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 June 30, 20172018
 
OR
 
[  ]           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                 to                 
 
Commission file number 0-31248
 
ALLSTATE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
 
 Illinois 36-2554642 
 (State or other jurisdiction of (I.R.S. Employer 
 incorporation or organization) Identification No.) 
 
3075 Sanders Road, Northbrook, Illinois 60062
(Address of principal executive offices)      (Zip Code)
 
(847) 402-5000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes   X            No ___
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes   X            No ___
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,”  “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ____ 
Accelerated filer                            
   
Non-accelerated filer    X    (Do not check if a smaller reporting company)
 
Smaller reporting company          
   
  Emerging growth company _____          
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ____

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ___           No   X  
 
As of August 3, 2017,6, 2018, the registrant had 23,800 common shares, $227 par value, outstanding, all of which are held by Allstate Insurance Company.




ALLSTATE LIFE INSURANCE COMPANY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 20172018
 
PART IFINANCIAL INFORMATIONPAGE
   
Item 1.
Financial Statements
 
   
 Condensed Consolidated Statements of Operations and Comprehensive Income for the Three-MonthThree Month and Six-MonthSix Month Periods Ended June 30, 20172018 and 20162017 (unaudited)
1
   
 Condensed Consolidated Statements of Financial Position as of June 30, 20172018 (unaudited) and December 31, 20162017
2
   
 Condensed Consolidated Statements of Shareholder’s Equity for the Six-MonthSix Month Periods Ended June 30, 20172018 and 20162017 (unaudited)
3
   
 Condensed Consolidated Statements of Cash Flows for the Six-MonthSix Month Periods Ended June 30, 20172018 and 20162017 (unaudited)
4
   
 
Notes to Condensed Consolidated Financial Statements (unaudited)
5
   
 
Report of Independent Registered Public Accounting Firm
33
   
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
   
 
Highlights
34
 
Operations
35
 
Investments
39
 
Capital Resources and Liquidity
46
 
Forward Looking Statements
48
   
Item 4.
Controls and Procedures
4849
   
PART II
OTHER INFORMATION
 
   
Item 1.
Legal Proceedings
4950
   
Item 1A.
Risk Factors
4950
   
Item 6.
Exhibits
4950

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 June 30, Six months ended June 30,Three months ended June 30, Six months ended June 30,
2017 2016 2017 20162018 2017 2018 2017
(unaudited) (unaudited)(unaudited) (unaudited)
Revenues 
  
  
  
 
  
  
  
Premiums$170
 $147
 $339
 $296
$175
 $170
 $352
 $339
Contract charges177
 180
 356
 362
173
 177
 349
 356
Other revenue8
 10
 16
 21
Net investment income473
 416
 877
 816
419
 473
 826
 877
Realized capital gains and losses: 
  
  
  
 
  
  
  
Total other-than-temporary impairment (“OTTI”) losses(13) (21) (41) (56)(2) (13) (2) (41)
OTTI losses reclassified to (from) other comprehensive income—
 (1) 4
 7
—
 —
 (1) 4
Net OTTI losses recognized in earnings(13) (22) (37) (49)(2) (13) (3) (37)
Sales and other realized capital gains and losses9
 21
 32
 2
Sales and valuation changes on equity investments and derivatives10
 9
 (21) 32
Total realized capital gains and losses(4) (1) (5) (47)8
 (4) (24) (5)
816
 742
 1,567
 1,427
783
 826
 1,519
 1,588
Costs and expenses 
  
  
  
 
  
  
  
Contract benefits364
 341
 718
 679
357
 364
 727
 718
Interest credited to contractholder funds161
 172
 322
 350
152
 161
 300
 322
Amortization of deferred policy acquisition costs43
 37
 84
 74
39
 43
 78
 84
Operating costs and expenses68
 52
 137
 108
68
 78
 136
 158
Restructuring and related charges—
 1
 —
 1
2
 —
 2
 —
Interest expense2
 3
 3
 7
1
 2
 2
 3
638
 606
 1,264
 1,219
619
 648
 1,245
 1,285
              
Gain on disposition of operations2
 1
 4
 3
2
 2
 3
 4
              
Income from operations before income tax expense180
 137
 307
 211
166
 180
 277
 307
              
Income tax expense60
 43
 101
 65
32
 60
 53
 101
              
Net income120
 94
 206
 146
134
 120
 224
 206
              
Other comprehensive income, after-tax 
  
  
  
Other comprehensive (loss) income, after-tax 
  
  
  
Change in unrealized net capital gains and losses118
 233
 183
 474
(61) 118
 (236) 183
Change in unrealized foreign currency translation adjustments—
 6
 (3) 4
5
 —
 9
 (3)
Other comprehensive income, after-tax118
 239
 180
 478
Other comprehensive (loss) income, after-tax(56) 118
 (227) 180
              
Comprehensive income$238
 $333
 $386
 $624
Comprehensive income (loss)$78
 $238
 $(3) $386
 

















See notes to condensed consolidated financial statements.

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
($ in millions, except par value data) June 30, 2017 December 31, 2016June 30, 2018 December 31, 2017
Assets(unaudited)  
(unaudited)  
Investments 
  
 
  
Fixed income securities, at fair value (amortized cost $22,324 and $23,112)$23,651
 $24,222
Fixed income securities, at fair value (amortized cost $21,041 and $22,004)$21,567
 $23,261
Mortgage loans3,793
 3,938
3,839
 3,876
Equity securities, at fair value (cost $1,419 and $1,429)1,617
 1,511
Equity securities, at fair value (cost $1,439 and $1,306)1,705
 1,614
Limited partnership interests2,946
 2,776
3,452
 3,147
Short-term, at fair value (amortized cost $505 and $566)505
 566
Short-term, at fair value (amortized cost $1,066 and $725)1,066
 725
Policy loans555
 563
557
 561
Other1,231
 1,491
1,322
 1,254
Total investments34,298
 35,067
33,508
 34,438
Cash208
 138
61
 145
Deferred policy acquisition costs1,161
 1,187
1,231
 1,156
Reinsurance recoverables from non-affiliates2,302
 2,339
2,202
 2,243
Reinsurance recoverables from affiliates442
 452
428
 437
Accrued investment income269
 273
265
 263
Other assets487
 410
516
 501
Separate Accounts3,396
 3,373
3,247
 3,422
Total assets$42,563
 $43,239
$41,458
 $42,605
Liabilities 
  
 
  
Contractholder funds$19,013
 $19,470
$18,016
 $18,592
Reserve for life-contingent contract benefits11,326
 11,322
11,267
 11,625
Unearned premiums5
 5
4
 4
Payable to affiliates, net45
 52
41
 55
Other liabilities and accrued expenses920
 952
1,003
 1,076
Deferred income taxes1,389
 1,191
812
 836
Notes due to related parties140
 465
140
 140
Separate Accounts3,396
 3,373
3,247
 3,422
Total liabilities36,234
 36,830
34,530
 35,750
Commitments and Contingent Liabilities (Note 7)

 



 

Shareholder’s equity 
  
 
  
Redeemable preferred stock - series A, $100 par value, 1,500,000 shares authorized, none issued—
 —
—
 —
Redeemable preferred stock - series B, $100 par value, 1,500,000 shares authorized, none issued—
 —
—
 —
Common stock, $227 par value, 23,800 shares authorized and outstanding5
 5
5
 5
Additional capital paid-in2,024
 1,990
2,024
 2,024
Retained income3,442
 3,736
4,519
 3,981
Accumulated other comprehensive income: 
  
 
  
Unrealized net capital gains and losses: 
  
 
  
Unrealized net capital gains and losses on fixed income securities with OTTI37
 39
48
 47
Other unrealized net capital gains and losses951
 733
368
 1,186
Unrealized adjustment to DAC, DSI and insurance reserves(124) (91)(55) (398)
Total unrealized net capital gains and losses864
 681
361
 835
Unrealized foreign currency translation adjustments(6) (3)19
 10
Total accumulated other comprehensive income858
 678
Total accumulated other comprehensive income (“AOCI”)380
 845
Total shareholder’s equity6,329
 6,409
6,928
 6,855
Total liabilities and shareholder’s equity$42,563
 $43,239
$41,458
 $42,605
 






See notes to condensed consolidated financial statements.

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY
($ in millions)Six months ended June 30,Six months ended June 30,
2017 20162018 2017
(unaudited)(unaudited)
Common stock$5
 $5
$5
 $5
      
Additional capital paid-in      
Balance, beginning of period1,990
 1,990
2,024
 1,990
Gain on reinsurance with an affiliate34
 —
—
 34
Balance, end of period2,024
 1,990
2,024
 2,024
      
Retained income 
  
 
  
Balance, beginning of period3,736
 3,417
3,981
 3,736
Cumulative effect of change in accounting principle

314
 —
Net income206
 146
224
 206
Dividends(500) —
—
 (500)
Balance, end of period3,442
 3,563
4,519
 3,442
      
Accumulated other comprehensive income 
  
 
  
Balance, beginning of period678
 521
845
 678
Cumulative effect of change in accounting principle

(238) —
Change in unrealized net capital gains and losses183
 474
(236) 183
Change in unrealized foreign currency translation adjustments(3) 4
9
 (3)
Balance, end of period858
 999
380
 858
      
Total shareholder’s equity$6,329
 $6,557
$6,928
 $6,329
 





































See notes to condensed consolidated financial statements.

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)Six months ended June 30,Six months ended June 30,
2017 20162018 2017
Cash flows from operating activities(unaudited)(unaudited)
Net income$206
 $146
$224
 $206
Adjustments to reconcile net income to net cash provided by operating activities: 
  
 
  
Amortization and other non-cash items(30) (31)(30) (30)
Realized capital gains and losses5
 47
24
 5
Gain on disposition of operations(4) (3)(3) (4)
Interest credited to contractholder funds322
 350
300
 322
Changes in: 
  
 
  
Policy benefits and other insurance reserves(278) (324)(319) (278)
Deferred policy acquisition costs24
 31
34
 24
Reinsurance recoverables, net18
 13
24
 18
Income taxes85
 48
(8) 85
Other operating assets and liabilities(133) (35)(36) (133)
Net cash provided by operating activities215
 242
210
 215
Cash flows from investing activities 
  
 
  
Proceeds from sales 
  
 
  
Fixed income securities2,564
 3,984
3,087
 2,564
Equity securities828
 608
663
 828
Limited partnership interests240
 168
86
 240
Other investments6
 33
10
 6
Investment collections 
  
 
  
Fixed income securities860
 1,051
687
 860
Mortgage loans281
 143
308
 281
Other investments89
 59
78
 89
Investment purchases 
  
 
  
Fixed income securities(2,683) (4,054)(2,887) (2,683)
Equity securities(815) (624)(757) (815)
Limited partnership interests(275) (339)(271) (275)
Mortgage loans(129) (234)(269) (129)
Other investments(116) (109)(156) (116)
Change in short-term investments, net56
 (309)(302) 56
Change in policy loans and other investments, net(13) (25)(25) (13)
Net cash provided by investing activities893
 352
252
 893
Cash flows from financing activities 
  
 
  
Contractholder fund deposits408
 425
386
 408
Contractholder fund withdrawals(925) (982)(960) (925)
Dividends paid(500) —
—
 (500)
Other(21) —
28
 (21)
Net cash used in financing activities(1,038) (557)(546) (1,038)
Net increase in cash70
 37
Net (decrease) increase in cash(84) 70
Cash at beginning of period138
 104
145
 138
Cash at end of period$208
 $141
$61
 $208
 












See notes to condensed consolidated financial statements.


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

1. General
Basis of presentation
The accompanying condensed consolidated financial statements include the accounts of Allstate Life Insurance Company (“ALIC”) and its wholly owned subsidiaries (collectively referred to as the “Company”). ALIC is wholly owned by Allstate Insurance Company (“AIC”), which is wholly owned by Allstate Insurance Holdings, LLC, a wholly owned subsidiary of The Allstate Corporation (the “Corporation”). These condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
The condensed consolidated financial statements and notes as of June 30, 20172018 and for the three-monththree month and six-monthsix month periods ended June 30, 20172018 and 20162017 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 Reportannual report on Form 10-K for the year ended December 31, 2016.2017. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year. All significant intercompany accounts and transactions have been eliminated.
Reinsurance transaction
Effective January 1, 2017, ALIC entered into a coinsurance reinsurance agreement with AACAllstate Assurance Company to assume certain term life insurance policies. The agreement covered policies issued from January 1, 2015 through December 31, 2017. In connection with the agreement, the Company recorded cash of $20 million, deferred policy acquisition costs (“DAC”) of $45 million, other assets of $11 million, reserve for life-contingent contract benefits of $24 million and deferred tax liabilities of $18 million. The $34 million gain on the transaction was recorded as an increase to additional capital paid-in since the transaction was between entities under common control.
Redemption of surplus notes and notes due from related party
In January 2017, all $325 million of surplus notes due to Kennett Capital, Inc. (“Kennett”), an unconsolidated affiliate of ALIC, were redeemed. In connection with the redemption, the related $325 million of notes due from Kennett (recorded as other investments) were terminated. These were recorded as non-cash transactions.
External financing agreement
In January 2017, ALIC Reinsurance Company (“ALIC Re”), a wholly owned subsidiary of ALIC, entered into a master transaction agreement with Bueller Financing LLC (“Bueller”), an external financing provider. In accordance with the agreement, Bueller issued a variable funding puttable note (“credit-linked note”) that will be held in a trust. The credit-linked note can be put back to Bueller for cash in the event certain ALIC Re statutory reserves and capital are depleted. The balance of the credit-linked note will vary based on the statutory reserve balance with a maximum value of $1.75 billion. The agreement has no impact on the GAAP-basis Condensed Consolidated Statement of Financial Position.
Dividends
The Company paid cash dividends of $300 million and $200 million to AIC in the first and second quarter of 2017, respectively.  Total dividends paid were in excess of the $305 million that were allowed under Illinois insurance law based on the 2016 formula amount.  The Company received approval from the Illinois Department of Insurance for the portion of the dividends in excess of this amount based on 2017 net income and capital and surplus determined in conformity with statutory accounting practices.




Premiums and contract charges
The following table summarizes premiums and contract charges by product.
($ in millions)Three months ended June 30, Six months ended June 30,Three months ended June 30, Six months ended June 30,
2017 2016 2017 20162018 2017 2018 2017
Premiums 
  
  
  
 
  
  
  
Traditional life insurance$143
 $125
 $286
 $251
$145
 $143
 $292
 $286
Accident and health insurance27
 22
 53
 45
30
 27
 60
 53
Total premiums170
 147
 339
 296
175
 170
 352
 339
              
Contract charges 
  
  
  
 
  
  
  
Interest-sensitive life insurance174
 177
 350
 356
170
 174
 343
 350
Fixed annuities3
 3
 6
 6
3
 3
 6
 6
Total contract charges177
 180
 356
 362
173
 177
 349
 356
Total premiums and contract charges$347
 $327
 $695
 $658
$348
 $347
 $701
 $695
Adopted accounting standard
Transition to Equity Method Accounting
Effective January 1, 2017, the Company adopted new FASB 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 applied prospectively to investments that qualify for EMA after application of the cost method of accounting. Accordingly, the adoption of this guidance had no impact on the Company’s results of operations or financial position.
Pending accounting standards
Recognition and Measurement of Financial Assets and Financial Liabilities
InEffective January 2016,1, 2018, the FASB issuedCompany adopted new Financial Accounting Standards Board (“FASB”) guidance requiring equity investments, including equity securities and limited partnership interests that are not accounted for under the equity method of accounting or that do not result in consolidation to be measured at fair value with changes in fair value recognized in net income. 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 assetassets 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 asCompany’s adoption of the datenew FASB guidance included adoption of adoption. Thethe relevant elements of Technical Corrections and Improvements to Financial Instruments, issued in February 2018.
Upon adoption of the new guidance related to equity investments without readily determinable fair values is applied prospectively as of the date of adoption. The most significant anticipated impacts, using values as of June 30, 2017, relate to the change in accounting for equity securities where $198on January 1, 2018, $308 million of pre-tax unrealized net capital gains would befor equity securities were reclassified from accumulated other comprehensive incomeAOCI to retained income. The after-tax change in accounting for equity securities did not affect the Company’s total shareholder’s equity and the unrealized net capital gains of $238 million reclassified to retained income andwill never be recognized in net income.


Upon adoption of the new guidance on January 1, 2018, the carrying value of cost method limited partnership interests (excludingincreased $95 million, pre-tax, to fair value. The after-tax cumulative-effect increase in retained income of $76 million increased the Company’s shareholder’s equity but will never be recognized in net income.
Changes to significant accounting policies
Investments
Changes were made to the Company’s Significant Accounting Policies upon adoption of new FASB guidance related to the recognition and measurement of financial assets. Equity securities primarily include common stocks, exchange traded and mutual funds, non-redeemable preferred stocks and real estate investment trust equity investments. Equity securities are carried at fair value. The periodic change in fair value of equity securities is recognized within realized capital gains and losses on the Condensed Consolidated Statements of Operations and Comprehensive Income.
Investments in limited partnership interests include interests in private equity funds, real estate funds and other funds. Where the Company’s interest is so minor that it exercises virtually no influence over operating and financial policies, investments in limited partnership interests purchased prior to January 1, 2018 are accounted for at fair value primarily utilizing the net asset value as a practical expedient (“NAV”) to determine fair value. All other investments in limited partnership interests, including those purchased subsequent to January 1, 2018, are accounted for in accordance with the equity method of accounting (“EMA”).
Investment income from limited partnership interests carried at fair value is recognized based upon the changes in fair value of the investee’s equity primarily determined using NAV. Income from EMA limited partnership interests is recognized based on the Company’s share of the partnerships’ earnings. Income for EMA limited partnership interests is generally recognized on a cost recovery basis), wherethree month delay due to the carrying value would increase by approximately $83 million, pre-tax, withavailability of the offsetting adjustment recognizedrelated financial statements.
Tax Reform
On December 22, 2017, Public Law 115-97, known as the Tax Cuts and Jobs Act of 2017 (“Tax Legislation”) became effective, permanently reducing the U.S. corporate income tax rate from 35% to 21% beginning January 1, 2018. As a result, the corporate tax rate is not comparable between periods.
During 2017, the Company revalued deferred tax assets and liabilities and recorded liabilities related to the transition to the modified territorial system for international taxation.  The impact of the Tax Legislation may differ from the Company’s preliminary estimates due to, among other things, changes in retained income.interpretations and assumptions the Company has made, guidance that may be issued and actions the Company may take as a result of the Tax Legislation. During the period ended June 30, 2018, the Company has not recorded any material adjustments to these provisional amounts.  The Company continues to refine the analysis and calculations, which could impact the provisional estimates previously recorded.  Accordingly, as of June 30, 2018, the Company has not fully completed the accounting for the Tax Legislation.
Pending accounting standards
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued guidance which revises the credit loss recognition criteria for certain financial assets measured at amortized cost, including reinsurance recoverables. The new guidance replaces the existing incurred loss recognition model with an expected loss recognition model. The objective of the expected credit loss model is for the reporting entity to recognize its estimate of expected credit losses for affected financial assets in a valuation allowance deducted from the amortized cost basis of the related financial assets that results in presenting the net carrying value of the financial assets at the amount expected to be collected. The reporting entity must consider all available relevant information available when estimating expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts over the life of an asset. Financial assets may be evaluated individually or on a pooled basis when they share similar risk characteristics. The measurement of credit losses for available-for-sale debt securities measured at fair value is not affected except that credit losses recognized are limited to the amount by which fair value is below amortized cost and the carrying value adjustment is recognized through a valuation allowance and not as a direct write-down. The guidance is effective for interim and annualreporting periods beginning after December 15, 2019, and


for most affected instruments must be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to beginning retained income. The Company is in the process of evaluating the impact of adoption.
Accounting for Hedging Activities
In August 2017, the FASB issued amendments intended to better align hedge accounting with an organization’s risk management activities. The amendments expand hedge accounting for nonfinancial and financial risk components and revise the measurement methodologies to better align with an organization’s risk management activities. Separate presentation of hedge ineffectiveness is eliminated to provide greater transparency of the full impact of hedging by requiring presentation of the results of the hedged item and hedging instrument in a single financial statement line item. In addition, the amendments reduce complexity by simplifying the manner in which assessments of hedge effectiveness may be performed. The guidance is effective for reporting


periods beginning after December 15, 2018. The presentation and disclosure guidance is effective on a prospective basis. The impact of adoption is not expected to be material to the Company’s results of operations or financial position.
Other revenue presentation
The Company revised the presentation of total revenue to include other revenue. Previously, components of other revenue were presented within operating costs and expenses and primarily represent gross dealer concessions received in connection with Allstate exclusive agencies and exclusive financial specialists sales of non-proprietary products. Other revenue is recognized when performance obligations are fulfilled. Prior periods have been reclassified to conform to current separate presentation of other revenue.
2. Supplemental Cash Flow Information
Non-cash investing activities include $4$13 million and $99$4 million related to mergers and exchanges completed with equity securities, fixed income securities and limited partnerships, and modifications of certain mortgage loans and other investments for the six months ended June 30, 2018 and 2017, and 2016, respectively. Non-cash financing activities included $34 million related to debt acquired in conjunction with the purchase of an investment for the six months ended June 30, 2016.
Liabilities for collateral received in conjunction with the Company’s securities lending program and over-the-counter (“OTC”) and cleared derivatives are reported in other liabilities and accrued expenses or other investments. The accompanying cash flows are included in cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows along with the activities resulting from management of the proceeds, which are as follows:
($ in millions)Six months ended June 30,Six months ended June 30,
2017 20162018 2017
Net change in proceeds managed 
  
