UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
The Registrant meets the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format.
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2010
OR
o 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: 000-31248
ALLSTATE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Illinois |
| 36-2554642 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
3100 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 o
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 o No o
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
| Accelerated filer o |
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Non-accelerated filer x |
| Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of August 9, 2010, the registrant had 23,800 common shares, $227 par value, outstanding, all of which are held by Allstate Insurance Company.
ALLSTATE LIFE INSURANCE COMPANY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2010
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| PAGE |
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| 1 | |
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| 2 | |
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| 3 | |
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| Notes to Condensed Consolidated Financial Statements (unaudited) | 4 |
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| 42 | |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| |
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| 43 | |
| 43 | |
| 49 | |
| 49 | |
| 73 | |
| 73 | |
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76 | ||
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77 | ||
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77 | ||
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77 |
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
($ in millions) |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
|
| (unaudited) |
| (unaudited) |
| ||||||||
Revenues |
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Premiums |
| $ | 154 |
| $ | 154 |
| $ | 307 |
| $ | 306 |
|
Contract charges |
| 248 |
| 237 |
| 494 |
| 465 |
| ||||
Net investment income |
| 700 |
| 741 |
| 1,407 |
| 1,538 |
| ||||
Realized capital gains and losses: |
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|
|
|
|
| ||||
Total other-than-temporary impairment losses |
| (174 | ) | (332 | ) | (353 | ) | (716 | ) | ||||
Portion of loss recognized in other comprehensive income |
| (24 | ) | 104 |
| (10 | ) | 104 |
| ||||
Net other-than-temporary impairment losses recognized in earnings |
| (198 | ) | (228 | ) | (363 | ) | (612 | ) | ||||
Sales and other realized capital gains and losses |
| (154 | ) | 350 |
| (150 | ) | 696 |
| ||||
Total realized capital gains and losses |
| (352 | ) | 122 |
| (513 | ) | 84 |
| ||||
|
| 750 |
| 1,254 |
| 1,695 |
| 2,393 |
| ||||
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Costs and expenses |
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Contract benefits |
| 406 |
| 357 |
| 770 |
| 691 |
| ||||
Interest credited to contractholder funds |
| 439 |
| 548 |
| 891 |
| 1,113 |
| ||||
Amortization of deferred policy acquisition costs |
| 14 |
| 268 |
| 81 |
| 697 |
| ||||
Operating costs and expenses |
| 83 |
| 81 |
| 169 |
| 170 |
| ||||
Restructuring and related charges |
| (1 | ) | 2 |
| (1 | ) | 19 |
| ||||
Interest expense |
| 11 |
| 10 |
| 22 |
| 21 |
| ||||
|
| 952 |
| 1,266 |
| 1,932 |
| 2,711 |
| ||||
Gain on disposition of operations |
| 2 |
| 1 |
| 3 |
| 4 |
| ||||
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| ||||
Loss from operations before income tax (benefit) expense |
| (200 | ) | (11 | ) | (234 | ) | (314 | ) | ||||
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Income tax (benefit) expense |
| (73 | ) | (11 | ) | (89 | ) | 22 |
| ||||
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Net loss |
| $ | (127 | ) | $ | — |
| $ | (145 | ) | $ | (336 | ) |
See notes to condensed consolidated financial statements.
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
|
| June 30, |
| December 31, |
| ||
($ in millions, except par value data) |
| 2010 |
| 2009 |
| ||
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| (unaudited) |
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Assets |
|
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Investments |
|
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Fixed income securities, at fair value (amortized cost $48,700 and $49,842) |
| $ | 48,871 |
| $ | 47,658 |
|
Mortgage loans |
| 7,039 |
| 7,780 |
| ||
Equity securities, at fair value (cost $161 and $159) |
| 172 |
| 183 |
| ||
Limited partnership interests |
| 1,064 |
| 1,028 |
| ||
Short-term, at fair value (amortized cost $903 and $1,669) |
| 903 |
| 1,669 |
| ||
Policy loans |
| 825 |
| 823 |
| ||
Other |
| 844 |
| 1,076 |
| ||
Total investments |
| 59,718 |
| 60,217 |
| ||
Cash |
| 196 |
| 145 |
| ||
Deferred policy acquisition costs |
| 3,235 |
| 3,664 |
| ||
Reinsurance recoverables |
| 4,155 |
| 4,016 |
| ||
Accrued investment income |
| 541 |
| 540 |
| ||
Deferred income taxes |
| — |
| 203 |
| ||
Other assets |
| 506 |
| 963 |
| ||
Separate Accounts |
| 8,003 |
| 9,072 |
| ||
Total assets |
| $ | 76,354 |
| $ | 78,820 |
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Liabilities |
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Contractholder funds |
| $ | 47,697 |
| $ | 50,850 |
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Reserve for life-contingent contract benefits |
| 12,785 |
| 12,256 |
| ||
Unearned premiums |
| 28 |
| 30 |
| ||
Payable to affiliates, net |
| 116 |
| 119 |
| ||
Other liabilities and accrued expenses |
| 1,572 |
| 1,432 |
| ||
Deferred income taxes |
| 262 |
| — |
| ||
Notes due to related parties |
| 681 |
| 675 |
| ||
Separate Accounts |
| 8,003 |
| 9,072 |
| ||
Total liabilities |
| 71,144 |
| 74,434 |
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Commitments and Contingent Liabilities (Note 8) |
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Shareholder’s Equity |
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Redeemable preferred stock - series A, $100 par value, 1,500,000 shares authorized, none issued |
| — |
| — |
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Redeemable preferred stock - series B, $100 par value, 1,500,000 shares authorized, none issued |
| — |
| — |
| ||
Common stock, $227 par value, 23,800 shares authorized and outstanding |
| 5 |
| 5 |
| ||
Additional capital paid-in |
| 3,189 |
| 3,189 |
| ||
Retained income |
| 1,824 |
| 1,969 |
| ||
Accumulated other comprehensive income: |
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Unrealized net capital gains and losses: |
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Unrealized net capital losses on fixed income securities with OTTI |
| (207 | ) | (274 | ) | ||
Other unrealized net capital gains and losses |
| 325 |
| (1,146 | ) | ||
Unrealized adjustment to DAC, DSI and insurance reserves |
| 74 |
| 643 |
| ||
Total unrealized net capital gains and losses |
| 192 |
| (777 | ) | ||
Total accumulated other comprehensive income (loss) |
| 192 |
| (777 | ) | ||
Total shareholder’s equity |
| 5,210 |
| 4,386 |
| ||
Total liabilities and shareholder’s equity |
| $ | 76,354 |
| $ | 78,820 |
|
See notes to condensed consolidated financial statements.
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| Six Months Ended |
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|
| June 30, |
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($ in millions) |
| 2010 |
| 2009 |
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|
| (unaudited) |
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Cash flows from operating activities |
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Net loss |
| $ | (145 | ) | $ | (336 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
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Amortization and other non-cash items |
| (86 | ) | (164 | ) | ||
Realized capital gains and losses |
| 513 |
| (84 | ) | ||
Gain on disposition of operations |
| (3 | ) | (4 | ) | ||
Interest credited to contractholder funds |
| 891 |
| 1,113 |
| ||
Changes in: |
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Policy benefits and other insurance reserves |
| (130 | ) | (52 | ) | ||
Unearned premiums |
| (2 | ) | (1 | ) | ||
Deferred policy acquisition costs |
| (106 | ) | 501 |
| ||
Reinsurance recoverables, net |
| (195 | ) | (240 | ) | ||
Income taxes |
| 449 |
| 425 |
| ||
Other operating assets and liabilities |
| (1 | ) | 109 |
| ||
Net cash provided by operating activities |
| 1,185 |
| 1,267 |
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Cash flows from investing activities |
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Proceeds from sales |
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Fixed income securities |
| 4,914 |
| 5,516 |
| ||
Equity securities |
| 75 |
| 7 |
| ||
Limited partnership interests |
| 66 |
| 19 |
| ||
Mortgage loans |
| 44 |
| 139 |
| ||
Other investments |
| 55 |
| 251 |
| ||
Investment collections |
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Fixed income securities |
| 1,270 |
| 1,817 |
| ||
Mortgage loans |
| 620 |
| 584 |
| ||
Other investments |
| 37 |
| 57 |
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Investment purchases |
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Fixed income securities |
| (5,122 | ) | (6,048 | ) | ||
Equity securities |
| (50 | ) | (101 | ) | ||
Limited partnership interests |
| (112 | ) | (96 | ) | ||
Mortgage loans |
| (4 | ) | (13 | ) | ||
Other investments |
| (77 | ) | (7 | ) | ||
Change in short-term investments, net |
| 595 |
| 1,893 |
| ||
Change in other investments, net |
| (52 | ) | (162 | ) | ||
Net cash provided by investing activities |
| 2,259 |
| 3,856 |
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Cash flows from financing activities |
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Capital contribution |
| — |
| 250 |
| ||
Contractholder fund deposits |
| 1,266 |
| 1,943 |
| ||
Contractholder fund withdrawals |
| (4,659 | ) | (7,160 | ) | ||
Net cash used in financing activities |
| (3,393 | ) | (4,967 | ) | ||
Net increase in cash |
| 51 |
| 156 |
| ||
Cash at beginning of period |
| 145 |
| 93 |
| ||
Cash at end of period |
| $ | 196 |
| $ | 249 |
|
See notes to condensed consolidated financial statements.
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
Basis of presentation
The accompanying condensed consolidated financial statements include the accounts of Allstate Life Insurance Company (“ALIC”) and its wholly owned subsidiaries (collectively referred to as the “Company”). ALIC is wholly owned by Allstate Insurance Company (“AIC”), which is wholly owned by Allstate Insurance Holdings, LLC, a wholly owned subsidiary of The Allstate Corporation (the “Corporation”).
The condensed consolidated financial statements and notes as of June 30, 2010, and for the three-month and six-month periods ended June 30, 2010 and 2009 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, 2009. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.
Premiums and Contract Charges
The following table summarizes premiums and contract charges by product.
|
| Three months ended |
| Six months ended |
| ||||||||
|
| June 30, |
| June 30, |
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($ in millions) |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Premiums |
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| ||||
Traditional life insurance |
| $ | 100 |
| $ | 97 |
| $ | 202 |
| $ | 193 |
|
Immediate annuities with life contingencies |
| 31 |
| 34 |
| 58 |
| 68 |
| ||||
Accident and health |
| 23 |
| 23 |
| 47 |
| 45 |
| ||||
Total premiums |
| 154 |
| 154 |
| 307 |
| 306 |
| ||||
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Contract charges |
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Interest-sensitive life insurance |
| 238 |
| 226 |
| 471 |
| 442 |
| ||||
Fixed annuities |
| 10 |
| 11 |
| 23 |
| 23 |
| ||||
Total contract charges |
| 248 |
| 237 |
| 494 |
| 465 |
| ||||
Total premiums and contract charges |
| $ | 402 |
| $ | 391 |
| $ | 801 |
| $ | 771 |
|
Adopted accounting standards
Disclosures about Fair Value Measurements
In January 2010, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance which expands disclosure requirements relating to fair value measurements. The guidance adds requirements for disclosing amounts of and reasons for significant transfers into and out of Levels 1 and 2 and requires gross rather than net disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. The guidance also provides clarification that fair value measurement disclosures are required for each class of assets and liabilities. Disclosures about the valuation techniques and inputs used to measure fair value for measurements that fall in either Level 2 or Level 3 are also required. The Company adopted the provisions of the new guidance as of March 31, 2010, except for disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements, which are required for fiscal years beginning after December 15, 2010. Disclosures are not required for earlier periods presented for comparative purposes. The new guidance affects disclosures only; and therefore, the adoption had no impact on the Company’s results of operations or financial position.
Consolidation of Variable Interest Entities
In June 2009, the FASB issued new accounting guidance which requires an entity to perform a qualitative analysis to determine whether it holds a controlling financial interest (i.e., is a primary beneficiary) in a variable interest entity (“VIE”). The analysis identifies the primary beneficiary of a VIE as the entity that has both the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and the
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the VIE. The Company adopted the new guidance as of January 1, 2010. The adoption had no impact on the Company’s results of operations or financial position.
In the normal course of investing activities, the Company invests in variable interests issued by VIEs. These variable interests include structured investments such as asset-backed securities, commercial mortgage-backed securities and residential mortgage-backed securities as well as limited partnerships, special purpose entities and trusts. For these variable interests, the Company concluded it is not the primary beneficiary due to the amount of the Company’s interest in the VIEs and the Company’s lack of power to direct the activities that are most significant to the economic performance of the VIEs. The Company’s maximum exposure to loss on these interests is limited to the amount of the Company’s investment, including future funding commitments, as applicable.
Pending accounting standards
Embedded Credit Derivatives Scope Exception
In March 2010, the FASB issued accounting guidance that clarifies the scope exception for embedded credit derivative features related to the transfer of credit risk in the form of subordination of one financial instrument to another. The guidance addresses how to determine which embedded credit derivative features, including those in collateralized debt obligations and synthetic collateralized debt obligations, are considered to be embedded derivatives that should not be analyzed for potential bifurcation and separate accounting under the existing accounting guidance for embedded derivatives. The guidance is effective for fiscal quarters beginning after June 15, 2010. The Company will be required to bifurcate the credit default swaps embedded in synthetic collateralized debt obligations purchased after January 1, 2007. The amortized cost and fair value of the synthetic collateralized debt obligations subject to the guidance are $100 million and $48 million, respectively, as of June 30, 2010. Prospectively, the periodic changes in fair value of the embedded credit derivatives will be recorded in net income. The adoption of this guidance on July 1, 2010 is not expected to have a material impact on the Company’s results of operations or financial position.
Consolidation Analysis Considering Investments Held through Separate Accounts
In April 2010, the 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 guidance is effective for fiscal years and interim periods beginning after December 15, 2010 with early adoption permitted. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations or financial position.
2. Related Party Transaction
In March 2010, in accordance with an asset purchase agreement between Road Bay Investments, LLC (“RBI”), a consolidated subsidiary of ALIC, and American Heritage Life Insurance Company (“AHL”), an unconsolidated affiliate of ALIC, AHL sold to RBI mortgage loans with a carrying value of $6 million on the date of sale. As payment, RBI issued a 7.00% note due March 26, 2017 to AHL for the same amount. As security for the performance of RBI’s obligations under the agreement and note, RBI granted a pledge of and security interest in RBI’s right, title and interest in the mortgage loans and their proceeds. The note due from RBI to AHL is classified as notes due to related parties in the Condensed Consolidated Statements of Financial Position.
3. Supplemental Cash Flow Information
Non-cash investment exchanges, including modifications of certain mortgage loans, fixed income securities, and other investments, as well as mergers completed with equity securities and limited partnerships, totaled $319 million and $141 million for the six months ended June 30, 2010 and 2009, respectively.
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Liabilities for collateral received in conjunction with the Company’s securities lending and over-the-counter (“OTC”) derivatives are reported in other liabilities and accrued expenses or other investments in the Condensed Consolidated Statements of Financial Position. The accompanying cash flows are included in cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows along with the activities resulting from management of the proceeds, which are as follows:
|
| Six months ended |
| ||||
($ in millions) |
| 2010 |
| 2009 |
| ||
Net change in proceeds managed |
|
|
|
|
| ||
Net change in short-term investments |
| $ | 175 |
| $ | (350 | ) |
Operating cash flow provided (used) |
| $ | 175 |
| $ | (350 | ) |
|
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Net change in liabilities |
|
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| ||
Liabilities for collateral, beginning of year |
| $ | (617 | ) | $ | (340 | ) |
Liabilities for collateral, end of period |
| (442 | ) | (690 | ) | ||
Operating cash flow (used) provided |
| $ | (175 | ) | $ | 350 |
|
4. Investments
Fair values
The amortized cost, gross unrealized gains and losses and fair value for fixed income securities are as follows:
|
| Amortized |
| Gross unrealized |
| Fair |
| ||||||
($ in millions) |
| cost |
| Gains |
| Losses |
| value |
| ||||
At June 30, 2010 |
|
|
|
|
|
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|
|
| ||||
U.S. government and agencies |
| $ | 3,233 |
| $ | 334 |
| $ | — |
| $ | 3,567 |
|
Municipal |
| 5,320 |
| 178 |
| (304 | ) | 5,194 |
| ||||
Corporate |
| 27,268 |
| 1,633 |
| (449 | ) | 28,452 |
| ||||
Foreign government |
| 1,981 |
| 326 |
| (6 | ) | 2,301 |
| ||||
Residential mortgage-backed securities (“RMBS”) |
| 5,548 |
| 139 |
| (719 | ) | 4,968 |
| ||||
Commercial mortgage-backed securities (“CMBS”) |
| 2,588 |
| 45 |
| (598 | ) | 2,035 |
| ||||
Asset-backed securities (“ABS”) |
| 2,747 |
| 61 |
| (469 | ) | 2,339 |
| ||||
Redeemable preferred stock |
| 15 |
| — |
| — |
| 15 |
| ||||
Total fixed income securities |
| $ | 48,700 |
| $ | 2,716 |
| $ | (2,545 | ) | $ | 48,871 |
|
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| ||||
At December 31, 2009 |
|
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| ||||
U.S. government and agencies |
| $ | 3,426 |
| $ | 168 |
| $ | (13 | ) | $ | 3,581 |
|
Municipal |
| 5,578 |
| 50 |
| (519 | ) | 5,109 |
| ||||
Corporate |
| 27,314 |
| 1,015 |
| (790 | ) | 27,539 |
| ||||
Foreign government |
| 1,906 |
| 258 |
| (11 | ) | 2,153 |
| ||||
RMBS |
| 5,596 |
| 76 |
| (1,006 | ) | 4,666 |
| ||||
CMBS |
| 3,390 |
| 30 |
| (952 | ) | 2,468 |
| ||||
ABS |
| 2,616 |
| 48 |
| (537 | ) | 2,127 |
| ||||
Redeemable preferred stock |
| 16 |
| — |
| (1 | ) | 15 |
| ||||
Total fixed income securities |
| $ | 49,842 |
| $ | 1,645 |
| $ | (3,829 | ) | $ | 47,658 |
|
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Scheduled maturities
The scheduled maturities for fixed income securities are as follows at June 30, 2010:
($ in millions) |
| Amortized |
| Fair |
| ||
Due in one year or less |
| $ | 1,507 |
| $ | 1,526 |
|
Due after one year through five years |
| 13,351 |
| 13,909 |
| ||
Due after five years through ten years |
| 10,848 |
| 11,704 |
| ||
Due after ten years |
| 14,699 |
| 14,425 |
| ||
|
| 40,405 |
| 41,564 |
| ||
RMBS and ABS |
| 8,295 |
| 7,307 |
| ||
Total |
| $ | 48,700 |
| $ | 48,871 |
|
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.
Net investment income
Net investment income is as follows:
|
| Three months ended |
| Six months ended |
| ||||||||
($ in millions) |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Fixed income securities |
| $ | 629 |
| $ | 639 |
| $ | 1,264 |
| $ | 1,320 |
|
Mortgage loans |
| 98 |
| 129 |
| 199 |
| 263 |
| ||||
Equity securities |
| 1 |
| 1 |
| 2 |
| 2 |
| ||||
Limited partnership interests |
| 4 |
| 2 |
| 7 |
| 4 |
| ||||
Short-term investments |
| 1 |
| 3 |
| 2 |
| 10 |
| ||||
Other |
| (5 | ) | (10 | ) | (13 | ) | (16 | ) | ||||
Investment income, before expense |
| 728 |
| 764 |
| 1,461 |
| 1,583 |
| ||||
Investment expense |
| (28 | ) | (23 | ) | (54 | ) | (45 | ) | ||||
Net investment income |
| $ | 700 |
| $ | 741 |
| $ | 1,407 |
| $ | 1,538 |
|
Realized capital gains and losses
Realized capital gains and losses by security type are as follows:
|
| Three months ended |
| Six months ended |
| ||||||||
($ in millions) |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Fixed income securities |
| $ | (176 | ) | $ | 4 |
| $ | (267 | ) | $ | 148 |
|
Mortgage loans |
| (28 | ) | (16 | ) | (53 | ) | (48 | ) | ||||
Equity securities |
| 20 |
| 1 |
| 20 |
| (24 | ) | ||||
Limited partnership interests |
| 9 |
| (53 | ) | (6 | ) | (224 | ) | ||||
Derivatives |
| (177 | ) | 221 |
| (212 | ) | 290 |
| ||||
Other |
| — |
| (35 | ) | 5 |
| (58 | ) | ||||
Realized capital gains and losses |
| $ | (352 | ) | $ | 122 |
| $ | (513 | ) | $ | 84 |
|
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Realized capital gains and losses by transaction type are as follows:
|
| Three months ended |
| Six months ended |
| ||||||||
($ in millions) |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Impairment write-downs |
| $ | (141 | ) | $ | (203 | ) | $ | (283 | ) | $ | (555 | ) |
Change in intent write-downs |
| (57 | ) | (25 | ) | (80 | ) | (57 | ) | ||||
Net OTTI losses recognized in earnings |
| (198 | ) | (228 | ) | (363 | ) | (612 | ) | ||||
Sales |
| 17 |
| 163 |
| 60 |
| 521 |
| ||||
Valuation of derivative instruments |
| (149 | ) | 179 |
| (203 | ) | 262 |
| ||||
Settlements of derivative instruments |
| (30 | ) | 41 |
| (11 | ) | 23 |
| ||||
EMA limited partnership income |
| 8 |
| (33 | ) | 4 |
| (110 | ) | ||||
Realized capital gains and losses |
| $ | (352 | ) | $ | 122 |
| $ | (513 | ) | $ | 84 |
|
Gross gains of $71 million and $223 million and gross losses of $94 million and $47 million were realized on sales of fixed income securities during the three months ended June 30, 2010 and 2009, respectively. Gross gains of $166 million and $629 million and gross losses of $143 million and $115 million were realized on sales of fixed income securities during the six months ended June 30, 2010 and 2009, respectively.
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other-than-temporary impairment losses by asset type are as follows:
|
| Three months ended |
| Six months ended |
| ||||||||||||||
($ in millions) |
| Gross |
| Included |
| Net |
| Gross |
| Included |
| Net |
| ||||||
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Municipal |
| $ | (28 | ) | $ | — |
| $ | (28 | ) | $ | (48 | ) | $ | — |
| $ | (48 | ) |
Corporate |
| (2 | ) | — |
| (2 | ) | (42 | ) | 2 |
| (40 | ) | ||||||
RMBS |
| (89 | ) | 2 |
| (87 | ) | (149 | ) | 15 |
| (134 | ) | ||||||
CMBS |
| (17 | ) | (11 | ) | (28 | ) | (43 | ) | (11 | ) | (54 | ) | ||||||
ABS |
| (5 | ) | (15 | ) | (20 | ) | (8 | ) | (16 | ) | (24 | ) | ||||||
Total fixed income securities |
| (141 | ) | (24 | ) | (165 | ) | (290 | ) | (10 | ) | (300 | ) | ||||||
Mortgage loans |
| (28 | ) | — |
| (28 | ) | (47 | ) | — |
| (47 | ) | ||||||
Limited partnership interests |
| (5 | ) | — |
| (5 | ) | (16 | ) | — |
| (16 | ) | ||||||
Other-than-temporary impairment losses |
| $ | (174 | ) | $ | (24 | ) | $ | (198 | ) | $ | (353 | ) | $ | (10 | ) | $ | (363 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| Three months ended |
| Six months ended |
| ||||||||||||||
|
| Gross |
| Included |
| Net |
| Gross |
| Included |
| Net |
| ||||||
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Municipal |
| $ | (16 | ) | $ | — |
| $ | (16 | ) | $ | (16 | ) | $ | — |
| $ | (16 | ) |
Corporate |
| (37 | ) | (9 | ) | (46 | ) | (70 | ) | (9 | ) | (79 | ) | ||||||
Foreign government |
| — |
| — |
| — |
| (17 | ) | — |
| (17 | ) | ||||||
RMBS |
| (148 | ) | 104 |
| (44 | ) | (168 | ) | 104 |
| (64 | ) | ||||||
CMBS |
| (44 | ) | — |
| (44 | ) | (53 | ) | — |
| (53 | ) | ||||||
ABS |
| (37 | ) | 9 |
| (28 | ) | (167 | ) | 9 |
| (158 | ) | ||||||
Total fixed income securities |
| (282 | ) | 104 |
| (178 | ) | (491 | ) | 104 |
| (387 | ) | ||||||
Mortgage loans |
| (15 | ) | — |
| (15 | ) | (49 | ) | — |
| (49 | ) | ||||||
Equity securities |
| (1 | ) | — |
| (1 | ) | (26 | ) | — |
| (26 | ) | ||||||
Limited partnership interests |
| (21 | ) | — |
| (21 | ) | (115 | ) | — |
| (115 | ) | ||||||
Other |
| (13 | ) | — |
| (13 | ) | (35 | ) | — |
| (35 | ) | ||||||
Other-than-temporary impairment losses |
| $ | (332 | ) | $ | 104 |
| $ | (228 | ) | $ | (716 | ) | $ | 104 |
| $ | (612 | ) |
The total amount of other-than-temporary impairment losses included in accumulated other comprehensive income for fixed income securities, which were not included in earnings, are presented in the following table. The amount excludes $180 million and $136 million as of June 30, 2010 and December 31, 2009, respectively, of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.
($ in millions) |
| June 30, |
| December 31, |
| ||
Corporate |
| $ | (18 | ) | $ | (18 | ) |
RMBS |
| (314 | ) | (323 | ) | ||
CMBS |
| (94 | ) | (127 | ) | ||
ABS |
| (73 | ) | (90 | ) | ||
Total |
| $ | (499 | ) | $ | (558 | ) |
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Rollforwards of the cumulative credit losses recognized in earnings for fixed income securities held as of the end of the period are as follows:
|
| Three months ended |
| Six months ended |
| ||||||||
($ in millions) |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Beginning balance |
| $ | (833 | ) | $ | — |
| $ | (808 | ) | $ | — |
|
Beginning balance of cumulative credit loss for securities held at April 1, 2009 |
| — |
| (1,059 | ) | — |
| (1,059 | ) | ||||
Additional credit loss for securities previously other-than-temporarily impaired |
| (75 | ) | (39 | ) | (122 | ) | (39 | ) | ||||
Additional credit loss for securities not previously other-than-temporarily impaired |
| (34 | ) | (119 | ) | (105 | ) | (119 | ) | ||||
Reduction in credit loss for securities disposed or collected |
| 75 |
| 24 |
| 168 |
| 24 |
| ||||
Reduction in credit loss for securities other-than-temporarily impaired to fair value |
| 1 |
| — |
| 1 |
| — |
| ||||
Change in credit loss due to accretion of increase in cash flows and time value of cash flows for securities previously other-than-temporarily impaired |
| 2 |
| — |
| 2 |
| — |
| ||||
Ending balance |
| $ | (864 | ) | $ | (1,193 | ) | $ | (864 | ) | $ | (1,193 | ) |
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 of the issue or issuer(s), expected defaults, expected recoveries, the value of underlying collateral and current subordination levels, vintage, geographic concentration, available reserves or escrows, third party guarantees and other credit enhancements. Additionally, 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 may 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 OCI. If the Company determines that the fixed income security does not have sufficient cash flow or other information to determine a recovery value for the security, the Company may conclude that the entire decline in fair value is deemed to be credit related and is recorded in earnings.
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Unrealized net capital gains and losses
Unrealized net capital gains and losses included in accumulated other comprehensive income are as follows:
|
| Fair | �� | Gross unrealized |
| Unrealized net |
| ||||||
($ in millions) |
| value |
| Gains |
| Losses |
| gains (losses) |
| ||||
At June 30, 2010 |
|
|
|
|
|
|
|
|
| ||||
Fixed income securities (1) |
| $ | 48,871 |
| $ | 2,716 |
| $ | (2,545 | ) | $ | 171 |
|
Equity securities |
| 172 |
| 19 |
| (8 | ) | 11 |
| ||||
Short-term investments |
| 903 |
| — |
| — |
| — |
| ||||
Derivative instruments (2) |
| 7 |
| 10 |
| (3 | ) | 7 |
| ||||
Unrealized net capital gains and losses, pre-tax |
|
|
|
|
|
|
| 189 |
| ||||
Amounts recognized for: |
|
|
|
|
|
|
|
|
| ||||
Insurance reserves (3) |
|
|
|
|
|
|
| (292 | ) | ||||
DAC and DSI (4) |
|
|
|
|
|
|
| 406 |
| ||||
Amounts recognized |
|
|
|
|
|
|
| 114 |
| ||||
Deferred income taxes |
|
|
|
|
|
|
| (111 | ) | ||||
Unrealized net capital gains and losses, after-tax |
|
|
|
|
|
|
| $ | 192 |
| |||
(1) |
| Unrealized net capital gains and losses for fixed income securities as of June 30, 2010 comprises $(319) million related to unrealized net capital losses on fixed income securities with OTTI and $490 million related to other unrealized net capital gains and losses. |
|
|
|
(2) |
| Included in the fair value of derivative securities are $5 million classified as assets and $(2) million classified as liabilities. |
|
|
|
(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 |
| ||||||
|
| value |
| Gains |
| Losses |
| gains (losses) |
| ||||
At December 31, 2009 |
|
|
|
|
|
|
|
|
| ||||
Fixed income securities (1) |
| $ | 47,658 |
| $ | 1,645 |
| $ | (3,829 | ) | $ | (2,184 | ) |
Equity securities |
| 183 |
| 31 |
| (7 | ) | 24 |
| ||||
Short-term investments |
| 1,669 |
| — |
| — |
| — |
| ||||
Derivative instruments (2) |
| (20 | ) | 2 |
| (20 | ) | (18 | ) | ||||
Unrealized net capital gains and losses, pre-tax |
|
|
|
|
|
|
| (2,178 | ) | ||||
Amounts recognized for: |
|
|
|
|
|
|
|
|
| ||||
Insurance reserves |
|
|
|
|
|
|
| — |
| ||||
DAC and DSI |
|
|
|
|
|
|
| 990 |
| ||||
Amounts recognized |
|
|
|
|
|
|
| 990 |
| ||||
Deferred income taxes |
|
|
|
|
|
|
| 411 |
| ||||
Unrealized net capital gains and losses, after-tax |
|
|
|
|
|
|
| $ | (777 | ) | |||
(1) |
| Unrealized net capital gains and losses for fixed income securities as of December 31, 2009 comprises $(422) million related to net unrealized capital losses on fixed income securities with OTTI and $(1,762) million related to other unrealized net capital gains and losses. |
|
|
|
(2) |
| Included in the fair value of derivative securities are $(2) million classified as assets and $18 million classified as liabilities. |
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Change in unrealized net capital gains and losses
The change in unrealized net capital gains and losses for the six months ended June 30, 2010 is as follows:
($ in millions) |
|
|
| |
Fixed income securities |
| $ | 2,355 |
|
Equity securities |
| (13 | ) | |
Derivative instruments |
| 25 |
| |
Total |
| 2,367 |
| |
|
|
|
| |
Amounts recognized for: |
|
|
| |
Insurance reserves |
| (292 | ) | |
DAC and DSI |
| (584 | ) | |
Decrease in amounts recognized |
| (876 | ) | |
Deferred income taxes |
| (522 | ) | |
Increase in unrealized net capital gains and losses |
| $ | 969 |
|
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 a 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 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 if it expects to receive cash flows sufficient to recover the entire amortized cost basis of the security by comparing the estimated recovery value, calculated by discounting the best estimate of future cash flows at the security’s original or current effective rate, as appropriate, 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 OCI.
For equity securities, the Company considers various factors, including whether the Company 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 through a screening process which identifies instances where the fair value compared to amortized cost (for fixed income securities) and cost (for equity securities) is below established thresholds. The screening process also includes the monitoring of other criteria 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 of the issue or issuer and its future earnings potential. 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 a significant 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.
