10-Q 1 allcorp-9301810xq.htm 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
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 1-11840
THE ALLSTATE CORPORATION
(Exact name of registrant as specified in its charter)

| Delaware |  | 36-3871531 |
| (State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.) |

| 2775 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 every Interactive Data File required to be submitted 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 such files).

| Yes X | No ___ |

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

Large accelerated filer | X | Accelerated filer | ____
Non-accelerated filer |  | Smaller reporting company | ____
|  | Emerging growth company | ____

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ____
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

| Yes | No X |

As of October 15, 2018, the registrant had 344,442,270 common shares, $.01 par value, outstanding.

The Allstate Corporation
Index to Quarterly Report on Form 10-Q
September 30, 2018

Part I Financial Information | Page
Item 1. Financial Statements
| Condensed Consolidated Statements of Operations for the Three Month and Nine Month Periods Ended September 30, 2018 and 2017 (unaudited) | 1
| Condensed Consolidated Statements of Comprehensive Income for the Three Month and Nine Month Periods Ended September 30, 2018 and 2017 (unaudited) | 2
| Condensed Consolidated Statements of Financial Position as of September 30, 2018 (unaudited) and December 31, 2017 | 3
| Condensed Consolidated Statements of Shareholders’ Equity for the Nine Month Periods Ended September 30, 2018 and 2017 (unaudited) | 4
| Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 2018 and 2017 (unaudited) | 5
| Notes to Condensed Consolidated Financial Statements (unaudited) | 6
| Report of Independent Registered Public Accounting Firm | 45
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| Highlights | 46
| Consolidated Net Income | 50
| Property-Liability Operations | 51
| Allstate Protection | 54
– Allstate brand | 62
– Esurance brand | 68
– Encompass brand | 72
Discontinued Lines and Coverages | 76
Service Businesses | 78
Allstate Life | 80
Allstate Benefits | 83
Allstate Annuities | 85
| Investment s | 88
| Capital Resources and Liquidity | 95
| Forward-Looking Statements | 98
Item 4. Controls and Procedures | 98
Part II Other Information
Item 1. Legal Proceedings | 99
Item 1A. Risk Factors | 99
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 99
Item 6. Exhibits | 100

Condensed Consolidated Financial Statements
Part I. Financial Information
Item 1. Financial Statements
The Allstate Corporation and Subsidiaries
Condensed Consolidated Statements of Operations

($ in millions, except per share data) |  | Three months ended September 30, |  | Nine months ended September 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
|  | (unaudited) |  | (unaudited)
Revenues |  |  |  |  |  |  |  |  |  |  |  |
Property and casualty insurance premiums |  | $ | 8,595 |  |  | $ | 8,121 |  |  | $ | 25,341 |  |  | $ | 24,098 |
Life premiums and contract charges |  | 612 |  |  | 593 |  |  | 1,840 |  |  | 1,777 |
Other revenue |  | 238 |  |  | 228 |  |  | 682 |  |  | 664 |
Net investment income |  | 844 |  |  | 843 |  |  | 2,454 |  |  | 2,488 |
Realized capital gains and losses: |  |  |  |  |  |  |  |  |  |  |  |
Total other-than-temporary impairment (“OTTI”) losses |  | (4 | ) |  | (26 | ) |  | (8 | ) |  | (135 | )
OTTI losses reclassified (from) to other comprehensive income (“OCI”) |  | (1 | ) |  | (2 | ) |  | (2 | ) |  | (2 | )
Net OTTI losses recognized in earnings |  | (5 | ) |  | (28 | ) |  | (10 | ) |  | (137 | )
Sales and valuation changes on equity investments and derivatives |  | 181 |  |  | 131 |  |  | 27 |  |  | 455 |
Total realized capital gains and losses |  | 176 |  |  | 103 |  |  | 17 |  |  | 318 |
Total revenues |  | 10,465 |  |  | 9,888 |  |  | 30,334 |  |  | 29,345 |
Costs and expenses |  |  |  |  |  |  |  |  |  |  |  |
Property and casualty insurance claims and claims expense |  | 5,817 |  |  | 5,545 |  |  | 16,758 |  |  | 16,650 |
Life contract benefits |  | 498 |  |  | 456 |  |  | 1,485 |  |  | 1,416 |
Interest credited to contractholder funds |  | 163 |  |  | 174 |  |  | 489 |  |  | 522 |
Amortization of deferred policy acquisition costs |  | 1,317 |  |  | 1,200 |  |  | 3,886 |  |  | 3,545 |
Operating costs and expenses |  | 1,534 |  |  | 1,446 |  |  | 4,296 |  |  | 4,065 |
Restructuring and related charges |  | 16 |  |  | 14 |  |  | 65 |  |  | 77 |
Interest expense |  | 82 |  |  | 83 |  |  | 251 |  |  | 251 |
Total costs and expenses |  | 9,427 |  |  | 8,918 |  |  | 27,230 |  |  | 26,526 |
Gain on disposition of operations |  | 1 |  |  | 1 |  |  | 4 |  |  | 15 |
Income from operations before income tax expense |  | 1,039 |  |  | 971 |  |  | 3,108 |  |  | 2,834 |
Income tax expense |  | 169 |  |  | 305 |  |  | 587 |  |  | 894 |
Net income |  | 870 |  |  | 666 |  |  | 2,521 |  |  | 1,940 |
Preferred stock dividends |  | 37 |  |  | 29 |  |  | 105 |  |  | 87 |
Net income applicable to common shareholders |  | $ | 833 |  |  | $ | 637 |  |  | $ | 2,416 |  |  | $ | 1,853 |
Earnings per common share: |  |  |  |  |  |  |  |  |  |  |  |
Net income applicable to common shareholders per common share - Basic |  | $ | 2.41 |  |  | $ | 1.76 |  |  | $ | 6.91 |  |  | $ | 5.10 |
Weighted average common shares - Basic |  | 346.0 |  |  | 361.3 |  |  | 349.7 |  |  | 363.5 |
Net income applicable to common shareholders per common share - Diluted |  | $ | 2.37 |  |  | $ | 1.74 |  |  | $ | 6.80 |  |  | $ | 5.02 |
Weighted average common shares - Diluted |  | 351.7 |  |  | 367.1 |  |  | 355.4 |  |  | 369.1 |
Cash dividends declared per common share |  | $ | 0.46 |  |  | $ | 0.37 |  |  | $ | 1.38 |  |  | $ | 1.11 |

See notes to condensed consolidated financial statements.
Third Quarter 2018 Form 10-Q 1

Condensed Consolidated Financial Statements
The Allstate Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income

($ in millions) |  | Three months ended September 30, |  | Nine months ended September 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
|  | (unaudited) |  | (unaudited)
Net income |  | $ | 870 |  |  | $ | 666 |  |  | $ | 2,521 |  |  | $ | 1,940 |
Other comprehensive (loss) income, after-tax |  |  |  |  |  |  |  |  |  |  |  |
Changes in: |  |  |  |  |  |  |  |  |  |  |  |
Unrealized net capital gains and losses |  | (70 | ) |  | 125 |  |  | (768 | ) |  | 598 |
Unrealized foreign currency translation adjustments |  | (14 | ) |  | 28 |  |  | (25 | ) |  | 36 |
Unrecognized pension and other postretirement benefit cost |  | 68 |  |  | 73 |  |  | 113 |  |  | 110 |
Other comprehensive (loss) income, after-tax |  | (16 | ) |  | 226 |  |  | (680 | ) |  | 744 |
Comprehensive income |  | $ | 854 |  |  | $ | 892 |  |  | $ | 1,841 |  |  | $ | 2,684 |

See notes to condensed consolidated financial statements.
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Condensed Consolidated Financial Statements
The Allstate Corporation and Subsidiaries
Condensed Consolidated Statements of Financial Position

($ in millions, except par value data) |  | September 30, 2018 |  | December 31, 2017
Assets |  | (unaudited) |  |  |
Investments |  |  |  |  |  |
Fixed income securities, at fair value (amortized cost $57,618 and $57,525) |  | $ | 57,663 |  |  | $ | 58,992 |
Equity securities, at fair value (cost $5,741 and $5,461) |  | 6,965 |  |  | 6,621 |
Mortgage loans |  | 4,592 |  |  | 4,534 |
Limited partnership interests |  | 7,602 |  |  | 6,740 |
Short-term, at fair value (amortized cost $3,071 and $1,944) |  | 3,071 |  |  | 1,944 |
Other |  | 4,075 |  |  | 3,972 |
Total investments |  | 83,968 |  |  | 82,803 |
Cash |  | 460 |  |  | 617 |
Premium installment receivables, net |  | 6,196 |  |  | 5,786 |
Deferred policy acquisition costs |  | 4,667 |  |  | 4,191 |
Reinsurance recoverables, net |  | 8,994 |  |  | 8,921 |
Accrued investment income |  | 616 |  |  | 569 |
Property and equipment, net |  | 1,032 |  |  | 1,072 |
Goodwill |  | 2,189 |  |  | 2,181 |
Other assets |  | 3,061 |  |  | 2,838 |
Separate Accounts |  | 3,307 |  |  | 3,444 |
Total assets |  | $ | 114,490 |  |  | $ | 112,422 |
Liabilities |  |  |  |  |  |
Reserve for property and casualty insurance claims and claims expense |  | $ | 26,939 |  |  | $ | 26,325 |
Reserve for life-contingent contract benefits |  | 12,214 |  |  | 12,549 |
Contractholder funds |  | 18,650 |  |  | 19,434 |
Unearned premiums |  | 14,408 |  |  | 13,473 |
Claim payments outstanding |  | 904 |  |  | 875 |
Deferred income taxes |  | 660 |  |  | 782 |
Other liabilities and accrued expenses |  | 7,325 |  |  | 6,639 |
Long-term debt |  | 6,450 |  |  | 6,350 |
Separate Accounts |  | 3,307 |  |  | 3,444 |
Total liabilities |  | 90,857 |  |  | 89,871 |
Commitments and Contingent Liabilities (Note 12) |  |  |  |  |  |
Shareholders’ equity |  |  |  |  |  |
Preferred stock and additional capital paid-in, $1 par value, 25 million shares authorized, 95.2 thousand and 72.2 thousand shares issued and outstanding, $2,380 and $1,805 aggregate liquidation preference |  | 2,303 |  |  | 1,746 |
Common stock, $.01 par value, 2.0 billion shares authorized and 900 million issued, 345 million and 355 million shares outstanding |  | 9 |  |  | 9 |
Additional capital paid-in |  | 3,441 |  |  | 3,313 |
Retained income |  | 46,178 |  |  | 43,162 |
Deferred Employee Stock Ownership Plan (“ESOP”) expense |  | (3 | ) |  | (3 | )
Treasury stock, at cost (555 million and 545 million shares) |  | (27,011 | ) |  | (25,982 | )
Accumulated other comprehensive income: |  |  |  |  |  |
Unrealized net capital gains and losses: |  |  |  |  |  |
Unrealized net capital gains and losses on fixed income securities with OTTI |  | 86 |  |  | 85 |
Other unrealized net capital gains and losses |  | (53 | ) |  | 1,981 |
Unrealized adjustment to DAC, DSI and insurance reserves |  | (49 | ) |  | (404 | )
Total unrealized net capital gains and losses |  | (16 | ) |  | 1,662 |
Unrealized foreign currency translation adjustments |  | (34 | ) |  | (9 | )
Unrecognized pension and other postretirement benefit cost |  | (1,234 | ) |  | (1,347 | )
Total accumulated other comprehensive income (“AOCI”) |  | (1,284 | ) |  | 306 |
Total shareholders’ equity |  | 23,633 |  |  | 22,551 |
Total liabilities and shareholders’ equity |  | $ | 114,490 |  |  | $ | 112,422 |

See notes to condensed consolidated financial statements.
Third Quarter 2018 Form 10-Q 3

Condensed Consolidated Financial Statements
The Allstate Corporate and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity

($ in millions) |  | Nine months ended September 30,
| 2018 |  | 2017
|  | (unaudited)
Preferred stock par value |  | $ | — |  |  | $ | — |
Preferred stock additional capital paid-in |  |  |  |  |  |
Balance, beginning of period |  | 1,746 |  |  | 1,746 |
Preferred stock issuance |  | 557 |  |  | — |
Balance, end of period |  | 2,303 |  |  | 1,746 |
Common stock par value |  | 9 |  |  | 9 |
Common stock additional capital paid-in |  |  |  |  |  |
Balance, beginning of period |  | 3,313 |  |  | 3,303 |
Forward contract on accelerated share repurchase agreement |  | 45 |  |  | — |
Equity incentive plans activity |  | 83 |  |  | 27 |
Balance, end of period |  | 3,441 |  |  | 3,330 |
Retained income |  |  |  |  |  |
Balance, beginning of period |  | 43,162 |  |  | 40,678 |
Cumulative effect of change in accounting principle |  | 1,088 |  |  | — |
Net income |  | 2,521 |  |  | 1,940 |
Dividends on common stock |  | (488 | ) |  | (406 | )
Dividends on preferred stock |  | (105 | ) |  | (87 | )
Balance, end of period |  | 46,178 |  |  | 42,125 |
Deferred ESOP expense |  | (3 | ) |  | (6 | )
Treasury stock |  |  |  |  |  |
Balance, beginning of period |  | (25,982 | ) |  | (24,741 | )
Shares acquired |  | (1,117 | ) |  | (845 | )
Shares reissued under equity incentive plans, net |  | 88 |  |  | 173 |
Balance, end of period |  | (27,011 | ) |  | (25,413 | )
Accumulated other comprehensive income |  |  |  |  |  |
Balance, beginning of period |  | 306 |  |  | (416 | )
Cumulative effect of change in accounting principle |  | (910 | ) |  | — |
Change in unrealized net capital gains and losses |  | (768 | ) |  | 598 |
Change in unrealized foreign currency translation adjustments |  | (25 | ) |  | 36 |
Change in unrecognized pension and other postretirement benefit cost |  | 113 |  |  | 110 |
Balance, end of period |  | (1,284 | ) |  | 328 |
Total shareholders’ equity |  | $ | 23,633 |  |  | $ | 22,119 |

See notes to condensed consolidated financial statements.
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Condensed Consolidated Financial Statements
The Allstate Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows

($ in millions) |  | Nine months ended September 30,
| 2018 |  | 2017
Cash flows from operating activities |  | (unaudited)
Net income |  | $ | 2,521 |  |  | $ | 1,940 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |  |
Depreciation, amortization and other non-cash items |  | 376 |  |  | 358 |
Realized capital gains and losses |  | (17 | ) |  | (318 | )
Gain on disposition of operations |  | (4 | ) |  | (15 | )
Interest credited to contractholder funds |  | 489 |  |  | 522 |
Changes in: |  |  |  |  |  |
Policy benefits and other insurance reserves |  | 90 |  |  | 1,276 |
Unearned premiums |  | 785 |  |  | 525 |
Deferred policy acquisition costs |  | (203 | ) |  | (176 | )
Premium installment receivables, net |  | (422 | ) |  | (267 | )
Reinsurance recoverables, net |  | (103 | ) |  | (1,017 | )
Income taxes |  | (227 | ) |  | 119 |
Other operating assets and liabilities |  | 533 |  |  | 267 |
Net cash provided by operating activities |  | 3,818 |  |  | 3,214 |
Cash flows from investing activities |  |  |  |  |  |
Proceeds from sales |  |  |  |  |  |
Fixed income securities |  | 26,223 |  |  | 19,508 |
Equity securities |  | 4,637 |  |  | 5,179 |
Limited partnership interests |  | 490 |  |  | 767 |
Other investments |  | 234 |  |  | 170 |
Investment collections |  |  |  |  |  |
Fixed income securities |  | 2,388 |  |  | 3,038 |
Mortgage loans |  | 378 |  |  | 477 |
Other investments |  | 370 |  |  | 458 |
Investment purchases |  |  |  |  |  |
Fixed income securities |  | (29,049 | ) |  | (23,935 | )
Equity securities |  | (4,791 | ) |  | (5,296 | )
Limited partnership interests |  | (1,317 | ) |  | (1,082 | )
Mortgage loans |  | (435 | ) |  | (311 | )
Other investments |  | (686 | ) |  | (700 | )
Change in short-term investments, net |  | (665 | ) |  | 2,257 |
Change in other investments, net |  | (28 | ) |  | (28 | )
Purchases of property and equipment, net |  | (195 | ) |  | (216 | )
Acquisition of operations |  | (10 | ) |  | (1,356 | )
Net cash used in investing activities |  | (2,456 | ) |  | (1,070 | )
Cash flows from financing activities |  |  |  |  |  |
Proceeds from issuance of long-term debt |  | 498 |  |  | — |
Redemption and repayment of long-term debt |  | (401 | ) |  | — |
Proceeds from issuance of preferred stock |  | 557 |  |  | — |
Contractholder fund deposits |  | 756 |  |  | 767 |
Contractholder fund withdrawals |  | (1,474 | ) |  | (1,416 | )
Dividends paid on common stock |  | (455 | ) |  | (391 | )
Dividends paid on preferred stock |  | (97 | ) |  | (87 | )
Treasury stock purchases |  | (1,062 | ) |  | (848 | )
Shares reissued under equity incentive plans, net |  | 66 |  |  | 132 |
Other |  | 93 |  |  | (47 | )
Net cash used in financing activities |  | (1,519 | ) |  | (1,890 | )
Net (decrease) increase in cash |  | (157 | ) |  | 254 |
Cash at beginning of period |  | 617 |  |  | 436 |
Cash at end of period |  | $ | 460 |  |  | $ | 690 |

See notes to condensed consolidated financial statements.
Third Quarter 2018 Form 10-Q 5

Notes to Condensed Consolidated Financial Statements
The Allstate Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1 | General

Basis of presentation
The accompanying condensed consolidated financial statements include the accounts of The Allstate Corporation (the “Corporation”) and its wholly owned subsidiaries, primarily Allstate Insurance Company (“AIC”), a property and casualty insurance company with various property and casualty and life and investment subsidiaries, including Allstate Life Insurance Company (“ALIC”) (collectively referred to as the “Company” or “Allstate”). These condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
The condensed consolidated financial statements and notes as of September 30, 2018 and for the three month and nine month periods ended September 30, 2018 and 2017 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, 2017. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year. All significant intercompany accounts and transactions have been eliminated.
Adopted accounting standards
Recognition and Measurement of Financial Assets and Financial Liabilities
Effective January 1, 2018, the Company adopted new Financial Accounting Standards Board (“FASB”) guidance requiring equity investments, including equity securities and limited partnership interests not accounted for under the equity method of accounting or that do not result in consolidation to be measured at fair value with changes in fair value recognized in net income. The guidance clarifies that an entity should evaluate the realizability of deferred tax assets related to available-for-sale fixed income securities in combination with the entity’s other deferred tax assets. The Company’s adoption of the new FASB guidance included adoption of the relevant elements of Technical Corrections and Improvements to Financial Instruments, issued in February 2018.
Upon adoption of the new guidance on January 1, 2018, $1.16 billion of pre-tax unrealized net capital gains for equity securities were reclassified from AOCI to retained income. The after-tax change in accounting for equity securities did not affect the Company’s total shareholders’ equity and the unrealized net capital
gains of $910 million, reclassified to retained income will never be recognized in net income.
Upon adoption of the new guidance on January 1, 2018, the carrying value of cost method limited partnership interests increased $224 million, pre-tax, to fair value. The after-tax cumulative-effect increase in retained income of $177 million increased the Company’s shareholders’ equity but will never be recognized in net income thereby negatively impacting calculations of returns on equity.
Revenue from Contracts with Customers
Effective January 1, 2018, the Company adopted new FASB guidance which revises the criteria for revenue recognition. Insurance contracts are excluded from the scope of the new guidance. The Company’s principal activities impacted by the new guidance are those related to the issuance of protection plans for consumer products and automobiles and service contracts that provide roadside assistance. Under the guidance, the transaction price is attributed to underlying performance obligations in the contract and revenue is recognized as the entity satisfies performance obligations and transfers control of a good or service to the customer. Incremental costs of obtaining a contract may be capitalized and amortized to the extent the entity expects to recover those costs.
Adoption of the guidance on January 1, 2018 under the modified retrospective approach resulted in the recognition of an immaterial after-tax net cumulative effect increase to the beginning balance of retained income. In addition to the net cumulative effect, the Company also recorded in the statement of financial position an increase of approximately $160 million pre-tax in unearned premiums with a corresponding $160 million pre-tax increase in deferred policy acquisition costs (“DAC”) for protection plans sold directly to retailers for which SquareTrade Holding Company, Inc. (“SquareTrade”) is deemed to be the principal in the transaction. This impact offsets fully and did not impact retained income at the date of adoption.
Presentation of Net Periodic Pension and Postretirement Benefits Costs
Effective January 1, 2018, the Company adopted new FASB guidance requiring identification, on the statement of operations or in disclosures, the line items in which the components of net periodic pension and postretirement benefits costs are presented. The new guidance permits only the service cost component to be eligible for capitalization where applicable. The adoption had no impact on the Company’s results of operations or financial position.
Goodwill Impairment
In January 2017, the FASB issued guidance to simplify the accounting for goodwill impairment which
6 www.allstate.com

Notes to Condensed Consolidated Financial Statements
removes the second step of the goodwill impairment test that requires a hypothetical purchase price allocation. Under the new guidance, goodwill impairment will be measured and recognized as the amount by which a reporting unit’s carrying value, including goodwill, exceeds its fair value, not to exceed the carrying amount of goodwill allocated to the reporting unit. The revised guidance does not affect a reporting entity’s ability to first assess qualitative factors by reporting unit to determine whether to perform the quantitative goodwill impairment test. The guidance is to be applied on a prospective basis, with the effects, if any, recognized in net income in the period of adoption. The Company elected to early adopt the new guidance as of January 1, 2018. The adoption had no impact on the Company’s results of operations or financial position.
Changes to significant accounting policies
Investments
Changes were made to the Company’s Significant Accounting Policies upon adoption of new FASB guidance related to the recognition and measurement of financial assets. Equity securities primarily include common stocks, exchange traded and mutual funds, non-redeemable preferred stocks and real estate investment trust equity investments. Equity securities are carried at fair value. Equity securities without readily determinable or estimable fair values are measured using the measurement alternative of cost less impairment, if any, and adjustments resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. The periodic change in fair value of equity securities is recognized within realized capital gains and losses on the Condensed Consolidated Statements of Operations effective January 1, 2018.
Investments in limited partnership interests include interests in private equity funds, real estate funds and other funds. Where the Company’s interest is so minor that it exercises virtually no influence over operating and financial policies, investments in limited partnership interests purchased prior to January 1, 2018 are accounted for at fair value primarily utilizing the net asset value (“NAV”) as a practical expedient to determine fair value. All other investments in limited partnership interests, including those purchased subsequent to January 1, 2018, are accounted for in accordance with the equity method of accounting (“EMA”).
Investment income from limited partnership interests carried at fair value is recognized based upon the changes in fair value of the investee’s equity primarily determined using NAV. Income from EMA limited partnership interests is recognized based on the Company’s share of the partnerships’ earnings. Income from EMA limited partnership interests is generally recognized on a three month delay due to the availability of the related financial statements from investees.
Recognition of Revenue
Revenues related to protection plans, other contracts (primarily finance and insurance products) and roadside assistance are deferred and earned over the term of the contract in a manner that recognizes revenue as obligations under the contracts are performed. Revenues from these products are classified as premiums as the products are backed by insurance. Protection plans and finance and insurance premiums are recognized using a cost-based incurrence method. Roadside assistance premiums are recognized evenly over the term of the contract as performance obligations are fulfilled.
Tax Reform
On December 22, 2017, Public Law 115-97, known as the Tax Cuts and Jobs Act of 2017 (“Tax Legislation”) became effective, permanently reducing the U.S. corporate income tax rate from 35% to 21% beginning January 1, 2018. As a result, the corporate tax rate is not comparable between periods. During 2017, the Company revalued its deferred tax assets and liabilities and recorded liabilities related to the transition to the modified territorial system for international taxation. The impact of the Tax Legislation was adjusted from the Company’s preliminary estimate due to, among other things, changes in interpretations and assumptions the Company previously made, guidance that was issued and actions the Company took as a result of the Tax Legislation. During the third quarter of 2018, the Company recorded a reduction of $31 million to income tax expense related to these provisional amounts. The Company may make adjustments to these provisional amounts as additional information becomes available and future guidance is issued by the Internal Revenue Service.
Pending accounting standards
Accounting for Leases
In February 2016, the FASB issued guidance revising the accounting for leases. Under the new guidance, lessees will be required to recognize a right-of-use (“ROU”) asset and lease liability for all leases other than those with a term less than one year. The lease liability will be equal to the present value of lease payments. A ROU asset will be based on the lease liability adjusted for qualifying initial direct costs. The Company currently estimates that the recognition of the ROU asset and lease liability will result in an increase in both total assets and liabilities in the Condensed Consolidated Statement of Financial Position of approximately $525 million. The new guidance requires sellers in a sale-leaseback transaction to recognize the entire gain from the sale of an underlying asset at the time the sale is recognized rather than over the leaseback term. The carrying value of unrecognized gains on sale-leaseback transactions executed prior to January 1, 2019 are approximately $20 million, after-tax, and will be recorded as an increase to retained income.
The expense of operating leases under the new guidance will be recognized in the income statement on a straight-line basis by adjusting the amortization of
Third Quarter 2018 Form 10-Q 7

Notes to Condensed Consolidated Financial Statements
the ROU asset to produce a straight-line expense when combined with the interest expense on the lease liability. For finance leases, the expense components are computed separately and produce greater up-front expense compared to operating leases as interest expense on the lease liability is higher in early years and the ROU asset is amortized on a straight-line basis. Lease classification will be based on criteria similar to those currently applied. The accounting model for lessors will be similar to the current model with modifications to reflect definition changes for components such as initial direct costs. Lessors will continue to classify leases as operating, direct financing, or sales-type. The guidance is effective for reporting periods beginning after December 15, 2018, and will be implemented using the optional transition method that allows application of the transition provisions at the adoption date instead of the earliest date presented.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued guidance which revises the credit loss recognition criteria for certain financial assets measured at amortized cost, including reinsurance recoverables. The new guidance replaces the existing incurred loss recognition model with an expected loss recognition model. The objective of the expected credit loss model is for the reporting entity to recognize its estimate of expected credit losses for affected financial assets in a valuation allowance deducted from the amortized cost basis of the related financial assets that results in presenting the net carrying value of the financial assets at the amount expected to be collected. The reporting entity must consider all relevant information available when estimating expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts over the life of an asset. Financial assets may be evaluated individually or on a pooled basis when they share similar risk characteristics. The measurement of credit losses for available-for-sale debt securities measured at fair value is not affected except that credit losses recognized are limited to the amount by which fair value is below amortized cost and the carrying value adjustment is recognized through a valuation allowance and not as a direct write-down. The guidance is effective for reporting periods beginning after December 15, 2019, and for most affected instruments must be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to beginning retained income. The Company is in the process of evaluating the impact of adoption.
Accounting for Hedging Activities
In August 2017, the FASB issued amendments intended to better align hedge accounting with an organization’s risk management activities. The amendments expand hedge accounting for nonfinancial and financial risk components and revise the measurement methodologies to better align with an organization’s risk management activities. Separate presentation of hedge ineffectiveness is eliminated to provide greater transparency of the full impact of
hedging by requiring presentation of the results of the hedged item and hedging instrument in a single financial statement line item. In addition, the amendments are designed to reduce complexity by simplifying the manner in which assessments of hedge effectiveness may be performed. The guidance is effective for reporting periods beginning after December 15, 2018. The presentation and disclosure guidance is effective on a prospective basis. The impact of adoption is not expected to be material to the Company’s results of operations or financial position.
Changes to the Disclosure Requirements for Deferred Benefit Plans
In August 2018, the FASB issued amendments to modify certain disclosure requirements for defined benefit plans. Disclosure additions relate to the weighted-average interest crediting rates for cash balance plans and other plans with interest crediting rates and explanations for significant gains and losses related to changes in the benefit obligation for the period. Disclosures to be removed include those that identify amounts that are expected to be reclassified out of AOCI and into the income statement in the coming year and the anticipated impact of a one-percentage point change in assumed health care cost trend rate on service and interest cost and on the accumulated benefit obligation. The amendments are effective for annual reporting periods beginning after December 15, 2020. The impacts of adoption are to the Company’s disclosures only.
Accounting for Long-Duration Insurance Contracts
In August 2018, the FASB issued guidance revising the accounting for certain long-duration insurance contracts. The new guidance changes the measurement of the Company’s reserves for traditional life, life-contingent immediate annuities and certain voluntary accident and health insurance products.
Under the new guidance, measurement assumptions, including those for mortality, morbidity and policy terminations, will be required to be reviewed and updated at least annually. The effect of updating measurement assumptions other than the discount rate are required to be determined on a retrospective basis and reported in net income. In addition, cash flows under the new guidance are required to be discounted using an upper-medium grade fixed income instrument yield that is updated through OCI at each reporting date. These changes will replace current GAAP, which utilizes assumptions set at policy issuance until such time as the assumptions result in reserves that are deficient when compared to reserves computed using current assumptions. When this occurs under current GAAP, premium deficiency reserves are recognized by unlocking reserve assumptions to eliminate a reserve deficiency.
The new guidance requires DAC and other capitalized balances currently amortized in proportion to premiums or gross profits to be amortized on a constant level basis over the expected term for all long-duration insurance contracts. DAC will not be subject to loss recognition testing but rather will be
8 www.allstate.com

Notes to Condensed Consolidated Financial Statements
reduced when actual experience exceeds expected experience (i.e. as a result of unexpected contract terminations). The new guidance will no longer require adjustments to DAC and deferred sales inducement costs (“DSI”) related to unrealized gains and losses.
Market risk benefit product features are required to be measured at fair value with changes in fair value recorded in net income with the exception of changes in the fair value attributable to a change in the instrument’s credit risk, which are required to be recognized in OCI. Substantially all of the Company’s market risk benefits are reinsured and therefore these impacts are not expected to be material to the Company.
The guidance is to be included in the comparable financial statements issued in reporting periods beginning after December 15, 2020, thereby requiring restatement of prior periods presented. Early adoption is permitted. The new guidance will be applied to affected contracts and DAC on the basis of existing carrying amounts at the earliest period presented or the new guidance may be applied retrospectively using actual historical experience as of contract inception. The guidance for market risk benefits is required to be adopted retrospectively.
The Company is evaluating the anticipated impacts of applying the new guidance to both retained income and AOCI. While the requirements of the new guidance represent a material change from existing GAAP, the underlying economics of the business and related cash flows are unchanged. The Company has
not completed an evaluation of the specific impacts of adopting the new guidance, but anticipates the financial statement impact of migrating from existing GAAP to that required by the new guidance to be material, largely attributed to the impact of transitioning from an original investment-based discount rate to one based on an upper-medium grade fixed income investment yield and updates to mortality assumptions that had previously been locked in at issuance. The Company expects the most significant impacts will occur in the run-off annuity segment. The revised accounting for DAC will be applied prospectively using the new model and any DAC effects existing in AOCI as a result of applying existing GAAP at the date of adoption will be reversed.
Other revenue presentation
Concurrent with the adoption of new FASB guidance on revenue from contracts with customers and the Company’s objective of providing more information related to revenues for our Service Businesses, the Company revised the presentation of total revenue to include other revenue. Previously, components of other revenue were presented within operating costs and expenses and primarily represent fees collected from policyholders relating to premium installment payments, commissions on sales of non-proprietary products, fee-based services and other revenue transactions. Other revenue is recognized when performance obligations are fulfilled. Prior periods have been reclassified to conform to current separate presentation of other revenue.

Note 2 | Earnings per Common Share

Basic earnings per common share is computed using the weighted average number of common shares outstanding, including vested unissued participating restricted stock units. Diluted earnings per common share is computed using the weighted average number
of common and dilutive potential common shares outstanding. For the Company, dilutive potential common shares consist of outstanding stock options and unvested non-participating restricted stock units and contingently issuable performance stock awards.

Computation of basic and diluted earnings per common share |  |  |  |
($ in millions, except per share data) |  | Three months ended September 30, |  | Nine months ended September 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Numerator: |  |  |  |  |  |  |  |
Net income |  | $ | 870 |  |  | $ | 666 |  |  | $ | 2,521 |  |  | $ | 1,940 |
Less: Preferred stock dividends |  | 37 |  |  | 29 |  |  | 105 |  |  | 87 |
Net income applicable to common shareholders (1) |  | $ | 833 |  |  | $ | 637 |  |  | $ | 2,416 |  |  | $ | 1,853 |
Denominator: |  |  |  |  |  |  |  |
Weighted average common shares outstanding |  | 346.0 |  |  | 361.3 |  |  | 349.7 |  |  | 363.5 |
Effect of dilutive potential common shares: |  |  |  |  |  |  |  |
Stock options |  | 3.8 |  |  | 4.4 |  |  | 3.8 |  |  | 4.3 |
Restricted stock units (non-participating) and performance stock awards |  | 1.9 |  |  | 1.4 |  |  | 1.9 |  |  | 1.3 |
Weighted average common and dilutive potential common shares outstanding |  | 351.7 |  |  | 367.1 |  |  | 355.4 |  |  | 369.1 |
Earnings per common share - Basic |  | $ | 2.41 |  |  | $ | 1.76 |  |  | $ | 6.91 |  |  | $ | 5.10 |
Earnings per common share - Diluted |  | $ | 2.37 |  |  | $ | 1.74 |  |  | $ | 6.80 |  |  | $ | 5.02 |

(1) | Net income applicable to common shareholders is net income less preferred stock dividends.

Third Quarter 2018 Form 10-Q 9

Notes to Condensed Consolidated Financial Statements
The effect of dilutive potential common shares does not include the effect of options with an anti-dilutive effect on earnings per common share because their exercise prices exceed the average market price of Allstate common shares during the period or for which the unrecognized compensation cost would have an anti-dilutive effect.
Options to purchase 2.3 million and 0.2 million Allstate common shares, with exercise prices ranging from $84.93 to $102.84 and $78.35 to $93.93, were outstanding for the three month periods ended
September 30, 2018 and 2017, respectively, but were not included in the computation of diluted earnings per common share in those periods. Options to purchase 1.9 million and 2.5 million Allstate common shares, with exercise prices ranging from $84.93 to $102.84 and $74.03 to $93.93, were outstanding for the nine month periods ended September 30, 2018 and 2017, respectively, but were not included in the computation of diluted earnings per common share in those periods.

Note 3 | Acquisitions

On January 3, 2017, the Company acquired SquareTrade, a consumer product protection plan provider that distributes through many of America’s major retailers and Europe’s mobile operators, for $1.4 billion in cash. SquareTrade provides protection plans covering a variety of consumer electronics and appliances. This acquisition broadened Allstate’s unique product offerings to better meet consumers’ needs.
In connection with the SquareTrade acquisition, the Company recorded goodwill of $1.10 billion, commissions paid to retailers (reported in deferred policy acquisition costs) of $66 million, other intangible assets (reported in other assets) of $555 million, contractual liability insurance policy premium expenses (reported in other assets) of $205 million, unearned premiums of $389 million and net deferred income tax liability of $138 million. These amounts reflect re-measurement adjustments to the fair value of the opening balance sheet assets and liabilities.
Of the $555 million assigned to other intangible assets, $465 million was attributable to acquired customer relationships and $69 million was assigned to
the SquareTrade trade name which is considered to have an indefinite useful life. The amortization expense of intangible assets was $20 million and $23 million for the three months ended September 30, 2018 and 2017, respectively, and was $61 million and $69 million for the nine months ended September 30, 2018 and 2017, respectively.
Subsequent event On October 5, 2018, the Company acquired InfoArmor, Inc. (“InfoArmor”), a leading provider of identity protection in the employee benefits market, for $525 million in cash. InfoArmor primarily offers identity protection to employees and their family members through voluntary benefit programs at over 1,400 firms, including more than 100 of the Fortune 500 companies. Due to the limited time since the closing date, the Company is currently evaluating the allocation of the purchase price and is unable to provide amounts recognized as of the closing date for the major classes of assets acquired and liabilities assumed. The Company will include this information in its annual report on Form 10-K for the year ended December 31, 2018.
10 www.allstate.com

Notes to Condensed Consolidated Financial Statements

Note 4 | Reportable Segments

Reportable segments revenue information |  |  |  |
($ in millions) |  | Three months ended September 30, |  | Nine months ended September 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Property-Liability |  |  |  |  |  |  |  |  |  |  |  |
Insurance premiums |  |  |  |  |  |  |  |  |  |  |  |
Auto |  | $ | 5,798 |  |  | $ | 5,501 |  |  | $ | 17,094 |  |  | $ | 16,327 |
Homeowners |  | 1,891 |  |  | 1,832 |  |  | 5,603 |  |  | 5,462 |
Other personal lines |  | 455 |  |  | 439 |  |  | 1,354 |  |  | 1,306 |
Commercial lines |  | 176 |  |  | 124 |  |  | 477 |  |  | 367 |
Allstate Protection |  | 8,320 |  |  | 7,896 |  |  | 24,528 |  |  | 23,462 |
Discontinued Lines and Coverages |  | — |  |  | — |  |  | — |  |  | — |
Total property-liability insurance premiums |  | 8,320 |  |  | 7,896 |  |  | 24,528 |  |  | 23,462 |
Other revenue |  | 192 |  |  | 185 |  |  | 550 |  |  | 533 |
Net investment income |  | 410 |  |  | 368 |  |  | 1,100 |  |  | 1,063 |
Realized capital gains and losses |  | 126 |  |  | 82 |  |  | 16 |  |  | 302 |
Total Property-Liability |  | 9,048 |  |  | 8,531 |  |  | 26,194 |  |  | 25,360 |
Service Businesses |  |  |  |  |  |  |  |  |  |
Consumer product protection plans |  | 125 |  |  | 78 |  |  | 369 |  |  | 207 |
Roadside assistance |  | 66 |  |  | 69 |  |  | 198 |  |  | 204 |
Finance and insurance products |  | 84 |  |  | 78 |  |  | 246 |  |  | 225 |
Intersegment premiums and service fees (1) |  | 31 |  |  | 26 |  |  | 89 |  |  | 82 |
Other revenue |  | 16 |  |  | 17 |  |  | 48 |  |  | 50 |
Net investment income |  | 7 |  |  | 4 |  |  | 18 |  |  | 11 |
Realized capital gains and losses |  | — |  |  | — |  |  | (6 | ) |  | — |
Total Service Businesses |  | 329 |  |  | 272 |  |  | 962 |  |  | 779 |
Allstate Life |  |  |  |  |  |  |  |
Traditional life insurance premiums |  | 149 |  |  | 141 |  |  | 443 |  |  | 420 |
Accident and health insurance premiums |  | — |  |  | — |  |  | 1 |  |  | 1 |
Interest-sensitive life insurance contract charges |  | 173 |  |  | 175 |  |  | 531 |  |  | 535 |
Other revenue |  | 30 |  |  | 26 |  |  | 84 |  |  | 81 |
Net investment income |  | 128 |  |  | 119 |  |  | 380 |  |  | 362 |
Realized capital gains and losses |  | (3 | ) |  | 2 |  |  | (9 | ) |  | 4 |
Total Allstate Life |  | 477 |  |  | 463 |  |  | 1,430 |  |  | 1,403 |
Allstate Benefits |  |  |  |  |  |  |  |
Traditional life insurance premiums |  | 13 |  |  | 12 |  |  | 32 |  |  | 30 |
Accident and health insurance premiums |  | 246 |  |  | 232 |  |  | 739 |  |  | 696 |
Interest-sensitive life insurance contract charges |  | 26 |  |  | 29 |  |  | 83 |  |  | 85 |
Net investment income |  | 19 |  |  | 18 |  |  | 57 |  |  | 54 |
Realized capital gains and losses |  | 2 |  |  | 1 |  |  | — |  |  | 1 |
Total Allstate Benefits |  | 306 |  |  | 292 |  |  | 911 |  |  | 866 |
Allstate Annuities |  |  |  |  |  |  |  |
Fixed annuities contract charges |  | 5 |  |  | 4 |  |  | 11 |  |  | 10 |
Net investment income |  | 260 |  |  | 324 |  |  | 843 |  |  | 967 |
Realized capital gains and losses |  | 51 |  |  | 18 |  |  | 28 |  |  | 11 |
Total Allstate Annuities |  | 316 |  |  | 346 |  |  | 882 |  |  | 988 |
Corporate and Other |  |  |  |  |  |  |  |  |  |  |  |
Net investment income |  | 20 |  |  | 10 |  |  | 56 |  |  | 31 |
Realized capital gains and losses |  | — |  |  | — |  |  | (12 | ) |  | — |
Total Corporate and Other |  | 20 |  |  | 10 |  |  | 44 |  |  | 31 |
Intersegment eliminations (1) |  | (31 | ) |  | (26 | ) |  | (89 | ) |  | (82 | )
Consolidated revenues |  | $ | 10,465 |  |  | $ | 9,888 |  |  | $ | 30,334 |  |  | $ | 29,345 |

(1) Intersegment insurance premiums and service fees are primarily related to Arity and Allstate Roadside Services and are eliminated in the condensed consolidated financial statements.
Third Quarter 2018 Form 10-Q 11

Notes to Condensed Consolidated Financial Statements

Reportable segments financial performance |  |  |  |
|  | Three months ended September 30, |  | Nine months ended September 30,
($ in millions) |  | 2018 |  | 2017 |  | 2018 |  | 2017
Property-Liability |  |  |  |  |  |  |  |
Allstate Protection |  | $ | 553 |  |  | $ | 572 |  |  | $ | 1,934 |  |  | $ | 1,392 |
Discontinued Lines and Coverages |  | (80 | ) |  | (88 | ) |  | (86 | ) |  | (95 | )
Total underwriting income |  | 473 |  |  | 484 |  |  | 1,848 |  |  | 1,297 |
Net investment income |  | 410 |  |  | 368 |  |  | 1,100 |  |  | 1,063 |
Income tax expense on operations |  | (178 | ) |  | (271 | ) |  | (603 | ) |  | (746 | )
Realized capital gains and losses, after-tax |  | 103 |  |  | 54 |  |  | 16 |  |  | 199 |
Gain on disposition of operations, after-tax |  | — |  |  | 1 |  |  | — |  |  | 7 |
Tax Legislation expense |  | (3 | ) |  | — |  |  | (3 | ) |  | — |
Property-Liability net income applicable to common shareholders |  | 805 |  |  | 636 |  |  | 2,358 |  |  | 1,820 |
Service Businesses |  |  |  |  |  |  |  |
Adjusted net income (loss) |  | — |  |  | (17 | ) |  | (4 | ) |  | (35 | )
Realized capital gains and losses, after-tax |  | (1 | ) |  | — |  |  | (5 | ) |  | — |
Amortization of purchased intangible assets, after-tax |  | (16 | ) |  | (15 | ) |  | (48 | ) |  | (45 | )
Tax Legislation expense |  | (4 | ) |  | — |  |  | (4 | ) |  | — |
Service Businesses net loss applicable to common shareholders |  | (21 | ) |  | (32 | ) |  | (61 | ) |  | (80 | )
Allstate Life |  |  |  |  |  |  |  |
Adjusted net income |  | 74 |  |  | 74 |  |  | 221 |  |  | 196 |
Realized capital gains and losses, after-tax |  | (3 | ) |  | 1 |  |  | (7 | ) |  | 2 |
DAC and DSI amortization related to realized capital gains and losses, after-tax |  | (1 | ) |  | (2 | ) |  | (6 | ) |  | (8 | )
Tax Legislation expense |  | (16 | ) |  | — |  |  | (16 | ) |  | — |
Allstate Life net income applicable to common shareholders |  | 54 |  |  | 73 |  |  | 192 |  |  | 190 |
Allstate Benefits |  |  |  |  |  |  |  |
Adjusted net income |  | 32 |  |  | 28 |  |  | 94 |  |  | 75 |
Realized capital gains and losses, after-tax |  | 2 |  |  | 1 |  |  | — |  |  | 1 |
Allstate Benefits net income applicable to common shareholders |  | 34 |  |  | 29 |  |  | 94 |  |  | 76 |
Allstate Annuities |  |  |  |  |  |  |  |
Adjusted net income |  | 20 |  |  | 55 |  |  | 99 |  |  | 149 |
Realized capital gains and losses, after-tax |  | 40 |  |  | 11 |  |  | 22 |  |  | 6 |
Valuation changes on embedded derivatives not hedged, after-tax |  | 1 |  |  | (1 | ) |  | 5 |  |  | (2 | )
Gain on disposition of operations, after-tax |  | 1 |  |  | 1 |  |  | 3 |  |  | 3 |
Tax Legislation benefit |  | 69 |  |  | — |  |  | 69 |  |  | — |
Allstate Annuities net income applicable to common shareholders |  | 131 |  |  | 66 |  |  | 198 |  |  | 156 |
Corporate and Other |  |  |  |  |  |  |  |
Adjusted net loss |  | (155 | ) |  | (134 | ) |  | (340 | ) |  | (295 | )
Realized capital gains and losses, after-tax |  | — |  |  | — |  |  | (10 | ) |  | — |
Business combination expenses, after-tax |  | — |  |  | (1 | ) |  | — |  |  | (14 | )
Tax Legislation expense |  | (15 | ) |  | — |  |  | (15 | ) |  | — |
Corporate and Other net loss applicable to common shareholders |  | (170 | ) |  | (135 | ) |  | (365 | ) |  | (309 | )
Consolidated net income applicable to common shareholders |  | $ | 833 |  |  | $ | 637 |  |  | $ | 2,416 |  |  | $ | 1,853 |

12 www.allstate.com

Notes to Condensed Consolidated Financial Statements

Note 5 | Investments

Amortized cost, gross unrealized gains and losses and fair value for fixed income securities
($ in millions) |  | Amortized cost |  | Gross unrealized |  | Fair value
|  | Gains |  | Losses |
September 30, 2018 |  |  |  |  |  |  |  |  |  |  |  |
U.S. government and agencies |  | $ | 3,142 |  |  | $ | 36 |  |  | $ | (27 | ) |  | $ | 3,151 |
Municipal |  | 9,316 |  |  | 204 |  |  | (105 | ) |  | 9,415 |
Corporate |  | 42,828 |  |  | 557 |  |  | (723 | ) |  | 42,662 |
Foreign government |  | 854 |  |  | 12 |  |  | (12 | ) |  | 854 |
Asset-backed securities (“ABS”) |  | 979 |  |  | 8 |  |  | (8 | ) |  | 979 |
Residential mortgage-backed securities (“RMBS”) |  | 404 |  |  | 98 |  |  | (2 | ) |  | 500 |
Commercial mortgage-backed securities (“CMBS”) |  | 74 |  |  | 7 |  |  | (1 | ) |  | 80 |
Redeemable preferred stock |  | 21 |  |  | 1 |  |  | — |  |  | 22 |
Total fixed income securities |  | $ | 57,618 |  |  | $ | 923 |  |  | $ | (878 | ) |  | $ | 57,663 |
December 31, 2017 |  |  |  |  |  |  |  |  |  |  |  |
U.S. government and agencies |  | $ | 3,580 |  |  | $ | 56 |  |  | $ | (20 | ) |  | $ | 3,616 |
Municipal |  | 8,053 |  |  | 311 |  |  | (36 | ) |  | 8,328 |
Corporate |  | 42,996 |  |  | 1,234 |  |  | (204 | ) |  | 44,026 |
Foreign government |  | 1,005 |  |  | 27 |  |  | (11 | ) |  | 1,021 |
ABS |  | 1,266 |  |  | 13 |  |  | (7 | ) |  | 1,272 |
RMBS |  | 480 |  |  | 101 |  |  | (3 | ) |  | 578 |
CMBS |  | 124 |  |  | 6 |  |  | (2 | ) |  | 128 |
Redeemable preferred stock |  | 21 |  |  | 2 |  |  | — |  |  | 23 |
Total fixed income securities |  | $ | 57,525 |  |  | $ | 1,750 |  |  | $ | (283 | ) |  | $ | 58,992 |

Scheduled maturities for fixed income securities
($ in millions) |  | As of September 30, 2018
| Amortized cost |  | Fair value
Due in one year or less |  | $ | 4,038 |  |  | $ | 4,042 |
Due after one year through five years |  | 28,963 |  |  | 28,812 |
Due after five years through ten years |  | 16,216 |  |  | 15,987 |
Due after ten years |  | 6,944 |  |  | 7,263 |
|  | 56,161 |  |  | 56,104 |
ABS, RMBS and CMBS |  | 1,457 |  |  | 1,559 |
Total |  | $ | 57,618 |  |  | $ | 57,663 |

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 |  |  |  |
($ in millions) |  | Three months ended September 30, |  | Nine months ended September 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Fixed income securities |  | $ | 527 |  |  | $ | 519 |  |  | $ | 1,544 |  |  | $ | 1,564 |
Equity securities |  | 35 |  |  | 37 |  |  | 130 |  |  | 130 |
Mortgage loans |  | 52 |  |  | 52 |  |  | 163 |  |  | 157 |
Limited partnership interests (1)(2) |  | 210 |  |  | 223 |  |  | 563 |  |  | 596 |
Short-term investments |  | 19 |  |  | 9 |  |  | 50 |  |  | 21 |
Other |  | 71 |  |  | 58 |  |  | 205 |  |  | 174 |
Investment income, before expense |  | 914 |  |  | 898 |  |  | 2,655 |  |  | 2,642 |
Investment expense |  | (70 | ) |  | (55 | ) |  | (201 | ) |  | (154 | )
Net investment income |  | $ | 844 |  |  | $ | 843 |  |  | $ | 2,454 |  |  | $ | 2,488 |

(1) | Due to the adoption of the recognition and measurement accounting standard, limited partnerships previously reported using the cost method are now reported at fair value with changes in fair value recognized in net investment income.

