UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

/ X /  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2012

 

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)

 

 

 

(847) 402-5000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes   X                      No       

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes   X                      No       

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,”  “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   X		Accelerated filer
Non-accelerated filer            (Do not check if a smaller reporting company)		Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes                           No    X  

 

As of April 18, 2012, the registrant had 491,360,562 common shares, $.01 par value, outstanding.

 

 

THE ALLSTATE CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

March 31, 2012

 

PART I		FINANCIAL INFORMATION		PAGE
Item 1.		Financial Statements
		Condensed Consolidated Statements of Operations for the Three-Month Periods Ended March 31, 2012 and 2011 (unaudited)		1
		Condensed Consolidated Statements of Comprehensive Income for the Three-Month Periods Ended March 31, 2012 and 2011 (unaudited)		2
		Condensed Consolidated Statements of Financial Position as of March 31, 2012 (unaudited) and December 31, 2011		3
		Condensed Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 2012 and 2011 (unaudited)		4
		Notes to Condensed Consolidated Financial Statements (unaudited)		5
		Report of Independent Registered Public Accounting Firm		46
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
		Highlights		47
		Consolidated Net Income		48
		Property-Liability Highlights		48
		Allstate Protection Segment		52
		Discontinued Lines and Coverages Segment		59
		Property-Liability Investment Results		60
		Allstate Financial Highlights		61
		Allstate Financial Segment		61
		Investments Highlights		67
		Investments		67
		Capital Resources and Liquidity Highlights		80
		Capital Resources and Liquidity		81
Item 4.		Controls and Procedures		85
PART II		OTHER INFORMATION
Item 1.		Legal Proceedings		86
Item 1A.		Risk Factors		86
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		86
Item 5.		Other Information		87
Item 6.		Exhibits		87

 

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PART I. FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

THE ALLSTATE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

($ in millions, except per share data)		Three months ended March 31,
		2012		2011
		(unaudited)
				(As Adjusted See Note 1)
Revenues
Property-liability insurance premiums	$	6,630	$	6,448
Life and annuity premiums and contract charges		553		569
Net investment income		1,011		982
Realized capital gains and losses:
Total other-than-temporary impairment losses		(87)		(156	)
Portion of loss recognized in other comprehensive income		4		(27	)
Net other-than-temporary impairment losses recognized in earnings		(83)		(183	)
Sales and other realized capital gains and losses		251		279
Total realized capital gains and losses		168		96
		8,362		8,095
Costs and expenses
Property-liability insurance claims and claims expense		4,339		4,476
Life and annuity contract benefits		439		454
Interest credited to contractholder funds		378		418
Amortization of deferred policy acquisition costs		979		984
Operating costs and expenses		1,017		900
Restructuring and related charges		6		9
Interest expense		95		92
		7,253		7,333
Gain (loss) on disposition of operations		3		(20	)
Income from operations before income tax expense		1,112		742
Income tax expense		346		218
Net income	$	766	$	524
Earnings per share:
Net income per share - Basic	$	1.54	$	0.99
Weighted average shares - Basic		498.7		531.0
Net income per share - Diluted	$	1.53	$	0.98
Weighted average shares - Diluted		501.5		533.6
Cash dividends declared per share	$	0.22	$	0.21

 

See notes to condensed consolidated financial statements.

 

1

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THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

($ in millions)		Three Months Ended March 31,
		2012		2011
		(unaudited)
				(As Adjusted See Note 1)
Net income	$	766	$	524
Other comprehensive income, after-tax
Changes in:
Unrealized net capital gains and losses		474		124
Unrealized foreign currency translation adjustments		9		10
Unrecognized pension and other postretirement benefit cost		20		15
Other comprehensive income, after-tax		503		149
Comprehensive income	$	1,269	$	673

 

See notes to condensed consolidated financial statements.

