In a bid to instill more efficiency in its business operations, The Allstate Corp. ALL undertook a multi-year Transformative Growth Plan. This long-term growth strategy is aimed at steering the company smoothly amid the difficult macro and micro environment, triggered by the coronavirus outbreak.
Pursuant to this, the property and casualty insurer expects to incur a restructuring charge of approximately $290 million pretax with approximately $210-$220 million pretax to be recognized during the third quarter of 2020 and $50-$60 million pretax to be recognized in the fourth quarter of 2020. Rest of the expense will be recognized in the first half of 2021.
The company’s purpose behind this growth plan is to increase its market share in the personal property-liability space. It strives to achieve the by expanding its customer access, improving its customer value and investing in the marketing and technology domain.
For bettering customer access, the company will merge the Esurance and Allstate brand’s direct operations. For enhancing customer value, the company will lower the price position of auto insurance, which will then require cost reductions to maintain its margins.
The company’s cost-controlling plan will impact approximately 3,800 employees, primarily in claims, sales, service and support functions.
Though the transformative growth initiative will bear fruits after some time, recent financial results will see an increase in expenses on account of the same. These charges will reduce both net and adjusted net incomes. Severance and employee benefits are the primary costs, comprising nearly $210 million pretax. Additionally, Allstate expects to bear real estate exit costs of roughly $80 million pretax, resulting from office closures.
The company’s third-quarter results will also see the drain low interest rates The federal funds’ interest rate is kept at 0-0.25% range since Mar 15, 2020 in response to the COVID-19 pandemic to stimulate growth.
Low interest rates work against insurance companies in general as that decrease the amount of money that can be received as an interest on investments. Insurers Prudential Financial Inc. PRU, MetLife Inc. MET, American International Group Inc. AIG, et al have been suffering reduced interest rates for a while now.
Allstate expects to recognize a premium deficiency reserve for immediate annuities with life contingencies. This will diminish net income but not the adjusted one. The annual review of assumptions for life insurance, other annuities and Discontinued Lines and Coverages will shrink net as well as adjusted net incomes. In total, these items will reduce net income by approximately $450-$550 million pretax and adjusted net income by almost $240-$280 million pretax.
Along with these expenses, the company expects to incur catastrophe-related pretax losses of $651 million ($514 million on a post-tax basis).
These expenses in turn might weigh on the company’s impending third-quarter 2020 earnings results.
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