contracts on personal property, not real estate. asset-backed security A debt security collateralized by specific assets. During the fourth quarter of 2007, certain financial markets continued to experience decreased liquidity. This was particularly evident in the markets for sub-prime residential mortgage-backed securities. We experienced this illiquidity particularly in our asset-backed residential mortgage-backed securities ("ABS (Automatic Backup System) See backup program. RMBS RMBS Residential Mortgage-Backed Securities RMBS Rambus, Inc. (NASDAQ stock symbol) RMBS Russian Mortgage-Backed Securities "), asset-backed collateralized debt obligations ("ABS CDOs"), Alt-A residential mortgage-backed securities ("Alt-A") and commercial real estate collateralized debt obligations ("CRE CRE Commercial Real Estate CRE Corporate Real Estate CRE Commission for Racial Equality (Scotland) CRE CCD (Charge Coupled Device) and Readout Electronics CRE Camp Response Element CDO (Collaborative Data Objects) A programming interface from Microsoft for accessing MAPI-based e-mail, calendaring and scheduling servers. Originally called "OLE Messaging" and "Active Messaging," CDO wraps the Enhanced MAPI library into a COM object that provides the ") portfolios. These portfolios totaled $5.85 billion, or less than 5% of our total investments at December 31, 2007. Certain other asset-backed and real estate-backed securities markets experienced illiquidity, but to a lesser degree. The fair values of securities comprising the illiquid Illiquid An asset or security that cannot be converted into cash very quickly (or near prevailing market prices). Notes: A house is a good example of an illiquid asset. See also: Cash, Liquidity Illiquid In the context of finance. portfolios are obtained from an independent third-party pricing service and broker quotes. We evaluated the reasonableness of the fair value of these portfolios as of December 31, 2007 by comparing vendor prices to alternative third-party pricing and valuation services, both of which consider available market information including, but not limited to, collateral quality, anticipated cash flows, credit enhancements Credit Enhancement A method whereby a company attempts to improve its debt or credit worthiness. Notes: Credit enhancements take many different forms. An example of a credit enhancement would be conversion rights added on to a debt instrument in order to lower the issuing , default rates, loss severities, and credit ratings from statistical rating agencies. In addition, we also considered the reasonableness of security values based upon the securities' relative position within their respective capital structures in determining the reasonableness of fair values, on a portfolio basis, for the above referenced securities as of December 31, 2007. Write-downs during the fourth quarter of 2007, were recorded on our ABS RMBS and ABS CDOs totaling $20 million and $62 million, respectively. We did not record any write-downs related to our Alt-As or CRE CDOs. Unrealized losses as of December 31, 2007 totaled $502 million on the ABS RMBS, $40 million on the ABS CDOs, $60 million on the Alt-As and $156 million on the CRE CDOs. Although we do not currently anticipate any additional other-than-temporary impairments on these securities, a significant further deterioration de·te·ri·o·ra·tion n. The process or condition of becoming worse. or sustained weakness of future market conditions could cause us to alter that outlook. It is important to note, based on our analysis and the seniority of our securities' claim on the underlying collateral, we currently expect to receive all contractual principal and interest payments on these securities, and have the intent to hold these securities until they recover in value. Information about certain of our collateralized securities and their financial ratings is presented in the table below. [TABLE OMITTED] Alt-A mortgage-backed securities Mortgage-backed securities (MSBs) Securities backed by a pool of mortgage loans. are at fixed or variable rates and include certain securities that are collateralized by residential mortgage loans issued to borrowers with stronger credit profiles than sub-prime borrowers, but who do not qualify for prime financing terms due to high loan-to-value ratios Loan-to-value ratio (LTV) The ratio of money borrowed on a property to the property's fair market value. or limited supporting documentation. Changes during the fourth quarter of 2007 in our Alt-A holdings and characteristics of the portfolio: * We acquired $66 million, which are rated Aaa. * $1.06 billion or 80.5% were issued during 2005, 2006 and 2007. * There were no other-than-temporary losses during the fourth quarter of 2007. * As of December 31, 2007, net unrealized losses totaled $58 million, which were comprised of $2 million of unrealized gains and $60 million of unrealized losses. * Fair value represents 95.8% of the amortized cost of these securities. CRE CDOs are investments secured primarily by commercial mortgage-backed securities Commercial mortgage-backed securities (CMBS) are a type of bond commonly issued in American security