Allstate Financial

       The Company's Allstate Financial segment reinsures certain of its risks to other insurers primarily under yearly renewable term, coinsurance, modified coinsurance and coinsurance with funds withheld agreements. These agreements result in a passing of the agreed-upon percentage of risk to the reinsurer in exchange for negotiated reinsurance premium payments. Modified coinsurance and coinsurance with funds withheld are similar to coinsurance, except that the cash and investments that support the liability for contract benefits are not transferred to the assuming company and settlements are made on a net basis between the companies. Allstate Financial cedes 100% of the morbidity risk on substantially all of its long-term care contracts. Allstate Financial cedes specified percentages of the mortality risk on certain life policies, depending upon the issue date and product, to a pool of fourteen unaffiliated reinsurers. Beginning in July 2007, for new life insurance contracts, Allstate Financial ceded the mortality risk associated with coverage in excess of $3 million per life for contracts issued to individuals age 70 and over, and ceded the mortality risk associated with coverage in excess of $5 million per life for most other contracts. Also beginning in July 2007, for certain large contracts that meet specific criteria, Allstate Financial's retention limit was increased to $10 million per life. In the period prior to July 2007, but subsequent to August 1998, Allstate Financial ceded the mortality risk associated with coverage in excess of $2 million per life, except in 2006 in certain instances when specific criteria were met, it ceded the mortality risk associated with coverage in excess of $5 million per life. For business sold prior to September 1998, Allstate Financial ceded mortality risk in excess of specific amounts up to $1 million per individual life.

       In addition, Allstate Financial has used reinsurance to effect the acquisition or disposition of certain blocks of business. Allstate Financial had reinsurance recoverables of $1.51 billion and $1.57 billion at December 31, 2009 and 2008, respectively, due from Prudential related to the disposal of substantially all of its variable annuity business that was effected through reinsurance agreements. In 2009, life and annuity premiums and contract charges of $170 million, contract benefits of $44 million, interest credited to contractholder funds of $27 million, and operating costs and expenses of $28 million were ceded to Prudential. In 2008, life and annuity premiums and contract charges of $238 million, contract benefits of $467 million, interest credited to contractholder funds of $36 million, and operating costs and expenses of $47 million were ceded to Prudential. In 2007, life and annuity premiums and contract charges of $317 million, contract benefits of $59 million, interest credited to contractholder funds of $43 million, and operating costs and expenses of $72 million were ceded to Prudential. In addition, as of December 31, 2009 and 2008 Allstate Financial had reinsurance recoverables of $175 million and $181 million, respectively due from subsidiaries of Citigroup (Triton Insurance and American Health and Life Insurance), and Scottish Re (U.S.) Inc. in connection with the disposition of substantially all of the direct response distribution business in 2003.

       As of December 31, 2009, the gross life insurance in force was $535.61 billion of which $253.65 billion was ceded to the unaffiliated reinsurers.

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       Reinsurance recoverables at December 31 are summarized in the following table.

       At both December 31, 2009 and 2008, approximately 93% of Allstate Financial's reinsurance recoverables are due from companies rated A- or better by S&P.

Cash flows provided by investing activities increased in the first three months of 2009 compared to the first three months of 2008, primarily due to reductions of short-term investments to fund reductions in contractholder funds, partially offset by higher operating cash flows.

Allstate Financial

        The Company's Allstate Financial segment reinsures certain of its risks to other insurers primarily under yearly renewable term, coinsurance, modified coinsurance and coinsurance with funds withheld agreements. These agreements result in a passing of the agreed-upon percentage of risk to the reinsurer in exchange for negotiated reinsurance premium payments. Modified coinsurance and coinsurance with funds withheld are similar to coinsurance, except that the cash and investments that support the liability for contract benefits are not transferred to the assuming company and settlements are made on a net basis between the companies. Allstate Financial cedes 100% of the morbidity risk on substantially all of its long-term care contracts. Allstate Financial cedes specified percentages of the mortality risk on certain life policies, depending upon the issue date and product, to a pool of fourteen unaffiliated reinsurers. Beginning in July 2007, for new life insurance contracts, Allstate Financial ceded the mortality risk associated with coverage in excess of $3 million per life for contracts issued to individuals age 70 and over, and ceded the mortality risk associated with coverage in excess of $5 million per life for most other contracts. Also beginning in July 2007, for certain large contracts that meet specific criteria, Allstate Financial's retention limit was increased to $10 million per life. In the period prior to July 2007, but subsequent to August 1998, Allstate Financial ceded the mortality risk associated with coverage in excess of $2 million per life, except in 2006 in certain instances when specific criteria were met, it ceded the mortality risk associated with coverage in excess of $5 million per life. For business sold prior to October 1998, Allstate Financial ceded mortality risk in excess of specific amounts up to $1 million per individual life.

