Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 8, 2017)
  • 10-Q (Aug 8, 2017)
  • 10-Q (May 9, 2017)
  • 10-Q (Nov 8, 2016)
  • 10-Q (Aug 8, 2016)
  • 10-Q (May 10, 2016)

 
8-K

 
Other

BlackRock 10-Q 2013

Documents found in this filing:

  1. 10-Q
  2. Ex-12.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Graphic
  7. Graphic
Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
  EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
  EXCHANGE ACT OF 1934.

For the transition period from                                 to                                .

Commission file number 001-33099

 

LOGO

BlackRock, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

    

32-0174431

(State or Other Jurisdiction of

Incorporation or Organization)

         (I.R.S. Employer Identification No.)

55 East 52nd Street, New York, NY 10055

(Address of Principal Executive Offices)

(Zip Code)

(212) 810-5300

(Registrant’s Telephone Number, Including Area Code)

 

 

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes

             X               No                                

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes

             X               No                                

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or, a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer          X      

   Accelerated filer                           Non-accelerated filer                

Smaller reporting company                  

       

 

(Do not check if a smaller

reporting company)

  

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes                                

   No             X          

As of July 31, 2013, there were 167,923,814 shares of the registrant’s common stock outstanding.


Table of Contents

BlackRock, Inc.

Index to Form 10-Q

PART I

FINANCIAL INFORMATION

 

          Page  
Item 1.    Financial Statements (unaudited)   
        Condensed Consolidated Statements of Financial Condition      1   
        Condensed Consolidated Statements of Income      2   
        Condensed Consolidated Statements of Comprehensive Income      3   
        Condensed Consolidated Statements of Changes in Equity      4   
        Condensed Consolidated Statements of Cash Flows      6   
        Notes to Condensed Consolidated Financial Statements      7   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      44   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      82   
Item 4.    Controls and Procedures      85   

PART II

OTHER INFORMATION

 

Item 1.    Legal Proceedings      86   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      86   
Item 6.    Exhibits      87   

 

i


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

BlackRock, Inc.

Condensed Consolidated Statements of Financial Condition

(in millions, except share data)

(unaudited)

 

         June 30,    
2013
    December 31,
2012
 

Assets

    

Cash and cash equivalents

     $    3,668        $    4,606   

Accounts receivable

     2,249        2,250   

Investments

     1,773        1,750   

Assets of consolidated variable interest entities:

    

Cash and cash equivalents

     125        297   

Bank loans, other investments and other assets

     2,160        2,264   

Separate account assets

     132,846        134,768   

Separate account collateral held under securities lending agreements

     19,426        23,021   

Property and equipment (net of accumulated depreciation of $614 and $572 at June 30, 2013 and December 31, 2012, respectively)

     524        557   

Intangible assets (net of accumulated amortization of $979 and $899 at June 30, 2013 and December 31, 2012, respectively)

     17,322        17,402   

Goodwill

     12,899        12,910   

Other assets

     753        626   
  

 

 

   

 

 

 

Total assets

                     $193,745                        $200,451   
  

 

 

   

 

 

 

Liabilities

    

Accrued compensation and benefits

     $    948        $    1,547   

Accounts payable and accrued liabilities

     1,271        1,055   

Short-term borrowings

     -        100   

Liabilities of consolidated variable interest entities:

    

Borrowings

     2,145        2,402   

Other liabilities

     93        103   

Long-term borrowings

     4,938        5,687   

Separate account liabilities

     132,846        134,768   

Separate account collateral liabilities under securities lending agreements

     19,426        23,021   

Deferred income tax liabilities

     5,318        5,293   

Other liabilities

     935        858   
  

 

 

   

 

 

 

Total liabilities

     167,920        174,834   
  

 

 

   

 

 

 

Commitments and contingencies (Note 12)

    

Temporary equity

    

Redeemable noncontrolling interests

     70        32   

Permanent Equity

    

BlackRock, Inc. stockholders’ equity

    

Common stock, $0.01 par value;

     2        2   

Shares authorized: 500,000,000 at June 30, 2013 and December 31, 2012;

    

Shares issued: 171,252,185 at June 30, 2013 and December 31, 2012;

    

Shares outstanding: 168,150,018 and 168,875,304 at June 30, 2013 and December 31, 2012, respectively

    

Preferred stock (Note 16)

     -        -   

Additional paid-in capital

     19,302        19,419   

Retained earnings

     7,210        6,444   

Appropriated retained earnings

     23        29   

Accumulated other comprehensive loss

     (198     (59

Treasury stock, common, at cost (3,102,167 and 2,376,881 shares held at June 30, 2013 and December 31, 2012, respectively)

     (750     (432
  

 

 

   

 

 

 

Total BlackRock, Inc. stockholders’ equity

     25,589        25,403   

Nonredeemable noncontrolling interests

     142        155   

Nonredeemable noncontrolling interests of consolidated variable interest entities

     24        27   
  

 

 

   

 

 

 

Total permanent equity

     25,755        25,585   
  

 

 

   

 

 

 

Total liabilities, temporary equity and permanent equity

     $193,745        $200,451   
  

 

 

   

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

1


Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Income

(in millions, except per share data)

(unaudited)

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2013     2012     2013     2012  

Revenue

       

Investment advisory, administration fees and securities lending revenue

       

Related parties

    $1,470        $1,272        $2,925        $2,586   

Other third parties

    707        718        1,381        1,381   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investment advisory, administration fees and securities lending revenue

    2,177        1,990        4,306        3,967   

Investment advisory performance fees

    89        41        197        121   

BlackRock Solutions and advisory

    138        131        264        254   

Distribution fees

    18        20        35        39   

Other revenue

    60        47        129        97   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    2,482        2,229        4,931        4,478   

Expenses

       

Employee compensation and benefits

    864        786        1,769        1,611   

Distribution and servicing costs

    90        93        181        188   

Amortization of deferred sales commissions

    12        14        24        30   

Direct fund expenses

    162        144        323        296   

General and administration

    465        324        796        631   

Amortization of intangible assets

    40        39        80        78   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    1,633        1,400        3,173        2,834   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    849        829        1,758        1,644   

Non-operating income (expense)

       

Net gain (loss) on investments

    141        (7)        203        68   

Net gain (loss) on consolidated variable interest entities

    (23)        11        4        (1)   

Interest and dividend income

    4        8        10        17   

Interest expense

    (53)        (52)        (107)        (101)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating income (expense)

    69        (40)        110        (17)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    918        789        1,868        1,627   

Income tax expense

    212        229        496        492   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    706        560        1,372        1,135   

Less:

       

Net income (loss) attributable to redeemable noncontrolling interests

    (1)        3        (1)        4   

Net income (loss) attributable to nonredeemable noncontrolling interests

    (22)        3        12        5   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to BlackRock, Inc.

    $729        $554        $1,361        $1,126   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to BlackRock, Inc. common stockholders:

       

Basic

    $4.27        $3.13        $7.96        $6.32   

Diluted

    $4.19        $3.08        $7.81        $6.22   

Cash dividends declared and paid per share

    $1.68        $1.50        $3.36        $3.00   

Weighted-average common shares outstanding:

       

Basic

    170,648,731        177,010,239        170,973,462        178,016,539   

Diluted

    173,873,583        179,590,702        174,268,870        180,753,515   

 

 

See accompanying notes to condensed consolidated financial statements.

