ALL

Business Context and Reporting Period

This summary covers The Allstate Corporation's Form 10-Q for the quarterly period ended March 31, 2007. The Company operates primarily through two segments: Property-Liability (Allstate Protection and Discontinued Lines) and Allstate Financial. The report details financial performance, investment results, and liquidity positions, noting the adoption of several new accounting standards effective January 1, 2007, including FIN 48 (uncertainty in income taxes) and SFAS 158 (pension accounting).

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Growth: Net income increased 5.7% year-over-year, driven by higher realized capital gains ($471 million vs. $199 million) and increased net investment income. Diluted EPS rose 10.0%.
• Underwriting Deterioration: The Property-Liability combined ratio worsened from 81.9% to 84.6%. This was primarily due to higher catastrophe losses ($161 million vs. $107 million), increased claim frequency and severity in auto and homeowners lines, and lower favorable reserve reestimates ($129 million vs. $211 million).
• Premium Trends: Total Property-Liability premiums earned declined 1.0%. While standard auto premiums grew, homeowners premiums written dropped 5.8% due to catastrophe management actions and reinsurance costs.
• Financial Segment Performance: Allstate Financial net income surged 51.9% to $164 million, largely due to the absence of a $53 million loss on disposition of operations recorded in Q1 2006 related to the variable annuity reinsurance transaction.
• Shareholder Returns: The Company repurchased $720 million of treasury stock in Q1 2007 and declared a cash dividend of $0.38 per share.

Guidance, Outlook, and Risks

• Capital Allocation: The Board authorized the issuance of up to $1 billion of junior subordinated securities in Q2 2007 to fund an additional $1 billion in share repurchases, extending the existing $3 billion program through March 31, 2008.
• Reinsurance Strategy: Management continues to aggressively seek to cover reinsurance costs in premium rates. Rates effective in 2007 reflect approximately 45% of ceded costs, with expectations to reach over 50% by year-end.
• Legal and Regulatory Risks: Significant ongoing litigation includes multi-state class actions regarding "inherent diminished value" in auto claims, medical bill review processes, and flood exclusions related to Hurricanes Katrina and Rita. Management believes the ultimate outcome is not likely to be material but notes uncertainty.
• Accounting Changes: Adoption of FIN 48 resulted in a $48 million liability for unrecognized tax benefits. Adoption of SFAS 158 reduced shareholders' equity by $1.11 billion at year-end 2006 to reflect the funded status of pension plans.
• Investment Portfolio: 94.3% of the fixed income portfolio is investment grade. Management recognized $27 million in losses related to a change in intent to hold certain securities to achieve liquidity objectives.

Investor Verification Checklist

• Catastrophe Exposure: Verify the adequacy of reserves for weather-related events given the 5.6 point increase in the standard auto loss ratio and 3.4 point increase in the homeowners loss ratio.
• Reinsurance Cost Recovery: Monitor the effectiveness of rate increases in covering the $216 million cost of the catastrophe reinsurance program in Q1 2007.
• Legal Reserves: Review the status of the "inherent diminished value" and flood exclusion lawsuits, as unfavorable outcomes could impact future reserves.
• Investment Impairment: Assess the $27 million in realized losses from changed intent to hold securities and the $506 million in gross unrealized losses in the fixed income portfolio.
• Share Repurchase Execution: Track the execution of the new $1 billion repurchase authorization funded by subordinated debt issuance.