of Operations

                                                                    Page
         Overview                                                      27
         2008 Highlights                                               27
         Consolidated Net (Loss) Income                                28
         Application of Critical Accounting Estimates                  28
         Property-Liability 2008 Highlights                            42
         Property-Liability Operations                                 43
         Allstate Protection Segment                                   45
         Discontinued Lines and Coverages Segment                      58
         Property-Liability Investment Results                         59
         Property-Liability Claims and Claims Expense Reserves         60
         Allstate Financial 2008 Highlights                            71
         Allstate Financial Segment                                    72
         Investments                                                   82
         Fair Value of Financial Assets and Financial Liabilities     119
         Market Risk                                                  122
         Pension Plans                                                125
         Deferred Taxes                                               127
         Capital Resources and Liquidity                              128
         Enterprise Risk and Return Management                        137
         Regulation and Legal Proceedings                             138
         Pending Accounting Standards                                 138

The following discussion highlights significant factors influencing the consolidated financial position and results of operations of The Allstate Corporation (referred to in this document as "we", "our", "us", the "Company" or "Allstate"). It should be read in conjunction with the 5-year summary of selected financial data, consolidated financial statements and related notes found under Part II, Item 6 and Item 8 contained herein. Further analysis of our insurance segments is provided in the Property-Liability Operations (which includes the Allstate Protection and the Discontinued Lines and Coverages segments) and in the Allstate Financial Segment sections of Management's Discussion and Analysis ("MD&A"). The segments are consistent with the way in which we use financial information to evaluate business performance and to determine the allocation of resources.

Allstate is focused on three priorities in 2009: protecting Allstate's financial strength, building customer loyalty, and continue reinventing protection and retirement for the consumer. In addition, we will continue to monitor market conditions and will consider business start-ups, acquisitions and alliances that would forward our business objectives and represent prudent uses of corporate capital.

The most important factors we monitor to evaluate the financial condition and performance of our company include:

º •
º For Allstate Protection: premium written, the number of policies in force ("PIF"), retention, price changes, claim frequency (rate of claim occurrence per policy in force) and severity (average cost per claim), catastrophes, loss ratio, expenses, underwriting results and sales of all products and services;

º •
º For Allstate Financial: premiums and deposits, benefit and investment spread, amortization of deferred policy acquisition costs, expenses, operating income, net income, invested assets, and new business returns;

º •
º For Investments: credit quality/experience, realized capital gains and losses, investment income, unrealized capital gains and losses, stability of long-term returns, total returns, cash flows, and asset and liability duration; and

º •
º For financial condition: liquidity, parent company deployable invested assets, financial strength ratings, operating leverage, debt leverage, book value per share, and return on equity.

2008 HIGHLIGHTS

º •
º Consolidated net loss was $1.68 billion in 2008 compared to net income of $4.64 billion in 2007. Net loss per diluted share was $3.07 in 2008 compared to net income per diluted share of $7.77 in 2007.

º •
º Property-Liability net income was $228 million in 2008 compared to $4.26 billion in 2007.

º •
º The Property-Liability combined ratio was 99.4 in 2008 compared to 89.8 in 2007.

º •
º Catastrophe losses in 2008 totaled $3.34 billion compared to $1.41 billion in 2007. The effect of catastrophe losses on the combined ratio was 12.4 points and 5.2 points in 2008 and 2007, respectively.

º •
º Allstate Financial had a net loss of $1.72 billion in 2008 compared to net income of $465 million in 2007.

º •
º Total revenues were $29.39 billion in 2008 compared to $36.77 billion in 2007.

º •
º Property-Liability premiums earned in 2008 totaled $26.97 billion, a decrease of 1.0% from $27.23 billion in 2007.

º •
º Net realized capital losses were $5.09 billion in 2008 compared to net realized capital gains of $1.24 billion in 2007.

º •
º Investments as of December 31, 2008 totaled $96.00 billion, a decrease of 19.3% from $118.98 billion as of December 31, 2007. Net investment income in 2008 was $5.62 billion, a decrease of 12.6% from $6.44 billion in 2007.

º •
º Book value per diluted share was $23.51 as of December 31, 2008, a decrease of 39.1% from $38.58 as of December 31, 2007.

º •
º For the twelve months ended December 31, 2008, return on the average of beginning and ending period shareholders' equity was (9.7)%, a decrease of 30.9 points from 21.2% for the twelve months ended December 31, 2007.

