Allstate Finishes 2016 with Strong Profitability

NORTHBROOK, Ill., Feb. 1, 2017 /PRNewswire/ -- The Allstate Corporation (NYSE: ALL) today reported financial results for the fourth quarter and full year of 2016. The financial highlights:

"Allstate's ability to execute operational improvements in a challenging environment delivered excellent results in 2016," said Tom Wilson, chairman and chief executive officer of The Allstate Corporation. "In the fourth quarter, net income was $811 million, with operating earnings per share* of $2.17. For the full year, net income was $1.76 billion and operating income* was $1.84 billion on total revenues of $36.5 billion. Overall insurance policies in force declined modestly as strong growth at Allstate Benefits was more than offset by a decline in Property-Liability insurance caused by auto profit improvement actions. The recorded combined ratio for the year was 96.1 as the impact of an $853 million increase in catastrophe losses was partially offset by good underlying insurance margins. The full-year underlying combined ratio* of 87.9 was at the favorable end of our annual outlook range of 88-90, as the auto profit improvement plan was on pace, homeowners margins were maintained and expenses were well controlled. Continuation of these initiatives are expected to result in an annual underlying combined ratio* of 87-89⁽¹⁾ for 2017.

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"Proactive management of the investment portfolio in a volatile environment generated a total return of 4.4% for 2016. We simultaneously broadened the company's strategic platforms, forming Arity to leverage capabilities in the developing telematics business in 2016 and acquiring SquareTrade in January 2017 to expand our protection offerings to include consumer devices. Shareholders were served well by returning $1.8 billion of capital through dividends and share repurchases. Allstate continues to invest in our people and communities, in keeping with our view that corporations can do more," concluded Wilson.

Full Year 2016 Financial Highlights

• Total 2016 revenue of $36.5 billion reflected a 3.3% increase in property-liability insurance premium and a 5.4% increase in Allstate Financial premium and contract charges compared to the prior year.
• Property-liability net written premium increased 2.4% in 2016 compared to 2015, as the average auto insurance premium increase of 6.3% in the Allstate Brand was offset by a 2.8% decline in policies in force across all three underwriting brands.
• Total return on the $81.8 billion investment portfolio was a strong 4.4% for 2016, despite continued low market yields. Net investment income of $3.0 billion was 3.6% lower than in 2015, primarily due to a shortening of the fixed income portfolio duration and a shift to equity investments that will optimize long-term returns per unit of risk. Performance-based investments, which includes private equity and real estate, grew by 17.2% to $6.0 billion and generated $611 million of net investment income, which was $13 million higher than 2015. Total realized capital losses of $90 million were recognized for the year, as impairment losses were partially offset by net realized gains on sales.
• Net income applicable to common shareholders was $1.8 billion, or $4.67 per diluted share in 2016, compared to $2.1 billion, or $5.05 per diluted share in 2015, as higher catastrophe losses and lower investment income more than offset the improvement in the underlying combined ratio.
• Total operating income* was $1.8 billion, or $4.87 per diluted share in 2016, compared to $2.1 billion, or $5.19 per diluted share in 2015. Property-liability underwriting income of $1.2 billion for 2016 was $349 million lower than the prior year, due to an $853 million increase in pre-tax catastrophe losses, partially offset by improved underlying combined ratios across all three brands. The Allstate brand auto underlying combined ratio* improved 0.9 points for the year. The Esurance auto underlying combined ratio* of 102.4 improved 5.1 points in 2016 compared to 2015. Allstate Financial operating income of $448 million for 2016 was $61 million lower than 2015, due primarily to lower fixed income portfolio yields.

