Emerson Cammack Lecture Series University of Illinois October 19, 2007

1. Assessing Shareholder Value Creationin the P&C Industry Emerson Cammack Lecture Series University of Illinois October 19, 2007 This presentation contains confidential information. Allstate's policies prohibit you from disclosing or discussing such information with anyone –except other employees who need the information to do their work. Do not reproduce or redistribute this presentation. Make sure you store this presentation in a secure manner or destroy it. Remember that Allstate employees are prohibited from trading on the basis of material nonpublic information.

2. Today’s Discussion • Industry analysis • Financial and market analysis • Investor analysis • Governance and management analysis

3. Industry analysis • Whether they misclassify risk or allow risk pricing to be driven by the market instead of underwriting discipline … is the fundamental driver of low returns in this industry. • – McKinsey & Company, The Journey, Revisited

4. According to McKinsey & Company, “The Journey, Revisited”: Drivers of Poor Returns in P&C Industry • Key drivers • Undifferentiated, commodity-like products • Ease of shopping and switching • No barriers to entry; real barriers to exit • Decentralized decision making that pushes too much to the front line, where experience and expertise is thinnest • Slow rate-making engines that lag exposure levels • Complexity of the business, particularly the number and interrelationships of risk drivers • These factors contribute to the trailing returns of the P&C industry vis-à-vis other financial services sector 1 • Fundamental characteristics of P&C business • ROE by industry, 1988-2002Percent • Runaway, unpredictable litigation costs driven by the fact that many rulings are applied retrospectively and interpretations vary by jurisdiction • Fragmented, unsupportive regulatory system that frequently delays product design, underwriting, and pricing changes and holds down prices • Indiscriminate rating agencies • Naïve investors • Asset management 2 • External forces that put pressure on the industry • Investment banks • Credit cards • Brokerages • Commercial banks 3 • Underinvestment in talent, particularly shortage of general management and financial talent • Failure to build strong financial disciplines • No single voice in Washington • Failure to step up to core challenges • Life • P&C For management discussion only. Contains information from third-party sources that does not necessarily represent the opinions, business objectives, or business strategies of Allstate Insurance Company or its affiliates.

5. Financial and market analysis • All intelligent investing is value investing – acquiring more than you are paying for. You must value the business in order to value the stock. • – Charles T. Munger,Vice Chairman, Berkshire Hathaway

6. Overview of Analytical Approach • Key activities 1 • Map P&C universe of publicly traded companies • Gather 12-year data on 52 financial variables • Examine correlations between financial performance and share price performance • Examine correlations between financial performance and relative valuation 2 • Develop point of view on shareholder value creation 3 • Profile typical investors • Summarize investment focus of major investors • Analyze investor base of P&C companies

7. P&C Market Map 100% = $142.7 billion Price appreciation 12-year Percent 16-20 Chubb 11-15 6-10 The Hartford 0-5 Allstate Progressive Cincinnati Financial Ohio Casualty American Financial Safeco 21st Century Hanover Insurance Harleysville Selective Mercury General Commerce Group Horace Mann Source: WSJ Online: Allstate analysis

