Allstate Corporation — Q1 2018 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited three months ended March 31, 2018, compared with the three months ended March 31, 2017. Allstate is primarily a property and casualty insurer, with additional life, benefits, annuities, service and investment businesses. The financial statements were reviewed by Deloitte & Touche LLP and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $9.770 billion | $9.644 billion | +1.3% |
| Net income | $975 million | $695 million | +40.3% |
| Net income applicable to common shareholders | $946 million | $666 million | +42.0% |
| Diluted EPS | $2.63 | $1.79 | +46.9% |
| Net investment income | $786 million | $748 million | +5.1% |
| Realized capital gains/(losses) | $(134) million | $134 million | Unfavorable swing |
| Operating cash flow | $626 million | $857 million | $(231) million |
| Combined ratio | 88.0% | 92.9% | Improved 4.9 points |
| Shareholders’ equity | $23.277 billion | $22.551 billion at Dec. 31, 2017 | +$726 million |
| Long-term debt | $6.847 billion | $6.350 billion at Dec. 31, 2017 | +$497 million |
Property-liability premiums earned increased to $8.019 billion from $7.759 billion. Allstate Protection underwriting income increased to $962 million from $550 million. Catastrophe losses declined to $361 million from $781 million, while favorable prior-year reserve reestimates contributed $51 million to income. The underwriting margin, implied by the combined ratio, was 12.0%.
Cash declined to $450 million from $617 million at year-end. Total investments were $83.289 billion, including $56.674 billion of fixed-income securities, $6.986 billion of equity securities and $7.434 billion of limited partnership interests. The parent company reported $3.86 billion of deployable assets, and had $1.00 billion of unused commercial paper capacity and access to a $1.00 billion revolving credit facility.
Material changes versus the prior comparable period
- Net income benefited from lower catastrophe losses, higher premiums, lower claim frequency, higher net investment income and the lower corporate tax rate under the Tax Cuts and Jobs Act; these benefits were partly offset by realized capital losses instead of prior-year realized gains.
- Allstate Protection premiums written increased 5.0% to $7.844 billion. Auto premiums written increased 5.4% to $5.739 billion and homeowners premiums written increased 4.1% to $1.572 billion.
- The property-liability loss ratio improved to 63.0% from 68.6%, while the expense ratio increased to 25.0% from 24.3%, partly because of higher employee and technology costs and $43 million of Choice Dollars employee benefits.
- Service Businesses revenue increased 26.7% to $313 million, driven largely by SquareTrade growth and the adoption of new revenue-recognition guidance. Adjusted net loss improved to $5 million from $10 million.
- Allstate Life adjusted net income increased to $69 million from $59 million; Allstate Benefits increased to $28 million from $22 million; and Allstate Annuities increased to $35 million from $29 million. Allstate Annuities GAAP net income declined to $17 million from $29 million because of realized capital losses.
- Operating cash flow decreased, while investing cash use increased to $1.251 billion from $280 million, primarily reflecting investment purchases and a change in short-term investments.
- Allstate adopted new financial-instrument accounting guidance. Equity securities were remeasured through net income, and $1.16 billion of pre-tax unrealized equity gains were reclassified from accumulated other comprehensive income to retained income. The adoption did not reduce total shareholders’ equity.
- Allstate issued $500 million of floating-rate senior notes and $575 million of Series G preferred stock on March 29, 2018. It also repurchased approximately 3.5 million common shares for $333 million during the quarter.
Guidance, outlook, commentary, risks and unusual items
Management’s 2018 priorities are to better serve customers, achieve target economic returns, grow the customer base, manage investments proactively and build long-term growth platforms. Management expects to use tax-reform benefits to accelerate growth initiatives, enhance employee benefits, support communities and increase the target quarterly common dividend. The filing does not provide specific full-year earnings or revenue guidance.
- Allstate expects the 2018 catastrophe reinsurance program to support a stated objective of no more than a 1% likelihood of exceeding average annual aggregate catastrophe losses by $2 billion, net of reinsurance, based on current modeling assumptions. Certain Florida-related placements were expected to be completed in the second quarter.
- Catastrophe losses, claim frequency and severity, reserve development, reinsurance availability and reinsurer credit quality remain material sources of earnings volatility.
- Investment results are exposed to interest rates, credit spreads, equity markets, performance-based investment valuations and potential impairments. Fixed-income securities had $745 million of gross unrealized losses at March 31, 2018, although management stated it did not expect to sell the affected securities before recovery.
- Legal and regulatory matters include employment, agent-reorganization and securities litigation. For disclosed matters where an estimate was possible, the aggregate reasonably possible loss in excess of amounts accrued was estimated at zero to $150 million before tax; this is not an estimate of expected loss or maximum exposure.
- Allstate called $224 million of junior subordinated debentures for redemption on May 13, 2018, at par plus approximately $2 million of accrued interest.
- The company identified no material changes to previously disclosed risk factors. Principal risks include catastrophes, insurance reserving, regulation, litigation, cybersecurity, technology disruption, market volatility, ratings downgrades, liquidity and restrictions on subsidiary dividends.
Important facts for investors to verify
- Whether the improvement in the combined ratio is sustained after the unusually favorable catastrophe comparison with Q1 2017.
- Auto claim severity, homeowners loss trends, commercial-lines profitability and the effect of rising operating expenses.
- The sustainability and volatility of limited-partnership and other performance-based investment income.
- Liquidity, debt service and capital impacts from the March debt and preferred-stock issuances and the May debenture redemption.
- Development of asbestos, environmental and other discontinued-lines reserves, including the $1.379 billion net discontinued-lines reserve balance.
- Progress and profitability of SquareTrade, Arity and other Service Businesses following the new revenue-recognition presentation.
- Potential outcomes and timing of disclosed legal, regulatory and securities matters, including exposure above recorded accruals.
- The effect of tax reform, future employee-related costs and management’s planned increase to the target common dividend.