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
|
| Less than 12 months |
| 12 months or more |
| Total |
| |||||||||||||
|
| Number |
| Fair |
| Unrealized |
| Number |
| Fair |
| Unrealized |
| unrealized |
| |||||
($ in millions) |
| of issues |
| value |
| losses |
| of issues |
| value |
| losses |
| losses |
| |||||
At June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Fixed income securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Municipal |
| 20 |
| $ | 237 |
| $ | (4 | ) | 234 |
| $ | 1,601 |
| $ | (300 | ) | $ | (304 | ) |
Corporate |
| 194 |
| 1,917 |
| (80 | ) | 230 |
| 3,094 |
| (369 | ) | (449 | ) | |||||
Foreign government |
| 6 |
| 108 |
| (6 | ) | 2 |
| 20 |
| — |
| (6 | ) | |||||
RMBS |
| 53 |
| 354 |
| (6 | ) | 294 |
| 1,565 |
| (713 | ) | (719 | ) | |||||
CMBS |
| 6 |
| 60 |
| (2 | ) | 173 |
| 1,167 |
| (596 | ) | (598 | ) | |||||
ABS |
| 32 |
| 293 |
| (18 | ) | 143 |
| 1,230 |
| (451 | ) | (469 | ) | |||||
Redeemable preferred stock |
| 2 |
| 14 |
| — |
| — |
| — |
| — |
| — |
| |||||
Total fixed income securities (1) |
| 313 |
| 2,983 |
| (116 | ) | 1,076 |
| 8,677 |
| (2,429 | ) | (2,545 | ) | |||||
Equity securities |
| 7 |
| 56 |
| (6 | ) | 1 |
| 16 |
| (2 | ) | (8 | ) | |||||
Total fixed income and equity securities |
| 320 |
| $ | 3,039 |
| $ | (122 | ) | 1,077 |
| $ | 8,693 |
| $ | (2,431 | ) | $ | (2,553 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Investment grade fixed income securities |
| 214 |
| $ | 2,529 |
| $ | (107 | ) | 782 |
| $ | 6,965 |
| $ | (1,372 | ) | $ | (1,479 | ) |
Below investment grade fixed income securities |
| 99 |
| 454 |
| (9 | ) | 294 |
| 1,712 |
| (1,057 | ) | (1,066 | ) | |||||
Total fixed income securities |
| 313 |
| $ | 2,983 |
| $ | (116 | ) | 1,076 |
| $ | 8,677 |
| $ | (2,429 | ) | $ | (2,545 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
At December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Fixed income securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
U.S. government and agencies |
| 27 |
| $ | 1,952 |
| $ | (13 | ) | — |
| $ | — |
| $ | — |
| $ | (13 | ) |
Municipal |
| 144 |
| 1,634 |
| (62 | ) | 280 |
| 1,912 |
| (457 | ) | (519 | ) | |||||
Corporate |
| 300 |
| 3,979 |
| (131 | ) | 398 |
| 5,155 |
| (659 | ) | (790 | ) | |||||
Foreign government |
| 10 |
| 360 |
| (11 | ) | 1 |
| 1 |
| — |
| (11 | ) | |||||
RMBS |
| 162 |
| 604 |
| (14 | ) | 310 |
| 1,727 |
| (992 | ) | (1,006 | ) | |||||
CMBS |
| 19 |
| 186 |
| (3 | ) | 257 |
| 1,796 |
| (949 | ) | (952 | ) | |||||
ABS |
| 21 |
| 203 |
| (19 | ) | 163 |
| 1,363 |
| (518 | ) | (537 | ) | |||||
Redeemable preferred stock |
| 1 |
| — |
| — |
| 1 |
| 13 |
| (1 | ) | (1 | ) | |||||
Total fixed income securities (1) |
| 684 |
| 8,918 |
| (253 | ) | 1,410 |
| 11,967 |
| (3,576 | ) | (3,829 | ) | |||||
Equity securities |
| 7 |
| 11 |
| (2 | ) | 1 |
| 13 |
| (5 | ) | (7 | ) | |||||
Total fixed income and equity securities |
| 691 |
| $ | 8,929 |
| $ | (255 | ) | 1,411 |
| $ | 11,980 |
| $ | (3,581 | ) | $ | (3,836 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Investment grade fixed income securities |
| 650 |
| $ | 8,667 |
| $ | (191 | ) | 1,119 |
| $ | 10,260 |
| $ | (2,467 | ) | $ | (2,658 | ) |
Below investment grade fixed income securities |
| 34 |
| 251 |
| (62 | ) | 291 |
| 1,707 |
| (1,109 | ) | (1,171 | ) | |||||
Total fixed income securities |
| 684 |
| $ | 8,918 |
| $ | (253 | ) | 1,410 |
| $ | 11,967 |
| $ | (3,576 | ) | $ | (3,829 | ) |
(1) | Gross unrealized losses resulting from factors other than credit on fixed income securities with other-than-temporary impairments for which the Company has recorded a credit loss in earnings total $4 million for the less than 12 month category and $389 million for the 12 months or greater category as of June 30, 2010 and $16 million for the less than 12 month category and $468 million for the 12 months or greater category as of December 31, 2009. |
As of June 30, 2010, $584 million of unrealized losses are related to securities with an unrealized loss position less than 20% of amortized cost or cost, the degree of which suggests that these securities do not pose a high risk of being other-than-temporarily impaired. Of the $584 million, $494 million are related to unrealized losses on investment grade fixed income securities. Investment grade is defined as a security having a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A or BBB from S&P, Fitch, Dominion or Realpoint, a rating of aaa, aa, a or bbb from A.M. Best, or a comparable internal rating if an externally provided rating is not available. Unrealized losses on investment grade securities are principally related to rising interest rates or widening credit spreads since the securities were acquired.
As of June 30, 2010, the remaining $1.97 billion of unrealized losses are related to securities in unrealized loss positions greater than or equal to 20% of amortized cost or cost. Investment grade securities comprising $985 million of these unrealized losses were evaluated based on factors such as discounted cash flows and the financial condition and near-term and long-term prospects of the issue or issuer and were determined to have adequate resources to fulfill contractual obligations, such as recent financings or bank loans, cash flows from operations, collateral or the position of a subsidiary with respect to its parent’s bankruptcy. Of the $1.97 billion, $984 million are related to below investment grade fixed income securities. Of these amounts, $921 million of the below investment grade fixed income securities had been in an unrealized loss position for a period of twelve or more consecutive months as of June 30, 2010. Unrealized losses on below investment grade securities are principally related to RMBS, CMBS and ABS and were the result of wider credit spreads resulting from larger risk premiums
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
since the time of initial purchase, largely due to macroeconomic conditions and credit market deterioration, including the impact of declining residential and commercial real estate valuations.
RMBS, CMBS and ABS securities in an unrealized loss position were evaluated based on discounted cash flows and credit ratings, as well as the performance of the underlying collateral relative to the securities’ positions in the respective securitization trusts. The evaluation for RMBS and ABS in an unrealized loss position also takes into consideration credit enhancements from bond insurers, where applicable. Municipal bonds in an unrealized loss position were evaluated based on the quality of the underlying security, taking into consideration credit enhancements from bond insurers, where applicable. Unrealized losses on equity securities are primarily related to equity market fluctuations.
As of June 30, 2010, the Company has not made a decision to sell and it is not more likely than not the Company will be required to sell fixed income securities with unrealized losses before recovery of the amortized cost basis. As of June 30, 2010, the Company had the intent and ability to hold the equity securities with unrealized losses for a period of time sufficient for them to recover.
Limited partnership impairment
As of June 30, 2010 and December 31, 2009, the carrying value of equity method limited partnership interests totaled $474 million and $495 million, respectively. The Company recognizes an impairment loss for equity method investments when evidence demonstrates that it is other-than-temporarily impaired. Evidence of a loss in value that is other than temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment. The Company had write-downs of $1 million for the three months ended June 30, 2010 and had no write-downs for the three months ended June 30, 2009 related to equity method limited partnership interests. The Company had write-downs of $1 million and $5 million for the six months ended June 30, 2010 and 2009, respectively, related to equity-method limited partnership interests.
As of June 30, 2010 and December 31, 2009, the carrying value for cost method limited partnership interests was $590 million and $533 million, respectively. To determine if an other-than-temporary impairment has occurred, the Company evaluates whether an impairment indicator has occurred in the period that may have a significant adverse effect on the carrying value of the investment. Impairment indicators may include: actual recent cash flows received being significantly less than expected cash flows; reduced valuations based on financing completed at a lower value; completed sale of a material underlying investment at a price significantly lower than expected; significantly reduced valuations of the investments held by limited partnerships; or any other adverse events since the last financial statements received that might affect the fair value of the investee’s capital. Additionally, the Company uses a screening process to identify those investments whose net asset value is below established thresholds for certain periods of time, as well as investments that are performing below expectations, for further impairment consideration. If a cost method limited partnership is deemed other-than-temporarily impaired, the carrying value is written down to fair value, generally estimated to be equivalent to the reported net asset value of the underlying funds. The Company had write-downs of $4 million and $21 million for the three months ended June 30, 2010 and 2009, respectively, and write-downs of $15 million and $110 million for the six months ended June 30, 2010 and 2009, respectively, related to cost method investments that were other-than-temporarily impaired.
5. Fair Value of Assets and Liabilities
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Assets and liabilities recorded on the Condensed Consolidated Statements of Financial Position at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows:
Level 1: Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access.
Level 2: Assets and liabilities whose values are based on the following:
(a) Quoted prices for similar assets or liabilities in active markets;
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(b) Quoted prices for identical or similar assets or liabilities in markets that are not active; or
(c) Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Unobservable inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the assets and liabilities.
The availability of observable inputs varies by instrument. In situations where fair value is based on internally developed pricing models or inputs that are unobservable in the market, the determination of fair value requires more judgment. The degree of judgment exercised by the Company in determining fair value is typically greatest for instruments categorized in Level 3. In many instances, valuation inputs used to measure fair value fall into different levels of the fair value hierarchy. The category level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments.
The Company has two types of situations where investments are classified as Level 3 in the fair value hierarchy. The first is where quotes continue to be received from independent third-party valuation service providers and all significant inputs are market observable; however, there has been a significant decrease in the volume and level of activity for the asset when compared to normal market activity such that the degree of market observability has declined to a point where categorization as a Level 3 measurement is considered appropriate. The indicators considered in determining whether a significant decrease in the volume and level of activity for a specific asset has occurred include the level of new issuances in the primary market, trading volume in the secondary market, the level of credit spreads over historical levels, applicable bid-ask spreads, and price consensus among market participants and sources.
The second situation where the Company classifies securities in Level 3 is where specific inputs significant to the fair value estimation models are not market observable. This occurs in two primary instances. The first relates to the Company’s use of broker quotes. The second relates to auction rate securities (“ARS”) backed by student loans for which a key input, the anticipated date liquidity will return to this market, is not market observable.
Certain assets are not carried at fair value on a recurring basis, including investments such as mortgage loans, limited partnership interests, bank loans and policy loans. Accordingly, such investments are only included in the fair value hierarchy disclosure when the investment is subject to remeasurement at fair value after initial recognition and the resulting remeasurement is reflected in the condensed consolidated financial statements. In addition, equity options embedded in fixed income securities are not disclosed in the hierarchy with free-standing derivatives as the embedded derivatives are presented with the host contracts in fixed income securities. As of June 30, 2010, 76.3% of total assets are measured at fair value and 0.9% of total liabilities are measured at fair value.
In determining fair value, the Company principally uses the market approach which generally utilizes market transaction data for the same or similar instruments. To a lesser extent, the Company uses the income approach which involves determining fair values from discounted cash flow methodologies. For the majority of Level 2 and Level 3 valuations, a combination of the market and income approaches is used.
Summary of significant valuation techniques for assets and liabilities measured at fair value on a recurring basis
Level 1 measurements
· Fixed income securities: Comprise U.S. Treasuries. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.
· Equity securities: Comprise actively traded, exchange-listed U.S. and international equity securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.
· Short-term: Comprise actively traded money market funds that have daily quoted net asset values for identical assets that the Company can access.
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
· Separate account assets: Comprise actively traded mutual funds that have daily quoted net asset values for identical assets that the Company can access. Net asset values for the actively traded mutual funds in which the separate account assets are invested are obtained daily from the fund managers.
Level 2 measurements
· Fixed income securities:
U.S. government and agencies: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.
Municipal: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.
Corporate, including privately placed: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads. Also included are privately placed securities valued using a discounted cash flow model that is widely accepted in the financial services industry and uses market observable inputs and inputs derived principally from, or corroborated by, observable market data. The primary inputs to the discounted cash flow model include an interest rate curve, as well as published credit spreads for similar assets in markets that are not active that incorporate the credit quality and industry sector of the issuer.
Foreign government: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.
RMBS - U.S. government sponsored entities (“U.S. Agency”), Prime residential mortgage-backed securities (“Prime”) and Alt-A residential mortgage-backed securities (“Alt-A”); ABS - auto and student loans and other: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads.
Redeemable preferred stock: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, underlying stock prices and credit spreads.
CMBS: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, collateral performance and credit spreads.
· Equity securities: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active.
· Short-term: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads. For certain short-term investments, amortized cost is used as the best estimate of fair value.
· Other investments: Free-standing exchange listed derivatives that are not actively traded are valued based on quoted prices for identical instruments in markets that are not active.
OTC derivatives, including interest rate swaps, foreign currency swaps, foreign exchange forward contracts, and certain credit default swaps, are valued using models that rely on inputs such as interest rate yield curves, currency rates, and counterparty credit spreads that are observable for substantially the full term of the contract. The valuation techniques underlying the models are widely accepted in the financial services industry and do not involve significant judgment.
· Contractholder funds: Derivatives embedded in certain annuity contracts are valued based on internal models that rely on inputs such as interest rate yield curves and equity index volatility assumptions that are market observable for substantially the full term of the contract. The valuation techniques are widely accepted in the financial services industry and do not include significant judgment.
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Level 3 measurements
· Fixed income securities:
Municipal: ARS primarily backed by student loans that have become illiquid due to failures in the auction market are valued using a discounted cash flow model that is widely accepted in the financial services industry and uses significant non-market observable inputs, including estimates of future coupon rates if auction failures continue, maturity assumptions and illiquidity premium. Also included are municipal bonds that are not rated by third party credit rating agencies but are rated by the NAIC, in addition to other high-yield municipal bonds. The primary inputs to the valuation of these municipal bonds include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields and credit spreads.
Corporate, including privately placed: Primarily valued based on non-binding broker quotes. Also included are equity-indexed notes which are valued using a discounted cash flow model that is widely accepted in the financial services industry and uses significant non-market observable inputs, such as volatility. Other inputs include an interest rate curve, as well as published credit spreads for similar assets that incorporate the credit quality and industry sector of the issuer.
RMBS - Subprime residential mortgage-backed securities (“Subprime”) and Alt-A: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads. Also included are Subprime and Alt-A securities that are valued based on non-binding broker quotes. Due to the reduced availability of actual market prices or relevant observable inputs as a result of the decrease in liquidity that has been experienced in the market for these securities, Subprime and certain Alt-A securities are categorized as Level 3.
Foreign government: Valued based on non-binding broker quotes.
CMBS: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields, collateral performance and credit spreads. Also included are CMBS that are valued based on non-binding broker quotes. Due to the reduced availability of actual market prices or relevant observable inputs as a result of the decrease in liquidity that has been experienced in the market for these securities, certain CMBS are categorized as Level 3.
ABS - Collateralized debt obligations (“CDO”): Valued based on non-binding broker quotes received from brokers who are familiar with the investments. Due to the reduced availability of actual market prices or relevant observable inputs as a result of the decrease in liquidity that has been experienced in the market for these securities, all CDO are categorized as Level 3.
ABS - student loans and other: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads. Also included are ABS that are valued based on non-binding broker quotes. Due to the reduced availability of actual market prices or relevant observable inputs as a result of the decrease in liquidity that has been experienced in the market for these securities, certain ABS are categorized as Level 3.
· Other investments: Certain OTC derivatives, such as interest rate caps and floors, certain credit default swaps and OTC options (including swaptions), are valued using models that are widely accepted in the financial services industry. These are categorized as Level 3 as a result of the significance of non-market observable inputs such as volatility. Other primary inputs include interest rate yield curves and credit spreads.
· Contractholder funds: Derivatives embedded in certain annuity contracts are valued internally using models widely accepted in the financial services industry that determine a single best estimate of fair value for the embedded derivatives within a block of contractholder liabilities. The models use stochastically determined cash flows based on the contractual elements of embedded derivatives and other applicable
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
market data. These are categorized as Level 3 as a result of the significance of non-market observable inputs.
Assets and liabilities measured at fair value on a non-recurring basis
Mortgage loans written-down to fair value in connection with recognizing impairments are valued based on the fair value of the underlying collateral. Limited partnership interests written-down to fair value in connection with recognizing other-than-temporary impairments are valued using net asset values.
The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of June 30, 2010:
($ in millions) |
| Quoted prices |
| Significant |
| Significant |
| Counterparty |
| Balance as of |
| |||||
Assets |
|
|
|
|
|
|
|
|
|
|
| |||||
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
| |||||
U.S. government and agencies |
| $ | 839 |
| $ | 2,728 |
| $ | — |
|
|
| $ | 3,567 |
| |
Municipal |
| — |
| 4,591 |
| 603 |
|
|
| 5,194 |
| |||||
Corporate |
| — |
| 26,434 |
| 2,018 |
|
|
| 28,452 |
| |||||
Foreign government |
| — |
| 2,301 |
| — |
|
|
| 2,301 |
| |||||
RMBS |
| — |
| 3,606 |
| 1,362 |
|
|
| 4,968 |
| |||||
CMBS |
| — |
| 1,243 |
| 792 |
|
|
| 2,035 |
| |||||
ABS |
| — |
| 459 |
| 1,880 |
|
|
| 2,339 |
| |||||
Redeemable preferred stock |
| — |
| 14 |
| 1 |
|
|
| 15 |
| |||||
Total fixed income securities |
| 839 |
| 41,376 |
| 6,656 |
|
|
| 48,871 |
| |||||
Equity securities |
| 110 |
| 33 |
| 29 |
|
|
| 172 |
| |||||
Short-term investments |
| 95 |
| 808 |
| — |
|
|
| 903 |
| |||||
Other investments: |
|
|
|
|
|
|
|
|
|
|
| |||||
Free-standing derivatives |
| — |
| 364 |
| 7 |
| $ | (185 | ) | 186 |
| ||||
Separate account assets |
| 8,003 |
| — |
| — |
|
|
| 8,003 |
| |||||
Other assets |
| — |
| — |
| 2 |
|
|
| 2 |
| |||||
Total recurring basis assets |
| 9,047 |
| 42,581 |
| 6,694 |
| (185 | ) | 58,137 |
| |||||
Non-recurring basis (1) |
| — |
| — |
| 84 |
|
|
| 84 |
| |||||
Total assets at fair value |
| $ | 9,047 |
| $ | 42,581 |
| $ | 6,778 |
| $ | (185 | ) | $ | 58,221 |
|
% of total assets at fair value |
| 15.5 | % | 73.1 | % | 11.7 | % | (0.3 | )% | 100.0 | % | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
| |||||
Contractholder funds: |
|
|
|
|
|
|
|
|
|
|
| |||||
Derivatives embedded in annuity contracts |
| $ | — |
| $ | (106 | ) | $ | (119 | ) |
|
| $ | (225 | ) | |
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Free-standing derivatives |
| (1 | ) | (463 | ) | (115 | ) | $ | 185 |
| (394 | ) | ||||
Total liabilities at fair value |
| $ | (1 | ) | $ | (569 | ) | $ | (234 | ) | $ | 185 |
| $ | (619 | ) |
% of total liabilities at fair value |
| 0.2 | % | 91.9 | % | 37.8 | % | (29.9 | )% | 100.0 | % |
(1) Includes $78 million of mortgage loans and $6 million of limited partnership interests written-down to fair value in connection with recognizing other-than-temporary impairments.
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2009:
($ in millions) |
| Quoted prices |
| Significant |
| Significant |
| Counterparty |
| Balance as of |
| |||||
Assets |
|
|
|
|
|
|
|
|
|
|
| |||||
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
| |||||
U.S. government and agencies |
| $ | 1,596 |
| $ | 1,985 |
| $ | — |
|
|
| $ | 3,581 |
| |
Municipal |
| — |
| 4,363 |
| 746 |
|
|
| 5,109 |
| |||||
Corporate |
| — |
| 25,519 |
| 2,020 |
|
|
| 27,539 |
| |||||
Foreign government |
| — |
| 2,133 |
| 20 |
|
|
| 2,153 |
| |||||
RMBS |
| — |
| 3,614 |
| 1,052 |
|
|
| 4,666 |
| |||||
CMBS |
| — |
| 1,146 |
| 1,322 |
|
|
| 2,468 |
| |||||
ABS |
| — |
| 417 |
| 1,710 |
|
|
| 2,127 |
| |||||
Redeemable preferred stock |
| — |
| 14 |
| 1 |
|
|
| 15 |
| |||||
Total fixed income securities |
| 1,596 |
| 39,191 |
| 6,871 |
|
|
| 47,658 |
| |||||
Equity securities |
| 129 |
| 27 |
| 27 |
|
|
| 183 |
| |||||
Short-term investments |
| 133 |
| 1,536 |
| — |
|
|
| 1,669 |
| |||||
Other investments: |
|
|
|
|
|
|
|
|
|
|
| |||||
Free-standing derivatives |
| — |
| 808 |
| 32 |
| $ | (411 | ) | 429 |
| ||||
Separate account assets |
| 9,072 |
| — |
| — |
|
|
| 9,072 |
| |||||
Other assets |
| — |
| — |
| 2 |
|
|
| 2 |
| |||||
Total recurring basis assets |
| 10,930 |
| 41,562 |
| 6,932 |
| (411 | ) | 59,013 |
| |||||
Non-recurring basis (1) |
| — |
| — |
| 219 |
|
|
| 219 |
| |||||
Total assets at fair value |
| $ | 10,930 |
| $ | 41,562 |
| $ | 7,151 |
| $ | (411 | ) | $ | 59,232 |
|
% of total assets at fair value |
| 18.4 | % | 70.2 | % | 12.1 | % | (0.7 | )% | 100.0 | % | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
| |||||
Contractholder funds: |
|
|
|
|
|
|
|
|
|
|
| |||||
Derivatives embedded in annuity contracts |
| $ | — |
| $ | (217 | ) | $ | (110 | ) |
|
| $ | (327 | ) | |
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Free-standing derivatives |
| (1 | ) | (556 | ) | (85 | ) | $ | 243 |
| (399 | ) | ||||
Total liabilities at fair value |
| $ | (1 | ) | $ | (773 | ) | $ | (195 | ) | $ | 243 |
| $ | (726 | ) |
% of total liabilities at fair value |
| 0.1 | % | 106.5 | % | 26.9 | % | (33.5 | )% | 100.0 | % |
(1) Includes $205 million of mortgage loans and $14 million of limited partnership interests written-down to fair value in connection with recognizing other-than-temporary impairments.
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the three months ended June 30, 2010.
|
|
|
| Total realized and unrealized |
|
|
|
|
|
|
|
|
| |||||||||
($ in millions) |
| Balance as of |
| Net |
| OCI on |
| Purchases, |
| Transfers |
| Transfers out |
| Balance as of |
| |||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Municipal |
| $ | 681 |
| $ | (5 | ) | $ | 3 |
| $ | (68 | ) | $ | — |
| $ | (8 | ) | $ | 603 |
|
Corporate |
| 1,967 |
| (6 | ) | 29 |
| (5 | ) | 169 |
| (136 | ) | 2,018 |
| |||||||
RMBS |
| 1,387 |
| (88 | ) | 139 |
| (70 | ) | — |
| (6 | ) | 1,362 |
| |||||||
CMBS |
| 1,033 |
| (74 | ) | 192 |
| (155 | ) | — |
| (204 | ) | 792 |
| |||||||
ABS |
| 1,900 |
| 11 |
| (9 | ) | 55 |
| — |
| (77 | ) | 1,880 |
| |||||||
Redeemable preferred stock |
| 1 |
| — |
| — |
| — |
| — |
| — |
| 1 |
| |||||||
Total fixed income |
| 6,969 |
| (162 | ) | 354 |
| (243 | ) | 169 |
| (431 | ) | 6,656 |
| |||||||
Equity securities |
| 31 |
| — |
| (1 | ) | (1 | ) | — |
| — |
| 29 |
| |||||||
Other investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Free-standing derivatives, net |
| (70 | ) | (41 | ) | — |
| 3 |
| — |
| — |
| (108 | )(2) | |||||||
Other assets |
| 2 |
| — |
| — |
| — |
| — |
| — |
| 2 |
| |||||||
Total recurring Level 3 assets |
| $ | 6,932 |
| $ | (203 | ) | $ | 353 |
| $ | (241 | ) | $ | 169 |
| $ | (431 | ) | $ | 6,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Contractholder funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Derivatives embedded in |
| $ | (90 | ) | $ | (30 | ) | $ | — |
| $ | 1 |
| $ | — |
| $ | — |
| $ | (119 | ) |
Total recurring Level 3 liabilities |
| $ | (90 | ) | $ | (30 | ) | $ | — |
| $ | 1 |
| $ | — |
| $ | — |
| $ | (119 | ) |
(1) |
| The effect to net income totals $(233) million and is reported in the Condensed Consolidated Statements of Operations as follows: $(217) million in realized capital gains and losses, $18 million in net investment income, $4 million in interest credited to contractholder funds and $30 million in contract benefits. |
|
|
|
(2) |
| Comprises $7 million of assets and $115 million of liabilities. |
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the six months ended June 30, 2010.
|
|
|
| Total realized and unrealized |
|
|
|
|
|
|
|
|
| |||||||||
($ in millions) |
| Balance as of |
| Net |
| OCI on |
| Purchases, |
| Transfers |
| Transfers out |
| Balance as of |
| |||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Municipal |
| $ | 746 |
| $ | (10 | ) | $ | 10 |
| $ | (116 | ) | $ | — |
| $ | (27 | ) | $ | 603 |
|
Corporate |
| 2,020 |
| (22 | ) | 120 |
| (61 | ) | 172 |
| (211 | ) | 2,018 |
| |||||||
Foreign government |
| 20 |
| — |
| — |
| (20 | ) | — |
| — |
| — |
| |||||||
RMBS |
| 1,052 |
| (128 | ) | 248 |
| 196 |
| — |
| (6 | ) | 1,362 |
| |||||||
CMBS |
| 1,322 |
| (108 | ) | 301 |
| (334 | ) | 24 |
| (413 | ) | 792 |
| |||||||
ABS |
| 1,710 |
| 16 |
| 77 |
| 154 |
| — |
| (77 | ) | 1,880 |
| |||||||
Redeemable preferred stock |
| 1 |
| — |
| — |
| — |
| — |
| — |
| 1 |
| |||||||
Total fixed income securities |
| 6,871 |
| (252 | ) | 756 |
| (181 | ) | 196 |
| (734 | ) | 6,656 |
| |||||||
Equity securities |
| 27 |
| — |
| 1 |
| 1 |
| — |
| — |
| 29 |
| |||||||
Other investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Free-standing derivatives, net |
| (53 | ) | (65 | ) | — |
| 10 |
| — |
| — |
| (108 | )(2) | |||||||
Other assets |
| 2 |
| — |
| — |
| — |
| — |
| — |
| 2 |
| |||||||
Total recurring Level 3 assets |
| $ | 6,847 |
| $ | (317 | ) | $ | 757 |
| $ | (170 | ) | $ | 196 |
| $ | (734 | ) | $ | 6,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Contractholder funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Derivatives embedded in annuity contracts |
| $ | (110 | ) | $ | (12 | ) | $ | — |
| $ | 3 |
| $ | — |
| $ | — |
| $ | (119 | ) |
Total recurring Level 3 liabilities |
| $ | (110 | ) | $ | (12 | ) | $ | — |
| $ | 3 |
| $ | — |
| $ | — |
| $ | (119 | ) |
(1) The effect to net income totals $(329) million and is reported in the Condensed Consolidated Statements of Operations as follows: $(361) million in realized capital gains and losses, $47 million in net investment income, $3 million in interest credited to contractholder funds and $12 million in contract benefits.
(2) Comprises $7 million of assets and $115 million of liabilities.
Transfers between level categorizations may occur due to changes in the availability of market observable inputs, which generally are caused by changes in market conditions such as liquidity, trading volume or bid-ask spreads. Transfers between level categorizations may also occur due to changes in the valuation source. For example, in situations where a fair value quote is not provided by the Company’s independent third-party valuation service provider and as a result the price is stale or has been replaced with a broker quote, the security is transferred into Level 3. Transfers in and out of level categorizations are reported as having occurred at the beginning of the quarter in which the transfer occurred. Therefore, for all transfers into Level 3, all realized and changes in unrealized gains and losses in the quarter of transfer are reflected in the Level 3 rollforward table.
There were no transfers between Level 1 and Level 2 during the three and six months ended June 30, 2010.
During the three and six months ended June 30, 2010, certain CMBS and ABS were transferred into Level 2 from Level 3 as a result of increased liquidity in the market and the availability of market observable quoted prices for similar assets. When transferring these securities into Level 2, the Company did not change the source of fair value estimates or modify the estimates received from independent third-party valuation service providers or the internal valuation approach. Accordingly, for securities included within this group, there was no change in fair value in conjunction with the transfer resulting in a realized or unrealized gain or loss.
Transfers into Level 3 during the three and six months ended June 30, 2010, including those related to Corporate fixed income securities, included situations where a fair value quote was not provided by the Company’s independent third-party valuation service provider and as a result the price was stale or had been replaced with a broker quote resulting in the security being classified as Level 3. Transfers out of Level 3 during the three and six months ended June 30, 2010, including those related to Corporate fixed income securities, included situations where a broker quote was used in the prior period and a fair value quote became available from the Company’s independent third-party valuation service provider. A quote utilizing the new pricing source was not available as of
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
the prior period, and any gains or losses related to the change in valuation source for individual securities were not significant.
The following table provides the total gains and (losses) included in net income during the period for Level 3 assets and liabilities still held at June 30, 2010.
($ in millions) |
| Three months ended |
| Six months ended |
| ||
Assets |
|
|
|
|
| ||
Fixed income securities: |
|
|
|
|
| ||
Municipal |
| $ | (4 | ) | $ | (8 | ) |
Corporate |
| (9 | ) | (39 | ) | ||
RMBS |
| (83 | ) | (121 | ) | ||
CMBS |
| (19 | ) | (43 | ) | ||
ABS |
| 11 |
| 11 |
| ||
Total fixed income securities |
| (104 | ) | (200 | ) | ||
Other investments: |
|
|
|
|
| ||
Free-standing derivatives, net |
| (39 | ) | (57 | ) | ||
Total recurring Level 3 assets |
| $ | (143 | ) | $ | (257 | ) |
|
|
|
|
|
| ||
Liabilities |
|
|
|
|
| ||
Contractholder funds: |
|
|
|
|
| ||
Derivatives embedded in annuity contracts |
| $ | (30 | ) | $ | (12 | ) |
Total recurring Level 3 liabilities |
| $ | (30 | ) | $ | (12 | ) |
The amounts in the table above represent gains and losses included in net income during the period presented for the period of time that the asset or liability was determined to be in Level 3. These gains and losses total $(173) million for the three months ended June 30, 2010 and are reported in the Condensed Consolidated Statements of Operations as follows: $(155) million in realized capital gains and losses, $17 million in net investment income, $5 million in interest credited to contractholder funds and $30 million in contract benefits. These gains and losses total $(269) million for the six months ended June 30, 2010 and are reported in the Condensed Consolidated Statements of Operations as follows: $(282) million in realized capital gains and losses, $30 million in net investment income, $5 million in interest credited to contractholder funds and $12 million in contract benefits.
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the three months ended June 30, 2009.
|
|
|
| Total realized and unrealized |
|
|
|
|
|
|
| Total |
| |||||||||
($ in millions) |
| Balance as of |
| Net income (1) |
| OCI on |
| Purchases, |
| Net |
| Balance as of |
| instruments |
| |||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Municipal |
| $ | 633 |
| $ | — |
| $ | 26 |
| $ | (6 | ) | $ | 34 |
| $ | 687 |
| $ | — |
|
Corporate |
| 9,496 |
| (5 | ) | 568 |
| (548 | ) | (7 | ) | 9,504 |
| (18 | ) | |||||||
RMBS |
| 1,550 |
| (40 | ) | 97 |
| (34 | ) | (162 | ) | 1,411 |
| (41 | ) | |||||||
CMBS |
| 719 |
| (72 | ) | 255 |
| (2 | ) | (13 | ) | 887 |
| (72 | ) | |||||||
ABS |
| 1,056 |
| (26 | ) | 242 |
| (15 | ) | — |
| 1,257 |
| (27 | ) | |||||||
Redeemable preferred stock |
| 1 |
| — |
| — |
| — |
| — |
| 1 |
| — |
| |||||||
Total fixed income securities |
| 13,455 |
| (143 | ) | 1,188 |
| (605 | ) | (148 | ) | 13,747 |
| (158 | ) | |||||||
Equity securities |
| 26 |
| — |
| — |
| — |
| — |
| 26 |
| — |
| |||||||
Other investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Free-standing derivatives, net |
| (152 | ) | 47 |
| — |
| 6 |
| — |
| (99 | )(2) | 52 |
| |||||||
Other assets |
| 3 |
| (1 | ) | — |
| — |
| — |
| 2 |
| (1 | ) | |||||||
Total recurring Level 3 assets |
| $ | 13,332 |
| $ | (97 | ) | $ | 1,188 |
| $ | (599 | ) | $ | (148 | ) | $ | 13,676 |
| $ | (107 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Contractholder funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Derivatives embedded in annuity contracts |
| $ | (291 | ) | $ | 131 |
| $ | — |
| $ | 5 |
| $ | — |
| $ | (155 | ) | $ | 131 |
|
Total recurring Level 3 liabilities |
| $ | (291 | ) | $ | 131 |
| $ | — |
| $ | 5 |
| $ | — |
| $ | (155 | ) | $ | 131 |
|
(1) The effect to net income totals $34 million and is reported in the Condensed Consolidated Statements of Operations as follows: $(110) million in realized capital gains and losses, $13 million in net investment income and $(131) million in contract benefits.
