Edgar Filing: ALLSTATE CORP

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission file number 1-11840

THE ALLSTATE CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		36-3871531
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2775 Sanders Road, Northbrook, Illinois 60062

(Address of principal executive offices) (Zip Code)

(847) 402-5000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes X

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	X	Accelerated filer	___

Non-accelerated filer	(Do not check if a smaller reporting company)	Smaller reporting company	___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

No X

As of July 17, 2013, the registrant had 463,447,495 common shares, $.01 par value, outstanding.

THE ALLSTATE CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

June 30, 2013

PART I	FINANCIAL INFORMATION	PAGE

Item 1.	Financial Statements

	Condensed Consolidated Statements of Operations for the Three-Month and Six-Month Periods Ended June 30, 2013 and 2012 (unaudited)	1

	Condensed Consolidated Statements of Comprehensive Income for the Three-Month and Six-Month Periods Ended June 30, 2013 and 2012 (unaudited)	2

	Condensed Consolidated Statements of Financial Position as of June 30, 2013 (unaudited) and December 31, 2012	3

	Condensed Consolidated Statements of Shareholders’ Equity for the Six-Month Periods Ended June 30, 2013 and 2012 (unaudited)	4

	Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2013 and 2012 (unaudited)	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6

	Report of Independent Registered Public Accounting Firm	49

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

	Highlights	50
	Consolidated Net Income	51
	Impact of Low Interest Rate Environment	52
	Property-Liability Highlights	53
	Allstate Protection Segment	56
	Discontinued Lines and Coverages Segment	69
	Property-Liability Investment Results	69
	Allstate Financial Highlights	71
	Allstate Financial Segment	71
	Investments Highlights	78
	Investments	78
	Capital Resources and Liquidity Highlights	85
	Capital Resources and Liquidity	85

Item 4.	Controls and Procedures	90

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	91

Item 1A.	Risk Factors	91

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	92

Item 6.	Exhibits	92

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL INFORMATION

THE ALLSTATE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

($ in millions, except per share data)		Three months ended June 30						Six months ended June 30
		2013			2012			2013			2012
		(unaudited)						(unaudited)
Revenues
Property-liability insurance premiums	$	6,862		$	6,666		$	13,632		$	13,296
Life and annuity premiums and contract charges		579			559			1,158			1,112
Net investment income		984			1,026			1,967			2,037
Realized capital gains and losses:
Total other-than-temporary impairment losses		(55	)		(69	)		(82	)		(156	)
Portion of loss recognized in other comprehensive income		(5	)		19			(15	)		23
Net other-than-temporary impairment losses recognized in earnings		(60	)		(50	)		(97	)		(133	)
Sales and other realized capital gains and losses		422			77			590			328
Total realized capital gains and losses		362			27			493			195
		8,787			8,278			17,250			16,640
Costs and expenses
Property-liability insurance claims and claims expense		4,741			4,810			9,201			9,149
Life and annuity contract benefits		471			462			929			901
Interest credited to contractholder funds		311			366			656			744
Amortization of deferred policy acquisition costs		961			942			1,907			1,921
Operating costs and expenses		1,090			996			2,192			2,013
Restructuring and related charges		20			10			46			16
Loss on extinguishment of debt		480			--			480			--
Interest expense		99			93			197			188
		8,173			7,679			15,608			14,932

Gain on disposition of operations		--			3			2			6

Income from operations before income tax expense		614			602			1,644			1,714

Income tax expense		180			179			501			525

Net income		434			423			1,143			1,189

Preferred stock dividends		--			--			--			--

Net income available to common shareholders	$	434		$	423		$	1,143		$	1,189

Earnings per common share:

Net income available to common shareholders per common share - Basic	$	0.93		$	0.86		$	2.42		$	2.40

Weighted average common shares - Basic		468.3			490.6			471.9			494.9

Net income available to common shareholders per common share - Diluted	$	0.92		$	0.86		$	2.39		$	2.39

