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This excerpt taken from the ALL 8-K filed Jan 28, 2009. 2008 – A Year of Proactive Risk Management
During 2008, Allstate continued its proactive strategy for both catastrophe and investment portfolio risk management in order to maintain strong capital and liquidity.
Our catastrophe risk management program includes reinsurance, policy changes that increased deductibles, and market share reductions in high risk coastal regions. These actions served us well. Allstate’s analysis shows that our losses from Hurricanes Ike and Gustav would have been approximately twice the amount recorded without the catastrophe exposure management actions put into place beginning in 2005.
Allstate Financial initiated a number of actions to reduce risk and improve returns in the face of unprecedented deterioration of the fixed income markets. Liquidity was substantially increased to ensure cash was available to meet customers’ needs which reduced operating income. The operational transfer of the variable annuity business, which was sold in 2006, was completed. Fixed annuity volumes were reduced in the second half of 2008 reflecting an inability to earn attractive returns. In addition, a strategic review to narrow the business focus and lower expenses was initiated which will be implemented over the next two years.
Risk mitigation and return optimization programs related to investments were implemented throughout 2008 and included macro hedges to protect against negative movements in equity valuations, interest rates and
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credit spreads, as well as proactive disposition of securities. The macro hedges resulted in $256 million of realized net capital gains during the year, primarily due to the equity valuation protection partially offset by realized losses on the interest rate spike protection. These programs, when combined with losses avoided by selling selected securities, benefited shareholder value by over $500 million in 2008.
To preserve capital, we also suspended our share repurchase program. As of December 31, 2008, the current authorized $2.0 billion program had approximately $930 million remaining.
While these actions could not, and did not, completely insulate us from the impact of the environment surrounding our business, we finished the year a well-capitalized company with a strong liquidity position.
Continued Strong Profitability from Underlying Underwriting Business
Allstate’s Property-Liability business continued to produce strong underlying profitability. For the year ended December 31, 2008, our property-liability underlying combined ratio was 86.8%, which was within the updated outlook range provided of 86.0% to 88.0% and better than our initial estimate. This ratio benefited from favorable frequency (the number of claims per 100 policies) and only moderate severity (the average cost per claim paid). For the fourth quarter of 2008, the property-liability underlying combined ratio was 91.5%.
While catastrophic events were less costly in the fourth quarter of 2008, the full year included two of the ten most costly hurricanes in U.S. history. Total catastrophe losses were $3.3 billion in 2008, compared to $1.4 billion in 2007. The full year combined ratio was 99.4% which led to Property-Liability operating income of $1.4 billion.
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