ALL

Business Context and Reporting Period

This summary covers The Allstate Corporation's Form 10-Q for the quarterly period ended March 31, 2009. The Company operates primarily through two segments: Property-Liability (Allstate Protection and Discontinued Lines) and Allstate Financial. The reporting period reflects the impact of the global financial crisis, characterized by significant investment write-downs, reduced investment yields, and a shift in capital management strategies to preserve liquidity.

Key Financial Metrics

Segment Performance

• Property-Liability: Reported net income of $100 million (down from $503 million in Q1 2008). The combined ratio was 96.8 (up from 94.0), driven by increased loss frequencies and severities in auto and homeowners lines, partially offset by lower catastrophe losses ($516 million vs. $568 million).
• Allstate Financial: Reported a net loss of $327 million (worsening from a $111 million loss in Q1 2008). The loss was primarily driven by a $277 million pre-tax charge for accelerated amortization of Deferred Policy Acquisition Costs (DAC) and Deferred Sales Inducements (DSI) due to revised assumptions regarding future capital losses.

Material Changes vs. Prior Period

• Net Loss vs. Net Income: The Company swung from a $348 million profit in Q1 2008 to a $274 million loss in Q1 2009. This was primarily due to investment impairments, DAC/DSI amortization charges, and a $254 million increase in the valuation allowance for deferred tax assets related to capital losses.
• Investment Portfolio: Total investments decreased 2.2% to $93.87 billion. Net investment income fell 22.9% due to lower yields and reduced asset balances. Unrealized net capital losses increased to $9.40 billion.
• Dividends: The quarterly dividend per share was reduced to $0.20 from $0.41.
• Share Repurchases: The $2.00 billion share repurchase program was suspended in October 2008 and not completed by the March 2009 target date.
• Credit Ratings: S&P and Moody's downgraded the Company's corporate and subsidiary financial strength ratings in January 2009, citing the impact of the financial crisis on the investment portfolio.

Guidance, Outlook, and Risks

Management Commentary and Outlook

Management emphasized three priorities: protecting financial strength, improving customer loyalty, and reinventing protection and retirement products. The Company is actively managing liquidity by accumulating cash and short-term investments, reducing securities lending, and retaining portfolio cash flows. No specific earnings guidance was provided for the full year, but management noted that results for interim periods should not be considered indicative of full-year results.

Risks and Contingencies

• Investment Impairments: Significant exposure to illiquid fixed income securities (MBS, CMBS, ABS, CDOs) with substantial unrealized losses. The Company recorded $620 million in impairment write-downs in Q1 2009.
• Legal Proceedings: Ongoing litigation related to Hurricane Katrina and Rita claims, medical bill review processes, and worker classification issues. Management believes the ultimate outcome is not likely to have a material adverse effect, though individual matters could impact quarterly results.
• Reinsurance: The Company relies on a complex catastrophe reinsurance program. A default occurred on a catastrophe bond (Willow Re) related to the North-East agreement due to the failure of Lehman Brothers, though the reinsurance contract remains in place.
• Valuation Allowance: A significant increase in the valuation allowance for deferred tax assets ($330 million increase in Q1) reflects uncertainty regarding the realization of capital loss carryforwards.

Key Facts for Investor Verification

• Valuation Allowance Impact: Verify the $254 million income tax expense charge related to the valuation allowance on capital losses and the Company's assertion regarding the intent and ability to hold impaired securities to recovery.
• DAC/DSI Amortization: Review the $277 million pre-tax charge in Allstate Financial for accelerated DAC/DSI amortization and the specific assumption changes (e.g., expected realized capital losses) that triggered it.
• Illiquid Portfolio Exposure: Assess the $7.05 billion portfolio of illiquid securities (MBS, CMBS, ABS, CDOs) and the $4.98 billion in net unrealized losses associated with them.
• Liquidity Position: Confirm the $23.05 billion in liquid assets (24.3% of total cash and investments) and the status of the $1.00 billion commercial paper and credit facilities.
• Catastrophe Reserves: Monitor the $60 million favorable reserve reestimates for prior year catastrophes (Hurricanes Ike and Gustav) and the potential for future volatility in these estimates.