Allstate Corporation 2014 Q3 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited three- and nine-month periods ended September 30, 2014, compared with the corresponding 2013 periods. Allstate operates through Property-Liability, Allstate Financial, and Corporate and Other segments, with principal businesses in personal property and casualty insurance, life and annuity products, accident and health insurance, and investment management.
Financial performance and key metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenues | $8.94B | $8.47B | $26.48B | $25.72B |
| Net income | $781M | $316M | $2.03B | $1.46B |
| Net income available to common shareholders | $750M | $310M | $1.95B | $1.45B |
| Diluted EPS | $1.74 | $0.66 | $4.42 | $3.07 |
| Property-Liability premiums earned | $7.31B | $6.97B | $21.58B | $20.60B |
| Property-Liability underwriting income | $474M | $697M | $1.04B | $1.42B |
| Property-Liability combined ratio | 93.5 | 90.0 | 95.2 | 93.1 |
| Net cash provided by operating activities | — | — | $2.57B | $3.07B |
Net investment income was $823 million in the third quarter and $2.68 billion for the first nine months, down from $950 million and $2.92 billion, respectively. Net realized capital gains were $294 million in the quarter and $588 million year to date, compared with a $41 million loss in the 2013 quarter and $452 million of gains year to date.
At September 30, 2014, total assets were $108.31 billion, investments were $80.72 billion, cash was $885 million, shareholders’ equity was $22.33 billion, and long-term debt was $5.20 billion. Debt-to-shareholders’ equity was 23.3%, compared with 28.9% at December 31, 2013. Parent-level deployable assets were $2.33 billion. The company reported no commercial paper or revolving-credit borrowings outstanding and stated that it had sufficient liquidity.
Material changes versus the prior comparable period
- Consolidated net income available to common shareholders increased 142% in the quarter and 34% for the first nine months, although the comparison benefited substantially from the large 2013 loss on the Lincoln Benefit Life disposition and other 2013 unusual items.
- Property-Liability premiums earned increased 4.8% in the quarter and 4.7% year to date, while premiums written increased 4.9% and 5.2%, respectively.
- Property-Liability underwriting results weakened: the combined ratio increased 3.5 points in the quarter and 2.1 points year to date, primarily because catastrophe losses increased to $517 million and $1.90 billion from $128 million and $1.13 billion.
- Allstate Financial returned to profitability, with net income available to common shareholders of $116 million in the quarter and $423 million year to date, versus losses of $360 million and $24 million in the comparable 2013 periods.
- The company completed the sale of Lincoln Benefit Life-related businesses on April 1, 2014. The transaction generated $596 million of cash proceeds, but resulted in additional after-tax disposition losses of $29 million in the quarter and $60 million year to date.
- The company issued $998 million of preferred stock proceeds during 2014, repaid $950 million of senior notes, and had no debt maturities until 2018.
- Common share repurchases totaled $2.19 billion of financing cash outflows for the first nine months. A $750 million accelerated share repurchase agreement entered into in August remained subject to final settlement.
Guidance, outlook, commentary, risks, and unusual items
- Management identified priorities of growing policies in force, maintaining the underlying combined ratio, generating risk-adjusted investment returns, modernizing the operating model, and building long-term growth platforms. No specific earnings or revenue guidance was provided.
- Auto and homeowners premiums grew, with Esurance producing strong policy growth but continuing to report an underwriting loss. Esurance expansion and advertising increased its expense ratio.
- Catastrophe frequency and severity are inherently unpredictable. Severe weather materially affected homeowners results, particularly for Encompass.
- Discontinued Lines and Coverages produced underwriting losses of $105 million in the quarter and $111 million year to date, including unfavorable asbestos and environmental reserve reestimates. Net asbestos reserves were $1.05 billion and environmental reserves were $211 million.
- Legal and regulatory matters remain subject to significant uncertainty. The company estimated an aggregate reasonably possible loss range of zero to $685 million before tax for certain disclosed matters, excluding matters for which an estimate was not possible; management stated that this was not an indication of expected loss.
- The company disclosed a $6 million pre-tax annual review charge related to deferred policy acquisition costs, deferred sales inducement costs, and secondary guarantee liabilities, versus a $58 million charge in the 2013 quarter.
- Investment results remain exposed to interest rates, credit spreads, equity markets, limited partnership valuations, mortgage performance, catastrophe losses, reserve development, policyholder withdrawals, and regulatory actions.
Most important facts for investors to verify
- Whether the higher catastrophe losses and combined ratio represent temporary weather volatility or a deterioration in underlying underwriting profitability.
- The sustainability and quality of earnings excluding realized capital gains, the Lincoln Benefit Life disposition effects, reserve reestimates, and other unusual items.
- Future reserve development in asbestos, environmental, discontinued-line, and catastrophe exposures.
- The final share count and settlement economics of the $750 million accelerated share repurchase agreement.
- Liquidity and capital adequacy under stressed conditions, including policyholder withdrawals, catastrophe claims, investment losses, and potential legal or regulatory payments.
- Changes in Allstate Financial contractholder funds, investment spreads, fixed-annuity runoff, and the effects of the Lincoln Benefit Life sale.