allstate 2002 Summary Annual Report

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allstate 2002 Summary Annual Report

  1. 1. The Allstate Corporation 2002 Annual Report, Notice of Annual Meeting and Proxy Statement Our time. Our opportunity. The Allstate Corporation The Allstate Corporation 2002 Annual Report, 2775 Sanders Road Notice of Annual Meeting and Proxy Statement Northbrook, IL 60062-6127
  2. 2. After more than 60 years as part of Sears, Allstate became a publicly traded company almost a decade ago. Since then we’ve seen our customers through storms and accidents, earthquakes and hurricanes, bull markets and bear. Along the way, we’ve grown the company. We’ve focused more intently on the things we do best, and expanded the ways we reach and serve customers. We’ve staked out leader- ship positions in the evolving field of financial services. Now we’ve set even higher goals. And we’re better prepared and better positioned than ever. So the mission going forward is clear: One by one, we will deepen relationships with cus- tomers to help provide financial security for millions of American households. That’s the challenge. That’s the opportunity. That’s Allstate in the next decade and beyond. Table of Contents Financial Highlights 1 Message from the Chairman 2 Financial Section 17 At a Glance Product Alternatives 22 Our People 23 Board of Directors 24 Senior Management Team 24 Notice of Annual Meeting and Proxy Statement Shareholder Information inside back cover
  3. 3. Financial Highlights $ in millions, except per share data 2002 2001 % change $÷29,579 $÷28,865 2.5 Revenues 1,134 1,158 (2.1) Net income Operating income1 2,075 1,492 39.1 $÷90,650 $÷79,876 13.5 Investments 117,426 109,175 7.6 Total assets 17,438 17,196 1.4 Shareholders’ equity Per diluted common share: $÷÷÷1.60 $÷÷÷1.60 — Net income 2.92 2.06 41.7 Operating income 0.84 0.76 10.5 Dividends declared Market value per share: $÷÷36.99 $÷÷33.70 Close 41.95 45.90 12-month high 31.03 30.00 12-month low Revenues Total assets ($ in billions) ($ in billions) 30 120 29.58 117.43 29.13 28.87 109.18 28 110 104.81 26 100 24 90 22 80 2000 2001 2002 2000 2001 2002 Operating income Net income per diluted common share ($ in billions) (In dollars) 3.00 4.00 2.95 2.25 3.00 2.08 2.00 1.49 1.50 2.00 1.60 1.60 .75 1.00 0 0 2000 2001 2002 2000 2001 2002 1 Operating income is a measure used by Allstate management, which is not based on generally accepted accounting principles (“non-GAAP”), to supplement its evaluation of Net income. Operating income is “Income before dividends on preferred securities and cumulative effect of changes in accounting principle, after-tax”, excluding the effects of Realized capital gains and losses, after-tax, and Gain (loss) on disposition of operations, after-tax. In this computation Realized capital gains and losses, after-tax is presented net of the effects of Allstate Financial’s deferred policy acquisition cost amortization and additional future policy benefits, to the extent that such effects resulted from the recognition of Realized capital gains and losses. Further information and a reconciliation of Operating income to Net income appear in the Definitions of Non-GAAP and Operating Measures section of Appendix D of the Notice of Annual Meeting and Proxy Statement, beginning on page D-3. “This annual report contains forward-looking statements about Allstate, including statements about its profitability and the impact of Strategic Risk Management. These statements are subject to the Private Securities Litigation Reform Act of 1995 and are based on management’s estimates, assumptions and projections. Actual results may differ materially from those projected in the forward-looking statements for a variety of reasons. For example, profitability could be affected by loss costs in our Property-Liability business, including losses due to catastrophes such as hurricanes and earthquakes in excess of management’s projections. Also, the number of customers priced through SRM could be less than projected by management if competitive pressures lead to sales of private passenger auto and homeowners insurance that are lower than projected by management. Readers are encouraged to review the other risk factors facing Allstate that we disclose in our annual report to the Securities and Exchange Commission on Form 10-K. We undertake no obligation to publicly correct or update any forward-looking statements.” 1
  4. 4. Message from the Chairman Edward M. Liddy Chairman, President and CEO The Allstate Corporation On behalf of our Allstate employees and dedicated agencies, I am pleased to report that your company had a very good year in 2002. We significantly improved our financial results, while some of our competitors continued to struggle. This has enabled us to advance our strategy of helping to protect and secure the financial future of our customers, and enhanced the value of your shares. Just as important, we continued to transform Allstate by getting better and bigger in the personal lines insurance market and by broadening our financial services offerings. By doing so, we were able to give our customers more ways to protect and grow their assets. Allstate’s successful implementation of our business plan should provide for more predictable and sustained growth, create additional opportunities for our employees and agencies and ultimately translate into a reliable and rewarding picture for our investors. In a time of corporate mistrust, you should feel confident that your board worked diligently over the past year to further strengthen our corporate governance processes. These processes were recently recognized by a leading investor services group as being among the very best in corporate America. With the 10-year anniversary of our initial public offering only months away, Allstate is well-positioned for both accelerated growth and sustained profitability. Over the past decade, we have continuously refined our strategy to At the core of our company are only two Having the assurance of one of the meet the ever-changing expectations of things: people and capital. With the right