Allstate Corporation — 2Q13 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited three- and six-month periods ended June 30, 2013, compared with the same periods in 2012. Allstate operates primarily through Property-Liability, including Allstate Protection and discontinued lines, and Allstate Financial, which includes life, accident and health, annuity and institutional products.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenues | $8.79 billion | $8.28 billion | $17.25 billion | $16.64 billion |
| Net income available to common shareholders | $434 million | $423 million | $1.14 billion | $1.19 billion |
| Diluted EPS | $0.92 | $0.86 | $2.39 | $2.39 |
| Property-Liability net income | $617 million | $354 million | $1.23 billion | $1.05 billion |
| Allstate Financial net income | $190 million | $132 million | $336 million | $244 million |
| Property-Liability combined ratio | 96.1 | 98.0 | 94.7 | 95.1 |
| Operating cash flow | Not separately presented | Not separately presented | $1.55 billion | $1.77 billion |
Property-Liability premiums earned increased 2.9% to $6.86 billion in the second quarter and 2.5% to $13.63 billion for the first six months. Premiums written increased 4.2% to $7.15 billion in the quarter and 3.4% to $13.78 billion year to date. Catastrophe losses were $647 million in the quarter and $1.01 billion year to date, below the comparable 2012 amounts.
Net investment income declined 4.1% to $984 million in the quarter and 3.4% to $1.97 billion year to date, primarily because of lower fixed-income yields and lower average investment balances. Net realized capital gains increased to $362 million in the quarter and $493 million year to date, compared with $27 million and $195 million, respectively, in 2012.
As of June 30, 2013, total investments were $92.32 billion, total assets were $121.48 billion, shareholders’ equity was $19.87 billion and cash was $634 million. Total debt was $5.98 billion, including $500 million of commercial paper. Parent-level deployable assets were $2.37 billion, including $1.79 billion generally saleable within one quarter.
Material changes versus the prior comparable period
- Second-quarter consolidated net income increased modestly, but six-month net income declined because of a $480 million pretax debt-extinguishment loss, partially offset by stronger Property-Liability and Allstate Financial results.
- Property-Liability underwriting income increased to $269 million from $134 million in the quarter and to $727 million from $657 million year to date. The improvement reflected lower catastrophe losses and better homeowners and standard auto results.
- Allstate Financial net income increased to $190 million from $132 million in the quarter and to $336 million from $244 million year to date, driven by lower interest credited to contractholders, higher realized gains and premium growth.
- Allstate Protection growth was led by standard auto and Esurance. Esurance standard auto premiums written increased 31.3% in the quarter and 30.9% year to date, while non-standard auto premiums declined approximately 9% in both periods.
- Investment values fell by approximately $4.96 billion from December 31, 2012, primarily due to lower fixed-income valuations and the managed reduction of Allstate Financial contractholder funds. After-tax unrealized net capital gains fell to $1.65 billion from $2.83 billion.
- The company issued $1.0 billion of senior notes in June, issued $287.5 million of preferred stock, and repurchased $1.83 billion principal amount of debt. Total debt declined modestly, but the transaction generated the $480 million pretax extinguishment loss.
- Allstate repurchased 19.2 million common shares for $905 million during the first six months. The common dividend was increased to $0.25 per share per quarter from $0.22 in the comparable 2012 period.
Guidance, outlook, management commentary, risks and unusual items
- Management expects investment income to decline as portfolio cash flows are reinvested at lower market yields. It also expects higher interest rates and volatile capital markets to create volatility in accumulated other comprehensive income.
- Management is shortening the Property-Liability fixed-income portfolio duration, reducing reliance on spread-based assets, managing asset-liability alignment and seeking higher returns in homeowners and annuity businesses.
- Management expects the Allstate Protection expense ratio to decline over time following technology, call-center and claims-office restructuring initiatives. Restructuring charges were $20 million in the quarter and $46 million year to date.
- Management expects 2013 catastrophe reinsurance costs to be lower than in 2012. Catastrophe losses remain inherently unpredictable and materially affect underwriting results.
- In July 2013, Allstate agreed to sell Lincoln Benefit Life and related business to Resolution Life for $600 million, subject to approvals and closing conditions. The company estimated an after-tax third-quarter loss of $475 million to $525 million and a total shareholders’ equity reduction of $575 million to $675 million.
- Allstate announced pension and postretirement benefit changes expected to increase shareholders’ equity by approximately $825 million to $955 million in aggregate. This included an estimated $120 million after-tax curtailment gain in the third quarter from eliminating certain retiree life-insurance benefits.
- Allstate plans to stop offering fixed annuities effective January 1, 2014, outsource annuity administration by the end of 2014 and incur additional restructuring charges in late 2013 and 2014.
- Legal proceedings and regulatory matters remain significant. The estimated aggregate range of reasonably possible loss above accrued amounts for certain disclosed matters was zero to $800 million pretax; management stated this is not an expected-loss estimate and does not represent maximum exposure.
- Net asbestos reserves were $973 million and net environmental reserves were $189 million at June 30, 2013. Management noted that ultimate losses could vary materially and that a meaningful range of additional reserves was not practicable to estimate.
- Approximately 41.8% of contractholder funds were subject to discretionary withdrawal without adjustments, creating potential liquidity exposure. Management nevertheless stated that available liquidity was sufficient for base and stressed needs.
Most important facts for an investor to verify
- Whether the improvement in Property-Liability underwriting results persists after catastrophe losses and favorable reserve reestimates normalize.
- The effect of rising rates, credit spreads and reinvestment yields on investment income, unrealized gains and statutory capital.
- The closing, final purchase-price accounting and actual loss on the Lincoln Benefit Life sale.
- The realized savings and remaining costs from restructuring and benefit-plan changes.
- The level and composition of contractholder withdrawals, institutional maturities and liquidity requirements.
- The adequacy of asbestos, environmental and other discontinued-lines reserves, including potential litigation exposure above recorded amounts.
- Compliance with preferred-stock dividend restrictions, insurance-company dividend limitations and debt covenants while share repurchases continue.