        In addition, Allstate Financial has used reinsurance to effect the acquisition or disposition of certain blocks of business. Allstate Financial had reinsurance recoverables of $1.57 billion and $1.26 billion at December 31, 2008 and 2007, respectively, due from Prudential related to the disposal of substantially all of its variable annuity business that was effected through Reinsurance Agreements (see Note 3). In 2008, life and annuity premiums and contract charges of $238 million, contract benefits of $467 million, interest credited to contractholder funds of $36 million, and operating costs and expenses of $47 million were ceded to Prudential pursuant to the Reinsurance Agreements. In 2007, life and annuity premiums and contract charges of $317 million, contract benefits of $59 million, interest credited to contractholder funds of $43 million, and operating costs and expenses of $72 million were ceded to Prudential pursuant to the Reinsurance Agreements. In 2006, life and annuity premiums and contract charges of $170 million, contract benefits of $29 million, interest credited to contractholder funds of $35 million, and operating costs and expenses of $64 million were ceded to Prudential pursuant to the Reinsurance Agreements. In addition, as of December 31, 2008 and 2007 Allstate Financial had reinsurance recoverables of $181 million and $166 million, respectively due from subsidiaries of Citigroup (Triton Insurance and American Health and Life Insurance), and Scottish Re (U.S.) Inc. in connection with the disposition of substantially all of the direct response distribution business in 2003.

        As of December 31, 2008, the gross life insurance in force was $532 billion of which $252 billion was ceded to the unaffiliated reinsurers.

193

        Reinsurance recoverables at December 31 are summarized in the following table.

        At December 31, 2008 and 2007, approximately 93% and 88%, respectively, of Allstate Financial's reinsurance recoverables are due from companies rated A- or better by S&P.

Allstate Financial

        The Company's Allstate Financial segment reinsures certain of its risks to other insurers primarily under yearly renewable term,
coinsurance, modified coinsurance and coinsurance with funds withheld agreements. These agreements result in a passing of the agreed-upon percentage of risk to the reinsurer in exchange
for negotiated reinsurance premium payments. Modified coinsurance and coinsurance with funds withheld are similar to coinsurance, except that the cash and investments that support the liability for
contract benefits are not transferred to the assuming company and settlements are made on a net basis between the companies. Allstate Financial cedes 100% of the morbidity risk on substantially all of
its long-term care contracts. Allstate Financial cedes specified percentages of the mortality risk on certain life policies, depending upon the issue date and product, to a pool of
fourteen unaffiliated reinsurers. Beginning in July 2007, for new life insurance contracts, Allstate Financial ceded the mortality risk associated with coverage in excess of $3 million per life
for contracts issued to individuals age 70 and over, and ceded the mortality risk associated with coverage in excess of $5 million per life for most other contracts. Also beginning in July
2007, for certain large contracts that meet specific criteria, Allstate Financial's retention limit was increased to $10 million per life. In the period prior to July 2007, but subsequent to
August 1998, Allstate Financial ceded the mortality risk associated with coverage in excess of $2 million per life, except in 2006 in certain instances when specific criteria were met, it ceded
the mortality risk associated with coverage in excess of $5 million per life. For
business sold prior to October 1998, Allstate Financial ceded mortality risk in excess of specific amounts up to $1 million per individual life.

        In
addition, Allstate Financial has used reinsurance to effect the acquisition or disposition of certain blocks of business. Allstate Financial had reinsurance recoverables of
$1.57 billion and $1.26 billion at December 31, 2008 and 2007, respectively, due from Prudential related to the disposal of substantially all of its variable annuity business that
was effected through Reinsurance Agreements (see Note 3). In 2008, life and annuity premiums and contract charges of $238 million, contract benefits of $467 million, interest
credited to contractholder funds of $36 million, and operating costs and expenses of $47 million were ceded to Prudential pursuant to the Reinsurance Agreements. In 2007, life and
annuity premiums and contract charges of $317 million, contract benefits of $59 million, interest credited to contractholder funds of $43 million, and operating costs and expenses
of $72 million were ceded to Prudential pursuant to the Reinsurance Agreements. In 2006, life and annuity premiums and contract charges of $170 million, contract benefits of
$29 million, interest credited to contractholder funds of $35 million, and operating costs and expenses of $64 million were ceded to Prudential pursuant to the Reinsurance
Agreements. In addition, as of December 31, 2008 and 2007 Allstate Financial had reinsurance recoverables of $181 million and $166 million, respectively due from subsidiaries of
Citigroup (Triton Insurance and American Health and Life Insurance), and Scottish Re (U.S.) Inc. in connection with the disposition of substantially all of the direct response distribution
business in 2003.

