10-Q 1 allstatelife-33118x10q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
The registrant meets the conditions set forth in General Instructions H (1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format.
 
[X]          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2018
 
OR
 
[  ]           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                  to                 
 
Commission file number 0-31248
 
ALLSTATE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
 
 
Illinois
 
36-2554642
 
 
(State or other jurisdiction of
 
(I.R.S. Employer
 
 
incorporation or organization)
 
Identification No.)
 
 
3075 Sanders Road, Northbrook, Illinois 60062
(Address of principal executive offices)      (Zip Code)
 
(847) 402-5000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes   X             No ___
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes   X             No ___
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,”  “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ____
 
Accelerated filer                            
 
 
 
Non-accelerated filer    X    (Do not check if a smaller reporting company)
 
Smaller reporting company          
 
 
 
 
 
Emerging growth company _____          
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ____

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ___           No   X  
 
As of May 7, 2018, the registrant had 23,800 common shares, $227 par value, outstanding, all of which are held by Allstate Insurance Company.






ALLSTATE LIFE INSURANCE COMPANY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2018
 
PART I
FINANCIAL INFORMATION
PAGE
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Operations and Comprehensive Income for the Three-Month Periods Ended March 31, 2018 and 2017 (unaudited)
 
 
 
 
Condensed Consolidated Statements of Financial Position as of March 31, 2018 (unaudited) and December 31, 2017
 
 
 
 
Condensed Consolidated Statements of Shareholder’s Equity for the Three-Month Periods Ended March 31, 2018 and 2017 (unaudited)
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 2018 and 2017 (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
($ in millions)
Three months ended March 31,
 
2018
 
2017
 
(unaudited)
Revenues
 

 
 

Premiums
$
177

 
$
169

Contract charges
176

 
179

Other revenue
8

 
11

Net investment income
407

 
404

Realized capital gains and losses:
 

 
 

Total other-than-temporary impairment (“OTTI”) losses

 
(28
)
OTTI losses reclassified to (from) other comprehensive income
(1
)
 
4

Net OTTI losses recognized in earnings
(1
)
 
(24
)
Sales and valuation changes on equity investments and derivatives
(31
)
 
23

Total realized capital gains and losses
(32
)
 
(1
)
 
736

 
762

Costs and expenses
 

 
 

Contract benefits
370

 
354

Interest credited to contractholder funds
148

 
161

Amortization of deferred policy acquisition costs
39

 
41

Operating costs and expenses
68

 
80

Interest expense
1

 
1

 
626

 
637

 
 
 
 
Gain on disposition of operations
1

 
2

 
 
 
 
Income from operations before income tax expense
111

 
127

 
 
 
 
Income tax expense
21

 
41

 
 
 
 
Net income
90

 
86

 
 
 
 
Other comprehensive (loss) income, after-tax
 

 
 

Change in unrealized net capital gains and losses
(175
)
 
65

Change in unrealized foreign currency translation adjustments
4

 
(3
)
Other comprehensive (loss) income, after-tax
(171
)
 
62

 
 
 
 
Comprehensive (loss) income
$
(81
)
 
$
148

 

















See notes to condensed consolidated financial statements.

1


ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
($ in millions, except par value data) 
March 31, 2018
 
December 31, 2017
Assets
(unaudited)
 
 

Investments
 

 
 

Fixed income securities, at fair value (amortized cost $21,645 and $22,004)
$
22,401

 
$
23,261

Mortgage loans
3,988

 
3,876

Equity securities, at fair value (cost $1,213 and $1,306)
1,503

 
1,614

Limited partnership interests
3,413

 
3,147

Short-term, at fair value (amortized cost $596 and $725)
596

 
725

Policy loans
558

 
561

Other
1,310

 
1,254

Total investments
33,769

 
34,438

Cash
100

 
145

Deferred policy acquisition costs
1,217

 
1,156

Reinsurance recoverables from non-affiliates
2,217

 
2,243

Reinsurance recoverables from affiliates
432

 
437

Accrued investment income
263

 
263

Other assets
550

 
501

Separate Accounts
3,292

 
3,422

Total assets
$
41,840

 
$
42,605

Liabilities
 

 
 

Contractholder funds
$
18,284

 
$
18,592

Reserve for life-contingent contract benefits
11,398

 
11,625

Unearned premiums
4

 
4

Payable to affiliates, net
44

 
55

Other liabilities and accrued expenses
1,017

 
1,076

Deferred income taxes
811

 
836

Notes due to related parties
140

 
140

Separate Accounts
3,292

 
3,422

Total liabilities
34,990

 
35,750

Commitments and Contingent Liabilities (Note 7)


 


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
2,024

 
2,024

Retained income
4,385

 
3,981

Accumulated other comprehensive income:
 

 
 

Unrealized net capital gains and losses:
 

 
 

Unrealized net capital gains and losses on fixed income securities with OTTI
49

 
47

Other unrealized net capital gains and losses
551

 
1,186

Unrealized adjustment to DAC, DSI and insurance reserves
(178
)
 
(398
)
Total unrealized net capital gains and losses
422

 
835

Unrealized foreign currency translation adjustments
14

 
10

Total accumulated other comprehensive income (“AOCI”)
436

 
845

Total shareholder’s equity
6,850

 
6,855

Total liabilities and shareholder’s equity
$
41,840

 
$
42,605

 






See notes to condensed consolidated financial statements.

2


ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY
($ in millions)
Three months ended March 31,
 
2018
 
2017
 
(unaudited)
Common stock
$
5

 
$
5

 
 
 
 
Additional capital paid-in
 
 
 
Balance, beginning of period
2,024

 
1,990

Gain on reinsurance with an affiliate

 
34

Balance, end of period
2,024

 
2,024

 
 
 
 
Retained income
 

 
 

Balance, beginning of period
3,981

 
3,736

Cumulative effect of change in accounting principle

314

 

Net income
90

 
86

Dividends

 
(300
)
Balance, end of period
4,385

 
3,522

 
 
 
 
Accumulated other comprehensive income
 

 
 

Balance, beginning of period
845

 
678

Cumulative effect of change in accounting principle

(238
)
 

Change in unrealized net capital gains and losses
(175
)
 
65

Change in unrealized foreign currency translation adjustments
4

 
(3
)
Balance, end of period
436

 
740

 
 
 
 
Total shareholder’s equity
$
6,850

 
$
6,291

 



































See notes to condensed consolidated financial statements.

