Investments, Tax Cuts Boosted Allstate Profit in Q4
The Allstate Corp., like many carriers, faced an enormous hit from natural catastrophe losses in the 2017 fourth quarter. Investment returns soared by double digits, however, and the Trump tax cuts gave it a one-time gain, helping to ensure the insurer turned a substantial profit.
For the year 2017, policies in force reached 82.3 million, revenues grew five percent to $38.5 billion and net income reached $3.07 billion.
Thanks to the President Trump’s Tax Cuts and Jobs Act, in the fourth quarter Allstate saw its net income jump by $506 million, raising total net income to $1.2 billion compared to $811 million in the fourth quarter of 2016. Without the tax reform or goodwill impairment in certain segments, net income during Q4 was at $762 million.
Net investment income for the fourth quarter was $913 million, 14 percent higher than the $801 million generated in the same, year-ago period.
Catastrophe losses during Q4 came in just under $600 million, nearly double losses for the same period a year ago.
Allstate’s recorded property/liability combined ratio was 91 during Q4, compared to 89.7 in the 2016 fourth quarter.
Property-liability underwriting income was $715 million, $86 million lower than the same period in 2016. Allstate blamed higher catastrophe losses and more expensive compensation costs.
Tom Wilson, Allstate’s chairman and CEO, said in prepared remarks that the results will enable Allstate to “accelerate growth in 2018 while maintaining attractive returns.”
According to the company’s statement, it is accelerating investments in marketing, distribution, telematics, new products and technology and management expects Allstate Benefits, SquareTrade and Esurance to contribute to growth in 2018.
Key segment Q4 results:
Allstate brand homeowners net written premium increased 3.4 percent in the fourth quarter of 2017 compared to the prior year quarter, reflecting an increase in average premium. Policies in force declined 0.5 percent compared to the prior year quarter. The recorded combined ratio of 85.4 in the fourth quarter of 2017 includes the impact of increased catastrophe losses, while the underlying combined ratio came in at 59.9.
Allstate brand other personal lines net written premium of $410 million increased 4.3 percent in the fourth quarter of 2017 compared to the prior year quarter. The recorded combined ratio of 84.5 was 2.6 points better than the prior year quarter, primarily driven by lower catastrophe losses. The underlying combined ratio was 77.8 in the fourth quarter of 2017.
Esurance net written premium growth of 2.8 percent compared to the prior year quarter reflects increased average premium in auto and homeowners insurance, partially offset by a decline in auto policies in force. The strategy to drive higher growth across all lines of business continued to make progress as homeowners insurance policies in force increased 36.2 percent, with written premium of $79 million in 2017. The Esurance combined ratio of 100.2 in the fourth quarter of 2017 improved 4.8 points compared to the prior year quarter, primarily driven by a lower expense ratio. The underlying combined ratio of 99.8 was 5.2 points better than the prior year quarter, as both auto and homeowners insurance results improved.
Encompass net written premium declined 7.6 percent in the fourth quarter of 2017 compared to the prior year quarter, reflecting the continued execution of profit improvement plans. The recorded combined ratio of 106.4 in the fourth quarter of 2017 was 16.4 points higher than the prior year quarter, due to catastrophe losses from California wildfires which was partially offset by lower underlying loss costs. The underlying combined ratio of 86.4 for the fourth quarter was 4.3 points lower than the prior year quarter.
Service Businesses, a new reportable segment, includes Allstate roadside and auto dealer services; Arity, a transportation analytics and telematics spinoff; and SquareTrade, which offers consumer protection plans for mobile devices, laptops and other consumer electronics. Policies in force grew in the fourth quarter to 43.5 million, an increase of 4.6 million compared to the third quarter of 2017, driven by growth in SquareTrade. Adjusted net loss of $24 million in the fourth quarter of 2017 was primarily due to investments in Arity’s research and development, a SquareTrade restructuring charge and the deployment of a new digital platform in Allstate Roadside Services. SquareTrade revenue was $89 million in the fourth quarter, and policies in force grew to 38.7 million, an increase of 4.6 million policies compared to the third quarter of 2017. Adjusted net loss was $11 million in the fourth quarter of 2017.
Effects of Tax Cuts
Allstate said it anticipates an effective tax rate of 19-20 percent in 2018. The insurer said it will utilize the tax reform benefits to accelerate growth initiatives, raise shareholder returns by increasing the target quarterly dividend per common share; provide cash bonuses or 401(k) contributions to employees; boost employee technology training; and increase contributions to improve local communities and and charities.
Allstate increased its quarterly dividend 24 percent to 46 cents per share for the first quarter of 2018.
The company said future insurance rate filings will be impacted by lower tax rates, but its targeted after-tax return on equity will not change. “Tax reform affects only the profit provision component of the rate filings, and the impact will differ by state. As a result, this is not expected to have a material impact on Allstate’s near-term operating results or competitive position,” the company said.