industry’s strongest balance sheets helps the marketplace. people and sound stewardship of our give us, and our customers, that confi- We have broadened our business so financial resources, we can confidently dence. But more importantly, I’m fortunate that, as we reach out in new directions, deliver on our promise - to give our cus- to work with the finest employees and our journey will take us both further and tomers peace of mind by protecting their agencies in the business, and to have the faster in our quest to reassure you, our property and their lives, and to help them support and good sense of the best man- shareholders, that Allstate has the right achieve financial security. agement team in the insurance industry. strategy at the right time. Our perfor- Together, we have fashioned a strategy mance in 2002 represents another that worked very well in 2002, and has us milestone in achieving those goals that readied for the future. we set for ourselves and we’ll endeavor to I’m honored to lead the work ahead. build on those accomplishments in 2003. 2
  5. 5. Allstate today has a window of opportunity we can use to strengthen and consolidate our competitive position. We’re determined to seize that advantage. Execution will be the key. 2002 Results 2002. Total return for the year increased In financial services, our mix of busi- • As usual, numbers help tell the story: 12.3 percent over 2001, compared with an ness likewise is expanding from a average loss of 22 percent among compa- primary reliance on life insurance In our Allstate brand standard auto • nies in the Standard & Poor’s 500 (S&P), as products toward more asset accumu- insurance, our largest single product, well as outperforming all insurance indices lation products across a range of Premiums written2 rose 5.9 percent that S&P tracks. Your dividend increased distribution channels. last year and loss ratios moderated for the ninth straight year, while we com- We continue to refine our organization • compared with 2001. pleted one share repurchase program and to reflect the company’s business The improvement was even more • authorized another in early 2003. strategy. In September 2002, we dramatic in our Allstate brand home- Of course, not everything was perfect. joined our Allstate property and casu- owners product, where Premiums We had our challenges: Declining inter- alty and Ivantage businesses to written were up 18 percent. As est rates reduced our investment income leverage their resources. We intend to promised, we’re on track to bring prof- and, as a result of deteriorating capital strengthen and deepen the relation- itability to targeted levels by mid-2003. markets, losses on securities in our ships with agencies and customers in Our Ivantage independent agency • investment portfolio cut into Net income. both channels. business increased Premiums Elsewhere, regulation and other fac- Our protection claims organization • written by 4.5 percent and cut its tors slowed opportunities for growth in successfully completed a national Underwriting loss3 approximately in key states such as California, Texas and consolidation of claims offices, sub- half. We’re on schedule to achieve Florida. Issues like medical inflation and stantially reducing overhead costs targeted levels of profitability. mold claims, as well as adverse trends in while allowing us to focus our people In financial services, we performed environmental and asbestos litigation, and resources on front-line customer • well despite one of the most difficult caused us to strengthen reserves. service and severity control. market environments in memory. In all of these areas, we acted quickly This progress reflects the effort and to confront concerns. We did the same Overall Property-Liability Premiums expertise of everyone in the organization. with respect to rate increases in auto and written rose 5.8 percent and Operating Change is never easy, even when it’s homeowners. Because we were ahead income jumped 54.8 percent, driven working. But what we’ve accomplished of the industry curve, we are hitting largely by decisive pricing and risk man- has created real momentum. Allstate profitability targets faster and gaining agement actions. Premiums and today has a window of opportunity we greater strategic flexibility than many of deposits4 in our Allstate Financial busi- can use to strengthen and consolidate our competitors for 2003 and beyond. ness rose 11.6 percent and Operating our competitive position. Other trendlines are pointed in income gained 5.5 percent. We’re determined to seize that similarly positive directions: For the company as a whole, advantage. Execution will be the key. Operating income increased 39.1 per- In our protection business, the focus Underlying our better, bigger and • cent, from $1.49 billion to $2.08 billion. of our customer base is shifting. We’re broader strategy are seven priorities that A solid performance. increasing the number of more prof- will help make Allstate the company cus- These accomplishments helped drive itable customers while decreasing the tomers prefer to help bring alive their up the value of your Allstate stock during number of less profitable ones. version of the American Dream. 2 Premiums written is used in the property-liability insurance industry to measure the amount of premiums charged for policies issued during a fiscal period. Premiums are considered earned (“Premiums earned” is a GAAP measure) and are included in financial results on a pro-rata basis over the policy period. Further information and a reconciliation of Premiums written to Premiums earned appear in the Definitions of Non-GAAP and Operating Measures section of Appendix D of the Notice of Annual Meeting and Proxy Statement, beginning on page D-3. 3 Underwriting income (loss) is a non-GAAP measure used by Allstate management to supplement its evaluation of Property-Liability Net income. Underwriting income (loss) is Premiums earned, less Claims and claims expense (“losses”) and underwriting expenses as determined using GAAP. Further information and a reconciliation of Underwriting income to Net income appear in the Definitions of Non-GAAP and Operating Measures section of Appendix D of the Notice of Annual Meeting and Proxy Statement, beginning on page D-3. 4 Premiums and deposits is an operating measure used by Allstate management to analyze production trends for Allstate Financial sales. Premiums and deposits includes premiums on insurance policies and annuities, and all deposits and other funds received from customers on deposit-type products which are accounted for by Allstate as liabilities, rather than as rev- enue, including the net new deposits of Allstate Bank. Further information and a table illustrating where Premiums and deposits are reflected in the consolidated financial statements appear in the Definitions of Non-GAAP and Operating Measures section of Appendix D of the Notice of Annual Meeting and Proxy Statement, beginning on page D-3. 3
