Allstate Corporation: Q3 2020 Form 10-Q Summary
Business context and reporting period
The filing covers the three and nine months ended September 30, 2020, with comparisons to the same periods of 2019. Allstate operates property-liability insurance, life and health insurance, annuities, and service businesses. Results were materially influenced by COVID-19, lower auto driving frequency, catastrophe activity, market volatility, low interest rates, and the Transformative Growth Plan.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $11.50 billion | $11.07 billion | $32.77 billion | $33.20 billion |
| Net income applicable to common shareholders | $1.13 billion | $889 million | $2.86 billion | $2.97 billion |
| Diluted EPS | $3.58 | $2.67 | $9.01 | $8.85 |
| Net investment income | $832 million | $880 million | $1.66 billion | $2.47 billion |
| Realized capital gains | $440 million | $197 million | $682 million | $1.18 billion |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $4.17 billion | $3.90 billion |
Property-liability premiums earned increased 2.7% in the quarter and 2.8% in the first nine months. Property-liability underwriting income was $753 million in Q3 and $3.00 billion for the first nine months, compared with $737 million and $1.80 billion, respectively, in the prior-year periods. The consolidated Q3 operating result benefited from higher realized gains, favorable pension remeasurement, and stronger Allstate Protection underwriting.
Property-liability combined ratio was 91.6% in Q3 2020 versus 91.6% in Q3 2019, and 88.8% for the first nine months versus 93.1%. The Q3 loss ratio was 66.7% and the expense ratio was 24.9%. Catastrophe losses were $990 million in Q3 and $2.39 billion for the first nine months, including favorable prior-year reserve reestimates related to subrogation settlements.
As of September 30, 2020, total assets were $122.75 billion, investments were $91.20 billion, shareholders’ equity was $27.26 billion, cash was $370 million, and long-term debt was $6.64 billion. Debt-to-shareholders’ equity was 24.3%, compared with 25.5% at year-end 2019. The company reported $2.83 billion of parent holding-company deployable assets and $6.84 billion of cash and highly liquid securities expected to be liquidated within one week.
Material changes versus the prior comparable period
- Q3 net income applicable to common shareholders increased 26.7%, while nine-month earnings declined 3.6%.
- Q3 revenue increased 3.9%, but nine-month revenue decreased 1.3%, primarily because lower investment income and lower nine-month realized gains offset premium growth.
- Net investment income declined 5.5% in Q3 and 32.7% for the first nine months, reflecting lower portfolio yields and substantially weaker performance-based investment results.
- Allstate Protection underwriting income increased to $888 million in Q3 and $3.14 billion for the first nine months, aided by lower auto non-catastrophe losses and favorable reserve reestimates.
- The $948 million Shelter-in-Place Payback was recorded in the first nine months of 2020 and had no comparable 2019 expense.
- Restructuring and related charges were $200 million in Q3 and $219 million for the first nine months, primarily related to the Transformative Growth Plan. Approximately $290 million of total program charges are expected, with completion targeted for 2021.
- Allstate Annuities reported a $51 million Q3 loss and a $322 million nine-month loss, including a $178 million after-tax premium deficiency charge for immediate annuities with life contingencies.
- Allstate Life reported a $13 million Q3 loss versus $40 million of income in the prior-year quarter, primarily due to higher contract benefits and DAC amortization.
- Service Businesses adjusted net income improved to $40 million in Q3 and $115 million for the first nine months, driven primarily by Allstate Protection Plans growth.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal consolidated earnings or revenue guidance. Management expects the COVID-19 pandemic and related containment measures may continue to affect policy sales and retention, auto frequency and severity, life mortality, health claims, annuity reserves, investment valuations, liquidity, and credit losses into 2021. The duration and severity of these effects could not be reliably estimated.
Allstate agreed to acquire National General Holdings for approximately $4 billion in cash, with closing expected in early 2021 subject to regulatory and customary conditions. The funding mix may change from the originally contemplated $2.2 billion of combined cash and $1.5 billion of new senior debt. Management expects to continue its $3.0 billion share-repurchase program.
During the first nine months, Allstate repurchased $1.74 billion of common stock and paid $500 million of common dividends and $82 million of preferred dividends. The company had $1.56 billion remaining under the repurchase authorization as of September 30, 2020. A $750 million accelerated share repurchase agreement was initiated in September 2020.
Liquidity was described as sufficient for base and stressed needs. The company had no commercial paper borrowings and no borrowings under its $1.0 billion revolving credit facility. A $250 million floating-rate senior-note maturity is scheduled for March 2021. Key risks include catastrophe losses, reserve adequacy, reinsurance counterparty exposure, investment and interest-rate volatility, annuity and life assumptions, regulatory restrictions, litigation, cybersecurity, climate and weather events, and execution of the Transformative Growth Plan.
The company adopted the expected-credit-loss standard on January 1, 2020, recording an $88 million after-tax reduction to retained income. Total credit-loss allowances were $411 million at September 30, 2020. The company also expects the future long-duration insurance-contract accounting standard to have a material financial-statement impact, particularly in the run-off annuity segment, although the underlying economics and cash flows are unchanged.
Most important facts for investors to verify
- Whether COVID-19-related changes in driving frequency, claims severity, payment behavior, and policy demand persist or reverse.
- The sustainability of the 2020 property-liability underwriting improvement after excluding the Shelter-in-Place Payback and favorable subrogation settlements.
- The impact of catastrophe activity and reserve development, including asbestos, environmental, and other discontinued-lines reserves.
- The effect of sustained low interest rates and volatile performance-based investments on net investment income, annuity reserves, and life-insurance DAC amortization.
- National General acquisition approvals, final purchase funding mix, incremental debt, and integration costs.
- Completion and total cost of the Transformative Growth Plan restructuring program.
- Future credit losses, reinsurance recoverability, and the estimated impact of long-duration insurance-contract accounting adoption.
- The outcome and potential exposure from disclosed legal and regulatory proceedings; the estimated aggregate reasonably possible loss above recorded accruals was zero to $85 million for matters where an estimate was possible.