 

2


Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Comprehensive Income

(in millions)

(unaudited)

 

         Three Months Ended    
June 30,
         Six Months Ended    
June 30,
 
     2013      2012      2013      2012  

Net income

     $706         $560         $1,372         $1,135   

Other comprehensive income (loss):

           

Change in net unrealized gains (losses) from available-for-sale investments, net of tax:

           

Unrealized holding gains (losses), net of tax(1)

     (21)         (4)         (17)         2   

Less: reclassification adjustment included in net income(2)

     (12)         (2)         (9)         (1)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net change from available-for-sale investments, net of tax

     (9)         (2)         (8)         3   

Benefit plans, net of tax(3)

     -         -         -         (1)   

Foreign currency translation adjustments

     (23)         (34)         (131)         (1)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss)

     (32)         (36)         (139)         1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income

     674         524         1,233         1,136   

Less: Comprehensive income (loss) attributable to noncontrolling interests

     (23)         6         11         9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income attributable to BlackRock, Inc.

     $697         $518         $1,222         $1,127   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

  (1) 

The tax benefit (expense) was $8 million and $2 million for the three months ended June 30, 2013 and 2012, respectively, and $7 million and ($1) million for the six months ended June 30, 2013 and 2012, respectively.

  (2) 

The tax benefit (expense) was ($6) million and ($4) million for the three and six months ended June 30, 2013, respectively. The tax benefit (expense) was not material for the three and six months ended June 30, 2012.

  (3) 

The tax benefit (expense) for the six months ended June 30, 2012 was not material.

See accompanying notes to condensed consolidated financial statements.

 

3


Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Changes in Equity

(in millions)

(unaudited)

 

    Additional
Paid-in
Capital (1)
    Retained
Earnings
    Appropriated
Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
Common
    Total
BlackRock
Stockholders’
Equity
    Nonredeemable
Noncontrolling
Interests
    Nonredeemable
Noncontrolling
Interests of
Consolidated
VIEs
    Total
Permanent
Equity
    Redeemable
Non-
controlling
Interests /
Temporary
Equity
 

December 31, 2012

    $19,421         $6,444         $29         ($59)         ($432)         $25,403         $155         $27         $25,585         $32    

Net income

    -         1,361         -         -         -         1,361         8         4         1,373         (1)    

Allocation of gains (losses) of consolidated collateralized loan obligations

    -         -         3         -         -         3         -         (3)         -         -    

Dividends paid

    -         (595)         -         -         -         (595)         -         -         (595)         -    

Stock-based compensation

    231         -         -         -         -         231         -         -         231         -    

Issuance of common shares related to employee stock transactions

    (379)         -         -         -         397         18         -         -         18         -    

Employee tax benefit withholdings related to employee stock transactions

    -         -         -         -         (215)         (215)         -         -         (215)         -    

Shares repurchased

    -         -         -         -         (500)         (500)         -         -         (500)         -    

Net tax benefit (shortfall) from stock-based compensation

    31         -         -         -         -         31         -         -         31         -    

Subscriptions (redemptions/distributions)-noncontrolling interest holders

    -         -         (9)         -         -         (9)         (21)         130         100         75    

Net consolidations (deconsolidations) of sponsored investment funds

    -         -         -         -         -         -         -         (134)         (134)         (36)    

Other comprehensive income (loss)

    -         -         -         (139)         -         (139)         -         -         (139)         -    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2013

      $19,304           $7,210             $23             ($198)             ($750)             $25,589             $142             $24             $25,755               $70    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  

 

(1) 

Amounts include $2 million of common stock at both June 30, 2013 and December 31, 2012.

See accompanying notes to condensed consolidated financial statements.

 

4


Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Changes in Equity

(in millions)

(unaudited)

 

    Additional
Paid-in
Capital (1)
    Retained
Earnings
    Appropriated
Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Common
Shares
Held in
Escrow
    Treasury
Stock
Common
    Total
Stockholders’
Equity
    Nonredeemable
Noncontrolling
Interests
    Nonredeemable
Noncontrolling
Interests of
Consolidated
VIEs
    Total
Permanent
Equity
    Redeemable
Non-
controlling
Interests /
Temporary
Equity
 

December 31, 2011

    $20,276         $5,046         $72         ($127)         ($1)         ($218)         $25,048         $184         $38         $25,270         $92    

Net income

    -         1,126         -         -         -         -         1,126         6         (1)         1,131         4    

Allocation of losses of consolidated collateralized loan obligations

    -         -         (2)         -         -         -         (2)         -         2         -         -    

Dividends paid

    -         (545)         -         -         -         -         (545)         -         -         (545)         -    

Stock-based compensation

    235         -         -         -         -         -         235         -         -         235         -    

Merrill Lynch cash capital contribution

    7         -         -         -         -         -         7         -         -         7         -    

Issuance of common shares related to employee stock transactions

    (351)         -         -         -         -         400         49         -         -         49         -    

Employee tax benefit withholdings related to employee stock transactions

    -         -         -         -         -         (139)         (139)         -         -         (139)         -    

Shares repurchased

    (1,000)         -         -         -         -         (167)         (1,167)         -         -         (1,167)         -    

Net tax benefit (shortfall) from stock-based compensation

    59         -         -         -         -         -         59         -         -         59         -    

Subscriptions(redemptions/distributions)-noncontrolling interest holders

    -         -         -         -         -         -         -         (12)         (5)         (17)         188    

Net consolidations (deconsolidations) of sponsored investment funds

    -         -         -         -         -         -         -         -         -         -         (246)    

Other comprehensive income (loss)

    -         -         -         1         -         -         1         -         -         1         -    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2012

      $19,226           $5,627             $70             ($126)             ($1)           ($124)           $24,672             $178               $34           $24,884             $38    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amounts include $2 million and $1 million of common stock at June 30, 2012 and December 31, 2011, respectively.

See accompanying notes to condensed consolidated financial statements.

 

5


Table of Contents

BlackRock, Inc.