3


ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
Three months ended March 31,
 
2018
 
2017
Cash flows from operating activities
(unaudited)
Net income
$
90

 
$
86

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Amortization and other non-cash items
(16
)
 
(18
)
Realized capital gains and losses
32

 
1

Gain on disposition of operations
(1
)
 
(2
)
Interest credited to contractholder funds
148

 
161

Changes in:
 

 
 

Policy benefits and other insurance reserves
(178
)
 
(143
)
Deferred policy acquisition costs
15

 
12

Reinsurance recoverables, net
10

 
18

Income taxes
10

 
32

Other operating assets and liabilities
(83
)
 
(18
)
Net cash provided by operating activities
27

 
129

Cash flows from investing activities
 

 
 

Proceeds from sales
 

 
 

Fixed income securities
1,679

 
1,346

Equity securities
267

 
616

Limited partnership interests
23

 
87

Other investments
1

 
3

Investment collections
 

 
 

Fixed income securities
267

 
495

Mortgage loans
42

 
202

Other investments
34

 
31

Investment purchases
 

 
 

Fixed income securities
(1,594
)
 
(1,269
)
Equity securities
(167
)
 
(624
)
Limited partnership interests
(138
)
 
(129
)
Mortgage loans
(154
)
 
(86
)
Other investments
(99
)
 
(40
)
Change in short-term investments, net
64

 
(205
)
Change in policy loans and other investments, net
(19
)
 
(13
)
Net cash provided by investing activities
206

 
414

Cash flows from financing activities
 

 
 

Contractholder fund deposits
194

 
204

Contractholder fund withdrawals
(472
)
 
(468
)
Dividends paid

 
(300
)
Net cash used in financing activities
(278
)
 
(564
)
Net decrease in cash
(45
)
 
(21
)
Cash at beginning of period
145

 
138

Cash at end of period
$
100

 
$
117

 












See notes to condensed consolidated financial statements.

4



ALLSTATE LIFE INSURANCE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. General
Basis of presentation
The accompanying condensed consolidated financial statements include the accounts of Allstate Life Insurance Company (“ALIC”) and its wholly owned subsidiaries (collectively referred to as the “Company”). ALIC is wholly owned by Allstate Insurance Company (“AIC”), which is wholly owned by Allstate Insurance Holdings, LLC, a wholly owned subsidiary of The Allstate Corporation (the “Corporation”). These condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
The condensed consolidated financial statements and notes as of March 31, 2018 and for the three-month periods ended March 31, 2018 and 2017 are unaudited. The condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods. These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2017. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year. All significant intercompany accounts and transactions have been eliminated.
Reinsurance transaction
Effective January 1, 2017, ALIC entered into a coinsurance reinsurance agreement with Allstate Assurance Company to assume certain term life insurance policies. The agreement covered policies issued from January 1, 2015 through December 31, 2017. In connection with the agreement, the Company recorded cash of $20 million, deferred policy acquisition costs (“DAC”) of $45 million, other assets of $11 million, reserve for life-contingent contract benefits of $24 million and deferred tax liabilities of $18 million. The $34 million gain on the transaction was recorded as an increase to additional capital paid-in since the transaction was between entities under common control.
Premiums and contract charges
The following table summarizes premiums and contract charges by product.
($ in millions)
Three months ended March 31,
 
2018
 
2017
Premiums
 

 
 

Traditional life insurance
$
147

 
$
143

Accident and health insurance
30

 
26

Total premiums
177

 
169

 
 
 
 
Contract charges
 

 
 

Interest-sensitive life insurance
173

 
176

Fixed annuities
3

 
3

Total contract charges
176

 
179

Total premiums and contract charges
$
353

 
$
348

Adopted accounting standard
Recognition and Measurement of Financial Assets and Financial Liabilities
Effective January 1, 2018, the Company adopted new Financial Accounting Standards Board (“FASB”) guidance requiring equity investments, including equity securities and limited partnership interests not accounted for under the equity method of accounting or that do not result in consolidation to be measured at fair value with changes in fair value recognized in net income. The guidance clarifies that an entity should evaluate the realizability of deferred tax assets related to available-for-sale fixed income securities in combination with the entity’s other deferred tax assets. The Company’s adoption of the new FASB guidance included adoption of the relevant elements of Technical Corrections and Improvements to Financial Instruments, issued in February 2018.
Upon adoption of the new guidance on January 1, 2018, $308 million of pre-tax unrealized net capital gains for equity securities were reclassified from AOCI to retained income. The after-tax change in accounting for equity securities did not affect the Company’s total shareholder’s equity and the unrealized net capital gains reclassified to retained income will never be recognized in net income.

5



Upon adoption of the new guidance on January 1, 2018, the carrying value of cost method limited partnership interests increased $95 million, pre-tax, to fair value. The after-tax cumulative-effect increase in retained income of $76 million increased the Company’s shareholder’s equity but will never be recognized in net income.
Changes to significant accounting policies
Investments
Changes were made to the Company’s Significant Accounting Policies upon adoption of new FASB guidance related to the recognition and measurement of financial assets. Equity securities primarily include common stocks, exchange traded and mutual funds, non-redeemable preferred stocks and real estate investment trust equity investments. Equity securities are carried at fair value. The periodic change in fair value of equity securities is recognized within realized capital gains and losses on the Condensed Consolidated Statements of Operations and Comprehensive Income.
Investments in limited partnership interests include interests in private equity funds, real estate funds and other funds. Where the Company’s interest is so minor that it exercises virtually no influence over operating and financial policies, investments in limited partnership interests purchased prior to January 1, 2018 are accounted for at fair value primarily utilizing the net asset value as a practical expedient (“NAV”) to determine fair value. All other investments in limited partnership interests, including those purchased subsequent to January 1, 2018, are accounted for in accordance with the equity method of accounting (“EMA”).
Investment income from limited partnership interests carried at fair value is recognized based upon the changes in fair value primarily utilizing NAV. Income from EMA limited partnership interests is recognized based on the Company’s share of the partnerships’ earnings. Income for EMA limited partnership interests is generally recognized on a three month delay due to the availability of the related financial statements.
Tax Reform
On December 22, 2017, Public Law 115-97, known as the Tax Cuts and Jobs Act of 2017 (“Tax Legislation”) became effective, permanently reducing the U.S. corporate income tax rate from 35% to 21% beginning January 1, 2018. As a result, the corporate tax rate is not comparable between periods.
Pending accounting standards
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued guidance which revises the credit loss recognition criteria for certain financial assets measured at amortized cost, including reinsurance recoverables. The new guidance replaces the existing incurred loss recognition model with an expected loss recognition model. The objective of the expected credit loss model is for the reporting entity to recognize its estimate of expected credit losses for affected financial assets in a valuation allowance deducted from the amortized cost basis of the related financial assets that results in presenting the net carrying value of the financial assets at the amount expected to be collected. The reporting entity must consider all relevant information available when estimating expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts over the life of an asset. Financial assets may be evaluated individually or on a pooled basis when they share similar risk characteristics. The measurement of credit losses for available-for-sale debt securities measured at fair value is not affected except that credit losses recognized are limited to the amount by which fair value is below amortized cost and the carrying value adjustment is recognized through a valuation allowance and not as a direct write-down. The guidance is effective for reporting periods beginning after December 15, 2019, and for most affected instruments must be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to beginning retained income. The Company is in the process of evaluating the impact of adoption.
Accounting for Hedging Activities
In August 2017, the FASB issued amendments intended to better align hedge accounting with an organization’s risk management activities. The amendments expand hedge accounting for nonfinancial and financial risk components and revise the measurement methodologies to better align with an organization’s risk management activities. Separate presentation of hedge ineffectiveness is eliminated to provide greater transparency of the full impact of hedging by requiring presentation of the results of the hedged item and hedging instrument in a single financial statement line item. In addition, the amendments reduce complexity by simplifying the manner in which assessments of hedge effectiveness may be performed. The guidance is effective for reporting periods beginning after December 15, 2018. The presentation and disclosure guidance is effective on a prospective basis. The impact of adoption is not expected to be material to the Company’s results of operations or financial position.
Other revenue presentation
The Company revised the presentation of total revenue to include other revenue. Previously, components of other revenue were presented within operating costs and expenses and primarily represent gross dealer concessions received in connection with Allstate exclusive agencies and exclusive financial specialists sales of non-proprietary products. Other revenue is recognized

