Inside the Allstate IPO.

• Author: Haas, Joseph A.
• Position: Allstate Insurance Co.'s initial public offering - Management Strategy

Ever wonder what it's like to survive an IPO? Two financial executives who have been in the trenches tell you what to expect and how you can avoid some pitfalls of the process.

On June 3, 1993, Allstate Insurance, a property-liability and life insurer, completed one of the largest initial public offerings in the history of the New York Stock Exchange, raising $2.4 billion of equity capital from the sale of 89.5 million shares of common stock, in addition to $850 million of corporate debt. Those numbers exceeded our expectations of selling 20 percent of the common stock to the public and of raising $600 million through the corporate debt offering. Clearly, we did many things right, but we think our IPO process definitely could use improvement.

An IPO is not for the fainthearted. As a wholly owned subsidiary of Sears, Allstate already had considerable experience reporting as a public company. But the IPO still proved to be a momentous undertaking because of the company's size, the complexity of its businesses, the competitive and regulatory environments and its long history and culture.

The financial stress of extraordinarily large catastrophes in 1992 prompted Allstate to strengthen its capital position. These catastrophes, which approximated $3.3 billion on a pre-tax basis, resulted in $825.2 million in net losses. Of that amount, Hurricane Andrew alone cost $2.5 billion. Plus, shareholder equity decreased from $8.1 billion in 1991 to $5.4 billion in 1992. We used the IPO and debt offering proceeds to increase our statutory capital by $1.25 billion and retire $1.8 billion of Sears' debt, which we'd assumed as part of the process of capitalizing our parent holding company.

The lead underwriter established the IPO deadline of June 3, 1993 after consulting with senior Sears and Allstate management. Sears and Allstate wanted to have the offering to market in the second quarter of 1993, while the lead underwriter wanted to be in before the summer, when IPO activity is usually somewhat slower. Also, the IPO market was heating up and we didn't want to pass up a good opportunity.

From the beginning, the effort was truly a team undertaking. Clear and consistent communication throughout the process was extremely important, and commitment from the top was essential. Sears and Allstate management, and particularly our chairman, showed that this was a priority for the company and that they were fully committed to the project. That commitment was vital to completing the project on time, since we expected a great deal of extra effort from many employees, which often conflicted with other priorities.

Once we decided to take the plunge, management began looking at the company differently. Although Allstate was part of Sears, investment analysts and the public generally didn't scrutinize us as much as Sears. With the IPO underway, we needed to better anticipate the requirements of these new players. By meeting with our underwriters' insurance industry analysts, we developed plenty of insight into the concerns the investment community had about the insurance industry in general and Allstate's core businesses specifically. Our discussions covered a broad strategic look at the company, the economic outlook for the industry, investment portfolio conditions, Allstate financial relationships, industry comparative financial relationships, regulatory matters and current developments.

Senior management spent a great deal of time articulating Allstate's strategies, focus and operations to these new audiences. Deciding how to describe and market Allstate to the investment community, both in the prospectus and in the market-place, was key to the IPO's success. And making such decisions early makes the whole process go much more smoothly.

A WORD FROM THE WISE

We also sought out and listened to our professional advisers, which included the lead underwriter and its legal counsel, the co-managers, Allstate's legal counsel and its board of directors, the auditors and Sears' senior management. Since the IPO process is so complex and full of opportunities for mistakes, we needed the advice of professionals with different perspectives and roles in the process so that we could make informed decisions.

Accurately portraying Allstate in the prospectus was a big challenge because it's a large, diverse and complex corporation in an industry that's facing many issues and is subject to substantial state and federal regulation. We have important intercompany relationships with Sears and certain Sears affiliates. Some of these were outlined in written agreements, but others were not. That's why we needed the...