01—Abstract
Summary
Summary of the 10-K filed March 26, 1999. Cited figures are marked; the original filing is the authoritative source.
Allstate's 10-K for fiscal 1998 (filed March 26, 1999) describes a company that is the second-largest U.S. property-liability insurer, with 1997 national market shares of roughly 12.3%a in private passenger auto and 11.3% in homeowners.
Its core Personal Property & Casualty (PP&C) business wrote $19.5 billionb of statutory premiums in 1998, about 78% of the company's property-liability total, and is distributed mainly through roughly 15,500 exclusive agents. Life and Savings operations, conducted through Allstate Life Insurance Company, held $41.86 billion of investments at year-end 1998, including $10.10 billion of Separate Account assets. Net income rose to $3.29 billion in 1998 from $3.11 billion in 1997, and shareholders' equity grew to $17.24 billion from $15.61 billion, aided by share repurchases and retained earnings.
The key risk to watch is loss reserves. Gross property-liability reserves were $16.88 billionc at year-end 1998, and net reserves of $15.42 billion developed favorably by $700 million in 1998 and $677 million in 1997. The filing is candid that this favorable development has come mainly from lower-than-expected medical cost inflation in personal auto injury claims and claim-settlement improvements, and that it is expected to be offset over time by rising medical inflation.
Environmental, asbestos and mass tort exposures from Discontinued Lines and Coverages remain uncertain, and catastrophe losses (two events of about $2 billiond each in recent years) are an inherent source of volatility. Management changes and strategy also matter for investors. Edward M.
Liddy became Chairman, President and CEO on January 1, 1999, succeeding Jerry D. Choate. The company is pursuing growth in standard and non-standard auto and homeowners, expanding independent-agent and international channels (including direct auto marketing in Germany), and building new distribution through a Putnam Investments variable insurance joint venture.
The filing also discloses a $125 million Year 2000 cost estimate, a shareholder rights plan adopted in February 1999, and a 2-for-1 stock split in July 1998. Because much of the financial detail is incorporated by reference from the Proxy Statement, investors will need that document for full financial statements and MD&A.
02—Key points
Key Highlights
- Second-largest U.S. property-liability insurer; PP&C wrote $19.5 billion of 1998 statutory premiums (78% of property-liability), with roughly 15,500 exclusive agents and about 13,000 non-standard independent agents.
- Net income of $3.29 billion in 1998, up from $3.11 billion in 1997; shareholders' equity rose to $17.24 billion from $15.61 billion, with $1.49 billion of treasury stock purchases in 1998.
- Net property-liability reserves of $15.42 billion at year-end 1998 developed favorably by $700 million, though management warns future releases may be offset by rising medical cost inflation.
- Life and Savings held $41.86 billion of investments at year-end 1998, including $10.10 billion of Separate Account assets, and life insurance in force (net) reached $202 billion.
- Premium-to-surplus ratio of 1.4 to 1 for AIC, well below the 3-to-1 level regulators and rating agencies consider outside the usual range, indicating substantial capital capacity.
- Edward M. Liddy became Chairman, President and CEO on January 1, 1999; the company adopted a shareholder rights plan on February 12, 1999 (15% trigger, expiring 2009).
- Year 2000 remediation costs estimated at about $125 million (1995-2000), with critical systems mostly complete; some key vendors have not yet given affirmative compliance responses.
03—Questions
Frequently Asked Questions
How large is Allstate's core auto and homeowners franchise?
Allstate is the second-largest U.S. property-liability insurer by 1997 statutory premiums. It held about 12.3% of the national private passenger auto market and 11.3% of homeowners in 1997. Its PP&C segment wrote $19.5 billion of 1998 statutory premiums, and about 94% of that was generated through its exclusive agency network.
Is Allstate's reserve position conservative or at risk?
Reserves have developed favorably for several years, with net releases of $700 million in 1998 and $677 million in 1997, largely from lower-than-expected auto injury severity. The filing warns, however, that these releases may not continue because medical cost inflation is expected to rise. Environmental, asbestos and mass tort claims from discontinued lines are the most uncertain, and management says courts have not resolved the key coverage issues.
What are the main risks to earnings from catastrophes?
The company has experienced two severe catastrophes in recent years, each costing roughly $2 billion. It mitigates exposure through policy restrictions, higher deductibles, rate increases, limited growth in high-risk areas, a Florida reinsurance program, a Northeast excess-of-loss reinsurance contract, and participation in the California Earthquake Authority. Management nevertheless says future catastrophe losses could be material and cannot be predicted.
What is the company's growth strategy beyond core auto and homeowners?
Allstate is expanding Life and Savings through bank, broker and direct-response channels, and is pursuing a joint venture with Putnam Investments for co-branded variable insurance products. Internationally, it sells auto insurance in Canada and began direct-response auto marketing in Germany, with plans for Western Europe, Japan and Asia. Management says these international businesses will take years to contribute meaningfully to results.
Are there leadership or governance changes investors should know about?
Jerry D. Choate retired as Chairman and CEO at the end of 1998, and Edward M. Liddy, previously President and COO, took over as Chairman, President and CEO on January 1, 1999. The Board also adopted a shareholder rights plan on February 12, 1999, which becomes exercisable if a person or group acquires 15% or more of the common stock. Management says it is not aware of any takeover attempt.
04—Continue