10-Q 1 allcorp-6301510xq.htm 10-Q Allcorp - 6.30.15 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 June 30, 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 July 20, 2015, the registrant had 400,389,900 common shares, $.01 par value, outstanding.



THE ALLSTATE CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2015
 
PART I
FINANCIAL INFORMATION
PAGE
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
Condensed Consolidated Statements of Operations for the Three-Month and Six-Month Periods Ended June 30, 2015 and 2014 (unaudited)
 
Condensed Consolidated Statements of Comprehensive Income for the Three-Month and Six-Month Periods Ended June 30, 2015 and 2014 (unaudited)
 
Condensed Consolidated Statements of Financial Position as of June 30, 2015 (unaudited) and December 31, 2014
 
Condensed Consolidated Statements of Shareholders’ Equity for the Six-Month Periods Ended June 30, 2015 and 2014 (unaudited)
 
Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 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 June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(unaudited)
 
(unaudited)
Revenues
 

 
 

 
 

 
 

Property-liability insurance premiums
$
7,549

 
$
7,204

 
$
14,975

 
$
14,268

Life and annuity premiums and contract charges
536

 
518

 
1,073

 
1,125

Net investment income
789

 
898

 
1,639

 
1,857

Realized capital gains and losses:
 

 
 

 
 

 
 

Total other-than-temporary impairment (“OTTI”) losses
(47
)
 
(44
)
 
(100
)
 
(124
)
OTTI losses reclassified to (from) other comprehensive income
4

 
(1
)
 
8

 
(2
)
Net OTTI losses recognized in earnings
(43
)
 
(45
)
 
(92
)
 
(126
)
Sales and other realized capital gains and losses
151

 
285

 
339

 
420

Total realized capital gains and losses
108

 
240

 
247

 
294

 
8,982

 
8,860

 
17,934

 
17,544

Costs and expenses
 

 
 

 
 

 
 

Property-liability insurance claims and claims expense
5,587

 
5,142

 
10,580

 
9,901

Life and annuity contract benefits
446

 
413

 
887

 
901

Interest credited to contractholder funds
185

 
212

 
384

 
519

Amortization of deferred policy acquisition costs
1,086

 
1,035

 
2,156

 
2,070

Operating costs and expenses
1,061

 
1,023

 
2,151

 
2,117

Restructuring and related charges
19

 
4

 
23

 
10

Loss on extinguishment of debt

 
1

 

 
1

Interest expense
73

 
84

 
146

 
171

 
8,457

 
7,914

 
16,327

 
15,690

 
 
 
 
 
 
 
 
Gain (loss) on disposition of operations
1

 
9

 

 
(50
)
 
 
 
 
 
 
 
 
Income from operations before income tax expense
526

 
955

 
1,607

 
1,804

 
 
 
 
 
 
 
 
Income tax expense
171

 
310

 
575

 
559

 
 
 
 
 
 
 
 
Net income
355

 
645

 
1,032

 
1,245

 
 
 
 
 
 
 
 
Preferred stock dividends
29

 
31

 
58

 
44

 
 
 
 
 
 
 
 
Net income available to common shareholders
$
326

 
$
614

 
$
974

 
$
1,201

 
 
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 

 
 

Net income available to common shareholders per common share - Basic
$
0.80

 
$
1.41

 
$
2.37

 
$
2.73

Weighted average common shares - Basic
407.0

 
434.3

 
411.4

 
440.4

Net income available to common shareholders per common share - Diluted
$
0.79

 
$
1.39

 
$
2.33

 
$
2.69

Weighted average common shares - Diluted
412.6

 
440.7

 
417.6

 
446.8

Cash dividends declared per common share
$
0.30

 
$
0.28

 
$
0.60

 
$
0.56






See notes to condensed consolidated financial statements.