º •
º To further enhance our liquidity and capital levels, we suspended our $2.00 billion share repurchase program and do not plan to complete it by our original target date of March 2009. The number of shares repurchased under the program was 22.7 million shares for $1.07 billion during the twelve months ended December 31, 2008.

º •
º At December 31, 2008, we held $12.64 billion in capital. This total included $3.64 billion in deployable invested assets at the parent holding company level.

º •
º On February 25, 2009, we announced that our shareholder dividend was being revised to $.20.

CONSOLIDATED NET (LOSS) INCOME

                                                   For the years ended December 31,
 ($ in millions)                                   2008            2007         2006
 Revenues
 Property-liability insurance premiums         $     26,967    $     27,233   $  27,369
 earned
 Life and annuity premiums and contract               1,895           1,866       1,964
 charges
 Net investment income                                5,622           6,435       6,177
 Realized capital gains and losses                   (5,090 )         1,235         286

 Total revenues                                      29,394          36,769      35,796
 Costs and expenses
 Property-liability insurance claims and            (20,064 )       (17,667 )   (16,017 )
 claims expense
 Life and annuity contract benefits                  (1,612 )        (1,589 )    (1,570 )
 Interest credited to contractholder funds           (2,411 )        (2,681 )    (2,609 )
 Amortization of deferred policy acquisition         (4,679 )        (4,704 )    (4,757 )
 costs
 Operating costs and expenses                        (3,273 )        (3,103 )    (3,033 )
 Restructuring and related charges                      (23 )           (29 )      (182 )
 Interest expense                                      (351 )          (333 )      (357 )

 Total costs and expenses                           (32,413 )       (30,106 )   (28,525 )
 Loss on disposition of operations                       (6 )           (10 )       (93 )
 Income tax benefit (expense)                         1,346          (2,017 )    (2,185 )

 Net (loss) income                             $     (1,679 )  $      4,636   $   4,993

 Property-Liability                             $       228     $     4,258   $   4,614
 Allstate Financial                                  (1,721 )           465         464
 Corporate and Other                                   (186 )           (87 )       (85 )

 Net (loss) income                             $     (1,679 )  $      4,636   $   4,993

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the consolidated financial statements. The most critical estimates include those used in determining:

º •
º Fair Value of Financial Assets and Financial Liabilities

º •
º Impairment of Fixed Income and Equity Securities

º •
º Deferred Policy Acquisition Costs ("DAC") Amortization

º •
º Reserve for Property-Liability Insurance Claims and Claims Expense Estimation

º •
º Reserve for Life-Contingent Contract Benefits Estimation

In applying these policies, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to our businesses and operations. It is reasonably likely that changes in these estimates could occur from period to period and result in a material impact on our consolidated financial statements.

A brief summary of each of these critical accounting estimates follows. For a more detailed discussion of the effect of these estimates on our consolidated financial statements, and the judgments and assumptions related to these estimates, see the referenced sections of this document. For a complete summary of our significant accounting policies, see Note 2 of the consolidated financial statements.

º •
º 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;

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

º •
º Expands disclosures about financial instruments measured at fair value.

We categorize our financial assets and financial liabilities measured at fair value based on the observability of inputs to the valuation techniques, into a three-level fair value hierarchy as follows:

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

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

º (a)
º Quoted prices for similar assets or liabilities in active markets;

º (b)
º Quoted prices for identical or similar assets or liabilities in non-active markets; or

º (c)
º Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.

º Level
º 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 our estimates of the assumptions that market participants would use in valuing the financial assets and financial liabilities.

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 our 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. The degree of management judgment involved in determining fair values is inversely related to the availability of market observable information.

To distinguish among the categories, we consider the frequency of completed transactions such as daily trading for equity securities. If inputs used to measure a financial instrument fall within different levels of the fair value hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the entire instrument. 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. Accordingly, such investments are only included in the fair value hierarchy disclosure when the investment is subject to remeasurement at fair value after initial recognition and the resulting measurement is reflected in the consolidated financial statements. 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.

We are responsible for the determination of the value of the financial assets and financial liabilities carried at fair value and the supporting assumptions and methodologies. We gain assurance on the overall reasonableness and consistent application of valuation input assumptions, valuation methodologies and compliance with accounting standards for fair value determination through the execution of various processes and controls designed to ensure that our financial assets and financial liabilities are appropriately valued. We monitor fair values received from third parties and those derived internally on an ongoing basis.

