Allstate Quarterly Net Plunges 98 Percent

Battered by catastrophe losses and declines in mortgage investments, Allstate today reported a second quarter net income drop of 98.2 percent.

Still management said it was exceeding profitability goals in its property-casualty operations, which allowed Allstate to cover $698 million in second-quarter catastrophe losses–the highest in its 77-year history.

Net income for the quarter was $24 million compared with $1.4 billion for the period last year. Net income per share was 5 cents in the quarter, down from $2.30 from second quarter 2007.

Net investment income for the period was down 13.6 percent to $1.4 billion from $1.6 billion.

Analysts' reaction was mixed.

Morgan Stanley's William Wilt wrote that his firm is not convinced this is the right time to buy Allstate shares and recommended waiting for “another round of negative earnings revisions and secondarily for resolution to the firm's apparent bid for RBS' UK insurance unit.”

Company management said its acquisition strategy is to buy businesses that are in good financial shape at attractive prices.

Standard & Poor's said it was not changing Allstate ratings. It noted the company was taking charges writing down investments and said its portfolio restructuring plans could mean reduced investment income as the insurer replaces higher-yielding, higher-risk securities with lower-yielding but lower-risk securities.

S&P said it expects Allstate will remain focused on sustaining very strong profitability rather than premium growth and its property-liability operating performance will “outperform the industry, with a combined ratio of 95 percent or less.”

Allstate reported net realized capital losses on investments were $1.2 billion on a pre-tax basis for the quarter, due to $1.1 billion of net losses related to dispositions, including change in intent writedowns, and $250 million of impairment writedowns.

Allstate said these writedowns were partly offset by net gains totaling $123 million on the settlement and valuation of derivative instruments.

Impairment writedowns totaled $250 million, comprised $205 million on fixed income securities, primarily related to residential mortgages and other structured securities, and $37 million on equity securities, the company said.

It reported 95 percent of the fixed income writedowns relate to impaired securities that were performing in line with anticipated or contractual cash flows, but which were written down primarily because of expected deterioration in the performance of the underlying collateral.

After-tax capital losses were reported as $788 million.

The property-liability combined ratio was 94.4, a 6.8-point deterioration from second quarter 2007. Without catastrophe losses, the company said its combined ratio would have been 84.1.

Because the first-half year performance was positive, Allstate said its property-liability combined ratio for the full year will run between 86 and 88, excluding the effect of catastrophes and prior-year reserve estimates.

Premium written for property-liability declined 2 percent to $6.8 billion. The company said its cost of reinsurance was increased to $231 million in the quarter compared to $223 million last year.

Allstate said its standard auto premiums inforce saw a 0.8 percent decrease.

Allstate Financial premium written was up 54.2 percent rising to $4.5 billion.

Commenting on Allstate's investment portfolio, which generated $1.4 billion in net investment income for the quarter, management said the company has augmented risk mitigation and return optimization programs in its investment portfolios, reducing exposure to real estate and financial services related asset classes and guarding against significant adverse moves in equity valuations, interest rates and credit spreads through macro hedging.

Two-thirds of Allstate's after tax realized losses of $557 million for the quarter are related to change in intent writedowns resulting a strategic review of investments the company said.

The company said its standard auto property damage frequencies decreased 4.2 percent and bodily injury frequencies decreased 7.6 percent and management said it is paying attention to any impacts that arise from reduced driving by policyholders and higher gasoline prices.

Auto property damage and bodily injury paid severities increased 2.6 percent and 7.1 percent.

Homeowners gross claim frequency, excluding catastrophes, increased 13.7 percent compared to the second quarter of 2007. The company said results were impacted by noncatastrophe weather related claim trends.

Homeowners paid severity, excluding catastrophes, increased 0.3 percent compared to the second quarter of 2007.