Edgar Filing: ALLSTATE CORP

10-Q

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 September 30, 2015

[ ] 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	No ___

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	No ___

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 October 19, 2015, the registrant had 387,306,176 common shares, $.01 par value, outstanding.

THE ALLSTATE CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

September 30, 2015



PART I	FINANCIAL INFORMATION	PAGE

Item 1.	Financial Statements

	Condensed Consolidated Statements of Operations for the Three-Month and Nine-Month Periods Ended September 30, 2015 and 2014 (unaudited)	1
	Condensed Consolidated Statements of Comprehensive Income for the Three-Month and Nine-Month Periods Ended September 30, 2015 and 2014 (unaudited)	2
	Condensed Consolidated Statements of Financial Position as of September 30, 2015 (unaudited) and December 31, 2014	3
	Condensed Consolidated Statements of Shareholders’ Equity for the Nine-Month Periods Ended September 30, 2015 and 2014 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2015 and 2014 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
	Report of Independent Registered Public Accounting Firm	44

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

	Highlights	45
	Consolidated Net Income	46
	Property-Liability Highlights	46
	Allstate Protection Segment	49
	Discontinued Lines and Coverages Segment	61
	Property-Liability Investment Results	62
	Allstate Financial Highlights	63
	Allstate Financial Segment	64
	Investments Highlights	71
	Investments	71
	Capital Resources and Liquidity Highlights	78
	Capital Resources and Liquidity	78
	Forward-Looking Statements	81

Item 4.	Controls and Procedures	81

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	82
Item 1A.	Risk Factors	82
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	82
Item 6.	Exhibits	83

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE ALLSTATE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



($ in millions, except per share data)	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
	(unaudited)						(unaudited)
Revenues
Property-liability insurance premiums	$	7,650		$	7,307		$	22,625		$	21,575
Life and annuity premiums and contract charges	538			512			1,611			1,637
Net investment income	807			823			2,446			2,680
Realized capital gains and losses:
Total other-than-temporary impairment (“OTTI”) losses	(186		)	(53		)	(286		)	(177		)
OTTI losses reclassified to (from) other comprehensive income	12			—			20			(2		)
Net OTTI losses recognized in earnings	(174		)	(53		)	(266		)	(179		)
Sales and other realized capital gains and losses	207			347			546			767
Total realized capital gains and losses	33			294			280			588
	9,028			8,936			26,962			26,480
Costs and expenses
Property-liability insurance claims and claims expense	5,255			4,909			15,835			14,810
Life and annuity contract benefits	460			433			1,347			1,334
Interest credited to contractholder funds	194			198			578			717
Amortization of deferred policy acquisition costs	1,092			1,030			3,248			3,100
Operating costs and expenses	992			1,068			3,143			3,185
Restructuring and related charges	9			3			32			13
Loss on extinguishment of debt	—			—			—			1
Interest expense	73			78			219			249
	8,075			7,719			24,402			23,409

Gain (loss) on disposition of operations	2			(27		)	2			(77		)

Income from operations before income tax expense	955			1,190			2,562			2,994

Income tax expense	305			409			880			968

Net income	650			781			1,682			2,026

Preferred stock dividends	29			31			87			75

Net income available to common shareholders	$	621		$	750		$	1,595		$	1,951

Earnings per common share:
Net income available to common shareholders per common share - Basic	$	1.56		$	1.77		$	3.92		$	4.49
Weighted average common shares - Basic	397.0			424.5			406.5			435.0
Net income available to common shareholders per common share - Diluted	$	1.54		$	1.74		$	3.87		$	4.42
Weighted average common shares - Diluted	402.1			431.2			412.4			441.6
Cash dividends declared per common share	$	0.30		$	0.28		$	0.90		$	0.84

See notes to condensed consolidated financial statements.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



($ in millions)	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
	(unaudited)						(unaudited)
Net income	$	650		$	781		$	1,682		$	2,026

