10-Q 1 a11-13315_110q.htm 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, 2011

 

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, 2011, the registrant had 516,608,362 common shares, $.01 par value, outstanding.

 



 

THE ALLSTATE CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

June 30, 2011

 

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, 2011 and 2010 (unaudited)

 

1

 

 

 

 

 

 

 

Condensed Consolidated Statements of Financial Position as of June 30, 2011 (unaudited) and December 31, 2010

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2011 and 2010 (unaudited)

 

3

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

4

 

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

49

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

 

 

 

 

Highlights

 

50

 

 

Consolidated Net (Loss) Income

 

51

 

 

Property-Liability Highlights

 

52

 

 

Allstate Protection Segment

 

56

 

 

Discontinued Lines and Coverages Segment

 

66

 

 

Property-Liability Investment Results

 

66

 

 

Allstate Financial Highlights

 

67

 

 

Allstate Financial Segment

 

67

 

 

Investments Highlights

 

74

 

 

Investments

 

75

 

 

Capital Resources and Liquidity Highlights

 

92

 

 

Capital Resources and Liquidity

 

93

 

 

Recent Developments

 

96

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

97

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

98

 

 

 

 

 

Item 1A.

 

Risk Factors

 

98

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

98

 

 

 

 

 

Item 6.

 

Exhibits

 

99

 



 

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,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(unaudited)

 

(unaudited)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Property-liability insurance premiums

6,457

 

6,513

 

12,905

 

13,016

 

 

Life and annuity premiums and contract charges

 

547

 

 

545

 

 

1,116

 

 

1,089

 

 

Net investment income

 

1,020

 

 

1,049

 

 

2,002

 

 

2,099

 

 

Realized capital gains and losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other-than-temporary impairment losses

 

(82

)

 

(288

)

 

(238

)

 

(538

)

 

Portion of loss recognized in other comprehensive income

 

(4

)

 

(18

)

 

(31

)

 

(23

)

 

Net other-than-temporary impairment losses recognized in earnings

 

(86

)

 

(306

)

 

(269

)

 

(561

)

 

Sales and other realized capital gains and losses

 

143

 

 

(145

)

 

422

 

 

(238

)

 

Total realized capital gains and losses

 

57

 

 

(451

)

 

153

 

 

(799

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,081

 

 

7,656

 

 

16,176

 

 

15,405

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Property-liability insurance claims and claims expense

 

6,355

 

 

4,714

 

 

10,831

 

 

9,506

 

 

Life and annuity contract benefits

 

422

 

 

485

 

 

876

 

 

927

 

 

Interest credited to contractholder funds

 

417

 

 

450

 

 

835

 

 

913

 

 

Amortization of deferred policy acquisition costs

 

1,018

 

 

949

 

 

2,069

 

 

1,963

 

 

Operating costs and expenses

 

802

 

 

789

 

 

1,640

 

 

1,618

 

 

Restructuring and related charges

 

11

 

 

13

 

 

20

 

 

24

 

 

Interest expense

 

91

 

 

92

 

 

183

 

 

184

 

 

 

 

9,116

 

 

7,492

 

 

16,454

 

 

15,135

 

 

Gain (loss) on disposition of operations

 

6

 

 

2

 

 

(17

)

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from operations before income tax (benefit) expense

 

(1,029

)

 

166

 

 

(295

)

 

273

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax (benefit) expense

 

(409

)

 

21

 

 

(194

)

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

(620

)

145

 

(101

)

265

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share - Basic

(1.19

)

0.27

 

(0.19

)

0.49

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares - Basic

 

523.1

 

 

540.7

 

 

528.2

 

 

540.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share - Diluted

(1.19

)

0.27

 

(0.19

)

0.49

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares - Diluted

 

523.1

 

 

543.0

 

 

528.2

 

 

542.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

0.21

 

0.20

 

0.42

 

0.40

 

 

 

See notes to condensed consolidated financial statements.