(2) | Includes net investment income of $135 million and $381 million for EMA limited partnership interests and $75 million and $182 million for limited partnership interests carried at fair value for the three and nine months ended September 30, 2018, respectively.

Third Quarter 2018 Form 10-Q 13

Notes to Condensed Consolidated Financial Statements

Realized capital gains and losses by asset type |  |  |  |  |  |  |  |
($ in millions) |  | Three months ended September 30, |  | Nine months ended September 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Fixed income securities |  | $ | (30 | ) |  | $ | 41 |  |  | $ | (153 | ) |  | $ | 78 |
Equity securities |  | 223 |  |  | 57 |  |  | 204 |  |  | 182 |
Mortgage loans |  | — |  |  | 1 |  |  | 2 |  |  | 1 |
Limited partnership interests |  | (23 | ) |  | 21 |  |  | (56 | ) |  | 92 |
Derivatives |  | 5 |  |  | (17 | ) |  | 20 |  |  | (40 | )
Other |  | 1 |  |  | — |  |  | — |  |  | 5 |
Realized capital gains and losses |  | $ | 176 |  |  | $ | 103 |  |  | $ | 17 |  |  | $ | 318 |

Realized capital gains and losses by transaction type |  |  |  |  |  |  |  |
($ in millions) |  | Three months ended September 30, |  | Nine months ended September 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Impairment write-downs (1) |  | $ | (5 | ) |  | $ | (23 | ) |  | $ | (10 | ) |  | $ | (94 | )
Change in intent write-downs (1) |  | — |  |  | (5 | ) |  | — |  |  | (43 | )
Net OTTI losses recognized in earnings |  | (5 | ) |  | (28 | ) |  | (10 | ) |  | (137 | )
Sales (1) |  | (22 | ) |  | 148 |  |  | (139 | ) |  | 495 |
Valuation of equity investments (1) |  | 198 |  |  | — |  |  | 149 |  |  | — |
Valuation and settlements of derivative instruments |  | 5 |  |  | (17 | ) |  | 17 |  |  | (40 | )
Realized capital gains and losses |  | $ | 176 |  |  | $ | 103 |  |  | $ | 17 |  |  | $ | 318 |

(1) | Due to the adoption of the recognition and measurement accounting standard, equity securities are reported at fair value with changes in fair value recognized in valuation of equity investments and are no longer included in impairment write-downs, change in intent write-downs and sales.

Gross gains of $21 million and gross losses of $48 million were realized on sales of fixed income securities during the three months ended September 30, 2018. Gross gains of $145 million and gross losses of $36 million were realized on sales of fixed income and equity securities during the three months ended September 30, 2017.
Gross gains of $95 million and gross losses of $242 million were realized on sales of fixed income securities during the nine months ended September 30, 2018. Gross gains of $521 million and gross losses of $161 million were realized on sales of fixed income and equity securities during the nine months ended September 30, 2017.

Valuation changes included in net income for investments still held as of September 30, 2018
($ in millions) |  | Three months ended September 30, 2018 |  | Nine months ended September 30, 2018
Equity securities (1) |  | $ | 234 |  |  | $ | 321 |
Limited partnership interests carried at fair value (1) |  | 75 |  |  | 181 |
Total valuation changes |  | $ | 309 |  |  | $ | 502 |

(1) | Investments held at the end of a prior quarter that were sold in the current quarter are not included in the year-to-date amounts shown in the table above; therefore, the sum of the quarterly amounts may not equal the year-to-date amount.

14 www.allstate.com

Notes to Condensed Consolidated Financial Statements

OTTI losses by asset type
($ in millions) |  | Three months ended September 30, 2018 |  | Three months ended September 30, 2017
| Gross |  | Included in OCI |  | Net |  | Gross |  | Included in OCI |  | Net
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Municipal |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
ABS |  | — |  |  | (1 | ) |  | (1 | ) |  | — |  |  | (1 | ) |  | (1 | )
RMBS |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
CMBS |  | (2 | ) |  | — |  |  | (2 | ) |  | (1 | ) |  | (1 | ) |  | (2 | )
Total fixed income securities |  | (2 | ) |  | (1 | ) |  | (3 | ) |  | (1 | ) |  | (2 | ) |  | (3 | )
Equity securities (1) |  | — |  |  | — |  |  | — |  |  | (8 | ) |  | — |  |  | (8 | )
Mortgage loans |  | — |  |  | — |  |  | — |  |  | (1 | ) |  | — |  |  | (1 | )
Limited partnership interests (1) |  | (2 | ) |  | — |  |  | (2 | ) |  | (16 | ) |  | — |  |  | (16 | )
Other |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
OTTI losses |  | $ | (4 | ) |  | $ | (1 | ) |  | $ | (5 | ) |  | $ | (26 | ) |  | $ | (2 | ) |  | $ | (28 | )
|  | Nine months ended September 30, 2018 |  | Nine months ended September 30, 2017
| Gross |  | Included in OCI |  | Net |  | Gross |  | Included in OCI |  | Net
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Municipal |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (1 | ) |  | $ | (2 | ) |  | $ | (3 | )
Corporate |  | — |  |  | — |  |  | — |  |  | (9 | ) |  | 3 |  |  | (6 | )
ABS |  | (1 | ) |  | (1 | ) |  | (2 | ) |  | (1 | ) |  | (1 | ) |  | (2 | )
RMBS |  | (1 | ) |  | — |  |  | (1 | ) |  | (1 | ) |  | (3 | ) |  | (4 | )
CMBS |  | (2 | ) |  | (1 | ) |  | (3 | ) |  | (9 | ) |  | 1 |  |  | (8 | )
Total fixed income securities |  | (4 | ) |  | (2 | ) |  | (6 | ) |  | (21 | ) |  | (2 | ) |  | (23 | )
Equity securities (1) |  | — |  |  | — |  |  | — |  |  | (77 | ) |  | — |  |  | (77 | )
Mortgage loans |  | — |  |  | — |  |  | — |  |  | (1 | ) |  | — |  |  | (1 | )
Limited partnership interests (1) |  | (3 | ) |  | — |  |  | (3 | ) |  | (32 | ) |  | — |  |  | (32 | )
Other |  | (1 | ) |  | — |  |  | (1 | ) |  | (4 | ) |  | — |  |  | (4 | )
OTTI losses |  | $ | (8 | ) |  | $ | (2 | ) |  | $ | (10 | ) |  | $ | (135 | ) |  | $ | (2 | ) |  | $ | (137 | )

(1) | Due to the adopti on of the recognition and measurement accounting standard, equity securities and limited partnerships previously reported using the cost method are now reported at fair value with changes in fair value recognized in net income and are no longer included in the table above.

The total amount of OTTI losses included in AOCI at the time of impairment for fixed income securities, which were not included in earnings, are presented in the following table. The amounts exclude $195 million and $208 million as of September 30, 2018 and
December 31, 2017, respectively, of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.

OTTI losses included in AOCI at the time of impairment for fixed income securities
($ in millions) |  | September 30, 2018 |  | December 31, 2017
Municipal |  | $ | (5 | ) |  | $ | (5 | )
ABS |  | (11 | ) |  | (15 | )
RMBS |  | (68 | ) |  | (77 | )
CMBS |  | (3 | ) |  | (4 | )
Total |  | $ | (87 | ) |  | $ | (101 | )

Third Quarter 2018 Form 10-Q 15

Notes to Condensed Consolidated Financial Statements

Rollforward of the cumulative credit losses recognized in earnings for fixed income securities held as of September 30,
($ in millions) |  | Three months ended |  | Nine months ended September 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Beginning balance |  | $ | (206 | ) |  | $ | (281 | ) |  | $ | (226 | ) |  | $ | (318 | )
Additional credit loss for securities previously other-than-temporarily impaired |  | (3 | ) |  | (3 | ) |  | (5 | ) |  | (15 | )
Additional credit loss for securities not previously other-than-temporarily impaired |  | — |  |  | — |  |  | (1 | ) |  | (8 | )
Reduction in credit loss for securities disposed or collected |  | 4 |  |  | 20 |  |  | 26 |  |  | 76 |
Change in credit loss due to accretion of increase in cash flows |  | — |  |  | — |  |  | 1 |  |  | 1 |
Ending balance |  | $ | (205 | ) |  | $ | (264 | ) |  | $ | (205 | ) |  | $ | (264 | )

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 OTTI 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 AOCI. If the Company determines that the fixed income security does not have sufficient cash flow or other information to estimate a recovery value for the security, the Company may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings.

Unrealized net capital gains and losses included in AOCI
($ in millions) |  | Fair value |  | Gross unrealized |  | Unrealized net gains (losses)
September 30, 2018 |  |  | Gains |  | Losses |
Fixed income securities |  | $ | 57,663 |  |  | $ | 923 |  |  | $ | (878 | ) |  | $ | 45 |
Short-term investments |  | 3,071 |  |  | — |  |  | — |  |  | — |
Derivative instruments |  | — |  |  | — |  |  | (3 | ) |  | (3 | )
EMA limited partnerships (1) |  |  |  |  |  |  |  |  |  |  | 2 |
Unrealized net capital gains and losses, pre-tax |  |  |  |  |  |  |  |  |  |  | 44 |
Amounts recognized for: |  |  |  |  |  |  |  |  |  |  |  |
Insurance reserves (2) |  |  |  |  |  |  |  |  |  |  | — |
DAC and DSI (3) |  |  |  |  |  |  |  |  |  |  | (62 | )
Amounts recognized |  |  |  |  |  |  |  |  |  |  | (62 | )
Deferred income taxes |  |  |  |  |  |  |  |  |  |  | 2 |
Unrealized net capital gains and losses, after-tax |  |  |  |  |  |  |  |  |  |  | $ | (16 | )

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

(2) | The insurance reserves adjustment represents the amount by which the reserve balance would increase if the net unrealized gains in the applicable product portfolios were realized and reinvested at lower interest rates, resulting in a premium deficiency. This adjustment primarily relates to structured settlement annuities with life contingencies (a type of immediate fixed annuities).

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

16 www.allstate.com

Notes to Condensed Consolidated Financial Statements

Unrealized net capital gains and losses included in AOCI
($ in millions) |  | Fair value |  | Gross unrealized |  | Unrealized net gains (losses)
December 31, 2017 |  |  | Gains |  | Losses |
Fixed income securities |  | $ | 58,992 |  |  | $ | 1,750 |  |  | $ | (283 | ) |  | $ | 1,467 |
Equity securities |  | 6,621 |  |  | 1,172 |  |  | (12 | ) |  | 1,160 |
Short-term investments |  | 1,944 |  |  | — |  |  | — |  |  | — |
Derivative instruments (1) |  | 2 |  |  | 2 |  |  | (3 | ) |  | (1 | )
EMA limited partnerships |  |  |  |  |  |  |  |  |  |  | 1 |
Unrealized net capital gains and losses, pre-tax |  |  |  |  |  |  |  |  |  |  | 2,627 |
Amounts recognized for: |  |  |  |  |  |  |  |  |  |  |  |
Insurance reserves |  |  |  |  |  |  |  |  |  |  | (315 | )
DAC and DSI |  |  |  |  |  |  |  |  |  |  | (196 | )
Amounts recognized |  |  |  |  |  |  |  |  |  |  | (511 | )
Deferred income taxes |  |  |  |  |  |  |  |  |  |  | (454 | )
Unrealized net capital gains and losses, after-tax |  |  |  |  |  |  |  |  |  |  | $ | 1,662 |

(1) Included in the fair value of derivative instruments is $2 million classified as liabilities.

Change in unrealized net capital gains and losses
($ in millions) |  | Nine months ended September 30, 2018
Fixed income securities |  | $ | (1,422 | )
Equity securities (1) |  | — |
Derivative instruments |  | (2 | )
EMA limited partnerships |  | 1 |
Total |  | (1,423 | )
Amounts recognized for: |  |  |
Insurance reserves |  | 315 |
DAC and DSI |  | 134 |
Amounts recognized |  | 449 |
Deferred income taxes |  | 206 |
Decrease in unrealized net capital gains and losses, after-tax |  | $ | (768 | )

(1) Upon adoption of the recognition and measurement accounting standard on January 1, 2018, $1.16 billion of pre-tax unrealized net capital gains for equity securities were reclassified from AOCI to retained income. See Note 1 of the condensed consolidated financial statements.
Portfolio monitoring
The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed income 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 OCI.
For fixed income 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 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 OTTI using all reasonably available information relevant to the collectability or recovery of the security. Inherent in the Company’s evaluation of
Third Quarter 2018 Form 10-Q 17

Notes to Condensed Consolidated Financial Statements
OTTI for these securities are assumptions and estimates about the financial condition and future earnings potential of the issue or issuer. Some of the factors that may be considered in evaluating whether a decline in fair value 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.

Gross unrealized losses and fair value by type and length of time held 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, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government and agencies |  | 65 |  |  | $ | 2,517 |  |  | $ | (23 | ) |  | 26 |  |  | $ | 175 |  |  | $ | (4 | ) |  | $ | (27 | )
Municipal |  | 3,192 |  |  | 5,600 |  |  | (75 | ) |  | 480 |  |  | 667 |  |  | (30 | ) |  | (105 | )
Corporate |  | 1,823 |  |  | 24,061 |  |  | (500 | ) |  | 329 |  |  | 4,274 |  |  | (223 | ) |  | (723 | )
Foreign government |  | 26 |  |  | 166 |  |  | (2 | ) |  | 25 |  |  | 432 |  |  | (10 | ) |  | (12 | )
ABS |  | 68 |  |  | 442 |  |  | (3 | ) |  | 19 |  |  | 107 |  |  | (5 | ) |  | (8 | )
RMBS |  | 97 |  |  | 21 |  |  | — |  |  | 182 |  |  | 53 |  |  | (2 | ) |  | (2 | )
CMBS |  | 5 |  |  | 18 |  |  | — |  |  | 3 |  |  | 1 |  |  | (1 | ) |  | (1 | )
Total fixed income securities |  | 5,276 |  |  | $ | 32,825 |  |  | $ | (603 | ) |  | 1,064 |  |  | $ | 5,709 |  |  | $ | (275 | ) |  | $ | (878 | )
Investment grade fixed income securities |  | 4,939 |  |  | $ | 30,338 |  |  | $ | (529 | ) |  | 1,015 |  |  | $ | 5,461 |  |  | $ | (253 | ) |  | $ | (782 | )
Below investment grade fixed income securities |  | 337 |  |  | 2,487 |  |  | (74 | ) |  | 49 |  |  | 248 |  |  | (22 | ) |  | (96 | )
Total fixed income securities |  | 5,276 |  |  | $ | 32,825 |  |  | $ | (603 | ) |  | 1,064 |  |  | $ | 5,709 |  |  | $ | (275 | ) |  | $ | (878 | )
December 31, 2017 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government and agencies |  | 66 |  |  | $ | 2,829 |  |  | $ | (18 | ) |  | 18 |  |  | $ | 182 |  |  | $ | (2 | ) |  | $ | (20 | )
Municipal |  | 1,756 |  |  | 3,143 |  |  | (24 | ) |  | 165 |  |  | 349 |  |  | (12 | ) |  | (36 | )
Corporate |  | 781 |  |  | 11,616 |  |  | (102 | ) |  | 208 |  |  | 3,289 |  |  | (102 | ) |  | (204 | )
Foreign government |  | 45 |  |  | 580 |  |  | (10 | ) |  | 5 |  |  | 44 |  |  | (1 | ) |  | (11 | )
ABS |  | 57 |  |  | 476 |  |  | (3 | ) |  | 9 |  |  | 34 |  |  | (4 | ) |  | (7 | )
RMBS |  | 118 |  |  | 35 |  |  | (1 | ) |  | 181 |  |  | 50 |  |  | (2 | ) |  | (3 | )
CMBS |  | 2 |  |  | 1 |  |  | — |  |  | 6 |  |  | 23 |  |  | (2 | ) |  | (2 | )
Redeemable preferred stock |  | 1 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total fixed income securities |  | 2,826 |  |  | 18,680 |  |  | (158 | ) |  | 592 |  |  | 3,971 |  |  | (125 | ) |  | (283 | )
Equity securities |  | 127 |  |  | 369 |  |  | (12 | ) |  | 2 |  |  | — |  |  | — |  |  | (12 | )
Total fixed income and equity securities |  | 2,953 |  |  | $ | 19,049 |  |  | $ | (170 | ) |  | 594 |  |  | $ | 3,971 |  |  | $ | (125 | ) |  | $ | (295 | )
Investment grade fixed income securities |  | 2,706 |  |  | $ | 17,668 |  |  | $ | (134 | ) |  | 535 |  |  | $ | 3,751 |  |  | $ | (98 | ) |  | $ | (232 | )
Below investment grade fixed income securities |  | 120 |  |  | 1,012 |  |  | (24 | ) |  | 57 |  |  | 220 |  |  | (27 | ) |  | (51 | )
Total fixed income securities |  | 2,826 |  |  | $ | 18,680 |  |  | $ | (158 | ) |  | 592 |  |  | $ | 3,971 |  |  | $ | (125 | ) |  | $ | (283 | )

As of September 30, 2018, $862 million of the $878 million unrealized losses are related to securities with an unrealized loss position less than 20% of amortized cost, the degree of which suggests that these securities do not pose a high risk of being other-than-temporarily impai red. Of the $862 million, $770 million are related to unrea lized losses on investment grade fixed income securities. Of the remaining $92 million, $58 million have been in an unrealized loss position for less than 12 months. Investment grade is defined as a security having a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A or BBB from S&P Global Ratings (“S&P”), a comparable rating from another nationally recognized rating agency, or a comparable internal rating if an externally provided rating is not available. Market prices for certain securities may have credit spreads which imply higher or lower credit quality than the current third party rating. Unrealized
losses on investment grade securities are principally related to an increase in market yields which may include increased risk-free interest rates and/or wider credit spreads since the time of initial purchase. T he unrealized losses are expected to reverse as the securities approach maturity.
As of September 30, 2018, the remaining $16 million of unrealized losses are related to securities in unrealized loss positions greater than or equal to 20% of amortized cost. Investment grade fixed income securities comprising $12 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 $16 million, $4 million are related to below investment
18 www.allstate.com

Notes to Condensed Consolidated Financial Statements
grade fixed income securities. Of these amounts, $1 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, 2018.
ABS, RMBS and CMBS in an unrealized loss position were evaluated based on actual and projected collateral losses relative to the securities’ positions in the respective securitization trusts, security specific expectations of cash flows, and credit ratings. This evaluation also takes into consideration credit enhancement, measured in terms of (i) subordination from other classes of securities in the trust that are contractually obligated to absorb losses before the class of security the Company owns, and (ii) the expected impact of other structural features embedded in the securitization trust beneficial to the class of securities the Company owns, such as overcollateralization and excess spread. Municipal bonds in an unrealized loss position were evaluated based on the underlying credit quality of the primary obligor, obligation type and quality of the underlying assets.
As of September 30, 2018, the Company has not made the decision to sell and it is not more likely than not the Company will be required to sell fixed income securities with unrealized losses before recovery of the amortized cost basis.
Limited partnerships
Investments in limited partnership interests include interests in private equity funds, real estate funds and other funds. As of September 30, 2018 and December 31, 2017, the carrying value of EMA limited partnerships totaled $5.89 billion and $5.41 billion, respectively, and limited partnerships carried at fair value as of September 30, 2018, while at cost method as of December 31, 2017, totaled $1.71 billion and $1.33 billion, respectively.
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, 2018.
Accrual of income is suspended for mortgage loans that are in default or when full and timely collection of principal and interest payments is not probable. Cash receipts on mortgage loans on nonaccrual status are generally recorded as a reduction of carrying value.
Debt service coverage ratio is considered a key credit quality indicator when mortgage loans are evaluated for impairment. Debt service coverage ratio represents the amount of estimated cash flows from the property available to the borrower to meet principal and interest payment obligations. Debt service coverage ratio estimates are updated annually or more frequently if conditions are warranted based on the Company’s credit monitoring process.

Carrying value of non-impaired mortgage loans summarized by debt service coverage ratio distribution
($ in millions) |  | September 30, 2018 |  | December 31, 2017
Debt service coverage ratio distribution |  | Fixed rate mortgage loans |  | Variable rate mortgage loans |  | Total |  | Fixed rate mortgage loans |  | Variable rate mortgage loans |  | Total
Below 1.0 |  | $ | 2 |  |  | $ | 30 |  |  | $ | 32 |  |  | $ | 3 |  |  | $ | — |  |  | $ | 3 |
1.0 - 1.25 |  | 218 |  |  | — |  |  | 218 |  |  | 345 |  |  | — |  |  | 345 |
1.26 - 1.50 |  | 1,216 |  |  | — |  |  | 1,216 |  |  | 1,141 |  |  | 30 |  |  | 1,171 |
Above 1.50 |  | 3,021 |  |  | 101 |  |  | 3,122 |  |  | 2,949 |  |  | 62 |  |  | 3,011 |
Total non-impaired mortgage loans |  | $ | 4,457 |  |  | $ | 131 |  |  | $ | 4,588 |  |  | $ | 4,438 |  |  | $ | 92 |  |  | $ | 4,530 |

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.
Third Quarter 2018 Form 10-Q 19

Notes to Condensed Consolidated Financial Statements

Net carrying value of impaired mortgage loans
($ in millions) |  | September 30, 2018 |  | December 31, 2017
Impaired mortgage loans with a valuation allowance |  | $ | 4 |  |  | $ | 4 |
Impaired mortgage loans without a valuation allowance |  | — |  |  | — |
Total impaired mortgage loans |  | $ | 4 |  |  | $ | 4 |
Valuation allowance on impaired mortgage loans |  | $ | 3 |  |  | $ | 3 |

The valuation allowance on impaired loans had no activity for the three months and nine months ended September 30, 2018 and 2017. The average balance of impaired loans was $4 million and $8 million for the nine months ended September 30, 2018 and 2017, respectively.

Payments on all mortgage loans were current as of September 30, 2018 and December 31, 2017.

Short-term investments
Short-term investments, including commercial paper, U.S. Treasury bills, money market funds and other short-term investments, are carried at fair value.
As of September 30, 2018 and December 31, 2017, the fair value of short-term investments totaled $3.07 billion and $1.94 billion, respectively.
Other investments
Other investments primarily consist of bank loans, policy loans, real estate, agent loans and derivatives. Bank loans are primarily senior secured corporate loans and are carried at amortized cost. Policy loans are carried at unpaid principal balances. Real estate is carried at cost less accumulated depreciation. Agent loans are loans issued to exclusive Allstate agents and are carried at unpaid principal balances, net of valuation allowances and unamortized deferred fees or costs. Derivatives are carried at fair value.

Other investments by asset type
($ in millions) |  | September 30, 2018 |  | December 31, 2017
Bank loans |  | $ | 1,608 |  |  | $ | 1,702 |
Policy loans |  | 900 |  |  | 905 |
Real estate |  | 776 |  |  | 632 |
Agent loans |  | 597 |  |  | 538 |
Other |  | 194 |  |  | 195 |
Total |  | $ | 4,075 |  |  | $ | 3,972 |

Note 6 | Fair Value of Assets and Liabilities

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Assets and liabilities recorded on the 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
20 www.allstate.com

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

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

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

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

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

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.
Third Quarter 2018 Form 10-Q 21

Notes to Condensed Consolidated Financial Statements
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.

Over-the-counter (“OTC”) derivatives, including interest rate swaps, foreign currency swaps, total return swaps, foreign exchange forward contracts, certain options and certain credit default swaps, are valued using models that rely on inputs such
as interest rate yield curves, implied volatilities, index price levels, currency rates, and credit spreads that are observable for substantially the full term of the contract. The valuation techniques underlying the models are widely accepted in the financial services industry and do not involve significant judgment.
Level 3 measurements

• | Fixed income securities:

Municipal: Comprise municipal bonds that are not rated by third party credit rating agencies. The primary inputs to the valuation of these municipal bonds include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields and credit spreads. Also included are municipal bonds valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable and municipal bonds in default valued based on the present value of expected cash flows.
Corporate - public and Corporate - privately placed: Primarily valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable. Other inputs include an interest rate yield curve, as well as published credit spreads for similar assets that incorporate the credit quality and industry sector of the issuer.
ABS - CDO, ABS - consumer and other, 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

22 www.allstate.com

Notes to Condensed Consolidated Financial Statements
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. EMA limited partnership interests written-down to fair value in connection with recognizing OTTI losses are generally valued using net asset values.
Investments excluded from the fair value hierarchy
Limited partnerships carried at fair value, which do not have readily determinable fair values, use NAV provided by the investees and are excluded from the fair value hierarchy. These investments are generally not redeemable by the investees and generally cannot be sold withou t approval of the general partner. We receive distributions of income and from liquidation of the underlying assets of the investees over the life of these investments, typically 10-12 years. As of September 30, 2018, the Company has commitments to invest $775 million in these limited partnership interests.

Assets and liabilities measured at fair value
|  | As of September 30, 2018
($ in millions) |  | Quoted prices in active markets for identical assets (Level 1) |  | Significant other observable inputs (Level 2) |  | Significant unobservable inputs (Level 3) |  | Counterparty and cash collateral netting |  | Total
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government and agencies |  | $ | 2,693 |  |  | $ | 458 |  |  | $ | — |  |  |  |  |  | $ | 3,151 |
Municipal |  | — |  |  | 9,326 |  |  | 89 |  |  |  |  |  | 9,415 |
Corporate - public |  | — |  |  | 30,758 |  |  | 92 |  |  |  |  |  | 30,850 |
Corporate - privately placed |  | — |  |  | 11,645 |  |  | 167 |  |  |  |  | 11,812 |
Foreign government |  | — |  |  | 854 |  |  | — |  |  |  |  |  | 854 |
ABS - CDO |  | — |  |  | 310 |  |  | 29 |  |  |  |  |  | 339 |
ABS - consumer and other |  | — |  |  | 588 |  |  | 52 |  |  |  |  | 640 |
RMBS |  | — |  |  | 500 |  |  | — |  |  |  |  |  | 500 |
CMBS |  | — |  |  | 54 |  |  | 26 |  |  |  |  |  | 80 |
Redeemable preferred stock |  | — |  |  | 22 |  |  | — |  |  |  |  |  | 22 |
Total fixed income securities |  | 2,693 |  |  | 54,515 |  |  | 455 |  |  |  |  |  | 57,663 |
Equity securities |  | 6,286 |  |  | 359 |  |  | 320 |  |  |  |  |  | 6,965 |
Short-term investments |  | 1,228 |  |  | 1,823 |  |  | 20 |  |  |  |  |  | 3,071 |
Other investments: Free-standing derivatives |  | — |  |  | 120 |  |  | 1 |  |  | $ | (13 | ) |  | 108 |
Separate account assets |  | 3,307 |  |  | — |  |  | — |  |  |  |  |  | 3,307 |
Total recurring assets at fair value |  | $ | 13,514 |  |  | $ | 56,817 |  |  | $ | 796 |  |  | $ | (13 | ) |  | $ | 71,114 |
% of total assets at fair value |  | 19.0 | % |  | 79.9 | % |  | 1.1 | % |  | — | % |  | 100 | %
Investments reported at NAV |  |  |  |  |  |  |  |  |  | 1,709 |
Total |  |  |  |  |  |  |  |  |  | $ | 72,823 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contractholder funds: Derivatives embedded in life and annuity contracts |  | $ | — |  |  | $ | — |  |  | $ | (266 | ) |  |  |  |  | $ | (266 | )
Other liabilities: Free-standing derivatives |  | — |  |  | (47 | ) |  | — |  |  | $ | 6 |  |  | (41 | )
Total recurring liabilities at fair value |  | $ | — |  |  | $ | (47 | ) |  | $ | (266 | ) |  | $ | 6 |  |  | $ | (307 | )
% of total liabilities at fair value |  | — | % |  | 15.3 | % |  | 86.7 | % |  | (2.0 | )% |  | 100 | %

Third Quarter 2018 Form 10-Q 23

Notes to Condensed Consolidated Financial Statements

Assets and liabilities measured at fair value
|  | As of December 31, 2017
($ in millions) |  | Quoted prices in active markets for identical assets (Level 1) |  | Significant other observable inputs (Level 2) |  | Significant unobservable inputs (Level 3) |  | Counterparty and cash collateral netting |  | Total
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government and agencies |  | $ | 3,079 |  |  | $ | 537 |  |  | $ | — |  |  |  |  |  | $ | 3,616 |
Municipal |  | — |  |  | 8,227 |  |  | 101 |  |  |  |  |  | 8,328 |
Corporate - public |  | — |  |  | 31,963 |  |  | 108 |  |  |  |  |  | 32,071 |
Corporate - privately placed |  | — |  |  | 11,731 |  |  | 224 |  |  |  |  | 11,955 |
Foreign government |  | — |  |  | 1,021 |  |  | — |  |  |  |  |  | 1,021 |
ABS - CDO |  | — |  |  | 480 |  |  | 99 |  |  |  |  |  | 579 |
ABS - consumer and other |  | — |  |  | 645 |  |  | 48 |  |  |  |  | 693 |
RMBS |  | — |  |  | 578 |  |  | — |  |  |  |  |  | 578 |
CMBS |  | — |  |  | 102 |  |  | 26 |  |  |  |  |  | 128 |
Redeemable preferred stock |  | — |  |  | 23 |  |  | — |  |  |  |  |  | 23 |
Total fixed income securities |  | 3,079 |  |  | 55,307 |  |  | 606 |  |  |  |  |  | 58,992 |
Equity securities |  | 6,032 |  |  | 379 |  |  | 210 |  |  |  |  |  | 6,621 |
Short-term investments |  | 264 |  |  | 1,660 |  |  | 20 |  |  |  |  |  | 1,944 |
Other investments: Free-standing derivatives |  | — |  |  | 132 |  |  | 1 |  |  | $ | (6 | ) |  | 127 |
Separate account assets |  | 3,444 |  |  | — |  |  | — |  |  |  |  |  | 3,444 |
Total recurring basis assets |  | 12,819 |  |  | 57,478 |  |  | 837 |  |  | (6 | ) |  | 71,128 |
Non-recurring basis (1) |  | — |  |  | — |  |  | 3 |  |  |  |  |  | 3 |
Total assets at fair value |  | $ | 12,819 |  |  | $ | 57,478 |  |  | $ | 840 |  |  | $ | (6 | ) |  | $ | 71,131 |
% of total assets at fair value |  | 18.0 | % |  | 80.8 | % |  | 1.2 | % |  | — | % |  | 100 | %
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contractholder funds: Derivatives embedded in life and annuity contracts |  | $ | — |  |  | $ | — |  |  | $ | (286 | ) |  |  |  |  | $ | (286 | )
Other liabilities: Free-standing derivatives |  | (1 | ) |  | (83 | ) |  | — |  |  | $ | 14 |  |  | (70 | )
Total liabilities at fair value |  | $ | (1 | ) |  | $ | (83 | ) |  | $ | (286 | ) |  | $ | 14 |  |  | $ | (356 | )
% of total liabilities at fair value |  | 0.3 | % |  | 23.3 | % |  | 80.3 | % |  | (3.9 | )% |  | 100 | %

(1) | Includes $3 million of limited partnership interests written-down to fair value in connection with recognizing OTTI losses.

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, 2018 |  |  |  |  |  |  |  |  |  |  |
Derivatives embedded in life and annuity contracts – Equity-indexed and forward starting options |  | $ | (239 | ) |  | Stochastic cash flow model |  | Projected option cost |  | 1.0%-2.2% |  | 1.74%
December 31, 2017 |  |  |  |  |  |  |  |  |  |  |
Derivatives embedded in life and annuity contracts – Equity-indexed and forward starting options |  | $ | (252 | ) |  | Stochastic cash flow model |  | Projected option cost |  | 1.0 - 2.2% |  | 1.74%

The embedded derivatives are equity-indexed and forward starting options in certain life and annuity products that provide customers with interest crediting rates based on the performance of the S&P 500. If the projected option cost increased (decreased), it would result in a higher (lower) liability fair value.
As of September 30, 2018 and December 31, 2017, Level 3 fair value measurements of fixed income securities total $455 million and $606 million, respectively, and include $199 million and $271 million, respectively, of securities valued based on non-binding broker quotes where the inputs have not been
corroborated to be market observable and $48 million and $58 million, respectively, of municipal fixed income securities that are not rated by third party credit rating agencies. 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, and an increase (decrease) in the credit rating of municipal bonds that are not rated by third party credit rating agencies would result in a higher (lower) fair value.
24 www.allstate.com

Notes to Condensed Consolidated Financial Statements

Rollforward of Level 3 assets and liabilities held at fair value during the three months period ended September 30, 2018 |
|  | Balance as of June 30, 2018 |  | Total gains (losses) included in: |  | Transfers into Level 3 |  | Transfers out of Level 3 |
($ in millions) |  |  | Net income (1) |  | OCI |  |  |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Municipal |  | $ | 106 |  |  | $ | — |  |  | $ | (1 | ) |  | $ | — |  |  | $ | (9 | ) |
Corporate - public |  | 76 |  |  | — |  |  | (1 | ) |  | 12 |  |  | (4 | ) |
Corporate - privately placed |  | 195 |  |  | 1 |  |  | (1 | ) |  | — |  |  | (20 | ) |
ABS - CDO |  | 9 |  |  | — |  |  | 1 |  |  | 20 |  |  | — |  |
ABS - consumer and other |  | 73 |  |  | — |  |  | — |  |  | 12 |  |  | (29 | ) |
CMBS |  | 26 |  |  | — |  |  | — |  |  | — |  |  | — |  |
Total fixed income securities |  | 485 |  |  | 1 |  |  | (2 | ) |  | 44 |  |  | (62 | ) |
Equity securities |  | 291 |  |  | 8 |  |  | — |  |  | — |  |  | — |  |
Short-term investments |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |
Free-standing derivatives, net |  | 1 |  |  | — |  |  | — |  |  | — |  |  | — |  |
Total recurring Level 3 assets |  | $ | 777 |  |  | $ | 9 |  |  | $ | (2 | ) |  | $ | 44 |  |  | $ | (62 | ) |
Liabilities |  |  |  |  |  |  |  |  |  |  |
Contractholder funds: Derivatives embedded in life and annuity contracts |  | $ | (260 | ) |  | $ | (7 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |
Total recurring Level 3 liabilities |  | $ | (260 | ) |  | $ | (7 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |
|  | Purchases |  | Sales |  | Issues |  | Settlements |  | Balance as of September 30, 2018 |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Municipal |  | $ | — |  |  | $ | (6 | ) |  | $ | — |  |  | $ | (1 | ) |  | $ | 89 |  |
Corporate - public |  | 10 |  |  | (1 | ) |  | — |  |  | — |  |  | 92 |  |
Corporate - privately placed |  | 6 |  |  | (2 | ) |  | — |  |  | (12 | ) |  | 167 |  |
ABS - CDO |  | — |  |  | — |  |  | — |  |  | (1 | ) |  | 29 |  |
ABS - consumer and other |  | 33 |  |  | (20 | ) |  | — |  |  | (17 | ) |  | 52 |  |
CMBS |  | — |  |  | — |  |  | — |  |  | — |  |  | 26 |  |
Total fixed income securities |  | 49 |  |  | (29 | ) |  | — |  |  | (31 | ) |  | 455 |  |
Equity securities |  | 21 |  |  | — |  |  | — |  |  | — |  |  | 320 |  |
Short-term investments |  | 20 |  |  | — |  |  | — |  |  | — |  |  | 20 |  |
Free-standing derivatives, net |  | — |  |  | — |  |  | — |  |  | — |  |  | 1 |  | (2)
Total recurring Level 3 assets |  | $ | 90 |  |  | $ | (29 | ) |  | $ | — |  |  | $ | (31 | ) |  | $ | 796 |  |
Liabilities |  |  |  |  |  |  |  |  |  |  |
Contractholder funds: Derivatives embedded in life and annuity contracts |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 1 |  |  | $ | (266 | ) |
Total recurring Level 3 liabilities |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 1 |  |  | $ | (266 | ) |

(1) | The effect to net income totals $2 million and is reported in the Condensed Consolidated Statements of Operations as follows: $9 million in realized capital gains and losses, $(9) million in interest credited to contractholder funds and $2 million in life contract benefits.

(2) | Comprises $1 million of assets.

Third Quarter 2018 Form 10-Q 25

Notes to Condensed Consolidated Financial Statements

Rollforward of Level 3 assets and liabilities held at fair value during the nine months period ended September 30, 2018 |
|  | Balance as of December 31, 2017 |  | Total gains (losses) included in: |  | Transfers into Level 3 |  | Transfers out of Level 3 |
($ in millions) |  |  | Net income (1) |  | OCI |  |  |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Municipal |  | $ | 101 |  |  | $ | 1 |  |  | $ | (2 | ) |  | $ | — |  |  | $ | (11 | ) |
Corporate - public |  | 108 |  |  | — |  |  | (3 | ) |  | 16 |  |  | (9 | ) |
Corporate - privately placed |  | 224 |  |  | (1 | ) |  | (2 | ) |  | 20 |  |  | (49 | ) |
ABS - CDO |  | 99 |  |  | — |  |  | 1 |  |  | 20 |  |  | (89 | ) |
ABS - consumer and other |  | 48 |  |  | — |  |  | 1 |  |  | 22 |  |  | (45 | ) |
CMBS |  | 26 |  |  | — |  |  | — |  |  | — |  |  | — |  |
Total fixed income securities |  | 606 |  |  | — |  |  | (5 | ) |  | 78 |  |  | (203 | ) |
Equity securities |  | 210 |  |  | 24 |  |  | — |  |  | — |  |  | — |  |
Short-term investments |  | 20 |  |  | — |  |  | — |  |  | — |  |  | — |  |
Free-standing derivatives, net |  | 1 |  |  | — |  |  | — |  |  | — |  |  | — |  |
Total recurring Level 3 assets |  | $ | 837 |  |  | $ | 24 |  |  | $ | (5 | ) |  | $ | 78 |  |  | $ | (203 | ) |
Liabilities |  |  |  |  |  |  |  |  |  |  |
Contractholder funds: Derivatives embedded in life and annuity contracts |  | $ | (286 | ) |  | $ | 17 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |
Total recurring Level 3 liabilities |  | $ | (286 | ) |  | $ | 17 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |
|  | Purchases |  | Sales |  | Issues |  | Settlements |  | Balance as of September 30, 2018 |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Municipal |  | $ | 10 |  |  | $ | (8 | ) |  | $ | — |  |  | $ | (2 | ) |  | $ | 89 |  |
Corporate - public |  | 10 |  |  | (27 | ) |  | — |  |  | (3 | ) |  | 92 |  |
Corporate - privately placed |  | 21 |  |  | (5 | ) |  | — |  |  | (41 | ) |  | 167 |  |
ABS - CDO |  | — |  |  | — |  |  | — |  |  | (2 | ) |  | 29 |  |
ABS - consumer and other |  | 108 |  |  | (62 | ) |  | — |  |  | (20 | ) |  | 52 |  |
CMBS |  | 1 |  |  | — |  |  | — |  |  | (1 | ) |  | 26 |  |
Total fixed income securities |  | 150 |  |  | (102 | ) |  | — |  |  | (69 | ) |  | 455 |  |
Equity securities |  | 100 |  |  | (14 | ) |  | — |  |  | — |  |  | 320 |  |
Short-term investments |  | 45 |  |  | (45 | ) |  | — |  |  | — |  |  | 20 |  |
Free-standing derivatives, net |  | — |  |  | — |  |  | — |  |  | — |  |  | 1 |  | (2)
Total recurring Level 3 assets |  | $ | 295 |  |  | $ | (161 | ) |  | $ | — |  |  | $ | (69 | ) |  | $ | 796 |  |
Liabilities |  |  |  |  |  |  |  |  |  |  |
Contractholder funds: Derivatives embedded in life and annuity contracts |  | $ | — |  |  | $ | — |  |  | $ | (1 | ) |  | $ | 4 |  |  | $ | (266 | ) |
Total recurring Level 3 liabilities |  | $ | — |  |  | $ | — |  |  | $ | (1 | ) |  | $ | 4 |  |  | $ | (266 | ) |

(1) | The effect to net income totals $41 million and is reported in the Condensed Consolidated Statements of Operations as follows: $24 million in realized capital gains and losses, $10 million in interest credited to contractholder funds and $7 million in life contract benefits.

