Fair Value Measurements

3 Months Ended

Mar. 31, 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

March 31, 2014
Assets
Investment securities
Debt
U.S. corporate	$	0		$	19,590		$	3,071	$	0		$	22,661
State and municipal		0			4,834			560		0			5,394
Residential mortgage-backed		0			1,793			81		0			1,874
Commercial mortgage-backed		0			3,112			11		0			3,123
Asset-backed(c)		0			430			6,908		0			7,338
Corporate ̶ non-U.S.		51			678			1,060		0			1,789
Government ̶ non-U.S.		1,334			823			1		0			2,158
U.S. government and federal agency		0			505			232		0			737
Retained interests		0			0			75		0			75
Equity
Available-for-sale		208			14			11		0			233
Trading		66			2			0		0			68
Derivatives(d)		0			6,944			157		(6,106)			995
Other(e)		0			0			99		0			99
Total	$	1,659		$	38,725		$	12,266	$	(6,106)		$	46,544

Liabilities
Derivatives	$	0		$	4,156		$	18	$	(3,716)		$	458
Other		0			22			0		0			22
Total	$	0		$	4,178		$	18	$	(3,716)		$	480

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 three months ended March 31, 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 $29 million and $(7) million at March 31, 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)	January 1		in earnings		(a)	in AOCI		Purchases		Sales		Settlements		Level 3(b)		Level 3(b)		March 31		March 31		(c)
2014
Investment securities
Debt
U.S. corporate	$	2,918	$	8		$	63	$	153	$	(2)	$	(112)	$	96	$	(53)	$	3,071	$	-
State and municipal		96		-			27		9		-		(7)		435		-		560		-
RMBS		86		-			(1)		-		-		(4)		-		-		81		-
CMBS		10		-			-		-		-		(1)		2		-		11		-
ABS		6,898		1			(27)		405		-		(369)		-		-		6,908		-
Corporate – non-U.S.		1,052		(21)			46		220		(2)		(235)		-		-		1,060		-
Government – non-U.S.		31		-			-		-		-		-		-		(30)		1		-
U.S. government and
federal agency		225		-			9		-		-		-		-		(2)		232		-
Retained interests		72		2			3		1		-		(3)		-		-		75		-
Equity
Available-for-sale		11		-			-		-		-		-		-		-		11		-
Derivatives(d)(e)		163		(11)			-		(1)		-		(1)		(1)		-		149		(4)
Other		293		2			-		83		-		-		-		(279)		99		-
Total	$	11,855	$	(19)		$	120	$	870	$	(4)	$	(732)	$	532	$	(364)	$	12,258	$	(4)

2013
Investment securities
Debt
U.S. corporate	$	3,552	$	(258)	$	218	$	61	$	(6)	$	(45)	$	93	$	(73)	$	3,542	$	-
State and municipal		77		-		-		4		-		(1)		10		-		90		-
RMBS		100		-		(3)		-		-		(1)		-		-		96		-
CMBS		6		-		-		-		-		-		-		-		6		-
ABS		5,023		1		(2)		144		-		(262)		12		-		4,916		-
Corporate – non-U.S.		1,212		8		13		824		(3)		(733)		15		-		1,336		-
Government – non-U.S.		42		-		(1)		-		-		-		-		-		41		-
U.S. government and
federal agency		277		-		(13)		-		-		-		-		-		264		-
Retained interests		83		3		10		-		-		(5)		-		-		91		-
Equity
Available-for-sale		13		-		-		-		-		-		-		(2)		11		-
Derivatives(d)(e)		262		(38)		-		(1)		-		(53)		-		-		170		(7)
Other		432		(2)		-		33		(54)		-		-		-		409		(1)
Total	$	11,079	$	(286)	$	222	$	1,065	$	(63)	$	(1,100)	$	130	$	(75)	$	10,972	$	(8)

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 $10 million and $4 million not reflected in the fair value hierarchy table for the three months ended March 31, 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 March 31, 2014 and December 31, 2013.

	Remeasured during				Remeasured during
	the three months ended				the year ended
	March 31, 2014				December 31, 2013
(In millions)	Level 2		Level 3		Level 2		Level 3

Financing receivables and loans held for sale	$	87	$	1,596	$	210	$	2,986
Cost and equity method investments		0		349		0		649
Long-lived assets, including real estate		326		192		2,050		1,085
Total	$	413	$	2,137	$	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 March 31, 2014 and 2013.


	Three months ended March 31
(In millions)	2014		2013

Financing receivables and loans held for sale	$	(113)	$	(128)
Cost and equity method investments		(205)		(72)
Long-lived assets, including real estate		(67)		(359)
Total	$	(385)	$	(559)

Level 3 Measurements – Significant Unobservable Inputs

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

March 31, 2014
Recurring fair value measurements

Investment securities - Debt

U.S. corporate	$	947	Income approach	Discount rate(a)	1.5%-8.9% (5.0%)

State and Municipal		469	Income approach	Discount rate(a)	1.8%-6.0% (3.3%)

Asset-backed		6,868	Income approach	Discount rate(a)	1.3%-9.5% (3.8%)

Corporate ̶ non-U.S.		776	Income approach	Discount rate(a)	1.4%-46.0% (15.3%)

Other financial assets		99	Income approach	Discount rate(a)	3.9%-5.6% (4.8%)


Non-recurring fair value measurements

Financing receivables and loans held for sale	$	995	Income approach,	Capitalization rate(b)	2.7%-11.3% (6.5%)

			Business enterprise value	WACC(c)	19.0%-19.0% (19.0%)

				EBITDA multiple	4.3X-6.5X (5.9X)

Cost and equity method investments		134	Income approach,	Discount rate(a)	8.0%-10.0% (8.5%)

			Business enterprise value	EBITDA multiple	6.0X-9.0X (9.0X)

Long-lived assets, including real estate		5	Income approach	Capitalization rate(b)	9.4%-15.3% (12.0%)
				Discount rate(a)	4.0%-19.0% (8.3%)


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 March 31, 2014 and December 31, 2013, other Level 3 recurring fair value measurements of $2,935 million and $2,813 million, respectively, and non-recurring measurements of $730 million and $1,426 million, respectively, are valued using non-binding broker quotes or other third-party sources. At March 31, 2014 and December 31, 2013, other recurring fair value measurements of $154 million and $173 million, respectively, and non-recurring fair value measurements of $273 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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