XML 42 R23.htm IDEA: XBRL DOCUMENT

General (Policies)

6 Months Ended

Jun. 30, 2019

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 and casualty insurance company with various property and casualty 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 June 30, 2019 and for the three and six month periods ended June 30, 2019 and 2018 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, 2018, filed February 15, 2019, and the Company’s Current Report on Form 8-K filed on May 16, 2019, Exhibit 99.1, reflecting the Company’s 2018 Form 10-K with adjustments to Part II. Item 6., Item 7. and Item 8. for the Company’s change in accounting principle for pension and other postretirement benefit plans. 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.

To conform to the current year presentation, certain amounts in the prior year condensed consolidated financial statements and notes have been reclassified.

New Accounting Pronouncements

Adopted accounting standards

Accounting for Leases Effective January 1, 2019 the Company adopted new Financial Accounting Standards Board (“FASB”) guidance related to accounting for leases. Upon adoption of the guidance under the optional transition method that allows application of the transition provisions at the adoption date instead of the earliest period presented, the Company recorded a $585 million lease liability equal to the present value of lease payments and a $488 million right-of-use (“ROU”) asset, which is the corresponding lease liability adjusted for qualifying accrued lease payments. The lease liability and ROU asset were reported as part of other liabilities and other assets on the Condensed Consolidated Statements of Financial Position. The impact of these changes at adoption had no impact on net income or shareholders’ equity. Prior periods were not restated under the new standard. The Company utilized practical expedients which do not require reassessment of existing contracts for the existence of a lease or reassessment of existing lease classifications.

Upon adoption, the new guidance required sellers in a sale-leaseback transaction to recognize the entire gain from the sale of an underlying asset at the time the sale is recognized rather than over the leaseback term. The carrying value of unrecognized gains on sale-leaseback transactions executed prior to January 1, 2019 was $21 million, after-tax, and was recorded as an increase to retained income at the date of adoption.

Accounting for Hedging Activities Effective January 1, 2019 the Company adopted new FASB guidance intended to better align hedge accounting with an organization’s risk management activities. The new guidance expands hedge accounting to nonfinancial and financial risk components and revises the measurement methodologies to better align with an organization’s risk management activities. Separate presentation of hedge ineffectiveness is eliminated with the intention to provide greater transparency to 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 were designed to reduce complexity by simplifying hedge effectiveness testing. The adoption had no impact on the Company’s results of operations or financial position.

Changes to significant accounting policies

Leases The Company has certain operating leases for office facilities, computer and office equipment, and vehicles. The Company’s leases have remaining lease terms of 1 year to 11 years, some of which include options to extend the leases for up to 20 years, and some of which include options to terminate the leases within 60 days.

The Company determines if an arrangement is a lease at inception. Leases with an initial term less than one year are not recorded on the balance sheet and the lease costs for these leases are recorded on a straight-line basis over the lease term. Operating leases with terms greater than one year result in a lease liability recorded in other liabilities with a corresponding ROU asset recorded in other assets. As of June 30, 2019, the Company had $558 million in lease liabilities and $461 million in ROU assets.

Operating lease liabilities are recognized at the commencement date based on the present value of future minimum lease payments over the lease term. ROU assets are recognized based on the corresponding lease liabilities adjusted for qualifying initial direct costs, prepaid or accrued lease payments and unamortized lease incentives. As most of the Company’s leases do not disclose the implicit interest rate, the Company uses collateralized incremental borrowing rates based on information available at lease commencement when determining the present value of future lease payments. The Company has lease agreements with lease and non-lease components, which are generally accounted for as a single lease. Lease terms may include options to extend or terminate the lease which are incorporated into the Company’s measurements when it is reasonably certain that the Company will exercise the option.

Operating lease costs are recognized on a straight-line basis over the lease term and include interest expense on the lease liability and amortization of the ROU asset. Variable lease costs are expensed as incurred and include maintenance costs and real estate taxes. Lease costs are reported in operating costs and expenses and totaled $42 million and $83 million, including $8 million and $15 million of variable lease costs for the three and six months ended June 30, 2019, respectively.



