Allstate Corporation 2020 Form 10-K Summary
Business context and reporting period
Allstate Corporation reported results for the fiscal year ended December 31, 2020. The company is primarily a U.S. and Canadian personal property-liability insurer, offering auto, homeowners, other personal lines, selected commercial coverages, protection plans, roadside assistance, identity protection, life insurance, voluntary benefits and annuities. Allstate reported 175.9 million policies in force at year-end, including 136.3 million in Protection Services.
Reportable segments were Allstate Protection, Protection Services, Allstate Life, Allstate Benefits, Allstate Annuities, Discontinued Lines and Coverages, and Corporate and Other. This filing is an annual report, not a standalone fourth-quarter filing; quarterly information is included in Note 21.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $44.79 billion | $44.68 billion | 0.3% increase |
| Net income | $5.58 billion | $4.85 billion | 15.0% increase |
| Net income applicable to common shareholders | $5.46 billion | $4.68 billion | 16.7% increase |
| Diluted EPS | $17.31 | $14.03 | 23.4% increase |
| Operating cash flow | $5.49 billion | $5.13 billion | 7.1% increase |
| Net investment income | $2.85 billion | $3.16 billion | 9.7% decrease |
| Property-liability premiums earned | $35.58 billion | $34.84 billion | 2.1% increase |
| Property-liability combined ratio | 87.6% | 92.0% | 4.4-point improvement |
| Return on common equity | 21.0% | 21.7% | 0.7-point decrease |
Property-liability claims and claims expense declined to $22.00 billion from $23.98 billion, despite catastrophe losses of $2.81 billion versus $2.56 billion in 2019. The Allstate Protection underwriting result increased 56.8% to $4.57 billion, primarily due to lower auto non-catastrophe losses, higher earned premiums and favorable catastrophe reserve reestimates.
Premiums written in Allstate Protection increased 1.0% to $35.77 billion. Auto premiums written rose 0.6%, homeowners premiums rose 2.9%, and commercial lines premiums declined 12.2%. The Allstate Protection combined ratio was 87.2%, compared with 91.6% in 2019; the reported ratio includes a 2.7-point impact from the Shelter-in-Place Payback.
Protection Services revenue increased 16.6% to $1.92 billion. Adjusted net income increased to $153 million from $38 million, driven mainly by Allstate Protection Plans and improved Roadside profitability. Allstate Life adjusted net income declined to $194 million from $261 million, while Allstate Benefits adjusted net income declined to $96 million from $115 million. Allstate Annuities reported an adjusted net loss of $53 million versus adjusted net income of $10 million in 2019.
Total investments were $94.24 billion at year-end, up from $88.36 billion. The portfolio included $66.35 billion of fixed-income securities, of which 86.4% was investment grade, $4.71 billion of equity securities, $4.08 billion of mortgage loans and $7.61 billion of limited partnership interests.
Shareholders’ equity was $30.22 billion, up from $26.00 billion. Debt was $7.83 billion, compared with $6.63 billion, and debt-to-shareholders’ equity was 25.9%. Book value per diluted common share increased to $91.50 from $73.12.
Allstate generated $5.49 billion of operating cash flow, used $3.44 billion in investing activities and $2.01 billion in financing activities, resulting in a $39 million increase in cash to $377 million. The company reported $7.44 billion of cash and highly liquid securities available within one week and estimated normal-condition liquidity of $26.77 billion within one quarter.
Material changes versus the prior comparable period
- Net income applicable to common shareholders increased $783 million, primarily from stronger Allstate Protection underwriting and improved Protection Services results.
- The $948 million Shelter-in-Place Payback to auto and commercial customers reduced 2020 earnings and increased the property-liability expense ratio by 2.7 points.
- Auto physical-damage claim frequency fell 29.1%, while paid severity increased 10.0%, reflecting pandemic-related driving reductions and higher repair and total-loss costs.
- Catastrophe losses increased 9.9% to $2.81 billion, but included approximately $495 million of favorable reserve reestimates from PG&E and Southern California Edison subrogation settlements.
