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, 2014

[ ] 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 15, 2014, the registrant had 419,433,284 common shares, $.01 par value, outstanding.

THE ALLSTATE CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

September 30, 2014

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, 2014 and 2013 (unaudited)	1

	Condensed Consolidated Statements of Comprehensive Income for the Three-Month and Nine-Month Periods Ended September 30, 2014 and 2013 (unaudited)	2

	Condensed Consolidated Statements of Financial Position as of September 30, 2014 (unaudited) and December 31, 2013	3

	Condensed Consolidated Statements of Shareholders’ Equity for the Nine-Month Periods Ended September 30, 2014 and 2013 (unaudited)	4

	Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2014 and 2013 (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
	Property-Liability Highlights	52
	Allstate Protection Segment	55
	Discontinued Lines and Coverages Segment	66
	Property-Liability Investment Results	68
	Allstate Financial Highlights	69
	Allstate Financial Segment	70
	Investments Highlights	78
	Investments	78
	Capital Resources and Liquidity Highlights	85
	Capital Resources and Liquidity	85

Item 4.	Controls and Procedures	89

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	90

Item 1A.	Risk Factors	90

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	91

Item 6.	Exhibits	91

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,
		2014			2013			2014			2013

		(unaudited)						(unaudited)
Revenues
Property-liability insurance premiums	$	7,307		$	6,972		$	21,575		$	20,604
Life and annuity premiums and contract charges		512			584			1,637			1,742
Net investment income		823			950			2,680			2,917
Realized capital gains and losses:
Total other-than-temporary impairment losses		(53	)		(96	)		(177	)		(178	)
Portion of loss recognized in other comprehensive income		--			8			(2	)		(7	)
Net other-than-temporary impairment losses recognized in earnings		(53	)		(88	)		(179	)		(185	)
Sales and other realized capital gains and losses		347			47			767			637
Total realized capital gains and losses		294			(41	)		588			452
		8,936			8,465			26,480			25,715
Costs and expenses
Property-liability insurance claims and claims expense		4,909			4,427			14,810			13,628
Life and annuity contract benefits		433			498			1,334			1,427
Interest credited to contractholder funds		198			317			717			973
Amortization of deferred policy acquisition costs		1,030			1,026			3,100			2,933
Operating costs and expenses		1,068			937			3,185			3,129
Restructuring and related charges		3			13			13			59
Loss on extinguishment of debt		--			9			1			489
Interest expense		78			83			249			280
		7,719			7,310			23,409			22,918

Loss on disposition of operations		(27	)		(646	)		(77	)		(644	)

Income from operations before income tax expense		1,190			509			2,994			2,153

Income tax expense		409			193			968			694

Net income		781			316			2,026			1,459

Preferred stock dividends		31			6			75			6

Net income available to common shareholders	$	750		$	310		$	1,951		$	1,453

Earnings per common share:

Net income available to common shareholders per common share - Basic	$	1.77		$	0.67		$	4.49		$	3.10

Weighted average common shares - Basic		424.5			461.1			435.0			468.2

Net income available to common shareholders per common share - Diluted	$	1.74		$	0.66		$	4.42		$	3.07

Weighted average common shares - Diluted		431.2			467.1			441.6			473.8

Cash dividends declared per common share	$	0.28		$	0.25		$	0.84		$	0.75

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,
		2014			2013		2014			2013
		(unaudited)					(unaudited)

Net income	$	781		$	316	$	2,026		$	1,459

Other comprehensive income (loss), after-tax

Changes in:

Unrealized net capital gains and losses		(323	)		63		181			(1,120	)

Unrealized foreign currency translation adjustments		(17	)		13		(20	)		(20	)

Unrecognized pension and other postretirement benefit cost		12			684		31			775

Other comprehensive income (loss), after-tax		(328	)		760		192			(365	)

