**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**The Registrant meets the conditions set forth inGeneral Instruction H (1)(a) and (b) of Form 10-Q and istherefore filing this Form with the reduced disclosure format.**

 

**x        QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF**

**THESECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended March 31, 2010**

 

**OR**

 

**o        TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from          to          **

 

**Commission file number: 000-31248**

 

**ALLSTATELIFE INSURANCE COMPANY**

(Exact name of registrant as specified in itscharter)

 

| **Illinois**                                                    | ** ** | **36-2554642**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or  organization) |       | (I.R.S. Employer Identification No.) |

 

**3100Sanders Road, Northbrook, Illinois  60062**

(Address of principal executive offices)  (Zipcode)

 

**(847) 402-5000**

(Registrant’s telephone number, including area code)

 

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

 

Yes  x     No  o

 

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

 

Yes  o     No  o

 

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

 

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

 

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

 

Yes  o     No  x

 

As of May 5, 2010, the registrant had 23,800common shares, $227 par value, outstanding, all of which are held by AllstateInsurance Company.

 

 

 

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**ALLSTATE LIFE INSURANCE COMPANY**

**INDEX TO QUARTERLY REPORT ON FORM 10-Q**

##### **March 31, 2010**

 
| **PART I**  | ** ** | **FINANCIAL  INFORMATION**                                                                                                   | ** ** | **PAGE**   |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|             |       |                                                                                                                         |       |       |
| Item 1.          |       | Financial Statements                                                                                                         |       |       |
|             |       |                                                                                                                         |       |       |
|             |       | Condensed Consolidated Statements of Operations for  the Three-Month Periods Ended March 31, 2010 and 2009 (unaudited)  |       | 1          |
|             |       |                                                                                                                         |       |       |
|             |       | Condensed  Consolidated Statements of Financial Position as of March 31, 2010  (unaudited) and December 31, 2009   |       |  

2  |
|             |       |                                                                                                                         |       |       |
|             |       | Condensed  Consolidated Statements of Cash Flows for the Three-Month Periods Ended  March 31, 2010 and 2009 (unaudited) |       |  

3  |
|             |       |                                                                                                                         |       |       |
|             |       | Notes to Condensed Consolidated Financial Statements  (unaudited)                                                            |       | 4          |
|             |       |                                                                                                                         |       |       |
|             |       | Report of Independent Registered Public Accounting  Firm                                                                     |       | 37         |
|             |       |                                                                                                                         |       |       |
| Item 2.          |       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                  |       |       |
|             |       |                                                                                                                         |       |       |
|             |       | Operations Highlights                                                                                                        |       | 38         |
|             |       | Operations                                                                                                                   |       | 38         |
|             |       | Investments  Highlights                                                                                                      |       | 43         |
|             |       | Investments                                                                                                                  |       | 44         |
|             |       | Capital Resources and Liquidity Highlights                                                                                   |       | 60         |
|             |       | Capital Resources and Liquidity                                                                                              |       | 60         |
|             |       |                                                                                                                         |       |       |
| Item  4(T).      |       | Controls  and Procedures                                                                                                     |       | 63         |
|             |       |                                                                                                                         |       |       |
| **PART II** | ** ** | **OTHER INFORMATION**                                                                                                        | ** ** | ** ** |
|             |       |                                                                                                                         |       |       |
| Item 1.          |       | Legal Proceedings                                                                                                            |       | 64         |
|             |       |                                                                                                                         |       |       |
| Item 1A.         |       | Risk Factors                                                                                                                 |       | 64         |
|             |       |                                                                                                                         |       |       |
| Item 6.          |       | Exhibits                                                                                                                     |       | 64         |

 

----

 

##### **PART I. FINANCIAL INFORMATION**

 

**ITEM 1.FINANCIAL STATEMENTS**

 

**ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

 
| **($ in millions)**                                           | ** ** | **Three Months Ended********March 31,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                         | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| ** **                                                         | ** ** | **(unaudited)**                              | ** ** |
| **Revenues**                                                       |       |                                         |       |   |   |
| Premiums                                                           | $          |                                         | 153        | $ |   | 152 |   |
| Contract charges                                                   |       | 246                                          |       | 228 |   |
| Net investment income                                              |       | 707                                          |       | 797 |   |
| Realized capital gains and losses:                                 |       |                                         |       |   |   |
| Total other-than-temporary impairment losses                       |       | (179                                         | )          | (384 | ) |
| Portion of loss recognized in other comprehensive  income          |       | 14                                           |       | — |   |
| Net other-than-temporary impairment losses  recognized in earnings |       | (165                                         | )          | (384 | ) |
| Sales and other realized capital gains and losses                  |       | 4                                            |       | 346 |   |
| Total realized capital gains and losses                            |       | (161                                         | )          | (38 | ) |
|                                                               |       | 945                                          |       | 1,139 |   |
|                                                               |       |                                         |       |   |   |
| **Costs and expenses**                                             |       |                                         |       |   |   |
| Contract benefits                                                  |       | 364                                          |       | 334 |   |
| Interest credited to contractholder funds                          |       | 452                                          |       | 565 |   |
| Amortization of deferred policy acquisition costs                  |       | 67                                           |       | 429 |   |
| Operating costs and expenses                                       |       | 86                                           |       | 89 |   |
| Restructuring and related charges                                  |       | —                                       |       | 17 |   |
| Interest expense                                                   |       | 11                                           |       | 11 |   |
|                                                               |       | 980                                          |       | 1,445 |   |
| Gain on disposition of operations                                  |       | 1                                            |       | 3 |   |
|                                                               |       |                                         |       |   |   |
| **Loss from operations before income  tax benefit (expense)**      |       | (34                                          | )          | (303 | ) |
|                                                               |       |                                         |       |   |   |
| Income tax benefit (expense)                                       |       | 16                                           |       | (33 | ) |
|                                                               |       |                                         |       |   |   |
| **Net loss**                                                       | $          |                                         | (18        | ) | $ |   | (336 | ) |
|                                                                    |            |                                              |            |  |  |  |  |  |

 

See notes to condensed consolidated financial statements.

 

1

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**ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF FINANCIAL POSITION**

** **
| **($ in  millions, except par value data)**                                                      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                            | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| ** **                                                                                            | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| **Assets**                                                                                            |       |               |       |                  |       |
| Investments                                                                                           |       |               |       |                  |       |
| Fixed  income securities, at fair value (amortized cost $49,790 and $49,842)                          | $          | 48,657             | $          | 47,658                |       |
| Mortgage  loans                                                                                       |       | 7,491              |       | 7,780                 |       |
| Equity  securities, at fair value (cost $161 and $159)                                                |       | 205                |       | 183                   |       |
| Limited  partnership interests                                                                        |       | 1,019              |       | 1,028                 |       |
| Short-term,  at fair value (amortized cost $1,037 and $1,669)                                         |       | 1,037              |       | 1,669                 |       |
| Policy  loans                                                                                         |       | 824                |       | 823                   |       |
| Other                                                                                                 |       | 1,049              |       | 1,076                 |       |
| Total  investments                                                                                    |       | 60,282             |       | 60,217                |       |
| Cash                                                                                                  |       | 170                |       | 145                   |       |
| Deferred  policy acquisition costs                                                                    |       | 3,430              |       | 3,664                 |       |
| Reinsurance  recoverables                                                                             |       | 4,049              |       | 4,016                 |       |
| Accrued  investment income                                                                            |       | 580                |       | 540                   |       |
| Deferred  income taxes                                                                                |       | —             |       | 203                   |       |
| Other  assets                                                                                         |       | 527                |       | 963                   |       |
| Separate  Accounts                                                                                    |       | 9,059              |       | 9,072                 |       |
| **Total assets**                                                                                      | $          | 78,097             | $          | 78,820                |       |
|                                                                                                  |       |               |       |                  |       |
| **Liabilities**                                                                                       |       |               |       |                  |       |
| Contractholder  funds                                                                                 | $          | 49,281             | $          | 50,850                |       |
| Reserve  for life-contingent contract benefits                                                        |       | 12,371             |       | 12,256                |       |
| Unearned  premiums                                                                                    |       | 29                 |       | 30                    |       |
| Payable  to affiliates, net                                                                           |       | 110                |       | 119                   |       |
| Other  liabilities and accrued expenses                                                               |       | 1,591              |       | 1,432                 |       |
| Deferred  income taxes                                                                                |       | 79                 |       | —                |       |
| Notes  due to related parties                                                                         |       | 681                |       | 675                   |       |
| Separate  Accounts                                                                                    |       | 9,059              |       | 9,072                 |       |
| **Total liabilities**                                                                                 |       | 73,201             |       | 74,434                |       |
|                                                                                                  |       |               |       |                  |       |
| **Commitments and Contingent Liabilities (Note 8)**                                                   |       |               |       |                  |       |
|                                                                                                  |       |               |       |                  |       |
| **Shareholder’s Equity**                                                                         |       |               |       |                  |       |
| Redeemable  preferred stock - series A, $100 par value, 1,500,000 shares authorized, none issued |       | —             |       | —                |       |
| 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                                                                                      |       | 1,951              |       | 1,969                 |       |
| Accumulated  other comprehensive income:                                                              |       |               |       |                  |       |
| Unrealized  net capital gains and losses:                                                             |       |               |       |                  |       |
| Unrealized  net capital losses on fixed income securities with OTTI                                   |       | (244               | )          | (274                  | )          |
| Other  unrealized net capital gains and losses                                                        |       | (477               | )          | (1,146                | )          |
| Unrealized  adjustment to DAC, DSI and insurance reserves                                             |       | 472                |       | 643                   |       |
| Total  unrealized net capital gains and losses                                                        |       | (249               | )          | (777                  | )          |
| Total accumulated other comprehensive loss                                                            |       | (249               | )          | (777                  | )          |
| Total shareholder’s equity                                                                       |       | 4,896              |       | 4,386                 |       |
| **Total liabilities and shareholder’s equity**                                                   | $          | 78,097             | $          | 78,820                |       |

 

See notes to condensed consolidated financial statements.

 

2

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**ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

** **
| **($ in millions)**                                                         | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                       | ** ** | **March 31,**     | ** ** |
| ** **                                                                       | ** ** | **2010**               | ** ** | **2009** | ** ** |
| **Cash flows from operating  activities**                                        |       | **(unaudited)**        |       |
| Net loss                                                                         | $          | (18                    | )          | $ | (336 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities: |       |                   |       |   |   |
| Amortization and other non-cash items                                            |       | (41                    | )          | (101 | ) |
| Realized capital gains and losses                                                |       | 161                    |       | 38 |   |
| Gain on disposition of operations                                                |       | (1                     | )          | (3 | ) |
| Interest credited to contractholder funds                                        |       | 452                    |       | 565 |   |
| Changes in:                                                                      |       |                   |       |   |   |
| Policy benefits and other insurance reserves                                     |       | (98                    | )          | (3 | ) |
| Unearned premiums                                                                |       | (1                     | )          | (1 | ) |
| Deferred policy acquisition costs                                                |       | (21                    | )          | 336 |   |
| Reinsurance recoverables, net                                                    |       | (81                    | )          | (134 | ) |
| Income taxes                                                                     |       | 490                    |       | 565 |   |
| Other operating assets and liabilities                                           |       | (37                    | )          | (37 | ) |
| Net cash provided by operating activities                                        |       | 805                    |       | 889 |   |
|                                                                             |       |                   |       |   |   |
| **Cash flows from investing  activities**                                        |       |                   |       |   |   |
| Proceeds from sales:                                                             |       |                   |       |   |   |
| Fixed income securities                                                          |       | 2,666                  |       | 2,958 |   |
| Equity securities                                                                |       | 3                      |       | 5 |   |
| Limited partnership interests                                                    |       | 34                     |       | 14 |   |
| Mortgage loans                                                                   |       | 3                      |       | 12 |   |
| Other investments                                                                |       | 33                     |       | 12 |   |
| Investment collections:                                                          |       |                   |       |   |   |
| Fixed income securities                                                          |       | 616                    |       | 767 |   |
| Mortgage loans                                                                   |       | 260                    |       | 460 |   |
| Other investments                                                                |       | 13                     |       | 27 |   |
| Investment purchases:                                                            |       |                   |       |   |   |
| Fixed income securities                                                          |       | (3,152                 | )          | (2,078 | ) |
| Limited partnership interests                                                    |       | (43                    | )          | (55 | ) |
| Mortgage loans                                                                   |       | (1                     | )          | (10 | ) |
| Other investments                                                                |       | (41                    | )          | — |   |
| Change in short-term investments, net                                            |       | 487                    |       | (818 | ) |
| Change in other investments, net                                                 |       | 7                      |       | 38 |   |
| Net cash provided by investing activities                                        |       | 885                    |       | 1,332 |   |
|                                                                             |       |                   |       |   |   |
| **Cash flows from financing  activities**                                        |       |                   |       |   |   |
| Capital contribution                                                             |       | —                 |       | 250 |   |
| Contractholder fund deposits                                                     |       | 672                    |       | 1,020 |   |
| Contractholder fund withdrawals                                                  |       | (2,337                 | )          | (3,300 | ) |
| Net cash used in financing activities                                            |       | (1,665                 | )          | (2,030 | ) |
| **Net increase in cash**                                                         |       | 25                     |       | 191 |   |
| **Cash at beginning of period**                                                  |       | 145                    |       | 93 |   |
| **Cash at end of period**                                                        | $          | 170                    | $          | 284 |   |
|                                                                                  |            |                        |            |  |  |  |

 

See notes to condensed consolidated financial statements.

 

3

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**ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.   General**

 

**Basisof presentation**

 

The accompanyingcondensed consolidated financial statements include the accounts of AllstateLife Insurance Company (“ALIC”) and its wholly owned subsidiaries (collectivelyreferred to as the “Company”).  ALIC iswholly owned by Allstate Insurance Company (“AIC”), which is wholly owned byAllstate Insurance Holdings, LLC, a wholly owned subsidiary of The AllstateCorporation (the “Corporation”).

 

The condensed consolidated financial statements and notes as of March 31,2010, and for the three-month periods ended March 31, 2010 and 2009 areunaudited.  The condensed consolidatedfinancial statements reflect all adjustments (consisting only of normalrecurring accruals), which are, in the opinion of management, necessary for thefair presentation of the financial position, results of operations and cashflows for the interim periods.  Thesecondensed consolidated financial statements and notes should be read inconjunction with the consolidated financial statements and notes theretoincluded in the Company’s Annual Report on Form 10-K for the year ended December 31,2009.  The results of operations for theinterim periods should not be considered indicative of results to be expectedfor the full year.

 

**Premiumsand Contract Charges**

 

The followingtable summarizes premiums and contract charges by product.

 
| **($ in  millions)**                    | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------------|------------|
| ** **                                   | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| **Premiums**                                 |       |                                   |       |   |   |
| Traditional  life insurance                  | $          | 102                                    | $          | 96 |   |
| Immediate  annuities with life contingencies |       | 27                                     |       | 34 |   |
| Accident  and health                         |       | 24                                     |       | 22 |   |
| **Total premiums**                           |       | 153                                    |       | 152 |   |
|                                         |       |                                   |       |   |   |
| **Contract charges**                         |       |                                   |       |   |   |
| Interest-sensitive  life insurance           |       | 233                                    |       | 216 |   |
| Fixed  annuities                             |       | 13                                     |       | 12 |   |
| **Total contract charges**                   |       | 246                                    |       | 228 |   |
| **Total premiums and contract charges**      | $          | 399                                    | $          | 380 |   |

 

**Adoptedaccounting standards**

 

*Disclosures about Fair Value Measurements*

 

In January 2010, the FASB issued newaccounting guidance which expands disclosure requirements relating to fairvalue measurements.  The guidance addsrequirements for disclosing amounts of and reasons for significant transfersinto and out of Levels 1 and 2 and requires gross rather than net disclosuresabout purchases, sales, issuances and settlements relating to Level 3measurements.  The guidance also providesclarification that fair value measurement disclosures are required for eachclass of assets and liabilities. Disclosures about the valuation techniques and inputs used to measurefair value for measurements that fall in either Level 2 or Level 3 are alsorequired.  The Company adopted theprovisions of the new guidance as of March 31, 2010, except fordisclosures about purchases, sales, issuances and settlements in the roll forwardof activity in Level 3 fair value measurements, which are required for fiscalyears beginning after December 15, 2010. Disclosures are not required for earlier periods presented forcomparative purposes.  The new guidanceaffects disclosures only; and therefore, the adoption had no impact on theCompany’s results of operations or financial position.

 

*Consolidation of Variable Interest Entities*

 

InJune 2009, the FASB issued new accounting guidance which requires anentity to perform a qualitative analysis to determine whether it holds acontrolling financial interest (i.e., is a primary beneficiary) in a variableinterest entity (“VIE”).  The analysisidentifies the primary beneficiary of a VIE as the entity that has both thepower to direct the activities of the VIE that most significantly impact theeconomic performance of the VIE and the

 

4

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obligationto absorb losses, or the right to receive benefits, that could potentially besignificant to the VIE.  The Companyadopted the new guidance as of January 1, 2010.  The adoption had no impact on the Company’sresults of operations or financial position.

 

In the normal course of investing activities, theCompany invests in variable interests issued by VIEs. These variable interestsinclude structured investments such as asset-backed securities, commercialmortgage-backed securities and residential mortgage-backed securities as wellas limited partnerships, special purpose entities and trusts.  For these variable interests, the Companyconcluded it is not the primary beneficiary due to the amount of the Company’sinterest in the VIEs and the Company’s lack of power to direct the activitiesthat are most significant to the economic performance of the VIEs.  The Company’s maximum exposure to loss onthese interests is limited to the amount of the Company’s investment.

 

**Pending accounting standards**

 

*Embedded Credit Derivatives Scope Exception*

 

In March 2010, the FASB issuedaccounting guidance that clarifies the scope exception for embedded creditderivative features related to the transfer of credit risk in the form ofsubordination of one financial instrument to another. The guidance addresseshow to determine which embedded credit derivative features, including those incollateralized debt obligations and synthetic collateralized debt obligations,are considered to be embedded derivatives that should not be analyzed forpotential bifurcation and separate accounting under existing accountingguidance for embedded derivatives.  Theguidance is effective for fiscal quarters beginning after June 15,2010.  The Company is evaluating theimpact of adoption on the Company’s results of operations or financialposition.

 

*Consolidation Analysis Considering Investments Held throughSeparate Accounts*

 

In April 2010, the FASB issued guidanceclarifying that an insurer is not required to combine interests in investmentsheld in a qualifying separate account with its interests in the sameinvestments held in the general account when performing a consolidationevaluation.   The guidance is effectivefor fiscal years and interim periods beginning after December 15, 2010with early adoption permitted.  Theadoption of this guidance is not expected to have a material impact on theCompany’s results of operations or financial position.

 

**2.  Related Party Transaction**

 

In March 2010, in accordance with an asset purchase agreementbetween Road Bay Investments, LLC (“RBI”), a consolidated subsidiary of ALIC,and American HeritageLife Insurance Company (“AHL”), an unconsolidated affiliate of ALIC, AHL sold to RBI mortgage loans with acarrying 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.  Assecurity 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 andinterest in the mortgage loans and their proceeds.  The note due from RBI to AHL is classified asnotes due to related parties in the Condensed Consolidated Statements ofFinancial Position.

 

**3.  Supplemental Cash Flow Information**

 

Non-cash investmentexchanges, including modifications of certain mortgage loans, fixed incomesecurities, and other investments, as well as mergers completed with equitysecurities and limited partnerships, totaled $37 million and $68 million forthe three-month periods ended March 31, 2010 and 2009, respectively.

 

5

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Liabilities forcollateral received in conjunction with the Company’s securities lending andover-the-counter (“OTC”) derivatives are reported in other liabilities andaccrued expenses or other investments in the Condensed Consolidated Statementsof Financial Position.  The accompanyingcash flows are included in cash flows from operating activities in theCondensed Consolidated Statements of Cash Flows along with the activitiesresulting from management of the proceeds, which are as follows:

 
| **($ in  millions)**                                              | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                             | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| **Net change in proceeds managed**                                     |       |                                   |       |   |   |
| Net  change in fixed income securities                                 | $          | —                                 | $          | — |   |
| Net  change in short-term investments                                  |       | 149                                    |       | 79 |   |
| Operating  cash flow provided                                          | $          | 149                                    | $          | 79 |   |
| ** **                                                             |       |                                   |       |   |   |
| **Net change in liabilities**                                          |       |                                   |       |   |   |
| Liabilities  for collateral and security repurchase, beginning of year | $          | (617                                   | )          | $ | (340 | ) |
| Liabilities  for collateral and security repurchase, end of period     |       | (468                                   | )          | (261 | ) |
| Operating  cash flow used                                              | $          | (149                                   | )          | $ | (79 | ) |

 

In March 2010, the Company purchased from anunconsolidated affiliate mortgage loans with a carrying value of $6 million onthe date of sale.  As payment, theCompany issued a note payable to the unconsolidated affiliate (see Note 2).

 

**4. Investments**

 

**Fairvalues**

 

The amortized cost, gross unrealized gains and losses and fair valuefor fixed income securities are as follows:

 
| **($ in millions)**                                   | ** ** | **Amortized** | ** ** | **Gross unrealized** | ** ** | **Fair**   | ** ** |
|------------------------------------------------------------|------------|---------------|------------|----------------------|------------|------------|------------|
| ** **                                                 | ** ** | **cost**      | ** ** | **Gains**            | ** ** | **Losses** | ** ** | **value** | ** ** |
| **At March 31, 2010**                                 |       |          |       |                 |       |       |       |   |   |
| U.S.  government and agencies                              | $          | 3,737         | $          | 173                  | $          | (16        | )          | $ | 3,894 |   |
| Municipal                                                  |       | 5,541         |       | 78                   |       | (425       | )          | 5,194 |   |
| Corporate                                                  |       | 26,938        |       | 1,193                |       | (465       | )          | 27,666 |   |
| Foreign  government                                        |       | 1,991         |       | 269                  |       | (6         | )          | 2,254 |   |
| Residential  mortgage-backed securities (“RMBS”) |       | 5,827         |       | 105                  |       | (875       | )          | 5,057 |   |
| Commercial  mortgage-backed securities (“CMBS”)  |       | 3,093         |       | 42                   |       | (808       | )          | 2,327 |   |
| Asset-backed  securities (“ABS”)                 |       | 2,647         |       | 65                   |       | (463       | )          | 2,249 |   |
| Redeemable  preferred stock                                |       | 16            |       | —               |       | —     |       | 16 |   |
| Total  fixed income securities                             | $          | 49,790        | $          | 1,925                | $          | (3,058     | )          | $ | 48,657 |   |
| ** **                                                 |       |          |       |                 |       |       |       |   |   |
| **At December 31, 2009**                              |       |          |       |                 |       |       |       |   |   |
| 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 |   |
|                                                            |            |               |            |                      |            |            |            |  |  |  |  |

 

6

----

 

**Scheduledmaturities**

 

The scheduled maturities for fixed income securities are as follows at March 31,2010:

 
| **($ in millions)**                | ** ** | **Amortized********cost** | ** ** | **Fair********value** | ** ** |
|-----------------------------------------|------------|---------------------------|------------|-----------------------|------------|
| Due  in one year or less                | $          | 1,379                     | $          | 1,401                 |       |
| Due after one year through five years   |       | 13,837                    |       | 14,310                |       |
| Due  after five years through ten years |       | 10,727                    |       | 11,254                |       |
| Due  after ten years                    |       | 15,373                    |       | 14,386                |       |
|                                    |       | 41,316                    |       | 41,351                |       |
| RMBS  and ABS                           |       | 8,474                     |       | 7,306                 |       |
| Total                                   | $          | 49,790                    | $          | 48,657                |       |

 

Actual maturities may differ from those scheduled as a result ofprepayments by the issuers.  Because ofthe potential for prepayment on RMBS and ABS, they are not categorized bycontractual maturity.  The CMBS arecategorized by contractual maturity because they generally are not subject toprepayment risk.

 

**Netinvestment income**

 

Net investment income is as follows:

 
| **($ in millions)**           | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|
| ** **                         | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Fixed  income securities           | $          | 635                                    | $          | 681 |   |
| Mortgage  loans                    |       | 101                                    |       | 134 |   |
| Equity  securities                 |       | 1                                      |       | 1 |   |
| Limited  partnership interests     |       | 3                                      |       | 2 |   |
| Short-term  investments            |       | 1                                      |       | 7 |   |
| Other                              |       | (8                                     | )          | (6 | ) |
| Investment  income, before expense |       | 733                                    |       | 819 |   |
| Investment  expense                |       | (26                                    | )          | (22 | ) |
| Net  investment income             | $          | 707                                    | $          | 797 |   |

 

**Realizedcapital gains and losses**

 

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

 
| **($ in millions)**           | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|
| ** **                         | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Fixed  income securities           | $          | (91                                    | )          | $ | 144 |   |
| Mortgage  loans                    |       | (25                                    | )          | (32 | ) |
| Equity  securities                 |       | —                                 |       | (25 | ) |
| Limited  partnership interests     |       | (15                                    | )          | (171 | ) |
| Derivatives                        |       | (35                                    | )          | 69 |   |
| Other                              |       | 5                                      |       | (23 | ) |
| Realized  capital gains and losses | $          | (161                                   | )          | $ | (38 | ) |

 

7

----

 

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

 
| **($ in millions)**               | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------|------------|----------------------------------------|------------|
| ** **                             | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Impairment  write-downs                | $          | (142                                   | )          | $ | (352 | ) |
| Change  in intent write-downs          |       | (23                                    | )          | (32 | ) |
| Net OTTI losses recognized in earnings |       | (165                                   | )          | (384 | ) |
| Sales                                  |       | 43                                     |       | 358 |   |
| Valuation  of derivative instruments   |       | (54                                    | )          | 83 |   |
| Settlement  of derivative instruments  |       | 19                                     |       | (18 | ) |
| EMA  limited partnership income        |       | (4                                     | )          | (77 | ) |
| Realized  capital gains and losses     | $          | (161                                   | )          | $ | (38 | ) |

 

Gross gains of $95 million and $406 million and gross losses of $49million and $68 million were realized on sales of fixed income securitiesduring the three months ended March 31, 2010 and 2009, respectively.

 

Other-than-temporaryimpairment losses by asset type for the three months ended March 31, 2010are as follows:

 
| **($ in millions)******            | ** ** | **Total** | ** ** | **Included  in OCI** | ** ** | **Net** | ** ** |
|-----------------------------------------|------------|-----------|------------|----------------------|------------|---------|------------|
| Fixed income securities:                |       |      |       |                 |       |    |       |
| Municipal                               | $          | (20       | )          | $                    | —     | $       | (20        | ) |
| Corporate                               |       | (40       | )          | 2                    |       | (38     | )          |
| RMBS                                    |       | (60       | )          | 13                   |       | (47     | )          |
| CMBS                                    |       | (26       | )          | —               |       | (26     | )          |
| ABS                                     |       | (3        | )          | (1                   | )          | (4      | )          |
| Total fixed income securities           |       | (149      | )          | 14                   |       | (135    | )          |
| Mortgage loans                          |       | (19       | )          | —               |       | (19     | )          |
| Limited partnership interests           |       | (11       | )          | —               |       | (11     | )          |
| Other-than-temporary impairment  losses | $          | (179      | )          | $                    | 14         | $       | (165       | ) |

 

The total amount of other-than-temporary impairment losses included inaccumulated other comprehensive income for fixed income securities, which werenot included in earnings, are presented in the following table.  The amount excludes $189 million and $136million as of March 31, 2010 and December 31, 2009, respectively, ofnet unrealized gains related to changes in valuation of the fixed incomesecurities subsequent to the impairment measurement date.

 
| **($ in  millions)** | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Corporate                 | $          | (18                      | )          | $                           | (18        | ) |
| RMBS                      |       | (338                     | )          | (323                        | )          |
| CMBS                      |       | (121                     | )          | (127                        | )          |
| ABS                       |       | (88                      | )          | (90                         | )          |
| Total                     | $          | (565                     | )          | $                           | (558       | ) |

 

8

----

 

Arollforward of the amount recognized in earnings related to credit losses forfixed income securities is presented in the following table.

 
| **($ in  millions)**                                                                                                                                 |   |   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Beginning  balance at December 31, 2009                                                                                                              | $      | (808   | )      |
| Additional  credit loss for securities previously other-than-temporarily impaired                                                                         |   | (67    | )      |
| Additional  credit loss for securities not previously other-than-temporarily impaired                                                                     |   | (51    | )      |
| Reduction  in credit loss for securities disposed or collected                                                                                            |   | 93     |   |
| Reduction  in credit loss for securities other-than-temporarily impaired to fair value                                                                    |   | — |   |
| 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 |   | — |   |
| Ending  balance at March 31, 2010                                                                                                                    | $      | (833   | )      |

 

TheCompany uses its best estimate of future cash flows expected to be collectedfrom the fixed income security discounted at the security’s original or currenteffective rate, as appropriate, to calculate a recovery value and determinewhether a credit loss exists.  Thedetermination of cash flow estimates is inherently subjective and methodologiesmay vary depending on facts and circumstances specific to the security.  All reasonably available information relevantto the collectability of the security, including past events, current conditions, and reasonableand supportable assumptions and forecasts, are considered when developing theestimate of cash flows expected to be collected.  That information generally includes, but isnot 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 andcurrent subordination levels, vintage, geographic concentration, availablereserves or escrows, third party guarantees and other credit enhancements.  Additionally, other information, such asindustry analyst reports and forecasts, sector credit ratings, financial conditionof the bond insurer for insured fixed income securities, and other market datarelevant to the realizability of contractual cash flows, may also beconsidered.  The estimated fair value ofcollateral may be used to estimate recovery value if the Company determinesthat the security is dependent on the liquidation of collateral for ultimatesettlement.  If the estimated recoveryvalue is less than the amortized cost of the security, a credit loss exists andan other-than-temporary impairment for the difference between the estimatedrecovery value and amortized cost is recorded in earnings.  The unrealized loss deemed to be related tofactors other than credit remains classified in OCI.  If the Company determines that the fixedincome security does not have sufficient cash flow or other information todetermine a recovery value for the security, the Company may conclude that theentire decline in fair value is deemed to be credit related and is recorded inearnings.