Other information related to operating leases
	As of June 30, 2019
Weighted average remaining lease term (years)	6
Weighted average discount rate	3.39	%



Maturity of lease liabilities
($ in millions)	Operating leases
2019 ⁽¹⁾	$	50
2020	136
2021	107
2022	89
2023	74
2024	57
Thereafter	105
Total lease payments	$	618
Less: interest	(60		)
Present value of lease liabilities	$	558


⁽¹⁾	Excludes maturity of lease liabilities for the six months ended June 30, 2019.

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 and includes 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 a reporting entity to recognize its estimate of expected credit losses for affected financial assets in a valuation allowance that when deducted from the amortized cost basis of the related financial assets results in a net carrying value 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 which may change over time but once recorded cannot subsequently be reduced to an amount below zero. 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’s implementation activities, which remain in process, include review and validation of models, methodologies, data inputs and assumptions to be used to estimate expected credit losses. The implementation impacts relate primarily to the Company’s mortgage loans, bank loans and reinsurance recoverables and will depend on economic conditions and judgments at the date of adoption as well as the size and composition of the loan portfolios and reinsurance balances. The impact of adoption is

not expected to be material to the Company’s results of operations or financial position.

Changes to the Disclosure Requirements for Defined Benefit Plans

In August 2018, the FASB issued amendments to modify certain disclosure requirements for defined benefit plans. Disclosure additions relate to the weighted-average interest crediting rates for cash balance plans and other plans with interest crediting rates and explanations for significant gains and losses related to changes in the benefit obligation during the reporting period. Disclosures to be removed include those that identify amounts that are expected to be reclassified out of AOCI and into the income statement in the coming year and the anticipated impact of a one-percentage point change in assumed health care cost trend rate on service and interest cost and on the accumulated benefit obligation. The amendments are effective for annual reporting periods beginning after December 15, 2020. The impacts of adoption are to the Company’s disclosures only.

Accounting for Long-Duration Insurance Contracts

In August 2018, the FASB issued guidance revising the accounting for certain long-duration insurance contracts. The new guidance introduces material changes to the measurement of the Company’s reserves for traditional life, life-contingent immediate annuities and certain voluntary accident and health insurance products.

Under the new guidance, measurement assumptions, including those for mortality, morbidity and policy terminations, will be required to be reviewed and updated at least annually. The effect of updating measurement assumptions other than the discount rate are required to be measured on a retrospective basis and reported in net income. In addition, cash flows under the new guidance are required to be discounted using an upper-medium grade fixed income instrument yield required to be updated through OCI at each reporting date. Current GAAP requires reserves to utilize assumptions set at policy issuance unless updated current assumptions would result in reserves that are deficient compared to the reserves recorded.

The new guidance requires deferred policy acquisition costs (“DAC”) and other capitalized balances currently amortized in proportion to premiums or gross profits to be amortized on a constant level basis over the expected term for all long-duration insurance contracts. DAC will not be subject to loss recognition testing but will be reduced when actual experience exceeds expected experience. The new guidance will no longer require adjustments to DAC and deferred sales inducement costs (“DSI”) related to unrealized gains and losses on investment securities supporting the related business.

Market risk benefit product features are required to be measured at fair value with changes in fair value recorded in net income with the exception of changes in the fair value attributable to changes in the reporting entity’s own credit risk, which are required to

be recognized in OCI. Substantially all of the Company’s market risk benefits are reinsured and therefore these impacts are not expected to be material to the Company.

The new guidance is to be included in the comparable financial statements issued in reporting periods beginning after December 15, 2020, thereby requiring restatement of prior periods presented. Early adoption is permitted. The new guidance will be applied to affected contracts and DAC on the basis of existing carrying amounts at the earliest period presented or retrospectively using actual historical experience as of contract inception. The new guidance for market risk benefits is required to be adopted retrospectively. In July 2019, the FASB voted to expose a proposal for a thirty-day comment period to delay the effective date of the new guidance for public business entities that are SEC filers to reporting periods beginning after December 15, 2021. If adopted, the proposal would extend the effective date of the new guidance for public business entities that are SEC filers by one year.