6



when performance obligations are fulfilled. Prior periods have been reclassified to conform to current separate presentation of other revenue.
2. Supplemental Cash Flow Information
Non-cash investing activities include $7 million and $2 million related to mergers and exchanges completed with equity and fixed income securities, and modifications of certain mortgage loans for the three months ended March 31, 2018 and 2017, respectively.
Liabilities for collateral received in conjunction with the Company’s securities lending program and over-the-counter (“OTC”) and cleared derivatives are reported in other liabilities and accrued expenses or other investments. The accompanying cash flows are included in cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows along with the activities resulting from management of the proceeds, which are as follows:
($ in millions)
Three months ended March 31,
 
2018
 
2017
Net change in proceeds managed
 

 
 

Net change in fixed income securities
$
15

 
$
(36
)
Net change in short-term investments
66

 
11

Operating cash flow provided (used)
$
81

 
$
(25
)
Net change in liabilities
 

 
 

Liabilities for collateral, beginning of period
$
(542
)
 
$
(550
)
Liabilities for collateral, end of period
(461
)
 
(575
)
Operating cash flow (used) provided
$
(81
)
 
$
25

3. Investments
Fair values
The amortized cost, gross unrealized gains and losses and fair value for fixed income securities are as follows:
($ in millions)
Amortized
 
Gross unrealized
 
Fair
 
cost
 
Gains
 
Losses
 
value
March 31, 2018
 

 
 

 
 

 
 

U.S. government and agencies
$
538

 
$
31

 
$
(1
)
 
$
568

Municipal
2,033

 
234

 
(4
)
 
2,263

Corporate
18,135

 
667

 
(239
)
 
18,563

Foreign government
271

 
15

 

 
286

Asset-backed securities (“ABS”)
399

 
6

 
(5
)
 
400

Residential mortgage-backed securities (“RMBS”)
191

 
49

 
(1
)
 
239

Commercial mortgage-backed securities (“CMBS”)
64

 
5

 
(2
)
 
67

Redeemable preferred stock
14

 
1

 

 
15

Total fixed income securities
$
21,645

 
$
1,008

 
$
(252
)
 
$
22,401

 
 
 
 
 
 
 
 
December 31, 2017
 

 
 

 
 

 
 

U.S. government and agencies
$
768

 
$
38

 
$
(2
)
 
$
804

Municipal
2,001

 
275

 
(3
)
 
2,273

Corporate
18,262

 
960

 
(86
)
 
19,136

Foreign government
279

 
20

 

 
299

ABS
383

 
6

 
(4
)
 
385

RMBS
205

 
49

 
(1
)
 
253

CMBS
93

 
6

 
(2
)
 
97

Redeemable preferred stock
13

 
1

 

 
14

Total fixed income securities
$
22,004

 
$
1,355

 
$
(98
)
 
$
23,261


7



Scheduled maturities
The scheduled maturities for fixed income securities are as follows as of March 31, 2018:
($ in millions)
Amortized cost
 
Fair value
Due in one year or less
$
1,337

 
$
1,338

Due after one year through five years
8,596

 
8,781

Due after five years through ten years
7,068

 
7,089

Due after ten years
3,990

 
4,487

 
20,991

 
21,695

ABS, RMBS and CMBS
654

 
706

Total
$
21,645

 
$
22,401

Actual maturities may differ from those scheduled as a result of calls and make-whole payments by the issuers. ABS, RMBS and CMBS are shown separately because of the potential for prepayment of principal prior to contractual maturity dates.
Net investment income
Net investment income is as follows:
($ in millions)
Three months ended March 31,
 
2018
 
2017
Fixed income securities
$
251

 
$
268

Mortgage loans
44

 
49

Equity securities
7

 
15

Limited partnership interests (1) (2)
96

 
65

Short-term investments
4

 
1

Policy loans
7

 
8

Other
22

 
19

Investment income, before expense
431

 
425

Investment expense
(24
)
 
(21
)
Net investment income
$
407

 
$
404

_______________
 
(1) 
Due to the adoption of the recognition and measurement accounting standard, limited partnerships previously reported using the cost method are now reported at fair value with changes in fair value recognized in net investment income.
(2) 
Includes net investment income of $58 million for EMA limited partnership interests and $38 million for limited partnership interests carried at fair value for the three months ended March 31, 2018
Realized capital gains and losses
Realized capital gains and losses by asset type are as follows:
($ in millions)
Three months ended March 31,
 
2018
 
2017
Fixed income securities
$
(6
)
 
$
(7
)
Equity securities
(26
)
 

Limited partnership interests
3

 
13

Derivatives
(3
)
 
(5
)
Other

 
(2
)
Realized capital gains and losses
$
(32
)
 
$
(1
)

