NOTE 21. FAIR VALUE MEASUREMENTS
For a description of how we estimate fair value, see Note 1.
The following tables present our assets and liabilities measured at fair value on a recurring basis. Included in the tables are 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.
| Netting | ||||||||||||||
| (In millions) | Level 1 | (a) | Level 2 | (a) | Level 3 | adjustment | (b) | Net balance | ||||||
| December 31, 2013 | ||||||||||||||
| Assets | ||||||||||||||
| Investment securities | ||||||||||||||
| Debt | ||||||||||||||
| U.S. corporate | $ | - | $ | 18,788 | $ | 2,953 | $ | - | $ | 21,741 | ||||
| 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 | 1,064 | - | 1,770 | |||||||||
| 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 | 475 | 31 | 11 | - | 517 | |||||||||
| Trading | 78 | 2 | - | - | 80 | |||||||||
| Derivatives(d) | - | 8,304 | 175 | (6,739) | 1,740 | |||||||||
| Other(e) | - | - | 494 | - | 494 | |||||||||
| Total | $ | 2,204 | $ | 38,635 | $ | 12,115 | $ | (6,739) | $ | 46,215 | ||||
| Liabilities | ||||||||||||||
| Derivatives | $ | - | $ | 5,409 | $ | 20 | $ | (4,355) | $ | 1,074 | ||||
| Other(f) | - | 1,170 | - | - | 1,170 | |||||||||
| Total | $ | - | $ | 6,579 | $ | 20 | $ | (4,355) | $ | 2,244 | ||||
| December 31, 2012 | ||||||||||||||
| Assets | ||||||||||||||
| Investment securities | ||||||||||||||
| Debt | ||||||||||||||
| U.S. corporate | $ | - | $ | 20,580 | $ | 3,591 | $ | - | $ | 24,171 | ||||
| State and municipal | - | 4,469 | 77 | - | 4,546 | |||||||||
| Residential mortgage-backed | - | 2,162 | 100 | - | 2,262 | |||||||||
| Commercial mortgage-backed | - | 3,088 | 6 | - | 3,094 | |||||||||
| Asset-backed(c) | - | 715 | 5,023 | - | 5,738 | |||||||||
| Corporate – non-U.S. | 71 | 1,132 | 1,218 | - | 2,421 | |||||||||
| Government – non-U.S. | 702 | 1,019 | 42 | - | 1,763 | |||||||||
| U.S. government and federal | ||||||||||||||
| agency | - | 3,288 | 277 | - | 3,565 | |||||||||
| Retained interests | - | - | 83 | - | 83 | |||||||||
| Equity | ||||||||||||||
| Available-for-sale | 590 | 16 | 13 | - | 619 | |||||||||
| Trading | 248 | - | - | - | 248 | |||||||||
| Derivatives(d) | - | 11,432 | 434 | (7,926) | 3,940 | |||||||||
| Other(e) | 35 | - | 799 | - | 834 | |||||||||
| Total | $ | 1,646 | $ | 47,901 | $ | 11,663 | $ | (7,926) | $ | 53,284 | ||||
| Liabilities | ||||||||||||||
| Derivatives | $ | - | $ | 3,434 | $ | 20 | $ | (3,177) | $ | 277 | ||||
| Other(f) | - | 908 | - | - | 908 | |||||||||
| Total | $ | - | $ | 4,342 | $ | 20 | $ | (3,177) | $ | 1,185 | ||||
(a) The fair value of securities transferred between Level 1 and Level 2 was $2 million during 2013.
(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) 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.
(d) The fair value of derivatives included an adjustment for non-performance risk. The cumulative adjustment was a gain (loss) of $(7) million and $(15) million at December 31, 2013 and 2012, respectively. See Note 22 for additional information on the composition of our derivative portfolio.
(e) Included private equity investments and loans designated under the fair value option.
(f) Primarily represented the liability associated with certain of our deferred incentive compensation plans.
