Allstate Earnings and Sales Drop

Published: Thu 05 Aug 2010

Lucas Eichmann

Yesterday, Allstate Corp., the biggest publicly traded auto and home insurer in the United States, said profit declined 63 percent as the insurance company posted investment losses on derivatives and reduced the value of securities in its investment portfolio.

By contrast, operating profit, which does not account for certain investment results, increased roughly 50 percent and exceeded the estimates of analysts who forecasted Midwestern storm disaster claims would erode profits.

Disaster expenses dropped to $636 million from an all-time high of $818 million one year ago. Catastrophe claims remained the third-highest the insurer has ever experienced in the second quarter.

Allstate's net income was $145 million, or 27 cents per share, contrasted with $389 million, or 72 cents one year ago. The insurance company had a pre-tax net realized capital loss of $451 million, compared to a net realized capital gain of $328 million during the second quarter of last year. Allstate's derivatives portfolio was to blame for most of the $779 million disparity, and the insurer said it suffered write-downs associated with commercial and residential real estate investments.

Analysts started reducing their Allstate estimates after competitor Travelers Cos. reported record-breaking disaster expenses when it published its results a month ago. In mid-July, analysts polled by Thomson Reuters predicted that Allstate would record an operating profit of 92 cents per share, but that had dropped to 69 cents by the time the insurer announced an operating profit of 81 cents on Wednesday.

Changes in Business Strategy

The insurer has ratcheted up attempts to raise premiums and pare down the number of homes it covers in certain states to post a profit on its home insurance business. At some level, that strategy indicates early signs of success: the value of homeowners insurance policies sold during the quarter increased modestly despite a drop in the number of policyholders. However, for every dollar Allstate took from policyholders, it paid out nearly $1.04 on claims and costs. It was the fourth time during the previous six quarters that the home insurance business paid out more than it took in.

"I don't feel like we've fixed that one yet," said Allstate CEO Tom Wilson in an interview. "We need to generate a profit from that business."

The disaster expenses were linked to 30 different events in the second quarter. Severe hailstorms struck Oklahoma, and brutal thunderstorms plagued Ohio, Michigan, and Illinois. Meanwhile, record-breaking floods immersed Tennessee, swamping the Grand Ole Opry.