ALL Allstate Corporation

Allstate Corporation’s (ALL) second quarter operating loss of $1.23 per share came in modestly lower than the Zacks Consensus Estimate of a loss of $1.53 but lagged the year-ago quarter’s earnings of 81 cents per share.

Results for the quarter reflected higher catastrophe (CAT) losses that also led to increased claims expenses coupled with lower average premiums and policies-in-force in Property-Liability insurance unit and lower investment income.  However, prudent capital management and strong liquidity were quite impressive during the reported quarter. This is reflected from growth in book value per share and improved combined ratio, excluding the effect of catastrophes.

Allstate’s net loss for the reported quarter came in at $620 million or $1.19 per share, compared to net income of $145 million or 27 cents per share in the prior-year quarter, reflecting a substantial decline. Operating loss, which excludes realized net capital gains and losses from the sale of investments as well as accruals on unhedged derivative instruments, plunged to $642 million compared to operating income of $441 million.

Allstate reported total net revenue growth of 5.6% year over year to $8.08 billion and also exceeded the Zacks Consensus Estimate of $6.91 billion. Besides, property-liability insurance claims and claims expenses spiked 34.8% year over year to $6.36 billion while operating costs and expenses inched up 1.6% year over year to $802 million.

Additionally, catastrophe losses for the reported quarter escalated to $2.34 billion, contributing 36.2 point to the combined ratio but were substantially higher than $636 million in the year-ago period. During the reported quarter, Allstate experienced 33 catastrophe loss events including five tornadoes, three wildfires and 25 hailstorms.

Quarter in Detail

Property-Liability net written premiums were $6.61 billion, inching down 0.4% from prior-year quarter. The segment’s combined ratio was 123.3% against 96.8% in the year-ago quarter, reflecting increased catastrophe losses.

However, the underlying combined ratio, which excludes catastrophes and prior-year reserve estimates, was 87.5% in the reported quarter, lower than 88.1% recorded in the year-ago quarter. This was also within management’s outlook of underlying combined ratio of 88 to 91 for 2011.

Besides, Allstate brand standard auto premiums written for the reported quarter declined 0.9% from the prior-year quarter as a result of a 0.6% fall in policies in force along with a 5.2% decline in new issued applications. Average gross premium also dipped 0.5% from the year-ago period, reflecting rate decreases and customers’ choice of lower coverage.

As a result, the combined ratio increased 3.7 points year over year to 98.2%, primarily owing to increased catastrophe losses. However, underlying combined ratio improved to 93.6% from 94.1% in the year-ago quarter.

Allstate-branded homeowners’ written premiums for the quarter increased 2.6% year over year, reflecting a 6.0% climb in average gross premium that was partially offset by a 3.9% decline in policies in force. Higher catastrophe losses resulted in Allstate-branded homeowners combined ratio of 123.3%, although underlying combine ratio moderated marginally to 69.5% against 69.8% in the prior-year quarter.

Property-Liability net loss surged to $738 million from net income of $299 million in the year-ago quarter. Operating loss for this segment was $733 million, decreasing from operating loss of $368 million in the year-ago quarter. The Property-Liability expense ratio for the reported quarter was 24.9 compared with 24.4 in the prior-year quarter.

However, operating income for Allstate Financial increased 12.8% year over year to $141 million. The increase reflected lower investment income and higher amortization of deferred acquisition costs (DAC), offset by lower operating costs and tax expenses.

Meanwhile, net income came in at $166 million compared to net loss of $107 million in the year-ago quarter, primarily driven by realized capital gains in the reported quarter against losses in the comparable period.

Corporate & Other segment reported a net loss of $620 million, deteriorating from a net income of $145 million in the prior-year quarter. Total operating cost and expenses stood at $98 million, marginally down from $101 million in the year-ago quarter.

Investment and Capital Position

As of June 30, 2011, Allstate’s total investments decreased $1.2 billion from 2010-end to $99.3 billion, reflecting reductions in the Allstate Financial portfolio more than offset by strong investment returns. However, the pre-tax net unrealized capital gains jumped to $2.5 billion as on June 30, 2011 from $1.4 billion at the end of 2010.

Meanwhile, net realized capital gains totaled $57 million compared to a loss of $451 million in the year-ago period, primarily due to reduced derivative losses, lower impairment write-downs, and increased valuation gains on limited partnerships.

Allstate’s net investment income came in at $1.02 billion, down 2.8% from the year-ago quarter, although portfolio yields showed improvement. As on June 31, 2011, reported book value per share increased 8.2  % year over year to $35.95. Book value per share, excluding the impact of unrealized net capital gains and losses on fixed income securities, increased 4.3% year over year to $33.91.

Operating cash flow totaled $1.26 billion at the end of the reported quarter, significantly down from $2.09 billion at the end of the prior-year quarter. Long-term debt stood at $5.9 billion while total assets were recorded at $129.02 billion at the end of June 30, 2011.

Outlook

Management expects to maintain the profitability of the auto business and improve homeowners’ profitability, resulting in an underlying combined ratio outlook of 88% to 91% for 2011.

Allstate is taking strategic actions to reduce losses for Allstate business from catastrophes through enhanced property catastrophe reinsurance program, non-renewals, stricter underwriting guidelines, increased deductibles and discontinuance of selected lines of coverage, including earthquake.

We anticipate continued benefits from Allstate’s diversification, superior financial strength rating and proactive approach to investment. These factors have helped Allstate gain the second-largest personal lines writer position in the US, which also reflects its competitive strength against arch rivals such as Berkshire Hathaway-A (BRK) and The Travelers Companies (TRV).

However, Allstate’s exposure to catastrophe risks, capital losses and volatility in pricing, interest and loss costs will continue to impact the premiums and investment portfolio in the upcoming quarters.

 
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