 

9

----

 

## **Unrealized net capital gainsand losses**

## ** **

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

 
| **($ in millions)**                       | ** ** | **Fair**  | ** ** | **Gross unrealized** | ** ** | **Unrealized net** | ** ** |
|-----------------------------------------------------|------------|-----------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                          | ** ** | **value** | ** ** | **Gains**                 | ** ** | **Losses**              | ** ** | **gains (losses)** | ** ** |
| **At March 31, 2010**                          |       |      |       |                      |       |                    |       |   |   |   |
| Fixed  income securities (1)                        | $          | 48,657    | $          | 1,925                     | $          | (3,058                  | )          | $ | (1,133 | ) |
| Equity  securities                                  |       | 205       |       | 47                        |       | (3                      | )          | 44 |   |
| Short-term  investments                             |       | 1,037     |       | —                    |       | —                  |       | — |   |
| Derivative  instruments (2)                         |       | (14       | )          | 3                         |       | (16                     | )          | (13 | ) |
| Unrealized  net capital gains and losses, pre-tax   |       |      |       |                      |       |                    |       | (1,102 | ) |
| Amounts  recognized for:                            |       |      |       |                      |       |                    |       |   |   |
| Insurance  reserves (3)                             |       |      |       |                      |       |                    |       | — |   |
| DAC  and DSI (4)                                    |       |      |       |                      |       |                    |       | 727 |   |
| Amounts  recognized                                 |       |      |       |                      |       |                    |       | 727 |   |
| Deferred  income taxes                              |       |      |       |                      |       |                    |       | 126 |   |
| Unrealized  net capital gains and losses, after-tax |       |      |       |                      |       |                    | $          | (249 | ) |

 

----

| (1)    | Unrealized  net capital gains and losses for fixed income securities as of March 31,  2010 comprises $(376) million related to unrealized net capital losses on  fixed income securities with OTTI and $(757) 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 $16 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                            | $          | 47,658     | $          | 1,645                | $          | (3,829             | )          | $ | (2,184 | ) |
| Equity  securities                                  |       | 183        |       | 31                   |       | (7                 | )          | 24 |   |
| Short-term  investments                             |       | 1,669      |       | —               |       | —             |       | — |   |
| Derivative  instruments (1)                         |       | (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) | Included in the fair value of derivative  securities are $(2) million classified as assets and $18 million  classified as liabilities. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------|

 

10

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**Change inunrealized net capital gains and losses**

 

The change in unrealized net capital gains and losses for the threemonths ended March 31, 2010 is as follows:

 

| **($ in millions)**                        | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------|------------|
| Fixed  income securities                             | $          | 1,051      |       |
| Equity  securities                                   |       | 20         |       |
| Short-term  investments                              |       | —     |       |
| Derivative  instruments                              |       | 5          |       |
| Total                                                |       | 1,076      |       |
|                                                 |       |       |       |
| Amounts  recognized for:                             |       |       |       |
| Insurance  reserves                                  |       | —     |       |
| DAC  and DSI                                         |       | (263       | )          |
| Decrease  in amounts recognized                      |       | (263       | )          |
| Deferred  income taxes                               |       | (285       | )          |
| Increase  in unrealized net capital gains and losses | $          | 528        |       |

 

**Portfoliomonitoring**

 

The Company has acomprehensive portfolio monitoring process to identify and evaluate each fixedincome and equity security whose carrying value may be other-than-temporarilyimpaired*.*

 

For each fixed incomesecurity in an unrealized loss position, the Company assesses whethermanagement with the appropriate authority**has made adecision to sell or whether it is more likely than not the Company will berequired to sell the security before recovery of the amortized cost basis forreasons such as liquidity, contractual or regulatory purposes.  If a security meets either of these criteria,the security’s decline in fair value is deemed other than temporary and isrecorded in earnings.

 

If the Company has notmade the decision to sell the fixed income security and it is not more likelythan not the Company will be required to sell the fixed income security beforerecovery of its amortized cost basis, the Company evaluates if it expects toreceive cash flows sufficient to recover the entire amortized cost basis of thesecurity by comparing the estimated recovery value calculated by discountingthe best estimate of future cash flows at the security’s original or currenteffective rate, as appropriate, with the amortized cost of the security.  If the Company does not expect to receivecash flows sufficient to recover the entire amortized cost basis of the fixedincome security, the credit loss component of the impairment is recorded inearnings, with the remaining amount of the unrealized loss deemed to be relatedto other factors and recognized in OCI.

 

For equity securities, the Company considersvarious factors, including whether the Company has the intent and ability tohold the equity security for a period of time sufficient to recover its costbasis.  Where the Company lacks theintent and ability to hold to recovery, or believes the recovery period isextended, the equity security’s decline in fair value is considered other thantemporary and is recorded in earnings. For equity securities managed by a third party, the Company hascontractually retained its decision making authority as it pertains to sellingequity securities that are in an unrealized loss position.

 

The Company’s portfolio monitoring process includes a quarterly reviewof all securities through a screening process which identifies instances wherethe fair value compared to amortized cost for fixed income securities and costfor equity securities is below established thresholds, and also includes themonitoring of other criteria such as ratings, ratings downgrades or paymentdefaults.  The securities identified, inaddition to other securities for which the Company may have a concern, areevaluated for potential other-than-temporary impairment using all reasonablyavailable information relevant to the collectability or recovery of thesecurity.  Inherent in the Company’sevaluation of other-than-temporary impairment for these fixed income and equitysecurities are assumptions and estimates about the financial condition of theissue or issuer and its future earnings potential.  Some of the factors considered in evaluatingwhether a decline in fair value is other than temporary are: 1) the length oftime and extent to which the fair value has been less than amortized cost forfixed income securities, or cost for equity securities; 2) the financialcondition, near-term and long-term prospects of the issue or issuer, includingrelevant industry specific market conditions and trends, geographic locationand implications of rating agency actions and offering prices; and 3) thespecific reasons that a security is in a significant unrealized loss position,including overall market conditions which could affect liquidity.

 

11

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The following table summarizes the gross unrealized losses and fairvalue of fixed income and equity securities by the length of time thatindividual securities have been in a continuous unrealized loss position.

 
| **($ in  millions)**                      | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**      | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|----------------|------------|
| ** **                                     | ** ** | **Number**              | ** ** | **Fair**              | ** ** | **Unrealized** | ** ** | **Number** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** | **unrealized** | ** ** |
| ** **                                     | ** ** | **of issues**           | ** ** | **value**             | ** ** | **losses**     | ** ** | **of issues** | ** ** | **value** | ** ** | **losses** | ** ** | **losses** | ** ** |
| **At March 31, 2010**                     | ** ** | ** **              | ** ** | ** **            | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fixed income securities                        | ** ** | ** **              | ** ** | ** **            | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S. government and agencies                   |       | 37                      | $          | 1,406                 | $          | (16            | )          | — | $ | — | $ | — | $ | (16 | ) |
| Municipal                                      |       | 93                      |       | 1,005                 |       | (25            | )          | 274 |   | 1,953 |   | (400 | ) | (425 | ) |
| Corporate                                      |       | 253                     |       | 3,177                 |       | (91            | )          | 298 |   | 3,968 |   | (374 | ) | (465 | ) |
| Foreign government                             |       | 9                       |       | 439                   |       | (6             | )          | 1 |   | 1 |   | — |   | (6 | ) |
| RMBS                                           |       | 58                      |       | 262                   |       | (3             | )          | 301 |   | 1,627 |   | (872 | ) | (875 | ) |
| CMBS                                           |       | 4                       |       | 46                    |       | (2             | )          | 217 |   | 1,478 |   | (806 | ) | (808 | ) |
| ABS                                            |       | 22                      |       | 183                   |       | (17            | )          | 152 |   | 1,334 |   | (446 | ) | (463 | ) |
| Redeemable preferred stock                     |       | 1                       |       | —                |       | —         |       | — |   | — |   | — |   | — |   |
| Total fixed income securities (1)              |       | 477                     |       | 6,518                 |       | (160           | )          | 1,243 |   | 10,361 |   | (2,898 | ) | (3,058 | ) |
| Equity securities                              |       | 4                       |       | —                |       | —         |       | 2 |   | 27 |   | (3 | ) | (3 | ) |
| Total fixed income and equity securities       |       | 481                     | $          | 6,518                 | $          | (160           | )          | 1,245 | $ | 10,388 | $ | (2,901 | ) | $ | (3,061 | ) |
| ** **                                     |       |                    |       |                  |       |           |       |   |   |   |   |   |   |   |   |
| Investment grade fixed income securities       |       | 428                     | $          | 6,158                 | $          | (129           | )          | 963 | $ | 8,631 | $ | (1,818 | ) | $ | (1,947 | ) |
| Below investment grade fixed income securities |       | 49                      |       | 360                   |       | (31            | )          | 280 |   | 1,730 |   | (1,080 | ) | (1,111 | ) |
| Total fixed income securities                  |       | 477                     | $          | 6,518                 | $          | (160           | )          | 1,243 | $ | 10,361 | $ | (2,898 | ) | $ | (3,058 | ) |
| ** **                                     | ** ** | ** **              |       |                  |       |           |       |   |   |   |   |   |   |   |   |
| **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                  |       | 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 $6 million for the less than 12  month category and $461 million for the 12 months or greater category. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

As of March 31, 2010, $759 million ofunrealized losses are related to securities with an unrealized loss positionless than 20% of cost or amortized cost, the degree of which suggests thatthese securities do not pose a high risk of being other-than-temporarilyimpaired.  Of the $759 million, $663million are related to unrealized losses on investment grade fixed incomesecurities.  Investment grade is definedas a security having a rating of Aaa, Aa, A or Baa from Moody’s, a rating ofAAA, 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 anexternally provided rating is not available, which is consistent with theNational Association of Insurance Commissioners (“NAIC”) rating.  Unrealized losses on investment gradesecurities are principally related to rising interest rates or changes incredit spreads since the securities were acquired.

 

As of March 31, 2010, the remaining$2.30 billion of unrealized losses are related to securities in unrealized losspositions greater than or equal to 20% of cost or amortized cost.  Investment grade securities comprising $1.28billion of these unrealized losses were evaluated based on factors such asdiscounted cash flows, the financial condition and near-term and long-termprospects of the issue or issuer and were determined to have adequate resourcesto fulfill contractual obligations, such as recent financings or bank loans,cash flows from operations, collateral or the position of a subsidiary withrespect to its parent’s bankruptcy.  Ofthe $2.30 billion, $1.02 billion are related to below investment grade fixedincome securities.  Of these amounts,$965 million of the below investment grade fixed income securities had been inan unrealized loss position for a period of twelve or more consecutive monthsas of March 31, 2010.  Unrealizedlosses on below investment grade securities are principally related to RMBS,ABS and CMBS and were the result of wider credit spreads than at initialpurchase which was 

 

12

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largely due to the impact of macroeconomic conditions and credit marketdeterioration on real estate valuations. Securities in an unrealized loss position were evaluatedbased on discounted cash flows and credit ratings, as well as the performanceof the underlying collateral relative to the securities’ positions in thesecurities’ respective capital structure. RMBS and ABS in an unrealized loss position were evaluated with creditenhancements from bond insurers where applicable.  Municipal bonds in an unrealized lossposition were evaluated based on the quality of the underlying security, aswell as with credit enhancements from bond insurers, where applicable.  Unrealized losses on equity securities areprimarily related to equity market fluctuations.

 

As of March 31, 2010, the Company hasnot made a decision to sell and it is not more likely than not the Company willbe required to sell fixed income securities with unrealized losses beforerecovery of the amortized cost basis.  Asof March 31, 2010, the Company had the intent and ability to hold theequity securities with unrealized losses for a period of time sufficient forthem to recover.

 

**Limited partnership impairment**

 

As of March 31, 2010 and December 31, 2009, the carryingvalue of equity method limited partnership interests totaled $475 million and$495 million, respectively.  The Companyrecognizes an impairment loss for equity method investments when evidencedemonstrates that it is other-than-temporarily impaired.  Evidence of a loss in value that is otherthan temporary may include the absence of an ability to recover the carryingamount of the investment or the inability of the investee to sustain anearnings potential that would justify the carrying amount of theinvestment.  The Company had nowrite-downs for the three months ended March 31, 2010 and had write-downsof $5 million for the three months ended March 31, 2009, related to equitymethod limited partnership interests.

 

As of March 31, 2010 and December 31, 2009, the carryingvalue for cost method limited partnership interests was $544 million and $533million, respectively.  To determine ifan other-than-temporary impairment has occurred, the Company evaluates whetheran impairment indicator has occurred in the period that may have a significantadverse effect on the carrying value of the investment.  Impairment indicators may include: actualrecent cash flows received being significantly less than expected cash flows;reduced valuations based on financing completed at a lower value; completedsale of a material underlying investment at a price significantly lower thanexpected; significantly reduced valuations of the investments held by limitedpartnerships; or any other adverse events since the last financial statementsreceived that might affect the fair value of the investee’s capital.  Additionally, the Company uses a screeningprocess to identify those investments whose net asset value is belowestablished thresholds for certain periods of time as well as investments thatare performing below expectations, for further impairment consideration.  If a cost method limited partnership isdeemed other-than-temporarily impaired, the carrying value is written down tofair value, generally estimated to be equivalent to the reported net assetvalue of the underlying funds.  TheCompany had write-downs of $11 million and $89 million for the three monthsended March 31, 2010 and 2009, respectively, related to cost methodinvestments that were other-than-temporarily impaired.

 

**5.  FairValue of Assets and Liabilities**

 

Fair value is defined as the price that wouldbe received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date. The hierarchyfor inputs used in determining fair value maximizes the use of observableinputs and minimizes the use of unobservable inputs by requiring thatobservable inputs be used when available. Assets and liabilities recorded on the Condensed Consolidated Statementsof Financial Position at fair value are categorized in the fair value hierarchybased on the observability of inputs to the valuation techniques as follows:

 

*Level 1:**    *Assets and liabilities whose values are based onunadjusted quoted prices for identical assets or liabilities in an activemarket that the Company can access.

 

*Level 2:***    **Assets and liabilities whose values are based on thefollowing:

 

(a) Quoted prices for similar assets or liabilities in active markets;

(b) Quoted prices for identical or similar assets or liabilities in markets thatare not active; or

(c) Valuation models whose inputs are observable, directly or indirectly, forsubstantially the full term of the asset or liability.

 

13

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*Level 3:**    *Assets and liabilities whose values are based onprices or valuation techniques that require inputs that are both unobservableand significant to the overall fair value measurement.  Unobservable inputs reflect the Company’sestimates of the assumptions that market participants would use in valuing theassets and liabilities.

 

The availability ofobservable inputs varies by instrument. In situations where fair value is based on internally developed pricingmodels or inputs that are unobservable in the market, the determination of fairvalue requires more judgment.  The degreeof judgment exercised by the Company in determining fair value is typicallygreatest for instruments categorized in Level 3.  In many instances, valuation inputs used tomeasure fair value fall into different levels of the fair valuehierarchy.  The category level in thefair value hierarchy is determined based on the lowest level input that issignificant to the fair value measurement in its entirety.  The Company uses prices and inputs that arecurrent as of the measurement date, including during periods of marketdisruption.  In periods of marketdisruption, the ability to observe prices and inputs may be reduced for manyinstruments.

 

The Company has two types of situations where investments are classifiedas Level 3 in the fair value hierarchy. The first is where quotes continue to be received from independentthird-party valuation service providers and all significant inputs are marketobservable; however, there has been a significant decrease in the volume andlevel of activity for the asset when compared to normal market activity suchthat the degree of market observability has declined to a point wherecategorization as a Level 3 measurement is considered appropriate.  Among the indicators considered indetermining whether a significant decrease in the volume and level of activityfor a specific asset has occurred include the level of new issuances in theprimary market, trading volume in the secondary market, level of credit spreadsover historical levels, bid-ask spread, and price consensus among marketparticipants and sources.

 

The second situation where the Company has classified securities in Level3 is where specific inputs significant to the fair value estimation models arenot market observable.  This has occurredin two primarycategories.  The first is for brokerquotes.  The second is for ARS backed bystudent loans for which a key assumption, the anticipated date liquidity willreturn to this market, is not market observable.

 

Certain assets are not carried at fair value on arecurring basis, including investments such as mortgage loans, limitedpartnership interests, bank loans and policy loans.  Accordingly, such investments are only includedin the fair value hierarchy disclosure when the investment is subject toremeasurement at fair value after initial recognition and the resultingremeasurement is reflected in the condensed consolidated financialstatements.  In addition, equity optionsembedded in fixed income securities are not disclosed in the hierarchy withfree-standing derivatives as the embedded derivatives are presented with thehost contract in fixed income securities.  As of March 31, 2010, 76.2% of totalassets are measured at fair value and 0.7% of total liabilities are measured atfair value.

 

In determining fair value, the Companyprincipally uses the market approach which generally utilizes markettransaction data for the same or similar instruments.  To a lesser extent, the Company uses the incomeapproach which involves determining fair values from discounted cash flowmethodologies.  For the majority of Level2 and Level 3 valuations, a combination of market and income approaches isused.

 

*Summaryof significant valuation techniques for assets and liabilities measured at fairvalue on a recurring basis*

 

Level 1 measurements

 

·                  Fixed income securities: Comprise U.S. Treasuries. Valuation is based on unadjusted quoted prices for identical assets inactive markets that the Company can access.

 

·                  Equity securities: Comprise actively traded, exchange-listed U.S. and international equitysecurities. Valuation is based on unadjusted quoted prices for identical assetsin active markets that the Company can access.

 

·                  Short-term: Comprise actively traded money market funds that have daily quoted netasset values for identical assets that the Company can access.

 

·                  Separate account assets: Comprise actively traded mutual funds that have daily quoted net assetvalues for identical assets that the Company can access.  Net asset values for the actively tradedmutual funds in which the separate account assets are invested are obtaineddaily from the fund managers.

 

14

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Level 2 measurements

 

·                  Fixed income securities:

 

*U.S.government and agencies:*  The primary inputs to thevaluation include quoted prices for identical or similar assets in markets thatare not active, contractual cash flows, benchmark yields and credit spreads.

 

*Municipal:* The primary inputs to the valuation include quoted prices for identicalor similar assets in markets that are not active, contractual cash flows,benchmark yields and credit spreads.

 

*Corporate,including privately placed:*  The primaryinputs to the valuation include quoted prices for identical or similar assetsin markets that are not active, contractual cash flows, benchmark yields andcredit spreads.  Also includes privatelyplaced securities valued using a discounted cash flow model that is widelyaccepted in the financial services industry and uses market observable inputsand inputs derived principally from, or corroborated by, observable marketdata.  The primary inputs to thediscounted cash flow model include an interest rate curve, as well as publishedcredit spreads for similar assets in markets that are not active thatincorporate the credit quality and industry sector of the issuer.

 

*Foreigngovernment: *The primary inputs to the valuationinclude quoted prices for identical or similar assets in markets that are notactive,  contractual cash flows,benchmark yields and credit spreads.

 

*RMBS -U.S. government sponsored entities (“U.S. Agency”), Prime residentialmortgage-backed securities (“Prime”) and Alt-A residential mortgage-backedsecurities (“Alt-A”); ABS - auto and student loans:* The primary inputs to the valuation include quoted prices for identicalor similar assets in markets that are not active, contractual cash flows,benchmark yields, prepayment speeds, collateral performance and credit spreads.

 

*Redeemablepreferred stock:*  The primary inputs to the valuation includequoted prices for identical or similar assets in markets that are not active,contractual cash flows, benchmark yields, underlying stock prices and creditspreads.

 

*CMBS:* The primary inputs to the valuation include quoted prices for identicalor 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 identicalor similar assets in markets that are not active.

 

·                  Short-term: The primary inputs to the valuation include quoted prices for identicalor similar assets in markets that are not active, contractual cash flows,benchmark yields and credit spreads.  Forcertain short-term investments, amortized cost is used as the best estimate offair value.

 

·                  Other investments: Free-standing exchange listed derivatives that are not actively tradedare valued based on quoted prices for identical instruments in markets that arenot active.

 

OTC derivatives,including interest rate swaps, foreign currency swaps, foreign exchange forwardcontracts and certain credit default swaps, are valued using models that relyon inputs such as interest rate yield curves, currency rates and counterpartycredit spreads that are observable for substantially the full term of thecontract.  The valuation techniquesunderlying the models are widely accepted in the financial services industryand do not involve significant judgment.

 

·                  Contractholder funds: Derivatives embedded in certain annuity contracts are valued based oninternal models that rely on inputs such as interest rate yield curves andequity index volatility assumptions that are market observable for substantiallythe full term of the contract.  Thevaluation techniques are widely accepted in the financial services industry anddo not include significant judgment.

 

Level 3 measurements

 

·                  Fixed income securities:

 

*Municipal: *Auction rate securities (“ARS”) primarily backed bystudent loans that have become illiquid due to failures in the auction marketare valued using a discounted cash flow model that is widely accepted in thefinancial services industry and uses significant non-market observable inputs,including estimates of 

 

15

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future coupon rates ifauction failures continue, maturity assumptions and illiquidity premium.  Also includes municipal bonds that are notrated by third party credit rating agencies but are generally rated by theNAIC, in addition to other high-yield municipal bonds.  The primary inputs to the valuation of thesemunicipal bonds include quoted prices for identical or similar assets inmarkets that exhibit less liquidity relative to those markets supporting Level2 fair value measurements, contractual cash flows, benchmark yields and creditspreads.

 

*Corporate,including privately placed:*  Valued basedon non-binding broker quotes.  Alsoincludes equity-indexed notes which are valued using a discounted cash flowmodel that is widely accepted in thefinancial services industry and uses significant non-marketobservable inputs, such as volatility.  Otherinputs include an interest rate curve, as well as published credit spreads forsimilar assets that incorporate the credit quality and industry sector of theissuer.

 

*RMBS -Subprime residential mortgage-backed securities (“Subprime”) and Alt-A:* The primary inputs to the valuation include quoted prices for identicalor similar assets in markets that exhibit less liquidity relative to thosemarkets supporting Level 2 fair value measurements, contractual cash flows,benchmark yields, prepayment speeds, collateral performance and creditspreads.  Also includes certain Subprimeand Alt-A that are valued based on non-binding broker quotes.  Due to the reduced availability of actualmarket prices or relevant observable inputs as a result of the decrease inliquidity that has been experienced in the market for these securities,Subprime and certain Alt-A are categorized as Level 3.

 

*Foreigngovernment:*  Valued based on non-binding broker quotes.

 

*CMBS:* The primary inputs to the valuation include quoted prices for identicalor similar assets in markets that exhibit less liquidity relative to thosemarkets supporting Level 2 fair value measurements, contractual cash flows,benchmark yields, collateral performance and credit spreads.  Also includes CMBS that are valued based onnon-binding broker quotes.  Due to thereduced availability of actual market prices or relevant observable inputs as aresult of the decrease in liquidity that has been experienced in the market forthese securities, certain CMBS are categorized as Level 3.

 

*ABS -Collateralized debt obligations (“CDO”): *Valuedbased on non-binding broker quotes received from brokers who are familiar withthe investments.  Due to the reducedavailability of actual market prices or relevant observable inputs as a resultof the decrease in liquidity that has been experienced in the market for thesesecurities, all CDO are categorized as Level 3.

 

*ABS -student loans and other:*  The primary inputs to thevaluation include quoted prices for identical or similar assets in markets thatexhibit less liquidity relative to those markets supporting Level 2 fair valuemeasurements, contractual cash flows, benchmark yields, prepayment speeds,collateral performance and credit spreads. Also includes ABS that are valued based on non-binding broker quotes.  Due to the reduced availability of actualmarket prices or relevant observable inputs as a result of the decrease inliquidity that has been experienced in the market for these securities, certainABS are categorized as Level 3.

 

·                  Other investments: Certain OTC derivatives, such as interest rate caps and floors, certaincredit default swaps and OTC options (including swaptions), are valued usingmodels that are widely accepted in the financial services industry.  Non-market observable inputs such asvolatility assumptions may be significant to the valuation of theinstruments.  Other primary inputsinclude interest rate yield curves and credit spreads.

 

·                  Contractholder funds:  Derivativesembedded in certain annuity contracts are valued internally using models widelyaccepted in the financial services industry that determine a single best estimate of fair value for the embeddedderivatives within a block of contractholder liabilities.  The models use stochastically determined cashflows based on the contractual elements of embedded derivatives and otherapplicable market data.  These are categorizedas Level 3 as a result of thesignificance of non-marketobservable inputs.

 

*Assetsand liabilities measured at fair value on a non-recurring basis*

 

Mortgage loanswritten-down to fair value in connection with recognizing other-than-temporaryimpairments are valued based on the fair value of the underlying collateral.  Limited partnership interests written-down tofair

 

16

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value in connection withrecognizing other-than-temporary impairments are valued using net asset valuesand other sources.

 

Thefollowing table summarizes the Company’s assets and liabilities measured atfair value on a recurring and non-recurring basis as of March 31, 2010:

 
| **($ in millions)**                  | ** ** | **Quoted prices  in active  markets for  identical assets********(Level 1)** | ** ** | **Significant  other  observable  inputs********(Level 2)** | ** ** | **Significant  unobservable  inputs********(Level 3)** | ** ** | **Counterparty  and cash  collateral********netting** | ** ** | **Balance as of********March 31,********2010** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **Assets**                                | ** ** | ** **                                                                   | ** ** | ** **                                                  | ** ** | ** **                                             | ** ** | ** **                                            | ** ** | ** **                                          | ** ** |
| Fixed income securities:                  |       |                                                                         |       |                                                        |       |                                                   |       |                                                  |       |                                                |       |
| U.S. government and agencies              | $          | 1,373                                                                        | $          | 2,521                                                       | $          | —                                                 |       |                                                  | $          | 3,894                                               |       |
| Municipal                                 |       | —                                                                       |       | 4,513                                                       |       | 681                                                    |       |                                                  |       | 5,194                                               |       |
| Corporate                                 |       | —                                                                       |       | 25,699                                                      |       | 1,967                                                  |       |                                                  |       | 27,666                                              |       |
| Foreign government                        |       | —                                                                       |       | 2,254                                                       |       | —                                                 |       |                                                  |       | 2,254                                               |       |
| RMBS                                      |       | —                                                                       |       | 3,670                                                       |       | 1,387                                                  |       |                                                  |       | 5,057                                               |       |
| CMBS                                      |       | —                                                                       |       | 1,294                                                       |       | 1,033                                                  |       |                                                  |       | 2,327                                               |       |
| ABS                                       |       | —                                                                       |       | 349                                                         |       | 1,900                                                  |       |                                                  |       | 2,249                                               |       |
| Redeemable preferred stock                |       | —                                                                       |       | 15                                                          |       | 1                                                      |       |                                                  |       | 16                                                  |       |
| Total fixed income securities             |       | 1,373                                                                        |       | 40,315                                                      |       | 6,969                                                  |       |                                                  |       | 48,657                                              |       |
| Equity securities                         |       | 139                                                                          |       | 35                                                          |       | 31                                                     |       |                                                  |       | 205                                                 |       |
| Short-term investments                    |       | 122                                                                          |       | 915                                                         |       | —                                                 |       |                                                  |       | 1,037                                               |       |
| Other investments:                        |       |                                                                         |       |                                                        |       |                                                   |       |                                                  |       |                                                |       |
| Free-standing derivatives                 |       | —                                                                       |       | 611                                                         |       | 20                                                     | $          | (231                                                  | )          | 400                                                 |       |
| Separate account assets                   |       | 9,059                                                                        |       | —                                                      |       | —                                                 |       |                                                  |       | 9,059                                               |       |
| Other assets                              |       | —                                                                       |       | —                                                      |       | 2                                                      |       |                                                  |       | 2                                                   |       |
| **Total recurring basis assets**          |       | 10,693                                                                       |       | 41,876                                                      |       | 7,022                                                  |       | (231                                                  | )          | 59,360                                              |       |
| Non-recurring basis (1)                   |       | —                                                                       |       | —                                                      |       | 171                                                    |       |                                                  |       | 171                                                 |       |
| **Total assets at fair value**            | $          | 10,693                                                                       | $          | 41,876                                                      | $          | 7,193                                                  | $          | (231                                                  | )          | $                                                   | 59,531     |   |
| % of total assets at fair value           |       | 18.0                                                                         | %          | 70.3                                                        | %          | 12.1                                                   | %          | (0.4                                                  | )%         | 100.0                                               | %          |
| ** **                                |       |                                                                         |       |                                                        |       |                                                   |       |                                                  |       |                                                |       |
| **Liabilities**                           |       |                                                                         |       |                                                        |       |                                                   |       |                                                  |       |                                                |       |
| Contractholder funds:                     |       |                                                                         |       |                                                        |       |                                                   |       |                                                  |       |                                                |       |
| Derivatives embedded in annuity contracts | $          | —                                                                       | $          | (220                                                        | )          | $                                                      | 86         |                                                  |       | $                                                   | (134       | ) |
| Other liabilities:                        |       |                                                                         |       |                                                        |       |                                                   |       |                                                  |       |                                                |       |
| Free-standing derivatives                 |       | —                                                                       |       | (510                                                        | )          | (90                                                    | )          | $                                                     | 209        |                                                | (391       | ) |
| **Total liabilities at fair value**       | $          | —                                                                       | $          | (730                                                        | )          | $                                                      | (4         | )                                                     | $          | 209                                                 | $          | (525 | ) |
| % of total liabilities at fair value      |       | —                                                                       | %          | 139.0                                                       | %          | 0.8                                                    | %          | (39.8                                                 | )%         | 100.0                                               | %          |
|                                           |            |                                                                              |            |                                                             |            |                                                        |            |                                                       |            |                                                     |            |  |  |  |

 

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| (1) | Includes  $147 million of mortgage loans and $24 million of limited partnership  interests written-down to fair value in connection with recognizing  other-than-temporary impairments. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

17

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Thefollowing table summarizes the Company’s assets and liabilities measured atfair value on a recurring and non-recurring basis as of December 31, 2009:

 
| **($ in millions)**                  | ** ** | **Quoted prices  in active  markets for  identical assets  (Level 1)** | ** ** | **Significant  other  observable  inputs********(Level 2)** | ** ** | **Significant  unobservable  inputs********(Level 3)** | ** ** | **Counterparty  and cash  collateral********netting** | ** ** | **Balance as of  December 31,  2009** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------|------------|
| **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                                      | %          |
|                                           |            |                                                                        |            |                                                             |            |                                                        |            |                                                       |            |                                            |            |  |  |  |  |

 

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| (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. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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The following tablepresents the rollforward of Level 3 assets and liabilities held at fair valueon a recurring basis during the three-month period ended March 31, 2010.