Other comprehensive (loss) income, after-tax
Changes in:
Unrealized net capital gains and losses	(540		)	(323		)	(1,047		)	181
Unrealized foreign currency translation adjustments	(14		)	(17		)	(50		)	(20		)
Unrecognized pension and other postretirement benefit cost	25			12			74			31
Other comprehensive (loss) income, after-tax	(529		)	(328		)	(1,023		)	192

Comprehensive income	$	121		$	453		$	659		$	2,218

See notes to condensed consolidated financial statements.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION



($ in millions, except par value data)	September 30, 2015			December 31, 2014
Assets	(unaudited)
Investments
Fixed income securities, at fair value (amortized cost $56,918 and $59,672)	$	58,257		$	62,440
Equity securities, at fair value (cost $4,123 and $3,692)	4,236			4,104
Mortgage loans	4,402			4,188
Limited partnership interests	4,823			4,527
Short-term, at fair value (amortized cost $3,036 and $2,540)	3,036			2,540
Other	3,588			3,314
Total investments	78,342			81,113
Cash	905			657
Premium installment receivables, net	5,711			5,465
Deferred policy acquisition costs	3,811			3,525
Reinsurance recoverables, net	8,468			8,490
Accrued investment income	575			591
Property and equipment, net	1,050			1,031
Goodwill	1,219			1,219
Other assets	2,091			2,046
Separate Accounts	3,677			4,396
Total assets	$	105,849		$	108,533
Liabilities
Reserve for property-liability insurance claims and claims expense	$	23,757		$	22,923
Reserve for life-contingent contract benefits	12,229			12,380
Contractholder funds	21,559			22,529
Unearned premiums	12,343			11,655
Claim payments outstanding	804			784
Deferred income taxes	243			715
Other liabilities and accrued expenses	5,558			5,653
Long-term debt	5,175			5,194
Separate Accounts	3,677			4,396
Total liabilities	85,345			86,229
Commitments and Contingent Liabilities (Note 10)
Shareholders’ equity
Preferred stock and additional capital paid-in, $1 par value, 25 million shares authorized, 72.2 thousand shares issued and outstanding, and $1,805 aggregate liquidation preference	1,746			1,746
Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 390 million and 418 million shares outstanding	9			9
Additional capital paid-in	3,224			3,199
Retained income	39,068			37,842
Deferred ESOP expense	(23		)	(23		)
Treasury stock, at cost (510 million and 482 million shares)	(23,058		)	(21,030		)
Accumulated other comprehensive income:
Unrealized net capital gains and losses:
Unrealized net capital gains and losses on fixed income securities with OTTI	57			72
Other unrealized net capital gains and losses	886			1,988
Unrealized adjustment to DAC, DSI and insurance reserves	(64		)	(134		)
Total unrealized net capital gains and losses	879			1,926
Unrealized foreign currency translation adjustments	(52		)	(2		)
Unrecognized pension and other postretirement benefit cost	(1,289		)	(1,363		)
Total accumulated other comprehensive (loss) income	(462		)	561
Total shareholders’ equity	20,504			22,304
Total liabilities and shareholders’ equity	$	105,849		$	108,533

See notes to condensed consolidated financial statements.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY



($ in millions)	Nine months ended September 30,
	2015			2014
	(unaudited)
Preferred stock par value	$	—		$	—

Preferred stock additional capital paid-in
Balance, beginning of period	1,746			780
Preferred stock issuance	—			966
Balance, end of period	1,746			1,746

Common stock	9			9

Additional capital paid-in
Balance, beginning of period	3,199			3,143
Forward contract on accelerated share repurchase agreement	—			(113		)
Equity incentive plans activity	25			29
Balance, end of period	3,224			3,059

Retained income
Balance, beginning of period	37,842			35,580
Net income	1,682			2,026
Dividends on common stock	(369		)	(367		)
Dividends on preferred stock	(87		)	(75		)
Balance, end of period	39,068			37,164

Deferred ESOP expense
Balance, beginning of period	(23		)	(31		)
Payments	—			—
Balance, end of period	(23		)	(31		)

Treasury stock
Balance, beginning of period	(21,030		)	(19,047		)
Shares acquired	(2,230		)	(2,054		)
Shares reissued under equity incentive plans, net	202			245
Balance, end of period	(23,058		)	(20,856		)

Accumulated other comprehensive income
Balance, beginning of period	561			1,046
Change in unrealized net capital gains and losses	(1,047		)	181
Change in unrealized foreign currency translation adjustments	(50		)	(20		)
Change in unrecognized pension and other postretirement benefit cost	74			31
Balance, end of period	(462		)	1,238
Total shareholders’ equity	$	20,504		$	22,329

See notes to condensed consolidated financial statements.

