10-Q 1 allcorp-3311510xq.htm 10-Q Allcorp - 3.31.15 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 March 31, 2015
OR
[ ]  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 April 21, 2015, the registrant had 409,012,961 common shares, $.01 par value, outstanding.



THE ALLSTATE CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2015
 
PART I
FINANCIAL INFORMATION
PAGE
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
Condensed Consolidated Statements of Operations for the Three-Month Periods Ended March 31, 2015 and 2014 (unaudited)
 
Condensed Consolidated Statements of Comprehensive Income for the Three-Month Periods Ended March 31, 2015 and 2014 (unaudited)
 
Condensed Consolidated Statements of Financial Position as of March 31, 2015 (unaudited) and December 31, 2014
 
Condensed Consolidated Statements of Shareholders’ Equity for the Three-Month Periods Ended March 31, 2015 and 2014 (unaudited)
 
Condensed Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 2015 and 2014 (unaudited)
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
Report of Independent Registered Public Accounting Firm
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
Highlights
 
Consolidated Net Income
 
Property-Liability Highlights
 
Allstate Protection Segment
 
Discontinued Lines and Coverages Segment
 
Property-Liability Investment Results
 
Allstate Financial Highlights
 
Allstate Financial Segment
 
Investments Highlights
 
Investments
 
Capital Resources and Liquidity Highlights
 
Capital Resources and Liquidity
 
Forward-Looking Statements
 
 
 
Item 4.
Controls and Procedures
 
 
 
PART II
OTHER INFORMATION
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits



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 March 31,
 
2015
 
2014
 
(unaudited)
Revenues
 

 
 

Property-liability insurance premiums
$
7,426

 
$
7,064

Life and annuity premiums and contract charges
537

 
607

Net investment income
850

 
959

Realized capital gains and losses:
 

 
 

Total other-than-temporary impairment (“OTTI”) losses
(53
)
 
(80
)
OTTI losses reclassified to (from) other comprehensive income
4

 
(1
)
Net OTTI losses recognized in earnings
(49
)
 
(81
)
Sales and other realized capital gains and losses
188

 
135

Total realized capital gains and losses
139

 
54

 
8,952

 
8,684

Costs and expenses
 

 
 

Property-liability insurance claims and claims expense
4,993

 
4,759

Life and annuity contract benefits
441

 
488

Interest credited to contractholder funds
199

 
307

Amortization of deferred policy acquisition costs
1,070

 
1,035

Operating costs and expenses
1,090

 
1,094

Restructuring and related charges
4

 
6

Interest expense
73

 
87

 
7,870

 
7,776

 
 
 
 
Loss on disposition of operations
(1
)
 
(59
)
 
 
 
 
Income from operations before income tax expense
1,081

 
849

 
 
 
 
Income tax expense
404

 
249

 
 
 
 
Net income
677

 
600

 
 
 
 
Preferred stock dividends
29

 
13

 
 
 
 
Net income available to common shareholders
$
648

 
$
587

 
 
 
 
Earnings per common share:
 

 
 

Net income available to common shareholders per common share - Basic
$
1.56

 
$
1.31

Weighted average common shares - Basic
415.8

 
446.4

Net income available to common shareholders per common share - Diluted
$
1.53

 
$
1.30

Weighted average common shares - Diluted
422.6

 
452.8

Cash dividends declared per common share
$
0.30

 
$
0.28






See notes to condensed consolidated financial statements.

1


THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)
Three months ended March 31,
 
2015
 
2014
 
 (unaudited)
Net income
$
677

 
$
600

 
 
 
 
Other comprehensive income, after-tax
 

 
 

Changes in:
 

 
 

Unrealized net capital gains and losses
211

 
445

Unrealized foreign currency translation adjustments
(27
)
 
(16
)
Unrecognized pension and other postretirement benefit cost
29

 
11

Other comprehensive income, after-tax
213

 
440

 
 
 
 
Comprehensive income
$
890

 
$
1,040

 






























See notes to condensed consolidated financial statements.

2


THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
($ in millions, except par value data)
March 31, 2015
 
December 31, 2014
Assets
(unaudited)
 
 

Investments
 

 
 

Fixed income securities, at fair value (amortized cost $58,235 and $59,672)
$
61,403

 
$
62,440

Equity securities, at fair value (cost $3,752 and $3,692)
4,166

 
4,104

Mortgage loans
4,276

 
4,188

Limited partnership interests
4,699

 
4,527

Short-term, at fair value (amortized cost $2,497 and $2,540)
2,497

 
2,540

Other
3,396

 
3,314

Total investments
80,437

 
81,113

Cash
916

 
657

Premium installment receivables, net
5,502

 
5,465

Deferred policy acquisition costs
3,527

 
3,525

Reinsurance recoverables, net
8,408

 
8,490

Accrued investment income
597

 
591

Property and equipment, net
1,026

 
1,031

Goodwill
1,219

 
1,219

Other assets
2,128

 
2,046

Separate Accounts
4,304

 
4,396

Total assets
$
108,064

 
$
108,533

Liabilities
 

 
 

