Allstate Corporation: 2016 First-Quarter Form 10-Q Summary
Business context and reporting period
The filing covers The Allstate Corporation and subsidiaries for the three months ended March 31, 2016, with comparative results for the three months ended March 31, 2015. The principal businesses are Property-Liability insurance, including Allstate, Esurance and Encompass, and Allstate Financial, including life, accident and health, and annuity products. Interim financial statements are unaudited and were reviewed by Deloitte & Touche LLP.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenues | $8.871 billion | $8.952 billion | Down 0.9% |
| Net income | $246 million | $677 million | Down 63.7% |
| Net income applicable to common shareholders | $217 million | $648 million | Down 66.5% |
| Diluted earnings per share | $0.57 | $1.53 | Down $0.96 |
| Common dividends declared per share | $0.33 | $0.30 | Up $0.03 |
| Operating cash flow | $714 million | $566 million | Up $148 million |
| Ending cash | $531 million | $916 million | Down $385 million |
| Total investments at March 31/December 31 | $78.877 billion | $77.758 billion | Up $1.119 billion |
| Shareholders’ equity | $20.340 billion | $20.025 billion | Up 1.6% |
| Long-term debt | $5.108 billion | $5.124 billion | Down $16 million |
Net income applicable to common shareholders represented approximately 2.4% of revenue, compared with approximately 7.2% in the prior-year quarter. The decline primarily reflected catastrophe losses, weaker investment results and realized capital losses.
Segment performance and material changes
- Property-Liability: Net income applicable to common shareholders was $222 million versus $538 million. Premiums earned increased 4.0% to $7.723 billion, while underwriting income declined to $125 million from $467 million.
- Underwriting margins: The combined ratio increased to 98.4 from 93.7, including a loss ratio of 73.6 versus 67.2 and an expense ratio of 24.8 versus 26.5.
- Catastrophes: Catastrophe losses rose to $827 million from $294 million, increasing the combined-ratio impact to 10.7 points from 4.0 points. Wind and hail accounted for $783 million of 2016 catastrophe losses.
- Allstate Financial: Net income applicable to common shareholders fell to $68 million from $183 million. Premiums and contract charges increased 5.4% to $566 million, but net investment income declined 13.4% to $419 million and realized capital results shifted from a $111 million gain to a $49 million loss.
- Investment results: Consolidated net investment income declined 14.0% to $731 million. Net realized capital losses were $149 million, compared with $139 million of gains in the prior-year quarter. Net other-than-temporary impairment losses recognized in earnings increased to $81 million from $49 million.
- Comprehensive income and book value: Comprehensive income was $851 million versus $890 million, supported by $605 million of after-tax other comprehensive income, principally unrealized investment gains. Book value per diluted common share was $48.89, up from $47.34 at December 31, 2015.
- Share repurchases: Allstate repurchased 7.2 million common shares for $450 million during the quarter. The existing $3 billion program was completed in April 2016, and the board authorized a new $1.5 billion program expected to run through November 2017.
Cash flow, debt and liquidity
- Operating activities provided $714 million; investing activities provided $96 million; financing activities used $774 million. Cash increased by $36 million during the quarter.
- Debt-to-shareholders’ equity was 25.1%, and debt-to-capital resources was 20.1%, compared with 25.6% and 20.4%, respectively, at December 31, 2015.
- Parent-level deployable assets were $2.93 billion. The parent had no commercial paper outstanding and had $1.00 billion of remaining commercial paper capacity.
- The company had access to a $1.00 billion unsecured revolving credit facility, with no borrowings during the quarter. The facility’s debt-to-capitalization covenant was 37.5%; the reported ratio was 12.1% as of March 31, 2016.
- Contractholder funds were $21.092 billion, down from $21.295 billion at December 31, 2015, reflecting continued runoff of deferred fixed annuity business.
Guidance, outlook, commentary and unusual items
- No formal consolidated earnings guidance is provided in the filing. Management stated that it is pursuing rate increases, underwriting changes, claims-process improvements and expense reductions to address higher loss trends.
- Approximately half of the Allstate-brand auto rate increases approved in the first quarter were expected to be earned in 2016, with the remainder expected in 2017. Management noted that regulatory review may affect the timing and extent of rate actions.
- The 2016 catastrophe reinsurance program was substantially placed, excluding a Florida component expected to be placed in the second quarter. The program is designed to limit the modeled likelihood of catastrophe losses exceeding specified thresholds; actual catastrophe results remain unpredictable.
- Management reported a preliminary mortality study indicating that structured-settlement annuitants may be living longer than previously estimated. Further developments could affect premium deficiency and liability assumptions.
- The company identified investment risks related to energy, metals and mining exposures. It sold approximately $1.90 billion of securities to reduce these exposures and recognized $105 million of losses on those sales.
- April 2016 developments included a new U.S. Department of Labor fiduciary rule, an extension of the revolving credit facility to April 2021, completion of the prior share-repurchase program, and a new $1.5 billion repurchase authorization. Management expected the fiduciary rule’s financial impact to be immaterial, but its operational effects remained under review.
Risks, contingencies and unusual exposures
- The filing identifies risks from catastrophe frequency and severity, claims inflation, reserve reestimates, pricing and regulatory restrictions, reinsurance availability and counterparty credit.
- Aggregate reasonably possible legal losses above accrued amounts were estimated at zero to $875 million before tax for disclosed matters where an estimate was possible. The company stated that this is not an expected-loss estimate or a maximum exposure.
- Net asbestos reserves were $907 million and net environmental reserves were $178 million at March 31, 2016. Management stated that these estimates are subject to substantially greater uncertainty than ordinary claims reserves and that no meaningful range of additional losses could be developed.
- The company held $730 million of gross unrealized losses on fixed-income and equity securities, including $580 million on fixed-income securities. Management stated that it did not intend, and was not more likely than not, to sell the affected fixed-income securities before recovery.
- Limited partnership commitments totaled approximately $2.72 billion. The company also had residual-value guarantees on leased automobiles with a maximum potential obligation of $48 million, although historical payments have not been material.
Most important facts for investors to verify
- Whether catastrophe losses normalize and whether the combined ratio improves as rate increases are earned.
- Auto and homeowners claim-frequency and severity trends, particularly bodily injury and property damage claims.
- The sustainability of investment income, limited-partnership returns and unrealized investment gains.
- Progress and assumptions from the structured-settlement annuity mortality study and any resulting reserve or premium-deficiency adjustments.
- Actual capital deployment under the new $1.5 billion repurchase program and its effect on leverage and book value.
- Development of asbestos, environmental, Florida personal-injury-protection, California employment and other legal contingencies.
- Reinsurance pricing, available limits and recoverability following significant catastrophe events.