This excerpt taken from the ALL 8-K filed May 7, 2009.
Conservative Investment Management
While the investment markets remain difficult, Allstates proactive risk mitigation and return optimization programs continue to benefit shareholder value. The company remains focused on reducing its exposure to rising interest rates and real estate investments while maintaining a significant exposure to corporate credit to capture appreciation as spreads tighten.
Allstates consolidated investment portfolio totaled $93.87 billion at March 31, 2009, a decline of $2.13 billion from year-end 2008, which was due primarily to net reductions in contractholder funds at Allstate Financial and increases in unrealized net capital losses. 72.9% of the overall investment portfolio was invested in fixed income securities of which 94.1% were rated investment grade. In the first quarter of 2009, the fixed income portfolio generated cash flow of $2.07 billion, consistent with amounts due. The strong ratings and continuing cash performance reflect the high quality of this portfolio.
Allstate manages risks and returns in its portfolio through risk mitigation and return optimization strategies, including macro hedges to protect against extreme negative movements in interest rates and equity valuations. The company also manages risk through the proactive disposition of securities, having reduced exposure to real estate and financial assets, among other exposures. During 2009, Allstate is moving to reduce exposure to rising interest rates by shortening its fixed income portfolio duration. It is also continuing to actively reduce its exposure to commercial real estate. Through March 31, 2009, the fixed income portfolio duration was reduced by approximately 10% (0.5 years) and exposure to commercial real estate declined by $1.03 billion primarily due to collections and sales.
Net investment income for the quarter was $1.18 billion, down 22.9% ($350 million) from $1.53 billion in the first quarter of 2008, due to lower overall yields, increased short-term investment balances reflecting liquidity management activities, and lower average asset balances.
Net realized capital losses for the quarter were $359 million pre-tax, due primarily to $620 million of impairment write-downs on investments where losses in value were determined to be other-than-temporary, $143 million of net losses on the valuation of limited partnerships, and $105 million of losses on securities where we could no longer assert our intent to hold them until their value recovers. Partially offsetting these write-downs was $418 million of net gains on sales, mainly of U.S. government fixed income securities sold by Allstate Financial to support our strategy to reduce portfolio duration. In addition, the company realized $91 million of net gains from derivative instruments primarily from its macro hedging program.
Unrealized net capital losses rose to $9.40 billion, pretax, in the first quarter, an increase of $590 million when compared to year-end 2008, resulting primarily from increases of $388 million in fixed income unrealized net losses and $205 million in equity unrealized net losses. $8.88 billion of the unrealized net loss at March 31, 2009 relates to the fixed income portfolio, of which 79.6% of the unrealized losses were on securities that were rated investment grade. Allstate expects to hold these assets until they recover in value, and maintains prudent levels of liquidity in order to minimize the risk of unanticipated sales.
Deferred tax valuation allowances increased to $379 million in the first quarter of 2009 compared to $49 million at December 31, 2008. Of the $330 million increase, $254 million was recorded as income tax expense in net income and realized capital gains and losses, after-tax in the presentation of operating income, and $76 million was recorded as accumulated other comprehensive income in equity.
On April 9, 2009, the Financial Accounting Standards Board issued new staff positions covering fair value measurement / disclosure and other-than-temporary impairment. These rules will be adopted by Allstate effective April 1, 2009, and reflected in the companys second quarter 2009 results. The impact of this guidance is currently being studied and assessed. The company expects that it will result in an increase to retained income offset by a decrease in accumulated other comprehensive income.