Reserve for property-liability insurance claims and claims expense
$
23,103

 
$
22,923

Reserve for life-contingent contract benefits
12,318

 
12,380

Contractholder funds
22,267

 
22,529

Unearned premiums
11,489

 
11,655

Claim payments outstanding
796

 
784

Deferred income taxes
779

 
715

Other liabilities and accrued expenses
5,635

 
5,653

Long-term debt
5,194

 
5,194

Separate Accounts
4,304

 
4,396

Total liabilities
85,885

 
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, 409 million and 418 million shares outstanding
9

 
9

Additional capital paid-in
3,109

 
3,199

Retained income
38,363

 
37,842

Deferred ESOP expense
(23
)
 
(23
)
Treasury stock, at cost (491 million and 482 million shares)
(21,799
)
 
(21,030
)
Accumulated other comprehensive income:
 

 
 

Unrealized net capital gains and losses:
 

 
 

Unrealized net capital gains and losses on fixed income securities with OTTI
71

 
72

Other unrealized net capital gains and losses
2,255

 
1,988

Unrealized adjustment to DAC, DSI and insurance reserves
(189
)
 
(134
)
Total unrealized net capital gains and losses
2,137

 
1,926

Unrealized foreign currency translation adjustments
(29
)
 
(2
)
Unrecognized pension and other postretirement benefit cost
(1,334
)
 
(1,363
)
Total accumulated other comprehensive income
774

 
561

Total shareholders’ equity
22,179

 
22,304

Total liabilities and shareholders’ equity
$
108,064

 
$
108,533






See notes to condensed consolidated financial statements.

3


THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
($ in millions)
Three months ended March 31,
 
2015
 
2014
 
(unaudited)
Preferred stock par value
$

 
$

 
 
 
 
Preferred stock additional capital paid-in
 

 
 

Balance, beginning of period
1,746

 
780

Preferred stock issuance

 
725

Balance, end of period
1,746

 
1,505

 
 
 
 
Common stock
9

 
9

 
 
 
 
Additional capital paid-in
 

 
 

Balance, beginning of period
3,199

 
3,143

Forward contract on accelerated share repurchase agreement
(75
)
 
(113
)
Equity incentive plans activity
(15
)
 
(13
)
Balance, end of period
3,109

 
3,017

 
 
 
 
Retained income
 

 
 

Balance, beginning of period
37,842

 
35,580

Net income
677

 
600

Dividends on common stock
(127
)
 
(126
)
Dividends on preferred stock
(29
)
 
(13
)
Balance, end of period
38,363

 
36,041

 
 
 
 
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
(915
)
 
(987
)
Shares reissued under equity incentive plans, net
146

 
112

Balance, end of period
(21,799
)
 
(19,922
)
 
 
 
 
Accumulated other comprehensive income
 

 
 

Balance, beginning of period
561

 
1,046

Change in unrealized net capital gains and losses
211

 
445

Change in unrealized foreign currency translation adjustments
(27
)
 
(16
)
Change in unrecognized pension and other postretirement benefit cost
29

 
11

Balance, end of period
774

 
1,486

Total shareholders’ equity
$
22,179

 
$
22,105

 






See notes to condensed consolidated financial statements.

4


THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
Three months ended March 31,
 
2015
 
2014
Cash flows from operating activities
(unaudited)
Net income
$
677

 
$
600

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation, amortization and other non-cash items
87

 
98

Realized capital gains and losses
(139
)
 
(54
)
Loss on disposition of operations
1

 
59

Interest credited to contractholder funds
199

 
307

Changes in:
 

 
 

Policy benefits and other insurance reserves
115

 
(18
)
Unearned premiums
(117
)
 
(92
)
Deferred policy acquisition costs
(35
)
 
3

Premium installment receivables, net
(66
)
 
(46
)
Reinsurance recoverables, net
(24
)
 
(45
)
Income taxes
59

 
(68
)
Other operating assets and liabilities
(191
)
 
(270
)
Net cash provided by operating activities
566

 
474

Cash flows from investing activities
 

 
 

Proceeds from sales
 

 
 

Fixed income securities
9,453

 
6,483

Equity securities
1,152

 
1,328

Limited partnership interests
296

 
238

Mortgage loans

 
10

Other investments
47

 
30

Investment collections
 

 
 

Fixed income securities
1,213

 
849

Mortgage loans
114

 
324

Other investments
60

 
50

Investment purchases
 

 
 

Fixed income securities
(9,210
)
 
(6,252
)
Equity securities
(1,172
)
 
(1,330
)
Limited partnership interests
(365
)
 
(277
)
Mortgage loans
(202
)
 
(2
)
Other investments
(193
)
 
(243
)
Change in short-term investments, net
(63
)
 
189

Change in other investments, net
2

 
36

Purchases of property and equipment, net
(59
)
 
(55
)
Disposition (acquisition) of operations

 
(2
)
Net cash provided by investing activities
1,073

 
1,376

Cash flows from financing activities
 

 
 

Repayments of long-term debt

 
(1
)
Proceeds from issuance of preferred stock

 
725

Contractholder fund deposits
261

 
403

Contractholder fund withdrawals
(572
)
 
(1,084
)
Dividends paid on common stock
(118
)
 
(113
)
Dividends paid on preferred stock
(29
)
 
(12
)
Treasury stock purchases
(1,010
)
 
(1,115
)
Shares reissued under equity incentive plans, net
64

 
77

Excess tax benefits on share-based payment arrangements
26

 
13

Other
(2
)
 
(6
)
Net cash used in financing activities
(1,380
)
 
(1,113
)
Cash classified as held for sale

 
(242
)
Net increase in cash
259

 
495

Cash at beginning of period
657

 
675

Cash at end of period
$
916

 
$
1,170


See notes to condensed consolidated financial statements.

