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ALLSTATE LIFE INSURANCE CO - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2014 AND 2013

August 1, 2014

OVERVIEW

The following discussion highlights significant factors influencing the consolidated financial position and results of operations of Allstate Life Insurance Company (referred to in this document as "we," "our," "us," the "Company" or "ALIC"). It should be read in conjunction with the condensed consolidated financial statements and notes thereto found under Part I. Item 1. contained herein, and with the discussion, analysis, consolidated financial statements and notes thereto in Part I. Item 1. and Part II. Item 7. and Item 8. of the Allstate Life Insurance Company Annual Report on Form 10-K for 2013.



We

operate as a single segment entity based on the manner in which we use financial information to evaluate business performance and to determine the allocation of resources. OPERATIONS HIGHLIGHTS Net income was $132 million and $259 million in the second quarter and first six months of 2014, respectively, compared to $150 million and $259 million in the second quarter and first six months of 2013, respectively. Premiums and contract charges on underwritten products, including traditional life, interest-sensitive life and accident and health insurance, totaled $332 million in the second quarter of 2014, a decrease of 16.4% from $397 million in the second quarter of 2013, and $744 million in the first six months of 2014, a decrease of 6.5% from $796 million in the first six months of 2013. Investments totaled $38.23 billion as of June 30, 2014, reflecting an increase of $284 million from $37.94 billion as of December 31, 2013. Investments as of December 31, 2013 excluded investments classified as held for sale. Net investment income decreased 15.2% to $525 million in the second quarter of 2014 and 7.2% to $1.15 billion in the first six months of 2014 from $619 million and $1.24 billion in the second quarter and first six months of 2013, respectively. Net realized capital losses totaled $10 million in both the second quarter and first six months of 2014 compared to net realized capital gains of $58 million and $77 million in the second quarter and first six months of 2013, respectively. Contractholder funds totaled $22.76 billion as of June 30, 2014, reflecting a decrease of $840 million from $23.60 billion as of December 31, 2013. On April 1, 2014, we closed the sale of Lincoln Benefit Life Company ("LBL"), LBL's life insurance business generated through independent master brokerage agencies, and all of LBL's deferred fixed annuity and long-term care insurance business to Resolution Life Holdings, Inc. The loss on disposition decreased by $9 million, after-tax, and increased by $9 million, after-tax, in the three months and six months ended June 30, 2014, respectively. 38 --------------------------------------------------------------------------------

OPERATIONS Summary analysis Summarized financial data is presented in the following table. ($ in millions) Three months ended Six months ended June 30, June 30, 2014 2013 2014 2013 Revenues Premiums $ 143 $ 150 $ 299 $ 295 Contract charges 193 260 460 524 Net investment income 525 619 1,151



1,240

Realized capital gains and losses (10) 58 (10) 77 Total revenues 851 1,087 1,900 2,136 Costs and expenses Contract benefits (334) (396) (745) (777) Interest credited to contractholder funds (205) (304) (505) (643) Amortization of DAC (43) (51) (88) (104) Operating costs and expenses (76) (114) (157) (231) Restructuring and related charges (1) -- (3)



(2)

Interest expense (4) (7) (8)



(15)

Total costs and expenses (663) (872) (1,506)



(1,772)

Gain (loss) on disposition of operations 15 1 (44) 3 Income tax expense (71) (66) (91) (108) Net income $ 132 $ 150 $ 259 $ 259 Investments as of June 30 $ 38,228$ 51,415 Net income was $132 million in the second quarter of 2014 compared to $150 million in the second quarter of 2013. The decline primarily relates to the reduction in business due to the sale of LBL on April 1, 2014. Excluding results of the LBL business for second quarter 2013 of $28 million, net income increased $10 million in the second quarter of 2014 compared to the second quarter of 2013, primarily due to higher net investment income and lower operating costs and expenses, partially offset by net realized capital losses in second quarter 2014 compared to net realized capital gains in second quarter 2013. Net income was $259 million in the first six months of 2014, which was comparable to the first six months of 2013. Excluding results of the LBL business for second quarter 2013 of $28 million, net income increased $28 million in the first six months of 2014 compared to the first six months of 2013, primarily due to lower operating costs and expenses, lower interest credited to contractholder funds, higher net investment income and higher premiums and contract charges, partially offset by net realized capital losses in the first six months of 2014 compared to net realized capital gains in the first six months of 2013, the increase in the loss on disposition related to the LBL sale and higher contract benefits. Analysis of revenues Total revenues decreased 21.7% or $236 million and 11.0% or $236 million in the second quarter and first six months of 2014, respectively, compared to the same periods of 2013. Excluding results of the LBL business for second quarter 2013 of $218 million, total revenues decreased $18 million in both the second quarter and first six months of 2014 compared to the same periods of 2013, primarily due to net realized capital losses in 2014 compared to net realized capital gains in 2013, partially offset by higher net investment income and higher premiums and contract charges. Premiums represent revenues generated from traditional life insurance, immediate annuities with life contingencies, and accident and health insurance products that have significant mortality or morbidity risk. Contract charges are revenues generated from interest-sensitive and variable life insurance and fixed annuities for which deposits are classified as contractholder funds or separate account liabilities. Contract charges are assessed against the contractholder account values for maintenance, administration, cost of insurance and surrender prior to contractually specified dates. 39

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The following table summarizes premiums and contract charges by product.

