Growing investment losses, market-driven charges on its annuity business and higher-than-usual catastrophe losses pulled Allstate Corp. (ALL) to a fourth-quarter and full-year loss and pushed the company to cut back the size of its life insurance business.

The Northbrook, Ill.-based insurer swung to a loss in the fourth quarter on $1.9 billion in capital losses in its investment portfolio and $493 million in annuity-sales costs recorded because of the tumbling stock market.

The nation's largest publicly held personal-lines insurer posted a fourth-quarter net loss of $1.13 billion, or $2.11 a share, compared with year-earlier net income of $760 million, or $1.36 a share, on revenue of $6.57 billion. Operating earnings, which exclude investment gains and losses and the annuity costs, fell to 97 cents a share from $1.24. That was below the Thomson Reuters analyst estimate of $1.35 a share on revenue of $8.46 billion.

Shares fell 11% in after-hours trading to $26.50, more than erasing gains recorded during the regular session as part of a strong rebound in financial stocks. The shares closed Wednesday up nearly 9% to $29.64.

In an interview Thomas J. Wilson, chairman, president and chief executive of Allstate, said the company's capital position remained strong. With more than $12.6 billion in capital, including $3.6 billion available at its holding company, he did not anticipate that the company would need to raise capital.

At the same time, he said he could not predict how ratings agencies would view the earnings, and whether Allstate might be in for a downgrade.

"They are in the mode of more downgrades than upgrades these days," Wilson said. At least one ratings agency had some Allstate units on a negative outlook.

The company will reduce costs in part by reducing Allstate Financial's employee count by 1,000 through layoffs and attrition, and will "reposition" its products. The company aims for a 20% reduction in certain operating expenses in that unit for an annual savings of $90 million by 2011.

The company stopped its share buyback program during the fourth quarter and will not complete the current allotment.

Allstate does not provide earnings guidance but said it expects a property-liability combined ratio excluding catastrophes and prior year reserve re-estimates, to be in a range between 87% and 89% for the full year 2009.

"Selling life insurance to the middle market is still part of our strategy," Wilson said, though the economic downturn has affected that market severely.

"Their houses are not worth as much and neither are their savings. We have to come up with a more focused, lower cost model. That is strategic."

The insurer said pretax unrealized losses more than doubled during the quarter to $8.8 billion because of widening credit spreads in Allstate's fixed-income securities.

The investment losses, which have been plaguing other insurers and some others such as State Street Corp. (STT) helped result in last month's ouster of Allstate's life-insurance chief and a downgrade following third-quarter results from Fitch Ratings.

But Allstate's auto and homeowners operations have generally done well in a competitive market, which has been subject to some pricing pressures.

Revenue dropped to $6.57 billion from $8.99 billion on the capital losses, which included $652 million in write-downs, $585 million from the settling and valuation of derivatives and $357 million of losses on sales. Life insurers have been pressured by the stock market's pummeling, resulting in surging costs for annuities, with have guaranteed minimum returns no matter market performance.

Allstate took a premium deficiency charge of $219 million after tax when a mortality study Allstate conducted indicated that the some of the annuity contract holders will live longer than the company had calculated when it sold the annuities. The rest of the charge was due to a reduction in the related investment portfolio yield, the company said.

The property and liability segment's combined ratio, the percentage of each dollar the company collects in premiums against what it pays out on losses and expenses, increased to 96.4% from 95.9%. Excluding catastrophes and prior-year reserve re-estimates, the ratio climbed to 91.5% from 88.6%.

Overall catastrophe losses dropped 45% while premiums written dropped 3.9% amid falling new-car sales and ongoing weakness in the housing market. That, plus "a highly competitive environment" resulted in policies under force dropping. But Allstate said it held the line on prices, with average auto premiums rising.

Allstate's investment portfolio fell 8.6% during the quarter to $96 billion amid the $4.7 billion increase in net unrealized capital losses during the quarter.

-By Lavonne Kuykendall, Dow Jones Newswires; 312-750-4141; lavonne.kuykendall@dowjones.com

-By Kevin Kingsbury, Dow Jones Newswires; 201-938-2136; kevin.kingsbury@dowjones.com

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