Weighted average common shares - Diluted		473.8			493.8			477.3			497.9

Cash dividends declared per common share	$	0.25		$	0.22		$	0.50		$	0.44

See notes to condensed consolidated financial statements.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($ in millions)		Three months ended June 30,						Six months ended June 30,
		2013			2012			2013			2012
		(unaudited)						(unaudited)

Net income	$	434		$	423		$	1,143		$	1,189


Other comprehensive (loss) income, after-tax

Changes in:

Unrealized net capital gains and losses		(1,254	)		196			(1,183	)		670

Unrealized foreign currency translation adjustments		(21	)		(7	)		(33	)		2

Unrecognized pension and other postretirement benefit cost		46			24			91			44

Other comprehensive (loss) income, after-tax		(1,229	)		213			(1,125	)		716


Comprehensive (loss) income	$	(795	)	$	636		$	18		$	1,905

See notes to condensed consolidated financial statements.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

($ in millions, except par value data)		June 30, 2013		December 31, 2012
Assets		(unaudited)
Investments
Fixed income securities, at fair value (amortized cost $68,475 and $71,915)	$	71,039	$	77,017
Equity securities, at fair value (cost $4,237 and $3,577)		4,505		4,037
Mortgage loans		6,413		6,570
Limited partnership interests		4,941		4,922
Short-term, at fair value (amortized cost $2,646 and $2,336)		2,646		2,336
Other		2,771		2,396
Total investments		92,315		97,278
Cash		634		806
Premium installment receivables, net		5,116		5,051
Deferred policy acquisition costs		3,914		3,621
Reinsurance recoverables, net		8,346		8,767
Accrued investment income		773		781
Property and equipment, net		971		989
Goodwill		1,239		1,240
Other assets		1,684		1,804
Separate Accounts		6,488		6,610
Total assets	$	121,480	$	126,947
Liabilities
Reserve for property-liability insurance claims and claims expense	$	20,989	$	21,288
Reserve for life-contingent contract benefits		14,242		14,895
Contractholder funds		36,357		39,319
Unearned premiums		10,510		10,375
Claim payments outstanding		745		797
Deferred income taxes		250		597
Other liabilities and accrued expenses		6,055		6,429
Short-term debt		500		--
Long-term debt		5,475		6,057
Separate Accounts		6,488		6,610
Total liabilities		101,611		106,367
Commitments and Contingent Liabilities (Note 11)
Equity
Preferred stock and additional capital paid-in, $1 par value, 25 million shares authorized, 11,500 shares issued and outstanding as of June 30, 2013 and none issued and outstanding as of December 31, 2012, $287.5 aggregate liquidation preference		278		--
Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 465 million and 479 million shares outstanding		9		9
Additional capital paid-in		3,105		3,162
Retained income		34,691		33,783
Deferred ESOP expense		(39)		(41)
Treasury stock, at cost (435 million and 421 million shares)		(18,225)		(17,508)
Accumulated other comprehensive income:
Unrealized net capital gains and losses:
Unrealized net capital gains and losses on fixed income securities with OTTI		36		(11)
Other unrealized net capital gains and losses		1,794		3,614
Unrealized adjustment to DAC, DSI and insurance reserves		(179)		(769)
Total unrealized net capital gains and losses		1,651		2,834
Unrealized foreign currency translation adjustments		37		70
Unrecognized pension and other postretirement benefit cost		(1,638)		(1,729)
Total accumulated other comprehensive income		50		1,175
Total shareholders’ equity		19,869		20,580
Total liabilities and shareholders’ equity	$	121,480	$	126,947

See notes to condensed consolidated financial statements.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

($ in millions)		Six months ended June 30,
		2013			2012
Preferred stock par value		(unaudited)
Balance, beginning of period	$	--		$	--
Preferred stock issuance		--			--
Balance, end of period		--			--

Preferred stock additional capital paid-in
Balance, beginning of period		--			--
Preferred stock issuance		278			--
Balance, end of period		278			--

