Allstate (ALL)

Exposure to Potential Subsequent Event for Citizens Property Insurance Corporation Assessment

Allstate Floridian Insurance Company and its subsidiaries are subject to assessments from Citizens Property Insurance Corporation (“Citizens”), which was created by the state of Florida to provide insurance to property owners unable to obtain coverage in the private insurance market.  Citizens, at the discretion and direction of its Board of Directors (“Citizens Board”), can levy a regular assessment on participating companies for a deficit in any calendar year up to the greater of 10% of the deficit or 10% of Florida property premiums industry-wide for the prior year.  An insurer may recoup a regular assessment through a surcharge to policyholders.  In order to recoup its Citizens regular assessment, an insurer must file for a policy surcharge with the Florida Department of Insurance at least fifteen days prior to imposing the surcharge on policies.  If a deficit remains after the regular assessment, Citizens can also fund the remaining deficit by issuing bonds.  The costs of these bonds are then funded through emergency assessments in subsequent years.  Companies are required to collect the emergency assessments directly from residential property policyholders and remit them to Citizens as they are collected.  Participating companies are obligated to purchase any unsold bonds issued by Citizens.

Citizens is designed so that the ultimate cost is borne by policyholders, however the exposure to assessments and the availability of recoupments may not offset each other.  Moreover, even if they do offset each other, they may not offset each other in the same fiscal period’s financial statements.  This would be due to the ultimate timing of the assessments and recoupments, as well as the possibility of policies not being renewed in subsequent years.

Citizens is expected to report higher losses from the hurricanes that struck Florida in the third quarter of 2004 and a deficit for the 2004 plan year.  The Citizens Board met on March 30; however, they took no action to declare a deficit or levy an assessment.  Instead, they deferred making a decision until the completion of the external audit by Ernst & Young LLP, which was to have been completed by April 15, and until a determination is made as to whether any appropriations are going to be received from the state of Florida.  In its legislative session scheduled to end May 6, the state of Florida is expected to consider if an appropriation will be made to offset or eliminate the deficit and the need for an assessment, and therefore, any potential appropriation is not estimable.

As a result of the timing of these potential decisions, we are not in a position to estimate or accrue a potential assessment from Citizens. The Citizens Board will meet again on April 21 at which time a decision may be made.  The agenda for the April 21 meeting indicates that Citizens officers will recommend to the Citizens Board that the audited financial statements be accepted, but that no action be taken on the deficit disclosed by those statements, until such time as the legislature has taken action or has failed to take action by May 6.  Based on currently available information regarding the amount of the estimated deficiency and our market share, we believe that our maximum exposure to a regular assessment is $45 million pre-tax, which would be recorded as a catastrophe loss when approved by the Citizens Board.  This assessment would then be recouped through subsequent billing to insureds in addition to their premium.  These recoupments will be reportable in our financial results as they are billed.

The table below presents the estimated maximum impact of a regular assessment on the financial statements.

(in millions, except per share amounts and ratios)

If the Citizens Board declares the assessment before May 3, our anticipated Form 10-Q filing date, our results will be adjusted for our best estimate at that time.  Otherwise the impact of this assessment will be included in our results when estimable.

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