Allstate Reports Third Straight Loss on Investments (Update2)
By Erik Holm
Bloomberg News
May 7, 2009

May 7 (Bloomberg) -- Allstate Corp., the largest publicly traded U.S. home and auto insurer, posted its third straight loss on investment writedowns and declines in private equity and hedge fund holdings. Shares fell 6.6 percent in late trading.

The first-quarter net loss of $274 million, or 51 cents a share, compares with a profit of $348 million, or 62 cents, in the same period a year earlier, the Northbrook, Illinois-based company said in a statement today. Profit before investment losses was 84 cents a share, compared with the $1.25 estimate of 14 analysts surveyed by Bloomberg.

Chief Executive Officer Tom Wilson halved the firm's dividend, halted share buybacks and is cutting 1,000 jobs at Allstate's money-losing life insurance business to preserve capital. The insurer in December announced it was replacing the heads of its life and investing units before announcing a $1.13 billion fourth-quarter loss.

"When you look at the business, it looks a lot like the fourth quarter of last year, yet is better in a few key areas," Wilson said in an interview. "We're halfway home on getting our expenses where we want to be" at the life operation, he said.

Insurers typically add to profits by investing payments from customers until the funds are needed to pay claims. The model backfired last year, leaving 23 of the 24 companies in the KBW Insurance Index with a profit decline or a net loss. The trend has continued as companies report first quarter results, with Hartford Financial Services Group Inc., MetLife Inc. and Lincoln National Corp. among those with losses.

Hedge Funds

Allstate's investment losses were $359 million before taxes. The insurer wrote down $620 million in securities it said had permanently declined in value, and lost $105 million in its so-called limited partnership investments in private equity and hedge funds. The investment total also included gains from $418 million in sales of securities, primarily U.S. government fixed- income holdings, the company said.

Book value per share, a measure of Allstate's assets minus liabilities, fell 3.7 percent in the three months ending March 31 from the previous quarter because of the net loss and a $590 million decline in the value of securities the insurer doesn't intend to sell. That compares to a 25 percent plunge in the fourth quarter.

Since the end of the quarter, the benchmark Standard & Poor's 500 Index has risen 14 percent and "credit spreads have come in a little bit," Wilson said. "We appear to be at least if nothing else hovering around the bottom. It is too early to tell if there is a turn up in an aggressive way yet."

Profit Margin

Allstate has fallen 16 percent in New York Stock Exchange composite trading this year, compared with the 2.1 percent decline in the KBW Index. The shares fell $1.82 to $25.78 at 5:05 p.m. after the close of regular trading.

The company earned 3.2 cents for every dollar it collected in premiums for its property-casualty units. Excluding the effects of catastrophes and changes to reserves for claims from prior quarters, the company earned 11.1 cents per premium dollar, compared with 14.2 cents a year earlier.

The insurer repeated the guidance it gave in January, when it said it expects to retain from 11 to 13 cents of every premium dollar in 2008 excluding catastrophes and reserve changes.

Allstate, which gets about 60 percent of revenue from its auto unit, has been raising the price of car coverage in some states. Rivals including Bloomington, Illinois-based State Farm Mutual Automobile Insurance Co., the largest U.S. auto insurer, and No. 4 Progressive Corp. are following suit as drivers pare back, drop their coverage or file more fraudulent claims because of the slumping economy.

Auto Fraud

"People are raising the deductibles to save money," Wilson said. "More people are dropping their insurance altogether, and when they hit one of our customers we still cover that," he said. "We are also seeing an uptick in theft, and an uptick in the number of cases that we refer to our special investigative unit," to examine for potential fraud.

The number of auto-theft claims where drivers are suspected of abandoning their cars increased 24 percent industrywide in the first quarter from the same period a year earlier, the National Insurance Crime Bureau said last week.

Allstate is the second largest home and auto insurer in the U.S. by premium behind State Farm, according to 2008 data compiled by the National Association of Insurance Commissioners.

(To hear Allstate's second-quarter conference call tomorrow at 9 a.m. New York time, visit LIVE .)

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