10-Q 1 allcorp-9301510xq.htm 10-Q 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549
FORM 10-Q
/X/  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
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 October 19, 2015, the registrant had 387,306,176 common shares, $.01 par value, outstanding.



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

 
 

 
 

 
 

Property-liability insurance premiums
$
7,650

 
$
7,307

 
$
22,625

 
$
21,575

Life and annuity premiums and contract charges
538

 
512

 
1,611

 
1,637

Net investment income
807

 
823

 
2,446

 
2,680

Realized capital gains and losses:
 

 
 

 
 

 
 

Total other-than-temporary impairment (“OTTI”) losses
(186
)
 
(53
)
 
(286
)
 
(177
)
OTTI losses reclassified to (from) other comprehensive income
12

 

 
20

 
(2
)
Net OTTI losses recognized in earnings
(174
)
 
(53
)
 
(266
)
 
(179
)
Sales and other realized capital gains and losses
207

 
347

 
546

 
767

Total realized capital gains and losses
33

 
294

 
280

 
588

 
9,028

 
8,936

 
26,962

 
26,480

Costs and expenses
 

 
 

 
 

 
 

Property-liability insurance claims and claims expense
5,255

 
4,909

 
15,835

 
14,810

Life and annuity contract benefits
460

 
433

 
1,347

 
1,334

Interest credited to contractholder funds
194

 
198

 
578

 
717

Amortization of deferred policy acquisition costs
1,092

 
1,030

 
3,248

 
3,100

Operating costs and expenses
992

 
1,068

 
3,143

 
3,185

Restructuring and related charges
9

 
3

 
32

 
13

Loss on extinguishment of debt

 

 

 
1

Interest expense
73

 
78

 
219

 
249

 
8,075

 
7,719

 
24,402

 
23,409

 
 
 
 
 
 
 
 
Gain (loss) on disposition of operations
2

 
(27
)
 
2

 
(77
)
 
 
 
 
 
 
 
 
Income from operations before income tax expense
955

 
1,190

 
2,562

 
2,994

 
 
 
 
 
 
 
 
Income tax expense
305

 
409

 
880

 
968

 
 
 
 
 
 
 
 
Net income
650

 
781

 
1,682

 
2,026

 
 
 
 
 
 
 
 
Preferred stock dividends
29

 
31

 
87

 
75

 
 
 
 
 
 
 
 
Net income available to common shareholders
$
621

 
$
750

 
$
1,595

 
$
1,951

 
 
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 

 
 

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

 
$
1.77

 
$
3.92

 
$
4.49

Weighted average common shares - Basic
397.0

 
424.5

 
406.5

 
435.0

Net income available to common shareholders per common share - Diluted
$
1.54

 
$
1.74

 
$
3.87

 
$
4.42

Weighted average common shares - Diluted
402.1

 
431.2

 
412.4

 
441.6

Cash dividends declared per common share
$
0.30

 
$
0.28

 
$
0.90

 
$
0.84






See notes to condensed consolidated financial statements.

1


THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
 
 (unaudited)
 
 (unaudited)
Net income
$
650

 
$
781

 
$
1,682

 
$
2,026

 
 
 
 
 
 
 
 
Other comprehensive (loss) income, after-tax
 

 
 

 
 

 
 

Changes in:
 

 
 

 
 

 
 

Unrealized net capital gains and losses
(540
)
 
(323
)
 
(1,047
)
 
181

Unrealized foreign currency translation adjustments
(14
)
 
(17
)
 
(50
)
 
(20
)
Unrecognized pension and other postretirement benefit cost
25

 
12

 
74

 
31

Other comprehensive (loss) income, after-tax
(529
)
 
(328
)
 
(1,023
)
 
192

 
 
 
 
 
 
 
 
Comprehensive income
$
121

 
$
453

 
$
659

 
$
2,218

 































See notes to condensed consolidated financial statements.

