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Allstate Life Insurance Co Of New York

Filed: 29 Mar 21, 8:00pm

ALLSTATE LIFE INSURANCE CO OF NEW YORK
As filed with the Securities and Exchange Commission on March 30, 2021
FILE NO. 333-
_____________________________________________________________________________________________________________

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_____________________

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
(Exact Name of Registrant as specified in its charter)

NEW YORK
(State or Other Jurisdiction of Incorporation or Organization)
36-2608394
(I.R.S. Employer Identification Number)
6311
(Primary Standard Industrial Classification Code Number)
878 VETERAN’S MEMORIAL HIGHWAY SUITE 400
HAUPPAUGE, NEW YORK 11788
(631) 357-8920
(Address, including zip code, and telephone Number, including area code, of registrant’s Principal Executive Offices)
_____________________
CT CORPORATION SYSTEM 111 EIGHTH AVENUE
13TH FLOOR NEW YORK, NY 10011
(212) 894-8800
(Name, address, including zip code, Address and Telephone Number, including area code, of Agent for Service)
_____________________
COPIES TO:
ANGELA K. FONTANA
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
 2775 SANDERS ROAD SUITE A2E
NORTHBROOK, IL 60062
_____________________



Approximate date of commencement of proposed sale to the Public: As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☒
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐



If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 filerAccelerated filer
Non-accelerated filerSmaller 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 7(a)(2)(B) of the Securities Act.

Title of each class of securities being registered
Amount to
registered
Proposed maximum offering price unit
Proposed
maximum aggregate offering price (2)
Amount of registration fee (2)
Deferred annuity interests and participating interests therein
$(1)
$(1)
$0$0

1.The amount to be registered and the proposed maximum offering price per unit are not applicable because the securities are not issued in predetermined amounts or units.
2.This filing is being made under the Securities Act of 1933 to register $11,668,648 of deferred annuity interests and participating interests therein. The interests being registered herein are carried over, as unsold securities, from an existing Form S-1 Registration Statement of the same issuer (333-224078) filed on April 2, 2018. Because a filing fee of $1,539 previously had been paid with respect to those interests, there was no filing fee due under that Registration Statement. Registrant continues that offering in this Post-Effective Amendment to that Registration Statement.

This Registration Statement contains a combined prospectus under Rule 429 under the Securities Act of 1933 which relates to the Form S-1 registration statement (File Nos. 333-224078 and 333-203177), filed on April 2, 2018 and April 1, 2015, respectively, by Allstate Life Insurance Company of New York. Upon effectiveness, this Registration Statement, which is a new Registration Statement, will also act as a post-effective amendment to such earlier Registration Statements.

Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine. Neither the Securities and Exchange Commission nor any State securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

Allstate Distributors, L.L.C. (“ADLLC”) serves as distributor of the securities registered herein. The securities offered herein are sold on a continuous basis, and there is no specific end date for the offering. ADLLC, an affiliate of Allstate Life Insurance Company of New York, is a wholly owned subsidiary of Allstate Life Insurance Company. ADLLC is a registered broker dealer under the Securities and Exchange Act of 1934, as amended, and is a member of the Financial Industry Regulatory Authority. ADLLC is not required to sell any specific number or dollar amount of securities, but will use its best efforts to sell the securities offered. Commissions earned by ADLLC are described in the notes to the insurer financial statements, under the heading “Broker-Dealer Agreements.” The prospectuses, dated as of the date indicated therein, by which the securities registered in this Form S-1 are described, are included in this registration statement.



Item 3(c). Risk Factors
Forward-Looking Statements
This document 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. 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. These statements may address, among other things, our strategy for growth, product development, investment results, regulatory approvals, market position, expenses, financial results, litigation and reserves. We believe that these statements are based on reasonable estimates, assumptions and plans. Forward-looking statements speak only as of the date on which they are made, and we assume no obligation to update any forward-looking statements as a result of new information or future events or developments. In addition, forward-looking statements are subject to certain risks or uncertainties that could cause actual results to differ materially from those communicated in these forward-looking statements.
Risks are categorized by (1) insurance and financial services, (2) business, strategy and operations and (3) macro, regulatory and risk environment. Many risks may affect more than one category and are included where the impact is most significant. Consider these cautionary statements carefully together with other factors discussed elsewhere in this document, in filings with the Securities and Exchange Commission (“SEC”) or in materials incorporated therein by reference.
Insurance and financial services
Changes in reserve estimates and amortization of deferred acquisition costs (“DAC”) could materially affect our results of operations and financial condition
We use long-term assumptions, including future investment yields, mortality, morbidity, persistency and expenses in pricing and valuation. If experience differs significantly from assumptions, adjustments to reserves and amortization of DAC may be required that could have a material adverse effect on our results of operations and financial condition.
We may not be able to mitigate the capital impact associated with statutory reserving and capital requirements
Regulatory capital and reserving requirements affect the amount of capital required. Changes to capital or reserving requirements or regulatory interpretations may result in holding additional capital and could require us to increase prices, reduce our sales of certain products, and/or accept a return on equity below original levels assumed in pricing.
A downgrade in financial strength ratings may have an adverse effect on our business
Financial strength ratings are important factors in establishing the competitive position of insurance companies. Rating agencies could downgrade or change the outlook on our ratings due to:
Changes in statutory capital
Changes in a rating agency’s determination of the amount of capital required to maintain a particular rating
Increases in the perceived risk of our investment portfolio, a reduced confidence in management or our business strategy, as well as a number of other considerations that may or may not be under our control
Changes in ownership resulting from divestiture of business
A downgrade in our ratings could have a material effect on our sales, competitiveness, retention, the marketability of our product offerings, liquidity, results of operations and financial condition.
Changes in tax laws may adversely affect profitability of life insurance products
Changes in taxation of life insurance products could reduce sales and result in the surrender of some existing contracts and policies, which may have a material effect on our profitability and financial condition.
Our investment portfolio is subject to market risk and declines in quality which may adversely affect or create volatility in our investment income and cause realized and unrealized losses
We continually evaluate investment management strategies since we are subject to risk of loss due to adverse changes in interest rates, credit spreads, equity prices, real estate values, currency exchange rates and liquidity. Adverse changes may occur due to changes in monetary and fiscal policy and the economic climate, liquidity of a market or market segment, investor return expectations or risk tolerance, insolvency or financial distress of key market makers or participants, or changes in market perceptions of credit worthiness. Adverse changes in market conditions could cause the value of our investments to decrease significantly and impact our results of operations and financial condition.
1


Our investments are subject to risks associated with economic and capital market conditions and factors that may be unique to our portfolio, including:
General weakening of the economy, which is typically reflected through higher credit spreads and lower equity and real estate valuations
Declines in credit quality
Declines in market interest rates, credit spreads or sustained low interest rates could lead to further declines in portfolio yields and investment income
Increases in market interest rates, credit spreads or a decrease in liquidity could have an adverse effect on the value of our fixed income securities that form a substantial majority of our investment portfolio
Weak performance of general and joint venture partners and underlying investments unrelated to general market or economic conditions could lead to declines in investment income and cause realized losses in our limited partnership interests
Concentration in any particular issuer, industry, collateral type, group of related industries, geographic sector or risk type
The amount and timing of net investment income, capital contributions and distributions from our performance-based investments, which primarily include limited partnership interests, can fluctuate significantly due to the underlying investments’ performance or changes in market or economic conditions. Additionally, these investments are less liquid than similar, publicly-traded investments and a decline in market liquidity could impact our ability to sell them at their current carrying values.
Determination of the fair value and amount of credit losses for investments includes subjective judgments and could materially impact our results of operations and financial condition
The valuation of the portfolio is subjective, and the value of assets may differ from the actual amount received upon the sale of an asset. The degree of judgment required in determining fair values increases when:
Market observable information is less readily available
The use of different valuation assumptions may have a material effect on the assets’ fair values
Changing market conditions could materially affect the fair value of investments
The determination of the amount of credit losses varies by investment type and is based on ongoing evaluation and assessment of known and inherent risks associated with the respective asset class or investment.
Such evaluations and assessments are highly judgmental and are revised as conditions change and new information becomes available.
We update our evaluations regularly and reflect changes in credit losses in our results of operations. Our conclusions may ultimately prove to be incorrect as assumptions, facts and circumstances change. Historical loss trends, consideration of current conditions, and forecasts may not be indicative of future changes in credit losses and additional amounts may need to be recorded in the future.
Changes in market interest rates or performance-based investment returns may lead to a significant decrease in the profitability of our spread-based products
Spread-based products, such as fixed annuities, are dependent upon maintaining profitable spreads between investment returns and interest crediting rates. When market interest rates decrease or remain at low levels, investment income may decline. Lowering interest crediting rates on some products in such an environment can partially offset decreases in investment yield. However, these changes could be limited by regulatory minimum rates or contractual minimum rate guarantees on many contracts and may not match the timing or magnitude of changes in investment yields.
Increases in market interest rates can lead to increased surrenders at a time when fixed income investment asset values are lower due to the increase in interest rates. Liquidating investments to fund surrenders could result in a loss that would adversely impact results of operations.
Performance-based net investment income, capital contributions and distributions can fluctuate significantly due to the underlying investments’ performance or changes in market or economic conditions.

2


Business, strategy and operations
We operate in markets that are highly competitive and may be impacted by new or changing technologies
Markets in which we operate are highly competitive, and we must continually allocate resources to refine and improve products and services to remain competitive.
There is also significant competition for producers such as exclusive financial specialists. Growth and retention may be materially affected if we are unable to attract and retain effective producers or if those producers further emphasize sales of non-life insurance products. Similarly, growth and retention may be impacted if customer preferences change and we are unable to effectively adapt our business model and processes.
Technology and customer preference changes may impact the ways in which we interact, do business with our customers and design our products. We may not be able to respond effectively to these changes, which could have a material effect on our results of operations and financial condition.
Many voluntary benefits contracts are renewed annually. There is a risk that employers may be able to obtain more favorable terms from competitors than they could by renewing coverage with us. These competitive pressures may adversely affect the renewal of these contracts, as well as our ability to sell products.
Reinsurance may be unavailable at current levels and prices, which may limit our ability to write new business
Market conditions beyond our control impact the availability and cost of the reinsurance we purchase. Reinsurance may not remain continuously available to us to the same extent and on the same terms and rates as is currently available. If we cannot maintain our current level of reinsurance or purchase new reinsurance protection in amounts we consider sufficient at acceptable prices, we would have to either accept an increase in our risk exposure, reduce our insurance exposure or seek other alternatives.
Reinsurance subjects us to counterparty risk and may not be adequate to protect us against losses arising from ceded insurance
Collecting from reinsurers is subject to uncertainty arising from whether reinsurers or their affiliates have the financial capacity and willingness to make payments under the terms of a reinsurance treaty or contract. Our inability to recover from a reinsurer could have a material effect on our results of operations and financial condition.
Divestitures of businesses may not produce anticipated benefits
We may divest portions of our businesses either through a sale or financial arrangements. These transactions may result in continued financial involvement in the divested businesses, such as through reinsurance, guarantees or other financial arrangements, following the transaction. If the acquiring companies do not perform under the arrangements, our financial results could be negatively impacted.
In connection with the Allstate Life Insurance Company (“ALIC”) sale, we announced that Allstate Insurance Company will retain ownership of Allstate Life Insurance Company of New York (“ALNY”) while pursuing to sell or otherwise transfer risk to a third party.
We may be subject to the risks and costs associated with intellectual property infringement, misappropriation and third-party claims
We rely on a combination of contractual rights and copyright, trademark, patent and trade secret laws to establish and protect our intellectual property. Third parties may infringe or misappropriate our intellectual property. We may have to litigate to enforce and protect intellectual property and to determine its scope, validity or enforceability, which could divert significant resources and prove unsuccessful. An inability to protect intellectual property or an inability to successfully defend against a claim of intellectual property infringement could have a material effect on our business.
We may be subject to claims by third parties for patent, trademark or copyright infringement or breach of usage rights. Any such claims and any resulting litigation could result in significant expense and liability. If third-party providers or we are found to have infringed a third-party intellectual property right, either of us could be enjoined from providing certain products or services or from utilizing and benefiting from certain methods, processes, copyrights, trademarks, trade secrets or licenses. Alternatively, we could be required to enter into costly licensing arrangements with third parties or implement costly work-arounds. Any of these scenarios could have a material effect on our business and results of operations.



3


Macro, regulatory and risk environment
Conditions in the global economy and capital markets could adversely affect our business and results of operations
Global economic and capital market conditions could adversely impact demand for our products, returns on our investment portfolio and results of operations. The conditions that would have the largest impact on our business include;
Low or negative economic growth
Sustained low interest rates
Rising inflation
Substantial increases in delinquencies or defaults on debt
Significant downturns in the market value or liquidity of our investment portfolio
Reduced consumer spending and business investment
Stressed conditions, volatility and disruptions in global capital markets or financial asset classes could adversely affect our investment portfolio.
Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs or obtain credit on acceptable terms 
In periods of extreme volatility and disruption in the capital and credit markets, liquidity and credit capacity may be severely restricted. Our access to additional financing depends on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to our industry, our credit ratings and credit capacity, as well as lenders’ perception of our long- or short-term financial prospects. In such circumstances, our ability to obtain capital to fund operating expenses may be limited, and the cost of any such capital may be significant.
A large-scale pandemic, the occurrence of terrorism, military actions, social unrest or other actions may have an adverse effect on our business
A large-scale pandemic, such as the Coronavirus and its impacts, the occurrence of terrorism, military actions, social unrest or other actions, may result in loss of life, property damage, and disruptions to commerce and reduced economic activity. Some of the assets in our investment portfolio may be adversely affected by declines in the equity markets, changes in interest rates, reduced liquidity and economic activity caused by a large-scale pandemic. Additionally, a large-scale pandemic or terrorist act could have a material effect on sales, liquidity and operating results.
The Coronavirus resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which have included the implementation of travel restrictions, government-imposed shelter-in-place orders, quarantine periods, social distancing, and restrictions on large gatherings, have caused material disruption to businesses globally, resulting in increased unemployment, a recession and increased economic uncertainty. Additionally, there is no way of predicting with certainty how long the pandemic might last, including the potential for restrictions being restored or new restrictions being implemented that could result in further economic volatility.
The Coronavirus has affected our operations and depending on its length and severity may continue to significantly affect our results of operations, financial condition and liquidity, including sales of new and retention of existing policies, life insurance mortality, hospital and outpatient claim costs and annuity reserves, investment valuations and returns and credit allowance exposure.
The failure in cyber or other information security controls, as well as the occurrence of events unanticipated in our disaster recovery processes and business continuity planning, could result in a loss or disclosure of confidential information, damage to our reputation, additional costs and impair our ability to conduct business effectively
We depend heavily on computer systems, mathematical algorithms and data to perform necessary business functions. There are threats that could impact our ability to protect our data and systems; if the threats are successful, they could impact confidentiality, integrity and availability:
Confidentiality - protecting our data from disclosure to unauthorized parties
Integrity - ensuring data is not changed accidentally or without authorization and is accurate
Availability - ensuring our data and systems are accessible to meet our business needs
We collect, use, store or transmit a large amount of confidential, proprietary and other information (including personal information of customers or employees) in connection with the operation of our business. Systems are subject to increased attempted cyberattacks and unauthorized access, such as physical and electronic break-ins or unauthorized tampering.
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We constantly defend against threats to our data and systems, including malware and computer virus attacks, unauthorized access, system failures and disruptions. Events like these could jeopardize the information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations, which could result in damage to our reputation, financial losses, litigation, increased costs, regulatory penalties or customer dissatisfaction.
These risks may increase in the future as threats become more sophisticated and we continue to expand internet and mobile strategies, develop additional remote connectivity solutions to serve our employees and customers and build and maintain an integrated digital enterprise. Our increased use of third-party services (e.g., cloud technology and software as a service) can make it more difficult to identify and respond to cyberattacks in any of the above situations. Although we may review and assess third-party vendor cybersecurity controls, our efforts may not be successful in preventing or mitigating the effects of such events. Third parties to whom we outsource certain functions are also subject to cybersecurity risks.
Personal information is subject to an increasing number of federal, state, local and international laws and regulations regarding privacy and data security, as well as contractual commitments. Any failure or perceived failure by us to comply with such obligations may result in governmental enforcement actions and fines, litigation or public statements against us by consumer advocacy groups or others and could cause our employees and customers to lose trust in us, which could have an adverse effect on our reputation and business.
The occurrence of a disaster, such as a natural catastrophe, pandemic, industrial accident, blackout, terrorist attack, war, cyberattack, computer virus, insider threat, unanticipated problems with our disaster recovery processes, or a support failure from external providers, could have an adverse effect on our ability to conduct business and on our results of operations and financial condition, particularly if those events affect our computer-based data processing, transmission, storage, and retrieval systems or destroy data. If a significant number of employees were unavailable in the event of a disaster, our ability to effectively conduct business could be severely compromised. Our systems are also subject to compromise from internal threats.
We are subject to extensive regulation, and potential further restrictive regulation may increase operating costs and limit growth
We operate in the highly regulated insurance sector and are subject to extensive laws and regulations that are complex and subject to change. Changes may lead to additional expenses, increased legal exposure, or increased reserve or capital requirements limiting our ability to grow or to achieve targeted profitability. Moreover, laws and regulations are administered and enforced by governmental authorities that exercise interpretive latitude, including state insurance regulators; state securities administrators; state attorneys general as well as federal agencies including the SEC, the Financial Industry Regulatory Authority, the Department of Labor, and the U.S. Department of Justice. Consequently, compliance with one regulator’s or enforcement authority’s interpretation of a legal issue may not result in compliance with another’s interpretation of the same issue.
In addition, there is risk that one regulator’s or enforcement authority’s interpretation of a legal issue may change to our detriment. There is also a risk that changes in the overall legal environment may cause us to change our views regarding the actions we need to take from a legal risk management perspective. This could necessitate changes to our practices that may adversely impact our business. In some cases, state insurance laws and regulations are generally intended to protect or benefit purchasers or users of insurance products. These laws and regulations may limit our ability to grow or to improve the profitability of our business.
Regulatory reforms, and the more stringent application of existing regulations, may make it more expensive for us to conduct our business
The federal government has enacted comprehensive regulatory reforms for financial services entities. As part of a larger effort to strengthen the regulation of the financial services market, certain reforms are applicable to the insurance industry.
The Federal Insurance Office and Financial Stability Oversight Council have been established and the federal government may enact reforms that affect the state insurance regulatory framework. The potential impact of state or federal measures that change the nature or scope of insurance and financial regulation is uncertain but may make it more expensive for us to conduct business and limit our ability to grow or achieve profitability.
Losses from legal and regulatory actions may be material to our results of operations, cash flows and financial condition
From time to time, we are involved in various legal actions, some of which involve claims for substantial or indeterminate amounts. We are also involved in various regulatory actions and inquiries, including market conduct exams by state insurance regulatory agencies. In the event of an unfavorable outcome in any of these matters, the ultimate liability may be more than amounts currently accrued, and may be material to our results of operations, cash flows and financial condition.
5


Changes in or the application of accounting standards issued by standard-setting bodies and changes in tax laws may adversely affect our results of operations and financial condition
Our financial statements are subject to the application of accounting principles generally accepted in the United States of America, which are periodically revised, interpreted and/or expanded. Accordingly, we may be required to adopt new guidance or interpretations, which may have a material effect on our results of operations and financial condition and could adversely impact financial strength ratings.
Pending changes to accounting for long-duration insurance contracts such as traditional life, life-contingent immediate annuities and certain voluntary accident and health insurance products will have a material effect on reserves and could adversely impact financial strength ratings
Realization of our deferred tax assets assumes that we can fully utilize the deductions recognized for tax purposes; we may recognize additional tax expense if these assets are not fully utilized
New tax legislative initiatives may be enacted that may impact our effective tax rate and could adversely affect our tax positions or tax liabilities
Loss of key vendor relationships or failure of a vendor to protect our data, confidential and proprietary information, or personal information of our customers or employees could adversely affect our operations
We rely on services and products provided by many vendors in the U.S. and abroad. These include, vendors of computer hardware, software, cloud technology and software as a service, as well as vendors and/or outsourcing of services such as:
Call center services
Human resource benefits management
Information technology support
Investment management services
If any vendor becomes unable to continue to provide products or services, or fails to protect our confidential, proprietary, and other information, we may suffer operational impairments and financial losses.
Our ability to attract, develop, and retain talent to maintain appropriate staffing levels, and establish a successful work culture is critical to our success
Competition from within the insurance industry and from other industries, including the technology sector, for qualified employees with highly specialized knowledge in areas such as underwriting, data and analytics, technology and e-commerce has often been intense and we have experienced increased competition in hiring and retaining employees.
Factors that affect our ability to attract and retain such employees include:
Compensation and benefits
Training and re-skilling programs
Reputation as a successful business with a culture of fair hiring, and of training and promoting qualified employees
Recognition of and response to changing trends and other circumstances that affect employees
The unexpected loss of key personnel, including those affected by the pending sale of ALIC, could have a material adverse impact on our business because of the loss of their skills, knowledge of our products and offerings and years of industry experience and, in some cases, the difficulty of promptly finding qualified replacement personnel.
Misconduct or fraudulent acts by employees, agents and third parties may expose us to financial loss, disruption of business, regulatory assessments and reputational harm
The company and the insurance industry are inherently susceptible to past and future misconduct or fraudulent activities by employees, representative agents, vendors, customers and other third parties.  These activities could include:
Fraud against the company, its employees and its customers through illegal or prohibited activities
Unauthorized acts or representations, unauthorized use or disclosure of personal or proprietary information, deception, and misappropriation of funds or other benefits


6


Item 11(a). Description of Business
Allstate Life Insurance Company of New York (“Allstate Life of New York” or “ALNY”) was incorporated in 1967 as a stock life insurance company under the laws of the State of New York. In 1984, Allstate Life of New York was purchased by Allstate Life Insurance Company (“ALIC”). Allstate Life of New York is a wholly owned subsidiary of ALIC, a stock life insurance company incorporated under the laws of the State of Illinois. ALIC is a wholly owned subsidiary of Allstate Insurance Company (“AIC”), a stock property-liability insurance company organized under the laws of the State of Illinois. All of the outstanding stock of AIC is owned by Allstate Insurance Holdings, LLC, which is wholly owned by The Allstate Corporation (the “Corporation”), a publicly owned holding company incorporated under the laws of the State of Delaware.
On January 26, 2021, AIC entered into an agreement to sell ALIC to Antelope US Holdings Company, an affiliate of an investment fund associated with The Blackstone Group Inc. On March 29, 2021, AIC and ALIC entered into an agreement to sell ALNY to Wilton Reassurance Company. The sales transactions are expected to close in the second half of 2021, subject to regulatory approvals and other customary closing conditions.
In our reports, we occasionally refer to statutory financial information. All domestic United States insurance companies are required to prepare statutory-basis financial statements. As a result, industry data is available that enables comparisons between insurance companies, including competitors that are not required to prepare financial statements in conformity with accounting principles generally accepted in the United States of America. We frequently use industry publications containing statutory financial information to assess our competitive position.
Products and distribution
    We sell traditional, interest-sensitive and variable life insurance and voluntary accident and health insurance products to customers in the state of New York. We sell products through Allstate exclusive agents and exclusive financial specialists, and workplace enrolling independent agents. We previously offered and continue to have in force deferred fixed annuities and immediate fixed annuities (including standard and sub-standard structured settlements). We expect to discontinue sales of proprietary life and voluntary accident and health insurance products during the second quarter of 2021.
The table below lists our current distribution channels with the associated products and target customers.
 
