Allstate 2011 Annual Report Download - page 195

respectively. Derivatives are carried at fair value. Bank loans are primarily senior secured corporate loans and are
carried at amortized cost.
Investment income consists primarily of interest, dividends, income from certain limited partnership interests and
income from certain derivative transactions. Interest is recognized on an accrual basis using the effective yield method
and dividends are recorded at the ex-dividend date. Interest income for certain RMBS, CMBS and ABS is determined
considering estimated principal repayments obtained from third party data sources and internal estimates. Actual
prepayment experience is periodically reviewed and effective yields are recalculated when differences arise between
the prepayments originally anticipated and the actual prepayments received and currently anticipated. For beneficial
interests in securitized financial assets not of high credit quality, the effective yield is recalculated on a prospective
basis. For all other RMBS, CMBS and ABS, the effective yield is recalculated on a retrospective basis. For
other-than-temporarily impaired fixed income securities, the effective yield method utilizes the difference between the
amortized cost basis at impairment and the cash flows expected to be collected. Accrual of income is suspended for
other-than-temporarily impaired fixed income securities when the timing and amount of cash flows expected to be
received is not reasonably estimable. Accrual of income is suspended for mortgage loans and bank loans that are in
default or when full and timely collection of principal and interest payments is not probable. Cash receipts on
investments on nonaccrual status are generally recorded as a reduction of carrying value. Income from investments in
limited partnership interests accounted for utilizing the cost method of accounting is recognized upon receipt of
amounts distributed by the partnerships as investment income. Subsequent to October 1, 2008, income from
investments in limited partnership interests accounted for utilizing the equity method of accounting (‘‘EMA limited
partnerships’’) is reported in realized capital gains and losses.
Realized capital gains and losses include gains and losses on investment sales, write-downs in value due to
other-than-temporary declines in fair value, adjustments to valuation allowances on mortgage loans, periodic changes
in the fair value and settlements of certain derivatives including hedge ineffectiveness, and income from EMA limited
partnerships. Realized capital gains and losses on investment sales include calls and prepayments and are determined
on a specific identification basis. Income from EMA limited partnerships is recognized based on the financial results of
the partnership and the Company’s proportionate investment interest, and is recognized on a delay due to the
availability of the related financial statements. Income recognition on hedge funds is generally on a one month delay
and income recognition on private equity/debt funds, real estate funds and tax credit funds is generally on a three
month delay.
The Company recognizes other-than-temporary impairment losses on fixed income securities in earnings when a
security’s fair value is less than its amortized cost and the Company has made the decision to sell or it is more likely than
not the Company will be required to sell the fixed income security before recovery of its amortized cost basis.
Additionally, if the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of
a fixed income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount
of the unrealized loss related to other factors recognized in other comprehensive income (‘‘OCI’’). The Company
recognizes other-than-temporary impairment losses on equity securities in earnings when the decline in fair value is
considered other than temporary including when the Company does not have the intent and ability to hold the equity
security for a period of time sufficient to recover its cost basis.
Derivative and embedded derivative financial instruments
Derivative financial instruments include interest rate swaps, credit default swaps, futures (interest rate, equity and
commodity), options (including swaptions), interest rate caps and floors, warrants and rights, forward contracts to
hedge foreign currency risk, certain investment risk transfer reinsurance agreements, forward sale commitments and
certain bond forward purchase commitments. Derivatives required to be separated from the host instrument and
accounted for as derivative financial instruments (‘‘subject to bifurcation’’) are embedded in certain fixed income
securities, equity-indexed life and annuity contracts, reinsured variable annuity contracts and certain funding
agreements (see Note 6).
All derivatives are accounted for on a fair value basis and reported as other investments, other assets, other
liabilities and accrued expenses or contractholder funds. Embedded derivative instruments subject to bifurcation are
also accounted for on a fair value basis and are reported together with the host contract. The change in fair value of
derivatives embedded in certain fixed income securities and subject to bifurcation is reported in realized capital gains
and losses. The change in fair value of derivatives embedded in life and annuity product contracts and subject to
bifurcation is reported in life and annuity contract benefits or interest credited to contractholder funds. Cash flows from
embedded derivatives requiring bifurcation and derivatives receiving hedge accounting are reported consistently with
the host contracts and hedged risks, respectively, within the Consolidated Statements of Cash Flows. Cash flows from
other derivatives are reported in cash flows from investing activities within the Consolidated Statements of Cash Flows.
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Notes