Common stock		9			9

Additional capital paid-in
Balance, beginning of period		3,162			3,189
Equity incentive plans activity		(57	)		(35	)
Balance, end of period		3,105			3,154

Retained income
Balance, beginning of period		33,783			31,909
Net income		1,143			1,189
Dividends on common stock		(235	)		(218	)
Dividends on preferred stock		--			--
Balance, end of period		34,691			32,880

Deferred ESOP expense
Balance, beginning of period		(41	)		(43	)
Payments		2			2
Balance, end of period		(39	)		(41	)

Treasury stock
Balance, beginning of period		(17,508	)		(16,795	)
Shares acquired		(905	)		(575	)
Shares reissued under equity incentive plans, net		188			98
Balance, end of period		(18,225	)		(17,272	)

Accumulated other comprehensive income
Balance, beginning of period		1,175			29
Change in unrealized net capital gains and losses		(1,183	)		670
Change in unrealized foreign currency translation adjustments		(33	)		2
Change in unrecognized pension and other postretirement benefit cost		91			44
Balance, end of period		50			745

Noncontrolling interest
Balance, beginning of period		--			28
Change in noncontrolling interest ownership		--			(28	)
Balance, end of period		--			--

Total shareholders’ equity	$	19,869		$	19,475

See notes to condensed consolidated financial statements.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in millions)		Six months ended June 30,
		2013			2012
Cash flows from operating activities		(unaudited)
Net income	$	1,143		$	1,189
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other non-cash items		180			201
Realized capital gains and losses		(493	)		(195	)
Loss on extinguishment of debt		480			--
Gain on disposition of operations		(2	)		(6	)
Interest credited to contractholder funds		656			744
Changes in:
Policy benefits and other insurance reserves		(607	)		(377	)
Unearned premiums		165			27
Deferred policy acquisition costs		(107	)		6
Premium installment receivables, net		(81	)		(9	)
Reinsurance recoverables, net		327			27
Income taxes		283			341
Other operating assets and liabilities		(391	)		(174	)
Net cash provided by operating activities		1,553			1,774
Cash flows from investing activities
Proceeds from sales
Fixed income securities		10,461			9,918
Equity securities		1,742			1,275
Limited partnership interests		438			796
Mortgage loans		20			11
Other investments		38			88
Investment collections
Fixed income securities		3,658			2,141
Mortgage loans		475			458
Other investments		171			39
Investment purchases
Fixed income securities		(10,637	)		(12,345	)
Equity securities		(2,010	)		(290	)
Limited partnership interests		(477	)		(664	)
Mortgage loans		(314	)		(267	)
Other investments		(538	)		(243	)
Change in short-term investments, net		(423	)		(392	)
Change in other investments, net		91			(57	)
Purchases of property and equipment, net		(43	)		(116	)
Net cash provided by investing activities		2,652			352
Cash flows from financing activities
Change in short-term debt		500			--
Proceeds from issuance of long-term debt		1,481			493
Repayment of long-term debt		(2,540	)		(351	)
Proceeds from issuance of preferred stock		278			--
Contractholder fund deposits		1,119			1,005
Contractholder fund withdrawals		(4,273	)		(2,665	)
Dividends paid on common stock		(119	)		(215	)
Treasury stock purchases		(897	)		(583	)
Shares reissued under equity incentive plans, net		60			26
Excess tax benefits on share-based payment arrangements		29			4
Other		(15	)		(45	)
Net cash used in financing activities		(4,377	)		(2,331	)
Net decrease in cash		(172	)		(205	)
Cash at beginning of period		806			776
Cash at end of period	$	634		$	571

See notes to condensed consolidated financial statements.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. General

Basis of presentation

The accompanying condensed consolidated financial statements include the accounts of The Allstate Corporation (the “Corporation”) and its wholly owned subsidiaries, primarily Allstate Insurance Company (“AIC”), a property-liability insurance company with various property-liability and life and investment subsidiaries, including Allstate Life Insurance Company (“ALIC”) (collectively referred to as the “Company” or “Allstate”).

