ALLSTATE CORP quarterly report, Q3 FY2011

Business Context and Reporting Period

The Allstate Corporation filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. Allstate operates primarily through Property-Liability insurance, including personal auto and homeowners coverage, and Allstate Financial, including life, annuity and other financial products. Interim results are not necessarily indicative of full-year results.

Key Financial Metrics

Metric	Q3 2011	Q3 2010	9M 2011	9M 2010
Total revenues	$8.24 billion	$7.91 billion	$24.42 billion	$23.31 billion
Net income	$165 million	$367 million	$64 million	$632 million
Diluted EPS	$0.32	$0.68	$0.12	$1.16
Net realized capital gains/(losses)	$264 million	$(144) million	$417 million	$(943) million
Net cash from operations	Not separately provided for the quarter	Not separately provided for the quarter	$1.67 billion	$3.02 billion

Approximate net margin was 2.0% in the third quarter and 0.3% for the first nine months, compared with approximately 4.6% and 2.7%, respectively, in the prior-year periods.
Property-Liability net income was $40 million in the quarter and a $230 million loss for the first nine months, compared with $331 million and $794 million of income in the comparable periods.
Allstate Financial net income was $183 million in the quarter and $446 million for the first nine months, compared with $85 million and an $18 million loss, respectively.
Property-Liability premiums earned declined 1.0% in the quarter and 0.9% year to date. Life and annuity premiums and contract charges increased 0.7% and 1.9%, respectively.
The Property-Liability combined ratio was 104.8 in the quarter and 107.7 for the first nine months, versus 95.9 and 97.2 in the prior-year periods. The implied underwriting margins were negative 4.8% and negative 7.7%, respectively.
Catastrophe losses were $1.08 billion in the quarter and $3.75 billion year to date, versus $386 million and $1.67 billion in the comparable 2010 periods.

Financial Position, Debt and Liquidity

At September 30, 2011, total assets were $126.96 billion, investments were $97.53 billion, cash was $1.03 billion, shareholders’ equity was $18.10 billion and long-term debt was $5.91 billion.
Shareholders’ equity declined from $19.02 billion at December 31, 2010, primarily due to share repurchases and dividends, partly offset by net income and higher unrealized investment gains.
Debt-to-shareholders’ equity was 32.6% and debt-to-capital resources was 24.6%. The company reported no borrowings under its $1.00 billion revolving credit facility and no commercial paper outstanding at September 30, 2011.
Parent-company deployable invested assets were $3.43 billion, including $2.91 billion generally saleable within one quarter. The parent received $638 million of dividends from Allstate Insurance Company during the first nine months.
Contractholder funds declined to $43.78 billion from $48.20 billion at December 31, 2010, reflecting Allstate’s continuing reduction in spread-based products. Surrenders and partial withdrawals increased, while deposits declined.
The company had $350 million of senior notes due in February 2012 and $42 million of synthetic-lease debt scheduled to mature in December 2011. Management expected the February maturity to be refinanced or repaid from available capital.

Material Changes Versus Prior Comparable Period

Net income fell 55% in the quarter and 90% for the first nine months, despite higher total revenues and improved realized capital gains.
Property-Liability results deteriorated sharply because catastrophe losses increased, particularly in homeowners. The Allstate brand homeowners loss ratio rose to 108.6 in the quarter and 115.9 year to date from 80.5 and 83.5.
Allstate Protection underwriting moved from $287 million of income to a $299 million loss in the quarter and from $571 million of income to a $1.46 billion loss year to date.
Allstate Financial improved substantially, principally because realized capital gains replaced prior-year realized losses, interest credited to contractholder funds declined and life and annuity benefits were lower year to date. Higher DAC amortization partially offset the improvement.
Net investment income declined 1.1% in the quarter and 3.5% year to date, primarily because of lower average investment balances, partially offset by higher yields.
Net realized gains were supported by sales of fixed-income securities during a period of historically low interest rates. Derivative valuation and settlement losses remained significant.
Allstate repurchased 29.0 million shares for $840 million during the first nine months and completed its $1.00 billion repurchase program in September.

Outlook, Commentary, Risks and Unusual Items

Management’s stated priorities were to improve operating results, grow profitably and differentiate the business. Growth initiatives, including sales campaigns, agent incentives, referrals and additional marketing, were expected to increase fourth-quarter 2011 expenses.
Management continued profitability actions in Florida and New York, including rate increases, underwriting restrictions, enhanced claims staffing and advocacy for legislative reform.
On October 7, 2011, after the reporting date, Allstate acquired the Esurance and Answer Financial businesses for $1.01 billion in cash. Initial purchase accounting was incomplete at the filing date.
Allstate received regulatory approval to voluntarily dissolve Allstate Bank and expected to return customer funds, cease operations and deregister as a savings and loan holding company by the first half of 2012.
Investment risks included credit-spread widening, lower real-estate valuations, structured-security impairment, mortgage-loan performance, equity-market volatility, interest-rate changes and European Union exposure. Fixed-income securities included $1.81 billion of gross unrealized losses, although management concluded that securities were not other-than-temporarily impaired based on expected cash flows and its intent and ability to hold them.
Other-than-temporary impairment losses recognized in earnings were $203 million in the quarter and $472 million year to date. Goodwill testing as of September 30, 2011 indicated no impairment.
Asbestos reserves were $1.09 billion net of reinsurance and environmental reserves were $187 million net of reinsurance. Management noted that ultimate losses could vary materially and that a meaningful range of additional reserves could not be developed.
For disclosed legal and regulatory matters where estimation was possible, the aggregate reasonably possible loss in excess of amounts accrued ranged from zero to $855 million pre-tax. Management stated this was not an estimate of expected loss or maximum exposure and believed the matters were not likely to materially affect financial position.
Pending accounting guidance on insurance acquisition costs was expected to reduce deferred policy acquisition costs and retained income upon retrospective adoption on January 1, 2012; the amount of the impact had not been finalized.

Important Facts for Investors to Verify

Whether catastrophe frequency and severity normalize and whether rate increases offset homeowners and auto loss-cost trends.
The adequacy of property-liability, asbestos, environmental and other discontinued-line reserves, including the impact of future adverse development.
The valuation, cash-flow performance and impairment sensitivity of below-investment-grade RMBS, CMBS, ABS, mortgage loans and other structured investments.
The effect of the Esurance and Answer Financial acquisition on premiums, expenses, capital and goodwill after final purchase accounting.
The timing and funding of upcoming debt maturities, Allstate Bank dissolution costs and continued contractholder withdrawals.
The final retained-earnings impact of the 2012 deferred acquisition cost accounting adoption.
The status and potential cost of legal proceedings, including the disclosed possible-loss range of up to $855 million pre-tax.