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 September 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

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 16, 2013, the registrant had 454,848,452 common shares, $.01 par value, outstanding.

THE ALLSTATE CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

September 30, 2013

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, 2013 and 2012 (unaudited)	1

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

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

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

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

	Notes to Condensed Consolidated Financial Statements (unaudited)	6

	Report of Independent Registered Public Accounting Firm	50

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

	Highlights	51
	Consolidated Net Income	52
	Impact of Low Interest Rate Environment	53
	Property-Liability Highlights	54
	Allstate Protection Segment	57
	Discontinued Lines and Coverages Segment	69
	Property-Liability Investment Results	70
	Allstate Financial Highlights	71
	Allstate Financial Segment	71
	Investments Highlights	79
	Investments	79
	Capital Resources and Liquidity Highlights	86
	Capital Resources and Liquidity	87

Item 4.	Controls and Procedures	91

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	92

Item 1A.	Risk Factors	92

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	93

Item 6.	Exhibits	93

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 September 30						Nine months ended September 30
		2013			2012			2013			2012

		(unaudited)						(unaudited)
Revenues
Property-liability insurance premiums	$	6,972		$	6,697		$	20,604		$	19,993
Life and annuity premiums and contract charges		584			563			1,742			1,675
Net investment income		950			940			2,917			2,977
Realized capital gains and losses:
Total other-than-temporary impairment losses		(96	)		(39	)		(178	)		(195	)
Portion of loss recognized in other comprehensive income		8			(7	)		(7	)		16
Net other-than-temporary impairment losses recognized in earnings		(88	)		(46	)		(185	)		(179	)
Sales and other realized capital gains and losses		47			(26	)		637			302
Total realized capital gains and losses		(41	)		(72	)		452			123
		8,465			8,128			25,715			24,768
Costs and expenses
Property-liability insurance claims and claims expense		4,427			4,293			13,628			13,442
Life and annuity contract benefits		498			453			1,427			1,354
Interest credited to contractholder funds		317			215			973			959
Amortization of deferred policy acquisition costs		1,026			1,016			2,933			2,937
Operating costs and expenses		937			1,010			3,129			3,023
Restructuring and related charges		13			9			59			25
Loss on extinguishment of debt		9			--			489			--
Interest expense		83			93			280			281
		7,310			7,089			22,918			22,021

(Loss) gain on disposition of operations		(646	)		9			(644	)		15

Income from operations before income tax expense		509			1,048			2,153			2,762

Income tax expense		193			325			694			850

Net income		316			723			1,459			1,912

Preferred stock dividends		6			--			6			--

Net income available to common shareholders	$	310		$	723		$	1,453		$	1,912

Earnings per common share:

Net income available to common shareholders per common share - Basic	$	0.67		$	1.49		$	3.10		$	3.89

Weighted average common shares - Basic		461.1			485.9			468.2			491.5

Net income available to common shareholders per common share - Diluted	$	0.66		$	1.48		$	3.07		$	3.86

Weighted average common shares - Diluted		467.1			489.9			473.8			494.7

Cash dividends declared per common share	$	0.25		$	0.22		$	0.75		$	0.66

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,
		2013		2012		2013			2012
		(unaudited)				(unaudited)

Net income	$	316	$	723	$	1,459		$	1,912

Other comprehensive income (loss), after-tax

Changes in:

Unrealized net capital gains and losses		63		810		(1,120	)		1,480

Unrealized foreign currency translation adjustments		13		12		(20	)		14

Unrecognized pension and other postretirement benefit cost		684		20		775			64

Other comprehensive income (loss), after-tax		760		842		(365	)		1,558

Comprehensive income	$	1,076	$	1,565	$	1,094		$	3,470

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, 2013			December 31, 2012
Assets		(unaudited)
Investments
Fixed income securities, at fair value (amortized cost $58,129 and $71,915)	$	60,295		$	77,017
Equity securities, at fair value (cost $4,370 and $3,577)		4,812			4,037
Mortgage loans		4,817			6,570
Limited partnership interests		5,091			4,922
Short-term, at fair value (amortized cost $2,694 and $2,336)		2,694			2,336
Other		2,774			2,396
Total investments		80,483			97,278
Cash		1,069			806
Premium installment receivables, net		5,341			5,051
Deferred policy acquisition costs		3,286			3,621
Reinsurance recoverables, net		6,938			8,767
Accrued investment income		617			781
Property and equipment, net		993			989
Goodwill		1,243			1,240
Other assets		1,810			1,804
Separate Accounts		4,928			6,610
Assets held for sale		15,577			--
Total assets	$	122,285		$	126,947
Liabilities
Reserve for property-liability insurance claims and claims expense	$	20,983		$	21,288
Reserve for life-contingent contract benefits		12,590			14,895
Contractholder funds		24,476			39,319
Unearned premiums		11,016			10,375
Claim payments outstanding		702			797
Deferred income taxes		440			597
Other liabilities and accrued expenses		5,245			6,429
Long-term debt		6,217			6,057
Separate Accounts		4,928			6,610
Liabilities held for sale		14,908			--
Total liabilities		101,505			106,367
Commitments and Contingent Liabilities (Note 12)
Equity
Preferred stock and additional capital paid-in, $1 par value, 25 million shares authorized, 26,900 shares issued and outstanding as of September 30, 2013 and none issued and outstanding as of December 31, 2012, $672.5 aggregate liquidation preference		650			--
Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 456 million and 479 million shares outstanding		9			9
Additional capital paid-in		3,127			3,162
Retained income		34,885			33,783
Deferred ESOP expense		(39	)		(41	)
Treasury stock, at cost (444 million and 421 million shares)		(18,662	)		(17,508	)
Accumulated other comprehensive income:
Unrealized net capital gains and losses:
Unrealized net capital gains and losses on fixed income securities with OTTI		33			(11	)
Other unrealized net capital gains and losses		1,804			3,614
Unrealized adjustment to DAC, DSI and insurance reserves		(123	)		(769	)
Total unrealized net capital gains and losses		1,714			2,834
Unrealized foreign currency translation adjustments		50			70
Unrecognized pension and other postretirement benefit cost		(954	)		(1,729	)
Total accumulated other comprehensive income		810			1,175
Total shareholders’ equity		20,780			20,580
Total liabilities and shareholders’ equity	$	122,285		$	126,947

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,
		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		650			--
Balance, end of period		650			--

Common stock		9			9

Additional capital paid-in
Balance, beginning of period		3,162			3,189
Equity incentive plans activity		(35	)		(35	)
Balance, end of period		3,127			3,154

Retained income
Balance, beginning of period		33,783			31,909
Net income		1,459			1,912
Dividends on common stock		(351	)		(325	)
Dividends on preferred stock		(6	)		--
Balance, end of period		34,885			33,496

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		(1,395	)		(728	)
Shares reissued under equity incentive plans, net		241			155
Balance, end of period		(18,662	)		(17,368	)

Accumulated other comprehensive income
Balance, beginning of period		1,175			29
Change in unrealized net capital gains and losses		(1,120	)		1,480
Change in unrealized foreign currency translation adjustments		(20	)		14
Change in unrecognized pension and other postretirement benefit cost		775			64
Balance, end of period		810			1,587