Comprehensive income	$	453		$	1,076	$	2,218		$	1,094

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, 2014			December 31, 2013

Assets		(unaudited)
Investments
Fixed income securities, at fair value (amortized cost $59,616 and $59,008)	$	62,313		$	60,910
Equity securities, at fair value (cost $3,877 and $4,473)		4,335			5,097
Mortgage loans		4,143			4,721
Limited partnership interests		4,348			4,967
Short-term, at fair value (amortized cost $2,463 and $2,393)		2,463			2,393
Other		3,119			3,067
Total investments		80,721			81,155
Cash		885			675
Premium installment receivables, net		5,604			5,237
Deferred policy acquisition costs		3,516			3,372
Reinsurance recoverables, net		7,555			7,621
Accrued investment income		595			624
Property and equipment, net		1,012			1,024
Goodwill		1,219			1,243
Other assets		2,682			1,937
Separate Accounts		4,521			5,039
Assets held for sale		--			15,593
Total assets	$	108,310		$	123,520
Liabilities
Reserve for property-liability insurance claims and claims expense	$	22,350		$	21,857
Reserve for life-contingent contract benefits		12,482			12,386
Contractholder funds		22,848			24,304
Unearned premiums		11,728			10,932
Claim payments outstanding		814			631
Deferred income taxes		1,076			635
Other liabilities and accrued expenses		4,967			5,156
Long-term debt		5,195			6,201
Separate Accounts		4,521			5,039
Liabilities held for sale		--			14,899
Total liabilities		85,981			102,040
Commitments and Contingent Liabilities (Note 12)
Equity
Preferred stock and additional capital paid-in, $1 par value, 25 million shares authorized, 72.2 thousand and 32.3 thousand shares issued and outstanding, $1,805 and $807.5 aggregate liquidation preference		1,746			780
Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 419 million and 449 million shares outstanding		9			9
Additional capital paid-in		3,059			3,143
Retained income		37,164			35,580
Deferred ESOP expense		(31	)		(31	)
Treasury stock, at cost (481 million and 451 million shares)		(20,856	)		(19,047	)
Accumulated other comprehensive income:
Unrealized net capital gains and losses:
Unrealized net capital gains and losses on fixed income securities with OTTI		70			50
Other unrealized net capital gains and losses		1,970			1,698
Unrealized adjustment to DAC, DSI and insurance reserves		(213	)		(102	)
Total unrealized net capital gains and losses		1,827			1,646
Unrealized foreign currency translation adjustments		18			38
Unrecognized pension and other postretirement benefit cost		(607	)		(638	)
Total accumulated other comprehensive income		1,238			1,046
Total shareholders’ equity		22,329			21,480
Total liabilities and shareholders’ equity	$	108,310		$	123,520

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,
		2014			2013
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		780			--
Preferred stock issuance		966			650
Balance, end of period		1,746			650

Common stock		9			9

Additional capital paid-in
Balance, beginning of period		3,143			3,162
Forward contract on accelerated share repurchase agreement		(113	)		--
Equity incentive plans activity		29			(35	)
Balance, end of period		3,059			3,127

Retained income
Balance, beginning of period		35,580			33,783
Net income		2,026			1,459
Dividends on common stock		(367	)		(351	)
Dividends on preferred stock		(75	)		(6	)
Balance, end of period		37,164			34,885

Deferred ESOP expense
Balance, beginning of period		(31	)		(41	)
Payments		--			2
Balance, end of period		(31	)		(39	)

Treasury stock
Balance, beginning of period		(19,047	)		(17,508	)
Shares acquired		(2,054	)		(1,395	)
Shares reissued under equity incentive plans, net		245			241
Balance, end of period		(20,856	)		(18,662	)

Accumulated other comprehensive income
Balance, beginning of period		1,046			1,175
Change in unrealized net capital gains and losses		181			(1,120	)
Change in unrealized foreign currency translation adjustments		(20	)		(20	)
Change in unrecognized pension and other postretirement benefit cost		31			775
Balance, end of period		1,238			810
Total shareholders’ equity	$	22,329		$	20,780

