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Allstate Corporation’s (ALL - Analyst Report) third quarter operating earnings of 83 cents per share came in way behind the Zacks Consensus Estimate of 97 cents and 99 cents recorded in the year-ago quarter.

Results for the quarter deteriorated primarily due to lower-than-expected premiums coupled with higher expenses in the Property-Liability insurance segment, along with relatively higher tax expenses. However, lower catastrophic losses, prudent capital management and strong liquidity were quite impressive during the reported quarter. This is reflected from growth in book value per share.

Allstate’s net income for the reported quarter came in at $367 million or 68 cents per share, compared with $221 million or 41 cents in the prior-year quarter, reflecting growth of about 66%. Operating income, which excludes realized net capital gains and losses from the sale of investments as well as accruals on unhedged derivative instruments, for the reported quarter was $452 million, down 16.0% from $538 million in the year-ago quarter.

Allstate reported total net revenue growth of 4.3% year over year to $7.90 billion and also came in about 14% higher than the Zacks Consensus Estimate of $6.95 billion.

Quarter in Detail

Property-Liability net written premiums were $6.76 billion, down 0.6% from prior-year quarter. This segment’s combined ratio deteriorated by 1.2 points year over year to 95.9%.

The underlying combined ratio, which excludes catastrophes and prior-year reserve estimates, was 89.2% in the reported quarter, within the company’s 88%-90% outlook range for full year 2010 but higher than 88.0% recorded in the year-ago quarter.

Besides, Allstate brand standard auto premiums written for the reported quarter declined 0.5% from the prior-year quarter as a result of a 1.7% decline in policies in force, reflecting a 0.4 point decline in retention to 88.7% that was partly offset by a 2.5% increase in new issued applications from the prior year third quarter.

This decrease was partially offset by a 1.4% year over year growth in average premium. Nevertheless, the combined ratio increased 0.5 points year over year to 93.2%, primarily due to growth in higher claim frequencies.

Allstate-branded homeowners’ written premiums for the quarter increased 2.4% year over year, reflecting a 7.2% increase in average premium that was partially offset by a 4.1% decline in policies in force. The combined ratio deteriorated to 104.7% from 98.3% in the prior-year quarter, reflecting unfavorable prior-year reserve reestimates and a higher expense ratio.

Catastrophe losses for the reported quarter came in at $386 million, down 5.2% year over year. Property-Liability net income came in at $331 million, up 5.4% from the prior-year quarter. Operating income for this segment was $394 million, down 21.4% from $501 million in the year-ago quarter. The Property-Liability expense ratio for the third quarter of 2010 was 25.1 compared to 24.7 in the prior year third quarter, primarily due to higher marketing expenditures.

Operating income for Allstate Financial increased 13.7% year over year to $108 million. The growth reflected higher investment spread and lower amortization of deferred acquisition costs (DAC), partially offset by higher operating costs and expenses and a lower benefit spread. As a result, net income came in at $85 million compared with a net loss of $38 million in the year-ago quarter.

Corporate & Other segment reported a net loss of $49 million, compared to a net loss of $55 million in the prior-year quarter. Total cost and expenses were $95 million, down 12.8% from $109 million in the year-ago quarter.

Investment and Capital Position

As of September 30, 2010, Allstate’s total investments modestly increased $2.3 billion over June 30, 2010 to $102.2 billion, reflecting lower interest rates, improved equity markets and cash flow generation by the portfolio. The investment valuations helped pre-tax unrealized net gains to climb to $2.7 million as on September 30, 2010 from $400 million as on June 30, 2010.

Allstate’s net investment income for the reported quarter came in at $1.0 billion, down 7.3% from the prior-year quarter. The declines primarily resulted from lower short-term interest rates and duration-shortening actions taken to protect the portfolio from rising interest rates.

As on September 30, 2010, reported book value per share increased 9.9% year over year to $35.48. Book value per share, excluding the impact of unrealized net capital gains and losses on fixed income securities, increased 2.9% year over year to $33.38.

Statutory surplus as on September 30, 2010 was estimated at $15.1 billion for Allstate Insurance Co., comparing favorably with $14.9 billion at June 30, 2010 and $14.8 billion at September 30, 2009.

Our Take

We anticipate continued benefits from Allstate’s diversification, superior financial strength rating, pricing discipline and proactive approach to investment, but the ongoing volatile markets along with interest rate and catastrophe risks will continue to impact the premiums and investment portfolio in the upcoming quarters.

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