(2) | Comprises $1 million of assets.

26 www.allstate.com

Notes to Condensed Consolidated Financial Statements

Rollforward of Level 3 assets and liabilities held at fair value during the three months period ended September 30, 2017 |
|  | Balance as of June 30, 2017 |  | Total gains (losses) included in: |  | Transfers into Level 3 |  | Transfers out of Level 3 |
($ in millions) |  |  | Net income (1) |  | OCI |  |  |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Municipal |  | $ | 114 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (4 | ) |
Corporate - public |  | 60 |  |  | — |  |  | — |  |  | — |  |  | (4 | ) |
Corporate - privately placed |  | 266 |  |  | 1 |  |  | 2 |  |  | — |  |  | (34 | ) |
ABS - CDO |  | 91 |  |  | — |  |  | 1 |  |  | — |  |  | (68 | ) |
ABS - consumer and other |  | 120 |  |  | — |  |  | — |  |  | — |  |  | (62 | ) |
CMBS |  | 24 |  |  | — |  |  | — |  |  | — |  |  | — |  |
Total fixed income securities |  | 675 |  |  | 1 |  |  | 3 |  |  | — |  |  | (172 | ) |
Equity securities |  | 166 |  |  | 2 |  |  | 1 |  |  | — |  |  | (1 | ) |
Free-standing derivatives, net |  | 1 |  |  | — |  |  | — |  |  | — |  |  | — |  |
Total recurring Level 3 assets |  | $ | 842 |  |  | $ | 3 |  |  | $ | 4 |  |  | $ | — |  |  | $ | (173 | ) |
Liabilities |  |  |  |  |  |  |  |  |  |  |
Contractholder funds: Derivatives embedded in life and annuity contracts |  | $ | (285 | ) |  | $ | (9 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |
Total recurring Level 3 liabilities |  | $ | (285 | ) |  | $ | (9 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |
|  | Purchases |  | Sales |  | Issues |  | Settlements |  | Balance as of September 30, 2017 |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Municipal |  | $ | 1 |  |  | $ | (3 | ) |  | $ | — |  |  | $ | (1 | ) |  | $ | 107 |  |
Corporate - public |  | 51 |  |  | (1 | ) |  | — |  |  | (2 | ) |  | 104 |  |
Corporate - privately placed |  | 18 |  |  | (1 | ) |  | — |  |  | (2 | ) |  | 250 |  |
ABS - CDO |  | — |  |  | — |  |  | — |  |  | (5 | ) |  | 19 |  |
ABS - consumer and other |  | 10 |  |  | — |  |  | — |  |  | (2 | ) |  | 66 |  |
CMBS |  | 3 |  |  | — |  |  | — |  |  | (1 | ) |  | 26 |  |
Total fixed income securities |  | 83 |  |  | (5 | ) |  | — |  |  | (13 | ) |  | 572 |  |
Equity securities |  | — |  |  | — |  |  | — |  |  | — |  |  | 168 |  |
Free-standing derivatives, net |  | — |  |  | — |  |  | — |  |  | — |  |  | 1 |  | (2)
Total recurring Level 3 assets |  | $ | 83 |  |  | $ | (5 | ) |  | $ | — |  |  | $ | (13 | ) |  | $ | 741 |  |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contractholder funds: Derivatives embedded in life and annuity contracts |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 2 |  |  | $ | (292 | ) |
Total recurring Level 3 liabilities |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 2 |  |  | $ | (292 | ) |

(1) | The effect to net income totals $(6) million and is reported in the Condensed Consolidated Statements of Operations as follows: $3 million in net investment income, $(5) million in interest credited to contractholder funds and $(4) million in life contract benefits.

(2) | Comprises $1 million of assets.

Third Quarter 2018 Form 10-Q 27

Notes to Condensed Consolidated Financial Statements

Rollforward of Level 3 assets and liabilities held at fair value during the nine months period ended September 30, 2017 |
|  | Balance as of December 31, 2016 |  | Total gains (losses) included in: |  | Transfers into Level 3 |  | Transfers out of Level 3 |
($ in millions) |  |  | Net income (1) |  | OCI |  |  |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Municipal |  | $ | 125 |  |  | $ | (1 | ) |  | $ | 6 |  |  | $ | — |  |  | $ | (5 | ) |
Corporate - public |  | 78 |  |  | — |  |  | — |  |  | — |  |  | (20 | ) |
Corporate - privately placed |  | 263 |  |  | 7 |  |  | — |  |  | 30 |  |  | (34 | ) |
ABS - CDO |  | 27 |  |  | — |  |  | 3 |  |  | 30 |  |  | (190 | ) |
ABS - consumer and other |  | 42 |  |  | — |  |  | — |  |  | — |  |  | (69 | ) |
RMBS |  | 1 |  |  | — |  |  | — |  |  | — |  |  | — |  |
CMBS |  | 22 |  |  | — |  |  | — |  |  | — |  |  | — |  |
Total fixed income securities |  | 558 |  |  | 6 |  |  | 9 |  |  | 60 |  |  | (318 | ) |
Equity securities |  | 163 |  |  | 15 |  |  | 4 |  |  | — |  |  | (4 | ) |
Short-term investments |  | 15 |  |  | — |  |  | — |  |  | — |  |  | — |  |
Free-standing derivatives, net |  | (2 | ) |  | 3 |  |  | — |  |  | — |  |  | — |  |
Other assets |  | 1 |  |  | (1 | ) |  | — |  |  | — |  |  | — |  |
Total recurring Level 3 assets |  | $ | 735 |  |  | $ | 23 |  |  | $ | 13 |  |  | $ | 60 |  |  | $ | (322 | ) |
Liabilities |  |  |  |  |  |  |  |  |  |  |
Contractholder funds: Derivatives embedded in life and annuity contracts |  | $ | (290 | ) |  | $ | (6 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |
Total recurring Level 3 liabilities |  | $ | (290 | ) |  | $ | (6 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |
|  | Purchases |  | Sales |  | Issues |  | Settlements |  | Balance as of September 30, 2017 |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Municipal |  | $ | 6 |  |  | $ | (23 | ) |  | $ | — |  |  | $ | (1 | ) |  | $ | 107 |  |
Corporate - public |  | 50 |  |  | — |  |  | — |  |  | (4 | ) |  | 104 |  |
Corporate - privately placed |  | 22 |  |  | (30 | ) |  | — |  |  | (8 | ) |  | 250 |  |
ABS - CDO |  | 160 |  |  | — |  |  | — |  |  | (11 | ) |  | 19 |  |
ABS - consumer and other |  | 99 |  |  | — |  |  | — |  |  | (6 | ) |  | 66 |  |
RMBS |  | — |  |  | — |  |  | — |  |  | (1 | ) |  | — |  |
CMBS |  | 6 |  |  | — |  |  | — |  |  | (2 | ) |  | 26 |  |
Total fixed income securities |  | 343 |  |  | (53 | ) |  | — |  |  | (33 | ) |  | 572 |  |
Equity securities |  | 3 |  |  | (13 | ) |  | — |  |  | — |  |  | 168 |  |
Short-term investments |  | 25 |  |  | (40 | ) |  | — |  |  | — |  |  | — |  |
Free-standing derivatives, net |  | — |  |  | — |  |  | — |  |  | — |  |  | 1 |  | (2)
Other assets |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |
Total recurring Level 3 assets |  | $ | 371 |  |  | $ | (106 | ) |  | $ | — |  |  | $ | (33 | ) |  | $ | 741 |  |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contractholder funds: Derivatives embedded in life and annuity contracts |  | $ | — |  |  | $ | — |  |  | $ | (1 | ) |  | $ | 5 |  |  | $ | (292 | ) |
Total recurring Level 3 liabilities |  | $ | — |  |  | $ | — |  |  | $ | (1 | ) |  | $ | 5 |  |  | $ | (292 | ) |

(1) | The effect to net income totals $17 million and is reported in the Condensed Consolidated Statements of Operations as follows: $7 million in realized capital gains and losses, $17 million in net investment income, $(11) million in interest credited to contractholder funds and $4 million in life contract benefits.

(2) | Comprises $1 million of assets.

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. 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, 2018 or 2017.
28 www.allstate.com

Notes to Condensed Consolidated Financial Statements
Transfers into Level 3 during the three months and nine months ended September 30, 2018 and 2017 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, 2018 and 2017 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.

Valuation changes included in net income for Level 3 assets and liabilities held as of
($ in millions) |  | Three months ended September 30, |  | Nine months ended September 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Assets |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |
Municipal |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (3 | )
Corporate |  | — |  |  | 1 |  |  | — |  |  | 1 |
Total fixed income securities |  | — |  |  | 1 |  |  | — |  |  | (2 | )
Equity securities |  | 8 |  |  | 2 |  |  | 23 |  |  | 16 |
Free-standing derivatives, net |  | — |  |  | (3 | ) |  | — |  |  | — |
Other assets |  | — |  |  | — |  |  | — |  |  | (1 | )
Total recurring Level 3 assets |  | $ | 8 |  |  | $ | — |  |  | $ | 23 |  |  | $ | 13 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Contractholder funds: Derivatives embedded in life and annuity contracts |  | $ | (7 | ) |  | $ | (9 | ) |  | $ | 17 |  |  | $ | (6 | )
Total recurring Level 3 liabilities |  | $ | (7 | ) |  | $ | (9 | ) |  | $ | 17 |  |  | $ | (6 | )

The amounts in the table above represent gains and losses related to valuation changes included in net income for the period of time that the asset or liability was held and determined to be in Level 3. These gains and losses result in $1 million of net income for the three months ended September 30, 2018 and are reported as follows: $8 million in realized capital gains and losses, $2 million in life contract benefits and $(9) million in interest credited to contractholder funds. These gains and losses result in $(9) million of net income for the three months ended September 30, 2017 and are reported as follows: $(3) million in realized capital gains and losses, $3 million in net investment
income, $(5) million in interest credited to contractholder funds and $(4) million in life contract benefits. These gains and losses result in $40 million of net income for the nine months ended September 30, 2018 and are reported as follows: $23 million in realized capital gains and losses, $10 million in interest credited to contractholder funds and $7 million in life contract benefits. These gains and losses result in $7 million of net income for the nine months ended September 30, 2017 and are reported as follows: $(3) million in realized capital gains and losses, $17 million in net investment income, $(11) million in interest credited to contractholder funds and $4 million in life contract benefits.
Financial assets

Carrying values and fair value estimates of financial instruments not carried at fair value as of
($ in millions) |  | September 30, 2018 |  | December 31, 2017
| Carrying value |  | Fair value |  | Carrying value |  | Fair value
Mortgage loans |  | $ | 4,592 |  |  | $ | 4,607 |  |  | $ | 4,534 |  |  | $ | 4,732 |
Bank loans |  | 1,608 |  |  | 1,614 |  |  | 1,702 |  |  | 1,704 |
Agent loans |  | 597 |  |  | 586 |  |  | 538 |  |  | 536 |

The fair value measurements for mortgage loans, bank loans and agent loans are categorized as Level 3.
Financial liabilities

Carrying values and fair value estimates of financial instruments not carried at fair value as of
($ in millions) |  | September 30, 2018 |  | December 31, 2017
| Carrying value |  | Fair value |  | Carrying value |  | Fair value
Contractholder funds on investment contracts |  | $ | 9,546 |  |  | $ | 9,951 |  |  | $ | 10,367 |  |  | $ | 11,071 |
Long-term debt |  | 6,450 |  |  | 6,833 |  |  | 6,350 |  |  | 7,199 |
Liability for collateral |  | 1,403 |  |  | 1,403 |  |  | 1,124 |  |  | 1,124 |

The fair value measurement is Level 3 for contractholder funds on investment contracts and Level 2 for long-term debt and liability for collateral.
Third Quarter 2018 Form 10-Q 29

Notes to Condensed Consolidated Financial Statements

Note 7 | Derivative Financial Instruments

The Company uses derivatives for risk reduction and to increase investment portfolio returns through asset replication. Risk reduction activity is focused on managing the risks with certain assets and liabilities arising from the potential adverse impacts from changes in risk-free interest rates, changes in equity market valuations, increases in credit spreads and foreign currency fluctuations.
Asset replication refers to the “synthetic” creation of assets through the use of derivatives. The Company replicates fixed income securities using a combination of a credit default swap, index total return swap, or a foreign currency forward contract and one or more highly rated fixed income securities, primarily investment grade host bonds, to synthetically replicate the economic characteristics of one or more cash market securities. The Company replicates equity securities using futures, index total return swaps, and options to increase equity exposure.
Property-Liability may use interest rate swaps, swaptions, futures and options to manage the interest rate risks of existing investments. These instruments are utilized to change the duration of the portfolio in order to offset the economic effect that interest rates would otherwise have on the fair value of its fixed income securities. Fixed income index total return swaps are used to offset valuation losses in the fixed income portfolio during periods of declining fixed income market values. Credit default swaps are typically used to mitigate the credit risk within the Property-Liability fixed income portfolio. Equity index total return swaps, futures and options are used by Property-Liability to offset valuation losses in the equity portfolio during periods of declining equity market values. In addition, equity futures are used to hedge the market risk related to deferred compensation liability contracts. Forward contracts are primarily used by Property-Liability to hedge foreign currency risk associated with holding foreign currency denominated investments and foreign operations.
Asset-liability management is a risk management strategy that is principally employed by Allstate Life and Allstate Annuities to balance the respective interest-rate sensitivities of its assets and liabilities. Depending upon the attributes of the assets acquired and liabilities issued, derivative instruments such as interest rate swaps, caps, swaptions and futures are utilized to change the interest rate characteristics of existing assets and liabilities to ensure the relationship is maintained within specified ranges and to reduce exposure to rising or falling interest rates. Fixed income index total return swaps are used to offset valuation losses in the portfolio during periods of declining market values. Credit default swaps are typically used to mitigate the credit risk within the Allstate Life and Allstate Annuities fixed income portfolios. Futures and options are used for hedging the equity exposure contained in equity indexed life and annuity product contracts that offer equity returns to contractholders. In addition, the Company uses
equity index total return swaps, options and futures to offset valuation losses in the equity portfolio during periods of declining equity market values. Foreign currency swaps and forwards are primarily used to reduce the foreign currency risk associated with holding foreign currency denominated investments.
The Company also has derivatives embedded in non-derivative host contracts that are required to be separated from the host contracts and accounted for at fair value with changes in fair value of embedded derivatives reported in net income. The Company’s primary embedded derivatives are equity options in life and annuity product contracts, which provide returns linked to equity indices to contractholders.
When derivatives meet specific criteria, they may be designated as accounting hedges and accounted for as fair value, cash flow, foreign currency fair value or foreign currency cash flow hedges. The Company designates certain investment risk transfer reinsurance agreements as fair value hedges when the hedging instrument is highly effective in offsetting the risk of changes in the fair value of the hedged item. The Company designates certain of its foreign currency swap contracts as cash flow hedges when the hedging instrument is highly effective in offsetting the exposure of variations in cash flows for the hedged risk that could affect net income. Amounts are reclassified to net investment income or realized capital gains and losses as the hedged item affects net income.
The notional amounts specified in the contracts are used to calculate the exchange of contractual payments under the agreements and are generally not representative of the potential for gain or loss on these agreements. However, the notional amounts specified in credit default swaps where the Company has sold credit protection represent the maximum amount of potential loss, assuming no recoveries.
Fair value, which is equal to the carrying value, is the estimated amount that the Company would receive or pay to terminate the derivative contracts at the reporting date. The carrying value amounts for OTC derivatives are further adjusted for the effects, if any, of enforceable master netting agreements and are presented on a net basis, by counterparty agreement, in the Condensed Consolidated Statements of Financial Position.
For 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 AOCI 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
30 www.allstate.com

Notes to Condensed Consolidated Financial Statements
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.

Summary of the volume and fair value positions of derivative instruments as of September 30, 2018
($ 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 |  | $ | 20 |  |  | n/a |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Options | Other investments |  | — |  |  | 6,813 |  |  | — |  |  | — |  |  | — |
Equity and index contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Options | Other investments |  | — |  |  | 3,842 |  |  | 106 |  |  | 106 |  |  | — |
Futures | Other assets |  | — |  |  | 1,217 |  |  | — |  |  | — |  |  | — |
Total return index contracts |  |  |  |  |  |  |  |  |  |  |
Total return swap agreements – fixed income | Other investments |  | 60 |  |  | n/a |  |  | 2 |  |  | 2 |  |  | — |
Total return swap agreements – equity index | Other investments |  | 23 |  |  | n/a |  |  | — |  |  | — |  |  | — |
Foreign currency contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency forwards | Other investments |  | 527 |  |  | n/a |  |  | 10 |  |  | 12 |  |  | (2 | )
Credit default contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit default swaps – buying protection | Other investments |  | 222 |  |  | n/a |  |  | (3 | ) |  | — |  |  | (3 | )
Credit default swaps – selling protection | Other investments |  | 4 |  |  | n/a |  |  | — |  |  | — |  |  | — |
Other contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other | Other assets |  | 3 |  |  | n/a |  |  | — |  |  | — |  |  | — |
Total asset derivatives |  |  | $ | 859 |  |  | 11,872 |  |  | $ | 115 |  |  | $ | 120 |  |  | $ | (5 | )
Liability derivatives |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives not designated as accounting hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate cap agreements | Other liabilities & accrued expenses |  | $ | 18 |  |  | n/a |  |  | $ | 1 |  |  | $ | 1 |  |  | $ | — |
Options | Other liabilities & accrued expenses |  | — |  |  | 1,062 |  |  | — |  |  | — |  |  | — |
Equity and index contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Options and futures | Other liabilities & accrued expenses |  | — |  |  | 5,059 |  |  | (40 | ) |  | — |  |  | (40 | )
Total return index contracts |  |  |  |  |  |  |  |  |  |  |
Total return swap agreements – fixed income | Other liabilities & accrued expenses |  | — |  |  | n/a |  |  | — |  |  | — |  |  | — |
Total return swap agreements – equity index | Other liabilities & accrued expenses |  | 210 |  |  | n/a |  |  | (1 | ) |  | — |  |  | (1 | )
Foreign currency contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency forwards | Other liabilities & accrued expenses |  | — |  |  | n/a |  |  | — |  |  | — |  |  | — |
Embedded derivative financial instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Guaranteed accumulation benefits | Contractholder funds |  | 200 |  |  | n/a |  |  | (17 | ) |  | — |  |  | (17 | )
Guaranteed withdrawal benefits | Contractholder funds |  | 248 |  |  | n/a |  |  | (10 | ) |  | — |  |  | (10 | )
Equity-indexed and forward starting options in life and annuity product contracts | Contractholder funds |  | 1,783 |  |  | n/a |  |  | (239 | ) |  | — |  |  | (239 | )
Credit default contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit default swaps – buying protection | Other liabilities & accrued expenses |  | 21 |  |  | n/a |  |  | (1 | ) |  | — |  |  | (1 | )
Credit default swaps – selling protection | Other liabilities & accrued expenses |  | 1 |  |  | n/a |  |  | — |  |  | — |  |  | — |
Total liability derivatives |  |  | 2,481 |  |  | 6,121 |  |  | (307 | ) |  | $ | 1 |  |  | $ | (308 | )
Total derivatives |  |  | $ | 3,340 |  |  | 17,993 |  |  | $ | (192 | ) |  |  |  |  |  |

(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)

Third Quarter 2018 Form 10-Q 31

Notes to Condensed Consolidated Financial Statements

Summary of the volume and fair value positions of derivative instruments as of December 31, 2017
($ 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 |  | $ | 15 |  |  | n/a |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Equity and index contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Options | Other investments |  | — |  |  | 6,316 |  |  | 125 |  |  | 125 |  |  | — |
Futures | Other assets |  | — |  |  | 289 |  |  | — |  |  | — |  |  | — |
Foreign currency contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency forwards | Other investments |  | 52 |  |  | n/a |  |  | 1 |  |  | 1 |  |  | — |
Credit default contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit default swaps – buying protection | Other investments |  | 105 |  |  | n/a |  |  | (1 | ) |  | — |  |  | (1 | )
Credit default swaps – selling protection | Other investments |  | 80 |  |  | n/a |  |  | 1 |  |  | 1 |  |  | — |
Other contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other | Other assets |  | 3 |  |  | n/a |  |  | — |  |  | — |  |  | — |
Total asset derivatives |  |  | $ | 255 |  |  | 6,605 |  |  | $ | 126 |  |  | $ | 127 |  |  | $ | (1 | )
Liability derivatives |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives designated as accounting hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency swap agreements | Other liabilities & accrued expenses |  | $ | 19 |  |  | n/a |  |  | $ | 2 |  |  | $ | 2 |  |  | $ | — |
Derivatives not designated as accounting hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate cap agreements | Other liabilities & accrued expenses |  | 30 |  |  | n/a |  |  | 1 |  |  | 1 |  |  | — |
Equity and index contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Options and futures | Other liabilities & accrued expenses |  | — |  |  | 7,128 |  |  | (58 | ) |  | — |  |  | (58 | )
Foreign currency contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency forwards | Other liabilities & accrued expenses |  | 650 |  |  | n/a |  |  | (17 | ) |  | 3 |  |  | (20 | )
Embedded derivative financial instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Guaranteed accumulation benefits | Contractholder funds |  | 225 |  |  | n/a |  |  | (22 | ) |  | — |  |  | (22 | )
Guaranteed withdrawal benefits | Contractholder funds |  | 274 |  |  | n/a |  |  | (12 | ) |  | — |  |  | (12 | )
Equity-indexed and forward starting options in life and annuity product contracts | Contractholder funds |  | 1,774 |  |  | n/a |  |  | (252 | ) |  | — |  |  | (252 | )
Credit default contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit default swaps – buying protection | Other liabilities & accrued expenses |  | 136 |  |  | n/a |  |  | (5 | ) |  | — |  |  | (5 | )
Credit default swaps – selling protection | Other liabilities & accrued expenses |  | 25 |  |  | n/a |  |  | — |  |  | — |  |  | — |
Subtotal |  |  | 3,114 |  |  | 7,128 |  |  | (365 | ) |  | 4 |  |  | (369 | )
Total liability derivatives |  |  | 3,133 |  |  | 7,128 |  |  | (363 | ) |  | $ | 6 |  |  | $ | (369 | )
Total derivatives |  |  | $ | 3,388 |  |  | 13,733 |  |  | $ | (237 | ) |  |  |  |  |  |

(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)

Gross and net amounts for OTC derivatives (1)
($ 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, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Asset derivatives |  | $ | 16 |  |  | $ | (6 | ) |  | $ | (7 | ) |  | $ | 3 |  |  | $ | — |  |  | $ | 3 |
Liability derivatives |  | (8 | ) |  | 6 |  |  | — |  |  | (2 | ) |  | — |  |  | (2 | )
December 31, 2017 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Asset derivatives |  | $ | 8 |  |  | $ | (7 | ) |  | $ | 1 |  |  | $ | 2 |  |  | $ | — |  |  | $ | 2 |
Liability derivatives |  | (26 | ) |  | 7 |  |  | 7 |  |  | (12 | ) |  | 3 |  |  | (9 | )

(1) | All OTC derivatives are subject to enforceable master netting agreements.

32 www.allstate.com

Notes to Condensed Consolidated Financial Statements

Summary of the impacts of the foreign currency contracts in cash flow hedging relationships
($ in millions) |  | Three months ended September 30, |  | Nine months ended September 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
(Loss) gain recognized in OCI on derivatives during the period |  | $ | — |  |  | $ | (3 | ) |  | $ | 1 |  |  | $ | (5 | )
Loss recognized in OCI on derivatives during the term of the hedging relationship |  | (3 | ) |  | (2 | ) |  | (3 | ) |  | (2 | )
Loss reclassified from AOCI into income (net investment income) |  | — |  |  | (2 | ) |  | — |  |  | (1 | )
Gain reclassified from AOCI into income (realized capital gains and losses) |  | — |  |  | — |  |  | 3 |  |  | — |

Amortization of net gains from AOCI related to cash flow hedges is expected to be a gain of less than $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, 2018 or 2017.

Gains and losses from valuation and settlements reported on derivatives not designated as accounting hedges
($ in millions) |  | Realized capital gains and losses |  | Life contract benefits |  | Interest credited to contractholder funds |  | Operating costs and expenses |  | Total gain (loss) recognized in net income on derivatives
Three months ended September 30, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate contracts |  | $ | (1 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (1 | )
Equity and index contracts |  | (12 | ) |  | — |  |  | 19 |  |  | 9 |  |  | 16 |
Embedded derivative financial instruments |  | — |  |  | 2 |  |  | (8 | ) |  | — |  |  | (6 | )
Foreign currency contracts |  | 7 |  |  | — |  |  | — |  |  | — |  |  | 7 |
Total return swaps |  | 11 |  |  | — |  |  | — |  |  | — |  |  | 11 |
Total |  | $ | 5 |  |  | $ | 2 |  |  | $ | 11 |  |  | $ | 9 |  |  | $ | 27 |
Nine months ended September 30, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Equity and index contracts |  | $ | (15 | ) |  | $ | — |  |  | $ | 25 |  |  | $ | 12 |  |  | $ | 22 |
Embedded derivative financial instruments |  | — |  |  | 7 |  |  | 13 |  |  | — |  |  | 20 |
Foreign currency contracts |  | 19 |  |  | — |  |  | — |  |  | (1 | ) |  | 18 |
Total return swaps |  | 12 |  |  | — |  |  | — |  |  | — |  |  | 12 |
Credit default contracts |  | 1 |  |  | — |  |  | — |  |  | — |  |  | 1 |
Total |  | $ | 17 |  |  | $ | 7 |  |  | $ | 38 |  |  | $ | 11 |  |  | $ | 73 |
Three months ended September 30, 2017 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Equity and index contracts |  | $ | (10 | ) |  | $ | — |  |  | $ | 11 |  |  | $ | 8 |  |  | $ | 9 |
Embedded derivative financial instruments |  | — |  |  | (4 | ) |  | (3 | ) |  | — |  |  | (7 | )
Foreign currency contracts |  | (5 | ) |  | — |  |  | — |  |  | 1 |  |  | (4 | )
Credit default contracts |  | (2 | ) |  | — |  |  | — |  |  | — |  |  | (2 | )
Total |  | $ | (17 | ) |  | $ | (4 | ) |  | $ | 8 |  |  | $ | 9 |  |  | $ | (4 | )
Nine months ended September 30, 2017 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Equity and index contracts |  | $ | (17 | ) |  | $ | — |  |  | $ | 33 |  |  | $ | 20 |  |  | $ | 36 |
Embedded derivative financial instruments |  | — |  |  | 4 |  |  | (7 | ) |  | — |  |  | (3 | )
Foreign currency contracts |  | (20 | ) |  | — |  |  | — |  |  | 6 |  |  | (14 | )
Credit default contracts |  | (3 | ) |  | — |  |  | — |  |  | — |  |  | (3 | )
Total |  | $ | (40 | ) |  | $ | 4 |  |  | $ | 26 |  |  | $ | 26 |  |  | $ | 16 |

For the three months and nine months ended September 30, 2018 and 2017, the Company had no derivatives used in fair value hedging relationships.
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,
2018, counterparties pledged $9 million in collateral to the Company, and the Company pledged $2 million in collateral to counterparties which includes $1 million of collateral posted under MNAs for contracts containing credit-risk-contingent provisions that are in a liability position and $1 million of collateral posted under MNAs for contracts without credit-risk-contingent features. The Company has not incurred any losses on derivative financial instruments due to counterparty nonperformance. Other derivatives, including futures and certain option contracts, are traded on organized exchanges which require margin deposits and
Third Quarter 2018 Form 10-Q 33

Notes to Condensed Consolidated Financial Statements
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.
For certain exchange traded and cleared derivatives, margin deposits are required as well as daily cash settlements of margin accounts. As of September 30, 2018, the Company pledged $32 million in the form of margin deposits.

OTC derivatives counterparty credit exposure by counterparty credit rating
($ in millions) |  | September 30, 2018 |  | December 31, 2017
Rating (1) |  | Number of counter- parties |  | Notional amount (2) |  | Credit exposure (2) |  | Exposure, net of collateral (2) |  | Number of counter- parties |  | Notional amount (2) |  | Credit exposure (2) |  | Exposure, net of collateral (2)
AA- |  | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | 1 |  |  | $ | 18 |  |  | $ | 1 |  |  | $ | — |
A+ |  | 4 |  |  | 659 |  |  | 11 |  |  | 3 |  |  | 3 |  |  | 90 |  |  | 3 |  |  | 1 |
A |  | 1 |  |  | 10 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total |  | 5 |  |  | $ | 669 |  |  | $ | 11 |  |  | $ | 3 |  |  | 4 |  |  | $ | 108 |  |  | $ | 4 |  |  | $ | 1 |

(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, 2018 |  | December 31, 2017
Gross liability fair value of contracts containing credit-risk-contingent features |  | $ | 7 |  |  | $ | 28 |
Gross asset fair value of contracts containing credit-risk-contingent features and subject to MNAs |  | (5 | ) |  | (17 | )
Collateral posted under MNAs for contracts containing credit-risk-contingent features |  | (1 | ) |  | (6 | )
Maximum amount of additional exposure for contracts with credit-risk-contingent features if all features were triggered concurrently |  | $ | 1 |  |  | $ | 5 |

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.
34 www.allstate.com

Notes to Condensed Consolidated Financial Statements

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, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Single name |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate debt |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 5 |  |  | $ | 5 |  |  | $ | — |
Total |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 5 |  |  | $ | 5 |  |  | $ | — |
December 31, 2017 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Single name |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate debt |  | $ | — |  |  | $ | 10 |  |  | $ | 10 |  |  | $ | 5 |  |  | $ | 25 |  |  | $ | — |
Index |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate debt |  | 1 |  |  | 19 |  |  | 45 |  |  | 15 |  |  | 80 |  |  | 1 |
Total |  | $ | 1 |  |  | $ | 29 |  |  | $ | 55 |  |  | $ | 20 |  |  | $ | 105 |  |  | $ | 1 |

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

Note 8 | Reserve for Property and Casualty Insurance Claims and Claims Expense

The Company establishes reserves for claims and claims expense on reported and unreported claims of insured losses. The Company’s reserving process takes into account known facts and interpretations of circumstances and factors including the Company’s experience with similar cases, actual claims paid, historical trends involving claim payment patterns and pending levels of unpaid claims, loss management programs, product mix and contractual terms, changes in law and regulation, judicial decisions, and economic conditions. In the normal course of business, the Company may also supplement its claims processes by utilizing third party adjusters, appraisers, engineers, inspectors, and other professionals and information sources to assess and settle catastrophe and non-catastrophe related claims. The effects of inflation are implicitly considered in the reserving process.
Because reserves are estimates of unpaid portions of losses that have occurred, including incurred but not reported (“IBNR”) losses, the establishment of appropriate reserves, including reserves for catastrophes and reserves and reinsurance
recoverables for the Discontinued Lines and Coverages, is an inherently uncertain and complex process. The ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimates. The highest degree of uncertainty is associated with reserves for losses incurred in the current reporting period as it contains the greatest proportion of losses that have not been reported or settled. The Company regularly updates its reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in prior year reserve estimates, which may be material, are reported in property and casualty insurance claims and claims expense in the Condensed Consolidated Statements of Operations in the period such changes are determined.
Management believes that the reserve for property and casualty insurance claims and claims expense, net of reinsurance recoverables, is appropriately established in the aggregate and adequate to cover the ultimate net cost of reported and unreported claims arising from losses which had
Third Quarter 2018 Form 10-Q 35

Notes to Condensed Consolidated Financial Statements
occurred by the date of the Condensed Consolidated Statements of Financial Position based on available facts, technology, laws and regulations.
Allstate’s reserves for asbestos claims were $882 million and $884 million, net of reinsurance recoverables of $423 million and $412 million, as of
September 30, 2018 and December 31, 2017, respectively. Reserves for environmental claims were $174 million and $166 million, net of reinsurance recoverables of $40 million and $33 million, as of September 30, 2018 and December 31, 2017, respectively.

Rollforward of the reserve for property and casualty insurance claims and claims expense
|  | Nine months ended September 30,
($ in millions) |  | 2018 |  | 2017
Balance as of January 1 |  | $ | 26,325 |  |  | $ | 25,250 |
Less reinsurance recoverables |  | (6,471 | ) |  | (6,184 | )
Net balance as of January 1 |  | 19,854 |  |  | 19,066 |
SquareTrade acquisition as of January 3, 2017 |  | — |  |  | 17 |
Incurred claims and claims expense related to: |  |  |  |
Current year |  | 16,893 |  |  | 16,971 |
Prior years |  | (135 | ) |  | (321 | )
Total incurred |  | 16,758 |  |  | 16,650 |
Claims and claims expense paid related to: |  |  |  |
Current year |  | (10,124 | ) |  | (10,052 | )
Prior years |  | (6,174 | ) |  | (5,784 | )
Total paid |  | (16,298 | ) |  | (15,836 | )
Net balance as of September 30 |  | 20,314 |  |  | 19,897 |
Plus reinsurance recoverables |  | 6,625 |  |  | 7,257 |
Balance as of September 30 |  | $ | 26,939 |  |  | $ | 27,154 |

Incurred claims and claims expense represents the sum of paid losses and reserve changes in the period. This expense includes losses from catastrophes of $1.89 billion and $2.64 billion in the nine months ended September 30, 2018 and 2017, respectively, net of reinsurance and other recoveries. Catastrophes are an inherent risk of the property and casualty insurance business that have contributed to, and will continue to contribute to, material year-to-year fluctuations in the Company’s results of operations and financial position. During the nine months ended September 30, 2018, incurred claims and claims expense included $135 million of prior year reserve reestimates, increasing net income, including f avorable prior year reserve reestimates excluding catastrophes of $180 million and $45 million of unfavorable prior year reserve reestimates related to catastrophes.
Favorable prior year reserve reestimates excluding catastrophes is comprised of net decreases in reserves of $372 million, primarily due to continued favorable personal lines auto injury coverage development, offset by net increases of $192 million, related to commercial lines and discontinued lines and coverages of $107 million and $85 million, respectively. Unfavorable catastrophe loss reestimates of $45 million, net of reinsurance and other recoveries, include $84 million of unfavorable reestimates related to ho meowners, including $37 million for Texas Windstorm Insurance Association (“TWIA”) assessments related to Hurricane Harvey (see Note 12), offset by $39 million of favorable reestimates, primarily related to auto.
36 www.allstate.com

Notes to Condensed Consolidated Financial Statements

Note 9 | Reinsurance

Effects of reinsurance ceded on property and casualty premiums earned and life premiums and contract charges
($ in millions) |  | Three months ended September 30, |  | Nine months ended September 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Property and casualty insurance premiums earned |  | $ | (260 | ) |  | $ | (245 | ) |  | $ | (756 | ) |  | $ | (745 | )
Life premiums and contract charges |  | (76 | ) |  | (75 | ) |  | (221 | ) |  | (225 | )

Effects of reinsurance ceded on property and casualty insurance claims and claims expense, life contract benefits and interest credited to contractholder funds
($ in millions) |  | Three months ended September 30, |  | Nine months ended September 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Property and casualty insurance claims and claims expense (1) |  | $ | (247 | ) |  | $ | (1,268 | ) |  | $ | (572 | ) |  | $ | (1,523 | )
Life contract benefits |  | (35 | ) |  | (47 | ) |  | (150 | ) |  | (164 | )
Interest credited to contractholder funds |  | (5 | ) |  | (6 | ) |  | (16 | ) |  | (17 | )

(1) | Includes expected reinsurance recoveries on catastrophe losses related to homeowners flood claims covered by the National Flood Insurance Program.

Note 10 | Capital Structure

Debt On March 29, 2018, the Company issued $250 million of Floating Rate Senior Notes due 2021 (“2021 Senior Notes”) and $250 million of Floating Rate Senior Notes due 2023 (“2023 Senior Notes” and, together with the 2021 Senior Notes, the “Senior Notes”). The 2021 Senior Notes bear interest at a floating rate equal to three month LIBOR, reset quarterly on each interest reset date, plus 0.43% per year and the 2023 Senior Notes bear interest at a floating rate equal to three month LIBOR, reset quarterly on each interest reset date, plus 0.63% per year. The Company will pay interest on the Senior Notes quarterly in arrears on March 29, June 29, September 29 and December 29 of each year, beginning on June 29, 2018. The 2021 Senior Notes will mature on March 29, 2021, and the 2023 Senior Notes will mature on March 29, 2023. The Senior Notes will not be redeemable prior to the applicable maturity dates.
Preferred stock On March 29, 2018, the Company issued 23,000 shares of 5.625% Fixed Rate Noncumulative Perpetual Preferred Stock, Series G, par value $1.00 per share and liquidation preference $25,000 per share, for gross proceeds of $575 million. The preferred stock is perpetual and has no maturity date. The preferred stock is redeemable at the Company’s option in whole or in part, on or after April 15, 2023 at a redemption price of $25,000 per share, plus declared and unpaid dividends. Prior to April 15, 2023, the preferred stock is redeemable at the Company’s option, in whole but not in part, within 90 days of the occurrence of certain rating agency events at a redemption price equal to $25,000 per share, plus declared and unpaid dividends.
The proceeds of Senior Notes and Preferred Stock issuances will be used for general corporate purposes, including the redemption, repayment or repurchase of certain preferred stock or debt.
On April 30, 2018, the Company filed a universal shelf registration statement with the Securities and Exchange Commission (“SEC”) that expires in 2021. The registration statement covers an unspecified amount of securities and can be used to issue debt securities, common stock, preferred stock, depositary shares, warrants, stock purchase contracts, stock purchase units and securities of trust subsidiaries.
Redemption and repayment of preferred stock and debentures On May 13, 2018, the Company redeemed its $224 million Series B 6.125% Fixed-to-Floating Rate Junior Subordinated Debentures at a redemption price equal to 100% of the outstanding principal.
On May 15, 2018, the Company repaid $176 million of 6.75% Senior Debentures at maturity. The repayment was equal to 100% of the outstanding principal.
Subsequent event On October 15, 2018, the Company redeemed all 15,400 shares of its Fixed Rate Noncumulative Perpetual Preferred Stock, Series C, par value $1.00 per share and liquidation preference $25,000 per share and the corresponding depositary shares for a total redemption payment of $385 million.
Third Quarter 2018 Form 10-Q 37

Notes to Condensed Consolidated Financial Statements

Note 11 | Company Restructuring

The Company undertakes various programs to reduce expenses. These programs generally involve a reduction in staffing levels, and in certain cases, office closures. Restructuring and related charges primarily include employee severance and relocation benefits, and post-exit rent expenses in connection with these programs, and non-cash charges resulting from pension benefit payments made to agents and certain legal expenses and settlements incurred in connection with the 1999 reorganization of Allstate’s multiple agency programs to a single exclusive agency
program. The expenses related to these activities are included in the Condensed Consolidated Statements of Operations as restructuring and related charges, and totaled $16 million and $14 million during the three months ended September 30, 2018 and 2017, respectively, and $65 million and $77 million during the nine months ended September 30, 2018 and 2017, respectively. Restructuring expenses in 2018 primarily related to realignment of certain employees to centralized talent centers as well as legal settlements and expenses.

Restructuring activity during the period
($ in millions) |  | Employee costs |  | Exit costs |  | Total liability
Restructuring liability as of December 31, 2017 |  | $ | 15 |  |  | $ | 30 |  |  | $ | 45 |
Expense incurred |  | 41 |  |  | 26 |  |  | 67 |
Adjustments to liability |  | — |  |  | (2 | ) |  | (2 | )
Payments and non-cash pension settlements |  | (20 | ) |  | (38 | ) |  | (58 | )
Restructuring liability as of September 30, 2018 |  | $ | 36 |  |  | $ | 16 |  |  | $ | 52 |

The payments applied against the liability for employee costs primarily reflect severance costs and the payments for exit costs generally consist of post-exit rent expenses and contract termination penalties.
As of September 30, 2018, the cumulative amount incurred to date for active programs totaled $130 million for employee costs and $110 million for exit costs.

