Allstate 2008 Annual Report Download - page 179

Management’s Discussion and Analysis
of Financial Condition and Results of Operations–(Continued)
The Allstate Financial investment portfolio decreased to $61.50 billion at December 31, 2008, from
$74.25 billion at December 31, 2007, due to unrealized net capital losses, net reductions in contractholder funds,
net realized capital losses, and lower funds associated with collateral received in conjunction with securities
lending, partially offset by capital contributions from AIC.
The Corporate and Other investment portfolio decreased to $3.66 billion at December 31, 2008, from
$3.82 billion at December 31, 2007, primarily due to cash flows used in financing activities and a $1.00 billion
capital contribution to AIC.
Total investments at amortized cost related to collateral received in connection with securities lending
business activities and collateral posted by counterparties related to derivative transactions decreased to
$340 million at December 31, 2008, from $3.46 billion at December 31, 2007. As of December 31, 2008, these
investments are included as a component of short-term investments. At December 31, 2007, these investments
were carried at fair value and $2.85 billion were classified in fixed income securities and $549 million were
classified in short-term investments.
Securities lending activities are primarily used as an investment yield enhancement, and are conducted with
third parties such as brokerage firms. We obtain collateral, typically in the form of cash, in an amount generally
equal to 102% to 105% of the fair value of domestic and foreign securities, respectively, and monitor the market
value of the securities loaned on a daily basis with additional collateral obtained as necessary. The cash we
receive is invested in short-term and fixed income investments, and an offsetting liability to return the collateral is
recorded in other liabilities and accrued expenses.
We obtain fair values of our fixed income and equity securities and exchange traded and non-exchange
traded derivative contracts from several sources and methods. For a discussion of these sources and methods, see
the Application of Critical Accounting Estimates section of the MD&A.
We may utilize derivative financial instruments to help manage the exposure to interest rate risk, and to a
lesser extent currency and credit risks, from the fixed income securities portfolio as well as exposure to equity
price risk from the equity securities portfolio. For a more detailed discussion of interest rate, currency, credit and
equity price risks and our use of derivative financial instruments, see the Net realized capital gains and losses and
Market Risk sections of the MD&A and Note 6 of the consolidated financial statements.
Fixed income securities See Note 5 of the consolidated financial statements for a table showing the
amortized cost, unrealized gains, unrealized losses and fair value for each type of fixed income security for the
years ended December 31, 2008 and 2007.
The following table shows fixed income securities by type.
Fair value at % to Total Fair value at % to Total
December 31, 2008 Investments December 31, 2007 Investments
($ in millions)
U.S. government and agencies $ 4,234 4.4% $ 4,421 3.7%
Municipal 21,848 22.8 25,307 21.3
Corporate 27,627 28.8 38,467 32.3
Foreign government 2,675 2.8 2,936 2.5
Mortgage-backed securities (‘‘MBS’’) 4,492 4.7 6,959 5.8
CMBS 3,846 4.0 7,617 6.4
ABS 3,860 4.0 8,679 7.3
Redeemable preferred stock 26 — 65 0.1
Total fixed income securities $68,608 71.5% $94,451 79.4%
At December 31, 2008, 95.2% of the consolidated fixed income securities portfolio was rated investment
grade, which is defined as a security having a rating from the NAIC of 1 or 2; a rating of Aaa, Aa, A or Baa from
Moody’s, a rating of AAA, AA, A or BBB from S&P’s, Fitch or Dominion or a rating of aaa, aa, a, or bbb from
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MD&A