 
  
Net change in fixed income securities$9
 $—
$68
 $9
Net change in short-term investments12
 (45)(37) 12
Operating cash flow provided (used)$21
 $(45)
   
Operating cash flow provided$31
 $21
Net change in liabilities 
  
 
  
Liabilities for collateral, beginning of period$(550) $(550)$(542) $(550)
Liabilities for collateral, end of period(529) (595)(511) (529)
Operating cash flow (used) provided$(21) $45
Operating cash flow used$(31) $(21)
3. Investments
Fair values
The amortized cost, gross unrealized gains and losses and fair value for fixed income securities are as follows:
($ in millions)Amortized Gross unrealized FairAmortized Gross unrealized Fair
cost Gains Losses valuecost Gains Losses value
June 30, 2017 
  
  
  
June 30, 2018 
  
  
  
U.S. government and agencies$609
 $45
 $(1) $653
$376
 $27
 $—
 $403
Municipal2,000
 275
 (5) 2,270
2,036
 218
 (4) 2,250
Corporate18,639
 1,015
 (80) 19,574
17,731
 527
 (306) 17,952
Foreign government286
 26
 —
 312
271
 12
 —
 283
Asset-backed securities (“ABS”)405
 6
 (8) 403
382
 4
 (4) 382
Residential mortgage-backed securities (“RMBS”)239
 47
 (1) 285
178
 48
 (1) 225
Commercial mortgage-backed securities (“CMBS”)133
 13
 (7) 139
53
 6
 (2) 57
Redeemable preferred stock13
 2
 —
 15
14
 1
 —
 15
Total fixed income securities$22,324
 $1,429
 $(102) $23,651
$21,041
 $843
 $(317) $21,567
              
December 31, 2016 
  
  
  
December 31, 2017 
  
  
  
U.S. government and agencies$968
 $48
 $(2) $1,014
$768
 $38
 $(2) $804
Municipal2,017
 264
 (7) 2,274
2,001
 275
 (3) 2,273
Corporate18,945
 905
 (169) 19,681
18,262
 960
 (86) 19,136
Foreign government304
 28
 —
 332
279
 20
 —
 299
ABS337
 4
 (10) 331
383
 6
 (4) 385
RMBS294
 42
 (3) 333
205
 49
 (1) 253
CMBS233
 17
 (9) 241
93
 6
 (2) 97
Redeemable preferred stock14
 2
 —
 16
13
 1
 —
 14
Total fixed income securities$23,112
 $1,310
 $(200) $24,222
$22,004
 $1,355
 $(98) $23,261


Scheduled maturities
The scheduled maturities for fixed income securities are as follows as of June 30, 2017:2018:
($ in millions)Amortized cost Fair valueAmortized cost Fair value
Due in one year or less$1,516
 $1,527
$1,170
 $1,177
Due after one year through five years8,253
 8,655
8,135
 8,264
Due after five years through ten years7,502
 7,769
7,149
 7,092
Due after ten years4,276
 4,873
3,974
 4,370
21,547
 22,824
20,428
 20,903
ABS, RMBS and CMBS777
 827
613
 664
Total$22,324
 $23,651
$21,041
 $21,567
Actual maturities may differ from those scheduled as a result of calls and make-whole payments by the issuers. ABS, RMBS and CMBS are shown separately because of the potential for prepayment of principal prior to contractual maturity dates.
Net investment income
Net investment income is as follows:
($ in millions)Three months ended June 30, Six months ended June 30,Three months ended June 30, Six months ended June 30,
2017 2016 2017 20162018 2017 2018 2017
Fixed income securities$269
 $274
 $537
 $544
$247
 $269
 $498
 $537
Mortgage loans45
 47
 94
 94
53
 45
 97
 94
Equity securities14
 14
 29
 21
16
 14
 23
 29
Limited partnership interests135
 66
 200
 129
Limited partnership interests (1) (2)
92
 135
 188
 200
Short-term investments2
 1
 3
 3
5
 2
 9
 3
Policy loans7
 8
 15
 16
8
 7
 15
 15
Other21
 23
 40
 44
23
 21
 45
 40
Investment income, before expense493
 433
 918
 851
444
 493
 875
 918
Investment expense(20) (17) (41) (35)(25) (20) (49) (41)
Net investment income$473
 $416
 $877
 $816
$419
 $473
 $826
 $877
_______________
(1)
Due to the adoption of the recognition and measurement accounting standard, limited partnerships previously reported using the cost method are now reported at fair valuewith changes in fair value recognized in net investment income.
(2)
Includes net investment income of $82 million and $140 million for EMA limited partnership interests and $10 million and $48 million for limited partnership interests carried at fair value for the three months and six months ended June 30, 2018, respectively.
Realized capital gains and losses
Realized capital gains and losses by asset type are as follows:
($ in millions)Three months ended June 30, Six months ended June 30,Three months ended June 30, Six months ended June 30,
2017 2016 2017 20162018 2017 2018 2017
Fixed income securities$(6) $(2) $(13) $(25)$(12) $(6) $(18) $(13)
Mortgage loans—
 1
 —
 1
2
 —
 2
 —
Equity securities(4) (4) (4) (34)20
 (4) (6) (4)
Limited partnership interests10
 —
 23
 13
(11) 10
 (8) 23
Derivatives(4) 4
 (9) (1)10
 (4) 7
 (9)
Other—
 —
 (2) (1)(1) —
 (1) (2)
Realized capital gains and losses$(4) $(1) $(5) $(47)$8
 $(4) $(24) $(5)


Realized capital gains and losses by transaction type are as follows:
($ in millions)Three months ended June 30, Six months ended June 30,Three months ended June 30, Six months ended June 30,
2017 2016 2017 20162018 2017 2018 2017
Impairment write-downs(1)$(12) $(18) $(33) $(42)$(2) $(12) $(3) $(33)
Change in intent write-downs(1)(1) (4) (4) (7)—
 (1) —
 (4)
Net other-than-temporary impairment losses recognized in earnings(13) (22) (37) (49)
Sales and other13
 20
 41
 6
Net OTTI losses recognized in earnings(2) (13) (3) (37)
Sales (1)
(7) 13
 (12) 41
Valuation of equity investments (1)

10
 —
 (13) —
Valuation and settlements of derivative instruments(4) 1
 (9) (4)7
 (4) 4
 (9)
Realized capital gains and losses$(4) $(1) $(5) $(47)$8
 $(4) $(24) $(5)

_______________

(1)
Due to the adoption of the recognition and measurement accounting standard, equity securities are reported at fair value with changes in fair value recognized in valuation of equity investments and are no longer included in impairment write-downs, change in intent write-downs and sales.
Gross gains of $22$13 million and $35$22 million and gross losses of $23$24 million and $22$23 million were realized on sales of fixed income and equity securities during the three months ended June 30, 20172018 and 2016,2017, respectively. Gross gains of $55$20 million and $106$55 million and gross losses of $44$36 million and $111$44 million were realized on sales of fixed income and equity securities during the six months ended June 30, 20172018 and 2016,2017, respectively.
Other-than-temporary impairmentValuation changes included in net income for investments still held as of June 30, 2018 are as follows:
($ in millions)Three months ended June 30, Six months ended June 30,
 2018 2018
Equity securities (1)
$20
 $14
Limited partnership interests carried at fair value (1)
11
 49
Total valuation changes$31
 $63
_______________
(1)
Investments held at the end of a prior quarter that were sold in the current quarter are not included in the year-to-date amounts shown in the table above; therefore, the sum of the quarterly amounts may not equal the year-to-date amount.


OTTI losses by asset type are as follows:
($ in millions)Three months ended June 30, 2017 Three months ended June 30, 2016Three months ended June 30, 2018 Three months ended June 30, 2017
Gross 
Included
in OCI
 Net Gross 
Included
in OCI
 NetGross 
Included
in OCI
 Net Gross 
Included
in OCI
 Net
Fixed income securities: 
  
  
  
  
  
 
  
  
  
  
  
Municipal$(1) $—
 $(1) $—
 $—
 $—
$—
 $—
 $—
 $(1) $—
 $(1)
ABS—
 —
 —
 (1) —
 (1)
RMBS(1) —
 (1) —
 —
 —
CMBS(3) —
 (3) —
 (1) (1)—
 —
 —
 (3) —
 (3)
Total fixed income securities(4) —
 (4) (1) (1) (2)(1) —
 (1) (4) —
 (4)
Equity securities(1)(5) —
 (5) (17) —
 (17)—
 —
 —
 (5) —
 (5)
Limited partnership interests(1)(4) —
 (4) (3) —
 (3)—
 —
 —
 (4) —
 (4)
Other-than-temporary impairment losses$(13) $—
 $(13) $(21) $(1) $(22)
Other(1) —
 (1) —
 —
 —
OTTI losses$(2) $—
 $(2) $(13) $—
 $(13)
                      
Six months ended June 30, 2017 Six months ended June 30, 2016Six months ended June 30, 2018 Six months ended June 30, 2017
Gross 
Included
in OCI
 Net Gross 
Included
in OCI
 NetGross 
Included
in OCI
 Net Gross 
Included
in OCI
 Net
Fixed income securities: 
  
  
  
  
  
 
  
  
  
  
  
Municipal$(1) $—
 $(1) $—
 $—
 $—
$—
 $—
 $—
 $(1) $—
 $(1)
Corporate(7) 3
 (4) (11) 6
 (5)—
 —
 —
 (7) 3
 (4)
ABS—
 —
 —
 (4) —
 (4)
RMBS—
 (2) (2) —
 —
 —
(1) —
 (1) —
 (2) (2)
CMBS(9) 3
 (6) (4) 1
 (3)—
 (1) (1) (9) 3
 (6)
Total fixed income securities(17) 4
 (13) (19) 7
 (12)(1) (1) (2) (17) 4
 (13)
Equity securities(1)(15) —
 (15) (42) —
 (42)—
 —
 —
 (15) —
 (15)
Limited partnership interests(1)(7) —
 (7) 6
 —
 6
—
 —
 —
 (7) —
 (7)
Other(2) —
 (2) (1) —
 (1)(1) —
 (1) (2) —
 (2)
Other-than-temporary impairment losses$(41) $4
 $(37) $(56) $7
 $(49)$(2) $(1) $(3) $(41) $4
 $(37)
_______________
(1)
Due to the adoption of the recognition and measurement accounting standard, equity securities and limited partnerships previously reported using the cost method are now reported at fair value with changes in fair value recognized in net income and are no longer included in the table above.
The total amount of other-than-temporary impairmentOTTI losses included in accumulated other comprehensive incomeAOCI at the time of impairment for fixed income securities, which were not included in earnings, are presented in the following table. The amounts exclude $121$109 million and $131$113 million as of June 30, 20172018 and December 31, 2016,2017, respectively, of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.
($ in millions)June 30, 2017 December 31, 2016June 30, 2018 December 31, 2017
Municipal$(5) $(5)$(4) $(4)
Corporate(3) (5)
ABS(8) (11)(6) (8)
RMBS(40) (43)(34) (37)
CMBS(8) (7)(4) (4)
Total$(64) $(71)$(48) $(53)
Rollforwards of the cumulative credit losses recognized in earnings for fixed income securities held as of the end of the period are as follows:
($ in millions)Three months ended June 30, Six months ended June 30,Three months ended June 30, Six months ended June 30,
2017 2016 2017 20162018 2017 2018 2017
Beginning balance$(167) $(175) $(176) $(200)$(128) $(167) $(138) $(176)
Additional credit loss for securities previously other-than-temporarily impaired(3) (1) (6) (5)(1) (3) (2) (6)
Additional credit loss for securities not previously other-than-temporarily impaired(1) (1) (7) (7)—
 (1) —
 (7)
Reduction in credit loss for securities disposed or collected11
 9
 29
 44
5
 11
 16
 29
Ending balance$(160) $(168) $(160) $(168)$(124) $(160) $(124) $(160)
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 impairmentOTTI 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.AOCI. If the Company determines that the fixed income security does not have sufficient cash flow or other information to estimate a recovery value for the security, the Company may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings.
Unrealized net capital gains and losses
Unrealized net capital gains and losses included in accumulated other comprehensive incomeAOCI are as follows:
($ in millions)Fair value Gross unrealized Unrealized net gains (losses)Fair value Gross unrealized Unrealized net gains (losses)
June 30, 2017 Gains Losses 
June 30, 2018Fair value Gains Losses Unrealized net gains (losses)
Fixed income securities$23,651
 $1,429
 $(102) $1,327
 $843
 $(317) 
Equity securities1,617
 216
 (18) 198
Short-term investments505
 —
 —
 —
1,066
 —
 —
 —
Derivative instruments (1)
3
 3
 —
 3
Equity method (“EMA”) limited partnerships (2)
 
  
  
 —
EMA limited partnerships (1)
 
  
  
 1
Unrealized net capital gains and losses, pre-tax 
  
  
 1,528
 
  
  
 527
Amounts recognized for: 
  
  
  
 
  
  
  
Insurance reserves (3)
 
  
  
 —
DAC and DSI (4)
 
  
  
 (191)
Insurance reserves (2)
 
  
  
 —
DAC and DSI (3)
 
  
  
 (70)
Amounts recognized 
  
  
 (191) 
  
  
 (70)
Deferred income taxes 
  
  
 (473) 
  
  
 (96)
Unrealized net capital gains and losses, after-tax 
  
  
 $864
 
  
  
 $361
_______________
(1)
Included in the fair value of derivative instruments is $(3) 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)(2) 
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, theThis 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.(a type of immediate fixed annuities).
(4)(3) 
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)Fair value Gross unrealized Unrealized net gains (losses)
December 31, 2016 Gains Losses 
December 31, 2017Fair value Gains Losses Unrealized net gains (losses)
Fixed income securities$24,222
 $1,310
 $(200) $1,110
 $1,355
 $(98) 
Equity securities1,511
 117
 (35) 82
1,614
 311
 (3) 308
Short-term investments566
 —
 —
 —
725
 —
 —
 —
Derivative instruments (1)
5
 5
 —
 5
2
 2
 —
 2
EMA limited partnerships 
  
  
 (2) 
  
  
 1
Unrealized net capital gains and losses, pre-tax 
  
  
 1,195
 
  
  
 1,568
Amounts recognized for: 
  
  
  
 
  
  
  
Insurance reserves 
  
  
 —
 
  
  
 (315)
DAC and DSI 
  
  
 (140) 
  
  
 (189)
Amounts recognized 
  
  
 (140) 
  
  
 (504)
Deferred income taxes 
  
  
 (374) 
  
  
 (229)
Unrealized net capital gains and losses, after-tax 
  
  
 $681
 
  
  
 $835
_______________
 
(1) 
Included in the fair value of derivative instruments is $5$2 million classified as assets.liabilities.


Change in unrealized net capital gains and losses
The change in unrealized net capital gains and losses for the six months ended June 30, 20172018 is as follows:
($ in millions) 
 
Fixed income securities$217
$(731)
Equity securities(1)116
—
Derivative instruments(2)(2)
EMA limited partnerships2
Total333
(733)
Amounts recognized for: 
 
Insurance reserves—
315
DAC and DSI(51)119
Amounts recognized(51)434
Deferred income taxes(99)63
Increase in unrealized net capital gains and losses, after-tax$183
Decrease in unrealized net capital gains and losses, after-tax$(236)
______________
(1) Upon adoption of the recognition and measurement accounting standard on January 1, 2018, $308 million of pre-tax unrealized net capital gains for equity securities were reclassified from AOCI to retained income.  See Note 1 of the condensed consolidated financial statements.
Portfolio monitoring
The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed income 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 impairmentOTTI using all reasonably available information relevant to the collectability or recovery of the security. Inherent in the Company’s evaluation of other-than-temporary impairmentOTTI 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.


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		 
 
 June 30, 2017 
  
  
  
  
  
  
 Fixed income securities 
  
  
  
  
  
  
 U.S. government and agencies13
 $177
 $(1) —
 $—
 $—
 $(1)
 Municipal5
 22
 (2) 1
 10
 (3) (5)
 Corporate421
 3,063
 (52) 29
 224
 (28) (80)
 ABS27
 161
 (1) 8
 23
 (7) (8)
 RMBS44
 2
 —
 44
 28
 (1) (1)
 CMBS5
 23
 (3) 4
 13
 (4) (7)
 Redeemable preferred stock1
 —
 —
 —
 —
 —
 —
 Total fixed income securities516
 3,448
 (59) 86
 298
 (43) (102)
 Equity securities107
 133
 (11) 35
 40
 (7) (18)
 Total fixed income and equity securities623
 $3,581
 $(70) 121
 $338
 $(50) $(120)
 Investment grade fixed income securities417
 $3,122
 $(47) 59
 $206
 $(27) $(74)
 Below investment grade fixed income securities99
 326
 (12) 27
 92
 (16) (28)
 Total fixed income securities516
 $3,448
 $(59) 86
 $298
 $(43) $(102)
               
 December 31, 2016 
  
  
  
  
  
  
 Fixed income securities 
  
  
  
  
  
  
 U.S. government and agencies6
 $104
 $(2) —
 $—
 $—
 $(2)
 Municipal8
 44
 (1) 3
 18
 (6) (7)
 Corporate629
 4,767
 (118) 56
 414
 (51) (169)
 ABS18
 95
 (1) 13
 76
 (9) (10)
 RMBS47
 3
 —
 50
 38
 (3) (3)
 CMBS12
 57
 (4) 4
 15
 (5) (9)
 Redeemable preferred stock1
 —
 —
 —
 —
 —
 —
 Total fixed income securities721
 5,070
 (126) 126
 561
 (74) (200)
 Equity securities167
 200
 (19) 62
 80
 (16) (35)
 Total fixed income and equity securities888
 $5,270
 $(145) 188
 $641
 $(90) $(235)
 Investment grade fixed income securities559
 $4,348
 $(100) 75
 $350
 $(47) $(147)
 Below investment grade fixed income securities162
 722
 (26) 51
 211
 (27) (53)
 Total fixed income securities721
 $5,070
 $(126) 126
 $561
 $(74) $(200)
 ($ 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		 
 
 June 30, 2018 
  
  
  
  
  
  
 Fixed income securities 
  
  
  
  
  
  
 U.S. government and agencies7
 $77
 $—
 1
 $5
 $—
 $—
 Municipal54
 117
 (2) 1
 12
 (2) (4)
 Corporate1,290
 7,670
 (216) 135
 1,127
 (90) (306)
 Foreign government2
 15
 —
 —
 —
 —
 —
 ABS41
 194
 (1) 6
 9
 (3) (4)
 RMBS90
 4
 —
 56
 16
 (1) (1)
 CMBS2
 11
 (1) 5
 10
 (1) (2)
 Redeemable preferred stock1
 —
 —
 —
 —
 —
 —
 Total fixed income securities1,487
 $8,088
 $(220) 204
 $1,179
 $(97) $(317)
 Investment grade fixed income securities1,102
 $6,719
 $(176) 171
 $1,086
 $(86) $(262)
 Below investment grade fixed income securities385
 1,369
 (44) 33
 93
 (11) (55)
 Total fixed income securities1,487
 $8,088
 $(220) 204
 $1,179
 $(97) $(317)
               
 December 31, 2017 
  
  
  
  
  
  
 Fixed income securities 
  
  
  
  
  
