Edgar Filing: ALLSTATE CORP

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-11840

THE ALLSTATE CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		36-3871531
(State of Incorporation)		(I.R.S. Employer Identification No.)

2775 Sanders Road
Northbrook, Illinois		60062
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 847/402-5000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x

No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	Accelerated filer	Non-accelerated filer	Smaller reporting company
x	o	o	o
	(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o

No x

As of July 31, 2008, the registrant had 541,517,994 common shares, $.01 par value, outstanding.

THE ALLSTATE CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

June 30, 2008

		PAGE
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Statements of Operations for the Three-Month and Six-Month Periods Ended June 30, 2008 and 2007 (unaudited)	1

	Condensed Consolidated Statements of Financial Position as of June 30, 2008 (unaudited) and December 31, 2007	2

	Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2008 and 2007 (unaudited)	3

	Notes to Condensed Consolidated Financial Statements (unaudited)	4

	Report of Independent Registered Public Accounting Firm	27

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

	Highlights	28
	Consolidated Net Income	29
	Property-Liability Highlights	29
	Allstate Protection Segment	33
	Discontinued Lines and Coverages Segment	46
	Property-Liability Investment Results	47
	Allstate Financial Highlights	48
	Allstate Financial Segment	48
	Investments	54
	Application of Critical Accounting Estimates	72
	Capital Resources and Liquidity	80

Item 4.	Controls and Procedures	83

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	84

Item 1A.	Risk Factors	84

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	85

Item 4.	Submission of Matters to a Vote of Security Holders	86

Item 6.	Exhibits	86

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE ALLSTATE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended June 30,					Six Months Ended June 30,
($ in millions, except per share data)	2008			2007		2008			2007
	(unaudited)					(unaudited)
Revenues
Property-liability insurance premiums earned	$	6,750		$	6,822	$	13,514		$	13,628
Life and annuity premiums and contract charges	471			454		923			937
Net investment income	1,412			1,634		2,938			3,205
Realized capital gains and losses	(1,215		)	545		(1,870		)	1,016
	7,418			9,455		15,505			18,786

Costs and expenses
Property-liability insurance claims and claims expense	4,776			4,317		9,452			8,434
Life and annuity contract benefits	395			386		792			814
Interest credited to contractholder funds	563			673		1,187			1,322
Amortization of deferred policy acquisition costs	959			1,216		2,034			2,369
Operating costs and expenses	728			734		1,520			1,461
Restructuring and related charges	(5		)	4		(6		)	3
Interest expense	88			83		176			155
	7,504			7,413		15,155			14,558

Gain (loss) on disposition of operations	—			2		(9		)	2

(Loss) income from operations before income tax (benefit) expense	(86		)	2,044		341			4,230

Income tax (benefit) expense	(111		)	641		(32		)	1,332

Net income	$	25		$	1,403	$	373		$	2,898

Earnings per share:

Net income per share - Basic	$	0.05		$	2.33	$	0.67		$	4.75

Weighted average shares - Basic	549.6			604.1		554.2			610.4

Net income per share - Diluted	$	0.05		$	2.30	$	0.67		$	4.71

Weighted average shares - Diluted	552.9			608.8		557.2			615.2

Cash dividends declared per share	$	0.41		$	0.38	$	0.82		$	0.76

See notes to condensed consolidated financial statements.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

	June 30,			December 31,
($ in millions, except par value data)	2008			2007
	(unaudited)
Assets
Investments
Fixed income securities, at fair value (amortized cost $84,438 and $93,495)	$	83,224		$	94,451
Equity securities, at fair value (cost $4,197 and $4,267)	4,664			5,257
Mortgage loans	10,629			10,830
Limited partnership interests	2,890			2,501
Short-term	9,639			3,058
Other	2,557			2,883
Total investments	113,603			118,980
Cash	748			422
Premium installment receivables, net	4,906			4,879
Deferred policy acquisition costs	6,630			5,768
Reinsurance recoverables, net	5,798			5,817
Accrued investment income	968			1,050
Deferred income taxes	1,333			467
Property and equipment, net	1,017			1,062
Goodwill	875			825
Other assets	2,517			2,209
Separate Accounts	12,438			14,929
Total assets	$	150,833		$	156,408
Liabilities
Reserve for property-liability insurance claims and claims expense	$	18,863		$	18,865
Reserve for life-contingent contract benefits	12,965			13,212
Contractholder funds	62,419			61,975
Unearned premiums	10,266			10,409
Claim payments outstanding	833			748
Other liabilities and accrued expenses	7,682			8,779
Short-term debt	18			—
Long-term debt	5,640			5,640
Separate Accounts	12,438			14,929
Total liabilities	131,124			134,557

Commitments and Contingent Liabilities (Note 8)
Shareholders’ equity
Preferred stock, $1 par value, 25 million shares authorized, none issued	—			—
Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 546 million and 563 million shares outstanding	9			9
Additional capital paid-in	3,096			3,052
Retained income	32,701			32,796
Deferred ESOP expense	(49		)	(55		)
Treasury stock, at cost (354 million and 337 million shares)	(15,420		)	(14,574		)
Accumulated other comprehensive income:
Unrealized net capital gains and losses	(274		)	888
Unrealized foreign currency translation adjustments	65			79
Net funded status of pension and other postretirement benefit obligation	(419		)	(344		)
Total accumulated other comprehensive (loss) income	(628		)	623
Total shareholders’ equity	19,709			21,851
Total liabilities and shareholders’ equity	$	150,833		$	156,408

See notes to condensed consolidated financial statements.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended June 30,
($ in millions)	2008			2007
	(unaudited)
Cash flows from operating activities
Net income	$	373		$	2,898
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other non-cash items	(141		)	(114		)
Realized capital gains and losses	1,870			(1,016		)
Gain (loss) on disposition of operations	9			(2		)
Interest credited to contractholder funds	1,187			1,322
Changes in:
Policy benefits and other insurance reserves	(146		)	(213		)
Unearned premiums	(179		)	(108		)
Deferred policy acquisition costs	(269		)	36
Premium installment receivables, net	(12		)	(62		)
Reinsurance recoverables, net	51			(145		)
Income taxes (payable) receivable	(361		)	113
Other operating assets and liabilities	(83		)	(115		)
Net cash provided by operating activities	2,299			2,594
Cash flows from investing activities
Proceeds from sales
Fixed income securities	14,113			11,939
Equity securities	5,106			3,758
Limited partnership interests	214			648
Mortgage loans	204			—
Other investments	163			82
Investment collections
Fixed income securities	2,144			2,719
Mortgage loans	399			978
Other investments	69			265
Investment purchases
Fixed income securities	(9,430		)	(14,174		)
Equity securities	(5,155		)	(2,864		)
Limited partnership interests	(599		)	(750		)
Mortgage loans	(438		)	(1,472		)
Other investments	(75		)	(498		)
Change in short-term investments, net	(6,604		)	(1,707		)
Change in other investments, net	(274		)	96
(Acquisition) disposition of operations	(120		)	—
Purchases of property and equipment, net	(98		)	(150		)
Net cash used in investing activities	(381		)	(1,130		)
Cash flows from financing activities
Change in short-term debt, net	18			(12		)
Proceeds from issuance of long-term debt	—			987
Repayment of long-term debt	—			(9		)
Contractholder fund deposits	7,035			5,009
Contractholder fund withdrawals	(7,441		)	(5,369		)
Dividends paid	(444		)	(451		)
Treasury stock purchases	(865		)	(1,826		)
Shares reissued under equity incentive plans, net	13			90
Excess tax benefits on share-based payment arrangements	2			27
Other	90			32
Net cash used in financing activities	(1,592		)	(1,522		)
Net increase (decrease) in cash	326			(58		)
Cash at beginning of period	422			443
Cash at end of period	$	748		$	385

See notes to condensed consolidated financial statements.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. General

Basis of presentation

The accompanying condensed consolidated financial statements include the accounts of The Allstate Corporation and its wholly owned subsidiaries, primarily Allstate Insurance Company (“AIC”), a property–liability insurance company with various property–liability and life and investment subsidiaries, including Allstate Life Insurance Company (“ALIC”) (collectively referred to as the “Company” or “Allstate”).

The condensed consolidated financial statements and notes as of June 30, 2008, and for the three–month and six–month periods ended June 30, 2008 and 2007 are unaudited. The condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals), which are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods. These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10–K for the year ended December 31, 2007. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

To conform to the 2008 presentation, certain amounts in the prior year condensed consolidated financial statements and notes have been reclassified.

Adopted accounting standards

Statement of Position 05–1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts (“SOP 05–1”)

In October 2005, the American Institute of Certified Public Accountants (“AICPA”) issued SOP 05–1. SOP 05–1 provides accounting guidance for deferred policy acquisition costs (“DAC”) associated with internal replacements of insurance and investment contracts other than those set forth in Statement of Financial Accounting Standards (“SFAS”) No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long–Duration Contracts and for Realized Gains and Losses from the Sale of Investments”. SOP 05–1 defines an internal replacement as a modification in product benefits, features, rights or coverages that occurs through the exchange of an existing contract for a new contract, or by amendment, endorsement or rider to an existing contract, or by the election of a feature or coverage within an existing contract. The Company adopted the provisions of SOP 05–1 on January 1, 2007 for internal replacements occurring in fiscal years beginning after December 15, 2006. The adoption resulted in a $9 million after–tax reduction to retained income to reflect the impact on estimated future gross profits (“EGP”) from the changes in accounting for certain costs associated with contract continuations that no longer qualify for deferral under SOP 05–1 and a reduction of DAC and deferred sales inducement balances of $13 million pre–tax as of January 1, 2007.