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,
		2014			2013
Cash flows from operating activities		(unaudited)
Net income	$	2,026		$	1,459
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other non-cash items		277			246
Realized capital gains and losses		(588	)		(452	)
Loss on extinguishment of debt		1			489
Loss on disposition of operations		77			644
Interest credited to contractholder funds		717			973
Changes in:
Policy benefits and other insurance reserves		50			(787	)
Unearned premiums		822			670
Deferred policy acquisition costs		(189	)		(208	)
Premium installment receivables, net		(386	)		(300	)
Reinsurance recoverables, net		(110	)		294
Income taxes		175			455
Other operating assets and liabilities		(307	)		(412	)
Net cash provided by operating activities		2,565			3,071
Cash flows from investing activities
Proceeds from sales
Fixed income securities		27,648			15,354
Equity securities		5,263			2,231
Limited partnership interests		1,084			676
Mortgage loans		10			20
Other investments		292			93
Investment collections
Fixed income securities		2,787			4,879
Mortgage loans		868			783
Other investments		158			213
Investment purchases
Fixed income securities		(30,650	)		(16,645	)
Equity securities		(4,208	)		(2,565	)
Limited partnership interests		(892	)		(911	)
Mortgage loans		(218	)		(423	)
Other investments		(652	)		(880	)
Change in short-term investments, net		265			(544	)
Change in other investments, net		58			92
Purchases of property and equipment, net		(207	)		(116	)
Disposition (acquisition) of operations		378			(24	)
Net cash provided by investing activities		1,984			2,233
Cash flows from financing activities
Proceeds from issuance of long-term debt		--			2,267
Repayments of long-term debt		(1,006	)		(2,605	)
Proceeds from issuance of preferred stock		965			651
Contractholder fund deposits		926			1,608
Contractholder fund withdrawals		(2,831	)		(5,458	)
Dividends paid on common stock		(360	)		(237	)
Dividends paid on preferred stock		(56	)		--
Treasury stock purchases		(2,189	)		(1,385	)
Shares reissued under equity incentive plans, net		204			108
Excess tax benefits on share-based payment arrangements		22			33
Other		(14	)		(10	)
Net cash used in financing activities		(4,339	)		(5,028	)
Cash classified as held for sale		--			(13	)
Net increase in cash		210			263
Cash at beginning of period		675			806
Cash at end of period	$	885		$	1,069

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, 2014 and for the three-month and nine-month periods ended September 30, 2014 and 2013 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, 2013. 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.

Pending accounting standards

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. The guidance is effective for reporting periods beginning after December 15, 2014 and is to be applied retrospectively. The impact of adoption is not expected to be material to the Company’s results of operations and financial position.

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, 2016 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 and 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 affect 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,
		2014		2013		2014		2013
Numerator:
Net income	$	781	$	316	$	2,026	$	1,459
Less: Preferred stock dividends		31		6		75		6
Net income available to common shareholders	$	750	$	310	$	1,951	$	1,453

Denominator:
Weighted average common shares outstanding		424.5		461.1		435.0		468.2
Effect of dilutive potential common shares:
Stock options		4.8		4.2		4.7		3.9
Restricted stock units (non-participating) and performance stock awards		1.9		1.8		1.9		1.7
Weighted average common and dilutive potential common shares outstanding		431.2		467.1		441.6		473.8

Earnings per common share - Basic	$	1.77	$	0.67	$	4.49	$	3.10
Earnings per common share - Diluted	$	1.74	$	0.66	$	4.42	$	3.07

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 3.3 million and 8.4 million Allstate common shares, with exercise prices ranging from $49.96 to $62.42 and $41.16 to $62.42, were outstanding for the three-month periods ended September 30, 2014 and 2013, respectively, but were not included in the computation of diluted earnings per common share in those periods. Options to purchase 4.5 million and 13.0 million Allstate common shares, with exercise prices ranging from $45.61 to $62.42 and $39.05 to $62.42, were outstanding for the nine-month periods ended September 30, 2014 and 2013, respectively, but were not included in the computation of diluted earnings per common share in those periods.

3. Disposition

On April 1, 2014, the Company completed the sale of 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 to Resolution Life Holdings, Inc. The gross sale price was $797 million, representing $596 million of cash and the retention of tax benefits. The loss on disposition increased by $28 million, pre-tax, ($29 million, after-tax) and $100 million, pre-tax, ($60 million, after-tax) in the three months and nine months ended September 30, 2014, respectively. The loss on disposition in the three months ended September 30, 2014 included the finalization of certain tax balances and other adjustments. The loss on disposition in the nine months ended September 30, 2014 included a $22 million, pre-tax, reduction in goodwill.

In conjunction with the sale, the Company was required to establish a trust relating to the business that LBL continues to cede to ALIC. This trust is required to have assets greater than or equal to the statutory reserves ceded by LBL to ALIC, measured on a monthly basis. As of September 30, 2014, the trust holds $5.08 billion of investments, which are reported in the statement of financial position.

The following table summarizes the assets and liabilities classified as held for sale as of December 31, 2013.

($ in millions)

Assets
Investments
Fixed income securities	$	10,167
Mortgage loans		1,367
Short-term investments		160
Other investments		289
Total investments		11,983
Cash		--
Deferred policy acquisition costs		743
Reinsurance recoverables, net		1,660
Accrued investment income		109
Other assets		79
Separate Accounts		1,701
Assets held for sale		16,275
Less: Loss accrual		(682)
Total assets held for sale	$	15,593
Liabilities
Reserve for life-contingent contract benefits	$	1,894
Contractholder funds		10,945
Unearned premiums		12
Deferred income taxes		151
Other liabilities and accrued expenses		196
Separate Accounts		1,701
Total liabilities held for sale	$	14,899

Included in shareholders’ equity was $85 million of accumulated other comprehensive income related to assets held for sale as of December 31, 2013.

