Losses on credit insurance policies led to a small drop in operating income at Allstate Financial during the second quarter.[@@]

Allstate Financial is a unit of The Allstate Corp., Northbrook, Ill. The large multiline insurer is reporting a total of $1 billion in net income for the latest quarter on $8.3 billion in revenue, up from $588 million in net income on $7.9 billion in revenue for the second quarter of 2003.

Premiums and deposits at the Allstate Financial unit, which sells life insurance, annuities and other life and health products, increased 30%, to $4.3 billion, thanks to a big expansion in a program that uses funding agreements to back medium-term notes.

When an insurer sells a funding agreement, it is promising that it will pay the holder a fixed rate of return for a specified period of time. Funding agreements and funding agreement-backed notes have been popular with customers who are looking for a safe investment that offers a relatively high rate of return.

The boom in the FA program helped increase Allstate Financial sales through specialized brokers to $1.6 billion, from $791 million during the second quarter of 2003.

But the Allstate Financial unit is reporting operating income of $126 million for the second quarter on $1.3 billion in revenue, compared with $131 million in operating income on $1.3 billion in revenue for the comparable quarter in 2003. Revenue was flat partly because of a restructuring that eliminated most of the company’s direct-marketing operation, Allstate says.

Today, the Allstate Financial strategy is to emphasize “product manufacturing for targeted distribution partners,” Allstate Chairman Edward Liddy says.

In addition to letting premiums and deposits from direct-marketing channels fall to $16 million, from $73 million, Allstate Financial let premiums and deposits from independent agents fall to $573 million, from $695 million.

Allstate agencies and financial services firms, such as banks and broker-dealers, produced double-digit increases in premiums and deposits.