Allstate 2008 Annual Report Download - page 181

Management’s Discussion and Analysis
of Financial Condition and Results of Operations–(Continued)
Taxable
Fair value
Par Amortized Fair Unrealized as a percent of
value cost value gain/loss amortized cost
(in millions)
Zero-coupon:
Rating(2)
Aaa 147 42 39 (3) 92.9
Aa 1,014 440 308 (132) 70.0
A 771 331 228 (103) 68.9
Baa 3,610 573 337 (236) 58.8
Total 5,542 1,386 912 (474) 65.8
Total taxable $ 7,547 $ 3,393 $ 2,761 $(632) 81.4
Total
Fair value
Par Amortized Fair Unrealized as a percent of
value cost value gain/loss amortized cost
(in millions)
Rating(2)
Aaa $ 4,455 $ 3,655 $ 3,552 $ (103) 97.2%
Aa 8,373 7,491 7,181 (310) 95.9
A 6,850 6,109 5,769 (340) 94.4
Baa 9,807 5,202 4,501 (701) 86.5
Ba or lower 1,155 1,108 845 (263) 76.3
To t al (1) $30,640 $23,565 $21,848 $ (1,717) 92.7
(1) Includes ARS securities with par value of $1.91 billion, amortized cost of $1.91 billion, fair value of $1.73 billion and unrealized gains/
losses of $(176) million.
(2) Moody’s equivalent rating will not necessarily tie to ratings distributions from the NAIC due to potential timing differences between the
various rating suppliers and the number of external rating agencies used in the determination.
The unrealized net capital loss of $1.72 billion at December 31, 2008 in our municipal bond portfolio was
mainly caused by widening credit spreads that affected three main areas in this portfolio: tax exempt A and Baa
rated holdings contributing $550 million of the unrealized losses and taxable zero-coupon holdings contributing
$474 million of the unrealized losses, but particularly our less liquid zero-coupon and longer dated securities; high
yield municipal bond portfolio contributing $263 million of the unrealized losses; and student loan ARS
contributing $176 million of the unrealized losses.
Included in our municipal bond portfolio at December 31, 2008 are $1.73 billion of ARS that have long-term
stated maturities, with the interest rate reset based on auctions that generally occur every 7, 28 or 35 days
depending on the specific security. This is compared to a balance of ARS at December 31, 2007 of $2.56 billion,
with the decline primarily representing redemptions from calls or refunding proceeds since December 31, 2007.
Our holdings primarily have a Moody’s equivalent rating of Aaa. Approximately $1.69 billion of our holdings are
pools of student loans for which at least 85% of the collateral was insured by the U.S. Department of Education at
the time we purchased the security. As of December 31, 2008, $1.11 billion of our ARS backed by student loans
was 100% insured by the U.S. Department of Education, $335 million was 90% to 99% insured and $165 million
was 80% to 89% insured. All of our student loan ARS holdings are experiencing failed auctions and we receive
the failed auction rate or, for those which contain maximum reset rate formulas, we received the contractual
maximum rate. We anticipate that failed auctions may persist and most of our holdings will continue to pay the
failed auction rate or, for those that contain maximum rate reset formulas, the maximum rate, as described below.
Auctions continue to be conducted as scheduled for each of the securities.
We estimate that approximately one third of our student loan backed ARS include maximum rate reset
formulas with a look back feature whereby if the failed auction rate exceeds an annual contractual maximum rate
over a preceding stipulated period, the coupon interest rate is temporarily reset to the maximum rate, which can
vary between zero and the failed auction rate. This maximum rate formula causes the reset interest rate on these
securities to be lower than the failed auction rate in order to reduce the annual interest rate so that it does not
exceed the annual contractual maximum rate. Generally, the annual contractual maximum rate is higher than the
historical rates paid on these securities. At December 31, 2008, interest on $118 million of our ARS has reset
using the maximum rate reset formula.
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MD&A