Note 12 | Guarantees and Contingent Liabilities

Shared markets and state facility assessments
The Company is required to participate in assigned risk plans, reinsurance facilities and joint underwriting associations in various states that provide insurance coverage to individuals or entities that otherwise are unable to purchase such coverage from private insurers. Underwriting results related to these arrangements, which tend to be adverse, have been immaterial to the Company’s results of operations. Because of the Company’s participation, it may be exposed to losses that surpass the capitalization of these facilities and/or assessments from these facilities.
Texas Windstorm Insurance Association The Company participates as a member of TWIA, which provides wind and hail property coverage to coastal risks unable to procure coverage in the voluntary market. Wind and hail coverage is written on a TWIA-issued policy. TWIA follows a funding structure first utilizing currently available funds set aside from current and prior years. Under the current law, to the extent losses exceed premiums received from policyholders, TWIA utilizes a combination of reinsurance, TWIA issued securities, as well as member and policyholder assessments to fund loss payments.
During 2018, the TWIA Board announced assessments related to Hurricane Harvey for which the Company’s share was $37 million. These costs were recorded in property and casualty insurance claims and claims expense as catastrophe losses on the Condensed Consolidated Statements of Operations. Any assessments from TWIA for a particular quarter or annual period may be material to the results of
operations and cash flows, but not the financial position of the Company.
Guarantees
Related to the sale of Lincoln Benefit Life Company on April 1, 2014, ALIC agreed to indemnify Resolution Life Holdings, Inc. in connection with certain representations, warranties and covenants of ALIC, and certain liabilities specifically excluded from the transaction, subject to specific contractual limitations regarding ALIC’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 its variable annuity business to Prudential in 2006, the Company and its consolidated subsidiaries, ALIC and ALNY, have agreed to indemnify Prudential for certain pre-closing contingent liabilities (including extra-contractual liabilities of ALIC and ALNY and liabilities specifically excluded from the transaction) that ALIC and ALNY have agreed to retain. In addition, the Company, ALIC and ALNY will each indemnify Prudential for certain post-closing liabilities that may arise from the acts of ALIC, ALNY and their agents, including certain liabilities arising from ALIC’s and ALNY’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
38 www.allstate.com

Notes to Condensed Consolidated Financial Statements
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.
In the normal course of business, the Company provides standard indemnifications to contractual counterparties in connection with numerous transactions, including acquisitions and divestitures. The types of indemnifications typically provided include indemnifications for breaches of representations and warranties, taxes and certain other liabilities, such as third party lawsuits. The indemnification clauses are often standard contractual terms and are entered into in the normal course of business based on an assessment that the risk of loss would be remote. The terms of the indemnifications vary in duration and nature. In many cases, the maximum obligation is not explicitly stated and the contingencies triggering the obligation to indemnify have not occurred and are not expected to occur. Consequently, the maximum amount of the obligation under such indemnifications is not determinable. Historically, the Company has not made any material payments pursuant to these obligations.
The aggregate liability balance related to all guarantees was not material as of September 30, 2018.
Regulation and compliance
The Company is subject to extensive laws, regulations, administrative directives, and regulatory actions. From time to time, regulatory authorities or legislative bodies seek to influence and restrict premium rates, require premium refunds to policyholders, require reinstatement of terminated policies, prescribe rules or guidelines on how affiliates compete in the marketplace, restrict the ability of insurers to cancel or non-renew policies, require insurers to continue to write new policies or limit their ability to write new policies, limit insurers’ ability to change coverage terms or to impose underwriting standards, impose additional regulations regarding agent and broker compensation, regulate the nature of and amount of investments, impose fines and penalties for unintended errors or mistakes, impose additional regulations regarding cybersecurity and privacy, and otherwise expand overall regulation of insurance products and the insurance industry. In addition, the Company is subject to laws and regulations administered and enforced by federal agencies, international agencies, and other organizations, including but not limited to the SEC, the Financial Industry Regulatory Authority, the U.S. Equal Employment Opportunity Commission, 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.
Legal and regulatory proceedings and inquiries
The Company and certain subsidiaries are involved in a number of lawsuits, regulatory inquiries, and other legal proceedings arising out of various aspects of its business.
Background These matters raise difficult and complicated factual and legal issues and are subject to many uncertainties and complexities, including the underlying facts of each matter; novel legal issues; variations between jurisdictions in which matters are being litigated, heard, or investigated; changes in assigned judges; differences or developments in applicable laws and judicial interpretations; judges reconsidering prior rulings; the length of time before many of these matters might be resolved by settlement, through litigation, or otherwise; adjustments with respect to anticipated trial schedules and other proceedings; developments in similar actions against other companies; the fact that some of the lawsuits are putative class actions in which a class has not been certified and in which the purported class may not be clearly defined; the fact that some of the lawsuits involve multi-state class actions in which the applicable law(s) for the claims at issue is in dispute and therefore unclear; and the challenging legal environment faced by corporations and insurance companies.
The outcome of these matters may be affected by decisions, verdicts, and settlements, and the timing of such decisions, verdicts, and settlements, in other individual and class action lawsuits that involve the Company, other insurers, or other entities and by other legal, governmental, and regulatory actions that involve the Company, other insurers, or other entities. The outcome may also be affected by future state or federal legislation, the timing or substance of which cannot be predicted.
In the lawsuits, plaintiffs seek a variety of remedies which may include equitable relief in the form of injunctive and other remedies and monetary relief in the form of contractual and extra-contractual damages. In some cases, the monetary damages sought may include punitive or treble damages. Often specific information about the relief sought, such as the amount of damages, is not available because plaintiffs have not requested specific relief in their pleadings. When specific monetary demands are made, they are often set just below a state court jurisdictional limit in order to seek the maximum amount available in state court, regardless of the specifics of the case, while still avoiding the risk of removal to federal court. In Allstate’s experience, monetary demands in pleadings bear little relation to the ultimate loss, if any, to the Company.
In connection with regulatory examinations and proceedings, government authorities may seek various forms of relief, including penalties, restitution, and changes in business practices. The Company may not
Third Quarter 2018 Form 10-Q 39

Notes to Condensed Consolidated Financial Statements
be advised of the nature and extent of relief sought until the final stages of the examination or proceeding.
Accrual and disclosure policy The Company reviews its lawsuits, regulatory inquiries, and other legal proceedings on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. The Company establishes accruals for such matters at management’s best estimate when the Company assesses that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company does not establish accruals for such matters when the Company does not believe both that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company’s assessment of whether a loss is reasonably possible or probable is based on its assessment of the ultimate outcome of the matter following all appeals. The Company does not include potential recoveries in its estimates of reasonably possible or probable losses. Legal fees are expensed as incurred.
The Company continues to monitor its lawsuits, regulatory inquiries, and other legal proceedings for further developments that would make the loss contingency both probable and estimable, and accordingly accruable, or that could affect the amount of accruals that have been previously established. There may continue to be exposure to loss in excess of any amount accrued. Disclosure of the nature and amount of an accrual is made when there have been sufficient legal and factual developments such that the Company’s ability to resolve the matter would not be impaired by the disclosure of the amount of accrual.
When the Company assesses it is reasonably possible or probable that a loss has been incurred, it discloses the matter. When it is possible to estimate the reasonably possible loss or range of loss above the amount accrued, if any, for the matters disclosed, that estimate is aggregated and disclosed. Disclosure is not required when an estimate of the reasonably possible loss or range of loss cannot be made.
For certain of the matters described below in the “Claims related proceedings” and “Other proceedings” subsections, the Company is able to estimate the reasonably possible loss or range of loss above the amount accrued, if any. In determining whether it is possible to estimate the reasonably possible loss or range of loss, the Company reviews and evaluates the disclosed matters, in conjunction with counsel, in light of potentially relevant factual and legal developments.
These developments may include information learned through the discovery process, rulings on dispositive motions, settlement discussions, information obtained from other sources, experience from managing these and other matters, and other rulings by courts, arbitrators or others. When the Company possesses sufficient appropriate information to develop an estimate of the reasonably possible loss or range of loss above the amount accrued, if any, that estimate is aggregated and disclosed below. There may be other disclosed matters for which a loss is probable or reasonably possible, but such an estimate
is not possible. Disclosure of the estimate of the reasonably possible loss or range of loss above the amount accrued, if any, for any individual matter would only be considered when there have been sufficient legal and factual developments such that the Company’s ability to resolve the matter would not be impaired by the disclosure of the individual estimate.
The Company currently estimates that the aggregate range of reasonably possible loss in excess of the amount accrued, if any, for the disclosed matters where such an estimate is possible is zero to $115 million, pre-tax. This disclosure is not an indication of expected loss, if any. Under accounting guidance, an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely” and an event is “remote” if “the chance of the future event or events occurring is slight.” This estimate is based upon currently available information and is subject to significant judgment and a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimate will change from time to time, and actual results may vary significantly from the current estimate. The estimate does not include matters or losses for which an estimate is not possible. Therefore, this estimate represents an estimate of possible loss only for certain matters meeting these criteria. It does not represent the Company’s maximum possible loss exposure. Information is provided below regarding the nature of all of the disclosed matters and, where specified, the amount, if any, of plaintiff claims associated with these loss contingencies.
Due to the complexity and scope of the matters disclosed in the “Claims related proceedings” and “Other proceedings” subsections below and the many uncertainties that exist, the ultimate outcome of these matters cannot be predicted and in the Company’s judgment, a loss, in excess of amounts accrued, if any, is not probable. In the event of an unfavorable outcome in one or more of these matters, the ultimate liability may be in excess of amounts currently accrued, if any, and may be material to the Company’s operating results or cash flows for a particular quarterly or annual period. However, based on information currently known to it, management believes that the ultimate outcome of all matters described below, as they are resolved over time, is not likely to have a material effect on the financial position of the Company.
Claims related proceedings T he case of Jack Jimenez, et al. v. Allstate Insurance Company was filed in the U.S. District Court for the Central District of California in September 2010. Plaintiffs allege off-the-clock wage and hour claims and other California Labor Code violations resulting from purported unpaid overtime. Plaintiffs seek recovery of unpaid compensation, liquidated damages, penalties, and attorneys’ fees and costs. The court certified a class that includes all adjusters in the state of California, except auto field adjusters, from September 29, 2006 to final judgment. Allstate’s appeals to the Ninth Circuit Court of Appeals and then to the U.S. Supreme Court did not result in decertification. No trial date is calendared.
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Notes to Condensed Consolidated Financial Statements
The Company is managing various disputes challenging the method in which it has applied deductibles relating to claims for personal injury protection benefits under Florida auto policies. These disputes include a putative class action and litigation involving individual plaintiffs.
Gail Pierce, et al. v. Allstate Insurance Company is a putative class action filed in August 2013 in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida. It is brought on behalf of all insureds and their health care provider assignees who submitted claims for personal injury protection under auto policies in effect from March 2008. In the policies at issue, the Company applied the personal injury protection deductible to health care provider charges after the Company reduced those charges for reasonableness. In Pierce and the individual matters, plaintiffs seek determinations that the Company must apply the personal injury protection deductible to the full amount charged by the providers. In addition to the difference in policy benefits that may result from applying the deductible to the full amount charged, plaintiffs also seek recovery of attorneys’ fees and costs pursuant to Florida statutes.
The question concerning how the personal injury protection deductible is to be applied under Florida law is currently pending before the Florida Supreme Court in a matter involving another insurer, Progressive v. Florida Hospital. Progressive appealed from a Fifth District Court of Appeals decision in favor of the health providers. Another appellate district subsequently ruled in favor of insurers in three separate appeals. The Florida Supreme Court indicated that it will decide the issues in Progressive without oral argument.
Other proceedings The three shareholder derivative actions described below are disclosed pursuant to SEC disclosure requirements for these types of matters, and the putative class action has been disclosed because these matters involve similar allegations.
In Biefeldt v. Wilson, et al., a plaintiff alleging to be a stockholder in the Company filed a shareholder derivative complaint in the Circuit Court for Cook County, Illinois, Chancery Division on August 3, 2017. The plaintiff seeks, on behalf of the Company, an unspecified amount of damages and various forms of equitable relief. The complaint alleges breaches of fiduciary duty based on allegations similar to those asserted in In re The Allstate Corp. Securities Litigation. The complaint names as defendants the Company’s chairman, president and chief executive officer, its former president, its former chief financial officer, who is now the Company’s vice chairman, and the members of the board of directors during the relevant period. The defendants’ motion to dismiss the complaint was heard on May 8, 2018. On June 29, 2018, the court granted the motion to dismiss. On July 26, 2018, the court consolidated this matter with the IBEW Local No. 98 Pension Fund matter described below. The court granted the consolidated plaintiffs leave to file a consolidated complaint by August 10, 2018. Defendants answered the consolidated complaint on September 24, 2018. Plaintiff’s opposition brief is due
on November 8, 2018, and defendants’ reply is due on December 7, 2018.
In IBEW Local No. 98 Pension Fund v. Wilson, et al., another plaintiff alleging to be a stockholder in the Company filed a shareholder derivative complaint in the Circuit Court for Cook County, Illinois, Chancery Division on April 12, 2018. The plaintiff seeks, on behalf of the Company, an unspecified amount of damages and various forms of equitable relief. The complaint alleges breaches of fiduciary duty based on allegations similar to those asserted in In re The Allstate Corp. Securities Litigation. The complaint also includes allegations concerning the exercise of stock options by the Company’s chairman, president and chief executive officer and several other members of our board of directors during the relevant period. The complaint names as defendants the Company’s chairman, president and chief executive officer, its former president and the members of the board of directors during the relevant period. On May 17, 2018, the court transferred this case to the same judge handling the Biefeldt v. Wilson, et al. lawsuit. On July 26, 2018, the court consolidated this matter with the Biefeldt matter described above. The court granted the consolidated plaintiffs leave to file a consolidated complaint by August 10, 2018. Defendants answered the consolidated complaint on September 24, 2018. Plaintiff’s opposition brief is due on November 8, 2018, and defendants’ reply is due on December 7, 2018.
In Sundquist v. Wilson, et al., another plaintiff alleging to be a stockholder in the Company filed a shareholder derivative complaint in federal court in the Northern District of Illinois on May 21, 2018. The plaintiff seeks, on behalf of the Company, an unspecified amount of damages and various forms of equitable relief. The complaint alleges breaches of fiduciary duty based on allegations similar to those asserted in In re The Allstate Corp. Securities Litigation. The complaint also asserts state law “misappropriation” claims based on stock option transactions by the Company’s chairman, president and chief executive officer, its former chief financial officer, who is now the Company’s vice chairman, and members of the board of directors. The complaint names as defendants the Company’s chairman, president and chief executive officer, its former president, its former chief financial officer, who is now the Company’s vice chairman, and the members of the board of directors during the relevant period. Defendants answered the complaint on August 7, 2018. Plaintiff filed her opposition to defendants’ motion to dismiss on September 7, 2018. Defendants filed their reply to plaintiff’s opposition on September 28, 2018.
In re The Allstate Corp. Securities Litigation is a putative class action filed in November 2016 in the United States District Court for the Northern District of Illinois against the Company and several of its officers asserting claims under the federal securities laws. Plaintiffs seek an unspecified amount of damages, costs, attorney’s fees, and such other relief as the court deems appropriate. Plaintiffs allege that the Company and certain senior officers made allegedly material misstatements or omissions concerning claim
Third Quarter 2018 Form 10-Q 41

Notes to Condensed Consolidated Financial Statements
frequency statistics and the reasons for a claim frequency increase for Allstate brand auto insurance. Plaintiffs’ further allege that a senior officer engaged in stock option exercises and sales during that time allegedly while in possession of nonpublic information about claim frequency. The Company, its chairman, president and chief executive officer, and its former president are the named defendants. Defendants answered the complaint, disputing plaintiffs’ allegations that there was any misstatement or omission or other misconduct, after the court denied
their motion to dismiss on February 27, 2018. On June 22, 2018, plaintiffs filed their motion for class certification. Defendants’ response to plaintiffs’ motion was filed on October 5, 2018. Plaintiffs’ reply is due on November 19, 2018. On September 12, 2018, the court allowed the lead plaintiffs to amend their complaint to add the City of Providence Employee Retirement System as a proposed class representative. The amended complaint was filed the same day.

Note 13 | Benefit Plans

Components of net periodic cost included in operating costs and expenses
|  | Three months ended September 30, |  | Nine months ended September 30,
($ in millions) |  | 2018 |  | 2017 |  | 2018 |  | 2017
Pension benefits |  |  |  |  |  |  |  |
Service cost |  | $ | 29 |  |  | $ | 28 |  |  | $ | 85 |  |  | $ | 85 |
Interest cost |  | 60 |  |  | 66 |  |  | 181 |  |  | 198 |
Expected return on plan assets |  | (105 | ) |  | (102 | ) |  | (316 | ) |  | (306 | )
Amortization of: |  |  |  |  |  |  |  |  |  |
Prior service credit |  | (14 | ) |  | (14 | ) |  | (42 | ) |  | (42 | )
Net actuarial loss |  | 43 |  |  | 48 |  |  | 132 |  |  | 142 |
Settlement loss |  | 68 |  |  | 94 |  |  | 82 |  |  | 110 |
Net periodic pension cost |  | $ | 81 |  |  | $ | 120 |  |  | $ | 122 |  |  | $ | 187 |
Postretirement benefits |  |  |  |  |  |  |  |
Service cost |  | $ | 2 |  |  | $ | 2 |  |  | $ | 6 |  |  | $ | 6 |
Interest cost |  | 3 |  |  | 4 |  |  | 10 |  |  | 11 |
Amortization of: |  |  |  |  |  |  |  |
Prior service credit |  | (5 | ) |  | (6 | ) |  | (16 | ) |  | (18 | )
Net actuarial gain |  | (6 | ) |  | (6 | ) |  | (17 | ) |  | (18 | )
Net periodic postretirement credit |  | $ | (6 | ) |  | $ | (6 | ) |  | $ | (17 | ) |  | $ | (19 | )

During the third quarter of 2018, the Company concluded that its qualified employee pension plan 2018 lump sum payments are expected to exceed a threshold of service and interest cost due to higher-than-expected retirement levels and rising interest rates that reduce benefit lump sum payments in the future.
As a result, a pension settlement loss of $61 million, pre-tax, was recorded as part of operating costs and expenses in the Corporate and Other segment.
The Company will continue to monitor lump sum payments through the end of the year and will recognize an additional settlement loss based on lump sum payments made during the fourth quarter of 2018.
During the third quarter of 2017, the Company also recorded a pension settlement loss in the amount of $86 million, pre-tax, related to higher levels of lump sum payments in the qualified employee pension plan.
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Notes to Condensed Consolidated Financial Statements

Note 14 | Supplemental Cash Flow Information

Non-cash investing activities include $78 million and $31 million related to mergers and exchanges completed with equity securities, fixed income securities and limited partnerships, and modifications of certain mortgage loans for the nine months ended September 30, 2018 and 2017, respectively. Non-cash financing activities include $30 million and $42 million related to the issuance of Allstate common shares for vested equity awards for the nine months ended September 30, 2018 and 2017, respectively.
Liabilities for collateral received in conjunction with the Company’s securities lending program and over-the-counter 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,
| 2018 |  | 2017
Net change in proceeds managed |  |  |  |  |  |
Net change in fixed income securities |  | $ | 175 |  |  | $ | 129 |
Net change in short-term investments |  | (454 | ) |  | (157 | )
Operating cash flow (used) provided |  | $ | (279 | ) |  | $ | (28 | )
Net change in cash |  | — |  |  | 1 |
Net change in proceeds managed |  | $ | (279 | ) |  | $ | (27 | )
Net change in liabilities |  |  |  |  |  |
Liabilities for collateral, beginning of period |  | $ | (1,124 | ) |  | $ | (1,129 | )
Liabilities for collateral, end of period |  | (1,403 | ) |  | (1,156 | )
Operating cash flow provided (used) |  | $ | 279 |  |  | $ | 27 |

Third Quarter 2018 Form 10-Q 43

Notes to Condensed Consolidated Financial Statements

Note 15 | Other Comprehensive Income

Components of other comprehensive income (loss) on a pre-tax and after-tax basis
($ in millions) |  | Three months ended September 30,
| 2018 |  | 2017
| Pre-tax |  | Tax |  | After-tax |  | Pre-tax |  | Tax |  | After-tax
Unrealized net holding gains and losses arising during the period, net of related offsets |  | $ | (116 | ) |  | $ | 25 |  |  | $ | (91 | ) |  | $ | 300 |  |  | $ | (105 | ) |  | $ | 195 |
Less: reclassification adjustment of realized capital gains and losses |  | (26 | ) |  | 5 |  |  | (21 | ) |  | 107 |  |  | (37 | ) |  | 70 |
Unrealized net capital gains and losses |  | (90 | ) |  | 20 |  |  | (70 | ) |  | 193 |  |  | (68 | ) |  | 125 |
Unrealized foreign currency translation adjustments |  | (18 | ) |  | 4 |  |  | (14 | ) |  | 43 |  |  | (15 | ) |  | 28 |
Unrecognized pension and other postretirement benefit cost arising during the period |  | — |  |  | — |  |  | — |  |  | (5 | ) |  | 3 |  |  | (2 | )
Less: reclassification adjustment of net periodic cost recognized in operating costs and expenses |  | (86 | ) |  | 18 |  |  | (68 | ) |  | (116 | ) |  | 41 |  |  | (75 | )
Unrecognized pension and other postretirement benefit cost |  | 86 |  |  | (18 | ) |  | 68 |  |  | 111 |  |  | (38 | ) |  | 73 |
Other comprehensive (loss) income |  | $ | (22 | ) |  | $ | 6 |  |  | $ | (16 | ) |  | $ | 347 |  |  | $ | (121 | ) |  | $ | 226 |
|  | Nine months ended September 30,
|  | 2018 |  | 2017
|  | Pre-tax |  | Tax |  | After-tax |  | Pre-tax |  | Tax |  | After-tax
Unrealized net holding gains and losses arising during the period, net of related offsets |  | $ | (1,103 | ) |  | $ | 233 |  |  | $ | (870 | ) |  | $ | 1,165 |  |  | $ | (408 | ) |  | $ | 757 |
Less: reclassification adjustment of realized capital gains and losses |  | (129 | ) |  | 27 |  |  | (102 | ) |  | 245 |  |  | (86 | ) |  | 159 |
Unrealized net capital gains and losses |  | (974 | ) |  | 206 |  |  | (768 | ) |  | 920 |  |  | (322 | ) |  | 598 |
Unrealized foreign currency translation adjustments |  | (32 | ) |  | 7 |  |  | (25 | ) |  | 55 |  |  | (19 | ) |  | 36 |
Unrecognized pension and other postretirement benefit cost arising during the period |  | 4 |  |  | (1 | ) |  | 3 |  |  | (8 | ) |  | 5 |  |  | (3 | )
Less: reclassification adjustment of net periodic cost recognized in operating costs and expenses |  | (139 | ) |  | 29 |  |  | (110 | ) |  | (174 | ) |  | 61 |  |  | (113 | )
Unrecognized pension and other postretirement benefit cost |  | 143 |  |  | (30 | ) |  | 113 |  |  | 166 |  |  | (56 | ) |  | 110 |
Other comprehensive (loss) income |  | $ | (863 | ) |  | $ | 183 |  |  | $ | (680 | ) |  | $ | 1,141 |  |  | $ | (397 | ) |  | $ | 744 |

44 www.allstate.com

Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
The Allstate Corporation
Northbrook, Illinois 60062
Results of Review of Interim Financial Information
We have reviewed the accompanying condensed consolidated statement of financial position of The Allstate Corporation and subsidiaries (the “Company”) as of September 30, 2018, the related condensed consolidated statements of operations and comprehensive income for the three month and nine month periods ended September 30, 2018 and 2017, shareholders’ equity and cash flows for the nine month periods ended September 30, 2018 and 2017 and the related notes (collectively referred to as the “condensed consolidated financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated statement of financial position of The Allstate Corporation and subsidiaries as of December 31, 2017, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 26, 2018, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 2017 is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived.
Basis for Review Results
These condensed consolidated financial statements are the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with standards of the PCAOB. A review of the condensed consolidated financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Emphasis of a Matter
As discussed in Note 1 to the condensed consolidated financial statements, the Company changed its presentation and method of accounting for the recognition and measurement of financial assets and financial liabilities due to an adopted accounting standard.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
October 31, 2018
Third Quarter 2018 Form 10-Q 45

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three and Nine Month Periods Ended September 30, 2018 and 2017
Overview
To achieve its goals in 2018, Allstate is focused on the following priorities:

• Better serve customers
• Achieve target economic returns on capital
• Grow customer base
• Proactively manage investments
• Build long-term growth platforms

The following discussion highlights significant factors influencing the consolidated financial position and results of operations of The Allstate Corporation (referred to in this document as “we,” “our,” “us,” the “Company” or “Allstate”). 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 Corporation annual report on Form 10-K for 2017. Further analysis of our insurance segments is provided in the Property-Liability Operations and Segment Results sections, including Allstate Protection, Service Businesses, Allstate Life, Allstate Benefits, and Allstate Annuities, of Management’s Discussion and Analysis (“MD&A”). The segments are consistent with the way in which the chief operating decision maker reviews financial performance and makes decisions about the allocation of resources.
Measuring segment profit or loss
The measure of segment profit or loss used in evaluating performance is underwriting income for the Allstate Protection and Discontinued Lines and Coverages segments and adjusted net income for the Service Businesses, Allstate Life, Allstate Benefits, Allstate Annuities, and Corporate and Other segments.
Underwriting income is calculated as premiums earned and other revenue, less claims and claims expense (“losses”), amortization of deferred policy acquisition costs (“DAC”), operating costs and expenses and restructuring and related charges, as determined using accounting principles generally accepted in the United States of America (“GAAP”). We use this measure in our evaluation of results of operations to analyze the profitability of the Property-Liability insurance operations separately from investment results. Underwriting income is reconciled to net income applicable to common shareholders in the Property-Liability Operations section of Management’s Discussion and Analysis.
Adjusted net income is net income applicable to common shareholders, excluding:

• Realized capital gains and losses, after-tax, except for periodic settlements and accruals on non-hedge derivative instruments, which are reported with realized capital gains and losses but included in adjusted net income
• Valuation changes on embedded derivatives not hedged, after-tax
• Amortization of DAC and deferred sales inducement costs (“DSI”), to the extent they resulted from the recognition of certain realized capital gains and losses or valuation changes on embedded derivatives not hedged, after-tax
• Business combination expenses and the amortization of purchased intangible assets, after-tax
• Gain (loss) on disposition of operations, after-tax
• Adjustments for other significant non-recurring, infrequent or unusual items, when (a) the nature of the charge or gain is such that it is reasonably unlikely to recur within two years, or (b) there has been no similar charge or gain within the prior two years

Adjusted net income is reconciled to net income applicable to common shareholders in the Service Businesses, Allstate Life, Allstate Benefits and Allstate Annuities Segment sections of MD&A.
46 www.allstate.com

Highlights

Consolidated Net Income
($ in millions)

Consolidated net income applicable to common shareholders increased 30.8% and 30.4% in the third quarter and first nine months of 2018, respectively, compared to the prior periods. The increase in both periods was driven by a 5.8% and 3.4% increase in total revenue (see table below), lower catastrophe losses and a lower effective tax rate from the Tax Cuts and Jobs Act of 2017, partially offset by higher property and casualty insurance non-catastrophe claims losses, higher amortization of DAC for property and casualty businesses and Allstate Life, and lower realized capital gains in the first nine months of 2018 compared to the same period of 2017. The Property-Liability combined ratio increased from 93.9 in the third quarter of 2017 to 94.3 in the third quarter of 2018 and improved from 94.5 in the first nine months of 2017 to 92.5 in the first nine months of 2018.

Total Revenue
($ in millions)

Total revenue increased 5.8% and 3.4% in the third quarter and first nine months of 2018, respectively, compared to the prior periods, driven by a 5.7% and 5.0% increase in insurance premiums in the third quarter and first nine months of 2018, respectively. Insurance premiums increased in the following segments: Allstate Protection (Allstate brand and Esurance), Service Businesses, Allstate Benefits and Allstate Life. The increase in revenue in the first nine months of 2018 is partially offset by lower net realized capital gains and net investment income.

Net Investment Income
($ in millions)

Net investment income was flat in the third quarter of 2018, compared to the third quarter of 2017. Net investment income decreased 1.4% in the first nine months of 2018, compared to the first nine months of 2017, primarily due to lower performance-based investment results, mainly from limited partnerships.

Legend

Third Quarter 2018 Form 10-Q 47

Segment Highlights
Allstate Protection underwriting income totaled $553 million in the third quarter of 2018, a 3.3% decrease from $572 million in the third quarter of 2017, primarily due to higher claim severity, higher operating costs and expenses and lower favorable non-catastrophe prior year reserve reestimates, partially offset by increased premiums earned, lower catastrophe losses and improved auto claim frequency.
Underwriting income totaled $1.93 billion in the first nine months of 2018, a 38.9% increase from $1.39 billion in the first nine months of 2017, primarily due to increased premiums earned, lower catastrophe losses and improved auto claim frequency, partially offset by higher claim severity and operating costs and expenses.
Premiums written increased 5.9% to $8.80 billion in the third quarter of 2018 and 5.8% to $25.19 billion in the first nine months of 2018, compared to the same periods of 2017.
Service Businesses adjusted net income was zero in the third quarter of 2018 compared to an adjusted net loss of $17 million in the third quarter of 2017. Adjusted net loss improved to $4 million in the first nine months of 2018 compared to $35 million in the first nine months of 2017. The improvements in both periods were primarily due to improved loss experience at SquareTrade and Allstate Dealer Services, partially offset by higher loss costs and investments in the provider network and technology at Allstate Roadside Services and investments in business expansion at Arity.
Total revenues increased 21.0% to $329 million in the third quarter of 2018 and 23.5% to $962 million in the first nine months of 2018, compared to the same periods of 2017. These amounts include $24 million and $80 million related to SquareTrade in the third quarter and first nine months of 2018, respectively, recorded for protection plans sold directly to retailers prior to January 1, 2018 for which SquareTrade is deemed to be the principal. These amounts are due to the adoption of the revenue from contracts with customers accounting standard and are offset by corresponding increases in amortization of DAC, resulting in no impact to adjusted net income.
Net investment income increased $3 million in the third quarter of 2018 and $7 million in the first nine months of 2018, compared to the same periods of 2017.
Allstate Life adjusted net income was $74 million in both the third quarter of 2018 and 2017. Adjusted net income was $221 million in the first nine months of 2018 compared to $196 million in the first nine months of 2017, primarily due to a lower effective tax rate from the Tax Legislation, increased premiums and higher net investment income, partially offset by higher contract benefits.
Premiums and contract charges increased 1.9% to $322 million in the third quarter of 2018 and 2.0% to $975 million in the first nine months of 2018, compared to the same periods of 2017.
Allstate Benefits adjusted net income was $32 million in the third quarter of 2018 compared to $28 million in the third quarter of 2017 and $94 million in the first nine months of 2018 compared to $75 million in the first nine months of 2017, primarily due to higher premiums and a lower effective tax rate from the Tax Legislation, partially offset by higher contract benefits and operating costs and expenses.
Premiums and contract charges increased 4.4% to $285 million in the third quarter of 2018 and 5.3% to $854 million in the first nine months of 2018, compared to the same periods of 2017.
Allstate Annuities adjusted net income was $20 million in the third quarter of 2018 compared to $55 million in the third quarter of 2017 and $99 million in the first nine months of 2018 compared to $149 million in the first nine months of 2017, primarily due to decreased net investment income, driven by lower performance-based investment results and average investment balances, partially offset by a lower effective tax rate from the Tax Legislation and decreased interest credited to contractholder funds.
Net investment income decreased 19.8% to $260 million in the third quarter of 2018 and 12.8% to $843 million in the first nine months of 2018, compared to the same periods of 2017.
48 www.allstate.com

Financial Highlights
Tax reform On December 22, 2017, Public Law 115-97, known as the Tax Cuts and Jobs Act of 2017 (“Tax Legislation”) became effective, permanently reducing the U.S. corporate income tax rate from 35% to 21% beginning January 1, 2018. As a result, the corporate tax rate is not comparable between periods. During 2017, we revalued deferred tax assets and liabilities and recorded liabilities related to the transition to the modified territorial system for international taxation. During the third quarter of 2018, the impact of the Tax Legislation was adjusted from our preliminary estimate due to, among other things, changes in interpretations and assumptions we previously made, guidance that was issued and actions we took as a result of the Tax Legislation. During the third quarter of 2018, we recorded a reduction of $31 million to income tax expense related to these provisional amounts. We may make adjustments to these provisional amounts as additional information becomes available and future guidance is issued by the Internal Revenue Service.
We are utilizing a portion of the benefits from the Tax Legislation for the following initiatives:

• | Accelerating growth initiatives

• | Enhancing our employee value proposition

• | Improving local communities

• | Increasing cash returns to shareholders through the increase of our quarterly dividend per common share in the first quarter of 2018

In the first quarter of 2018, employees received either $1,000 or $2,000 of Choice Dollars (“Choice Dollars”) following a reduction in the federal tax rate, which could be taken as a cash bonus or contributed to a 401(k) or health savings account. $43 million was recorded as an expense with $21 million recorded in claims and claim expense and $22 million recorded in other costs and expenses.
The expenses associated with these initiatives will occur throughout 2018 and will reoccur in future periods.
InfoArmor On October 5, 2018, we acquired InfoArmor, Inc. (“InfoArmor”), a leading provider of identity protection in the employee benefits market, for $525 million in cash. InfoArmor primarily offers identity protection to employees and their family members through voluntary benefit programs at over 1,400 firms, including more than 100 of the Fortune 500 companies.
Investments totaled $83.97 billion as of September 30, 2018, increasing from $82.80 billion as of December 31, 2017.
Shareholders’ equity As of September 30, 2018, shareholders’ equity was $23.63 billion, including $3.38 billion in deployable assets at the parent holding company level comprising cash and investments that are generally saleable within one quarter.
Book value per diluted common share (ratio of common shareholders’ equity to total common shares
outstanding and dilutive potential common shares outstanding) was $60.79 as of September 30, 2018, an increase of 9.2% from $55.69 as of September 30, 2017, and an increase of 5.6% from $57.58 as of December 31, 2017.
Return on average common shareholders’ equity For the twelve months ended September 30, 2018, net income applicable to common shareholders’ return on the average of beginning and ending period common shareholders’ equity of 17.4% increased by 3.9 points from 13.5% for the twelve months ended September 30, 2017.
Pension settlement loss During the third quarter of 2018, we concluded that our qualified employee pension plan 2018 lump sum payments are expected to exceed a threshold of service and interest cost, which resulted in a pension settlement loss of $61 million, pre-tax, and was recorded as part of operating costs and expenses in the Corporate and Other segment. We will continue to monitor lump sum payments through the end of the year and we expect to recognize an additional settlement loss based on lump sum payments made during the fourth quarter of 2018. During third quarter 2017, we also recorded a pension settlement loss in the amount of $86 million, pre-tax, related to higher levels of lump sum payments in the qualified employee pension plan.
Common share repurchases On October 31, 2018, the Board authorized a new $3.00 billion common share repurchase program that is expected to be completed by April 2020.
Adopted Accounting Standards
Recognition and Measurement of Financial Assets and Financial Liabilities (“recognition and measurement accounting standard”) Beginning January 1, 2018, equity securities are reported at fair value with changes in fair value recognized in realized capital gains and losses. Limited partnerships previously reported using the cost method are now reported at fair value with changes in fair value recognized in net investment income. See the Investments section of this Item for further details.
Revenue from Contracts with Customers Beginning January 1, 2018, we adopted the revenue from contracts with customers accounting standard, which revises the criteria for revenue recognition and impacted the Service Businesses segment by increasing deferred revenue by approximately $160 million with a corresponding increase in DAC for protection plans that are sold directly to retailers. The anticipated impact of these adjustments offset and do not impact net income, but impact premium and DAC comparability trends as they are recognized over the life of the policy.
See Note 1 of the condensed consolidated financial statements for additional details on the adopted accounting standards.
Third Quarter 2018 Form 10-Q 49

Consolidated net income
|  | Three months ended September 30, |  | Nine months ended September 30,
($ in millions) |  | 2018 |  | 2017 |  | 2018 |  | 2017
Revenues |  |  |  |  |  |  |  |
Property-liability insurance premiums |  | $ | 8,595 |  |  | $ | 8,121 |  |  | $ | 25,341 |  |  | $ | 24,098 |
Life and annuity premiums and contract charges |  | 612 |  |  | 593 |  |  | 1,840 |  |  | 1,777 |
Other revenue |  | 238 |  |  | 228 |  |  | 682 |  |  | 664 |
Net investment income (1) |  | 844 |  |  | 843 |  |  | 2,454 |  |  | 2,488 |
Realized capital gains and losses: |  |  |  |  |  |  |  |
Total other-than-temporary impairment (“OTTI”) losses |  | (4 | ) |  | (26 | ) |  | (8 | ) |  | (135 | )
OTTI losses reclassified (from) to other comprehensive income |  | (1 | ) |  | (2 | ) |  | (2 | ) |  | (2 | )
Net OTTI losses recognized in earnings |  | (5 | ) |  | (28 | ) |  | (10 | ) |  | (137 | )
Sales and valuation changes on equity investments and derivatives |  | 181 |  |  | 131 |  |  | 27 |  |  | 455 |
Total realized capital gains and losses (1) |  | 176 |  |  | 103 |  |  | 17 |  |  | 318 |
Total revenues |  | 10,465 |  |  | 9,888 |  |  | 30,334 |  |  | 29,345 |
Costs and expenses |  |  |  |  |  |  |  |
Property and casualty insurance claims and claims expense |  | (5,817 | ) |  | (5,545 | ) |  | (16,758 | ) |  | (16,650 | )
Life contract benefits |  | (498 | ) |  | (456 | ) |  | (1,485 | ) |  | (1,416 | )
Interest credited to contractholder funds |  | (163 | ) |  | (174 | ) |  | (489 | ) |  | (522 | )
Amortization of deferred policy acquisition costs |  | (1,317 | ) |  | (1,200 | ) |  | (3,886 | ) |  | (3,545 | )
Operating costs and expenses |  | (1,534 | ) |  | (1,446 | ) |  | (4,296 | ) |  | (4,065 | )
Restructuring and related charges |  | (16 | ) |  | (14 | ) |  | (65 | ) |  | (77 | )
Interest expense |  | (82 | ) |  | (83 | ) |  | (251 | ) |  | (251 | )
Total costs and expenses |  | (9,427 | ) |  | (8,918 | ) |  | (27,230 | ) |  | (26,526 | )
Gain on disposition of operations |  | 1 |  |  | 1 |  |  | 4 |  |  | 15 |
Income tax expense (2) |  | (169 | ) |  | (305 | ) |  | (587 | ) |  | (894 | )
Net income |  | 870 |  |  | 666 |  |  | 2,521 |  |  | 1,940 |
Preferred stock dividends |  | (37 | ) |  | (29 | ) |  | (105 | ) |  | (87 | )
Net income applicable to common shareholders |  | $ | 833 |  |  | $ | 637 |  |  | $ | 2,416 |  |  | $ | 1,853 |

(1) | Due to the adoption of the recognition and measurement accounting standard, limited partnerships previously reported using the cost method are now reported at fair value with changes in fair value recognized in net investment income and equity securities are reported at fair value with changes in fair value recognized in valuation changes on equity investments in realized capital gains and losses. See the Investments section of this Item and Note 1 of the condensed consolidated financial statements for further details related to the adoption.

(2) | Beginning January 1, 2018, Tax Legislation reduced the U.S. corporate income tax rate from 35% to 21%.

50 www.allstate.com

Property-Liability Operations
Property-Liability Operations
Overview Our Property-Liability operations consist of two reportable segments: Allstate Protection and Discontinued Lines and Coverages. These segments are consistent with the groupings of financial information that management uses to evaluate performance and to determine the allocation of resources.
We do not allocate Property-Liability investment income, realized capital gains and losses, or assets to the Allstate Protection and Discontinued Lines and Coverages segments. Management reviews assets at the Property-Liability level for decision-making purposes.
The table below includes GAAP operating ratios we use to measure our profitability. We believe that they enhance an investor’s understanding of our profitability. They are calculated as follows:

• | Loss ratio: the ratio of claims and claims expense to premiums earned. Loss ratios include the impact of catastrophe losses.

• | Expense ratio: the ratio of amortization of DAC, operating costs and expenses and restructuring and related charges, less other revenue to premiums earned.

• | Combined ratio: the ratio of claims and claims expense, amortization of DAC, operating costs and expenses, and restructuring and related charges, less other revenue to premiums earned. The combined ratio is the sum of the loss ratio and the expense ratio. The difference between 100% and the combined ratio represents underwriting income as a percentage of premiums earned, or underwriting margin.

We have also calculated the following impacts of specific items on the GAAP operating ratios because of the volatility of these items between fiscal periods.

• | Effect of catastrophe losses on combined ratio: the ratio of catastrophe losses included in claims and claims expense to premiums earned. This ratio includes prior year reserve reestimates of catastrophe losses.

• | Effect of prior year reserve reestimates on combined ratio: the ratio of prior year reserve reestimates included in claims and claims expense to premiums earned. This ratio includes prior year reserve reestimates of catastrophe losses.

• | Effect of amortization of purchased intangible assets on combined ratio: the ratio of amortization of purchased intangible assets to premiums earned. Amortization of purchased intangible assets is reported in operating costs and expenses on the Condensed Consolidated Statements of Operations.

• | Effect of restructuring and related charges on combined ratio: the ratio of restructuring and related charges to premiums earned.

• | Effect of Discontinued Lines and Coverages on combined ratio: the ratio of claims and claims expense and operating costs and expenses in the Discontinued Lines and Coverages segment to Property-Liability premiums earned. The sum of the effect of Discontinued Lines and Coverages on the combined ratio and the Allstate Protection combined ratio is equal to the Property-Liability combined ratio.

Third Quarter 2018 Form 10-Q 51

Property-Liability Operations

Summarized financial data |  |  |  |
|  | Three months ended September 30, |  | Nine months ended September 30,
($ in millions, except ratios) |  | 2018 |  | 2017 |  | 2018 |  | 2017
Premiums written |  | $ | 8,800 |  |  | $ | 8,311 |  |  | $ | 25,185 |  |  | $ | 23,810 |
Revenues |  |  |  |  |  |  |  |  |  |  |  |
Premiums earned |  | $ | 8,320 |  |  | $ | 7,896 |  |  | $ | 24,528 |  |  | $ | 23,462 |
Other revenue |  | 192 |  |  | 185 |  |  | 550 |  |  | 533 |
Net investment income |  | 410 |  |  | 368 |  |  | 1,100 |  |  | 1,063 |
Realized capital gains and losses |  | 126 |  |  | 82 |  |  | 16 |  |  | 302 |
Total revenues |  | 9,048 |  |  | 8,531 |  |  | 26,194 |  |  | 25,360 |
Costs and expenses |  |  |  |  |  |  |  |  |  |  |  |
Claims and claims expense |  | (5,729 | ) |  | (5,441 | ) |  | (16,491 | ) |  | (16,376 | )
Amortization of DAC |  | (1,133 | ) |  | (1,060 | ) |  | (3,331 | ) |  | (3,114 | )
Operating costs and expenses |  | (1,162 | ) |  | (1,084 | ) |  | (3,347 | ) |  | (3,135 | )
Restructuring and related charges |  | (15 | ) |  | (12 | ) |  | (61 | ) |  | (73 | )
Total costs and expenses |  | (8,039 | ) |  | (7,597 | ) |  | (23,230 | ) |  | (22,698 | )
Gain on disposition of operations (1) |  | — |  |  | — |  |  | — |  |  | 10 |
Income tax expense |  | (204 | ) |  | (298 | ) |  | (606 | ) |  | (852 | )
Net income applicable to common shareholders |  | $ | 805 |  |  | $ | 636 |  |  | $ | 2,358 |  |  | $ | 1,820 |
Underwriting income |  | $ | 473 |  |  | $ | 484 |  |  | $ | 1,848 |  |  | $ | 1,297 |
Net investment income |  | 410 |  |  | 368 |  |  | 1,100 |  |  | 1,063 |
Income tax expense on operations |  | (178 | ) |  | (271 | ) |  | (603 | ) |  | (746 | )
Realized capital gains and losses, after-tax |  | 103 |  |  | 54 |  |  | 16 |  |  | 199 |
Gain on disposition of operations, after-tax |  | — |  |  | 1 |  |  | — |  |  | 7 |
Tax Legislation expense |  | (3 | ) |  | — |  |  | (3 | ) |  | — |
Net income applicable to common shareholders |  | $ | 805 |  |  | $ | 636 |  |  | $ | 2,358 |  |  | $ | 1,820 |
Catastrophe losses (2) |  | $ | 625 |  |  | $ | 856 |  |  | $ | 1,892 |  |  | $ | 2,630 |
GAAP operating ratios |  |  |  |  |  |  |  |  |  |  |  |
Claims and claims expense ratio |  | 68.8 |  |  | 68.9 |  |  | 67.3 |  |  | 69.8 |
Expense ratio |  | 25.5 |  |  | 25.0 |  |  | 25.2 |  |  | 24.7 |
Combined ratio |  | 94.3 |  |  | 93.9 |  |  | 92.5 |  |  | 94.5 |
Effect of catastrophe losses on combined ratio |  | 7.5 |  |  | 10.9 |  |  | 7.7 |  |  | 11.2 |
Effect of prior year reserve reestimates on combined ratio |  | 0.1 |  |  | (1.7 | ) |  | (0.5 | ) |  | (1.4 | )
Effect of catastrophe losses included in prior year reserve reestimates on combined ratio |  | — |  |  | (0.1 | ) |  | 0.2 |  |  | (0.1 | )
Effect of amortization of purchased intangible assets on combined ratio |  | 0.1 |  |  | — |  |  | 0.1 |  |  | — |
Effect of restructuring and related charges on combined ratio |  | 0.2 |  |  | 0.2 |  |  | 0.2 |  |  | 0.3 |
Effect of Discontinued Lines and Coverages on combined ratio |  | 0.9 |  |  | 1.1 |  |  | 0.4 |  |  | 0.4 |

(1) | 2017 results represented the conclusion of a contractual arrangement related to the sale of Sterling Collision Centers, Inc. in 2014.

(2) | Prior year reserve reestimates included in catastrophe losses totaled $1 million and $45 million unfavorable in the three and nine months ended September 30, 2018, respectively, including $37 million for Texas Windstorm Insurance Association (“TWIA”) assessments related to Hurricane Harvey recorded in second quarter 2018 (see Note 12 of the condensed consolidated financial statements), compared to $7 million and $10 million favorable in the three and nine months ended September 30, 2017, respectively.

52 www.allstate.com

Property-Liability Operations
Net investment income increased 11.4% or $42 million to $410 million in the third quarter of 2018 and 3.5% or $37 million to $1.10 billion in the first nine months of 2018 from $368 million in the third quarter of 2017 and $1.06 billion in the first nine months of 2017, and benefited from higher performance-based investment results, primarily from limited partnerships, and higher market-based portfolio income.