(2) Comprises $30 million of assets and $129 million of liabilities.
(3) The amounts represent gains and losses included in net income for the period of time that the asset or liability was determined to be in Level 3. These gains and losses total $24 million and are reported in the Condensed Consolidated Statements of Operations as follows: $(122) million in realized capital gains and losses, $14 million in net investment income, $(1) million in interest credited to contractholder funds, and $(131) million in contract benefits.
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the six months ended June 30, 2009.
|
|
|
| Total realized and unrealized gains |
|
|
|
|
|
|
| Total |
| |||||||||
($ in millions) |
| Balance as of |
| Net income (1) |
| OCI on |
| Purchases, |
| Net |
| Balance as of |
| instruments |
| |||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Municipal |
| $ | 703 |
| $ | — |
| $ | 7 |
| $ | (13 | ) | $ | (10 | ) | $ | 687 |
| $ | — |
|
Corporate |
| 9,867 |
| (57 | ) | 624 |
| (872 | ) | (58 | ) | 9,504 |
| (68 | ) | |||||||
RMBS |
| 1,811 |
| (34 | ) | (122 | ) | (82 | ) | (162 | ) | 1,411 |
| (39 | ) | |||||||
CMBS |
| 410 |
| (104 | ) | 173 |
| (17 | ) | 425 |
| 887 |
| (94 | ) | |||||||
ABS |
| 1,341 |
| (155 | ) | 246 |
| (129 | ) | (46 | ) | 1,257 |
| (152 | ) | |||||||
Redeemable preferred stock |
| 1 |
| — |
| — |
| — |
| — |
| 1 |
| — |
| |||||||
Total fixed income securities |
| 14,133 |
| (350 | ) | 928 |
| (1,113 | ) | 149 |
| 13,747 |
| (353 | ) | |||||||
Equity securities |
| 27 |
| — |
| (1 | ) | — |
| — |
| 26 |
| — |
| |||||||
Other investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Free-standing derivatives, net |
| (93 | ) | 38 |
| — |
| (44 | ) | — |
| (99 | )(2) | 44 |
| |||||||
Other assets |
| 1 |
| 1 |
| — |
| — |
| — |
| 2 |
| 1 |
| |||||||
Total recurring Level 3 assets |
| $ | 14,068 |
| $ | (311 | ) | $ | 927 |
| $ | (1,157 | ) | $ | 149 |
| $ | 13,676 |
| $ | (308 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Contractholder funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Derivatives embedded in annuity contracts |
| $ | (265 | ) | $ | 105 |
| $ | — |
| $ | 5 |
| $ | — |
| $ | (155 | ) | $ | 105 |
|
Total recurring Level 3 liabilities |
| $ | (265 | ) | $ | 105 |
| $ | — |
| $ | 5 |
| $ | — |
| $ | (155 | ) | $ | 105 |
|
(1) The effect to net income totals $(206) million and is reported in the Condensed Consolidated Statements of Operations as follows: $(359) million in realized capital gains and losses, $49 million in net investment income, $1 million in interest credited to contractholder funds, and $(105) million in contract benefits.
(2) Comprises $30 million of assets and $129 million of liabilities.
(3) The amounts represent gains and losses included in net income for the period of time that the asset or liability was determined to be in Level 3. These gains and losses total $(203) million and are reported in the Condensed Consolidated Statements of Operations as follows: $(357) million in realized capital gains and losses, $48 million in net investment income, $(1) million in interest credited to contractholder funds, and $(105) million in contract benefits.
Presented below are the carrying values and fair value estimates of financial instruments not carried at fair value.
Financial assets
|
| June 30, 2010 |
| December 31, 2009 |
| ||||||||
($ in millions) |
| Carrying |
| Fair |
| Carrying |
| Fair |
| ||||
Mortgage loans |
| $ | 7,039 |
| $ | 6,043 |
| $ | 7,780 |
| $ | 6,220 |
|
Limited partnership interests - cost basis |
| 590 |
| 608 |
| 533 |
| 521 |
| ||||
Bank loans |
| 328 |
| 304 |
| 359 |
| 329 |
| ||||
Notes due from related party |
| 275 |
| 245 |
| 275 |
| 233 |
| ||||
The fair value of mortgage loans is based on discounted contractual cash flows or, if the loans are impaired due to credit reasons, the fair value of collateral less costs to sell. Risk adjusted discount rates are selected using current rates at which similar loans would be made to borrowers with similar characteristics, using similar types of properties as collateral. The fair value of limited partnership interests accounted for on the cost basis is determined using reported net asset values of the underlying funds. The fair value of bank loans, which are reported in other investments on the Condensed Consolidated Statements of Financial Position, are valued based on broker quotes from brokers familiar with the loans and current market conditions. The fair value of notes due from related party is based on discounted cash flow calculations using current interest rates for instruments with comparable terms.
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Financial liabilities
|
| June 30, 2010 |
| December 31, 2009 |
| ||||||||
($ in millions) |
| Carrying |
| Fair |
| Carrying |
| Fair |
| ||||
Contractholder funds on investment contracts |
| $ | 36,409 |
| $ | 35,480 |
| $ | 39,824 |
| $ | 38,196 |
|
Notes due to related parties |
| 681 |
| 641 |
| 675 |
| 611 |
| ||||
Liability for collateral |
| 442 |
| 442 |
| 617 |
| 617 |
| ||||
The fair value of contractholder funds on investment contracts is based on the terms of the underlying contracts utilizing prevailing market rates for similar contracts adjusted for the Company’s own credit risk. Deferred annuities included in contractholder funds are valued using discounted cash flow models which incorporate market value margins, which are based on the cost of holding economic capital, and the Company’s own credit risk. Immediate annuities without life contingencies and fixed rate funding agreements are valued at the present value of future benefits using market implied interest rates which include the Company’s own credit risk.
The fair value of notes due to related parties is based on discounted cash flow calculations using current interest rates for instruments with comparable terms and considers the Company’s own credit risk. The liability for collateral is valued at carrying value due to its short-term nature.
6. Derivative Financial Instruments
The Company primarily uses derivatives for risk management and asset replication. In addition, the Company has derivatives embedded in non-derivative “host” contracts that are required to be separated from the host contracts and accounted for at fair value. With the exception of non-hedge derivatives used for asset replication and non-hedge embedded derivatives, all of the Company’s derivatives are evaluated for their ongoing effectiveness as either accounting hedge or non-hedge derivative financial instruments on at least a quarterly basis. The Company does not use derivatives for trading purposes. Non-hedge accounting is generally used for “portfolio” level hedging strategies where the terms of the individual hedged items do not meet the strict homogeneity requirements to permit the application of hedge accounting.
The Company uses derivatives to partially mitigate potential adverse impacts from increases in credit spreads. Credit default swaps are typically used to mitigate the credit risk within the Company’s fixed income portfolio. The Company uses foreign currency swaps primarily to reduce the foreign currency risk associated with issuing foreign currency denominated funding agreements and holding foreign currency denominated investments.
Asset-liability management is a risk management strategy that is principally employed to balance the respective interest-rate sensitivities of the Company’s assets and liabilities. Depending upon the attributes of the assets acquired and liabilities issued, derivative instruments such as interest rate swaps, caps, floors, swaptions and futures are acquired to change the interest rate characteristics of existing assets and liabilities to ensure the relationship is maintained within specified ranges and to reduce exposure to rising or falling interest rates. The Company uses financial futures and interest rate swaps to hedge anticipated asset purchases and liability issuances and futures and options for hedging the Company’s equity exposure contained in equity indexed annuity product contracts that offer equity returns to contractholders. In addition, the Company uses interest rate swaps to hedge interest rate risk inherent in funding agreements.
When derivatives meet specific criteria, they may be designated as accounting hedges and accounted for as fair value, cash flow, foreign currency fair value or foreign currency cash flow hedges. The Company designates certain of its interest rate and foreign currency swap contracts and certain investment risk transfer reinsurance agreements as fair value hedges when the hedging instrument is highly effective in offsetting the risk of changes in the fair value of the hedged item. The Company designates certain of its foreign currency swap contracts as cash flow hedges when the hedging instrument is highly effective in offsetting the exposure of variations in cash flows for the hedged risk that could affect net income. Amounts are reclassified to net investment income or realized capital gains and losses as the hedged item affects net income.
Asset replication refers to the “synthetic” creation of assets through the use of derivatives and primarily investment grade host bonds to replicate securities that are either unavailable in the cash markets or more economical to acquire in synthetic form. The Company replicates fixed income securities using a combination of a
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
credit default swap and one or more highly rated fixed income securities to synthetically replicate the economic characteristics of one or more cash market securities.
The Company’s primary embedded derivatives are conversion options in fixed income securities, which provide the Company with the right to convert the instrument into a predetermined number of shares of common stock; equity options in annuity product contracts, which provide equity returns to contractholders; and equity-indexed notes containing equity call options, which provide a coupon payout that is determined using one or more equity-based indices.
The notional amounts specified in the contracts are used to calculate the exchange of contractual payments under the agreements and are generally not representative of the potential for gain or loss on these agreements. However, the notional amounts specified in selling protection credit default swaps represent the maximum amount of potential loss, assuming no recoveries.
Fair value, which is equal to the carrying value, is the estimated amount that the Company would receive or pay to terminate the derivative contracts at the reporting date. The carrying value amounts for OTC derivatives are further adjusted for the effects, if any, of legally enforceable master netting agreements and are presented on a net basis, by counterparty agreement, in the Condensed Consolidated Statements of Financial Position. For certain exchange traded derivatives, the exchange requires margin deposits as well as daily cash settlements of margin accounts. As of June 30, 2010, the Company pledged $16 million of securities and cash in the form of margin deposits.
The net impact to pre-tax income for derivatives includes valuation and settlements of derivatives. For those derivatives which qualify for fair value hedge accounting, net income includes the changes in the fair value of the hedged risk, and therefore reflects any hedging ineffectiveness. For cash flow hedges, gains and losses amortized from accumulated other comprehensive income are reported in net income. For embedded derivatives in convertible fixed income securities and equity-indexed notes, net income includes the change in fair value of the embedded derivative and accretion income related to the host instrument. For non-hedge derivatives, net income includes changes in fair value and accrued periodic settlements.
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table provides a summary of the volume and fair value positions of derivative instruments as well as their reporting location in the Condensed Consolidated Statements of Financial Position at June 30, 2010.
|
| Asset derivatives |
| ||||||||||||||
|
|
|
| Volume (1) |
|
|
|
|
|
|
| ||||||
($ in millions, except number of contracts) |
| Balance sheet location |
| Notional |
| Number |
| Fair |
| Gross |
| Gross |
| ||||
Derivatives designated as accounting hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate swap agreements |
| Other investments |
| $ | 39 |
| n/a |
| $ | (3 | ) | $ | — |
| $ | (3 | ) |
Foreign currency swap agreements |
| Other investments |
| 41 |
| n/a |
| 5 |
| 5 |
| — |
| ||||
Total |
|
|
| $ | 80 |
| n/a |
| $ | 2 |
| $ | 5 |
| $ | (3 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Derivatives not designated as accounting hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate swap agreements |
| Other investments |
| $ | 573 |
| n/a |
| $ | 45 |
| $ | 49 |
| $ | (4 | ) |
Interest rate cap and floor agreements |
| Other investments |
| 61 |
| n/a |
| 1 |
| 1 |
| — |
| ||||
Financial futures contracts and options |
| Other investments |
| n/a |
| 1,235 |
| — |
| — |
| — |
| ||||
Equity and index contracts |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Options, futures and warrants (2) |
| Other investments |
| 73 |
| 21,900 |
| 134 |
| 134 |
| — |
| ||||
Options, futures and warrants |
| Other assets |
| n/a |
| 30 |
| — |
| — |
| — |
| ||||
Foreign currency contracts |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign currency swap agreements |
| Other investments |
| 40 |
| n/a |
| 3 |
| 3 |
| — |
| ||||
Embedded derivative financial instruments |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Conversion options in fixed income securities |
| Fixed income securities |
| 322 |
| n/a |
| 76 |
| 76 |
| — |
| ||||
Equity-indexed call options in fixed income securities |
| Fixed income securities |
| 425 |
| n/a |
| 57 |
| 57 |
| — |
| ||||
Credit default contracts |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Credit Default Swaps - Buying Protection |
| Other investments |
| 41 |
| n/a |
| 1 |
| 1 |
| — |
| ||||
Other contracts |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other contracts |
| Other investments |
| 13 |
| n/a |
| — |
| — |
| — |
| ||||
Other contracts |
| Other assets |
| 6 |
| n/a |
| 2 |
| 2 |
| — |
| ||||
Total |
|
|
| $ | 1,554 |
| 23,165 |
| $ | 319 |
| $ | 323 |
| $ | (4 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total derivative assets |
|
|
| $ | 1,634 |
| 23,165 |
| $ | 321 |
| $ | 328 |
| $ | (7 | ) |
(1) Volume for OTC derivative contracts is represented by their notional amounts. Volume for exchange traded derivatives is represented by the number of contracts, which is the basis on which they are traded. (n/a = not applicable)
(2) In addition to the number of contracts presented in the table, the Company held 837,100 stock warrants. Stock warrants can be converted to cash upon sale of those instruments or exercised for shares of common stock.
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| Liability derivatives |
| ||||||||||||||
|
|
|
| Volume (1) |
|
|
|
|
|
|
| ||||||
|
| Balance sheet location |
| Notional |
| Number |
| Fair |
| Gross |
| Gross |
| ||||
Derivatives designated as accounting hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate swap agreements |
| Other liabilities & accrued expenses |
| $ | 3,832 |
| n/a |
| $ | (240 | ) | $ | 14 |
| $ | (254 | ) |
Interest rate swap agreements |
| Contractholder funds |
| — |
| n/a |
| 3 |
| 3 |
| — |
| ||||
Foreign currency swap agreements |
| Other liabilities & accrued expenses |
| 161 |
| n/a |
| 2 |
| 5 |
| (3 | ) | ||||
Foreign currency and interest rate swap agreements |
| Other liabilities & accrued expenses |
| 435 |
| n/a |
| 27 |
| 27 |
| — |
| ||||
Foreign currency and interest rate swap agreements |
| Contractholder funds |
| — |
| n/a |
| 12 |
| 12 |
| — |
| ||||
Total |
|
|
| $ | 4,428 |
| n/a |
| $ | (196 | ) | $ | 61 |
| $ | (257 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Derivatives not designated as accounting hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate swap agreements |
| Other liabilities & accrued expenses |
| $ | 5,297 |
| n/a |
| $ | (45 | ) | $ | 93 |
| $ | (138 | ) |
Interest rate swaption agreements |
| Other liabilities & accrued expenses |
| 750 |
| n/a |
| 4 |
| 4 |
| — |
| ||||
Interest rate cap and floor agreements |
| Other liabilities & accrued expenses |
| 3,563 |
| n/a |
| (32 | ) | 1 |
| (33 | ) | ||||
Financial futures contracts and options |
| Other liabilities & accrued expenses |
| n/a |
| 1,947 |
| — |
| — |
| — |
| ||||
Equity and index contracts |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Options and futures |
| Other liabilities & accrued expenses |
| 48 |
| 22,855 |
| (48 | ) | — |
| (48 | ) | ||||
Foreign currency contracts |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign currency swap agreements |
| Other liabilities & accrued expenses |
| 50 |
| n/a |
| 8 |
| 8 |
| — |
| ||||
Embedded derivative financial instruments |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Guaranteed accumulation benefits |
| Contractholder funds |
| 1,015 |
| n/a |
| (75 | ) | — |
| (75 | ) | ||||
Guaranteed withdrawal benefits |
| Contractholder funds |
| 721 |
| n/a |
| (40 | ) | — |
| (40 | ) | ||||
Equity-indexed options in life and annuity product contracts |
| Contractholder funds |
| 4,236 |
| n/a |
| (106 | ) | — |
| (106 | ) | ||||
Other embedded derivative financial instruments |
| Contractholder funds |
| 85 |
| n/a |
| (4 | ) | — |
| (4 | ) | ||||
Credit default contracts |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Credit Default Swaps - Buying Protection |
| Other liabilities & accrued expenses |
| 523 |
| n/a |
| 2 |
| 10 |
| (8 | ) | ||||
Credit Default Swaps - Selling Protection |
| Other liabilities & accrued expenses |
| 479 |
| n/a |
| (87 | ) | 1 |
| (88 | ) | ||||
Total |
|
|
| $ | 16,767 |
| 24,802 |
| $ | (423 | ) | $ | 117 |
| $ | (540 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total derivative liabilities |
|
|
| $ | 21,195 |
| 24,802 |
| $ | (619 | ) | $ | 178 |
| $ | (797 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total derivatives |
|
|
| $ | 22,829 |
| 47,967 |
| $ | (298 | ) |
|
|
|
|
(1) Volume for OTC derivative contracts is represented by their notional amounts. Volume for exchange traded derivatives is represented by the number of contracts, which is the basis on which they are traded. (n/a = not applicable)
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table provides a summary of the volume and fair value positions of derivative instruments as well as their reporting location in the Consolidated Statements of Financial Position at December 31, 2009.
|
| Asset derivatives |
| ||||||||||||||
|
|
|
| Volume (1) |
|
|
|
|
|
|
| ||||||
($ in millions, except number of contracts) |
| Balance sheet location |
| Notional |
| Number |
| Fair |
| Gross |
| Gross |
| ||||
Derivatives designated as accounting hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate swap agreements |
| Other investments |
| $ | 45 |
| n/a |
| $ | (3 | ) | $ | — |
| $ | (3 | ) |
Foreign currency swap agreements |
| Other investments |
| 23 |
| n/a |
| (2 | ) | — |
| (2 | ) | ||||
Total |
|
|
| $ | 68 |
| n/a |
| $ | (5 | ) | $ | — |
| $ | (5 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Derivatives not designated as accounting hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate swap agreements |
| Other investments |
| $ | 1,106 |
| n/a |
| $ | 57 |
| $ | 61 |
| $ | (4 | ) |
Interest rate cap and floor agreements |
| Other investments |
| 52 |
| n/a |
| 2 |
| 2 |
| — |
| ||||
Financial futures contracts and options |
| Other assets |
| n/a |
| 404 |
| — |
| — |
| — |
| ||||
Equity and index contracts |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Options, futures and warrants (2) |
| Other investments |
| 62 |
| 19,850 |
| 385 |
| 385 |
| — |
| ||||
Options, futures and warrants |
| Other assets |
| n/a |
| 102 |
| — |
| — |
| — |
| ||||
Foreign currency contracts |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign currency swap agreements |
| Other investments |
| 53 |
| n/a |
| 1 |
| 1 |
| — |
| ||||
Embedded derivative financial instruments |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Conversion options in fixed income securities |
| Fixed income securities |
| 315 |
| n/a |
| 117 |
| 117 |
| — |
| ||||
Equity-indexed call options in fixed income securities |
| Fixed income securities |
| 475 |
| n/a |
| 89 |
| 89 |
| — |
| ||||
Credit default contracts |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Credit Default Swaps - Buying Protection |
| Other investments |
| 83 |
| n/a |
| (3 | ) | 2 |
| (5 | ) | ||||
Credit Default Swaps - Selling Protection |
| Other investments |
| 14 |
| n/a |
| — |
| — |
| — |
| ||||
Other contracts |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other contracts |
| Other investments |
| 75 |
| n/a |
| — |
| — |
| — |
| ||||
Other contracts |
| Other assets |
| 6 |
| n/a |
| 2 |
| 2 |
| — |
| ||||
Total |
|
|
| $ | 2,241 |
| 20,356 |
| $ | 650 |
| $ | 659 |
| $ | (9 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total derivative assets |
|
|
| $ | 2,309 |
| 20,356 |
| $ | 645 |
| $ | 659 |
| $ | (14 | ) |
(1) Volume for OTC derivative contracts is represented by their notional amounts. Volume for exchange traded derivatives is represented by the number of contracts, which is the basis on which they are traded. (n/a = not applicable)
(2) In addition to the number of contracts presented in the table, the Company held 837,100 stock warrants. Stock warrants can be converted to cash upon sale of those instruments or exercised for shares of common stock.
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| Liability derivatives |
| ||||||||||||||
|
|
|
| Volume (1) |
|
|
|
|
|
|
| ||||||
|
| Balance sheet location |
| Notional |
| Number |
| Fair |
| Gross |
| Gross |
| ||||
Derivatives designated as accounting hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate swap agreements |
| Other liabilities & accrued expenses |
| $ | 2,443 |
| n/a |
| $ | (230 | ) | $ | — |
| $ | (230 | ) |
Foreign currency swap agreements |
| Other liabilities & accrued expenses |
| 179 |
| n/a |
| (18 | ) | 3 |
| (21 | ) | ||||
Foreign currency and interest rate swap agreements |
| Other liabilities & accrued expenses |
| 870 |
| n/a |
| 231 |
| 231 |
| — |
| ||||
Foreign currency and interest rate swap agreements |
| Contractholder funds |
| — |
| n/a |
| 44 |
| 44 |
| — |
| ||||
Total |
|
|
| $ | 3,492 |
| n/a |
| $ | 27 |
| $ | 278 |
| $ | (251 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Derivatives not designated as accounting hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate swap agreements |
| Other liabilities & accrued expenses |
| $ | 6,087 |
| n/a |
| $ | 32 |
| $ | 69 |
| $ | (37 | ) |
Interest rate swaption agreements |
| Other liabilities & accrued expenses |
| 1,000 |
| n/a |
| 15 |
| 15 |
| — |
| ||||
Interest rate cap and floor agreements |
| Other liabilities & accrued expenses |
| 3,896 |
| n/a |
| (16 | ) | 9 |
| (25 | ) | ||||
Equity and index contracts |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Options, futures and warrants |
| Other liabilities & accrued expenses |
| 45 |
| 19,946 |
| (213 | ) | 3 |
| (216 | ) | ||||
Foreign currency contracts |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign currency swap agreements |
| Other liabilities & accrued expenses |
| 54 |
| n/a |
| 3 |
| 3 |
| — |
| ||||
Foreign currency forwards and options |
| Other liabilities & accrued expenses |
| 185 |
| n/a |
| 2 |
| 2 |
| — |
| ||||
Embedded derivative financial instruments |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Guaranteed accumulation benefits |
| Contractholder funds |
| 1,113 |
| n/a |
| (66 | ) | — |
| (66 | ) | ||||
Guaranteed withdrawal benefits |
| Contractholder funds |
| 810 |
| n/a |
| (41 | ) | — |
| (41 | ) | ||||
Equity-indexed options in life and annuity product contracts |
| Contractholder funds |
| 4,321 |
| n/a |
| (217 | ) | — |
| (217 | ) | ||||
Other embedded derivative financial instruments |
| Contractholder funds |
| 85 |
| n/a |
| (3 | ) | — |
| (3 | ) | ||||
Credit default contracts |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Credit Default Swaps - Buying Protection |
| Other liabilities & accrued expenses |
| 550 |
| n/a |
| (29 | ) | 4 |
| (33 | ) | ||||
Credit Default Swaps - Selling Protection |
| Other liabilities & accrued expenses |
| 1,070 |
| n/a |
| (60 | ) | 6 |
| (66 | ) | ||||
Total |
|
|
| $ | 19,216 |
| 19,946 |
| $ | (593 | ) | $ | 111 |
| $ | (704 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total derivative liabilities |
|
|
| $ | 22,708 |
| 19,946 |
| $ | (566 | ) | $ | 389 |
| $ | (955 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total derivatives |
|
|
| $ | 25,017 |
| 40,302 |
| $ | 79 |
|
|
|
|
|
(1) Volume for OTC derivative contracts is represented by their notional amounts. Volume for exchange traded derivatives is represented by the number of contracts, which is the basis on which they are traded. (n/a = not applicable)
The following table provides a summary of the impacts of the Company’s foreign currency contracts in cash flow hedging relationships in the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Financial Position. Amortization of net gains from accumulated other comprehensive income related to cash flow hedges is expected to be $1 million during the next twelve months.
|
| Three months |
| Six months |
| ||||||||
($ in millions) |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Effective portion |
|
|
|
|
|
|
|
|
| ||||
Gain (loss) recognized in OCI on derivatives during the period |
| $ | 22 |
| $ | (28 | ) | $ | 28 |
| $ | (24 | ) |
Gain (loss) recognized in OCI on derivatives during the term of the hedging relationship |
| 7 |
| (11 | ) | 7 |
| (11 | ) | ||||
Gain reclassified from AOCI into income (net investment income) |
| — |
| — |
| 1 |
| 1 |
| ||||
Gain reclassified from AOCI into income (realized capital gains and losses) |
| 2 |
| 1 |
| 2 |
| 1 |
| ||||
Ineffective portion and amount excluded from effectiveness |
|
|
|
|
|
|
|
|
| ||||
Gain recognized in income on derivatives (realized capital gains and losses) |
| — |
| — |
| — |
| — |
| ||||
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables present gains and losses from valuation, settlements and hedge ineffectiveness reported on derivatives used in fair value hedging relationships and derivatives not designated as accounting hedging instruments in the Condensed Consolidated Statements of Operations.
|
| Three months ended June 30, 2010 |
| |||||||||||||
($ in millions) |
| Net |
| Realized |
| Contract |
| Interest |
| Total gain |
| |||||
Derivatives in fair value accounting hedging relationships |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest rate contracts |
| $ | (72 | ) | $ | 2 |
| $ | — |
| $ | 13 |
| $ | (57 | ) |
Foreign currency and interest rate contracts |
| — |
| (1 | ) | — |
| (16 | ) | (17 | ) | |||||
Subtotal |
| (72 | ) | 1 |
| — |
| (3 | ) | (74 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Derivatives not designated as accounting hedging instruments |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest rate contracts |
| — |
| (115 | ) | — |
| — |
| (115 | ) | |||||
Equity and index contracts |
| — |
| — |
| — |
| (70 | ) | (70 | ) | |||||
Embedded derivative financial instruments |
| — |
| (51 | ) | (28 | ) | 112 |
| 33 |
| |||||
Credit default contracts |
| — |
| (14 | ) | — |
| — |
| (14 | ) | |||||
Other contracts |
| — |
| — |
| — |
| 2 |
| 2 |
| |||||
Subtotal |
| — |
| (180 | ) | (28 | ) | 44 |
| (164 | ) | |||||
Total |
| $ | (72 | ) | $ | (179 | ) | $ | (28 | ) | $ | 41 |
| $ | (238 | ) |
|
| Six months ended June 30, 2010 |
| |||||||||||||
|
| Net |
| Realized |
| Contract |
| Interest |
| Total gain |
| |||||
Derivatives in fair value accounting hedging relationships |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest rate contracts |
| $ | (113 | ) | $ | 2 |
| $ | — |
| $ | 12 |
| $ | (99 | ) |
Foreign currency and interest rate contracts |
| — |
| (1 | ) | — |
| (40 | ) | (41 | ) | |||||
Subtotal |
| (113 | ) | 1 |
| — |
| (28 | ) | (140 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Derivatives not designated as accounting hedging instruments |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest rate contracts |
| — |
| (147 | ) | — |
| — |
| (147 | ) | |||||
Equity and index contracts |
| — |
| — |
| — |
| (36 | ) | (36 | ) | |||||
Embedded derivative financial instruments |
| — |
| (56 | ) | (8 | ) | 110 |
| 46 |
| |||||
Foreign currency contracts |
| — |
| 4 |
| — |
| — |
| 4 |
| |||||
Credit default contracts |
| — |
| (16 | ) | — |
| — |
| (16 | ) | |||||
Other contracts |
| — |
| — |
| — |
| 2 |
| 2 |
| |||||
Subtotal |
| — |
| (215 | ) | (8 | ) | 76 |
| (147 | ) | |||||
Total |
| $ | (113 | ) | $ | (214 | ) | $ | (8 | ) | $ | 48 |
| $ | (287 | ) |
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| Three months ended June 30, 2009 |
| |||||||||||||
|
| Net |
| Realized |
| Contract |
| Interest |
| Total gain |
| |||||
Derivatives in fair value accounting hedging relationships |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest rate contracts |
| $ | 71 |
| $ | 6 |
| $ | — |
| $ | (1 | ) | $ | 76 |
|
Foreign currency and interest rate contracts |
| — |
| (2 | ) | — |
| 90 |
| 88 |
| |||||
Subtotal |
| 71 |
| 4 |
| — |
| 89 |
| 164 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Derivatives not designated as accounting hedging instruments |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest rate contracts |
| — |
| 218 |
| — |
| — |
| 218 |
| |||||
Equity and index contracts |
| — |
| (3 | ) | — |
| 32 |
| 29 |
| |||||
Embedded derivative financial instruments |
| — |
| 25 |
| 133 |
| (68 | ) | 90 |
| |||||
Foreign currency contracts |
| — |
| (1 | ) | — |
| — |
| (1 | ) | |||||
Credit default contracts |
| — |
| (23 | ) | — |
| — |
| (23 | ) | |||||
Other contracts |
| — |
| — |
| — |
| (4 | ) | (4 | ) | |||||
Subtotal |
| — |
| 216 |
| 133 |
| (40 | ) | 309 |
| |||||
Total |
| $ | 71 |
| $ | 220 |
| $ | 133 |
| $ | 49 |
| $ | 473 |
|
|
| Six months ended June 30, 2009 |
| |||||||||||||
|
| Net |
| Realized |
| Contract |
| Interest |
| Total gain |
| |||||
Derivatives in fair value accounting hedging relationships |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest rate contracts |
| $ | 78 |
| $ | 10 |
| $ | — |
| $ | (13 | ) | $ | 75 |
|
Foreign currency and interest rate contracts |
| — |
| (3 | ) | — |
| 60 |
| 57 |
| |||||
Subtotal |
| 78 |
| 7 |
| — |
| 47 |
| 132 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Derivatives not designated as accounting hedging instruments |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest rate contracts |
| — |
| 274 |
| — |
| — |
| 274 |
| |||||
Equity and index contracts |
| — |
| — |
| — |
| 9 |
| 9 |
| |||||
Embedded derivative financial instruments |
| — |
| 2 |
| 110 |
| (85 | ) | 27 |
| |||||
Credit default contracts |
| — |
| 6 |
| — |
| — |
| 6 |
| |||||
Other contracts |
| — |
| — |
| — |
| (1 | ) | (1 | ) | |||||
Subtotal |
| — |
| 282 |
| 110 |
| (77 | ) | 315 |
| |||||
Total |
| $ | 78 |
| $ | 289 |
| $ | 110 |
| $ | (30 | ) | $ | 447 |
|
The following tables provide a summary of the changes in fair value of the Company’s fair value hedging relationships in the Condensed Consolidated Statements of Operations.
