Business Context and Reporting Period
The Allstate Corporation filed an unaudited Form 10-Q for the three months ended March 31, 2019. Allstate is primarily a property and casualty insurer, with additional life, benefits, annuity, service and investment businesses. Results are compared with the three months ended March 31, 2018, unless otherwise stated.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $10.99 billion | $9.77 billion | +12.5% |
| Net income | $1.29 billion | $1.01 billion | +28.4% |
| Net income applicable to common shareholders | $1.26 billion | $977 million | +29.1% |
| Diluted EPS | $3.74 | $2.71 | +38.0% |
| Net margin | 11.8% | 10.3% | Improved |
| Operating cash flow | $714 million | $626 million | +14.1% |
| Net investment income | $648 million | $786 million | -17.6% |
| Realized capital gains/(losses) | $662 million | $(134) million | Material swing |
| Property-liability combined ratio | 91.8 | 87.5 | +4.3 points |
Revenue growth reflected higher property and casualty premiums, life premiums and contract charges, service-business growth and substantial realized investment gains. Earnings benefited from the swing to realized gains, but were partly offset by lower investment income and higher insurance losses and operating expenses.
- Property and casualty premiums increased to $8.80 billion from $8.29 billion, while life premiums and contract charges increased to $628 million from $616 million.
- Property-liability underwriting income declined to $700 million from $1.01 billion. Allstate Protection underwriting income declined 30.3% to $703 million.
- Catastrophe losses increased to $680 million from $361 million and contributed 8.0 points to the combined ratio versus 4.5 points in the prior-year quarter.
- Claims and claims expense increased to $5.82 billion from $5.13 billion. Prior-year reserve reestimates were unfavorable by $12 million, including $53 million of unfavorable catastrophe reestimates.
- Service Businesses revenue increased 25.2% to $392 million; adjusted net income improved to $11 million from an adjusted net loss of $3 million.
- Allstate Annuities reported net income of $97 million versus $17 million, but adjusted net loss of $25 million versus adjusted net income of $35 million, primarily because of lower investment income.
Financial Position, Debt and Liquidity
| Balance-sheet metric | March 31, 2019 | December 31, 2018 |
|---|---|---|
| Total assets | $115.83 billion | $112.25 billion |
| Investments | $84.12 billion | $81.26 billion |
| Cash | $551 million | $499 million |
| Shareholders’ equity | $23.42 billion | $21.31 billion |
| Long-term debt | $6.45 billion | $6.45 billion |
| Contractholder funds | $18.16 billion | $18.37 billion |
- Debt-to-shareholders’ equity was 27.6%, down from 30.3%; debt-to-capital resources was 21.6%, down from 23.2%.
- Parent holding-company deployable assets were $2.34 billion. Allstate had $1.00 billion of unused commercial paper capacity and no borrowings under its $1.00 billion revolving credit facility.
- AIC paid $1.06 billion of dividends to the parent during the quarter. Management stated that it had sufficient liquidity for base and stressed needs.
- Common shareholders received $158 million of dividends and preferred shareholders received $31 million. The company reported $2.07 billion remaining under its $3.00 billion share-repurchase authorization.
- $317 million of senior debt was scheduled to mature in May 2019.
Material Changes Versus the Prior Comparable Period
- Common-share earnings increased substantially because Q1 2019 included $662 million of realized capital gains compared with a $134 million realized loss in Q1 2018.
- Net investment income fell $138 million, primarily because performance-based investment income declined to $24 million from $197 million, mainly due to lower private-equity appreciation.
- Property-liability underwriting performance weakened as catastrophe losses, claim severity and expenses increased, despite premium growth and improved auto claim frequency.
- Allstate Protection premiums written rose 6.2% to $8.33 billion. Allstate-brand auto and homeowners policies in force increased 2.7% and 1.7%, respectively.
- Service Businesses benefited from SquareTrade growth and the acquisitions of InfoArmor, PlumChoice and iCracked. iCracked was acquired on February 12, 2019.
- The company retrospectively changed its pension and postretirement accounting policy. The change reduced retained income by $1.58 billion at January 1, 2018, with no effect on total shareholders’ equity, and increased reported Q1 2018 net income by $31 million.
- New lease accounting adopted January 1, 2019 added a $572 million lease liability and a $474 million right-of-use asset at March 31, 2019, with no adoption impact on net income or shareholders’ equity.
Guidance, Outlook, Risks and Unusual Items
Management identified 2019 priorities of better serving customers, achieving target economic returns on capital, growing the customer base, proactively managing investments and building long-term growth platforms. The filing does not provide a specific consolidated earnings or revenue forecast.
- Allstate’s catastrophe reinsurance program targets less than a 1% likelihood that annual aggregate hurricane and earthquake losses, net of reinsurance, exceed $2 billion. The 2019 nationwide program provides $4.9 billion of limits subject to a $500 million retention, with certain Florida-related placements still expected in Q2 2019.
- Insurance reserves remain inherently uncertain. Asbestos reserves were $847 million net of reinsurance and environmental reserves were $167 million net at March 31, 2019.
- Allstate reported $9.37 billion of reinsurance and indemnification recoverables. Scottish Re, which represented $63 million of life reinsurance recoverables net of allowance, was under regulatory supervision and rehabilitation proceedings; management stated it would continue reassessing collectability.
- The company disclosed legal and regulatory proceedings, including Florida personal-injury-protection disputes, a California wage-and-hour class action, and securities and derivative litigation concerning historical auto claim-frequency disclosures and stock-option transactions. The estimated aggregate reasonably possible loss above amounts accrued for certain disclosed matters was zero to $100 million pre-tax, but this is not the company’s maximum exposure or an expected loss estimate.
- Principal risks include catastrophe frequency and severity, reserve development, reinsurance availability and counterparty risk, investment-market volatility, interest rates, annuity spread pressure, regulatory restrictions on pricing and capital, litigation, cybersecurity and execution risk from acquisitions and technology initiatives.
- Pending long-duration insurance-contract accounting changes are expected to have a material financial-statement transition effect, particularly in the run-off annuity segment, although the underlying economics and cash flows are unchanged.
Facts Investors Should Verify
- Whether catastrophe losses and unfavorable reserve development normalize, particularly in homeowners and other personal lines.
- The sustainability and quality of earnings excluding realized capital gains, investment-market movements and pension remeasurement items.
- Performance-based investment returns and the effect of lower investment income on Allstate Annuities and other spread-based businesses.
- Progress and economics of the $3.00 billion share-repurchase program, including completion of the $1.00 billion accelerated share-repurchase agreement.
- Liquidity and capital consequences of the May 2019 debt maturity, contractholder withdrawals and potential restrictions on subsidiary dividends.
- Exposure to Scottish Re recoverables, asbestos and environmental reserves, pending litigation and regulatory matters.
- Expected transition impacts from the new long-duration insurance-contract accounting standard and other pending accounting guidance.