The condensed consolidated financial statements and notes as of June 30, 2013 and for the three-month and six-month periods ended June 30, 2013 and 2012 are unaudited. The condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods. These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year. All significant intercompany accounts and transactions have been eliminated.

Adopted accounting standards

Disclosures about Offsetting Assets and Liabilities

In December 2011 and January 2013, the Financial Accounting Standards Board (“FASB”) issued guidance requiring expanded disclosures, including both gross and net information, for derivatives, repurchase and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in the reporting entity’s financial statements or those that are subject to an enforceable master netting arrangement or similar agreement. The Company adopted the new guidance in the first quarter of 2013. The new guidance affects disclosures only and therefore had no impact on the Company’s results of operations or financial position.

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

In February 2013, the FASB issued guidance requiring expanded disclosures about the amounts reclassified out of accumulated other comprehensive income by component. The guidance requires the presentation of significant amounts reclassified out of accumulated other comprehensive income by income statement line item but only if the amount reclassified is required under accounting principles generally accepted in the United States of America (“GAAP”) to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, cross-reference to other disclosures that provide additional detail about those amounts is required. The Company adopted the new guidance in the first quarter of 2013. The new guidance affects disclosures only and therefore had no impact on the Company’s results of operations or financial position.

2. Earnings per common share

Basic earnings per common share is computed using the weighted average number of common shares outstanding, including unvested participating restricted stock units. Diluted earnings per common share is computed using the weighted average number of common and dilutive potential common shares outstanding. For the Company, dilutive potential common shares consist of outstanding stock options and unvested non-participating restricted stock units and contingently issuable performance stock awards.

The computation of basic and diluted earnings per common share is presented in the following table.

($ in millions, except per share data)		Three months ended June 30,				Six months ended June 30,
		2013		2012		2013		2012
Numerator:
Net income	$	434	$	423	$	1,143	$	1,189
Less: Preferred stock dividends		--		--		--		--
Net income available to common shareholders	$	434	$	423	$	1,143	$	1,189

Denominator:
Weighted average common shares outstanding		468.3		490.6		471.9		494.9
Effect of dilutive potential common shares:
Stock options		3.9		2.3		3.8		2.2
Restricted stock units and performance stock awards (non-participating)		1.6		0.9		1.6		0.8
Weighted average common and dilutive potential common shares outstanding		473.8		493.8		477.3		497.9

Earnings per common share - Basic	$	0.93	$	0.86	$	2.42	$	2.40
Earnings per common share - Diluted	$	0.92	$	0.86	$	2.39	$	2.39

The effect of dilutive potential common shares does not include the effect of options with an anti-dilutive effect on earnings per common share because their exercise prices exceed the average market price of Allstate common shares during the period or for which the unrecognized compensation cost would have an anti-dilutive effect. Options to purchase 13.5 million and 22.5 million Allstate common shares, with exercise prices ranging from $39.95 to $62.42 and $27.75 to $62.84, were outstanding for the three-month periods ended June 30, 2013 and 2012, respectively, but were not included in the computation of diluted earnings per common share in those periods. Options to purchase 13.7 million and 25.3 million Allstate common shares, with exercise prices ranging from $39.05 to $62.42 and $26.09 to $62.84, were outstanding for the six-month periods ended June 30, 2013 and 2012, respectively, but were not included in the computation of diluted earnings per common share in those periods.

3. Supplemental Cash Flow Information

Non-cash modifications of certain mortgage loans, fixed income securities, limited partnership interests and other investments, as well as mergers completed with equity securities, totaled $203 million and $109 million for the six months ended June 30, 2013 and 2012, respectively. Non-cash financing activities include $92 million and $39 million related to the issuance of Allstate common shares for vested restricted stock units for the six months ended June 30, 2013 and 2012, respectively.