($ in millions)
|
| Three months ended June 30, 2010 |
| ||||||||||
|
| Gain (loss) on derivatives |
| Gain (loss) on hedged risk |
| ||||||||
Location of gain or (loss) recognized |
| Interest |
| Foreign |
| Contractholder |
| Investments |
| ||||
Interest credited to contractholder funds |
| $ | 9 |
| $ | (24 | ) | $ | 15 |
| $ | — |
|
Net investment income |
| (43 | ) | — |
| — |
| 43 |
| ||||
Realized capital gains and losses |
| 2 |
| (1 | ) | — |
| — |
| ||||
Total |
| $ | (32 | ) | $ | (25 | ) | $ | 15 |
| $ | 43 |
|
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| Six months ended June 30, 2010 |
| ||||||||||
|
| Gain (loss) on derivatives |
| Gain (loss) on hedged risk |
| ||||||||
Location of gain or (loss) recognized |
| Interest |
| Foreign |
| Contractholder |
| Investments |
| ||||
Interest credited to contractholder funds |
| $ | 8 |
| $ | (57 | ) | $ | 49 |
| $ | — |
|
Net investment income |
| (56 | ) | — |
| — |
| 56 |
| ||||
Realized capital gains and losses |
| 2 |
| (1 | ) | — |
| — |
| ||||
Total |
| $ | (46 | ) | $ | (58 | ) | $ | 49 |
| $ | 56 |
|
|
| Three months ended June 30, 2009 |
| ||||||||||
|
| Gain (loss) on derivatives |
| Gain (loss) on hedged risk |
| ||||||||
Location of gain or (loss) recognized |
| Interest |
| Foreign |
| Contractholder |
| Investments |
| ||||
Interest credited to contractholder funds |
| $ | — |
| $ | 79 |
| $ | (79 | ) | $ | — |
|
Net investment income |
| 105 |
| — |
| — |
| (105 | ) | ||||
Realized capital gains and losses |
| 6 |
| (2 | ) | — |
| — |
| ||||
Total |
| $ | 111 |
| $ | 77 |
| $ | (79 | ) | $ | (105 | ) |
|
| Six months ended June 30, 2009 |
| ||||||||||
|
| Gain (loss) on derivatives |
| Gain (loss) on hedged risk |
| ||||||||
Location of gain or (loss) recognized |
| Interest |
| Foreign |
| Contractholder |
| Investments |
| ||||
Interest credited to contractholder funds |
| $ | (26 | ) | $ | 44 |
| $ | (18 | ) | $ | — |
|
Net investment income |
| 145 |
| — |
| — |
| (145 | ) | ||||
Realized capital gains and losses |
| 10 |
| (3 | ) | — |
| — |
| ||||
Total |
| $ | 129 |
| $ | 41 |
| $ | (18 | ) | $ | (145 | ) |
The Company manages its exposure to credit risk by utilizing highly rated counterparties, establishing risk control limits, executing legally enforceable master netting agreements (“MNAs”) and obtaining collateral where appropriate. The Company uses MNAs for OTC derivative transactions, including interest rate swap, foreign currency swap, interest rate cap, interest rate floor, credit default swap, forward and certain option agreements (including swaptions). These agreements permit either party to net payments due for transactions covered by the agreements. Under the provisions of the agreements, collateral is either pledged or obtained when certain predetermined exposure limits are exceeded. As of June 30, 2010, counterparties pledged $9 million in securities to the Company, and the Company pledged $302 million in securities to counterparties which includes $263 million of collateral posted under MNAs for contracts containing credit-risk-contingent provisions that are in a liability position and $39 million of collateral posted under MNAs for contracts without credit-risk-contingent liabilities. The Company has not incurred any losses on derivative financial instruments due to counterparty nonperformance. Other derivatives including futures and certain option contracts are traded on organized exchanges, which require margin deposits and guarantee the execution of trades, thereby mitigating any potential credit risk associated with transactions executed on organized exchanges.
Counterparty credit exposure represents the Company’s potential loss if all of the counterparties concurrently fail to perform under the contractual terms of the contracts and all collateral, if any, becomes worthless. This exposure is measured by the fair value of OTC derivative contracts with a positive fair value at the reporting date reduced by the effect, if any, of legally enforceable master netting agreements.
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the counterparty credit exposure by counterparty credit rating as it relates to interest rate swap, foreign currency swap, interest rate cap, interest rate floor, credit default swap, forward and certain option agreements (including swaptions).
($ in millions)
|
| June 30, 2010 |
| December 31, 2009 |
| ||||||||||||||||||
Rating (1) |
| Number of |
| Notional |
| Credit |
| Exposure, |
| Number of |
| Notional |
| Credit |
| Exposure, |
| ||||||
AA- |
| 1 |
| $ | 672 |
| $ | 21 |
| $ | 12 |
| — |
| $ | — |
| $ | — |
| $ | — |
|
A+ |
| 1 |
| 15 |
| — |
| — |
| 3 |
| 6,666 |
| 151 |
| 18 |
| ||||||
A |
| 2 |
| 94 |
| — |
| — |
| 2 |
| 1,041 |
| 48 |
| 17 |
| ||||||
A- |
| 1 |
| 89 |
| 30 |
| 30 |
| 1 |
| 145 |
| 23 |
| 23 |
| ||||||
Total |
| 5 |
| $ | 870 |
| $ | 51 |
| $ | 42 |
| 6 |
| $ | 7,852 |
| $ | 222 |
| $ | 58 |
|
(1) Rating is the lower of S&P or Moody’s ratings.
(2) Only OTC derivatives with a net positive fair value are included for each counterparty.
Market risk is the risk that the Company will incur losses due to adverse changes in market rates and prices. Market risk exists for all of the derivative financial instruments the Company currently holds, as these instruments may become less valuable due to adverse changes in market conditions. To limit this risk, the Company’s senior management has established risk control limits. In addition, changes in fair value of the derivative financial instruments that the Company uses for risk management purposes are generally offset by the change in the fair value or cash flows of the hedged risk component of the related assets, liabilities or forecasted transactions.
Certain of the Company’s derivative instruments contain credit-risk-contingent termination events, cross-default provisions and credit support annex agreements. Credit-risk-contingent termination events allow the counterparties to terminate the derivative on certain dates if ALIC’s or Allstate Life Insurance Company of New York’s (“ALNY”) financial strength credit ratings by Moody’s or S&P fall below a certain level or in the event ALIC or ALNY are no longer rated by both Moody’s and S&P. Credit-risk-contingent cross-default provisions allow the counterparties to terminate the derivative instruments if the Company defaults by pre-determined threshold amounts on certain debt instruments. Credit-risk-contingent credit support annex agreements specify the amount of collateral the Company must post to counterparties based on ALIC’s or ALNY’s financial strength credit ratings by Moody’s or S&P, or in the event ALIC or ALNY are no longer rated by both Moody’s and S&P.
The following summarizes the fair value of derivative instruments with termination, cross-default or collateral credit-risk-contingent features that are in a liability position, as well as the fair value of assets and collateral that are netted against the liability in accordance with provisions within legally enforceable MNAs.
($ in millions) |
| June 30, |
| December 31, |
| ||
Gross liability fair value of contracts containing credit-risk-contingent features |
| $ | 499 |
| $ | 386 |
|
Gross asset fair value of contracts containing credit-risk-contingent features and subject to MNAs |
| (182 | ) | (233 | ) | ||
Collateral posted under MNAs for contracts containing credit-risk-contingent features |
| (263 | ) | (122 | ) | ||
Maximum amount of additional exposure for contracts with credit-risk-contingent features if all features were triggered concurrently |
| $ | 54 |
| $ | 31 |
|
Credit derivatives - selling protection
Credit default swaps (“CDS”) are utilized for selling credit protection against a specified credit event. A credit default swap is a derivative instrument, representing an agreement between two parties to exchange the credit risk of a specified entity (or a group of entities), or an index based on the credit risk of a group of entities (all commonly referred to as the “reference entity” or a portfolio of “reference entities”), for a periodic premium. In selling protection, CDS are used to replicate fixed income securities and to complement the cash market when credit exposure to certain issuers is not available or when the derivative alternative is less expensive than the cash market alternative. CDS typically have a five-year term.
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table shows the CDS notional amounts by credit rating and fair value of protection sold as of June 30, 2010:
|
| Notional amount |
|
|
| |||||||||||||||||
($ in millions) |
| AAA |
| AA |
| A |
| BBB |
| BB and |
| Total |
| Fair |
| |||||||
Single name |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Investment grade corporate debt |
| $ | — |
| $ | 40 |
| $ | 75 |
| $ | 36 |
| $ | 15 |
| $ | 166 |
| $ | (5 | ) |
High yield debt |
| — |
| — |
| — |
| — |
| 8 |
| 8 |
| — |
| |||||||
Municipal |
| — |
| 25 |
| — |
| — |
| — |
| 25 |
| (8 | ) | |||||||
Subtotal |
| — |
| 65 |
| 75 |
| 36 |
| 23 |
| 199 |
| (13 | ) | |||||||
Baskets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Tranche |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Investment grade corporate debt |
| — |
| — |
| — |
| — |
| 65 |
| 65 |
| (35 | ) | |||||||
First-to-default |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Investment grade corporate debt |
| — |
| — |
| — |
| 15 |
| — |
| 15 |
| — |
| |||||||
Municipal |
| — |
| — |
| 100 |
| — |
| — |
| 100 |
| (38 | ) | |||||||
Subtotal |
| — |
| — |
| 100 |
| 15 |
| 65 |
| 180 |
| (73 | ) | |||||||
Index |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Investment grade corporate debt |
| 1 |
| 2 |
| 26 |
| 66 |
| 5 |
| 100 |
| (1 | ) | |||||||
Total |
| $ | 1 |
| $ | 67 |
| $ | 201 |
| $ | 117 |
| $ | 93 |
| $ | 479 |
| $ | (87 | ) |
The following table shows the CDS notional amounts by credit rating and fair value of protection sold as of December 31, 2009:
|
| Notional amount |
|
|
| ||||||||||||||
($ in millions) |
| AA |
| A |
| BBB |
| BB and |
| Total |
| Fair |
| ||||||
Single name |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Investment grade corporate debt |
| $ | 50 |
| $ | 65 |
| $ | 41 |
| $ | 15 |
| $ | 171 |
| $ | (5 | ) |
High yield debt |
| — |
| — |
| — |
| 8 |
| 8 |
| — |
| ||||||
Municipal |
| 25 |
| — |
| — |
| — |
| 25 |
| (4 | ) | ||||||
Subtotal |
| 75 |
| 65 |
| 41 |
| 23 |
| 204 |
| (9 | ) | ||||||
Baskets |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Tranche |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Investment grade corporate debt |
| — |
| — |
| — |
| 65 |
| 65 |
| (27 | ) | ||||||
First-to-default |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Investment grade corporate debt |
| — |
| 45 |
| 15 |
| — |
| 60 |
| — |
| ||||||
Municipal |
| 20 |
| 135 |
| — |
| — |
| 155 |
| (28 | ) | ||||||
Subtotal |
| 20 |
| 180 |
| 15 |
| 65 |
| 280 |
| (55 | ) | ||||||
Index |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Investment grade corporate debt |
| 14 |
| 159 |
| 408 |
| 19 |
| 600 |
| 4 |
| ||||||
Total |
| $ | 109 |
| $ | 404 |
| $ | 464 |
| $ | 107 |
| $ | 1,084 |
| $ | (60 | ) |
In selling protection with CDS, the Company sells credit protection on an identified single name, a basket of names in a first-to-default (“FTD”) structure or a specific tranche of a basket, or credit derivative index (“CDX”) that is generally investment grade, and in return receives periodic premiums through expiration or termination of the agreement. With single name CDS, this premium or credit spread generally corresponds to the difference between
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
the yield on the referenced entity’s public fixed maturity cash instruments and swap rates, at the time the agreement is executed. With a FTD basket or a tranche of a basket, because of the additional credit risk inherent in a basket of named credits, the premium generally corresponds to a high proportion of the sum of the credit spreads of the names in the basket and the correlation between the names. CDX index is utilized to take a position on multiple (generally 125) reference entities. Credit events are typically defined as bankruptcy, failure to pay, or restructuring, depending on the nature of the reference credit. If a credit event occurs, the Company settles with the counterparty, either through physical settlement or cash settlement. In a physical settlement, a reference asset is delivered by the buyer of protection to the Company, in exchange for cash payment at par, whereas in a cash settlement, the Company pays the difference between par and the prescribed value of the reference asset. When a credit event occurs in a single name or FTD basket (for FTD, the first credit event occurring for any one name in the basket), the contract terminates at time of settlement. When a credit event occurs in a tranche of a basket, there is no immediate impact to the Company until cumulative losses in the basket exceed the contractual subordination. To date, realized losses have not exceeded the subordination. For CDX index, the reference entity’s name incurring the credit event is removed from the index while the contract continues until expiration. The maximum payout on a CDS is the contract notional amount. A physical settlement may afford the Company with recovery rights as the new owner of the asset.
The Company monitors risk associated with credit derivatives through individual name credit limits at both a credit derivative and a combined cash instrument/credit derivative level. The ratings of individual names for which protection has been sold are also monitored.
7. Reinsurance
The effects of reinsurance on premiums and contract charges are as follows:
|
| Three months ended |
| Six months ended |
| ||||||||
($ in millions) |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Premiums and contract charges |
|
|
|
|
|
|
|
|
| ||||
Direct |
| $ | 566 |
| $ | 555 |
| $ | 1,117 |
| $ | 1,100 |
|
Assumed |
|
|
|
|
|
|
|
|
| ||||
Affiliate |
| 26 |
| 25 |
| 53 |
| 50 |
| ||||
Non-affiliate |
| 6 |
| 6 |
| 11 |
| 11 |
| ||||
Ceded—non-affiliate |
| (196 | ) | (195 | ) | (380 | ) | (390 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Premiums and contract charges, net of reinsurance |
| $ | 402 |
| $ | 391 |
| $ | 801 |
| $ | 771 |
|
The effects of reinsurance on contract benefits are as follows:
|
| Three months ended |
| Six months ended |
| ||||||||
($ in millions) |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Contract benefits |
|
|
|
|
|
|
|
|
| ||||
Direct |
| $ | 590 |
| $ | 480 |
| $ | 1,058 |
| $ | 1,239 |
|
Assumed |
|
|
|
|
|
|
|
|
| ||||
Affiliate |
| 18 |
| 18 |
| 35 |
| 33 |
| ||||
Non-affiliate |
| 8 |
| 6 |
| 12 |
| 14 |
| ||||
Ceded—non-affiliate |
| (210 | ) | (147 | ) | (335 | ) | (595 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Contract benefits, net of reinsurance |
| $ | 406 |
| $ | 357 |
| $ | 770 |
| $ | 691 |
|
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The effects of reinsurance on interest credited to contractholder funds are as follows:
|
| Three months ended |
| Six months ended |
| ||||||||
($ in millions) |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Interest credited to contractholder funds |
|
|
|
|
|
|
|
|
| ||||
Direct |
| $ | 441 |
| $ | 551 |
| $ | 895 |
| $ | 1,117 |
|
Assumed |
|
|
|
|
|
|
|
|
| ||||
Affiliate |
| 3 |
| 2 |
| 5 |
| 5 |
| ||||
Non-affiliate |
| 4 |
| 3 |
| 7 |
| 6 |
| ||||
Ceded—non-affiliate |
| (9 | ) | (8 | ) | (16 | ) | (15 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Interest credited to contractholder funds, net of reinsurance |
| $ | 439 |
| $ | 548 |
| $ | 891 |
| $ | 1,113 |
|
8. Guarantees and Contingent Liabilities
Guaranty funds
Under state insurance guaranty fund laws, insurers doing business in a state can be assessed, up to prescribed limits, for certain obligations of insolvent insurance companies to policyholders and claimants. Amounts assessed to each company are typically related to its proportion of business written in each state. The Company’s policy is to accrue a guaranty fund assessment when the entity for which the insolvency relates has met its state of domicile’s statutory definition of insolvency and the amount of the loss is reasonably estimable. In most states, the definition is met with a declaration of financial insolvency by a court of competent jurisdiction. In certain states there must also be a final order of liquidation.
The New York Liquidation Bureau (the “Bureau”) has publicly reported that Executive Life Insurance Company of New York (“Executive Life”) is currently under its jurisdiction as part of a 1992 court-ordered rehabilitation plan. However, Executive Life does not have a liquidity problem at this time, and an order of liquidation has not been sought by the Bureau. The current publicly available estimated shortfall from the Bureau is $1.27 billion.
If Executive Life were to be declared insolvent in the future, the Company may have exposure to future guaranty fund assessments. The Company’s exposure will ultimately depend on the level of guaranty fund system participation, as well as the viability of a plan of the Bureau to obtain voluntary contributions from insurance companies. New York law currently contains an aggregate limit on guaranty funds under the Life Insurance Corporation of New York of $500 million, of which approximately $40 million has been used. Under current law, the Company may be allowed to recoup a portion of the amount of any additional guaranty fund assessment in periods subsequent to the recognition of the assessment by offsetting future premium taxes. The Company’s average market share for New York, based on assessable premiums, was approximately 3.1% in 2009.
Guarantees
The Company owns certain fixed income securities that obligate the Company to exchange credit risk or to forfeit principal due, depending on the nature or occurrence of specified credit events for the referenced entities. In the event all such specified credit events were to occur, the Company’s maximum amount at risk on these fixed income securities, as measured by the amount of the aggregate initial investment, was $111 million at June 30, 2010. The obligations associated with these fixed income securities expire at various dates on or before March 26, 2014.
Related to the disposal through reinsurance of substantially all of the Company’s variable annuity business to The Prudential Insurance Company of America, a subsidiary of Prudential Financial, Inc. (collectively “Prudential”) in 2006, the Company and the Corporation have agreed to indemnify Prudential for certain pre-closing contingent liabilities (including extra-contractual liabilities of the Company and liabilities specifically excluded from the transaction) that the Company has agreed to retain. In addition, the Company and the Corporation will each indemnify Prudential for certain post-closing liabilities that may arise from the acts of the Company and its agents, including in connection with the Company’s provision of transition services. The reinsurance agreements contain no limitations or indemnifications with regard to insurance risk transfer, and transferred all of the future risks and responsibilities for performance on the underlying variable annuity contracts to Prudential, including those related to
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
benefit guarantees. Management does not believe this agreement will have a material adverse effect on results of operations, cash flows or financial position of the Company.
In the normal course of business, the Company provides standard indemnifications to contractual counterparties in connection with numerous transactions, including acquisitions and divestitures. The types of indemnifications typically provided include indemnifications for breaches of representations and warranties, taxes and certain other liabilities, such as third party lawsuits. The indemnification clauses are often standard contractual terms and are entered into in the normal course of business based on an assessment that the risk of loss would be remote. The terms of the indemnifications vary in duration and nature. In many cases, the maximum obligation is not explicitly stated and the contingencies triggering the obligation to indemnify have not occurred and are not expected to occur. Consequently, the maximum amount of the obligation under such indemnifications is not determinable. Historically, the Company has not made any material payments pursuant to these obligations.
The aggregate liability balance related to all guarantees was not material as of June 30, 2010.
Regulation and Compliance
The Company is subject to changing social, economic and regulatory conditions. From time to time, regulatory authorities or legislative bodies seek to impose additional regulations regarding agent and broker compensation, regulate the nature of and amount of investments, and otherwise expand overall regulation of insurance products and the insurance industry. The Company has established procedures and policies to facilitate compliance with laws and regulations, to foster prudent business operations, and to support financial reporting. The Company routinely reviews its practices to validate compliance with laws and regulations and with internal procedures and policies. As a result of these reviews, from time to time the Company may decide to modify some of its procedures and policies. Such modifications, and the reviews that led to them, may be accompanied by payments being made and costs being incurred. The ultimate changes and eventual effects of these actions on the Company’s business, if any, are uncertain.
Legal and regulatory proceedings and inquiries
Background
The Company and certain affiliates are involved in a number of lawsuits, regulatory inquiries, and other legal proceedings arising out of various aspects of its business. As background to the “Proceedings” subsection below, please note the following:
· These matters raise difficult and complicated factual and legal issues and are subject to many uncertainties and complexities, including the underlying facts of each matter; novel legal issues; variations between jurisdictions in which matters are being litigated, heard, or investigated; differences in applicable laws and judicial interpretations; the length of time before many of these matters might be resolved by settlement, through litigation or otherwise; the fact that some of the lawsuits are putative class actions in which a class has not been certified and in which the purported class may not be clearly defined; the fact that some of the lawsuits involve multi-state class actions in which the applicable law(s) for the claims at issue is in dispute and therefore unclear; and the current challenging legal environment faced by large corporations and insurance companies.
· The outcome of these matters may be affected by decisions, verdicts, and settlements, and the timing of such decisions, verdicts, and settlements, in other individual and class action lawsuits that involve the Company, other insurers, or other entities and by other legal, governmental, and regulatory actions that involve the Company, other insurers, or other entities. The outcome may also be affected by future state or federal legislation, the timing or substance of which cannot be predicted.
· In the lawsuits, plaintiffs seek a variety of remedies including equitable relief in the form of injunctive and other remedies and monetary relief in the form of contractual and extra-contractual damages. In some cases, the monetary damages sought include punitive damages. Often specific information about the relief sought, such as the amount of damages, is not available because plaintiffs have not requested specific relief in their pleadings. In the Company’s experience, when specific monetary demands are made in pleadings, they bear little relation to the ultimate loss, if any, to the Company.
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
· In connection with regulatory examinations and proceedings, government authorities may seek various forms of relief, including penalties, restitution and changes in business practices. The Company may not be advised of the nature and extent of relief sought until the final stages of the examination or proceeding.
· For the reasons specified above, it is often not possible to make meaningful estimates of the amount or range of loss that could result from the matters described below in the “Proceedings” subsection. The Company reviews these matters on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. When assessing reasonably possible and probable outcomes, the Company bases its decisions on its assessment of the ultimate outcome following all appeals.
· Due to the complexity and scope of the matters disclosed in the “Proceedings” subsection below and the many uncertainties that exist, the ultimate outcome of these matters cannot be reasonably predicted. In the event of an unfavorable outcome in one or more of these matters, the ultimate liability may be in excess of amounts currently reserved, if any, and may be material to the Company’s operating results or cash flows for a particular quarterly or annual period. However, based on information currently known to it, management believes that the ultimate outcome of all matters described below, as they are resolved over time, is not likely to have a material adverse effect on the financial position of the Company.
Proceedings
Legal proceedings involving Allstate agencies and AIC may impact the Company, even when the Company is not directly involved, because the Company sells its products through a variety of distribution channels including Allstate agencies. Consequently, information about the more significant of these proceedings is provided in the following paragraph.
AIC is defending certain matters relating to its agency program reorganization announced in 1999. These matters are in various stages of development.
· These matters include a lawsuit filed in 2001 by the U.S. Equal Employment Opportunity Commission (“EEOC”) alleging retaliation under federal civil rights laws (the “EEOC I” suit) and a class action filed in 2001 by former employee agents alleging retaliation and age discrimination under the Age Discrimination in Employment Act (“ADEA”), breach of contract and ERISA violations (the “Romero I” suit). In 2004, in the consolidated EEOC I and Romero I litigation, the trial court issued a memorandum and order that, among other things, certified classes of agents, including a mandatory class of agents who had signed a release, for purposes of effecting the court’s declaratory judgment that the release is voidable at the option of the release signer. The court also ordered that an agent who voids the release must return to AIC “any and all benefits received by the [agent] in exchange for signing the release.” The court also stated that, “on the undisputed facts of record, there is no basis for claims of age discrimination.” The EEOC and plaintiffs asked the court to clarify and/or reconsider its memorandum and order and in January 2007, the judge denied their request. In June 2007, the court granted AIC’s motions for summary judgment. Following plaintiffs’ filing of a notice of appeal, the U.S. Court of Appeals for the Third Circuit (“Third Circuit”) issued an order in December 2007 stating that the notice of appeal was not taken from a final order within the meaning of the federal law and thus not appealable at this time. In March 2008, the Third Circuit decided that the appeal should not summarily be dismissed and that the question of whether the matter is appealable at this time will be addressed by the Third Circuit along with the merits of the appeal. In July 2009, the Third Circuit vacated the decision which granted AIC’s summary judgment motions, remanded the cases to the trial court for additional discovery, and directed that the cases be reassigned to another trial court judge. In January 2010, the cases were assigned to a new judge for further proceedings in the trial court.
· A putative nationwide class action has also been filed by former employee agents alleging various violations of ERISA, including a worker classification issue. These plaintiffs are challenging certain amendments to the Agents Pension Plan and are seeking to have exclusive agent independent contractors treated as employees for benefit purposes. This matter was dismissed with prejudice by the trial court, was the subject of further proceedings on appeal, and was reversed and remanded to the trial court in 2005. In June 2007, the court granted AIC’s motion to dismiss the case. Following plaintiffs’ filing of a notice of appeal, the Third Circuit issued an order in December 2007 stating that the notice of appeal was not taken from a final order within the meaning of the federal law and thus not appealable at this time. In March 2008, the Third Circuit decided that the appeal should not summarily be dismissed and that the question of whether the
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
matter is appealable at this time will be addressed by the Third Circuit along with the merits of the appeal. In July 2009, the Third Circuit vacated the decision which granted AIC’s motion to dismiss the case, remanded the case to the trial court for additional discovery, and directed that the case be reassigned to another trial court judge. In January 2010, the case was assigned to a new judge for further proceedings in the trial court.
In these agency program reorganization matters, plaintiffs seek compensatory and punitive damages, and equitable relief. AIC has been vigorously defending these lawsuits and other matters related to its agency program reorganization.
Other Matters
Various other legal, governmental, and regulatory actions, including state market conduct exams, and other governmental and regulatory inquiries are currently pending that involve the Company and specific aspects of its conduct of business. Like other members of the insurance industry, the Company is the target of a number of class action lawsuits and other types of proceedings, some of which involve claims for substantial or indeterminate amounts. These actions are based on a variety of issues and target a range of the Company’s practices. The outcome of these disputes is currently unpredictable.
One or more of these matters could have an adverse effect on the Company’s operating results or cash flows for a particular quarterly or annual period. However, based on information currently known to it, management believes that the ultimate outcome of all matters described in this “Other Matters” subsection, in excess of amounts currently reserved, if any, as they are resolved over time is not likely to have a material effect on the operating results, cash flows or financial position of the Company.
9. Income Taxes
A reconciliation of the statutory federal income tax rate to the effective income tax rate on income from operations for the six months ended June 30 is as follows:
($ in millions) |
| 2010 |
| 2009 |
| ||||||
Statutory federal income tax rate - benefit |
| $ | (82 | ) | (35.0 | )% | $ | (110 | ) | (35.0 | )% |
Dividends received deduction |
| (6 | ) | (2.6 | ) | (6 | ) | (1.9 | ) | ||
Other |
| (1 | ) | (0.4 | ) | 1 |
| 0.3 |
| ||
Valuation allowance |
| — |
| — |
| 137 |
| 43.6 |
| ||
Effective income tax rate - (benefit) expense |
| $ | (89 | ) | (38.0 | )% | $ | 22 |
| 7.0 | % |
Income tax expense for the six months ended June 30, 2009 included expense of $142 million attributable to an increase in the valuation allowance relating to the deferred tax asset on capital losses.
10. Other Comprehensive Income
The components of other comprehensive income on a pre-tax and after-tax basis are as follows:
|
| Three months ended June 30, |
| ||||||||||||||||
|
| 2010 |
| 2009 |
| ||||||||||||||
($ in millions) |
| Pre-tax |
| Tax |
| After- |
| Pre-tax |
| Tax |
| After- |
| ||||||
Unrealized holding gains and losses arising during the period, net of related offsets |
| $ | 522 |
| $ | (182 | ) | $ | 340 |
| $ | 2,625 |
| $ | (1,021 | ) | $ | 1,604 |
|
Less: reclassification adjustment of realized capital gains and losses |
| (156 | ) | 55 |
| (101 | ) | (49 | ) | 17 |
| (32 | ) | ||||||
Unrealized net capital gains and losses |
| 678 |
| (237 | ) | 441 |
| 2,674 |
| (1,038 | ) | 1,636 |
| ||||||
Other comprehensive income |
| $ | 678 |
| $ | (237 | ) | 441 |
| $ | 2,674 |
| $ | (1,038 | ) | 1,636 |
| ||
Net loss |
|
|
|
|
| (127 | ) |
|
|
|
| — |
| ||||||
Comprehensive income |
|
|
|
|
| $ | 314 |
|
|
|
|
| $ | 1,636 |
|
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| Six months ended June 30, |
| ||||||||||||||||
|
| 2010 |
| 2009 |
| ||||||||||||||
|
| Pre-tax |
| Tax |
| After- |
| Pre-tax |
| Tax |
| After- |
| ||||||
Unrealized holding gains and losses arising during the period, net of related offsets |
| $ | 1,244 |
| $ | (436 | ) | $ | 808 |
| $ | 2,471 |
| $ | (964 | ) | $ | 1,507 |
|
Less: reclassification adjustment of realized capital gains and losses |
| (247 | ) | 86 |
| (161 | ) | (102 | ) | 36 |
| (66 | ) | ||||||
Unrealized net capital gains and losses |
| 1,491 |
| (522 | ) | 969 |
| 2,573 |
| (1,000 | ) | 1,573 |
| ||||||
Other comprehensive income |
| $ | 1,491 |
| $ | (522 | ) | 969 |
| $ | 2,573 |
| $ | (1,000 | ) | 1,573 |
| ||
Net loss |
|
|
|
|
| (145 | ) |
|
|
|
| (336 | ) | ||||||
Comprehensive income |
|
|
|
|
| $ | 824 |
|
|
|
|
| $ | 1,237 |
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholder of
Allstate Life Insurance Company
Northbrook, IL 60062
We have reviewed the accompanying condensed consolidated statement of financial position of Allstate Life Insurance Company and subsidiaries (the “Company”), an affiliate of The Allstate Corporation, as of June 30, 2010, and the related condensed consolidated statements of operations for the three-month and six-month periods ended June 30, 2010 and 2009, and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2010 and 2009. These interim financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial position of Allstate Life Insurance Company and subsidiaries as of December 31, 2009, and the related consolidated statements of operations and comprehensive income, shareholder’s equity, and cash flows for the year then ended (not presented herein); and in our report dated March 12, 2010, which report includes an explanatory paragraph relating to a change in the Company’s recognition and presentation for other-than-temporary impairments of debt securities in 2009, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 2009 is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived.
/s/ Deloitte & Touche LLP
Chicago, Illinois
August 9, 2010
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2010 AND 2009
OVERVIEW
The following discussion highlights significant factors influencing the consolidated financial position and results of operations of Allstate Life Insurance Company (referred to in this document as “we”, “our”, “us”, or the “Company”). It should be read in conjunction with the condensed consolidated financial statements and notes thereto found under Part I. Item 1. contained herein, and with the discussion, analysis, consolidated financial statements and notes thereto in Part I. Item 1. and Part II. Item 7. and Item 8. of the Allstate Life Insurance Company Annual Report on Form 10-K for 2009. We operate as a single segment entity based on the manner in which we use financial information to evaluate business performance and to determine the allocation of resources.
· Net loss was $127 million and $145 million in the second quarter and first six months of 2010, respectively, compared to breaking even (no net income or loss) and a net loss of $336 million in the second quarter and first six months of 2009, respectively.
· Premiums and contract charges on underwritten products, including traditional and interest-sensitive life insurance and accident and health insurance, increased 4.3% or $15 million and 5.9% or $40 million in the second quarter and first six months of 2010, respectively, compared to the same periods in the prior year.
· Net realized capital losses totaled $352 million and $513 million in the second quarter and first six months of 2010, respectively, compared to net realized capital gains of $122 million and $84 million in the second quarter and first six month of 2009, respectively.
· Investments as of June 30, 2010 totaled $59.72 billion, reflecting a decrease in carrying value of $499 million from $60.22 billion as of December 31, 2009. Net investment income decreased 5.5% to $700 million in the second quarter and 8.5% to $1.41 billion in the first six months of 2010 from $741 million and $1.54 billion in the second quarter and first six months of 2009, respectively.
· Contractholder funds as of June 30, 2010 totaled $47.70 billion, reflecting a decrease of $3.15 billion from $50.85 billion as of December 31, 2009.
Summary analysis Summarized financial data is presented in the following table.
|
| Three months ended |
| Six months ended |
| ||||||||
($ in millions) |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Revenues |
|
|
|
|
|
|
|
|
| ||||
Premiums |
| $ | 154 |
| $ | 154 |
| $ | 307 |
| $ | 306 |
|
Contract charges |
| 248 |
| 237 |
| 494 |
| 465 |
| ||||
Net investment income |
| 700 |
| 741 |
| 1,407 |
| 1,538 |
| ||||
Realized capital gains and losses |
| (352 | ) | 122 |
| (513 | ) | 84 |
| ||||
Total revenues |
| 750 |
| 1,254 |
| 1,695 |
| 2,393 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Costs and expenses |
|
|
|
|
|
|
|
|
| ||||
Contract benefits |
| (406 | ) | (357 | ) | (770 | ) | (691 | ) | ||||
Interest credited to contractholder funds |
| (439 | ) | (548 | ) | (891 | ) | (1,113 | ) | ||||
Amortization of DAC |
| (14 | ) | (268 | ) | (81 | ) | (697 | ) | ||||
Operating costs and expenses |
| (83 | ) | (81 | ) | (169 | ) | (170 | ) | ||||
Restructuring and related charges |
| 1 |
| (2 | ) | 1 |
| (19 | ) | ||||
Interest expense |
| (11 | ) | (10 | ) | (22 | ) | (21 | ) | ||||
Total costs and expenses |
| (952 | ) | (1,266 | ) | (1,932 | ) | (2,711 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Gain on disposition of operations |
| 2 |
| 1 |
| 3 |
| 4 |
| ||||
Income tax benefit (expense) |
| 73 |
| 11 |
| 89 |
| (22 | ) | ||||
Net loss |
| $ | (127 | ) | $ | — |
| $ | (145 | ) | $ | (336 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Investments at June 30 |
|
|
|
|
| $ | 59,718 |
| $ | 57,957 |
|
Net loss in the second quarter of 2010 was $127 million compared to breaking even (no net income or loss) in the same period of 2009. The unfavorable change of $127 million was primarily due to net realized capital losses in the current year period compared to net realized capital gains in the prior year period and higher contract benefits, partially offset by lower amortization of DAC and interest credited to contractholder funds.
