Allstate Corporation 2017 Q1 Form 10-Q Summary
Business context and reporting period
The Allstate Corporation filed its unaudited Form 10-Q for the three months ended March 31, 2017, with comparable results for the three months ended March 31, 2016. Allstate operates primarily through Property-Liability, including Allstate Protection and Discontinued Lines and Coverages, and Allstate Financial, which provides life, accident and health, and annuity products.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenues | $9.434 billion | $8.871 billion | Up 6.3% |
| Net income | $695 million | $246 million | Up $449 million |
| Net income applicable to common shareholders | $666 million | $217 million | Up $449 million |
| Diluted earnings per share | $1.79 | $0.57 | Up $1.22 |
| Net cash provided by operating activities | $857 million | $714 million | Up $143 million |
| Property-Liability premiums earned | $7.959 billion | $7.723 billion | Up 3.1% |
| Property-Liability combined ratio | 93.6 | 98.4 | Improved 4.8 points |
| Net investment income | $748 million | $731 million | Up 2.3% |
| Realized capital gains and losses | $134 million gain | $149 million loss | Improved $283 million |
Property-Liability net income applicable to common shareholders was $652 million, compared with $222 million in the prior-year quarter. Allstate Financial generated $108 million, compared with $68 million. Corporate and Other produced a common-shareholder loss of $94 million, compared with a $73 million loss.
Property-Liability underwriting income increased to $507 million from $125 million. The loss ratio improved to 68.0 from 73.6, while the expense ratio increased to 25.6 from 24.8. Catastrophe losses were $781 million, compared with $827 million, and prior-year reserve reestimates were favorable by $97 million, compared with unfavorable reestimates of $24 million in Q1 2016.
As of March 31, 2017, total assets were $110.243 billion, shareholders’ equity was $21.158 billion, investments were $81.143 billion, cash was $442 million, and long-term debt was $6.346 billion. Debt represented 30.0% of shareholders’ equity and 23.1% of total capital resources. Parent-level deployable assets were $2.74 billion. The company reported no borrowings under its $1.0 billion revolving credit facility and no commercial paper outstanding.
Cash flows included $280 million of net cash used in investing activities, primarily reflecting the $1.356 billion cash acquisition of SquareTrade, and $571 million used in financing activities. The company paid $122 million of common dividends, $29 million of preferred dividends, and repurchased $264 million of treasury stock. Cash increased by $6 million during the quarter.
Material changes versus the prior comparable period
- Profitability improved substantially, driven primarily by stronger Property-Liability underwriting, favorable reserve development, lower catastrophe losses, and a swing from realized capital losses to gains.
- On January 3, 2017, Allstate acquired SquareTrade for $1.4 billion in cash. SquareTrade contributed $59 million of premiums earned and had a $35 million underwriting loss, including $23 million of amortization of purchased intangible assets.
- SquareTrade-related accounting added approximately $1.08 billion of goodwill, $555 million of other intangible assets, $70 million of deferred policy acquisition costs, and $201 million of contractual liability insurance premium expenses.
- Investments declined from $81.799 billion at December 31, 2016 to $81.143 billion, primarily because of the SquareTrade acquisition, share repurchases, and dividends, partly offset by operating cash flow and higher investment valuations.
- Unrealized net capital gains increased to $2.101 billion from $1.770 billion at year-end 2016, contributing to shareholders’ equity growth of 2.8% during the quarter.
- Common diluted weighted-average shares declined to 371.3 million from 382.9 million, reflecting share repurchases.
- Allstate Financial benefited from lower realized capital losses, higher premiums and contract charges, lower credited interest, and improved annuity results. Contractholder funds declined to $20.051 billion from $20.260 billion.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide formal consolidated earnings guidance. Management emphasized profitable growth, customer service, target economic returns, expansion of the customer base, proactive investment management, and development of long-term growth platforms.
Management stated that auto profit-improvement actions, rate increases, lower claim frequency, and favorable reserve development supported Q1 results. Rate filings and underwriting actions remain focused on markets with returns below target, while growth is being pursued where returns are acceptable. Esurance and Encompass continued profitability actions that reduced or constrained policy counts and new business in selected markets.
Allstate substantially completed its 2017 catastrophe reinsurance program, with a nationwide program providing $4.4 billion of limits subject to a $500 million retention, excluding certain Florida and New Jersey arrangements. The Florida component was expected to be placed in the second quarter. First-quarter catastrophe reinsurance costs were $93 million.
Material uncertainties include catastrophe severity and frequency, claims inflation, reserve adequacy, rate regulation, reinsurance availability and counterparty risk, investment credit and market risk, interest-rate movements, performance-based investment volatility, life and annuity surrender activity, regulatory changes, litigation, cyber risk, acquisitions, goodwill impairment, and changes in accounting standards.
The company disclosed an aggregate range of reasonably possible legal loss in excess of amounts accrued of zero to $725 million before tax for certain disclosed matters where an estimate was possible. This range is not an estimate of expected loss or maximum exposure. Asbestos reserves were $891 million net of reinsurance, and environmental reserves were $178 million net of reinsurance, at March 31, 2017; management noted that these reserves involve unusually high uncertainty.
Allstate adopted new share-based payment accounting guidance prospectively in 2017. The adoption had no impact on financial position or results at adoption, but generated a $23 million tax benefit in Q1 2017. The filing also identifies pending accounting standards concerning financial instruments, leases, credit losses, goodwill impairment, revenue recognition, and pension-cost presentation.
Most important facts for investors to verify
- Whether the improvement in the 93.6 combined ratio is sustainable after normalizing for catastrophe losses and favorable prior-year reserve development.
- The financial contribution, growth rate, integration progress, and amortization burden of SquareTrade.
- Future catastrophe experience and the adequacy, pricing, and availability of reinsurance, particularly for Florida and other catastrophe-exposed markets.
- Auto policy counts, renewal rates, rate actions, claims frequency and severity, and the effect of profit-improvement actions on premium growth.
- Reserve adequacy for property-liability claims, asbestos, environmental and other discontinued lines exposures.
- Investment portfolio credit quality, unrealized gains and losses, impairment activity, private-market valuation risk, and sensitivity to interest rates and equity markets.
- Liquidity at the parent and insurance-subsidiary levels, dividend capacity, capital requirements, debt covenants, and the remaining $442 million under the share-repurchase authorization.
- Potential outcomes of disclosed legal and regulatory proceedings, including the possible loss range of up to $725 million before tax.