markets. They are a type of Mortgage-backed security which are backed by mortgages on commercial rather than residential real estate. and other commercial mortgage debt obligations. These securities are generally less liquid and have a higher risk profile than other commercial mortgage-backed securities. Characteristics of the portfolio: * There were no other-than-temporary losses during the fourth quarter of 2007. * As of December 31, 2007, net unrealized losses totaled $155 million, which were comprised of $1 million of unrealized gains and $156 million of unrealized losses. * Fair value represents 78.7% of the amortized cost of these securities. ABS RMBS includes securities that are collateralized by mortgage loans issued to borrowers that cannot qualify for prime or alternative financing terms due in part to an impaired or limited credit history. Changes during the fourth quarter of 2007 in our ABS RMBS holdings and characteristics of the portfolio: * We collected $166 million of principal repayments consistent with the expected cash flows. These repayments represent approximately 4% of the amortized cost of our outstanding portfolio at December 31, 2007. * Three second lien A Second lien financing is a form of financing secured on a second ranking basis by (more or less) the same security, which secures the first ranking financing. The first lien lenders and the second lien lenders agree that, in the event of a security enforcement or bankruptcy, the securities with a fair value of $16 million were downgraded within the investment grade ratings. Four second lien securities with a fair value of $38 million were downgraded from investment grade to below investment grade ratings. * We sold $30 million, recognizing a loss of $2 million. * $3.24 billion or 82.5% were issued during 2005, 2006 and 2007, with 81.9% of these securities rated Aaa, 15.4% rated Aa and 1.4% rated A. * $900 million or 31.9% of the Aaa securities are insured by 6 bond insurers. * $20 million other-than-temporary losses were recorded on three ABS RMBS due to actual and expected deterioration in the performance of the underlying collateral. * As of December 31, 2007, net unrealized losses on sub-prime RMBS totaled $500 million and were comprised of $2 million of unrealized gains and $502 million of unrealized losses. * Fair value represents 88.7% of the amortized cost of these securities. ABS CDOs are securities collateralized by a variety of residential mortgage-backed and other securities, which may include sub-prime RMBS. Changes during the fourth quarter of 2007 in our ABS CDO holdings and characteristics of this portfolio: * $62 million other-than-temporary losses were recorded on seven ABS CDO reflecting the impaired value of the underlying assets based on expected credit losses. In addition, one transaction was unable to meet a margin call due to significant declines in the market values of the underlying collateral. * As of December 31, 2007, unrealized losses on ABS CDOs totaled $40 million. * Fair value represents 47.4% of the amortized cost of these securities. Bond Insurers Approximately $13.0 billion or 51.4% of our municipal bond portfolio is insured by bond insurers. Our practices for acquiring and monitoring municipal bonds primarily take into consideration the quality of the underlying security. As of December 31, 2007, we believe that the current valuations already reflect a significant decline in the value of the insurance, and further such declines if any, are not expected to be material. While the valuation of these holdings may be temporarily impacted by negative market developments, we continue to have the intent and ability to hold the bonds and expect to receive all of the contractual cash flows. As of December 31, 2007, 34.6% of our insured municipal bond portfolio was insured by MBIA MBIA Montana Building Industry Association MBIA Municipal Bond Insurance Association MBIA Michigan Boating Industries Association MBIA Municipal Bond Investors Assurance MBIA Massachusetts Brain Injury Association MBIA Maryland Business Incubation Association , 25.6% by AMBAC AMBAC American Municipal Bond Assurance Corporation AMBAC Active Mass Balance Auto-Control (Gundam anime) , 19.4% by FSA FSA Financial Services Authority FSA Food Standards Agency (UK) FSA Farm Service Agency (USDA) FSA Financial Services Agency (Japan) and 16.6% by FGIC FGIC See Financial Guaranty Insurance Corporation (FGIC). . In addition, we hold securities totaling $47 million that were directly issued by these bond insurers. Definitions of GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). Operating Ratios Operating Ratio A ratio that shows the efficiency of management by comparing operating expense to net sales: and Impacts of Specific Items on the GAAP Operating Ratios Claims and claims expense ("loss") ratio is the ratio of claims and claims expense to premiums earned. Loss ratios include the impact of catastrophe losses. Expense ratio is the ratio of amortization of deferred acquisition costs ("DAC See D/A converter and discretionary access control. DAC - Digital to Analog Converter "), operating costs operating costs npl → gastos