 

1



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

($ in millions, except par value data) 

 

June 30,
2011

 

December 31,
2010

 

Assets

 

(unaudited)

 

 

 

Investments

 

 

 

 

 

 

 

Fixed income securities, at fair value (amortized cost $76,502 and $78,786)

78,414

 

79,612

 

 

Equity securities, at fair value (cost $4,329 and $4,228)

 

4,954

 

 

4,811

 

 

Mortgage loans

 

6,827

 

 

6,679

 

 

Limited partnership interests

 

4,400

 

 

3,816

 

 

Short-term, at fair value (amortized cost $2,536 and $3,279)

 

2,536

 

 

3,279

 

 

Other

 

2,158

 

 

2,286

 

 

Total investments

 

99,289

 

 

100,483

 

 

Cash

 

693

 

 

562

 

 

Premium installment receivables, net

 

4,869

 

 

4,839

 

 

Deferred policy acquisition costs

 

4,572

 

 

4,769

 

 

Reinsurance recoverables, net

 

6,446

 

 

6,552

 

 

Accrued investment income

 

875

 

 

809

 

 

Deferred income taxes

 

525

 

 

784

 

 

Property and equipment, net

 

914

 

 

921

 

 

Goodwill

 

874

 

 

874

 

 

Other assets

 

1,791

 

 

1,605

 

 

Separate Accounts

 

8,175

 

 

8,676

 

 

Total assets

129,023

 

130,874

 

 

Liabilities

 

 

 

 

 

 

 

Reserve for property-liability insurance claims and claims expense

20,456

 

19,468

 

 

Reserve for life-contingent contract benefits

 

13,787

 

 

13,482

 

 

Contractholder funds

 

45,078

 

 

48,195

 

 

Unearned premiums

 

9,727

 

 

9,800

 

 

Claim payments outstanding

 

948

 

 

737

 

 

Other liabilities and accrued expenses

 

6,152

 

 

5,564

 

 

Long-term debt

 

5,907

 

 

5,908

 

 

Separate Accounts

 

8,175

 

 

8,676

 

 

Total liabilities

 

110,230

 

 

111,830

 

 

 

 

 

 

 

 

 

 

Commitments and Contingent Liabilities (Note 10)

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

Preferred stock, $1 par value, 25 million shares authorized, none issued

 

--

 

 

--

 

 

Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 517 million and 533 million shares outstanding

 

9

 

 

9

 

 

Additional capital paid-in

 

3,165

 

 

3,176

 

 

Retained income

 

31,647

 

 

31,969

 

 

Deferred ESOP expense

 

(43

)

 

(44

)

 

Treasury stock, at cost (383 million and 367 million shares)

 

(16,387

)

 

(15,910

)

 

Accumulated other comprehensive income:

 

 

 

 

 

 

 

Unrealized net capital gains and losses:

 

 

 

 

 

 

 

Unrealized net capital losses on fixed income securities with OTTI

 

(156

)

 

(190

)

 

Other unrealized net capital gains and losses

 

1,783

 

 

1,089

 

 

Unrealized adjustment to DAC, DSI and insurance reserves

 

(181

)

 

36

 

 

Total unrealized net capital gains and losses

 

1,446

 

 

935

 

 

Unrealized foreign currency translation adjustments

 

83

 

 

69

 

 

Unrecognized pension and other postretirement benefit cost

 

(1,156

)

 

(1,188

)

 

Total accumulated other comprehensive income (loss)

 

373

 

 

(184

)

 

Total shareholders’ equity

 

18,764

 

 

19,016

 

 

Noncontrolling interest

 

29

 

 

28

 

 

Total equity

 

18,793

 

 

19,044

 

 

Total liabilities and equity

129,023

 

130,874

 

 

 

See notes to condensed consolidated financial statements.

 

2



 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

($ in millions)

 

Six Months Ended
June 30,

 

 

 

2011

 

2010

 

Cash flows from operating activities

 

(unaudited)

 

Net (loss) income

(101

)

265

 

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation, amortization and other non-cash items

 

89

 

 

26

 

 

Realized capital gains and losses

 

(153

)

 

799

 

 

Loss (gain) on disposition of operations

 

17

 

 

(3

)

 

Interest credited to contractholder funds

 

835

 

 

913

 

 

Changes in:

 

 

 

 

 

 

 

Policy benefits and other insurance reserves

 

665

 

 

306

 

 

Unearned premiums

 

(87

)

 

(135

)

 

Deferred policy acquisition costs

 

57

 

 

(70

)

 

Premium installment receivables, net

 

(22

)

 

9

 

 

Reinsurance recoverables, net

 

(40

)

 

(206

)

 

Income taxes

 

(226

)

 

74

 

 

Other operating assets and liabilities

 

226

 

 

116

 

 

Net cash provided by operating activities

 

1,260

 

