Allstate Net Income Impacted By Catastrophes

"Allstate delivered $242 million of net income, $0.64 per share, despite the impact of severe weather and increased frequency of auto accidents," said Tom Wilson, chairman and chief executive officer of The Allstate Corporation. "Homeowners insurance generated an underwriting profit despite seasonally high second quarter catastrophe losses and a record hail storm in Texas. Initiating an aggressive auto insurance profit improvement plan over a year ago enabled us to maintain underlying margins despite higher auto insurance frequency. The underlying combined ratio was 88.6 for the quarter and 87.9 for the first six months of 2016 in comparison to the full year outlook range between 88 and 90⁽¹⁾."

"Progress on our five operating priorities reflected the adjustments made to proactively adapt to the external operating environment," Wilson continued. "Our focus on better serving customers, achieving target returns on capital and growing insurance policies in force are interrelated and results reflect the priority on customers and returns. We served customers particularly well in those areas impacted by catastrophes. Overall insurance policies in force were flat as outstanding growth in Allstate Financial's benefits business was offset by a reduction in auto insurance policies. Total return on the investment portfolio was 1.9% for the quarter with an equal contribution from investment income and increased bond values. Our efforts to build long-term growth platforms led us to combine our telematics efforts into a new company, Arity, LLC, which serves Allstate, Esurance and other businesses in the connected car market," concluded Wilson.

Consolidated Highlights

Total revenue of $9.2 billion in the second quarter of 2016 increased by 2.0% compared to the prior year quarter, as higher insurance premiums outweighed declines in net investment income and realized capital gains. Property-liability insurance premiums increased 3.5% and Allstate Financial premiums and contract charges rose 5.2% compared to the second quarter of 2015. Net investment income was 3.4% lower than the second quarter a year ago, and realized capital gains were $24 million, compared to $108 million in the prior year quarter. Total revenue through the first six months of 2016 was $18.0 billion, 0.6% higher than the first six months of 2015.

Net income applicable to common shareholders was $242 million, or $0.64 per diluted share, in the second quarter of 2016, compared to $326 million, or $0.79 per diluted share, in the second quarter of 2015. For the first six months of 2016, net income applicable to common shareholders was $459 million, compared to $974 million for the same period in 2015. The decline in net income in both periods was due primarily to higher catastrophe losses. Property-liability net income was $198 million in the second quarter of 2016, a decline of $24 million compared to the prior year quarter. Allstate Financial net income was $116 million in the second quarter of 2016, a decline of $63 million compared to the prior year quarter.

Operating income was $235 million in the second quarter of 2016, compared to $262 million in the second quarter of 2015. Property-liability operating income of $186 million in the second quarter of 2016 was $12 million lower than in the second quarter of 2015. The property-liability underwriting loss* of $66 million in the second quarter of 2016 was $56 million worse than in the prior year quarter, driven by an increase in catastrophe losses and higher auto loss costs, partially offset by higher earned premium. Allstate Financial operating income of  $120 million in the second quarter of 2016 was $19 million lower than in the second quarter of 2015, due primarily to lower investment income resulting from portfolio repositioning in 2015 to deliver better long-term risk-adjusted returns. Operating income through the first six months of 2016 was $557 million, compared to $878 million for the first six months of 2015.

Financial Results: Second Quarter 2016

Property-liability earned premium increased 3.5% in the second quarter of 2016 compared to the prior year quarter, driven by 3.9% growth in the Allstate brand. The recorded combined ratio was 100.8 for the second quarter of 2016, which included $961 million, or 12.3 points, of catastrophe losses. The underlying combined ratio of 88.6 for the second quarter of 2016 was 0.5 points better than the second quarter of 2015.

Allstate brand earned premium growth of 3.9% in the second quarter of 2016 compared to the prior year quarter reflects a 5.7% increase in Allstate brand auto average premium, the result of increased rates that were driven by higher loss costs. The Allstate brand recorded combined ratio of 100.1 was 1.4 points higher than in the second quarter of 2015, driven by higher catastrophe losses, which were partially offset by a 0.7 point decline in the expense ratio. Allstate brand auto insurance had a second quarter 2016 recorded combined ratio of 101.2, which included 4.1 points of catastrophe losses. The homeowners insurance recorded combined ratio of 97.0 for the second quarter of 2016 included $644 million of catastrophe losses, while the recorded combined ratio on a trailing twelve month basis was 83.5.

