ALLSTATE CORP quarterly report, Q1 FY2023

Allstate Corporation: Q1 2023 Form 10-Q Summary

Business context and reporting period

The Allstate Corporation reported unaudited results for the three months ended March 31, 2023, compared with the three months ended March 31, 2022. The company primarily operates through Allstate Protection, Run-off Property-Liability, Protection Services, Allstate Health and Benefits, and Corporate and Other.

Allstate adopted revised FASB accounting guidance for long-duration insurance contracts effective January 1, 2023, using a modified retrospective approach. The transition reduced January 1, 2021 equity by $298 million, including a $21 million reduction in retained income and a $277 million reduction in accumulated other comprehensive income.

Financial performance and key metrics

Metric	Q1 2023	Q1 2022	Change
Total revenue	$13.786 billion	$12.336 billion	Up 11.8%
Property-casualty premiums	$12.173 billion	$10.981 billion	Up 10.9%
Net investment income	$575 million	$594 million	Down $19 million
Net gains on investments and derivatives	$14 million	$(267) million	Improved $281 million
Net income attributable to Allstate	$(320) million	$660 million	Declined $980 million
Net income applicable to common shareholders	$(346) million	$634 million	Declined $980 million
Diluted earnings per share	$(1.31)	$2.25	Declined $3.56
Operating cash flow	$601 million	$432 million	Up $169 million

Property-casualty claims and claims expense increased to $10.326 billion from $7.822 billion. Catastrophe losses increased to $1.691 billion from $462 million, primarily due to wind events in March. The consolidated loss from operations before tax was $406 million, compared with income of $801 million in the prior-year quarter.

Allstate Protection reported a $998 million underwriting loss versus $282 million of underwriting income. The total Property-Liability combined ratio was 108.6%, compared with 97.3%; the loss ratio was 87.5% versus 73.3%, while the expense ratio improved to 21.1% from 24.0%.

Protection Services adjusted net income declined to $34 million from $53 million. Allstate Health and Benefits adjusted net income was $56 million, broadly comparable with $57 million. The Allstate Health and Benefits benefit ratio was 55.5%, compared with 55.6%.

Balance sheet, capital, debt and liquidity

Total assets were $99.631 billion at March 31, 2023, compared with $97.989 billion at December 31, 2022.
Total investments were $63.475 billion, up from $61.829 billion. Fixed-income securities were $44.103 billion and 91.0% of the consolidated fixed-income portfolio was rated investment grade.
Allstate shareholders’ equity was $17.494 billion, essentially unchanged from $17.488 billion at year-end. Book value per diluted common share was $58.65, up from $58.12 at December 31, 2022 but down from $75.46 at March 31, 2022.
Debt was $8.452 billion, up from $7.964 billion. Debt represented 48.3% of Allstate shareholders’ equity and 32.6% of total capital resources.
Allstate issued $750 million of 5.250% senior notes due 2033 and repaid $250 million of floating-rate senior notes at maturity. Net proceeds were used for the repayment and general corporate purposes.
Cash was $662 million at March 31, 2023, down from $736 million at year-end. The company generated $601 million of operating cash flow, used $796 million in investing activities, and generated $121 million in financing activities.
Deployable parent-company assets were $4.16 billion. The company reported $16.72 billion of cash and readily liquid securities expected to be liquidated within one week.
The company had no borrowings under its $750 million revolving credit facility or commercial paper facility. The revolving facility matures in November 2027.

Material changes versus the prior comparable period

Premium growth was more than offset by substantially higher claims costs, particularly in auto and homeowners insurance.
Auto report-year incurred claim severity for the Allstate brand increased approximately 9% to 11%, reflecting higher repair costs, labor rates, total-loss frequency, attorney representation, and medical inflation. Auto policies in force declined 1.3% year over year to 25.733 million.
Homeowners’ loss ratio increased to 98.5% from 61.8%, primarily because of higher catastrophe losses and severity.
Allstate reduced advertising and other expenses, helping lower the Property-Liability expense ratio, but these actions and rate increases adversely affected policy retention and future policy growth.
Performance-based investment income declined to $126 million from $306 million, principally because of lower valuation increases in private equity and real estate investments. Higher fixed-income yields partly offset the decline.
After-tax other comprehensive income was $719 million, compared with an after-tax loss of $1.514 billion, primarily reflecting improved unrealized investment values.
Allstate repurchased 1.2 million common shares for $153 million during the quarter. At March 31, $649 million remained under the $5 billion repurchase authorization.

Guidance, outlook, management commentary, risks and unusual items

The filing does not provide a specific earnings or revenue guidance range. Management expects to continue pursuing rate increases for Allstate and National General auto insurance throughout 2023 and is implementing underwriting restrictions, claims initiatives, and expense reductions to improve profitability.

Allstate no longer writes new homeowners business in California and Florida and may take additional actions to reduce exposure in underperforming markets. The company also plans to exit traditional commercial insurance in five states, with non-renewals beginning later in 2023.

The 2023 catastrophe reinsurance program provides substantial coverage, but includes retentions, co-participation, limits, reinstatement provisions, and exclusions, including the exclusion of Florida property business from the Nationwide Program. The filing states that catastrophe frequency and severity cannot be reliably predicted.

Inflation, supply-chain disruption, labor shortages, elevated repair and medical costs, used-car values, and changing driving behavior may increase claim severity and reserve volatility.
Market volatility, interest rates, credit spreads, recession concerns, and banking-sector disruption may affect investment valuations, liquidity, and returns. Allstate reported approximately $240 million of exposure to regional banks, primarily through investment-grade corporate bonds, and insignificant exposure to Silicon Valley Bank, First Republic Bank, and Signature Bank before their failures.
Fixed-income securities had $2.228 billion of gross unrealized losses at March 31, 2023. Management stated it had not decided to sell, and was not more likely than not required to sell, securities with unrealized losses before recovery of amortized cost.
Reserves for property-casualty claims are inherently uncertain, particularly for recent accident years, catastrophe claims, litigation-related claims, and run-off asbestos and environmental exposures.
The aggregate reasonably possible legal loss in excess of amounts accrued, where estimable, was disclosed as zero to $148 million before tax. Management stated that an unfavorable outcome in one or more matters could materially affect a particular period, although the ultimate outcome of all disclosed matters was not expected to materially affect financial position.
Moody’s affirmed the company’s ratings but changed the outlook to negative. A.M. Best placed the ratings of Castle Key Group under review with negative implications.
On April 17, 2023, after the quarter-end, Allstate redeemed all Series G preferred stock for $575 million.

Most important facts for an investor to verify

Whether auto rate increases and claims-management actions reduce the elevated auto loss ratio without causing further deterioration in retention, new business, or policies in force.
Whether catastrophe losses and homeowners’ severity remain elevated and how effectively reinsurance limits and retentions protect future results.
The development of property-casualty reserves, including prior-year reestimates, asbestos and environmental run-off reserves, and inflation-sensitive claims.
The sustainability of operating cash flow, parent-company liquidity, debt leverage, dividend capacity, and the impact of the $575 million Series G preferred-stock redemption.
Changes in investment valuations, unrealized losses, credit-loss allowances, private-equity performance, and sensitivity to interest rates and credit spreads.
The status and potential exposure from California insurance-rate proceedings, policyholder and class-action litigation, and the disclosed reasonably possible legal-loss range.
The effect of the long-duration insurance accounting adoption on period-to-period comparability and future reserve, DAC, earnings, and OCI volatility.