2


THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
($ in millions, except par value data)
September 30, 2015
 
December 31, 2014
Assets
(unaudited)
 
 

Investments
 

 
 

Fixed income securities, at fair value (amortized cost $56,918 and $59,672)
$
58,257

 
$
62,440

Equity securities, at fair value (cost $4,123 and $3,692)
4,236

 
4,104

Mortgage loans
4,402

 
4,188

Limited partnership interests
4,823

 
4,527

Short-term, at fair value (amortized cost $3,036 and $2,540)
3,036

 
2,540

Other
3,588

 
3,314

Total investments
78,342

 
81,113

Cash
905

 
657

Premium installment receivables, net
5,711

 
5,465

Deferred policy acquisition costs
3,811

 
3,525

Reinsurance recoverables, net
8,468

 
8,490

Accrued investment income
575

 
591

Property and equipment, net
1,050

 
1,031

Goodwill
1,219

 
1,219

Other assets
2,091

 
2,046

Separate Accounts
3,677

 
4,396

Total assets
$
105,849

 
$
108,533

Liabilities
 

 
 

Reserve for property-liability insurance claims and claims expense
$
23,757

 
$
22,923

Reserve for life-contingent contract benefits
12,229

 
12,380

Contractholder funds
21,559

 
22,529

Unearned premiums
12,343

 
11,655

Claim payments outstanding
804

 
784

Deferred income taxes
243

 
715

Other liabilities and accrued expenses
5,558

 
5,653

Long-term debt
5,175

 
5,194

Separate Accounts
3,677

 
4,396

Total liabilities
85,345

 
86,229

Commitments and Contingent Liabilities (Note 10)


 


Shareholders’ equity
 

 
 

Preferred stock and additional capital paid-in, $1 par value, 25 million shares authorized, 72.2 thousand shares issued and outstanding, and $1,805 aggregate liquidation preference
1,746

 
1,746

Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 390 million and 418 million shares outstanding
9

 
9

Additional capital paid-in
3,224

 
3,199

Retained income
39,068

 
37,842

Deferred ESOP expense
(23
)
 
(23
)
Treasury stock, at cost (510 million and 482 million shares)
(23,058
)
 
(21,030
)
Accumulated other comprehensive income:
 

 
 

Unrealized net capital gains and losses:
 

 
 

Unrealized net capital gains and losses on fixed income securities with OTTI
57

 
72

Other unrealized net capital gains and losses
886

 
1,988

Unrealized adjustment to DAC, DSI and insurance reserves
(64
)
 
(134
)
Total unrealized net capital gains and losses
879

 
1,926

Unrealized foreign currency translation adjustments
(52
)
 
(2
)
Unrecognized pension and other postretirement benefit cost
(1,289
)
 
(1,363
)
Total accumulated other comprehensive (loss) income
(462
)
 
561

Total shareholders’ equity
20,504

 
22,304

Total liabilities and shareholders’ equity
$
105,849

 
$
108,533



See notes to condensed consolidated financial statements.

3


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

 
$

 
 
 
 
Preferred stock additional capital paid-in
 

 
 

Balance, beginning of period
1,746

 
780

Preferred stock issuance

 
966

Balance, end of period
1,746

 
1,746

 
 
 
 
Common stock
9

 
9

 
 
 
 
Additional capital paid-in
 

 
 

Balance, beginning of period
3,199

 
3,143

Forward contract on accelerated share repurchase agreement

 
(113
)
Equity incentive plans activity
25

 
29

Balance, end of period
3,224

 
3,059

 
 
 
 
Retained income
 

 
 

Balance, beginning of period
37,842

 
35,580

Net income
1,682

 
2,026

Dividends on common stock
(369
)
 
(367
)
Dividends on preferred stock
(87
)
 
(75
)
Balance, end of period
39,068

 
37,164

 
 
 
 
Deferred ESOP expense
 

 
 

Balance, beginning of period
(23
)
 
(31
)
Payments

 

Balance, end of period
(23
)
 