($ in millions) Three months ended Six months ended June 30, June 30, 2014 2013 2014 2013 Underwritten products Traditional life insurance premiums $ 122$ 116$ 245$ 228 Accident and health insurance premiums 21 25 49



51

Interest-sensitive life insurance contract charges 189 256 450 517 Subtotal 332 397 744 796 Annuities Immediate annuities with life contingencies premiums -- 9 5



16

Other fixed annuity contract charges 4 4 10



7

Subtotal 4 13 15



23

Premiums and contract charges (1) $ 336$ 410$ 759$ 819

(1) Contract charges related to the cost of insurance totaled $132 million and $176 million for the second quarter of 2014 and 2013, respectively, and $317 million and $353 million in the first six months of 2014 and 2013, respectively. Total premiums and contract charges decreased 18.0% or $74 million and 7.3% or $60 million in the second quarter and first six months of 2014, respectively, compared to the same periods of 2013. Excluding results of the LBL business for second quarter 2013 of $82 million, premiums and contract charges increased $8 million and $22 million in the second quarter and first six months of 2014, respectively, compared to the same periods of 2013, primarily due to increased traditional life insurance premiums due to higher renewals and sales through Allstate agencies, partially offset by lower premiums on immediate annuities with life contingencies due to discontinuing new sales January 1, 2014. Allstate agencies and exclusive financial specialists continue to sell LBL life products until we transition these products to an Allstate company. LBL life business sold through the Allstate agency channel and all LBL payout annuity business continues to be reinsured and serviced by ALIC. Following the closing of the sale, LBL was rated A- from A.M. Best and BBB+ from Standard & Poor's ("S&P"). ALIC is rated A+ by A.M. Best, A+ by S&P and A1 by Moody's. 40

-------------------------------------------------------------------------------- Contractholder funds represent interest-bearing liabilities arising from the sale of products such as interest-sensitive life insurance, fixed annuities and funding agreements. The balance of contractholder funds is equal to the cumulative deposits received and interest credited to the contractholder less cumulative contract benefits, surrenders, withdrawals, maturities and contract charges for mortality or administrative expenses. The following table shows the changes in contractholder funds. ($ in millions) Three months ended Six months ended June 30, June 30, 2014 2013 2014 2013 Contractholder funds, beginning balance $ 23,286$ 38,116$ 23,604 $



38,634

Contractholder funds classified as held for sale, beginning balance 10,661 -- 10,945 -- Total contractholder funds, including those classified as held for sale 33,947 38,116 34,549 38,634 Deposits Interest-sensitive life insurance 218 280 509 567 Fixed annuities 56 301 183 662 Total deposits 274 581 692 1,229 Interest credited 205 306 506 650 Benefits, withdrawals, maturities and other adjustments Benefits (281) (394) (656) (786) Surrenders and partial withdrawals (549) (840) (1,256) (1,726) Maturities of and interest payments on institutional products -- (1,797) -- (1,798) Contract charges (178) (255) (438) (513) Net transfers from separate accounts 1 5 4 6 Other adjustments (1) 7 (61) 25 (35) Total benefits, withdrawals, maturities and other adjustments (1,000) (3,342) (2,321)



(4,852)

Contractholder funds sold in LBL disposition (10,662) -- (10,662) -- Contractholder funds, ending balance $ 22,764$ 35,661$ 22,764$ 35,661 (1) The table above illustrates the changes in contractholder funds, which are presented gross of reinsurance recoverables on the Condensed Consolidated Statements of Financial Position. The table above is intended to supplement our discussion and analysis of revenues, which are presented net of reinsurance on the Condensed Consolidated Statements of Operations and Comprehensive Income. As a result, the net change in contractholder funds associated with products reinsured to third parties is reflected as a component of the other adjustments line. Contractholder funds decreased 2.2% and 3.6% in the second quarter and first six months of 2014, respectively, compared to decreases of 6.4% and 7.7% in the same periods of 2013, respectively. The decreases in the 2014 periods reflect no longer offering fixed annuity products beginning January 1, 2014. Contractholder deposits decreased 52.8% and 43.7% in the second quarter and first six months of 2014, respectively, compared to the same periods of 2013, primarily due to no longer offering fixed annuity products beginning January 1, 2014, as well as lower deposits on interest-sensitive life insurance due to the LBL sale. Surrenders and partial withdrawals on deferred fixed annuities and interest-sensitive life insurance products decreased 34.6% to $549 million in the second quarter of 2014 and 27.2% to 1.26 billion in the first six months of 2014 from $840 million and $1.73 billion in the second quarter and first six months of 2013, respectively. The annualized surrender and partial withdrawal rate on deferred fixed annuities and interest-sensitive life insurance products, based on the beginning of year contractholder funds, was 9.7% in the first six months of 2014 compared to 10.9% in the same period of 2013.



Maturities of and interest payments on institutional products included a $1.75 billion maturity in second quarter 2013.

Analysis of costs and expenses Total costs and expenses decreased 24.0% or $209 million in the second quarter of 2014 and 15.0% or $266 million in the first six months of 2014 compared to the same periods of 2013. Excluding results of the LBL business for second quarter 2013 of $176 million, total costs and expenses decreased $33 million and $90 million in the second quarter and first six months of 2014, respectively, compared to the same 41 -------------------------------------------------------------------------------- periods of 2013, primarily due to lower operating costs and expenses and lower interest credited to contractholder funds, partially offset by higher contract benefits in the six month period. Contract benefits decreased 15.7% or $62 million in the second quarter of 2014 and 4.1% or $32 million in the first six months of 2014 compared to the same periods of 2013. Excluding results of the LBL business for second quarter 2013 of $62 million, contract benefits in the second quarter of 2014 were comparable to the same period of 2013. Excluding results of the LBL business for second quarter 2013 of $62 million, contract benefits increased $30 million in first six months of 2014 compared to the same period of 2013, primarily due to worse mortality experience on life insurance in the first quarter of 2014. We analyze our mortality and morbidity results using the difference between premiums and contract charges earned for the cost of insurance and contract benefits excluding the portion related to the implied interest on immediate annuities with life contingencies ("benefit spread"). This implied interest totaled $130 million and $260 million in the second quarter and first six months of 2014, respectively, compared to $130 million and $263 million in the second quarter and first six months of 2013, respectively.



