Business Context and Reporting Period
This summary covers The Allstate Corporation's Form 10-Q for the quarterly period ended June 30, 2010. The Company is a large accelerated filer engaged primarily in property-liability insurance (Allstate Protection and Discontinued Lines) and life/annuity products (Allstate Financial). The reporting period reflects the impact of ongoing economic conditions, including lower interest rates and credit market deterioration, as well as the Company's strategic focus on improving customer loyalty and reinventing protection products.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 |
|---|---|---|---|
| Total Revenues | $7,656 million | $15,405 million | $16,373 million |
| Net Income | $145 million | $265 million | $115 million |
| Earnings Per Share (Diluted) | $0.27 | $0.49 | $0.21 |
| Property-Liability Combined Ratio | 96.8 | 97.9 | 98.4 |
| Net Investment Income | $1,049 million | $2,099 million | $2,284 million |
| Total Investments | $99,943 million | $99,943 million | $99,833 million (Dec 31, 2009) |
| Shareholders' Equity | $18,039 million | $18,039 million | $16,692 million (Dec 31, 2009) |
| Long-Term Debt | $5,909 million | $5,909 million | $5,910 million (Dec 31, 2009) |
Material Changes vs. Prior Period
- Net Income Improvement: Consolidated net income for the six months ended June 30, 2010, increased to $265 million from $115 million in the same period of 2009. This improvement was driven by better underwriting results and lower amortization of deferred policy acquisition costs (DAC), partially offset by net realized capital losses.
- Underwriting Performance: The Property-Liability combined ratio improved to 97.9 for the six months of 2010 compared to 98.4 in 2009. This was primarily due to a decrease in the homeowners loss ratio (85.0 vs. 88.9) driven by lower catastrophe losses and favorable prior year reserve reestimates.
- Investment Results: Net realized capital losses were $799 million for the six months of 2010, compared to $31 million in 2009. This shift from gains to losses was largely due to valuation changes in derivative instruments used for risk management and impairment write-downs on fixed income securities.
- Allstate Financial Segment: The segment reported a net loss of $103 million for the six months of 2010, a significant improvement from a net loss of $308 million in 2009. The 2009 loss included a $142 million valuation allowance charge related to deferred tax assets on capital losses.
Guidance, Outlook, and Risks
- Investment Outlook: Management continues to focus on strategic risk mitigation regarding interest rate, equity, credit, and real estate risks. The Company has reduced exposure to municipal bonds and commercial real estate. Unrealized net capital gains on the portfolio improved to $400 million as of June 30, 2010, from losses of $2.32 billion at year-end 2009, primarily due to declining risk-free interest rates.
- Catastrophe Exposure: Catastrophe losses for the six months of 2010 were $1.28 billion, down from $1.33 billion in 2009. The Company maintains a reinsurance program with an estimated annualized cost of $560 million for the year beginning June 1, 2010.
- Liquidity and Capital: Shareholders' equity increased to $18.04 billion. The Company holds $35.08 billion in cash and liquid investments saleable within one quarter. The debt-to-capital resources ratio was 24.7% as of June 30, 2010.
- Legal and Regulatory Risks: The Company is involved in various legal proceedings, including a nationwide putative class action regarding total loss automobile valuations and litigation related to Hurricane Katrina. Management believes the ultimate outcome of these matters is not likely to have a material adverse effect on financial position, though individual outcomes remain uncertain.
- Asbestos and Environmental: Reserves for asbestos and environmental claims totaled $1.14 billion and $190 million, respectively, net of reinsurance. Management notes significant uncertainty regarding the ultimate cost of these long-tail liabilities.
Key Facts for Investor Verification
- Realized Capital Losses: Verify the composition of the $799 million net realized capital loss, specifically the portion attributed to derivative valuation changes versus impairment write-downs on fixed income securities.
- Reserve Reestimates: Confirm the sustainability of the $173 million favorable prior year reserve reestimates in the Property-Liability segment, which significantly improved the combined ratio.
- Investment Portfolio Quality: Review the details of the $3.33 billion in gross unrealized losses on fixed income securities, particularly the concentration in below-investment grade RMBS, CMBS, and ABS, and the Company's assessment of other-than-temporary impairment (OTTI).
- Allstate Financial DAC Amortization: Understand the drivers behind the 83.2% decrease in DAC amortization for the Allstate Financial segment compared to the prior year, as this significantly impacted net income.
- Contractholder Fund Surrenders: Monitor the annualized surrender and partial withdrawal rate of 12.2% for the first six months of 2010, which increased from 11.2% in the prior year, and its impact on liquidity and investment spread.