SFAS No. 155, Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140 (“SFAS No. 155”)

In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, which permits fair value remeasurement at the date of adoption of any hybrid financial instrument containing an embedded derivative that otherwise would require bifurcation under paragraph 12 or 13 of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”); clarifies which interest–only strips and principal–only strips are not subject to the requirements of SFAS No. 133; establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or hybrid financial instruments that contain embedded derivatives requiring bifurcation; and clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives. The Company adopted the provisions of SFAS No. 155 on January 1, 2007, which were effective for all financial instruments acquired, issued or subject to a remeasurement event occurring after the beginning of the first fiscal year after September 15, 2006. The Company elected not to remeasure existing hybrid financial instruments that contained embedded derivatives requiring bifurcation at the date of adoption pursuant to paragraph 12 or 13 of SFAS No. 133. The adoption of SFAS No. 155 did not have a material effect on the results of operations or financial position of the Company.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 and FASB Staff Position No. FIN 48–1, Definition of Settlement in FASB Interpretation No. 48 (“FIN 48”)

The FASB issued FIN 48 in July 2006 and the related staff position in May 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes”. FIN 48 requires an entity to recognize the tax benefit of uncertain tax positions only when it is more likely than not, based on the position’s technical merits, that the position would be sustained upon examination by the respective taxing authorities. The tax benefit is measured as the largest benefit that is more than fifty–percent likely of being realized upon final settlement with the respective taxing authorities. On January 1, 2007, the Company adopted the provisions of FIN 48, which were effective for fiscal years beginning after December 15, 2006. No cumulative effect of a change in accounting principle or adjustment to the liability for unrecognized tax benefits was recognized as a result of the adoption of FIN 48. Accordingly, the adoption of FIN 48 did not have an effect on the results of operations or financial position of the Company.

SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) (“SFAS No. 158”)

SFAS No. 158 required, as of December 31, 2006 for calendar year–end companies, recognition in the statements of financial position of the over or underfunded status of defined pension and other postretirement plans, measured as the difference between the fair value of plan assets and the projected benefit obligation (“PBO”) for pension plans and the accumulated postretirement benefit obligation (“APBO”) for other postretirement benefit plans. This effectively required the recognition of all previously unrecognized actuarial gains and losses and prior service costs as a component of accumulated other comprehensive income, net of tax, at the date of adoption. In addition, SFAS No. 158 required, on a prospective basis, that the actuarial gains and losses and prior service costs and credits that arise during any reporting period, but are not recognized as components of net periodic benefit cost, be recognized as a component of other comprehensive income (“OCI”) and that disclosure in the notes to the financial statements include the anticipated impact on the net periodic benefit cost of the actuarial gains and losses and the prior service costs and credits previously deferred and recognized, net of tax, as a component of OCI. The Company adopted the funded status provisions of SFAS No. 158 as of December 31, 2006. The impact on the Consolidated Statements of Financial Position of adopting SFAS No. 158, including the inter–related impact to the minimum pension liability, was a decrease in shareholders’ equity of $1.11 billion.

In addition to the impacts of reporting the funded status of pension and other postretirement benefit plans and the related additional disclosures, SFAS No. 158 also required reporting entities to conform plan measurement dates with the fiscal year–end reporting date. The effective date of the guidance relating to the measurement date of the plans is for years ending after December 15, 2008. The Company remeasured its plans as of January 1, 2008 to transition to a December 31 measurement date in 2008. As a result, the Company recorded a decrease of $13 million, net of tax, to beginning retained earnings in 2008 representing the net periodic benefit cost for the period between October 31, 2007 and December 31, 2007 and a decrease of $80 million, net of tax, to beginning accumulated other comprehensive income in 2008 to reflect changes in the fair value of plan assets and the benefit obligations between October 31, 2007 and January 1, 2008, and for amortization of actuarial gains and losses and prior service cost between October 31, 2007 and December 31, 2007.

SEC Staff Accounting Bulletin No. 109, Written Loan Commitments That are Recorded At Fair Value Through Earnings (“SAB 109”)

In October 2007, the SEC issued SAB 109, a replacement of SAB 105, “Application of Accounting Principles to Loan Commitments”. SAB 109 is applicable to both loan commitments accounted for under SFAS No. 133, and other loan commitments for which the issuer elects fair value accounting under SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. SAB 109 states that the expected net future cash flows related to the servicing of a loan should be included in the fair value measurement of a loan commitment accounted for at fair value through earnings. The expected net future cash flows associated with loan servicing should be determined in accordance with the guidance in SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, as amended by SFAS No. 156, “Accounting for Servicing of Financial Assets”. SAB 109 should be applied on a prospective basis to loan commitments accounted for under SFAS No. 133 that were issued or modified in fiscal quarters beginning after December 15, 2007. Earlier adoption was not permitted. The adoption of SAB 109 did not have a material impact on the Company’s results of operations or financial position.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

SFAS No. 157, Fair Value Measurements (“SFAS No. 157”)

In September 2006, the FASB issued SFAS No. 157, which redefines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS No. 157 establishes a three–level hierarchy for fair value measurements based upon the nature of the inputs to the valuation of an asset or liability. SFAS No. 157 applies where other accounting pronouncements require or permit fair value measurements. In February 2008, the FASB issued FASB Staff Position No. 157–2, “Effective Date of FASB Statement No. 157” (“FSP 157–2”), which permits the deferral of the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company adopted the provisions of SFAS No. 157 for financial assets and liabilities recognized or disclosed at fair value on a recurring and non–recurring basis as of January 1, 2008. Consistent with the provisions of FSP 157–2, the Company decided to defer the adoption of SFAS No. 157 for non–financial assets and liabilities measured at fair value on a non–recurring basis until January 1, 2009. The adoption of SFAS No. 157 did not have a material effect on the Company’s results of operations or financial position (see Note 4).

SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115 (“SFAS No. 159”)

In February 2007, the FASB issued SFAS No. 159 which provides reporting entities, on an ongoing basis, an option to report selected financial assets, including investment securities, and financial liabilities, including most insurance contracts, at fair value through earnings. SFAS No. 159 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement alternatives for similar types of financial assets and liabilities. The standard also requires additional information to aid financial statement users’ understanding of the impacts of a reporting entity’s decision to use fair value on its earnings and requires entities to display, on the face of the statement of financial position, the fair value of those assets and liabilities for which the reporting entity has chosen to measure at fair value. SFAS No. 159 was effective as of the beginning of a reporting entity’s first fiscal year beginning after November 15, 2007. The Company did not apply the fair value option to any existing financial assets or liabilities as of January 1, 2008. Consequently, the initial adoption of SFAS No. 159 had no impact on the Company’s results of operations or financial position.

FASB Staff Position No. FIN 39–1, Amendment of FASB Interpretation No. 39 (“FSP FIN 39–1”)

In April 2007, the FASB issued FSP FIN 39–1, which amends FASB Interpretation No. 39, “Offsetting of Amounts Related to Certain Contracts”. FSP FIN 39–1 replaces the terms “conditional contracts” and “exchange contracts” with the term “derivative instruments” and requires a reporting entity to offset fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement that have been offset in the statement of financial position. FSP FIN 39–1 was effective for fiscal years beginning after November 15, 2007, with early adoption permitted. The adoption of FSP FIN 39–1 did not have a material impact on the Company’s results of operations or financial position.

Pending accounting standards

SFAS No. 141(R), Business Combinations (“SFAS No. 141R”)

In December 2007, the FASB issued SFAS No. 141R which replaces SFAS No. 141, “Business Combinations” (“SFAS No. 141”). Among other things, SFAS No. 141R broadens the scope of SFAS No. 141 to include all transactions where an acquirer obtains control of one or more other businesses; retains the guidance to recognize intangible assets separately from goodwill; requires, with limited exceptions, that all assets acquired and liabilities assumed, including certain of those that arise from contractual contingencies, be measured at their acquisition date fair values; requires most acquisition and restructuring–related costs to be expensed as incurred; requires that step acquisitions, once control is acquired, to be recorded at the full amounts of the fair values of the identifiable assets, liabilities and the noncontrolling interest in the acquiree; and replaces the reduction of asset values and recognition of negative goodwill with a requirement to recognize a gain in earnings. The provisions of SFAS No. 141R are effective for fiscal years beginning after December 15, 2008 and are to be applied prospectively only. Early adoption is not permitted. The Company will apply the provisions of SFAS 141R as required when effective.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51 (“SFAS No. 160”)

In December 2007, the FASB issued SFAS No. 160 which clarifies that a noncontrolling interest in a subsidiary is that portion of the subsidiary’s equity that is attributable to owners of the subsidiary other than its parent or parent’s affiliates. Noncontrolling interests are required to be reported as equity in the consolidated financial statements and as such net income will include amounts attributable to both the parent and the noncontrolling interest with disclosure of the amounts attributable to each on the face of the consolidated statement of operations. SFAS No. 160 requires that all changes in a parent’s ownership interest in a subsidiary when control of the subsidiary is retained, be accounted for as equity transactions. In contrast, SFAS No. 160 requires a parent to recognize a gain or loss in net income when control over a subsidiary is relinquished and the subsidiary is deconsolidated, as well as provide certain associated expanded disclosures. SFAS No. 160 is effective as of the beginning of a reporting entity’s first fiscal year beginning after December 15, 2008. Early adoption is prohibited. SFAS No. 160 requires prospective application as of the beginning of the fiscal year in which the standard is initially applied, except for the presentation and disclosure requirements which are to be applied retrospectively for all periods presented. The adoption of SFAS No. 160 is not expected to have a material effect on the Company’s results of operations or financial position.

SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (“SFAS No. 161”)

In March 2008, the FASB issued SFAS No. 161, which amends and expands the disclosure requirements for derivatives currently accounted for in accordance with SFAS No. 133. The new disclosures are designed to enhance the understanding of how and why an entity uses derivative instruments and how derivative instruments affect an entity’s financial position, results of operations, and cash flows. The standard requires, on a quarterly basis, quantitative disclosures about the potential cash outflows associated with the triggering of credit–related contingent features, if any; tabular disclosures about the classification and fair value amounts of derivative instruments reported in the statement of financial position; disclosure of the location and amount of gains and losses on derivative instruments reported in the statement of operations; and qualitative information about how and why an entity uses derivative instruments and how derivative instruments and related hedged items affect the entity’s financial statements. SFAS No. 161 is effective for fiscal periods beginning after November 15, 2008, and is to be applied on a prospective basis only. SFAS No. 161 affects disclosures and therefore will not impact the Company’s results of operations or financial position.

2. Earnings per share

Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share is computed based on the weighted average number of common and dilutive potential common shares outstanding. For Allstate, dilutive potential common shares consist of outstanding stock options and restricted stock units.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The computation of basic and diluted earnings per share is presented in the following table.

	Three months ended June 30,				Six months ended June 30,
($ in millions, except per share data)	2008		2007		2008		2007

Numerator:
Net income	$	25	$	1,403	$	373	$	2,898

Denominator:
Weighted average common shares outstanding	549.6		604.1		554.2		610.4
Effect of dilutive potential securities:
Stock options	1.0		2.9		0.9		3.1
Unvested restricted stock units	2.3		1.8		2.1		1.7
Weighted average common and dilutive potential common shares outstanding	552.9		608.8		557.2		615.2

Earnings per share – Basic:	$	0.05	$	2.33	$	0.67	$	4.75
Earnings per share – Diluted:	$	0.05	$	2.30	$	0.67	$	4.71

The effect of dilutive potential securities does not include the options with exercise prices that exceed the average market price of Allstate common shares during the period or for which the unrecognized compensation cost would have an antidilutive effect. Options to purchase 17.6 million and 4.1 million Allstate common shares, with exercise prices ranging from $48.01 to $65.38 and $52.23 to $65.38, were outstanding at June 30, 2008 and 2007, respectively, but were not included in the computation of diluted earnings per share for the six–month periods.

3. Supplemental Cash Flow Information

Non–cash investment exchanges and modifications, which primarily reflect refinancings of fixed income securities and mergers completed with equity securities and limited partnerships, totaled $20 million and $60 million for the six–month periods ended June 30, 2008 and 2007, respectively.

Liabilities for collateral received in conjunction with the Company’s securities lending and other business activities and for funds received from the Company’s security repurchase business activities are reported in either other liabilities and accrued expenses or other invested assets as permitted under FSP FIN 39-1 in the Condensed Consolidated Statements of Financial Position. The accompanying cash flows are included in cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows along with the activities resulting from management of the proceeds, which are as follows:

	Six months ended June 30,
($ in millions)	2008			2007
Net change in fixed income securities	$	399		$	(799	)
Net change in short–term investments	82			(547		)
Operating cash flow provided (used)	481			(1,346		)
Net change in cash	—			2
Net change in proceeds managed	$	481		$	(1,344	)

Liabilities for collateral and security repurchase, beginning of year	$	(3,461	)	$	(4,144	)
Liabilities for collateral and security repurchase, end of period	(2,980		)	(5,488		)
Operating cash flow (used) provided	$	(481	)	$	1,344

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4. Fair Value of Financial Assets and Financial Liabilities

The measurement basis for a significant amount of the Company’s financial assets is fair value. Financial instruments measured at fair value on a recurring basis include:

Financial Assets Primarily investments including U.S. treasuries, U.S. equities, international equities, money market funds, corporates, municipals, U.S. government and agencies, commercial mortgage–backed securities (“CMBS”), preferred stock, mortgage–backed securities (“MBS”), foreign governments, asset–backed securities (“ABS”), commercial paper, derivatives (exchange traded and over–the–counter (“OTC”)), and separate account assets.

Financial Liabilities Primarily free–standing derivatives (exchange listed and OTC) and derivatives embedded in certain contractholder liabilities in the Allstate Financial segment.

Financial instruments measured at fair value on a non–recurring basis include:

Financial Assets Primarily mortgage loans and other investments written–down to fair value in connection with recognizing other–than–temporary impairments.

Financial Liabilities Includes certain reserves on a closed block of policies expected to be transferred through a future reinsurance agreement to an unrelated third party.

SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company adopted the provisions of SFAS No. 157 as of January 1, 2008 for its financial assets and financial liabilities that are measured at fair value. SFAS No. 157:

· Defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, and establishes a framework for measuring fair value;

· Establishes a three–level hierarchy for fair value measurements based upon the transparency of inputs to the valuation as of the measurement date;

· Expands disclosures about financial instruments measured at fair value.

In determining fair value, the Company principally uses the market approach which generally utilizes market data for the same or similar instruments. To a lesser extent, the Company uses the income approach which involves determining fair values from discounted cash flow methodologies. SFAS No. 157 establishes a hierarchy for inputs used in determining fair value that maximize the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Certain financial assets are not carried at fair value on a recurring basis, including investments such as mortgage loans, limited partnership interests, bank loans and policy loans, and thus are only categorized in the fair value hierarchy when held at fair value on a non–recurring basis. In addition, equity options embedded in fixed income securities are not disclosed in the hierarchy with free–standing derivatives as the embedded derivatives are presented as combined instruments in fixed income securities.

Observable inputs are those used by market participants in valuing financial instruments that are developed based on market data obtained from independent sources. In the absence of sufficient observable inputs, unobservable inputs reflect the Company’s estimates of the assumptions market participants would use in valuing financial assets and financial liabilities and are developed based on the best information available in the circumstances.

Pursuant to SFAS No. 157, fair value is a market–based measure, considered from the perspective of a market participant who owns an asset or owes a liability. Accordingly, when market observable data is not readily available, the Company’s own assumptions are set to reflect those that market participants would be presumed to use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2, or from Level 2 to Level 3.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Financial assets and financial liabilities recorded on the Condensed Consolidated Statements of Financial Position at fair value are categorized based on the reliability of inputs to the valuation techniques as follows:

Level 1 Financial assets and financial liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access.

Level 2 Financial assets and financial liabilities whose values are based on the following:

a)	Quoted prices for similar assets or liabilities in active markets;
b)	Quoted prices for identical or similar assets or liabilities in non–active markets; or
c)	Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability

Level 3 Financial assets and financial liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs may reflect the Company’s estimates of the assumptions that market participants would use in valuing the financial assets and financial liabilities.

The availability of observable inputs varies by instrument. In situations where fair value is based on internally developed pricing models or inputs that are unobservable in the market, the determination of fair value requires more judgment. The degree of judgment exercised by the Company in determining fair value is typically greatest for instruments categorized in Level 3. In many instances, inputs used to measure fair value fall into different levels of the fair value hierarchy. In those instances, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is categorized is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Summary of Significant Valuation Techniques for Financial Assets and Financial Liabilities on a Recurring Basis

Level 1 Measurements

Fixed Income Securities: U.S. treasuries are in Level 1 and valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.

Equity Securities: Comprise actively traded, exchange listed U.S. and international equity securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.

Short-term: Comprise actively traded money market funds that have daily quoted net asset values for identical assets that the Company can access.

Separate Account Assets: Comprise actively traded mutual funds that have daily quoted net asset values for identical assets that the Company can access. Net asset values for the actively traded mutual funds in which the separate account assets are invested are obtained daily from the fund managers.

Level 2 Measurements

Fixed Income Securities:

Corporate, including privately placed: Valued based on inputs including quoted prices for identical or similar assets in markets that are not active. Also includes privately placed securities totaling $4.4 billion that are valued based on market–observable external ratings from independent third party rating agencies.

Municipal: Externally rated municipals are valued based on inputs including quoted prices for identical or similar assets in markets that are not active. Included in municipals are $89 million of auction rate securities (“ARS”) other than those backed by student loans. ARS backed by student loans are included in Level 3.

U.S. Government and Agencies: Valued based on inputs including quoted prices for identical or similar assets in markets that are not active.

CMBS: Valuation is principally based on inputs including quoted prices for identical or similar assets in markets that are not active and are categorized as Level 2.

Preferred Stock; MBS; Foreign Government; ABS – credit card and auto loans: Valued based on inputs including quoted prices for identical or similar assets in markets that are not active.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Equity Securities: Valued based on inputs including quoted prices for identical or similar assets in markets that are not active.

Short–term: Commercial paper and other short–term are valued based on inputs including amortized cost, which approximates fair value, and quoted prices for identical or similar assets in markets that are not active.

