NEW YORK, May 18 (Reuters) - Allstate Corp., already the second-largest U.S. auto insurer, said on Wednesday it would expand into online sales by buying Esurance from White Mountains Insurance Group for about $1 billion.

The deal will help Allstate diversify its auto business, which has been shrinking as the company chose profitability over expansion. Premiums written fell 1% last quarter, and policies in force declined as fewer customers renewed their coverage.

On the other hand, Esurance's gross premiums written and policies in force both rose 6% in the first quarter. The company, which calls itself the third-largest online auto insurer, has been advertising aggressively.

On a conference call with analysts, Allstate executives said the Esurance business would add a distinct channel to Allstate's operations and appeal to a different kind of customer than the one that uses the company's traditional brokerage force.

Allstate shares were about 12 cents lower at $32.30 in early trading on the New York Stock Exchange.

Allstate said it would pay about $700 million plus the tangible book value of the companies when the deal closes. It estimated the final payment at about $1 billion.

The deal also includes Answer Financial, an online comparison engine that lets users get quotes and buy insurance from dozens of carriers.

Allstate expects the deal to be finalized this autumn, and said it will be at least neutral to its earnings in the second full year of ownership. It will pay for the purchase in cash and both businesses will operate under their current brands.

Separately, Bermuda-based White Mountains said it expects the deal to increase its adjusted book value by about $80 per share.

White Mountains shares rose 11.6 percent, or $40, to $383.91 in early trading.

(Reporting by Ben Berkowitz in New York and Jochelle Mendonca in Bangalore; Editing by Sriraj Kalluvila and Maureen Bavdek)

© 2010 Thomson Reuters. Click for Restrictions.

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