The following tables present the changes in Level 3 instruments measured on a recurring basis for the years ended December 31, 2013 and 2012, respectively. 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 Year Ended December 31, 2013 | |||||||||||||||||||||||||||||||
| Net | |||||||||||||||||||||||||||||||
| (In millions) | change in | ||||||||||||||||||||||||||||||
| Net realized/ | unrealized | ||||||||||||||||||||||||||||||
| Net | unrealized | gains | |||||||||||||||||||||||||||||
| realized/ | gains (losses) | (losses) | |||||||||||||||||||||||||||||
| unrealized | included in | relating to | |||||||||||||||||||||||||||||
| Balance | gains | accumulated | Balance | instruments | |||||||||||||||||||||||||||
| at | (losses) | other | Transfers | Transfers | at | still held at | |||||||||||||||||||||||||
| January 1, | included | comprehensive | into | out of | December 31, | December 31, | |||||||||||||||||||||||||
| 2013 | in earnings | (a) | income | Purchases | Sales | Settlements | Level 3 | (b) | Level 3 | (b) | 2013 | 2013 | (c) | ||||||||||||||||||
| Investment securities | |||||||||||||||||||||||||||||||
| Debt | |||||||||||||||||||||||||||||||
| U.S. corporate | $ | 3,591 | $ | (497) | $ | 135 | $ | 380 | $ | (424) | $ | (231) | $ | 108 | $ | (109) | $ | 2,953 | $ | - | |||||||||||
| State and municipal | 77 | - | (7) | 21 | - | (5) | 10 | - | 96 | - | |||||||||||||||||||||
| Residential | |||||||||||||||||||||||||||||||
| mortgage-backed | 100 | - | (5) | - | (2) | (7) | - | - | 86 | - | |||||||||||||||||||||
| Commercial | |||||||||||||||||||||||||||||||
| mortgage-backed | 6 | - | - | - | - | (6) | 10 | - | 10 | - | |||||||||||||||||||||
| Asset-backed | 5,023 | 5 | 32 | 2,632 | (4) | (795) | 12 | (7) | 6,898 | - | |||||||||||||||||||||
| Corporate – non-U.S. | 1,218 | (103) | 49 | 5,814 | (3) | (5,874) | 21 | (58) | 1,064 | - | |||||||||||||||||||||
| 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 | - | |||||||||||||||||||||
| Trading | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||
| Derivatives(d)(e) | 416 | (66) | 2 | (2) | - | (226) | 37 | 3 | 164 | (30) | |||||||||||||||||||||
| Other | 799 | (68) | 12 | 538 | (779) | - | 4 | (12) | 494 | (102) | |||||||||||||||||||||
| Total | $ | 11,645 | $ | (725) | $ | 155 | $ | 9,389 | $ | (1,212) | $ | (7,165) | $ | 202 | $ | (185) | $ | 12,104 | $ | (132) | |||||||||||
(a) Earnings effects are primarily included in the “GECC revenues from services” and “Interest and other financial charges” captions in the Statement of Earnings.
(b) Transfers in and out of Level 3 are considered to occur at the beginning of the period. Transfers out of Level 3 were a result of increased use of quotes from independent pricing vendors based on recent trading activity.
(c) Represented the amount of unrealized gains or losses for the period included in earnings.
(d) Represented derivative assets net of derivative liabilities and included cash accruals of $9 million not reflected in the fair value hierarchy table.
(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 22.
| Changes in Level 3 Instruments for the Year Ended December 31, 2012 | |||||||||||||||||||||||||||||||
| Net | |||||||||||||||||||||||||||||||
| (In millions) | change in | ||||||||||||||||||||||||||||||
| Net realized/ | unrealized | ||||||||||||||||||||||||||||||
| Net | unrealized | gains | |||||||||||||||||||||||||||||
| realized/ | gains (losses) | (losses) | |||||||||||||||||||||||||||||
| unrealized | included in | relating to | |||||||||||||||||||||||||||||
| Balance | gains | accumulated | Balance | instruments | |||||||||||||||||||||||||||
| at | (losses) | other | Transfers | Transfers | at | still held at | |||||||||||||||||||||||||
| January 1, | included | comprehensive | into | out of | December 31, | December 31, | |||||||||||||||||||||||||
| 2012 | in earnings | (a) | income | Purchases | Sales | Settlements | Level 3 | (b) | Level 3 | (b) | 2012 | 2012 | (c) | ||||||||||||||||||
| Investment securities | |||||||||||||||||||||||||||||||
| Debt | |||||||||||||||||||||||||||||||
| U.S. corporate | $ | 3,235 | $ | 66 | $ | 32 | $ | 483 | $ | (214) | $ | (110) | $ | 299 | $ | (200) | $ | 3,591 | $ | - | |||||||||||
| State and municipal | 77 | - | 10 | 16 | - | (1) | 78 | (103) | 77 | - | |||||||||||||||||||||
| Residential | |||||||||||||||||||||||||||||||
| mortgage-backed | 41 | (3) | 1 | 6 | - | (3) | 135 | (77) | 100 | - | |||||||||||||||||||||
| Commercial | |||||||||||||||||||||||||||||||
| mortgage-backed | 4 | - | (1) | - | - | - | 6 | (3) | 6 | - | |||||||||||||||||||||
| Asset-backed | 4,040 | 1 | (25) | 1,490 | (502) | - | 25 | (6) | 5,023 | - | |||||||||||||||||||||
| Corporate – non-U.S. | 1,204 | (11) | 19 | 341 | (51) | (172) | 24 | (136) | 1,218 | - | |||||||||||||||||||||
| Government | |||||||||||||||||||||||||||||||
| – non-U.S. | 84 | (33) | 38 | 65 | (72) | (40) | - | - | 42 | - | |||||||||||||||||||||
| U.S. government and | |||||||||||||||||||||||||||||||
| federal agency | 253 | - | 24 | - | - | - | - | - | 277 | - | |||||||||||||||||||||
| Retained interests | 35 | (1) | (3) | 16 | (6) | (12) | 54 | - | 83 | - | |||||||||||||||||||||
| Equity | |||||||||||||||||||||||||||||||
| Available-for-sale | 17 | - | (1) | 3 | (3) | (1) | 2 | (4) | 13 | - | |||||||||||||||||||||
| Trading | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||
| Derivatives(d)(e) | 369 | 29 | (1) | (1) | - | (112) | 190 | (58) | 416 | 160 | |||||||||||||||||||||
| Other | 817 | 50 | 2 | 159 | (137) | - | - | (92) | 799 | 43 | |||||||||||||||||||||
| Total | $ | 10,176 | $ | 98 | $ | 95 | $ | 2,578 | $ | (985) | $ | (451) | $ | 813 | $ | (679) | $ | 11,645 | $ | 203 | |||||||||||
(a) Earnings effects are primarily included in the “GECC revenues from services” and “Interest and other financial charges” captions in the Statement of Earnings.
(b) Transfers in and out of Level 3 are considered to occur at the beginning of the period. Transfers out of Level 3 were a result of increased use of quotes from independent pricing vendors based on recent trading activity.
(c) Represented the amount of unrealized gains or losses for the period included in earnings.
(d) Represented derivative assets net of derivative liabilities and included cash accruals of $2 million not reflected in the fair value hierarchy table.
(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 22.
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, 2013 and 2012. These assets can include loans and long-lived assets that have been reduced to fair value when they are held for sale, impaired loans that have been reduced based on the fair value of the underlying collateral, cost and equity method investments and long-lived assets that are written down to fair value when they are impaired and the remeasurement of retained investments in formerly consolidated subsidiaries upon a change in control that results in deconsolidation of a subsidiary, if we sell a controlling interest and retain a noncontrolling stake in the entity. Assets that are written down to fair value when impaired and retained investments are not subsequently adjusted to fair value unless further impairment occurs.
| Remeasured during the year ended December 31 | |||||||||||
| 2013 | 2012 | ||||||||||
| (In millions) | Level 2 | Level 3 | Level 2 | Level 3 | |||||||
| Financing receivables and loans held for sale | $ | 210 | $ | 2,986 | $ | 366 | $ | 4,094 | |||
| Cost and equity method investments(a) | - | 690 | 8 | 313 | |||||||
| Long-lived assets, including real estate | 2,050 | 1,088 | 702 | 2,182 | |||||||
| Total | $ | 2,260 | $ | 4,764 | $ | 1,076 | $ | 6,589 | |||
(a) Includes the fair value of private equity and real estate funds included in Level 3 of $126 million and $84 million at December 31, 2013 and 2012, respectively.
