Allstate 2012 Annual Report Download - page 103

determination of cash flow estimates is inherently subjective and methodologies may vary depending on facts and
circumstances specific to the security. All reasonably available information relevant to the collectability of the security,
including past events, current conditions, and reasonable and supportable assumptions and forecasts, are considered
when developing the estimate of cash flows expected to be collected. That information generally includes, but is not
limited to, the remaining payment terms of the security, prepayment speeds, foreign exchange rates, the financial
condition and future earnings potential of the issue or issuer, expected defaults, expected recoveries, the value of
underlying collateral, vintage, geographic concentration, available reserves or escrows, current subordination levels,
third party guarantees and other credit enhancements. Other information, such as industry analyst reports and
forecasts, sector credit ratings, financial condition of the bond insurer for insured fixed income securities, and other
market data relevant to the realizability of contractual cash flows, may also be considered. The estimated fair value of
collateral will be used to estimate recovery value if we determine that the security is dependent on the liquidation of
collateral for ultimate settlement. If the estimated recovery value is less than the amortized cost of the security, a credit
loss exists and an other-than-temporary impairment for the difference between the estimated recovery value and
amortized cost is recorded in earnings. The portion of the unrealized loss related to factors other than credit remains
classified in accumulated other comprehensive income. If we determine that the fixed income security does not have
sufficient cash flow or other information to estimate a recovery value for the security, we may conclude that the entire
decline in fair value is deemed to be credit related and the loss is recorded in earnings.
There are a number of assumptions and estimates inherent in evaluating impairments of equity securities and
determining if they are other than temporary, including: 1) our ability and intent to hold the investment for a period of
time sufficient to allow for an anticipated recovery in value; 2) the length of time and extent to which the fair value has
been less than cost; 3) the financial condition, near-term and long-term prospects of the issue or issuer, including
relevant industry specific market conditions and trends, geographic location and implications of rating agency actions
and offering prices; and 4) the specific reasons that a security is in an unrealized loss position, including overall market
conditions which could affect liquidity.
Once assumptions and estimates are made, any number of changes in facts and circumstances could cause us to
subsequently determine that a fixed income or equity security is other-than-temporarily impaired, including: 1) general
economic conditions that are worse than previously forecasted or that have a greater adverse effect on a particular issuer
or industry sector than originally estimated; 2) changes in the facts and circumstances related to a particular issue or
issuer’s ability to meet all of its contractual obligations; and 3) changes in facts and circumstances that result in changes to
management’s intent to sell or result in our assessment that it is more likely than not we will be required to sell before
recovery of the amortized cost basis of a fixed income security or causes a change in our ability or intent to hold an equity
security until it recovers in value. Changes in assumptions, facts and circumstances could result in additional charges to
earnings in future periods to the extent that losses are realized. The charge to earnings, while potentially significant to net
income, would not have a significant effect on shareholders’ equity, since our securities are designated as available for sale
and carried at fair value and as a result, any related unrealized loss, net of deferred income taxes and related DAC, deferred
sales inducement costs (‘‘DSI’’) and reserves for life-contingent contract benefits, would already be reflected as a
component of accumulated other comprehensive income in shareholders’ equity.
The determination of the amount of other-than-temporary impairment is an inherently subjective process based on
periodic evaluation of the factors described above. Such evaluations and assessments are revised as conditions change
and new information becomes available. We update our evaluations regularly and reflect changes in
other-than-temporary impairments in results of operations as such evaluations are revised. The use of different
methodologies and assumptions in the determination of the amount of other-than-temporary impairments may have a
material effect on the amounts presented within the consolidated financial statements.
For additional detail on investment impairments, see Note 5 of the consolidated financial statements.
Deferred policy acquisition costs amortization We incur significant costs in connection with acquiring insurance
policies and investment contracts. In accordance with GAAP, costs that vary with and are primarily related to acquiring
insurance policies and investment contracts are deferred and recorded as an asset on the Consolidated Statements of
Financial Position.
DAC related to property-liability contracts is amortized into income as premiums are earned, typically over periods
of six or twelve months. The amortization methodology for DAC related to Allstate Financial policies and contracts
includes significant assumptions and estimates.
DAC related to traditional life insurance is amortized over the premium paying period of the related policies in
proportion to the estimated revenues on such business. Significant assumptions relating to estimated premiums,
investment returns, as well as mortality, persistency and expenses to administer the business are established at the time
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