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 September 30, 2012
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
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 | ¨ | (Do not check if a smaller reporting company) | 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 October 31, 2012, there were 169,537,195 shares of the registrant’s common stock outstanding.
Table of Contents
Index to Form 10-Q
PART I
FINANCIAL INFORMATION
| Page | ||||||
| Item 1. |
Financial Statements (unaudited) | |||||
| 1 | ||||||
| 3 | ||||||
| 4 | ||||||
| 5 | ||||||
| 7 | ||||||
| 9 | ||||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 44 | ||||
| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 84 | ||||
| Item 4. |
Controls and Procedures | 86 | ||||
| PART II | ||||||
| OTHER INFORMATION | ||||||
| Item 1. |
Legal Proceedings | 87 | ||||
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 88 | ||||
| Item 6. |
Exhibits | 89 | ||||
- ii -
Table of Contents
PART I – FINANCIAL INFORMATION
Condensed Consolidated Statements of Financial Condition
(Dollar amounts in millions, except share data)
(unaudited)
| September 30, 2012 |
December 31, 2011 |
|||||||
| Assets |
||||||||
| Cash and cash equivalents |
$ | 4,223 | $ | 3,506 | ||||
| Accounts receivable |
2,464 | 1,960 | ||||||
| Due from related parties |
121 | 142 | ||||||
| Investments |
1,864 | 1,631 | ||||||
| Assets of consolidated variable interest entities: |
||||||||
| Cash and cash equivalents |
292 | 54 | ||||||
| Bank loans and other investments |
1,683 | 1,639 | ||||||
| Separate account assets |
128,013 | 118,871 | ||||||
| Collateral held under securities lending agreements |
22,562 | 20,918 | ||||||
| Deferred sales commissions, net |
26 | 38 | ||||||
| Property and equipment (net of accumulated depreciation of $564 and $483 at September 30, 2012 and December 31, 2011, respectively) |
560 | 537 | ||||||
| Intangible assets (net of accumulated amortization of $859 and $751 at September 30, 2012 and December 31, 2011, respectively) |
17,442 | 17,356 | ||||||
| Goodwill |
12,908 | 12,792 | ||||||
| Other assets |
670 | 452 | ||||||
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| Total assets |
$ | 192,828 | $ | 179,896 | ||||
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| Liabilities |
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| Accrued compensation and benefits |
$ | 1,204 | $ | 1,383 | ||||
| Accounts payable and accrued liabilities |
1,427 | 923 | ||||||
| Due to related parties |
15 | 22 | ||||||
| Short-term borrowings |
100 | 100 | ||||||
| Liabilities of consolidated variable interest entities: |
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| Borrowings |
1,843 | 1,574 | ||||||
| Other liabilities |
9 | 9 | ||||||
| Long-term borrowings |
6,186 | 4,690 | ||||||
| Separate account liabilities |
128,013 | 118,871 | ||||||
| Collateral liabilities under securities lending agreements |
22,562 | 20,918 | ||||||
| Deferred income tax liabilities |
5,311 | 5,323 | ||||||
| Other liabilities |
849 | 721 | ||||||
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| Total liabilities |
167,519 | 154,534 | ||||||
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| Commitments and contingencies (Note 11) |
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| Temporary equity |
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| Redeemable non-controlling interests |
28 | 92 | ||||||
| Redeemable non-controlling interests of consolidated variable interest entities |
20 | — | ||||||
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Table of Contents
BlackRock, Inc.
