CHICAGO -(Dow Jones)- Allstate Corp. (All), which has struggled along with its auto-insurance peers in a highly competitive market that has held prices down even as the cost of auto accidents has risen, will likely cut prices for auto insurance in California, the company's chief executive said Thursday.

Referring to the "debate" that Allstate has had with insurance regulators in California, the biggest market for auto insurance, over the company's auto- insurance prices, CEO Thomas Wilson suggested the discussion wasn't going his way.

"We will end up lowering prices in auto late this year or early next year," he predicted during the company's earnings conference call, which was broadcast over the Internet.

In the third quarter, Allstate said the largest auto insurers have been cutting prices throughout the year, with larger rival State Farm Mutual Automobile Insurance Co. and smaller upstart Geico, a unit of Berkshire Hathaway Inc. (BRKA, BRKB), adding to the competitive pressure.

For the quarter, Allstate reported that the average premium it charges for auto insurance rose 1% from the prior year's quarter, with property damage and injury claims both rising in number and price, a trend Wilson said he saw across the industry. Allstate's standard auto loss ratio, which represents the percentage of premium dollars spent on claims, increased 5.9 percentage points to 65.8% in the third quarter from a year ago.

Price cuts in California could add to Allstate's struggle to improve its margin of profitability on auto insurance. California represents 12% of the country's auto-insurance market with more than $23 billion in auto-insurance premiums written in 2006, according to A.M. Best.

On Wednesday after the close of the markets, Allstate reported that third- quarter net income dropped 7% to $1.70 a share from the year-ago quarter.

Higher catastrophe losses in this year's third quarter and the absence of favorable prior-year reserve releases caused most of the shortfall.

Operating earnings dropped 18%, to $1.54 a share, as revenue rose 2.9% to $ 8.99 billion.

The average earnings estimate of analysts surveyed by Thomson Financial was $ 1.67 a share on revenue of $8.9 billion.

In a research note Wednesday, Bear Stearns analyst David Small said he was concerned with the increase in the cost of accident claims in the company's auto-insurance business, particularly the 7.3% increase in bodily injury costs, following a 6.2% increase last quarter.

"However, this latest data point suggests that the company's severity expectations may be too modest, potentially having a negative impact on future profitability and likely reducing future reserve releases," Small said.

Shares of Allstate dropped 3.7% to $55.43 in recent trading.

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By Lavonne Kuykendall, Dow Jones Newswires

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