 
| **($ in millions)**              | ** ** | ** **                                           | ** ** | ** ** | **Total realized and unrealized  gains (losses) included in:** | ** ** | ** ** | ** **                                              | ** ** | ** **                                                        | ** ** | ** ** | ** **                            | ** ** | ** **                                   | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|------------|----------------------------------------------------------------------------------------------|------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------------------|------------|------------|---------------------------------------|------------|----------------------------------------------|------------|
| ** **                                 | ** ** | **Balance as of  December 31,  2009** | ** ** | ** ** | **Net  income **(1)                                                                     | ** ** | ** ** | **OCI on  Statement of  Financial  Position** | ** ** | **Purchases,  sales, issuances  and settlements,  net** | ** ** | ** ** | **Transfers  into Level 3** | ** ** | **Transfers out  of Level 3** | ** ** | ** ** | **Balance as of  March 31,  2010** | ** ** |
| **Assets**                                 |       |                                                 |       |       |                                                                                         |       |       |                                                    |       |                                                              |       |       |                                  |       |                                         |       |   |   |   |
| Fixed  income securities:                  |       |                                                 |       |       |                                                                                         |       |       |                                                    |       |                                                              |       |       |                                  |       |                                         |       |   |   |   |
| Municipal                                  | $          | 746                                                  |       | $          | (5                                                                                           | )          | $          | 7                                                       | $          | (48                                                               | )          | $          | —                                | $          | (19                                          | )          | $ | 681 |   |
| Corporate                                  |       | 2,020                                                |       |       | (16                                                                                          | )          |       | 91                                                      |       | (56                                                               | )          |       | 3                                     |       | (75                                          | )          |   | 1,967 |   |
| Foreign  government                        |       | 20                                                   |       |       | —                                                                                       |       |       | —                                                  |       | (20                                                               | )          |       | —                                |       | —                                       |       |   | — |   |
| RMBS                                       |       | 1,052                                                |       |       | (40                                                                                          | )          |       | 109                                                     |       | 266                                                               |       |       | —                                |       | —                                       |       |   | 1,387 |   |
| CMBS                                       |       | 1,322                                                |       |       | (34                                                                                          | )          |       | 109                                                     |       | (179                                                              | )          |       | 24                                    |       | (209                                         | )          |   | 1,033 |   |
| ABS                                        |       | 1,710                                                |       |       | 5                                                                                            |       |       | 86                                                      |       | 99                                                                |       |       | —                                |       | —                                       |       |   | 1,900 |   |
| Redeemable  preferred stock                |       | 1                                                    |       |       | —                                                                                       |       |       | —                                                  |       | —                                                            |       |       | —                                |       | —                                       |       |   | 1 |   |
| Total  fixed income securities             |       | 6,871                                                |       |       | (90                                                                                          | )          |       | 402                                                     |       | 62                                                                |       |       | 27                                    |       | (303                                         | )          |   | 6,969 |   |
| Equity  securities                         |       | 27                                                   |       |       | —                                                                                       |       |       | 2                                                       |       | 2                                                                 |       |       | —                                |       | —                                       |       |   | 31 |   |
| Other  investments:                        |       |                                                 |       |       |                                                                                         |       |       |                                                    |       |                                                              |       |       |                                  |       |                                         |       |   |   |   |
| Free-standing  derivatives, net            |       | (53                                                  | )          |       | (24                                                                                          | )          |       | —                                                  |       | 7                                                                 |       |       | —                                |       | —                                       |       |   | (70 | )(2) |
| Other  assets                              |       | 2                                                    |       |       | —                                                                                       |       |       | —                                                  |       | —                                                            |       |       | —                                |       | —                                       |       |   | 2 |   |
| **Total recurring****Level 3 assets**      | $          | 6,847                                                |       | $          | (114                                                                                         | )          | $          | 404                                                     | $          | 71                                                                |       | $          | 27                                    | $          | (303                                         | )          | $ | 6,932 |   |
|                                       |       |                                                 |       |       |                                                                                         |       |       |                                                    |       |                                                              |       |       |                                  |       |                                         |       |   |   |   |
| **Liabilities**                            |       |                                                 |       |       |                                                                                         |       |       |                                                    |       |                                                              |       |       |                                  |       |                                         |       |   |   |   |
| Contractholder  funds:                     |       |                                                 |       |       |                                                                                         |       |       |                                                    |       |                                                              |       |       |                                  |       |                                         |       |   |   |   |
| Derivatives  embedded in annuity contracts | $          | (110                                                 | )          | $          | 194                                                                                          |       | $          | —                                                  | $          | 2                                                                 |       | $          | —                                | $          | —                                       |       | $ | 86 |   |
| **Total recurring****Level 3 liabilities** | $          | (110                                                 | )          | $          | 194                                                                                          |       | $          | —                                                  | $          | 2                                                                 |       | $          | —                                | $          | —                                       |       | $ | 86 |   |

 

----

| (1)    | The  effect to net income totals $80 million and is reported in the Condensed  Consolidated Statements of Operations as follows: $(144) million in realized  capital gains and losses, $29 million in net investment income,  $(1) million in interest credited to contractholder funds and $(194)  million in contract benefits. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                   |
| (2)    | Comprises $20 million of assets and $(90)  million of liabilities.                                                                                                                                                                                                                                                                     |

 

Transfers between levelcategorizations may occur due to changes in the availability of marketobservable inputs, which generally are caused by changes in market conditionssuch as liquidity, trading volume or bid-ask spreads.  Transfers between level categorizations mayalso occur due to changes in the valuation source.  For example, in situations where a fair valuequote is not provided by the Company’s independent third-party valuationservice provider and as a result the price is stale or has been replaced with abroker quote, the security is transferred into Level 3.  Transfers in and out of level categorizationsare reported as having occurred at the beginning of the quarter in which thetransfer occurred.  Therefore, for alltransfers into Level 3, all realized and changes in unrealized gains and lossesin the quarter of transfer are reflected in the Level 3 rollforward table.

 

There were no transfersbetween Level 1 and Level 2 during the three months ended March 31, 2010.

 

During the three monthsended March 31, 2010, certain CMBS were transferred into Level 2 fromLevel 3 as a result of increased liquidity in the market and the availability ofmarket observable quoted prices for similar assets.  Whentransferring these securities into Level 2, the Company does not change thesource of fair value estimates or modify the estimates received fromindependent third-party valuation service providers or the internal valuationapproach.  Accordingly, for securitiesincluded within this group, there was no change in fair value resulting in arealized or unrealized gain or loss.

 

Transfers intoLevel 3 during the three months ended March 31, 2010 included situationswhere a fair value quote is not provided by the Company’s independentthird-party valuation service provider and as a result the price is stale orhas been replaced with a broker quote resulting in the security beingclassified as Level 3.  Transfers out ofLevel 3 during the three-months ended March 31, 2010 also includedsituations where a broker quote was used in the prior period and a fair valuequote is now available from the Company’s independent third-party valuationservice provider.  A quote utilizing thenew pricing source is not available as of the prior period, and any gains orlosses related to the change in valuation source for individual securities arenot significant.

 

19

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The following tableprovides the total gains and (losses) included in net income during thethree-months ended March 31, 2010 for Level 3 assets and liabilities stillheld at March 31, 2010.

 

| **($ in millions)**              | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------|------------|
| **Assets**                                 |       |       |       |
| Fixed  income securities:                  |       |       |       |
| Municipal                                  | $          | (4         | )          |
| Corporate                                  |       | (18        | )          |
| Foreign  government                        |       | —     |       |
| RMBS                                       |       | (39        | )          |
| CMBS                                       |       | (23        | )          |
| ABS                                        |       | —     |       |
| Redeemable  preferred stock                |       | —     |       |
| Total  fixed income securities             |       | (84        | )          |
| Equity  securities                         |       | —     |       |
| Other  investments:                        |       |       |       |
| Free-standing  derivatives, net            |       | (18        | )          |
| Other  assets                              |       | —     |       |
| **Total recurring Level 3 assets**         | $          | (102       | )          |
|                                       |       |       |       |
| **Liabilities**                            |       |       |       |
| Contractholder  funds:                     |       |       |       |
| Derivatives  embedded in annuity contracts | $          | 194        |       |
| **Total recurring Level 3 liabilities**    | $          | 194        |       |

 

The amounts in the table above represent gains and losses included innet income for the period of time during the three-months ended March 31,2010 that the asset or liability was determined to be in Level 3.  These gains and losses total $92 millionand are reported in the Condensed Consolidated Statements of Operations as follows:$(130) million in realized capital gains and losses, $28 million innet investment income, and $(194) million in contract benefits.

 

20

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The following table presents the rollforwardof Level 3 assets and liabilities held at fair value on a recurring basisduring the three-month period ended March 31, 2009.

 
| **($ in millions)**                   | ** ** | ** **                                           | ** ** | ** ** | **Total  realized and unrealized  gains (losses) included in:** | ** ** | ** ** | ** **                                              | ** ** | ** **                                                        | ** ** | ** ** | ** **                                                          | ** ** | **Total  gains (losses)  included in net  income for  assets and** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|------------|-----------------------------------------------------------------|------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------------------|------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Balance as of  December 31,  2008** | ** ** | ** ** | **Net income **(1)                                    | ** ** | ** ** | **OCI on  Statement of  Financial  Position** | ** ** | **Purchases, sales,  issuances and  settlements,  net** | ** ** | ** ** | **Net  transfers in  and/or (out)  of Level 3** | ** ** | **Balance as of  March 31,  2009**                                           | ** ** | ** ** | **liabilities  still held at  March 31,  2009 **(3) | ** ** |
| **Assets**                                 |       |                                                 |       |       |                                                            |       |       |                                                    |       |                                                              |       |       |                                                                |       |                                                                                        |       |   |   |   |
| Fixed  income securities:                  |       |                                                 |       |       |                                                            |       |       |                                                    |       |                                                              |       |       |                                                                |       |                                                                                        |       |   |   |   |
| Municipal                                  | $          | 703                                                  |       | $          | —                                                          |       | $          | (19                                                     | )          | $                                                                 | (7         | )          | $                                                                   | (44        | )                                                                                           | $          | 633 |   | $ | — |   |
| Corporate                                  |       | 9,867                                                |       |       | (52                                                             | )          |       | 56                                                      |       | (324                                                              | )          |       | (51                                                                 | )          | 9,496                                                                                       |       |   | (48 | ) |
| RMBS                                       |       | 1,811                                                |       |       | 6                                                               |       |       | (219                                                    | )          | (48                                                               | )          |       | —                                                              |       | 1,550                                                                                       |       |   | 1 |   |
| CMBS                                       |       | 410                                                  |       |       | (32                                                             | )          |       | (82                                                     | )          | (15                                                               | )          |       | 438                                                                 |       | 719                                                                                         |       |   | (16 | ) |
| ABS                                        |       | 1,341                                                |       |       | (129                                                            | )          |       | 4                                                       |       | (114                                                              | )          |       | (46                                                                 | )          | 1,056                                                                                       |       |   | (130 | ) |
| Redeemable  preferred stock                |       | 1                                                    |       |       | —                                                          |       |       | —                                                  |       | —                                                            |       |       | —                                                              |       | 1                                                                                           |       |   | — |   |
| Total  fixed income securities             |       | 14,133                                               |       |       | (207                                                            | )          |       | (260                                                    | )          | (508                                                              | )          |       | 297                                                                 |       | 13,455                                                                                      |       |   | (193 | ) |
| Equity  securities                         |       | 27                                                   |       |       | —                                                          |       |       | (1                                                      | )          | —                                                            |       |       | —                                                              |       | 26                                                                                          |       |   | — |   |
| Other  investments:                        |       |                                                 |       |       |                                                            |       |       |                                                    |       |                                                              |       |       |                                                                |       |                                                                                        |       |   |   |   |
| Free-standing  derivatives, net            |       | (93                                                  | )          |       | (9                                                              | )          |       | —                                                  |       | (50                                                               | )          |       | —                                                              |       | (152                                                                                        | )(2)       |   | 8 |   |
| Other  assets                              |       | 1                                                    |       |       | 2                                                               |       |       | —                                                  |       | —                                                            |       |       | —                                                              |       | 3                                                                                           |       |   | 2 |   |
| **Total recurring****Level 3 assets**      | $          | 14,068                                               |       | $          | (214                                                            | )          | $          | (261                                                    | )          | $                                                                 | (558       | )          | $                                                                   | 297        | $                                                                                           | 13,332     |   | $ | (183 | ) |
|                                       |       |                                                 |       |       |                                                            |       |       |                                                    |       |                                                              |       |       |                                                                |       |                                                                                        |       |   |   |   |
| **Liabilities**                            |       |                                                 |       |       |                                                            |       |       |                                                    |       |                                                              |       |       |                                                                |       |                                                                                        |       |   |   |   |
| Contractholder  funds:                     |       |                                                 |       |       |                                                            |       |       |                                                    |       |                                                              |       |       |                                                                |       |                                                                                        |       |   |   |   |
| Derivatives  embedded in annuity contracts | $          | (265                                                 | )          | $          | (25                                                             | )          | $          | —                                                  | $          | (1                                                                | )          | $          | —                                                              | $          | (291                                                                                        | )          | $ | (25 | ) |
| **Total recurring****Level 3 liabilities** | $          | (265                                                 | )          | $          | (25                                                             | )          | $          | —                                                  | $          | (1                                                                | )          | $          | —                                                              | $          | (291                                                                                        | )          | $ | (25 | ) |
|                                            |            |                                                      |            |            |                                                                 |            |            |                                                         |            |                                                                   |            |            |                                                                     |            |                                                                                             |            |  |  |  |  |  |

 

----

| (1)    | The  effect to net income totals $(239) million and is reported in the  Condensed Consolidated Statements of Operations as follows:  $(249) million in realized capital gains and losses,  $36 million in net investment income, $1 million in interest  credited to contractholder funds and $25 million in contract benefits.                                                                                   |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (2)    | Comprises  $11 million of assets and $(163) 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 $(208) million and are  reported in the Condensed Consolidated Statements of Operations as follows:  $(219) million in realized capital gains and losses, $36 million in  net investment income and $25 million in contract benefits. |

 

Presented below are the carrying values andfair value estimates of financial instruments not carried at fair value.

 

**Financial assets**

 
| **($ in millions)**                   | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                 | ** ** | **Carrying  value**     | ** ** | **Fair  value**            | ** ** | **Carrying  value** | ** ** | **Fair  value** | ** ** |
| Mortgage loans                             | $          | 7,491                   | $          | 6,205                      | $          | 7,780 | $ | 6,220 |   |
| Limited partnership interests - cost basis |       | 544                     |       | 550                        |       | 533 |   | 521 |   |
| Bank loans                                 |       | 352                     |       | 335                        |       | 359 |   | 329 |   |
| Notes due from related party               |       | 275                     |       | 248                        |       | 275 |   | 233 |   |

 

The fair value of mortgage loans is based ondiscounted contractual cash flows or, if the loans are impaired due to creditreasons, the fair value of collateral less costs to sell.  Risk adjusted discount rates are selectedusing current rates at which similar loans would be made to borrowers withsimilar characteristics, using similar types of properties as collateral.  The fair value of limited partnershipinterests accounted for on the cost basis is determined using reported netasset values of the underlying funds. The fair value of bank loans, which are reported in other investments onthe Condensed Consolidated Statements of Financial Position, are valued basedon broker quotes from brokers familiar with the loans and current marketconditions.  The fair value of notes duefrom related party is based on discounted cash flow calculations using currentinterest rates for instruments with comparable terms.

 

21

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**Financial liabilities**

 
| **($ in millions)**                     | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                   | ** ** | **Carrying   value**    | ** ** | **Fair   value**           | ** ** | **Carrying   value** | ** ** | **Fair   value** | ** ** |
| Contractholder funds on investment contracts | $          | 38,163                  | $          | 37,037                     | $          | 39,824 | $ | 38,196 |   |
| Notes due to related parties                 |       | 681                     |       | 644                        |       | 675 |   | 611 |   |
| Liability for collateral                     |       | 468                     |       | 468                        |       | 617 |   | 617 |   |

 

The fair value of contractholder funds oninvestment contracts is based on the terms of the underlying contractsutilizing prevailing market rates for similar contracts adjusted for credit risk.  Deferred annuities included in contractholderfunds are valued using discounted cash flow models which incorporate marketvalue margins, which are based on the cost of holding economic capital, and theCompany’s own credit risk.  Immediateannuities without life contingencies and fixed rate funding agreements arevalued at the present value of future benefits using market implied interestrates which include the Company’s own credit risk.

 

The fair value of notes due to relatedparties is based on discounted cash flow calculations using current interestrates for instruments with comparable terms and considers the Company’s owncredit risk.  The liability forcollateral is valued at carrying value due to its short-term nature.

 

**6. Derivative Financial Instruments**

 

The Company primarily uses derivatives forrisk management and asset replication. In addition, the Company has derivatives embedded in non-derivative “host”contracts, which are required to be separated from the host contracts andaccounted for at fair value as derivative instruments.  With the exception of non-hedge derivativesused for asset replication and non-hedge embedded derivatives, all of theCompany’s derivatives are evaluated for their ongoing effectiveness as eitheraccounting hedge or non-hedge derivative financial instruments on at least aquarterly basis.  The Company does notuse derivatives for trading purposes. Non-hedge accounting is generally used for “portfolio” level hedgingstrategies where the terms of the individual hedged items do not meet thestrict homogeneity requirements to permit the application of hedge accounting.

 

The Company uses derivatives to partiallymitigate potential adverse impacts from increases in credit spreads.  Credit default swaps are typically used tomitigate the credit risk within the Company’s fixed income portfolio.  The Company uses foreign currency swapsprimarily to reduce the foreign currency risk associated with issuing foreigncurrency denominated funding agreements and holding foreign currencydenominated investments.

 

Asset-liability management is a risk management strategy thatis principally employed to balance the respective interest-rate sensitivitiesof the Company’s assets and liabilities. Depending upon the attributes of the assets acquired and liabilitiesissued, derivative instruments such as interest rate swaps, caps, floors andfutures are acquired to change the interest rate characteristics of existingassets and liabilities to ensure the relationship is maintained within specifiedranges and to reduce exposure to rising or falling interest rates. The Companyuses financial futures and interest rate swaps to hedge anticipatedasset purchases and liability issuances andfinancial futures and options for hedging the Company’s equity exposurecontained in equity indexed annuity product contracts that offer equity returnsto contractholders.  In addition, the Company also uses interestrate swaps to hedge interest rate risk inherent in funding agreements.

 

When derivatives meet specific criteria, they may be designated asaccounting hedges and accounted for as fair value, cash flow, foreign currencyfair value or foreign currency cash flow hedges.  The Company designates certain of its interestrate and foreign currency swap contracts and certain investment risktransfer reinsurance agreements as fair value hedges when the hedginginstrument is highly effective in offsetting the risk of changes in the fairvalue of the hedged item.  The Companydesignates certain of its foreign currency swap contracts as cash flow hedgeswhen the hedging instrument is highly effective in offsetting the exposure ofvariations in cash flows for the hedged risk that could affect net income.  Amounts are reclassified to net investmentincome or realized capital gains and losses as the hedged item affects netincome.

 

Asset replicationrefers to the “synthetic” creation of assets through the use of derivatives andprimarily investment grade host bonds to replicate securities that are eitherunavailable in the cash markets or more economical to acquire in syntheticform.  The Company replicates fixedincome securities using a combination of a 

 

22

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credit default swap andone or more highly rated fixed income securities to synthetically replicate theeconomic characteristics of one or more cash market securities.

 

The Company’s primaryembedded derivatives are conversion options in fixed income securities, whichprovide the Company with the right to convert the instrument into apredetermined number of shares of common stock; equity options in annuityproduct contracts, which provide equity returns to contractholders; andequity-indexed notes containing equity call options, which provide a couponpayout that is determined using one or more equity-based indices.

 

The notional amountsspecified in the contracts are used to calculate the exchange of contractualpayments under the agreements and are generally not representative of thepotential for gain or loss on these agreements. However, the notional amounts specified in selling protection creditdefault swaps represent the maximum amount of potential loss, assuming norecoveries.

 

Fair value, which is equal to the carryingvalue, is the estimated amount that the Company would receive (pay) toterminate the derivative contracts at the reporting date.  The carrying value amounts for OTCderivatives have been further adjusted for the effects, if any, of legallyenforceable master netting agreements and are presented on a net basis in theCondensed Consolidated Statements of Financial Position.  For certain exchange traded derivatives, theexchange requires margin deposits as well as daily cash settlements of marginaccounts.  As of March 31, 2010, theCompany pledged $10 million of securities and cash in the form of margindeposits.

 

The net impact to pre-tax income forderivatives includesvaluation and settlements of derivatives. For those derivatives which qualify for fair value hedge accounting, netincome includes the changes in the fair value of the hedged risk, and thereforereflects any hedging ineffectiveness. For cash flow hedges, gains and losses amortized from accumulated othercomprehensive income are reported in net income.  For embedded derivatives in convertible fixedincome securities and equity-indexed notes, net income includes the change infair value of the embedded derivative and accretion income related to the hostinstrument.  For non-hedge derivatives,net income includes changes in fair value and accrued periodic settlements.

 

23

----

 

The following table provides a summary of thevolume andfair value positions of derivative instruments as well as their reportinglocation in the Condensed Consolidated Statements of Financial Position at March 31,2010.

 
| **($ in millions, except number of contracts)** | ** ** | **Asset derivatives**           | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                    | ** ** | ** **                           | ** ** | **Volume ****(1)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | **Balance sheet location** | ** ** | **Notional  amount** | ** ** | **Number   of   contracts** | ** ** | **Fair  value,  net** | ** ** | **Gross   asset** | ** ** | **Gross  liability** | ** ** |
| **Derivatives designated as  accounting hedging instruments**                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate swap agreements                                                 |       | Other investments                    | $          |   | 63 |   | n/a | $ |   | (6 | ) | $ |   | — | $ |   | (6 | ) |
| Foreign currency swap agreements                                              |       | Other investments                    |       | 41 |   | n/a |   | 3 |   |   | 3 |   | — |   |
| Foreign currency and interest rate swap agreements                            |       | Other investments                    |       | 288 |   | n/a |   | 28 |   |   | 28 |   | — |   |
| Total                                                                         |       |                                 | $          |   | 392 |   | n/a | $ |   | 25 |   | $ |   | 31 | $ |   | (6 | ) |
|                                                                          |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |
| **Derivatives not designated as  accounting****hedging instruments**          |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |
| **Interest rate contracts**                                                   |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate swap agreements                                                 |       | Other investments                    | $          |   | 707 |   | n/a | $ |   | 35 |   | $ |   | 43 | $ |   | (8 | ) |
| Interest rate cap and floor agreements                                        |       | Other investments                    |       | 251 |   | n/a |   | 5 |   |   | 5 |   | — |   |
| **Equity and index contracts**                                                |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |
| Options, financial futures and warrants (2)                              |       | Other investments                    |       | 55 |   | 19,950 |   | 360 |   |   | 360 |   | — |   |
| Options, financial futures and warrants                                       |       | Other assets                         |       | n/a |   | 20 |   | — |   |   | — |   | — |   |
| **Foreign currency contracts**                                                |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |
| Foreign currency swap agreements                                              |       | Other investments                    |       | 54 |   | n/a |   | 5 |   |   | 5 |   | — |   |
| **Embedded derivative financial  instruments**                                |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |
| Conversion options in fixed income securities                                 |       | Fixed income securities              |       | 310 |   | n/a |   | 114 |   |   | 114 |   | — |   |
| Equity-indexed call options in fixed income  securities                       |       | Fixed income securities              |       | 475 |   | n/a |   | 85 |   |   | 85 |   | — |   |
| **Credit default contracts**                                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |
| Credit Default Swaps - Buying Protection                                      |       | Other investments                    |       | 56 |   | n/a |   | (1 | ) |   | — |   | (1 | ) |
| Credit Default Swaps - SellingProtection                                      |       | Other investments                    |       | 136 |   | n/a |   | (28 | ) |   | — |   | (28 | ) |
| **Other contracts**                                                           |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |
| Other contracts                                                               |       | Other investments                    |       | 40 |   | n/a |   | — |   |   | — |   | — |   |
| Other contracts                                                               |       | Other assets                         |       | 6 |   | n/a |   | 2 |   |   | 2 |   | — |   |
| Total                                                                         |       |                                 | $          |   | 2,090 |   | 19,970 | $ |   | 577 |   | $ |   | 614 | $ |   | (37 | ) |
|                                                                          |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |
| **Total derivative assets**                                                   |       |                                 | $          |   | 2,482 |   | 19,970 | $ |   | 602 |   | $ |   | 645 | $ |   | (43 | ) |

 

----

(1)          Volume for OTCderivative contracts is represented by their notional amounts.  Volume for exchange traded derivatives isrepresented by the number of contracts which is the basis on which they aretraded.  (n/a = not applicable)

 

(2)          In addition to thenumber of contracts presented in the table, the Company held 837,100 stockwarrants.  Stock warrants can beconverted to cash upon sale of those instruments or exercised for shares ofcommon stock.

 

24

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| **($ in millions, except number of contracts)** | ** ** | **Liability derivatives**                | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                    | ** ** | ** **                                    | ** ** | **Volume ****(1)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | **Balance sheet location**          | ** ** | **Notional  amount** | ** ** | **Number   of   contracts** | ** ** | **Fair  value,  net** | ** ** | **Gross   asset** | ** ** | **Gross   liability** | ** ** |
| **Derivatives designated as  accounting hedging instruments**                 |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| Interest rate swap agreements                                                 |       | Other liabilities & accrued expenses | $          | 4,019 |   | n/a | $ | (214 | ) | $ | — | $ | (214 | ) |
| Foreign currency swap agreements                                              |       | Other liabilities & accrued expenses |       | 161 |   | n/a |   | (17 | ) |   | 1 |   | (18 | ) |
| Foreign currency and interest rate swap agreements                            |       | Other liabilities & accrued expenses |       | 267 |   | n/a |   | 82 |   |   | 82 |   | — |   |
| Foreign currency and interest rate swap agreements                            |       | Contractholder funds                          |       | — |   | n/a |   | 13 |   |   | 13 |   | — |   |
| Total                                                                         |       |                                          | $          | 4,447 |   | n/a | $ | (136 | ) | $ | 96 | $ | (232 | ) |
|                                                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |
| **Derivatives not designated as  accounting hedging instruments**             |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |
| **Interest rate contracts**                                                   |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate swap agreements                                                 |       | Other liabilities & accrued expenses | $          | 5,102 |   | n/a | $ | 7 |   | $ | 66 | $ | (59 | ) |
| Interest rate swaption agreements                                             |       | Other liabilities & accrued expenses |       | 1,000 |   | n/a |   | 8 |   |   | 8 |   | — |   |
| Interest rate cap and floor agreements                                        |       | Other liabilities & accrued expenses |       | 3,502 |   | n/a |   | (29 | ) |   | 1 |   | (30 | ) |
| Financial futures contracts and options                                       |       | Other liabilities & accrued expenses |       | n/a |   | 727 |   | — |   |   | — |   | — |   |
| **Equity and index contracts**                                                |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |
| Options, financial futures and warrants                                       |       | Other liabilities & accrued expenses |       | 60 |   | 19,953 |   | (179 | ) |   | 3 |   | (182 | ) |
| **Foreign currency contracts**                                                |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |
| Foreign currency swap agreements                                              |       | Other liabilities & accrued expenses |       | 49 |   | n/a |   | 3 |   |   | 3 |   | — |   |
| **Embedded derivative financial****instruments**                              |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |
| Guaranteed accumulation benefits                                              |       | Contractholder funds                          |       | 1,125 |   | n/a |   | (56 | ) |   | — |   | (56 | ) |
| Guaranteed withdrawal benefits                                                |       | Contractholder funds                          |       | 808 |   | n/a |   | (32 | ) |   | — |   | (32 | ) |
| Equity-indexed options in life and annuity product  contracts                 |       | Contractholder funds                          |       | 4,282 |   | n/a |   | (220 | ) |   | — |   | (220 | ) |
| Other embedded derivative financial instruments                               |       | Contractholder funds                          |       | 85 |   | n/a |   | (2 | ) |   | — |   | (2 | ) |
| **Credit default contracts**                                                  |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |
| Credit Default Swaps - BuyingProtection                                       |       | Other liabilities & accrued expenses |       | 367 |   | n/a |   | (11 | ) |   | 5 |   | (16 | ) |
| Credit Default Swaps - SellingProtection                                      |       | Other liabilities & accrued expenses |       | 516 |   | n/a |   | (33 | ) |   | 5 |   | (38 | ) |
| Total                                                                         |       |                                          | $          | 16,896 |   | 20,680 | $ | (544 | ) | $ | 91 | $ | (635 | ) |
|                                                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |
| **Total derivative liabilities**                                              |       |                                          | $          | 21,343 |   | 20,680 | $ | (680 | ) | $ | 187 | $ | (867 | ) |
|                                                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |
| **Total derivatives**                                                         |       |                                          | $          | 23,825 |   | 40,650 | $ | (78 | ) |   |   |   |   |   |

 

----

(1)          Volume for OTCderivative contracts is represented by their notional amounts.  Volume for exchange traded derivatives isrepresented by the number of contracts which is the basis on which they aretraded.  (n/a = not applicable)

 

25

----

 

The following table provides a summary of thevolume andfair value positions of derivative instruments as well as their reportinglocation in the Consolidated Statements of Financial Position at December 31,2009.

 
| **($ in millions, except number of contracts)** | ** ** | **Asset derivatives**           | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                    | ** ** | ** **                           | ** ** | **Volume ****(1)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | **Balance sheet location** | ** ** | **Notional  amount** | ** ** | **Number   of  contracts** | ** ** | **Fair  value,  net** | ** ** | ** ** | **Gross   asset** | ** ** | **Gross   liability** | ** ** |
| **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, financial futures and warrants (2)                                   |       | Other investments                    |       | 62 |   | 19,850 |   | 385 |   |   | 385 |   | — |   |
| Options, financial 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 - SellingProtection                                      |       | 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 OTCderivative contracts is represented by their notional amounts.  Volume for exchange traded derivatives isrepresented by the number of contracts which is the basis on which they aretraded.  (n/a = not applicable)

 

(2)          In addition to thenumber of contracts presented in the table, the Company held 837,100 stockwarrants.  Stock warrants can beconverted to cash upon sale of those instruments or exercised for shares ofcommon stock.