mpl operacionales and expenses and restructuring restructuring - The transformation from one representation form to another at the same relative abstraction level, while preserving the subject system's external behaviour (functionality and semantics). and related charges to premiums earned. Combined ratio is the ratio of claims and claims expense, amortization of DAC, operating costs and expenses and restructuring and related charges to premiums earned. The combined ratio is the sum of the loss ratio and the expense ratio. The difference between 100% and the combined ratio represents underwriting income (loss) as a percentage of premiums earned. Effect of Discontinued Lines and Coverages on combined ratio is the ratio of claims and claims expense and other costs and expenses in the Discontinued Lines and Coverages segment to Property-Liability premiums earned. The sum of the effect of Discontinued Lines and Coverages on the combined ratio and the Allstate Protection combined ratio is equal to the Property-Liability combined ratio. Effect of catastrophe losses on combined ratio is the percentage of catastrophe losses included in claims and claims expenses to premiums earned. This ratio includes prior year reserve reestimates. Effect of prior year reserve reestimates on combined ratio is the percentage of prior year reserve reestimates included in claims and claims expense to premiums earned. This ratio includes prior year reserve reestimates of catastrophe losses. Effect of restructuring and related charges on combined ratio is the percentage of restructuring and related charges to premiums earned. Definitions of Non-GAAP and Operating Measures We believe that investors' understanding of Allstate's performance is enhanced by our disclosure of the following non-GAAP financial measures. Our methods of calculating these measures may differ from those used by other companies and therefore comparability may be limited. Operating income is net income, excluding: * realized capital gains and losses, after-tax, except for periodic settlements and accruals Accruals Accounts on a balance sheet that represent liabilities and non-cash-based assets used in accrual-based accounting. These accounts include, among many others, accounts payable, accounts receivable, goodwill, future tax liability and future interest expense. on non-hedge derivative instruments, which are reported with realized capital gains and losses but included in operating income, * amortization of DAC and deferred sales inducements ("DSI (Dynamic Systems Initiative) An umbrella term for a suite of Microsoft products that help manage the Windows environment in large enterprises. DSI was introduced in 2003. "), to the extent they resulted from the recognition of certain realized capital gains and losses, * gain (loss) on disposition of operations, after-tax, and * adjustments for other significant non-recurring, infrequent in·fre·quent adj. 1. Not occurring regularly; occasional or rare: an infrequent guest. 2. or unusual items, when (a) the nature of the charge or gain is such that it is reasonably unlikely to recur within two years, or (b) there has been no similar charge or gain within the prior two years. Net income is the GAAP measure that is most directly comparable to operating income. We use operating income as an important measure to evaluate our results of operations. We believe that the measure provides investors with a valuable measure of the Company's ongoing performance because it reveals trends in our insurance and financial services The examples and perspective in this article or section may not represent a worldwide view of the subject. Please [ improve this article] or discuss the issue on the talk page. business that may be obscured by the net effect of realized capital gains and losses, gain (loss) on disposition of operations and adjustments for other significant non-recurring, infrequent or unusual items. Realized capital gains and losses and gain (loss) on disposition of operations may vary significantly between periods and are generally driven by business decisions and external economic developments such as capital market conditions, the timing of which is unrelated to the insurance underwriting Underwriting 1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt). 2. The process of issuing insurance policies. process. Consistent with our intent to protect results or earn additional income, operating income includes periodic settlements and accruals on certain derivative instruments that are reported in realized capital gains and losses because they do not qualify for hedge accounting Why is hedge accounting necessary? Many financial institutions and corporate businesses (entities) use derivative financial instruments to hedge their exposure to different risks (eg interest rate risk, foreign exchange risk, commodity risk, etc). or are not designated as hedges for accounting purposes. These instruments are used for economic hedges and to replicate rep·li·cate v. 1. To duplicate, copy, reproduce, or repeat. 