ALLSTATE CORP annual report, FY2013

Business context and reporting period

The Allstate Corporation filed its Form 10-K for the fiscal year ended December 31, 2013. Allstate is primarily a U.S.-based personal property-liability and life insurer, with four reportable segments: Allstate Protection, Discontinued Lines and Coverages, Allstate Financial, and Corporate and Other. The filing also reports fourth-quarter 2013 results, but the principal financial discussion covers the full fiscal year.

Allstate Protection sells auto, homeowners and other personal-lines products through exclusive agencies, independent agencies, contact centers and digital channels. Allstate Financial sells life insurance and voluntary accident and health products. Effective January 1, 2014, Allstate Financial stopped offering fixed annuities.

Key financial metrics

($ in millions, except per-share data and ratios)	2013	2012	Change
Total revenues	$34,507	$33,315	+3.6%
Net income	$2,280	$2,306	-1.1%
Net income available to common shareholders	$2,263	$2,306	-1.9%
Diluted EPS	$4.81	$4.68	+2.8%
Operating cash flow	$4,242	$3,054	+$1,188
Net investment income	$3,943	$4,010	-1.7%
Realized capital gains	$594	$327	+$267
Shareholders' equity	$21,480	$20,580	+4.4%
Long-term debt	$6,201	$6,057	+2.4%
Debt/equity	28.9%	29.4%	Improved

Cash decreased by $131 million during 2013 to $675 million. Cash provided by investing activities was $1.58 billion, while financing activities used $5.95 billion. The filing does not provide a consolidated operating margin; for property-liability operations, the combined ratio is the key underwriting margin measure.

Property-liability performance

Premiums written increased to $28.16 billion from $27.03 billion; premiums earned increased 3.3% to $27.62 billion.
Net income available to common shareholders increased to $2.75 billion from $1.97 billion.
Underwriting income increased to $2.22 billion from $1.20 billion.
The combined ratio improved to 92.0 from 95.5; the Allstate Protection combined ratio improved to 91.5 from 95.3.
The loss ratio improved to 64.9 from 69.1, while the expense ratio increased to 27.1 from 26.4.
Catastrophe losses declined to $1.25 billion from $2.35 billion.
Net property-liability claims reserves were $17.19 billion at year-end, including $15.55 billion for Allstate Protection and $1.65 billion for discontinued lines.

Allstate Financial performance

Net income available to common shareholders fell to $95 million from $541 million.
Premiums and contract charges increased to $2.35 billion from $2.24 billion.
Net investment income declined to $2.54 billion from $2.65 billion.
Contractholder funds decreased to $24.30 billion from $39.32 billion, primarily due to the LBL held-for-sale classification, a $1.75 billion institutional-product maturity and the planned reduction of spread-based business.
Investments decreased to $39.11 billion from $57.00 billion; $11.98 billion of investments were classified as held for sale.

Liquidity, capital and debt

Parent-company deployable assets were $2.56 billion at December 31, 2013.
Allstate Insurance Company paid $1.95 billion of dividends to its parent during 2013 and was estimated to have $2.47 billion of additional dividend capacity in 2014 without prior regulatory approval, subject to statutory limitations.
Allstate issued $2.30 billion of long-term debt, repurchased $1.90 billion of debt and recognized a $491 million pretax loss on extinguishment of debt.
The company issued $807.5 million of perpetual preferred stock and repurchased 37.4 million common shares for $1.84 billion.
The next stated debt maturities were $300 million due May 2014 and $650 million due August 2014; management expected to fund them from available resources.
The $1.00 billion commercial paper program and $1.00 billion revolving credit facility had no borrowings at year-end.

