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EX-32 - EXHIBIT 32 - ALLSTATE LIFE INSURANCE COexhibit32allstatelife33116.htm
EX-15 - EXHIBIT 15 - ALLSTATE LIFE INSURANCE COexhibit15allstatelife33116.htm
EX-31.(I) - EXHIBIT 31.(I) - ALLSTATE LIFE INSURANCE COexhibit31iallstatelife33116.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
The registrant meets the conditions set forth in General Instructions H (1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format.
 
[X]          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 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 0-31248
 
ALLSTATE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
 
 
Illinois
 
36-2554642
 
 
(State or other jurisdiction of
 
(I.R.S. Employer
 
 
incorporation or organization)
 
Identification No.)
 
 
3075 Sanders Road, Northbrook, Illinois 60062
(Address of principal executive offices)      (Zip Code)
 
(847) 402-5000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes   X             No ___
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes   X             No ___
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ____
 
Accelerated filer                            
 
 
 
Non-accelerated filer    X    (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 May 6, 2016, the registrant had 23,800 common shares, $227 par value, outstanding, all of which are held by Allstate Insurance Company.






ALLSTATE LIFE INSURANCE COMPANY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2016
 
PART I
FINANCIAL INFORMATION
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
($ in millions)
Three months ended March 31,
 
2016
 
2015
 
(unaudited)
Revenues
 

 
 

Premiums
$
149

 
$
150

Contract charges
182

 
195

Net investment income
400

 
471

Realized capital gains and losses:
 

 
 

Total other-than-temporary impairment (“OTTI”) losses
(35
)
 
(10
)
OTTI losses reclassified to (from) other comprehensive income
8

 

Net OTTI losses recognized in earnings
(27
)
 
(10
)
Sales and other realized capital gains and losses
(19
)
 
121

Total realized capital gains and losses
(46
)
 
111

 
685

 
927

Costs and expenses
 

 
 

Contract benefits
338

 
358

Interest credited to contractholder funds
178

 
191

Amortization of deferred policy acquisition costs
37

 
40

Operating costs and expenses
56

 
80

Interest expense
4

 
4

 
613

 
673

 
 
 
 
Gain (loss) on disposition of operations
2

 
(2
)
 
 
 
 
Income from operations before income tax expense
74

 
252

 
 
 
 
Income tax expense
22

 
99

 
 
 
 
Net income
52

 
153

 
 
 
 
Other comprehensive income, after-tax
 

 
 

Change in unrealized net capital gains and losses
241

 
71

Change in unrealized foreign currency translation adjustments
(2
)
 
(2
)
Other comprehensive income, after-tax
239

 
69

 
 
 
 
Comprehensive income
$
291

 
$
222

 

















See notes to condensed consolidated financial statements.

1


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

Investments
 

 
 

Fixed income securities, at fair value (amortized cost $23,135 and $23,770)
$
24,443

 
$
24,629

Mortgage loans
3,749

 
3,781

Equity securities, at fair value (cost $1,330 and $1,526)
1,344

 
1,542

Limited partnership interests
2,405

 
2,295

Short-term, at fair value (amortized cost $1,545 and $816)
1,545

 
816

Policy loans
566

 
572

Other
1,397

 
1,327

Total investments
35,449

 
34,962

Cash
141

 
104

Deferred policy acquisition costs
1,232

 
1,314

Reinsurance recoverables from non-affiliates
2,405

 
2,407

Reinsurance recoverables from affiliates
460

 
464

Accrued investment income
273

 
278

Other assets
600

 
510

Separate Accounts
3,488

 
3,639

Total assets
$
44,048

 
$
43,678

Liabilities
 

 
 

Contractholder funds
$
20,329

 
$
20,542

Reserve for life-contingent contract benefits
11,359

 
11,394

Unearned premiums
5

 
5

Payable to affiliates, net
42

 
55

Other liabilities and accrued expenses
1,187

 
849

Deferred income taxes
1,139

 
986

Notes due to related parties
275

 
275

Separate Accounts
3,488

 
3,639

Total liabilities
37,824

 
37,745

Commitments and Contingent Liabilities (Note 7)


 


Shareholder’s equity
 

 
 

Redeemable preferred stock - series A, $100 par value, 1,500,000 shares authorized, none issued

 

Redeemable preferred stock - series B, $100 par value, 1,500,000 shares authorized, none issued

 

Common stock, $227 par value, 23,800 shares authorized and outstanding
5

 
5

Additional capital paid-in
1,990

 
1,990

Retained income
3,469

 
3,417

Accumulated other comprehensive income:
 

 
 

Unrealized net capital gains and losses:
 

 
 

Unrealized net capital gains and losses on fixed income securities with OTTI
25

 
41

Other unrealized net capital gains and losses
832

 
527

Unrealized adjustment to DAC, DSI and insurance reserves
(88
)
 
(40
)
Total unrealized net capital gains and losses
769

 
528

Unrealized foreign currency translation adjustments
(9
)
 
(7
)
Total accumulated other comprehensive income
760

 
521

Total shareholder’s equity
6,224

 
5,933

Total liabilities and shareholder’s equity
$
44,048

 
$
43,678

 






See notes to condensed consolidated financial statements.

2


ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY
($ in millions)
Three months ended March 31,
 
2016
 
2015
 
(unaudited)
Common stock
$
5

 
$
5

 
 
 
 
Additional capital paid-in
1,990

 
1,990

 
 
 
 
Retained income
 

 
 

Balance, beginning of period
3,417

 
2,973

Net income
52

 
153

Loss on sale of subsidiary to an affiliate

 
(2
)
Balance, end of period
3,469

 
3,124

 
 
 
 
Accumulated other comprehensive income
 

 
 

Balance, beginning of period
521

 
1,379

Change in unrealized net capital gains and losses
241

 
71

Change in unrealized foreign currency translation adjustments
(2
)
 
(2
)
Balance, end of period
760

 
1,448

 
 
 
 
Total shareholder’s equity
$
6,224

 
$
6,567

 









































See notes to condensed consolidated financial statements.

3


ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
Three months ended March 31,
 
2016
 
2015
Cash flows from operating activities
(unaudited)
Net income
$
52

 
$
153

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

 
 

Amortization and other non-cash items
(17
)
 
(21
)
Realized capital gains and losses
46

 
(111
)
(Gain) loss on disposition of operations
(2
)
 
2

Interest credited to contractholder funds
178

 
191

Changes in:
 

 
 

Policy benefits and other insurance reserves
(169
)
 
(150
)
Deferred policy acquisition costs
15

 
2

Reinsurance recoverables, net
14

 
6

Income taxes
13

 
(1
)
Other operating assets and liabilities
85

 
21

Net cash provided by operating activities
215

 
92

Cash flows from investing activities
 

 
 

Proceeds from sales
 

 
 

Fixed income securities
2,011

 
2,082

Equity securities
382

 
201

Limited partnership interests
86

 
109

Other investments
28

 
5

Investment collections
 

 
 

Fixed income securities
458

 
618

Mortgage loans
76

 
74

Other investments
20

 
13

Investment purchases
 

 
 

Fixed income securities
(1,815
)
 
(2,131
)
Equity securities
(216
)
 
(254
)
Limited partnership interests
(132
)
 
(176
)
Mortgage loans
(44
)
 
(182
)
Other investments
(67
)
 
(49
)
Change in short-term investments, net
(696
)
 
16

Change in policy loans and other investments, net
(6
)
 
1

Disposition of operations

 
10

Net cash provided by investing activities
85

 
337

Cash flows from financing activities
 

 
 

Contractholder fund deposits
214

 
233

Contractholder fund withdrawals
(477
)
 
(564
)
Net cash used in financing activities
(263
)
 
(331
)
Net increase in cash
37

 
98

Cash at beginning of period
104

 
146

Cash at end of period
$
141

 
$
244

 











See notes to condensed consolidated financial statements.

4



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

1. General
Basis of presentation
The accompanying condensed consolidated financial statements include the accounts of Allstate Life Insurance Company (“ALIC”) and its wholly owned subsidiaries (collectively referred to as the “Company”). ALIC is wholly owned by Allstate Insurance Company (“AIC”), which is wholly owned by Allstate Insurance Holdings, LLC, a wholly owned subsidiary of The Allstate Corporation (the “Corporation”).
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.
Premiums and contract charges
The following table summarizes premiums and contract charges by product.
($ in millions)
Three months ended March 31,
 
2016
 
2015
Premiums
 

 
 

Traditional life insurance
$
126

 
$
129

Accident and health insurance
23

 
21

Total premiums
149

 
150

 
 
 
 
Contract charges
 

 
 

Interest-sensitive life insurance
179

 
192

Fixed annuities
3

 
3

Total contract charges
182

 
195

Total premiums and contract charges
$
331

 
$
345

Adopted accounting standard
Amendments to the Consolidation Analysis
In February 2015, the Financial Accounting Standards Board (“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
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 $14 million of pre-tax unrealized net capital gains would

5



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 $100 million, pre-tax, with the adjustment recorded in retained income.
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 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. Supplemental Cash Flow Information
Non-cash investing activities include $2 million and $8 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 $34 million related to debt acquired in conjunction with the purchase of an investment for the three months ended March 31, 2016.
Liabilities for collateral received in conjunction with the Company’s securities lending program and over-the-counter (“OTC”) and cleared derivatives are reported in other liabilities and accrued expenses or other investments. The accompanying cash flows are included in cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows along with the activities resulting from management of the proceeds, which are as follows:
($ in millions)
Three months ended March 31,
 
2016
 
2015
Net change in proceeds managed
 

 
 

Net change in short-term investments
$
(29
)
 
$
18

Operating cash flow (used) provided
$
(29
)
 
$
18

 
 
 
 
Net change in liabilities
 

 
 

Liabilities for collateral, beginning of period
$
(550
)
 
$
(510
)
Liabilities for collateral, end of period
(579
)
 
(492
)
Operating cash flow provided (used)
$
29

 
$
(18
)

6



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

 
 

 
 

 
 

U.S. government and agencies
$
856

 
$
68

 
$

 
$
924

Municipal
2,138

 
342

 
(9
)
 
2,471

Corporate
17,581

 
1,091

 
(261
)
 
18,411

Foreign government
338

 
41

 

 
379

Asset-backed securities (“ABS”)
1,432

 
5

 
(26
)
 
1,411

Residential mortgage-backed securities (“RMBS”)
379

 
41

 
(5
)
 
415

Commercial mortgage-backed securities (“CMBS”)
398

 
26

 
(7
)
 
417

Redeemable preferred stock
13

 
2

 

 
15

Total fixed income securities
$
23,135

 
$
1,616

 
$
(308
)
 
$
24,443

 
 
 
 
 
 
 
 
December 31, 2015
 

 
 

 
 

 
 

U.S. government and agencies
$
920

 
$
57

 
$

 
$
977

Municipal
2,162

 
292

 
(12
)
 
2,442

Corporate
18,069

 
849

 
(414
)
 
18,504

Foreign government
348

 
36

 

 
384

ABS
1,443

 
5

 
(28
)
 
1,420

RMBS
406

 
49

 
(4
)
 
451

CMBS
409

 
31

 
(4
)
 
436

Redeemable preferred stock
13

 
2

 

 
15

Total fixed income securities
$
23,770

 
$
1,321

 
$
(462
)
 
$
24,629

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
$
977

 
$
984

Due after one year through five years
7,487

 
7,872

Due after five years through ten years
7,710

 
8,016

Due after ten years
4,752

 
5,328

 
20,926

 
22,200

ABS, RMBS and CMBS
2,209

 
2,243

Total
$
23,135

 
$
24,443

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.











7



Net investment income
Net investment income is as follows:
($ in millions)
Three months ended March 31,
 
2016
 
2015
Fixed income securities
$
270

 
$
334

Mortgage loans
47

 
49

Equity securities
7

 
5

Limited partnership interests
63

 
72

Short-term investments
2

 

Policy loans
8

 
9

Other
21

 
18

Investment income, before expense
418

 
487

Investment expense
(18
)
 
(16
)
Net investment income
$
400

 
$
471

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
$
(23
)
 
$
68

Equity securities
(30
)
 
32

Limited partnership interests
13

 
4

Derivatives
(5
)
 
7

Other
(1
)
 

Realized capital gains and losses
$
(46
)
 
$
111

Realized capital gains and losses by transaction type are as follows:
($ in millions)
Three months ended March 31,
 
2016
 
2015
Impairment write-downs
$
(24
)
 
$
(7
)
Change in intent write-downs
(3
)
 
(3
)
Net other-than-temporary impairment losses recognized in earnings
(27
)
 
(10
)
Sales and other
(14
)
 
117

Valuation and settlements of derivative instruments
(5
)
 
4

Realized capital gains and losses
$
(46
)
 
$
111

Gross gains of $71 million and $131 million and gross losses of $89 million and $23 million were realized on sales of fixed income and equity securities during the three months ended March 31, 2016 and 2015, respectively.
Other-than-temporary impairment losses by asset type are as follows:
($ 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:
 

 
 

 
 

 
 

 
 

 
 

Corporate
$
(11
)
 
$
6

 
$
(5
)
 
$
(3
)
 
$

 
$
(3
)
ABS
(3
)
 

 
(3
)
 

 

 

CMBS
(4
)
 
2

 
(2
)
 

 

 

Total fixed income securities
(18
)
 
8

 
(10
)
 
(3
)
 

 
(3
)
Equity securities
(25
)
 

 
(25
)
 
(5
)
 

 
(5
)
Limited partnership interests
9

 

 
9

 
(2
)
 

 
(2
)
Other
(1
)
 

 
(1
)
 

 

 

Other-than-temporary impairment losses
$
(35
)
 
$
8

 
$
(27
)
 
$
(10
)
 
$

 
$
(10
)

8



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 $120 million and $138 million as of March 31, 2016 and December 31, 2015, respectively, of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.
($ in millions)
March 31, 2016
 
December 31, 2015
Municipal
$
(5
)
 
$
(5
)
Corporate
(8
)
 
(2
)
ABS
(12
)
 
(12
)
RMBS
(48
)
 
(49
)
CMBS
(8
)
 
(6
)
Total
$
(81
)
 
$
(74
)
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
$
(200
)
 
$
(209
)
Additional credit loss for securities previously other-than-temporarily impaired
(4
)
 
(1
)
Additional credit loss for securities not previously other-than-temporarily impaired
(6
)
 
(2
)
Reduction in credit loss for securities disposed or collected
35

 
4

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

 
1

Ending balance
$
(175
)
 
$
(207
)
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 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.











