Allstate 2015 Annual Report Download - page 189

The Allstate Corporation 2015 Annual Report 183
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
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. Federal
and state laws and regulations affect the taxation of insurance companies and life insurance 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. Congress and various state legislatures also consider proposals to
reduce the taxation of certain products or investments that may compete with life insurance. 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, asset-backed securities (“ABS”), residential mortgage-backed securities
(“RMBS”), commercial mortgage-backed securities (“CMBS”) 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 and related life and annuity deferred
policy acquisition costs (“DAC”), deferred sales inducement costs (“DSI”) and reserves for life-contingent contract
benefits, is reflected as a component of accumulated other comprehensive income. Cash received from calls 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 and mutual 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 unpaid 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.
Investments in limited partnership interests include interests in private equity funds and co-investments, real estate
funds and joint ventures, and other funds. Where the Company’s interest is so minor that it exercises virtually no influence
over operating and financial policies, investments in limited partnership interests are accounted for in accordance with
the cost method of accounting; all other investments in limited partnership interests are accounted for in accordance
with the equity method of accounting (“EMA”).
Short-term investments, including money market funds, commercial paper and other short-term investments, are
carried at fair value. Other investments primarily consist of bank loans, policy loans, agent loans and derivatives. Bank
loans are primarily senior secured corporate loans and are carried at amortized cost. Policy loans are carried at unpaid
principal balances and were $905 million and $909 million as of December 31, 2015 and 2014, respectively. Agent loans
are loans issued to exclusive Allstate agents and are carried at unpaid principal balances, net of valuation allowances and
unamortized deferred fees or costs. Derivatives are carried at fair value.
Investment income primarily consists of interest, dividends, income from limited partnership interests, and income
from certain derivative transactions. Interest is recognized on an accrual basis using the effective yield method and
dividends are recorded at the ex-dividend date. Interest income for ABS, RMBS and CMBS is determined considering
estimated pay-downs, including prepayments, obtained from third party data sources and internal estimates. Actual