Net investment income
|  | Three months ended September 30, |  | Nine months ended September 30,
($ in millions) |  | 2018 |  | 2017 |  | 2018 |  | 2017
Fixed income securities |  | $ | 240 |  |  | $ | 229 |  |  | $ | 690 |  |  | $ | 681 |
Equity securities |  | 24 |  |  | 27 |  |  | 93 |  |  | 89 |
Mortgage loans |  | 5 |  |  | 4 |  |  | 13 |  |  | 9 |
Limited partnership interests (1) |  | 136 |  |  | 108 |  |  | 301 |  |  | 281 |
Short-term investments |  | 11 |  |  | 5 |  |  | 26 |  |  | 13 |
Other |  | 33 |  |  | 25 |  |  | 93 |  |  | 74 |
Investment income, before expense |  | 449 |  |  | 398 |  |  | 1,216 |  |  | 1,147 |
Investment expense (2) (3) |  | (39 | ) |  | (30 | ) |  | (116 | ) |  | (84 | )
Net investment income |  | $ | 410 |  |  | $ | 368 |  |  | $ | 1,100 |  |  | $ | 1,063 |

(1) | Due to the adoption of the recognition and measurement accounting standard, limited partnerships previously reported using the cost method are now reported at fair value with changes in fair value recognized in net investment income.

(2) | Investment expense includes $10 million and $5 million of investee level expenses in the third quarter of 2018 and 2017, respectively, and $34 million and $16 million in the first nine months of 2018 and 2017, respectively. Investee level expenses include depreciation and asset level operating expenses on directly held real estate and other consolidated investments.

(3) | Investment expense includes $6 million and $1 million related to the portion of reinvestment income on securities lending collateral paid to the counterparties in the third quarter of 2018 and 2017, respectively, and $12 million and $3 million in the first nine months of 2018 and 2017, respectively.

Realized capital gains and losses Net realized capital gains in the third quarter and first nine months of 2018, primarily related to increases in the valuation of equity investments, partially offset by losses on sales of fixed income securities.

Realized capital gains and losses
($ in millions) |  | Three months ended September 30, |  | Nine months ended September 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Impairment write-downs (1) |  | $ | (1 | ) |  | $ | (17 | ) |  | $ | (3 | ) |  | $ | (55 | )
Change in intent write-downs (1) |  | — |  |  | (5 | ) |  | — |  |  | (39 | )
Net OTTI losses recognized in earnings |  | (1 | ) |  | (22 | ) |  | (3 | ) |  | (94 | )
Sales (1) |  | (16 | ) |  | 117 |  |  | (104 | ) |  | 423 |
Valuation of equity investments (1) |  | 142 |  | (2) | — |  |  | 114 |  | (3) | — |
Valuation and settlements of derivative instruments |  | 1 |  |  | (13 | ) |  | 9 |  |  | (27 | )
Realized capital gains and losses, pre-tax |  | 126 |  |  | 82 |  |  | 16 |  |  | 302 |
Income tax expense |  | (23 | ) |  | (28 | ) |  | — |  |  | (103 | )
Realized capital gains and losses, after-tax |  | $ | 103 |  |  | $ | 54 |  |  | $ | 16 |  |  | $ | 199 |

(1) | Due to the adoption of the recognition and measurement accounting standard, equity securities are reported at fair value with changes in fair value recognized in valuation of equity investments and are no longer included in impairment write-downs, change in intent write-downs and sales.

(2) | Includes $161 million of appreciation of equity investments and $19 million of declines in value primarily related to certain limited partnerships where the underlying assets are predominately public equity securities.

(3) | Includes $156 million of appreciation of equity investments and $42 million of declines in value primarily related to certain limited partnerships where the underlying assets are predominately public equity securities.

Third Quarter 2018 Form 10-Q 53

Segment Results Allstate Protection
Allstate Protection Segment

Underwriting results
|  | Three months ended September 30, |  | Nine months ended September 30,
($ in millions) |  | 2018 |  | 2017 |  | 2018 |  | 2017
Premiums written |  | $ | 8,800 |  |  | $ | 8,311 |  |  | $ | 25,185 |  |  | $ | 23,810 |
Premiums earned |  | $ | 8,320 |  |  | $ | 7,896 |  |  | $ | 24,528 |  |  | $ | 23,462 |
Other revenue |  | 192 |  |  | 185 |  |  | 550 |  |  | 533 |
Claims and claims expense |  | (5,649 | ) |  | (5,353 | ) |  | (16,406 | ) |  | (16,283 | )
Amortization of DAC |  | (1,133 | ) |  | (1,060 | ) |  | (3,331 | ) |  | (3,114 | )
Other costs and expenses |  | (1,162 | ) |  | (1,084 | ) |  | (3,346 | ) |  | (3,133 | )
Restructuring and related charges |  | (15 | ) |  | (12 | ) |  | (61 | ) |  | (73 | )
Underwriting income |  | $ | 553 |  |  | $ | 572 |  |  | $ | 1,934 |  |  | $ | 1,392 |
Catastrophe losses |  | $ | 625 |  |  | $ | 856 |  |  | $ | 1,892 |  |  | $ | 2,630 |
Underwriting income (loss) by line of business
Auto |  | $ | 371 |  |  | $ | 252 |  |  | $ | 1,326 |  |  | $ | 892 |
Homeowners |  | 204 |  |  | 335 |  |  | 546 |  |  | 431 |
Other personal lines (1) |  | 7 |  |  | (15 | ) |  | 114 |  |  | 54 |
Commercial lines |  | (43 | ) |  | (15 | ) |  | (87 | ) |  | (21 | )
Other business lines (2) |  | 15 |  |  | 15 |  |  | 39 |  |  | 37 |
Answer Financial |  | (1 | ) |  | — |  |  | (4 | ) |  | (1 | )
Underwriting income |  | $ | 553 |  |  | $ | 572 |  |  | $ | 1,934 |  |  | $ | 1,392 |

(1) | Other personal lines include renters, condominium, landlord and other personal lines products.

(2) | Other business lines primarily include Ivantage, a general agency for Allstate exclusive agencies. Ivantage provides agencies a solution for their customers when coverage through Allstate brand underwritten products is not available.

54 www.allstate.com

Allstate Protection Segment Results

Changes in underwriting results from prior year by component and by line of business (1)
|  | Three months ended September 30,
|  | Auto |  | Homeowners |  | Other personal lines |  | Commercial lines |  | Allstate Protection (2)
($ in millions) |  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017
Underwriting income (loss) - prior period |  | $ | 252 |  |  | $ | 18 |  |  | $ | 335 |  |  | $ | 395 |  |  | $ | (15 | ) |  | $ | 50 |  |  | $ | (15 | ) |  | $ | (19 | ) |  | $ | 572 |  |  | $ | 459 |
Changes in underwriting income (loss) from: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Increase (decrease) premiums earned |  | 297 |  |  | 148 |  |  | 59 |  |  | 19 |  |  | 16 |  |  | 13 |  |  | 52 |  |  | (3 | ) |  | 424 |  |  | 177 |
Increase (decrease) other revenue |  | 5 |  |  | 2 |  |  | 2 |  |  | (1 | ) |  | (2 | ) |  | 2 |  |  | — |  |  | — |  |  | 7 |  |  | 5 |
(Increase) decrease incurred claims and claims expense (“losses”): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Incurred losses, excluding catastrophe losses and reserve reestimates |  | (234 | ) |  | 214 |  |  | (92 | ) |  | 3 |  |  | — |  |  | (29 | ) |  | (52 | ) |  | 8 |  |  | (378 | ) |  | 196 |
Catastrophe losses, excluding reserve reestimates |  | 259 |  |  | (221 | ) |  | (40 | ) |  | (119 | ) |  | 14 |  |  | (40 | ) |  | 6 |  |  | (5 | ) |  | 239 |  |  | (385 | )
Non-catastrophe reserve reestimates |  | (90 | ) |  | 176 |  |  | (21 | ) |  | 30 |  |  | (2 | ) |  | (2 | ) |  | (36 | ) |  | 7 |  |  | (149 | ) |  | 211 |
Catastrophe reserve reestimates |  | — |  |  | 3 |  |  | (8 | ) |  | 8 |  |  | (1 | ) |  | — |  |  | 1 |  |  | (1 | ) |  | (8 | ) |  | 10 |
Losses subtotal |  | (65 | ) |  | 172 |  |  | (161 | ) |  | (78 | ) |  | 11 |  |  | (71 | ) |  | (81 | ) |  | 9 |  |  | (296 | ) |  | 32 |
(Increase) decrease expenses |  | (118 | ) |  | (88 | ) |  | (31 | ) |  | — |  |  | (3 | ) |  | (9 | ) |  | 1 |  |  | (2 | ) |  | (154 | ) |  | (101 | )
Underwriting income (loss) |  | $ | 371 |  |  | $ | 252 |  |  | $ | 204 |  |  | $ | 335 |  |  | $ | 7 |  |  | $ | (15 | ) |  | $ | (43 | ) |  | $ | (15 | ) |  | $ | 553 |  |  | $ | 572 |
|  | Nine months ended September 30,
|  | Auto |  | Homeowners |  | Other personal lines |  | Commercial lines |  | Allstate Protection (2)
|  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017
Underwriting income (loss) - prior period |  | $ | 892 |  |  | $ | (56 | ) |  | $ | 431 |  |  | $ | 528 |  |  | $ | 54 |  |  | $ | 104 |  |  | $ | (21 | ) |  | $ | (90 | ) |  | $ | 1,392 |  |  | $ | 523 |
Changes in underwriting income (loss) from: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Increase (decrease) premiums earned |  | 767 |  |  | 448 |  |  | 141 |  |  | 24 |  |  | 48 |  |  | 35 |  |  | 110 |  |  | (16 | ) |  | 1,066 |  |  | 491 |
Increase (decrease) other revenue |  | 15 |  |  | 3 |  |  | 4 |  |  | (1 | ) |  | 1 |  |  | — |  |  | (3 | ) |  | 2 |  |  | 17 |  |  | 11 |
(Increase) decrease incurred claims and claims expense (“losses”): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Incurred losses, excluding catastrophe losses and reserve reestimates |  | (396 | ) |  | 560 |  |  | (199 | ) |  | (49 | ) |  | (43 | ) |  | (27 | ) |  | (81 | ) |  | 29 |  |  | (719 | ) |  | 513 |
Catastrophe losses, excluding reserve reestimates |  | 358 |  |  | (179 | ) |  | 377 |  |  | (182 | ) |  | 50 |  |  | (26 | ) |  | 8 |  |  | 3 |  |  | 793 |  |  | (384 | )
Non-catastrophe reserve reestimates |  | (3 | ) |  | 289 |  |  | (46 | ) |  | 73 |  |  | 8 |  |  | (1 | ) |  | (101 | ) |  | 46 |  |  | (142 | ) |  | 407 |
Catastrophe reserve reestimates |  | 23 |  |  | 6 |  |  | (86 | ) |  | 21 |  |  | 7 |  |  | (7 | ) |  | 1 |  |  | 3 |  |  | (55 | ) |  | 23 |
Losses subtotal |  | (18 | ) |  | 676 |  |  | 46 |  |  | (137 | ) |  | 22 |  |  | (61 | ) |  | (173 | ) |  | 81 |  |  | (123 | ) |  | 559 |
(Increase) decrease expenses |  | (330 | ) |  | (179 | ) |  | (76 | ) |  | 17 |  |  | (11 | ) |  | (24 | ) |  | — |  |  | 2 |  |  | (418 | ) |  | (192 | )
Underwriting income (loss) |  | $ | 1,326 |  |  | $ | 892 |  |  | $ | 546 |  |  | $ | 431 |  |  | $ | 114 |  |  | $ | 54 |  |  | $ | (87 | ) |  | $ | (21 | ) |  | $ | 1,934 |  |  | $ | 1,392 |

(1) | The 2018 column presents changes in 2018 compared to 2017. The 2017 column presents changes in 2017 compared to 2016.

(2) | Includes other business lines underwriting income of $15 million in both the third quarter of 2018 and 2017 and $39 million and $37 million in the first nine months of 2018 and 2017, respectively. Includes Answer Financial underwriting loss of $1 million and zero in the third quarter of 2018 and 2017, respectively, and $4 million and $1 million in the first nine months of 2018 and 2017, respectively.

Underwriting income decreased to $553 million in the third quarter of 2018 from $572 million in the third quarter of 2017, primarily due to higher claim severity, higher operating costs and expenses and lower favorable non-catastrophe prior year reserve reestimates, partially offset by increased premiums earned, lower catastrophe losses and improved auto claim frequency. Underwriting income increased to $1.93 billion in the first nine months of 2018 from $1.39 billion in the first nine months of 2017, primarily due to increased premiums earned, lower catastrophe losses and improved auto claim frequency, partially offset by higher claim severity and operating costs and expenses.
Third Quarter 2018 Form 10-Q 55

Segment Results Allstate Protection
Premiums written is the amount of premiums charged for policies issued during a fiscal period. Premiums are considered earned and are included in the financial results on a pro-rata basis over the policy period. The portion of premiums written applicable to the unexpired term of the policies is recorded as unearned premiums on our Condensed Consolidated Statements of Financial Position.

Premiums written and earned by line of business
($ in millions) |  | Three months ended September 30, |  | Nine months ended September 30,
Premiums written |  | 2018 |  | 2017 |  | 2018 |  | 2017
Auto |  | $ | 5,987 |  |  | $ | 5,664 |  |  | $ | 17,513 |  |  | $ | 16,569 |
Homeowners |  | 2,144 |  |  | 2,053 |  |  | 5,800 |  |  | 5,542 |
Other personal lines |  | 496 |  |  | 478 |  |  | 1,390 |  |  | 1,336 |
Subtotal – Personal lines |  | 8,627 |  |  | 8,195 |  |  | 24,703 |  |  | 23,447 |
Commercial lines |  | 173 |  |  | 116 |  |  | 482 |  |  | 363 |
Total premiums written |  | $ | 8,800 |  |  | $ | 8,311 |  |  | $ | 25,185 |  |  | $ | 23,810 |
Reconciliation of premiums written to premiums earned: |  |  |  |  |  |  |  |
Increase in unearned premiums |  | (505 | ) |  | (456 | ) |  | (643 | ) |  | (397 | )
Other |  | 25 |  |  | 41 |  |  | (14 | ) |  | 49 |
Total premiums earned |  | $ | 8,320 |  |  | $ | 7,896 |  |  | $ | 24,528 |  |  | $ | 23,462 |
Auto |  | $ | 5,798 |  |  | $ | 5,501 |  |  | $ | 17,094 |  |  | $ | 16,327 |
Homeowners |  | 1,891 |  |  | 1,832 |  |  | 5,603 |  |  | 5,462 |
Other personal lines |  | 455 |  |  | 439 |  |  | 1,354 |  |  | 1,306 |
Subtotal – Personal lines |  | 8,144 |  |  | 7,772 |  |  | 24,051 |  |  | 23,095 |
Commercial lines |  | 176 |  |  | 124 |  |  | 477 |  |  | 367 |
Total |  | $ | 8,320 |  |  | $ | 7,896 |  |  | $ | 24,528 |  |  | $ | 23,462 |

Combined ratios by line of business
|  | Loss ratio |  | Expense ratio (1) |  | Combined ratio
|  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017
Three months ended September 30, |  |  |  |  |  |  |  |  |  |  |  |
Auto |  | 67.8 |  |  | 70.3 |  |  | 25.8 |  |  | 25.1 |  |  | 93.6 |  |  | 95.4 |
Homeowners |  | 64.3 |  |  | 57.6 |  |  | 24.9 |  |  | 24.1 |  |  | 89.2 |  |  | 81.7 |
Other personal lines |  | 69.3 |  |  | 74.3 |  |  | 29.2 |  |  | 29.1 |  |  | 98.5 |  |  | 103.4 |
Commercial lines |  | 104.5 |  |  | 83.1 |  |  | 19.9 |  |  | 29.0 |  |  | 124.4 |  |  | 112.1 |
Total |  | 67.9 |  |  | 67.8 |  |  | 25.5 |  |  | 25.0 |  |  | 93.4 |  |  | 92.8 |
Nine months ended September 30, |  |  |  |  |  |  |  |  |  |  |  |
Auto |  | 66.6 |  |  | 69.6 |  |  | 25.6 |  |  | 24.9 |  |  | 92.2 |  |  | 94.5 |
Homeowners |  | 66.1 |  |  | 68.6 |  |  | 24.2 |  |  | 23.5 |  |  | 90.3 |  |  | 92.1 |
Other personal lines |  | 63.5 |  |  | 67.6 |  |  | 28.1 |  |  | 28.3 |  |  | 91.6 |  |  | 95.9 |
Commercial lines |  | 96.0 |  |  | 77.6 |  |  | 22.2 |  |  | 28.1 |  |  | 118.2 |  |  | 105.7 |
Total |  | 66.9 |  |  | 69.4 |  |  | 25.2 |  |  | 24.7 |  |  | 92.1 |  |  | 94.1 |

(1) | Other revenue is deducted from operating costs and expenses in the expense ratio calculation.

56 www.allstate.com

Allstate Protection Segment Results

Loss ratios by line of business
|  | Loss ratio |  | Effect of catastrophe losses |  | Effect of prior year reserve reestimates |  | Effect of catastrophe losses included in prior year reserve reestimates
|  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017
Three months ended September 30, |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Auto |  | 67.8 |  |  | 70.3 |  |  | 2.1 |  |  | 6.9 |  |  | (1.7 | ) |  | (3.4 | ) |  | (0.1 | ) |  | (0.1 | )
Homeowners |  | 64.3 |  |  | 57.6 |  |  | 23.5 |  |  | 21.6 |  |  | (0.7 | ) |  | (2.3 | ) |  | 0.3 |  |  | (0.1 | )
Other personal lines |  | 69.3 |  |  | 74.3 |  |  | 11.4 |  |  | 14.8 |  |  | 0.7 |  |  | — |  |  | — |  |  | (0.2 | )
Commercial lines |  | 104.5 |  |  | 83.1 |  |  | 3.4 |  |  | 10.5 |  |  | 23.8 |  |  | 5.6 |  |  | — |  |  | 0.8 |
Total |  | 67.9 |  |  | 67.8 |  |  | 7.5 |  |  | 10.9 |  |  | (0.8 | ) |  | (2.8 | ) |  | — |  |  | (0.1 | )
Nine months ended September 30, |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Auto |  | 66.6 |  |  | 69.6 |  |  | 1.8 |  |  | 4.2 |  |  | (2.1 | ) |  | (2.1 | ) |  | (0.2 | ) |  | (0.1 | )
Homeowners |  | 66.1 |  |  | 68.6 |  |  | 25.8 |  |  | 31.8 |  |  | 0.9 |  |  | (1.6 | ) |  | 1.5 |  |  | (0.1 | )
Other personal lines |  | 63.5 |  |  | 67.6 |  |  | 9.5 |  |  | 14.3 |  |  | (1.1 | ) |  | — |  |  | (0.2 | ) |  | 0.4 |
Commercial lines |  | 96.0 |  |  | 77.6 |  |  | 2.7 |  |  | 6.0 |  |  | 22.4 |  |  | 1.9 |  |  | — |  |  | 0.3 |
Total |  | 66.9 |  |  | 69.4 |  |  | 7.7 |  |  | 11.2 |  |  | (0.9 | ) |  | (1.8 | ) |  | 0.2 |  |  | (0.1 | )

Third Quarter 2018 Form 10-Q 57

Segment Results Allstate Protection
Catastrophe losses were $625 million and $1.89 billion in the third quarter and first nine months of 2018, respectively, including $37 million for TWIA assessments related to Hurricane Harvey recorded in second quarter 2018 (see Note 12 of the condensed consolidated financial statements), compared to $856 million and $2.63 billion in the third quarter and first nine months of 2017, respectively.
We define a “catastrophe” as an event that produces pre-tax losses before reinsurance in excess of $1 million and involves multiple first party policyholders, or a winter weather event that produces a number of claims in excess of a preset, per-event threshold of average claims in a specific area, occurring within a certain amount of time following the event. Catastrophes are caused by various natural events including high winds, winter storms and freezes, tornadoes, hailstorms, wildfires, tropical storms, tsunamis, hurricanes, earthquakes and volcanoes. We are also exposed to man-made catastrophic events,
such as certain types of terrorism or industrial accidents. The nature and level of catastrophes in any period cannot be reliably predicted.
Loss estimates are generally based on claim adjuster inspections and the application of historical loss development factors. Our loss estimates are calculated in accordance with the coverage provided by our policies. Auto policyholders generally have coverage for physical damage due to flood if they have purchased optional auto comprehensive coverage. Our homeowners policies specifically exclude coverage for losses caused by flood.
Over time, we have limited our aggregate insurance exposure to catastrophe losses in certain regions of the country that are subject to high levels of natural catastrophes through reinsurance and changes in underwriting guidelines, limited by our participation in various state facilities.

Catastrophe losses by the size of event
|  | Three months ended September 30, 2018
($ in millions) |  | Number of events |  |  |  | Claims and claims expense |  |  |  | Combined ratio impact |  | Average catastrophe loss per event
Size of catastrophe loss |  |  |  |  |  |  |  |  |  |  |  |  |  |
Greater than $250 million |  | — |  |  | — | % |  | $ | — |  |  | — | % |  | — |  |  | $ | — |
$101 million to $250 million |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
$50 million to $100 million |  | 4 |  |  | 9.1 |  |  | 240 |  |  | 38.4 |  |  | 2.9 |  |  | 60 |
Less than $50 million |  | 40 |  |  | 90.9 |  |  | 282 |  |  | 45.1 |  |  | 3.4 |  |  | 7 |
Total |  | 44 |  |  | 100.0 | % |  | 522 |  |  | 83.5 |  |  | 6.3 |  |  | 12 |
Prior year reserve reestimates |  |  |  |  |  |  |  | 1 |  |  | 0.2 |  |  | — |  |  |  |
Prior quarter reserve reestimates |  |  |  |  |  | 102 |  |  | 16.3 |  |  | 1.2 |  |  |
Total catastrophe losses |  |  |  |  |  |  |  | $ | 625 |  |  | 100.0 | % |  | 7.5 |  |  |
|  | Nine months ended September 30, 2018
|  | Number of events |  |  |  | Claims and claims expense |  |  |  | Combined ratio impact |  | Average catastrophe loss per event
Size of catastrophe loss |  |  |  |  |  |  |  |  |  |  |  |  |  |
Greater than $250 million |  | — |  |  | — | % |  | $ | — |  |  | — | % |  | — |  |  | $ | — |
$101 million to $250 million |  | 3 |  |  | 3.2 |  |  | 416 |  |  | 22.0 |  |  | 1.7 |  |  | 139 |
$50 million to $100 million |  | 10 |  |  | 10.9 |  |  | 706 |  |  | 37.3 |  |  | 2.9 |  |  | 71 |
Less than $50 million |  | 79 |  |  | 85.9 |  |  | 725 |  |  | 38.3 |  |  | 2.9 |  |  | 9 |
Total |  | 92 |  |  | 100.0 | % |  | 1,847 |  |  | 97.6 |  |  | 7.5 |  |  | 20 |
Prior year reserve reestimates |  |  |  |  |  |  |  | 45 |  |  | 2.4 |  |  | 0.2 |  |  |
Total catastrophe losses |  |  |  |  |  |  |  | $ | 1,892 |  |  | 100.0 | % |  | 7.7 |  |  |

58 www.allstate.com

Allstate Protection Segment Results

Catastrophe losses by the type of event |  |  |  |  |  |  |  |
|  | Three months ended September 30, |  | Nine months ended September 30,
($ in millions) |  | Number of events |  | 2018 |  | Number of events |  | 2017 |  | Number of events |  | 2018 |  | Number of events |  | 2017
Hurricanes/Tropical storms |  | 2 |  |  | $ | 75 |  |  | 2 |  |  | $ | 641 |  |  | 3 |  |  | $ | 79 |  |  | 2 |  |  | $ | 641 |
Tornadoes |  | 1 |  |  | 9 |  |  | — |  |  | — |  |  | 1 |  |  | 9 |  |  | 3 |  |  | 101 |
Wind/Hail |  | 34 |  |  | 376 |  |  | 17 |  |  | 180 |  |  | 77 |  |  | 1,567 |  |  | 81 |  |  | 1,872 |
Wildfires |  | 7 |  |  | 62 |  |  | 3 |  |  | 8 |  |  | 9 |  |  | 78 |  |  | 3 |  |  | 8 |
Other events |  | — |  |  | — |  |  | — |  |  | — |  |  | 2 |  |  | 114 |  |  | 2 |  |  | 23 |
Prior year reserve reestimates |  |  |  | 1 |  |  |  |  | (7 | ) |  |  |  | 45 |  |  |  |  | (10 | )
Prior quarter reserve reestimates |  |  |  | 102 |  |  |  |  | 39 |  |  |  |  | — |  |  |  |  | — |
Total catastrophe losses |  | 44 |  |  | $ | 625 |  |  | 22 |  |  | $ | 861 |  |  | 92 |  |  | $ | 1,892 |  |  | 91 |  |  | $ | 2,635 |

Expense ratio increased 0.5 points in both the third quarter and first nine months of 2018 compared to the same periods of 2017.

Expense ratios by line of business |  |  |  |  |  |  |  |
|  | Three months ended September 30, |  | Nine months ended September 30,
|  | 2018 |  | 2017 |  | 2018 |  | 2017
Auto |  | 25.8 |  |  | 25.1 |  |  | 25.6 |  |  | 24.9 |
Homeowners |  | 24.9 |  |  | 24.1 |  |  | 24.2 |  |  | 23.5 |
Other personal lines |  | 29.2 |  |  | 29.1 |  |  | 28.1 |  |  | 28.3 |
Commercial lines |  | 19.9 |  |  | 29.0 |  |  | 22.2 |  |  | 28.1 |
Total expense ratio (1) |  | 25.5 |  |  | 25.0 |  |  | 25.2 |  |  | 24.7 |

(1) | O ther revenue is deducted from other costs and expenses in the expense ratio calculation.

Impact of specific costs and expenses on the expense ratio |  |  |  |  |  |  |  |
|  | Three months ended September 30, |  | Nine months ended September 30,
|  | 2018 |  | 2017 |  | 2018 |  | 2017
Amortization of DAC |  | 13.6 |  |  | 13.4 |  |  | 13.6 |  |  | 13.3 |
Advertising expense |  | 2.9 |  |  | 2.4 |  |  | 2.3 |  |  | 2.3 |
Amortization of purchased intangible assets |  | 0.1 |  |  | — |  |  | 0.1 |  |  | — |
Other costs and expenses (1) |  | 8.7 |  |  | 9.0 |  |  | 9.0 |  |  | 8.8 |
Restructuring and related charges |  | 0.2 |  |  | 0.2 |  |  | 0.2 |  |  | 0.3 |
Total expense ratio |  | 25.5 |  |  | 25.0 |  |  | 25.2 |  |  | 24.7 |

(1) | O ther revenue is deducted from other costs and expenses in the expense ratio calculation.

Reserve reestimates were favorable in the third quarter and first nine months of 2018 and primarily related to continued favorable personal lines auto injury coverage development, partially offset by strengthening in our commercial lines.

Total reserves, net of reinsuranc e (estimated cost of outstanding claims) as of January 1, by line of business
($ in millions) |  | 2018 |  | 2017
Auto |  | $ | 14,051 |  |  | $ | 13,530 |
Homeowners |  | 2,205 |  |  | 1,990 |
Other personal lines |  | 1,489 |  |  | 1,456 |
Commercial lines |  | 616 |  |  | 621 |
Total Allstate Protection |  | $ | 18,361 |  |  | $ | 17,597 |

Third Quarter 2018 Form 10-Q 59

Segment Results Allstate Protection

Reserve reestimates |  |  |  |  |  |  |  |
|  | Three months ended September 30, |  | Nine months ended September 30,
|  | Reserve reestimate (1) |  | Effect on combined ratio (2) |  | Reserve reestimate (1) |  | Effect on combined ratio (2)
($ in millions, except ratios) |  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017
Auto |  | $ | (99 | ) |  | $ | (189 | ) |  | (1.2 | ) |  | (2.4 | ) |  | $ | (356 | ) |  | $ | (336 | ) |  | (1.4 | ) |  | (1.4 | )
Homeowners |  | (13 | ) |  | (42 | ) |  | (0.1 | ) |  | (0.5 | ) |  | 46 |  |  | (86 | ) |  | 0.2 |  |  | (0.4 | )
Other personal lines |  | 3 |  |  | — |  |  | — |  |  | — |  |  | (15 | ) |  | — |  |  | (0.1 | ) |  | — |
Commercial lines |  | 42 |  |  | 7 |  |  | 0.5 |  |  | 0.1 |  |  | 107 |  |  | 7 |  |  | 0.4 |  |  | — |
Total Allstate Protection (3) |  | $ | (67 | ) |  | $ | (224 | ) |  | (0.8 | ) |  | (2.8 | ) |  | $ | (218 | ) |  | $ | (415 | ) |  | (0.9 | ) |  | (1.8 | )
Allstate brand |  | $ | (64 | ) |  | $ | (221 | ) |  | (0.8 | ) |  | (2.8 | ) |  | $ | (216 | ) |  | $ | (409 | ) |  | (0.9 | ) |  | (1.8 | )
Esurance brand |  | — |  |  | (1 | ) |  | — |  |  | — |  |  | — |  |  | (2 | ) |  | — |  |  | — |
Encompass brand |  | (3 | ) |  | (2 | ) |  | — |  |  | — |  |  | (2 | ) |  | (4 | ) |  | — |  |  | — |
Total Allstate Protection |  | $ | (67 | ) |  | $ | (224 | ) |  | (0.8 | ) |  | (2.8 | ) |  | $ | (218 | ) |  | $ | (415 | ) |  | (0.9 | ) |  | (1.8 | )

(1) | Favorable reserve reestimates are shown in parentheses.

(2) | Ratios are calculated using Allstate Protection premiums earned.

(3) | Prior year reserve reestimates included in catastrophe losses totaled $1 million and $45 million unfavorable in the three and nine months ended September 30, 2018, respectively, including $37 million for TWIA assessments related to Hurricane Harvey recorded in second quarter 2018 (see Note 12 of the condensed consolidated financial statements), and $7 million and $10 million favorable in the three and nine months ended September 30, 2017, respectively.

60 www.allstate.com

Allstate Protection Segment Results
The following table presents premiums written, policies in force (“PIF”) and underwriting income (loss) by line of business for Allstate brand, Esurance brand, Encompass brand and Allstate Protection as of or for the nine months ended September 30, 2018. Detailed analysis of underwriting results, premiums written and earned, and the combined ratios, including loss and expense ratios, are discussed in the brand sections below.

Premiums written, policies in force and underwriting income (loss)
($ in millions) |  | Allstate brand |  | Esurance brand |  | Encompass brand |  | Allstate Protection
Premiums written |  | Amount |  | Percent to total |  | Amount |  | Percent to total |  | Amount |  | Percent to total |  | Amount |  | Percent to total
Auto |  | $ | 15,719 |  |  | 68.5 | % |  | $ | 1,387 |  |  | 94.3 | % |  | $ | 407 |  |  | 52.9 | % |  | $ | 17,513 |  |  | 69.6 | %
Homeowners |  | 5,422 |  |  | 23.6 |  |  | 78 |  |  | 5.3 |  |  | 300 |  |  | 39.0 |  |  | 5,800 |  |  | 23.0 |
Other personal lines |  | 1,322 |  |  | 5.8 |  |  | 6 |  |  | 0.4 |  |  | 62 |  |  | 8.1 |  |  | 1,390 |  |  | 5.5 |
Commercial lines |  | 482 |  |  | 2.1 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 482 |  |  | 1.9 |
Total |  | $ | 22,945 |  |  | 100.0 | % |  | $ | 1,471 |  |  | 100.0 | % |  | $ | 769 |  |  | 100.0 | % |  | $ | 25,185 |  |  | 100.0 | %
Percent to total Allstate Protection |  |  |  | 91.1 | % |  |  |  | 5.8 | % |  |  |  | 3.1 | % |  |  |  |
PIF (thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Auto |  | 19,912 |  |  | 65.2 | % |  | 1,463 |  |  | 91.4 | % |  | 504 |  |  | 61.2 | % |  | 21,879 |  |  | 66.3 | %
Homeowners |  | 6,145 |  |  | 20.1 |  |  | 92 |  |  | 5.7 |  |  | 240 |  |  | 29.1 |  |  | 6,477 |  |  | 19.7 |
Other personal lines |  | 4,271 |  |  | 14.0 |  |  | 46 |  |  | 2.9 |  |  | 80 |  |  | 9.7 |  |  | 4,397 |  |  | 13.3 |
Commercial lines |  | 231 |  |  | 0.7 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 231 |  |  | 0.7 |
Total |  | 30,559 |  |  | 100.0 | % |  | 1,601 |  |  | 100.0 | % |  | 824 |  |  | 100.0 | % |  | 32,984 |  |  | 100.0 | %
Percent to total Allstate Protection |  |  |  | 92.6 | % |  |  |  | 4.9 | % |  |  |  | 2.5 | % |  |  |  |  |
Underwriting income (loss) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Auto |  | $ | 1,305 |  |  | 67.4 | % |  | $ | 1 |  |  | (6.3 | )% |  | $ | 20 |  |  | 111.1 | % |  | $ | 1,326 |  |  | 68.6 | %
Homeowners |  | 574 |  |  | 29.6 |  |  | (18 | ) |  | 112.6 |  |  | (10 | ) |  | (55.5 | ) |  | 546 |  |  | 28.2 |
Other personal lines |  | 105 |  |  | 5.4 |  |  | 1 |  |  | (6.3 | ) |  | 8 |  |  | 44.4 |  |  | 114 |  |  | 5.9 |
Commercial lines |  | (87 | ) |  | (4.4 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | (87 | ) |  | (4.5 | )
Other business lines |  | 39 |  |  | 2.0 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 39 |  |  | 2.0 |
Answer Financial |  |  |  |  |  |  |  |  |  |  |  |  |  | (4 | ) |  | (0.2 | )
Total |  | $ | 1,936 |  |  | 100.0 | % |  | $ | (16 | ) |  | 100.0 | % |  | $ | 18 |  |  | 100.0 | % |  | $ | 1,934 |  |  | 100.0 | %

When analyzing premium measures and statistics for all three brands the following calculations are used as described below.

• | PIF: Policy counts are based on items rather than customers. A multi-car customer would generate multiple item (policy) c ounts, even if all cars were insured under one policy. Commercial lines PIF for the agreement with a transportation network company reflects corporate contracts as opposed to individual driver counts.

• | New issued applications: Item counts of automobile or homeowner insurance applications for insurance policies that were issued during the period, regardless of whether the customer was previously insured by another Allstate Protection brand. Allstate brand includes automobiles added by existing customers when they exceed the number allowed (currently 10) on a policy.

• | Average premium-gross written (“average premium”): Gross premiums written divided by issued item count. Gross premiums written include the impacts from discounts, surcharges and ceded reinsurance premiums and exclude the impacts from mid-term premium adjustments and premium refund accruals. Average premiums represent the appropriate policy term for each line. Allstate and Esurance brand policy terms are 6 months for auto and 12 months for homeowners. Encompass brand policy terms are 12 months for auto and homeowners.

• | Renewal ratio: Renewal policies issued during the period, based on contract effective dates, divided by the total policies issued 6 months prior for auto (generally 12 months prior for Encompass brand) or 12 months prior for homeowners.

Third Quarter 2018 Form 10-Q 61

Segment Results Allstate Protection: Allstate brand

Underwriting results
($ in millions) |  | Three months ended September 30, |  | Nine months ended September 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Premiums written |  | $ | 8,010 |  |  | $ | 7,587 |  |  | $ | 22,945 |  |  | $ | 21,700 |
Premiums earned |  | $ | 7,587 |  |  | $ | 7,195 |  |  | $ | 22,386 |  |  | $ | 21,356 |
Other revenue |  | 152 |  |  | 149 |  |  | 431 |  |  | 425 |
Claims and claims expense |  | (5,121 | ) |  | (4,858 | ) |  | (14,861 | ) |  | (14,696 | )
Amortization of DAC |  | (1,076 | ) |  | (1,000 | ) |  | (3,157 | ) |  | (2,931 | )
Other costs and expenses |  | (974 | ) |  | (912 | ) |  | (2,810 | ) |  | (2,625 | )
Restructuring and related charges |  | (14 | ) |  | (12 | ) |  | (53 | ) |  | (65 | )
Underwriting income |  | $ | 554 |  |  | $ | 562 |  |  | $ | 1,936 |  |  | $ | 1,464 |
Catastrophe losses |  | $ | 588 |  |  | $ | 827 |  |  | $ | 1,754 |  |  | $ | 2,450 |
Underwriting income (loss) by line of business
Auto |  | $ | 368 |  |  | $ | 261 |  |  | $ | 1,305 |  |  | $ | 927 |
Homeowners |  | 213 |  |  | 319 |  |  | 574 |  |  | 473 |
Other personal lines (1) |  | 1 |  |  | (18 | ) |  | 105 |  |  | 48 |
Commercial lines |  | (43 | ) |  | (15 | ) |  | (87 | ) |  | (21 | )
Other business lines (2) |  | 15 |  |  | 15 |  |  | 39 |  |  | 37 |
Underwriting income |  | $ | 554 |  |  | $ | 562 |  |  | $ | 1,936 |  |  | $ | 1,464 |

(1) | Other personal lines include renters, condominium, landlord and other personal lines products.

(2) | Other business lines primarily include Ivantage.

Changes in underwriting results from prior year by component (1) |  |  |  |
($ in millions) |  | Three months ended September 30, |  | Nine months ended September 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Underwriting income (loss) - prior period |  | $ | 562 |  |  | $ | 497 |  |  | $ | 1,464 |  |  | $ | 659 |
Changes in underwriting income from: |  |  |  |  |  |  |  |
Increase (decrease) premiums earned |  | 392 |  |  | 193 |  |  | 1,030 |  |  | 534 |
Increase (decrease) other revenue |  | 3 |  |  | 5 |  |  | 6 |  |  | 11 |
(Increase) decrease incurred claims and claims expense (“losses”): |  |  |  |  |  |  |  |
Incurred losses, excluding catastrophe losses and reserve reestimates |  | (350 | ) |  | 168 |  |  | (708 | ) |  | 445 |
Catastrophe losses, excluding reserve reestimates |  | 244 |  |  | (396 | ) |  | 736 |  |  | (336 | )
Non-catastrophe reserve reestimates |  | (152 | ) |  | 212 |  |  | (153 | ) |  | 398 |
Catastrophe reserve reestimates |  | (5 | ) |  | 9 |  |  | (40 | ) |  | 22 |
Losses subtotal |  | (263 | ) |  | (7 | ) |  | (165 | ) |  | 529 |
(Increase) decrease expenses |  | (140 | ) |  | (126 | ) |  | (399 | ) |  | (269 | )
Underwriting income |  | $ | 554 |  |  | $ | 562 |  |  | $ | 1,936 |  |  | $ | 1,464 |

(1) | The 2018 column presents changes in 2018 compared to 2017. The 2017 column presents changes in 2017 compared to 2016.

Underwriting income totaled $554 million in the third quarter of 2018 decreasing marginally from $562 million in the third quarter of 2017, primarily due to higher claim severity, lower favorable non-catastrophe prior year reserve reestimates and higher agent and employee-related compensation costs, partially offset by increased premiums earned, lower catastrophe losses and improved auto claim frequency. Underwriting income increased to $1.94 billion in the first nine months of 2018 from $1.46 billion in the first nine months of 2017, primarily due to increased premiums earned, lower catastrophe losses and improved auto claim frequency, partially offset by higher claim severity and agent and employee-related compensation costs.
62 www.allstate.com

Allstate Protection: Allstate brand Segment Results

Premiums written and earned by line of business
($ in millions) |  | Three months ended September 30, |  | Nine months ended September 30,
Premiums written |  | 2018 |  | 2017 |  | 2018 |  | 2017
Auto |  | $ | 5,357 |  |  | $ | 5,096 |  |  | $ | 15,719 |  |  | $ | 14,903 |
Homeowners |  | 2,008 |  |  | 1,921 |  |  | 5,422 |  |  | 5,171 |
Other personal lines |  | 472 |  |  | 454 |  |  | 1,322 |  |  | 1,263 |
Subtotal – Personal lines |  | 7,837 |  |  | 7,471 |  |  | 22,463 |  |  | 21,337 |
Commercial lines |  | 173 |  |  | 116 |  |  | 482 |  |  | 363 |
Total |  | $ | 8,010 |  |  | $ | 7,587 |  |  | $ | 22,945 |  |  | $ | 21,700 |
Premiums earned |  |  |  |  |  |  |  |
Auto |  | $ | 5,210 |  |  | $ | 4,950 |  |  | $ | 15,387 |  |  | $ | 14,673 |
Homeowners |  | 1,769 |  |  | 1,707 |  |  | 5,238 |  |  | 5,086 |
Other personal lines |  | 432 |  |  | 414 |  |  | 1,284 |  |  | 1,230 |
Subtotal – Personal lines |  | 7,411 |  |  | 7,071 |  |  | 21,909 |  |  | 20,989 |
Commercial lines |  | 176 |  |  | 124 |  |  | 477 |  |  | 367 |
Total |  | $ | 7,587 |  |  | $ | 7,195 |  |  | $ | 22,386 |  |  | $ | 21,356 |

Auto premium measures and statistics
|  | Three months ended September 30, |  | Nine months ended September 30, |
|  | 2018 |  | 2017 |  | 2018 |  | 2017 |
PIF (thousands) |  | 19,912 |  |  | 19,513 |  |  | 19,912 |  |  | 19,513 |  |
New issued applications (thousands) |  | 755 |  |  | 651 |  |  | 2,223 |  |  | 1,900 |  |
Average premium |  | $ | 572 |  |  | $ | 556 |  |  | $ | 567 |  |  | $ | 546 |  |
Renewal ratio (%) |  | 88.7 |  |  | 87.7 |  |  | 88.5 |  |  | 87.5 |  |
Approved rate changes (1): |  |  |  |  |  |  |  |  |
# of locations (2) |  | 20 |  |  | 17 |  |  | 42 |  |  | 43 |  |
Total brand (%) (3) |  | — |  |  | 0.4 |  |  | 0.8 |  |  | 2.8 |  | (6)
Location specific (%) (4) (5) |  | 1.0 |  |  | 3.0 |  |  | 2.7 |  |  | 4.7 |  | (6)

(1) | Rate changes do not include rating plan enhancements, including the introduction of discounts and surcharges that result in no change in the overall rate level in a location. These rate changes do not reflect initial rates filed for insurance subsidiaries initially writing business in a location.

(2) | Allstate brand operates in 50 states, the District of Columbia and 5 Canadian provinces.

(3) | Represents the impact in the states, the District of Columbia and Canadian provinces where rate changes were approved during the period as a percentage of total brand 2017 premiums written.

(4) | Represents the impact in the states, the District of Columbia and Canadian provinces where rate changes were approved during the period as a percentage of their respective total 2017 premiums written in those same locations.

(5) | Based on historical premiums written in the locations noted above, the annual impact of rate changes approved for auto totaled $12 million and $165 million in the three and nine months ended September 30, 2018, respectively, compared to $76 million and $551 million in the three and nine months ended September 30, 2017, respectively.

(6) Includes a rate increase in California in first quarter 2017. Excluding California, Allstate brand auto total brand and location specific rate changes were 2.2% and 4.3%, respectively, for the nine months ended September 30, 2017.
Auto insurance premiums written totaled $5.36 billion in the third quarter of 2018, a 5.1% increase from $5.10 billion in the third quarter of 2017 and $15.72 billion in the first nine months of 2018, a 5.5% increase from $14.90 billion in the first nine months of 2017. Factors impacting premiums written were the following:

• | 2.0% or 399 thousand increase in PIF as of September 30, 2018 compared to September 30, 2017. Auto PIF increased in 40 states, including 8 of our largest 10 states, as of September 30, 2018 compared to September 30, 2017.

• | 1.0 point increase in the renewal ratio in both the third quarter and first nine months of 2018, compared to the same periods of 2017. 48 states, including 9 of our 10 largest states, and 45 states, including 9 of our 10 largest states, experienced

increases in the renewal ratio in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017.

• | 16.0% and 17.0% increase in new issued applications in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017 due to improved competitive position, increasing agency productivity and expansion of the agency footprint. The increase in new issued applications is geographically broad-based with 39 states, including 8 of our 10 largest states, experiencing increases in new issued applications in the third quarter of 2018 compared to the third quarter of 2017, with 32 states experiencing double digit increases. 42 states, including 9 of our 10 largest states, experienced increases in new issued applications in the first nine months of 2018 compared to the same period

Third Quarter 2018 Form 10-Q 63

Segment Results Allstate Protection: Allstate brand
of 2017, with 35 states experiencing double digit increases.