9



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
$
24,443

 
$
1,616

 
$
(308
)
 
$
1,308

Equity securities
1,344

 
78

 
(64
)
 
14

Short-term investments
1,545

 

 

 

Derivative instruments (1)
7

 
7

 

 
7

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

 
 

 
 

 
(3
)
Unrealized net capital gains and losses, pre-tax
 

 
 

 
 

 
1,326

Amounts recognized for:
 

 
 

 
 

 
 

Insurance reserves (3)
 

 
 

 
 

 

DAC and DSI (4)
 

 
 

 
 

 
(135
)
Amounts recognized
 

 
 

 
 

 
(135
)
Deferred income taxes
 

 
 

 
 

 
(422
)
Unrealized net capital gains and losses, after-tax
 

 
 

 
 

 
$
769

_______________
 
(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
$
24,629

 
$
1,321

 
$
(462
)
 
$
859

Equity securities
1,542

 
76

 
(60
)
 
16

Short-term investments
816

 

 

 

Derivative instruments (1)
10

 
10

 

 
10

EMA limited partnerships
 

 
 

 
 

 
(2
)
Unrealized net capital gains and losses, pre-tax
 

 
 

 
 

 
883

Amounts recognized for:
 

 
 

 
 

 
 

Insurance reserves
 

 
 

 
 

 

DAC and DSI
 

 
 

 
 

 
(62
)
Amounts recognized
 

 
 

 
 

 
(62
)
Deferred income taxes
 

 
 

 
 

 
(293
)
Unrealized net capital gains and losses, after-tax
 

 
 

 
 

 
$
528

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










10



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
$
449

Equity securities
(2
)
Derivative instruments
(3
)
EMA limited partnerships
(1
)
Total
443

Amounts recognized for:
 

Insurance reserves

DAC and DSI
(73
)
Amounts recognized
(73
)
Deferred income taxes
(129
)
Increase in unrealized net capital gains and losses, after-tax
$
241

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.






11



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
2

 
$
230

 
$

 

 
$

 
$

 
$

 
Municipal
8

 
30

 
(1
)
 
5

 
25

 
(8
)
 
(9
)
 
Corporate
424

 
2,132

 
(126
)
 
88

 
595

 
(135
)
 
(261
)
 
ABS
53

 
502

 
(7
)
 
18

 
152

 
(19
)
 
(26
)
 
RMBS
42

 
27

 
(1
)
 
41

 
49

 
(4
)
 
(5
)
 
CMBS
13

 
120

 
(5
)
 
1

 
2

 
(2
)
 
(7
)
 
Total fixed income securities
542

 
3,041

 
(140
)
 
153

 
823

 
(168
)
 
(308
)
 
Equity securities
260

 
456

 
(51
)
 
52

 
72

 
(13
)
 
(64
)
 
Total fixed income and equity securities
802

 
$
3,497

 
$
(191
)
 
205

 
$
895

 
$
(181
)
 
$
(372
)
 
Investment grade fixed income securities
314

 
$
2,049

 
$
(61
)
 
78

 
$
489

 
$
(84
)
 
$
(145
)
 
Below investment grade fixed income securities
228

 
992

 
(79
)
 
75

 
334

 
(84
)
 
(163
)
 
Total fixed income securities
542

 
$
3,041

 
$
(140
)
 
153

 
$
823

 
$
(168
)
 
$
(308
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Fixed income securities
 

 
 

 
 

 
 

 
 

 
 

 
 

 
U.S. government and agencies
6

 
$
91

 
$

 

 
$

 
$

 
$

 
Municipal
15

 
125

 
(3
)
 
5

 
25

 
(9
)
 
(12
)
 
Corporate
953

 
5,315

 
(281
)
 
78

 
568

 
(133
)
 
(414
)
 
Foreign government
1

 
2

 

 

 

 

 

 
ABS
81

 
1,152

 
(11
)
 
16

 
154

 
(17
)
 
(28
)
 
RMBS
38

 
7

 

 
40

 
53

 
(4
)
 
(4
)
 
CMBS
12

 
75

 
(2
)
 
1

 
2

 
(2
)
 
(4
)
 
Total fixed income securities
1,106

 
6,767

 
(297
)
 
140

 
802

 
(165
)
 
(462
)
 
Equity securities
279

 
543

 
(49
)
 
32

 
56

 
(11
)
 
(60
)
 
Total fixed income and equity securities
1,385

 
$
7,310

 
$
(346
)
 
172

 
$
858

 
$
(176
)
 
$
(522
)
 
Investment grade fixed income securities
780

 
$
5,429

 
$
(175
)
 
82

 
$
503

 
$
(90
)
 
$
(265
)
 
Below investment grade fixed income securities
326

 
1,338

 
(122
)
 
58

 
299

 
(75
)
 
(197
)
 
Total fixed income securities
1,106

 
$
6,767

 
$
(297
)
 
140

 
$
802

 
$
(165
)
 
$
(462
)
As of March 31, 2016, $196 million of the $372 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 $196 million, $84 million are related to unrealized losses on investment grade fixed income securities and $42 million are related to equity securities. Of the remaining $70 million, $43 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 $176 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 $61 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 $176 million, $93 million are related to below investment grade fixed income securities and $22 million are related to equity securities. Of these amounts, $14 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. This evaluation also takes into consideration credit enhancement, measured in terms of (i) subordination from other classes of

12



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 $1.86 billion and $1.77 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 $549 million and $530 million, 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.








13



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
$
54

 
$
55

1.0 - 1.25
320

 
357

1.26 - 1.50
1,123

 
1,120

Above 1.50
2,246

 
2,243

Total non-impaired mortgage loans
$
3,743

 
$
3,775

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

14



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 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.



15



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

16



ABS - CDO, ABS - consumer and other, 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.
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
$
484

 
$
440

 
$

 
 

 
$
924

Municipal

 
2,405

 
66

 
 

 
2,471

Corporate - public

 
12,447

 
38

 
 

 
12,485

Corporate - privately placed

 
5,429

 
497

 
 
 
5,926

Foreign government

 
379

 

 
 

 
379

ABS - CDO

 
157

 
50

 
 

 
207

ABS - consumer and other

 
1,161

 
43

 
 
 
1,204

RMBS

 
415

 

 
 

 
415

CMBS

 
417

 

 
 

 
417

Redeemable preferred stock

 
15

 

 
 

 
15

Total fixed income securities
484

 
23,265

 
694

 
 

 
24,443

Equity securities
1,285

 
3

 
56

 
 

 
1,344

Short-term investments
175

 
1,370

 

 
 

 
1,545

Other investments: Free-standing derivatives

 
60

 
1

 
$
(9
)
 
52

Separate account assets
3,488

 

 

 
 
 
3,488

Other assets

 

 
1

 
 
 
1

Total recurring basis assets
5,432

 
24,698

 
752

 
(9
)
 
30,873

Non-recurring basis (1)

 

 
24

 


 
24

Total assets at fair value
$
5,432

 
$
24,698

 
$
776

 
$
(9
)
 
$
30,897

% of total assets at fair value
17.6
%
 
79.9
%
 
2.5
%
 
 %
 
100
%
 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
 

Contractholder funds: Derivatives embedded in life and annuity contracts
$

 
$

 
$
(313
)
 
 

 
$
(313
)
Other liabilities: Free-standing derivatives

 
(16
)
 
(9
)
 
$
1

 
(24
)
Total liabilities at fair value
$

 
$
(16
)
 
$
(322
)
 
$
1

 
$
(337
)
% of total liabilities at fair value
%
 
4.8
%
 
95.5
%
 
(0.3
)%
 
100
%
 ____________
(1) 
Includes $20 million of limited partnership interests and $4 million of other investments written-down to fair value in connection with recognizing other-than-temporary impairments.

17



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:
 

 
 

 
 

 
 

 
 

U.S. government and agencies
$
546

 
$
431

 
$

 
 

 
$
977

Municipal

 
2,364

 
78

 
 

 
2,442

Corporate - public

 
12,490

 
44

 
 

 
12,534

Corporate - privately placed

 
5,523

 
447

 
 
 
5,970

Foreign government

 
384

 

 
 

 
384

ABS - CDO

 
178

 
53

 
 

 
231

ABS - consumer and other

 
1,145

 
44

 
 
 
1,189

RMBS

 
451

 

 
 

 
451

CMBS

 
436

 

 
 

 
436

Redeemable preferred stock

 
15

 

 
 

 
15

Total fixed income securities
546

 
23,417

 
666

 
 

 
24,629

Equity securities
1,479

 
3

 
60

 
 

 
1,542

Short-term investments
193

 
623

 

 
 

 
816

Other investments: Free-standing derivatives

 
59

 
1

 
$
(11
)
 
49

Separate account assets
3,639

 

 

 
 
 
3,639

Other assets
1

 

 
1

 
 
 
2

Total recurring basis assets
5,858

 
24,102

 
728

 
(11
)
 
30,677

Non-recurring basis (1)

 

 
8

 


 
8

Total assets at fair value
$
5,858

 
$
24,102

 
$
736

 
$
(11
)
 
$
30,685

% of total assets at fair value
19.1
%
 
78.5
%
 
2.4
%
 
 %
 
100.0
%
 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
 

Contractholder funds: Derivatives embedded in life and annuity contracts
$

 
$

 
$
(299
)
 
 

 
$
(299
)
Other liabilities: Free-standing derivatives

 
(7
)
 
(8
)
 
$
1

 
(14
)
Total liabilities at fair value
$

 
$
(7
)
 
$
(307
)
 
$
1

 
$
(313
)
% of total liabilities at fair value
%
 
2.2
%
 
98.1
%
 
(0.3
)%
 
100.0
%
 
____________
(1) 
Includes $3 million of limited partnership interests and $5 million of other investments written-down to fair value in connection with recognizing other-than-temporary impairments.
The following table summarizes quantitative information about the significant unobservable inputs used in Level 3 fair value measurements.
($ in millions)
Fair value
 
Valuation
technique
 
Unobservable
input
 
Range
 
Weighted
average
March 31, 2016
 

 
 
 
 
 
 
 
 

Derivatives embedded in life and annuity contracts – Equity-indexed and forward starting options
$
(245
)
 
Stochastic cash flow model
 
Projected option cost
 
1.0 - 2.2%
 
1.75
%
December 31, 2015
 

 
 
 
 
 
 
 
 

Derivatives embedded in life and annuity contracts – Equity-indexed and forward starting options
$
(247
)
 
Stochastic cash flow model
 
Projected option cost
 
1.0 - 2.2%
 
1.76
%
The embedded derivatives are equity-indexed and forward starting options in certain life and annuity products that provide customers with interest crediting rates based on the performance of the S&P 500. If the projected option cost increased (decreased), it would result in a higher (lower) liability fair value.
As of March 31, 2016 and December 31, 2015, Level 3 fair value measurements of fixed income securities total $694 million and $666 million, respectively, and include $587 million and $577 million, respectively, of securities valued based on non-binding

18



broker quotes where the inputs have not been corroborated to be market observable. The Company does not develop the unobservable inputs used in measuring fair value; therefore, these are not included in the table above. However, an increase (decrease) in credit spreads for fixed income securities valued based on non-binding broker quotes would result in a lower (higher) fair value.
The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the three months ended March 31, 2016.
($ in millions)
 
 
Total gains (losses)
included in:
 
 
 
 
 
 
 
Balance as of December 31, 2015
 
Net
income (1)
 
OCI
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
 
Assets
 

 
 

 
 

 
 

 
 

 
 
Fixed income securities:
 

 
 

 
 

 
 

 
 

 
 
Municipal
$
78

 
$
11

 
$
(8
)
 
$

 
$

 
 
Corporate - public
44

 

 
1

 
1

 
(7
)
 
 
Corporate - privately placed
447

 
1

 
4

 

 
(5
)
 
 
ABS - CDO
53

 

 
(1
)
 
2

 

 
 
ABS - consumer and other
44

 

 
(1
)
 

 

 
 
Total fixed income securities
666

 
12

 
(5
)
 
3

 
(12
)
 
 
Equity securities
60

 
(12
)
 
3

 

 

 
 
Free-standing derivatives, net
(7
)
 
(1
)
 

 

 

 
 
Other assets
1

 

 

 

 

 
 
Total recurring Level 3 assets
$
720

 
$
(1
)
 
$
(2
)
 
$
3

 
$
(12
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
 

 
 
Contractholder funds: Derivatives embedded in life and annuity contracts
$
(299
)
 
$
(15
)
 
$

 
$

 
$

 
 
Total recurring Level 3 liabilities
$
(299
)
 
$
(15
)
 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases
 
Sales
 
Issues
 
Settlements
 
Balance as of March 31, 2016
 
 
Assets
 

 
 

 
 
 
 

 
 

 
 
Fixed income securities:
 

 
 

 
 
 
 

 
 

 
 
Municipal
$

 
$
(15
)
 
$

 
$

 
$
66

 
 
Corporate - public

 

 

 
(1
)
 
38

 
 
Corporate - privately placed
55

 

 

 
(5
)
 
497

 
 
ABS - CDO

 
(1
)
 

 
(3
)
 
50

 
 
ABS - consumer and other

 

 

 

 
43

 
 
Total fixed income securities
55

 
(16
)
 

 
(9
)
 
694

 
 
Equity securities
5

 

 

 

 
56

 
 
Free-standing derivatives, net

 

 

 

 
(8
)
 
(2) 
Other assets

 

 

 

 
1

 
 
Total recurring Level 3 assets
$
60

 
$
(16
)
 
$

 
$
(9
)
 
$
743

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 
 
 

 
 

 
 
Contractholder funds: Derivatives embedded in life and annuity contracts
$

 
$

 
$
(1
)
 
$
2

 
$
(313
)
 
 
Total recurring Level 3 liabilities
$

 
$

 
$
(1
)
 
$
2

 
$
(313
)
 
 
 ____________
(1) 
The effect to net income totals $(16) million and is reported in the Condensed Consolidated Statements of Operations and Comprehensive Income as follows: $(4) million in realized capital gains and losses, $3 million in net investment income, $1 million in interest credited to contractholder funds and $(16) million in life an annuity contract benefits.
(2) 
Comprises $1 million of assets and $9 million of liabilities.





