Fair Value Measurements

6 Months Ended

Jun. 30, 2015

NOTE 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.

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, 2015
Assets
Investment securities
Debt
U.S. corporate	$	-		$	19,817		$	3,019	$	-		$	22,836
State and municipal		-			4,222			101		-			4,323
Residential mortgage-backed		-			1,156			2		-			1,158
Commercial mortgage-backed		-			2,459			2		-			2,461
Asset-backed		-			22			76		-			98
Corporate ̶ non-U.S.		12			618			283		-			913
Government ̶ non-U.S.		28			1,808			2		-			1,838
U.S. government and federal agency		-			5,291			293		-			5,584
Retained interests
Equity
Available-for-sale		104			15			6		-			125
Trading		19			-			-		-			19
Derivatives(c)		-			6,083			69		(5,514)			638
Total	$	163		$	41,491		$	3,853	$	(5,514)		$	39,993
Liabilities
Derivatives	$	-		$	4,659		$	9	$	(4,587)		$	81
Other		-			19			-		-			19
Total	$	-		$	4,678		$	9	$	(4,587)		$	100

December 31, 2014
Assets
Investment securities
Debt
U.S. corporate	$	-		$	20,659		$	3,044	$	-		$	23,703
State and municipal		-			4,560			115		-			4,675
Residential mortgage-backed		-			1,676			16		-			1,692
Commercial mortgage-backed		-			3,054			9		-			3,063
Asset-backed		-			172			123		-			295
Corporate ̶ non-U.S.		-			680			336		-			1,016
Government ̶ non-U.S.		-			1,708			2		-			1,710
U.S. government and federal agency		-			1,747			266		-			2,013
Equity
Available-for-sale		108			15			9		-			132
Trading		21			-			-		-			21
Derivatives(c)		-			8,981			27		(7,378)			1,630
Total	$	129		$	43,252		$	3,947	$	(7,378)		$	39,950
Liabilities
Derivatives	$	-		$	4,218		$	9	$	(4,171)		$	56
Other		-			20			-		-			20
Total	$	-		$	4,238		$	9	$	(4,171)		$	76

(a) There were no securities transferred between Level 1 and Level 2 in the six months ended June 30, 2015. There were $487 million of Government – non-U.S. and $13 million of Corporate – non-U.S. available-for-sale debt securities transferred from Level 1 to Level 2 in the twelve months ended December 31, 2014 primarily attributable to changes in market observable data.

(b) 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.

(c) The fair value of derivatives includes an adjustment for non-performance risk. The cumulative adjustment was a gain (loss) of $15 million and $15 million at June 30, 2015 and December 31, 2014, respectively. See Note 11 for additional information on the composition of our derivative portfolio.

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)

2015
Investment securities
Debt
U.S. corporate	$	3,150	$	4	$	(145)	$	81	$	(38)	$	(20)	$	-	$	(13)	$	3,019	$	-
State and municipal		114		-		(5)		-		-		(8)		-		-		101		-
RMBS		2		-		-		-		-		-		-		-		2		-
CMBS		2		-		-		-		-		-		-		-		2		-
ABS		111		(14)		(8)		-		-		-		-		(13)		76		-
Corporate – non-U.S.		290		-		(7)		-		-		-		-		-		283		-
Government – non-U.S.		2		-		-		-		-		-		-		-		2		-
U.S. government and
federal agency		291		-		2		-		-		-		-		-		293		-
Equity
Available-for-sale		5		-		-		6		(5)		-		-		-		6		-
Derivatives(d)(e)		30		(1)		1		(1)		-		-		42		-		71		-
Total	$	3,997	$	(11)	$	(162)	$	86	$	(43)	$	(28)	$	42	$	(26)	$	3,855	$	-

2014
Investment securities
Debt
U.S. corporate	$	2,976	$	13	$	60	$	187	$	(156)	$	(27)	$	42	$	(63)	$	3,032	$	-
State and municipal		105		-		4		1		-		-		-		-		110		-
RMBS		81		1		1		-		(16)		(1)		-		-		66		-
CMBS		11		-		-		-		-		-		-		-		11		-
ABS		142		1		2		-		-		(5)		-		(10)		130		-
Corporate – non-U.S.		510		12		36		-		(54)		-		1		(6)		499		-
Government – non-U.S.		1		-		-		-		-		-		-		-		1		-
U.S. government and
federal agency		232		-		17		-		-		-		-		-		249		-
Retained interests		1		-		-		-		-		-		-		-		1		-
Equity
Available-for-sale		11		-		-		2		(2)		(2)		-		-		9		-
Derivatives(d)(e)		18		4		-		-		-		-		-		-		22		4
Total	$	4,088	$	31	$	120	$	190	$	(228)	$	(35)	$	43	$	(79)	$	4,130	$	4

(a) Earnings effects are primarily included in the “Revenues from services” and “Interest” captions in the Statement of Earnings (Loss).

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.

(d) Represents derivative assets net of derivative liabilities and included cash accruals of $11 million and $8 million not reflected in the fair value hierarchy table for the three months ended June 30, 2015 and 2014, respectively.

