Fair Value Measurements

6 Months Ended

Jun. 30, 2014

10. FAIR VALUE MEASUREMENTS

Recurring Fair Value Measurements

Our assets and liabilities measured at fair value on a recurring basis include investment securities primarily supporting obligations to annuitants and policyholders in our run-off insurance operations and supporting obligations to holders of GICs in Trinity and investment securities held in our CLL business collateralized by senior secured loans of high-quality, middle-market companies in a variety of industries.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

									Netting
(In millions)	Level 1		(a)	Level 2		(a)	Level 3		adjustment		(b)	Net balance

June 30, 2014
Assets
Investment securities
Debt
U.S. corporate	$	0		$	20,093		$	3,126	$	0		$	23,219
State and municipal		0			4,985			560		0			5,545
Residential mortgage-backed		0			1,812			66		0			1,878
Commercial mortgage-backed		0			3,086			12		0			3,098
Asset-backed(c)		0			405			7,277		0			7,682
Corporate ̶ non-U.S.		51			702			1,042		0			1,795
Government ̶ non-U.S.		1,323			802			1		0			2,126
U.S. government and federal agency		0			498			249		0			747
Retained interests		0			0			73		0			73
Equity
Available-for-sale		260			15			9		0			284
Trading		51			2			0		0			53
Derivatives(d)		0			6,909			151		(5,938)			1,122
Other(e)		0			0			140		0			140
Total	$	1,685		$	39,309		$	12,706	$	(5,938)		$	47,762

Liabilities
Derivatives	$	0		$	3,352		$	18	$	(3,108)		$	262
Other		0			22			0		0			22
Total	$	0		$	3,374		$	18	$	(3,108)		$	284

December 31, 2013
Assets
Investment securities
Debt
U.S. corporate	$	0		$	18,788		$	2,918	$	0		$	21,706
State and municipal		0			4,193			96		0			4,289
Residential mortgage-backed		0			1,824			86		0			1,910
Commercial mortgage-backed		0			3,025			10		0			3,035
Asset-backed(c)		0			489			6,898		0			7,387
Corporate ̶ non-U.S.		61			645			1,052		0			1,758
Government ̶ non-U.S.		1,590			789			31		0			2,410
U.S. government and federal agency		0			545			225		0			770
Retained interests		0			0			72		0			72
Equity
Available-for-sale		225			15			11		0			251
Trading		72			2			0		0			74
Derivatives(d)		0			7,493			170		(6,546)			1,117
Other(e)		0			0			293		0			293
Total	$	1,948		$	37,808		$	11,862	$	(6,546)		$	45,072

Liabilities
Derivatives	$	0		$	4,893		$	16	$	(4,162)		$	747
Other		0			24			0		0			24
Total	$	0		$	4,917		$	16	$	(4,162)		$	771

There were no securities transferred between Level 1 and Level 2 in the six months ended June 30, 2014.
The netting of derivative receivables and payables (including the effects of any collateral posted or received) is permitted when a legally enforceable master netting agreement exists.
Includes investments in our CLL business in asset-backed securities collateralized by senior secured loans of high-quality, middle-market companies in a variety of industries.
The fair value of derivatives includes an adjustment for non-performance risk. The cumulative adjustment was a gain (loss) of $18 million and $(7) million at June 30, 2014 and December 31, 2013, respectively. See Note 11 for additional information on the composition of our derivative portfolio.
Includes private equity investments and loans designated under the fair value option.

Level 3 Instruments

The majority of our Level 3 balances consist of investment securities classified as available-for-sale with changes in fair value recorded in shareowners' equity.