8. Comparison of Market and Performance Metrics

9. Balance sheet data Cash flow data Fixed income securities Dividends paid Equity securities Treasury Stock Repurchases Total investments Investment yield Other assets Reinsurance recoverables Total assets Reserves Long-term debt Total liabilities Retained income Total equity Shares outstanding Overview of Statistical Methodology and Data Analysis • Statistical methodology • Exploratory data analysis: descriptive statistics (numbers and graphs) were calculated on Y (dependent) variable and each of the X (independent) variables. Scatterplots identified correlations between Y and each X, in addition to correlated X variables. • Model building, selection and refinement • Find a set of predictor variables that will be included in the model: (R Squared, Adjusted R Squared, Cp criterion, etc.); stepwise procedure; forward, backward selection; decision trees • Model selection and refinement: model adequacy, addition of interaction terms, outlying observations, model assumptions • Data analysis • A broad array of historical and financial/accounting data was reviewed in order to determine which measurements strongly correlated with stock price performance. 180 data points were collected for each variable listed below Income statement data Calculated data and other variables Automobile earned premium Book value per share Homeowners earned premium Dividend payout Life earned premium Dividend yield Investment income Dow Jones Industrial Average Capital gains Expense ratio Total revenue Liabilities/assets Claims and claims expense Liabilities/equity Amortization of deferred policy Loss ratio acquisitions costs Market cap Operating costs and expenses Market share Interest expense Net margin Total costs and expenses Premium/surplus Underwriting income Price/book value Net income Price/EPS Earnings per share basic Reserves/surplus Earnings per share diluted Return on assets Reinsurance: direct premiums earned Return on equity Reinsurance: premiums assumed S&P 500 Index Reinsurance: premiums ceded Sustainable growth rate • Correlation coefficients

10. Book value per share • Equity • Revenue • Net income • Earned premium • Combined ratio* Summary of Correlation Coefficients • Bottom 7 performers • Aggregate • Top 6 performers * Absolute values

11. Drivers of Return on Equity 1995-2006 Averages • A company’s ROE is affected by two factors: how profitably it employs its assets and how big the firm’s asset base is relative to shareholders’ investment • On average over long periods, large publicly traded firms in the U.S. generate ROEs in the range of 12% • Compared to historical trends, this peer group’s collective performance can be viewed as below average, and is likely not adequate to cover reasonable estimates of its equity cost of capital Net income/revenue – profitability of a company’s operating and financing decisions Revenue/assets – revenue dollars that a company is able to generate for each dollar of its assets Net income/assets – profits that a company is able to generate for each dollar of assets invested Assets/shareholders’ equity – how many dollars of assets a company is able to deploy for each dollar invested by its shareholders

12. Return on Equity and Cost of Equity Differential • Market/book • R2 = 0.81 Progressive Mercury Horace Mann Chubb Allstate American Financial Commerce Group Hartford Safeco Selective Harleysville Cincinnati Financial Hanover Ohio Casualty • Spread * Assumes market risk premium of 8.0% and risk-free rate of 5.275%. CAPM likely understates true cost of equity for this peer group. Using the Fama-French three factor model would yield higher estimates, given that all are value and/or small cap companies Note: Excluding 21st Century Source: Bloomberg; www.federalreserve.gov

13. Drivers of Price and Multiples 1996-2006 • Price appreciation • Multiple expansion • Market value/ book value • r² = 0.80 • r² = 0.74 • Price change • Market-to-book multiples are strongly correlated with return on equity • Price appreciation is strongly correlated with changes in book value • Book value growth • ROE

14. Impact of Size on Relative Valuation • Market/book multiple • Market value/ book value • r² = 0.05 • r² = 0.43 PGR • Other indicators of size (i.e., in addition to revenue) correlate poorly with relative market valuation PGR TW TW MCY MCY HMN CB ALL AFG HIG CB HMN ALL CGI CGI HIG SAF AFG CINF THG HGIC OCAS SIGI SAF SIGI CINF OCAS THG HGIC • Total assets$ Thousands • Number of employees Source: Wall Street Journal; Company 10-K filings

15. Investor analysis • One of the biggest risks in owning growth stocks is not that their growth will stop, but merely that it will slow down. And in the long run, that is not merely a risk, but a virtual certainty. • – Benjamin Graham, The Intelligent Investor

16. Overview of Investor Base

17. Major Institutional Holders of Allstate The Fund seeks to provide long-term growth of capital. As a secondary objective, the Fund seeks to provide some dividend income. Focus is on stocks with below-average price/earnings ratios and above-average yields. Vanguard Windsor II Fund This relatively conservative fund invests only in stocks that have paid dividends in nine of the most recent 10 years. If you want a fund with low expenses, low portfolio turnover and conservative stock picking, Washington Mutual Investors might be your cup of tea. Paul Merriman, Fund Advice.com The Fund seeks to track the performance of a benchmark index that measures the investment return of large-capitalization stocks. Vanguard 500 Index Fund

