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Financial Highlights$ in millions except per share data

1998 1997 % change

Revenues $25,879 $24,949 3.7Operating income 2,573 2,429 5.9Net income 3,294 3,105 6.1Total assets 87,691 80,918 8.4Shareholders’ equity 17,240 15,610 10.4

Per Common Share*Operating income 3.08 2.78 10.8Net income 3.94 3.56 10.7Dividends 0.54 0.48 12.5Shareholders’ equity 21.00 18.28 14.9Market value–closing 38 1⁄2 45 1⁄4

–high 52 3⁄8 473⁄16

–low 361⁄16 28 1⁄8

*Per common share data have been restated for the effects of the 2-for-1 stock split paid on July 1, 1998.

0.54 2.12 2.31 3.56 3.94484 1,904 2,075 3,105 3,294

Net Income perDiluted Common Share

94 95 96 97 98

Net Income$ in millions

94 95 96 97 98

61.0 70.0 74.5 80.9 87.7

Total Assets$ in billions

94 95 96 97 98

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his is my first letter to shareholders aschairman, president and chief executive

officer of Allstate. I welcome the opportunity to lead 53,000 of the finest employees andagents in America, whose combined efforts led to another record year for the company.

1998 was a watershed year for another reason,too: Jerry Choate, my predecessor and goodfriend, announced his retirement after a stellar37-year career at Allstate. Starting as an opera-tions supervisor in California, Jerry rose throughthe company and graced everything and everyonehe touched with a sense of purpose and integrity.He took over as CEO in 1994 and under hisstewardship the company and its shareholdersthrived. From 1994 to 1998, during his leader-ship, we increased operating income to $2.6 bil-lion and improved earnings per share from $.30to $3.08. The value of Allstate stock, althoughdown in 1998, increased more than $21 billion,from $11.88 to $38.50 per share.

His emphasis on people resulted in numerousemployee and diversity honors, including “bestcompany to work for” awards from Fortune,Working Mother and Minority MBA magazines in 1998. He leaves a very strong legacy.

Outstanding ResultsIn 1998 we achieved outstanding bottom lineresults in the face of an increasingly competitivemarket. Operating income was $2.6 billion, or$3.08 per share, a 10.8 percent increase on aper-share basis, over the prior year. Net income,which includes capital gains, was a record $3.3 billion, or $3.94 per share. Our capitalposition, which helps fund new growth, is in thebest condition in the company’s history.

Most importantly, we continued to sharpen thestrategies and accelerate the programs that willenhance our sales and claims operations, bond

To Our Shareholders

T

Ed Liddy withJerry Choate (at right, below,and bottomphoto), formerchairman andchief executiveofficer.

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old and new customers ever more closely to usthrough unrivaled service, and position the cor-poration to generate strong growth in the future.

We are blessed with many unique assets. Wehave the most highly recognized brand name inthe business. We have a dedicated agency force15,500 strong and a claims organization secondto none. We have a broad range of insuranceproducts, making it easy for consumers to get theprotection they need. We have a high-qualityinvestment portfolio that consistently achievesexcellent returns. And we have world-classresearch facilities and data management skillsthat provide us with ongoing insights into whatcustomers want.

The Need to GrowOur challenge is to use our strengths to grow—faster and more profitably. It won’t be easy, becausethe competitive environment is fierce. New aswell as traditional competitors are finding moreways to deliver an increasing array of financialproducts and services. Strong industry operatingand investment performance are creating substan-tial excess capital, intensifying the battle for thecustomer. Declining inflation and lower interestrates are adding more pressure on companies tofind innovative ways to grow their business. Allof this has led to intense price competition.

In this competitive environment, our premiumgrowth is not yet in line with our own or the mar-ket’s expectations. As a result, our stock price fell15 percent in 1998, after having soared 56 per-cent the previous year.

Profitable top-line growth, the engine forprosperity in the years ahead, is our No. 1 priorityin the company.