Liabilities for collateral received in conjunction with the Company’s securities lending program and over-the-counter (“OTC”) derivatives are reported in other liabilities and accrued expenses or other investments. The accompanying cash flows are included in cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows along with the activities resulting from management of the proceeds, which are as follows:

($ in millions)		Six months ended June 30,
		2013			2012
Net change in proceeds managed
Net change in short-term investments	$	113		$	(202	)
Operating cash flow provided (used)		113			(202	)
Net change in cash		3			(1	)
Net change in proceeds managed	$	116		$	(203	)

Net change in liabilities
Liabilities for collateral, beginning of year	$	(808	)	$	(462	)
Liabilities for collateral, end of period		(692	)		(665	)
Operating cash flow (used) provided	$	(116	)	$	203

4. Investments

Fair values

The amortized cost, gross unrealized gains and losses and fair value for fixed income securities are as follows:

($ in millions)		Amortized		Gross unrealized					Fair
		cost		Gains		Losses			value
June 30, 2013
U.S. government and agencies	$	3,001	$	205	$	(2	)	$	3,204
Municipal		10,220		601		(105	)		10,716
Corporate		45,969		2,159		(512	)		47,616
Foreign government		2,099		141		(16	)		2,224
Asset-backed securities (“ABS”)		3,467		86		(77	)		3,476
Residential mortgage-backed securities (“RMBS”)		2,423		119		(57	)		2,485
Commercial mortgage-backed securities (“CMBS”)		1,273		50		(32	)		1,291
Redeemable preferred stock		23		4		--			27
Total fixed income securities	$	68,475	$	3,365	$	(801	)	$	71,039

December 31, 2012
U.S. government and agencies	$	4,387	$	326	$	--		$	4,713
Municipal		12,139		1,038		(108	)		13,069
Corporate		44,943		3,721		(127	)		48,537
Foreign government		2,290		228		(1	)		2,517
ABS		3,623		108		(107	)		3,624
RMBS		3,000		142		(110	)		3,032
CMBS		1,510		65		(77	)		1,498
Redeemable preferred stock		23		4		--			27
Total fixed income securities	$	71,915	$	5,632	$	(530	)	$	77,017

Scheduled maturities

The scheduled maturities for fixed income securities are as follows as of June 30, 2013:

($ in millions)		Amortized cost		Fair value
Due in one year or less	$	2,816	$	2,859
Due after one year through five years		25,101		25,901
Due after five years through ten years		22,450		23,243
Due after ten years		10,945		11,784
		61,312		63,787
ABS, RMBS and CMBS		7,163		7,252
Total	$	68,475	$	71,039

Actual maturities may differ from those scheduled as a result of prepayments by the issuers. ABS, RMBS and CMBS are shown separately because of the potential for prepayment of principal prior to contractual maturity dates.

Net investment income

Net investment income is as follows:

($ in millions)		Three months ended June 30,						Six months ended June 30,
		2013			2012			2013			2012
Fixed income securities	$	740		$	818		$	1,502		$	1,624
Equity securities		39			24			64			45
Mortgage loans		93			92			191			185
Limited partnership interests		126			107			233			216
Short-term investments		1			1			3			2
Other		39			34			76			64
Investment income, before expense		1,038			1,076			2,069			2,136
Investment expense		(54	)		(50	)		(102	)		(99	)
Net investment income	$	984		$	1,026		$	1,967		$	2,037

Realized capital gains and losses

Realized capital gains and losses by asset type are as follows:

($ in millions)		Three months ended June 30,						Six months ended June 30,
		2013			2012			2013			2012
Fixed income securities	$	79		$	6		$	151		$	(23	)
Equity securities		283			13			312			172
Mortgage loans		(6	)		9			25			8
Limited partnership interests		(8	)		3			(3	)		13
Derivatives		14			7			10			28
Other		--			(11	)		(2	)		(3	)
Realized capital gains and losses	$	362		$	27		$	493		$	195

Realized capital gains and losses by transaction type are as follows:

