GE 2011 Annual Report Download - page 84

82 GE 2011 ANNUAL REPORT
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mortality and/or morbidity risks, while investment contracts are
contracts without such risks. Universal life insurance contracts
are a particular type of long-duration insurance contract whose
terms are not fi xed and guaranteed.
For short-duration insurance contracts, including accident
and health insurance, we report premiums as earned income
over the terms of the related agreements, generally on a pro-rata
basis. For traditional long-duration insurance contracts including
term, whole life and annuities payable for the life of the annuitant,
we report premiums as earned income when due.
Premiums received on investment contracts (including annui-
ties without signifi cant mortality risk) and universal life contracts
are not reported as revenues but rather as deposit liabilities. We
recognize revenues for charges and assessments on these con-
tracts, mostly for mortality, contract initiation, administration
and surrender. Amounts credited to policyholder accounts are
charged to expense.
Liabilities for traditional long-duration insurance contracts
represent the present value of such benefi ts less the present
value of future net premiums based on mortality, morbidity, inter-
est and other assumptions at the time the policies were issued
or acquired. Liabilities for investment contracts and universal life
policies equal the account value, that is, the amount that accrues
to the benefi t of the contract or policyholder including credited
interest and assessments through the fi nancial statement date.
Liabilities for unpaid claims and estimated claim settlement
expenses represent our best estimate of the ultimate obliga-
tions for reported and incurred-but-not-reported claims and
the related estimated claim settlement expenses. Liabilities for
unpaid claims and estimated claim settlement expenses are con-
tinually reviewed and adjusted through current operations.
Fair Value Measurements
For fi nancial assets and liabilities measured at fair value on a
recurring basis, fair value is the price we would receive to sell an
asset or pay to transfer a liability in an orderly transaction with a
market participant at the measurement date. In the absence of
active markets for the identical assets or liabilities, such measure-
ments involve developing assumptions based on market
observable data and, in the absence of such data, internal infor-
mation that is consistent with what market participants would
use in a hypothetical transaction that occurs at the
measurement date.
Observable inputs refl ect market data obtained from inde-
pendent sources, while unobservable inputs refl ect our market
assumptions. Preference is given to observable inputs. These two
types of inputs create the following fair value hierarchy:
Level 1— Quoted prices for identical instruments in
active markets.
Level 2— Quoted prices for similar instruments in active markets;
quoted prices for identical or similar instruments in
markets that are not active; and model-derived valua-
tions whose inputs are observable or whose signifi cant
value drivers are observable.
Level 3— Signifi cant inputs to the valuation model
are unobservable.
We maintain policies and procedures to value instruments using
the best and most relevant data available. In addition, we have risk
management teams that review valuation, including independent
price validation for certain instruments. With regards to Level 3
valuations (including instruments valued by third parties), we
perform a variety of procedures to assess the reasonableness of
the valuations. Such reviews, which may be performed quarterly,
monthly or weekly, include an evaluation of instruments whose
fair value change exceeds predefi ned thresholds (and/or does
not change) and consider the current interest rate, currency and
credit environment, as well as other published data, such as rating
agency market reports and current appraisals. These reviews are
performed within each business by the asset and risk managers,
pricing committees and valuation committees. A detailed review
of methodologies and assumptions is performed by individuals
independent of the business for individual measurements with a
fair value exceeding predefi ned thresholds. This detailed review
may include the use of a third-party valuation fi rm.
The following section describes the valuation methodologies
we use to measure different fi nancial instruments at fair value on
a recurring basis.
INVESTMENTS IN DEBT AND EQUITY SECURITIES. When available, we
use quoted market prices to determine the fair value of invest-
ment securities, and they are included in Level 1. Level 1
securities primarily include publicly-traded equity securities.
For large numbers of investment securities for which market
prices are observable for identical or similar investment secu-
rities but not readily accessible for each of those investments
individually (that is, it is diffi cult to obtain pricing information for
each individual investment security at the measurement date), we
obtain pricing information from an independent pricing vendor.
The pricing vendor uses various pricing models for each asset
class that are consistent with what other market participants
would use. The inputs and assumptions to the model of the pric-
ing vendor are derived from market observable sources including:
benchmark yields, reported trades, broker/dealer quotes, issuer
spreads, benchmark securities, bids, offers, and other market-
related data. Since many fi xed income securities do not trade on a
daily basis, the methodology of the pricing vendor uses available
information as applicable such as benchmark curves, benchmark-
ing of like securities, sector groupings, and matrix pricing. The
pricing vendor considers available market observable inputs in
determining the evaluation for a security. Thus, certain securities
may not be priced using quoted prices, but rather determined
from market observable information. These investments are
included in Level 2 and primarily comprise our portfolio of corpo-
rate fi xed income, and government, mortgage and asset-backed
securities. In infrequent circumstances, our pricing vendors may
provide us with valuations that are based on signifi cant unob-
servable inputs, and in those circumstances we classify the
investment securities in Level 3.
Annually, we conduct reviews of our primary pricing vendor
to validate that the inputs used in that vendor’s pricing process
are deemed to be market observable as defi ned in the standard.