 

26

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| **($ in millions, except number of contracts)** | ** ** | **Liability derivatives**                | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                    | ** ** | ** **                                    | ** ** | **Volume ****(1)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | **Balance sheet location**          | ** ** | **Notional   amount** | ** ** | **Number   of   contracts** | ** ** | **Fair  value,  net** | ** ** | **Gross   asset** | ** ** | **Gross   liability** | ** ** |
| **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, financial 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 - BuyingProtection                                       |       | Other liabilities & accrued expenses |       | 550 |   | n/a |   | (29 | ) |   | 4 |   | (33 | ) |
| Credit Default Swaps - SellingProtection                                      |       | 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 OTCderivative contracts is represented by their notional amounts.  Volume for exchange traded derivatives isrepresented by the number of contracts which is the basis on which they aretraded.  (n/a = not applicable)

 

The following table provides a summary of theimpacts of the Company’s foreign currency contracts in cash flow hedgingrelationships in the Condensed Consolidated Statements of Operations and the CondensedConsolidated Statements of Financial Position for the three-month periods endedMarch 31.  Amortization of net gainsfrom accumulated other comprehensive income related to cash flow hedges isexpected to be less than $1 million during the next twelve months.

 
| **($ in millions)**                                                              | ** ** | **2010**     | ** ** | **2009** | ** **   |
|--------------------------------------------------------------------------------------------|------------|--------------|------------|----------|--------------|
| **Effective portion**                                                                      |       |         |       |     |         |
| Gain  recognized in OCI on derivatives during the period                                   | $          |  6      |       | $        |  4      |   |
| (Loss)  gain recognized in OCI on derivatives during the term of the hedging  relationship | $          |  (13    | )          | $        |  20     |   |
| Gain  reclassified from AOCI into income (net investment income)                           | $          |  1      |       | $        |  1      |   |
| Gain  reclassified from AOCI into income (realized capital gains and losses)               | $          |  — |       | $        |  — |   |
| **Ineffective portion and amount excluded from  effectiveness testing**                    |       |         |       |     |         |   |
| Gain  recognized in income on derivatives (realized capital gains and losses)              | $          |  — |       | $        |  — |   |

 

27

----

 

The following table presentsgains and losses from valuation, settlements and hedge ineffectiveness reportedon derivatives used in fair value hedging relationships and derivatives notdesignated as accounting hedging instruments in the Condensed ConsolidatedStatements of Operations.

 
| **($ in millions)**                                          | ** ** | **Three months ended  March 31, 2010** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                        | ** ** | **Net  investment  income**                 | ** ** | ** ** | **Realized  capital  gains and  losses** | ** ** | ** ** | **Contract  benefits** | ** ** | ** ** | **Interest  credited to  contractholder  funds** | ** ** | ** ** | **Total gain  (loss)  recognized  in net  income on  derivatives** | ** ** |
| **Derivatives in fair value  accounting hedging relationships**   |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate contracts                                           | $          | (41                                         | )          | $ | — |   | $ | — |   | $ | (1 | ) | $ | (42 | ) |
| Foreign currency and  interest rate contracts                     |       | —                                      |       |   | — |   |   | — |   |   | (24 | ) |   | (24 | ) |
| Subtotal                                                          |       | (41                                         | )          |   | — |   |   | — |   |   | (25 | ) |   | (66 | ) |
|                                                              |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Derivatives not designated as  accounting hedging instruments** |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate contracts                                           |       | —                                      |       |   | (32 | ) |   | — |   |   | — |   |   | (32 | ) |
| Equity and index contracts                                        |       | —                                      |       |   | — |   |   | — |   |   | 34 |   |   | 34 |   |
| Embedded derivative  financial instruments                        |       | —                                      |       |   | (5 | ) |   | 20 |   |   | (2 | ) |   | 13 |   |
| Foreign currency contracts                                        |       | —                                      |       |   | 4 |   |   | — |   |   | — |   |   | 4 |   |
| Credit default contracts                                          |       | —                                      |       |   | (2 | ) |   | — |   |   | — |   |   | (2 | ) |
| Subtotal                                                          |       | —                                      |       |   | (35 | ) |   | 20 |   |   | 32 |   |   | 17 |   |
| Total                                                             | $          | (41                                         | )          | $ | (35 | ) | $ | 20 |   | $ | 7 |   | $ | (49 | ) |
|                                                              |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| ** **                                                        | ** ** | **Three months ended  March 31, 2009** | ** ** |
| ** **                                                        | ** ** | **Net  investment  income**                 | ** ** | ** ** | **Realized  capital  gains and  losses** | ** ** | ** ** | **Contract  benefits** | ** ** | ** ** | **Interest  credited to  contractholder  funds** | ** ** | ** ** | **Total gain  (loss)  recognized  in net  income on  derivatives** | ** ** |
| **Derivatives in fair value  accounting hedging relationships**   |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate contracts                                           | $          | 7                                           |       | $ | 4 |   | $ | — |   | $ | (12 | ) | $ | (1 | ) |
| Foreign currency and  interest rate contracts                     |       | —                                      |       |   | (1 | ) |   | — |   |   | (30 | ) |   | (31 | ) |
| Subtotal                                                          |       | 7                                           |       |   | 3 |   |   | — |   |   | (42 | ) |   | (32 | ) |
|                                                              |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Derivatives not designated as  accounting hedging instruments** |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate contracts                                           |       | —                                      |       |   | 56 |   |   | — |   |   | — |   |   | 56 |   |
| Equity and index contracts                                        |       | —                                      |       |   | 3 |   |   | — |   |   | (23 | ) |   | (20 | ) |
| Embedded derivative  financial instruments                        |       | —                                      |       |   | (23 | ) |   | (23 | ) |   | (14 | ) |   | (60 | ) |
| Foreign currency contracts                                        |       | —                                      |       |   | 1 |   |   | — |   |   | — |   |   | 1 |   |
| Credit default contracts                                          |       | —                                      |       |   | 29 |   |   | — |   |   | — |   |   | 29 |   |
| Subtotal                                                          |       | —                                      |       |   | 66 |   |   | (23 | ) |   | (37 | ) |   | 6 |   |
| Total                                                             | $          | 7                                           |       | $ | 69 |   | $ | (23 | ) | $ | (79 | ) | $ | (26 | ) |

 

28

----

 

The following table provides asummary of the changes in fair value of the Company’s fair value hedging relationshipsin the Condensed Consolidated Statements of Operations.

 
| **($ in  millions)**                                               | ** ** | **Three months ended March 31, 2010** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                              | ** ** | **Gain (loss) on derivatives**             | ** ** | ** ** | **Gain (loss) on hedged risk** | ** ** |
| **Location of gain or (loss) recognized  in net income on derivatives** | ** ** | **Interest  rate  contracts**              | ** ** | ** ** | **Foreign  currency &  interest rate  contracts** | ** ** | ** ** | **Contractholder  funds** | ** ** | **Investments** | ** ** |
| Interest credited to  contractholder funds                              | $          | (1                                         | )          | $ | (33 | ) | $ | 34 | $ | — |   |
| Net investment income                                                   |       | (13                                        | )          |   | — |   |   | — |   | 13 |   |
| Total                                                                   | $          | (14                                        | )          | $ | (33 | ) | $ | 34 | $ | 13 |   |
|                                                                    |       |                                       |       |   |   |   |   |   |   |   |   |
| ** **                                                              | ** ** | **Three months ended March 31, 2009** | ** ** |
| ** **                                                              | ** ** | **Gain (loss) on derivatives**             | ** ** | ** ** | **Gain (loss) on hedged risk** | ** ** |
| **Location of gain or (loss) recognized  in net income on derivatives** | ** ** | **Interest  rate  contracts**              | ** ** | ** ** | **Foreign  currency &  interest rate  contracts** | ** ** | ** ** | **Contractholder  funds** | ** ** | **Investments** | ** ** |
| Interest credited to  contractholder funds                              | $          | (26                                        | )          | $ | (35 | ) | $ | 61 | $ | — |   |
| Net investment income                                                   |       | 40                                         |       |   | — |   |   | — |   | (40 | ) |
| Realized capital gains and  losses                                      |       | 4                                          |       |   | (1 | ) |   | — |   | — |   |
| Total                                                                   | $          | 18                                         |       | $ | (36 | ) | $ | 61 | $ | (40 | ) |

 

The Company manages itsexposure to credit risk by utilizing highly rated counterparties, establishingrisk control limits, executing legally enforceable master netting agreements (“MNAs”)and obtaining collateral where appropriate. The Company uses MNAs for OTC derivative transactions, including interestrate swap, foreign currency swap, interest rate cap, interest rate floor,credit default swap, forward and certain option agreements (includingswaptions).  These agreements permiteither 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 exposurelimits are exceeded.  As of March 31,2010, counterparties pledged $21 million in cash and $2 million in securitiesto the Company, and the Company pledged $185 million in securities tocounterparties which includes $133 million of collateral posted under MNAs forcontracts containing credit-risk-contingent provisions that are in a liabilityposition and $52 million of collateral posted under MNAs for contracts withoutcredit-risk-contingent liabilities.  TheCompany has not incurred any losses on derivative financial instruments due tocounterparty nonperformance.  Otherderivatives including futures and certain option contracts are traded onorganized exchanges, which require margin deposits and guarantee the executionof trades, thereby mitigating any potential credit risk associated withtransactions executed on organized exchanges.

 

Counterparty credit exposurerepresents the Company’s potential loss if all of the counterpartiesconcurrently fail to perform under the contractual terms of the contracts andall collateral, if any, becomes worthless. This exposure is measured by the fair value of OTC derivative contractswith a positive fair value at the reporting date reduced by the effect, if any,of legally enforceable master netting agreements.

 

The following table summarizesthe counterparty credit exposure by counterparty credit rating at as it relatesto interest rate swap, foreign currency swap, interest rate cap, interest ratefloor, credit default swap, forward and certain option agreements (includingswaptions).

 
| **($ in millions)** | ** ** | **March 31, 2010**                | ** ** | **December 31, 2009** | ** ** |
|--------------------------|------------|----------------------------------------|------------|----------------------------|------------|
| **Rating****(1)**        | ** ** | **Number of********counter-  parties** | ** ** | **Notional********amount** | ** ** | **Credit********exposure****(2)** | ** ** | **Exposure,********net of********collateral****(2)** | ** ** | **Number of********counter-  parties** | ** ** | **Notional********amount** | ** ** | **Credit********exposure****(2)** | ** ** | **Exposure,********net of********collateral****(2)** | ** ** |
| AA-                      |       | 1                                      | $          | 680                        | $          | 12 | $ | 10 |   | — | $ | — | $ | — | $ | — |   |
| A+                       |       | 2                                      |       | 4,782                      |       | 23 |   | 2 |   | 3 |   | 6,666 |   | 151 |   | 18 |   |
| A                        |       | 2                                      |       | 857                        |       | 9 |   | 9 |   | 2 |   | 1,041 |   | 48 |   | 17 |   |
| A-                       |       | 1                                      |       | 115                        |       | 25 |   | 25 |   | 1 |   | 145 |   | 23 |   | 23 |   |
| Total                    |       | 6                                      | $          | 6,434                      | $          | 69 | $ | 46 |   | 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 areincluded for each counterparty.

 

Market risk is the risk thatthe Company will incur losses due to adverse changes in market rates andprices.  Market risk exists for all ofthe derivative financial instruments the Company currently holds, as these instruments

 

29

----

 

may becomeless valuable due to adverse changes in market conditions.  To limit this risk, the Company’s seniormanagement has established risk control limits. In addition, changes in fair value of the derivative financial instrumentsthat the Company uses for risk management purposes are generally offset by thechange in the fair value or cash flows of the hedged risk component of therelated assets, liabilities or forecasted transactions.

 

Certain of the Company’sderivative instruments contain credit-risk-contingent termination events,cross-default provisions and credit support annex agreements.  Credit-risk-contingent termination eventsallow the counterparties to terminate the derivative on certain dates if ALIC’sor Allstate Life Insurance Company of New York’s (“ALNY”) financial strengthcredit ratings by Moody’s or S&P fall below a certain level or in the eventALIC or ALNY are no longer rated by both Moody’s and S&P.  Credit-risk-contingent cross-defaultprovisions allow the counterparties to terminate the derivative instruments ifthe Company defaults by pre-determined threshold amounts on certain debtinstruments.  Credit-risk-contingentcredit support annex agreements specify the amount of collateral the Companymust post to counterparties based on ALIC’s or ALNY’s financial strength creditratings by Moody’s or S&P, or in the event ALIC or ALNY are no longer ratedby both Moody’s and S&P.

 

The following summarizes thefair value of derivative instruments with termination, cross-default orcollateral credit-risk-contingent features that are in a liability position, aswell as the fair value of assets and collateral that are netted against theliability in accordance with provisions within legally enforceable MNAs.

 
| **($ in millions)**                                                                                                               | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Gross liability fair value  of contracts containing credit-risk-contingent features                                                    | $          | 371                      | $          | 386                         |       |
| Gross asset fair value of  contracts containing credit-risk-contingent features and subject to MNAs                                    |       | (203                     | )          | (233                        | )          |
| Collateral posted under  MNAs for contracts containing credit-risk-contingent features                                                 |       | (133                     | )          | (122                        | )          |
| Maximum amount of  additional exposure for contracts with credit-risk-contingent features if all  features were triggered concurrently | $          | 35                       | $          | 31                          |       |

 

**Credit derivatives - selling protection**

 

Creditdefault swaps (“CDS”) are utilized for selling credit protectionagainst a specified credit event.  Acredit default swap is a derivative instrument, representing an agreementbetween two parties to exchange the credit risk of a specified entity (or agroup 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 “referenceentities”), for a periodic premium.  Inselling protection, CDS are used to replicate fixed income securities and tocomplement the cash market when credit exposure to certain issuers is notavailable or when the derivative alternative is less expensive than the cashmarket alternative.  CDS typically have afive-year term.

 

30

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The following table shows theCDS notional amounts by credit rating and fair value of protection sold as of March 31,2010:

 
| **($ in millions)**         | ** ** | **Notional  amount** | ** ** | ** ** | ** ** |
|----------------------------------|------------|----------------------|------------|------------|------------|
| ** **                       | ** ** | **AA**               | ** ** | **A**      | ** ** | **BBB** | ** ** | **BB and  lower** | ** ** | **Total** | ** ** | **Fair  value** | ** ** |
| **Single name**                  |       |                 |       |       |       |   |   |   |   |   |   |   |   |
| Investment grade corporate  debt | $          | 50                   | $          | 65         | $          | 41 | $ | 15 | $ | 171 | $ | (4 | ) |
| High yield debt                  |       | —               |       | —     |       | — |   | 11 |   | 11 |   | — |   |
| Municipal                        |       | 25                   |       | —     |       | — |   | — |   | 25 |   | (4 | ) |
| Subtotal                         |       | 75                   |       | 65         |       | 41 |   | 26 |   | 207 |   | (8 | ) |
| **Baskets**                      |       |                 |       |       |       |   |   |   |   |   |   |   |   |
| **Tranche**                      |       |                 |       |       |       |   |   |   |   |   |   |   |   |
| Investment grade corporate  debt |       | —               |       | —     |       | — |   | 65 |   | 65 |   | (28 | ) |
| **First-to-default**             |       |                 |       |       |       |   |   |   |   |   |   |   |   |
| Investment grade corporate  debt |       | —               |       | 15         |       | 15 |   | — |   | 30 |   | — |   |
| Municipal                        |       | —               |       | 100        |       | — |   | — |   | 100 |   | (28 | ) |
| Subtotal                         |       | —               |       | 115        |       | 15 |   | 65 |   | 195 |   | (56 | ) |
| **Index**                        |       |                 |       |       |       |   |   |   |   |   |   |   |   |
| Investment grade corporate  debt |       | 6                    |       | 66         |       | 170 |   | 8 |   | 250 |   | 3 |   |
| **Total**                        | $          | 81                   | $          | 246        | $          | 226 | $ | 99 | $ | 652 | $ | (61 | ) |

 

The following table shows theCDS notional amounts by credit rating and fair value of protection sold as of December 31,2009:

 
| **($ in millions)**         | ** ** | **Notional  amount** | ** ** | ** ** | ** ** |
|----------------------------------|------------|----------------------|------------|------------|------------|
| ** **                       | ** ** | **AA**               | ** ** | **A**      | ** ** | **BBB** | ** ** | **BB and  lower** | ** ** | **Total** | ** ** | **Fair  value** | ** ** |
| **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 ofnames in a first-to-default (“FTD”) structure or a specific tranche of abasket, or credit derivative index (“CDX”) that is generally investment grade,and in return receives periodic premiums through expiration or termination ofthe 

 

31

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agreement.  With single name CDS, this premium or creditspread generally corresponds to the difference between the yield on thereferenced entity’s public fixed maturity cash instruments and swap rates, atthe time the agreement is executed.  Witha FTD basket or a tranche of a basket, because of the additional credit riskinherent in a basket of named credits, the premium generally corresponds to ahigh proportion of the sum of the credit spreads of the names in the basket andthe correlation between the names.  CDXindex is utilizedto take a position on multiple (generally 125) reference entities.  Credit events are typically defined asbankruptcy, failure to pay, or restructuring, depending on the nature of thereference credit.  If a credit eventoccurs, the Company settles with the counterparty, either through physicalsettlement or cash settlement.  In aphysical settlement, a reference asset is delivered by the buyer of protectionto the Company, in exchange for cash payment at par, whereas in a cashsettlement, the Company pays the difference between par and the prescribedvalue of the reference asset.  When acredit event occurs in a single name or FTD basket (for FTD, the first creditevent occurring for any one name in the basket), the contract terminates attime of settlement.  When a credit eventoccurs in a tranche of a basket, there is no immediate impact to the Companyuntil cumulative losses in the basket exceed the contractual subordination.  To date, realized losses have not exceededthe subordination.  For CDX index, thereference entity’s name incurring the credit event is removed from the indexwhile the contract continues until expiration. The maximum payout on a CDS is the contract notional amount.  A physical settlement may afford the Companywith recovery rights as the new owner of the asset.

 

TheCompany monitors risk associated with credit derivatives through individualname credit limits at both a credit derivative and a combined cashinstrument/credit derivative level.  Theratings of individual names for which protection has been sold are alsomonitored.

 

**7.****             ****Reinsurance**

 

The effects of reinsurance on premiums and contractcharges are as follows:

 
| **($ in millions)**                          | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                        | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| **Premiums and contract charges**                 |       |                                   |       |   |   |
| Direct                                            | $          | 551                                    | $          | 545 |   |
| Assumed                                           |       |                                   |       |   |   |
| Affiliate                                         |       | 27                                     |       | 25 |   |
| Non-affiliate                                     |       | 5                                      |       | 5 |   |
| Ceded—non-affiliate                          |       | (184                                   | )          | (195 | ) |
| Premiums and contract charges, net of reinsurance | $          | 399                                    | $          | 380 |   |

 

The effects of reinsurance on contract benefits are as follows:

 
| **($ in millions)**              | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|
| ** **                            | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| **Contract benefits**                 |       |                                   |       |   |   |
| Direct                                | $          | 468                                    | $          | 759 |   |
| Assumed                               |       |                                   |       |   |   |
| Affiliate                             |       | 17                                     |       | 15 |   |
| Non-affiliate                         |       | 4                                      |       | 8 |   |
| Ceded—non-affiliate              |       | (125                                   | )          | (448 | ) |
| Contract benefits, net of reinsurance | $          | 364                                    | $          | 334 |   |

 

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The effects of reinsurance on interestcredited to contractholder funds are as follows:

 
| **($ in  millions)**                                      | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                     | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| **Interest credited to contractholder funds**                  |       |                                   |       |   |   |
| Direct                                                         | $          | 454                                    | $          | 566 |   |
| Assumed                                                        |       |                                   |       |   |   |
| Affiliate                                                      |       | 2                                      |       | 3 |   |
| Non-affiliate                                                  |       | 3                                      |       | 3 |   |
| Ceded—non-affiliate                                       |       | (7                                     | )          | (7 | ) |
| Interest  credited to contractholder funds, net of reinsurance | $          | 452                                    | $          | 565 |   |

 

**8.****    ****Guarantees and Contingent Liabilities**

 

**Guarantyfunds**

 

Under state insurance guaranty fund laws, insurers doing business in astate can be assessed, up to prescribed limits, for certain obligations ofinsolvent insurance companies to policyholders and claimants.  Amounts assessed to each company aretypically related to its proportion of business written in each state.  The Company’s policy is to accrue aguaranty fund assessment when the entity for which the insolvency relates hasmet its state of domicile’s statutory definition of insolvency and the amountof the loss is reasonably estimable.  Inmost states, the definition is met with a declaration of financial insolvencyby a court of competent jurisdiction.  Incertain states there must also be a final order of liquidation.

 

The New York Liquidation Bureau (the “Bureau”) has publicly reportedthat Executive Life Insurance Company of New York (“Executive Life”) iscurrently under its jurisdiction as part of a 1992 court-ordered rehabilitationplan. 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 estimatedshortfall from the Bureau is $1.27 billion.

 

If Executive Life were to be declaredinsolvent in the future, the Company may have exposure to future guaranty fundassessments.  The Company’s exposure willultimately depend on the level of guaranty fund system participation, as wellas the viability of a plan of the Bureau to obtain voluntary contributions,primarily from the original insurance companies that acquired structuredsettlement annuity contracts from Executive Life.  New York law currently contains an aggregatelimit 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 allowedto recoup a portion of the amount of any additional guaranty fund assessment inperiods subsequent to the recognition of the assessment by offsetting futurepremium taxes.  The Company’s averagemarket share for New York, based on assessable premiums, was approximately 3.1%in 2009.

 

**Guarantees**

 

The Company owns certain fixed income securities that obligate theCompany to exchange credit risk or to forfeit principal due, depending on thenature or occurrence of specified credit events for the referenced entities.  In the event all such specified credit eventswere to occur, the Company’s maximum amount at risk on these fixed incomesecurities, as measured by the amount of the aggregate initial investment, was$160 million at March 31, 2010.  Theobligations associated with these fixed income securities expire at variousdates during the next five years.

 

Related to the disposal through reinsurance of substantially all of theCompany’s variable annuity business to The Prudential Insurance Company ofAmerica, a subsidiary of Prudential Financial, Inc. (collectively “Prudential”)in 2006, the Company and the Corporation have agreed to indemnify Prudentialfor certain pre-closing contingent liabilities (including extra-contractualliabilities of the Company and liabilities specifically excluded from thetransaction) that the Company has agreed to retain.  In addition, the Company and the Corporationwill each indemnify Prudential for certain post-closing liabilities that mayarise from the acts of the Company and its agents, including in connection withthe Company’s provision of transition services. The reinsurance agreements contain no limitations or indemnificationswith regard to insurance risk transfer, and transferred all of the future risksand responsibilities for performance on the underlying variable annuitycontracts to Prudential, including those related to 

 

33

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benefit guarantees. Management does not believe this agreement will have a material adverseeffect on results of operations, cash flows or financial position of theCompany.

 

In the normal course of business, the Company provides standardindemnifications to contractual counterparties in connection with numeroustransactions, including acquisitions and divestitures.  The types of indemnifications typicallyprovided include indemnifications for breaches of representations andwarranties, taxes and certain other liabilities, such as third party lawsuits.  The indemnification clauses are oftenstandard contractual terms and are entered into in the normal course ofbusiness based on an assessment that the risk of loss would be remote.  The terms of the indemnifications vary induration and nature.  In many cases, themaximum obligation is not explicitly stated and the contingencies triggeringthe obligation to indemnify have not occurred and are not expected tooccur.  Consequently, the maximum amountof the obligation under such indemnifications is not determinable.  Historically, the Company has not made anymaterial payments pursuant to these obligations.

 

The aggregateliability balance related to all guarantees was not material as of March 31,2010.

 

**Regulation and Compliance**

 

The Company is subject to changing social, economic and regulatoryconditions.  From time to time,regulatory authorities or legislative bodies seek to impose additionalregulations regarding agent and broker compensation and otherwise expandoverall regulation of insurance products and the insurance industry.  The Company has established procedures andpolicies to facilitate compliance with laws and regulations, to foster prudentbusiness operations, and to support financial reporting.  The Company routinely reviews its practicesto validate compliance with laws and regulations and with internal proceduresand policies.  As a result of thesereviews, from time to time the Company may decide to modify some of itsprocedures and policies.  Suchmodifications, and the reviews that led to them, may be accompanied by paymentsbeing made and costs being incurred.  Theultimate changes and eventual effects of these actions on the Company’sbusiness, if any, are uncertain.

 

**Legaland regulatory proceedings and inquiries**

 

***Background***

 

TheCompany and certain affiliates are involved in a number of lawsuits, regulatoryinquiries, and other legal proceedings arising out of various aspects of itsbusiness.  As background to the “Proceedings”subsection below, please note the following:

 

·      These matters raise difficult and complicatedfactual and legal issues and are subject to many uncertainties andcomplexities, including the underlying facts of each matter; novel legalissues; variations between jurisdictions in which matters are being litigated,heard, or investigated; differences in applicable laws and judicialinterpretations; the length of time before many of these matters might beresolved by settlement, through litigation or otherwise; the fact that some ofthe lawsuits are putative class actions in which a class has not been certifiedand in which the purported class may not be clearly defined; the fact that someof the lawsuits involve multi-state class actions in which the applicable law(s) forthe claims at issue is in dispute and therefore unclear; and the currentchallenging legal environment faced by large corporations and insurancecompanies.

 

·      Theoutcome of these matters may be affected by decisions, verdicts, andsettlements, and the timing of such decisions, verdicts, and settlements, inother individual and class action lawsuits that involve the Company, otherinsurers, or other entities and by other legal, governmental, and regulatory actions that involve theCompany, 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 ofremedies including equitable relief in the form of injunctive and otherremedies and monetary relief in the form of contractual and extra-contractualdamages.  In some cases, the monetarydamages sought include punitive damages. Often specific information about the relief sought, such as the amountof damages, is not available because plaintiffs have not requested specificrelief in their pleadings.  In the Company’sexperience, when specific monetary demands are made in pleadings, they bearlittle relation to the ultimate loss, if any, to the Company.

 

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·      In connection with regulatory examinations andproceedings, government authorities may seek various forms of relief, includingpenalties, restitution, and changes in business practices.  The Company may not be advised of the natureand extent of relief sought until the final stages of the examination orproceeding.

 

·      For the reasons specified above, it is often notpossible to make meaningful estimates of the amount or range of loss that couldresult from the matters described below in the “Proceedings” subsection.  The Company reviews these matters on an ongoingbasis and follows appropriate accounting guidance when making accrual anddisclosure decisions.  When assessingreasonably possible and probable outcomes, the Company bases its decisions onits assessment of the ultimate outcome following all appeals.

 

·      Due to the complexity and scope of the mattersdisclosed in the “Proceedings” subsection below and the many uncertainties thatexist, the ultimate outcome of these matters cannot be reasonablypredicted.  In the event of anunfavorable outcome in one or more of these matters, the ultimate liability maybe in excess of amounts currently reserved, if any, and may be material to theCompany’s operating results or cash flows for a particular quarterly or annualperiod.  However, based on informationcurrently known to it, management believes that the ultimate outcome of allmatters described below, as they are resolved over time, is not likely to havea material adverse effect on the financial position of the Company.

 

***Proceedings***

 

Legalproceedings involving Allstate agencies and AIC may impact the Company, evenwhen the Company is not directly involved, because the Company sells itsproducts through a variety of distribution channels including Allstateagencies.  Consequently, informationabout the more significant of these proceedings is provided in the followingparagraph.

 

AIC is defending certain matters relating toits agency program reorganization announced in 1999.  These matters are in various stages ofdevelopment.

 

·      These matters include a lawsuit filed in 2001 bythe U.S. Equal Employment Opportunity Commission (“EEOC”) alleging retaliationunder federal civil rights laws (the “EEOC I” suit) and a class action filed in2001 by former employee agents alleging retaliation and age discriminationunder the Age Discrimination in Employment Act (“ADEA”), breach of contract andERISA violations (the “Romero I” suit). In 2004, in the consolidated EEOC I and Romero I litigation, the trialcourt issued a memorandum and order that, among other things, certified classesof agents, including a mandatory class of agents who had signed a release, forpurposes of effecting the court’s declaratory judgment that the release isvoidable at the option of the release signer. The court also ordered that an agent who voids the release must returnto AIC “any and all benefits received by the [agent] in exchange for signingthe release.”  The court also statedthat, “on the undisputed facts of record, there is no basis for claims of agediscrimination.”  The EEOC and plaintiffsasked 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 ofappeal, 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 nottaken from a final order within the meaning of the federal law and thus notappealable at this time.  In March 2008,the Third Circuit decided that the appeal should not summarily be dismissed andthat the question of whether the matter is appealable at this time will beaddressed by the Third Circuit along with the merits of the appeal.  In July 2009, the Third Circuit vacatedthe decision which granted AIC’s summary judgment motions, remanded the casesto the trial court for additional discovery, and directed that the cases bereassigned to another trial court judge. In January 2010, the cases were assigned to a new judge for furtherproceedings in the trial court.

 

·      A putative nationwide class action has also beenfiled by former employee agents alleging various violations of ERISA, includinga worker classification issue.  Theseplaintiffs are challenging certain amendments to the Agents Pension Plan andare seeking to have exclusive agent independent contractors treated asemployees for benefit purposes.  Thismatter was dismissed with prejudice by the trial court, was the subject offurther proceedings on appeal, and was reversed and remanded to the trial courtin 2005.  In June 2007, the courtgranted AIC’s motion to dismiss the case. Following plaintiffs’ filing of a notice of appeal, the Third Circuitissued an order in December 2007 stating that the notice of appeal was nottaken from a final order within the meaning of the federal law and thus notappealable at this time.  In March 2008,the Third Circuit decided that the appeal should not summarily be dismissed andthat the question of whether the 

 

35

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matter isappealable at this time will be addressed by the Third Circuit along with themerits of the appeal.  In July 2009,the Third Circuit vacated the decision which granted AIC’s motion to dismissthe case, remanded the case to the trial court for additional discovery, anddirected that the case be reassigned to another trial court judge.  In January 2010, the case was assignedto a new judge for further proceedings in the trial court.

 

In all of these various matters, plaintiffsseek compensatory and punitive damages, and equitable relief.  AIC has been vigorously defending theselawsuits and other matters related to its agency program reorganization.

 

***OtherMatters***

** **

Various other legal, governmental, and regulatory actions, includingstate market conduct exams, and other governmental and regulatory inquiries arecurrently pending that involve the Company and specific aspects of its conductof business.  Like other members of theinsurance industry, the Company is the target of a number of class actionlawsuits and other types of proceedings, some of which involve claims forsubstantial or indeterminate amounts. These actions are based on a variety of issues and target a range of theCompany’s practices.  The outcome ofthese disputes is currently unpredictable.

 

One or more of these matters could have anadverse effect on the Company’s operating results or cash flows for aparticular quarterly or annual period.  However,based on information currently known to it, management believes that theultimate outcome of all matters describedin this “Other Matters” subsection, in excess of amounts currently reserved, ifany, as they are resolved over time is not likely to have a material effect onthe operating results, cash flows or financial position of the Company.

