Allstate Corporation: Q1 2011 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited three months ended March 31, 2011, with comparison to March 31, 2010. Allstate operates through Property-Liability, including Allstate Protection and discontinued lines, and Allstate Financial, which includes life, annuity and other investment products. The company’s stated priorities are improving operating results, growing profitably and differentiating its business.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenues | $8.095 billion | $7.749 billion | Up 4.5% |
| Net income | $519 million | $120 million | Up $399 million |
| Diluted EPS | $0.97 | $0.22 | Up $0.75 |
| Property-Liability net income | $468 million | $164 million | Up $304 million |
| Allstate Financial net income | $97 million | $4 million | Up $93 million |
| Net investment income | $982 million | $1.050 billion | Down 6.5% |
| Realized capital gains and losses | $96 million gain | $348 million loss | Improved $444 million |
| Operating cash flow | $726 million | $964 million | Down $238 million |
| Ending cash | $641 million | $704 million | Down $63 million |
Net income margin was approximately 6.4% of revenue, compared with approximately 1.5% in the prior-year quarter. Property-Liability underwriting income increased to $327 million from $71 million, and the combined ratio improved to 94.9 from 98.9. The Allstate Protection combined ratio was 94.8, while the Encompass combined ratio remained above break-even at 100.4.
- Property-Liability premiums earned declined 0.8% to $6.448 billion; premiums written declined 0.7% to $6.215 billion.
- Catastrophe losses declined to $333 million from $648 million, reflecting 16 events versus 11 events in the prior-year period.
- Allstate Financial premiums and contract charges increased to $569 million from $544 million.
- Contractholder funds declined to $46.834 billion from $48.195 billion at December 31, 2010 and $51.027 billion at March 31, 2010.
- Total investments were $99.611 billion, down from $100.483 billion at year-end 2010. The portfolio was 80.6% fixed income securities, and 90.5% of fixed income securities were rated investment grade.
- Shareholders’ equity was $19.312 billion, up from $19.016 billion at year-end 2010. Book value per diluted share was $36.51, up from $35.32 at year-end 2010.
- Long-term debt was $5.908 billion. Debt represented 30.6% of shareholders’ equity and 23.4% of total capital resources.
- The quarterly dividend was increased to $0.21 per share from $0.20. Allstate repurchased 9.5 million shares for approximately $300 million, leaving $540 million under the current $1.0 billion authorization.
Material changes versus the prior comparable period
- Consolidated earnings improved primarily because of stronger Property-Liability underwriting results, sharply lower catastrophe losses and a swing from realized investment losses to gains.
- Homeowners underwriting income improved to $127 million from a $192 million loss, mainly because catastrophe losses declined. Standard auto underwriting income fell to $188 million from $213 million as claim frequency increased.
- Net investment income declined because of lower average investment balances and lower yields following risk-mitigation actions.
- Allstate Financial’s improvement was partly offset by higher deferred policy acquisition cost amortization, including a $12 million unfavorable assumption-related unlocking charge versus a $12 million favorable adjustment in Q1 2010.
- Allstate recorded a $23 million loss on disposition of operations, including a $25 million charge related to the planned sale and wind-down of Allstate Bank operations.
- Other-than-temporary impairment losses recognized in earnings declined to $183 million from $255 million, although investment portfolio credit and valuation risks remained material.
- Substantially all of the Property-Liability macro hedge program was terminated during the quarter, producing $69 million of net realized capital losses.
Outlook, management commentary, risks and contingencies
Management stated that rate changes indicated by loss-trend analysis would continue to be pursued. Standard auto results remained pressured by higher bodily-injury and physical-damage claim frequency and severity, particularly in Florida and New York. Homeowners results remain exposed to unpredictable catastrophe activity.
Management believes liquidity is sufficient for expected base and stressed needs. Parent-level deployable invested assets were $3.65 billion, including $3.21 billion generally saleable within one quarter. The company had no commercial paper or revolving-credit borrowings outstanding at March 31, 2011; the commercial paper program and revolving credit facility each had $1.0 billion limits, subject to the stated facility terms.
- Insurance reserves, particularly asbestos, environmental and other discontinued-lines reserves, involve substantial uncertainty. Net asbestos reserves were $1.09 billion and net environmental reserves were $193 million at March 31, 2011.
- Legal and regulatory matters include Hurricane Katrina-related litigation, contractor overhead and profit class actions, agency-program reorganization matters, wage-and-hour claims and other insurance-industry proceedings. Management stated that ultimate outcomes cannot be predicted, but are not expected to have a material adverse effect on financial position based on currently known information.
- Investment risks include unrealized losses of $2.016 billion on fixed income securities, concentrated exposure to structured securities, mortgage-credit deterioration, interest-rate movements, credit spreads, liquidity and valuation uncertainty.
- Contractholder funds subject to discretionary withdrawal without adjustments totaled $13.684 billion, or 29.2% of contractholder funds. The annualized surrender and partial-withdrawal rate was 12.8%, compared with 11.7% in Q1 2010.
- The filing does not provide full-year earnings or revenue guidance. It states that interim results should not be considered indicative of full-year results.
Important facts for investors to verify
- Whether underwriting improvement is sustained after adjusting for the unusually favorable year-over-year catastrophe comparison and favorable reserve reestimates.
- Auto claim-frequency and severity trends, especially in Florida and New York, and the effect of continuing rate and underwriting actions on policy counts and retention.
- Performance and impairment sensitivity of Alt-A, subprime RMBS, CMBS, ABS, municipal bonds and other below-investment-grade investments.
- Actual runoff, surrender and maturity experience in Allstate Financial and the company’s ability to maintain investment spreads as contractholder funds decline.
- Final resolution and financial impact of the Allstate Bank disposition, pending litigation and regulatory proceedings.
- Capital deployment priorities, including completion of the remaining $540 million share-repurchase authorization, dividends and debt maturities.