Maintaining profitability is essential to protecting shareholder value. Allstate is well positioned in a competitive personal lines market, with a combination of product differentiation, effective expense and risk management, superior service delivery and a powerful brand. Together, these capabilities add up to operating efficiency and good value for customers—strengths that allow us to compete on a broader basis than price alone. Evidence of this can be seen in Allstate’s Property-Liability combined ratio, which over time has outperformed the industry average regardless of industry profitability. Simply put, Property-Liability combined ratio is the percent of premiums that goes to pay operating and claim expenses. The lower the number, the more profit the company is generating from its core business operations. Our Property-Liability combined ratio has been below 90 percent over the last two years—an underlying indication of our ability and commitment to shareholder value. Our belief is that this performance should ultimately translate into a stock price more in line with our historic range.

As 2007 unfolded, competitive pressure in auto insurance steadily moderated. In the first quarter, large insurers filed substantially more price decreases than increases; by the third and fourth quarters, the opposite was true. The homeowners market is less competitive than auto insurance and is in transition as the industry copes with a rapid increase in risk of loss from mega-catastrophes. In general, homeowner margins declined, but this was partly offset by the absence of large hurricanes. In homeowners, Allstate is focused on risk reduction and improving margins using the same capabilities that make us successful in auto insurance. We will continue to monitor the margin compression we saw in 2007 and adjust rates as needed in order to maintain our combined ratio.

Chances are, consumers don’t associate the insurance industry with creativity, speed or for innovation to meet their changing needs. We believe we can fundamentally change this, and create sustainable growth, by using Allstate’s unique combination of brand, product differentiation and breadth, extensive distribution and operational strength. Our vision is to reinvent protection and retirement for the consumer. More on reinventing for the consumer can be found in the Reinventing Protection & Retirement section of this report.

In today’s unpredictable economic and investment environment, reducing volatility in earnings is increasingly important. Historically, the single largest influence on earnings volatility for Allstate has been catastrophe losses from earthquakes and hurricanes. More than 12 years ago, we began taking steps to mitigate our exposure to catastrophes. In 2004 and 2005, as it became clear that the United States may be in a period of substantially greater hurricane risk due to warmer oceans, we significantly increased these efforts. We extensively purchased reinsurance to lower our risk of loss. We restructured coverage and pricing, changed policy language and raised rates. We also reduced our exposure by limiting new business and declining continuing coverage to some customers in some coastal areas, instead offering them alternatives from other insurance companies when we could. We also began advocating legislative changes, at both the state and federal levels, to help markets address increased risks.

Of further concern for investors today is the earnings volatility of a financial services company’s investment portfolio—in particular, the diversity, quality and productivity of its assets. Allstate’s investment portfolio totals more than $118 billion and is highly diversified. It generates significant annual cash flow and has primarily high-quality fixed income investments that back up our liabilities.