Allstate Corporation 2018 Q2 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited three and six months ended June 30, 2018, compared with the corresponding 2017 periods. Allstate operates primarily in property-liability insurance, life insurance, benefits, annuities and service businesses. The interim results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $10.099 billion | $9.813 billion | $19.869 billion | $19.457 billion |
| Net income | $676 million | $579 million | $1.651 billion | $1.274 billion |
| Net income applicable to common shareholders | $637 million | $550 million | $1.583 billion | $1.216 billion |
| Diluted EPS | $1.80 | $1.49 | $4.43 | $3.29 |
| Net investment income | $824 million | $897 million | $1.610 billion | $1.645 billion |
| Realized capital gains and losses | $(25) million | $81 million | $(159) million | $215 million |
| Operating cash flow | Not separately provided for the quarter | $2.090 billion | $1.348 billion | |
| Property-liability combined ratio | 94.9% | 96.6% | 91.5% | 94.8% |
Net income margins were approximately 6.7% in Q2 and 8.3% for the six months, based on total revenue. Property-liability underwriting income was $416 million in Q2 and $1.375 billion for the six months. Allstate Protection underwriting income was $419 million and $1.381 billion, respectively.
Financial position, debt and liquidity
- Total assets were $113.369 billion at June 30, 2018, compared with $112.422 billion at December 31, 2017.
- Investments totaled $83.241 billion; cash was $489 million.
- Shareholders’ equity was $23.122 billion, compared with $22.551 billion at year-end 2017. Book value per diluted common share was $59.16, up from $57.58 at year-end.
- Long-term debt was $6.448 billion, compared with $6.350 billion at year-end. Debt-to-shareholders’ equity was 27.9%; debt-to-capital resources was 21.8%.
- Parent-level deployable assets were $3.42 billion. The company reported no commercial paper outstanding and no borrowings under its $1.00 billion revolving credit facility at June 30, 2018.
- Operating cash flow was $2.090 billion; investing activities used $1.311 billion and financing activities used $907 million, resulting in a $128 million decrease in cash during the first six months.
- Allstate paid $295 million of common dividends, $58 million of preferred dividends and repurchased 9.4 million common shares for $892 million during the first six months.
Material changes versus the prior comparable period
- Net income increased 15.8% in Q2 and 30.2% for the six months, driven primarily by stronger Allstate Protection results, lower catastrophe losses and the lower U.S. corporate tax rate under the Tax Cuts and Jobs Act.
- Total revenue increased 2.9% in Q2 and 2.1% for the six months. Property-casualty premiums increased 5.5% and 4.8%, respectively.
- Property-liability underwriting improved materially: the combined ratio decreased 1.7 points in Q2 and 3.3 points for the six months.
- Catastrophe losses declined to $906 million in Q2 and $1.267 billion for the six months, from $993 million and $1.774 billion in the prior-year periods.
- Net investment income decreased 8.1% in Q2 and 2.1% for the six months, primarily because of lower performance-based investment results and higher investment expenses.
- Realized capital results shifted from gains to losses, reflecting fixed-income security sales, equity valuation changes and other investment activity.
- Service Businesses revenue increased 23.1% in Q2 and 24.9% for the six months, while adjusted results improved to $1 million of income and $4 million of loss, respectively, from losses of $8 million and $18 million.
- Allstate Annuities adjusted net income declined to $44 million in Q2 and $79 million for the six months, primarily because of lower investment income and continued runoff of the annuity portfolio.
Guidance, outlook, commentary and unusual items
- No formal earnings or revenue guidance is provided in the filing. Management states that 2018 priorities include serving customers, achieving target economic returns, growing the customer base, actively managing investments and building long-term growth platforms.
- The company adopted new financial-instrument accounting guidance on January 1, 2018. Equity valuation changes now generally flow through net income, and certain limited partnerships are measured at fair value. Adoption resulted in a $1.088 billion cumulative increase to retained income without changing total equity for the equity-security reclassification, while the limited-partnership change increased equity by approximately $177 million after tax.
- The company also adopted new revenue-recognition guidance. For certain SquareTrade protection plans, approximately $160 million of pre-tax unearned premiums and deferred policy acquisition costs were recorded, with no initial retained-income impact.
- The Tax Cuts and Jobs Act reduced the U.S. corporate tax rate from 35% to 21%. Allstate had not completed its accounting for the legislation as of June 30, 2018, although no material adjustment to provisional amounts was recorded during the period.
- Allstate accrued $37 million for anticipated Texas Windstorm Insurance Association assessments related to Hurricane Harvey. Catastrophe losses included $44 million of unfavorable prior-year reestimates for the six months.
- The company issued $500 million of floating-rate senior notes and $575 million of Series G preferred stock, redeemed $224 million of subordinated debentures and repaid $176 million of senior debentures.
- Allstate disclosed an estimated aggregate range of reasonably possible legal losses, above amounts accrued where applicable, of zero to $145 million before tax for certain matters. Management believes an outcome materially affecting financial position is unlikely, but quarterly or annual operating results and cash flows could be affected.
- Key risks include catastrophe frequency and severity, reserve development, reinsurance availability and credit risk, investment-market volatility, annuity surrenders, regulatory and legal developments, cybersecurity, technology changes and restrictions on subsidiary dividends.
Most important facts for investors to verify
- Whether improved combined ratios and favorable auto reserve development persist after catastrophe-normalized results and higher claim severity.
- The sustainability of premium and policy growth, particularly in Allstate brand auto and homeowners, while commercial lines remained unprofitable.
- The impact of lower performance-based investment income, interest rates and unrealized investment losses on future earnings and equity.
- The final accounting effects of the Tax Cuts and Jobs Act and the newly adopted financial-instrument and revenue standards.
- Catastrophe exposure, the $37 million TWIA assessment and the effectiveness and cost of reinsurance protection.
- Runoff, surrender and liquidity trends in annuity and other contractholder-fund portfolios.
- Remaining authorization under the $2.00 billion share-repurchase program, reported as $376 million at June 30, 2018, and the effect of future repurchases on per-share results.
- Developments in disclosed litigation, regulatory proceedings and the estimated $0 to $145 million reasonably possible loss range.