THE ALLSTATE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



($ in millions)	Nine months ended September 30,
	2015			2014
Cash flows from operating activities	(unaudited)
Net income	$	1,682		$	2,026
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other non-cash items	275			277
Realized capital gains and losses	(280		)	(588		)
Loss on extinguishment of debt	—			1
(Gain) loss on disposition of operations	(2		)	77
Interest credited to contractholder funds	578			717
Changes in:
Policy benefits and other insurance reserves	500			50
Unearned premiums	762			822
Deferred policy acquisition costs	(219		)	(189		)
Premium installment receivables, net	(290		)	(386		)
Reinsurance recoverables, net	(133		)	(110		)
Income taxes	(60		)	175
Other operating assets and liabilities	(127		)	(307		)
Net cash provided by operating activities	2,686			2,565
Cash flows from investing activities
Proceeds from sales
Fixed income securities	22,796			27,648
Equity securities	2,688			5,263
Limited partnership interests	795			1,084
Mortgage loans	6			10
Other investments	178			292
Investment collections
Fixed income securities	3,248			2,787
Mortgage loans	305			868
Other investments	254			158
Investment purchases
Fixed income securities	(22,928		)	(30,650		)
Equity securities	(3,238		)	(4,208		)
Limited partnership interests	(930		)	(892		)
Mortgage loans	(524		)	(218		)
Other investments	(743		)	(652		)
Change in short-term investments, net	(577		)	265
Change in other investments, net	(16		)	58
Purchases of property and equipment, net	(219		)	(207		)
Disposition of operations	—			378
Net cash provided by investing activities	1,095			1,984
Cash flows from financing activities
Repayments of long-term debt	(20		)	(1,006		)
Proceeds from issuance of preferred stock	—			965
Contractholder fund deposits	784			926
Contractholder fund withdrawals	(1,793		)	(2,831		)
Dividends paid on common stock	(365		)	(360		)
Dividends paid on preferred stock	(87		)	(56		)
Treasury stock purchases	(2,216		)	(2,189		)
Shares reissued under equity incentive plans, net	121			204
Excess tax benefits on share-based payment arrangements	44			22
Other	(1		)	(14		)
Net cash used in financing activities	(3,533		)	(4,339		)
Net increase in cash	248			210
Cash at beginning of period	657			675
Cash at end of period	$	905		$	885

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 September 30, 2015 and for the three-month and nine-month periods ended September 30, 2015 and 2014 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, 2014. 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 standard

Accounting for Investments in Qualified Affordable Housing Projects

In January 2014, the Financial Accounting Standards Board (“FASB”) issued guidance which allows entities that invest in certain qualified affordable housing projects through limited liability entities the option to account for these investments using the proportional amortization method if certain conditions are met. Under the proportional amortization method, the entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense or benefit. Adoption of the new guidance in the first quarter of 2015 resulted in a one-time $45 million increase in income tax expense.

Pending accounting standards

Revenue from Contracts with Customers

In May 2014, the FASB issued guidance which revises the criteria for revenue recognition. Insurance contracts are excluded from the scope of the new guidance. Under the guidance, the transaction price is attributed to underlying performance obligations in the contract and revenue is recognized as the entity satisfies the performance obligations and transfers control of a good or service to the customer. Incremental costs of obtaining a contract may be capitalized to the extent the entity expects to recover those costs. The guidance is effective for reporting periods beginning after December 15, 2017 and is to be applied retrospectively. The Company is in the process of evaluating the impact of adoption, which is not expected to be material to the Company’s results of operations or financial position.

Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period

In June 2014, the FASB issued guidance which clarifies that a performance target that affects vesting and could be achieved after the requisite service period should be treated as a performance condition and should not be reflected in estimating the grant-date fair value of the award. Compensation costs should reflect the amount attributable to the periods for which the requisite service has been rendered. Total compensation expense recognized during and after the requisite service period (which may differ from the vesting period) should reflect the number of awards that are expected to vest and should be adjusted to reflect the number of awards that ultimately vest. The guidance is effective for reporting periods beginning after December 15, 2015 and may be applied either prospectively or retrospectively. The Company’s existing accounting policy for performance targets that affect the vesting of share-based payment awards is consistent with the proposed guidance and as such the impact of adoption is not expected to impact the Company’s results of operations or financial position.

Amendments to the Consolidation Analysis

In February 2015, the FASB issued guidance affecting the consolidation evaluation for limited partnerships and similar entities, fees paid to a decision maker or service provider, and variable interests in a variable interest entity held by related parties of the reporting enterprise. The guidance is effective for annual and interim reporting periods beginning after December 15, 2015. The Company is in the process of assessing the impact of adoption which is not expected to be material to the Company’s results of operations or financial position.

Presentation of Debt Issuance Costs

In April 2015, the FASB issued guidance that amends the accounting for debt issuance costs. The amended guidance requires that debt issuance costs related to a recognized debt liability be presented as a direct reduction in the carrying amount of the debt liability. The amortization of debt issuance costs shall be classified as interest expense. In August 2015, the FASB expanded the guidance on debt issuance costs to address debt issuance costs associated with line-of-credit agreements. The guidance allows reporting entities to defer and present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The guidance is effective for reporting periods beginning after December 15, 2015 and is to be applied retrospectively. The impact of adoption of the new guidance is not expected to be material to the Company’s results of operations or financial position.

Disclosures about Short-Duration Contracts

In May 2015, the FASB issued guidance requiring expanded disclosures for insurance entities that issue short-duration contracts. The expanded disclosures are designed to provide additional insight into an insurance entity’s ability to underwrite and anticipate costs associated with insurance claims. The disclosures include information about incurred and paid claims development by accident year, on a net basis after reinsurance, for the number of years claims incurred typically remain outstanding, not to exceed ten years. Each period presented in the disclosure about claims development that precedes the current reporting period is considered required supplementary information. The expanded disclosures also include information about significant changes in methodologies and assumptions, a reconciliation of incurred and paid claims development to the carrying amount of the liability for unpaid claims and claim adjustment expenses, the total amount of incurred but not reported liabilities plus expected development, claims frequency information including the methodology used to determine claim frequency and any changes to that methodology, and claim duration. The guidance is effective for annual periods beginning after December 15, 2015, and interim periods beginning after December 15, 2016, and is to be applied retrospectively. The new guidance affects disclosures only and will have 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 September 30,				Nine months ended September 30,
	2015		2014		2015		2014
Numerator:
Net income	$	650	$	781	$	1,682	$	2,026
Less: Preferred stock dividends	29		31		87		75
Net income available to common shareholders	$	621	$	750	$	1,595	$	1,951

Denominator:
Weighted average common shares outstanding	397.0		424.5		406.5		435.0
Effect of dilutive potential common shares:
Stock options	3.6		4.8		4.2		4.7
Restricted stock units (non-participating) and performance stock awards	1.5		1.9		1.7		1.9
Weighted average common and dilutive potential common shares outstanding	402.1		431.2		412.4		441.6

Earnings per common share - Basic	$	1.56	$	1.77	$	3.92	$	4.49
Earnings per common share - Diluted	$	1.54	$	1.74	$	3.87	$	4.42

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 2.2 million and 3.3 million Allstate common shares, with exercise prices ranging from $52.22 to $71.29 and $49.96 to $62.42, were outstanding for the three-month periods ended September 30, 2015 and 2014, respectively, but were not included in the computation of diluted earnings per common share in those periods. Options to purchase 2.2 million and 4.5 million Allstate common shares, with exercise prices

ranging from $57.98 to $71.29 and $45.61 to $62.42, were outstanding for the nine-month periods ended September 30, 2015 and 2014, respectively, but were not included in the computation of diluted earnings per common share in those periods.