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

Total shareholders’ equity	$	20,780		$	20,837

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,
		2013			2012
Cash flows from operating activities		(unaudited)
Net income	$	1,459		$	1,912
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other non-cash items		246			293
Realized capital gains and losses		(452	)		(123	)
Loss on extinguishment of debt		489			--
Loss (gain) on disposition of operations		644			(15	)
Interest credited to contractholder funds		973			959
Changes in:
Policy benefits and other insurance reserves		(787	)		(769	)
Unearned premiums		670			421
Deferred policy acquisition costs		(208	)		13
Premium installment receivables, net		(300	)		(178	)
Reinsurance recoverables, net		294			(139	)
Income taxes		455			669
Other operating assets and liabilities		(412	)		(425	)
Net cash provided by operating activities		3,071			2,618
Cash flows from investing activities
Proceeds from sales
Fixed income securities		15,354			13,952
Equity securities		2,231			1,345
Limited partnership interests		676			1,067
Mortgage loans		20			11
Other investments		93			104
Investment collections
Fixed income securities		4,879			3,892
Mortgage loans		783			682
Other investments		213			70
Investment purchases
Fixed income securities		(16,645	)		(16,809	)
Equity securities		(2,565	)		(385	)
Limited partnership interests		(911	)		(1,232	)
Mortgage loans		(423	)		(472	)
Other investments		(880	)		(275	)
Change in short-term investments, net		(544	)		(1,284	)
Change in other investments, net		92			(6	)
Purchases of property and equipment, net		(116	)		(176	)
(Acquisition) disposition of operations		(24	)		13
Net cash provided by investing activities		2,233			497
Cash flows from financing activities
Proceeds from issuance of long-term debt		2,267			493
Repayment of long-term debt		(2,605	)		(351	)
Proceeds from issuance of preferred stock		651			--
Contractholder fund deposits		1,608			1,571
Contractholder fund withdrawals		(5,458	)		(3,938	)
Dividends paid on common stock		(237	)		(322	)
Treasury stock purchases		(1,385	)		(729	)
Shares reissued under equity incentive plans, net		108			60
Excess tax benefits on share-based payment arrangements		33			7
Other		(10	)		(40	)
Net cash used in financing activities		(5,028	)		(3,249	)
Transfer of cash to held for sale		(13	)		--
Net increase (decrease) in cash		263			(134	)
Cash at beginning of period		806			776
Cash at end of period	$	1,069		$	642

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, 2013 and for the three-month and nine-month periods ended September 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 September 30,				Nine months ended September 30,
		2013		2012		2013		2012
Numerator:
Net income	$	316	$	723	$	1,459	$	1,912
Less: Preferred stock dividends		6		--		6		--
Net income available to common shareholders	$	310	$	723	$	1,453	$	1,912

Denominator:
Weighted average common shares outstanding		461.1		485.9		468.2		491.5
Effect of dilutive potential common shares:
Stock options		4.2		2.7		3.9		2.2
Restricted stock units and performance stock awards (non-participating)		1.8		1.3		1.7		1.0
Weighted average common and dilutive potential common shares outstanding		467.1		489.9		473.8		494.7

Earnings per common share - Basic	$	0.67	$	1.49	$	3.10	$	3.89
Earnings per common share - Diluted	$	0.66	$	1.48	$	3.07	$	3.86

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 8.4 million and 17.8 million Allstate common shares, with exercise prices ranging from $41.16 to $62.42 and $31.41 to $62.84, were outstanding for the three-month periods ended September 30, 2013 and 2012, respectively, but were not included in the computation of diluted earnings per common share in those periods. Options to purchase 13.0 million and 22.1 million Allstate common shares, with exercise prices ranging from $39.05 to $62.42 and $26.56 to $62.84, were outstanding for the nine-month periods ended September 30, 2013 and 2012, respectively, but were not included in the computation of diluted earnings per common share in those periods.

3. Held for Sale Transaction

On July 17, 2013, the Company entered into a definitive agreement with Resolution Life Holdings, Inc. to sell Lincoln Benefit Life Company (“LBL”), LBL’s life insurance business generated through independent master brokerage agencies, and all of LBL’s deferred fixed annuity and long-term care insurance business for $600 million subject to certain adjustments as of the closing date. LBL is reported in the Allstate Financial segment. The transaction is subject to regulatory approvals and other customary closing conditions. The Company expects the closing to occur during the first quarter of 2014. The estimated loss on disposition of $475 million, after-tax, was recorded in third quarter 2013, excluding any impact of unrealized net capital gains and losses. This transaction met the criteria for held for sale accounting. As a result, the related assets and liabilities are included as single line items in the asset and liability sections of the Condensed Consolidated Statement of Financial Position as of September 30, 2013. The following table summarizes the assets and liabilities held for sale as of September 30, 2013.

($ in millions)
Assets
Investments
Fixed income securities	$	10,514
Mortgage loans		1,400
Short-term investments		31
Other investments		294
Total investments		12,239
Cash		13
Deferred policy acquisition costs		741
Reinsurance recoverables, net		1,403
Accrued investment income		117
Other assets		52
Separate Accounts		1,655
Assets held for sale		16,220
Less: Loss accrual		(643)
Total assets held for sale	$	15,577
Liabilities
Reserve for life-contingent contract benefits	$	1,629
Contractholder funds		11,283
Unearned premiums		12
Deferred income taxes		114
Other liabilities and accrued expenses		215
Separate Accounts		1,655
Total liabilities held for sale	$	14,908

Included in shareholders’ equity is $111 million of accumulated other comprehensive income related to assets held for sale.