 

**9.****    ****Income Taxes**

 

Areconciliation of the statutory federal income tax rate to the effective incometax rate on the loss from operations for the three months ended March 31is as follows:

 
| **($ in  millions)**                     | ** ** | **2010** | ** ** | **2009** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
| Statutory federal income tax rate - (benefit) | $          | (12      | )          | (35.0    | )%  $ | (106 | ) | (35.0 | )% |
| Dividends received deduction                  |       | (2       | )          | (8.0     | )          | (3 | ) | (1.0 | ) |
| State income taxes                            |       | (1       | )          | (1.8     | )          | — |   | — |   |
| Other                                         |       | (1       | )          | (1.5     | )          | — |   | — |   |
| Valuation allowance                           |       | —   |       | —   |       | 142 |   | 46.9 |   |
| Effective income tax rate - (benefit) expense | $          | (16      | )          | (46.3    | )%  $ | 33 |   | 10.9 | % |

 

Incometax expense for the first quarter of 2009 included expense of $142 millionattributable to an increase in the valuation allowance relating to the deferredtax asset on capital losses.

 

**10.**** ****Other Comprehensive Income**

 

The components of other comprehensive income (loss) on a pre-tax andafter-tax basis are as follows:

 
| **($ in  millions)**                                                              | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                             | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| ** **                                                                             | ** ** | **Pre-tax**                           | ** ** | **Tax** | ** ** | **After-********tax** | ** ** | **Pre-tax** | ** ** | **Tax** | ** ** | **After-********tax** | ** ** |
| Unrealized  holding gains and losses arising during the period, net of related offsets | $          | 723                                   | $          | (253 | ) $ | 470 | $ | 18 | $ | (4 | ) $ | 14 |   |
| Less:  reclassification adjustment of realized capital gains and losses                |       | (90                                   | )          | 32 |   | (58 | ) | 119 |   | (42 | ) | 77 |   |
| Unrealized  net capital gains and losses                                               |       | 813                                   |       | (285 | ) | 528 |   | (101 | ) | 38 |   | (63 | ) |
| Other  comprehensive income (loss)                                                     | $          | 813                                   | $          | (285 | ) | 528 | $ | (101 | ) $ | 38 |   | (63 | ) |
| Net  loss                                                                              |       |                                  |       |   |   | (18 | ) |   |   |   |   | (336 | ) |
| Comprehensive  income (loss)                                                           |       |                                  |       |   | $ | 510 |   |   |   |   | $ | (399 | ) |

 

36

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors and Shareholder of

AllstateLife Insurance Company

Northbrook,IL 60062

 

We have reviewed the accompanying condensedconsolidated statement of financial position of Allstate Life Insurance Companyand subsidiaries (the “Company”), an affiliate of The Allstate Corporation, asof March 31, 2010, and the related condensed consolidated statements ofoperations and cash flows for the three-month periods ended March 31, 2010and 2009.  These interim financialstatements are the responsibility of the Company’s management.

 

Weconducted our reviews in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). A review of interim financial information consists principally ofapplying analytical procedures and making inquiries of persons responsible forfinancial and accounting matters.  It issubstantially less in scope than an audit conducted in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theobjective of which is the expression of an opinion regarding the financialstatements taken as a whole. Accordingly, we do not express such an opinion.

 

Basedon our reviews, we are not aware of any material modifications that should bemade to such condensed consolidated interim financial statements for them to bein conformity with accounting principles generally accepted in the UnitedStates of America.

 

Wehave previously audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated statement offinancial position of Allstate Life Insurance Company and subsidiaries as of December 31,2009, and the related consolidated statements of operations and comprehensiveincome, shareholder’s equity, and cash flows for the year then ended (notpresented herein); and in our report dated March 12, 2010, which reportincludes an explanatory paragraph relating to a change in the Company’srecognition and presentation for other-than-temporary impairments of debtsecurities in 2009, we expressed an unqualified opinion on those consolidatedfinancial statements.  In our opinion,the information set forth in the accompanying condensed consolidated statementof financial position as of December 31, 2009 is fairly stated, in allmaterial respects, in relation to the consolidated statement of financialposition from which it has been derived.

 

 

/s/Deloitte & Touche LLP

 

Chicago,Illinois

May 5,2010

 

37

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**Item 2.****   ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND 2009**

** **

**OVERVIEW**

 

The following discussion highlightssignificant factors influencing the consolidated financial position and resultsof operations of Allstate Life Insurance Company (referred to in this documentas “we”, “our”, “us”, or the “Company”). It should be read in conjunction with the condensed consolidatedfinancial statements and notes thereto found under Part I. Item 1.contained herein, and with the discussion, analysis, consolidated financialstatements 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-Kfor 2009.  We operate as a single segmententity based on the manner in which we use financial information to evaluatebusiness performance and to determine the allocation of resources.

** **

**OPERATIONS HIGHLIGHTS**

 

·      Netloss was $18 million in the first quarter of 2010 compared to $336 million inthe first quarter of 2009.

·      During the first quarter of2010, amortization deceleration (credit to income) of $13 million was recordedrelated to our annualcomprehensive review of the deferred policy acquisition costs (“DAC”) anddeferred sales inducement costs (“DSI”) balances and assumptions for ourinterest-sensitive life, fixed annuities and other investment contracts.  Thiscompares to DAC and DSI amortization acceleration of $323 million in the firstquarter of 2009.

·      Contractholder fund depositsfor the first quarter of 2010 totaled $665 million compared to $957 million inthe first quarter of 2009.

** **

**OPERATIONS**

 

**Summary analysis**  Summarizedfinancial data is presented in the following table.

 
| **($ in  millions)**                 | ** ** | **Three months ended  March 31,** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|
| ** **                                | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| **Revenues**                              |       |                                   |       |   |   |
| Premiums                                  | $          | 153                                    | $          | 152 |   |
| Contract charges                          |       | 246                                    |       | 228 |   |
| Net investment income                     |       | 707                                    |       | 797 |   |
| Realized capital gains and losses         |       | (161                                   | )          | (38 | ) |
| Total revenues                            |       | 945                                    |       | 1,139 |   |
|                                      |       |                                   |       |   |   |
| **Costs and expenses**                    |       |                                   |       |   |   |
| Contract benefits                         |       | (364                                   | )          | (334 | ) |
| Interest credited to contractholder funds |       | (452                                   | )          | (565 | ) |
| Amortization of DAC                       |       | (67                                    | )          | (429 | ) |
| Operating costs and expenses              |       | (86                                    | )          | (89 | ) |
| Restructuring and related charges         |       | —                                 |       | (17 | ) |
| Interest expense                          |       | (11                                    | )          | (11 | ) |
| Total costs and expenses                  |       | (980                                   | )          | (1,445 | ) |
|                                      |       |                                   |       |   |   |
| Gain on disposition of operations         |       | 1                                      |       | 3 |   |
| Income tax benefit (expense)              |       | 16                                     |       | (33 | ) |
| Net  loss                                 | $          | (18                                    | ) $   | (336 | ) |
|                                      |       |                                   |       |   |   |
| Investments  at March 31             | $          | 60,282                                 | $          | 57,686 |   |

 

*Net loss* in the first quarter of 2010 was $18million compared to $336 million in the same period of 2009.  The improvement of $318 million was primarilydue to lower amortization of DAC and interest credited to contractholder fundsand increased contract charges, partially offset by higher net realized capitallosses, lower net investment income and increased contract benefits.  Additionally, the first quarter of 2009included $142 million of income tax expense related to an increase in thedeferred tax asset valuation allowance.

 

38

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Effective March 31,2010, we will no longer wholesale or provide distribution support to banks andbroker-dealers.  Although we willcontinue to service inforce contracts sold through these channels, we will nolonger solicit new sales through our direct relationships with banks orbroker-dealers.  Certain of our masterbrokerage agencies and independent agents may continue to wholesale ourproducts to banks and broker-dealers through their relationships.  These distribution channels have primarilybeen used to sell deferred fixed annuities and interest-sensitive lifeinsurance.  In 2009, contract charges onproducts sold through these distribution channels were $44 million andcontractholder deposits were $896 million. In the first quarter of 2010, contract charges on products sold throughthese distribution channels were $11 million and contractholder deposits were$102 million.  As of March 31, 2010,contractholder funds associated with these distribution channels totaled $17.96billion.

** **

**Analysis of revenues**Total revenues decreased17.0% or $194 million in the first quarter of 2010 compared to the same periodof 2009 due to higher net realized capital losses and lower net investmentincome, partially offset by increased premiums and contract charges.

* *

*Premiums*represent revenues generated from traditional life insurance, immediateannuities with life contingencies, and accident and health and insuranceproducts that have significant mortality or morbidity risk.

* *

*Contract charges* are revenues generated frominterest-sensitive and variable life insurance and fixed annuities for whichdeposits are classified as contractholder funds or separate accountliabilities.  Contract charges areassessed against the contractholder account values for maintenance,administration, cost of insurance and surrender prior to contractuallyspecified dates.  As a result, changes incontractholder funds are considered in the evaluation of growth and asindicators of future levels of revenues.

 

The following table summarizes premiums and contract charges byproduct.

 
| **($ in  millions)**                   | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| **Premiums**                                |       |                                   |       |   |   |
| Traditional life insurance                  | $          | 102                                    | $          | 96 |   |
| Immediate annuities with life contingencies |       | 27                                     |       | 34 |   |
| Accident and health                         |       | 24                                     |       | 22 |   |
| **Total premiums**                          |       | 153                                    |       | 152 |   |
|                                        |       |                                   |       |   |   |
| **Contract charges**                        |       |                                   |       |   |   |
| Interest-sensitive life insurance           |       | 233                                    |       | 216 |   |
| Fixed annuities                             |       | 13                                     |       | 12 |   |
| **Total contract charges**(1)               |       | 246                                    |       | 228 |   |
| ** **                                  |       |                                   |       |   |   |
| **Total premiums and contract  charges**    | $          | 399                                    | $          | 380 |   |

 

----

(1) Total contractcharges for the first quarter of 2010 and 2009 include contract charges relatedto the cost of insurance totaling $153 million and $150 million, respectively.

 

Total premiums in the first quarter of 2010 were consistent with the sameperiod of 2009 as higher sales of traditional life insurance and accident andhealth products were offset by lower sales of immediate annuities with lifecontingencies.

 

Total contract charges increased 7.9% in the first quarter of 2010 andcompared to the same period of 2009 primarily due to higher contract charges oninterest-sensitive life insurance products resulting from increases in certainpolicy administration fees and higher rates charged for the cost of insurance.

 

39

----

 

*Contractholder funds*represent interest-bearing liabilities arising fromthe sale of individual and institutional products, such as interest-sensitivelife insurance, fixed annuities and funding agreements.  The balance of contractholder funds is equalto the cumulative deposits received and interest credited to the contractholderless cumulative contract maturities, benefits, surrenders, withdrawals andcontract charges for mortality or administrative expenses.  The following table shows the changes incontractholder funds.

 
| **($ in millions)**                                       | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                     | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| **Contractholder funds, beginning  balance**                   | $          | 50,850                                 | $          | 56,780 |   |
| ** **                                                     |       |                                   |       |   |   |
| **Deposits**                                                   |       |                                   |       |   |   |
| Fixed annuities                                                |       | 291                                    |       | 635 |   |
| Interest-sensitive life insurance                              |       | 373                                    |       | 322 |   |
| Other                                                          |       | 1                                      |       | — |   |
| Total deposits                                                 |       | 665                                    |       | 957 |   |
| ** **                                                     |       |                                   |       |   |   |
| **Interest credited**                                          |       | 451                                    |       | 518 |   |
| ** **                                                     |       |                                   |       |   |   |
| **Maturities, benefits, withdrawals  and other adjustments**   |       |                                   |       |   |   |
| Maturities and retirements of institutional  products          |       | (954                                   | )          | (1,951 | ) |
| Benefits                                                       |       | (391                                   | )          | (431 | ) |
| Surrenders and partial withdrawals                             |       | (994                                   | )          | (921 | ) |
| Contract charges                                               |       | (226                                   | )          | (206 | ) |
| Net transfers from separate accounts                           |       | 2                                      |       | 4 |   |
| Fair value hedge adjustments for institutional  products       |       | (123                                   | )          | (48 | ) |
| Other adjustments (1)                                          |       | 1                                      |       | 174 |   |
| Total maturities, benefits, withdrawals and other  adjustments |       | (2,685                                 | )          | (3,379 | ) |
| **Contractholder funds, ending  balance**                      | $          | 49,281                                 | $          | 54,876 |   |

 

----

(1) The table above illustratesthe changes in contractholder funds, which are presented gross of reinsurancerecoverables on the Condensed Consolidated Statements of FinancialPosition.  The table above is intended tosupplement our discussion and analysis of revenues, which are presented net ofreinsurance on the Condensed Consolidated Statements of Operations.  As a result, the net change in contractholderfunds associated with products reinsured to third parties is reflected as acomponent of the other adjustments line.

 

Contractholderfunds decreased 3.1% and 3.4% in the first quarter of 2010 and 2009,respectively.  Average contractholderfunds decreased 10.3% in the first quarter of 2010 compared to the same periodof 2009.

 

Contractholderdeposits decreased 30.5% in the first quarter of 2010 compared to the sameperiod of 2009 due to lower deposits on fixed annuities.  Deposits on fixed annuities decreased 54.2%in the first quarter of 2010 compared to the same period of 2009 due to pricingactions to improve returns on new business and reduce our concentration inspread based products.

 

Maturities and retirementsof institutional products decreased 51.1% to $954 million in the first quarterof 2010 from $1.95 billion in the same period of 2009.  The prior year period included the retirementof $1.36 billion of extendible institutional market obligations, all of whichwere retired during 2009.

 

Surrenders and partialwithdrawals on deferred fixed annuities and interest-sensitive life insuranceproducts increased 7.9% to $994 million in the first quarter of 2010 from $921million in the same period of 2009 due to higher surrenders and partial withdrawalson market value adjusted annuities, partially offset by lower surrenders andpartial withdrawals on traditional fixed annuities.  The annualized surrender and partialwithdrawal rate on deferred fixed annuities and interest-sensitive lifeinsurance products, based on the beginning of period contractholder funds, was9.7% in the first quarter of 2010 compared to 8.8% in the same period of 2009.

** **

**Analysis of costs and expenses** Total costs and expenses decreased 32.2%or $465 million in the first quarter of 2010 compared to the same period of2009 primarily due to lower amortization of DAC and interest credited tocontractholder funds, partially offset by higher contract benefits.

 

40

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*Contract benefits* increased 9.0% or $30 million in the first quarter of2010 compared to the same period of 2009 due to higher contract benefits oninterest-sensitive life insurance.  Thehigher contract benefits on interest-sensitive life insurance were primarilydue to unfavorable mortality experience in 2010.

 

We analyze our mortality and morbidity results using the differencebetween premiums and contract charges earned for the cost of insurance andcontract benefits excluding the portion related to the implied interest onimmediate annuities with life contingencies (“benefit spread”).  This implied interest totaled $139 million inboth the first quarter of 2010 and 2009. The benefit spread by product group is disclosed in the following table.

 
| **($ in  millions)** | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------|------------|----------------------------------------|------------|
| ** **                | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Life insurance            | $          | 83                                     | $          | 101 |   |
| Accident and health       |       | 8                                      |       | 8 |   |
| Annuities                 |       | (10                                    | )          | (2 | ) |
| Total benefit spread      | $          | 81                                     | $          | 107 |   |

 

Benefit spread decreased 24.3% or $26 million in thefirst quarter of 2010 compared to the same period of 2009 primarily due tounfavorable mortality experience on interest-sensitive life insurance.

* *

*Interest credited to contractholder funds* decreased 20.0% or $113 million in thefirst quarter of 2010 compared to the same period of 2009 primarily due tolower average contractholder funds, decreased weighted average interestcrediting rates on deferred fixed annuities and institutional products, andlower amortization of DSI.  Amortizationof DSI in the first quarter of 2010 and 2009 was $5 million and $57 million,respectively.  The decrease is primarilydue to the first quarter of 2009 including $38 million in amortizationacceleration due to changes in assumptions.

 

In order to analyze the impact of net investmentincome and interest credited to contractholders on net income, we monitor thedifference between net investment income and the sum of interest credited tocontractholder funds and the implied interest on immediate annuities with lifecontingencies, which is included as a component of contract benefits on theCondensed Consolidated Statements of Operations (“investment spread”).

 

The investment spread by product group is shown in thefollowing table.

 
| **($ in  millions)**                                | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                               | ** ** | **2010**                               | ** ** | **2009****(1)** | ** ** |
| Annuities and institutional products                     | $          | 50                                     | $          | 34 |   |
| Life insurance                                           |       | 7                                      |       | (3 | ) |
| Accident and health                                      |       | 2                                      |       | 2 |   |
| Net investment income on investments supporting  capital |       | 57                                     |       | 60 |   |
| Total investment spread                                  | $          | 116                                    | $          | 93 |   |

 

----

(1) To conform to the current year presentation, certain amounts in theprior year have been reclassified.

 

Investment spreadincreased 24.7% or $23 million in the first quarter of 2010 compared to thesame period of 2009 as lower net investment income was more than offset bydecreased interest credited to contractholder funds.

 

To further analyze investment spreads, thefollowing table summarizes the weighted average investment yield on assetssupporting product liabilities and capital, interest crediting rates andinvestment spreads for the three months ended March 31.

 
| ** **                                                           | ** ** | **Weighted average********investment yield** | ** ** | **Weighted average********interest crediting rate** | ** ** | **Weighted average********investment spreads** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                           | ** ** | **2010**                                     | ** ** | **2009**                                            | ** ** | **2010**                                       | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| Interest-sensitive  life insurance                                   |       | 5.5                                          | %          | 5.4                                                 | %          | 4.5                                            | %          | 4.7 | % | 1.0 | % | 0.7 | % |
| Deferred  fixed annuities andinstitutional products                  |       | 4.4                                          |       | 4.7                                                 |       | 3.2                                            |       | 3.4 |   | 1.2 |   | 1.3 |   |
| Immediate  fixed annuities with and without life contingencies       |       | 6.4                                          |       | 6.3                                                 |       | 6.5                                            |       | 6.4 |   | (0.1 | ) | (0.1 | ) |
| Investments supporting capital, traditional life  and other products |       | 3.7                                          |       | 4.0                                                 |       | N/A                                            |       | N/A |   | N/A |   | N/A |   |

 

41

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The following table summarizes our product liabilities and indicatesthe account value of those contracts and policies in which an investment spreadis generated.

 
| **($ in  millions)**                                        | ** ** | **March 31,** | ** ** |
|------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                       | ** ** | **2010**           | ** ** | **2009** | ** ** |
| Immediate fixed annuities with life contingencies                | $          | 8,512              | $          | 8,363 |   |
| Other life contingent contracts and other                        |       | 3,859              |       | 3,684 |   |
| Reserve for life-contingent contract benefits                    | $          | 12,371             | $          | 12,047 |   |
|                                                             |       |               |       |   |   |
| Interest-sensitive life insurance                                | $          | 9,798              | $          | 9,401 |   |
| Deferred fixed annuities                                         |       | 31,540             |       | 33,524 |   |
| Immediate fixed annuities without life  contingencies            |       | 3,868              |       | 3,881 |   |
| Institutional products                                           |       | 3,448              |       | 7,078 |   |
| Market value adjustments related to fair value  hedges and other |       | 627                |       | 992 |   |
| Contractholder funds                                             | $          | 49,281             | $          | 54,876 |   |

 

*Amortization of DAC* decreased 84.4% in thefirst quarter of 2010 compared to the same period of 2009.  The components of amortization of DAC aresummarized in the following table.

 
| **($ in  millions)**                                                                                       | ** ** | **Three months ended********March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                                      | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| Amortization  of DAC before amortizationrelating to realized capital gains and lossesand changes in assumptions | $          | (77                                          | ) $   | (124 | ) |
| Amortization  relating to realized capital gains and losses (1)                                                 |       | (3                                           | )          | (27 | ) |
| Amortization  deceleration (acceleration) for changes in assumptions (“DAC unlocking”)                |       | 13                                           |       | (278 | ) |
| Total  amortization of DAC                                                                                      | $          | (67                                          | ) $   | (429 | ) |

 

----

(1) The impact of realized capital gains and losses on amortization of DACis dependent upon the relationship between the assets that give rise to thegain or loss and the product liability supported by the assets.  Fluctuations result from changes in theimpact of realized capital gains and losses on actual and expected grossprofits.

 

The decrease of $362million in the first quarter of 2010 compared to the same period of 2009 wasprimarily due to a favorable change in amortization acceleration/decelerationfor changes in assumptions.

 

During the first quarterof 2010, we completed our annual comprehensive review of the profitability ofour products to determine DAC balances for our interest-sensitive life, fixedannuities and other investment contracts, which covers assumptions forinvestment returns, including capital gains and losses, interest creditingrates to policyholders, the effect of any hedges, persistency, mortality andexpenses in all product lines.  In thefirst quarter of 2010,the review resulted in a deceleration of DAC amortization (credit toincome) of $13 million.  Amortizationdeceleration of $45 million related to variable life insurance and wasprimarily due to appreciation in the underlying separate accountvaluations.  Amortization acceleration of$31 million related to interest-sensitive life insurance and was primarily dueto an increase in projected realized capital losses and lower projected renewalpremium (which is also expected to reduce persistency), partially offset bylower expenses.

 

In the first quarter of2009, our annual comprehensive review resulted in the acceleration of DACamortization (charge to income) of $278 million.  $289 million related to fixed annuities, ofwhich $210 million was attributable to market value adjusted annuities, and $18million related to variable life insurance. Partially offsetting these amounts was amortization deceleration (creditto income) for interest-sensitive life insurance of $29 million.  The principal assumption impacting fixedannuity amortization acceleration was an increase in the level of expectedrealized capital losses in 2009 and 2010. For interest-sensitive life insurance, the amortization deceleration wasdue to a favorable change in our mortality assumptions, partially offset byincreased expected capital losses.

 

42

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The following table providesthe effect on DAC amortization of changes in assumptions relating to the grossprofit components of investment margin, benefit margin and expense margin.

 
| **($ in  millions)**        | ** ** | **Three months ended********March 31,** | ** ** |
|----------------------------------|------------|----------------------------------------------|------------|
| ** **                       | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| Investment  margin               | $          | 15                                           | $          | (399 | ) |
| Benefit  margin                  |       | (45                                          | )          | 128 |   |
| Expense  margin                  |       | 43                                           |       | (7 | ) |
| Net deceleration  (acceleration) | $          | 13                                           | $          | (278 | ) |

 

*Operating costs andexpenses* decreased 3.4% or $3 million in the firstquarter of 2010 compared to the same period of 2009.  The following table summarizes operatingcosts and expenses.

 
| **($ in  millions)**          | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|
| ** **                         | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Non-deferrable acquisition costs   | $          | 22                                     | $          | 22 |   |
| Other operating costs and expenses |       | 64                                     |       | 67 |   |
| Total operating costs and expenses | $          | 86                                     | $          | 89 |   |
|                               |       |                                   |       |   |   |
| Restructuring  and related charges | $          | —                                 | $          | 17 |   |

 

Other operating costs and expenses decreased 4.5% or$3 million in the first quarter of 2010 compared to the same period of 2009 dueprimarily to our expense reduction actions, which resulted in lower employee,professional services and sales support expenses.

* *

*Income taxbenefit* of $16 million was recognized for the firstquarter of 2010 compared to expense of $33 million for the same period in2009.  Income tax expense for the firstquarter of 2009 included expense of $142 million attributable to an increase inthe valuation allowance relating to the deferred tax asset on capital losses.

** **

**INVESTMENT HIGHLIGHTS**

 

·      Investments as of March 31, 2010totaled $60.28 billion, an increase of 0.1% from $60.22 billion as of December 31,2009.

·      Unrealized net capital losses totaled$1.10 billion as of March 31, 2010, declining from $2.18 billion as of December 31,2009.  This resulted from improving fixedincome portfolio valuations.  The fairvalue of fixed income securities increased primarily as a result of tighteningcredit spreads.

·      Net investment income was $707 million inthe first quarter of 2010, a decrease of 11.3% from $797 million in the firstquarter of 2009.

·      Net realized capital losseswere $161 million in the first quarter of 2010 compared to $38 million in thefirst quarter of 2009.  First quarter2010 net realized capital losses include $165 million of impairment and intentwrite-downs, compared to $384 million in the first quarter of 2009, $35 millionof derivative losses, compared to $65 million of derivative gains in the firstquarter of 2009, and $4 million of EMA limited partnership losses, compared to$77 million in the first quarter of 2009. Net realized capital losses in the first quarter of 2010 were partiallyoffset by net realized capital gains of $43 million from investment sales,compared to $358 million in the first quarter of 2009.

·      During the first quarter of 2010, our fixed income andmortgage loan portfolio continued to generate significant cash flows totaling$1.54 billion, which provides flexibility to take advantage of marketopportunities and manage liabilities.

 

43

----

 

 

**INVESTMENTS**

 

We continue tofocus our strategic risk mitigation efforts towards managing interest rate,credit and real estate investment risks, while our return optimization effortsfocus on investing in market opportunities to generate income and capitalappreciation.  As a result, during thefirst quarter of 2010 we decreased our commercial real estate exposure by 5.2%or $606 million of amortized cost primarily through targeted dispositions andprincipal repayments from borrowers.

 

The composition of theinvestment portfolio at March 31, 2010 is presented in the table below.

 
| **($ in millions)**          | ** ** | **Investments** | ** ** | **Percent  to total** | ** ** |
|-----------------------------------|------------|-----------------|------------|-----------------------|------------|
| Fixed income securities (1)       | $          | 48,657          |       | 80.7                  | %          |
| Mortgage loans                    |       | 7,491           |       | 12.4                  |       |
| Equity securities (2)             |       | 205             |       | 0.4                   |       |
| Limited partnership interests (3) |       | 1,019           |       | 1.7                   |       |
| Short-term (4)                    |       | 1,037           |       | 1.7                   |       |
| Policy loans                      |       | 824             |       | 1.4                   |       |
| Other                             |       | 1,049           |       | 1.7                   |       |
| Total                             | $          | 60,282          |       | 100.0                 | %          |

 

______________________

(1)   Fixed income securities arecarried at fair value.  Amortized costbasis for these securities was $49.79 billion.

 

(2)   Equity securities arecarried at fair value.  Cost basis forthese securities was $161 million.

 

(3)   We have commitments toinvest in additional limited partnership interests totaling $759 million.

 

(4)    Short-term investments arecarried at fair value.  Amortized costbasis for these investments was $1.04 billion.

 

Total investments increased to $60.28 billion at March 31, 2010,from $60.22 billion at December 31, 2009, primarily due to highervaluations for fixed income securities from improved market conditions thatwere almost entirely offset by net reductions in contractholder obligations of$1.57 billion primarily from maturities and retirements of institutionalproducts.

 

**Fixed income securities** by type are listed in thetable below.

 
| **($ in millions)**                                      | ** ** | **Fair  value at********March 31,  2010** | ** ** | **Percent  to  total********investments** | ** ** | ** ** | **Fair  value at********December 31,  2009** | ** ** | **Percent  to  total********investments** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------|------------|-------------------------------------------|------------|------------|---------------------------------------------------|------------|-------------------------------------------|------------|
| U.S. government and agencies                                  | $          | 3,894                                          |       | 6.5                                       | %          | $          | 3,581                                             |       | 5.9                                       | %          |
| Municipal                                                     |       | 5,194                                          |       | 8.6                                       |       |       | 5,109                                             |       | 8.5                                       |       |
| Corporate                                                     |       | 27,666                                         |       | 45.9                                      |       |       | 27,539                                            |       | 45.7                                      |       |
| Foreign government                                            |       | 2,254                                          |       | 3.7                                       |       |       | 2,153                                             |       | 3.6                                       |       |
| Residential mortgage-backed****securities  (“RMBS”) |       | 5,057                                          |       | 8.4                                       |       |       | 4,666                                             |       | 7.8                                       |       |
| Commercial mortgage-backed securities (“CMBS”)      |       | 2,327                                          |       | 3.9                                       |       |       | 2,468                                             |       | 4.1                                       |       |
| Asset-backed securities (“ABS”)                     |       | 2,249                                          |       | 3.7                                       |       |       | 2,127                                             |       | 3.5                                       |       |
| Redeemable preferred stock                                    |       | 16                                             |       | —                                    |       |       | 15                                                |       | —                                    |       |
| Total fixed income securities                                 | $          | 48,657                                         |       | 80.7                                      | %          | $          | 47,658                                            |       | 79.1                                      | %          |

 

At March 31, 2010, 93.6% of the consolidated fixed incomesecurities portfolio was rated investment grade, which is defined as a securityhaving a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A orBBB from Standard and Poor’s (“S&P”), Fitch, Dominion, or Realpoint, arating of aaa, aa, a or bbb from A.M. Best, or a comparable internalrating, if an externally provided rating is not available, which is consistentwith the NationalAssociation of Insurance Commissioners (“NAIC”) rating.

