Business Context and Reporting Period
The Allstate Corporation filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2014. Allstate operates primarily through Property-Liability, including Allstate, Encompass and Esurance, and Allstate Financial, including life, retirement and benefits businesses. The interim results are not necessarily indicative of full-year results.
Financial Performance and Key Metrics
| Metric | Q2 2014 | Q2 2013 | Six Months 2014 | Six Months 2013 |
|---|---|---|---|---|
| Total revenues | $8.86 billion | $8.79 billion | $17.54 billion | $17.25 billion |
| Net income | $645 million | $434 million | $1.25 billion | $1.14 billion |
| Net income available to common shareholders | $614 million | $434 million | $1.20 billion | $1.14 billion |
| Diluted EPS | $1.39 | $0.92 | $2.69 | $2.39 |
| Net investment income | $898 million | $984 million | $1.86 billion | $1.97 billion |
| Realized capital gains and losses | $240 million | $362 million | $294 million | $493 million |
| Operating cash flow | Not separately provided | Not separately provided | $1.20 billion | $1.55 billion |
Property-Liability premiums earned increased 5.0% to $7.20 billion in the quarter and 4.7% to $14.27 billion for the six months. Property-Liability underwriting income was $192 million in the quarter and $567 million year to date. The combined ratio was 97.4% in the quarter and 96.1% year to date, compared with 96.1% and 94.7%, respectively, in the prior-year periods.
Catastrophe losses were $936 million in the quarter and $1.38 billion year to date, compared with $647 million and $1.01 billion in the prior-year periods. Allstate Financial net income available to common shareholders was $145 million in the quarter and $307 million year to date.
At June 30, 2014, total investments were $82.56 billion, cash was $889 million, shareholders’ equity was $22.87 billion and long-term debt was $5.85 billion. Debt represented 25.6% of shareholders’ equity and 20.4% of total capital resources. Parent-level deployable assets were $3.61 billion. The company reported no commercial paper or revolving-credit borrowings outstanding and stated that it had sufficient liquidity for base and stressed needs.
Material Changes Versus the Prior Comparable Period
- Net income available to common shareholders increased 41% in the second quarter, primarily because second-quarter 2013 included a $312 million after-tax loss on extinguishment of debt.
- Property-Liability earnings declined despite premium growth, reflecting higher catastrophe losses, higher non-catastrophe loss costs and less favorable reserve development. The combined ratio deteriorated by 1.3 points in the quarter and 1.4 points year to date.
- Net investment income declined 8.7% in the quarter and 5.6% year to date, primarily because of lower fixed-income yields and the sale of Lincoln Benefit Life, partly offset by higher limited-partnership income.
- Allstate Financial earnings declined to $145 million from $190 million in the quarter and to $307 million from $336 million year to date, largely reflecting the Lincoln Benefit Life disposition and lower realized investment results.
- On April 1, 2014, Allstate completed the sale of Lincoln Benefit Life and related businesses for a gross sale price of $797 million, including $596 million of cash and retained tax benefits. The sale generated a $50 million pretax loss for the six months.
- Shareholders’ equity increased 6.5% from December 31, 2013, supported by net income, preferred-stock issuance and higher unrealized investment gains, partly offset by repurchases and dividends. After-tax unrealized net capital gains increased to $2.15 billion from $1.65 billion.
- Allstate issued $747.5 million of Series E preferred stock in March and $250 million of Series F preferred stock in June. It also repurchased common shares and maintained a $2.5 billion repurchase authorization.
Outlook, Commentary, Risks and Unusual Items
Management identified priorities including policy growth, maintaining the underlying combined ratio, generating risk-adjusted investment returns, modernizing operations and building long-term growth platforms. The filing does not provide formal earnings or revenue guidance.
- Catastrophe frequency and severity are unpredictable. The company placed additional 2014 catastrophe reinsurance, including $4.18 billion of nationwide coverage subject to a $500 million retention for specified exposures, plus separate Florida protection.
- Insurance reserves are inherently uncertain, particularly for current-period claims, asbestos, environmental and other discontinued-line exposures. Net asbestos reserves were $976 million and net environmental reserves were $201 million at June 30, 2014.
- The company estimated aggregate reasonably possible legal losses above amounts accrued at zero to $825 million pretax for disclosed matters where an estimate was possible. Management stated that the ultimate outcome of all disclosed matters is not likely to materially affect financial position, but individual periods could be materially affected.
- Allstate reported $126 million of other-than-temporary investment impairment losses for the six months, including $104 million from changes in intent to sell certain investments.
- The August 15, 2014 maturity of $650 million of 5.00% senior notes was expected to be paid from available funds.
- The final proceeds and loss on the Lincoln Benefit Life sale remained subject to closing-balance-sheet review and could be re-estimated.
Investor Verification Priorities
- Verify whether catastrophe losses and the 97.4% quarterly combined ratio normalize in subsequent periods.
- Review reserve development, especially homeowners, Encompass and discontinued asbestos and environmental claims.
- Assess the sustainability of investment income given lower fixed-income yields and reliance on limited-partnership results.
- Confirm the final Lincoln Benefit Life sale proceeds, loss and related trust requirements.
- Monitor debt maturities, preferred-stock costs, capital adequacy and the pace of share repurchases.
- Review the potential range of legal losses and regulatory exposure, including the disclosed zero-to-$825 million reasonably possible loss range.