Allstate brand auto policies in force declined by 1.0% in the second quarter of 2016 as the company continued to execute its auto profit improvement plan, which adversely impacted both new business and retention. New business volume in the second quarter of 2016 declined 29% compared to the second quarter of 2015. Auto retention levels in the second quarter of 2016 were in line with the first quarter of 2016, but 0.9 points below the prior year quarter. Allstate brand auto approved rate increases for the second quarter of 2016 were 3.2%, bringing the trailing twelve month total increase to 8.4%. Price increases over the past twelve months helped increase net written premium by 3.9% in the second quarter of 2016 compared to the second quarter of 2015. The underlying combined ratio of 97.8 was consistent with the second quarter of 2015, as higher frequency and severity were offset by higher average premium and a lower expense ratio.

Allstate brand homeowners net written premium grew by 0.7% in the second quarter of 2016 compared to the second quarter of 2015, as average premium increased by 1.8% and policies in force declined by 0.1%. The underlying combined ratio of 58.6 was 2.1 points better than the second quarter of 2015, primarily due to a decline in claim frequency in the second quarter of 2016 compared to the second quarter of 2015.

Esurance net written premium growth of 5.7% compared to the prior year quarter reflects a 1.4% decline in policies in force, which was more than offset by a 6.3% increase in auto average premium. The Esurance recorded combined ratio of 108.9 in the second quarter of 2016 was 1.3 points better than the same quarter a year ago. The loss ratio was 76.9 in the second quarter of 2016 compared to 75.6 in the prior year quarter.

Encompass net written premium declined by 6.8% and policies in force were 11.4% lower in the second quarter of 2016 compared to the prior year quarter, given our continued focus on improving returns in this business. The recorded combined ratio of 104.9 in the second quarter of 2016 was adversely impacted by $34 million, or 11.2 points, of catastrophe losses. The underlying combined ratio of 92.8 was 3.7 points better than the same period a year ago, as we continue to focus on enhanced pricing and underwriting sophistication.

Allstate Financial net income was $116 million in the second quarter of 2016 including $61 million in the life insurance business, $29 million in the benefits business and $26 million in the annuity business. Net income was $179 million in the second quarter of 2015. Operating income of $120 million in the second quarter of 2016 was $19 million lower than the prior year quarter. Life business operating income of $64 million in the second quarter increased $9 million compared to the prior year quarter, driven by favorable mortality experience and premium growth. Benefits business operating income of $29 million for the second quarter was consistent with the prior year quarter, while the annuity business generated operating income of $27 million, down $29 million from second quarter 2015.

Net investment income of $762 million declined $27 million in the second quarter of 2016 compared to the second quarter of 2015, due to lower interest income partially offset by higher dividends on equity securities and performance-based investment results. Interest income from our fixed income portfolio declined compared to the second quarter of 2015, reflecting the Allstate Financial annuity portfolio repositioning into equity securities, performance-based investments and interim positions in shorter maturity fixed income securities. These investments are intended to improve our long-term economic returns.

Net realized capital gains were $24 million in the second quarter of 2016 compared to $108 million in the prior year quarter. Net realized gains on sales totaled $104 million, primarily related to ongoing portfolio management actions. Impairment write-downs were $63 million in the second quarter, including $38 million related to energy investments.

Proactive Capital Management

"Allstate returned $1.07 billion to shareholders during the first six months of 2016, through a combination of common stock dividends and repurchasing outstanding shares," said Steve Shebik, chief financial officer. "On June 1, 2016, we entered into an accelerated share repurchase (ASR) agreement to purchase $350 million of our outstanding common stock. As of June 30, 2016, there was $1.2 billion remaining on the common share repurchase authorization. Book value per diluted common share of $50.05 was 4.4% higher than the second quarter of 2015 and 2.4% greater than the first quarter of 2016 due to increased unrealized gains in the investment portfolio."

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, August 4.

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.

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 operating income and net income applicable to common shareholders. Taxes on adjustments to reconcile operating income and net income applicable to common shareholders 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.