  
 U.S. government and agencies17
 $443
 $(2) 2
 $25
 $—
 $(2)
 Municipal4
 14
 —
 1
 11
 (3) (3)
 Corporate456
 2,899
 (28) 144
 1,324
 (58) (86)
 ABS33
 170
 (1) 8
 24
 (3) (4)
 RMBS70
 3
 —
 56
 18
 (1) (1)
 CMBS2
 1
 —
 6
 23
 (2) (2)
 Redeemable preferred stock1
 —
 —
 —
 —
 —
 —
 Total fixed income securities583
 3,530
 (31) 217
 1,425
 (67) (98)
 Equity securities87
 66
 (3) 1
 —
 —
 (3)
 Total fixed income and equity securities670
 $3,596
 $(34) 218
 $1,425
 $(67) $(101)
 Investment grade fixed income securities472
 $3,192
 $(22) 181
 $1,320
 $(52) $(74)
 Below investment grade fixed income securities111
 338
 (9) 36
 105
 (15) (24)
 Total fixed income securities583
 $3,530
 $(31) 217
 $1,425
 $(67) $(98)
As of June 30, 2017, $892018, $303 million of the $120$317 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 $89$303 million, $58$251 million are related to unrealized losses on investment grade fixed income securities and $14 million are related to equity securities. Of the remaining $17$52 million, $8$44 million have been in an unrealized loss position for less than 12 months. Investment grade is defined as a security having a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A or BBB from S&P Global Ratings (“S&P”), a comparable rating from another nationally recognized rating agency, or a comparable internal rating if an externally provided rating is not available. Market prices for certain securities may have credit spreads which imply higher or lower credit quality than the current third party rating. Unrealized losses on investment


grade securities are principally related to an increase in market yields which may include increased risk-free interest rates and/or wider credit spreads since the time of initial purchase. The unrealized losses are expected to reverse as the securities approach maturity.
As of June 30, 2017,2018, the remaining $31$14 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 $16$11 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 $31$14 million, $11 million are related to below investment grade fixed income securities and $4 million are related to equity securities. Of these amounts, $5$3 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 June 30, 2017.2018.
ABS, RMBS and CMBS in an unrealized loss position were evaluated based on actual and projected collateral losses relative to the securities’ positions in the respective securitization trusts, security specific expectations of cash flows, and credit ratings. This evaluation also takes into consideration credit enhancement, measured in terms of (i) subordination from other classes of securities in the trust that are contractually obligated to absorb losses before the class of security the Company owns, and (ii) the expected impact of other structural features embedded in the securitization trust beneficial to the class of securities the Company


owns, such as overcollateralization and excess spread. Municipal bonds in an unrealized loss position were evaluated based on the underlying credit quality of the primary obligor, obligation type and quality of the underlying assets. Unrealized losses on equity securities are primarily related to temporary equity market fluctuations of securities that are expected to recover.
As of June 30, 2017,2018, the Company has not made the decision to sell and it is not more likely than not the Company will be required to sell fixed income securities with unrealized losses before recovery of the amortized cost basis.
Limited partnerships
Investments in limited partnership interests include interests in private equity funds, real estate funds and other funds. As of June 30, 2017, 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 June 30, 20172018 and December 31, 2016,2017, the carrying value of equity methodEMA limited partnerships totaled $2.36$2.71 billion and $2.19$2.54 billion, respectively.  The Company recognizes an impairment loss for equity methodrespectively, and limited partnerships when evidence demonstrates that the loss is other than temporary. Evidence of a loss incarried at fair 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.
Asas of June 30, 2017 and2018, while at cost method as of December 31, 2016, the carrying value for cost method limited partnerships was $5832017, totaled $740 million and $591$611 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 June 30, 2017.2018.
Accrual of income is suspended for mortgage loans that are in default or when full and timely collection of principal and interest payments is not probable. Cash receipts on mortgage loans on nonaccrual status are generally recorded as a reduction of carrying value.


Debt service coverage ratio is considered a key credit quality indicator when mortgage loans are evaluated for impairment. Debt service coverage ratio represents the amount of estimated cash flows from the property available to the borrower to meet principal and interest payment obligations. Debt service coverage ratio estimates are updated annually or more frequently if conditions are warranted based on the Company’s credit monitoring process.
The following table reflects the carrying value of non-impaired fixed rate mortgage loans summarized by debt service coverage ratio distribution.
($ in millions)June 30, 2017 December 31, 2016 June 30, 2018 December 31, 2017
Debt service coverage ratio distribution 
Fixed rate
mortgage
loans
 
Variable rate
mortgage
loans
 Total 
Fixed rate
mortgage
loans
 
Variable rate
mortgage
loans
 Total
Below 1.0$18
 $52
 $3
 $15
 $18
 $3
 $—
 $3
1.0 - 1.25318
 321
 293
 —
 293
 326
 —
 326
1.26 - 1.501,167
 1,196
 1,058
 —
 1,058
 1,033
 15
 1,048
Above 1.502,285
 2,364
 2,424
 42
 2,466
 2,482
 13
 2,495
Total non-impaired mortgage loans$3,788
 $3,933
 $3,778
 $57
 $3,835
 $3,844
 $28
 $3,872
Mortgage loans with a debt service coverage ratio below 1.0 that are not considered impaired primarily relate to instances where the borrower has the financial capacity to fund the revenue shortfalls from the properties for the foreseeable term, the decrease in cash flows from the properties is considered temporary, or there are other risk mitigating circumstances such as additional collateral, escrow balances or borrower guarantees.
The net carrying value of impaired mortgage loans is as follows:
($ in millions)June 30, 2017 December 31, 2016June 30, 2018 December 31, 2017
Impaired mortgage loans with a valuation allowance$5
 $5
$4
 $4
Impaired mortgage loans without a valuation allowance—
 —
—
 —
Total impaired mortgage loans$5
 $5
$4
 $4
Valuation allowance on impaired mortgage loans$3
 $3
$3
 $3


The valuation allowance on impaired mortgage loans had no activity for the three months and six months ended June 30, 2018 and 2017. The average balance of impaired loans was $5$4 million and $6$5 million for the six months ended June 30, 2018 and 2017, and 2016, respectively.
The rollforward of the valuation allowance on impaired mortgage loans is as follows:
($ in millions)Three months ended June 30, Six months ended June 30,
 2017 2016 2017 2016
Beginning balance$3
 $3
 $3
 $3
Charge offs—
 —
 —
 —
Ending balance$3
 $3
 $3
 $3
Payments on all mortgage loans were current as of June 30, 20172018 and December 31, 2016.2017.
Short-term investments
Short-term investments, including commercial paper, U.S. Treasury bills, money market funds and other short-term investments, are carried at fair value. As of June 30, 2018 and December 31, 2017, the fair value of short-term investments totaled $1.07 billion and $725 million, respectively.
Policy loans
Policy loans are carried at unpaid principal balances. As of June 30, 2018 and December 31, 2017, the carrying value of policy loans totaled $557 million and $561 million, respectively.
Other investments
Other investments primarily consist of agent loans, bank loans, real estate and derivatives. Agent loans are loans issued to exclusive Allstate agents and are carried at unpaid principal balances, net of valuation allowances and unamortized deferred fees or costs. Bank loans are primarily senior secured corporate loans and are carried at amortized cost. Real estate is carried at cost less accumulated depreciation. Derivatives are carried at fair value. The following table summarizes other investments.
($ in millions) June 30, 2018 December 31, 2017
Agent loans $570
 $538
Bank loans 447
 437
Real estate 212
 157
Derivatives and other 93
 122
Total $1,322
 $1,254
    
4. Fair Value of Assets and Liabilities
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Assets and liabilities recorded on the Condensed Consolidated Statements of Financial Position at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows:
Level 1: Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access.
Level 2: Assets and liabilities whose values are based on the following:
(a)Quoted prices for similar assets or liabilities in active markets;
(b)Quoted prices for identical or similar assets or liabilities in markets that are not active; or
(c)Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Unobservable inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the assets and liabilities.


The availability of observable inputs varies by instrument. In situations where fair value is based on internally developed pricing models or inputs that are unobservable in the market, the determination of fair value requires more judgment. The degree of judgment exercised by the Company in determining fair value is typically greatest for instruments categorized in Level 3. In many instances, valuation inputs used to measure fair value fall into different levels of the fair value hierarchy. The category level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments.
The Company is responsible for the determination of fair value and the supporting assumptions and methodologies. The Company gains assurance that assets and liabilities are appropriately valued through the execution of various processes and controls designed to ensure the overall reasonableness and consistent application of valuation methodologies, including inputs and


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


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, total return swaps, foreign exchange forward contracts, certain options and certain credit default swaps, are valued using models that rely on inputs such as interest rate yield curves, implied volatilities, index price levels, currency rates, and credit spreads that are observable for substantially the full term of the contract. The valuation techniques underlying the models are widely accepted in the financial services industry and do not involve significant judgment.
Level 3 measurements
Fixed income securities:
Municipal: Comprise municipal bonds that are not rated by third party credit rating agencies.  The primary inputs to the valuation of these municipal bonds include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields and credit spreads. Also included are municipal bonds valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable and municipal bonds in default valued based on the present value of expected cash flows.
Corporate - public and Corporate - privately placed: Primarily valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable. Other inputs include an interest rate yield curve, as well as published credit spreads for similar assets that incorporate the credit quality and industry sector of the issuer.
ABS - CDO, ABS - consumer and other, and CMBS:other: Valued based on non-binding broker quotes received from brokers who are familiar with the investments and where the inputs have not been corroborated to be market observable.


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. LimitedEMA limited partnership interests written-down to fair value in connection with recognizing other-than-temporary impairmentsOTTI losses are generally valued using net asset values.
Investments excluded from the fair value hierarchy
Limited partnerships carried at fair value, which do not have readily determinable fair values, use NAV provided by the investees and are excluded from the fair value hierarchy. These investments are generally not redeemable by the investees and generally cannot be sold without approval of the general partner. We receive distributions of income and from liquidation of the underlying assets of the investees over the life of these investments, typically 10-12 years. As of June 30, 2018, the Company has commitments to invest $352 million in these limited partnership interests.
The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of June 30, 2017.2018.
($ in millions)
Quoted prices
in active
markets for
identical assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Counterparty
and cash
collateral
netting
 Balance as of June 30, 2017
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 June 30, 2018
Assets 
  
  
  
  
 
  
  
  
  
Fixed income securities: 
  
  
  
  
 
  
  
  
  
U.S. government and agencies$286
 $367
 $—
  
 $653
$126
 $277
 $—
  
 $403
Municipal—
 2,210
 60
  
 2,270
—
 2,192
 58
  
 2,250
Corporate - public—
 13,439
 36
  
 13,475
—
 12,381
 47
  
 12,428
Corporate - privately placed—
 5,849
 250
   6,099
—
 5,337
 187
   5,524
Foreign government—
 312
 —
  
 312
—
 283
 —
  
 283
ABS - CDO—
 39
 24
  
 63
—
 29
 9
  
 38
ABS - consumer and other—
 277
 63
   340
—
 297
 47
   344
RMBS—
 285
 —
  
 285
—
 225
 —
  
 225
CMBS—
 139
 —
  
 139
—
 57
 —
  
 57
Redeemable preferred stock—
 15
 —
  
 15
—
 15
 —
  
 15
Total fixed income securities286
 22,932
 433
  
 23,651
126
 21,093
 348
  
 21,567
Equity securities1,538
 4
 75
  
 1,617
1,577
 15
 113
  
 1,705
Short-term investments92
 413
 —
  
 505
395
 671
 —
  
 1,066
Other investments: Free-standing derivatives—
 105
 1
 $(6) 100
—
 88
 1
 $(3) 86
Separate account assets3,396
 —
 —
   3,396
3,247
 —
 —
   3,247
Total recurring basis assets5,312
 23,454
 509
 (6) 29,269
Non-recurring basis (1)
—
 —
 8
 

 8
Total assets at fair value$5,312
 $23,454
 $517
 $(6) $29,277
Total recurring assets at fair value$5,345
 $21,867
 $462
 $(3) $27,671
% of total assets at fair value18.1% 80.1% 1.8% — % 100%19.3% 79.0% 1.7% — % 100%
         
Investments reported at NAV

        740
Total        $28,411
                  
Liabilities 
  
  
  
  
 
  
  
  
  
Contractholder funds: Derivatives embedded in life and annuity contracts$—
 $—
 $(284)  
 $(284)$—
 $—
 $(257)  
 $(257)
Other liabilities: Free-standing derivatives—
 (46) —
 $2
 (44)—
 (30) —
 $(3) (33)
Total liabilities at fair value$—
 $(46) $(284) $2
 $(328)$—
 $(30) $(257) $(3) $(290)
% of total liabilities at fair value—% 14.0% 86.6% (0.6)% 100%—% 10.4% 88.6% 1.0 % 100%
 ____________
(1)
Includes $8 million of limited partnership interests written-down to fair value in connection with recognizing other-than-temporary impairments.




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, 2016.2017.
($ in millions)
Quoted prices
in active
markets for
identical assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Counterparty
and cash
collateral
netting
 Balance as of December 31, 2016
Quoted prices
in active
markets for
identical assets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Counterparty
and cash
collateral
netting
 Balance as of December 31, 2017
Assets 
  
  
  
  
 
  
  
  
  
Fixed income securities: 
  
  
  
  
 
  
  
  
  
U.S. government and agencies$619
 $395
 $—
  
 $1,014
$488
 $316
 $—
  
 $804
Municipal—
 2,215
 59
  
 2,274
—
 2,216
 57
  
 2,273
Corporate - public—
 13,475
 47
  
 13,522
—
 13,168
 49
  
 13,217
Corporate - privately placed—
 5,895
 264
   6,159
—
 5,699
 220
   5,919
Foreign government—
 332
 —
  
 332
—
 299
 —
  
 299
ABS - CDO—
 102
 27
  
 129
—
 38
 10
  
 48
ABS - consumer and other—
 160
 42
   202
—
 297
 40
   337
RMBS—
 333
 —
  
 333
—
 253
 —
  
 253
CMBS—
 241
 —
  
 241
—
 97
 —
  
 97
Redeemable preferred stock—
 16
 —
  
 16
—
 14
 —
  
 14
Total fixed income securities619
 23,164
 439
  
 24,222
488
 22,397
 376
  
 23,261
Equity securities1,432
 3
 76
  
 1,511
1,508
 16
 90
  
 1,614
Short-term investments166
 400
 —
  
 566
110
 615
 —
  
 725
Other investments: Free-standing derivatives—
 101
 1
 $(6) 96
—
 117
 1
 $(3) 115
Separate account assets3,373
 —
 —
   3,373
3,422
 —
 —
   3,422
Other assets—
 —
 1
   1
Total recurring basis assets5,590
 23,668
 517
 (6) 29,769
Non-recurring basis (1)
—
 —
 9
 

 9
Total assets at fair value$5,590
 $23,668
 $526
 $(6) $29,778
Total recurring assets at fair value$5,528
 $23,145
 $467
 $(3) $29,137
% of total assets at fair value18.7% 79.5% 1.8% — % 100%19.0% 79.4% 1.6% — % 100%
                  
Liabilities 
  
  
  
  
 
  
  
  
  
Contractholder funds: Derivatives embedded in life and annuity contracts$—
 $—
 $(289)  
 $(289)$—
 $—
 $(284)  
 $(284)
Other liabilities: Free-standing derivatives—
 (39) (3) $2
 (40)—
 (62) —
 $1
 (61)
Total liabilities at fair value$—
 $(39) $(292) $2
 $(329)$—
 $(62) $(284) $1
 $(345)
% of total liabilities at fair value—% 11.9% 88.7% (0.6)% 100%—% 18.0% 82.3% (0.3)% 100%
 
____________
(1)
Includes $9 million of limited partnership interests written-down to fair value in connection with recognizing other-than-temporary impairments.
The following table summarizes quantitative information about the significant unobservable inputs used in Level 3 fair value measurements.
($ in millions)Fair value 
Valuation
technique
 
Unobservable
input
 Range 
Weighted
average
Fair value 
Valuation
technique
 
Unobservable
input
 Range 
Weighted
average
June 30, 2017 
        
June 30, 2018 
        
Derivatives embedded in life and annuity contracts – Equity-indexed and forward starting options$(249) Stochastic cash flow model Projected option cost 1.0 - 2.2% 1.74%$(228) Stochastic cash flow model Projected option cost 1.0 - 2.2% 1.74%
December 31, 2016 
        
December 31, 2017 
        
Derivatives embedded in life and annuity contracts – Equity-indexed and forward starting options$(246) Stochastic cash flow model Projected option cost 1.0 - 2.2% 1.75%$(250) Stochastic cash flow model Projected option cost 1.0 - 2.2% 1.74%
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 June 30, 20172018 and December 31, 2016,2017, Level 3 fair value measurements of fixed income securities total $433$348 million and $439$376 million, respectively, and include $276$204 million and $296$237 million, respectively, of securities valued based on non-binding 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 June 30, 2018.
($ in millions)  
Total gains (losses)
included in:
     
 Balance as of March 31, 2018 
Net
income (1)
 OCI 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Assets 
  
  
  
  
 
Fixed income securities: 
  
  
  
  
 
Municipal$56
 $—
 $—
 $—
 $—
 
Corporate - public47
 —
 —
 —
 —
 
Corporate - privately placed215
 (2) 1
 10
 (10) 
ABS - CDO10
 —
 —
 —
 —
 
ABS - consumer and other41
 —
 —
 3
 (2) 
Total fixed income securities369
 (2) 1
 13
 (12) 
Equity securities99
 6
 —
 —
 —
 
Free-standing derivatives, net1
 —
 —
 —
 —
 
Total recurring Level 3 assets$469
 $4
 $1
 $13
 $(12) 
           
Liabilities 
  
  
  
  
 
Contractholder funds: Derivatives embedded in life and annuity contracts$(260) $2
 $—
 $—
 $—
 
Total recurring Level 3 liabilities$(260) $2
 $—
 $—
 $—
 
           
 Purchases Sales Issues Settlements Balance as of June 30, 2018 
Assets 
  
    
  
 
Fixed income securities: 
  
    
  
 
Municipal$2
 $—
 $—
 $—
 $58
 
Corporate - public—
 —
 —
 —
 47
 
Corporate - privately placed—
 —
 —
 (27) 187
 
ABS - CDO—
 —
 —
 (1) 9
 
ABS - consumer and other10
 (4) —
 (1) 47
 
Total fixed income securities12
 (4) —
 (29) 348
 
Equity securities15
 (7) —
 —
 113
 
Free-standing derivatives, net—
 —
 —
 —
 1
(2) 
Total recurring Level 3 assets$27
 $(11) $—
 $(29) $462
 
           
Liabilities 
  
    
  
 
Contractholder funds: Derivatives embedded in life and annuity contracts$—
 $—
 $—
 $1
 $(257) 
Total recurring Level 3 liabilities$—
 $—
 $—
 $1
 $(257) 
 ____________
(1)
The effect to net income totals $6 million and is reported in the Condensed Consolidated Statements of Operations and Comprehensive Income as follows: $4 million in realized capital gains and losses, $1 million in interest credited to contractholder funds and $1 million in contract benefits.
(2)
Comprises $1 million of assets.







The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the six months ended June 30, 2018.
($ in millions)  
Total gains (losses)
included in:
     
 Balance as of December 31, 2017 
Net
income (1)
 OCI 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Assets 
  
  
  
  
 
Fixed income securities: 
  
  
  
  
 
Municipal$57
 $—
 $(1) $—
 $—
 
Corporate - public49
 —
 (1) 3
 —
 
Corporate - privately placed220
 (2) (1) 10
 (23) 
ABS - CDO10
 —
 —
 —
 —
 
ABS - consumer and other40
 —
 —
 6
 (2) 
Total fixed income securities376
 (2) (3) 19
 (25) 
Equity securities90
 7
 —
 —
 —
 
Free-standing derivatives, net1
 —
 —
 —
 —
 
Total recurring Level 3 assets$467
 $5
 $(3) $19
 $(25) 
           
Liabilities 
  
  
  
  
 
Contractholder funds: Derivatives embedded in life and annuity contracts$(284) $25
 $—
 $—
 $—
 
Total recurring Level 3 liabilities$(284) $25
 $—
 $—
 $—
 
           
 Purchases Sales Issues Settlements Balance as of June 30, 2018 
Assets 
  
    
  
 
Fixed income securities: 
  
    
  
 
Municipal$2
 $—
 $—
 $—
 $58
 
Corporate - public—
 (1) —
 (3) 47
 
Corporate - privately placed11
 —
 —
 (28) 187
 
ABS - CDO—
 —
 —
 (1) 9
 
ABS - consumer and other13
 (8) —
 (2) 47
 
Total fixed income securities26
 (9) —
 (34) 348
 
Equity securities23
 (7) —
 —
 113
 
Free-standing derivatives, net—
 —
 —
 —
 1
(2) 
Total recurring Level 3 assets$49
 $(16) $—
 $(34) $462
 
           
Liabilities 
  
    
  
 
Contractholder funds: Derivatives embedded in life and annuity contracts$—
 $—
 $(1) $3
 $(257) 
Total recurring Level 3 liabilities$—
 $—
 $(1) $3
 $(257) 
 ____________
(1)
The effect to net income totals $30 million and is reported in the Condensed Consolidated Statements of Operations as follows: $5 million in realized capital gains and losses, $20 million in interest credited to contractholder funds and $5 million in contract benefits.
(2)
Comprises $1 million of assets.