Distribution Channels
 
 
Proprietary Products
 
 
Target Customers
 
Allstate exclusive agents and exclusive financial specialistsTerm life insurance
Whole life insurance
Interest-sensitive life insurance
Variable life insurance
Middle market consumers with family and financial protection needs
Workplace enrolling independent agents and benefits brokersWorkplace voluntary accident and health insurance:
Short-term disability income insurance
Accident and critical illness insurance
Middle market consumers with family financial protection needs employed by small, medium, and large size firms
We compete on a variety of factors, including product offerings, brand recognition, financial strength and ratings, price, distribution and customer service. The market for life insurance continues to be highly fragmented and competitive. As of December 31, 2019, there were approximately 335 groups of life insurance companies in the United States.
REGULATION
Allstate Life of New York is subject to extensive regulation, primarily, but not exclusively, from the New York Department of Financial Services (“NYDFS”). The method, extent and substance of such regulation generally has its source in statutes that establish standards and requirements for conducting the business of insurance and that delegate regulatory authority to the NYDFS. These rules have a substantial effect on our business and relate to a wide variety of matters, including insurer solvency and statutory surplus sufficiency, reserve adequacy, insurance company licensing and examination, agent licensing, agent and broker compensation, policy forms, rate setting, the nature and amount of investments, claims and sales practices, participation in guaranty funds, transactions with affiliates, the payment of dividends, underwriting standards, statutory accounting methods, trade practices, privacy regulation and data security, corporate governance and risk management.
Further, the NYDFS cybersecurity regulation and the National Association of Insurance Commissioners (“NAIC”) Insurance Data Security Model Law, which has been adopted in some form by several states, establish standards for data security and for the investigation of and notification to insurance commissioners of cybersecurity events. We cannot predict the impact on our business of possible future legislative measures regarding privacy or cybersecurity.
In addition, state legislators and insurance regulators continue to examine the appropriate nature and scope of state insurance regulation. For a discussion of statutory financial information, see Note 13 of the financial statements included in
7


Item 11(e). For a discussion of regulatory contingencies, see Note 11 of the financial statements included in Item 11(e). Notes 11 and 13 are incorporated in this Item 11(a) by reference.
As part of an effort to strengthen the regulation of the financial services market, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) was enacted in 2010. Dodd-Frank created the Federal Insurance Office (“FIO”) within the U.S. Department of the Treasury. The FIO monitors the insurance industry, provides advice to the Financial Stability Oversight Council (“FSOC”), represents the U.S. on international insurance matters, and studies the current regulatory system.
Additional regulations or new requirements may emerge from the activities of various regulatory entities, including the Federal Reserve Board, FIO, FSOC, the NAIC, and the International Association of Insurance Supervisors (“IAIS”), that are evaluating solvency and capital standards for insurance company groups. In addition, the NAIC has adopted amendments to its model holding company law that have been adopted by some jurisdictions. The outcome of these actions is uncertain; however, these actions may result in changes in the level of capital and liquidity required by insurance holding companies.
We cannot predict whether any specific state or federal measures will be adopted to change the nature or scope of the regulation of insurance or what effect any such measures would have on Allstate Life of New York.

Item 11(b). Description of Property
Allstate Life of New York occupies office space in Hauppauge, New York, and Northbrook, Illinois, that is owned or leased by Allstate Insurance Company. Expenses associated with these facilities are allocated to us. We believe that these facilities are suitable and adequate for our current operations.

Item 11(c). Legal Proceedings
Information required for Item 11(c) is incorporated by reference to the discussion under the heading “Regulation and compliance” in Note 11 of the financial statements included in Item 11(e).

Item 11(e). Financial Statements and Notes to Financial Statements
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of
Allstate Life Insurance Company of New York
Hauppauge, New York 11788

Opinion on the Financial Statements
We have audited the accompanying Statements of Financial Position of Allstate Life Insurance Company of New York (the “Company”), an affiliate of The Allstate Corporation, as of December 31, 2020 and 2019, and the related Statements of Operations and Comprehensive Income, Shareholder’s Equity, and Cash Flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, Schedule I-Summary of Investments Other Than Investments in Related Parties, Schedule IV-Reinsurance, and Schedule V-Valuation Allowances and Qualifying Accounts, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Reserve for Life-Contingent Contract Benefits and Premium Deficiency Reserve for Life-Contingent Immediate Annuities – Refer to Notes 2 and 8 to the Financial Statements
Critical Audit Matter Description
As of December 31, 2020, the reserve for life-contingent contract benefits for Life-Contingent Immediate Annuities was $2.4 billion. Due to the long-term nature of life-contingent immediate annuities, benefits are payable over many years. The Company establishes reserves as the present value of future expected benefits to be paid, reduced by the present value of future expected net premiums. Long-term actuarial assumptions, such as future investment yields and mortality, are used when establishing the reserve. These assumptions are established at the time the contract is issued and are generally not changed during the life of the contract. The Company periodically performs a gross premium valuation (“GPV”) analysis to review the adequacy of reserves using actual experience and current assumptions. If actual experience and current assumptions are adverse compared to the original assumptions and a premium deficiency is determined to exist, any remaining unamortized deferred acquisition costs (“DAC”) balance would be expensed to the extent not recoverable, and the establishment of a



premium deficiency reserve may be required for any remaining deficiency. During the year-ended December 31, 2020, annuitants living longer than originally anticipated and lower long-term investment yield assumptions resulted in a premium deficiency. The deficiency was recognized as an increase in the reserve for life-contingent contract benefits and life contract benefits of $196 million. The original assumptions used to establish reserves were updated to reflect current assumptions and the primary changes included mortality expectations and long-term investment yields.
The Company also reviews these policies for circumstances where projected profits would be recognized in early years followed by projected losses in later years through a profits followed by losses (“PFBL”) analysis. If this circumstance exists, the Company will accrue a liability, during the period of profits, to offset the losses at such time as the future losses are expected to commence using a method updated prospectively over time. The Company’s analyses did not indicate periods of profits followed by periods of losses; therefore, the Company has not established a PFBL reserve as of December 31, 2020.
Given the subjectivity involved in selecting the current assumptions for projected investment yields and mortality, the sensitivity of the estimate to these assumptions, and the establishment of a premium deficiency reserve, the related audit effort to evaluate the reserve for life-contingent contract benefits, the GPV, the resulting premium deficiency reserve, and the PFBL analysis for life-contingent immediate annuities required a high degree of auditor judgment and an increased extent of effort, including involvement of our actuarial specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the reserve for life-contingent contract benefits and the premium deficiency reserve, including the GPV and PFBL analysis for life-contingent immediate annuities, included the following:
We tested the effectiveness of controls over management’s reserve for life-contingent contract benefits, premium deficiency reserve, GPV, and PFBL analysis, including those over the Company’s selection of assumptions.
With the assistance of our actuarial specialists, we evaluated the reasonableness of assumptions and their incorporation into the projection model used by the Company to perform its analysis by:
Testing the underlying data that served as the basis for the assumptions setting and the underlying data used in the projection model to ensure the inputs were complete and accurate
Comparing mortality assumptions selected to actual historical experience
Comparing projected investment yields selected to historical portfolio returns, evaluating for consistency with current investment portfolio yields and the Company’s long-term reinvestment strategy, and comparing to independently obtained market data
With the assistance of our actuarial specialists, we independently calculated the GPV reserves from the Company’s projection model for a sample of contracts and compared our estimates to management’s estimates.
With the assistance of our actuarial specialists, we evaluated the reasonableness of the total gross premium valuation reserve at the date the premium deficiency was determined by the Company and at year-end based on known changes to long-term investment yield assumptions and current market data.
We agreed the recorded premium deficiency reserve amount to the Company’s GPV analysis.
With the assistance of our actuarial specialists, we evaluated the aggregate cash flows generated through the Company’s premium deficiency reserve testing for evidence of potential PFBL scenarios that would require the accrual of additional reserves to cover such future losses.

/s/ DELOITTE & TOUCHE LLP


Chicago, Illinois
March 12, 2021 (March 30, 2021, as to the subsequent events described in Note 1)

We have served as the Company’s auditor since 1995.




ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
($ in thousands)Year Ended December 31,
 202020192018
Revenues   
Premiums (net of reinsurance ceded of $10,004, $10,600 and $11,054)$79,942 $108,452 $103,447 
Contract charges (net of reinsurance ceded of $7,978, $7,945 and $8,279)77,476 77,314 77,194 
Other revenue644 1,186 1,414 
Net investment income222,087 256,006 287,883 
Realized capital gains and losses128,265 106,627 (20,554)
Total revenues508,414 549,585 449,384 
Costs and expenses
Contract benefits (net of reinsurance ceded of $11,666, $13,687 and $11,016)434,641 259,013 237,578 
Interest credited to contractholder funds (net of reinsurance ceded of $4,503, $4,307 and $4,533)84,324 86,464 91,482 
Amortization of deferred policy acquisition costs20,346 30,396 16,299 
Operating costs and expenses32,975 45,162 45,964 
Total costs and expenses572,286 421,035 391,323 
(Loss) income from operations before income tax (benefit) expense(63,872)128,550 58,061 
Income tax (benefit) expense(11,993)30,926 12,827 
Net (loss) income(51,879)97,624 45,234 
Other comprehensive income (loss), after-tax
Change in unrealized net capital gains and losses86,101 67,612 (50,575)
Change in unrealized foreign currency translation adjustments1,519 (3,131)98 
Other comprehensive income (loss), after-tax87,620 64,481 (50,477)
Comprehensive income (loss)$35,741 $162,105 $(5,243)





















See notes to financial statements.
9


ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF FINANCIAL POSITION
($ in thousands, except par value data) December 31,
 20202019
Assets  
Investments  
Fixed income securities, at fair value (amortized cost, net $4,293,492 and $4,023,107)$4,918,874 $4,434,362 
Mortgage loans, net621,702 733,258 
Equity securities, at fair value (cost $182,261 and $233,118)251,437 274,133 
Limited partnership interests343,251 386,310 
Short-term, at fair value (amortized cost $132,970 and $224,111)133,045 224,098 
Policy loans37,294 38,583 
Other8,097 5,237 
Total investments6,313,700 6,095,981 
Cash10,840 9,273 
Deferred policy acquisition costs101,212 124,118 
Reinsurance recoverable223,349 229,759 
Accrued investment income45,790 46,846 
Current income taxes receivable7,654 
Other assets, net332,338 399,126 
Reinsurance receivable from parent4,919 1,218 
Separate Accounts286,751 265,546 
Total assets$7,326,553 $7,171,867 
Liabilities  
Contractholder funds$2,464,770 $2,547,968 
Reserve for life-contingent contract benefits2,698,383 2,411,809 
Current income taxes payable31,713 
Deferred income taxes166,881 154,849 
Other liabilities and accrued expenses108,440 188,362 
Payable to affiliates, net4,349 4,973 
Separate Accounts286,751 265,546 
Total liabilities5,729,574 5,605,220 
Commitments and Contingent Liabilities (Note 11)00
Shareholder’s Equity  
Common stock, $25 par value, 100 thousand shares authorized, issued and outstanding2,500 2,500 
Additional capital paid-in140,529 140,529 
Retained income1,242,580 1,299,868 
Accumulated other comprehensive income:
Unrealized net capital gains and losses on fixed income securities with credit losses664 
Other unrealized net capital gains and losses493,834 324,055 
Unrealized adjustment to DAC, DSI and insurance reserves(283,024)(200,010)
Total unrealized net capital gains and losses210,810 124,709 
Unrealized foreign currency translation adjustments560 (959)
Total accumulated other comprehensive income (“AOCI”)211,370 123,750 
Total shareholder’s equity1,596,979 1,566,647 
Total liabilities and shareholder’s equity$7,326,553 $7,171,867 













See notes to financial statements.
10


ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF SHAREHOLDER’S EQUITY
($ in thousands)Year Ended December 31,
 202020192018
Common stock$2,500 $2,500 $2,500 
Additional capital paid-in140,529 140,529 140,529 
Retained income
Balance, beginning of year1,299,868 1,202,244 1,117,020 
Net (loss) income(51,879)97,624 45,234 
Cumulative effect of change in accounting principle(5,409)— 39,990 
Balance, end of year1,242,580 1,299,868 1,202,244 
Accumulated other comprehensive income   
Balance, beginning of year123,750 59,269 143,219 
Change in unrealized net capital gains and losses86,101 67,612 (50,575)
Change in unrealized foreign currency translation adjustments1,519 (3,131)98 
Cumulative effect of change in accounting principle— — (33,473)
Balance, end of year211,370 123,750 59,269 
Total shareholder’s equity$1,596,979 $1,566,647 $1,404,542 































See notes to financial statements.
11


ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF CASH FLOWS
($ in thousands)Year Ended December 31,
 202020192018
Cash flows from operating activities   
Net income$(51,879)$97,624 $45,234 
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and other non-cash items(15,343)(27,136)(27,152)
Realized capital gains and losses(128,265)(106,627)20,554 
Interest credited to contractholder funds84,324 86,464 91,482 
Changes in:
Policy benefits and other insurance reserves136,304 (29,174)(46,890)
Deferred policy acquisition costs9,171 13,625 (3,278)
Income taxes(49,282)29,817 (3,424)
Other operating assets and liabilities60,431 14,996 15,481 
Net cash provided by operating activities45,461 79,589 92,007 
Cash flows from investing activities 
Proceeds from sales
Fixed income securities439,542 295,930 292,026 
Equity securities430,217 141,893 165,147 
Limited partnership interests31,418 25,195 31,337 
Mortgage loans50,364 
Investment collections
Fixed income securities298,583 345,540 334,019 
Mortgage loans72,725 76,582 50,627 
Investment purchases
Fixed income securities(850,671)(411,139)(421,643)
Equity securities(371,576)(190,441)(171,271)
Limited partnership interests(27,847)(41,881)(56,986)
Mortgage loans(26,800)(113,712)(116,996)
Change in short-term investments, net13,890 (46,116)12,231 
Change in policy loans and other investments, net2,288 1,228 576 
Net cash provided by investing activities62,133 83,079 119,067 
Cash flows from financing activities 
Contractholder fund deposits96,917 95,390 96,954 
Contractholder fund withdrawals(202,944)(257,264)(304,412)
Net cash used in financing activities(106,027)(161,874)(207,458)
Net increase in cash1,567 794 3,616 
Cash at beginning of year9,273 8,479 4,863 
Cash at end of year$10,840 $9,273 $8,479 

















See notes to financial statements.
12


NOTES TO FINANCIAL STATEMENTS
1. General
Basis of presentation
The accompanying financial statements include the accounts of Allstate Life Insurance Company of New York (the “Company”), a wholly owned subsidiary of Allstate Life Insurance Company (“ALIC”), which is wholly owned by Allstate Insurance Company (“AIC”). AIC is wholly owned by Allstate Insurance Holdings, LLC, a wholly owned subsidiary of The Allstate Corporation (the “Corporation”). These financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
The Company operates as a single segment entity based on the manner in which the Company uses financial information to evaluate business performance and to determine the allocation of resources.
Nature of operations
The Company offers traditional, interest-sensitive and variable life insurance and voluntary accident and health insurance products to customers in the State of New York. The Company distributes its products through Allstate exclusive agencies and exclusive financial specialists, and workplace enrolling independent agents and benefits brokers. The Company previously offered and continues to have in force fixed annuities such as deferred and immediate annuities. The Company also previously offered variable annuities and all of this business is reinsured. The Company expects to discontinue sales of proprietary life and voluntary accident and health insurance products during the second quarter of 2021.
The following table summarizes premiums and contract charges by product.
($ in thousands)202020192018
Premiums   
Traditional life insurance$62,575 $61,980 $59,185 
Accident and health insurance17,367 46,472 44,262 
Total premiums79,942 108,452 103,447 
Contract charges   
Interest-sensitive life insurance77,557 77,324 76,931 
Fixed annuities(81)(10)263 
Total contract charges77,476 77,314 77,194 
Total premiums and contract charges$157,418 $185,766 $180,641 
Subsequent event
On January 26, 2021, AIC entered into an agreement to sell ALIC to Antelope US Holdings Company, an affiliate of an investment fund associated with The Blackstone Group Inc. On March 29, 2021, AIC and ALIC entered into an agreement to sell ALNY to Wilton Reassurance Company. The sales transactions are expected to close in the second half of 2021, subject to regulatory approvals and other customary closing conditions.
2. Summary of Significant Accounting Policies
Investments
Fixed income securities include bonds, asset-backed securities (“ABS”) and mortgage-backed securities (“MBS”). MBS includes residential and commercial mortgage-backed securities. Fixed income securities, which may be sold prior to their contractual maturity, are designated as available-for-sale (“AFS”) and are carried at fair value. The difference between amortized cost, net of credit loss allowances (“amortized cost, net”) and fair value, net of deferred income taxes and related deferred policy acquisition costs (“DAC”), deferred sales inducement costs (“DSI”) and reserves for life-contingent contract benefits, is reflected as a component of AOCI. The Company excludes accrued interest receivable from the amortized cost basis of its AFS fixed income securities. Cash received from calls and make-whole payments is reflected as a component of proceeds from sales and cash received from maturities and pay-downs is reflected as a component of investment collections within the Statements of Cash Flows.
Mortgage loans are carried at amortized cost, net which represent the amount expected to be collected. The Company excludes accrued interest receivable from the amortized cost basis of its mortgage loans. Credit loss allowances are estimates of expected credit losses established for loans upon origination or purchase, and are established considering all relevant
13


information available, including past events, current conditions, and reasonable and supportable forecasts over the life of the loans. Loans are evaluated on a pooled basis when they share similar risk characteristics; otherwise, they are evaluated individually.
Equity securities primarily include common stocks, exchange traded funds, non-redeemable preferred stocks and real estate investment trust equity investments. Certain exchange traded funds have fixed income securities as their underlying investments. Equity securities are carried at fair value. Equity securities without readily determinable or estimable fair values are measured using the measurement alternative, which is cost less impairment, if any, and adjustments resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer.
Investments in limited partnership interests are primarily accounted for in accordance with the equity method of accounting (“EMA”) and include interests in private equity funds, real estate funds and other funds. Investments in limited partnership interests purchased prior to January 1, 2018 where the Company’s interest is so minor that it exercises virtually no influence over operating and financial policies are accounted for at fair value primarily utilizing the net asset value (“NAV”) as a practical expedient to determine fair value.
Short-term investments, including money market funds, commercial paper, U.S. Treasury bills and other short-term investments, are carried at fair value. Policy loans are carried at unpaid principal balances. Other investments consist of derivatives. Derivatives are carried at fair value.
Investment income primarily consists of interest, dividends, income from limited partnership interests, and income from certain derivative transactions. Interest is recognized on an accrual basis using the effective yield method and dividends are recorded at the ex-dividend date. Interest income for ABS and MBS is determined considering estimated pay-downs, including prepayments, obtained from third party data sources and internal estimates. Actual prepayment experience is periodically reviewed and effective yields are recalculated when differences arise between the prepayments originally anticipated and the actual prepayments received and currently anticipated. For ABS and MBS of high credit quality with fixed interest rates, the effective yield is recalculated on a retrospective basis. For all others, the effective yield is generally recalculated on a prospective basis. Net investment income for AFS fixed income securities includes the impact of accreting the credit loss allowance for the time value of money. Accrual of income is suspended for fixed income securities when the timing and amount of cash flows expected to be received is not reasonably estimable. 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. Accrued income receivable is monitored for recoverability and when not expected to be collected is written off through net investment income. Cash receipts on investments on nonaccrual status are generally recorded as a reduction of amortized cost. 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 from EMA limited partnership interests is generally recognized on a three month delay due to the availability of the related financial statements from investees.
Realized capital gains and losses include gains and losses on investment sales, changes in the credit loss allowances related to fixed income securities and mortgage loans, impairments, valuation changes of equity investments, including equity securities and certain limited partnerships where the underlying assets are predominately public equity securities, and periodic changes in fair value and settlements of certain derivatives including hedge ineffectiveness. Realized capital gains and losses on investment sales are determined on a specific identification basis and are net of credit losses already recognized through an allowance.
Derivative and embedded derivative financial instruments
Derivative financial instruments include equity futures, options, interest rate caps, foreign currency forwards and a reinvestment related risk transfer reinsurance agreement with ALIC that meets the accounting definition of a derivative (see Note 4). Derivatives required to be separated from the host instrument and accounted for as derivative financial instruments (“subject to bifurcation”) are embedded in equity-indexed life contracts and reinsured variable annuity contracts.
All derivatives are accounted for on a fair value basis and reported as other investments, other assets, other liabilities and accrued expenses or contractholder funds. The income statement effects of derivatives, including fair value gains and losses and accrued periodic settlements, are reported either in realized capital gains and losses or in a single line item together with the results of the associated asset or liability for which risks are being managed. Embedded derivative instruments subject to bifurcation are also accounted for on a fair value basis and are reported together with the host contract. The change in fair value of derivatives embedded in life and annuity product contracts and subject to bifurcation is reported in contract benefits or interest credited to contractholder funds. Cash flows from embedded derivatives subject to bifurcation are reported consistently with the host contracts within the Statements of Cash Flows. Cash flows from other derivatives are reported in cash flows from investing activities within the Statements of Cash Flows.
14


