Allstate Corporation: Q2 2012 Form 10-Q Summary
Business context and reporting period
The Allstate Corporation is an insurance holding company with two principal operating segments: Property-Liability, including Allstate Protection and discontinued lines, and Allstate Financial, including life, annuity and accident and health products. This unaudited Form 10-Q covers the three and six months ended June 30, 2012, with comparisons to the corresponding 2011 periods.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenues | $8.28 billion, versus $8.08 billion | $16.64 billion, versus $16.18 billion |
| Net income | $423 million, versus $(624) million | $1.19 billion, versus $(100) million |
| Diluted EPS | $0.86, versus $(1.19) | $2.39, versus $(0.19) |
| Property-Liability net income | $354 million, versus $(737) million | $1.05 billion, versus $(269) million |
| Allstate Financial net income | $132 million, versus $161 million | $244 million, versus $263 million |
| Property-Liability combined ratio | 98.0, versus 123.3 | 95.1, versus 109.1 |
- Property-Liability premiums earned increased 3.2% to $6.67 billion in the quarter and 3.0% to $13.30 billion year to date. Premiums written increased 3.8% to $6.86 billion in the quarter and 3.9% to $13.33 billion year to date.
- Property-Liability underwriting income was $134 million in the quarter and $657 million year to date, compared with losses of $1.50 billion and $1.17 billion, respectively, in 2011. The implied underwriting margins were approximately 2.0% and 4.9%.
- Catastrophe losses declined to $819 million in the quarter and $1.08 billion year to date, from $2.34 billion and $2.67 billion in the comparable 2011 periods.
- Allstate Financial premiums and contract charges were $559 million in the quarter and $1.11 billion year to date. Net investment income declined 4.5% to $663 million in the quarter and 2.0% to $1.35 billion year to date.
- Consolidated net investment income increased 0.6% to $1.03 billion in the quarter and 1.7% to $2.04 billion year to date. Net realized capital gains were $27 million and $195 million, respectively.
- Other-than-temporary impairment losses recognized in earnings were $50 million in the quarter and $133 million year to date, compared with $86 million and $269 million in 2011.
- Shareholders’ equity was $19.48 billion at June 30, 2012, up from $18.30 billion at December 31, 2011. Book value per diluted share was $39.73, up from $36.18 at year-end.
- Total investments were $97.32 billion, including $77.93 billion of fixed-income securities. Approximately 90.7% of fixed-income securities were investment grade. Unrealized net capital gains were $4.24 billion, compared with $2.88 billion at year-end.
- Long-term debt was $6.06 billion, versus $5.91 billion at December 31, 2011. Debt represented 31.1% of shareholders’ equity and 23.7% of total capital resources.
- Operating cash flow was $1.77 billion for the first six months, compared with $1.26 billion in 2011. Investing cash flow was $352 million, while financing cash flow was $(2.33) billion. Ending cash was $571 million.
Material changes versus the prior comparable period
- The return to profitability was driven primarily by substantially lower catastrophe losses, favorable prior-year reserve reestimates and improved Property-Liability underwriting results.
- Allstate Protection underwriting income improved to $138 million in the quarter and $664 million year to date, from losses of $1.50 billion and $1.16 billion. Homeowners underwriting improved to a $70 million loss in the quarter and $236 million of income year to date, compared with losses of $1.40 billion and $1.27 billion.
- Allstate Financial net income declined because of lower realized capital gains, lower investment income and higher life and annuity contract benefits. Lower interest credited to contractholder funds and lower DAC amortization partly offset these pressures.
- Contractholder funds declined to $40.83 billion from $42.33 billion at year-end and $45.08 billion a year earlier, reflecting the planned reduction of spread-based products and the absence of Allstate Bank deposits.
- The company issued $500 million of 5.20% senior notes due 2042 and repaid $350 million of 6.125% senior notes. It repurchased 18.0 million common shares for $575 million during the first six months.
- The company retrospectively adopted updated insurance acquisition-cost guidance, reducing shareholders’ equity by $399 million as of January 1, 2011 and changing the presentation of DAC and operating expenses.
- Esurance, acquired in October 2011, contributed $224 million of second-quarter standard-auto premiums written but recorded underwriting losses of $39 million in the quarter and $100 million year to date, including significant advertising and integration-related expense effects.
Guidance, outlook, management commentary and risks
- No specific quantitative earnings or revenue guidance is provided. Management’s stated priorities are to maintain auto profitability, improve returns in homeowners and annuities, grow premiums, and proactively manage investments and capital.
- Management expects annualized catastrophe reinsurance costs of approximately $533 million for the year beginning June 1, 2012, compared with $555 million for the prior year. Catastrophe frequency and severity remain inherently unpredictable.
- Management continues rate actions, underwriting restrictions, claims-management initiatives and fraud controls in auto, particularly in Florida and New York. Homeowners exposure is being managed through selective underwriting and reduced coastal exposure.
- Management believes liquidity is sufficient for base and stressed needs. Parent-level deployable invested assets totaled $2.29 billion, including $1.94 billion generally saleable within one quarter. The company had no commercial paper or credit-facility borrowings at June 30, 2012 and had a $1.00 billion revolving credit facility expiring in April 2017.
- Contractholder liquidity remains important: $14.09 billion, or 34.5% of contractholder funds, was subject to discretionary withdrawal without adjustments. Institutional product maturities totaled $1.84 billion, principally due in 2013.
- Investment risks include interest-rate, credit-spread, mortgage-backed security, below-investment-grade, structured-security and valuation risks. The company reported $1.24 billion of gross unrealized losses on fixed-income and equity securities, including $1.13 billion on fixed-income securities.
- Legal and regulatory matters include catastrophe-related claims litigation, a certified Montana claims-handling class action, agency-reorganization litigation and regulatory proceedings. For disclosed matters where estimation was possible, the aggregate reasonably possible loss in excess of amounts accrued ranged from zero to $855 million pretax. Management stated that a material effect on financial position was not likely, but adverse outcomes could materially affect a particular period.
- Net asbestos reserves were $1.03 billion and net environmental reserves were $181 million at June 30, 2012. Management stated that meaningful ranges for additional reserves cannot be developed and that ultimate costs could vary materially.
Important facts investors should verify
- Whether the improvement in the 2012 combined ratio is sustainable after normalizing for substantially lower catastrophe losses and favorable reserve development.
- The effect of declining policy counts, lower renewal ratios and reduced new applications in Allstate-brand auto and homeowners businesses.
- Esurance’s path to profitability, including advertising, acquisition-related costs and underwriting performance.
- Future realized and unrealized investment losses, particularly in subprime RMBS, CMBS, ABS, corporate securities and below-investment-grade holdings.
- Contractholder surrender activity, institutional-product maturities and the continuing runoff of spread-based liabilities.
- Potential adverse developments in litigation, regulatory matters, asbestos and environmental claims, and the disclosed possible-loss range of up to $855 million pretax.
- The impact of the retrospective DAC accounting change on future operating expenses, amortization and comparability.