Changes in Level 3 Instruments for the Three Months Ended

																					Net
																					change in
				Net			Net														unrealized
				realized/			realized/														gains
			unrealized			unrealized															(losses)
				gains			gains														relating to
				(losses)		(losses)									Transfers		Transfers				instruments
		Balance at		included		included									into		out of		Balance at		still held at
(In millions)		April 1	in earnings		(a)	in AOCI		Purchases			Sales		Settlements		Level 3(b)		Level 3(b)		June 30		June 30		(c)
2014
Investment securities
Debt
U.S. corporate	$	3,071	$	13		$	57		$	190	$	(157)	$	(27)	$	42	$	(63)	$	3,126	$	0
State and municipal		560		0			4			4		(7)		(1)		0		0		560		0
RMBS		81		1			1			0		(16)		(1)		0		0		66		0
CMBS		11		0			0			0		0		1		0		0		12		0
ABS		6,908		1			1			591		0		(214)		0		(10)		7,277		0
Corporate – non-U.S.		1,060		24			33			216		(64)		(222)		1		(6)		1,042		0
Government – non-U.S.		1		0			0			0		0		0		0		0		1		0
U.S. government and
federal agency		232		0			17			0		0		0		0		0		249		0
Retained interests		75		1			2			0		0		(5)		0		0		73		0
Equity
Available-for-sale		11		0			0			2		(2)		(2)		0		0		9		0
Derivatives(d)(e)		149		(4)			0			(1)		0		0		0		0		144		(4)
Other		99		1			0			154		0		(112)		0		(2)		140		0
Total	$	12,258	$	37		$	115		$	1,156	$	(246)	$	(583)	$	43	$	(81)	$	12,699	$	(4)

2013
Investment securities
Debt
U.S. corporate	$	3,542	$	7	$	(4)	$	33	$	(341)	$	(45)	$	15	$	-	$	3,207	$	-
State and municipal		90		-		(4)		12		-		-		-		-		98		-
RMBS		96		-		1		-		(2)		(4)		-		-		91		-
CMBS		6		-		-		-		-		(1)		-		-		5		-
ABS		4,916		1		(66)		766		(1)		(263)		-		(7)		5,346		-
Corporate – non-U.S.		1,336		(91)		7		1,985		-		(2,009)		-		(44)		1,184		-
Government – non-U.S.		41		-		(3)		-		-		-		-		-		38		-
U.S. government and
federal agency		264		-		-		-		-		-		-		-		264		-
Retained interests		91		2		6		2		-		(8)		-		-		93		-
Equity
Available-for-sale		11		-		-		-		-		-		-		-		11		-
Derivatives(d)(e)		170		(25)		1		(1)		-		(1)		26		-		170		(27)
Other		409		(100)		4		126		(1)		-		-		-		438		(92)
Total	$	10,972	$	(206)	$	(58)	$	2,923	$	(345)	$	(2,331)	$	41	$	(51)	$	10,945	$	(119)

Earnings effects are primarily included in the Revenues from services and Interest captions in the Condensed Statement of Earnings.
Transfers in and out of Level 3 are considered to occur at the beginning of the period. Transfers out of Level 3 were primarily a result of increased use of quotes from independent pricing vendors based on recent trading activity.
Represented the amount of unrealized gains or losses for the period included in earnings.
Represented derivative assets net of derivative liabilities and included cash accruals of $11 million and $6 million not reflected in the fair value hierarchy table in the three months ended June 30, 2014 and 2013, respectively.
Gains (losses) included in net realized/unrealized gains (losses) included in earnings were offset by the earnings effects from the underlying items that were economically hedged. See Note 11.

