GE 2015 Annual Report Download - page 173

FINANCIAL STATEMENTS PRESENTATION & POLICIES
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RECURRING FAIR VALUE MEASUREMENTS
The following sections describe the valuation methodologies we use to measure different financial 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 securities but not
readily accessible for each of those investments individually (that is, it is difficult 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 fixed
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
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
corporate fixed income, and government, mortgage and asset-backed securities. In infrequent circumstances, our pricing vendors may
provide us with valuations that are based on significant 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 LQSXWVXVHGLQWKDWYHQGRU¶VSULFLQJSURFHVVDUHGHHPHG
to be market observable as defined in the standard. 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 valuations, which facilitates identification 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 classified 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 specific instrument 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 proprietary valuation models, inputs and assumptions. Accordingly, our risk management personnel conduct
reviews of vendors, as applicable, similar to the reviews performed of our primary pricing vendor. In addition, we conduct internal
reviews of pricing for all such investment securities quarterly to ensure reasonableness of valuations used in our financial statements.
These reviews are designed to identify prices that appear stale, those that have changed significantly 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 representative of prices that would be received to sell the assets at
the measurement date (exit prices).
Derivatives. We use closing prices for derivatives included in Level 1, which are traded either on exchanges or liquid over-the-counter
markets.
The majority of our derivatives are valued using internal models. The models maximize the use of market observable inputs including
interest rate curves and both forward and spot prices for currencies and commodities. Derivative assets and liabilities included in Level
2 primarily represent interest rate swaps, cross-currency swaps and foreign currency and commodity forward and option contracts.
Derivative assets and liabilities included in Level 3 primarily represent equity derivatives and interest rate products that contain
embedded optionality or prepayment features.
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