Allstate 2014 Annual Report Download - page 213

Change in unrealized net capital gains and losses
The change in unrealized net capital gains and losses for the years ended December 31 is as follows:
($ in millions) 2014 2013 2012
Fixed income securities $ 866 $ (3,200) $ 2,368
Equity securities (212) 164 300
Derivative instruments 16 4 (5)
EMA limited partnerships (2) (10) 5
Investments classified as held for sale (190) 190 —
Total 478 (2,852) 2,668
Amounts recognized for:
Insurance reserves (28) 771 (177)
DAC and DSI (21) 254 (288)
Amounts recognized (49) 1,025 (465)
Deferred income taxes (149) 639 (769)
Increase (decrease) in unrealized net capital gains and losses, after-tax $ 280 $ (1,188) $ 1,434
Portfolio monitoring
The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed income and
equity security whose carrying value may be other-than-temporarily impaired.
For each fixed income security in an unrealized loss position, the Company assesses whether management with the
appropriate authority has made the decision to sell or whether it is more likely than not the Company will be required to
sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory
purposes. If a security meets either of these criteria, the security’s decline in fair value is considered other than
temporary and is recorded in earnings.
If the Company has not made the decision to sell the fixed income security and it is not more likely than not the
Company will be required to sell the fixed income security before recovery of its amortized cost basis, the Company
evaluates whether it expects to receive cash flows sufficient to recover the entire amortized cost basis of the security.
The Company calculates the estimated recovery value by discounting the best estimate of future cash flows at the
security’s original or current effective rate, as appropriate, and compares this to the amortized cost of the security. If the
Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the 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.
For equity securities, the Company considers various factors, including whether it has the intent and ability to hold
the equity security for a period of time sufficient to recover its cost basis. Where the Company lacks the intent and
ability to hold to recovery, or believes the recovery period is extended, the equity security’s decline in fair value is
considered other than temporary and is recorded in earnings.
For fixed income and equity securities managed by third parties, either the Company has contractually retained its
decision making authority as it pertains to selling securities that are in an unrealized loss position or it recognizes any
unrealized loss at the end of the period through a charge to earnings.
The Company’s portfolio monitoring process includes a quarterly review of all securities to identify instances where
the fair value of a security compared to its amortized cost (for fixed income securities) or cost (for equity securities) is
below established thresholds. The process also includes the monitoring of other impairment indicators such as ratings,
ratings downgrades and payment defaults. The securities identified, in addition to other securities for which the
Company may have a concern, are evaluated for potential other-than-temporary impairment using all reasonably
available information relevant to the collectability or recovery of the security. Inherent in the Company’s evaluation of
other-than-temporary impairment for these fixed income and equity securities are assumptions and estimates about
the financial condition and future earnings potential of the issue or issuer. Some of the factors that may be considered in
evaluating whether a decline in fair value is other than temporary are: 1) 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; 2) the specific reasons that a security is in an unrealized
loss position, including overall market conditions which could affect liquidity; and 3) the length of time and extent to
which the fair value has been less than amortized cost or cost.
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