($ in millions)		Three months ended June 30,				Six months ended June 30,
		2013		2012		2013		2012
Impairment write-downs	$	(33)	$	(49)	$	(43)	$	(88)
Change in intent write-downs		(27)		(1)		(54)		(45)
Net other-than-temporary impairment losses recognized in earnings		(60)		(50)		(97)		(133)
Sales		408		70		580		299
Valuation of derivative instruments		3		(10)		(1)		1
Settlements of derivative instruments		11		17		11		28
Realized capital gains and losses	$	362	$	27	$	493	$	195

Gross gains of $114 million and $72 million and gross losses of $24 million and $47 million were realized on sales of fixed income securities during the three months ended June 30, 2013 and 2012, respectively. Gross gains of $248 million and $187 million and gross losses of $44 million and $137 million were realized on sales of fixed income securities during the six months ended June 30, 2013 and 2012, respectively.

Other-than-temporary impairment losses by asset type are as follows:

($ in millions)		Three months ended June 30, 2013						Six months ended June 30, 2013
		Gross		Included in OCI		Net		Gross		Included in OCI		Net
Fixed income securities:
Municipal	$	(4)	$	(3)	$	(7)	$	(17)	$	(5)	$	(22)
ABS		--		(1)		(1)		--		(1)		(1)
RMBS		(1)		(1)		(2)		(1)		(2)		(3)
CMBS		(1)		--		(1)		(20)		(7)		(27)
Total fixed income securities		(6)		(5)		(11)		(38)		(15)		(53)
Equity securities		(32)		--		(32)		(51)		--		(51)
Mortgage loans		(9)		--		(9)		17		--		17
Limited partnership interests		(8)		--		(8)		(8)		--		(8)
Other		--		--		--		(2)		--		(2)
Other-than-temporary impairment losses	$	(55)	$	(5)	$	(60)	$	(82)	$	(15)	$	(97)

($ in millions)		Three months ended June 30, 2012						Six months ended June 30, 2012
		Gross		Included in OCI		Net		Gross		Included in OCI		Net
Fixed income securities:
Municipal	$	(25)	$	17	$	(8)	$	(26)	$	17	$	(9)
Corporate		--		(1)		(1)		(18)		(1)		(19)
RMBS		(12)		--		(12)		(55)		4		(51)
CMBS		(9)		3		(6)		(15)		3		(12)
Total fixed income securities		(46)		19		(27)		(114)		23		(91)
Equity securities		(20)		--		(20)		(36)		--		(36)
Mortgage loans		7		--		7		4		--		4
Limited partnership interests		(1)		--		(1)		(3)		--		(3)
Other		(9)		--		(9)		(7)		--		(7)
Other-than-temporary impairment losses	$	(69)	$	19	$	(50)	$	(156)	$	23	$	(133)

The total amount of other-than-temporary impairment losses included in accumulated other comprehensive income at the time of impairment for fixed income securities, which were not included in earnings, are presented in the following table. The amount excludes $247 million and $219 million as of June 30, 2013 and December 31, 2012, respectively, of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.

($ in millions)		June 30, 2013		December 31, 2012
Municipal	$	(10)	$	(20)
Corporate		(1)		(1)
ABS		(10)		(14)
RMBS		(158)		(182)
CMBS		(12)		(19)
Total	$	(191)	$	(236)

Rollforwards of the cumulative credit losses recognized in earnings for fixed income securities held as of the end of the period are as follows:

($ in millions)		Three months ended June 30,				Six months ended June 30,
		2013		2012		2013		2012
Beginning balance	$	(600)	$	(820)	$	(617)	$	(944)
Additional credit loss for securities previously other-than-temporarily impaired		(10)		(16)		(24)		(36)
Additional credit loss for securities not previously other-than-temporarily impaired		(1)		(10)		(17)		(19)
Reduction in credit loss for securities disposed or collected		46		65		93		211
Reduction in credit loss for securities the Company has made the decision to sell or more likely than not will be required to sell		--		--		--		7
Change in credit loss due to accretion of increase in cash flows		1		--		1		--
Ending balance	$	(564)	$	(781)	$	(564)	$	(781)

