10-Q 1 allcorp-3311610xq.htm 10-Q 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
OR
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 1-11840
THE ALLSTATE CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
 
36-3871531
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
2775 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
X  
Accelerated filer
____
 
 
 
 
Non-accelerated filer
        (Do not check if a smaller reporting company)
Smaller reporting company
____
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes        
No   X  
 
As of April 19, 2016, the registrant had 374,367,234 common shares, $.01 par value, outstanding.



THE ALLSTATE CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2016
 
PART I
FINANCIAL INFORMATION
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ in millions, except per share data)
Three months ended March 31,
 
2016
 
2015
 
(unaudited)
Revenues
 

 
 

Property-liability insurance premiums
$
7,723

 
$
7,426

Life and annuity premiums and contract charges
566

 
537

Net investment income
731

 
850

Realized capital gains and losses:
 

 
 

Total other-than-temporary impairment (“OTTI”) losses
(91
)
 
(53
)
OTTI losses reclassified to (from) other comprehensive income
10

 
4

Net OTTI losses recognized in earnings
(81
)
 
(49
)
Sales and other realized capital gains and losses
(68
)
 
188

Total realized capital gains and losses
(149
)
 
139

 
8,871

 
8,952

Costs and expenses
 

 
 

Property-liability insurance claims and claims expense
5,684

 
4,993

Life and annuity contract benefits
455

 
441

Interest credited to contractholder funds
190

 
199

Amortization of deferred policy acquisition costs
1,129

 
1,070

Operating costs and expenses
982

 
1,090

Restructuring and related charges
5

 
4

Interest expense
73

 
73

 
8,518

 
7,870

 
 
 
 
Gain (loss) on disposition of operations
2

 
(1
)
 
 
 
 
Income from operations before income tax expense
355

 
1,081

 
 
 
 
Income tax expense
109

 
404

 
 
 
 
Net income
246

 
677

 
 
 
 
Preferred stock dividends
29

 
29

 
 
 
 
Net income applicable to common shareholders
$
217

 
$
648

 
 
 
 
Earnings per common share:
 

 
 

Net income applicable to common shareholders per common share - Basic
$
0.57

 
$
1.56

Weighted average common shares - Basic
378.1

 
415.8

Net income applicable to common shareholders per common share - Diluted
$
0.57

 
$
1.53

Weighted average common shares - Diluted
382.9

 
422.6

Cash dividends declared per common share
$
0.33

 
$
0.30







See notes to condensed consolidated financial statements.

1


THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)
Three months ended March 31,
 
2016
 
2015
 
 (unaudited)
Net income
$
246

 
$
677

 
 
 
 
Other comprehensive income, after-tax
 

 
 

Changes in:
 

 
 

Unrealized net capital gains and losses
580

 
211

Unrealized foreign currency translation adjustments
14

 
(27
)
Unrecognized pension and other postretirement benefit cost
11

 
29

Other comprehensive income, after-tax
605

 
213

 
 
 
 
Comprehensive income
$
851

 
$
890

 































See notes to condensed consolidated financial statements.

2


THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
($ in millions, except par value data)
March 31, 2016
 
December 31, 2015
Assets
(unaudited)
 
 

Investments
 

 
 

Fixed income securities, at fair value (amortized cost $55,627 and $57,201)
$
57,291

 
$
57,948

Equity securities, at fair value (cost $4,792 and $4,806)
5,117

 
5,082

Mortgage loans
4,302

 
4,338

Limited partnership interests
5,091

 
4,874

Short-term, at fair value (amortized cost $3,526 and $2,122)
3,526

 
2,122

Other
3,550

 
3,394

Total investments
78,877

 
77,758

Cash
531

 
495

Premium installment receivables, net
5,558

 
5,544

Deferred policy acquisition costs
3,807

 
3,861

Reinsurance recoverables, net
8,573

 
8,518

Accrued investment income
567

 
569

Property and equipment, net
1,011

 
1,024

Goodwill
1,219

 
1,219

Other assets
2,297

 
2,010

Separate Accounts
3,507

 
3,658

Total assets
$
105,947

 
$
104,656

Liabilities
 

 
 

Reserve for property-liability insurance claims and claims expense
$
24,605

 
$
23,869

Reserve for life-contingent contract benefits
12,224

 
12,247

Contractholder funds
21,092

 
21,295

Unearned premiums
12,036

 
12,202

Claim payments outstanding
852

 
842

Deferred income taxes
479

 
90

Other liabilities and accrued expenses
5,704

 
5,304

Long-term debt
5,108

 
5,124

Separate Accounts
3,507

 
3,658

Total liabilities
85,607

 
84,631

Commitments and Contingent Liabilities (Note 10)


 


Shareholders’ equity
 

 
 

Preferred stock and additional capital paid-in, $1 par value, 25 million shares authorized, 72.2 thousand shares issued and outstanding, and $1,805 aggregate liquidation preference
1,746

 
1,746

Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 375 million and 381 million shares outstanding
9

 
9

Additional capital paid-in
3,237

 
3,245

Retained income
39,505

 
39,413

Deferred ESOP expense
(13
)
 
(13
)
Treasury stock, at cost (525 million and 519 million shares)
(23,994
)
 
(23,620
)
Accumulated other comprehensive income:
 

 
 

Unrealized net capital gains and losses:
 

 
 

Unrealized net capital gains and losses on fixed income securities with OTTI
31

 
56

Other unrealized net capital gains and losses
1,259

 
608

Unrealized adjustment to DAC, DSI and insurance reserves
(90
)
 
(44
)
Total unrealized net capital gains and losses
1,200

 
620

Unrealized foreign currency translation adjustments
(46
)
 
(60
)
Unrecognized pension and other postretirement benefit cost
(1,304
)
 
(1,315
)
Total accumulated other comprehensive loss
(150
)
 
(755
)
Total shareholders’ equity
20,340

 
20,025

Total liabilities and shareholders’ equity
$
105,947

 
$
104,656



See notes to condensed consolidated financial statements.