 

2

 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

($ in millions, except par value data)		March 31, 2012		December 31, 2011
		(unaudited)
Assets				(As Adjusted
Investments				See Note 1)
Fixed income securities, at fair value (amortized cost $74,060 and $73,379)	$	77,223	$	76,113
Equity securities, at fair value (cost $3,430 and $4,203)		3,847		4,363
Mortgage loans		7,167		7,139
Limited partnership interests		4,637		4,697
Short-term, at fair value (amortized cost $1,886 and $1,291)		1,886		1,291
Other		2,249		2,015
Total investments		97,009		95,618
Cash		577		776
Premium installment receivables, net		4,908		4,920
Deferred policy acquisition costs		3,716		3,871
Reinsurance recoverables, net		7,118		7,251
Accrued investment income		846		826
Deferred income taxes		201		722
Property and equipment, net		912		914
Goodwill		1,242		1,242
Other assets		2,049		2,069
Separate Accounts		7,355		6,984
Total assets	$	125,933	$	125,193
Liabilities
Reserve for property-liability insurance claims and claims expense	$	20,283	$	20,375
Reserve for life-contingent contract benefits		14,296		14,406
Contractholder funds		41,603		42,332
Unearned premiums		9,888		10,057
Claim payments outstanding		750		827
Other liabilities and accrued expenses		6,490		5,978
Long-term debt		6,058		5,908
Separate Accounts		7,355		6,984
Total liabilities		106,723		106,867
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, 493 million and 501 million shares outstanding		9		9
Additional capital paid-in		3,151		3,189
Retained income		32,565		31,909
Deferred ESOP expense		(41)		(43	)
Treasury stock, at cost (407 million and 399 million shares)		(17,034)		(16,795	)
Accumulated other comprehensive income:
Unrealized net capital gains and losses:
Unrealized net capital losses on fixed income securities with OTTI		(100)		(174	)
Other unrealized net capital gains and losses		2,412		2,041
Unrealized adjustment to DAC, DSI and insurance reserves		(438)		(467	)
Total unrealized net capital gains and losses		1,874		1,400
Unrealized foreign currency translation adjustments		65		56
Unrecognized pension and other postretirement benefit cost		(1,407)		(1,427	)
Total accumulated other comprehensive income		532		29
Total shareholders’ equity		19,182		18,298
Noncontrolling interest		28		28
Total equity		19,210		18,326
Total liabilities and equity	$	125,933	$	125,193

 

See notes to condensed consolidated financial statements.

 

3

 

THE ALLSTATE CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

($ in millions)		Three months ended March 31,
		2012		2011
		(unaudited)
Cash flows from operating activities				(As Adjusted   See Note 1)
Net income	$	766	$	524
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other non-cash items		96		31
Realized capital gains and losses		(168)		(96)
(Gain) loss on disposition of operations		(3)		20
Interest credited to contractholder funds		378		418
Changes in:
Policy benefits and other insurance reserves		(346)		(58)
Unearned premiums		(180)		(248)
Deferred policy acquisition costs		52		67
Premium installment receivables, net		19		3
Reinsurance recoverables, net		57		(117)
Income taxes		333		203
Other operating assets and liabilities		(197)		(21)
Net cash provided by operating activities		807		726
Cash flows from investing activities
Proceeds from sales
Fixed income securities		5,689		8,363
Equity securities		1,059		642
Limited partnership interests		403		113
Mortgage loans		6		26
Other investments		36		63
Investment collections
Fixed income securities		966		1,201
Mortgage loans		170		88
Other investments		23		77
Investment purchases
Fixed income securities		(7,008)		(10,207)
Equity securities		(128)		(144)
Limited partnership interests		(318)		(334)
Mortgage loans		(216)		(26)
Other investments		(163)		(58)
Change in short-term investments, net		(379)		1,649
Change in other investments, net		(9)		(119)
Purchases of property and equipment, net		(51)		(48)
Disposition of operations		(1)		(1)
Net cash provided by investing activities		79		1,285
Cash flows from financing activities
Proceeds from issuance of long-term debt		493		--
Repayment of long-term debt		(350)		--
Contractholder fund deposits		485		596
Contractholder fund withdrawals		(1,299)		(2,122)
Dividends paid		(106)		(107)
Treasury stock purchases		(309)		(305)
Shares reissued under equity incentive plans, net		15		9
Excess tax benefits on share-based payment arrangements		(1)		(3)
Other		(13)		--
Net cash used in financing activities		(1,085)		(1,932)
Net (decrease) increase in cash		(199)		79
Cash at beginning of period		776		562
Cash at end of period	$	577	$	641

 

See notes to consolidated financial statements.

 

4

 

 

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 March 31, 2012 and for the three-month periods ended March 31, 2012 and 2011 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, 2011.  The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

 

To conform to the current year presentation, certain amounts in the prior year condensed consolidated financial statements and notes have been reclassified.