  6. 6. Designers Insurance Agency, Fairfax, Va. – Agent Wally Arcayan’s outbound marketing results have been aided by ECRM. “My team is more targeted in its outreach,” says Arcayan. 4
  7. 7. 1. Meeting Customer Needs “Putting the customer first” is too often an empty promise. Mistrust in the marketplace is real, and it creates problems for many companies. But it also creates opportunities for those who can consistently meet and exceed expectations. Allstate is working to be that kind of company. In the recent era of rapid growth and mass products like auto and homeowners with customers in ways that help us marketing, many businesses believed the insurance to providing for their future understand and anticipate customers’ key to success was “pushing product.” financial security with savings and current and future needs. One tool Many companies still do. But it’s a strategy investment opportunities. we’re testing is Enterprise Customer out of sync with today’s realities. And we’re constantly assessing Relationship Management (ECRM). We know the only way for Allstate market trends to introduce new products. It’s a technology that helps us better to win in a crowded and competitive In 2002, for example, we redesigned understand our customer needs, marketplace is to understand and meet some long-term care and life insurance especially in response to significant customer needs, one-on-one, better than policies and introduced important new life events. It gives our agencies, our anyone else in the business. So we’re annuity features for customers. Web site and our telephone centers a constantly studying what matters most to We also offer alternatives in terms of better ability to interact with our cus- our customers – what attracts them, sat- accessibility. We’re available to customers tomers in a more personal manner. isfies them and keeps them coming back. through Allstate’s exclusive agency By tapping into true needs rather For example, research shows that network, the Internet and our toll-free than simply pushing product, we Allstate customers closely associate our telephone number. Moreover, customers intend to draw on the reservoir of traditional protection products with other can also buy Allstate products through consumer goodwill that we know financial services. But to help make that independent agents, banks and financial exists. Customers want to be satisfied, connection a reality, we have to offer a services firms. to be delighted, to be loyal. Our job is spectrum of financial solutions – from To succeed, we must pull together our to help make that possible. protecting their current assets with various products and ways to interact 5
  8. 8. 2. Help Middle America Achieve Financial Security But who are our customers? They are teachers, firefighters, professionals from all walks of life. Mostly they are middle-income Americans who want and need better protection and retirement planning. Many have been ignored or intimidated by traditional financial services companies. And with relationships with one out of six American households, Allstate is in a unique position to help them achieve financial security. Steinbacher residence, Marysville, Wash. – Commercial tradesman Jason Steinbacher and wife Andrea (with newborn daughter Malia) think they will move to a larger home soon, and they intend to seek out their agent Bruce Pleasant when they start planning for Malia’s education costs. 6
  9. 9. Personal Financial Representatives. More Our focus is clear. Allstate does not want than a third also regularly partner with to be all things to all people in financial Allstate’s Exclusive Financial Specialists services. We want to be more things to (EFS) – more than 1,000 professionals more people. So we don’t plan on being who focus solely on life insurance and a player in the consumer finance or bro- financial, rather than property/casualty, kerage businesses, for example. Instead products. we focus on areas adjacent to our exist- The strategy is already working. ing business – asset protection, asset New sales of financial products by accumulation and life insurance and sav- Allstate exclusive agencies5 reached ings. Within our overall customer base, $1.6 billion in 2002 – more than in the we likewise focus on an underserved three previous years combined. segment of the financial services market- In addition to life insurance, annuities place. Households earning between and mutual funds, we offer insured $30,000 and $100,000 a year have an savings accounts, certificates of deposit, aggregate income of $3.1 trillion. Like insured money-market accounts and most Americans, they want to build other savings and lending products assets for a home, for college education through our Allstate Bank. Deposits have and especially for retirement. grown rapidly, reaching $610 million in Our protection business gives Allstate less than 18 months. It’s one more way a great place to start – because of our we’re reaching customers with new brand name and large customer base. solutions that fit their financial futures. Also, because insuring assets like homes and cars is the first step toward financial security. But to build on that base for the future, we must make the most of our existing customer relationships. That’s where our Allstate agencies play a critical role. They have answered the challenge and broadened their expertise. More than half have studied, tested and are licensed to sell a broad range of financial products. We call them 5 New sales of financial products by Allstate exclusive agencies is an operating measure used by Allstate management to quantify the current year sales of financial products by the Allstate proprietary distribution channel. New sales of financial products by Allstate exclusive agencies includes annual premiums on new insurance policies, initial premiums and deposits on annuities, deposits in the Allstate Bank, sales of other com- pany’s mutual funds and generally excludes renewal premiums. Further information appears in the Definitions of Non-GAAP and Operating Measures section of Appendix D of the Notice of Annual Meeting and Proxy Statement, beginning on page D-3. 7