3. Supplemental Cash Flow Information

Non-cash investing activities include $84 million and $105 million related to modifications of certain mortgage loans, fixed income securities and other investments, as well as mergers completed with equity securities for the nine months ended September 30, 2015 and 2014, respectively, and a $90 million obligation to fund a limited partnership investment for the nine months ended September 30, 2015. Non-cash financing activities include $74 million and $46 million related to the issuance of Allstate common shares for vested restricted stock units and performance stock awards for the nine months ended September 30, 2015 and 2014, respectively.

Liabilities for collateral received in conjunction with the Company’s securities lending program and over-the-counter (“OTC”) and cleared 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)	Nine months ended September 30,
	2015			2014
Net change in proceeds managed
Net change in short-term investments	$	(2	)	$	(162	)
Operating cash flow used	(2		)	(162		)
Net change in cash	1			7
Net change in proceeds managed	$	(1	)	$	(155	)

Net change in liabilities
Liabilities for collateral, beginning of period	$	(782	)	$	(624	)
Liabilities for collateral, end of period	(783		)	(779		)
Operating cash flow provided	$	1		$	155

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 cost		Gross unrealized					Fair value
	Amortized cost		Gains		Losses			Fair value
September 30, 2015
U.S. government and agencies	$	3,642	$	118	$	—		$	3,760
Municipal	7,082		431		(19		)	7,494
Corporate	40,997		1,322		(690		)	41,629
Foreign government	1,026		60		(1		)	1,085
Asset-backed securities (“ABS”)	2,727		19		(35		)	2,711
Residential mortgage-backed securities (“RMBS”)	913		108		(10		)	1,011
Commercial mortgage-backed securities (“CMBS”)	510		35		(3		)	542
Redeemable preferred stock	21		4		—			25
Total fixed income securities	$	56,918	$	2,097	$	(758	)	$	58,257

December 31, 2014
U.S. government and agencies	$	4,192	$	139	$	(3	)	$	4,328
Municipal	7,877		645		(25		)	8,497
Corporate	40,386		1,998		(240		)	42,144
Foreign government	1,543		102		—			1,645
ABS	3,971		38		(31		)	3,978
RMBS	1,108		112		(13		)	1,207
CMBS	573		44		(2		)	615
Redeemable preferred stock	22		4		—			26
Total fixed income securities	$	59,672	$	3,082	$	(314	)	$	62,440

Scheduled maturities

The scheduled maturities for fixed income securities are as follows as of September 30, 2015:



($ in millions)	Amortized cost		Fair value
Due in one year or less	$	4,465	$	4,494
Due after one year through five years	25,511		26,082
Due after five years through ten years	16,859		16,944
Due after ten years	5,933		6,473
	52,768		53,993
ABS, RMBS and CMBS	4,150		4,264
Total	$	56,918	$	58,257

Actual maturities may differ from those scheduled as a result of calls and make-whole payments 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 September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Fixed income securities	$	546		$	581		$	1,681		$	1,870
Equity securities	23			28			77			91
Mortgage loans	53			54			165			206
Limited partnership interests	167			162			483			499
Short-term investments	4			1			8			5
Other	49			41			143			127
Investment income, before expense	842			867			2,557			2,798
Investment expense	(35		)	(44		)	(111		)	(118		)
Net investment income	$	807		$	823		$	2,446		$	2,680

Realized capital gains and losses

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



($ in millions)	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Fixed income securities	$	221		$	23		$	361		$	121
Equity securities	(150		)	213			(24		)	474
Mortgage loans	1			2			2			3
Limited partnership interests	(55		)	59			(52		)	10
Derivatives	24			(8		)	4			(27		)
Other	(8		)	5			(11		)	7
Realized capital gains and losses	$	33		$	294		$	280		$	588

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



($ in millions)	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Impairment write-downs	$	(47	)	$	10		$	(77	)	$	(12	)
Change in intent write-downs	(127		)	(63		)	(189		)	(167		)
Net other-than-temporary impairment losses recognized in earnings	(174		)	(53		)	(266		)	(179		)
Sales and other	183			355			545			792
Valuation and settlements of derivative instruments	24			(8		)	1			(25		)
Realized capital gains and losses	$	33		$	294		$	280		$	588

Gross gains of $357 million and $353 million and gross losses of $120 million and $48 million were realized on sales of fixed income and equity securities during the three months ended September 30, 2015 and 2014, respectively. Gross gains of $828 million and $866 million and gross losses of $241 million and $111 million were realized on sales of fixed income and equity securities during the nine months ended September 30, 2015 and 2014, respectively.