The benefit spread by product group is disclosed in the following table.

($ in millions) Three months ended Six months ended June 30, June 30, 2014 2013 2014 2013 Life insurance $ 83$ 72$ 155$ 155 Accident and health insurance 7 4 15 12 Annuities (19) (16) (39) (33) Total benefit spread $ 71$ 60$ 131$ 134



Benefit spread increased 18.3% or $11 million in the second quarter of 2014 compared to the same period of 2013, primarily due to higher life insurance premiums and better mortality experience on life insurance. Benefit spread decreased 2.2% or $3 million in the first six months of 2014 compared to the same periods of 2013, primarily due to worse mortality experience on life insurance and annuities, partially offset by higher life insurance premiums.

Interest credited to contractholder funds decreased 32.6% or $99 million in the second quarter of 2014 and 21.5% or $138 million in the first six months of 2014 compared to the same periods of 2013. Excluding results of the LBL business for second quarter 2013 of $89 million, interest credited to contractholder funds decreased $10 million and $49 million in the second quarter and first six months of 2014, respectively, compared to the same periods of 2013, primarily due to lower average contractholder funds and lower interest crediting rates. Valuation changes on derivatives embedded in equity-indexed annuity contracts that are not hedged increased interest credited to contractholder funds by $4 million and $21 million in the second quarter and first six months of 2014, respectively, compared to a $5 million decrease and a $4 million increase in the second quarter and first six months of 2013, respectively. In order to analyze the impact of net investment income and interest credited to contractholders on net income, we monitor the difference between net investment income and the sum of interest credited to contractholder funds and the implied interest on immediate annuities with life contingencies, which is included as a component of contract benefits on the Condensed Consolidated Statements of Operations and Comprehensive Income ("investment spread"). 42 --------------------------------------------------------------------------------



The investment spread by product group is shown in the following table.

($ in millions) Three months ended Six months ended June 30, June 30, 2014 2013 2014 2013 Annuities and institutional products $ 98$ 86$ 206$ 143 Life insurance 27 27 58 53 Accident and health insurance 2 3 6 7 Net investment income on investments supporting capital 67 64 137 135 Investment spread before valuation changes on embedded derivatives that are not hedged 194 180 407 338 Valuation changes on derivatives embedded in equity-indexed annuity contracts that are not hedged (4) 5 (21) (4) Total investment spread $ 190$ 185$ 386$ 334 Investment spread before valuation changes on embedded derivatives that are not hedged increased 7.8% or $14 million in the second quarter of 2014 and 20.4% or $69 million in the first six months of 2014 compared to the same periods of 2013. Excluding results of the LBL business for second quarter 2013 of $51 million, investment spread before valuation changes on embedded derivatives that are not hedged increased $65 million in the second quarter of 2014 and $120 million in the first six months of 2014 compared to the same periods of 2013, primarily due to higher limited partnership income and lower crediting rates, partially offset by the continued managed reduction in our spread-based business in force. To further analyze investment spreads, the following table summarizes the weighted average investment yield on assets supporting product liabilities and capital, interest crediting rates and investment spreads. For purposes of these calculations, investments, reserves and contractholder funds classified as held for sale were included for periods prior to April 1, 2014. Three months ended June 30, Weighted average Weighted average Weighted average investment yield interest crediting rate investment spreads 2014 2013 2014 2013 2014 2013 Interest-sensitive life insurance 5.5 % 5.2 % 4.0 % 3.8 % 1.5 % 1.4 % Deferred fixed annuities and institutional products 4.3 4.7 2.7 2.9 1.6 1.8 Immediate fixed annuities with and without life contingencies 8.0 6.8 5.9 6.0 2.1 0.8 Investments supporting capital, traditional life and other products 5.1 3.9 n/a n/a n./a n/a Six months ended June 30, Weighted average Weighted average Weighted average investment yield interest crediting rate investment spreads 2014 2013 2014 2013 2014 2013 Interest-sensitive life insurance 5.4 % 5.3 % 3.9 % 3.9 % 1.5 % 1.4 % Deferred fixed annuities and institutional products 4.4 4.6 2.9 3.0 1.5 1.6 Immediate fixed annuities with and without life contingencies 7.8 6.5 6.0 6.0 1.8 0.5 Investments supporting capital, traditional life and other products 4.6 4.1 n/a n/a n/a n/a 43

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The following table summarizes our product liabilities and indicates the account value of those contracts and policies in which an investment spread is generated.