Condensed Consolidated Statements of Cash Flows

(in millions)

(unaudited)

 

         Six Months Ended    
June 30,
 
         2013              2012      

Cash flows from operating activities

     

Net income

     $1,372         $1,135   

Adjustments to reconcile net income to cash flows from operating activities:

     

Depreciation and amortization

     144         145   

Amortization of deferred sales commissions

     24         30   

Stock-based compensation

     231         235   

Deferred income tax expense (benefit)

     37         33   

Gain related to PennyMac initial public offering

     (39)         -   

Gain related to the charitable contribution

     (80)         -   

Charitable contribution

     124         -   

Net (gains) losses on non-trading investments

     (27)         (18)   

Purchases of investments within consolidated sponsored investment funds

     (47)         (70)   

Proceeds from sales and maturities of investments within consolidated sponsored investment funds

     77         41   

Assets and liabilities of consolidated VIEs:

     

Change in cash and cash equivalents

     172         10   

Net (gains) losses within consolidated VIEs

     (4)         1   

Net (purchases) proceeds within consolidated VIEs

     (32)         169   

(Earnings) losses from equity method investees

     (85)         (59)   

Distributions of earnings from equity method investees

     32         18   

Changes in operating assets and liabilities:

     

Accounts receivable

     (15)         (122)   

Deferred sales commissions

     (28)         (23)   

Investments, trading

     (70)         (188)   

Other assets

     (94)         (136)   

Accrued compensation and benefits

     (601)         (557)   

Accounts payable and accrued liabilities

     207         90   

Other liabilities

     32         131   
  

 

 

    

 

 

 

Cash flows from operating activities

     1,330         865   
  

 

 

    

 

 

 

Cash flows from investing activities

     

Purchases of investments

     (182)         (274)   

Proceeds from sales and maturities of investments

     203         209   

Distributions of capital from equity method investees

     38         32   

Net consolidations (deconsolidations) of sponsored investment funds

     (3)         (204)   

Acquisitions, net of cash acquired

     -         (212)   

Purchases of property and equipment

     (46)         (98)   
  

 

 

    

 

 

 

Cash flows from investing activities

     10         (547)   
  

 

 

    

 

 

 

Cash flows from financing activities

     

Repayments of short-term borrowings

     (100)         -   

Repayments of long-term borrowings

     (750)         -   

Proceeds from long-term borrowings

     -         1,495   

Cash dividends paid

     (595)         (545)   

Proceeds from stock options exercised

     15         44   

Proceeds from issuance of common stock

     3         4   

Repurchases of common stock

     (715)         (1,305)   

Merrill Lynch cash capital contribution

     -         7   

Net proceeds from (repayments of) borrowings by consolidated VIEs

     (261)         (174)   

Net (redemptions/distributions paid) subscriptions received from noncontrolling interests holders

     175         171   

Excess tax benefit from stock-based compensation

     35         68   
  

 

 

    

 

 

 

Cash flows from financing activities

     (2,193)         (235)   
  

 

 

    

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (85)         6   
  

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

     (938)         89   

Cash and cash equivalents, beginning of period

     4,606         3,506   
  

 

 

    

 

 

 

Cash and cash equivalents, end of period

     $3,668         $3,595   
  

 

 

    

 

 

 

Supplemental disclosure of cash flow information:

     

Cash paid for:

     

Interest

     $102         $92   

Interest on borrowings of consolidated VIEs

     $59         $35   

Income taxes

     $492         $556   

Supplemental schedule of non-cash investing and financing transactions:

     

Issuance of common stock

     $378         $352   

Increase (decrease) in noncontrolling interests due to net consolidation (deconsolidation) of sponsored investment funds

     ($170)         ($246)   

See accompanying notes to condensed consolidated financial statements.

 

6


Table of Contents

BlackRock, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1.  Business Overview

BlackRock, Inc. (together, with its subsidiaries, unless the context otherwise indicates, “BlackRock” or the “Company”) provides diversified investment management services to institutional clients, intermediary and individual investors through various investment vehicles. Investment management services primarily consist of the management of equity, fixed income, multi-asset, alternative investment and cash management products. BlackRock offers investment products in a variety of vehicles, including open-end and closed-end mutual funds, iShares® exchange-traded funds (“ETFs”), collective investment trusts and separate accounts. In addition, BlackRock provides market risk management, financial markets advisory and enterprise investment system services to a broad base of clients. Financial markets advisory services include valuation services relating to illiquid securities, dispositions and workout assignments (including long-term portfolio liquidation assignments), risk management and strategic planning and execution.

On June 30, 2013, The PNC Financial Services Group, Inc. (“PNC”) held 20.8% of the Company’s voting common stock and 21.8% of the Company’s capital stock, which includes outstanding common and non-voting preferred stock.

2.  Significant Accounting Policies

Basis of Presentation.    These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of the Company and its controlled subsidiaries. Noncontrolling interests on the condensed consolidated statements of financial condition include the portion of consolidated sponsored investment funds in which the Company does not have direct equity ownership. Significant accounts and transactions between consolidated entities have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Certain financial information that normally is included in annual financial statements, including certain financial statement footnotes, is not required for interim reporting purposes and has been condensed or omitted herein. These condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, which was filed with the Securities and Exchange Commission (“SEC”) on March 1, 2013 (“2012 Form 10-K”).

The interim financial information at June 30, 2013 and for the three and six months ended June 30, 2013 and 2012 is unaudited. However, in the opinion of management, the interim information includes all normal recurring adjustments necessary for the fair presentation of the Company’s results for the periods presented. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.

 

7


Table of Contents

2.  Significant Accounting Policies (continued)

 

Fair Value Measurements.

Hierarchy of Fair Value Inputs.    The provisions of Accounting Standards Codification (“ASC”) 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), establish a hierarchy that prioritizes inputs to valuation techniques used to measure fair value and require companies to disclose the fair value of their financial instruments according to the fair value hierarchy (i.e., Level 1, 2 and 3 inputs, as defined). The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:

Level 1 Inputs:

Quoted prices (unadjusted) in active markets for identical assets or liabilities at the reporting date.

 

   

Level 1 assets may include listed mutual funds (including those accounted for under the equity method of accounting as these mutual funds are investment companies that have publicly available net asset values (“NAVs”), which in accordance with GAAP, are calculated under fair value measures and the changes are equal to the earnings of such funds), ETFs, listed equities and certain exchange-traded derivatives.

Level 2 Inputs:

Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; quotes from pricing services or brokers for which the Company can determine that orderly transactions took place at the quoted price or that the inputs used to arrive at the price are observable; and inputs other than quoted prices that are observable, such as models or other valuation methodologies. As a practical expedient, the Company relies on the NAV (or its equivalent) of certain investments as their fair value.

 

   

Level 2 assets may include debt securities, bank loans, short-term floating rate notes and asset-backed securities, securities held within consolidated hedge funds, certain equity method limited partnership interests in hedge funds valued based on NAV (or its equivalent) where the Company has the ability to redeem at the measurement date or within the near term without redemption restrictions, restricted public securities valued at a discount, as well as over-the-counter derivatives, including interest and inflation rate swaps and foreign currency exchange contracts that have inputs to the valuations that generally can be corroborated by observable market data.

Level 3 Inputs:

Unobservable inputs for the valuation of the asset or liability, which may include non-binding broker quotes. Level 3 assets include investments for which there is little, if any, market activity. These inputs require significant management judgment or estimation. Certain investments that are valued using a NAV (or its equivalent) and are subject to current redemption restrictions that will not be lifted in the near term are included in Level 3.

 

   

Level 3 assets may include general and limited partnership interests in private equity funds, funds of private equity funds, real estate funds, hedge funds and funds of hedge funds, direct private equity investments held within consolidated funds, bank loans and bonds.

 

8


Table of Contents

2.  Significant Accounting Policies (continued)

 

Fair Value Measurements (continued)

 

   

Level 3 liabilities include borrowings of consolidated collateralized loan obligations (“CLOs”) valued based upon non-binding single-broker quotes.

