Allstate Corporation 10-Q Summary
Business context and reporting period
The filing covers the three and six months ended June 30, 2020. Allstate operates primarily through property-liability insurance, service businesses, life insurance, employee benefits and annuities. Results were materially affected by the COVID-19 pandemic, including reduced driving activity, customer payment relief, lower investment income and heightened economic uncertainty.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $11.20 billion | $11.14 billion | $21.27 billion | $22.13 billion |
| Net income | $1.25 billion | $851 million | $1.80 billion | $2.14 billion |
| Net income applicable to common shareholders | $1.22 billion | $821 million | $1.74 billion | $2.08 billion |
| Diluted EPS | $3.86 | $2.44 | $5.43 | $6.17 |
| Net investment income | $409 million | $942 million | $830 million | $1.59 billion |
| Realized capital gains | $704 million | $324 million | $242 million | $986 million |
| Operating income before tax | $1.55 billion | $1.08 billion | $2.21 billion | $2.70 billion |
Property-liability premiums increased 2.6% in the quarter and 3.8% year to date. Allstate Protection underwriting income rose to $907 million from $370 million in Q2 2019 and to $2.26 billion from $1.07 billion for the first six months. The consolidated property-liability combined ratio improved to 89.8% from 95.8% in Q2 and to 87.3% from 93.8% year to date. The ratio includes an 8.3-point Q2 and 5.3-point year-to-date impact from the $948 million Shelter-in-Place Payback.
Cash provided by operating activities was $2.88 billion in the first six months, compared with $2.06 billion in the prior-year period. Investing activities used $958 million and financing activities used $1.71 billion. Ending cash was $547 million, compared with $599 million at June 30, 2019.
At June 30, 2020, total assets were $121.27 billion, shareholders' equity was $26.99 billion and long-term debt was $6.63 billion. Debt represented 24.6% of shareholders' equity and 19.7% of total capital resources. Parent-company deployable assets were $3.63 billion; liquid cash and securities expected to be saleable within one week totaled $7.53 billion. No commercial paper or revolving-credit borrowings were outstanding.
Material changes versus prior comparable periods
- Quarterly common earnings increased 49.1%, primarily from stronger Allstate Protection underwriting results and higher realized capital gains. Year-to-date common earnings decreased 16.6% because of lower investment income and realized gains, together with the Shelter-in-Place Payback.
- Net investment income declined 56.6% in Q2 and 47.8% year to date, mainly because of lower private-equity and limited-partnership results and lower yields on interest-bearing investments.
- Auto claim frequency fell sharply as miles driven declined. Q2 auto property-damage gross claim frequency decreased 46.4%, while paid severity increased 20.1%.
- Catastrophe losses were $1.19 billion in Q2, up from $1.07 billion, but $1.40 billion year to date, down from $1.75 billion.
- Service Businesses adjusted net income increased to $38 million from $16 million in Q2 and to $75 million from $27 million year to date, driven primarily by Allstate Protection Plans and improved Roadside results.
- Allstate Annuities reported an adjusted net loss of $111 million in Q2 and $250 million year to date, compared with adjusted income of $52 million and $27 million, respectively, primarily because of lower investment income.
- Allstate Benefits adjusted net income declined to $5 million in Q2 and $29 million year to date, partly because of a $41 million pretax write-off of capitalized billing-system software.
Guidance, outlook, risks and unusual items
- The filing provides no formal earnings or revenue guidance. Management stated that the duration and severity of COVID-19 and its financial effects cannot be reliably estimated and could remain material into 2021.
- The pandemic may affect policy sales and retention, driving behavior, claim frequency and severity, mortality, hospital claims, annuity reserves, investment valuations, liquidity and credit losses. The Allstate Special Payment plan generated higher bad-debt expense, and the company extended $948 million of Shelter-in-Place Payback to customers.
- Allstate announced a definitive agreement to acquire National General Holdings for approximately $4 billion in cash, or $34.50 per share including an expected closing dividend. Funding is expected to include $2.2 billion of combined cash and $1.5 billion of potential new senior debt. Closing was expected in early 2021, subject to approvals and other conditions.
- Management expects a favorable pretax impact of approximately $400 million to $450 million in Q3 2020 from PG&E wildfire subrogation recoveries. An initial distribution representing approximately 80% of the expected recovery was received on July 24, 2020.
- The company is implementing a multi-year Transformative Growth Plan, including integration of Esurance into the Allstate brand and restructuring of agency, sales, service and administrative operations. Significant costs were expected to be recognized later in Q3 2020.
- Allstate adopted the current expected credit loss standard on January 1, 2020, recording an $88 million after-tax reduction to retained income. Total credit-loss allowances were $413 million at June 30, compared with $289 million at adoption.
- Legal proceedings and regulatory matters remain ongoing. The company estimated an aggregate reasonably possible loss range of zero to $75 million before tax for certain disclosed matters above accrued amounts, while noting that this is not its maximum exposure.
- The company identified no material changes to its previously disclosed risk factors. Key ongoing risks include catastrophes, reserve inadequacy, reinsurance and counterparty risk, investment volatility, low interest rates, regulation, litigation, cyber risk, pandemic effects and execution of the National General acquisition and Transformative Growth Plan.
Important facts for investors to verify
- Whether reduced auto frequency persists as driving activity normalizes, and whether higher claim severity offsets the benefit.
- The ultimate cost and customer response to the Shelter-in-Place Payback and Special Payment plan, including bad-debt levels.
- Future private-equity, limited-partnership and other performance-based investment results, which materially affected net investment income.
- The timing, financing, regulatory approvals, integration costs and expected synergies of the National General acquisition.
- The recognition and final amount of the expected PG&E recovery in Q3 2020.
- The effect of sustained low interest rates and COVID-19 mortality or lapse trends on life and annuity reserves, capital and liquidity.
- Changes in credit-loss allowances, below-investment-grade exposure and unrealized losses in the investment portfolio.
- Progress and costs associated with the Transformative Growth Plan and Esurance integration.