3


THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
($ in millions)
Three months ended March 31,
 
2016
 
2015
 
(unaudited)
Preferred stock par value
$

 
$

 
 
 
 
Preferred stock additional capital paid-in
1,746

 
1,746

 
 
 
 
Common stock
9

 
9

 
 
 
 
Additional capital paid-in
 

 
 

Balance, beginning of period
3,245

 
3,199

Forward contract on accelerated share repurchase agreement

 
(75
)
Equity incentive plans activity
(8
)
 
(15
)
Balance, end of period
3,237

 
3,109

 
 
 
 
Retained income
 

 
 

Balance, beginning of period
39,413

 
37,842

Net income
246

 
677

Dividends on common stock
(125
)
 
(127
)
Dividends on preferred stock
(29
)
 
(29
)
Balance, end of period
39,505

 
38,363

 
 
 
 
Deferred ESOP expense
 

 
 

Balance, beginning of period
(13
)
 
(23
)
Payments

 

Balance, end of period
(13
)
 
(23
)
 
 
 
 
Treasury stock
 

 
 

Balance, beginning of period
(23,620
)
 
(21,030
)
Shares acquired
(450
)
 
(915
)
Shares reissued under equity incentive plans, net
76

 
146

Balance, end of period
(23,994
)
 
(21,799
)
 
 
 
 
Accumulated other comprehensive (loss) income
 

 
 

Balance, beginning of period
(755
)
 
561

Change in unrealized net capital gains and losses
580

 
211

Change in unrealized foreign currency translation adjustments
14

 
(27
)
Change in unrecognized pension and other postretirement benefit cost
11

 
29

Balance, end of period
(150
)
 
774

Total shareholders’ equity
$
20,340

 
$
22,179

 









See notes to condensed consolidated financial statements.

4


THE ALLSTATE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
Three months ended March 31,
 
2016
 
2015
Cash flows from operating activities
(unaudited)
Net income
$
246

 
$
677

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

 
 

Depreciation, amortization and other non-cash items
91

 
87

Realized capital gains and losses
149

 
(139
)
(Gain) loss on disposition of operations
(2
)
 
1

Interest credited to contractholder funds
190

 
199

Changes in:
 

 
 

Policy benefits and other insurance reserves
459

 
115

Unearned premiums
(205
)
 
(117
)
Deferred policy acquisition costs
(7
)
 
(35
)
Premium installment receivables, net
11

 
(66
)
Reinsurance recoverables, net
(40
)
 
(24
)
Income taxes
(26
)
 
59

Other operating assets and liabilities
(152
)
 
(191
)
Net cash provided by operating activities
714

 
566

Cash flows from investing activities
 

 
 

Proceeds from sales
 

 
 

Fixed income securities
6,216

 
9,453

Equity securities
1,664

 
1,152

Limited partnership interests
180

 
296

Other investments
94

 
47

Investment collections
 

 
 

Fixed income securities
949

 
1,213

Mortgage loans
79

 
114

Other investments
43

 
60

Investment purchases
 

 
 

Fixed income securities
(5,401
)
 
(9,210
)
Equity securities
(1,733
)
 
(1,172
)
Limited partnership interests
(270
)
 
(365
)
Mortgage loans
(44
)
 
(202
)
Other investments
(253
)
 
(193
)
Change in short-term investments, net
(1,357
)
 
(63
)
Change in other investments, net
(19
)
 
2

Purchases of property and equipment, net
(52
)
 
(59
)
Net cash provided by investing activities
96

 
1,073

Cash flows from financing activities
 

 
 

Repayments of long-term debt
(16
)
 

Contractholder fund deposits
261

 
261

Contractholder fund withdrawals
(492
)
 
(572
)
Dividends paid on common stock
(115
)
 
(118
)
Dividends paid on preferred stock
(29
)
 
(29
)
Treasury stock purchases
(456
)
 
(1,010
)
Shares reissued under equity incentive plans, net
30

 
64

Excess tax benefits on share-based payment arrangements
12

 
26

Other
31

 
(2
)
Net cash used in financing activities
(774
)
 
(1,380
)
Net increase in cash
36

 
259

Cash at beginning of period
495

 
657

Cash at end of period
$
531

 
$
916






See notes to condensed consolidated financial statements.