 

   

Level 3 inputs include BlackRock capital accounts for its partnership interests in various alternative investments, including distressed credit hedge funds, real estate and private equity funds, which may be adjusted by using the returns of certain market indices.

Significance of Inputs.    The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.

Valuation Techniques.    The fair values of certain Level 3 assets and liabilities were determined using various methodologies as appropriate, including NAVs of underlying investments, third-party pricing vendors, broker quotes and market and income approaches. Such quotes and modeled prices are evaluated for reasonableness through various procedures, including due diligence reviews of third-party pricing vendors, variance analyses, consideration of the current market environment and other analytical procedures.

As a practical expedient, the Company relies on NAV as the fair value for certain investments. The inputs to value these investments may include BlackRock capital accounts for its partnership interests in various alternative investments, including distressed credit hedge funds, real estate and private equity funds, which may be adjusted by using the returns of certain market indices. The various partnerships are investment companies, which record their underlying investments at fair value based on fair value policies established by management of the underlying fund. Fair value policies at the underlying fund generally require the fund to utilize pricing/valuation information, from third-party sources including independent appraisals. However, in some instances, current valuation information for illiquid securities or securities in markets that are not active may not be available from any third-party source or fund management may conclude that the valuations that are available from third-party sources are not reliable. In these instances, fund management may perform model-based analytical valuations that may be used as an input to value these investments.

A significant amount of inputs used to value equity, debt securities and bank loans is sourced from well-recognized third-party pricing vendors. Generally, prices obtained from pricing vendors are categorized as Level 1 inputs for identical securities traded in active markets and as Level 2 for other similar securities if the vendor uses observable inputs in determining the price. Annually, BlackRock’s internal valuation committee or other designated groups review both the valuation methodologies, including the general assumptions and methods used to value various asset classes, and operational processes with these vendors. In addition, on a quarterly basis, meetings are held with the vendors to identify any significant changes to the vendors’ processes.

In addition, quotes obtained from brokers generally are non-binding and categorized as Level 3 inputs. However, if the Company is able to determine that market participants have transacted for the asset in an orderly manner near the quoted price or if the Company can determine that the inputs used by the broker are observable, the quote is classified as a Level 2 input.

Fair Value Option.    ASC 825-10, Financial Instruments (“ASC 825-10”), provides a fair value option election that allows companies an irrevocable election to use fair value as the initial and

 

9


Table of Contents

2.  Significant Accounting Policies (continued)

 

Fair Value Measurements (continued)

 

subsequent accounting measurement attribute for certain financial assets and liabilities. ASC 825-10 permits entities to elect to measure eligible financial assets and liabilities at fair value on an ongoing basis. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The decision to elect the fair value option is determined on an instrument-by-instrument basis, which must be applied to an entire instrument, and not only specified risks, specific cash flows, or portions of that instrument, and is irrevocable once elected. Assets and liabilities measured at fair value pursuant to ASC 825-10 are required to be reported separately from those instruments measured using another accounting method.

Derivative Instruments and Hedging Activities.    ASC 815-10, Derivatives and Hedging (“ASC 815-10”), establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts and for hedging activities. ASC 815-10 generally requires an entity to recognize all derivatives as either assets or liabilities on the condensed consolidated statements of financial condition and to measure those investments at fair value.

The Company does not use derivative financial instruments for trading or speculative purposes. The Company uses derivative financial instruments primarily for purposes of hedging: (i) exposures to fluctuations in foreign currency exchange rates of certain assets and liabilities, (ii) market exposures for certain seed investments and (iii) future cash flows on floating-rate notes. The Company may also use derivatives within its separate account assets, which are segregated funds held for purposes of funding individual and group pension contracts. In addition, certain consolidated sponsored investment funds may also invest in derivatives as a part of their investment strategy.

Changes in the fair value of the Company’s derivative financial instruments are generally recognized in earnings and, where applicable, are offset by the corresponding gain or loss on the related foreign-denominated assets or liabilities or hedged investments, on the condensed consolidated statements of income.

Separate Account Assets and Liabilities. Separate account assets are maintained by BlackRock Life Limited, a wholly owned subsidiary of the Company, which is a registered life insurance company in the United Kingdom, and represent segregated assets held for purposes of funding individual and group pension contracts. The life insurance company does not underwrite any insurance contracts that involve any insurance risk transfer from the insured to the life insurance company. The separate accounts assets primarily include equity, debt securities, money market funds and derivatives. The separate account assets are not subject to general claims of the creditors of BlackRock. These separate account assets and the related equal and offsetting liabilities are recorded as separate account assets and separate account liabilities on the condensed consolidated statements of financial condition in accordance with the ASC 944-80, Financial Services – Separate Accounts.

The net investment income attributable to separate account assets supporting individual and group pension contracts accrues directly to the contract owner and is not reported on the condensed consolidated statements of income. While BlackRock has no economic interest in these separate account assets and liabilities, BlackRock earns policy administration and management fees associated with these products, which are included in investment advisory, administration fees and securities lending revenue on the condensed consolidated statements of income.

 

10


Table of Contents

2.  Significant Accounting Policies (continued)

 

Fair Value Measurements (continued)

 

Separate Account Collateral Assets Held and Liabilities Under Securities Lending Agreements.    The Company facilitates securities lending arrangements whereby securities held by separate account assets maintained by BlackRock Life Limited are lent to third parties under global master securities lending agreements. In exchange, the Company receives collateral with minimum values generally ranging from approximately 102% to 112% of the value of the securities lent in order to reduce counterparty risk. The required collateral value is calculated on a daily basis. The global master securities lending agreements provide the Company, in the event of customer default, the right to liquidate collateral or to request additional collateral. Under the Company’s securities lending arrangements, the Company can resell or re-pledge the collateral and the borrower can resell or re-pledge the loaned securities. The securities lending transactions entered into by the Company are accompanied by an agreement that entitles the Company to request the borrower to return the securities at any time; therefore, these transactions are not reported as sales under ASC 860, Transfers and Servicing.

As a result of the Company’s ability to resell or re-pledge the collateral, the Company records on the condensed consolidated statements of financial condition the cash and non-cash collateral received under these arrangements as its own asset in addition to an equal and offsetting collateral liability for the obligation to return the collateral. During the six months ended June 30, 2013 and 2012, the Company had not re-sold or re-pledged any of the collateral received under these arrangements. At June 30, 2013 and December 31, 2012, the fair value of loaned securities held by separate account assets was approximately $17.7 billion and $21.0 billion, respectively, and the fair value of the collateral held under these securities lending agreements was approximately $19.4 billion and $23.0 billion, respectively.

Appropriated Retained Earnings.    Upon the initial consolidation of CLOs, BlackRock records a cumulative effect adjustment to appropriated retained earnings on the condensed consolidated statements of financial condition equal to the difference between the fair value of the CLOs’ assets and the fair value of their liabilities. Such amounts are recorded as appropriated retained earnings as the CLO noteholders, not BlackRock, ultimately will receive the benefits or absorb the losses associated with the CLOs’ assets and liabilities. The net change in the fair value of the CLOs’ assets and liabilities is recorded as net income (loss) attributable to nonredeemable noncontrolling interests and as an adjustment to appropriated retained earnings.