Net loss in the first six months of 2010 was $145 million compared to a net loss of $336 million in the first six months of 2009. The improvement of $191 million was primarily due to lower amortization of DAC and interest credited to contractholder funds, partially offset by net realized capital losses in the current year period compared to net realized capital gains in the prior year period, decreased net investment income and higher contract benefits. Additionally, the first six months of 2009 included expense of $142 million attributable to an increase in the valuation allowance relating to the deferred tax asset on capital losses.
Analysis of revenues Total revenues decreased 40.2% or $504 million in the second quarter of 2010 and 29.2% or $698 million in the first six months of 2010 compared to the same periods of 2009 due to net realized capital losses in the current year periods compared to net realized capital gains in the prior year periods and lower net investment income, partially offset by increased contract charges.
Premiums represent revenues generated from traditional life insurance, immediate annuities with life contingencies, and accident and health and insurance products that have significant mortality or morbidity risk.
Contract charges are revenues generated from interest-sensitive and variable life insurance and fixed annuities for which deposits are classified as contractholder funds or separate account liabilities. Contract charges are assessed against the contractholder account values for maintenance, administration, cost of insurance and surrender prior to contractually specified dates. As a result, changes in contractholder funds are considered in the evaluation of growth and as indicators of future levels of revenues.
The following table summarizes premiums and contract charges by product.
|
| Three months ended |
| Six months ended |
| ||||||||
($ in millions) |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Premiums |
|
|
|
|
|
|
|
|
| ||||
Traditional life insurance |
| $ | 100 |
| $ | 97 |
| $ | 202 |
| $ | 193 |
|
Immediate annuities with life contingencies |
| 31 |
| 34 |
| 58 |
| 68 |
| ||||
Accident and health |
| 23 |
| 23 |
| 47 |
| 45 |
| ||||
Total premiums |
| 154 |
| 154 |
| 307 |
| 306 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Contract charges |
|
|
|
|
|
|
|
|
| ||||
Interest-sensitive life insurance |
| 238 |
| 226 |
| 471 |
| 442 |
| ||||
Fixed annuities |
| 10 |
| 11 |
| 23 |
| 23 |
| ||||
Total contract charges (1) |
| 248 |
| 237 |
| 494 |
| 465 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total premiums and contract charges |
| $ | 402 |
| $ | 391 |
| $ | 801 |
| $ | 771 |
|
(1) |
| Total contract charges for the second quarter of 2010 and 2009 include contract charges related to the cost of insurance totaling $157 million and $147 million, respectively. Total contract charges for the first six months of 2010 and 2009 include contract charges related to the cost of insurance totaling $310 million and $297 million, respectively. |
|
Total premiums were consistent in the second quarter and first six months of 2010, respectively, compared to the same periods of 2009 as higher sales of traditional life insurance products were offset by lower sales of immediate annuities with life contingencies.
Total contract charges increased 4.6% and 6.2% in the second quarter and first six months of 2010, respectively, compared to the same periods of 2009 primarily due to higher contract charges on interest-sensitive life insurance products resulting from a shift in the mix of policies in force.
Contractholder funds represent interest-bearing liabilities arising from the sale of individual and institutional products, such as interest-sensitive life insurance, fixed annuities and funding agreements. The balance of contractholder funds is equal to the cumulative deposits received and interest credited to the contractholder less cumulative contract maturities, benefits, surrenders, withdrawals and contract charges for mortality or administrative expenses. The following table shows the changes in contractholder funds.
|
| Three months ended |
| Six months ended |
| ||||||||
($ in millions) |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Contractholder funds, beginning balance |
| $ | 49,281 |
| $ | 54,876 |
| $ | 50,850 |
| $ | 56,780 |
|
|
|
|
|
|
|
|
|
|
| ||||
Deposits |
|
|
|
|
|
|
|
|
| ||||
Fixed annuities |
| 236 |
| 635 |
| 527 |
| 1,270 |
| ||||
Interest-sensitive life insurance |
| 369 |
| 337 |
| 742 |
| 659 |
| ||||
Other |
| — |
| — |
| 1 |
| — |
| ||||
Total deposits |
| 605 |
| 972 |
| 1,270 |
| 1,929 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Interest credited |
| 438 |
| 502 |
| 889 |
| 1,020 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Maturities, benefits, withdrawals and other adjustments |
|
|
|
|
|
|
|
|
| ||||
Maturities and retirements of institutional products |
| (827 | ) | (2,552 | ) | (1,781 | ) | (4,503 | ) | ||||
Benefits |
| (390 | ) | (394 | ) | (781 | ) | (825 | ) | ||||
Surrenders and partial withdrawals |
| (1,109 | ) | (918 | ) | (2,103 | ) | (1,839 | ) | ||||
Contract charges |
| (228 | ) | (213 | ) | (454 | ) | (419 | ) | ||||
Net transfers from separate accounts |
| 3 |
| 2 |
| 5 |
| 6 |
| ||||
Fair value hedge adjustments for institutional products |
| (74 | ) | 78 |
| (197 | ) | 30 |
| ||||
Other adjustments (1) |
| (2 | ) | (55 | ) | (1 | ) | 119 |
| ||||
Total maturities, benefits, withdrawals and other adjustments |
| (2,627 | ) | (4,052 | ) | (5,312 | ) | (7,431 | ) | ||||
Contractholder funds, ending balance |
| $ | 47,697 |
| $ | 52,298 |
| $ | 47,697 |
| $ | 52,298 |
|
(1) The table above illustrates the changes in contractholder funds, which are presented gross of reinsurance recoverables on the Condensed Consolidated Statements of Financial Position. The table above is intended to supplement our discussion and analysis of revenues, which are presented net of reinsurance on the Condensed Consolidated Statements of Operations. As a result, the net change in contractholder funds associated with products reinsured to third parties is reflected as a component of the other adjustments line.
Contractholder funds decreased 3.2% and 6.2% in the second quarter and first six months of 2010, respectively, compared to a decrease of 4.7% and 7.9% in the second quarter and first six months of 2009, respectively. Average contractholder funds decreased 9.5% and 9.7% in the second quarter and first six months of 2010, respectively, compared to the same periods of 2009.
Contractholder deposits decreased 37.8% and 34.2% in the second quarter and first six months of 2010, respectively, compared to the same periods of 2009 primarily due to lower deposits on fixed annuities. Deposits on fixed annuities decreased 62.8% and 58.5% in the second quarter and first six months of 2010, respectively, compared to the same periods of 2009 due to our strategic decision to discontinue distributing fixed annuities through banks and broker-dealers and our goal to reduce our concentration in spread based products.
Maturities and retirements of institutional products decreased 67.6% to $827 million in the second quarter of 2010 and 60.4% to $1.78 billion in the first six months of 2010 from $2.55 billion and $4.50 billion in the second quarter and first six months of 2009, respectively. These declines were primarily due to the redemption in the second quarter of 2009 of $1.39 billion of institutional product liabilities in conjunction with cash tender offers. In addition, the second quarter and first six months of 2009 included the retirement of $80 million and $1.44 billion, respectively, of extendible institutional market obligations, all of which were retired during 2009.
Surrenders and partial withdrawals on deferred fixed annuities and interest-sensitive life insurance products increased 20.8% to $1.11 billion in the second quarter of 2010 and 14.4% to $2.10 billion in the first six months of 2010 from $918 million and $1.84 billion in the second quarter and first six months of 2009, respectively, due to higher surrenders and partial withdrawals on fixed annuities. The annualized surrender and partial withdrawal rate on deferred fixed annuities and interest-sensitive life insurance products, based on the beginning of period contractholder funds, was 10.3% in the first six months of 2010 compared to 8.7% in the first six months of 2009.
Analysis of costs and expenses Total costs and expenses decreased 24.8% or $314 million in the second quarter of 2010 and 28.7% or $779 million in the first six months of 2010 compared to the same periods of 2009 due primarily to lower amortization of DAC and interest credited to contractholder funds, partially offset by higher contract benefits.
Contract benefits increased 13.7% or $49 million in the second quarter of 2010 and 11.4% or $79 million in the first six months of 2010 compared to the same periods of 2009. The increase in both periods reflects higher contract benefits on interest-sensitive life insurance, partially offset by lower contract benefits on immediate annuities. The increase in contract benefits on interest-sensitive life insurance in both periods was due to the re-estimation of reserves for certain secondary guarantees on universal life insurance policies and unfavorable mortality experience. The decrease in contract benefits on immediate annuities in both periods was primarily due to the re-estimation of reserves for benefits payable to certain annuitants to reflect current contractholder information.
The reserve re-estimations utilized more refined policy level information and assumptions in the second quarter of 2010. The increase in reserves for certain secondary guarantees on universal life insurance policies resulted in a charge to contract benefits of $68 million and a related reduction in amortization of DAC of $50 million. The decrease in reserves for immediate annuities resulted in a credit to contract benefits of $26 million. The net impact was an increase to income of $8 million, pre-tax.
We analyze our mortality and morbidity results using the difference between premiums and contract charges earned for the cost of insurance and contract benefits excluding the portion related to the implied interest on immediate annuities with life contingencies (“benefit spread”). This implied interest totaled $139 million and $278 million in the second quarter and first six months of 2010, respectively, compared to $140 million and $279 million in the second quarter and first six months of 2009, respectively.
The benefit spread by product group is disclosed in the following table.
|
| Three months ended |
| Six months ended |
| ||||||||
($ in millions) |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Life insurance |
| $ | 21 |
| $ | 93 |
| $ | 104 |
| $ | 194 |
|
Accident and health |
| 7 |
| 6 |
| 15 |
| 14 |
| ||||
Annuities |
| 16 |
| (15 | ) | 6 |
| (17 | ) | ||||
Total benefit spread |
| $ | 44 |
| $ | 84 |
| $ | 125 |
| $ | 191 |
|
Benefit spread decreased 47.6% or $40 million in the second quarter of 2010 and 34.6% or $66 million in the first six months of 2010 compared to the same periods of 2009 primarily due to re-estimates of reserves that increased contract benefits for interest-sensitive life insurance and decreased contract benefits for immediate annuities and unfavorable mortality experience on interest-sensitive life insurance.
Interest credited to contractholder funds decreased 19.9% or $109 million in the second quarter of 2010 and 19.9% or $222 million in the first six months of 2010 compared to the same periods of 2009 primarily due to lower average contractholder funds, management actions to reduce interest crediting rates on deferred fixed annuities, and lower amortization of deferred sales inducement costs (“DSI”).
Amortization of DSI in the second quarter and first six months of 2010 was $6 million and $11 million, respectively, compared to $53 million and $110 million in the second quarter and first six months of 2009, respectively. The decline in amortization of DSI in both periods was primarily due to lower amortization relating to realized capital gains and losses and, for the first six months of 2010, a reduction in amortization acceleration for changes in assumptions. Amortization of DSI relating to realized capital gains and losses declined $41 million and $45 million in the second quarter and first six months of 2010, respectively, compared to the same periods in the prior year. Amortization acceleration for changes in assumptions declined $38 million in the first six months of 2010 compared to the same period in the prior year.
In order to analyze the impact of net investment income and interest credited to contractholders on net income, we monitor the difference between net investment income and the sum of interest credited to contractholder funds and the implied interest on immediate annuities with life contingencies, which is included as a component of contract benefits on the Condensed Consolidated Statements of Operations (“investment spread”).
The investment spread by product group is shown in the following table.
|
| Three months ended |
| Six months ended |
| ||||||||
($ in millions) |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Annuities and institutional products |
| $ | 54 |
| $ | 3 |
| $ | 104 |
| $ | 37 |
|
Life insurance |
| 7 |
| 5 |
| 14 |
| 2 |
| ||||
Accident and health |
| 2 |
| 2 |
| 4 |
| 4 |
| ||||
Net investment income on investments supporting capital |
| 59 |
| 43 |
| 116 |
| 103 |
| ||||
Total investment spread |
| $ | 122 |
| $ | 53 |
| $ | 238 |
| $ | 146 |
|
Investment spread increased 130.2% or $69 million in the second quarter of 2010 and 63.0% or $92 million in the first six months of 2010 compared to the same periods of 2009 as lower net investment income was more than offset by decreased interest credited to contractholder funds, which includes lower amortization of DSI. Excluding amortization of DSI, investment spread increased $22 million or 20.8% in the second quarter of 2010 and decreased $7 million or 2.7% in the first six months of 2010 compared to the same periods in the prior year.
To further analyze investment spreads, the following tables summarize the weighted average investment yield on assets supporting product liabilities and capital, interest crediting rates and investment spreads.
|
| Three months ended June 30, |
| ||||||||||
|
| Weighted average |
| Weighted average |
| Weighted average |
| ||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
|
Interest-sensitive life insurance |
| 5.4 | % | 5.4 | % | 4.5 | % | 4.5 | % | 0.9 | % | 0.9 | % |
Deferred fixed annuities and institutional products |
| 4.5 |
| 4.5 |
| 3.2 |
| 3.5 |
| 1.3 |
| 1.0 |
|
Immediate fixed annuities with and without life contingencies |
| 6.5 |
| 6.3 |
| 6.4 |
| 6.5 |
| 0.1 |
| (0.2 | ) |
Investments supporting capital, traditional life and other products |
| 3.8 |
| 2.6 |
| N/A |
| N/A |
| N/A |
| N/A |
|
|
| Six months ended June 30, |
| ||||||||||
|
| Weighted average |
| Weighted average |
| Weighted average |
| ||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
|
Interest-sensitive life insurance |
| 5.5 | % | 5.4 | % | 4.5 | % | 4.6 | % | 1.0 | % | 0.8 | % |
Deferred fixed annuities and institutional products |
| 4.4 |
| 4.6 |
| 3.3 |
| 3.4 |
| 1.1 |
| 1.2 |
|
Immediate fixed annuities with and without life contingencies |
| 6.5 |
| 6.3 |
| 6.4 |
| 6.5 |
| 0.1 |
| (0.2 | ) |
Investments supporting capital, traditional life and other products |
| 3.8 |
| 3.3 |
| N/A |
| N/A |
| N/A |
| N/A |
|
The following table summarizes our product liabilities and indicates the account value of those contracts and policies in which an investment spread is generated.
|
| June 30, |
| ||||
($ in millions) |
| 2010 |
| 2009 |
| ||
Immediate fixed annuities with life contingencies |
| $ | 8,567 |
| $ | 8,402 |
|
Other life contingent contracts and other |
| 4,218 |
| 3,806 |
| ||
Reserve for life-contingent contract benefits |
| $ | 12,785 |
| $ | 12,208 |
|
|
|
|
|
|
| ||
Interest-sensitive life insurance |
| $ | 9,902 |
| $ | 9,477 |
|
Deferred fixed annuities |
| 30,680 |
| 33,382 |
| ||
Immediate fixed annuities without life contingencies |
| 3,838 |
| 3,876 |
| ||
Institutional products |
| 2,650 |
| 4,570 |
| ||
Market value adjustments related to fair value hedges and other |
| 627 |
| 993 |
| ||
Contractholder funds |
| $ | 47,697 |
| $ | 52,298 |
|
Amortization of DAC decreased 94.8% or $254 million in the second quarter of 2010 and 88.4% or $616 million in the first six months of 2010 compared to the same periods of 2009. The components of amortization of DAC are summarized in the following table.
|
| Three months ended |
| Six months ended |
| ||||||||
($ in millions) |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Amortization of DAC before amortization relating to realized capital gains and losses and changes in assumptions |
| $ | (19 | ) | $ | (109 | ) | $ | (96 | ) | $ | (233 | ) |
Accretion (amortization) relating to realized capital gains and losses (1) |
| 5 |
| (159 | ) | 2 |
| (186 | ) | ||||
Amortization deceleration (acceleration) for changes in assumptions (“DAC unlocking”) |
| — |
| — |
| 13 |
| (278 | ) | ||||
Total amortization of DAC |
| $ | (14 | ) | (268 | ) | $ | (81 | ) | $ | (697 | ) | |
(1) The impact of realized capital gains and losses on amortization of DAC is dependent upon the relationship between the assets that give rise to the gain or loss and the product liability supported by the assets. Fluctuations result from changes in the impact of realized capital gains and losses on actual and expected gross profits.
The decreases of $254 million and $616 million in the second quarter and first six months of 2010, respectively, compared to the same periods of 2009 were primarily due to a favorable change in amortization/accretion relating to realized capital gains and losses, lower amortization resulting from decreased benefit spread on interest-sensitive life insurance due to the re-estimation of reserves, a lower amortization rate on fixed annuities and, for the first six months of 2010, a favorable change in amortization acceleration/deceleration for changes in assumptions.
During the first quarter of 2010, we completed our annual comprehensive review of the profitability of our products to determine DAC balances for our interest-sensitive life, fixed annuities and other investment contracts, which covers assumptions for investment returns, including capital gains and losses, interest crediting rates to policyholders, the effect of any hedges, persistency, mortality and expenses in all product lines. In the first quarter of 2010, the review resulted in a deceleration of DAC amortization (credit to income) of $13 million. Amortization deceleration of $45 million related to variable life insurance and was primarily due to appreciation in the underlying separate account valuations. Amortization acceleration of $31 million related to interest-sensitive life insurance and was primarily due to an increase in projected realized capital losses and lower projected renewal premium (which is also expected to reduce persistency), partially offset by lower expenses.
In the first quarter of 2009, our annual comprehensive review resulted in the acceleration of DAC amortization (charge to income) of $278 million. $289 million related to fixed annuities, of which $210 million was attributable to market value adjusted annuities, and $18 million related to variable life insurance. Partially offsetting these amounts was amortization deceleration (credit to income) for interest-sensitive life insurance of $29 million. The principal assumption impacting fixed annuity amortization acceleration was an increase in the level of expected realized capital losses in 2009 and 2010. For interest-sensitive life insurance, the amortization deceleration was due to a favorable change in our mortality assumptions, partially offset by increased expected capital losses.
Operating costs and expenses increased 2.5% and decreased 0.6% in the second quarter and first six months of 2010, respectively, compared to the same periods of 2009. The following table summarizes operating costs and expenses.
|
| Three months ended |
| Six months ended |
| ||||||||
($ in millions) |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Non-deferrable acquisition costs |
| $ | 20 |
| $ | 22 |
| $ | 42 |
| $ | 44 |
|
Other operating costs and expenses |
| 63 |
| 59 |
| 127 |
| 126 |
| ||||
Total operating costs and expenses |
| $ | 83 |
| $ | 81 |
| $ | 169 |
| $ | 170 |
|
|
|
|
|
|
|
|
|
|
| ||||
Restructuring and related charges |
| $ | (1 | ) | $ | 2 |
| $ | (1 | ) | $ | 19 |
|
Non-deferrable acquisition costs decreased 9.1% or $2 million and 4.5% or $2 million in the second quarter and first six months of 2010, respectively, compared to the same periods of 2009 primarily due to decreased expenses associated with non-deferrable agent compensation. Other operating costs and expenses increased 6.8% or $4 million and 0.8% or $1 million in the second quarter and first six months of 2010, respectively, compared to the same periods of 2009 due primarily to increases in the net cost of employee benefits due to unfavorable investment results. In the first six months of 2010, the increase in the net cost of employee benefits was partially offset by our expense reduction actions, which resulted in lower employee, professional services and sales support expenses.
Income tax benefit of $73 million and $89 million was recognized for the second quarter and first six months of 2010, respectively, compared to an income tax benefit of $11 million in the second quarter of 2009 and expense of $22 million in the first six months of 2009. Income tax expense for the first six months of 2009 included expense of $142 million attributable to an increase in the valuation allowance relating to the deferred tax asset on capital losses.
· Investments as of June 30, 2010 totaled $59.72 billion, a decrease of 0.8% from $60.22 billion as of December 31, 2009.
· Unrealized net capital gains totaled $189 million as of June 30, 2010, improving from unrealized net capital losses of $2.18 billion as of December 31, 2009.
· Net investment income was $700 million in the second quarter of 2010, a decrease of 5.5% from $741 million in the second quarter of 2009, and $1.41 billion in the first six months of 2010, a decrease of 8.5% from $1.54 billion in the first six months of 2009.
· Net realized capital losses were $352 million in the second quarter of 2010 compared to net realized capital gains of $122 million in the second quarter of 2009. Net realized capital losses were $513 million in the first six months of 2010 compared to net realized capital gains of $84 million in the first six months of 2009.
· During the first six months of 2010, our fixed income and mortgage loan portfolio generated $3.24 billion of cash flows from interest and maturities.
We continue to focus our strategic risk mitigation efforts towards managing interest rate, credit and real estate investment risks, while our return optimization efforts focus on investing in new opportunities to generate income and capital appreciation. As a result, during the first six months of 2010 we took the following actions:
· Reduced our commercial real estate exposure by 13.0% or $1.53 billion of amortized cost primarily through targeted dispositions and principal repayments from borrowers.
· Reduced our municipal bond exposure by 4.6% or $258 million of amortized cost primarily through targeted dispositions, calls and scheduled maturities.
· We continue to monitor fixed income and equity securities in our portfolio which are exposed to certain economies under stress in the European Union, particularly Ireland, Italy, Portugal and Spain. The total market value of our investments in these four countries is $816 million, with net unrealized capital losses of $1 million. As of June 30, 2010, we did not hold any investments in Greece. Our total sovereign debt exposure is $3 million, all of which relates to Italy. Of the remaining $813 million of these investments, $804 million are corporate fixed income securities and $9 million are equity securities.
The composition of the investment portfolio at June 30, 2010 is presented in the table below.
($ in millions) |
| Investments |
| Percent |
| |
Fixed income securities (1) |
| $ | 48,871 |
| 81.8 | % |
Mortgage loans |
| 7,039 |
| 11.8 |
| |
Equity securities (2) |
| 172 |
| 0.3 |
| |
Limited partnership interests (3) |
| 1,064 |
| 1.8 |
| |
Short-term (4) |
| 903 |
| 1.5 |
| |
Policy loans |
| 825 |
| 1.4 |
| |
Other |
| 844 |
| 1.4 |
| |
Total |
| $ | 59,718 |
| 100.0 | % |
(1) |
| Fixed income securities are carried at fair value. Amortized cost basis for these securities was $48.70 billion. |
|
(2) |
| Equity securities are carried at fair value. Cost basis for these securities was $161 million. |
|
(3) |
| We have commitments to invest in additional limited partnership interests totaling $721 million. |
|
(4) |
| Short-term investments are carried at fair value. Amortized cost basis for these investments was $903 million. |
|
Total investments decreased to $59.72 billion at June 30, 2010, from $60.22 billion at December 31, 2009, primarily due to net reductions in contractholder obligations of $3.15 billion, partially offset by higher valuations for fixed income securities. Valuations of fixed income securities are typically driven by a combination of changes in risk-free interest rates and credit spreads over the relevant period. Risk-free interest rates are typically defined as the yield on U.S. Treasury securities, whereas credit spread is the additional yield on fixed income securities above the risk-free rate that market participants require to compensate them for assuming credit, liquidity and/or prepayment risks. The increase in valuation for fixed income securities for the six months ended June 30, 2010 was mainly due to declining risk-free interest rates, partially offset by widening credit spreads in certain sectors.
Fixed income securities by type are listed in the table below.
($ in millions) |
| Fair value at |
| Percent to |
| Fair value at |
| Percent to |
| ||
U.S. government and agencies |
| $ | 3,567 |
| 6.0 | % | $ | 3,581 |
| 5.9 | % |
Municipal |
| 5,194 |
| 8.7 |
| 5,109 |
| 8.5 |
| ||
Corporate |
| 28,452 |
| 47.6 |
| 27,539 |
| 45.7 |
| ||
Foreign government |
| 2,301 |
| 3.9 |
| 2,153 |
| 3.6 |
| ||
Residential mortgage-backed securities (“RMBS”) |
| 4,968 |
| 8.3 |
| 4,666 |
| 7.8 |
| ||
Commercial mortgage-backed securities (“CMBS”) |
| 2,035 |
| 3.4 |
| 2,468 |
| 4.1 |
| ||
Asset-backed securities (“ABS”) |
| 2,339 |
| 3.9 |
| 2,127 |
| 3.5 |
| ||
Redeemable preferred stock |
| 15 |
| — |
| 15 |
| — |
| ||
Total fixed income securities |
| $ | 48,871 |
| 81.8 | % | $ | 47,658 |
| 79.1 | % |
At June 30, 2010, 93.2% of the fixed income securities portfolio was rated investment grade, which is defined as a security having a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A or BBB from Standard and Poor’s (“S&P”), Fitch, Dominion, or Realpoint, a rating of aaa, aa, a or bbb from A.M. Best, or a comparable internal rating, if an externally provided rating is not available.
The following table summarizes the fair value and unrealized net capital gains and losses for fixed income securities by credit rating as of June 30, 2010.
|
| Aaa |
| Aa |
| A |
| ||||||||||||
($ in millions) |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. government and agencies |
| $ | 3,567 |
| $ | 334 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Municipal |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Tax exempt |
| — |
| — |
| 30 |
| 2 |
| 1 |
| — |
| ||||||
Taxable |
| 144 |
| 7 |
| 2,540 |
| 66 |
| 1,302 |
| (27 | ) | ||||||
Auction rate securities (“ARS”) |
| 415 |
| (22 | ) | 27 |
| (4 | ) | 39 |
| (7 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Public |
| 957 |
| 32 |
| 1,742 |
| 92 |
| 4,948 |
| 373 |
| ||||||
Privately placed |
| 791 |
| 42 |
| 1,466 |
| 79 |
| 3,158 |
| 180 |
| ||||||
Hybrid |
| 33 |
| 3 |
| 33 |
| 6 |
| 499 |
| (94 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign government |
| 1,444 |
| 260 |
| 149 |
| 5 |
| 375 |
| 39 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
RMBS |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. government sponsored entities (“U.S. Agency”) |
| 2,550 |
| 123 |
| — |
| — |
| — |
| — |
| ||||||
Prime residential mortgage-backed securities (“Prime”) |
| 445 |
| (7 | ) | 81 |
| (8 | ) | 172 |
| (3 | ) | ||||||
Alt-A residential mortgage-backed securities (“Alt-A”) |
| 35 |
| (1 | ) | 51 |
| (8 | ) | 107 |
| (6 | ) | ||||||
Subprime residential mortgage-backed securities (“Subprime”) |
| 55 |
| (3 | ) | 245 |
| (97 | ) | 126 |
| (45 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
CMBS |
| 1,245 |
| (10 | ) | 230 |
| (44 | ) | 265 |
| (125 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
ABS |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Collateralized debt obligations (“CDO”) |
| 8 |
| (1 | ) | 468 |
| (21 | ) | 428 |
| (94 | ) | ||||||
Consumer and other asset-backed securities (“Consumer and other ABS”) |
| 282 |
| 5 |
| 158 |
| — |
| 174 |
| (7 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Redeemable preferred stock |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||
Total fixed income securities |
| $ | 11,971 |
| $ | 762 |
| $ | 7,220 |
| $ | 68 |
| $ | 11,594 |
| $ | 184 |
|
|
| Baa |
| Ba or lower |
| Total |
| ||||||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. government and agencies |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 3,567 |
| $ | 334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Municipal |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Tax exempt |
| 31 |
| 2 |
| — |
| — |
| 62 |
| 4 |
| ||||||
Taxable |
| 546 |
| (80 | ) | 75 |
| (55 | ) | 4,607 |
| (89 | ) | ||||||
ARS |
| 32 |
| (5 | ) | 12 |
| (3 | ) | 525 |
| (41 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Public |
| 6,763 |
| 421 |
| 679 |
| (17 | ) | 15,089 |
| 901 |
| ||||||
Privately placed |
| 5,927 |
| 172 |
| 875 |
| 9 |
| 12,217 |
| 482 |
| ||||||
Hybrid |
| 449 |
| (100 | ) | 132 |
| (14 | ) | 1,146 |
| (199 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign government |
| 327 |
| 15 |
| 6 |
| 1 |
| 2,301 |
| 320 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
RMBS |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. Agency |
| — |
| — |
| — |
| — |
| 2,550 |
| 123 |
| ||||||
Prime |
| 8 |
| — |
| 245 |
| (12 | ) | 951 |
| (30 | ) | ||||||
Alt-A |
| 31 |
| (7 | ) | 227 |
| (70 | ) | 451 |
| (92 | ) | ||||||
Subprime |
| 48 |
| (15 | ) | 542 |
| (421 | ) | 1,016 |
| (581 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
CMBS |
| 173 |
| (181 | ) | 122 |
| (193 | ) | 2,035 |
| (553 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
ABS |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
CDO |
| 238 |
| (97 | ) | 388 |
| (181 | ) | 1,530 |
| (394 | ) | ||||||
Consumer and other ABS |
| 175 |
| (7 | ) | 20 |
| (5 | ) | 809 |
| (14 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Redeemable preferred stock |
| 14 |
| — |
| 1 |
| — |
| 15 |
| — |
| ||||||
Total fixed income securities |
| $ | 14,762 |
| $ | 118 |
| $ | 3,324 |
| $ | (961 | ) | $ | 48,871 |
| $ | 171 |
|
Municipal Bonds, including tax exempt, taxable and ARS securities, totaled $5.19 billion as of June 30, 2010 with an unrealized net capital loss of $126 million. Taxable municipal bonds have an unrealized net capital loss of $89 million resulting primarily from wider credit spreads than at initial purchase, which is largely due to the deterioration of state and municipal market conditions which continue to persist in 2010, as well as issuer-specific conditions.
Included in our municipal bond holdings at June 30, 2010 are $57 million of municipal securities which are not rated by third party credit rating agencies, but are rated by the National Association of Insurance Commissioners (“NAIC”) and are also internally rated. These holdings include $7 million of below investment grade municipal bonds that provide the opportunity to achieve incremental returns. Our initial investment decisions and ongoing monitoring procedures for these securities are based on a thorough due diligence process which includes, but is not limited to, an assessment of the credit quality, sector, structure, and liquidity risks of each issue.
As of June 30, 2010, 37.7% or $1.96 billion of our municipal bond portfolio is insured by six bond insurers and 39.1% of these securities have a credit rating of Aaa or Aa. 61.0% of our insured municipal bond portfolio was insured by National Public Finance Guarantee Corporation, Inc., 19.9% by Assured Guaranty Municipal Corporation, 14.8% by Ambac Assurance Corporation and 1.9% by Syncora Holdings. Given the effects of the economic crisis on bond insurers in recent years, the value inherent in this insurance has declined. We believe the fair value of our insured municipal bond portfolio substantially reflects the decline in the value of the insurance, and further related valuation declines, if any, are not expected to be material. While the valuation of these holdings may be temporarily impacted by negative market developments, we expect to receive all of the contractual cash flows because our practices for acquiring and monitoring municipal bonds are predominantly based on the underlying credit quality of the primary obligor.
Corporate bonds, including publicly traded, privately placed and hybrid securities, totaled $28.45 billion as of June 30, 2010 with an unrealized net capital gain of $1.18 billion. Privately placed securities primarily consist of corporate issued senior debt securities that are in unregistered form or are directly negotiated with the borrower. 49.6% of the privately placed corporate securities in our portfolio are rated by an independent rating agency and substantially all are rated by the NAIC.