5



THE ALLSTATE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
Basis of presentation
The accompanying condensed consolidated financial statements include the accounts of The Allstate Corporation (the “Corporation”) and its wholly owned subsidiaries, primarily Allstate Insurance Company (“AIC”), a property-liability insurance company with various property-liability and life and investment subsidiaries, including Allstate Life Insurance Company (“ALIC”) (collectively referred to as the “Company” or “Allstate”). 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, 2016 and for the three-month periods ended March 31, 2016 and 2015 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, 2015. 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.
Adopted accounting standards
Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period
In June 2014, the Financial Accounting Standards Board (“FASB”) issued guidance which clarifies that a performance target that affects vesting and could be achieved after the requisite service period should be treated as a performance condition and not reflected in estimating the grant-date fair value of the award. Compensation costs should reflect the amount attributable to the periods for which the requisite service has been rendered. Total compensation expense recognized during and after the requisite service period (which may differ from the vesting period) should reflect the number of awards that are expected to vest and should be adjusted to reflect the number of awards that ultimately vest. The Company’s existing accounting policy for performance targets that affect the vesting of share-based payment awards is consistent with the new guidance and as such, the adoption as of January 1, 2016 had no impact on the Company’s results of operations or financial position.
Amendments to the Consolidation Analysis
In February 2015, the FASB issued guidance affecting the consolidation evaluation for limited partnerships and similar entities, fees paid to a decision maker or service provider, and variable interests in a variable interest entity held by related parties of the reporting enterprise. The adoption of this guidance as of January 1, 2016 did not have a material impact on the Company’s results of operations or financial position.
Pending accounting standards
Revenue from Contracts with Customers
In May 2014, the FASB issued guidance which revises the criteria for revenue recognition. Insurance contracts are excluded from the scope of the new guidance. Under the guidance, the transaction price is attributed to underlying performance obligations in the contract and revenue is recognized as the entity satisfies the performance obligations and transfers control of a good or service to the customer. Incremental costs of obtaining a contract may be capitalized to the extent the entity expects to recover those costs. The guidance is effective for reporting periods beginning after December 15, 2017 and is to be applied retrospectively. The Company is in the process of evaluating the impact of adoption, which is not expected to be material to the Company’s results of operations or financial position.
Disclosures about Short-Duration Contracts
In May 2015, the FASB issued guidance requiring expanded disclosures for insurance entities that issue short-duration contracts. The expanded disclosures are designed to provide additional insight into an insurance entity’s significant estimates made in measuring the liability for unpaid claims and claim adjustment expenses. The disclosures include information about incurred and paid claims development by accident year, on a net basis after reinsurance, for the number of years claims incurred typically remain outstanding, not to exceed ten years. Each period presented in the disclosure about claims development that precedes the current reporting period is considered required supplementary information. The expanded disclosures also include information about significant changes in methodologies and assumptions, a reconciliation of incurred and paid claims development to the carrying amount of the liability for unpaid claims and claim adjustment expenses, the total amount of incurred but not reported liabilities plus expected development, claims frequency information including the methodology used to determine claim

6



frequency and claim duration. The guidance is effective for annual periods beginning after December 15, 2015, and interim periods beginning after December 15, 2016, and is to be applied retrospectively. The new guidance affects disclosures only and will have no impact on the Company’s results of operations or financial position.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued guidance requiring equity investments, including equity securities and limited partnership interests, that are not accounted for under the equity method of accounting or result in consolidation to be measured at fair value with changes in fair value recognized in net income. Equity investments without readily determinable fair values may be measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. When a qualitative assessment of equity investments without readily determinable fair values indicates that impairment exists, the carrying value is required to be adjusted to fair value, if lower. The guidance clarifies that an entity should evaluate the realizability of a deferred tax asset related to available-for-sale fixed income securities in combination with the entity’s other deferred tax assets. The guidance also changes certain disclosure requirements. The guidance is effective for interim and annual periods beginning after December 15, 2017, and is to be applied through a cumulative-effect adjustment to beginning retained income as of the beginning of the period of adoption. The new guidance related to equity investments without readily determinable fair values is to be applied prospectively as of the date of adoption. The Company is in the process of evaluating the impact of adoption. The most significant impacts, using values as of March 31, 2016, are expected to be the change in accounting for equity securities where $325 million of pre-tax unrealized net capital gains would be reclassified from accumulated other comprehensive income to retained income and cost method limited partnership interests (excluding limited partnership interests accounted for on a cost recovery basis) where the carrying value would increase by approximately $240 million, pre-tax, with the adjustment recorded in retained income.
Accounting for Leases
In February 2016, the FASB issued guidance that revises the accounting for leases. Under the new guidance, lessees will be required to recognize a right-of-use asset and lease liability for all leases other than those that meet the definition of a short-term lease. The lease liability will be equal to the present value of lease payments. A right-of-use asset will be based on the lease liability adjusted for qualifying initial direct costs. The expense of operating leases under the new guidance will be recognized in the income statement on a straight-line basis after combining the lease expense components (interest expense on the lease liability and amortization of the right-of-use asset) over the term of the lease. For finance leases, the expense components will be computed separately thereby producing greater up-front expense as interest expense on the lease liability is higher in early years and the right-of-use asset is amortized on a straight-line basis. Lease classification will be based on criteria similar to those currently applied. The accounting model for lessors will be similar to the current model with modifications to reflect definition changes for components such as initial direct costs. Lessors will continue to classify leases as operating, direct financing, or sales-type. The guidance is effective for reporting periods beginning after December 15, 2018 using a modified retrospective approach applied at the beginning of the earliest period presented. The Company is in the process of evaluating the impact of adoption, which is not expected to be material to the Company’s results of operations or financial position.
Employee Share-Based Payment Accounting
In March 2016, the FASB issued guidance to amend the accounting for share-based payments. Under the new guidance, reporting entities will be required to recognize all tax effects related to share-based payments at settlement (or expiration) through the income statement and will no longer be permitted to recognize excess tax benefits and tax deficiencies in additional paid in capital. The change will be applied on a modified retrospective basis, with a cumulative effect adjustment to beginning retained income. In addition, all tax-related cash flows resulting from share-based payments will be reported as operating activities on the statement of cash flows, with either prospective or retrospective transition permitted. The new guidance will permit employers to withhold shares upon settlement of an award to satisfy the employer’s tax withholding requirement (up to the employee’s maximum individual statutory tax rate) without causing liability classification of the award. The new guidance clarifies that all cash payments made to taxing authorities on an employee’s behalf for withheld shares should be presented as financing activities on the statement of cash flows. Also under the new guidance, reporting entities are permitted to make an accounting policy election to estimate forfeitures or recognize them when they occur. If elected, the change to recognize forfeitures when they occur must be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to beginning retained income. The new guidance is effective for reporting periods beginning after December 15, 2016. The Company is in the process of evaluating the impact of adoption, which is not expected to be material to the Company’s results of operations or financial position.
Transition to Equity Method Accounting
In March 2016, the FASB issued guidance amending the accounting requirements for transitioning to the equity method of accounting (“EMA”), including a transition from the cost method. The guidance requires the cost of acquiring an additional interest in an investee to be added to the existing carrying value to establish the initial basis of the EMA investment. Under the new guidance, no retroactive adjustment is required when an investment initially qualifies for EMA treatment. The guidance is effective for interim and annual periods beginning after December 15, 2016, and is to be applied prospectively. The guidance will