19



The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the three months ended March 31, 2015.
($ in millions)
 
 
Total gains (losses) included in:
 
 
 
 
 
 
 
Balance as of December 31, 2014
 
Net
income (1)
 
OCI
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
 
Assets
 

 
 

 
 

 
 

 
 

 
 
Fixed income securities:
 

 
 

 
 

 
 

 
 

 
 
Municipal
$
106

 
$

 
$
1

 
$

 
$

 
 
Corporate
792

 
(2
)
 
(9
)
 
2

 

 
 
ABS
129

 

 

 
6

 
(21
)
 
 
CMBS
1

 

 
(1
)
 

 

 
 
Total fixed income securities
1,028

 
(2
)
 
(9
)
 
8

 
(21
)
 
 
Equity securities
37

 

 

 

 

 
 
Free-standing derivatives, net
(7
)
 

 

 

 

 
 
Other assets
1

 

 

 

 

 
 
Total recurring Level 3 assets
$
1,059

 
$
(2
)
 
$
(9
)
 
$
8

 
$
(21
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
 

 
 
Contractholder funds: Derivatives embedded in life and annuity contracts
$
(323
)
 
$
(4
)
 
$

 
$

 
$

 
 
Total recurring Level 3 liabilities
$
(323
)
 
$
(4
)
 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases
 
Sales
 
Issues
 
Settlements
 
Balance as of March 31, 2015
 
 
Assets
 

 
 

 
 

 
 

 
 

 
 
Fixed income securities:
 

 
 

 
 

 
 

 
 

 
 
Municipal
$

 
$
(1
)
 
$

 
$

 
$
106

 
 
Corporate
19

 
(47
)
 

 
(16
)
 
739

 
 
ABS

 

 

 
(3
)
 
111

 
 
CMBS

 

 

 

 

 
 
Total fixed income securities
19

 
(48
)
 

 
(19
)
 
956

 
 
Equity securities
2

 

 

 

 
39

 
 
Free-standing derivatives, net

 

 

 

 
(7
)
 
(2) 
Other assets

 

 

 

 
1

 
 
Total recurring Level 3 assets
$
21

 
$
(48
)
 
$

 
$
(19
)
 
$
989

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

 
 

 
 
Contractholder funds: Derivatives embedded in life and annuity contracts
$

 
$

 
$
(1
)
 
$
2

 
$
(326
)
 
 
Total recurring Level 3 liabilities
$

 
$

 
$
(1
)
 
$
2

 
$
(326
)
 
 
__________
(1) 
The effect to net income totals $(6) million and is reported in the Condensed Consolidated Statements of Operations and Comprehensive Income as follows:$(5) million in realized capital gains and loses, $3 million in net investment income and $(4) million in interest credited to contractholder funds.
(2) 
Comprises $2 million of assets and $9 million of liabilities.
Transfers between level categorizations may occur due to changes in the availability of market observable inputs, which generally are caused by changes in market conditions such as liquidity, trading volume or bid-ask spreads. Transfers between level categorizations may also occur due to changes in the valuation source. For example, in situations where a fair value quote is not provided by the Company’s independent third-party valuation service provider and as a result the price is stale or has been replaced with a broker quote whose inputs have not been corroborated to be market observable, the security is transferred into Level 3. Transfers in and out of level categorizations are reported as having occurred at the beginning of the quarter in which the transfer occurred. Therefore, for all transfers into Level 3, all realized and changes in unrealized gains and losses in the quarter of transfer are reflected in the Level 3 rollforward table.
There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2016 or 2015.
Transfers into Level 3 during the three months ended March 31, 2016 and 2015 included situations where a fair value quote was not provided by the Company’s independent third-party valuation service provider and as a result the price was stale or had been replaced with a broker quote where the inputs had not been corroborated to be market observable resulting in the security

20



being classified as Level 3. Transfers out of Level 3 during the three months ended March 31, 2016 and 2015 included situations where a broker quote was used in the prior period and a fair value quote became available from the Company’s independent third-party valuation service provider in the current period. A quote utilizing the new pricing source was not available as of the prior period, and any gains or losses related to the change in valuation source for individual securities were not significant.
The following table provides the change in unrealized gains and losses included in net income for Level 3 assets and liabilities held as of March 31.
($ in millions)
Three months ended March 31,
 
2016
 
2015
Assets
 

 
 

Fixed income securities:
 

 
 

Corporate
$
(2
)
 
$
2

Equity securities
(12
)
 

Free-standing derivatives, net
(1
)
 

Total recurring Level 3 assets
$
(15
)
 
$
2

 
 
 
 
Liabilities
 

 
 

Contractholder funds: Derivatives embedded in life and annuity contracts
$
(15
)
 
$
(4
)
Total recurring Level 3 liabilities
$
(15
)
 
$
(4
)
The amounts in the table above represent the change in unrealized gains and losses included in net income for the period of time that the asset or liability was determined to be in Level 3. These gains and losses total $(30) million for the three months ended March 31, 2016 and are reported as follows: $(18) million in realized capital gains and losses, $3 million in net investment income, $1 million in interest credited to contractholder funds and $(16) million in life and annuity contract benefits. These gains and losses total $(2) million for the three months ended March 31, 2015 and are reported as follows: $(1) million in realized capital gains and loses, $3 million in net investment income and $(4) million in interest credited to contractholder funds.
Presented below are the carrying values and fair value estimates of financial instruments not carried at fair value.
Financial assets
($ in millions)
March 31, 2016
 
December 31, 2015
 
Carrying
value
 
Fair
value
 
Carrying
value
 
Fair
value
Mortgage loans
$
3,749

 
$
3,935

 
$
3,781

 
$
3,920

Cost method limited partnerships
549

 
664

 
530

 
661

Bank loans
496

 
485

 
502

 
493

Agent loans
437

 
427

 
422

 
408

Notes due from related party
275

 
275

 
275

 
275

The fair value of mortgage loans is based on discounted contractual cash flows or, if the loans are impaired due to credit reasons, the fair value of collateral less costs to sell. Risk adjusted discount rates are selected using current rates at which similar loans would be made to borrowers with similar characteristics, using similar types of properties as collateral. The fair value of cost method limited partnerships is determined using reported net asset values. The fair value of bank loans, which are reported in other investments, is based on broker quotes from brokers familiar with the loans and current market conditions. The fair value of agent loans, which are reported in other investments, is based on discounted cash flow calculations that use discount rates with a spread over U.S. Treasury rates. Assumptions used in developing estimated cash flows and discount rates consider the loan’s credit and liquidity risks. The fair value of notes due from related party, which are reported in other investments, is based on discounted cash flow calculations using current interest rates for instruments with comparable terms. The fair value measurements for mortgage loans, cost method limited partnerships, bank loans, agent loans, notes due from related party and assets held for sale are categorized as Level 3.






21



Financial liabilities
($ in millions)
March 31, 2016
 
December 31, 2015
 
Carrying
value
 
Fair
value
 
Carrying
value
 
Fair
value
Contractholder funds on investment contracts
$
12,152

 
$
12,584

 
$
12,387

 
$
12,836

Notes due to related parties
275

 
275

 
275

 
275

Liability for collateral
579

 
579

 
550

 
550

The fair value of contractholder funds on investment contracts is based on the terms of the underlying contracts incorporating current market-based crediting rates for similar contracts that reflect the Company’s own credit risk. Deferred annuities classified in contractholder funds are valued based on discounted cash flow models that incorporate current market-based margins and reflect the Company’s own credit risk. Immediate annuities without life contingencies and funding agreements are valued based on discounted cash flow models that incorporate current market-based implied interest rates and reflect the Company’s own credit risk. The fair value measurement for contractholder funds on investment contracts is categorized as Level 3.
The fair value of notes due to related parties is based on discounted cash flow calculations based on current interest rates for instruments with comparable terms and considers the Company’s own credit risk. The liability for collateral is valued at carrying value due to its short-term nature. The fair value measurement for liability for collateral is categorized as Level 2. The fair value measurement for notes due to related parties is categorized as Level 3.
5. Derivative Financial Instruments
The Company uses derivatives for risk reduction and to increase investment portfolio returns through asset replication. Risk reduction activity is focused on managing the risks with certain assets and liabilities arising from the potential adverse impacts from changes in risk-free interest rates, changes in equity market valuations, increases in credit spreads and foreign currency fluctuations.
The Company utilizes several derivative strategies to manage risk. Asset-liability management is a risk management strategy that is principally employed to balance the respective interest-rate sensitivities of the Company’s assets and liabilities. Depending upon the attributes of the assets acquired and liabilities issued, derivative instruments such as interest rate swaps, caps, swaptions and futures are utilized to change the interest rate characteristics of existing assets and liabilities to ensure the relationship is maintained within specified ranges and to reduce exposure to rising or falling interest rates. Credit default swaps are typically used to mitigate the credit risk within the Company’s fixed income portfolio. Futures and options are used for hedging the equity exposure contained in the Company’s equity indexed life and annuity product contracts that offer equity returns to contractholders. In addition, the Company uses equity index futures to offset valuation losses in the equity portfolio during periods of declining equity market values. Interest rate swaps are used to hedge interest rate risk inherent in funding agreements. Foreign currency swaps and forwards are primarily used by the Company to reduce the foreign currency risk associated with holding foreign currency denominated investments.
Asset replication refers to the “synthetic” creation of assets through the use of derivatives. The Company replicates fixed income securities using a combination of a credit default swap or a foreign currency forward contract and one or more highly rated fixed income securities, primarily investment grade host bonds, to synthetically replicate the economic characteristics of one or more cash market securities. The Company replicates equity securities using futures to increase equity exposure.
The Company also has derivatives embedded in non-derivative host contracts that are required to be separated from the host contracts and accounted for at fair value with changes in fair value of embedded derivatives reported in net income. The Company’s primary embedded derivatives are equity options in life and annuity product contracts, which provide equity returns to contractholders and conversion options in fixed income securities, which provide the Company with the right to convert the instrument into a predetermined number of shares of common stock.
When derivatives meet specific criteria, they may be designated as accounting hedges and accounted for as fair value, cash flow, foreign currency fair value or foreign currency cash flow hedges. The Company designates certain investment risk transfer reinsurance agreements as fair value hedges when the hedging instrument is highly effective in offsetting the risk of changes in the fair value of the hedged item. The Company designates certain of its foreign currency swap contracts as cash flow hedges when the hedging instrument is highly effective in offsetting the exposure of variations in cash flows for the hedged risk that could affect net income. Amounts are reclassified to net investment income or realized capital gains and losses as the hedged item affects net income.
The notional amounts specified in the contracts are used to calculate the exchange of contractual payments under the agreements and are generally not representative of the potential for gain or loss on these agreements. However, the notional amounts specified in credit default swaps where the Company has sold credit protection represent the maximum amount of potential loss, assuming no recoveries.

22



Fair value, which is equal to the carrying value, is the estimated amount that the Company would receive or pay to terminate the derivative contracts at the reporting date. The carrying value amounts for OTC derivatives are further adjusted for the effects, if any, of enforceable master netting agreements and are presented on a net basis, by counterparty agreement, in the Condensed Consolidated Statements of Financial Position. For certain exchange traded and cleared derivatives, margin deposits are required as well as daily cash settlements of margin accounts. As of March 31, 2016, the Company pledged $8 million of cash in the form of margin deposits.
For those derivatives which qualify for fair value hedge accounting, net income includes the changes in the fair value of both the derivative instrument and the hedged risk, and therefore reflects any hedging ineffectiveness. For cash flow hedges, gains and losses are amortized from accumulated other comprehensive income and are reported in net income in the same period the forecasted transactions being hedged impact net income.
Non-hedge accounting is generally used for “portfolio” level hedging strategies where the terms of the individual hedged items do not meet the strict homogeneity requirements to permit the application of hedge accounting. For non-hedge derivatives, net income includes changes in fair value and accrued periodic settlements, when applicable. With the exception of non-hedge derivatives used for asset replication and non-hedge embedded derivatives, all of the Company’s derivatives are evaluated for their ongoing effectiveness as either accounting hedge or non-hedge derivative financial instruments on at least a quarterly basis.










































23



The following table provides a summary of the volume and fair value positions of derivative instruments as well as their reporting location in the Condensed Consolidated Statement of Financial Position as of March 31, 2016.
($ in millions, except number of contracts)
 
 
Volume (1)
 
 
 
 
 
 
 
Balance sheet location
 
Notional
amount
 
Number
of
contracts
 
Fair
value,
net
 
Gross
asset
 
Gross
liability
Asset derivatives
 
 
 

 
 

 
 

 
 

 
 

Derivatives designated as accounting hedging instruments
 
 

 
 

 
 

 
 

 
 

Foreign currency swap agreements
Other investments
 
$
15

 
n/a

 
$
3

 
$
3

 
$

Derivatives not designated as accounting hedging instruments
 
 

 
 

 
 

 
 

 
 

Interest rate contracts
 
 
 

 
 

 
 

 
 

 
 

Interest rate cap agreements
Other investments
 
24

 
n/a

 

 

 

Equity and index contracts
 
 
 

 
 

 
 

 
 

 
 

Options
Other investments
 

 
3,762

 
51

 
51

 

Financial futures contracts
Other assets
 

 
743

 

 

 

Credit default contracts
 
 
 

 
 

 
 

 
 

 
 

Credit default swaps – buying protection
Other investments
 
5

 
n/a

 

 

 

Credit default swaps – selling protection
Other investments
 
80

 
n/a

 
1

 
1

 

Other contracts
 
 
 

 
 

 
 

 
 

 
 

Other contracts
Other assets
 
3

 
n/a

 
1

 
1

 

Subtotal
 
 
112

 
4,505

 
53

 
53

 

Total asset derivatives
 
 
$
127

 
4,505

 
$
56

 
$
56

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Liability derivatives
 
 
 

 
 

 
 

 
 

 
 

Derivatives designated as accounting hedging instruments
 
 

 
 

 
 

 
 

 
 

Foreign currency swap agreements
Other liabilities & accrued expenses
 
$
49

 
n/a

 
$
4

 
$
4

 
$

Derivatives not designated as accounting hedging instruments
 
 

 
 

 
 

 
 

 
 

Interest rate contracts
 
 
 

 
 

 
 

 
 

 
 

Interest rate swap agreements
Other liabilities & accrued expenses
 
85

 
n/a

 

 

 

Interest rate cap agreements
Other liabilities & accrued expenses
 
66

 
n/a

 
1

 
1

 

Equity and index contracts
 
 
 

 
 

 
 

 
 

 
 

Options and futures
Other liabilities & accrued expenses
 

 
3,638

 
(11
)
 

 
(11
)
Foreign currency contracts
 
 
 

 
 

 
 

 
 

 
 

Foreign currency forwards
Other liabilities & accrued expenses
 
104

 
n/a

 
(4
)
 

 
(4
)
Embedded derivative financial instruments
 
 
 

 
 

 
 

 
 

 
 

Guaranteed accumulation benefits
Contractholder funds
 
423

 
n/a

 
(49
)
 

 
(49
)
Guaranteed withdrawal benefits
Contractholder funds
 
292

 
n/a

 
(19
)
 

 
(19
)
Equity-indexed and forward starting options in life and annuity product contracts
Contractholder funds
 
1,766

 
n/a

 
(245
)
 

 
(245
)
Other embedded derivative financial instruments
Contractholder funds
 
85

 
n/a

 

 

 

Credit default contracts
 
 
 

 
 

 
 

 
 

 
 

Credit default swaps – buying protection
Other liabilities & accrued expenses
 
58

 
n/a

 

 
1

 
(1
)
Credit default swaps – selling protection
Other liabilities & accrued expenses
 
100

 
n/a

 
(9
)
 

 
(9
)
Subtotal
 
 
2,979

 
3,638

 
(336
)
 
2

 
(338
)
Total liability derivatives
 
 
3,028

 
3,638

 
(332
)
 
$
6

 
$
(338
)
Total derivatives
 
 
$
3,155

 
8,143

 
$
(276
)
 
 

 
 

___________

(1) 
Volume for OTC and cleared derivative contracts is represented by their notional amounts. Volume for exchange traded derivatives is represented by the number of contracts, which is the basis on which they are traded. (n/a = not applicable)









24



The following table provides a summary of the volume and fair value positions of derivative instruments as well as their reporting location in the Consolidated Statement of Financial Position as of December 31, 2015.
($ in millions, except number of contracts)
 
