Allstate Corporation — Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited three-month period ended March 31, 2013, with comparison to the three months ended March 31, 2012. Allstate operates primarily through Property-Liability insurance, including Allstate, Encompass and Esurance, and Allstate Financial, which includes life, accident and health insurance, annuity and institutional products.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenues | $8.463 billion | $8.362 billion | 1.2% increase |
| Net income | $709 million | $766 million | 7.4% decrease |
| Diluted earnings per share | $1.47 | $1.53 | 3.9% decrease |
| Property-Liability net income | $616 million | $695 million | 11.4% decrease |
| Allstate Financial net income | $146 million | $112 million | 30.4% increase |
| Operating cash flow | $740 million | $807 million | 8.3% decrease |
| Net realized capital gains | $131 million | $168 million | Decrease |
| Net investment income | $983 million | $1.011 billion | 2.8% decrease |
| Shareholders’ equity at period-end | $20.619 billion | $20.580 billion at Dec. 31, 2012 | 0.2% increase |
Property-Liability premiums earned increased 2.1% to $6.770 billion. Premiums written increased 2.5% to $6.625 billion. Property-Liability underwriting income declined to $458 million from $523 million, and the combined ratio increased to 93.2 from 92.1. The loss ratio increased to 65.9 from 65.4, while the expense ratio increased to 27.3 from 26.7.
Catastrophe losses were $359 million, or a 5.3-point combined-ratio impact, compared with $259 million and 3.9 points in the prior-year quarter. Favorable prior-year reserve reestimates were $35 million in Q1 2013 versus $204 million in Q1 2012.
Allstate Financial premiums and contract charges increased to $579 million from $553 million. Net investment income declined to $635 million from $687 million, but realized capital gains improved to $19 million from a $21 million loss. Contractholder funds were $38.807 billion at March 31, 2013, down from $39.319 billion at year-end 2012.
Total investments were $97.382 billion at March 31, 2013, including $75.806 billion of fixed-income securities. Approximately 91.2% of the fixed-income portfolio was investment grade. Unrealized net capital gains were $5.500 billion, compared with $5.547 billion at December 31, 2012.
Long-term debt was $6.556 billion, up from $6.057 billion at December 31, 2012. Debt-to-shareholders’ equity was 31.8%, compared with 29.4% at year-end. Cash increased to $820 million from $806 million. The company reported $2.73 billion of deployable parent-company assets, including $2.23 billion of cash and investments generally saleable within one quarter.
Material changes versus the prior comparable period
- Revenue grew modestly, but net income declined because of lower realized gains, higher catastrophe losses, less favorable reserve development and higher operating and restructuring costs.
- Property-Liability results weakened primarily in homeowners and other personal lines. Standard auto underwriting income improved to $172 million from $115 million.
- Esurance standard-auto premiums written increased 30.5% to $342 million, supported by a 35.6% increase in policies in force. Non-standard-auto premiums written declined 9.0% to $172 million.
- Allstate Financial earnings improved despite lower investment income, supported by realized gains, lower interest credited to contractholders and lower deferred policy acquisition cost amortization.
- Operating cash flow declined, while financing cash use improved to $862 million from $1.085 billion, primarily because the prior-year period included $106 million of dividend payments and $350 million of debt repayment.
- Shares outstanding declined materially due to repurchases. The company repurchased 15.4 million shares during the quarter, including 9.2 million shares under an accelerated share repurchase agreement, and had $1.33 billion remaining under repurchase programs.
Guidance, outlook, commentary, risks and unusual items
- Management’s stated priorities were to grow insurance premiums, maintain auto profitability, improve homeowners and annuity returns, actively manage investments and reduce the cost structure.
- Management expected 2013 catastrophe reinsurance costs to be lower than in 2012. The planned program provided $3.25 billion of coverage above specified retentions, but the Florida component remained expected to be placed in the second quarter.
- Management expects to refinance or repay the $250 million debt maturity due June 15, 2013 from available cash and planned an additional $500 million subordinated-debt issuance in connection with the share-repurchase program.
- Allstate ceased offering structured settlement annuities effective March 22, 2013, while continuing to service existing contracts.
- Restructuring charges increased to $26 million from $6 million, primarily for a technology-organization reorganization involving centralization, global sourcing, automation and oversight changes.
- The company estimated reasonably possible legal losses above accrued amounts, where estimable, ranging from zero to $830 million pre-tax. Management stated that this was not an expected-loss estimate and did not represent maximum exposure.
- Net reserves for asbestos claims were approximately $1.00 billion and environmental claims approximately $192 million. Management noted that these reserves are subject to substantially greater uncertainty than ordinary claims reserves and that a meaningful range of additional possible losses could not be developed.
- Contractholder liquidity remains a consideration: $14.861 billion, or 38.3% of contractholder funds, was subject to discretionary withdrawal without adjustments. Institutional products of approximately $1.84 billion included scheduled maturities of $1.75 billion in April 2013.
- The filing states that disclosure controls were effective and that no material change occurred in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether catastrophe frequency and severity, particularly in homeowners, continue to pressure the combined ratio and underwriting earnings.
- Whether rate increases, underwriting restrictions and claims initiatives improve profitability in Florida, New York and other challenged markets.
- The completion and economics of the Florida catastrophe reinsurance placement and the actual cost and coverage of the 2013 program.
- The ultimate outcome and potential financial exposure from litigation, regulatory matters, asbestos and environmental claims, including the disclosed possible-loss range of up to $830 million above accruals.
- Whether lower fixed-income yields and the managed reduction of spread-based products continue to reduce Allstate Financial investment spreads and earnings.
- The settlement value of the accelerated share repurchase agreement, remaining repurchase activity and the effect of additional debt issuance on leverage.
- The timing and funding of the $250 million June 2013 debt maturity and the scheduled April 2013 institutional-product maturities.