7



principally affect the future accounting for investments that qualify for EMA after application of the cost method of accounting. The Company is in the process of evaluating the impact of adoption, which is not expected to be material to the Company’s results of operations or financial position.
2. Earnings per Common Share
Basic earnings per common share is computed using the weighted average number of common shares outstanding, including vested unissued participating restricted stock units. Diluted earnings per common share is computed using the weighted average number of common and dilutive potential common shares outstanding. For the Company, dilutive potential common shares consist of outstanding stock options and unvested non-participating restricted stock units and contingently issuable performance stock awards.
The computation of basic and diluted earnings per common share is presented in the following table.
($ in millions, except per share data)
Three months ended March 31,
 
2016
 
2015
Numerator:
 

 
 

Net income
$
246

 
$
677

Less: Preferred stock dividends
29

 
29

Net income applicable to common shareholders (1)
$
217

 
$
648

 
 
 
 
Denominator:
 

 
 

Weighted average common shares outstanding
378.1

 
415.8

Effect of dilutive potential common shares:
 

 
 

Stock options
3.4

 
4.9

Restricted stock units (non-participating) and performance stock awards
1.4

 
1.9

Weighted average common and dilutive potential common shares outstanding
382.9

 
422.6

 
 
 
 
Earnings per common share - Basic
$
0.57

 
$
1.56

Earnings per common share - Diluted
$
0.57

 
$
1.53

_____________________________
(1) 
Net income applicable to common shareholders is net income less preferred stock dividends.
The effect of dilutive potential common shares does not include the effect of options with an anti-dilutive effect on earnings per common share because their exercise prices exceed the average market price of Allstate common shares during the period or for which the unrecognized compensation cost would have an anti-dilutive effect. Options to purchase 5.0 million and 2.1 million Allstate common shares, with exercise prices ranging from $52.18 to $71.29 and $60.81 to $70.91, were outstanding for the three-month periods ended March 31, 2016 and 2015, respectively, but were not included in the computation of diluted earnings per common share in those periods.

8



3. Supplemental Cash Flow Information
Non-cash investing activities include $7 million and $12 million related to mergers completed with equity securities and modifications of other investments for the three months ended March 31, 2016 and 2015, respectively. Non-cash financing activities include $37 million and $68 million related to the issuance of Allstate common shares for vested equity awards for the three months ended March 31, 2016 and 2015, respectively. Non-cash financing activities also include $34 million related to debt acquired in conjunction with the purchase of an investment for the three months ended March 31, 2016.
Liabilities for collateral received in conjunction with the Company’s securities lending program and over-the-counter (“OTC”) and cleared derivatives are reported in other liabilities and accrued expenses or other investments. The accompanying cash flows are included in cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows along with the activities resulting from management of the proceeds, which are as follows:
($ in millions)
Three months ended March 31,
 
2016
 
2015
Net change in proceeds managed
 

 
 

Net change in short-term investments
$
(34
)
 
$
27

Operating cash flow (used) provided
(34
)
 
27

Net change in cash

 

Net change in proceeds managed
$
(34
)
 
$
27

 
 
 
 
Net change in liabilities
 

 
 

Liabilities for collateral, beginning of period
$
(840
)
 
$
(782
)
Liabilities for collateral, end of period
(874
)
 
(755
)
Operating cash flow provided (used)
$
34

 
$
(27
)
4. Investments
Fair values
The amortized cost, gross unrealized gains and losses and fair value for fixed income securities are as follows:
($ in millions)
Amortized cost
 
Gross unrealized
 
Fair
value
 
 
Gains
 
Losses
 
March 31, 2016
 

 
 

 
 

 
 

U.S. government and agencies
$
3,390

 
$
114

 
$

 
$
3,504

Municipal
7,174

 
457

 
(15
)
 
7,616

Corporate
40,283

 
1,496

 
(507
)
 
41,272

Foreign government
999

 
55

 

 
1,054

Asset-backed securities (“ABS”)
2,526

 
12

 
(39
)
 