The following table shows details of our hybrid securities as of June 30, 2010.
|
| Public |
| Privately placed |
| Total |
| ||||||||||||
($ in millions) |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| ||||||
United Kingdom (“UK”) |
| $ | 70 |
| $ | (12 | ) | $ | 48 |
| $ | (6 | ) | $ | 118 |
| $ | (18 | ) |
Europe (non-UK) |
| 159 |
| (2 | ) | 260 |
| (59 | ) | 419 |
| (61 | ) | ||||||
Asia/Australia |
| 11 |
| — |
| 112 |
| (11 | ) | 123 |
| (11 | ) | ||||||
North America |
| 301 |
| (63 | ) | 185 |
| (46 | ) | 486 |
| (109 | ) | ||||||
Total |
| $ | 541 |
| $ | (77 | ) | $ | 605 |
| $ | (122 | ) | $ | 1,146 |
| $ | (199 | ) |
Hybrid securities have attributes most similar to those of fixed income securities such as stated interest rates and mandatory redemption dates. Additionally, some hybrids may have an interest rate step-up feature which is intended to incent the issuer to redeem the security at a specified call date. While hybrid securities are generally issued by investment grade-rated financial institutions, they have structural features, such as the ability to defer principal and interest payments, which make them more sensitive to credit market deterioration. $955 million of our hybrid securities with $194 million of unrealized net capital losses are Tier 1 securities, and $191 million with $5 million of unrealized net capital losses are Tier 2 securities. Tier 1 securities are lower in the capital structure than Tier 2 securities.
RMBS, CMBS and ABS are structured securities that are primarily collateralized by residential and commercial real estate related loans and other consumer related borrowings. The cash flows from the collateral paid to the securitization trust are generally applied in a pre-determined order and are designed so that each security issued by the trust, typically referred to as a “class”, qualifies for a specific original rating. For example, the “senior” portion or “top” of the capital structure, or rating class, which would originally qualify for a rating of Aaa typically has priority in receiving the principal repayments on the collateral. In a sequential structure, underlying collateral principal repayments are directed to the most senior rated Aaa class in the structure until paid in full, after which principal repayments are directed to the next most senior Aaa class in the structure until it is paid in full. Senior Aaa classes generally share any losses from the underlying collateral on a pro-rata basis after losses are absorbed by
classes with lower original ratings. The collateral can have fixed interest rates, variable interest rates (such as adjustable rate mortgages (“ARM”)) or may contain features of both fixed and variable rate mortgages.
RMBS, including U.S. Agency, Prime, Alt-A and Subprime, totaled $4.97 billion, with 79.6% rated investment grade, at June 30, 2010. The RMBS portfolio is subject to interest rate risk, but unlike other fixed income securities, is additionally subject to significant prepayment risk from the underlying residential mortgage loans. The credit risk associated with our RMBS portfolio is mitigated due to the fact that 51.3% of the portfolio consists of securities that were issued by or have underlying collateral guaranteed by U.S. government agencies. The unrealized net capital loss of $580 million at June 30, 2010 was the result of wider credit spreads than at initial purchase on the non-U.S. Agency portion of our RMBS portfolio, largely due to increased risk premiums caused by macroeconomic conditions and credit market deterioration, including the impact of real estate valuations, which continue to persist in 2010. The following table shows our RMBS portfolio at June 30, 2010, based upon vintage year of the issuance of the securities.
|
| U.S. Agency |
| Prime |
| Alt-A |
| Subprime |
| Total RMBS |
| ||||||||||||||||||||
($ in millions) |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| ||||||||||
2010 |
| $ | — |
| $ | — |
| $ | 180 |
| $ | (2 | ) | $ | 60 |
| $ | — |
| $ | — |
| $ | — |
| $ | 240 |
| $ | (2 | ) |
2009 |
| 523 |
| 14 |
| 56 |
| — |
| 10 |
| — |
| — |
| — |
| 589 |
| 14 |
| ||||||||||
2008 |
| 366 |
| 13 |
| — |
| — |
| — |
| — |
| — |
| — |
| 366 |
| 13 |
| ||||||||||
2007 |
| 101 |
| 4 |
| 136 |
| (4 | ) | 35 |
| (18 | ) | 307 |
| (224 | ) | 579 |
| (242 | ) | ||||||||||
2006 |
| 135 |
| 7 |
| 158 |
| (8 | ) | 63 |
| (12 | ) | 251 |
| (161 | ) | 607 |
| (174 | ) | ||||||||||
2005 |
| 336 |
| 17 |
| 142 |
| (13 | ) | 123 |
| (32 | ) | 257 |
| (125 | ) | 858 |
| (153 | ) | ||||||||||
Pre-2005 |
| 1,089 |
| 68 |
| 279 |
| (3 | ) | 160 |
| (30 | ) | 201 |
| (71 | ) | 1,729 |
| (36 | ) | ||||||||||
Total |
| $ | 2,550 |
| $ | 123 |
| $ | 951 |
| $ | (30 | ) | $ | 451 |
| $ | (92 | ) | $ | 1,016 |
| $ | (581 | ) | $ | 4,968 |
| $ | (580 | ) |
Prime are collateralized by residential mortgage loans issued to prime borrowers. As of June 30, 2010, $787 million of the Prime were fixed rate and $164 million were variable rate.
Alt-A includes securities collateralized by residential mortgage loans issued to borrowers who do not qualify for prime financing terms due to high loan-to-value ratios or limited supporting documentation, but have stronger credit profiles than subprime borrowers. As of June 30, 2010, $370 million of the Alt-A were fixed rate and $81 million were variable rate.
Subprime includes securities that are collateralized by residential mortgage loans issued to borrowers that cannot qualify for Prime or Alt-A financing terms due in part to weak or limited credit history. It also includes securities that are collateralized by certain second lien mortgages regardless of the borrower’s credit history. The Subprime portfolio consisted of $823 million and $191 million of first lien and second lien securities, respectively. Subprime included $546 million of fixed rate and $470 million of variable rate securities.
CMBS totaled $2.04 billion, with 94.0% rated investment grade, at June 30, 2010. The CMBS portfolio is subject to credit risk, but unlike certain other structured securities, is generally not subject to prepayment risk due to protections within the underlying commercial mortgage loans whereby borrowers are effectively restricted from prepaying their mortgages. Of the CMBS investments, 96.0% are traditional conduit transactions collateralized by commercial mortgage loans, broadly diversified across property types and geographical area. The remainder consists of non-traditional CMBS such as small balance transactions, large loan pools and single borrower transactions.
The following table shows our CMBS portfolio at June 30, 2010 based upon vintage year.
($ in millions) |
| Fair |
| Unrealized |
| ||
2007 |
| $ | 436 |
| $ | (130 | ) |
2006 |
| 526 |
| (328 | ) | ||
2005 |
| 306 |
| (78 | ) | ||
Pre-2005 |
| 767 |
| (17 | ) | ||
Total CMBS |
| $ | 2,035 |
| $ | (553 | ) |
The unrealized net capital loss of $553 million at June 30, 2010 on our CMBS portfolio was the result of wider credit spreads than at initial purchase, largely due to the macroeconomic conditions and credit market deterioration, including the impact of real estate valuations, which continue to persist in 2010. While CMBS spreads tightened during 2009 and 2010, credit spreads in most rating classes remain wider than at initial purchase, which is
particularly evident in our 2005-2007 vintage year and non-traditional CMBS. These holdings accounted for $536 million, or 96.9%, of the unrealized net capital loss.
ABS, including CDO and Consumer and other ABS, totaled $2.34 billion, with 82.6% rated investment grade, at June 30, 2010. Credit risk is managed by monitoring the performance of the collateral. In addition, many of the securities in the ABS portfolio are credit enhanced with features such as overcollateralization, subordinated structures, reserve funds, guarantees and/or insurance. The unrealized net capital loss of $408 million at June 30, 2010 on our ABS portfolio was the result of wider credit spreads than at initial purchase.
CDO totaled $1.53 billion, with 74.6% rated investment grade, at June 30, 2010. CDO consist primarily of obligations collateralized by high yield and investment grade corporate credits including $1.21 billion of cash flow collateralized loan obligations (“CLO”) and $92 million of synthetic CDO with unrealized losses of $202 million and $84 million, respectively. The remaining $227 million of securities consisted of trust preferred CDO, market value CDO, project finance CDO, collateralized bond obligations and other CLO with unrealized losses of $108 million.
Cash flow CLO are structures collateralized primarily by below investment grade senior secured corporate loans. The collateral is actively managed by external managers that monitor the collateral performance. The underlying collateral is well diversified across industries and among issuers. A transaction will typically issue notes with various capital structure classes (i.e. Aaa, Aa, A, etc.) as well as equity-like tranches. In general, these securities are structured with overcollateralization ratios and performance is impacted by downgrades, defaults and recoveries of the underlying collateral within the structures. Downgrades of underlying collateral, along with increased defaults, reduce overcollateralization ratios over time. A violation of the senior overcollateralization test could result in an event of default of the structure. This would give the controlling class, defined as the majority of the senior lenders, certain rights which could include diverting cash flows or liquidating the underlying portfolio to pay off the senior liabilities.
Synthetic CDO primarily consist of a portfolio of corporate credit default swaps (“CDS”) which are collateralized by Aaa, Aa and A rated LIBOR-based securities (i.e. “fully funded” synthetic CDO). Our synthetic CDO collateral primarily is actively managed by external managers monitoring the CDS selection and performance.
Consumer and other ABS totaled $809 million, with 97.5% rated investment grade, at June 30, 2010. Consumer and other ABS consists of $398 million of auto and $411 million of other ABS securities with unrealized gains of $4 million for auto and unrealized losses of $18 million for other ABS securities.
Mortgage loans Our mortgage loan portfolio totaled $7.04 billion at June 30, 2010, compared to $7.78 billion at December 31, 2009, and primarily comprise loans secured by first mortgages on developed commercial real estate. Key considerations used to manage our exposure include property type and geographic diversification. Our exposure to any metropolitan area is highly diversified, with the largest exposure not exceeding 9.9% of the portfolio. The portfolio is also diversified across several property types, with the largest concentrations of 34.0% in office buildings and 25.6% in retail property. Debt service coverage ratio represents the amount of cash flows from the property available to the borrower to meet principal and interest payment obligations. For fixed rate mortgage loans, which comprise 90.7% and 89.9% of the total portfolio at June 30, 2010 and December 31, 2009, respectively, the average debt service coverage ratios as of June 30, 2010 and December 31, 2009 were 1.6 and 1.7, respectively. Mortgage loans with debt service coverage ratios below 1.0 generally have a higher level of risk. 5.9% of the mortgage loan portfolio had a debt service coverage ratio under 1.0 as of June 30, 2010 compared to 5.8% as of December 31, 2009. As of June 30, 2010, 30.3% or $125 million of these loans are impaired and have valuation allowances totaling $62 million compared to 18.7% totaling $26 million as of December 31, 2009. Mortgage loans with debt service coverage below 1.0 which are not impaired primarily relate to instances where the borrower has the financial capacity to fund the revenue shortfalls from the properties for the foreseeable term, the decrease in occupancy is considered temporary, or there are other risk mitigating circumstances such as additional collateral, escrow balances or borrower guarantees.
In the first six months of 2010, $494 million of commercial mortgage loans were contractually due. Of these, 26% were paid as due, 10% were extended, 58% were refinanced for an average of six years at market rates using our standard underwriting criteria and 6% were foreclosed or in the process of foreclosure. In addition, $329 million that were not contractually due in the first six months of 2010 were paid in full. We have eight additional loans totaling $81 million in the process of foreclosure that were not contractually due in the first six months of 2010. In
total, we have ten loans totaling $109 million in the process of foreclosure, reflecting an increase from five loans totaling $49 million as of December 31, 2009.
The net carrying value of impaired loans at June 30, 2010 and December 31, 2009 was $245 million and $377 million, respectively. Total valuation allowances of $97 million were held on impaired loans at June 30, 2010, compared to $94 million at December 31, 2009. We recognized $28 million and $41 million of realized capital losses related to net increases in the valuation allowances on impaired loans for the three months and six months ended June 30, 2010, respectively. The net increases in both periods were primarily due to deteriorating debt service coverage resulting from a decrease in occupancy and the risk associated with refinancing near-term maturities due to declining collateral valuations. Realized capital losses recognized on mortgage loans held for sale totaled $6 million for the six months ended June 30, 2010. There were no realized capital losses recognized on mortgage loans held for sale for the three months ended June 30, 2010.
Limited partnership interests consist of investments in private equity/debt funds, real estate funds and hedge funds. The overall limited partnership interests portfolio is well diversified across a number of characteristics including fund sponsors, vintage years, strategies, geography (including international), and company/property types. The following table presents information about our limited partnership interests as of June 30, 2010.
($ in millions) |
| Private |
| Real estate |
| Hedge |
| Total |
| ||||
Cost method of accounting (“Cost”) |
| $ | 469 |
| $ | 121 |
| $ | — |
| $ | 590 |
|
Equity method of accounting (“EMA”) |
| 354 |
| 112 |
| 8 |
| 474 |
| ||||
Total |
| $ | 823 |
| $ | 233 |
| $ | 8 |
| $ | 1,064 |
|
|
|
|
|
|
|
|
|
|
| ||||
Number of sponsors |
| 74 |
| 30 |
| 1 |
|
|
| ||||
Number of individual funds |
| 114 |
| 57 |
| 2 |
|
|
| ||||
Largest exposure to single fund |
| $ | 22 |
| $ | 16 |
| $ | 7 |
|
|
|
Our aggregate limited partnership exposure represented 1.8% and 1.7% of total invested assets as of June 30, 2010 and December 31, 2009, respectively.
The following table shows the results from our limited partnership interests by fund type and accounting classification.
|
| Three months ended |
| ||||||||||||||||||||||
|
| 2010 |
| 2009 |
| ||||||||||||||||||||
($ in millions) |
| Cost |
| EMA |
| Total |
| Impairment |
| Cost |
| EMA |
| Total |
| Impairment |
| ||||||||
Private equity/debt funds |
| $ | 4 |
| $ | 10 |
| $ | 14 |
| $ | — |
| $ | 2 |
| $ | (12 | ) | $ | (10 | ) | $ | (4 | ) |
Real estate funds |
| — |
| (3 | ) | (3 | ) | (5 | ) | — |
| (23 | ) | (23 | ) | (17 | ) | ||||||||
Hedge funds |
| — |
| 1 |
| 1 |
| — |
| — |
| 2 |
| 2 |
| — |
| ||||||||
Total |
| $ | 4 |
| $ | 8 |
| $ | 12 |
| $ | (5 | ) | $ | 2 |
| $ | (33 | ) | $ | (31 | ) | $ | (21 | ) |
|
| Six months ended |
| ||||||||||||||||||||||
|
| 2010 |
| 2009 |
| ||||||||||||||||||||
|
| Cost |
| EMA |
| Total |
| Impairment |
| Cost |
| EMA |
| Total |
| Impairment |
| ||||||||
Private equity/debt funds |
| $ | 7 |
| $ | 19 |
| $ | 26 |
| $ | (2 | ) | $ | 4 |
| $ | (45 | ) | $ | (41 | ) | $ | (41 | ) |
Real estate funds |
| — |
| (21 | ) | (21 | ) | (14 | ) | — |
| (66 | ) | (66 | ) | (74 | ) | ||||||||
Hedge funds |
| — |
| 6 |
| 6 |
| — |
| — |
| 1 |
| 1 |
| — |
| ||||||||
Total |
| $ | 7 |
| $ | 4 |
| $ | 11 |
| $ | (16 | ) | $ | 4 |
| $ | (110 | ) | $ | (106 | ) | $ | (115 | ) |
(1) Impairment write-downs related to Cost limited partnerships were $4 million and $15 million in the three months and six months ended June 30, 2010, respectively, compared to $21 million and $110 million in the three months and six months ended June 30, 2009, respectively. Impairment write-downs related to EMA limited partnerships were $1 million in both the three months and six months ended June 30, 2010 compared to $5 million in the six months ended June 30, 2009. There were no impairment write-downs related to EMA limited partnerships in the three months ended June 30, 2009.
Limited partnership interests, excluding impairment write-downs, produced income of $12 million and $11 million in the three months and six months ended June 30, 2010 compared to losses of $31 million and $106 million in the three months and six months ended June 30, 2009. Income on EMA limited partnerships is recognized on a delay due to the availability of the related financial statements. The recognition of income on hedge funds is primarily on a one-month delay and the income recognition on private equity/debt funds and real estate funds are generally on a three-month delay. Income on Cost limited partnerships is recognized only upon cash distributions by the partnership.
Unrealized net capital gains totaled $189 million as of June 30, 2010 compared to unrealized net capital losses of $2.18 billion as of December 31, 2009. The improvement since December 31, 2009 for fixed income securities was primarily a result of declining risk-free interest rates. The decline since December 31, 2009 for equity securities was a result of declines in equity markets over the period. The following table presents unrealized net capital gains and losses, pre-tax and after-tax.
($ in millions) |
| June 30, |
| March 31, |
| December 31, |
| |||
U.S. government and agencies |
| $ | 334 |
| $ | 157 |
| $ | 155 |
|
Municipal |
| (126 | ) | (347 | ) | (469 | ) | |||
Corporate |
| 1,184 |
| 728 |
| 225 |
| |||
Foreign government |
| 320 |
| 263 |
| 247 |
| |||
RMBS |
| (580 | ) | (770 | ) | (930 | ) | |||
CMBS |
| (553 | ) | (766 | ) | (922 | ) | |||
ABS |
| (408 | ) | (398 | ) | (489 | ) | |||
Redeemable preferred stock |
| — |
| — |
| (1 | ) | |||
Fixed income securities (1) |
| 171 |
| (1,133 | ) | (2,184 | ) | |||
Equity securities |
| 11 |
| 44 |
| 24 |
| |||
Short-term investments |
| — |
| — |
| — |
| |||
Derivatives |
| 7 |
| (13 | ) | (18 | ) | |||
Unrealized net capital gains and losses, pre-tax |
| 189 |
| (1,102 | ) | (2,178 | ) | |||
Amounts recognized for: |
|
|
|
|
|
|
| |||
Insurance reserves (2) |
| (292 | ) | — |
| — |
| |||
DAC and DSI (3) |
| 406 |
| 727 |
| 990 |
| |||
Amounts recognized |
| 114 |
| 727 |
| 990 |
| |||
Deferred income taxes |
| (111 | ) | 126 |
| 411 |
| |||
Unrealized net capital gains and losses, after-tax |
| $ | 192 |
| $ | (249 | ) | $ | (777 | ) |
(1) Unrealized net capital gains and losses for fixed income securities as of June 30, 2010, March 31, 2010 and December 31, 2009 comprise $(319) million, $(376) million and $(422) million, respectively, related to unrealized net capital losses on fixed income securities with other-than-temporary impairment and $490 million, $(757) million and $(1,762) million, respectively, related to other unrealized net capital gains and losses.
(2) 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 we evaluate premium deficiencies on the combined performance of our 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.
(3) 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. Only the unrealized net capital gains and losses on the fixed annuity and interest-sensitive life product portfolios are used in this calculation. The reduction in unrealized net capital losses in the first and second quarter of 2010 for these product portfolios was less than the reduction in unrealized net capital losses for the total portfolio. The DAC and DSI adjustment balance, subject to limitations, is determined by applying the DAC and DSI amortization rate to unrealized net capital gains or losses. Recapitalization of the DAC and DSI balances is limited to the originally deferred costs plus interest.
|
The net unrealized gains for the fixed income portfolio totaled $171 million and comprised $2.72 billion of gross unrealized gains and $2.55 billion of gross unrealized losses at June 30, 2010. This is compared to a net unrealized loss for the fixed income portfolio totaling $2.18 billion and comprised $1.65 billion of gross unrealized gains and $3.83 billion of gross unrealized losses at December 31, 2009.
Gross unrealized gains and losses as of June 30, 2010 on fixed income securities by type and sector are provided in the table below.
|
| Par |
| Amortized |
| Gross unrealized |
| Fair |
| Amortized |
| Fair value |
| |||||||
($ in millions) |
| value (1) |
| cost |
| Gains |
| Losses |
| value |
| par value (2) |
| par value (2) |
| |||||
Corporate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Banking |
| $ | 3,280 |
| $ | 3,166 |
| $ | 87 |
| $ | (217 | ) | $ | 3,036 |
| 96.5 | % | 92.6 | % |
Financial services |
| 2,527 |
| 2,501 |
| 105 |
| (44 | ) | 2,562 |
| 99.0 |
| 101.4 |
| |||||
Consumer goods (cyclical and non-cyclical) |
| 4,245 |
| 4,283 |
| 285 |
| (38 | ) | 4,530 |
| 100.9 |
| 106.7 |
| |||||
Transportation |
| 1,437 |
| 1,453 |
| 97 |
| (33 | ) | 1,517 |
| 101.1 |
| 105.6 |
| |||||
Utilities |
| 5,423 |
| 5,436 |
| 443 |
| (32 | ) | 5,847 |
| 100.2 |
| 107.8 |
| |||||
Energy |
| 1,759 |
| 1,776 |
| 100 |
| (20 | ) | 1,856 |
| 101.0 |
| 105.5 |
| |||||
Capital goods |
| 3,027 |
| 3,028 |
| 218 |
| (19 | ) | 3,227 |
| 100.0 |
| 106.6 |
| |||||
Basic industry |
| 1,306 |
| 1,322 |
| 74 |
| (12 | ) | 1,384 |
| 101.2 |
| 106.0 |
| |||||
Communications |
| 1,589 |
| 1,591 |
| 93 |
| (10 | ) | 1,674 |
| 100.1 |
| 105.3 |
| |||||
Technology |
| 905 |
| 916 |
| 61 |
| (7 | ) | 970 |
| 101.2 |
| 107.2 |
| |||||
FDIC guaranteed |
| 635 |
| 638 |
| 13 |
| — |
| 651 |
| 100.5 |
| 102.5 |
| |||||
Other |
| 1,284 |
| 1,158 |
| 57 |
| (17 | ) | 1,198 |
| 90.2 |
| 93.3 |
| |||||
Total corporate fixed income portfolio |
| 27,417 |
| 27,268 |
| 1,633 |
| (449 | ) | 28,452 |
| 99.5 |
| 103.8 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
U.S. government and agencies |
| 3,935 |
| 3,233 |
| 334 |
| — |
| 3,567 |
| 82.2 |
| 90.6 |
| |||||
Municipal |
| 8,750 |
| 5,320 |
| 178 |
| (304 | ) | 5,194 |
| 60.8 |
| 59.4 |
| |||||
Foreign government |
| 2,418 |
| 1,981 |
| 326 |
| (6 | ) | 2,301 |
| 81.9 |
| 95.2 |
| |||||
RMBS |
| 5,945 |
| 5,548 |
| 139 |
| (719 | ) | 4,968 |
| 93.3 |
| 83.6 |
| |||||
CMBS |
| 2,649 |
| 2,588 |
| 45 |
| (598 | ) | 2,035 |
| 97.7 |
| 76.8 |
| |||||
ABS |
| 3,137 |
| 2,747 |
| 61 |
| (469 | ) | 2,339 |
| 87.6 |
| 74.6 |
| |||||
Redeemable preferred stock |
| 20 |
| 15 |
| — |
| — |
| 15 |
| 75.0 |
| 75.0 |
| |||||
Total fixed income securities |
| $ | 54,271 |
| $ | 48,700 |
| $ | 2,716 |
| $ | (2,545 | ) | $ | 48,871 |
| 89.7 |
| 90.0 |
|
(1) Included in par value are zero-coupon securities that are generally purchased at a deep discount to the par value that is received at maturity. These primarily included corporate, municipal, foreign government and U.S. government and agencies zero-coupon securities with par value of $852 million, $4.71 billion, $1.19 billion and $1.65 billion, respectively.
(2) Excluding the impact of zero-coupon securities, the percentage of amortized cost to par value would be 100.1% for corporates, 99.0% for municipals, 104.4% for foreign governments and 103.6% for U.S. government and agencies. Similarly, excluding the impact of zero-coupon securities, the percentage of fair value to par value would be 104.4% for corporates, 100.3% for municipals, 110.7% for foreign governments and 108.4% for U.S. government and agencies.
The banking, financial services, consumer goods, transportation and utilities sectors had the highest concentration of gross unrealized losses in our corporate fixed income securities portfolio at June 30, 2010. In general, credit spreads remain wider than at initial purchase for most of the securities in these categories.
The net unrealized gain for the equity portfolio totaled $11 million and comprised $19 million of gross unrealized gains and $8 million of gross unrealized losses at June 30, 2010. This is compared to a net unrealized gain for the equity portfolio totaling $24 million, comprised of $31 million of gross unrealized gains and $7 million of gross unrealized losses at December 31, 2009. Within the equity portfolio, the losses were in the financial services and banking sectors. The unrealized losses in these sectors were company and sector specific. As of June 30, 2010, we have the intent and ability to hold our equity securities with unrealized losses until recovery.
We have a comprehensive portfolio monitoring process to identify and evaluate each fixed income and equity security whose carrying value may be other-than-temporarily impaired. The process includes a quarterly review of all securities through a screening process which identifies instances where the fair value compared to amortized cost (for fixed income securities) and cost (for equity securities) is below established thresholds. The screening process also includes the monitoring of other criteria such as ratings, ratings downgrades and payment defaults. The securities identified, in addition to other securities for which we may have a concern, are evaluated based on facts and circumstances for inclusion on our watch-list. All investments in an unrealized loss position at June 30, 2010 were included in our portfolio monitoring process for determining whether declines in value were other than temporary.
The extent and duration of a decline in fair value have become less indicative of actual credit deterioration with respect to an issue or issuer. While we continue to use declines in fair value and the length of time a security is in an unrealized loss position as indicators of potential credit deterioration, our determination of whether a security’s decline in fair value is other than temporary has placed greater emphasis on our analysis of the underlying credit and collateral.
The following table summarizes the fair values and gross unrealized losses of fixed income securities by type and investment grade classification as of June 30, 2010.
|
| Investment grade |
| Below investment grade |
| Total |
| ||||||||||||
($ in millions) |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| ||||||
Municipal |
| $ | 1,762 |
| $ | (246 | ) | $ | 76 |
| $ | (58 | ) | $ | 1,838 |
| $ | (304 | ) |
Corporate |
| 4,218 |
| (368 | ) | 793 |
| (81 | ) | 5,011 |
| (449 | ) | ||||||
Foreign government |
| 128 |
| (6 | ) | — |
| — |
| 128 |
| (6 | ) | ||||||
RMBS |
| 1,085 |
| (205 | ) | 834 |
| (514 | ) | 1,919 |
| (719 | ) | ||||||
CMBS |
| 1,109 |
| (404 | ) | 118 |
| (194 | ) | 1,227 |
| (598 | ) | ||||||
ABS |
| 1,178 |
| (250 | ) | 345 |
| (219 | ) | 1,523 |
| (469 | ) | ||||||
Redeemable preferred stock |
| 14 |
| — |
| — |
| — |
| 14 |
| — |
| ||||||
Total |
| $ | 9,494 |
| $ | (1,479 | ) | $ | 2,166 |
| $ | (1,066 | ) | $ | 11,660 |
| $ | (2,545 | ) |
We have experienced declines in the fair values of fixed income securities primarily due to wider credit spreads resulting from larger risk premiums since the time of initial purchase, largely due to macroeconomic conditions and credit market deterioration, including the impact of declining residential and commercial real estate valuations, which continue to persist in 2010. Consistent with their ratings, our portfolio monitoring process indicates that investment grade securities have a relatively low risk of default. Securities rated below investment grade, comprising securities with a rating of Ba, B and Caa or lower, have a higher default risk.
As of June 30, 2010, our below investment grade gross unrealized losses were primarily concentrated in RMBS, specifically Alt-A and Subprime, CMBS and ABS. Gross unrealized losses on these securities as of June 30, 2010 totaled $910 million.
Fair values for our structured securities are obtained from third-party valuation service providers and are subject to review as disclosed in our Application of Critical Accounting Estimates. In accordance with GAAP, when fair value is less than the amortized cost of a security and we have not made the decision to sell the security and it is not more likely than not we will be required to sell the security before recovery of its amortized cost basis, we evaluate if we expect to receive cash flows sufficient to recover the entire amortized cost basis of the security by comparing the estimated recovery value, calculated by discounting our best estimate of future cash flows at the security’s original or current effective rate, as appropriate, 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 security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss related to other factors (“non-credit-related”) recognized in other comprehensive income.
The non-credit-related unrealized losses for our structured securities, including our below investment grade Alt-A, Subprime, CMBS and ABS, are heavily influenced by risk factors other than those related to our best estimate of future cash flows. The difference between these securities’ original or current effective rates and the yields implied by their fair value indicates that a larger risk premium is included in the valuation of these securities than existed at initial issue or purchase. This higher risk premium represents the return that a market participant requires as compensation to assume the risk associated with the uncertainties regarding the future performance of the underlying commercial and residential real estate collateral. The risk premium is comprised of: default risk, which reflects the increased probability of default and the uncertainty related to collection of contractual principal and interest; liquidity risk, which reflects the risk associated with exiting the investment in an illiquid market, both in terms of timeliness and cost; and volatility risk, which reflects the potential valuation volatility during an investor’s holding period. Other factors reflected in the risk premium include the costs associated with underwriting, monitoring and holding these types of complex securities. Certain aspects of the default risk are included in the development of our best estimate of future cash flows, as appropriate. Other aspects of the risk premium are considered to be temporary in nature and are expected to reverse over the remaining lives of the securities as our future cash flows are received.
Other-than-temporary impairment assessment for below investment grade Alt-A and Subprime RMBS
Gross unrealized losses for our below investment grade Alt-A and Subprime portfolios totaled $74 million and $423 million, respectively, while gross unrealized gains for these portfolios totaled $4 million and $2 million, respectively, as of June 30, 2010. For our below investment grade Alt-A and Subprime securities with gross unrealized gains, we have recognized cumulative write-downs in earnings totaling $15 million and $62 million, respectively, as of June 30, 2010.
The credit loss evaluation for Alt-A and Subprime securities with gross unrealized losses is performed in two phases. The first phase estimates the future cash flows of the entire securitization trust from which our security was issued. A critical part of this estimate involves forecasting delinquency rates and loss severities of the residential mortgage loans that collateralize the securitization trust. The factors that affect the delinquency rates and loss severities include, but are not limited to, collateral type, transaction vintage year, geographic concentrations, borrower credit quality, origination practices of the transaction sponsor, and practices of the mortgage loan servicers. The delinquency rate and loss severity forecasts result in a trust-level projected cumulative collateral loss estimate.
We then analyze the position of the class of securities we own in the securitization trust relative to the trust’s other classes to determine whether any of the projected cumulative collateral loss will be applied to our class. If we have sufficient credit enhancement, measured in terms of subordination from other classes of securities in the trust that are contractually obligated to absorb losses before the class of security we own, no collateral losses will be realized by our class and we expect to collect all contractual principal and interest of the security we own.
For securities where there is insufficient credit enhancement for the class of securities we own, a second, security-specific estimate of future cash flows is calculated. This estimate is based on the contractual principal and interest of the securities we own, reduced by the projected cumulative collateral losses applied to them. This estimate takes into consideration additional secondary sources of credit enhancement, such as reliable bond insurance. For securities without secondary sources of credit enhancement or for which the secondary sources do not fully offset the projected cumulative collateral losses applied to them, a credit loss is recorded in earnings to the extent amortized cost exceeds recovery value.
98.6% and 1.4% of our below investment grade Alt-A securities with gross unrealized losses were issued with Aaa and Aa original ratings and capital structure classifications, respectively. 86.3%, 11.6% and 1.6% of our below investment grade Subprime securities with gross unrealized losses were issued with Aaa, Aa and A original ratings and capital structure classifications, respectively. Alt-A and Subprime securities with higher original ratings typically have priority in receiving the principal repayments on the collateral compared to those with lower original ratings. Our projected cash flow assumptions for our below investment grade Alt-A and Subprime securities with gross unrealized losses have deteriorated since the securities were originated, as reflected by their current credit ratings.