 

44

----

 

The followingtable summarizes the fair value and unrealized net capital gains and losses forfixed income securities by credit rating as of March 31, 2010.

 
| **($ in millions)**                                                         | ** ** | **Aaa**               | ** ** | **Aa**                      | ** ** | ** **            | **A**      | ** **                  |
|----------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------------|------------|-----------------------|------------|-----------------------------|
| ** **                                                                       | ** ** | **Fair********value** | ** ** | **Unrealized  gain/(loss)** | ** ** | **Fair********value** | ** ** | **Unrealized  gain/(loss)** | ** ** | ** ** | **Fair********value** | ** ** | ** ** | **Unrealized  gain/(loss)** | ** ** |
|                                                                             |       |                  |       |                        |       |                  |       |                        |   |   |   |   |   |   |   |
| U.S. government and agencies                                                     | $          | 3,894                 | $          | 157                         | $          | —                | $          | —                      |   | $ | — |   | $ | — |   |
|                                                                             |       |                  |       |                        |       |                  |       |                        |   |   |   |   |   |   |   |
| Municipal                                                                        |       |                  |       |                        |       |                  |       |                        |   |   |   |   |   |   |   |
| Tax exempt                                                                       |       | —                |       | —                      |       | 30                    |       | 1                           |   |   | — |   |   | — |   |
| Taxable                                                                          |       | 130                   |       | 3                           |       | 2,249                 |       | (32                         | ) |   | 1,320 |   |   | (85 | ) |
| Auction rate securities (“ARS”)                                        |       | 481                   |       | (23                         | )          | 27                    |       | (4                          | ) |   | 42 |   |   | (6 | ) |
|                                                                             |       |                  |       |                        |       |                  |       |                        |   |   |   |   |   |   |   |
| Corporate                                                                        |       |                  |       |                        |       |                  |       |                        |   |   |   |   |   |   |   |
| Public                                                                           |       | 953                   |       | 13                          |       | 1,648                 |       | 42                          |   |   | 4,754 |   |   | 229 |   |
| Privately placed                                                                 |       | 665                   |       | 23                          |       | 1,381                 |       | 51                          |   |   | 3,266 |   |   | 132 |   |
| Hybrid                                                                           |       | 33                    |       | 3                           |       | 60                    |       | 9                           |   |   | 572 |   |   | (74 | ) |
|                                                                             |       |                  |       |                        |       |                  |       |                        |   |   |   |   |   |   |   |
| Foreign government                                                               |       | 1,474                 |       | 212                         |       | 115                   |       | 1                           |   |   | 335 |   |   | 34 |   |
|                                                                             |       |                  |       |                        |       |                  |       |                        |   |   |   |   |   |   |   |
| RMBS                                                                             |       |                  |       |                        |       |                  |       |                        |   |   |   |   |   |   |   |
| U.S. government sponsored entities (“U.S. Agency”)                     |       | 2,680                 |       | 95                          |       | —                |       | —                      |   |   | — |   |   | — |   |
| Prime residential mortgage-backed securities  (“Prime”)                |       | 471                   |       | (14                         | )          | 84                    |       | (11                         | ) |   | 154 |   |   | (2 | ) |
| Alt-A residential mortgage-backed securities(“Alt-A”)                  |       | 35                    |       | (3                          | )          | 51                    |       | (10                         | ) |   | 101 |   |   | (6 | ) |
| Subprime residential mortgage-backed securities  (“Subprime”)          |       | 103                   |       | (7                          | )          | 358                   |       | (129                        | ) |   | 95 |   |   | (80 | ) |
|                                                                             |       |                  |       |                        |       |                  |       |                        |   |   |   |   |   |   |   |
| CMBS                                                                             |       | 1,514                 |       | (35                         | )          | 310                   |       | (74                         | ) |   | 237 |   |   | (218 | ) |
|                                                                             |       |                  |       |                        |       |                  |       |                        |   |   |   |   |   |   |   |
| ABS                                                                              |       |                  |       |                        |       |                  |       |                        |   |   |   |   |   |   |   |
| Collateralized debt obligations (“CDO”)                                |       | 20                    |       | (9                          | )          | 398                   |       | (15                         | ) |   | 468 |   |   | (89 | ) |
| Consumer and other asset-backed securities  (“Consumer and other ABS”) |       | 190                   |       | (4                          | )          | 156                   |       | (2                          | ) |   | 158 |   |   | (7 | ) |
|                                                                             |       |                  |       |                        |       |                  |       |                        |   |   |   |   |   |   |   |
| Redeemable preferred stock                                                       |       | —                |       | —                      |       | —                |       | —                      |   |   | — |   |   | — |   |
| Total fixed income securities                                                    | $          | 12,643                | $          | 411                         | $          | 6,867                 | $          | (173                        | ) | $ | 11,502 |   | $ | (172 | ) |

 
| ** **                    | ** ** | **Baa**               | ** ** | ** **                  | **Ba or  lower** | ** ** | ** **            | **Total**  | ** **                  |
|-------------------------------|------------|-----------------------|------------|-----------------------------|------------------|------------|-----------------------|------------|-----------------------------|
| ** **                    | ** ** | **Fair********value** | ** ** | **Unrealized  gain/(loss)** | ** **       | ** ** | **Fair********value** | ** ** | **Unrealized  gain/(loss)** | ** ** | ** ** | **Fair********value** | ** ** | **Unrealized  gain/(loss)** | ** ** |
|                          |       |                  |       |                        |             |       |                  |       |                        |   |   |   |   |   |   |
| U.S. government and agencies  | $          | —                | $          | —                      |             | $          | —                | $          | —                      |   | $ | 3,894 | $ | 157 |   |
|                          |       |                  |       |                        |             |       |                  |       |                        |   |   |   |   |   |   |
| Municipal                     |       |                  |       |                        |             |       |                  |       |                        |   |   |   |   |   |   |
| Tax exempt                    |       | 32                    |       | 3                           |             |       | —                |       | —                      |   |   | 62 |   | 4 |   |
| Taxable                       |       | 757                   |       | (158                        | )                |       | 80                    |       | (39                         | ) |   | 4,536 |   | (311 | ) |
| ARS                           |       | 33                    |       | (5                          | )                |       | 13                    |       | (2                          | ) |   | 596 |   | (40 | ) |
|                          |       |                  |       |                        |             |       |                  |       |                        |   |   |   |   |   |   |
| Corporate                     |       |                  |       |                        |             |       |                  |       |                        |   |   |   |   |   |   |
| Public                        |       | 6,404                 |       | 281                         |             |       | 476                   |       | (16                         | ) |   | 14,235 |   | 549 |   |
| Privately placed              |       | 5,838                 |       | 117                         |             |       | 959                   |       | (6                          | ) |   | 12,109 |   | 317 |   |
| Hybrid                        |       | 469                   |       | (76                         | )                |       | 188                   |       | —                      |   |   | 1,322 |   | (138 | ) |
|                          |       |                  |       |                        |             |       |                  |       |                        |   |   |   |   |   |   |
| Foreign government            |       | 313                   |       | 15                          |             |       | 17                    |       | 1                           |   |   | 2,254 |   | 263 |   |
|                          |       |                  |       |                        |             |       |                  |       |                        |   |   |   |   |   |   |
| RMBS                          |       |                  |       |                        |             |       |                  |       |                        |   |   |   |   |   |   |
| U.S. Agency                   |       | —                |       | —                      |             |       | —                |       | —                      |   |   | 2,680 |   | 95 |   |
| Prime                         |       | 9                     |       | (1                          | )                |       | 171                   |       | (14                         | ) |   | 889 |   | (42 | ) |
| Alt-A                         |       | 49                    |       | (13                         | )                |       | 209                   |       | (73                         | ) |   | 445 |   | (105 | ) |
| Subprime                      |       | 43                    |       | (49                         | )                |       | 444                   |       | (453                        | ) |   | 1,043 |   | (718 | ) |
|                          |       |                  |       |                        |             |       |                  |       |                        |   |   |   |   |   |   |
| CMBS                          |       | 149                   |       | (233                        | )                |       | 117                   |       | (206                        | ) |   | 2,327 |   | (766 | ) |
|                          |       |                  |       |                        |             |       |                  |       |                        |   |   |   |   |   |   |
| ABS                           |       |                  |       |                        |             |       |                  |       |                        |   |   |   |   |   |   |
| CDO                           |       | 255                   |       | (88                         | )                |       | 407                   |       | (172                        | ) |   | 1,548 |   | (373 | ) |
| Consumer and other ABS        |       | 176                   |       | (6                          | )                |       | 21                    |       | (6                          | ) |   | 701 |   | (25 | ) |
|                          |       |                  |       |                        |             |       |                  |       |                        |   |   |   |   |   |   |
| Redeemable preferred stock    |       | 14                    |       | —                      |             |       | 2                     |       | —                      |   |   | 16 |   | — |   |
| Total fixed income securities | $          | 14,541                | $          | (213                        | )                | $          | 3,104                 | $          | (986                        | ) | $ | 48,657 | $ | (1,133 | ) |

 

45

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*MunicipalBonds,* includingtax exempt, taxable and ARS securities, totaled $5.19 billion as of March 31,2010 with an unrealized net capital loss of $347 million.  Taxable municipal bonds have an unrealizednet capital loss of $311 million resulting from wider credit spreads than atinitial purchase, which is largely due to the macroeconomic conditions andcredit market deterioration that persisted into 2010, as well as specific issueor issuer conditions.

 

Included in ourmunicipal bond holdings at March 31, 2010 are $64 million of municipalsecurities which are not rated by third party credit rating agencies, but arerated by the NAIC and also internally rated. These holdings include $8 million of below investment grade municipalbonds that provide the opportunity to achieve incremental returns.  Our initial investment decisions and ongoingmonitoring procedures for these securities are based on a thorough duediligence process which includes, but is not limited to, an assessment of thecredit quality, sector, structure, and liquidity risks of the issue.

 

36.3% or $1.89billion of our municipal bond portfolio is insured by six bond insurers and33.9% of these securities have a credit rating of Aaa or Aa.  Our practices for acquiring and monitoring municipalbonds primarily are based on the credit quality of the primary obligor.  As of March 31, 2010, we believevaluations substantially reflected the decline in the value of the insurance,and further related valuation declines, if any, are not expected to bematerial.  While the valuation of theseholdings may be temporarily impacted by negative market developments, we expectto receive all of the contractual cash flows. As of March 31, 2010, 60.4% of our insured municipal bond portfoliowas insured by National Public Finance Guarantee Corporation, Inc., 20.0%by Assured Guaranty Municipal Corporation, 15.1% by Ambac Assurance Corporationand 2.1% by Syncora Holdings.

 

*Corporatebonds,* includingpublically traded, privately placed and hybrid securities, totaled $27.67billion as of March 31, 2010 with an unrealized net capital gain of $728million.  Privately placed securitiesprimarily consist of corporate issued senior debt securities that are inunregistered form or are directly negotiated with the borrower.  Privately placed corporate securities arerated by the NAIC in instances when information is provided to them.  47.6% of the privately placed corporatesecurities in our portfolio are rated by an independent rating agency.

 

The followingtable shows details of hybrid securities as of March 31, 2010.

 
| **($ in  millions)**       | ** ** | **Public**            | ** ** | ** **                  | **Privately placed** | ** ** | ** **            | **Total**  | ** **                  |
|---------------------------------|------------|-----------------------|------------|-----------------------------|----------------------|------------|-----------------------|------------|-----------------------------|
| ** **                      | ** ** | **Fair********value** | ** ** | **Unrealized  gain/(loss)** | ** **           | ** ** | **Fair********value** | ** ** | **Unrealized  gain/(loss)** | ** ** | ** ** | **Fair********value** | ** ** | **Unrealized  gain/(loss)** | ** ** |
| United Kingdom (“UK”) | $          | 72                    | $          | (5                          | )                    | $          | 54                    | $          | (3                          | ) | $ | 126 | $ | (8 | ) |
| Europe (non-UK)                 |       | 131                   |       | 9                           |                 |       | 308                   |       | (32                         | ) |   | 439 |   | (23 | ) |
| Asia/Australia                  |       | 12                    |       | —                      |                 |       | 137                   |       | (11                         | ) |   | 149 |   | (11 | ) |
| North America                   |       | 395                   |       | (53                         | )                    |       | 213                   |       | (43                         | ) |   | 608 |   | (96 | ) |
| Total                           | $          | 610                   | $          | (49                         | )                    | $          | 712                   | $          | (89                         | ) | $ | 1,322 | $ | (138 | ) |

 

Hybrid securities haveattributes most similar to those of fixed income securities such as statedinterest rates and mandatory redemption dates. Additionally, some hybrids may have an interest rate step-up featurewhich is intended to incent the issuer to redeem the security at a specifiedcall date.  Hybrid securities includepublicly-traded and privately placed securities. ** **While hybrid securities are generally issued byinvestment grade-rated financial institutions, they have structural features,such as the ability to defer principal and interest payments, which make themmore sensitive to credit market deterioration. $1.09 billion of our hybrid securities with $136 million of unrealizednet capital losses are Tier 1 securities, and $229 million with $2 million ofunrealized net capital losses are Tier 2 securities.  Tier 1 securities are lower in the capitalstructure than Tier 2 securities.

 

*RMBS*, *CMBS* and *ABS* are structured securities that are primarilycollateralized by residential and commercial real estate related loans and otherconsumer related borrowings.  The cashflows are generally applied in a pre-determined order and are designed so thateach security issued qualifies for a specific original rating.  The security issue is typically referred toas the “class”.  For example, the “senior”portion or “top” of the capital structure, or rating class, which wouldoriginally qualify for a rating of Aaa typically has priority in receiving theprincipal repayments on the collateral. In a sequential structure, underlying collateral principal repaymentsare directed to the most senior rated Aaa class in the structure until paid infull, after which principal repayments are directed to the next most senior Aaaclass in the structure until it is paid in full.  Senior Aaa classes generally share any lossesfrom the underlying collateral on a pro-rata basis after losses are absorbed byclasses with lower original ratings and include other “junior” or “subordinate”securities.  The collateral can havefixed interest rates, variable interest rates (such as adjustable ratemortgages (“ARM”)) or may contain features of both fixed and variable ratemortgages.

 

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*RMBS*,including U.S. Agency, Prime, Alt-A and Subprime, totaled $5.06 billion, with83.7% rated investment grade, at March 31, 2010.  The RMBS portfolio is subject to interestrate risk, but unlike other fixed income securities, is additionally subject tosignificant prepayment risk from the underlying mortgages.  The credit risk associated with our RMBS ismitigated due to the fact that 53.0% of the portfolio consists of securitiesthat were issued by, or have underlying collateral that is guaranteed by, U.S.government agencies.  The unrealized netcapital loss of $770 million at March 31, 2010 on our RMBS portfolio wasthe result of wider credit spreads than at initial purchase on non-U.S. Agencysecurities, which is largely due to the macroeconomic conditions and creditmarket deterioration, including the impact of real estate valuations, thatpersisted into 2010.  The following table shows our RMBS portfolioat March 31, 2010 based upon vintage year of the issuance of thesecurities.

 
| **($ in millions)** | ** ** | **U.S.  Agency** | ** ** | **Prime**                   | ** ** | ** **      | **Alt-A**  | ** **                  | ** ** | **Subprime** | ** **      | ** ** | **Total  RMBS**             | ** ** |
|--------------------------|------------|------------------|------------|-----------------------------|------------|-----------------|------------|-----------------------------|------------|--------------|-----------------|------------|-----------------------------|------------|
| ** **               | ** ** | **Fair  value**  | ** ** | **Unrealized  gain/(loss)** | ** ** | **Fair  value** | ** ** | **Unrealized  gain/(loss)** | ** ** | ** **   | **Fair  value** | ** ** | **Unrealized  gain/(loss)** | ** ** | ** ** | **Fair  value** | ** ** | **Unrealized  gain/(loss)** | ** ** | ** ** | **Fair  value** | ** ** | **Unrealized  gain/(loss)** | ** ** |
| 2010                     | $          | —           | $          | —                      | $          | 192             | $          | —                      |       | $            | 64              | $          | —                      |       | $ | — | $ | — |   | $ | 256 | $ | — |   |
| 2009                     |       | 541              |       | 5                           |       | 58              |       | —                      |       |         | 12              |       | —                      |       |   | — |   | — |   |   | 611 |   | 5 |   |
| 2008                     |       | 385              |       | 8                           |       | —          |       | —                      |       |         | —          |       | —                      |       |   | — |   | — |   |   | 385 |   | 8 |   |
| 2007                     |       | 117              |       | 4                           |       | 103             |       | (7                          | )          |         | 37              |       | (19                         | )          |   | 311 |   | (282 | ) |   | 568 |   | (304 | ) |
| 2006                     |       | 169              |       | 7                           |       | 103             |       | (10                         | )          |         | 65              |       | (15                         | )          |   | 256 |   | (205 | ) |   | 593 |   | (223 | ) |
| 2005                     |       | 342              |       | 12                          |       | 146             |       | (16                         | )          |         | 108             |       | (36                         | )          |   | 241 |   | (153 | ) |   | 837 |   | (193 | ) |
| Pre-2005                 |       | 1,126            |       | 59                          |       | 287             |       | (9                          | )          |         | 159             |       | (35                         | )          |   | 235 |   | (78 | ) |   | 1,807 |   | (63 | ) |
| Total                    | $          | 2,680            | $          | 95                          | $          | 889             | $          | (42                         | )          | $            | 445             | $          | (105                        | )          | $ | 1,043 | $ | (718 | ) | $ | 5,057 | $ | (770 | ) |

 

Prime arecollateralized by residential mortgage loans issued to prime borrowers.  As of March 31, 2010, $746 million of thePrime were fixed rate and $143 million were variable rate.

 

Alt-A includessecurities collateralized by residential mortgage loans issued to borrowerswith stronger credit profiles than subprime borrowers, but who do not qualifyfor prime financing terms due to high loan-to-value ratios or limitedsupporting documentation.  As of March 31,2010, $374 million of the Alt-A were fixed rate and $71 million were variablerate.

 

Subprime includessecurities that are collateralized by mortgage loans issued to borrowers thatcannot qualify for Prime or Alt-A financing terms due in part to weak orlimited credit history.  It also includessecurities that are collateralized by certain second lien mortgages regardlessof the borrower’s credit history.  TheSubprime portfolio consisted of $853 million and $188 million of first lien andsecond lien securities, respectively. Subprime included $539 million of fixed rate and $504 million ofvariable rate securities.

 

*CMBS* totaled $2.33 billion, with 95.0% rated investmentgrade, at March 31, 2010.  The CMBSportfolio is subject to credit risk, but unlike certain other structuredsecurities, is generally not subject to prepayment risk due to protectionswithin the underlying commercial mortgages whereby borrowers are effectivelyrestricted from prepaying their mortgages due to changes in interestrates.  Of the CMBS investments, 92.7%are traditional conduit transactions collateralized by pools of commercialmortgages, broadly diversified across property types and geographicalarea.  The remainder consists ofnon-traditional CMBS such as small balance transactions, large loan pools andsingle borrower transactions.

 

Thefollowing table shows our CMBS portfolio at March 31, 2010 based uponvintage year.

 
| **($ in millions)** | ** ** | **Fair********value** | ** ** | **Unrealized  gain/(loss)** | ** ** |
|--------------------------|------------|-----------------------|------------|-----------------------------|------------|
| 2007                     | $          | 619                   | $          | (229                        | )          |
| 2006                     |       | 496                   |       | (400                        | )          |
| 2005                     |       | 375                   |       | (100                        | )          |
| Pre-2005                 |       | 837                   |       | (37                         | )          |
| Total  CMBS              | $          | 2,327                 | $          | (766                        | )          |

 

The unrealized netcapital loss of $766 million at March 31, 2010 on our CMBS portfolio wasthe result of wider credit spreads than at initial purchase, which is largelydue to the macroeconomic conditions and credit market deterioration, includingthe impact of real estate valuations, that has persisted into 2010.  While CMBS spreads tightened during 2009 and2010, credit spreads in most rating classes remain wider than at initialpurchase, which is particularly evident in our 2005-2007 vintage year andnon-traditional CMBS.  These holdingsaccounted for $693 million, or 90.5%, of the unrealized net capital loss.

 

47

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*ABS,* including CDO and Consumer and other ABS, totaled$2.25 billion, with 81.0% rated investment grade, at March 31, 2010.  Credit risk is managed by monitoring the performanceof the collateral.  In addition, many ofthe securities in the ABS portfolio are credit enhanced with features such asovercollateralization, subordinated structures, reserve funds, guaranteesand/or insurance.  The unrealized netcapital loss of $398 million at March 31, 2010 on our ABS portfolio wasthe result of wider credit spreads than at initial purchase.

 

CDO totaled $1.55billion, with 73.7% rated investment grade, at March 31, 2010.  CDO consist primarily of obligations securedby high yield and investment grade corporate credits including $1.22 billion ofcash flow collateralized loan obligations (“CLO”) and $97 million of syntheticCDO with unrealized losses of $175 million and $97 million, respectively.  The remaining $228 million of securitiesconsisted of trust preferred CDO, market value CDO, project finance CDO,collateralized bond obligations and other CLO with unrealized losses of $101million.

 

Cash flow CLO are structureswhere the underlying assets are primarily comprised of below investment gradesenior secured corporate loans.  The collateral is actively managed byexternal managers that monitor the collateral performance.  The underlying investments are welldiversified across industries and among issuers.  A transaction will typically issuenotes with various capital structure classes (i.e. Aaa, Aa, A, etc.) as well asequity-like tranches.  In general, thesesecurities are structured with overcollateralization ratios and performance isimpacted by downgrades, defaults and recoveries of the underlying assets withinthe structures.  Downgrades of underlyingassets, along with increased defaults reduce overcollateralization ratios overtime.  A violation of the seniorovercollateralization test could result in an event of default of thestructure.  This would give thecontrolling class, defined as the majority of the senior lenders, certainrights which could include diverting cash flows or liquidating the underlyingportfolio to pay off the senior liabilities.

 

Synthetic CDO primarily consist of a portfolio of corporatecredit default swaps (“CDS”) which are collateralized by Aaa rated LIBOR-basedsecurities (i.e. “fully funded” synthetic CDO). Our synthetic CDO collateral primarily is actively managed byexternal managers monitoring the CDS selection and performance.

 

Consumer and otherABS totaled $701 million, with 97.0% rated investment grade, at March 31,2010.  Consumer and other ABS consists of$349 million of auto and $352 million of other ABS securities with unrealizedgains of $5 million for auto and unrealized losses of $30 million for other ABSsecurities.

 

**Mortgageloans**  Ourmortgage loan portfolio totaled $7.49 billion at March 31, 2010,compared to $7.78 billion at December 31, 2009, and is primarily comprisedof loans secured by first mortgages on developed commercial real estate.  Key considerations used to manage ourexposure include property type and geographic diversification.  Our exposure to any metropolitan area is alsohighly diversified, with the largest exposure not exceeding 9.4% of the portfolio.  The portfolio is diversified across severalproperty types, with the largest concentrations of 34.1% in office buildingsand 24.8% in retail property.  Debtservice coverage ratio represents the amount of cash flows from the propertyavailable to the borrower to meet principal and interest paymentobligations.  For fixed rate mortgageloans, which comprise 90% of the total portfolio, the average debt servicecoverage ratios as of both March 31, 2010 and December 31, 2009 were1.7.  Mortgage loans with debt servicecoverage ratios below 1.0 generally have a higher level of risk.  5.5% of the mortgage loan portfolio had adebt service coverage ratio under 1.0 compared to 5.8% as of December 31,2009.  As of March 31, 2010, 27.3%of these loans have valuation allowances totaling $36 million compared to 18.7%totaling $26 million as of December 31, 2009.  Mortgage loans with debt service coveragebelow 1.0 for which valuation allowances have not been established primarilyrelate to instances where the borrower has the financial capacity to fund therevenue shortfalls from the properties for the foreseeable term, the decreasein occupancy is considered temporary, or there are other risk mitigatingcircumstances such as additional collateral, escrow balances or borrowerguarantees.

 

In the first three monthsof 2010, $316 million of commercial mortgage loans were contractuallydue.  Of these, 10% were paid as due, 70%were extended generally for less than one year, 11% were refinanced and 9% wereforeclosed or in the process of foreclosure. In addition, $193 million that were not contractually due in the firstthree months of 2010 were paid in full. We have nine additional loans totaling $129 million in the process offoreclosure that were not contractually due in the first three months of2010.  In total we have eleven loanstotaling $158 million in foreclosure, reflecting an increase from five loanstotaling $49 million as of December 31, 2009.

 

The net carrying value ofimpaired loans at March 31, 2010 and December 31, 2009 was$339 million and $377 million, respectively.  Total valuation allowances of $104 millionwere held on impaired loans at March 31, 2010.  We recognized $13 million of realizedcapital losses related to net increases in the valuation allowances on 

 

48

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impaired loans for thethree months ended March 31, 2010 primarily due to deteriorating debtservice coverage resulting from a decrease in occupancy and the risk associatedwith refinancing near-term maturities due to declining collateralvaluations.  Realized capital lossesrecognized on mortgage loans held for sale totaled $6 million for thethree months ended March 31, 2010.

 

**Limitedpartnership interests** consist of investments in private equity/debt funds, real estate fundsand hedge funds.  The overall limitedpartnership interests portfolio is well diversified across a number ofcharacteristics including fund sponsors, vintage years, strategies, geography(including international), and company/property types.  The following table presents informationabout our limited partnership interests as of March 31, 2010.

 
| **($ in  millions)**                      | ** ** | **Private  equity/ debt  funds** | ** ** | **Real estate  funds** | ** ** | **Hedge  funds** | ** ** | **Total** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|------------------------|------------|------------------|------------|-----------|------------|
| Cost  method of accounting (“Cost”)  | $          | 431                              | $          | 113                    | $          | —           | $          | 544       |       |
| Equity  method of accounting (“EMA”) |       | 349                              |       | 116                    |       | 10               |       | 475       |       |
| Total                                          | $          | 780                              | $          | 229                    | $          | 10               | $          | 1,019     |       |
|                                           |       |                             |       |                   |       |             |       |      |       |
| Number  of sponsors                            |       | 71                               |       | 30                     |       | 1                |       |      |       |
| Number  of individual funds                    |       | 110                              |       | 57                     |       | 2                |       |      |       |
| Largest  exposure to single fund               | $          | 22                               | $          | 16                     | $          | 8                |       |      |       |

 

As of both March 31,2010 and December 31, 2009, our aggregate limited partnership exposurerepresented 1.7% of total invested assets.

 

The following table showsthe results from our limited partnership interests by fund type and accountingclassification.

 
| **($ in  millions)**  | ** ** | **Three months ended********March 31,** | ** ** |
|----------------------------|------------|----------------------------------------------|------------|
| ** **                 | ** ** | **2010**                                     | ** ** | ** ** | **2009** | ** ** |
| ** **                 | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | **Total** | ** ** | ** ** | **Impairment** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Total** | ** ** | ** ** | **Impairment** | ** ** |
| ** **                 | ** ** | **Cost**                                     | ** ** | **EMA** | ** ** | ** ** | **income** | ** ** | ** ** | **write-downs****(1)** | ** ** | ** ** | **Cost** | ** ** | **EMA** | ** ** | ** ** | **income** | ** ** | ** ** | **write-downs****(1)** | ** ** |
| Private equity/ debt funds | $          | 3                                            | $          | 9 |   | $ | 12 |   | $ | (2 | ) | $ | 2 | $ | (33 | ) | $ | (31 | ) | $ | (37 | ) |
| Real estate funds          |       | —                                       |       | (18 | ) |   | (18 | ) |   | (9 | ) |   | — |   | (43 | ) |   | (43 | ) |   | (57 | ) |
| Hedge funds                |       | —                                       |       | 5 |   |   | 5 |   |   | — |   |   | — |   | (1 | ) |   | (1 | ) |   | — |   |
| Total                      | $          | 3                                            | $          | (4 | ) | $ | (1 | ) | $ | (11 | ) | $ | 2 | $ | (77 | ) | $ | (75 | ) | $ | (94 | ) |

 

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(1)   Impairment write-downs relatedto Cost limited partnerships were $11 million and $89 million in the threemonths ended March 31, 2010 and 2009, respectively. Impairment write-downsrelated to EMA limited partnerships were $5 million in the three months endedMarch 31, 2009. There were no impairment write-downs related to EMAlimited partnerships in the three months ended March 31, 2010.

 

Limited partnershipinterests, excluding impairment write-downs, generated losses of $1 million inthe three months ended March 31, 2010 compared to losses of $75 million inthe three months ended March 31, 2009. Income on EMA limited partnerships is recognized on a delay due to theavailability of the related financial statements.  The recognition of income on hedge funds is primarilyon a one-month delay and the income recognition on private equity/debt fundsand real estate funds are generally on a three-month delay.  Limited partnership interests accounted forunder the cost method of accounting recognize income only upon cashdistributions by the partnership.

 

49

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**Unrealizednet capital losses**totaled $1.10 billion as of March 31, 2010, compared to unrealized netcapital losses of $2.18 billion as of December 31, 2009.  The improvement since December 31, 2009was primarily a result of tightening credit spreads on certain fixed incomesecurities.  The following table presentsunrealized net capital gains and losses, pre-tax and after-tax.

 

| **($ in  millions)**                          | ** ** | **March 31,  2010** | ** ** | ** ** | **December 31,  2009** | ** ** |
|----------------------------------------------------|------------|--------------------------|------------|------------|-----------------------------|------------|
| U.S. government and agencies                       | $          | 157                      |       | $          | 155                         |       |
| Municipal                                          |       | (347                     | )          |       | (469                        | )          |
| Corporate                                          |       | 728                      |       |       | 225                         |       |
| Foreign government                                 |       | 263                      |       |       | 247                         |       |
| RMBS                                               |       | (770                     | )          |       | (930                        | )          |
| CMBS                                               |       | (766                     | )          |       | (922                        | )          |
| ABS                                                |       | (398                     | )          |       | (489                        | )          |
| Redeemable preferred stock                         |       | —                   |       |       | (1                          | )          |
| Fixed income securities (1)                        |       | (1,133                   | )          |       | (2,184                      | )          |
| Equity securities                                  |       | 44                       |       |       | 24                          |       |
| Short-term investments                             |       | —                   |       |       | —                      |       |
| Derivatives                                        |       | (13                      | )          |       | (18                         | )          |
| Unrealized net capital gains and losses, pre-tax   |       | (1,102                   | )          |       | (2,178                      | )          |
|                                               |       |                     |       |       |                        |       |
| Amounts recognized for:                            |       |                     |       |       |                        |       |
| Insurance reserves (2)                             |       | —                   |       |       | —                      |       |
| DAC and DSI (3)                                    |       | 727                      |       |       | 990                         |       |
| Amounts recognized                                 |       | 727                      |       |       | 990                         |       |
| Deferred income taxes                              |       | 126                      |       |       | 411                         |       |
| Unrealized net capital gains and losses, after-tax | $          | (249                     | )          | $          | (777                        | )          |

 

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| (1)    |   | Unrealized net capital  gains and losses for fixed income securities as of March 31, 2010 and  December 31, 2009 comprises $(376) million and $(422) million, respectively,  related to unrealized net capital losses on fixed income securities with  other-than-temporary impairment and $(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 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 loss for the fixed incomeportfolio totaled $1.13 billion, comprised of $1.93 billion of gross unrealizedgains and $3.06 billion of gross unrealized losses at March 31, 2010.  This is compared to a net unrealized loss forthe fixed income portfolio totaling $2.18 billion, comprised of $1.65 billionof gross unrealized gains and $3.83 billion of gross unrealized losses at December 31,2009.

