Allstate Corporation 2017 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2017, including fourth-quarter results. Allstate is primarily a U.S. and Canadian personal-lines insurer, with auto and homeowners insurance as its core businesses. Reportable segments were revised from four to seven beginning in the fourth quarter: Allstate Protection, Service Businesses, Allstate Life, Allstate Benefits, Allstate Annuities, Discontinued Lines and Coverages, and Corporate and Other.
- Allstate Protection represented approximately 91% of consolidated insurance premiums and contract charges.
- Service Businesses include SquareTrade, Arity, Allstate Roadside Services and Allstate Dealer Services.
- Allstate Annuities is in run-off; the company discontinued new annuity sales during 2006–2014.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenues | $38.52 billion | $36.53 billion | Up 5.4% |
| Net income applicable to common shareholders | $3.07 billion | $1.76 billion | Up 74.5% |
| Diluted EPS | $8.36 | $4.67 | Up 79.1% |
| Net investment income | $3.40 billion | $3.04 billion | Up 11.8% |
| Realized capital gains and losses | $445 million gain | $90 million loss | Improved $535 million |
| Operating cash flow | $4.31 billion | $3.99 billion | Up 8.0% |
| Property-Liability combined ratio | 93.6 | 96.0 | Improved 2.4 points |
| Shareholders’ equity | $22.55 billion | $20.57 billion | Up 9.6% |
| Long-term debt | $6.35 billion | $6.35 billion | Essentially unchanged |
Net income margin was approximately 8.0% of revenue in 2017, compared with approximately 4.8% in 2016. Return on average common equity was 15.5%, compared with 9.5% in 2016.
- Property-casualty premiums earned were $31.43 billion, up from $30.73 billion.
- Allstate Protection underwriting income was $2.11 billion, up 59.1% from $1.33 billion.
- Allstate Protection catastrophe losses increased to $3.23 billion from $2.57 billion and affected the combined ratio by 10.3 points.
- Allstate Protection premiums written were $31.65 billion, up 2.5%; auto premiums written rose 2.9% and homeowners premiums written rose 1.5%.
- Service Businesses generated $1.09 billion of premiums written but reported a $59 million adjusted net loss, compared with $3 million of adjusted net income in 2016.
- Allstate Life adjusted net income was $253 million, Allstate Benefits adjusted net income was $95 million, and Allstate Annuities adjusted net income was $204 million.
- Investments totaled $82.80 billion, including $58.99 billion of fixed-income securities, $6.62 billion of equity securities and $6.74 billion of limited partnership interests.
Fourth-quarter 2017 results
| Metric | Q4 2017 | Q4 2016 |
|---|---|---|
| Revenue | $9.84 billion | $9.28 billion |
| Net income applicable to common shareholders | $1.22 billion | $811 million |
| Diluted EPS | $3.35 | $2.18 |
Material changes versus the prior comparable period
- Profitability improved materially, primarily from higher Allstate Protection premiums, favorable prior-year reserve development, lower underlying loss costs, stronger investment income, positive realized capital gains and the Tax Cuts and Jobs Act benefit.
- The Property-Liability combined ratio improved despite substantially higher catastrophe losses, reflecting favorable reserve development and better auto results.
- Auto underwriting income improved to $1.30 billion from $156 million, while homeowners underwriting income declined to $658 million from $1.08 billion because of higher catastrophe losses.
- Allstate acquired SquareTrade on January 3, 2017 for approximately $1.4 billion in cash. SquareTrade added $426 million of premiums written and 38.7 million policies in force.
- Service Businesses shifted to an adjusted loss because of SquareTrade integration and restructuring costs, Arity research and development, investments in roadside services and Hurricane Harvey effects on Allstate Dealer Services.
- Allstate Annuities adjusted net income doubled to $204 million, mainly from stronger performance-based investment income, lower credited interest and lower contract benefits, but contractholder funds declined 8.2% as the business continued to run off.
- Allstate adopted revised segment reporting and recognized a $125 million goodwill impairment related to Allstate Annuities.