So how do we get there? We’re focusing onimproving our core business, and also looking atnew opportunities for growth as well. We plan togrow Allstate faster, in more ways, more placesand with more products than ever before.

Strengthening the Customer ExperienceFirst and foremost, we’re strengthening theAllstate customer experience. For two years we’vebeen focusing on the best ways to provide aunique insurance experience to our customers.That, in turn, will drive higher satisfaction,greater retention and improved growth rates. Inlast year’s annual report letter, we described howour intensive research has yielded highly valuableinformation about what customers want and thetype of service that appeals to them.

Since then our efforts have accelerated. In1998, we readied new programs to sell and ser-vice the customer better, to provide faster andmore efficient claims service, to improve our reliability and prove our loyalty, and to price our product more effectively.

Many important initiatives in sales and claimsare being introduced in 1999, including:■ Expanded agency hours during the week andon Saturdays, to make it more convenient forcustomers to have access to account informationand talk with a licensed insurance professional.We also plan to add several hundred agents to oursales force.■ Seamless phone links from agents’ offices tocall centers where sales representatives cananswer customer questions 24 hours a day, sevendays a week. No other insurer can offer all thesebenefits—licensed professionals to serve cus-tomers in person, weekend and longer weekdayoffice hours and 24-hour coverage. Quite simply,we’re making it easier for customers to do busi-ness with us.■ New target marketing programs to make usmore attractive and competitive with selectedAllstate customers and prospects.■ An easier renewal process and increased con-tact with key customers to encourage new policypurchases and improve retention rates.

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■ New desktop technology and processes to handle questions and allow customers to give usclaim information more easily. This is importantat a claim “moment of truth,” when customerslook to us for fast and empathetic help.■ Introduction of property claims coordinatorsas a single point of contact to help guide cus-tomers through the claims process. ■ Customer contact in most cases within 24hours of notice of loss. In some states we’re test-ing a program to repair cars with minor damagewithin 72 hours. We’re working to reduce signifi-cantly the number of days it takes to inspect andsettle auto claims.

Overall, in both our sales and claims organi-zations, we’ve been re-engineering the way weoperate to make it easier for the customer to dobusiness with us. The goal is to raise service levelsto new heights, thereby attracting more new customers and retaining more current ones. Animprovement of just 1 point in retention is worth$180 million a year in incremental revenue, soretention initiatives are a high priority.

New Ways to GrowThe experience, expertise and scale of our agencyand claims organizations give us a huge competi-tive advantage in our core markets. But just asimportant, our strengths also serve us well as weincrease our focus on other channels of distribu-tion. We plan to build or buy capabilities that willmake us a force beyond our traditional base.

One important channel is independentagents, who sell Allstate and other insurancecompany products countrywide. We already haveextensive experience in this area. We’ve workedwith rural independent agents for more than 25years. More recently we’ve built our Deerbrookbrand into a top player by selling non-standardinsurance through the independent agency channel.We plan to significantly increase our presence in

this market, in order to reach customers whoprefer to do business this way.

We will also be expanding our life and savingsbusiness, starting with our own auto and home-owner customers. Only 1 in 11 Allstate auto andhomeowner customers currently are insured withour life and savings products, so increasing cross-line sales is a major priority within the company.We’re also developing new life and savings products.To that end, we set up the Allstate Federal SavingsBank in 1998 to begin providing new financialproducts, such as cash management and personaltrust services, to our customers. And in March1999, we announced a joint venture with PutnamInvestments to sell variable annuity insuranceproducts. We’re piloting programs to train andlicense some of our life specialists and producersas fully accredited financial advisers, and we’relooking at acquiring companies whose producersprovide financial advice. We’re also exploring theexpanded use of new Internet channels to sell ourlife and savings products, some of which are soldon line now.