Operating Results: Fourth Quarter 2016

• Total revenue of $9.3 billion in the fourth quarter of 2016 increased by 6.8% compared to the prior year quarter.
  • Property-liability insurance premiums increased 2.8%.
  • Allstate Financial premiums and contract charges rose 4.9%.
  • Net investment income increased 12.8%.
  • Realized capital gains were $2 million, compared to losses of $250 million in the prior year quarter.
• Net income applicable to common shareholders was $811 million, or $2.18 per diluted share, in the fourth quarter of 2016, compared to $460 million, or $1.18 per diluted share, in the fourth quarter of 2015. Operating income* was $807 million in the fourth quarter of 2016, compared to $625 million in the fourth quarter of 2015.
• Property-liability net income of $761 million was $268 million higher than the fourth quarter of 2015. Underwriting income of $796 million was $185 million above the prior year quarter, driven by a lower loss ratio and partially offset by a higher expense ratio. The lower loss ratio was primarily driven by higher average premium, improved loss trends, lower catastrophes and larger favorable prior year reserve releases.
  • The underlying combined ratio* of 87.7 for the fourth quarter of 2016 was 0.3 points higher than the fourth quarter of 2015, reflecting an increased expense ratio, driven by investments in growth, and an increased Allstate brand homeowners underlying combined ratio as compared to a very favorable fourth quarter of 2015. This was partially offset by improved Allstate brand auto loss trends.

• Allstate brand auto net written premium growth of 3.9% in the fourth quarter of 2016 reflects a 7.0% increase in average premium, which more than offset a 2.9% decline in policies in force. The recorded combined ratio of 95.3 in the fourth quarter of 2016 was 3.3 points better than the prior year quarter and was favorably impacted by 2.0 points of prior year reserve reestimates in addition to favorable current accident year reserve development. The underlying combined ratio* in the fourth quarter of 2016 was 1.5 points better than the fourth quarter of 2015, due to higher average premium and moderating loss costs, partially offset by higher expenses. Quarterly profitability results are subject to fluctuations due to items such as abnormal weather patterns, reserve reestimates and expense timing, while full year results are often less volatile.
• Allstate brand homeowners net written premium increased slightly in the fourth quarter of 2016 compared to the fourth quarter of 2015, as average premium increased by 1.5% while policies in force declined by 1.2%. The recorded combined ratio of 68.7 in the fourth quarter of 2016 was 2.3 points better than the prior year quarter due to lower catastrophe losses and higher favorable prior year reserve reestimates. The underlying combined ratio* of 59.1 in the fourth quarter of 2016 continued to reflect strong underlying profitability.
• Allstate brand other personal lines net written premium increased 4.5% in the fourth quarter of 2016, while overall policies in force declined 0.1%. The recorded combined ratio was 87.1 in the fourth quarter of 2016, an increase of 6.8 points compared to the prior year quarter due primarily to higher expenses, elevated catastrophes and unfavorable prior year reserve development. The underlying combined ratio* was 76.7 in the fourth quarter of 2016.
• Esurance net written premium growth of 5.6% compared to the prior year quarter reflects a 5.5% increase in auto average premium and a modest increase in policies in force. The recorded combined ratio of 105.0 was 2.0 points lower in the fourth quarter of 2016, primarily driven by a lower expense ratio that was partially offset by a higher loss ratio. The auto loss ratio of 76.0 in the fourth quarter was 0.8 points higher than the prior year quarter, as increased auto frequency and severity more than offset higher earned premium. The homeowners loss ratio in the fourth quarter was 61.6 while the combined ratio of 138.5 continues to be adversely impacted by high start-up costs.
• Encompass net written premium declined by 10.2% and policies in force were 13.4% lower in the fourth quarter of 2016 compared to the prior year quarter, reflecting our continued focus on improving returns in this business. The majority of the decline in policies in force was in six states. Both the recorded combined ratio of 90.0 and underlying combined ratio* of 90.7 improved in the fourth quarter of 2016 compared to the same period a year ago.
• Allstate Financial net income was $127 million and operating income was $130 million in the fourth quarter of 2016. Operating income was $32 million higher than the prior year quarter which was largely the result of performance-based investment returns that were in excess of long-term expectations.