• | 2.9% and 3.8% increase in average premium in the third quarter and first nine months of 2018,

respectively, compared to the same periods of 2017, primarily due to rate increases approved in 2017.

Homeowners premium measures and statistics
|  | Three months ended September 30, |  | Nine months ended September 30,
|  | 2018 |  | 2017 |  | 2018 |  | 2017
PIF (thousands) |  | 6,145 |  |  | 6,071 |  |  | 6,145 |  |  | 6,071 |
New issued applications (thousands) |  | 219 |  |  | 198 |  |  | 629 |  |  | 556 |
Average premium |  | $ | 1,238 |  |  | $ | 1,203 |  |  | $ | 1,227 |  |  | $ | 1,194 |
Renewal ratio (%) |  | 88.3 |  |  | 87.5 |  |  | 87.9 |  |  | 87.2 |
Approved rate changes (1): |  |  |  |  |  |  |  |
# of locations (2) |  | 10 |  |  | 8 |  |  | 28 |  |  | 23 |
Total brand (%) |  | 0.4 |  |  | 0.5 |  |  | 1.6 |  |  | 1.6 |
Location specific (%) (3) |  | 3.6 |  |  | 5.3 |  |  | 4.1 |  |  | 4.2 |

(1) | Includes rate changes approved based on our net cost of reinsurance.

(2) | Allstate brand operates in 50 states, the District of Columbia and 5 Canadian provinces.

(3) | Based on historical premiums written in the locations noted above, the annual impact of rate changes approved for homeowners totaled $30 million and $115 million in the three and nine months ended September 30, 2018, respectively, compared to $38 million and $113 million in the three and nine months ended September 30, 2017, respectively.

Homeowners insurance premiums written totaled $2.01 billion in the third quarter of 2018, a 4.5% increase from $1.92 billion in the third quarter of 2017 and $5.42 billion in the first nine months of 2018, a 4.9% increase from $5.17 billion in the first nine months of 2017. Factors impacting premiums written were the following:

• | 1.2% or 74 thousand increase in PIF as of September 30, 2018 compared to September 30, 2017. Homeowners PIF increased in 30 states, including 5 of our largest 10 states, as of September 30, 2018 compared to September 30, 2017.

• | 0.8 point and 0.7 point increase in the renewal ratio in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017. Of our largest 10 states, 9 experienced an increase in the renewal ratio in both the third quarter and first nine months of 2018 compared to the same periods of 2017.

• | 10.6% and 13.1% increase in new issued applications in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017, due to improved competitive position, increasing agency productivity and expansion of the agency footprint. The increase in new issued applications is geographically broad-based with 7 of our largest 10 states experiencing increases in both the third quarter and first nine months of 2018 compared to the same periods of 2017.

• | 2.9% and 2.8% increase in average premium in the third quarter and first nine months of 2018,

respectively, compared to the same periods of 2017, primarily due to rate increases and increasing insured home values due to inflation.

• | $4 million decrease in the cost of our catastrophe reinsurance program to $65 million in the third quarter of 2018 from $69 million in the third quarter of 2017, and $24 million decrease to $199 million in the first nine months of 2018 from $223 million in the first nine months of 2017. Catastrophe reinsurance premiums are recorded primarily in the Allstate brand and are a reduction of premium.

Other personal lines premiums written totaled $472 million in the third quarter of 2018, a 4.0% increase from $454 million in the third quarter of 2017 and $1.32 billion in the first nine months of 2018, a 4.7% increase from $1.26 billion in the first nine months of 2017. The increase in both periods was primarily due to increases in personal umbrella and condominium insurance premiums, partially offset by agreements to transfer our auto residual market obligations to third party carriers.
Commercial lines premiums written totaled $173 million in the third quarter of 2018, a 49.1% increase from $116 million in the third quarter of 2017 and $482 million in the nine months of 2018, a 32.8% increase from $363 million in the first nine months of 2017. The increase in both periods was due to the agreement with a transportation network company to provide commercial auto insurance coverage in select states.
64 www.allstate.com

Allstate Protection: Allstate brand Segment Results

Combined ratios by line of business
|  | Loss ratio |  | Expense ratio (1) |  | Combined ratio
|  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017
Three months ended September 30, |  |  |  |  |  |  |  |  |  |  |  |
Auto |  | 67.2 |  |  | 69.8 |  |  | 25.7 |  |  | 24.9 |  |  | 92.9 |  |  | 94.7 |
Homeowners |  | 63.7 |  |  | 57.9 |  |  | 24.3 |  |  | 23.4 |  |  | 88.0 |  |  | 81.3 |
Other personal lines |  | 70.9 |  |  | 75.3 |  |  | 28.9 |  |  | 29.0 |  |  | 99.8 |  |  | 104.3 |
Commercial lines |  | 104.5 |  |  | 83.1 |  |  | 19.9 |  |  | 29.0 |  |  | 124.4 |  |  | 112.1 |
Total |  | 67.5 |  |  | 67.5 |  |  | 25.2 |  |  | 24.7 |  |  | 92.7 |  |  | 92.2 |
Nine months ended September 30, |  |  |  |  |  |  |  |  |  |  |  |
Auto |  | 65.9 |  |  | 69.0 |  |  | 25.6 |  |  | 24.7 |  |  | 91.5 |  |  | 93.7 |
Homeowners |  | 65.5 |  |  | 67.9 |  |  | 23.5 |  |  | 22.8 |  |  | 89.0 |  |  | 90.7 |
Other personal lines |  | 64.2 |  |  | 67.9 |  |  | 27.6 |  |  | 28.2 |  |  | 91.8 |  |  | 96.1 |
Commercial lines |  | 96.0 |  |  | 77.6 |  |  | 22.2 |  |  | 28.1 |  |  | 118.2 |  |  | 105.7 |
Total |  | 66.4 |  |  | 68.8 |  |  | 25.0 |  |  | 24.3 |  |  | 91.4 |  |  | 93.1 |

(1) | Other revenue is deducted from operating costs and expenses in the expense ratio calculation.

Loss ratios by line of business
|  | Loss ratio |  | Effect of catastrophe losses |  | Effect of prior year reserve reestimates |  | Effect of catastrophe losses included in prior year reserve reestimates
|  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017
Three months ended September 30, |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Auto |  | 67.2 |  |  | 69.8 |  |  | 2.2 |  |  | 7.3 |  |  | (1.9 | ) |  | (3.8 | ) |  | (0.1 | ) |  | (0.1 | )
Homeowners |  | 63.7 |  |  | 57.9 |  |  | 23.6 |  |  | 22.4 |  |  | (0.9 | ) |  | (2.5 | ) |  | 0.1 |  |  | (0.2 | )
Other personal lines |  | 70.9 |  |  | 75.3 |  |  | 11.8 |  |  | 15.7 |  |  | 1.9 |  |  | 0.7 |  |  | — |  |  | — |
Commercial lines |  | 104.5 |  |  | 83.1 |  |  | 3.4 |  |  | 10.5 |  |  | 23.8 |  |  | 5.6 |  |  | — |  |  | 0.8 |
Total |  | 67.5 |  |  | 67.5 |  |  | 7.8 |  |  | 11.5 |  |  | (0.8 | ) |  | (3.1 | ) |  | — |  |  | (0.1 | )
Nine months ended September 30, |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Auto |  | 65.9 |  |  | 69.0 |  |  | 1.8 |  |  | 4.4 |  |  | (2.3 | ) |  | (2.3 | ) |  | (0.2 | ) |  | (0.1 | )
Homeowners |  | 65.5 |  |  | 67.9 |  |  | 25.6 |  |  | 31.6 |  |  | 0.6 |  |  | (1.7 | ) |  | 1.3 |  |  | (0.1 | )
Other personal lines |  | 64.2 |  |  | 67.9 |  |  | 9.7 |  |  | 14.7 |  |  | (0.3 | ) |  | 0.5 |  |  | (0.2 | ) |  | 0.4 |
Commercial lines |  | 96.0 |  |  | 77.6 |  |  | 2.7 |  |  | 6.0 |  |  | 22.4 |  |  | 1.9 |  |  | — |  |  | 0.3 |
Total |  | 66.4 |  |  | 68.8 |  |  | 7.9 |  |  | 11.5 |  |  | (1.0 | ) |  | (1.9 | ) |  | 0.1 |  |  | — |

Auto loss ratio decreased 2.6 points and 3.1 points in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017, primarily due to increased premiums earned, lower catastrophe losses and improved claim frequency, partially offset by higher claim severity.
Frequency and severity statistics, which are influenced by driving patterns, inflation and other factors, are provided to describe the trends in loss costs of the business. Our reserving process incorporates changes in loss patterns, operational statistics and changes in claims reporting processes to determine our best estimate of recorded reserves. We use the following statistics to evaluate losses:

• Paid claim frequency (1) is calculated as annualized notice counts closed with payment in the period divided by the average of PIF with the applicable coverage during the period.

• Gross claim frequency (1) is calculated as annualized notice counts received in the period divided by the average of PIF with the applicable coverage during the period. Gross claim frequency includes all actual notice counts, regardless of their current status (open or closed) or their ultimate disposition (closed with a payment or closed without payment).
• Paid claim severity is calculated by dividing the sum of paid losses and loss expenses by claims closed with a payment during the period.
• Percent change in frequency or severity statistics is calculated as the amount of increase or decrease in the paid or gross claim frequency or severity in the current period compared to the same period in the prior year divided by the prior year paid or gross claim frequency or severity.

(1) | Frequency statistics exclude counts associated with catastrophe events.

Third Quarter 2018 Form 10-Q 65

Segment Results Allstate Protection: Allstate brand
Paid claim frequency trends will often differ from gross claim frequency trends due to differences in the timing of when notices are received and when claims are settled. For property damage claims, paid frequency trends reflect smaller differences as timing between opening and settlement is generally less. For bodily injury, gross frequency trends reflect emerging trends since the difference in timing between opening and settlement is much greater and gross frequency does not experience the same volatility in quarterly fluctuations seen in paid frequency. In evaluating frequency, we typically rely upon paid frequency trends for physical damage coverages such as property damage and gross frequency for casualty coverages such as bodily injury to provide an indicator of emerging trends in overall claim frequency while also providing insights for our analysis of severity.
We are continuing to aggressively seek new technology and process solutions to provide continued loss cost accuracy, efficient processing and enhanced customer experiences that are simple, fast and produce high degrees of satisfaction. For example, we have opened several Digital Operating Centers to handle auto claims countrywide utilizing our virtual estimation capabilities, which includes estimating damage through photos and video with the use of QuickFoto Claim® and Virtual Assist SM. These organizational and process changes impact frequency and severity statistics as changes in claim opening and closing practices and shifts in timing, if any, can impact comparisons to prior periods.
Property damage paid claim frequency increased 0.2% and decreased 2.0% in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017. 36 states experienced a year over year decrease in property damage paid claim frequency in the first nine months of 2018 when compared to the same peri od of 2017. Third quarter 2018 paid claim frequency increased slightly compared to a very favorable third quarter 2017 that was partially impacted by Hurricanes Harvey and Irma. Third quarter 2018 paid claim frequency remains consistent with the results experienced in the first half of 2018. Property damage paid claim severities increased 7.7% and 5.4% in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017 due to the impact of higher costs to repair more sophisticate d newer model vehicles, higher third-party subrogation demands and increased costs associated with total losses.
Bodily injury gross claim freque ncy decreased 0.7% and 1.8% in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017. Bodily injury severity trends have been impacted by higher medical costs, which after adjusting for company specific claims practices, policy provisions and coverage limits, generally increased consistent with medical care inflation indices.
Homeowners loss ratio increased 5.8 points in the third quarter of 2018 compared to the same period of 2017 primarily due to higher loss costs and catastrophe losses, partially offset by increased premiums earned. Homeowners loss ratio decreased 2.4 points in the first nine months of 2018 compared to the same period of 2017, primarily due to lower catastrophe losses and increased premiums earned, partially offset by higher loss costs driven by adverse non-catastrophe weather in 2018 compared to the prior year and less favorable non-catastrophe prior year reserve reestimates in the first nine months of 2018 compared to favorable prior year reserve reestimates in the first nine months of 2017. Paid claim frequency excluding catastrophe losses increased 8.5% and 3.7% in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017. Paid claim severity excluding catastrophe losses increased 3.4% and 7.2% in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017, primarily due to a higher level of fire and water claims experienced in the first nine months of 2018, which typically have higher severities. Homeowner paid claim severity can be impacted by both the mix of perils and the magnitude of specific losses paid during the quarter.
Other personal lines loss ratio decreased 4.4 points and 3.7 points in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017, primarily due to lower catastrophe losses and increased premiums earned, partially offset by higher non-catastrophe loss costs.
Commercial lines loss ratio increased 21.4 points and 18.4 points in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017, primarily due to unfavorable non-catastrophe prior year reserve reestimates related to auto bodily injury cove rages, partially offset by increased premiums earned. Commercial lines include losses recorded related to a transportation network company based on original pricing expectations given limited loss experience.
Catastrophe losses were $588 million and $1.75 billion in the third quarter and first nine months of 2018, respectively, compared to $827 million and $2.45 billion in the third quarter and first nine months of 2017, respectively.
66 www.allstate.com

Allstate Protection: Allstate brand Segment Results

Expense ratios by line of business
|  | Three months ended September 30, |  | Nine months ended September 30,
|  | 2018 |  | 2017 |  | 2018 |  | 2017
Auto |  | 25.7 |  |  | 24.9 |  |  | 25.6 |  |  | 24.7 |
Homeowners |  | 24.3 |  |  | 23.4 |  |  | 23.5 |  |  | 22.8 |
Other personal lines |  | 28.9 |  |  | 29.0 |  |  | 27.6 |  |  | 28.2 |
Commercial lines |  | 19.9 |  |  | 29.0 |  |  | 22.2 |  |  | 28.1 |
Total expense ratio (1) |  | 25.2 |  |  | 24.7 |  |  | 25.0 |  |  | 24.3 |

(1) | O ther revenue is deducted from other costs and expenses in the expense ratio calculation.

Impact of specific costs and expenses on the expense ratio |  |  |  |  |  |  |  |
|  | Three months ended September 30, |  | Nine months ended September 30,
|  | 2018 |  | 2017 |  | 2018 |  | 2017
Amortization of DAC |  | 14.2 |  |  | 13.9 |  |  | 14.1 |  |  | 13.7 |
Advertising expense |  | 2.5 |  |  | 2.1 |  |  | 2.1 |  |  | 2.0 |
Other costs and expenses (1) |  | 8.3 |  |  | 8.5 |  |  | 8.6 |  |  | 8.3 |
Restructuring and related charges |  | 0.2 |  |  | 0.2 |  |  | 0.2 |  |  | 0.3 |
Total expense ratio |  | 25.2 |  |  | 24.7 |  |  | 25.0 |  |  | 24.3 |

(1) | O ther revenue is deducted from other costs and expenses in the expense ratio calculation.

Expense ratio increased 0.5 points and 0.7 points in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017, primarily due to higher agent and employee-related compensation costs and h igher advertising costs.
Amortization of DAC primarily includes agent remuneration and premium taxes. Allstate agency total incurred base commissions, variable compensation and bonuses in the third quarter and first nine months of 2018 were higher than the same periods of 2017.
Third Quarter 2018 Form 10-Q 67

Segment Results Allstate Protection: Esurance brand

Underwriting results
($ in millions) |  | Three months ended September 30, |  | Nine months ended September 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Premiums written |  | $ | 519 |  |  | $ | 453 |  |  | $ | 1,471 |  |  | $ | 1,318 |
Premiums earned |  | $ | 479 |  |  | $ | 432 |  |  | $ | 1,375 |  |  | $ | 1,280 |
Other revenue |  | 21 |  |  | 17 |  |  | 61 |  |  | 50 |
Claims and claims expense |  | (366 | ) |  | (337 | ) |  | (1,051 | ) |  | (997 | )
Amortization of DAC |  | (10 | ) |  | (11 | ) |  | (31 | ) |  | (31 | )
Other costs and expenses |  | (134 | ) |  | (120 | ) |  | (368 | ) |  | (354 | )
Restructuring and related charges |  | — |  |  | — |  |  | (2 | ) |  | (3 | )
Underwriting loss |  | $ | (10 | ) |  | $ | (19 | ) |  | $ | (16 | ) |  | $ | (55 | )
Catastrophe losses |  | $ | 14 |  |  | $ | 17 |  |  | $ | 46 |  |  | $ | 49 |
Underwriting income (loss) by line of business
Auto |  | $ | (5 | ) |  | $ | (15 | ) |  | $ | 1 |  |  | $ | (32 | )
Homeowners |  | (6 | ) |  | (4 | ) |  | (18 | ) |  | (24 | )
Other personal lines |  | 1 |  |  | — |  |  | 1 |  |  | 1 |
Underwriting loss |  | $ | (10 | ) |  | $ | (19 | ) |  | $ | (16 | ) |  | $ | (55 | )

Changes in underwriting results from prior year by component (1)
($ in millions) |  | Three months ended September 30, |  | Nine months ended September 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Underwriting income (loss) - prior period |  | $ | (19 | ) |  | $ | (41 | ) |  | $ | (55 | ) |  | $ | (103 | )
Changes in underwriting income (loss) from: |  |  |  |  |  |  |  |
Increase (decrease) premiums earned |  | 47 |  |  | 14 |  |  | 95 |  |  | 43 |
Increase (decrease) other revenue |  | 4 |  |  | 2 |  |  | 11 |  |  | 3 |
(Increase) decrease incurred claims and claims expense (“losses”): |  |  |  |  |  |  |  |
Incurred losses, excluding catastrophe losses and reserve reestimates |  | (32 | ) |  | (5 | ) |  | (58 | ) |  | (29 | )
Catastrophe losses, excluding reserve reestimates |  | 4 |  |  | (3 | ) |  | 6 |  |  | (19 | )
Non-catastrophe reserve reestimates |  | — |  |  | (3 | ) |  | 1 |  |  | (11 | )
Catastrophe reserve reestimates |  | (1 | ) |  | — |  |  | (3 | ) |  | 1 |
Losses subtotal |  | (29 | ) |  | (11 | ) |  | (54 | ) |  | (58 | )
(Increase) decrease expenses |  | (13 | ) |  | 17 |  |  | (13 | ) |  | 60 |
Underwriting income (loss) |  | $ | (10 | ) |  | $ | (19 | ) |  | $ | (16 | ) |  | $ | (55 | )

(1) | The 2018 column presents changes in 2018 compared to 2017. The 2017 column presents changes in 2017 compared to 2016.

Underwriting loss totaled $10 million in the third quarter of 2018, an improvement from $19 million in the third quarter of 2017, and $16 million in the first nine months of 2018, compared to $55 million in the first nine months of 2017. The improvement in both periods was primarily due to increased premiums earned, partially offset by higher claim severities.
68 www.allstate.com

Allstate Protection: Esurance brand Segment Results

Premiums written and earned by line of business |  |  |  |
($ in millions) |  | Three months ended September 30, |  | Nine months ended September 30,
Premiums written |  | 2018 |  | 2017 |  | 2018 |  | 2017
Auto |  | $ | 487 |  |  | $ | 427 |  |  | $ | 1,387 |  |  | $ | 1,252 |
Homeowners |  | 30 |  |  | 24 |  |  | 78 |  |  | 60 |
Other personal lines |  | 2 |  |  | 2 |  |  | 6 |  |  | 6 |
Total |  | $ | 519 |  |  | $ | 453 |  |  | $ | 1,471 |  |  | $ | 1,318 |
Premiums earned |  |  |  |  |  |  |  |
Auto |  | $ | 455 |  |  | $ | 411 |  |  | $ | 1,305 |  |  | $ | 1,225 |
Homeowners |  | 22 |  |  | 19 |  |  | 64 |  |  | 49 |
Other personal lines |  | 2 |  |  | 2 |  |  | 6 |  |  | 6 |
Total |  | $ | 479 |  |  | $ | 432 |  |  | $ | 1,375 |  |  | $ | 1,280 |

Auto premium measures and statistics |  |  |  |
|  | Three months ended September 30, |  | Nine months ended September 30,
|  | 2018 |  | 2017 |  | 2018 |  | 2017
PIF (thousands) |  | 1,463 |  |  | 1,369 |  |  | 1,463 |  |  | 1,369 |
New issued applications (thousands) |  | 166 |  |  | 116 |  |  | 480 |  |  | 379 |
Average premium |  | $ | 603 |  |  | $ | 574 |  |  | $ | 603 |  |  | $ | 570 |
Renewal ratio (%) |  | 82.9 |  |  | 81.8 |  |  | 83.5 |  |  | 81.3 |
Approved rate changes (1): |  |  |  |  |  |  |  |
# of locations (2) |  | 14 |  |  | 16 |  |  | 25 |  |  | 34 |
Total brand (%) (3) |  | 0.9 |  |  | 2.0 |  |  | 1.6 |  |  | 4.4 |
Location specific (%) (4) (5) |  | 3.4 |  |  | 5.6 |  |  | 3.4 |  |  | 5.7 |

(1) | Rate changes do not include rating plan enhancements, including the introduction of discounts and surcharges that result in no change in the overall rate level in a location. These rate changes do not reflect initial rates filed for insurance subsidiaries initially writing business in a location.

(2) | Esurance brand operates in 43 states. In the second quarter of 2018, Esurance discontinued its operation in Canada.

(3) | Represents the impact in the states where rate changes were approved during the period as a percentage of total brand 2017 premiums written.

(4) | Represents the impact in the states where rate changes were approved during the period as a percentage of their respective total 2017 premiums written in those same locations.

(5) | Based on historical premiums written in the locations noted above, the annual impact of rate changes approved for auto totaled $13 million and $25 million in the three and nine months ended September 30, 2018, respectively, compared to $32 million and $71 million in the three and nine months ended September 30, 2017, respectively.

Auto insurance premiums written totaled $487 million in the third quarter of 2018, a 14.1% increase from $427 million in the third quarter of 2017 and $1.39 billion in the first nine months of 2018, a 10.8% increase from $1.25 billion in the first nine months of 2017. Factors impacting premiums written were the following:

• | 6.9% or 94 thousand increase in PIF as of September 30, 2018 compared to September 30, 2017.

• | 1.1 point and 2.2 point increase in the renewal ratio in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017, primarily due to improved customer experience.

• | 43.1% and 26.6% increase in new issued applications in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017, primarily due to changes in the sales process as well as increases in quote volume driven in part by additional marketing spend.

• | 5.1% and 5.8% increase in average premium in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017, primarily due to rate changes approved in 2017 as well as changes in business mix.

Third Quarter 2018 Form 10-Q 69

Segment Results Allstate Protection: Esurance brand

Homeowners premium measures and statistics |  |  |  |
|  | Three months ended September 30, |  | Nine months ended September 30,
|  | 2018 |  | 2017 |  | 2018 |  | 2017
PIF (thousands) |  | 92 |  |  | 76 |  |  | 92 |  |  | 76 |
New issued applications (thousands) |  | 9 |  |  | 10 |  |  | 26 |  |  | 27 |
Average premium |  | $ | 984 |  |  | $ | 924 |  |  | $ | 982 |  |  | $ | 919 |
Renewal ratio (%) (1) |  | 85.9 |  |  | 85.8 |  |  | 85.6 |  |  | 85.3 |
Approved rate changes (2) : |  |  |  |  |  |  |  |
# of locations (3) |  | — |  |  | — |  |  | 5 |  |  | — |
Total brand (%) |  | — |  |  | — |  |  | 1.7 |  |  | — |
Location specific (%) (4) |  | — |  |  | — |  |  | 6.4 |  |  | — |

(1) | Esurance’s renewal ratios exclude the impact of risk related cancellations. Customers can enter into a policy without a physical inspection. During the underwriting review period, a number of policies may be canceled if upon inspection the condition is unsatisfactory.

(2) | Includes rate changes approved based on our net cost of reinsurance.

(3) | Esurance brand operates in 31 states. In the second quarter of 2018, Esurance discontinued its operation in Canada.

(4) | Based on historical premiums written in the locations noted above, the annual impact of rate changes approved for homeowners totaled zero and $1 million in the three and nine months ended September 30, 2018, respectively. No rate changes were approved in the first nine months of 2017.

Homeowners insurance premiums written totaled $30 million in the third quarter of 2018, a 25.0% increase from $24 million in the third quarter of 2017 and $78 million in the first nine months of 2018, a 30.0% increase from $60 million in the first nine months of 2017. Factors impacting premiums written were the following:

• | 21.1% or 16 thousand increase in PIF as of September 30, 2018 compared to September 30, 2017.

• | 10.0% and 3.7% decrease in new issued applications in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017.

• | 6.5% and 6.9% increase in average premium in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017, primarily due to increased premium distribution in higher average premium states and rate increases. As of September 30, 2018, Esurance is writing homeowners insurance in 31 states with lower hurricane risk, contributing to lower average premium compared to the industry.

Other revenue increased $4 million and $11 million in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017, primarily due to increased revenues from sales of insurance leads that Esurance has chosen not to write.

Combined ratios by line of business
|  | Loss ratio |  | Expense ratio (1) |  | Combined ratio
|  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017
Three months ended September 30, |  |  |  |  |  |  |  |  |  |  |  |
Auto |  | 76.0 |  |  | 78.3 |  |  | 25.1 |  |  | 25.3 |  |  | 101.1 |  |  | 103.6 |
Homeowners |  | 90.9 |  |  | 73.7 |  |  | 36.4 |  |  | 47.4 |  |  | 127.3 |  |  | 121.1 |
Total |  | 76.4 |  |  | 78.0 |  |  | 25.7 |  |  | 26.4 |  |  | 102.1 |  |  | 104.4 |
Nine months ended September 30, |  |  |  |  |  |  |  |  |  |  |  |
Auto |  | 75.8 |  |  | 77.2 |  |  | 24.1 |  |  | 25.4 |  |  | 99.9 |  |  | 102.6 |
Homeowners |  | 92.2 |  |  | 98.0 |  |  | 35.9 |  |  | 51.0 |  |  | 128.1 |  |  | 149.0 |
Total |  | 76.5 |  |  | 77.9 |  |  | 24.7 |  |  | 26.4 |  |  | 101.2 |  |  | 104.3 |

(1) | Other revenue is deducted from operating costs and expenses in the expense ratio calculation.

70 www.allstate.com

Allstate Protection: Esurance brand Segment Results

Loss ratios by line of business
|  | Loss ratio |  | Effect of catastrophe losses |  | Effect of prior year reserve reestimates |  | Effect of catastrophe losses included in prior year reserve reestimates
|  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017
Three months ended September 30, |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Auto |  | 76.0 |  |  | 78.3 |  |  | 1.8 |  |  | 3.6 |  |  | — |  |  | — |  |  | — |  |  | — |
Homeowners |  | 90.9 |  |  | 73.7 |  |  | 27.3 |  |  | 10.5 |  |  | 4.5 |  |  | (5.2 | ) |  | 4.5 |  |  | — |
Total |  | 76.4 |  |  | 78.0 |  |  | 2.9 |  |  | 3.9 |  |  | — |  |  | (0.2 | ) |  | 0.2 |  |  | — |
Nine months ended September 30, |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Auto |  | 75.8 |  |  | 77.2 |  |  | 1.9 |  |  | 2.8 |  |  | — |  |  | — |  |  | — |  |  | — |
Homeowners |  | 92.2 |  |  | 98.0 |  |  | 32.8 |  |  | 30.6 |  |  | 1.6 |  |  | (4.1 | ) |  | 3.2 |  |  | (2.1 | )
Total |  | 76.5 |  |  | 77.9 |  |  | 3.4 |  |  | 3.8 |  |  | — |  |  | (0.2 | ) |  | 0.1 |  |  | (0.1 | )

Auto loss ratio decreased 2.3 points and 1.4 points in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017, primarily due to increased premiums earned and lower catastrophe losses.
Catastrophe losses were $14 million and $46 million in the third quarter and first nine months of 2018, respectively, compared to $17 million and $49 million in the third quarter and first nine months of 2017, respectively.

Expense ratios by line of business |  |  |  |
|  | Three months ended September 30, |  | Nine months ended September 30,
|  | 2018 |  | 2017 |  | 2018 |  | 2017
Auto |  | 25.1 |  |  | 25.3 |  |  | 24.1 |  |  | 25.4 |
Homeowners |  | 36.4 |  |  | 47.4 |  |  | 35.9 |  |  | 51.0 |
Total expense ratio (1) |  | 25.7 |  |  | 26.4 |  |  | 24.7 |  |  | 26.4 |

(1) | O ther revenue is deducted from other costs and expenses in the expense ratio calculation.

Impact of specific costs and expenses on the expense ratio |  |  |  |  |  |  |  |
|  | Three months ended September 30, |  | Nine months ended September 30,
|  | 2018 |  | 2017 |  | 2018 |  | 2017
Amortization of DAC |  | 2.1 |  |  | 2.5 |  |  | 2.2 |  |  | 2.4 |
Advertising expense |  | 10.6 |  |  | 9.3 |  |  | 9.2 |  |  | 8.8 |
Amortization of purchased intangible assets |  | 0.2 |  |  | 0.2 |  |  | 0.1 |  |  | 0.2 |
Other costs and expenses (1) |  | 12.8 |  |  | 14.4 |  |  | 13.0 |  |  | 14.8 |
Restructuring and related charges |  | — |  |  | — |  |  | 0.2 |  |  | 0.2 |
Total expense ratio |  | 25.7 |  |  | 26.4 |  |  | 24.7 |  |  | 26.4 |

(1) | O ther revenue is deducted from other costs and expenses in the expense ratio calculation.

Expense ratio decreased 0.7 points and 1.7 points in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017. Other costs and expenses, including salaries of telephone sales personnel and other underwriting costs related to customer acquisition, were 1.6 points and 1.8 points lower in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017 due to the implementation of process efficiencies.
Esurance uses a direct distribution model, therefore its primary acquisition-related costs are advertising as opposed to commissions. Esurance advertising expense ratio increased 1.3 points and 0.4 points in the third quarter and first nine months of 2018 compared to the same periods of 2017, respectively, primarily due to a new marketing campaign launched during the third quarter of 2018.
Third Quarter 2018 Form 10-Q 71

Segment Results Allstate Protection: Encompass brand

Underwriting results |  |  |  |
($ in millions) |  | Three months ended September 30, |  | Nine months ended September 30,
|  | 2018 |  | 2017 |  | 2018 |  | 2017
Premiums written |  | $ | 271 |  |  | $ | 271 |  |  | $ | 769 |  |  | $ | 792 |
Premiums earned |  | $ | 254 |  |  | $ | 269 |  |  | $ | 767 |  |  | $ | 826 |
Other revenue |  | 1 |  |  | 1 |  |  | 4 |  |  | 4 |
Claims and claims expense |  | (162 | ) |  | (158 | ) |  | (494 | ) |  | (590 | )
Amortization of DAC |  | (47 | ) |  | (49 | ) |  | (143 | ) |  | (152 | )
Other costs and expenses |  | (35 | ) |  | (34 | ) |  | (110 | ) |  | (99 | )
Restructuring and related charges |  | (1 | ) |  | — |  |  | (6 | ) |  | (5 | )
Underwriting income (loss) |  | $ | 10 |  |  | $ | 29 |  |  | $ | 18 |  |  | $ | (16 | )
Catastrophe losses |  | $ | 23 |  |  | $ | 12 |  |  | $ | 92 |  |  | $ | 131 |
Underwriting income (loss) by line of business
Auto |  | $ | 8 |  |  | $ | 6 |  |  | $ | 20 |  |  | $ | (3 | )
Homeowners |  | (3 | ) |  | 20 |  |  | (10 | ) |  | (18 | )
Other personal lines |  | 5 |  |  | 3 |  |  | 8 |  |  | 5 |
Underwriting income (loss) |  | $ | 10 |  |  | $ | 29 |  |  | $ | 18 |  |  | $ | (16 | )

Changes in underwriting results from prior year by component (1) |  |  |  |
($ in millions) |  | Three months ended September 30, |  | Nine months ended September 30,
|  | 2018 |  | 2017 |  | 2018 |  | 2017
Underwriting income (loss) - prior period |  | $ | 29 |  |  | $ | 5 |  |  | $ | (16 | ) |  | $ | (28 | )
Changes in underwriting loss from: |  |  |  |  |  |  |  |
Increase (decrease) premiums earned |  | (15 | ) |  | (30 | ) |  | (59 | ) |  | (86 | )
Increase (decrease) other revenue |  | — |  |  | (1 | ) |  | — |  |  | (1 | )
(Increase) decrease incurred claims and claims expense (“losses”): |  |  |  |  |  |  |  |
Incurred losses, excluding catastrophe losses and reserve reestimates |  | 4 |  |  | 33 |  |  | 47 |  |  | 97 |
Catastrophe losses, excluding reserve reestimates |  | (9 | ) |  | 14 |  |  | 51 |  |  | (29 | )
Non-catastrophe reserve reestimates |  | 3 |  |  | 2 |  |  | 10 |  |  | 20 |
Catastrophe reserve reestimates |  | (2 | ) |  | 1 |  |  | (12 | ) |  | — |
Losses subtotal |  | (4 | ) |  | 50 |  |  | 96 |  |  | 88 |
(Increase) decrease expenses |  | — |  |  | 5 |  |  | (3 | ) |  | 11 |
Underwriting income (loss) |  | $ | 10 |  |  | $ | 29 |  |  | $ | 18 |  |  | $ | (16 | )

(1) | The 2018 column presents changes in 2018 compared to 2017. The 2017 column presents changes in 2017 compared to 2016.

Underwriting income was $10 million in the third quarter of 2018 compared to $29 million in the third quarter of 2017 and underwriting income was $18 million in the first nine months of 2018 compared to an underwriting loss of $16 million in the first nine months of 2017. The decrease in the three month period was primarily due to decreased premiums earned and higher catastrophe losses, partially offset by improved auto claim frequency. The improvement in the nine month period was primarily due to lower catastrophe losses and improved auto claim frequency, partially offset by decreased premiums earned.
72 www.allstate.com

Allstate Protection: Encompass brand Segment Results

Premiums written and earned by line of business |  |  |  |
($ in millions) |  | Three months ended September 30, |  | Nine months ended September 30,
|  | 2018 |  | 2017 |  | 2018 |  | 2017
Premiums written |  |  |  |  |  |  |  |
Auto |  | $ | 143 |  |  | $ | 141 |  |  | $ | 407 |  |  | $ | 414 |
Homeowners |  | 106 |  |  | 108 |  |  | 300 |  |  | 311 |
Other personal lines |  | 22 |  |  | 22 |  |  | 62 |  |  | 67 |
Total |  | $ | 271 |  |  | $ | 271 |  |  | $ | 769 |  |  | $ | 792 |
Premiums earned |  |  |  |  |  |  |  |
Auto |  | $ | 133 |  |  | $ | 140 |  |  | $ | 402 |  |  | $ | 429 |
Homeowners |  | 100 |  |  | 106 |  |  | 301 |  |  | 327 |
Other personal lines |  | 21 |  |  | 23 |  |  | 64 |  |  | 70 |
Total |  | $ | 254 |  |  | $ | 269 |  |  | $ | 767 |  |  | $ | 826 |

Auto premium measures and statistics |  |  |  |
|  | Three months ended September 30, |  | Nine months ended September 30,
|  | 2018 |  | 2017 |  | 2018 |  | 2017
PIF (thousands) |  | 504 |  |  | 548 |  |  | 504 |  |  | 548 |
New issued applications (thousands) |  | 21 |  |  | 13 |  |  | 57 |  |  | 38 |
Average premium |  | $ | 1,115 |  |  | $ | 1,087 |  |  | $ | 1,112 |  |  | $ | 1,070 |
Renewal ratio (%) (1) |  | 76.4 |  |  | 73.5 |  |  | 74.1 |  |  | 73.4 |
Approved rate changes (2): |  |  |  |  |  |  |  |
# of locations (3) |  | 7 |  |  | 8 |  |  | 14 |  |  | 22 |
Total brand (%) (4) |  | 0.6 |  |  | 0.8 |  |  | 1.9 |  |  | 4.5 |
Location specific (%) (5) (6) |  | 4.6 |  |  | 4.5 |  |  | 5.9 |  |  | 7.1 |

(1) | Encompass announced a plan to exit business in Massachusetts in the second quarter of 2017 and previously announced a plan to exit business in North Carolina in the first half of 2016, which impacted the renewal ratio. Excluding Massachusetts and North Carolina, the renewal ratio was 77.2 points and 76.2 points for the three and nine months ended September 30, 2018, respectively, compared to 75.3 points and 74.6 points for the three and nine months ended September 30, 2017, respectively.

(2) | Rate changes that are indicated based on loss trend analysis to achieve a targeted return will continue to be pursued. Rate changes do not include rating plan enhancements, including the introduction of discounts and surcharges that result in no change in the overall rate level in a location. These rate changes do not reflect initial rates filed for insurance subsidiaries initially writing business in a location.

(3) | Encompass brand operates in 38 states and the District of Columbia.

(4) | Represents the impact in the states and the District of Columbia where rate changes were approved during the period as a percentage of total brand 2017 premiums written.

(5) | Represents the impact in the states and the District of Columbia where rate changes were approved during the period as a percentage of their respective total 2017 premiums written in those same locations.

(6) | Based on historical premiums written in the locations noted above, the annual impact of rate changes approved for auto totaled $3 million and $10 million in the three and nine months ended September 30, 2018, respectively, compared to $5 million and $27 million in the three and nine months ended September 30, 2017, respectively.

Auto insurance premiums written totaled $143 million in the third quarter of 2018, a 1.4% increase from $141 million in the third quarter of 2017 and $407 million in the first nine months of 2018, a 1.7% decrease from $414 million in the first nine months of 2017. Factors impacting premiums written were the following:

• | 8.0% or 44 thousand decrease in PIF as of September 30, 2018 compared to September 30, 2017.

• | 2.9 point and 0.7 point increase in the renewal ratio in the third quarter and first nine months of 2018,

respectively, compared to the same periods of 2017, as profit improvement actions have moderated.

• | 61.5% and 50.0% increase in new issued applications in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017.

• | 2.6% and 3.9% increase in average premium in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017, due to rate changes.

Third Quarter 2018 Form 10-Q 73

Segment Results Allstate Protection: Encompass brand

Homeowners premium measure and statistics |  |  |  |
|  | Three months ended September 30, |  | Nine months ended September 30,
|  | 2018 |  | 2017 |  | 2018 |  | 2017
PIF (thousands) |  | 240 |  |  | 262 |  |  | 240 |  |  | 262 |
New issued applications (thousands) |  | 10 |  |  | 8 |  |  | 28 |  |  | 23 |
Average premium |  | $ | 1,730 |  |  | $ | 1,703 |  |  | $ | 1,710 |  |  | $ | 1,677 |
Renewal ratio (%) (1) |  | 80.9 |  |  | 78.7 |  |  | 79.5 |  |  | 78.5 |
Approved rate changes (2): |  |  |  |  |  |  |  |
# of locations (3) |  | 11 |  |  | 6 |  |  | 19 |  |  | 17 |
Total brand (%) |  | 2.7 |  |  | 0.9 |  |  | 3.5 |  |  | 3.9 |
Location specific (%) (4) |  | 7.8 |  |  | 6.0 |  |  | 7.5 |  |  | 8.0 |

(1) | Encompass announced a plan to exit business in Massachusetts in the second quarter of 2017 and previously announced a plan to exit business in North Carolina in the first half of 2016, which has impacted the renewal ratio. Excluding Massachusetts and North Carolina, the renewal ratios were 81.4 points and 80.5 points for the three and nine months ended September 30, 2018, respectively, compared to 79.7 points and 79.2 points for the three and nine months ended September 30, 2017.

(2) Includes rate changes approved based on our net cost of reinsurance.

(3) | Encompass brand operates in 38 states and the District of Columbia.

(4) | Based on historical premiums written in the locations noted above, the annual impact of rate changes approved for homeowners totaled $12 million and $15 million in the three and nine months ended September 30, 2018, respectively, compared to $5 million and $19 million in the three and nine months ended September 30, 2017, respectively.

Homeowners insurance premiums written totaled $106 million in the third quarter of 2018, a 1.9% decrease from $108 million in the third quarter of 2017 and $300 million in the first nine months of 2018, a 3.5% decrease from $311 million in the first nine months of 2017. Factors impacting premiums written were the following:

• | 8.4% or 22 thousand decrease in PIF as of September 30, 2018 compared to September 30, 2017.

• | 2.2 point and 1.0 point increase in the renewal ratio in the third quarter and first nine months of 2018,

respectively, compared to the same periods of 2017, as profit improvement actions have moderated.

• | 25.0% and 21.7% increase in new issued applications in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017.

• | 1.6% and 2.0% increase in average premium in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017, primarily due to rate changes.

Combined ratios by line of business
|  | Loss ratio |  | Expense ratio (1) |  | Combined ratio
|  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017
Three months ended September 30, |  |  |  |  |  |  |  |  |  |  |  |
Auto |  | 62.4 |  |  | 65.0 |  |  | 31.6 |  |  | 30.7 |  |  | 94.0 |  |  | 95.7 |
Homeowners |  | 70.0 |  |  | 50.9 |  |  | 33.0 |  |  | 30.2 |  |  | 103.0 |  |  | 81.1 |
Other personal lines |  | 42.9 |  |  | 56.5 |  |  | 33.3 |  |  | 30.5 |  |  | 76.2 |  |  | 87.0 |
Total |  | 63.8 |  |  | 58.7 |  |  | 32.3 |  |  | 30.5 |  |  | 96.1 |  |  | 89.2 |
Nine months ended September 30, |  |  |  |  |  |  |  |  |  |  |  |
Auto |  | 62.4 |  |  | 69.9 |  |  | 32.6 |  |  | 30.8 |  |  | 95.0 |  |  | 100.7 |
Homeowners |  | 69.7 |  |  | 75.2 |  |  | 33.6 |  |  | 30.3 |  |  | 103.3 |  |  | 105.5 |
Other personal lines |  | 51.6 |  |  | 62.9 |  |  | 35.9 |  |  | 30.0 |  |  | 87.5 |  |  | 92.9 |
Total |  | 64.4 |  |  | 71.4 |  |  | 33.3 |  |  | 30.5 |  |  | 97.7 |  |  | 101.9 |

(1) | Other revenue is deducted from operating costs and expenses in the expense ratio calculation.

74 www.allstate.com

Allstate Protection: Encompass brand Segment Results

Loss ratios by line of business
|  | Loss ratio |  | Effect of catastrophe losses |  | Effect of prior year reserve reestimates |  | Effect of catastrophe losses included in prior year reserve reestimates
|  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017
Three months ended September 30, |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Auto |  | 62.4 |  |  | 65.0 |  |  | 1.5 |  |  | 0.7 |  |  | (1.5 | ) |  | — |  |  | (0.8 | ) |  | — |
Homeowners |  | 70.0 |  |  | 50.9 |  |  | 20.0 |  |  | 10.3 |  |  | 3.0 |  |  | 0.9 |  |  | 3.0 |  |  | 0.9 |
Other personal lines |  | 42.9 |  |  | 56.5 |  |  | 4.8 |  |  | — |  |  | (19.1 | ) |  | (13.0 | ) |  | — |  |  | (4.3 | )
Total |  | 63.8 |  |  | 58.7 |  |  | 9.1 |  |  | 4.5 |  |  | (1.2 | ) |  | (0.8 | ) |  | 0.8 |  |  | — |
Nine months ended September 30, |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Auto |  | 62.4 |  |  | 69.9 |  |  | 1.7 |  |  | 2.8 |  |  | (0.7 | ) |  | (0.2 | ) |  | (0.2 | ) |  | (0.2 | )
Homeowners |  | 69.7 |  |  | 75.2 |  |  | 26.6 |  |  | 34.9 |  |  | 3.6 |  |  | 0.6 |  |  | 4.0 |  |  | 0.3 |
Other personal lines |  | 51.6 |  |  | 62.9 |  |  | 7.8 |  |  | 7.1 |  |  | (15.6 | ) |  | (7.1 | ) |  | 1.6 |  |  | — |
Total |  | 64.4 |  |  | 71.4 |  |  | 12.0 |  |  | 15.8 |  |  | (0.3 | ) |  | (0.5 | ) |  | 1.5 |  |  | — |

Auto loss ratio decreased 2.6 points and 7.5 points in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017, primarily related to decreased loss costs due to lower claim frequency and a slower decline in premiums earned.
Homeowners loss ratio increased 19.1 points in the third quarter of 2018 compared to the same period of 2017, primarily due to higher catastrophe losses and decreased premiums earned. Homeowners loss ratio
decreased 5.5 points in the first nine months of 2018 compared to the same period of 2017, primarily due to lower catastrophe losses, partially offset by decreased premiums earned.
Catastrophe losses were $23 million and $92 million in the third quarter and first nine months of 2018, respectively, compared to $12 million and $131 million in the third quarter and first nine months of 2017, respectively.

