Allstate 2008 Annual Report Download - page 126

relevant industry conditions and trends, and implications of rating agency actions and offering prices; and 5) the
specific reasons that a security is in a significant unrealized loss position, including market conditions which could
affect liquidity. Additionally, once assumptions and estimates are made, any number of changes in facts and
circumstances could cause us to subsequently determine that an impairment is other than temporary, 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 obtained that causes a change in our ability or intent to hold a security to maturity or until it
recovers in value. Examples of situations which may change our ability or intent to hold a security to maturity or
recovery include where significant unanticipated new facts and circumstances emerge or existing facts and
circumstances increase in significance and are anticipated to adversely impact a security’s future valuations more
than previously expected, including negative developments that would change the view of long term investors and
their intent to continue to hold the investment, subsequent credit deterioration of an issuer or holding, subsequent
further deterioration in capital markets (i.e. debt and equity) and of economic conditions, subsequent further
deterioration in the financial services and real estate industries, liquidity needs, federal income tax situations
involving capital gains and capital loss carrybacks and carryforwards with specific expiration dates, investment
risk mitigation actions, and other new facts and circumstances that would cause a change in our previous intent
to hold a security to recovery or maturity. 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 the
majority of our portfolio is designated as available-for-sale and carried at fair value and as a result, any related
net unrealized loss would already be reflected as a component of accumulated other comprehensive income in
shareholders’ equity.
The determination of the amount of 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 impairments
in results of operations as such evaluations are revised. The use of different methodologies and assumptions as to
the determination of the fair value of investments and the timing and amount of impairments may have a material
effect on the amounts presented within the consolidated financial statements.
Fixed income securities subject to other-than-temporary impairment write-downs continue to earn investment
income when future expected payments are both reasonably estimable and probable, and any discount or
premium is recognized using the effective yield method over the expected life of the security; otherwise income
recognition is discontinued. For a more detailed discussion of the risks relating to changes in investment values
and levels of investment impairment as well as the potential causes of such changes, see Note 5 of the
consolidated financial statements and the Investments, Market Risk, Enterprise Risk and Return Management and
Forward-looking Statements and Risk Factors sections of this document.
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 to twelve months. The amortization methodology for DAC for 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, which include investment income and realized capital gains and losses, as well as
mortality, persistency and expenses to administer the business are established at the time the policy is issued and
are generally not revised during the life of the policy. The assumptions for determining DAC amortization are
consistent with the assumptions used to calculate the reserve for life-contingent contract benefits. Any deviations
from projected business in force resulting from actual policy terminations differing from expected levels and any
estimated premium deficiencies may result in a change to the rate of amortization in the period such events
occur. Generally, the amortization periods for these policies approximates the estimated lives of the policies. The
recovery of DAC is dependent upon the future profitability of this business. We periodically review the adequacy
of reserves and recoverability of DAC for these policies on an aggregate basis using actual experience. We
aggregate all products accounted for pursuant to Statement of Financial Accounting Standard No. 60, ‘‘Accounting
and Reporting by Insurance Enterprises’’ (‘‘SFAS No. 60’’), in the analysis. In the event actual experience is
significantly adverse compared to the original assumptions, any remaining unamortized DAC balance must be
expensed to the extent not recoverable and a premium deficiency reserve may be required if the remaining DAC
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MD&A