Annual report pursuant to Section 13 and 15(d)

CASH AND INVESTMENTS

v3.8.0.1
CASH AND INVESTMENTS
 12 Months Ended
Dec. 31, 2017
Investments and Cash [Abstract]  
CASH AND INVESTMENTS
CASH AND INVESTMENTS
The following is a summary of marketable securities classified as trading and available-for-sale at December 31, 2017 and 2016 (in millions):
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
2017
 
 
 
 
 
 
 
Current trading marketable securities:
 
 
 
 
 
 
 
Corporate debt securities
$
75

 
$
—

 
$
—

 
$
75

Carbon credit investments(1)
77

 
16

 
—

 
93

Total trading marketable securities
152

 
16

 
—

 
168

 
 
 
 
 
 
 
 
Current available-for-sale marketable securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
286

 
—

 
(3
)
 
283

Mortgage and asset-backed debt securities
86

 
—

 
—

 
86

Corporate debt securities
201

 
1

 
(1
)
 
201

Equity securities
2

 
—

 
—

 
2

Non-U.S. government debt securities
9

 
—

 
—

 
9

Total available-for-sale marketable securities
584

 
1

 
(4
)
 
581

 
 
 
 
 
 
 
 
Total current marketable securities
$
736

 
$
17

 
$
(4
)
 
$
749

 
 
 
 
 
 
 
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
2016
 
 
 
 
 
 
 
Current trading marketable securities:
 
 
 
 
 
 
 
Corporate debt securities
$
427

 
$
—

 
$
—

 
$
427

Carbon credit investments(1)
80

 
10

 
—

 
90

Total trading marketable securities
507

 
10

 
—

 
517

 
 
 
 
 
 
 
 
Current available-for-sale marketable securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
314

 
—

 
(2
)
 
312

Mortgage and asset-backed debt securities
90

 
1

 
—

 
91

Corporate debt securities
167

 
—

 
(1
)
 
166

Equity securities
2

 
—

 
—

 
2

Non-U.S. government debt securities
3

 
—

 
—

 
3

Total available-for-sale marketable securities
576

 
1

 
(3
)
 
574

 
 
 
 
 
 
 
 
Total current marketable securities
$
1,083

 
$
11

 
$
(3
)
 
$
1,091

 
 
 
 
 
 
 
 
(1) These investments are hedged with forward contracts that are not designated in hedging relationships. See note 15 for offsetting statement of consolidated income impact.

Total current marketable securities that were pledged as collateral for our self-insurance requirements had an estimated fair value of $579 and $572 million at December 31, 2017 and 2016, respectively.

The gross realized gains on sales of available-for-sale securities totaled $0, $1 and $1 million in 2017, 2016, and 2015, respectively. The gross realized losses on sales of available-for-sale securities totaled $2, $1 and $1 million in 2017, 2016, and 2015, respectively.
There were no material impairment losses recognized on marketable securities during 2017, 2016 or 2015.
Investment Other-Than-Temporary Impairments
We have concluded that no material other-than-temporary impairment losses existed as of December 31, 2017. In making this determination, we considered the financial condition and prospects of the issuer, the magnitude of the losses compared with the investments’ cost, the probability that we will be unable to collect all amounts due according to the contractual terms of the security, the credit rating of the security and our ability and intent to hold these investments until the anticipated recovery in market value occurs.

Unrealized Losses
The following table presents the age of gross unrealized losses and fair value by investment category for all securities in a loss position as of December 31, 2017 (in millions):
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
U.S. government and agency debt securities
$
183

 
$
(2
)
 
$
90

 
$
(1
)
 
$
273

 
$
(3
)
Mortgage and asset-backed debt securities
36

 
—

 
25

 
—

 
61

 
—

Corporate debt securities
101

 
(1
)
 
70

 
—

 
171

 
(1
)
Non-U.S. government debt securities
8

 
—

 
—

 
—

 
8

 
—

Total marketable securities
$
328

 
$
(3
)
 
$
185

 
$
(1
)
 
$
513

 
$
(4
)

The unrealized losses for the corporate debt securities and U.S. government and agency debt securities are primarily due to changes in market interest rates. We have both the intent and ability to hold the securities contained in the previous table for a time necessary to recover the cost basis.
Maturity Information
The amortized cost and estimated fair value of marketable securities at December 31, 2017, by contractual maturity, are shown below (in millions). Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
 