  10. 10. 3. Improve Agency Relationships Meeting customers’ needs and helping them achieve financial security is everyone’s job at Allstate, but the people customers see most – the faces and voices of our company in the community – are Allstate agencies and EFSs. The Parthenon, Nashville, Tenn. – Dennis Smith was among the first agents to secure his Series 6/63 licenses. Smith also has partnered with Allstate to develop new ways for agencies to manage their businesses more efficiently. 8
  11. 11. Allstate’s local presence is a long-stand- compensation to strategies that ing strategic advantage, and it will be just produce more profit for the agency as important in the future. But running and for the company, we’ll help an agency is harder than it used to be. motivate and encourage agencies Competition is keener, costs keep rising to build their businesses. We’re working in other ways, and the industry keeps changing. too. Because so many agencies We’ve made some changes too. In are active as volunteer leaders in recent years, for example, almost all their communities, we’re increasing Allstate employee agencies have made financial and other support for local the shift to independent contractors. community efforts. Likewise, we asked our agencies to All this represents progress. But become educated on new products, we need to do much more. Nationally new processes, new technology. To be the trend is toward larger agencies competitive, all these changes were with more support staff. So, for essential. But they still were wrenching. agencies, finding and training more So now, more than ever, our job at employees, organizing businesses for Allstate is to help make the work of our greatest efficiencies, and financing agencies easier, not harder. And to give growth initiatives all are issues we them more ways to win. must help them address. By listening One way we can help is by providing harder to them, and working harder more opportunities to sell more products with them, we’ll help create more to more customers. Our expansion into opportunities for them. financial services, for example, is broad- ening their revenue base. We’ll also help by expanding local agency advertising and marketing programs in 2003. We’ll make more tech- nology enhancements available, based upon guidelines and feedback from agencies themselves. And, by linking 9
  12. 12. 4. Deepen Relationships With Our Financial Partners Allstate exclusive agencies serve one of the biggest customer bases in the business, with a presence in 14 million American households. But the other 90 million-plus U.S. households need financial services too. To be a leader, we must be able to serve consumers who prefer to do their financial business through other channels. Allstate reaches these consumers in a We’re also diversified in terms of in sales in just nine months. Some variety of ways. Approximately 80,000 products we can offer customers – from of its features are so unique we’ve even independent agents and financial plan- traditional life insurance to mutual funds applied for a patent. ners sell Allstate products under the to annuities and 529 college savings Another growing distribution Lincoln Benefit Life name. We also pro- plans. And we’re constantly adding to channel focuses on workplace market- vide Allstate Financial products through a our portfolio based on feedback from ing. Allstate’s Workplace Division sells wide range of blue-chip financial services consumers and producers. Product life insurance, disability and supplemen- firms, including many of the largest development at Allstate today is faster tal insurance coverage through national and regional investment advisory and more focused. independent agencies to employees at One example is the Allstate® firms and banks, as well as through inde- more than 20,000 small and mid-sized pendent insurance agents and Treasury-Linked Annuity, which com- businesses across the country. brokerages. bines the safety and security of a fixed All told, these non-proprietary chan- Diversified distribution is good annuity with the opportunity for growth, nels accounted for 80.2 percent of the for growth. In 2002, for example, total based on the five-year U.S. Treasury yield. total Premiums and deposits generated Premiums and deposits in the bank Based on extensive investor research by the Allstate Financial business unit channel rose 38 percent, easily surpass- and developed by a cross-functional in 2002. Our aim is to continually ing projections. Today, Allstate ranks team of Allstate Financial and Allstate strengthen these relationships by Investments professionals, the Allstate® third in life insurance, sixth in fixed annu- offering more products and generating ity and eighth in variable annuity sales more revenue with our successful Treasury-Linked Annuity was launched through banks. producer-partners. in February 2002. It recorded $762 million 5. Simplify Doing Business With Allstate Reaching customers through Allstate agencies or other distribution chan- nels is only the beginning. To succeed, we need to nurture customer relationships. Every interaction is an opportunity to serve, satisfy and retain their loyalty. So we need to provide real solutions and support – no matter what, where or when. Our most important interactions with the claims experience faster, better and innovative Sterling Autobody Centers, customers involve claims. So we’re con- more attuned to customer needs. which offer customers the option of hav- stantly seeking innovative ways to make For example, we expanded our ing Allstate-owned facilities repair their 10