The Company is evaluating the anticipated impacts of applying the new guidance to both retained income and AOCI. The requirements of the new guidance represent a material change from existing GAAP, however, the underlying economics of the business and related cash flows are unchanged. The Company is evaluating the specific impacts of adopting the new guidance and anticipates the financial statement impact of adopting the new guidance to be material, largely attributed to the impact of transitioning to a discount rate based on an upper-medium grade fixed income investment yield and updates to mortality assumptions. The Company expects the most significant impacts will occur in the run-off annuity segment. The revised accounting for DAC will be applied prospectively using the new model and any DAC effects existing in AOCI as a result of applying existing GAAP at the date of adoption will be reversed.

Change in accounting principle

The Company changed its accounting principle for recognizing actuarial gains and losses and expected return on plan assets for its pension and other postretirement plans to a more preferable policy under U.S. GAAP. Under the new principle, remeasurement of projected benefit obligation and plan assets are immediately recognized in earnings and are referred to as pension and other postretirement remeasurement gains and losses on the Condensed Consolidated Statements of Operations. Previously, actuarial gains and losses and differences between the expected and actual returns on plan assets were recognized as a component of AOCI and were subject to amortization into earnings in future periods. This change has been applied on a retrospective basis. The Company’s policy is to remeasure its pension and postretirement plans on a quarterly basis.

Differences between expected and actual returns and changes in assumptions affect our pension and other postretirement obligations, plan assets and

expenses. The primary factors contributing to pension and other postretirement remeasurement gains and losses are 1) changes in the discount rate used to value pension and postretirement obligations as of the measurement date, 2) differences between the expected and the actual return on plan assets, 3) changes in demographic assumptions, including mortality, and 4) participant experience different from demographic assumptions.

The Company also changed its policy for recognizing expected returns on plan assets by eliminating the permitted accounting practice allowing the five-year smoothing of equity returns and moving to an unadjusted fair value method.

The Company believes that immediately recognizing remeasurement of projected benefit obligation and plan assets in earnings is preferable as it provides greater transparency of the Company’s economic obligations in accounting results and better

aligns with fair value accounting principles by recognizing the effects of economic and interest rate changes on pension and other postretirement plan assets and liabilities in the year in which the gains and losses are incurred. These changes have been applied on a retrospective basis and as of January 1, 2018 resulted in a cumulative effect decrease to retained income of $1.58 billion, with a corresponding offset to AOCI and had no impact on total shareholders’ equity.

Pension and other postretirement service cost, interest cost, expected return on plan assets and amortization of prior service credits are allocated to the Company’s reportable segments. The pension and other postretirement remeasurement gains and losses are now reported in the Corporate and Other segment.

The impacts of the adjustments on the financial statements are summarized in the following tables.



Condensed Consolidated Statements of Operations (unaudited)
	Previous accounting principle		Impact of change ⁽¹⁾			As reported
($ in millions, except per share data)	Three months ended June 30, 2019
Property and casualty insurance claims and claims expense	$	6,376	$	(20	)	$	6,356
Operating costs and expenses	1,401		(21		)	1,380
Pension and other postretirement remeasurement gains and losses	—		125			125
Restructuring and related charges	5		4			9
Total costs and expenses	9,980		88			10,068
Income from operations before income tax expense	1,166		(88		)	1,078
Income tax expense	246		(19		)	227
Net income	920		(69		)	851
Net income applicable to common shareholders	$	890	$	(69	)	$	821

Earnings per common share:
Net income applicable to common shareholders per common share - Basic	$	2.68	$	(0.21	)	$	2.47
Net income applicable to common shareholders per common share - Diluted	$	2.64	$	(0.20	)	$	2.44