 
Volume (1)
 
 
 
 
 
 
 
Balance sheet location
 
Notional
amount
 
Number
of
contracts
 
Fair
value,
net
 
Gross
asset
 
Gross
liability
Asset derivatives
 
 
 

 
 

 
 

 
 

 
 

Derivatives designated as accounting hedging instruments
 
 

 
 

 
 

 
 

 
 

Foreign currency swap agreements
Other investments
 
$
45

 
n/a

 
$
6

 
$
6

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as accounting hedging instruments
 
 

 
 

 
 

 
 

 
 

Interest rate contracts
 
 
 

 
 

 
 

 
 

 
 

Interest rate cap agreements
Other investments
 
42

 
n/a

 

 

 

Equity and index contracts
 
 
 

 
 

 
 

 
 

 
 

Options
Other investments
 

 
3,730

 
44

 
44

 

Financial futures contracts
Other assets
 

 
997

 
1

 
1

 

Foreign currency contracts
 
 
 

 
 

 
 

 
 

 
 

Foreign currency forwards
Other investments
 
81

 
n/a

 
1

 
1

 

Credit default contracts
 
 
 

 
 

 
 

 
 

 
 

Credit default swaps – buying protection
Other investments
 
51

 
n/a

 
2

 
3

 
(1
)
Credit default swaps – selling protection
Other investments
 
80

 
n/a

 
1

 
1

 

Other contracts
 
 
 

 
 

 
 

 
 

 
 

Other contracts
Other assets
 
3

 
n/a

 
1

 
1

 

Subtotal
 
 
257

 
4,727

 
50

 
51

 
(1
)
Total asset derivatives
 
 
$
302

 
4,727

 
$
56

 
$
57

 
$
(1
)
 
 
 
 
 
 
 
 
 
 
 
 
Liability derivatives
 
 
 

 
 

 
 

 
 

 
 

Derivatives designated as accounting hedging instruments
 
 

 
 

 
 

 
 

 
 

Foreign currency swap agreements
Other liabilities & accrued expenses
 
$
19

 
n/a

 
$
4

 
$
4

 
$

Derivatives not designated as accounting hedging instruments
 
 

 
 

 
 

 
 

 
 

Interest rate contracts
 
 
 

 
 

 
 

 
 

 
 

Interest rate swap agreements
Other liabilities & accrued expenses
 
85

 
n/a

 

 

 

Interest rate cap agreements
Other liabilities & accrued expenses
 
72

 
n/a

 
1

 
1

 

Equity and index contracts
 
 
 

 
 

 
 

 
 

 
 

Options
Other liabilities & accrued expenses
 

 
3,645

 
(6
)
 

 
(6
)
Embedded derivative financial instruments
 
 
 

 
 

 
 

 
 

 
 

Guaranteed accumulation benefits
Contractholder funds
 
481

 
n/a

 
(38
)
 

 
(38
)
Guaranteed withdrawal benefits
Contractholder funds
 
332

 
n/a

 
(14
)
 

 
(14
)
Equity-indexed and forward starting options in life and annuity product contracts
Contractholder funds
 
1,781

 
n/a

 
(247
)
 

 
(247
)
Other embedded derivative financial instruments
Contractholder funds
 
85

 
n/a

 

 

 

Credit default contracts
 
 
 

 
 

 
 

 
 

 
 

Credit default swaps – buying protection
Other liabilities & accrued expenses
 
2

 
n/a

 

 

 

Credit default swaps – selling protection
Other liabilities & accrued expenses
 
100

 
n/a

 
(8
)
 

 
(8
)
Subtotal
 
 
2,938

 
3,645

 
(312
)
 
1

 
(313
)
Total liability derivatives
 
 
2,957

 
3,645

 
(308
)
 
$
5

 
$
(313
)
Total derivatives
 
 
$
3,259

 
8,372

 
$
(252
)
 
 

 
 

____________
 
(1) 
Volume for OTC and cleared derivative contracts is represented by their notional amounts.  Volume for exchange traded derivatives is represented by the number of contracts, which is the basis on which they are traded. (n/a = not applicable)







25



The following table provides gross and net amounts for the Company’s OTC derivatives, all of which are subject to enforceable master netting agreements.
($ in millions)
 
 
Offsets
 
 
 
 
 
 
 
Gross
amount
 
Counter-
party
netting
 
Cash
collateral
(received)
pledged
 
Net
amount on
balance
sheet
 
Securities
collateral
(received)
pledged
 
Net
amount
March 31, 2016
 

 
 

 
 

 
 

 
 

 
 

Asset derivatives
$
9

 
$
(6
)
 
$
(3
)
 
$

 
$

 
$

Liability derivatives
(14
)
 
6

 
(5
)
 
(13
)
 
7

 
(6
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 

 
 

 
 

 
 

 
 

 
 

Asset derivatives
$
15

 
$
(6
)
 
$
(5
)
 
$
4

 
$
(1
)
 
$
3

Liability derivatives
(9
)
 
6

 
(5
)
 
(8
)
 
7

 
(1
)
The following table provides a summary of the impacts of the Company’s foreign currency contracts in cash flow hedging relationships. Amortization of net gains from accumulated other comprehensive income related to cash flow hedges is expected to be a gain of $1 million during the next twelve months. There was no hedge ineffectiveness reported in realized gains and losses for the three months ended March 31, 2016 or 2015.
($ in millions)
Three months ended March 31,
 
2016
 
2015
(Loss) gain recognized in OCI on derivatives during the period
$
(3
)
 
$
8

Gain recognized in OCI on derivatives during the term of the hedging relationship
7

 
7

Gain reclassified from AOCI into income (realized capital gains and losses)

 
3

The following tables present gains and losses from valuation and settlements reported on derivatives not designated as accounting hedging instruments in the Condensed Consolidated Statements of Operations and Comprehensive Income. For the three months ended March 31, 2016 and 2015, the Company had no derivatives used in fair value hedging relationships.
($ in millions)
Realized
capital
gains and
losses
 
Contract
benefits
 
Interest
credited to
contractholder
funds
 
Total gain (loss)
recognized in
net income on
derivatives
Three months ended March 31, 2016
 

 
 

 
 

 
 

Equity and index contracts
$


$


$
(7
)

$
(7
)
Embedded derivative financial instruments


(16
)

2


(14
)
Foreign currency contracts
(4
)





(4
)
Credit default contracts
(1
)





(1
)
Total
$
(5
)

$
(16
)

$
(5
)

$
(26
)
 
 
 
 
 
 
 
 
Three months ended March 31, 2015
 
 
 
 
 
 
 
Equity and index contracts
$
(1
)
 
$

 
$
4

 
$
3

Embedded derivative financial instruments

 

 
(3
)
 
(3
)
Foreign currency contracts
5

 

 

 
5

Total
$
4

 
$

 
$
1

 
$
5

The Company manages its exposure to credit risk by utilizing highly rated counterparties, establishing risk control limits, executing legally enforceable master netting agreements (“MNAs”) and obtaining collateral where appropriate. The Company uses MNAs for OTC derivative transactions that permit either party to net payments due for transactions and collateral is either pledged or obtained when certain predetermined exposure limits are exceeded. As of March 31, 2016, counterparties pledged $9 million in cash and securities to the Company, and the Company pledged $8 million in securities to counterparties as collateral posted under MNAs for contracts containing credit-risk-contingent provisions that are in a liability position. The Company has not incurred any losses on derivative financial instruments due to counterparty nonperformance. Other derivatives, including futures and certain option contracts, are traded on organized exchanges which require margin deposits and guarantee the execution of trades, thereby mitigating any potential credit risk.
Counterparty credit exposure represents the Company’s potential loss if all of the counterparties concurrently fail to perform under the contractual terms of the contracts and all collateral, if any, becomes worthless. This exposure is measured by the fair

26



value of OTC derivative contracts with a positive fair value at the reporting date reduced by the effect, if any, of legally enforceable master netting agreements.
The following table summarizes the counterparty credit exposure by counterparty credit rating as it relates to the Company’s OTC derivatives.
($ in millions)
 
March 31, 2016
 
December 31, 2015
Rating (1)
 
Number of counter-parties
 
Notional amount (2)
 
Credit exposure (2)
 
Exposure, net of collateral (2)
 
Number of
counter-
parties
 
Notional
amount (2)
 
Credit
exposure (2)
 
Exposure, net of collateral (2)
A+
 
1

 
$
71

 
$
3

 
$

 
1

 
$
82

 
$
5

 
$

A
 
4

 
63

 
2

 

 
5

 
178

 
6

 
6

A-
 
1

 
16

 
3

 
3

 
1

 
16

 
3

 

BBB+
 
1

 
16

 

 

 
2

 
36

 

 

Total
 
7

 
$
166

 
$
8

 
$
3

 
9

 
$
312

 
$
14

 
$
6

__________
 
(1) 
Rating is the lower of S&P or Moody’s ratings.
(2) 
Only OTC derivatives with a net positive fair value are included for each counterparty.
Market risk is the risk that the Company will incur losses due to adverse changes in market rates and prices. Market risk exists for all of the derivative financial instruments the Company currently holds, as these instruments may become less valuable due to adverse changes in market conditions. To limit this risk, the Company’s senior management has established risk control limits. In addition, changes in fair value of the derivative financial instruments that the Company uses for risk management purposes are generally offset by the change in the fair value or cash flows of the hedged risk component of the related assets, liabilities or forecasted transactions.
Certain of the Company’s derivative instruments contain credit-risk-contingent termination events, cross-default provisions and credit support annex agreements. Credit-risk-contingent termination events allow the counterparties to terminate the derivative agreement or a specific trade on certain dates if AIC’s, ALIC’s or Allstate Life Insurance Company of New York’s (“ALNY”) financial strength credit ratings by Moody’s or S&P fall below a certain level. Credit-risk-contingent cross-default provisions allow the counterparties to terminate the derivative agreement if the Company defaults by pre-determined threshold amounts on certain debt instruments. Credit-risk-contingent credit support annex agreements specify the amount of collateral the Company must post to counterparties based on AIC’s, ALIC’s or ALNY’s financial strength credit ratings by Moody’s or S&P, or in the event AIC, ALIC or ALNY are no longer rated by either Moody’s or S&P.
The following summarizes the fair value of derivative instruments with termination, cross-default or collateral credit-risk-contingent features that are in a liability position, as well as the fair value of assets and collateral that are netted against the liability in accordance with provisions within legally enforceable MNAs.
($ in millions)
March 31, 2016
 
December 31, 2015
Gross liability fair value of contracts containing credit-risk-contingent features
$
14

 
$
9

Gross asset fair value of contracts containing credit-risk-contingent features and subject to MNAs
(1
)
 
(1
)
Collateral posted under MNAs for contracts containing credit-risk-contingent features
(8
)
 
(7
)
Maximum amount of additional exposure for contracts with credit-risk-contingent features if all features were triggered concurrently
$
5

 
$
1

Credit derivatives - selling protection
Free-standing credit default swaps (“CDS”) are utilized for selling credit protection against a specified credit event. A credit default swap is a derivative instrument, representing an agreement between two parties to exchange the credit risk of a specified entity (or a group of entities), or an index based on the credit risk of a group of entities (all commonly referred to as the “reference entity” or a portfolio of “reference entities”), in return for a periodic premium. In selling protection, CDS are used to replicate fixed income securities and to complement the cash market when credit exposure to certain issuers is not available or when the derivative alternative is less expensive than the cash market alternative. CDS typically have a five-year term.








27



The following table shows the CDS notional amounts by credit rating and fair value of protection sold.
($ in millions)
Notional amount
 
 
 
AA
 
A
 
BBB
 
BB and
lower
 
Total
 
Fair
value
March 31, 2016
 

 
 

 
 

 
 

 
 

 
 

First-to-default Basket
 

 
 

 
 

 
 

 
 

 
 

Municipal
$

 
$

 
$
100

 
$

 
$
100

 
$
(9
)
Index
 

 
 

 
 

 
 

 
 

 
 

Corporate debt
1

 
20

 
50

 
9

 
80

 
1

Total
$
1

 
$
20

 
$
150

 
$
9

 
$
180

 
$
(8
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 

 
 

 
 

 
 

 
 

 
 

First-to-default Basket
 

 
 

 
 

 
 

 
 

 
 

Municipal
$

 
$

 
$
100

 
$

 
$
100

 
$
(8
)
Index
 

 
 

 
 

 
 

 
 

 
 

Corporate debt
1

 
20

 
52

 
7

 
80

 
1

Total
$
1

 
$
20

 
$
152

 
$
7

 
$
180

 
$
(7
)
In selling protection with CDS, the Company sells credit protection on an identified single name, a basket of names in a first-to-default (“FTD”) structure or credit derivative index (“CDX”) that is generally investment grade, and in return receives periodic premiums through expiration or termination of the agreement. With single name CDS, this premium or credit spread generally corresponds to the difference between the yield on the reference entity’s public fixed maturity cash instruments and swap rates at the time the agreement is executed. With a FTD basket, because of the additional credit risk inherent in a basket of named reference entities, the premium generally corresponds to a high proportion of the sum of the credit spreads of the names in the basket and the correlation between the names. CDX is utilized to take a position on multiple (generally 125) reference entities. Credit events are typically defined as bankruptcy, failure to pay, or restructuring, depending on the nature of the reference entities. If a credit event occurs, the Company settles with the counterparty, either through physical settlement or cash settlement. In a physical settlement, a reference asset is delivered by the buyer of protection to the Company, in exchange for cash payment at par, whereas in a cash settlement, the Company pays the difference between par and the prescribed value of the reference asset. When a credit event occurs in a single name or FTD basket (for FTD, the first credit event occurring for any one name in the basket), the contract terminates at the time of settlement. For CDX, the reference entity’s name incurring the credit event is removed from the index while the contract continues until expiration. The maximum payout on a CDS is the contract notional amount. A physical settlement may afford the Company with recovery rights as the new owner of the asset.
The Company monitors risk associated with credit derivatives through individual name credit limits at both a credit derivative and a combined cash instrument/credit derivative level. The ratings of individual names for which protection has been sold are also monitored.
6. Reinsurance
The effects of reinsurance on premiums and contract charges are as follows:
($ in millions)
Three months ended March 31,
 
2016
 
2015
Direct
$
177

 
$
183

Assumed
 
 
 
Affiliate
34

 
32

Non-affiliate
203

 
210

Ceded
 
 
 
Affiliate
(13
)
 

Non-affiliate
(70
)
 
(80
)
Premiums and contract charges, net of reinsurance
$
331

 
$
345






28



The effects of reinsurance on contract benefits are as follows:
($ in millions)
Three months ended March 31,
 
2016
 
2015
Direct
$
256

 
$
274

Assumed
 
 
 
Affiliate
21

 
19

Non-affiliate
133

 
135

Ceded
 
 
 
Affiliate
(9
)
 

Non-affiliate
(63
)
 
(70
)
Contract benefits, net of reinsurance
$
338

 
$
358

The effects of reinsurance on interest credited to contractholder funds are as follows:
($ in millions)
Three months ended March 31,
 
