Business Context and Reporting Period
This summary covers The Allstate Corporation's Form 10-Q for the quarterly period ended September 30, 2007. The Company operates primarily through two segments: Property-Liability (Allstate Protection and Discontinued Lines) and Allstate Financial. The reporting period reflects the impact of increased catastrophe losses, higher claim frequencies, and the ongoing effects of the 2006 reinsurance transaction disposing of substantially all variable annuity business.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 | Three Months Ended Sep 30, 2006 | Nine Months Ended Sep 30, 2006 |
|---|---|---|---|---|
| Total Revenues | $8,992 million | $27,778 million | $8,738 million | $26,694 million |
| Net Income | $978 million | $3,876 million | $1,158 million | $3,780 million |
| Diluted EPS | $1.70 | $6.41 | $1.83 | $5.91 |
| Property-Liability Combined Ratio | 91.0% | 87.7% | 84.1% | 82.9% |
| Net Investment Income | $1,603 million | $4,808 million | $1,554 million | $4,613 million |
| Realized Capital Gains (Pre-tax) | $121 million | $1,137 million | ($61 million) loss | $90 million |
| Total Assets | $159,373 million | As of Sep 30, 2007 | ||
| Total Shareholders' Equity | $21,634 million | As of Sep 30, 2007 | ||
| Long-Term Debt | $5,640 million | As of Sep 30, 2007 |
Material Changes vs. Prior Period
- Net Income Decline (Q3): Net income decreased 15.5% to $978 million in Q3 2007 compared to $1.16 billion in Q3 2006. This was primarily driven by higher catastrophe losses ($343 million vs. $169 million) and lower favorable prior-year reserve reestimates.
- Combined Ratio Deterioration: The Property-Liability combined ratio worsened to 91.0% in Q3 2007 from 84.1% in Q3 2006. The increase was due to higher catastrophe losses, increased claim frequency (auto and homeowners), and higher claim severity.
- Investment Gains: Realized capital gains improved significantly to $121 million in Q3 2007 from a loss of $61 million in the prior year, largely due to tactical reallocation of equity securities.
- Share Repurchases: The Company repurchased $773 million of stock in Q3 2007 and $2.97 billion for the nine-month period. As of September 30, 2007, $820 million remained on the $4.0 billion repurchase program.
- Debt Issuance: In May 2007, the Company issued $1.0 billion in junior subordinated debentures to fund share repurchases and strengthen capital resources.
Outlook, Risks, and Management Commentary
- Catastrophe Exposure: Management continues to manage property catastrophe exposure through reinsurance. The cost of the 2007 catastrophe reinsurance program is estimated at approximately $900 million annually, an increase from the 2006 estimate. Rates effective in 2007 reflect approximately 45% of this total cost.
- Investment Portfolio Risks: The Company holds $4.4 billion in Asset-Backed Residential Mortgage-Backed Securities (ABS RMBS) and $1.3 billion in Alt-A mortgage-backed securities. While no other-than-temporary impairments were recorded as of September 30, 2007, management noted liquidity declines in the sub-prime market. They currently expect to receive all payments in accordance with contractual terms but acknowledged that a deterioration in market conditions could alter this outlook.
- Legal Proceedings: Significant litigation remains regarding Hurricanes Katrina and Rita, including challenges to flood exclusions and claims handling. Additionally, the Company is defending class actions related to "inherent diminished value" in auto policies and medical bill review processes. Management believes the ultimate outcome of these matters is not likely to have a material adverse effect on financial position, though individual periods could be impacted.
- Variable Annuity Disposition: The 2006 reinsurance of variable annuity business to Prudential continues to impact comparisons, as 2007 results exclude the gross margin and expenses associated with that block of business.
Investor Verification Checklist
- Catastrophe Reserve Adequacy: Verify the sufficiency of reserves for 2005 and 2006 catastrophe events, given the $57 million unfavorable reestimate in Q3 2007.
- Sub-prime Exposure: Review the specific tranches and credit ratings of the $4.4 billion ABS RMBS portfolio to assess potential future write-downs given market volatility.
- Reinsurance Cost Recovery: Monitor the ability to fully recover the increased $900 million annual reinsurance cost through premium rate increases in 2007 and 2008.
- Legal Settlements: Track the status of the 19-state "inherent diminished value" class action and Hurricane Katrina-related litigation for potential settlement costs.
- Share Repurchase Completion: Confirm the completion of the remaining $820 million of the share repurchase program by the March 31, 2008 target date.