 

2,094

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Proceeds from sales

 

 

 

 

 

 

 

Fixed income securities

 

14,140

 

 

9,114

 

 

Equity securities

 

854

 

 

3,046

 

 

Limited partnership interests

 

335

 

 

278

 

 

Mortgage loans

 

65

 

 

44

 

 

Other investments

 

109

 

 

62

 

 

Investment collections

 

 

 

 

 

 

 

Fixed income securities

 

2,385

 

 

2,391

 

 

Mortgage loans

 

308

 

 

638

 

 

Other investments

 

92

 

 

44

 

 

Investment purchases

 

 

 

 

 

 

 

Fixed income securities

 

(13,934

)

 

(11,900

)

 

Equity securities

 

(781

)

 

(1,501

)

 

Limited partnership interests

 

(765

)

 

(616

)

 

Mortgage loans

 

(536

)

 

(10

)

 

Other investments

 

(146

)

 

(79

)

 

Change in short-term investments, net

 

1,166

 

 

439

 

 

Change in other investments, net

 

(170

)

 

(128

)

 

Purchases of property and equipment, net

 

(106

)

 

(69

)

 

Disposition of operations

 

(1

)

 

--

 

 

Net cash provided by investing activities

 

3,015

 

 

1,753

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Repayment of long-term debt

 

(1

)

 

(1

)

 

Contractholder fund deposits

 

1,120

 

 

1,567

 

 

Contractholder fund withdrawals

 

(4,508

)

 

(5,112

)

 

Dividends paid

 

(218

)

 

(215

)

 

Treasury stock purchases

 

(544

)

 

(5

)

 

Shares reissued under equity incentive plans, net

 

17

 

 

25

 

 

Excess tax benefits on share-based payment arrangements

 

(3

)

 

(4

)

 

Other

 

(7

)

 

(3

)

 

Net cash used in financing activities

 

(4,144

)

 

(3,748

)

 

Net increase in cash

 

131

 

 

99

 

 

Cash at beginning of period

 

562

 

 

612

 

 

Cash at end of period

693

 

711

 

 

 

See notes to condensed consolidated financial statements.

 

3



 

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 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, 2011, and for the three-month and six-month periods ended June 30, 2011 and 2010 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, 2010.  The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

 

Adopted accounting standards

 

Consolidation Analysis Considering Investments Held through Separate Accounts

 

In April 2010, the Financial Accounting Standards Board (“FASB”) issued guidance clarifying that an insurer is not required to combine interests in investments held in a qualifying separate account with its interests in the same investments held in the general account when performing a consolidation evaluation.  The adoption of this guidance as of January 1, 2011 had no impact on the Company’s results of operations or financial position.

 

Disclosure of Supplementary Pro Forma Information for Business Combinations

 

In December 2010, the FASB issued disclosure guidance for entities that enter into business combinations that are material.  The guidance specifies that if an entity presents comparative financial statements, the entity should disclose pro forma revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only.  The guidance expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination.  The Company will apply the guidance to any business combinations entered into on or after January 1, 2011.

 

Pending accounting standards

 

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

 

In October 2010, the FASB issued guidance modifying the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts.  The guidance specifies that the costs must be based on successful efforts.  The guidance also specifies that advertising costs should be included as deferred acquisition costs only when the direct-response advertising accounting criteria are met.  If application of the guidance would result in the capitalization of acquisition costs that had not been capitalized prior to adoption, the entity may elect not to capitalize those additional costs.  The new guidance is effective for reporting periods beginning after December 15, 2011 and should be applied prospectively, with retrospective application permitted.  The Company is in the process of evaluating the impact of adoption on the Company’s results of operations and financial position.

 

Criteria for Classification as a Troubled Debt Restructuring (“TDR”)

 

In April 2011, the FASB issued clarifying guidance related to determining whether a loan modification or restructuring should be classified as a TDR.  The additional guidance provided pertains to the two criteria used to determine whether a TDR exists, specifically whether the creditor has granted a concession and whether the debtor is experiencing financial difficulties.  The new guidance is effective for reporting periods beginning on or after June 15, 2011 with early adoption permitted.  The guidance related to the identification of a TDR is to be applied retrospectively to the beginning of the annual period of adoption.  The measurement of impairment on a TDR identified under this guidance is effective prospectively.  Disclosures about the credit quality of financing receivables and the allowance for credit losses previously deferred for TDRs, is also effective for reporting periods

 

4



 

beginning on or after June 15, 2011.  The Company is in the process of evaluating the impact of adoption, which is not expected to be material to the Company’s results of operations and financial position.

