Business Context and Reporting Period
The Allstate Corporation’s Form 10-K covers the fiscal year ended December 31, 2019, with quarterly information included for the fourth quarter. Allstate is primarily a U.S. and Canadian personal property-liability insurer, supplemented by life, voluntary benefits, consumer protection plans, roadside assistance, identity protection, telematics and run-off annuity businesses. Total policies in force reached 145.9 million at year-end, including 33.7 million Property-Liability policies.
Management’s Transformative Growth Plan emphasizes broader customer access, improved customer value, expense reduction, and increased investment in marketing and technology. Esurance was planned for integration into the Allstate brand in 2020, while the Allstate and Encompass independent-agent businesses were to be combined under the Encompass brand.
Financial Results and Key Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $44.675 billion | $39.815 billion | 12.2% increase |
| Insurance premiums and contract charges | $38.577 billion | $36.513 billion | 5.7% increase |
| Net investment income | $3.159 billion | $3.240 billion | 2.5% decrease |
| Realized capital gains and losses | $1.885 billion gain | $877 million loss | Significant improvement |
| Net income attributable to common shareholders | $4.678 billion | $2.012 billion | Increase of $2.666 billion |
| Diluted earnings per share | $14.03 | $5.70 | Increase |
| Operating cash flow | $5.129 billion | $5.175 billion | Slight decrease |
| Shareholders’ equity | $25.998 billion | $21.312 billion | 22.0% increase |
| Long-term debt | $6.631 billion | $6.451 billion | Increase of $180 million |
Property-Liability premiums written increased 5.6% to $35.419 billion, while underwriting income increased 24.3% to $2.912 billion. The Allstate Protection combined ratio improved to 92.0% from 93.2%; the loss ratio was 67.8% and the expense ratio was 24.2%. Catastrophe losses declined to $2.557 billion from $2.855 billion.
Allstate Protection’s underwriting improvement was partly offset by higher non-catastrophe loss costs, including auto claim severity. Auto premiums written increased 4.7%, homeowners premiums written increased 6.1%, and commercial lines premiums written increased 36.9%, primarily from shared-economy business.
- Service Businesses revenue increased 25.1% to $1.649 billion. Adjusted net income rose to $38 million from $8 million, although GAAP net loss attributable to common shareholders was $77 million.
- Allstate Life adjusted net income declined to $261 million from $295 million, primarily because of higher deferred acquisition cost amortization and contract benefits.
- Allstate Benefits adjusted net income declined to $115 million from $124 million; its benefit ratio increased slightly to 52.5% from 52.4%.
- Allstate Annuities adjusted net income fell to $10 million from $131 million as net investment income declined 16.3% to $917 million. The segment remains in run-off.
Balance Sheet, Capital, Debt and Liquidity
Total assets were $119.950 billion, including $88.362 billion of investments, compared with $112.249 billion and $81.260 billion, respectively, at December 31, 2018. Net unrealized capital gains increased to $2.744 billion from $33 million, primarily reflecting higher fixed-income and equity valuations.
Debt represented 25.5% of shareholders’ equity and 20.3% of total capital resources, compared with 30.3% and 23.2%, respectively, in 2018. Allstate issued $500 million of 3.850% senior notes due 2049 and repaid $317 million of senior notes at maturity.
Management reported $27.25 billion of cash and estimated liquidity available within one quarter under normal market conditions, including $12.79 billion expected to be liquidated within one week. Parent-level deployable assets were $2.30 billion. The company had no commercial paper or revolving credit facility borrowings outstanding at year-end; the revolving facility provided up to $1.00 billion of capacity.
Allstate paid $653 million of common dividends and $134 million of preferred dividends in 2019, and repurchased 16.4 million common shares for $1.81 billion. The $3.00 billion repurchase authorization was completed in January 2020, and a new $3.00 billion authorization was approved for completion by the end of 2021.
Material Changes Versus the Prior Comparable Period
- Net income attributable to common shareholders more than doubled, primarily because 2019 included substantial realized investment gains while 2018 included realized losses, together with stronger Allstate Protection underwriting.
