Allstate 2008 Annual Report Download - page 247

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
are adjusted periodically by the Company to reflect current market conditions subject to contractually guaranteed
minimum rates. Crediting rates for indexed annuities and indexed funding agreements are generally based on a
specified interest rate index, such as LIBOR, or an equity index, such as the Standard & Poor’s (‘‘S&P’’) 500 Index.
Interest credited also includes amortization of DSI expenses. DSI is amortized into interest credited using the
same method used to amortize DAC.
Contract charges for variable life and variable annuity products consist of fees assessed against the
contractholder account values for contract maintenance, administration, mortality, expense and early surrender.
Contract benefits incurred include guaranteed minimum death, income, withdrawal and accumulation benefits.
Subsequent to the Allstate Financial segment’s disposal of substantially all of its variable annuity business through
reinsurance agreements with Prudential in 2006 (see Note 3), the contract charges and contract benefits related
thereto are reported net of reinsurance ceded.
Deferred policy acquisition and sales inducement costs
Costs that vary with and are primarily related to acquiring property-liability insurance, life insurance and
investment contracts are deferred and recorded as DAC. These costs are principally agents’ and brokers’
remuneration, premium taxes, inspection costs, and certain underwriting and direct mail solicitation expenses. DSI
costs, which are deferred and recorded as other assets, relate to sales inducements offered on sales to new
customers, principally on annuities and primarily in the form of additional credits to the customer’s account value
or enhancements to interest credited for a specified period, which are in excess of the rates currently being
credited to similar contracts without sales inducements. All other acquisition costs are expensed as incurred and
included in operating costs and expenses on the Consolidated Statements of Operations. DAC associated with
property-liability insurance is amortized to income as premiums are earned, typically over periods of six or twelve
months, and is included in amortization of deferred policy acquisition costs on the Consolidated Statements of
Operations. Future investment income is considered in determining the recoverability of DAC. Amortization of DAC
associated with life insurance and investment contracts is included in amortization of deferred policy acquisition
costs on the Consolidated Statements of Operations and is described in more detail below. DSI is amortized to
income using the same methodology and assumptions as DAC and is included in interest credited to
contractholder funds on the Consolidated Statements of Operations. DAC and DSI are periodically reviewed for
recoverability and adjusted if necessary.
For traditional life insurance, DAC is amortized over the premium paying period of the related policies in
proportion to the estimated revenues on such business. Assumptions used in the amortization of DAC and reserve
calculations are established at the time the policy is issued and are generally not revised during the life of the
policy. 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.
For interest-sensitive life, annuities and other investment contracts, DAC and DSI are amortized in proportion
to the incidence of the total present value of gross profits, which includes both actual historical gross profits
(‘‘AGP’’) and estimated future gross profits (‘‘EGP’’) expected to be earned over the estimated lives of the
contracts. The amortization is net of interest on the prior period DAC balance and uses rates established at the
inception of the contracts. Actual amortization periods generally range from 15-30 years; however, incorporating
estimates of customer surrender rates, partial withdrawals and deaths generally results in the majority of the DAC
being amortized during the surrender charge period. The rate of amortization during this term is matched to the
recognition pattern of total gross profits.
AGP and EGP consist primarily of the following components: contract charges for the cost of insurance less
mortality costs and other benefits; investment income and realized capital gains and losses less interest credited;
and surrender and other contract charges less maintenance expenses. The principal assumptions for determining
the amount of EGP are investment returns, including capital gains and losses on assets supporting contract
liabilities, interest crediting rates to contractholders, and the effects of persistency, mortality, expenses, and
hedges if applicable.
Changes in the amount or timing of EGP result in adjustments to the cumulative amortization of DAC and
DSI. All such adjustments are reflected in the current results of operations.
The Company performs quarterly reviews of DAC and DSI recoverability for interest-sensitive life, annuities
and other investment contracts in the aggregate using current assumptions. If a change in the amount of EGP is
significant, it could result in the unamortized DAC and DSI not being recoverable, resulting in a charge which is
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Notes