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, 2013 and 2012.
| Year ended December 31 | |||||
| (In millions) | 2013 | 2012 | |||
| Financing receivables and loans held for sale | $ | (361) | $ | (595) | |
| Cost and equity method investments(a) | (484) | (153) | |||
| Long-lived assets, including real estate(b) | (1,188) | (624) | |||
| Total | $ | (2,033) | $ | (1,372) | |
(a) Includes fair value adjustments associated with private equity and real estate funds of $(14) million and $(33) million during 2013 and 2012, respectively.
(b) Includes impairments related to real estate equity properties and investments recorded in other costs and expenses of $108 million and $218 million during 2013 and 2012, respectively.
Level 3 Measurements
The following table presents information relating to the significant unobservable inputs of our Level 3 recurring and non-recurring measurements.
| Valuation | Unobservable | Range (weighted | ||||||
| (Dollars in millions) | Fair value | technique | inputs | average) | ||||
| 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 | 381 | Income approach, Market comparables | Weighted average cost of capital | 9.3%-9.3% (9.3%) | ||||
| EBITDA multiple | 5.4X-12.5X (9.5X) | |||||||
| Discount rate(a) | 5.2%-8.8% (5.3%) | |||||||
| Capitalization rate(b) | 6.3%-7.5% (7.2%) | |||||||
| Non-recurring fair value measurements | ||||||||
| Financing receivables and loans held for sale | $ | 1,937 | Income approach, Business enterprise value | Capitalization rate(b) | 5.5%-16.7% (8.0%) | |||
| EBITDA multiple | 4.3X-5.5X (4.8X) | |||||||
| Discount rate(a) | 6.6%-6.6% (6.6%) | |||||||
| Cost and equity method investments | 102 | Income approach, Market comparables | Discount rate(a) | 5.7%-5.9% (5.8%) | ||||
| Capitalization rate(b) | 8.5%-10.6% (10.0%) | |||||||
| Weighted average cost of capital | 9.3%-9.6% (9.4%) | |||||||
| EBITDA multiple | 7.1X-14.5X (11.3X) | |||||||
| Revenue multiple | 2.2X-12.6X (9.4X) | |||||||
| Long-lived assets, including real estate | 694 | Income approach | Capitalization rate(b) | 5.4%-14.5% (7.8%) | ||||
| Discount rate(a) | 4.0%-23.0% (9.0%) | |||||||
| December 31, 2012 | ||||||||
| Recurring fair value measurements | ||||||||
| Investment securities | ||||||||
| Debt | ||||||||
| U.S. corporate | $ | 1,652 | Income approach | Discount rate(a) | 1.3%-29.9% (11.1%) | |||
| Asset-backed | 4,977 | Income approach | Discount rate(a) | 2.1%-13.1% (3.8%) | ||||
| Corporate – non-U.S. | 865 | Income approach | Discount rate(a) | 1.5%-25.0% (13.2%) | ||||
| Other financial assets | 633 | Income approach, Market comparables | Weighted average cost of capital | 8.7%-10.2% (8.7%) | ||||
| EBITDA multiple | 4.9X-10.6X (7.9X) | |||||||
| Non-recurring fair value measurements | ||||||||
| Financing receivables and loans held for sale | $ | 2,835 | Income approach, Business enterprise value | Capitalization rate(b) | 3.8%-14.0% (8.0%) | |||
| EBITDA multiple | 2.0X-6.0X (4.8X) | |||||||
| Cost and equity method investments | 72 | Income approach | Capitalization rate(b) | 9.2%-12.8% (12.0%) | ||||
| Long-lived assets, including real estate | 985 | Income approach | Capitalization rate(b) | 4.8%-14.6% (7.3%) | ||||
At December 31, 2013 and December 31, 2012, other Level 3 recurring fair value measurements of $2,816 million and $3,146 million, respectively, and non-recurring measurements of $1,460 million and $2,412 million, respectively, are valued using non-binding broker quotes or other third-party sources. For a description of our process to evaluate third-party pricing servicers, see Note 1. At December 31, 2013 and December 31, 2012, other recurring fair value measurements of $327 million and $370 million, respectively, and non-recurring fair value measurements of $571 million and $285 million, respectively, were individually insignificant and utilize a number of different unobservable inputs not subject to meaningful aggregation.