Other Investments: Free–standing exchange listed derivatives that are not actively traded are valued based on quoted prices for identical instruments in markets that are not active.

OTC derivatives including interest rate swaps, foreign currency swaps, foreign exchange forward contracts, certain credit default swaps, and commodity swaps are valued using models that rely on inputs such as interest rate yield curves, currency rates, counterparty credit risk, and commodity prices that are observable for substantially the full term of the contract. The valuation techniques underlying the models are widely accepted in the financial services industry and do not involve significant judgment.

Contractholder Funds: Derivatives embedded in certain annuity contracts are valued based on internal models that rely on inputs such as interest rate yield curves and equity index volatility assumptions that are market observable for substantially the full term of the contract. The valuation techniques are widely accepted in the financial services industry and do not include significant judgment.

Level 3 Measurements

Fixed Income Securities:

Corporate: Valued based on non–binding broker quotes and are categorized as Level 3.

Corporate Privately Placed Securities: Valued based on non–binding broker quotes and models that are widely accepted in the financial services industry and use internally assigned credit ratings as inputs and instrument specific inputs. Instrument specific inputs used in internal fair value determinations include: coupon rate, weighted average life, sector of the issuer and call provisions. Privately placed securities are categorized as Level 3 as a result of the significance of non–market observable inputs. The $11.4 billion of privately placed fixed income securities included in Level 3 comprise $9.9 billion valued using an internal model and $1.5 billion valued using non–binding broker quotes. The internally modeled securities are valued based on internal ratings, which are not observable in the market. Multiple internal ratings comprise a National Association of Insurance Commissioners (“NAIC”) rating category and when used in the internal model provide a more refined determination of fair value. The Company’s internal ratings are primarily consistent with the NAIC ratings which are generally updated annually.

ABS RMBS; Alt-A Residential Mortgage–backed Securities (“Alt-A”): ABS RMBS and Alt-A are principally valued based on inputs including quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements. Certain ABS RMBS and Alt-A are valued based on non–binding broker quotes. Due to the reduced availability of actual market prices or relevant observable inputs as a result of the decrease in liquidity that has been experienced in the market for these securities, all ABS RMBS and Alt-A are categorized as Level 3.

Other CDO; ABS CDO: Valued based on non–binding broker quotes received from brokers who are familiar with the investments. Due to the reduced availability of actual market prices or relevant observable inputs as a result of the decrease in liquidity that has been experienced in the market for these securities, all CLO, ABS CDO, and Synthetic CDO are categorized as Level 3.

CMBS; Commercial Real Estate Collateralized Debt Obligations (“CRE CDO”): CRE CDO, which are reported as CMBS, and other CMBS, are valued based on non–binding broker quotes and are categorized as Level 3.

Municipals: Certain distressed municipal securities for which valuation is based on valuation models that are widely accepted in the financial services industry and require projections of future cash flows that are not market–observable are included in Level 3. Included in this category are $1.9 billion of ARS that are backed by student loans. ARS backed by student loans are valued based on a discounted cash flow model with certain inputs to the valuation model that are significant to the valuation, but are not market observable, including estimates of future coupon rates if auction failures continue, maturity assumptions, and illiquidity premium.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Other Investments: Certain free–standing OTC derivatives, such as caps, floors, certain credit default swaps and OTC options (including swaptions), are valued using valuation models that are widely accepted in the financial services industry. Inputs include non–market observable inputs such as volatility assumptions that are significant to the valuation of the instruments.

Contractholder Funds: Derivatives embedded in annuity contracts are valued internally using models widely accepted in the financial services industry that determine a single best estimate of fair value for a block of contractholder liabilities that contain certain embedded derivatives. The models use stochastically determined cash flows based on the contractual elements of embedded derivatives and other applicable market data. These are categorized as Level 3 as a result of the significance of non–market observable inputs.

Financial Assets and Financial Liabilities on a Non-recurring Basis

Mortgage loans, limited partnerships and other investments written–down to fair value in connection with recognizing other–than–temporary impairments are primarily valued using valuation models that are widely accepted in the financial services industry. Inputs include non–market observable inputs such as credit spreads. At June 30, 2008, the fair value of mortgage loans, limited partnerships and other investments totaled $282 million and were categorized as Level 3.

Reserves on a closed block of policies expected to be transferred through a future reinsurance agreement to an unrelated third party are valued based on significant non–observable inputs. At June 30, 2008, the fair value of Reserves for life–contingent contract benefits on a closed block of policies totaled $89 million and were categorized as Level 3.

The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring and non–recurring basis as of June 30, 2008:

	Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs			Other Valuations and			Balance as of
($ in millions)	(Level 1)			(Level 2)			(Level 3)			Netting			June 30, 2008
Financial assets
Fixed income securities	$	875		$	60,062		$	22,287					$	83,224
Equity securities	3,968			621			75						4,664
Short-term investments:	895			7,797			—						8,692
Other investments:
Free–standing derivatives	—			601			59						660
Total recurring basis assets	5,738			69,081			22,421						97,240
Non–recurring basis	—			—			282						282
Valued at cost, amortized cost or using the equity method										$	16,495		16,495
Counterparty and cash collateral netting (1)										(414		)	(414		)
Total investments	5,738			69,081			22,703			16,081			113,603
Separate account assets	12,438			—			—			—			12,438
Other assets	1			—			2			—			3
Total financial assets	$	18,177		$	69,081		$	22,705		$	16,081		$	126,044
% of Total financial assets	14.4		%	54.8		%	18.0		%	12.8		%	100.0		%

Financial liabilities
Contractholder funds:
Derivatives embedded in annuity contracts	$	—		$	(50	)	$	(20	)				$	(70	)
Other liabilities:
Free–standing derivatives	—			(424		)	(78		)				(502		)
Non–recurring basis	—			—			(89		)				(89		)
Counterparty and cash collateral netting (1)										$	263		263
Total financial liabilities	$	—		$	(474	)	$	(187	)	$	263		$	(398	)
% of Total financial liabilities	0.0		%	119.1		%	47.0		%	(66.1		)%	100.0		%

(1)

In accordance with FSP FIN 39–1, the Company nets all fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral executed with the same counterparty under a master netting agreement. At June 30, 2008, the right to reclaim cash collateral was offset by securities held, and the obligation to return collateral was $151 million.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As required by SFAS No. 157, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). Gains and losses for such assets and liabilities categorized within the Level 3 table may include changes in fair value that are attributable to both observable inputs (Level 1 and Level 2) and unobservable inputs (Level 3). Net transfers in and/or out of Level 3 are reported as having occurred at the beginning of the period; therefore, all realized and unrealized gains and losses on these securities for the period are reflected in the table below. Further, it should be noted that the following table does not take into consideration the effect of offsetting Level 1 and Level 2 financial instruments entered into that economically hedge certain exposures to the Level 3 positions.

The following table provides a summary of changes in fair value during the three–month period ended June 30, 2008 of Level 3 financial assets and financial liabilities held at fair value on a recurring basis at June 30, 2008.

				Total realized and unrealized Gains (Losses) included in:															Total Gains (Losses) included in
($ in millions)	Balance as of March 31, 2008			Net Income (1)			OCI on Statement of Financial Position			Purchases, Sales, Issuances and Settlements, net			Net Transfers In and/or (Out) of Level 3			Balance as of June 30, 2008			Net Income for Instruments Still Held at June 30, 2008 (4)
Financial assets
Fixed income securities	$	22,566		$	(826	)	$	258		$	(1,223	)	$	1,512		$	22,287		$	(801	)
Equity securities	128			(4		)	(3		)	36			(82		)	75			(2		)
Other investments:
Free-standing derivatives, net	(39		)	10			—			10			—			(19		)(2)	41
Total investments	22,655			(820		)	255			(1,177		)	1,430			22,343		(3)	(762		)
Other assets	2			—			—			—			—			2			—
Total recurring Level 3 financial assets	$	22,657		$	(820	)	$	255		$	(1,177	)	$	1,430		$	22,345		$	(762	)

Financial liabilities
Contractholder funds:
Derivatives embedded in annuity contracts	$	(10	)	$	(11	)	$	—		$	1		$	—		$	(20	)	$	(11	)
Total recurring Level 3 financial liabilities	$	(10	)	$	(11	)	$	—		$	1		$	—		$	(20	)	$	(11	)

(1)	The amounts above total $(831) million and are reported in the Condensed Consolidated Statements of Operations as follows: $(834) million in Realized capital gains and losses; $15 million in Net investment income; $(1) million in Interest credited to contractholder funds; and $(11) million in Life and annuity contract benefits.

(2)	Comprises $59 million of financial assets and $(78) million of financial liabilities.

(3)	Comprises $22.42 billion of investments and $(78) million of free–standing derivatives included in financial liabilities.

(4)	The amounts above represent gains and losses included in net income for the period of time that the financial asset or financial liability was determined to be in Level 3. These gains and losses total $(773) million and are reported in the Condensed Consolidated Statements of Operations as follows: $(777) million in Realized capital gains and losses; $15 million in Net investment income; and $(11) million in Life and annuity contract benefits.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table provides a summary of changes in fair value during the six–month period ended June 30, 2008 of Level 3 financial assets and financial liabilities held at fair value on a recurring basis at June 30, 2008.