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



($ in millions)	Three months ended September 30, 2015									Three months ended September 30, 2014
	Gross			Included in OCI			Net			Gross			Included in OCI			Net
Fixed income securities:
Municipal	$	(1	)	$	—		$	(1	)	$	(3	)	$	—		$	(3	)
Corporate	(9		)	—			(9		)	(6		)	1			(5		)
ABS	(16		)	12			(4		)	—			—			—
RMBS	—			—			—			3			(1		)	2
CMBS	(1		)	—			(1		)	—			—			—
Total fixed income securities	(27		)	12			(15		)	(6		)	—			(6		)
Equity securities	(151		)	—			(151		)	(63		)	—			(63		)
Mortgage loans	—			—			—			2			—			2
Limited partnership interests	(2		)	—			(2		)	14			—			14
Other	(6		)	—			(6		)	—			—			—
Other-than-temporary impairment losses	$	(186	)	$	12		$	(174	)	$	(53	)	$	—		$	(53	)

	Nine months ended September 30, 2015									Nine months ended September 30, 2014
	Gross			Included in OCI			Net			Gross			Included in OCI			Net
Fixed income securities:
Municipal	$	(5	)	$	4		$	(1	)	$	(9	)	$	—		$	(9	)
Corporate	(19		)	4			(15		)	(6		)	1			(5		)
ABS	(20		)	13			(7		)	(3		)	—			(3		)
RMBS	1			(1		)	—			9			(3		)	6
CMBS	(1		)	—			(1		)	—			—			—
Total fixed income securities	(44		)	20			(24		)	(9		)	(2		)	(11		)
Equity securities	(226		)	—			(226		)	(149		)	—			(149		)
Mortgage loans	—			—			—			6			—			6
Limited partnership interests	(7		)	—			(7		)	(25		)	—			(25		)
Other	(9		)	—			(9		)	—			—			—
Other-than-temporary impairment losses	$	(286	)	$	20		$	(266	)	$	(177	)	$	(2	)	$	(179	)

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 amounts exclude $221 million and $233 million as of September 30, 2015 and December 31, 2014, respectively, of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.



($ in millions)	September 30, 2015			December 31, 2014
Municipal	$	(8	)	$	(8	)
ABS	(15		)	(2		)
RMBS	(105		)	(108		)
CMBS	(6		)	(5		)
Total	$	(134	)	$	(123	)

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 September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Beginning balance	$	(372	)	$	(424	)	$	(380	)	$	(513	)
Additional credit loss for securities previously other-than-temporarily impaired	(7		)	(1		)	(10		)	(2		)
Additional credit loss for securities not previously other-than-temporarily impaired	(8		)	(5		)	(14		)	(8		)
Reduction in credit loss for securities disposed or collected	23			28			37			61
Reduction in credit loss for securities the Company has made the decision to sell or more likely than not will be required to sell	—			—			—			—
Change in credit loss due to accretion of increase in cash flows	—			1			3			2
Reduction in credit loss for securities sold in Lincoln Benefit Life Company (“LBL”) disposition	—			—			—			59
Ending balance	$	(364	)	$	(401	)	$	(364	)	$	(401	)

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 value		Gross unrealized					Unrealized net gains (losses)
September 30, 2015	Fair value		Gains		Losses			Unrealized net gains (losses)
Fixed income securities	$	58,257	$	2,097	$	(758	)	$	1,339
Equity securities	4,236		274		(161		)	113
Short-term investments	3,036		—		—			—
Derivative instruments ⁽¹⁾	11		11		(4		)	7
Equity method (“EMA”) limited partnerships ⁽²⁾								(5		)
Unrealized net capital gains and losses, pre-tax								1,454
Amounts recognized for:
Insurance reserves ⁽³⁾								—
DAC and DSI ⁽⁴⁾								(98		)
Amounts recognized								(98		)
Deferred income taxes								(477		)
Unrealized net capital gains and losses, after-tax								$	879

_______________


⁽¹⁾	Included in the fair value of derivative instruments are $4 million classified as assets and $(7) 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 unrealized 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.



