Allstate Corporation 10-Q Summary
Business context and reporting period
The filing covers the unaudited three- and six-month periods ended June 30, 2017, compared with the corresponding 2016 periods. Allstate operates primarily through Property-Liability insurance, Allstate Financial, and Corporate and Other. Property-Liability includes the Allstate, Esurance, Encompass and newly acquired SquareTrade businesses.
Management continued to prioritize customer service, targeted growth, economic returns on capital, proactive investment management and development of long-term growth platforms. Allstate expected to adopt a revised segment reporting structure in the fourth quarter of 2017.
Financial performance and key metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenues | $9.587 billion | $9.164 billion | $19.021 billion | $18.035 billion |
| Net income | $579 million | $271 million | $1.274 billion | $517 million |
| Net income applicable to common shareholders | $550 million | $242 million | $1.216 billion | $459 million |
| Diluted EPS | $1.49 | $0.64 | $3.29 | $1.21 |
| Property-Liability premiums earned | $8.018 billion | $7.814 billion | $15.977 billion | $15.537 billion |
| Net investment income | $897 million | $762 million | $1.645 billion | $1.493 billion |
| Realized capital gains and losses | $81 million gain | $24 million gain | $215 million gain | $125 million loss |
| Operating cash flow | Not separately presented | Not separately presented | $1.348 billion | $1.358 billion |
Six-month net income applicable to common shareholders increased approximately 165%, while diluted EPS increased approximately 172%. Revenue increased approximately 5.5% for the quarter and 5.5% year to date. The improvement reflected stronger underwriting, higher investment income and improved realized investment results.
- Property-Liability net income applicable to common shareholders was $484 million in Q2 and $1.136 billion year to date, compared with $198 million and $420 million, respectively, in 2016.
- Allstate Financial net income applicable to common shareholders was $146 million in Q2 and $254 million year to date, compared with $116 million and $184 million, respectively.
- Property-Liability underwriting income was $227 million in Q2 and $734 million year to date, compared with a $66 million underwriting loss and $59 million of underwriting income in the prior-year periods.
- The Property-Liability combined ratio improved to 97.2 in Q2 from 100.8 and to 95.4 year to date from 99.6. The loss ratio improved to 71.0 from 75.5 in Q2 and to 69.5 from 74.6 year to date.
- Catastrophe losses were $993 million in Q2 and $1.774 billion year to date, broadly comparable with $961 million and $1.788 billion in the prior-year periods.
- Favorable prior-year reserve reestimates were $89 million in Q2 and $186 million year to date, compared with $3 million and $21 million favorable, respectively, in 2016.
- Net investment income increased 17.7% in Q2 and 10.2% year to date, primarily from stronger limited partnership, private equity and other performance-based investment results.
Financial position, debt and liquidity
| Balance-sheet metric | June 30, 2017 | December 31, 2016 |
|---|---|---|
| Total assets | $110.865 billion | $108.610 billion |
| Total investments | $81.305 billion | $81.799 billion |
| Cash | $482 million | $436 million |
| Shareholders’ equity | $21.501 billion | $20.573 billion |
| Long-term debt | $6.348 billion | $6.347 billion |
| Contractholder funds | $19.832 billion | $20.260 billion |
- Debt-to-shareholders’ equity was 29.5%, compared with 30.9% at year-end; debt-to-capital resources was 22.8%, compared with 23.6%.
- Parent-company deployable assets were $2.11 billion. Allstate stated that it had sufficient liquidity for base and stressed needs.
- The company had no commercial paper outstanding and no borrowings under its $1.0 billion unsecured revolving credit facility. The facility’s debt-to-capitalization covenant was 37.5%; the reported ratio was 15.5%.
- Operating cash flow was $1.348 billion, investing cash flow was $57 million, and financing cash flow was negative $1.359 billion for the first six months.
- Financing uses included $257 million of common dividends, $58 million of preferred dividends and $657 million of treasury-stock purchases.
