(Bloomberg) — Allstate Corp. is betting on timber and real estate to boost returns at a struggling annuity unit.

“We do need to figure out what we do with our annuity business,” Chief Executive Officer Tom Wilson, said at an investor presentation yesterday. “It's still not where we'd like it to be on a long-term basis, so we're investing a little differently there.”

Allstate, the largest publicly traded U.S. home-and-auto insurer, has been retreating from annuities as low interest rates weigh on results. The company agreed last year to divest a life-and-retirement operation called Lincoln Benefit Life Co., after selling its variable-annuity operation to Prudential Financial Inc. in 2006.

Wilson said Allstate has been harmed by reinvesting funds from maturing investments at lower interest rates. In annuities, insurers profit when investment returns exceed the promised payouts to policyholders. Allstate said in its annual report that investment returns on immediate fixed annuities exceed customer payouts by 0.9 percentage points. The company will benefit when rates eventually rise, Wilson said today.

“In the meantime, we're putting more money into alpha investments,” Wilson said. “We're investing in things like timber and some real estate.”

Allstate advanced 12% this year before today, beating the 7.6% gain of the Standard & Poor's 500 Index. The company has benefited from selling homeowners' coverage and car insurance, where results are less linked to interest rates. MetLife Inc., the largest U.S. life insurer, gained less than 1% this year through yesterday while No. 2 Prudential was down about 4%.

'Muted' Response

XL Group Plc and CNO Financial Group Inc. are among insurers that have made deals this year to exit obligations tied to life or retirement contracts as the companies work to narrow their focus. Randy Binner, an analyst at FBR Capital Markets, said in a note to clients today that such divestitures got a “muted” response from investors who focused on the loss of assets at the selling companies.

Allstate has no immediate plan to exit the annuity operation, “given that we're at the low point in the interest-rate cycle,” Wilson said. “When rates go up, we'll reinvest and that should increase margins.”

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Allstate bets on timber, property to boost annuity returns

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