Allstate 2005 Annual Report Download - page 6

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Shareholders expect us
to ask tough questions
about the exposures we
face and manage them
aggressively to deliver
consistent earnings. In
the aftermath of
Hurricanes Katrina,
Rita and Wilma, two
questions warranted
close attention.
First, why were
Allstate’s losses so
significant in Louisiana
and Mississippi?
Katrina’s wide path
and unusual severity
meant high payouts
on the hundreds of
thousands of homes
we insure there.
Reinsurance could
have softened the blow,
as it did in Texas, for
Hurricane Rita. When
we considered our expo-
sures on an enterprise-
wide basis, before the
2005 hurricane
season, we chose to
invest our reinsurance
dollars in high-density
coastal areas where our
financial exposure is
much higher—and
where the probability
of payback is greatest.
Second, what will
we do in the future to
mitigate this risk so we
can continue to generate
reliable earnings growth
and increase our returns
on capital? Each major
storm teaches us new
lessons— and makes us
better able to manage
risks. We factor new
data into our risk
management strategy,
including recent find-
ings that point to a
period of more frequent
and severe hurricanes.
We purchased country-
wide reinsurance that
will reimburse Allstate
for $2 billion of losses
in excess of $2 billion
for named storms,
earthquakes and fires
following earthquakes
in all states except
Florida. We also pur-
chased as additional
protection from hurri-
canes in Florida $900
million of reinsurance in
excess of amounts recov-
erable from the Florida
Hurricane Catastrophe
Fund. In some other
states, we’re purchasing
more reinsurance to
reduce our exposures.
In other markets,
we’re increasing rates
and deductibles on our
homeowners policies
and limiting new
business writing.
In markets where we
cannot adequately cover
our risks, we may be
able to help customers
find alternative coverage
while we focus instead
on auto and financial
services products.
Though we can’t control
the weather, we can
and will mitigate the
weather’s impact on our
business. As a result,
we expect our long-term
exposure will decline.
Moreover, we’re
calling for public policy
change and a more
rational approach to
how Americans prepare
for and protect them-
selves against the
devastating and highly
unpredictable effects of
catastrophes.
In 2006 these efforts
will expand and acceler-
ate. By re-examining
our catastrophe risk
on an ongoing basis,
we can protect our
business and generate
more consistent share-
holder returns.
Re-examining Risk
By staying close to our
customers and markets,
we’re growing our
customer base in a
highly competitive
market. We compete
aggressively for high
lifetime value insurance
customers in multi-line
households. But it takes
more than price to win.
To attract and retain
profitable customers,
we also continue to
develop our product
mix to meet their needs
and back these products
with fast response,
financial strength and
integrity. In addition,
we anticipate and
respond to demo-
graphic, regulatory and
market trends to find
new ways to connect
with consumers. For
example, over the last
five years we’ve doubled
our investment in multi-
cultural advertising.
We’re also aggressively
tapping such channels
as NASCAR, Olympic
and college football
sponsorships and
placing greater emphasis
on cable TV, the
Internet and customer-
experience activities.
Finding New
Opportunities
Managing an Unpredictable Market Allstate responded
to the severe
catastrophes of
2005 with speed,
efficiency and
compassion.
We also worked
to decrease our
exposures and
applied leadership
and innovative
thinking to create
a better business
climate.
Letter to Shareholders