UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

The registrant meets the conditions set forth in General Instructions H (1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format.

[X]          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

OR

[  ]           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-31248

ALLSTATE LIFE INSURANCE COMPANY

(Exact name of registrant as specified in its charter)

Illinois	36-2554642
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

3075 Sanders Road, Northbrook, Illinois 60062

(Address of principal executive offices)      (Zip Code)

(847) 402-5000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   X  No ___

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   X  No ___

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,”  “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ____	Accelerated filer
Non-accelerated filer    X    (Do not check if a smaller reporting company)	Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ___No   X  

As of November 3, 2016, the registrant had 23,800 common shares, $227 par value, outstanding, all of which are held by Allstate Insurance Company.

ALLSTATE LIFE INSURANCE COMPANY

INDEX TO QUARTERLY REPORT ON FORM 10-Q

September 30, 2016

PART I	FINANCIAL INFORMATION	PAGE
Item 1.	Financial Statements
	Condensed Consolidated Statements of Operations and Comprehensive Income for the Three-Month and Nine-Month Periods Ended September 30, 2016 and 2015 (unaudited)	1
	Condensed Consolidated Statements of Financial Position as of September 30, 2016 (unaudited) and December 31, 2015	2
	Condensed Consolidated Statements of Shareholder’s Equity for the Nine-Month Periods Ended September 30, 2016 and 2015 (unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2016 and 2015 (unaudited)	4
	Notes to Condensed Consolidated Financial Statements (unaudited)	5
	Report of Independent Registered Public Accounting Firm	36
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Highlights	37
	Operations	38
	Investments	44
	Capital Resources and Liquidity	55
	Forward Looking Statements	57
Item 4.	Controls and Procedures	57
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	58
Item 1A.	Risk Factors	58
Item 6.	Exhibits	58

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

($ in millions)	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
	(unaudited)						(unaudited)
Revenues
Premiums	$	147		$	150		$	443		$	448
Contract charges	177			180			539			557
Net investment income	408			473			1,224			1,417
Realized capital gains and losses:
Total other-than-temporary impairment (“OTTI”) losses	(39		)	(73		)	(95		)	(95		)
OTTI losses reclassified to (from) other comprehensive income	—			6			7			9
Net OTTI losses recognized in earnings	(39		)	(67		)	(88		)	(86		)
Sales and other realized capital gains and losses	20			256			22			445
Total realized capital gains and losses	(19		)	189			(66		)	359
	713			992			2,140			2,781
Costs and expenses
Contract benefits	367			353			1,046			1,057
Interest credited to contractholder funds	170			181			520			546
Amortization of deferred policy acquisition costs	24			38			98			116
Operating costs and expenses	56			56			164			211
Restructuring and related charges	—			—			1			2
Interest expense	4			4			11			12
	621			632			1,840			1,944
Gain on disposition of operations	1			2			4			2
Income from operations before income tax expense	93			362			304			839
Income tax expense	28			123			93			297
Net income	65			239			211			542
Other comprehensive income (loss), after-tax
Change in unrealized net capital gains and losses	73			(302		)	547			(697		)
Change in unrealized foreign currency translation adjustments	(3		)	3			1			(4		)
Other comprehensive income (loss), after-tax	70			(299		)	548			(701		)
Comprehensive income (loss)	$	135		$	(60	)	$	759		$	(159	)

See notes to condensed consolidated financial statements.

1

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

($ in millions, except par value data)	September 30, 2016			December 31, 2015
Assets	(unaudited)
Investments
Fixed income securities, at fair value (amortized cost $22,999 and $23,770)	$	24,796		$	24,629
Mortgage loans	3,855			3,781
Equity securities, at fair value (cost $1,499 and $1,526)	1,573			1,542
Limited partnership interests	2,679			2,295
Short-term, at fair value (amortized cost $700 and $816)	700			816
Policy loans	564			572
Other	1,485			1,327
Total investments	35,652			34,962
Cash	115			104
Deferred policy acquisition costs	1,141			1,314
Reinsurance recoverables from non-affiliates	2,363			2,407
Reinsurance recoverables from affiliates	453			464
Accrued investment income	275			278
Other assets	435			510
Separate Accounts	3,450			3,639
Total assets	$	43,884		$	43,678
Liabilities
Contractholder funds	$	19,803		$	20,542
Reserve for life-contingent contract benefits	11,334			11,394
Unearned premiums	5			5
Payable to affiliates, net	43			55
Other liabilities and accrued expenses	887			849
Deferred income taxes	1,345			986
Notes due to related parties	325			275
Separate Accounts	3,450			3,639
Total liabilities	37,192			37,745
Commitments and Contingent Liabilities (Note 7)
Shareholder’s equity
Redeemable preferred stock - series A, $100 par value, 1,500,000 shares authorized, none issued	—			—
Redeemable preferred stock - series B, $100 par value, 1,500,000 shares authorized, none issued	—			—
Common stock, $227 par value, 23,800 shares authorized and outstanding	5			5
Additional capital paid-in	1,990			1,990
Retained income	3,628			3,417
Accumulated other comprehensive income:
Unrealized net capital gains and losses:
Unrealized net capital gains and losses on fixed income securities with OTTI	40			41
Other unrealized net capital gains and losses	1,173			527
Unrealized adjustment to DAC, DSI and insurance reserves	(138		)	(40		)
Total unrealized net capital gains and losses	1,075			528
Unrealized foreign currency translation adjustments	(6		)	(7		)
Total accumulated other comprehensive income	1,069			521
Total shareholder’s equity	6,692			5,933
Total liabilities and shareholder’s equity	$	43,884		$	43,678

See notes to condensed consolidated financial statements.

2

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY

($ in millions)	Nine months ended September 30,
	2016		2015
	(unaudited)
Common stock	$	5	$	5
Additional capital paid-in	1,990		1,990
Retained income
Balance, beginning of period	3,417		2,973
Net income	211		542
Dividends	—		(103		)
Loss on reinsurance with an affiliate	—		(12		)
Loss on sale of subsidiary to an affiliate	—		(2		)
Balance, end of period	3,628		3,398
Accumulated other comprehensive income
Balance, beginning of period	521		1,379
Change in unrealized net capital gains and losses	547		(697		)
Change in unrealized foreign currency translation adjustments	1		(4		)
Balance, end of period	1,069		678
Total shareholder’s equity	$	6,692	$	6,071

See notes to condensed consolidated financial statements.

3

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in millions)	Nine months ended September 30,
	2016			2015
Cash flows from operating activities	(unaudited)
Net income	$	211		$	542
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and other non-cash items	(48		)	(58		)
Realized capital gains and losses	66			(359		)
Gain on disposition of operations	(4		)	(2		)
Interest credited to contractholder funds	520			546
Changes in:
Policy benefits and other insurance reserves	(454		)	(422		)
Deferred policy acquisition costs	37			20
Reinsurance recoverables, net	25			17
Income taxes	108			128
Other operating assets and liabilities	(72		)	(31		)
Net cash provided by operating activities	389			381
Cash flows from investing activities
Proceeds from sales
Fixed income securities	5,116			6,758
Equity securities	842			511
Limited partnership interests	247			349
Mortgage loans	—			6
Other investments	37			18
Investment collections
Fixed income securities	1,569			1,448
Mortgage loans	280			257
Other investments	107			59
Investment purchases
Fixed income securities	(5,771		)	(6,308		)
Equity securities	(841		)	(1,045		)
Limited partnership interests	(523		)	(481		)
Mortgage loans	(353		)	(475		)
Other investments	(148		)	(204		)
Change in short-term investments, net	(52		)	(88		)
Change in policy loans and other investments, net	(37		)	(17		)
Disposition of operations	—			10
Net cash provided by investing activities	473			798
Cash flows from financing activities
Contractholder fund deposits	641			674
Contractholder fund withdrawals	(1,492		)	(1,755		)
Dividends paid	—			(17		)
Net cash used in financing activities	(851		)	(1,098		)
Net increase in cash	11			81
Cash at beginning of period	104			146
Cash at end of period	$	115		$	227

See notes to condensed consolidated financial statements.

4

ALLSTATE LIFE INSURANCE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. General

Basis of presentation

The accompanying condensed consolidated financial statements include the accounts of Allstate Life Insurance Company (“ALIC”) and its wholly owned subsidiaries (collectively referred to as the “Company”). ALIC is wholly owned by Allstate Insurance Company (“AIC”), which is wholly owned by Allstate Insurance Holdings, LLC, a wholly owned subsidiary of The Allstate Corporation (the “Corporation”). These condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

The condensed consolidated financial statements and notes as of September 30, 2016 and for the three-month and nine-month periods ended September 30, 2016 and 2015 are unaudited. The condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods. These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year. All significant intercompany accounts and transactions have been eliminated.

Issuance of surplus note

On April 26, 2016, under an existing agreement with Kennett Capital, Inc. (“Kennett”), an unconsolidated affiliate of ALIC, ALIC sold Kennett a $50 million redeemable surplus note issued by ALIC Reinsurance Company (“ALIC Re”), a wholly owned subsidiary of ALIC. The surplus note is due December 1, 2036 with an initial rate of 4.14% that will reset every ten years to the then current ten year Constant Maturity Treasury yield (“CMT”), plus 2.23%. As payment, Kennett issued a full recourse note due December 1, 2036 to ALIC for the same amount with an initial interest rate of 3.14% that will reset every ten years to the then current ten year CMT, plus 1.23%. The note due from Kennett is classified as other investments and the related surplus note is classified as notes due to related parties in the Condensed Consolidated Statements of Financial Position.

Premiums and contract charges

The following table summarizes premiums and contract charges by product.

($ in millions)	Three months ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
Premiums
Traditional life insurance	$	124	$	129	$	375	$	384
Accident and health insurance	23		21		68		64
Total premiums	147		150		443		448
Contract charges
Interest-sensitive life insurance	173		176		529		547
Fixed annuities	4		4		10		10
Total contract charges	177		180		539		557
Total premiums and contract charges	$	324	$	330	$	982	$	1,005

Adopted accounting standard

Amendments to the Consolidation Analysis

In February 2015, the Financial Accounting Standards Board (“FASB”) issued guidance affecting the consolidation evaluation for limited partnerships and similar entities, fees paid to a decision maker or service provider, and variable interests in a variable interest entity held by related parties of the reporting enterprise. The adoption of this guidance as of January 1, 2016 did not have a material impact on the Company’s results of operations or financial position. 

5

Pending accounting standards

Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued guidance requiring equity investments, including equity securities and limited partnership interests, that are not accounted for under the equity method of accounting or result in consolidation to be measured at fair value with changes in fair value recognized in net income. Equity investments without readily determinable fair values may be measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. When a qualitative assessment of equity investments without readily determinable fair values indicates that impairment exists, the carrying value is required to be adjusted to fair value, if lower. The guidance clarifies that an entity should evaluate the realizability of a deferred tax asset related to available-for-sale fixed income securities in combination with the entity’s other deferred tax assets. The guidance also changes certain disclosure requirements. The guidance is effective for interim and annual periods beginning after December 15, 2017, and is to be applied through a cumulative-effect adjustment to beginning retained income as of the beginning of the period of adoption. The new guidance related to equity investments without readily determinable fair values is to be applied prospectively as of the date of adoption. The Company is in the process of evaluating the impact of adoption. The most significant impacts, using values as of September 30, 2016, are expected to be the change in accounting for equity securities where $74 million of pre-tax unrealized net capital gains would be reclassified from accumulated other comprehensive income to retained income and cost method limited partnership interests (excluding limited partnership interests accounted for on a cost recovery basis) where the carrying value would increase by approximately $78 million, pre-tax, with the adjustment recorded in retained income.

Transition to Equity Method Accounting

In March 2016, the FASB issued guidance amending the accounting requirements for transitioning to the equity method of accounting (“EMA”), including a transition from the cost method. The guidance requires the cost of acquiring an additional interest in an investee to be added to the existing carrying value to establish the initial basis of the EMA investment. Under the new guidance, no retroactive adjustment is required when an investment initially qualifies for EMA treatment. The guidance is effective for interim and annual periods beginning after December 15, 2016, and is to be applied prospectively. The guidance will principally affect the future accounting for investments that qualify for EMA after application of the cost method of accounting. The Company is in the process of evaluating the impact of adoption, which is not expected to be material to the Company’s results of operations or financial position.

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued guidance which revises the credit loss recognition criteria for certain financial assets measured at amortized cost. The new guidance replaces the existing incurred loss recognition model with an expected loss recognition model. The objective of the expected credit loss model is for the reporting entity to recognize its estimate of expected credit losses for affected financial assets in a valuation allowance deducted from the amortized cost basis of the related financial assets that results in presenting the net carrying value of the financial assets at the amount expected to be collected. The reporting entity must consider all available relevant information when estimating expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts over the contractual life of an asset. Financial assets may be evaluated individually or on a pooled basis when they share similar risk characteristics. The measurement of credit losses for available-for-sale debt securities measured at fair value is not affected except that credit losses recognized are limited to the amount by which fair value is below amortized cost and the carrying value adjustment is recognized through an allowance and not as a direct write-down. The guidance is effective for interim and annual periods beginning after December 15, 2019, and for most affected instruments must be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to beginning retained income. The Company is in the process of evaluating the impact of adoption.

6

2. Supplemental Cash Flow Information

Non-cash investing activities include $105 million and $63 million related to mergers and exchanges completed with equity securities and modifications of certain mortgage loans and other investments for the nine months ended September 30, 2016 and 2015, respectively. Non-cash financing activities include $34 million related to debt acquired in conjunction with the purchase of an investment for the nine months ended September 30, 2016.

Liabilities for collateral received in conjunction with the Company’s securities lending program and over-the-counter (“OTC”) and cleared derivatives are reported in other liabilities and accrued expenses or other investments. The accompanying cash flows are included in cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows along with the activities resulting from management of the proceeds, which are as follows:

($ in millions)	Nine months ended September 30,
	2016			2015
Net change in proceeds managed
Net change in fixed income securities	$	(126	)	$	—
Net change in short-term investments	175			6
Operating cash flow provided	49			6
Net change in cash	—			1
Net change in proceeds managed	$	49		$	7
Net change in liabilities
Liabilities for collateral, beginning of period	$	(550	)	$	(510	)
Liabilities for collateral, end of period	(501		)	(503		)
Operating cash flow used	$	(49	)	$	(7	)

In second quarter 2016, the Company transferred to an unconsolidated affiliate a $50 million surplus note issued by a consolidated subsidiary in exchange for a note receivable with a principal sum equal to that of the surplus note.

3. Investments

Fair values

The amortized cost, gross unrealized gains and losses and fair value for fixed income securities are as follows:

($ in millions)	Amortized		Gross unrealized					Fair
	cost		Gains		Losses			value
September 30, 2016
U.S. government and agencies	$	751	$	65	$	—		$	816
Municipal	2,045		378		(6		)	2,417
Corporate	18,787		1,359		(82		)	20,064
Foreign government	302		39		—			341
Asset-backed securities (“ABS”)	509		3		(13		)	499
Residential mortgage-backed securities (“RMBS”)	319		45		(3		)	361
Commercial mortgage-backed securities (“CMBS”)	272		18		(8		)	282
Redeemable preferred stock	14		2		—			16
Total fixed income securities	$	22,999	$	1,909	$	(112	)	$	24,796
December 31, 2015
U.S. government and agencies	$	920	$	57	$	—		$	977
Municipal	2,162		292		(12		)	2,442
Corporate	18,069		849		(414		)	18,504
Foreign government	348		36		—			384
ABS	1,443		5		(28		)	1,420
RMBS	406		49		(4		)	451
CMBS	409		31		(4		)	436
Redeemable preferred stock	13		2		—			15
Total fixed income securities	$	23,770	$	1,321	$	(462	)	$	24,629

7

Scheduled maturities

The scheduled maturities for fixed income securities are as follows as of September 30, 2016:

($ in millions)	Amortized cost		Fair value
Due in one year or less	$	1,026	$	1,043
Due after one year through five years	8,224		8,712
Due after five years through ten years	8,085		8,568
Due after ten years	4,564		5,331
	21,899		23,654
ABS, RMBS and CMBS	1,100		1,142
Total	$	22,999	$	24,796

Actual maturities may differ from those scheduled as a result of calls and make-whole payments by the issuers. ABS, RMBS and CMBS are shown separately because of the potential for prepayment of principal prior to contractual maturity dates.

Net investment income

Net investment income is as follows:

($ in millions)	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
Fixed income securities	$	268		$	300		$	812		$	960
Mortgage loans	50			46			144			147
Equity securities	10			6			31			19
Limited partnership interests	67			105			196			250
Short-term investments	1			1			4			2
Policy loans	8			9			24			26
Other	21			19			65			55
Investment income, before expense	425			486			1,276			1,459
Investment expense	(17		)	(13		)	(52		)	(42		)
Net investment income	$	408		$	473		$	1,224		$	1,417

Realized capital gains and losses

Realized capital gains and losses by asset type are as follows:

($ in millions)	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
Fixed income securities	$	(17	)	$	256		$	(42	)	$	370
Mortgage loans	—			1			1			2
Equity securities	3			(58		)	(31		)	(10		)
Limited partnership interests	(1		)	(20		)	12			(18		)
Derivatives	(1		)	15			(2		)	21
Other	(3		)	(5		)	(4		)	(6		)
Realized capital gains and losses	$	(19	)	$	189		$	(66	)	$	359

Realized capital gains and losses by transaction type are as follows:

($ in millions)	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
Impairment write-downs	$	(37	)	$	(17	)	$	(79	)	$	(29	)
Change in intent write-downs	(2		)	(50		)	(9		)	(57		)
Net other-than-temporary impairment losses recognized in earnings	(39		)	(67		)	(88		)	(86		)
Sales and other	21			241			27			427
Valuation and settlements of derivative instruments	(1		)	15			(5		)	18
Realized capital gains and losses	$	(19	)	$	189		$	(66	)	$	359

8

Gross gains of $28 million and $308 million and gross losses of $18 million and $46 million were realized on sales of fixed income and equity securities during the three months ended September 30, 2016 and 2015, respectively. Gross gains of $134 million and $524 million and gross losses of $129 million and $84 million were realized on sales of fixed income and equity securities during the nine months ended September 30, 2016 and 2015, respectively.