2016
 
2015
Direct
$
161

 
$
158

Assumed
 
 
 
Affiliate
2

 
3

Non-affiliate
25

 
36

Ceded
 
 
 
Affiliate
(5
)
 

Non-affiliate
(5
)
 
(6
)
Interest credited to contractholder funds, net of reinsurance
$
178

 
$
191


7. Guarantees and Contingent Liabilities
Guarantees
The Company owns certain investments that obligate the Company to exchange credit risk or to forfeit principal due, depending on the nature or occurrence of specified credit events for the reference entities. In the event all such specified credit events were to occur, the Company’s maximum amount at risk on these investments, as measured by the amount of the aggregate initial investment, was $4 million as of March 31, 2016. The obligations associated with these investments expire at various dates on or before March 11, 2018.
In the normal course of business, the Company provides standard indemnifications to contractual counterparties in connection with numerous transactions, including acquisitions and divestitures. The types of indemnifications typically provided include indemnifications for breaches of representations and warranties, taxes and certain other liabilities, such as third party lawsuits. The indemnification clauses are often standard contractual terms and are entered into in the normal course of business based on an assessment that the risk of loss would be remote. The terms of the indemnifications vary in duration and nature. In many cases, the maximum obligation is not explicitly stated and the contingencies triggering the obligation to indemnify have not occurred and are not expected to occur. Consequently, the maximum amount of the obligation under such indemnifications is not determinable. Historically, the Company has not made any material payments pursuant to these obligations.
Related to the sale of LBL on April 1, 2014, the Company agreed to indemnify Resolution Life Holdings, Inc. in connection with certain representations, warranties and covenants of the Company, and certain liabilities specifically excluded from the transaction, subject to specific contractual limitations regarding the Company’s maximum obligation. Management does not believe these indemnifications will have a material effect on results of operations, cash flows or financial position of the Company.
Related to the disposal through reinsurance of substantially all of the Company’s variable annuity business to Prudential in 2006, the Company and the Corporation have agreed to indemnify Prudential for certain pre-closing contingent liabilities (including extra-contractual liabilities of the Company and liabilities specifically excluded from the transaction) that the Company has agreed to retain. In addition, the Company and the Corporation will each indemnify Prudential for certain post-closing liabilities that may arise from the acts of the Company and its agents, including certain liabilities arising from the Company’s provision of transition services. The reinsurance agreements contain no limitations or indemnifications with regard to insurance risk transfer, and transferred all of the future risks and responsibilities for performance on the underlying variable annuity contracts to Prudential, including those related to benefit guarantees. Management does not believe this agreement will have a material effect on results of operations, cash flows or financial position of the Company.
The aggregate liability balance related to all guarantees was not material as of March 31, 2016.

29



Regulation and Compliance
The Company is subject to extensive laws, regulations and regulatory actions. From time to time, regulatory authorities or legislative bodies seek to impose additional regulations regarding agent and broker compensation, regulate the nature of and amount of investments, impose fines and penalties for unintended errors or mistakes, and otherwise expand overall regulation of insurance products and the insurance industry. In addition, the Company is subject to laws and regulations administered and enforced by federal agencies and other organizations, including but not limited to the Securities and Exchange Commission, the Financial Industry Regulatory Authority, the Department of Labor, and the U.S. Department of Justice. The Company has established procedures and policies to facilitate compliance with laws and regulations, to foster prudent business operations, and to support financial reporting. The Company routinely reviews its practices to validate compliance with laws and regulations and with internal procedures and policies. As a result of these reviews, from time to time the Company may decide to modify some of its procedures and policies. Such modifications, and the reviews that led to them, may be accompanied by payments being made and costs being incurred. The ultimate changes and eventual effects of these actions on the Company’s business, if any, are uncertain.
The Company is currently being examined by certain states for compliance with unclaimed property laws.  It is possible that this examination may result in additional payments of abandoned funds to states and to changes in the Company’s practices and procedures for the identification of escheatable funds, which could impact benefit payments and reserves, among other consequences; however, it is not likely to have a material effect on the condensed consolidated financial statements of the Company.
8. Other Comprehensive Income
The components of other comprehensive income on a pre-tax and after-tax basis are as follows:
($ in millions)
Three months ended March 31,
 
2016
 
2015
 
Pre-
tax
 
Tax
 
After-
tax
 
Pre-
tax
 
Tax
 
After-
tax
Unrealized net holding gains and losses arising during the period, net of related offsets
$
329

 
$
(115
)
 
$
214

 
$
212

 
$
(74
)
 
$
138

Less: reclassification adjustment of realized capital gains and losses
(41
)
 
14

 
(27
)
 
103

 
(36
)
 
67

Unrealized net capital gains and losses
370

 
(129
)
 
241

 
109

 
(38
)
 
71

Unrealized foreign currency translation adjustments
(3
)
 
1

 
(2
)
 
(3
)
 
1

 
(2
)
Other comprehensive income
$
367

 
$
(128
)
 
$
239

 
$
106

 
$
(37
)
 
$
69



30



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder of
Allstate Life Insurance Company
Northbrook, Illinois 60062

We have reviewed the accompanying condensed consolidated statement of financial position of Allstate Life Insurance Company and subsidiaries (the “Company”), an affiliate of The Allstate Corporation, as of March 31, 2016, and the related condensed consolidated statements of operations and comprehensive income, shareholder’s equity and cash flows for the three-month periods ended March 31, 2016 and 2015. These interim financial statements are the responsibility of the Company’s management.

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

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial position of Allstate Life Insurance Company and subsidiaries as of December 31, 2015, and the related consolidated statements of operations and comprehensive income, shareholder’s equity, and cash flows for the year then ended (not presented herein); and in our report dated March 2, 2016, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 2015 is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived.

/s/ DELOITTE & TOUCHE LLP

Chicago, Illinois
May 6, 2016

31



Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2016 AND 2015
 
OVERVIEW
 
The following discussion highlights significant factors influencing the consolidated financial position and results of operations of Allstate Life Insurance Company (referred to in this document as “we,” “our,” “us,” the “Company” or “ALIC”). It should be read in conjunction with the condensed consolidated financial statements and notes thereto found under Part I. Item 1. contained herein, and with the discussion, analysis, consolidated financial statements and notes thereto in Part I. Item 1. and Part II. Item 7. and Item 8. of the Allstate Life Insurance Company Annual Report on Form 10-K for 2015. We operate as a single segment entity based on the manner in which we use financial information to evaluate business performance and to determine the allocation of resources.
HIGHLIGHTS
Net income was $52 million in the first quarter of 2016 compared to $153 million in the first quarter of 2015.
Premiums and contract charges on underwritten products, including traditional life, interest-sensitive life and accident and health insurance, totaled $328 million in the first quarter of 2016, a decrease of 4.1% from $342 million in the first quarter of 2015.
Investments totaled $35.45 billion as of March 31, 2016, reflecting an increase of $487 million from $34.96 billion as of December 31, 2015. Net investment income decreased 15.1% to $400 million in the first quarter of 2016 from $471 million in the first quarter of 2015.
Net realized capital losses totaled $46 million in the first quarter of 2016 compared to net realized capital gains of $111 million in the first quarter of 2015.
Contractholder funds totaled $20.33 billion as of March 31, 2016, reflecting a decrease of $213 million from $20.54 billion as of December 31, 2015.
Effective April 1, 2015, ALIC entered into a coinsurance reinsurance agreement with Allstate Assurance Company (“AAC”) to cede certain interest-sensitive life insurance policies with contractholder funds totaling $476 million to AAC. This business generated approximately $14 million of contract charges and $9 million of contract benefits per quarter in 2014.

32



OPERATIONS
Summary analysis Summarized financial data is presented in the following table.
($ in millions)
Three months ended March 31,
 
2016
 
2015
Revenues
 

 
 

Premiums
$
149

 
$
150

Contract charges
182

 
195

Net investment income
400

 
471

Realized capital gains and losses
(46
)
 
111

Total revenues
685

 
927

 
 
 
 
Costs and expenses
 

 
 

Contract benefits
(338
)
 
(358
)
Interest credited to contractholder funds
(178
)
 
(191
)
Amortization of DAC
(37
)
 
(40
)
Operating costs and expenses
(56
)
 
(80
)
Interest expense
(4
)
 
(4
)
Total costs and expenses
(613
)
 
(673
)
 
 
 
 
Gain (loss) on disposition of operations
2

 
(2
)
Income tax expense
(22
)
 
(99
)
Net income
$
52

 
$
153

 
 
 
 
Investments as of March 31
$
35,449

 
$
37,418

Net income was $52 million in the first quarter of 2016 compared to $153 million in the first quarter of 2015. The decrease was primarily due to net realized capital losses in first quarter 2016 compared to net realized capital gains in first quarter 2015 and lower net investment income, partially offset by lower operating costs and expenses and lower contract benefits.
Analysis of revenues Total revenues decreased 26.1% or $242 million in the first quarter of 2016 compared to the first quarter of 2015, primarily due to net realized capital losses in first quarter 2016 compared to net realized capital gains in first quarter 2015 and lower net investment income.
Premiums represent revenues generated from traditional life insurance, accident and health insurance, and immediate annuities with life contingencies that have significant mortality or morbidity risk.
Contract charges are revenues generated from interest-sensitive and variable life insurance and fixed annuities for which deposits are classified as contractholder funds or separate account liabilities. Contract charges are assessed against the contractholder account values for maintenance, administration, cost of insurance and surrender prior to contractually specified dates.
The following table summarizes premiums and contract charges by product.
($ in millions)
Three months ended March 31,
 
2016
 
2015
Underwritten products
 

 
 

Traditional life insurance premiums
$
126

 
$
129

Accident and health insurance premiums
23

 
21

Interest-sensitive life insurance contract charges
179

 
192

Subtotal
328

 
342

 
 
 
 
Annuities
 

 
 

Immediate annuities with life contingencies premiums

 

Other fixed annuity contract charges
3

 
3

Subtotal
3

 
3

Premiums and contract charges (1)
$
331

 
$
345

____________
(1) 
Contract charges related to the cost of insurance totaled $125 million and $135 million for the first quarter of 2016 and 2015, respectively.

33



Premiums and contract charges decreased 4.1% or $14 million in the first quarter of 2016 compared to the first quarter of 2015. The decrease was primarily due to lower interest-sensitive life insurance contract charges related to the reinsurance agreement with AAC effective April 1, 2015.
Contractholder funds represent interest-bearing liabilities arising from the sale of products such as interest-sensitive life insurance, fixed annuities and funding agreements. The balance of contractholder funds is equal to the cumulative deposits received and interest credited to the contractholder less cumulative contract benefits, surrenders, withdrawals, maturities and contract charges for mortality or administrative expenses. The following table shows the changes in contractholder funds.
($ in millions)
Three months ended March 31,
 
2016
 
2015
Contractholder funds, beginning balance
$
20,542

 
$
21,816

 
 
 
 
Deposits
 

 
 

Interest-sensitive life insurance
205

 
222

Fixed annuities
44

 
51

Total deposits
249

 
273

 
 
 
 
Interest credited
177

 
192

 
 
 
 
Benefits, withdrawals, maturities and other adjustments
 

 
 

Benefits
(247
)
 
(269
)
Surrenders and partial withdrawals
(236
)
 
(301
)
Contract charges
(167
)
 
(181
)
Net transfers from separate accounts
1

 
1

Other adjustments (1)
10

 
7

Total benefits, withdrawals, maturities and other adjustments
(639
)
 
(743
)
 
 
 
 
Contractholder funds, ending balance
$
20,329

 
$
21,538

____________
(1) 
The table above illustrates the changes in contractholder funds, which are presented gross of reinsurance recoverables on the Condensed Consolidated Statements of Financial Position. The table above is intended to supplement our discussion and analysis of revenues, which are presented net of reinsurance on the Condensed Consolidated Statements of Operations and Comprehensive Income. As a result, the net change in contractholder funds associated with products reinsured is reflected as a component of the other adjustments line.
Contractholder funds decreased 1.0% in the first quarter of 2016 primarily due to the continued runoff of our deferred fixed annuity business.
Contractholder deposits decreased 8.8% in the first quarter of 2016 compared to the first quarter of 2015, primarily due to lower deposits on interest-sensitive life insurance resulting from the absence of deposits on the business reinsured to AAC effective April 1, 2015 and lower additional deposits on interest-sensitive life and fixed annuities.
Surrenders and partial withdrawals on deferred fixed annuities and interest-sensitive life insurance products decreased 21.6% to $236 million in the first quarter of 2016 from $301 million in the first quarter of 2015, due to a decrease in fixed annuities. The annualized surrender and partial withdrawal rate on deferred fixed annuities and interest-sensitive life insurance products, based on the beginning of year contractholder funds, was 5.8% in the first quarter of 2016 compared to 6.9% in the same period of 2015.
Analysis of costs and expenses Total costs and expenses decreased 8.9% or $60 million in the first quarter of 2016 compared to the first quarter of 2015, primarily due to lower operating costs and expenses, lower contract benefits and lower interest credited to contractholder funds.
Contract benefits decreased 5.6% or $20 million in the first quarter of 2016 compared to the first quarter of 2015, primarily due to favorable mortality experience and a decline related to the reinsurance agreement with AAC effective April 1, 2015.
In 2015, we initiated a mortality study for our structured settlement annuities with life contingencies (a type of immediate fixed annuities), which is expected to be completed in 2016. The study thus far indicates that annuitants may be living longer and receiving benefits for a longer period than originally estimated. The preliminary results of the study were considered in the premium deficiency and profits followed by losses evaluations as of March 31, 2016 and December 31, 2015. We anticipate that mortality and investment and reinvestment yields are the factors that would be most likely to require premium deficiency adjustments.
We analyze our mortality and morbidity results using the difference between premiums and contract charges earned for the cost of insurance and contract benefits excluding the portion related to the implied interest on immediate annuities with life contingencies (“benefit spread”). This implied interest totaled $128 million and $129 million in the first quarter of 2016 and 2015, respectively.

