Allstate 2011 Annual Report Download - page 194

distribution channels, including Allstate exclusive agencies, which include exclusive financial specialists, independent
agents (including master brokerage agencies and workplace enrolling agents), and specialized structured settlement
brokers.
Allstate has exposure to market risk as a result of its investment portfolio. Market risk is the risk that the Company
will incur realized and unrealized net capital losses due to adverse changes in interest rates, credit spreads, equity
prices, commodity prices, or currency exchange rates. The Company’s primary market risk exposures are to changes in
interest rates, credit spreads and equity prices. Interest rate risk is the risk that the Company will incur a loss due to
adverse changes in interest rates relative to the interest rate characteristics of its interest bearing assets and liabilities.
This risk arises from many of the Company’s primary activities, as it invests substantial funds in interest-sensitive assets
and issues interest-sensitive liabilities. Interest rate risk includes risks related to changes in U.S. Treasury yields and
other key risk-free reference yields. Credit spread risk is the risk that the Company will incur a loss due to adverse
changes in credit spreads. This risk arises from many of the Company’s primary activities, as the Company invests
substantial funds in spread-sensitive fixed income assets. Equity price risk is the risk that the Company will incur losses
due to adverse changes in the general levels of the equity markets.
The Company monitors economic and regulatory developments that have the potential to impact its business. The
ability of banks to affiliate with insurers may have a material adverse effect on all of the Company’s product lines by
substantially increasing the number, size and financial strength of potential competitors. Furthermore, federal and state
laws and regulations affect the taxation of insurance companies and life insurance and annuity products. Congress
from time to time considers legislation that would reduce or eliminate the favorable policyholder tax treatment currently
applicable to life insurance and annuities. Congress also considers proposals to reduce the taxation of certain products
or investments that may compete with life insurance or annuities. Legislation that increases the taxation on insurance
products or reduces the taxation on competing products could lessen the advantage or create a disadvantage for
certain of the Company’s products making them less competitive. Such proposals, if adopted, could have an adverse
effect on the Company’s financial position or Allstate Financial’s ability to sell such products and could result in the
surrender of some existing contracts and policies. In addition, changes in the federal estate tax laws could negatively
affect the demand for the types of life insurance used in estate planning.
2. Summary of Significant Accounting Policies
Investments
Fixed income securities include bonds, residential mortgage-backed securities (‘‘RMBS’’), commercial mortgage-
backed securities (‘‘CMBS’’), asset-backed securities (‘‘ABS’’) and redeemable preferred stocks. Fixed income
securities, which may be sold prior to their contractual maturity, are designated as available for sale and are carried at
fair value. The difference between amortized cost and fair value, net of deferred income taxes, certain life and annuity
deferred policy acquisition costs (‘‘DAC’’), certain deferred sales inducement costs (‘‘DSI’’) and certain reserves for
life-contingent contract benefits, is reflected as a component of accumulated other comprehensive income. Cash
received from calls, principal payments and make-whole payments is reflected as a component of proceeds from sales
and cash received from maturities and pay-downs is reflected as a component of investment collections within the
Consolidated Statements of Cash Flows.
Equity securities primarily include common stocks, exchange traded funds, non-redeemable preferred stocks and
real estate investment trust equity investments. Equity securities are designated as available for sale and are carried at
fair value. The difference between cost and fair value, net of deferred income taxes, is reflected as a component of
accumulated other comprehensive income.
Mortgage loans are carried at outstanding principal balances, net of unamortized premium or discount and
valuation allowances. Valuation allowances are established for impaired loans when it is probable that contractual
principal and interest will not be collected. Valuation allowances for impaired loans reduce the carrying value to the fair
value of the collateral less costs to sell or the present value of the loan’s expected future repayment cash flows
discounted at the loan’s original effective interest rate.
Investments in limited partnership interests, including interests in private equity/debt funds, real estate funds,
hedge funds and tax credit funds, where the Company’s interest is so minor that it exercises virtually no influence over
operating and financial policies, are accounted for in accordance with the cost method of accounting; otherwise,
investments in limited partnership interests are accounted for in accordance with the equity method of accounting.
Short-term investments, including money market funds, commercial paper and other short-term investments, are
carried at fair value. Other investments consist primarily of policy loans, derivatives and bank loans. Policy loans are
carried at the unpaid principal balances and were $1.14 billion and $1.13 billion as of December 31, 2010 and 2009,
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Notes