Other-than-temporary impairment losses by asset type are as follows:

($ in millions)	Three months ended September 30, 2016								Three months ended September 30, 2015
	Gross			Included in OCI		Net			Gross			Included in OCI		Net
Fixed income securities:
Corporate	$	(12	)	$	—	$	(12	)	$	(4	)	$	—	$	(4	)
ABS	—			—		—			(8		)	6		(2		)
CMBS	(3		)	—		(3		)	(1		)	—		(1		)
Total fixed income securities	(15		)	—		(15		)	(13		)	6		(7		)
Equity securities	(9		)	—		(9		)	(58		)	—		(58		)
Limited partnership interests	(12		)	—		(12		)	—			—		—
Other	(3		)	—		(3		)	(2		)	—		(2		)
Other-than-temporary impairment losses	$	(39	)	$	—	$	(39	)	$	(73	)	$	6	$	(67	)
	Nine months ended September 30, 2016								Nine months ended September 30, 2015
	Gross			Included in OCI		Net			Gross			Included in OCI		Net
Fixed income securities:
Corporate	$	(23	)	$	6	$	(17	)	$	(11	)	$	3	$	(8	)
ABS	(4		)	—		(4		)	(10		)	6		(4		)
CMBS	(7		)	1		(6		)	(1		)	—		(1		)
Total fixed income securities	(34		)	7		(27		)	(22		)	9		(13		)
Equity securities	(51		)	—		(51		)	(68		)	—		(68		)
Limited partnership interests	(6		)	—		(6		)	(2		)	—		(2		)
Other	(4		)	—		(4		)	(3		)	—		(3		)
Other-than-temporary impairment losses	$	(95	)	$	7	$	(88	)	$	(95	)	$	9	$	(86	)

The total amount of other-than-temporary impairment losses included in accumulated other comprehensive income at the time of impairment for fixed income securities, which were not included in earnings, are presented in the following table. The amounts exclude $134 million and $138 million as of September 30, 2016 and December 31, 2015, respectively, of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.

($ in millions)	September 30, 2016			December 31, 2015
Municipal	$	(5	)	$	(5	)
Corporate	(5		)	(2		)
ABS	(11		)	(12		)
RMBS	(45		)	(49		)
CMBS	(7		)	(6		)
Total	$	(73	)	$	(74	)

9

Rollforwards of the cumulative credit losses recognized in earnings for fixed income securities held as of the end of the period are as follows:

($ in millions)	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
Beginning balance	$	(168	)	$	(206	)	$	(200	)	$	(209	)
Additional credit loss for securities previously other-than-temporarily impaired	(3		)	(3		)	(8		)	(5		)
Additional credit loss for securities not previously other-than-temporarily impaired	(12		)	(4		)	(19		)	(8		)
Reduction in credit loss for securities disposed or collected	4			13			48			20
Change in credit loss due to accretion of increase in cash flows	—			—			—			2
Ending balance	$	(179	)	$	(200	)	$	(179	)	$	(200	)

The Company uses its best estimate of future cash flows expected to be collected from the fixed income security, discounted at the security’s original or current effective rate, as appropriate, to calculate a recovery value and determine whether a credit loss exists. The determination of cash flow estimates is inherently subjective and methodologies may vary depending on facts and circumstances specific to the security. All reasonably available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable assumptions and forecasts, are considered when developing the estimate of cash flows expected to be collected. That information generally includes, but is not limited to, the remaining payment terms of the security, prepayment speeds, foreign exchange rates, the financial condition and future earnings potential of the issue or issuer, expected defaults, expected recoveries, the value of underlying collateral, vintage, geographic concentration of underlying collateral, available reserves or escrows, current subordination levels, third party guarantees and other credit enhancements. Other information, such as industry analyst reports and forecasts, sector credit ratings, financial condition of the bond insurer for insured fixed income securities, and other market data relevant to the realizability of contractual cash flows, may also be considered. The estimated fair value of collateral will be used to estimate recovery value if the Company determines that the security is dependent on the liquidation of collateral for ultimate settlement. If the estimated recovery value is less than the amortized cost of the security, a credit loss exists and an other-than-temporary impairment for the difference between the estimated recovery value and amortized cost is recorded in earnings. The portion of the unrealized loss related to factors other than credit remains classified in accumulated other comprehensive income. If the Company determines that the fixed income security does not have sufficient cash flow or other information to estimate a recovery value for the security, the Company may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings.

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Unrealized net capital gains and losses

Unrealized net capital gains and losses included in accumulated other comprehensive income are as follows:

($ in millions)	Fair value		Gross unrealized					Unrealized net gains (losses)
September 30, 2016			Gains		Losses
Fixed income securities	$	24,796	$	1,909	$	(112	)	$	1,797
Equity securities	1,573		116		(42		)	74
Short-term investments	700		—		—			—
Derivative instruments (1)	4		4		—			4
Equity method (“EMA”) limited partnerships (2)								(2		)
Unrealized net capital gains and losses, pre-tax								1,873
Amounts recognized for:
Insurance reserves(3)								—
DAC and DSI(4)								(211		)
Amounts recognized								(211		)
Deferred income taxes								(587		)
Unrealized net capital gains and losses, after-tax								$	1,075

_______________

⁽¹⁾  Included in the fair value of derivative instruments is $(4) million classified as liabilities.

⁽²⁾  Unrealized net capital gains and losses for limited partnership interests represent the Company’s share of EMA limited partnerships’ other comprehensive income. Fair value and gross unrealized gains and losses are not applicable.

⁽³⁾  The insurance reserves adjustment represents the amount by which the reserve balance would increase if the net unrealized gains in the applicable product portfolios were realized and reinvested at current lower interest rates, resulting in a premium deficiency. Although the Company evaluates premium deficiencies on the combined performance of life insurance and immediate annuities with life contingencies, the adjustment, if any, primarily relates to structured settlement annuities with life contingencies, in addition to annuity buy-outs and certain payout annuities with life contingencies.

⁽⁴⁾  The DAC and DSI adjustment balance represents the amount by which the amortization of DAC and DSI would increase or decrease if the unrealized gains or losses in the respective product portfolios were realized.

($ in millions)	Fair value		Gross unrealized					Unrealized net gains (losses)
December 31, 2015			Gains		Losses
Fixed income securities	$	24,629	$	1,321	$	(462	)	$	859
Equity securities	1,542		76		(60		)	16
Short-term investments	816		—		—			—
Derivative instruments(1)	10		10		—			10
EMA limited partnerships								(2		)
Unrealized net capital gains and losses, pre-tax								883
Amounts recognized for:
Insurance reserves								—
DAC and DSI								(62		)
Amounts recognized								(62		)
Deferred income taxes								(293		)
Unrealized net capital gains and losses, after-tax								$	528

_______________

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

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Change in unrealized net capital gains and losses

The change in unrealized net capital gains and losses for the nine months ended September 30, 2016 is as follows:

($ in millions)
Fixed income securities	$	938
Equity securities	58
Derivative instruments	(6		)
EMA limited partnerships	—
Total	990
Amounts recognized for:
Insurance reserves	—
DAC and DSI	(149		)
Amounts recognized	(149		)
Deferred income taxes	(294		)
Increase in unrealized net capital gains and losses, after-tax	$	547

Portfolio monitoring

The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed income and equity security whose carrying value may be other-than-temporarily impaired.

For each fixed income security in an unrealized loss position, the Company assesses whether management with the appropriate authority has made the decision to sell or whether it is more likely than not the Company will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes. If a security meets either of these criteria, the security’s decline in fair value is considered other than temporary and is recorded in earnings.

If the Company has not made the decision to sell the fixed income security and it is not more likely than not the Company will be required to sell the fixed income security before recovery of its amortized cost basis, the Company evaluates whether it expects to receive cash flows sufficient to recover the entire amortized cost basis of the security. The Company calculates the estimated recovery value by discounting the best estimate of future cash flows at the security’s original or current effective rate, as appropriate, and compares this to the amortized cost of the security. If the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the fixed income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss related to other factors recognized in other comprehensive income.

For equity securities, the Company considers various factors, including whether it has the intent and ability to hold the equity security for a period of time sufficient to recover its cost basis. Where the Company lacks the intent and ability to hold to recovery, or believes the recovery period is extended, the equity security’s decline in fair value is considered other than temporary and is recorded in earnings.

For fixed income and equity securities managed by third parties, either the Company has contractually retained its decision making authority as it pertains to selling securities that are in an unrealized loss position or it recognizes any unrealized loss at the end of the period through a charge to earnings.

The Company’s portfolio monitoring process includes a quarterly review of all securities to identify instances where the fair value of a security compared to its amortized cost (for fixed income securities) or cost (for equity securities) is below established thresholds. The process also includes the monitoring of other impairment indicators such as ratings, ratings downgrades and payment defaults. The securities identified, in addition to other securities for which the Company may have a concern, are evaluated for potential other-than-temporary impairment using all reasonably available information relevant to the collectability or recovery of the security. Inherent in the Company’s evaluation of other-than-temporary impairment for these fixed income and equity securities are assumptions and estimates about the financial condition and future earnings potential of the issue or issuer. Some of the factors that may be considered in evaluating whether a decline in fair value is other than temporary are: 1) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; 2) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity; and 3) the length of time and extent to which the fair value has been less than amortized cost or cost.

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

($ in millions)	Less than 12 months						12 months or more						Total unrealized losses
	Number of issues	Fair value		Unrealized losses			Number of issues	Fair value		Unrealized losses
September 30, 2016
Fixed income securities
U.S. government and agencies	10	$	258	$	—		—	$	—	$	—		$	—
Municipal	2	—		—			3	18		(6		)	(6		)
Corporate	172	1,141		(17		)	75	493		(65		)	(82		)
ABS	9	68		—			16	92		(13		)	(13		)
RMBS	32	1		—			49	40		(3		)	(3		)
CMBS	16	93		(7		)	3	8		(1		)	(8		)
Total fixed income securities	241	1,561		(24		)	146	651		(88		)	(112		)
Equity securities	183	255		(29		)	61	71		(13		)	(42		)
Total fixed income and equity securities	424	$	1,816	$	(53	)	207	$	722	$	(101	)	$	(154	)
Investment grade fixed income securities	150	$	1,126	$	(7	)	79	$	389	$	(56	)	$	(63	)
Below investment grade fixed income securities	91	435		(17		)	67	262		(32		)	(49		)
Total fixed income securities	241	$	1,561	$	(24	)	146	$	651	$	(88	)	$	(112	)
December 31, 2015
Fixed income securities
U.S. government and agencies	6	$	91	$	—		—	$	—	$	—		$	—
Municipal	15	125		(3		)	5	25		(9		)	(12		)
Corporate	953	5,315		(281		)	78	568		(133		)	(414		)
Foreign government	1	2		—			—	—		—			—
ABS	81	1,152		(11		)	16	154		(17		)	(28		)
RMBS	38	7		—			40	53		(4		)	(4		)
CMBS	12	75		(2		)	1	2		(2		)	(4		)
Total fixed income securities	1,106	6,767		(297		)	140	802		(165		)	(462		)
Equity securities	279	543		(49		)	32	56		(11		)	(60		)
Total fixed income and equity securities	1,385	$	7,310	$	(346	)	172	$	858	$	(176	)	$	(522	)
Investment grade fixed income securities	780	$	5,429	$	(175	)	82	$	503	$	(90	)	$	(265	)
Below investment grade fixed income securities	326	1,338		(122		)	58	299		(75		)	(197		)
Total fixed income securities	1,106	$	6,767	$	(297	)	140	$	802	$	(165	)	$	(462	)

As of September 30, 2016, $75 million of the $154 million unrealized losses are related to securities with an unrealized loss position less than 20% of amortized cost or cost, the degree of which suggests that these securities do not pose a high risk of being other-than-temporarily impaired.  Of the $75 million, $29 million are related to unrealized losses on investment grade fixed income securities and $24 million are related to equity securities. Of the remaining $22 million, $7 million have been in an unrealized loss position for less than 12 months. Investment grade is defined as a security having a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A or BBB from Standard and Poor’s (“S&P”), a comparable rating from another nationally recognized rating agency, or a comparable internal rating if an externally provided rating is not available. Market prices for certain securities may have credit spreads which imply higher or lower credit quality than the current third party rating. Unrealized losses on investment grade securities are principally related to an increase in market yields which may include increased risk-free interest rates and/or wider credit spreads since the time of initial purchase.

As of September 30, 2016, the remaining $79 million of unrealized losses are related to securities in unrealized loss positions greater than or equal to 20% of amortized cost or cost. Investment grade fixed income securities comprising $34 million of these unrealized losses were evaluated based on factors such as discounted cash flows and the financial condition and near-term and long-term prospects of the issue or issuer and were determined to have adequate resources to fulfill contractual obligations. Of the $79 million, $27 million are related to below investment grade fixed income securities and $18 million are related to equity securities. Of these amounts, $14 million are related to below investment grade fixed income securities that had been in an unrealized loss position greater than or equal to 20% of amortized cost for a period of twelve or more consecutive months as of September 30, 2016.

ABS, RMBS and CMBS in an unrealized loss position were evaluated based on actual and projected collateral losses relative to the securities’ positions in the respective securitization trusts, security specific expectations of cash flows, and credit ratings. This evaluation also takes into consideration credit enhancement, measured in terms of (i) subordination from other classes of

13

securities in the trust that are contractually obligated to absorb losses before the class of security the Company owns, (ii) the expected impact of other structural features embedded in the securitization trust beneficial to the class of securities the Company owns, such as overcollateralization and excess spread, and (iii) for ABS and RMBS in an unrealized loss position, credit enhancements from reliable bond insurers, where applicable. Municipal bonds in an unrealized loss position were evaluated based on the underlying credit quality of the primary obligor, obligation type and quality of the underlying assets. Unrealized losses on equity securities are primarily related to temporary equity market fluctuations of securities that are expected to recover.

As of September 30, 2016, the Company has not made the decision to sell and it is not more likely than not the Company will be required to sell fixed income securities with unrealized losses before recovery of the amortized cost basis. As of September 30, 2016, the Company had the intent and ability to hold equity securities with unrealized losses for a period of time sufficient for them to recover.

Limited partnerships

As of September 30, 2016 and December 31, 2015, the carrying value of equity method limited partnerships totaled $2.05 billion and $1.77 billion, respectively.  The Company recognizes an impairment loss for equity method limited partnerships when evidence demonstrates that the loss is other than temporary. Evidence of a loss in value that is other than temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment.

As of September 30, 2016 and December 31, 2015, the carrying value for cost method limited partnerships was $632 million and $530 million, respectively. To determine if an other-than-temporary impairment has occurred, the Company evaluates whether an impairment indicator has occurred in the period that may have a significant adverse effect on the carrying value of the investment. Impairment indicators may include: significantly reduced valuations of the investments held by the limited partnerships; actual recent cash flows received being significantly less than expected cash flows; reduced valuations based on financing completed at a lower value; completed sale of a material underlying investment at a price significantly lower than expected; or any other adverse events since the last financial statements received that might affect the fair value of the investee’s capital. Additionally, the Company’s portfolio monitoring process includes a quarterly review of all cost method limited partnerships to identify instances where the net asset value is below established thresholds for certain periods of time, as well as investments that are performing below expectations, for further impairment consideration. If a cost method limited partnership is other-than-temporarily impaired, the carrying value is written down to fair value, generally estimated to be equivalent to the reported net asset value.

Mortgage loans

Mortgage loans are evaluated for impairment on a specific loan basis through a quarterly credit monitoring process and review of key credit quality indicators. Mortgage loans are considered impaired when it is probable that the Company will not collect the contractual principal and interest. Valuation allowances are established for impaired loans to reduce the carrying value to the fair value of the collateral less costs to sell or the present value of the loan’s expected future repayment cash flows discounted at the loan’s original effective interest rate. Impaired mortgage loans may not have a valuation allowance when the fair value of the collateral less costs to sell is higher than the carrying value. Valuation allowances are adjusted for subsequent changes in the fair value of the collateral less costs to sell or present value of the loan’s expected future repayment cash flows. Mortgage loans are charged off against their corresponding valuation allowances when there is no reasonable expectation of recovery. The impairment evaluation is non-statistical in respect to the aggregate portfolio but considers facts and circumstances attributable to each loan. It is not considered probable that additional impairment losses, beyond those identified on a specific loan basis, have been incurred as of September 30, 2016.

Accrual of income is suspended for mortgage loans that are in default or when full and timely collection of principal and interest payments is not probable. Cash receipts on mortgage loans on nonaccrual status are generally recorded as a reduction of carrying value.

Debt service coverage ratio is considered a key credit quality indicator when mortgage loans are evaluated for impairment. Debt service coverage ratio represents the amount of estimated cash flows from the property available to the borrower to meet principal and interest payment obligations. Debt service coverage ratio estimates are updated annually or more frequently if conditions are warranted based on the Company’s credit monitoring process.

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The following table reflects the carrying value of non-impaired fixed rate mortgage loans summarized by debt service coverage ratio distribution.

($ in millions)	September 30, 2016		December 31, 2015
Below 1.0	$	52	$	55
1.0 - 1.25	317		357
1.26 - 1.50	1,102		1,120
Above 1.50	2,378		2,243
Total non-impaired mortgage loans	$	3,849	$	3,775

Mortgage loans with a debt service coverage ratio below 1.0 that are not considered impaired primarily relate to instances where the borrower has the financial capacity to fund the revenue shortfalls from the properties for the foreseeable term, the decrease in cash flows from the properties is considered temporary, or there are other risk mitigating circumstances such as additional collateral, escrow balances or borrower guarantees.

The net carrying value of impaired mortgage loans is as follows:

($ in millions)	September 30, 2016		December 31, 2015
Impaired mortgage loans with a valuation allowance	$	6	$	6
Impaired mortgage loans without a valuation allowance	—		—
Total impaired mortgage loans	$	6	$	6
Valuation allowance on impaired mortgage loans	$	3	$	3

The average balance of impaired loans was $6 million and $12 million for the nine months ended September 30, 2016 and 2015, respectively.