			Total realized and unrealized Gains (Losses) included in:															Total Gains (Losses) included in
($ in millions)	Balance as of January 1, 2008		Net Income (1)			OCI on Statement of Financial Position			Purchases, Sales, Issuances and Settlements, net			Net Transfers In and/or (Out) of Level 3			Balance as of June 30, 2008			Net Income for Instruments Still Held at June 30, 2008 (4)
Financial assets
Fixed income securities	$	24,372	$	(1,159	)	$	(719	)	$	(1,899	)	$	1,692		$	22,287		$	(1,136	)
Equity securities	129		(5		)	(9		)	49			(89		)	75			(3		)
Other investments:
Free-standing derivatives, net	10		(42		)	—			13			—			(19		)(2)	3
Total investments	24,511		(1,206		)	(728		)	(1,837		)	1,603			22,343		(3)	(1,136		)
Other assets	2		—			—			—			—			2			—
Total recurring Level 3 financial assets	$	24,513	$	(1,206	)	$	(728	)	$	(1,837	)	$	1,603		$	22,345		$	(1,136	)

Financial liabilities
Contractholder funds:
Derivatives embedded in annuity contracts	$	4	$	(25	)	$	—		$	1		$	—		$	(20	)	$	(25	)
Total recurring Level 3 financial liabilities	$	4	$	(25	)	$	—		$	1		$	—		$	(20	)	$	(25	)

(1)	The amounts above total $(1.23) billion and are reported in the Condensed Consolidated Statements of Operations as follows: $(1.23) billion in Realized capital gains and losses; $28 million in Net investment income; $(4) million in Interest credited to contractholder funds; and $(25) million in Life and annuity contract benefits.

(2)	Comprises $59 million of financial assets and $(78) million of financial liabilities.

(3)	Comprises $22.42 billion of investments and $(78) million of free–standing derivatives included in financial liabilities.

(4)	The amounts above represent gains and losses included in net income for the period of time that the financial asset or financial liability was determined to be in Level 3. These gains and losses total $(1.16) billion and are reported in the Condensed Consolidated Statements of Operations as follows: $(1.16) billion in Realized capital gains and losses; $28 million in Net investment income; $(1) million in Interest credited to contractholder funds; and $(25) million in Life and annuity contract benefits.

5. Reserve for Property–Liability Insurance Claims and Claims Expense

The Company establishes reserves for claims and claims expense (“loss”) on reported and unreported claims of insured losses. The Company’s reserving process takes into account known facts and interpretations of circumstances and factors including the Company’s experience with similar cases, actual claims paid, historical trends involving claim payment patterns and pending levels of unpaid claims, loss management programs, product mix and contractual terms, law changes, court decisions, changes to regulatory requirements and economic conditions. In the normal course of business, the Company may also supplement its claims processes by utilizing third party adjusters, appraisers, engineers, inspectors, other professionals and information sources to assess and settle catastrophe and non–catastrophe related claims. The effects of inflation are implicitly considered in the reserving process.

Because reserves are estimates of unpaid portions of losses that have occurred, including incurred but not reported (“IBNR”) losses, the establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain and complex process. The ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimates. The highest degree of uncertainty is associated with reserves for losses incurred in the current reporting period as it contains the greatest proportion of losses that have not been reported or settled. The Company regularly updates its reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in prior year reserve estimates, which may be material, are reported in property–liability insurance claims and claims expense in the Condensed Consolidated Statements of Operations in the period such changes are determined.

Management believes that the reserve for property–liability claims and claims expense, net of reinsurance recoverables, is appropriately established in the aggregate and adequate to cover the ultimate net cost of reported and unreported claims arising from losses which had occurred by the date of the Condensed Consolidated Statement of Financial Position based on available facts, technology, laws and regulations.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

6. Reinsurance

Property–liability insurance premiums earned and life and annuity premiums and contract charges have been reduced by the reinsurance premium ceded amounts shown in the following table.

	Three months ended June 30,				Six months ended June 30,
($ in millions)	2008		2007		2008		2007

Property–liability insurance premiums earned	$	294	$	349	$	624	$	696
Life and annuity premiums and contract charges	225		244		459		477

Property–liability insurance claims and claims expense and life and annuity contract benefits and interest credited to contractholder funds have been reduced by the reinsurance recovery amounts shown in the following table.

	Three months ended June 30,				Six months ended June 30,
($ in millions)	2008		2007		2008		2007

Property-liability insurance claims and claims expense	$	47	$	99	$	120	$	203
Life and annuity contract benefits	169		172		362		318
Interest credited to contractholder funds	8		11		18		24

Property–Liability

During the second quarter, the Company entered into several reinsurance agreements effective in June, 2008, including a Texas agreement that provides for coverage for Allstate Protection personal property excess catastrophe losses in Texas for hurricane catastrophe losses effective June 18, 2008 to June 17, 2011, and four separate agreements for Allstate Floridian and its subsidiaries (“Allstate Floridian”) that provide coverage for personal property excess catastrophe losses in Florida effective June 1, 2008 to May 31, 2009. The Florida agreements coordinate coverage with the Florida Hurricane Catastrophe Fund.

7. Company Restructuring

The Company undertakes various programs to reduce expenses. These programs generally involve a reduction in staffing levels, and in certain cases, office closures. Restructuring and related charges include employee termination and relocation benefits, and post–exit rent expenses in connection with these programs, and non–cash charges resulting from pension benefit payments made to agents in connection with the 1999 reorganization of Allstate’s multiple agency programs to a single exclusive agency program and the Company’s 2006 voluntary termination offer. The expenses related to these activities are included in the Condensed Consolidated Statements of Operations as restructuring and related charges, and totaled $(5) million and $4 million for the three–month periods ended June 30, 2008 and 2007, respectively, and $(6) million and $3 million for the six–month periods ended June 30, 2008 and 2007, respectively.

The following table illustrates the changes in the restructuring liability during the six–month period ended June 30, 2008:

($ in millions)	Employee costs			Exit costs		Total liability
Balance at the beginning of the year	$	23		$	2	$	25
Expense incurred	10			—		10
Adjustments to liability	(13		)	—		(13		)
Payments applied against liability	(8		)	—		(8		)
Balance at the end of the period	$	12		$	2	$	14

The payments applied against the liability for employee costs primarily reflect severance costs.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

8. Guarantees and Contingent Liabilities

State facility assessments

The Company is required to participate in assigned risk plans, reinsurance facilities and joint underwriting associations in various states that provide insurance coverage to individuals or entities that otherwise are unable to purchase such coverage from private insurers. Because of the Company’s participation, it may be exposed to losses that surpass the capitalization of these facilities and/or to assessments from these facilities.

Shared markets

As a condition of maintaining its licenses to write personal property and casualty insurance in various states, the Company is required to participate in assigned risk plans, reinsurance facilities and joint underwriting associations that provide various types of insurance coverage to individuals or entities that otherwise are unable to purchase such coverage from private insurers. Underwriting results related to these arrangements, which tend to be adverse, have been immaterial to the Company’s results of operations.

Guarantees

The Company provides residual value guarantees on Company leased automobiles. If all outstanding leases were terminated effective June 30, 2008, the Company’s maximum obligation pursuant to these guarantees, assuming the automobiles have no residual value, would be $19 million at June 30, 2008. The remaining term of each residual value guarantee is equal to the term of the underlying lease that range from less than one year to three years. Historically, the Company has not made any material payments pursuant to these guarantees.

The Company owns certain fixed income securities that obligate the Company to exchange credit risk or to forfeit principal due, depending on the nature or occurrence of specified credit events for the referenced entities. In the event all such specified credit events were to occur, the Company’s maximum amount at risk on these fixed income securities, as measured by the amount of the aggregate initial investment, was $207 million at June 30, 2008. The obligations associated with these fixed income securities expire at various times during the next six years.

Related to the disposal through reinsurance of substantially all of Allstate Financial’s variable annuity business to Prudential Financial, Inc. and its subsidiary in 2006, the Company and its consolidated subsidiaries, ALIC and Allstate Life Insurance Company of New York (“ALNY”), have agreed to indemnify Prudential for certain pre–closing contingent liabilities (including extra–contractual liabilities of ALIC and ALNY and liabilities specifically excluded from the transaction) that ALIC and ALNY have agreed to retain. In addition, the Company, ALIC and ALNY will each indemnify Prudential for certain post–closing liabilities that may arise from the acts of ALIC, ALNY and their agents, including in connection with ALIC’s and ALNY’s provision of transition services. The Reinsurance Agreements contain no limitations or indemnifications with regard to insurance risk transfer, and transferred all of the future risks and responsibilities for performance on the underlying variable annuity contracts to Prudential, including those related to benefit guarantees, in accordance with the provisions of SFAS No. 113 “Accounting and Reporting for Reinsurance of Short–Duration and Long–Duration Contracts”. Management does not believe this agreement will have a material adverse effect on results of operations, cash flows or financial position of the Company.

In the normal course of business, the Company provides standard indemnifications to contractual counterparties in connection with numerous transactions, including acquisitions and divestitures. The types of indemnifications typically provided include indemnifications for breaches of representations and warranties, taxes and certain other liabilities, such as third party lawsuits. The indemnification clauses are often standard contractual terms and are entered into in the normal course of business based on an assessment that the risk of loss would be remote. The terms of the indemnifications vary in duration and nature. In many cases, the maximum obligation is not explicitly stated and the contingencies triggering the obligation to indemnify have not occurred and are not expected to occur. Consequently, the maximum amount of the obligation under such indemnifications is not determinable. Historically, the Company has not made any material payments pursuant to these obligations.