The Company uses its best estimate of future cash flows expected to be collected from the fixed income security, discounted at the security’s original or current effective rate, as appropriate, to calculate a recovery value and determine whether a credit loss exists. The determination of cash flow estimates is inherently subjective and methodologies may vary depending on facts and circumstances specific to the security. All reasonably available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable assumptions and forecasts, are considered when developing the estimate of cash flows expected to be collected. That information generally includes, but is not limited to, the remaining payment terms of the security, prepayment speeds, foreign exchange rates, the financial condition and future earnings potential of the issue or issuer, expected defaults, expected recoveries, the value of underlying collateral, vintage, geographic concentration, available reserves or escrows, current subordination levels, third party guarantees and other credit enhancements. Other information, such as industry analyst reports and forecasts, sector credit ratings, financial condition of the bond insurer for insured fixed income securities, and other market data relevant to the realizability of contractual cash flows, may also be considered. The estimated fair value of collateral will be used to estimate recovery value if the Company determines that the security is dependent on the liquidation of collateral for ultimate settlement. If the estimated recovery value is less than the amortized cost of the security, a credit loss exists and an other-than-temporary impairment for the difference between the estimated recovery value and amortized cost is recorded in earnings. The portion of the unrealized loss related to factors other than credit remains classified in accumulated other comprehensive income. If the Company determines that the fixed income security does not have sufficient cash flow or other information to estimate a recovery value for the security, the Company may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings.

Unrealized net capital gains and losses

Unrealized net capital gains and losses included in accumulated other comprehensive income are as follows:

($ in millions)		Fair		Gross unrealized			Unrealized net
June 30, 2013		value		Gains		Losses	gains (losses)
Fixed income securities	$	71,039	$	3,365	$	(801)	$	2,564
Equity securities		4,505		362		(94)		268
Short-term investments		2,646		--		--		--
Derivative instruments (1)		(7)		3		(15)		(12)
EMA limited partnerships (2)								--
Unrealized net capital gains and losses, pre-tax								2,820
Amounts recognized for:
Insurance reserves (3)								(76)
DAC and DSI (4)								(199)
Amounts recognized								(275)
Deferred income taxes								(894)
Unrealized net capital gains and losses, after-tax							$	1,651

(1) Included in the fair value of derivative instruments are $(1) million classified as assets and $6 million classified as liabilities.

(2) Unrealized net capital gains and losses for limited partnership interests represent the Company’s share of EMA limited partnerships’ other comprehensive income. Fair value and gross gains and losses are not applicable.

(3) The insurance reserves adjustment represents the amount by which the reserve balance would increase if the net unrealized gains in the applicable product portfolios were realized and reinvested at current lower interest rates, resulting in a premium deficiency. Although the Company evaluates premium deficiencies on the combined performance of life insurance and immediate annuities with life contingencies, the adjustment primarily relates to structured settlement annuities with life contingencies, in addition to annuity buy-outs and certain payout annuities with life contingencies.

(4) The DAC and DSI adjustment balance represents the amount by which the amortization of DAC and DSI would increase or decrease if the unrealized gains or losses in the respective product portfolios were realized.

		Fair		Gross unrealized			Unrealized net
December 31, 2012		value		Gains		Losses	gains (losses)
Fixed income securities	$	77,017	$	5,632	$	(530)	$	5,102
Equity securities		4,037		494		(34)		460
Short-term investments		2,336		--		--		--
Derivative instruments (1)		(17)		2		(24)		(22)
EMA limited partnerships								7
Unrealized net capital gains and losses, pre-tax								5,547
Amounts recognized for:
Insurance reserves								(771)
DAC and DSI								(412)
Amounts recognized								(1,183)
Deferred income taxes								(1,530)
Unrealized net capital gains and losses, after-tax							$	2,834

(1) Included in the fair value of derivative instruments are $2 million classified as assets and $19 million classified as liabilities.