Another sizable opportunity lies outside theU.S. We already market a full range of personalproperty and liability products in Canada. Wehave aggressive growth plans in Germany andJapan, where we currently have just auto insur-ance, and also in South Korea, the Philippinesand Indonesia, where we sell life coverage. We’llintroduce auto insurance in Italy later this year.We intend to build solid businesses in countrieswe view as long-term attractive markets.

The Core of AllstateOur core is, and will continue to be, the Allstatebrand and the Allstate agent. That’s where we’llfocus most of our attention and where most ofour success in 1999 and the years ahead willcome. But for us to achieve sustainable, profitablegrowth year-in and year-out, we must utilize ad-ditional channels, brands and products. We muststart reaching segments of the marketplace we don’t

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currently reach. Ever-changing customer needsfor products and services demand it. The AllstateCorporation will, over time, be multi-channel,multi-brand, multi-product and multi-national.Not all these initiatives will bear fruit right away,but they plant the seeds for future growth.

In the pages that follow, we describe how ourproduct breadth and expertise can help serve cus-tomers for a lifetime, building relationships thatgenerate trust, loyalty and greater business. Andwe go on to describe the high standards set by ouremployees, in the workplace as well as in thecommunities they serve.

Allstate is a great company, a caring company,with a strong record of safety innovations, productand service excellence, community support, andsolid shareholder returns. I’m confident that withour strengths, strategies and the resolve to providethe highest level of service in the industry, we’re onthe right track for continued growth and prosperity.

Finally, I’d like to express my thanks to one of our directors, Mary Alice Taylor, who steppeddown from the board last year following themerger of Citibank and Travelers. Mary Alicemade valuable contributions to the board andcorporation during her tenure here, and we willmiss her. I’d like to welcome to the board two newdirectors—Ronald T. LeMay, president and chiefoperating officer of Sprint Corporation, and H. John Riley Jr., chairman, president and chiefexecutive officer of Cooper Industries Inc. I’dalso like to acknowledge Edward W. Young, whoheaded the international and specialty operationsand retired in 1998 after a 33-year career atAllstate. Our board and senior management teamare crucial to Allstate’s future, and their out-standing services were instrumental in guiding usthrough our first five years as a public company.

Edward M. LiddyChairman, President and Chief Executive Officer

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Building Stronger Relationships: At Allstate, satisfying customersmeans more than just great claims service. It also means providingadvice, information and the right coverage for the changing needsof our customer family at every stage of life. We’re building on our world-class reputation for product excellence and superiorservice to deliver greater reliability, to enhance loyalty and tostrengthen our best-in-class claims operation. The stories that follow relate how, as our customer relationships grow, we canbuild stronger ties and generate more business.

Strengthening the customer experience…at every stage of life.

Teen Driver

First Residence

Retir

emen

t

Empty

Nest

ClaimFirst

BabyNe

wly

wed

s

Our Customer Family

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Cay Chavez Jr. Amy Bydash

The Allstate Customer Family Tree

Aaron and Angie Polly

Doug, Heidi and Colin Newbold

Auto

Home

Life

Auto

Home

Life

Auto

Renter

Auto

Robin Summers

Home

Life

Mike and RobinEchols

Auto

Home

Life

Boat

Lynn and AnneMiller

Auto

Home

Umbrella

Motor Club

Strong customerrelations, likestrong family ties,are built on de-pendability, loyaltyand understanding.For more than 60years Allstate hasserved the insur-ance needs of millions of customers—

from newborns toretirees and newdrivers to emptynesters. The storiesthat follow illustratehow great servicecan lead to strongrelationships, andincreased businessover time.

Umbrella

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New Drivers: Every year 1.5 million 16-year-olds slide

behind the wheel for the first time. Allstate can meet their

needs with our broad auto coverage and auto safety pro-

grams. Allstate strongly supports teen safety programs and

graduated licensing laws. Last year Allstate agents ordered

almost 1 million company safety brochures and videos to

distribute to their teenage customers. Safer, more experienced

drivers make the nation’s roadways safer for everyone.