The rollforward of the valuation allowance on impaired mortgage loans is as follows:

($ in millions)	Three months ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
Beginning balance	$	3	$	7	$	3	$	8
Charge offs	—		—		—		(1		)
Ending balance	$	3	$	7	$	3	$	7

Payments on all mortgage loans were current as of September 30, 2016 and December 31, 2015.

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4. Fair Value of Assets and Liabilities

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Assets and liabilities recorded on the Condensed Consolidated Statements of Financial Position at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows:

Level 1: Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access.

Level 2: Assets and liabilities whose values are based on the following:

(a) Quoted prices for similar assets or liabilities in active markets;

(b) Quoted prices for identical or similar assets or liabilities in markets that are not active; or

(c) Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Unobservable inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the assets and liabilities.

The availability of observable inputs varies by instrument. In situations where fair value is based on internally developed pricing models or inputs that are unobservable in the market, the determination of fair value requires more judgment. The degree of judgment exercised by the Company in determining fair value is typically greatest for instruments categorized in Level 3. In many instances, valuation inputs used to measure fair value fall into different levels of the fair value hierarchy. The category level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments.

The Company is responsible for the determination of fair value and the supporting assumptions and methodologies. The Company gains assurance that assets and liabilities are appropriately valued through the execution of various processes and controls designed to ensure the overall reasonableness and consistent application of valuation methodologies, including inputs and assumptions, and compliance with accounting standards. For fair values received from third parties or internally estimated, the Company’s processes and controls are designed to ensure that the valuation methodologies are appropriate and consistently applied, the inputs and assumptions are reasonable and consistent with the objective of determining fair value, and the fair values are accurately recorded. For example, on a continuing basis, the Company assesses the reasonableness of individual fair values that have stale security prices or that exceed certain thresholds as compared to previous fair values received from valuation service providers or brokers or derived from internal models. The Company performs procedures to understand and assess the methodologies, processes and controls of valuation service providers. In addition, the Company may validate the reasonableness of fair values by comparing information obtained from valuation service providers or brokers to other third party valuation sources for selected securities. The Company performs ongoing price validation procedures such as back-testing of actual sales, which corroborate the various inputs used in internal models to market observable data. When fair value determinations are expected to be more variable, the Company validates them through reviews by members of management who have relevant expertise and who are independent of those charged with executing investment transactions.

The Company has two types of situations where investments are classified as Level 3 in the fair value hierarchy. The first is where specific inputs significant to the fair value estimation models are not market observable. This primarily occurs in the Company’s use of broker quotes to value certain securities where the inputs have not been corroborated to be market observable, and the use of valuation models that use significant non-market observable inputs.

The second situation where the Company classifies securities in Level 3 is where quotes continue to be received from independent third-party valuation service providers and all significant inputs are market observable; however, there has been a significant decrease in the volume and level of activity for the asset when compared to normal market activity such that the degree of market observability has declined to a point where categorization as a Level 3 measurement is considered appropriate. The indicators considered in determining whether a significant decrease in the volume and level of activity for a specific asset has occurred include the level of new issuances in the primary market, trading volume in the secondary market, the level of credit spreads over historical levels, applicable bid-ask spreads, and price consensus among market participants and other pricing sources.

Certain assets are not carried at fair value on a recurring basis, including investments such as mortgage loans, limited partnership interests, bank loans, agent loans and policy loans. Accordingly, such investments are only included in the fair value hierarchy disclosure when the investment is subject to remeasurement at fair value after initial recognition and the resulting remeasurement is reflected in the condensed consolidated financial statements. In addition, derivatives embedded in fixed income securities are not disclosed in the hierarchy as free-standing derivatives since they are presented with the host contracts in fixed income securities.

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In determining fair value, the Company principally uses the market approach which generally utilizes market transaction data for the same or similar instruments. To a lesser extent, the Company uses the income approach which involves determining fair values from discounted cash flow methodologies. For the majority of Level 2 and Level 3 valuations, a combination of the market and income approaches is used.

Summary of significant valuation techniques for assets and liabilities measured at fair value on a recurring basis

Level 1 measurements

• Fixed income securities: Comprise certain U.S. Treasury fixed income securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.

• Equity securities: Comprise actively traded, exchange-listed equity securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.

• Short-term: Comprise U.S. Treasury bills valued based on unadjusted quoted prices for identical assets in active markets that the Company can access and actively traded money market funds that have daily quoted net asset values for identical assets that the Company can access.

• Separate account assets: Comprise actively traded mutual funds that have daily quoted net asset values for identical assets that the Company can access. Net asset values for the actively traded mutual funds in which the separate account assets are invested are obtained daily from the fund managers.

Level 2 measurements

• Fixed income securities:

U.S. government and agencies: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.

Municipal: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.

Corporate - public: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.

Corporate - privately placed: Valued using a discounted cash flow model that is widely accepted in the financial services industry and uses market observable inputs and inputs derived principally from, or corroborated by, observable market data. The primary inputs to the discounted cash flow model include an interest rate yield curve, as well as published credit spreads for similar assets in markets that are not active that incorporate the credit quality and industry sector of the issuer.

Foreign government: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.

ABS - collateralized debt obligations (“CDO”) and ABS - consumer and other: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads. Certain ABS - CDO and ABS - consumer and other are valued based on non-binding broker quotes whose inputs have been corroborated to be market observable.

RMBS: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads.

CMBS: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, collateral performance and credit spreads.

Redeemable preferred stock: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, underlying stock prices and credit spreads.

• Equity securities:The primary inputs to the valuation include quoted prices or quoted net asset values for identical or similar assets in markets that are not active.

• Short-term: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.  For certain short-term investments, amortized cost is used as the best estimate of fair value.

• 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.

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OTC derivatives, including interest rate swaps, foreign currency swaps, foreign exchange forward contracts, certain options and certain credit default swaps, are valued using models that rely on inputs such as interest rate yield curves, currency rates, and counterparty credit spreads that are observable for substantially the full term of the contract. The valuation techniques underlying the models are widely accepted in the financial services industry and do not involve significant judgment.

Level 3 measurements

• Fixed income securities:

Municipal: Comprise municipal bonds that are not rated by third party credit rating agencies.  The primary inputs to the valuation of these municipal bonds include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields and credit spreads. Also included are municipal bonds valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable and municipal bonds in default valued based on the present value of expected cash flows.

Corporate - public and Corporate - privately placed: Primarily valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable. Other inputs include an interest rate yield curve, as well as published credit spreads for similar assets that incorporate the credit quality and industry sector of the issuer.

ABS - CDO, ABS - consumer and other, and CMBS: Valued based on non-binding broker quotes received from brokers who are familiar with the investments and where the inputs have not been corroborated to be market observable.

• Equity securities: The primary inputs to the valuation include quoted prices or quoted net asset values for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements.

• Other investments: Certain OTC derivatives, such as interest rate caps, certain credit default swaps and certain options (including swaptions), are valued using models that are widely accepted in the financial services industry. These are categorized as Level 3 as a result of the significance of non-market observable inputs such as volatility. Other primary inputs include interest rate yield curves and credit spreads.

• Contractholder funds: Derivatives embedded in certain life and annuity contracts are valued internally using models widely accepted in the financial services industry that determine a single best estimate of fair value for the embedded derivatives within a block of contractholder liabilities. The models primarily use stochastically determined cash flows based on the contractual elements of embedded derivatives, projected option cost and applicable market data, such as interest rate yield curves and equity index volatility assumptions. These are categorized as Level 3 as a result of the significance of non-market observable inputs.

Assets and liabilities measured at fair value on a non-recurring basis

Mortgage loans written-down to fair value in connection with recognizing impairments are valued based on the fair value of the underlying collateral less costs to sell. Limited partnership interests written-down to fair value in connection with recognizing other-than-temporary impairments are generally valued using net asset values.

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The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2016.

($ in millions)	Quoted prices in active markets for identical assets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)			Counterparty and cash collateral netting			Balance as of September 30, 2016
Assets
Fixed income securities:
U.S. government and agencies	$	376		$	440		$	—					$	816
Municipal	—			2,351			66						2,417
Corporate - public	—			13,607			36						13,643
Corporate - privately placed	—			6,179			242						6,421
Foreign government	—			341			—						341
ABS - CDO	—			118			33						151
ABS - consumer and other	—			297			51						348
RMBS	—			361			—						361
CMBS	—			282			—						282
Redeemable preferred stock	—			16			—						16
Total fixed income securities	376			23,992			428						24,796
Equity securities	1,497			2			74						1,573
Short-term investments	134			566			—						700
Other investments: Free-standing derivatives	—			88			1			$	(5	)	84
Separate account assets	3,450			—			—						3,450
Other assets	—			—			1						1
Total recurring basis assets	5,457			24,648			504			(5		)	30,604
Non-recurring basis (1)	—			—			14						14
Total assets at fair value	$	5,457		$	24,648		$	518		$	(5	)	$	30,618
% of total assets at fair value	17.8		%	80.5		%	1.7		%	—		%	100		%
Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	—		$	—		$	(306	)				$	(306	)
Other liabilities: Free-standing derivatives	—			(32		)	(4		)	$	—		(36		)
Total liabilities at fair value	$	—		$	(32	)	$	(310	)	$	—		$	(342	)
% of total liabilities at fair value	—		%	9.4		%	90.6		%	—		%	100		%

 ____________

⁽¹⁾  Includes $10 million of limited partnership interests and $4 million of other investments written-down to fair value in connection with recognizing other-than-temporary impairments.

19

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

($ in millions)	Quoted prices in active markets for identical assets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)			Counterparty and cash collateral netting			Balance as of December 31, 2015
Assets
Fixed income securities:
U.S. government and agencies	$	546		$	431		$	—					$	977
Municipal	—			2,364			78						2,442
Corporate - public	—			12,490			44						12,534
Corporate - privately placed	—			5,523			447						5,970
Foreign government	—			384			—						384
ABS - CDO	—			178			53						231
ABS - consumer and other	—			1,145			44						1,189
RMBS	—			451			—						451
CMBS	—			436			—						436
Redeemable preferred stock	—			15			—						15
Total fixed income securities	546			23,417			666						24,629
Equity securities	1,479			3			60						1,542
Short-term investments	193			623			—						816
Other investments: Free-standing derivatives	—			59			1			$	(11	)	49
Separate account assets	3,639			—			—						3,639
Other assets	1			—			1						2
Total recurring basis assets	5,858			24,102			728			(11		)	30,677
Non-recurring basis (1)	—			—			8						8
Total assets at fair value	$	5,858		$	24,102		$	736		$	(11	)	$	30,685
% of total assets at fair value	19.1		%	78.5		%	2.4		%	—		%	100.0		%
Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	—		$	—		$	(299	)				$	(299	)
Other liabilities: Free-standing derivatives	—			(7		)	(8		)	$	1		(14		)
Total liabilities at fair value	$	—		$	(7	)	$	(307	)	$	1		$	(313	)
% of total liabilities at fair value	—		%	2.2		%	98.1		%	(0.3		)%	100.0		%

____________

⁽¹⁾  Includes $3 million of limited partnership interests and $5 million of other investments written-down to fair value in connection with recognizing other-than-temporary impairments.

The following table summarizes quantitative information about the significant unobservable inputs used in Level 3 fair value measurements.

($ in millions)	Fair value			Valuation technique	Unobservable input	Range	Weighted average
September 30, 2016
Derivatives embedded in life and annuity contracts – Equity-indexed and forward starting options	$	(255	)	Stochastic cash flow model	Projected option cost	1.0 - 2.2%	1.75	%
December 31, 2015
Derivatives embedded in life and annuity contracts – Equity-indexed and forward starting options	$	(247	)	Stochastic cash flow model	Projected option cost	1.0 - 2.2%	1.76	%

The embedded derivatives are equity-indexed and forward starting options in certain life and annuity products that provide customers with interest crediting rates based on the performance of the S&P 500. If the projected option cost increased (decreased), it would result in a higher (lower) liability fair value.

As of September 30, 2016 and December 31, 2015, Level 3 fair value measurements of fixed income securities total $428 million and $666 million, respectively, and include $305 million and $577 million, respectively, of securities valued based on non-

20

binding broker quotes where the inputs have not been corroborated to be market observable. The Company does not develop the unobservable inputs used in measuring fair value; therefore, these are not included in the table above. However, an increase (decrease) in credit spreads for fixed income securities valued based on non-binding broker quotes would result in a lower (higher) fair value.

The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the three months ended September 30, 2016.

($ in millions)				Total gains (losses) included in:
	Balance as of June 30, 2016			Net income(1)			OCI			Transfers into Level 3			Transfers out of Level 3
Assets
Fixed income securities:
Municipal	$	70		$	1		$	(1	)	$	—		$	—
Corporate - public	41			—			—			—			(6		)
Corporate - privately placed	474			—			2			—			(211		)
ABS - CDO	33			—			2			—			—
ABS - consumer and other	44			—			—			—			—
Total fixed income securities	662			1			3			—			(217		)
Equity securities	52			—			—			—			—
Free-standing derivatives, net	(7		)	4			—			—			—
Other assets	1			—			—			—			—
Total recurring Level 3 assets	$	708		$	5		$	3		$	—		$	(217	)
Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	(304	)	$	(2	)	$	—		$	—		$	—
Total recurring Level 3 liabilities	$	(304	)	$	(2	)	$	—		$	—		$	—
	Purchases			Sales			Issues			Settlements			Balance as of September 30, 2016
Assets
Fixed income securities:
Municipal	$	—		$	(4	)	$	—		$	—		$	66
Corporate - public	3			(2		)	—			—			36
Corporate - privately placed	1			—			—			(24		)	242
ABS - CDO	—			—			—			(2		)	33
ABS - consumer and other	7			—			—			—			51
Total fixed income securities	11			(6		)	—			(26		)	428
Equity securities	22			—			—			—			74
Free-standing derivatives, net	—			—			—			—			(3		)	(2)
Other assets	—			—			—			—			1
Total recurring Level 3 assets	$	33		$	(6	)	$	—		$	(26	)	$	500
Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	—		$	—		$	(1	)	$	1		$	(306	)
Total recurring Level 3 liabilities	$	—		$	—		$	(1	)	$	1		$	(306	)

 ____________

⁽¹⁾  The effect to net income totals $3 million and is reported in the Condensed Consolidated Statements of Operations and Comprehensive Income as follows: $3 million in realized capital gains and losses, $2 million in net investment income, $(5) million in interest credited to contractholder funds and $3 million in contract benefits.

⁽²⁾  Comprises $1 million of assets and $4 million of liabilities.

21

The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the nine months ended September 30, 2016.

($ in millions)				Total gains (losses) included in:
	Balance as of December 31, 2015			Net income(1)			OCI			Transfers into Level 3			Transfers out of Level 3
Assets
Fixed income securities:
Municipal	$	78		$	12		$	(6	)	$	6		$	—
Corporate - public	44			—			1			1			(13		)
Corporate - privately placed	447			4			14			16			(276		)
ABS - CDO	53			—			4			8			(1		)
ABS - consumer and other	44			—			(2		)	3			—
Total fixed income securities	666			16			11			34			(290		)
Equity securities	60			(16		)	3			—			—
Free-standing derivatives, net	(7		)	4			—			—			—
Other assets	1			—			—			—			—
Total recurring Level 3 assets	$	720		$	4		$	14		$	34		$	(290	)
Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	(299	)	$	(10	)	$	—		$	—		$	—
Total recurring Level 3 liabilities	$	(299	)	$	(10	)	$	—		$	—		$	—
	Purchases			Sales			Issues			Settlements			Balance as of September 30, 2016
Assets
Fixed income securities:
Municipal	$	—		$	(24	)	$	—		$	—		$	66
Corporate - public	6			(2		)	—			(1		)	36
Corporate - privately placed	68			—			—			(31		)	242
ABS - CDO	—			(1		)	—			(30		)	33
ABS - consumer and other	7			—			—			(1		)	51
Total fixed income securities	81			(27		)	—			(63		)	428
Equity securities	27			—			—			—			74
Free-standing derivatives, net	—			—			—			—			(3		)	(2)
Other assets	—			—			—			—			1
Total recurring Level 3 assets	$	108		$	(27	)	$	—		$	(63	)	$	500
Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	—		$	—		$	(2	)	$	5		$	(306	)
Total recurring Level 3 liabilities	$	—		$	—		$	(2	)	$	5		$	(306	)

 ____________

⁽¹⁾  The effect to net income totals $(6) million and is reported in the Condensed Consolidated Statements of Operations and Comprehensive Income as follows: $(5) million in realized capital gains and losses, $9 million in net investment income, $(11) million in interest credited to contractholder funds and $1 million in contract benefits.

⁽²⁾  Comprises $1 million of assets and $4 million of liabilities.

22

The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the three months ended September 30, 2015.

($ in millions)				Total gains (losses) included in:
	Balance as of June 30, 2015			Net income (1)			OCI			Transfers into Level 3			Transfers out of Level 3
Assets
Fixed income securities:
Municipal	$	101		$	2		$	—		$	—		$	—
Corporate	569			10			(9		)	—			(23		)
ABS	105			—			(1		)	15			—
Total fixed income securities	775			12			(10		)	15			(23		)
Equity securities	46			—			(1		)	—			—
Free-standing derivatives, net	(7		)	(1		)	—			—			—
Other assets	1			—			—			—			—
Total recurring Level 3 assets	$	815		$	11		$	(11	)	$	15		$	(23	)
Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	(315	)	$	19		$	—		$	—		$	—
Total recurring Level 3 liabilities	$	(315	)	$	19		$	—		$	—		$	—
	Purchases			Sales			Issues			Settlements			Balance as of September 30, 2015
Assets
Fixed income securities:
Municipal	$	—		$	(14	)	$	—		$	—		$	89
Corporate	1			(11		)	—			(2		)	535
ABS	27			—			—			(15		)	131
Total fixed income securities	28			(25		)	—			(17		)	755
Equity securities	19			—			—			—			64
Free-standing derivatives, net	—			—			—			—			(8		)	(2)
Other assets	—			—			—			—			1
Total recurring Level 3 assets	$	47		$	(25	)	$	—		$	(17	)	$	812
Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	—		$	—		$	—		$	1		$	(295	)
Total recurring Level 3 liabilities	$	—		$	—		$	—		$	1		$	(295	)

__________

⁽¹⁾  The effect to net income totals $30 million and is reported in the Condensed Consolidated Statements of Operations and Comprehensive Income as follows: $8 million in realized capital gains and losses, $3 million in net investment income, $27 million in interest credited to contractholder funds and $(8) million in contract benefits.

