Allstate 2008 Annual Report Download - page 249

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Property and equipment
Property and equipment is carried at cost less accumulated depreciation. Included in property and equipment
are capitalized costs related to computer software licenses and software developed for internal use. These costs
generally consist of certain external payroll and payroll related costs. Certain facilities and equipment held under
capital leases are also classified as property and equipment with the related lease obligations recorded as
liabilities. Property and equipment depreciation is calculated using the straight-line method over the estimated
useful lives of the assets, generally 3 to 10 years for equipment and 40 years for real property. Depreciation
expense is reported in operating costs and expenses. Accumulated depreciation on property and equipment was
$2.12 billion and $1.94 billion at December 31, 2008 and 2007, respectively. Depreciation expense on property and
equipment was $240 million, $224 million and $235 million for the years ended December 31, 2008, 2007 and
2006, respectively. The Company reviews its property and equipment for impairment at least annually and
whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Income taxes
The income tax provision is calculated under the liability method. Deferred tax assets and liabilities are
recorded based on the difference between the financial statement and tax bases of assets and liabilities at the
enacted tax rates. The principal assets and liabilities giving rise to such differences are unrealized capital gains
and losses on certain investments, differences in tax bases of invested assets, insurance reserves, unearned
premiums, DAC and employee benefits. A deferred tax asset valuation allowance is established when there is
uncertainty that such assets would be realized (see Note 14).
Reserves for property liability insurance claims and claims expense and life-contingent contract benefits
The reserve for property-liability claims and claims expense is the estimate of amounts necessary to settle all
reported and unreported claims for the ultimate cost of insured property-liability losses, based upon the facts of
each case and the Company’s experience with similar cases. Estimated amounts of salvage and subrogation are
deducted from the reserve for claims and claims expense. The establishment of appropriate reserves, including
reserves for catastrophes, is an inherently uncertain and complex process. Reserve estimates are regularly
reviewed and updated, using the most current information available. Any resulting reestimates are reflected in
current results of operations (see Note 7).
The reserve for life-contingent contract benefits payable under insurance policies, including traditional life
insurance, life-contingent immediate annuities and voluntary health products, is computed on the basis of
long-term actuarial assumptions of future investment yields, mortality, morbidity, policy terminations and expenses
(see Note 8). These assumptions, which for traditional life insurance are applied using the net level premium
method, include provisions for adverse deviation and generally vary by characteristics such as type of coverage,
year of issue and policy duration. To the extent that unrealized gains on fixed income securities would result in a
premium deficiency had those gains actually been realized, the related increase in reserves for certain immediate
annuities with life contingencies is recorded net of tax as a reduction of unrealized net capital gains included in
accumulated other comprehensive income.
Contractholder funds
Contractholder funds represent interest-bearing liabilities arising from the sale of products, such as interest-
sensitive life, fixed annuities, bank deposits and funding agreements. Contractholder funds are comprised primarily
of deposits received and interest credited to the benefit of the contractholder less surrenders and withdrawals,
mortality charges and administrative expenses (see Note 8). Contractholder funds also include reserves for
secondary guarantees on interest-sensitive life insurance and certain fixed annuity contracts and reserves for
certain guarantees on reinsured variable annuity contracts.
Separate accounts
Separate accounts assets are carried at fair value. The assets of the separate accounts are legally segregated
and available only to settle separate account contract obligations. Separate accounts liabilities represent the
contractholders’ claims to the related assets and are carried at an amount equal to the separate accounts assets.
Investment income and realized capital gains and losses of the separate accounts accrue directly to the
contractholders and therefore, are not included in the Company’s Consolidated Statements of Operations. Deposits
to and surrenders and withdrawals from the separate accounts are reflected in separate accounts liabilities and
are not included in consolidated cash flows.
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Notes