Cay Chavez Jr.Wichita, Kansas

Allstate Customer: 9 monthsPolicies: 1

Agent: Anthony Newry

➣

Cay Chavez Jr.

Auto

The Allstate Customer Family Tree

Cay Chavez Jr., 17,with the ’85 Cougarhe bought andrestored last year,when he began dri-ving: “I love thiscar but it costsmoney, so I’mworking to help payfor the upkeep andthe insurance.”Before he got hisdriver’s license, hismom took him tosee their Allstate

agent, who talked tothem about theresponsibilities ofsafe driving. “Wegot the teen driverbrochure, and Isigned the contractthat says I’ll callhome for a ride ifI’m ever out drink-ing,” Cay says. “Itmakes a lot ofsense.”

Amy Bydash, 21, oncampus at theUniversity of Toledo:“When I got my carand my own apart-ment, I went to myAllstate agent andhe set me up withthe insurance Ineeded. Even withmy limited income,these policies arevery affordable. Ihad no idea how

any of it worked, somy agent explainedthe various provi-sions. He made itreal easy for me.”Amy has never hadan accident orbreak-in, but shesays her policiesgive her a goodfeeling. “I know ifsomething hap-pened with my caror apartment, I’mcovered allaround.”

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Going it Alone: Settling into a first household is a big

move. Proper liability protection and coverage for personal

belongings, even for young people just starting out on their

own, is important. And many mortgage companies require

proof of adequate coverage before they’ll approve a loan.

Whether it’s an apartment, condo or house, Allstate has the

protection and agent expertise to help first-time renters and

buyers feel right at home.

Amy BydashToledo, OhioAllstate Customer: 2 yearsPolicies: 2Agent: Rich Brown

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Cay Chavez Jr.

Auto

Amy Bydash

Auto

Renter

The Allstate Customer Family Tree

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Wedding Vows: Young married couples pledge their devo-

tion “in sickness and in health,” but don’t always plan for

life’s unexpected problems. Allstate agents can help newly-

weds get a good start by providing financial advice and

proper coverage for their belongings, as well as adequate

life insurance. There’s peace of mind in knowing if some-

thing unexpected happened, they’re financially protected.

Aaron and Angie PollyParadise, California

Allstate Customers: 4 yearsPolicies: 3

Agent: Larry Spencer

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Cay Chavez Jr.

Auto

Amy Bydash

Auto

Renter

The Allstate Customer Family Tree

Aaron and AngiePolly

Auto

Home

Life

Aaron and AngiePolly were far-sighted about theirfinancial responsi-bilities: “We’recommitted to life-time planning andsaving for thefuture,” says Aaron.“When we first gotmarried, we went tomy Allstate agentand he guided us tothe best plan forour needs, now and

in the future.” Heenabled them tolower their rates,too. “I had anotherauto policy at thetime, but myAllstate agentshowed us how amultiple line dis-count was actuallyless expensive. Wewant the best foreach other and ourfuture. Allstate ishelping us makethat happen.”

Heidi and DougNewbold with theirbaby: “When Colinwas born ourAllstate agenthelped set up lifecoverage for him. Inthe future he canconvert it to hisown universal life

policy. And in themeantime, if some-thing happens tous, he’s protected.”The Newbolds alsorely on their agentfor auto and home-owner insurance.“It gives us peaceof mind to know we have the rightcoverage.”

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Baby Makes Three: 4 million babies are born in the U.S.

every year. Newborns are a blessing, but they also create

huge financial responsibilities. Allstate agents can offer a

wide variety of life insurance policies to make sure the

family wage earners, as well as the infant, have adequate

coverage. It’s also a good time to review auto and home-

owner policies. That way the expanding family has the

broadest and best protection possible.

Doug and Heidi Newboldwith 6-month-old ColinBedford, New HampshireAllstate Customers: 10 yearsPolicies: 4Agent: Jim Parolin

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Cay Chavez Jr.