Changes in Level 3 Instruments for the Six Months Ended

																				Net
																				change in
			Net				Net													unrealized
			realized/				realized/													gains
			unrealized			unrealized														(losses)
			gains				gains													relating to
			(losses)			(losses)								Transfers		Transfers				instruments
	Balance at		included			included								into		out of		Balance at		still held at
(In millions)	January 1		in earnings		(a)	in AOCI		Purchases		Sales		Settlements		Level 3(b)		Level 3(b)		June 30		June 30		(c)
2014
Investment securities
Debt
U.S. corporate	$	2,918	$	21		$	120	$	343	$	(159)	$	(139)	$	138	$	(116)	$	3,126	$	-
State and municipal		96		-			31		13		(7)		(8)		435		-		560		-
RMBS		86		1			-		-		(16)		(5)		-		-		66		-
CMBS		10		-			-		-		-		-		2		-		12		-
ABS		6,898		2			(26)		996		-		(583)		-		(10)		7,277		-
Corporate – non-U.S.		1,052		3			79		436		(66)		(457)		1		(6)		1,042		-
Government – non-U.S.		31		-			-		-		-		-		-		(30)		1		-
U.S. government and
federal agency		225		-			26		-		-		-		-		(2)		249		-
Retained interests		72		3			5		1		-		(8)		-		-		73		-
Equity
Available-for-sale		11		-			-		2		(2)		(2)		-		-		9		-
Derivatives(d)(e)		163		(15)			-		(2)		-		(1)		(1)		-		144		(8)
Other		293		3			-		237		-		(112)		-		(281)		140		-
Total	$	11,855	$	18		$	235	$	2,026	$	(250)	$	(1,315)	$	575	$	(445)	$	12,699	$	(8)

2013
Investment securities
Debt
U.S. corporate	$	3,552	$	(251)	$	214	$	94	$	(347)	$	(90)	$	108	$	(73)	$	3,207	$	-
State and municipal		77		-		(4)		16		-		(1)		10		-		98		-
RMBS		100		-		(2)		-		(2)		(5)		-		-		91		-
CMBS		6		-		-		-		-		(1)		-		-		5		-
ABS		5,023		2		(68)		910		(1)		(525)		12		(7)		5,346		-
Corporate – non-U.S.		1,212		(83)		20		2,809		(3)		(2,742)		15		(44)		1,184		-
Government – non-U.S.		42		-		(4)		-		-		-		-		-		38		-
U.S. government and
federal agency		277		-		(13)		-		-		-		-		-		264		-
Retained interests		83		5		16		2		-		(13)		-		-		93		-
Equity
Available-for-sale		13		-		-		-		-		-		-		(2)		11		-
Derivatives(d)(e)		262		(63)		1		(2)		-		(54)		26		-		170		(34)
Other		432		(102)		4		159		(55)		-		-		-		438		(93)
Total	$	11,079	$	(492)	$	164	$	3,988	$	(408)	$	(3,431)	$	171	$	(126)	$	10,945	$	(127)

Earnings effects are primarily included in the Revenues from services and Interest captions in the Condensed Statement of Earnings.
Transfers in and out of Level 3 are considered to occur at the beginning of the period. Transfers out of Level 3 were primarily a result of increased use of quotes from independent pricing vendors based on recent trading activity.
Represents the amount of unrealized gains or losses for the period included in earnings.
Represents derivative assets net of derivative liabilities and included cash accruals of $11 million and $6 million not reflected in the fair value hierarchy table for the six months ended June 30, 2014 and 2013, respectively.
Gains (losses) included in “net realized/unrealized gains (losses) included in earnings” were offset by the earnings effects from the underlying items that were economically hedged. See Note 11.

Non-Recurring Fair Value Measurements

The following table represents non-recurring fair value amounts (as measured at the time of the adjustment) for those assets remeasured to fair value on a non-recurring basis during the fiscal year and still held at June 30, 2014 and December 31, 2013.

	Remeasured during				Remeasured during
	the six months ended				the year ended
	June 30, 2014				December 31, 2013
(In millions)	Level 2		Level 3		Level 2		Level 3

Financing receivables and loans held for sale	$	89	$	2,007	$	210	$	2,986
Cost and equity method investments		296		428		0		649
Long-lived assets, including real estate		361		225		2,050		1,085
Total	$	746	$	2,660	$	2,260	$	4,720

The following table represents the fair value adjustments to assets measured at fair value on a non-recurring basis and still held at June 30, 2014 and 2013.


