Allstate Corporation’s (ALL) third quarter operating earnings of 99 cents per share were in line with the Zacks Consensus Estimate. This is in stark contrast to the operating loss of 35 cents in the year-ago quarter. Results for the quarter benefited primarily from a milder catastrophe environment, prudent capital management and strong liquidity. However, lower investment income and decrease in property-liability premiums did weigh on the results.

Primarily as a result of 77.6% year-over-year decrease in catastrophe losses, the company turned to a GAAP net income of $221 million or 41 cents per share, compared to net loss of $923 million or $1.70 per share in the prior-year quarter. Operating income excludes realized net gains and losses from the sale of investments as well as accruals on non-hedge derivative instruments, which are reported with realized capital gains and losses.

Property-Liability net written premiums were $6.8 million, down 2.2% from $7.0 million in the prior-year quarter. This segment’s combined ratio improved to 94.7% from 112.7% in the year-ago quarter. The improvement in combined ratio resulted from continued margin strength in the auto business and actions taken to reduce expenses, partly offset by the impact of catastrophe losses in the homeowners business.

The underlying combined ratio was 88.0% in the third quarter, within the company’s 87-89% outlook range, for the full year. Management anticipates that the underlying combined ratio for the fiscal year 2009 will be within its previous outlook range. 

Allstate-branded standard auto premiums written for the quarter were almost in line with the prior-year quarter. Total policies in force declined 1.3% from the prior-year quarter as improved sales and retention were offset by fewer policies available for renewal. The combined ratio deteriorated 1.7 points year-over-year to 92.7%, due primarily to higher loss frequency.

However, average claim cost increases were within expectations.

Allstate-branded homeowners’ written premiums for the quarter declined 0.2% year-over-year, resulting from a 4.1% decline in policies in force. The combined ratio improved to 98.3% from 181.3% in the prior-year quarter, reflecting lower catastrophe losses, partly offset by higher non-catastrophe claim frequencies and severities. 

Catastrophe losses for the reported quarter came in at $407 million, down 77.6% year-over-year. 

Property-liability net income came in at $314 million, compared to a loss of $661 million in the prior-year quarter.

Operating income for Allstate Financial increased 8.0% year-over-year to $95 million. The increase resulted primarily due to improved benefit spread, lower amortization of deferred policy acquisition costs and reduced operating expenses, partly offset by a lower investment spread. The investment spread during the third quarter declined to $109 million from $214 million in the prior-year quarter. The decrease was due to lower net investment income partly offset by lower interest credited on contract-holder fund.

Operating expenses for this segment declined 26.1% year-over-year to $99 million, reflecting the substantial progress made through Focus to Win.

In sum, this segment reported a net loss of $38 million, compared to a net loss $196 million in the prior-year quarter. 
Corporate & Other segment reported a net loss of $55 million, compared to a net loss of $66 million in the prior-year quarter.

As of Sep 30, 2009, Allstate’s overall investment portfolio increased $4.2 billion from the end of prior quarter to $100.6 billion. The unrealized net loss position improved by $4.8 billion compared to the prior quarter, reducing pre-tax unrealized net losses to $2.5 billion at Sep 30, 2009. Improved unrealized balances in all asset classes were the result of tightening credit spreads, declining interest rates and positive equity portfolio returns.

Net investment income for the quarter declined 20.0% year-over-year to $1.1 billion, due to lower yields, actions to shorten duration and maintaining additional liquidity in the portfolio, and reduced investment balances.

Operating ROE for the quarter improved to 10.1% from 5.8% in the prior quarter and 10.0% in the prior-year quarter. Reported book value per share increased 15.9% sequentially and 2.9% year-over-year to $32.29 as of Sep 30, 2009.

We anticipate continued benefits from the company’s diversification, pricing discipline and proactive approach to investing but the ongoing global crisis and catastrophes will continue to impact the results in the coming quarters.
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