Securities loaned
The Company’s business activities include securities lending transactions, which are used primarily to generate net investment income. The proceeds received in conjunction with securities lending transactions can be reinvested in short-term investments or fixed income securities. These transactions are short-term in nature, usually 30 days or less.
The Company receives cash collateral for securities loaned in an amount generally equal to 102% and 105% of the fair value of domestic and foreign securities, respectively, and records the related obligations to return the collateral in other liabilities and accrued expenses. The carrying value of these obligations approximates fair value because of their relatively short-term nature. The Company monitors the market value of securities loaned on a daily basis and obtains additional collateral as necessary under the terms of the agreements to mitigate counterparty credit risk. The Company maintains the right and ability to repossess the securities loaned on short notice.
Recognition of premium revenues and contract charges, and related benefits and interest credited
Traditional life insurance products consist principally of products with fixed and guaranteed premiums and benefits, primarily term and whole life insurance products. Voluntary accident and health insurance products are expected to remain in force for an extended period and therefore are primarily classified as long-duration contracts. Premiums from these products are recognized as revenue when due from policyholders, net of any credit loss allowance for uncollectible premiums. Benefits are reflected in contract benefits and recognized over the life of the policy in relation to premiums.
Immediate annuities with life contingencies, including certain structured settlement annuities, provide benefits over a period that extends beyond the period during which premiums are collected. Premiums from these products are recognized as revenue when received at the inception of the contract. Benefits are recognized in relation to premiums with the establishment of a reserve. The change in reserve over time is recorded in contract benefits and primarily relates to accumulation at the discount rate and annuitant mortality. Profits from these policies come primarily from investment income, which is recognized over the life of the contract.
Interest-sensitive life contracts, such as universal life and single premium life, are insurance contracts whose terms are not fixed and guaranteed. The terms that may be changed include premiums paid by the contractholder, interest credited to the contractholder account balance and contract charges assessed against the contractholder account balance. Premiums from these contracts are reported as contractholder fund deposits. Contract charges consist of fees assessed against the contractholder account balance for the cost of insurance (mortality risk), contract administration and surrender of the contract prior to contractually specified dates. These contract charges are recognized as revenue when assessed against the contractholder account balance. Contract benefits include life-contingent benefit payments in excess of the contractholder account balance.
Contracts that do not subject the Company to significant risk arising from mortality or morbidity are referred to as investment contracts. Fixed annuities, including market value adjusted annuities and immediate annuities without life contingencies, are considered investment contracts. Consideration received for such contracts is reported as contractholder fund deposits. Contract charges for investment contracts consist of fees assessed against the contractholder account balance for maintenance, administration and surrender of the contract prior to contractually specified dates, and are recognized when assessed against the contractholder account balance.
Interest credited to contractholder funds represents interest accrued or paid on interest-sensitive life and investment contracts. Crediting rates for certain fixed annuities and interest-sensitive life contracts are adjusted periodically by the Company to reflect current market conditions subject to contractually guaranteed minimum rates. Crediting rates for indexed life contracts are generally based on an equity index, such as the Standard & Poor’s 500 Index (“S&P 500”). Interest credited also includes amortization of DSI expenses. DSI is amortized into interest credited using the same method used to amortize DAC.
Contract charges for variable life and variable annuity products consist of fees assessed against the contractholder account balances for contract maintenance, administration, mortality, expense and surrender of the contract prior to contractually specified dates. Contract benefits incurred for variable annuity products include guaranteed minimum death, income, withdrawal and accumulation benefits. All of the Company’s variable annuity business is ceded through reinsurance agreements and the contract charges and contract benefits related thereto are reported net of reinsurance ceded.
Other revenue
Other revenue represents gross dealer concessions received in connection with sales of non-proprietary products by Allstate exclusive agents and exclusive financial specialists. Other revenue is recognized when performance obligations are fulfilled.
Deferred policy acquisition and sales inducement costs
Costs that are related directly to the successful acquisition of new or renewal life insurance policies are deferred and recorded as DAC. These costs are principally agent and broker remuneration and certain underwriting expenses. DSI costs,
15


which are deferred and recorded as other assets, relate to sales inducements offered on sales to new customers, principally on interest-sensitive life contracts. These sales inducements are primarily in the form of additional credits to the customer’s account balance or enhancements to interest credited for a specified period which are in excess of the rates currently being credited to similar contracts without sales inducements. All other acquisition costs are expensed as incurred and included in operating costs and expenses. Amortization of DAC is included in amortization of deferred policy acquisition costs and is described in more detail below. DSI is amortized into income using the same methodology and assumptions as DAC and is included in interest credited to contractholder funds.
For traditional life and voluntary accident and health insurance, DAC is amortized over the premium paying period of the related policies in proportion to the estimated revenues on such business. Assumptions used in the amortization of DAC and reserve calculations are established at the time the policy is issued and are generally not revised during the life of the policy. Any deviations from projected business in force resulting from actual policy terminations differing from expected levels and any estimated premium deficiencies may result in a change to the rate of amortization in the period such events occur. Generally, the amortization periods for these policies approximates the estimated lives of the policies. The Company periodically reviews the recoverability of DAC using actual experience and current assumptions. Traditional life insurance products, immediate annuities with life contingencies, and voluntary accident and health insurance products are reviewed individually. If actual experience and current assumptions are adverse compared to the original assumptions and a premium deficiency is determined to exist, any remaining unamortized DAC balance would be expensed to the extent not recoverable and the establishment of a premium deficiency reserve may be required for any remaining deficiency.
For interest-sensitive life insurance, DAC and DSI are amortized in proportion to the incidence of the total present value of gross profits, which includes both actual historical gross profits (“AGP”) and estimated future gross profits (“EGP”) expected to be earned over the estimated lives of the contracts. The amortization is net of interest on the prior period DAC balance using rates established at the inception of the contracts. Actual amortization periods generally range from 15-30 years; however, incorporating estimates of the rate of customer surrenders, partial withdrawals and deaths generally results in the majority of the DAC being amortized during the surrender charge period, which is typically 10-20 years for interest-sensitive life. The rate of DAC and DSI amortization is reestimated and adjusted by a cumulative charge or credit to income when there is a difference between the incidence of actual versus expected gross profits in a reporting period or when there is a change in total EGP. When DAC or DSI amortization or a component of gross profits for a quarterly period is potentially negative (which would result in an increase of the DAC or DSI balance) as a result of negative AGP, the specific facts and circumstances surrounding the potential negative amortization are considered to determine whether it is appropriate for recognition in the financial statements. Negative amortization is only recorded when the increased DAC or DSI balance is determined to be recoverable based on facts and circumstances. Recapitalization of DAC and DSI is limited to the originally deferred costs plus interest.
AGP and EGP primarily consist of the following components: contract charges for the cost of insurance less mortality costs and other benefits; investment income and realized capital gains and losses less interest credited; and surrender and other contract charges less maintenance expenses. The principal assumptions for determining the amount of EGP are mortality, persistency, expenses, investment returns, including capital gains and losses on assets supporting contract liabilities, interest crediting rates to contractholders, and the effects of any hedges. For products whose supporting investments are exposed to capital losses in excess of the Company’s expectations which may cause periodic AGP to become temporarily negative, EGP and AGP utilized in DAC and DSI amortization may be modified to exclude the excess capital losses.
The Company performs quarterly reviews of DAC and DSI recoverability for interest-sensitive life contracts using current assumptions. If a change in the amount of EGP is significant, it could result in the unamortized DAC or DSI not being recoverable, resulting in a charge which is included as a component of amortization of deferred policy acquisition costs or interest credited to contractholder funds, respectively.
The DAC and DSI balances presented include adjustments to reflect the amount by which the amortization of DAC and DSI would increase or decrease if the unrealized capital gains or losses in the respective product investment portfolios were actually realized. The adjustments are recorded net of tax in AOCI. DAC, DSI and deferred income taxes determined on unrealized capital gains and losses and reported in AOCI recognize the impact on shareholder’s equity consistently with the amounts that would be recognized in the income statement on realized capital gains and losses.
Customers of the Company may exchange one insurance policy or investment contract for another offered by the Company, or make modifications to an existing investment or life contract issued by the Company. These transactions are identified as internal replacements for accounting purposes. Internal replacement transactions determined to result in replacement contracts that are substantially unchanged from the replaced contracts are accounted for as continuations of the replaced contracts. Unamortized DAC and DSI related to the replaced contracts continue to be deferred and amortized in connection with the replacement contracts. For interest-sensitive life contracts, the EGP of the replacement contracts are treated as a revision to the EGP of the replaced contracts in the determination of amortization of DAC and DSI. For traditional life insurance policies, any changes to unamortized DAC that result from replacement contracts are treated as prospective revisions.
16


Any costs associated with the issuance of replacement contracts are characterized as maintenance costs and expensed as incurred. Internal replacement transactions determined to result in a substantial change to the replaced contracts are accounted for as an extinguishment of the replaced contracts, and any unamortized DAC and DSI related to the replaced contracts are eliminated with a corresponding charge to amortization of deferred policy acquisition costs or interest credited to contractholder funds, respectively.
Reinsurance
In the normal course of business, the Company seeks to limit aggregate and single exposure to losses on large risks by purchasing reinsurance. The Company has also used reinsurance to effect the disposition of certain blocks of business. The amounts reported as reinsurance recoverables include amounts billed to reinsurers on losses paid as well as estimates of amounts expected to be recovered from reinsurers on insurance reserves and contractholder funds that have not yet been paid. Reinsurance recoverables on unpaid losses are estimated based upon assumptions consistent with those used in establishing the liabilities related to the underlying reinsured contracts. Insurance reserves are reported gross of reinsurance recoverables. Reinsurance premiums are generally reflected in income in a manner consistent with the recognition of premiums on the reinsured contracts. Reinsurance does not extinguish the Company’s primary liability under the policies written. Therefore, the Company evaluates reinsurer counterparty credit risk and records reinsurance recoverables net of credit loss allowances. The Company assesses counterparty credit risk for individual reinsurers separately when more relevant or on a pooled basis when shared risk characteristics exist. The evaluation considers the credit quality of the reinsurer and the period over which the recoverable balances are expected to be collected. The Company considers factors including past events, current conditions and reasonable and supportable forecasts in the development of the estimate of credit loss allowances.
The Company uses a probability of default and loss given default model developed independently of the Company to estimate current expected credit losses. The model utilizes factors including historical industry factors based on the probability of liquidation, and incorporates current loss given default factors reflective of the industry.
The Company monitors the credit ratings of reinsurer counterparties and evaluates the circumstances surrounding credit rating changes as inputs into its credit loss assessments. Uncollectible reinsurance recoverable balances are written off against the allowances when there is no reasonable expectation of recovery. The changes in the allowance are reported in contract benefits.
The Company has a reinsurance treaty with ALIC through which it cedes reinvestment related risk on its structured settlement annuities. The terms of the treaty meet the accounting definition of a derivative. Accordingly, the treaty is recorded in the Statement of Financial Position at fair value. Changes in the fair value of the treaty, premiums paid to ALIC and settlements received from ALIC are recognized in realized capital gains and losses.
Income taxes
Income taxes are accounted for using the asset and liability method under which deferred tax assets and liabilities are recognized for temporary differences between the financial reporting and tax bases of assets and liabilities at the enacted tax rates. The principal assets and liabilities giving rise to such differences are investments (including unrealized capital gains and losses), insurance reserves and DAC. A deferred tax asset valuation allowance is established when it is more likely than not such assets will not be realized. The Company recognizes interest expense related to income tax matters in income tax expense and penalties in operating costs and expenses.
Reserve for life-contingent contract benefits
The reserve for life-contingent contract benefits payable under insurance policies, including traditional life insurance, life-contingent immediate annuities and voluntary accident and health insurance products, is computed on the basis of long-term actuarial assumptions of future investment yields, mortality, morbidity, policy terminations and expenses. These assumptions, which for traditional life insurance are applied using the net level premium method, include provisions for adverse deviation and generally vary by characteristics such as type of coverage, year of issue and policy duration. The assumptions are established at the time the policy is issued and are generally not changed during the life of the policy. The Company periodically reviews the adequacy of reserves using actual experience and current assumptions. If actual experience and current assumptions are adverse compared to the original assumptions and a premium deficiency is determined to exist, any remaining unamortized DAC balance would be expensed to the extent not recoverable and the establishment of a premium deficiency reserve may be required for any remaining deficiency. Traditional life insurance products, immediate annuities with life contingencies, and voluntary accident and health insurance are reviewed individually. The Company also reviews these policies for circumstances where projected profits would be recognized in early years followed by projected losses in later years. If this circumstance exists, the Company will accrue a liability, during the period of profits, to offset the losses at such time as the future losses are expected to commence using a method updated prospectively over time. To the extent that unrealized gains on fixed income securities would result in a premium deficiency if those gains were realized, the related
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increase in reserves for certain immediate annuities with life contingencies is recorded net of tax as a reduction of unrealized net capital gains included in AOCI.
Contractholder funds
Contractholder funds represent interest-bearing liabilities arising from the sale of products such as interest-sensitive life insurance and fixed annuities. Contractholder funds primarily comprise cumulative deposits received and interest credited to the contractholder less cumulative contract benefits, surrenders, withdrawals and contract charges for mortality or administrative expenses. Contractholder funds also include reserves for secondary guarantees on interest-sensitive life insurance and certain fixed annuity contracts and reserves for certain guarantees on reinsured variable annuity contracts.
Separate accounts
Separate accounts assets are carried at fair value. The assets of the separate accounts are legally segregated and available only to settle separate accounts contract obligations. Separate accounts liabilities represent the contractholders’ claims to the related assets and are carried at an amount equal to the separate accounts assets. Investment income and realized capital gains and losses of the separate accounts accrue directly to the contractholders and therefore are not included in the Company’s Statements of Operations and Comprehensive Income. Deposits to and surrenders and withdrawals from the separate accounts are reflected in separate accounts liabilities and are not included in cash flows.
Absent any contract provision wherein the Company provides a guarantee, variable annuity and variable life insurance contractholders bear the investment risk that the separate accounts’ funds may not meet their stated investment objectives. All of the Company’s variable annuity business was reinsured beginning in 2006.
Measurement of credit losses
The Company carries an allowance for expected credit losses for all financial assets measured at amortized cost on the Statements of Financial Position. The Company considers past events, current conditions and reasonable and supportable forecasts in estimating an allowance for credit losses. The Company also carries a credit loss allowance for fixed income securities where applicable and, when amortized cost is reported, it is net of credit loss allowances. For additional information, refer to the Investments or Reinsurance topics of this section.
The Company also estimates a credit loss allowance for commitments to fund mortgage loans unless they are unconditionally cancellable by the Company. The related allowance is reported in other liabilities and accrued expenses.
The Company’s allowance for credit losses is presented in the following table.
($ in millions)December 31, 2020January 1, 2020
Mortgage loans$11,093 $6,129 
Investments11,093 6,129 
Reinsurance recoverables624 655 
Other assets4,130 4,259 
Assets15,847 11,043 
Commitments to fund mortgage loans97 
Liabilities97 
Total$15,847 $11,140 
Off-balance sheet financial instruments
Commitments to invest, commitments to purchase private placement securities, commitments to fund mortgage loans and financial guarantees have off-balance sheet risk because their contractual amounts are not recorded in the Company’s Statements of Financial Position (see Note 7 and Note 11).
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Adopted accounting standard
Measurement of Credit Losses on Financial Instruments
Effective January 1, 2020 the Company adopted new Financial Accounting Standards Board (“FASB”) guidance related to the measurement of credit losses on financial instruments that primarily affected mortgage loans and reinsurance recoverables.
Upon adoption of the guidance, the Company recorded a total allowance for expected credit losses of $11.1 million, pre-tax. After consideration of existing valuation allowances maintained prior to adopting the new guidance, the Company increased its valuation allowances for credit losses to conform to the new requirements which resulted in recognizing a cumulative effect decrease in retained income of $5.4 million, after-tax, at the date of adoption.
The measurement of credit losses for AFS fixed income 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 credit loss adjustment is recognized through a valuation allowance which may change over time but once recorded cannot subsequently be reduced to an amount below zero. Previously these credit loss adjustments were recorded as other than temporary impairments and were not reversed once recorded.
Pending accounting standards
Accounting for Long-Duration Insurance Contracts
In August 2018, the FASB issued guidance revising the accounting for certain long-duration insurance contracts. The new guidance introduces material changes to the measurement of the Company’s reserves for traditional life, life-contingent immediate annuities and certain voluntary accident and health insurance products.
Under the new guidance, measurement assumptions, including those for mortality, morbidity and policy terminations, will be required to be reviewed and updated at least annually. The effect of updating measurement assumptions other than the discount rate are required to be measured on a retrospective basis and reported in net income. In addition, reserves under the new guidance are required to be discounted using an upper-medium grade fixed income instrument yield that is updated through OCI at each reporting date. Current GAAP requires the measurement of reserves to utilize assumptions set at policy issuance unless updated current assumptions indicate that recorded reserves are deficient.
The new guidance also requires DAC and other capitalized balances currently amortized in proportion to premiums or gross profits to be amortized on a constant level basis over the expected term for all long-duration insurance contracts. DAC will not be subject to loss recognition testing but will be reduced when actual lapse experience exceeds expected experience. The new guidance will no longer require adjustments to DAC and DSI related to unrealized gains and losses on investment securities supporting the related business.
All market risk benefit product features will be measured at fair value with changes in fair value recorded in net income with the exception of changes in the fair value attributable to changes in the reporting entity’s own credit risk, which are required to be recognized in OCI. Substantially all of the Company’s market risk benefits relate to variable annuities that are reinsured and therefore these impacts are not expected to be material to the Company.
The new guidance is effective for financial statements issued for reporting periods beginning after December 15, 2022, and restatement of prior periods presented is required. Early adoption is permitted and if elected, restatement of only one prior period is required. The new guidance will be applied to affected contracts and DAC on the basis of existing carrying amounts at the earliest period presented or retrospectively using actual historical experience as of contract inception. The new guidance for market risk benefits is required to be adopted retrospectively.
The Company is evaluating the anticipated impacts of applying the new guidance to both retained income and AOCI. The requirements of the new guidance represent a material change from existing GAAP, however, the underlying economics of the business and related cash flows are unchanged. The Company anticipates the financial statement impact of adopting the new guidance to be material, largely attributed to the impact of transitioning to a discount rate based on an upper-medium grade fixed income investment yield. The Company expects the most significant impacts will occur in the run-off annuity business. The revised accounting for DAC will be applied prospectively using the new model and any DAC effects existing in AOCI as a result of applying existing GAAP at the date of adoption will be eliminated.
Simplifications to the Accounting for Income Taxes
In December 2019, the FASB issued amendments to simplify the accounting for income taxes. The amendments eliminate certain exceptions in the existing guidance including those related to intraperiod tax allocation and deferred tax liability recognition when a subsidiary meets the criteria to apply the equity method of accounting. The amendments require recognition of the effect of an enacted change in tax laws or rates in the period that includes the enactment date, provide an option to not allocate taxes to a legal entity that is not subject to tax as well as other minor changes. The amendments are effective for
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reporting periods beginning after December 15, 2020. The new guidance specifies which amendments should be applied prospectively, retrospectively or on a modified retrospective basis through a cumulative-effect adjustment to retained income as of the beginning of the year of adoption. The impact of adoption is not expected to be material to the Company’s results of operations or financial position.
3. Supplemental Cash Flow Information
Non-cash investing activities include $412 thousand, $8.0 million and $8.2 million related to mergers and exchanges completed with equity securities, fixed income securities and modifications of certain mortgage loans in 2020, 2019 and 2018, respectively.
Liabilities for collateral received in conjunction with the Company’s securities lending program were $76.4 million, $158.1 million and $69.8 million as of December 31, 2020, 2019 and 2018, respectively, and are reported in other liabilities and accrued expenses.
The accompanying cash flows are included in cash flows from operating activities in the Statements of Cash Flows along with the activities resulting from management of the proceeds, which for the years ended December 31 are as follows:
($ in thousands)202020192018
Net change in proceeds managed   
Net change in short-term investments$81,718 $(88,323)$(10,721)
Operating cash flow provided (used)$81,718 $(88,323)$(10,721)
Net change in liabilities   
Liabilities for collateral, beginning of year$(158,111)$(69,788)$(59,067)
Liabilities for collateral, end of year(76,393)(158,111)(69,788)
Operating cash flow (used) provided$(81,718)$88,323 $10,721 
4. Related Party Transactions
Business operations
The Company uses services performed by AIC, ALIC and other affiliates, and business facilities owned or leased and operated by AIC in conducting its business activities. In addition, the Company shares the services of employees with AIC. The Company reimburses its affiliates for the operating expenses incurred on behalf of the Company. The Company is charged for the cost of these operating expenses based on the level of services provided. Operating expenses, including compensation, retirement and other benefit programs (see Note 14), allocated to the Company were $38.0 million, $45.0 million and $46.2 million in 2020, 2019 and 2018, respectively. A portion of these expenses relate to the acquisition of business, which are deferred and amortized into income as described in Note 2.
Structured settlement annuities
The Company previously issued structured settlement annuities, a type of immediate annuity, to fund structured settlements in matters involving AIC. In most cases, these annuities were issued under a “qualified assignment” whereby Allstate Assignment Company and prior to July 1, 2001 Allstate Settlement Corporation (“ASC”), both wholly owned subsidiaries of ALIC, purchased annuities from the Company and assumed AIC’s obligation to make future payments.
AIC issued surety bonds to guarantee the payment of structured settlement benefits assumed by ASC (from both AIC and non-related parties) and funded by certain annuity contracts issued by the Company through June 30, 2001. ASC entered into a General Indemnity Agreement pursuant to which it indemnified AIC for any liabilities associated with the surety bonds and gave AIC certain collateral security rights with respect to the annuities and certain other rights in the event of any defaults covered by the surety bonds. ALIC guaranteed the payment of structured settlement benefits on all contracts issued on or after July 1, 2001. Reserves recorded by the Company for annuities that are guaranteed by the surety bonds of AIC were $1.58 billion and $1.42 billion as of December 31, 2020 and 2019, respectively. Reserves recorded by the Company for annuities that are guaranteed by ALIC were $557.2 million and $559.5 million as of December 31, 2020 and 2019, respectively.
Broker-Dealer agreements
The Company receives distribution services from Allstate Financial Services, LLC, an affiliated broker-dealer company, for certain annuity and variable life insurance contracts sold by Allstate exclusive agencies and exclusive financial specialists. For these services, the Company incurred commission and other distribution expenses of $380 thousand, $317 thousand and $215 thousand in 2020, 2019 and 2018, respectively.
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The Company has a service agreement with Allstate Distributors, LLC (“ADLLC”), a broker-dealer company owned by ALIC, whereby ADLLC promotes and markets products sold by the Company. In return for these services, the Company recorded expense of $9 thousand, $3 thousand and $5 thousand in 2020, 2019 and 2018, respectively.
Reinsurance
The Company has reinsurance agreements with ALIC whereby a portion of the Company’s premiums and policy benefits are ceded to ALIC (see Note 9).
The Company has a reinsurance treaty (the “structured settlement annuity reinsurance agreement”) through which it cedes reinvestment related risk on its structured settlement annuities to ALIC. Under the terms of the treaty, the Company pays a premium to ALIC that varies with the aggregate structured settlement annuity statutory reserve balance. In return, ALIC guarantees that the yield on the portion of the Company’s investment portfolio that supports structured settlement annuity liabilities will not fall below contractually determined rates. The Company ceded premium related to structured settlement annuities to ALIC of $3.3 million, $4.2 million and $3.4 million in 2020, 2019 and 2018, respectively. The Company received settlements from ALIC of $21.7 million, $1.0 million and 0 in 2020, 2019 and 2018, respectively. As of December 31, 2020 and 2019, the carrying value of the structured settlement reinsurance treaty was $313.9 million and $231.5 million, respectively, which is recorded in other assets. The premiums ceded and changes in the fair value of the reinsurance treaty are reflected as a component of realized capital gains and losses as the treaty is recorded as a derivative instrument. In 2019, ALIC established a trust for the benefit of the Company and maintains it with assets equal to or greater than the Company’s statutory-basis cession. As of December 31, 2020 and 2019, the trust held $1.56 billion and $1.45 billion of investments, respectively.
Income taxes
The Company is a party to a federal income tax allocation agreement with the Corporation (see Note 12).
Intercompany loan agreement
The Company 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 $1.00 billion. The Corporation may use commercial paper borrowings, bank lines of credit and securities lending to fund intercompany borrowings. The Company had 0 amounts outstanding under the intercompany loan agreement as of December 31, 2020 or 2019.
5. Investments
Portfolio composition
The composition of the investment portfolio is presented as follows:
As of December 31,
($ in thousands)20202019
Fixed income securities, at fair value$4,918,874 $4,434,362 
Mortgage loans, net621,702 733,258 
Equity securities, at fair value251,437 274,133 
Limited partnership interests343,251 386,310 
Short-term investments, at fair value133,045 224,098 
Policy loans37,294 38,583 
Other8,097 5,237 
Total$6,313,700 $6,095,981 
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Fair values
The amortized cost, gross unrealized gains and losses and fair value for fixed income securities are as follows:
($ in thousands)Amortized cost, netGross unrealizedFair value
 GainsLosses
December 31, 2020    
U.S. government and agencies$134,490 $10,415 $$144,905 
Municipal402,728 141,825 544,553 
Corporate3,685,510 471,999 (3,782)4,153,727 
Foreign government67,435 4,652 72,087 
MBS3,329 273 3,602 
Total fixed income securities$4,293,492 $629,164 $(3,782)$4,918,874 
December 31, 2019    
U.S. government and agencies$43,280 $9,534 $$52,814 
Municipal433,038 119,242 552,280 
Corporate3,400,471 277,338 (2,564)3,675,245 
Foreign government133,635 6,531 140,166 
MBS12,683 1,174 13,857 
Total fixed income securities$4,023,107 $413,819 $(2,564)$4,434,362 
Scheduled maturities
The scheduled maturities for fixed income securities are as follows:
($ in thousands)As of December 31, 2020
Amortized
cost, net
Fair
value
Due in one year or less$236,261 $241,561 
Due after one year through five years1,259,325 1,348,880 
Due after five years through ten years1,686,785 1,900,883 
Due after ten years1,107,792 1,423,948 
 4,290,163 4,915,272 
MBS3,329 3,602 
Total$4,293,492 $4,918,874 
Actual maturities may differ from those scheduled as a result of calls and make-whole payments by the issuers. MBS is shown separately because of potential prepayment of principal prior to contractual maturity dates.
Net investment income
Net investment income for the years ended December 31 is as follows:
($ in thousands)202020192018
Fixed income securities$188,432 $208,816 $214,039 
Mortgage loans34,510 32,566 30,920 
Equity securities3,267 4,283 5,565 
Limited partnership interests817 15,348 43,365 
Short-term investments1,600 4,393 2,966 
Policy loans2,272 2,343 2,339 
Investment income, before expense230,898 267,749 299,194 
Investment expense(8,811)(11,743)(11,311)
Net investment income$222,087 $256,006 $287,883 

