This excerpt taken from the ALL 8-K filed Aug 5, 2009.
Proactive Investment Strategies Generate Realized Gains and Lower Unrealized Loss Position
The companys consolidated investment portfolio grew $2.6 billion during the second quarter to $96.5 billion at June 30, 2009. Allstates ongoing programs to strategically mitigate exposure to rising interest rates and maintain exposure to credit spreads benefited the portfolio significantly in the second quarter. In addition to generating a pre-tax net realized gain of $328 million, Allstates unrealized loss position improved by $3.2 billion in the quarter ($2.1 billion net of the impact of a change in accounting) reducing pre-tax unrealized losses to $7.3 billion at June 30, 2009.
Building on the past successes of its risk mitigation and return optimization program, Allstate reduced commercial real estate exposure by $1.2 billion and lowered its exposure to rising interest rates by decreasing the overall duration of interest-sensitive assets by 8% in the quarter when compared to the first quarter of 2009. A significant exposure to corporate credit was maintained, which resulted in improved fixed income investment valuations as credit spreads continued to tighten. The company also deployed more than $5 billion of short-term assets and cash receipts into securities to generate income and capital appreciation.
Net investment income for the quarter was $1.1 billion, down 21.5% from $1.4 billion in the second quarter of 2008, due to lower yields and lower average asset balances. Lower yields particularly impacted short-term assets, where elevated levels are being maintained in anticipation of more stable market conditions.
Net realized capital gains for the quarter were $328 million, pre-tax. This was due primarily to $419 million of net gains from derivative instruments, including benefits from the macro hedging program designed to mitigate increases in interest rates. In addition, $263 million of net gains were realized on sales, mainly of U.S. and foreign government fixed income securities sold in anticipation of rising interest rates. Partly offsetting these gains were $291 million of impairment write-downs on investments where the amortized cost basis is not expected to be entirely recovered, $37 million of net losses on the valuation of limited partnerships, and $26 million of change in intent losses.
Unrealized net capital losses declined to $7.3 billion, pre-tax at June 30, 2009. The decline resulted primarily from decreases of $1.8 billion in fixed income unrealized net losses and $351 million in equity unrealized net losses in the quarter when compared to the first quarter of 2009. At June 30, 2009, $7.1 billion of the unrealized net loss was related to the fixed income portfolio, of which 64.5% was on investment grade securities. In the second quarter of 2009, the fixed income portfolio generated cash flow of $2.4 billion. Strong ratings and continuing cash performance reflect the high quality of this portfolio.
On April 1, 2009, Allstate adopted Financial Accounting Standards Board Staff Position No. FAS 115-2. This adoption resulted in the reclassification of $1.1 billion of previously recorded other-than-temporary impairment write-downs. While the adoption had no impact on the income statement, the total impact, net of related DAC and tax adjustments, was an increase in retained income of $863 million and a decrease in unrealized net capital gains and losses of $578 million, with a net benefit to shareholders equity of $285 million. Without this adoption, the unrealized net capital loss at June 30, 2009 would have been $6.2 billion, pre-tax.