2,499

Residential mortgage-backed securities (“RMBS”)
807

 
80

 
(12
)
 
875

Commercial mortgage-backed securities (“CMBS”)
427

 
27

 
(7
)
 
447

Redeemable preferred stock
21

 
3

 

 
24

Total fixed income securities
$
55,627

 
$
2,244

 
$
(580
)
 
$
57,291

 
 
 
 
 
 
 
 
December 31, 2015
 

 
 

 
 

 
 

U.S. government and agencies
$
3,836

 
$
90

 
$
(4
)
 
$
3,922

Municipal
7,032

 
389

 
(20
)
 
7,401

Corporate
41,674

 
1,032

 
(879
)
 
41,827

Foreign government
983

 
50

 

 
1,033

ABS
2,359

 
11

 
(43
)
 
2,327

RMBS
857

 
100

 
(10
)
 
947

CMBS
438

 
32

 
(4
)
 
466

Redeemable preferred stock
22

 
3

 

 
25

Total fixed income securities
$
57,201

 
$
1,707

 
$
(960
)
 
$
57,948





9



Scheduled maturities
The scheduled maturities for fixed income securities are as follows as of March 31, 2016:
($ in millions)
Amortized
cost
 
Fair
value
Due in one year or less
$
4,206

 
$
4,226

Due after one year through five years
26,150

 
26,792

Due after five years through ten years
16,030

 
16,384

Due after ten years
5,481

 
6,068

 
51,867

 
53,470

ABS, RMBS and CMBS
3,760

 
3,821

Total
$
55,627

 
$
57,291

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,
 
2016
 
2015
Fixed income securities
$
518

 
$
568

Equity securities
28

 
23

Mortgage loans
53

 
55

Limited partnership interests
121

 
198

Short-term investments
4

 
1

Other
51

 
45

Investment income, before expense
775

 
890

Investment expense
(44
)
 
(40
)
Net investment income
$
731

 
$
850

Realized capital gains and losses
Realized capital gains and losses by asset type are as follows:
($ in millions)
Three months ended March 31,
 
2016
 
2015
Fixed income securities
$
(71
)
 
$
80

Equity securities
(90
)
 
78

Limited partnership interests
26

 
6

Derivatives
(9
)
 
(25
)
Other
(5
)
 

Realized capital gains and losses
$
(149
)
 
$
139

Realized capital gains and losses by transaction type are as follows:
($ in millions)
Three months ended March 31,
 
2016
 
2015
Impairment write-downs
$
(59
)
 
$
(19
)
Change in intent write-downs
(22
)
 
(30
)
Net other-than-temporary impairment losses recognized in earnings
(81
)
 
(49
)
Sales and other
(59
)
 
216

Valuation and settlements of derivative instruments
(9
)
 
(28
)
Realized capital gains and losses
$
(149
)
 
$
139

Gross gains of $143 million and $277 million and gross losses of $211 million and $75 million were realized on sales of fixed income and equity securities during the three months ended March 31, 2016 and 2015, respectively.


10



Other-than-temporary impairment losses by asset type are as follows:
($ in millions)
Three months ended March 31, 2016
 
Three months ended March 31, 2015
 
Gross
 
Included
 in OCI
 
Net
 
Gross
 
Included
in OCI
 
Net
Fixed income securities:
 

 
 

 
 

 
 

 
 

 
 

Municipal
$

 
$

 
$

 
$
(4
)
 
$
4

 
$

Corporate
(16
)
 
7

 
(9
)
 
(5
)
 

 
(5
)
ABS
(6
)
 
1

 
(5
)
 
(1
)
 
1

 

RMBS

 

 

 
1

 
(1
)
 

CMBS
(4
)
 
2

 
(2
)
 

 

 

Total fixed income securities
(26
)
 
10

 
(16
)
 
(9
)
 
4

 
(5
)
Equity securities
(77
)
 

 
(77
)
 
(39
)
 

 
(39
)
Limited partnership interests
13

 

 
13

 
(5
)
 

 
(5
)
Other
(1
)
 

 
(1
)
 

 

 

Other-than-temporary impairment losses
$
(91
)
 
$
10

 
$
(81
)
 
$
(53
)
 
$
4

 
$
(49
)
The total amount of other-than-temporary impairment losses included in accumulated other comprehensive income at the time of impairment for fixed income securities, which were not included in earnings, are presented in the following table. The amounts exclude $200 million and $233 million as of March 31, 2016 and December 31, 2015, respectively, of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.
($ in millions)
March 31, 2016
 
December 31, 2015
Municipal
$
(8
)
 
$
(9
)
Corporate
(15
)
 
(7
)
ABS
(24
)
 
(23
)
RMBS
(98
)
 
(102
)
CMBS
(7
)
 
(6
)
Total
$
(152
)
 
$
(147
)
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,
 
2016
 
2015
Beginning balance
$
(392
)
 
$
(380
)
Additional credit loss for securities previously other-than-temporarily impaired
(8
)
 
(1
)
Additional credit loss for securities not previously other-than-temporarily impaired
(8
)
 
(4
)
Reduction in credit loss for securities disposed or collected
58

 
6

Change in credit loss due to accretion of increase in cash flows

 
1

Ending balance
$
(350
)
 
$
(378
)
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 other-than-temporary impairment for the difference between the estimated recovery value and amortized cost is recorded in earnings. The portion of the unrealized loss related to factors other than credit remains classified in accumulated other comprehensive income. If the Company determines that the fixed income security does not have sufficient cash flow or