  13. 13. Allstate Customer Information Center, Charlotte, N.C. – Allstate CICs provide extensive upfront and ongoing training to elevate and maintain strong customer service skills. (Instructor Charlotte Tucker pictured.) phone centers answered more than 50,000 calls for agencies that were closed the day after Thanksgiving last year. Our Customer Information Centers (CIC) offer all the services available autos. Compared with traditional a wealth of services and information, on our Web site and more. All told, alternatives, Sterling Autobody including paying a bill, reporting a claim, 1-800-Allstate handled nearly 10 mil- Centers have substantially lower purchasing a policy, viewing policy lion calls last year from claims reports repair times. Plans call for continued information or learning about invest- to agent referrals. expansion in 2003 and beyond. ment-planning basics. It’s already a powerful partnership. Beyond claims, customers have The response has been positive. Allstate.com and 1-800-Allstate help more routine interactions such as Registration for our online Customer handle many routine service tasks, policy changes or bill payments. And Care Center more than doubled during freeing agencies to focus more on they want to do them on their time, 2002. Nearly nine of 10 visitors were building relationships and satisfying on their terms. We try to make that either very or completely satisfied with customers. They also bring new as easy as possible. the overall experience. customers into agencies. Our focus So we’re continually expanding our Like our Web presence, 1-800-Allstate will be to continue to leverage this online presence at allstate.com. Most is available to customers 24 hours a day, relationship with Allstate agencies American customers can choose from seven days a week. For example, our tele- and Exclusive Financial Specialists. 11
  14. 14. Leaving school, Scottsdale, Ariz. – Persistent work by agent Chris King and more flexible SRM auto policy pricing won back working mother of two Audrey Contreras from a competitor. Contreras has auto, renters and life policies with Allstate. 12
  15. 15. 6. Achieve Profitable Growth Focusing on customers first is the surest way to build our business. But as we expand, we must keep a close eye on our bottom line and our capital as well. It all starts with our Strategic Risk to total policies in force. The same is true created a separate property/casualty Management (SRM) tool that integrates when we sell more policies to the same company in New Jersey to deal with underwriting, pricing and marketing number of customers. profitability issues. Today, Allstate to help attract and retain the right cus- It’s also important to remember that New Jersey is profitable and growing. tomers with the right products at the the impact of SRM is cumulative. Today, We’re currently looking at this and right price. In particular, SRM helps us customers priced through SRM repre- other options in states where we face attract and keep high-lifetime-value cus- sent about 25 percent of our total similar profitability challenges. tomers – the kind who are more likely to business. Within five years, they will Finally, generating profitable renew their policies and buy more prod- account for two-thirds, and the cumula- growth requires that we be highly ucts from Allstate. tive effects will be significant. One visible in the marketplace. That’s In one 22-state sample, for instance, example: High-lifetime-value customers why late last year we dramatically the share of new standard auto customers are renewing their policies today at a rate increased advertising and marketing in high-value segments increased from 1 percent to 2 percent higher than other spending, with a focus on encourag- 28 percent to 43 percent. Retention rates customers. Over 10 years, that could ing current single-line customers to in those segments are higher. And those mean substantially fewer defections. become multi-line customers. We’ll customers buy more, too. In the same Moving forward, we know profitability, build on that marketing momentum in study, cross-sell results were 51 percent growth and acceptable returns can live 2003 and supplement national efforts more in higher-value segments. together, even when the need arises to with local plans in key markets. The long-term benefits are obvious: adapt to different regulatory and market When we lose fewer customers, we add conditions. In 1998, for example, Allstate 13
  16. 16. Allstate Investments trading floor, Northbrook, Ill. – A 100-member investments team actively manages the company’s investment decisions. 14
  17. 17. 7 Maintain Our Financial Strength . Supporting growth – in our customer base, in our distribution networks and in our product portfolio – is the financial strength that has made us a stable company for decades. When we tell our customers, our investors and our ® employees, “You’re In Good Hands with Allstate, ” the commitment carries with it an awesome responsibility. While some companies today find their resources and reputations declining, financial strength ensures that Allstate will be able to keep its promises. than most. In 2002, for example, our Strength comes from strategy and investment writedowns, while substantial, focus. Since our public offering, we sold amounted to only one half of 1 percent of non-core businesses, including large the average portfolio for the year. And commercial accounts, reinsurance and while the major rating agencies down- mortgage insurance. That channeled our graded the life operations of many other energies and resources to markets where companies in the industry, our ratings we had the best chance of winning, while from A.M. Best Company, Moody’s limiting our catastrophe exposure and Investors Service and