Allstate 2011 Annual Report Download - page 2

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proactive actions protected allstate
Looking back to 2007, the U.S. economy was growing,
investment markets were stable and we had a relatively light
year of catastrophe losses. Our concern at the time was that
our growth strategy was not yielding strong enough results
and the investment markets were overleveraged. In response,
we introduced Our Shared Vision to reinvent protection and
retirement for the consumer. Our belief at the time
— which
remains so today
— was that we must differentiate ourselves
from the competition by putting the customer at the center of
our business model. In my letter that year, I also talked of how
we instituted a risk mitigation and return optimization program
and began reducing our investment holdings in financial
institutions and real estate. We finished 2007 with strong
financial results, as net income was $4.6 billion. The stock
price closed the year at $52.23, which represented a book
value multiple of 1.4 times.
The two subsequent years were filled with turmoil in the
financial markets and high catastrophe losses. We proactively
protected shareholder value and adapted our business to
the changing environment. Risk mitigation efforts were
accelerated by further reducing investments in financial firms
and real estate and initiating interest rate and equity hedges
to protect the company’s capital. We were right about the
direction of the investment markets, but underestimated the
severity of the economic implications.
The emergence of high catastrophe losses from regional
events also led us to adapt by significantly increasing prices on
homeowners insurance and focusing our efforts on multi-line
customers. Despite rate increases, this business significantly
underperformed our goals for return on capital. At the
same time, Allstate Financial undertook its “Focus To Win”
initiative to downsize its annuity business and lower costs.
We implemented modest increases in auto insurance prices
to maintain profitability even though we knew this would
negatively impact growth.
From all accounts, it was a tough two years, but Allstate
recovered. Net income went from a loss of $1.7 billion in 2008
to a profit of $854 million in 2009. We remained financially
strong and avoided the need to utilize TARP funding that was
accessed by some of our competitors. To protect capital levels,
a share repurchase program was stopped and the annualized
dividend was reduced to 80 cents per share. Book value ended
2009 at $30.84 and the share price was $30.04, a book value
multiple of 0.97.
achieved our 2010 financial goals
2010 benefited from the proactive steps taken over the prior
three years. Net income improved by 9% to $928 million in
2010 versus 2009 and operating income* was $1.5 billion,
despite another year of high regional catastrophe losses. We
also accelerated our efforts to differentiate ourselves from the
competition by launching new products and refining strategies
for different customer segments. A share repurchase
program was initiated with the goal of returning $1 billion to
shareholders. Overall book value increased by 14.5% to $35.32
per share and the total return to shareholders was 8.8%.
Allstate Protection met its profit goals with an underlying
combined ratio* within the annual range communicated at
the beginning of the year. The combined ratio was higher than
in 2009, however, reflecting an increase in the frequency of
auto claims. We continued to increase prices on homeowners
insurance to improve returns. Marketing efforts to grow
auto insurance performed well with the addition of the
“Mayhem” ads, which made the brand more contemporary
and increased new business levels. New business, however,
was more than offset by lower retention levels of existing
customers, leading to a decline in the size of our auto
business. Improving customer loyalty is key to growth, so
the customer improvements made in most markets must be
expanded to the entire country.
Fellow shareholders,
In this time of rapid economic, political and physical
changes in our world, a report on the twelve
months of 2010 seems incomplete. While 2010 was
a year of harvesting and building, one cannot fully
appreciate what that means without discussing
the prior several years. So instead of just one year,
I will cover Allstate’s journey since 2007 and the new initiatives underway
to further increase the value of your investment.