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 June 30, 2017.
($ in millions)  
Total gains (losses)
included in:
       Total gains (losses) included in:     
Balance as of March 31, 2017 
Net
income (1)
 OCI 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 Balance as of March 31, 2017 
Net
income (1)
 OCI 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Assets 
  
  
  
  
  
  
  
  
  
 
Fixed income securities: 
  
  
  
  
  
  
  
  
  
 
Municipal$60
 $—
 $—
 $—
 $—
 $60
 $—
 $—
 $—
 $—
 
Corporate - public36
 —
 —
 —
 —
 36
 —
 —
 —
 —
 
Corporate - privately placed268
 5
 (7) 11
 —
 268
 5
 (7) 11
 —
 
ABS - CDO32
 1
 —
 1
 (9) 32
 1
 —
 1
 (9) 
ABS - consumer and other47
 —
 —
 —
 (3) 47
 —
 —
 —
 (3) 
Total fixed income securities443
 6
 (7) 12
 (12) 443
 6
 (7) 12
 (12) 
Equity securities80
 1
 2
 —
 —
 80
 1
 2
 —
 —
 
Free-standing derivatives, net(1) 2
 —
 —
 —
 (1) 2
 —
 —
 —
 
Total recurring Level 3 assets$522
 $9
 $(5) $12
 $(12) $522
 $9
 $(5) $12
 $(12) 
                    
Liabilities 
  
  
  
  
  
  
  
  
  
 
Contractholder funds: Derivatives embedded in life and annuity contracts$(285) $—
 $—
 $—
 $—
 $(285) $—
 $—
 $—
 $—
 
Total recurring Level 3 liabilities$(285) $—
 $—
 $—
 $—
 $(285) $—
 $—
 $—
 $—
 
                    
Purchases Sales Issues Settlements Balance as of June 30, 2017 Purchases Sales Issues Settlements Balance as of June 30, 2017 
Assets 
  
    
  
  
  
  
  
  
 
Fixed income securities: 
  
    
  
  
  
  
  
  
 
Municipal$—
 $—
 $—
 $—
 $60
 $—
 $—
 $—
 $—
 $60
 
Corporate - public—
 —
 —
 —
 36
 —
 —
 —
 —
 36
 
Corporate - privately placed3
 (29) —
 (1) 250
 3
 (29) —
 (1) 250
 
ABS - CDO—
 —
 —
 (1) 24
 —
 —
 —
 (1) 24
 
ABS - consumer and other21
 —
 —
 (2) 63
 21
 —
 —
 (2) 63
 
Total fixed income securities24
 (29) —
 (4) 433
 24
 (29) —
 (4) 433
 
Equity securities—
 (8) —
 —
 75
 —
 (8) —
 —
 75
 
Free-standing derivatives, net—
 —
 —
 —
 1
(2) 
—
 —
 —
 —
 1
(2) 
Total recurring Level 3 assets$24
 $(37) $—
 $(4) $509
 $24
 $(37) $—
 $(4) $509
 
                    
Liabilities 
  
    
  
  
  
  
  
  
 
Contractholder funds: Derivatives embedded in life and annuity contracts$—
 $—
 $—
 $1
 $(284) $—
 $—
 $—
 $1
 $(284) 
Total recurring Level 3 liabilities$—
 $—
 $—
 $1
 $(284) $—
 $—
 $—
 $1
 $(284) 
 ______________________
(1) 
The effect to net income totals $9 million and is reported in the Condensed Consolidated Statements of Operations and Comprehensive Income as follows: $7 million in realized capital gains and losses, $2 million in net investment income, $(1) million in interest credited to contractholder funds and $1 million in contract benefits.
(2) 
Comprises $1 million of assets.





The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the six months ended June 30, 2017.
($ in millions)  
Total gains (losses)
included in:
       Total gains (losses) included in:     
Balance as of December 31, 2016 
Net
income (1)
 OCI 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 Balance as of December 31, 2016 
Net
income (1)
 OCI 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Assets 
  
  
  
  
  
  
  
  
  
 
Fixed income securities: 
  
  
  
  
  
  
  
  
  
 
Municipal$59
 $—
 $1
 $—
 $—
 $59
 $—
 $1
 $—
 $—
 
Corporate - public47
 1
 —
 —
 (10) 47
 1
 —
 —
 (10) 
Corporate - privately placed264
 5
 (2) 11
 —
 264
 5
 (2) 11
 —
 
ABS - CDO27
 —
 2
 4
 (9) 27
 —
 2
 4
 (9) 
ABS - consumer and other42
 —
 —
 —
 (5) 42
 —
 —
 —
 (5) 
Total fixed income securities439
 6
 1
 15
 (24) 439
 6
 1
 15
 (24) 
Equity securities76
 6
 2
 —
 —
 76
 6
 2
 —
 —
 
Free-standing derivatives, net(2) 3
 —
 —
 —
 (2) 3
 —
 —
 —
 
Other assets1
 (1) —
 —
 —
 1
 (1) —
 —
 —
 
Total recurring Level 3 assets$514
 $14
 $3
 $15
 $(24) $514
 $14
 $3
 $15
 $(24) 
                    
Liabilities 
  
  
  
  
  
  
  
  
  
 
Contractholder funds: Derivatives embedded in life and annuity contracts$(289) $3
 $—
 $—
 $—
 $(289) $3
 $—
 $—
 $—
 
Total recurring Level 3 liabilities$(289) $3
 $—
 $—
 $—
 $(289) $3
 $—
 $—
 $—
 
                    
Purchases Sales Issues Settlements Balance as of June 30, 2017 Purchases Sales Issues Settlements Balance as of June 30, 2017 
Assets 
  
    
  
  
  
  
  
  
 
Fixed income securities: 
  
    
  
  
  
  
  
  
 
Municipal$—
 $—
 $—
 $—
 $60
 $—
 $—
 $—
 $—
 $60
 
Corporate - public—
 —
 —
 (2) 36
 —
 —
 —
 (2) 36
 
Corporate - privately placed3
 (29) —
 (2) 250
 3
 (29) —
 (2) 250
 
ABS - CDO5
 —
 —
 (5) 24
 5
 —
 —
 (5) 24
 
ABS - consumer and other29
 —
 —
 (3) 63
 29
 —
 —
 (3) 63
 
Total fixed income securities37
 (29) —
 (12) 433
 37
 (29) —
 (12) 433
 
Equity securities—
 (9) —
 —
 75
 —
 (9) —
 —
 75
 
Free-standing derivatives, net—
 —
 —
 —
 1
(2) 
—
 —
 —
 —
 1
(2) 
Other assets—
 —
 —
 —
 —
 —
 —
 —
 —
 —
 
Total recurring Level 3 assets$37
 $(38) $—
 $(12) $509
 $37
 $(38) $—
 $(12) $509
 
                    
Liabilities 
  
    
  
  
  
  
  
  
 
Contractholder funds: Derivatives embedded in life and annuity contracts$—
 $—
 $(1) $3
 $(284) $—
 $—
 $(1) $3
 $(284) 
Total recurring Level 3 liabilities$—
 $—
 $(1) $3
 $(284) $—
 $—
 $(1) $3
 $(284) 
 ______________________
(1) 
The effect to net income totals $17 million and is reported in the Condensed Consolidated Statements of Operations and Comprehensive Income as follows: $8 million in realized capital gains and losses, $7 million in net investment income, $(6) million in interest credited to contractholder funds and $8 million in contract benefits.
(2) 
Comprises $1 million of assets.


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 June 30, 2016.
($ in millions)  Total gains (losses) included in:     
 Balance as of March 31, 2016 
Net
income (1)
 OCI 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Assets 
  
  
  
  
 
Fixed income securities: 
  
  
  
  
 
Municipal$66
 $—
 $3
 $6
 $—
 
Corporate - public38
 —
 —
 —
 —
 
Corporate - privately placed497
 3
 8
 16
 (60) 
ABS - CDO50
 —
 3
 6
 (1) 
ABS - consumer and other43
 —
 (1) 3
 —
 
Total fixed income securities694
 3
 13
 31
 (61) 
Equity securities56
 (4) —
 —
 —
 
Free-standing derivatives, net(8) 1
 —
 —
 —
 
Other assets1
 —
 —
 —
 —
 
Total recurring Level 3 assets$743
 $—
 $13
 $31
 $(61) 
           
Liabilities 
  
  
  
  
 
Contractholder funds: Derivatives embedded in life and annuity contracts$(313) $7
 $—
 $—
 $—
 
Total recurring Level 3 liabilities$(313) $7
 $—
 $—
 $—
 
           
 Purchases Sales Issues Settlements Balance as of June 30, 2016 
Assets 
  
  
  
  
 
Fixed income securities: 
  
  
  
  
 
Municipal$—
 $(5) $—
 $—
 $70
 
Corporate - public3
 —
 —
 —
 41
 
Corporate - privately placed12
 —
 —
 (2) 474
 
ABS - CDO—
 —
 —
 (25) 33
 
ABS - consumer and other—
 —
 —
 (1) 44
 
Total fixed income securities15
 (5) —
 (28) 662
 
Equity securities—
 —
 —
 —
 52
 
Free-standing derivatives, net—
 —
 —
 —
 (7)
(2) 
Other assets—
 —
 —
 —
 1
 
Total recurring Level 3 assets$15
 $(5) $—
 $(28) $708
 
           
Liabilities 
  
  
  
  
 
Contractholder funds: Derivatives embedded in life and annuity contracts$—
 $—
 $—
 $2
 $(304) 
Total recurring Level 3 liabilities$—
 $—
 $—
 $2
 $(304) 
__________
(1)
The effect to net income totals $7 million and is reported in the Condensed Consolidated Statements of Operations and Comprehensive Income as follows: $(4) million in realized capital gains and losses, $4 million in net investment income, $(7) million in interest credited to contractholder funds and $14 million in contract benefits.
(2)
Comprises $1 million of assets and $8 millionof liabilities.












The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the six months ended June 30, 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
 $(5) $6
 $—
 
Corporate - public44
 —
 1
 1
 (7) 
Corporate - privately placed447
 4
 12
 16
 (65) 
ABS - CDO53
 —
 2
 8
 (1) 
ABS - consumer and other44
 —
 (2) 3
 —
 
Total fixed income securities666
 15
 8
 34
 (73) 
Equity securities60
 (16) 3
 —
 —
 
Free-standing derivatives, net(7) —
 —
 —
 —
 
Other assets1
 —
 —
 —
 —
 
Total recurring Level 3 assets$720
 $(1) $11
 $34
 $(73) 
           
Liabilities 
  
  
  
  
 
Contractholder funds: Derivatives embedded in life and annuity contracts$(299) $(8) $—
 $—
 $—
 
Total recurring Level 3 liabilities$(299) $(8) $—
 $—
 $—
 
           
 Purchases Sales Issues Settlements Balance as of June 30, 2016 
Assets 
  
  
  
  
 
Fixed income securities: 
  
  
  
  
 
Municipal$—
 $(20) $—
 $—
 $70
 
Corporate - public3
 —
 —
 (1) 41
 
Corporate - privately placed67
 —
 —
 (7) 474
 
ABS - CDO—
 (1) —
 (28) 33
 
ABS - consumer and other—
 —
 —
 (1) 44
 
Total fixed income securities70
 (21) —
 (37) 662
 
Equity securities5
 —
 —
 —
 52
 
Free-standing derivatives, net—
 —
 —
 —
 (7)
(2) 
Other assets—
 —
 —
 —
 1
 
Total recurring Level 3 assets$75
 $(21) $—
 $(37) $708
 
           
Liabilities 
  
  
  
  
 
Contractholder funds: Derivatives embedded in life and annuity contracts$—
 $—
 $(1) $4
 $(304) 
Total recurring Level 3 liabilities$—
 $—
 $(1) $4
 $(304) 
__________
(1)
The effect to net income totals $(9) million and is reported in the Condensed Consolidated Statements of Operations and Comprehensive Income as follows: $(8) million in realized capital gains and losses, $7 million in net investment income, $(6) million in interest credited to contractholder funds and $(2) million in contract benefits.
(2)
Comprises $1 million of assets and $8 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 and six months ended June 30, 20172018 or 2016.


2017.
Transfers into Level 3 during the three months and six months ended June 30, 20172018 and 20162017 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 being classified as Level 3. Transfers out of Level 3 during the three months and six months ended June 30, 20172018 and 20162017 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 lossesvaluation changes included in net income for Level 3 assets and liabilities held as of June 30.
($ in millions)Three months ended June 30, Six months ended June 30,Three months ended June 30, Six months ended June 30,
2017 2016 2017 20162018 2017 2018 2017
Assets 
  
  
  
 
  
  
  
Fixed income securities: 
  
  
  
Corporate$—
 $3
 $—
 $1
Equity securities2
 (4) 7
 (16)$6
 $2
 $7
 $7
Free-standing derivatives, net2
 1
 3
 —
—
 2
 —
 3
Other assets—
 —
 (1) —
—
 —
 —
 (1)
Total recurring Level 3 assets$4
 $—
 $9
 $(15)$6
 $4
 $7
 $9
              
Liabilities 
  
  
  
 
  
  
  
Contractholder funds: Derivatives embedded in life and annuity contracts$—
 $7
 $3
 $(8)$2
 $—
 $25
 $3
Total recurring Level 3 liabilities$—
 $7
 $3
 $(8)$2
 $—
 $25
 $3
The amounts in the table above represent the change in unrealized gains and losses related to valuation changes included in net income for the period of time that the asset or liability was held and determined to be in Level 3. These gains and losses total $8 million for the three months ended June 30, 2018 and are reported as follows: $6 million in realized capital gains and losses, $1 million in interest credited to contractholder funds and $1 million in contract benefits. These gains and losses total $4 million for the three months ended June 30, 2017 and are reported as follows: $2 million in realized capital gains and losses, $2 million in net investment income, $(1) million in interest credited to contractholder funds and $1 million in contract benefits. These gains and losses total $7$32 million for the threesix months ended June 30, 20162018 and are reported as follows: $(4)$7 million in realized capital gains and losses, $4 million in net investment income, $(7)$20 million in interest credited to contractholder funds and $14$5 million in contract benefits.  These gains and losses total $12 million for the six months ended June 30, 2017 and are reported as follows: $3 million in realized capital gains and losses, $7 million in net investment income, $(6) million in interest credited to contractholder funds and $8 million in contract benefits.  These gains and losses total $(23) million for the six months ended June 30, 2016 and are reported as follows: $(22) million in realized capital gains and losses, $7 million in net investment income, $(6) million in interest credited to contractholder funds and $(2) million in contract benefits.
Presented below are the carrying values and fair value estimates of financial instruments not carried at fair value.
Financial assets
($ in millions)June 30, 2017 December 31, 2016June 30, 2018 December 31, 2017
Carrying
value
 
Fair
value
 
Carrying
value
 
Fair
value
Carrying
value
 
Fair
value
 
Carrying
value
 
Fair
value
Mortgage loans$3,793
 $3,920
 $3,938
 $3,963
$3,839
 $3,879
 $3,876
 $4,052
Cost method limited partnerships583
 683
 591
 681
Agent loans570
 562
 538
 536
Bank loans478
 479
 467
 467
447
 449
 437
 437
Agent loans499
 495
 467
 467
Notes due from related party—
 —
 325
 325
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. Risk adjusted discount rates are selected using current rates at which similar loans would be made to borrowers with similar characteristics. As of December 31, 2016, the fair value of notes due from related party, which were reported in other investments, was based on discounted cash flow calculations using current interest rates for instruments with comparable terms. Since the notes could be


called at par value, their fair value was not greater than par value. The fair value measurements for mortgage loans, cost method limited partnerships, bank loans and agent loans notes due from related party and assets held for sale are categorized as Level 3.
Financial liabilities
($ in millions)June 30, 2017 December 31, 2016June 30, 2018 December 31, 2017
Carrying
value
 
Fair
value
 
Carrying
value
 
Fair
value
Carrying
value
 
Fair
value
 
Carrying
value
 
Fair
value
Contractholder funds on investment contracts$10,810
 $11,405
 $11,276
 $11,972
$9,771
 $10,203
 $10,331
 $11,036
Liability for collateral529
 529
 550
 550
511
 511
 542
 542
Notes due to related parties140
 143
 465
 465
140
 138
 140
 141
The fair value of contractholder funds on investment contractsmeasurement 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 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 measurementLevel 3 for contractholder funds on investment contracts is categorized as Level 3.
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. Notes due to related parties comprise agent loan collateralized notes. The fair value of agent loan collateralizedand notes due to related parties is based on discounted cash flow calculations using current interest ratesand Level 2 for instruments with comparable terms and considers the Corporation’s credit risk. Notes due to related parties also included surplus notes as of December 31, 2016. The fair value of surplus notes due to related parties was based on discounted cash flow calculations using current interest ratesliability for instruments with comparable terms and considered the Company’s own credit risk. Since the surplus notes could be called at par value, their fair value was not greater than par value. The fair value measurement for notes due to related parties is categorized as Level 3.collateral.
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. 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, index total return 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, index total return swaps, and options to increase equity exposure.
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. Fixed income index total return swaps are used to offset valuation losses in the fixed income portfolio during periods of declining fixed income market values. 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 futurestotal return swaps, options and optionsfutures to offset valuation losses in the equity portfolio during periods of declining equity market values. Foreign currency swaps and forwards are primarily used by the Company to reduce the foreign currency risk associated with holding foreign currency denominated investments.
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 returns linked to equity returnsindices to contractholders.
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.
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 June 30, 2017, the Company pledged $12 million 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 incomeAOCI 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.