1


THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
 
 (unaudited)
 
 (unaudited)
Net income
$
355

 
$
645

 
$
1,032

 
$
1,245

 
 
 
 
 
 
 
 
Other comprehensive (loss) income, after-tax
 

 
 

 
 

 
 

Changes in:
 

 
 

 
 

 
 

Unrealized net capital gains and losses
(718
)
 
59

 
(507
)
 
504

Unrealized foreign currency translation adjustments
(9
)
 
13

 
(36
)
 
(3
)
Unrecognized pension and other postretirement benefit cost
20

 
8

 
49

 
19

Other comprehensive (loss) income, after-tax
(707
)
 
80

 
(494
)
 
520

 
 
 
 
 
 
 
 
Comprehensive (loss) income
$
(352
)
 
$
725

 
$
538

 
$
1,765

 































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)
June 30, 2015
 
December 31, 2014
Assets
(unaudited)
 
 

Investments
 

 
 

Fixed income securities, at fair value (amortized cost $57,971 and $59,672)
$
59,930

 
$
62,440

Equity securities, at fair value (cost $3,649 and $3,692)
4,000

 
4,104

Mortgage loans
4,343

 
4,188

Limited partnership interests
4,536

 
4,527

Short-term, at fair value (amortized cost $2,821 and $2,540)
2,821

 
2,540

Other
3,511

 
3,314

Total investments
79,141

 
81,113

Cash
805

 
657

Premium installment receivables, net
5,599

 
5,465

Deferred policy acquisition costs
3,708

 
3,525

Reinsurance recoverables, net
8,520

 
8,490

Accrued investment income
610

 
591

Property and equipment, net
1,038

 
1,031

Goodwill
1,219

 
1,219

Other assets
2,356

 
2,046

Separate Accounts
4,121

 
4,396

Total assets
$
107,117

 
$
108,533

Liabilities
 

 
 

Reserve for property-liability insurance claims and claims expense
$
23,702

 
$
22,923

Reserve for life-contingent contract benefits
12,227

 
12,380

Contractholder funds
21,968

 
22,529

Unearned premiums
11,858

 
11,655

Claim payments outstanding
820

 
784

Deferred income taxes
475

 
715

Other liabilities and accrued expenses
5,462

 
5,653

Long-term debt
5,186

 
5,194

Separate Accounts
4,121

 
4,396

Total liabilities
85,819

 
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, 402 million and 418 million shares outstanding
9

 
9

Additional capital paid-in
3,205

 
3,199

Retained income
38,567

 
37,842

Deferred ESOP expense
(23
)
 
(23
)
Treasury stock, at cost (498 million and 482 million shares)
(22,273
)
 
(21,030
)
Accumulated other comprehensive income:
 

 
 

Unrealized net capital gains and losses:
 

 
 

Unrealized net capital gains and losses on fixed income securities with OTTI
62

 
72

Other unrealized net capital gains and losses
1,435

 
1,988

Unrealized adjustment to DAC, DSI and insurance reserves
(78
)
 
(134
)
Total unrealized net capital gains and losses
1,419

 
1,926

Unrealized foreign currency translation adjustments
(38
)
 
(2
)
Unrecognized pension and other postretirement benefit cost
(1,314
)
 
(1,363
)
Total accumulated other comprehensive income
67

 
561

Total shareholders’ equity
21,298

 
22,304

Total liabilities and shareholders’ equity
$
107,117

 
$
108,533






See notes to condensed consolidated financial statements.

3


THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
($ in millions)
Six months ended June 30,
 
2015
 
2014
 
(unaudited)
Preferred stock par value
$

 
$

 
 
 
 
Preferred stock additional capital paid-in
 

 
 

Balance, beginning of period
1,746

 
780

Preferred stock issuance

 
966

Balance, end of period
1,746

 
1,746

 
 
 
 
Common stock
9

 
9

 
 
 
 
Additional capital paid-in
 

 
 

Balance, beginning of period
3,199

 
3,143

Forward contract on accelerated share repurchase agreement

 
(113
)
Equity incentive plans activity
6

 
5

Balance, end of period
3,205

 
3,035

 
 
 
 
Retained income
 

 
 