(31
)
 
 
 
 
Treasury stock
 

 
 

Balance, beginning of period
(21,030
)
 
(19,047
)
Shares acquired
(2,230
)
 
(2,054
)
Shares reissued under equity incentive plans, net
202

 
245

Balance, end of period
(23,058
)
 
(20,856
)
 
 
 
 
Accumulated other comprehensive income
 

 
 

Balance, beginning of period
561

 
1,046

Change in unrealized net capital gains and losses
(1,047
)
 
181

Change in unrealized foreign currency translation adjustments
(50
)
 
(20
)
Change in unrecognized pension and other postretirement benefit cost
74

 
31

Balance, end of period
(462
)
 
1,238

Total shareholders’ equity
$
20,504

 
$
22,329

 







See notes to condensed consolidated financial statements.

4


THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
Nine months ended September 30,
 
2015
 
2014
Cash flows from operating activities
(unaudited)
Net income
$
1,682

 
$
2,026

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

 
 

Depreciation, amortization and other non-cash items
275

 
277

Realized capital gains and losses
(280
)
 
(588
)
Loss on extinguishment of debt

 
1

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

Interest credited to contractholder funds
578

 
717

Changes in:
 

 
 

Policy benefits and other insurance reserves
500

 
50

Unearned premiums
762

 
822

Deferred policy acquisition costs
(219
)
 
(189
)
Premium installment receivables, net
(290
)
 
(386
)
Reinsurance recoverables, net
(133
)
 
(110
)
Income taxes
(60
)
 
175

Other operating assets and liabilities
(127
)
 
(307
)
Net cash provided by operating activities
2,686

 
2,565

Cash flows from investing activities
 

 
 

Proceeds from sales
 

 
 

Fixed income securities
22,796

 
27,648

Equity securities
2,688

 
5,263

Limited partnership interests
795

 
1,084

Mortgage loans
6

 
10

Other investments
178

 
292

Investment collections
 

 
 

Fixed income securities
3,248

 
2,787

Mortgage loans
305

 
868

Other investments
254

 
158

Investment purchases
 

 
 

Fixed income securities
(22,928
)
 
(30,650
)
Equity securities
(3,238
)
 
(4,208
)
Limited partnership interests
(930
)
 
(892
)
Mortgage loans
(524
)
 
(218
)
Other investments
(743
)
 
(652
)
Change in short-term investments, net
(577
)
 
265

Change in other investments, net
(16
)
 
58

Purchases of property and equipment, net
(219
)
 
(207
)
Disposition of operations

 
378

Net cash provided by investing activities
1,095

 
1,984

Cash flows from financing activities
 

 
 

Repayments of long-term debt
(20
)
 
(1,006
)
Proceeds from issuance of preferred stock

 
965

Contractholder fund deposits
784

 
926

Contractholder fund withdrawals
(1,793
)
 
(2,831
)
Dividends paid on common stock
(365
)
 
(360
)
Dividends paid on preferred stock
(87
)
 
(56
)
Treasury stock purchases
(2,216
)
 
(2,189
)
Shares reissued under equity incentive plans, net
121

 
204

Excess tax benefits on share-based payment arrangements
44

 
22

Other
(1
)
 
(14
)
Net cash used in financing activities
(3,533
)
 
(4,339
)
Net increase in cash
248

 
210

Cash at beginning of period
657

 
675

Cash at end of period
$
905

 
$
885

See notes to condensed consolidated financial statements.