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 June 30, 2017.2018.
($ in millions, except number of contracts)  
Volume (1)
        
Volume (1)
      
Balance sheet location 
Notional
amount
 
Number
of
contracts
 
Fair
value,
net
 
Gross
asset
 
Gross
liability
Balance sheet location 
Notional
amount
 
Number
of
contracts
 
Fair
value,
net
 
Gross
asset
 
Gross
liability
Asset derivatives   
  
  
  
  
   
  
  
  
  
Derivatives not designated as accounting hedging instrumentsDerivatives not designated as accounting hedging instruments  
  
  
  
  
Derivatives not designated as accounting hedging instruments  
  
  
  
  
Interest rate contracts   
  
  
  
  
   
  
  
  
  
Interest rate cap agreementsOther investments $22
 n/a
 $—
 $—
 $—
Other investments $13
 n/a
 $—
 $—
 $—
Financial optionsOther investments —
 18
 —
 —
 —
Equity and index contracts   
  
  
  
  
   
  
  
  
  
OptionsOther investments 180
 4,857
 100
 101
 (1)Other investments —
 32,622
 85
 85
 —
Financial futuresOther assets —
 51
 —
 —
 —
Total return index contracts          
Total return swap agreements - fixed incomeOther assets 19
 n/a
 —
 —
 —
Foreign currency contracts   
  
  
  
  
Foreign currency forwardsOther investments 9
 n/a
 —
 —
 —
Credit default contracts   
  
  
  
  
   
  
  
  
  
Credit default swaps – buying protectionOther investments 3
 n/a
 —
 —
 —
Other investments 15
 n/a
 (1) —
 (1)
Credit default swaps – selling protectionOther investments 80
 n/a
 1
 1
 —
Other investments 30
 n/a
 1
 1
 —
Other contracts   
  
  
  
  
   
  
  
  
  
Other contractsOther assets 3
 n/a
 —
 —
 —
OtherOther assets 3
 n/a
 —
 —
 —
Total asset derivatives  $288
 4,857
 $101
 $102
 $(1)  $89
 32,691
 $85
 $86
 $(1)
                    
Liability derivatives   
  
  
  
  
   
  
  
  
  
Derivatives designated as accounting hedging instruments  
  
  
  
  
Foreign currency swap agreementsOther liabilities & accrued expenses $49
 n/a
 $2
 $2
 $—
Derivatives not designated as accounting hedging instrumentsDerivatives not designated as accounting hedging instruments  
  
  
  
  
Derivatives not designated as accounting hedging instruments  
  
  
  
  
Interest rate contracts   
  
  
  
  
   
  
  
  
  
Interest rate cap agreementsOther liabilities & accrued expenses 37
 n/a
 1
 1
 —
Other liabilities & accrued expenses $28
 n/a
 $1
 $1
 $—
Financial optionsOther liabilities & accrued expenses —
 574
 —
 —
 —
Equity and index contracts   
  
  
  
  
   
  
  
  
  
Options and futuresOther liabilities & accrued expenses —
 4,870
 (38) —
 (38)
OptionsOther liabilities & accrued expenses —
 32,524
 (28) —
 (28)
Total return index contracts          
Total return swap agreements - fixed incomeOther liabilities & accrued expenses 3
 n/a
 —
 —
 —
Total return swap agreements - equityOther liabilities & accrued expenses 21
 n/a
 —
 —
 —
Foreign currency contracts   
  
  
  
  
   
  
  
  
  
Foreign currency forwardsOther liabilities & accrued expenses 241
 n/a
 (4) 1
 (5)Other liabilities & accrued expenses 186
 n/a
 1
 2
 (1)
Embedded derivative financial instruments   
  
  
  
  
   
  
  
  
  
Guaranteed accumulation benefitsContractholder funds 246
 n/a
 (28) —
 (28)Contractholder funds 205
 n/a
 (19) —
 (19)
Guaranteed withdrawal benefitsContractholder funds 282
 n/a
 (7) —
 (7)Contractholder funds 252
 n/a
 (10) —
 (10)
Equity-indexed and forward starting options in life and annuity product contractsContractholder funds 1,729
 n/a
 (249) —
 (249)Contractholder funds 1,718
 n/a
 (228) —
 (228)
Credit default contracts   
  
  
  
  
   
  
  
  
  
Credit default swaps – buying protectionOther liabilities & accrued expenses 24
 n/a
 (2) —
 (2)Other liabilities & accrued expenses 12
 n/a
 —
 —
 —
Credit default swaps – selling protectionOther liabilities & accrued expenses 101
 n/a
 —
 —
 —
Other liabilities & accrued expenses 1
 n/a
 —
 —
 —
Subtotal  2,660
 4,870
 (327) 2
 (329)
Total liability derivatives  2,709
 4,870
 (325) $4
 $(329)  2,426
 33,098
 (283) $3
 $(286)
Total derivatives  $2,997
 9,727
 $(224)  
  
  $2,515
 65,789
 $(198)  
  
___________

(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)


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, 2016.2017.
($ in millions, except number of contracts)  
Volume (1)
        
Volume (1)
      
Balance sheet location 
Notional
amount
 
Number
of
contracts
 
Fair
value,
net
 
Gross
asset
 
Gross
liability
Balance sheet location 
Notional
amount
 
Number
of
contracts
 
Fair
value,
net
 
Gross
asset
 
Gross
liability
Asset derivatives   
  
  
  
  
   
  
  
  
  
Derivatives not designated as accounting hedging instrumentsDerivatives not designated as accounting hedging instruments  
  
  
  
  
Interest rate contracts   
  
  
  
  
Interest rate cap agreementsOther investments $15
 n/a
 $—
 $—
 $—
Equity and index contracts   
  
  
  
  
OptionsOther investments —
 4,485
 114
 114
 —
Credit default contracts   
  
  
  
  
Credit default swaps – buying protectionOther investments 3
 n/a
 —
 —
 —
Credit default swaps – selling protectionOther investments 80
 n/a
 1
 1
 —
Other contracts   
  
  
  
  
OtherOther assets 3
 n/a
 —
 —
 —
Total asset derivatives  $101
 4,485
 $115
 $115
 $—
          
Liability derivatives   
  
  
  
  
Derivatives designated as accounting hedging instrumentsDerivatives designated as accounting hedging instruments  
  
  
  
  
Derivatives designated as accounting hedging instruments  
  
  
  
  
Foreign currency swap agreementsOther investments $49
 n/a
 $5
 $5
 $—
Other liabilities & accrued expenses $19
 n/a
 $2
 $2
 $—
Derivatives not designated as accounting hedging instrumentsDerivatives not designated as accounting hedging instruments  
  
  
  
  
Derivatives not designated as accounting hedging instruments  
  
  
  
  
Interest rate contracts   
  
  
  
  
   
  
  
  
  
Interest rate cap agreementsOther investments 65
 n/a
 1
 1
 —
Other liabilities & accrued expenses 30
 n/a
 1
 1
 —
Equity and index contracts   
  
  
  
  
   
  
  
  
  
OptionsOther investments —
 3,917
 87
 87
 —
Financial futures contractsOther assets —
 6
 —
 —
 —
Options and futuresOther liabilities & accrued expenses —
 4,464
 (53) —
 (53)
Foreign currency contracts   
  
  
  
  
          
Foreign currency forwardsOther investments 173
 n/a
 7
 8
 (1)Other liabilities & accrued expenses 207
 n/a
 (8) —
 (8)
Credit default contracts   
  
  
  
  
Credit default swaps – buying protectionOther investments 25
 n/a
 (1) —
 (1)
Credit default swaps – selling protectionOther investments 80
 n/a
 1
 1
 —
Other contracts   
  
  
  
  
Other contractsOther assets 3
 n/a
 1
 1
 —
Subtotal  346
 3,923
 96
 98
 (2)
Total asset derivatives  $395
 3,923
 $101
 $103
 $(2)
          
Liability derivatives   
  
  
  
  
Equity and index contracts   
  
  
  
  
Options and futuresOther liabilities & accrued expenses $—
 3,928
 $(37) $—
 $(37)
Embedded derivative financial instruments   
  
  
  
  
   
  
  
  
  
Guaranteed accumulation benefitsContractholder funds 391
 n/a
 (34) —
 (34)Contractholder funds 225
 n/a
 (22) —
 (22)
Guaranteed withdrawal benefitsContractholder funds 290
 n/a
 (9) —
 (9)Contractholder funds 274
 n/a
 (12) —
 (12)
Equity-indexed and forward starting options in life and annuity product contractsContractholder funds 1,737
 n/a
 (246) —
 (246)Contractholder funds 1,735
 n/a
 (250) —
 (250)
Credit default contracts   
  
  
  
  
   
  
  
  
  
Credit default swaps – buying protectionOther liabilities & accrued expenses 6
 n/a
 —
 —
 —
Other liabilities & accrued expenses 34
 n/a
 (1) —
 (1)
Credit default swaps – selling protectionOther liabilities & accrued expenses 100
 n/a
 (3) —
 (3)Other liabilities & accrued expenses 1
 n/a
 —
 —
 —
Subtotal  2,524
 3,928
 (329) —
 (329)  2,506
 4,464
 (345) 1
 (346)
Total liability derivatives  2,524
 3,928
 (329) $—
 $(329)  2,525
 4,464
 (343) $3
 $(346)
Total derivatives  $2,919
 7,851
 $(228)  
  
  $2,626
 8,949
 $(228)  
  
____________
 
(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)
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        Offsets      
Gross
amount
 
Counter-
party
netting
 
Cash
collateral
(received)
pledged
 
Net
amount on
balance
sheet
 
Securities
collateral
(received)
pledged
 
Net
amount
Gross
amount
 
Counter-
party
netting
 
Cash
collateral
(received)
pledged
 
Net
amount on
balance
sheet
 
Securities
collateral
(received)
pledged
 
Net
amount
June 30, 2017 
�� 
  
  
  
  
June 30, 2018 
  
  
  
  
  
Asset derivatives$7
 $(5) $(1) $1
 $—
 $1
$4
 $(4) $1
 $1
 $—
 $1
Liability derivatives(8) 5
 (3) (6) 3
 (3)(2) 4
 (7) (5) —
 (5)
                      
December 31, 2016 
  
  
  
  
  
December 31, 2017 
  
  
  
  
  
Asset derivatives$14
 $(2) $(4) $8
 $(1) $7
$4
 $(3) $—
 $1
 $—
 $1
Liability derivatives(5) 2
 —
 (3) 4
 1
(10) 3
 (2) (9) 3
 (6)


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 $3 million during the next twelve months. There was no hedge ineffectiveness reported in realized gains and losses for the three months and six months ended June 30, 20172018 or 2016.2017. As of June 30, 2018, the Company had no derivatives used in cash flow hedging relationships.
($ in millions)Three months ended June 30, Six months ended June 30,Three months ended June 30, Six months ended June 30,
2017 2016 2017 20162018 2017 2018 2017
Gain (loss) recognized in OCI on derivatives during the period$—
 $1
 $(2) $(2)$1
 $—
 $1
 $(2)
Gain recognized in OCI on derivatives during the term of the hedging relationship3
 5
 3
 5
—
 3
 —
 3
Gain reclassified from AOCI into income (realized capital gains and losses)—
 3
 —
 3
3
 —
 3
 —
The following tables present gains and losses from valuation and settlements reported on derivatives not designated as accounting hedging instruments in the Condensed Consolidated Statements of Operations and Comprehensive Income. For the three months and six months ended June 30, 20172018 and 2016,2017, the Company had no derivatives used in fair value hedging relationships.
($ in millions)Realized capital gains and losses Contract benefits Interest credited to contractholder funds Total gain (loss) recognized in net income on derivativesRealized capital gains and losses Contract benefits Interest credited to contractholder funds Total gain (loss) recognized in net income on derivatives
Three months ended June 30, 2018 
  
  
  
Equity and index contracts$—

$—

$10

$10
Embedded derivative financial instruments—

1

2

3
Foreign currency contracts7

—

—

7
Total$7

$1

$12

$20
       
Six months ended June 30, 2018 
  
  
  
Equity and index contracts$—
 $—
 $6
 $6
Embedded derivative financial instruments—
 5
 22
 27
Foreign currency contracts4
 —
 —
 4
Total$4
 $5
 $28
 $37
       
Three months ended June 30, 2017 
  
  
  
       
Equity and index contracts$—

$—

$9

$9
$—
 $—
 $9
 $9
Embedded derivative financial instruments—

1

—

1
—
 1
 —
 1
Foreign currency contracts(5)
—

—

(5)(5) —
 —
 (5)
Credit default contracts1

—

—

1
1
 —
 —
 1
Total$(4)
$1

$9

$6
$(4) $1
 $9
 $6
              
Six months ended June 30, 2017 
  
  
  
       
Equity and index contracts$(2) $—
 $22
 $20
$(2) $—
 $22
 $20
Embedded derivative financial instruments—
 8
 (4) 4
—
 8
 (4) 4
Foreign currency contracts(9) —
 —
 (9)(9) —
 —
 (9)
Credit default contracts2
 —
 —
 2
2
 —
 —
 2
Total$(9) $8
 $18
 $17
$(9) $8
 $18
 $17
       
Three months ended June 30, 2016       
Interest rate contracts$(1) $—
 $—
 $(1)
Equity and index contracts(1) —
 2
 1
Embedded derivative financial instruments—
 14
 (5) 9
Foreign currency contracts3
 —
 —
 3
Total$1
 $14
 $(3) $12
       
Six months ended June 30, 2016       
Interest rate contracts$(1) $—
 $—
 $(1)
Equity and index contracts(1) —
 (5) (6)
Embedded derivative financial instruments—
 (2) (3) (5)
Foreign currency contracts(1) —
 —
 (1)
Credit default contracts(1) —
 —
 (1)
Total$(4) $(2) $(8) $(14)
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 June 30, 2017,2018, counterparties pledged $4$7 million in cashcollateral to the Company, and the Company pledged $3$1 million in cash and securitiescollateral to counterparties which includes $2 million of collateral posted under MNAs for contracts containing credit-risk-contingent provisions that are in a liability position and $1 million of collateral posted under MNAs for contracts without credit-risk-contingent features. 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 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) June 30, 2017 December 31, 2016 June 30, 2018 December 31, 2017
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)
 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+ 4
 $250
 $4
 $—
 5
 $312
 $12
 $9
 —
 $—
 $—
 $—
 2
 $59
 $3
 $—
A- 2
 33
 1
 —
 —
 —
 —
 —
BBB+ 1
 231
 1
 —
 —
 —
 —
 —
BBB 1
 2
 —
 —
 —
 —
 —
 —
Total 4
 $266
 $2
 $—
 2
 $59
 $3
 $—
__________
 
(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.
For certain exchange traded and cleared derivatives, margin deposits are required as well as daily cash settlements of margin accounts. As of June 30, 2018, counterparties pledged $1 million in collateral to the Company and the Company pledged $3 million in the form of margin deposits.
Market risk is the risk that the Company will incur losses due to adverse changes in market rates and prices. Market risk exists for all of the derivative financial instruments the Company currently holds, as these instruments may become less valuable due to adverse changes in market conditions. To limit this risk, the Company’s senior management has established risk control limits. In addition, changes in fair value of the derivative financial instruments that the Company uses for risk management purposes are generally offset by the change in the fair value or cash flows of the hedged risk component of the related assets, liabilities or forecasted transactions.
Certain of the Company’s derivative instruments contain credit-risk-contingent termination events, cross-default provisions and credit support annex agreements. Credit-risk-contingent termination events allow the counterparties to terminate the derivative agreement or a specific trade on certain dates if AIC’s, ALIC’s or Allstate Life Insurance Company of New York’s (“ALNY”) financial strength credit ratings by Moody’s or S&P fall below a certain level. Credit-risk-contingent cross-default provisions allow the counterparties to terminate the derivative agreement if the Company defaults by pre-determined threshold amounts on certain debt instruments. Credit-risk-contingent credit support annex agreements specify the amount of collateral the Company must post to counterparties based on AIC’s, ALIC’s or ALNY’s financial strength credit ratings by Moody’s or S&P, or in the event AIC, ALIC or ALNY are no longer rated by either Moody’s or S&P.
The following summarizes the fair value of derivative instruments with termination, cross-default or collateral credit-risk-contingent features that are in a liability position, as well as the fair value of assets and collateral that are netted against the liability in accordance with provisions within legally enforceable MNAs.
($ in millions)June 30, 2017 December 31, 2016June 30, 2018 December 31, 2017
Gross liability fair value of contracts containing credit-risk-contingent features$7
 $2
$2
 $12
Gross asset fair value of contracts containing credit-risk-contingent features and subject to MNAs(2) (2)(2) (5)
Collateral posted under MNAs for contracts containing credit-risk-contingent features(2) —
—
 (3)
Maximum amount of additional exposure for contracts with credit-risk-contingent features if all features were triggered concurrently$3
 $—
$—
 $4
Credit derivatives - selling protection
A credit default swap (“CDS”) 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.


The following table shows the CDS notional amounts by credit rating and fair value of protection sold.
($ in millions)Notional amount  Notional amount  
AA A BBB 
BB and
lower
 Total 
Fair
value
AA A BBB 
BB and
lower
 Total 
Fair
value
June 30, 2017 
  
  
  
  
  
June 30, 2018 
  
  
  
  
  
Single name 
  
  
  
  
  
 
  
  
  
  
  
Corporate debt$—
 $—
 $—
 $1
 $1
 $—
$—
 $—
 $—
 $1
 $1
 $—
First-to-default Basket 
  
  
  
  
  
Municipal—
 —
 100
 —
 100
 —
Index 
  
  
  
  
  
 
  
  
  
  
  
Corporate debt1
 17
 49
 13
 80
 1
1
 5
 21
 3
 30
 1
Total$1
 $17
 $149
 $14
 $181
 $1
$1
 $5
 $21
 $4
 $31
 $1
                      
December 31, 2016 
  
  
  
  
  
First-to-default Basket 
  
  
  
  
  
Municipal$—
 $—
 $100
 $—
 $100
 $(3)
December 31, 2017 
  
  
  
  
  
Single name 
  
  
  
  
  
Corporate debt$—
 $—
 $—
 $1
 $1
 $—
Index 
  
  
  
  
  
 
  
  
  
  
  
Corporate debt1
 19
 50
 10
 80
 1
1
 19
 45
 15
 80
 1
Total$1
 $19
 $150
 $10
 $180
 $(2)$1
 $19
 $45
 $16
 $81
 $1
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 June 30, Six months ended June 30,Three months ended June 30, Six months ended June 30,
2017 2016 2017 20162018 2017 2018 2017
Direct$183
 $177
 $363
 $354
$184
 $183
 $369
 $363
Assumed              
Affiliate55
 35
 108
 69
61
 55
 121
 108
Non-affiliate193
 202
 391
 405
185
 193
 374
 391
Ceded              
Affiliate(13) (13) (26) (26)(12) (13) (25) (26)
Non-affiliate(71) (74) (141) (144)(70) (71) (138) (141)
Premiums and contract charges, net of reinsurance$347
 $327
 $695
 $658
$348
 $347
 $701
 $695


The effects of reinsurance on contract benefits are as follows:
($ in millions)Three months ended June 30, Six months ended June 30,Three months ended June 30, Six months ended June 30,
2017 2016 2017 20162018 2017 2018 2017
Direct$257
 $257
 $516
 $513
$266
 $257
 $523
 $516
Assumed              
Affiliate34
 20
 63
 41
34
 34
 68
 63
Non-affiliate147
 145
 263
 278
123
 147
 257
 263
Ceded              
Affiliate(8) (9) (16) (18)(8) (8) (20) (16)
Non-affiliate(66) (72) (108) (135)(58) (66) (101) (108)
Contract benefits, net of reinsurance$364
 $341
 $718
 $679
$357
 $364
 $727
 $718
The effects of reinsurance on interest credited to contractholder funds are as follows:
($ in millions)Three months ended June 30, Six months ended June 30,Three months ended June 30, Six months ended June 30,
2017 2016 2017 20162018 2017 2018 2017
Direct$140
 $154
 $276
 $315
$129
 $140
 $259
 $276
Assumed              
Affiliate2
 2
 4
 4
2
 2
 4
 4
Non-affiliate31
 27
 64
 52
33
 31
 58
 64
Ceded              
Affiliate(6) (5) (11) (10)(5) (6) (10) (11)
Non-affiliate(6) (6) (11) (11)(7) (6) (11) (11)
Interest credited to contractholder funds, net of reinsurance$161
 $172
 $322
 $350
$152
 $161
 $300
 $322
7. Guarantees and Contingent Liabilities
Guarantees
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 LBLLincoln Benefit Life Company (“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 June 30, 2017.2018.
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, impose additional regulations regarding cybersecurity and privacy, 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, international 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.
In June 2017, the Company entered into a Global Resolution Agreement (“GRA”) to resolve the unclaimed property examination that a third-party auditor conducted of the Company on behalf of participating state treasurers. The GRA will not become effective until at least two-thirds of the participating states become signatory states. Under the terms of the GRA, the Company denied any wrongdoing. Pursuant to the GRA, the third-party auditor acting on behalf of the signatory states will compare matching criteria, including the Social Security Death Master File, to identify deceased insureds and contract holders where a valid claim has not been made. The Company had already implemented broad search procedures in order to identify potential claims, and as a result, it is not anticipated the auditor will identify a significant number of potential claims not already identified by the Company. The Company continues to be examined by certain state insurance departments 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 (loss) income on a pre-tax and after-tax basis are as follows:
($ in millions)Three months ended June 30,Three months ended June 30,
2017 20162018 2017
Pre-
tax
 Tax 
After-
tax
 
Pre-
tax
 Tax 
After-
tax
Pre-
tax
 Tax 
After-
tax
 
Pre-
tax
 Tax 
After-
tax
Unrealized net holding gains and losses arising during the period, net of related offsets$178
 $(62) $116
 $351
 $(123) $228
$(94) $20
 $(74) $178
 $(62) $116
Less: reclassification adjustment of realized capital gains and losses(3) 1
 (2) (8) 3
 (5)(17) 4
 (13) (3) 1
 (2)
Unrealized net capital gains and losses181
 (63) 118
 359
 (126) 233
(77) 16
 (61) 181
 (63) 118
Unrealized foreign currency translation adjustments—
 —
 —
 9
 (3) 6
6
 (1) 5
 —
 —
 —
Other comprehensive income$181
 $(63) $118
 $368
 $(129) $239
Other comprehensive (loss) income$(71) $15
 $(56) $181
 $(63) $118
                      
Six months ended June 30,Six months ended June 30,
2017 20162018 2017
Pre-
tax
 Tax 
After-
tax
 
Pre-
tax
 Tax 
After-
tax
Pre-
tax
 Tax 
After-
tax
 
Pre-
tax
 Tax 
After-
tax
Unrealized net holding gains and losses arising during the period, net of related offsets$281
 $(99) $182
 $674
 $(236) $438
$(320) $67
 $(253) $281
 $(99) $182
Less: reclassification adjustment of realized capital gains and losses(1) —
 (1) (55) 19
��(36)(21) 4
 (17) (1) —
 (1)
Unrealized net capital gains and losses282
 (99) 183
 729
 (255) 474
(299) 63
 (236) 282
 (99) 183
Unrealized foreign currency translation adjustments(5) 2
 (3) 6
 (2) 4
11
 (2) 9
 (5) 2
 (3)
Other comprehensive income$277
 $(97) $180
 $735
 $(257) $478
Other comprehensive (loss) income$(288) $61
 $(227) $277
 $(97) $180



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

Results of Review of Interim Financial Information

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 June 30, 2017,2018, and the related condensed consolidated statements of operations and comprehensive income for the three-monththree month and six-monthsix month periods ended June 30, 20172018 and 2016, and of2017, shareholder’s equity and cash flows for the six-monthsix month periods ended June 30, 2018 and 2017, and 2016. These interimthe related notes (collectively referred to as the “condensed consolidated 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)statements”). 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 suchthe accompanying 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) (“PCAOB”), the consolidated statement of financial position of Allstate Life Insurance Company and subsidiaries as of December 31, 2016,2017, 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 February 24, 2017,March 5, 2018, 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, 20162017 is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived.