Standard & Poor’s shielding our asset base against multi- remained unchanged at the same high billion-dollar losses. levels that we have consistently enjoyed Financial strength comes from over the past five years. sound governance, transparency and a Finally, financial strength comes from commitment to integrity. Our board is always being conscious of costs. In 2002, recognized as one of the most indepen- our Property-Liability expense ratio dent in America. In recent years we’ve declined again, from 23.9 percent to increased the transparency of our finan- 23.3 percent. The reduction reflected cial reporting. What’s more, we operate premium increases and companywide in one of the most regulated industries efforts by individuals at all levels. Six anywhere. Our principles, accounting Sigma initiatives implemented in Allstate and otherwise, are sound. So when I sign Financial and a more rigorous procure- our financial statements every quarter, ment governance process also yielded I do it with a steady hand. incremental savings. Strength also comes from sound Staying true to these priorities while investment decisions that help improve making prudent moves to ensure that our returns for shareholders. Allstate reserves are sufficient to address liquidity Investments, LLC, an Allstate subsidiary, requirements will help keep us financially manages our $91 billion portfolio. We strong far into the future. believe in being diversified and value- oriented. While almost no one emerged unscathed from economic downturns in recent years – Allstate fared far better 15
  18. 18. Looking Ahead Clearly, we have a full plate of initiatives going forward. Our agenda is ambitious, yet achievable. And our confidence in the future is bolstered by lessons from the recent past. In the near decade since becoming These attributes will continue to a public company, much has changed at serve us well. In many ways, Allstate Allstate. But several characteristics have today represents the best of both worlds. remained consistent: As a company with roots that go back more than 70 years, we have financial • We have an unwavering commitment strength and one of America’s finest to integrity. Our word is our bond. brands. Having functioned on our own • Our approach to change has been as a public company for nearly a decade, calculated, not haphazard. We built we’re becoming nimble enough to on our core strengths. respond to changing markets and • We place a premium on execution. customer preferences. We did what we said we’d do. The combination makes us a • We demonstrated a passion for formidable competitor. We’ll draw on success. Our employees have all of these resources as we expand our been able to embrace, and to operations and our opportunities in implement change. the years ahead. Sincerely, Edward M. Liddy Chairman, President and CEO 16
  19. 19. Financial Data Allstate operates from a strong provide insurance, investment and position financially, with $117.4 billion retirement products to 14 million house- in assets and shareholders’ equity of holds served through Allstate directly, $17.4 billion. Its main business units, and 2.5 million households served Property-Liability and Allstate Financial, through non-proprietary channels. Comparison of Cumulative Total Return For a $100 initial investment made as of December 31, 1997, 1998, 1999, 2000 and 2001. Allstate vs. Published Indices Allstate $175 S&P 500 163.27 S&P 500 Property/Casualty 150 126.98 125 112.26 104.59 97.08 94.91 100 90.24 88.80 88.68 89.14 81.98 78.03 75.64 75 68.79 62.57 50 25 0 Five-year Return Four-year Return Three-year Return Two-year Return One-year Return (Invested at 12/31/97) (Invested at 12/31/98) (Invested at 12/31/99) (Invested at 12/31/00) (Invested at 12/31/01) The chart above compares the cumulative performance of Allstate’s returns for an initial $100 investment made at the end of each of Operating income Revenues ($ in billions) ($ in billions) the preceding five year periods, with the performance of the S&P 500 and S&P 500 Property/Casualty indices. The chart shows the 3.00 30 29.58 changes in cumulative value of an initial $100 29.13 28.87 investment over the indicated time periods, assuming all dividends are reinvested quarterly. 2.25 28 2.08 2.00 1.49 1.50 26 .75 24 0 22 2000 2001 2002 2000 2001 2002 Net income ($ in billions) 3.00 2.21 2.25 1.50 1.16 1.13 .75 0 2000 2001 2002 17
  20. 20. Consolidated Financial Allstate provides insurance, investment DeerbrookSM Insurance brand property Highlights and retirement products to more than and casualty insurance products that 14 million households served through are sold exclusively through independent Allstate directly and 2.5 million house- agents. Allstate Financial products can holds served through non-proprietary also be accessed through independent channels, and has approximately 12,300 agents and representatives of banks exclusive agents in the United States and and securities firms. The consolidated Canada. Customers can access Allstate financial results of Allstate include its products and services through Allstate Property-Liability, Allstate Financial and agents, allstate.com and 1-800-Allstate. Corporate and Other business units. Ivantage includes EncompassSM and Revenues ($ in billions) Revenues increased to $29.58 billion in Net income declined to $1.13 billion in 2002 from $28.87 billion in 2001 due to 2002 from $1.16 billion in 2001 due to 30 29.58 29.13 increased Premiums earned in the higher realized capital losses when com- 28.87 Property-Liability business, Life and pared to 2001, and the cumulative effect 28 annuity premiums and contract charges of a 2002 change in accounting principle. in the Allstate Financial business and Net income per diluted common share in 26 Net investment income. Offsetting these 2002 was equal to 2001 as reduced Net increases was a higher level of net income was offset by the positive impacts realized capital losses in 2002 when of Allstate’s share repurchase program. 24 compared to 2001. Allstate repurchased 12 million shares totaling $446 million during 2002. 22 2000 2001 2002 Operating income increased to $2.08 billion in 2002 from $1.49 billion in 2001 Net income due to higher Operating income in both ($ in billions) Property-Liability and Allstate Financial. 3.00 2.21 2.25 1.50 1.16 1.13 .75 0 2000 2001 2002 Operating income ($ in billions) 3.00 2.25 2.08 2.00 1.49 1.50 .75 0 2000 2001 2002 18