2. To reproduce or make an exact copy or copies of genetic material, a cell, or an organism. n. A repetition of an experiment or a procedure. fixed income securities, and by including them in operating income, we are appropriately reflecting their trends in our performance and in a manner consistent with the economically hedged investments, product attributes (e.g. net investment income and interest credited to contractholder funds) or replicated investments. Non-recurring items are excluded because, by their nature, they are not indicative of our business or economic trends. Accordingly, operating income excludes the effect of items that tend to be highly variable from period to period and highlights the results from ongoing operations and the underlying profitability of our business. A byproduct by·prod·uct or by-prod·uct n. 1. Something produced in the making of something else. 2. A secondary result; a side effect. Noun 1. of excluding these items to determine operating income is the transparency (1) The quality of being able to see through a material. The terms transparency and translucency are often used synonymously; however, transparent would technically mean "seeing through clear glass," while translucent would mean "seeing through frosted glass." See alpha blending. and understanding of their significance to net income variability and profitability while recognizing these or similar items may recur in subsequent periods. Operating income is used by management along with the other components of net income to assess our performance. We use adjusted measures of operating income and operating income per diluted share in incentive compensation. Therefore, we believe it is useful for investors to evaluate net income, operating income and their components separately and in the aggregate when reviewing and evaluating our performance. We note that investors, financial analysts, financial and business media organizations and rating agencies utilize operating income results in their evaluation of our and our industry's financial performance and in their investment decisions, recommendations and communications as it represents a reliable, representative and consistent measurement of the industry and the Company and management's performance. We note that the price to earnings multiple commonly used by insurance investors as a forward-looking valuation technique uses operating income as the denominator denominator the bottom line of a fraction; the base population on which population rates such as birth and death rates are calculated. denominator . Operating income should not be considered as a substitute for net income and does not reflect the overall profitability of our business. The following tables reconcile operating income and net income for the three months and twelve months ended December 31, 2007 and 2006. [TABLE OMITTED] [TABLE OMITTED] Underwriting income (loss) is calculated as premiums earned, less claims and claims expense ("losses"), amortization of DAC, operating costs and expenses and restructuring and related charges as determined using GAAP. Management uses this measure in its evaluation of the results of operations to analyze the profitability of our Property-Liability insurance operations separately from investment results. It is also an integral component of incentive compensation. It is useful for investors to evaluate the components of income separately and in the aggregate when reviewing performance. Net income is the most directly comparable GAAP measure. Underwriting income (loss) should not be considered as a substitute for net income and does not reflect the overall profitability of our business. A reconciliation of Property-Liability underwriting income (loss) to net income is provided in the Segment Results table. Combined ratio excluding the effect of catastrophes is a non-GAAP ratio, which is computed as the difference between two GAAP operating ratios: the combined ratio and the effect of catastrophes on the combined ratio. The most directly comparable GAAP measure is the combined ratio. We believe that this ratio is useful to investors and it is used by management to reveal the trends in our Property-Liability business that may be obscured by catastrophe losses. These catastrophe losses cause our loss trends to vary significantly between periods as a result of their incidence of occurrence and magnitude and can have a significant impact on the combined ratio. We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our underwriting performance. The combined ratio excluding the effect of catastrophes should not be considered a substitute for the combined ratio and does not reflect the overall underwriting profitability of our business. A reconciliation of combined ratio excluding the effect of catastrophes to combined ratio is provided in the Property-Liability Highlights section of the Consolidated and Segments Highlights table. Combined ratio excluding the effect of catastrophes and prior year reserve reestimates ("underlying combined ratio") is a non-GAAP ratio, which is computed as the difference between three GAAP operating ratios: the combined ratio, the effect of catastrophes on the combined ratio and the effect of prior year reserve reestimates on the combined ratio. The