4. 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 $271 million and $170 million for the nine months ended September 30, 2013 and 2012, respectively. Non-cash financing activities include $93 million and $39 million related to the issuance of Allstate common shares for vested restricted stock units for the nine months ended September 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)		Nine months ended September 30,
		2013		2012
Net change in proceeds managed
Net change in short-term investments	$	156	$	(297	)
Operating cash flow provided (used)		156		(297	)
Net change in cash		(3)		(6	)
Net change in proceeds managed	$	153	$	(303	)

Net change in liabilities
Liabilities for collateral, beginning of year	$	(808)	$	(462	)
Liabilities for collateral, end of period		(655)		(765	)
Operating cash flow (used) provided	$	(153)	$	303

5. 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
September 30, 2013
U.S. government and agencies	$	2,725	$	158	$	(2)	$	2,881
Municipal		9,246		451		(86)		9,611
Corporate		38,285		1,777		(365)		39,697
Foreign government		1,831		119		(11)		1,939
Asset-backed securities (“ABS”)		3,389		75		(43)		3,421
Residential mortgage-backed securities (“RMBS”)		1,787		100		(43)		1,844
Commercial mortgage-backed securities (“CMBS”)		844		48		(17)		875
Redeemable preferred stock		22		5		--		27
Total fixed income securities	$	58,129	$	2,733	$	(567)	$	60,295

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 September 30, 2013:

($ in millions)		Amortized cost		Fair value
Due in one year or less	$	2,564	$	2,604
Due after one year through five years		22,645		23,399
Due after five years through ten years		17,441		18,079
Due after ten years		9,459		10,073
		52,109		54,155
ABS, RMBS and CMBS		6,020		6,140
Total	$	58,129	$	60,295

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 September 30,				Nine months ended September 30,
		2013		2012		2013		2012
Fixed income securities	$	721	$	817	$	2,223	$	2,441
Equity securities		30		29		94		74
Mortgage loans		99		92		290		277
Limited partnership interests		106		22		339		238
Short-term investments		1		2		4		4
Other		44		33		120		97
Investment income, before expense		1,001		995		3,070		3,131
Investment expense		(51)		(55)		(153)		(154)
Net investment income	$	950	$	940	$	2,917	$	2,977

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,
		2013		2012		2013		2012
Fixed income securities	$	24	$	(50)	$	175	$	(73)
Equity securities		(51)		(15)		261		157
Mortgage loans		(6)		(3)		19		5
Limited partnership interests		2		--		(1)		13
Derivatives		(12)		(2)		(2)		26
Other		2		(2)		--		(5)
Realized capital gains and losses	$	(41)	$	(72)	$	452	$	123

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

($ in millions)		Three months ended September 30,				Nine months ended September 30,
		2013		2012		2013		2012
Impairment write-downs	$	(18)	$	(43)	$	(61)	$	(131)
Change in intent write-downs		(70)		(3)		(124)		(48)
Net other-than-temporary impairment losses recognized in earnings		(88)		(46)		(185)		(179)
Sales		59		(24)		639		275
Valuation of derivative instruments		--		--		(1)		1
Settlements of derivative instruments		(12)		(2)		(1)		26
Realized capital gains and losses	$	(41)	$	(72)	$	452	$	123

Gross gains of $74 million and $109 million and gross losses of $39 million and $154 million were realized on sales of fixed income securities during the three months ended September 30, 2013 and 2012, respectively. Gross gains of $322 million and $296 million and gross losses of $83 million and $291 million were realized on sales of fixed income securities during the nine months ended September 30, 2013 and 2012, respectively.