8



Realized capital gains and losses by transaction type are as follows:
($ in millions)
Three months ended March 31,
 
2018
 
2017
Impairment write-downs (1)
$
(1
)
 
$
(21
)
Change in intent write-downs (1)

 
(3
)
Net OTTI losses recognized in earnings
(1
)
 
(24
)
Sales (1)
(5
)
 
28

Valuation of equity investments (1)

(23
)
 

Valuation and settlements of derivative instruments
(3
)
 
(5
)
Realized capital gains and losses
$
(32
)
 
$
(1
)
_______________
 
(1) 
Due to the adoption of the recognition and measurement accounting standard, equity securities are reported at fair value with changes in fair value recognized in valuation of equity investments and are no longer included in impairment write-downs, change in intent write-downs and sales.
Gross gains of $7 million and gross losses of $12 million were realized on sales of fixed income securities during the three months ended March 31, 2018. Gross gains of $33 million and gross losses of $21 million were realized on sales of fixed income and equity securities during the three months ended March 31, 2017.
Valuation changes included in net income for investments still held as of March 31, 2018 are as follows:
($ in millions)
Three months ended March 31,
 
2018
Equity securities
$
(9
)
Limited partnership interests carried at fair value
38

Total valuation changes
$
29

OTTI losses by asset type are as follows:
($ in millions)
Three months ended March 31, 2018
 
Three months ended March 31, 2017
 
Gross
 
Included
in OCI
 
Net
 
Gross
 
Included
in OCI
 
Net
Fixed income securities:
 

 
 

 
 

 
 

 
 

 
 

Corporate
$

 
$

 
$

 
$
(7
)
 
$
3

 
$
(4
)
RMBS

 

 

 

 
(2
)
 
(2
)
CMBS

 
(1
)
 
(1
)
 
(6
)
 
3

 
(3
)
Total fixed income securities

 
(1
)
 
(1
)
 
(13
)
 
4

 
(9
)
Equity securities (1)

 

 

 
(10
)
 

 
(10
)
Limited partnership interests (1)

 

 

 
(3
)
 

 
(3
)
Other

 

 

 
(2
)
 

 
(2
)
OTTI losses
$

 
$
(1
)
 
$
(1
)
 
$
(28
)
 
$
4

 
$
(24
)
_______________
 
(1) 
Due to the adoption of the recognition and measurement accounting standard, equity securities and limited partnerships previously reported using the cost method are now reported at fair value with changes in fair value recognized in net income and are no longer included in the table above.
The total amount of OTTI losses included in AOCI at the time of impairment for fixed income securities, which were not included in earnings, are presented in the following table. The amounts exclude $111 million and $113 million as of March 31, 2018 and December 31, 2017, respectively, of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.
($ in millions)
March 31, 2018
 
December 31, 2017
Municipal
$
(4
)
 
$
(4
)
ABS
(6
)
 
(8
)
RMBS
(36
)
 
(37
)
CMBS
(4
)
 
(4
)
Total
$
(50
)
 
$
(53
)

9



Rollforwards of the cumulative credit losses recognized in earnings for fixed income securities held as of the end of the period are as follows:
($ in millions)
Three months ended March 31,
 
2018
 
2017
Beginning balance
$
(138
)
 
$
(176
)
Additional credit loss for securities previously other-than-temporarily impaired
(1
)
 
(4
)
Additional credit loss for securities not previously other-than-temporarily impaired

 
(5
)
Reduction in credit loss for securities disposed or collected
11

 
18

Ending balance
$
(128
)
 
$
(167
)
The Company uses its best estimate of future cash flows expected to be collected from the fixed income security, discounted at the security’s original or current effective rate, as appropriate, to calculate a recovery value and determine whether a credit loss exists. The determination of cash flow estimates is inherently subjective and methodologies may vary depending on facts and circumstances specific to the security. All reasonably available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable assumptions and forecasts, are considered when developing the estimate of cash flows expected to be collected. That information generally includes, but is not limited to, the remaining payment terms of the security, prepayment speeds, foreign exchange rates, the financial condition and future earnings potential of the issue or issuer, expected defaults, expected recoveries, the value of underlying collateral, vintage, geographic concentration of underlying collateral, available reserves or escrows, current subordination levels, third party guarantees and other credit enhancements. Other information, such as industry analyst reports and forecasts, sector credit ratings, financial condition of the bond insurer for insured fixed income securities, and other market data relevant to the realizability of contractual cash flows, may also be considered. The estimated fair value of collateral will be used to estimate recovery value if the Company determines that the security is dependent on the liquidation of collateral for ultimate settlement. If the estimated recovery value is less than the amortized cost of the security, a credit loss exists and an OTTI for the difference between the estimated recovery value and amortized cost is recorded in earnings. The portion of the unrealized loss related to factors other than credit remains classified in AOCI. If the Company determines that the fixed income security does not have sufficient cash flow or other information to estimate a recovery value for the security, the Company may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings.
Unrealized net capital gains and losses
Unrealized net capital gains and losses included in AOCI are as follows:
($ in millions)
Fair value
 
Gross unrealized
 
Unrealized net gains (losses)
March 31, 2018
 
Gains
 
Losses
 
Fixed income securities
$
22,401

 
$
1,008

 
$
(252
)
 
$
756

Short-term investments
596

 

 

 

Derivative instruments (1)
2

 
2

 

 
2

EMA limited partnerships (2)
 

 
 

 
 

 
1

Unrealized net capital gains and losses, pre-tax
 

 
 

 
 

 
759

Amounts recognized for:
 

 
 

 
 

 
 

Insurance reserves (3)
 

 
 

 
 

 
(119
)
DAC and DSI (4)
 

 
 

 
 

 
(106
)
Amounts recognized
 

 
 

 
 

 
(225
)
Deferred income taxes
 

 
 

 
 

 
(112
)
Unrealized net capital gains and losses, after-tax
 

 
 

 
 

 
$
422

_______________
 
(1) 
Included in the fair value of derivative instruments is $2 million classified as liabilities.
(2) 
Unrealized net capital gains and losses for limited partnership interests represent the Company’s share of EMA limited partnerships’ other comprehensive income. Fair value and gross unrealized gains and losses are not applicable.
(3) 
The insurance reserves adjustment represents the amount by which the reserve balance would increase if the net unrealized gains in the applicable product portfolios were realized and reinvested at current lower interest rates, resulting in a premium deficiency. This adjustment primarily relates to structured settlement annuities with life contingencies (a type of immediate fixed annuities).
(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.