 

Criteria for Determining Effective Control for Repurchase Agreements

 

In April 2011, the FASB issued guidance modifying the assessment criteria of effective control for repurchase agreements.  The new guidance removes the criterion requiring an entity to have the ability to repurchase or redeem financial assets on substantially the agreed terms and the collateral maintenance implementation guidance related to that criterion.  The guidance is to be applied prospectively to transactions or modifications of existing transactions that occur during reporting periods beginning on or after December 15, 2011.  Early adoption is not permitted.  The impact of adoption is not expected to be material to the Company’s results of operations and financial position.

 

Amendments to Fair Value Measurement and Disclosure Requirements

 

In May 2011, the FASB issued guidance that clarifies the application of existing fair value measurement and disclosure requirements and amends certain fair value measurement principles, requirements and disclosures.  To improve consistency in global application, changes in wording were made.  The guidance is to be applied prospectively for reporting periods beginning after December 15, 2011.  Early adoption is not permitted.  The impact of adoption is not expected to be material to the Company’s results of operations and financial position.

 

Presentation of Comprehensive Income

 

In June 2011, the FASB issued guidance amending the presentation of comprehensive income and its components.  Under the new guidance, an entity has the option to present comprehensive income in a single continuous statement or in two separate but consecutive statements.  Both options require an entity to present reclassification adjustments for items reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of comprehensive income are presented.  The guidance is effective for reporting periods beginning after December 15, 2011 and is to be applied retrospectively.  Early adoption is permitted.  The impact of adoption is related to presentation only and will have no impact on the Company’s results of operations and financial position.

 

2.  Earnings per share

 

Basic earnings per share is computed using the weighted average number of common shares outstanding, including unvested participating restricted stock units.  Diluted earnings per 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.

 

The computation of basic and diluted earnings per share is presented in the following table.

 

($ in millions, except per share data)

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

(620

)

145

 

(101

)

265

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

523.1

 

 

540.7

 

 

528.2

 

 

540.4

 

 

Effect of dilutive potential common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

--

 

 

2.1

 

 

--

 

 

2.0

 

 

Restricted stock units (non-participating)

 

--

 

 

0.2

 

 

--

 

 

--

 

 

Weighted average common and dilutive potential common shares outstanding

 

523.1

 

 

543.0

 

 

528.2

 

 

542.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - Basic

(1.19

)

0.27

 

(0.19

)

0.49

 

 

Earnings per share - Diluted

(1.19

)

0.27

 

(0.19

)

0.49

 

 

 

As a result of the net loss for the three-month and six-month periods ended June 30, 2011, weighted average dilutive potential common shares outstanding resulting from 2.1 million stock options and 0.5 million restricted stock options (non-participating) in both periods were not included in the computation of diluted earnings per share since inclusion of these securities would have an anti-dilutive effect.  In the absence of the net loss, weighted

 

5



 

average common and dilutive potential common shares would have totaled 525.7 million and 530.8 million for the three-month and six-month periods ended June 30, 2011, respectively.

 

The effect of dilutive potential common shares does not include the effect of options with an anti-dilutive effect on earnings per 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 28.3 million and 27.7 million Allstate common shares, with exercise prices ranging from $27.36 to $62.84 and $28.52 to $62.84, were outstanding for the three-month periods ended June 30, 2011 and 2010, respectively, but were not included in the computation of diluted earnings per share in those periods.  Options to purchase 28.4 million and 26.1 million Allstate common shares, with exercise prices ranging from $27.36 to $62.84 and $27.36 to $64.53, were outstanding for the six-month periods ended June 30, 2011 and 2010, respectively, but were not included in the computation of diluted earnings per share in those periods.

 

3.  Supplemental Cash Flow Information

 

Non-cash investment exchanges, including modifications of certain mortgage loans (primarily refinances at maturity with no concessions granted to the borrower), fixed income securities, limited partnerships and other investments, as well as mergers completed with equity securities, totaled $513 million and $353 million for the six months ended June 30, 2011 and 2010, respectively.

