CHICAGO -(Dow Jones)- Rising losses from major catastrophes and everyday auto accidents held back growth for auto and homeowners insurer Allstate Corp. (ALL).

The unwelcome uptick in the losses came amid worries over rising competition in insurance pricing, which limited how much of an increase Allstate could implement on its popular auto insurance product Your Choice. At the same time, a continued push to cut back on catastrophe exposure in its homeowners business also cut back growth in that area.

Overall premiums written fell slightly during the fourth quarter to $6.56 billion from $6.6 billion in the year-ago quarter as competition held rates to an average 1.4% increase in its auto business, which was outweighed by a drop in homeowners premiums.

Allstate follows rival auto insurer Progressive Corp. (PGR) in reporting a tough auto insurance market that forces the largest insurers to spend heavily on marketing while holding price increases to a minimum, even as losses start to creep up.

The company also saw a drop in the value of its investment portfolio, which contains $3.9 billion of subprime-related investments. But the company said it is well-insulated from potential downgrades of the bond insurers that protect around half its municipal bond investments.

"There were clearly some areas of challenges for us in 2007," said President and Chief Executive Thomas Wilson during the company's earnings conference call Wednesday.

Allstate Corp.'s fourth-quarter net income dropped to $760 million, or $1.36 a share, compared with $1.21 million, or $1.93 a share, a year earlier.

Operating earnings, which excludes realized capital gains and losses and other items, fell to $1.24 a share from $1.78 a share a year earlier, and below analyst expectations of $1.32 a share. Revenue dropped 1.2% to $8.99 billion.

The October wildfires in California resulted in $318 million in claims, while bodily injury payments for auto accident claims jumped 9.3%, which Wilson said was higher than expected.

Higher loss trends, particularly in its auto business amid an environment of price competition, persuaded Goldman Sachs analyst Thomas V. Cholnoky that prices increases will not be enough to outweigh it over the next several quarters. He cut his earnings estimate on Allstate for 2008 through 2011.

Others gave Allstate some credit for the ongoing success of its Your Choice auto insurance platform, which has attracted customers by offering cafeteria- style package choices. "We expect auto insurance pricing to stabilize in 2008 and rise in 2009, positioning Allstate to again gain market share under its consumer-driven focus," Raymond James Analyst David O. Lewis said in a Wednesday note.

The subprime meltdown has touched Allstate, although the company said it was well-positioned to weather any downturn.

Around half the company's municipal bond portfolio is insured, which potentially means some portion of those $13 billion in bonds could be downgraded if the insurer loses its triple-A credit rating. The two largest bond insurers face rating agency downgrades in coming weeks.

Wilson brushed off the concern, saying the company doesn't put much stock in bond insurance anyway, and relies on its own underwriting.

"While declines in the value of insurance could temporarily affect the value of this portfolio, we continue to have the intent and ability to hold the bonds and expect to receive all the contractual cash flows," Wilson said.

In its earnings conference call Tuesday, Chubb Corp. (CB) had a similar reaction to the bond insurer situation. Around 43% of its $18 billion tax exempt bond portfolio is insured, but underlying ratings are high enough that a bond insurer downgrade would have an "immaterial" impact, said Michael O'Reilly, Chubb's vice chairman.

In recent after-hours trading, shares of Allstate were unchanged from the Wednesday close of $48.49.

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