Capital, debt and liquidity
- Operating cash flow was $4.31 billion. Investing activities used $1.21 billion, primarily reflecting the SquareTrade acquisition and investment purchases; financing activities used $2.92 billion.
- Allstate paid $525 million of common dividends and $116 million of preferred dividends and repurchased $1.50 billion of common stock during 2017.
- The company repurchased 15.8 million common shares during the year. The remaining authorization under the $2.00 billion repurchase program was $1.27 billion at year-end.
- Debt-to-shareholders’ equity was 28.2%, and debt-to-capital was 22.0%. Debt maturities include $176 million in 2018 and $317 million in 2019; no other debt matures until 2023.
- Parent-company deployable assets were $1.95 billion. Allstate estimated $8.38 billion could be liquidated within one week and $20.99 billion within one quarter without significant net realized capital losses.
- Allstate Insurance Company paid $1.56 billion of dividends to its parent in 2017. The estimated 2018 dividend capacity without prior Illinois regulatory approval was $2.87 billion, less dividends paid during the preceding twelve months.
- The company had access to a $1.00 billion commercial paper program and a $1.00 billion unsecured revolving credit facility; neither had borrowings outstanding at year-end.
Guidance, outlook, risks and unusual items
- Management anticipated a 2018 effective tax rate of approximately 19%–20%, versus a 20.1% reported 2017 effective rate. The 2017 rate benefited from a $506 million, or $1.38 per diluted share, Tax Cuts and Jobs Act benefit.
- Management’s 2018 priorities were to better serve customers, achieve target economic returns, grow the customer base, manage investments proactively and build long-term growth platforms.
- Management expected interest rates to rise but remain below historical averages and noted that performance-based investment income and annuity results may remain volatile.
- Allstate’s nationwide catastrophe reinsurance program provided $4.42 billion of coverage above a $500 million retention, subject to program-specific limits and placements. Management stated that the modeled likelihood of exceeding average annual aggregate catastrophe losses by $2 billion, net of reinsurance, from hurricanes and earthquakes was less than 1%.
- Major risks include catastrophes and severe weather, rate and underwriting regulation, reserve inadequacy, reinsurance collectability, investment-market volatility, low interest rates, cybersecurity, technological disruption to auto insurance, competition and legal proceedings.
- Net reinsurance recoverables were $6.57 billion, including $5.26 billion from the Michigan Catastrophic Claims Association. The MCCA’s statutory deficit and long-duration Michigan personal-injury-protection claims create concentration and collectability risks.
- Net reserves for asbestos, environmental and other discontinued lines were $1.41 billion at year-end, including $884 million of asbestos reserves and $166 million of environmental reserves. Management stated that a meaningful range of possible additional losses could not be estimated.
- The company reported an aggregate reasonably possible legal loss range, in excess of amounts accrued where estimable, of zero to $240 million pretax. This range excludes matters for which an estimate was not possible and is not an indication of expected loss.
- Other unusual items included a $122 million pretax pension settlement loss, $109 million of restructuring and related charges, the $125 million goodwill impairment and the $506 million tax reform benefit.
Most important facts for investors to verify
- Whether the improved 2017 combined ratio is sustained after the unusually favorable $505 million prior-year reserve reestimate and despite elevated catastrophe losses.
- The adequacy and collectability of the $6.57 billion reinsurance recoverable balance, particularly the $5.26 billion MCCA exposure.
- SquareTrade’s post-acquisition growth, profitability and integration costs, and whether Service Businesses can move from an adjusted loss to sustainable earnings.
- The sensitivity of Allstate Annuities to mortality, interest rates, performance-based investment returns and further run-off of contractholder funds.
- The effect of the 21% corporate tax rate on recurring earnings after excluding the one-time 2017 tax benefit.
- Future catastrophe frequency and severity, reinsurance pricing and availability, and regulatory approval of needed rate increases.
- Reserve development for auto bodily injury, homeowners claims, asbestos and environmental exposures, including potential losses outside disclosed estimable ranges.
- Capital deployment decisions, remaining share-repurchase authorization, debt maturities and the availability of dividends from regulated insurance subsidiaries.