Allstate (ALL)

Florida hurricane assessments

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 due to the ultimate timing of the assessments and recoupments, as well as the possibility of policies not being renewed in subsequent years.

7

Florida hurricane assessments

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 due to the ultimate timing of the assessments and recoupments, as well as the possibility of policies not being renewed in subsequent years.

Citizens reported higher losses from the hurricanes that struck Florida in the third quarter of 2004 and a deficit for the 2004 plan year.  When the Citizens Board met on April 21, 2005, they accepted the external audit results and declared a deficit; however, they have taken no action to levy an assessment.  Instead, they have deferred a decision on whether to assess 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, 2005, 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 and uncertain outcome of these potential decisions, the Company is not in a position to estimate or accrue a liability for a potential assessment from Citizens. Based on currently available information regarding the amount of the estimated deficiency and the Company’s market share, the Company believes that its maximum loss exposure to a regular assessment is $45 million pre-tax  ($29 million after-tax and $0.04 per diluted share), which would be recorded 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 recorded in the financial statements as they are billed.

8

Florida hurricane assessments

        Floridian and Allstate Floridian Indemnity Company ("AFI") sell and service Allstate's Florida residential property policies and have access to reimbursements on certain qualifying Florida hurricane

163

losses (see Note 9), as well as exposure to assessments from the FHCF. The FHCF has the authority to issue bonds to pay its obligations to participating insurers in excess of its capital balances, which are funded by assessments on all property and casualty premiums in the state, except workers' compensation, medical malpractice and accident and health insurance. By law, these assessments are the obligation of insurance policyholders, which insurance companies must collect. The FHCF assessments are limited to 6% of premiums per year beginning the first year in which reimbursements require bonding, and up to a total of 10% of premiums per year for assessments in the second and subsequent years, if required to fund additional bonding. Upon the order of the Florida Office of Insurance Regulation ("FL OIR"), companies are required to collect the FHCF assessments directly from residential property policyholders and remit them to the FHCF as they are collected.

        In addition, Floridian and AFI 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, can levy a Regular Assessment on participating companies for a deficit in any calendar year equal 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 subject to a cap on the amount that can be charged in any one year. A rate filing or any portion of a rate change attributable entirely to an assessment is subject to the FL OIR's statutory authority to review the "adequacy" of any rate at any time. 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. In order to recoup its Citizens assessment, an insurer must file for a policy surcharge with the FL OIR at least 15 days prior to imposing the surcharge on policies.

        While facilities such as the FHCF and Citizens are designed so that the ultimate cost is borne by policyholders, the exposure to assessments and the availability of recoveries from these facilities 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. Its Board of Directors is meeting in March 2005 to review its financial condition and determine if it will assess the industry.