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Realized capital gains and losses
Realized capital gains (losses) by asset type for the years ended December 31 are as follows:
($ in thousands)202020192018
Fixed income securities$(2,190)$1,389 $(1,306)
Mortgage loans(9,390)466 
Equity securities36,110 40,780 (16,364)
Limited partnership interests3,520 5,383 (3,895)
Derivatives100,412 59,087 638 
Short-term investments(197)(12)(93)
Realized capital gains (losses)$128,265 $106,627 $(20,554)
Realized capital gains (losses) by transaction type for the years ended December 31 are as follows:
($ in thousands)202020192018
Sales$(1,861)$4,698 $(1,548)
Credit losses (1)
(10,388)(169)(285)
Valuation of equity investments (2)
40,102 43,011 (19,359)
Valuation and settlements of derivative instruments100,412 59,087 638 
Realized capital gains (losses)$128,265 $106,627 $(20,554)
____________________
(1)Due to the adoption of the measurement of credit losses on financial instruments accounting standard, prior period other-than-temporary impairment write-downs are now presented as credit losses.
(2)Includes valuation of equity securities and certain limited partnership interests where the underlying assets are predominately public equity securities.
Gross realized gains (losses) on sales of fixed income securities for the years ended December 31 are as follows:
($ in thousands)202020192018
Gross realized gains$3,165 $4,863 $4,397 
Gross realized losses(5,099)(3,305)(5,418)
The following table presents the net pre-tax appreciation (decline) recognized in net income of equity securities and limited partnership interests carried at fair value that are still held as of December 31, 2020 and 2019, respectively.
For the years ended December 31,
($ in thousands)20202019
Equity securities$39,830 $29,558 
Limited partnership interests carried at fair value13,787 9,165 
Total$53,617 $38,723 
Credit losses recognized in net income (1) for the years ended December 31 are as follows:
($ in thousands)202020192018
Fixed income securities:   
MBS$(255)$(169)$(285)
Total fixed income securities(255)(169)(285)
Mortgage loans(9,691)
Limited partnership interests(538)
Total credit losses by asset type(10,484)(169)(285)
Liabilities
Commitments to fund commercial mortgage loans97 
Total$(10,387)$(169)$(285)
_______________
(1)Due to the adoption of the measurement of credit losses on financial instruments accounting standard, realized capital losses previously reported as other-than-temporary impairment write-downs are now presented as credit losses.
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Unrealized net capital gains and losses
Unrealized net capital gains and losses included in AOCI are as follows:
($ in thousands)Fair valueGross unrealizedUnrealized net gains (losses)
December 31, 2020GainsLosses
Fixed income securities$4,918,874 $629,164 $(3,782)$625,382 
Short-term investments
133,045 76 (1)75 
EMA limited partnerships (1)
   (350)
Unrealized net capital gains and losses, pre-tax   625,107 
Amounts recognized for:    
Insurance reserves (2)
   (321,591)
DAC and DSI (3)
   (36,668)
Amounts recognized   (358,259)
Deferred income taxes   (56,038)
Unrealized net capital gains and losses, after-tax   $210,810 
December 31, 2019
Fixed income securities$4,434,362 $413,819 $(2,564)$411,255 
Short-term investments
224,098 (17)(13)
EMA limited partnerships   (205)
Unrealized net capital gains and losses, pre-tax   411,037 
Amounts recognized for:    
Insurance reserves   (231,357)
DAC and DSI   (21,820)
Amounts recognized   (253,177)
Deferred income taxes   (33,151)
Unrealized net capital gains and losses, after-tax   $124,709 
____________________
(1)Unrealized net capital gains and losses for limited partnership interests represent the Company’s share of EMA limited partnerships’ OCI. Fair value and gross unrealized gains and losses are not applicable.
(2)The insurance reserves adjustment represents the amount by which the reserve balance would increase if the net unrealized gains in the applicable product portfolios were realized and reinvested at lower interest rates, resulting in a premium deficiency. This adjustment primarily relates to structured settlement annuities with life contingencies (a type of immediate annuity with life contingencies).
(3)The DAC and DSI adjustment balance represents the amount by which the amortization of DAC and DSI would increase or decrease if the unrealized gains or losses in the respective product portfolios were realized.
Change in unrealized net capital gains and losses
The change in unrealized net capital gains and losses for the years ended December 31 is as follows:
($ in thousands)202020192018
Fixed income securities$214,127 $256,021 $(212,483)
Short-term investments88 (9)
EMA limited partnerships(145)(155)(40)
Total214,070 255,857 (212,514)
Amounts recognized for:   
Insurance reserves(90,234)(150,729)141,714 
DAC and DSI(14,848)(19,543)6,780 
Amounts recognized(105,082)(170,272)148,494 
Deferred income taxes(22,887)(17,973)13,445 
Increase (decrease) in unrealized net capital gains and losses, after-tax$86,101 $67,612 $(50,575)
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Mortgage loans
The Company’s mortgage loans are commercial mortgage loans collateralized by a variety of commercial real estate property types located across the United States and totaled $621.7 million and $733.3 million, net of credit loss allowance, as of December 31, 2020 and 2019, respectively. Substantially all of the commercial mortgage loans are non-recourse to the borrower.
The following table shows the principal geographic distribution of commercial real estate represented in the Company’s mortgage loan portfolio. No other state represented more than 5% of the portfolio as of December 31.
(% of mortgage loan portfolio carrying value)20202019
Texas23.9 %19.9 %
California15.8 16.7 
North Carolina9.3 8.2 
Utah6.7 5.9 
New Jersey4.2 5.6 
Nevada2.9 5.8 
Illinois2.0 5.5 
The types of properties collateralizing the mortgage loans as of December 31 are as follows:
(% of mortgage loan portfolio carrying value)20202019
Apartment complex30.6 %32.6 %
Office buildings28.4 27.4 
Retail16.6 15.6 
Warehouse13.2 16.5 
Other11.2 7.9 
Total100.0 %100.0 %
The contractual maturities of the mortgage loan portfolio as of December 31, 2020 are as follows:
($ in thousands)Number
of loans
Amortized cost, netPercent
2021$44,345 7.1 %
202246,326 7.5 
202311 82,043 13.2 
202412 97,143 15.6 
Thereafter46 351,845 56.6 
Total83 $621,702 100.0 %
Limited partnerships
Investments in limited partnership interests include interests in private equity funds, real estate funds and other funds. Principal factors influencing carrying value appreciation or decline include operating performance, comparable public company earnings multiples, capitalization rates and the economic environment. For equity method limited partnerships, the Company recognizes an impairment loss when evidence demonstrates that the loss is other than temporary. Evidence of a loss in value that is other than temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment. Changes in fair value limited partnerships are recorded through net investment income and therefore are not tested for impairment.
The carrying value for limited partnership interest as of December 31 is as follows:
20202019
($ in thousands)EMAFair ValueTotalEMAFair ValueTotal
Private equity$204,573 $107,500 $312,073 $251,154 $107,500 $358,654 
Real estate15,814 987 16,801 15,357 1,566 16,923 
Other (1)
14,377 14,377 10,733 10,733 
Total$234,764 $108,487 $343,251 $277,244 $109,066 $386,310 
____________
(1)Other consists of certain limited partnership interests where the underlying assets are predominately public equity and debt securities.

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Municipal bonds
The Company maintains a diversified portfolio of municipal bonds which totaled $544.6 million and $552.3 million as of December 31, 2020 and 2019, respectively. 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). The following table shows the principal geographic distribution of municipal bond issuers represented in the Company’s portfolio as of December 31. No other state represents more than 5% of the portfolio.
(% of municipal bond portfolio carrying value)20202019
California35.2 %33.3 %
Oregon11.6 10.6 
Texas10.9 10.8 
Illinois8.7 8.0 
Short-term investments
Short-term investments, including money market funds, commercial paper, U.S. Treasury bills and other short-term investments, are carried at fair value. As of December 31, 2020 and 2019, the fair value of short-term investments totaled $133.0 million and $224.1 million, respectively.
Policy loans
Policy loans are carried at unpaid principal balances. As of December 31, 2020 and 2019, the carrying value of policy loans totaled $37.3 million and $38.6 million, respectively.
Other investments
Other investments consist of derivatives. Derivatives are carried at fair value. As of December 31, 2020 and 2019, the fair value of derivatives totaled $8.1 million and $5.2 million, respectively.
Concentration of credit risk
As of December 31, 2020, the Company is not exposed to any credit concentration risk of a single issuer and its affiliates greater than 10% of the Company’s shareholder’s equity, other than the U.S. government and its agencies.
Securities loaned
The Company’s business activities include securities lending programs with third parties, mostly large banks. As of December 31, 2020 and 2019, fixed income and equity securities with a carrying value of $73.8 million and $152.3 million, respectively, were on loan under these agreements. Interest income on collateral, net of fees, was $235 thousand, $342 thousand and $286 thousand in 2020, 2019 and 2018, respectively.
Other investment information
Included in fixed income securities are below investment grade assets totaling $471.8 million and $406.0 million as of December 31, 2020 and 2019, respectively.
As of December 31, 2020, fixed income securities with a carrying value of $2.1 million were on deposit with regulatory authorities as required by law.
As of December 31, 2020, there were 0 fixed income securities or other investments that were non-income producing.
Portfolio monitoring and credit losses
Fixed income securities The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed income security that may require a credit loss allowance.
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, any existing credit loss allowance would be written-off against the amortized cost basis of the asset along with any remaining unrealized losses, with incremental losses 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 based on the best estimate of future cash flows considering past events, current conditions and
26


reasonable and supportable forecasts. The estimated future cash flows are discounted at the security’s current effective rate and is compared to the amortized cost of the security.
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 is 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, the financial condition and future earnings potential of the issue or issuer, expected defaults, expected recoveries, the value of underlying collateral, origination vintage year, 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, 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 Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the fixed income security, a credit loss allowance is recorded in earnings for the shortfall in expected cash flows; however, the amortized cost, net of the credit loss allowance, may not be lower than the fair value of the security. The portion of the unrealized loss related to factors other than credit remains classified in AOCI. If the Company determines that the fixed income security does not have sufficient cash flow or other information to estimate a recovery value for the security, the Company may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings.
When a security is sold or otherwise disposed or when the security is deemed uncollectible and written off, the Company removes amounts previously recognized in the credit loss allowance. Recoveries after write-offs are recognized when received. Accrued interest excluded from the amortized cost of fixed income securities totaled $42.5 million as of December 31, 2020 and is reported within the accrued investment income line of the Statements of Financial Position. The Company monitors accrued interest and writes off amounts when they are not expected to be received.
The Company’s portfolio monitoring process includes a quarterly review of all securities to identify instances where the fair value of a security compared to its amortized cost is below internally established thresholds. The process also includes the monitoring of other credit loss indicators such as ratings, ratings downgrades and payment defaults. The securities identified, in addition to other securities for which the Company may have a concern, are evaluated for potential credit losses using all reasonably available information relevant to the collectability or recovery of the security. Inherent in the Company’s evaluation of credit losses for these securities are assumptions and estimates about the financial condition and future earnings potential of the issue or issuer. Some of the factors that may be considered in evaluating whether a decline in fair value requires a credit loss allowance are: 1) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; 2) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity; and 3) the extent to which the fair value has been less than amortized cost.
Rollforward of credit loss allowance for fixed income securities for the year ended December 31, 2020 is as follows:
($ in thousands)2020
Beginning balance$
Credit losses on securities for which credit losses not previously reported(255)
Reduction of allowance related to sales255 
Write-offs
Ending balance$
27


The following table summarizes the gross unrealized losses and fair value of securities by the length of time that individual securities have been in a continuous unrealized loss position.
($ in thousands)Less than 12 months12 months or moreTotal unrealized losses
 Number
of issues
Fair
value
Unrealized lossesNumber
of issues
Fair
value
Unrealized losses
 
December 31, 2020       
Fixed income securities       
Corporate46 $154,414 $(2,984)$15,133 $(798)$(3,782)
MBS
Total fixed income securities47 $154,414 $(2,984)$15,133 $(798)$(3,782)
Investment grade fixed income securities20 $111,172 $(1,883)$$$(1,883)
Below investment grade fixed income securities27 43,242 (1,101)15,133 (798)(1,899)
Total fixed income securities47 $154,414 $(2,984)$15,133 $(798)$(3,782)
December 31, 2019       
Fixed income securities3      
Corporate44 104,484 (815)17 31,900 (1,749)(2,564)
MBS38 
Total fixed income securities46 $104,522 $(815)19 $31,901 $(1,749)$(2,564)
Investment grade fixed income securities22 $82,142 $(347)$9,845 $(130)$(477)
Below investment grade fixed income securities24 22,380 (468)16 22,056 (1,619)(2,087)
Total fixed income securities46 $104,522 $(815)19 $31,901 $(1,749)$(2,564)

The following table summarizes gross unrealized losses by unrealized loss position and credit quality as of December 31, 2020.
($ in thousands)Investment
grade
Below investment gradeTotal
Fixed income securities with unrealized loss position less than 20% of amortized cost, net (1) (2)
$(1,883)$(1,635)$(3,518)
Fixed income securities with unrealized loss position greater than or equal to 20% of amortized cost, net (3) (4)
(264)(264)
Total unrealized losses$(1,883)$(1,899)$(3,782)
_______________
(1)Below investment grade fixed income securities include $1.1 million that have been in an unrealized loss position for less than twelve months.
(2)Related to securities with an unrealized loss position less than 20% of amortized cost, net, the degree of which suggests that these securities do not pose a high risk of having credit losses.
(3)NaN below investment grade fixed income securities have been in an unrealized loss position for a period of twelve or more consecutive months.
(4)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.
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 or wider credit spreads since the time of initial purchase. The unrealized losses are expected to reverse as the securities approach maturity.
MBS in an unrealized loss position were evaluated based on actual and projected collateral losses relative to the securities’ positions in the respective securitization trusts, security specific expectations of cash flows, and credit ratings. This evaluation also takes into consideration credit enhancement, measured in terms of (i) subordination from other classes of securities in the trust that are contractually obligated to absorb losses before the class of security the Company owns, and (ii) the expected impact of other structural features embedded in the securitization trust beneficial to the class of securities the Company owns, such as overcollateralization and excess spread. Municipal bonds in an unrealized loss position were evaluated based on the underlying credit quality of the primary obligor, obligation type and quality of the underlying assets.
As of December 31, 2020, 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.
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Mortgage loans The Company establishes a credit loss allowance for mortgage loans when they are originated, and for unfunded commitments unless they are unconditionally cancellable by the Company. The Company uses a probability of default and loss given default model to estimate current expected credit losses that considers all relevant information available including past events, current conditions, and reasonable and supportable forecasts over the life of an asset. The Company also considers such factors as historical losses, expected prepayments and various economic factors, origination vintage year and property level information such as debt service coverage, property type, property location and collateral value.
Mortgage loans are evaluated on a pooled basis when they share similar risk characteristics. The Company monitors these loans through a quarterly credit monitoring process to determine when they no longer share similar risk characteristics and are to be evaluated individually when estimating credit losses.
Mortgage loans are written off against their corresponding allowances when there is no reasonable expectation of recovery. If a loan recovers after a write-off, the estimate of expected credit losses includes the expected recovery.
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. Accrued income receivable is monitored for recoverability and when not expected to be collected is written off through net investment income. Cash receipts on mortgage loans on non-accrual status are generally recorded as a reduction of amortized cost.
Accrued interest is excluded from the amortized cost of loans and is reported within the accrued investment income line of the Statements of Financial Position. As of December 31, 2020, accrued interest totaled $2.0 million for mortgage loans.
When it is determined a mortgage loan shall be evaluated individually, the Company uses various methods to estimate credit losses on individual loans such as using collateral value less estimated costs to sell where applicable, including when foreclosure is probable or when repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. When collateral value is used, the mortgage loans may not have a credit loss allowance when the fair value of the collateral exceeds the loan’s amortized cost. An alternative approach may be utilized to estimate credit losses using the present value of the loan’s expected future repayment cash flows discounted at the loan’s current effective interest rate.
Individual loan credit loss allowances are adjusted for subsequent changes in the fair value of the collateral less costs to sell, when applicable, or present value of the loan’s expected future repayment cash flows.
Debt service coverage ratio is considered a key credit quality indicator when mortgage loan credit loss allowances are estimated. Debt service coverage ratio represents the amount of estimated cash flow from the property available to the borrower to meet principal and interest payment obligations. Debt service coverage ratio estimates are updated annually or more frequently if conditions are warranted based on the Company’s credit monitoring process.
The following table reflects mortgage loans amortized cost by debt service coverage ratio distribution and year of origination as of December 31.
($ in thousands)20202019
2015 and prior2016201720182019CurrentTotalTotal
Below 1.0$$$$$$$$
1.0 - 1.2531,451 16,187 5,000 14,078 13,800 80,516 48,780 
1.26 - 1.5079,681 6,290 27,786 12,009 52,456 178,222 221,384 
Above 1.50171,774 60,568 13,216 61,913 53,586 13,000 374,057 463,094 
Amortized cost before allowance$282,906 $66,858 $57,189 $78,922 $120,120 $26,800 $632,795 $733,258 
Allowance (1)
(11,093)
Amortized cost, net$621,702 $733,258 
_______________
(1)Due to the adoption of the measurement of credit losses on financial instruments accounting standard, prior valuation allowance is now presented as an allowance for expected credit losses.
Payments on all mortgage loans were current as of December 31, 2020, 2019 and 2018. During the fourth quarter of 2020, the Company sold $50.1 million of mortgage loans, net of a $4.7 million credit loss allowance, resulting in a net realized capital gain of $238 thousand.
29


The rollforward of credit loss allowance for mortgage loans for the years ended December 31 is as follows:
($ in thousands)2020
Beginning balance$
Cumulative effect of change in accounting principle(6,129)
Net increases related to credit losses(9,691)
Reduction of allowance related to sales4,727 
Write-offs
Ending balance$(11,093)
6. 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 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:
(1) 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.
(2) 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
30


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 mortgage loans and policy loans, and these are only included in the fair value hierarchy disclosure when the individual investment is reported at fair value.
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 inputs and valuation techniques for Level 2 and Level 3 assets and liabilities measured at fair value on a recurring basis
Level 2 measurements
Fixed income securities:
U.S. government and agencies, municipal, corporate - public and 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.
Corporate - privately placed: Privately placed are 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.
Corporate - privately placed also includes redeemable preferred stock that are valued using quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, underlying stock prices and credit spreads.
MBS: 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. Residential MBS includes prepayment speeds as a primary input for valuation.
Equity securities: The primary inputs to the valuation include quoted prices or quoted net asset values for identical or similar assets in markets that are not active.
Short-term: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.
Other investments:  Free-standing exchange listed derivatives that are not actively traded are valued based on quoted prices for identical instruments in markets that are not active.
Over-the-counter (“OTC”) derivatives, including foreign exchange forward contracts and options, are valued using models that rely on inputs such as currency rates 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.
Corporate - public and privately placed and ABS: Primarily valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable. Other inputs for corporate fixed income securities 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.
31