11



other information to estimate a recovery value for the security, the Company may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings.
Unrealized net capital gains and losses
Unrealized net capital gains and losses included in accumulated other comprehensive income are as follows:
($ in millions)
Fair
value
 
Gross unrealized
 
Unrealized net
gains (losses)
March 31, 2016
 
Gains
 
Losses
 
Fixed income securities
$
57,291

 
$
2,244

 
$
(580
)
 
$
1,664

Equity securities
5,117

 
475

 
(150
)
 
325

Short-term investments
3,526

 

 

 

Derivative instruments (1)
7

 
7

 
(3
)
 
4

Equity method (“EMA”) limited partnerships (2)
 

 
 

 
 

 
(5
)
Unrealized net capital gains and losses, pre-tax
 

 
 

 
 

 
1,988

Amounts recognized for:
 

 
 

 
 

 
 

Insurance reserves (3)
 

 
 

 
 

 

DAC and DSI (4)
 

 
 

 
 

 
(138
)
Amounts recognized
 

 
 

 
 

 
(138
)
Deferred income taxes
 

 
 

 
 

 
(650
)
Unrealized net capital gains and losses, after-tax
 

 
 

 
 

 
$
1,200

_______________
(1) 
Included in the fair value of derivative instruments are $3 million classified as assets and $(4) million classified as liabilities.
(2) 
Unrealized net capital gains and losses for limited partnership interests represent the Company’s share of EMA limited partnerships’ other comprehensive income. Fair value and gross unrealized gains and losses are not applicable.
(3) 
The insurance reserves adjustment represents the amount by which the reserve balance would increase if the net unrealized gains in the applicable product portfolios were realized and reinvested at current lower interest rates, resulting in a premium deficiency. Although the Company evaluates premium deficiencies on the combined performance of life insurance and immediate annuities with life contingencies, the adjustment, if any, primarily relates to structured settlement annuities with life contingencies, in addition to annuity buy-outs and certain payout annuities with life contingencies.
(4) 
The DAC and DSI adjustment balance represents the amount by which the amortization of DAC and DSI would increase or decrease if the unrealized gains or losses in the respective product portfolios were realized.
($ in millions)
Fair
value
 
Gross unrealized
 
Unrealized net
gains (losses)
December 31, 2015
 
Gains
 
Losses
 
Fixed income securities
$
57,948

 
$
1,707

 
$
(960
)
 
$
747

Equity securities
5,082

 
415

 
(139
)
 
276

Short-term investments
2,122

 

 

 

Derivative instruments (1)
10

 
10

 
(4
)
 
6

EMA limited partnerships
 

 
 

 
 

 
(4
)
Unrealized net capital gains and losses, pre-tax
 

 
 

 
 

 
1,025

Amounts recognized for:
 

 
 

 
 

 
 

Insurance reserves
 

 
 

 
 

 

DAC and DSI
 

 
 

 
 

 
(67
)
Amounts recognized
 

 
 

 
 

 
(67
)
Deferred income taxes
 

 
 

 
 

 
(338
)
Unrealized net capital gains and losses, after-tax
 

 
 

 
 

 
$
620

_______________
(1) 
Included in the fair value of derivative instruments are $6 million classified as assets and $(4) million classified as liabilities.








12



Change in unrealized net capital gains and losses
The change in unrealized net capital gains and losses for the three months ended March 31, 2016 is as follows:
($ in millions)
 
Fixed income securities
$
917

Equity securities
49

Derivative instruments
(2
)
EMA limited partnerships
(1
)
Total
963

Amounts recognized for:
 

Insurance reserves

DAC and DSI
(71
)
Amounts recognized
(71
)
Deferred income taxes
(312
)
Increase in unrealized net capital gains and losses, after-tax
$
580

Portfolio monitoring
The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed income and equity security whose carrying value may be other-than-temporarily impaired.
For each fixed income security in an unrealized loss position, the Company assesses whether management with the appropriate authority has made 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 equity securities, the Company considers various factors, including whether it has the intent and ability to hold the equity security for a period of time sufficient to recover its cost basis. Where the Company lacks the intent and ability to hold to recovery, or believes the recovery period is extended, the equity security’s decline in fair value is considered other than temporary and is recorded in earnings.
For fixed income and equity 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 (for fixed income securities) or cost (for equity securities) 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 other-than-temporary impairment using all reasonably available information relevant to the collectability or recovery of the security. Inherent in the Company’s evaluation of other-than-temporary impairment for these fixed income and equity securities are assumptions and estimates about the financial condition 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 or cost.






13



The following table summarizes the gross unrealized losses and fair value of fixed income and equity securities by the length of time that individual securities have been in a continuous unrealized loss position.
($ 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, 2016
 

 
 

 
 

 
 

 
 

 
 

 
 

Fixed income securities
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. government and agencies
10

 
$
307

 
$

 

 
$

 
$

 
$

Municipal
132

 
351

 
(3
)
 
7

 
32

 
(12
)
 
(15
)
Corporate
632

 
7,101

 
(332
)
 
124

 
1,126

 
(175
)
 
(507
)
Foreign government
11

 
29

 

 
1

 
3

 

 

ABS
76

 
836

 
(16
)
 
22

 
320

 
(23
)
 
(39
)
RMBS
79

 
54

 
(1
)
 
174

 
119

 
(11
)
 
(12
)
CMBS
14

 
120

 
(6
)
 
