Allstate Corporation: Q2 2019 Form 10-Q Summary
Business context and reporting period
Allstate is a diversified insurer with property-liability, life, benefits, annuities, service businesses and investment operations. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the same periods of 2018. Results should not be considered indicative of full-year results.
Financial results and key metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $11.14 billion | $10.10 billion | $22.13 billion | $19.87 billion |
| Net income | $851 million | $717 million | $2.14 billion | $1.72 billion |
| Net income applicable to common shareholders | $821 million | $678 million | $2.08 billion | $1.66 billion |
| Diluted EPS | $2.44 | $1.91 | $6.17 | $4.63 |
| Net cash from operating activities | — | — | $2.06 billion | $2.09 billion |
| Property-liability combined ratio | 95.8% | 94.4% | 93.8% | 91.0% |
- Property and casualty premiums increased 6.2% in the quarter and 6.2% year to date; life premiums and contract charges increased 1.5% and 1.7%, respectively.
- Realized capital gains were $324 million in Q2 and $986 million year to date, versus a $25 million loss and $159 million loss in the comparable 2018 periods. Net investment income increased 14.3% in Q2 but declined 1.2% year to date.
- Catastrophe losses were $1.07 billion in Q2 and $1.75 billion year to date, compared with $906 million and $1.27 billion in 2018. Favorable prior-year reserve reestimates partially offset current-period losses.
- Investments totaled $86.49 billion at June 30, 2019, compared with $81.26 billion at December 31, 2018. Cash was $599 million, versus $499 million at year-end.
- Shareholders’ equity was $24.48 billion. Book value per diluted common share was $67.28, compared with $57.56 at December 31, 2018, primarily reflecting investment-market gains and earnings.
- Long-term debt was $6.63 billion, versus $6.45 billion at year-end. Debt-to-shareholders’ equity was 27.1%, compared with 30.3% at December 31, 2018.
Material changes versus the prior comparable period
- Common-shareholder net income rose 21.1% in Q2 and 25.8% year to date, primarily because of net realized capital gains, higher premiums and contract charges, and higher revenue; the benefit was partly offset by increased catastrophe losses.
- Allstate Protection underwriting income declined to $370 million from $458 million in Q2 and to $1.07 billion from $1.46 billion year to date. Higher catastrophe losses, claim severity and policy acquisition costs outweighed premium growth and lower other expenses.
- Service Businesses revenue increased 26.6% in Q2 and 25.9% year to date, driven by SquareTrade growth and the InfoArmor, PlumChoice and iCracked acquisitions. Adjusted net income improved to $16 million from $2 million in Q2 and to $27 million from a $1 million loss year to date.
- Allstate Life adjusted net income declined to $68 million from $80 million in Q2 and to $141 million from $151 million year to date, primarily because of higher contract benefits and operating expenses.
- Allstate Annuities adjusted net income increased to $52 million from $44 million in Q2 but declined to $27 million from $79 million year to date, reflecting weaker performance-based investment income in the first half.
- The company retrospectively changed pension and postretirement accounting. Remeasurement losses were $125 million in Q2 and $140 million year to date, versus a $7 million gain and $7 million loss in the comparable 2018 periods. The change reduced January 1, 2018 retained income by $1.58 billion but did not change total shareholders’ equity.
- Unrealized net capital gains increased to $2.47 billion from $33 million at year-end, primarily due to lower risk-free rates and tighter credit spreads.
Guidance, outlook, commentary, risks and unusual items
- No formal quantitative earnings guidance is provided in the filing. Management’s 2019 priorities are serving customers, achieving target economic returns, growing the customer base, managing investments and building long-term growth platforms.
- Allstate issued $500 million of 3.850% senior notes due 2049 and repaid $317 million of 7.450% senior notes at maturity. It had $1.57 billion remaining under its $3.00 billion share-repurchase authorization, expected to be completed by April 2020.
- The company had $2.82 billion of parent-level deployable assets. It reported $1.00 billion of unused commercial-paper capacity and no borrowings under its $1.00 billion revolving credit facility. Management stated that liquidity was sufficient for base and stressed needs.
- Allstate recognized a $55 million pretax impairment of the SquareTrade trade name after deciding to phase out that name in the United States and market consumer protection plans as Allstate Protection Plan.
- Michigan enacted no-fault auto insurance reforms effective primarily in 2020 and later. Management expects a reduction in Michigan unlimited personal-injury-protection reserves and related indemnification recoverables, but the ultimate effect was still under evaluation.
- Reinsurance recoverables totaled $9.29 billion. Scottish Re, which owed Allstate $64 million of life reinsurance recoverables net of allowance, was under regulatory rehabilitation; court rulings on Allstate’s motions were pending.
- Key risks include catastrophe frequency and severity, claims inflation, reserve development, reinsurance availability and counterparty credit, investment-market volatility, interest rates, annuity runoff and surrender behavior, regulatory rate restrictions, legal proceedings, cyber risk and execution of acquisitions.
- Legal proceedings included Florida personal-injury-protection disputes, a certified California wage-and-hour class action, and securities and derivative litigation concerning historical auto claim-frequency disclosures. The estimated aggregate range of reasonably possible loss above amounts accrued for certain matters was zero to $115 million, pre-tax; this was not an estimate of maximum exposure.
Most important facts for investors to verify
- Whether elevated catastrophe losses and higher claim severity persist, particularly in homeowners and auto, and whether rate actions restore target underwriting returns.
- The sustainability of earnings excluding realized investment gains, pension remeasurement effects and the SquareTrade impairment.
- Development of reserves, including asbestos, environmental, Michigan personal-injury-protection and Scottish Re recoverables.
- Investment portfolio sensitivity to interest rates, equity markets, credit spreads and performance-based assets.
- Progress and profitability of SquareTrade, InfoArmor and other acquired service businesses, including integration costs and intangible-asset impairment risk.
- Actual share repurchases, dividend capacity, debt maturities and parent-company liquidity relative to the stated capital-management program.
- The final financial and regulatory effects of Michigan no-fault reform, pending litigation and future insurance-accounting changes.