($ in millions) June 30, 2014 2013



Immediate fixed annuities with life contingencies $ 8,913$ 8,891 Other life contingent contracts and other

2,967 4,558



Reserve for life-contingent contract benefits $ 11,880$ 13,449

Interest-sensitive life insurance $ 7,131$ 10,453 Deferred fixed annuities 11,753 20,852 Immediate fixed annuities without life contingencies 3,557 3,771 Institutional products 85 85 Other 238 500 Contractholder funds $ 22,764$ 35,661 Amortization of DAC The components of amortization of DAC are summarized in the following table. ($ in millions) Three months ended Six months ended June 30, June 30, 2014 2013 2014 2013 Amortization of DAC before amortization relating to realized capital gains and losses, valuation changes on embedded derivatives that are not hedged and changes in assumptions $ 42$ 45$ 87$ 99 Amortization relating to realized capital gains and losses(1) and valuation changes on embedded derivatives that are not hedged 1 6 1 5 Amortization acceleration for changes in assumptions ("DAC unlocking") -- -- -- -- Total amortization of DAC $ 43$ 51$ 88$ 104 _______________ (1) The impact of realized capital gains and losses on amortization of DAC is dependent upon the relationship between the assets that give rise to the gain or loss and the product liability supported by the assets. Fluctuations result from changes in the impact of realized capital gains and losses on actual and expected gross profits. Amortization of DAC decreased 15.7% or $8 million in the second quarter of 2014 and 15.4% or $16 million in the first six months of 2014 compared to the same periods of 2013. Excluding results of the LBL business for second quarter 2013 of $12 million, amortization of DAC increased $4 million in the second quarter of 2014 compared to the same period of 2013, primarily due to higher amortization on interest-sensitive life insurance resulting from increased gross profits. Excluding results of the LBL business for second quarter 2013 of $12 million, amortization of DAC decreased $4 million in first six months of 2014, compared to the same period of 2013, primarily due to lower amortization relating to valuation changes on embedded derivatives that are not hedged. 44 -------------------------------------------------------------------------------- Operating costs and expenses decreased 33.3% or $38 million in the second quarter of 2014 and 32.0% or $74 million in the first six months of 2014 compared to the same periods of 2013. Excluding results of the LBL business for second quarter 2013 of $13 million, operating costs and expenses decreased $25 million and $61 million in the second quarter and first six months of 2014, respectively, compared to the same periods of 2013. The following table summarizes operating costs and expenses. ($ in millions) Three months ended Six months ended June 30, June 30, 2014 2013 2014 2013 Non-deferrable commissions $ 2$ 6$ 11$ 13



General and administrative expenses 66 98 127

197

Taxes and licenses 8 10 19



21

Total operating costs and expenses $ 76$ 114$ 157 $

231

Restructuring and related charges $ 1 $ -- $ 3 $

2



General and administrative expenses decreased 32.7% or $32 million in the second quarter of 2014 and 35.5% or $70 million in the first six months of 2014 compared to the same periods of 2013, primarily due to the sale of LBL on April 1, 2014, lower employee related expenses, lower net Allstate agencies distribution channel expenses reflecting increased fees from sales of third party financial products, and lower technology and marketing costs.

INVESTMENTS HIGHLIGHTS



Investments totaled $38.23 billion as of June 30, 2014, increasing from $37.94 billion as of December 31, 2013.

Unrealized net capital gains totaled $2.51 billion as of June 30, 2014, increasing from $1.59 billion as of December 31, 2013.

Net investment income was $525 million in the second quarter of 2014, a decrease of 15.2% from $619 million in the second quarter of 2013, and $1.15 billion in the first six months of 2014, a decrease of 7.2% from $1.24 billion in the first six months of 2013. Net realized capital losses were $10 million in both the second quarter and first six months of 2014 compared to net realized capital gains of $58 million and $77 million in the second quarter and first six months of 2013, respectively. INVESTMENTS The composition of the investment portfolio as of June 30, 2014 is presented in the following table. ($ in millions) Percent to total Fixed income securities (1) $ 28,924 75.7 % Mortgage loans 3,684 9.6 Equity securities (2) 1,267 3.3 Limited partnership interests (3) 1,866 4.9 Short-term investments (4) 899 2.3 Policy loans 611 1.6 Other 977 2.6 Total $ 38,228 100.0 % _____________________



(1) Fixed income securities are carried at fair value. Amortized cost basis for these securities was $26.54 billion.

(2) Equity securities are carried at fair value. Cost basis for these securities was $1.12 billion.

(3) We have commitments to invest in additional limited partnership interests totaling $1.28 billion.

(4) Short-term investments are carried at fair value. Amortized cost basis for these investments was $899 million.

Total investments increased to $38.23 billion as of June 30, 2014, from $37.94 billion as of December 31, 2013, primarily due to favorable fixed income valuations resulting from a decrease in risk-free interest rates and tightening credit spreads, partially offset by a $700 million return of capital paid to Allstate Insurance Company ("AIC") and the reclassification of tax credit funds from limited partnership interests to other assets. 45 --------------------------------------------------------------------------------



Fixed income securities by type are listed in the following table.