Change in unrealized net capital gains and losses

The change in unrealized net capital gains and losses for the six months ended June 30, 2013 is as follows:

($ in millions)
Fixed income securities	$	(2,538)
Equity securities		(192)
Derivative instruments		10
EMA limited partnerships		(7)
Total		(2,727)
Amounts recognized for:
Insurance reserves		695
DAC and DSI		213
Amounts recognized		908
Deferred income taxes		636
Decrease in unrealized net capital gains and losses	$	(1,183)

Portfolio monitoring

The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed income and equity security whose carrying value may be other-than-temporarily impaired.

For each fixed income security in an unrealized loss position, the Company assesses whether management with the appropriate authority has made the decision to sell or whether it is more likely than not the Company will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes. If a security meets either of these criteria, the security’s decline in fair value is considered other than temporary and is recorded in earnings.

If the Company has not made the decision to sell the fixed income security and it is not more likely than not the Company will be required to sell the fixed income security before recovery of its amortized cost basis, the Company evaluates whether it expects to receive cash flows sufficient to recover the entire amortized cost basis of the security. The Company calculates the estimated recovery value by discounting the best estimate of future cash flows at the security’s original or current effective rate, as appropriate, and compares this to the amortized cost of the security. If the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the fixed income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss related to other factors recognized in other comprehensive income.

For equity securities, the Company considers various factors, including whether it has the intent and ability to hold the equity security for a period of time sufficient to recover its cost basis. Where the Company lacks the intent and ability to hold to recovery, or believes the recovery period is extended, the equity security’s decline in fair value is considered other than temporary and is recorded in earnings.

For fixed income and equity securities managed by third parties, either the Company has contractually retained its decision making authority as it pertains to selling securities that are in an unrealized loss position or it recognizes any unrealized loss at the end of the period through a charge to earnings.

The Company’s portfolio monitoring process includes a quarterly review of all securities to identify instances where the fair value of a security compared to its amortized cost (for fixed income securities) or cost (for equity securities) is below established thresholds. The process also includes the monitoring of other impairment indicators such as ratings, ratings downgrades and payment defaults. The securities identified, in addition to other securities for which the Company may have a concern, are evaluated for potential other-than-temporary impairment using all reasonably available information relevant to the collectability or recovery of the security. Inherent in the Company’s evaluation of other-than-temporary impairment for these fixed income and equity securities are assumptions and estimates about the financial condition and future earnings potential of the issue or issuer. Some of the factors that may be considered in evaluating whether a decline in fair value is other than temporary are: 1) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; 2) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity; and 3) the length of time and extent to which the fair value has been less than amortized cost or cost.

The following table summarizes the gross unrealized losses and fair value of fixed income and equity securities by the length of time that individual securities have been in a continuous unrealized loss position.

($ in millions)	Less than 12 months						12 months or more							Total
	Number		Fair		Unrealized		Number		Fair		Unrealized			unrealized
	of issues		value		losses		of issues		value		losses			losses
June 30, 2013
Fixed income securities
U.S. government and agencies	22	$	562	$	(2	)	--	$	--	$	--		$	(2	)
Municipal	334		2,360		(60	)	40		200		(45	)		(105	)
Corporate	827		12,084		(418	)	57		717		(94	)		(512	)
Foreign government	93		434		(16	)	--		--		--			(16	)
ABS	43		684		(8	)	71		741		(69	)		(77	)
RMBS	238		398		(10	)	318		380		(47	)		(57	)
CMBS	22		226		(5	)	21		133		(27	)		(32	)
Total fixed income securities	1,579		16,748		(519	)	507		2,171		(282	)		(801	)
Equity securities	265		1,596		(94	)	9		5		--			(94	)
Total fixed income and equity securities	1,844	$	18,344	$	(613	)	516	$	2,176	$	(282	)	$	(895	)

Investment grade fixed income securities	1,344	$	15,012	$	(460	)	373	$	1,371	$	(148	)	$	(608	)
Below investment grade fixed income securities	235		1,736		(59	)	134		800		(134	)		(193	)
Total fixed income securities	1,579	$	16,748	$	(519	)	507	$	2,171	$	(282	)	$	(801	)

December 31, 2012