Annual report pursuant to Section 13 and 15(d)

CASH AND INVESTMENTS

v2.4.0.8
CASH AND INVESTMENTS
12 Months Ended
Dec. 31, 2013
Investments and Cash [Abstract]  
CASH AND INVESTMENTS
CASH AND INVESTMENTS
The following is a summary of marketable securities classified as available-for-sale at December 31, 2013 and 2012 (in millions):
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
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

U.S. state and local municipal debt securities
2

 

 

 
2

Other debt and equity securities
3

 

 

 
3

Total marketable securities
$
582

 
$
2

 
$
(4
)
 
$
580

 
 
 
 
 
 
 
 


 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
2012
 
 
 
 
 
 
 
Current marketable securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
236

 
$
2

 
$

 
$
238

Mortgage and asset-backed debt securities
171

 
3

 

 
174

Corporate debt securities
158

 
5

 

 
163

U.S. state and local municipal debt securities
15

 

 

 
15

Other debt and equity securities
7

 

 

 
7

Total marketable securities
$
587

 
$
10

 
$

 
$
597


The gross realized gains on sales of marketable securities totaled $11, $15 and $49 million in 2013, 2012, and 2011, respectively. The gross realized losses totaled $6, $6 and $20 million in 2013, 2012, and 2011, respectively. There were no impairment losses recognized on marketable securities during 2013, 2012 or 2011.
Investment Other-Than-Temporary Impairments
We have concluded that no other-than-temporary impairment losses existed as of December 31, 2013. 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, 2013 (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

 
$
(1
)
 
$

 
$

 
$
183

 
$
(1
)
Mortgage and asset-backed debt securities
50

 
(2
)
 
4

 

 
54

 
(2
)
Corporate debt securities
47

 
(1
)
 

 

 
47

 
(1
)
U.S. state and local municipal debt securities

 

 

 

 

 

Other debt and equity securities

 

 

 

 

 

Total marketable securities
$
280

 
$
(4
)
 
$
4

 
$

 
$
284

 
$
(4
)

The unrealized losses for the U.S. government and agency debt securities, mortgage and asset-backed debt securities, corporate debt securities and other debt securities primarily relate to holdings of various fixed income securities, and 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, 2013, 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
$
33

 
$
33

Due after one year through three years
432

 
432

Due after three years through five years
21

 
21

Due after five years
93

 
91

 
579

 
577

Equity securities
3

 
3

 
$
582

 
$
580


Non-Current Investments and Restricted Cash
Restricted cash is 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 cash collateral to the insurance carrier, which is reported in “Investments and Restricted Cash” on our consolidated balance sheets. Additional cash collateral provided is reflected in other investing activities in the statements of consolidated cash flows. This restricted cash is invested in money market funds and similar cash equivalent type assets. As of December 31, 2013 and 2012, we had $425 and $288 million in restricted cash, respectively.
We held a $19 million investment in a variable life insurance policy to fund benefits for the UPS Excess Coordinating Benefit Plan at December 31, 2013 and 2012. This investment is classified as “Investments and Restricted Cash” in the consolidated balance sheets with the quarterly change in investment value 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 non-auction rate 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) 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 8.65% and 7.75% as of December 31, 2013 and 2012, 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, 2013 and 2012, 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
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

U.S. state and local municipal debt securities

 
2

 

 
2

Other debt and equity securities

 
3

 

 
3

Total marketable securities
353

 
227

 

 
580

Other investments
19

 

 
110

 
129

Total
$
372

 
$
227

 
$
110

 
$
709

 
 
 
 
 
 
 
 
 
Quoted Prices in
Active Markets 
for Identical
Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
2012
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
U.S. government and agency debt securities
$
237

 
$
1

 
$

 
$
238

Mortgage and asset-backed debt securities

 
174

 

 
174

Corporate debt securities

 
163

 

 
163

U.S. state and local municipal debt securities

 
15

 

 
15

Other debt and equity securities

 
7

 

 
7

Total marketable securities
237

 
360

 

 
597

Other investments
19

 

 
163

 
182

Total
$
256

 
$
360

 
$
163

 
$
779



The following table presents the changes in the above Level 3 instruments measured on a recurring basis for the years ended December 31, 2013 and 2012 (in millions).
 
Marketable
Securities
 
Other
Investments
 
Total
Balance on January 1, 2012
$

 
$
217

 
$
217

Transfers into (out of) Level 3

 

 

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

 
(54
)
 
(54
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Settlements

 

 

Balance on December 31, 2012
$

 
$
163

 
$
163

Transfers into (out of) Level 3

 

 

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

 
(53
)
 
(53
)
Included in accumulated other comprehensive income (pre-tax)

 

 

Purchases

 

 

Settlements

 

 

Balance on December 31, 2013
$

 
$
110

 
$
110