($ in millions) Percent to Percent to Fair value as of total Fair value as of total June 30, 2014 investments December 31, 2013 investments U.S. government and agencies $ 814 2.1 % $ 766 2.0 % Municipal 3,505 9.2 3,304 8.7 Corporate 21,595 56.5 21,316 56.2 Foreign government 750 2.0 792 2.1 Asset-backed securities ("ABS") 863 2.3 1,007 2.7 Residential mortgage-backed securities ("RMBS") 702 1.8 790 2.1 Commercial mortgage-backed securities ("CMBS") 679 1.8 764 2.0 Redeemable preferred stock 16 -- 17 -- Total fixed income securities $ 28,924 75.7 % $ 28,756 75.8 % As of June 30, 2014, 88.0% of the fixed income securities portfolio was rated investment grade, which is defined as a security having a rating of Aaa, Aa, A or Baa from Moody's, a rating of AAA, AA, A or BBB from S&P, Fitch, Dominion, Kroll or Realpoint, a rating of aaa, aa, a or bbb from A.M. Best, or a comparable internal rating if an externally provided rating is not available. All of our fixed income securities are rated by third party credit rating agencies, the National Association of Insurance Commissioners, and/or are internally rated. Our initial investment decisions and ongoing monitoring procedures for fixed income securities are based on a thorough due diligence process which includes, but is not limited to, an assessment of the credit quality, sector, structure, and liquidity risks of each issue. The following table summarizes the fair value and unrealized net capital gains and losses for fixed income securities by credit rating as of June 30, 2014. ($ in millions) Investment grade Below investment grade Total Fair Unrealized Fair Unrealized Fair Unrealized value gain/(loss) value gain/(loss) value gain/(loss) U.S. government and agencies $ 814 $ 102 $ -- $ -- $ 814 $ 102 Municipal 3,456 407 49 (1) 3,505 406 Corporate Public 12,921 1,102 1,850 74 14,771 1,176 Privately placed 6,051 482 773 26 6,824 508 Foreign government 750 88 -- -- 750 88 ABS Collateralized debt obligations ("CDO") 405 1 98 (7) 503 (6) Consumer and other asset-backed securities ("Consumer and other ABS") 353 7 7 -- 360 7 RMBS U.S. government sponsored entities ("U.S. Agency") 184 11 -- -- 184 11 Prime residential mortgage-backed securities ("Prime") 74 2 131 20 205 22 Alt-A residential mortgage-backed securities ("Alt-A") 13 -- 165 12 178 12 Subprime residential mortgage-backed securities ("Subprime") 4 (1) 131 6 135 5 CMBS 424 23 255 30 679 53 Redeemable preferred stock 16 3 -- -- 16 3



Total fixed income securities $ 25,465$ 2,227$ 3,459 $

160 $ 28,924$ 2,387 46

-------------------------------------------------------------------------------- Municipal bonds totaled $3.51 billion as of June 30, 2014 with an unrealized net capital gain of $406 million. The municipal bond portfolio includes general obligations of state and local issuers and revenue bonds (including pre-refunded bonds, which are bonds for which an irrevocable trust has been established to fund the remaining payments of principal and interest). Corporate bonds, including publicly traded and privately placed, totaled $21.60 billion as of June 30, 2014, with an unrealized net capital gain of $1.68 billion. Privately placed securities primarily consist of corporate issued senior debt securities that are directly negotiated with the borrower or are in unregistered form. ABS, RMBS and CMBS are structured securities that are primarily collateralized by consumer or corporate borrowings and residential and commercial real estate loans. The cash flows from the underlying collateral paid to the securitization trust are generally applied in a pre-determined order and are designed so that each security issued by the trust, typically referred to as a "class", qualifies for a specific original rating. For example, the "senior" portion or "top" of the capital structure, or rating class, which would originally qualify for a rating of Aaa typically has priority in receiving principal repayments on the underlying collateral and retains this priority until the class is paid in full. In a sequential structure, underlying collateral principal repayments are directed to the most senior rated Aaa class in the structure until paid in full, after which principal repayments are directed to the next most senior Aaa class in the structure until it is paid in full. Senior Aaa classes generally share any losses from the underlying collateral on a pro-rata basis after losses are absorbed by classes with lower original ratings. The payment priority and class subordination included in these securities serves as credit enhancement for holders of the senior or top portions of the structures. These securities continue to retain the payment priority features that existed at the origination of the securitization trust. Other forms of credit enhancement may include structural features embedded in the securitization trust, such as overcollateralization, excess spread and bond insurance. The underlying collateral can have fixed interest rates, variable interest rates (such as adjustable rate mortgages) or may contain features of both fixed and variable rate mortgages. ABS, including CDO and Consumer and other ABS, totaled $863 million as of June 30, 2014, with 87.8% rated investment grade and an unrealized net capital gain of $1 million. Credit risk is managed by monitoring the performance of the underlying collateral. Many of the securities in the ABS portfolio have credit enhancement with features such as overcollateralization, subordinated structures, reserve funds, guarantees and/or insurance. CDO totaled $503 million as of June 30, 2014, with 80.5% rated investment grade and an unrealized net capital loss of $6 million. CDO consist of obligations collateralized by cash flow CDO, which are structures collateralized primarily by below investment grade senior secured corporate loans.



Consumer and other ABS totaled $360 million as of June 30, 2014, with 98.1% rated investment grade and an unrealized net capital gain of $7 million.

RMBS totaled $702 million as of June 30, 2014, with 39.2% rated investment grade and an unrealized net capital gain of $50 million. The RMBS portfolio is subject to interest rate risk, but unlike other fixed income securities, is additionally subject to significant prepayment risk from the underlying residential mortgage loans. RMBS consists of a U.S. Agency portfolio having collateral issued or guaranteed by U.S. government agencies and a non-agency portfolio consisting of securities collateralized by Prime, Alt-A and Subprime loans. The non-agency portfolio totaled $518 million as of June 30, 2014, with 17.6% rated investment grade and an unrealized net capital gain of $39 million. CMBS totaled $679 million as of June 30, 2014, with 62.4% rated investment grade and an unrealized net capital gain of $53 million. The CMBS portfolio is subject to credit risk and has a sequential paydown structure. Of the CMBS investments, 100.0% are traditional conduit transactions collateralized by commercial mortgage loans, broadly diversified across property types and geographical area. The remainder consists of non-traditional CMBS such as small balance transactions, large loan pools and single borrower transactions. Mortgage loans Our mortgage loan portfolio totaled $3.68 billion as of June 30, 2014 and primarily comprises loans secured by first mortgages on developed commercial real estate. Key considerations used to manage our exposure include property type and geographic diversification. For further detail on our mortgage loan portfolio, see Note 4 of the condensed consolidated financial statements. 47

