Fair Value Measurements

12 Months Ended

Dec. 31, 2014

NOTE 14. 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
December 31, 2014
Assets
Investment securities
Debt
U.S. corporate	$	-		$	20,659		$	3,128	$	-		$	23,787
State and municipal		-			5,171			578		-			5,749
Residential mortgage-backed		-			1,709			16		-			1,725
Commercial mortgage-backed		-			3,054			9		-			3,063
Asset-backed(c)		-			343			7,575		-			7,918
Corporate ̶ non-U.S.		-			681			795		-			1,476
Government ̶ non-U.S.		56			1,738			2		-			1,796
U.S. government and federal agency		-			1,747			266		-			2,013
Retained interests		-			-			24		-			24
Equity
Available-for-sale		231			14			9		-			254
Trading		20			2			-		-			22
Derivatives(d)		-			9,061			133		(7,400)			1,794
Other(e)		-			-			48		-			48
Total	$	307		$	44,179		$	12,583	$	(7,400)		$	49,669
Liabilities
Derivatives	$	-		$	4,298		$	15	$	(4,215)		$	98
Other		-			22			-		-			22
Total	$	-		$	4,320		$	15	$	(4,215)		$	120

December 31, 2013
Assets
Investment securities
Debt
U.S. corporate	$	-		$	18,788		$	2,918	$	-		$	21,706
State and municipal		-			4,193			96		-			4,289
Residential mortgage-backed		-			1,824			86		-			1,910
Commercial mortgage-backed		-			3,025			10		-			3,035
Asset-backed(c)		-			489			6,898		-			7,387
Corporate ̶ non-U.S.		61			645			1,052		-			1,758
Government ̶ non-U.S.		1,590			789			31		-			2,410
U.S. government and federal agency		-			545			225		-			770
Retained interests		-			-			72		-			72
Equity
Available-for-sale		225			15			11		-			251
Trading		72			2			-		-			74
Derivatives(d)		-			7,493			170		(6,546)			1,117
Other(e)		-			-			293		-			293
Total	$	1,948		$	37,808		$	11,862	$	(6,546)		$	45,072
Liabilities
Derivatives	$	-		$	4,893		$	16	$	(4,162)		$	747
Other		-			24			-		-			24
Total	$	-		$	4,917		$	16	$	(4,162)		$	771

Included $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 primarily attributable to changes in market observable data during 2014. The fair value of securities transferred between Level 1 and Level 2 was $2 million during 2013.
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 $8 million and $(7) million at December 31, 2014 and 2013, respectively. See Note 15 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 YEARS ENDED DECEMBER 31, 2014 AND 2013

																			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)		December 31		December 31(c)

2014
Investment securities
Debt
U.S. corporate	$	2,918	$	23	$	136	$	536	$	(234)	$	(284)	$	174	$	(141)	$	3,128	$	-
State and municipal		96		-		38		18		(36)		(10)		472		-		578		-
RMBS		86		-		2		-		(16)		(9)		-		(47)		16		-
CMBS		10		-		-		-		-		(3)		2		-		9		-
ABS		6,898		3		(206)		2,249		-		(1,359)		-		(10)		7,575		-
Corporate – non-U.S.		1,052		30		3		1,018		(269)		(1,034)		1		(6)		795		-
Government – non-U.S.		31		-		-		-		-		-		2		(31)		2		-
U.S. government and
federal agency		225		-		34		-		-		-		9		(2)		266		-
Retained interests		72		29		(4)		3		(66)		(10)		-		-		24		-
Equity
Available-for-sale		11		-		-		2		(2)		-		-		(2)		9		-
Derivatives(d)(e)		163		59		1		5		-		(97)		(1)		-		130		(29)
Other		293		1		-		614		(575)		(6)		-		(279)		48		-
Total	$	11,855	$	145	$	4	$	4,445	$	(1,198)	$	(2,812)	$	659	$	(518)	$	12,580	$	(29)