most directly comparable GAAP measure is the combined ratio. We believe that this ratio is useful to investors and it is used by management to reveal the trends in our Property-Liability business that may be obscured by catastrophe losses and prior year reserve reestimates. These catastrophe losses cause our loss trends to vary significantly between periods as a result of their incidence of occurrence and magnitude and can have a significant impact on the combined ratio. Prior year reserve reestimates are caused by unexpected loss development on historical reserves. We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our underwriting performance. We also provide it to facilitate a comparison to our outlook on the 2007 combined ratio excluding the effect of catastrophe losses and prior year reserve reestimates. The combined ratio excluding the effect of catastrophes and prior year reserve reestimates should not be considered a substitute for the combined ratio and does not reflect the overall underwriting profitability of our business. A reconciliation of combined ratio excluding the effect of catastrophes and prior year reserve reestimates to combined ratio is provided in the Property-Liability Highlights section of the Consolidated and Segments Highlights table. In this press release, we provide our outlook on the 2008 combined ratio excluding the effect of catastrophe losses and prior year reserve reestimates. A reconciliation of this measure to the combined ratio is not possible on a forward-looking basis because it is not possible to provide a reliable forecast of catastrophes. Future prior year reserve reestimates are expected to be zero because reserves are determined based on our best estimate of ultimate loss reserves as of the reporting date. Operating income return on equity is a ratio that uses a non-GAAP measure. It is calculated by dividing the rolling 12-month operating income by the average of shareholders' equity at the beginning and at the end of the 12-months, after excluding the effect of unrealized net capital gains. Return on equity is the most directly comparable GAAP measure. We use operating income as the numerator numerator the upper part of a fraction. numerator relationship see additive genetic relationship. numerator Epidemiology The upper part of a fraction for the same reasons we use operating income, as discussed above. We use average shareholder's equity excluding the effect of unrealized net capital gains for the denominator as a representation of shareholder's equity primarily attributable to the Company's earned and realized business operations Business operations are those activities involved in the running of a business for the purpose of producing value for the stakeholders. Compare business processes. The outcome of business operations is the harvesting of value from assets because it eliminates the effect of items that are unrealized and vary significantly between periods due to external economic developments such as capital market conditions like changes in equity prices and interest rates, the amount and timing of which are unrelated to the insurance underwriting process. We use it to supplement our evaluation of net income and return on equity because it excludes the effect of items that tend to be highly variable from period to period. We believe that this measure is useful to investors and that it provides a valuable tool for investors when considered along with net income return on equity because it eliminates the effect of items that can fluctuate significantly from period to period and that are driven by economic developments, the magnitude and timing of which are generally not influenced by management: the after-tax effects of realized and unrealized capital gains and losses, and the cumulative effect of change in accounting principle. In addition, it eliminates non-recurring items that are not indicative of our ongoing business or economic trends. A byproduct of excluding the items noted above to determine operating income return on equity from return on equity is the transparency and understanding of their significance to return on equity variability and profitability while recognizing these or similar items may recur in subsequent periods. Therefore, we believe it is useful for investors to have operating income return on equity and return on equity when evaluating our performance. We note that investors, financial analysts, financial and business media organizations and rating agencies utilize operating income return on equity results in their evaluation of our and our industry's financial performance and in their investment decisions, recommendations and communications as it represents a reliable, representative and consistent measurement of the industry and the Company and management's utilization of capital. Operating income return on equity should not be considered as a substitute for net income and does not reflect the overall profitability of our business. The following table shows the reconciliation. [TABLE OMITTED] Book value per share, excluding the impact of unrealized net capital gains on fixed income securities, is a ratio