Allstate Corporation 10-Q Summary
Business context and reporting period
The filing covers The Allstate Corporation and subsidiaries for the three and nine months ended September 30, 2009, with comparisons to the same periods of 2008. The principal businesses are Property-Liability insurance, including Allstate Protection and discontinued lines, and Allstate Financial, including life insurance, annuities, banking and investment products. The interim financial statements are unaudited and were reviewed by Deloitte & Touche LLP, not audited.
Key financial metrics
| Metric | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Total revenues | $7.58 billion | $7.32 billion | $23.96 billion | $22.83 billion |
| Net income (loss) | $221 million | $(923) million | $336 million | $(550) million |
| Diluted EPS | $0.41 | $(1.70) | $0.62 | $(1.00) |
| Property-Liability net income (loss) | $314 million | $(661) million | $836 million | $281 million |
| Allstate Financial net loss | $(38) million | $(196) million | $(346) million | $(686) million |
| Property-Liability combined ratio | 94.7 | 112.7 | 97.2 | 100.4 |
| Net investment income | $1.08 billion | $1.36 billion | $3.37 billion | $4.29 billion |
| Realized capital gains (losses) | $(519) million | $(1.29) billion | $(550) million | $(3.16) billion |
| Operating cash flow | Not separately provided | Not separately provided | $3.52 billion | $3.56 billion |
Property-Liability premiums earned declined 3.7% in the third quarter and 3.1% year to date, while life and annuity premiums and contract charges increased 3.0% and 5.0%, respectively. Catastrophe losses fell to $407 million in the third quarter and $1.74 billion year to date, from $1.82 billion and $3.08 billion in the comparable 2008 periods.
At September 30, 2009, total assets were $135.50 billion, total investments were $100.63 billion, cash was $727 million, shareholders’ equity was $17.51 billion and long-term debt was $6.66 billion. The debt-to-shareholders’ equity ratio was 38.1%, compared with 44.8% at December 31, 2008. Book value per diluted share was $32.29, up from $23.47 at year-end 2008.
Liquidity included $32.96 billion of cash and investments considered saleable within one quarter, representing 32.5% of the consolidated cash and investment portfolio. Parent-level deployable invested assets were $3.36 billion. The company reported $1.00 billion of unused commercial paper capacity and no borrowings under its $1.00 billion revolving credit facility at September 30, 2009. Operating, investing and financing cash flows for the first nine months were $3.52 billion, $2.46 billion and $(5.66) billion, respectively, resulting in a $312 million increase in cash.
Material changes versus prior comparable periods
- Allstate returned to profitability, driven primarily by improved Property-Liability underwriting results and substantially lower investment impairment losses.
- Property-Liability underwriting income was $346 million in the third quarter and $551 million year to date, compared with losses of $865 million and $79 million in 2008.
- The homeowners loss ratio improved materially because of lower catastrophe activity, although standard auto loss ratios increased because of higher claim frequency.
- Net investment income declined 20.0% in the quarter and 21.5% year to date because of lower yields, shorter portfolio duration, additional liquidity holdings and reduced investment balances.
- Realized capital losses narrowed substantially, but remained significant. Net other-than-temporary impairment losses recognized in earnings were $392 million in the quarter and $1.43 billion year to date.
- Unrealized net capital losses improved to $2.50 billion at September 30, 2009 from $8.81 billion at December 31, 2008, primarily because of improved fixed-income and equity valuations.
- Allstate Financial continued to report losses, although losses narrowed to $38 million in the quarter and $346 million year to date. Contractholder funds declined to $53.34 billion from $58.41 billion at year-end 2008.
Guidance, outlook, commentary and unusual items
The filing does not provide formal consolidated earnings guidance. Management stated that it would continue focusing on financial strength, customer loyalty and reinventing protection and retirement products. Management expected approximately $640 million of annualized catastrophe reinsurance costs for the year beginning June 1, 2009, or approximately $160 million per quarter.
Allstate Financial restructuring initiatives targeted approximately $90 million of annual savings beginning in 2011. The company expected to reduce approximately 1,000 positions during 2009 and 2010; actions completed through September 30, 2009 represented approximately 80% of the targeted savings.
Allstate adopted new accounting guidance for debt-security other-than-temporary impairments effective April 1, 2009. The adoption reclassified $1.15 billion of prior write-downs, increased retained income by $863 million, reduced unrealized net capital gains and losses by $578 million, and increased equity by $285 million. It did not affect reported operating income or net income at adoption.
The company issued $1.00 billion of senior notes in May 2009, consisting of $300 million due 2014 and $700 million due 2019. The proceeds were intended partly to facilitate repayment of $750 million of senior notes maturing December 1, 2009. The share repurchase program was suspended in October 2008 and ended March 31, 2009; no new program had been authorized.
Material risks include catastrophe volatility, adverse development of property-liability, asbestos and environmental reserves, investment impairment and credit-spread risk, mortgage and structured-securities exposure, interest-rate and equity-market movements, policyholder surrenders, regulatory changes, litigation and market-conduct examinations. Net asbestos reserves were $1.16 billion and net environmental reserves were $200 million at September 30, 2009. Management stated that loss estimates could vary materially and that a meaningful range of additional asbestos or environmental reserves could not be developed.
Legal and regulatory matters included a multi-state market-conduct examination of claims handling, class actions involving medical bill review and total-loss automobile valuations, Hurricane Katrina and Rita litigation, agency-program employment matters, and a New Mexico installment-fee class action. Management believed the ultimate resolution of disclosed matters was not likely to materially affect financial position, but acknowledged that individual periods could be materially affected.
Most important facts for investors to verify
- Whether improved underwriting results remain sustainable after normalizing for the unusually low catastrophe losses in 2009.
- The severity and duration of higher auto claim frequencies and homeowners’ non-catastrophe frequency and severity trends.
- Future impairment losses and cash-flow performance in RMBS, CMBS, ABS, CDOs, hybrid securities, commercial mortgage loans and limited partnerships.
- The adequacy and development of asbestos, environmental, discontinued-lines and litigation reserves.
- Allstate Financial’s ability to rebuild investment spreads while managing declining contractholder funds and surrender activity.
- Compliance with debt covenants, the December 2009 debt maturity, intercompany liquidity arrangements and statutory capital requirements.
- The effect of DAC unlocking, expected realized capital losses, persistency, mortality, interest-crediting rates and other assumptions on future Allstate Financial earnings.
- Subsequent catastrophe activity, regulatory actions, litigation developments and changes in insurer financial-strength ratings.