-------------------------------------------------------------------------------- Limited partnership interests consist of investments in private equity/debt funds, real estate funds and other funds. The limited partnership interests portfolio is well diversified across a number of characteristics including fund managers, vintage years, strategies, geography (including international), and company/property types. Tax credit funds were reclassified from limited partnership interests to other assets as of June 30, 2014 since the return on these funds is in the form of tax credits rather than investment income. These tax credit funds totaled $292 million as of June 30, 2014. The following table presents information about our limited partnership interests as of June 30, 2014. ($ in millions) Private Real equity/debt estate Other funds (1) funds funds Total



Cost method of accounting ("Cost") $ 422 $ 113 $ -- $ 535 Equity method of accounting ("EMA")

948 347 36 1,331 Total $ 1,370$ 460$ 36$ 1,866 Number of managers 97 30 2 Number of individual funds 165 56 2 Largest exposure to single fund $ 74 $ 34$ 31 _______________



(1) Includes $269 million of infrastructure and real asset funds.

The following tables show the earnings from our limited partnership interests by fund type and accounting classification.

($ in Three months ended millions) June 30, 2014 2013 Total Impairment Total Impairment Cost EMA income write-downs Cost EMA income write-downs Private equity/debt funds $ 29$ 45$ 74 $ -- $ 18$ 14$ 32 $ (4) Real estate funds 5 8 13 (2) 4 7 11 -- Tax credit funds -- 2 2 -- -- (6) (6) -- Other funds -- 2 2 -- -- -- -- -- Total $ 34$ 57$ 91 $ (2) $ 22$ 15$ 37 $ (4) Six months ended June 30, 2014 2013 Total Impairment Total Impairment Cost EMA income write-downs Cost EMA income write-downs Private equity/debt funds $ 47$ 84$ 131 $ (6) $ 29$ 25$ 54 $ (4) Real estate funds 11 14 25 (3) 6 14 20 -- Tax credit funds -- -- -- -- -- (8) (8) -- Other funds -- 2 2 -- -- 1 1 -- Total $ 58$ 100$ 158 $ (9) $ 35$ 32$ 67 $ (4) Limited partnership interests produced income, excluding impairment write-downs, of $91 million and $158 million in the three months and six months ended June 30, 2014, respectively, compared to $37 million and $67 million in the three months and six months ended June 30, 2013, respectively. Higher EMA limited partnership income resulted from favorable equity valuations which increased the carrying value of the partnerships, while cost method limited partnerships experienced an increase in earnings distributed by the partnerships. Income on EMA limited partnerships is recognized on a delay due to the availability of the related financial statements. The recognition of income on private equity/debt funds and real estate funds are generally on a three month delay and the income recognition on other funds is primarily on a one month delay. Income on cost method limited partnerships is recognized only upon receipt of amounts distributed by the partnerships. 48 -------------------------------------------------------------------------------- Unrealized net capital gains totaled $2.51 billion as of June 30, 2014 compared to $1.59 billion as of December 31, 2013. The increase was primarily due to a decrease in risk-free interest rates and tightening credit spreads.



The following table presents unrealized net capital gains and losses.

($ in millions) June 30, 2014 December 31, 2013 U.S. government and agencies $ 102 $ 88 Municipal 406 169 Corporate 1,684 919 Foreign government 88 77 ABS 1 (4) RMBS 50 38 CMBS 53 40 Redeemable preferred stock 3 2 Fixed income securities 2,387 1,329 Equity securities 143 85 Derivatives (15) (13) EMA limited partnerships (2) (2) Investments classified as held for sale --



190

Unrealized net capital gains and losses, pre-tax $ 2,513 $ 1,589 The unrealized net capital gain for the fixed income portfolio totaled $2.39 billion and comprised $2.51 billion of gross unrealized gains and $126 million of gross unrealized losses as of June 30, 2014. This is compared to an unrealized net capital gain for the fixed income portfolio totaling $1.33 billion, comprised of $1.75 billion of gross unrealized gains and $418 million of gross unrealized losses as of December 31, 2013.



Gross unrealized gains and losses on fixed income securities by type and sector as of June 30, 2014 are provided in the following table.

($ in millions) Amortized Gross unrealized Fair cost Gains Losses value Corporate: Banking $ 1,094$ 52$ (27)$ 1,119 Utilities 3,832 465 (12) 4,285 Capital goods 2,132 189 (11) 2,310 Consumer goods (cyclical and non-cyclical) 3,835 298 (8) 4,125 Basic industry 1,282 85 (4) 1,363 Technology 1,003 53 (4) 1,052 Energy 2,579 241 (3) 2,817 Transportation 995 110 (3) 1,102 Communications 1,488 129 (2) 1,615 Financial services 1,121 95 (2) 1,214 Other 550 44 (1) 593 Total corporate fixed income portfolio 19,911 1,761 (77) 21,595 U.S. government and agencies 712 102 -- 814 Municipal 3,099 419 (13) 3,505 Foreign government 662 89 (1) 750 ABS 862 26 (25) 863 RMBS 652 57 (7) 702 CMBS 626 56 (3) 679 Redeemable preferred stock 13 3 -- 16 Total fixed income securities $ 26,537$ 2,513$ (126)$ 28,924



The banking, utilities, capital goods and consumer goods sectors had the highest concentration of gross unrealized losses in our corporate fixed income securities portfolio as of June 30, 2014. In general, the gross unrealized losses are principally related to increasing risk-free interest rates or widening credit spreads since the time of initial purchase.

