Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS AND RESTRICTED CASH

v2.4.0.8
INVESTMENTS AND RESTRICTED CASH
6 Months Ended
Jun. 30, 2014
Marketable Securities [Abstract]  
CASH AND INVESTMENTS
INVESTMENTS AND RESTRICTED CASH
The following is a summary of marketable securities classified as available-for-sale as of June 30, 2014 and December 31, 2013 (in millions):
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
June 30, 2014
 
 
 
 
 
 
 
Current marketable securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
332

 
$
1

 
$
(1
)
 
$
332

Mortgage and asset-backed debt securities
92

 
1

 
(1
)
 
92

Corporate debt securities
1,045

 
1

 

 
1,046

Other debt and equity securities
73

 

 

 
73

Total marketable securities
$
1,542

 
$
3

 
$
(2
)
 
$
1,543

 
 
 
 
 
 
 
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
December 31, 2013
 
 
 
 
 
 
 
Current marketable securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
355

 
$

 
$
(1
)
 
$
354

Mortgage and asset-backed debt securities
76

 
1

 
(2
)
 
75

Corporate debt securities
146

 
1

 
(1
)
 
146

Other debt and equity securities
5

 

 

 
5

Total marketable securities
$
582

 
$
2

 
$
(4
)
 
$
580


Investment Other-Than-Temporary Impairments
We have concluded that no other-than-temporary impairment losses existed as of June 30, 2014. In making this determination, we considered the financial condition and prospects of the issuers, the magnitude of the losses compared with the investments’ cost, the length of time the investments have been in an unrealized loss position, the probability that we will be unable to collect all amounts due according to the contractual terms of the securities, the credit rating of the securities and our ability and intent to hold these investments until the anticipated recovery in market value occurs.
Maturity Information
The amortized cost and estimated fair value of marketable securities at June 30, 2014, 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
$
990

 
$
990

Due after one year through three years
445

 
445

Due after three years through five years
15

 
15

Due after five years
90

 
91

 
1,540

 
1,541

Equity securities
2

 
2

 
$
1,542

 
$
1,543


Non-Current Investments and Restricted Cash
We had $426 and $425 million of restricted cash related to our self-insurance requirements as of June 30, 2014 and December 31, 2013, respectively, which is reported in “Non-Current Investments and Restricted Cash” on the consolidated balance sheets. This restricted cash is invested in money market funds and similar cash-equivalent type assets.
At June 30, 2014 and December 31, 2013, we held a $19 million investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan. This investment is classified as “Non-Current Investments and Restricted Cash” in the consolidated balance sheets with the quarterly change in investment value recognized in the statements of consolidated income.
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 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) the 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 8.20% and 8.65% as of June 30, 2014 and December 31, 2013, 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 June 30, 2014 and December 31, 2013, 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)
 
Balance 
June 30, 2014
 
 
 
 
 
 
 
Marketable Securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
332

 
$

 
$

 
$
332

Mortgage and asset-backed debt securities

 
92

 

 
92

Corporate debt securities

 
1,046

 

 
1,046

Other debt and equity securities

 
73

 

 
73

Total marketable securities
332

 
1,211

 

 
1,543

Other investments
19

 

 
95

 
114

Total
$
351

 
$
1,211

 
$
95

 
$
1,657

 

 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance 
December 31, 2013
 
 
 
 
 
 
 
Marketable Securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
353

 
$
1

 
$

 
$
354

Mortgage and asset-backed debt securities

 
75

 

 
75

Corporate debt securities

 
146

 

 
146

Other debt and equity securities

 
5

 

 
5

Total marketable securities
353

 
227

 

 
580

Other investments
19

 

 
110

 
129

Total
$
372

 
$
227

 
$
110

 
$
709


The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the three months ended June 30, 2014 and 2013 (in millions):
 
Marketable
Securities
 
Other
Investments
 
Total
Balance on April 1, 2014
$

 
$
99

 
$
99

Transfers into (out of) Level 3

 

 

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

 
(4
)
 
(4
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Sales

 

 

Balance on June 30, 2014
$

 
$
95

 
$
95

 
 
 
 
 
 
 
Marketable
Securities
 
Other
Investments
 
Total
Balance on April 1, 2013
$

 
$
150

 
$
150

Transfers into (out of) Level 3

 

 

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

 
(14
)
 
(14
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Sales

 

 

Balance on June 30, 2013
$

 
$
136

 
$
136


The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the six months ended June 30, 2014 and 2013 (in millions):
 
Marketable
Securities
 
Other
Investments
 
Total
Balance on January 1, 2014
$

 
110

 
110

Transfers into (out of) Level 3

 

 

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

 
(15
)
 
(15
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Sales

 

 

Balance on June 30, 2014
$

 
$
95

 
$
95

 
 
 
 
 
 
 
Marketable
Securities
 
Other
Investments
 
Total
Balance on January 1, 2013
$

 
163

 
163

Transfers into (out of) Level 3

 

 

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

 
(27
)
 
(27
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Sales

 

 

Balance on June 30, 2013
$

 
$
136


$
136


There were no transfers of investments between Level 1 and Level 2 during the three and six months ended June 30, 2014 and 2013.