⁽²⁾  Comprises $1 million of assets and $9 millionof liabilities.

23

The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the nine months ended September 30, 2015.

($ in millions)				Total gains (losses)included in:
	Balance as of December 31, 2014			Net income (1)			OCI			Transfers into Level 3			Transfers out of Level 3
Assets
Fixed income securities:
Municipal	$	106		$	3		$	(2	)	$	—		$	—
Corporate	792			11			(15		)	2			(150		)
ABS	129			(1		)	1			21			(27		)
CMBS	1			—			(1		)	—			—
Total fixed income securities	1,028			13			(17		)	23			(177		)
Equity securities	37			—			—			—			—
Free-standing derivatives, net	(7		)	—			—			—			—
Other assets	1			—			—			—			—
Total recurring Level 3 assets	$	1,059		$	13		$	(17	)	$	23		$	(177	)
Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	(323	)	$	24		$	—		$	—		$	—
Total recurring Level 3 liabilities	$	(323	)	$	24		$	—		$	—		$	—
	Purchases			Sales			Issues			Settlements			Balance as of September 30, 2015
Assets
Fixed income securities:
Municipal	$	—		$	(17	)	$	—		$	(1	)	$	89
Corporate	20			(58		)	—			(67		)	535
ABS	27			—			—			(19		)	131
CMBS	—			—			—			—			—
Total fixed income securities	47			(75		)	—			(87		)	755
Equity securities	27			—			—			—			64
Free-standing derivatives, net	—			—			—			(1		)	(8		)	(2)
Other assets	—			—			—			—			1
Total recurring Level 3 assets	$	74		$	(75	)	$	—		$	(88	)	$	812
Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	—		$	—		$	(1	)	$	5		$	(295	)
Total recurring Level 3 liabilities	$	—		$	—		$	(1	)	$	5		$	(295	)

__________

⁽¹⁾  The effect to net income totals $37 million and is reported in the Condensed Consolidated Statements of Operations and Comprehensive Income as follows: $4 million in realized capital gains and losses, $9 million in net investment income, $32 million in interest credited to contractholder funds and $(8) million in contract benefits.

⁽²⁾  Comprises $1 million of assets and $9 million of liabilities.

Transfers between level categorizations may occur due to changes in the availability of market observable inputs, which generally are caused by changes in market conditions such as liquidity, trading volume or bid-ask spreads. Transfers between level categorizations may also occur due to changes in the valuation source. For example, in situations where a fair value quote is not provided by the Company’s independent third-party valuation service provider and as a result the price is stale or has been replaced with a broker quote whose inputs have not been corroborated to be market observable, the security is transferred into Level 3. Transfers in and out of level categorizations are reported as having occurred at the beginning of the quarter in which the transfer occurred. Therefore, for all transfers into Level 3, all realized and changes in unrealized gains and losses in the quarter of transfer are reflected in the Level 3 rollforward table.

There were no transfers between Level 1 and Level 2 during the three months and nine months ended September 30, 2016 or 2015.

24

Transfers into Level 3 during the three months and nine months ended September 30, 2016 and 2015 included situations where a fair value quote was not provided by the Company’s independent third-party valuation service provider and as a result the price was stale or had been replaced with a broker quote where the inputs had not been corroborated to be market observable resulting in the security being classified as Level 3. Transfers out of Level 3 during the three months and nine months ended September 30, 2016 and 2015 included situations where a broker quote was used in the prior period and a fair value quote became available from the Company’s independent third-party valuation service provider in the current period. A quote utilizing the new pricing source was not available as of the prior period, and any gains or losses related to the change in valuation source for individual securities were not significant.

The following table provides the change in unrealized gains and losses included in net income for Level 3 assets and liabilities held as of September 30.

($ in millions)	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
Assets
Fixed income securities:
Municipal	$	1		$	—		$	1		$	—
Corporate	—			3			1			8
ABS	—			—			—			1
Total fixed income securities	1			3			2			9
Equity securities	—			(1		)	(16		)	—
Free-standing derivatives, net	4			(1		)	4			—
Total recurring Level 3 assets	$	5		$	1		$	(10	)	$	9
Liabilities
Contractholder funds: Derivatives embedded in life and annuity contracts	$	(2	)	$	19		$	(10	)	$	24
Total recurring Level 3 liabilities	$	(2	)	$	19		$	(10	)	$	24

The amounts in the table above represent the change in unrealized gains and losses included in net income for the period of time that the asset or liability was determined to be in Level 3. These gains and losses total $3 million for the three months ended September 30, 2016 and are reported as follows: $3 million in realized capital gains and losses, $2 million in net investment income, $(5) million in interest credited to contractholder funds and $3 million in contract benefits. These gains and losses total $20 million for the three months ended September 30, 2015 and are reported as follows: $(2) million in realized capital gains and losses, $3 million in net investment income, $27 million in interest credited to contractholder funds and $(8) million in contract benefits. These gains and losses total $(20) million for the nine months ended September 30, 2016 and are reported as follows: $(19) million in realized capital gains and losses, $9 million in net investment income, $(11) million in interest credited to contractholder funds and $1 million in contract benefits.  These gains and losses total $33 million for the nine months ended September 30, 2015 and are reported as follows: $(2) million in realized capital gains and losses, $11 million in net investment income, $32 million in interest credited to contractholder funds and $(8) million in contract benefits.

Presented below are the carrying values and fair value estimates of financial instruments not carried at fair value.

Financial assets

($ in millions)	September 30, 2016				December 31, 2015
	Carrying value		Fair value		Carrying value		Fair value
Mortgage loans	$	3,855	$	4,017	$	3,781	$	3,920
Cost method limited partnerships	632		724		530		661
Bank loans	477		478		502		493
Agent loans	463		452		422		408
Notes due from related party	325		325		275		275

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

25

credit and liquidity risks. The fair value of notes due from related party, which are reported in other investments, is based on discounted cash flow calculations using current interest rates for instruments with comparable terms. Since the notes may be called at par value, their fair value will not be greater than par value. The fair value measurements for mortgage loans, cost method limited partnerships, bank loans, agent loans, notes due from related party and assets held for sale are categorized as Level 3.

Financial liabilities

($ in millions)	September 30, 2016				December 31, 2015
	Carrying value		Fair value		Carrying value		Fair value
Contractholder funds on investment contracts	$	11,607	$	12,308	$	12,387	$	12,836
Notes due to related parties	325		325		275		275
Liability for collateral	501		501		550		550

The fair value of contractholder funds on investment contracts is based on the terms of the underlying contracts incorporating current market-based crediting rates for similar contracts that reflect the Company’s own credit risk. Deferred annuities classified in contractholder funds are valued based on discounted cash flow models that incorporate current market-based margins and reflect the Company’s own credit risk. Immediate annuities without life contingencies and funding agreements are valued based on discounted cash flow models that incorporate current market-based implied interest rates and reflect the Company’s own credit risk. The fair value measurement for contractholder funds on investment contracts is categorized as Level 3.

The fair value of notes due to related parties is based on discounted cash flow calculations based on current interest rates for instruments with comparable terms and considers the Company’s own credit risk. Since the notes may be called at par value, their fair value will not be greater than par value. The liability for collateral is valued at carrying value due to its short-term nature. The fair value measurement for liability for collateral is categorized as Level 2. The fair value measurement for notes due to related parties is categorized as Level 3.

5. Derivative Financial Instruments

The Company uses derivatives for risk reduction and to increase investment portfolio returns through asset replication. Risk reduction activity is focused on managing the risks with certain assets and liabilities arising from the potential adverse impacts from changes in risk-free interest rates, changes in equity market valuations, increases in credit spreads and foreign currency fluctuations.

The Company utilizes several derivative strategies to manage risk. Asset-liability management is a risk management strategy that is principally employed to balance the respective interest-rate sensitivities of the Company’s assets and liabilities. Depending upon the attributes of the assets acquired and liabilities issued, derivative instruments such as interest rate swaps, caps, swaptions and futures are utilized to change the interest rate characteristics of existing assets and liabilities to ensure the relationship is maintained within specified ranges and to reduce exposure to rising or falling interest rates. Credit default swaps are typically used to mitigate the credit risk within the Company’s fixed income portfolio. Futures and options are used for hedging the equity exposure contained in the Company’s equity indexed life and annuity product contracts that offer equity returns to contractholders. In addition, the Company uses equity index futures to offset valuation losses in the equity portfolio during periods of declining equity market values. Interest rate swaps are used to hedge interest rate risk inherent in funding agreements. Foreign currency swaps and forwards are primarily used by the Company to reduce the foreign currency risk associated with holding foreign currency denominated investments.

Asset replication refers to the “synthetic” creation of assets through the use of derivatives. The Company replicates fixed income securities using a combination of a credit default swap or a foreign currency forward contract and one or more highly rated fixed income securities, primarily investment grade host bonds, to synthetically replicate the economic characteristics of one or more cash market securities. The Company replicates equity securities using futures to increase equity exposure.

The Company also has derivatives embedded in non-derivative host contracts that are required to be separated from the host contracts and accounted for at fair value with changes in fair value of embedded derivatives reported in net income. The Company’s primary embedded derivatives are equity options in life and annuity product contracts, which provide equity returns to contractholders and conversion options in fixed income securities, which provide the Company with the right to convert the instrument into a predetermined number of shares of common stock.

When derivatives meet specific criteria, they may be designated as accounting hedges and accounted for as fair value, cash flow, foreign currency fair value or foreign currency cash flow hedges. The Company designates certain investment risk transfer reinsurance agreements as fair value hedges when the hedging instrument is highly effective in offsetting the risk of changes in the fair value of the hedged item. The Company designates certain of its foreign currency swap contracts as cash flow hedges when the hedging instrument is highly effective in offsetting the exposure of variations in cash flows for the hedged risk that could

26

affect net income. Amounts are reclassified to net investment income or realized capital gains and losses as the hedged item affects net income.

The notional amounts specified in the contracts are used to calculate the exchange of contractual payments under the agreements and are generally not representative of the potential for gain or loss on these agreements. However, the notional amounts specified in credit default swaps where the Company has sold credit protection represent the maximum amount of potential loss, assuming no recoveries.

Fair value, which is equal to the carrying value, is the estimated amount that the Company would receive or pay to terminate the derivative contracts at the reporting date. The carrying value amounts for OTC derivatives are further adjusted for the effects, if any, of enforceable master netting agreements and are presented on a net basis, by counterparty agreement, in the Condensed Consolidated Statements of Financial Position. For certain exchange traded and cleared derivatives, margin deposits are required as well as daily cash settlements of margin accounts. As of September 30, 2016, the Company pledged $8 million of cash in the form of margin deposits.

For those derivatives which qualify for fair value hedge accounting, net income includes the changes in the fair value of both the derivative instrument and the hedged risk, and therefore reflects any hedging ineffectiveness. For cash flow hedges, gains and losses are amortized from accumulated other comprehensive income and are reported in net income in the same period the forecasted transactions being hedged impact net income.

Non-hedge accounting is generally used for “portfolio” level hedging strategies where the terms of the individual hedged items do not meet the strict homogeneity requirements to permit the application of hedge accounting. For non-hedge derivatives, net income includes changes in fair value and accrued periodic settlements, when applicable. With the exception of non-hedge derivatives used for asset replication and non-hedge embedded derivatives, all of the Company’s derivatives are evaluated for their ongoing effectiveness as either accounting hedge or non-hedge derivative financial instruments on at least a quarterly basis.

27

The following table provides a summary of the volume and fair value positions of derivative instruments as well as their reporting location in the Condensed Consolidated Statement of Financial Position as of September 30, 2016.

($ in millions, except number of contracts)		Volume (1)
	Balance sheet location	Notional amount		Number of contracts	Fair value, net			Gross asset		Gross liability
Asset derivatives
Derivatives not designated as accounting hedging instruments
Interest rate contracts
Interest rate cap agreements	Other investments	$	23	n/a	$	—		$	—	$	—
Equity and index contracts
Options	Other investments	—		4,210	83			83		—
Financial futures contracts	Other assets	—		52	—			—		—
Credit default contracts
Credit default swaps – selling protection	Other investments	80		n/a	1			1		—
Other contracts
Other contracts	Other assets	3		n/a	1			1		—
Subtotal		106		4,262	85			85		—
Total asset derivatives		$	106	4,262	$	85		$	85	$	—
Liability derivatives
Derivatives designated as accounting hedging instruments
Foreign currency swap agreements	Other liabilities & accrued expenses	$	49	n/a	$	4		$	4	$	—
Derivatives not designated as accounting hedging instruments
Interest rate contracts
Interest rate swap agreements	Other liabilities & accrued expenses	85		n/a	—			—		—
Interest rate cap agreements	Other liabilities & accrued expenses	44		n/a	1			1		—
Equity and index contracts
Options and futures	Other liabilities & accrued expenses	—		4,627	(26		)	—		(26		)
Foreign currency contracts
Foreign currency forwards	Other liabilities & accrued expenses	173		n/a	(2		)	—		(2		)
Embedded derivative financial instruments
Guaranteed accumulation benefits	Contractholder funds	420		n/a	(38		)	—		(38		)
Guaranteed withdrawal benefits	Contractholder funds	299		n/a	(13		)	—		(13		)
Equity-indexed and forward starting options in life and annuity product contracts	Contractholder funds	1,741		n/a	(255		)	—		(255		)
Other embedded derivative financial instruments	Contractholder funds	85		n/a	—			—		—
Credit default contracts
Credit default swaps – buying protection	Other liabilities & accrued expenses	86		n/a	(4		)	—		(4		)
Credit default swaps – selling protection	Other liabilities & accrued expenses	100		n/a	(4		)	—		(4		)
Subtotal		3,033		4,627	(341		)	1		(342		)
Total liability derivatives		3,082		4,627	(337		)	$	5	$	(342	)
Total derivatives		$	3,188	8,889	$	(252	)

___________

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

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The following table provides a summary of the volume and fair value positions of derivative instruments as well as their reporting location in the Consolidated Statement of Financial Position as of December 31, 2015.

($ in millions, except number of contracts)		Volume(1)
	Balance sheet location	Notional amount		Number of contracts	Fair value, net			Gross asset		Gross liability
Asset derivatives
Derivatives designated as accounting hedging instruments
Foreign currency swap agreements	Other investments	$	45	n/a	$	6		$	6	$	—
Derivatives not designated as accounting hedging instruments
Interest rate contracts
Interest rate cap agreements	Other investments	42		n/a	—			—		—
Equity and index contracts
Options	Other investments	—		3,730	44			44		—
Financial futures contracts	Other assets	—		997	1			1		—
Foreign currency contracts
Foreign currency forwards	Other investments	81		n/a	1			1		—
Credit default contracts
Credit default swaps – buying protection	Other investments	51		n/a	2			3		(1		)
Credit default swaps – selling protection	Other investments	80		n/a	1			1		—
Other contracts
Other contracts	Other assets	3		n/a	1			1		—
Subtotal		257		4,727	50			51		(1		)
Total asset derivatives		$	302	4,727	$	56		$	57	$	(1	)
Liability derivatives
Derivatives designated as accounting hedging instruments
Foreign currency swap agreements	Other liabilities & accrued expenses	$	19	n/a	$	4		$	4	$	—
Derivatives not designated as accounting hedging instruments
Interest rate contracts
Interest rate swap agreements	Other liabilities & accrued expenses	85		n/a	—			—		—
Interest rate cap agreements	Other liabilities & accrued expenses	72		n/a	1			1		—
Equity and index contracts
Options	Other liabilities & accrued expenses	—		3,645	(6		)	—		(6		)
Embedded derivative financial instruments
Guaranteed accumulation benefits	Contractholder funds	481		n/a	(38		)	—		(38		)
Guaranteed withdrawal benefits	Contractholder funds	332		n/a	(14		)	—		(14		)
Equity-indexed and forward starting options in life and annuity product contracts	Contractholder funds	1,781		n/a	(247		)	—		(247		)
Other embedded derivative financial instruments	Contractholder funds	85		n/a	—			—		—
Credit default contracts
Credit default swaps – buying protection	Other liabilities & accrued expenses	2		n/a	—			—		—
Credit default swaps – selling protection	Other liabilities & accrued expenses	100		n/a	(8		)	—		(8		)
Subtotal		2,938		3,645	(312		)	1		(313		)
Total liability derivatives		2,957		3,645	(308		)	$	5	$	(313	)
Total derivatives		$	3,259	8,372	$	(252	)

____________

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

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The following table provides gross and net amounts for the Company’s OTC derivatives, all of which are subject to enforceable master netting agreements.

($ in millions)				Offsets
	Gross amount			Counter- party netting			Cash collateral (received) pledged			Net amount on balance sheet			Securities collateral (received) pledged			Net amount
September 30, 2016
Asset derivatives	$	5		$	(5	)	$	—		$	—		$	—		$	—
Liability derivatives	(8		)	5			(5		)	(8		)	6			(2		)
December 31, 2015
Asset derivatives	$	15		$	(6	)	$	(5	)	$	4		$	(1	)	$	3
Liability derivatives	(9		)	6			(5		)	(8		)	7			(1		)

The following table provides a summary of the impacts of the Company’s foreign currency contracts in cash flow hedging relationships. Amortization of net gains from accumulated other comprehensive income related to cash flow hedges is expected to be a gain of $1 million during the next twelve months. There was no hedge ineffectiveness reported in realized gains and losses for the three months and nine months ended September 30, 2016 or 2015.

($ in millions)	Three months ended September 30,				Nine months ended September 30,
	2016		2015		2016			2015
Gain (loss) recognized in OCI on derivatives during the period	$	—	$	4	$	(2	)	$	11
Gain recognized in OCI on derivatives during the term of the hedging relationship	4		11		4			11
Gain (loss) reclassified from AOCI into income (net investment income)	1		—		1			(1		)
Gain reclassified from AOCI into income (realized capital gains and losses)	—		—		3			3

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The following tables present gains and losses from valuation and settlements reported on derivatives not designated as accounting hedging instruments in the Condensed Consolidated Statements of Operations and Comprehensive Income. For the three months and nine months ended September 30, 2016 and 2015, the Company had no derivatives used in fair value hedging relationships.