Balance, beginning of period
37,842

 
35,580

Net income
1,032

 
1,245

Dividends on common stock
(249
)
 
(249
)
Dividends on preferred stock
(58
)
 
(44
)
Balance, end of period
38,567

 
36,532

 
 
 
 
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
(1,432
)
 
(1,129
)
Shares reissued under equity incentive plans, net
189

 
191

Balance, end of period
(22,273
)
 
(19,985
)
 
 
 
 
Accumulated other comprehensive income
 

 
 

Balance, beginning of period
561

 
1,046

Change in unrealized net capital gains and losses
(507
)
 
504

Change in unrealized foreign currency translation adjustments
(36
)
 
(3
)
Change in unrecognized pension and other postretirement benefit cost
49

 
19

Balance, end of period
67

 
1,566

Total shareholders’ equity
$
21,298

 
$
22,872

 







See notes to condensed consolidated financial statements.

4


THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
Six months ended June 30,
 
2015
 
2014
Cash flows from operating activities
(unaudited)
Net income
$
1,032

 
$
1,245

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

 
 

Depreciation, amortization and other non-cash items
179

 
189

Realized capital gains and losses
(247
)
 
(294
)
Loss on extinguishment of debt

 
1

Loss on disposition of operations

 
50

Interest credited to contractholder funds
384

 
519

Changes in:
 

 
 

Policy benefits and other insurance reserves
526

 
103

Unearned premiums
244

 
287

Deferred policy acquisition costs
(132
)
 
(77
)
Premium installment receivables, net
(158
)
 
(152
)
Reinsurance recoverables, net
(144
)
 
(39
)
Income taxes
(283
)
 
(195
)
Other operating assets and liabilities
(98
)
 
(436
)
Net cash provided by operating activities
1,303

 
1,201

Cash flows from investing activities
 

 
 

Proceeds from sales
 

 
 

Fixed income securities
16,012

 
14,205

Equity securities
2,074

 
2,744

Limited partnership interests
591

 
802

Mortgage loans

 
10

Other investments
132

 
81

Investment collections
 

 
 

Fixed income securities
2,243

 
1,730

Mortgage loans
357

 
726

Other investments
177

 
107

Investment purchases
 

 
 

Fixed income securities
(16,482
)
 
(15,802
)
Equity securities
(1,920
)
 
(2,668
)
Limited partnership interests
(563
)
 
(653
)
Mortgage loans
(509
)
 
(109
)
Other investments
(518
)
 
(395
)
Change in short-term investments, net
(391
)
 
(60
)
Change in other investments, net
(16
)
 
49

Purchases of property and equipment, net
(133
)
 
(124
)
Disposition of operations

 
378

Net cash provided by investing activities
1,054

 
1,021

Cash flows from financing activities
 

 
 

Repayments of long-term debt
(9
)
 
(355
)
Proceeds from issuance of preferred stock

 
965

Contractholder fund deposits
527

 
666

Contractholder fund withdrawals
(1,152
)
 
(1,922
)
Dividends paid on common stock
(243
)
 
(238
)
Dividends paid on preferred stock
(58
)
 
(25
)
Treasury stock purchases
(1,424
)
 
(1,257
)
Shares reissued under equity incentive plans, net
109

 
149

Excess tax benefits on share-based payment arrangements
43

 
18

Other
(2
)
 
(9
)
Net cash used in financing activities
(2,209
)
 
