Allstate Corporation 2011 Q2 Form 10-Q Summary
Business context and reporting period
The Allstate Corporation, a property-liability and life insurance holding company, reported unaudited results for the three and six months ended June 30, 2011, compared with the same periods of 2010. Its principal segments were Allstate Protection, Discontinued Lines and Coverages, Allstate Financial, and Corporate and Other. The filing was reviewed by Deloitte & Touche LLP, not audited.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenues | $8.08 billion | $7.66 billion | $16.18 billion | $15.41 billion |
| Net income (loss) | $(620) million | $145 million | $(101) million | $265 million |
| Diluted EPS | $(1.19) | $0.27 | $(0.19) | $0.49 |
| Property-liability premiums earned | $6.46 billion | $6.51 billion | $12.91 billion | $13.02 billion |
| Net investment income | $1.02 billion | $1.05 billion | $2.00 billion | $2.10 billion |
| Realized capital gains (losses) | $57 million | $(451) million | $153 million | $(799) million |
| Operating cash flow | Not separately provided | Not separately provided | $1.26 billion | $2.09 billion |
| Property-liability combined ratio | 123.3 | 96.8 | 109.1 | 97.9 |
Property-Liability generated a net loss of $738 million in the second quarter and $270 million for the first six months. Allstate Financial generated net income of $166 million and $263 million, respectively, compared with losses in the prior-year periods.
At June 30, 2011, total assets were $129.02 billion, shareholders’ equity was $18.76 billion, total investments were $99.29 billion, cash was $693 million, and long-term debt was $5.91 billion. Debt represented 31.5% of shareholders’ equity and 23.9% of total capital resources. Parent-level deployable invested assets totaled $3.49 billion, including $3.02 billion generally saleable within one quarter.
Material changes versus the prior comparable period
- Net loss replaced prior-year net income, primarily because Property-Liability underwriting results deteriorated sharply.
- Property-Liability underwriting loss was $1.50 billion in Q2 and $1.18 billion for the first six months, versus underwriting income of $207 million and $278 million, respectively.
- Catastrophe losses increased to $2.34 billion in Q2 and $2.67 billion for the first six months, compared with $636 million and $1.28 billion in the prior-year periods. The filing reported 33 catastrophe events in Q2 and 49 events year to date.
- Homeowners underwriting loss increased to $1.40 billion in Q2 and $1.27 billion year to date, driven principally by catastrophe losses. The Allstate brand homeowners loss ratio rose to 171.1 in Q2 from 82.6.
- Property-liability premiums earned declined approximately 0.9% in both Q2 and the first six months. Standard auto premiums written declined, while homeowners premiums written increased due primarily to higher average premiums despite lower policies in force.
- Allstate Financial improved substantially because realized capital gains replaced prior-year realized capital losses, while contract benefits and interest credited to contractholders declined. This improvement was partly offset by higher deferred policy acquisition cost amortization and lower investment income.
- Net investment income declined 2.8% in Q2 and 4.6% year to date, primarily because of lower average investment balances. Contractholder funds declined to $45.08 billion from $48.20 billion at December 31, 2010.
- Shareholders’ equity declined from $19.02 billion at year-end, mainly because of the net loss, dividends, and share repurchases, partly offset by higher unrealized investment gains. Unrealized net capital gains increased to $2.51 billion from $1.39 billion.
Guidance, outlook, commentary, risks and unusual items
- Management targeted a return on equity approaching historical levels by 2014, excluding primarily the effects of realized and unrealized capital gains and losses.
- Management targeted a mid-90s combined ratio for Allstate brand standard auto and a low-60s homeowners combined ratio excluding catastrophes. It expected auto policies to continue declining in 2011, with low-single-digit growth targeted for 2013.
- Management targeted a 9% to 10% Allstate Financial operating return on equity and expected approximately $1.0 billion of excess capital to be produced over the period discussed.
- Allstate entered into an agreement to acquire Esurance and Answer Financial for $700 million plus tangible book value, with total consideration expected to be approximately $1 billion. Closing was expected in fall 2011, subject to regulatory, antitrust, and other customary approvals.
- Allstate continued profitability actions in Florida and New York, including rate increases, underwriting restrictions, claims staffing and review, and advocacy for legislative reform.
- The annualized cost of catastrophe reinsurance for the year beginning June 1, 2011 was estimated at approximately $564 million. Catastrophe frequency and severity remain inherently unpredictable.
- Allstate continued winding down Allstate Bank after termination of a planned deposit sale to Discover Bank and anticipated regulatory approval to cancel the banking charter by year-end 2011.
- During the first six months, Allstate repurchased 16.9 million shares for $532 million. The $1.0 billion repurchase authorization had $308 million remaining at June 30, 2011.
- Asbestos reserves were $1.09 billion net of reinsurance and environmental reserves were $192 million net of reinsurance. Management stated that these reserves are subject to significantly greater uncertainty than ordinary claims reserves.
- The estimated aggregate range of reasonably possible legal losses in excess of amounts accrued, where estimable, was zero to $855 million pre-tax. Management stated that the estimate was not an expected loss or maximum exposure.
- Key investment risks included approximately $15.36 billion of fixed-income securities with gross unrealized losses, including $3.91 billion of below-investment-grade securities. Management did not intend to sell, and did not expect to be required to sell, the affected fixed-income securities before recovery of amortized cost.
- The filing identified market, credit, catastrophe, reserve-estimation, reinsurance, liquidity, regulatory, litigation, interest-rate, structured-security, derivative-counterparty, and surrender risks. No material changes to internal control over financial reporting were reported.
Most important facts for an investor to verify
- Whether catastrophe losses normalize and whether the Property-Liability combined ratio can return toward management’s targets.
- The adequacy of homeowners, auto, asbestos, environmental, and other discontinued-lines reserves as claims develop.
- The performance and valuation of RMBS, CMBS, ABS, CDO, mortgage loans, and other below-investment-grade investments, including future impairment risk.
- Progress, regulatory approval, purchase price, and integration economics for the Esurance and Answer Financial acquisition.
- The pace of Allstate Financial contractholder-fund runoff, surrender activity, liquidity needs, and investment spread performance.
- The outcome and potential financial impact of disclosed litigation and regulatory matters, including the stated possible-loss range of up to $855 million pre-tax.
- Debt maturities, credit-facility compliance, insurance financial-strength ratings, and the effect of continued dividends and share repurchases on holding-company liquidity.