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


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

 
 

 
 

 
 

Net income
$
650

 
$
781

 
$
1,682

 
$
2,026

Less: Preferred stock dividends
29

 
31

 
87

 
75

Net income available to common shareholders
$
621

 
$
750

 
$
1,595

 
$
1,951

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

Weighted average common shares outstanding
397.0

 
424.5

 
406.5

 
435.0

Effect of dilutive potential common shares:
 

 
 

 
 

 
 

Stock options
3.6

 
4.8

 
4.2

 
4.7

Restricted stock units (non-participating) and performance stock awards
1.5

 
1.9

 
1.7

 
1.9

Weighted average common and dilutive potential common shares outstanding
402.1

 
431.2

 
412.4

 
441.6

 
 
 
 
 
 
 
 
Earnings per common share - Basic
$
1.56

 
$
1.77

 
$
3.92

 
$
4.49

Earnings per common share - Diluted
$
1.54

 
$
1.74

 
$
3.87

 
$
4.42

The effect of dilutive potential common shares does not include the effect of options with an anti-dilutive effect on earnings per common share because their exercise prices exceed the average market price of Allstate common shares during the period or for which the unrecognized compensation cost would have an anti-dilutive effect.  Options to purchase 2.2 million and 3.3 million Allstate common shares, with exercise prices ranging from $52.22 to $71.29 and $49.96 to $62.42, were outstanding for the three-month periods ended September 30, 2015 and 2014, respectively, but were not included in the computation of diluted earnings per common share in those periods.  Options to purchase 2.2 million and 4.5 million Allstate common shares, with exercise prices

7



ranging from $57.98 to $71.29 and $45.61 to $62.42, were outstanding for the nine-month periods ended September 30, 2015 and 2014, respectively, but were not included in the computation of diluted earnings per common share in those periods. 
3.  Supplemental Cash Flow Information
Non-cash investing activities include $84 million and $105 million related to modifications of certain mortgage loans, fixed income securities and other investments, as well as mergers completed with equity securities for the nine months ended September 30, 2015 and 2014, respectively, and a $90 million obligation to fund a limited partnership investment for the nine months ended September 30, 2015.  Non-cash financing activities include $74 million and $46 million related to the issuance of Allstate common shares for vested restricted stock units and performance stock awards for the nine months ended September 30, 2015 and 2014, respectively.
Liabilities for collateral received in conjunction with the Company’s securities lending program and over-the-counter (“OTC”) and cleared derivatives are reported in other liabilities and accrued expenses or other investments.  The accompanying cash flows are included in cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows along with the activities resulting from management of the proceeds, which are as follows:
($ in millions)
Nine months ended September 30,
 
2015
 
2014
Net change in proceeds managed
 

 
 

Net change in short-term investments
$
(2
)
 
$
(162
)
Operating cash flow used
(2
)
 
(162
)
Net change in cash
1

 
7

Net change in proceeds managed
$
(1
)
 
$
(155
)
 
 
 
 
Net change in liabilities
 

 
 

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

 
$
155

4.  Investments
Fair values
The amortized cost, gross unrealized gains and losses and fair value for fixed income securities are as follows:
($ in millions)
Amortized cost
 
Gross unrealized
 
Fair
value
 
 
Gains
 
Losses
 
September 30, 2015
 

 
 

 
 

 
 

U.S. government and agencies
$
3,642

 
$
118

 
$

 
$
3,760

Municipal
7,082

 
431

 
(19
)
 
7,494

Corporate
40,997

 
1,322

 
(690
)
 
41,629

Foreign government
1,026

 
60

 
(1
)
 
1,085

Asset-backed securities (“ABS”)
2,727

 
19

 
(35
)
 
2,711

Residential mortgage-backed securities (“RMBS”)
913

 
108

 
(10
)
 
1,011

Commercial mortgage-backed securities (“CMBS”)
510

 
35

 
(3
)
 
542

Redeemable preferred stock
21

 
4

 

 
25

Total fixed income securities
$
56,918

 
$
2,097

 
$
(758
)
 
$
58,257

 
 
 
 
 
 
 
 
December 31, 2014
 

 
 

 
 

 
 

U.S. government and agencies
$
4,192

 
$
139

 
$
(3
)
 
$
4,328

Municipal
7,877

 
645

 
(25
)
 
8,497

Corporate
40,386

 
1,998

 
(240
)
 
42,144

Foreign government
1,543

 
102

 

 
1,645

ABS
3,971

 
38

 
(31
)
 
3,978

RMBS
1,108

 
112

 
(13
)
 
1,207

CMBS
573

 
44

 
(2
)
 
615

Redeemable preferred stock
22

 
4

 

 
26

Total fixed income securities
$
59,672

 
$
3,082

 
$
(314
)
 
$
62,440



8



Scheduled maturities
The scheduled maturities for fixed income securities are as follows as of September 30, 2015:
($ in millions)
Amortized
cost
 
Fair
value
Due in one year or less
$
4,465

 
$
4,494

Due after one year through five years
25,511

 
26,082

Due after five years through ten years
16,859

 
16,944

Due after ten years
5,933

 
6,473

 
52,768

 
53,993

ABS, RMBS and CMBS
4,150

 
4,264

Total
$
56,918

 
$
58,257

Actual maturities may differ from those scheduled as a result of calls and make-whole payments by the issuers.  ABS, RMBS and CMBS are shown separately because of the potential for prepayment of principal prior to contractual maturity dates.
Net investment income
Net investment income is as follows:
($ in millions)
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Fixed income securities
$
546

 
$
581

 
$
1,681

 
$
1,870

Equity securities
23

 
28

 
77

 
91

Mortgage loans
53

 
54

 
165

 
206

Limited partnership interests
167

 
162

 
483

 
499

Short-term investments
4

 
1

 
8

 
5

Other
49

 
41

 
143

 
127

Investment income, before expense
842

 
867

 
2,557

 
2,798

Investment expense
(35
)
 
(44
)
 
(111
)
 
(118
)
Net investment income
$
807

 
$
823

 
$
2,446

 
$
2,680

Realized capital gains and losses
Realized capital gains and losses by asset type are as follows:
($ in millions)
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Fixed income securities
$
221

 
$
23

 
$
361

 
$
121

Equity securities
(150
)
 
213

 
(24
)
 
474

Mortgage loans
1

 
2

 
2

 
3

Limited partnership interests
(55
)
 
59

 
(52
)
 
10

Derivatives
24

 
(8
)
 
4

 
(27
)
Other
(8
)
 
5

 
(11
)
 
7

Realized capital gains and losses
$
33

 
$
294

 
$
280

 
$
588

Realized capital gains and losses by transaction type are as follows:
($ in millions)
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Impairment write-downs
$
(47
)
 
$
10

 
$
(77
)
 
$
(12
)
Change in intent write-downs
(127
)
 
(63
)
 
(189
)
 
(167
)
Net other-than-temporary impairment losses recognized in earnings
(174
)
 
(53
)
 
(266
)
 
(179
)
Sales and other
183

 
355

 
545

 
792

Valuation and settlements of derivative instruments
24

 
(8
)
 
1

 
(25
)
Realized capital gains and losses
$
33

 
$
294

 
$
280

 
$
588



9



Gross gains of $357 million and $353 million and gross losses of $120 million and $48 million were realized on sales of fixed income and equity securities during the three months ended September 30, 2015 and 2014, respectively.  Gross gains of $828 million and $866 million and gross losses of $241 million and $111 million were realized on sales of fixed income and equity securities during the nine months ended September 30, 2015 and 2014, respectively. 
Other-than-temporary impairment losses by asset type are as follows:
($ in millions)
Three months ended September 30, 2015
 
Three months ended September 30, 2014
 
Gross
 
Included
 in OCI
 
Net
 
Gross
 
Included
in OCI
 
Net
Fixed income securities:
 

 
 

 
 

 
 

 
 

 
 

Municipal
$
(1
)
 
$

 
$
(1
)
 
$
(3
)
 
$

 
$
(3
)
Corporate
(9
)
 

 
(9
)
 
(6
)
 
1

 
(5
)
ABS
(16
)
 
12

 
(4
)
 

 

 

RMBS

 

 

 
3

 
(1
)
 
2

CMBS
(1
)
 

