UPDATE: Allstate Profit Falls On Derivative 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. Catastrophe claims were still the third-highest the company had ever recorded in 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 of $451 million before taxes, compared with a net realized capital gain of $328 million in last year's second quarter. The 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 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.

Allstate rose 1.5% to $29.03 after hours.

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 value of policies sold in the quarter rose slightly 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.

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

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 recover 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 that trend continued in the latest quarter as the number of policyholders with Allstate's standard auto coverage fell for the 10th straight period. Some smaller rivals, including Progressive Corp. (PGR), have been adding customers while Allstate lost them.

"We want to turn that around," Wilson said. "The number should be higher than that. If you look at other companies in the industry, you'd find we're not at the low end. We'd be in the upper range, but we wouldn't be as high as people like State Farm and USAA and others, which means we have some upside on that."

Separately, life and property insurer Hartford Financial Services Group Inc. (HIG) reported its third consecutive profit, but its so-called core earnings, which exclude some investment results, were below analyst expectations. Hartford shares fell 3.5% to $23 after hours as the company lowered its 2010 target for operating earnings to a range of $2.10 to $2.30 a share.

Prudential Financial Inc. (PRU) profit jumped 48% in its financial-services business and core earnings were much better than analysts anticipated. Shares of the life insurer rose 1.9% to $57.80 after hours.

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

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