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.
Allstate Financial achieved its goals in the “Focus to Win” strategy, and 2010 operating income* was $476 million, a $136 million increase from the prior year. We exited the annuity business through banks and broker-dealers based on an assessment of future returns and a desire to have a larger portion of profits coming from underwritten products. Allstate Benefits continued to grow, with premiums increasing by 33% in 2010, putting us in the number two market share position in U.S. workplace voluntary benefits. We recently announced the strategic decision to wind down Allstate Bank, which, when completed, will not subject the corporation to thrift holding company regulation.
The investment strategies were well-executed and timed as the market returned to more “normal” levels. We continued to stay long on corporate credit. As part of the risk reduction strategy, commercial real estate holdings were reduced by $2.3 billion of amortized cost and municipal bond holdings were lowered by $5.5 billion of amortized cost in 2010. Given continued economic uncertainty, hedges against declines in equity prices and higher interest rates were maintained throughout the year. As a result of these actions and lower interest rates, investment income declined by 8%, which negatively impacted net income and return on equity. The overall value of our portfolio, however, did exceptionally well and moved into an unrealized gain position from an unrealized loss, a $3.7 billion increase.
Reinvention: The Key to our Future
Allstate is hard at work reinventing protection and retirement for the consumer. We are investing in “go-to-market” strategies to differentiate us from the competition and grow market share. Several new products were launched, including GoodForLifeSM, which combines life insurance with critical illness and severe accident benefits, and Good HandsSM Roadside Assistance, the first-ever free-to-join roadside assistance program. In addition, two exciting concepts, Drive WiseSM and the Allstate Claim Satisfaction GuaranteeSM, are being tested. Plans are also being developed to serve the customer segment that is more self-directed and price-sensitive than those customers attracted to Allstate agencies.
People and Culture are Critical to our Success
Allstate is powered by a remarkable group of talented individuals that come together with a purpose and mission to help customers.The senior leadership team provides the right high-performance environment for 36,000 employees and 12,000 agency owners and exclusive financial representatives. About half of the senior team has joined us since 2007, which, when combined with a wealth of Allstate experience, provides breadth and depth of leadership. The performance bar gets higher each year and this team continues to rise to the occasion and deliver results. You are also well-served by an experienced board, with 10 independent directors, that utilizes leading corporate governance practices.
Improving Our Reputation And Community Leadership
Allstate’s corporate reputation improved again last year. By taking a stakeholder and shareholder approach to reputation, our relative industry position improved in 2010. Allstate also makes a difference in the broader community. The Allstate Foundation invests with thousands of organizations in communities in every state, and thousands of Allstate agency owners and employees serve their communities every day.
Leading Allstate is a privilege and an honor. In the year ahead, we will deliver value to shareholders and make an even bigger difference in the lives of those we protect. After all—we are The Good Hands® People!
Thomas J. Wilson
Chairman, President and Chief Executive Officer
April 1, 2011