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 $105 million and $271 million for the nine months ended September 30, 2014 and 2013, respectively. Non-cash financing activities include $46 million and $93 million related to the issuance of Allstate common shares for vested restricted stock units for the nine months ended September 30, 2014 and 2013, 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,
		2014		2013
Net change in proceeds managed
Net change in short-term investments	$	(162)	$	156
Operating cash flow (used) provided		(162)		156
Net change in cash		7		(3)
Net change in proceeds managed	$	(155)	$	153

Net change in liabilities
Liabilities for collateral, beginning of period	$	(624)	$	(808)
Liabilities for collateral, end of period		(779)		(655)
Operating cash flow provided (used)	$	155	$	(153)

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, 2014
U.S. government and agencies	$	4,181	$	132	$	(4)	$	4,309
Municipal		7,978		580		(23)		8,535
Corporate		39,329		1,930		(188)		41,071
Foreign government		1,597		97		(1)		1,693
Asset-backed securities (“ABS”)		4,691		50		(32)		4,709
Residential mortgage-backed securities (“RMBS”)		1,185		118		(14)		1,289
Commercial mortgage-backed securities (“CMBS”)		633		51		(3)		681
Redeemable preferred stock		22		4		--		26
Total fixed income securities	$	59,616	$	2,962	$	(265)	$	62,313

December 31, 2013
U.S. government and agencies	$	2,791	$	129	$	(7)	$	2,913
Municipal		8,446		364		(87)		8,723
Corporate		39,331		1,659		(387)		40,603
Foreign government		1,736		99		(11)		1,824
ABS		4,491		71		(44)		4,518
RMBS		1,403		101		(30)		1,474
CMBS		788		48		(7)		829
Redeemable preferred stock		22		4		--		26
Total fixed income securities	$	59,008	$	2,475	$	(573)	$	60,910

Scheduled maturities

The scheduled maturities for fixed income securities are as follows as of September 30, 2014:

($ in millions)		Amortized cost		Fair value
Due in one year or less	$	3,440	$	3,482
Due after one year through five years		25,684		26,410
Due after five years through ten years		15,629		16,319
Due after ten years		8,354		9,423
		53,107		55,634
ABS, RMBS and CMBS		6,509		6,679
Total	$	59,616	$	62,313

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,
		2014		2013		2014		2013
Fixed income securities	$	581	$	721	$	1,870	$	2,223
Equity securities		28		30		91		94
Mortgage loans		54		99		206		290
Limited partnership interests		162		106		499		339
Short-term investments		1		1		5		4
Other		41		44		127		120
Investment income, before expense		867		1,001		2,798		3,070
Investment expense		(44)		(51)		(118)		(153)
Net investment income	$	823	$	950	$	2,680	$	2,917

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,
		2014		2013		2014		2013
Fixed income securities	$	23	$	24	$	121	$	175
Equity securities		213		(51)		474		261
Mortgage loans		2		(6)		3		19
Limited partnership interests		59		2		10		(1)
Derivatives		(8)		(12)		(27)		(2)
Other		5		2		7		--
Realized capital gains and losses	$	294	$	(41)	$	588	$	452

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

($ in millions)		Three months ended September 30,				Nine months ended September 30,
		2014		2013		2014		2013
Impairment write-downs	$	10	$	(18)	$	(12)	$	(61)
Change in intent write-downs		(63)		(70)		(167)		(124)
Net other-than-temporary impairment losses recognized in earnings		(53)		(88)		(179)		(185)
Sales		355		59		792		639
Valuation and settlements of derivative instruments		(8)		(12)		(25)		(2)
Realized capital gains and losses	$	294	$	(41)	$	588	$	452

Gross gains of $353 million and $109 million and gross losses of $48 million and $58 million were realized on sales of fixed income and equity securities during the three months ended September 30, 2014 and 2013, respectively. Gross gains of $866 million and $760 million and gross losses of $111 million and $142 million were realized on sales of fixed income and equity securities during the nine months ended September 30, 2014 and 2013, respectively.

