Allstate Posts First Profit in Year on Investments (Update1)

By Erik Holm
Bloomberg News
August 6, 2009

Aug. 5 (Bloomberg) -- Allstate Corp., the largest publicly traded U.S. home and auto insurer, had a profit for the first time in a year as it sold securities. Results missed analyst estimates on rising costs tied to catastrophes.

Second-quarter net income rose to $389 million, or 72 cents a share, from $25 million, or 5 cents, in the same period a year earlier, the Northbrook, Illinois-based insurer said today in a statement. Operating profit, which excludes some investment results, was 55 cents a share, missing the $1.11 average estimate of 17 analysts surveyed by Bloomberg.

The company's portfolio of fixed-income securities and stocks recovered in value, ending a streak of five quarters of increasing unrealized losses. The reversal allowed Allstate to turn down a U.S. bailout from the Troubled Asset Relief Program in May, while rivals Hartford Financial Services Group Inc. and Lincoln National Corp. agreed to take government funds. Allstate raised $1 billion in a debt offering instead.

"We didn't take TARP because we had plenty of capital," Chief Executive Officer Tom Wilson said in an interview today. "We made money despite a terrible catastrophe quarter, and we had good investment results."

Allstate fell as low as $27 in extended trading following the earnings announcement, from $28.23. The insurer has jumped 47 percent since the end of the first quarter, less than the 62 percent increase in the KBW Insurance Index. Allstate shares remain down 40 percent over the past 12 months.

Unrealized Losses

The unrealized investment losses narrowed to $7.3 billion, a 22 percent decline from the end of the first quarter, helping to increase a measure of assets and liabilities called book value per share by 23 percent in three months.

"People have been worried about their capital levels, and this quarter goes a long way toward repairing the balance sheet," said Meyer Shields, an analyst at Stifel Nicolaus & Co. in Baltimore. "It's been a while since anyone cared more about insurance results instead of investments, but the catastrophe losses indicate a need on Allstate's part to raise rates."

Catastrophe costs rose to a second-quarter record, topping the previous high set a year earlier. Claims costs tied to hailstorms, tornadoes and other severe weather reached $818 million, a 17 percent increase from the same period in 2008.

The company said it won approvals to increase prices for homeowner's coverage, which recorded an underwriting loss, by an average of 13 percent in 16 states during the quarter.

Losses Halted

The profit comes after three quarters of net losses totaling $2.33 billion, driven by writedowns, declines in private equity and hedge funds holdings, and hurricane claims in last year's third quarter. Wilson is replacing the head of Allstate's life insurance operation after reducing sales of fixed annuities and parting with some securities in the unit's portfolio to reduce the potential for further investment losses.

He said he had no new information on the search for a head of the life insurance operation, called Allstate Financial.

The insurer repeated the guidance it gave in May, 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.

Progressive last month said second-quarter profit rose 16 percent to $250.1 million on increased premium revenue and profits from the sale of securities. It was the first quarterly increase in net income for the Mayfield Village, Ohio-based insurer since 2006.

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

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