 

Adopted 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 insurance contracts.  The guidance specifies that the costs must be directly related to the successful acquisition of insurance contracts.  The guidance also specifies that advertising costs should be included as deferred acquisition costs (“DAC”) only when the direct-response advertising accounting criteria are met.  The Company adopted the new guidance on a retrospective basis as of January 1, 2012.  The cumulative effect of the adoption to shareholders’ equity as of January 1, 2011 was a decrease of $399 million, net of taxes.  The impacts of the retrospective adjustments on previously issued financial statements are summarized in the following table.

 

($ in millions, except per share data)		Previously Reported		As Adjusted
Three months ended March 31, 2011
Amortization of DAC	$	1,051	$	984
Operating costs and expenses		838		900
Loss on disposition of operations		(23)		(20)
Income tax expense		215		218
Net income		519		524
Net income per share - Basic		0.98		0.99
Net income per share - Diluted		0.97		0.98
As of December 31, 2011
DAC		4,443		3,871
Deferred income taxes		520		722
Reserve for life-contingent contract benefits		14,449		14,406
Other liabilities and accrued expenses		5,929		5,978
Retained income		32,321		31,909
Unrealized adjustment to DAC, DSI and insurance reserves		(504)		(467)
Unrealized foreign currency translation adjustments		57		56

 

In future periods, operating costs and expenses will increase since a lower amount of acquisition costs will be capitalized, which will be partially offset by a decrease in amortization of DAC due to the retrospective reduction of the DAC balance.  The effect of the adoption on net income and related per share amounts for interim periods after

 

5

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adoption is not determinable since calculations under the historic DAC accounting policy were not continued after adoption.

 

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 criteria requiring an entity to have the ability to repurchase or redeem financial assets on substantially the agreed terms and the collateral maintenance guidance related to that criteria.  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. The adoption of this guidance as of January 1, 2012 had no impact on the Company’s results of operations or 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.  Changes were made to improve consistency in global application.  The guidance is to be applied prospectively for reporting periods beginning after December 15, 2011.  The adoption of this guidance as of January 1, 2012 had no impact on the Company’s results of operations or financial position.

 

Presentation of Comprehensive Income

 

In June and December 2011, the FASB issued guidance amending the presentation of comprehensive income and its components. Under the new guidance, a reporting entity has the option to present comprehensive income in a single continuous statement or in two separate but consecutive statements.  The Company adopted the new guidance in the first quarter of 2012.  The new guidance affects presentation only and therefore had no impact on the Company’s results of operations or financial position.

 

Intangibles – Goodwill and Other

 

In September 2011, the FASB issued guidance providing the option to first assess qualitative factors, such as macroeconomic conditions and industry and market considerations, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  If impairment is indicated by the qualitative assessment, then it is necessary to perform the two-step goodwill impairment test.  If the option is not elected, the guidance requiring the two-step goodwill impairment test is unchanged. The adoption of this guidance as of January 1, 2012 had no impact on the Company’s results of operations or financial position.

 

Pending accounting standard

 

Disclosures about Offsetting Assets and Liabilities for Financial Instruments and Derivative Instruments

 

In December 2011, the FASB issued guidance requiring expanded disclosures, including both gross and net information, for financial instruments and derivative instruments that are either offset in the reporting entity’s financial statements or those that are subject to an enforceable master netting arrangement or similar agreement.  The guidance is effective for reporting periods beginning on or after January 1, 2013 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 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 and performance stock awards.

 

6

 

The computation of basic and diluted earnings per share for the three months ended March 31 is presented in the following table.

 

($ in millions, except per share data)		2012		2011
Numerator:
Net income	$	766	$	524
Denominator:
Weighted average common shares outstanding		498.7		531.0
Effect of dilutive potential common shares:
Stock options		2.0		2.2
Restricted stock units and performance stock awards (non-participating)		0.8		0.4
Weighted average common and dilutive potential common shares outstanding		501.5		533.6
Earnings per share - Basic	$	1.54	$	0.99
Earnings per share - Diluted	$	1.53	$	0.98

 

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 28.5 million and 30.4 million Allstate common shares, with exercise prices ranging from $25.91 to $62.84 and $27.36 to $62.84, were outstanding for the three-month periods ended March 31, 2012 and 2011, respectively, but were not included in the computation of diluted earnings per share in those periods.