Expense ratios by line of business |  |  |  |
|  | Three months ended September 30, |  | Nine months ended September 30,
|  | 2018 |  | 2017 |  | 2018 |  | 2017
Auto |  | 31.6 |  |  | 30.7 |  |  | 32.6 |  |  | 30.8 |
Homeowners |  | 33.0 |  |  | 30.2 |  |  | 33.6 |  |  | 30.3 |
Other personal lines |  | 33.3 |  |  | 30.5 |  |  | 35.9 |  |  | 30.0 |
Total expense ratio (1) |  | 32.3 |  |  | 30.5 |  |  | 33.3 |  |  | 30.5 |

(1) | O ther revenue is deducted from other costs and expenses in the expense ratio calculation.

Impact of specific costs and expenses on the expense ratio |  |  |  |
|  | Three months ended September 30, |  | Nine months ended September 30,
|  | 2018 |  | 2017 |  | 2018 |  | 2017
Amortization of DAC |  | 18.5 |  |  | 18.2 |  |  | 18.7 |  |  | 18.4 |
Advertising expense |  | — |  |  | 0.4 |  |  | 0.1 |  |  | 0.1 |
Other costs and expenses (1) |  | 13.4 |  |  | 11.9 |  |  | 13.7 |  |  | 11.4 |
Restructuring and related charges |  | 0.4 |  |  | — |  |  | 0.8 |  |  | 0.6 |
Total expense ratio |  | 32.3 |  |  | 30.5 |  |  | 33.3 |  |  | 30.5 |

(1) | O ther revenue is deducted from other costs and expenses in the expense ratio calculation.

Expense ratio increased 1.8 points and 2.8 points in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017, primarily due to decreased premiums earned, higher employee-related compensation costs and increased investment in technology.
Third Quarter 2018 Form 10-Q 75

Segment Results Discontinued Lines and Coverages
Discontinued Lines and Coverages Segment

Underwriting results
($ in millions) |  | Three months ended September 30, |  | Nine months ended September 30,
|  | 2018 |  | 2017 |  | 2018 |  | 2017
Claims and claims expense |  | $ | (80 | ) |  | $ | (88 | ) |  | $ | (85 | ) |  | $ | (93 | )
Operating costs and expenses |  | — |  |  | — |  |  | (1 | ) |  | (2 | )
Underwriting loss |  | $ | (80 | ) |  | $ | (88 | ) |  | $ | (86 | ) |  | $ | (95 | )

Underwriting loss totaled $80 million and $86 million in the third quarter and first nine months of 2018, respectively, compared to $88 million and $95 million in the third quarter and first nine months of 2017, respectively.

Claims and claims expense |  |  |  |  |  |  |  |
($ in millions) |  | Three months ended September 30, |  | Nine months ended September 30,
|  | 2018 |  | 2017 |  | 2018 |  | 2017
Asbestos claims |  | $ | 44 |  |  | $ | 61 |  |  | $ | 44 |  |  | $ | 61 |
Environmental claims |  | 20 |  |  | 10 |  |  | 20 |  |  | 10 |
Other discontinued lines |  | 16 |  |  | 17 |  |  | 21 |  |  | 22 |
Total |  | $ | 80 |  |  | $ | 88 |  |  | $ | 85 |  |  | $ | 93 |

Our 2018 annual reserve review, using established industry and actuarial best practices, resulted in unfavorable reestimates of $76 million, including $44 million for asbestos exposures, primarily related to new reported information, changes in our projections of reported claims and settlement agreements, including bankruptcy proceedings; $20 million for environmental exposures; $13 million for other exposures, partially offset by a $1 million decrease in the allowance for future uncollectible reinsurance. Our 2017 annual reserve review resulted in unfavorable reestimates of $85 million, including $61 million for asbestos exposures, primarily related to new reported information and settlement agreements, including bankruptcy proceedings; $10 million for environmental exposures; $27 million for other exposures, partially offset by a $13 million decrease in the allowance for future uncollectible reinsurance.
The allowance for uncollectible reinsurance recoverables was $65 million and $70 million as of September 30, 2018 and December 31, 2017, respectively. The allowance represents 11.3% and 12.0% of the related reinsurance recoverable balances as of September 30, 2018 and December 31, 2017, respectively.
We believe that our reserves are appropriately established based on available facts, technology, laws, regulations, and assessments of other pertinent factors and characteristics of exposure (i.e. claim activity, potential liability, jurisdiction, products versus non-products exposure) presented by individual policyholders, assuming no change in the legal, legislative or economic environment. However, as we progress with the resolution of disputed claims in the courts and arbitrations and with negotiations and settlements, our reported losses may be more variable.

Reserves for asbestos, environmental and other discontinued lines claims before and after the effects of reinsurance
($ in millions) |  | September 30, 2018 |  | December 31, 2017
Asbestos claims |  |  |  |
Gross reserves |  | $ | 1,305 |  |  | $ | 1,296 |
Reinsurance |  | (423 | ) |  | (412 | )
Net reserves |  | 882 |  |  | 884 |
Environmental claims |  |  |  |
Gross reserves |  | 214 |  |  | 199 |
Reinsurance |  | (40 | ) |  | (33 | )
Net reserves |  | 174 |  |  | 166 |
Other discontinued lines |  |  |  |
Gross reserves |  | 394 |  |  | 398 |
Reinsurance |  | (38 | ) |  | (41 | )
Net reserves |  | 356 |  |  | 357 |
Total |  |  |  |
Gross reserves |  | 1,913 |  |  | 1,893 |
Reinsurance |  | (501 | ) |  | (486 | )
Net reserves |  | $ | 1,412 |  |  | $ | 1,407 |

76 www.allstate.com

Discontinued Lines and Coverages Segment Results

Reserves by type of exposure before and after the effects of reinsurance
($ in millions) |  | September 30, 2018 |  | December 31, 2017
Direct excess commercial insurance |  |  |  |
Gross reserves (1) |  | $ | 1,004 |  |  | $ | 997 |
Reinsurance (2) |  | (378 | ) |  | (378 | )
Net reserves |  | 626 |  |  | 619 |
Assumed reinsurance coverage |  |  |  |
Gross reserves (3) |  | 636 |  |  | 622 |
Reinsurance (4) |  | (54 | ) |  | (38 | )
Net reserves |  | 582 |  |  | 584 |
Direct primary commercial insurance |  |  |  |
Gross reserves (5) |  | 177 |  |  | 177 |
Reinsurance (6) |  | (51 | ) |  | (48 | )
Net reserves |  | 126 |  |  | 129 |
Other run-off business |  |  |  |
Gross reserves |  | 20 |  |  | 24 |
Reinsurance |  | (17 | ) |  | (21 | )
Net reserves |  | 3 |  |  | 3 |
Unallocated loss adjustment expenses |  |  |  |
Gross reserves |  | 76 |  |  | 73 |
Reinsurance |  | (1 | ) |  | (1 | )
Net reserves |  | 75 |  |  | 72 |
Total |  |  |  |
Gross reserves |  | 1,913 |  |  | 1,893 |
Reinsurance |  | (501 | ) |  | (486 | )
Net reserves |  | $ | 1,412 |  |  | $ | 1,407 |

(1) Gross reserves as of September 30, 2018, comprised 67% case reserves and 33% incurred but not reported (“IBNR”) reserves. Approximately 76% of the total gross case reserves are subject to settlement agreements. In the first nine months of 2018, total gross payments from case reserves were $72 million with approximately 90% attributable to settlements. Reserves as of December 31, 2017, comprised 65% case reserves and 35% IBNR reserves.
(2) Ceded reserves as of September 30, 2018, comprised 79% case reserves and 21% IBNR reserves. Approximately 83% of the total ceded case reserves are subject to settlement agreements. In the first nine months of 2018, reinsurance billings of ceded case reserves were $32 million with approximately 97% attributable to settlements. Reserves as of December 31, 2017, comprised 76% case reserves and 24% IBNR reserves.
(3) Gross reserves as of September 30, 2018, comprised 34% case reserves and 66% IBNR reserves. In the first nine months of 2018, total gross payments from case reserves were $28 million. Reserves as of December 31, 2017, comprised 31% case reserves and 69% IBNR reserves.
(4) Ceded reserves as of September 30, 2018, comprised 39% case reserves and 61% IBNR reserves. In the first nine months of 2018, reinsurance billings of ceded case reserves were $4 million. Reserves as of December 31, 2017, comprised 36% case reserves and 64% IBNR reserves.
(5) Gross reserves as of September 30, 2018, comprised 60% case reserves and 40% IBNR reserves. In the first nine months of 2018, total gross payments from case reserves were $6 million. Reserves as of December 31, 2017, comprised 54% case reserves and 46% IBNR reserves.
(6) Ceded reserves as of September 30, 2018, comprised 78% case reserves and 22% IBNR reserves. In the first nine months of 2018, reinsurance billings of ceded case reserves were $1 million. Reserves as of December 31, 2017, comprised 76% case reserves and 24% IBNR reserves.
Total net reserves were $1.41 billion including $696 million or 49% of estimated IBNR reserves as of September 30, 2018 compared to total net reserves of $1.41 billion including $733 million or 52% of estimated IBNR reserves as of December 31, 2017.
Total gross payments were $43 million and $110 million for the third quarter and first nine months of 2018, respectively, primarily related to payments on settlement agreements reached with several insureds on large claims, mainly asbestos related losses, where
the scope of coverages has been agreed upon. The claims associated with these settlement agreements are expected to be substantially paid out over the next several years as qualified claims are submitted by these insureds. Reinsurance collections were $12 million and $40 million for the third quarter and first nine months of 2018, respectively.
Third Quarter 2018 Form 10-Q 77

Segment Results Service Businesses
Service Businesses Segment

Summarized financial information
($ in millions) |  | Three months ended September 30, |  | Nine months ended September 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Premiums written |  | $ | 358 |  |  | $ | 272 |  |  | $ | 942 |  |  | $ | 785 |
Revenues |  |  |  |  |  |  |  |
Premiums |  | $ | 275 |  |  | $ | 225 |  |  | $ | 813 |  |  | $ | 636 |
Intersegment insurance premiums and service fees (1) |  | 31 |  |  | 26 |  |  | 89 |  |  | 82 |
Other revenue |  | 16 |  |  | 17 |  |  | 48 |  |  | 50 |
Net investment income |  | 7 |  |  | 4 |  |  | 18 |  |  | 11 |
Realized capital gains and losses |  | — |  |  | — |  |  | (6 | ) |  | — |
Total revenues |  | 329 |  |  | 272 |  |  | 962 |  |  | 779 |
Costs and expenses |  |  |  |  |  |  |  |
Claims and claims expense |  | (90 | ) |  | (106 | ) |  | (272 | ) |  | (279 | )
Amortization of DAC |  | (118 | ) |  | (78 | ) |  | (341 | ) |  | (217 | )
Operating costs and expenses |  | (125 | ) |  | (115 | ) |  | (362 | ) |  | (335 | )
Amortization of purchased intangible assets |  | (20 | ) |  | (23 | ) |  | (61 | ) |  | (69 | )
Restructuring and related charges |  | — |  |  | (1 | ) |  | (1 | ) |  | (2 | )
Total costs and expenses |  | (353 | ) |  | (323 | ) |  | (1,037 | ) |  | (902 | )
Income tax benefit |  | 3 |  |  | 19 |  |  | 14 |  |  | 43 |
Net loss applicable to common shareholders |  | $ | (21 | ) |  | $ | (32 | ) |  | $ | (61 | ) |  | $ | (80 | )
Adjusted net income (loss) |  | $ | — |  |  | $ | (17 | ) |  | $ | (4 | ) |  | $ | (35 | )
Realized capital gains and losses, after-tax |  | (1 | ) |  | — |  |  | (5 | ) |  | — |
Amortization of purchased intangible assets, after-tax |  | (16 | ) |  | (15 | ) |  | (48 | ) |  | (45 | )
Tax Legislation expense |  | (4 | ) |  | — |  |  | (4 | ) |  | — |
Net loss applicable to common shareholders |  | $ | (21 | ) |  | $ | (32 | ) |  | $ | (61 | ) |  | $ | (80 | )
SquareTrade |  | $ | 7 |  |  | $ | (4 | ) |  | $ | 14 |  |  | $ | (11 | )
Allstate Roadside Services |  | (6 | ) |  | (5 | ) |  | (16 | ) |  | (13 | )
Allstate Dealer Services |  | 3 |  |  | (4 | ) |  | 9 |  |  | (2 | )
Arity |  | (4 | ) |  | (4 | ) |  | (11 | ) |  | (9 | )
Adjusted net income (loss) |  | $ | — |  |  | $ | (17 | ) |  | $ | (4 | ) |  | $ | (35 | )
Policies in force as of September 30 (in thousands) |  |  |  |  |  |  | 56,741 |  |  | 38,916 |

(1) Intersegment insurance premiums and service fees are primarily related to Arity and Allstate Roadside Services and are eliminated in our condensed consolidated financial statements.
Net loss applicable to common shareholders was $21 million in the third quarter of 2018 compared to $32 million in the third quarter of 2017 and $61 million in the first nine months of 2018 compared to $80 million in the first nine months of 2017. 2018 results include $4 million of tax expense related to the Tax Legislation.
Adjusted net income was zero in the third quarter of 2018 compared to an adjusted net loss of $17 million in the third quarter of 2017. Adjusted net loss improved to $4 million in the first nine months of 2018 compared to $35 million in the first nine months of 2017. The improvement in both periods was primarily due to improved loss experience at SquareTrade and Allstate Dealer Services, partially offset by higher loss
costs and investments in the provider network and technology at Allstate Roadside Services and investments in business expansion at Arity.
Total revenues increased 21.0% or $57 million to $329 million in the third quarter of 2018 from $272 million in the third quarter of 2017 and 23.5% or $183 million to $962 million in the first nine months of 2018 from $779 million in the first nine months of 2017. Included in these amounts are $24 million and $80 million in the third quarter and first nine months of 2018, respectively, recorded for SquareTrade protection plans sold directly to retailers prior to January 1, 2018 for which SquareTrade is deemed to be the principal. These amounts are due to the adoption of the revenue from contracts with customers
78 www.allstate.com

Service Businesses Segment Results
accounting standard and are offset by corresponding increases in amortization of DAC. The remaining increase of $33 million and $103 million in the third quarter and first nine months of 2018, respectively, were primarily due to SquareTrade’s growth through its U.S. retail and international channels and increased premiums earned on Allstate Dealer Services’ vehicle service contracts.
Premiums written were $358 million in the third quarter of 2018 compared to $272 million in the third quarter of 2017 and were $942 million in the first nine months of 2018 compared to $785 million in the first nine months of 2017. The increase in both periods was primarily due to continued growth at SquareTrade, including the addition of a leading U.S. retailer during the quarter.
PIF of 56.7 million as of September 30, 2018, increased by 45.8% compared to 38.9 million as of September 30, 2017, due to continued growth at SquareTrade, including the addition of a leading U.S. retailer during the quarter.
Intersegment premiums and service fees were $31 million in third quarter 2018 compared to $26 million in third quarter 2017 and $89 million in the first nine months of 2018 compared to $82 million in the first nine months of 2017. The increase in both periods relates to increased auto connections through Arity’s device and mobile data collection services and analytic solutions used by Allstate brand, Esurance and Answer Financial.
Claims and claims expense decreased 15.1% to $90 million in third quarter 2018 compared to $106 million in third quarter 2017 and 2.5% to $272 million in the first nine months of 2018 compared to $279 million in the first nine months of 2017. The decrease in both periods was primarily due to improved loss experience at SquareTrade and Allstate Dealer Services, including a decrease in catastrophe losses as Allstate Dealer Services was impacted by Hurricane Harvey in 2017, partially offset by SquareTrade’s growth.
Amortization of DAC increased 51.3% or $40 million to $118 million in the third quarter of 2018 from $78 million in the third quarter of 2017 and 57.1% or $124 million to $341 million in the first nine months of 2018 compared to $217 million in the first nine months of 2017, including $24 million and $80 million in the third quarter and first nine months of 2018, respectively, related to the adoption of the revenue from contracts with customers accounting standard. The remaining increase is in line with the growth we are experiencing in SquareTrade and Allstate Dealer Services.
Operating costs and expenses increased 8.7% to $125 million in the third quarter of 2018 compared to $115 million in the third quarter of 2017 and 8.1% to $362 million in the first nine months of 2018 compared to $335 million in the first nine months of 2017. The increase in both periods was primarily due to higher product development and advertising costs at SquareTrade and investments in research and business expansion at Arity.
Amortization of purchased intangible assets relates entirely to the acquisition of SquareTrade. We recognized $555 million of intangible assets for which we recorded amortization expense of $20 million and $61 million in the third quarter and first nine months of 2018, respectively, compared to $23 million and $69 million in the third quarter and first nine months of 2017, respectively.
Third Quarter 2018 Form 10-Q 79

Segment Results Allstate Life
Allstate Life Segment

Summarized financial information
($ in millions) |  | Three months ended September 30, |  | Nine months ended September 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Revenues |  |  |  |  |  |  |  |  |  |  |  |
Premiums and contract charges |  | $ | 322 |  |  | $ | 316 |  |  | $ | 975 |  |  | $ | 956 |
Other revenue |  | 30 |  |  | 26 |  |  | 84 |  |  | 81 |
Net investment income |  | 128 |  |  | 119 |  |  | 380 |  |  | 362 |
Realized capital gains and losses |  | (3 | ) |  | 2 |  |  | (9 | ) |  | 4 |
Total revenues |  | 477 |  |  | 463 |  |  | 1,430 |  |  | 1,403 |
Costs and expenses |  |  |  |  |  |  |  |  |  |  |  |
Contract benefits |  | (193 | ) |  | (173 | ) |  | (593 | ) |  | (555 | )
Interest credited to contractholder funds |  | (72 | ) |  | (71 | ) |  | (213 | ) |  | (211 | )
Amortization of DAC |  | (38 | ) |  | (29 | ) |  | (106 | ) |  | (104 | )
Operating costs and expenses |  | (90 | ) |  | (82 | ) |  | (264 | ) |  | (254 | )
Restructuring and related charges |  | (1 | ) |  | (1 | ) |  | (3 | ) |  | (1 | )
Total costs and expenses |  | (394 | ) |  | (356 | ) |  | (1,179 | ) |  | (1,125 | )
Income tax expense |  | (29 | ) |  | (34 | ) |  | (59 | ) |  | (88 | )
Net income applicable to common shareholders |  | $ | 54 |  |  | $ | 73 |  |  | $ | 192 |  |  | $ | 190 |
Adjusted net income |  | $ | 74 |  |  | $ | 74 |  |  | $ | 221 |  |  | $ | 196 |
Realized capital gains and losses, after-tax |  | (3 | ) |  | 1 |  |  | (7 | ) |  | 2 |
DAC and DSI amortization related to realized capital gains and losses, after-tax |  | (1 | ) |  | (2 | ) |  | (6 | ) |  | (8 | )
Tax Legislation expense |  | (16 | ) |  | — |  |  | (16 | ) |  | — |
Net income applicable to common shareholders |  | $ | 54 |  |  | $ | 73 |  |  | $ | 192 |  |  | $ | 190 |
Reserve for life-contingent contract benefits as of September 30 |  |  |  |  |  | $ | 2,672 |  |  | $ | 2,604 |
Contractholder funds as of September 30 |  |  |  |  |  | $ | 7,650 |  |  | $ | 7,559 |
Policies in force as of September 30 by distribution channel (in thousands) |  |  |  |  |  |  |  |
Allstate agencies |  |  |  |  |  | 1,820 |  |  | 1,808 |
Closed channels |  |  |  |  |  |  | 198 |  |  | 211 |
Total |  |  |  |  |  |  |  | 2,018 |  |  | 2,019 |

Net income applicable to common shareholders was $54 million in the third quarter of 2018 compared to $73 million in the third quarter of 2017 and was $192 million in the first nine months of 2018 compared to $190 million in the first nine months of 2017. 2018 results include $16 million of tax expense related to the Tax Legislation.
Adjusted net income was $74 million in both the third quarter of 2018 and 2017. Adjusted net income increased to $221 million in the first nine months of 2018 compared to $196 million in the first nine months
of 2017, primarily due to a lower effective tax rate from the Tax Legislation, increased premiums and higher net investment income, partially offset by higher contract benefits.
Premiums and contract charges increased 1.9% or $6 million in the third quarter of 2018 and 2.0% or $19 million in the first nine months of 2018 compared to the same periods of 2017. The increase in both periods primarily relates to growth in traditional life insurance as well as lower reinsurance premiums ceded.

Premiums and contract charges by product
|  | Three months ended September 30, |  | Nine months ended September 30,
($ in millions) |  | 2018 |  | 2017 |  | 2018 |  | 2017
Traditional life insurance premiums |  | $ | 149 |  |  | $ | 141 |  |  | $ | 443 |  |  | $ | 420 |
Accident and health insurance premiums |  | — |  |  | — |  |  | 1 |  |  | 1 |
Interest-sensitive life insurance contract charges |  | 173 |  |  | 175 |  |  | 531 |  |  | 535 |
Premiums and contract charges (1) |  | $ | 322 |  |  | $ | 316 |  |  | $ | 975 |  |  | $ | 956 |

(1) | Contract charges related to the cost of insurance totaled $119 million and $121 million for the third quarter of 2018 and 2017, respectively, and $366 million and $368 million for the first nine months of 2018 and 2017, respectively.

80 www.allstate.com

Allstate Life Segment Results
Contract benefits increased 11.6% or $20 million in the third quarter of 2018 and 6.8% or $38 million in the first nine months of 2018 compared to the same periods of 2017, primarily due to higher claim experience on both traditional and interest-sensitive life insurance.
Our annual review of assumptions in third quarter 2018 resulted in a $1 million increase in reserves primarily for secondary guarantees on interest-sensitive life insurance due to higher than anticipated policyholder persistency. In third quarter 2017, the review resulted in a $12 million increase in reserves due to increased projected exposure to benefits paid under secondary guarantees resulting from continued low interest rates.
Benefit spread reflects our mortality and morbidity results using the difference between premiums and contract charges earned for the cost of insurance and contract benefits (“benefit spread”). Benefit spread decreased 15.7% to $75 million in the third quarter of 2018 compared to $89 million in third quarter of 2017 and 7.3% to $217 million in the first nine months of 2018
compared to $234 million in the first nine months of 2017, primarily due to higher claim experience, partially offset by growth in traditional life premiums.
Investment spread reflects the difference between net investment income and interest credited to contractholder funds (“investment spread”) and is used to analyze the impact of net investment income and interest credited to contractholder funds on net income. Investment spread increased 16.7% to $56 million in the third quarter of 2018 compared to $48 million in the third quarter of 2017 and 10.6% to $167 million in the first nine months of 2018 compared to $151 million in the first nine months of 2017, due to higher net investment income.
Amortization of DAC increased 31.0% or $9 million in the third quarter of 2018 and 1.9% or $2 million in the first nine months of 2018 compared to the same periods of 2017, primarily due to amortization acceleration in the third quarter of 2018 compared to amortization deceleration in the third quarter of 2017 for changes in assumptions, partially offset by lower gross profits on interest-sensitive life insurance.

Components of amortization of DAC
|  | Three months ended September 30, |  | Nine months ended September 30,
($ in millions) |  | 2018 |  | 2017 |  | 2018 |  | 2017
Amortization of DAC before amortization relating to realized capital gains and losses and changes in assumptions |  | $ | 31 |  |  | $ | 39 |  |  | $ | 93 |  |  | $ | 106 |
Amortization relating to realized capital gains and losses (1) |  | 2 |  |  | 4 |  |  | 8 |  |  | 12 |
Amortization acceleration (deceleration) for changes in assumptions (‘‘DAC unlocking’’) |  | 5 |  |  | (14 | ) |  | 5 |  |  | (14 | )
Total amortization of DAC |  | $ | 38 |  |  | $ | 29 |  |  | $ | 106 |  |  | $ | 104 |

(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.

Our annual comprehensive review of assumptions underlying estimated future gross profits for our interest-sensitive life contracts covers assumptions for mortality, persistency, expenses, investment returns, including capital gains and losses, interest crediting rates to policyholders, and the effect of any hedges.
In third quarter 2018, the review resulted in an acceleration of DAC amortization (decrease to income) of $5 million. In third quarter 2017, the review resulted in a deceleration of DAC amortization (increase to income) of $14 million.

Effect on DAC amortization of changes in assumptions relating to gross profit components
|  | Nine months ended September 30,
($ in millions) |  | 2018 |  | 2017
Investment margin |  | $ | 11 |  |  | $ | 10 |
Benefit margin |  | (7 | ) |  | (23 | )
Expense margin |  | 1 |  |  | (1 | )
Net acceleration (deceleration) |  | $ | 5 |  |  | $ | (14 | )

In 2018, DAC amortization acceleration for changes in the investment margin component of estimated gross profits was due to lower projected investment returns. The deceleration related to benefit margin was due to a decrease in projected mortality.
In 2017, DAC amortization acceleration for changes in the investment margin component of estimated gross profits was due to continued low interest rates and lower projected investment returns. The deceleration related to benefit margin was due to a decrease in projected mortality.
Third Quarter 2018 Form 10-Q 81

Segment Results Allstate Life
Operating costs and expenses increased 9.8% or $8 million in the third quarter of 2018 compared to the same period of 2017, primarily due to higher commissions on non-proprietary product sales and higher marketing expenses. Operating costs and expenses increased 3.9% or $10 million in the first nine months of 2018 compared to the same period of 2017, primarily due to higher employee-related and technology costs and higher commissions on non-proprietary product sales.
Analysis of reserves and contractholder funds

Reserve for life-contingent contract benefits
($ in millions) |  | September 30, 2018 |  | December 31, 2017
Traditional life insurance |  | $ | 2,507 |  |  | $ | 2,460 |
Accident and health insurance |  | 165 |  |  | 176 |
Reserve for life-contingent contract benefits |  | $ | 2,672 |  |  | $ | 2,636 |

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

Change in contractholder funds
|  | Three months ended September 30, |  | Nine months ended September 30,
($ in millions) |  | 2018 |  | 2017 |  | 2018 |  | 2017
Contractholder funds, beginning balance |  | $ | 7,630 |  |  | $ | 7,514 |  |  | $ | 7,608 |  |  | $ | 7,464 |
Deposits |  | 237 |  |  | 236 |  |  | 715 |  |  | 730 |
Interest credited |  | 71 |  |  | 71 |  |  | 212 |  |  | 211 |
Benefits, withdrawals and other adjustments |  |  |  |  |  |  |  |  |
Benefits |  | (59 | ) |  | (54 | ) |  | (174 | ) |  | (183 | )
Surrenders and partial withdrawals |  | (64 | ) |  | (62 | ) |  | (196 | ) |  | (190 | )
Contract charges |  | (176 | ) |  | (175 | ) |  | (527 | ) |  | (527 | )
Net transfers from separate accounts |  | 1 |  |  | — |  |  | 5 |  |  | 3 |
Other adjustments (1) |  | 10 |  |  | 29 |  |  | 7 |  |  | 51 |
Total benefits, withdrawals and other adjustments |  | (288 | ) |  | (262 | ) |  | (885 | ) |  | (846 | )
Contractholder funds, ending balance |  | $ | 7,650 |  |  | $ | 7,559 |  |  | $ | 7,650 |  |  | $ | 7,559 |

(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. As a result, the net change in contractholder funds associated with products reinsured is reflected as a component of the other adjustments line.

82 www.allstate.com

Allstate Benefits Segment Results
Allstate Benefits Segment

Summarized financial information
|  | Three months ended September 30, |  | Nine months ended September 30,
($ in millions) |  | 2018 |  | 2017 |  | 2018 |  | 2017
Revenues |  |  |  |  |  |  |  |  |  |  |  |
Premiums and contract charges |  | $ | 285 |  |  | $ | 273 |  |  | $ | 854 |  |  | $ | 811 |
Net investment income |  | 19 |  |  | 18 |  |  | 57 |  |  | 54 |
Realized capital gains and losses |  | 2 |  |  | 1 |  |  | — |  |  | 1 |
Total revenues |  | 306 |  |  | 292 |  |  | 911 |  |  | 866 |
Costs and expenses |  |  |  |  |  |  |  |  |  |  |  |
Contract benefits |  | (159 | ) |  | (142 | ) |  | (451 | ) |  | (421 | )
Interest credited to contractholder funds |  | (8 | ) |  | (8 | ) |  | (25 | ) |  | (26 | )
Amortization of DAC |  | (26 | ) |  | (31 | ) |  | (103 | ) |  | (105 | )
Operating costs and expenses |  | (70 | ) |  | (65 | ) |  | (212 | ) |  | (196 | )
Restructuring and related charges |  | — |  |  | (1 | ) |  | — |  |  | (1 | )
Total costs and expenses |  | (263 | ) |  | (247 | ) |  | (791 | ) |  | (749 | )
Income tax expense |  | (9 | ) |  | (16 | ) |  | (26 | ) |  | (41 | )
Net income applicable to common shareholders |  | $ | 34 |  |  | $ | 29 |  |  | $ | 94 |  |  | $ | 76 |
Adjusted net income |  | $ | 32 |  |  | $ | 28 |  |  | $ | 94 |  |  | $ | 75 |
Realized capital gains and losses, after-tax |  | 2 |  |  | 1 |  |  | — |  |  | 1 |
Net income applicable to common shareholders |  | $ | 34 |  |  | $ | 29 |  |  | $ | 94 |  |  | $ | 76 |
Benefit ratio (1) |  | 55.8 |  |  | 52.0 |  |  | 52.8 |  |  | 51.9 |
Operating expense ratio (2) |  | 24.6 |  |  | 23.8 |  |  | 24.8 |  |  | 24.2 |
Reserve for life-contingent contract benefits as of September 30 |  |  |  |  |  | $ | 1,007 |  |  | $ | 979 |
Contractholder funds as of September 30 |  |  |  |  |  | $ | 902 |  |  | $ | 887 |
Policies in force as of September 30 (in thousands) |  |  |  |  |  | 4,241 |  |  | 4,035 |

(1) | Benefit ratio is calculated as contract benefits divided by premiums and contract charges.

(2) | Operating expense ratio is calculated as operating costs and expenses divided by premiums and contract charges.

Net income applicable to common shareholders was $34 million in the third quarter of 2018 compared to $29 million in the third quarter of 2017 and was $94 million in the first nine months of 2018 compared to $76 million in the first nine months of 2017.
Adjusted net income increased to $32 million in the third quarter of 2018 compared to $28 million in the third quarter of 2017 and $94 million in the first nine months of 2018 compared to $75 million in the first nine months of 2017, primarily due to higher premiums and a lower effective tax rate from the Tax Legislation, partially offset by higher contract benefits and operating costs and expenses.
Premiums and contract charges increased 4.4% or $12 million in the third quarter of 2018 and 5.3% or $43 million in the first nine months of 2018 compared to the same periods of 2017. The increase in both periods primarily related to growth in hospital indemnity (included in other health) and accident products.
Third Quarter 2018 Form 10-Q 83

Segment Results Allstate Benefits

Premiums and contract charges by product
|  | Three months ended September 30, |  | Nine months ended September 30,
($ in millions) |  | 2018 |  | 2017 |  | 2018 |  | 2017
Life |  | $ | 39 |  |  | $ | 41 |  |  | $ | 115 |  |  | $ | 115 |
Accident |  | 75 |  |  | 70 |  |  | 224 |  |  | 212 |
Critical illness |  | 119 |  |  | 116 |  |  | 359 |  |  | 351 |
Short-term disability |  | 27 |  |  | 27 |  |  | 81 |  |  | 76 |
Other health |  | 25 |  |  | 19 |  |  | 75 |  |  | 57 |
Premiums and contract charges |  | $ | 285 |  |  | $ | 273 |  |  | $ | 854 |  |  | $ | 811 |

PIF increased 5.1% as of September 30, 2018, compared to September 30, 2017.
Contract benefits increased 12.0% or $17 million in the third quarter of 2018 and 7.1% or $30 million in the first nine months of 2018 compared to the same periods of 2017, primarily due to higher claim experience and growth.
Benefit ratio increased to 55.8 in the third quarter of 2018 compared to 52.0 in the third quarter of 2017, due to higher mortality experience in life products, partially offset by improved claim experience in critical illness and hospital indemnity (included in other health) products. Benefit ratio increased to 52.8 in the first nine months of 2018 compared to 51.9 in the first nine months of 2017, due to higher mortality experience in life products.
Amortization of DAC decreased 16.1% or $5 million in the third quarter of 2018 and 1.9% or $2 million in the
first nine months of 2018 compared to the same periods of 2017, primarily due to a favorable adjustment associated with our annual review of assumptions. Our annual comprehensive review of assumptions underlying estimated future gross profits for our interest-sensitive life contracts resulted in a deceleration of DAC amortization (increase to income) of $4 million in third quarter 2018 compared to a $1 million acceleration (decrease to income) in third quarter 2017. The deceleration in third quarter 2018 primarily relates to favorable projected mortality.
Operating expense ratio increased to 24.6 in the third quarter of 2018 compared to 23.8 in the third quarter of 2017 and increased to 24.8 in the first nine months of 2018 compared to 24.2 in the first nine months of 2017, primarily due to policy growth and investment in the business.

Operating costs and expenses
|  | Three months ended September 30, |  | Nine months ended September 30,
($ in millions) |  | 2018 |  | 2017 |  | 2018 |  | 2017
Non-deferrable commissions |  | $ | 27 |  |  | $ | 24 |  |  | $ | 81 |  |  | $ | 73 |
General and administrative expenses |  | 43 |  |  | 41 |  |  | 131 |  |  | 123 |
Total operating costs and expenses |  | $ | 70 |  |  | $ | 65 |  |  | $ | 212 |  |  | $ | 196 |

Operating costs and expenses increased 7.7% or $5 million in the third quarter of 2018 and 8.2% or $16 million in the first nine months of 2018 compared to the same periods of 2017, primarily due to higher non-deferrable commissions (associated with growth in premiums and contract charges), employee-related costs consistent with growth and higher technology expenses.
Analysis of reserves and contractholder funds

Reserve for life-contingent contract benefits
($ in millions) |  | September 30, 2018 |  | December 31, 2017
Traditional life insurance |  | $ | 269 |  |  | $ | 262 |
Accident and health insurance |  | 738 |  |  | 717 |
Reserve for life-contingent contract benefits |  | $ | 1,007 |  |  | $ | 979 |

Contractholder funds relate to interest-sensitive life insurance and totaled $902 million as of September 30, 2018, compared to $890 million as of December 31, 2017.
84 www.allstate.com

Allstate Annuities Segment Results
Allstate Annuities Segment

Summarized financial information
|  | Three months ended September 30, |  | Nine months ended September 30,
($ in millions) |  | 2018 |  | 2017 |  | 2018 |  | 2017
Revenues |  |  |  |  |  |  |  |  |  |  |  |
Contract charges |  | $ | 5 |  |  | $ | 4 |  |  | $ | 11 |  |  | $ | 10 |
Net investment income |  | 260 |  |  | 324 |  |  | 843 |  |  | 967 |
Realized capital gains and losses |  | 51 |  |  | 18 |  |  | 28 |  |  | 11 |
Total revenues |  | 316 |  |  | 346 |  |  | 882 |  |  | 988 |
Costs and expenses |  |  |  |  |  |  |  |  |  |  |  |
Contract benefits |  | (146 | ) |  | (141 | ) |  | (441 | ) |  | (440 | )
Interest credited to contractholder funds |  | (83 | ) |  | (95 | ) |  | (251 | ) |  | (285 | )
Amortization of DAC |  | (2 | ) |  | (2 | ) |  | (5 | ) |  | (5 | )
Operating costs and expenses |  | (8 | ) |  | (9 | ) |  | (26 | ) |  | (26 | )
Restructuring and related charges |  | — |  |  | 1 |  |  | — |  |  | — |
Total costs and expenses |  | (239 | ) |  | (246 | ) |  | (723 | ) |  | (756 | )
Gain on disposition of operations |  | 1 |  |  | 1 |  |  | 4 |  |  | 5 |
Income tax benefit (expense) |  | 53 |  |  | (35 | ) |  | 35 |  |  | (81 | )
Net income applicable to common shareholders |  | $ | 131 |  |  | $ | 66 |  |  | $ | 198 |  |  | $ | 156 |
Adjusted net income |  | $ | 20 |  |  | $ | 55 |  |  | $ | 99 |  |  | $ | 149 |
Realized capital gains and losses, after-tax |  | 40 |  |  | 11 |  |  | 22 |  |  | 6 |
Valuation changes on embedded derivatives not hedged, after-tax |  | 1 |  |  | (1 | ) |  | 5 |  |  | (2 | )
Gain on disposition of operations, after-tax |  | 1 |  |  | 1 |  |  | 3 |  |  | 3 |
Tax legislation benefit |  | 69 |  |  | — |  |  | 69 |  |  | — |
Net income applicable to common shareholders |  | $ | 131 |  |  | $ | 66 |  |  | $ | 198 |  |  | $ | 156 |
Reserve for life-contingent contract benefits as of September 30 |  |  |  |  |  | $ | 8,535 |  |  | $ | 8,644 |
Contractholder funds as of September 30 |  |  |  |  |  | $ | 10,098 |  |  | $ | 11,204 |
Policies in force as of September 30 (in thousands) |  |  |  |  |  |  |  |
Deferred annuities |  |  |  |  |  | 130 |  |  | 145 |
Immediate annuities |  |  |  |  |  | 85 |  |  | 91 |
Total |  |  |  |  |  |  |  | 215 |  |  | 236 |

Net income applicable to common shareholders was $131 million in the third quarter of 2018 compared to $66 million in the third quarter of 2017 and was $198 million in the first nine months of 2018 compared to $156 million in the first nine months of 2017. 2018 results include a tax benefit of $69 million related to the Tax Legislation.
Adjusted net income decreased to $20 million in the third quarter of 2018 compared to $55 million in the third quarter of 2017 and to $99 million in the first nine months of 2018 compared to $149 million in the first nine months of 2017. The decrease in both periods was primarily due to decreased net investment income, driven by lower performance-based investment results and average investment balances, partially offset by a lower effective tax rate from the Tax Legislation and decreased interest credited to contractholder funds.
Net investment income decreased 19.8% or $64 million in the third quarter of 2018 and 12.8% or $124 million in the first nine months of 2018 compared to the same periods of 2017, primarily due to lower performance-based investment results, mainly from
limited partnership interests, and lower average investment balances.
Net realized capital gains in the third quarter of 2018 primarily related to increased valuation of equity investments. Net realized capital gains in the first nine months of 2018 primarily related to increased valuation of equity investments, partially offset by losses on sales of fixed income securities.
Contract benefits increased 3.5% or $5 million in the third quarter of 2018 and 0.2% or $1 million in the first nine months of 2018 compared to the same periods of 2017. The increase in third quarter 2018 was primarily due to worse immediate annuity mortality experience.
Our annual review of assumptions in third quarter 2018 resulted in a $2 million increase in reserves primarily for guaranteed withdrawal benefits on equity-indexed annuities due to higher projected guaranteed benefits. In third quarter 2017, the review resulted in a $1 million increase in reserves.
Benefit spread reflects our mortality results using the difference between contract charges earned and
Third Quarter 2018 Form 10-Q 85

Segment Results Allstate Annuities
contract benefits excluding the portion related to the implied interest on immediate annuities with life contingencies. This implied interest totaled $123 million and $370 million in the third quarter and first nine months of 2018, respectively, compared to $124 million and $376 million in the third quarter and first nine months of 2017, respectively. Total benefit spread was $(20) million in third quarter 2018 compared to $(14) million in third quarter 2017 and $(65) million in the first nine months of 2018 compared to $(58) million in the first nine months of 2017.
Interest credited to contractholder funds decreased 12.6% or $12 million in the third quarter of 2018 and 11.9% or $34 million in the first nine months of 2018 compared to the same periods of 2017, primarily due to lower average contractholder funds. Valuation
changes on derivatives embedded in equity-indexed annuity contracts that are not hedged decreased interest credited to contractholder funds by zero and $6 million in the third quarter and first nine months of 2018, respectively, compared to increases of $2 million and $3 million in the third quarter and first nine months of 2017, respectively.
Investment spread reflects 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 and is used to analyze the impact of net investment income and interest credited to contractholders on net income.

Investment spread
|  | Three months ended September 30, |  | Nine months ended September 30,
($ in millions) |  | 2018 |  | 2017 |  | 2018 |  | 2017
Investment spread before valuation changes on embedded derivatives not hedged |  | $ | 54 |  |  | $ | 107 |  |  | $ | 216 |  |  | $ | 309 |
Valuation changes on derivatives embedded in equity-indexed annuity contracts that are not hedged |  | — |  |  | (2 | ) |  | 6 |  |  | (3 | )
Total investment spread |  | $ | 54 |  |  | $ | 105 |  |  | $ | 222 |  |  | $ | 306 |

Investment spread before valuation changes on embedded derivatives not hedged decreased 49.5% to $54 million in the third quarter of 2018 and 30.1% to $216 million in the first nine months of 2018 compared to $107 million and $309 million in the third quarter and first nine months of 2017, respectively, primarily due to lower investment income, mainly from limited partnership interests, partially offset by lower credited interest.
To further analyze investment spreads, the following table summarizes the weighted average investment yield on assets supporting product liabilities, interest crediting rates and investment spreads. Investment spreads may vary significantly between periods due to the variability in investment income, particularly for immediate fixed annuities where the investment portfolio includes performance-based investments.

Analysis of investment spread
|  | Three months ended September 30,
|  | Weighted average investment yield |  | Weighted average interest crediting rate |  | Weighted average investment spreads
|  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017
Deferred fixed annuities |  | 4.1 | % |  | 4.4 | % |  | 2.8 | % |  | 2.9 | % |  | 1.3 | % |  | 1.5 | %
Immediate fixed annuities with and without life contingencies |  | 6.0 |  |  | 7.8 |  |  | 6.0 |  |  | 6.0 |  |  | — |  |  | 1.8 |
|  | Nine months ended September 30,
|  | Weighted average investment yield |  | Weighted average interest crediting rate |  | Weighted average investment spreads
|  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | 2018 |  | 2017
Deferred fixed annuities |  | 4.1 | % |  | 4.3 | % |  | 2.8 | % |  | 2.8 | % |  | 1.3 | % |  | 1.5 | %
Immediate fixed annuities with and without life contingencies |  | 6.6 |  |  | 7.7 |  |  | 6.0 |  |  | 6.0 |  |  | 0.6 |  |  | 1.7 |

Operating costs and expenses decreased by $1 million in the third quarter of 2018 compared to the same period of 2017. Operating costs and expenses in the first nine months of 2018, were comparable to the same period of 2017.
86 www.allstate.com

Allstate Annuities Segment Results
Analysis of reserves and contractholder funds

Product Liabilities
($ in millions) |  | September 30, 2018 |  | December 31, 2017
Immediate fixed annuities with life contingencies |  |  |  |
Sub-standard structured settlements and group pension terminations (1) |  | $ | 5,010 |  |  | $ | 5,284 |
Standard structured settlements and SPIA (2) |  | 3,443 |  |  | 3,565 |
Other |  | 82 |  |  | 85 |
Reserve for life-contingent contract benefits |  | $ | 8,535 |  |  | $ | 8,934 |
Deferred fixed annuities |  | $ | 7,423 |  |  | $ | 8,128 |
Immediate fixed annuities without life contingencies |  | 2,568 |  |  | 2,700 |
Other |  | 107 |  |  | 108 |
Contractholder funds |  | $ | 10,098 |  |  | $ | 10,936 |

(1) | Comprises structured settlement annuities for annuitants with severe injuries or other health impairments which increased their expected mortality rate at the time the annuity was issued (“sub-standard structured settlements”) and group annuity contracts issued to sponsors of terminated pension plans.

(2) | Comprises structured settlement annuities for annuitants with standard life expectancy (“standard structured settlements”) and single premium immediate annuities (“SPIA”) with life contingencies.