 

Liabilities for collateral received in conjunction with the Company’s securities lending program and over-the-counter (“OTC”) derivatives are reported in other liabilities and accrued expenses or other investments.  The accompanying cash flows are included in cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows along with the activities resulting from management of the proceeds, which are as follows:

 

($ in millions)

 

Six months ended
June 30,

 

 

 

2011

 

2010

 

Net change in proceeds managed

 

 

 

 

 

 

 

Net change in short-term investments

(421

)

211

 

 

Operating cash flow (used) provided

 

(421

)

 

211

 

 

Net change in cash

 

(2

)

 

2

 

 

Net change in proceeds managed

(423

)

213

 

 

 

 

 

 

 

 

 

 

Net change in liabilities

 

 

 

 

 

 

 

Liabilities for collateral, beginning of year

(484

)

(658

)

 

Liabilities for collateral, end of period

 

(907

)

 

(445

)

 

Operating cash flow provided (used)

423

 

(213

)

 

 

6



 

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

 

Gross unrealized

 

Fair

 

 

 

cost

 

Gains

 

Losses

 

value

 

June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

5,872

 

318

 

(3

)

6,187

 

 

Municipal

 

14,557

 

 

491

 

 

(375

)

 

14,673

 

 

Corporate

 

40,610

 

 

2,014

 

 

(255

)

 

42,369

 

 

Foreign government

 

2,720

 

 

327

 

 

(4

)

 

3,043

 

 

Residential mortgage-backed securities (“RMBS”)

 

6,356

 

 

203

 

 

(569

)

 

5,990

 

 

Commercial mortgage-backed securities (“CMBS”)

 

2,083

 

 

57

 

 

(154

)

 

1,986

 

 

Asset-backed securities (“ABS”)

 

4,281

 

 

95

 

 

(234

)

 

4,142

 

 

Redeemable preferred stock

 

23

 

 

1

 

 

--

 

 

24

 

 

Total fixed income securities

76,502

 

3,506

 

(1,594

)

78,414

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

8,320

 

327

 

(51

)

8,596

 

 

Municipal

 

16,201

 

 

379

 

 

(646

)

 

15,934

 

 

Corporate

 

36,260

 

 

1,816

 

 

(421

)

 

37,655

 

 

Foreign government

 

2,821

 

 

347

 

 

(10

)

 

3,158

 

 

RMBS

 

8,509

 

 

216

 

 

(732

)

 

7,993

 

 

CMBS

 

2,213

 

 

58

 

 

(277

)

 

1,994

 

 

ABS

 

4,425

 

 

113

 

 

(294

)

 

4,244

 

 

Redeemable preferred stock

 

37

 

 

1

 

 

--

 

 

38

 

 

Total fixed income securities

78,786

 

3,257

 

(2,431

)

79,612

 

 

 

Scheduled maturities

 

The scheduled maturities for fixed income securities are as follows as of June 30, 2011:

 

($ in millions) 

 

Amortized

 

Fair

 

 

 

cost

 

value

 

Due in one year or less

2,921

 

2,965

 

 

Due after one year through five years

 

24,089

 

 

25,112

 

 

Due after five years through ten years

 

19,237

 

 

20,311

 

 

Due after ten years

 

19,618

 

 

19,894

 

 

 

 

65,865

 

 

68,282

 

 

RMBS and ABS

 

10,637

 

 

10,132

 

 

Total

76,502

 

78,414

 

 

 

Actual maturities may differ from those scheduled as a result of prepayments by the issuers.  Because of the potential for prepayment on RMBS and ABS, they are not categorized by contractual maturity.  CMBS are categorized by contractual maturity because they generally are not subject to prepayment risk.

 

7



 

Net investment income

 

Net investment income is as follows:

 

($ in millions)

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Fixed income securities

899

 

955

 

1,799

 

1,914

 

 

Equity securities

 

34

 

 

25

 

 

53

 

 

46

 

 

Mortgage loans

 

87

 

 

99

 

 

176

 

 

203

 

 

Limited partnership interests

 

18

 

 

7

 

 

28

 

 

13

 

 

Short-term investments

 

1

 

 

2

 

 

3

 

 

4

 

 

Other

 

26

 

 

6

 

 

37

 

 

7

 

 

Investment income, before expense

 

1,065

 

 

1,094

 

 

2,096

 

 

2,187

 

 

Investment expense

 

(45

)

 

(45

)

 

(94

)

 

(88

)

 

Net investment income

1,020

 

1,049

 

2,002

 

2,099

 

