Allstate 2012 Annual Report Download - page 189

fair value hedges. At the inception of the hedge, the Company formally documents the hedging relationship and risk
management objective and strategy. The documentation identifies the hedging instrument, the hedged item, the nature
of the risk being hedged and the methodology used to assess the effectiveness of the hedging instrument in offsetting
the exposure to changes in the hedged item’s fair value attributable to the hedged risk. For a cash flow hedge, this
documentation includes the exposure to changes in the variability in cash flows attributable to the hedged risk. The
Company does not exclude any component of the change in fair value of the hedging instrument from the effectiveness
assessment. At each reporting date, the Company confirms that the hedging instrument continues to be highly effective
in offsetting the hedged risk. Ineffectiveness in fair value hedges and cash flow hedges, if any, is reported in realized
capital gains and losses.
Fair value hedges The change in fair value of hedging instruments used in fair value hedges of investment assets or
a portion thereof is reported in net investment income, together with the change in fair value of the hedged items. The
change in fair value of hedging instruments used in fair value hedges of contractholder funds liabilities or a portion
thereof is reported in interest credited to contractholder funds, together with the change in fair value of the hedged
items. Accrued periodic settlements on swaps are reported together with the changes in fair value of the swaps in net
investment income or interest credited to contractholder funds. The amortized cost for fixed income securities, the
carrying value for mortgage loans or the carrying value of the hedged liability is adjusted for the change in fair value of
the hedged risk.
Cash flow hedges For hedging instruments used in cash flow hedges, the changes in fair value of the derivatives
representing the effective portion of the hedge are reported in accumulated other comprehensive income. Amounts are
reclassified to net investment income, realized capital gains and losses or interest expense as the hedged or forecasted
transaction affects income. Accrued periodic settlements on derivatives used in cash flow hedges are reported in net
investment income. The amount reported in accumulated other comprehensive income for a hedged transaction is
limited to the lesser of the cumulative gain or loss on the derivative less the amount reclassified to income, or the
cumulative gain or loss on the derivative needed to offset the cumulative change in the expected future cash flows on
the hedged transaction from inception of the hedge less the derivative gain or loss previously reclassified from
accumulated other comprehensive income to income. If the Company expects at any time that the loss reported in
accumulated other comprehensive income would lead to a net loss on the combination of the hedging instrument and
the hedged transaction which may not be recoverable, a loss is recognized immediately in realized capital gains and
losses. If an impairment loss is recognized on an asset or an additional obligation is incurred on a liability involved in a
hedge transaction, any offsetting gain in accumulated other comprehensive income is reclassified and reported together
with the impairment loss or recognition of the obligation.
Termination of hedge accounting If, subsequent to entering into a hedge transaction, the derivative becomes
ineffective (including if the hedged item is sold or otherwise extinguished, the occurrence of a hedged forecasted
transaction is no longer probable or the hedged asset becomes other-than-temporarily impaired), the Company may
terminate the derivative position. The Company may also terminate derivative instruments or redesignate them as
non-hedge as a result of other events or circumstances. If the derivative instrument is not terminated when a fair value
hedge is no longer effective, the future gains and losses recognized on the derivative are reported in realized capital
gains and losses. When a fair value hedge is no longer effective, is redesignated as non-hedge or when the derivative has
been terminated, the fair value gain or loss on the hedged asset, liability or portion thereof which has already been
recognized in income while the hedge was in place and used to adjust the amortized cost for fixed income securities, the
carrying value for mortgage loans or the carrying value of the hedged liability, is amortized over the remaining life of the
hedged asset, liability or portion thereof, and reflected in net investment income or interest credited to contractholder
funds beginning in the period that hedge accounting is no longer applied. If the hedged item in a fair value hedge is an
asset that has become other-than-temporarily impaired, the adjustment made to the amortized cost for fixed income
securities or the carrying value for mortgage loans is subject to the accounting policies applied to
other-than-temporarily impaired assets.
When a derivative instrument used in a cash flow hedge of an existing asset or liability is no longer effective or is
terminated, the gain or loss recognized on the derivative is reclassified from accumulated other comprehensive income
to income as the hedged risk impacts income. If the derivative instrument is not terminated when a cash flow hedge is
no longer effective, the future gains and losses recognized on the derivative are reported in realized capital gains and
losses. When a derivative instrument used in a cash flow hedge of a forecasted transaction is terminated because it is
probable the forecasted transaction will not occur, the gain or loss recognized on the derivative is immediately
reclassified from accumulated other comprehensive income to realized capital gains and losses in the period that hedge
accounting is no longer applied.
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