Material changes versus the prior comparable period
- Allstate acquired SquareTrade on January 3, 2017, for $1.4 billion in cash. The acquisition added $1.08 billion of goodwill and $555 million of other intangible assets. SquareTrade generated $129 million of earned premiums and a $57 million underwriting loss in the first six months, including $46 million of purchased-intangible amortization.
- Property-Liability underwriting materially improved because of higher earned premiums, lower claim frequency and more favorable prior-year reserve development. Auto underwriting was the primary contributor.
- Allstate Financial earnings improved, driven particularly by Allstate Annuities, where investment income and investment spreads increased while contractholder funds continued to run off.
- Restructuring and related charges increased to $53 million in Q2 and $63 million year to date from $11 million and $16 million, respectively, in 2016. Charges primarily related to claims-process changes, office closures, employee programs and operational realignment.
- Unrealized net capital gains increased to $2.549 billion from $1.770 billion at year-end, benefiting shareholders’ equity and accumulated other comprehensive income.
- Common shares outstanding declined, reflecting ongoing repurchases. The company entered into a $250 million accelerated share repurchase agreement in June; $45 million remained under the then-existing $1.5 billion authorization at June 30.
Guidance, outlook, risks and unusual items
The filing does not provide a formal consolidated earnings or revenue guidance range. Management indicated that auto rate increases were moderating as loss trends improved, while rate actions and profit-improvement measures would continue in markets with inadequate returns. Management also expected to continue disciplined homeowners underwriting and targeted growth initiatives.
- Catastrophe losses are inherently volatile and cannot be reliably predicted. Allstate’s catastrophe program targets no more than a 1% likelihood of exceeding modeled average annual catastrophe losses by $2 billion, net of reinsurance, for hurricanes and earthquakes.
- Allstate completed additional 2017 Florida and nationwide catastrophe reinsurance placements, including $658 million of Florida limits subject to a $20 million retention, and additional aggregate and gap-fill coverage.
- Net reserves for asbestos, environmental and other discontinued lines totaled $1.383 billion at June 30, including $867 million for asbestos and $166 million for environmental claims. Management stated that meaningful ranges for additional asbestos and environmental losses were not practicable to develop.
- For disclosed legal matters where estimation was possible, the aggregate reasonably possible loss above accrued amounts was estimated at zero to $425 million pretax. Management stated that an unfavorable outcome could materially affect a particular period, although a material effect on financial position was not considered likely.
- Other significant risks include reserve development, regulatory restrictions on rates and underwriting, reinsurance availability and counterparty risk, investment-market volatility, interest rates, credit losses, fair-value judgments, technology and cybersecurity, litigation, climate and weather conditions, and potential goodwill impairment.
- The company stated that the Department of Labor fiduciary rule could increase regulatory costs and litigation exposure, although its expected financial impact was considered immaterial at the time of filing.
- Allstate’s fixed-income portfolio was $58.656 billion, of which 85.3% was rated investment grade. Net other-than-temporary impairment losses recognized in earnings were $109 million year to date.
Most important facts for investors to verify
- Whether improved auto frequency and reserve development persist after removing favorable prior-year reestimates and considering catastrophe volatility.
- The earnings trajectory and underlying profitability of SquareTrade after purchased-intangible amortization and the new quota-share reinsurance arrangement.
- Future catastrophe losses, reinsurance recoveries, retentions and pricing adequacy, particularly in Florida and other catastrophe-exposed markets.
- The sustainability of performance-based investment income and realized capital gains, which contributed materially to the year-over-year earnings improvement.
- Development of asbestos, environmental, discontinued-lines and legal contingencies, including potential losses above accrued amounts.
- Execution of restructuring and claims-technology initiatives, including whether higher near-term charges produce durable expense savings.
- Capital deployment, including completion of the existing repurchase program, the June ASR, the new $2 billion repurchase authorization announced August 1, 2017, and any potential preferred-stock issuance.
- Changes resulting from the planned fourth-quarter segment reorganization and related goodwill impairment testing.