Condensed Consolidated Statements of Financial Condition (continued)
(Dollar amounts in millions, except share data)
(unaudited)
| September 30, 2012 |
December 31, 2011 |
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| Permanent Equity |
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| BlackRock, Inc. stockholders’ equity |
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| Common stock, $0.01 par value; |
2 | 1 | ||||||
| Shares authorized: 500,000,000 at September 30, 2012 and December 31, 2011; |
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| Shares issued: 168,661,718 and 139,880,380 at September 30, 2012 and December 31, 2011, respectively; |
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| Shares outstanding: 167,102,878 and 138,463,135 at September 30, 2012 and December 31, 2011, respectively |
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| Preferred stock (Note 15) |
— | — | ||||||
| Additional paid-in capital |
19,322 | 20,275 | ||||||
| Retained earnings |
6,010 | 5,046 | ||||||
| Appropriated retained earnings |
56 | 72 | ||||||
| Accumulated other comprehensive loss |
(58 | ) | (127 | ) | ||||
| Escrow shares, common, at cost (3,603 shares held at September 30, 2012 and December 31, 2011) |
(1 | ) | (1 | ) | ||||
| Treasury stock, common, at cost (1,555,237 and 1,413,642 shares held at September 30, 2012 and December 31, 2011, respectively) |
(274 | ) | (218 | ) | ||||
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| Total BlackRock, Inc. stockholders’ equity |
25,057 | 25,048 | ||||||
| Nonredeemable non-controlling interests |
170 | 184 | ||||||
| Nonredeemable non-controlling interests of consolidated variable interest entities |
34 | 38 | ||||||
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| Total permanent equity |
25,261 | 25,270 | ||||||
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| Total liabilities, temporary equity and permanent equity |
$ | 192,828 | $ | 179,896 | ||||
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See accompanying notes to condensed consolidated financial statements.
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Table of Contents
Condensed Consolidated Statements of Income
(Dollar amounts in millions, except per share data)
(unaudited)
| Three Months
Ended September 30, |
Nine Months
Ended September 30, |
|||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Revenue |
||||||||||||||||
| Investment advisory, administration fees and securities lending revenue |
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| Related parties |
$ | 1,319 | $ | 1,320 | $ | 3,900 | $ | 4,075 | ||||||||
| Other third parties |
705 | 629 | 2,091 | 1,958 | ||||||||||||
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| Investment advisory, administration fees and securities lending revenue |
2,024 | 1,949 | 5,991 | 6,033 | ||||||||||||
| Investment advisory performance fees |
103 | 91 | 224 | 224 | ||||||||||||
| BlackRock Solutions and advisory |
128 | 117 | 382 | 361 | ||||||||||||
| Distribution fees |
19 | 23 | 58 | 78 | ||||||||||||
| Other revenue |
46 | 45 | 143 | 158 | ||||||||||||
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| Total revenue |
2,320 | 2,225 | 6,798 | 6,854 | ||||||||||||
| Expenses |
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| Employee compensation and benefits |
828 | 771 | 2,439 | 2,425 | ||||||||||||
| Distribution and servicing costs |
94 | 90 | 282 | 299 | ||||||||||||
| Amortization of deferred sales commissions |
13 | 20 | 43 | 63 | ||||||||||||
| Direct fund expenses |
144 | 139 | 440 | 435 | ||||||||||||
| General and administration |
327 | 389 | 958 | 1,074 | ||||||||||||
| Amortization of intangible assets |
39 | 39 | 117 | 117 | ||||||||||||
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| Total expenses |
1,445 | 1,448 | 4,279 | 4,413 | ||||||||||||
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| Operating income |
875 | 777 | 2,519 | 2,441 | ||||||||||||
| Non-operating income (expense) |
||||||||||||||||
| Net gain (loss) on investments |
75 | (59 | ) | 143 | 18 | |||||||||||
| Net gain (loss) on consolidated variable interest entities |
2 | (16 | ) | 1 | (36 | ) | ||||||||||
| Interest and dividend income |
10 | 12 | 27 | 25 | ||||||||||||
| Interest expense |
(57 | ) | (49 | ) | (158 | ) | (128 | ) | ||||||||
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| Total non-operating income (expense) |
30 | (112 | ) | 13 | (121 | ) | ||||||||||
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| Income before income taxes |
905 | 665 | 2,532 | 2,320 | ||||||||||||
| Income tax expense |
250 | 95 | 742 | 564 | ||||||||||||
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| Net income |
