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This excerpt taken from the ALL 10-Q filed Aug 6, 2008. Municipals:
Certain distressed municipal securities for which valuation is 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 are
included in Level 3. Included in this
category are $1.9 billion of ARS that are backed by student loans. 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.
11
THE ALLSTATE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Other Investments: Certain free–standing 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 non–market 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 a block of contractholder liabilities that contain certain embedded derivatives. 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 non–market observable inputs.
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