Allstate Posts $1.1 Billion Loss, Cuts 1,000 Jobs (Update3)

By Erik Holm
Bloomberg News
January 28, 2009

Jan. 28 (Bloomberg) -- Allstate Corp. will cut 1,000 jobs at its life insurance operations and review the products sold by the unit after losses on investments caused the company's first unprofitable year as a public firm. Shares dropped 12 percent in extended trading.

The fourth-quarter net loss of $1.13 billion, or $2.11 a share, compares with a profit of $760 million, or $1.36 a share, in the same period a year earlier, the Northbrook, Illinois- based insurer said today in a statement. Excluding the declines in the value of some holdings, Allstate earned 97 cents, missing the $1.35 average estimate of 18 analysts surveyed by Bloomberg.

Allstate joins competitors Progressive Corp. and Travelers Cos. in writing down investments, indicating the fourth quarter may be a repeat of the third, when most of the 24 companies in the KBW Insurance Index posted a loss or profit decline. Chief Executive Officer Tom Wilson may pare back products sold by the life business after moves to dump securities and buy hedges to protect against market declines failed to prevent another loss.

"It's the life insurance business that's hurting them," said Jim Ryan, an analyst at Morningstar Inc. in Chicago. "They're taking big hits on their investments, which has become the fate of all the life insurers these days."

Life insurers guarantee minimum returns for some customers, and adjust profit assumptions when investment returns don't meet the company's targets. They also invest more aggressively than property insurers because they hold policyholder premiums for longer periods of time before paying claims.

Stock Falls

Allstate, the largest publicly traded home and auto insurer in the U.S., gets about one-sixth of its revenue from life operations. The company slipped $3.64 to $26 at 6:01 p.m. in New York.

Allstate lost $1.68 billion for all of 2008, its only unprofitable year since former owner Sears, Roebuck & Co. first sold shares of the insurer to the public. Allstate's stock fell 37 percent last year, matching its worst ever share decline in 1999. The firm has dropped an additional 9.5 percent in New York Stock Exchange composite trading since Dec. 31.

Wilson last month removed the president of Allstate's life insurance business after injecting $1 billion of capital into the unit in October. Wilson told investors at a conference the next day that "we needed new leadership" heading that business. A permanent successor hasn't been named.

Investment Losses

Allstate had $1.93 billion in investment losses in the quarter and $5.09 billion for the year. The firm's property and casualty insurance operations earned $243 million for the quarter and $164 million for the year amid the record number of tornadoes in the second quarter and Hurricane Ike, the third costliest U.S. storm, in September. Insurers hold policyholder premiums until they're needed to pay claims, and invest their customers' cash on the expectation they'll earn extra profit.

The investment losses would have been worse had the insurer not sold some securities and purchased hedges that protected its portfolio from losses.

"Those risk mitigation programs we put in place in the middle of 2008 were worth over $500 million for us," Wilson said in an interview today. The life insurance business, he said, "is important to our strategy. It is still core to reinventing both life insurance and retirement for middle income people, but that doesn't mean we shouldn't think about new ways to do it."

Corporate Debt

Book value per share, a measure of Allstate's assets minus liabilities, fell 25 percent in three months to $23.51 because of the net loss and a $4.7 billion decline in the value of securities the insurer doesn't intend to sell. The drop includes about $1.6 billion on corporate debt, $1.2 billion on commercial mortgage-backed securities and about $900 million on asset- backed securities.

The job cuts represent about 2.6 percent of the staff, based on 38,000 employees at the end of 2007, according to the firm's most recent annual report. Allstate joins insurers including Genworth Financial Inc., Hartford Financial Services Group Inc. and Lincoln National Corp. in cutting staff as falling markets drain capital. North American insurers have slashed more than 6,000 positions in the past two years, according to Bloomberg data.

Fitch Ratings and Moody's Investors Service downgraded Allstate in October, citing the investment losses. Standard & Poor's changed its outlook for the insurer's credit ratings to negative. That same month, Wilson suspended a $2 billion share repurchase to preserve capital.

LBO, Hedge Funds

Allstate's private equity, real estate and hedge fund investments produced a $101 million loss in the fourth quarter, compared with an $88 million profit a year earlier. Hedge fund losses of $96 million dragged down results in the so-called alternative investments, while real estate funds lost $30 million and private equity earned $25 million.

The company had a total of $2.79 billion in the alternative assets at yearend, making up about 2.9 percent of total investment assets, compared with 2.1 percent a year earlier.

Allstate kept 3.6 cents of ever dollar collected in premiums at its property-casualty units in the fourth quarter, compared with 4.1 cents in the same period a year earlier.

"The cornerstone and bedrock of our company is making sure we earn good insurance profits," Wilson said. "That business continues to generate capital and be a strong source for us.

Combined Ratio

The insurer's profit margin for the full year was 13.2 cents on every dollar, excluding the effects of catastrophes and costs for claims in prior quarters. The result was within the range it gave investors in July, and the firm said it expected to earn between 11 and 13 cents by that measure in 2009.

Allstate is the second-largest home and auto insurer in the U.S. by premium revenue, behind State Farm Mutual Automobile Insurance Co., according to 2007 data compiled by the National Association of Insurance Commissioners. State Farm is owned by its policyholders and has no publicly traded debt.

Progressive, vying with Warren Buffett's Geico Corp. for the No. 3 spot among companies selling car coverage, last week became the first of the 10 largest property and casualty insurers to report year-end results. The Mayfield Village, Ohio- based firm said fourth-quarter profit fell 33 percent to $159.3 million on investment losses.

Travelers, the largest U.S. property and casualty insurer by market value, said yesterday that fourth-quarter profit slipped 25 percent to $801 million.

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