Allstate Corporation 2016 Q3 Form 10-Q Summary
Business Context and Reporting Period
The Allstate Corporation is a property-liability and life and annuity insurer. Its principal reporting segments are Allstate Protection, Discontinued Lines and Coverages, Allstate Financial, and Corporate and Other. This unaudited Form 10-Q covers the three and nine months ended September 30, 2016, with comparisons to the same periods of 2015. The interim statements were reviewed by Deloitte & Touche LLP but were not audited.
Financial Performance and Key Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenues | $9.22 billion | $9.03 billion | $27.26 billion | $26.96 billion |
| Net income applicable to common shareholders | $491 million | $621 million | $950 million | $1.60 billion |
| Diluted EPS | $1.31 | $1.54 | $2.51 | $3.87 |
| Operating cash flow | Not separately provided | Not separately provided | $2.74 billion | $2.69 billion |
| Net investment income | $748 million | $807 million | $2.24 billion | $2.45 billion |
| Realized capital gains/(losses) | $33 million | $33 million | $(92) million | $280 million |
- Premiums: Property-liability premiums earned increased 2.9% to $7.87 billion in the third quarter and 3.5% to $23.41 billion for the first nine months. Life and annuity premiums and contract charges increased 6.1% to $571 million in the quarter and 5.6% to $1.70 billion year to date.
- Profitability: Net income applicable to common shareholders declined 21% in the quarter and approximately 40% year to date. Consolidated net margins were approximately 5.3% in Q3 and 3.5% for the first nine months, based on reported revenues.
- Property-liability: Segment net income was $483 million in Q3 and $903 million year to date. The combined ratio was 95.5 in Q3 and 98.2 for the first nine months, compared with 93.6 and 95.8, respectively, in the prior-year periods.
- Catastrophes and reserves: Catastrophe losses were $481 million in Q3 and $2.27 billion year to date, versus $270 million and $1.36 billion in 2015. Prior-year reserve reestimates were $99 million unfavorable in Q3 and $120 million unfavorable year to date, including significant Discontinued Lines and Coverages reestimates.
- Allstate Financial: Segment net income fell to $80 million in Q3 and $264 million year to date, from $262 million and $624 million, respectively. Lower investment income and a shift from realized gains to realized losses were principal factors.
- Balance sheet: Total assets were $108.54 billion at September 30, 2016, versus $104.66 billion at December 31, 2015. Shareholders’ equity was $20.93 billion versus $20.03 billion. Investments were $81.10 billion versus $77.76 billion, and unrealized net capital gains increased to $3.02 billion from $1.03 billion.
- Debt and liquidity: Long-term debt was $5.11 billion. Debt-to-shareholders’ equity was 24.4%, and debt-to-capital resources was 19.6%. Parent-level deployable assets were $2.66 billion. Cash declined to $389 million from $495 million at year-end, while operating cash flow remained strong.
- Capital allocation: The company paid $364 million of common dividends and $87 million of preferred dividends during the first nine months. It repurchased $1.15 billion of treasury stock and had $938 million remaining under its $1.5 billion repurchase authorization. A $250 million Wells Fargo accelerated share repurchase agreement was entered into in September.
Material Changes Versus the Prior Comparable Period
- Revenue grew modestly, primarily from higher insurance premiums, but earnings declined materially because of higher catastrophe losses, unfavorable reserve development, lower investment income, and lower realized investment gains.
- Property-liability underwriting weakened: the combined ratio increased 1.9 points in Q3 and 2.4 points year to date. Allstate Protection underwriting income declined to $455 million in Q3 and $518 million year to date, from $540 million and $1.00 billion.
- Allstate Financial results were adversely affected by realized capital losses of $21 million in Q3 and $70 million year to date, compared with gains of $194 million and $364 million in the prior-year periods.
- Net investment income decreased 7.3% in Q3 and 8.4% year to date, primarily because of lower fixed-income yields and lower limited partnership income.
- Allstate continued pricing and underwriting actions intended to improve returns, but these actions reduced growth. Allstate brand auto policies in force declined 2.5% year over year, while new issued applications declined 26.1% in Q3 and 27.1% year to date.
- Discontinued Lines and Coverages generated a $100 million underwriting loss in Q3 and a $104 million loss year to date, primarily from the annual reserve review, including $67 million of unfavorable asbestos reserve development and $23 million of unfavorable environmental reserve development.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management did not provide a specific consolidated earnings or revenue forecast in the filing. It stated that underwriting actions, rate increases, claims-process improvements, expense controls, and targeted growth spending would continue to be adjusted to achieve acceptable returns.
- Management expects performance-based investment income and realized gains or losses to vary significantly between periods. It is increasing the allocation to performance-based investments over time and expects the related carrying value to increase by approximately $2 billion from the June 2015 level by the end of 2018.
- Key risks include catastrophe severity and frequency, rising claim costs, regulatory restrictions on rates and underwriting, reserve uncertainty, reinsurance availability and collectability, investment credit and market risk, interest-rate effects on life and annuity products, legal proceedings, financial-strength downgrades, cybersecurity, climate and weather conditions, and changes in accounting standards.
- Legal and regulatory matters remain significant. The company estimated an aggregate reasonably possible loss range of zero to $875 million before tax for certain disclosed matters in excess of amounts accrued, while emphasizing that this is not an expected-loss estimate or a maximum exposure.
- Asbestos reserves were $936 million net of reinsurance and environmental reserves were $190 million net of reinsurance at September 30, 2016. Management stated that these estimates are subject to substantially greater uncertainty than ordinary claims reserves and that a meaningful range of additional losses could not be developed.
- The company reported no material changes to previously disclosed risk factors and concluded that disclosure controls and procedures were effective as of September 30, 2016.
- Pending or developing regulatory matters include the U.S. Department of Labor fiduciary rule, potential U.S.-EU insurance regulation arrangements, and Federal Reserve capital-framework proposals. Management expected the fiduciary rule’s financial impact to be immaterial, but noted potential compliance costs and litigation exposure.
Most Important Facts for Investors to Verify
- Whether elevated catastrophe losses and unfavorable reserve development persist and continue to pressure the combined ratio.
- The sustainability of premium growth given declining policies in force, lower new business, and more restrictive underwriting actions.
- The effect of lower interest rates and portfolio repositioning on recurring investment income and life-and-annuity investment spreads.
- The potential volatility of limited partnership and other performance-based investment results, including impairment exposure.
- The adequacy of asbestos, environmental, discontinued-lines, and other insurance reserves, including potential losses above recorded amounts.
- The outcome and timing of Florida personal injury protection litigation, California and New York employment matters, and Romero-related proceedings.
- The remaining authorization, final share count, and settlement economics of the Wells Fargo accelerated share repurchase agreement.
- Capital and liquidity at the parent and insurance-subsidiary levels, including dividend capacity, rating-agency actions, and reinsurance recoverability.