Basis for Review Results

These condensed consolidated financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with standards of the PCAOB. A review of condensed consolidated financial statements 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 PCAOB, 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.

Emphasis of a Matter

As discussed in Note 1 to the condensed consolidated financial statements, the Company changed its presentation and method of accounting for the recognition and measurement of financial assets and financial liabilities due to an adopted accounting standard.


/s/ DELOITTE & TOUCHE LLP

Chicago, Illinois
August 3, 20176, 2018


Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTHTHREE MONTH AND SIX-MONTHSIX MONTH PERIODS ENDED JUNE 30, 20172018 AND 20162017
 
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 Reportannual report on Form 10-K for 2016.2017. 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 $134 million and $224 million in the second quarter and first six months of 2018, respectively, compared to $120 million and $206 million in the second quarter and first six months of 2017, respectively, comparedrespectively.
Premiums and contract charges totaled $348 million in the second quarter of 2018, an increase of 0.3% from $347 million in the second quarter of 2017, and $701 million in the first six months of 2018, an increase of 0.9% from $695 million in the first six months of 2017.
Investments totaled $33.51 billion as of June 30, 2018, a decrease of $930 million from $34.44 billion as of December 31, 2017. Net investment income decreased 11.4% to $94$419 million in the second quarter of 2018 and 5.8% to $826 million in the first six months of 2018 from $473 million and $146$877 million in the second quarter and first six months of 2016,2017, respectively.
Premiums and contract chargesNet realized capital gains totaled $347$8 million in the second quarter of 2017, an increase2018, compared to net realized capital losses of 6.1% from $327$4 million in the second quarter of 2016, and $6952017. Net realized capital losses totaled $24 million in the first six months of 2017, an increase of 5.6% from $6582018, compared to $5 million in the first six months of 2016.2017.
InvestmentsContractholder funds totaled $34.30$18.02 billion as of June 30, 2017,2018, reflecting a decrease of $769$576 million from $35.07$18.59 billion as of December 31, 2016. Net investment income increased 13.7% to $473 million in2017.
On December 22, 2017, Public Law 115-97, known as the second quarterTax Cuts and Jobs Act of 2017 (“Tax Legislation”) became effective, permanently reducing the U.S. corporate income tax rate from 35% to 21% beginning January 1, 2018. As a result, the corporate tax rate is not comparable between periods. During 2017, we revalued deferred tax assets and 7.5%liabilities and recorded liabilities related to $877 millionthe transition to the modified territorial system for international taxation.  The impact of the Tax Legislation may differ from our preliminary estimates due to, among other things, changes in interpretations and assumptions we have made, guidance that may be issued and actions we may take as a result of the first six months of 2017 from $416 millionTax Legislation. During the period ended June 30, 2018, we have not recorded any material adjustments to these provisional amounts.  We continue to refine our analysis and $816 million incalculations, which could impact the second quarter and first six months of 2016, respectively.
Net realized capital losses totaled $4 million and $5 millionin the second quarter and first six months of 2017, respectively, compared to $1 million and $47 million in the second quarter and first six months of 2016, respectively.
Contractholder funds totaled $19.01 billionprovisional estimates previously recorded.  Accordingly, as of June 30, 2017, reflecting a decrease2018, we have not fully completed our accounting for the Tax Legislation.
Concurrent with the adoption of $457 millionthe Financial Accounting Standards Board’s standard on revenue from $19.47 billion ascontracts with customers and our objective of December 31, 2016.
Effective January 1, 2017, ALIC entered into a coinsurance reinsurance agreementproviding more information, we revised the presentation of total revenue to include other revenue. Previously, components of other revenue were presented within operating costs and expenses and primarily represent gross dealer concessions received in connection with Allstate Assurance Company (“AAC”)exclusive agencies and exclusive financial specialists sales of non-proprietary products, including fixed annuities, disability insurance and long-term care insurance. Other revenue is recognized when performance obligations are fulfilled. Prior periods have been reclassified to assume certain term life insurance policies. This business generated approximately $16 millionconform to current separate presentation of premiums and $9 million of contract benefits in fourth quarter 2016.other revenue.


OPERATIONS
Summary analysis Summarized financial data is presented in the following table.
($ in millions)Three months ended June 30, Six months ended June 30,Three months ended June 30, Six months ended June 30,
2017 2016 2017 20162018 2017 2018 2017
Revenues 
  
  
  
 
  
  
  
Premiums$170
 $147
 $339
 $296
$175
 $170
 $352
 $339
Contract charges177
 180
 356
 362
173
 177
 349
 356
Other revenue8
 10
 16
 21
Net investment income473
 416
 877
 816
419
 473
 826
 877
Realized capital gains and losses(4) (1) (5) (47)8
 (4) (24) (5)
Total revenues816
 742
 1,567
 1,427
783
 826
 1,519
 1,588
              
Costs and expenses 
  
  
  
 
  
  
  
Contract benefits(364) (341) (718) (679)(357) (364) (727) (718)
Interest credited to contractholder funds(161) (172) (322) (350)(152) (161) (300) (322)
Amortization of deferred policy acquisition costs (“DAC”)(43) (37) (84) (74)(39) (43) (78) (84)
Operating costs and expenses(68) (52) (137) (108)(68) (78) (136) (158)
Restructuring and related charges—
 (1) —
 (1)(2) —
 (2) —
Interest expense(2) (3) (3) (7)(1) (2) (2) (3)
Total costs and expenses(638) (606) (1,264) (1,219)(619) (648) (1,245) (1,285)
              
Gain on disposition of operations2
 1
 4
 3
2
 2
 3
 4
Income tax expense(60) (43) (101) (65)(32) (60) (53) (101)
Net income$120
 $94
 $206
 $146
$134
 $120
 $224
 $206
       
Investments as of June 30    $34,298
 $35,888
Net income was $134 million in the second quarter of 2018 compared to $120 million in the second quarter of 2017 compared to $94 million in the second quarter of 2016.2017. The increase was primarily due to higher net investment income, higher premiumsa lower effective tax rate from the Tax Legislation, realized capital gains in the current year period compared to realized capital losses in the prior year and lower interest credited to contractholder funds,operating costs and expenses, partially offset by higher contract benefits and operating costs and expenses.lower net investment income. Net income was $224 million in the first six months of 2018 compared to $206 million in the first six months of 20172017. The increase was primarily due to a lower effective tax rate from the Tax Legislation, and lower interest credited to contractholder funds and operating costs and expenses, partially offset by lower net investment income and higher net realized capital losses.
Analysis of revenues Total revenues decreased 5.2% or $43 million in the second quarter of 2018 compared to $146the second quarter of 2017, primarily due to lower net investment income, partially offset by realized capital gains in the current year period compared to realized capital losses in the prior year. Total revenues decreased 4.3% or $69 million in the first six months of 2016. The increase was primarily due to higher net investment income, higher premiums, lower net realized capital losses and lower interest credited to contractholder funds, partially offset by higher contract benefits and operating costs and expenses.
Analysis of revenuesTotal revenues increased 10.0% or $74 million in the second quarter of 20172018 compared to the second quarter of 2016, primarily due to higher net investment income and premiums. Total revenues increased 9.8% or $140 million in the first six months of 2017, compared to the first six months of2016, primarily due to higherlower net investment income higher premiums and lowerhigher net realized capital losses.losses, partially offset by higher premiums.
Premiums represent revenues generated from traditional life insurance, accident and health insurance products, 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 June 30, Six months ended June 30,Three months ended June 30, Six months ended June 30,
2017 2016 2017 20162018 2017 2018 2017
Underwritten products 
  
  
  
 
  
  
  
Traditional life insurance premiums$143
 $125
 $286
 $251
$145
 $143
 $292
 $286
Accident and health insurance premiums27
 22
 53
 45
30
 27
 60
 53
Interest-sensitive life insurance contract charges174
 177
 350
 356
170
 174
 343
 350
Subtotal344
 324
 689
 652
345
 344
 695
 689
              
Annuities 
  
  
  
 
  
  
  
Fixed annuity contract charges3
 3
 6
 6
3
 3
 6
 6
Premiums and contract charges (1)
$347
 $327
 $695
 $658
$348
 $347
 $701
 $695
____________
(1) 
Contract charges related to the cost of insurance totaled $123 million and $124 million for bothin the second quarter of 2018 and 2017, respectively, and 2016$248 million and $249 million for bothin the first six months of 2018 and 2017, and 2016.respectively.
Premiums and contract charges increased 6.1%0.3% or $20$1 million in the second quarter of 20172018 and 5.6%0.9% or $37$6 million in the first six months of 20172018 compared to the same periods of 2016,2017, primarily due to highergrowth in voluntary accident and health insurance and traditional life insurance.
Analysis of costs and expenses Total costs and expenses decreased 4.5% or $29 million in the second quarter of 2018 and 3.1% or $40 million in the first six months of 2018 compared to the same periods of 2017, primarily due to lower operating costs and expenses and lower interest credited to contractholder funds.
Contract benefits decreased 1.9% or $7 million in the second quarter of 2018 compared to the second quarter of 2017, primarily due to immediate annuity mortality experience that was favorable in comparison to the prior year, partially offset by lower reinsurance ceded on both traditional and interest-sensitive life insurance. Contract benefits increased 1.3% or $9 million in the first six months of 2018 compared to the first six months of 2017, primarily due to lower reinsurance ceded on both traditional and interest-sensitive life insurance.
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 $124 million and $247 million in the second quarter and first six months of 2018, respectively, compared to $127 million and $252 million in the second quarter and first six months of 2017, respectively.
The benefit spread by product group is disclosed in the following table.
($ in millions)Three months ended June 30, Six months ended June 30,
 2018 2017 2018 2017
Life insurance$69
 $74
 $132
 $143
Accident and health insurance15
 11
 32
 22
Annuities(19) (28) (44) (43)
Total benefit spread$65
 $57
 $120
 $122
Benefit spread increased 14.0% or $8 million in the second quarter of 2018 compared to the second quarter of 2017, primarily due to immediate annuity mortality experience that was favorable in comparison to the prior year and growth in voluntary accident and health insurance, partially offset by lower reinsurance agreementcoverage on interest-sensitive life contract benefits. Benefit spread decreased 1.6% or $2 million in the first six months of 2018 compared to the first six months of 2017, primarily due to lower reinsurance coverage on interest-sensitive life contract benefits, partially offset by growth in voluntary accident and health insurance.
Interest credited to contractholder funds decreased 5.6% or $9 million in the second quarter of 2018 and 6.8% or $22 million in the first six months of 2018 compared to the same periods of 2017, primarily due to lower average contractholder funds. Valuation changes on derivatives embedded in equity-indexed annuity contracts that are not hedged decreased interest credited to contractholder funds by $1 million and $6 million in the second quarter and first six months of 2018, respectively, compared to increases of $1 million in both the second quarter and first six months of 2017, respectively.




In order to analyze the impact of net investment income and interest credited to contractholders on net income, we monitor the difference between net investment income and the sum of interest credited to contractholder funds and the implied interest on immediate annuities with AAClife 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 is shown in the following table.
($ in millions)Three months ended June 30, Six months ended June 30,
 2018 2017 2018 2017
Investment spread before valuation changes on embedded derivatives not hedged$142
 $186
 $273
 $304
Valuation changes on derivatives embedded in equity-indexed annuity contracts that are not hedged1
 (1) 6
 (1)
Total investment spread$143
 $185
 $279
 $303
Investment spread before valuation changes on embedded derivatives not hedged decreased 23.7% or $44 million in the second quarter of 2018 and 10.2% or $31 million in the first six months of 2018 compared to the same periods of 2017, primarily due to lower 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 performance-based investments.
 Three months ended June 30,
 
Weighted average
investment yield
 
Weighted average
interest crediting rate
 
Weighted average
investment spreads
 2018 2017 2018 2017 2018 2017
Interest-sensitive life insurance5.4% 5.2% 3.8% 3.8% 1.6% 1.4%
Deferred fixed annuities4.2
 4.2
 2.8
 2.8
 1.4
 1.4
Immediate fixed annuities with and without life contingencies7.1
 8.9
 6.0
 6.0
 1.1
 2.9
Investments supporting capital, traditional life and other products3.2
 3.9
 n/a
 n/a
 n/a
 n/a
            
 Six months ended June 30,
 
Weighted average
investment yield
 
Weighted average
interest crediting rate
 
Weighted average
investment spreads
 2018 2017 2018 2017 2018 2017
Interest-sensitive life insurance5.2% 5.1% 3.7% 3.8% 1.5% 1.3%
Deferred fixed annuities4.2
 4.3
 2.8
 2.8
 1.4
 1.5
Immediate fixed annuities with and without life contingencies7.0
 7.6
 6.0
 6.0
 1.0
 1.6
Investments supporting capital, traditional life and other products3.4
 3.8
 n/a
 n/a
 n/a
 n/a
Amortization of DAC The components of amortization of DAC are summarized in the following table.
($ in millions)Three months ended June 30, Six months ended June 30,
 2018 2017 2018 2017
Amortization of DAC before amortization relating to realized capital gains and losses, valuation changes on embedded derivatives not hedged and changes in assumptions$35
 $39
 $72
 $76
Amortization relating to realized capital gains and losses (1) and valuation changes on embedded derivatives not hedged
4
 4
 6
 8
Amortization deceleration for changes in assumptions (“DAC unlocking”)—
 —
 —
 —
Total amortization of DAC$39
 $43
 $78
 $84
_____________
(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 9.3% or $4 million in the second quarter of 2018 and 7.1% or $6 million in the first six months of 2018 compared to the same periods of 2017, primarily due to lower gross profits on interest-sensitive life insurance.
Operating costs and expenses decreased 12.8% or $10 million in the second quarter of 2018 and 13.9% or $22 million in the first six months of 2018 compared to the same periods of 2017, primarily due to lower non-deferred acquisition-related costs since we stopped assuming new term life insurance business from Allstate Assurance Company (“AAC”) effective January 1, 2017.2018.
Analysis of reserves and contractholder funds
The following table summarizes our product liabilities.
($ in millions)June 30,
 2018 2017
Traditional life insurance$2,472
 $2,418
Accident and health insurance232
 237
Immediate fixed annuities with life contingencies   
Sub-standard structured settlements and group pension terminations (1)
5,011
 5,035
Standard structured settlements and SPIA (2)
3,464
 3,539
Other88
 97
Reserve for life-contingent contract benefits$11,267
 $11,326
    
Interest-sensitive life insurance$7,379
 $7,334
Deferred fixed annuities7,596
 8,486
Immediate fixed annuities without life contingencies2,617
 2,790
Other424
 403
Contractholder funds$18,016
 $19,013
____________
(1)
Comprises structured settlement annuities for annuitants with severe injuries or other health impairments which increased their expected mortality rate at the time the annuity was issued (“sub-standard structured settlements”) and group annuity contracts issued to sponsors of terminated pension plans.
(2)
Comprises structured settlement annuities for annuitants with standard life expectancy (“standard structured settlements”) and single premium immediate annuities (“SPIA”) with life contingencies.
Contractholder funds represent interest-bearing liabilities arising from the sale of products such as interest-sensitive life insurance and fixed annuities and funding agreements.annuities. The balance of contractholder funds is equal to the cumulative deposits received and interest credited to the contractholder less cumulative contract benefits, surrenders, withdrawals maturities and contract charges for mortality or administrative expenses. The following table shows the changes in contractholder funds.
($ in millions)Three months ended June 30, Six months ended June 30,
 2018 2017 2018 2017
Contractholder funds, beginning balance$18,284
 $19,248
 $18,592
 $19,470
        
Deposits 
  
  
  
Interest-sensitive life insurance212
 222
 425
 452
Fixed annuities5
 6
 9
 17
Total deposits217
 228
 434
 469
        
Interest credited151
 160
 298
 320
        
Benefits, withdrawals and other adjustments 
  
  
  
Benefits(201) (225) (415) (453)
Surrenders and partial withdrawals(289) (237) (551) (479)
Contract charges(160) (163) (322) (327)
Net transfers from separate accounts2
 2
 4
 3
Other adjustments (1)
12
 —
 (24) 10
Total benefits, withdrawals and other adjustments(636) (623) (1,308) (1,246)
        
Contractholder funds, ending balance$18,016
 $19,013
 $18,016
 $19,013
($ in millions)Three months ended June 30, Six months ended June 30,
 2017 2016 2017 2016
Contractholder funds, beginning balance$19,248
 $20,329
 $19,470
 $20,542
        
Deposits 
  
  
  
Interest-sensitive life insurance222
 230
 452
 469
Fixed annuities6
 11
 17
 21
Total deposits228
 241
 469
 490
        
Interest credited160
 171
 320
 348
        
Benefits, withdrawals, maturities and other adjustments 
  
  
  
Benefits(225) (221) (453) (468)
Surrenders and partial withdrawals(237) (288) (479) (524)
Contract charges(163) (165) (327) (332)
Net transfers from separate accounts2
 1
 3
 2
Other adjustments (1)
—
 5
 10
 15
Total benefits, withdrawals, maturities and other adjustments(623) (668) (1,246) (1,307)
        
