This excerpt taken from the ALL 8-K filed Oct 23, 2008.
Investment Portfolio Risk Mitigation Impact
As of September 30, 2008, Allstates consolidated total investments were $105 billion, with more than two-thirds in investment grade fixed income securities. From June 30, 2008 to September 30, 2008, the Companys portfolio value declined by approximately $8.6 billion, primarily reflecting reduced market valuations of $4.6 billion and net sales of $3.8 billion to fund net reductions in liabilities. The $4.6 billion decline in market valuations during the period was predominantly due to the widening of credit spreads and, to a lesser extent, equity market value declines. The decline was reflected through a $3.3 billion increase in net unrealized losses and $1.3 billion of realized capital losses.
Net realized capital losses for the third quarter of $1.3 billion on a pre-tax basis reduced net income by $728 million. Net realized capital losses primarily consisted of impairment write-downs of $666 million and change in intent write-downs of $453 million. While change in intent losses flow through the income statement, the Company believes the flexibility the classification provides enables it to execute faster market decisions. Since valuation related losses on these assets are realized each period, any potential losses realized upon sale will be limited to declines in value since the last reporting date.
Net unrealized losses, primarily reflecting depressed valuations from widening credit spreads, were $4.1 billion as of September 30, 2008. Gross unrealized losses as of September 30 were $6.3 billion, $2.5 billion higher than June 30, 2008. Given its current level of liquidity, the Company intends and believes it has the ability to hold these assets to recovery and therefore does not anticipate significant conversion from unrealized to realized losses.
The Company employs proactive risk mitigation and return optimization programs, which were augmented in June, 2008. The programs consist of macro-hedging actions, including equity hedges, interest rate risk hedges and credit spread risk hedges, as well as reductions in residential and commercial real estate holdings and financial assets. For investments under this program, the Company changed its intent to hold to recovery, which resulted in realized losses affecting the income statement.
During the third quarter, Allstate sold 33% of securities identified as part of the targeted $3.3 billion risk mitigation program. These assets were sold at approximately 95% of the fair values reported at June 30, 2008. Also during the quarter, Allstates macro-hedging program produced gains that partially offset investment losses.