Allstate Corporation: Q3 2019 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited three and nine months ended September 30, 2019, compared with the same periods of 2018. Allstate operates primarily through property and casualty insurance, life and annuity businesses, employee benefits, and service businesses including Allstate Protection Plans and Allstate Identity Protection.
Management’s stated priorities were to improve customer service, achieve target economic returns, grow the customer base, manage investments proactively, and build long-term growth platforms. Prior-period amounts were retrospectively adjusted for a change in pension and postretirement accounting.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenues | $11.069 billion | $10.465 billion | $33.203 billion | $30.334 billion |
| Net income | $931 million | $979 million | $3.074 billion | $2.702 billion |
| Net income applicable to common shareholders | $889 million | $942 million | $2.971 billion | $2.597 billion |
| Diluted EPS | $2.67 | $2.68 | $8.85 | $7.31 |
| Net investment income | $880 million | $844 million | $2.470 billion | $2.454 billion |
| Realized capital gains and losses | $197 million | $176 million | $1.183 billion | $17 million |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $3.895 billion | $3.818 billion |
Property and casualty premiums increased 5.8% to $9.094 billion in Q3 and 6.1% to $26.882 billion for nine months. Life premiums and contract charges increased 2.1% in Q3 and 1.8% for nine months. The reported consolidated net income margin was approximately 8.4% in Q3 and 9.3% for nine months, based on reported net income and total revenues.
- Property-Liability: underwriting income was $737 million in Q3 versus $507 million in the prior-year quarter, and $1.804 billion for nine months versus $1.967 billion. The combined ratio was 91.6% in Q3 and 93.1% for nine months, compared with 93.9% and 92.0%.
- Allstate Protection: underwriting income was $836 million in Q3 and $1.909 billion for nine months. Premiums written increased 5.8% in Q3 and 5.9% for nine months.
- Service Businesses: revenue increased 27.1% in Q3 to $418 million and 26.3% for nine months to $1.215 billion. Adjusted net income was $8 million in Q3 and $35 million for nine months.
- Life and benefits: Allstate Life adjusted net income was $44 million in Q3 and $185 million for nine months; Allstate Benefits adjusted net income was $31 million and $99 million.
- Annuities: adjusted net income was $16 million in Q3 and $43 million for nine months. Contractholder funds declined to $9.159 billion from $9.817 billion at December 31, 2018, reflecting runoff of the discontinued annuity sales business.
Balance sheet, capital and liquidity
- Total assets were $121.073 billion at September 30, 2019, compared with $112.249 billion at December 31, 2018.
- Total investments were $89.307 billion, including $59.259 billion of fixed income securities, $8.206 billion of equity securities, and $5.254 billion of short-term investments.
- Shareholders’ equity was $26.140 billion, up from $21.312 billion, primarily due to net income and higher unrealized investment gains. Accumulated other comprehensive income was $2.107 billion versus $118 million.
- Long-term debt was $6.630 billion versus $6.451 billion. Debt-to-shareholders’ equity was 25.4%, and debt-to-capital resources was 20.2%, compared with 30.3% and 23.2% at year-end 2018.
- Cash was $587 million at September 30, 2019. Parent-level deployable assets were $3.55 billion, though the filing states that the preferred stock issuance proceeds were subsequently used for a preferred stock redemption after quarter-end.
- Allstate issued $500 million of 3.850% senior notes due 2049 and $1.15 billion of Series H preferred stock during 2019. It repaid $317 million of senior notes and redeemed $1.13 billion of preferred stock on October 15, 2019.
- The company had a $1.00 billion commercial paper facility with no borrowings and access to a $1.00 billion unsecured revolving credit facility with no 2019 borrowings. Management stated that liquidity was sufficient for base and stressed needs.
- Common share repurchases totaled $1.11 billion during the first nine months. The remaining authorization under the $3.00 billion program was $962 million at September 30, 2019.