1

 
3

 
(1
)
 
(7
)
Total fixed income securities
954

 
8,798

 
(358
)
 
329

 
1,603

 
(222
)
 
(580
)
Equity securities
242

 
1,165

 
(121
)
 
43

 
159

 
(29
)
 
(150
)
Total fixed income and equity securities
1,196

 
$
9,963

 
$
(479
)
 
372

 
$
1,762

 
$
(251
)
 
$
(730
)
Investment grade fixed income securities
620

 
$
5,727

 
$
(131
)
 
223

 
$
979

 
$
(93
)
 
$
(224
)
Below investment grade fixed income securities
334

 
3,071

 
(227
)
 
106

 
624

 
(129
)
 
(356
)
Total fixed income securities
954

 
$
8,798

 
$
(358
)
 
329

 
$
1,603

 
$
(222
)
 
$
(580
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 

 
 

 
 

 
 

 
 

 
 

 
 

Fixed income securities
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. government and agencies
53

 
$
1,874

 
$
(4
)
 

 
$

 
$

 
$
(4
)
Municipal
222

 
810

 
(6
)
 
9

 
36

 
(14
)
 
(20
)
Corporate
1,361

 
17,915

 
(696
)
 
111

 
1,024

 
(183
)
 
(879
)
Foreign government
9

 
44

 

 

 

 

 

ABS
133

 
1,733

 
(24
)
 
20

 
324

 
(19
)
 
(43
)
RMBS
88

 
69

 

 
176

 
125

 
(10
)
 
(10
)
CMBS
13

 
75

 
(2
)
 
1

 
2

 
(2
)
 
(4
)
Total fixed income securities
1,879

 
22,520

 
(732
)
 
317

 
1,511

 
(228
)
 
(960
)
Equity securities
265

 
1,397

 
(107
)
 
37

 
143

 
(32
)
 
(139
)
Total fixed income and equity securities
2,144

 
$
23,917

 
$
(839
)
 
354

 
$
1,654

 
$
(260
)
 
$
(1,099
)
Investment grade fixed income securities
1,405

 
$
17,521

 
$
(362
)
 
225

 
$
972

 
$
(105
)
 
$
(467
)
Below investment grade fixed income securities
474

 
4,999

 
(370
)
 
92

 
539

 
(123
)
 
(493
)
Total fixed income securities
1,879

 
$
22,520

 
$
(732
)
 
317

 
$
1,511

 
$
(228
)
 
$
(960
)
As of March 31, 2016, $445 million of the $730 million unrealized losses are related to securities with an unrealized loss position less than 20% of amortized cost or cost, the degree of which suggests that these securities do not pose a high risk of being other-than-temporarily impaired. Of the $445 million, $156 million are related to unrealized losses on investment grade fixed income securities and $111 million are related to equity securities. Of the remaining $178 million, $132 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 Standard and Poor’s (“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. 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, 2016, the remaining $285 million of unrealized losses are related to securities in unrealized loss positions greater than or equal to 20% of amortized cost or cost. Investment grade fixed income securities comprising $68 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 $285 million, $178 million are related to below investment grade fixed income securities and $39 million are related to equity securities. Of these amounts, $18 million are related to 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, 2016.
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.

14



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, (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, and (iii) for ABS and RMBS in an unrealized loss position, credit enhancements from reliable bond insurers, where applicable. 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. Unrealized losses on equity securities are primarily related to temporary equity market fluctuations of securities that are expected to recover.
As of March 31, 2016, 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. As of March 31, 2016, the Company had the intent and ability to hold equity securities with unrealized losses for a period of time sufficient for them to recover.
Limited partnerships
As of March 31, 2016 and December 31, 2015, the carrying value of equity method limited partnerships totaled $3.90 billion and $3.72 billion, respectively. The Company recognizes an impairment loss for equity method limited partnerships when evidence demonstrates that the loss is other than temporary. Evidence of a loss in value that is other than temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment.
As of March 31, 2016 and December 31, 2015, the carrying value for cost method limited partnerships was $1.19 billion and $1.15 billion, respectively. To determine if an other-than-temporary impairment has occurred, the Company evaluates whether an impairment indicator has occurred in the period that may have a significant adverse effect on the carrying value of the investment. Impairment indicators may include: significantly reduced valuations of the investments held by the limited partnerships; actual recent cash flows received being significantly less than expected cash flows; reduced valuations based on financing completed at a lower value; completed sale of a material underlying investment at a price significantly lower than expected; or any other adverse events since the last financial statements received that might affect the fair value of the investee’s capital. Additionally, the Company’s portfolio monitoring process includes a quarterly review of all cost method limited partnerships to identify instances where the net asset value is below established thresholds for certain periods of time, as well as investments that are performing below expectations, for further impairment consideration. If a cost method limited partnership is other-than-temporarily impaired, the carrying value is written down to fair value, generally estimated to be equivalent to the reported net asset value.
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, 2016.
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.







