Chairman’s Letter
This year’s annual report focuses on the many ways your company is part of everyday life in Sacramento and in communities across the country. Just think: Without insurance and financial services, most people couldn’t own a car or home, save for their children’s education or plan for a secure retirement. At Allstate, we help underwrite the American dream. We’re proud of that.

In 2001, Allstate’s strength and stability helped provide security for 14 million households served through Allstate directly and 2.5 million households served through non-proprietary channels, and also helped us execute a strategy that will meet even more of our customers’ needs, while growing your company more predictably and more profitably.

That strategy dates back to 1995, when Allstate became a fully independent company. Early on, we reduced our catastrophe exposure and sold non-core businesses, including large commercial accounts and reinsurance. These actions strengthened our financial base, made us less susceptible to natural and manmade disasters, and lessened the volatility of our earnings.

More recently, we have focused on expanding the scope of our core business. That includes offering around-the-clock access to customers by continuing to roll out The Good Hands^® Network, which combines our national agency force with 1-800-Allstate and allstate.com.

Expanding the scope of our business also means aggressively accelerating growth in financial products and services. Allstate’s property-casualty business is a powerhouse, insuring one of every eight cars and homes in America. But we know it does have some limitations. The existence of many mutual companies creates an unusually competitive environment, regulation is rigorous and external trends, like auto and home sales, aren’t always favorable.

Financial services balances our traditional insurance business because it is driven by favorable baby-boomer demographic trends, more predictable earnings and higher industrywide growth rates. Most important, millions of current and potential Allstate customers want and need a trusted partner in planning for a more secure financial future.

2001 Results
In 2001, our financial performance was disappointing – to me, to our employees and, most of all, to you, our owners. Our stock price dropped 23 percent as revenues declined 1 percent and operating income declined 26 percent. Unacceptable by any measure.

The biggest problem occurred in our homeowners line. Rising costs of construction and repairs, combined with sharp increases in weather-related and mold claims across the country, caused results to deteriorate industrywide. At Allstate, we reacted quickly with a variety of measures, including changes in prices, in product coverages and in claims processes. Because the majority of those changes take effect when policies renew, typically once a year, it will take time for their full effect to be felt. But our results continue to outpace the industry.

Much of our news was very favorable:

Allstate’s standard auto business – by far our biggest line – had written premium growth of 7 percent, the highest rate in recent years.
Actions taken to restore our nonstandard auto business to profitability showed significant progress.
Operating income for Allstate Financial increased slightly even in a difficult year in the stock market, when sales of annuities and other financial instruments were down significantly.
More than 2,500 Allstate Exclusive Agents were trained and licensed to offer a broader array of financial products, including mutual funds and variable annuities, bringing the total number of Personal Financial Representatives to 5,900.
In a challenging financial climate, our investment operation reported increased net investment income of approximately 4 percent. The success of Allstate Investments not only contributed to the company’s balance sheet, it also lent credibility to our expansion into financial and investment services for individuals.

Throughout 2001, 54,000 Allstate Agents and employees helped execute our strategy on many fronts. Simply put, we’re working to get better in our property-casualty business and broader in financial services.

Strategy Update: Property-casualty
Getting better in property-casualty means giving customers more reasons and more opportunities to do business with us. It means supporting and strengthening our agency force, underwriting and pricing smarter than ever, and marketing in a more aggressive, targeted way.

Specifically:

Last year we expanded The Good Hands Network to a total of 30 states and Washington, D.C., covering almost 90 percent of the U.S. population. The Network has proven popular with customers – allstate.com is recording 1 million unique hits per month and our Customer Information Centers, which support 1-800-Allstate, are receiving almost 170,000 calls per week.
At the same time, the vast majority of customers have made it clear they want the option of a local agent. So last year we completed a technology rollout that links our agencies with our Web site and 1-800-Allstate. New software also helps agencies serve and satisfy current customers, while targeting and attracting new ones.
We continued implementing Strategic Risk Management (SRM), our tier-based pricing, underwriting and marketing system. SRM helps us target the most profitable and competitive customer segments with the right products at the right price. And it’s working. Last year in states where SRM had been implemented, new business was up. So was retention.
Last year also saw Allstate move from a traditional mass-marketing approach to a much more targeted strategy. One example: We sent nearly 32 million pieces of direct mail offering different discounts and features to specific customer segments.
We worked to strengthen our Ivantage^SM business, which includes our Encompass and Deerbrook brands and is sold through Independent Agents. Here, as with our Allstate brand, problems with homeowners coverage hit hard. But we responded by adjusting prices and improving claim practices. We also began rolling out technology that makes it much easier for Independent Agents to do business with us – a key ingredient for success in this market.

Strategy Update: Allstate Financial
Getting broader in financial services means strengthening our ties with Allstate agencies and our current customers, offering more products and using more distribution channels. We offer products and services for all spectrums of consumers.

Strategically, we are focused on consumers that represent affluent Americans as well as middle-income households whose needs often have been overlooked by other financial services companies. Many are already Allstate customers. Now, in addition to protecting their property, we want to help them grow their assets and meet their future retirement needs.

And we’ve already made good progress toward this vision:

By the end of 2001, 66 percent of our Allstate Exclusive Agents made a commitment to become Personal Financial Representatives, licensed to sell a broad range of financial products. We also increased by half the number of Exclusive Financial Specialists who work with Allstate Agents to find, sell and serve more financial services customers. The result: Sales of financial products through Allstate Agencies increased 25 percent last year. And we believe we’ve just scratched the surface.
Last October, we began offering savings accounts, certificates of deposit, insured money-market accounts, and other savings and lending products through the Allstate Bank. By year-end, the bank was available online, by phone, at ATMs across the country and through participating Allstate Agencies in California and New York. Rollout through Allstate Agencies across the country should be completed in 2002.
In addition, we reached financial services customers through tens of thousands of broker/dealers, banks and other financial services firms and Independent Agents. These non-proprietary distribution channels generated four of every five dollars in new financial products statutory premiums and deposits for Allstate last year.
We also expanded our workplace marketing business to 24 regional sales offices serving 49 states, selling life, disability and supplemental insurance directly to employees at almost 18,000 companies. Thanks to a terrific push from Allstate Agencies, sales in this channel increased almost 30 percent over prior year.

Doing Even More
Last year was a testing time for our country and our company. As a nation, we pulled together and pulled through. As a company, we also stayed the course – by working hard for our customers and by making tangible contributions in cities and towns across America.

In this we’ve been aided by the best employees and Agents in the business. They not only bring their enthusiasm and expertise to their customers, they also volunteer their time and talent to make a difference in their communities. As it has for 70 years, the same spirit of caring infuses everything we do.

I would also like to express my gratitude to two of our directors, Warren Batts and Jim Denny. Both have reached the Board’s mandatory retirement age and will not stand for re-election at the annual shareholders’ meeting in May. Each made invaluable contributions to our Board during their tenures here, and I thank them for sharing their talent, experience and vision for the betterment of our company.

Going forward, I am confident that Allstate will do more than ever to help our customers rest assured. We will keep protecting their property and their lives. We will offer them greater choice and convenience. We will help them achieve their financial goals and secure a better future.

That’s our mission. That’s our strategy. That’s the best way to create greater value for our customers, greater opportunities for our employees and greater wealth for our investors.

Edward M. Liddy
Chairman, President and CEO