Allstate 2008 Annual Report Download - page 135

Management’s Discussion and Analysis
of Financial Condition and Results of Operations–(Continued)
vary by characteristics such as type of coverage, year of issue and policy duration. Future investment yield
assumptions are determined based upon prevailing investment yields as well as estimated reinvestment yields.
Mortality, morbidity and policy termination assumptions are based on our experience and industry experience.
Expense assumptions include the estimated effects of inflation and expenses to be incurred beyond the premium-
paying period. These assumptions are established at the time the policy is issued, are consistent with assumptions
for determining DAC amortization for these policies, and are generally not changed during the policy coverage
period. However, if actual experience emerges in a manner that is significantly adverse relative to the original
assumptions, adjustments to DAC or reserves may be required resulting in a charge to earnings which could have
a material adverse effect on our operating results and financial condition. We periodically review the adequacy of
these reserves and recoverability of DAC for these policies on an aggregate basis using actual experience. In the
event that actual experience is significantly adverse compared to the original assumptions, any remaining
unamortized DAC balance must be expensed to the extent not recoverable and the establishment of a premium
deficiency reserve may be required. The effects of changes in reserve estimates are reported in the results of
operations in the period in which the changes are determined. In 2008, for traditional life insurance and
immediate annuities with life contingencies, an aggregate premium deficiency of $336 million pre-tax ($219 million
after-tax) resulted primarily from a study indicating that the annuitants on certain life-contingent contracts are
projected to live longer than we anticipated when the contracts were issued and, to a lesser degree, a reduction
in the related investment portfolio yield. The deficiency was recorded through a reduction in DAC. In 2007 and
2006, our reviews concluded that no premium deficiency adjustments were necessary, primarily due to projected
income from traditional life insurance more than offsetting the projected deficiency in immediate annuities with
life contingencies. We will continue to monitor the experience of our traditional life insurance and immediate
annuities. Further significant changes in mortality experience or the portfolio yield could result in additional
charges in future periods. The Company has not recognized a charge of this nature in previous years. We
anticipate that mortality, investment and reinvestment yields, and policy terminations are the factors that would be
most likely to require adjustment to these reserves or related DAC.
For further discussion of these policies, see Note 8 of the consolidated financial statements and the Forward-
looking Statements and Risk Factors section of this document.
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MD&A