Business Context and Reporting Period
This summary covers The Allstate Corporation's Form 10-Q for the quarterly period ended March 31, 2008. The Company is a large accelerated filer engaged primarily in property-liability insurance (Allstate Protection and Discontinued Lines) and financial services (Allstate Financial). The reporting period reflects significant market volatility, particularly in fixed income and mortgage-backed securities, impacting investment valuations and realized gains/losses.
Key Financial Metrics
| Metric | Q1 2008 | Q1 2007 |
|---|---|---|
| Total Revenues | $8,087 million | $9,331 million |
| Net Income | $348 million | $1,495 million |
| Earnings Per Share (Diluted) | $0.62 | $2.41 |
| Property-Liability Premiums Earned | $6,764 million | $6,806 million |
| Combined Ratio (Property-Liability) | 94.0% | 84.6% |
| Realized Capital Gains/Losses | ($655 million) | $471 million |
| Total Investments | $115,470 million | $118,980 million (Dec 31, 2007) |
| Shareholders' Equity | $20,303 million | $21,851 million (Dec 31, 2007) |
| Long-Term Debt | $5,640 million | $5,640 million (Dec 31, 2007) |
| Net Cash Provided by Operating Activities | $1,120 million | $1,528 million |
Material Changes vs. Prior Period
- Profitability Decline: Net income decreased by $1.15 billion (77%) compared to Q1 2007. This was primarily driven by a swing from $471 million in realized capital gains in 2007 to $655 million in realized capital losses in 2008.
- Underwriting Deterioration: The Property-Liability combined ratio worsened to 94.0% from 84.6%. Catastrophe losses increased significantly to $568 million (up from $161 million), and prior year reserve reestimates were $101 million unfavorable (compared to $129 million favorable in 2007).
- Segment Performance:
- Property-Liability: Net income dropped to $503 million from $1,349 million due to higher catastrophe losses and investment losses.
- Allstate Financial: Reported a net loss of $111 million, a reversal from $164 million net income in the prior year, driven largely by $432 million in realized capital losses.
- Investment Portfolio: Total investments decreased 3.0% from year-end 2007. Unrealized net capital losses totaled $570 million as of March 31, 2008, compared to unrealized gains of $1.91 billion at year-end 2007, largely due to widening credit spreads in fixed income securities.
Guidance, Outlook, Risks, and Unusual Items
- Share Repurchases: The Company completed its $4.00 billion share repurchase program and initiated a new $2.00 billion program expected to be completed by March 31, 2009. As of March 31, 2008, $1.82 billion remained available under the new program.
- Dividends: The quarterly dividend was increased to $0.41 per share, a 7.9% increase over the prior year.
- Investment Risks: The Company highlighted illiquidity in specific asset classes, including ABS RMBS, Alt-A, and CRE CDO portfolios. Impairment write-downs totaled $347 million for fixed income securities in the quarter. Management maintains intent to hold most securities with unrealized losses to recovery.
- Legal and Regulatory:
- Florida Regulation: The Florida Office of Insurance Regulation (OIR) suspended certificates of authority for ten affiliated companies regarding new business writing, though a court stay allowed continued operations pending appeal.
- Katrina/Rita Litigation: Ongoing litigation regarding flood exclusions and claim handling continues, with the Louisiana Supreme Court recently ruling flood exclusions valid and enforceable.
- Rate Filings: The Company is defending rate filings in Texas and California, including a 15.9% rate reduction order in California implemented in April 2008.
- Unusual Items: A $9 million loss on disposition of operations was recorded, primarily related to the anticipated disposition of the direct response long-term care business.
Investor Verification Checklist
- Investment Valuation: Verify the extent of unrealized losses in Level 3 assets (specifically Alt-A, ABS RMBS, and CRE CDO) and the Company's assessment of "other-than-temporary" impairment.
- Catastrophe Reserves: Review the adequacy of catastrophe loss reserves given the $568 million incurred in Q1 and the $117 million unfavorable reestimate of prior year catastrophe reserves.
- Liquidity Position: Confirm the impact of the $1.00 billion dividend paid by Allstate Insurance Company (AIC) to the parent and the remaining capacity for future dividends ($4.96 billion).
- Regulatory Exposure: Monitor the status of the Florida OIR suspension and the outcome of the Texas and California rate filing disputes.
- Shareholder Returns: Track the execution of the new $2.00 billion share repurchase program and the sustainability of the increased dividend payout.