ALLSTATE CORP quarterly report, Q3 FY2012

Business Context and Reporting Period

The Allstate Corporation filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. Allstate operates primarily through Property-Liability insurance, including auto and homeowners coverage, and Allstate Financial, including life, annuity and accident and health products. Interim results are not necessarily indicative of full-year results.

Financial Performance and Key Metrics

Metric	Three months ended September 30	Nine months ended September 30
Total revenue	$8.13 billion, versus $8.24 billion	$24.77 billion, versus $24.42 billion
Net income	$723 million, versus $175 million	$1.91 billion, versus $75 million
Diluted EPS	$1.48, versus $0.34	$3.86, versus $0.14
Net investment income	$940 million, versus $994 million	$2.98 billion, versus $3.00 billion
Realized capital gains and losses	$72 million loss, versus $264 million gain	$123 million gain, versus $417 million gain
Operating cash flow	Not separately provided for the quarter	$2.62 billion, versus $1.67 billion

Property-Liability net income was $639 million in the quarter and $1.69 billion year to date, compared with $41 million and a $228 million loss, respectively, in the prior-year periods.
Allstate Financial net income was $131 million in the quarter and $375 million year to date, compared with $192 million and $455 million, respectively.
Property-Liability premiums earned increased 4.1% to $6.70 billion in the quarter and 3.4% to $19.99 billion year to date.
Property-Liability underwriting income was $659 million in the quarter and $1.32 billion year to date, compared with an underwriting loss of $309 million and $1.48 billion, respectively.
The Property-Liability combined ratio improved to 90.2 from 104.8 in the quarter and to 93.4 from 107.7 year to date. Catastrophe losses declined to $206 million from $1.08 billion in the quarter and to $1.28 billion from $3.75 billion year to date.
Total investments were $98.52 billion at September 30, 2012, including $77.73 billion of fixed-income securities. Unrealized net capital gains were $5.73 billion, compared with $2.88 billion at December 31, 2011.
Shareholders’ equity was $20.84 billion, compared with $18.30 billion at December 31, 2011. Book value per diluted share was $42.64, up from $36.18 at year-end 2011.
Long-term debt was $6.06 billion, compared with $5.91 billion at December 31, 2011. Debt represented 29.1% of shareholders’ equity and 22.5% of total capital resources.
Cash was $642 million at September 30, 2012, compared with $776 million at year-end 2011. Consolidated cash declined by $134 million year to date, primarily because financing cash uses exceeded operating and investing cash inflows.

Material Changes and Unusual Items

The improvement in consolidated earnings was driven principally by substantially lower catastrophe losses, favorable prior-year reserve reestimates and stronger Property-Liability underwriting results.
Allstate Financial earnings declined because of realized capital losses and lower net investment income, partly offset by lower interest credited to contractholder funds and lower DAC amortization.
A third-quarter valuation change on embedded derivatives in equity-indexed annuity contracts reduced interest-crediting expense by $169 million and produced a $75 million after-tax benefit to Allstate Financial net income.
The annual review of insurance assumptions produced a $34 million acceleration of DAC amortization and a $27 million pre-tax charge related to DAC, deferred sales inducement costs and secondary guarantee liabilities.
Allstate adopted revised insurance acquisition-cost accounting retrospectively. The adoption reduced shareholders’ equity by $399 million as of January 1, 2011 and changed the presentation of prior-period expenses and net income.
Allstate issued $500 million of 5.20% senior notes due 2042 and repaid $350 million of 6.125% senior notes during 2012.
The company repurchased 22.1 million common shares for $728 million during the first nine months. $166 million remained under the $1.00 billion repurchase authorization at September 30, 2012.
Contractholder funds declined to $40.11 billion from $42.33 billion at year-end 2011, consistent with management’s strategy to reduce exposure to spread-based products.

Outlook, Risks, Contingencies and Management Commentary

Management identified priorities of maintaining auto profitability, improving returns in homeowners and annuity businesses, growing insurance premiums, and proactively managing investments and capital. No formal quantitative earnings guidance is provided in the filing.

Management stated that catastrophe activity cannot be reliably predicted. Homeowners growth is being managed through rate actions, underwriting restrictions and selective non-renewals or limited offerings in certain coastal areas.
Auto profitability remains sensitive to claim severity, particularly bodily injury and property damage severity, as well as regulatory and market conditions in Florida and New York. Esurance experienced underwriting losses and elevated personal-injury-protection losses in Florida and New Jersey.
The investment portfolio remains exposed to interest rates, credit spreads, structured securities, mortgage-backed securities, below-investment-grade assets, valuation uncertainty and other-than-temporary impairment risk. Management reported that it did not intend, and was not more likely than not, to sell fixed-income securities with unrealized losses before recovery.
Asbestos and environmental reserves were $1.05 billion and $201 million, respectively, net of reinsurance, at September 30, 2012. Management stated that meaningful ranges for additional reserves cannot be developed because of significant uncertainty.
For disclosed legal matters where an estimate was possible, the aggregate reasonably possible loss in excess of amounts accrued ranged from zero to $855 million before tax. Management stated that this is not an indication of expected loss and does not represent maximum exposure.
Potential risks include regulatory changes affecting insurance rates and practices, litigation and class actions, reserve inadequacy, catastrophe losses, rating downgrades, liquidity needs and counterparty or derivative exposures.
Management stated that it believed liquidity was sufficient. The parent had $2.34 billion of deployable invested assets, including $1.92 billion generally saleable within one quarter, no commercial paper outstanding, and a $1.00 billion unsecured revolving credit facility.

Important Facts for Investors to Verify

Whether the unusually favorable Property-Liability results, including the 90.2 combined ratio, remain sustainable after normalizing for catastrophe losses and favorable reserve development.
The future impact of lower interest rates, declining investment yields and the planned reduction in spread-based annuity products on Allstate Financial earnings.
The assumptions supporting the $169 million embedded-derivative valuation benefit and the $34 million DAC unlocking charge.
Credit performance, impairment risk and valuation sensitivity within the fixed-income, subprime RMBS, CMBS, ABS and below-investment-grade portfolios.
Developments in asbestos, environmental and other discontinued-lines reserves, including the potential legal loss range of up to $855 million before tax.
Progress on auto and homeowners rate increases, policy counts, renewal ratios and profitability actions in Florida, New York, New Jersey and other higher-risk jurisdictions.
Debt maturities, including $250 million of debentures due June 15, 2013, and the pace of remaining share repurchases.