Allstate Corporation: Form 10-Q Summary
Reporting period: Three months ended March 31, 2010, compared with the three months ended March 31, 2009. The interim financial statements are unaudited and reflect normal recurring adjustments. Allstate operates primarily through Property-Liability, Allstate Financial, and Corporate and Other segments.
Financial performance and position
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Total revenues | $7.749 billion | $7.883 billion | Down 1.7% |
| Net income (loss) | $120 million | $(274) million | Improved $394 million |
| Diluted EPS | $0.22 | $(0.51) | Improved $0.73 |
| Net cash from operating activities | $964 million | $1.522 billion | Down $558 million |
| Net realized capital gains (losses) | $(348) million | $(359) million | Loss narrowed $11 million |
| Net investment income | $1.050 billion | $1.176 billion | Down 10.7% |
| Shareholders’ equity at period-end | $17.560 billion | $16.692 billion at Dec. 31, 2009 | Up 5.2% |
- Property-Liability: Net income was $164 million versus $100 million. Underwriting income declined to $71 million from $208 million, and the combined ratio increased to 98.9 from 96.8. Premiums earned decreased 1.2% to $6.503 billion.
- Allstate Protection: Underwriting income declined to $75 million from $214 million. Homeowners produced a $192 million underwriting loss versus an $85 million loss, while standard auto underwriting income declined to $213 million from $258 million.
- Allstate Financial: Net income was $4 million versus a $327 million loss. The improvement primarily reflected substantially lower DAC and DSI amortization and lower interest credited to contractholder funds, partly offset by lower investment income and higher contract benefits.
- Cash and liquidity: Cash increased to $704 million from $612 million at year-end. Management reported $35.21 billion of cash and liquid investments saleable within 90 days without significant additional losses, representing 34.9% of the consolidated cash and investment portfolio. Expected investment portfolio cash flows over the next 12 months were $10.15 billion.
- Debt and capital: Long-term debt was $5.910 billion. Debt-to-shareholders’ equity was 33.7%, and debt-to-capital resources was 25.2%. The company had no borrowings under its $1.0 billion revolving credit facility or commercial paper facility at March 31, 2010.
- Investments: Total investments were $100.223 billion, including $81.284 billion of fixed-income securities. Unrealized net capital losses improved to $849 million from $2.321 billion at December 31, 2009. Approximately 93.3% of the fixed-income portfolio was investment grade.
Material changes versus the prior comparable period
- Allstate returned to profitability, primarily because Q1 2009 included a $254 million increase in the deferred tax asset valuation allowance and a $322 million DAC and DSI amortization acceleration, compared with a $12 million amortization deceleration in Q1 2010.
- Property-Liability results weakened operationally despite higher segment net income, reflecting higher catastrophe losses, adverse claim-frequency trends, and lower investment income.
- Catastrophe losses increased to $648 million from $516 million. Eleven events generated $663 million of losses before $15 million of favorable prior-year reserve reestimates.
- Net investment income fell $126 million, primarily due to lower yields, portfolio duration-shortening actions, and reduced average asset balances.
- Contractholder funds declined to $51.027 billion from $52.582 billion at year-end 2009. Deposits declined to $938 million from $1.404 billion in the prior-year quarter, while withdrawals, maturities, benefits, and other adjustments remained significant.
- Management reduced municipal bond exposure by 5.9%, commercial real estate exposure by 4.9%, and equity exposure by $1.41 billion of cost during the quarter.
- Effective March 31, 2010, Allstate Financial stopped wholesaling or providing direct distribution support to banks and broker-dealers, while continuing to service in-force contracts. Related 2009 contract charges were $44 million and deposits were $896 million; Q1 2010 contract charges were $11 million and deposits were $102 million.
- The company adopted new variable-interest-entity consolidation guidance. Four VIEs were consolidated at January 1, 2010 and two were subsequently deconsolidated on March 26, 2010; the effect on Q1 operations was not material.
Outlook, commentary, risks, and unusual items
- Management stated that rate changes indicated by loss trends would continue to be pursued in auto and homeowners insurance. No specific consolidated earnings guidance was provided in the filing.
- Future catastrophe frequency and severity cannot be reliably predicted. Homeowners profitability remains particularly sensitive to catastrophe activity and weather-related claim frequency.
- The investment portfolio remains exposed to credit spreads, interest rates, real estate valuations, liquidity, mortgage performance, and structured securities. Fixed-income unrealized losses totaled $1.202 billion, including substantial losses in RMBS, CMBS, and ABS.
- Mortgage loans totaled $7.639 billion. Eleven loans totaling $158 million were in foreclosure at March 31, 2010, compared with five loans totaling $49 million at year-end 2009.
- Derivative activities generated $185 million of net realized capital losses, including $161 million from macro hedging programs. These losses were intended to mitigate interest-rate and equity-market risks and were partly offset by gains recognized in other comprehensive income.
- Asbestos reserves were $1.16 billion net of reinsurance, and environmental reserves were $197 million. Management stated that the ultimate costs may vary materially and that a meaningful range of additional reserves could not be developed.
- Allstate faces class actions, regulatory inquiries, market-conduct examinations, Hurricane Katrina-related litigation, worker-classification matters, agency-reorganization litigation, and a New Mexico installment-fee class action. Management believed the disclosed matters were not likely to have a material adverse effect on financial position, but acknowledged that individual periods could be materially affected.
- Management concluded that disclosure controls and procedures were effective and that no material change occurred in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the higher catastrophe losses and 98.9 combined ratio persist, particularly in homeowners insurance.
- The adequacy of property-liability, asbestos, environmental, and other discontinued-line reserves as claims develop.
- Performance and impairment risk in RMBS, CMBS, ABS, municipal bonds, commercial mortgage loans, and other structured investments.
- The sustainability of Allstate Financial earnings without the unusually favorable year-over-year DAC and tax comparisons.
- Contractholder-fund deposit trends, surrender rates, institutional maturities, and liquidity under stressed market conditions.
- Potential effects of pending litigation, the multi-state claims-handling examination, and other regulatory proceedings.
- Changes in debt ratings, collateral requirements, derivative exposures, and the company’s ability to maintain reported liquidity and capital levels.