34



The benefit spread by product group is disclosed in the following table.
($ in millions)
Three months ended March 31,
 
2016
 
2015
Life insurance
$
70

 
$
65

Accident and health insurance
11

 
12

Annuities
(17
)
 
(21
)
Total benefit spread
$
64

 
$
56

Benefit spread increased 14.3% or $8 million in the first quarter of 2016 compared to the same period of 2015. The increase was primarily due to favorable mortality experience, partially offset by a decline related to the reinsurance agreement with AAC effective April 1, 2015.
Interest credited to contractholder funds decreased 6.8% or $13 million in the first quarter of 2016 compared to the same period of 2015, primarily due to lower average contractholder funds and a decline related to the reinsurance agreement with AAC effective April 1, 2015. Valuation changes on derivatives embedded in equity-indexed annuity contracts that are not hedged increased interest credited to contractholder funds by $6 million in first quarter 2016 compared to $7 million in first quarter 2015.
In order to analyze the impact of net investment income and interest credited to contractholders on net income, we monitor the difference between net investment income and the sum of interest credited to contractholder funds and the implied interest on immediate annuities with life contingencies, which is included as a component of contract benefits on the Condensed Consolidated Statements of Operations and Comprehensive Income (“investment spread”).
The investment spread by product group is shown in the following table.
($ in millions)
Three months ended March 31,
 
2016
 
2015
Annuities and institutional products
$
16

 
$
69

Life insurance
35

 
35

Accident and health insurance
1

 
1

Net investment income on investments supporting capital
48

 
53

Investment spread before valuation changes on embedded derivatives that are not hedged
100

 
158

Valuation changes on derivatives embedded in equity-indexed annuity contracts that are not hedged
(6
)
 
(7
)
Total investment spread
$
94

 
$
151

Investment spread before valuation changes on embedded derivatives that are not hedged decreased 36.7% or $58 million in the first quarter of 2016 compared to the same period of 2015, primarily due to lower net investment income, partially offset by lower credited interest.
To further analyze investment spreads, the following table summarizes the weighted average investment yield on assets supporting product liabilities and capital, interest crediting rates and investment spreads. Investment spreads may vary significantly between periods due to the variability in investment income, particularly for immediate fixed annuities where the investment portfolio includes limited partnerships.
 
Three months ended March 31,
 
Weighted average
investment yield
 
Weighted average
interest crediting rate
 
Weighted average
investment spreads
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Interest-sensitive life insurance
5.3
%
 
5.4
%
 
3.9
%
 
3.9
%
 
1.4
%
 
1.5
%
Deferred fixed annuities and institutional products
4.0

 
4.3

 
2.8

 
2.8

 
1.2

 
1.5

Immediate fixed annuities with and without life contingencies
6.0

 
7.3

 
5.9

 
5.9

 
0.1

 
1.4

Investments supporting capital, traditional life and other products
3.9

 
4.4

 
n/a

 
n/a

 
n/a

 
n/a





35



The following table summarizes our product liabilities and indicates the account value of those contracts and policies for which an investment spread is generated.
($ in millions)
March 31,
 
2016
 
2015
Immediate fixed annuities with life contingencies
$
8,683

 
$
8,772

Other life contingent contracts and other
2,676

 
2,726

Reserve for life-contingent contract benefits
$
11,359

 
$
11,498

 
 
 
 
Interest-sensitive life insurance
$
7,269

 
$
7,209

Deferred fixed annuities
9,518

 
10,572

Immediate fixed annuities without life contingencies
3,179

 
3,400

Institutional products
85

 
85

Other
278

 
272

Contractholder funds
$
20,329

 
$
21,538

Amortization of DAC The components of amortization of DAC are summarized in the following table.
($ in millions)
Three months ended March 31,
 
2016
 
2015
Amortization of DAC before amortization relating to realized capital gains and losses, valuation changes on embedded derivatives that are not hedged and changes in assumptions
$
36

 
$
39

Amortization relating to realized capital gains and losses (1) and valuation changes on embedded derivatives that are not hedged
1

 
1

Amortization acceleration (deceleration) for changes in assumptions (“DAC unlocking”)

 

Total amortization of DAC
$
37

 
$
40

_____________
 
(1) 
The impact of realized capital gains and losses on amortization of DAC is dependent upon the relationship between the assets that give rise to the gain or loss and the product liability supported by the assets. Fluctuations result from changes in the impact of realized capital gains and losses on actual and expected gross profits.
Amortization of DAC decreased 7.5% or $3 million in the first quarter of 2016 compared to the same period of 2015.
Operating costs and expenses decreased 30.0% or $24 million in the first quarter of 2016 compared to the same period of 2015. The following table summarizes operating costs and expenses.
($ in millions)
Three months ended March 31,
 
2016
 
2015
Non-deferrable commissions
$
7

 
$
4

General and administrative expenses
41

 
68

Taxes and licenses
8

 
8

Total operating costs and expenses
$
56

 
$
80

General and administrative expenses decreased 39.7% or $27 million in the first quarter of 2016 compared to the first quarter of 2015, primarily due to lower employee related and other operating costs as a result of the decline in new and inforce business.
In April 2016, the U.S. Department of Labor issued a regulation that will expand the range of activities that would be considered to be “investment advice” and establish a new framework for determining whether a person is a fiduciary when mutual funds, variable and indexed annuities, or variable life are sold in connection with an Individual Retirement Account or an employee benefit plan covered under the Employee Retirement Income Security Act of 1974, as amended. ALIC does not currently sell proprietary annuities or proprietary variable life sold in connection with Individual Retirement Accounts or covered under the Employee Retirement Income Security Act of 1974. Products that we previously offered and continue to have in force, such as indexed annuities, could be impacted by the regulation. Compliance with the regulation may add costs and may impact producer compensation and processes. The impact is under review. The rule becomes effective on June 7, 2016 and compliance of certain components of the rule is required by April 10, 2017 and full compliance is required by January 1, 2018.
Income tax expense in first quarter 2015 included $17 million related to our adoption of new accounting guidance for investments in qualified affordable housing projects.

36



INVESTMENTS
Portfolio composition The composition of the investment portfolio as of March 31, 2016 is presented in the following table.
($ in millions)
 
 
Percent to total
Fixed income securities (1)
$
24,443

 
69.0
%
Mortgage loans
3,749

 
10.6

Equity securities (2)
1,344

 
3.8

Limited partnership interests (3)
2,405

 
6.8

Short-term investments (4)
1,545

 
4.3

Policy loans
566

 
1.6

Other
1,397

 
3.9

Total
$
35,449

 
100.0
%
__________
(1) 
Fixed income securities are carried at fair value. Amortized cost basis for these securities was $23.14 billion.
(2) 
Equity securities are carried at fair value. Cost basis for these securities was $1.33 billion.
(3) 
We have commitments to invest in additional limited partnership interests totaling $1.32 billion.
(4) 
Short-term investments are carried at fair value. Amortized cost basis for these investments was $1.55 billion.
Investments totaled $35.45 billion as of March 31, 2016, increasing from $34.96 billion as of December 31, 2015, primarily due to higher fixed income valuations resulting from a decrease in risk-free interest rates.
Portfolio composition by investment strategy
We utilize four high level strategies to manage risks and returns and to position our portfolio to take advantage of market opportunities while attempting to mitigate adverse effects. As strategies and market conditions evolve, the asset allocation may change or assets may move between strategies.
Market-Based Core strategy seeks to deliver predictive earnings aligned to business needs through investments primarily in public fixed income and equity securities. Private fixed income assets, such as commercial mortgages, bank loans and privately placed debt are also included in this category. As of March 31, 2016, 90% of the portfolio follows this strategy with 86% in fixed income securities and mortgage loans and 4% in equity securities.
Market-Based Active strategy seeks to outperform within the public markets through tactical positioning and by taking advantage of short-term opportunities. This strategy may generate results that meaningfully deviate from those achieved by market indices, both favorably and unfavorably. The portfolio primarily includes public fixed income and equity securities. As of March 31, 2016, 3% of the portfolio follows this strategy with 71% in fixed income securities and 13% in equity securities.
Performance-Based Long-Term (“PBLT”) strategy seeks to deliver attractive risk-adjusted returns over a longer horizon. The achieved return is a function of both general market conditions and the performance of the underlying assets or businesses. The portfolio, which primarily includes private equity, real estate, infrastructure, timber and agriculture-related assets, is diversified across a number of characteristics, including managers or partners, vintage years, strategies, geographies (including international) and industry sectors or property types. These investments are generally illiquid in nature, often require specialized expertise, typically involve a third party manager, and may offer the potential to add value through transformation at the company or property level. As of March 31, 2016, 7% of the portfolio follows this strategy with 93% in limited partnership interests.
Performance-Based Opportunistic strategy seeks to earn attractive returns by making investments that involve asset dislocations or special situations, often in private markets. The portfolio primarily includes distressed and event driven assets primarily in fixed income and equity securities.










37



The following table presents the investment portfolio by strategy as of March 31, 2016.
($ in millions)
Total
 
Market-Based Core
 
Market-Based Active
 
Performance-Based
Long-Term
 
Performance-Based Opportunistic
Fixed income securities
$
24,443

 
$
23,676

 
$
745

 
$
6

 
$
16

Equity securities
1,344

 
1,169

 
139

 
28

 
8

Mortgage loans
3,749

 
3,749

 

 

 

Limited partnership interests
2,405

 
122

 

 
2,283

 

Short-term investments
1,545

 
1,387

 
158

 

 

Policy loans
566

 
566

 

 

 

Other
1,397

 
1,253

 
4

 
135

 
5

Total
$
35,449

 
$
31,922

 
$
1,046

 
$
2,452

 
$
29

% of total
 
 
90
%
 
3
%
 
7
%
 
%
Fixed income securities by type are listed in the following table. 
($ in millions) 
Fair value as of March 31, 2016
 
Percent to
total
investments
 
Fair value as of December 31, 2015
 
Percent to
total
investments
U.S. government and agencies
$
924

 
2.6
%
 
$
977

 
2.8
%
Municipal
2,471

 
7.0

 
2,442

 
7.0

Corporate
18,411

 
51.9

 
18,504

 
52.9

Foreign government
379

 
1.1

 
384

 
1.1

Asset-backed securities (“ABS”)
1,411

 
4.0

 
1,420

 
4.1

Residential mortgage-backed securities (“RMBS”)
415

 
1.2

 
451

 
1.3

Commercial mortgage-backed securities (“CMBS”)
417

 
1.2

 
436

 
1.3

Redeemable preferred stock
15

 

 
15

 

Total fixed income securities
$
24,443

 
69.0
%
 
$
24,629

 
70.5
%
As of March 31, 2016, 86.7% of the fixed income securities portfolio was rated investment grade, which is defined as a security having a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A or BBB from Standard & 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. Credit ratings below these designations are considered low credit quality or below investment grade, which includes high yield bonds. Fixed income securities are rated by third party credit rating agencies, the National Association of Insurance Commissioners (“NAIC”), and/or are internally rated. Market prices for certain securities may have credit spreads which imply higher or lower credit quality than the current third party rating. Our initial investment decisions and ongoing monitoring procedures for fixed income securities are based on a thorough due diligence process which includes, but is not limited to, an assessment of the credit quality, sector, structure, and liquidity risks of each issue.
  














38



The following table summarizes the fair value and unrealized net capital gains and losses for fixed income securities by investment grade and below investment grade classifications as of March 31, 2016
($ in millions)
Investment grade
 
Below investment grade
 
Total
 
Fair
value
 
Unrealized
gain/(loss)
 
Fair
value
 
Unrealized
gain/(loss)
 
Fair
value
 
Unrealized
gain/(loss)
U.S. government and agencies
$
924

 
$
68

 
$

 
$

 
$
924

 
$
68

Municipal
2,424

 
333

 
47

 

 
2,471

 
333

Corporate
 
 
 
 
 
 
 
 
 

 
 

Public
10,682

 
588

 
1,803

 
(46
)
 
12,485

 
542

Privately placed
5,086

 
320

 
840

 
(32
)
 
5,926

 
288

Foreign government
373

 
41

 
6

 

 
379

 
41

ABS
 
 
 
 
 
 
 
 
 

 
 

Collateralized debt obligations (“CDO”)
168

 
(12
)
 
39

 
(12
)
 
207

 
(24
)
Consumer and other asset-backed securities (“Consumer and other ABS”)
1,198

 
3

 
6

 

 
1,204

 
3

RMBS
 
 
 
 
 
 
 
 
 

 
 

U.S. government sponsored entities (“U.S. Agency”)
83

 
6

 

 

 
83

 
6

Non-agency
35

 
(1
)
 
297

 
31

 
332

 
30

CMBS
193

 
3

 
224

 
16

 
417

 
19

Redeemable preferred stock
15

 
2

 

 

 
15

 
2

Total fixed income securities
$
21,181

 
$
1,351

 
$
3,262

 
$
(43
)
 
$
24,443

 
$
1,308

Municipal bonds totaled $2.47 billion as of March 31, 2016 with an unrealized net capital gain of $333 million. The municipal bond portfolio includes general obligations of state and local issuers and revenue bonds (including pre-refunded bonds, which are bonds for which an irrevocable trust has been established to fund the remaining payments of principal and interest).
Corporate bonds, including publicly traded and privately placed, totaled $18.41 billion as of March 31, 2016, with an unrealized net capital gain of $830 million. Privately placed securities primarily consist of corporate issued senior debt securities that are directly negotiated with the borrower or are in unregistered form.
ABS, including CDO and Consumer and other ABS, totaled $1.41 billion as of March 31, 2016, with 96.8% rated investment grade and an unrealized net capital loss of $21 million. Credit risk is managed by monitoring the performance of the underlying collateral. Many of the securities in the ABS portfolio have credit enhancement with features such as overcollateralization, subordinated structures, reserve funds, guarantees and/or insurance.
CDO totaled $207 million as of March 31, 2016, with 81.2% rated investment grade and an unrealized net capital loss of $24 million. CDO consist of obligations collateralized by cash flow CDO, which are structures collateralized primarily by below investment grade senior secured corporate loans.
Consumer and other ABS totaled $1.20 billion as of March 31, 2016, with 99.5% rated investment grade and an unrealized net capital gain of $3 million.
RMBS totaled $415 million as of March 31, 2016, with 28.4% rated investment grade and an unrealized net capital gain of $36 million. The RMBS portfolio is subject to interest rate risk, but unlike other fixed income securities, is additionally subject to prepayment risk from the underlying residential mortgage loans. RMBS consists of a U.S. Agency portfolio having collateral issued or guaranteed by U.S. government agencies and a non-agency portfolio consisting of securities collateralized by Prime, Alt-A and Subprime loans. The non-agency portfolio totaled $332 million as of March 31, 2016, with 10.5% rated investment grade and an unrealized net capital gain of $30 million.
CMBS totaled $417 million as of March 31, 2016, with 46.3% rated investment grade and an unrealized net capital gain of $19 million. The CMBS portfolio is subject to credit risk and has a sequential paydown structure. All of the CMBS investments are traditional conduit transactions collateralized by commercial mortgage loans, broadly diversified across property types and geographical area.
Mortgage loans totaled $3.75 billion as of March 31, 2016 and primarily comprise loans secured by first mortgages on developed commercial real estate. Key considerations used to manage our exposure include property type and geographic diversification. For further detail on our mortgage loan portfolio, see Note 3 of the condensed consolidated financial statements.


