ALL

Business Context and Reporting Period

This summary covers The Allstate Corporation's Form 10-Q for the quarterly period ended June 30, 2009. The Company operates primarily through two segments: Property-Liability (Allstate Protection and Discontinued Lines) and Allstate Financial. The reporting period reflects the adoption of FASB Staff Position No. FAS 115-2 regarding other-than-temporary impairments (OTTI) on April 1, 2009, which resulted in a reclassification of $1.15 billion of previously recorded write-downs from retained income to unrealized capital losses.

Key Financial Metrics

Note: Comparative balance sheet data for Q2 2008 is not provided in the text; December 31, 2008 Total Assets were $134.8 billion and Equity was $12.6 billion.

Material Changes vs. Prior Period

• Net Income Improvement: Consolidated net income increased significantly to $389 million in Q2 2009 from $25 million in Q2 2008, driven primarily by a shift from net realized capital losses of $1.22 billion in 2008 to net realized capital gains of $328 million in 2009.
• Property-Liability Performance: The Property-Liability segment reported a combined ratio of 100.0 in Q2 2009, worsening from 94.4 in Q2 2008. This deterioration was driven by increased catastrophe losses ($818 million in Q2 2009 vs. $698 million in Q2 2008) and higher claim frequencies and severities in auto and homeowners lines.
• Allstate Financial Turnaround: The Allstate Financial segment reported a net income of $19 million in Q2 2009, a significant improvement from a net loss of $379 million in Q2 2008. This was largely due to reduced realized capital losses and improved investment spreads.
• Investment Portfolio: Total investments increased slightly to $96.46 billion from $96.00 billion at year-end 2008. Net investment income declined 21.5% year-over-year due to lower yields and reduced average investment balances.
• Accounting Change: The adoption of FSP FAS 115-2 resulted in a $285 million net benefit to equity, primarily from a decrease in the deferred tax asset valuation allowance.

Guidance, Outlook, and Risks

• Outlook: Management continues to focus on protecting financial strength, improving customer loyalty, and reinventing protection and retirement products. The Company is monitoring market conditions for potential business start-ups or acquisitions.
• Capital Management: The Company suspended its $2.0 billion share repurchase program and reduced the quarterly dividend to $0.20 per share (from $0.41) to preserve liquidity. In May 2009, the Company issued $1.0 billion in senior notes to facilitate the repayment of maturing debt.
• Investment Risks: Significant unrealized net capital losses of $7.33 billion remain in the portfolio, concentrated in fixed income securities (municipals, corporates, RMBS, CMBS, and ABS). Management asserts it has the intent and ability to hold these securities to recovery, but notes that further deterioration in collateral performance could lead to additional OTTI charges.
• Legal and Regulatory: The Company faces ongoing litigation related to Hurricanes Katrina and Rita, specifically regarding flood exclusions and general contractor overhead claims in Louisiana and Mississippi. Additionally, a multi-state examination of claims handling practices is underway.
• Rating Actions: In early 2009, S&P and Moody's downgraded the Company's ratings. A.M. Best affirmed its ratings in February 2009 but downgraded the Castle Key Group (Florida operations) to B- in July 2009.

Key Facts for Investor Verification

• OTTI Accounting Impact: Verify the specific impact of the FSP FAS 115-2 adoption on the valuation allowance and the reclassification of $1.15 billion from retained income to OCI.
• Catastrophe Exposure: Review the detailed breakdown of catastrophe losses ($818 million in Q2 2009) and the adequacy of reinsurance coverage, particularly for Florida and the North-East regions.
• Illiquid Portfolio Valuation: Assess the valuation methodology for the $6.89 billion of illiquid fixed income securities (Subprime, Alt-A, CMBS, CDOs) categorized as Level 3, which represent a significant portion of unrealized losses.
• Liquidity Position: Confirm the $3.38 billion in deployable invested assets at the parent holding company level and the status of the $750 million intercompany loan to Allstate Insurance Company.
• Legal Reserves: Monitor the status of Hurricane-related litigation and the potential for reserve reestimates, particularly in Louisiana where class action certification is pending.