that uses a non-GAAP measure. It is calculated by dividing shareholders' equity after excluding the impact of unrealized net capital gains on fixed income securities and related DAC and life insurance reserves by total shares outstanding plus dilutive potential shares outstanding. Book value per share is the most directly comparable GAAP measure. We use the trend in book value per share, excluding unrealized net capital gains on fixed income securities, in conjunction with book value per share to identify and analyze the change in net worth attributable to management efforts between periods. We believe the non-GAAP ratio is useful to investors because it eliminates the effect of items that can fluctuate significantly from period to period and are generally driven by economic developments, primarily capital market conditions, the magnitude and timing of which are generally not influenced by management, and we believe it enhances understanding and comparability of performance by highlighting underlying business activity and profitability drivers. We note that book value per share, excluding unrealized net capital gains on fixed income securities, is a measure commonly used by insurance investors as a valuation technique. Book value per share, excluding unrealized net capital gains on fixed income securities, should not be considered as a substitute for book value per share, and does not reflect the recorded net worth of our business. The following table shows the reconciliation. [TABLE OMITTED] Operating Measures We believe that investors' understanding of Allstate's performance is enhanced by our disclosure of the following operating financial measures. Our method of calculating these measures may differ from those used by other companies and therefore comparability may be limited. Premiums written is the amount of premiums charged for policies issued during a fiscal period. Premiums earned is a GAAP measure. Premiums are considered earned and are included in financial results on a pro-rata Pro-rata Used to describe a proportionate allocation. Notes: For example, a pro-rata dividend means that every shareholder gets an equal proportion for each share they own. See also: Dividend basis over the policy period. The portion of premiums written applicable to the unexpired terms of the policies is recorded as unearned premiums on our Consolidated Statements of Financial Position. A reconciliation of premiums written to premiums earned is presented in the following table. [TABLE OMITTED] Premiums and deposits is an operating measure that we use to analyze production trends for Allstate Financial sales. It includes premiums on insurance policies and annuities and all deposits and other funds received from customers on deposit-type products including the net new deposits of Allstate Bank, which we account for under GAAP as increases to liabilities rather than as revenue. The following table illustrates where premiums and deposits are reflected in the consolidated financial statements Consolidated Financial Statements The combined financial statements of a parent company and its subsidiaries. Notes: Because consolidated financial statements present an aggregated look at the financial position of a parent and its subsidiaries, they enable you to gauge . [TABLE OMITTED] New sales of financial products by Allstate exclusive agencies is an operating measure that we use to quantify Quantify - A performance analysis tool from Pure Software. the current year sales of financial products by the Allstate Agency proprietary distribution channel. New sales of financial products by Allstate exclusive agencies includes sales of Allstate Financial products such as annual premiums on new life insurance policies, annual premiums on Allstate Workplace Division products, premiums and deposits on fixed annuities Fixed annuities Contracts in which an insurance company or issuing financial institution pays a fixed dollar amount of money per period. , net new deposits in the Allstate Bank, sales of Allstate Financial-issued variable annuities Variable annuities Investment contracts whose issuer pays a periodic amount linked to the investment performance of an underlying portfolio. , and sales of products by non-affiliated issuers such as mutual funds and Prudential-issued variable annuities. New sales of financial products by Allstate exclusive agencies exclude renewal premiums on life insurance policies. New sales of financial products by Allstate exclusive agencies for the three months and twelve months ended December 31, 2007 and 2006 are presented in the following table. [TABLE OMITTED] Forward-Looking Statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. and Risk Factors This press release contains forward-looking statements about our combined ratio excluding the effect of catastrophes and prior year reserve reestimates for 2008, the expected cost of our 2008 catastrophe reinsurance program, our expectation for write-downs, payments and rating changes in our ABS RMBS, ABS CDO, Alt-A and CRE CDO securities portfolios, and the impact on the value of our portfolios of a rating downgrade Downgrade A negative change in the