The following tables show trust-level, class-level and security-specific detailed information for our below investment grade Alt-A securities with gross unrealized losses, by credit rating.
|
| June 30, 2010 |
| |||||||||||||||||||||||||
|
| With other-than-temporary |
| Other |
|
|
| |||||||||||||||||||||
($ in millions) |
| Ba |
| B |
| Caa or |
| Total |
| Ba |
| B |
| Caa or |
| Total |
| Total |
| |||||||||
Trust-level |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Delinquency rates (1) |
| 11.2 | % | 41.4 | % | 26.6 | % | 26.5 | % | 2.8 | % | 10.8 | % | 10.0 | % | 8.9 | % | 19.6 | % | |||||||||
Cumulative collateral losses (2) |
| 0.3 |
| 0.6 |
| 5.1 |
| 4.9 |
| 0.1 |
| 1.0 |
| 1.5 |
| 1.3 |
| 3.5 |
| |||||||||
Class-level |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Average remaining credit enhancement (3) |
| 10.9 |
| 19.1 |
| 5.9 |
| 6.3 |
| 5.2 |
| 25.8 |
| 8.5 |
| 8.1 |
| 7.0 |
| |||||||||
Security-specific |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Number of positions |
| 1 |
| 1 |
| 10 |
| 12 |
| 2 |
| 1 |
| 4 |
| 7 |
| 19 |
| |||||||||
Par value |
| $ | 4 |
| $ | 3 |
| $ | 162 |
| $ | 169 |
| $ | 17 |
| $ | 1 |
| $ | 92 |
| $ | 110 |
| $ | 279 |
|
Fair value |
| 1 |
| 1 |
| 94 |
| 96 |
| 13 |
| — |
| 65 |
| 78 |
| 174 |
| |||||||||
Gross unrealized losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Total |
| (3 | ) | (1 | ) | (41 | ) | (45 | ) | (3 | ) | — |
| (26 | ) | (29 | ) | (74 | ) | |||||||||
12-24 months (4) |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||||
Over 24 months (5) |
| (3 | ) | (1 | ) | (41 | ) | (45 | ) | (3 | ) | — |
| (26 | ) | (29 | ) | (74 | ) | |||||||||
Cumulative write-downs recognized (6) |
| — |
| (1 | ) | (21 | ) | (22 | ) | — |
| — |
| — |
| — |
| (22 | ) | |||||||||
Principal payments received during the period (7) |
| 2 |
| — |
| 6 |
| 8 |
| 3 |
| — |
| 5 |
| 8 |
| 16 |
| |||||||||
|
| December 31, 2009 |
| |||||||||||||||||||||||||
|
| With other-than-temporary |
| Other |
|
|
| |||||||||||||||||||||
|
| Ba |
| B |
| Caa or |
| Total |
| Ba |
| B |
| Caa or |
| Total |
| Total |
| |||||||||
Trust-level |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Delinquency rates (1) |
| 13.1 | % | 17.6 | % | 27.0 | % | 25.6 | % | 7.1 | % | 37.8 | % | — | % | 6.8 | % | 19.1 | % | |||||||||
Cumulative collateral losses (2) |
| 0.2 |
| 1.6 |
| 3.7 |
| 3.4 |
| 0.5 |
| 0.5 |
| 1.2 |
| 0.6 |
| 2.4 |
| |||||||||
Class-level |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Average remaining credit enhancement (3) |
| 11.3 |
| 8.7 |
| 7.3 |
| 7.6 |
| 7.3 |
| 19.3 |
| 4.0 |
| 7.1 |
| 7.4 |
| |||||||||
Security-specific |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Number of positions |
| 1 |
| 2 |
| 8 |
| 11 |
| 4 |
| 1 |
| 1 |
| 6 |
| 17 |
| |||||||||
Par value |
| $ | 4 |
| $ | 19 |
| $ | 151 |
| $ | 174 |
| $ | 71 |
| $ | 3 |
| $ | 18 |
| $ | 92 |
| $ | 266 |
|
Fair value |
| 1 |
| 13 |
| 82 |
| 96 |
| 45 |
| 1 |
| 13 |
| 59 |
| 155 |
| |||||||||
Gross unrealized losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Total |
| (3 | ) | (6 | ) | (44 | ) | (53 | ) | (25 | ) | (3 | ) | (3 | ) | (31 | ) | (84 | ) | |||||||||
12-24 months (4) |
| (3 | ) | (2 | ) | (16 | ) | (21 | ) | (18 | ) | — |
| (3 | ) | (21 | ) | (42 | ) | |||||||||
Over 24 months (5) |
| — |
| (4 | ) | (28 | ) | (32 | ) | (6 | ) | (3 | ) | — |
| (9 | ) | (41 | ) | |||||||||
Cumulative write-downs recognized (6) |
| — |
| (1 | ) | (19 | ) | (20 | ) | — |
| — |
| — |
| — |
| (20 | ) | |||||||||
Principal payments received during the period (7) |
| 4 |
| 3 |
| 13 |
| 20 |
| 26 |
| — |
| 3 |
| 29 |
| 49 |
| |||||||||
(1) Weighted average delinquency rates as of period end are based on the principal amount of loans that are 60 days or more past due as a percentage of the remaining principal amount of the loans in the trust as reported by the servicers. The weighting calculation is based on the par value of each security.
(2) Weighted average cumulative collateral losses as of period end are based on the actual principal losses incurred as a percentage of the remaining principal amount of the loans in the trust. The weighting calculation is based on the par value of each security. Actual losses on the securities we hold are significantly less than the losses on the underlying collateral as presented in this table, as a majority of the securities we hold include substantial credit enhancements. Actual cumulative realized principal losses reduced the par value of the below investment grade Alt-A securities we own by $3 million as of June 30, 2010.
(3) Weighted average remaining credit enhancement as of period end is based on structural subordination and reflects the principal losses that can occur as a percentage of the remaining principal amount of the loans in the trust before the class of the security we own will incur its first dollar of principal loss. The weighting calculation is based on the par value of each security.
(4) Includes total gross unrealized losses on securities in an unrealized loss position for a period of 12 to 24 consecutive months.
(5) Includes total gross unrealized losses on securities in an unrealized loss position for a period more than 24 consecutive months. As of June 30, 2010, $18 million of unrealized losses on securities with other-than-temporary impairments recognized in earnings and $1 million of unrealized losses on other securities are greater than or equal to 20% of those securities’ amortized cost. As of December 31, 2009, there were no Alt-A securities with gross unrealized losses greater than or equal to 20% for a period of more than 24 consecutive months.
(6) Includes cumulative write-downs recorded in accordance with GAAP.
(7) Reflects principal payments for the six months ended June 30, 2010 or the year ended December 31, 2009, respectively.
The above tables include information about below investment grade Alt-A securities with gross unrealized losses as of each period presented. As such, the par value and composition of securities included can vary significantly from period to period due to changes in variables such as credit ratings, purchases, principal payments, sales and realized principal losses.
As of June 30, 2010, our below investment grade Alt-A securities with gross unrealized losses and with other-than-temporary impairments recorded in earnings had actual cumulative collateral losses of 4.9%, with remaining average credit enhancement of 6.3%. Our impairment evaluation forecasts more severe assumptions than the trusts are actually experiencing, including a projected weighted average underlying delinquency rate of 40.2% and a projected weighted average loss severity of 50.9%, which resulted in projected cumulative collateral losses of 20.1%. The difference between the actual cumulative collateral loss experience of 4.9% and our projections of cumulative collateral losses of 20.1% reflects our expectations of future losses due to further deterioration in the performance of the securities’ underlying collateral. Accordingly, we have recognized cumulative write-downs in earnings on these securities as reflected in the table above.
As of June 30, 2010, our below investment grade Alt-A securities with gross unrealized losses that are not other-than-temporarily impaired had actual cumulative collateral losses of 1.3%, with remaining average credit enhancement of 8.1%. Our impairment evaluation forecasts more severe assumptions than the trusts are actually experiencing including a projected weighted average underlying delinquency rate of 30.4% and a projected weighted average loss severity of 43.0%, which resulted in projected cumulative collateral losses of 14.0%. In instances where the projected cumulative collateral losses exceed the remaining credit enhancement and the security has not been impaired, the recovery value of the security exceeds the current amortized cost.
The following table shows other trust-level and class-level key metrics specific to the trusts and classes from which our below investment grade Alt-A securities with gross unrealized losses were issued.
|
| June 30, |
| March 31, |
| December 31, |
| September 30, |
| June 30, |
|
Trust-level statistics |
|
|
|
|
|
|
|
|
|
|
|
Delinquency rates |
| 19.6 | % | 19.7 | % | 19.1 | % | 18.9 | % | 17.9 | % |
Cumulative collateral losses |
| 3.5 |
| 3.1 |
| 2.4 |
| 2.1 |
| 1.5 |
|
Class-level statistics |
|
|
|
|
|
|
|
|
|
|
|
Average remaining credit enhancement |
| 7.0 |
| 6.9 |
| 7.4 |
| 7.9 |
| 8.9 |
|
In general and as discussed above, our average credit enhancement remains strong while the cumulative collateral losses continue to be applied against lower classes issued by the securitization trusts.
The following tables show trust-level, class-level and security-specific detailed information for our below investment grade Subprime securities with gross unrealized losses, by credit rating.
|
| June 30, 2010 |
| |||||||||||||||||||||||||
|
| With other-than-temporary |
| Other |
|
|
| |||||||||||||||||||||
($ in millions) |
| Ba |
| B |
| Caa or |
| Total |
| Ba |
| B |
| Caa or |
| Total |
| Total |
| |||||||||
Trust-level |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Delinquency rates |
| — | % | 18.0 | % | 27.4 | % | 27.0 | % | 32.6 | % | 11.2 | % | 30.9 | % | 24.0 | % | 25.8 | % | |||||||||
Cumulative collateral losses (1) |
| — |
| 9.7 |
| 15.8 |
| 15.6 |
| 11.6 |
| 21.3 |
| 7.3 |
| 12.8 |
| 14.4 |
| |||||||||
Class-level |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Average remaining credit enhancement |
| — |
| 12.4 |
| 6.5 |
| 6.8 |
| 31.3 |
| 5.8 |
| 25.7 |
| 19.3 |
| 12.0 |
| |||||||||
Security-specific |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Number of positions |
| — |
| 3 |
| 59 |
| 62 |
| 12 |
| 17 |
| 39 |
| 68 |
| 130 |
| |||||||||
Par value |
| $ | — |
| $ | 28 |
| $ | 643 |
| $ | 671 |
| $ | 60 |
| $ | 171 |
| $ | 246 |
| $ | 477 |
| $ | 1,148 |
|
Fair value |
| — |
| 16 |
| 212 |
| 228 |
| 41 |
| 96 |
| 139 |
| 276 |
| 504 |
| |||||||||
Gross unrealized losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Total |
| — |
| (9 | ) | (214 | ) | (223 | ) | (19 | ) | (75 | ) | (106 | ) | (200 | ) | (423 | ) | |||||||||
Insured (2) |
| — |
| (9 | ) | (90 | ) | (99 | ) | (1 | ) | (65 | ) | (6 | ) | (72 | ) | (171 | ) | |||||||||
12-24 months (3) |
| — |
| — |
| (17 | ) | (17 | ) | — |
| (1 | ) | — |
| (1 | ) | (18 | ) | |||||||||
Over 24 months (4) |
| — |
| (9 | ) | (197 | ) | (206 | ) | (19 | ) | (74 | ) | (106 | ) | (199 | ) | (405 | ) | |||||||||
Cumulative write-downs recognized (5) |
| — |
| (3 | ) | (217 | ) | (220 | ) | — |
| — |
| — |
| — |
| (220 | ) | |||||||||
Principal payments received during the period (6) |
| — |
| 7 |
| 16 |
| 23 |
| 10 |
| 20 |
| 7 |
| 37 |
| 60 |
| |||||||||
|
| December 31, 2009 |
| |||||||||||||||||||||||||
|
| With other-than-temporary |
| Other |
|
|
| |||||||||||||||||||||
|
| Ba |
| B |
| Caa or |
| Total |
| Ba |
| B |
| Caa or |
| Total |
| Total |
| |||||||||
Trust-level |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Delinquency rates |
| 5.5 | % | 9.8 | % | 32.4 | % | 29.4 | % | 31.7 | % | 14.8 | % | 30.8 | % | 25.6 | % | 27.5 | % | |||||||||
Cumulative collateral losses |
| 15.0 |
| 15.8 |
| 14.8 |
| 14.8 |
| 6.9 |
| 17.9 |
| 9.2 |
| 11.7 |
| 13.3 |
| |||||||||
Class-level |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Average remaining credit enhancement |
| — |
| — |
| 7.6 |
| 6.7 |
| 24.7 |
| 4.6 |
| 15.6 |
| 13.9 |
| 10.3 |
| |||||||||
Security-specific |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Number of positions |
| 1 |
| 3 |
| 39 |
| 43 |
| 14 |
| 19 |
| 27 |
| 60 |
| 103 |
| |||||||||
Par value |
| $ | 30 |
| $ | 35 |
| $ | 469 |
| $ | 534 |
| $ | 117 |
| $ | 180 |
| $ | 233 |
| $ | 530 |
| $ | 1,064 |
|
Fair value |
| 10 |
| 15 |
| 110 |
| 135 |
| 74 |
| 75 |
| 106 |
| 255 |
| 390 |
| |||||||||
Gross unrealized losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Total |
| (14 | ) | (17 | ) | (209 | ) | (240 | ) | (43 | ) | (105 | ) | (126 | ) | (274 | ) | (514 | ) | |||||||||
Insured (2) |
| (14 | ) | (14 | ) | (63 | ) | (91 | ) | (3 | ) | (94 | ) | (39 | ) | (136 | ) | (227 | ) | |||||||||
12-24 months (3) |
| — |
| (3 | ) | (19 | ) | (22 | ) | (2 | ) | (2 | ) | (13 | ) | (17 | ) | (39 | ) | |||||||||
Over 24 months (4) |
| (14 | ) | (12 | ) | (188 | ) | (214 | ) | (41 | ) | (102 | ) | (113 | ) | (256 | ) | (470 | ) | |||||||||
Cumulative write-downs recognized (5) |
| (6 | ) | (4 | ) | (146 | ) | (156 | ) | — |
| — |
| — |
| — |
| (156 | ) | |||||||||
Principal payments received during the period (6) |
| — |
| 4 |
| 24 |
| 28 |
| 32 |
| 30 |
| 29 |
| 91 |
| 119 |
| |||||||||
(1) Actual cumulative realized principal losses reduced the par value of the below investment grade Subprime securities we own by $23 million as of June 30, 2010.
(2) Includes gross unrealized losses on securities with reliable bond insurance. These unrealized losses are included in the aging below.
(3) Includes total gross unrealized losses on securities in an unrealized loss position for a period of 12 to 24 consecutive months.
(4) Includes total gross unrealized losses on securities in an unrealized loss position for a period more than 24 consecutive months. As of June 30, 2010, $141 million of unrealized losses on securities with other-than-temporary impairments recognized in earnings and $128 million of unrealized losses on other securities are greater than or equal to 20% of those securities’ amortized cost, and as of December 31, 2009, $63 million of unrealized losses on securities with other-than-temporary impairments recognized in earnings and $26 million of unrealized losses on other securities are greater than or equal to 20% of those securities’ amortized cost.
(5) Includes cumulative write-downs recorded in accordance with GAAP.
(6) Reflects principal payments for the six months ended June 30, 2010 or the year ended December 31, 2009, respectively.
The above tables include information about below investment grade Subprime securities with gross unrealized losses as of each period presented. As such, the par value and composition of securities included can vary significantly from period to period due to changes in variables such as credit ratings, purchases, principal payments, sales and realized principal losses.
As of June 30, 2010, our below investment grade Subprime securities with gross unrealized losses and with other-than-temporary impairments recorded in earnings had actual cumulative collateral losses of 15.6%, with remaining average credit enhancement of 6.8%. Our impairment evaluation forecasts more severe assumptions than the trusts are actually experiencing, including a projected weighted average underlying delinquency rate of 54.9% and a projected weighted average loss severity of 77.0%, which resulted in projected cumulative collateral losses of 40.8%. The difference between the actual cumulative collateral loss experience of 15.6% and our projections of cumulative collateral losses of 40.8% reflects our expectations of future losses due to further deterioration in the performance of the securities’ underlying collateral. Accordingly, we have recognized cumulative write-downs in earnings on these securities as reflected in the table above.
As of June 30, 2010, our below investment grade Subprime securities with gross unrealized losses that are not other-than-temporarily impaired had actual cumulative collateral losses of 12.8%, with remaining average credit enhancement of 19.3%. Our impairment evaluation forecasts more severe assumptions than the trusts are actually experiencing including a projected weighted average underlying delinquency rate of 49.7% and a projected weighted average loss severity of 73.5%, which resulted in projected cumulative collateral losses of 36.6%. In instances where the projected cumulative collateral losses exceed the remaining credit enhancement and the security has not been impaired, sufficient secondary credit enhancement exists, such as reliable bond insurance, and the recovery value of the security exceeds the current amortized cost.
The following table shows other trust-level and class-level key metrics specific to the trusts and classes from which our below investment grade Subprime securities with gross unrealized losses were issued.
|
| June 30, |
| March 31, |
| December 31, |
| September 30, |
| June 30, |
|
Trust-level statistics |
|
|
|
|
|
|
|
|
|
|
|
Delinquency rates |
| 25.8 | % | 28.5 | % | 27.5 | % | 26.6 | % | 26.4 | % |
Cumulative collateral losses |
| 14.4 |
| 14.4 |
| 13.3 |
| 11.4 |
| 10.3 |
|
Class-level statistics |
|
|
|
|
|
|
|
|
|
|
|
Average remaining credit enhancement |
| 12.0 |
| 11.2 |
| 10.3 |
| 11.1 |
| 12.3 |
|
In general and as discussed above, our average credit enhancement remains strong while the cumulative collateral losses continue to be applied against lower classes issued by the securitization trusts.
Other-than-temporary impairment assessment for below investment grade CMBS
Gross unrealized losses for our below investment grade CMBS portfolio totaled $194 million, while gross unrealized gains were $1 million as of June 30, 2010. For below investment grade CMBS with gross unrealized gains, we have recognized cumulative write-downs in earnings totaling $8 million as of June 30, 2010.
The credit loss evaluation for CMBS with gross unrealized losses is performed in two phases. The first phase estimates the future cash flows of the entire securitization trust from which our security was issued. A critical part of this estimate involves forecasting the cumulative collateral losses of the commercial mortgage loans that collateralize the securitization trust. Factors affecting these estimates include, but are not limited to, estimates of current and future property prices, current and projected rental incomes, the propensity of the commercial mortgage loans to default under these assumptions and loss severities in cases of default. Estimates of future property prices and rental incomes consider specific property-type and geographic economic trends such as employment, property vacancy and rental rates, and forecasts of new supply in the commercial real estate markets. Estimates of delinquency rates and loss severities consider factors such as borrower payment history, the origination practices of the transaction sponsor, overall collateral quality and diversification, transaction vintage year, maturity date, overall transaction structure and other factors that may influence performance. Realized losses in the CMBS market have historically been low and, we believe, are not predictive of future losses. Therefore, our projections of collateral performance rely on probability-weighted scenarios informed by credit opinions obtained from third parties, such as nationally recognized credit rating agencies, industry analysts and a CMBS loss modeling advisory service.
We then analyze the position of the class of securities we own in the securitization trust relative to the trust’s other classes to determine whether any of the projected cumulative collateral loss will be applied to our class. If we have sufficient credit enhancement, measured in terms of subordination from other classes of securities in the trust being contractually obligated to absorb losses before the class of security we own, no collateral losses will be realized by our class and we expect to collect all contractual principal and interest of the security we own.
For securities where there is insufficient credit enhancement for the class of securities we own, a second, security-specific estimate of future cash flows is calculated. This estimate is based on the contractual principal and interest of the securities we own, reduced by the projected cumulative collateral losses applied to them. In instances where the recovery value of the security is less than amortized cost, a credit loss is recorded in earnings.
39.8%, 50.2% and 8.1% of our below investment grade CMBS with gross unrealized losses were issued with Aaa, Aa and A original ratings and capital structure classifications, respectively. CMBS with higher original ratings typically have priority in receiving the principal repayments on the collateral compared to those with lower original ratings. Commercial property prices have deteriorated substantially during the last 24 months and property rental incomes are declining as the commercial real estate sector adjusts to lower macroeconomic activity. In addition, tight credit markets and conservative underwriting standards continue to stress commercial mortgage borrowers’ ability to refinance obligations. Our projected cash flow assumptions for our below investment grade CMBS securities with gross unrealized losses have deteriorated since the securities were originated, as reflected by their current credit ratings.
The following tables show trust-level, class-level and security-specific detailed information for our below investment grade CMBS securities with gross unrealized losses, by credit rating.
|
| June 30, 2010 |
| |||||||||||||||||||||||||
|
| With other-than-temporary |
| Other |
|
|
| |||||||||||||||||||||
($ in millions) |
| Ba |
| B |
| Caa or |
| Total |
| Ba |
| B |
| Caa or |
| Total |
| Total |
| |||||||||
Trust-level |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Delinquency rates |
| 3.4 | % | 11.6 | % | 12.8 | % | 11.7 | % | 5.3 | % | 3.5 | % | — | % | 4.9 | % | 8.5 | % | |||||||||
Cumulative collateral losses |
| — |
| 0.3 |
| 3.5 |
| 2.5 |
| 0.5 |
| 0.9 |
| — |
| 0.6 |
| 1.6 |
| |||||||||
Class-level |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Average remaining credit enhancement |
| 7.6 |
| 10.2 |
| 19.0 |
| 16.1 |
| 8.6 |
| 8.3 |
| — |
| 8.6 |
| 12.5 |
| |||||||||
Security-specific |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Number of positions |
| 2 |
| 2 |
| 6 |
| 10 |
| 14 |
| 4 |
| — |
| 18 |
| 28 |
| |||||||||
Par value |
| $ | 20 |
| $ | 43 |
| $ | 141 |
| $ | 204 |
| $ | 140 |
| $ | 42 |
| $ | — |
| $ | 182 |
| $ | 386 |
|
Fair value |
| 5 |
| 14 |
| 28 |
| 47 |
| 54 |
| 17 |
| — |
| 71 |
| 118 |
| |||||||||
Gross unrealized losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Total |
| (5 | ) | (8 | ) | (61 | ) | (74 | ) | (90 | ) | (30 | ) | — |
| (120 | ) | (194 | ) | |||||||||
12-24 months (1) |
| — |
| — |
| — |
| — |
| (6 | ) | — |
| — |
| (6 | ) | (6 | ) | |||||||||
Over 24 months (2) |
| (5 | ) | (8 | ) | (61 | ) | (74 | ) | (84 | ) | (30 | ) | — |
| (114 | ) | (188 | ) | |||||||||
Cumulative write-downs recognized (3) |
| (10 | ) | (19 | ) | (58 | ) | (87 | ) | — |
| — |
| — |
| — |
| (87 | ) | |||||||||
Principal payments received during the period (4) |
| — |
| — |
| 2 |
| 2 |
| 1 |
| — |
| — |
| 1 |
| 3 |
| |||||||||
|
| December 31, 2009 |
| |||||||||||||||||||||||||
|
| With other-than-temporary |
| Other |
|
|
| |||||||||||||||||||||
|
| Ba |
| B |
| Caa or |
| Total |
| Ba |
| B |
| Caa or |
| Total |
| Total |
| |||||||||
Trust-level |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Delinquency rates |
| 7.3 | % | 9.4 | % | — | % | 8.9 | % | 2.2 | % | 3.8 | % | — | % | 2.8 | % | 5.2 | % | |||||||||
Cumulative collateral losses |
| 1.4 |
| 0.6 |
| — |
| 0.8 |
| — |
| — |
| — |
| — |
| 0.3 |
| |||||||||
Class-level |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Average remaining credit enhancement |
| 17.4 |
| 9.8 |
| — |
| 11.5 |
| 9.1 |
| 8.5 |
| — |
| 8.9 |
| 9.9 |
| |||||||||
Security-specific |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Number of positions |
| 1 |
| 5 |
| — |
| 6 |
| 6 |
| 6 |
| — |
| 12 |
| 18 |
| |||||||||
Par value |
| $ | 20 |
| $ | 69 |
| $ | — |
| $ | 89 |
| $ | 87 |
| $ | 49 |
| $ | — |
| $ | 136 |
| $ | 225 |
|
Fair value |
| 9 |
| 16 |
| — |
| 25 |
| 29 |
| 13 |
| — |
| 42 |
| 67 |
| |||||||||
Gross unrealized losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Total |
| (5 | ) | (25 | ) | — |
| (30 | ) | (55 | ) | (37 | ) | — |
| (92 | ) | (122 | ) | |||||||||
12-24 months (1) |
| — |
| — |
| — |
| — |
| (13 | ) | — |
| — |
| (13 | ) | (13 | ) | |||||||||
Over 24 months (2) |
| (5 | ) | (25 | ) | — |
| (30 | ) | (42 | ) | (37 | ) | — |
| (79 | ) | (109 | ) | |||||||||
Cumulative write-downs recognized (3) |
| (7 | ) | (34 | ) | — |
| (41 | ) | — |
| — |
| — |
| — |
| (41 | ) | |||||||||
Principal payments received during the period (4) |
| 1 |
| — |
| — |
| 1 |
| 1 |
| — |
| — |
| 1 |
| 2 |
| |||||||||
(1) Includes total gross unrealized losses on securities in an unrealized loss position for a period of 12 to 24 consecutive months.
(2) Includes total gross unrealized losses on securities in an unrealized loss position for a period more than 24 consecutive months. As of June 30, 2010, $18 million of unrealized losses on securities with other-than-temporary impairments recognized in earnings and $79 million of unrealized losses on other securities are greater than or equal to 20% of those securities’ amortized cost. As of December 31, 2009, there were no CMBS securities with gross unrealized losses greater than or equal to 20% for a period of more than 24 consecutive months.
(3) Includes cumulative write-downs recorded in accordance with GAAP.
(4) Reflects principal payments for the six months ended June 30, 2010 or the year ended December 31, 2009, respectively.
The above tables include information about below investment grade CMBS with gross unrealized losses as of each period presented. As such, the par value and composition of securities included can vary significantly from period to period due to changes in variables such as credit ratings, purchases, principal payments and sales.
As of June 30, 2010, our below investment grade CMBS with gross unrealized losses and with other-than-temporary impairments recorded in earnings had actual cumulative collateral losses of 2.5%, with remaining average credit enhancement of 16.1%. As of June 30, 2010, our below investment grade CMBS with gross unrealized losses that were not other-than-temporarily impaired had actual cumulative collateral losses of 0.6%, with remaining average credit enhancement of 8.6%.
Our impairment evaluation for CMBS forecasts more severe assumptions than the trusts are actually experiencing. We assume that all loans delinquent 60 days or more default and project delinquency rates on
otherwise performing loans. Projected loss severities are then applied against the resulting delinquency rates, arriving at our projected cumulative collateral loss rates. The projected cumulative collateral loss rates by vintage year of the security range from a low of 2.1% for holdings with a vintage year of 2003 to a high of 10.5% for holdings with a vintage year of 2007. The projected cumulative collateral loss rate for our entire CMBS portfolio at June 30, 2010 was 8.0%. The difference between the actual cumulative collateral loss experience of 1.6% and our projections of cumulative collateral losses of 8.0% reflects our expectations of future losses due to further deterioration in the performance of the securities’ underlying collateral. Accordingly, we have recognized cumulative write-downs in earnings on these securities as reflected in the table above. In instances where the projected cumulative collateral losses exceed the remaining credit enhancement and the security has not been impaired, the recovery value of the security exceeds the current amortized cost.
The following table shows other trust-level and class-level key metrics specific to the trusts and classes from which our below investment grade CMBS with gross unrealized losses were issued.
|
| June 30, |
| March 31, |
| December 31, |
| September 30, |
| June 30, |
|
Trust-level statistics |
|
|
|
|
|
|
|
|
|
|
|
Delinquency rates |
| 8.5 | % | 8.6 | % | 5.2 | % | 4.9 | % | 6.0 | % |
Cumulative collateral losses |
| 1.6 |
| 0.8 |
| 0.3 |
| 0.1 |
| 0.2 |
|
Class-level statistics |
|
|
|
|
|
|
|
|
|
|
|
Average remaining credit enhancement |
| 12.5 |
| 11.6 |
| 9.9 |
| 11.3 |
| 10.0 |
|
In general and as discussed above, our average credit enhancement remains strong while the cumulative collateral losses continue to be applied against lower classes issued by the securitization trusts.
Other-than-temporary impairment assessment for below investment grade ABS
Gross unrealized losses for our below investment grade ABS portfolio totaled $219 million, while gross unrealized gains were $33 million as of June 30, 2010. For below investment grade ABS with gross unrealized gains, we have recognized cumulative write-downs in earnings totaling $197 million as of June 30, 2010.
The ABS portfolio is composed of various holdings with unique features; and therefore, our credit loss evaluation primarily relies on expectations of future losses on the underlying collateral and structural considerations of each issue. The projection of future losses is based on our expectations for investment grade corporate, bank loan and high yield markets. Our expectations are formulated through ongoing monitoring and participation in these markets, and consider opinions from third parties, such as industry analysts and strategists, and credit rating agencies as well as our overall economic outlook for indicators such as unemployment and GDP. The expected performance of each security considers expected collateral losses and credit enhancement levels, as well as factors including default rates, expected recoveries, prepayment rates, changes in interest rates and other characteristics. In addition, the performance of collateral underlying certain ABS securities is actively monitored by external managers, allowing for enhanced collateral management actions which help mitigate the risk of loss.
The following table shows certain statistics for our below investment grade ABS securities with gross unrealized losses.
|
| June 30, 2010 |
| |||||||||||||||||||
|
| With other-than-temporary |
| Other |
| |||||||||||||||||
($ in millions) |
| Fair |
| Total |
| Unrealized |
| Cumulative |
| Fair |
| Total |
| Unrealized |
| |||||||
Cash flow CLO |
| $ | 10 |
| $ | — |
| $ | — |
| $ | (7 | ) | $ | 172 |
| $ | (97 | ) | $ | (96 | ) |
Market value CDO |
| — |
| — |
| — |
| — |
| 30 |
| (14 | ) | (14 | ) | |||||||
Synthetic CDO |
| 24 |
| (25 | ) | (24 | ) | (81 | ) | 66 |
| (59 | ) | (59 | ) | |||||||
Trust preferred CDO |
| 5 |
| (4 | ) | (3 | ) | (15 | ) | 18 |
| (15 | ) | (11 | ) | |||||||
Consumer and other ABS |
| 8 |
| (1 | ) | — |
| (6 | ) | 12 |
| (4 | ) | (4 | ) | |||||||
Total |
| $ | 47 |
| $ | (30 | ) | $ | (27 | ) | $ | (109 | ) | $ | 298 |
| $ | (189 | ) | $ | (184 | ) |
|
| December 31, 2009 |
| |||||||||||||||||||
|
| With other-than-temporary |
| Other |
| |||||||||||||||||
|
| Fair |
| Total |
| Unrealized |
| Cumulative |
| Fair |
| Total |
| Unrealized |
| |||||||
Cash flow CLO |
| $ | 8 |
| $ | (2 | ) | $ | — |
| $ | (5 | ) | $ | 180 |
| $ | (98 | ) | $ | (95 | ) |
Market value CDO |
| — |
| — |
| — |
| — |
| 30 |
| (14 | ) | (14 | ) | |||||||
Synthetic CDO |
| 28 |
| (44 | ) | (40 | ) | (130 | ) | 61 |
| (44 | ) | (44 | ) | |||||||
Trust preferred CDO |
| 4 |
| (5 | ) | (5 | ) | (15 | ) | 3 |
| (6 | ) | — |
| |||||||
Consumer and other ABS |
| 5 |
| (3 | ) | — |
| (14 | ) | 23 |
| (6 | ) | (4 | ) | |||||||
Total |
| $ | 45 |
| $ | (54 | ) | $ | (45 | ) | $ | (164 | ) | $ | 297 |
| $ | (168 | ) | $ | (157 | ) |
The above tables include information about below investment grade ABS with gross unrealized losses as of each period presented. As such, the composition of securities included can vary significantly from period to period due to changes in variables such as credit ratings, purchases, principal payments, sales and realized principal losses.
As of June 30, 2010, our below investment grade ABS with gross unrealized losses that are not other-than-temporarily impaired are concentrated in Cash flow CLO and Synthetic CDO securities, which together comprise 82.5% of the total unrealized loss on such securities.
Cash flow CLO are collateralized primarily by below investment grade senior secured corporate loans and are structured with overcollateralization which serves as credit enhancement for the class of securities we own. Our best estimate of future cash flows, supported by the applicable overcollateralization, indicates that the nature of the unrealized loss on these securities is temporary and will reverse over time.
Synthetic CDO primarily consist of a portfolio of corporate CDS collateralized by Aaa, Aa and A rated LIBOR-based securities (i.e. “fully funded” synthetic CDO). Our best estimate of future cash flows as of June 30, 2010 indicates that the remaining unrealized loss is not predictive of their ultimate performance and will recover in line with our best estimate of future cash flows.
We believe that the unrealized losses on our fixed income securities are not predictive of their ultimate performance and the unrealized losses should reverse over the remaining lives of the securities. We anticipate that these securities will recover in line with our best estimate of the expected cash flows which are used for other-than-temporary impairment evaluations. As of June 30, 2010, we do not have the intent to sell and it is not more likely than not we will be required to sell these securities before the recovery of their amortized cost basis. Our evaluation of whether it is more likely than not we will be required to sell a security before recovery of its amortized cost basis is supported by our liquidity position, which cushions us from the need to liquidate securities with significant unrealized losses to meet cash obligations.
