Allstate Corporation — Q1 2014 Form 10-Q Summary
Business context and reporting period
Allstate Corporation is a U.S.-based insurance holding company operating primarily through Property-Liability and Allstate Financial businesses. This unaudited Form 10-Q covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013. The interim results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenues | $8.684 billion | $8.463 billion | +2.6% |
| Net income | $600 million | $709 million | -15.4% |
| Net income available to common shareholders | $587 million | $709 million | -17.2% |
| Diluted EPS | $1.30 | $1.47 | Lower |
| Property-Liability premiums earned | $7.064 billion | $6.770 billion | +4.3% |
| Property-Liability underwriting income | $372 million | $458 million | -18.8% |
| Property-Liability combined ratio | 94.7 | 93.2 | +1.5 points |
| Allstate Financial net income available to common shareholders | $162 million | $146 million | +11.0% |
| Net investment income | $959 million | $983 million | -2.4% |
| Net realized capital gains | $54 million | $131 million | Lower |
| Operating cash flow | $474 million | $740 million | Lower |
Property-Liability premiums written increased 5.2% to $6.969 billion. Catastrophe losses rose to $445 million from $359 million, while prior-year reserve reestimates were $13 million favorable versus $35 million favorable in the prior-year quarter. The loss ratio increased to 67.4 from 65.9, while the expense ratio was stable at 27.3.
Allstate Financial benefited from lower interest credited to contractholder funds and lower operating expenses, partly offset by higher life and annuity contract benefits and the loss associated with the Lincoln Benefit Life disposition. Contractholder funds were $23.989 billion at March 31, 2014, including $10.661 billion classified as held for sale.
As of March 31, 2014, total assets were $124.291 billion, investments were $81.690 billion, shareholders’ equity was $22.105 billion and long-term debt was $6.200 billion. Debt-to-shareholders’ equity was 28.0%, compared with 28.9% at December 31, 2013. Parent-level deployable assets were $3.35 billion. Cash was $1.170 billion, compared with $675 million at year-end 2013.
Material changes versus the prior comparable period
- Revenue growth was more than offset by higher property-liability claims, higher deferred policy acquisition cost amortization, lower realized capital gains and a loss on disposition of operations.
- Common earnings declined primarily because Property-Liability underwriting income fell and realized capital gains decreased. Preferred stock dividends of $13 million further reduced earnings available to common shareholders.
- Property-Liability results weakened because of higher catastrophe losses, increased non-catastrophe loss costs and less favorable reserve development.
- Allstate Financial earnings improved as interest credited to contractholder funds declined 11.0% and operating costs decreased 20.3%; however, life and annuity contract benefits increased 6.6%.
- Net cash from operating activities decreased to $474 million from $740 million. Investing activities provided $1.376 billion, while financing activities used $1.113 billion.
- Accumulated other comprehensive income increased, principally from a $445 million after-tax increase in unrealized net capital gains. Unrealized net capital gains were $3.60 billion at March 31, 2014 versus $2.70 billion at December 31, 2013.
- Allstate issued $747.5 million of 6.625% Noncumulative Perpetual Preferred Stock and repurchased common shares for approximately $1.10 billion during the quarter, including a $750 million accelerated share repurchase prepayment.
Guidance, outlook, commentary, risks and unusual items
- Management’s stated priorities are to grow policies in force, maintain the underlying combined ratio, generate attractive risk-adjusted investment returns, modernize operations and build long-term growth platforms. The filing does not provide formal consolidated earnings guidance.
- Allstate expects catastrophe volatility to remain material. The 2014 catastrophe reinsurance program was designed to provide $3.83 billion of coverage subject to a $500 million retention and placed reinsurance, although certain Florida and upper-layer coverage remained to be placed in the second quarter.
- Management expects the Ontario auto rate reductions effective in May and July 2014 to reduce expected 2014 premiums written by approximately $35 million and premiums earned by approximately $11 million.
- Allstate closed the sale of Lincoln Benefit Life on April 1, 2014. The estimated gross sale price was $796 million, consisting of approximately $594 million of cash and retained tax benefits. The estimated after-tax loss on disposition increased by $18 million in Q1.
- The company’s investment portfolio is exposed to interest-rate, credit, equity-market, liquidity, prepayment and valuation risks. Fixed-income securities totaled $61.161 billion, of which 88.7% were investment grade. Other-than-temporary impairment losses recognized in earnings were $81 million, versus $37 million in Q1 2013.
- Contractholder liquidity risk remains relevant: 42.9% of contractholder funds were subject to discretionary withdrawal without adjustments, and 28.3% were subject to specified surrender charges.
- As of March 31, 2014, the aggregate estimated range of reasonably possible legal loss above accrued amounts for disclosed matters was zero to $825 million pretax, where estimation was possible. Management stated that the ultimate outcome of disclosed matters was not likely to materially affect financial position, but individual-period operating results or cash flows could be materially affected.
- Net asbestos reserves were $993 million and net environmental reserves were $204 million. Management noted that these reserves are subject to unusually high uncertainty and that a meaningful range of additional required reserves could not be developed.
- Management concluded that disclosure controls and procedures were effective and that no material changes occurred in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether catastrophe frequency and severity, especially severe winter-weather losses, normalize and how this affects the combined ratio.
- The sustainability of Property-Liability premium growth and the performance of Esurance, Encompass and commercial lines, which had elevated or negative underwriting results.
- The final cash proceeds, tax benefits and accounting impact of the Lincoln Benefit Life sale.
- Future investment income, realized gains and impairment charges under changing interest rates, credit spreads and equity markets.
- Actual share count and settlement economics of the $750 million accelerated share repurchase, as well as remaining repurchase authorization.
- Refinancing or repayment of the $300 million May 2014 and $650 million August 2014 debt maturities.
- Developments in asbestos, environmental, class-action, regulatory and agency-reorganization proceedings, including potential losses beyond recorded reserves.
- The filing’s reported liquidity resources, including $3.35 billion of parent deployable assets, a $1.0 billion commercial paper program and a $1.0 billion revolving credit facility with no borrowings reported at March 31, 2014.