(2,008
)
Net increase in cash
148

 
214

Cash at beginning of period
657

 
675

Cash at end of period
$
805

 
$
889


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 June 30, 2015 and for the three-month and six-month periods ended June 30, 2015 and 2014 are unaudited.  The condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods.  These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.  The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.  All significant intercompany accounts and transactions have been eliminated.
Adopted accounting standard
Accounting for Investments in Qualified Affordable Housing Projects
In January 2014, the Financial Accounting Standards Board (“FASB”) issued guidance which allows entities that invest in certain qualified affordable housing projects through limited liability entities the option to account for these investments using the proportional amortization method if certain conditions are met.  Under the proportional amortization method, the entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense or benefit.  Adoption of the new guidance in the first quarter of 2015 resulted in a one-time $45 million increase in income tax expense.
Pending accounting standards
Revenue from Contracts with Customers
In May 2014, the FASB issued guidance which revises the criteria for revenue recognition.  Insurance contracts are excluded from the scope of the new guidance.  Under the guidance, the transaction price is attributed to underlying performance obligations in the contract and revenue is recognized as the entity satisfies the performance obligations and transfers control of a good or service to the customer.  Incremental costs of obtaining a contract may be capitalized to the extent the entity expects to recover those costs.  The guidance is expected to be effective for reporting periods beginning after December 15, 2017 and is to be applied retrospectively.  The Company is in the process of evaluating the impact of adoption, which is not expected to be material to the Company’s results of operations or financial position.
Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period
In June 2014, the FASB issued guidance which clarifies that a performance target that affects vesting and could be achieved after the requisite service period should be treated as a performance condition and should not be reflected in estimating the grant-date fair value of the award.  Compensation costs should reflect the amount attributable to the periods for which the requisite service has been rendered.  Total compensation expense recognized during and after the requisite service period (which may differ from the vesting period) should reflect the number of awards that are expected to vest and should be adjusted to reflect the number of awards that ultimately vest.  The guidance is effective for reporting periods beginning after December 15, 2015 and may be applied either prospectively or retrospectively.  The Company’s existing accounting policy for performance targets that affect the vesting of share-based payment awards is consistent with the proposed guidance and as such the impact of adoption is not expected to 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 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. 

6



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.
Disclosures about Short-Duration Contracts
In May 2015, the FASB issued guidance requiring expanded disclosures for insurance entities that issue short-duration contracts. The expanded disclosures are designed to provide additional insight into an insurance entity’s ability to underwrite and anticipate costs associated with claims. The disclosures include information about incurred and paid claims development by accident year, on a net basis after reinsurance, for the number of years claims incurred typically remain outstanding, not to exceed ten years. Each period presented in the disclosure about claims development that precedes the current reporting periods is considered required supplementary information. The expanded disclosures also include information about significant changes in methodologies and assumptions, a reconciliation of incurred and paid claims development to the carrying amount of the liability for unpaid claims and claim adjustment expenses, the total amount of incurred but not reported liabilities plus expected development, claims frequency information including the methodology used to determine claim frequency and any changes to that methodology, and claim duration. The guidance is effective for annual periods beginning after December 15, 2015, and interim periods beginning after December 15, 2016, and is to be applied retrospectively.  The new guidance affects disclosures only and will have no impact on the Company’s results of operations or financial position.
2.  Earnings per Common Share
Basic earnings per common share is computed using the weighted average number of common shares outstanding, including unvested participating restricted stock units.  Diluted earnings per common share is computed using the weighted average number of common and dilutive potential common shares outstanding.  For the Company, dilutive potential common shares consist of outstanding stock options and unvested non-participating restricted stock units and contingently issuable performance stock awards.
The computation of basic and diluted earnings per common share is presented in the following table.
($ in millions, except per share data)
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Numerator:
 

 
 

 
 

 
 

Net income
$
355

 
$
645

 
$
1,032

 
$
1,245

Less: Preferred stock dividends
29

 
31

 
58

 
44

Net income available to common shareholders
$
326

 
$
614

 
$
974

 
$
1,201

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

Weighted average common shares outstanding
407.0

 
434.3

 
411.4

 
440.4

Effect of dilutive potential common shares:
 

 
 

 
 

 
 

Stock options
4.2

 
4.8

 
4.5

 
4.6

Restricted stock units (non-participating) and performance stock awards
1.4

 
1.6

 
1.7

 
1.8

Weighted average common and dilutive potential common shares outstanding
412.6

 
440.7

 
417.6

 
446.8

 
 
 
 
 
 
 
 
