Allstate 2011 Annual Report Download - page 199

The Company performs quarterly reviews of DAC and DSI recoverability for interest-sensitive life, fixed annuities
and other investment contracts in the aggregate using current assumptions. If a change in the amount of EGP is
significant, it could result in the unamortized DAC and DSI not being recoverable, resulting in a charge which is
included as a component of amortization of deferred policy acquisition costs or interest credited to contractholder
funds, respectively.
The DAC and DSI balances presented include adjustments to reflect the amount by which the amortization of DAC
and DSI would increase or decrease if the unrealized capital gains or losses in the respective product investment
portfolios were actually realized. The adjustments are recorded net of tax in accumulated other comprehensive income.
DAC, DSI and deferred income taxes determined on unrealized capital gains and losses and reported in accumulated
other comprehensive income recognize the impact on shareholders’ equity consistently with the amounts that would be
recognized in the income statement on realized capital gains and losses.
Customers of the Company may exchange one insurance policy or investment contract for another offered by the
Company, or make modifications to an existing investment, life or property-liability contract issued by the Company.
These transactions are identified as internal replacements for accounting purposes. Internal replacement transactions
determined to result in replacement contracts that are substantially unchanged from the replaced contracts are
accounted for as continuations of the replaced contracts. Unamortized DAC and DSI related to the replaced contracts
continue to be deferred and amortized in connection with the replacement contracts. For interest-sensitive life
insurance and investment contracts, the EGP of the replacement contracts are treated as a revision to the EGP of the
replaced contracts in the determination of amortization of DAC and DSI. For traditional life and property-liability
insurance policies, any changes to unamortized DAC that result from replacement contracts are treated as prospective
revisions. Any costs associated with the issuance of replacement contracts are characterized as maintenance costs and
expensed as incurred.
Internal replacement transactions determined to result in a substantial change to the replaced contracts are
accounted for as an extinguishment of the replaced contracts, and any unamortized DAC and DSI related to the
replaced contracts are eliminated with a corresponding charge to amortization of deferred policy acquisition costs or
interest credited to contractholder funds, respectively.
The costs assigned to the right to receive future cash flows from certain business purchased from other insurers are
also classified as DAC in the Consolidated Statements of Financial Position. The costs capitalized represent the present
value of future profits expected to be earned over the lives of the contracts acquired. These costs are amortized as
profits emerge over the lives of the acquired business and are periodically evaluated for recoverability. The present
value of future profits was $133 million and $158 million as of December 31, 2010 and 2009, respectively. Amortization
expense of the present value of future profits was $23 million, $28 million and $21 million in 2010, 2009 and 2008,
respectively.
Reinsurance
In the normal course of business, the Company seeks to limit aggregate and single exposure to losses on large risks
by purchasing reinsurance (see Note 9). The Company has also used reinsurance to effect the acquisition or disposition
of certain blocks of business. The amounts reported in the Consolidated Statements of Financial Position as reinsurance
recoverables include amounts billed to reinsurers on losses paid as well as estimates of amounts expected to be
recovered from reinsurers on insurance liabilities and contractholder funds that have not yet been paid. Reinsurance
recoverables on unpaid losses are estimated based upon assumptions consistent with those used in establishing the
liabilities related to the underlying reinsured contracts. Insurance liabilities are reported gross of reinsurance
recoverables. Reinsurance premiums are generally reflected in income in a manner consistent with the recognition of
premiums on the reinsured contracts. For catastrophe coverage, the cost of reinsurance premiums is recognized ratably
over the contract period to the extent coverage remains available. Reinsurance does not extinguish the Company’s
primary liability under the policies written. Therefore, the Company regularly evaluates the financial condition of its
reinsurers including their activities with respect to claim settlement practices and commutations, and establishes
allowances for uncollectible reinsurance as appropriate.
Goodwill
Goodwill represents the excess of amounts paid for acquiring businesses over the fair value of the net assets
acquired. The goodwill balances were $456 million and $418 million as of December 31, 2010 and $457 million and
$418 million as of December 31, 2009 for the Allstate Protection segment and the Allstate Financial segment,
respectively. The Company annually evaluates goodwill for impairment using a trading multiple analysis, which is a
widely accepted valuation technique to estimate the fair value of its reporting units. If conditions warrant, a discounted
cash flow analysis may also be used. The Company also reviews its goodwill for impairment whenever events or
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Notes