Accounting Pronouncements Adopted in the Six Months Ended June 30, 2013

Amendments to Accumulated Other Comprehensive Income Disclosures.    On February 5, 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”), which added new disclosure requirements for items reclassified out of accumulated other comprehensive income (“AOCI”). See Note 15, Accumulated Other Comprehensive Income (Loss).

Disclosures About Offsetting Assets and Liabilities.    On December 16, 2011, the FASB issued ASU 2011-11, Disclosures About Offsetting Assets and Liabilities (“ASU 2011-11”), which creates new disclosure requirements about the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. On January 31, 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (“ASU 2013-01”), that provides clarification about which instruments and transactions are subject to ASU 2011-11. The adoption of ASU 2011-11 and ASU 2013-01 on January 1, 2013 was not material to the condensed consolidated financial statements.

 

11


Table of Contents

2.  Significant Accounting Policies (continued)

 

Recent Accounting Pronouncements Not Yet Adopted

Cumulative Translation Adjustment.    In March 2013, the FASB issued ASU 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU 2013-05”). ASU 2013-05 addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. ASU 2013-05 is effective for the Company on January 1, 2014. The Company does not believe the adoption of ASU 2013-05 will have a material impact on the condensed consolidated financial statements.

Investment Company Guidance.    In June 2013, the FASB issued ASU 2013-08, Financial Services — Investment Companies: Amendments to the Scope, Measurement, and Disclosure Requirements (“ASU 2013-08”). ASU 2013-08 amends the current criteria for an entity to qualify as an investment company, creates new disclosure requirements and amends the measurement criteria for certain interests in other investment companies. The Company is currently evaluating the impact of adopting ASU 2013-08, which is effective for the Company on January 1, 2014.

Benchmark Interest Rate for Hedge Accounting.    In July 2013, the FASB issued ASU 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (ASU 2013-10”). ASU 2013-10 provides for the inclusion of certain interest rate benchmarks for hedge accounting purposes. ASU 2013-10 is effective for the Company for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The Company does not believe the adoption of ASU 2013-10 will have a material impact on the condensed consolidated financial statements.

Presentation of an Unrecognized Tax Benefit.    In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 is effective for the Company on January 1, 2014. The Company does not believe the adoption of ASU 2013-11 will have a material impact on the condensed consolidated financial statements.

 

12


Table of Contents

3.  Investments

A summary of the carrying value of investments is as follows:

 

(in millions)   June 30,
2013
   December 31,
2012

Available-for-sale investments

    $150           $158     

Held-to-maturity investments

    53           112     

Trading investments:

        

Consolidated sponsored investment funds

    289           123     

Other equity and debt securities

    79           94     

Deferred compensation plan mutual funds

    57           53     
 

 

 

  

 

 

Total trading investments

    425           270     

Other investments:

        

Consolidated sponsored investment funds

    338           401     

Equity method investments

    545           595     

Deferred compensation plan hedge fund equity method investments

    10           9     

Cost method investments(1)

    122           120     

Carried interest

    130           85     
 

 

 

  

 

 

Total other investments

    1,145           1,210     
 

 

 

  

 

 

Total investments

                $1,773                       $1,750     
 

 

 

  

 

 

 

  (1) 

Amounts primarily include Federal Reserve Bank Stock.

At June 30, 2013, the Company consolidated $627 million of investments held by consolidated sponsored investment funds (non-variable interest entities (“VIEs”)) of which $289 million and $338 million were classified as trading investments and other investments, respectively. At December 31, 2012, the Company consolidated $524 million of investments held by consolidated sponsored investment funds (non-VIEs) of which $123 million and $401 million were classified as trading investments and other investments, respectively.

Available-for-Sale Investments

A summary of the cost and carrying value of investments classified as available-for-sale investments is as follows:

 

(in millions)                                    
        Gross Unrealized   Carrying
Value
 
June 30, 2013   Cost   Gains   Losses  

Equity securities of sponsored investment funds

    $148          $3          ($4)          $147   

Other securities

    2          1          -          3   
 

 

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale investments

    $150          $4          ($4)          $150   
 

 

 

 

 

 

 

 

 

 

 

 

 
              Gross Unrealized   Carrying
Value
 
December 31, 2012   Cost   Gains   Losses  

Equity securities of sponsored investment funds

    $142          $14          ($1)          $155   

Other securities

    2          1          -          3   
 

 

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale investments

            $144                  $15                  ($1)                  $158   
 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale investments primarily included seed investments in BlackRock sponsored investment mutual funds.

 

13


Table of Contents

3.  Investments (continued)

 

Held-to-Maturity Investments

The carrying value of held-to-maturity investments was $53 million and $112 million at June 30, 2013 and December 31, 2012, respectively. Held-to-maturity investments included foreign government debt held for regulatory purposes and the amortized cost (carrying value) of these investments approximated fair value. At June 30, 2013, $40 million of these investments mature in one year or less and $13 million mature after 10 years.

Trading Investments

A summary of the cost and carrying value of trading investments is as follows:

 

(in millions)        June 30, 2013              December 31, 2012      
     Cost     

Carrying

Value

     Cost     

Carrying

Value

 
  

 

 

    

 

 

 

Trading investments:

           

Deferred compensation plan mutual funds

     $  51         $  57         $  46         $  53   

Equity/Multi-asset mutual funds

     93         100         154         162   

Debt securities/fixed income mutual funds:

           

Corporate debt

     159         156         44         44   

Government debt

     119         112         11         11   
  

 

 

    

 

 

 

Total trading investments

             $422                 $425                 $255                 $270   
  

 

 

    

 

 

 

At June 30, 2013, trading investments included $80 million of equity securities and $209 million of debt securities held by consolidated sponsored investment funds, $57 million of certain deferred compensation plan mutual fund investments and $79 million of other equity and debt securities.

Other Investments

A summary of the cost and carrying value of other investments is as follows:

 

(in millions)        June 30, 2013              December 31, 2012      
     Cost     

Carrying

Value

     Cost     

Carrying

Value

 
  

 

 

    

 

 

 

Other investments:

           

Consolidated sponsored investment funds

     $325         $338         $378         $401   

Equity method

     467         545         541         595   

Deferred compensation plan hedge fund

equity method investments

     9         10         15         9   

Cost method investments:

           

Federal Reserve Bank stock

     92         92         89         89   

Other

     19         30         31         31   
  

 

 

    

 

 

 

Total cost method investments

     111         122         120         120   

Carried interest

     -         130         -         85   
  

 

 

    

 

 

 

Total other investments

             $912                 $1,145                 $1,054                 $1,210   
  

 

 

    

 

 

 

Consolidated sponsored investment funds include third-party private equity funds, direct investments in private companies and third-party hedge funds held by BlackRock sponsored investment funds.

 

14


Table of Contents

3.  Investments (continued)

 

Other Investments (continued)

 

Equity method investments primarily include BlackRock’s direct investment in certain BlackRock sponsored investment funds. See Note 10, Other Assets, for information on the Company’s investment in PennyMac Financial Services, Inc. (“PennyMac”), which is included in other assets on the condensed consolidated statements of financial condition.