Earnings per common share - Basic
$
0.80

 
$
1.41

 
$
2.37

 
$
2.73

Earnings per common share - Diluted
$
0.79

 
$
1.39

 
$
2.33

 
$
2.69

The effect of dilutive potential common shares does not include the effect of options with an anti-dilutive effect on earnings per common share because their exercise prices exceed the average market price of Allstate common shares during the period or for which the unrecognized compensation cost would have an anti-dilutive effect.  Options to purchase 2.2 million and 4.5 million Allstate common shares, with exercise prices ranging from $60.81 to $71.29 and $48.46 to $62.42, were outstanding for the three-month periods ended June 30, 2015 and 2014, respectively, but were not included in the computation of diluted earnings per common share in those periods.  Options to purchase 2.2 million and 4.6 million Allstate common shares, with exercise prices ranging from $60.81 to $71.29 and $45.61 to $62.42, were outstanding for the six-month periods ended June 30, 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 $54 million and $86 million for the six months ended June 30, 2015 and 2014, respectively.  Non-cash financing activities include $72 million and $45 million related to the issuance of Allstate common shares for vested restricted stock units and performance stock awards for the six months ended June 30, 2015 and 2014, respectively.
Liabilities for collateral received in conjunction with the Company’s securities lending program and over-the-counter (“OTC”) and cleared derivatives are reported in other liabilities and accrued expenses or other investments.  The accompanying cash flows are included in cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows along with the activities resulting from management of the proceeds, which are as follows:
($ in millions)
Six months ended June 30,
 
2015
 
2014
Net change in proceeds managed
 

 
 

Net change in short-term investments
$
34

 
$
(284
)
Operating cash flow provided (used)
34

 
(284
)
Net change in cash
(3
)
 
1

Net change in proceeds managed
$
31

 
$
(283
)
 
 
 
 
Net change in liabilities
 

 
 

Liabilities for collateral, beginning of period
$
(782
)
 
$
(624
)
Liabilities for collateral, end of period
(751
)
 
(907
)
Operating cash flow (used) provided
$
(31
)
 
$
283

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
 
June 30, 2015
 

 
 

 
 

 
 

U.S. government and agencies
$
3,827

 
$
110

 
$
(1
)
 
$
3,936

Municipal
8,111

 
519

 
(36
)
 
8,594

Corporate
41,153

 
1,524

 
(360
)
 
42,317

Foreign government
1,258

 
67

 
(1
)
 
1,324

Asset-backed securities (“ABS”)
2,081

 
21

 
(26
)
 
2,076

Residential mortgage-backed securities (“RMBS”)
982

 
113

 
(12
)
 
1,083

Commercial mortgage-backed securities (“CMBS”)
538

 
39

 
(2
)
 
575

Redeemable preferred stock
21

 
4

 

 
25

Total fixed income securities
$
57,971

 
$
2,397

 
$
(438
)
 
$
59,930

 
 
 
 
 
 
 
 
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 June 30, 2015:
($ in millions)
Amortized
cost
 
Fair
value
Due in one year or less
$
4,446

 
$
4,491

Due after one year through five years
25,081

 
25,705

Due after five years through ten years
17,248

 
17,605

Due after ten years
7,595

 
8,395

 
54,370

 
56,196

ABS, RMBS and CMBS
3,601

 
3,734

Total
$
57,971

 
$
59,930

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 June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Fixed income securities
$
567

 
$
584

 
$
1,135

 
$
1,289

Equity securities
31

 
35

 
54

 
63

Mortgage loans
57

 
71

 
112

 
152

Limited partnership interests
118

 
195

 
316

 
337

Short-term investments
3

 
3

 
4

 
4

Other
49

 
44

 
94

 
86

Investment income, before expense
825

 
932

 
1,715

 
1,931

Investment expense
(36
)
 
(34
)
 
(76
)
 
(74
)
Net investment income
$
789

 
$
898

 
$
1,639

 
$
1,857

Realized capital gains and losses
Realized capital gains and losses by asset type are as follows:
($ in millions)
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Fixed income securities
$
60