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

($ in millions)		Three months ended September 30, 2013						Nine months ended September 30, 2013
		Gross		Included in OCI		Net		Gross		Included in OCI		Net
Fixed income securities:
Municipal	$	(6)	$	--	$	(6)	$	(23)	$	(5)	$	(28)
ABS		--		--		--		--		(1)		(1)
RMBS		(4)		4		--		(5)		2		(3)
CMBS		(9)		4		(5)		(29)		(3)		(32)
Total fixed income securities		(19)		8		(11)		(57)		(7)		(64)
Equity securities		(67)		--		(67)		(118)		--		(118)
Mortgage loans		(6)		--		(6)		11		--		11
Limited partnership interests		(2)		--		(2)		(10)		--		(10)
Other		(2)		--		(2)		(4)		--		(4)
Other-than-temporary impairment losses	$	(96)	$	8	$	(88)	$	(178)	$	(7)	$	(185)

($ in millions)		Three months ended September 30, 2012						Nine months ended September 30, 2012
		Gross		Included in OCI		Net		Gross		Included in OCI		Net
Fixed income securities:
Municipal	$	(2)	$	(3)	$	(5)	$	(28)	$	14	$	(14)
Corporate		(1)		(1)		(2)		(19)		(2)		(21)
RMBS		(4)		(6)		(10)		(59)		(2)		(61)
CMBS		(4)		3		(1)		(19)		6		(13)
Total fixed income securities		(11)		(7)		(18)		(125)		16		(109)
Equity securities		(22)		--		(22)		(58)		--		(58)
Mortgage loans		(1)		--		(1)		3		--		3
Limited partnership interests		(2)		--		(2)		(5)		--		(5)
Other		(3)		--		(3)		(10)		--		(10)
Other-than-temporary impairment losses	$	(39)	$	(7)	$	(46)	$	(195)	$	16	$	(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 amount excludes $243 million and $219 million as of September 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)		September 30, 2013		December 31, 2012
Municipal	$	(9)	$	(20)
Corporate		(7)		(1)
ABS		(10)		(14)
RMBS		(150)		(182)
CMBS		(16)		(19)
Total	$	(192)	$	(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 September 30,				Nine months ended September 30,
		2013		2012		2013		2012
Beginning balance	$	(564)	$	(781)	$	(617)	$	(944)
Additional credit loss for securities previously other-than-temporarily impaired		(6)		(15)		(30)		(49)
Additional credit loss for securities not previously other-than-temporarily impaired		(2)		(3)		(19)		(24)
Reduction in credit loss for securities disposed or collected		43		128		136		339
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		1
Ending balance (1)	$	(529)	$	(670)	$	(529)	$	(670)

(1)	The September 30, 2013 ending balance includes $59 million of cumulative credit losses recognized in earnings for fixed income securities that are classified as held for sale.

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
September 30, 2013		value		Gains		Losses	gains (losses)
Fixed income securities	$	60,295	$	2,733	$	(567)	$	2,166
Equity securities		4,812		465		(23)		442
Short-term investments		2,694		--		--		--
Derivative instruments (1)		(14)		2		(21)		(19)
EMA limited partnerships (2)								(3)
Investments classified as held for sale								244
Unrealized net capital gains and losses, pre-tax								2,830
Amounts recognized for:
Insurance reserves (3)								--
DAC and DSI (4)								(189)
Amounts recognized								(189)
Deferred income taxes								(927)
Unrealized net capital gains and losses, after-tax							$	1,714

(1)	Included in the fair value of derivative instruments are $2 million classified as assets and $16 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 nine months ended September 30, 2013 is as follows:

($ in millions)
Fixed income securities	$	(2,936	)
Equity securities		(18	)
Derivative instruments		3
EMA limited partnerships		(10	)
Investments classified as held for sale		244
Total		(2,717	)
Amounts recognized for:
Insurance reserves		771
DAC and DSI		223
Amounts recognized		994
Deferred income taxes		603
Decrease in unrealized net capital gains and losses	$	(1,120	)

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
September 30, 2013
Fixed income securities
U.S. government and agencies	8	$	93	$	(2)	--	$	--	$	--	$	(2)
Municipal	325		2,308		(46)	33		191		(40)		(86)
Corporate	767		9,035		(293)	44		467		(72)		(365)
Foreign government	90		335		(11)	1		1		--		(11)
ABS	46		699		(6)	42		407		(37)		(43)
RMBS	285		297		(6)	280		261		(37)		(43)
CMBS	11		67		--	10		73		(17)		(17)
Total fixed income securities	1,532		12,834		(364)	410		1,400		(203)		(567)
Equity securities	210		1,047		(23)	10		7		--		(23)
Total fixed income and equity securities	1,742	$	13,881	$	(387)	420	$