Allstate 2012 Annual Report Download - page 91

Risks Relating to Investments
We are subject to market risk and declines in credit quality which may adversely affect investment income, cause
additional realized losses, and cause increased unrealized losses
Although we continually reevaluate our return optimization and risk mitigation strategies, we remain subject to the
risk that we will incur losses due to adverse changes in interest rates, credit spreads, equity prices or currency exchange
rates. Adverse changes to these rates, spreads and prices may occur due to changes in fiscal policy and the economic
climate, the liquidity of a market or market segment, insolvency or financial distress of key market makers or
participants, or changes in market perceptions of credit worthiness and/or risk tolerance.
We are subject to risks associated with potential declines in credit quality related to specific issuers or specific
industries and a general weakening in the economy, which are typically reflected through credit spreads. Credit spread is
the additional yield on fixed income securities above the risk-free rate (typically referenced as the yield on U.S. Treasury
securities) that market participants require to compensate them for assuming credit, liquidity and/or prepayment risks.
Credit spreads vary (i.e. increase or decrease) in response to the market’s perception of risk and liquidity in a specific
issuer or specific sector and are influenced by the credit ratings, and the reliability of those ratings, published by external
rating agencies. Although we use derivative financial instruments to manage these risks, the effectiveness of such
instruments is subject to the same risks. A decline in the quality of our investment portfolio as a result of adverse
economic conditions or otherwise could cause additional realized and unrealized losses on securities, including realized
and unrealized losses relating to equity and derivative strategies.
A decline in market interest rates or credit spreads could have an adverse effect on our investment income as we
invest cash in new investments that may earn less than the portfolio’s average yield. In a declining interest rate
environment, borrowers may prepay or redeem securities more quickly than expected as they seek to refinance at lower
rates. A decline could also lead us to purchase longer-term or riskier assets in order to obtain adequate investment
yields resulting in a duration gap when compared to the duration of liabilities. An increase in market interest rates or
credit spreads could have an adverse effect on the value of our investment portfolio by decreasing the fair values of the
fixed income securities that comprise a substantial majority of our investment portfolio. A declining equity market could
also cause the investments in our pension plans to decrease or decreasing interest rates could cause the funding target
and the projected benefit obligation of our pension plans or the accumulated benefit obligation of our other
postretirement benefit plans to increase, either or both resulting in a decrease in the funded status of the pension plans
and a reduction of shareholders’ equity, increases in pension and other postretirement benefit expense and increases in
required contributions to the pension plans.
Deteriorating financial performance impacting securities collateralized by residential and commercial mortgage
loans, collateralized corporate loans, and commercial mortgage loans may lead to write-downs and impact our
results of operations and financial condition
Changes in residential or commercial mortgage delinquencies, loss severities or recovery rates, declining residential
or commercial real estate prices, corporate loan delinquencies or recovery rates, changes in credit or bond insurer
strength ratings and the quality of service provided by service providers on securities in our portfolios could lead us to
determine that write-downs are necessary in the future.
The impact of our investment strategies may be adversely affected by developments in the financial markets
The impact of our investment portfolio return optimization and risk mitigation strategies may be adversely affected
by unexpected developments in the financial markets. For example, derivative contracts may result in coverage that is
not as effective as intended thereby leading to the recognition of losses without the recognition of gains expected to
mitigate the losses.
Concentration of our investment portfolios in any particular segment of the economy may have adverse effects on
our operating results and financial condition
The concentration of our investment portfolios in any particular industry, collateral type, group of related industries,
geographic sector or risk type could have an adverse effect on our investment portfolios and consequently on our results
of operations and financial condition. Events or developments that have a negative impact on any particular industry,
group of related industries or geographic region may have a greater adverse effect on the investment portfolios to the
extent that the portfolios are concentrated rather than diversified.
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