• Allstate Life net income was $58 million and operating income was $66 million in the fourth quarter of 2016. Operating income was $1 million lower than the prior year quarter as higher premiums and improved mortality were offset by lower net investment income.
• Allstate Benefits net income was $22 million and operating income was $23 million in the fourth quarter of 2016. Operating income was flat to the prior year quarter, as new business growth was offset by higher benefit costs and on-going investments in the business.
• Allstate Annuities net income was $47 million and operating income was $41 million in the fourth quarter of 2016. Operating income was $33 million higher than the prior year quarter, primarily driven by higher performance-based investment income, which included income realization on direct real estate investments and significant appreciation on a few funds.
• Allstate Investments carrying value of $81.8 billion at year-end 2016 is largely comprised of fixed income securities, which represents 71% of the total portfolio. Investments carrying value increased by $4.0 billion above year-end 2015 and included $1.25 billion attributable to the debt issuance related to the acquisition of SquareTrade and higher unrealized net capital gains of $745 million, as fixed income and public equity valuations increased. The portfolio is managed to deliver attractive risk adjusted returns over an intermediate time horizon with performance measured on a current and multiple-year basis.

• Net investment income of $801 million increased 12.8% or $91 million in the fourth quarter of 2016 from the prior year quarter. This increase reflects strong performance-based results partially offset by lower interest income on market-based investments, which was impacted by reinvestment and portfolio repositioning.
• Net realized capital gains were $2 million in the fourth quarter of 2016, compared to losses of $250 million in the prior year quarter. Net realized gains on sales of $47 million and derivative gains of $25 million, were offset by impairment and change in intent losses of $70 million.

Proactive Capital Management

"Allstate continued to proactively manage shareholders' capital by returning $369 million during the fourth quarter through a combination of $122 million in common stock dividends and repurchasing $247 million of outstanding shares," said Steve Shebik, chief financial officer. "For the full year we returned a total of $1.8 billion to shareholders. As of December 31, 2016, $691 million remained on the $1.5 billion authorization. Allstate completed the acquisition of SquareTrade in January 2017 utilizing the proceeds from the December 2016 debt issuance and corporate cash, with no impact on Allstate's existing share repurchase program. Operating income return on common shareholders' equity* was 10.4% for 2016. Book value per diluted common share of $50.77 was 7.2% higher than December 31, 2015."

Visit www.allstateinvestors.com to view additional information about Allstate's results, including a webcast of its quarterly conference call and the call presentation. The conference call will be held at 9 a.m. ET on Thursday, February 2.

The Allstate Corporation (NYSE: ALL) is the nation's largest publicly held personal lines insurer, protecting approximately 16 million households from life's uncertainties through auto, home, life and other insurance offered through its Allstate, Esurance, Encompass and Answer Financial brand names. Now celebrating its 85th anniversary as an insurer, Allstate is widely known through the slogan "You're In Good Hands With Allstate^®." Allstate agencies are in virtually every local community in America.

Financial information, including material announcements about The Allstate Corporation, is routinely posted on www.allstateinvestors.com.

Forward-Looking Statements

This news release contains "forward-looking statements" that anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. These statements are made subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements do not relate strictly to historical or current facts and may be identified by their use of words like "plans," "seeks," "expects," "will," "should," "anticipates," "estimates," "intends," "believes," "likely," "targets" and other words with similar meanings. We believe these statements are based on reasonable estimates, assumptions and plans. However, if the estimates, assumptions or plans underlying the forward-looking statements prove inaccurate or if other risks or uncertainties arise, actual results could differ materially from those communicated in these forward-looking statements. Factors that could cause actual results to differ materially from those expressed in, or implied by, the forward-looking statements may be found in our filings with the U.S. Securities and Exchange Commission, including the "Risk Factors" section in our most recent Annual Report on Form 10-K. Forward-looking statements speak only as of the date on which they are made, and we assume no obligation to update or revise any forward-looking statement.

The following table presents the investment portfolio by strategy as of December 31, 2016.

The following table presents investment income by investment strategy for the three months and twelve months ended December 31.

The following table presents investment income by investment type and strategy for the three months and twelve months ended December 31, 2016.

Definitions of Non-GAAP Measures

We believe that investors' understanding of Allstate's performance is enhanced by our disclosure of the following non-GAAP measures. Our methods for calculating these measures may differ from those used by other companies and therefore comparability may be limited.