5



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 March 31, 2015 and for the three-month periods ended March 31, 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, 2016 and is to be applied retrospectively.  In April 2015, the FASB issued an exposure draft that would delay the effective date of the standard by one year. Under the proposal, the standard would be effective for interim and annual periods beginning after December 15, 2017. 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 affect 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 and may be applied either retrospectively or using a modified retrospective approach with a cumulative-effect adjustment to equity at

6



the beginning of the year of adoption.  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. The guidance is effective for reporting periods beginning after December 15, 2015 and is to be applied retrospectively.  The impact of adoption is not expected to be material to 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 March 31,
 
2015
 
2014
Numerator:
 

 
 

Net income
$
677

 
$
600

Less: Preferred stock dividends
29

 
13

Net income available to common shareholders
$
648

 
$
587

 
 
 
 
Denominator:
 

 
 

Weighted average common shares outstanding
415.8

 
446.4

Effect of dilutive potential common shares:
 

 
 

Stock options
4.9

 
4.4

Restricted stock units (non-participating) and performance stock awards
1.9

 
2.0

Weighted average common and dilutive potential common shares outstanding
422.6

 
452.8

 
 
 
 
Earnings per common share - Basic
$
1.56

 
$
1.31

Earnings per common share - Diluted
$
1.53

 
$
1.30

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 2.1 million and 6.7 million Allstate common shares, with exercise prices ranging from $60.81 to $70.91 and $45.61 to $62.42, were outstanding for the three-month periods ended March 31, 2015 and 2014, respectively, but were not included in the computation of diluted earnings per common share in those periods. 











7



3.  Supplemental Cash Flow Information
Non-cash modifications of certain mortgage loans, fixed income securities and other investments, as well as mergers completed with equity securities, totaled $12 million and $49 million for the three months ended March 31, 2015 and 2014, respectively.  Non-cash financing activities include $68 million and $39 million related to the issuance of Allstate common shares for vested restricted stock units and performance stock awards for the three months ended March 31, 2015 and 2014, respectively.
Liabilities for collateral received in conjunction with the Company’s securities lending program and over-the-counter (“OTC”) and cleared derivatives are reported in other liabilities and accrued expenses or other investments.  The accompanying cash flows are included in cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows along with the activities resulting from management of the proceeds, which are as follows:
($ in millions)
Three months ended March 31,
 
2015
 
2014
Net change in proceeds managed
 

 
 

Net change in short-term investments
$
27

 
$
(155
)
Operating cash flow provided (used)
27

 
(155
)
Net change in cash

 
(1
)
Net change in proceeds managed
$
27

 
$
(156
)
 
 
 
 
Net change in liabilities
 

 
 

Liabilities for collateral, beginning of period
$
(782
)
 
$
(624
)
Liabilities for collateral, end of period
(755
)
 
(780
)
Operating cash flow (used) provided
$
(27
)
 
$
156

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
 
 
Gains
 
Losses
 
March 31, 2015
 

 
 

 
 

 
 

U.S. government and agencies
$
3,972

 
$
137

 
$
(3
)
 
$
4,106

Municipal
8,043

 
691

 
(21
)
 
8,713

Corporate
40,255

 
2,294

 
(174
)
 
42,375

Foreign government
1,290

 
85

 

 
1,375

Asset-backed securities (“ABS”)
3,047

 
34

 
(26
)
 
3,055

Residential mortgage-backed securities (“RMBS”)
1,049

 
117

 
(12
)
 
1,154

Commercial mortgage-backed securities (“CMBS”)
558

 
43

 
(1
)
 
600

Redeemable preferred stock
21

 
4

 

 
25

Total fixed income securities
$
58,235

 
$
3,405

 
$
(237
)
 
$
61,403

 
 
 
 
 
 
 
 
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






8



Scheduled maturities
The scheduled maturities for fixed income securities are as follows as of March 31, 2015:
($ in millions)
Amortized
cost
 
Fair
value
Due in one year or less
$
4,044

 
$
4,092

Due after one year through five years
25,110

 
25,883

Due after five years through ten years
16,379

 
17,180

Due after ten years
8,048

 
9,439

 
53,581

 
56,594

ABS, RMBS and CMBS
4,654

 
4,809

Total
$
58,235

 
$
61,403

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 March 31,
 
2015
 
2014
Fixed income securities
$
568

 
$
705

Equity securities
23

 
28

Mortgage loans
55

 
81

Limited partnership interests
198

 
142

Short-term investments
1

 
1

Other
45

 
42

Investment income, before expense
890

 
999

Investment expense
(40
)
 
(40
)
Net investment income
$
850

 
$
959

Realized capital gains and losses
Realized capital gains and losses by asset type are as follows:
($ in millions)
Three months ended March 31,
 
2015
 
2014
Fixed income securities
$
80

 
$
36

Equity securities
78

 
22

Mortgage loans

 
3

Limited partnership interests
6

 
2

Derivatives
(25
)
 
