01—Abstract
Summary
Summary of the 10-K filed March 28, 2000. Cited figures are marked; the original filing is the authoritative source.
The Allstate Corporation's 10-K for fiscal year 1999 presents a company in transition.
Allstate is the second-largest U.S. personal property and casualty insurer (based on 1998 statutory premiums) and the 17th-largest U.S. life insurer by ordinary life insurance in force. Its strategy centers on a multi-channel, multi-brand distribution model announced in November 1999, which integrates exclusive agents, independent agents, call centers and the Internet, alongside completed 1999 acquisitions of CNA's personal lines auto and homeowners business and American Heritage Life. The company is also reorganizing its employee agency programs into a single exclusive agency independent contractor program.
The key financial headline is a sharp decline in earnings: 1999 net income was $2.72 billiona versus $3.29 billion in 1998, and other comprehensive income swung to a $1.61 billion loss from unrealized capital losses, driving total comprehensive income down to $1.11 billion from $3.47 billion. Shareholders' equity fell to $16.6 billion from $17.2 billion, largely because of share repurchases of $2.17 billion and lower unrealized gains. Stock traded from a high of about $41 in early 1999 to a low near $22.88 in the fourth quarter.
To fund technology, competitive pricing and marketing, management announced a roughly $600 millionb expense reduction program expected to be fully realized beginning in 2001. Investors should weigh several risks disclosed in the filing: long-run uncertainty in property-liability loss reserves, particularly for environmental, asbestos and mass tort claims; exposure to catastrophe losses; sensitivity to medical cost inflation and state rate regulation in auto insurance; execution risk in the distribution overhaul and agent reorganization; and the Parent's reliance on dividends from Allstate Insurance Company. Favorable reserve development ($587 million net in 1999) has helped results, but management warns future releases may be offset by rising medical cost inflation.
02—Key points
Key Highlights
- Net income declined to $2.72 billion in 1999 from $3.29 billion in 1998, while total comprehensive income fell to $1.11 billion due to a $1.61 billion other comprehensive loss from unrealized capital losses.
- Allstate is the second-largest U.S. personal property and casualty insurer by 1998 statutory premiums, with the personal property and casualty segment accounting for 71% of 1999 statutory written premiums.
- The company announced a multi-access distribution model in November 1999 combining agents, Internet and call centers, with implementation beginning in Q2 2000 and covering about 40% of the U.S. population by year-end 2000.
- A program to reduce expenses by approximately $600 million, fully realized beginning in 2001, funds technology, competitive pricing and marketing investments.
- Acquisitions of CNA's personal lines auto and homeowners business (October 1999) and American Heritage Life added independent agency and workplace marketing capabilities; Allstate is now the third-largest personal lines provider through independent agencies.
- Favorable net reserve development of $587 million in 1999 contributed to results, but management cautions that future favorable releases may be offset by anticipated increases in medical cost inflation.
- Shareholders' equity declined to $16.60 billion from $17.24 billion, reflecting $2.17 billion in treasury stock purchases and lower unrealized gains, while dividends rose to $0.15 per quarter from $0.135.
03—Questions
Frequently Asked Questions
Why did Allstate's comprehensive income fall so sharply in 1999?
Net income fell about 17% to $2.72 billion, but the larger drag came from other comprehensive income, which swung to a $1.61 billion loss, mainly from unrealized net capital losses on the investment portfolio as interest rates rose. Total comprehensive income therefore dropped to $1.11 billion from $3.47 billion in 1998.
What is the purpose of the $600 million expense reduction program?
The program is designed to offset the cost of investments in the new multi-access distribution model, competitive auto and homeowners pricing, and enhanced marketing and advertising. Management expects the savings to be fully realized beginning in 2001, and the program relies on eliminating certain positions, consolidating operations and facilities, and reorganizing employee agencies.
What are the main risks to Allstate's loss reserves?
Property-liability reserves involve inherent uncertainty, especially for environmental, asbestos and other mass tort claims, where courts have reached inconsistent rulings and reserves may prove inadequate. Catastrophe losses, changes in claim severity driven by medical inflation, and state rate regulation also affect reserve adequacy. Management notes that favorable reserve development in recent years may not continue as medical cost inflation rises.
How much can Allstate Insurance Company pay in dividends to the parent without regulatory approval?
Under Illinois law, the subsidiary may pay dividends up to the greater of 10% of prior-year statutory surplus or prior-year statutory net income without prior approval. In the twelve months beginning January 1, 1999, it paid $2.96 billion. From May 20, 2000 through December 31, 2000, it can pay $1.96 billion, less dividends paid in the preceding 12 months, without approval. The Parent depends on these dividends because it has no significant operations of its own.
What does the multi-access distribution model mean for agents and sales?
The model aims to let customers buy the same products at the same price through exclusive agents, the Internet or call centers. Allstate is also converting its multiple employee agency programs into a single exclusive agency independent contractor program, which may temporarily reduce written premiums as some agents retire, sell their books or leave. The company believes the model will strengthen its selling and service advantage over the long term.
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