18. Major Institutional Holders of Progressive A bottom-up approach is emphasized that focuses primarily on assessing the operating prospects of each prospective holding. Companies targeted for investment are believed to have strong and enduring business models, inherent advantages over their competitors and unique business franchise characteristics. The following characteristics are emphasized: Superior management teams, specific plans to capitalize on positive fundamental changes, and low-cost production and/or distribution capability. TCW Galileo Select Equities Fund Like most portfolio managers, we believe in understanding the financial condition of companies inside and out. Where we gain a competitive edge is by focusing on finding top-quality management teams who respond innovatively to change. We see our job as separating the doers from the bluffers. Christopher Davis, Portfolio Manager, Davis New York Venture Fund

19. A • Ruane Cunniff, along with its affiliated Sequoia Fund, files Schedule 13-G, reporting beneficial ownership of 124 million Progressive shares, approximately 17% of total shares outstanding B • John Harris, the investment analyst at Ruane Cunniff responsible for Progressive, responds at Sequoia Fund annual meeting to fundholder questioning Progressive’s recent slide, “I don’t think our view of the company’s prospects has changed. We think they are bright. We are perfectly happy to wait a few years while the earnings are flattish or possibly decline so long as we think that management is doing what it needs to do to maximize the company’s ability to earn money far into the future. I think that Glenn Renwick, who is just an outstanding CEO, and his team are doing just that. As long as they continue to do that, we’re very happy to hold the stock.” C • Ruane Cunniff and Sequoia divest over 13 million Progressive shares D • Progressive reports a 29% drop in second quarter earnings. Shares experience 1-day decline of almost 4%. Goldman Sachs analyst, Tom Cholnoky, comments, “Progressive’s more aggressive pricing actions have yet to generate meaningful improvements in new business production.” E • Progressive reports a 21% drop in third-quarter earnings Progressive’s Recent Quarterly Performance • Key drivers • Price/book • Multiple • Price • $ • Over recent history, Progressive has been the only P&C stock that has been widely held by growth investors • Investors are particularly unforgiving of companies that have positioned themselves as growth plays and are subsequently unable to fulfill growth expectations • Progressive’s plight highlights two fundamental forces at play • Inability of any one company to defy powerful industry dynamics and to overcome industry structure/barriers • Reversion to the mean A B C D E Source: Wall Street Journal; Market Watch; www.sec.gov; Sequoia Fund 2006 Annual Meeting transcript

20. Governance and management analysis • It’s the people, stupid. • – Ram Shriram,Early Google Investor

21. Executive Leadership – Allstate

22. Executive Leadership – Allstate, continued

23. Board of Directors – Allstate

24. Board of Directors – Allstate, continued

25. Executive Leadership – Progressive

26. Executive Leadership – Progressive, continued

27. Board of Directors – Progressive

28. Board of Directors – Progressive, continued

29. Assessing Shareholder Value Creationin the P&C Industry Appendix October 19, 2007 This presentation contains confidential information. Allstate's policies prohibit you from disclosing or discussing such information with anyone –except other employees who need the information to do their work. Do not reproduce or redistribute this presentation. Make sure you store this presentation in a secure manner or destroy it. Remember that Allstate employees are prohibited from trading on the basis of material nonpublic information.

