Allstate Corporation — 2012 Q1 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited three-month period ended March 31, 2012. Allstate operates primarily through Property-Liability insurance, including auto and homeowners coverage, and Allstate Financial, including life insurance, annuities and institutional products. Prior-period amounts were retrospectively adjusted for changes in deferred policy acquisition cost accounting.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenues | $8.362 billion | $8.095 billion | +3.3% |
| Net income | $766 million | $524 million | +46.2% |
| Diluted EPS | $1.53 | $0.98 | +56.1% |
| Property-Liability net income | $695 million | $468 million | +48.5% |
| Allstate Financial net income | $112 million | $102 million | +9.8% |
| Operating cash flow | $807 million | $726 million | +11.2% |
| Net change in cash | $(199) million | $79 million | Decline |
| Property-Liability combined ratio | 92.1 | 94.9 | Improved 2.8 points |
| Shareholders’ equity at period-end | $19.182 billion | $18.298 billion at Dec. 31, 2011 | +4.8% |
Property-Liability premiums earned increased to $6.630 billion from $6.448 billion. Underwriting income rose to $523 million from $328 million, driven largely by lower catastrophe losses and favorable prior-year reserve reestimates. Net investment income increased to $1.011 billion from $982 million, while realized capital gains increased to $168 million from $96 million.
Comprehensive income was $1.269 billion, including $503 million of after-tax other comprehensive income, primarily from higher unrealized investment gains. Total investments were $97.009 billion at March 31, 2012, including $77.223 billion of fixed-income securities. Cash was $577 million.
Long-term debt was $6.058 billion, compared with $5.908 billion at December 31, 2011. Debt-to-shareholders’ equity was 31.6%, and debt-to-capital resources was 24.0%. The company reported $2.65 billion of deployable invested assets at the parent holding-company level and no commercial paper outstanding at March 31, 2012.
Material changes versus the prior comparable period
- Net income benefited from stronger Property-Liability underwriting, lower catastrophe losses, higher realized gains and lower impairment losses.
- Catastrophe losses declined to $259 million from $333 million. Current-period catastrophe losses before favorable prior-year reserve reestimates were $420 million, offset by $161 million of favorable reestimates.
- The Property-Liability claims ratio improved to 65.4 from 69.4, while the expense ratio increased to 26.7 from 25.5.
- Property-Liability premiums written increased 4.0% to $6.463 billion. Standard auto premiums written increased overall, but Allstate-brand standard auto premiums declined 1.2%; homeowners premiums written increased 3.0%.
- Allstate Financial premiums and contract charges declined 2.8%, primarily because of lower immediate-annuity sales. Contractholder funds declined to $41.603 billion from $42.332 billion at year-end 2011 and from $46.834 billion at March 31, 2011.
- Allstate Financial net realized capital results changed from a $39 million gain to a $21 million loss, but lower interest credited to contractholders and lower DAC amortization supported higher segment earnings.
- The company adopted revised insurance acquisition-cost guidance retrospectively. Compared with previously reported December 31, 2011 amounts, DAC declined by $572 million and shareholders’ equity declined by $376 million.
- Allstate issued $500 million of 5.20% senior notes due 2042 and repaid $350 million of 6.125% senior notes. It repurchased approximately 9.8 million shares for $300 million during the quarter.
Outlook, management commentary, risks and unusual items
Management’s stated priorities were to maintain auto profitability, improve returns in homeowners and annuity businesses, grow insurance premiums, and actively manage investments and capital. The filing does not provide a formal earnings or revenue guidance range. Management expected to complete its annual comprehensive DAC review in the third quarter of 2012.
- Insurance results remain exposed to unpredictable catastrophe frequency and severity, claims inflation, reserve-estimate changes, policy retention and new business trends. Management continued profitability actions in Florida and New York, including rate increases, underwriting restrictions and claims-management initiatives.
- The investment portfolio contains material exposure to structured securities, including RMBS, CMBS and ABS. Fixed-income securities had $1.243 billion of gross unrealized losses at March 31, 2012, and the company recognized $83 million of net other-than-temporary impairment losses in earnings.
- Approximately 90.6% of fixed-income securities were investment grade. Management stated it did not intend to sell, and was not more likely than not required to sell, fixed-income securities with unrealized losses before recovery of amortized cost.
- Reported legal contingencies include an estimated aggregate reasonably possible loss range of zero to $855 million before tax for certain disclosed matters where estimation was possible. The estimate is not the company’s maximum exposure, and management stated the ultimate outcome cannot be predicted.
- Net reserves for asbestos claims were $1.05 billion and environmental claims were $183 million, both net of reinsurance. Management noted that these reserves are subject to unusually high uncertainty and that a meaningful range of additional losses could not be developed.
- Liquidity resources included a new $1 billion unsecured revolving credit facility entered into on April 27, 2012, expiring in April 2017, with a potential $500 million increase provision. The facility includes a 37.5% debt-to-capitalization covenant.
- The financial statements are unaudited, and interim results should not be considered indicative of full-year results. Deloitte & Touche reported that its review identified no material modifications necessary for conformity with U.S. GAAP.
Investor verification checklist
- Reconcile the improvement in net income and combined ratio for catastrophe losses, favorable prior-year reserve reestimates, realized gains and impairment losses.
- Assess whether premium growth is sustainable given declines in policies in force, renewal ratios and new applications in several core products.
- Monitor Esurance integration costs and underwriting performance; the brand recorded a $61 million underwriting loss and a 127.6 combined ratio in the quarter.
- Review investment impairments, structured-securities valuations, unrealized losses and assumptions regarding future cash flows and credit enhancement.
- Track contractholder-fund runoff, surrender rates and upcoming institutional-product maturities, including approximately $1.75 billion scheduled in 2013.
- Evaluate asbestos, environmental, catastrophe and litigation reserves, including the disclosed possible legal-loss range of up to $855 million before tax.
- Confirm the impact of retrospective DAC accounting on future operating expenses, DAC amortization, equity and period-to-period comparability.