Cost method investments include non-marketable securities, including Federal Reserve Bank stock, which is held for regulatory purposes and is restricted from sale. At June 30, 2013 and December 31, 2012, there were no indicators of impairment on these investments.

Carried interest represents allocations to BlackRock’s general partner capital accounts from certain funds. These balances are subject to change upon cash distributions, additional allocations or reallocations back to limited partners within the respective funds.

4.  Consolidated Sponsored Investment Funds

The Company consolidates certain sponsored investment funds primarily because it is deemed to control such funds. The investments owned by these consolidated sponsored investment funds are classified as trading or other investments. The following table presents the balances related to these consolidated funds that were included on the condensed consolidated statements of financial condition as well as BlackRock’s net interest in these funds:

 

(in millions)    June 30,
2013
     December 31,
2012
 

Cash and cash equivalents

     $185         $133   

Investments:

     

Trading investments

     289         123   

Other investments

     338         401   

Other assets

     16         25   

Other liabilities

     (41)         (65)   

Noncontrolling interests

     (212)         (187)   
  

 

 

    

 

 

 

BlackRock’s net interests in consolidated sponsored investment funds

                       $575                           $430   
  

 

 

    

 

 

 

BlackRock’s total exposure to consolidated sponsored investment funds of $575 million and $430 million at June 30, 2013 and December 31, 2012, respectively, represents the value of the Company’s economic ownership interest in these sponsored investment funds. Valuation changes associated with these consolidated investment funds are reflected in non-operating income (expense) and partially offset in net income (loss) attributable to noncontrolling interests for the portion not attributable to BlackRock.

In addition, at June 30, 2013 and December 31, 2012, several consolidated CLOs and one investment fund, which were deemed to be VIEs, were excluded from the balances in the table above as the balances for these investment products are reported separately on the condensed consolidated statements of financial condition. See Note 6, Variable Interest Entities, for further discussion of these consolidated investment products.

The Company is not readily able to access cash and cash equivalents held by consolidated sponsored investment funds to use in its operating activities. In addition, the Company is not readily able to sell investments held by consolidated sponsored investment funds in order to obtain cash for use in the Company’s operations.

 

15


Table of Contents

5.  Fair Value Disclosures

Fair Value Hierarchy

June 30, 2013

Assets measured at fair value on a recurring basis and other assets not held at fair value were as follows:

 

    Assets measured at fair value on a
recurring basis
             
(in millions)  

Quoted

Prices in

Active

Markets for
Identical
Assets

(Level 1)

    Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
    Other Assets
Not Held at Fair
Value(1)
   

June 30,

2013

 
 

 

 

 

Assets:

         

Investments

         

Available-for-sale:

         

Equity securities (funds and CDOs)

    $147        $-        $1        $-        $148   

Debt securities

    -        2        -        -        2   
 

 

 

 

Total available-for-sale

    147        2        1        -        150   

Held-to-maturity:

         

Debt securities

    -        -        -        53        53   

Trading:

         

Deferred compensation plan mutual funds

    57        -        -        -        57   

Equity/Multi-asset mutual funds

    97        3        -        -        100   

Debt securities / fixed income mutual funds

    58        210        -        -        268   
 

 

 

 

Total trading

    212        213        -        -        425   

Other investments:

         

Consolidated sponsored investment funds:

         

Hedge funds / Funds of funds

    3        24        47        -        74   

Private / public equity(2)

    2        13        249        -        264   
 

 

 

 

Total consolidated sponsored investment funds

    5        37        296        -        338   

Equity method:

         

Hedge funds / Funds of hedge funds

    -        68        157        52        277   

Private equity investments

    -        -        105        -        105   

Real estate funds

    -        19        97        7        123   

Fixed income mutual funds

    34        -        -        -        34   

Equity/Multi-asset, alternative mutual funds

    6        -        -        -        6   
 

 

 

 

Total equity method

    40        87        359        59        545   

Deferred compensation plan hedge fund equity method investments

    -        10        -        -        10   

Cost method investments

    -        -        -        122        122   

Carried interest

    -        -        -        130        130   
 

 

 

 

Total investments

    404        349        656        364        1,773   
 

 

 

 

Separate account assets

    95,377        36,635        -        834        132,846   

Separate account collateral held under securities lending agreements:

         

Equity securities

    17,880        -        -        -        17,880   

Debt securities

    -        1,546        -        -        1,546   
 

 

 

 

Total separate account collateral held under securities lending agreements

    17,880        1,546        -        -        19,426   

Other assets(3)

    -        12        -        -        12   

Assets of consolidated VIEs:

         

Bank loans

    -        1,910        93        -        2,003   

Bonds

    -        60        35        -        95   

Private / public equity(4)

    -        7        19        -        26   
 

 

 

 

Total assets of consolidated VIEs

    -        1,977        147        -        2,124   
 

 

 

 

Total

            $113,661                $40,519                $803                $1,198                $156,181   
 

 

 

 

 

  (1) 

Amounts comprised of investments held at cost or amortized cost, carried interest and certain equity method investments, which include investment companies and other assets, which in accordance with GAAP are not accounted for under a fair value measure. In accordance with GAAP, certain equity method investees do not account for both their financial assets and liabilities under fair value measures; therefore, the Company’s investment in such equity method investees may not represent fair value.

  (2) 

Level 3 amounts included $209 million and $40 million of underlying third-party private equity funds and direct investments in private equity companies held by private equity funds, respectively.

  (3) 

Amount included company-owned and split-dollar life insurance policies.

  (4) 

Level 3 amounts included $17 million and $2 million of underlying third-party private equity funds and direct investments in private equity companies held by a private equity fund.

 

16


Table of Contents

5.  Fair Value Disclosures (continued)

 

Fair Value Hierarchy (continued)

 

Liabilities measured at fair value on a recurring basis at June 30, 2013 were as follows:

 

(in millions)    Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
    

June 30,

2013

 

Liabilities:

           

Borrowings of consolidated VIEs

     $           -         $         -         $2,145         $  2,145   

Separate account collateral liabilities under securities lending agreements

     17,880         1,546         -         19,426   

Other liabilities(1)

     16         5         -         21   
  

 

 

 

Total liabilities measured at fair value

             $17,896                 $1,551                 $2,145                 $21,592   
  

 

 

 

 

  (1) 

Amounts included a credit default swap (see Note 7, Derivatives and Hedging, for more information) and securities sold short within consolidated sponsored investment funds recorded within other liabilities on the condensed consolidated statements of financial condition.