Operating income is net income applicable to common shareholders, excluding:

• realized capital gains and losses, after-tax, except for periodic settlements and accruals on non-hedge derivative instruments, which are reported with realized capital gains and losses but included in operating income,
• valuation changes on embedded derivatives that are not hedged, after-tax,
• amortization of deferred policy acquisition costs (DAC) and deferred sales inducements (DSI), to the extent they resulted from the recognition of certain realized capital gains and losses or valuation changes on embedded derivatives that are not hedged, after-tax,
• amortization of purchased intangible assets, after-tax,
• gain (loss) on disposition of operations, after-tax, and 
• adjustments for other significant non-recurring, infrequent or unusual items, when (a) the nature of the charge or gain is such that it is reasonably unlikely to recur within two years, or (b) there has been no similar charge or gain within the prior two years.

Net income applicable to common shareholders is the GAAP measure that is most directly comparable to operating income.

We use operating income as an important measure to evaluate our results of operations. We believe that the measure provides investors with a valuable measure of the company's ongoing performance because it reveals trends in our insurance and financial services business that may be obscured by the net effect of realized capital gains and losses, valuation changes on embedded derivatives that are not hedged, amortization of purchased intangible assets, gain (loss) on disposition of operations and adjustments for other significant non-recurring, infrequent or unusual items. Realized capital gains and losses, valuation changes on embedded derivatives that are not hedged and gain (loss) on disposition of operations may vary significantly between periods and are generally driven by business decisions and external economic developments such as capital market conditions, the timing of which is unrelated to the insurance underwriting process. Consistent with our intent to protect results or earn additional income, operating income includes periodic settlements and accruals on certain derivative instruments that are reported in realized capital gains and losses because they do not qualify for hedge accounting or are not designated as hedges for accounting purposes. These instruments are used for economic hedges and to replicate fixed income securities, and by including them in operating income, we are appropriately reflecting their trends in our performance and in a manner consistent with the economically hedged investments, product attributes (e.g. net investment income and interest credited to contractholder funds) or replicated investments. Amortization of purchased intangible assets is excluded because it relates to the acquisition purchase price and is not indicative of our underlying insurance business results or trends. Non-recurring items are excluded because, by their nature, they are not indicative of our business or economic trends. Accordingly, operating income excludes the effect of items that tend to be highly variable from period to period and highlights the results from ongoing operations and the underlying profitability of our business. A byproduct of excluding these items to determine operating income is the transparency and understanding of their significance to net income variability and profitability while recognizing these or similar items may recur in subsequent periods. Operating income is used by management along with the other components of net income applicable to common shareholders to assess our performance. We use adjusted measures of operating income in incentive compensation. Therefore, we believe it is useful for investors to evaluate net income applicable to common shareholders, operating income and their components separately and in the aggregate when reviewing and evaluating our performance. We note that investors, financial analysts, financial and business media organizations and rating agencies utilize operating income results in their evaluation of our and our industry's financial performance and in their investment decisions, recommendations and communications as it represents a reliable, representative and consistent measurement of the industry and the company and management's performance. We note that the price to earnings multiple commonly used by insurance investors as a forward-looking valuation technique uses operating income as the denominator. Operating income should not be considered a substitute for net income applicable to common shareholders and does not reflect the overall profitability of our business.

The following tables reconcile net income applicable to common shareholders and operating income. Taxes on adjustments to reconcile net income applicable to common shareholders and operating income generally use a 35% effective tax rate and are reported net with the reconciling adjustment. If the effective tax rate is other than 35%, this is specified in the disclosure.

