What Is Enterprise Risk Management?

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1 What Is Enterprise Risk Management? April 24, 2006 Marty Przygoda AVP, Enterprise Risk Management 2002 Allstate Insurance Company Before we start talking about ERM, it might be helpful to know who we are... The Allstate Corporation is the largest publicly held personal lines insurer in the United States Engaged primarily in the personal property and casualty insurance business and life insurance, retirement, and investment products business Market Rank (2004): #2 Property-Casualty #13 Life 2005 Statistics: Revenues $35 B Assets $156 B Market Cap $36 B

2 Similar to many other insurance companies, Allstate has always had many well established risk management practices... Asset-Liability Management Business Continuity and Disaster Recovery Compliance Corporate Insurance Financial Reporting Internal Audit reviews Product Management Sarbanes-Oxley Investment Risk Management Legal Risk Management Loss Reserving Corporate Security Information Security Internal Control Process Reinsurance Risk Management Underwriting Reviews Workplace Safety While these effective, but silo-based risk practices are important, Allstate believes that a better framework to drive improvements in shareholder value on its overall portfolio of businesses is ERM... Enterprise Risk Management (ERM) Identifies risks, opportunities and economic capital Helps prioritize strategic and operational decisions Drives Improved Decision Making Ensures planned objectives are achieved Improves capital efficiency Leads to Improved Financial Performance Higher ROE, Earnings & Book Value Higher & less volatile EPS Drives Improved Shareholder Value Higher P / BV Ratio Higher P / E Ratio

3 Enterprise Risk and Capital Management practices have evolved at Allstate over many years... Early 1990 s 1995/96 Allstate Investments establishes CRMC 1995 Allstate and expands introduces AIR quantitative risk and RMS cat analytics models 1995/96 A.M. Best and S&P introduce Risk adjusted capital measures 2002 Allstate develops ERM Framework and Strategic Vision with Tillinghast 2003 AF makes Strategic ALM Investment initiates enhanced Legal Risk Management Identifies 16 Top Risks with Enterprise Risk Survey enhanced state reinsurance contracts/ Allstate Floridian risk and capital actions discloses ERM in MD&A Financial ALM develops GAAP EaR model Today Develop Enterprise Economic Capital model and analytics Future Banking Industry adopts Risk Adjusted Capital measures (Basel I) 1997 AF develops internal capital formula incorporating credit, mortality, and interest rate risks 2001 Allstate begins to develop P&C Economic Capital Model 2003 Allstate forms Enterprise Risk Council Allstate begins hedging portion of VA DBs hedges Accumulation and Withdrawal Benefits in VA contracts Protection begins utilizing Economic Capital Measures appoints CRO and forms ERM Function 2004 Capital management actions partially based on economic capital Implements Enterprise Risk Dashboard Protection Implements Economic Capital in Strategic Plan Protection model enhancements and efficiencies 2005 Begin AF economic capital model prototype Protection interest rate limits and duration adjustments Implement Long-term Cat Management/ Terrorism Solutions Basel II Solvency II Framework and Standards Enterprise Risk Management is part of an overall framework with which we drive the Company... Enterprise Risk Management Framework at Allstate ERM Culture Established by Senior Management ERM Infrastructure ERM Process ERM Integration Vision/Goals Governance Policies Tools Technology Tolerance/Limits Communication / Reporting Internal External Risk Monitoring Ongoing Activity Separate Evaluations Risk Identification Threats Opportunities Corporate Strategy Strategic Objectives ERM Process Business Goals Risk Appetite Risk Treatment Avoid Mitigate Accept Exploit Risk Evaluation Qualitative Quantitative Risk Prioritization Level of Impact Level of Preparedness Strategy & Financial Planning Capital Management Capital Adequacy Risk-Adjusted Returns Performance Management Goals Measurement Incentives Aligned Customers / Employees / Regulators Stakeholders Stockholders / Debt holders / Rating Agencies