655 | 570 | 1,790 | 1,756 | ||||||||||||
| Less: |
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| Net income (loss) attributable to redeemable non-controlling interests |
3 | — | 7 | — | ||||||||||||
| Net income (loss) attributable to nonredeemable non-controlling interests |
10 | (25 | ) | 15 | (26 | ) | ||||||||||
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| Net income attributable to BlackRock, Inc. |
$ | 642 | $ | 595 | $ | 1,768 | $ | 1,782 | ||||||||
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| Earnings per share attributable to BlackRock, Inc. common stockholders: |
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| Basic |
$ | 3.72 | $ | 3.28 | $ | 10.02 | $ | 9.46 | ||||||||
| Diluted |
$ | 3.65 | $ | 3.23 | $ | 9.87 | $ | 9.33 | ||||||||
| Cash dividends declared and paid per share |
$ | 1.50 | $ | 1.375 | $ | 4.50 | $ | 4.125 | ||||||||
| Weighted-average common shares outstanding: |
||||||||||||||||
| Basic |
172,359,141 | 179,034,837 | 176,116,975 | 186,187,318 | ||||||||||||
| Diluted |
175,450,532 | 181,825,329 | 178,956,699 | 188,792,952 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
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Table of Contents
Condensed Consolidated Statements of Comprehensive Income
(Dollar amounts in millions)
(unaudited)
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Net income |
$ | 655 | $ | 570 | $ | 1,790 | $ | 1,756 | ||||||||
| Other comprehensive income: |
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| Change in net unrealized gains (losses) from available-for-sale investments, net of tax: |
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| Unrealized holding gains (losses), net of tax |
10 | (5 | ) | 12 | (6 | ) | ||||||||||
| Less: reclassification adjustment included in net income |
(4 | ) | (2 | ) | (5 | ) | — | |||||||||
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| Net change in unrealized gains (losses) from available-for-sale investments, net of tax(1) |
14 | (3 | ) | 17 | (6 | ) | ||||||||||
| Minimum pension liability adjustment |
— | — | (1 | ) | — | |||||||||||
| Foreign currency translation adjustments |
54 | (67 | ) | 53 | (8 | ) | ||||||||||
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| Other comprehensive income (loss) |
68 | (70 | ) | 69 | (14 | ) | ||||||||||
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| Comprehensive income |
723 | 500 | 1,859 | 1,742 | ||||||||||||
| Less: Comprehensive income (loss) attributable to non-controlling interests |
13 | (25 | ) | 22 | (26 | ) | ||||||||||
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| Comprehensive income attributable to BlackRock, Inc. |
$ | 710 | $ | 525 | $ | 1,837 | $ | 1,768 | ||||||||
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| (1) | The tax benefit (expense) on unrealized holding gains (losses) was ($7) million and $2 million during the three months ended September 30, 2012 and 2011, respectively, and ($8) million and $3 million during the nine months ended September 30, 2012 and 2011, respectively. |
See accompanying notes to condensed consolidated financial statements.
4
Table of Contents
Condensed Consolidated Statements of Changes in Equity
(Dollar amounts 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 BlackRock Stockholders’ Equity |
Nonredeemable Non-controlling Interests |
Nonredeemable Non-controlling Interests of Consolidated VIEs |
Total Permanent Equity |
Redeemable Non- controlling Interests / Temporary Equity(3) |
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| December 31, 2011 |
$ | 20,276 | $ | 5,046 | $ | 72 | ($ | 127 | ) | ($ | 1 | ) | ($ | 218 | ) | $ | 25,048 | $ | 184 | $ | 38 | $ | 25,270 | $ | 92 | |||||||||||||||||||
| Net income |
— | 1,768 | — | — | — | — | 1,768 | 14 | 1 | 1,783 | 7 | |||||||||||||||||||||||||||||||||
| Consolidation of a collateralized loan obligation(2) |
— | — | (13 | ) | — | — | — | (13 | ) | — | — | (13 | ) | — | ||||||||||||||||||||||||||||||
| Allocation of losses of consolidated collateralized loan obligations |
— | — | (3 | ) | — | — | — | (3 | ) | — | 3 | — | — | |||||||||||||||||||||||||||||||
| Dividends paid |
— | (804 | ) | — | — | — | — | (804 | ) | — | — | (804 | ) | — | ||||||||||||||||||||||||||||||
| Stock-based compensation |
344 | — | — | — | — | — | 344 | — | — | 344 | — | |||||||||||||||||||||||||||||||||
| Merrill Lynch cash capital contribution |
7 | — | — | — | — | — | 7 | — | — | 7 | — | |||||||||||||||||||||||||||||||||
| Issuance of common shares related to employee stock transactions |
(366 | ) | — | — | — | — | 419 | 53 | — | — | 53 | — | ||||||||||||||||||||||||||||||||
| Employee tax benefit withholdings related to employee stock transactions |
— | — | — | — | — | (141 | ) | (141 | ) | — | — | (141 | ) | — | ||||||||||||||||||||||||||||||
| Shares repurchased |
(1,000 | ) | — | — | — | — | (334 | ) | (1,334 | ) | — | — | (1,334 | ) | — | |||||||||||||||||||||||||||||
| Net tax benefit (shortfall) from stock-based compensation |
63 | — | — | — | — | — | 63 | — | — | 63 | — | |||||||||||||||||||||||||||||||||
| Subscriptions (redemptions/distributions) - non-controlling interest holders |
— | — | — | — | — | — | — | (20 | ) | (8 | ) | (28 | ) | 221 | ||||||||||||||||||||||||||||||
| Net consolidations (deconsolidations) of sponsored investment funds |
— | — | — | — | — | — | — | (8 | ) | — | (8 | ) | (272 | ) | ||||||||||||||||||||||||||||||
| Other comprehensive income (loss) |
— | — | — | 69 | — | — | 69 | — | — | 69 | — | |||||||||||||||||||||||||||||||||
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| September 30, 2012 |
$ | 19,324 | $ | 6,010 | $ | 56 | ($ | 58 | ) | ($ | 1 | ) | ($ | 274 | ) | $ | 25,057 | $ | 170 | $ | 34 | $ | 25,261 | $ | 48 | |||||||||||||||||||
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| (1) | Amount includes $2 million and $1 million of common stock at September 30, 2012 and December 31, 2011, respectively. |
| (2) | Consolidated during the three months ended September 30, 2012. |
| (3) | Amount at September 30, 2012 includes $20 million related to variable interest entities. |
See accompanying notes to condensed consolidated financial statements.
5
Table of Contents
BlackRock, Inc.
Condensed Consolidated Statements of Changes in Equity
(Dollar amounts 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 BlackRock Stockholders’ Equity |
Nonredeemable Non-controlling Interests |
Nonredeemable Non-controlling Interests of Consolidated VIEs |
Total Permanent Equity |
Redeemable Non- controlling Interests / Temporary Equity |
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| December 31, 2010 |
$ | 22,504 | $ | 3,723 | $ | 75 | ($ | 96 | ) | ($ | 1 | ) | ($ | 111 | ) | $ | 26,094 | $ | 189 | $ | 45 | $ | 26,328 | $ | 6 | |||||||||||||||||||
| Net income |
— | 1,782 | — | — | — | — | 1,782 | 10 | (36 | ) | 1,756 | — | ||||||||||||||||||||||||||||||||
| Consolidation of a collateralized loan obligation(2) |
— | — | 41 | — | — | — | 41 | — | — | 41 | — | |||||||||||||||||||||||||||||||||
| Allocation of losses of consolidated collateralized loan obligations |
— | — | (37 | ) | — | — | — | (37 | ) | — | 37 | — | — | |||||||||||||||||||||||||||||||
| Dividends paid |
— | (769 | ) | — | — | — | — | (769 | ) | — | — | (769 | ) | — | ||||||||||||||||||||||||||||||
| Stock-based compensation |
373 | — | — | — | — | 2 | 375 | — | — | 375 | — | |||||||||||||||||||||||||||||||||
| PNC preferred stock capital contribution |
200 | — | — | — | — | — | 200 | — | — | 200 | — | |||||||||||||||||||||||||||||||||
| Retirement of preferred stock |
(200 | ) | — | — | — | — | — | (200 | ) | — | — | (200 | ) | — | ||||||||||||||||||||||||||||||
| Merrill Lynch cash capital contribution |
8 | — | — | — | — | — | 8 | — | — | 8 | — | |||||||||||||||||||||||||||||||||
| Issuance of common shares related to employee stock transactions |
(202 | ) | — | — | — | — | 217 | 15 | — | — | 15 | — | ||||||||||||||||||||||||||||||||
| Employee tax benefit withholdings related to employee stock transactions |
— | — | — | — | — | (237 | ) | (237 | ) | — | — | (237 | ) | — | ||||||||||||||||||||||||||||||
| Shares repurchased |
(2,545 | ) | — | — | — | — | — | (2,545 | ) | — | — | (2,545 | ) | — | ||||||||||||||||||||||||||||||
| Convertible debt conversions |
4 | — | — | — | — | 1 | 5 | — | — | 5 | ||||||||||||||||||||||||||||||||||
| Net tax benefit (shortfall) from stock-based compensation |
9 | — | — | — | — | — | 9 | — | — | 9 | — | |||||||||||||||||||||||||||||||||
| Subscriptions(redemptions/ |
— | — | — | — | — | — | — | (24 | ) | (10 | ) | (34 | ) | 7 | ||||||||||||||||||||||||||||||
| Net consolidations (deconsolidations) of sponsored investment funds |
— | — | — | — | — | — | — | — | — | — | (12 | ) | ||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) |
— | — | — | (14 | ) | (14 | ) | — | — | (14 | ) | — | ||||||||||||||||||||||||||||||||
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| September 30, 2011 |
$ | 20,151 | $ | 4,736 | $ | 79 | ($ | 110 | ) | ($ | 1 | ) | ($ | 128 | ) | $ | 24,727 | $ | 175 | $ | 36 | $ | 24,938 | $ | 1 | |||||||||||||||||||
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| (1) | Amount includes $1 million of common stock at both September 30, 2011 and December 31, 2010 and $1 million of preferred stock at December 31, 2010. |
| (2) | Consolidated during the three months ended September 30, 2011. |
See accompanying notes to condensed consolidated financial statements.