($ in millions)	Realized capital gains and losses			Contract benefits			Interest credited to contractholder funds			Total gain (loss) recognized in net income on derivatives
Three months ended September 30, 2016
Equity and index contracts	$	(2	)	$	—		$	14		$	12
Embedded derivative financial instruments	—			3			(5		)	(2		)
Foreign currency contracts	(2		)	—			—			(2		)
Credit default contracts	3			—			—			3
Total	$	(1	)	$	3		$	9		$	11
Nine months ended September 30, 2016
Interest rate contracts	$	(1	)	$	—		$	—		$	(1	)
Equity and index contracts	(3		)	—			9			6
Embedded derivative financial instruments	—			1			(8		)	(7		)
Foreign currency contracts	(3		)	—			—			(3		)
Credit default contracts	2			—			—			2
Total	$	(5	)	$	1		$	1		$	(3	)
Three months ended September 30, 2015
Interest rate contracts	$	(1	)	$	—		$	—		$	(1	)
Equity and index contracts	11			—			(27		)	(16		)
Embedded derivative financial instruments	—			(8		)	28			20
Foreign currency contracts	3			—			—			3
Credit default contracts	2			—			—			2
Other contracts	—			—			(1		)	(1		)
Total	$	15		$	(8	)	$	—		$	7
Nine months ended September 30, 2015
Equity and index contracts	$	10		$	—		$	(23	)	$	(13	)
Embedded derivative financial instruments	—			(8		)	36			28
Foreign currency contracts	5			—			—			5
Credit default contracts	3			—			—			3
Total	$	18		$	(8	)	$	13		$	23

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 September 30, 2016, counterparties pledged $5 million in cash to the Company, and the Company pledged $6 million in securities to counterparties as collateral posted under MNAs for contracts without credit-risk-contingent features. The Company has not incurred any losses on derivative financial instruments due to counterparty nonperformance. Other derivatives, including futures and certain option contracts, are traded on organized exchanges which require margin deposits and guarantee the execution of trades, thereby mitigating any potential credit risk.

Counterparty credit exposure represents the Company’s potential loss if all of the counterparties concurrently fail to perform under the contractual terms of the contracts and all collateral, if any, becomes worthless. This exposure is measured by the fair value of OTC derivative contracts with a positive fair value at the reporting date reduced by the effect, if any, of legally enforceable master netting agreements.

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The following table summarizes the counterparty credit exposure by counterparty credit rating as it relates to the Company’s OTC derivatives.

($ in millions)	September 30, 2016							December 31, 2015
Rating(1)	Number of counter-parties	Notional amount (2)		Credit exposure (2)		Exposure, net of collateral(2)		Number of counter- parties	Notional amount (2)		Credit exposure (2)		Exposure, net of collateral(2)
A+	1	$	63	$	3	$	—	1	$	82	$	5	$	—
A	3	43		1		1		5	178		6		6
A-	—	—		—		—		1	16		3		—
BBB+	1	1		—		—		2	36		—		—
Total	5	$	107	$	4	$	1	9	$	312	$	14	$	6

__________

⁽¹⁾  Rating is the lower of S&P or Moody’s ratings.

⁽²⁾  Only OTC derivatives with a net positive fair value are included for each counterparty.

Market risk is the risk that the Company will incur losses due to adverse changes in market rates and prices. Market risk exists for all of the derivative financial instruments the Company currently holds, as these instruments may become less valuable due to adverse changes in market conditions. To limit this risk, the Company’s senior management has established risk control limits. In addition, changes in fair value of the derivative financial instruments that the Company uses for risk management purposes are generally offset by the change in the fair value or cash flows of the hedged risk component of the related assets, liabilities or forecasted transactions.

Certain of the Company’s derivative instruments contain credit-risk-contingent termination events, cross-default provisions and credit support annex agreements. Credit-risk-contingent termination events allow the counterparties to terminate the derivative agreement or a specific trade on certain dates if AIC’s, ALIC’s or Allstate Life Insurance Company of New York’s (“ALNY”) financial strength credit ratings by Moody’s or S&P fall below a certain level. Credit-risk-contingent cross-default provisions allow the counterparties to terminate the derivative agreement if the Company defaults by pre-determined threshold amounts on certain debt instruments. Credit-risk-contingent credit support annex agreements specify the amount of collateral the Company must post to counterparties based on AIC’s, ALIC’s or ALNY’s financial strength credit ratings by Moody’s or S&P, or in the event AIC, ALIC or ALNY are no longer rated by either Moody’s or S&P.

The following summarizes the fair value of derivative instruments with termination, cross-default or collateral credit-risk-contingent features that are in a liability position, as well as the fair value of assets and collateral that are netted against the liability in accordance with provisions within legally enforceable MNAs.

($ in millions)	September 30, 2016			December 31, 2015
Gross liability fair value of contracts containing credit-risk-contingent features	$	4		$	9
Gross asset fair value of contracts containing credit-risk-contingent features and subject to MNAs	(1		)	(1		)
Collateral posted under MNAs for contracts containing credit-risk-contingent features	—			(7		)
Maximum amount of additional exposure for contracts with credit-risk-contingent features if all features were triggered concurrently	$	3		$	1

Credit derivatives - selling protection

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

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The following table shows the CDS notional amounts by credit rating and fair value of protection sold.

($ in millions)	Notional amount
	AA		A		BBB		BB and lower		Total		Fair value
September 30, 2016
First-to-default Basket
Municipal	$	—	$	—	$	100	$	—	$	100	$	(4	)
Index
Corporate debt	1		19		49		11		80		1
Total	$	1	$	19	$	149	$	11	$	180	$	(3	)
December 31, 2015
First-to-default Basket
Municipal	$	—	$	—	$	100	$	—	$	100	$	(8	)
Index
Corporate debt	1		20		52		7		80		1
Total	$	1	$	20	$	152	$	7	$	180	$	(7	)

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

The Company monitors risk associated with credit derivatives through individual name credit limits at both a credit derivative and a combined cash instrument/credit derivative level. The ratings of individual names for which protection has been sold are also monitored.

6. Reinsurance

The effects of reinsurance on premiums and contract charges are as follows:

($ in millions)	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
Direct	$	178		$	180		$	532		$	546
Assumed
Affiliate	34			33			103			98
Non-affiliate	200			208			605			627
Ceded
Affiliate	(14		)	(13		)	(40		)	(27		)
Non-affiliate	(74		)	(78		)	(218		)	(239		)
Premiums and contract charges, net of reinsurance	$	324		$	330		$	982		$	1,005

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The effects of reinsurance on contract benefits are as follows:

($ in millions)	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
Direct	$	243		$	228		$	756		$	749
Assumed
Affiliate	24			20			65			59
Non-affiliate	130			141			408			411
Ceded
Affiliate	(8		)	(12		)	(26		)	(23		)
Non-affiliate	(22		)	(24		)	(157		)	(139		)
Contract benefits, net of reinsurance	$	367		$	353		$	1,046		$	1,057

The effects of reinsurance on interest credited to contractholder funds are as follows:

($ in millions)	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
Direct	$	147		$	170		$	462		$	486
Assumed
Affiliate	3			2			7			7
Non-affiliate	33			20			85			81
Ceded
Affiliate	(6		)	(5		)	(16		)	(10		)
Non-affiliate	(7		)	(6		)	(18		)	(18		)
Interest credited to contractholder funds, net of reinsurance	$	170		$	181		$	520		$	546

7. Guarantees and Contingent Liabilities

Guarantees

In the normal course of business, the Company provides standard indemnifications to contractual counterparties in connection with numerous transactions, including acquisitions and divestitures. The types of indemnifications typically provided include indemnifications for breaches of representations and warranties, taxes and certain other liabilities, such as third party lawsuits. The indemnification clauses are often standard contractual terms and are entered into in the normal course of business based on an assessment that the risk of loss would be remote. The terms of the indemnifications vary in duration and nature. In many cases, the maximum obligation is not explicitly stated and the contingencies triggering the obligation to indemnify have not occurred and are not expected to occur. Consequently, the maximum amount of the obligation under such indemnifications is not determinable. Historically, the Company has not made any material payments pursuant to these obligations.

Related to the sale of LBL on April 1, 2014, the Company agreed to indemnify Resolution Life Holdings, Inc. in connection with certain representations, warranties and covenants of the Company, and certain liabilities specifically excluded from the transaction, subject to specific contractual limitations regarding the Company’s maximum obligation. Management does not believe these indemnifications will have a material effect on results of operations, cash flows or financial position of the Company.

Related to the disposal through reinsurance of substantially all of the Company’s variable annuity business to Prudential in 2006, the Company and the Corporation have agreed to indemnify Prudential for certain pre-closing contingent liabilities (including extra-contractual liabilities of the Company and liabilities specifically excluded from the transaction) that the Company has agreed to retain. In addition, the Company and the Corporation will each indemnify Prudential for certain post-closing liabilities that may arise from the acts of the Company and its agents, including certain liabilities arising from the Company’s provision of transition services. The reinsurance agreements contain no limitations or indemnifications with regard to insurance risk transfer, and transferred all of the future risks and responsibilities for performance on the underlying variable annuity contracts to Prudential, including those related to benefit guarantees. Management does not believe this agreement will have a material effect on results of operations, cash flows or financial position of the Company.

The aggregate liability balance related to all guarantees was not material as of September 30, 2016.

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

34

amount of investments, impose fines and penalties for unintended errors or mistakes, and otherwise expand overall regulation of insurance products and the insurance industry. In addition, the Company is subject to laws and regulations administered and enforced by federal agencies and other organizations, including but not limited to the Securities and Exchange Commission, the Financial Industry Regulatory Authority, the Department of Labor, and the U.S. Department of Justice. The Company has established procedures and policies to facilitate compliance with laws and regulations, to foster prudent business operations, and to support financial reporting. The Company routinely reviews its practices to validate compliance with laws and regulations and with internal procedures and policies. As a result of these reviews, from time to time the Company may decide to modify some of its procedures and policies. Such modifications, and the reviews that led to them, may be accompanied by payments being made and costs being incurred. The ultimate changes and eventual effects of these actions on the Company’s business, if any, are uncertain.

The Company is currently being examined by certain states for compliance with unclaimed property laws.  It is possible that this examination may result in additional payments of abandoned funds to states and to changes in the Company’s practices and procedures for the identification of escheatable funds, which could impact benefit payments and reserves, among other consequences; however, it is not likely to have a material effect on the condensed consolidated financial statements of the Company.

8. Other Comprehensive Income

The components of other comprehensive income (loss) on a pre-tax and after-tax basis are as follows:

($ in millions)	Three months ended September 30,
	2016									2015
	Pre- tax			Tax			After- tax			Pre- tax			Tax			After- tax
Unrealized net holding gains and losses arising during the period, net of related offsets	$	97		$	(34	)	$	63		$	(286	)	$	224		$	(62	)
Less: reclassification adjustment of realized capital gains and losses	(15		)	5			(10		)	178			62			240
Unrealized net capital gains and losses	112			(39		)	73			(464		)	162			(302		)
Unrealized foreign currency translation adjustments	(4		)	1			(3		)	5			(2		)	3
Other comprehensive income (loss)	$	108		$	(38	)	$	70		$	(459	)	$	160		$	(299	)
	Nine months ended September 30,
	2016									2015
	Pre- tax			Tax			After- tax			Pre- tax			Tax			After- tax
Unrealized net holding gains and losses arising during the period, net of related offsets	$	763		$	(267	)	$	496		$	(726	)	$	496		$	(230	)
Less: reclassification adjustment of realized capital gains and losses	(78		)	27			(51		)	346			121			467
Unrealized net capital gains and losses	841			(294		)	547			(1,072		)	375			(697		)
Unrealized foreign currency translation adjustments	2			(1		)	1			(6		)	2			(4		)
Other comprehensive income (loss)	$	843		$	(295	)	$	548		$	(1,078	)	$	377		$	(701	)

35

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder of

Allstate Life Insurance Company

Northbrook, Illinois 60062

We have reviewed the accompanying condensed consolidated statement of financial position of Allstate Life Insurance Company and subsidiaries (the “Company”), an affiliate of The Allstate Corporation, as of September 30, 2016, and the related condensed consolidated statements of operations and comprehensive income for the three-month and nine-month periods ended September 30, 2016 and 2015, and of shareholder’s equity and cash flows for the nine-month periods ended September 30, 2016 and 2015. These interim financial statements are the responsibility of the Company’s management.

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

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

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

/s/ DELOITTE & TOUCHE LLP

Chicago, Illinois

November 3, 2016

36

Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2016 AND 2015

OVERVIEW

The following discussion highlights significant factors influencing the consolidated financial position and results of operations of Allstate Life Insurance Company (referred to in this document as “we,” “our,” “us,” the “Company” or “ALIC”). It should be read in conjunction with the condensed consolidated financial statements and notes thereto found under Part I. Item 1. contained herein, and with the discussion, analysis, consolidated financial statements and notes thereto in Part I. Item 1. and Part II. Item 7. and Item 8. of the Allstate Life Insurance Company Annual Report on Form 10-K for 2015. We operate as a single segment entity based on the manner in which we use financial information to evaluate business performance and to determine the allocation of resources.

HIGHLIGHTS

• Net income was $65 million and $211 million in the third quarter and first nine months of 2016, respectively, compared to $239 million and $542 million in the third quarter and first nine months of 2015, respectively.

• Premiums and contract charges on underwritten products, including traditional life, interest-sensitive life and accident and health insurance, totaled $320 million in the third quarter of 2016, a decrease of 1.8% from $326 million in the third quarter of 2015, and $972 million in the first nine months of 2016, a decrease of 2.3% from $995 million in the first nine months of 2015.

• Investments totaled $35.65 billion as of September 30, 2016, reflecting an increase of $690 million from $34.96 billion as of December 31, 2015. Net investment income decreased 13.7% to $408 million in the third quarter of 2016 and 13.6% to $1.22 billion in the first nine months of 2016 from $473 million and $1.42 billion in the third quarter and first nine months of 2015, respectively.

• Net realized capital losses totaled $19 million and $66 million in the third quarter and first nine months of 2016, respectively, compared to net realized capital gains of $189 million and $359 million in the third quarter and first nine months of 2015, respectively.

• During third quarter 2016, a $5 million pre-tax charge to income was recorded related to our annual comprehensive review of the deferred policy acquisition costs (“DAC”), deferred sales inducement costs and secondary guarantee liability balances. This compares to a $5 million pre-tax charge to income in the third quarter of 2015.

• Contractholder funds totaled $19.80 billion as of September 30, 2016, reflecting a decrease of $739 million from $20.54 billion as of December 31, 2015.

• Effective April 1, 2015, ALIC entered into a coinsurance reinsurance agreement with Allstate Assurance Company (“AAC”) to cede certain interest-sensitive life insurance policies with contractholder funds totaling $476 million to AAC. This business generated approximately $14 million of contract charges and $9 million of contract benefits per quarter in 2014.

37

OPERATIONS

Summary analysis Summarized financial data is presented in the following table.

($ in millions)	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
Revenues
Premiums	$	147		$	150		$	443		$	448
Contract charges	177			180			539			557
Net investment income	408			473			1,224			1,417
Realized capital gains and losses	(19		)	189			(66		)	359
Total revenues	713			992			2,140			2,781
Costs and expenses
Contract benefits	(367		)	(353		)	(1,046		)	(1,057		)
Interest credited to contractholder funds	(170		)	(181		)	(520		)	(546		)
Amortization of DAC	(24		)	(38		)	(98		)	(116		)
Operating costs and expenses	(56		)	(56		)	(164		)	(211		)
Restructuring and related charges	—			—			(1		)	(2		)
Interest expense	(4		)	(4		)	(11		)	(12		)
Total costs and expenses	(621		)	(632		)	(1,840		)	(1,944		)
Gain on disposition of operations	1			2			4			2
Income tax expense	(28		)	(123		)	(93		)	(297		)
Net income	$	65		$	239		$	211		$	542
Investments as of September 30							$	35,652		$	35,445

Net income was $65 million in the third quarter of 2016 compared to $239 million in the third quarter of 2015. The decrease was primarily due to net realized capital losses in third quarter 2016 compared to net realized capital gains in third quarter 2015 and lower net investment income. Net income was $211 million in the first nine months of 2016 compared to $542 million in the first nine months of 2015. The decrease was primarily due to net realized capital losses in the first nine months of 2016 compared to net realized capital gains in the first nine months of 2015 and lower net investment income, partially offset by lower operating costs and expenses and lower interest credited to contractholder funds.

Analysis of revenues Total revenues decreased 28.1% or $279 million in the third quarter of 2016 and 23.0% or $641 million in the first nine months of 2016 compared to the same periods of 2015, primarily due to net realized capital losses in the current year compared to net realized capital gains in the prior year and lower net investment income.

Premiums represent revenues generated from traditional life insurance, accident and health insurance, and immediate annuities with life contingencies that have significant mortality or morbidity risk.

Contract charges are revenues generated from interest-sensitive and variable life insurance and fixed annuities for which deposits are classified as contractholder funds or separate account liabilities. Contract charges are assessed against the contractholder account values for maintenance, administration, cost of insurance and surrender prior to contractually specified dates.

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The following table summarizes premiums and contract charges by product.

($ in millions)	Three months ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
Underwritten products
Traditional life insurance premiums	$	124	$	129	$	375	$	384
Accident and health insurance premiums	23		21		68		64
Interest-sensitive life insurance contract charges	173		176		529		547
Subtotal	320		326		972		995
Annuities
Immediate annuities with life contingencies premiums	—		—		—		—
Other fixed annuity contract charges	4		4		10		10
Subtotal	4		4		10		10
Premiums and contract charges(1)	$	324	$	330	$	982	$	1,005

____________

⁽¹⁾  Contract charges related to the cost of insurance totaled $122 million for both the third quarter of 2016 and 2015, and $371 million and $380 million in the first nine months of 2016 and 2015, respectively.