 

3.  Supplemental Cash Flow Information

 

Non-cash modifications of certain mortgage loans, fixed income securities, limited partnership interests and other investments, as well as mergers completed with equity securities, totaled $22 million and $53 million for the three months ended March 31, 2012 and 2011, respectively.  Non-cash financing activities include $39 million related to the issuance of Allstate shares for vested restricted stock units for the three months ended March 31, 2012.

 

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 for the three months ended March 31 are as follows:

 

($ in millions)		2012			2011
Net change in proceeds managed
Net change in short-term investments	$	(210	)	$	(351	)
Operating cash flow used		(210	)		(351	)
Net change in cash		(2	)		(3	)
Net change in proceeds managed	$	(212	)	$	(354	)
Net change in liabilities
Liabilities for collateral, beginning of year	$	(462	)	$	(484	)
Liabilities for collateral, end of period		(674	)		(838	)
Operating cash flow provided	$	212		$	354

 

7

 

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
March 31, 2012
U.S. government and agencies	$	5,259	$	287	$	(5)	$	5,541
Municipal		12,970		864		(220)		13,614
Corporate		43,819		2,760		(248)		46,331
Foreign government		1,794		196		(1)		1,989
Residential mortgage-backed securities (“RMBS”)		3,959		126		(357)		3,728
Commercial mortgage-backed securities (“CMBS”)		1,864		63		(174)		1,753
Asset-backed securities (“ABS”)		4,372		108		(238)		4,242
Redeemable preferred stock		23		2		--		25
Total fixed income securities	$	74,060	$	4,406	$	(1,243)	$	77,223
December 31, 2011
U.S. government and agencies	$	5,966	$	349	$	--	$	6,315
Municipal		13,634		863		(256)		14,241
Corporate		41,217		2,743		(379)		43,581
Foreign government		1,866		216		(1)		2,081
RMBS		4,532		110		(521)		4,121
CMBS		1,962		48		(226)		1,784
ABS		4,180		73		(287)		3,966
Redeemable preferred stock		22		2		--		24
Total fixed income securities	$	73,379	$	4,404	$	(1,670)	$	76,113

 

Scheduled maturities

 

The scheduled maturities for fixed income securities are as follows as of March 31, 2012:

 

($ in millions)		Amortized		Fair
		cost		value
Due in one year or less	$	4,031	$	4,081
Due after one year through five years		20,971		21,893
Due after five years through ten years		23,172		24,703
Due after ten years		17,555		18,576
		65,729		69,253
RMBS and ABS		8,331		7,970
Total	$	74,060	$	77,223

 

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.

 

8

 

 

Net investment income

 

Net investment income for the three months ended March 31 is as follows:

 

($ in millions)		2012		2011
Fixed income securities	$	806	$	900
Equity securities		21		19
Mortgage loans		93		89
Limited partnership interests (1)		109		10
Short-term investments		1		2
Other		30		11
Investment income, before expense		1,060		1,031
Investment expense		(49)		(49)
Net investment income	$	1,011	$	982

                                                                                                                                                                                                                                                                                               

(1)   Income from limited partnership interests accounted for under the equity method of accounting (“EMA”) is reported in net investment income in 2012 and realized capital gains and losses in 2011.

 

Realized capital gains and losses

 

Realized capital gains and losses by asset type for the three months ended March 31 are as follows:

 

($ in millions)		2012		2011
Fixed income securities	$	(29)	$	(27)
Equity securities		159		122
Mortgage loans		(1)		(6)
Limited partnership interests (1)		10		68
Derivatives		21		(67)
Other		8		6
Realized capital gains and losses	$	168	$	96

 

(1)   Income from EMA limited partnerships is reported in net investment income in 2012 and realized capital gains and losses in 2011.

 

Realized capital gains and losses by transaction type for the three months ended March 31 are as follows:

 

($ in millions)		2012		2011
Impairment write-downs	$	(39)	$	(114)
Change in intent write-downs		(44)		(69)
Net other-than-temporary impairment losses recognized in earnings		(83)		(183)
Sales		229		283
Valuation of derivative instruments		11		22
Settlements of derivative instruments		11		(89)
EMA limited partnership income		--		63
Realized capital gains and losses	$	168	$	96

 

Gross gains of $115 million and $211 million and gross losses of $90 million and $88 million were realized on sales of fixed income securities during the three months ended March 31, 2012 and 2011, respectively.