30. Profile of 21st Century Insurance Group Overview Summary financials Address 6301 Owensmouth Ave Ste 700 Woodland Hills, CA 91367 Business summary Key observations • On May 15, 2007 21st Century and AIG announced a definitive merger agreement. AIG currently owns approximately 62% of the outstanding shares of 21st Century. Upon completion of the transaction, 21st Century will become a wholly owned subsidiary of AIG. • Bruce Marlow will lead AIG’s direct private passenger auto operations, which will be comprised of 21st Century and AIG Direct. • In 2006, 21st Century entered eight new states, increasing the total to 17 states and raising the percentage of the US market in which it operates from 34% at year-end 2005 to 60% at year-end 2006. • Non-California direct premiums written increased 77.3% in 2006 • Long-term financial goals include: 96% combined ratio, 15% growth in DPW, 15% ROE and strong financial ratings. • Over 90% of their current customers renew their policy each year Source: SEC Form S-1; Wall Street Journal; A.M. Best

31. Profile of Allstate Corp. Overview Summary financials Address 2775 Sanders Road Northbrook, IL 60062 Business summary Key observations • Protection’s policies-in-force increased by 2.6% during 1Q07 v. 1Q06. New business applications grew 7.3%; operating income was $1.2 billion • Second quarter operating earnings per share come in at $0.80, or 4 cents less than expectations. Shares declined 5%, for a total decline in 2007 of 12% • On analyst conference call, CEO highlighted areas of focus for future growth: Emerging Businesses, Allstate Blue, direct channel and Allstate Financial retirement products • July 13, 2007: Merrill Lynch downgrades stock from “buy” to “neutral” • July 20, 2007: FBR lowers twelve-month price target from $67 to $63 Source: SEC Form 10-K; Wall Street Journal; A.M. Best

32. Profile of American Financial Group Overview Summary financials Address 250 East Fifth Street Cincinnati, OH 45202 Business summary Key observations • Lindner family owns approximately 35% of the company; employees own another 7% through AFG’s retirement plans. • AFG’s stated strategy is to grow and expand in the specialty insurance niche markets through organic growth and targeted acquisitions. • American Financial’s ROE from 1995 – 2006 has not consistently met its cost of capital. • 1Q07 was the most profitable quarter in the history of American Financial. Net earnings were $.92 per share. Source: SEC Form S-1; Wall Street Journal; A.M. Best, Smith Barney

33. Profile of Chubb Group, Inc. Overview Summary financials Address 15 Mountain View Road Warren, NJ 07061 Business summary Key observations • Homeowners line accounts for 60% of Chubb Personal Insurance’s business • Chubb has had difficulties sustaining consistent underwriting profit. ROE from 1995 – 2006 is 11% • Chubb has been criticized for some of its underwriting decisions, including $1 billion of exposure to credit derivatives and the $1.91 per share of asbestos exposure • Net written premium for 1Q07 declined 2% to $2.9 billion. Combined ratio for the quarter was 83.4%, a slight increase from the 82.9% that was achieved in 1Q06 • John Degnan: “Chubb, as you know, is a brand that is sold, it’s not bought. So we go for the more selective, cream-of-the-crop agents who can sell Chubb and the various niches that we perform in” Source: SEC Form 10-K; Wall Street Journal; A.M. Best, Chubb.com, Morningstar

34. Profile of Cincinnati Financial Overview Summary financials Address 6200 S. Gilmore Road Fairfield, OH 45014 Business summary Key observations • Cincinnati Financial’s investment record is very strong. Firm focuses on buying stocks with strong prospects of increasing earning and dividends. Based primarily on its investment in Fifth Third Bancorp, the company had record net income of $930 million in 2006. • Cincinnati’s growth plans center primarily on two points: • More agent appointments within existing markets • Entering new markets • Cincinnati Financial’s value proposition centers on an agent-centric culture. Cincinnati looks to be the dominant carrier within new agent appointments within 5 years • July 10, 2007: Citigroup commences coverage of CINF, rating the stock a “buy” Source: SEC Form 10-K; Wall Street Journal; A.M. Best, Smith Barney

