Allstate (ALL)

“The destructive and devastating effects of Hurricane Katrina significantly overshadowed Allstate’s strong underlying performance trends in the quarter,” said Edward M. Liddy, chairman and CEO of The Allstate Corporation. “This unprecedented hurricane is the United States’ costliest catastrophe in history, surpassing Hurricane Andrew by a wide margin.

“For Allstate, pre-tax catastrophe losses, including claims from Hurricanes Katrina, Rita, Dennis and Ophelia, were more than $4.7 billion net of reinsurance in the quarter.  This represents nearly a ten-fold increase from what we would normally expect in catastrophe losses in a quarter.  For Hurricanes Katrina and Rita, the company expects to handle more than 300,000 claims from customers primarily in Louisiana, Mississippi, Alabama, Florida and Texas.

“Allstate has nearly 4,000 claim professionals along the gulf coast working as fast and as hard as possible to bring aid to the many thousands of people impacted by the terrible hurricane season. We remain absolutely committed to helping our affected customers return to some semblance of a normal way of life as soon as possible.

“We continue working on our homeowners catastrophe management strategy through a variety of strong proactive risk management actions to better address significant potential hurricane and earthquake losses. We have made progress to reduce our exposure to catastrophe losses, but we will do much more and do it on an accelerated basis.

“In addition, it is also clear to Allstate that how this country prepares for and offers protection against mega-catastrophes must be re-thought and changed. We have all seen on our television screens that the current system is inadequate.  America cannot continue to look into the rear-view mirror to manage catastrophes such as hurricanes and earthquakes.

“We believe it’s time to develop a new system to plan ahead and become better prepared for catastrophes. Allstate is aggressively pursuing a broadened dialogue and stands ready to help develop a solution that more effectively protects people, families, communities and our national economy from these horrific catastrophes.

“Absent the impact of the hurricanes, it was a strong quarter for Allstate Protection.  Net written premiums were up 2.9 percent with Allstate brand standard auto and homeowners premiums written growing 4.7 percent and 6.0 percent, respectively.  Allstate brand standard auto and homeowners policies in force grew 3.6 and 4.4 percent, respectively. And the retention ratio for Allstate brand standard auto and homeowners remained strong.

“Allstate brand standard auto and homeowners loss costs, excluding catastrophes, continued to trend favorably as compared to prior quarters.  Frequencies continue to improve and severities remain manageable with modest levels of increase, well within our pricing assumptions.  The impact of catastrophes on the third quarter accounted for 69.4 points of the total combined ratio of 149.6, indicating the outstanding underlying profitability performance of the business.

“Allstate Financial generated operating income in the quarter of $156 million, an increase of $5 million or 3.3 percent compared to the third quarter of 2004.  Non-deferred operating expenses were held flat compared to the third quarter of 2004.  Total premiums and deposits were down $1.6 billion in the quarter compared to the third quarter of 2004, primarily due to declines in sales of traditional fixed annuities and the absence of opportunistic sales of institutional products.  The reduced retail sales reflect our strategy to focus on improving returns.

“We continued to make significant progress on our share repurchase program in the quarter, buying back 12.1 million shares for $717 million.  We have now bought back a total of 39.5 million shares this year at a total cost of $2.22 billion toward the current $4.0 billion share repurchase program to be completed in 2006.”

“The effects of the 2005 hurricane season will likely be with us for some time to come as we work to settle claims and help restore our customers’ lives.”

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“Allstate has turned in another very strong quarterly performance,” said Edward M. Liddy, chairman and CEO of The Allstate Corporation. “We continued to generate profitable growth accompanied by attractive returns on equity while, at the same time, continuing our disciplined capital management activities.  Solid growth in book value per share is a good indicator of the value we are creating for our shareholders.

“Our property-liability business earned an impressive $994 million in underwriting income, which is an 11.9% increase over the second quarter of 2004.  A relatively mild quarter for catastrophe losses and a continuation of favorable frequencies for auto and homeowners helped generate this outstanding result.

“We are pleased with the growth in net premiums written for Allstate Protection in the quarter, particularly given the catastrophe risk management strategies we implemented in a few key markets and the substantial reinsurance purchases we made in the quarter.  Premiums written were up 3.8% compared to the second quarter of 2004 with Allstate brand standard auto and homeowner premiums written serving as the key drivers increasing 5.3% and 8.1%, respectively, over the prior year quarter.  In a climate of relatively stable pricing and a more competitive marketplace, we believe this is a good result.