Contractholder funds, ending balance$19,013
 $20,073
 $19,013
 $20,073
____________
(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 1.2%1.5% and 2.3%3.1% in the second quarter and first six months of 2017,2018, respectively, primarily due to the continued runoff of our deferred fixed annuity business. We exiteddiscontinued the continuing sale of annuities over an eight year period from 2006 to 2014, but still accept additional deposits on existing contracts.
Contractholder deposits decreased 5.4%4.8% and 4.3%7.5% in the second quarter and first six months of 2017,2018, respectively, compared to the same periods of 2016,2017, primarily due to lower deposits on interest-sensitive life insurance and lower additional deposits on fixed annuities.
Surrenders and partial withdrawals on deferred fixed annuities and interest-sensitive life insurance products decreased 17.7%increased 21.9% to $237$289 million in the second quarter of 20172018 and 8.6%15.0% to $479$551 million in the first six months of 20172018 from $288$237 million and $524$479 million in the second quarter and first six months of 2016,2017, respectively. 2018 had elevated surrenders on fixed annuities resulting from a large number of contracts reaching the 30-45 day period (typically at their 5, 7 or 10 year anniversary) during which there is no surrender charge. 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 7.4% in the first six months of 2018 compared to 6.2% in the first six months of 2017 compared to 6.4% in the first six months of 2016.
Analysis of costs and expensesTotal costs and expenses increased 5.3% or $32 million in the second quarter of 2017 and 3.7% or $45 million in the first six months of 2017 compared to the same periods of 2016, primarily due to higher contract benefits and operating costs and expenses, partially offset by lower interest credited to contractholder funds.
Contract benefits increased 6.7% or $23 million in the second quarter of 2017 and 5.7% or $39 million in the first six months of 2017 compared to the same periods of 2016, primarily due to higher life insurance mortality experience and an increase related to the reinsurance agreement with AAC effective January 1, 2017.
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 $127 million and $252 million in the second quarter and first six months of 2017, respectively, compared to $129 million and $257 million in the second quarter and first six months of 2016, respectively.
The benefit spread by product group is disclosed in the following table.
($ in millions)Three months ended June 30, Six months ended June 30,
 2017 2016 2017 2016
Life insurance$74
 $73
 $143
 $143
Accident and health insurance11
 11
 22
 22
Annuities(28) (25) (43) (42)
Total benefit spread$57
 $59
 $122
 $123
Interest credited to contractholder funds decreased 6.4% or $11 million in the second quarter of 2017 and 8.0% or $28 million in the first six months of 2017 compared to the same periods of 2016, primarily due to lower average contractholder funds. Valuation changes on derivatives embedded in equity-indexed annuity contracts that are not hedged increased interest credited to contractholder funds by $1 million in both the second quarter and first six months of 2017 compared to increases of $6 million and $12 million in the second quarter and first six months of 2016, respectively.
In order to analyze the impact of net investment income and interest credited to contractholders on net income, we monitor the difference between net investment income and the sum of interest credited to contractholder funds and the implied interest on immediate annuities with life contingencies, which is included as a component of contract benefits on the Condensed Consolidated Statements of Operations and Comprehensive Income (“investment spread”).
The investment spread by product group is shown in the following table.
($ in millions)Three months ended June 30, Six months ended June 30,
 2017 2016 2017 2016
Annuities and institutional products$93
 $35
 $121
 $51
Life insurance32
 30
 62
 65
Accident and health insurance2
 2
 3
 3
Net investment income on investments supporting capital59
 54
 118
 102
Investment spread before valuation changes on embedded derivatives that are not hedged186
 121
 304
 221
Valuation changes on derivatives embedded in equity-indexed annuity contracts that are not hedged(1) (6) (1) (12)
Total investment spread$185
 $115
 $303
 $209
Investment spread before valuation changes on embedded derivatives that are not hedged increased 53.7% or $65 million in the second quarter of 2017 and 37.6% or $83 million in the first six months of 2017 compared to the same periods of 2016, primarily due to higher net investment income and 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 June 30,
 
Weighted average
investment yield
 
Weighted average
interest crediting rate
 
Weighted average
investment spreads
 2017 2016 2017 2016 2017 2016
Interest-sensitive life insurance5.2% 5.0% 3.8% 3.9% 1.4% 1.1%
Deferred fixed annuities and institutional products4.2
 4.2
 2.8
 2.8
 1.4
 1.4
Immediate fixed annuities with and without life contingencies8.9
 6.5
 6.0
 5.9
 2.9
 0.6
Investments supporting capital, traditional life and other products3.9
 3.8
 n/a
 n/a
 n/a
 n/a
            
 Six months ended June 30,
 
Weighted average
investment yield
 
Weighted average
interest crediting rate
 
Weighted average
investment spreads
 2017 2016 2017 2016 2017 2016
Interest-sensitive life insurance5.1% 5.1% 3.8% 3.9% 1.3% 1.2%
Deferred fixed annuities and institutional products4.3
 4.1
 2.8
 2.8
 1.5
 1.3
Immediate fixed annuities with and without life contingencies7.6
 6.3
 6.0
 5.9
 1.6
 0.4
Investments supporting capital, traditional life and other products3.8
 3.7
 n/a
 n/a
 n/a
 n/a
The following table summarizes our product liabilities.
($ in millions)June 30,
 2017 2016
Immediate fixed annuities with life contingencies$8,574
 $8,650
Other life contingent contracts and other2,752
 2,690
Reserve for life-contingent contract benefits$11,326
 $11,340
    
Interest-sensitive life insurance$7,334
 $7,283
Deferred fixed annuities8,486
 9,284
Immediate fixed annuities without life contingencies2,790
 2,997
Institutional products—
 85
Other403
 424
Contractholder funds$19,013
 $20,073
Amortization of DAC The components of amortization of DAC are summarized in the following table.
($ in millions)Three months ended June 30, Six months ended June 30,
 2017 2016 2017 2016
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$39
 $34
 $76
 $70
Amortization relating to realized capital gains and losses (1) and valuation changes on embedded derivatives that are not hedged
4
 3
 8
 4
Amortization acceleration for changes in assumptions (“DAC unlocking”)—
 —
 —
 —
Total amortization of DAC$43
 $37
 $84
 $74
_____________
(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 increased 16.2% or $6 million in the second quarter of 2017 and 13.5% or $10 million in the first six months of 2017 compared to the same periods of 2016. The increase in both periods relates to higher gross profits and net realized capital gains on interest-sensitive life insurance.
Operating costs and expenses increased 30.8% or $16 million in the second quarter of 2017 and 26.9% or $29 million in the first six months of 2017 compared to the same periods of 2016. The following table summarizes operating costs and expenses.
($ in millions)Three months ended June 30, Six months ended June 30,
 2017 2016 2017 2016
Non-deferrable commissions$3
 $5
 $7
 $12
General and administrative expenses65
 47
 130
 96
Total operating costs and expenses$68
 $52
 $137
 $108
General and administrative expenses increased 38.3% or $18 million in the second quarter of 2017 and 35.4% or $34 million in the first six months of 2017 compared to the same periods of2016, primarily due to higher operating costs related to the reinsurance agreement with AAC effective January 1, 2017 and higher guaranty fund expenses. The second quarter 2016 period included a reduction in the accrual for anticipated guaranty fund expenses.
In April 2016, the U.S. Department of Labor (“DOL”) issued a rule expanding the range of activities considered to be “investment advice” and establishing a new framework for determining whether an entity or person is a “fiduciary” when selling mutual funds, variable and indexed annuities, or variable life products in connection with an Individual Retirement Account (“IRA”) or an employee benefit plan covered under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The Allstate Life Group does not currently sell proprietary annuities or proprietary variable life products in connection with IRAs or employee benefit plans covered under ERISA. Products that we previously offered and continue to have in force, such as indexed annuities, are impacted by the rule. Compliance with the regulation may add costs and may impact producer compensation and processes. The financial impact to The Allstate Life Group is expected to be immaterial. The phased implementation of the rule began June 9, 2017, with full compliance currently required by January 1, 2018. The DOL is engaging in analysis of the issues raised by the President of the United States directing the DOL to examine the fiduciary duty rule to determine whether it may adversely affect investors or retirees or adversely affect the ability of Americans to gain access to retirement information and financial advice.  The DOL has issued a Request For Information to assist the DOL in assessing the impact. It is yet to be determined whether any other action, including changes to the rule’s requirements, will result from the DOL’s continued examination of the rule. In addition, the new Securities and Exchange Commission Chairman has pledged to work with the DOL Secretary on a fiduciary rule.
INVESTMENTS
Portfolio composition The composition of the investment portfolio as of June 30, 20172018 is presented in the following table.
($ in millions)  
Percent to total
  
Percent to total
Fixed income securities (1)
$23,651
 69.0%$21,567
 64.4%
Mortgage loans3,793
 11.0
3,839
 11.4
Equity securities (2)
1,617
 4.7
1,705
 5.1
Limited partnership interests (3)
2,946
 8.6
3,452
 10.3
Short-term investments (4)(3)
505
 1.5
1,066
 3.2
Policy loans555
 1.6
557
 1.7
Other1,231
 3.6
1,322
 3.9
Total$34,298
 100.0%$33,508
 100.0%
__________
(1) 
Fixed income securities are carried at fair value. Amortized cost basis for these securities was $22.32$21.04 billion.
(2) 
Equity securities are carried at fair value. Cost basis for theseThe fair value of equity securities held as of June 30, 2018 was $1.42 billion.$266 million in excess of cost. These net gains were primarily concentrated in the technology and consumer goods sectors and in domestic equity index funds. Beginning January 1, 2018, the periodic changes in fair value are reflected in realized capital gains and losses.
(3)
We have commitments to invest in additional limited partnership interests totaling $1.41 billion.
(4) 
Short-term investments are carried at fair value.
Investments totaled $34.30$33.51 billion as of June 30, 2017,2018, decreasing from $35.07$34.44 billion as of December 31, 2016,2017, primarily due to dividends paid to Allstate Insurance Company (“AIC”)lower fixed income valuations and net reductions in contractholder funds, partially offset by higher fixed income and equity valuations and positive operating cash flows.

Adopted Recognition and Measurement of Financial Assets and Financial Liabilities

Beginning January 1, 2018, equity securities are reported at fair value with changes in fair value recognized in realized capital gains and losses.
Limited partnerships previously reported using the cost method are now reported at fair value with changes in fair value recognized in net investment income.
Portfolio composition by investment strategy
We utilize two primary 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 be moved between strategies.
Market-BasedMarket-based strategies include investments primarily in public fixed income and equity securities. Market-Based CoreMarket-based core seeks to deliver predictable earnings aligned to business needs and returns consistent with the markets in which we invest. Private fixed income assets, such as commercial mortgages, bank loans and privately placed debt that provide liquidity premiums are also included in this category. Market-Based ActiveMarket-based active seeks to outperform within the public markets through tactical positioning and by taking advantage of short-term opportunities. This category may generate results that meaningfully deviate from those achieved by market indices, both favorably and unfavorably.
Performance-BasedPerformance-based strategy seeks to deliver attractive risk-adjusted returns and supplement market risk with idiosyncratic risk. Returns are impacted by a variety of factors including general macroeconomic and public market conditions as public benchmarks are often usedrisk primarily through investments in the valuation of underlying investments. Variability in earnings will also result from the performance of the underlying assets or business and the timing of sales of those investments. Earnings from the sales of investments may be recorded as net investment income or realized capital gains and losses. The portfolio, which primarily includes private equity and real estate, infrastructure 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 often enhance returns and income through transformation at the company or property level. estate.A portion of these investments seek returns in markets or asset classes that are dislocated or special situations, primarily in private markets.


The following table presents the investment portfolio by strategy as of June 30, 2017.2018.
($ in millions)Total Market-Based Core Market-Based Active Performance-BasedMarket-based core Market-based active Performance-based Total
Fixed income securities$23,651
 $22,681
 $965
 $5
$20,602
 $957
 $8
 $21,567
Mortgage loans3,793
 3,793
 —
 —
3,839
 —
 —
 3,839
Equity securities1,617
 1,366
 206
 45
1,442
 182
 81
 1,705
Limited partnership interests2,946
 191
 —
 2,755
228
 —
 3,224
 3,452
Short-term investments505
 461
 44
 —
1,011
 55
 —
 1,066
Policy loans555
 555
 —
 —
557
 —
 —
 557
Other1,231
 1,066
 3
 162
1,096
 4
 222
 1,322
Total$34,298
 $30,113
 $1,218
 $2,967
$28,775
 $1,198
 $3,535
 $33,508
% of total  88% 3% 9%86% 4% 10%  
              
Unrealized net capital gains and losses
            
Fixed income securities$1,327
 $1,318
 $9
 $—
$540
 $(14) $—
 $526
Equity securities198
 188
 6
 4
Other3
 3
 —
 —
Limited partnership interests—
 —
 1
 1
Total$1,528
 $1,509
 $15
 $4
$540
 $(14) $1
 $527
Fixed income securities by type are listed in the following table. 
Fair value as of
($ in millions)
Fair value as of June 30, 2017 Fair value as of December 31, 2016June 30, 2018 December 31, 2017
U.S. government and agencies$653
 $1,014
$403
 $804
Municipal2,270
 2,274
2,250
 2,273
Corporate19,574
 19,681
17,952
 19,136
Foreign government312
 332
283
 299
Asset-backed securities (“ABS”)403
 331
382
 385
Residential mortgage-backed securities (“RMBS”)285
 333
225
 253
Commercial mortgage-backed securities (“CMBS”)139
 241
57
 97
Redeemable preferred stock15
 16
15
 14
Total fixed income securities$23,651
 $24,222
$21,567
 $23,261
Fixed income securities are rated by third party credit rating agencies and/or are internally rated. As of June 30, 2017, 87.0%2018, 87.6% of the fixed income securities portfolio was rated investment grade, which is defined as a security having a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A or BBB from S&P Global Ratings (“S&P”), a comparable rating from another nationally recognized rating agency, or a comparable internal rating if an externally provided rating is not available. Credit ratings below these designations are considered low credit quality or below investment grade, which includes high yield bonds. 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.


The following table summarizes the fair value and unrealized net capital gains and losses for fixed income securities by credit quality as of June 30, 2017.2018. 
($ in millions)Investment grade Below investment grade TotalInvestment grade Below investment grade Total
Fair
value
 
Unrealized
gain/(loss)
 
Fair
value
 
Unrealized
gain/(loss)
 
Fair
value
 
Unrealized
gain/(loss)
Fair
value		 Unrealized
gain/(loss)		 Fair
value		 Unrealized
gain/(loss)		 Fair
value		 Unrealized
gain/(loss)
U.S. government and agencies$653
 $44
 $—
 $—
 $653
 $44
$403
 $27
 $—
 $—
 $403
 $27
Municipal2,237
 269
 33
 1
 2,270
 270
2,211
 211
 39
 3
 2,250
 214
Corporate         
  
         
  
Public11,812
 572
 1,663
 54
 13,475
 626
10,968
 130
 1,460
 (14) 12,428
 116
Privately placed5,086
 279
 1,013
 30
 6,099
 309
4,585
 108
 939
 (3) 5,524
 105
Foreign government312
 26
 —
 —
 312
 26
283
 12
 —
 —
 283
 12
ABS         
  
         
  
Collateralized debt obligations (“CDO”)46
 (6) 17
 4
 63
 (2)26
 (2) 12
 2
 38
 —
Consumer and other asset-backed securities (“Consumer and other ABS”)339
 —
 1
 —
 340
 —
343
 —
 1
 —
 344
 —
RMBS         
  
         
  
U.S. government sponsored entities (“U.S. Agency”)50
 3
 —
 —
 50
 3
31
 2
 —
 —
 31
 2
Non-agency12
 —
 223
 43
 235
 43
14
 —
 180
 45
 194
 45
CMBS26
 —
 113
 6
 139
 6
3
 —
 54
 4
 57
 4
Redeemable preferred stock15
 2
 —
 —
 15
 2
15
 1
 —
 —
 15
 1
Total fixed income securities$20,588
 $1,189
 $3,063
 $138
 $23,651
 $1,327
$18,882
 $489
 $2,685
 $37
 $21,567
 $526
Municipal bonds totaled $2.27$2.25 billion as of June 30, 20172018 with 98.3% rated investment grade and an unrealized net capital gain of $270$214 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 $19.57$17.95 billion as of June 30, 2017,2018, with an unrealized net capital gain of $935$221 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 $403$382 million as of June 30, 2017,2018, with 95.5%96.6% rated investment grade and an unrealized net capital lossgain of $2 million.zero. 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 $63$38 million as of June 30, 2017,2018, with 73.0%68.4% rated investment grade.grade and an unrealized net capital gain of zero. 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 $340$344 million as of June 30, 2017,2018, with 99.7% rated investment grade.
RMBS totaled $285$225 million as of June 30, 2017,2018, with 21.8%20.0% rated investment grade and an unrealized net capital gain of $46$47 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 $235$194 million as of June 30, 2017,2018, with 5.1%7.2% rated investment grade and an unrealized net capital gain of $43$45 million.
CMBS totaled $139$57 million as of June 30, 2017,2018, with 18.7%5.3% rated investment grade and an unrealized net capital gain of $6$4 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 $3.79$3.84 billion as of June 30, 20172018 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.
Equity securities primarily include common stocks, exchange traded and mutual funds, non-redeemable preferred stocks and real estate investment trust equity investments. Certain exchange traded and mutual funds have fixed income securities as their underlying investments. The equity securities portfolio was $1.62$1.71 billion as of June 30, 2017, with an unrealized net capital gain of $198 million.2018.


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 June 30, 2017.2018.
($ in millions)Private equity Real estate Other Total
Cost method of accounting (“Cost”)$520
 $48
 $15
 $583
Equity method of accounting (“EMA”)1,824
 363
 176
 2,363
Total$2,344
 $411
 $191
 $2,946
        
Number of managers128
 25
 4
 157
Number of individual investments230
 51
 4
 285
Largest exposure to single investment$136
 $41
 $86
 $136
($ in millions)
Limited partnership interests (1) (2)
 Number of managers Number of individual investments Largest exposure to single investment
Private equity$2,772
 137
 265
 $146
Real estate452
 26
 52
 47
Other228
 5
 5
 96
Total$3,452
 168
 322
  
______________________________
(1)
Due to the adoption of the recognition and measurement accounting standard, limited partnerships previously reported using the cost method are now reported at fair value. See Note 1 of the condensed consolidated financial statements.
(2)
We have commitments to invest in additional limited partnership interests totaling $1.36 billion.
Unrealized net capital gains totaled $1.53 billion$527 million as of June 30, 20172018 compared to $1.20$1.57 billion as of December 31, 2016.  The increase for fixed income securities was primarily due to a decrease in market yields resulting from tighter credit spreads and a decrease in long-term risk-free interest rates. The increase for equity securities was primarily due to favorable equity market performance.2017. 
The following table presents unrealized net capital gains and losses.
($ in millions)June 30, 2017 December 31, 2016June 30, 2018 December 31, 2017
U.S. government and agencies$44
 $46
$27
 $36
Municipal270
 257
214
 272
Corporate935
 736
221
 874
Foreign government26
 28
12
 20
ABS(2) (6)—
 2
RMBS46
 39
47
 48
CMBS6
 8
4
 4
Redeemable preferred stock2
 2
1
 1
Fixed income securities1,327
 1,110
526
 1,257
Equity securities(1)198
 82
—
 308
Derivatives3
 5
—
 2
EMA limited partnerships—
 (2)1
 1
Unrealized net capital gains and losses, pre-tax$1,528
 $1,195
$527
 $1,568

(1)
Due to the adoption of the recognition and measurement accounting standard, equity securities are reported at fair value with changes in fair value recognized in realized capital gains and losses and are no longer included in the table above. Upon adoption of the new guidance on January 1, 2018, $308 million of pre-tax unrealized net capital gains for equity securities were reclassified from accumulated other comprehensive income to retained income. See Note 1 of the consolidated financial statements.
The unrealized net capital gain for the fixed income portfolio totaled $1.33 billion,$526 million, comprised of $1.43 billion$843 million of gross unrealized gains and $102$317 million of gross unrealized losses as of June 30, 2017.2018. This is comparedcompares to an unrealized net capital gain for the fixed income portfolio totaling $1.11$1.26 billion, comprised of $1.31$1.36 billion of gross unrealized gains and $200$98 million of gross unrealized losses as of December 31, 2016.2017. Fixed income valuations decreased primarily due to an increase in risk-free interest rates and wider credit spreads.


Gross unrealized gains and losses on fixed income securities by type and sector as of June 30, 20172018 are provided in the following table.
($ in millions)
Amortized
cost
 Gross unrealized 
Fair
value
Amortized
cost
 Gross unrealized 
Fair
value
 Gains Losses  Gains Losses 
Corporate:
 
  
  
  
 
  
  
  
Consumer goods (cyclical and non-cyclical)$5,265
 $216
 $(17) $5,464
$4,927
 $84
 $(99) $4,912
Capital goods2,244
 39
 (51) 2,232
Utilities3,527
 327
 (17) 3,837
3,421
 227
 (49) 3,599
Communications1,296
 21
 (23) 1,294
Banking891
 22
 (16) 897
796
 6
 (20) 782
Capital goods2,223
 92
 (10) 2,305
Energy1,164
 71
 (5) 1,230
Communications1,406
 65
 (5) 1,466
Technology987
 10
 (14) 983
Transportation941
 37
 (14) 964
Financial services1,044
 65
 (3) 1,106
1,031
 29
 (13) 1,047
Basic industry949
 48
 (3) 994
883
 26
 (12) 897
Transportation892
 68
 (2) 958
Technology1,085
 33
 (2) 1,116
Energy1,074
 44
 (9) 1,109
Other193
 8
 —
 201
131
 4
 (2) 133
Total corporate fixed income portfolio18,639
 1,015
 (80) 19,574
17,731
 527
 (306) 17,952
U.S. government and agencies609
 45
 (1) 653
376
 27
 —
 403
Municipal2,000
 275
 (5) 2,270
2,036
 218
 (4) 2,250
Foreign government286
 26
 —
 312
271
 12
 —
 283
ABS405
 6
 (8) 403
382
 4
 (4) 382
RMBS239
 47
 (1) 285
178
 48
 (1) 225
CMBS133
 13
 (7) 139
53
 6
 (2) 57
Redeemable preferred stock13
 2
 —
 15
14
 1
 —
 15
Total fixed income securities$22,324
 $1,429
 $(102) $23,651
$21,041
 $843
 $(317) $21,567
The consumer goods, utilities and capital goods sectors comprise 28%27%, 20% and 12%, respectively, of the carryingfair value of our corporate fixed income securities portfolio as of June 30, 2017.2018. The consumer goods, utilitiescapital goods and bankingutilities sectors had the highest concentration of gross unrealized losses in our corporate fixed income securities portfolio as of June 30, 2017.2018. 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. Similarly, gross unrealized gains reflect a decrease in market yields since the time of initial purchase.
The unrealized net capital gain for the equity portfolio totaled $198 million, comprised of $216 million of gross unrealized gains and $18 million of gross unrealized losses as of June 30, 2017. This is compared to an unrealized net capital gain for the equity portfolio totaling $82 million, comprised of $117 million of gross unrealized gains and $35 million of gross unrealized losses as of December 31, 2016.