15



The following table reflects the carrying value of non-impaired fixed rate mortgage loans summarized by debt service coverage ratio distribution.
($ in millions)
March 31, 2016
 
December 31, 2015
Below 1.0
$
62

 
$
64

1.0 - 1.25
344

 
382

1.26 - 1.50
1,222

 
1,219

Above 1.50
2,668

 
2,667

Total non-impaired mortgage loans
$
4,296

 
$
4,332

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.
The net carrying value of impaired mortgage loans is as follows:
($ in millions)
March 31, 2016
 
December 31, 2015
Impaired mortgage loans with a valuation allowance
$
6

 
$
6

Impaired mortgage loans without a valuation allowance

 

Total impaired mortgage loans
$
6

 
$
6

Valuation allowance on impaired mortgage loans
$
3

 
$
3

The average balance of impaired loans was $6 million and $16 million for the three months ended March 31, 2016 and 2015, respectively.
The rollforward of the valuation allowance on impaired mortgage loans is as follows:
($ in millions)
Three months ended March 31,
 
2016
 
2015
Beginning balance
$
3

 
$
8

Net decrease in valuation allowance

 

Charge offs

 

Ending balance
$
3

 
$
8

Payments on all mortgage loans were current as of March 31, 2016 and December 31, 2015.
 
 
 
 

16



5. Fair Value of Assets and Liabilities
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Assets and liabilities recorded on the Condensed Consolidated Statements of Financial Position at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows:
Level 1: Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access.
Level 2: Assets and liabilities whose values are based on the following:
(a)
Quoted prices for similar assets or liabilities in active markets;
(b)
Quoted prices for identical or similar assets or liabilities in markets that are not active; or
(c)
Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Unobservable inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the assets and liabilities.
The availability of observable inputs varies by instrument. In situations where fair value is based on internally developed pricing models or inputs that are unobservable in the market, the determination of fair value requires more judgment. The degree of judgment exercised by the Company in determining fair value is typically greatest for instruments categorized in Level 3. In many instances, valuation inputs used to measure fair value fall into different levels of the fair value hierarchy. The category level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments.
The Company 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, limited partnership interests, bank loans and policy loans. Accordingly, such investments are only included in the fair value hierarchy disclosure when the investment is subject to remeasurement at fair value after initial recognition and the resulting remeasurement is reflected in

17



the condensed consolidated financial statements. In addition, derivatives embedded in fixed income securities are not disclosed in the hierarchy as free-standing derivatives since they are presented with the host contracts in fixed income securities.
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 for identical assets that the Company can access. Net asset values for the actively traded mutual funds in which the separate account assets are invested are obtained daily from the fund managers.
Level 2 measurements
Fixed income securities:
U.S. government and agencies: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.
Municipal: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.
Corporate - 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.

18



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, currency rates, and counterparty credit spreads that are observable for substantially the full term of the contract. The valuation techniques underlying the models are widely accepted in the financial services industry and do not involve significant judgment.
Level 3 measurements
Fixed income securities:
Municipal: Comprise municipal bonds that are not rated by third party credit rating agencies but are rated by the National Association of Insurance Commissioners (“NAIC”). 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. Also includes auction rate securities (“ARS”) primarily backed by student loans that have become illiquid due to failures in the auction market and are valued using a discounted cash flow model that is widely accepted in the financial services industry and uses significant non-market observable inputs, including the anticipated date liquidity will return to the market.
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, RMBS and CMBS: 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.
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. Limited partnership interests written-down to fair value in connection with recognizing other-than-temporary impairments are generally valued using net asset values.















19



The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2016.
($ 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, 2016
Assets
 

 
 

 
 

 
 

 
 

Fixed income securities:
 

 
 

 
 

 
 

 
 

U.S. government and agencies
$
2,641

 
$
859

 
$
4

 
 

 
$
3,504

Municipal

 
7,470

 
146

 
 

 
7,616

Corporate - public

 
30,081

 
63

 
 

 
30,144

Corporate - privately placed

 
10,579

 
549

 
 
 
11,128

Foreign government

 
1,054

 

 
 

 
1,054

ABS - CDO

 
687

 
58

 
 

 
745

ABS - consumer and other

 
1,710

 
44

 
 
 
1,754

RMBS

 
874

 
1

 
 

 
875

CMBS

 
427

 
20

 
 

 
447

Redeemable preferred stock

 
24

 

 
 

 
24

Total fixed income securities
2,641

 
53,765

 
885

 
 

 
57,291

Equity securities
4,821

 
171

 
125

 
 

 
5,117

Short-term investments
786

 
2,740

 

 
 

 
3,526

Other investments: Free-standing derivatives

 
72

 
1

 
$
(15
)
 
58

Separate account assets
3,507

 

 

 
 

 
3,507

Other assets

 

 
1

 
 

 
1

Total recurring basis assets
11,755

 
56,748

 
1,012

 
(15
)
 
69,500

Non-recurring basis (1)

 

 
38

 
 

 
38

Total assets at fair value
$
11,755

 
$
56,748

 
$
1,050

 
$
(15
)
 
$
69,538

% of total assets at fair value
16.9
%
 
81.6
%
 
1.5
%
 
 %
 
100
%
 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
 

Contractholder funds: Derivatives embedded in life and annuity contracts
$

 
$

 
$
(313
)
 
 

 
$
(313
)
Other liabilities: Free-standing derivatives

 
(36
)
 
(9
)
 
$
16

 
(29
)
Total liabilities at fair value
$

 
$
(36
)
 
$
(322
)
 
$
16

 
$
(342
)
% of total liabilities at fair value
%
 
10.5
%
 
94.2
%
 
(4.7
)%
 
100
%
_______________
(1) 
Includes $27 million of limited partnership interests and $11 million of other investments written-down to fair value in connection with recognizing other-than-temporary impairments.




















20



The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2015.
($ 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, 2015
Assets
 

 
 

 
 

 
 

 
 

Fixed income securities: