his is my first letter to shareholders as chairman, president and chief executive officer of Allstate. I welcome the opportunity to lead 53,000 of the finest employees and agents 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 good friend, announced his retirement after a stellar 37-year career at Allstate. Starting as an operations supervisor in California, Jerry rose through the company and graced everything and everyone he touched with a sense of purpose and integrity. He took over as CEO in 1994 and under his stewardship the company and its shareholders thrived. From 1994 to 1998, during his leadership, we increased operating income to $2.6 billion and improved earnings per share from $.30 to $3.08. The value of Allstate stock, although down in 1998, increased more than $21 billion, from $11.88 to $38.50 per share. His emphasis on people resulted in numerous employee and diversity honors, including "best company to work for" awards from Fortune, Working Mother and Minority MBA magazines in 1998. He leaves a very strong legacy. Outstanding Results In 1998 we achieved outstanding bottom line results in the face of an increasingly competitive market. Operating income was $2.6 billion, or $3.08 per share, a 10.8 percent increase on a per-share basis, over the prior year. Net income, which includes capital gains, was a record $3.3 billion, or $3.94 per share. Our capital position, which helps fund new growth, is in the best condition in the company's history. Most importantly, we continued to sharpen the strategies and accelerate the programs that will enhance our sales and claims operations, bond old and new customers ever more closely to us through unrivaled service, and position the corporation to generate strong growth in the future. We are blessed with many unique assets. We have the most highly recognized brand name in the business. We have a dedicated agency force 15,500 strong and a claims organization second to none. We have a broad range of insurance products, making it easy for consumers to get the protection they need. We have a high-quality investment portfolio that consistently achieves excellent returns. And we have world-class research facilities and data management skills that provide us with ongoing insights into what customers want. The Need to Grow Our challenge is to use our strengths to grow -- faster and more profitably. It won't be easy, because the competitive environment is fierce. New as well as traditional competitors are finding more ways to deliver an increasing array of financial products and services. Strong industry operating and investment performance are creating substantial excess capital, intensifying the battle for the customer. Declining inflation and lower interest rates are adding more pressure on companies to find innovative ways to grow their business. All of this has led to intense price competition. In this competitive environment, our premium growth is not yet in line with our own or the market's expectations. As a result, our stock price fell 15 percent in 1998, after having soared 56 percent the previous year. Profitable top-line growth, the engine for prosperity in the years ahead, is our No. 1 priority in the company. So how do we get there? We're focusing on improving our core business, and also looking at new opportunities for growth as well. We plan to grow Allstate faster, in more ways, more places and with more products than ever before. Strengthening the Customer Experience First and foremost, we're strengthening the Allstate customer experience. For two years we've been focusing on the best ways to provide a unique insurance experience to our customers. That, in turn, will drive higher satisfaction, greater retention and improved growth rates. In last year's annual report letter, we described how our intensive research has yielded highly valuable information about what customers want and the type of service that appeals to them. Since then our efforts have accelerated. In 1998, we readied new programs to sell and service the customer better, to provide faster and more efficient claims service, to improve our reliability and prove our loyalty, and to price our product more effectively. Many important initiatives in sales and claims are being introduced in 1999, including:    Expanded agency hours during the week and on Saturdays, to make it more convenient for customers to have access to account information and talk with a licensed insurance professional. We also plan to add several hundred agents to our sales force.    Seamless phone links from agents' offices to call centers where sales representatives can answer customer questions 24 hours a day, seven days a week. No other insurer can offer all these benefits -- licensed professionals to serve customers in person, weekend and longer weekday office hours and 24-hour coverage. Quite simply, we're making it easier for customers to do business with us.    New target marketing programs to make us more attractive and competitive with selected Allstate customers and prospects.    An easier renewal process and increased contact with key customers to encourage new policy purchases and improve retention rates.    New desktop technology and processes to handle questions and allow customers to give us claim information more easily. This is important at a claim "moment of truth," when customers look to us for fast and empathetic help.    Introduction of property claims coordinators as a single point of contact to help guide customers through the claims process.    Customer contact in most cases within 24 hours of notice of loss. In some states we're testing a program to repair cars with minor damage within 72 hours. We're working to reduce significantly the number of days it takes to inspect and settle auto claims.
Overall, in both our sales and claims organizations, we've been re-engineering the way we operate to make it easier for the customer to do business with us. The goal is to raise service levels to new heights, thereby attracting more new customers and retaining more current ones. An improvement of just 1 point in retention is worth $180 million a year in incremental revenue, so retention initiatives are a high priority. New Ways to Grow The experience, expertise and scale of our agency and claims organizations give us a huge competitive advantage in our core markets. But just as important, our strengths also serve us well as we increase our focus on other channels of distribution. We plan to build or buy capabilities that will make us a force beyond our traditional base. One important channel is independent agents, who sell Allstate and other insurance company products countrywide. We already have extensive experience in this area. We've worked with rural independent agents for more than 25 years. More recently we've built our Deerbrook brand into a top player by selling non-standard insurance through the independent agency channel. We plan to significantly increase our presence in this market, in order to reach customers who prefer to do business this way. We will also be expanding our life and savings business, starting with our own auto and homeowner customers. Only 1 in 11 Allstate auto and homeowner customers currently are insured with our 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 Savings Bank in 1998 to begin providing new financial products, such as cash management and personal trust services, to our customers. And in March 1999, we announced a joint venture with Putnam Investments to sell variable annuity insurance products. We're piloting programs to train and license some of our life specialists and producers as fully accredited financial advisers, and we're looking at acquiring companies whose producers provide financial advice. We're also exploring the expanded use of new Internet channels to sell our life and savings products, some of which are sold on line now. Another sizable opportunity lies outside the U.S. We already market a full range of personal property and liability products in Canada. We have aggressive growth plans in Germany and Japan, where we currently have just auto insurance, and also in South Korea, the Philippines and Indonesia, where we sell life coverage. We'll introduce auto insurance in Italy later this year. We intend to build solid businesses in countries we view as long-term attractive markets. The Core of Allstate Our core is, and will continue to be, the Allstate brand and the Allstate agent. That's where we'll focus most of our attention and where most of our success in 1999 and the years ahead will come. But for us to achieve sustainable, profitable growth year-in and year-out, we must utilize ad-ditional channels, brands and products. We must start reaching segments of the marketplace we don't currently reach. Ever-changing customer needs for products and services demand it. The Allstate Corporation 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 our product breadth and expertise can help serve customers for a lifetime, building relationships that generate trust, loyalty and greater business. And we go on to describe the high standards set by our employees, in the workplace as well as in the communities they serve. Allstate is a great company, a caring company, with a strong record of safety innovations, product and service excellence, community support, and solid shareholder returns. I'm confident that with our strengths, strategies and the resolve to provide the highest level of service in the industry, we're on the right track for continued growth and prosperity. Finally, I'd like to express my thanks to one of our directors, Mary Alice Taylor, who stepped down from the board last year following the merger of Citibank and Travelers. Mary Alice made valuable contributions to the board and corporation during her tenure here, and we will miss her. I'd like to welcome to the board two new directors -- Ronald T. LeMay, president and chief operating officer of Sprint Corporation, and H. John Riley Jr., chairman, president and chief executive officer of Cooper Industries Inc. I'd also like to acknowledge Edward W. Young, who headed the international and specialty operations and retired in 1998 after a 33-year career at Allstate. Our board and senior management team are crucial to Allstate's future, and their outstanding services were instrumental in guiding us through our first five years as a public company.

For a printable version of the Allstate 1998 Annual Report, click here.