6
Table of Contents
Condensed Consolidated Statements of Cash Flows
(Dollar amounts in millions)
(unaudited)
| Nine Months Ended September 30, |
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| 2012 | 2011 | |||||||
| Cash flows from operating activities |
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| Net income |
$ | 1,790 | $ | 1,756 | ||||
| Adjustments to reconcile net income to cash flows from operating activities: |
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| Depreciation and amortization |
219 | 222 | ||||||
| Amortization of deferred sales commissions |
43 | 63 | ||||||
| Stock-based compensation |
344 | 375 | ||||||
| Deferred income tax expense (benefit) |
(42 | ) | (108 | ) | ||||
| Net (gains) losses on non-trading investments |
(32 | ) | (17 | ) | ||||
| Purchases of investments within consolidated funds |
(83 | ) | (8 | ) | ||||
| Proceeds from sales and maturities of investments within consolidated funds |
48 | 41 | ||||||
| Assets and liabilities of consolidated VIEs: |
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| Change in cash and cash equivalents |
(32 | ) | 38 | |||||
| Net (gains) losses within consolidated VIEs |
(1 | ) | 36 | |||||
| Net (purchases) proceeds within consolidated VIEs |
233 | 44 | ||||||
| (Earnings) losses from equity method investees |
(124 | ) | (13 | ) | ||||
| Distributions of earnings from equity method investees |
29 | 26 | ||||||
| Changes in operating assets and liabilities: |
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| Accounts receivable |
(493 | ) | 6 | |||||
| Due from related parties |
21 | (9 | ) | |||||
| Deferred sales commissions |
(31 | ) | (42 | ) | ||||
| Investments, trading |
(197 | ) | (31 | ) | ||||
| Other assets |
(194 | ) | (156 | ) | ||||
| Accrued compensation and benefits |
(199 | ) | (420 | ) | ||||
| Accounts payable and accrued liabilities |
489 | 90 | ||||||
| Due to related parties |
(7 | ) | (34 | ) | ||||
| Other liabilities |
105 | 94 | ||||||
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|||||
| Cash flows from operating activities |
1,886 | 1,953 | ||||||
|
|
|
|
|
|||||
| Cash flows from investing activities |
||||||||
| Purchases of investments |
(397 | ) | (142 | ) | ||||
| Proceeds from sales and maturities of investments |
391 | 142 | ||||||
| Distributions of capital from equity method investees |
51 | 32 | ||||||
| Net consolidations (deconsolidations) of sponsored investment funds |
(208 | ) | — | |||||
| Acquisitions, net of cash acquired |
(267 | ) | — | |||||
| Purchases of property and equipment |
(121 | ) | (218 | ) | ||||
|
|
|
|
|
|||||
| Cash flows from investing activities |
(551 | ) | (186 | ) | ||||
|
|
|
|
|
|||||
7
Table of Contents
BlackRock, Inc.
Condensed Consolidated Statements of Cash Flows (continued)
(Dollar amounts in millions)
(unaudited)
| Nine Months Ended September 30, |
||||||||
| 2012 | 2011 | |||||||
| Cash flows from financing activities |
||||||||
| Repayments of short-term borrowings |
— | (600 | ) | |||||
| Proceeds from short-term borrowings |
— | 600 | ||||||
| Repayments of convertible debt |
— | (67 | ) | |||||
| Proceeds from long-term borrowings |
1,495 | 1,496 | ||||||
| Cash dividends paid |
(804 | ) | (769 | ) | ||||
| Proceeds from stock options exercised |
47 | 13 | ||||||
| Proceeds from issuance of common stock |
6 | 3 | ||||||
| Repurchases of common stock |
(1,475 | ) | (2,783 | ) | ||||
| Merrill Lynch cash capital contribution |
7 | 8 | ||||||
| Repayments of borrowings by consolidated VIEs |
(203 | ) | (72 | ) | ||||
| Net (redemptions/distributions paid) subscriptions received from non-controlling interests holders |
193 | (27 | ) | |||||
| Excess tax benefit from stock-based compensation |
73 | 23 | ||||||
|
|
|
|
|
|||||
| Cash flows from financing activities |
(661 | ) | (2,175 | ) | ||||
|
|
|
|
|
|||||
| Effect of exchange rate changes on cash and cash equivalents |
43 | 24 | ||||||
|
|
|
|
|
|||||
| Net increase (decrease) in cash and cash equivalents |
717 | (384 | ) | |||||
| Cash and cash equivalents, beginning of period |
3,506 | 3,367 | ||||||
|
|
|
|
|
|||||
| Cash and cash equivalents, end of period |
$ | 4,223 | $ | 2,983 | ||||
|
|
|
|
|
|||||
| Supplemental disclosure of cash flow information: |
||||||||
| Cash paid for: |
||||||||
| Interest |
$ | 116 | $ | 98 | ||||
| Interest on borrowings of consolidated VIEs |
$ | 52 | $ | 43 | ||||
| Income taxes |
$ | 837 | $ | 819 | ||||
| Supplemental schedule of non-cash investing and financing transactions: |
||||||||
| Issuance of common stock |
$ | 366 | $ | 207 | ||||
| Increase (decrease) in non-controlling interests due to net consolidation (deconsolidation) of sponsored investment funds |
($ | 280 | ) | ($ | 12 | ) | ||
| Increase (decrease) in borrowings due to consolidation of VIEs |
$ | 406 | $ | 390 | ||||
| PNC preferred stock capital contribution |
$ | — | $ | 200 | ||||
See accompanying notes to condensed consolidated financial statements.
8
Table of Contents
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 class, alternative investment and cash management products. BlackRock offers its 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 May 29, 2012, BlackRock completed a secondary offering of 26,211,335 shares of common stock held by Barclays Bank PLC (“Barclays”) at a price of $160.00 per share, which included 23,211,335 shares of common stock issued upon the conversion of Series B Convertible Participating Preferred Stock by a subsidiary of Barclays. Upon completion of this offering, BlackRock repurchased 6,377,552 shares directly from Barclays at a price of $156.80 per share (consisting of 6,346,036 of Series B Convertible Preferred Stock and 31,516 shares of common stock). The total transactions, including the full exercise of the underwriters’ option to purchase 2,621,134 additional shares in the secondary offering, amounted to 35,210,021 shares, resulting in Barclays exiting its entire ownership position in BlackRock.
On September 30, 2012, The PNC Financial Services Group, Inc. (“PNC”) held 21.0% 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. Non-controlling 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 revenue 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 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, 2011, which was filed with the Securities and Exchange Commission (“SEC”) on February 28, 2012 (“2011 Form 10-K”).
The interim financial information at September 30, 2012 and for the three and nine months ended September 30, 2012 and 2011 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.
9
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, 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 were 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 and certain equity method limited partnership interests in hedge funds valued based on NAV 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 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. |
Level 3 inputs 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.
| • | Level 3 liabilities may include borrowings of consolidated collateralized loan obligations (“CLOs”) valued based upon non-binding single broker quotes. |
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.
10
Table of Contents
2. Significant Accounting Policies (continued)
Fair Value Measurements (continued)
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. These inputs are evaluated for reasonableness through various procedures, including due diligence reviews of third-party pricing vendors, variance analyses, consideration of 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, including independent appraisals, from third-party sources. 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 methodology, including the general assumptions and methods used to value various asset classes, and operational process 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 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, must be applied to an entire 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 generally are 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.