 

 

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,

 

 

 

2011

 

2010

 

2011

 

2010

 

Fixed income securities

39

 

(188

)

12

 

(324

)

 

Equity securities

 

15

 

 

45

 

 

137

 

 

59

 

 

Mortgage loans

 

(3

)

 

(28

)

 

(9

)

 

(53

)

 

Limited partnership interests

 

53

 

 

26

 

 

121

 

 

5

 

 

Derivatives

 

(53

)

 

(308

)

 

(120

)

 

(493

)

 

Other

 

6

 

 

2

 

 

12

 

 

7

 

 

Realized capital gains and losses

57

 

(451

)

153

 

(799

)

 

 

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

 

($ in millions)

 

Three months ended
June 30,

 

 

Six months ended
June 30,

 

 

 

 

2011

 

 

2010

 

 

2011

 

 

2010

 

 

Impairment write-downs

(70

)

(239

)

(184

)

(462

)

 

Change in intent write-downs

 

(16

)

 

(67

)

 

(85

)

 

(99

)

 

Net other-than-temporary impairment losses recognized in earnings

 

(86

)

 

(306

)

 

(269

)

 

(561

)

 

Sales

 

141

 

 

145

 

 

424

 

 

233

 

 

Valuation of derivative instruments

 

(50

)

 

(283

)

 

(28

)

 

(438

)

 

Settlements of derivative instruments

 

(3

)

 

(27

)

 

(92

)

 

(57

)

 

Equity method of accounting (“EMA”) limited partnership income

 

55

 

 

20

 

 

118

 

 

24

 

 

Realized capital gains and losses

57

 

(451

)

153

 

(799

)

 

 

Gross gains of $177 million and $144 million and gross losses of $98 million and $113 million were realized on sales of fixed income securities during the three months ended June 30, 2011 and 2010, respectively.  Gross gains of $388 million and $286 million and gross losses of $186 million and $187 million were realized on sales of fixed income securities during the six months ended June 30, 2011 and 2010, respectively.

 

8



 

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

 

($ in millions)

 

Three months ended
June 30, 2011

 

Six months ended
 June 30, 2011

 

 

 

Gross

 

Included
in OCI

 

Net

 

Gross

 

Included
in OCI

 

Net

 

Fixed income securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal

(15

)

(1

)

(16

)

(42

)

(3

)

(45

)

 

Corporate

 

--

 

 

--

 

 

--

 

 

(5

)

 

1

 

 

(4

)

 

Foreign government

 

--

 

 

--

 

 

--

 

 

(1

)

 

--

 

 

(1

)

 

RMBS

 

(35

)

 

--

 

 

(35

)

 

(107

)

 

(25

)

 

(132

)

 

CMBS

 

(10

)

 

(3

)

 

(13

)

 

(26

)

 

(7

)

 

(33

)

 

ABS

 

--

 

 

--

 

 

--

 

 

(7

)

 

3

 

 

(4

)

 

Total fixed income securities

 

(60

)

 

(4

)

 

(64

)

 

(188

)

 

(31

)

 

(219

)

 

Equity securities

 

(13

)

 

--

 

 

(13

)

 

(33

)

 

--

 

 

(33

)

 

Mortgage loans

 

(7

)

 

--

 

 

(7

)

 

(13

)

 

--

 

 

(13

)

 

Limited partnership interests

 

(1

)

 

--

 

 

(1

)

 

(2

)

 

--

 

 

(2

)

 

Other

 

(1

)

 

--

 

 

(1

)

 

(2

)

 

--

 

 

(2

)

 

Other-than-temporary impairment losses

(82

)

(4

)

(86

)

(238

)

(31

)

(269

)

 

 

 

 

Three months ended
June 30, 2010

 

Six months ended
June 30, 2010

 

 

 

Gross

 

Included
in OCI

 

Net

 

Gross

 

Included
in OCI

 

Net

 

Fixed income securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal

(68

)

4

 

(64

)

(105

)

4

 

(101

)

 

Corporate

 

(6

)

 

(1

)

 

(7

)

 

(53

)

 

2

 

 

(51

)

 

RMBS

 

(124

)

 

5

 

 

(119

)

 

(212

)

 

(2

)

 

(214

)

 

CMBS

 

(17

)

 

(11

)

 

(28

)

 

(43

)

 

(11

)

 

(54

)

 

ABS

 

(6

)

