Allstate 3Q Earnings Sink 16 Percent

The Allstate Corporation reported a 15.5 percent drop in third-quarter net income last night, attributing the decline to higher catastrophe losses and a lack of favorable loss development that boosted earnings in last year's third quarter.

Net income was $978 million, or $1.70 per share, compared with $1.2 billion, or $1.83 per share, for third-quarter 2006.

Through nine months, net income was $3.9 billion, up 2.5 percent from $3.8 billion last year.

Net income for the quarter was impacted by a $273 million swing in prior-year reserve estimates. In last year's third quarter, the Northbrook, Ill.-based insurer recorded $221 million of favorable loss developments, while this year's third-quarter results included $52 million of unfavorable prior-year reserve development.

In addition, Allstate reported $81 million more in catastrophe losses for third-quarter 2007 compared with third-quarter 2006. Catastrophe losses in this year's third quarter totaled $286 million from 21 events, Allstate executives said on a conference call this morning.

Reserve changes and cat losses pushed the third-quarter combined ratio to 91.0–6.9 points higher than the 84.1 combined ratio recorded for third-quarter 2006.

The catastrophe losses added 4.2 points to the 2007 third-quarter combined ratio and reserve additions added 0.8 points. In contrast, in third-quarter 2006, cat losses added only three points to the combined ratio, and prior-year reserve decreases shaved off 3.2 points.

On the top line, property-casualty premiums for the quarter fell 0.7 percent to $7.1 billion. Explaining the decline, executives said growth in standard auto was more than offset by declines in the homeowners line which were the direct result of catastrophe management activities.

Thomas Wilson, Allstate's chief executive officer, called the overall financial results solid in what he termed “a competitive and volatile market.”

While various executives noted upticks in auto claims frequency and severity, they also noted the company has been putting through premium rate increases to keep pace with loss cost trends, even as competitors continue to reduce rates.

Robert Block, vice president of investor relations, noted that rate increases averaged 4.2 percent in 28 states so far this year.

Mr. Wilson, giving his view of the field of competitors, said the nation's largest auto insurer, State Farm, took more rate decreases in individual states than decreases this year, and GEICO has done the same. On the other hand, Farmers took mostly increases, and at Nationwide, there's been a 50-50 split of hikes and declines.

Analyzing the competitive dynamics by quarter, he said the first quarter had about three times as many decreases as increases, the second quarter had two time more decreases, and the third quarter had fewer increases than decreases.

“What that says is that price competition is focused [in] a couple of companies, and those decreases have moderated as we've gone through the year,” he said.

During this morning's conference call, an analyst questioned the company's ability to “sell rate increases to state regulators” given fairly good loss ratios in the mid-60s range and high returns overall.

Mr. Wilson noted that some states are tougher than others, adding that requested “changes are not so high that they're shocking anybody,” and sometimes, he opined “people make a political issue out of it so they can get some votes.”

Another analyst, referring to jumps in property damage and bodily injury claims frequencies for Allstate's standard auto book of 4.8 percent and 0.1 percent over last year's third quarter, asked, “Is the gravy train of favorable frequency playing out?”

“We don't really see it as a gravy train, but as a trend we react to and factor it in,” Mr. Wilson said, adding that he believes a long-term trend of lower frequency, attributable to factors like safer cars and older drivers, continues to play out. But this year's frequencies look more like those of 2005 than 2006, he said, suggesting that, for whatever reason, 2006 was an abnormally low frequency year.