 

17


Table of Contents

5.  Fair Value Disclosures (continued)

 

Fair Value Hierarchy (continued)

 

December 31, 2012

Assets measured at fair value on a recurring basis and other assets not held at fair value were as follows:

 

    Assets measured at fair value on a
recurring basis
             
(in millions)   Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
    Other Assets
Not Held at
Fair Value (1)
    December 31,
2012
 

Assets:

         

Investments

         

Available-for-sale:

         

Equity securities (funds and CDOs)

  $ 155      $ -      $ 1      $ -      $ 156   

Debt securities

    -        2        -        -        2   
 

 

 

 

Total available-for-sale

    155        2        1        -        158   

Held-to-maturity:

         

Debt securities

    -        -        -        112        112   

Trading:

         

Deferred compensation plan mutual funds

    53        -        -        -        53   

Equity/Multi-asset mutual funds

    159        3        -        -        162   

Debt securities / fixed income mutual funds

    5        50        -        -        55   
 

 

 

 

Total trading

    217        53        -        -        270   

Other investments:

         

Consolidated sponsored investment funds:

         

Hedge funds / Funds of funds

    3        39        73        -        115   

Private / public equity(2)

    10        10        266        -        286   
 

 

 

 

Total consolidated sponsored investment funds

    13        49        339        -        401   

Equity method:

         

Hedge funds / Funds of hedge funds

    -        61        161        39        261   

Private equity investments

    -        -        90        -        90   

Real estate funds

    -        19        88        15        122   

Fixed income mutual funds

    46        -        -        -        46   

Equity/Multi-asset, alternative mutual funds

    76        -        -        -        76   
 

 

 

 

Total equity method

    122        80        339        54        595   

Deferred compensation plan hedge fund equity method investments

    -        9        -        -        9   

Cost method investments

    -        -        -        120        120   

Carried interest

    -        -        -        85        85   
 

 

 

 

Total investments

    507        193        679        371        1,750   
 

 

 

 

Separate account assets

    95,514        38,392        2        860        134,768   

Separate account collateral held under securities lending agreements:

         

Equity securities

    21,273        -        -        -        21,273   

Debt securities

    -        1,748        -        -        1,748   
 

 

 

 

Total separate account collateral held under securities lending agreements

    21,273        1,748        -        -        23,021   

Other assets(3)

    -        12        -        -        12   

Assets of consolidated VIEs:

         

Bank loans

    -        2,004        106        -        2,110   

Bonds

    -        78        46        -        124   

Private / public equity(4)

    2        6        22        -        30   
 

 

 

 

Total assets of consolidated VIEs

    2        2,088        174        -        2,264   
 

 

 

 

Total

  $ 117,296      $ 42,433      $ 855      $ 1,231      $ 161,815   
 

 

 

 

 

  (1) 

Amounts comprised of investments held at cost or amortized cost, carried interest and certain equity method investments, which include investment companies and other assets, which in accordance with GAAP are not accounted for under a fair value measure. In accordance with GAAP, certain equity method investees do not account for both their financial assets and liabilities under fair value measures; therefore, the Company’s investment in such equity method investees may not represent fair value.

  (2) 

Level 3 amounts included $212 million and $54 million of underlying third-party private equity funds and direct investments in private equity companies held by private equity funds, respectively.

  (3) 

Amount included company-owned and split-dollar life insurance policies.

  (4) 

Level 3 amounts included $20 million and $2 million of underlying third-party private equity funds and direct investments in private equity companies held by a private equity fund.

 

18


Table of Contents

5.  Fair Value Disclosures (continued)

 

Fair Value Hierarchy (continued)

 

Liabilities measured at fair value on a recurring basis at December 31, 2012 were as follows:

 

(in millions)   

Quoted

Prices in
Active
Markets for
Identical
Assets

(Level 1)

     Significant
Other
Observable
Inputs
(Level 2)
    

Significant
Unobservable
Inputs

(Level 3)

     December 31,
2012
 

Liabilities:

           

Borrowings of consolidated VIEs

   $ -       $ -       $ 2,402       $ 2,402   

Separate account collateral liabilities under securities lending agreements

     21,273         1,748         -         23,021   

Other liabilities(1)

     15         5         -         20   
  

 

 

 

Total liabilities measured at fair value

           $ 21,288           $ 1,753           $ 2,402           $ 25,443   
  

 

 

 

 

 

  (1) 

Amounts include a credit default swap (see Note 7, Derivatives and Hedging, for more information) and securities sold short within consolidated sponsored investment funds recorded within other liabilities on the condensed consolidated statements of financial condition.

Level 3 Assets.  Level 3 investments of $656 million and $679 million at June 30, 2013 and December 31, 2012, respectively, primarily related to equity method investments and consolidated sponsored investment funds. Level 3 assets within investments, except for direct investments in private equity companies held by private equity funds described below, were primarily valued based upon NAVs received from internal as well as third-party fund managers.

Direct investments in private equity companies held by private equity funds totaled $42 million and $56 million at June 30, 2013 and December 31, 2012, respectively. Direct investments in private equity companies may be valued using the market approach or the income approach, or a combination thereof, and were valued based on an assessment of each underlying investment, incorporating evaluation of additional significant third-party financing, changes in valuations of comparable peer companies, the business environment of the companies, market indices, assumptions relating to appropriate risk adjustments for nonperformance and legal restrictions on disposition, among other factors. The fair value derived from the methods used is evaluated and weighted, as appropriate, considering the reasonableness of the range of values indicated. Under the market approach, fair value may be determined by reference to multiples of market-comparable companies or transactions, including earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples. Under the income approach, fair value may be determined by discounting the expected cash flows to a single present value amount using current expectations about those future amounts. Unobservable inputs used in a discounted cash flow model may include projections of operating performance generally covering a five-year period and a terminal value of the private equity direct investment. For securities utilizing the discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, risk premium or discount for lack of marketability in isolation could result in a significantly lower (higher) fair value measurement. For securities utilizing the market comparable companies valuation technique, a significant increase (decrease) in the EBITDA multiple in isolation could result in a significantly higher (lower) fair value measurement.

 

19


Table of Contents

5.  Fair Value Disclosures (continued)

 

Fair Value Hierarchy (continued)

 

Level 3 assets recorded within separate account assets include single-broker non-binding quotes for fixed income securities and equity securities that have unobservable inputs due to certain corporate actions.

Level 3 assets of consolidated VIEs include bank loans and bonds valued based on single-broker non-binding quotes and direct private equity investments and private equity funds valued based upon internal as well as third-party fund manager valuations, which may be adjusted by using the returns of certain market indices.

Level 3 Liabilities.  Level 3 liabilities recorded as borrowings of consolidated VIEs include CLO borrowings valued based upon single-broker non-binding quotes.

