Allstate Reports Strong Second Quarter 2012 Earnings

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The Allstate Corporation today reported financial results for the second quarter of 2012.

“We made good progress this quarter on our 2012 operating priorities of maintaining auto profitability, improving returns in homeowners insurance and annuities, growing insurance premiums, and proactively managing our investments and capital,” said Thomas J. Wilson, chairman, president and chief executive officer of The Allstate Corporation. “We improved our underlying margins in both auto and homeowners insurance. Our investment portfolio generated solid returns in a challenging interest rate environment. During the quarter, we repurchased 8.2 million shares of common stock for $275 million. With an increase in book value per share of 9.8% since year-end 2011 and a dividend yield around 2.5%, we are generating solid value for our shareholders.

“Our strategy of offering unique products to different customer segments continued to show positive results,” Wilson said. “Overall, we grew insurance premiums in the second quarter despite the negative impact of raising returns in homeowners insurance. Total Allstate brand premiums written grew compared to last year as higher average homeowners premiums and growth in emerging businesses more than offset a decline in Allstate brand homeowners and standard auto policies. Allstate Financial increased unit sales of life insurance through our Allstate agency channel. Esurance’s premium growth accelerated with its policies in force increasing 13.5% since year-end 2011. Encompass premiums written increased 5.9% compared to prior year on the strength of improved package policy sales.”

Consolidated Results
Net income for the quarter was $423 million, or $0.86 per diluted share, compared to a net loss of $624 million, or a loss of $1.19 per diluted share in the second quarter of 2011. The increase in operating income of $1.1 billion was the primary driver of the improvement in net income. For the quarter, operating income was $432 million, or $0.87 per diluted share versus an operating loss of $647 million, or a loss of $1.24 per diluted share for the second quarter of 2011. The increase in operating income was due to lower catastrophe losses and an improvement in the underlying property-liability combined ratio. Return on equity was 11.0% on a net income basis and 11.4%* on an operating income basis.

Property-Liability Premiums Grow while Profits Improve
Allstate’s priority to grow premiums showed positive results in the second quarter. Total property-liability premiums written* of $6.86 billion grew 3.8% from the second quarter of 2011 due to the acquisition of Esurance in early October 2011 and to a lesser extent, growth in both the Allstate and Encompass brands. Allstate brand standard auto premiums written declined slightly from the prior year quarter as an expected reduction in units was partially offset by an increase in average premium. Allstate brand homeowners, Emerging Businesses and Encompass contributed to the positive premiums written growth in the second quarter. Overall policies in force declined by 0.6% from year-end 2011 as reductions in Allstate brand standard auto and homeowners were partially offset by growth in Canada, Emerging Businesses, Encompass and Esurance.

Allstate continued to execute successfully on its strategy to maintain auto margins while improving homeowners returns. In the second quarter, the property-liability combined ratio was 98.0 compared to 123.3 in the prior year quarter. The underlying combined ratio was 86.3, an improvement of 1.2 points from the second quarter of 2011 and below the outlook range of 88 to 91 for the full year 2012. Catastrophe losses of $819 million in the quarter were substantial, but were significantly less than the catastrophe losses of $2.3 billion incurred in last year’s second quarter.

For Allstate brand standard auto, the combined ratio was 95.5, an improvement of 2.8 points from the second quarter of 2011. The underlying combined ratio for Allstate brand standard auto of 93.4 improved slightly from the second quarter of 2011 as implemented rate actions essentially matched the increase in loss costs. Allstate brand homeowners combined ratio was 104.9 for the second quarter, a significant improvement from the combined ratio of 193.3 in the prior year quarter, driven by lower catastrophe losses and continued improvement in the underlying margin. For the second quarter, the underlying combined ratio was 64.6, 4.8 points better than the 69.4 underlying combined ratio recorded in the prior year quarter, reflecting the impact of implemented rate changes as well as moderating loss costs. Also contributing to the second quarter’s positive results were improvements in the underlying margins for the other personal lines which comprise Emerging Businesses.

Allstate Financial Results Consistent with Strategy Execution

Allstate Financial continued to make progress on improving returns on attributed equity and shifting its focus to underwritten products from spread-based products. Net income for the second quarter was $132 million, a $29 million decline from the prior year quarter driven by lower net realized capital gains. Operating income increased 2.2% to $138 million in the second quarter of 2012, helped by the inclusion of equity method limited partnership results in operating income this year as well as lower crediting rates that were partially offset by worse mortality in both life insurance and annuities, lower yields on fixed income securities, and the continued managed reduction in spread business.

Premiums and contract charges on underwritten products totaled $540 million in the second quarter, an increase of 3.1% from the prior year period. Consistent with the strategic direction to reduce Allstate Financial’s annuity business, contractholder funds declined by $771 million from March 31, 2012 and $1.5 billion from year-end 2011. Allstate agencies increased life unit sales, with issued policies growing 2.5% in the second quarter compared to the prior year quarter.

Proactive Management Drives Investment Results

Allstate delivered solid total returns on investments, reflecting continued proactive management of investment risk and return. We remain focused on balancing yield and return considerations in this low rate environment, favoring corporate credit over Treasuries and equities, and intermediate over long-dated maturities.
Allstate’s consolidated investment portfolio totaled $97.3 billion at June 30, 2012 compared to $95.6 billion at December 31, 2011, as solid investment returns and operating cash flow more than offset the impact of the ongoing managed reduction in Allstate Financial’s liabilities. For the second quarter of 2012, net investment income was $1.0 billion and total portfolio yield was 4.6%, higher than the second quarter of 2011 and consistent with the first quarter of 2012. Inclusion of equity method limited partnership results in 2012, along with a higher amount, were the primary drivers of the favorable variance to the prior year quarter. Excluding the limited partnership results, second quarter 2012 net investment income and portfolio yield were lower than the prior year, consistent with the reduction in Allstate Financial’s liabilities and lower reinvestment rates.
Pre-tax net realized capital gains for the second quarter of 2012 were $27 million compared to $57 million in the second quarter of 2011. Realized capital gains in the second quarter of 2012 reflect lower gains from sales of fixed income and equity securities and included lower impairment write-downs than last year’s second quarter and derivative gains compared to losses in the prior year quarter. Pre-tax net unrealized capital gains were $4.2 billion at June 30, 2012 compared to $2.9 billion at December 31, 2011, as a result of lower interest rates, tightened credit spreads and higher equity values.

Book Value per Share Increased 3% Sequentially; Repurchased $275 Million in Shares

“We continue to focus on effective capital management as a key priority,” said Steve Shebik, chief financial officer. “In the second quarter, Allstate repurchased shares worth $275 million, bringing total purchases to $681 million under the current $1 billion authorization. With our strong operating performance, increased portfolio valuation and an active share repurchase program, book value per diluted share increased to $39.73.”
Book value per diluted share increased 3% from March 31, 2012, 9.8% from year-end 2011, and 12.8% from June 30, 2011.
Statutory surplus at June 30, 2012 was an estimated $16.5 billion for the combined insurance operating companies. Property-liability surplus was an estimated $12.9 billion with Allstate Financial companies accounting for the remainder. Deployable assets at the holding company level were $2.3 billion at June 30, 2012. Also during the quarter, Allstate maintained its dividend of $0.22 per share.

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