Allstate Corporation: FY 2016 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2016, with quarterly information including the fourth quarter. Allstate is primarily a U.S. personal-lines insurer, offering auto, homeowners and other property-liability products through the Allstate, Esurance and Encompass brands. It also sells life insurance, voluntary accident and health products, and maintains a runoff annuity business through Allstate Financial.
Reportable segments are Allstate Protection, Discontinued Lines and Coverages, Allstate Financial, and Corporate and Other. Allstate had approximately 43,050 full-time employees at year-end. The consolidated financial statements received an unqualified audit opinion from Deloitte & Touche LLP, and management concluded that internal controls were effective.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenues | $36.53 billion | $35.65 billion | +2.5% |
| Net income attributable to common shareholders | $1.76 billion | $2.06 billion | -14.3% |
| Diluted EPS | $4.67 | $5.05 | -7.5% |
| Property-liability premiums earned | $31.31 billion | $30.31 billion | +3.3% |
| Net investment income | $3.04 billion | $3.16 billion | -3.6% |
| Realized capital gains and losses | $(90) million | $30 million | Turned to loss |
| Operating cash flow | $3.99 billion | $3.62 billion | +10.4% |
| Shareholders' equity | $20.57 billion | $20.03 billion | +2.7% |
| Book value per diluted share | $50.77 | $47.34 | +7.2% |
Property-liability underwriting income was $1.21 billion versus $1.56 billion in 2015. The combined ratio was 96.1%, compared with 94.9%; the loss ratio increased to 71.0% from 69.4%, while the expense ratio improved to 25.1% from 25.5%. Allstate Protection underwriting income was $1.32 billion, down from $1.61 billion. Catastrophe losses increased to $2.57 billion from $1.72 billion and added 8.2 percentage points to the combined ratio.
Allstate Financial net income was $391 million, down from $663 million. Premiums and contract charges increased to $2.28 billion from $2.16 billion, but net investment income declined to $1.73 billion from $1.88 billion and realized capital gains turned into an $81 million loss. Contractholder funds declined 4.9% to $20.26 billion, reflecting the runoff of deferred fixed annuities.
Consolidated assets were $108.61 billion, including $81.80 billion of investments. Reserves for claims, life-contingent benefits and contractholder funds totaled $57.75 billion. Long-term debt was $6.35 billion, up from $5.12 billion, and debt represented 23.6% of total capital resources versus 20.4% in 2015. No commercial paper or revolving-credit borrowings were outstanding at year-end.
Net cash provided by operating activities was $3.99 billion. Investing activities used $2.53 billion, primarily because debt proceeds were invested in short-term securities before the SquareTrade acquisition. Financing activities used $1.53 billion, including $1.34 billion of share repurchases and $602 million of common and preferred dividends. Year-end cash was $436 million.
Liquidity was supported by $7.75 billion of assets expected to be liquidated within one week and estimated liquidity of $20.82 billion within one quarter without significant net realized capital losses. Parent-company deployable assets were $2.43 billion. Allstate Insurance Company paid $1.90 billion of dividends to its parent in 2016; its estimated 2017 dividend capacity without prior regulatory approval was $1.56 billion, less dividends already paid during the applicable period.
Fourth-quarter and year-over-year changes
Fourth-quarter 2016 revenue was $9.28 billion and net income attributable to common shareholders was $811 million, compared with $8.69 billion and $460 million, respectively, in fourth-quarter 2015. The quarterly improvement did not offset weaker full-year results.
- Revenue growth was driven mainly by higher property-liability premiums and higher premiums and contract charges in Allstate Financial.
- Full-year earnings declined because of higher catastrophe and other insurance claims, lower net investment income, and a shift from realized capital gains in 2015 to realized capital losses in 2016.
- Allstate Protection auto premiums written increased 3.7%, but Allstate-brand auto policies in force declined 2.9%, new applications fell 21.9%, and the renewal ratio declined to 87.8%.
- Homeowners premiums written were broadly flat, while homeowners underwriting income declined because catastrophe losses increased.
- Commercial lines remained unprofitable, with a $110 million underwriting loss and a 121.7% combined ratio.
- Discontinued Lines and Coverages produced a $107 million underwriting loss, including $96 million of unfavorable reserve reestimates, principally $67 million for asbestos and $23 million for environmental claims.
- Unrealized net capital gains increased to $1.77 billion from $1.03 billion, supporting the increase in book value despite lower earnings.
Guidance, outlook, commentary and unusual items
Management's 2017 priorities are to improve customer service, achieve target economic returns, grow the customer base, manage investments proactively, and build long-term growth platforms. Allstate Protection expects continued rate increases, tighter underwriting, expense management and claims-process improvements in auto; selective homeowners growth with limited catastrophe exposure; continued catastrophe reinsurance; digital modernization; and expanded use of the trusted-advisor agency model.
Allstate expects interest rates to rise but remain below historical averages. Lower reinvestment yields are expected to pressure future investment income, particularly in Allstate Financial. Management is shifting part of the portfolio toward performance-based investments, which may improve long-term returns but increase period-to-period earnings volatility.
On January 3, 2017, Allstate completed its approximately $1.4 billion cash acquisition of SquareTrade, a consumer electronics and appliance protection-plan provider. The acquisition was funded in part with the $1.25 billion of senior notes issued in December 2016. Initial purchase accounting was incomplete at the filing date.
Material contingencies include catastrophe exposure, reserve uncertainty, asbestos and environmental claims, reinsurance collectability, state facility assessments, regulatory restrictions on rates and underwriting, litigation, cybersecurity, and market risk. The aggregate reasonably possible legal loss above accrued amounts for disclosed matters was estimated at zero to $875 million before tax, but this estimate excludes matters for which a range could not be determined and is not an estimate of expected loss.
Key specific exposures include a $4.95 billion MCCA reinsurance recoverable, a $506 million PLIGA recoverable, and a $1.74 billion accumulated deficit reported by the MCCA after a statutory discounting practice. Allstate also disclosed that its 2016 mortality study resulted in a $143 million increase in statutory reserves for structured settlement annuities and reduced Allstate Financial statutory surplus by approximately $105 million after tax.
Investor verification points
- Verify whether auto pricing actions improve loss trends without causing further declines in policies in force, applications or retention.
- Track catastrophe losses, reinsurance costs, modeled catastrophe exposure and the effect of severe weather on the combined ratio.
- Assess the sustainability of earnings excluding realized investment gains and losses, catastrophe volatility and reserve reestimates.
- Review Allstate Financial's runoff profile, investment spread, contractholder-fund withdrawals, mortality assumptions and sensitivity to interest rates.
- Examine the $6.35 billion debt balance, new 2026 and 2046 senior notes, debt-to-capitalization covenant and future refinancing needs.
- Monitor the collectability and funding condition of MCCA, PLIGA and other industry-pool reinsurance recoverables.
- Evaluate the integration, purchase accounting and returns of the SquareTrade acquisition.
- Review asbestos, environmental and other discontinued-lines reserve development, for which management states that a meaningful additional-loss range is not practicable.
- Consider regulatory, litigation, cybersecurity, climate, autonomous-vehicle and other technology risks that could affect pricing, claims, liquidity or capital.