 
$
62

 
$
140

 
$
98

Equity securities
48

 
239

 
126

 
261

Mortgage loans
1

 
(2
)
 
1

 
1

Limited partnership interests
(3
)
 
(51
)
 
3

 
(49
)
Derivatives
5

 
(7
)
 
(20
)
 
(19
)
Other
(3
)
 
(1
)
 
(3
)
 
2

Realized capital gains and losses
$
108

 
$
240

 
$
247

 
$
294

Realized capital gains and losses by transaction type are as follows:
($ in millions)
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Impairment write-downs
$
(11
)
 
$
(6
)
 
$
(30
)
 
$
(22
)
Change in intent write-downs
(32
)
 
(39
)
 
(62
)
 
(104
)
Net other-than-temporary impairment losses recognized in earnings
(43
)
 
(45
)
 
(92
)
 
(126
)
Sales
146

 
290

 
362

 
437

Valuation and settlements of derivative instruments
5

 
(5
)
 
(23
)
 
(17
)
Realized capital gains and losses
$
108

 
$
240

 
$
247

 
$
294



9



Gross gains of $194 million and $347 million and gross losses of $46 million and $27 million were realized on sales of fixed income and equity securities during the three months ended June 30, 2015 and 2014, respectively.  Gross gains of $471 million and $513 million and gross losses of $121 million and $63 million were realized on sales of fixed income and equity securities during the six months ended June 30, 2015 and 2014, respectively. 
Other-than-temporary impairment losses by asset type are as follows:
($ in millions)
Three months ended June 30, 2015
 
Three months ended June 30, 2014
 
Gross
 
Included
 in OCI
 
Net
 
Gross
 
Included
in OCI
 
Net
Fixed income securities:
 

 
 

 
 

 
 

 
 

 
 

Municipal
$

 
$

 
$

 
$
(1
)
 
$

 
$
(1
)
Corporate
(5
)
 
4

 
(1
)
 

 

 

ABS
(3
)
 

 
(3
)
 
(2
)
 

 
(2
)
RMBS

 

 

 
6

 
(1
)
 
5

Total fixed income securities
(8
)
 
4

 
(4
)
 
3

 
(1
)
 
2

Equity securities
(36
)
 

 
(36
)
 
(21
)
 

 
(21
)
Limited partnership interests

 

 

 
(26
)
 

 
(26
)
Other
(3
)
 

 
(3
)
 

 

 

Other-than-temporary impairment losses
$
(47
)
 
$
4

 
$
(43
)
 
$
(44
)
 
$
(1
)
 
$
(45
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2015
 
Six months ended June 30, 2014
 
Gross
 
Included
 in OCI
 
Net
 
Gross
 
Included
in OCI
 
Net
Fixed income securities:
 

 
 

 
 

 
 

 
 

 
 

Municipal
$
(4
)
 
$
4

 
$

 
$
(6
)
 
$

 
$
(6
)
Corporate
(10
)
 
4

 
(6
)
 

 

 

ABS
(4
)
 
1

 
(3
)
 
(3
)
 

 
(3
)
RMBS
1

 
(1
)
 

 
6

 
(2
)
 
4

Total fixed income securities
(17
)
 
8

 
(9
)
 
(3
)
 
(2
)
 
(5
)
Equity securities
(75
)
 

 
(75
)
 
(86
)
 

 
(86
)
Mortgage loans

 

 

 
4

 

 
4

Limited partnership interests
(5
)
 

 
(5
)
 
(39
)
 

 
(39
)
Other
$
(3
)
 
$

 
$
(3
)
 

 

 

Other-than-temporary impairment losses
$
(100
)
 
$
8

 
$
(92
)
 
$
(124
)
 
$
(2
)
 
$
(126
)
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 $224 million and $233 million as of June 30, 2015 and December 31, 2014, respectively, of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.
($ in millions)
June 30, 2015
 
December 31, 2014
Municipal
$
(9
)
 
$
(8
)
Corporate
(4
)
 

ABS
(3
)
 