Material changes versus the prior comparable period
- Q3 net income applicable to common shareholders declined 5.6% to $889 million, primarily because of pension and postretirement remeasurement losses, higher non-catastrophe claims, and higher DAC amortization.
- Nine-month net income applicable to common shareholders increased 14.4% to $2.971 billion, driven primarily by higher premiums and substantially higher realized capital gains.
- Catastrophe losses declined to $510 million in Q3 from $625 million, but increased to $2.262 billion for nine months from $1.892 billion.
- Realized capital gains increased sharply, particularly from equity valuation gains and fixed-income sales. Unrealized net capital gains increased to $2.990 billion from $33 million at year-end 2018, exposing results and equity to market movements.
- Pension and postretirement remeasurement losses were $225 million in Q3 and $365 million for nine months, compared with gains of $39 million and $32 million in the comparable 2018 periods. The losses primarily reflected lower discount rates.
- Allstate adopted lease accounting guidance on January 1, 2019, recording a $585 million lease liability and a $488 million right-of-use asset without an impact on net income or equity at adoption.
- Service Businesses were rebranded: SquareTrade’s U.S. business is being marketed as Allstate Protection Plans, and InfoArmor as Allstate Identity Protection. The rebranding resulted in a $55 million pre-tax impairment of the SquareTrade trade-name intangible asset in Q2 2019.
Guidance, outlook, commentary and risks
The filing does not provide specific quantitative earnings or revenue guidance. Management highlighted continued premium growth, investment management, customer growth, and expansion of long-term growth platforms. It also stated that Allstate Protection Plans would incur additional growth-related operating costs in Q4 2019.
- Primary operating risks include catastrophe frequency and severity, rising claim severity, reserve inadequacy, reinsurance availability and counterparty risk, and regulatory restrictions on rates and underwriting.
- Auto physical-damage severity increased as vehicle repair costs, third-party subrogation demands, and total losses rose. Homeowners severity also increased, particularly for fire and water perils.
- Lower interest rates affected pension liabilities, life insurance DAC amortization, annuity spreads, and the valuation of fixed-income assets and liabilities.
- The company estimated future adoption of the current expected credit loss standard would require pre-tax valuation allowances of $260 million to $330 million and an after-tax retained-income reduction of $75 million to $125 million, subject to conditions at adoption.
- Long-duration insurance contract accounting changes are expected to be material, particularly for the run-off annuity segment, but the filing states that the underlying economics and cash flows will not change.
- Allstate had $9.363 billion of reinsurance and indemnification recoverables. Scottish Re, relating to $64 million of life reinsurance recoverables net of allowance, was under regulatory rehabilitation, and the ultimate recovery remained uncertain.
- Legal and regulatory matters included Florida personal-injury-protection litigation, securities litigation concerning historical auto claim-frequency disclosures, shareholder derivative actions, and other proceedings. The estimated aggregate range of reasonably possible losses above amounts accrued for certain disclosed matters was zero to $75 million pre-tax, excluding matters for which an estimate was not possible.
- Potential proceeds from a PG&E settlement involving California wildfire subrogation claims had not been recorded because the settlement remained subject to bankruptcy-court approval and the amount allocable to Allstate was undetermined.
Most important facts for an investor to verify
- Whether premium growth and rate actions continue to offset auto and homeowners claim severity, catastrophe volatility, and higher acquisition costs.
- The sustainability of unusually large realized and unrealized investment gains and the sensitivity of equity to interest-rate and credit-spread changes.
- The effect of pension remeasurement volatility and the eventual impact of new long-duration insurance and expected-credit-loss accounting standards.
- Progress and profitability of Allstate Protection Plans and Allstate Identity Protection, including the effect of planned growth investments and the $55 million trade-name impairment.
- Reinsurance collectability, including Scottish Re exposure, asbestos and environmental reserves, and discontinued-lines reserve development.
- Liquidity and capital after the October 2019 preferred stock redemption, continued share repurchases, dividends, and future debt activity.
- Resolution and potential financial exposure from the disclosed legal proceedings and the PG&E wildfire settlement.