  21. 21. Property-Liability Allstate’s Property-Liability business Highlights is the second largest personal property and casualty insurer in the United States. It is principally engaged in the sale of private passenger auto and homeowners insurance. Premiums written ($ in billions) Premiums written increased to $23.92 Operating income for Property- 23.92 billion in 2002 from $22.61 billion in 2001 Liability increased to $1.63 billion in 24 due to increases in the standard auto and 2002 from $1.05 billion in 2001. This 22.61 homeowners lines. These increases were increase was due to higher Premiums 21.86 22 due to increased premium rates, but were earned and lower catastrophe losses. partially offset by a decline in the number These factors were partially offset by 20 of policies. Increases in Premiums written higher insurance claims and claims in standard auto and homeowners were expenses and declines in Net investment partially offset by declines in Premiums income. During 2002, claims and claims 18 written in the Allstate brand non- expenses were affected by a higher aver- standard auto line related to the imple- age cost per claim, which was partially 16 mentation of programs to address offset by a lower rate of claim occurrence. 2000 2001 2002 profitability trends in this line. Outlook Property-Liability will continue Net income Net income for Property-Liability to seek approval for rate changes wher- ($ in billions) increased to $1.27 billion in 2002 from ever and whenever it’s appropriate, and 2.4 $926 million in 2001. This increase was the to pursue other actions such as under- result of higher Operating income, par- writing process improvements, that will 1.86 tially offset by increased realized capital promote a targeted level of profitability. 1.8 losses and the Cumulative effect of a Strategic plans are also in place to 1.27 change in accounting principle. increase the retention of current cus- 1.2 tomers, increase the number of agents 0.93 and market to a focused group of con- .6 sumers who are best able to provide profitable growth. 0 2000 2001 2002 Operating income ($ in billions) 2.4 1.8 1.63 1.54 1.2 1.05 .6 0 2000 2001 2002 19
  22. 22. Allstate Financial Highlights The Allstate Financial business provides life insurance, investment and retirement products through Allstate agents, inde- pendent agents and representatives of banks and securities firms. Premiums and deposits ($ in billions) Premiums and deposits increased to ments for prior year tax liabilities and the $11.83 billion in 2002 from $10.61 billion elimination of goodwill amortization due 16 in 2001 due to an increase in fixed annu- to an accounting change. These ity sales and an increase in deposits at increases were partly offset by higher 12.25 11.83 12 10.61 the Allstate Bank. These increases were Amortization of deferred policy acquisi- partially offset by a significant decline in tion costs related to variable annuities 8 sales of institutional products reflecting resulting from the equity market environ- unfavorable credit market conditions, and ment during 2002, and increased variable annuities caused by poor equity Operating costs and expenses. 4 market performance. Outlook Allstate Financial will continue 0 Net income for Allstate Financial to manage its investment margin to 2000 2001 2002 declined to a loss of $22 million in 2002 maintain profitable spreads between from Net income of $363 million in 2001. investment yields and interest crediting Net income This decrease was the result of the rates on its inforce products. Manage- ($ in millions) Cumulative effect of a change in ment will also continue to evaluate the 600 accounting principle and higher realized investment environment and manage capital losses in 2002 compared to 2001. product pricing to ensure that new prod- 469 uct sales generate acceptable returns. 450 Operating income for Allstate Allstate Financial will continue to 363 Financial increased to $556 million in strengthen its relationships within its 300 2002 from $527 million in 2001. This current distribution channels by enhanc- increase was due to new product sales, ing its focus on key distribution partners management actions to improve the 150 and Allstate agents. gross investment margin, which is the margin earned on investments in excess (22) 0 of interest credited on policies, adjust- 2000 2001 2002 Operating income ($ in millions) 600 556 527 520 450 300 150 0 2000 2001 2002 20
  23. 23. Investments Highlights Investment Growth Fixed Income Portfolio Quality Consolidated investment balances Allstate’s fixed income portfolios are both Allstate Investments, LLC is a increased to $90.65 billion in 2002 highly-diversified and of high quality. On wholly-owned subsidiary of The Allstate from $79.88 billion in 2001, or 13.5%, a consolidated basis, approximately 93% Corporation responsible for managing primarily due to increased cash flows of Allstate’s fixed income assets are of the invested assets of the principal busi- from growth in operations, as well as investment grade quality. Allstate consid- ness units, Property-Liability and Allstate increased unrealized gains in fixed ers a security investment grade when it Financial. Allstate Investments, LLC income assets generated in a lower has received a rating from the National works closely with Allstate’s business interest rate environment. Association of Insurance Commissioners units to design effective market and of 1 or 2, a Moody’s rating of Aaa, Aa, A credit quality, liquidity and asset alloca- or Baa, or a comparable internal rating. tion strategies that will most effectively Investment Growth ($ in billions) The high quality nature of the portfolios support their business objectives. Property-Liability provide the foundation for the risk man- Allstate is a major investor in many Allstate Financial 100 Corporate and Other 90.65 agement framework that best meets domestic securities markets and partici- 79.88 each business unit’s financial objectives pates in several international investment 74.48 75 and risk tolerance levels. markets. Working within a comprehen- sive risk management framework, Allstate’s team of dedicated investment 50 Distribution of Fixed Income Assets professionals takes an active market by Credit Quality (In Percent) stance in pursuit of generating returns At Dec. 31, 2002: 25 in excess of appropriate benchmarks in Investment Grade Aaa/Aa/A support of the Company’s overall 86% 0 financial objectives. 