Total policies in force for Allstate brand personal lines grew 3.4% compared to the end of the second quarter of 2004.  Policies in force for Allstate brand standard auto and homeowners grew 4.2% and 5.4%, respectively, compared to the second quarter of 2004.

“Our retention ratio for Allstate brand standard auto and homeowners remains strong at 90.8 and 88.3, respectively, compared to 91.0 and 88.2 in the second quarter of 2004.  We also continued our rollout of Allstate^® Your Choice Auto Insurance, an innovative new auto insurance product, which provides even more choice for auto insurance customers.  This product is now available in a total of nine states after six new states came online in the second quarter of 2005 and we are on target for the product to be in a majority of the country by the end of 2005.

“Our rollout of SRM IV, the company’s newest generation underwriting and pricing process for auto insurance, remains on track to be in a majority of states before the end of the year. As evidenced by our results, tiered pricing allows us to segment risks with even more sophistication while helping us achieve the profitable growth we seek.

“Allstate Financial turned in an improved performance for the quarter.  Operating income of $137 million was 8.7% over the second quarter of 2004, driven by lower expenses and investment margin growth.  Premiums and deposits of $4.0 billion decreased 5.9% from the prior year due to reduced institutional product sales and market interest rates decreasing the competitiveness of fixed annuities.  Allstate Financial’s primary focus is improving returns and then profitably growing the business in those product lines and distribution channels where acceptable returns can be achieved.

“The challenging interest rate climate has consumers considering alternative savings vehicles such as money market funds and short- and medium-term CDs because they have become more competitive with fixed annuities.  If this continues, we expect the fixed annuity market to contract in the near term.  With Allstate Financial remaining disciplined in pricing to meet our return objectives, fixed annuity sales may decline temporarily until the interest rate environment improves.

“We continued to make significant progress on our share repurchase program in the quarter, buying back 14.0 million shares at $796 million.  For the first half of the year, we have bought back a total of 27.4 million shares at $1.5 billion toward the current $4.0 billion share repurchase program.

“Our new leadership structure, with Tom Wilson as president and chief operating officer, responsible for all insurance operations, is off to a great start. Finally, our performance for the first half of 2005 was excellent and I remain confident about our prospects for the future. Thus, we have raised our annual operating income earnings per diluted share guidance for 2005 to a range of $6.00 to $6.40.”

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“This is a strong start for Allstate in 2005,” said Edward M. Liddy, Allstate chairman, president, and CEO. “ We generated solid net and operating income in this first quarter of 2005 on good revenue growth. Seeking profitable growth is our objective and results this quarter provide more evidence that our focus continues to benefit our shareholders.

“Allstate Protection generated almost $1 billion of underwriting income in the quarter, an increase of more than 13 percent over the first quarter of 2004. Contributing to that record underwriting result was an improvement in frequency trends for both Allstate brand standard auto and homeowners compared to the first quarter of 2004.  Premium written for Allstate Protection increased almost 4% over the first quarter of 2004 while premium written for Allstate brand standard auto and homeowners increased 5.3% and 8.4%, respectively, compared to first quarter of 2004. Policies in force (PIF) for Allstate brand standard auto and homeowners grew 4.9 percent and 6 percent, respectively, compared to the first quarter of 2004. Our retention rate in the quarter remained strong and continued near historical highs.

“I remain very encouraged by these excellent results for Allstate Protection. As competition within our industry increases, our Tiered Pricing efforts will continue to serve us well and the new business we bring on our books should generate profitable growth.

“In the first quarter, we began our introduction in certain markets of the next iteration of Tiered Pricing for our auto insurance line. We are also introducing new versions of Tiered Pricing for homeowners and our other lines of business in the coming months. The changes we have made to Tiered Pricing will allow us to segment risks with even more sophistication, which will help us achieve the profitable growth we seek.  Through our marketing and advertising, we are continuing to communicate the benefits and advantages Allstate offers customers and are doing so with a more targeted approach. We are also introducing a new auto insurance product that we believe will significantly increase customer choice and further enhance the value proposition Allstate offers to consumers.

“Allstate Financial also turned in a solid performance for the quarter.  Premium and deposits of almost $4 billion were 15.2% over the first quarter of 2004 with double digit growth rates experienced in our Allstate agency, bank, broker-dealer and independent agency distribution systems.  Operating income of $149 million was 12.9% over the first quarter of 2004, driven by investment and benefit margin growth.

