Written by Philip Klein
NEW YORK (Reuters) – Allstate Corp. on Thursday reported its first increase in quarterly earnings in more than a year, as higher insurance rates took hold and catastrophe claims fell dramatically from the prior year.
The company, the No. 2 U.S. car and home insurer behind State Farm Insurance Cos., also raised its full-year outlook and said it has added to reserves to cover mold and water damage in Texas. Its shares rose as much as 5 percent.
Allstate, like other insurers, in the past year has raised rates after a decade-long price war in the industry to respond to soaring real estate values and rising claims on damage caused by storms, mold and water. In February, it reported its third straight annual profit decline.
“Allstate … began taking aggressive pricing action along with much of the rest of the industry,” said Sanford Bernstein analyst Todd Bault. “That is now working its way into their results.”
The Northbrook, Illinois-based company, said second-quarter net income rose to $344 million, or 48 cents per share, from $168 million, or 23 cents per share, a year earlier.
Excluding losses on investments, earnings increased to 64 cents per share, from 31 cents last year. On this basis, analysts on average expected earnings of 58 cents per share, with their estimates ranging from 50 cents to 66 cents, according to research firm Thomson First Call.
The upbeat announcement prompted Merrill Lynch analyst Jay A. Cohen to raise his investment rating on Allstate to “buy” from “neutral.” The research note also said that the 2 percent decrease in Allstate’s investment income during the quarter was less than the 6 percent he expected.
“The earnings were a breath of fresh air in difficult market conditions right now,” said UBS Warburg analyst Michael Lewis.
Lewis said that in addition to rate increases the company was helped by keeping expenses down and exiting low margin businesses, which has been part of a larger strategy undertaken by Chief Executive Edward Liddy, who joined the company in January of 1999.
MOLD AND WATER DAMAGE CLAIMS A CHALLENGE
Allstate said mold and water damage claims in Texas, which was a primary reason for the earnings decline in the first quarter, continue to be a challenge. It added $68 million to its reserves for losses to cover these claims.
“The mold problems will probably continue to be a thorn in their side for the rest of this year,” said Williams Capital Group analyst Michael Paisan. “But it’s much more manageable than we thought a year ago.”
Many U.S. home insurers have been hit with massive claims for mold damage, especially in Texas, where regulators have favored policyholders more than in other states. Harmful mold can attack houses that are not dried out immediately after floods.
In addition, Allstate said catastrophic losses fell to $288 million from $537 million in the comparable quarter last year, when the insurer was hit by huge claims during a harsh spring storm season. The 2001 quarter was the worst quarter for catastrophe losses since the Northridge, California, earthquake of 1994.
For 2002, the company said it was raising its earnings guidance by 20 cents per share, to the range of $2.70 to $2.90, excluding restructuring charges and any changes in the value of its investments and assuming no unforeseen catastrophe.
“The bottom line is that the market is more favorable today than what it was a year or two years ago and Allstate is in a good position to be able to take advantage of that,” Paisan said.
The company also said it would benefit from larger rival State Farm’s decision to consolidate and exit businesses in many states after it reported a $9 billion underwriting loss for 2001.
Analysts said many markets would be up for grabs as State Farm’s restructuring takes place.
Allstate said revenues for the second quarter rose about 3 percent to $7.46 billion, from $7.2 billion a year earlier.
Shares of Allstate were up 84 cents or about 2.5 percent, at $34.92 in late afternoon trading on the New York Stock exchange. They fell about 2 percent in the second quarter, outperforming the Standard & Poor’s property-casualty insurance index <.GSPINPC>, which fell 4.6 percent during the same period.