Allstate Corporation: Fiscal 2018 Form 10-K Summary
Business context and reporting period
Allstate reported for the fiscal year ended December 31, 2018. The company is primarily a U.S. and Canadian personal property-and-casualty insurer, with additional life, voluntary benefits, annuity, identity protection, consumer protection-plan, roadside assistance and dealer-service businesses. Allstate reported 113.9 million policies in force at year-end.
The seven reportable segments were Allstate Protection, Discontinued Lines and Coverages, Service Businesses, Allstate Life, Allstate Benefits, Allstate Annuities and Corporate and Other. The filing provides fourth-quarter data, including a fourth-quarter net loss attributable to common shareholders of $312 million, compared with fourth-quarter 2017 net income of $1.22 billion.
Key financial metrics
| Metric | 2018 | 2017 | Change or comment |
|---|---|---|---|
| Total revenue | $39.815 billion | $39.407 billion | Increased 1.0% |
| Insurance premiums and contract charges | $36.513 billion | $34.678 billion | Increased 5.3% |
| Net income applicable to common shareholders | $2.104 billion | $3.073 billion | Decreased 31.5% |
| Diluted earnings per share | $5.96 | $8.36 | Decreased 28.7% |
| Operating cash flow | $5.175 billion | $4.314 billion | Increased $861 million |
| Net investment income | $3.240 billion | $3.401 billion | Decreased 4.7% |
| Realized capital gains and losses | $(877) million | $445 million | Shifted to a significant loss |
| Property-Liability combined ratio | 93.6 | 93.6 | Unchanged; 6.4% underwriting margin |
| Return on average common equity | 10.5% | 15.5% | Decreased 5.0 percentage points |
| Investments | $81.260 billion | $82.803 billion | Decreased $1.543 billion |
| Shareholders’ equity | $21.312 billion | $22.551 billion | Decreased $1.239 billion |
| Long-term debt | $6.451 billion | $6.350 billion | Increased $101 million |
Allstate Protection underwriting income was $2.187 billion, up 3.6% from $2.111 billion. Premiums written increased 6.0% to $33.555 billion. Auto underwriting income increased to $1.681 billion, while homeowners underwriting income declined to $457 million and commercial lines produced an $87 million underwriting loss.
Service Businesses revenue increased 24.5% to $1.318 billion. Adjusted net income improved to $2 million from an adjusted net loss of $59 million, although reported net loss attributable to common shareholders was $85 million, reflecting amortization of acquired intangibles, realized losses and other items.
Material changes versus the prior comparable period
- Net income declined primarily because 2018 included net realized investment losses rather than 2017 gains, a smaller tax benefit, lower favorable reserve reestimates and higher distribution expenses. Lower catastrophe losses and higher premiums partly offset these effects.
- Catastrophe losses declined to $2.855 billion from $3.228 billion. The 2018 catastrophe total included significant wildfire and hurricane-related losses, including the Camp Fire and Hurricane Michael.
- Allstate Protection’s combined ratio remained 93.6, but the expense ratio increased to 25.4 from 25.0. Auto results improved, while homeowners and commercial-lines loss experience deteriorated.
- Unfavorable reserve development in Discontinued Lines and Coverages was $87 million, including $44 million for asbestos, $20 million for environmental exposures and $13 million for other exposures. Net discontinued-lines reserves were $1.391 billion at year-end.
- Allstate acquired InfoArmor for $525 million in cash on October 5, 2018, adding $318 million of goodwill and $257 million of intangible assets. It acquired PlumChoice for $30 million in cash on November 30, 2018.
- Allstate Annuities adjusted net income fell to $130 million from $204 million, principally because of lower performance-based investment income and declining average investment balances. Contractholder funds declined 10.2% to $9.817 billion.
- Accounting changes effective January 1, 2018 caused equity securities to be marked through earnings and certain limited partnerships to be measured at fair value. These changes contributed to income-statement volatility and reduced comparability with 2017.
Capital, liquidity and shareholder returns
- Allstate generated $5.175 billion of operating cash flow and ended the year with $499 million of consolidated cash. The company reported $8.96 billion of assets generally liquid within one week and estimated $21.34 billion of liquidity available within one quarter without significant net realized capital losses.