4 Successful implementation of an ERM framework requires a strong commitment from the top of the organization. The CEO requested the establishment of a senior level Enterprise Risk Council (ERC) to drive this effort successfully... The ERC consists of: CFO (Chair) President and COO President of Allstate Financial Chief Investment Officer Corporate Risk Officer Other attendees Dan Hale Tom Wilson Casey Sylla Ric Simonson Larry Moews Business Unit Financial Officers, Investments Risk Officer, Product Group VP, ERM Officer The ERC has specific responsibility for... Assessing/evaluating risk capacity impacting multiple operations and subsidiaries Aligning risk appetites and strategy Linking enterprise growth, risk, and return Identifying enterprise risk opportunities Coordinating risk management authority Providing direction and oversight to the CRO, ERM Center Of Expertise (COE) and management throughout Allstate Establishing Key Enterprise Risk Limits and Key Individual Risk Limits that are taken into account by the business units and shared services in setting limits applicable to their areas Establishing consistent measures of risk Advising on economic capital and capital allocation

5 This establishment of the ERC has put ERM in the center of the risk governance processes... CORPORATE STAKEHOLDERS Business Units/Shared Services responsible for owning individual risks GOVERNANCE UMBRELLA Board of Directors / Audit Committee ALM CRMC Pension Other Risk Oversight Processes Reinsurance Public Policy Reserving RISK MANAGEMENT CEO, ERC, Sr. Management, Risk Oversight Committees Internal Auditors ASSURANCE External Auditors Cat Mgmt Compliance Business Units/ Shared Services Technology Hurricanes Terrorism Credit Fraud Mortality Pricing Market Strategy execution Lawsuits Earthquake Reputation Disaster Recovery Internal Controls Potential Risks While commitment by senior management is critical to success, embedding ERM into an organization requires that there is buy-in with the framework by the businesses and that it is useful in driving better decisions... Need to demonstrate value of ERM even if all elements are not completely built out Buy in to the long-term vision...communicate and educate WIFM ERM has been used to inform several strategic decisions including: Strategic plan assessment Reinsurance purchase Asset Liability Management actions Capital management and confidence around meeting external obligations Extreme event scenario development Catastrophe exposure Avian flu impacts Key understanding of strategic needs, data availability, talented staff, and strong underlying processes and systems Need continuous communication and education internally and externally Management across the organization Analysts and shareholders Rating agencies Industry peers Create transparency and alignment around ERM and strengthen political support

6 The practical applications of ERM provide opportunities to embed it into the Company culture... Risk-return thinking is embraced and leveraged at the most senior levels ERM framework is reinforced Risk-return thinking is integrated into both operational and strategic decision making including: Business strategy and performance evaluation Dividend/share repurchases policies and decisions Holistic view of business portfolio is reinforced Asset Liability Management is enhanced Look at both enterprise and business unit level Catastrophe management options are considered Are we appropriately compensated for risks and are risks within our overall risk appetite? Economic Capital is used in Performance Evaluation Aligned in SVA activities In summary, we believe that ERM is extremely important to how we run Allstate... The Allstate Board of Directors and Senior Management are actively engaged in understanding and optimizing Allstate s risk profile. Significant progress has been made implementing Enterprise Risk Management, building upon Allstate s long history and culture of disciplined risk management. ERM is becoming more embedded at Allstate. There has been an increased level of conversation and decisions on risk return tradeoffs. Analyses using our economic capital model have ranged from reinsurance evaluations to confidence levels surrounding our ability to achieve aspects of our capital management plans. Allstate has a very deep and talented group of professional risk managers across the enterprise. Allstate has made significant investments building strong risk management processes and modeling tools. Allstate s increased communication with external stakeholders including shareholders, analysts, and rating agencies have improved the understanding of Allstate s progress in ERM thinking and action and enhanced transparency. Allstate will continue to aggressively move forward implementing Enterprise Risk Management to ensure capital safety and enhance shareholder returns. ERM is an ongoing journey, but it is definitely worth the trip!