39



Equity securities primarily include common stocks, exchange traded and mutual funds, non-redeemable preferred stocks and real estate investment trust equity investments. The equity securities portfolio was $1.34 billion as of March 31, 2016, with an unrealized net capital gain of $14 million.
Limited partnership interests include interests in private equity funds and co-investments, real estate funds and joint ventures, and other funds. The following table presents carrying value and other information about our limited partnership interests as of March 31, 2016.
($ in millions)
Private equity
 
Real estate
 
Other
 
Total
Cost method of accounting (“Cost”)
$
482

 
$
67

 
$

 
$
549

Equity method of accounting (“EMA”)
1,363

 
371

 
122

 
1,856

Total
$
1,845

 
$
438

 
$
122

 
$
2,405

 
 
 
 
 
 
 
 
Number of managers
110

 
23

 
2

 
135

Number of individual investments
195

 
48

 
2

 
245

Largest exposure to single investments
$
122

 
$
56

 
$
61

 
$
122

Unrealized net capital gains totaled $1.33 billion as of March 31, 2016 compared to $883 million as of December 31, 2015.  The increase was primarily due to a decrease in risk-free interest rates.
The following table presents unrealized net capital gains and losses.
($ in millions)
March 31, 2016
 
December 31, 2015
U.S. government and agencies
$
68

 
$
57

Municipal
333

 
280

Corporate
830

 
435

Foreign government
41

 
36

ABS
(21
)
 
(23
)
RMBS
36

 
45

CMBS
19

 
27

Redeemable preferred stock
2

 
2

Fixed income securities
1,308

 
859

Equity securities
14

 
16

Derivatives
7

 
10

EMA limited partnerships
(3
)
 
(2
)
Unrealized net capital gains and losses, pre-tax
$
1,326

 
$
883

The unrealized net capital gain for the fixed income portfolio totaled $1.31 billion, comprised of $1.62 billion of gross unrealized gains and $308 million of gross unrealized losses as of March 31, 2016. This is compared to an unrealized net capital gain for the fixed income portfolio totaling $859 million, comprised of $1.32 billion of gross unrealized gains and $462 million of gross unrealized losses as of December 31, 2015.












40



Gross unrealized gains and losses on fixed income securities by type and sector as of March 31, 2016 are provided in the following table.
($ in millions)
Amortized
cost
 
Gross unrealized
 
Fair
value
 
 
Gains
 
Losses
 
Corporate (1): 
 

 
 

 
 

 
 

Energy
$
1,360

 
$
38

 
$
(97
)
 
$
1,301

Banking
987

 
31

 
(46
)
 
972

Basic industry
877

 
34

 
(25
)
 
886

Consumer goods (cyclical and non-cyclical)
4,774

 
265

 
(22
)
 
5,017

Utilities
3,240

 
350

 
(21
)
 
3,569

Communications
1,453

 
78

 
(15
)
 
1,516

Transportation
935

 
73

 
(13
)
 
995

Financial services
951

 
71

 
(7
)
 
1,015

Capital goods
1,695

 
102

 
(6
)
 
1,791

Technology
963

 
33

 
(6
)
 
990

Other
346

 
16

 
(3
)
 
359

Total corporate fixed income portfolio
17,581

 
1,091

 
(261
)
 
18,411

U.S. government and agencies
856

 
68

 

 
924

Municipal
2,138

 
342

 
(9
)
 
2,471

Foreign government
338

 
41

 

 
379

ABS
1,432

 
5

 
(26
)
 
1,411

RMBS
379

 
41

 
(5
)
 
415

CMBS
398

 
26

 
(7
)
 
417

Redeemable preferred stock
13

 
2

 

 
15

Total fixed income securities
$
23,135

 
$
1,616

 
$
(308
)
 
$
24,443

__________
(1) 
Beginning in 2016, we are reporting sector data based on the direct issuer as opposed to the ultimate parent of the issuer for corporate fixed income and equity securities. The change resulted in certain revisions in sector classifications.
The consumer goods, utilities, capital goods and communications sectors comprise 27%, 19%, 10% and 8%, respectively, of the carrying value of our corporate fixed income securities portfolio as of March 31, 2016. The energy, banking, basic industry, consumer goods and utilities sectors had the highest concentration of gross unrealized losses in our corporate fixed income securities portfolio as of March 31, 2016. In general, the gross unrealized losses are 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.
Global oil prices and natural gas and other commodity values have declined significantly since 2014 and remain volatile. Among commodity exposed companies, those in the metal and mining sectors have experienced the largest decline in values of their debt. In the fixed income and equity securities tables above and below, oil and natural gas exposure is reflected within the energy sector and metals and mining exposure is reflected within the basic industry sector. Within these sectors, we continue to monitor the impact to our investment portfolio for those companies that may be adversely affected, both directly and indirectly. If oil, natural gas and commodity prices remain at depressed levels for an extended period or decline further, certain issuers and investments may come under duress and result in increased other-than-temporary impairments and unrealized losses in these parts of our investment portfolio.
We reduced our corporate fixed income and equity securities that have direct exposure to the energy sector by $610 million of fair value to $1.37 billion. Securities that have direct exposure to the energy sector are presented in the following table.
($ in millions)
March 31, 2016
 
December 31, 2015
 
Fair value (1)
 
Amortized cost or Cost
 
Fair value
 
Amortized cost or Cost
Fixed income securities
$
1,301

 
$
1,360

 
$
1,908

 
$
2,015

Equity securities
70

 
76

 
73

 
83

Total (2)
$
1,371

 
$
1,436

 
$
1,981

 
$
2,098

_______________
(1) 
78% of the corporate fixed income securities with direct exposure to the energy sector were investment grade as of March 31, 2016, compared to 85% as of December 31, 2015.
(2) 
In addition, private equity limited partnership interests with exposure to energy totaled approximately $170 million as of March 31, 2016.



41



Securities with gross unrealized losses that have direct exposure to the energy sector and metals and mining sectors are presented in the following table.
($ in millions)
March 31, 2016
 
December 31, 2015
 
Fair value
 
Gross unrealized losses (1)
 
Fair value
 
Gross unrealized losses
Securities that have direct exposure to the energy sector:
 
 
 
 
 
 
 
Fixed income securities
$
711

 
$
(97
)
 
$
1,126

 
$
(151
)
Equity securities
45

 
(8
)
 
57

 
(12
)
Total
$
756

 
$
(105
)
 
$
1,183

 
$
(163
)
 
 
 
 
 
 
 
 
Securities that have direct exposure to the metals and mining sectors: (2)
 
 
 
 
Fixed income securities
$
109

 
$
(20
)
 
$
181

 
$
(53
)
Equity securities
4

 

 
6

 
(2
)
Total
$
113

 
$
(20
)
 
$
187

 
$
(55
)
_______________
(1) 
Gross unrealized losses on below investment grade corporate fixed income securities with direct exposure to the energy sector totaled $56 million of which $31 million relate to securities that had been in an unrealized loss position for a period of twelve or more consecutive months as of March 31, 2016.
(2) 
Metals and mining exposure is reflected within the basic industry sector. The total fair value of fixed income and equity securities with direct exposure to the metals and mining sectors was $173 million as of March 31, 2016, a decrease from $234 million as of December 31, 2015.
The following table summarizes the fair value and gross unrealized losses of fixed income securities by type and investment grade classification as of March 31, 2016.
($ in millions)
Investment grade
 
Below investment grade
 
Total
 
Fair
value
 
Gross unrealized losses
 
Fair
value
 
Gross unrealized losses
 
Fair
value
 
Gross unrealized losses
Corporate:
 
 
 
 
 
 
 
 
 
 
 
Energy
$
458

 
$
(41
)
 
$
253

 
$
(56
)
 
$
711

 
$
(97
)
Banking
169

 
(38
)
 
35

 
(8
)
 
204

 
(46
)
Basic industry
160

 
(8
)
 
131

 
(17
)
 
291

 
(25
)
Consumer goods (cyclical and non-cyclical)
227

 
(3
)
 
238

 
(19
)
 
465

 
(22
)
Utilities
171

 
(13
)
 
90

 
(8
)
 
261

 
(21
)
Communications
42

 
(1
)
 
153

 
(14
)
 
195

 
(15
)
Transportation
112

 
(11
)
 
20

 
(2
)
 
132

 
(13
)
Financial services
29

 
(4
)
 
73

 
(3
)
 
102

 
(7
)
Capital goods
176

 
(2
)
 
74

 
(4
)
 
250

 
(6
)
Technology
47

 
(4
)
 
46

 
(2
)
 
93

 
(6
)
Other
13

 
(3
)
 
10

 

 
23

 
(3
)
Total corporate fixed income portfolio
1,604

 
(128
)
 
1,123

 
(133
)
 
2,727

 
(261
)
U.S. government and agencies
231

 

 

 

 
231

 

Municipal
35

 
(1
)
 
20

 
(8
)
 
55

 
(9
)
ABS
615

 
(14
)
 
39

 
(12
)
 
654

 
(26
)
RMBS
15

 
(1
)
 
61

 
(4
)
 
76

 
(5
)
CMBS
39

 
(1
)
 
83

 
(6
)
 
122

 
(7
)
Total fixed income securities
$
2,539

 
$
(145
)
 
$
1,326

 
$
(163
)
 
$
3,865

 
$
(308
)








42



The following table summarizes the fair value and gross unrealized losses for below investment grade corporate fixed income securities by sector and credit rating as of March 31, 2016.
($ in millions)
Less than 12 months
 
Ba
 
B
 
Caa or lower
 
Total
 
Fair value
 
Gross unrealized losses
 
Fair value
 
Gross unrealized losses
 
Fair value
 
Gross unrealized losses
 
Fair value
 
Gross unrealized losses
Corporate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
116

 
$
(8
)
 
$
43

 
$
(12
)
 
$
5

 
$
(5
)
 
$
164

 
$
(25
)
Banking
2

 

 

 

 

 

 
2

 

Basic industry
91

 
(4
)
 
22

 
(9
)
 
3

 

 
116

 
(13
)
Consumer goods (cyclical and non-cyclical)
86

 
(4
)
 
93

 
(5
)
 
2

 

 
181

 
(9
)
Utilities
34

 
(1
)
 
27

 
(2
)
 
7

 
(1
)
 
68

 
(4
)
Communications
76

 
(4
)
 
36

 
(1
)
 
13

 
(2
)
 
125

 
(7
)
Transportation
5

 

 
15

 
(2
)
 

 

 
20

 
(2
)
Financial services
64

 
(1
)
 
1

 

 
4

 
(1
)
 
69

 
(2
)
Capital goods
35

 
(1
)
 
30

 
(1
)
 
7

 
(1
)
 
72

 
(3
)
Technology
15

 
(2
)
 
24

 

 
2

 

 
41

 
(2
)
   Other

 

 
10

 

 

 

 
10

 

Subtotal
$
524

 
$
(25
)
 
$
301

 
$
(32
)
 
$
43

 
$
(10
)
 
$
868

 
$
(67
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12 months or more
 
Ba
 
B
 
Caa or lower
 
Total
 
Fair value
 
Gross unrealized losses
 
Fair value
 
Gross unrealized losses
 
Fair value
 
Gross unrealized losses
 
Fair value
 
Gross unrealized losses
Corporate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
$
61

 
$
(13
)
 
$
10

 
$
(7
)
 
$
18

 
$
(11
)
 
$
89

 
$
(31
)
Banking
33

 
(8
)
 

 

 

 

 
33

 
(8
)
Basic industry
12

 
(2
)
 
3

 
(2
)
 

 

 
15

 
(4
)
Consumer goods (cyclical and non-cyclical)
19

 
(5
)
 
37

 
(5
)
 
1

 

 
57

 
(10
)
Utilities
8

 
(2
)
 
1

 
(1
)
 
13

 
(1
)
 
22

 
(4
)
Communications
7

 

 
17

 
(4
)
 
4

 
(3
)
 
28

 
(7
)
Financial services
4

 
(1
)
 

 

 

 

 
4

 
(1
)
Capital goods

 

 
2

 
(1
)
 

 

 
2

 
(1
)
Technology
5

 

 

 

 

 

 
5

 

Subtotal
$
149

 
$
(31
)
 
$
70

 
$
(20
)
 
$
36

 
$
(15
)
 
$
255

 
$
(66
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
673

 
$
(56
)
 
$
371

 
$
(52
)
 
$
79

 
$
(25
)
 
$
1,123

 
$
(133
)
Of the unrealized losses on below investment grade corporate fixed income securities, 49.6% or $66 million relate to securities that had been in an unrealized loss position for a period of twelve or more consecutive months as of March 31, 2016. Unrealized losses were concentrated in the energy, banking and basic industry sectors.
The unrealized net capital gain for the equity portfolio totaled $14 million, comprised of $78 million of gross unrealized gains and $64 million of gross unrealized losses as of March 31, 2016. This is compared to an unrealized net capital gain for the equity portfolio totaling $16 million, comprised of $76 million of gross unrealized gains and $60 million of gross unrealized losses as of December 31, 2015.







43



Gross unrealized gains and losses on equity securities by sector as of March 31, 2016 are provided in the table below.
($ in millions)
Cost
 
Gross unrealized
 
Fair value
 
 
Gains
 
Losses
 
Consumer goods (cyclical and non-cyclical)
$
364

 
$
27

 
$
(16
)
 
$
375

Banking
109

 

 
(15
)
 
94

Energy
76

 
2

 
(8
)
 
70

Financial services
76

 
4

 
(5
)
 
75

Technology
131

 
12

 
(5
)
 
138

Communications
73

 
6

 
(3
)
 
76

Capital goods
110

 
9

 
(2
)
 
117

Basic industry
40

 
4

 
(2
)
 
42

Transportation
22

 
1

 
(2
)
 
21

Real estate
34

 
2

 
(1
)
 
35

Utilities
35

 
3

 
(1
)
 
37

Funds
260

 
8

 
(4
)
 
264

Total equity securities
$
1,330

 
$
78

 
$
(64
)
 
$
1,344

Within the equity portfolio, the unrealized losses were primarily concentrated in the consumer goods, banking and energy sectors. The unrealized losses were company and sector specific.
Net investment income The following table presents net investment income.
($ in millions)
Three months ended March 31,
 
2016
 
2015
Fixed income securities
$
270

 
$
334

Mortgage loans
47

 
49

Equity securities
7

 
5

Limited partnership interests
63

 
72

Short-term investments
2

 

Policy loans
8

 
9

Other
21

 
18

Investment income, before expense
418

 
487

Investment expense
(18
)
 
(16
)
Net investment income
$
400

 
$
471

Net investment income decreased 15.1% or $71 million in the first quarter of 2016 compared to the first quarter of 2015, primarily due to lower fixed income portfolio yields, lower average investment balances and lower limited partnership income. Net investment income in the first quarter of 2016 includes $2 million related to prepayment fee income compared to $7 million in the first quarter of 2015. Prepayment fee income may vary significantly from period to period.