 
(1
)
 

 

 

Total fixed income securities
(27
)
 
12

 
(15
)
 
(6
)
 

 
(6
)
Equity securities
(151
)
 

 
(151
)
 
(63
)
 

 
(63
)
Mortgage loans

 

 

 
2

 

 
2

Limited partnership interests
(2
)
 

 
(2
)
 
14

 

 
14

Other
(6
)
 

 
(6
)
 

 

 

Other-than-temporary impairment losses
$
(186
)
 
$
12

 
$
(174
)
 
$
(53
)
 
$

 
$
(53
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2015
 
Nine months ended September 30, 2014
 
Gross
 
Included
 in OCI
 
Net
 
Gross
 
Included
in OCI
 
Net
Fixed income securities:
 

 
 

 
 

 
 

 
 

 
 

Municipal
$
(5
)
 
$
4

 
$
(1
)
 
$
(9
)
 
$

 
$
(9
)
Corporate
(19
)
 
4

 
(15
)
 
(6
)
 
1

 
(5
)
ABS
(20
)
 
13

 
(7
)
 
(3
)
 

 
(3
)
RMBS
1

 
(1
)
 

 
9

 
(3
)
 
6

CMBS
(1
)
 

 
(1
)
 

 

 

Total fixed income securities
(44
)
 
20

 
(24
)
 
(9
)
 
(2
)
 
(11
)
Equity securities
(226
)
 

 
(226
)
 
(149
)
 

 
(149
)
Mortgage loans

 

 

 
6

 

 
6

Limited partnership interests
(7
)
 

 
(7
)
 
(25
)
 

 
(25
)
Other
(9
)
 

 
(9
)
 

 

 

Other-than-temporary impairment losses
$
(286
)
 
$
20

 
$
(266
)
 
$
(177
)
 
$
(2
)
 
$
(179
)
The total amount of other-than-temporary impairment losses included in accumulated other comprehensive income at the time of impairment for fixed income securities, which were not included in earnings, are presented in the following table.  The amounts exclude $221 million and $233 million as of September 30, 2015 and December 31, 2014, respectively, of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.
($ in millions)
September 30, 2015
 
December 31, 2014
Municipal
$
(8
)
 
$
(8
)
ABS
(15
)
 
(2
)
RMBS
(105
)
 
(108
)
CMBS
(6
)
 
(5
)
Total
$
(134
)
 
$
(123
)





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 September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Beginning balance
$
(372
)
 
$
(424
)
 
$
(380
)
 
$
(513
)
Additional credit loss for securities previously other-than-temporarily impaired
(7
)
 
(1
)
 
(10
)
 
(2
)
Additional credit loss for securities not previously other-than-temporarily impaired
(8
)
 
(5
)
 
(14
)
 
(8
)
Reduction in credit loss for securities disposed or collected
23

 
28

 
37

 
61

Reduction in credit loss for securities the Company has made the decision to sell or more likely than not will be required to sell

 

 

 

Change in credit loss due to accretion of increase in cash flows

 
1

 
3

 
2

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

 

 

 
59

Ending balance
$
(364
)
 
$
(401
)
 
$
(364
)
 
$
(401
)
The Company uses its best estimate of future cash flows expected to be collected from the fixed income security, discounted at the security’s original or current effective rate, as appropriate, to calculate a recovery value and determine whether a credit loss exists.  The determination of cash flow estimates is inherently subjective and methodologies may vary depending on facts and circumstances specific to the security.  All reasonably available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable assumptions and forecasts, are considered when developing the estimate of cash flows expected to be collected.  That information generally includes, but is not limited to, the remaining payment terms of the security, prepayment speeds, foreign exchange rates, the financial condition and future earnings potential of the issue or issuer, expected defaults, expected recoveries, the value of underlying collateral, vintage, geographic concentration, available reserves or escrows, current subordination levels, third party guarantees and other credit enhancements.  Other information, such as industry analyst reports and forecasts, sector credit ratings, financial condition of the bond insurer for insured fixed income securities, and other market data relevant to the realizability of contractual cash flows, may also be considered.  The estimated fair value of collateral will be used to estimate recovery value if the Company determines that the security is dependent on the liquidation of collateral for ultimate settlement.  If the estimated recovery value is less than the amortized cost of the security, a credit loss exists and an other-than-temporary impairment for the difference between the estimated recovery value and amortized cost is recorded in earnings.  The portion of the unrealized loss related to factors other than credit remains classified in accumulated other comprehensive income.  If the Company determines that the fixed income security does not have sufficient cash flow or other information to estimate a recovery value for the security, the Company may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings.
