Material changes versus the prior comparable period

Consolidated earnings were broadly stable, but improved property-liability underwriting was offset by Allstate Financial losses associated with the planned LBL sale and higher Corporate and Other charges.
Allstate Protection benefited materially from lower catastrophe losses and better auto and homeowners loss experience. The improvement was partly offset by higher expenses and lower favorable prior-year reserve development.
Allstate Financial recorded a $521 million after-tax estimated loss on the pending sale of Lincoln Benefit Life. The transaction was expected to close in April 2014, subject to regulatory and customary approvals.
Investments and liabilities declined substantially because LBL assets and liabilities were reclassified as held for sale and because management continued reducing spread-based products.
Unrealized net capital gains declined to $2.70 billion from $5.55 billion, mainly because of higher interest rates and realized gains on sales.
The company changed pension and postretirement benefits, producing a $118 million after-tax curtailment gain and a $150 million after-tax settlement loss. The changes reduced unrecognized benefit costs and improved accumulated other comprehensive income.
The quarterly pattern was volatile: fourth-quarter 2013 net income available to common shareholders was $810 million versus $394 million in fourth-quarter 2012, while third-quarter 2013 earnings were $310 million versus $723 million in the prior-year quarter.

Guidance, outlook, risks and unusual items

Management priorities and outlook

For 2014, management prioritized growth in policies in force, maintaining the underlying combined ratio, risk-adjusted investment returns, operating-model modernization and long-term growth platforms.
Allstate Protection expected continued pricing discipline, operating-efficiency improvements, digital and product investment, and catastrophe volatility moderated by reinsurance.
Management expected lower investment income and spread pressure as assets are reinvested at yields below portfolio averages and as Allstate Financial reduces contractholder funds.
Allstate Financial planned to emphasize life insurance and voluntary benefits, outsource annuity administration by the end of 2014 and continue reducing spread-based exposure.

Principal risks and contingencies

Catastrophe and severe-weather losses may materially affect earnings, capital and liquidity. Management modeled less than a 1% likelihood of exceeding average annual hurricane and earthquake catastrophe losses by $2 billion net of reinsurance, but noted that model and exposure changes could alter this estimate.
Reserve adequacy remains uncertain, particularly for Michigan and New Jersey unlimited personal injury protection, asbestos, environmental and other discontinued lines. A 1% change in net reserves was estimated to affect common net income by approximately $112 million.
Reinsurance collectability is a material exposure. Property-liability reinsurance recoverables were $4.75 billion, including $3.46 billion from the Michigan Catastrophic Claim Association, which operates with a reported deficit.
Low interest rates, rising rates, credit spreads, equity markets and investment impairments could reduce investment income, fair values and capital.
Insurance rate regulation, assigned-risk facilities, guaranty funds and state restrictions on cancellations, non-renewals and subsidiary dividends may limit pricing flexibility or liquidity.
The company disclosed legal and regulatory matters with an aggregate reasonably possible loss range, in excess of accrued amounts where applicable, of zero to $810 million pretax. Management stated that the ultimate outcome of disclosed matters was not likely to be material to financial position, but quarterly or annual earnings and cash flows could be materially affected.
Discontinued-lines reserves included $1.02 billion for asbestos and $208 million for environmental claims, net of reinsurance. Management stated that a meaningful additional-loss range could not be developed.

Most important facts for an investor to verify

Whether the LBL sale closed as expected and the final proceeds, statutory capital release and any difference from the $521 million after-tax estimated loss.
Whether the 2014 catastrophe reinsurance program was placed on terms and limits similar to 2013, and how much risk remains net of reinsurance.
Development of Michigan and New Jersey unlimited PIP reserves and the collectability of related MCCA and NJUCJF recoverables.
Whether Allstate Protection can sustain a combined ratio below 100% after catastrophe normalization, reserve development and higher expenses.
Trends in Allstate Financial contractholder funds, surrenders, investment spreads and reinvestment yields after exiting fixed annuities.
Investment portfolio sensitivity to interest rates, credit spreads and equity markets, including the decline in unrealized gains.
Subsidiary dividend capacity, parent liquidity, 2014 debt maturities and the effect of share repurchases and preferred dividends on capital.
Developments in disclosed litigation, regulatory proceedings, asbestos and environmental claims, and state facility assessments.