 

50

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Grossunrealized gains and losses as of March 31, 2010 on fixed incomesecurities by type and sector are provided in the table below.

 
| **($ in millions)**                   | ** ** | **Par**          | ** ** | **Amortized** | ** ** | **Gross  unrealized** | ** ** | ** ** | **Fair**   | ** ** | **Amortized  cost as a  percent of** | ** ** | **Fair  value  as a percent********of** | ** ** |
|--------------------------------------------|------------|------------------|------------|---------------|------------|-----------------------|------------|------------|------------|------------|--------------------------------------|------------|-----------------------------------------|------------|
| ** **                                 | ** ** | **value****(1)** | ** ** | **cost**      | ** ** | **Gains**             | ** ** | **Losses** | ** ** | ** ** | **value**                            | ** ** | **par  value****(2)**                   | ** ** | **par  value****(2)** | ** ** |
| ** **                                 | ** ** | ** **       | ** ** | ** **    | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** **                           | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Corporate:                                 |       |             |       |          |       |                  |       |       |       |       |                                 |       |                                    |       |   |   |
| Banking                                    | $          | 3,493            | $          | 3,347         | $          | 86                    | $          | (199       | )          | $          | 3,234                                |       | 95.8                                    | %          | 92.6 | % |
| Financial services                         |       | 2,516            |       | 2,501         |       | 82                    |       | (55        | )          |       | 2,528                                |       | 99.4                                    |       | 100.5 |   |
| Utilities                                  |       | 5,362            |       | 5,374         |       | 318                   |       | (48        | )          |       | 5,644                                |       | 100.2                                   |       | 105.3 |   |
| Consumer goods (cyclical and non-cyclical) |       | 3,992            |       | 4,034         |       | 188                   |       | (45        | )          |       | 4,177                                |       | 101.1                                   |       | 104.6 |   |
| Transportation                             |       | 1,406            |       | 1,421         |       | 62                    |       | (31        | )          |       | 1,452                                |       | 101.1                                   |       | 103.3 |   |
| Capital goods                              |       | 2,961            |       | 2,963         |       | 150                   |       | (24        | )          |       | 3,089                                |       | 100.1                                   |       | 104.3 |   |
| Basic industry                             |       | 1,283            |       | 1,297         |       | 63                    |       | (14        | )          |       | 1,346                                |       | 101.1                                   |       | 104.9 |   |
| Energy                                     |       | 1,756            |       | 1,775         |       | 85                    |       | (9         | )          |       | 1,851                                |       | 101.1                                   |       | 105.4 |   |
| Communications                             |       | 1,572            |       | 1,573         |       | 74                    |       | (9         | )          |       | 1,638                                |       | 100.1                                   |       | 104.2 |   |
| Technology                                 |       | 847              |       | 860           |       | 38                    |       | (8         | )          |       | 890                                  |       | 101.5                                   |       | 105.1 |   |
| FDIC guaranteed                            |       | 640              |       | 643           |       | 9                     |       | —     |       |       | 652                                  |       | 100.5                                   |       | 101.9 |   |
| Other                                      |       | 1,283            |       | 1,150         |       | 38                    |       | (23        | )          |       | 1,165                                |       | 89.6                                    |       | 90.8 |   |
| Total corporate fixed income portfolio     |       | 27,111           |       | 26,938        |       | 1,193                 |       | (465       | )          |       | 27,666                               |       | 99.4                                    |       | 102.0 |   |
|                                       |       |             |       |          |       |                  |       |       |       |       |                                 |       |                                    |       |   |   |
| U.S. government and agencies               |       | 4,393            |       | 3,737         |       | 173                   |       | (16        | )          |       | 3,894                                |       | 85.1                                    |       | 88.6 |   |
| Municipal                                  |       | 9,643            |       | 5,541         |       | 78                    |       | (425       | )          |       | 5,194                                |       | 57.5                                    |       | 53.9 |   |
| Foreign government                         |       | 2,491            |       | 1,991         |       | 269                   |       | (6         | )          |       | 2,254                                |       | 79.9                                    |       | 90.5 |   |
| RMBS                                       |       | 6,130            |       | 5,827         |       | 105                   |       | (875       | )          |       | 5,057                                |       | 95.1                                    |       | 82.5 |   |
| CMBS                                       |       | 3,160            |       | 3,093         |       | 42                    |       | (808       | )          |       | 2,327                                |       | 97.9                                    |       | 73.6 |   |
| ABS                                        |       | 3,052            |       | 2,647         |       | 65                    |       | (463       | )          |       | 2,249                                |       | 86.7                                    |       | 73.7 |   |
| Redeemable preferred stock                 |       | 21               |       | 16            |       | —                |       | —     |       |       | 16                                   |       | 76.2                                    |       | 76.2 |   |
| Total fixed income securities              | $          | 56,001           | $          | 49,790        | $          | 1,925                 | $          | (3,058     | )          | $          | 48,657                               |       | 88.9                                    |       | 86.9 |   |

 

----

| (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 $859 million, $5.47  billion, $1.35 billion and $1.49 billion, respectively.                                                                                                 |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (2)    | Excluding  the impact of zero-coupon securities, the percentage of amortized cost to par  value would be 100.0% for corporates, 99.2% for municipals, 104.8% for  foreign governments and 102.9% for U.S. government and agencies. Similarly,  excluding the impact of zero-coupon securities, the percentage of fair value  to par value would be 102.7% for corporates, 97.1% for municipals, 109.8% for  foreign governments and 104.4% for U.S. government and agencies. |

 

The banking,financial services, utilities and consumer goods sectors had the highestconcentration of gross unrealized losses in our corporate fixed incomesecurities portfolio at March 31, 2010. While credit spreads tightened in 2009 and 2010, they remain wider thanat initial purchase for select securities in the portfolio.

 

The net unrealizedgain for the equity portfolio totaled $44 million, comprised of $47 million ofunrealized gains and $3 million of unrealized losses at March 31,2010.  This is compared to a netunrealized gain for the equity portfolio totaling $24 million, comprised of $31million of unrealized gains and $7 million of unrealized losses at December 31,2009.  Within the equity portfolio, thelosses were in the banking sector.  Theunrealized losses in this sector were company and sector specific.  As of March 31, 2010, we have the intentand ability to hold our equity securities with unrealized losses until recovery.

 

We have a comprehensiveportfolio monitoring process to identify and evaluate each fixed income andequity security whose carrying value may be other-than-temporarilyimpaired.  The process includes aquarterly review of all securities through a screening criteria whichidentifies instances where the fair value compared to amortized cost for fixedincome securities and cost for equity securities is below establishedthresholds, and also includes the monitoring of other criteria such as ratings,ratings downgrades or payment defaults. The securities identified, in addition to other securities for which wemay have a concern, are evaluated based on facts and circumstances forinclusion on our watch-list.  All investments in an unrealized lossposition at March 31, 2010 were included in our portfolio monitoringprocess for determining whether declines in value were other than temporary.

 

Theextent and duration of a decline in fair value have become less indicative ofwhen the market may believe there has been credit deterioration with respect toan issue or issuer.  While we continue touse declines in fair value and the length of time a security is in anunrealized loss position as indicators of potential credit deterioration, our 

 

51

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determination of whethera security’s decline in fair value is other than temporary has placed greateremphasis on our analysis of the underlying credit and collateral.

 

The following table summarizes fixed incomeand equity securities in a gross unrealized loss position according tosignificance, aging and investment grade classification.

 
| **($ in millions, except number  of issues)**                                                                                                                    | ** ** | **March 31,  2010** | ** ** | ** ** | **December 31,  2009**  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|------------|------------------------------|------------|
| ** **                                                                                                                                                                 | ** ** | **Fixed  income**        | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Fixed  income** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                                 | ** ** | **Investment  grade**    | ** ** | ** ** | **Below  investment  grade** | ** ** | ** ** | **Equity** | ** ** | ** ** | **Total** | ** ** | ** ** | **Investment  grade** | ** ** | ** ** | **Below  investment  grade** | ** ** | ** ** | **Equity** | ** ** | ** ** | **Total** | ** ** |
|                                                                                                                                                                       |       |                     |       |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Category (I):  Unrealized loss less than 20% of cost (1) (2)                                                                                                     |       |                     |       |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Number  of issues                                                                                                                                                          |       | 1,037                    |       |       | 130                          |       |   | 5 |   |   | 1,172 |   |   | 1,323 |   |   | 117 |   |   | 5 |   |   | 1,445 |   |
| Fair  value                                                                                                                                                                | $          | 12,945                   |       | $          | 972                          |       | $ | 27 |   | $ | 13,944 |   | $ | 16,453 |   | $ | 823 |   | $ | 11 |   | $ | 17,287 |   |
| Unrealized                                                                                                                                                                 | $          | (663                     | )          | $          | (93                          | )          | $ | (3 | ) | $ | (759 | ) | $ | (892 | ) | $ | (87 | ) | $ | (2 | ) | $ | (981 | ) |
|                                                                                                                                                                       |       |                     |       |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Category (II):  Unrealized loss greater than or equal to 20% of cost for a period of less  than 6 consecutive months (1) (2)                                          |       |                     |       |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Number  of issues                                                                                                                                                          |       | 34                       |       |       | 6                            |       |   | 1 |   |   | 41 |   |   | 51 |   |   | 19 |   |   | 1 |   |   | 71 |   |
| Fair  value                                                                                                                                                                | $          | 252                      |       | $          | 88                           |       | $ | — |   | $ | 340 |   | $ | 378 |   | $ | 135 |   | $ | 13 |   | $ | 526 |   |
| Unrealized                                                                                                                                                                 | $          | (79                      | )          | $          | (33                          | )          | $ | — |   | $ | (112 | ) | $ | (124 | ) | $ | (58 | ) | $ | (5 | ) | $ | (187 | ) |
|                                                                                                                                                                       |       |                     |       |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Category (III):  Unrealized loss greater than or equal to 20% of cost for a period of 6 or  more consecutive months, but less than 12 consecutive months (1) (2) |       |                     |       |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Number  of issues                                                                                                                                                          |       | 3                        |       |       | 9                            |       |   | — |   |   | 12 |   |   | 20 |   |   | 19 |   |   | 2 |   |   | 41 |   |
| Fair  value                                                                                                                                                                | $          | 17                       |       | $          | 40                           |       | $ | — |   | $ | 57 |   | $ | 129 |   | $ | 83 |   | $ | — |   | $ | 212 |   |
| Unrealized                                                                                                                                                                 | $          | (9                       | )          | $          | (20                          | )          | $ | — |   | $ | (29 | ) | $ | (79 | ) | $ | (49 | ) | $ | — |   | $ | (128 | ) |
|                                                                                                                                                                       |       |                     |       |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Category (IV): Unrealized  loss greater than or equal to 20% of cost for 12 or more consecutive months (1) (2)                                                        |       |                     |       |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Number  of issues                                                                                                                                                          |       | 317                      |       |       | 184                          |       |   | — |   |   | 501 |   |   | 375 |   |   | 170 |   |   | — |   |   | 545 |   |
| Fair  value                                                                                                                                                                | $          | 1,575                    |       | $          | 990                          |       | $ | — |   | $ | 2,565 |   | $ | 1,967 |   | $ | 917 |   | $ | — |   | $ | 2,884 |   |
| Unrealized                                                                                                                                                                 | $          | (1,196                   | )          | $          | (965                         | )          | $ | — |   | $ | (2,161 | ) | $ | (1,563 | ) | $ | (977 | ) | $ | — |   | $ | (2,540 | ) |
|                                                                                                                                                                       |       |                     |       |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  number of issues                                                                                                                                                    |       | 1,391                    |       |       | 329                          |       |   | 6 |   |   | 1,726 |   |   | 1,769 |   |   | 325 |   |   | 8 |   |   | 2,102 |   |
| Total  fair value                                                                                                                                                          | $          | 14,789                   |       | $          | 2,090                        |       | $ | 27 |   | $ | 16,906 |   | $ | 18,927 |   | $ | 1,958 |   | $ | 24 |   | $ | 20,909 |   |
| Total  unrealized losses                                                                                                                                                   | $          | (1,947                   | )          | $          | (1,111                       | )          | $ | (3 | ) | $ | (3,061 | ) | $ | (2,658 | ) | $ | (1,171 | ) | $ | (7 | ) | $ | (3,836 | ) |

 

----

| (1)    | For  fixed income securities, cost represents amortized cost.                                                                                                                                                                                                                                                                                                            |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                     |
| (2)    | At  March 31, 2010, gross unrealized losses resulting from factors other  than credit on fixed income securities with other-than-temporary impairments  for which we have recorded a credit loss in earnings are included as follows:  Category (I) $15 million, none in  Category (II), Category (III) $7 million, and Category (IV) $445  million. |

 

Categories (I) and (II) havegenerally been adversely affected by overall economic conditions includinginterest rate increases and the market’s evaluation of certain sectors.  The degree to which and/or length of timethat the securities have been in an unrealized loss position does not suggestthat these securities pose a high risk of being other-than-temporarilyimpaired.  The largest individualunrealized loss was $9 million for Category (I) and $17 million forCategory (II) as of March 31, 2010.

 

Gross unrealized losses on fixed incomesecurities in Category (II) decreased $70 million since December 31,2009.  This change was primarily theresult of improved market conditions resulting in higher valuations, whicheither caused a shift to Category (I) or created an overall grossunrealized gain position.  The remainderof the reduction in Category (II) is primarily a result of losses shiftinginto Category (III) and (IV) due to continued aging of losses in acontinuous unrealized loss position of greater than or equal to 20% ofamortized cost.

 

52

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Categories (III) and (IV) areaffected by macroeconomic and credit pressures upon real estate valuations andborrowers, and issue, issuer or industry specific conditions.  The degree to which and/or length of timethese securities have been in an unrealized loss position subject them toincreased scrutiny through our portfolio monitoring process.  The largest individual unrealized loss was $4million for Category (III) and $28 million for Category (IV) as of March 31,2010.  Category (III) and (IV) fixedincome securities at March 31, 2010 are listed in the following table byfixed income security type and investment quality classification.

 
| **($ in millions)** | ** ** | **Investment grade**  | ** ** |
|--------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **Category (III)**    | ** ** | ** ** | **Category (IV)** | ** ** | ** ** | **Total** | ** ** |
| ** **               | ** ** | **Fair********value** | ** ** | ** ** | **Unrealized  losses** | ** ** | ** ** | **Fair********value** | ** ** | ** ** | **Unrealized  losses** | ** ** | ** ** | **Fair********value** | ** ** | ** ** | **Unrealized  losses** | ** ** |
| ** **               | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Municipal                | $          | —                |       | $ | — |   | $ | 312 |   | $ | (214 | ) | $ | 312 |   | $ | (214 | ) |
| Corporate                |       | 15                    |       |   | (7 | ) |   | 129 |   |   | (57 | ) |   | 144 |   |   | (64 | ) |
| RMBS                     |       | 2                     |       |   | (2 | ) |   | 276 |   |   | (245 | ) |   | 278 |   |   | (247 | ) |
| CMBS                     |       | —                |       |   | — |   |   | 563 |   |   | (536 | ) |   | 563 |   |   | (536 | ) |
| ABS                      |       | —                |       |   | — |   |   | 295 |   |   | (144 | ) |   | 295 |   |   | (144 | ) |
|                     | $          | 17                    |       | $ | (9 | ) | $ | 1,575 |   | $ | (1,196 | ) | $ | 1,592 |   | $ | (1,205 | ) |

 
| ** ** | ** ** | **Below investment grade** | ** ** |
|------------|------------|----------------------------|------------|
| ** ** | ** ** | **Category (III)**         | ** ** | ** ** | **Category (IV)** | ** ** | ** ** | **Total** | ** ** |
| ** ** | ** ** | **Fair********value**      | ** ** | ** ** | **Unrealized losses** | ** ** | ** ** | **Fair********value** | ** ** | ** ** | **Unrealized losses** | ** ** | ** ** | **Fair********value** | ** ** | ** ** | **Unrealized losses** | ** ** |
| ** ** | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Municipal  | $          | 11                         |       | $ | (5 | ) | $ | 46 |   | $ | (27 | ) | $ | 57 |   | $ | (32 | ) |
| Corporate  |       | 11                         |       |   | (4 | ) |   | 49 |   |   | (17 | ) |   | 60 |   |   | (21 | ) |
| RMBS       |       | 14                         |       |   | (7 | ) |   | 465 |   |   | (510 | ) |   | 479 |   |   | (517 | ) |
| CMBS       |       | —                     |       |   | — |   |   | 118 |   |   | (206 | ) |   | 118 |   |   | (206 | ) |
| ABS        |       | 4                          |       |   | (4 | ) |   | 312 |   |   | (205 | ) |   | 316 |   |   | (209 | ) |
|       | $          | 40                         |       | $ | (20 | ) | $ | 990 |   | $ | (965 | ) | $ | 1,030 |   | $ | (985 | ) |
| Total      | $          | 57                         |       | $ | (29 | ) | $ | 2,565 |   | $ | (2,161 | ) | $ | 2,622 |   | $ | (2,190 | ) |

 

As of March 31, 2010, our gross unrealizedlosses in Category (III) and (IV) were primarily concentrated instructured securities, as we have experienced declines in fair value primarilydue to wider credit spreads since the time of initial purchase.  As of March 31, 2010, RMBS, CMBS and ABScomprised $1.14 billion and $913 million of investment grade and belowinvestment grade securities in Category (III) and (IV), respectively.  Consistent with their rating, our portfoliomonitoring indicates that the investment grade securities have a relatively lowrisk of default.  Securities rated belowinvestment grade, whether at issue or upon subsequent downgrade, have a higherlevel of risk and can be more volatile.

 

A key consideration inthe determination of other-than-temporary impairment for structured securitiesis whether the present value of loss adjusted cash flows from the underlyingcollateral will be sufficient to recover our amortized cost basis.  This evaluation focuses on the adequacy ofcredit enhancement relative to the performance of the underlying collateral,adjusted for projected defaults and prepayments.  Credit enhancement includes, but is notlimited to, structural subordination, guarantees and reserves.  Key future collateral performanceconsiderations include historical default/prepayment trends, as well asprojected macroeconomic variables such as unemployment rates and interestrates.  In general, securities withcredit enhancement in excess of projected loss-adjusted collateral performanceor which are reliably insured are deemed not other-than-temporarily impaired.

 

A description of theother-than-temporary impairment (“OTTI”) assessment for our RMBS, CMBS and ABS,which comprise a majority of our Category (III) and (IV) unrealizedlosses, follows:

 

·                  The credit loss evaluation for non-agencyRMBS securities, including Prime, Alt-A and Subprime securities, primarilyrelies on projections of losses based on future collateral performance, takinginto account security specific delinquency and loss severity trends on theunderlying mortgage collateral to date. The expected performance of each transaction considers projectedcollateral losses and credit enhancement levels, as well as an assessment ofthe origination practices of the transaction sponsor, geographicdiversification, overall transaction structure, collateral type and quality,transaction vintage year and other considerations that may be of concern.  Our default estimates on the underlyingmortgage collateral are forward looking and generally based upon securityspecific performance trends to date as well as our overall economic outlook,with a focus on housing, unemployment and GDP expectations, and consider otherfactors that may influence future 

 

53

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borrowerbehaviors.  Our loss severity estimatesare forward looking and incorporate estimates of future house priceappreciation/depreciation expectations and estimates of foreclosure timing andexpenses.

 

Thefollowing table shows our Category (IV) below investment grade RMBSsecurities, including Prime, Alt-A and Subprime, by credit rating as of March 31,2010.

 
| **($ in millions)**     | ** ** | **With OTTI recorded** | ** ** | ** ** | **Other** | ** ** | ** ** | **Total**              | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|------------|-----------|------------|------------|------------------------|------------|------------|------------|------------|
| ** **                        | ** ** | **Ba**                           | ** ** | ** ** | **B**     | ** ** | ** ** | **Caa or  lower** | ** ** | ** ** | **Ba**     | ** ** | ** ** | **B** | ** ** | ** ** | **Caa or  lower** | ** ** | ** ** | **Ba** | ** ** | ** ** | **B** | ** ** | ** ** | **Caa or  lower** | ** ** | ** ** | **Total** | ** ** |
| Prime                             |       |                             |       |       |      |       |       |                   |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fair value                        | $          | —                           |       | $          | —    |       | $          | 21                     |       | $          | —     |       | $ | 3 |   | $ | — |   | $ | — |   | $ | 3 |   | $ | 21 |   | $ | 24 |   |
| Unrealized losses                 | $          | —                           |       | $          | —    |       | $          | (10                    | )          | $          | —     |       | $ | (3 | ) | $ | — |   | $ | — |   | $ | (3 | ) | $ | (10 | ) | $ | (13 | ) |
| Cumulative write-downs recognized | $          | —                           |       | $          | —    |       | $          | (2                     | )          | $          | —     |       | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | (2 | ) | $ | (2 | ) |
|                              |       |                             |       |       |      |       |       |                   |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Alt-A                             |       |                             |       |       |      |       |       |                   |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fair value                        | $          | 1                                |       | $          | —    |       | $          | 65                     |       | $          | 23         |       | $ | 1 |   | $ | 11 |   | $ | 24 |   | $ | 1 |   | $ | 76 |   | $ | 101 |   |
| Unrealized losses                 | $          | (3                               | )          | $          | —    |       | $          | (39                    | )          | $          | (17        | )          | $ | (2 | ) | $ | (4 | ) | $ | (20 | ) | $ | (2 | ) | $ | (43 | ) | $ | (65 | ) |
| Cumulative write-downs recognized | $          | —                           |       | $          | —    |       | $          | (15                    | )          | $          | —     |       | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | (15 | ) | $ | (15 | ) |
|                              |       |                             |       |       |      |       |       |                   |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Subprime                          |       |                             |       |       |      |       |       |                   |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fair value                        | $          | 5                                |       | $          | 7         |       | $          | 159                    |       | $          | 24         |       | $ | 77 |   | $ | 68 |   | $ | 29 |   | $ | 84 |   | $ | 227 |   | $ | 340 |   |
| Unrealized losses                 | $          | (5                               | )          | $          | (9        | )          | $          | (227                   | )          | $          | (20        | )          | $ | (92 | ) | $ | (79 | ) | $ | (25 | ) | $ | (101 | ) | $ | (306 | ) | $ | (432 | ) |
| Cumulative write-downs recognized | $          | (1                               | )          | $          | —    |       | $          | (164                   | )          | $          | —     |       | $ | — |   | $ | — |   | $ | (1 | ) | $ | — |   | $ | (164 | ) | $ | (165 | ) |
|                              |       |                             |       |       |      |       |       |                   |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                             |       |                             |       |       |      |       |       |                   |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fair value                        | $          | 6                                |       | $          | 7         |       | $          | 245                    |       | $          | 47         |       | $ | 81 |   | $ | 79 |   | $ | 53 |   | $ | 88 |   | $ | 324 |   | $ | 465 |   |
| Unrealized losses                 | $          | (8                               | )          | $          | (9        | )          | $          | (276                   | )          | $          | (37        | )          | $ | (97 | ) | $ | (83 | ) | $ | (45 | ) | $ | (106 | ) | $ | (359 | ) | $ | (510 | ) |
| Cumulative write-downs recognized | $          | (1                               | )          | $          | —    |       | $          | (181                   | )          | $          | —     |       | $ | — |   | $ | — |   | $ | (1 | ) | $ | — |   | $ | (181 | ) | $ | (182 | ) |

 

Other-than-temporaryimpairment write-downs have been recorded for 55% of our Category (IV) belowinvestment grade RMBS as of March 31, 2010.  For securities in this group rated Caa orlower, 76% have had other-than-temporary impairment write-downs recorded as of March 31,2010.  For the Category (IV) belowinvestment grade RMBS with other-than-temporary impairment write-downsrecorded, approximately 38% of the decline in fair value has been recognized asimpairment losses.

 

·                  The credit loss evaluation for CMBSprimarily relies on model-driven projections of future collateral performance,taking into account all reasonably available information specific to theunderlying commercial mortgage loans including estimates of current and futureproperty value, current and projected rental income and the credit enhancementlevels.  Estimates of future propertyvalue and rental income consider specific property-type and metro area economictrends such as property vacancy rates and rental rates, employment indicatorsand building industry fundamentals. Other considerations include borrower payment history, the originationpractices of the transaction sponsor, overall collateral quality anddiversification, transaction vintage year, maturity date, overall structure ofthe transaction and other factors that may influence performance.  Actual realized losses in the CMBS markethave historically been low, therefore our projection of collateral performanceis informed by credit opinions obtained from third parties, such as nationallyrecognized credit rating agencies, industry analysts and a CMBS loss modelingadvisory service.

 

Thefollowing table shows our Category (IV) below investment grade CMBSsecurities by credit rating as of March 31, 2010.

 
| **($ in millions)**          | ** ** | **With  OTTI recorded** | ** ** | ** ** | **Other** | ** ** | ** ** | **Total**         | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|-------------------------|------------|------------|-----------|------------|------------|-------------------|------------|------------|------------|------------|
| ** **                        | ** ** | **Ba**                  | ** ** | ** ** | **B**     | ** ** | ** ** | **Caa or  lower** | ** ** | ** ** | **Ba**     | ** ** | ** ** | **B** | ** ** | ** ** | **Caa or  lower** | ** ** | ** ** | **Ba** | ** ** | ** ** | **B** | ** ** | ** ** | **Caa or  lower** | ** ** | ** ** | **Total** | ** ** |
| CMBS                              |       |                    |       |       |      |       |       |              |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fair value                        | $          | 6                       |       | $          | 38        |       | $          | 9                 |       | $          | 50         |       | $ | 15 |   | $ | — |   | $ | 56 |   | $ | 53 |   | $ | 9 |   | $ | 118 |   |
| Unrealized losses                 | $          | (20                     | )          | $          | (46       | )          | $          | (19               | )          | $          | (81        | )          | $ | (40 | ) | $ | — |   | $ | (101 | ) | $ | (86 | ) | $ | (19 | ) | $ | (206 | ) |
| Cumulative write-downs recognized | $          | (13                     | )          | $          | (45       | )          | $          | (15               | )          | $          | —     |       | $ | — |   | $ | — |   | $ | (13 | ) | $ | (45 | ) | $ | (15 | ) | $ | (73 | ) |

 

Other-than-temporaryimpairment write-downs have been recorded for 45% of our Category (IV) belowinvestment grade CMBS as of March 31, 2010.  For securities in this group rated Caa orlower, 100% have had other-

 

54

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than-temporary impairmentwrite-downs recorded as of March 31, 2010. For the Category (IV) below investment grade CMBS withother-than-temporary impairment write-downs recorded, approximately 46% of thedecline in fair value has been recognized as impairment losses.

 

·      The credit loss evaluation for ABSprimarily relies on expectations of future losses on the underlying collateraland structural considerations of each issue. The projection of future losses is based on our expectations forinvestment grade corporate, bank loan and high yield markets.  Our expectations are formulated throughongoing monitoring and participation in these markets, and considers opinionsfrom third parties, such as industry analysts and strategists, and creditrating agencies as well as our overall economic outlook for indicators such asunemployment and GDP.  The expectedperformance of each transaction considers expected collateral losses and creditenhancement levels, as well as factors including default rates, expectedrecoveries, prepayment rates, changes in interest rates and othercharacteristics.  In addition, theperformance of collateral underlying certain ABS securities is activelymonitored by external managers, allowing for enhanced collateral managementactions which help mitigate the risk of loss.

 

Thefollowing table shows our Category (IV) below investment grade ABSsecurities, including CDO and other ABS by credit rating as of March 31,2010.

 
| **($ in millions)**          | ** ** | **With  OTTI recorded** | ** ** | ** ** | **Other**  | ** ** | ** **        | **Total**  | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|-------------------------|------------|------------|------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                        | ** ** | ******Ba**              | ** ** | ******B**  | ** ** | ** ** | **Caa or  lower** | ** ** | ** ** | ******Ba** | ** ** | ** ** | ******B** | ** ** | ** ** | **Caa or  lower** | ** ** | ** ** | ******Ba** | ** ** | ** ** | ******B** | ** ** | ** ** | **Caa or  lower** | ** ** | ** ** | ******Total** | ** ** |
| ABS                               |       |                    |       |       |       |       |              |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fair value                        | $          | —                  | $          | 5          |       | $          | 12                |       | $          | 251        |       | $          | 17 |   | $ | 27 |   | $ | 251 |   | $ | 22 |   | $ | 39 |   | $ | 312 |   |
| Unrealized losses                 | $          | —                  | $          | (4         | )          | $          | (34               | )          | $          | (139       | )          | $          | (10 | ) | $ | (18 | ) | $ | (139 | ) | $ | (14 | ) | $ | (52 | ) | $ | (205 | ) |
| Cumulative write-downs recognized | $          | —                  | $          | (15        | )          | $          | (97               | )          | $          | —     |       | $          | — |   | $ | — |   | $ | — |   | $ | (15 | ) | $ | (97 | ) | $ | (112 | ) |

 

Other-than-temporaryimpairment write-downs have been recorded for 5% of our Category (IV) belowinvestment grade ABS as of March 31, 2010. For securities in this group rated Caa or lower, 31% have hadother-than-temporary impairment write-downs recorded as of March 31,2010.  For the Category (IV) belowinvestment grade ABS with other-than-temporary impairment write-downs recorded,approximately 75% of the decline in fair value has been recognized asimpairment losses.

 

For structured securitiesdeemed other-than-temporarily impaired, we recognized the estimated credit lossin earnings, while $422 million of net unrealized losses related to factorsother than credit remains classified in other comprehensive income (“OCI”) asof March 31, 2010.  Structuredsecurities deemed not other-than-temporarily impaired are current oncontractual or expected payments and our detailed analysis of the underlyingcredit and related cash flows has concluded that our amortized cost basis isrecoverable or the securities are reliably insured.  The declines in fair value are primarily dueto credit spread widening in the structured security marketplace and higherliquidity discounts.

 

We believe that the unrealized losses on our fixedincome securities are not predictive of their ultimate performance and theunrealized losses should reverse over the remaining lives of thesecurities.  We anticipate that these securities will recover in line withour best estimate of the expected cash flows which are used forother-than-temporary impairment evaluations. As of March 31, 2010, we do not have the intent to sell and it isnot more likely than not we will be required to sell these securities beforethe recovery of their amortized cost basis.  Our evaluation of whether itis more likely than not we will be required to sell a security before recoveryof its amortized cost basis is supported by our liquidity position, which cushionsus from the need to liquidate securities with significant unrealized losses tomeet cash obligations.

 

Additionally, if a fixedincome security which is deemed not to be other-than-temporarily impairedthrough our portfolio monitoring process has an unrealized loss of 20% or morefor at least 36 months or any equity security’s unrealized loss of 20% or morefor at least 12 months, additional evaluations and management approvals arerequired to substantiate that recognition of an impairment write-down is notappropriate.  As of March 31, 2010,no securities met these criteria.

 

We also monitor the quality of our fixedincome and bank loan portfolios by categorizing certain investments as “problem”,“restructured” or “potential problem.” Problem fixed income securities and bank loans are in default withrespect to principal or interest and/or are investments issued by companiesthat have gone into bankruptcy subsequent to our acquisition or loan.  Fixed income and bank loan investments arecategorized as restructured when the debtor is in financial difficulty and wegrant a concession.  Potential problemfixed income or bank loan  

 

55

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investments are current with respect to contractual principal and/orinterest, but because of other facts and circumstances, we have concernsregarding the borrower’s ability to pay future principal and interest accordingto the original terms, which causes us to believe these investments may beclassified as problem or restructured in the future. 

