Allstate's auto coverage strategy pays

CHICAGO -- When a series of killer hurricanes walloped the Gulf Coast in 2005, costing Allstate a record quarterly loss of $1.55 billion, the company tried to make sure its bottom line would never be hit so hard again.

The nation's largest publicly traded personal-lines insurer pulled back aggressively from areas susceptible to expensive storms. It did not renew many homeowners' policies. It dramatically increased its own insurance, or reinsurance.

Two years later, despite the continuing risk of a consumer and regulatory backlash, the strategy is paying off: Northbrook-based Allstate, which reports third-quarter earnings Wednesday, is on a pace to exceed last year's record annual profit of $5 billion.

Not only has the company reduced its exposure to catastrophic events, it is benefiting from a calculated shift away from the riskier homeowners' business into the increasingly profitable auto line. Automobile insurance now accounts for 67 percent of its property-liability premiums and more than double the revenue from homeowners.

"Allstate has come a long way in becoming more sophisticated in understanding the risks that it underwrites, and it's had very, very good financial results because of that," said Donald Light, an analyst at research and consulting firm Celent. "They've clearly made a management judgment that they'll take the lumps that they have to take, public relations-wise, in order to insulate themselves from the shock losses."

Criticism has been harsh.

The Consumer Federation of America says the company favors investors at the expense of clients and has engaged in price-gouging. Sen. Trent Lott, a Republican from Mississippi, has repeatedly assailed Allstate and other big insurers for what he claims is negligence since Katrina and even sued State Farm for related claims, ultimately settling the lawsuit.

"It's OK to make a profit, but they are ripping people off," said J. Robert Hunter, the consumer group's insurance director. "Why are they so risk-averse? If they're not going to take on risk, what do we need insurance companies for?"

Allstate declined to make an executive available, citing the mandated quiet period before its earnings announcement. But the company has been very public about its intentions.

"It's purely model-driven, it's purely risk-driven -- it's not like they hate Florida or anything," said Morningstar analyst Matt Nellans. "What people don't see is that for 10 years they were writing underpriced insurance and nobody complained about that."