Allstate Corporation 2015 Q2 Form 10-Q Summary
Business context and reporting period
The Allstate Corporation filed an unaudited Form 10-Q for the three and six months ended June 30, 2015. Allstate operates primarily through Allstate Protection, which includes auto, homeowners and other property-liability insurance, and Allstate Financial, which includes life, accident and health, annuity and institutional products. The interim results should not be viewed as indicative of full-year results.
Financial performance and key metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenues | $8.98 billion | $8.86 billion | $17.93 billion | $17.54 billion |
| Net income | $355 million | $645 million | $1.03 billion | $1.25 billion |
| Net income available to common shareholders | $326 million | $614 million | $974 million | $1.20 billion |
| Diluted EPS | $0.79 | $1.39 | $2.33 | $2.69 |
| Cash dividends declared per common share | $0.30 | $0.28 | $0.60 | $0.56 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $1.30 billion | $1.20 billion |
- Property-liability premiums earned increased 4.8% in the quarter to $7.55 billion and 5.0% for the six months to $14.98 billion.
- Property-Liability underwriting income was a $10 million loss in the quarter versus $189 million of income in the prior-year quarter; six-month underwriting income was $457 million versus $561 million.
- The Property-Liability combined ratio was 100.1 in Q2 and 96.9 for the six months, compared with 97.4 and 96.1, respectively, in the prior comparable periods. The loss ratio increased to 74.0 in Q2 and 70.6 for the six months.
- Catastrophe losses were $797 million in Q2 and $1.09 billion for the six months, down from $936 million and $1.38 billion, respectively. Higher non-catastrophe auto losses, claim frequency and severity, and unfavorable reserve reestimates offset the catastrophe improvement.
- Allstate Financial net income available to common shareholders increased to $179 million in Q2 from $145 million and to $362 million for the six months from $307 million, helped by realized gains and lower interest credited to contractholders.
- Net investment income declined 12.1% in Q2 to $789 million and 11.7% for the six months to $1.64 billion, primarily due to lower limited partnership income, lower average investment balances and lower prepayment fee income and litigation proceeds.
- Net realized capital gains and losses were $108 million in Q2 and $247 million for the six months, versus $240 million and $294 million in the prior-year periods.
- Shareholders' equity was $21.30 billion at June 30, down from $22.30 billion at December 31, 2014. Book value per diluted common share was $47.96, compared with $48.24 at year-end.
- Total investments were $79.14 billion, including $59.93 billion of fixed-income securities. Approximately 85.3% of fixed-income securities were investment grade.
- Long-term debt was $5.19 billion. Debt was 24.3% of shareholders' equity and 19.6% of total capital resources.
- Cash increased to $805 million from $657 million at year-end. Six-month financing cash outflows were $2.21 billion, including $1.42 billion of treasury-stock purchases and $301 million of common and preferred dividends paid.
Material changes versus the prior comparable period
- Common earnings declined 47% in Q2 and 19% for the first six months, primarily reflecting weaker Property-Liability underwriting, lower investment income and lower realized gains.
- Allstate Protection moved from $192 million of underwriting income to an $8 million underwriting loss in Q2. Auto underwriting shifted to a $111 million loss from $130 million of income, while homeowners improved to $91 million of income from a $12 million loss.
- Auto claims frequency increased, including a 6.8% increase in bodily-injury gross frequency in both Q2 and the first six months. Property-damage gross frequency increased 6.9% in Q2 and 4.4% for the six months.
- Allstate Financial earnings improved despite lower investment income, partly because the prior-year periods included losses related to the Lincoln Benefit Life disposition and 2015 included realized capital gains.
- Other comprehensive income declined by $707 million in Q2 and $494 million for the six months after tax, largely because of lower unrealized investment gains. This reduced accumulated other comprehensive income to $67 million from $561 million.
- The company repurchased 20.6 million common shares for $1.43 billion in the first six months. A $3 billion repurchase authorization commenced in March 2015, with $1.9 billion remaining at June 30.
- First-quarter adoption of accounting guidance for qualified affordable housing investments increased income tax expense by $45 million, with a $17 million after-tax impact identified in segment commentary.
Guidance, outlook, management commentary, risks and unusual items
- Management expects to pursue increased auto rate increases in response to current loss-cost trends. Approximately 47% of Allstate-brand auto rates approved through June 2015 were expected to be earned in the second half of 2015.
- Management is taking profit-improvement actions involving rate increases, underwriting-guideline changes, reduced advertising and targeted expense reductions.
- The 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. The 2015 Florida program provides $707 million of per-occurrence limits subject to a $15 million retention.
- Parent-level deployable assets totaled $3.40 billion. The company reported sufficient liquidity, no debt maturities until 2018, no commercial-paper borrowings and no borrowings under its $1 billion revolving credit facility at June 30.
- Allstate had $21.97 billion of contractholder funds; 47.1% were subject to discretionary withdrawal without adjustments. Management monitors surrender and liquidity risk through asset-liability management.
- Potentially material investment risks include interest-rate changes, credit-spread widening, equity-market volatility, energy-sector exposure and valuation uncertainty. Fixed-income securities had $438 million of gross unrealized losses at June 30, including $82 million associated with corporate fixed-income and equity securities directly exposed to the energy sector.
- The company estimated the aggregate range of reasonably possible legal losses above amounts accrued for certain disclosed matters at zero to $675 million before tax. This estimate excludes matters for which a loss range could not be determined and is not an estimate of expected loss.
- Asbestos reserves, net of reinsurance, were $977 million and environmental reserves were $190 million at June 30. Management stated that these reserves are subject to substantially greater uncertainty than other claims reserves and that a meaningful range of additional possible losses was not practicable to estimate.
- Restructuring and related charges were $19 million in Q2 and $23 million for the six months, compared with $4 million and $10 million, respectively, in 2014.
- Management identified no material changes to previously disclosed risk factors. Principal risks include catastrophes, claims frequency and severity, reserve development, regulation and rate restrictions, reinsurance availability, investment and interest-rate risk, legal proceedings, credit downgrades, liquidity constraints, cybersecurity and accounting changes.
Most important facts for investors to verify
- Whether elevated auto claim frequency and severity persist and whether approved rate increases restore underwriting margins.
- Subsequent catastrophe losses, reserve development and trends in the combined ratio.
- Investment income sustainability, particularly limited partnership results, prepayment fees and litigation proceeds that may not recur.
- Changes in interest rates, credit spreads, unrealized investment gains and losses, and energy-sector credit exposure.
- Progress and valuation effects of the $3 billion share-repurchase program, dividend capacity and statutory restrictions on subsidiary dividends.
- Developments in asbestos, environmental, employment and other legal matters, including exposure beyond the disclosed zero-to-$675 million range.
- Liquidity and surrender behavior in the life and annuity portfolio, including the 47.1% of contractholder funds subject to withdrawal without adjustments.