The results fell well short of Wall Street expectations and Allstate's shares tumbled 5 percent in extended trading.
In the final three months of last year, the company based in Northbrook, Ill., earned $296 million, or 55 cents per share. That's down from $518 million, or 96 cents per share, in the year-ago period.
Not including one-time items, the company's operating income was $271 million, or 50 cents per share. By that measure, analysts on average expected a profit of 91 cents per share, according to FactSet.
Its revenue rose slightly to $8.09 billion from $8.06 billion. Analysts were expecting $8.02 billion.
Allstate's catastrophe losses in the fourth quarter were $537 million, up 64 percent from the same period in 2009. It said the Arizona hailstorm accounted for $355 million of that amount. The storm brought winds as strong as 70 miles per hour to the Phoenix area in October and led to the temporary shutdown the Phoenix Sky Harbor International Airport. Golf ball-sized hail damaged roofs and downed power lines, some of which landed on homes and caused severe damage.
Allstate said the surge in catastrophe losses underscored its need to increase profitability in its homeowners segment. That means hiking prices to reflect the bigger payouts the company has been making in recent years as a result of weather-related losses, CEO Tom Wilson said.
"When you look at the homeowners business, the amount of losses that are being paid out due to the severe weather is not just an anomaly," he said.
Allstate boosted rates an average of 7.4 percent in 10 states in the latest quarter. The company said it plans to pursue further price hikes.
Meanwhile, the company said its auto insurance business also took a hit as price hikes and tighter underwriting standards in California, Georgia and New York resulted in lower retention rates. Expenses also rose, in part because of a new TV ad campaign.
The company's total combined ratio worsened to 100.8 in the quarter, from 93.2 a year ago. A ratio above 100 means the insurer is paying out more in claims and expenses than it takes in from writing new premiums.
Net investment income was $998 million, down from $1.08 billion a year ago. Total realized capital gains were $116 million, compared with a loss of $33 million a year ago.
This week, Allstate also announced that Discover Financial Services is taking over its banking business so that it could focus on its insurance, retirement and investment products.
Under the multi-year deal, Discover Bank will buy all of Allstate Bank's deposits and provide banking services to Allstate customers. Allstate will no longer provide banking products or services after the deal closes.
The transaction is expected to close mid-year.
For all of 2010, Allstate reported net income of $928 million, or $1.71 a share, up from $854 million, or $1.58 a share, in 2009. Revenue slipped to $31.4 billion from $32.01 billion.
Allstate's shares fell $1.66 to $30.70 in after-market trading Wednesday following the release of the earnings report. They ended the regular trading session down 20 cents at $32.36.