Allstate Posts 9% Decline in Profit for 2008; Combined Ratio at 99.4%

January 29, 2009

Allstate reported consolidated revenues were $6.6 billion in the fourth quarter of 2008 and $29.4 billion for the 2008 year, a 9 percent drop from the previous year. The decrease in revenue of $2.4 billion and $7.4 billion for the quarter and full year in comparison to 2007 is primarily the result of realized net capital losses in 2008, which are treated as a reduction in revenue, the company said.

Allstate’s underwriting income declined in 2008 primarily due to increased catastrophe losses last year, including a record level of tornadoes and two substantial hurricanes.

For the year ended Dec. 31, 2008, Allstate’s property liability underlying combined ratio was 86.8 percent, which was within the updated outlook range provided of 86.0 percent to 88.0 percent and better than the initial estimate. This ratio benefited from favorable frequency (the number of claims per 100 policies) and only moderate severity (the average cost per claim paid). For the fourth quarter of 2008, the property liability underlying combined ratio was 91.5 percent.

While catastrophic events were less costly in the fourth quarter of 2008, the full year included two of the 10 most costly hurricanes in U.S. history. Total catastrophe losses were $3.3 billion in 2008, compared to $1.4 billion in 2007. The full year combined ratio was 99.4 percent which led to Property Liability operating income of $1.4 billion.

Operating income per diluted share was $0.97 in the fourth quarter of 2008 compared to $1.24 in the fourth quarter of 2007, reflecting lower net investment income and decreased underwriting income. Investment income was lower in both the 2008 year and the fourth quarter due to a reduction in short-term interest rates and the decision to maintain ample liquidity given the uncertainty in the financial markets and economy, the company said.

Operating income per diluted share was $3.22 for the year ended December 31, 2008 compared to $6.47 in 2007, reflecting lower net investment income and decreased underwriting income.

“Allstate remains financially strong and delivered solid operating performance in 2008, despite costly natural catastrophes and unprecedented financial market deterioration,” said Thomas J. Wilson, chairman, president and chief executive officer of The Allstate Corporation. “2008 was our second highest year for catastrophe losses in the past decade, which added to investment losses and led to a net loss for the year. Fortunately, strong underlying operating cash flow and conservative risk management of investments, liquidity and capital kept us financially strong for the 17 million households served by Allstate.

During 2008, Allstate continued its proactive strategy for both catastrophe and investment portfolio risk management in order to maintain strong capital and liquidity. The company’s catastrophe risk management program includes reinsurance, policy changes that increased deductibles, and market share reductions in high risk coastal regions.

These actions served Allstate well, the company said. Allstate’s analysis shows that losses from Hurricanes Ike and Gustav would have been approximately twice the amount recorded without the catastrophe exposure management actions put into place beginning in 2005.

Allstate Financial initiated a number of actions to reduce risk and improve returns in the face of unprecedented deterioration of the fixed income markets. Liquidity was substantially increased to ensure cash was available to meet customers’ needs which reduced operating income.

The operational transfer of the variable annuity business, which was sold in 2006, was completed. Fixed annuity volumes were reduced in the second half of 2008 reflecting an inability to earn attractive returns. In addition, a strategic review to narrow the business focus and lower expenses was initiated which will be implemented over the next two years.

Capital Position
At year-end 2008, Allstate held $12.6 billion in capital. This total included $3.6 billion in deployable invested assets at the parent holding company level. The substantial earnings capacity of the operating subsidiaries is the primary source of capital generation for the Corporation.

The recent turmoil in financial markets has caused many financial institutions to reflect significant unrealized loss positions on their balance sheets. Allstate is no different, and during the fourth quarter, pretax unrealized loss position grew from $4.1 billion to $8.8 billion, primarily due to significantly widening credit spreads in fixed income securities. The company says it has the intent and ability to hold these securities to recovery.

“Our ability to do so is substantially enhanced by our strong liquidity position, which cushions us from the need to liquidate securities with significant unrealized losses to meet cash obligations. Furthermore, the high quality of underlying assets provides further protection against credit impairments. During 2008, our fixed income securities portfolio provided approximately $8.6 billion in principal and interest cash flows, of which substantially all have been received in accordance with the contractual terms.”

Investment Portfolio
Consolidated total investments were $96.0 billion as of December 31, 2008, a decline of $9.0 billion from September 30, 2008, due primarily to a $4.7 billion increase in unrealized net capital losses and net reductions in both contractholder obligations of $1.7 billion and securities lending balances of $1.2 billion.

Net realized capital losses were $1.9 billion on a pretax basis for the fourth quarter of 2008, due to $652 million of impairment writedowns, $585 million of net losses on the settlement and valuation of derivative instruments, $357 million of net losses on sales, $241 million of change in intent writedowns and $97 million of net losses on the valuation of limited partnerships..

2009 Outlook and Focus
“We expect 2009 to challenge businesses and consumers alike,” Wilson said. “As people focus more on value, we’re reaching out with a variety of initiatives to help consumers make the best use of their insurance and investment dollars. We are taking the actions necessary to protect Allstate’s financial strength, improve customer loyalty and introduce new products and services.”

Property Liability
• Continued emphasis on preserving auto insurance margins by providing customerfocused products and services
• Reducing homeowners exposure to catastrophe losses
• Shortterm growth will be limited reflecting a transition to a valuebased strategy in the competitive environment and reductions of catastrophe exposure
• PropertyLiability combined ratio, excluding the effects of catastrophes and prior year reserve reestimates, to be between 87.0% and 89.0% for the full year of 2009

Allstate Financial
• Continued focus on improving returns and reducing Allstate Financial’s concentration in spread based products, primarily fixed annuities and institutional markets products, will result in lower premiums and deposits and a smaller balance sheet
• Finalizing plans to improve efficiency and narrow the focus of product offerings to better serve the needs of everyday Americans. Targeting savings at 20% of certain operating expenses, excluding acquisition costs, estimated to yield annual savings of $90 million beginning in 2011. We anticipate a reduction of approximately 1,000 workforce positions, through a combination of attrition and position elimination over the next two years
• Maintaining high liquidity in the investment portfolio will result in lower operating income but ensure ability to meet contractholder obligations. We will target sales of our spread based products at levels that allow us to avoid sales of investments with significant unrealized losses into distressed or illiquid markets
• Continued investment spread compression due to credit losses, reduced contractholder funds balances and maintenance of liquidity will result in operating income of approximately $300 million in 2009

Source: Allstate Financial

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Latest Comments

  • January 29, 2009 at 6:47 am
    Oldtimer says:
    Read the last line of the article: Analysis provided by Allstate Financial. In related news: AIG announced that the financial crunch is over and that their outlook is extremel... read more
  • January 29, 2009 at 2:25 am
    bud bowl says:
    gonna kick you guys out, too?
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