Premiums and contract charges decreased 1.8% or $6 million and 2.3% or $23 million in the third quarter and first nine months of 2016, respectively, compared to the same periods of 2015. The decrease in third quarter 2016 was primarily due to lower sales of traditional life insurance, partially offset by lower levels of reinsurance premium ceded. The decrease in the first nine months of 2016 was primarily due to lower interest-sensitive life insurance contract charges related to the reinsurance agreement with AAC effective April 1, 2015 and lower sales of traditional life insurance.

Contractholder funds represent interest-bearing liabilities arising from the sale of products such as interest-sensitive life insurance, fixed annuities and funding agreements. The balance of contractholder funds is equal to the cumulative deposits received and interest credited to the contractholder less cumulative contract benefits, surrenders, withdrawals, maturities and contract charges for mortality or administrative expenses. The following table shows the changes in contractholder funds.

($ in millions)	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
Contractholder funds, beginning balance	$	20,073		$	21,233		$	20,542		$	21,816
Deposits
Interest-sensitive life insurance	203			211			609			644
Fixed annuities	40			55			124			159
Total deposits	243			266			733			803
Interest credited	169			180			517			545
Benefits, withdrawals, maturities and other adjustments
Benefits	(252		)	(271		)	(720		)	(817		)
Surrenders and partial withdrawals	(263		)	(365		)	(787		)	(959		)
Maturities of and interest payments on institutional products	—			—			—			(1		)
Contract charges	(166		)	(167		)	(498		)	(514		)
Net transfers from separate accounts	2			2			4			5
Other adjustments(1)	(3		)	(62		)	12			(62		)
Total benefits, withdrawals, maturities and other adjustments	(682		)	(863		)	(1,989		)	(2,348		)
Contractholder funds, ending balance	$	19,803		$	20,816		$	19,803		$	20,816

____________

⁽¹⁾  The table above illustrates the changes in contractholder funds, which are presented gross of reinsurance recoverables on the Condensed Consolidated Statements of Financial Position. The table above is intended to supplement our discussion and analysis of revenues, which are presented net of reinsurance on the Condensed Consolidated Statements of Operations and Comprehensive Income. As a result, the net change in contractholder funds associated with products reinsured is reflected as a component of the other adjustments line.

Contractholder funds decreased 1.3% and 3.6% in the third quarter and first nine months of 2016, respectively, primarily due to the continued runoff of our deferred fixed annuity business. We stopped offering new deferred fixed annuities beginning January 1, 2014, but still accept additional deposits on existing contracts.

Contractholder deposits decreased 8.6% in the third quarter of 2016 compared to the third quarter of 2015, primarily due to lower additional deposits on deferred fixed annuities and interest-sensitive life insurance. Contractholder deposits decreased 8.7%

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in the first nine months of 2016 compared to the the first nine months of 2015, primarily due to lower additional deposits on deferred fixed annuities and interest-sensitive life insurance and lower deposits on interest-sensitive life insurance resulting from the absence of deposits on the business reinsured to AAC effective April 1, 2015.

Surrenders and partial withdrawals on deferred fixed annuities and interest-sensitive life insurance products decreased 27.9% to $263 million in the third quarter of 2016 and 17.9% to $787 million in the first nine months of 2016 from $365 million and $959 million in the third quarter and first nine months of 2015, respectively, due to decreases in deferred fixed annuities. The annualized surrender and partial withdrawal rate on deferred fixed annuities and interest-sensitive life insurance products, based on the beginning of year contractholder funds, was 6.4% in the first nine months of 2016 compared to 7.4% in the first nine months of 2015.

Analysis of costs and expenses Total costs and expenses decreased 1.7% or $11 million in the third quarter of 2016 compared to the same period of 2015, primarily due to lower amortization of DAC and lower interest credited to contractholder funds, partially offset by higher contract benefits. Total costs and expenses decreased 5.3% or $104 million in the first nine months of 2016 compared to the same period of 2015, primarily due to lower operating costs and expenses, lower interest credited to contractholder funds and lower amortization of DAC.

Contract benefits increased 4.0% or $14 million in the third quarter of 2016 compared to the third quarter of 2015, primarily due to unfavorable life insurance mortality experience, an increase in reserves for secondary guarantees on interest-sensitive life insurance and unfavorable immediate annuity mortality experience. Contract benefits decreased 1.0% or $11 million in the first nine months of 2016 compared to the first nine months of 2015, primarily due to favorable life insurance mortality experience and a decline related to the reinsurance agreement with AAC effective April 1, 2015, partially offset by unfavorable immediate annuity mortality experience and an increase in reserves for secondary guarantees on interest-sensitive life insurance.

Our annual review of assumptions in third quarter 2016 resulted in a $10 million increase in reserves primarily for secondary guarantees on interest-sensitive life insurance due to higher than anticipated retention of guaranteed interest-sensitive life business. In the third quarter of 2015, the review resulted in a $4 million increase in reserves which were also primarily for secondary guarantees on interest-sensitive life insurance due to higher than anticipated retention of guaranteed interest-sensitive life business.

In 2015, we initiated a mortality study for our structured settlement annuities with life contingencies (a type of immediate fixed annuities), which is estimated to be completed in the fourth quarter of 2016. The study thus far indicates that annuitants may be living longer and receiving benefits for a longer period than originally estimated. A substantial portion of the structured settlement annuity business includes annuitants with severe injuries or other health impairments which significantly reduced their life expectancy at the time the annuity was issued. Medical advances and access to medical care may be favorably impacting mortality rates. The preliminary results of the study were considered in the premium deficiency and profits followed by losses evaluations as of September 30, 2016 and December 31, 2015, and no adjustments were recognized. We aggregate traditional life insurance products and immediate annuities with life contingencies in these evaluations. We anticipate that mortality and investment and reinvestment yields are the factors that would be most likely to require premium deficiency or profits followed by losses adjustments.

We analyze our mortality and morbidity results using the difference between premiums and contract charges earned for the cost of insurance and contract benefits excluding the portion related to the implied interest on immediate annuities with life contingencies (“benefit spread”). This implied interest totaled $126 million and $383 million in the third quarter and first nine months of 2016, respectively, compared to $127 million and $383 million in the third quarter and first nine months of 2015, respectively.

The benefit spread by product group is disclosed in the following table.

($ in millions)	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
Life insurance	$	48		$	62		$	191		$	189
Accident and health insurance	8			7			30			26
Annuities	(28		)	(23		)	(70		)	(61		)
Total benefit spread	$	28		$	46		$	151		$	154

Benefit spread decreased 39.1% or $18 million in the third quarter of 2016 compared to the third quarter of 2015, primarily due to unfavorable life insurance mortality experience, an increase in reserves for secondary guarantees on interest-sensitive life insurance, lower life insurance premiums and unfavorable immediate annuity mortality experience. Benefit spread decreased 1.9% or $3 million in the first nine months of 2016 compared to the first nine months of 2015, primarily due to lower life insurance premiums, unfavorable immediate annuity mortality experience, an increase in reserves for secondary guarantees on interest-sensitive life insurance and a decline related to the reinsurance agreement with AAC effective April 1, 2015, partially offset by favorable life insurance mortality experience.

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Interest credited to contractholder funds decreased 6.1% or $11 million in the third quarter of 2016 compared to the third quarter of 2015, primarily due to lower average contractholder funds. Interest credited to contractholder funds decreased 4.8% or $26 million in the first nine months of 2016 compared to the first nine months of 2015, primarily due to lower average contractholder funds and a decline related to the reinsurance agreement with AAC effective April 1, 2015. Valuation changes on derivatives embedded in equity-indexed annuity contracts that are not hedged had no impact on interest credited to contractholder funds in third quarter 2016 compared to an increase of $3 million in third quarter 2015, and increased interest credited to contractholder funds by $12 million in the first nine months of 2016 compared to an increase of $4 million in the first nine months of 2015.

In order to analyze the impact of net investment income and interest credited to contractholders on net income, we monitor the difference between net investment income and the sum of interest credited to contractholder funds and the implied interest on immediate annuities with life contingencies, which is included as a component of contract benefits on the Condensed Consolidated Statements of Operations and Comprehensive Income (“investment spread”).

The investment spread by product group is shown in the following table.

($ in millions)	Three months ended September 30,					Nine months ended September 30,
	2016		2015			2016			2015
Annuities and institutional products	$	26	$	85		$	77		$	229
Life insurance	31		33			96			104
Accident and health insurance	1		1			4			4
Net investment income on investments supporting capital	54		49			156			155
Investment spread before valuation changes on embedded derivatives that are not hedged	112		168			333			492
Valuation changes on derivatives embedded in equity-indexed annuity contracts that are not hedged	—		(3		)	(12		)	(4		)
Total investment spread	$	112	$	165		$	321		$	488

Investment spread before valuation changes on embedded derivatives that are not hedged decreased 33.3% or $56 million in the third quarter of 2016 and 32.3% or $159 million in the first nine months of 2016 compared to the same periods of 2015, primarily due to lower net investment income.

To further analyze investment spreads, the following table summarizes the weighted average investment yield on assets supporting product liabilities and capital, interest crediting rates and investment spreads. Investment spreads may vary significantly between periods due to the variability in investment income, particularly for immediate fixed annuities where the investment portfolio includes limited partnerships.

	Three months ended September 30,
	Weighted average investment yield				Weighted average interest crediting rate				Weighted average investment spreads
	2016		2015		2016		2015		2016		2015
Interest-sensitive life insurance	5.0	%	5.3	%	3.9	%	3.9	%	1.1	%	1.4	%
Deferred fixed annuities and institutional products	4.2		4.2		2.8		2.8		1.4		1.4
Immediate fixed annuities with and without life contingencies	6.2		8.0		6.0		5.9		0.2		2.1
Investments supporting capital, traditional life and other products	3.9		3.7		n/a		n/a		n/a		n/a
	Nine months ended September 30,
	Weighted average investment yield				Weighted average interest crediting rate				Weighted average investment spreads
	2016		2015		2016		2015		2016		2015
Interest-sensitive life insurance	5.1	%	5.3	%	3.9	%	3.9	%	1.2	%	1.4	%
Deferred fixed annuities and institutional products	4.1		4.3		2.8		2.8		1.3		1.5
Immediate fixed annuities with and without life contingencies	6.2		7.6		5.9		5.9		0.3		1.7
Investments supporting capital, traditional life and other products	3.8		4.1		n/a		n/a		n/a		n/a

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The following table summarizes our product liabilities and indicates the account value of those contracts and policies for which an investment spread is generated.

($ in millions)	September 30,
	2016		2015
Immediate fixed annuities with life contingencies	$	8,640	$	8,723
Other life contingent contracts and other	2,694		2,667
Reserve for life-contingent contract benefits	$	11,334	$	11,390
Interest-sensitive life insurance	$	7,301	$	7,243
Deferred fixed annuities	9,077		9,956
Immediate fixed annuities without life contingencies	3,069		3,279
Institutional products	85		85
Other	271		253
Contractholder funds	$	19,803	$	20,816

Amortization of DAC The components of amortization of DAC are summarized in the following table.

($ in millions)	Three months ended September 30,					Nine months ended September 30,
	2016			2015		2016			2015
Amortization of DAC before amortization relating to realized capital gains and losses, valuation changes on embedded derivatives that are not hedged and changes in assumptions	$	29		$	36	$	99		$	110
Amortization relating to realized capital gains and losses (1)and valuation changes on embedded derivatives that are not hedged	1			2		5			6
Amortization deceleration for changes in assumptions (“DAC unlocking”)	(6		)	—		(6		)	—
Total amortization of DAC	$	24		$	38	$	98		$	116

_____________

⁽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 36.8% or $14 million in the third quarter of 2016 and 15.5% or $18 million in the first nine months of 2016 compared to the same periods of 2015, primarily due to amortization deceleration for changes in assumptions in 2016 and the decline in new and inforce business.

Our annual comprehensive review of assumptions underlying estimated future gross profits for our interest-sensitive life and fixed annuity 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 in all product lines. In the third quarter of 2016, the review resulted in a deceleration of DAC amortization (credit to income) of $6 million related to interest-sensitive life insurance.

In the third quarter of 2015, the review resulted in no net acceleration of DAC amortization.

The following table provides the effect on DAC amortization of changes in assumptions relating to the gross profit components of investment margin, benefit margin and expense margin for the nine months ended September 30.

($ in millions)	2016			2015
Investment margin	$	(3	)	$	1
Benefit margin	—			1
Expense margin	(3		)	(2		)
Net deceleration	$	(6	)	$	—

In 2016, DAC amortization deceleration for changes in the investment margin component of estimated gross profits related to interest-sensitive life insurance and was due to increased projected investment margins from a favorable asset portfolio mix. The expense margin deceleration related primarily to variable life insurance and was due to a decrease in projected expenses.

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Operating costs and expenses in the third quarter of 2016 were comparable to the same period of 2015. Operating costs and expenses decreased 22.3% or $47 million in the first nine months of 2016 compared to the same period of 2015. The following table summarizes operating costs and expenses.

($ in millions)	Three months ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
Non-deferrable commissions	$	5	$	3	$	17	$	10
General and administrative expenses	44		45		124		177
Taxes and licenses	7		8		23		24
Total operating costs and expenses	$	56	$	56	$	164	$	211
Restructuring and related charges	$	—	$	—	$	1	$	2

General and administrative expenses decreased 2.2% or $1 million in the third quarter of 2016 and 29.9% or $53 million in the first nine months of 2016 compared to the same periods of 2015, primarily due to lower employee related and other operating costs as a result of the decline in new and inforce business.

In April 2016, the U.S. Department of Labor issued a regulation that will expand the range of activities that would be considered to be “investment advice” and establish a new framework for determining whether a person is a fiduciary when mutual funds, variable and indexed annuities, or variable life are sold in connection with an Individual Retirement Account or an employee benefit plan covered under the Employee Retirement Income Security Act of 1974, as amended. ALIC does not currently sell proprietary annuities or proprietary variable life sold in connection with Individual Retirement Accounts or covered under the Employee Retirement Income Security Act of 1974. Products that we previously offered and continue to have in force, such as indexed annuities, could be impacted by the regulation. Compliance with the regulation may add costs and may impact producer compensation and processes. Compliance of certain components of the rule is required by April 10, 2017 and full compliance is required by January 1, 2018.

Income tax expense in first quarter 2015 included $17 million related to our adoption of new accounting guidance for investments in qualified affordable housing projects.

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INVESTMENTS

Portfolio composition The composition of the investment portfolio as of September 30, 2016 is presented in the following table.

($ in millions)			Percentto total
Fixed income securities (1)	$	24,796	69.6	%
Mortgage loans	3,855		10.8
Equity securities (2)	1,573		4.4
Limited partnership interests (3)	2,679		7.5
Short-term investments (4)	700		2.0
Policy loans	564		1.6
Other	1,485		4.1
Total	$	35,652	100.0	%

__________

⁽¹⁾  Fixed income securities are carried at fair value. Amortized cost basis for these securities was $23.00 billion.

⁽²⁾  Equity securities are carried at fair value. Cost basis for these securities was $1.50 billion.

⁽³⁾  We have commitments to invest in additional limited partnership interests totaling $1.29 billion.

⁽⁴⁾  Short-term investments are carried at fair value. Amortized cost basis for these investments was $700 million.

Investments totaled $35.65 billion as of September 30, 2016, increasing from $34.96 billion as of December 31, 2015, primarily due to higher fixed income valuations resulting from a decrease in risk-free interest rates and tighter credit spreads, partially offset by net reductions in contractholder funds.

Portfolio composition by investment strategy

We utilize four high level strategies to manage risks and returns and to position our portfolio to take advantage of market opportunities while attempting to mitigate adverse effects. As strategies and market conditions evolve, the asset allocation may change or assets may move between strategies.

Market-Based Core strategy seeks to deliver predictive earnings aligned to business needs through investments primarily in public fixed income and equity securities. Private fixed income assets, such as commercial mortgages, bank loans and privately placed debt are also included in this category. As of September 30, 2016, 89% of the total portfolio follows this strategy with 87% in fixed income securities and mortgage loans and 4% in equity securities.

Market-Based Activestrategy seeks to outperform within the public markets through tactical positioning and by taking advantage of short-term opportunities. This strategy may generate results that meaningfully deviate from those achieved by market indices, both favorably and unfavorably. The portfolio primarily includes public fixed income and equity securities. As of September 30, 2016, 3% of the total portfolio follows this strategy with 85% in fixed income securities and 11% in equity securities.

Performance-Based Long-Term (“PBLT”) strategy seeks to deliver attractive risk-adjusted returns over a longer horizon. The achieved return is a function of both general market conditions and the performance of the underlying assets or businesses. The portfolio, which primarily includes private equity, real estate, infrastructure, timber and agriculture-related assets, is diversified across a number of characteristics, including managers or partners, vintage years, strategies, geographies (including international) and industry sectors or property types. These investments are generally illiquid in nature, often require specialized expertise, typically involve a third party manager, and may offer the potential to add value through transformation at the company or property level. As of September 30, 2016, 8% of the total portfolio follows this strategy with 93% in limited partnership interests.

Performance-Based Opportunisticstrategy seeks to earn attractive returns by making investments that involve asset dislocations or special situations, often in private markets.

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The following table presents the investment portfolio by strategy as of September 30, 2016.

($ in millions)	Total			Market-Based Core			Market-Based Active			Performance-Based Long-Term			Performance-Based Opportunistic
Fixed income securities	$	24,796		$	23,790		$	995		$	6		$	5
Mortgage loans	3,855			3,855			—			—			—
Equity securities	1,573			1,394			135			44			—
Limited partnership interests	2,679			147			—			2,531			1
Short-term investments	700			657			43			—			—
Policy loans	564			564			—			—			—
Other	1,485			1,343			4			134			4
Total	$	35,652		$	31,750		$	1,177		$	2,715		$	10
% of total				89		%	3		%	8		%	—		%
Unrealized net capital gains and losses
Fixed income securities	$	1,797		$	1,782		$	14		$	—		$	1
Equity securities	74			69			5			—			—
Limited partnership interests	(2		)	—			—			(2		)	—
Other	4			4			—			—			—
Total	$	1,873		$	1,855		$	19		$	(2	)	$	1

Fixed income securities by type are listed in the following table. 

