ALL

Business Context and Reporting Period

This summary covers The Allstate Corporation's Form 10-Q for the quarterly period ended September 30, 2006. The Company operates primarily through two segments: Property-Liability (Allstate Protection and Discontinued Lines) and Allstate Financial. The reporting period reflects significant strategic shifts, including the disposal of substantially all variable annuity business to Prudential Financial on June 1, 2006, and ongoing efforts to manage catastrophe exposure through reinsurance and underwriting adjustments.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Surge: Net income for the three months ended September 30, 2006, was $1.16 billion, a dramatic improvement from a net loss of $1.55 billion in the same period of 2005. This turnaround was driven by significantly lower catastrophe losses ($169 million in Q3 2006 vs. $4.71 billion in Q3 2005) and favorable prior-year reserve reestimates ($221 million in Q3 2006).
• Underwriting Performance: The Property-Liability combined ratio improved to 84.1% in Q3 2006 from 149.6% in Q3 2005. The loss ratio dropped to 59.0% from 125.8%, reflecting the absence of major hurricane losses that impacted the prior year.
• Segment Restructuring: The Allstate Financial segment reported net income of $135 million in Q3 2006, down 12.3% from the prior year, largely due to the June 1, 2006, disposal of its variable annuity business. This transaction resulted in a $59 million after-tax loss on disposition of operations for the nine-month period.
• Reinsurance Costs: The cost of the catastrophe reinsurance program increased, impacting premiums written and earned by $214 million in Q3 2006 compared to $60 million in Q3 2005.

Guidance, Outlook, and Risks

• Catastrophe Management: Management continues to reduce catastrophe exposure by removing wind coverage in certain areas, adjusting rates, and purchasing reinsurance. The Company expects to eliminate approximately 90% of optional earthquake coverage countrywide by the end of 2007.
• Rate Filings: The Company has submitted over 350 rate filings in 29 states to recover reinsurance costs. Approximately 35% of these costs are currently reflected in effective rates, with expectations to reach over 50% by the end of 2007.
• Capital Actions: As of September 30, 2006, $295 million remained on a $4.0 billion share repurchase program. In October 2006, the Company announced a new $3.0 billion repurchase program expected to be completed by March 31, 2008.
• Legal and Regulatory Risks: Significant legal proceedings include multi-state class actions regarding "inherent diminished value" in auto policies, medical bill review processes, and worker classification issues. The Company also faces potential assessments from Florida state facilities (FL Citizens and FHCF) related to hurricane losses, though recent communications suggest a reduction in expected assessments.
• Accounting Changes: The Company adopted SFAS No. 158 regarding pension plans, which is expected to decrease shareholders' equity by approximately $1.37 billion upon adoption in the fourth quarter of 2006.

Investor Verification Checklist

• Catastrophe Reserve Adequacy: Verify the stability of the $19.1 billion property-liability claims reserve, particularly regarding the impact of favorable reestimates from prior years.
• Reinsurance Cost Recovery: Monitor the progress of rate filings in 29 states to ensure the Company can fully recover the increased $840 million annualized cost of its reinsurance program.
• Variable Annuity Disposition: Review the long-term amortization of the $78 million deferred gain from the Prudential transaction and the impact of the $59 million loss on disposition.
• Florida Exposure: Assess the potential for emergency assessments from FL Citizens and FHCF should cash flows from these facilities prove insufficient to cover deficits.
• Pension Plan Impact: Confirm the final impact of SFAS No. 158 adoption on the balance sheet and debt-to-equity ratios in the upcoming 10-K filing.