Allstate Corporation 2016 Q2 Form 10-Q Summary
Business context and reporting period
The Allstate Corporation is a Delaware insurance holding company operating primarily through Property-Liability and Allstate Financial segments. This unaudited Form 10-Q covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods. The filing was reviewed by Deloitte & Touche LLP and filed August 3, 2016.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenues | $9.16 billion | $8.98 billion | $18.04 billion | $17.93 billion |
| Net income | $271 million | $355 million | $517 million | $1.03 billion |
| Net income applicable to common shareholders | $242 million | $326 million | $459 million | $974 million |
| Diluted EPS | $0.64 | $0.79 | $1.21 | $2.33 |
| Property-Liability premiums earned | $7.81 billion | $7.55 billion | $15.54 billion | $14.98 billion |
| Net investment income | $762 million | $789 million | $1.49 billion | $1.64 billion |
| Realized capital gains/(losses) | $24 million | $108 million | $(125) million | $247 million |
| Operating cash flow | Not separately reported | Not separately reported | $1.36 billion | $1.30 billion |
- Property-Liability combined ratio was 100.8% in Q2 and 99.6% year to date, versus 100.1% and 96.9%, respectively, in 2015. A ratio above 100% indicates an underwriting loss.
- Property-Liability catastrophe losses were $961 million in Q2 and $1.79 billion year to date, compared with $797 million and $1.09 billion in 2015.
- Shareholders’ equity was $20.55 billion at June 30, 2016, including $295 million of accumulated other comprehensive income. Book value per diluted common share was $50.05.
- Total investments were $79.69 billion, including $58.13 billion of fixed-income securities. Unrealized net capital gains were $2.70 billion.
- Long-term debt was $5.11 billion. Debt-to-shareholders’ equity was 24.9%, and debt-to-capital resources was 19.9%.
- Cash was $446 million at June 30, 2016, down from $495 million at December 31, 2015. The company had $2.46 billion of deployable parent-company assets, $1.00 billion of commercial-paper capacity and access to a $1.00 billion revolving credit facility, with no borrowings under the facility during the period.
Material changes versus the prior comparable period
- Common-shareholder net income declined 25.8% in Q2 and 52.9% for the first six months; diluted EPS declined from $0.79 to $0.64 and from $2.33 to $1.21, respectively.
- Revenue grew modestly, supported by higher Property-Liability premiums and life and annuity premiums, but earnings were reduced by higher catastrophe losses, lower investment income and weaker realized investment results.
- Property-Liability underwriting deteriorated: Q2 underwriting loss increased to $66 million from $10 million, while year-to-date underwriting income fell to $59 million from $457 million. The loss ratio increased to 75.5% in Q2 and 74.6% year to date from 74.0% and 70.6%.
- Allstate Financial net income applicable to common shareholders declined to $116 million in Q2 and $184 million year to date, from $179 million and $362 million. The decline primarily reflected lower net investment income and realized investment results, concentrated in Allstate Annuities.
- Unrealized net capital gains increased substantially from $1.03 billion at December 31, 2015, to $2.70 billion at June 30, 2016, primarily because of higher fixed-income valuations.
- The company repurchased $532 million of common stock during the first six months and entered into a $350 million accelerated share repurchase agreement. A new $1.5 billion repurchase authorization was approved, with $1.2 billion remaining at June 30.
Guidance, outlook, management commentary, risks and unusual items
- No formal earnings or revenue guidance is provided in the filing. Management stated that it was pursuing rate increases, underwriting-guideline changes, expense reductions and claims-process improvements to address higher auto and property loss trends.
- Management noted that 2016 catastrophe losses included three severe Texas hail events that accounted for approximately half of total first-half catastrophe losses. The nature and level of catastrophes cannot be reliably predicted.
- Allstate completed the Florida catastrophe reinsurance program, providing $685 million of per-occurrence limits subject to a $20 million retention. Total catastrophe reinsurance costs were $204 million in the first half.
- Investment results remain exposed to interest rates, credit spreads, equity markets, energy-sector weakness, illiquid limited partnerships and other-than-temporary impairments. The company reduced direct energy-sector fixed-income and equity exposure by $1.65 billion during the first six months.
- The company recorded $160 million of net other-than-temporary impairment losses in the first half, compared with $92 million in 2015. Equity and limited-partnership impairments were significant contributors.
- Asbestos reserves, net of reinsurance, were $890 million and environmental reserves were $173 million at June 30, 2016. Management stated that these reserves are subject to substantially greater uncertainty than ordinary claims reserves.
- The aggregate reasonably possible legal loss above amounts accrued, where estimable, was disclosed as ranging from zero to $875 million, pre-tax. Management stated that this is not an indication of expected loss and does not represent maximum exposure.
- Other risks include reserve development, regulatory limits on insurance pricing and underwriting, reinsurance availability and counterparty credit, life-contingent mortality assumptions, investment portfolio valuation, liquidity, legal proceedings, regulatory changes and severe weather.
- The company expects the U.S. Department of Labor fiduciary rule to add costs and litigation exposure, although its financial impact was expected to be immaterial. The filing states that there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether catastrophe frequency and auto bodily-injury and property-damage severity continue to pressure the combined ratio.
- Whether approved rate increases improve underwriting margins without causing further declines in policies in force, new applications or renewal ratios.
- The sustainability of investment income amid lower fixed-income yields and the volatility of limited-partnership and other performance-based investments.
- Future realized impairments, particularly in energy, below-investment-grade credit and equity securities.
- Development of asbestos, environmental, Florida personal-injury-protection and other legal contingencies, including the disclosed $875 million upper range of reasonably possible losses.
- Completion and final share count of the $350 million accelerated share repurchase agreement and execution of the remaining repurchase authorization.
- Capital and liquidity at the parent and insurance-subsidiary levels, including dividend capacity and the effect of regulatory or rating changes.