- Property-Liability underwriting income improved by $551 million, and the combined ratio improved by 1.2 percentage points.
- Net investment income declined because performance-based investment income, particularly from limited partnerships, was lower. Fourth-quarter valuations on two private-equity investments reduced 2019 performance-based results.
- Shareholders’ equity increased by $4.686 billion, driven by net income and higher unrealized investment gains, partly offset by dividends and share repurchases.
- The company recorded $106 million of pre-tax impairment charges for purchased intangible assets: $55 million related to the SquareTrade trade name and $51 million related to the Esurance trade name.
- Allstate adopted new lease and hedge-accounting guidance in 2019. It also retrospectively changed its pension accounting policy, increasing reported 2019 net income attributable to common shareholders by $36 million, or $0.11 per diluted share, versus the previous accounting principle.
- Fourth-quarter 2019 net income attributable to common shareholders was $1.707 billion, compared with a $585 million loss in fourth-quarter 2018, largely reflecting investment valuation changes.
Guidance, Outlook, Commentary and Risks
Management stated that 2020 operating priorities would remain consistent with 2019 priorities: better serving customers, growing the customer base, achieving target returns on capital, managing investments, and building long-term growth platforms. The company expects low interest rates to pressure future portfolio yields and net investment income, while performance-based investment results may remain volatile.
Allstate expects to place its 2020 nationwide catastrophe reinsurance program in the second quarter of 2020. Its risk framework targets less than a 1% probability that annual aggregate hurricane and earthquake catastrophe losses, net of reinsurance, exceed $2 billion, although model assumptions and reinsurance terms may change.
- Catastrophe and severe-weather losses, wildfire exposure, climate-related changes, claims inflation and auto repair and medical-cost severity remain central underwriting risks.
- Claims reserves are highly judgmental. Management estimated potential variability in Allstate Protection reserves, excluding catastrophe reserves, of approximately plus or minus 4%, or approximately plus or minus $800 million in net income attributable to common shareholders.
- Run-off asbestos, environmental and other discontinued-lines reserves totaled $1.365 billion net of reinsurance at year-end. The 2019 annual review produced $105 million of unfavorable reserve reestimates, and management stated that a meaningful range of additional losses could not be developed.
- Immediate annuities with life contingencies had only marginal reserve sufficiency, approximately 3% of applicable reserves. A 25-basis-point decrease in future investment yields would reduce the sufficiency by approximately $211 million.
- The company relies on dividends from regulated insurance subsidiaries. AIC’s estimated 2020 dividend capacity without prior Illinois approval was $3.73 billion, less dividends paid during the preceding twelve months.
- Material risks also include investment-market volatility, low interest rates, reinsurance availability and counterparty risk, regulatory restrictions on rates and underwriting, cybersecurity and privacy obligations, litigation, competition, execution of the Transformative Growth Plan and changes in technology or customer distribution preferences.
- The company disclosed an aggregate reasonably possible legal-loss range of zero to $75 million before tax for certain matters where an estimate was possible; this excludes matters for which a loss estimate could not be made.
Most Important Facts for Investors to Verify
- Whether Allstate Protection can sustain a combined ratio near or below 92% as auto severity, catastrophe exposure and homeowners losses evolve.
- The extent to which 2019 earnings were driven by non-recurring or market-sensitive realized investment gains rather than recurring underwriting and investment income.
- Progress, costs and customer-retention effects from integrating Esurance and consolidating the independent-agent businesses.
- Future net investment income under continued low interest rates and the volatility of limited-partnership and other performance-based investments.
- Development of asbestos, environmental, discontinued-lines and Michigan catastrophic personal-injury reserves, including the collectability of related recoverables.
- Actual parent-company liquidity, subsidiary dividend capacity, debt maturities and the effect of future share repurchases and preferred-stock transactions.
- Implementation effects of the pending long-duration insurance-contract accounting standard, which management expects to be material, particularly for the run-off annuity segment.