- Protection Services policies in force increased 28.6%, principally from Allstate Protection Plans; Property-Liability policies in force declined slightly, as Allstate brand growth was offset by Encompass declines.
- Net investment income declined because of lower interest-bearing portfolio yields and lower performance-based investment income.
- Allstate adopted the expected-credit-loss standard effective January 1, 2020, recording an $88 million after-tax cumulative reduction to retained income.
- Restructuring and related charges increased to $259 million from $41 million, primarily related to Transformative Growth. Approximately $290 million of total charges are expected, with remaining costs to be recognized in future quarters.
- Allstate completed the acquisition of National General on January 4, 2021, for approximately $4 billion in cash. The acquisition expands the independent-agent channel and is expected to increase personal-lines market share by more than one percentage point.
Guidance, outlook, management commentary and unusual items
Management’s stated strategy is to increase personal property-liability market share and expand protection offerings through broader distribution, technology, analytics, telematics and the Allstate brand. The company expects to integrate its independent-agent and Encompass operations into National General and to continue investing in Transformative Growth.
Allstate expects to complete placement of its 2021 nationwide catastrophe reinsurance program in the second quarter of 2021. The program is expected to be similar to the 2020 program, while the company evaluates improved economics and potential inclusion of National General.
On January 26, 2021, Allstate agreed to sell Allstate Life Insurance Company and certain affiliates to an affiliate of Blackstone for approximately $2.8 billion. The transaction is expected to close in the second half of 2021, subject to approvals and other conditions. Allstate estimates an after-tax loss on disposition of approximately $3 billion, to be recorded in the first quarter of 2021. The divested entities generated approximately $290 million of net income in 2020 and $470 million in 2019 and represent approximately 80% of Allstate’s life and annuity reserves for life-contingent contract benefits and contractholder funds.
Allstate Annuities recognized a $225 million pre-tax, or $178 million after-tax, premium deficiency reserve for immediate annuities with life contingencies. The charge reflected lower long-term investment yield assumptions and longer-than-anticipated annuitant longevity.
The COVID-19 pandemic created uncertainty around claims frequency and severity, policy sales and retention, life mortality, benefits claims, investment valuations, bad debt and regulatory actions. Management stated that the pandemic’s duration and ultimate financial impact could be material and could continue or evolve in 2021.
Allstate’s catastrophe program targets less than a 1% likelihood that annual aggregate hurricane and earthquake losses, net of reinsurance, exceed $2 billion. This target excludes other catastrophe losses and is dependent on models, assumptions and reinsurance availability.
Legal proceedings include claims-related class actions, litigation concerning depreciation practices and total-loss vehicle payments, securities litigation and shareholder derivative matters. For disclosed matters where an estimate was possible, the aggregate reasonably possible loss in excess of accrued amounts was estimated at zero to $85 million, pre-tax. Management stated that the ultimate outcome of all matters is not expected to materially affect financial position, although individual periods could be materially affected.
Most important facts for investors to verify
- Confirm the timing, final purchase price adjustments and accounting treatment of the National General acquisition.
- Track closing conditions, regulatory approvals, proceeds and the final after-tax loss from the planned ALIC disposition.
- Assess whether the 2020 auto frequency benefit is sustainable as miles driven normalize and whether claim severity, repair costs and medical inflation remain elevated.
- Separate recurring underwriting performance from the $948 million Shelter-in-Place Payback, favorable catastrophe reserve reestimates and other unusual items.
- Monitor catastrophe exposure, reinsurance renewal pricing and recoverability, including the substantial $5.65 billion MCCA recoverable.
- Evaluate the impact of persistently low interest rates on net investment income, annuity spreads, life reserves and future premium deficiency risk.
- Review the adequacy and volatility of asbestos, environmental and other discontinued-lines reserves; net reserves were $1.41 billion at year-end.
- Verify liquidity after the National General acquisition, debt maturities, the $3 billion share-repurchase authorization and limitations on dividends from insurance subsidiaries.
- Consider the forthcoming long-duration insurance contract accounting standard, which management expects to have a material effect on reserves and shareholders’ equity.