The question for Allstate is, was this the right amount of interest? If it was, then that's your taxable income. What they told you was, "we aren't required to issue a 1099 below $600" which may be true, but doesn't mean it wasn't taxable.
The amount that is taxable to you is the amount that is more than the excess premiums you paid. Insurance companies invest their money in complicated ways, and if they overcharged you $1000 on premiums over a period of time, $350 might be their investment gains even though that's more than simple bank interest. But only Allstate can tell you how much of the refund is more than a premium refund.