 

(15

)

 

(21

)

 

(9

)

 

(16

)

 

(25

)

 

Total fixed income securities

 

(221

)

 

(18

)

 

(239

)

 

(422

)

 

(23

)

 

(445

)

 

Equity securities

 

(31

)

 

--

 

 

(31

)

 

(37

)

 

--

 

 

(37

)

 

Mortgage loans

 

(28

)

 

--

 

 

(28

)

 

(47

)

 

--

 

 

(47

)

 

Limited partnership interests

 

(8

)

 

--

 

 

(8

)

 

(32

)

 

--

 

 

(32

)

 

Other-than-temporary impairment losses

(288

)

(18

)

(306

)

(538

)

(23

)

(561

)

 

 

The total amount of other-than-temporary impairment losses included in accumulated other comprehensive income at the time of impairment for fixed income securities, which were not included in earnings, are presented in the following table.  The amount excludes $249 million and $322 million as of June 30, 2011 and December 31, 2010, 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,
2011

 

December 31,
2010

 

Municipal

$

(13

)

$

(27

)

 

Corporate

 

(32

)

 

(31

)

 

RMBS

 

(411

)

 

(467

)

 

CMBS

 

(11

)

 

(49

)

 

ABS

 

(22

)

 

(41

)

 

Total

$

(489

)

$

(615

)

 

 

9



 

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,

 

 

 

2011

 

2010

 

2011

 

2010

 

Beginning balance

(963

)

(1,236

)

(1,046

)

(1,187

)

 

Additional credit loss for securities previously other-than-temporarily impaired

 

(31

)

 

(101

)

 

(90

)

 

(180

)

 

Additional credit loss for securities not previously other-than-temporarily impaired

 

(17

)

 

(71

)

 

(44

)

 

(172

)

 

Reduction in credit loss for securities disposed or collected

 

94

 

 

95

 

 

247

 

 

226

 

 

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

 

--

 

 

1

 

 

15

 

 

1

 

 

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

 

5

 

 

3

 

 

6

 

 

3

 

 

Ending balance

(912

)

(1,309

)

(912

)

(1,309

)

 

 

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.

 

10



 

Unrealized net capital gains and losses

 

Unrealized net capital gains and losses included in accumulated other comprehensive income are as follows:

 

($ in millions)

 

Fair

 

Gross unrealized

 

Unrealized net

 

June 30, 2011

 

value

 

Gains

 

Losses

 

gains (losses)

 

Fixed income securities

78,414

 

3,506

 

(1,594

)

 

1,912

 

 

Equity securities

 

4,954

 

 

705

 

 

(80

)

 

 

625

 

 

Short-term investments

 

2,536

 

 

--

 

 

--

 

 

 

--

 

 

Derivative instruments (1)

 

(31

)

 

--

 

 

(36

)

 

 

(36

)

 

EMA limited partnership interests (2)

 

 

 

 

 

 

 

 

 

 

 

7

 

 

Unrealized net capital gains and losses, pre-tax

 

 

 

 

 

 

 

 

 

 

 

2,508

 

 

Amounts recognized for:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance reserves (3)

 

 

 

 

 

 

 

 

 

 

 

(217

)

 

DAC and DSI (4)

 

 

 

 

 

 

 

 

 

 

 

(61

)

 

Amounts recognized

 

 

 

 

 

 

 

 

 

 

 

(278

)

 

Deferred income taxes

 

 

 

 

 

 

 

 

 

 

 

(784

)

 

Unrealized net capital gains and losses, after-tax

 

 

 

 

 

 

 

 

 

 

1,446

 

 

 


(1)

Included in the fair value of derivative instruments are $(5) million classified as assets and $26 million classified as liabilities.

(2)

Unrealized net capital gains and losses for limited partnership interests represent the Company’s share of EMA limited partnerships’ other comprehensive income. Fair value and gross gains and losses are not applicable.

(3)

The insurance reserves adjustment represents the amount by which the reserve balance would increase if the net unrealized gains in the applicable product portfolios were realized and reinvested at current lower interest rates, resulting in a premium deficiency. Although the Company evaluates premium deficiencies on the combined performance of life insurance and immediate annuities with life contingencies, the adjustment primarily relates to structured settlement annuities with life contingencies, in addition to annuity buy-outs and certain payout annuities with life contingencies.