10



($ in millions)
Fair value
 
Gross unrealized
 
Unrealized net gains (losses)
December 31, 2017
 
Gains
 
Losses
 
Fixed income securities
$
23,261

 
$
1,355

 
$
(98
)
 
$
1,257

Equity securities
1,614

 
311

 
(3
)
 
308

Short-term investments
725

 

 

 

Derivative instruments (1)
2

 
2

 

 
2

EMA limited partnerships
 

 
 

 
 

 
1

Unrealized net capital gains and losses, pre-tax
 

 
 

 
 

 
1,568

Amounts recognized for:
 

 
 

 
 

 
 

Insurance reserves
 

 
 

 
 

 
(315
)
DAC and DSI
 

 
 

 
 

 
(189
)
Amounts recognized
 

 
 

 
 

 
(504
)
Deferred income taxes
 

 
 

 
 

 
(229
)
Unrealized net capital gains and losses, after-tax
 

 
 

 
 

 
$
835

_______________
 
(1) 
Included in the fair value of derivative instruments is $2 million classified as liabilities.
Change in unrealized net capital gains and losses
The change in unrealized net capital gains and losses for the three months ended March 31, 2018 is as follows:
($ in millions)
 

Fixed income securities
$
(501
)
Equity securities (1)

Total
(501
)
Amounts recognized for:
 

Insurance reserves
196

DAC and DSI
83

Amounts recognized
279

Deferred income taxes
47

Decrease in unrealized net capital gains and losses, after-tax
$
(175
)
_______________
 
(1) Upon adoption of the recognition and measurement accounting standard on January 1, 2018, $308 million of pre-tax unrealized net capital gains for equity securities were reclassified from AOCI to retained income.  See Note 1 of the condensed consolidated financial statements.
Portfolio monitoring
The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed income security whose carrying value may be other-than-temporarily impaired.
For each fixed income security in an unrealized loss position, the Company assesses whether management with the appropriate authority has made the decision to sell or whether it is more likely than not the Company will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes. If a security meets either of these criteria, the security’s decline in fair value is considered other than temporary and is recorded in earnings.
If the Company has not made the decision to sell the fixed income security and it is not more likely than not the Company will be required to sell the fixed income security before recovery of its amortized cost basis, the Company evaluates whether it expects to receive cash flows sufficient to recover the entire amortized cost basis of the security. The Company calculates the estimated recovery value by discounting the best estimate of future cash flows at the security’s original or current effective rate, as appropriate, and compares this to the amortized cost of the security. If the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the fixed income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss related to other factors recognized in other comprehensive income.
For fixed income securities managed by third parties, either the Company has contractually retained its decision making authority as it pertains to selling securities that are in an unrealized loss position or it recognizes any unrealized loss at the end of the period through a charge to earnings.
The Company’s portfolio monitoring process includes a quarterly review of all securities to identify instances where the fair value of a security compared to its amortized cost is below established thresholds. The process also includes the monitoring of other impairment indicators such as ratings, ratings downgrades and payment defaults. The securities identified, in addition to other securities for which the Company may have a concern, are evaluated for potential OTTI using all reasonably available

11



information relevant to the collectability or recovery of the security. Inherent in the Company’s evaluation of OTTI for these securities are assumptions and estimates about the financial condition and future earnings potential of the issue or issuer. Some of the factors that may be considered in evaluating whether a decline in fair value is other than temporary are: 1) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; 2) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity; and 3) the length of time and extent to which the fair value has been less than amortized cost.
The following table summarizes the gross unrealized losses and fair value of securities by the length of time that individual securities have been in a continuous unrealized loss position.
 
($ in millions)
Less than 12 months
 
12 months or more
 
Total
unrealized
losses
 
 
Number
of issues
 
Fair
value
 
Unrealized
losses
 
Number
of issues
 
Fair
value
 
Unrealized
losses
 
 
 
March 31, 2018
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Fixed income securities
 

 
 

 
 

 
 

 
 

 
 

 
 

 
U.S. government and agencies
9

 
$
104

 
$
(1
)
 
1

 
$
5

 
$

 
$
(1
)
 
Municipal
55

 
119

 
(2
)
 
1

 
11

 
(2
)
 
(4
)
 
Corporate
1,082

 
6,649

 
(153
)
 
139

 
1,250

 
(86
)
 
(239
)
 
Foreign government
2

 
16

 

 

 

 

 

 
ABS
48

 
215

 
(2
)
 
6

 
10

 
(3
)
 
(5
)
 
RMBS
86

 
4

 

 
56

 
16

 
(1
)
 
(1
)
 
CMBS

 

 

 
6

 
24

 
(2
)
 
(2
)
 
Total fixed income securities
1,282

 
7,107

 
(158
)
 
209

 
1,316

 
(94
)
 
(252
)
 
Investment grade fixed income securities
960

 
$
6,028

 
$
(123
)
 
177

 
$
1,211

 
$
(79
)
 
$
(202
)
 
Below investment grade fixed income securities
322

 
1,079

 
(35
)
 
32

 
105

 
(15
)
 
(50
)
 
Total fixed income securities
1,282

 
$
7,107

 
$
(158
)
 
209

 
$
1,316

 
$
(94
)
 
$
(252
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Fixed income securities
 

 
 

 
 

 
 

 
 

 
 

 
 

 
U.S. government and agencies
17

 
$
443

 
$
(2
)
 
2

 
$
25

 
$

 
$
(2
)
 
Municipal
4

 
14

 

 
1

 
11

 
(3
)
 
(3
)
 
Corporate
456

 
2,899

 
(28
)
 
144

 
1,324

 
(58
)
 
(86
)
 
ABS
33

 
170

 
(1
)
 
8

 
24

 
(3
)
 
(4
)
 
RMBS
70

 
3

 

 
56

 
18

 
(1
)
 
(1
)
 
CMBS
2

 
1

 

 
6

 
23

 
(2
)
 
(2
)
 
Redeemable preferred stock
1

 

 

 

 

 

 

 
Total fixed income securities
583

 
3,530

 
(31
)
 
217

 
1,425

 
(67
)
 
(98
)
 
Equity securities
87

 
66

 
(3
)
 
1

 

 

 
(3
)
 
Total fixed income and equity securities
670

 
$
3,596

 
$
(34
)
 
218

 
$
1,425

 
$
(67
)
 
$
(101
)
 
Investment grade fixed income securities
472

 
$
3,192

 
$
(22
)
 
181

 
$
1,320

 
$
(52
)
 
$
(74
)
 
Below investment grade fixed income securities
111

 
338

 
(9
)
 
