Business Context and Reporting Period
The Allstate Corporation filed an unaudited Form 10-Q for the three months ended March 31, 2015, compared with the three months ended March 31, 2014. Allstate operates primarily through Property-Liability, including Allstate Protection and discontinued lines, and Allstate Financial, which provides life, annuity, and accident and health products.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenues | $8.952 billion | $8.684 billion | +$268 million |
| Net income | $677 million | $600 million | +$77 million |
| Net income available to common shareholders | $648 million | $587 million | +$61 million |
| Diluted EPS | $1.53 | $1.30 | +$0.23 |
| Operating income before tax | $1.081 billion | $849 million | +$232 million |
| Operating cash flow | $566 million | $474 million | +$92 million |
| Net realized capital gains | $139 million | $54 million | +$85 million |
Consolidated net income margin was approximately 7.6% in Q1 2015 versus 6.9% in Q1 2014. The filing does not provide a consolidated operating margin.
Property-Liability
- Premiums earned were $7.426 billion, up 5.1%; premiums written were $7.306 billion, up 4.8%.
- Underwriting income increased to $467 million from $372 million.
- The combined ratio improved to 93.7 from 94.7, while the loss ratio improved modestly to 67.2 from 67.4 and the expense ratio declined to 26.5 from 27.3.
- Catastrophe losses declined to $294 million from $445 million, but prior-year reserve reestimates were $37 million unfavorable versus $13 million favorable in the prior-year quarter.
- Property-Liability net income available to common shareholders increased to $538 million from $493 million.
Allstate Financial
- Net income available to common shareholders increased to $183 million from $162 million.
- Life and annuity premiums and contract charges declined to $537 million from $607 million, primarily reflecting the 2014 sale of Lincoln Benefit Life operations.
- Net investment income fell to $484 million from $640 million, while realized capital gains increased to $111 million from $1 million.
- Contractholder funds were $22.267 billion at March 31, 2015, down from $22.529 billion at December 31, 2014.
Balance Sheet, Debt, and Liquidity
- Total assets were $108.064 billion and shareholders’ equity was $22.179 billion at March 31, 2015, compared with $108.533 billion and $22.304 billion, respectively, at December 31, 2014.
- Investments totaled $80.437 billion, including $61.403 billion of fixed-income securities. Unrealized net capital gains were $3.581 billion before related adjustments.
- Long-term debt was $5.194 billion. Debt-to-shareholders’ equity was 23.4% and debt-to-capital resources was 19.0%.
- Cash was $916 million at quarter-end, and the company generated a $259 million net increase in cash during the quarter.
- Parent-level deployable assets were $3.37 billion. Allstate reported no commercial paper or revolving credit facility borrowings at March 31, 2015, with $1.0 billion available under each facility.
Material Changes Versus the Prior Comparable Period
- Common earnings benefited from stronger Property-Liability underwriting results, lower catastrophe losses, higher realized capital gains, and lower loss-on-disposition charges.
- Investment income declined 11.4% to $850 million, primarily due to lower average investment balances following the Lincoln Benefit Life sale, partially offset by higher limited partnership income.
- Property-Liability auto results weakened: the Allstate brand auto loss ratio increased 3.8 points, reflecting higher claim frequency, severity, and unfavorable reserve reestimates.
- Homeowners underwriting results improved substantially because of lower catastrophe losses and higher earned premiums.
- Shares outstanding declined materially due to repurchases. Allstate repurchased approximately 13.6 million shares during the quarter, including an initial 6.0 million shares under a $500 million accelerated share repurchase agreement.
- Q1 2015 income tax expense included a $45 million pretax-equivalent one-time impact from adopting the proportional amortization method for qualified affordable housing investments; management identified $28 million in Property-Liability and $17 million in Allstate Financial related to the adoption.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that, given current auto loss-cost trends, it expected the level of rate increases to accelerate; approved rates in April 2015 exceeded those approved during the entire first quarter.
- Allstate’s catastrophe reinsurance strategy targets no more than a 1% likelihood of exceeding average annual aggregate catastrophe losses by $2 billion, net of reinsurance, from hurricanes and earthquakes, based on current models.
- Management believes liquidity is sufficient for base and stressed needs. The filing does not provide formal earnings guidance.
- Key risks include catastrophe and severe weather losses, claim frequency and severity, reserve development, regulatory limits on rates and underwriting, reinsurance availability and counterparty credit, interest-rate and spread-based product risk, investment impairments, market volatility, litigation, legal and regulatory changes, cyber and operational failures, and rating downgrades.
- Estimated aggregate reasonably possible legal losses in excess of amounts accrued ranged from zero to $690 million pretax for disclosed matters where estimation was possible. Management stated that no disclosed proceeding was considered probable of loss as of March 31, 2015, but actual outcomes could materially affect a particular period.
- Net asbestos reserves were $993 million and net environmental reserves were $199 million at March 31, 2015. Management noted that these reserves involve materially greater uncertainty than ordinary claims reserves and that no meaningful range of additional losses could be developed.
Important Facts for Investors to Verify
- Whether accelerated auto rate increases offset unfavorable frequency and severity trends without materially affecting policy retention or growth.
- Future catastrophe activity, reinsurance recoveries, and the adequacy of catastrophe reserves.
- Development of prior-year claims reserves, especially auto, commercial lines, asbestos, environmental, and other discontinued exposures.
- The sustainability of higher realized capital gains and limited partnership income, which management states may vary significantly between periods.
- Investment portfolio credit quality, unrealized losses, energy-sector exposure, and the potential for other-than-temporary impairments.
- Progress and final share count under the $500 million accelerated share repurchase agreement and the remaining $2.4 billion authorization.
- Liquidity and capital requirements associated with contractholder withdrawals, rating changes, regulatory restrictions, and subsidiary dividend capacity.