Allstate 2008 Annual Report Download - page 176

We enter into certain inter-company reinsurance transactions for the Allstate Financial operations in order to
maintain underwriting control and manage insurance risk among various legal entities. These reinsurance
agreements have been approved by the appropriate regulatory authorities. All significant inter-company
transactions have been eliminated in consolidation.
Allstate Financial Outlook
●We will continue to focus on improving returns and reducing our concentration in spread based products,
primarily fixed annuities and institutional markets products, resulting in lower premiums and deposits and
reductions in net contractholder obligations.
●We plan to improve efficiency and narrow the focus of product offerings to better serve the needs of
everyday Americans. We are targeting savings at 20% of certain operating expenses, excluding acquisition
costs, and expect to yield estimated annual savings of $90 million beginning in 2011. We anticipate a
reduction of approximately 1,000 workforce positions, through a combination of attrition and position
elimination over the next two years.
●Maintaining high liquidity in our investment portfolio will result in lower net investment income but will
ensure our ability to meet contractholder obligations. We will target sales of our spread based products at
levels that allow us to avoid sales of investments with significant unrealized losses into distressed or
illiquid markets.
●We expect continued investment spread compression due to credit losses, reduced contractholder funds
and maintenance of liquidity.
INVESTMENTS
Overview and Strategy An important component of our financial results is the return on our investment
portfolios. Investment portfolios are segmented between the Property-Liability, Allstate Financial and Corporate
and Other operations. While taking into consideration the investment portfolio in aggregate, we manage the
underlying portfolios based upon the nature of each respective business and its corresponding liability structure.
The global economy is under significant stress and financial markets continue to experience extreme levels of
volatility. Our strategy in 2009 will focus primarily upon mitigating the risks from a potential increase in risk-free
interest rates, reducing exposure to certain investment sectors, and maintaining sufficient liquidity and capital. In
order to achieve this, we expect to use a combination of reinvestment of the portfolio’s significant cash flows,
derivatives and other portfolio actions.
The Property-Liability portfolio’s investment strategy emphasizes safety of principal and consistent income
generation, within a total return framework. This approach, which has produced competitive returns over the long
term, is designed to ensure financial strength and stability for paying claims, while maximizing economic value
and surplus growth. We employ a strategic asset allocation approach, which uses models that consider the nature
of the liabilities and risk tolerances, as well as the risk and return parameters of the various asset classes in
which we invest. The recommended asset allocation is informed by our economic and market outlook, as well as
other inputs and constraints, including duration, liquidity and capital considerations.
The Allstate Financial portfolio’s investment strategy focuses on the total return of assets needed to support
the underlying liabilities to achieve return on capital and profitable growth. The portfolio management process
begins with a strategic asset allocation model which considers the nature and risk tolerances of the liabilities and
risk tolerances, as well as the risk and return parameters, of the various asset classes in which we invest. This
approach is informed by our economic and market outlook, as well as other inputs and constraints including
duration, liquidity and capital preservation. Within the ranges set by the strategic asset allocation model, tactical
investment decisions are made in consideration of prevailing market conditions.
The Corporate and Other portfolio’s investment strategy balances the pursuit of competitive returns with the
unique liquidity needs of the portfolio relative to the overall corporate capital structure. The portfolio is primarily
invested in high quality, liquid fixed income and short-term securities with additional investments in less liquid
holdings in order to enhance overall returns.
As a result of decisions in managing each of the portfolios, we may sell securities during a period in which
fair value has declined below amortized cost for fixed income securities or cost for equity securities. For more
information, see the Net Realized Capital Gains and Losses section of the MD&A.
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MD&A