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Despite 55% Net Income Loss, Allstate Manages To Profit

Nov 14 2011

Hurricane Katrina in the Gulf of Mexico near i...

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Allstate Corp., the second largest home and auto insurance company in the United States, announced a significant fall in net income during its third quarter earnings call. The year-over-year loss of net income was significant; the company had posted $367 million in the previous third quarter, compared to $165 million this year. Despite losing 55 percent in net income, Allstate's third quarter earnings beat overall expectations, resulting in shares rising as much as 6% in after hours trading on Monday.

The sharp loss of net income was due to the large number of payouts of claims against damages caused by natural disasters. The number of catastrophic claims in 2011 was the largest since Hurricane Katrina struck the Gulf Coast in 2005. The catastrophic losses cause by Katrina exceeded $120 billion, while the losses this year have so far added up to $70 billion. Allstate processed and paid out claims for 23 catastrophic events in 2011, including Hurricane Irene, Tropical Storm Lee, a string of tornadoes across several states, and massive flooding. The catastrophic cost for Allstate was $1.08 billion in the third quarter, while in 2010 that figure was $368 million.

Allstate had warned investors about the increased amount of catastrophic payouts in advance. Insurance companies in the United States had already faced numerous catastrophes in the first decade of 2010, and 2011 was no different. As a result, Allstate and other insurers have been sharply raising their rates on home insurance policies over the last few years.

Despite the high number of catastrophic claims, Allstate managed to return a quarterly profit. The company's auto insurance business segment has managed to maintain profitability with overall improvement in New York and Florida. Those two states are notorious for their high rates of home and auto insurance fraud, and Allstate has implemented strategies to reduce losses. The strategies have resulted in a loss of policies, but the results have been favorable in general. Insurance policy premiums in Florida and New York are higher than the average premiums around the country.

Chairman Tom Wilson indicated that Allstate will continue to pursue profitable strategies of increased insurance rates and a diminished presence in high-risk or negative areas. The company's rates of auto insurance premiums are one percent higher than a year ago, while homeowner's insurance rates have increased sharply in at least a dozen states. The company is focused on returning 13% on equity by 2014. To that extent, Allstate revealed three priorities to be executed in the near-term: maintain auto insurance margins closer to the industry level, improve returns on the financial and annuities division, and manage the company's capital aggressively.

Allstate's fixed deferred annuity portfolios have declined $4 billion since last year, mostly due to annuity surrenders. Allstate Financial now sells products at higher premiums in order to offset the losses posted by its annuities. Chief Executive Officer Thomas Wilson indicated that Allstate is shifting its attention to corporate bonds rather than government bonds. The current rate of return on U.S. Treasury debt is too low, and Allstate has responded by accumulating its holdings of corporate bonds, up by about 20 percent since the beginning of the year. Wilson's investment policies have managed to turn Allstate around since 2008, when the company's annual write-downs topped the $1 billion mark.

Allstate's commitment to extending its brand continues with the recent acquisition of Esurance, an online marketplace for auto insurance. In the auto insurance business, Allstate has been losing market share to Geico and Progressive, two brands often preferred by younger drivers who pay higher premiums. Allstate will launch a new advertising campaign in the fourth quarter to promote online sales of auto insurance policies.

Donna Dingwall is an independent auto insurance claims adjuster.  If you think you might be overpaying for your car insurance do a Kanetix comparison search, and see who's got the best rates.

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