rating of a security. Notes: For example, an analyst may downgrade a stock from strong buy to buy, or a bond rating agency may downgrade a bond from AAA to AA. by a bond insurer An individual or company who, through a contractual agreement, undertakes to compensate specified losses, liability, or damages incurred by another individual. An insurer is frequently an insurance company and is also known as an underwriter. . These statements are subject to the Private Securities Litigation Reform Act The Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several significant substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation and awards fees and of 1995 and are based on management's estimates, assumptions and projections. Actual results may differ materially from those projected based on the risk factors described below. * Premiums earned, the denominator of the combined ratio excluding the effect of catastrophes and prior year reserve reestimates for 2008, may be materially less than projected. Adjustments to our business structure, size and underwriting practices in markets with significant catastrophe risk exposure may impact homeowners premium growth rates Growth Rates The compounded annualized rate of growth of a company's revenues, earnings, dividends, or other figures. Notes: Remember, historically high growth rates don't always mean a high rate of growth looking into the future. and retention more adversely than we expect. In addition, due to the diminished di·min·ish v. di·min·ished, di·min·ish·ing, di·min·ish·es v.tr. 1. a. To make smaller or less or to cause to appear so. b. potential for cross-selling opportunities, new business growth in our auto lines could be lower than expected. Our ability to capture the costs of our catastrophe reinsurance program through rate increases may not be entirely successful due to regulatory restrictions or policyholder Policyholder An individual who owns an insurance policy. attrition Attrition The reduction in staff and employees in a company through normal means, such as retirement and resignation. This is natural in any business and industry. Notes: resulting in a lower amount of insurance in force. * Auto and homeowners frequencies or severities may be higher than anticipated levels due to unexpected trends or events such as severe weather. * The cost of the catastrophe reinsurance that we intend to purchase for Florida for the 2008 hurricane season Hurricane season refers to a period in a year when hurricanes usually form. For more information see: Tropical cyclone#Times of formation. For a lists of past seasons, see:
* Changes in mortgage delinquency delinquency Criminal behaviour carried out by a juvenile. Young males make up the bulk of the delinquent population (about 80% in the U.S.) in all countries in which the behaviour is reported. or recovery rates, rating agency changes, bond insurer strength or rating, and the quality of service provided by service providers on securities in our ABS RMBS, ABS CDO, Alt-A and CRE CDO portfolios, as well as the effects of bond insurer strength on the value of our municipal bond portfolio, could lead us to reconsider re·con·sid·er v. re·con·sid·ered, re·con·sid·er·ing, re·con·sid·ers v.tr. 1. To consider again, especially with intent to alter or modify a previous decision. 2. our payment outlook and determine that write-downs are appropriate in the future. We undertake no obligation to publicly correct or update any forward-looking statements. This press release contains unaudited financial information. The Allstate Corporation (NYSE:ALL) is the nation's largest publicly held personal lines insurer. Widely known through the "You're In Good Hands With Allstate([R])" slogan A slogan is a memorable motto or phrase used in a political, commercial, religious and other context as a repetitive expression of an idea or purpose. Slogans vary from the written and the visual to the chanted and the vulgar. , Allstate helps individuals in approximately 17 million households protect what they have today and better prepare for tomorrow through approximately 14,900 exclusive agencies and financial representatives in the U.S. and Canada. Customers can access Allstate products and services such as auto insurance and homeowners insurance through Allstate agencies, or in select states at allstate.com and 1-800 Allstate([R]). Encompass ENCOMPASS Enhanced Consequence Management Planning and Support System (DARPA) ([R]) and Deerbrook([R])Insurance brand property and casualty products are sold exclusively through independent agents. The Allstate Financial Group provides life insurance, supplemental accident and health insurance, annuity annuity: see insurance. annuity Payment made at a fixed interval. A common example is the payment received by retirees from their pension plan. There are two main classes of annuities: annuities certain and contingent annuities. , banking and retirement products designed for individual, institutional and worksite customers that are distributed through Allstate agencies, independent agencies, financial institutions and broker-dealers. |
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