35. Profile of Commerce Group Inc. Overview Summary financials Address 211 Main Street Webster, MA 01570 Business summary Key observations • Acquisitions of Western Pioneer Insurance Company and Automobile Insurance Club of Columbus, Ohio helped Commerce Group increase earned premium by about 85% from YE2000 to YE2006 • Total revenues rose 12% from 1Q06 to 1Q07 to $531.2 million. Income before taxes rose 9% over same period • Commerce Group’s ROE average has been greater than its cost of capital from 1995-2006 • In June, Commerce West entered into an agreement with Stonewood Insurance Services, Inc. of Rancho Cordova, CA. Under terms of the agreement Stonewood is placing $170 Million of California personal passenger auto insurance with Commerce West over a three year period • July 10, 2007: Citigroup commences coverage with a “hold” rating Source: Wall Street Journal; A.M. Best, Smith Barney, Standard & Poor’s

36. Profile of Hanover Insurance Group Inc. Overview Summary financials Address 440 Lincoln Street Worcester, MA 01653 Business summary Key observations • Over the course of the last three to four years, Hanover has focused on strengthening its balance sheet, improving its business mix and running off unprofitable business. Hanover’s upper management has changed significantly as well • Hanover appears to be at the end of their turnaround. 2006 was a successful year for the company with net income of $192 million • Hanover was able to grow the past few years by increasing operational efficiency and capturing market share from weak P&C competitors. The next few year will determine if Hanover can capture share from larger, more established competitors • Fred Eppinger, CEO: “I remain convinced our best-of-both strategy that combines the product, technology, and people quality of the best nationals, with a local presence and responsiveness of the best regionals, makes up a distinctive carrier for winning independent agents that are consolidating their markets” Source: SEC Form S-1; Wall Street Journal; A.M. Best

37. Profile of Harleysville Group Inc. Overview Summary financials Address 355 Maple Avenue Harleysville, PA 19438 Business summary Key observations • Consolidated property and casualty operations produced $1.2 billion of net written premiums in 2006 • Operating ROE of 13% for 2006; long-term objective is ROE greater than 12% • Ranks as one of the top 60 P&C insurance companies according to A.M.Best Company • Further expanded field sales and underwriting presence with opening a new office in Charlotte, N.C. • Focused primarily on three types of growth: acquisition, start-up operations and internal growth • Michael Browne, CEO: “Our number of agents overall has stayed steady around 1,500. We think we will probably make about 100 appointments this year, but we will probably terminate around 100 agents. We are constantly trying to upgrade the quality of our agents. And we think that is going to be our focus, not the number, but the quality and the consistency and the relationships in trying to drive more business through our most important partnerships” Source: SEC Form S-1; Wall Street Journal; A.M. Best

38. Profile of The Hartford Financial Services, Inc. Overview Summary financials Address One Hartford Plaza Hartford, CT 06115 Business summary Key observations • Net Income for the company’s Life’s division increased 27% over 1Q06. It is commonly believed The Hartford is well positioned to take advantage’s of the Life sector’s current growth phase. • 1Q07 ROE was approximately 17% and book value per diluted share increased approximately 13%. • Property & Casualty continues to provide solid earnings. 1Q07 combined ratio was 88.8%. The Hartford’s personal lines business grew at a solid pace. Written premium grew at 10% over 1Q06 for the AARP channel and 8% for the Independent Agent channel. • The Hartford recently announced a change in leadership. Tom Marra, previously President of the Life Division has been promoted to President of COO of the corporation. Ramani Ayer relinquished his position as President but remains as Chairman and CEO. David Zwiener, President of Property & Casualty, is leaving the company to join The Carlyle Group. Source: SEC Form 10-K; Wall Street Journal; A.M. Best, Smith Barney

39. Profile of Horace Mann Educators Corp. Overview Summary financials Address 1 Horace Mann Plaza Springfield, IL 62715 Business summary Key observations • From the period of 1995 – 2006 Horace Mann’s average cost of capital has exceeded its return on equity • Horace Mann had an outstanding 1Q07 from a auto sales standpoint. New auto policies increased 19% over prior year. Despite this auto growth, net income for the company remained flat to prior year • Since 2002, Horace Mann has increased its premium production by only 4.6% • Core educator market represents approximately three-quarters of in-force auto business Source: Wall Street Journal; A.M. Best, Horace Mann

