Allstate 2nd Quarter Earnings Rise 16 Percent, Fall Short of Estimates

July 20, 2007

Allstate Corp., the nation’s No. 2 property and casualty insurer, said Wednesday its second-quarter profits climbed 16 percent on strong auto insurance sales but operating income fell as the company paid significantly more in catastrophe-related costs.

The results fell short of Wall Street’s expectations and Allstate’s stock edged lower in after-hours trading.

Net income for the April-through-June period was $1.40 billion, or $2.30 per share, up from $1.21 billion, or $1.89 per share, for the same period a year earlier.

The Northbrook-based company said operating earnings were $1.07 billion or $1.76 per share. That was 4 cents per share less than the estimate of analysts surveyed by Thomson Financial.

Revenue increased 7 percent to $9.46 billion from $8.88 billion, or better than the $9 billion forecast by analysts.

Allstate said its auto insurance business continued to grow, adding 300,000 customers for its Your Choice Auto in the quarter to bring the total for that relatively new program to 2.4 million.

Operating income, which excludes investment gains, fell 15.7 percent because of increased costs for reinsurance and catastrophes, or events generating more than $1 million in claims.

Catastrophe losses for the quarter jumped 70 percent to $433 million from $255 million a year earlier. While losses from hurricanes in the period were comparable to those in 2006, the company said claims from past storms cost more than it had previously estimated.

Moving to lessen the impact of future catastrophes also hurt results. Allstate bought billions of dollars in reinsurance earlier this year to cover the costs of future natural disasters and claims in New York, New Jersey, Connecticut and Florida.

Total underwriting income dipped to $845 million from $1.2 billion, which the company said was due to lower premiums earned as a result of the expanded catastrophe reinsurance program and the change in last year’s catastrophe reserve estimates.

Allstate Financial posted record quarterly net income of $200 million but also experienced a nearly 4 percent decline in operating income.

Despite missing expectations, Chief Executive Thomas Wilson maintained it was a great quarter for Allstate.

“We are driving profitable growth in the competitive auto insurance business, while mitigating our exposure to mega-catastrophes in higher-risk geographic areas,” he said in a statement. “While operating income declined due largely to increased reinsurance and catastrophe costs, the underlying run rate of our business continues in line with our expectations.”

Analyst Donald Light of Celent, a Boston-based financial research and consulting firm, said the results were good by historical industry standards but nonetheless “uninspiring.”

“Allstate continues to sacrifice new business growth in order to manage its catastrophe exposure in homeowners insurance,” he said, citing a 16.5 percent decline in new homeowners applications. “More worrisome, new issued applications in auto insurance, where Allstate does not want to pull back, dropped 4.8 percent nationally.”

For the first six months of the year, net income was $2.90 billion, or $4.71 per share, up 11 percent from $2.62 billion, or $4.08 per share. Revenue was $18.79 billion, up 5 percent from the first half of 2006.

Allstate shares declined 55 cents in after-hours trading after gaining 14 cents to $60.56 in the regular session. The stock is down 7 percent in 2007.

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