($ in millions)	Fair value as of September 30, 2016		Percent to total investments		Fair value as of December 31, 2015		Percent to total investments
U.S. government and agencies	$	816	2.3	%	$	977	2.8	%
Municipal	2,417		6.8		2,442		7.0
Corporate	20,064		56.3		18,504		52.9
Foreign government	341		1.0		384		1.1
Asset-backed securities (“ABS”)	499		1.4		1,420		4.1
Residential mortgage-backed securities (“RMBS”)	361		1.0		451		1.3
Commercial mortgage-backed securities (“CMBS”)	282		0.8		436		1.3
Redeemable preferred stock	16		—		15		—
Total fixed income securities	$	24,796	69.6	%	$	24,629	70.5	%

Fixed income securities are rated by third party credit rating agencies and/or are internally rated. As of September 30, 2016, 86.3% of the fixed income securities portfolio was rated investment grade, which is defined as a security having a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A or BBB from Standard & Poor’s (“S&P”), a comparable rating from another nationally recognized rating agency, or a comparable internal rating if an externally provided rating is not available. Credit ratings below these designations are considered low credit quality or below investment grade, which includes high yield bonds. Market prices for certain securities may have credit spreads which imply higher or lower credit quality than the current third party rating. Our initial investment decisions and ongoing monitoring procedures for fixed income securities are based on a thorough due diligence process which includes, but is not limited to, an assessment of the credit quality, sector, structure, and liquidity risks of each issue.

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The following table summarizes the fair value and unrealized net capital gains and losses for fixed income securities by investment grade and below investment grade classifications as of September 30, 2016. 

($ in millions)	Investment grade					Below investment grade					Total
	Fair value		Unrealized gain/(loss)			Fair value		Unrealized gain/(loss)			Fair value		Unrealized gain/(loss)
U.S. government and agencies	$	816	$	65		$	—	$	—		$	816	$	65
Municipal	2,372		369			45		3			2,417		372
Corporate
Public	11,886		829			1,757		51			13,643		880
Privately placed	5,329		371			1,092		26			6,421		397
Foreign government	336		39			5		—			341		39
ABS
Collateralized debt obligations (“CDO”)	124		(8		)	27		(3		)	151		(11		)
Consumer and other asset-backed securities (“Consumer and other ABS”)	344		—			4		1			348		1
RMBS
U.S. government sponsored entities (“U.S. Agency”)	68		5			—		—			68		5
Non-agency	26		—			267		37			293		37
CMBS	88		1			194		9			282		10
Redeemable preferred stock	16		2			—		—			16		2
Total fixed income securities	$	21,405	$	1,673		$	3,391	$	124		$	24,796	$	1,797

Municipal bonds totaled $2.42 billion as of September 30, 2016 with an unrealized net capital gain of $372 million. The municipal bond portfolio includes general obligations of state and local issuers and revenue bonds (including pre-refunded bonds, which are bonds for which an irrevocable trust has been established to fund the remaining payments of principal and interest).

Corporate bonds, including publicly traded and privately placed, totaled $20.06 billion as of September 30, 2016, with an unrealized net capital gain of $1.28 billion. Privately placed securities primarily consist of corporate issued senior debt securities that are directly negotiated with the borrower or are in unregistered form.

ABS, including CDO and Consumer and other ABS, totaled $499 million as of September 30, 2016, with 93.8% rated investment grade and an unrealized net capital loss of $10 million. Credit risk is managed by monitoring the performance of the underlying collateral. Many of the securities in the ABS portfolio have credit enhancement with features such as overcollateralization, subordinated structures, reserve funds, guarantees and/or insurance.

CDO totaled $151 million as of September 30, 2016, with 82.1% rated investment grade and an unrealized net capital loss of $11 million. CDO consist of obligations collateralized by cash flow CDO, which are structures collateralized primarily by below investment grade senior secured corporate loans.

Consumer and other ABS totaled $348 million as of September 30, 2016, with 98.9% rated investment grade and an unrealized net capital gain of $1 million.

RMBS totaled $361 million as of September 30, 2016, with 26.0% rated investment grade and an unrealized net capital gain of $42 million. The RMBS portfolio is subject to interest rate risk, but unlike other fixed income securities, is additionally subject to prepayment risk from the underlying residential mortgage loans. RMBS consists of a U.S. Agency portfolio having collateral issued or guaranteed by U.S. government agencies and a non-agency portfolio consisting of securities collateralized by Prime, Alt-A and Subprime loans. The non-agency portfolio totaled $293 million as of September 30, 2016, with 8.9% rated investment grade and an unrealized net capital gain of $37 million.

CMBS totaled $282 million as of September 30, 2016, with 31.2% rated investment grade and an unrealized net capital gain of $10 million. The CMBS portfolio is subject to credit risk and has a sequential paydown structure. All of the CMBS investments are traditional conduit transactions collateralized by commercial mortgage loans, broadly diversified across property types and geographical area.

Mortgage loans totaled $3.86 billion as of September 30, 2016 and primarily comprise loans secured by first mortgages on developed commercial real estate. Key considerations used to manage our exposure include property type and geographic diversification. For further detail on our mortgage loan portfolio, see Note 3 of the condensed consolidated financial statements.

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Equity securities primarily include common stocks, exchange traded and mutual funds, non-redeemable preferred stocks and real estate investment trust equity investments. The equity securities portfolio was $1.57 billion as of September 30, 2016, with an unrealized net capital gain of $74 million.

Limited partnership interestsinclude interests in private equity funds and co-investments, real estate funds and joint ventures, and other funds. The following table presents carrying value and other information about our limited partnership interests as of September 30, 2016.

($ in millions)	Private equity		Real estate		Other		Total
Cost method of accounting (“Cost”)	$	554	$	63	$	15	$	632
Equity method of accounting (“EMA”)	1,541		374		132		2,047
Total	$	2,095	$	437	$	147	$	2,679
Number of managers	116		23		3		142
Number of individual investments	204		48		3		255
Largest exposure to single investment	$	136	$	52	$	67	$	136

Unrealized net capital gains totaled $1.87 billion as of September 30, 2016 compared to $883 million as of December 31, 2015.  The increase for fixed income securities was primarily due to a decrease in risk-free interest rates and tighter credit spreads. The increase for equity securities was primarily due to the realization of unrealized net capital losses through write-downs, as well as favorable equity market performance, partially offset by the realization of unrealized net capital gains through sales.

The following table presents unrealized net capital gains and losses.

($ in millions)	September 30, 2016			December 31, 2015
U.S. government and agencies	$	65		$	57
Municipal	372			280
Corporate	1,277			435
Foreign government	39			36
ABS	(10		)	(23		)
RMBS	42			45
CMBS	10			27
Redeemable preferred stock	2			2
Fixed income securities	1,797			859
Equity securities	74			16
Derivatives	4			10
EMA limited partnerships	(2		)	(2		)
Unrealized net capital gains and losses, pre-tax	$	1,873		$	883

The unrealized net capital gain for the fixed income portfolio totaled $1.80 billion, comprised of $1.91 billion of gross unrealized gains and $112 million of gross unrealized losses as of September 30, 2016. This is compared to an unrealized net capital gain for the fixed income portfolio totaling $859 million, comprised of $1.32 billion of gross unrealized gains and $462 million of gross unrealized losses as of December 31, 2015.

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Gross unrealized gains and losses on fixed income securities by type and sector as of September 30, 2016 are provided in the following table.

($ in millions)	Amortized cost		Gross unrealized					Fair value
			Gains		Losses
Corporate:
Banking	$	1,014	$	35	$	(31	)	$	1,018
Utilities	3,353		412		(12		)	3,753
Transportation	950		91		(10		)	1,031
Energy	1,164		79		(8		)	1,235
Consumer goods (cyclical and non-cyclical)	5,572		324		(8		)	5,888
Communications	1,473		95		(5		)	1,563
Financial services	1,081		83		(4		)	1,160
Capital goods	1,918		124		(2		)	2,040
Technology	1,093		48		(1		)	1,140
Basic industry	902		55		(1		)	956
Other	267		13		—			280
Total corporate fixed income portfolio	18,787		1,359		(82		)	20,064
U.S. government and agencies	751		65		—			816
Municipal	2,045		378		(6		)	2,417
Foreign government	302		39		—			341
ABS	509		3		(13		)	499
RMBS	319		45		(3		)	361
CMBS	272		18		(8		)	282
Redeemable preferred stock	14		2		—			16
Total fixed income securities	$	22,999	$	1,909	$	(112	)	$	24,796

The consumer goods, utilities and capital goods sectors comprise 29%, 19% and 10%, respectively, of the carrying value of our corporate fixed income securities portfolio as of September 30, 2016. The banking, utilities and transportation sectors had the highest concentration of gross unrealized losses in our corporate fixed income securities portfolio as of September 30, 2016. In general, the gross unrealized losses are related to an increase in market yields which may include increased risk-free interest rates and/or wider credit spreads since the time of initial purchase. Similarly, gross unrealized gains reflect a decrease in market yields since the time of initial purchase.

Global oil prices and natural gas values have declined significantly from 2014 through the first quarter of 2016. Although values increased during the second and third quarters of 2016 compared to the first quarter, they remain volatile. In the fixed income and equity securities tables above and below, oil and natural gas exposure is reflected within the energy sector. Within this sector, we continue to monitor the impact to our investment portfolio for those companies that may be adversely affected, both directly and indirectly. If oil and natural gas prices return to depressed levels for an extended period, certain issuers and investments may come under duress and result in increased other-than-temporary impairments and unrealized losses in these parts of our investment portfolio.

In the nine months ended September 30, 2016, we reduced our corporate fixed income and equity securities that have direct exposure to the energy sector by $681 million of fair value to $1.30 billion. Securities that have direct exposure to the energy sector are presented in the following table.

($ in millions)	September 30, 2016				December 31, 2015
	Fair value (1)		Amortized cost or Cost		Fair value		Amortized cost or Cost
Fixed income securities	$	1,235	$	1,164	$	1,908	$	2,015
Equity securities	65		64		73		83
Total (2)	$	1,300	$	1,228	$	1,981	$	2,098

_______________

⁽¹⁾  77% of the corporate fixed income securities with direct exposure to the energy sector were investment grade as of September 30, 2016, compared to 85% as of December 31, 2015.

⁽²⁾  In addition, private equity limited partnership interests with exposure to energy totaled approximately $190 million as of September 30, 2016.

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Securities with gross unrealized losses that have direct exposure to the energy sector are presented in the following table.

($ in millions)	September 30, 2016					December 31, 2015
	Fair value		Gross unrealized losses (1)			Fair value		Gross unrealized losses
Fixed income securities	$	161	$	(8	)	$	1,126	$	(151	)
Equity securities	37		(3		)	57		(12		)
Total	$	198	$	(11	)	$	1,183	$	(163	)

_______________

⁽¹⁾  Gross unrealized losses on below investment grade corporate fixed income securities with direct exposure to the energy sector totaled $5 million, all of which relate to securities that had been in an unrealized loss position for a period of twelve or more consecutive months as of September 30, 2016.

The following table summarizes the fair value and gross unrealized losses of fixed income securities in a loss position by type and investment grade classification as of September 30, 2016.

($ in millions)	Investment grade					Below investment grade					Total
	Fair value		Gross unrealized losses			Fair value		Gross unrealized losses			Fair value		Gross unrealized losses
Corporate:
Banking	$	162	$	(27	)	$	15	$	(4	)	$	177	$	(31	)
Utilities	139		(6		)	59		(6		)	198		(12		)
Transportation	39		(10		)	—		—			39		(10		)
Energy	91		(3		)	70		(5		)	161		(8		)
Consumer goods (cyclical and non-cyclical)	302		(1		)	205		(7		)	507		(8		)
Communications	49		(1		)	99		(4		)	148		(5		)
Financial services	43		(3		)	38		(1		)	81		(4		)
Capital goods	160		(1		)	31		(1		)	191		(2		)
Technology	31		(1		)	19		—			50		(1		)
Basic industry	72		(1		)	10		—			82		(1		)
Total corporate fixed income portfolio	1,088		(54		)	546		(28		)	1,634		(82		)
U.S. government and agencies	258		—			—		—			258		—
Municipal	1		—			17		(6		)	18		(6		)
ABS	149		(9		)	11		(4		)	160		(13		)
RMBS	13		—			28		(3		)	41		(3		)
CMBS	7		—			94		(8		)	101		(8		)
Total fixed income securities	$	1,516	$	(63	)	$	696	$	(49	)	$	2,212	$	(112	)

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The following table summarizes the fair value and gross unrealized losses for below investment grade corporate fixed income securities in a loss position by sector and credit rating as of September 30, 2016.

($ in millions)	Less than 12 months
	Ba					B					Caa or lower					Total
	Fair value		Gross unrealized losses			Fair value		Gross unrealized losses			Fair value		Gross unrealized losses			Fair value		Gross unrealized losses
Corporate:
Banking	$	—	$	—		$	—	$	—		$	—	$	—		$	—	$	—
Utilities	21		(4		)	18		—			—		—			39		(4		)
Energy	6		—			7		—			—		—			13		—
Consumer goods (cyclical and non-cyclical)	58		(1		)	80		(4		)	7		—			145		(5		)
Communications	50		(1		)	20		—			—		—			70		(1		)
Financial services	32		—			—		—			—		—			32		—
Capital goods	6		—			19		—			—		—			25		—
Technology	14		—			—		—			—		—			14		—
Basic industry	8		—			—		—			—		—			8		—
Subtotal	$	195	$	(6	)	$	144	$	(4	)	$	7	$	—		$	346	$	(10	)
	12 months or more
	Ba					B					Caa or lower					Total
	Fair value		Gross unrealized losses			Fair value		Gross unrealized losses			Fair value		Gross unrealized losses			Fair value		Gross unrealized losses
Corporate:
Banking	$	15	$	(4	)	$	—	$	—		$	—	$	—		$	15	$	(4	)
Utilities	—		—			7		(1		)	13		(1		)	20		(2		)
Energy	51		(3		)	2		(1		)	4		(1		)	57		(5		)
Consumer goods (cyclical and non-cyclical)	21		—			39		(2		)	—		—			60		(2		)
Communications	4		(1		)	21		—			4		(2		)	29		(3		)
Financial services	6		(1		)	—		—			—		—			6		(1		)
Capital goods	—		—			6		(1		)	—		—			6		(1		)
Technology	5		—			—		—			—		—			5		—
Basic industry	—		—			—		—			2		—			2		—
Subtotal	$	102	$	(9	)	$	75	$	(5	)	$	23	$	(4	)	$	200	$	(18	)
Total	$	297	$	(15	)	$	219	$	(9	)	$	30	$	(4	)	$	546	$	(28	)

Of the unrealized losses on below investment grade corporate fixed income securities, 64.3% or $18 million relate to securities that had been in an unrealized loss position for a period of twelve or more consecutive months as of September 30, 2016. Unrealized losses were concentrated in the consumer goods, utilities, energy, banking and communications sectors.

The unrealized net capital gain for the equity portfolio totaled $74 million, comprised of $116 million of gross unrealized gains and $42 million of gross unrealized losses as of September 30, 2016. This is compared to an unrealized net capital gain for the equity portfolio totaling $16 million, comprised of $76 million of gross unrealized gains and $60 million of gross unrealized losses as of December 31, 2015.

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Gross unrealized gains and losses on equity securities by sector as of September 30, 2016 are provided in the table below.

($ in millions)	Cost		Gross unrealized					Fair value
			Gains		Losses
Consumer goods (cyclical and non-cyclical)	$	327	$	32	$	(16	)	$	343
Banking	96		2		(8		)	90
Financial services	70		5		(4		)	71
Communications	64		7		(4		)	67
Energy	64		4		(3		)	65
Technology	125		19		(2		)	142
Real estate	32		2		(2		)	32
Basic industry	38		6		(1		)	43
Transportation	19		1		(1		)	19
Utilities	31		3		(1		)	33
Capital goods	107		11		—			118
Funds	526		24		—			550
Total equity securities	$	1,499	$	116	$	(42	)	$	1,573

Within the equity portfolio, the unrealized losses were primarily concentrated in the consumer goods, banking, financial services and communications sectors. The unrealized losses were company and sector specific.

On June 23, 2016, the United Kingdom (“U.K.”) held a referendum in which they voted to leave the European Union. The vote is expected to be followed by the formal process of withdrawal under Article 50 of the Lisbon Treaty that, once invoked, would take place over a period of up to two years. Prior to the vote, we reduced our direct and counterparty exposure to the European banking and financial services sectors and repositioned global equity exposure in our market-based strategies. The majority of our investments with U.K. and European credit exposure are in multinational public companies with global revenue sources that are diversified across region and sector. As of September 30, 2016, the fair value of our fixed income and equity securities with direct exposure to the U.K. and other countries in the European Union was approximately $852 million and $1.06 billion, respectively, with net unrealized capital gains of $37 million and $46 million, respectively. In addition, we have limited partnerships with exposure to the U.K. and other countries in Europe of approximately $104 million and $342 million, respectively, that are typically more sensitive to local economic conditions. Significant uncertainty exists as the U.K.’s exit from the European Union will be a multi-year process and impacts on the global economy are difficult to predict. We expect the impact on the Company to be immaterial.

Net investment income The following table presents net investment income.

($ in millions)	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
Fixed income securities	$	268		$	300		$	812		$	960
Mortgage loans	50			46			144			147
Equity securities	10			6			31			19
Limited partnership interests	67			105			196			250
Short-term investments	1			1			4			2
Policy loans	8			9			24			26
Other	21			19			65			55
Investment income, before expense	425			486			1,276			1,459
Investment expense	(17		)	(13		)	(52		)	(42		)
Net investment income	$	408		$	473		$	1,224		$	1,417
Market-Based Core	$	345		$	375		$	1,042		$	1,185
Market-Based Active	9			5			25			16
Performance-Based Long-Term	71			106			207			256
Performance-Based Opportunistic	—			—			2			2
Investment income, before expense	$	425		$	486		$	1,276		$	1,459

Net investment income decreased 13.7% or $65 million in the third quarter of 2016 and 13.6% or $193 million in the first nine months of 2016 compared to the same periods of 2015, primarily due to lower fixed income portfolio yields resulting from lower market yields and portfolio positioning, and lower limited partnership income. Net investment income in the third quarter and first nine months of 2016 includes $9 million and $23 million, respectively, related to prepayment fee income compared to

51

$5 million and $24 million in the third quarter and first nine months of 2015, respectively. Prepayment fee income may vary significantly from period to period.

