Business Context and Reporting Period
The Allstate Corporation filed its Form 10-K for the fiscal year ended December 31, 2011. Allstate primarily provides personal property and casualty insurance, life insurance, retirement and investment products, and voluntary accident and health insurance, principally in the United States. Its reportable segments are Allstate Protection, Discontinued Lines and Coverages, Allstate Financial, and Corporate and Other.
Management’s 2012 priorities were to maintain auto profitability, improve returns in homeowners and annuity businesses, grow insurance premiums, and proactively manage investments and capital.
Key Financial Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total revenues | $32.65 billion | $31.40 billion | +4.0% |
| Net income | $788 million | $928 million | -15.1% |
| Diluted EPS | $1.51 | $1.71 | Down $0.20 |
| Net cash from operating activities | $1.93 billion | $3.69 billion | Down $1.76 billion |
| Investments | $95.62 billion | $100.48 billion | -4.8% |
| Net investment income | $3.97 billion | $4.10 billion | -3.2% |
| Realized capital gains/(losses) | $503 million | $(827) million | Improved $1.33 billion |
| Shareholders’ equity | $18.67 billion | $19.02 billion | -1.8% |
| Book value per diluted share | $36.92 | $35.32 | +4.5% |
| Long-term debt | $5.91 billion | $5.91 billion | Flat |
Cash and cash equivalents were $776 million at year-end, compared with $562 million in 2010. The company had no commercial paper outstanding and no borrowings under its $1.00 billion revolving credit facility. Parent-level deployable invested assets were $2.24 billion, including $1.72 billion generally saleable within one quarter.
Property-Liability
- Premiums written were $25.98 billion, up 0.3%; premiums earned were $25.94 billion, essentially flat.
- Net income was $408 million, down from $1.05 billion.
- The combined ratio increased to 103.4 from 98.1, producing an underwriting loss of $874 million versus underwriting income of $495 million.
- Allstate Protection’s underwriting loss was $849 million versus income of $526 million. Its combined ratio rose to 103.3 from 98.0.
- Catastrophe losses increased to $3.82 billion from $2.21 billion, comprising 91 events versus 90 events in 2010.
- Net property-liability claims reserves increased to $17.79 billion from $17.40 billion; gross reserves increased to $20.38 billion from $19.47 billion.
- Prior-year reserve development was favorable by $335 million, compared with $159 million favorable in 2010.
Allstate Financial
- Net income rose to $586 million from $58 million, primarily because of realized capital gains, lower interest credited to contractholder funds, and higher premiums and contract charges.
- Premiums and contract charges increased to $2.24 billion from $2.17 billion.
- Net investment income declined to $2.72 billion from $2.85 billion, while realized capital gains improved to $388 million from a $517 million loss.
- Contractholder funds declined to $42.33 billion from $48.20 billion, reflecting continued reduction of spread-based products and the return of Allstate Bank customer funds.
Material Changes Versus the Prior Comparable Period
- Overall revenue increased, but net income declined because the deterioration in Property-Liability underwriting more than offset stronger Allstate Financial results and improved investment gains.
- Homeowners underwriting loss increased to $1.33 billion from $335 million. The homeowners loss ratio rose to 98.0 from 82.1, primarily because catastrophe losses increased.
- Standard auto underwriting income declined to $568 million from $692 million, although the Allstate brand standard auto loss ratio improved slightly to 70.6.
- Allstate Financial’s benefit spread improved to $629 million from $509 million, and investment spread increased to $530 million from $497 million.
- Operating cash generation fell substantially, largely because of higher claim payments and income tax payments.
- Allstate acquired Esurance and Answer Financial on October 7, 2011 for approximately $1.01 billion in cash. The acquisition added $368 million of goodwill, $426 million of other intangible assets, and $487 million of gross property-liability claims reserves.
- Allstate Bank ceased operations in 2011 and expected to cancel its charter and deregister as a savings and loan holding company in the first half of 2012.
- Share repurchases totaled approximately $953 million in cash during 2011. A new $1.00 billion repurchase authorization had $894 million remaining at year-end.
Guidance, Outlook, Risks and Unusual Items
- Management expected continued focus on auto pricing and profitability, homeowners rate adequacy and catastrophe exposure reduction, growth of Esurance and Emerging Businesses, and reduction of spread-based Allstate Financial products.
- The 2012 catastrophe reinsurance program was expected to provide approximately $3.25 billion of coverage above specified retentions. Estimated annualized catastrophe reinsurance cost was approximately $577 million, compared with $564 million for the comparable prior program.
- Management targeted no more than a 1% modeled likelihood of exceeding $2 billion in annual aggregate hurricane and earthquake catastrophe losses, net of reinsurance. Actual losses could differ materially from modeled results.
- Allstate remains exposed to severe weather, hurricanes, earthquakes, wildfires, terrorism, reserve inadequacy, asbestos and environmental claims, reinsurance collectability, investment impairments, credit spreads, interest rates, equity markets, regulatory restrictions, litigation and rating downgrades.
- The company estimated the aggregate range of reasonably possible loss above accrued amounts for certain disclosed legal matters at zero to $855 million, pre-tax. This was not an estimate of expected loss or maximum exposure.
- Asbestos reserves were $1.08 billion net and environmental reserves were $185 million net at year-end. Management stated that additional losses could vary materially from recorded reserves and that a meaningful range could not be developed.
- Effective January 1, 2012, new deferred acquisition cost accounting guidance was expected to reduce reported DAC by an estimated $571 million and shareholders’ equity by approximately $375 million, net of tax, on a retrospective basis. The company estimated an approximately $40 million after-tax reduction in 2012 net income for Allstate Financial from the guidance.
- The company reported $1.43 billion of unrecognized pension and postretirement benefit cost, contributed $264 million to pension plans in 2011, and expected to contribute approximately $417 million in 2012.
Important Facts for Investors to Verify
- Whether homeowners pricing, underwriting actions and catastrophe management can reduce the combined ratio below 100%.
- The sustainability and quality of Allstate Financial’s 2011 earnings, given the significant contribution from realized capital gains and the decline in contractholder funds.
- Actual versus modeled catastrophe losses and the availability, cost and collectability of reinsurance.
- Development of property-liability, asbestos and environmental reserves, including the effect of unfavorable litigation or claims trends.
- Investment portfolio credit quality, other-than-temporary impairments, structured securities exposure and sensitivity to interest rates and credit spreads.
- Progress integrating Esurance and Answer Financial, including premium growth, expense levels and the effect of acquisition-related amortization.
- Regulatory approval and implementation of rate increases, dividend capacity from insurance subsidiaries, and the status of the revolving credit facility after its May 2012 expiration.
- The effect of the 2012 DAC accounting adoption on opening equity, operating expenses, amortization and comparability of reported results.