(12
)
Other

 
3

Realized capital gains and losses
$
139

 
$
54

Realized capital gains and losses by transaction type are as follows:
($ in millions)
Three months ended March 31,
 
2015
 
2014
Impairment write-downs
$
(19
)
 
$
(16
)
Change in intent write-downs
(30
)
 
(65
)
Net other-than-temporary impairment losses recognized in earnings
(49
)
 
(81
)
Sales
216

 
147

Valuation and settlements of derivative instruments
(28
)
 
(12
)
Realized capital gains and losses
$
139

 
$
54


9



Gross gains of $277 million and $166 million and gross losses of $75 million and $36 million were realized on sales of fixed income and equity securities during the three months ended March 31, 2015 and 2014, respectively. 
Other-than-temporary impairment losses by asset type are as follows:
($ in millions)
Three months ended March 31, 2015
 
Three months ended March 31, 2014
 
Gross
 
Included
 in OCI
 
Net
 
Gross
 
Included
in OCI
 
Net
Fixed income securities:
 

 
 

 
 

 
 

 
 

 
 

Municipal
$
(4
)
 
$
4

 
$

 
$
(5
)
 
$

 
$
(5
)
Corporate
(5
)
 

 
(5
)
 

 

 

ABS
(1
)
 
1

 

 
(1
)
 

 
(1
)
RMBS
1

 
(1
)
 

 

 
(1
)
 
(1
)
Total fixed income securities
(9
)
 
4

 
(5
)
 
(6
)
 
(1
)
 
(7
)
Equity securities
(39
)
 

 
(39
)
 
(65
)
 

 
(65
)
Mortgage loans

 

 

 
4

 

 
4

Limited partnership interests
(5
)
 

 
(5
)
 
(13
)
 

 
(13
)
Other-than-temporary impairment losses
$
(53
)
 
$
4

 
$
(49
)
 
$
(80
)
 
$
(1
)
 
$
(81
)
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 $234 million and $233 million as of March 31, 2015 and December 31, 2014, respectively, of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.
($ in millions)
March 31, 2015
 
December 31, 2014
Municipal
$
(12
)
 
$
(8
)
ABS
(2
)
 
(2
)
RMBS
(105
)
 
(108
)
CMBS
(6
)
 
(5
)
Total
$
(125
)
 
$
(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 March 31,
 
2015
 
2014
Beginning balance
$
(380
)
 
$
(513
)
Additional credit loss for securities previously other-than-temporarily impaired
(1
)
 
(5
)
Additional credit loss for securities not previously other-than-temporarily impaired
(4
)
 
(1
)
Reduction in credit loss for securities disposed or collected
6

 
26

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

 

Ending balance
$
(378
)
 
$
(493
)
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

10



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)
March 31, 2015
 
Gains
 
Losses
 
Fixed income securities
$
61,403

 
$
3,405

 
$
(237
)
 
$
3,168

Equity securities
4,166

 
468

 
(54
)
 
414

Short-term investments
2,497

 

 

 

Derivative instruments (1)
7

 
8

 
(5
)
 
3

Equity method (“EMA”) limited partnerships (2)
 

 
 

 
 

 
(4
)
Unrealized net capital gains and losses, pre-tax
 

 
 

 
 

 
3,581

Amounts recognized for:
 

 
 

 
 

 
 

Insurance reserves (3)
 

 
 

 
 

 
(79
)
DAC and DSI (4)
 

 
 

 
 

 
(212
)
Amounts recognized
 

 
 

 
 

 
(291
)
Deferred income taxes
 

 
 

 
 

 
(1,153
)
Unrealized net capital gains and losses, after-tax
 

 
 

 
 

 
$
2,137

_______________
(1) 
Included in the fair value of derivative instruments are $7 million classified as assets and $0 million classified as liabilities.
(2) 
Unrealized net capital gains and losses for limited partnership interests represent the Company’s share of EMA limited partnerships’ other comprehensive income. Fair value and gross unrealized gains and losses are not applicable.
(3) 
The insurance reserves adjustment represents the amount by which the reserve balance would increase if the net unrealized gains in the applicable product portfolios were realized and reinvested at current lower interest rates, resulting in a premium deficiency. Although the Company evaluates premium deficiencies on the combined performance of life insurance and immediate annuities with life contingencies, the adjustment primarily relates to structured settlement annuities with life contingencies, in addition to annuity buy-outs and certain payout annuities with life contingencies.
(4) 
The DAC and DSI adjustment balance represents the amount by which the amortization of DAC and DSI would increase or decrease if the unrealized gains or losses in the respective product portfolios were realized.
($ in millions)
Fair
value
 
Gross unrealized
 
Unrealized net
gains (losses)
December 31, 2014
 
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

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






11



Change in unrealized net capital gains and losses
The change in unrealized net capital gains and losses for the three months ended March 31, 2015 is as follows:
($ in millions)
 
Fixed income securities
$
400

Equity securities
2

Derivative instruments
5

EMA limited partnerships
1

Total
408

Amounts recognized for:
 

Insurance reserves
(51
)
DAC and DSI
(33
)
Amounts recognized
(84
)
Deferred income taxes
(113
)
Increase in unrealized net capital gains and losses, after-tax
$
211

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.