Net investment income The following table presents net investment income.
($ in millions)Three months ended June 30, Six months ended June 30,
 2018 2017 2018 2017
Fixed income securities$247
 $269
 $498
 $537
Mortgage loans53
 45
 97
 94
Equity securities16
 14
 23
 29
Limited partnership interests (1)
92
 135
 188
 200
Short-term investments5
 2
 9
 3
Policy loans8
 7
 15
 15
Other23
 21
 45
 40
Investment income, before expense444
 493
 875
 918
Investment expense (2) (3)
(25) (20) (49) (41)
Net investment income$419
 $473
 $826
 $877
        
Market-based core$335
 $343
 $656
 $685
Market-based active10
 9
 19
 19
Performance-based99
 141
 200
 214
Investment income, before expense$444
 $493
 $875
 $918

($ in millions)Three months ended June 30, Six months ended June 30,
 2017 2016 2017 2016
Fixed income securities$269
 $274
 $537
 $544
Mortgage loans45
 47
 94
 94
Equity securities14
 14
 29
 21
Limited partnership interests135
 66
 200
 129
Short-term investments2
 1
 3
 3
Policy loans7
 8
 15
 16
Other21
 23
 40
 44
Investment income, before expense493
 433
 918
 851
Investment expense(20) (17) (41) (35)
Net investment income$473
 $416
 $877
 $816
        
Market-Based Core$343
 $353
 $685
 $697
Market-Based Active9
 9
 19
 16
Performance-Based141
 71
 214
 138
Investment income, before expense$493
 $433
 $918
 $851


(1)
Due to the adoption of the recognition and measurement accounting standard, limited partnerships previously reported using the cost method are now reported at fair value with changes in fair value recognized in net investment income.
(2)
Investment expense includes $6 million and $4 million of investee level expenses in the second quarter of 2018 and 2017, respectively, and $11 million and $8 million in the first six months of 2018 and 2017, respectively. Investee level expenses include depreciation and asset level operating expenses on directly held real estate and other consolidated investments.
(3)
Investment expense includes $2 million and $1 million related to the portion of reinvestment income on securities lending collateral paid to the counterparties in the second quarter of 2018 and 2017, respectively, and $4 million and $2 million in the first six months of 2018 and 2017, respectively.
Net investment income increased 13.7%decreased 11.4% or $57$54 million in the second quarter of 20172018 and 7.5%5.8% or $61$51 million in the first six months of 20172018 compared to the same periods of 2016,2017, primarily due to higher limited partnership income, including private equity value appreciation and distributions related to the sales of underlying investments. The investment portfolio supporting our immediate annuities is managed to ensure the assets match the characteristics of the liabilities and provide the long-term returns needed to support this business. To better match the long-term nature of our immediate annuities, we continue to increase performance-based investments in which we have ownership interests and a greater proportion of return is derived from idiosyncratic asset or operating performance.Economic conditions and equity market performance are reflected inlower performance-based investment results, mainly from limited partnership interests, and income could vary significantly between periods.lower average investment balances.
Performance-based investments primarily include private equity and real estate, infrastructure and agriculture-related assets with a majority being limited partnerships.estate. The following table presents investment income for performance-based investments.
($ in millions)Three months ended June 30, Six months ended June 30,Three months ended June 30, Six months ended June 30,
2017 2016 2017 20162018 2017 2018 2017
Limited partnerships              
Private equity (1)
$104
 $61
 $161
 $113
$76
 $104
 $164
 $161
Real estate30
 4
 37
 14
16
 31
 24
 39
Agriculture-related1
 1
 2
 2
Performance-based - limited partnerships135
 66
 200
 129
92
 135
 188
 200
              
Non-limited partnerships              
Private equity2
 1
 6
 2
1
 2
 1
 6
Real estate4
 4
 8
 7
6
 4
 11
 8
Agriculture-related—
 —
 —
 —
Performance-based - non-limited partnerships6
 5
 14
 9
7
 6
 12
 14
              
Total              
Private equity106
 62
 167
 115
77
 106
 165
 167
Real estate34
 8
 45
 21
22
 35
 35
 47
Agriculture-related1
 1
 2
 2
Total performance-based$141
 $71
 $214
 $138
$99
 $141
 $200
 $214
              
Investee level expenses (2)
$(4) $(4) $(8) $(7)
Investee level expenses (1)
$(6) $(4) $(11) $(8)

(1)
Includes infrastructure.
(2) 
Investee level expenses include depreciation and asset level operating expenses reported in investment expense. When calculating the pre-tax yields, investee level expenses are netted against income for directly held real estate and other consolidated investments.
Performance-based investment income increased 98.6%decreased 29.8% or $70$42 million in the second quarter of 20172018 and 55.1%6.5% or $76$14 million in the first six months of 20172018 compared to the same periods of 2016. The increase in both2017, primarily due to the prior periods reflects the continued growth of our performance-based strategy and included privateincluding strong equity valuemarket appreciation and distributions related to the sales of underlying investments.


Performance-based investment results and income can vary significantly between periods and are influenced by economic conditions, equity market performance, comparable public company earnings multiples, capitalization rates, operating performance of the underlying investments and the timing of asset sales.
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 June 30, Six months ended June 30,
 2018 2017 2018 2017
Impairment write-downs       
Fixed income securities$(1) $(4) $(2) $(13)
Equity securities (1)
—
 (4) —
 (11)
Limited partnership interests—
 (4) —
 (7)
Other investments(1) —
 (1) (2)
Total impairment write-downs(2) (12) (3) (33)
Change in intent write-downs (1)
—
 (1) —
 (4)
Net OTTI losses recognized in earnings(2) (13) (3) (37)
Sales (1)
(7) 13
 (12) 41
Valuation of equity investments (1)
10
 —
 (13) —
Valuation and settlements of derivative instruments7
 (4) 4
 (9)
Realized capital gains and losses, pre-tax8
 (4) (24) (5)
Income tax (expense) benefit(2) 1
 5
 1
Realized capital gains and losses, after-tax$6
 $(3) $(19) $(4)
        
Market-based core$(5) $(1) $(27) $—
Market-based active(4) 6
 (10) 10
Performance-based17
 (9) 13
 (15)
Realized capital gains and losses, pre-tax$8
 $(4) $(24) $(5)

(1)
Due to the adoption of the recognition and measurement accounting standard, equity securities are reported at fair value with changes in fair value recognized in valuation of equity investments and are no longer included in impairment write-downs, change in intent write-downs, and sales.
Net realized capital gains in the second quarter of 2018 primarily related to increased valuation of equity investments and gains on valuation of derivative instruments, partially offset by losses on sales of fixed income securities. Net realized capital losses in the first six months of 2018 were primarily related to declines in the valuation of equity investments and losses on sales of fixed income securities.
($ in millions)Three months ended June 30, Six months ended June 30,
 2017 2016 2017 2016
Impairment write-downs       
Fixed income securities$(4) $(2) $(13) $(12)
Equity securities(4) (13) (11) (35)
Limited partnership interests(4) (3) (7) 6
Other investments—
 —
 (2) (1)
Total impairment write-downs(12) (18) (33) (42)
Change in intent write-downs(1) (4) (4) (7)
Net other-than-temporary impairment losses recognized in earnings(13) (22) (37) (49)
Sales and other13
 20
 41
 6
Valuation and settlements of derivative instruments(4) 1
 (9) (4)
Realized capital gains and losses, pre-tax(4) (1) (5) (47)
Income tax benefit1
 1
 1
 17
Realized capital gains and losses, after-tax$(3) $—
 $(4) $(30)
        
Market-Based Core$(1) $2
 $—
 $(36)
Market-Based Active6
 5
 10
 —
Performance-Based(9) (8) (15) (11)
Realized capital gains and losses, pre-tax$(4) $(1) $(5) $(47)
Impairment write-downs totaledSales resulted in $7 million and $12 million and $33 millionof net realized capital losses in the three and six months ended June 30, 2017. Write-downs on2018, respectively. Sales related primarily to fixed income securities primarily related to issuer specific circumstances. Equity securities were written down due to the length of time and extent to which fair value was below cost, considering our assessment of the financial condition and prospects of the issuer, including relevant industry conditions and trends. Limited partnership write-downs primarily related to private equity investments.
Change in intent write-downs totaled $1 million and $4 million in the three and six months ended June 30, 2017, respectively, and primarily relate to $415 million of equity securities as of June 30, 2017 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.
Sales and other generated $13 million and $41 million of net realized capital gains in the three and six months ended June 30, 2017. Sales and other primarily included gains from valuation changes in public securities held in certain limited partnerships, as well as sales of equity securities in connection with ongoing portfolio management.
Valuation of equity investments resulted in net realized capital gains of $10 million for the three months ended June 30, 2018, which included $20 million of appreciation in the valuation of equity securities and $10 million in declines in value primarily for certain limited partnerships where the underlying assets are predominately public equity securities. Valuation of equity investments resulted in net realized capital losses of $13 million for the six months ended June 30, 2018, which included $7 million of declines in value primarily for certain limited partnerships where the underlying assets are predominately public equity securities and $6 million of declines in the valuation of equity securities.
Valuation and settlements of derivative instruments generated net realized capital lossesgains of $4$7 million and $9$4 million for the three months and six months ended June 30, 2017,2018, respectively, and were primarily comprised of lossesgains on foreign currency contracts due to the weakeningstrengthening of the U.S. Dollar.












The following table presents realized capital gains and losses for performance-based investments.
($ in millions)Three months ended June 30, Six months ended June 30,
 2017 2016 2017 2016
Limited partnerships       
Private equity$(5) $(6) $(9) $3
Real estate2
 2
 3
 2
Agriculture-related—
 —
 —
 —
Performance-based - limited partnerships (1)
(3) (4) (6) 5
        
Non-limited partnerships       
Private equity(6) (4) (9) (17)
Real estate—
 —
 —
 1
Agriculture-related—
 —
 —
 —
Performance-based - non-limited partnerships(6) (4) (9) (16)
        
Total       
Private equity(11) (10) (18) (14)
Real estate2
 2
 3
 3
Agriculture-related—
 —
 —
 —
Total performance-based$(9) $(8) $(15) $(11)
($ in millions)Three months ended June 30, Six months ended June 30,
 2018 2017 2018 2017
Limited partnerships (1)
$—
 $(3) $—
 $(6)
Non-limited partnerships17
 (6) 13
 (9)
Total performance-based$17
 $(9) $13
 $(15)

(1) 
OtherExcludes limited partnership interests where the underlying assets are locatedpredominately public equity securities held in the market-based core and are not included in the table above. Realized capital gains and losses were $13 million and $4 million in the second quarter of 2017 and 2016, respectively, and $29 million and $8 million in the first six months of 2017 and 2016, respectively, for these limited partnership interests.portfolio.
Net realized capital lossesgains on performance-based investments were $9$17 million in the second quarter of 20172018 and $15$13 million in the first six months of 2017 compared to2018. Both periods included appreciation in the same periodsvaluation of 2016. The second quarter and first six months of 2017 included impairment write-downs on private equity investments and derivative lossesgains related to the hedging of foreign currency risk.
CAPITAL RESOURCES AND LIQUIDITY
Capital resources consist of shareholder’s equity and notes due to related parties, representing funds deployed or available to be deployed to support business operations. The following table summarizes our capital resources.
($ in millions)June 30, 2017 December 31, 2016June 30, 2018 December 31, 2017
Common stock, retained income and additional capital paid-in$5,471
 $5,731
$6,548
 $6,010
Accumulated other comprehensive income858
 678
380
 845
Total shareholder’s equity6,329
 6,409
6,928
 6,855
Notes due to related parties140
 465
140
 140
Total capital resources$6,469
 $6,874
$7,068
 $6,995
Shareholder’s equity decreasedincreased in the first six months of 2017,2018, primarily due to dividends paid to AIC,net income, partially offset by net income and increaseddecreased unrealized net capital gains on investments.
Notes due to related parties In January 2017, $325 million of surplus notes due to an unconsolidated affiliate were redeemed.
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’sAllstate Insurance Company’s (“AIC”) ratings. In July 2017, Moody’sApril 2018, A.M. Best affirmed our insurance financial strength rating of A1A+ and the outlook for the rating remainedis stable. In August 2018, S&P affirmed our insurance financial strength rating of A+ and the outlook for the rating is stable. There have been no changes to our ratingsrating from A.M. Best or S&PMoody’s since December 31, 2016.2017.
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.
The Company AIC, AAC and the Corporation areis party to an Amended and Restated Intercompany Liquidity Agreement (“Liquidity Agreement”) with certain of its affiliates, which include, but are not limited to, AIC, AAC and the Corporation. The Liquidity Agreement 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 servesand certain other affiliates serve only as a borrower,borrowers, 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 provideproviding 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.
Allstate parent company capital capacity At the parent holding company level, the Corporation has deployable assets totaling $2.11$3.42 billion as of June 30, 20172018 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 borrowingsresources to support liquidity through the Corporation as follows. The amount available to the Company is at the discretion of the Corporation.


A commercial paper facility with a borrowing limit of $1.00 billion to cover short-term cash needs. As of June 30, 2017,2018, 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. The maturity date of this facility is 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 15.5%15.2% as of June 30, 2017.2018. Although the right to borrow under the facility is not subject to a minimum rating requirement, the costs of maintaining the facility and borrowing under it are based on the ratings of the Corporation’s senior unsecured, unguaranteed long-term debt. There were no borrowings under the credit facility during the second quarter or the first six months of 2017.2018.
A universal shelf registration statement that was filed by the Corporation with the Securities and Exchange Commission (“SEC”) on April 30, 2015.2018. The Corporation can use this shelf registration to issue an unspecified amount of debt securities, common stock (including 539553 million shares of treasury stock as of June 30, 2017)2018), 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 $19.01$18.02 billion as of June 30, 2017.2018. The following table summarizes contractholder funds by their contractual withdrawal provisions as of June 30, 2017.2018.
($ in millions)   
Percent
to total
Not subject to discretionary withdrawal$2,883
 16.0%
Subject to discretionary withdrawal with adjustments:   
Specified surrender charges (1)
4,561
 25.3
Market value adjustments (2)
1,189
 6.6
Subject to discretionary withdrawal without adjustments (3)
9,383
 52.1
Total contractholder funds (4)
$18,016
 100.0%
($ in millions)   
Percent
to total
Not subject to discretionary withdrawal$3,006
 15.8%
Subject to discretionary withdrawal with adjustments:   
Specified surrender charges (1)
4,810
 25.3
Market value adjustments (2)
1,516
 8.0
Subject to discretionary withdrawal without adjustments (3)
9,681
 50.9
Total contractholder funds (4)
$19,013
 100.0%
 
____________
(1) 
Includes $1.16 billion$870 million of liabilities with a contractual surrender charge of less than 5% of the account balance.
(2) 
$957679 million 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 1, 5, 7 or 10 years) during which there is no surrender charge or market value adjustment.
(3) 
88%89% of these contracts have a minimum interest crediting rate guarantee of 3% or higher.
(4) 
Includes $757$722 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 6.2%7.4% and 6.4%6.2% in the first six


months of 20172018 and 2016,2017, respectively. We strive to promptly pay customers who request cash surrenders; however, statutory regulations generally provide up to six months in most states to fulfill surrender requests.
Our asset-liability management practices enable us to manage the differences between the cash flows generated by our investment portfolio and the expected cash flow requirements of our life insurance and annuity product obligations.
Cash flows As reflected in our Condensed Consolidated Statements of Cash Flows, lower cash provided by operating activities in the first six months of 20172018 compared to the first six months of 20162017 was primarily due to higherincreased payments for operating expensescontract benefits and a decrease in payables,higher tax payments, partially offset by higher premiums.
HigherLower cash provided by investing activities in the first six months of 20172018 compared to the first six months of 20162017 was the result of a reductionan increase in short-term investments, decreased limited partnership distributions and higher originations related to fund the dividends paid to AIC.mortgage loans.
HigherLower cash used in financing activities in the first six months of 20172018 compared to the first six months of 20162017 was primarily due to the dividends paid to AIC in 2017.


RECENT DEVELOPMENTS
Department of Labor (“DOL”).In March 2018, the U.S. Court of Appeals for the Fifth Circuit overturned the DOL Fiduciary Rule (the “Rule”) and the ruling took effect in June 2018. This ruling vacates the Rule in total, including those requirements, such as the impartial conduct standards, that became effective in June 2017. Other state and federal regulators, such as the SEC, are considering implementation of best interest standards.
Life Risk-based capital (“RBC”) changes as a result of Tax Legislation. The National Association of Insurance Commissioners is anticipated to approve a change in the RBC formula to reflect the impact of the Tax Legislation on year-end 2018 RBC calculations for life insurers.  Since RBC requirements are net of tax, the decrease in the tax rate from 35% to 21% results in an increase in the amount of after-tax RBC required to be held by the Company.  Changes in capital requirements could decrease deployable capital and potentially reduce future dividends to AIC.
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:
Insurance Industry Risks (1) the availability of reinsurance at current levels and prices; (2) risk of our reinsurers; (3) changes in underwriting and actual experience; (2)(4) changes in reserve estimates for life-contingent contract benefits payable; (3)(5) changes in estimates of profitability on interest-sensitive life products
Financial Risks (6) conditions in the global economy and capital markets; (7) a downgrade in our financial strength ratings; (8) the effect of adverse capital and credit market conditions; (9) the realization of deferred tax assets
Investment Risks (10) market risk and declines in credit quality relating to our investment portfolio; (11) our subjective determination of the amount of realized capital losses recorded for impairments of our investments and the fair value of our fixed income and equity securities; (12) the influence of changes in market interest rates or performance-based investment returns on our 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 statutory reserving and capital requirements; (8) 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;products
Operational Risks (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)security, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning; (14) the impact of a large scale pandemic, the threat or occurrence of terrorism or military action; (21) changes in accounting standards; (22) the realization of deferred tax assets; (23)(15) loss of key vendor relationships or failure of a vendor to protect confidential, proprietary and proprietarypersonal information; and (24)(16) intellectual property infringement, misappropriation and third party claims. claims
Regulatory and Legal Risks (17) regulatory reforms and restrictive regulations; (18) changes in tax laws; (19) our ability to mitigate the capital impact associated with statutory reserving and capital requirements; (20) changes in accounting standards; (21) losses from legal and regulatory actions
Strategic Risks (22) competition in the insurance industry; (23) divestitures of businesses; and (24) reducing our concentration in spread-based business and exiting certain distribution channels
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 onlyare 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 June 30, 2017,2018, 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.



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 Reportannual report on Form 10-K for the year ended December 31, 2016.

2017.
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
ExhibitFiling Date
Filed or
Furnished
Herewith
15
Acknowledgment of awareness from Deloitte & Touche LLP, dated August 3, 2017,6, 2018, 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.INSXBRL Instance Document    X
101.SCHXBRL Taxonomy Extension Schema    X
101.CALXBRL Taxonomy Extension Calculation Linkbase    X
101.DEFXBRL Taxonomy Extension Definition Linkbase    X
101.LABXBRL Taxonomy Extension Label Linkbase    X
101.PREXBRL Taxonomy Extension Presentation Linkbase    X



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)
  
  
  
  
August 3, 20176, 2018 
 By/s/ Samuel H. PilchEric K. Ferren
  Samuel H. PilchEric K. Ferren
Senior Vice President, Controller, and Chief Accounting Officer

  (chief accounting officerAuthorized Signatory and duly
authorized officer of Registrant)Principal Accounting Officer)

5051