In certain situations, we employ independent third-party valuation service providers to gather, analyze, and interpret market information and derive fair values based upon relevant assumptions and methodologies for individual instruments. In situations where our valuation service providers are unable to obtain sufficient market observable information upon which to estimate the fair value for a particular security, fair value is determined either by requesting brokers who are knowledgeable about these securities to provide a single quote or by employing internal valuation models that are widely accepted in the financial services industry. Changing market conditions are incorporated into valuation assumptions and reflected in the fair values, which are validated by calibration and other analytical techniques to available market observable data.

Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of proprietary algorithms, produce valuation information in the

form of a single fair value for individual securities for which a fair value has been requested under the terms of our agreements. For certain equity securities, valuation service providers provide market quotations for completed transactions on the measurement date. For other security types, fair values are derived from the valuation service providers' proprietary valuation models. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, liquidity spread, currency rates, and other market-observable information, as applicable. Credit and liquidity spreads are typically implied from completed transactions and transactions of comparable securities. Valuation service providers also use proprietary discounted cash flow models that are widely accepted in the financial services industry and similar to those used by other market participants to value the same financial instruments. The valuation models take into account, among other things, market observable information as of the measurement date, as described above, as well as the specific attributes of the security being valued including its term, interest rate, credit rating, industry sector, and where applicable, collateral quality and other issue or issuer specific information. Executing valuation models effectively requires seasoned professional judgment and experience. In cases where market transactions or other market observable data is limited, the extent to which judgment is applied varies inversely with the availability of market observable information.

For certain of our financial assets carried at fair value, where our valuation service providers cannot provide fair value determinations, we obtain non-binding price quotes from brokers familiar with the security who, similar to our valuation service providers, may consider transactions or activity in similar securities, as applicable, among other information. The brokers providing price quotes are generally from the brokerage divisions of leading financial institutions with market making, underwriting and distribution expertise.

The fair value of financial assets and financial liabilities, including privately-placed securities, certain free-standing derivatives and certain derivatives embedded in certain contractholder liabilities, where our valuation service providers or brokers do not provide fair value determinations, is determined using valuation methods and models widely accepted in the financial services industry. Internally developed valuation models, which include inputs that may not be market observable and as such involve some degree of judgment, are considered appropriate for each class of security to which they are applied.

Our internal pricing methods are primarily based on models using discounted cash flow methodologies that determine a single best estimate of fair value for individual financial instruments. In addition, our models use internally assigned credit ratings as inputs (which are generally consistent with any external ratings and those we use to report our holdings by credit rating) and stochastically determined cash flows for certain derivatives embedded in certain contractholder liabilities, both of which are difficult to independently observe and verify. Instrument specific inputs used in our internal fair value determinations include: coupon rate, coupon type, weighted average life, sector of the issuer, call provisions, and the contractual elements of derivatives embedded in certain contractholder liabilities. Market related inputs used in these fair values, which we believe are representative of inputs other market participants would use to determine fair value of the same instruments include:
interest rate yield curves, quoted market prices of comparable securities, credit spreads, estimated liquidity premiums, and other applicable market data including lapse and anticipated market return estimates for derivatives embedded in certain contractholder liabilities. Credit spreads are determined using those published by a commonly used industry specialist for comparable public securities. A liquidity premium is also added to certain securities to reflect spreads commonly required for the types of securities being valued and are calibrated based on actual trades or other market data. As a result of the significance of non-market observable inputs, including internally assigned credit ratings and stochastic cash flow estimates as described above, judgment is required in developing these fair values. The fair value of these financial assets and financial liabilities may differ from the amount actually received to sell an asset or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date. Moreover, the use of different valuation assumptions may have a material effect on the financial assets' and financial liabilities' fair values.

Fair value of our investments comprise an aggregation of numerous, single best estimates for each security in the Consolidated Statements of Financial Position. Because of this detailed approach, there is no single set of assumptions that determine our fair value estimates at a consolidated level. Moreover, management does not compile a range of estimates for items reported at fair value at the consolidated level because we do not believe that a range would provide meaningful information. In the last 10 years, our quarterly net unrealized capital gains and losses have ranged from a $7.55 billion net unrealized capital gain at June 30, 2003 to an $8.81 billion net unrealized capital loss at December 31, 2008. The change in net unrealized capital gains and losses by quarter over the 10 year period has averaged $1.10 billion and has ranged from a $4.71 billion decrease to a $2.29 billion increase.

