CHICAGO -(Dow Jones)- Allstate Corp. (ALL) boosted its auto insurance premiums and policies-in-force in the second quarter by about 2% despite increasing competition, but two rivals in particular are taking business in some states, the company's chief executive said Thursday.

"It's clearly a very competitive market. Some of that is due to price decreases other people have taken, which we've chosen not to take," CEO Thomas J. Wilson said during a conference call. "We are still very competitive in the high lifetime value customers. We will not trade off profits for growth."

State Farm Mutual Automobile Insurance Co., the country's largest auto insurer, and the Geico unit of Berkshire Hathaway Inc. (BRKA, BRKB) have both cut prices in some key markets, including Florida and New Jersey, he noted. The price cuts were a factor in the 4.8% drop in new auto insurance applications at Allstate in the quarter, a reversal from recent quarters, when new applications rose.

The drop in new applications could mean that policy growth could be inconsistent as the company focuses on winning business from "high lifetime value" customers who will tend to stay with one carrier and be profitable over the long haul, Wilson said.

In fact, some markets have become so competitive that the company has chosen not to fight for more business at rates it considers too low.

Wilson said that new applications dropped in Florida, where the company did good business last year. "Our new business is way off this year," in a competitive situation he called "pretty tough," with both State Farm and Geico offering lowered rates.

The company's new business also dropped recently in New Jersey as that market became more competitive, with American International Group Inc. (AIG) unit 21st Century offering prices that Wilson said were too low to match.

In the future, policy growth may tend to be "bumpier on new business, but it will also be more stable on the long term," Wilson said.

Morningstar Inc. analyst Jim Ryan said he had no problems with Allstate's strategy of focusing on high-value customers and refusing to get pulled into price wars. "I think what is happening is some insurers are competing mainly on price," he said.

He called the big jump in advertising spending among the largest insurers a concern, as the companies fight to get their message heard.

Keefe Bruyette & Woods Inc. analyst Cliff Gallant called Allstate "relatively well-positioned," considering that the auto insurance business in general is going into a very competitive time, especially since some competitors, most notably Progressive Corp. (PGR), have promised to cut their margins in order to gain business.

"They are under pressure, but they are in a pretty good position defensively, with a strong distribution network and a valuable franchise" in the Your Choice auto insurance product rolled out last year, Gallant said. That product, which offers customers varying levels of coverage, has proven popular, as more than 2.4 million customers have signed up, including 300,000 in the second quarter.

But the drop in new applications for Allstate is a strong indicator that the competition will eventually take a toll, Gallant said. "We will start to see some top-line declines," but he said he isn't sure if it would show up as soon as the third quarter.

Keefe Bruyette may seek compensation for investment banking services from Allstate in the next three months.

After the market closed Wednesday, Allstate reported second-quarter net income that rose 16% from a year earlier to $1.4 billion, or $2.30 a share.

Operating income, which excludes investment gains and losses and significant nonrecurring items, was $1.07 billion, or $1.76 a share, down 16% from last year and below the Thomson Financial average analyst estimate of $1.81 a share, mostly due to higher reinsurance costs and catastrophe losses.

Shares of Allstate recently traded down $1.48, or 2.4%, to $59.08.

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By Lavonne Kuykendall, Dow Jones Newswires

Copyright (c) 2007 Dow Jones & Company, Inc.