36

 
105

 
(15
)
 
(24
)
 
Total fixed income securities
583

 
$
3,530

 
$
(31
)
 
217

 
$
1,425

 
$
(67
)
 
$
(98
)
As of March 31, 2018, $233 million of the $252 million unrealized losses are related to securities with an unrealized loss position less than 20% of amortized cost, the degree of which suggests that these securities do not pose a high risk of being other-than-temporarily impaired.  Of the $233 million, $190 million are related to unrealized losses on investment grade fixed income securities. Of the remaining $43 million, $32 million have been in an unrealized loss position for less than 12 months. Investment grade is defined as a security having a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A or BBB from S&P Global Ratings (“S&P”), a comparable rating from another nationally recognized rating agency, or a comparable internal rating if an externally provided rating is not available. Market prices for certain securities may have credit spreads which imply higher or lower credit quality than the current third party rating. Unrealized losses on investment grade securities are principally related to an increase in market yields which may include increased risk-free interest rates and/or wider credit spreads since the time of initial purchase.
As of March 31, 2018, the remaining $19 million of unrealized losses are related to securities in unrealized loss positions greater than or equal to 20% of amortized cost. Investment grade fixed income securities comprising $12 million of these unrealized losses were evaluated based on factors such as discounted cash flows and the financial condition and near-term and long-term prospects of the issue or issuer and were determined to have adequate resources to fulfill contractual obligations. Of the $19 million, $7 million are related to below investment grade fixed income securities. Of these amounts, $3 million are related to

12



below investment grade fixed income securities that had been in an unrealized loss position greater than or equal to 20% of amortized cost for a period of twelve or more consecutive months as of March 31, 2018.
ABS, RMBS and CMBS in an unrealized loss position were evaluated based on actual and projected collateral losses relative to the securities’ positions in the respective securitization trusts, security specific expectations of cash flows, and credit ratings. This evaluation also takes into consideration credit enhancement, measured in terms of (i) subordination from other classes of securities in the trust that are contractually obligated to absorb losses before the class of security the Company owns, and (ii) the expected impact of other structural features embedded in the securitization trust beneficial to the class of securities the Company owns, such as overcollateralization and excess spread. Municipal bonds in an unrealized loss position were evaluated based on the underlying credit quality of the primary obligor, obligation type and quality of the underlying assets.
As of March 31, 2018, the Company has not made the decision to sell and it is not more likely than not the Company will be required to sell fixed income securities with unrealized losses before recovery of the amortized cost basis.
Limited partnerships
Investments in limited partnership interests include interests in private equity funds, real estate funds and other funds. As of March 31, 2018 and December 31, 2017, the carrying value of EMA limited partnerships totaled $2.66 billion and $2.54 billion, respectively, and limited partnerships carried at fair value as of March 31, 2018, while at cost method as of December 31, 2017, totaled $751 million and $611 million, respectively.
Mortgage loans
Mortgage loans are evaluated for impairment on a specific loan basis through a quarterly credit monitoring process and review of key credit quality indicators. Mortgage loans are considered impaired when it is probable that the Company will not collect the contractual principal and interest. Valuation allowances are established for impaired loans to reduce the carrying value to the fair value of the collateral less costs to sell or the present value of the loan’s expected future repayment cash flows discounted at the loan’s original effective interest rate. Impaired mortgage loans may not have a valuation allowance when the fair value of the collateral less costs to sell is higher than the carrying value. Valuation allowances are adjusted for subsequent changes in the fair value of the collateral less costs to sell or present value of the loan’s expected future repayment cash flows. Mortgage loans are charged off against their corresponding valuation allowances when there is no reasonable expectation of recovery. The impairment evaluation is non-statistical in respect to the aggregate portfolio but considers facts and circumstances attributable to each loan. It is not considered probable that additional impairment losses, beyond those identified on a specific loan basis, have been incurred as of March 31, 2018.
Accrual of income is suspended for mortgage loans that are in default or when full and timely collection of principal and interest payments is not probable. Cash receipts on mortgage loans on nonaccrual status are generally recorded as a reduction of carrying value.
Debt service coverage ratio is considered a key credit quality indicator when mortgage loans are evaluated for impairment. Debt service coverage ratio represents the amount of estimated cash flows from the property available to the borrower to meet principal and interest payment obligations. Debt service coverage ratio estimates are updated annually or more frequently if conditions are warranted based on the Company’s credit monitoring process.
The following table reflects the carrying value of non-impaired mortgage loans summarized by debt service coverage ratio distribution.
($ in millions)
 
March 31, 2018
 
December 31, 2017
Debt service coverage ratio distribution
 
Fixed rate
mortgage
loans
 
Variable rate
mortgage
loans
 
Total
 
Fixed rate
mortgage
loans
 
Variable rate
mortgage
loans
 
Total
Below 1.0
 
$
27

 
$

 
$
27

 
$
3

 
$

 
$
3

1.0 - 1.25
 
323

 

 
323

 
326

 

 
326

1.26 - 1.50
 
1,058

 
15

 
1,073

 
1,033

 
15

 
1,048

Above 1.50
 
2,519

 
42

 
2,561

 
2,482

 
13

 
2,495

Total non-impaired mortgage loans
 
$
3,927

 
$
57

 
$
3,984

 
$
3,844

 
$
28

 
$
3,872

Mortgage loans with a debt service coverage ratio below 1.0 that are not considered impaired primarily relate to instances where the borrower has the financial capacity to fund the revenue shortfalls from the properties for the foreseeable term, the decrease in cash flows from the properties is considered temporary, or there are other risk mitigating circumstances such as additional collateral, escrow balances or borrower guarantees.