        As
of December 31, 2008, the gross life insurance in force was $532 billion of which $252 billion was ceded to the unaffiliated reinsurers.

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        Reinsurance recoverables at December 31 are summarized in the following table.

        At
December 31, 2008 and 2007, approximately 93% and 88%, respectively, of Allstate Financial's reinsurance recoverables are due from companies rated A- or better by
S&P.

Allstate Financial

·                  Continued focus on improving returns and reducing Allstate Financial’s concentration in spread based products, primarily fixed annuities and institutional markets products, will result in lower premiums and deposits and a smaller balance sheet

·                  Finalizing plans to improve efficiency and narrow the focus of product offerings to better serve the needs of everyday Americans

·                  Targeting savings at 20% of certain operating expenses, excluding acquisition costs, estimated to yield annual savings of $90 million beginning in 2011.  We anticipate a reduction of approximately 1,000 workforce positions, through a combination of attrition and position elimination over the next two years

·                  Maintaining high liquidity in the investment portfolio will result in lower operating income but ensure ability to meet contractholder obligations.  We will target sales of our spread based products at levels that allow us to avoid sales of investments with significant unrealized losses into distressed or illiquid markets

·                  Continued investment spread compression due to credit losses, reduced contractholder funds balances and maintenance of liquidity will result in operating income of approximately $300 million in 2009

Cash flows provided by investing activities in the first nine months of 2008 compared to cash flows used in investing activities in the first nine months of 2007 was primarily due to the sale of assets to fund liability settlements.

Allstate Financial

·                  Premiums and deposits in the third quarter of 2008 were $1.9 billion, a decrease of $406 million or 17.6% from the prior year quarter.  This decrease is due to the absence of issuances of institutional products in the third quarter of 2008 compared to $500 million in the prior year quarter, partially offset by an increase in retail premiums and deposits of $94 million or 5.2% due to an increase in deposits on fixed deferred annuities of 14.3%.

·                  Operating income for the third quarter of 2008 was $88 million, a decrease of $59 million from the prior year quarter.  The decline was primarily due to lower investment spreads, reduced benefit spreads on life and annuities reflecting unfavorable mortality experience and increased operating expenses related to our continuing efforts to reinvent protection and retirement for consumers, partially offset by lower amortization of deferred policy acquisition costs (“DAC”).

·                  Net loss for the third quarter of 2008 was $196 million compared to net income of $70 million in the prior year quarter.  The decline was primarily due to a $209 million increase in after-tax net realized capital losses including the effect of DAC and deferred sales inducements accretion related to the net realized capital losses, and a $59 million decline in operating income.

·                  During the third quarter of 2008, we retired $2.2 billion of institutional market deposits for which investors had elected to non-extend their maturity date through a combination of maturities, calls, and acquisitions in the secondary market.  Total outstanding non-extended institutional market deposits were $1.3 billion as of September 30, 2008, all of which become due before the end of the third quarter of 2009.  We have accumulated, and expect to maintain, short-term and other maturing investments to fund the retirement of these obligations.

Cash flows used in investing activities increased in the first six months of 2008, compared to the first six months of 2007, primarily due to an increased investment in short-term securities, partially offset by a lower investment in and higher proceeds from sales of fixed income securities.

Cash flows used in financing activities decreased primarily due to increased contractholder fund deposits and net short-term borrowings in the first six months of 2008, compared to net repayments of short-term debt in the first six months of 2007, partially offset by higher contractholder fund withdrawals.  For quantification of the changes in contractholder funds, see the Allstate Financial Segment section of the MD&A.

A total of $986 million of extendible medium-term notes backed by funding agreements have been called and will be retired in July 2008.  We have accumulated, and expect to maintain, short-term investments to retire these obligations.  As of June 30, 2008, $3.12 billion of extendible funding agreements have maturity dates prior to or on March 31, 2009.

Allstate Financial

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Allstate Financial