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, 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.    
Other assets: Includes a structured settlement annuity reinsurance agreement accounted for as a derivative instrument that is valued internally. The model primarily uses stochastically determined cash flows, ultimate reinvestment spreads and applicable market data, such as interest rate and volatility assumptions. This item is categorized as Level 3 as a result of the significance of non-market observable inputs.
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.
Investments excluded from the fair value hierarchy
Limited partnerships carried at fair value, which do not have readily determinable fair values, use NAV provided by the investees and are excluded from the fair value hierarchy. These investments are generally not redeemable by the investees and generally cannot be sold without approval of the general partner. The Company receives distributions of income and proceeds from the liquidation of the underlying assets of the investees, which usually takes place in years 4-9 of the typical contractual life of 10-12 years. As of December 31, 2020, the Company has commitments to invest $23.9 million in these limited partnership interests.
The following table summarizes the Company’s assets and liabilities measured at fair value as of December 31, 2020.
($ in thousands)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 nettingTotal
Assets     
Fixed income securities:     
U.S. government and agencies$102,167 $42,738 $ $144,905 
Municipal528,272 16,281  544,553 
Corporate - public3,122,120 5,560  3,127,680 
Corporate - privately placed1,021,072 4,975 1,026,047 
Foreign government72,087  72,087 
MBS3,602 3,602 
Total fixed income securities102,167 4,789,891 26,816  4,918,874 
Equity securities243,076 590 7,771 251,437 
Short-term investments112,293 20,752 133,045 
Other investments: Free-standing derivatives8,451 23 $(377)8,097 
Separate account assets286,751 286,751 
Other assets313,900 313,900 
Total recurring basis assets$744,287 $4,819,684 $348,510 $(377)$5,912,104 
% of total assets at fair value12.6 %81.5 %5.9 %%100.0 %
Investments reported at NAV108,487 
Total$6,020,591 
Liabilities     
Contractholder funds: Derivatives embedded in life and annuity contracts$$$(20,193)$(20,193)
Other liabilities: Free-standing derivatives(5,808)$287 (5,521)
Total recurring basis liabilities$$(5,808)$(20,193)$287 $(25,714)
% of total liabilities at fair value%22.6 %78.5 %(1.1)%100.0 %


32


The following table summarizes the Company’s assets and liabilities measured at fair value as of December 31, 2019.
($ in thousands)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 nettingTotal
Assets     
Fixed income securities:     
U.S. government and agencies$2,250 $50,564 $ $52,814 
Municipal530,584 21,696  552,280 
Corporate - public2,688,680 5,221  2,693,901 
Corporate - privately placed962,072 19,272 981,344 
Foreign government140,166  140,166 
MBS13,857 13,857 
Total fixed income securities2,250 4,385,923 46,189  4,434,362 
Equity securities265,195 858 8,080 274,133 
Short-term investments124,763 99,335 224,098 
Other investments: Free-standing derivatives6,008 75 $(846)5,237 
Separate account assets265,546 265,546 
Other assets231,491 231,491 
Total recurring basis assets$657,754 $4,492,124 $285,835 $(846)$5,434,867 
% of total assets at fair value12.1 %82.6 %5.3 %%100.0 %
Investments reported at NAV109,066 
Total$5,543,933 
Liabilities     
Contractholder funds: Derivatives embedded in life and annuity contracts$$$(16,653)$(16,653)
Other liabilities: Free-standing derivatives(2,920)$15 (2,905)
Total recurring basis liabilities$$(2,920)$(16,653)$15 $(19,558)
% of total liabilities at fair value%15.0 %85.1 %(0.1)%100.0 %

The following table summarizes quantitative information about the significant unobservable inputs used in Level 3 fair value measurements.
($ in thousands)Fair valueValuation
technique
Unobservable
input
RangeWeighted
average
December 31, 2020     
Other assets – Structured settlement annuity reinsurance agreement$313,900 Stochastic cash flow modelUltimate reinvestment spreads119.0 - 226.0 basis points170.3 basis points
Derivatives embedded in life contracts – equity-indexed and forward starting options$(19,478)Stochastic cash flow modelProjected option cost3.9 - 4.2%4.01%
December 31, 2019     
Other assets – Structured settlement annuity reinsurance agreement$231,491 Stochastic cash flow modelUltimate reinvestment spreads129.8 - 203.6 basis points165.7 basis points
Derivatives embedded in life contracts - equity indexed and forward starting options$(14,239)Stochastic cash flow modelProjected option cost3.9 - 4.2%4.00%

If the ultimate reinvestment spreads increased (decreased), it would result in a lower (higher) fair value for the structured settlement annuity reinsurance agreement. The embedded derivatives are equity-indexed and forward starting options in certain life 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.
33


As of December 31, 2020 and 2019, Level 3 fair value measurements of fixed income securities total $26.8 million and $46.2 million, respectively, and include $9.6 million and $8.4 million, respectively, of securities valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable. As the Company does not develop the Level 3 fair value unobservable inputs for these fixed income securities, they are not included in the table above. However, an increase (decrease) in credit spreads for fixed income securities valued based on non-binding broker quotes would result in a lower (higher) fair value.
The following table presents the rollforward of Level 3 assets and liabilities held at fair value during the year ended December 31, 2020.
($ in thousands) Total gains (losses)
included in:
  
 Balance as of December 31, 2019Net
income
OCITransfers
into
Level 3
Transfers
out of
Level 3
PurchasesSalesIssuesSettlementsBalance as of December 31, 2020
Assets     
Fixed income securities:     
Municipal$21,696 $(30)$87 $6,013 $(10,619)$$(866)$$$16,281 
Corporate - public5,221 338 5,560 
Corporate - privately placed19,272 11 (168)2,141 (11,130)(4,685)(466)4,975 
Total fixed income securities46,189 (18)257 8,154 (21,749)(5,551)(466)26,816 
Equity securities8,080 (310)7,771 
Free-standing derivatives, net75 (38)25 (39)23 (1)
Other assets231,491 82,409 313,900 
Total recurring Level 3 assets$285,835 $82,043 $257 $8,154 $(21,749)$26 $(5,551)$$(505)$348,510 
Liabilities     
Contractholder funds: Derivatives embedded in life and annuity contracts$(16,653)$(1,822)$$$$$$(2,763)$1,045 $(20,193)
Total recurring Level 3 liabilities$(16,653)$(1,822)$$$$$$(2,763)$1,045 $(20,193)
____________________
(1)Comprises $23 thousand of assets.
The following table presents the total Level 3 gains (losses) included in net income for the year ended December 31, 2020.
($ in thousands)Net investment incomeRealized capital gains and lossesContract benefitsInterest credited to contractholder fundsTotal
Components of net income$(1,467)$83,510 $1,699 $(3,521)$80,221 
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The following table presents the rollforward of Level 3 assets and liabilities held at fair value during the year ended December 31, 2019.
($ in thousands) Total gains (losses)
included in:
  
 Balance as of December 31, 2018Net
income
OCITransfers
into
Level 3
Transfers
out of
Level 3
PurchasesSalesIssuesSettlementsBalance as of December 31, 2019
Assets     
Fixed income securities:     
Municipal$20,821 $$1,695 $$$$(820)$$$21,696 
Corporate - public6,761 542 (2,083)5,221 
Corporate - privately placed11,190 422 13,987 (6,333)19,272 
Total fixed income securities38,772 2,659 13,987 (2,083)(820)(6,333)46,189 
Equity securities12,162 2,653 (16)210 (6,768)(161)8,080 
Free-standing derivatives, net394 (200)18 (137)75 (1)
Other assets169,386 62,105 231,491 
Total recurring Level 3 assets$220,714 $64,565 $2,659 $13,987 $(2,099)$228 $(7,588)$$(6,631)$285,835 
Liabilities     
Contractholder funds: Derivatives embedded in life and annuity contracts$(3,801)$(1,664)$$(10,128)$$$$(1,283)$223 $(16,653)
Total recurring Level 3 liabilities$(3,801)$(1,664)$$(10,128)$$$$(1,283)$223 $(16,653)
____________________
(1)Comprises $75 thousand of assets.
The following table presents the total Level 3 gains (losses) included in net income for the year ended December 31, 2019.
($ in thousands)Net investment incomeRealized capital gains and lossesContract benefitsInterest credited to contractholder fundsTotal
Components of net income$(535)$65,100 $987 $(2,651)$62,901 

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The following table presents the rollforward of Level 3 assets and liabilities held at fair value during the year ended December 31, 2018.
($ in thousands) Total gains (losses)
included in:
  
 Balance as of December 31, 2017Net
income
OCITransfers
into
Level 3
Transfers
out of
Level 3
PurchasesSalesIssuesSettlementsBalance as of December 31, 2018
Assets     
Fixed income securities:     
Municipal$21,178 $$(357)$$$$$$$20,821 
Corporate - public7,312 (383)(169)6,761 
Corporate - privately placed55,979 (639)(22,957)(21,197)11,190 
ABS15,205 (205)(15,000)
Total fixed income securities99,674 (1,584)(22,957)(36,366)38,772 
Equity securities7,159 2,600 (5)3,723 (1,315)12,162 
Free-standing derivatives, net336 65 66 (73)394 (1)
Other assets166,290 3,096 169,386 
Total recurring Level 3 assets$273,459 $5,766 $(1,589)$$(22,957)$3,789 $(1,315)$$(36,439)$220,714 
Liabilities     
Contractholder funds: Derivatives embedded in life and annuity contracts$(4,796)$995 $$$$$$$$(3,801)
Total recurring Level 3 liabilities$(4,796)$995 $$$$$$$$(3,801)
____________________
(1)Comprises $394 thousand of assets.
The following table presents the total Level 3 gains (losses) included in net income for the year ended December 31, 2018.
($ in thousands)Net investment incomeRealized capital gains and lossesContract benefitsInterest credited to contractholder fundsTotal
Components of net income$$5,763 $(326)$1,321 $6,761 
Transfers into Level 3 during 2020, 2019 and 2018 included situations where a 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 into Level 3 during 2019 also included derivatives embedded in equity-indexed universal life contracts due to refinements in the valuation modeling resulting in an increase in significance of non-market observable inputs.
Transfers out of Level 3 during 2020, 2019 and 2018 included situations where a broker quote was used in the prior period and a 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.
36


    The table below provides valuation changes included in net income and OCI for Level 3 assets and liabilities held as of December 31.
($ in thousands)202020192018
Assets   
Fixed income securities:   
Municipal$(30)$$
Corporate - public
Corporate - privately placed
Total fixed income securities(27)
Free-standing derivatives, net(38)(200)65 
Equity securities(310)82 2,594 
Other assets82,409 62,105 3,096 
Total recurring Level 3 assets$82,034 $61,990 $5,758 
Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts$(1,822)$(1,664)$995 
Total recurring Level 3 liabilities$(1,822)$(1,664)$995 
Total included in net income$80,212 $60,326 $6,753 
Components of net income
Net investment income$(1,467)$(535)$
Realized capital gains (losses)83,501 62,525 5,755 
Contract benefits1,699 987 (326)
Interest credited to contractholder funds(3,521)(2,651)1,321 
Total included in net income$80,212 $60,326 $6,753 
Assets
Municipal$87 
Corporate - public338 
Corporate - privately placed27 
Changes in unrealized net capital gains and losses reported in OCI (1)
$452 
___________________
(1)Effective January 1, 2020, the Company adopted the fair value accounting standard that prospectively requires the disclosure of valuation changes reported in OCI.
Presented below are the carrying values and fair value estimates of financial instruments not carried at fair value.
($ in thousands)December 31, 2020December 31, 2019
Financial assetsFair value levelAmortized cost, netFair
value
Amortized cost, netFair
value
Mortgage loansLevel 3$621,702 $660,862 $733,258 $764,201 
Financial liabilitiesFair value level
Carrying
value (1)
Fair
value
Carrying
value (1)
Fair
value
Contractholder funds on investment contractsLevel 3$1,504,295 $1,735,933 $1,605,574 $1,730,341 
Liability for collateralLevel 276,393 76,393 158,111 158,111 
___________________
(1)Represents the amounts reported on the Statements of Financial Position.
7. Derivative Financial Instruments and Off-balance sheet Financial Instruments
The Company uses derivatives for risk reduction 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 and foreign currency fluctuations.
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 caps 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. Futures and options are used for hedging the equity exposure contained in the Company’s equity-indexed life product
37


contracts that offer equity returns to contractholders. Foreign currency forwards are primarily used by the Company to reduce the foreign currency risk associated with holding foreign currency denominated investments. The Company also has a reinsurance treaty that is recorded as a derivative instrument, under which it primarily cedes reinvestment related risk on its structured settlement annuities to ALIC.
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 guaranteed minimum accumulation and withdrawal benefits in reinsured variable annuity contracts, and equity options in life product contracts, which provide returns linked to equity indices to contractholders.
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.
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 Statements of Financial Position.
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 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 Statement of Financial Position as of December 31, 2020. None of these derivatives are designated as accounting hedging instruments.
($ in thousands, except number of contracts) 
Volume (1)
   
 Balance sheet locationNotional
amount
Number
of
contracts
Fair
value,
net
Gross
asset
Gross
liability
Asset derivatives      
Interest rate contracts      
Interest rate cap agreementsOther investments$13,100 n/a$23 $23 $
Equity and index contracts     
OptionsOther investmentsn/a132 8,000 8,000 $
Foreign currency contracts   
Foreign currency forwardsOther investments3,513 n/a(200)17 (217)
Other contracts      
Structured settlement annuity reinsurance agreementOther assetsn/a313,900 313,900 
Total asset derivatives $16,613 133 $321,723 $321,940 $(217)
Liability derivatives      
Equity and index contracts      
OptionsOther liabilities & accrued expensesn/a132 $(5,411)$$(5,411)
Foreign currency contracts
Foreign currency forwardsOther liabilities & accrued expenses11,071 n/a250 430 (180)
Embedded derivative financial instruments      
Guaranteed accumulation benefitsContractholder funds18,322 n/a(423)(423)
Guaranteed withdrawal benefitsContractholder funds14,146 n/a(292)(292)
Equity-indexed options in life product contractsContractholder funds52,340 n/a(19,478)(19,478)
Total liability derivatives 95,879 132 (25,354)$430 $(25,784)
Total derivatives $112,492 265 $296,369   
_________________
(1)Volume for OTC 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)





38



The following table provides a summary of the volume and fair value positions of derivative instruments as well as their reporting location in the Statement of Financial Position as of December 31, 2019. None of these derivatives are designated as accounting hedging instruments.
($ in thousands, except number of contracts) Volume   
 Balance sheet locationNotional
amount
Number
of
contracts
Fair
value,
net
Gross
asset
Gross
liability
Asset derivatives      
Equity and index contracts     
OptionsOther investmentsn/a140 $5,232 $5,232 
Other contracts      
Structured settlement annuity reinsurance agreementOther assetsn/a231,491 231,491 
Total asset derivatives 140 $236,723 $236,723 $
Liability derivatives      
Interest rate contracts
Interest rate cap agreementsOther liabilities & accrued expenses$13,400 n/a$75 $75 $
Equity and index contracts      
OptionsOther liabilities & accrued expensesn/a139 (2,832)(2,832)
FuturesOther liabilities & accrued expensesn/a1
Foreign currency contracts
Foreign currency forwardsOther liabilities & accrued expenses17,984 n/a683 771 (88)
Embedded derivative financial instruments      
Guaranteed accumulation benefitsContractholder funds23,629 n/a(1,987)(1,987)
Guaranteed withdrawal benefitsContractholder funds15,369 n/a(427)(427)
Equity-indexed options in life product contractsContractholder funds43,855 n/a(14,239)(14,239)
Total liability derivatives 114,237 140 (18,727)$846 $(19,573)
Total derivatives $114,237 280 $217,996   
The following table provides gross and net amounts for the Company’s OTC derivatives, all of which are subject to enforceable master netting agreements.
($ in thousands) Offsets   
 Gross
amount
Counter-
party
netting
Cash
collateral
(received)
pledged
Net
amount on
balance
sheet
Securities
collateral
(received)
pledged
Net
amount
December 31, 2020      
Asset derivatives$470 $(647)$270 $93 $$93 
Liability derivatives(397)647 (360)(110)(110)
December 31, 2019     
Asset derivatives$846 $(846)$$$$
Liability derivatives(88)846 (831)(73)(73)







39


The following tables present gains and losses from valuation and settlements reported on derivatives in the Statements of Operations and Comprehensive Income.
($ in thousands)Realized capital gains and lossesContract
benefits
Interest credited to contractholder fundsTotal gain (loss) recognized in net income on derivatives
2020
Interest rate contracts$(37)$$$(37)
Equity and index contracts(1)845 844 
Embedded derivative financial instruments0 1,699 (5,239)(3,540)
Foreign currency contracts(304)(304)
Other contracts - structured settlement annuity reinsurance agreement100,754 100,754 
Total$100,412 $1,699 $(4,394)$97,717 
2019
Interest rate contracts$(200)$$$(200)
Equity and index contracts1,987 1,988 
Embedded derivative financial instruments987 (3,711)(2,724)
Foreign currency contracts364 364 
Other contracts - structured settlement annuity reinsurance agreement58,922 58,922 
Total$59,087 $987 $(1,724)$58,350 
2018
Interest rate contracts$65 $$$65 
Equity and index contracts(768)(768)
Embedded derivative financial instruments(326)1,321 995 
Foreign currency contracts887 887 
Other contracts - structured settlement annuity reinsurance agreement(314)(314)
Total$638 $(326)$553 $865 
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 December 31, 2020, counterparties pledged $360 thousand in collateral to the Company, and the Company pledged $270 thousand in cash and securities to counterparties 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 as of December 31 by counterparty credit rating as it relates to the Company’s OTC derivatives.
($ in thousands)20202019
Rating (1)
Number of counter-parties
Notional amount (2)
Credit exposure (2)
Exposure, net of collateral (2)
Number of counter-parties
Notional amount (2)
Credit exposure (2)
Exposure, net of collateral (2)
A+$8,341 $349 $$30,670 $770 $
_________________
(1)Allstate uses the lower of S&P’s or Moody’s long-term debt issuer ratings.
(2)Only OTC derivatives with a net positive fair value are included for each counterparty.
40


For certain exchange traded derivatives, margin deposits are required as well as daily cash settlements of margin accounts. As of December 31, 2020, the Company pledged $400 thousand in the form of margin deposits.
Market risk is the risk that the Company will incur losses due to adverse changes in market rates and prices. Market risk exists for all of the derivative financial instruments the Company currently holds, as these instruments may become less valuable due to adverse changes in market conditions. To limit this risk, the Company’s senior management has established risk control limits. In addition, changes in fair value of the derivative financial instruments that the Company uses for risk management purposes are generally offset by the change in the fair value or cash flows of the hedged risk component of the related assets, liabilities or forecasted transactions.
Certain of the Company’s derivative instruments contain credit-risk-contingent cross-default provisions. Credit-risk-contingent cross-default provisions allow the counterparties to terminate the derivative agreement if the Company defaults by pre-determined threshold amounts on certain debt instruments.
The following summarizes the fair value of derivative instruments with credit-risk-contingent features that are in a gross liability position as of December 31, as well as the fair value of assets and collateral that are netted against the liability in accordance with provisions within legally enforceable MNAs.
($ in thousands)20202019
Gross liability fair value of contracts containing credit-risk-contingent features$101 $83 
Gross asset fair value of contracts containing credit-risk-contingent features and subject to MNAs(2)(70)
Maximum amount of additional exposure for contracts with credit-risk-contingent features if all features were triggered concurrently$99 $13 
Off-balance sheet financial instruments
The contractual amounts of off-balance sheet financial instruments as of December 31 are as follows:
($ in thousands)20202019
Commitments to invest in limited partnership interests$98,858 $127,515 
Commitments to extend mortgage loans13,000 
Private placement commitments21 15,000 
In the preceding table, the contractual amounts represent the amount at risk if the contract is fully drawn upon, the counterparty defaults and the value of any underlying security becomes worthless. Unless noted otherwise, the Company does not require collateral or other security to support off-balance sheet financial instruments with credit risk.
Commitments to invest in limited partnership interests represent agreements to acquire new or additional participation in certain limited partnership investments. The Company enters into these agreements in the normal course of business. Because the investments in limited partnerships are not actively traded, it is not practical to estimate the fair value of these commitments.
Commitments to extend mortgage loans are agreements to lend to a borrower provided there is no violation of any condition established in the contract. The Company enters into these agreements to commit to future loan fundings at predetermined interest rates. Commitments generally have fixed expiration dates or other termination clauses. The fair value of these commitments is insignificant.
Private placement commitments represent commitments to purchase private placement private debt and equity securities at a future date. The Company enters into these agreements in the normal course of business. The fair value of the debt commitments generally cannot be estimated on the date the commitment is made as the terms and conditions of the underlying private placement securities are not yet final. Because the private equity securities are not actively traded, it is not practical to estimate fair value of the commitments.
41


8. Reserve for Life-Contingent Contract Benefits and Contractholder Funds
As of December 31, the reserve for life-contingent contract benefits consists of the following:
($ in thousands)20202019
Immediate fixed annuities:  
Structured settlement annuities$2,347,415 $2,051,363 
Other immediate fixed annuities58,832 61,039 
Traditional life insurance273,067 265,971 
Accident and health insurance18,218 32,261 
Other851 1,175 
Total reserve for life-contingent contract benefits$2,698,383 $2,411,809 
The following table highlights the key assumptions generally used in calculating the reserve for life-contingent contract benefits.
ProductMortalityInterest rateEstimation method
Structured settlement annuitiesActual company experience with projected calendar year improvements6.0%Present value of contractually specified future benefits and expenses
Other immediate fixed annuitiesActual company experience with projected calendar year improvements
6.0%

Present value of expected future benefits and expenses
Traditional life insuranceActual company experience plus loadingInterest rate assumptions range from 3.0% to 8.0%Net level premium reserve method using the Company’s withdrawal experience rates; includes reserves for unpaid claims
Accident and health insurance
Actual company experience plus loadingInterest rate assumptions range from 3.5% to 6.0%Unearned premium; additional contract reserves for mortality risk and unpaid claims
Other:
   Variable annuity
   guaranteed minimum
   death benefits (1)
Annuity 2012 mortality table with internal modificationsInterest rate assumptions range from 1.4% to 5.8%Projected benefit ratio applied to cumulative assessments
______________________
(1)In 2006, the Company disposed of its variable annuity business through a reinsurance agreement with The Prudential Insurance Company of America, a subsidiary of Prudential Financial, Inc. (collectively “Prudential”).
In the third quarter of 2020, the premium deficiency evaluation of the Company’s immediate annuities with life contingencies resulted in a premium deficiency reserve of $196.0 million. The long-term investment yield assumption was lowered, which resulted in the prior sufficiency changing to a deficiency. The deficiency was recognized as an increase in the reserve for life contingent contract benefits. The original assumptions used to establish reserves were updated to reflect current assumptions, and the primary changes included mortality expectations, where annuitants are living longer than originally anticipated, and long-term investment yields. In 2019, the Company’s reviews concluded that no premium deficiency adjustments were necessary.
To the extent that unrealized gains on fixed income securities would result in a premium deficiency had those gains actually been realized, an insurance reserves adjustment is recorded for certain immediate annuities with life contingencies. This liability is included in the reserve for life-contingent contract benefits with respect to this unrealized deficiency. The offset to this liability is recorded as a reduction of the unrealized net capital gains included in AOCI. This liability was $321.6 million and $231.4 million as of December 31, 2020 and 2019, respectively.
42


As of December 31, contractholder funds consist of the following:
($ in thousands)20202019
Interest-sensitive life insurance$773,531 $756,995 
Investment contracts: 
Fixed annuities1,639,591 1,741,488 
Other investment contracts51,648 49,485 
Total contractholder funds$2,464,770 $2,547,968 
The following table highlights the key contract provisions relating to contractholder funds.
ProductInterest rateWithdrawal/surrender charges
Interest-sensitive life insuranceInterest rates credited range from 0.0% to 8.3% for equity-indexed life (whose returns are indexed to the S&P 500) and 2.0% to 5.1% for all other products
Either a percentage of account balance or dollar amount grading off generally over 20 years

Fixed annuitiesInterest rates credited range from 0.6% to 7.0% for immediate annuities and 1.0% to 5.0% for other fixed annuitiesEither a declining or a level percentage charge generally over ten years or less. Additionally, approximately 12.2% of fixed annuities are subject to market value adjustment for discretionary withdrawals
Other investment contracts:
Guaranteed minimum income, accumulation and withdrawal benefits on variable annuities (1) and secondary guarantees on interest-sensitive life insurance and fixed annuities
Interest rates used in establishing reserves range from 1.7% to 10.3%
Withdrawal and surrender charges are based on the terms of the related variable annuity or interest-sensitive life contract
_______________________
(1)In 2006, the Company disposed of its variable annuity business through a reinsurance agreement with Prudential.
Contractholder funds activity for the years ended December 31 is as follows:
($ in thousands)202020192018
Balance, beginning of year$2,547,968 $2,681,300 $2,874,884 
Deposits104,355 104,850 107,606 
Interest credited83,769 86,338 91,430 
Benefits(102,483)(104,681)(114,006)
Surrenders and partial withdrawals(100,697)(152,898)(190,873)
Contract charges(76,801)(75,879)(75,483)
Net transfers (to) from separate accounts(84)88 256 
Other adjustments8,743 8,850 (12,514)
Balance, end of year$2,464,770 $2,547,968 $2,681,300 
The Company offered various guarantees to variable annuity contractholders. In 2006, the Company disposed of its variable annuity business through a reinsurance agreement with Prudential. Liabilities for variable contract guarantees related to death benefits are included in the reserve for life-contingent contract benefits and the liabilities related to the income, withdrawal and accumulation benefits are included in contractholder funds. All liabilities for variable contract guarantees are reported on a gross basis on the balance sheet with a corresponding reinsurance recoverable asset.
Absent any contract provision wherein the Company guarantees either a minimum return or account value upon death, a specified contract anniversary date, partial withdrawal or annuitization, variable annuity and variable life insurance contractholders bear the investment risk that the separate accounts’ funds may not meet their stated investment objectives. The account balances of variable annuity contracts’ separate accounts with guarantees included $237.9 million and $222.2 million of equity, fixed income and balanced mutual funds and $22.3 million and $21.7 million of money market mutual funds as of December 31, 2020 and 2019, respectively.




43


The table below presents information regarding the Company’s variable annuity contracts with guarantees. The Company’s variable annuity contracts may offer more than one type of guarantee in each contract; therefore, the sum of amounts listed exceeds the total account balances of variable annuity contracts’ separate accounts with guarantees.
($ in thousands)As of December 31,
 20202019
In the event of death  
Separate account value$260,159 $243,833 
Net amount at risk (1)
$4,081 $4,392 
Average attained age of contractholders71 years68 years
At annuitization (includes income benefit guarantees) 
Separate account value$21,409 $18,849 
Net amount at risk (2)
$1,674 $1,750 
Weighted average waiting period until annuitization options availableNoneNone
For cumulative periodic withdrawals
Separate account value$13,999 $15,173 
Net amount at risk (3)
$234 $421 
Accumulation at specified dates 
Separate account value$18,285 $24,033 
Net amount at risk (4)
$117 $224 
Weighted average waiting period until guarantee date2 years3 years
________________________
(1)Defined as the estimated current guaranteed minimum death benefit in excess of the current account balance as of the balance sheet date.
(2)Defined as the estimated present value of the guaranteed minimum annuity payments in excess of the current account balance.
(3)Defined as the estimated current guaranteed minimum withdrawal balance (initial deposit) in excess of the current account balance as of the balance sheet date.
(4)Defined as the estimated present value of the guaranteed minimum accumulation balance in excess of the current account balance.
The liability for death and income benefit guarantees is equal to a benefit ratio multiplied by the cumulative contract charges earned, plus accrued interest less contract excess guarantee benefit payments. The benefit ratio is calculated as the estimated present value of all expected contract excess guarantee benefits divided by the present value of all expected contract charges. The establishment of reserves for these guarantees requires the projection of future fund values, mortality, persistency and customer benefit utilization rates. These assumptions are periodically reviewed and updated. For guarantees related to death benefits, benefits represent the projected excess guaranteed minimum death benefit payments. For guarantees related to income benefits, benefits represent the present value of the minimum guaranteed annuitization benefits in excess of the projected account balance at the time of annuitization.
Projected benefits and contract charges used in determining the liability for certain guarantees are developed using models and stochastic scenarios that are also used in the development of estimated expected gross profits. Underlying assumptions for the liability related to income benefits include assumed future annuitization elections based on factors such as the extent of benefit to the potential annuitant, eligibility conditions and the annuitant’s attained age. The liability for guarantees is re-evaluated periodically, and adjustments are made to the liability balance through a charge or credit to contract benefits.
Guarantees related to withdrawal and accumulation benefits are considered to be derivative financial instruments; therefore, the liability for these benefits is established based on its fair value.










44


The following table summarizes the liabilities for guarantees.
($ in thousands)Liability for guarantees related to death benefits and interest-sensitive life productsLiability for guarantees related to income benefitsLiability for guarantees related to accumulation and withdrawal benefitsTotal
Balance, December 31, 2019$34,135 $336 $2,414 $36,885 
Less reinsurance recoverables1,189 333 2,414 3,936 
Net balance as of December 31, 201932,946 32,949 
Incurred guarantee benefits6,041 6,041 
Paid guarantee benefits(745)(745)
Net change5,296 5,296 
Net balance as of December 31, 202038,242 38,245 
Plus reinsurance recoverables877 267 715 1,859 
Balance, December 31, 2020$39,119 $270 $715 $40,104 
Balance, December 31, 2018$30,674 $572 $3,401 $34,647 
Less reinsurance recoverables1,752 568 3,401 5,721 
Net balance as of December 31, 201828,922 28,926 
Incurred guarantee benefits4,412 (1)4,411 
Paid guarantee benefits(388)(388)
Net change4,024 (1)4,023 
Net balance as of December 31, 201932,946 32,949 
Plus reinsurance recoverables1,189 333 2,414 3,936 
Balance, December 31, 2019$34,135 $336 $2,414 $36,885 
The following table summarizes reserves included in total liability balance for guarantees by type of benefit as of December 31.
($ in thousands)202020192018
Variable annuity
Death benefits$851 $1,174 $1,752 
Income benefits267 333 568 
Accumulation benefits423 1,987 3,003 
Withdrawal benefits292 427 398 
Other guarantees38,271 32,964 28,926 
Total$40,104 $36,885 $34,647 

45


9. Reinsurance
The Company reinsures certain of its risks to unaffiliated reinsurers and ALIC under yearly renewable term, coinsurance and modified coinsurance agreements. These agreements result in a passing of the agreed-upon percentage of risk to the reinsurer in exchange for negotiated reinsurance premium payments. Modified coinsurance is similar to coinsurance, except that the cash and investments that support the liability for contract benefits are not transferred to the assuming company and settlements are made on a net basis between the companies.
As of December 31, 2020 and 2019, for certain term life insurance policies, the Company ceded up to 90% of the mortality risk depending on the year of policy issuance. Further, the Company cedes the mortality risk associated with coverage in excess of $2.0 million per life to ALIC. Prior to July 1, 2013, the Company ceded mortality risk in excess of $250 thousand per life to ALIC.
In addition, the Company has used reinsurance to effect the disposition of certain blocks of business. The Company had reinsurance recoverables of $162.9 million and $166.9 million as of December 31, 2020 and 2019, respectively, due from Prudential related to the disposal of its variable annuity business that was effected through reinsurance agreements.
The amounts ceded to Prudential for the years ended December 31 are as follows:
($ in thousands)202020192018
Premiums and contract charges$4,750 $4,797 $5,189 
Contract benefits(1,524)(890)1,459 
Interest credited to contractholder funds4,503 4,307 4,533 
Operating costs and expenses712 867 868 
As of December 31, 2020 and 2019, the Company had reinsurance recoverables of $282 thousand and $579 thousand, respectively, due from a subsidiary of Citigroup (Triton Insurance Company) and Scottish Re (U.S.), Inc. in connection with the disposition of the direct response distribution business in 2003.
As of December 31, 2020, the gross life insurance in force was $42.27 billion of which $433.3 million and $7.90 billion were ceded to affiliated and unaffiliated reinsurers, respectively.
The effects of reinsurance on premiums and contract charges for the years ended December 31 are as follows:
($ in thousands)202020192018
Direct$174,812 $203,614 $199,289 
Assumed - non-affiliate588 697 685 
Ceded
Affiliate(2,308)(2,186)(1,972)
Non-affiliate(15,674)(16,359)(17,361)
Premiums and contract charges, net of reinsurance$157,418 $185,766 $180,641 
The effects of reinsurance on contract benefits for the years ended December 31 are as follows:
($ in thousands)202020192018
Direct$445,983 $272,200 $248,008 
Assumed - non-affiliate324 500 586 
Ceded
Affiliate(945)(2,354)(55)
Non-affiliate(10,721)(11,333)(10,961)
Contract benefits, net of reinsurance$434,641 $259,013 $237,578 
The effects of reinsurance on interest credited to contractholder funds for the years ended December 31 are as follows:
($ in thousands)202020192018
Direct$88,814 $90,758 $96,002 
Assumed - non-affiliate13 13 13 
Ceded - non-affiliate(4,503)(4,307)(4,533)
Interest credited to contractholder funds, net of reinsurance$84,324 $86,464 $91,482 
In addition to amounts included in the table above are reinsurance premiums ceded to ALIC of $3.3 million, $4.2 million and $3.4 million and settlements received from ALIC of $21.7 million, $1.0 million and 0 in 2020, 2019 and 2018, respectively, under the terms of the structured settlement annuity reinsurance agreement (see Note 4).
46


The following table shows the rollforward of the credit loss allowance for reinsurance recoverables for the year ended December 31.
($ in thousands)2020
Beginning balance$(34)
Cumulative effect of change in accounting principle(621)
Decrease in the provision for credit losses31 
Write-offs
Ending Balance$(624)

10. Deferred Policy Acquisition and Sales Inducement Costs
Deferred policy acquisition costs for the years ended December 31 are as follows:
($ in thousands)202020192018
Balance, beginning of year$124,118 $155,887 $146,333 
Acquisition costs deferred11,175 16,771 19,577 
Amortization charged to income(20,346)(30,396)(16,299)
Effect of unrealized gains and losses(13,735)(18,144)6,276 
Balance, end of year$101,212 $124,118 $155,887 
DSI activity, which primarily relates to interest-sensitive life contracts, for the years ended December 31 was as follows:
($ in thousands)202020192018
Balance, beginning of year$1,776 $2,391 $2,278 
Sales inducements deferred64 125 128 
Amortization charged to income(619)(251)(181)
Effect of unrealized gains and losses549 (489)166 
Balance, end of year$1,770 $1,776 $2,391 

11. Guarantees and Contingent Liabilities
Guaranty funds
Under state insurance guaranty fund laws, insurers doing business in a state can be assessed, up to prescribed limits, for certain obligations of insolvent insurance companies to policyholders and claimants. Amounts assessed to each company are typically related to its proportion of business written in each state. The Company’s policy is to accrue assessments when the entity for which the insolvency relates has met its state of domicile’s statutory definition of insolvency and the amount of the loss is reasonably estimable. In most states, the definition is met with a declaration of financial insolvency by a court of competent jurisdiction. In certain states there must also be a final order of liquidation. Since most states allow a credit against premium or other state related taxes for assessments, an asset is recorded based on paid and accrued assessments for the amount the Company expects to recover on the respective state’s tax return and is realized over the period allocated by each state. As of December 31, 2020 and 2019, the liability balance included in other liabilities and accrued expenses was $758 thousand and $759 thousand, respectively. The related premium tax offsets included in other assets were $911 thousand and $916 thousand as of December 31, 2020 and 2019, respectively.
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.
The aggregate liability balance related to all guarantees was not material as of December 31, 2020.


47


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, 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.
12. Income Taxes
The Company joins with the Corporation and its other subsidiaries (the “Allstate Group”) in the filing of a consolidated federal income tax return and is party to a federal income tax allocation agreement (the “Allstate Tax Sharing Agreement”). Under the Allstate Tax Sharing Agreement, the Company pays to or receives from the Corporation the amount, if any, by which the Allstate Group’s federal income tax liability is affected by virtue of inclusion of the Company in the consolidated federal income tax return. Effectively, this results in the Company’s annual income tax provision being computed, with adjustments, as if the Company filed a separate return.
Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. Deferred tax assets and liabilities are adjusted through income tax expense as changes in tax laws or rates are enacted.
The Internal Revenue Service (“IRS”) has completed its exam of the Allstate Group’s 2013 through 2016 federal income tax returns. The 2017 and 2018 audit cycle is expected to begin in the first quarter of 2021. Any adjustments that may result from IRS examinations of the Allstate Group’s tax return are not expected to have a material effect on the financial statements.
The Company recognizes tax positions in the financial statements only when it is more likely than not that the position will be sustained on examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized on settlement. A liability is established for differences between positions taken in a tax return and amounts recognized in the financial statements.
The Company had 0 liability for unrecognized tax benefits as of December 31, 2020, 2019 or 2018, and believes that the unrecognized tax benefits balance will not materially increase within the next twelve months.
The components of the deferred income tax assets and liabilities as of December 31 are as follows:
($ in thousands)20202019
Deferred tax assets  
Accrued liabilities$25 $25 
Unrealized foreign currency translation adjustments on limited partnerships317 
Other assets148 20 
Total deferred tax assets173 362 
Deferred tax liabilities  
Investments(96,249)(78,081)
Unrealized net capital gains(56,038)(33,151)
DAC(11,521)(14,447)
Life and annuity reserves(2,483)(29,048)
Unrealized foreign currency translation adjustments on limited partnerships(180)
Other liabilities(583)(484)
Total deferred tax liabilities(167,054)(155,211)
Net deferred tax liability$(166,881)$(154,849)
Although realization is not assured, management believes it is more likely than not that the deferred tax assets will be realized based on the Company’s assessment that the deductions ultimately recognized for tax purposes will be fully utilized.
48


The components of income tax (benefit) expense for the years ended December 31 are as follows:
($ in thousands)202020192018
Current$(2,078)$36,766 $11,257 
Deferred(9,915)(5,840)1,570 
Total income tax (benefit) expense$(11,993)$30,926 $12,827 
The Company paid income taxes of $37.2 million, $1.0 million and $16.0 million in 2020, 2019 and 2018, respectively.
A reconciliation of the statutory federal income tax rate to the effective income tax rate on income from operations for the years ended December 31 is as follows:
 202020192018
Statutory federal income tax rate - (benefit) expense(21.0)%21.0 %21.0 %
State income taxes3.7 1.8 5.4 
Adjustments to prior year tax liabilities(1.1)1.4 (0.1)
Tax Legislation benefit(3.9)
Other(0.4)(0.1)(0.3)
Effective income tax rate - (benefit) expense(18.8)%24.1 %22.1 %
13. Statutory Financial Information and Dividend Limitations
The Company prepares its statutory-basis financial statements in conformity with accounting practices prescribed or permitted by the New York Department of Financial Services (“NYDFS”). Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (“NAIC”), as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed.
The State of New York requires insurance companies domiciled in its state to prepare statutory-basis financial statements in conformity with the NAIC Accounting Practices and Procedures Manual, subject to any deviations prescribed or permitted by the NYDFS. Statutory accounting practices differ from GAAP primarily since they require charging policy acquisition and certain sales inducement costs to expense as incurred, establishing life insurance reserves based on different actuarial assumptions, and valuing certain investments and establishing deferred taxes on a different basis.
Statutory net (loss) income was $(66.1) million, $(34.0) million and $68.0 million in 2020, 2019 and 2018, respectively. Statutory capital and surplus was $555.9 million and $614.2 million as of December 31, 2020 and 2019, respectively.
Dividend Limitations
The ability of the Company to pay dividends is dependent on business conditions, income, cash requirements and other relevant factors. The payment of shareholder dividends by the Company without the prior approval of the NYDFS is limited to formula amounts based on capital and surplus and net gain from operations excluding realized capital gains and losses, determined in conformity with statutory accounting practices, as well as the timing and amount of dividends paid in the preceding twelve months. The Company did 0t pay any dividends in 2020. The Company cannot pay dividends without prior NYDFS approval at any given point in time during 2021. Any dividend must be paid out of unassigned surplus excluding unrealized appreciation from investments, which totaled $317.7 million as of December 31, 2020, and cannot result in capital and surplus being less than the minimum amount required by law.
Under state insurance laws, insurance companies are required to maintain paid up capital of not less than the minimum capital requirement applicable to the types of insurance they are authorized to write. Insurance companies are also subject to risk-based capital (“RBC”) requirements adopted by state insurance regulators. A company’s “authorized control level RBC” is calculated using various factors applied to certain financial balances and activity. Companies that do not maintain adjusted statutory capital and surplus at a level in excess of the company action level RBC, which is two times authorized control level RBC, are required to take specified actions. Company action level RBC is significantly in excess of the minimum capital requirements. Total adjusted statutory capital and surplus and authorized control level RBC of the Company were $643.6 million and $92.1 million, respectively, as of December 31, 2020.
49


14. Benefit Plans
Pension and other postretirement plans
Defined benefit pension plans and other postretirement plans, sponsored by the Corporation, cover most full-time employees, certain part-time employees and employee-agents. Benefits under the pension plans are based upon the employee’s length of service and eligible annual compensation. The Corporation also provides a medical coverage subsidy for eligible employees hired before January 1, 2003, including their eligible dependents, when they retire. In September 2020, the Corporation announced it will eliminate the medical coverage subsidy effective January 1, 2021 for employees who are not eligible to retire as of December 31, 2020. The cost allocated to the Company for these plans was $303 thousand, $609 thousand and $439 thousand in 2020, 2019 and 2018, respectively.
The Corporation has reserved the right to modify or terminate its benefit plans at any time and for any reason.
Allstate 401(k) Savings Plan
Employees of AIC are eligible to become members of the Allstate 401(k) Savings Plan (“Allstate Plan”). The Corporation’s contributions are based on the Corporation’s matching obligation. The cost allocated to the Company for the Allstate Plan was $743 thousand, $953 thousand and $1.0 million in 2020, 2019 and 2018, respectively.
15. Other Comprehensive Income
The components of other comprehensive income (loss) on a pre-tax and after-tax basis for the years ended December 31 are as follows:
($ in thousands)202020192018
 Pre-
tax
TaxAfter-
tax
Pre-
tax
TaxAfter-
tax
Pre-
tax
TaxAfter-
tax
Unrealized net holding gains and losses arising during the period, net of related offsets$106,690 $(22,404)$84,286 $86,980 $(18,266)$68,714 $(65,379)$13,730 $(51,649)
Less: reclassification adjustment of realized capital gains and losses(2,298)483 (1,815)1,395 (293)1,102 (1,359)285 (1,074)
Unrealized net capital gains and losses108,988 (22,887)86,101 85,585 (17,973)67,612 (64,020)13,445 (50,575)
Unrealized foreign currency translation adjustments1,923 (404)1,519 (3,963)832 (3,131)124 (26)98 
Other comprehensive income (loss)$110,911 $(23,291)$87,620 $81,622 $(17,141)$64,481 $(63,896)$13,419 $(50,477)

50


`ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
SCHEDULE I - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2020
($ in thousands)Cost/
amortized
cost
Fair
value
Amount shown
in the
Balance Sheet
Type of investment   
Fixed maturities:   
Bonds:   
United States government, government agencies and authorities$134,490 $144,905 $144,905 
States, municipalities and political subdivisions402,728 544,553 544,553 
Foreign governments67,435 72,087 72,087 
Public utilities683,019 789,742 789,742 
All other corporate bonds3,002,491 3,363,985 3,363,985 
Mortgage-backed securities3,329 3,602 3,602 
Total fixed maturities4,293,492 $4,918,874 4,918,874 
Equity securities:   
Common stocks:   
Public utilities4,299 $5,794 5,794 
Banks, trusts and insurance companies19,835 27,477 27,477 
Industrial, miscellaneous and all other156,462 215,930 215,930 
Nonredeemable preferred stocks1,665 2,236 2,236 
Total equity securities182,261 $251,437 251,437 
Mortgage loans on real estate (NaN acquired in satisfaction of debt)621,702 $660,862 621,702 
Policy loans37,294 37,294 
Derivative instruments8,097 $8,097 8,097 
Limited partnership interests343,251 343,251 
Short-term investments132,970 $133,045 133,045 
Total investments$5,619,067  $6,313,700 
51



ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
SCHEDULE IV - REINSURANCE
($ in thousands)Gross
amount
Ceded to
other
companies (1)
Assumed
from other
companies
Net
amount
Percentage
of amount
assumed
to net
Year ended December 31, 2020     
Life insurance in force$41,853,809 $8,329,864 $416,082 $33,940,027 1.2 %
Premiums and contract charges:    
Life insurance$156,594 $17,131 $588 $140,051 0.4 %
Accident and health insurance18,218 851 17,367 %
Total premiums and contract charges$174,812 $17,982 $588 $157,418 0.4 %
Year ended December 31, 2019     
Life insurance in force$42,654,371 $8,581,710 $436,841 $34,509,502 1.3 %
Premiums and contract charges:     
Life insurance$156,192 $17,595 $697 $139,294 0.5 %
Accident and health insurance47,422 950 46,472 %
Total premiums and contract charges$203,614 $18,545 $697 $185,766 0.4 %
Year ended December 31, 2018     
Life insurance in force$42,502,450 $8,914,558 $455,594 $34,043,486 1.3 %
Premiums and contract charges:     
Life insurance$154,016 $18,322 $685 $136,379 0.5 %
Accident and health insurance45,273 1,011 44,262 %
Total premiums and contract charges$199,289 $19,333 $685 $180,641 0.4 %
__________________
(1) NaN reinsurance or coinsurance income was netted against premiums ceded in 2020, 2019 or 2018.

