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)
September 30, 2015
 
Gains
 
Losses
 
Fixed income securities
$
58,257

 
$
2,097

 
$
(758
)
 
$
1,339

Equity securities
4,236

 
274

 
(161
)
 
113

Short-term investments
3,036

 

 

 

Derivative instruments (1)
11

 
11

 
(4
)
 
7

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

 
 

 
 

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

 
 

 
 

 
1,454

Amounts recognized for:
 

 
 

 
 

 
 

Insurance reserves (3)
 

 
 

 
 

 

DAC and DSI (4)
 

 
 

 
 

 
(98
)
Amounts recognized
 

 
 

 
 

 
(98
)
Deferred income taxes
 

 
 

 
 

 
(477
)
Unrealized net capital gains and losses, after-tax
 

 
 

 
 

 
$
879

_______________
(1) 
Included in the fair value of derivative instruments are $4 million classified as assets and $(7) million classified as liabilities.
(2) 
Unrealized net capital gains and losses for limited partnership interests represent the Company’s share of EMA limited partnerships’ other comprehensive income. Fair value and gross unrealized gains and losses are not applicable.
(3) 
The insurance reserves adjustment represents the amount by which the reserve balance would increase if the net unrealized gains in the applicable product portfolios were realized and reinvested at current lower interest rates, resulting in a premium deficiency. Although the Company evaluates premium deficiencies on the combined performance of life insurance and immediate annuities with life contingencies, the adjustment primarily relates to structured settlement annuities with life contingencies, in addition to annuity buy-outs and certain payout annuities with life contingencies.
(4) 
The DAC and DSI adjustment balance represents the amount by which the amortization of DAC and DSI would increase or decrease if the unrealized gains or losses in the respective product portfolios were realized.
($ in millions)
Fair
value
 
Gross unrealized
 
Unrealized net
gains (losses)
December 31, 2014
 
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 nine months ended September 30, 2015 is as follows:
($ in millions)
 
Fixed income securities
$
(1,429
)
Equity securities
(299
)
Derivative instruments
9

Total
(1,719
)
Amounts recognized for:
 