($ in millions)	Fair value		Gross unrealized					Unrealized net gains (losses)
December 31, 2014	Fair value		Gains		Losses			Unrealized net gains (losses)
Fixed income securities	$	62,440	$	3,082	$	(314	)	$	2,768
Equity securities	4,104		467		(55		)	412
Short-term investments	2,540		—		—			—
Derivative instruments ⁽¹⁾	2		3		(5		)	(2		)
EMA limited partnerships								(5		)
Unrealized net capital gains and losses, pre-tax								3,173
Amounts recognized for:
Insurance reserves								(28		)
DAC and DSI								(179		)
Amounts recognized								(207		)
Deferred income taxes								(1,040		)
Unrealized net capital gains and losses, after-tax								$	1,926

_______________


⁽¹⁾	Included in the fair value of derivative instruments are $3 million classified as assets and $1 million classified as liabilities.

Change in unrealized net capital gains and losses

The change in unrealized net capital gains and losses for the nine months ended September 30, 2015 is as follows:



($ in millions)
Fixed income securities	$	(1,429	)
Equity securities	(299		)
Derivative instruments	9
Total	(1,719		)
Amounts recognized for:
Insurance reserves	28
DAC and DSI	81
Amounts recognized	109
Deferred income taxes	563
Decrease in unrealized net capital gains and losses, after-tax	$	(1,047	)

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 unrealized losses
	Number of issues	Fair value		Unrealized losses			Number of issues	Fair value		Unrealized losses			Total unrealized losses
September 30, 2015
Fixed income securities
U.S. government and agencies	5	$	364	$	—		—	$	—	$	—		$	—
Municipal	171	495		(5		)	9	48		(14		)	(19		)
Corporate	1,078	12,371		(563		)	82	800		(127		)	(690		)
Foreign government	14	73		(1		)	—	—		—			(1		)
ABS	53	738		(17		)	21	281		(18		)	(35		)
RMBS	76	13		—			176	132		(10		)	(10		)
CMBS	7	32		(1		)	2	4		(2		)	(3		)
Total fixed income securities	1,404	14,086		(587		)	290	1,265		(171		)	(758		)
Equity securities	354	1,619		(137		)	25	84		(24		)	(161		)
Total fixed income and equity securities	1,758	$	15,705	$	(724	)	315	$	1,349	$	(195	)	$	(919	)

Investment grade fixed income securities	906	$	9,147	$	(217	)	212	$	762	$	(80	)	$	(297	)
Below investment grade fixed income securities	498	4,939		(370		)	78	503		(91		)	(461		)
Total fixed income securities	1,404	$	14,086	$	(587	)	290	$	1,265	$	(171	)	$	(758	)

December 31, 2014
Fixed income securities
U.S. government and agencies	21	$	1,501	$	(3	)	—	$	—	$	—		$	(3	)
Municipal	252	1,008		(9		)	19	116		(16		)	(25		)
Corporate	576	7,545		(147		)	119	1,214		(93		)	(240		)
Foreign government	2	13		—			1	19		—			—
ABS	81	1,738		(11		)	26	315		(20		)	(31		)
RMBS	75	70		(1		)	188	156		(12		)	(13		)
CMBS	8	33		—			3	32		(2		)	(2		)
Total fixed income securities	1,015	11,908		(171		)	356	1,852		(143		)	(314		)
Equity securities	258	866		(53		)	1	11		(2		)	(55		)
Total fixed income and equity securities	1,273	$	12,774	$	(224	)	357	$	1,863