Allstate 2008 Annual Report Download - page 257

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
FSP No. FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (‘‘FSP FAS 132(R)-1’’)
In January 2009, the FASB issued FSP FAS 132(R)-1 which amends SFAS No. 132(R) ‘‘Employers’ Disclosures
about Pensions and Other Postretirement Benefits’’ to provide guidance on an employer’s disclosures about plan
assets of a defined benefit pension or other postretirement plan. Since plan assets measured at fair value are
reported net of benefit obligations in an employer’s statements of financial position, the disclosures are intended
to increase transparency surrounding the types of assets and associated risks in the benefit plans. FSP
FAS 132(R)-1 requires companies to disclose information about how investment allocation decisions are made in
the plans, the fair value of each major category of plan assets at each annual reporting date for each plan
separately, information that would enable users to assess the assumptions and valuation techniques used in the
development of the fair value measurements at the reporting date, and information that provides an
understanding of significant concentrations of risk in plan assets. FSP FAS 132(R)-1 is effective for fiscal years
ending after December 15, 2009. The disclosures are not required for earlier periods that are presented for
comparative purposes and earlier application is permitted. FSP FAS 132(R)-1 affects disclosures and therefore
implementation will not impact the Company’s results of operations or financial position.
3. Dispositions
Variable annuity business
On June 1, 2006, in accordance with the terms of the definitive Master Transaction Agreement and related
agreements (collectively the ‘‘Agreement’’) the Company and its subsidiaries, ALIC and Allstate Life Insurance
Company of New York (‘‘ALNY’’), completed the disposal through reinsurance of substantially all of Allstate
Financial’s variable annuity business to Prudential Financial, Inc. and its subsidiary, The Prudential Insurance
Company of America (collectively ‘‘Prudential’’). For Allstate, this disposal achieved the economic benefit of
transferring to Prudential the future rights and obligations associated with this business.
The disposal was effected through reinsurance agreements (the ‘‘Reinsurance Agreements’’) which include
both coinsurance and modified coinsurance provisions. Coinsurance and modified coinsurance provisions are
commonly used in the reinsurance of variable annuities because variable annuities generally include both separate
account and general account liabilities. When contractholders make a variable annuity deposit, they must choose
how to allocate their account balances between a selection of variable-return mutual funds that must be held in a
separate account and fixed-return funds held in the Company’s general account. In addition, variable annuity
contracts include various benefit guarantees that are general account obligations of the Company. The
Reinsurance Agreements do not extinguish the Company’s primary liability under the variable annuity contracts.
Variable annuity balances invested in variable-return mutual funds are held in separate accounts, which are
legally segregated assets and available only to settle separate account contract obligations. Because the separate
account assets must remain with the Company under insurance regulations, modified coinsurance is typically used
when parties wish to transfer future economic benefits of such business. Under the modified coinsurance
provisions, the separate account assets remain on the Company’s Consolidated Statements of Financial Position,
but the related results of operations are fully reinsured and presented net of reinsurance on the Consolidated
Statements of Operations.
The coinsurance provisions of the Reinsurance Agreements were used to transfer the future rights and
obligations related to fixed-return fund options and benefit guarantees. $1.37 billion of assets supporting general
account liabilities have been transferred to Prudential, net of consideration, under the coinsurance reinsurance
provisions as of the transaction closing date. General account liabilities of $1.57 billion and $1.26 billion as of
December 31, 2008 and 2007 respectively, however, remain on the Consolidated Statements of Financial Position
with a corresponding reinsurance recoverable.
For purposes of presentation in the Consolidated Statements of Cash Flows, the Company treated the
reinsurance of substantially all the variable annuity business of ALIC and ALNY to Prudential as a disposition of
operations, consistent with the substance of the transaction which was the disposition of a block of business
accomplished through reinsurance. Accordingly, the net consideration transferred to Prudential of $744 million
(computed as $1.37 billion of general account insurance liabilities transferred to Prudential on the closing date
less consideration of $628 million), the cost of hedging the ceding commission received from Prudential of
$69 million, pre-tax, and the costs of executing the transaction of $13 million, pre-tax, were classified as a
disposition of operations in the cash flows from investing activities section of the Consolidated Statements of
Cash Flows.
Under the Agreement, the Company, ALIC and ALNY have indemnified Prudential for certain pre-closing
contingent liabilities (including extra-contractual liabilities of ALIC and ALNY and liabilities specifically excluded
from the transaction) that ALIC and ALNY have agreed to retain. In addition, the Company, ALIC and ALNY will
147
Notes