52



ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
SCHEDULE V - VALUATION ALLOWANCES AND QUALIFYING ACCOUNTS
($ in thousands)  Additions  
DescriptionBalance
as of
beginning
of period
Cumulative effect of change in accounting principle (1)
Charged
to costs
and
expenses
Other
additions
DeductionsBalance
as of
end of
period
Year ended December 31, 2020     
Allowance for credit losses on fixed income securities$$$255 $$255 $
Allowance for credit losses on mortgage loans6,129 9,691 4,727 11,093 
Allowance for credit losses on reinsurance recoverables34 621 31 624 
Allowance for credit losses on other assets4,259 129 4,130 
Allowance for credit losses on commitments to fund mortgage loans97 97 
Year ended December 31, 2019     
Allowance for reinsurance recoverables$$34 $$$34 
Allowance for estimated losses on mortgage loans
Year ended December 31, 2018     
Allowance for estimated losses on mortgage loans$$$$$
(1)Effective January 1, 2020, the Company adopted the measurement of credit losses on financial instruments accounting standard that primarily affected mortgage loans and reinsurance recoverables.

Item 11(f).
None.

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Item 11(h). Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
The following discussion highlights significant factors influencing the financial position and results of operations of Allstate Life Insurance Company of New York (referred to in this document as “we,” “our,” “us,” the “Company” or “ALNY”). It should be read in conjunction with the financial statements and related notes found under Item 11(e) contained herein. 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.
The most important factors we monitor to evaluate the financial condition and performance of our company include:
For operations: benefit and investment spread, asset-liability matching, expenses, net income, new business sales, and premiums and contract charges.
For investments: exposure to market risk, asset allocation, credit quality/experience, total return, net investment income, cash flows, realized capital gains and losses, unrealized capital gains and losses, stability of long-term returns, and asset and liability duration.
For financial condition: liquidity, financial strength ratings, capital position, and return on equity.
    This Management’s Discussion and Analysis (“MD&A”) generally discusses 2020 and 2019 results and year-to-year comparisons between 2020 and 2019. Discussions of 2018 results and year-to-year comparisons between 2019 and 2018 that are not included in this MD&A can be found in Item 11(h) of our registration statement on Form S-1, filed April 1, 2020.
OPERATIONS
Overview and strategy
We currently sell traditional, interest-sensitive and variable life insurance and voluntary accident and health insurance products. We serve customers through Allstate exclusive agents and exclusive financial specialists and workplace enrolling independent agents and benefits brokers. We previously offered and continue to have in force deferred fixed annuities and immediate fixed annuities. We also previously offered variable annuities which are reinsured. We expect to discontinue sales of proprietary life and voluntary accident and health insurance products during the second quarter of 2021.
Our overall strategy is to broaden Allstate’s customer relationships and value proposition. We also distribute non-proprietary retirement products offered by third-party providers. Our target customers are middle market consumers with family and financial protection needs.
Our product positioning provides solutions to help meet customer needs during various phases of life. Term and whole life insurance products offer basic life protection solutions. Universal life and retirement products cover more advanced needs. Allstate exclusive agencies partner with exclusive financial specialists to deliver life and retirement solutions to their customers. These specialists have expertise with advanced life and retirement cases and other more complex customer needs. Successful partnerships assist agencies with building stronger and deeper customer relationships. Improvements in sales education and technology are being made to ensure agencies have the tools and information needed to help customers meet their needs and build personal relationships.
Allstate Benefits (Allstate’s workplace distribution business) is among the industry leaders in the growing and highly competitive voluntary benefits market, offering a broad range of products through workplace enrollment, including critical illness, accident and short-term disability. Allstate Benefits uses ALNY to write its business in New York. Products are offered through independent agents, benefits brokers and Allstate exclusive agents. Allstate Benefits is differentiated through its broad product portfolio, flexible enrollment solutions, strong national accounts team and well-recognized brand. Allstate Benefits’ strategy for growth is to deliver substantially more value through innovative products and technology, tailored solutions and exceptional service through investments in future-state technologies and data and analytics capabilities.
We discontinued the sale of annuities over an eight year period from 2006 to 2014, reflecting our expectations of declining returns. As a result, the declining volume of business is managed with a focus on increasing lifetime economic value. Both the deferred and immediate annuity businesses have been adversely impacted by the historically low interest rate environment. Our immediate annuity business has also been impacted by medical advancements that have resulted in annuitants living longer than anticipated when many of these contracts were originated. We focus on the distinct risk and return profiles of the specific products when developing investment and liability management strategies. The level of legacy deferred annuities in force has been significantly reduced and the investment portfolio and crediting rates are proactively managed to improve profitability of the business while providing appropriate levels of liquidity. 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 use performance-based investments (primarily
54


limited partnership investments) in which we have ownership interests and a greater proportion of return is derived from idiosyncratic assets or operating performance.
The Coronavirus resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which have included the implementation of travel restrictions, government-imposed shelter-in-place orders, quarantine periods, social distancing and restrictions on large gatherings, have caused material disruption to businesses globally, resulting in increased unemployment, a recession and increased economic uncertainty. Additionally, there is no way of predicting with certainty how long the pandemic might last, including the potential for restrictions being restored or new restrictions being implemented that could result in further economic volatility. The magnitude and duration of the global pandemic and the impact of actions taken by governmental authorities, businesses and consumers, including timing of vaccine distribution, to mitigate health risks create significant uncertainty. We will continue to closely monitor and proactively adapt to developments and changing conditions. Currently, it is not possible to reliably estimate the length and severity of the pandemic or its impact to our operations, but the effects could be material.
On January 26, 2021, AIC entered into an agreement to sell ALIC to Antelope US Holdings Company, an affiliate of an investment fund associated with The Blackstone Group Inc. On March 29, 2021, AIC and ALIC entered into an agreement to sell ALNY to Wilton Reassurance Company. The sales transactions are expected to close in the second half of 2021, subject to regulatory approvals and other customary closing conditions.
Summary analysis Summarized financial data for the years ended December 31 is presented in the following table.
($ in thousands)202020192018
Revenues   
Premiums$79,942 $108,452 $103,447 
Contract charges77,476 77,314 77,194 
Other revenue644 1,186 1,414 
Net investment income222,087 256,006 287,883 
Realized capital gains and losses128,265 106,627 (20,554)
Total revenues508,414 549,585 449,384 
Costs and expenses
Contract benefits(434,641)(259,013)(237,578)
Interest credited to contractholder funds(84,324)(86,464)(91,482)
Amortization of DAC(20,346)(30,396)(16,299)
Operating costs and expenses(32,975)(45,162)(45,964)
Total costs and expenses(572,286)(421,035)(391,323)
Income tax benefit (expense)11,993 (30,926)(12,827)
Net (loss) income$(51,879)$97,624 $45,234 
Net loss was $51.9 million in 2020 compared to net income of $97.6 million in 2019, primarily due to higher contract benefits, including a premium deficiency for immediate annuities with life contingencies of $196.0 million, and lower net investment income.
We periodically review the adequacy of reserves for immediate annuities with life contingencies using actual experience and current assumptions. In the event actual experience and current assumptions are adverse compared to the original assumptions and a premium deficiency is determined to exist, the establishment of a premium deficiency reserve is required.
In third quarter 2020, our long-term investment yield assumption was lowered, which resulted in the prior sufficiency changing to a deficiency. The deficiency was recognized as an increase in the reserve for life-contingent contract benefits. The original assumptions used to establish reserves were updated to reflect current assumptions, and the primary changes included mortality expectations, where annuitants are living longer than originally anticipated, and long-term investment yields.
Analysis of revenues Total revenues decreased 7.5% or $41.2 million in 2020 compared to 2019, primarily due to lower net investment income and premiums, partially offset by higher net realized capital gains.
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.
55


The following table summarizes premiums and contract charges by product for the years ended December 31.
($ in thousands)202020192018
Underwritten products 
Traditional life insurance premiums$62,575 $61,980 $59,185 
Accident and health insurance premiums17,367 46,472 44,262 
Interest-sensitive life insurance contract charges77,557 77,324 76,931 
Subtotal157,499 185,776 180,378 
Annuities   
Fixed annuity contract charges(81)(10)263 
Premiums and contract charges (1)
$157,418 $185,766 $180,641 
____________________
(1)Contract charges related to the cost of insurance totaled $56.9 million, $55.6 million and $54.5 million in 2020, 2019 and 2018, respectively.
Premiums and contract charges decreased 15.3% or $28.3 million in 2020 compared to 2019, primarily due to decreases in voluntary accident and health premiums from the non-renewal of a large underperforming account in the fourth quarter of 2019.
Other revenue decreased 45.7% or $542 thousand in 2020 compared to 2019, primarily due to lower gross dealer concessions earned on Allstate agents’ or exclusive financial specialists’ sales of non-proprietary products.
Analysis of costs and expenses Total costs and expenses increased 35.9% or $151.3 million in 2020 compared to 2019, primarily due to higher contract benefits, partially offset by lower operating costs and expenses and lower amortization of DAC.
Contract benefits increased 67.8% or $175.6 million in 2020 compared to 2019, primarily due to the premium deficiency for immediate annuities and higher claim experience related to Coronavirus on interest-sensitive and traditional life insurance, partially offset by the non-renewal of a large underperforming account in the fourth quarter of 2019. Estimated Coronavirus claims, net of reinsurance and reserve releases, totaled $12.4 million in 2020.
Our annual review of assumptions in 2020 and 2019 resulted in a $2.1 million and $256 thousand increase in reserves, respectively, primarily for secondary guarantees on interest-sensitive life insurance due to decreased projected interest rates that result in lower projected policyholder account values which increases benefits on guaranteed products.
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 $114.0 million and $112.2 million in 2020 and 2019, respectively.
The benefit spread by product group for the years ended December 31 is disclosed in the following table.
($ in thousands) 202020192018
Life insurance$23,491 $38,194 $34,246 
Accident and health insurance9,500 6,660 12,554 
Annuities(216,731)(27,608)(12,815)
Total benefit spread$(183,740)$17,246 $33,985 
Benefit spread decreased to $(183.7) million in 2020 compared to $17.2 million in 2019, primarily due to the premium deficiency for immediate annuities with life contingencies and higher claim experience on interest-sensitive and traditional life insurance.
Interest credited to contractholder funds decreased 2.5% or $2.1 million in 2020 compared to 2019, primarily due to lower average annuity contractholder funds, partially offset by valuation changes on derivatives embedded in equity-indexed life contracts that are not hedged. Valuation changes on derivatives embedded in equity-indexed life contracts that are not hedged increased interest credited to contractholder funds by $2.5 million in 2020 compared to $568 thousand in 2019.
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 Statements of Operations and Comprehensive Income (“investment spread”).
Investment spread totaled $23.7 million, $57.3 million and $82.8 million in 2020, 2019 and 2018, respectively. Investment spread decreased 58.6% or $33.6 million in 2020 compared to 2019, primarily due to lower net investment income, partially offset by lower interest credited to contractholder funds.
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
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significantly between periods due to the variability in investment income, particularly for immediate fixed annuities where the investment portfolio includes performance-based investments.
 Weighted average
investment yield
Weighted average
interest crediting rate
Weighted average
investment spreads
 202020192018202020192018202020192018
Interest-sensitive life insurance4.4 %4.7 %4.7 %3.6 %3.7 %3.7 %0.8 %1.0 %1.0 %
Deferred fixed annuities3.8 3.8 3.7 2.8 2.8 2.7 1.0 1.0 1.0 
Immediate fixed annuities with and without life contingencies4.2 5.3 6.6 5.9 5.9 6.0 (1.7)(0.6)0.6 
Investments supporting capital, traditional life and other products3.1 3.4 3.5 n/an/an/an/an/an/a

Amortization of DAC The components of amortization of DAC for the years ended December 31 are summarized in the following table.
($ in thousands)202020192018
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$11,307 $27,498 $15,771 
Amortization relating to realized capital gains and losses and valuation changes on embedded derivatives that are not hedged (1)
(868)476 933 
Amortization acceleration (deceleration) for changes in assumptions (“DAC unlocking”)9,907 2,422 (405)
Total amortization of DAC$20,346 $30,396 $16,299 
_________________
(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 33.1% or $10.1 million in 2020 compared to 2019, primarily due to prior year amortization related to the non-renewal of a large underperforming voluntary benefits account and lower amortization from lower gross profits on interest-sensitive life insurance, partially offset by higher amortization acceleration for changes in assumptions.
Our annual comprehensive review of assumptions underlying estimated future gross profits for our interest-sensitive life contracts covers assumptions for mortality, persistency, expenses, investment returns, including capital gains and losses, interest crediting rates to policyholders, and the effect of any hedges. An assessment is made of future projections to ensure the reported DAC balances reflect current expectations.
In 2020, the review resulted in an acceleration of DAC amortization (decrease to income) of $9.9 million. DAC amortization acceleration primarily related to the investment margin component of estimated gross profits and was due to lower projected future interest rates and investment returns compared to our previous expectations. This was partially offset by DAC amortization deceleration (increase to income) for changes in the expense margin due to a decrease in projected expenses.
In 2019, the review resulted in an acceleration of DAC amortization (decrease to income) of $2.4 million related to interest sensitive life insurance. The acceleration related to the investment margin component of estimated gross profits and was due to lower projected future interest rates and investment returns compared to our previous expectations. The acceleration related to benefit margin was primarily due to more refined policy level information and assumptions.
For additional detail related to the DAC annual review, see the Application of Critical Accounting Estimates section of this document.
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The changes in DAC for the years ended December 31 are detailed in the following table.
($ in thousands)Traditional life and accident and healthInterest-sensitive life insuranceTotal
 202020192020201920202019
Beginning balance$56,459 $65,076 $67,659 $90,811 $124,118 $155,887 
Acquisition costs deferred
5,551 9,816 5,624 6,955 11,175 16,771 
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 (1)
(6,752)(18,433)(4,555)(9,065)(11,307)(27,498)
Amortization relating to realized capital gains and losses and valuation changes on embedded derivatives that are not hedged (1)
— — 868 (476)868 (476)
Amortization acceleration for changes in assumptions (“DAC unlocking”) (1)
— — (9,907)(2,422)(9,907)(2,422)
Effect of unrealized capital gains and losses (2)
— — (13,735)(18,144)(13,735)(18,144)
Ending balance$55,258 $56,459 $45,954 $67,659 $101,212 $124,118 
______________
(1)Included as a component of amortization of DAC on the Statements of Operations and Comprehensive Income.
(2)Represents the change in the DAC adjustment for unrealized capital gains and losses. The DAC adjustment represents the amount by which the amortization of DAC would increase or decrease if the unrealized gains and losses in the respective product portfolios were realized.
Operating costs and expenses decreased 27.0% or $12.2 million in 2020 compared to 2019, primarily due to lower expenses related to the non-renewal of a large underperforming account in the fourth quarter of 2019 and lower employee-related expenses.
Analysis of reserves and contractholder funds
The following table summarizes our product liabilities as of December 31.
($ in thousands)202020192018
Traditional life insurance$273,067 $265,971 $258,336 
Accident and health insurance18,218 32,261 25,360 
Immediate fixed annuities with life contingencies
Sub-standard structured settlements (1)
1,628,749 1,416,305 1,274,723 
Standard structured settlements and SPIA (2)
777,498 696,097 671,965 
Other851 1,175 1,752 
Reserve for life-contingent contract benefits$2,698,383 $2,411,809 $2,232,136 
Interest-sensitive life insurance$773,531 $756,995 $740,694 
Deferred fixed annuities1,298,906 1,372,890 1,496,565 
Immediate fixed annuities without life contingencies340,685 368,598 399,657 
Other51,648 49,485 44,384 
Contractholder funds$2,464,770 $2,547,968 $2,681,300 
_______________________
(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”). Sub-standard structured settlements comprise 14% of our immediate annuity policies in force and 68% of the immediate annuity reserve for life-contingent contract benefits.
(2) Comprises structured settlement annuities for annuitants with standard life expectancy (“standard structured settlements”) and single premium immediate annuities (“SPIA”) with life contingencies.

58


Contractholder funds represent interest-bearing liabilities arising from the sale of products such as interest-sensitive life insurance and fixed 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 and contract charges for mortality or administrative expenses.
The following table shows the changes in contractholder funds for the years ended December 31.
($ in thousands)202020192018
Contractholder funds, beginning balance$2,547,968 $2,681,300 $2,874,884 
Deposits
Interest-sensitive life insurance100,147 102,233 104,466 
Fixed annuities4,208 2,617 3,140 
Total deposits104,355 104,850 107,606 
Interest credited83,769 86,338 91,430 
Benefits, withdrawals and other adjustments
Benefits(102,483)(104,681)(114,006)
Surrenders and partial withdrawals(100,697)(152,898)(190,873)
Contract charges(76,801)(75,879)(75,483)
Net transfers (to) from separate accounts(84)88 256 
Other adjustments (1)
8,743 8,850 (12,514)
Total benefits, withdrawals and other adjustments(271,322)(324,520)(392,620)
Contractholder funds, ending balance$2,464,770 $2,547,968 $2,681,300 
_______________________
(1)The table above illustrates the changes in contractholder funds, which are presented gross of reinsurance recoverables on the 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 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 3.3% in 2020, primarily due to the continued runoff of our deferred fixed annuity business. We discontinued the sale of annuities, but still accept additional deposits on existing contracts.
Surrenders and partial withdrawals decreased 34.1% or $52.2 million in 2020 compared to 2019. 2018 had elevated surrenders on fixed annuities resulting from an increased number of contracts reaching the 30-45 day period during which there is no surrender charge. The surrender and partial withdrawal rate, based on the beginning of year contractholder funds, was 5.1% in 2020 compared to 7.3% in 2019.
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Reinsurance Ceded
In the normal course of business, we seek to limit aggregate and single exposure to losses on large risks by purchasing reinsurance. In addition, we have used reinsurance to effect the disposition of certain blocks of business. We retain primary liability as a direct insurer for all risks ceded to reinsurers. As of December 31, 2020, 20% of our face amount of life insurance in force was reinsured. Additionally, we ceded all of the risk associated with our variable annuity business to Prudential Insurance Company of America.
Our reinsurance recoverables, net of allowance, summarized by reinsurer as of December 31, are shown in the following table.
($ in thousands)
S&P financial strength rating (1)
Reinsurance recoverable on paid and unpaid benefits
  20202019
Prudential Insurance Company of AmericaAA-$162,944 $166,876 
Transamerica Life GroupA+40,133 40,682 
Swiss Re Life and Health America, Inc.AA-8,968 9,755 
RGA Reinsurance CompanyAA-6,899 6,790 
Canada LifeAA2,230 2,460 
Security Life of DenverA+661 899 
SCOR Global LifeAA-571 565 
Scottish Re (U.S.), Inc. (2)
N/A518 224 
American United Life Insurance CompanyAA-448 472 
Allstate Life Insurance Company (3)
N/A294 268 
Metropolitan LifeAA-94 93 
Triton Insurance Company (4)
N/A79 577 
General ReAA+51 71 
Minnesota MutualAA-43 38 
Mutual of OmahaA+38 23 
Hanover Insurance GroupAA-— 
Credit loss allowance (5)
(624)$(34)
Total $223,349 $229,759 
__________________________
(1)N/A reflects no S&P Global Ratings (“S&P”) rating available.
(2)In December 2018, the Delaware Insurance Commissioner placed Scottish Re (U.S.), Inc. under regulatory supervision and in March 2019, the reinsurer was placed in rehabilitation. We have been permitted to exercise certain setoff rights while the parties address any potential disputes.
(3)Affiliate company.
(4)A.M. Best rating is B++.
(5)Due to the adoption of the measurement of credit losses on financial instruments accounting standard, prior valuation allowance is now presented as an allowance for expected credit losses.
We continuously monitor the creditworthiness of reinsurers in order to determine our risk of recoverability on an individual and aggregate basis. In connection with the adoption of the measurement of credit losses on financial instruments accounting standard in 2020, the method of calculating the allowance for reinsurance recoverables changed. See Note 2 of the financial statements in Item 11(e) for additional details. No reinsurance recoverables have been written off in the three-years ended December 31, 2020.
60


INVESTMENTS
Overview and strategy The return on our investment portfolio is an important component of our ability to offer good value to customers. We identify a strategic asset allocation which considers both the nature of the liabilities and the risk and return characteristics of the various asset classes in which we invest. This allocation is informed by our long-term business and market expectations, as well as other considerations such as risk appetite, portfolio diversification, duration, desired liquidity and capital. Within appropriate ranges relative to strategic allocations, tactical allocations are made in consideration of prevailing and potential future market conditions. We manage risks that involve uncertainty related to interest rates, credit spreads, equity returns and currency exchange rates.
Our portfolio is comprised of assets chosen to generate returns to support corresponding liabilities, within an asset-liability framework that targets an appropriate return on capital. For shorter-term annuity liability cash flows and life insurance liabilities, we invest primarily in fixed income securities and commercial mortgage loans with maturity profiles aligned with liability cash flow requirements. For longer-term immediate annuity liability cash flows, we invest primarily in performance-based investments, such as limited partnerships and public equity securities.
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-based strategy includes investments primarily in public fixed income and equity securities. It seeks to deliver predictable earnings aligned to business needs and take advantage of short-term opportunities primarily through public and private fixed income investments and public equity securities.
Performance-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 used 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 with a majority being limited partnerships, 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. A portion of these investments seek returns in markets or asset classes that are dislocated or special situations, primarily in private markets.
Coronavirus impacts
Ongoing uncertainty related to the future path of the pandemic has and may continue to create market volatility that has impacted the valuations, liquidity, prospects and risks of fixed income securities, equity securities and performance-based investments, primarily limited partnership interests, during 2020. Although fixed income and equity security values generally increased since the first quarter, future investment results will depend on developments, including the duration and spread of the outbreak, preventive measures to combat the spread of the virus, and capital market conditions, including the pace of economic recovery and effectiveness of the fiscal and monetary policy responses. During the second quarter of 2020, short-term loan modifications were executed to grant temporary partial deferral of payments on $8.3 million of commercial mortgage loans with $186 thousand of modified payments outstanding as of December 31, 2020.
The ongoing impact of the Coronavirus on financial markets and the overall economy remain uncertain. Some of the restrictions implemented to contain the pandemic have been relaxed, but reduced economic activity, limits on large gatherings and events and higher unemployment continue. Additionally, there is no way of predicting with certainty how long the pandemic might last, including the potential for restrictions being restored or new restrictions being implemented that could result in further economic volatility.

