Allstate Corporation’s
(ALL) second quarter operating earnings of 55 cents per share came in substantially short of the Zacks Consensus Estimate, compared to $1.24 in the year-ago quarter. Results for the quarter were adversely impacted primarily by surging catastrophe losses and lower investment income, though prudent capital management and strong liquidity were impressive.
Despite a 17.2% year-over-year increase in catastrophe losses, GAAP net income for the quarter increased to $389 million or 72 cents per share, compared to net income of $25 million or 5 cents per share in the prior-year quarter. Operating income excludes realized net gains and losses from the sale of investments as well as after-tax gains and losses on the sale or disposal of operations. 
Property-Liability net written premiums were $6.6 million, down 2.8% from $6.8 million in the prior-year quarter. The year-over-year decrease was driven primarily by significant catastrophe costs and an overall decline in Policies in Force (PIFs). This segment’s underlying combined ratio deteriorated to 87.2% from 84.1% in the year-ago quarter.

The effect of catastrophe losses on the combined ratio was 12.5%, compared to 10.3% in the prior-year quarter. The company expects the underlying combined ratio to remain in the range of 87–89% for the full year.

Allstate-branded standard auto premiums written for the quarter decreased 2.0%, and total PIFs declined 1.6% on a year-over-year basis due to a marginal decline in the renewal ratio. The combined ratio deteriorated to 94.9%, due primarily to higher loss frequency. However, average claim cost increases were within expectations.

Allstate-branded homeowners’ written premiums in the quarter were in line with the prior-year quarter, while total PIFs decreased 4.2% due primarily to an 11.6% decline in new issued applications. Importantly, Allstate’s risk management programs contributed to the drop in homeowners business. The combined ratio deteriorated to 116.3%, due to higher catastrophe losses, claim frequencies and severities.

Catastrophe losses for the reported quarter came in at $818 million, up 17.2% year-over-year, due to a large number of costly windstorms and hailstorms.

Property-liability net income came in at $422 million, down 3.9% from $439 million in the prior-year quarter.

Operating income for Allstate Financial decreased 44.9% year-over-year to $65 million. The decrease resulted primarily due to a lower investment spread. The investment spread for the quarter declined to $63 million from $242 million in the prior-year quarter, due to historically low short-term yields, lower total investment balances and higher levels of short-term investments.

However, the segment’s benefit spread during the quarter increased 3.1% year-over-year to $131 million, driven by higher premiums on accident and health products sold through the Allstate Workplace Division. Operating expenses of this segment decreased 16.0% year-over-year to $105 million as a result of the progress made on restructuring initiatives.

In all, this segment reported a net income of $19 million, compared to a net loss $379 million in the prior-year quarter. Lower operating expenses and after-tax net realized capital gains of $82 million mainly contributed to the income. However, the results were partly offset by higher deferred acquisition costs and deferred sales inducements (DAC) amortization related to the realized capital gains and lower operating income.
Corporate & Other segment reported a net loss of $52 million, compared to a net loss of $35 million in the prior-year quarter.

As of June 30, 2009, Allstate’s overall investment portfolio increased by $2.6 billion to $96.5 billion. A significant exposure to corporate credit was maintained, which resulted in improved fixed income investment valuations as credit spreads continued to tighten. At June 30, 2009, $7.1 billion of the unrealized net loss related to the fixed income portfolio, of which 64.5% was on investment-grade securities.

Net investment income for the quarter declined 21.5% year-over-year to $1.1 billion, due to lower overall yields and lower average asset balances.

Operating ROE for the quarter declined to 5.8% from 8.0% in the prior quarter and 15.1% in the prior-year quarter. Reported book value per share increased 23.0% sequentially but decreased 22.3% year-over-year to $27.87 as of June 30, 2009.

On October 22, 2008, the company suspended its $2 billion share repurchase program and did not complete it by the target date of March 31, 2009. During the reported quarter, the company declared a shareholder dividend of 20 cents per share.

We anticipate continued benefits from the company’s diversification and pricing discipline, but the ongoing global crisis and catastrophes will continue to impact the results in the coming quarters.
Read the full analyst report on “ALL”
Zacks Investment Research