Problem, restructured, or potential problem
We also monitor the quality of our fixed income and bank loan portfolios by categorizing certain investments as “problem”, “restructured” or “potential problem.” Problem fixed income securities and bank loans are in default with respect to principal or interest and/or are investments issued by companies that have gone into bankruptcy subsequent to our acquisition or loan. Fixed income and bank loan investments are categorized as restructured when
the debtor is in financial difficulty and we grant a concession. Potential problem fixed income or bank loan investments are current with respect to contractual principal and/or interest, but because of other facts and circumstances, we have concerns regarding the borrower’s ability to pay future principal and interest according to the original terms, which causes us to believe these investments may be classified as problem or restructured in the future.
The following table summarizes problem, restructured and potential problem fixed income securities and bank loans, which are reported in other investments.
|
| June 30, 2010 |
| |||||||||||||
($ in millions) |
| Par |
| Amortized |
| Amortized |
| Fair |
| Fair |
| Percent of |
| |||
Restructured |
| $ | 74 |
| $ | 52 |
| 70.3 | % | $ | 57 |
| 77.0 | % | 0.1 | % |
Problem |
| 480 |
| 125 |
| 26.0 |
| 82 |
| 17.1 |
| 0.2 |
| |||
Potential problem |
| 1,509 |
| 925 |
| 61.3 |
| 608 |
| 40.3 |
| 1.2 |
| |||
Total |
| $ | 2,063 |
| $ | 1,102 |
| 53.4 |
| $ | 747 |
| 36.2 |
| 1.5 | % |
Cumulative write-downs recognized (3) |
|
|
| $ | 830 |
|
|
|
|
|
|
|
|
|
|
| December 31, 2009 |
| |||||||||||||
|
| Par |
| Amortized |
| Amortized |
| Fair |
| Fair |
| Percent of |
| |||
Restructured |
| $ | 75 |
| $ | 53 |
| 70.7 | % | $ | 51 |
| 68.0 | % | 0.1 | % |
Problem |
| 480 |
| 165 |
| 34.4 |
| 100 |
| 20.8 |
| 0.2 |
| |||
Potential problem |
| 1,735 |
| 1,080 |
| 62.2 |
| 645 |
| 37.2 |
| 1.3 |
| |||
Total |
| $ | 2,290 |
| $ | 1,298 |
| 56.7 |
| $ | 796 |
| 34.8 |
| 1.6 | % |
Cumulative write-downs recognized (3) |
|
|
| $ | 805 |
|
|
|
|
|
|
|
|
|
(1) The difference between par value and amortized cost of $961 million at June 30, 2010 and $992 million at December 31, 2009 is primarily attributable to write-downs. Par value has been reduced by principal payments.
(2) Bank loans are reflected at amortized cost.
(3) Cumulative write-downs recognized only reflect impairment write-downs related to investments within the problem, potential problem and restructured categories.
At June 30, 2010, amortized cost for the problem category was $125 million and comprised $51 million of Subprime, $19 million of Alt-A, $16 million of CMBS, $5 million of other CDO, and $4 million of Consumer and other ABS. Also included were $20 million of corporates (primarily privately placed), $7 million of municipal bonds, and $3 million of bank loans. The decrease of $40 million compared to December 31, 2009 is primarily attributable to a reduction in corporate bonds. The amortized cost of problem investments with a fair value less than 80% of amortized cost totaled $85 million with unrealized losses of $51 million and fair value of $34 million.
At June 30, 2010, amortized cost for the potential problem category was $925 million and comprised $432 million of Subprime, $182 million of Alt-A, $124 million of CMBS, $80 million of other CDO and $9 million of Consumer and other ABS. Also included were $58 million of corporates (primarily privately placed), $31 million of prime and $9 million of bank loans. The decrease of $155 million from December 31, 2009 is primarily attributable to a reduction in corporate bonds. The amortized cost of potential problem investments with a fair value less than 80% of amortized cost totaled $677 million with unrealized losses of $343 million and fair value of $334 million.
Net investment income The following table presents net investment income.
|
| Three months ended |
| Six months ended |
| ||||||||
($ in millions) |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Fixed income securities |
| $ | 629 |
| $ | 639 |
| $ | 1,264 |
| $ | 1,320 |
|
Mortgage loans |
| 98 |
| 129 |
| 199 |
| 263 |
| ||||
Equity securities |
| 1 |
| 1 |
| 2 |
| 2 |
| ||||
Cost limited partnership interests |
| 4 |
| 2 |
| 7 |
| 4 |
| ||||
Short-term |
| 1 |
| 3 |
| 2 |
| 10 |
| ||||
Other |
| (5 | ) | (10 | ) | (13 | ) | (16 | ) | ||||
Investment income, before expense |
| 728 |
| 764 |
| 1,461 |
| 1,583 |
| ||||
Investment expense |
| (28 | ) | (23 | ) | (54 | ) | (45 | ) | ||||
Net investment income |
| $ | 700 |
| $ | 741 |
| $ | 1,407 |
| $ | 1,538 |
|
Net investment income decreased 5.5% or $41 million to $700 million in the second quarter of 2010 and 8.5% or $131 million to $1.41 billion in the first six months of 2010 from $741 million and $1.54 billion in the second quarter and first six months of 2009, respectively, primarily due to lower yields and actions to reduce the portfolio’s exposure to commercial real estate, along with reduced average asset balances. Net investment income was $722 million, $714 million and $707 million in the third quarter of 2009, fourth quarter of 2009 and first quarter of 2010, respectively.
Net realized capital gains and losses The following table presents the components of realized capital gains and losses and the related tax effect.
|
| Three months ended |
| Six months ended |
| ||||||||
($ in millions) |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Impairment write-downs |
| $ | (141 | ) | $ | (203 | ) | $ | (283 | ) | $ | (555 | ) |
Change in intent write-downs |
| (57 | ) | (25 | ) | (80 | ) | (57 | ) | ||||
Net other-than-temporary impairment losses recognized in earnings |
| (198 | ) | (228 | ) | (363 | ) | (612 | ) | ||||
Sales |
| 17 |
| 163 |
| 60 |
| 521 |
| ||||
Valuation of derivative instruments |
| (149 | ) | 179 |
| (203 | ) | 262 |
| ||||
Settlements of derivative instruments |
| (30 | ) | 41 |
| (11 | ) | 23 |
| ||||
EMA limited partnership income |
| 8 |
| (33 | ) | 4 |
| (110 | ) | ||||
Realized capital gains and losses, pre-tax |
| (352 | ) | 122 |
| (513 | ) | 84 |
| ||||
Income tax benefit (expense) |
| 122 |
| (39 | ) | 179 |
| (168 | ) | ||||
Realized capital gains and losses, after-tax |
| $ | (230 | ) | $ | 83 |
| $ | (334 | ) | $ | (84 | ) |
Impairment write-downs are presented in the following table.
|
| Three months ended |
| Six months ended |
| ||||||||
($ in millions) |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Fixed income securities |
| $ | (108 | ) | $ | (158 | ) | $ | (226 | ) | $ | (347 | ) |
Mortgage loans |
| (28 | ) | (15 | ) | (41 | ) | (43 | ) | ||||
Equity securities |
| — |
| (1 | ) | — |
| (20 | ) | ||||
Limited partnership interests |
| (5 | ) | (21 | ) | (16 | ) | (115 | ) | ||||
Other investments |
| — |
| (8 | ) | — |
| (30 | ) | ||||
Impairment write-downs |
| $ | (141 | ) | $ | (203 | ) | $ | (283 | ) | $ | (555 | ) |
Impairment write-downs for the three months and six months ended June 30, 2010 were primarily driven by RMBS, which experienced deterioration in expected cash flows; investments with commercial real estate exposure, including CMBS, limited partnership interests, and mortgage loans, which were impacted by declines in real estate valuations or experienced deterioration in expected cash flows; and privately placed corporate bonds and municipal bonds impacted by issuer specific circumstances. Impairment write-downs on below investment grade RMBS, CMBS and ABS for the three months ended June 30, 2010 were $58 million, $27 million and $20 million, respectively. Impairment write-downs on below investment grade RMBS, CMBS and ABS for the six months
ended June 30, 2010 were $103 million, $51 million and $24 million, respectively. $83 million or 76.9% and $182 million or 80.5% of the fixed income security write-downs for the three months and six months ended June 30, 2010, respectively, related to impaired securities that were performing in line with anticipated or contractual cash flows but were written down primarily because of expected deterioration in the performance of the underlying collateral or our assessment of the probability of future default. For these securities, as of June 30, 2010, there were either no defaults or defaults only impacted classes lower than our position in the capital structure. $14 million and $30 million of the fixed income security write-downs for the three months and six months ended June 30, 2010, respectively, related to securities experiencing a significant departure from anticipated cash flows; however, we believe they retain economic value. $11 million and $14 million for the three months and six months ended June 30, 2010, respectively, related to fixed income securities for which future cash flows are not anticipated.
Limited partnership impairment write-downs related to Cost limited partnerships, which experienced significant declines in portfolio valuations and we could not assert the recovery period would be temporary. To determine if an other-than-temporary impairment has occurred related to a Cost limited partnership, we evaluate whether an impairment indicator has occurred in the period that may have a significant adverse effect on the carrying value of the investment. Impairment indicators may include: significantly reduced valuations of the investments held by the limited partnerships; actual recent cash flows received being significantly less than expected cash flows; reduced valuations based on financing completed at a lower value; completed sale of a material underlying investment at a price significantly lower than expected; or any other recent adverse events since the last financial statements received that might affect the fair value of the investee’s capital.
Change in intent write-downs are presented in the following table.
|
| Three months ended |
| Six months ended |
| ||||||||
($ in millions) |
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Fixed income securities |
| $ | (57 | ) | $ | (20 | ) | $ | (74 | ) | $ | (40 | ) |
Mortgage loans |
| — |
| — |
| (6 | ) | (6 | ) | ||||
Equity securities |
| — |
| — |
| — |
| (6 | ) | ||||
Other investments |
| — |
| (5 | ) | — |
| (5 | ) | ||||
Change in intent write-downs |
| $ | (57 | ) | $ | (25 | ) | $ | (80 | ) | $ | (57 | ) |
Change in intent write-downs in the three months and six months ended June 30, 2010 related primarily to municipal bonds and Subprime RMBS for which we have the intent to sell. Change in intent write-downs on below investment grade RMBS for the three months and six months ended June 30, 2010 were $29 million and $31 million, respectively.
Sales generated $17 million and $60 million of net realized gains for the three months and six months ended June 30, 2010, respectively. Net realized gains for the three months ended June 30, 2010 primarily related to $50 million of gains on sales of corporate and U.S. and foreign government fixed income securities and $20 million of net gains on sales of equity securities, offset by $61 million of losses on sales of CMBS and municipal securities. Net realized gains for the six months ended June 30, 2010 primarily related to $108 million of gains on sales of corporate and U.S. and foreign government fixed income securities and $20 million of net gains on sales of equity securities, offset by $74 million of losses on sales of CMBS and municipal securities.
Valuation and settlement of derivative instruments recorded as net realized capital losses totaling $214 million for the six months ended June 30, 2010 included $203 million of losses on the valuation of derivative instruments and $11 million of losses on the settlement of derivative instruments. Losses from the risk management programs primarily occurred in duration gap management programs and are related to a decrease in interest rates and a decline in volatility.
A changing interest rate environment will drive changes in our portfolio duration targets at a tactical level. A duration target and range is established with an economic view of liabilities relative to a long-term investment portfolio view. Tactical duration management is accomplished through both cash market transactions, sales and new purchases and derivative activities that generate realized gains and losses. As a component of our approach to managing portfolio duration, realized gains and losses on certain derivative instruments are most appropriately considered in conjunction with the unrealized gains and losses on the fixed income portfolio. This approach mitigates the impacts of general interest rate changes to our overall financial condition.
At June 30, 2010, our securities with embedded options totaled $714 million, a decrease in fair value of $53 million from December 31, 2009, resulting in realized capital losses on valuation of $56 million, net sales activity of $42 million, and unrealized net capital gains reported in OCI of $45 million for the host securities. Net unrealized capital gains were further decreased by $12 million due to amortization of the host securities. The change in fair value of embedded options is bifurcated from the host securities, separately valued and reported in realized capital gains and losses, while the change in the difference between the fair value and the amortized cost of the host securities is reported in OCI. Total fair value exceeded total amortized cost by $18 million at June 30, 2010. Valuation gains and losses are converted into cash for securities with embedded options upon our election to sell these securities. In the event the economic value of the options is not realized, we will recover the par value if held to maturity unless the issuer of the note defaults. Total par value exceeded fair value by $33 million at June 30, 2010.
The table below presents the realized capital gains and losses (pre-tax) on the valuation and settlement of derivative instruments shown by underlying exposure and derivative strategy.
|
| Six months ended June 30, |
|
|
| ||||||||||||||||||||||
|
| 2010 |
| 2009 |
| 2010 Explanations |
| ||||||||||||||||||||
($ in millions) |
| Valuation |
| Settlements |
| Total |
| Total |
|
|
| ||||||||||||||||
Risk reduction |
|
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| ||||||||||||||||
Duration gap management |
| $ | (137 | ) | $ | (21 | ) | $ | (158 | ) | $ | 277 |
| Interest rate caps, floors, swaptions and swaps are used to balance interest-rate sensitivities of assets and liabilities. The contracts settle based on differences between current market rates and a contractually specified fixed rate through expiration. The contracts can be terminated and settled at any time with minimal additional cost. The maximum loss on caps, floors and swaptions is limited to the amount of premiums paid. The change in valuation reflects the changing value of expected future settlements from changing interest rates, which may vary over the period of the contracts. The 2010 losses, resulting from decreasing interest rates, are offset in unrealized capital gains and losses of our fixed income securities in OCI to the extent it relates to changes in risk-free rates. |
| ||||||||||||
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|
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| ||||||||||||||||
Anticipatory hedging |
| 22 |
| 5 |
| 27 |
| (15 | ) | Futures and interest rate swaps are used to protect investment spread from interest rate changes during mismatches in the timing of cash flows between product sales and the related investment activity. The futures contracts are exchange traded, daily cash settled and can be exited at any time for minimal additional cost. If the cash flow mismatches are such that a positive net investment position is being hedged, there is an offset for the related investment’s unrealized loss in OCI. The 2010 gains were caused by a decrease in risk-free interest rates over the life of the net short position as liability issuances exceeded asset acquisitions. |
| ||||||||||||||||
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|
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| ||||||||||||||||
Hedging of interest rate exposure in annuity contracts |
| (16 | ) | — |
| (16 | ) | 12 |
| Value of expected future settlements on interest rate caps and the associated value of future credited interest, which is reportable in future periods when incurred, decreased due to a decrease in interest rates. |
| ||||||||||||||||
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| ||||||||||||||||
Hedge ineffectiveness |
| 1 |
| — |
| 1 |
| 3 |
| The hedge ineffectiveness of $1 million includes $104 million in realized capital losses on swaps that were offset by $105 million in realized capital gains on the hedged risk. |
| ||||||||||||||||
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| ||||||||||||||||
Foreign currency contracts |
| (3 | ) | 7 |
| 4 |
| — |
| Currency forwards are used to protect our foreign bond portfolio from changes in currency rates. |
| ||||||||||||||||
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| ||||||||||||||||
Credit risk reduction |
| 15 |
| (6 | ) | 9 |
| (14 | ) | Valuation gain is the result of widening credit spreads on referenced credit entities. |
| ||||||||||||||||
|
|
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|
|
|
| ||||||||||||||||
Total Risk reduction |
| (118 | ) | (15 | ) | (133 | ) | 263 |
|
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| ||||||||||||||||
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| ||||||||||||||||
Income generation |
|
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| ||||||||||||||||
Asset replication - credit exposure |
| (29 | ) | 4 |
| (25 | ) | 20 |
| The 2010 changes in valuation are due to the widening credit spreads on referenced credit entities. The losses are primarily on first-to-default CDS and credit derivative index CDS. The changes in valuation would only be converted to cash upon disposition, which can be done at any time, or if the credit event specified in the contract occurs. For further discussion on CDS, see Note 6 of the condensed consolidated financial statements. |
| ||||||||||||||||
Accounting |
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|
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| ||||||||||||||||
Equity indexed notes |
| (23 | ) | — |
| (23 | ) | (11 | ) | Equity-indexed notes are fixed income securities that contain embedded options. The changes in valuation of the embedded equity indexed call options are reported in realized capital gains and losses. The results generally track the performance of underlying equity indices. Valuation gains and losses are converted into cash upon sale or maturity. In the event the economic value of the options is not realized, we will recover the par value of the host fixed income security if held to maturity unless the issuer of the note defaults. Par value exceeded fair value by $43 million at June 30, 2010. Equity-indexed notes are subject to our comprehensive portfolio monitoring and watchlist processes to identify and evaluate when the carrying value may be other-than-temporarily impaired. The following table compares the June 30, 2010 and December 31, 2009 holdings, respectively. |
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| ||||||||
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| ($ in millions) |
| June 30, |
| Change |
| Change due |
| December 31, |
| ||||||||
|
|
|
|
|
|
|
|
|
| Par value |
| $ | 425 |
| $ | — |
| $ | (50 | ) | $ | 475 |
| ||||
|
|
|
|
|
|
|
|
|
| Amortized cost of host contract |
| $ | 316 |
| $ | 9 |
| $ | (37 | ) | $ | 344 |
| ||||
|
|
|
|
|
|
|
|
|
| Fair value of equity-indexed call option |
| 57 |
| (23 | ) | (9 | ) | 89 |
| ||||||||
|
|
|
|
|
|
|
|
|
| Total amortized cost |
| $ | 373 |
| $ | (14 | ) | $ | (46 | ) | $ | 433 |
| ||||
|
|
|
|
|
|
|
|
|
| Total fair value |
| $ | 382 |
| $ | 1 |
| $ | (49 | ) | $ | 430 |
| ||||
|
|
|
|
|
|
|
|
|
| Unrealized gain/loss |
| $ | 9 |
| $ | 15 |
| $ | (3 | ) | $ | (3 | ) | ||||
|
| Six months ended June 30, |
|
|
| ||||||||||||||||||||||
|
| 2010 |
| 2009 |
| 2010 Explanations |
| ||||||||||||||||||||
($ in millions) |
| Valuation |
| Settlements |
| Total |
| Total |
|
|
| ||||||||||||||||
Conversion options in fixed income securities |
| (33 | ) | — |
| (33 | ) | 13 |
| Convertible bonds are fixed income securities that contain embedded options. Changes in valuation of the embedded option are reported in realized capital gains and losses. The results generally track the performance of underlying equities. Valuation gains and losses are converted into cash upon our election to sell these securities. In the event the economic value of the options is not realized, we will recover the par value of the host fixed income security if held to maturity unless the issuer of the note defaults. Fair value exceeded par value by $10 million at June 30, 2010. Convertible bonds are subject to our comprehensive portfolio monitoring and watchlist processes to identify and evaluate when the carrying value may be other-than-temporarily impaired. The following table compares the June 30, 2010 and December 31, 2009 holdings, respectively. |
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| ||||||||||||||||
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| ($ in millions) |
| June 30, |
| Change |
| Change due |
| December 31, |
| ||||||||
|
|
|
|
|
|
|
|
|
| Par value |
| $ | 322 |
| $ | — |
| $ | 7 |
| $ | 315 |
| ||||
|
|
|
|
|
|
|
|
|
| Amortized cost of host contract |
| $ | 247 |
| $ | 3 |
| $ | 20 |
| $ | 224 |
| ||||
|
|
|
|
|
|
|
|
|
| Fair value of conversion option |
| 76 |
| (33 | ) | (8 | ) | 117 |
| ||||||||
|
|
|
|
|
|
|
|
|
| Total amortized cost |
| $ | 323 |
| $ | (30 | ) | $ | 12 |
| $ | 341 |
| ||||
|
|
|
|
|
|
|
|
|
| Total fair value |
| $ | 332 |
| $ | (12 | ) | $ | 7 |
| $ | 337 |
| ||||
|
|
|
|
|
|
|
|
|
| Unrealized gain/loss |
| $ | 9 |
| $ | 18 |
| $ | (5 | ) | $ | (4 | ) | ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Accounting |
| (56 | ) | — |
| (56 | ) | 2 |
|
|
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total |
| $ | (203 | ) | $ | (11 | ) | $ | (214 | )(1) | $ | 285 |
|
|
| ||||||||||||
(1) Does not include $2 million of derivative gains related to the termination of fair value and cash flow hedges which are included in sales and reported with the hedged risk.
CAPITAL RESOURCES AND LIQUIDITY HIGHLIGHTS
· Shareholder’s equity as of June 30, 2010 was $5.21 billion, an increase of 18.8% from $4.39 billion as of December 31, 2009.
· The Allstate Corporation (the “Corporation”) has at the parent holding company level $3.05 billion of deployable invested assets at June 30, 2010 compared to $3.07 billion at December 31, 2009.
· At June 30, 2010, we held 25.0% of our total cash and investment portfolio, or $14.96 billion, in cash and liquid investments that are saleable within one quarter without significant additional net realized capital losses.
CAPITAL RESOURCES AND LIQUIDITY
Capital resources consist of shareholder’s equity and notes due to related parties, representing funds deployed or available to be deployed to support business operations. The following table summarizes our capital resources.
($ in millions) |
| June 30, |
| December 31, |
| ||
Common stock, additional capital paid-in and retained income |
| $ | 5,018 |
| $ | 5,163 |
|
Accumulated other comprehensive income (loss) |
| 192 |
| (777 | ) | ||
Total shareholder’s equity |
| 5,210 |
| 4,386 |
| ||
Notes due to related parties |
| 681 |
| 675 |
| ||
Total capital resources |
| $ | 5,891 |
| $ | 5,061 |
|
Shareholder’s equity increased in the first six months of 2010, due primarily to unrealized net capital gains on investments, partially offset by a net loss.
Financial ratings and strength Our ratings are influenced by many factors including our operating and financial performance, asset quality, liquidity, asset/liability management, overall portfolio mix, financial leverage (i.e., debt), exposure to risks, the current level of operating leverage and Allstate Insurance Company’s (“AIC’s”) ratings. There have been no changes to our insurance financial strength ratings from Moody’s, S&P and A.M. Best since December 31, 2009.
The Company, AIC and the Corporation are party to the Amended and Restated Intercompany Liquidity Agreement (“Liquidity Agreement”) which allows for short-term advances of funds to be made between parties for liquidity and other general corporate purposes. The Liquidity Agreement does not establish a commitment to advance funds on the part of any party. The Company and AIC each serve as a lender and borrower and the
Corporation serves only as a lender. The Company also has a capital support agreement with AIC. Under the capital support agreement, AIC is committed to provide capital to the Company to maintain an adequate capital level. The maximum amount of potential funding under each of these agreements is $1.00 billion.
In addition to the Liquidity Agreement, the Company also has an intercompany loan agreement with the Corporation. The amount of intercompany loans available to the Company is at the discretion of the Corporation. The maximum amount of loans the Corporation will have outstanding to all its eligible subsidiaries at any given point in time is limited to $1.00 billion. The Corporation may use commercial paper borrowings, bank lines of credit and repurchase agreements to fund intercompany borrowings.
Liquidity sources and uses We actively manage our financial position and liquidity levels in light of changing market, economic, and business conditions. Liquidity is managed at both the entity and enterprise level across the Company, and is assessed on both base and stressed level liquidity needs. We believe we have sufficient liquidity to meet these needs, with $14.96 billion of cash and liquid investments saleable within 90 days without generating significant additional capital losses (25.0% of the total cash and investment portfolio). We expect $6.61 billion of investment portfolio cash flows from maturities, calls, and interest receipts over the next 12 months. Additionally, we have existing intercompany agreements in place that facilitate liquidity management across the Company to enhance flexibility.
Allstate parent holding company capital capacity The Corporation has at the parent holding company level $3.05 billion of deployable invested assets at June 30, 2010. These assets include investments that are generally saleable within one quarter totaling $2.69 billion. This provides funds for the parent company’s relatively low fixed charges.
The Company has access to additional borrowing to support liquidity through the Corporation as follows:
· A commercial paper facility with a borrowing limit of $1.00 billion to cover short-term cash needs. As of June 30, 2010, there were no balances outstanding and therefore the remaining borrowing capacity was $1.00 billion; however, the outstanding balance can fluctuate daily.
· A primary credit facility is available for short-term liquidity requirements and backs the commercial paper facility. The $1.00 billion unsecured revolving credit facility has an initial term of five years expiring in 2012 with two optional one-year extensions that can be exercised at the end of any of the remaining anniversary years of the facility upon approval of existing or replacement lenders providing more than two-thirds of the commitments to lend. The program is fully subscribed among 11 lenders with the largest commitment being $185 million. The commitments of the lenders are several and no lender is responsible for any other lender’s commitment if such lender fails to make a loan under the facility. This facility contains an increase provision that would allow up to an additional $500 million of borrowing provided the increased portion could be fully syndicated at a later date among existing or new lenders. This facility has a financial covenant requiring that the Corporation not exceed a 37.5% debt to capital resources ratio as defined in the agreement. This ratio at June 30, 2010 was 19.9%. Although the right to borrow under the facility is not subject to a minimum rating requirement, the costs of maintaining the facility and borrowing under it are based on the ratings of the Corporation’s senior, unsecured, nonguaranteed long-term debt. There were no borrowings under the credit facility during the second quarter and first six months of 2010. The total amount outstanding at any point in time under the combination of the commercial paper program and the credit facility cannot exceed the amount that can be borrowed under the credit facility.
· A universal shelf registration statement was filed by the Corporation with the Securities and Exchange Commission on May 8, 2009. The Corporation can use the current shelf registration to issue an unspecified amount of debt securities, common stock (including 362 million shares of treasury stock as of June 30, 2010), preferred stock, depositary shares, warrants, stock purchase contracts, stock purchase units and securities of trust subsidiaries. The specific terms of any securities the Corporation issues under this registration statement will be provided in the applicable prospectus supplements.
Liquidity Exposure Contractholder funds as of June 30, 2010 were $47.70 billion. The following table summarizes contractholder funds by their contractual withdrawal provisions at June 30, 2010.
($ in millions) |
|
|
| Percent to |
| |
Not subject to discretionary withdrawal |
| $ | 6,820 |
| 14.3 | % |
Subject to discretionary withdrawal with adjustments: |
|
|
|
|
| |
Specified surrender charges (1) |
| 20,308 |
| 42.6 |
| |
Market value adjustments (2) |
| 8,327 |
| 17.4 |
| |
Subject to discretionary withdrawal without adjustments (3) |
| 12,242 |
| 25.7 |
| |
Total contractholder funds (4) |
| $ | 47,697 |
| 100.0 | % |
(1) Includes $9.33 billion of liabilities with a contractual surrender charge of less than 5% of the account balance.
(2) $6.91 billion of the contracts with market value adjusted surrenders have a 30-45 day period at the end of their initial and subsequent interest rate guarantee periods (which are typically 5 or 6 years) during which there is no surrender charge or market value adjustment.
(3) 67% of these contracts have a minimum interest crediting rate guarantee of 3% or higher.
(4) Includes $1.28 billion of contractholder funds on variable annuities reinsured to The Prudential Insurance Company of America, a subsidiary of Prudential Financial, Inc. effective June 1, 2006.
While we are able to quantify remaining scheduled maturities for our institutional products, anticipating retail product surrenders is less precise. Retail life and annuity products may be surrendered by customers for a variety of reasons. Reasons unique to individual customers include a current or unexpected need for cash or a change in life insurance coverage needs. Other key factors that may impact the likelihood of customer surrender include the level of the contract surrender charge, the length of time the contract has been in force, distribution channel, market interest rates, equity market conditions and potential tax implications. In addition, the propensity for retail life insurance policies to lapse is lower than it is for fixed annuities because of the need for the insured to be re-underwritten upon policy replacement. Surrenders and partial withdrawals for our retail annuities increased 24.5% and 17.1% in the second quarter and first six months of 2010, respectively, compared to the same periods of 2009. The annualized surrender and partial withdrawal rate on deferred annuities and interest-sensitive life insurance, based on the beginning of year contractholder funds, was 10.3% and 8.7% for the first six months of 2010 and 2009, respectively. We strive to promptly pay customers who request cash surrenders, however, statutory regulations generally provide up to six months in most states to fulfill surrender requests.
Our institutional products are primarily funding agreements sold to unaffiliated trusts used to back medium-term notes. As of June 30, 2010, total institutional products outstanding were $2.64 billion. The following table presents the remaining scheduled maturities for our institutional products outstanding as of June 30, 2010.
($ in millions) |
|
|
| |
2010 |
| $ | — |
|
2011 |
| 760 |
| |
2012 |
| 40 |
| |
2013 |
| 1,750 |
| |
2016 |
| 85 |
| |
|
| $ | 2,635 |
|
Our asset-liability management practices limit the differences between the cash flows generated by our investment portfolio and the expected cash flow requirements of our life insurance, annuity and institutional product obligations.
Cash Flows As reflected in our Condensed Consolidated Statements of Cash Flows, operating cash flows in the first six months of 2010 declined compared with the same period in 2009 as lower investment income and higher contract benefits paid were partially offset by decreased expenses paid.
Lower cash flows provided by investing activities in the first six months of 2010 compared to the first six months of 2009 were primarily related to lower net reductions in short-term investments to fund reductions in contractholder funds.
Lower cash flows used in financing activities in the first six months of 2010 compared to the first six months of 2009 were primarily due to decreased maturities and retirements of institutional products, partially offset by lower deposits on fixed annuities and higher surrenders and partial withdrawals on fixed annuities.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, the principal executive officer and the principal financial officer concluded that our disclosure controls and procedures are effective in providing reasonable assurance that material information required to be disclosed in our reports filed with or submitted to the Securities and Exchange Commission under the Securities Exchange Act is made known to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting. During the fiscal quarter ended June 30, 2010, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Information required for this Part II, Item 1 is incorporated by reference to the discussion under the heading “Regulation and Compliance” and under the heading “Legal and regulatory proceedings and inquiries” in Note 8 of the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.
This document contains “forward-looking statements” that anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. These statements are made subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. We assume no obligation to update any forward-looking statements as a result of new information or future events or developments.
These forward-looking statements do not relate strictly to historical or current facts and may be identified by their use of words like “plans,” “seeks,” “expects,” “will,” “should,” “anticipates,” “estimates,” “intends,” “believes,” “likely,” “targets” and other words with similar meanings. These statements may address, among other things, our strategy for growth, product development, investment results, regulatory approvals, market position, expenses, financial results, litigation and reserves. We believe that these statements are based on reasonable estimates, assumptions and plans. However, if the estimates, assumptions or plans underlying the forward-looking statements prove inaccurate or if other risks or uncertainties arise, actual results could differ materially from those communicated in these forward-looking statements. Risk factors which could cause actual results to differ materially from those suggested by such forward-looking statements include but are not limited to those discussed or identified in this document, in our public filings with the Securities and Exchange Commission, and those incorporated by reference in Part I, Item 1A of the Allstate Life Insurance Company Annual Report on Form 10-K for 2009.
(a) Exhibits
An Exhibit Index has been filed as part of this report on page E-1.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Allstate Life Insurance Company | |
| (Registrant) | |
|
| |
|
| |
August 9, 2010 |
| |
| By | /s/ Samuel H. Pilch |
|
| Samuel H. Pilch |
|
| (chief accounting officer and duly |
|
| authorized officer of Registrant) |
Exhibit No. |
| Description |
|
|
|
10.1 |
| Form of Asset Purchase Agreement between American Heritage Life Insurance Company and Road Bay Investments, LLC. |
|
|
|
10.2 |
| Form of Pledge and Security Agreement between Road Bay Investments, LLC and American Heritage Life Insurance Company. |
|
|
|
10.3 |
| Reinsurance Agreement effective July 1, 2010 between Allstate Life Insurance Company and American Heritage Life Insurance Company, incorporated herein by reference to Exhibit 10.1 to Allstate Life Insurance Company’s Current Report on Form 8-K filed July 15, 2010. |
|
|
|
15 |
| Acknowledgment of awareness from Deloitte & Touche LLP, dated August 9, 2010, concerning unaudited interim financial information. |
|
|
|
31(i) |
| Rule 13a-14(a) Certification of Principal Executive Officer |
|
|
|
31(i) |
| Rule 13a-14(a) Certification of Principal Financial Officer |
|
|
|
32 |
| Section 1350 Certifications |