Though the company caught a lucky break over the weekend, Mother Nature has been a recent pain for Allstate (NYSE: ALL). A series of storms turned the car- and home-insurer giant’s last year’s profits to significant losses in its second quarter.

However, shares went up on the earnings report as the Street was expecting higher losses. Now, as a prudent Fool, should you go by the market’s earnings optimism or the negative results? Digging a little deeper into the company’s books can give us the answer.

In detail
Net premiums written in the auto segment declined 0.9% year over year, while the homeowner segment’s rose 2.6%. But the point worth noting is that this rise was due to higher rates, and not more policies. Policies in force, in fact, declined in both segments.

Due to devastating storms, Allstate’s catastrophe losses shot up to $2.34 billion from $636 million in the year-ago quarter. While none of the insurance players have been immune to nature’s fury, Allstate seems to be the worst hit in the industry. Rival Progressive (NYSE: PGR) reported catastrophe losses of $125 million, while Travelers’ (NYSE: TRV) catastrophe losses totaled $1.09 billion, in their respective second quarters.

The huge catastrophe loss turned the company’s bottom line around from a profit of $145 million last year to a loss of $620 million. Excluding investment impact, the operating loss amounted to $1.23 per share, beating estimates of a loss of $1.56 per share.

The biggest cause of concern, however, is the combined ratio, which gauges an insurer’s effectiveness. In Allstate’s case, the ratio stands at 123. In simple terms, for every dollar the company collected as premium, it spent $1.23 on expenses and claims in the quarter. This is somewhat alarming, as anything below 100 is technically good. While insurers may insist on a combined ratio excluding catastrophe losses (which has improved from 88.1 to 87.5 year over year for Allstate), I do not see much sense in a metric that omits an integral and unavoidable part of an insurer’s business.

Dwindling business
Allstate’s largest unit, auto insurance, continues to be weak, with both premiums and units declining. Stiff competition seems to be eating into Allstate’s revenues. Progressive offers direct policy selling, and is introducing new packages to attract customers. Berkshire Hathaway’s (NYSE: BRK-A) (NYSE: BRK-B) Geico unit is also aggressively advertising to pull in customers.

In a bid to gain foothold, Allstate agreed to acquire two auto insurance-related businesses recently. But the deal, which will be completed later this year, is likely to dilute earnings in the first year after acquisition. Not very impressive.

To improve margins in the homeowner segment, Allstate introduced rate hikes averaging 6% in the quarter. Again, such steps may cure the problem until policy counts rise (they fell 3.9% in the quarter).  

Recent setbacks
Allstate’s shares were recently hit when a subsidiary’s head departed suddenly. Now, its deal to sell its banking business to Discover Financial Services (NYSE: DFS) has fallen through, compelling the company to proceed toward winding down the business.

The Foolish bottom line
Though the company dodged a bullet with the relatively modest damage from Hurricane Irene over the weekend, not much else seems to be working for Allstate now. Fools may not be in great hands with the stock in their portfolios.