Allstate Corporation: Q3 2013 Form 10-Q Summary
Business context and reporting period
The Allstate Corporation filed an unaudited Form 10-Q for the three and nine months ended September 30, 2013. Operations primarily comprise Property-Liability insurance, Allstate Financial life and annuity operations, and Corporate and Other activities. Interim results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenues | $8.47 billion | $8.13 billion | $25.72 billion | $24.77 billion |
| Net income available to common shareholders | $310 million | $723 million | $1.45 billion | $1.91 billion |
| Diluted earnings per common share | $0.66 | $1.48 | $3.07 | $3.86 |
| Property-Liability premiums earned | $6.97 billion | $6.70 billion | $20.60 billion | $19.99 billion |
| Net investment income | $950 million | $940 million | $2.92 billion | $2.98 billion |
| Realized capital gains/(losses) | $(41) million | $(72) million | $452 million | $123 million |
| Operating cash flow | Not separately provided | Not separately provided | $3.07 billion | $2.62 billion |
Property-Liability underwriting income was $697 million in the third quarter and $1.42 billion for the first nine months. The consolidated Property-Liability combined ratio was 90.0% in the quarter and 93.1% year to date. Allstate Protection underwriting income was $831 million in the quarter and $1.57 billion year to date.
At September 30, 2013, total assets were $122.29 billion, shareholders’ equity was $20.78 billion, cash was $1.07 billion, investments were $80.48 billion, and long-term debt was $6.22 billion. Debt represented 29.9% of shareholders’ equity and 23.0% of total capital resources. Parent-level deployable assets were $2.83 billion, including $2.21 billion generally saleable within one quarter.
Material changes versus the prior comparable period
- Net income available to common shareholders declined 57% in Q3 and 24% for the first nine months, primarily because of the Lincoln Benefit Life disposition loss, debt extinguishment costs, and lower Allstate Financial results.
- Property-Liability performance improved: the combined ratio decreased from 90.2% to 90.0% in Q3 and from 93.4% to 93.1% year to date. Catastrophe losses declined to $128 million in Q3 and $1.13 billion year to date, from $206 million and $1.28 billion, respectively.
- Property-Liability premiums earned increased 4.1% in Q3 and 3.1% year to date. Premiums written increased 5.3% in Q3 and 4.0% year to date, supported by standard auto, homeowners, and Esurance growth.
- Allstate Financial reported a $360 million Q3 loss and a $24 million year-to-date loss, compared with income of $131 million and $375 million in the prior-year periods.
- Allstate Financial contractholder funds fell to $24.48 billion from $39.32 billion at December 31, 2012, reflecting the planned LBL sale, a $1.75 billion institutional product maturity, and continued reduction of spread-based liabilities.
- Unrealized net capital gains declined to $2.83 billion from $5.55 billion at year-end, primarily because of higher interest rates and realized gains from portfolio repositioning.
- Operating cash flow increased to $3.07 billion from $2.62 billion, while financing cash use increased to $5.03 billion from $3.25 billion due to debt transactions, share repurchases, dividends, and contractholder withdrawals.
Guidance, outlook, management commentary, risks and unusual items
- Management expects interest rates to continue rising but remain below historical averages for some time, with continued capital-market volatility and pressure on reinvestment yields and future net investment income.
- Allstate is prioritizing premium growth, auto profitability, improved homeowners and annuity returns, active investment management, and cost reduction. Management expects the Allstate Protection expense ratio to decline over time.
- Allstate agreed to sell Lincoln Benefit Life and specified related businesses to Resolution Life for $600 million, subject to adjustments and approvals. A $475 million after-tax loss was recorded in Q3; closing was expected in Q1 2014. The filing does not provide a formal earnings guidance range.
- The company plans to stop offering fixed annuities effective January 1, 2014 and expects to outsource annuity administration by the end of 2014. Additional restructuring charges are expected in late 2013 and 2014.
- Debt issuance and refinancing activity included $1.8 billion of principal repurchases in June, an $800 million subordinated-debt issuance in August, and $9 million of Q3 debt-extinguishment expense. Total year-to-date debt-extinguishment expense was $489 million.
- Allstate issued $672.5 million aggregate liquidation preference of noncumulative perpetual preferred stock during 2013. Preferred dividends rank ahead of common dividends and may restrict common dividends and repurchases under specified conditions.
- Pension and postretirement plan changes produced a $69 million net increase to Q3 net income and a $658 million increase to accumulated other comprehensive income. A $76 million pretax pension settlement loss and a $181 million pretax postretirement curtailment gain were recorded. Additional pension settlement losses of a comparable or greater amount were possible in Q4.
- Discontinued Lines and Coverages recorded a $134 million Q3 underwriting loss, including unfavorable reserve reestimates of $74 million for asbestos, $30 million for environmental claims, and $30 million for other exposures. Net asbestos reserves were $1.03 billion and net environmental reserves were $213 million.
- Legal and regulatory matters included an estimated aggregate range of reasonably possible loss above recorded accruals of zero to $810 million pretax for matters where an estimate was possible. Management stated that this is not an expected-loss estimate and does not represent maximum exposure.
- Material risks include catastrophe frequency and severity, reserve development, asbestos and environmental claims, low interest rates and reinvestment risk, investment valuation and impairment, annuity surrender activity, regulatory restrictions, litigation, rating changes, and the need for regulatory approval of the LBL transaction.
Most important facts for investors to verify
- Completion, final consideration, and statutory capital impact of the LBL sale.
- Actual Q4 pension settlement losses and restructuring costs related to annuity operations and technology changes.
- Development of asbestos, environmental, and other discontinued-line reserves.
- Property-Liability combined ratio, catastrophe losses, reserve reestimates, and auto and homeowners loss trends.
- Future investment income as fixed-income securities mature and are reinvested at lower yields.
- Liquidity and capital availability after debt maturities in 2014, preferred-stock issuance, dividends, and remaining share repurchases.
- Whether legal and regulatory proceedings produce losses above recorded accruals, particularly the matters included in the disclosed $810 million possible-loss range.