(2
)
RMBS
(106
)
 
(108
)
CMBS
(6
)
 
(5
)
Total
$
(128
)
 
$
(123
)







10



Rollforwards of the cumulative credit losses recognized in earnings for fixed income securities held as of the end of the period are as follows:
($ in millions)
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Beginning balance
$
(378
)
 
$
(493
)
 
$
(380
)
 
$
(513
)
Additional credit loss for securities previously other-than-temporarily impaired
(2
)
 
4

 
(3
)
 
(1
)
Additional credit loss for securities not previously other-than-temporarily impaired
(2
)
 
(2
)
 
(6
)
 
(3
)
Reduction in credit loss for securities disposed or collected
8

 
7

 
14

 
33

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
2

 
1

 
3

 
1

Reduction in credit loss for securities sold in Lincoln Benefit Life Company (“LBL”) disposition

 
59

 

 
59

Ending balance
$
(372
)
 
$
(424
)
 
$
(372
)
 
$
(424
)
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.
















11



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)
June 30, 2015
 
Gains
 
Losses
 
Fixed income securities
$
59,930

 
$
2,397

 
$
(438
)
 
$
1,959

Equity securities
4,000

 
413

 
(62
)
 
351

Short-term investments
2,821

 

 

 

Derivative instruments (1)
7

 
7

 
(4
)
 
3

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

 
 

 
 

 
(5
)
Unrealized net capital gains and losses, pre-tax
 

 
 

 
 

 
2,308

Amounts recognized for:
 

 
 

 
 

 
 

Insurance reserves (3)
 

 
 

 
 

 

DAC and DSI (4)
 

 
 

 
 

 
(121
)
Amounts recognized
 

 
 

 
 

 
(121
)
Deferred income taxes
 

 
 

 
 

 
(768
)
Unrealized net capital gains and losses, after-tax
 

 
 

 
 

 
$
1,419

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

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









12



Change in unrealized net capital gains and losses
The change in unrealized net capital gains and losses for the six months ended June 30, 2015 is as follows:
($ in millions)
 
Fixed income securities
$
(809
)
Equity securities
(61
)
Derivative instruments
5

Total
(865
)
Amounts recognized for:
 

Insurance reserves
28

DAC and DSI
58

Amounts recognized
86

Deferred income taxes
272

Decrease in unrealized net capital gains and losses, after-tax
$
(507
)
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.






13



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
 
June 30, 2015
 

 
 

 
 

 
 

 
 

 
 

 
 

Fixed income securities
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. government and agencies
16

 
$
761

 
$
(1
)
 

 
$

 
$

 
$
(1
)
Municipal
473

 
1,472

 
(23
)
 
9

 
60

 
(13
)
 
(36
)
Corporate
954

 
11,790

 
(274
)
 
65

 
616

 
(86
)
 
(360
)
Foreign government
10

 
53

 
(1
)
 

 

 

 
(1
)
ABS
56

 
801

 
(10
)
 
22

 
253

 
(16
)
 
(26
)
RMBS
81

 
51

 
(1
)
 
177

 
146

 
(11
)
 
(12
)
CMBS
7

 
31

 

 
1

 
3

 
(2
)
 
(2
)
Total fixed income securities
1,597

 
14,959

 
(310
)
 
274

 
1,078

 
(128
)
 
(438
)
Equity securities
251

 
753

 
(61
)
 
1

 
13

 
(1
)
 
(62
)
Total fixed income and equity securities
1,848

 
$
15,712

 
$
(371
)
 
275

 
$
1,091

 
$
(129
)
 
$
(500
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade fixed income securities
1,225

 
$
10,917

 
$
(158
)
 
206

 
$
670

 
$
(69
)
 
$
(227
)
Below investment grade fixed income securities
372

 
4,042

 
(152
)
 
68

 
408

 
(59
)
 
(211
)
Total fixed income securities
1,597

 
$
14,959

 
$
(310
)
 
274

 
$
1,078

 
$
(128
)
 
$
(438
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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