Level 1 and Level 2 measurements represent valuations where all significant inputs are market observable. Level 3 measurements have one or more significant inputs that are not market observable and as a result these

fair value determinations have greater potential variability as it relates to their significant inputs. The Level 3 principal components are privately placed securities valued using internal models and broker quoted securities. Additionally, 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, all asset-backed residential mortgage-backed securities ("ABS RMBS"), auction rate securities ("ARS") backed by student loans, Alt-A residential mortgage-backed securities ("Alt-A"), other collateralized debt obligations ("CDO"), certain asset-backed securities ("ABS") and certain commercial mortgage-backed securities ("CMBS") are categorized as Level 3. In general, the greater the reliance on significant inputs that are not market observable, the greater potential variability of the fair value determinations. For broker quoted securities' fair value determinations, which were all categorized as Level 3, we believe the brokers providing the quotes may consider market observable transactions or activity in similar securities, as applicable, and other information as calibration points. Privately placed securities' fair value determinations, which are based on internal ratings that are not market observable and categorized as Level 3, are calibrated to market observable information in the form of external National Association of Insurance Commissioners ("NAIC") ratings and credit spreads.

We believe our most significant exposure to changes in fair value is due to market risk. Our exposure to changes in market conditions is discussed fully in the Market Risk section of the MD&A.

We employ specific control processes to determine the reasonableness of the fair values of our financial assets and financial liabilities. Our processes are designed to ensure that the values received or internally estimated are accurately recorded and that the data inputs and the valuation techniques utilized are appropriate, consistently applied, and that the assumptions are reasonable and consistent with the objective of determining fair value. For example, on a continuing basis, we assess the reasonableness of individual security values received from valuation service providers that exceed certain thresholds as compared to previous values received from those valuation service providers. In addition, we may validate the reasonableness of fair values by comparing information obtained from our valuation service providers to other third party valuation sources for selected financial assets. When fair value determinations are expected to be more variable, we validate them through reviews by members of management who have relevant expertise and who are independent of those charged with executing investment transactions. We do not alter fair values provided by our valuation providers or brokers.

The following table identifies investments as of December 31, 2008 by source of value determination:

                                                                Investments
                                                             Fair      Percent
    ($ in millions)                                         value      to total
    Fair value based on internal sources                   $  9,256          9.7 %
    Fair value based on external sources(1)                  71,063         74.0

    Total fixed income, equity and short-term securities     80,319         83.7

    Fair value of derivatives                                   301          0.3
    Mortgage loans, policy loans, bank loans and certain
    limited partnership and other investments,
    valued at cost, amortized cost and the equity method     15,378         16.0

    Total                                                  $ 95,998        100.0 %

For more detailed information on our accounting policy for the fair value of financial assets and financial liabilities and information on the financial assets and financial liabilities included in the levels promulgated by SFAS No. 157, see Note 2 of the consolidated financial statements.

Impairment of Fixed Income and Equity Securities For investments classified as available for sale, the difference between fair value and amortized cost for fixed income securities and cost for equity securities, net of certain other items and deferred income taxes (as disclosed in Note 5), is reported as a component of accumulated other comprehensive income on the Consolidated Statements of Financial Position and is not reflected in the operating results of any period until reclassified to net income upon the consummation of a transaction with an unrelated third party or when the decline in fair value is deemed other than temporary. The assessment of whether the impairment of a security's fair value is other than temporary is performed using a portfolio review as well as a case-by-case review considering a wide range of factors.

There are a number of assumptions and estimates inherent in evaluating impairments and determining if they are other than temporary, including: 1) our ability and intent to hold the investment for a period of time sufficient to allow for an anticipated recovery in value; 2) the expected recoverability of principal and interest; 3) the length of time and extent to which the fair value has been less than amortized cost for fixed income securities or cost for equity securities; 4) the financial condition, near-term and long-term prospects of the issue or issuer, including

relevant industry conditions and trends, and implications of rating agency actions and offering prices; and 5) the specific reasons that a security is in a . . .