Allstate Corporation 2010 Form 10-K Summary
Business context and reporting period
Allstate is primarily a U.S. personal property and casualty insurer, with additional life insurance, retirement, investment, accident and health, and banking businesses. The report covers the fiscal year ended December 31, 2010, with comparisons primarily to 2009 and 2008.
- Allstate Protection generated 92% of consolidated insurance premiums and contract charges and had approximately 16 million households, 35,000 full-time employees, and 700 part-time employees.
- 2011 priorities were to improve operating results, grow profitably, and differentiate the business through reinvention.
Financial performance and position
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total revenues | $31.40 billion | $32.01 billion | Down 1.9% |
| Net income | $928 million | $854 million | Up 8.7% |
| Diluted EPS | $1.71 | $1.58 | Up 8.2% |
| Net investment income | $4.10 billion | $4.44 billion | Down 7.7% |
| Realized capital gains/(losses) | $(827) million | $(583) million | Greater loss |
| Operating cash flow | $3.69 billion | $4.30 billion | Down $612 million |
| Total assets | $130.87 billion | $132.65 billion | Down 1.3% |
| Shareholders’ equity | $19.02 billion | $16.69 billion | Up 13.9% |
| Long-term debt | $5.91 billion | $5.91 billion | Essentially unchanged |
| Book value per diluted share | $35.32 | $30.84 | Up 14.5% |
Return on average shareholders’ equity was 5.2%, compared with 5.8% in 2009. Cash dividends declared were $0.80 per share. Consolidated cash decreased by $50 million during 2010, ending at $562 million.
Segment results and margins
- Property-Liability: Net income was $1.05 billion versus $1.54 billion in 2009. Premiums earned declined 0.9% to $25.96 billion. The combined ratio increased to 98.1% from 96.2%, reducing underwriting income to $495 million from $995 million.
- Allstate Protection: Underwriting income fell to $526 million from $1.03 billion. Standard auto premiums written decreased 0.5% to $16.49 billion; homeowners premiums written increased 1.1% to $6.11 billion; and Encompass premiums written declined 17.5% to $1.10 billion.
- Allstate Protection’s combined ratio was 98.0%, compared with 96.1% in 2009. The homeowners loss ratio increased to 82.1% from 79.6%, while the Allstate brand standard auto loss ratio increased to 70.7% from 69.3%.
- Catastrophe losses were $2.21 billion across 90 events, compared with $2.07 billion across 82 events in 2009. Wind and hail accounted for $1.91 billion of 2010 catastrophe losses.
- Allstate Financial: Net income improved to $58 million from a $483 million loss. Premiums and contract charges increased 10.7% to $2.17 billion, while net investment income declined 6.9% to $2.85 billion. Contractholder funds decreased 8.3% to $48.20 billion.
- Allstate Financial’s improvement primarily reflected a $609 million reduction in DAC amortization, lower interest credited to contractholders, and higher premiums, partly offset by lower investment income and larger realized capital losses.
Material changes and unusual items
- Unrealized net capital gains improved to $1.39 billion pretax at year-end from unrealized net capital losses of $2.32 billion in 2009, substantially increasing shareholders’ equity.
- Other-than-temporary impairment losses recognized in earnings declined to $1.00 billion from $1.92 billion, but derivative-related realized losses increased materially, contributing to total realized capital losses of $827 million.
- Prior-year property-liability reserve reestimates were favorable by $159 million, compared with $112 million favorable in 2009. Favorable auto and catastrophe development was partly offset by litigation settlements.
- Property-liability reserves increased to $19.47 billion gross and $17.40 billion net from $19.17 billion gross and $17.03 billion net. Discontinued-lines reserves included $1.10 billion for asbestos and $201 million for environmental claims.
- Allstate adopted new variable-interest-entity consolidation guidance, which increased assets and liabilities at adoption but had no material effect on 2010 operating results. It also adopted new embedded credit-derivative guidance, reducing retained income by $28 million.
- Allstate repurchased approximately 5.24 million shares for $160 million during the fourth quarter and had $840 million remaining under a newly authorized $1.00 billion repurchase program.
Liquidity, debt, guidance, and risks
- Parent-level deployable invested assets totaled $3.84 billion, including $3.43 billion generally saleable within one quarter. Allstate Insurance Company paid $1.30 billion of dividends to the parent in 2010; its estimated 2011 ordinary dividend capacity was $1.54 billion, subject to prior dividends and regulatory rules.
- The company had no commercial paper or credit-facility borrowings at year-end and had access to a $1.00 billion commercial paper program and a $1.00 billion revolving credit facility. Management stated that liquidity was sufficient under base and stressed conditions.
- Management expected lower Allstate Financial investment spreads because of reduced contractholder funds and the low-interest-rate environment. It expected invested assets and investment income to decline with contractholder obligations, while portfolio yields were expected to remain comparable to 2010.
- Management expected continued catastrophe volatility, further underwriting and exposure-management actions in homeowners insurance, profitable growth in Emerging Businesses, and increased sales of underwritten life and accident and health products.
- Allstate announced an agreement to sell substantially all Allstate Bank deposits to Discover Bank, subject to regulatory approval, with closing expected by mid-2011. Allstate Financial did not intend to originate new banking products after closing.
- Key risks include catastrophe and severe-weather losses, reserve inadequacy, asbestos and environmental claims, reinsurance availability and collectability, investment impairments, low interest rates, equity and credit-market volatility, policyholder surrenders, regulatory limits on pricing and dividends, litigation, ratings downgrades, and changes in tax or accounting standards.
Most important facts for an investor to verify
- Whether the higher 2010 catastrophe losses and combined ratio remain elevated or normalize in subsequent periods.
- The adequacy and sensitivity of property-liability reserves, including the approximately $17.40 billion net reserve balance and asbestos/environmental exposures.
- The sustainability of Allstate Financial’s return to profitability given declining contractholder funds, low yields, surrender activity, and reserve assumptions.
- Future realized impairments and derivative losses in the investment portfolio, particularly RMBS, CMBS, ABS, municipal bonds, and below-investment-grade holdings.
- Regulatory approval and financial effects of the Allstate Bank deposit sale and related distribution agreement.
- Parent liquidity, statutory capital, dividend capacity, debt maturities, and the planned $1.00 billion share-repurchase program.
- Pending litigation and regulatory proceedings, including homeowner overhead-and-profit claims, agency-reorganization matters, and asbestos/environmental disputes.