40. Profile of Mercury General Corp. Overview Summary financials Address 4484 Wilshire Blvd. Los Angeles, CA 90010 Business summary Key observations • Mercury is expanding nationally and has stated a goal of writing more than 50% of its business outside of California. Currently, about 75% of all premiums are from California • Business written outside of California is not yet profitable. The combined ratio for business outside of California was 108.3% in 2006 while California business had a 90.3% combined ratio • Mercury’s commission for agents is higher than industry average • Premium growth has slowed significantly. Premium volume increased just 3% in 2006 versus an 11% increase in 2005 Source: SEC Form S-1; Wall Street Journal; A.M. Best

41. Profile of Ohio Casualty Corp. Overview Summary financials Address 9450 Seward Street Fairfield, OH 45014 Business summary Key observations • In May, Ohio Casualty agreed to be purchased by Liberty Mutual. Liberty Mutual has stated that it plans to fold Ohio Casualty into its Agency Markets unit • Liberty Mutual paid about a 32% premium to Ohio Casualty’s stock price • Book value increased over 14% in 2006 and the CAGR over the last 3 years exceeds 11% • Dan Carmichael, CEO: “Our book value is up 17%. I believe that real, long-term shareholder value is primarily created by growing book value, and we have an excellent record” • “Our new strategic plan describes one of our major goals: to become a stronger marketing company. A key ingredient of that is the development of differentiated products and services that will strengthen our agency franchise and enhance the value of an agency agreement with Ohio Casualty” Source: Wall Street Journal; A.M. Best, Smith Barney

42. Profile of Progressive Corp. Overview Summary financials Address 6300 Wilson Mills Road Mayfield Village, OH 44143 Business summary Key observations • Historically, Progressive has been an outstanding performer within the P&C sector. Progressive’s average ROE from 1995 to 2006 is 18.2% • Progressive’s meteoric rise in growth and profit has slowed significantly of late. Through the second quarter Progressive’s net written premium has shrunk 3% and combined ratio has deteriorated by 8.3 percentage points. Progressive’s recent rate reductions have yet to pay dividends • Progressive’s declining new written premium is driven primarily by its agency and commercial auto business. The Direct Channel is essentially flat to prior year. Source: SEC Form 10-K; Wall Street Journal; A.M. Best, Chubb.com, Morningstar

43. Profile of Safeco Corp. Overview Summary financials Address 4333 Brooklyn Avenue NE Seattle, WA 98185 Business summary Key observations • Safeco had a profitable 1Q07 with a combined ratio of 89.8% a decline from a year prior of 86.9%. While profits have been solid, Safeco’s net written premiums declined 2% from 1Q06. • Safeco experienced significant profitability challenges in the late 1990s. New leadership returned the company to profitability. Paula Reynolds joined Safeco as CEO in 2006 and is focusing on the following goals • Market products that mirror diversity of customers and their buying preferences • Higher operating efficiency / lower expenses • Use company capital to increase shareholder returns • Achieve best-in-class infrastructure and technological capabilities Source: SEC Form 10-K; Wall Street Journal; A.M. Best, Safeco.com, Morningstar

44. Profile of Selective Insurance Group Inc. Overview Summary financials Address 40 Wantage Avenue Branchville, NJ 07890 Business summary Key observations • Rated A+ (superior) by A.M.Best for the 45th consecutive year • Selective 1Q07 results were disappointing compared to 1Q06 • Net income declined to $37.3M from $40.0 million • Net written premiums declined to $417.2 million from $432.o million • Selective attributed the poor profits to higher than expected weather related losses • Uses “High Tech, High Touch”. “High Tech” is advanced technology used for independent insurance agents to transact and process business with Selective and customers to access real-time information, manage their accounts and pay their bills through an on-line customer portal Source: SEC Form S-1; Wall Street Journal; A.M. Best