	Six months ended June 30, 2019
Property and casualty insurance claims and claims expense	$	12,205	$	(29	)	$	12,176
Operating costs and expenses	2,789		(29		)	2,760
Pension and other postretirement remeasurement gains and losses	—		140			140
Restructuring and related charges	27		—			27
Total costs and expenses	19,357		82			19,439
Income from operations before income tax expense	2,780		(82		)	2,698
Income tax expense	573		(18		)	555
Net income	2,207		(64		)	2,143
Net income applicable to common shareholders	$	2,146	$	(64	)	$	2,082

Earnings per common share:
Net income applicable to common shareholders per common share - Basic	$	6.46	$	(0.19	)	$	6.27
Net income applicable to common shareholders per common share - Diluted	$	6.36	$	(0.19	)	$	6.17

⁽¹⁾ The Company merged two of its pension plans, which had no impact on our financial statements as we remeasure pension plan assets and projected benefit obligations immediately in earnings on a quarterly basis. However, the plan merger increased the impact of change by $18 million for both the second quarter and first six months of 2019, reflecting the shorter amortization period for losses deferred in AOCI from one of the merged plans that was required as part of the merger.



Condensed Consolidated Statements of Operations (unaudited)
	Previously reported		Impact of change			As adjusted
($ in millions, except per share data)	Three months ended June 30, 2018
Property and casualty insurance claims and claims expense	$	5,792	$	(15	)	$	5,777
Operating costs and expenses	1,384		(26		)	1,358
Pension and other postretirement remeasurement gains and losses	—		(7		)	(7		)
Restructuring and related charges	27		(4		)	23
Total costs and expenses	9,256		(52		)	9,204
Income from operations before income tax expense	845		52			897
Income tax expense	169		11			180
Net income	676		41			717
Net income applicable to common shareholders	$	637	$	41		$	678

Earnings per common share:
Net income applicable to common shareholders per common share - Basic	$	1.82	$	0.12		$	1.94
Net income applicable to common shareholders per common share - Diluted	$	1.80	$	0.11		$	1.91

	Six months ended June 30, 2018
Property and casualty insurance claims and claims expense	$	10,941	$	(35	)	$	10,906
Operating costs and expenses	2,717		(56		)	2,661
Pension and other postretirement remeasurement gains and losses	—		7			7
Restructuring and related charges	49		(7		)	42
Total costs and expenses	17,803		(91		)	17,712
Income from operations before income tax expense	2,069		91			2,160
Income tax expense	418		19			437
Net income	1,651		72			1,723
Net income applicable to common shareholders	$	1,583	$	72		$	1,655

Earnings per common share:
Net income applicable to common shareholders per common share - Basic	$	4.50	$	0.21		$	4.71
Net income applicable to common shareholders per common share - Diluted	$	4.43	$	0.20		$	4.63



Condensed Consolidated Statements of Comprehensive Income (unaudited)
	Previous accounting principle		Impact of change			As reported
($ in millions)	Three months ended June 30, 2019
Net income	$	920	$	(69	)	$	851
Other comprehensive income (loss), after-tax
Changes in:
Unrealized net capital gains and losses	682		—			682
Unrealized foreign currency translation adjustments	7		(3		)	4
Unrecognized pension and other postretirement benefit cost⁽¹⁾	125		(136		)	(11		)
Other comprehensive income (loss), after-tax	814		(139		)	675
Comprehensive income	$	1,734	$	(208	)	$	1,526

	Six months ended June 30, 2019
Net income	$	2,207	$	(64	)	$	2,143
Other comprehensive income (loss), after-tax
Changes in:
Unrealized net capital gains and losses	1,656		—			1,656
Unrealized foreign currency translation adjustments	14		(5		)	9
Unrecognized pension and other postretirement benefit cost⁽¹⁾	135		(158		)	(23		)
Other comprehensive income (loss), after-tax	1,805		(163		)	1,642
Comprehensive income	$	4,012	$	(227	)	$	3,785

⁽¹⁾ Financial statement line item has been updated to “Unamortized pension and other postretirement prior service credit”.



