Allstate Corporation 2015 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2015. Allstate is primarily a U.S. and Canadian property-liability and life insurer, with four reportable segments: Allstate Protection, Discontinued Lines and Coverages, Allstate Financial, and Corporate and Other. Allstate Protection generated approximately 93% of consolidated insurance premiums and contract charges and primarily writes auto and homeowners coverage under the Allstate, Esurance, and Encompass brands.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenues | $35.65 billion | $35.24 billion | Up 1.2% |
| Net income applicable to common shareholders | $2.06 billion | $2.75 billion | Down 25.2% |
| Diluted earnings per share | $5.05 | $6.27 | Down 19.5% |
| Operating cash flow | $3.62 billion | $3.24 billion | Up $380 million |
| Net investment income | $3.16 billion | $3.46 billion | Down 8.8% |
| Net realized capital gains | $30 million | $694 million | Down substantially |
| Shareholders’ equity | $20.03 billion | $22.30 billion | Down 10.2% |
| Long-term debt | $5.12 billion | $5.14 billion | Down slightly |
| Debt to shareholders’ equity | 25.6% | 23.0% | Up 2.6 points |
| Parent deployable assets | $2.62 billion | Not clearly provided | Not comparable from supplied text |
Property-liability premiums earned increased 4.8% to $30.31 billion, while premiums written increased 4.2% to $30.87 billion. The property-liability combined ratio deteriorated to 94.9% from 93.9%, reflecting a higher loss ratio of 69.4% versus 67.2%, partly offset by a lower expense ratio of 25.5% versus 26.7%. Underwriting income declined to $1.56 billion from $1.77 billion.
Allstate Protection underwriting income declined to $1.61 billion from $1.89 billion. Its combined ratio was 94.7%, compared with 93.5% in 2014. Auto underwriting income fell sharply to $23 million from $604 million, while homeowners underwriting income increased to $1.43 billion from $1.10 billion.
Allstate Financial net income increased to $663 million from $631 million, although net investment income declined 11.6% to $1.88 billion. Contractholder funds decreased 5.5% to $21.30 billion, primarily due to the runoff of deferred fixed annuity business, which Allstate stopped selling beginning January 1, 2014.
Net cash provided by operating activities was $3.62 billion. Investing activities provided $742 million, while financing activities used $4.52 billion, principally reflecting dividends, common share repurchases, and contractholder fund activity. Allstate paid $483 million of common dividends and repurchased approximately 42.8 million common shares for $2.80 billion during 2015.
Material changes versus the prior comparable period
- Net income declined primarily because of higher property-liability claims and claims expense, lower net investment income, and a sharp reduction in realized capital gains.
- Catastrophe losses decreased to $1.72 billion from $1.99 billion, but current-year auto claim frequency and severity increased. Bodily injury frequency rose 5.9% and property damage frequency rose 6.3% for the Allstate brand.
- Prior-year reserve reestimates shifted from an $84 million favorable adjustment in 2014 to an $81 million unfavorable adjustment in 2015, primarily from higher-than-expected bodily injury severity and older litigation settlements.
- Net property-liability reserves increased to $17.98 billion from $17.23 billion; gross reserves increased to $23.87 billion from $22.92 billion.
- Investment assets declined to $77.76 billion from $81.11 billion. After-tax unrealized net capital gains fell to $620 million from $1.93 billion, largely because of wider credit spreads, higher risk-free rates, and weaker equity markets.
- Shareholders’ equity declined despite positive net income, principally because of share repurchases, dividends, and the decline in unrealized investment gains.
- Allstate Financial’s 2015 results benefited from higher realized capital gains and the absence of the significant Lincoln Benefit Life disposition loss recorded in 2014. Comparability is affected by the 2014 sale of LBL’s business.
Guidance, outlook, commentary, and unusual items
- Management’s 2016 priorities are customer-focused innovation and efficiency, target economic returns on capital, policy growth, proactive investment management, and building or acquiring long-term growth platforms.
- Allstate Protection plans to pursue auto rate increases, underwriting and claims-management actions, expense controls, and disciplined homeowners growth without significantly increasing catastrophe exposure.
- Management expects catastrophe volatility to continue, with reinsurance mitigating but not eliminating the impact. The 2016 catastrophe reinsurance program was expected to be similar to the 2015 program.
- Allstate Financial expects lower investment spreads because of low interest rates, declining contractholder funds, and portfolio maturity-shortening actions. It is shifting toward performance-based investments intended to produce higher long-term returns but more variable periodic income.
- A mortality study for structured settlement annuities is expected to be completed in 2016. Preliminary findings indicated longer annuitant lifetimes and resulted in a $244 million increase in statutory reserves, reducing Allstate Financial statutory surplus by approximately $175 million after tax.
- The filing identifies significant exposure to catastrophes, bodily injury severity, asbestos and environmental claims, Michigan unlimited personal injury protection, reinsurance collectability, investment-market volatility, low interest rates, regulatory restrictions, litigation, cybersecurity, and potential financial-strength-rating downgrades.
- The aggregate range of reasonably possible legal losses above amounts accrued, where estimable, was disclosed as zero to $875 million before tax. Allstate stated that this range is not an estimate of expected loss or maximum exposure.
- Unusual or nonrecurring items included $416 million of net other-than-temporary investment impairment losses recognized in earnings, a $45 million pretax income-tax expense from adopting qualified affordable-housing investment guidance, and $39 million of restructuring and related charges.
Most important facts for an investor to verify
- Whether auto claim frequency and severity trends improve after the 2015 rate increases and underwriting actions.
- The adequacy of the $17.98 billion net property-liability reserve, especially auto bodily injury, Michigan MCCA, asbestos, environmental, and other discontinued-lines reserves.
- The collectability and risk concentration of $5.98 billion of property-liability reinsurance recoverables, including $4.66 billion from the MCCA and $500 million from PLIGA.
- The sustainability of earnings without the unusually high realized capital gains recorded in 2014 and amid lower investment yields.
- The impact of low interest rates, portfolio repositioning, and the runoff of annuity liabilities on Allstate Financial’s investment spread and statutory capital.
- Future catastrophe losses, reinsurance pricing and availability, and possible assessments from state facilities including the CEA, FHCF, TWIA, and Florida and Louisiana residual markets.
- Parent liquidity and capital-return capacity, including the $1.71 billion estimated 2016 dividend capacity of Allstate Insurance Company without prior Illinois regulatory approval.
- The effect of share repurchases and dividends on capital, leverage, book value per share, and future liquidity.