Business Context and Reporting Period
The Allstate Corporation filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. Allstate operates primarily through Property-Liability insurance, including Allstate, Esurance and Encompass, and Allstate Financial, including life, accident and health, annuity and institutional products. The interim financial statements were reviewed by Deloitte & Touche LLP and should be read with the 2014 Form 10-K.
Key Financial Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenues | $9.03 billion | $8.94 billion | $26.96 billion | $26.48 billion |
| Net income available to common shareholders | $621 million | $750 million | $1.60 billion | $1.95 billion |
| Diluted EPS | $1.54 | $1.74 | $3.87 | $4.42 |
| Property-Liability premiums earned | $7.65 billion | $7.31 billion | $22.63 billion | $21.58 billion |
| Property-Liability combined ratio | 93.6 | 93.5 | 95.8 | 95.2 |
| Net investment income | $807 million | $823 million | $2.45 billion | $2.68 billion |
| Net realized capital gains | $33 million | $294 million | $280 million | $588 million |
| Operating cash flow | Not separately provided | Not separately provided | $2.69 billion | $2.57 billion |
Property-Liability underwriting income was $540 million in the third quarter and $1.00 billion for the first nine months, compared with $579 million and $1.15 billion, respectively, in the prior-year periods. Allstate Financial net income available to common shareholders increased to $262 million in the third quarter and $624 million for the nine months, from $116 million and $423 million, respectively.
As of September 30, 2015, total investments were $78.34 billion, cash was $905 million, total assets were $105.85 billion, shareholders’ equity was $20.50 billion and long-term debt was $5.18 billion. Debt represented 25.2% of shareholders’ equity and 20.2% of total capital resources. Parent-level deployable assets were $3.06 billion.
Material Changes Versus Prior Comparable Period
- Third-quarter and nine-month net income available to common shareholders declined 17% and 18%, respectively, largely because of lower realized capital gains and weaker Property-Liability results.
- Revenue increased 1.0% in the third quarter and 1.8% for the first nine months, driven primarily by higher Property-Liability premiums.
- Property-Liability premiums earned increased 4.7% in the third quarter and 4.9% for the nine months; premiums written increased 4.2% and 4.5%, respectively.
- The Property-Liability combined ratio was broadly stable in the quarter but deteriorated 0.6 points for the nine months. Auto underwriting weakened materially, including a nine-month underwriting loss of $13 million versus $539 million of income in 2014, while homeowners underwriting improved.
- Catastrophe losses declined to $270 million in the third quarter and $1.36 billion for the nine months, compared with $517 million and $1.90 billion in the prior-year periods.
- Net investment income declined 1.9% in the quarter and 8.7% for the nine months. Net realized capital gains declined substantially, while Allstate Financial benefited from higher realized gains and lower losses associated with the 2014 Lincoln Benefit Life disposition.
- After-tax other comprehensive loss was $529 million in the third quarter and $1.02 billion for the nine months, primarily reflecting declines in unrealized investment gains. Unrealized net capital gains fell to $1.45 billion from $3.17 billion at December 31, 2014.
- Shareholders’ equity decreased 8.1% from year-end, reflecting share repurchases, dividends and lower unrealized investment gains. The company repurchased 33.5 million common shares for $2.23 billion during the first nine months.
Outlook, Management Commentary, Risks and Unusual Items
Management identified priorities of growing policies in force, maintaining the underlying combined ratio, managing investments for risk-adjusted returns, modernizing the operating model and building long-term growth platforms. In response to higher auto loss trends, Allstate is pursuing additional rate filings, adjusting underwriting guidelines, modifying down-payment and coverage requirements, and reducing selected marketing expenditures. Management stated that approximately 45% of Allstate brand auto rate increases approved in 2015 were expected to be earned during 2015, with the balance earned in 2016 and 2017.
The filing does not provide formal earnings or revenue guidance. Management states that catastrophe activity cannot be reliably predicted and that actual results may differ materially from forward-looking expectations.
- Auto claim frequency increased materially, including bodily injury and property damage frequency, while claim severity was mixed. This contributed to weaker auto margins and unfavorable reserve development.
- Prior-year reserve reestimates were unfavorable by $47 million in the third quarter and $112 million for the nine months, including unfavorable annual reviews of discontinued asbestos, environmental and other exposures.
- Net other-than-temporary impairment losses recognized in earnings were $174 million in the third quarter and $266 million for the nine months, compared with $53 million and $179 million, respectively, in 2014.
- Allstate Financial repositioned approximately $1.96 billion of longer-duration fixed-income securities into shorter-duration fixed-income securities and public equities. The repositioning generated approximately $266 million of third-quarter gains but may reduce investment income until assets are redeployed.
- A first-quarter accounting change for qualified affordable housing investments increased income tax expense by $45 million pre-tax, or $28 million after tax in Allstate Financial reporting.
- Asbestos reserves were $995 million net of reinsurance and environmental reserves were $188 million net of reinsurance at September 30, 2015. Management cautions that these reserves are subject to unusually high uncertainty and that a meaningful range of additional losses cannot be estimated.
- The aggregate reasonably possible legal loss in excess of accrued amounts for certain disclosed matters was estimated at zero to $875 million pre-tax. This is not an indication of expected loss and excludes matters for which an estimate is not possible.
- Contractholder funds were $21.56 billion. The annualized surrender and partial withdrawal rate on deferred fixed annuities and interest-sensitive life products was 7.3% for the first nine months, down from 10.6% in 2014.
- Liquidity sources included $3.06 billion of parent-level deployable assets, an undrawn $1.0 billion commercial paper facility and an undrawn $1.0 billion revolving credit facility. No debt maturities were scheduled until 2018.
Important Facts for Investors to Verify
- Whether auto frequency and severity trends, rate increases and underwriting restrictions improve the Property-Liability combined ratio.
- The sustainability and quality of realized investment gains, including the effect of portfolio repositioning on recurring investment income.
- Future reserve development, particularly asbestos, environmental, discontinued-lines and auto reserves.
- Exposure to widening credit spreads, energy and metals-and-mining issuers, equity-market declines and additional investment impairments.
- Catastrophe losses, reinsurance availability and pricing, and potential changes in insurance-rate regulation.
- The impact of share repurchases and dividends on capital, liquidity and insurance-subsidiary dividend capacity.
- Developments in disclosed litigation and regulatory matters, including the possible-loss range of up to $875 million and matters for which no estimate is currently possible.
- Allstate’s ability to maintain financial-strength ratings and comply with capital, debt and preferred-stock dividend restrictions.