(e) 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)

2015
Investment securities
Debt
U.S. corporate	$	3,044	$	11	$	(86)	$	174	$	(55)	$	(56)	$	-	$	(13)	$	3,019	$	-
State and municipal		115		-		(4)		-		-		(10)		-		-		101		-
RMBS		16		5		(4)		-		(15)		-		-		-		2		-
CMBS		9		-		-		-		(7)		-		-		-		2		-
ABS		123		(14)		(5)		-		(12)		(3)		-		(13)		76		-
Corporate – non-U.S.		336		-		(4)		-		(49)		-		-		-		283		-
Government – non-U.S.		2		-		-		-		-		-		-		-		2		-
U.S. government and
federal agency		266		-		28		-		-		(1)		-		-		293		-
Equity
Available-for-sale		9		2		(2)		6		(5)		(4)		-		-		6		-
Derivatives(d)(e)		28		(1)		3		(1)		-		-		42		-		71		-
Total	$	3,948	$	3	$	(74)	$	179	$	(143)	$	(74)	$	42	$	(26)	$	3,855	$	-

2014
Investment securities
Debt
U.S. corporate	$	2,751	$	18	$	127	$	338	$	(156)	$	(68)	$	138	$	(116)	$	3,032	$	-
State and municipal		96		-		7		10		-		(3)		-		-		110		-
RMBS		86		1		-		-		(16)		(5)		-		-		66		-
CMBS		10		-		-		-		-		(1)		2		-		11		-
ABS		145		2		4		-		-		(11)		-		(10)		130		-
Corporate – non-U.S.		503		13		43		-		(54)		(1)		1		(6)		499		-
Government – non-U.S.		31		-		-		-		-		-		-		(30)		1		-
U.S. government and
federal agency		225		-		26		-		-		-		-		(2)		249		-
Retained interests		1		-		-		-		-		-		-		-		1		-
Equity
Available-for-sale		11		-		-		2		(2)		(2)		-		-		9		-
Derivatives(d)(e)		19		4		-		-		-		-		(1)		-		22		10
Total	$	3,878	$	38	$	207	$	350	$	(228)	$	(91)	$	140	$	(164)	$	4,130	$	10

	Remeasured during				Remeasured during
	the six months ended June 30, 2015				the year ended December 31, 2014
(In millions)	Level 2		Level 3		Level 2		Level 3

Financing receivables and financing receivables held for sale	$	-	$	22,532	$	1	$	584
Cost and equity method investments		-		2,105		-		334
Long-lived assets, including real estate		-		154		102		718
Total	$	-	$	24,791	$	103	$	1,636

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, 2015 and 2014.

	Three months ended June 30				Six months ended June 30
(In millions)		2015	2014		2015		2014

Financing receivables and financing receivables held for sale	$	(27)	$	(89)	$	(2,447)	$	(117)
Cost and equity method investments		(14)		(44)		(1,462)		(204)
Long-lived assets, including real estate		(24)		(56)		(46)		(73)
Total	$	(65)	$	(189)	$	(3,955)	$	(394)

LEVEL 3 MEASUREMENTS - SIGNIFICANT UNOBSERVABLE INPUTS
					Range
(Dollars in millions)	Fair value		Valuation technique	Unobservable inputs	(weighted average)

June 30, 2015
Recurring fair value measurements
Investment securities - Debt
U.S. corporate	$	855	Income approach	Discount rate(a)	1.8%-11.0% (7.0%)
State and municipal		17	Income approach	Discount rate(a)	5.2%-5.2% (5.2%)
Asset-backed		76	Income approach	Discount rate(a)	5.0%-5.5% (5.4%)
Corporate ̶ non-U.S.		227	Income approach	Discount rate(a)	6.0%-14.0% (7.4%)


Non-recurring fair value measurements
Financing receivables and financing receivables held for sale	$	22,483	Income approach	Discount rate(a)	0.1%-8.0% (6.7%)

Cost and equity method investments		1,867	Market comparables	Price to book multiple	0.4X-0.7X (0.6X)

Long-lived assets, including real estate		17	Income approach	Discount rate(a)	2.0%-10.8% (6.8%)



December 31, 2014
Recurring fair value measurements
Investment securities - Debt
U.S. corporate	$	917	Income approach	Discount rate(a)	1.5%-14.8% (6.6%)
State and municipal		17	Income approach	Discount rate(a)	4.9%-4.9% (4.9%)
Asset-backed		102	Income approach	Discount rate(a)	4.3%-9.0% (5.6%)
Corporate ̶ non-U.S.		278	Income approach	Discount rate(a)	3.3%-14.0% (6.5%)




Non-recurring fair value measurements



Cost and equity method investments		309	Income approach	Discount rate(a)	8.0%-10.0% (9.4%)
			Market comparables	EBITDA multiple	1.8X-5.2X (4.8X)


Long-lived assets, including real estate		664	Income approach	Discount rate(a)	2.0%-10.8% (6.7%)

(a) 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.

At June 30, 2015 and December 31, 2014, other Level 3 recurring fair value measurements of $2,664 million and $2,594 million, respectively, and non-recurring measurements of $297 million and $657 million, respectively, are valued using non-binding broker quotes or other third-party sources. At June 30, 2015 and December 31, 2014, other recurring fair value measurements of $5 million and $30 million, respectively, and non-recurring fair value measurements of $127 million and $6 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.

+ References + Details