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

Changes in contractholder funds
|  | Three months ended September 30, |  | Nine months ended September 30,
($ in millions) |  | 2018 |  | 2017 |  | 2018 |  | 2017
Contractholder funds, beginning balance |  | $ | 10,359 |  |  | $ | 11,428 |  |  | $ | 10,936 |  |  | $ | 11,915 |
Deposits |  | 3 |  |  | 6 |  |  | 12 |  |  | 23 |
Interest credited |  | 82 |  |  | 94 |  |  | 248 |  |  | 282 |
Benefits, withdrawals and other adjustments |  |  |  |  |  |  |  |  |  |
Benefits |  | (148 | ) |  | (163 | ) |  | (452 | ) |  | (489 | )
Surrenders and partial withdrawals |  | (197 | ) |  | (165 | ) |  | (625 | ) |  | (526 | )
Contract charges |  | (3 | ) |  | (3 | ) |  | (6 | ) |  | (6 | )
Net transfers from separate accounts |  | — |  |  | — |  |  | — |  |  | 1 |
Other adjustments (1) |  | 2 |  |  | 7 |  |  | (15 | ) |  | 4 |
Total benefits, withdrawals and other adjustments |  | (346 | ) |  | (324 | ) |  | (1,098 | ) |  | (1,016 | )
Contractholder funds, ending balance |  | $ | 10,098 |  |  | $ | 11,204 |  |  | $ | 10,098 |  |  | $ | 11,204 |

(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. 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 2.5% and 7.7% in the third quarter and first nine months of 2018, respectively, primarily due to the continued runoff of our deferred fixed annuity business. We discontinued the sale of annuities over an eight year period from 2006 to 2014 but still accept additional deposits on existing contracts.
Contractholder deposits decreased $3 million and $11 million in the third quarter and first nine months of 2018, respectively, compared to the same periods of 2017, primarily due to lower additional deposits on fixed annuities.
Surrenders and partial withdrawals increased 19.4% to $197 million in the third quarter of 2018 from $165 million in the third quarter of 2017. Surrenders and partial withdrawals increased 18.8% to $625 million in the first nine months of 2018 from $526 million in the first nine months of 2017. 2018 had elevated surrenders on fixed annuities resulting from a large number of contracts reaching the 30-45 day period (typically at their 5, 7 or 10 year anniversary) during which there is no surrender charge. The annualized surrender and partial withdrawal rate on deferred fixed annuities, based on the beginning of year contractholder funds, was 11.1% in the first nine months of 2018 compared to 8.5% in the first nine months of 2017.
Third Quarter 2018 Form 10-Q 87

Investments
Investments

Portfolio composition and strategy by reporting segment (1)
|  | As of September 30, 2018
($ in millions) |  | Property-Liability |  | Service Businesses |  | Allstate Life |  | Allstate Benefits |  | Allstate Annuities |  | Corporate and Other |  | Total
Fixed income securities (2) |  | $ | 30,911 |  |  | $ | 983 |  |  | $ | 7,823 |  |  | $ | 1,212 |  |  | $ | 14,191 |  |  | $ | 2,543 |  |  | $ | 57,663 |
Equity securities (3) |  | 5,124 |  |  | 90 |  |  | 74 |  |  | 96 |  |  | 1,444 |  |  | 137 |  |  | 6,965 |
Mortgage loans |  | 397 |  |  | — |  |  | 1,798 |  |  | 196 |  |  | 2,201 |  |  | — |  |  | 4,592 |
Limited partnership interests |  | 4,216 |  |  | — |  |  | — |  |  | — |  |  | 3,385 |  |  | 1 |  |  | 7,602 |
Short-term investments (4) |  | 1,548 |  |  | 53 |  |  | 327 |  |  | 20 |  |  | 606 |  |  | 517 |  |  | 3,071 |
Other |  | 1,800 |  |  | — |  |  | 1,258 |  |  | 307 |  |  | 710 |  |  | — |  |  | 4,075 |
Total |  | $ | 43,996 |  |  | $ | 1,126 |  |  | $ | 11,280 |  |  | $ | 1,831 |  |  | $ | 22,537 |  |  | $ | 3,198 |  |  | $ | 83,968 |
Market-based core |  | $ | 31,037 |  |  | $ | 1,126 |  |  | $ | 11,280 |  |  | $ | 1,831 |  |  | $ | 17,703 |  |  | $ | 3,198 |  |  | $ | 66,175 |
Market-based active |  | 8,505 |  |  | — |  |  | — |  |  | — |  |  | 1,250 |  |  | — |  |  | 9,755 |
Performance-based |  | 4,454 |  |  | — |  |  | — |  |  | — |  |  | 3,584 |  |  | — |  |  | 8,038 |
Total |  | $ | 43,996 |  |  | $ | 1,126 |  |  | $ | 11,280 |  |  | $ | 1,831 |  |  | $ | 22,537 |  |  | $ | 3,198 |  |  | $ | 83,968 |

(1) | Balances reflect the elimination of related party investments between segments.

(2) | Fixed income securities are carried at fair value. Amortized cost basis for these securities was $31.29 billion, $996 million, $7.66 billion, $1.22 billion, $13.89 billion, $2.56 billion and $57.62 billion for Property-Liability, Service Businesses, Allstate Life, Allstate Benefits, Allstate Annuities, Corporate and Other, and in Total, respectively.

(3) | Equity securities are carried at fair value. The fair value of equity securities held as of September 30, 2018, was $1.22 billion in excess of cost. These net gains were primarily concentrated in the consumer goods and technology sectors and in domestic equity index funds. Beginning January 1, 2018, the periodic changes in fair value are reflected in realized capital gains and losses.

(4) | Short-term investments are carried at fair value.

Investments totaled $83.97 billion as of September 30, 2018, increasing from $82.80 billion as of December 31, 2017, primarily due to the proceeds from the issuance of preferred stock and senior debt and positive operating cash flows, partially offset by lower fixed income valuations, common share repurchases, net reductions in contractholder funds, dividends paid to shareholders and redemption and maturity of senior debt.
Adopted Recognition and Measurement of Financial Assets and Financial Liabilities Beginning January 1, 2018, equity securities are reported at fair value with changes in fair value recognized in realized capital gains and losses.
Limited partnerships previously reported using the cost method are now reported at fair value with changes in fair value recognized in net investment income.
Portfolio composition by investment strategy We utilize two primary strategies to manage risks and returns and to position our portfolio to take advantage of market opportunities while attempting to mitigate adverse effects. As strategies and market conditions evolve, the asset allocation may change or assets may be moved between strategies.
Market-based strategies include investments primarily in public fixed income and equity securities. Market-based core seeks to deliver predictable earnings aligned to business needs and returns consistent with the markets in which we invest. Private fixed income assets, such as commercial mortgages, bank loans and privately placed debt that provide liquidity premiums are also included in this category. Market-based active seeks to outperform within the public markets through tactical positioning and by taking advantage of short-term opportunities. This category may generate results that meaningfully deviate from those achieved by market indices, both favorably and unfavorably.
Performance-based strategy seeks to deliver attractive risk-adjusted returns and supplement market risk with idiosyncratic risk primarily through investments in private equity and real estate.
88 www.allstate.com

Investments

Portfolio composition by investment strategy
| As of September 30, 2018
($ in millions) |  | Market-based core |  | Market-based active |  | Performance-based |  | Total
Fixed income securities |  | $ | 49,585 |  |  | $ | 7,999 |  |  | $ | 79 |  |  | $ | 57,663 |
Equity securities |  | 5,750 |  |  | 975 |  |  | 240 |  |  | 6,965 |
Mortgage loans |  | 4,592 |  |  | — |  |  | — |  |  | 4,592 |
Limited partnership interests |  | 617 |  |  | 103 |  |  | 6,882 |  |  | 7,602 |
Short-term investments |  | 2,555 |  |  | 516 |  |  | — |  |  | 3,071 |
Other |  | 3,076 |  |  | 162 |  |  | 837 |  |  | 4,075 |
Total |  | $ | 66,175 |  |  | $ | 9,755 |  |  | $ | 8,038 |  |  | $ | 83,968 |
% of total |  | 79 | % |  | 12 | % |  | 9 | % |  |
Unrealized net capital gains and losses |  |  |  |  |  |  |  |
Fixed income securities |  | $ | 138 |  |  | $ | (92 | ) |  | $ | (1 | ) |  | $ | 45 |
Limited partnership interests |  | — |  |  | — |  |  | 2 |  |  | 2 |
Other |  | (3 | ) |  | — |  |  | — |  |  | (3 | )
Total |  | $ | 135 |  |  | $ | (92 | ) |  | $ | 1 |  |  | $ | 44 |

Fixed income securities by type
|  | Fair value as of
($ in millions) |  | September 30, 2018 |  | December 31, 2017
U.S. government and agencies |  | $ | 3,151 |  |  | $ | 3,616 |
Municipal |  | 9,415 |  |  | 8,328 |
Corporate |  | 42,662 |  |  | 44,026 |
Foreign government |  | 854 |  |  | 1,021 |
Asset-backed securities (“ABS”) |  | 979 |  |  | 1,272 |
Residential mortgage-backed securities (“RMBS”) |  | 500 |  |  | 578 |
Commercial mortgage-backed securities (“CMBS”) |  | 80 |  |  | 128 |
Redeemable preferred stock |  | 22 |  |  | 23 |
Total fixed income securities |  | $ | 57,663 |  |  | $ | 58,992 |

Fixed income securities are rated by third party credit rating agencies and/or are internally rated. As of September 30, 2018, 89.9% of the consolidated fixed income securities portfolio was rated investment grade, which is defined as a security having a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A or BBB from S&P Global Ratings (“S&P”), a comparable rating from another nationally recognized rating agency, or a comparable internal rating if an externally provided rating is not available. Credit ratings below
these designations are considered low credit quality or below investment grade, which includes high yield bonds. Market prices for certain securities may have credit spreads which imply higher or lower credit quality than the current third party rating. Our initial investment decisions and ongoing monitoring procedures for fixed income securities are based on a thorough due diligence process which includes, but is not limited to, an assessment of the credit quality, sector, structure, and liquidity risks of each issue.
Third Quarter 2018 Form 10-Q 89

Investments

Fair value and unrealized net capital gains and losses for fixed income securities by credit quality
|  | As of September 30, 2018
|  | Investment grade |  | Below investment grade |  | Total
($ in millions) |  | Fair value |  | Unrealized gain/(loss) |  | Fair value |  | Unrealized gain/(loss) |  | Fair value |  | Unrealized gain/(loss)
U.S. government and agencies |  | $ | 3,151 |  |  | $ | 9 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,151 |  |  | $ | 9 |
Municipal |  |  |  |  |  |  |  |  |  |  |  |
Tax exempt |  | 7,220 |  |  | (89 | ) |  | 32 |  |  | 1 |  |  | 7,252 |  |  | (88 | )
Taxable |  | 2,125 |  |  | 185 |  |  | 38 |  |  | 2 |  |  | 2,163 |  |  | 187 |
Corporate |  |  |  |  |  |  |  |  |  |  |  |
Public |  | 27,793 |  |  | (150 | ) |  | 3,057 |  |  | (6 | ) |  | 30,850 |  |  | (156 | )
Privately placed |  | 9,606 |  |  | 3 |  |  | 2,206 |  |  | (13 | ) |  | 11,812 |  |  | (10 | )
Foreign government |  | 845 |  |  | — |  |  | 9 |  |  | — |  |  | 854 |  |  | — |
ABS |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations (“CDO”) |  | 311 |  |  | (1 | ) |  | 28 |  |  | 3 |  |  | 339 |  |  | 2 |
Consumer and other asset-backed securities (“Consumer and other ABS”) |  | 613 |  |  | (2 | ) |  | 27 |  |  | — |  |  | 640 |  |  | (2 | )
RMBS |  |  |  |  |  |  |  |  |  |  |  |
U.S. government sponsored entities (“U.S. Agency”) |  | 87 |  |  | — |  |  | — |  |  | — |  |  | 87 |  |  | — |
Non-agency |  | 19 |  |  | 1 |  |  | 394 |  |  | 95 |  |  | 413 |  |  | 96 |
CMBS |  | 31 |  |  | — |  |  | 49 |  |  | 6 |  |  | 80 |  |  | 6 |
Redeemable preferred stock |  | 22 |  |  | 1 |  |  | — |  |  | — |  |  | 22 |  |  | 1 |
Total fixed income securities |  | $ | 51,823 |  |  | $ | (43 | ) |  | $ | 5,840 |  |  | $ | 88 |  |  | $ | 57,663 |  |  | $ | 45 |

Municipal bonds, including tax exempt and taxable securities, totaled $9.42 billion as of September 30, 2018, with 99.3% rated investment grade and an unrealized net capital gain of $99 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 $42.66 billion as of September 30, 2018, with 87.7% rated investment grade and an unrealized net capital loss of $166 million. Privately placed securities primarily consist of corporate issued senior debt securities that are directly negotiated with the borrower or are in unregistered form.
ABS, including CDO and Consumer and other ABS, totaled $979 million as of September 30, 2018, with 94.4% rated investment grade and an unrealized net capital gain of zero. Credit risk is managed by monitoring the performance of the underlying collateral. Many of the securities in the ABS portfolio have credit enhancement with features such as overcollateralization, subordinated structures, reserve funds, guarantees and/or insurance.
CDO totaled $339 million as of September 30, 2018, with 91.7% rated investment grade and an unrealized net capital gain of $2 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 $640 million as of September 30, 2018, with 95.8% rated investment grade. Consumer and other ABS consists of $230 million of consumer auto, $128 million of credit card
and $282 million of other ABS with unrealized net capital losses of $2 million and $1 million and an unrealized net capital gain of $1 million, respectively.
RMBS totaled $500 million as of September 30, 2018, with 21.2% rated investment grade and an unrealized net capital gain of $96 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 $413 million as of September 30, 2018, with 4.6% rated investment grade and an unrealized net capital gain of $96 million.
CMBS totaled $80 million as of September 30, 2018, with 38.8% rated investment grade and an unrealized net capital gain of $6 million. The CMBS investments are primarily traditional conduit transactions collateralized by commercial mortgage loans, broadly diversified across property types and geographical area.
Equity securities primarily include common stocks, exchange traded and mutual funds, non-redeemable preferred stocks and real estate investment trust equity investments. Certain exchange traded and mutual funds have fixed income securities as their underlying investments. The equity securities portfolio was $6.97 billion as of September 30, 2018.
Mortgage loans, which are primarily held in the life and annuity portfolios, totaled $4.59 billion as of September 30, 2018, and primarily comprise loans
90 www.allstate.com

Investments
secured by first mortgages on developed commercial real estate.
Limited partnership interests include interests in private equity funds, real estate funds and other funds.

Carrying value and other information for limited partnership interests
|  | As of September 30, 2018
($ in millions) |  | Limited partnership interests (1) (2) |  | Number of managers |  | Number of individual investments |  | Largest exposure to single investment
Private equity |  | $ | 5,712 |  |  | 140 |  |  | 277 |  |  | $ | 186 |
Real estate |  | 1,170 |  |  | 37 |  |  | 78 |  |  | 105 |
Other |  | 720 |  |  | 13 |  |  | 14 |  |  | 302 |
Total |  | $ | 7,602 |  |  | 190 |  |  | 369 |  |  |  |

(1) | Due to the adoption of the recognition and measurement accounting standard, limited partnerships previously reported using the cost method are now reported at fair value. See Note 1 of the condensed consolidated financial statements.

(2) | We have commitments to invest in additional limited partnership interests totaling $3.03 billion.

Unrealized net capital gains totaled $44 million as of September 30, 2018 compared to $2.63 billion as of December 31, 2017.

Unrealized net capital gains and losses
($ in millions) |  | September 30, 2018 |  | December 31, 2017
U.S. government and agencies |  | $ | 9 |  |  | $ | 36 |
Municipal |  | 99 |  |  | 275 |
Corporate |  | (166 | ) |  | 1,030 |
Foreign government |  | — |  |  | 16 |
ABS |  | — |  |  | 6 |
RMBS |  | 96 |  |  | 98 |
CMBS |  | 6 |  |  | 4 |
Redeemable preferred stock |  | 1 |  |  | 2 |
Fixed income securities |  | 45 |  |  | 1,467 |
Equity securities (1) |  | — |  |  | 1,160 |
Derivatives |  | (3 | ) |  | (1 | )
EMA limited partnerships |  | 2 |  |  | 1 |
Unrealized net capital gains and losses, pre-tax |  | $ | 44 |  |  | $ | 2,627 |

(1) | Due to the adoption of the recognition and measurement accounting standard, equity securities are reported at fair value with changes in fair value recognized in realized capital gains and losses and are no longer included in the table above. Upon adoption of the new guidance on January 1, 2018, $1.16 billion of pre-tax unrealized net capital gains for equity securities were reclassified from accumulated other comprehensive income to retained income. See Note 1 of the condensed consolidated financial statements.

The unrealized net capital gain for the fixed income portfolio totaled $45 million, comprised of $923 million of gross unrealized gains and $878 million of gross unrealized losses as of September 30, 2018. This compares to an unrealized net capital gain for the fixed income portfolio totaling $1.47 billion, comprised of $1.75 billion of gross unrealized gains and $283 million of gross unrealized losses as of December 31, 2017. Fixed income valuations decreased primarily due to an increase in risk-free interest rates and wider credit spreads.
Third Quarter 2018 Form 10-Q 91

Investments

Gross unrealized gains and losses on fixed income securities by type and sector
|  | As of September 30, 2018
($ in millions) |  | Amortized cost |  | Gross unrealized |  | Fair value
| Gains |  | Losses |
Corporate: |  |  |  |  |  |  |  |  |  |  |  |
Consumer goods (cyclical and non-cyclical) |  | $ | 12,950 |  |  | $ | 88 |  |  | $ | (233 | ) |  | $ | 12,805 |
Capital goods |  | 4,877 |  |  | 40 |  |  | (104 | ) |  | 4,813 |
Utilities |  | 5,702 |  |  | 220 |  |  | (103 | ) |  | 5,819 |
Banking |  | 4,254 |  |  | 9 |  |  | (66 | ) |  | 4,197 |
Communications |  | 2,820 |  |  | 26 |  |  | (48 | ) |  | 2,798 |
Technology |  | 2,885 |  |  | 12 |  |  | (47 | ) |  | 2,850 |
Financial services |  | 3,005 |  |  | 31 |  |  | (38 | ) |  | 2,998 |
Transportation |  | 1,812 |  |  | 42 |  |  | (30 | ) |  | 1,824 |
Basic industry |  | 1,911 |  |  | 33 |  |  | (28 | ) |  | 1,916 |
Energy |  | 2,331 |  |  | 53 |  |  | (22 | ) |  | 2,362 |
Other |  | 281 |  |  | 3 |  |  | (4 | ) |  | 280 |
Total corporate fixed income portfolio |  | 42,828 |  |  | 557 |  |  | (723 | ) |  | 42,662 |
U.S. government and agencies |  | 3,142 |  |  | 36 |  |  | (27 | ) |  | 3,151 |
Municipal |  | 9,316 |  |  | 204 |  |  | (105 | ) |  | 9,415 |
Foreign government |  | 854 |  |  | 12 |  |  | (12 | ) |  | 854 |
ABS |  | 979 |  |  | 8 |  |  | (8 | ) |  | 979 |
RMBS |  | 404 |  |  | 98 |  |  | (2 | ) |  | 500 |
CMBS |  | 74 |  |  | 7 |  |  | (1 | ) |  | 80 |
Redeemable preferred stock |  | 21 |  |  | 1 |  |  | — |  |  | 22 |
Total fixed income securities |  | $ | 57,618 |  |  | $ | 923 |  |  | $ | (878 | ) |  | $ | 57,663 |

The consumer goods, utilities and capital goods sectors comprise 30%, 14% and 11%, respectively, of the fair value of our corporate fixed income securities portfolio as of September 30, 2018. The consumer goods, capital goods and utilities sectors had the highest concentration of gross unrealized losses in our corporate fixed income securities portfolio as of September 30, 2018.
In general, the gross unrealized losses are related to an increase in market yields which may include increased risk-free interest rates and/or wider credit spreads since the time of initial purchase. Similarly, gross unrealized gains reflect a decrease in market yields since the time of initial purchase.
92 www.allstate.com

Investments

Net investment income
|  | Three months ended September 30, |  | Nine months ended September 30,
($ in millions) |  | 2018 |  | 2017 |  | 2018 |  | 2017
Fixed income securities |  | $ | 527 |  |  | $ | 519 |  |  | $ | 1,544 |  |  | $ | 1,564 |
Equity securities |  | 35 |  |  | 37 |  |  | 130 |  |  | 130 |
Mortgage loans |  | 52 |  |  | 52 |  |  | 163 |  |  | 157 |
Limited partnership interests (1) |  | 210 |  |  | 223 |  |  | 563 |  |  | 596 |
Short-term investments |  | 19 |  |  | 9 |  |  | 50 |  |  | 21 |
Other |  | 71 |  |  | 58 |  |  | 205 |  |  | 174 |
Investment income, before expense |  | 914 |  |  | 898 |  |  | 2,655 |  |  | 2,642 |
Investment expense (2) (3) |  | (70 | ) |  | (55 | ) |  | (201 | ) |  | (154 | )
Net investment income |  | $ | 844 |  |  | $ | 843 |  |  | $ | 2,454 |  |  | $ | 2,488 |
Market-based core |  | $ | 609 |  |  | $ | 586 |  |  | $ | 1,814 |  |  | $ | 1,772 |
Market-based active |  | 76 |  |  | 77 |  |  | 222 |  |  | 224 |
Performance-based |  | 229 |  |  | 235 |  |  | 619 |  |  | 646 |
Investment income, before expense |  | $ | 914 |  |  | $ | 898 |  |  | $ | 2,655 |  |  | $ | 2,642 |

(1) | Due to the adoption of the recognition and measurement accounting standard, limited partnerships previously reported using the cost method are now reported at fair value with changes in fair value recognized in net investment income.

(2) | Investment expense includes $17 million and $9 million of investee level expenses in the third quarter of 2018 and 2017, respectively, and $53 million and $29 million in the first nine months of 2018 and 2017, respectively. Investee level expenses include depreciation and asset level operating expenses on directly held real estate and other consolidated investments.

(3) | Investment expense includes $8 million and $3 million related to the portion of reinvestment income on securities lending collateral paid to the counterparties in the third quarter of 2018 and 2017, respectively, and $19 million and $7 million in the first nine months of 2018 and 2017, respectively.

Net investment income was flat in the third quarter of 2018 compared to the same period of 2017. Net investment income decreased 1.4% or $34 million in the first nine months of 2018 compared to the same period of 2017 primarily due to lower performance-based investment results, mainly from limited partnerships.

Performance-based investment income
|  | Three months ended September 30, |  | Nine months ended September 30,
($ in millions) |  | 2018 |  | 2017 |  | 2018 |  | 2017
Limited partnerships |  |  |  |  |  |  |  |
Private equity |  | $ | 123 |  |  | $ | 183 |  |  | $ | 452 |  |  | $ | 506 |
Real estate |  | 87 |  |  | 40 |  |  | 111 |  |  | 90 |
Performance-based - limited partnerships |  | 210 |  |  | 223 |  |  | 563 |  |  | 596 |
Non-limited partnerships |  |  |  |  |  |  |  |
Private equity |  | 1 |  |  | 2 |  |  | 7 |  |  | 16 |
Real estate |  | 18 |  |  | 10 |  |  | 49 |  |  | 34 |
Performance-based - non-limited partnerships |  | 19 |  |  | 12 |  |  | 56 |  |  | 50 |
Total |  |  |  |  |  |  |  |
Private equity |  | 124 |  |  | 185 |  |  | 459 |  |  | 522 |
Real estate |  | 105 |  |  | 50 |  |  | 160 |  |  | 124 |
Total performance-based |  | $ | 229 |  |  | $ | 235 |  |  | $ | 619 |  |  | $ | 646 |
Investee level expenses (1) |  | $ | (15 | ) |  | $ | (8 | ) |  | $ | (48 | ) |  | $ | (25 | )

(1) | Investee level expenses include depreciation and asset level operating expenses reported in investment expense.

Performance-based investment income decreased 2.6% or $6 million in the third quarter of 2018 and 4.2% or $27 million in the first nine months of 2018 compared to the same periods of 2017. While performance-based investment income has decreased modestly in 2018, both 2018 and 2017 reflected strong equity market appreciation and gains on sales of underlying investments held by limited partnerships. The five highest contributing performance-based
investments in each period generated investment income of $149 million and $134 million in the first nine months of 2018 and 2017, respectively. Performance-based investment results and income can vary significantly between periods and are influenced by economic conditions, equity market performance, comparable public company earnings multiples, capitalization rates, operating performance of the underlying investments and the timing of asset sales.
Third Quarter 2018 Form 10-Q 93

Investments

Components of realized capital gains and losses and the related tax effect
|  | Three months ended September 30, |  | Nine months ended September 30,
($ in millions) |  | 2018 |  | 2017 |  | 2018 |  | 2017
Impairment write-downs |  |  |  |  |  |  |  |
Fixed income securities |  | $ | (3 | ) |  | $ | (3 | ) |  | $ | (6 | ) |  | $ | (23 | )
Equity securities (1) |  | — |  |  | (3 | ) |  | — |  |  | (34 | )
Mortgage Loans |  | — |  |  | (1 | ) |  | — |  |  | (1 | )
Limited partnership interests |  | (2 | ) |  | (16 | ) |  | (3 | ) |  | (32 | )
Other investments |  | — |  |  | — |  |  | (1 | ) |  | (4 | )
Total impairment write-downs |  | (5 | ) |  | (23 | ) |  | (10 | ) |  | (94 | )
Change in intent write-downs (1) |  | — |  |  | (5 | ) |  | — |  |  | (43 | )
Net OTTI losses recognized in earnings |  | (5 | ) |  | (28 | ) |  | (10 | ) |  | (137 | )
Sales (1) |  | (22 | ) |  | 148 |  |  | (139 | ) |  | 495 |
Valuation of equity investments (1) |  | 198 |  |  | — |  |  | 149 |  |  | — |
Valuation and settlements of derivative instruments |  | 5 |  |  | (17 | ) |  | 17 |  |  | (40 | )
Realized capital gains and losses, pre-tax |  | 176 |  |  | 103 |  |  | 17 |  |  | 318 |
Income tax expense |  | (35 | ) |  | (36 | ) |  | (1 | ) |  | (110 | )
Realized capital gains and losses, after-tax |  | $ | 141 |  |  | $ | 67 |  |  | $ | 16 |  |  | $ | 208 |
Market-based core |  | $ | 121 |  |  | $ | 68 |  |  | $ | (6 | ) |  | $ | 199 |
Market-based active |  | 42 |  |  | 56 |  |  | (18 | ) |  | 158 |
Performance-based |  | 13 |  |  | (21 | ) |  | 41 |  |  | (39 | )
Realized capital gains and losses, pre-tax |  | $ | 176 |  |  | $ | 103 |  |  | $ | 17 |  |  | $ | 318 |

(1) | Due to the adoption of the recognition and measurement accounting standard, equity securities are reported at fair value with changes in fair value recognized in valuation of equity investments and are no longer included in impairment write-downs, change in intent write-downs and sales.

Realized capital gains in the third quarter of 2018, related primarily to increased valuation of equity investments, partially offset by losses on sales of fixed income securities. Realized capital gains in the first nine months of 2018, were primarily related to increased valuation of equity investments and gains on valuation and settlements of derivative instruments, partially offset by sales of fixed income securities.
Sales resulted in $22 million and $139 million of net realized capital losses in the three and nine months ended September 30, 2018, respectively. Sales related primarily to fixed income securities in connection with ongoing portfolio management.
Valuation of equity investments resulted in gains of $198 million for the three months en ded September 30, 2018, which included $223 million of appreciation in the valuation of equity securities and $25 million in declines in value primarily for certain
limited partnerships where the underlying assets are predominately public equity securities. Valuation of equity investments resulted in gains of $149 million for the nine months ended September 30, 2018, which included $204 million of appreciation in the valuation of equity securities and $55 million of declines in value primarily for certain limited partnerships where the underlying assets are predominately public equity securities.
Valuation and settlements of derivative instruments generated gains of $5 million and $17 million for the three months and nine months ended September 30, 2018, respectively, and were primarily comprised of gains on foreign currency contracts due to the strengthening of the U.S. Dollar and gains on total return swaps, partially offset by losses on equity options and futures used for risk management due to increases in equity indices.

Realized capital gains and losses for performance-based investments
|  | Three months ended September 30, |  | Nine months ended September 30,
($ in millions) |  | 2018 |  | 2017 |  | 2018 |  | 2017
Impairment write-downs |  | $ | (2 | ) |  | $ | (16 | ) |  | $ | (3 | ) |  | $ | (32 | )
Change in intent write-downs |  | — |  |  | — |  |  | — |  |  | — |
Net OTTI losses recognized in earnings |  | (2 | ) |  | (16 | ) |  | (3 | ) |  | (32 | )
Sales |  | 3 |  |  | — |  |  | 2 |  |  | 10 |
Valuation of equity investments |  | 4 |  |  | — |  |  | 23 |  |  | — |
Valuation and settlements of derivative instruments |  | 8 |  |  | (5 | ) |  | 19 |  |  | (17 | )
Total performance-based |  | $ | 13 |  |  | $ | (21 | ) |  | $ | 41 |  |  | $ | (39 | )

Realized capital gains on performance-based investments were $13 million in the third quarter of 2018 and $41 million in the first nine months of 2018 primarily related to increased valuation of equity investments and gains on valuation and settlements of derivative instruments.
94 www.allstate.com

Capital Resources and Liquidity
Capital Resources and Liquidity
Capital resources consist of shareholders’ equity and debt, representing funds deployed or available to be deployed to support business operations or for general corporate purposes.

Capital resources
($ in millions) |  | September 30, 2018 |  | December 31, 2017
Preferred stock, common stock, treasury stock, retained income and other shareholders’ equity items |  | $ | 24,917 |  |  | $ | 22,245 |
Accumulated other comprehensive (loss) income |  | (1,284 | ) |  | 306 |
Total shareholders’ equity |  | 23,633 |  |  | 22,551 |
Debt |  | 6,450 |  |  | 6,350 |
Total capital resources |  | $ | 30,083 |  |  | $ | 28,901 |
Ratio of debt to shareholders’ equity |  | 27.3 | % |  | 28.2 | %
Ratio of debt to capital resources |  | 21.4 | % |  | 22.0 | %

Shareholders’ equity increased in the first nine months of 2018, primarily due to net income and issuance of preferred stock, partially offset by decreased unrealized capital gains on investments, common share repurchases and dividends paid to shareholders. In the nine months ended September 30, 2018, we paid dividends of $455 million and $97 million related to our common and preferred shares, respectively.
Preferred stock and debt issuances On March 29, 2018, we issued 23,000 shares of 5.625% Fixed Rate Noncumulative Perpetual Preferred Stock, Series G, for aggregate proceeds of $575 million, $250 million of Floating Rate Se nior Notes due 2021 and $250 million of Floating Rate Senior Notes due 2023. The proceeds of these issuances were for general corporate purposes, including the redemption, repayment or repurchase of certain preferred stock or debt.
Redemption and repayment of preferred stock and debt On May 13, 2018, we redeemed our $224 million Series B 6.125% Fixed-to-Floating Rate Junior Subordinated Debentures at a redemption price equal to 100% of the outstanding principal.
On May 15, 2018, we repaid $176 million of 6.75% Senior Debentures at maturity. There are no other debt maturities until May 2019.
On October 15, 2018, we redeemed all 15,400 shares of our Fixed Rate Noncumulative Perpetual Preferred Stock, Series C and the corresponding depository shares for $385 million.
For additional details on these transactions, see Note 10 of the condensed consolidated financial statements.
Common share repurchases As of September 30, 2018, there was $151 million remaining on the $2.00 billion common share repurchase program that is expected to be completed by November 2018.
During the first nine months of 2018, we repurchased 11.7 million common shares for $1.12 billion in the market and under accelerated share repurchase agreements.
On October 31, 2018, the Board authorized a new $3.00 billion common share repurchase program that is expected to be completed by April 2020. Funding for the repurchase program may include potential preferred stock issuances of up to $1.00 billion.
Common shareholder dividends On January 2, 2018, April 2, 2018, July 2, 2018 and October 1, 2018, we paid common shareholder dividends of $0.37, $0.46, $0.46 and $0.46, respectively.
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 such as catastrophes and the current level of operating leverage. Our preferred stock and subordinated debentures are viewed as having a common equity component by certain rating agencies and are given equity credit up to a pre-determined limit in our capital structure as determined by their respective methodologies. These respective methodologies consider the existence of certain terms and features in the instruments such as the noncumulative dividend feature in the preferred stock. In April 2018, A.M. Best upgraded The Allstate Corporation’s debt and short-term issuer ratings of a- and AMB-1 to a and AMB-1+, respectively, and affirmed the insurance financial strength ratings of A+ for Allstate Insurance Company (“AIC”), Allstate Life Insurance Company (“ALIC”) and Allstate Assurance Company. The outlook for the ratings is stable. In August 2018, S&P affirmed The Allstate Corporation’s debt and short-term issuer ratings of A- and A-2, respectively, and the insurance financial strength ratings of AA- for AIC and A+ for ALIC. The outlook for the ratings is stable. In August 2018, Moody’s affirmed The Allstate Corporation’s debt and short-term issuer ratings of A3 and P-2, respectively, and the insurance financial strength ratings of Aa3 for AIC and A1 for ALIC. The outlook for the ratings is stable.
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
Third Quarter 2018 Form 10-Q 95

Capital Resources and Liquidity
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 Allstate Corporation is party to an Amended and Restated Intercompany Liquidity Agreement (“Liquidity Agreement”) with certain subsidiaries, which include, but are not limited to, ALIC and AIC. The Liquidity Agreement allows for short-term advances of funds to be made between parties for liquidity and other general corporate purposes. The Liquidity Agreement does not establish a commitment to advance funds on the part of any party. ALIC and AIC each serve as a lender and borrower, certain other subsidiaries serve only as borrowers, and the Corporation serves only as a lender. AIC also has a capital support agreement with ALIC. Under the capital support agreement, AIC is committed to providing capital to ALIC 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 Corporation also has an intercompany loan agreement with certain of its subsidiaries, which include, but are not limited to, AIC and ALIC. The amount of intercompany loans available to the Corporation’s subsidiaries 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.
Parent company capital capacity At the parent holding company level, we have deployable assets totaling $3.38 billion as of September 30, 2018, comprising cash and investments that are generally saleable within one quarter. The substantial earnings capacity of the operating subsidiaries is the primary source of capital generation for the Corporation and provides funds for the parent company’s fixed charges and other corporate purposes.
In the first nine months of 2018, AIC paid dividends totaling $2.27 billion to its parent, Allstate Insurance Holdings, LLC, which then paid $2.27 billion of dividends to the Corporation.
Dividends may not be paid or declared on our common stock and shares of common stock may not be repurchased unless the full dividends for the latest completed dividend period on our preferred stock have been declared and paid or provided for. We are prohibited from declaring or paying dividends on our preferred stock if we fail to meet specified capital adequacy, net income or shareholders’ equity levels, except out of the net proceeds of common stock issued during the 90 days prior to the date of declaration. As of September 30, 2018, we satisfied all
of the tests with no current restrictions on the payment of preferred stock dividends.
The terms of our outstanding subordinated debentures also prohibit us from declaring or paying any dividends or distributions on our common or preferred stock or redeeming, purchasing, acquiring, or making liquidation payments on our common stock or preferred stock if we have elected to defer interest payments on the subordinated debentures, subject to certain limited exceptions. In the first nine months of 2018, we did not defer interest payments on the subordinated debentures.
Additional resources to support liquidity are as follows:

• | The Corporation has access to a commercial paper facility with a borrowing limit of $1.00 billion to cover short-term cash needs. As of September 30, 2018, there were no balances outstanding and therefore the remaining borrowing capacity was $1.00 billion; however, the outstanding balance can fluctuate daily.

• | The Corporation, AIC and ALIC have access to a $1.00 billion unsecured revolving credit facility that is available for short-term liquidity requirements. The maturity date of this facility is April 2021. The facility is fully subscribed among 11 lenders with the largest commitment being $115 million. The commitments of the lenders are several and no lender is responsible for any other lender’s commitment if such lender fails to make a loan under the facility. This facility contains an increase provision that would allow up to an additional $500 million of borrowing. This facility has a financial covenant requiring that we not exceed a 37.5% debt to capitalization ratio as defined in the agreement. This ratio was 15.0% as of September 30, 2018. Although the right to borrow under the facility is not subject to a minimum rating requirement, the costs of maintaining the facility and borrowing under it are based on the ratings of our senior unsecured, unguaranteed long-term debt. There were no borrowings under the credit facility during the third quarter or the first nine months of 2018.

• | The Corporation has access to a universal shelf registration statement that was filed with the Securities and Exchange Commission on April 30, 2018. We can use this shelf registration to issue an unspecified amount of debt securities, common stock (including 555 million shares of treasury stock as of September 30, 2018), preferred stock, depositary shares, warrants, stock purchase contracts, stock purchase units and securities of trust subsidiaries. The specific terms of any securities we issue under this registration statement will be provided in the applicable prospectus supplements.

96 www.allstate.com

Capital Resources and Liquidity
Liquidity exposure Contractholder funds were $18.65 billion as of September 30, 2018.

Contractholder funds by contractual withdrawal provisions
($ in millions) |  |  |  | Percent to total
Not subject to discretionary withdrawal |  | $ | 2,884 |  |  | 15.5 | %
Subject to discretionary withdrawal with adjustments: |  |  |  |
Specified surrender charges (1) |  | 4,819 |  |  | 25.8 |
Market value adjustments (2) |  | 1,098 |  |  | 5.9 |
Subject to discretionary withdrawal without adjustments (3) |  | 9,849 |  |  | 52.8 |
Total contractholder funds (4) |  | $ | 18,650 |  |  | 100.0 | %

(1) | Includes $895 million of liabilities with a contractual surrender charge of less than 5% of the account balance.

(2) | $603 million of the contracts with market value adjusted surrenders have a 30-45 day period at the end of their initial and subsequent interest rate guarantee periods (which are typically 1, 5, 7 or 10 years) during which there is no surrender charge or market value adjustment.

(3) | 89% of these contracts have a minimum interest crediting rate guarantee of 3% or higher.

(4) | Includes $712 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 7.1% and 6.0% in the first nine months of 2018 and 2017, respectively. We strive to promptly pay customers who request cash surrenders; however, statutory regulations generally provide up to six months in most states to fulfill surrender requests.
Third Quarter 2018 Form 10-Q 97

Forward-Looking Statements
This report contains “forward-looking statements” that anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. These statements are made subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements do not relate strictly to historical or current facts and may be identified by their use of words like “plans,” “seeks,” “expects,” “will,” “should,” “anticipates,” “estimates,” “intends,” “believes,” “likely,” “targets” and other words with similar meanings. We believe these statements are based on reasonable estimates, assumptions and plans. However, if the estimates, assumptions or plans underlying the forward-looking statements prove inaccurate or if other risks or uncertainties arise, actual results could differ materially from those communicated in these forward-looking statements. Factors that could cause actual results to differ materially from those expressed in, or implied by, the forward-looking statements include risks related to:
Insurance Industry Risks (1) adverse changes in the nature and level of catastrophes and severe weather events; (2) our catastrophe management strategy on premium growth; (3) unexpected increases in the frequency or severity of claims; (4) the cyclical nature of the property and casualty business; (5) the availability of reinsurance at current levels and prices; (6) risk of our reinsurers; (7) changing climate and weather conditions; (8) changes in underwriting and actual experience; (9) changes in reserve estimates; (10) changes in estimates of profitability on interest-sensitive life products
Financial Risks (11) conditions in the global economy and capital markets; (12) a downgrade in our financial strength ratings; (13) the effect of adverse capital and credit market conditions; (14) possible impairments in the value of goodwill; (15) the realization of deferred tax assets; (16) restrictions on our subsidiaries’ ability to pay dividends; (17) restrictions under the terms of certain of our securities on our ability to pay dividends or repurchase our stock
Investment Risks (18) market risk and declines in credit quality relating to our investment portfolio; (19) our subjective determination of the amount of realized capital losses recorded for impairments of our investments and the fair value of our fixed income and equity securities; (20) the influence of changes in market interest rates or performance-based investment returns on our annuity business
Operational Risks (21) impacts of new or changing technologies, including those impacting personal transportation, on our business; (22) failure in cyber or other information security, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning; (23) the impact of a large scale pandemic, the threat or occurrence of terrorism or military action; (24) loss of key vendor relationships or failure of a vendor to protect confidential, proprietary and personal information; (25) intellectual property infringement, misappropriation and third party claims
Regulatory and Legal Risks (26) regulatory changes, including limitations on rate increases and requirements to underwrite business and participate in loss sharing arrangements; (27) regulatory reforms and restrictive regulations; (28) changes in tax laws; (29) our ability to mitigate the capital impact associated with statutory reserving and capital requirements; (30) changes in accounting standards; (31) losses from legal and regulatory actions; (32) our participation in state industry pools and facilities; (33) impacts from the Covered Agreement, including changes in state insurance laws
Strategic Risks (34) competition in the insurance industry; (35) market convergence and regulatory changes on our risk segmentation and pricing; (36) acquisitions and divestitures of businesses; and (37) reducing our concentration in spread-based business and exiting certain distribution channels
Additional information concerning these and other factors may be found in our filings with the Securities and Exchange Commission, including the “Risk Factors” section in our most recent annual report on Form 10-K. Forward-looking statements are 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, 2018, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
98 www.allstate.com

Other Information Part II.
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” and under the heading “Legal and regulatory proceedings and inquiries” in Note 12 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, 2017.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities

Period |  | Total number of shares (or units) purchased (1) |  | Average price paid per share (or unit) |  | Total number of shares (or units) purchased as part of publicly announced plans or programs (2) |  | Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs (3) (4)
July 1, 2018 - July 31, 2018 |  |  |  |  |  |  |  |
Open Market Purchases |  | 753,257 |  |  | $ | 93.3742 |  |  | 752,191 |  |  |
August 1, 2018 - August 31, 2018 |  |  |  |  |  |  |  |
Open Market Purchases |  | 766,417 |  |  | $ | 99.2493 |  |  | 766,188 |  |  |
September 1, 2018 - September 30, 2018 |  |  |  |  |  |  |  |
Open Market Purchases |  | 785,953 |  |  | $ | 99.8314 |  |  | 785,412 |  |  |
Total |  | 2,305,627 |  |  | $ | 97.5283 |  |  | 2,303,791 |  |  | $151 million

(1) | In accordance with the terms of its equity compensation plans, Allstate acquired the following shares in connection with the vesting of restricted stock units and performance stock awards and the exercise of stock options held by employees and/or directors. The shares were acquired in satisfaction of withholding taxes due upon exercise or vesting and in payment of the exercise price of the options.

July: 1,066
August: 229
September: 541

(2) | From time to time, repurchases under our programs are executed under the terms of a pre-set trading plan meeting the requirements of Rule 10b5-1(c) of the Securities Exchange Act of 1934.

(3) | On August 1, 2017, we announced the approval of a common share repurchase program for $2 billion, which is expected to be completed by November 2018.

(4) | On October 31, 2018, we announced the approval of a common share repurchase program for $3 billion, which is expected to be completed by April 2020.

Third Quarter 2018 Form 10-Q 99

Other Information Part II.
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
4 | The Allstate Corporation hereby agrees to furnish to the Commission, upon request, the instruments defining the rights of holders of each issue of long-term debt of it and its consolidated subsidiaries |  |  |  |  |
10.1 | The Allstate Corporation 2013 Equity Incentive Plan, as amended and restated effective July 24, 2018 |  |  |  |  | X
15 | Acknowledgment of awareness from Deloitte & Touche LLP, dated October 31, 2018, concerning unaudited interim financial information |  |  |  |  | X
31(i) | Rule 13a-14(a) Certification of Principal Executive Officer |  |  |  |  | X
31(i) | Rule 13a-14(a) Certification of Principal Financial Officer |  |  |  |  | X
32 | Section 1350 Certifications |  |  |  |  | X
101.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

100 www.allstate.com

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.

| The Allstate Corporation
| (Registrant)
October 31, 2018 | By | /s/ Eric K. Ferren
|  | Eric K. Ferren
|  | Senior Vice President, Controller, and Chief Accounting Officer
|  | (Authorized Signatory and Principal Accounting Officer)

Third Quarter 2018 Form 10-Q 101