(4)

The DAC and DSI adjustment balance represents the amount by which the amortization of DAC and DSI would increase or decrease if the unrealized gains or losses in the respective product portfolios were realized.

 

 

 

Fair

 

Gross unrealized

 

Unrealized net

 

December 31, 2010

 

value

 

Gains

 

Losses

 

gains (losses)

 

Fixed income securities

79,612

 

3,257

 

(2,431

)

 

826

 

 

Equity securities

 

4,811

 

 

646

 

 

(63

)

 

 

583

 

 

Short-term investments

 

3,279

 

 

--

 

 

--

 

 

 

--

 

 

Derivative instruments (1)

 

(17

)

 

2

 

 

(24

)

 

 

(22

)

 

Unrealized net capital gains and losses, pre-tax

 

 

 

 

 

 

 

 

 

 

 

1,387

 

 

Amounts recognized for:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance reserves

 

 

 

 

 

 

 

 

 

 

 

(41

)

 

DAC and DSI

 

 

 

 

 

 

 

 

 

 

 

97

 

 

Amounts recognized

 

 

 

 

 

 

 

 

 

 

 

56

 

 

Deferred income taxes

 

 

 

 

 

 

 

 

 

 

 

(508

)

 

Unrealized net capital gains and losses, after-tax

 

 

 

 

 

 

 

 

 

 

935

 

 

 


(1)

Included in the fair value of derivative instruments are $2 million classified as assets and $19 million classified as liabilities.

 

11



 

Change in unrealized net capital gains and losses

 

The change in unrealized net capital gains and losses for the six months ended June 30, 2011 is as follows:

 

($ in millions)

 

 

 

 

 

 

 

Fixed income securities

$

1,086

 

 

Equity securities

 

42

 

 

Derivative instruments

 

(14

)

 

EMA limited partnership interests

 

7

 

 

Total

 

1,121

 

 

Amounts recognized for:

 

 

 

 

Insurance reserves

 

(176

)

 

DAC and DSI

 

(158

)

 

Amounts recognized

 

(334

)

 

Deferred income taxes

 

(276

)

 

Increase in unrealized net capital gains and losses

$

511

 

 

 

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 equity securities managed by a third party, the Company has contractually retained its decision making authority as it pertains to selling equity securities that are in an unrealized loss position.

 

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 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

 

 

 

Number

 

Fair

 

Unrealized

 

Number

 

Fair

 

Unrealized

 

unrealized

 

 

 

of issues

 

value

 

losses

 

of issues

 

value

 

losses

 

losses

 

June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed income securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

9

 

$

198

 

$

(3

)

 

--

 

$

--

 

$

--

 

$

(3

)

 

Municipal

 

417

 

 

1,985

 

 

(75

)

 

357

 

 

2,222

 

 

(300

)

 

(375

)

 

Corporate

 

385

 

 

4,980

 

 

(95

)

 

113

 

 

1,552

 

 

(160

)

 

(255

)

 

Foreign government

 

25

 

 

114

 

 

(4

)

 

--

 

 

--

 

 

--

 

 

(4

)

 

RMBS

 

120

 

 

368

 

 

(12

)

 

296

 

 

1,338

 

 

(557

)

 

(569

)

 

CMBS

 

29

 

 

314

 

 

(16

)

 

75

 

 

609

 

 

(138

)

 

(154

)

 

ABS

 

30

 

 

441

 

 

(5

)

 

121

 

 

1,235

 

 

(229

)

 

(234

)

 

Total fixed income securities

 

1,015

 

 

8,400

 

 

(210

)

 

962

 

 

6,956

 

 

(1,384

)

 

(1,594

)

 

Equity securities

 

895

 

 

666

 

 

(60

)

 

87

 

 

73

 

 

(20

)

 

(80

)

 

Total fixed income and equity securities

 

1,910

 

$

9,066

 

$

(270

)

 

1,049

 

$

7,029

 

$

(1,404

)

$

(1,674

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment grade fixed income securities

 

836

 

$

6,786

 

$

(156

)

 

618

 

$

4,665

 

$

(607

)

$

(763

)

 

Below investment grade fixed income securities

 

179

 

 

1,614

 

 

(54

)

 

344

 

 

2,291

 

 

(777

)

 

(831

)

 

Total fixed income securities

 

1,015

 

$

8,400

 

$

(210

)

 

962

 

$

6,956

 

$

(1,384

)

$

(1,594

)