	Three months ended June 30				Six months ended June 30
(In millions)	2014		2013		2014		2013

Financing receivables and loans held for sale	$	(119)	$	(102)	$	(196)	$	(212)
Cost and equity method investments		(59)		(157)		(247)		(220)
Long-lived assets, including real estate		(134)		(253)		(178)		(593)
Total	$	(312)	$	(512)	$	(621)	$	(1,025)

Level 3 Measurements – Significant Unobservable Inputs

							Range
(Dollars in millions)	Fair value		Valuation technique		Unobservable inputs		(weighted average)

June 30, 2014
Recurring fair value measurements

Investment securities - Debt

U.S. corporate	$	968	Income approach		Discount rate(a)		1.4%-10.0% (6.4%)

State and municipal		466	Income approach		Discount rate(a)		1.8%-5.4% (3.3%)

Asset-backed		7,250	Income approach		Discount rate(a)		1.3%-9.5% (4.0%)

Corporate ̶ non-U.S.		605	Income approach		Discount rate(a)		0.8%-15.7% (8.5%)

Other financial assets		140	Income approach		Discount rate(a)		4.3%-4.8% (4.5%)


Non-recurring fair value measurements

Financing receivables and loans held for sale	$	909	Income approach, Business enterprise value		Capitalization rate(b)		2.7%-11.3% (7.0%)

					EBITDA multiple		4.3X-6.5X (6.0X)

Cost and equity method investments		154		Income approach,		Discount rate(a)		8.0%-10.0% (8.5%)

			Business enterprise value, Market comparables		EBITDA multiple		1.8X-9.4X (7.6X)

Long-lived assets, including real estate		69	Income approach		Capitalization rate(b)		5.0%-15.3% (7.3%)
					Discount rate(a)		4.0%-19.0% (8.9%)


December 31, 2013
Recurring fair value measurements

Investment securities - Debt

U.S. corporate	$	898	Income approach		Discount rate(a)		1.5%-13.3% (6.5%)

Asset-backed		6,854	Income approach		Discount rate(a)		1.2%-10.5% (3.7%)

Corporate ̶ non-U.S.		819	Income approach		Discount rate(a)		1.4%-46.0% (15.1%)

Other financial assets		288	Income approach, Market comparables		WACC(c)		9.3%-9.3% (9.3%)
					Discount rate(a)		5.2%-5.3% (5.3%)

					EBITDA multiple		8.3X-12.5X (10.6X)

Non-recurring fair value measurements

Financing receivables and loans held for sale	$	1,937	Income approach,		Capitalization rate(b)		5.5%-16.7% (8.0%)

			Business enterprise value		EBITDA multiple		4.3X-5.5X (4.8X)
					Discount rate(a)		6.6%-6.6% (6.6%)

Cost and equity method investments		100	Income approach, Market comparables		Discount rate(a)		5.7%-5.9% (5.8%)

					Capitalization rate(b)		8.5%-10.6% (10.0%)

					WACC(c)		9.3%-9.6% (9.4%)

					EBITDA multiple		7.1X-14.5X (11.3X)

					Revenue multiple		9.3X-12.6X (10.9X)

Long-lived assets, including real estate		691	Income approach		Capitalization rate(b)		5.4%-14.5% (7.8%)

					Discount rate(a)		4.0%-23.0% (8.8%)

Discount rates are determined based on inputs that market participants would use when pricing investments, including credit and liquidity risk. An increase in the discount rate would result in a decrease in the fair value.
Represents the rate of return on net operating income that is considered acceptable for an investor and is used to determine a property's capitalized value. An increase in the capitalization rate would result in a decrease in the fair value.
Weighted average cost of capital (WACC).

At June 30, 2014 and December 31, 2013, other Level 3 recurring fair value measurements of $3,110 million and $2,813 million, respectively, and non-recurring measurements of $1,239 million and $1,426 million, respectively, are valued using non-binding broker quotes or other third-party sources. At June 30, 2014 and December 31, 2013, other recurring fair value measurements of $149 million and $173 million, respectively, and non-recurring fair value measurements of $289 million and $566 million, respectively, were individually insignificant and utilize a number of different unobservable inputs not subject to meaningful aggregation.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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