Condensed Consolidated Statements of Comprehensive Income (unaudited)
	Previously reported			Impact of change			As adjusted
($ in millions)	Three months ended June 30, 2018
Net income	$	676		$	41		$	717
Other comprehensive loss, after-tax
Changes in:
Unrealized net capital gains and losses	(133		)	—			(133		)
Unrealized foreign currency translation adjustments	(7		)	1			(6		)
Unrecognized pension and other postretirement benefit cost	22			(38		)	(16		)
Other comprehensive loss, after-tax	(118		)	(37		)	(155		)
Comprehensive income	$	558		$	4		$	562

	Six months ended June 30, 2018
Net income	$	1,651		$	72		$	1,723
Other comprehensive loss, after-tax
Changes in:
Unrealized net capital gains and losses	(698		)	—			(698		)
Unrealized foreign currency translation adjustments	(11		)	3			(8		)
Unrecognized pension and other postretirement benefit cost	45			(75		)	(30		)
Other comprehensive loss, after-tax	(664		)	(72		)	(736		)
Comprehensive income	$	987		$	—		$	987



Condensed Consolidated Statements of Financial Position (unaudited)
	Previous accounting principle			Impact of change			As reported
($ in millions)	June 30, 2019
Deferred income taxes	$	1,057		$	(60	)	$	997
Other liabilities and accrued expenses	8,855			287			9,142
Total liabilities	93,671			227			93,898
Retained income	47,542			(1,739		)	45,803
Unrealized foreign currency translation adjustments	(50		)	10			(40		)
Unrecognized pension and other postretirement benefit cost	(1,356		)	1,502			146
Total AOCI	248			1,512			1,760
Total shareholders’ equity	$	24,703		$	(227	)	$	24,476


	Previously reported			Impact of change			As adjusted
($ in millions)	December 31, 2018
Retained income	$	45,708		$	(1,675	)	$	44,033
Unrealized foreign currency translation adjustments	(64		)	15			(49		)
Unrecognized pension and other postretirement benefit cost	(1,491		)	1,660			169
Total AOCI	$	(1,557	)	$	1,675		$	118



Condensed Consolidated Statements of Shareholders’ Equity (unaudited)
	Previous accounting principle			Impact of change			As reported
($ in millions)	Three months ended June 30, 2019
Retained income
Balance, beginning of period	$	46,818		$	(1,670	)	$	45,148
Cumulative effect of change in accounting principle	—			—			—
Net income	920			(69		)	851
Dividends on common stock	(166		)	—			(166		)
Dividends on preferred stock	(30		)	—			(30		)
Balance, end of period	47,542			(1,739		)	45,803

Accumulated other comprehensive income (loss)
Balance, beginning of period	(566		)	1,651			1,085
Cumulative effect of change in accounting principle	—			—			—
Change in unrealized net capital gains and losses	682			—			682
Change in unrealized foreign currency translation adjustments	7			(3		)	4
Change in unrecognized pension and other postretirement benefit cost ⁽¹⁾	125			(136		)	(11		)
Balance, end of period	248			1,512			1,760
Total shareholders’ equity	$	24,703		$	(227	)	$	24,476

	Six months ended June 30, 2019
Retained income
Balance, beginning of period	$	45,708		$	(1,675	)	$	44,033
Cumulative effect of change in accounting principle	21			—			21
Net income	2,207			(64		)	2,143
Dividends on common stock	(333		)	—			(333		)
Dividends on preferred stock	(61		)	—			(61		)
Balance, end of period	47,542			(1,739		)	45,803

Accumulated other comprehensive income (loss)
Balance, beginning of period	(1,557		)	1,675			118
Cumulative effect of change in accounting principle	—			—			—
Change in unrealized net capital gains and losses	1,656			—			1,656
Change in unrealized foreign currency translation adjustments	14			(5		)	9
Change in unrecognized pension and other postretirement benefit cost ⁽¹⁾	135			(158		)	(23		)
Balance, end of period	248			1,512			1,760
Total shareholders’ equity	$	24,703		$	(227	)	$	24,476

⁽¹⁾ Financial statement line item has been updated to “Change in unamortized pension and other postretirement prior service credit”.