2013
Investment securities
Debt
U.S. corporate	$	3,552	$	(477)	$	122	$	376	$	(423)	$	(231)	$	108	$	(109)	$	2,918	$	-
State and municipal		77		-		(7)		21		-		(5)		10		-		96		-
RMBS		100		-		(5)		-		(2)		(7)		-		-		86		-
CMBS		6		-		-		-		-		(6)		10		-		10		-
ABS		5,023		5		32		2,632		(4)		(795)		12		(7)		6,898		-
Corporate – non-U.S.		1,212		(103)		49		5,814		(3)		(5,874)		15		(58)		1,052		-
Government – non-U.S.		42		1		(12)		-		-		-		-		-		31		-
U.S. government and
federal agency		277		-		(52)		-		-		-		-		-		225		-
Retained interests		83		3		1		6		-		(21)		-		-		72		-
Equity
Available-for-sale		13		-		-		-		-		-		-		(2)		11		-
Derivatives(d)(e)		262		31		2		(1)		-		(162)		33		(2)		163		(31)
Other		432		(94)		12		493		(542)		-		4		(12)		293		(90)
Total	$	11,079	$	(634)	$	142	$	9,341	$	(974)	$	(7,101)	$	192	$	(190)	$	11,855	$	(121)

Earnings effects are primarily included in the “Revenues from services” and “Interest” captions in the 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 $12 million and $9 million not reflected in the fair value hierarchy table during 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 15.

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 December 31, 2014 and 2013.

	Remeasured during the years ended December 31
	2014				2013
(In millions)	Level 2		Level 3		Level 2		Level 3

Financing receivables and loans held for sale	$	49	$	1,430	$	210	$	2,986
Cost and equity method investments(a)		11		392		-		649
Long-lived assets, including real estate		364		1,253		2,050		1,085
Total	$	424	$	3,075	$	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 December 31, 2014 and 2013.

	Years ended December 31
(In millions)	2014		2013

Financing receivables and loans held for sale	$	(317)	$	(361)
Cost and equity method investments		(372)		(466)
Long-lived assets, including real estate		(760)		(1,126)
Total	$	(1,449)	$	(1,953)

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

December 31, 2014
Recurring fair value measurements
Investment securities - Debt
U.S. corporate	$	980	Income approach	Discount rate(a)	1.5%-14.8% (6.6%)
State and municipal		481	Income approach	Discount rate(a)	1.9%-5.9% (2.8%)
Asset-backed		7,554	Income approach	Discount rate(a)	2.2%-12.4% (5.0%)
Corporate ̶ non-U.S.		724	Income approach	Discount rate(a)	0.4%-14.7% (7.6%)
Other financial assets		48	Income approach	Discount rate(a)	4.2%-4.7% (4.3%)

Non-recurring fair value measurements
Financing receivables and loans held for sale	$	666	Income approach,	Capitalization rate(b)	6.9%-11.0% (7.8%)
			Business enterprise	EBITDA multiple	4.3X-6.5X (6.2X)
			value
Cost and equity method investments		346	Income approach,	Discount rate(a)	8.0%-10.0% (9.4%)
			Business enterprise, Market comparables value	EBITDA multiple	1.8X-10.5X (7.0X)
				Capitalization rate(b)	6.4%-6.4% (6.4%)
Long-lived assets, including real estate		932	Income approach	Capitalization rate(b)	6.3%-15.3% (6.8%)
				Discount rate(a)	2.0%-19.0% (6.8%)


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,	WACC(c)	9.3%-9.3% (9.3%)
			Market comparables	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	EBITDA multiple	4.3X-5.5X (4.8X)
			value	Discount rate(a)	6.6%-6.6% (6.6%)
Cost and equity method investments		100	Income approach,	Discount rate(a)	5.7%-5.9% (5.8%)
			Market comparables	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 December 31, 2014 and 2013, other Level 3 recurring fair value measurements of $2,692 million and $2,813 million, respectively, and non-recurring measurements of $1,035 million and $1,426 million, respectively, are valued using non-binding broker quotes or other third-party sources. At December 31, 2014 and 2013, other recurring fair value measurements of $89 million and $173 million, respectively, and non-recurring fair value measurements of $96 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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