The aggregate liability balance related to all guarantees was not material as of June 30, 2008.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Regulation

The Company is subject to changing social, economic and regulatory conditions. From time to time, regulatory authorities or legislative bodies seek to influence and restrict premium rates, require premium refunds to policyholders, restrict the ability of insurers to cancel or non–renew policies, require insurers to continue to write new policies or limit their ability to write new policies, limit insurers’ ability to change coverage terms or to impose underwriting standards, impose additional regulations regarding agent and broker compensation and otherwise expand overall regulation of insurance products and the insurance industry. The ultimate changes and eventual effects of these initiatives on the Company’s business, if any, are uncertain.

The Florida Office of Insurance Regulation (“OIR”) filed an Immediate Final Order (“IFO”) with respect to ten affiliated Allstate companies on January 17, 2008, suspending their certificates of authority in Florida and ordering them to discontinue transacting any new insurance business in Florida until all requested documents were produced in accordance with previously issued OIR subpoenas. The subpoenas were issued in connection with the investigation of residential property insurance rate practices but sought a wide range of information. The IFO order allowed the companies to continue all of their existing insurance business and renewals of that insurance; only the writing of new insurance policies was prohibited. On January 18, 2008, the companies filed an emergency motion for immediate relief with the First District Court of Appeal of the State of Florida. The Court granted the motion and stayed the order and subsequently upheld the stay pending a final disposition on the merits. On May 16, 2008, the OIR stayed enforcement of its IFO, relying on the companies’ submission of an affidavit certifying that the companies have complied with Florida law by providing documents requested by the OIR. That same day, the companies resumed writing new property and casualty business. In June 2008, the Florida Supreme Court denied the companies’ request to review the First District Court of Appeal’s ruling that the OIR had the authority to issue the IFO. The companies are abiding by the Court’s decision. In February 2008, the OIR filed an administrative complaint against the companies regarding the response to the subpoenas and their rate filing certification process. The filing of this complaint provides the companies with an opportunity for an evidentiary hearing, which was required by Florida law after the OIR issued the IFO. Additionally, following hearings in February 2008 regarding residential property insurance rate practices before the Florida Senate Select Committee on Property Insurance Accountability, the Committee submitted a request to the companies to produce certain documents. The companies have provided responsive documents to both the OIR and the Committee.

Legal and regulatory proceedings and inquiries

Background

The Company and certain subsidiaries are involved in a number of lawsuits, regulatory inquiries, and other legal proceedings arising out of various aspects of its business. As background to the “Proceedings” subsection below, please note the following:

· These matters raise difficult and complicated factual and legal issues and are subject to many uncertainties and complexities, including the underlying facts of each matter; novel legal issues; variations between jurisdictions in which matters are being litigated, heard, or investigated; differences in applicable laws and judicial interpretations; the length of time before many of these matters might be resolved by settlement, through litigation or otherwise; the fact that some of the lawsuits are putative class actions in which a class has not been certified and in which the purported class may not be clearly defined; the fact that some of the lawsuits involve multi–state class actions in which the applicable law(s) for the claims at issue is in dispute and therefore unclear; and the current challenging legal environment faced by large corporations and insurance companies.

· The outcome on these matters may also be affected by decisions, verdicts, and settlements, and the timing of such decisions, verdicts, and settlements, in other individual and class action lawsuits that involve the Company, other insurers, or other entities and by other legal, governmental, and regulatory actions that involve the Company, other insurers, or other entities.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

· In the lawsuits, plaintiffs seek a variety of remedies including equitable relief in the form of injunctive and other remedies and monetary relief in the form of contractual and extra–contractual damages. In some cases, the monetary damages sought include punitive or treble damages. Often specific information about the relief sought, such as the amount of damages, is not available because plaintiffs have not requested specific relief in their pleadings. When specific monetary demands are made, they are often set just below a state court jurisdictional limit in order to seek the maximum amount available in state court, regardless of the specifics of the case, while still avoiding the risk of removal to federal court. In Allstate’s experience, monetary demands in pleadings bear little relation to the ultimate loss, if any, to the Company.

· In connection with regulatory examinations and proceedings, government authorities may seek various forms of relief, including penalties, restitution and changes in business practices. The Company may not be advised of the nature and extent of relief sought until the final stages of the examination or proceeding.

· For the reasons specified above, it is often not possible to make meaningful estimates of the amount or range of loss that could result from the matters described below in the “Proceedings” subsection. The Company reviews these matters on an ongoing basis and follows the provisions of SFAS No. 5, “Accounting for Contingencies”, when making accrual and disclosure decisions. When assessing reasonably possible and probable outcomes, the Company bases its decisions on its assessment of the ultimate outcome following all appeals.

· Due to the complexity and scope of the matters disclosed in the “Proceedings” subsection below and the many uncertainties that exist, the ultimate outcome of these matters cannot be reasonably predicted. In the event of an unfavorable outcome in one or more of these matters, the ultimate liability may be in excess of amounts currently reserved and may be material to the Company’s operating results or cash flows for a particular quarterly or annual period. However, based on information currently known to it, management believes that the ultimate outcome of all matters described below as they are resolved over time is not likely to have a material adverse effect on the financial position of the Company.

Proceedings

There are a number of state and nationwide class action lawsuits pending in various state courts challenging the legal propriety of Allstate’s medical bill review processes on a number of grounds, including the manner in which Allstate determines reasonableness and necessity. These lawsuits, which to a large degree mirror similar lawsuits filed against other carriers in the industry, allege these processes are used by Allstate systematically to undervalue claims. Plaintiffs seek monetary damages in the form of contractual and extra–contractual damages. The Company denies these allegations. One nationwide class action has been certified. The Company continues to vigorously defend these cases.

There is a nationwide putative class action pending against Allstate that challenges Allstate’s use of a vendor’s automated database in valuing total loss automobiles. To a large degree, this lawsuit mirrors similar lawsuits filed against other carriers in the industry. Plaintiffs allege that Allstate systematically underpays first party total loss vehicle claims. The plaintiffs are seeking actual and punitive damages. The lawsuit is in the early stages of discovery and Allstate is vigorously defending it.

The Company is defending a number of matters filed in the aftermath of Hurricanes Katrina and Rita, including individual lawsuits, and several statewide putative class action lawsuits pending in Mississippi and Louisiana. These matters are in various stages of development. The lawsuits and developments in litigation arising from the hurricanes include the following:

· The Mississippi Attorney General filed a suit asserting that the flood exclusion found in Allstate’s and other insurance companies’ policies is either ambiguous, unenforceable as unconscionable or contrary to public policy, or inapplicable to the damage suffered in the wake of Hurricane Katrina. Allstate’s motion for judgment on the pleadings is pending.

· In a putative class action in Mississippi, some members of the Mississippi Windstorm Underwriters Association (“MWUA”) have filed suit against the MWUA board members and the companies they represent, including an Allstate subsidiary, alleging that the Board purchased insufficient reinsurance to protect the MWUA members. Plaintiffs’ motion for class certification has been denied. Discovery as to the individual plaintiffs’ claims is ongoing.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

· In a putative class action in Louisiana, the federal trial court ruled that Allstate’s and other insurers’ flood, water and negligent construction exclusions do not preclude coverage for damage caused by flooding in the New Orleans area to the extent it was caused by human negligence in the design, construction and/or maintenance of the levees. Allstate and other insurers pursued an interlocutory appeal and in June 2007 the United States Court of Appeals for the Fifth Circuit reversed the trial court’s ruling. The matter has been remanded to the trial court for further proceedings, which have been consolidated along with other putative class and individual actions brought against the Company and other insurers, challenging the adjustment and settlement of Hurricane Katrina claims. In a case in Louisiana state court involving a similar challenge to the flood exclusion of another carrier, the Louisiana Supreme Court issued its ruling in April 2008 that the flood exclusion is clear and unambiguous, and therefore valid and enforceable regardless of whether the source of the flooding was natural or man–made. The Louisiana Supreme Court has denied plaintiffs’ motion for reconsideration of its ruling. In light of the Louisiana Supreme Court’s ruling, the federal trial court has issued an order that all claims for insurance coverage for flood damage, where the policy has a flood exclusion, are dismissed. The plaintiffs’ bar has moved for reconsideration of the federal trial court’s dismissal.

· The Company has also been sued in a putative class action in the United States District Court for the Western District of Louisiana. The plaintiffs allege that they were entitled to, but did not receive, payment for general contractor overhead and profit or that the overhead and profit they received was not adequate to compensate them for the entire costs of a general contractor. The Company’s motion to strike the class allegations was denied and the parties are proceeding with discovery. Plaintiffs’ motion for class certification is pending.

· The Louisiana Attorney General filed a class action lawsuit in state court against Allstate and other insurers on behalf of Road Home fund recipients alleging that the insurers have failed to pay all damages owed under their policies. The insurers removed the matter to federal court. The district court denied plaintiffs’ motion to remand the matter to state court and the U.S. Court of Appeals for the Fifth Circuit has upheld the denial of remand motion. The matter will now proceed in federal court.

· The Louisiana Attorney General also has filed a lawsuit in state court against Allstate, other insurers, a consulting company, and two computer database companies. The lawsuit is brought under the Louisiana Monopolies Act and generally alleges the defendants conspired to suppress competition and thwart policyholder recoveries. The defendants removed the matter to federal court. Plaintiffs’ motion to remand the matter to state court was defeated at both the trial court and Court of Appeals levels. The matter now will proceed in federal court.