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

($ in millions)		Three months ended September 30, 2014						Nine months ended September 30, 2014
		Gross		Included in OCI		Net		Gross		Included in OCI		Net
Fixed income securities:
Municipal	$	(3)	$	--	$	(3)	$	(9)	$	--	$	(9)
Corporate		(6)		1		(5)		(6)		1		(5)
ABS		--		--		--		(3)		--		(3)
RMBS		3		(1)		2		9		(3)		6
Total fixed income securities		(6)		--		(6)		(9)		(2)		(11)
Equity securities		(63)		--		(63)		(149)		--		(149)
Mortgage loans		2		--		2		6		--		6
Limited partnership interests		14		--		14		(25)		--		(25)
Other-than-temporary impairment losses	$	(53)	$	--	$	(53)	$	(177)	$	(2)	$	(179)

		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)

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 $239 million and $260 million as of September 30, 2014 and December 31, 2013, 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, 2014		December 31, 2013
Municipal	$	(9)	$	(9)
Corporate		(1)		--
ABS		(6)		(10)
RMBS		(111)		(152)
CMBS		(5)		(12)
Total	$	(132)	$	(183)

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,
		2014		2013		2014		2013
Beginning balance	$	(424)	$	(564)	$	(513)	$	(617)
Additional credit loss for securities previously other-than-temporarily impaired		(1)		(6)		(2)		(30)
Additional credit loss for securities not previously other-than-temporarily impaired		(5)		(2)		(8)		(19)
Reduction in credit loss for securities disposed or collected		28		43		61		136
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		--		2		1
Reduction in credit loss for securities sold in LBL disposition		--		--		59		--
Ending balance	$	(401)	$	(529)	$	(401)	$	(529)

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, 2014		value		Gains		Losses	gains (losses)
Fixed income securities	$	62,313	$	2,962	$	(265)	$	2,697
Equity securities		4,335		477		(19)	458
Short-term investments		2,463		--		--	--
Derivative instruments (1)		(4)		1		(9)	(8)
Equity method (“EMA”) limited partnerships (2)								(5)
Unrealized net capital gains and losses, pre-tax								3,142
Amounts recognized for:
Insurance reserves (3)							(169)
DAC and DSI (4)								(158)
Amounts recognized								(327)
Deferred income taxes								(988)
Unrealized net capital gains and losses, after-tax							$	1,827

(1)	Included in the fair value of derivative instruments are $1 million classified as assets and $5 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		Gross unrealized			Unrealized net
December 31, 2013		value		Gains		Losses	gains (losses)
Fixed income securities	$	60,910	$	2,475	$	(573)	$	1,902
Equity securities		5,097		658		(34)	624
Short-term investments		2,393		--		--	--
Derivative instruments (1)		(13)		1		(19)	(18)
EMA limited partnerships							(3)
Investments classified as held for sale								190
Unrealized net capital gains and losses, pre-tax								2,695
Amounts recognized for:
Insurance reserves							--
DAC and DSI								(158)
Amounts recognized								(158)
Deferred income taxes							(891)
Unrealized net capital gains and losses, after-tax							$	1,646

(1)	Included in the fair value of derivative instruments are $1 million classified as assets and $14 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, 2014 is as follows:

($ in millions)
Fixed income securities	$	795
Equity securities		(166)
Derivative instruments		10
EMA limited partnerships		(2)
Investments classified as held for sale		(190)
Total		447
Amounts recognized for:
Insurance reserves		(169)
DAC and DSI		--
Amounts recognized		(169)
Deferred income taxes		(97)
Increase in unrealized net capital gains and losses, after-tax	$	181

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, 2014
Fixed income securities
U.S. government and agencies	18	$	1,761	$	(4)	3	$	22	$	--	$	(4)
Municipal	86		359		(7)	38		227		(16)		(23)
Corporate	535		6,974		(89)	163		1,767		(99)		(188)
Foreign government	7		90		--	1		19		(1)		(1)
ABS	83		2,055		(9)	28		393		(23)		(32)
RMBS	68		53		(1)	200		189		(13)		(14)
CMBS	5		4		--	4		42		(3)		(3)
Total fixed income securities	802		11,296		(110)	437		2,659		(155)		(265)
Equity securities	353		932		(18)	1		12		(1)		(19)
Total fixed income and equity securities	1,155	$	12,228	$	(128)	438	$	2,671	$	(156)	$	(284)

Investment grade fixed income securities	532	$	9,199	$	(50)	353	$	2,219	$	(102)	$	(152)
Below investment grade fixed income securities	270		2,097		(60)	84		440		(53)		(113)
Total fixed income securities	802	$	11,296	$	(110)	437	$	2,659	$	(155)	$	(265)

December 31, 2013