 

9

 

Other-than-temporary impairment losses by asset type for the three months ended March 31 are as follows:

 

($ in millions)		2012						2011
		Gross		Included in OCI		Net		Gross		Included in OCI		Net
Fixed income securities:
Municipal	$	(1)	$	--	$	(1)	$	(27)	$	(2)	$	(29)
Corporate		(18)		--		(18)		(5)		1		(4)
Foreign government		--		--		--		(1)		--		(1)
RMBS		(43)		4		(39)		(72)		(25)		(97)
CMBS		(6)		--		(6)		(16)		(4)		(20)
ABS		--		--		--		(7)		3		(4)
Total fixed income securities		(68)		4		(64)		(128)		(27)		(155)
Equity securities		(16)		--		(16)		(20)		--		(20)
Mortgage loans		(3)		--		(3)		(6)		--		(6)
Limited partnership interests		(2)		--		(2)		(1)		--		(1)
Other		2		--		2		(1)		--		(1)
Other-than-temporary impairment losses	$	(87)	$	4	$	(83)	$	(156)	$	(27)	$	(183)

 

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 $225 million and $172 million as of March 31, 2012 and December 31, 2011, respectively, of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.

 

($ in millions)		March 31, 2012		December 31, 2011
Municipal	$	(11)	$	(11)
Corporate		(35)		(35)
RMBS		(292)		(353)
CMBS		(20)		(19)
ABS		(21)		(21)
Total	$	(379)	$	(439)

 

Rollforwards of the cumulative credit losses recognized in earnings for fixed income securities held as of the end of the period are as follows:

 

($ in millions)		Three months ended March 31
		2012		2011
Beginning balance	$	(944)	$	(1,046)
Additional credit loss for securities previously other-than-temporarily impaired		(20)		(59)
Additional credit loss for securities not previously other-than-temporarily impaired		(9)		(27)
Reduction in credit loss for securities disposed or collected		146		153
Reduction in credit loss for securities the Company has made the decision to sell or more likely than not will be required to sell		7		15
Change in credit loss due to accretion of increase in cash flows		--		1
Ending balance	$	(820)	$	(963)

 

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

 

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issuer, expected defaults, expected recoveries, the value of underlying collateral, vintage, geographic concentration, available reserves or escrows, current subordination levels, third party guarantees and other credit enhancements.  Other information, such as industry analyst reports and forecasts, sector credit ratings, financial condition of the bond insurer for insured fixed income securities, and other market data relevant to the realizability of contractual cash flows, may also be considered.  The estimated fair value of collateral will be used to estimate recovery value if the Company determines that the security is dependent on the liquidation of collateral for ultimate settlement.  If the estimated recovery value is less than the amortized cost of the security, a credit loss exists and an other-than-temporary impairment for the difference between the estimated recovery value and amortized cost is recorded in earnings.  The portion of the unrealized loss related to factors other than credit remains classified in accumulated other comprehensive income.  If the Company determines that the fixed income security does not have sufficient cash flow or other information to estimate a recovery value for the security, the Company may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings.

 

Unrealized net capital gains and losses

 

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

 

($ in millions)		Fair		Gross unrealized				Unrealized net
March 31, 2012		value		Gains		Losses		gains (losses)
Fixed income securities	$	77,223	$	4,406	$	(1,243)		$	3,163
Equity securities		3,847		464		(47)			417
Short-term investments		1,886		--		--			--
Derivative instruments (1)		(16)		2		(23)			(21)
EMA limited partnerships (2)									1
Unrealized net capital gains and losses, pre-tax									3,560
Amounts recognized for:
Insurance reserves (3)									(443)
DAC and DSI (4)									(230)
Amounts recognized									(673)
Deferred income taxes									(1,013)
Unrealized net capital gains and losses, after-tax								$	1,874

 

(1)   Included in the fair value of derivative instruments are $(10) million classified as assets and $6 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, 2011		value		Gains		Losses		gains (losses)
Fixed income securities	$	76,113	$	4,404	$	(1,670)		$	2,734
Equity securities		4,363		369		(209)			160
Short-term investments		1,291		--		--			--
Derivative instruments (1)		(12)		3		(20)			(17)
EMA limited partnerships									2
Unrealized net capital gains and losses, pre-tax									2,879
Amounts recognized for:
Insurance reserves									(594)
DAC and DSI									(124)
Amounts recognized									(718)
Deferred income taxes									(761)
Unrealized net capital gains and losses, after-tax								$	1,400

 

(1)   Included in the fair value of derivative instruments are $(5) million classified as assets and $7 million classified as liabilities.

 

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