· Private plaintiffs have filed qui tam actions under the Federal False Claims Act against Allstate and certain other insurers in Louisiana and Mississippi federal courts regarding claims that they administered under the federally funded National Flood Insurance Program. The basic allegations are that insurers and engineering firms falsely or fraudulently identified the cause of Hurricane Katrina related property damage as “flood” so that those claims would be paid through the National Flood Insurance Program. The action brought in federal court in Louisiana has been dismissed. Plaintiffs are appealing that dismissal. In the Mississippi action, plaintiffs have, with the Government’s consent, filed a motion to voluntarily dismiss Allstate.

The various suits described above seek a variety of remedies, including actual and/or punitive damages in unspecified amounts and/or declaratory relief. The Company has been vigorously defending these suits and other matters related to Hurricanes Katrina and Rita.

In addition, the Company had been providing documents to federal and state authorities conducting investigations into the insurance industry’s handling of claims in the aftermath of Hurricanes Katrina and Rita, including a federal grand jury sitting in the Southern District of Mississippi. With the agreement of the respective authorities, the Company currently has suspended the production of documents. Other insurers have received similar subpoenas and requests for information.

Allstate is defending various lawsuits involving worker classification issues. These lawsuits include several certified class actions challenging the overtime exemption claimed by the Company under the Fair Labor Standards Act or a state wage and hour law. In these cases, plaintiffs seek monetary relief, such as penalties and liquidated damages, and non–monetary relief, such as injunctive relief. These class actions mirror similar lawsuits filed against other carriers in the industry and other employers. Allstate is continuing to vigorously defend its worker classification lawsuits.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company is defending certain matters relating to the Company’s agency program reorganization announced in 1999. These matters are in various stages of development.

· These matters include a lawsuit filed in 2001 by the U.S. Equal Employment Opportunity Commission (“EEOC”) alleging retaliation under federal civil rights laws (the “EEOC I” suit) and a class action filed in 2001 by former employee agents alleging retaliation and age discrimination under the Age Discrimination in Employment Act (“ADEA”), breach of contract and ERISA violations (the “Romero I” suit). In 2004, in the consolidated EEOC I and Romero I litigation, the trial court issued a memorandum and order that, among other things, certified classes of agents, including a mandatory class of agents who had signed a release, for purposes of effecting the court’s declaratory judgment that the release is voidable at the option of the release signer. The court also ordered that an agent who voids the release must return to Allstate “any and all benefits received by the [agent] in exchange for signing the release.” The court also stated that, “on the undisputed facts of record, there is no basis for claims of age discrimination.” The EEOC and plaintiffs have asked the court to clarify and/or reconsider its memorandum and order and in January 2007, the judge denied their request. In June 2007, the court granted the Company’s motions for summary judgment. Following plaintiffs’ filing of a notice of appeal, the Third Circuit issued an order in December 2007 stating that the notice of appeal was not taken from a final order within the meaning of the federal law and thus not appealable at this time. In March 2008, the Third Circuit decided that the appeal should not summarily be dismissed and that the question of whether the matter is appealable at this time will be addressed by the Court along with the merits of the appeal.

· The EEOC also filed another lawsuit in 2004 alleging age discrimination with respect to a policy limiting the rehire of agents affected by the agency program reorganization (the “EEOC II” suit). In EEOC II, in 2006, the court granted partial summary judgment to the EEOC. Although the court did not determine that the Company was liable for age discrimination under the ADEA, it determined that the rehire policy resulted in a disparate impact, reserving for trial the determination on whether the Company had reasonable factors other than age to support the rehire policy. In June 2008, the Eighth Circuit Court of Appeals affirmed summary judgment in the EEOC’s favor. The Company filed a petition for rehearing en banc.

· The Company is also defending a certified class action filed by former employee agents who terminated their employment prior to the agency program reorganization. Plaintiffs allege that they were constructively discharged so that Allstate could avoid paying ERISA and other benefits offered under the reorganization. They claim that the constructive discharge resulted from the implementation of agency standards, including mandatory office hours and a requirement to have licensed staff available during business hours. The court approved the form of class notice which was sent to approximately 1,800 potential class members in November 2007. Fifteen individuals opted out. The Company’s motions for judgment on the pleadings were partially granted. In May 2008, the Court granted summary judgment in Allstate’s favor on all class claims. Plaintiffs moved for reconsideration and in the alternative to decertify the class. Allstate opposed this motion and filed a motion for summary judgment with respect to the remaining non–class claim.

· A putative nationwide class action has also been filed by former employee agents alleging various violations of ERISA, including a worker classification issue. These plaintiffs are challenging certain amendments to the Agents Pension Plan and are seeking to have exclusive agent independent contractors treated as employees for benefit purposes. This matter was dismissed with prejudice by the trial court, was the subject of further proceedings on appeal, and was reversed and remanded to the trial court in 2005. In June 2007, the court granted Allstate’s motion to dismiss the case. Following plaintiffs’ filing of a notice of appeal, the Third Circuit issued an order in December 2007 stating that the notice of appeal was not taken from a final order within the meaning of the federal law and thus not appealable at this time. In March 2008, the Third Circuit decided that the appeal should not summarily be dismissed and that the question of whether the matter is appealable at this time will be addressed by the Court along with the merits of the appeal.

In all of these various matters, plaintiffs seek compensatory and punitive damages, and equitable relief. Allstate has been vigorously defending these lawsuits and other matters related to its agency program reorganization.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Allstate is defending a certified 13–state class action challenging the method by which Allstate discloses installment fees. The plaintiffs contend that installment fees must be disclosed on the insurance policy itself, which would include the declarations page, because the fees allegedly meet the legal definition of “premium.” Plaintiffs seek repayment of installment fees since October 1996. The New Mexico trial court had initially certified the 13–state class in 2005. In 2007, the class, except for New Mexico, was set aside on appeal. In June 2008, the New Mexico Supreme Court reinstated the 13–state class of Allstate policyholders who paid installment fees from October 1996 to present. The Court has denied the Company’s motion for reconsideration.

The Company is vigorously defending its auto and homeowners insurance rates in administrative actions filed by the Texas and California Departments of Insurance. The Departments are focusing on the reasonableness of the Company’s rates for the risks to which they apply.

· In 2004, the Company made a homeowners rate filing in Texas requesting to reduce its rates by approximately 1.5%. In December 2004, the Texas Commissioner of Insurance disapproved that filing and began proceedings to disapprove the Company’s then current rates. Following an administrative hearing process, in 2006, the Commissioner ordered the Company to reduce its then current homeowners rates by 5% and to pay refunds on the difference plus interest back to December 30, 2004, for which the Company has been accruing. The Company implemented a 5% rate decrease occurring in two stages, but challenged this 2006 refund order in the Travis County, Texas district court. In March 2007, the district court affirmed in whole the Texas Commissioner’s rate refund order. In April 2007, the Company appealed the judgment of the district court to the Third Court of Appeals, Austin, Texas. In May 2008, the Company resolved the dispute with the Commissioner. The Company has agreed to dismiss its appeal and the Commissioner has agreed to amend his order. Instead, the Company will be required to pay refunds in the total amount of principal and interest of $36.8 million for the period of December 1, 2004 through April 23, 2006.

· Allstate filed and implemented an 8% homeowners rate increase in August 2007 and immediately received an order from the Texas Commissioner of Insurance disapproving the rate change. In addition, in October 2007 the Commissioner ordered the Company to pay refunds of its homeowners rates amounting to approximately 6.5% for the period between August 20, 2007 and October 5, 2007, and refunds of approximately 18.5% for the period following October 5, 2007, plus interest. In May 2008, the Company resolved this dispute with the Commissioner. The Commissioner has agreed to vacate his refund order and vacate his disapproval of the Company’s August 2007 rate increase. The Company has agreed to provide credits or refunds of 3% to certain policyholders for the period between August 20, 2007 and June 1, 2008, and to also reduce its current rate level by an average of 3%, effective June 1, 2008.

· In 2006, the Company made an automobile rate filing in California. Following a rate hearing, the California Department of Insurance (“CDI”) issued an order in March 2008 directing the Company to reduce its rates by 15.9%. The Company implemented the rate reduction effective April 28, 2008. The Company has withdrawn its appeal of the order.

· In 2006, the Company made a homeowners rate filing in California. Following a rate hearing, the CDI issued an order in July 2008 directing the Company to reduce its rates by 28.5%. The Company is complying with this order. Additionally, in May 2007, the CDI issued an Order to Show Cause and commenced an administrative hearing seeking an order directing Allstate to issue refunds to its California homeowners customers for rates dating to May 2007 based upon the allegation that Allstate’s current rates are excessive. The CDI has made the decision to withdraw the Order to Show Cause.

Other Matters

Various other legal, governmental, and regulatory actions, including state market conduct exams, and other governmental and regulatory inquiries are currently pending that involve the Company and specific aspects of its conduct of business. Like other members of the insurance industry, the Company is the target of a number of class action lawsuits and other types of proceedings, some of which involve claims for substantial or indeterminate amounts. These actions are based on a variety of issues and target a range of the Company’s practices. The outcome of these disputes is currently unpredictable.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

One or more of these matters could have an adverse effect on the Company’s operating results or cash flows for a particular quarterly or annual period. However, based on information currently known to it, management believes that the ultimate outcome of all matters described in this “Other Matters” subsection, in excess of amounts currently reserved, as they are resolved over time is not likely to have a material effect on the operating results, cash flows or financial position of the Company.