 

The following table summarizes problem, restructured and potentialproblem fixed income securities and bank loans, which are reported in otherinvestments. 

 
| **($ in  millions)**             | ** ** | **March 31, 2010**    | ** ** |
|---------------------------------------|------------|----------------------------|------------|
| ** **                            | ** ** | **Par   value****(1)**     | ** ** | **Amortized  cost ****(1)** | ** ** | **Amortized  cost as a  percent of  par value** | ** ** | ** ** | **Fair********value ****(2)** | ** ** | **Fair********value as a  percent of  par value** | ** ** | **Percent of  total fixed  income and  bank loan  portfolios** | ** ** |
| Restructured                          | $          | 74                         | $          | 52 |   | 70.3 | % | $ | 54 |   | 73.0 | % | 0.1 | % |
| Problem                               |       | 445                        |       | 142 |   | 31.9 |   |   | 113 |   | 25.4 |   | 0.2 |   |
| Potential problem                     |       | 1,568                      |       | 990 |   | 63.1 |   |   | 592 |   | 37.8 |   | 1.2 |   |
| Total                                 | $          | 2,087                      | $          | 1,184 |   | 56.7 |   | $ | 759 |   | 36.4 |   | 1.5 | % |
| Cumulative write-downs recognized (3) |       |                       | $          | 791 |   |   |   |   |   |   |   |   |   |   |
| ** **                            | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| ** **                            | ** ** | **December 31, 2009** |       |
| ** **                            | ** ** | **Par   value****(1)**     | ** ** | **Amortized  cost ****(1)** | ** ** | **Amortized  cost as a  percent of  par value** | ** ** | ** ** | **Fair********value ****(2)** | ** ** | **Fair********value as a  percent of  par value** | ** ** | **Percent of  total fixed  income and  bank loan  portfolios** |   |
| 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 $903  million at March 31, 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 reflects impairment write-downs related to  investments within the problem, potential problem and restructured  categories.                                                                  |

 

At March 31,2010, amortized cost for the problem category was $142 million and wascomprised of $56 million of Subprime, $5 million of Consumer and other ABS, $4million of CMBS and $3 million of other CDO. Also included were $61 million of corporates (primarily privatelyplaced), $8 million of municipal bonds, and $5 million of bank loans.  The decrease of $23 million compared to December 31,2009 is primarily attributable to a reduction in Subprime.  The amortized cost of problem investmentswith a fair value less than 80% of amortized cost totaled $62 million withunrealized losses of $44 million and fair value of $18 million.

 

At March 31,2010, amortized cost for the potential problem category was $990 million andwas comprised of $389 million of Subprime, $196 million of Alt-A, $146 millionof CMBS, $116 million of other CDO, $32 million of Prime and $10 million ofConsumer and other ABS.  Also includedwere $84 million of corporates (primarily privately placed) and $17 million ofbank loans.  The decrease of $90 millionfrom December 31, 2009 is primarily attributable to a reduction ofcorporates (primarily privately placed) and CMBS.  The amortized cost of potential probleminvestments with a fair value less than 80% of amortized cost totaled $787million with unrealized losses of $421 million and fair value of $366 million.

 

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**NetInvestment Income** The following tablepresents net investment income.

 
| **($ in millions)**          | ** ** | **Three months ended********March 31,** | ** ** |
|-----------------------------------|------------|----------------------------------------------|------------|
| ** **                        | ** ** | **2010**                                     | ** ** | **2009** | ** ** |
| Fixed income securities           | $          | 635                                          | $          | 681 |   |
| Mortgage loans                    |       | 101                                          |       | 134 |   |
| Equity securities                 |       | 1                                            |       | 1 |   |
| Limited partnership interests     |       | 3                                            |       | 2 |   |
| Short-term                        |       | 1                                            |       | 7 |   |
| Other                             |       | (8                                           | )          | (6 | ) |
| Investment income, before expense |       | 733                                          |       | 819 |   |
| Investment expense                |       | (26                                          | )          | (22 | ) |
| Net investment income             | $          | 707                                          | $          | 797 |   |

 

Net investment income decreased 11.3% or $90 million to $707 million in the first quarter of2010 from $797 million in the same period of 2009 primarily due to lower yieldsand actions to reduce the portfolio’s exposure to commercial real estate alongwith reduced average asset balances.  Netinvestment income was $722 million and $714 million in the third and fourthquarter of 2009, respectively.

 

**Net realized capital gains and losses **The following table presentsthe components of realized capital gains and losses and the related tax effect.

 
| **($ in millions)**                                           | ** ** | **Three months ended  March 31,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                         | ** ** | **2010**                               | ** ** | ** ** | **2009** | ** ** |
| Impairment  write-downs                                            | $          | (142                                   | )          | $ | (352 | ) |
| Change in  intent write-downs                                      |       | (23                                    | )          |   | (32 | ) |
| Net  other-than-temporary impairment losses recognized in earnings |       | (165                                   | )          |   | (384 | ) |
| Sales                                                              |       | 43                                     |       |   | 358 |   |
| Valuation  of derivative instruments                               |       | (54                                    | )          |   | 83 |   |
| Settlements  of derivative instruments                             |       | 19                                     |       |   | (18 | ) |
| EMA  limited partnership income                                    |       | (4                                     | )          |   | (77 | ) |
| Realized  capital gains and losses, pre-tax                        |       | (161                                   | )          |   | (38 | ) |
| Income  tax benefit (expense)                                      |       | 57                                     |       |   | (129 | ) |
| Realized  capital gains and losses, after-tax                      | $          | (104                                   | )          | $ | (167 | ) |

 

*Impairmentwrite-downs* arepresented in the following table.

 
| **($ in  millions)**      | ** ** | **Three months ended  March 31,** | ** ** |
|--------------------------------|------------|----------------------------------------|------------|
| ** **                     | ** ** | **2010**                               | ** ** | ** ** | **2009** | ** ** |
| Fixed  income securities       | $          | (118                                   | )          | $ | (189 | ) |
| Mortgage  loans                |       | (13                                    | )          |   | (28 | ) |
| Equity  securities             |       | —                                 |       |   | (19 | ) |
| Limited  partnership interests |       | (11                                    | )          |   | (94 | ) |
| Other  investments             |       | —                                 |       |   | (22 | ) |
| Impairment  write-downs        | $          | (142                                   | )          | $ | (352 | ) |

 

Impairment write-downs in the three months ended March 31,2010 were primarily the result of RMBS which experienced deterioration inexpected cash flows; investments with commercial real estate exposure,including CMBS, limited partnership interests, and mortgage loans; which wereimpacted by declines in real estate valuations or experienced deterioration inexpected cash flows; and privately placed corporate bonds and municipal bondsdue to issuer specific circumstances. $102 million or 86.4% ofthe fixed income security write-downs for the three months ended March 31,2010 related to impaired securities that were performing in line withanticipated or contractual cash flows but were written down primarily becauseof expected deterioration in the performance of the underlying collateral orour assessment of the probability of future default.  For these securities, as of March 31,2010, there have either been no defaults or defaults have only impacted classeslower than our position in the capital  

 

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structure.  $16 million of the fixed income securitywrite-downs for the three months ended March 31, 2010 related tosecurities experiencing a significant departure from anticipated cash flows;however, we believe they retain economic value.

 

Limitedpartnership impairment write-downs related to Cost limited partnerships whichexperienced significant declines in portfolio valuations and we could notassert the recovery period would be temporary. To determine if an other-than-temporary impairment has occurred relatedto a Cost limited partnership, we evaluate whether an impairment indicator hasoccurred in the period that may have a significant adverse effect on thecarrying value of the investment. Impairment indicators may include: significantly reduced valuations ofthe investments held by the limited partnerships; actual recent cash flowsreceived being significantly less than expected cash flows; reduced valuationsbased on financing completed at a lower value; completed sale of a materialunderlying investment at a price significantly lower than expected; or anyother recent adverse events since the last financial statements received thatmight affect the fair value of the investee’s capital.

 

*Change inintent write-downs*are presented in the following table.

 
| **($ in  millions)**     | ** ** | **Three months ended********March 31,** | ** ** |
|-------------------------------|------------|----------------------------------------------|------------|
| ** **                    | ** ** | **2010**                                     | ** ** | ** ** | **2009** | ** ** |
| Fixed  income securities      | $          | (17                                          | )          | $ | (20 | ) |
| Mortgage  loans               |       | (6                                           | )          |   | (6 | ) |
| Equity  securities            |       | —                                       |       |   | (6 | ) |
| Change  in intent write-downs | $          | (23                                          | )          | $ | (32 | ) |

 

Change in intentwrite-downs in the three months ended March 31, 2010 related primarily tomunicipal bonds for which we have the intent to sell.

 

*Sales*generated $43 million of net realizedgains for the three months ended March 31, 2010 primarily due to sales ofcorporate fixed income securities.

 

*Valuationand settlement of derivative instruments*recorded as net realized capital losses totaling $35million for the three months ended March 31, 2010 included $54 million oflosses on the valuation of derivative instruments and $19 million of gains onthe settlement of derivative instruments. Losses from risk reduction strategies primarily occurred in the durationgap management program and related to a decrease in interest rates.

 

A changing interest rate environment will drivechanges in our portfolio duration targets at a tactical level.  A duration target and range is establishedwith an economic view of liabilities relative to a long-term investmentportfolio view.  Tactical durationmanagement is accomplished through both cash market transactions, sales and newpurchases and derivative activities that generate realized gains andlosses.  As a component of our approachto managing portfolio duration, realized gains and losses on certain derivativeinstruments are most appropriately considered in conjunction with theunrealized gains and losses on the fixed income portfolio.  This approach mitigates the impacts ofgeneral interest rate changes to our overall financial condition. 

 

At March 31,2010, our securities with embedded options totaled $778 million, an increase infair value of $11 million from December 31, 2009, resulting in realizedcapital losses on valuation of $5 million, net sales activity of $5 million,and unrealized net capital gains reported in OCI of $21 million for the hostsecurities.  Net unrealized capital gainswere further decreased by $7 million due to amortization of the hostsecurities.  The change in fair value ofembedded options is bifurcated from the host securities, separately valued andreported in realized capital gains and losses, while the change in thedifference between the fair value and the amortized cost of the host securitiesis reported in OCI.  Total fair valueexceeded total amortized cost by $5 million at March 31, 2010.  Valuation gains and losses are converted intocash for securities with embedded options upon our election to sell these securities.  In the event the economic value of theoptions is not realized, we will recover the par value if held to maturityunless the issuer of the note defaults. Total par value exceeded fair value by $7 million at March 31,2010.

 

58

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The table belowpresents the realized capital gains and losses (pre-tax) on the valuation andsettlement of derivative instruments shown by underlying exposure andderivative strategy.

 
| **($ in millions)**                                | ** ** | **Three months ended March 31,** | ** ** | ** **      | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|-----------------|------------|
| ** **                                              | ** ** | **2010**                              | ** ** | **2009**        | ** ** | **2010 Explanations** | ** ** |
| ** **                                              | ** ** | **Valuation**                         | ** ** | **Settlements** | ** ** | **Total** | ** ** | **Total** | ** ** | ** ** | ** ** |
| **Risk  reduction**                                     |       |                                  |       | ** **      |       |   |   |   |   |   |   |
| Duration  gap management                                | $          |                                  | (55        | )               | $          |   | 12 |   | $ |   | (43 | ) | $ |   | 74 |   | Interest rate caps, floors 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 and floors 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 relate  to a decrease in interest rates and a decline in volatility.  Volatility represents the measure of  variation of average value over a specified time period.  The 2010 losses 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. |   |
|                                                    |       |                                  |       |            |       |   |   |   |   |   |   |   |   |   |
| Anticipatory  hedging                                   |       | 16                                    |       |            | 4          |   |   | 20 |   |   | (16 | ) | 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. |   |
|                                                    |       |                                  |       |            |       |   |   |   |   |   |   |   |   |   |
| Hedging of  interest rate exposure in annuity contracts |       | (9                                    | )          |            | —     |   |   | (9 | ) |   | (2 | ) | 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. |   |
|                                                    |       |                                  |       |            |       |   |   |   |   |   |   |   |   |   |
| Hedging  unrealized gains on equity indexed notes       |       | —                                |       |            | —     |   |   | — |   |   | 3 |   |   |   |
|                                                    |       |                                  |       |            |       |   |   |   |   |   |   |   |   |   |
| Hedge  ineffectiveness                                  |       | —                                |       |            | —     |   |   | — |   |   | (1 | ) | The hedge ineffectiveness of less than $1 million  includes $47 million in realized capital losses on swaps that were offset by  $47 million in realized capital gains on the hedged risk. |   |
|                                                    |       |                                  |       |            |       |   |   |   |   |   |   |   |   |   |
| Foreign currency  contracts                             |       | (2                                    | )          |            | 6          |   |   | 4 |   |   | 1 |   |   |   |
|                                                    |       |                                  |       |            |       |   |   |   |   |   |   |   |   |   |
| Credit risk  reduction                                  |       | 3                                     |       |            | (3         | ) |   | — |   |   | 35 |   |   |   |
| **Total Risk reduction**                      |       |                                  | (47        | )               |       |   | 19 |   |   |   | (28 | ) |   |   | 94 |   |   |   |
|                                                    |       |                                  |       |            |       |   |   |   |   |   |   |   |   |   |
| **Income  generation**                                  |       |                                  |       |            |       |   |   |   |   |   |   |   |   |   |
| Asset replication  — credit exposure               |       |                                  | (2         | )               |       |   | — |   |   |   | (2 | ) |   |   | (6 | ) | 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**                                          |       |                                  |       |            |       |   |   |   |   |   |   |   |   |   |
| Equity indexed  notes                                   |       |                                  | (4         | )               |       |   | — |   |   |   | (4 | ) |   |   | (26 | ) | 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 $35 million at March 31, 2010.   Equity-indexed notes are subject to our comprehensive portfolio  monitoring and watchlist processes to identify and evaluate when the carrying  value may be other-than-temporarily impaired.   The following table compares the March 31, 2010 and  December 31, 2009 holdings, respectively. |   |
|                                                    |       |                                  |       |            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                    |       |                                  |       |            |       |   |   |   |   |   |   |   |   |   |   |   | **($ in millions)** | ** ** | **March 31,  2010** | ** ** | ** ** | **Change  in fair  value** | ** ** | ** ** | **Change  due  to net sale  activity** | ** ** | ** ** | **December 31,  2009** |   |
|                                                    |       |                                  |       |            |       |   |   |   |   |   |   |   |   |   |   |   | Par  value | $ | 475 |   | $ | — |   | $ | — |   | $ | 475 |   |
|                                                    |       |                                  |       |            |       |   |   |   |   |   |   |   |   |   |   |   | Amortized  cost of host contract | $ | 349 |   | $ | 5 |   | $ | — |   | $ | 344 |   |
|                                                    |       |                                  |       |            |       |   |   |   |   |   |   |   |   |   |   |   | Fair  value of equity-indexed call option | ** ** | 85 |   |   | (4 | ) | ** ** | — |   | ** ** | 89 |   |
|                                                    |       |                                  |       |            |       |   |   |   |   |   |   |   |   |   |   |   | Total  amortized cost | $ | 434 |   | $ | 1 |   | $ | — |   | $ | 433 |   |
|                                                    |       |                                  |       |            |       |   |   |   |   |   |   |   |   |   |   |   | Total  fair value | $ | 440 |   | $ | 10 |   | $ | — |   | $ | 430 |   |
|                                                    |       |                                  |       |            |       |   |   |   |   |   |   |   |   |   |   |   | Unrealized  gain/loss | $ | 6 |   | $ | 9 |   | $ | — |   | $ | (3 | ) |

 

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| **($ in millions)**                      | ** ** | **Three months ended March 31,** | ** ** | ** **      | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|-----------------|------------|
| ** **                                    | ** ** | **2010**                              | ** ** | **2009**        | ** ** | **2010  Explanations** | ** ** |
| ** **                                    | ** ** | **Valuation**                         | ** ** | **Settlements** | ** ** | **Total** | ** ** | **Total** | ** ** | ** ** | ** ** |
| Conversion options in fixed income securities |       |                                  | (1         | )               |       |   | — |   |   |   | (1 | ) |   |   | 3 |   | 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 $28 million at March 31, 2010.   Convertible bonds are subject to our comprehensive portfolio  monitoring and watchlist processes to identify and evaluate when the carrying  value may be other-than-temporarily impaired.   The following table compares the March 31, 2010 and  December 31, 2009 holdings, respectively. |   |
|                                          |       |                                  |       |            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                          |       |                                  |       |            |       |   |   |   |   |   |   |   |   |   |   |   | **($ in millions)** | ** ** | **March 31,  2010** | ** ** | ** ** | **Change  in fair  value** | ** ** | ** ** | **Change  due  to net sale  activity** | ** ** | ** ** | **December 31,  2009** |   |
|                                          |       |                                  |       |            |       |   |   |   |   |   |   |   |   |   |   |   | Par  value | $ | 310 |   | $ | — |   | $ | (5 | ) | $ | 315 |   |
|                                          |       |                                  |       |            |       |   |   |   |   |   |   |   |   |   |   |   | Amortized  cost of host contract | $ | 225 |   | $ | 2 |   | $ | (1 | ) | $ | 224 |   |
|                                          |       |                                  |       |            |       |   |   |   |   |   |   |   |   |   |   |   | Fair value  of conversion option | ** ** | 114 |   |   | (1 | ) | ** ** | (2 | ) | ** ** | 117 |   |
|                                          |       |                                  |       |            |       |   |   |   |   |   |   |   |   |   |   |   | Total  amortized cost | $ | 339 |   | $ | 1 |   | $ | (3 | ) | $ | 341 |   |
|                                          |       |                                  |       |            |       |   |   |   |   |   |   |   |   |   |   |   | Total  Fair value | $ | 338 |   | $ | 6 |   | $ | (5 | ) | $ | 337 |   |
|                                          |       |                                  |       |            |       |   |   |   |   |   |   |   |   |   |   |   | Unrealized  gain/loss | $ | (1 | ) | $ | 5 |   | $ | (2 | ) | $ | (4 | ) |

 
| ** **            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | ** ** |   |   |   |   |   |   |
|-----------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|------------|--------|--------|--------|--------|--------|--------|
| **Total  accounting** |   |   | (5     | )      |   |   | — |   |   |   | (5     | )      |   |   | (23    | )      |   |   |   |   |   |   | ** ** |   |   |   |   |   |   |
| ** **            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | ** ** |   |   |   |   |   |   |
| **Total**             | $      |   | (54    | )      | $      |   | 19     |   | $      |   | (35    | )      |   | $      | 65     |   |   |   |   |   |   |   | ** ** |   |   |   |   |   |   |

 

**CAPITAL RESOURCES AND LIQUIDITY HIGHLIGHTS**

 

·                  Shareholder’sequity as of March 31, 2010 was$4.90 billion, an increase of 11.6% 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 investedassets at March 31, 2010 compared to $3.07 billion at December 31,2009.

·                  At March 31, 2010, we held 25.6%of our total cash and investment portfolio, or $15.48 billion, in cash andliquid investments that are saleable within one quarter without significantadditional net realized capital losses.

 

**CAPITAL RESOURCES AND LIQUIDITY**

 

**Capital Resources** consist ofshareholder’s equity and notes due to related parties, representing fundsdeployed or available to be deployed to support business operations.  The following table summarizes our capitalresources.

 
| **($ in millions)**                                      | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Common stock, additional  capital paid-in and retained income | $          | 5,145                    | $          | 5,163                       |       |
| Accumulated other  comprehensive loss                         |       | (249                     | )          | (777                        | )          |
| Total shareholder’s equity                               |       | 4,896                    |       | 4,386                       |       |
| Notes due to related  parties                                 |       | 681                      |       | 675                         |       |
| Total capital resources                                       | $          | 5,577                    | $          | 5,061                       |       |

 

*Shareholder’s equity* increased in the first three months of 2010, dueprimarily to decreases in unrealized net capital losses on investments,partially offset by a net loss.

 

**Financial ratings and strength  **Our ratings are influencedby many factors including our operating and financial performance, assetquality, liquidity, asset/liability management, overall portfolio mix,financial leverage (i.e., debt), exposure to risks, the current level ofoperating leverage and Allstate Insurance Company’s (“AIC’s”) ratings. There have been no changes to our insurance financial strength ratingsfrom Moody’s, S&P and A.M. Best since December 31, 2009.

 

The Company, AICand the Corporation are party to the Amended and Restated IntercompanyLiquidity Agreement (“Liquidity Agreement”) which allows for short-termadvances of funds to be made between parties for liquidity and other generalcorporate purposes.  The LiquidityAgreement does not establish a commitment to advance funds on the part of anyparty.  The Company and AIC each serve asa lender and borrower and the Corporation serves only as a lender.  The Company also has a capital support agreementwith AIC.  Under the

 

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capital supportagreement, AIC is committed to provide capital to the Company to maintain anadequate capital level.  The maximumamount of potential funding under each of these agreements is $1.00 billion.

 

In addition to the Liquidity Agreement, the Companyalso has an intercompany loan agreement with the Corporation.  The amount of intercompany loans available tothe Company is at the discretion of the Corporation.  The maximum amount of loans the Corporationwill have outstanding to all its eligible subsidiaries at any given point intime is limited to $1.00 billion. The Corporation may use commercial paper borrowings, bank lines ofcredit and repurchase agreements to fund intercompany borrowings.

 

**Liquidity sources and uses **We actively manage our financial position andliquidity levels in light of changing market, economic, and businessconditions.  Liquidity is managed at boththe entity and enterprise level across the Company, and is assessed on bothbase and stressed level liquidity needs. We believe we have sufficient liquidity to meet these needs, with $15.48billion of cash and liquid investments saleable within 90 days withoutgenerating significant additional capital losses (25.6% of the total cash andinvestment portfolio).  We expect $6.68billion of investment portfolio cash flows from maturities, calls, and interestreceipts over the next 12 months. Additionally, we have existing intercompany agreements in place thatfacilitate liquidity management across the Company to enhance flexibility.

 

*Allstateparent holding company capital capacity*****The Corporation has at the parent holdingcompany level $3.05 billion of deployable invested assets at March 31,2010.  These assets include investmentsthat are generally saleable within one quarter totaling $2.64 billion.  This provides funds for the parent company’srelatively low fixed charges.

 

The Company has access toadditional borrowing to support liquidity through the Corporation as follows:

·               A commercial paper facility with a borrowinglimit of $1.00 billion to cover short-term cash needs.  As of March 31, 2010, there were nobalances outstanding and therefore the remaining borrowing capacity was $1.00billion; however, the outstanding balance can fluctuate daily.

·                  Aprimary credit facility is available for short-term liquidity requirements andbacks the commercial paper facility.  The$1.00 billion unsecured revolving credit facility has an initial term of fiveyears expiring in 2012 with two optional one-year extensions that can beexercised at the end of any of the remaining anniversary years of the facilityupon approval of existing or replacement lenders providing more than two-thirdsof the commitments to lend.  The programis fully subscribed among 11 lenders with the largest commitment being $185million.  The commitments of the lendersare several and no lender is responsible for any other lender’s commitment ifsuch lender fails to make a loan under the facility.  This facility contains an increase provisionthat would allow up to an additional $500 million of borrowing provided theincreased portion could be fully syndicated at a later date among existing ornew lenders.  This facility has afinancial covenant requiring that the Corporation not exceed a 37.5% debt tocapital resources ratio as defined in the agreement.  This ratio at March 31, 2010 was19.8%.  Although the right to borrowunder the facility is not subject to a minimum rating requirement, the costs ofmaintaining the facility and borrowing under it are based on the ratings of theCorporation’s senior, unsecured, nonguaranteed long-term debt.  There were no borrowings under the creditfacility during the first three months of 2010. The total amount outstanding at any point in time under the combinationof the commercial paper program and the credit facility cannot exceed theamount that can be borrowed under the credit facility.

·                  Auniversal shelf registration statement was filed by the Corporation with theSecurities and Exchange Commission on May 8, 2009.  The Corporation can use the current shelfregistration to issue an unspecified amount of debt securities, common stock(including 362 million shares of treasury stock as of March 31, 2010),preferred stock, depositary shares, warrants, stock purchase contracts, stockpurchase units and securities of trust subsidiaries.  The specific terms of any securities theCorporation issues under this registration statement will be provided in theapplicable prospectus supplements.

 

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*LiquidityExposure*** **Contractholder funds as of March 31, 2010 were$49.28 billion.  The following tablesummarizes contractholder funds by their contractual withdrawal provisions at March 31,2010.

 
| **($ in  millions)**                                    | ** ** | ** ** | ** ** | **Percent to  total** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|-----------------------|------------|
| Not  subject to discretionary withdrawal                     | $          | 7,671      |       | 15.6                  | %          |
| Subject  to discretionary withdrawal with adjustments:       |       |       |       |                  |       |
| Specified  surrender charges (1)                             |       | 21,151     |       | 42.9                  |       |
| Market  value adjustments (2)                                |       | 8,707      |       | 17.7                  |       |
| Subject  to discretionary withdrawal without adjustments (3) |       | 11,752     |       | 23.8                  |       |
| Total  contractholder funds (4)                              | $          | 49,281     |       | 100.0                 | %          |

 

----

| (1)    | Includes  $9.55 billion of liabilities with a contractual surrender charge of less than  5% of the account balance.                                                                                                                                                                  |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                 |
| (2)    | $7.24  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)    | 98%  of our fixed annuity contracts that are currently out of their surrender  charge period have a minimum interest crediting rate guarantee of 3% or  higher.                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                 |
| (4)    | Includes  $1.27 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 toquantify remaining scheduled maturities for our institutional products,anticipating retail product surrenders is less precise.  Retail life and annuity products may be surrenderedby customers for a variety of reasons. Reasons unique to individual customers include a current or unexpectedneed for cash or a change in life insurance coverage needs.  Other key factors that may impact thelikelihood of customer surrender include the level of the contract surrendercharge, the length of time the contract has been in force, distributionchannel, market interest rates, equity market conditions and potential taximplications.  In addition, thepropensity for retail life insurance policies to lapse is lower than it is forfixed annuities because of the need for the insured to be re-underwritten uponpolicy replacement.  Surrenders andpartial withdrawals for our retail annuities increased 9.9% in the first threemonths of 2010 compared to the same period of 2009.  The annualized surrender and partialwithdrawal rate on deferred annuities and interest-sensitive life insurance,based on the beginning of year contractholder funds, was 9.7% and 8.8% for thefirst three months of 2010 and 2009, respectively.  We strive to promptly pay customers whorequest cash surrenders, however, statutory regulations generally provide up tosix months in most states to fulfill surrender requests.

 

Our institutionalproducts are primarily funding agreements sold to unaffiliated trusts used toback medium-term notes.  As of March 31,2010, total institutional products outstanding were $3.41 billion.  The following table presents the remainingscheduled maturities for our institutional products outstanding as of March 31,2010.

 
| **($ in  millions)** |   |   |   |
|---------------------------|--------|--------|--------|
| 2010                      | $      | 771    |   |
| 2011                      |   | 760    |   |
| 2012                      |   | 40     |   |
| 2013                      |   | 1,750  |   |
| 2016                      |   | 85     |   |
|                      | $      | 3,406  |   |

 

Ourasset-liability management practices limit the differences between the cashflows generated by our investment portfolio and the expected cash flowrequirements of our life insurance, annuity and institutional productobligations.

* *

*CashFlows*  As reflected in our Condensed ConsolidatedStatements of Cash Flows, operatingcash flows in the first three months of 2010 declined compared with the sameperiod in 2009 as lower operating costs and expenses were more than offset bylower net investment income, lower tax refunds and higher contract benefits.

 

Lower cash flows provided by investing activities in the first threemonths of 2010 compared to the first three months of 2009 were primarilyrelated to lower cash flows used in financing activities.

 

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Lower cash flows used in financing activities inthe first three months of 2010 compared to the first three months of 2009 wereprimarily due to decreased maturities and retirements of institutionalproducts, partially offset by lower deposits on fixed annuities.

 

**Item 4(T).Controls and Procedures**

* *

*Evaluationof Disclosure Controls and Procedures. *We maintaindisclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934.  Under the supervision and with theparticipation of our management, including our principalexecutive officer and principal financial officer, we conducted an evaluationof the effectiveness of our disclosure controls and procedures as of the end ofthe period covered by this report.  Basedupon this evaluation, the principal executive officer and the principalfinancial officer concluded that our disclosure controls and procedures areeffective in providing reasonable assurance that material information requiredto be disclosed in our reports filed with or submitted to the Securities andExchange Commission under the Securities Exchange Act is made known tomanagement, including the principal executive officer and the principalfinancial officer, as appropriate to allow timely decisions regarding requireddisclosure.

* *

*Changes inInternal Control over Financial Reporting.  *During the fiscal quarterended March 31, 2010, there have been no changes in our internal controlover financial reporting that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

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**PART II.  OTHER INFORMATION**

 

**Item 1.    Legal Proceedings**

 

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 regulatoryproceedings and inquiries” in Note 8 of the condensed consolidated financialstatements in Part I, Item 1 of this Form 10-Q.

 

**Item 1A.  Risk Factors**

 

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 thesafe-harbor provisions of the Private Securities Litigation Reform Act of 1995.  We assume no obligation to update anyforward-looking statements as a result of new information or future events ordevelopments.

 

These forward-lookingstatements do not relate strictly to historical or current facts and may beidentified 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 otherthings, our strategy for growth, product development, investment results,regulatory approvals, market position, expenses, financial results, litigationand reserves.  We believe that thesestatements are based on reasonable estimates, assumptions and plans.  However, if the estimates, assumptions orplans underlying the forward-looking statements prove inaccurate or if otherrisks or uncertainties arise, actual results could differ materially from thosecommunicated in these forward-looking statements.  Risk factors which could cause actual resultsto differ materially from those suggested by such forward-looking statementsinclude but are not limited to those discussed or identified in this document,in our public filings with the Securities and Exchange Commission, and thoseincorporated by reference in Part I, Item 1A of the Allstate LifeInsurance Company Annual Report on Form 10-K for 2009.

 

**Item6.  Exhibits**

 

(a)           Exhibits

 

An Exhibit Index hasbeen filed as part of this report on page E-1.

 

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**SIGNATURE**

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

 
|              | Allstate  Life Insurance Company                                       |
|-------------------|------------------------------------------------------------------------|
|              | (Registrant)                                                           |
|              |                                                                   |
| May 5,  2010 |                                                                   |   |
|              | By                                                                     | /s/  Samuel H. Pilch |
|              | Samuel  H. Pilch                                                       |
|              | (chief accounting officer and duly   authorized officer of Registrant) |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                           |
| 15                   |       | Acknowledgment  of awareness from Deloitte & Touche LLP, dated May 5, 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                                                                                                              |

 

E-1

----