Allstate (ALL)

Long-Term Incentive Awards—Equity

        As stated in our compensation philosophy, we believe that a significant amount of executive compensation should be in the form of equity and that a greater percentage of compensation should be at risk for executives who bear higher levels of responsibility for Allstate's performance. Consistent with that philosophy, the size of stock option and restricted stock unit awards granted by the Compensation and Succession Committee is usually larger for executives with the broadest scope of responsibility. However, from time to time, larger equity awards are granted to attract new executives.

Long-Term Incentive Awards—Equity

        As stated in our compensation philosophy, we believe that a significant amount of executive compensation should be in the form of equity and that a greater percentage of compensation should be at risk for executives who bear higher levels of responsibility for Allstate's performance. Consistent with that philosophy, the size of stock options and restricted stock unit awards granted by the Compensation and Succession Committee are usually larger for executives with the broadest scope of responsibility. However, from time to time, larger equity awards are granted to attract new executives.

Long-Term Incentive Awards—Equity

        Stock options are used to align the interests of our executives with long-term stockholder value. Stock options represent the opportunity to buy shares of our stock at a fixed exercise price at a future date. Under our stockholder-approved equity incentive plan, the exercise price cannot be less than the fair market value of a share on the date of grant. This means that our stock options have value for our executives only if the stock price increases after the date the options are granted. In other words, the value of these awards correlates to the value provided to stockholders by increases in our stock price. All stock option awards have been made in the form of nonqualified stock options at exercise prices equal to 100% of the fair market value of Allstate common stock on the date of grant. Our stock options vest over stated vesting periods measured from the date of grant. In general, options are not fully exercisable until four years after the date of grant and expire in ten years, except in certain change-in-control situations or under other special circumstances approved by the Compensation and Succession Committee.

        RSUs are linked to stockholder value and are a tool for retaining executive talent. Each RSU represents our promise to transfer one fully vested share of stock in the future if and when the restrictions expire (when the RSU "vests"). Our RSUs vest in one or more installments over stated periods measured from the date of grant, except in certain change-in-control situations or under other special circumstances approved by the Compensation and Succession Committee. The period over which the RSUs vest is typically a four-year period. Our RSUs include the right to receive dividend equivalents in the same amount and at the same time as dividends paid to all Allstate common stockholders. Unlike

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options, RSUs retain some value even if the price of the stock declines. Because RSUs are based on and payable in stock, they serve to reinforce the alignment of interests of our executives and our stockholders. In addition, because RSUs have a real, current value that is forfeited, except in some circumstances, if an executive terminates employment before the RSUs vest, they provide a significant retention incentive. Under the terms of the RSU awards, the executives have only the rights of general unsecured creditors of Allstate and no rights as stockholders until delivery of the underlying shares.

        We began including RSUs and restricted stock as a component of equity incentive compensation in response to competitive pressures in the market for executive talent. Earlier in the decade other companies began using RSUs and restricted stock, instead of stock options. Based on competitive compensation data, the Compensation and Succession Committee determined that it was important to offer RSUs or restricted stock so that Allstate could continue to attract and retain executive talent. The Committee granted awards of restricted stock for the first time in 2000. In 2005, the Committee switched to RSUs.

        As indicated above, the Compensation and Succession Committee grants equity incentive awards on an annual basis during its February meeting. However, from time to time, the Committee makes an award in connection with the hiring of, or a change in the role or responsibilities of, an executive. The Committee grants awards during meetings at which a quorum is present, not by written consent. The February meeting during which the Committee makes the annual equity incentive awards is held after the issuance of our year-end earnings press release. In the event that the Committee is advised that material information about Allstate has not been publicly disclosed, the Committee will postpone the granting of such annual awards until such time as all material information has been publicly disclosed. For additional information on the Committee's practices, see the Corporate Governance section of this proxy statement.

        The Compensation and Succession Committee granted two sets of equity awards in February 2006: annual awards and special awards. Each set included both RSUs and options. The aggregate size of each named executive's annual award was determined by the Committee on the basis of the executive's position and the competitive assessment provided by the Committee's executive compensation consultant. For each of the named executives the annual awards were allocated so that substantially more of the grant date value was provided in the form of stock options than in the form of RSUs in order to emphasize the alignment with long-term increases in stockholder value.

        The special awards were designed to align the interests of the named executives with our stockholders and to motivate our named executives as they face extraordinary challenges over the next several years in pursuing our better, bigger, and broader goal. After the devastating 2004 and 2005 hurricane seasons, the named executives accelerated the pursuit of a strategy to address our exposure to catastrophes. Emerging consensus in the scientific community indicated that the U.S. is facing a period of more frequent and severe hurricanes due to the Atlantic Multidecadal Oscillation and that this period could extend for several decades. Our Board and senior management concluded that a new, comprehensive, and multi-faceted strategy was required to protect stockholders and customers alike from undue exposure to losses resulting from natural catastrophes while maintaining the vitality of Allstate's property insurance businesses. This strategy would require the sophisticated use of reinsurance, the development of new underwriting and pricing processes, and the pursuit of long-term public policy solutions aimed at forging a public and private partnership to assure the availability of high quality insurance coverage for homeowners at a price that would keep coverage within reach of as many customers as possible. Recognizing that this strategy would require a sustained, long-term focus, that it would present a high degree of achievement difficulty, and that stockholders would be significantly rewarded by the achievement of the strategy's objectives, the Committee determined that additional equity compensation would provide the most effective incentive. The Committee determined that the amount of the special awards, on a grant date fair value basis, should approximate the size of the annual awards in order to underscore the importance to stockholder value of achieving the strategy's objectives, without overshadowing the significance of the annual awards. However, in order to distinguish the special award

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from the annual award and to emphasize the executive retention aspect of the special awards, the Committee divided the grant date fair value equally between options and RSUs.

        The amount of each named executive's annual and special equity awards is set forth in the following table.

        The 2006 annual RSU awards vest in one installment on February 21, 2010 and the special awards vest in four annual installments of 25% on the first four anniversaries of the grant date. The 2006 annual and special awards of stock options become exercisable in four annual installments of 25% on the first four anniversaries of the grant date, were granted with an exercise price equal to the fair market value of Allstate's common stock on the date of grant, and expire ten years from the date of grant.