12



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
 
March 31, 2015
 

 
 

 
 

 
 

 
 

 
 

 
 

Fixed income securities
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. government and agencies
7

 
$
657

 
$
(3
)
 

 
$

 
$

 
$
(3
)
Municipal
216

 
701

 
(8
)
 
9

 
61

 
(13
)
 
(21
)
Corporate
342

 
3,596

 
(99
)
 
69

 
675

 
(75
)
 
(174
)
Foreign government
4

 
28

 

 

 

 

 

ABS
47

 
753

 
(7
)
 
24

 
301

 
(19
)
 
(26
)
RMBS
77

 
18

 
(1
)
 
179

 
154

 
(11
)
 
(12
)
CMBS
4

 
11

 

 
2

 
13

 
(1
)
 
(1
)
Total fixed income securities
697

 
5,764

 
(118
)
 
283

 
1,204

 
(119
)
 
(237
)
Equity securities
210

 
787

 
(52
)
 
1

 
11

 
(2
)
 
(54
)
Total fixed income and equity securities
907

 
$
6,551

 
$
(170
)
 
284

 
$
1,215

 
$
(121
)
 
$
(291
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade fixed income securities
500

 
$
4,171

 
$
(42
)
 
216

 
$
837

 
$
(68
)
 
$
(110
)
Below investment grade fixed income securities
197

 
1,593

 
(76
)
 
67

 
367

 
(51
)
 
(127
)
Total fixed income securities
697

 
$
5,764

 
$
(118
)
 
283

 
$
1,204

 
$
(119
)
 
$
(237
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 
$
(145
)
 
$
(369
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade fixed income securities
754

 
$
9,951

 
$
(71
)
 
281

 
$
1,444

 
$
(87
)
 
$
(158
)
Below investment grade fixed income securities
261

 
1,957

 
(100
)
 
75

 
408

 
(56
)
 
(156
)
Total fixed income securities
1,015

 
$
11,908

 
$
(171
)
 
356

 
$
1,852

 
$
(143
)
 
$
(314
)
As of March 31, 2015, $203 million of unrealized losses are related to securities with an unrealized loss position less than 20% of amortized cost or cost, the degree of which suggests that these securities do not pose a high risk of being other-than-temporarily impaired.  Of the $203 million, $72 million are related to unrealized losses on investment grade fixed income securities.  Investment grade is defined as a security having a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A or BBB from Standards and Poor’s (“S&P”), Fitch, Dominion, Kroll or Realpoint, a rating of aaa, aa, a or bbb from A.M. Best, or a comparable internal rating if an externally provided rating is not available.  Unrealized losses on investment grade securities are principally related to increasing risk-free interest rates or widening credit spreads since the time of initial purchase.
As of March 31, 2015, the remaining $88 million of unrealized losses are related to securities in unrealized loss positions greater than or equal to 20% of amortized cost or cost.  Investment grade fixed income securities comprising $38 million of these unrealized losses were evaluated based on factors such as discounted cash flows and the financial condition and near-term and long-term prospects of the issue or issuer and were determined to have adequate resources to fulfill contractual obligations.  Of the $88 million, $42 million are related to below investment grade fixed income securities and $8 million are related to equity securities.  Of these amounts, $6 million are related to below investment grade fixed income securities that had been in an unrealized loss position greater than or equal to 20% of amortized cost for a period of twelve or more consecutive months as of March 31, 2015.