Insurance reserves
28

DAC and DSI
81

Amounts recognized
109

Deferred income taxes
563

Decrease in unrealized net capital gains and losses, after-tax
$
(1,047
)
Portfolio monitoring
The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed income and equity security whose carrying value may be other-than-temporarily impaired.
For each fixed income security in an unrealized loss position, the Company assesses whether management with the appropriate authority has made the decision to sell or whether it is more likely than not the Company will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes.  If a security meets either of these criteria, the security’s decline in fair value is considered other than temporary and is recorded in earnings.
If the Company has not made the decision to sell the fixed income security and it is not more likely than not the Company will be required to sell the fixed income security before recovery of its amortized cost basis, the Company evaluates whether it expects to receive cash flows sufficient to recover the entire amortized cost basis of the security.  The Company calculates the estimated recovery value by discounting the best estimate of future cash flows at the security’s original or current effective rate, as appropriate, and compares this to the amortized cost of the security.  If the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the fixed income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss related to other factors recognized in other comprehensive income.
For equity securities, the Company considers various factors, including whether it has the intent and ability to hold the equity security for a period of time sufficient to recover its cost basis.  Where the Company lacks the intent and ability to hold to recovery, or believes the recovery period is extended, the equity security’s decline in fair value is considered other than temporary and is recorded in earnings.
For fixed income and equity securities managed by third parties, either the Company has contractually retained its decision making authority as it pertains to selling securities that are in an unrealized loss position or it recognizes any unrealized loss at the end of the period through a charge to earnings.
The Company’s portfolio monitoring process includes a quarterly review of all securities to identify instances where the fair value of a security compared to its amortized cost (for fixed income securities) or cost (for equity securities) is below established thresholds.  The process also includes the monitoring of other impairment indicators such as ratings, ratings downgrades and payment defaults.  The securities identified, in addition to other securities for which the Company may have a concern, are evaluated for potential other-than-temporary impairment using all reasonably available information relevant to the collectability or recovery of the security.  Inherent in the Company’s evaluation of other-than-temporary impairment for these fixed income and equity securities are assumptions and estimates about the financial condition and future earnings potential of the issue or issuer.  Some of the factors that may be considered in evaluating whether a decline in fair value is other than temporary are: 1) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; 2) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity; and 3) the length of time and extent to which the fair value has been less than amortized cost or cost.






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
 
September 30, 2015
 

 
 

 
 

 
 

 
 

 
 

 
 

Fixed income securities
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. government and agencies
5

 
$
364

 
$

 

 
$

 
$

 
$

Municipal
171

 
495

 
(5
)
 
9

 
48

 
(14
)
 
(19
)
Corporate
1,078

 
12,371

 
(563
)
 
82

 
800

 
(127
)
 
(690
)
Foreign government
14

 
73

 
(1
)
 

 

 

 
(1
)
ABS
53

 
738

 
(17
)
 
21

 
281

 
(18
)
 
(35
)
RMBS
76

 
13

 

 
176

 
132

 
(10
)
 
(10
)
CMBS
7

 
32

 
(1
)
 
2

 
4

 
(2
)
 
(3
)
Total fixed income securities
1,404

 
14,086

 
(587
)
 
290

 
1,265

 
(171
)
 
(758
)
Equity securities
354

 
1,619

 
(137
)
 
25

 
84

 
(24
)
 
(161
)
Total fixed income and equity securities
1,758

 
$
15,705

 
$
(724
)
 
315

 
$
1,349

 
$
(195
)
 
$
(919
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade fixed income securities
906

 
$
9,147

 
$
(217
)
 
212

 
$
762

 
$
(80
)
 
$
(297
)
Below investment grade fixed income securities
498

 
4,939

 
(370
)
 
78

 
503

 
(91
)
 
(461
)
Total fixed income securities
1,404

 
$
14,086

 
$
(587
)
 
290

 
$
1,265

 
$
(171
)
 
$
(758
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 

 
 

 
 

 
 

 
 

 
 

 
 

Fixed income securities
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. government and agencies
21

 
$
1,501

 
$
(3
)
 

 
$

 
$

 
$
(3
)
Municipal
252

 
1,008

 
(9
)
 
19

 
116

 
(16
)
 
(25
)
Corporate
576

 
7,545

 
(147
)
 
119

 
1,214

 
(93
)
 
(240
)
Foreign government
2

 
13

 

 
1

 
19

 

 

ABS
81

 
1,738

 
(11
)
 
26

 
315

 
(20
)
 
(31
)
RMBS
75

 
70

 
(1
)
 
188

 
156

 
(12
)
 
(13
)
CMBS
8

 
33

 

 
3

 
32

 
(2
)
 
(2
)
Total fixed income securities
1,015

 
11,908

 
(171
)
 
356

 
1,852

 
(143
)
 
(314
)
Equity securities
258

 
866

 
(53
)
 
1

 
11

 
(2
)
 
(55
)
Total fixed income and equity securities
1,273

 
$
12,774

 
$
(224
)
 
357

 
$
1,863

 
$
(145
)