- Parent-level deployable assets were $1.50 billion. Dividends from Allstate Insurance Company remain subject to Illinois insurance-law limitations; the estimated 2019 ordinary dividend capacity was $2.73 billion, less dividends paid during the preceding twelve months.
- Debt-to-shareholders’ equity was 30.3%, compared with 28.2% in 2017. The company had no commercial paper outstanding and no borrowings under its $1.0 billion revolving credit facility.
- Allstate repurchased 25.0 million common shares for $2.20 billion during 2018. A new $3.0 billion repurchase program was authorized, with $2.07 billion remaining at year-end. A $1.0 billion accelerated share repurchase agreement was entered into in December 2018.
- Cash dividends declared per common share increased to $1.84 from $1.48. The company issued $575 million of Series G preferred stock and redeemed $385 million of Series C preferred stock.
Guidance, outlook, management commentary, risks and unusual items
- Management stated that 2019 operating priorities would remain consistent with 2018: better serving customers, achieving target economic returns, growing the customer base, managing investments proactively and building long-term growth platforms.
- Management expects continued growth in telematics, Arity, SquareTrade, identity protection and other service businesses. Service Businesses premiums written in 2019 were expected to benefit from the full-year effect of a major retailer relationship, partly offset by normal attrition of existing retailer relationships.
- The company expects to complete placement of its 2019 nationwide catastrophe reinsurance program in the second quarter of 2019 and planned to evaluate improved economic terms and conditions.
- Management targets less than a 1% likelihood that annual aggregate hurricane and earthquake catastrophe losses, net of reinsurance, exceed $2 billion; actual results can differ materially because catastrophe models and exposure assumptions are uncertain.
- Material risks include severe weather and wildfire losses, auto claim-frequency and severity trends, inflation in repair and medical costs, reinsurance availability and collectability, investment-market volatility, interest rates, credit spreads, policyholder surrenders, cybersecurity, regulatory rate restrictions, litigation, asbestos and environmental claims, and statutory capital requirements.
- The Michigan Catastrophic Claims Association recoverable was $5.40 billion, and the company had $7.266 billion of total property-casualty and service-business reinsurance and indemnification recoverables. Collectability and future assessments remain important contingencies.
- Legal proceedings included Florida personal-injury-protection deductible disputes, wage-and-hour litigation, securities litigation and shareholder derivative actions. For disclosed matters where an estimate was possible, the aggregate reasonably possible loss in excess of accrued amounts was estimated at zero to $100 million before tax; the filing states this is not an expected-loss estimate or a maximum exposure.
- Unusual items included a $172 million pretax pension settlement loss, $83 million of restructuring and related charges, the InfoArmor and PlumChoice acquisitions, and a $29 million tax benefit related to finalizing the Tax Cuts and Jobs Act accounting.
- Allstate adopted a new long-duration insurance-contract accounting standard after year-end. Management expected the transition effect to be material, particularly for the run-off annuity segment, but the filing did not provide a final quantified impact.
Most important facts for investors to verify
- Confirm the sustainability of the 93.6 Property-Liability combined ratio after adjusting for catastrophe losses and favorable prior-year auto reserve development.
- Review homeowners and commercial-lines loss trends, including claim severity, wildfire exposure and unfavorable commercial auto reserve development.
- Assess the effect of investment-market performance and the new financial-instrument accounting rules on realized gains, losses, net income and accumulated other comprehensive income.
- Evaluate the adequacy and collectability of large recoverables, particularly the $5.40 billion MCCA balance and other state-facility exposures.
- Monitor Allstate Annuities’ runoff, surrender activity, investment spreads and the potential impact of long-duration insurance accounting.
- Reconcile adjusted net income with GAAP net income, especially for Service Businesses, where acquired-intangible amortization and other exclusions are significant.
- Review parent liquidity after share repurchases, dividends, acquisitions and the $317 million debt maturity due in 2019.
- Track regulatory, legal and asbestos/environmental developments, including the disclosed zero-to-$100 million range of reasonably possible legal losses above accrued amounts.