Allstate Corporation 2012 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2012; it is an annual 10-K rather than a standalone quarterly filing. Allstate primarily operates in U.S. personal property-casualty insurance and life, retirement and investment products. Reportable segments are Allstate Protection, Discontinued Lines and Coverages, Allstate Financial, and Corporate and Other.
Allstate Protection represented approximately 92% of 2012 consolidated insurance premiums and contract charges. The company reported approximately 16 million household relationships, 38,000 full-time employees, and $27.03 billion of Allstate Protection premiums written.
Key financial metrics
| ($ in millions, except per-share data and ratios) | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenues | $33,315 | $32,654 | +2.0% |
| Net income | $2,306 | $787 | +193% |
| Diluted EPS | $4.68 | $1.50 | +212% |
| Property-liability premiums earned | $26,737 | $25,942 | +3.1% |
| Property-liability net income | $1,968 | $403 | +388% |
| Allstate Financial net income | $541 | $590 | -8.3% |
| Net investment income | $4,010 | $3,971 | +1.0% |
| Net realized capital gains | $327 | $503 | -35% |
| Net cash provided by operating activities | $3,054 | $1,929 | +58% |
| Investments at year-end | $97,278 | $95,618 | +1.7% |
| Shareholders' equity at year-end | $20,580 | $18,298 | +12.5% |
| Long-term debt | $6,057 | $5,908 | +2.5% |
Property-liability profitability improved materially: the combined ratio was 95.5% versus 103.4% in 2011, producing a $1.20 billion underwriting profit versus an $882 million underwriting loss. The loss ratio improved to 69.1% from 77.7%, while the expense ratio increased to 26.4% from 25.7%.
Allstate Protection underwriting income was $1.25 billion versus a $857 million loss. Homeowners underwriting income improved to $690 million from a $1.33 billion loss. Standard auto underwriting income declined to $367 million from $561 million, partly because of a full year of Esurance losses.
Catastrophe losses declined to $2.35 billion from $3.82 billion. Hurricane Sandy accounted for approximately $1.12 billion of 2012 catastrophe losses. Favorable prior-year reserve reestimates totaled $665 million, compared with $335 million in 2011.
Allstate Financial premiums and contract charges were $2.24 billion, broadly unchanged, but net income declined because of lower investment income, net realized capital losses, and higher life and annuity benefits. Contractholder funds declined to $39.32 billion from $42.33 billion as the company reduced exposure to spread-based products.
Material changes versus the prior comparable period
- Consolidated earnings improved sharply, driven principally by lower catastrophe losses, favorable claims development, and stronger property-liability underwriting.
- Property-liability operating cash flow increased to $2.02 billion from $789 million, primarily because of lower claim payments.
- Consolidated operating cash flow increased to $3.05 billion, while investing cash flow declined to $1.58 billion from $6.16 billion as cash was reinvested in securities.
- Unrealized net capital gains increased to $5.55 billion from $2.88 billion, primarily because of tighter credit spreads and lower risk-free interest rates.
- Net property-liability reserves declined to $17.28 billion from $17.79 billion, while gross reserves increased to $21.29 billion from $20.38 billion as reinsurance recoverables increased.
- Reinsurance recoverables increased to $4.08 billion from $2.67 billion, including $2.59 billion related to the Michigan Catastrophic Claim Association.
- The company repurchased 26.7 million shares for $910 million and paid $432 million of common dividends. A new $1.0 billion repurchase authorization had $984 million remaining at year-end.
- Allstate issued $500 million of 5.20% senior notes due 2042 and repaid $350 million of senior notes. It had no commercial paper outstanding at year-end.
Guidance, outlook, commentary and risks
Management's 2013 priorities were to grow insurance premiums, maintain auto profitability, improve returns in homeowners and annuity businesses, actively manage investments, and reduce the cost structure.
- Allstate Protection expected continued pricing discipline, differentiated products, cost-efficiency efforts, and catastrophe management. Management expected catastrophe volatility to continue despite reinsurance.
- Homeowners growth remained constrained by catastrophe exposure and underwriting restrictions, particularly in coastal and other high-risk markets. The company expected the decline in homeowners policies in force to continue in 2013, although at a slower rate.
- Allstate Financial planned to grow underwritten life and accident-and-health products while reducing spread-based business. Management expected lower investment spreads because of low interest rates, declining contractholder funds, and asset-allocation changes.
- The 2013 catastrophe reinsurance program was expected to be similar to the 2012 program and was expected to be completed in March 2013.
- Key risks include severe weather and catastrophes, reserve inadequacy, asbestos and environmental claims, reinsurance collectability, investment losses, interest-rate and credit-spread movements, equity-market declines, regulatory restrictions on rates and underwriting, litigation, ratings downgrades, liquidity constraints, and changes in mortality, persistency and surrender behavior.
- The aggregate reasonably possible legal loss above accrued amounts, where estimable, was disclosed as zero to $830 million pre-tax. Management stated that this was not an expected loss estimate and did not represent maximum exposure.
- Statutory surplus increased to $17.28 billion from $15.59 billion, and domestic insurance subsidiaries exceeded company-action-level risk-based capital requirements. The parent had $2.06 billion of deployable invested assets and access to a $1.0 billion commercial paper program and $1.0 billion revolving credit facility.
Most important facts for investors to verify
- Whether the 2012 improvement in underwriting earnings persists after normalizing catastrophe losses and excluding $665 million of favorable prior-year reserve reestimates.
- The adequacy and volatility of property-liability reserves, particularly current accident years, asbestos and environmental reserves, and the $4.01 billion of ceded unpaid-loss recoverables.
- Future catastrophe exposure, modeled loss assumptions, reinsurance limits, retentions, pricing approvals, and the financial condition of key reinsurance facilities such as MCCA.
- The effect of historically low interest rates on Allstate Financial investment spreads, fixed-annuity profitability, contractholder surrenders, and DAC amortization.
- Investment portfolio credit quality and sensitivity to interest rates, credit spreads, equity prices, foreign exchange, and structured-securities impairments.
- Parent-company liquidity, dividend capacity from regulated subsidiaries, upcoming debt maturities, share repurchase funding, and ratings outlooks.
- Developments in disclosed litigation, regulatory proceedings, CEA and other state-facility assessments, and the IRS examinations.