Allstate (ALL)

Proactive Investment Strategies Provide both Protection and Returns

Throughout the year, Allstate’s investment portfolio benefited from proactive strategies to mitigate risk and optimize returns, including managing interest rate, equity, and credit exposures and reducing commercial real estate holdings.  Simultaneously, the company invested in opportunities to generate income and capital appreciation.  The fourth quarter of 2009 marked the fourth consecutive quarter of positive portfolio returns, as net investment income and valuation improvements were significantly greater than net realized capital losses.

The consolidated investment portfolio was $99.8 billion at December 31, 2009 a slight decline from September 30, 2009, as net reductions in Allstate Financial contractholder funds and a scheduled debt repayment more than offset operating cash flows.  The pre-tax unrealized net loss totaled $2.3 billion at December 31, 2009, a $180 million improvement from the prior quarter.

Net investment income for the fourth quarter of 2009 was $1.1 billion, consistent with the prior quarter, but $253 million less than the fourth quarter of 2008, primarily the result of lower yields and reduced average investment balances.  Net investment income in the Property-Liability portfolio totaled $324 million in the fourth quarter of 2009, a 16.3% decline from the prior year quarter, while Allstate Financial’s net investment income was $737 million, a 19.5% decline for the same period.

In the fourth quarter of 2009, the company deployed approximately $7.0 billion of short-term investments and cash receipts, for a total of $16.6 billion deployed during the last three quarters of 2009, primarily into fixed income and equity securities to generate income and capital appreciation.  The duration of the fixed income investment portfolio declined 5% to 4.0 years at December 31, 2009 when compared to year-end 2008.

Net realized capital losses for the quarter were $33 million, pre-tax, compared to a net realized loss of $1.9 billion in the prior year quarter.  The fourth quarter of 2009 reflected $270 million of impairment write-downs and $215 million of write-downs related to the intent to sell securities that primarily have commercial real estate exposure.  Net gains of $390 million were realized on sales that were primarily part of a change in equity strategy to a more passive portfolio management approach, and $56 million from derivatives, mainly related to the effects of rising interest rates upon liability hedges.

Risk mitigation programs continued to protect Allstate’s portfolios as macro hedges against interest rate and equity market risk performed as expected during the fourth quarter.  Commercial real estate exposure was reduced by 8.7% or $1.2 billion of amortized cost since September 30, 2009, and 30.3% or $5.4 billion of amortized cost since December 31, 2008, primarily through targeted dispositions and principal repayments from borrowers.  Exposure to certain municipal fixed income securities was also reduced by $445 million of amortized cost during the fourth quarter of 2009 and $1.9 billion of amortized cost, or 8.0%, since December 31, 2008.

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