Allstate Corporation — Third Quarter 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparative figures are for the same periods in 2017. The interim financial statements are unaudited and were reviewed by Deloitte & Touche LLP. Allstate is primarily a property-and-casualty insurer, with life, benefits, annuity, and service businesses.
Financial overview
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $10.465 billion | $9.888 billion | $30.334 billion | $29.345 billion |
| Net income | $870 million | $666 million | $2.521 billion | $1.940 billion |
| Net income applicable to common shareholders | $833 million | $637 million | $2.416 billion | $1.853 billion |
| Diluted EPS | $2.37 | $1.74 | $6.80 | $5.02 |
| Net margin | 8.3% | 6.7% | 8.3% | 6.6% |
| Net investment income | $844 million | $843 million | $2.454 billion | $2.488 billion |
| Realized capital gains and losses | $176 million | $103 million | $17 million | $318 million |
| Operating cash flow | Not separately provided | Not separately provided | $3.818 billion | $3.214 billion |
- Property-and-casualty premiums increased 5.8% in the third quarter and 5.2% for the first nine months, to $8.595 billion and $25.341 billion, respectively.
- Net income applicable to common shareholders increased 30.8% in the third quarter and 30.4% year to date. Management attributed the improvement primarily to revenue growth, lower catastrophe losses, and the lower effective tax rate under the Tax Cuts and Jobs Act.
- Allstate Protection underwriting income was $553 million in the third quarter, down from $572 million, but $1.934 billion for the first nine months, up from $1.392 billion.
- The Property-Liability combined ratio was 94.3 in the third quarter versus 93.9 in 2017, and 92.5 for the first nine months versus 94.5 in 2017. A ratio below 100 indicates underwriting profitability.
- Catastrophe losses were $625 million in the third quarter and $1.892 billion year to date, compared with $856 million and $2.630 billion in the comparable 2017 periods.
Financial position, debt, and liquidity
- As of September 30, 2018, total assets were $114.490 billion, shareholders’ equity was $23.633 billion, and long-term debt was $6.450 billion.
- Debt-to-shareholders’ equity was 27.3%, compared with 28.2% at December 31, 2017; debt-to-total capital resources was 21.4%, compared with 22.0%.
- Investments totaled $83.968 billion, including $57.663 billion of fixed-income securities, $6.965 billion of equity securities, $7.602 billion of limited partnership interests, and $3.071 billion of short-term investments.
- Cash was $460 million at September 30, 2018, compared with $617 million at year-end 2017. The company generated $3.818 billion of operating cash flow, used $2.456 billion in investing activities, and used $1.519 billion in financing activities during the first nine months.
- Parent-level deployable assets were $3.38 billion. Allstate reported $1.00 billion of unused commercial-paper capacity and access to a $1.00 billion unsecured revolving credit facility, with no borrowings under the facility during the period.
- Contractholder funds were $18.650 billion. Approximately 52.8% were subject to discretionary withdrawal without adjustments, creating potential liquidity exposure.
- Book value per diluted common share was $60.79, up 5.6% from December 31, 2017. Return on average common shareholders’ equity for the twelve months ended September 30, 2018 was 17.4%.
Material changes versus the prior comparable periods
- Revenue growth was driven by higher insurance premiums, particularly in Allstate Protection, Service Businesses, Allstate Benefits, and Allstate Life.
- Third-quarter Allstate Protection underwriting income declined because of higher claim severity, higher operating expenses, and less favorable prior-year reserve reestimates. The year-to-date improvement reflected lower catastrophe losses, premium growth, and improved auto claim frequency.
- Service Businesses revenue increased 21.0% in the third quarter and 23.5% year to date. The adjusted net loss improved to zero in the quarter and $4 million year to date, primarily due to improved SquareTrade and Allstate Dealer Services loss experience.
- Allstate Annuities adjusted net income declined to $20 million in the third quarter and $99 million year to date, from $55 million and $149 million, respectively, primarily because of lower investment income and average investment balances.
- Allstate Life adjusted net income was flat at $74 million in the quarter and increased to $221 million year to date. Allstate Benefits adjusted net income increased to $32 million and $94 million, respectively.
- Net unrealized capital gains declined to $44 million at September 30, 2018 from $2.627 billion at year-end 2017, primarily because of lower fixed-income valuations and the reclassification of equity unrealized gains upon adoption of new accounting guidance.
- Common share repurchases totaled $1.117 billion during the first nine months. The remaining authorization under the prior program was $151 million at September 30; on October 31, the board authorized a new $3.00 billion repurchase program through April 2020.
Accounting, unusual items, outlook, and risks
- Beginning January 1, 2018, equity securities were measured at fair value through net income, and certain limited partnerships were measured at fair value. The adoption reclassified $910 million after tax from accumulated other comprehensive income to retained income without changing total equity for the equity-security component.
- The Tax Cuts and Jobs Act reduced the U.S. corporate tax rate from 35% to 21%. Allstate recorded a $31 million reduction in tax expense in the third quarter related to provisional tax amounts. Tax rates are therefore not directly comparable with 2017.
- Allstate recorded a $61 million pretax pension settlement loss in the third quarter and expects an additional settlement loss based on fourth-quarter lump-sum payments.
- On October 5, 2018, after the reporting date, Allstate acquired InfoArmor for $525 million in cash. Purchase-price allocation information was not yet available.
- On October 15, 2018, Allstate redeemed its Series C preferred stock for $385 million. Management also disclosed the March 2018 issuance of $500 million of floating-rate senior notes and $575 million of Series G preferred stock.
- Management stated that it expects sufficient liquidity to meet base and stressed needs. No specific earnings or premium guidance was provided in the filing.
- Key risks include catastrophe severity and frequency, claim inflation and reserve development, reinsurance availability and counterparty risk, investment-market and interest-rate volatility, annuity surrenders, regulatory limits on rates and underwriting, cybersecurity, changing technology, acquisitions, and legal proceedings.
- Asbestos and environmental net reserves were $882 million and $174 million, respectively. The estimated aggregate range of reasonably possible legal losses above accrued amounts for matters where an estimate was possible was zero to $115 million pretax; management stated that this is not an expected-loss estimate or a maximum exposure.
Most important facts for investors to verify
- Whether the improvement in year-to-date underwriting results persists after catastrophe losses, claim severity, commercial-lines reserve development, and expense trends.
- The sustainability and quality of earnings given the contribution from tax reform, realized equity valuation gains, and volatile performance-based investment income.
- The effect of the sharp decline in accumulated unrealized gains and the company’s exposure to rising rates, widening credit spreads, and investment impairments.
- The magnitude of the expected fourth-quarter pension settlement loss and any further tax-law adjustments.
- InfoArmor’s purchase-price allocation, contribution, and integration costs when disclosed in the 2018 Form 10-K.
- Liquidity implications of contractholder withdrawals, elevated annuity surrenders, capital returns, preferred-stock redemptions, and the new $3.00 billion repurchase authorization.
- Developments in asbestos, environmental, shareholder-derivative, securities-litigation, Florida personal-injury-protection, and other legal or regulatory matters.