13



ABS, RMBS and CMBS in an unrealized loss position were evaluated based on actual and projected collateral losses relative to the securities’ positions in the respective securitization trusts, security specific expectations of cash flows, and credit ratings.  This evaluation also takes into consideration credit enhancement, measured in terms of (i) subordination from other classes of securities in the trust that are contractually obligated to absorb losses before the class of security the Company owns, (ii) the expected impact of other structural features embedded in the securitization trust beneficial to the class of securities the Company owns, such as overcollateralization and excess spread, and (iii) for ABS and RMBS in an unrealized loss position, credit enhancements from reliable bond insurers, where applicable.  Municipal bonds in an unrealized loss position were evaluated based on the underlying credit quality of the primary obligator, obligation type and quality of the underlying assets.  Unrealized losses on equity securities are primarily related to temporary equity market fluctuations of securities that are expected to recover.
As of March 31, 2015, the Company has not made the decision to sell and it is not more likely than not the Company will be required to sell fixed income securities with unrealized losses before recovery of the amortized cost basis.  As of March 31, 2015, the Company had the intent and ability to hold equity securities with unrealized losses for a period of time sufficient for them to recover.
Limited partnerships
As of March 31, 2015 and December 31, 2014, the carrying value of equity method limited partnerships totaled $3.56 billion and $3.41 billion, respectively.  The Company recognizes an impairment loss for equity method limited partnerships when evidence demonstrates that the loss is other than temporary.  Evidence of a loss in value that is other than temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment.
As of March 31, 2015 and December 31, 2014, the carrying value for cost method limited partnerships was $1.14 billion and $1.12 billion, respectively.  To determine if an other-than-temporary impairment has occurred, the Company evaluates whether an impairment indicator has occurred in the period that may have a significant adverse effect on the carrying value of the investment.  Impairment indicators may include: significantly reduced valuations of the investments held by the limited partnerships; actual recent cash flows received being significantly less than expected cash flows; reduced valuations based on financing completed at a lower value; completed sale of a material underlying investment at a price significantly lower than expected; or any other adverse events since the last financial statements received that might affect the fair value of the investee’s capital.  Additionally, the Company’s portfolio monitoring process includes a quarterly review of all cost method limited partnerships to identify instances where the net asset value is below established thresholds for certain periods of time, as well as investments that are performing below expectations, for further impairment consideration.  If a cost method limited partnership is other-than-temporarily impaired, the carrying value is written down to fair value, generally estimated to be equivalent to the reported net asset value of the underlying funds.
Mortgage loans
Mortgage loans are evaluated for impairment on a specific loan basis through a quarterly credit monitoring process and review of key credit quality indicators.  Mortgage loans are considered impaired when it is probable that the Company will not collect the contractual principal and interest.  Valuation allowances are established for impaired loans to reduce the carrying value to the fair value of the collateral less costs to sell or the present value of the loan’s expected future repayment cash flows discounted at the loan’s original effective interest rate.  Impaired mortgage loans may not have a valuation allowance when the fair value of the collateral less costs to sell is higher than the carrying value.  Valuation allowances are adjusted for subsequent changes in the fair value of the collateral less costs to sell.  Mortgage loans are charged off against their corresponding valuation allowances when there is no reasonable expectation of recovery.  The impairment evaluation is non-statistical in respect to the aggregate portfolio but considers facts and circumstances attributable to each loan.  It is not considered probable that additional impairment losses, beyond those identified on a specific loan basis, have been incurred as of March 31, 2015.
Accrual of income is suspended for mortgage loans that are in default or when full and timely collection of principal and interest payments is not probable.  Cash receipts on mortgage loans on nonaccrual status are generally recorded as a reduction of carrying value.
Debt service coverage ratio is considered a key credit quality indicator when mortgage loans are evaluated for impairment.  Debt service coverage ratio represents the amount of estimated cash flows from the property available to the borrower to meet principal and interest payment obligations.  Debt service coverage ratio estimates are updated annually or more frequently if conditions are warranted based on the Company’s credit monitoring process.





14



The following table reflects the carrying value of non-impaired fixed rate and variable rate mortgage loans summarized by debt service coverage ratio distribution.
($ in millions)
March 31, 2015
 
December 31, 2014
 
Debt service coverage
ratio distribution
Fixed rate
mortgage
loans
 
Variable rate
mortgage
loans
 
Total
 
Fixed rate
mortgage
loans
 
Variable rate
mortgage
loans
 
Total
Below 1.0
$
93

 
$

 
$
93

 
$
110

 
$

 
$
110

1.0 - 1.25
433

 

 
433

 
424

 

 
424

1.26 - 1.50
1,194

 
1

 
1,195

 
1,167

 
1

 
1,168

Above 1.50
2,519

 
20

 
2,539

 
2,450

 
20

 
2,470

Total non-impaired mortgage loans
$
4,239

 
$
21

 
$
4,260

 
$
4,151

 
$
21

 
$
4,172

Mortgage loans with a debt service coverage ratio below 1.0 that are not considered impaired primarily relate to instances where the borrower has the financial capacity to fund the revenue shortfalls from the properties for the foreseeable term, the decrease in cash flows from the properties is considered temporary, or there are other risk mitigating circumstances such as additional collateral, escrow balances or borrower guarantees.
The net carrying value of impaired mortgage loans is as follows:
($ in millions)
March 31, 2015
 
December 31, 2014
Impaired mortgage loans with a valuation allowance
$
16

 
$
16

Impaired mortgage loans without a valuation allowance

 

Total impaired mortgage loans
$
16

 
$
16

Valuation allowance on impaired mortgage loans
$
8

 
$
8

The average balance of impaired loans was $16 million and $48 million for the three months ended March 31, 2015 and 2014, respectively.
The rollforward of the valuation allowance on impaired mortgage loans is as follows:
($ in millions)
Three months ended March 31,
 
2015
 
2014
Beginning balance
$
8

 
$
21

Net decrease in valuation allowance

 
(4
)
Charge offs

 
(8
)
Ending balance
$
8

 
$
9

The carrying value of past due mortgage loans is as follows:
($ in millions)
March 31, 2015
 
December 31, 2014
Less than 90 days past due
$
6

 
$

90 days or greater past due

 

   Total past due
6

 