13



The net carrying value of impaired mortgage loans is as follows:
($ in millions)
March 31, 2018
 
December 31, 2017
Impaired mortgage loans with a valuation allowance
$
4

 
$
4

Impaired mortgage loans without a valuation allowance

 

Total impaired mortgage loans
$
4

 
$
4

Valuation allowance on impaired mortgage loans
$
3

 
$
3

The valuation allowance on impaired mortgage loans had no activity for the three months ended March 31, 2018 and 2017. The average balance of impaired loans was $4 million and $5 million for the three months ended March 31, 2018 and 2017, respectively.
Payments on all mortgage loans were current as of March 31, 2018 and December 31, 2017.
Short-term investments
Short-term investments, including commercial paper, U.S. Treasury bills, money market funds and other short-term investments, are carried at fair value. As of March 31, 2018 and December 31, 2017, the fair value of short-term investments totaled $596 million and $725 million, respectively.
Policy loans
Policy loans are carried at unpaid principal balances. As of March 31, 2018 and December 31, 2017, the carrying value of policy loans totaled $558 million and $561 million, respectively.
Other investments
Other investments primarily consist of agent loans, bank loans, real estate and derivatives. Agent loans are loans issued to exclusive Allstate agents and are carried at unpaid principal balances, net of valuation allowances and unamortized deferred fees or costs. Bank loans are primarily senior secured corporate loans and are carried at amortized cost. Real estate is carried at cost less accumulated depreciation. Derivatives are carried at fair value. The following table summarizes other investments.
($ in millions)
 
March 31, 2018
 
December 31, 2017
Agent loans
 
$
562

 
$
538

Bank loans
 
450

 
437

Real estate
 
207

 
157

Derivatives and other
 
91

 
122

Total
 
$
1,310

 
$
1,254

 
 
 
 
4. Fair Value of Assets and Liabilities
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Assets and liabilities recorded on the Condensed Consolidated Statements of Financial Position at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows:
Level 1: Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access.
Level 2: Assets and liabilities whose values are based on the following:
(a)
Quoted prices for similar assets or liabilities in active markets;
(b)
Quoted prices for identical or similar assets or liabilities in markets that are not active; or
(c)
Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Unobservable inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the assets and liabilities.
The availability of observable inputs varies by instrument. In situations where fair value is based on internally developed pricing models or inputs that are unobservable in the market, the determination of fair value requires more judgment. The degree of judgment exercised by the Company in determining fair value is typically greatest for instruments categorized in Level 3. In

14



many instances, valuation inputs used to measure fair value fall into different levels of the fair value hierarchy. The category level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments.
The Company is responsible for the determination of fair value and the supporting assumptions and methodologies. The Company gains assurance that assets and liabilities are appropriately valued through the execution of various processes and controls designed to ensure the overall reasonableness and consistent application of valuation methodologies, including inputs and assumptions, and compliance with accounting standards. For fair values received from third parties or internally estimated, the Company’s processes and controls are designed to ensure that the valuation methodologies are appropriate and consistently applied, the inputs and assumptions are reasonable and consistent with the objective of determining fair value, and the fair values are accurately recorded. For example, on a continuing basis, the Company assesses the reasonableness of individual fair values that have stale security prices or that exceed certain thresholds as compared to previous fair values received from valuation service providers or brokers or derived from internal models. The Company performs procedures to understand and assess the methodologies, processes and controls of valuation service providers. In addition, the Company may validate the reasonableness of fair values by comparing information obtained from valuation service providers or brokers to other third party valuation sources for selected securities. The Company performs ongoing price validation procedures such as back-testing of actual sales, which corroborate the various inputs used in internal models to market observable data. When fair value determinations are expected to be more variable, the Company validates them through reviews by members of management who have relevant expertise and who are independent of those charged with executing investment transactions.
The Company has two types of situations where investments are classified as Level 3 in the fair value hierarchy. The first is where specific inputs significant to the fair value estimation models are not market observable. This primarily occurs in the Company’s use of broker quotes to value certain securities where the inputs have not been corroborated to be market observable, and the use of valuation models that use significant non-market observable inputs.
The second situation where the Company classifies securities in Level 3 is where quotes continue to be received from independent third-party valuation service providers and all significant inputs are market observable; however, there has been a significant decrease in the volume and level of activity for the asset when compared to normal market activity such that the degree of market observability has declined to a point where categorization as a Level 3 measurement is considered appropriate. The indicators considered in determining whether a significant decrease in the volume and level of activity for a specific asset has occurred include the level of new issuances in the primary market, trading volume in the secondary market, the level of credit spreads over historical levels, applicable bid-ask spreads, and price consensus among market participants and other pricing sources.
Certain assets are not carried at fair value on a recurring basis, including investments such as mortgage loans, bank loans, agent loans and policy loans. Accordingly, such investments are only included in the fair value hierarchy disclosure when the investment is subject to remeasurement at fair value after initial recognition and the resulting remeasurement is reflected in the condensed consolidated financial statements.
In determining fair value, the Company principally uses the market approach which generally utilizes market transaction data for the same or similar instruments. To a lesser extent, the Company uses the income approach which involves determining fair values from discounted cash flow methodologies. For the majority of Level 2 and Level 3 valuations, a combination of the market and income approaches is used.
Summary of significant valuation techniques for assets and liabilities measured at fair value on a recurring basis
Level 1 measurements
Fixed income securities: Comprise certain U.S. Treasury fixed income securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.
Equity securities: Comprise actively traded, exchange-listed equity securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.
Short-term: Comprise U.S. Treasury bills valued based on unadjusted quoted prices for identical assets in active markets that the Company can access and actively traded money market funds that have daily quoted net asset values for identical assets that the Company can access.
Separate account assets: Comprise actively traded mutual funds that have daily quoted net asset values that are readily determinable for identical assets that the Company can access. Net asset values for the actively traded mutual funds in which the separate account assets are invested are obtained daily from the fund managers.

15



Level 2 measurements
Fixed income securities:
U.S. government and agencies: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.
Municipal: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.
Corporate - public: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.
Corporate - privately placed: Valued using a discounted cash flow model that is widely accepted in the financial services industry and uses market observable inputs and inputs derived principally from, or corroborated by, observable market data. The primary inputs to the discounted cash flow model include an interest rate yield curve, as well as published credit spreads for similar assets in markets that are not active that incorporate the credit quality and industry sector of the issuer.
Foreign government: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.
ABS - collateralized debt obligations (“CDO”) and ABS - consumer and other: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads. Certain ABS - CDO and ABS - consumer and other are valued based on non-binding broker quotes whose inputs have been corroborated to be market observable.
RMBS: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads.
CMBS: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, collateral performance and credit spreads.
Redeemable preferred stock: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, underlying stock prices and credit spreads.
Equity securities: The primary inputs to the valuation include quoted prices or quoted net asset values for identical or similar assets in markets that are not active.
Short-term: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.  For certain short-term investments, amortized cost is used as the best estimate of fair value.
Other investments: Free-standing exchange listed derivatives that are not actively traded are valued based on quoted prices for identical instruments in markets that are not active.
OTC derivatives, including interest rate swaps, foreign currency swaps, foreign exchange forward contracts, certain options and certain credit default swaps, are valued using models that rely on inputs such as interest rate yield curves, implied volatilities, currency rates, and credit spreads that are observable for substantially the full term of the contract. The valuation techniques underlying the models are widely accepted in the financial services industry and do not involve significant judgment.
Level 3 measurements
Fixed income securities:
Municipal: Comprise municipal bonds that are not rated by third party credit rating agencies.  The primary inputs to the valuation of these municipal bonds include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields and credit spreads. Also included are municipal bonds valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable and municipal bonds in default valued based on the present value of expected cash flows.
Corporate - public and Corporate - privately placed: Primarily valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable. Other inputs include an interest rate yield curve, as well as published credit spreads for similar assets that incorporate the credit quality and industry sector of the issuer.
ABS - CDO, ABS - consumer and other: Valued based on non-binding broker quotes received from brokers who are familiar with the investments and where the inputs have not been corroborated to be market observable.