Condensed Consolidated Statements of Shareholders’ Equity (unaudited)
	Previously reported			Impact of change			As adjusted
($ in millions)	Three months ended June 30, 2018
Retained income
Balance, beginning of period	$	45,031		$	(1,552	)	$	43,479
Net income	676			41			717
Dividends on common stock	(160		)	—			(160		)
Dividends on preferred stock	(39		)	—			(39		)
Balance, end of period	45,508			(1,511		)	43,997

Accumulated other comprehensive income (loss)
Balance, beginning of period	(1,150		)	1,548			398
Change in unrealized net capital gains and losses	(133		)	—			(133		)
Change in unrealized foreign currency translation adjustments	(7		)	1			(6		)
Change in unrecognized pension and other postretirement benefit cost	22			(38		)	(16		)
Balance, end of period	(1,268		)	1,511			243
Total shareholders’ equity	$	23,122		$	—		$	23,122

	Six months ended June 30, 2018
Retained income
Balance, beginning of period	$	43,162		$	(1,583	)	$	41,579
Cumulative effect of change in accounting principle	1,088			—			1,088
Net income	1,651			72			1,723
Dividends on common stock	(325		)	—			(325		)
Dividends on preferred stock	(68		)	—			(68		)
Balance, end of period	45,508			(1,511		)	43,997

Accumulated other comprehensive income (loss)
Balance, beginning of period	306			1,583			1,889
Cumulative effect of change in accounting principle	(910		)	—			(910		)
Change in unrealized net capital gains and losses	(698		)	—			(698		)
Change in unrealized foreign currency translation adjustments	(11		)	3			(8		)
Change in unrecognized pension and other postretirement benefit cost	45			(75		)	(30		)
Balance, end of period	(1,268		)	1,511			243
Total shareholders’ equity	$	23,122		$	—		$	23,122



Condensed Consolidated Statements of Cash Flows (unaudited)
	Previous accounting principle			Impact of change			As reported
($ in millions)	Six months ended June 30, 2019
Cash flows from operating activities
Net income	$	2,207		$	(64	)	$	2,143
Adjustments to reconcile net income to net cash provided by operating activities:
Pension and other postretirement remeasurement gains and losses	—			140			140
Income taxes	177			(18		)	159
Other operating assets and liabilities	(447		)	(58		)	(505		)
Net cash provided by operating activities	$	2,062		$	—		$	2,062

Condensed Consolidated Statements of Cash Flows (unaudited)
	Previously reported			Impact of change			As adjusted
($ in millions)	Six months ended June 30, 2018
Cash flows from operating activities
Net income	$	1,651		$	72		$	1,723
Adjustments to reconcile net income to net cash provided by operating activities:
Pension and other postretirement remeasurement gains and losses	—			7			7
Income taxes	(257		)	19			(238		)
Other operating assets and liabilities	51			(98		)	(47		)
Net cash provided by operating activities	$	2,090		$	—		$	2,090

Fair Value Measurement

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, 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.


•	Other assets: Comprise free-standing exchange-listed derivatives that are valued based on unadjusted quoted prices for identical assets in active markets.

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.


•	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.

Over-the-counter (“OTC”) derivatives, including interest rate swaps, foreign currency swaps, total return 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, index price levels, 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, 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.


•	Short-term: For certain short-term investments, amortized cost is used as the best estimate of fair value.


•	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. Bank loans written-down to fair value are valued based on broker quotes from brokers familiar with the loans and current market conditions or based on internal valuation models.

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. The Company receives distributions of income and proceeds from the liquidation of the underlying assets of the investees, which usually takes place in years 4-9 of the typical contractual life of 10-12 years.