“In the quarter, we repurchased 13.4 million shares at $706 million, which is an excellent start to our previously announced $4.0 billion share repurchase program to be completed in 2006.  As previously announced, we also increased our quarterly dividend to $0.32 per share, a 14.3% increase over prior year.  We will use capital to grow profitably and achieve our targeted returns.  In addition, as history has shown, we will return capital to shareholders when we are unable to effectively deploy all the capital we are generating in our various businesses.  Profitable business growth in addition to these capital management strategies will continue to drive growth in EPS and book value per share in the future.

“Our operating income return on equity for the past four quarters was a very attractive 17.2%, after absorbing the unusually high level of catastrophe losses in the third quarter of 2004.  Overall, the first quarter was an outstanding start to the year.  We remain very optimistic about the remainder of 2005 and beyond.”

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“It was a great quarter and a great year for Allstate,” said Chairman, President and CEO Edward M. Liddy. “We’re growing and generating solid returns for our shareholders thanks to a proven business strategy that we believe is sustainable into the future. In short, we are very pleased with our results and confident about our prospects.”

“Allstate Protection continues to make steady progress, growing faster than the marketplace in a very competitive environment. Helping to fuel solid increases in premiums for the quarter was growth in policies in force (PIF). These PIF increases also represent an increase in the rate of change in PIF growth we reported for the third quarter of 2004 and both Allstate brand standard auto and homeowners experienced PIF growth in most states.

“In the quarter, Allstate Protection’s overall underwriting income increased 58% over the prior year fourth quarter.  Both the Allstate brand and our Encompass business continued to contribute excellent underwriting results.  Allstate brand customer retention remained strong in the fourth quarter at near record levels, which we believe is a result of the service and value we provide our customers. Also contributing to our strong customer retention are the investments we continue to make in our business. Allstate brand standard auto retention improved almost half point compared to the prior year quarter and homeowners retention levels exceeded prior year fourth quarter results by more than a full point. Our advertising campaign has focused on educating consumers about Allstate’s strong competitive position in the marketplace, which has helped fuel solid gains in new business production.

“Our strategic risk management efforts continue to be extremely effective. Although we believe that Allstate is well ahead of most of our competitors in pricing sophistication, we will continue to add new and enhanced rating variables and additional refinements of our insurance scoring algorithms as competition continues to implement tiered rating programs. We believe our strategies have put Allstate in a great position going into 2005 to continue to grow profitably.

“I am very encouraged by the loss cost trends in our business during the fourth quarter and all of 2004.  As I have said before, we might see occasional fluctuations in the frequency trends due to weather, but the underlying frequency trend remains favorable.  Severity trends continue to be moderate, and our claims employees continue to provide excellent service to improve customer satisfaction.

“Allstate Financial also turned in a solid performance for the quarter. We generated strong and broad top line results delivering our second highest level of quarterly premiums and deposits ever. In particular, the Allstate Agency channel finished the year on a very strong note by generating one-third of its total 2004 sales of financial products in the fourth quarter. For the year, Allstate Financial delivered record retail, institutional, and total premiums and deposits. In January 2005, we launched our new SureIncome^SM withdrawal benefit on our variable annuity products which, combined with our TrueReturn^SM accumulation benefit, should boost sales in 2005.  Allstate Financial also had improved bottom line results with operating income of $142 million in the quarter, in line with our expectations.  Overall, the implementation of Allstate Financial’s business strategy is progressing well.

“In the quarter, we completed our $1.5 billion share repurchase program one year ahead of schedule and in January 2005, began our previously announced $4.0 billion share repurchase program to be completed in 2006.  Additionally, The Allstate Corporation board of directors will meet later this month to determine the dividend for the first quarter of 2005.

“Overall, 2004 was a very good year.  Even after absorbing an unusually high level of catastrophe losses of $2.5 billion in 2004, net income per diluted share and operating income per diluted share increased 18.5% and 17.0%, respectively, over the prior year, book value per diluted share increased 9.2% to $31.72 compared to prior year, and operating income return on equity increased 0.5 points to 17.0% compared to prior year.  We are very pleased with the consistent performance we have generated over time. We remain committed as ever to not rest on past performance. We are optimistic about 2005 and plan to use the momentum we have generated across the enterprise to ensure our company remains a powerful force that continues to deliver solid, consistent value to customers and shareholders.  We expect to generate operating earnings per diluted share growth of 22% to 32%.  This assumes our combined ratio, with an average expected level of catastrophe losses used in pricing for the year and no reserve reestimates, does not change materially from that experienced in 2004, which is in the low 90s.  Further, our expectation for top-line growth will be consistent with our objective of maintaining margins.  The resulting operating income return on equity is expected to exceed 18%.”

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