Allstate Profit Falls On Investment Losses, Write-Downs

Allstate Corp. (ALL), the largest publicly traded home and auto insurer in the U.S., said profit fell 63% as the company recorded investment losses on derivatives and wrote down the value of securities in its portfolio.

But operating profit, which excludes some investment results, rose about 50% and beat the estimates of analysts who had predicted that disaster claims from midwestern storms would cut into profit.

Disaster costs fell to $636 million from a record $818 million a year earlier. But catastrophe claims were still above average for the second quarter.

Net income was $145 million, or 27 cents a share, compared with $389 million, or 72 cents, a year earlier. The insurer had a net realized capital loss for the second quarter of $451 million before taxes, compared with a net realized capital gain of $328 million. Its derivatives portfolio was responsible for the majority of the $779 million difference, and the firm said it had write-downs related to residential and commercial-real-estate investments.

Analysts began cutting their estimates on Allstate after rival insurer Travelers Cos. (TRV) reported record disaster costs when it released second-quarter results last month. In mid-July, analysts surveyed by Thomson Reuters expected Allstate to earn an operating profit of 92 cents a share, but that had fallen to 69 cents by the time the firm said Wednesday that it had an operating profit of 81 cents.

The company has stepped up efforts to raise prices and pare back the number of houses it covers in some states to turn a profit in its homeowners business. On one level, that strategy shows signs of paying off: the average premium it is collecting on each policy rose even as the number of policyholders fell. But for every dollar it collected from customers, it spent almost $1.04 on claims and expenses. It was the fourth time in the last six quarters that the homeowners business spent more than it took in.

The disaster costs were tied to 30 separate events in the second quarter. Brutal hailstorms plagued Oklahoma, while massive thunderstorms hit Michigan, Ohio and Illinois. And Tennessee was immersed under record floodwaters that swamped the Grand Ole Opry.

The only insurer that sells coverage on more homes that Allstate is State Farm Mutual Automobile Insurance Co., and that company said in late July that it had paid $1.9 billion in losses on second-quarter disasters to date. Both companies tend to have a greater share in the homeowners market in states located away from the East and West coasts of the U.S.

Allstate and other property insurers face the prospect of further disaster costs with the peak of the 2010 Atlantic hurricane season still to come. Forecasters have predicted this year's season will be an active one.

Allstate gets a larger portion of its revenue from its auto-insurance operation, which has been a steady source of profit. The unit helped underwriting income to reverse from a $3 million loss in 2009 to a $207 million profit in this year's second quarter.

But the auto unit has also been losing customers, and the number of policyholders with Allstate's standard auto coverage fell for the 10th straight quarter. The customers that have stayed with Allstate has remained essentially steady at about 89% in that time. Some smaller rivals, including Progressive Corp. (PGR), have been adding customers while Allstate lost them.

-By Erik Holm, Dow Jones Newswires; 212-416-2892; erik.holm@dowjones.com

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