49 --------------------------------------------------------------------------------

The unrealized net capital gain for the equity portfolio totaled $143 million and comprised $148 million of gross unrealized gains and $5 million of gross unrealized losses as of June 30, 2014. This is compared to an unrealized net capital gain for the equity portfolio totaling $85 million, comprised of $90 million of gross unrealized gains and $5 million of gross unrealized losses as of December 31, 2013. Net investment income The following table presents net investment income. ($ in millions) Three months ended Six months ended June 30, June 30, 2014 2013 2014 2013 Fixed income securities $ 356$ 494$ 830$ 990 Mortgage loans 65 87 140 178 Equity securities 6 3 10 5 Limited partnership interests 91 37 158 67 Short-term investments 1 -- 1 1 Policy loans 9 12 20 24 Other 13 16 28 32 Investment income, before expense 541 649 1,187 1,297 Investment expense (16) (30) (36) (57) Net investment income $ 525$ 619$ 1,151$ 1,240 Net investment income decreased 15.2% or $94 million in the second quarter of 2014 and 7.2% or $89 million in the first six months of 2014 compared to the same periods of 2013. Excluding results of the LBL business for second quarter 2013 of $136 million, net investment income increased $42 million and $47 million in the second quarter and first six months of 2014, respectively, compared to the same periods of 2013, primarily due to higher limited partnership income, partially offset by lower average investment balances. Higher EMA limited partnership income resulted from favorable equity valuations which increased the carrying value of the partnerships, while cost method limited partnerships experienced an increase in earnings distributed by the partnerships.



Realized capital gains and losses The following table presents the components of realized capital gains and losses and the related tax effect.

($ in millions) Three months ended Six months ended June 30, June 30, 2014 2013 2014 2013 Impairment write-downs $ -- $ (16)$ (4)$ (18) Change in intent write-downs (14) (1) (19) (8) Net other-than-temporary impairment losses recognized in earnings (14) (17) (23) (26) Sales 1 63 8 84 Valuation and settlements of derivative instruments 3 12 5 19 Realized capital gains and losses, pre-tax (10) 58 (10) 77 Income tax benefit (expense) 3 (20) 3 (27) Realized capital gains and losses, after-tax $ (7)$ 38$ (7)$ 50



Impairment write-downs, which includes changes in the mortgage loan valuation allowance, are presented in the following table.

($ in millions) Three months ended Six months ended June 30, June 30, 2014 2013 2014 2013 Fixed income securities $ 2 $ (3)$ 1$ (29) Mortgage loans -- (9) 4 17 Limited partnership interests (2) (4) (9) (4) Other investments -- -- -- (2) Impairment write-downs $ -- $ (16)$ (4)$ (18) 50

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Limited partnership write-downs in the three months and six months ended June 30, 2014 primarily related to cost method limited partnerships that experienced declines in portfolio valuations deemed to be other than temporary.

Change in intent write-downs totaling $14 million and $19 million in the three months and six months ended June 30, 2014, respectively, were primarily related to the decision to sell certain limited partnership investments for which the transactions are anticipated to be completed in 2014 and ongoing portfolio management of our equity securities. Sales generated $1 million and $8 million of net realized capital gains in the three months and six months ended June 30, 2014, respectively, primarily related to equity securities in connection with ongoing portfolio management. Valuation and settlements of derivative instruments generated net realized capital gains of $3 million and $5 million for the three months and six months ended June 30, 2014, respectively, primarily composed of gains on credit default swaps due to the tightening of credit spreads on the underlying credit names.



CAPITAL RESOURCES AND LIQUIDITY

Capital resources consist of shareholder's equity and notes due to related parties, representing funds deployed or available to be deployed to support business operations. The following table summarizes our capital resources.

($ in millions) June 30, December 31, 2014 2013 Common stock, retained income and additional capital paid-in $ 4,701 $



5,142

Accumulated other comprehensive income 1,250 928 Total shareholder's equity 5,951 6,070 Notes due to related parties 275 282 Total capital resources $ 6,226 $ 6,352



Shareholder's equity decreased in the first six months of 2014, primarily due to a $700 million return of capital paid to AIC, partially offset by increased unrealized net capital gains on investments and net income.

Notes due to related parties decreased in the first six months of 2014 as the Company repaid the remaining $7 million of notes issued to AIC.

Financial ratings and strength Our ratings are influenced by many factors including our operating and financial performance, asset quality, liquidity, asset/liability management, overall portfolio mix, financial leverage (i.e., debt), exposure to risks, the current level of operating leverage and AIC's ratings. In January 2014, A.M. Best affirmed our financial strength rating of A+ and the outlook for the rating remained stable. In June 2014, S&P affirmed our financial strength ratings of A+ and the outlook for the rating remained stable. There have been no changes to our insurance financial strength rating from Moody's since December 31, 2013. The Company, AIC and The Allstate Corporation (the "Corporation") are party to the Amended and Restated Intercompany Liquidity Agreement ("Liquidity Agreement") which allows for short-term advances of funds to be made between parties for liquidity and other general corporate purposes. The Liquidity Agreement does not establish a commitment to advance funds on the part of any party. The Company and AIC each serve as a lender and borrower and the Corporation serves only as a lender. The Company also has a capital support agreement with AIC. Under the capital support agreement, AIC is committed to provide capital to the Company to maintain an adequate capital level. The maximum amount of potential funding under each of these agreements is $1.00 billion. In addition to the Liquidity Agreement, the Company also has an intercompany loan agreement with the Corporation. The amount of intercompany loans available to the Company is at the discretion of the Corporation. The maximum amount of loans the Corporation will have outstanding to all its eligible subsidiaries at any given point in time is limited to $1.00 billion. The Corporation may use commercial paper borrowings, bank lines of credit and securities lending to fund intercompany borrowings. Liquidity sources and uses We actively manage our financial position and liquidity levels in light of changing market, economic, and business conditions. Liquidity is managed at both the entity and enterprise level across the Company, and is assessed on both base and stressed level liquidity needs. We believe we have sufficient liquidity to 51 --------------------------------------------------------------------------------



meet these needs. Additionally, we have existing intercompany agreements in place that facilitate liquidity management across the Company to enhance flexibility.