During the third quarter of 2015, approximately $2 billion of longer duration fixed income securities were sold. Proceeds from these sales were initially reinvested in shorter duration fixed income and public equity securities. We expect to increase the portfolio allocation to performance-based investments over time. These investments primarily support our immediate annuity liabilities and are intended to improve our long-term economic results. Since June 30, 2015, the carrying value of performance-based investments and market-based equity securities have increased by $1.32 billion to $4.25 billion. The increase is expected to reach $2 billion by the end of 2018. The carrying value will vary from period to period and reflect amounts invested, cash distributions received from investments and changes in valuation of the underlying investments.

Realized capital gains and losses The following table presents the components of realized capital gains and losses and the related tax effect.

($ in millions)	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
Impairment write-downs	$	(37	)	$	(17	)	$	(79	)	$	(29	)
Change in intent write-downs	(2		)	(50		)	(9		)	(57		)
Net other-than-temporary impairment losses recognized in earnings	(39		)	(67		)	(88		)	(86		)
Sales and other	21			241			27			427
Valuation and settlements of derivative instruments	(1		)	15			(5		)	18
Realized capital gains and losses, pre-tax	(19		)	189			(66		)	359
Income tax benefit (expense)	5			(67		)	22			(127		)
Realized capital gains and losses, after-tax	$	(14	)	$	122		$	(44	)	$	232
Market-Based Core	$	(8	)	$	198		$	(44	)	$	356
Market-Based Active	4			(11		)	4			(1		)
Performance-Based Long-Term	(16		)	4			(26		)	5
Performance-Based Opportunistic	1			(2		)	—			(1		)
Realized capital gains and losses, pre-tax	$	(19	)	$	189		$	(66	)	$	359

Impairment write-downs are presented in the following table.

($ in millions)	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
Fixed income securities	$	(15	)	$	(7	)	$	(27	)	$	(13	)
Equity securities	(7		)	(7		)	(42		)	(10		)
Limited partnership interests	(12		)	—			(6		)	(2		)
Other investments	(3		)	(3		)	(4		)	(4		)
Impairment write-downs	$	(37	)	$	(17	)	$	(79	)	$	(29	)

Impairment write-downs on fixed income securities for the three and nine months ended September 30, 2016 were primarily driven by corporate fixed income securities impacted by issuer specific circumstances. Equity securities were written down primarily due to the length of time and extent to which fair value was below cost, considering our assessment of the financial condition and near-term and long-term prospects of the issuer, including relevant industry conditions and trends. Limited partnership write-downs primarily related to investments with exposure to the energy sector. The nine month period ended September 30, 2016 also included the recovery in value of a limited partnership that was previously written down. Impairment write-downs in the above table include $10 million and $41 million related to investments with exposure to the energy sector in the three and nine months ended September 30, 2016, respectively.

Change in intent write-downs totaled $2 million and $9 million in the three and nine months ended September 30, 2016, respectively, and primarily relate to $474 million of equity securities as of September 30, 2016 that we may not hold for a period of time sufficient to recover unrealized losses given our preference to maintain flexibility to reposition the portfolio.

Sales and other generated $21 million and $27 million of net realized capital gains in the three and nine months ended September 30, 2016. Sales in second and third quarter 2016 primarily included sales of equity securities in connection with ongoing portfolio management, as well as gains from valuation changes in public securities held in certain limited partnerships. Sales in first quarter 2016 included $43 million of losses on $781 million of sales to reduce our exposure to the energy, metals and mining sectors.

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Valuation and settlements of derivative instruments generated net realized capital losses of $1 million and $5 million for the three months and nine months ended September 30, 2016, primarily comprised of losses on equity futures used for risk management due to increases in equity indices and losses on foreign currency contracts due to the weakening of the U.S. Dollar, partially offset by gains on credit default swaps due to the tightening of credit spreads on the underlying credit names.

Performance-based long-term investments primarily include private equity, real estate, infrastructure, timber and agriculture-related assets and are materially reflected through our limited partnership investments.

The following table presents investment income for PBLT investments.

($ in millions)	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
Limited partnerships
Private equity (1)	$	62		$	98		$	175		$	199
Real estate	5			7			19			53
Timber and agriculture-related	—			—			2			—
PBLT - limited partnerships (2)	67			105			196			252
Other
Private equity	—			(1		)	—			—
Real estate	4			2			11			4
Timber and agriculture-related	—			—			—			—
PBLT - other	4			1			11			4
Total
Private equity	62			97			175			199
Real estate	9			9			30			57
Timber and agriculture-related	—			—			2			—
Total PBLT	$	71		$	106		$	207		$	256
Asset level operating expenses (3)	$	(5	)	$	(1	)	$	(12	)	$	(3	)

______________________________

⁽¹⁾  Includes infrastructure.

⁽²⁾  Other limited partnership interests are located in the market-based core and performance-based opportunistic investing strategies and are not included in the performance-based long-term table above. Investment income was zero in both the third quarter of 2016 and 2015, respectively, and zero and $(2) million in the first nine months of 2016 and 2015, respectively, for these limited partnership interests.

⁽³⁾  When calculating the pre-tax yields, asset level operating expenses are netted against income for directly held real estate, timber and other consolidated investments.

PBLT investments produced investment income of $71 million and $207 million in the third quarter and first nine months of 2016, respectively, compared to $106 million and $256 million in the third quarter and first nine months of 2015, respectively. The decrease in both periods were primarily due to lower distributions from cost method private equity and real estate funds due to a decrease in asset dispositions in the current year. Investment appreciation was consistent between years.

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The following table presents realized capital gains and losses for PBLT investments.

($ in millions)	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
Limited partnerships
Private equity	$	(13	)	$	(1	)	$	(10	)	$	1
Real estate	1			—			3			—
Timber and agriculture-related	—			—			—			—
PBLT - limited partnerships (1)	(12		)	(1		)	(7		)	1
Other
Private equity	(4		)	5			(20		)	4
Real estate	—			—			1			—
Timber and agriculture-related	—			—			—			—
PBLT - other	(4		)	5			(19		)	4
Total
Private equity	(17		)	4			(30		)	5
Real estate	1			—			4			—
Timber and agriculture-related	—			—			—			—
Total PBLT	$	(16	)	$	4		$	(26	)	$	5

______________________________

⁽¹⁾  Other limited partnership interests are located in the market-based core and performance-based opportunistic investing strategies and are not included in the performance-based long-term table above. Realized capital gains and losses were $11 million and $(19) million in the third quarter of 2016 and 2015, respectively, and $19 million and $(19) million in the first nine months of 2016 and 2015, respectively, for these limited partnership interests.

Realized capital losses on PBLT investments were $16 million and $26 million in the third quarter and first nine months of 2016, respectively, compared to realized capital gains of $4 million and $5 million in the third quarter and first nine months of 2015, respectively. Third quarter 2016 included impairment write-downs on certain investments with exposure to the energy sector. The first nine months of 2016 included impairment write-downs on certain investments with exposure to the energy sector, partially offset by the recovery in value of a limited partnership that was previously written-down.

Economic conditions and equity market performance are reflected in PBLT investment results, and we continue to expect this income to vary significantly between periods.

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CAPITAL RESOURCES AND LIQUIDITY

Capital resources consist of shareholder’s equity and notes due to related parties, representing funds deployed or available to be deployed to support business operations or for general corporate purposes. The following table summarizes our capital resources.

($ in millions)	September 30, 2016		December 31, 2015
Common stock, retained income and additional capital paid-in	$	5,623	$	5,412
Accumulated other comprehensive income	1,069		521
Total shareholder’s equity	6,692		5,933
Notes due to related parties	325		275
Total capital resources	$	7,017	$	6,208

Shareholder’s equity increased in the first nine months of 2016, primarily due to increased unrealized net capital gains on investments and net income.

Notes due to related parties increased in the first nine months of 2016 due to the issuance of a $50 million surplus note that was sold to an unconsolidated affiliate.

Financial ratings and strength Our ratings are influenced by many factors including our operating and financial performance, asset quality, liquidity, asset/liability management, overall portfolio mix, financial leverage (i.e., debt), exposure to risks, the current level of operating leverage and AIC’s ratings. In April 2016, A.M. Best affirmed our insurance financial strength rating of A+ and the outlook for the rating remained stable. In July 2016, S&P affirmed our insurance financial strength rating of A+ and the outlook for the rating remained stable. There have been no changes to our rating from Moody’s since December 31, 2015.

Liquidity sources and uses We actively manage our financial position and liquidity levels in light of changing market, economic, and business conditions. Liquidity is managed at both the entity and enterprise level across the Company, and is assessed on both base and stressed level liquidity needs. We believe we have sufficient liquidity to meet these needs. Additionally, we have existing intercompany agreements in place that facilitate liquidity management across the Company to enhance flexibility.

The Company, AIC, AAC and the Corporation are party to an Amended and Restated Intercompany Liquidity Agreement (“Liquidity Agreement”) which allows for short-term advances of funds to be made between parties for liquidity and other general corporate purposes. The Liquidity Agreement does not establish a commitment to advance funds on the part of any party. The Company and AIC each serve as a lender and borrower, AAC serves only as a borrower, and the Corporation serves only as a lender. The Company also has a capital support agreement with AIC. Under the capital support agreement, AIC is committed to provide capital to the Company to maintain an adequate capital level. The maximum amount of potential funding under each of these agreements is $1.00 billion.

In addition to the Liquidity Agreement, the Company also has an intercompany loan agreement with the Corporation. The amount of intercompany loans available to the Company is at the discretion of the Corporation. The maximum amount of loans the Corporation will have outstanding to all its eligible subsidiaries at any given point in time is limited to $1.00 billion. The Corporation may use commercial paper borrowings, bank lines of credit and securities lending to fund intercompany borrowings.

Allstate parent company capital capacity At the parent holding company level, the Corporation has deployable assets totaling $2.66 billion as of September 30, 2016 comprising cash and investments that are generally saleable within one quarter. This provides funds for the parent company’s fixed charges and other corporate purposes.

The Company has access to additional borrowing to support liquidity through the Corporation as follows. The amount available to the Company is at the discretion of the Corporation.

• A commercial paper facility with a borrowing limit of $1.00 billion to cover short-term cash needs. As of September 30, 2016, there were no balances outstanding and therefore the remaining borrowing capacity was $1.00 billion; however, the outstanding balance can fluctuate daily.

• A $1.00 billion unsecured revolving credit facility that is available for short-term liquidity requirements. In April 2016, the Corporation extended the maturity date of this facility to April 2021. The facility is fully subscribed among 11 lenders with the largest commitment being $115 million. The commitments of the lenders are several and no lender is responsible for any other lender’s commitment if such lender fails to make a loan under the facility. This facility contains an increase provision that would allow up to an additional $500 million of borrowing. This facility has a financial covenant requiring that the Corporation not exceed a 37.5% debt to capitalization ratio as defined in the agreement. This ratio was 12.1% as of September 30, 2016. Although the right to borrow under the facility is not subject to a minimum rating requirement, the costs of maintaining the facility and borrowing under it are based on the ratings of the Corporation’s senior unsecured, unguaranteed long-term debt. There were no borrowings under the credit facility during the third quarter or the first nine months of 2016.

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• A universal shelf registration statement that was filed by the Corporation with the Securities and Exchange Commission on April 30, 2015. The Corporation can use this shelf registration to issue an unspecified amount of debt securities, common stock (including 532 million shares of treasury stock as of September 30, 2016), preferred stock, depositary shares, warrants, stock purchase contracts, stock purchase units and securities of trust subsidiaries. The specific terms of any securities the Corporation issues under this registration statement will be provided in the applicable prospectus supplements.

Liquidity exposure Contractholder funds were $19.80 billion as of September 30, 2016. The following table summarizes contractholder funds by their contractual withdrawal provisions as of September 30, 2016.

($ in millions)			Percent to total
Not subject to discretionary withdrawal	$	3,225	16.3	%
Subject to discretionary withdrawal with adjustments:
Specified surrender charges(1)	5,095		25.7
Market value adjustments(2)	1,667		8.4
Subject to discretionary withdrawal without adjustments(3)	9,816		49.6
Total contractholder funds(4)	$	19,803	100.0	%

____________

⁽¹⁾  Includes $1.69 billion of liabilities with a contractual surrender charge of less than 5% of the account balance.

⁽²⁾  $1.08 billion of the contracts with market value adjusted surrenders have a 30-45 day period at the end of their initial and subsequent interest rate guarantee periods (which are typically 5, 7 or 10 years) during which there is no surrender charge or market value adjustment.

⁽³⁾  88% of these contracts have a minimum interest crediting rate guarantee of 3% or higher.

⁽⁴⁾  Includes $793 million of contractholder funds on variable annuities reinsured to The Prudential Insurance Company of America, a subsidiary of Prudential Financial Inc., in 2006.

Retail life and annuity products may be surrendered by customers for a variety of reasons. Reasons unique to individual customers include a current or unexpected need for cash or a change in life insurance coverage needs. Other key factors that may impact the likelihood of customer surrender include the level of the contract surrender charge, the length of time the contract has been in force, distribution channel, market interest rates, equity market conditions and potential tax implications. In addition, the propensity for retail life insurance policies to lapse is lower than it is for fixed annuities because of the need for the insured to be re-underwritten upon policy replacement. The annualized surrender and partial withdrawal rate on deferred fixed annuities and interest-sensitive life insurance products, based on the beginning of year contractholder funds, was 6.4% and 7.4% in the first nine months of 2016 and 2015, respectively. We strive to promptly pay customers who request cash surrenders; however, statutory regulations generally provide up to six months in most states to fulfill surrender requests.

Our asset-liability management practices enable us to manage the differences between the cash flows generated by our investment portfolio and the expected cash flow requirements of our life insurance and annuity product obligations.

Cash flows As reflected in our Condensed Consolidated Statements of Cash Flows, higher cash provided by operating activities in the first nine months of 2016 compared to the first nine months of 2015 was primarily due to lower tax payments and lower operating expenses, partially offset by lower net investment income.

Lower cash provided by investing activities in the first nine months of 2016 compared to the first nine months of 2015 was the result of less cash used in financing activities due to decreased payments for contractholder fund disbursements and lower tax payments.

Lower cash used in financing activities in the first nine months of 2016 compared to the first nine months of 2015 was primarily due to decreased payments for contractholder benefits and withdrawals on fixed annuities.

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Forward-Looking Statements

This report contains “forward-looking statements” that anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. These statements are made subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements do not relate strictly to historical or current facts and may be identified by their use of words like “plans,” “seeks,” “expects,” “will,” “should,” “anticipates,” “estimates,” “intends,” “believes,” “likely,” “targets” and other words with similar meanings. We believe these statements are based on reasonable estimates, assumptions and plans. However, if the estimates, assumptions or plans underlying the forward-looking statements prove inaccurate or if other risks or uncertainties arise, actual results could differ materially from those communicated in these forward-looking statements. Factors that could cause actual results to differ materially from those expressed in, or implied by, the forward-looking statements include risks related to: (1) changes in underwriting and actual experience; (2) changes in reserve estimates for life-contingent contract benefits payable; (3) the influence of changes in market interest rates on spread-based products; (4) changes in estimates of profitability on interest-sensitive life products; (5) reducing our concentration in spread-based business and exiting certain distribution channels; (6) changes in tax laws; (7) our ability to mitigate the capital impact associated with life insurance statutory reserving requirements; (8) operational issues relating to a decline in Lincoln Benefit Life Company’s financial strength ratings; (9) market risk and declines in credit quality relating to our investment portfolio; (10) our subjective determination of the fair value of our fixed income and equity securities and the amount of realized capital losses recorded for impairments of our investments; (11) competition in the insurance industry; (12) conditions in the global economy and capital markets; (13) losses from legal and regulatory actions; (14) restrictive regulation and regulatory reforms; (15) the availability of reinsurance at current levels and prices; (16) credit risk of our reinsurers; (17) a downgrade in our financial strength ratings; (18) the effect of adverse capital and credit market conditions; (19) failure in cyber or other information security; (20) the impact of a large scale pandemic, the threat or incurrence of terrorism or military action; (21) changes in accounting standards; (22) the realization of deferred tax assets; (23) loss of key vendor relationships or failure of a vendor to protect confidential and proprietary information; and (24) failure to protect intellectual property. Additional information concerning these and other factors may be found in our filings with the Securities and Exchange Commission, including the “Risk Factors” section in our most recent Annual Report on Form 10-K. Forward-looking statements speak only as of the date on which they are made, and we assume no obligation to update or revise any forward-looking statement.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, the principal executive officer and the principal financial officer concluded that our disclosure controls and procedures are effective in providing reasonable assurance that material information required to be disclosed in our reports filed with or submitted to the Securities and Exchange Commission under the Securities Exchange Act is made known to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting. During the fiscal quarter ended September 30, 2016, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

Item 6.  Exhibits

(a)Exhibits

The following is a list of exhibits filed as part of this Form 10-Q.

		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File Number	Exhibit	Filing Date	Filed or Furnished Herewith
15	Acknowledgment of awareness from Deloitte & Touche LLP, dated November 3, 2016, concerning unaudited interim financial information					X
31(i)	Rule 13a-14(a) Certification of Principal Executive Officer					X
31(i)	Rule 13a-14(a) Certification of Principal Financial Officer					X
32	Section 1350 Certifications					X
101.INS	XBRL Instance Document					X
101.SCH	XBRL Taxonomy Extension Schema					X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase					X
101.DEF	XBRL Taxonomy Extension Definition Linkbase					X
101.LAB	XBRL Taxonomy Extension Label Linkbase					X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase					X

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Allstate Life Insurance Company
	(Registrant)
November 3, 2016
	By	/s/ Samuel H. Pilch
		Samuel H. Pilch
		(chief accounting officer and duly
		authorized officer of Registrant)

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