GE 2013 Annual Report Download - page 84

82 GE 2013 ANNUAL REPORT
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Observable inputs refl ect market data obtained from
independent sources, while unobservable inputs refl ect our mar-
ket 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 mar-
kets that are not active; and model-derived valuations
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 regard 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 rat-
ing agency market reports and current appraisals. These reviews
are performed within each business by the asset and risk manag-
ers, pricing committees and valuation committees. A detailed
review of methodologies and assumptions is performed by indi-
viduals 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.
Recurring Fair Value Measurements
The following sections describe 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
investment 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 securi-
ties 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 pricing
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,
benchmarking of like securities, sector groupings and matrix
pricing. The pricing vendor considers available market observ-
able 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 corporate fi xed income, government, and mortgage
and asset-backed securities. In infrequent circumstances, our
pricing vendors may provide us with valuations that are based on
signifi cant unobservable 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 stan-
dard. While we are not provided access to proprietary models
of the vendor, our reviews have included on-site walk-throughs
of the pricing process, methodologies and control procedures
for each asset class and level for which prices are provided. Our
reviews also include an examination of the underlying inputs and
assumptions for a sample of individual securities across asset
classes, credit rating levels and various durations, a process we
perform each reporting period. In addition, the pricing vendor
has an established challenge process in place for all security valu-
ations, which facilitates identifi cation and resolution of potentially
erroneous prices. We believe that the prices received from
our pricing vendor are representative of prices that would be
received to sell the assets at the measurement date (exit prices)
and are classifi ed appropriately in the hierarchy.
We use non-binding broker quotes and other third-party
pricing services as our primary basis for valuation when there
is limited, or no, relevant market activity for a specifi c instru-
ment or for other instruments that share similar characteristics.
We have not adjusted the prices we have obtained. Investment
securities priced using non-binding broker quotes and other
third-party pricing services are included in Level 3. As is the case
with our primary pricing vendor, third-party brokers and other
third-party pricing services do not provide access to their pro-
prietary valuation models, inputs and assumptions. Accordingly,
our risk management personnel conduct reviews of vendors, as
applicable, similar to the reviews performed of our primary pric-
ing vendor. In addition, we conduct internal reviews of pricing for
all such investment securities quarterly to ensure reasonableness
of valuations used in our fi nancial statements. These reviews
are designed to identify prices that appear stale, those that have
changed signifi cantly from prior valuations, and other anomalies
that may indicate that a price may not be accurate. Based on the
information available, we believe that the fair values provided by
the brokers and other third-party pricing services are represen-
tative of prices that would be received to sell the assets at the
measurement date (exit prices).