Shareholder Derivative Suit

In January 2008, a shareholder derivative action was filed, purportedly on behalf of The Allstate Corporation, against the members of its Board of Directors, in the United States District Court for the Northern District of Illinois, Eastern Division. This derivative action alleges breaches of fiduciary duties, abuse of control, gross mismanagement, and waste of corporate assets in connection with Allstate’s actions to protect certain documents from public disclosure in litigation and regulatory proceedings. The complaint further alleges wrongdoing with respect to Allstate’s claim handling. According to the allegations, the director defendants conspired to approve or permit these alleged wrongs to occur and participated in efforts to conceal them from Allstate’s stockholders. Plaintiff alleges that these actions have resulted in a variety of sanctions and adverse orders being entered against Allstate by various courts and the Florida Office of Insurance Regulation. The complaint seeks an unspecified amount of damages. The defendants have moved to dismiss the complaint.

Asbestos and environmental

Allstate’s reserves for asbestos claims were $1.25 billion and $1.30 billion, net of reinsurance recoverables of $724 million and $752 million, at June 30, 2008 and December 31, 2007, respectively. Reserves for environmental claims were $223 million and $232 million, net of reinsurance recoverables of $103 million and $107 million, at June 30, 2008 and December 31, 2007, respectively. Approximately 63% of the total net asbestos and environmental reserves at June 30, 2008 and December 31, 2007 were for incurred but not reported estimated losses.

Management believes its net loss reserves for asbestos, environmental and other discontinued lines exposures are appropriately established based on available facts, technology, laws and regulations. However, establishing net loss reserves for asbestos, environmental and other discontinued lines claims is subject to uncertainties that are greater than those presented by other types of claims. The ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimate. Among the complications are lack of historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure and unresolved legal issues regarding policy coverage; unresolved legal issues regarding the determination, availability and timing of exhaustion of policy limits; plaintiffs’ evolving and expanding theories of liability, availability and collectibility of recoveries from reinsurance, retrospectively determined premiums and other contractual agreements; and estimating the extent and timing of any contractual liability, and other uncertainties. There are also complex legal issues concerning the interpretation of various insurance policy provisions and whether those losses are covered, or were ever intended to be covered, and could be recoverable through retrospectively determined premium, reinsurance or other contractual agreements. Courts have reached different and sometimes inconsistent conclusions as to when losses are deemed to have occurred and which policies provide coverage; what types of losses are covered; whether there is an insurer obligation to defend; how policy limits are determined; how policy exclusions and conditions are applied and interpreted; and whether clean—up costs represent insured property damage. Management believes these issues are not likely to be resolved in the near future, and the ultimate cost may vary materially from the amounts currently recorded resulting in an increase in loss reserves. In addition, while the Company believes that improved actuarial techniques and databases have assisted in its ability to estimate asbestos, environmental, and other discontinued lines net loss reserves, these refinements may subsequently prove to be inadequate indicators of the extent of probable losses. Due to the uncertainties and factors described above, management believes it is not practicable to develop a meaningful range for any such additional net loss reserves that may be required.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

9. Income Taxes

During the second quarter of 2008, the Company settled a case involving its 2003 and 2004 federal income tax returns at the Internal Revenue Service Appeals Office. Settlement of the examination of these tax years resulted in a $57 million decrease to the liability for unrecognized tax benefits, resulting in a liability balance of $19 million at June 30, 2008.

The Company believes it is reasonably possible that the liability balance will not significantly increase or decrease within the next twelve months. Because of the impact of deferred tax accounting, recognition of previously unrecognized tax benefits is not expected to impact the effective tax rate.

The Company recognizes interest accrued related to unrecognized tax benefits in income tax expense. During the six months ended June 30, 2008, the balance of interest expense accrued with respect to unrecognized tax benefits decreased to $1 million from $7 million at January 1, 2008 due to the Appeals settlement for 2003 and 2004. $4 million of this reduction was recognized in tax expense in the second quarter of 2008. No amounts have been accrued for penalties.

10. Components of Net Periodic Pension and Postretirement Benefit Costs

The components of net periodic cost for the Company’s pension and postretirement benefit plans are as follows:

	Three months ended June 30,						Six months ended June 30,
($ in millions)	2008			2007			2008			2007

Pension benefits
Service cost	$	37		$	40		$	73		$	80
Interest cost	79			77			157			155
Expected return on plan assets	(100		)	(88		)	(200		)	(176		)
Amortization of:
Prior service costs	(1		)	—			(1		)	(1		)
Net loss	9			29			18			58
Settlement loss	11			11			22			22
Net periodic pension benefit cost	$	35		$	69		$	69		$	138

Postretirement benefits
Service cost	$	4		$	6		$	9		$	12
Interest cost	15			17			29			33
Amortization of:
Prior service costs	1			(1		)	1			(1		)
Net (gain)	(6		)	—			(12		)	—
Net periodic postretirement benefit cost	$	14		$	22		$	27		$	44

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

11. Business Segments

Summarized revenue data for each of the Company’s business segments are as follows:

	Three months ended June 30,						Six months ended June 30,
($ in millions)	2008			2007			2008			2007
Revenues
Property–Liability
Property–liability insurance premiums earned
Standard auto	$	4,292		$	4,269		$	8,583		$	8,504
Non–standard auto	282			336			574			680
Homeowners	1,549			1,576			3,108			3,156
Other personal lines	627			641			1,249			1,288
Allstate Protection	6,750			6,822			13,514			13,628
Discontinued Lines and Coverages	—			—			—			—
Total property–liability insurance premiums earned	6,750			6,822			13,514			13,628
Net investment income	431			517			901			1,008
Realized capital gains and losses	(238		)	437			(432		)	881
Total Property–Liability	6,943			7,776			13,983			15,517

Allstate Financial
Life and annuity premiums and contract charges
Traditional life insurance	76			66			141			140
Immediate annuities with life contingencies	36			52			66			129
Accident, health and other	99			92			202			183
Total life and annuity premiums	211			210			409			452
Interest–sensitive life insurance	246			224			487			447
Fixed annuities	13			19			26			37
Variable annuities	1			1			1			1
Total contract charges	260			244			514			485
Total life and annuity premiums and contract charges	471			454			923			937
Net investment income	943			1,076			1,958			2,126
Realized capital gains and losses	(965		)	104			(1,397		)	127
Total Allstate Financial	449			1,634			1,484			3,190

Corporate and Other
Service fees	3			2			5			5
Net investment income	38			41			79			71
Realized capital gains and losses	(12		)	4			(41		)	8
Total Corporate and Other before reclassification of service fees	29			47			43			84
Reclassification of service fees (1)	(3		)	(2		)	(5		)	(5		)
Total Corporate and Other	26			45			38			79
Consolidated Revenues	$	7,418		$	9,455		$	15,505		$	18,786

(1) For presentation in the Condensed Consolidated Statements of Operations, service fees of the Corporate and Other segment are reclassified to operating costs and expenses.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Summarized financial performance data for each of the Company’s reportable segments are as follows:

	Three months ended June 30,						Six months ended June 30,
($ in millions)	2008			2007			2008			2007
Net income
Property–Liability
Underwriting income
Allstate Protection	$	381		$	850		$	796		$	1,856
Discontinued Lines and Coverages	(3		)	(5		)	(10		)	35
Total underwriting income	378			845			786			1,891
Net investment income	431			517			901			1,008
Income tax expense on operations	(217		)	(415		)	(467		)	(890		)
Realized capital gains and losses, after–tax	(153		)	283			(278		)	570
Property–Liability net income	439			1,230			942			2,579

Allstate Financial
Life and annuity premiums and contract charges	471			454			923			937
Net investment income	943			1,076			1,958			2,126
Periodic settlements and accruals on non–hedge derivative financial instruments	7			12			16			24
Contract benefits and interest credited to contractholder funds	(994		)	(1,056		)	(2,021		)	(2,133		)
Operating costs and expenses and amortization of deferred policy acquisition costs	(255		)	(259		)	(490		)	(493		)
Restructuring and related charges	—			1			—			1
Income tax expense on operations	(54		)	(74		)	(125		)	(152		)
Operating income	118			154			261			310
Realized capital gains and losses, after–tax	(627		)	67			(908		)	82
Deferred policy acquisition costs and deferred sales inducements amortization relating to realized capital gains and losses, after–tax	134			(15		)	173			(15		)
Reclassification of periodic settlements and accruals on non–hedge financial instruments, after–tax	(4		)	(7		)	(10		)	(15		)
Gain (loss) on disposition of operations, after–tax	—			1			(6		)	2
Allstate Financial net (loss) income	(379		)	200			(490		)	364

Corporate and Other
Service fees (1)	3			2			5			5
Net investment income	38			41			79			71
Operating costs and expenses	(93		)	(101		)	(187		)	(178		)
Income tax benefit on operations	25			29			51			52
Operating loss	(27		)	(29		)	(52		)	(50		)
Realized capital gains and losses, after–tax	(8		)	2			(27		)	5
Corporate and Other net loss	(35		)	(27		)	(79		)	(45		)
Consolidated net income	$	25		$	1,403		$	373		$