Operating income return on common shareholders' equity is a ratio that uses a non-GAAP measure. It is calculated by dividing the rolling 12-month operating income by the average of common shareholders' equity at the beginning and at the end of the 12-months, after excluding the effect of unrealized net capital gains and losses. Return on common shareholders' equity is the most directly comparable GAAP measure. We use operating income as the numerator for the same reasons we use operating income, as discussed above. We use average common shareholders' equity excluding the effect of unrealized net capital gains and losses for the denominator as a representation of common shareholders' equity primarily attributable to the company's earned and realized business operations because it eliminates the effect of items that are unrealized and vary significantly between periods due to external economic developments such as capital market conditions like changes in equity prices and interest rates, the amount and timing of which are unrelated to the insurance underwriting process. We use it to supplement our evaluation of net income applicable to common shareholders and return on common shareholders' equity because it excludes the effect of items that tend to be highly variable from period to period. We believe that this measure is useful to investors and that it provides a valuable tool for investors when considered along with return on common shareholders' equity because it eliminates the after-tax effects of realized and unrealized net capital gains and losses that can fluctuate significantly from period to period and that are driven by economic developments, the magnitude and timing of which are generally not influenced by management. In addition, it eliminates non-recurring items that are not indicative of our ongoing business or economic trends. A byproduct of excluding the items noted above to determine operating income return on common shareholders' equity from return on common shareholders' equity is the transparency and understanding of their significance to return on common shareholders' equity variability and profitability while recognizing these or similar items may recur in subsequent periods. We use adjusted measures of operating income return on common shareholders' equity in incentive compensation. Therefore, we believe it is useful for investors to have operating income return on common shareholders' equity and return on common shareholders' equity when evaluating our performance. We note that investors, financial analysts, financial and business media organizations and rating agencies utilize operating income return on common shareholders' equity results in their evaluation of our and our industry's financial performance and in their investment decisions, recommendations and communications as it represents a reliable, representative and consistent measurement of the industry and the company and management's utilization of capital. Operating income return on common shareholders' equity should not be considered a substitute for return on common shareholders' equity and does not reflect the overall profitability of our business.

The following tables reconcile return on common shareholders' equity and operating income return on common shareholders' equity.

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Combined ratio excluding the effect of catastrophes, prior year reserve reestimates and amortization of purchased intangible assets ("underlying combined ratio") is a non-GAAP ratio, which is computed as the difference between four GAAP operating ratios: the combined ratio, the effect of catastrophes on the combined ratio, the effect of prior year non-catastrophe reserve reestimates on the combined ratio, and the effect of amortization of purchased intangible assets on the combined ratio. We believe that this ratio is useful to investors and it is used by management to reveal the trends in our Property-Liability business that may be obscured by catastrophe losses, prior year reserve reestimates and amortization of purchased intangible assets. Catastrophe losses cause our loss trends to vary significantly between periods as a result of their incidence of occurrence and magnitude, and can have a significant impact on the combined ratio. Prior year reserve reestimates are caused by unexpected loss development on historical reserves. Amortization of purchased intangible assets relates to the acquisition purchase price and is not indicative of our underlying insurance business results or trends. We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our underwriting performance. We also provide it to facilitate a comparison to our outlook on the underlying combined ratio. The most directly comparable GAAP measure is the combined ratio. The underlying combined ratio should not be considered a substitute for the combined ratio and does not reflect the overall underwriting profitability of our business.

The following tables reconcile the respective combined ratio to the underlying combined ratio.

Underwriting margin is calculated as 100% minus the combined ratio.

Underlying loss ratio is a non-GAAP ratio, which is computed as the difference between three GAAP operating ratios: the loss ratio, the effect of catastrophes on the combined ratio and the effect of prior year non-catastrophe reserve reestimates on the combined ratio. We believe that this ratio is useful to investors and it is used by management to reveal the trends that may be obscured by catastrophe losses and prior year reserve reestimates. Catastrophe losses cause our loss trends to vary significantly between periods as a result of their incidence of occurrence and magnitude, and can have a significant impact on the combined ratio. Prior year reserve reestimates are caused by unexpected loss development on historical reserves. We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our underwriting performance. The most directly comparable GAAP measure is the loss ratio. The underlying loss ratio should not be considered a substitute for the loss ratio and does not reflect the overall loss ratio of our business.

The following table reconciles the Esurance brand combined ratio to the Esurance brand underlying loss ratio and underlying combined ratio.

SOURCE The Allstate Corporation