Allstate Swings to Profit on Investments, Weather (Update2)

By Jamie McGee
Bloomberg News
November 4, 2009

Nov. 4 (Bloomberg) -- Allstate Corp., the largest publicly traded U.S. home and auto insurer, swung to a third-quarter profit on fewer storm claims and improved investment results.

Allstate's net income of $221 million, or 41 cents a share, compared with a loss of $923 million, or $1.70, in the same period a year earlier, the Northbrook, Illinois-based insurer said today in a statement. Operating income was 99 cents a share, missing by four cents the average estimate of 14 analysts surveyed by Bloomberg.

Allstate joins insurers including Travelers Cos. and Chubb Corp. in reporting improved results after hurricanes stayed away from U.S. shores. Only one named system, Tropical Storm Claudette, made landfall this year. Hurricanes including Ike and Gustav cost Allstate $1.82 billion in last year's third quarter.

"It was such a light quarter in terms of the major catastrophes," said Meyer Shields, an analyst at Stifel Nicolaus & Co., in an interview before results were released. A lack of major hurricanes means "fairly light losses."

Catastrophes cost Allstate $407 million in the quarter. The insurer spent 94.7 cents of every premium dollar on claims and expenses at its property-casualty unit, compared with 112.7 cents a year earlier.

The insurer has dropped 9.6 percent this year in New York Stock Exchange composite trading, compared with the 16 percent increase in the Standard & Poor's 500 Index. Allstate rose 68 cents, or 2.3 percent, to $30.30 at 4:18 p.m. in late trading in New York.

Book Value

Realized investment losses narrowed to $519 million from $1.29 billion in last year's third quarter. Losses this year were from "real estate exposure and hybrid securities issued by European financial institutions," the company said in the statement.

Book value, a measure of assets minus liabilities, rose 16 percent to $32.29 from $27.87 at the end of the second quarter. Unrealized losses fell by two-thirds in three months to $2.5 billion on Sept. 30.

Allstate, which typically gets the largest portion of its revenue from its auto insurance business, is competing for new customers with Progressive Corp. and Warren Buffett's Geico Corp. as consumers cut spending on insurance.

Premium revenue for Allstate's standard auto policies fell 2.3 percent to $4.17 billion and underwriting income slipped 22 percent to $284 million. The number of policyholders declined by 62,000 from the end of the second quarter, the seventh straight drop.

Turning the Corner

"The total is down still because of the absence of growth really in 2008," Wilson said of the policy count in an interview. "We are just starting to turn the corner and begin to grow again."

Car owners who curtailed their driving last year amid record gas prices and the recession have begun to return to the road. Miles driven in the U.S. increased 2.8 percent to 522.5 billion miles in July and August compared with the same months a year earlier, according to the Federal Highway Administration. The agency hasn't released data for more recent months.

The frequency of claims for property damage by drivers rose 11 percent from a year earlier, Allstate said in a supplemental filing on its Web site. A year earlier, claims fell by 12 percent.

"Guess what, people are driving again," said Brian Meredith, an analyst at UBS AG, in an interview before results were released. "As people drive again, that means the amount of claims activity is going to be going up."

Life Insurance

The insurer's Allstate Financial unit, which sells life and retirement policies, lost $38 million, compared with a loss of $196 million a year earlier. The unit has lost money in six of the past seven quarters. Chief Executive Officer Thomas Wilson named American International Group Inc. Vice Chairman Matthew Winter as head of the unit in October, replacing James Hohmann, who stepped down in January.

Wilson also replaced his chief financial officer, chief investment officer and chief marketing officer in the past 16 months. Don Civgin, formerly of OfficeMax Inc., joined as CFO in August 2008, the same month Judith Greffin was promoted to investment chief. Mark LaNeve was selected for the marketing post last month.

The largest holdings in Allstate's investment portfolio include corporate and municipal fixed-income securities. Corporate bonds returned 9.58 percent in the third quarter after earning a 13 percent yield in the second, the best quarterly performance, according to Merrill Lynch & Co. data going back to 1997. That compares to a negative return of 0.4 percent in the first quarter.

Long Credit

"If you don't like credit risk, you should not own our stock," Wilson said in an interview in August. "We stayed long credit spreads on purpose."

State and local government bonds returned 8.1 percent during the July-through-September period, the best quarterly performance in at least two decades, according to the Municipal Master Index that Merrill Lynch & Co. started compiling in 1989.

"You've seen interest rates come down, as well as credit spreads came in in the third quarter in just about every asset class in the fixed-income side," Meredith said. "That's going to have a nice benefit for their investment portfolio."

Progressive, the fourth-largest U.S. auto-insurer, earned $269.9 billion in the third quarter after reporting a loss in the year-earlier period. Travelers Cos. boosted its quarterly dividend last month after third-quarter net income quadrupled to $935 million.

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