   Current loans
4,270

 
4,188

      Total mortgage loans
$
4,276

 
$
4,188










15



5.  Fair Value of Assets and Liabilities
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available.  Assets and liabilities recorded on the Condensed Consolidated Statements of Financial Position at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows:
Level 1:     Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access.
Level 2:     Assets and liabilities whose values are based on the following:
(a)
Quoted prices for similar assets or liabilities in active markets;
(b)
Quoted prices for identical or similar assets or liabilities in markets that are not active; or
(c)
Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.
Level 3:     Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.  Unobservable inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the assets and liabilities.
The availability of observable inputs varies by instrument.  In situations where fair value is based on internally developed pricing models or inputs that are unobservable in the market, the determination of fair value requires more judgment.  The degree of judgment exercised by the Company in determining fair value is typically greatest for instruments categorized in Level 3.  In many instances, valuation inputs used to measure fair value fall into different levels of the fair value hierarchy.  The category level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety.  The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption.  In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments.
The Company is responsible for the determination of fair value and the supporting assumptions and methodologies.  The Company gains assurance that assets and liabilities are appropriately valued through the execution of various processes and controls designed to ensure the overall reasonableness and consistent application of valuation methodologies, including inputs and assumptions, and compliance with accounting standards.  For fair values received from third parties or internally estimated, the Company’s processes and controls are designed to ensure that the valuation methodologies are appropriate and consistently applied, the inputs and assumptions are reasonable and consistent with the objective of determining fair value, and the fair values are accurately recorded.  For example, on a continuing basis, the Company assesses the reasonableness of individual fair values that have stale security prices or that exceed certain thresholds as compared to previous fair values received from valuation service providers or brokers or derived from internal models.  The Company performs procedures to understand and assess the methodologies, processes and controls of valuation service providers.  In addition, the Company may validate the reasonableness of fair values by comparing information obtained from valuation service providers or brokers to other third party valuation sources for selected securities.  The Company performs ongoing price validation procedures such as back-testing of actual sales, which corroborate the various inputs used in internal models to market observable data.  When fair value determinations are expected to be more variable, the Company validates them through reviews by members of management who have relevant expertise and who are independent of those charged with executing investment transactions.
The Company has two types of situations where investments are classified as Level 3 in the fair value hierarchy.  The first is where specific inputs significant to the fair value estimation models are not market observable.  This primarily occurs in the Company’s use of broker quotes to value certain securities where the inputs have not been corroborated to be market observable, and the use of valuation models that use significant non-market observable inputs.
The second situation where the Company classifies securities in Level 3 is where quotes continue to be received from independent third-party valuation service providers and all significant inputs are market observable; however, there has been a significant decrease in the volume and level of activity for the asset when compared to normal market activity such that the degree of market observability has declined to a point where categorization as a Level 3 measurement is considered appropriate.  The indicators considered in determining whether a significant decrease in the volume and level of activity for a specific asset has occurred include the level of new issuances in the primary market, trading volume in the secondary market, the level of credit spreads over historical levels, applicable bid-ask spreads, and price consensus among market participants and other pricing sources.
Certain assets are not carried at fair value on a recurring basis, including investments such as mortgage loans, limited partnership interests, bank loans and policy loans.  Accordingly, such investments are only included in the fair value hierarchy disclosure when the investment is subject to remeasurement at fair value after initial recognition and the resulting remeasurement is reflected in

16



the condensed consolidated financial statements.  In addition, derivatives embedded in fixed income securities are not disclosed in the hierarchy as free-standing derivatives since they are presented with the host contracts in fixed income securities. 
In determining fair value, the Company principally uses the market approach which generally utilizes market transaction data for the same or similar instruments.  To a lesser extent, the Company uses the income approach which involves determining fair values from discounted cash flow methodologies.  For the majority of Level 2 and Level 3 valuations, a combination of the market and income approaches is used.
Summary of significant valuation techniques for assets and liabilities measured at fair value on a recurring basis
Level 1 measurements
Fixed income securities:  Comprise certain U.S. Treasury fixed income securities.  Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.
Equity securities:  Comprise actively traded, exchange-listed equity securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.
Short-term:  Comprise U.S. Treasury bills valued based on unadjusted quoted prices for identical assets in active markets that the Company can access and actively traded money market funds that have daily quoted net asset values for identical assets that the Company can access.
Separate account assets:  Comprise actively traded mutual funds that have daily quoted net asset values for identical assets that the Company can access.  Net asset values for the actively traded mutual funds in which the separate account assets are invested are obtained daily from the fund managers.
Level 2 measurements
Fixed income securities:
U.S. government and agencies:  The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.
Municipal:  The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.
Corporate, including privately placed:  The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.  Also included are privately placed securities valued using a discounted cash flow model that is widely accepted in the financial services industry and uses market observable inputs and inputs derived principally from, or corroborated by, observable market data.  The primary inputs to the discounted cash flow model include an interest rate yield curve, as well as published credit spreads for similar assets in markets that are not active that incorporate the credit quality and industry sector of the issuer.
Foreign government:  The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.
ABS and RMBS:  The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads.  Certain ABS are valued based on non-binding broker quotes whose inputs have been corroborated to be market observable.
CMBS:  The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, collateral performance and credit spreads.
Redeemable preferred stock:  The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, underlying stock prices and credit spreads.
Equity securities:  The primary inputs to the valuation include quoted prices or quoted net asset values for identical or similar assets in markets that are not active.
Short-term:  The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.  For certain short-term investments, amortized cost is used as the best estimate of fair value.
Other investments:  Free-standing exchange listed derivatives that are not actively traded are valued based on quoted prices for identical instruments in markets that are not active.
OTC derivatives, including interest rate swaps, foreign currency swaps, foreign exchange forward contracts, certain options and certain credit default swaps, are valued using models that rely on inputs such as interest rate yield curves, currency rates,

