Allstate Corporation 2014 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2014, with comparative results for 2013 and 2012. Allstate is primarily a U.S. and Canadian property-liability and life insurer. Its reportable segments are Allstate Protection, Discontinued Lines and Coverages, Allstate Financial, and Corporate and Other. Allstate Protection generated 93% of 2014 consolidated insurance premiums and contract charges and primarily sells auto and homeowners insurance under the Allstate, Esurance, and Encompass brands.
The fourth quarter of 2014 produced revenue of $8.76 billion and net income available to common shareholders of $795 million, or $1.86 diluted earnings per share, compared with $8.79 billion, $810 million, and $1.76, respectively, in the fourth quarter of 2013.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenues | $35.24 billion | $34.51 billion | +2.1% |
| Net income | $2.85 billion | $2.28 billion | +25.0% |
| Net income available to common shareholders | $2.75 billion | $2.26 billion | +21.3% |
| Diluted EPS | $6.27 | $4.81 | +30.4% |
| Property-liability premiums earned | $28.93 billion | $27.62 billion | +4.7% |
| Property-liability premiums written | $29.61 billion | $28.16 billion | +5.1% |
| Property-liability combined ratio | 93.9% | 92.0% | 190 basis points worse |
| Allstate Protection combined ratio | 93.5% | 91.5% | 200 basis points worse |
| Net investment income | $3.46 billion | $3.94 billion | -12.3% |
| Net realized capital gains | $694 million | $594 million | +$100 million |
| Operating cash flow | $3.24 billion | $4.24 billion | -$1.01 billion |
| Shareholders’ equity | $22.30 billion | $21.48 billion | +3.8% |
| Long-term debt | $5.19 billion | $6.20 billion | -$1.01 billion |
Property-liability underwriting income declined to $1.77 billion from $2.22 billion. Catastrophe losses increased to $1.99 billion from $1.25 billion, raising the loss ratio to 67.2% from 64.9%. Favorable prior-year reserve reestimates were $84 million, compared with $121 million in 2013.
Allstate Financial net income available to common shareholders rose to $631 million from $95 million. The improvement primarily reflected the substantially lower loss associated with the Lincoln Benefit Life disposition, partly offset by lower investment income and the reduction in business following the sale.
Cash provided by operating activities was $3.24 billion. Cash provided by investing activities was $1.62 billion, while financing activities used $4.88 billion, principally reflecting share repurchases, debt repayment, dividends, and contractholder fund activity. Ending cash was $657 million.
Total investments were $81.11 billion, including $62.44 billion of fixed-income securities, $4.10 billion of equity securities, $4.19 billion of mortgage loans, and $4.53 billion of limited partnership interests. Approximately 89.3% of fixed-income securities were investment grade.
Material changes versus prior comparable periods
- Consolidated earnings improved primarily because 2013 included a $521 million after-tax estimated loss on the pending Lincoln Benefit Life sale and a $319 million after-tax-equivalent loss on debt extinguishment; these items were substantially lower in 2014.
- Allstate completed the sale of Lincoln Benefit Life on April 1, 2014. The 2014 after-tax loss on disposition was approximately $60 million, compared with $521 million in 2013.
- Property-liability earnings weakened despite premium growth because catastrophe losses increased and homeowners severity rose. Allstate Protection underwriting income fell 20.1% to $1.89 billion.
- Allstate Financial contractholder funds declined to $22.53 billion from $24.30 billion, reflecting the discontinuation of new fixed-annuity sales, the LBL sale, and the managed reduction of spread-based business.
- Net investment income declined because of lower fixed-income yields, lower average investment balances, and the LBL disposition. Limited partnership income increased and partly offset the decline.
- Allstate issued $997.5 million of preferred stock during 2014, repaid $1.01 billion of debt, and repurchased 39.0 million common shares for $2.31 billion.
- Book value per diluted common share increased 6.5% to $48.24, and return on average common shareholders’ equity increased to 13.3% from 11.0%.
Guidance, outlook, risks, contingencies, and unusual items
Management’s 2015 priorities are to grow policies in force, maintain the underlying combined ratio, manage investments for attractive risk-adjusted returns, modernize operations, and build long-term growth platforms. Allstate Protection expects catastrophe volatility to continue, while relying on pricing discipline, reinsurance, underwriting actions, telematics, agency modernization, and differentiated products.
Allstate Financial expects lower investment spreads as contractholder funds decline and interest rates remain low. The company stopped selling new fixed annuities in 2014, expects to outsource annuity administration in 2015, and plans to use Allstate Assurance Company for new life business previously written by LBL.
- Major risks include catastrophe and severe-weather losses, reserve inadequacy, asbestos and environmental claims, Michigan and New Jersey unlimited personal-injury-protection exposure, reinsurance collectability, investment and credit losses, low interest rates, surrender activity, regulatory rate restrictions, litigation, cyber risk, and rating downgrades.
- Net property-liability reserves were $17.23 billion, while gross reserves were $22.92 billion. Reinsurance recoverables totaled $5.78 billion, including $4.42 billion from the Michigan Catastrophic Claim Association and $508 million from the New Jersey fund.
- Management estimates that a 1% change in net property-liability reserves would affect net income available to common shareholders by approximately $112 million. Allstate Protection reserve variability, excluding catastrophes, was estimated at approximately plus or minus 4%, or about $500 million in net income available to common shareholders.
- Discontinued Lines and Coverages produced a $115 million underwriting loss, including unfavorable asbestos and environmental reserve reestimates. Net asbestos reserves were $1.01 billion and net environmental reserves were $203 million.
- The aggregate reasonably possible legal loss in excess of amounts accrued, where estimable, was disclosed as zero to $690 million before tax. Allstate stated that this range is not an indication of expected loss and excludes matters for which no estimate is possible.
- The company identified a maximum possible 2015 California Earthquake Authority assessment of approximately $273 million based on its market share, although actual assessments may differ.
- Interest-rate sensitivity was material: an immediate 100-basis-point rate increase was estimated to increase net fair value of assets and liabilities by $991 million, while a 100-basis-point credit-spread increase was estimated to reduce asset fair value by $2.91 billion.
- No goodwill impairment was identified as of December 31, 2014. The independent auditor reported an unqualified opinion and concluded that internal control over financial reporting was effective.
Most important facts an investor should verify
- Whether premium growth and policy growth can offset higher catastrophe losses, claims severity, and the 2014 deterioration in combined ratios.
- The sustainability of favorable prior-year reserve development and the adequacy of reserves for auto, homeowners, Michigan and New Jersey PIP, asbestos, and environmental claims.
- The collectability and concentration of the $5.78 billion property-liability reinsurance recoverable balance, particularly MCCA and other industry-facility exposures.
- The effect of prolonged low interest rates, reinvestment at lower yields, contractholder surrenders, and the continuing runoff of spread-based products on Allstate Financial earnings.
- The effect of the LBL sale and the transition to Allstate Assurance Company and outsourced administration on future premiums, expenses, capital, and operating income.
- Regulatory limits on subsidiary dividends, including the estimated $2.31 billion 2015 dividend capacity of Allstate Insurance Company without prior Illinois approval.
- The company’s ability to fund $2.31 billion of 2014 share repurchases, dividends, debt service, and future capital commitments while preserving insurance financial-strength ratings.
- Potential legal, regulatory, catastrophe-facility, climate, cyber, and reinsurance contingencies that may exceed recorded liabilities or disclosed estimates.