Allstate Corporation 2017 Q3 Form 10-Q Summary
Business context and reporting period
The filing covers the three and nine months ended September 30, 2017, with comparative periods ended September 30, 2016. Allstate operates primarily through Property-Liability insurance, Allstate Financial, and Corporate and Other. The interim financial statements are unaudited and prepared under U.S. GAAP.
Allstate acquired SquareTrade on January 3, 2017, for approximately $1.4 billion in cash. SquareTrade provides consumer electronics and appliance protection plans and generated $78 million of premiums earned in the third quarter and $207 million for the first nine months.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $9.66 billion | $9.22 billion | $28.68 billion | $27.26 billion |
| Net income | $666 million | $520 million | $1.94 billion | $1.04 billion |
| Net income applicable to common shareholders | $637 million | $491 million | $1.85 billion | $950 million |
| Diluted EPS | $1.74 | $1.31 | $5.02 | $2.51 |
| Property-Liability premiums earned | $8.12 billion | $7.87 billion | $24.10 billion | $23.41 billion |
| Net investment income | $843 million | $748 million | $2.49 billion | $2.24 billion |
| Operating cash flow | Not separately provided | Not separately provided | $3.21 billion | $2.74 billion |
| Property-Liability combined ratio | 94.7 | 95.5 | 95.2 | 98.2 |
Property-Liability net income applicable to common shareholders was $604 million in the third quarter and $1.74 billion for the first nine months. Allstate Financial contributed $168 million and $422 million, respectively. Corporate and Other reported losses of $135 million and $309 million, including preferred dividends and business-combination expenses.
At September 30, 2017, total assets were $113.63 billion, investments were $82.77 billion, cash was $690 million, shareholders’ equity was $22.12 billion, and long-term debt was $6.35 billion. Debt represented 28.7% of shareholders’ equity and 22.3% of total capital resources. Parent-level deployable assets were approximately $2.47 billion.
Net cash provided by operating activities was $3.21 billion. Investing activities used $1.07 billion, including $1.36 billion for acquisitions, while financing activities used $1.89 billion, including $848 million for treasury stock purchases and $478 million for common and preferred dividends. Cash increased by $254 million from year-end 2016.
Material changes versus the prior comparable periods
- Total revenue increased 4.8% in the third quarter and 5.2% for the first nine months.
- Net income applicable to common shareholders increased 29.7% in the third quarter and 95.1% for the first nine months; diluted EPS increased to $1.74 and $5.02, respectively, despite lower weighted-average common shares.
- Property-Liability underwriting income increased to $429 million in the third quarter and $1.16 billion for the first nine months, compared with $355 million and $414 million in the prior-year periods.
- The combined ratio improved by 0.8 points in the third quarter and 3.0 points for the first nine months, primarily from lower non-catastrophe claim costs and favorable prior-year reserve reestimates.
- Catastrophe losses increased to $861 million in the third quarter and $2.64 billion for the first nine months, compared with $481 million and $2.27 billion, respectively, in 2016. Third-quarter losses included $507 million from Hurricane Harvey and $134 million from Hurricane Irma.
- Prior-year reserve reestimates were favorable by $135 million in the third quarter and $321 million for the first nine months, principally reflecting better-than-expected auto injury severity development. Discontinued Lines and Coverages had an unfavorable $85 million third-quarter reestimate.
- Net investment income increased 12.7% in the third quarter and 11.0% for the first nine months, driven largely by stronger performance-based investment results, particularly limited partnerships.
- Net realized capital gains were $103 million in the third quarter and $318 million for the first nine months, versus $33 million and a $92 million loss, respectively, in 2016.
- Shareholders’ equity increased 7.5% from December 31, 2016, aided by net income and higher unrealized investment gains, partially offset by repurchases and dividends. Common share repurchases totaled $845 million during the first nine months.
Guidance, outlook, management commentary, risks, and unusual items
The filing does not provide a formal consolidated earnings or revenue guidance range. Management emphasizes profitable growth, customer service, target economic returns, investment management, and development of long-term growth platforms.
- Management described improving auto profitability and a balanced approach to growth, including moderated rate actions, expanded growth plans, distribution investments, and increased use of data and analytics.
- Homeowners profitability is being managed through underwriting guidelines, inspections, risk management, product changes, and targeted rate actions.
- Esurance and Encompass continued profit-improvement actions, including rate increases, customer-risk selection, reduced marketing, and exits from selected markets. Encompass announced an exit from Massachusetts.
- SquareTrade generated underwriting losses of $29 million in the third quarter and $86 million for the first nine months, primarily due to $23 million and $69 million of amortization of acquired intangible assets. Approximately $90 million of 2017 pre-tax amortization was expected from the acquired intangible assets.
- Restructuring charges were $14 million in the third quarter and $77 million for the first nine months, compared with $5 million and $21 million in 2016. These costs related mainly to claims-process changes, office closures, workforce actions, outsourcing, and organizational realignment.
- A pension settlement loss of $86 million, pre-tax, was recorded in the third quarter. Management expected additional settlement expense based on fourth-quarter lump-sum payments.
- Effective October 2017, Allstate changed from four to seven reportable segments. The change was expected to result in an approximately $125 million goodwill impairment in the fourth quarter related to Allstate Annuities.
- As part of the segment change, Allstate estimated a possible approximately $550 million increase in life-contingent contract benefit reserves, offset by an approximately $350 million after-tax reduction in unrealized net capital gains. No adjustment had been recorded as of September 30, 2017.
- Legal and regulatory matters include employment class actions, securities litigation concerning historical auto claim-frequency disclosures, agent-reorganization litigation, Florida personal-injury-protection litigation, and asbestos and environmental claims. The estimated aggregate range of reasonably possible loss above recorded amounts for certain disclosed matters was zero to $300 million, pre-tax; this was not characterized as an expected loss or maximum exposure.
- Key ongoing risks include catastrophe frequency and severity, claims inflation, reserve adequacy, reinsurance availability and collectability, investment and interest-rate volatility, performance-based investment variability, regulatory and rate restrictions, litigation, market competition, technology and cybersecurity, capital requirements, rating changes, and potential goodwill impairment.
Most important facts for investors to verify
- Whether the fourth-quarter goodwill impairment is approximately $125 million and whether the life-contingent reserve review produces the estimated $550 million reserve increase and $350 million after-tax equity reduction.
- The ultimate development of Hurricane Harvey and Irma claims, catastrophe reserves, reinsurance recoveries, and any state facility assessments.
- Whether the favorable auto reserve development and 95.2 nine-month combined ratio are sustainable after excluding reserve releases and catastrophe volatility.
- SquareTrade’s underlying loss ratio, customer growth, intangible amortization profile, and path to positive underwriting results.
- Development of asbestos, environmental, discontinued-lines, employment, securities, and agent-reorganization litigation beyond recorded reserves.
- Liquidity and capital flexibility, including parent deployable assets, debt levels, dividend capacity, the remaining $1.85 billion repurchase authorization, and the company’s ability to fund insurance subsidiaries.
- The effect of future accounting standards, especially equity-investment fair value changes, revenue recognition for protection plans, credit-loss accounting, and lease accounting.