Allstate 2008 Annual Report Download - page 242

Municipal: Externally rated municipals are valued based on inputs including quoted prices for identical or
similar assets in markets that are not active. Included in municipals are auction rate securities (‘‘ARS’’)
other than those backed by student loans. ARS backed by student loans are included in Level 3.
U.S. government and agencies: Valued based on inputs including quoted prices for identical or similar
assets in markets that are not active.
Commercial mortgage-backed securities (‘‘CMBS’’): Valuation is principally based on inputs including
quoted prices for identical or similar assets in markets that are not active.
Preferred stock; Mortgage-backed securities (‘‘MBS’’); Foreign government; Asset-backed securities (‘‘ABS’’)—
credit card: Valued based on inputs including quoted prices for identical or similar assets in markets that
are not active.
•Equity securities: Valued based on inputs including quoted prices for identical or similar assets in markets
that are not active.
•Short-term: Commercial paper and other short-term investments are valued based on quoted prices for
identical or similar assets in markets that are not active or amortized cost.
•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, foreign
exchange forward contracts, certain credit default swaps, and commodity swaps, are valued using models
that rely on inputs such as interest rate yield curves, currency rates, adjustment for counterparty credit
risks, and commodity prices 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.
•Contractholder funds: Derivatives embedded in certain annuity contracts are valued based on internal
models that rely on inputs such as interest rate yield curves and equity index volatility assumptions that are
market observable for substantially the full term of the contract. The valuation techniques are widely
accepted in the financial services industry and do not include significant judgment.
Level 3 measurements
•Fixed income securities:
Corporate: Valued based on non-binding broker quotes and are categorized as Level 3.
Corporate privately placed: Valued based on non-binding broker quotes and models that are widely
accepted in the financial services industry and use internally assigned credit ratings as inputs and
instrument specific inputs. Instrument specific inputs used in internal fair value determinations include
coupon rate, coupon type, weighted average life, sector of the issuer and call provisions. Privately placed
securities are categorized as Level 3 as a result of the significance of non-market observable inputs. The
internally modeled securities are valued based on internal ratings, which are not observable in the market.
Multiple internal ratings comprise a National Association of Insurance Commissioners (‘‘NAIC’’) rating
category and when used in the internal model provide a more refined determination of fair value. The
Company’s internal ratings are primarily consistent with the NAIC ratings which are generally updated
annually.
Municipal: ARS primarily backed by student loans that have become illiquid due to failures in the auction
market and municipal bonds that are not rated by third party credit rating agencies but are generally rated
by the NAIC are included in Level 3. ARS backed by student loans are valued based on a discounted cash
flow model with certain inputs to the valuation model that are significant to the valuation, but are not
market observable, including estimates of future coupon rates if auction failures continue, maturity
assumptions, and illiquidity premium. Non-rated municipal bonds are valued based on valuation models
that are widely accepted in the financial services industry and require projections of future cash flows that
are not market-observable, and are categorized as Level 3 as a result of the significance of non-market
observable inputs.
ABS residential mortgage-backed securities (‘‘ABS RMBS’’); Alt-A residential mortgage-backed securities
(‘‘Alt-A’’): ABS RMBS and Alt-A are principally valued based on inputs including quoted prices for
identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2
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Notes