 

20


Table of Contents

5.  Fair Value Disclosures (continued)

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended June 30, 2013

 

(in millions)    March 31,
2013
     Realized
and
unrealized
gains
(losses) in
earnings
and OCI
    Purchases      Sales and
maturities
    Issuances  and
other
settlements(1)
    Transfers
into
Level 3
     Transfers
out of
Level 3
    June 30,
2013
     Total net 
gains (losses)
included in
earnings(2)
 

Assets:

                      

Investments

                      

Available-for-sale:

                      

Equity securities (CDOs)

     $1         $-        $-         $-        $-        $-         $-        $1         $-   

Consolidated sponsored investment funds:

                      

Hedge funds / Funds of funds

     84         2        -         (9     (28     -         (2     47         2   

Private equity

     264         (7     5         (10     -        -         (3     249         (6

Equity method:

                      

Hedge funds / Funds of hedge funds

     136         5        -         -        16        -         -        157         5   

Private equity investments

     99         4        4         -        (2     -         -        105         4   

Real estate funds

     91         7        1         -        (2     -         -        97         6   
  

 

 

 

Total Level 3 investments

     675         11        10         (19     (16     -         (5     656         11   
  

 

 

 

Assets of consolidated VIEs:

                      

Bank loans

     97         (1     48         (29     -        17         (39     93      

Bonds

     49         -        -         (14     -        -         -        35      

Private equity

     20         -        -         (1     -        -         -        19      

Fund of hedge funds

     116         -        18         -        (134     -         -        -      
  

 

 

    

Total Level 3 assets of consolidated VIEs

     282         (1     66         (44     (134     17         (39     147         n/a (3) 
  

 

 

    

Total Level 3 assets

     $957         $10        $76         ($63     ($150     $17         ($44     $803      
  

 

 

    

Liabilities:

                      

Borrowings of consolidated VIEs

             $2,332         $6        $-         $-        ($181     $-         $-        $2,145         n/a (3) 

 

  n/a – not applicable
  (1) 

Amount primarily includes distributions from equity method investees, repayments of borrowings of consolidated VIEs, elimination of investment related to a deconsolidation of a consolidated VIE and a reclassification of an investment from a consolidated sponsored investment fund to an equity method investment due to a change in ownership percentage.

  (2) 

Earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date.

  (3) 

The net gain (loss) on consolidated VIEs is solely attributable to noncontrolling interests on the condensed consolidated statements of income.

 

21


Table of Contents

5.  Fair Value Disclosures (continued)

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Six Months Ended June 30, 2013

 

(in millions)    December 31,
2012
     Realized
and
unrealized
gains
(losses) in
earnings
and OCI
    Purchases      Sales and
maturities
    Issuances  and
other
settlements(1)
    Transfers
into
Level 3
     Transfers
out of
Level 3
    June 30,
2013
     Total net
gains
(losses)
included in
earnings(2)
 

Assets:

                      

Investments

                      

Available-for-sale:

                      

Equity securities (CDOs)

     $1         $-        $-         $-        $-        $-         $-        $1         $-   

Consolidated sponsored investment funds:

                      

Hedge funds / Funds of hedge funds

     73         6        12         (9     (28     -         (7     47         6   

Private equity

     266         16        12         (39     -        -         (6     249         14   

Equity method:

                      

Hedge funds / Funds of hedge funds

     161         9        1         -        (14     -         -        157         9   

Private equity investments

     90         10        9         -        (4     -         -        105         10   

Real estate funds

     88         8        3         -        (2     -         -        97         8   
  

 

 

 

Total Level 3 investments

     679         49        37         (48     (48     -         (13     656         47   
  

 

 

    

Separate account assets

     2         -        -         (2     -        -         -        -         n/a (3) 

Assets of consolidated VIEs:

                      

Bank loans

     106         (1     72         (40     -        32         (76     93      

Bonds

     46         (1     4         (14     -        -         -        35      

Private equity

     22         1        -         (4     -        -         -        19      

Fund of hedge funds

     -         -        134         -        (134     -         -        -         -   
  

 

 

    

Total Level 3 assets of consolidated VIEs

     174         (1     210         (58     (134     32         (76     147         n/a (4) 
  

 

 

    

Total Level 3 assets

     $855         $48        $247         ($108     ($182     $32         ($89     $803      
  

 

 

    

Liabilities:

                      

Borrowings of consolidated VIEs

             $2,402         ($4     $-         $-        ($261     $-         $-        $2,145         n/a (4) 

 

  n/a – not applicable
  (1) 

Amount primarily includes distributions from equity method investees, repayments of borrowings of consolidated VIEs, elimination of investment related to a deconsolidation of a consolidated VIE and a reclassification of an investment from a consolidated sponsored investment fund to an equity method investment due to a change in ownership percentage.

  (2) 

Earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date.

  (3) 

The net investment income attributable to separate account assets accrues directly to the contract owners and is not reported on the condensed consolidated statements of income.

  (4) 

The net gain (loss) on consolidated VIEs is solely attributable to noncontrolling interests on the condensed consolidated statements of income.

 

22


Table of Contents

5.  Fair Value Disclosures (continued)

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended June 30, 2012

 

(in millions)    March 31,
2012
     Realized
and
unrealized
gains
(losses) in
earnings
and OCI
    Purchases      Sales and
maturities
    Issuances  and
other
settlements(1)
    Transfers
into
Level 3
     Transfers
out of
Level 3
    June 30,
2012
     Total net 
gains (losses)
included in
earnings(2)
 

Assets:

                      

Investments

                      

Available-for-sale:

                      

Equity securities (CDOs)

     $1         $-        $-         $-        $-        $-         $-        $1         $-   

Consolidated sponsored investment funds:

                      

Hedge funds / Funds of funds

     53         (5     -         -        (2     -         -        46         (5

Private equity

     329         (8     4         (21     -        -         (6     298         (9

Equity method:

                      

Hedge funds / Funds of hedge funds

     197         3        -         -        (13     -         -        187         3   

Private equity investments

     89         2        1         -        (4     -         -        88         2   

Real estate funds

     95         2        6         -        (2     -         -        101         2   
  

 

 

 

Total Level 3 investments

     764         (6     11         (21     (21     -         (6     721         (7
  

 

 

 

Separate account assets

     13         (2     3         (2     -        3         (8     7         n/a (3) 

Assets of consolidated VIEs:

                      

Bank loans

     47         1        10         (1     -        47         (19     85      

Bonds

     44         -        -         -        -        -         -        44      

Private equity

     28         (1     -         (2     -        -         -        25      
  

 

 

    

Total Level 3 assets of consolidated VIEs

     119         -        10         (3     -        47         (19     154         n/a (4) 
  

 

 

    

Total Level 3 assets

     $896         ($8     $24         ($26     ($21     $50         ($33     $882      
  

 

 

    

Liabilities:

                      

Borrowings of consolidated VIEs

             $1,547         $10        $-         $-        ($98     $-         $-        $1,439         n/a (4) 

 

  n/a – not applicable
  (1) 

Amount primarily includes distributions from equity method investees and repayments of borrowings of consolidated VIEs.

  (2) 

Earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date.

  (3) 

The net investment income attributable to separate account assets accrues directly to the contract owners and is not reported on the condensed consolidated statements of income.

  (4) 

The net gain (loss) on consolidated VIEs is solely attributable to noncontrolling interests on the condensed consolidated statements of income.

 

23


Table of Contents

5.  Fair Value Disclosures (continued)

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Six Months Ended June 30, 2012

 

(in millions)    December 31,
2011
     Realized
and
unrealized
gains
(losses) in
earnings
and OCI
    Purchases      Sales and
maturities
    Issuances  and
other
settlements(1)
    Transfers
into
Level 3
     Transfers
out of
Level 3
    June 30,
2012
     Total net
gains (losses)
included in
earnings(2)
 

Assets:

                      

Investments

                      

Available-for-sale:

                      

Equity securities (CDOs)

     $1         $-        $-         $-        $-