United Parcel Service, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS AND RESTRICTED CASH

INVESTMENTS AND RESTRICTED CASH

6 Months Ended

Jun. 30, 2015

The following is a summary of marketable securities classified as trading and available-for-sale as of June 30, 2015 and December 31, 2014 (in millions):



	Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
June 30, 2015:
Current marketable securities:
U.S. government and agency debt securities	$	319	$	1	$	—		$	320
Mortgage and asset-backed debt securities	82		—		—			82
Corporate debt securities	1,835		1		(1		)	1,835
Other debt, equity and investment securities	546		11		(2		)	555
Total marketable securities	$	2,782	$	13	$	(3	)	$	2,792

December 31, 2014:
Current marketable securities:
U.S. government and agency debt securities	$	321	$	1	$	(1	)	$	321
Mortgage and asset-backed debt securities	89		1		(1		)	89
Corporate debt securities	534		—		—			534
Other debt, equity and investment securities	48		—		—			48
Total marketable securities	$	992	$	2	$	(2	)	$	992

Of the total estimated fair value in marketable securities listed above, $2.007 billion and $430 million as of June 30, 2015 and December 31, 2014, respectively, have been classified as "trading", with unrealized gains and losses recognized in investment income within the statements of consolidated income. The remaining estimated fair value of marketable securities was classified as "available-for-sale", with related unrealized gains and losses, net of tax, recognized in accumulated other comprehensive income ("AOCI").

Investment Other-Than-Temporary Impairments

We have concluded that no other-than-temporary impairment losses existed as of June 30, 2015. 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, 2015, 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	$	2,039	$	2,039
Due after one year through three years	428		428
Due after three years through five years	14		15
Due after five years	73		73
	2,554		2,555
Equity and other investment securities	228		237
	$	2,782	$	2,792

Non-Current Investments and Restricted Cash

We had $442 million of restricted cash related to our self-insurance requirements as of June 30, 2015 and December 31, 2014, 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, 2015 and December 31, 2014, we held a $19 million investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan. Additionally, we held escrowed cash related to the acquisition and disposition of certain assets of $8 and $28 million as of June 30, 2015 and December 31, 2014, respectively. The amounts described above are classified as “non-current investments and restricted cash” on the consolidated balance sheets, while the quarterly change in investment fair value is recognized in "investment income" on 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 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) 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 8.29% and 7.81% as of June 30, 2015 and December 31, 2014, 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, 2015 and December 31, 2014, 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, 2015:
Marketable Securities:
U.S. government and agency debt securities	$	320	$	—	$	—	$	320
Mortgage and asset-backed debt securities	—		82		—		82
Corporate debt securities	—		1,835		—		1,835
Other debt, equity and investment securities	—		555		—		555
Total marketable securities	320		2,472		—		2,792
Other non-current investments	19		—		48		67
Total	$	339	$	2,472	$	48	$	2,859



December 31, 2014:
Marketable Securities:
U.S. government and agency debt securities	$	321	$	—	$	—	$	321
Mortgage and asset-backed debt securities	—		89		—		89
Corporate debt securities	—		534		—		534
Other debt, equity and investment securities	—		48		—		48
Total marketable securities	321		671		—		992
Other non-current investments	19		—		64		83
Total	$	340	$	671	$	64	$	1,075

The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the three months ended June 30, 2015 and 2014 (in millions):



	Marketable Securities		Other Non-Current Investments			Total
Balance on April 1, 2015	$	—	$	56		$	56
Transfers into (out of) Level 3	—		—			—
Net realized and unrealized gains (losses):
Included in earnings (in investment income)	—		(8		)	(8		)
Included in accumulated other comprehensive income (pre-tax)	—		—			—
Purchases	—		—			—
Sales	—		—			—
Balance on June 30, 2015	$	—	$	48		$	48




	Marketable Securities		Other Non-Current 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

The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the six months ended June 30, 2015 and 2014 (in millions):




	Marketable Securities		Other Investments			Total
Balance on January 1, 2015	$	—	64			64
Transfers into (out of) Level 3	—		—			—
Net realized and unrealized gains (losses):
Included in earnings (in investment income)	—		(16		)	(16		)
Included in accumulated other comprehensive income (pre-tax)	—		—			—
Purchases	—		—			—
Sales	—		—			—
Balance on June 30, 2015	$	—	$	48		$	48

	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

There were no transfers of investments between Level 1 and Level 2 during the three and six months ended June 30, 2015 and 2014.