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Portfolio composition The composition of the investment portfolio is presented in the following table.
($ in thousands)December 31, 2020
Percent to total
Fixed income securities (1)
$4,918,874 77.9 %
Mortgage loans, net621,702 9.9 
Equity securities (2)
251,437 4.0 
Limited partnership interests343,251 5.4 
Short-term investments (3)
133,045 2.1 
Policy loans37,294 0.6 
Other8,097 0.1 
Total$6,313,700 100.0 %
________________
(1)Fixed income securities are carried at fair value. Amortized cost, net for these securities was $4.29 billion.
(2)Equity securities are carried at fair value. The fair value of equity securities held as of December 31, 2020 was $69.2 million in excess of cost. These net gains were primarily concentrated in the technology and consumer goods sectors and in equity index funds.
(3)Short-term investments are carried at fair value.
Investments totaled $6.31 billion as of December 31, 2020, increasing from $6.10 billion as of December 31, 2019, primarily due to higher fixed income valuations and positive operating cash flows, partially offset by net reductions in contractholder funds.
Portfolio composition by investment strategy The following table presents the investment portfolio by strategy as of December 31, 2020.
($ in thousands)Market-basedPerformance-basedTotal
Fixed income securities$4,917,945 $929 $4,918,874 
Mortgage loans, net621,702 — 621,702 
Equity securities243,667 7,770 251,437 
Limited partnership interests14,377 328,874 343,251 
Short-term investments133,045 — 133,045 
Policy loans37,294 — 37,294 
Other8,298 (201)8,097 
Total$5,976,328 $337,372 $6,313,700 
Percent to total94.7 %5.3 %100.0 %
Unrealized net capital gains (losses)
Fixed income securities$625,391 $(9)$625,382 
Limited partnership interests— (350)(350)
Short-term investments75 — 75 
Total$625,466 $(359)$625,107 
During 2020, strategic actions focused on optimizing portfolio yield, return and risk in the low interest rate environment. We increased the maturity profile of fixed income securities in our portfolio. Invested assets and market-based income declined with reductions in contractholder funds. Performance-based investments and equity securities will continue to be allocated primarily to the longer-term immediate annuity liabilities to reduce the risk that investment returns are below levels required to meet their funding needs while shorter-term annuity liabilities will be invested in market-based investments.
Fixed income securities by type are listed in the following table.
Fair value as of
($ in thousands)December 31, 2020December 31, 2019
U.S. government and agencies$144,905 $52,814 
Municipal544,553 552,280 
Corporate4,153,727 3,675,245 
Foreign government72,087 140,166 
Mortgage-backed securities (“MBS”)3,602 13,857 
Total fixed income securities$4,918,874 $4,434,362 
62


Fixed income securities are rated by third party credit rating agencies or are internally rated. As of December 31, 2020, 90.4% 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, 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 lower 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 due diligence process which includes, but is not limited to, an assessment of the credit quality, sector, structure and liquidity risks of each issue.
Fixed income portfolio monitoring is a comprehensive process to identify and evaluate each fixed income security that may require a credit loss allowance. The process includes a quarterly review of all securities to identify instances where the fair value of a security compared to its amortized cost is below internally established thresholds. For further detail on our fixed income portfolio monitoring process, see Note 5 of the financial statements in Item 11(e).
The following table summarizes the fair value and unrealized net capital gains (losses) for fixed income securities by credit quality as of December 31, 2020.
($ in thousands)Investment gradeBelow investment gradeTotal
 Fair
value
Unrealized
gain (loss)
Fair
value
Unrealized
gain (loss)
Fair
value
Unrealized
gain (loss)
Percent rated investment grade
U.S. government and agencies$144,905 $10,415 $— $— $144,905 $10,415 100.0 %
Municipal544,553 141,825 — — 544,553 141,825 100.0 
Corporate
Public2,926,668 375,681 201,012 13,445 3,127,680 389,126 93.6 
Privately placed755,212 70,708 270,835 8,383 1,026,047 79,091 73.6 
Total corporate3,681,880 446,389 471,847 21,828 4,153,727 468,217 88.6 
Foreign government72,087 4,652 — — 72,087 4,652 100.0 
MBS3,600 271 3,602 273 99.9 
Total fixed income securities$4,447,025 $603,552 $471,849 $21,830 $4,918,874 $625,382 90.4 
Municipal bonds include general obligations of state and local issuers and revenue bonds.
Our practice for acquiring and monitoring municipal bonds is predominantly based on the underlying credit quality of the primary obligor. We currently rely on the primary obligor to pay all contractual cash flows and are not relying on bond insurers for payments. As a result of downgrades in the insurers’ credit ratings, the ratings of the insured municipal bonds generally reflect the underlying ratings of the primary obligor.
Corporate bonds include publicly traded and privately placed securities. Privately placed securities primarily consist of corporate issued senior debt securities that are negotiated with the borrower or are issued by public entities in unregistered form.
Our portfolio of privately placed securities is diversified by issuer, industry sector and country. The portfolio is made up of 265 issuers. Privately placed corporate obligations may contain structural security features such as financial covenants and call protections that provide investors greater protection against credit deterioration, reinvestment risk or fluctuations in interest rates than those typically found in publicly registered debt securities. Additionally, investments in these securities are made after due diligence of the issuer, typically including discussions with senior management and on-site visits to company facilities. Ongoing monitoring includes direct periodic dialogue with senior management of the issuer and continuous monitoring of operating performance and financial position. Every issue not rated by an independent rating agency is internally rated with a formal rating affirmation at least once a year. Liquidity of securities issued by public entities in unregistered form is similar to public debt markets.
Our corporate bonds portfolio includes $471.8 million of below investment grade bonds, $270.8 million of which are privately placed. These securities are diversified by issuer and industry sector. The below investment grade corporate bonds portfolio is made up of 231 issuers. We employ fundamental analyses of issuers and sectors along with macro and asset class views to identify investment opportunities. This results in a portfolio with broad exposure to the high yield market with an emphasis on idiosyncratic positions reflective of our views of market conditions and opportunities.
63


Foreign government securities are all backed by the U.S. government.
    MBS are structured securities that are primarily collateralized by consumer or corporate borrowings and residential and commercial real estate loans. The cash flows from the underlying collateral paid to the securitization trust are generally applied in a pre-determined order and are designed so that each security issued by the trust, typically referred to as a “class”, qualifies for a specific original rating.
For example, the “senior” portion or “top” of the capital structure, or rating class, which would originally qualify for a rating of Aaa typically has priority in receiving principal repayments on the underlying collateral and retains this priority until the class is paid in full. In a sequential structure, underlying collateral principal repayments are directed to the most senior rated Aaa class in the structure until paid in full, after which principal repayments are directed to the next most senior Aaa class in the structure until it is paid in full. Senior Aaa classes generally share any losses from the underlying collateral on a pro-rata basis after losses are absorbed by classes with lower original ratings.
The payment priority and class subordination included in these securities serves as credit enhancement for holders of the senior or top portions of the structures. These securities continue to retain the payment priority features that existed at the origination of the securitization trust. Other forms of credit enhancement may include structural features embedded in the securitization trust, such as overcollateralization, excess spread and bond insurance. The underlying collateral may contain fixed interest rates, variable interest rates (such as adjustable rate mortgages), or both fixed and variable rate features.
MBS includes residential mortgage-backed securities (“RMBS”) and commercial mortgage-backed securities (“CMBS”). RMBS 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. CMBS investments are traditional conduit transactions collateralized by commercial mortgage loans and typically are diversified across property types and geographical area.
Mortgage loans mainly 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 5 of the financial statements in Item 11(e).
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.
Limited partnership interests include $312.1 million of interests in private equity funds, $16.8 million of interests in real estate funds and $14.4 million of interests in other funds as of December 31, 2020. We have commitments to invest additional amounts in limited partnership interests totaling $98.9 million as of December 31, 2020.
Short-term investments primarily comprise money market funds, commercial paper, U.S. Treasury bills and other short-term investments, including securities lending collateral of $77.1 million.
Policy loans are carried at unpaid principal balances.
Other investments comprise $8.1 million of derivatives as of December 31, 2020. For further detail on our use of derivatives, see Note 7 of the financial statements in Item 11(e).
The following table presents unrealized net capital gains (losses) as of December 31.
($ in thousands)20202019
U.S. government and agencies$10,415 $9,534 
Municipal141,825 119,242 
Corporate468,217 274,774 
Foreign government4,652 6,531 
MBS273 1,174 
Fixed income securities625,382 411,255 
Short-term investments75 (13)
Equity method of accounting (“EMA”) limited partnerships(350)(205)
Unrealized net capital gains and losses, pre-tax$625,107 $411,037 
64


Gross unrealized gains (losses) on fixed income securities by type as of December 31, 2020 are provided in the following table.
($ in thousands)AmortizedGross unrealizedFair
 costGainsLossesvalue
Corporate$3,685,510 $471,999 $(3,782)$4,153,727 
U.S. government and agencies134,490 10,415 — 144,905 
Municipal402,728 141,825 — 544,553 
Foreign government67,435 4,652 — 72,087 
MBS3,329 273 — 3,602 
Total fixed income securities$4,293,492 $629,164 $(3,782)$4,918,874 
The consumer goods, utilities and capital goods sectors comprise 31%, 19% and 11%, respectively, of the carrying value of our corporate fixed income securities portfolio as of December 31, 2020. The utilities, technology and financial services sectors comprise 34%, 21% and 14%, respectively, of the gross unrealized losses of our corporate fixed income securities portfolio as of December 31, 2020. In general, the gross unrealized losses are related to an increase in market yields, which may include increased risk-free interest rates or wider credit spreads since the time of initial purchase. Similarly, gross unrealized gains reflect a decrease in market yields since the time of initial purchase.
Net investment income The following table presents net investment income for the years ended December 31.
($ in thousands)202020192018
Fixed income securities$188,432 $208,816 $214,039 
Mortgage loans34,510 32,566 30,920 
Equity securities3,267 4,283 5,565 
Limited partnership interests817 15,348 43,365 
Short-term investments1,600 4,393 2,966 
Policy loans2,272 2,343 2,339 
Investment income, before expense230,898 267,749 299,194 
Investment expense
Investee level expenses (1)
— — — 
Securities lending expense(494)(2,482)(1,507)
Operating costs and expenses(8,317)(9,261)(9,804)
Total investment expense(8,811)(11,743)(11,311)
Net investment income$222,087 $256,006 $287,883 
Market-based$231,415 $252,842 $255,689 
Performance-based(517)14,907 43,505 
Investment income, before expense$230,898 $267,749 $299,194 
______________________________
(1)Beginning January 1, 2020, depreciation previously included in investee level expenses is reported as realized capital gains or losses.
Net investment income decreased 13.2% or $33.9 million in 2020 compared to 2019, primarily due to a decline in market-based income driven by lower interest-bearing portfolio yields and lower performance-based results, primarily from limited partnerships.
65


Performance-based investments primarily include private equity and real estate. The following table presents investment income for performance-based investments for the years ended December 31.
($ in thousands)202020192018
Limited partnerships
   Private equity
$626 $14,617 $43,264 
   Real estate191 731 101 
        Performance-based - limited partnerships817 15,348 43,365 
Non-limited partnerships
   Private equity(1,334)(441)140 
   Real estate— — — 
        Performance-based - non-limited partnerships(1,334)(441)140 
Total
   Private equity(708)14,176 43,404 
   Real estate191 731 101 
        Total performance-based$(517)$14,907 $43,505 
Investee level expenses (1)
$— $— $— 
______________________________
(1)Investee level expenses include depreciation and asset level operating expenses reported in investment expense. Beginning January 1, 2020, depreciation previously included in investee level expenses is reported as realized capital gains or losses.
Performance-based investment loss was $517 thousand in 2020 compared to income of $14.9 million in 2019 due to lower valuations of private equity and real estate investments.
Performance-based investment results and income can vary significantly between periods and are influenced by economic conditions, equity market performance, comparable public company earnings multiples, capitalization rates, operating performance of the underlying investments and the timing of asset sales.
Realized capital gains and losses The following table presents the components of realized capital gains (losses) and the related tax effect for the years ended December 31.
($ in thousands)202020192018
Sales (1)
$(1,861)$4,698 $(1,548)
Credit losses (2)
Fixed income securities(256)(169)(285)
Mortgage loans(9,594)— — 
Limited partnership interests(538)— — 
Total credit losses(10,388)(169)(285)
Valuation of equity investments - appreciation (decline):
Equity securities36,110 40,780 (16,364)
Limited partnerships (3)
3,992 2,231 (2,995)
Total valuation of equity investments40,102 43,011 (19,359)
Valuation and settlements of derivative instruments100,412 59,087 638 
Realized capital gains (losses), pre-tax128,265 106,627 (20,554)
Income tax (expense) benefit(26,936)(22,392)4,316 
Realized capital gains (losses), after-tax$101,329 $84,235 $(16,238)
Market-based$127,616 $100,112 $(23,400)
Performance-based649 6,515 2,846 
Realized capital gains (losses), pre-tax$128,265 $106,627 $(20,554)
______________________________
(1)Beginning January 1, 2020, depreciation previously included in investee level expenses is reported as realized capital gains or losses.
(2)Due to the adoption of the measurement of credit losses on financial instruments accounting standard, realized capital losses previously reported as other-than-temporary impairment write-downs are now presented as credit losses.
(3)Relates to limited partnerships where the underlying assets are predominately public equity securities.
66


Sales in 2020 related primarily to fixed income securities in connection with ongoing portfolio management. Sales in 2019 related primarily to gains from limited partnerships, as well as fixed income securities in connection with ongoing portfolio management.
Valuation and settlements of derivative instruments in both 2020 and 2019 primarily comprised the change in fair value of the structured settlement annuity reinsurance agreement.
The table below presents realized capital gains (losses) for performance-based investments for the years ended December 31.
($ in thousands)202020192018
Sales (1)
$74 $3,155 $(897)
Credit losses (2)
(537)— — 
Valuation of equity investments1,416 2,996 2,856 
Valuation and settlements of derivative instruments(304)364 887 
Total performance-based$649 $6,515 $2,846 
______________________________
(1)Beginning January 1, 2020, depreciation previously included in investee level expenses is reported as realized capital gains or losses.
(2)Due to the adoption of the measurement of credit losses on financial instruments accounting standard, realized capital losses previously reported as other-than-temporary impairment write-downs are now presented as credit losses.
67


MARKET RISK
Market risk is the risk that we will incur losses due to adverse changes in interest rates, credit spreads, equity prices, commodity prices or currency exchange rates. Adverse changes to these rates and prices may occur due to changes in fiscal policy, the economic climate, the liquidity of a market or market segment, insolvency or financial distress of key market makers or participants or changes in market perceptions of credit worthiness or risk tolerance. Our primary market risk exposures are to changes in interest rates, credit spreads and equity prices. We also have direct and indirect exposure to commodity price changes through our diversified investments in infrastructure and energy primarily held in limited partnership interests.
The active management of market risk is integral to our results of operations. We may use the following approaches to manage exposure to market risk within defined tolerance ranges: 1) rebalancing existing asset or liability portfolios, 2) changing the type of investments purchased in the future and 3) using derivative instruments to modify the market risk characteristics of existing assets and liabilities or assets expected to be purchased.
Overview In formulating and implementing guidelines for investing funds, we seek to earn attractive risk adjusted returns that enhance our ability to offer competitive rates and prices to customers while contributing to stable profits and long-term capital growth. Accordingly, our investment decisions and objectives are informed by the underlying risks and product profiles.
Investment policies define the overall framework for managing market and other investment risks, including accountability and controls over risk management activities. These investment activities follow policies that have been approved by our board of directors and which specify the investment limits and strategies that are appropriate given the liquidity, surplus, product profile and regulatory requirements. Executive oversight of investment activities is conducted primarily through our board of directors and investment committee. Asset-liability management (“ALM”) policies further define the overall framework for managing market and investment risks and are approved by our board of directors. ALM focuses on strategies to enhance yields, mitigate market risks and optimize capital to improve profitability and returns while incorporating future expected cash requirements to repay liabilities. These ALM policies specify limits, ranges or targets for investments that best meet business objectives in light of the unique demands and characteristics of the product liabilities and are intended to result in a prudent, methodical and effective adjudication of market risk and return.
We use widely-accepted quantitative and qualitative approaches to measure, monitor and manage market risk. We evaluate our market risk exposure using multiple measures including but not limited to duration, value-at-risk, scenario analysis and sensitivity analysis. Duration measures the price sensitivity of assets and liabilities to changes in interest rates. For example, if interest rates increase 100 basis points, the fair value of an asset with a duration of 5 is expected to decrease in value by 5%. Value-at-risk is a statistical estimate of the probability that the change in fair value of a portfolio will exceed a certain amount over a given time horizon. Scenario analysis estimates the potential changes in the fair value of a portfolio that could occur under hypothetical market conditions defined by changes to multiple market risk factors: interest rates, credit spreads, equity prices or currency exchange rates. Sensitivity analysis estimates the potential changes in the fair value of a portfolio that could occur under different hypothetical shocks to a market risk factor. The selection of measures used in our sensitivity analysis should not be construed as our prediction of future market events, but only as an illustration of the potential effect of such an event. In general, we establish investment portfolio asset allocation and market risk limits based upon a combination of these measures. The asset allocation limits place restrictions on the total funds that may be invested within an asset class. Comprehensive day-to-day management of market risk within defined tolerance ranges occurs as portfolio managers buy and sell within their respective markets based upon the acceptable boundaries established by investment policies. Although we apply a similar overall philosophy to market risk, the underlying business frameworks and the accounting and regulatory environments may differ between our products and therefore affect investment decisions and risk parameters.
Interest rate risk is the risk that we will incur a loss due to adverse changes in interest rates relative to the characteristics of our interest-bearing assets and liabilities. Interest rate risk includes risks related to changes in U.S. Treasury yields and other key risk-free reference yields. This risk arises from many of our primary activities, as we invest substantial funds in interest-sensitive assets and issue interest-sensitive liabilities. Changes in interest rates can have favorable and unfavorable effects on our results. For example, increases in rates can improve investment income, but decrease the fair value of our fixed income securities portfolio and increase policyholder surrenders requiring us to liquidate assets. Decreases in rates could increase the fair value of our fixed income securities portfolio while decreasing investment income due to reinvesting at lower market yields and accelerating pay-downs and prepayments of certain investments.
We manage the interest rate risk in our assets relative to the interest rate risk in our liabilities and our assessment of overall economic and capital risk. One of the measures used to quantify this exposure is duration. The difference in the duration of our assets relative to our liabilities is our duration gap. To calculate the duration gap between assets and liabilities, we project asset and liability cash flows and calculate their net present value using a risk-free market interest rate adjusted for credit quality, sector attributes, liquidity and other specific risks. Duration is calculated by revaluing these cash flows at alternative interest rates and determining the percentage change in aggregate fair value. The cash flows used in this calculation include the
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expected maturity and repricing characteristics of our derivative financial instruments, all other financial instruments, and certain other items including annuity liabilities and other interest-sensitive liabilities.
The projections include assumptions (based upon historical market experience and our experience) that reflect the effect of changing interest rates on the prepayment, lapse, leverage and/or option features of instruments, where applicable. The preceding assumptions relate primarily to callable municipal and corporate bonds, fixed rate single and flexible premium deferred annuities, mortgage-backed securities and municipal housing bonds.
As of December 31, 2020, the difference between our asset and liability duration was a (17.62) gap compared to a (9.93) gap as of December 31, 2019. A negative duration gap indicates that the fair value of our liabilities is more sensitive to interest rate movements than the fair value of our assets, while a positive duration gap indicates that the fair value of our assets is more sensitive to interest rate movements than the fair value of our liabilities. We may have a positive or negative duration gap, as the duration of our assets and liabilities vary based on the characteristics of the products in force and investing activity.
Shorter-term annuity liability cash flows are invested in market-based investments to generate cash flows that will fund future claims, benefits and expenses, and that will earn stable returns across a wide variety of interest rate and economic scenarios. To reduce the risk that investment returns are below levels required to meet the funding needs of longer-term liabilities, we are executing our performance-based strategy that supplements market risk with idiosyncratic risk. We are using these investments, in addition to public equity securities, to support our long-term annuity liability cash flows. Performance-based investments and public equity securities are generally not interest-bearing; accordingly, using them to support interest-bearing liabilities contributes toward a negative duration gap.
Based upon the information and assumptions used in the duration calculation, and market interest rates as of December 31, 2020, we estimate that a 100 basis point immediate, parallel increase in interest rates (“rate shock”) would increase the net fair value of the assets and liabilities by $717.5 million, compared to an increase of $389.6 million as of December 31, 2019, reflecting year to year changes in duration and the amount of assets and liabilities. The estimate excludes traditional and interest-sensitive life insurance and accident and health insurance products that are not considered financial instruments. The assets supporting these products totaled $1.50 billion and $1.40 billion as of December 31, 2020 and 2019, respectively. Based on assumptions described above, these assets would decrease in value by $88.5 million as of December 31, 2020 compared to a decrease of $71.4 million as of December 31, 2019.
To the extent that conditions differ from the assumptions we used in these calculations, duration and rate shock measures could be significantly impacted. Additionally, our calculations assume the current relationship between short-term and long-term interest rates (the term structure of interest rates) will remain constant over time. As a result, these calculations may not fully capture the effect of non-parallel changes in the term structure of interest rates or large changes in interest rates.
Credit spread risk is the risk that we will incur a loss due to adverse changes in credit spreads (“spreads”). Credit spread is the additional yield on fixed income securities and loans above the risk-free rate (typically referenced as the yield on U.S. Treasury securities) that market participants require to compensate them for assuming credit, liquidity or prepayment risks. The magnitude of the spread will depend on the likelihood that a particular issuer will default. This risk arises from many of our primary activities, as