Allstate parent company capital capacity The Corporation has at the parent holding company level deployable assets totaling $3.61 billion as of June 30, 2014 comprising cash and investments that are generally saleable within one quarter. This provides funds for the parent company's fixed charges and other corporate purposes.



The Company has access to additional borrowing to support liquidity through the Corporation as follows. The amount available to the Company is at the discretion of the Corporation.

A commercial paper facility with a borrowing limit of $1.00 billion to cover short-term cash needs. As of June 30, 2014, there were no balances outstanding and therefore the remaining borrowing capacity was $1.00 billion; however, the outstanding balance can fluctuate daily. A $1.00 billion unsecured revolving credit facility is available for short-term liquidity requirements and backs the commercial paper facility. In April 2014, the Corporation amended the maturity date of this facility to April 2019 and also amended the option to extend the expiration by one year to the first and second anniversary of the amendment, upon approval of existing or replacement lenders. The facility is fully subscribed among 12 lenders with the largest commitment being $115 million. The commitments of the lenders are several and no lender is responsible for any other lender's commitment if such lender fails to make a loan under the facility. This facility contains an increase provision that would allow up to an additional $500 million of borrowing. This facility has a financial covenant requiring that the Corporation not exceed a 37.5% debt to capitalization ratio as defined in the agreement. This ratio was 13.8% as of June 30, 2014. Although the right to borrow under the facility is not subject to a minimum rating requirement, the costs of maintaining the facility and borrowing under it are based on the ratings of the Corporation's senior unsecured, unguaranteed long-term debt. There were no borrowings under the credit facility during the second quarter and first six months of 2014. The total amount outstanding at any point in time under the combination of the commercial paper program and the credit facility cannot exceed the amount that can be borrowed under the credit facility. A universal shelf registration statement was filed by the Corporation with the Securities and Exchange Commission on April 30, 2012. The Corporation can use this shelf registration to issue an unspecified amount of debt securities, common stock (including 466 million shares of treasury stock as of June 30, 2014), preferred stock, depositary shares, warrants, stock purchase contracts, stock purchase units and securities of trust subsidiaries. The specific terms of any securities the Corporation issues under this registration statement will be provided in the applicable prospectus supplements.



Liquidity exposure Contractholder funds were $22.76 billion as of June 30, 2014. The following table summarizes contractholder funds by their contractual withdrawal provisions as of June 30, 2014.

($ in millions) Percent to total Not subject to discretionary withdrawal $ 3,689



16.2 % Subject to discretionary withdrawal with adjustments: Specified surrender charges (1)

6,378



28.0

Market value adjustments (2) 2,846



12.5

Subject to discretionary withdrawal without adjustments (3) 9,851 43.3 Total contractholder funds (4)

$ 22,764 100.0 % _______________ (1) Includes $2.72 billion of liabilities with a contractual surrender charge of less than 5% of the account balance. (2) $2.11 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, 6, 7 or 10 years) during which there is no surrender charge or market value adjustment. (3) 82% of these contracts have a minimum interest crediting rate guarantee of 3% or higher. (4) Includes $874 million of contractholder funds on variable annuities reinsured to The Prudential Insurance Company of America, a subsidiary of Prudential Financial Inc., in 2006. Retail life and annuity products may be surrendered by customers for a variety of reasons. Reasons unique to individual customers include a current or unexpected need for cash or a change in life insurance coverage needs. Other key factors that may impact the likelihood of customer surrender include the level of the contract surrender charge, the length of time the contract has been in force, distribution channel, market interest rates, equity market 52 -------------------------------------------------------------------------------- conditions and potential tax implications. In addition, the propensity for retail life insurance policies to lapse is lower than it is for fixed annuities because of the need for the insured to be re-underwritten upon policy replacement. Surrenders and partial withdrawals for our retail annuities decreased 36.3% and 49.5% in the second quarter and first six months of 2014, respectively, compared to the same periods of 2013. The annualized surrender and partial withdrawal rate on deferred fixed annuities and interest-sensitive life insurance products, based on the beginning of year contractholder funds, was 9.7% and 10.9% in the first six months of 2014 and 2013, respectively. We strive to promptly pay customers who request cash surrenders; however, statutory regulations generally provide up to six months in most states to fulfill surrender requests. Our asset-liability management practices enable us to manage the differences between the cash flows generated by our investment portfolio and the expected cash flow requirements of our life insurance and annuity product obligations. Cash flows As reflected in our Condensed Consolidated Statements of Cash Flows, lower cash provided by operating activities in the first six months of 2014 compared to the first six months of 2013 was primarily due to lower net investment income and higher income tax payments, partially offset by higher premiums on traditional life insurance products and lower contract benefits paid. Lower cash was provided by investing activities in the first six months of 2014 compared to the first six months of 2013 as proceeds from the sale of LBL were more than offset by lower collections resulting from the funding of a large institutional product maturity in 2013. Lower cash used in financing activities in the first six months of 2014 compared to the first six months of 2013 was primarily due to a $1.75 billion institutional product maturity in 2013 and lower contractholder benefits and withdrawals on fixed annuities and interest-sensitive life insurance, partially offset by lower deposits. 53



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