Allstate 2008 Annual Report Download - page 241

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
unobservable inputs reflect the Company’s estimates of the assumptions market participants would use in valuing
financial assets and financial liabilities and are developed based on the best information available in the
circumstances. 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. This condition could cause an instrument to be reclassified from Level 1 to
Level 2, or from Level 2 to Level 3.
Financial assets and financial liabilities recorded on the Consolidated Statements of Financial Position at fair
value as of December 31, 2008 are categorized in the fair value hierarchy based on the observability of inputs to
the valuation techniques as follows:
Level 1: Financial assets and financial 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: Financial assets and financial 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 non-active markets; or
c) Valuation models whose inputs are observable, directly or indirectly, for substantially the full term
of the asset or liability.
Level 3: Financial assets and financial 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. These
inputs reflect the Company’s estimates of the assumptions that market participants would use in
valuing the financial assets and financial 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.
Certain financial assets are not carried at fair value on a recurring basis, including investments such as
mortgage loans, limited partnership interests, bank loans and policy loans. Accordingly, such investments are only
included in the fair value hierarchy disclosure when the investment is subject to remeasurement at fair value after
initial recognition and the resulting remeasurement is reflected in the consolidated financial statements. In
addition, equity options embedded in fixed income securities are not disclosed in the hierarchy with free-standing
derivatives as the embedded derivatives are presented with the host contract in fixed income securities.
Summary of significant valuation techniques for financial assets and financial liabilities on a recurring basis
Level 1 measurements
•Fixed income securities: U.S. treasuries are in Level 1 and 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 U.S. and international equity securities.
Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company
can access.
•Short-term: Comprise actively traded money market funds that have daily quoted net asset values for
identical assets that the Company can access.
•Separate account assets: Comprise actively traded mutual funds that have daily quoted net asset values for
identical assets that the Company can access. Net asset values for the actively traded mutual funds in
which the separate account assets are invested are obtained daily from the fund managers.
Level 2 measurements
•Fixed income securities:
Corporate, including privately placed: Valued based on inputs including quoted prices for identical or
similar assets in markets that are not active. Also includes privately placed securities which have market-
observable external ratings from independent third party rating agencies.
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Notes