16



Equity securities: The primary inputs to the valuation include quoted prices or quoted net asset values for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements.
Other investments: Certain OTC derivatives, such as interest rate caps, certain credit default swaps and certain options (including swaptions), are valued using models that are widely accepted in the financial services industry. These are categorized as Level 3 as a result of the significance of non-market observable inputs such as volatility. Other primary inputs include interest rate yield curves and credit spreads.
Contractholder funds: Derivatives embedded in certain life and annuity contracts are valued internally using models widely accepted in the financial services industry that determine a single best estimate of fair value for the embedded derivatives within a block of contractholder liabilities. The models primarily use stochastically determined cash flows based on the contractual elements of embedded derivatives, projected option cost and applicable market data, such as interest rate yield curves and equity index volatility assumptions. These are categorized as Level 3 as a result of the significance of non-market observable inputs.
Assets and liabilities measured at fair value on a non-recurring basis
Mortgage loans written-down to fair value in connection with recognizing impairments are valued based on the fair value of the underlying collateral less costs to sell. EMA limited partnership interests written-down to fair value in connection with recognizing OTTI losses are generally valued using net asset values.
Investments excluded from the fair value hierarchy
Limited partnerships carried at fair value, which do not have readily determinable fair values, use NAV provided by the investees and are excluded from the fair value hierarchy. These investments are generally not redeemable by the investees and generally cannot be sold without approval of the general partner. We receive distributions of income and from liquidation of the underlying assets of the investees over the life of these investments, typically 10-12 years. As of March 31, 2018, the Company has commitments to invest $385 million in limited partnership interests valued using NAV.

17



The following table summarizes the Company’s assets and liabilities measured at fair value as of March 31, 2018.
($ 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, 2018
Assets
 

 
 

 
 

 
 

 
 

Fixed income securities:
 

 
 

 
 

 
 

 
 

U.S. government and agencies
$
258

 
$
310

 
$

 
 

 
$
568

Municipal

 
2,207

 
56

 
 

 
2,263

Corporate - public

 
12,766

 
47

 
 

 
12,813

Corporate - privately placed

 
5,535

 
215

 
 
 
5,750

Foreign government

 
286

 

 
 

 
286

ABS - CDO

 
36

 
10

 
 

 
46

ABS - consumer and other

 
313

 
41

 
 
 
354

RMBS

 
239

 

 
 

 
239

CMBS

 
67

 

 
 

 
67

Redeemable preferred stock

 
15

 

 
 

 
15

Total fixed income securities
258

 
21,774

 
369

 
 

 
22,401

Equity securities
1,389

 
15

 
99

 
 

 
1,503

Short-term investments
69

 
527

 

 
 

 
596

Other investments: Free-standing derivatives

 
87

 
1

 
$
(4
)
 
84

Separate account assets
3,292

 

 

 
 
 
3,292

Total recurring assets at fair value
$
5,008

 
$
22,403

 
$
469

 
$
(4
)
 
$
27,876

% of total assets at fair value
18.0
%
 
80.3
%
 
1.7
%
 
 %
 
100
%
 
 
 
 
 
 
 
 
 
 
Investments reported at NAV

 
 
 
 
 
 
 
 
751

Total
 
 
 
 
 
 
 
 
$
28,627

 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
 

Contractholder funds: Derivatives embedded in life and annuity contracts
$

 
$

 
$
(260
)
 
 

 
$
(260
)
Other liabilities: Free-standing derivatives

 
(43
)
 

 
$
5

 
(38
)
Total liabilities at fair value
$

 
$
(43
)
 
$
(260
)
 
$
5

 
$
(298
)
% of total liabilities at fair value
%
 
14.4
%
 
87.3
%
 
(1.7
)%
 
100
%
 



18



The following table summarizes the Company’s assets and liabilities measured at fair value as of December 31, 2017.
($ 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, 2017
Assets
 

 
 

 
 

 
 

 
 

Fixed income securities:
 

 
 

 
 

 
 

 
 

U.S. government and agencies
$
488

 
$
316

 
$

 
 

 
$
804

Municipal

 
2,216

 
57

 
 

 
2,273

Corporate - public

 
13,168

 
49

 
 

 
13,217

Corporate - privately placed

 
5,699

 
220

 
 
 
5,919

Foreign government

 
299

 

 
 

 
299

ABS - CDO

 
38

 
10

 
 

 
48

ABS - consumer and other

 
297

 
40

 
 
 
337

RMBS

 
253

 

 
 

 
253

CMBS

 
97

 

 
 

 
97

Redeemable preferred stock

 
14

 

 
 

 
14

Total fixed income securities
488

 
22,397

 
376

 
 

 
23,261

Equity securities
1,508

 
16

 
90

 
 

 
1,614

Short-term investments
110

 
615

 

 
 

 
725

Other investments: Free-standing derivatives

 
117

 
1

 
$
(3
)
 
115

Separate account assets
3,422

 

 

 
 
 
3,422

Total recurring assets at fair value
$
5,528

 
$
23,145

 
$
467

 
$
(3
)
 
$
29,137

% of total assets at fair value
19.0
%
 
79.4
%
 
1.6
%
 
 %
 
100
%
 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
 

Contractholder funds: Derivatives embedded in life and annuity contracts
$

 
$

 
$
(284
)
 
 

 
$
(284
)
Other liabilities: Free-standing derivatives

 
(62
)
 

 
$
1

 
(61
)
Total liabilities at fair value
$

 
$
(62
)
 
$
(284
)
 
$
1

 
$
(345
)
% of total liabilities at fair value
%
 
18.0
%
 
82.3
%
 
(0.3
)%
 
100
%
 
The following table summarizes quantitative information about the significant unobservable inputs used in Level 3 fair value measurements.
($ in millions)
Fair value
 
Valuation
technique
 
Unobservable
input
 
Range
 
Weighted
average