 
Cost
 
Estimated
Fair Value
Due in one year or less
$
112

 
$
112

Due after one year through three years
453

 
449

Due after three years through five years
21

 
21

Due after five years
73

 
74

 
659

 
656

Equity and carbon credit investment securities
77

 
93

 
$
736

 
$
749


Non-Current Investments and Restricted Cash
Investments and Restricted Cash are primarily associated with our self-insurance requirements. We entered into an escrow agreement with an insurance carrier to guarantee our self-insurance obligations. This agreement requires us to provide collateral to the insurance carrier, which is invested in money market funds and corporate and municipal bonds. Collateral provided is reflected in "other investing activities" in the statements of consolidated cash flows. At December 31, 2017 and 2016, we had $449 and $445 million in self-insurance investments and restricted cash, respectively.
We held a $19 and $18 million investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan at December 31, 2017 and 2016, respectively. The quarterly change in investment fair value is recognized in "investment income and other" on the statements of consolidated income. Additionally, we held escrowed cash related to the acquisition and disposition of certain assets, primarily real estate, of $15 and $13 million at December 31, 2017 and 2016, respectively.
The amounts described above are classified as “investments and restricted cash” in the consolidated balance sheets.
Fair Value Measurements
Marketable securities utilizing Level 1 inputs include active exchange-traded equity securities and equity index funds, and most U.S. Government debt securities, as these securities all have quoted prices in active markets. Marketable securities utilizing Level 2 inputs include asset-backed securities, corporate bonds and municipal bonds. These securities are valued using market corroborated pricing, matrix pricing or other models that utilize observable inputs such as yield curves.
We maintain holdings in certain investment partnerships that are measured at fair value utilizing Level 3 inputs (classified as “other non-current investments” in the tables below, and as “other non-current assets” in the consolidated balance sheets). These partnership holdings do not have quoted prices, nor can they be valued using inputs based on observable market data. These investments are valued internally using a discounted cash flow model with two significant inputs: (1) the after-tax cash flow projections for each partnership, and (2) a risk-adjusted discount rate consistent with the duration of the expected cash flows for each partnership. The weighted-average discount rates used to value these investments were 7.56% and 8.06% as of December 31, 2017 and 2016, respectively. These inputs and the resulting fair values are updated on a quarterly basis.
The following table presents information about our investments measured at fair value on a recurring basis as of December 31, 2017 and 2016, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value (in millions):
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
2017
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
283

 
$
—

 
$
—

 
$
283

Mortgage and asset-backed debt securities
—

 
86

 
—

 
86

Corporate debt securities
—

 
276

 
—

 
276

Equity securities
—

 
2

 
—

 
2

Non-U.S. government debt securities
—

 
9

 
—

 
9

Carbon credit investments
93

 
—

 
—

 
93

Total marketable securities
376

 
373

 
—

 
749

Other non-current investments
19

 
—

 
6

 
25

Total
$
395

 
$
373

 
$
6

 
$
774

 
 
 
 
 
 
 
 
 
Quoted Prices in
Active Markets 
for Identical
Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
2016
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
312

 
$
—

 
$
—

 
$
312

Mortgage and asset-backed debt securities
—

 
91

 
—

 
91

Corporate debt securities
—

 
593

 
—

 
593

Equity securities
—

 
2

 
—

 
2

Non-U.S. government debt securities
—

 
3

 
—

 
3

Carbon credit investments
90

 
—

 
—

 
90

Total marketable securities
402

 
689

 
—

 
1,091

Other non-current investments
18

 
—

 
13

 
31

Total
$
420

 
$
689

 
$
13

 
$
1,122



The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the years ended December 31, 2017 and 2016 (in millions).
 
Marketable
Securities
 
Other
Investments
 
Total
Balance on January 1, 2016
$
—

 
$
32

 
$
32

Transfers into (out of) Level 3
—

 
—

 
—

Net realized and unrealized gains (losses):
 
 
 
 
 
Included in earnings (in investment income)
—

 
(19
)
 
(19
)
Included in accumulated other comprehensive income (pre-tax)
—

 
—

 
—

Purchases
—

 
—

 
—

Settlements
—

 
—

 
—

Balance on December 31, 2016
$
—

 
$
13

 
$
13

Transfers into (out of) Level 3
—

 
—

 
—

Net realized and unrealized gains (losses):
 
 
 
 
 
Included in earnings (in investment income)
—

 
(7
)
 
(7
)
Included in accumulated other comprehensive income (pre-tax)
—

 
—

 
—

Purchases
—

 
—

 
—

Settlements
—

 
—

 
—

Balance on December 31, 2017
$
—

 
$
6

 
$
6