Goldman Sachs 2013 Annual Report Download - page 155

Notes to Consolidated Financial Statements
Unsecured Short-term and Long-term Borrowings.
The significant inputs to the valuation of unsecured short-
term and long-term borrowings at fair value are the amount
and timing of expected future cash flows, interest rates, the
credit spreads of the firm, as well as commodity prices in
the case of prepaid commodity transactions. The inputs
used to value the embedded derivative component of hybrid
financial instruments are consistent with the inputs used to
value the firm’s other derivative instruments. See Note 7 for
further information about derivatives. See Notes 15 and 16
for further information about unsecured short-term and
long-term borrowings, respectively.
Certain of the firm’s unsecured short-term and long-term
instruments are included in level 3, substantially all of
which are hybrid financial instruments. As the significant
unobservable inputs used to value hybrid financial
instruments primarily relate to the embedded derivative
component of these borrowings, these inputs are
incorporated in the firm’s derivative disclosures related to
unobservable inputs in Note 7.
Insurance Contracts. During 2013, the firm sold a
majority stake in both its Americas reinsurance business
(April 2013) and its European insurance business
(December 2013). See Note 3 for further information about
these sales. Prior to selling these businesses, the firm had
elected the fair value option on certain insurance contracts.
These contracts could be settled only in cash and qualified
for the fair value option because they were recognized
financial instruments. These contracts were valued using
market transactions and other market evidence where
possible, including market-based inputs to models,
calibration to market-clearing transactions or other
alternative pricing sources with reasonable levels of price
transparency. Significant inputs were interest rates,
inflation rates, volatilities, funding spreads, yield and
duration, which incorporated policy lapse and projected
mortality assumptions. When unobservable inputs to a
valuation model were significant to the fair value
measurement of an instrument, the instrument was
classified in level 3. As of December 2012, assets and
liabilities related to the European insurance business were
included in “Receivables from customers and
counterparties” and “Other liabilities and accrued
expenses,” respectively, and assets and liabilities related to
the Americas reinsurance business, which was classified as
held for sale as of December 2012, were included in “Other
assets” and “Other liabilities and accrued expenses,”
respectively. The ranges of significant unobservable inputs
used to value level 3 insurance contracts as of
December 2012 were as follows:
‰Funding spreads: 39 bps to 61 bps (weighted average:
49 bps)
‰Yield: 4.4% to 15.1% (weighted average: 6.2%)
‰Duration: 5.3 to 8.8 years (weighted average: 7.6 years)
Generally, increases in funding spreads, yield or duration, in
isolation, would result in a lower fair value measurement.
Due to the distinctive nature of each of the firm’s level 3
insurance contracts, the interrelationship of inputs was not
necessarily uniform across such contracts.
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