2000 2001 2002 63% Asset Allocation 72% Allstate’s consolidated allocation of Net Investment Income Investment Grade Baa assets is designed to best support the Allstate’s consolidated Net investment 8% needs of its business units. Allstate’s income for 2002 increased to $4.85 billion portfolio of invested assets is heavily 29% from $4.80 billion in 2001, or 1.2%, pri- weighted towards fixed income securi- marily due to higher investment balances, 21% ties. Fixed income securities provide the but partially offset by lower yields on pur- most effective match to the business chases of new fixed income securities. Below Investment Grade Ba units’ financial objectives while best Investment strategies are focused on 3% supporting Allstate policyholder claim achieving consistent growth in invest- payments. The balanced allocation 5% ment income within the context of overall across both fixed income and equity 4% asset growth and available market yields. markets performed well during the unique and volatile capital markets that Below Investment Grade B or Lower Net Investment Income existed during 2002. 3% ($ in billions) Property-Liability At Dec. 31, 2002: 3% Allstate Financial 6.0 Corporate and Other Total Corporation Property-Liability $90.65 billion Allstate Financial 3% 4.85 Consolidated 4.80 Taxable Fixed Income 63% 4.63 4.5 Tax-Exempt Fixed Income 22% Commercial Mortgage Loans 7% 0 20 40 60 80 0 10 Equity 4% Outlook The continued presence of a 3.0 Other 4% soft economy, geopolitical risks and his- Property-Liability torically low interest rates will present a $34.25 billion 1.5 Taxable Fixed Income 30% challenging investment climate in 2003. Tax-Exempt Fixed Income 56% Allstate believes a disciplined approach Equity 10% to risk management and asset allocation 0 Other 4% combined with an active management 2000 2001 2002 Allstate Financial philosophy will continue to serve Allstate $55.26 billion well in the coming year. Taxable Fixed Income 84% Commercial Mortgage Loans 11% Other 5% 21
  24. 24. At a Glance Product Alternatives Allstate offers a wide range of protection and savings tools that work together to achieve 5. Wealth Transfer financial security. Estate planning products: Fixed Survivorship Life Insurance Variable Survivorship Life Insurance 4. Asset Management and Accumulation Fixed Annuities Variable Annuities Single Premium Immediate Annuities Universal Life Insurance Variable Universal Life Insurance 5. Structured Settlement Annuities Mutual Funds IRAs Roth IRAs SIMPLE IRAs SEP IRAs 529 Plans Coverdell Education Savings Accounts 3. Short-term Financial Objectives Checking Accounts 4. Savings Accounts Certificates of Deposit Money Market Accounts Mortgages 2. Family Life Protection Term Life Insurance Universal Life Insurance Variable Universal Life Insurance Long-term Care Insurance 3. Disability Insurance 1. Asset Protection Auto Insurance Homeowners Insurance Condominium Insurance Renters Insurance Scheduled Personal Property Commercial Auto Insurance Customizer-Small Business Owner Insurance 2. Landlord Package Insurance Mobile Home Insurance Motorcycle Insurance Boat Insurance Personal Excess Liability Insurance Emergency Roadside Service Plans 1. 22
  25. 25. Our People The success of any business rests on We are pleased to receive confirma- the shoulders of its people. That’s particu- tion externally that we’re on the right larly true in a business like ours. Our track with our employment practices and product is our people and the service they work environment. Allstate has been rec- deliver each and every day. ognized repeatedly in various Allstate has long understood the publications including: CAREERS & the relationship between company perfor- disABLED, Fortune, Hispanic, LATINA mance and an effective work environ- Style, Money, Training Magazine and ment that recognizes and rewards per- Working Mother. formance while enabling employees to And, while we’re proud of the recog- pursue personal and professional goals. nition, we know we can’t rest on our Allstate offers a distinctive employ- laurels. Our workforce is a competitive ment opportunity including an inclusive advantage. Employees have the opportu- and effective work environment that nity on a regular basis to provide their ensures dignity and respect for all indi- feedback through a survey process viduals, competitive pay and benefits, designed to monitor the effectiveness of opportunities for development, and qual- our work environment. We continually ity leadership – all designed to attract the look for ways to improve the work envi- brightest new talent and retain and moti- ronment and provide the tools our vate our skilled workforce. employees need to be successful. A Diverse Workforce Shown are minority and female employee percentages of the company’s total U.S. workforce Source: EEO-1 report, December 2002 Total Total Total African Total Total Asian/ Total Native Total Number by Female American Hispanic Pacific Islander American Minority Job Category Category Percent Percent Percent Percent Percent Percent Officials & Managers 5,614 41.6 11.8 5.0 2.7 0.4 19.9 Professionals 18,789 49.2 13.2 6.0 5.0 0.4 24.5 Technicians 30 3.3 6.7 3.3 3.3 0 13.3 Sales Workers 209 18.7 9.1 4.3 3.8 0.5 17.7 Office Workers 13,779 84.1 24.0 10.2 3.1 0.4 37.8 Craft Workers 98 8.2 10.2 18.4 4.1 0 32.7 Total Workforce 38,519 60.3 16.8 7.4 4.0 0.4 28.6 Data as of 12/22/02 (Employee counts only. Exclude EAs, EFSs & IAs) 23

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