This excerpt taken from the ALL 10-Q filed Nov 6, 2008.
Municipal: ARS primarily backed by student loans totaling $1.8 billion that have become illiquid due to failures in the auction market and municipal bonds totaling $916 million 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. Nonrated 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 marketobservable, and are categorized as Level 3 as a result of the significance of nonmarket observable inputs.
Other investments: Certain freestanding OTC derivatives, such as caps, floors, certain credit default swaps and OTC options (including swaptions), are valued using valuation models that are widely accepted in the financial services industry. Inputs include nonmarket observable inputs such as volatility assumptions that are significant to the valuation of the instruments.
Contractholder funds: Derivatives embedded in 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 use stochastically determined cash flows based on the contractual elements of embedded derivatives and other applicable market data. These are categorized as Level 3 as a result of the significance of nonmarket observable inputs.
This excerpt taken from the ALL 10-Q filed Aug 6, 2008.
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 $89 million of auction rate securities (ARS) other than those backed by student loans. ARS backed by student loans are included in Level 3.