Auto

Amy Bydash

Auto

Renter

The Allstate Customer Family Tree

Aaron and AngiePolly

Auto

Home

Life

Doug and HeidiNewbold

Auto

Home

Life

Umbrella

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Moment of Truth: Life is unpredictable. When an accident

or tragedy occurs, good insurance coverage helps put

people back on their feet. At Allstate, we deliver on the

promise to help people recover. A strong brand name,

financial strength, almost 70 years of experience and a

claim organization second to none keep our customers

protected—and secure against the unexpected.

Robin D. SummersMount Vernon, New York

Allstate Customer: 3 yearsPolicies: 2

Agent: James R. Jubilee, Jr.

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Cay Chavez Jr.

Auto

Amy Bydash

Auto

Renter

The Allstate Customer Family Tree

Aaron and AngiePolly

Auto

Home

Life

Doug and HeidiNewbold

Auto

Home

Life

Robin Summers

Home

Life

Umbrella

Robin Summersremembers her hus-band LeVerne: “Hewas well-educated,well-respected,well-loved, a goodspirit.” He was alsoa hero: In May 1998LeVerne, an actor,was returning homefrom his agent’soffice when he sawa car bearing down

on a little boy. Hepushed the boy tosafety but waskilled in the acci-dent. Robin’sAllstate agent wasthere to help. “Hewas so supportive,a good friend of thefamily. And withoutthe life policy hesold us, I wouldn’thave the financialsecurity I havetoday.”

Robin and MikeEchols, fishing neartheir home: “Withour three kids grownup, we have moretime to relax. Butwe’re also workingfor the day we canretire. These are our prime savingsyears.” To help out,their Allstate agentset up a life insur-ance policy that

builds cash value tosupplement theirretirement nest egg,and also savedthem money ontheir auto coverage.“His advice on ourinsurance needsand savings hasbeen invaluable;he’s given us themost for our insur-ance money.”

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Empty Nest: From diapers to diplomas, kids cost a lot of

money. It’s hard to save money during the child rearing

years. But when kids grow up and leave home, parents can

start to focus on preparing for retirement. Allstate’s broad

array of products and expert agent counseling can provide

both protection and savings—and help feather the nest

for the future.

Mike and Robin EcholsBirmingham, AlabamaAllstate Customers: 12 yearsPolicies: 4Agent: Pete Russell

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Cay Chavez Jr.

Auto

Amy Bydash

Auto

Renter

The Allstate Customer Family Tree

Aaron and AngiePolly

Auto

Home

Life

Doug and HeidiNewbold

Auto

Home

Life

Robin Summers

Home

Life

Mike and RobinEchols

Auto

Home

Life

BoatUmbrella

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Golden Years: Nearly 10 million U.S. families enjoy

retirement. Allstate agents and life specialists can help by

assisting with life insurance and annuities, as well as estate

and financial planning. Working with Allstate to structure

a retirement plan that meets family members’ needs, and

the needs of their heirs, can make the retirement years still

more golden.

Lynn and Anne MillerEvergreen, Colorado

Allstate Customers: 50 years Policies: 4

Agent: Naoma Eisenbach

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Cay Chavez Jr.

Auto

Amy Bydash

Auto

Renter

The Allstate Customer Family Tree

Aaron and AngiePolly

Auto

Home

Life

Doug and HeidiNewbold

Auto

Home

Life

Robin Summers

Home

Life

Mike and RobinEchols

Auto

Home

Life

BoatUmbrella

Lynn and AnneMiller

Auto

Home

Umbrella

Motor Club

Lynn andAnne Miller,retired andliving inColorado, havebeen Allstatecustomers for 50years. “We boughtour first auto policyright after we gotmarried and movedto Chicago. Laterwe moved to Texasand added morecoverage. Weretired here in 1989and added home-owners and the

Allstate Motor Club.Allstate’s alwaysbeen very good forus, and we’ve neverhad occasion tothink of switching.Our agent gives usall the personalattention we’ve ever needed.”