17



and counterparty credit spreads that are observable for substantially the full term of the contract.  The valuation techniques underlying the models are widely accepted in the financial services industry and do not involve significant judgment.
Level 3 measurements
Fixed income securities:
Municipal:  Comprise municipal bonds that are not rated by third party credit rating agencies but are rated by the National Association of Insurance Commissioners (“NAIC”).  The primary inputs to the valuation of these municipal bonds include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields and credit spreads.  Also included are municipal bonds valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable.  Also includes auction rate securities (“ARS”) primarily backed by student loans that have become illiquid due to failures in the auction market and are valued using a discounted cash flow model that is widely accepted in the financial services industry and uses significant non-market observable inputs, including the anticipated date liquidity will return to the market.
Corporate, including privately placed:  Primarily valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable.  Also included are equity-indexed notes which are valued using a discounted cash flow model that is widely accepted in the financial services industry and uses significant non-market observable inputs, such as volatility.  Other inputs include an interest rate yield curve, as well as published credit spreads for similar assets that incorporate the credit quality and industry sector of the issuer.
ABS, RMBS and CMBS:  Valued based on non-binding broker quotes received from brokers who are familiar with the investments and where the inputs have not been corroborated to be market observable.
Equity securities:  The primary inputs to the valuation include quoted prices or quoted net asset values for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements.
Other investments:  Certain OTC derivatives, such as interest rate caps, certain credit default swaps and certain options (including swaptions), are valued using models that are widely accepted in the financial services industry.  These are categorized as Level 3 as a result of the significance of non-market observable inputs such as volatility.  Other primary inputs include interest rate yield curves and credit spreads.
Contractholder funds:  Derivatives embedded in certain life and annuity contracts are valued internally using models widely accepted in the financial services industry that determine a single best estimate of fair value for the embedded derivatives within a block of contractholder liabilities.  The models primarily use stochastically determined cash flows based on the contractual elements of embedded derivatives, projected option cost and applicable market data, such as interest rate yield curves and equity index volatility assumptions.  These are categorized as Level 3 as a result of the significance of non-market observable inputs.
Assets and liabilities measured at fair value on a non-recurring basis
Mortgage loans written-down to fair value in connection with recognizing impairments are valued based on the fair value of the underlying collateral less costs to sell.  Limited partnership interests written-down to fair value in connection with recognizing other-than-temporary impairments are valued using net asset values. 



















18



The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2015.
($ in millions)
Quoted prices
in active
markets for
identical assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Counterparty
and cash
collateral
netting
 
Balance as of March 31, 2015
Assets
 

 
 

 
 

 
 

 
 

Fixed income securities:
 

 
 

 
 

 
 

 
 

U.S. government and agencies
$
3,219

 
$
882

 
$
5

 
 

 
$
4,106

Municipal

 
8,475

 
238

 
 

 
8,713

Corporate

 
41,497

 
878

 
 

 
42,375

Foreign government

 
1,375

 

 
 

 
1,375

ABS

 
2,918

 
137

 
 

 
3,055

RMBS

 
1,153

 
1

 
 

 
1,154

CMBS

 
572

 
28

 
 

 
600

Redeemable preferred stock

 
25

 

 
 

 
25

Total fixed income securities
3,219

 
56,897

 
1,287

 
 

 
61,403

Equity securities
3,843

 
230

 
93

 
 

 
4,166

Short-term investments
632

 
1,855

 
10

 
 

 
2,497

Other investments: Free-standing derivatives

 
85

 
2

 
$
(8
)
 
79

Separate account assets
4,304

 

 

 
 

 
4,304

Other assets
1

 

 
1

 
 

 
2

Total recurring basis assets
11,999

 
59,067

 
1,393

 
(8
)
 
72,451

Non-recurring basis (1)

 

 
18

 
 

 
18

Total assets at fair value
$
11,999

 
$
59,067

 
$
1,411

 
$
(8
)
 
$
72,469

% of total assets at fair value
16.6
%
 
81.5
%
 
1.9
%
 
 %
 
100
%
 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
 

Contractholder funds: Derivatives embedded in life and annuity contracts
$

 
$

 
$
(326
)
 
 

 
$
(326
)
Other liabilities: Free-standing derivatives
(1
)
 
(51
)
 
(9
)
 
$
28

 
(33
)
Total liabilities at fair value
$
(1
)
 
$
(51
)
 
$
(335
)
 
$
28

 
$
(359
)
% of total liabilities at fair value
0.3
%
 
14.2
%
 
93.3
%
 
(7.8
)%
 
100
%
_______________
(1) 
Includes $18 million of limited partnership interests written-down to fair value in connection with recognizing other-than-temporary impairments.























19



The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2014.
($ in millions)
Quoted prices
in active
markets for
identical assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Counterparty
and cash
collateral
netting
 
Balance as of December 31, 2014
Assets
 

 
 

 
 

 
 

 
 

Fixed income securities:
 

 
 

 
 

 
 

 
 

U.S. government and agencies
$
3,240

 
$
1,082

 
$
6

 
 

 
$
4,328

Municipal

 
8,227

 
270

 
 

 
8,497

Corporate

 
41,253

 
891

 
 

 
42,144

Foreign government

 
1,645

 

 
 

 
1,645

ABS

 
3,782

 
196

 
 

 
3,978

RMBS

 
1,206

 
1

 
 

 
1,207

CMBS

 
592

 
23

 
 

 
615

Redeemable preferred stock

 
26

 

 
 

 
26

Total fixed income securities
3,240