44



Realized capital gains and losses The following table presents the components of realized capital gains and losses and the related tax effect.
($ in millions)
Three months ended March 31,
 
2016
 
2015
Impairment write-downs
$
(24
)
 
$
(7
)
Change in intent write-downs
(3
)
 
(3
)
Net other-than-temporary impairment losses recognized in earnings
(27
)
 
(10
)
Sales and other
(14
)
 
117

Valuation and settlements of derivative instruments
(5
)
 
4

Realized capital gains and losses, pre-tax
(46
)
 
111

Income tax benefit (expense)
16

 
(39
)
Realized capital gains and losses, after-tax
$
(30
)
 
$
72

Impairment write-downs, which include changes in the mortgage loan valuation allowance, are presented in the following table.
($ in millions)
Three months ended March 31,
 
2016
 
2015
Fixed income securities
$
(10
)
 
$
(3
)
Equity securities
(22
)
 
(2
)
Limited partnership interests
9

 
(2
)
Other investments
(1
)
 

Impairment write-downs
$
(24
)
 
$
(7
)
Impairment write-downs on fixed income securities for the three months ended March 31, 2016 were primarily driven by corporate fixed income securities impacted by issuer specific circumstances, including exposure to oil and natural gas. Equity securities were written down primarily due to the length of time and extent to which fair value was below cost, considering our assessment of the financial condition and near-term and long-term prospects of the issuer, including relevant industry conditions and trends. Limited partnership write-downs in the three months ended March 31, 2016 included the recovery in value of a limited partnership that was previously written down. Impairment write-downs in the above table include $20 million of investments with exposure to the energy sector.
Change in intent write-downs totaled $3 million in the three months ended March 31, 2016 and primarily relate to $301 million of equity securities that we may not hold for a period of time sufficient to recover unrealized losses given our preference to maintain flexibility to reposition the portfolio. The decrease in these holdings from $492 million as of December 31, 2015 primarily relates to sales.
Sales and other generated $14 million of net realized capital losses in the three months ended March 31, 2016, including $43 million of losses on $781 million of sales to reduce our exposure to the energy and metals and mining sectors.
Valuation and settlements of derivative instruments generated net realized capital losses of $5 million for the three months ended March 31, 2016, primarily comprised of losses on foreign currency contracts due to the weakening U.S. Dollar.












45



Performance-based long-term investments primarily include private equity, real estate, infrastructure, timber and agriculture-related assets and are materially reflected through our limited partnership investments.
The following table presents investment income and realized capital gains and losses for PBLT investments for the three months ended March 31.
($ in millions)
Investment income
 
Realized capital gains and losses
 
2016
 
2015
 
2016
 
2015
Limited partnerships
 
 
 
 
 
 
 
   Private equity
$
52

 
$
39

 
$
9

 
$
4

   Real estate
10

 
34

 

 

   Timber and agriculture-related
1

 

 

 

        PBLT - limited partnerships (1)
63

 
73

 
9

 
4

 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
   Private equity

 

 
(13
)
 

   Real estate
3

 
1

 
1

 

   Timber and agriculture-related

 

 

 

        PBLT - other
3

 
1

 
(12
)
 

 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
   Private equity
52

 
39

 
(4
)
 
4

   Real estate
13

 
35

 
1

 

   Timber and agriculture-related
1

 

 

 

        Total PBLT
$
66

 
$
74

 
$
(3
)
 
$
4

 
 
 
 
 
 
 
 
Asset level operating expenses (2)
$
(3
)
 
$
(1
)
 
 
 
 
______________________________
(1) 
Other limited partnership interests are located in the market-based core investing strategy and are not included in the performance-based long-term table above. Investment income was zero and $(1) million and realized capital gains and losses were $4 million and zero in the first quarter of 2016 and 2015, respectively, for these limited partnership interests.
(2) 
When calculating the pre-tax yields, asset level operating expenses are netted against income for directly held real estate, timber and other consolidated investments.
PBLT investments produced investment income of $66 million in the first quarter of 2016 compared to $74 million in the first quarter of 2015. The decrease was primarily due to a decrease in income from real estate investments as a result of lower appreciation.
Realized capital losses on PBLT investments in the first quarter of 2016 were $3 million compared to realized capital gains of $4 million in the first quarter of 2015. The first quarter of 2016 included an impairment loss on an equity investment with exposure to the energy sector, partially offset by the recovery in value of a limited partnership that was previously written-down.
Economic conditions and equity market performance are reflected in PBLT investment results, and we continue to expect this income to vary significantly between periods.



46



CAPITAL RESOURCES AND LIQUIDITY
Capital resources consist of shareholder’s equity and notes due to related parties, representing funds deployed or available to be deployed to support business operations or for general corporate purposes. The following table summarizes our capital resources.
($ in millions)
March 31, 2016
 
December 31, 2015
Common stock, retained income and additional capital paid-in
$
5,464

 
$
5,412

Accumulated other comprehensive income
760

 
521

Total shareholder’s equity
6,224

 
5,933

Notes due to related parties
275

 
275

Total capital resources
$
6,499

 
$
6,208

Shareholder’s equity increased in the first quarter of 2016, primarily due to increased unrealized net capital gains on investments and net income.
Financial ratings and strength Our ratings are influenced by many factors including our operating and financial performance, asset quality, liquidity, asset/liability management, overall portfolio mix, financial leverage (i.e., debt), exposure to risks, the current level of operating leverage and AIC’s ratings. In April 2016, A.M. Best affirmed our insurance financial strength rating of A+ and the outlook for the rating remained stable. There have been no changes to our ratings from S&P or Moody’s since December 31, 2015.
The Company, AIC, AAC and the Corporation are party to an Amended and Restated Intercompany Liquidity Agreement (“Liquidity Agreement”) which allows for short-term advances of funds to be made between parties for liquidity and other general corporate purposes. The Liquidity Agreement does not establish a commitment to advance funds on the part of any party. The Company and AIC each serve as a lender and borrower, AAC serves only as a borrower, and the Corporation serves only as a lender. The Company also has a capital support agreement with AIC. Under the capital support agreement, AIC is committed to provide capital to the Company to maintain an adequate capital level. The maximum amount of potential funding under each of these agreements is $1.00 billion.
In addition to the Liquidity Agreement, the Company also has an intercompany loan agreement with the Corporation. The amount of intercompany loans available to the Company is at the discretion of the Corporation. The maximum amount of loans the Corporation will have outstanding to all its eligible subsidiaries at any given point in time is limited to $1.00 billion. The Corporation may use commercial paper borrowings, bank lines of credit and securities lending to fund intercompany borrowings.
Liquidity sources and uses We actively manage our financial position and liquidity levels in light of changing market, economic, and business conditions. Liquidity is managed at both the entity and enterprise level across the Company, and is assessed on both base and stressed level liquidity needs. We believe we have sufficient liquidity to meet these needs. Additionally, we have existing intercompany agreements in place that facilitate liquidity management across the Company to enhance flexibility.
Allstate parent company capital capacity At the parent holding company level, the Corporation has deployable assets totaling $2.93 billion as of March 31, 2016 comprising cash and investments that are generally saleable within one quarter. This provides funds for the parent company’s fixed charges and other corporate purposes.
The Company has access to additional borrowing to support liquidity through the Corporation as follows. The amount available to the Company is at the discretion of the Corporation.
A commercial paper facility with a borrowing limit of $1.00 billion to cover short-term cash needs. As of March 31, 2016, there were no balances outstanding and therefore the remaining borrowing capacity was $1.00 billion; however, the outstanding balance can fluctuate daily.
A $1.00 billion unsecured revolving credit facility that is available for short-term liquidity requirements. In April 2016, the Corporation extended the maturity date of this facility to April 2021. The facility is fully subscribed among 11 lenders with the largest commitment being $115 million. The commitments of the lenders are several and no lender is responsible for any other lender’s commitment if such lender fails to make a loan under the facility. This facility contains an increase provision that would allow up to an additional $500 million of borrowing. This facility has a financial covenant requiring that the Corporation not exceed a 37.5% debt to capitalization ratio as defined in the agreement. This ratio was 12.1% as of March 31, 2016. Although the right to borrow under the facility is not subject to a minimum rating requirement, the costs of maintaining the facility and borrowing under it are based on the ratings of the Corporation’s senior unsecured, unguaranteed long-term debt. There were no borrowings under the credit facility during the first quarter of 2016.
A universal shelf registration statement that was filed by the Corporation with the Securities and Exchange Commission on April 30, 2015. The Corporation can use this shelf registration to issue an unspecified amount of debt securities, common

47



stock (including 525 million shares of treasury stock as of March 31, 2016), preferred stock, depositary shares, warrants, stock purchase contracts, stock purchase units and securities of trust subsidiaries. The specific terms of any securities the Corporation issues under this registration statement will be provided in the applicable prospectus supplements.
Liquidity exposure Contractholder funds were $20.33 billion as of March 31, 2016. The following table summarizes contractholder funds by their contractual withdrawal provisions as of March 31, 2016.
($ in millions) 
 
 
Percent
to total
Not subject to discretionary withdrawal
$
3,317

 
16.3
%
Subject to discretionary withdrawal with adjustments:
 
 
 
Specified surrender charges (1)
5,415

 
26.6

Market value adjustments (2)
1,843

 
9.1

Subject to discretionary withdrawal without adjustments (3)
9,754

 
48.0

Total contractholder funds (4)
$
20,329

 
100.0
%
 
____________
(1) 
Includes $1.79 billion of liabilities with a contractual surrender charge of less than 5% of the account balance.
(2) 
$1.23 billion of the contracts with market value adjusted surrenders have a 30-45 day period at the end of their initial and subsequent interest rate guarantee periods (which are typically 5, 7 or 10 years) during which there is no surrender charge or market value adjustment.
(3) 
88% of these contracts have a minimum interest crediting rate guarantee of 3% or higher.
(4) 
Includes $824 million of contractholder funds on variable annuities reinsured to The Prudential Insurance Company of America, a subsidiary of Prudential Financial Inc., in 2006.
Retail life and annuity products may be surrendered by customers for a variety of reasons. Reasons unique to individual customers include a current or unexpected need for cash or a change in life insurance coverage needs. Other key factors that may impact the likelihood of customer surrender include the level of the contract surrender charge, the length of time the contract has been in force, distribution channel, market interest rates, equity market conditions and potential tax implications. In addition, the propensity for retail life insurance policies to lapse is lower than it is for fixed annuities because of the need for the insured to be re-underwritten upon policy replacement. The annualized surrender and partial withdrawal rate on deferred fixed annuities and interest-sensitive life insurance products, based on the beginning of year contractholder funds, was 5.8% and 6.9% in the first three months of 2016 and 2015, respectively. We strive to promptly pay customers who request cash surrenders; however, statutory regulations generally provide up to six months in most states to fulfill surrender requests.
Our asset-liability management practices enable us to manage the differences between the cash flows generated by our investment portfolio and the expected cash flow requirements of our life insurance and annuity product obligations.
Cash flows As reflected in our Condensed Consolidated Statements of Cash Flows, higher cash provided by operating activities in the first three months of 2016 compared to the first three months of 2015 was primarily due to lower tax payments, partially offset by lower net investment income.
Lower cash provided by investing activities in the first three months of 2016 compared to the first three months of 2015 was the result of less cash used in financing activities due to decreased contractholder fund disbursements and lower tax payments.
Lower cash used in financing activities in the first three months of 2016 compared to the first three months of 2015 was primarily due to decreased contractholder benefits and withdrawals on fixed annuities.

48



Forward-Looking Statements
This report contains “forward-looking statements” that anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. These statements are made subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements do not relate strictly to historical or current facts and may be identified by their use of words like “plans,” “seeks,” “expects,” “will,” “should,” “anticipates,” “estimates,” “intends,” “believes,” “likely,” “targets” and other words with similar meanings. We believe these statements are based on reasonable estimates, assumptions and plans. However, if the estimates, assumptions or plans underlying the forward-looking statements prove inaccurate or if other risks or uncertainties arise, actual results could differ materially from those communicated in these forward-looking statements. Factors that could cause actual results to differ materially from those expressed in, or implied by, the forward-looking statements include risks related to: (1) changes in underwriting and actual experience; (2) changes in reserve estimates for life-contingent contract benefits payable; (3) the influence of changes in market interest rates on spread-based products; (4) changes in estimates of profitability on interest-sensitive life products; (5) reducing our concentration in spread-based business and exiting certain distribution channels; (6) changes in tax laws; (7) our ability to mitigate the capital impact associated with life insurance statutory reserving requirements; (8) operational issues relating to a decline in Lincoln Benefit Life Company’s financial strength ratings; (9) market risk and declines in credit quality relating to our investment portfolio; (10) our subjective determination of the fair value of our fixed income and equity securities and the amount of realized capital losses recorded for impairments of our investments; (11) competition in the insurance industry; (12) conditions in the global economy and capital markets; (13) losses from legal and regulatory actions; (14) restrictive regulation and regulatory reforms; (15) the availability of reinsurance at current levels and prices; (16) credit risk of our reinsurers; (17) a downgrade in our financial strength ratings; (18) the effect of adverse capital and credit market conditions; (19) failure in cyber or other information security; (20) the impact of a large scale pandemic, the threat or incurrence of terrorism or military action; (21) changes in accounting standards; (22) the realization of deferred tax assets; (23) loss of key vendor relationships or failure of a vendor to protect confidential and proprietary information; and (24) failure to protect intellectual property. Additional information concerning these and other factors may be found in our filings with the Securities and Exchange Commission, including the “Risk Factors” section in our most recent Annual Report on Form 10-K. Forward-looking statements speak only as of the date on which they are made, and we assume no obligation to update or revise any forward-looking statement.
Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, the principal executive officer and the principal financial officer concluded that our disclosure controls and procedures are effective in providing reasonable assurance that material information required to be disclosed in our reports filed with or submitted to the Securities and Exchange Commission under the Securities Exchange Act is made known to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting. During the fiscal quarter ended March 31, 2016, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


49



PART II. OTHER INFORMATION

Item 1. Legal Proceedings
 
Information required for Part II, Item 1 is incorporated by reference to the discussion under the heading “Regulation and Compliance” in Note 7 of the condensed consolidated financial statements in Part I, Item 1 of this Form 10-Q.

Item 1A. Risk Factors
 
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2015.

Item 6.  Exhibits
 
(a)            Exhibits
 
The following is a list of exhibits filed as part of this Form 10-Q.
 
Incorporated by Reference
 
Exhibit
Number
Exhibit Description                  
Form
File
Number
Exhibit
Filing Date
Filed or
Furnished
Herewith
15
Acknowledgment of awareness from Deloitte & Touche LLP, dated May 6, 2016, concerning unaudited interim financial information
 
 
 
 
X
31(i)
Rule 13a-14(a) Certification of Principal Executive Officer
 
 
 
 
X
31(i)
Rule 13a-14(a) Certification of Principal Financial Officer
 
 
 
 
X
32
Section 1350 Certifications
 
 
 
 
X
101.INS
XBRL Instance Document
 
 
 
 
X
101.SCH
XBRL Taxonomy Extension Schema
 
 
 
 
X
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
 
X
101.DEF
XBRL Taxonomy Extension Definition Linkbase
 
 
 
 
X
101.LAB
XBRL Taxonomy Extension Label Linkbase
 
 
 
 
X
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
 
 
 
 
X


50



SIGNATURE
 
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
Allstate Life Insurance Company
 
(Registrant)
 
 
 
 
 
 
 
 
May 6, 2016
 
 
By
/s/ Samuel H. Pilch
 
 
Samuel H. Pilch
 
 
(chief accounting officer and duly
 
 
authorized officer of Registrant)

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