Allstate 2012 Annual Report Download - page 90

Changes in reserve estimates may adversely affect our operating results
The reserve for life-contingent contract benefits is computed on the basis of long-term actuarial assumptions of
future investment yields, mortality, morbidity, persistency and expenses. We periodically review the adequacy of these
reserves on an aggregate basis and if future experience differs significantly from assumptions, adjustments to reserves
and amortization of deferred policy acquisition costs (‘‘DAC’’) may be required which could have a material effect on our
operating results.
Changes in market interest rates may lead to a significant decrease in the sales and profitability of spread-based
products
Our ability to manage the Allstate Financial spread-based products, such as fixed annuities and institutional
products, is dependent upon maintaining profitable spreads between investment yields and interest crediting rates.
When market interest rates decrease or remain at relatively low levels, proceeds from investments that have matured or
have been prepaid or sold may be reinvested at lower yields, reducing investment spread. Lowering interest crediting
rates on some products in such an environment can partially offset decreases in investment yield. However, these
changes could be limited by market conditions, regulatory minimum rates or contractual minimum rate guarantees on
many contracts and may not match the timing or magnitude of changes in investment yields. Decreases in the interest
crediting rates offered on products in the Allstate Financial segment could make those products less attractive, leading
to lower sales and/or changes in the level of policy loans, surrenders and withdrawals. Non-parallel shifts in interest
rates, such as increases in short-term rates without accompanying increases in medium- and long-term rates, can
influence customer demand for fixed annuities, which could impact the level and profitability of new customer deposits.
Increases in market interest rates can also have negative effects on Allstate Financial, for example by increasing the
attractiveness of other investments to our customers, which can lead to increased surrenders at a time when the
segment’s fixed income investment asset values are lower as a result of the increase in interest rates. This could lead to
the sale of fixed income securities at a loss. For certain products, principally fixed annuity and interest-sensitive life
products, the earned rate on assets could lag behind rising market yields. We may react to market conditions by
increasing crediting rates, which could narrow spreads and reduce profitability. Unanticipated surrenders could result in
accelerated amortization of DAC or affect the recoverability of DAC and thereby increase expenses and reduce
profitability.
Changes in estimates of profitability on interest-sensitive life, fixed annuities and other investment products may
adversely affect our profitability and financial condition through the amortization of DAC
DAC related to interest-sensitive life, fixed annuities and other investment contracts is amortized in proportion to
actual historical gross profits and estimated future gross profits (‘‘EGP’’) over the estimated lives of the contracts. 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. Updates to these assumptions (commonly referred to as ‘‘DAC unlocking’’) could
adversely affect our profitability and financial condition.
Reducing our concentration in fixed annuities and funding agreements may adversely affect reported results
We have been reducing our concentration in fixed annuities and funding agreements. Lower new sales of these
products could negatively impact investment portfolio levels, complicate settlement of expiring contracts including
forced sales of assets with unrealized capital losses, and affect goodwill impairment testing and insurance reserves
deficiency testing.
Changes in tax laws may decrease sales and profitability of products and adversely affect our financial condition
Under current federal and state income tax law, certain products we offer, primarily life insurance and annuities,
receive favorable tax treatment. This favorable treatment may give certain of our products a competitive advantage over
noninsurance products. Congress and various state legislatures from time to time consider legislation that would reduce
or eliminate the favorable policyholder tax treatment currently applicable to life insurance and annuities. Congress and
various state legislatures also consider 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 our products making
them less competitive. Such proposals, if adopted, could have a material effect on our profitability and financial
condition or 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.
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