11
Table of Contents
2. Significant Accounting Policies (continued)
Separate Account Assets. The separate account assets are maintained by 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. In accordance with GAAP, the Company records equal and offsetting separate account liabilities. The separate account assets are not available to creditors of the Company and the holders of the pension contracts have no recourse to the Company’s assets. The net investment income attributable to separate account assets accrues directly to the contract owners and is not reported on the Company’s condensed consolidated statements of income. While BlackRock has no economic interest in these assets or liabilities, BlackRock earns an investment advisory fee for the service of managing these assets on behalf of the clients.
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’s registered life insurance company are lent to third parties. In exchange, the Company receives collateral, principally cash and securities, with minimum value generally ranging from approximately 102% to 112% of the value of the securities lent in order to reduce counterparty risk. Under the Company’s securities lending arrangements, the Company can re-sell or re-pledge the collateral and the borrower can re-sell 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 re-sell or re-pledge the collateral combined with the fact the activity is in a registered life insurance company, the Company records on its condensed consolidated statements of financial condition the 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. At September 30, 2012 and December 31, 2011, the fair value of loaned securities held by separate account assets was approximately $20.8 billion and $19.5 billion, respectively, and the value of collateral held under these securities lending agreements was approximately $22.6 billion and $20.9 billion, respectively. During the nine months ended September 30, 2012 and 2011, the Company had not sold or re-pledged any of the collateral received under these arrangements.
Appropriated Retained Earnings. Upon adoption of Accounting Standards Update (“ASU”) 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”), BlackRock consolidated three CLOs and recorded a cumulative effect adjustment to appropriated retained earnings on the condensed consolidated statement 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. Subsequent to the adoption of ASU 2009-17, the net change in the fair value of the CLOs’ assets and liabilities has been recorded as net income (loss) attributable to nonredeemable non-controlling interests and as an adjustment to appropriated retained earnings. In addition, on September 30, 2012 and September 30, 2011, BlackRock consolidated additional CLOs, resulting in ($13) million and $19 million of additional appropriated retained earnings upon the initial consolidation, respectively.
Accounting Pronouncements Adopted in the Nine Months Ended September 30, 2012
Amendments to Fair Value Measurements and Disclosures. On January 1, 2012, the Company adopted the applicable provisions of ASU 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 clarified existing fair value measurement guidance and changed certain principles or requirements for measuring fair value for disclosing information about fair value measurements. The adoption of ASU 2011-04 did not materially impact BlackRock’s condensed consolidated financial statements.
Amendments on Testing Indefinite-lived Intangible Assets for Impairment. On July 27, 2012, the Financial Accounting Standards Board (“FASB”) issued ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”), which amends the guidance in ASC 350-30 on testing indefinite-lived intangible assets, other than goodwill, for impairment. Under ASU 2012-02, an entity testing an indefinite-lived intangible asset for impairment has the option of performing a qualitative assessment before calculating the fair value of the asset. If the entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is not more likely than not (i.e., a likelihood of more than 50 percent) impaired, the entity would not need to calculate the fair value of the asset. The Company’s adoption of ASU 2012-02 during the quarter ended September 30, 2012 did not impact its condensed consolidated financial statements.
12
Table of Contents
2. Significant Accounting Policies (continued)
Recent Accounting Pronouncements Not Yet Adopted
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. The provisions of ASU 2011-11 are effective for the Company for annual reporting period beginning on January 1, 2013, and interim periods therein, with retrospective application required. The adoption of ASU 2011-11 is not expected to materially impact BlackRock’s condensed consolidated financial statements.
13
Table of Contents
3. Investments
A summary of the carrying value of total investments is as follows:
| (Dollar amounts in millions) | September 30, 2012 |
December 31, 2011 |
||||||
| Available-for-sale investments |
$ | 192 | $ | 52 | ||||
| Held-to-maturity investments |
103 | 105 | ||||||
| Trading investments: |
||||||||
| Consolidated sponsored investment funds |
67 | 214 | ||||||
| Other equity securities and debt securities |
4 | 7 | ||||||
| Deferred compensation plan mutual funds |
53 | 46 | ||||||
|
|
|
|
|
|||||
| Total trading investments |
124 | 267 | ||||||
| Other investments: |
||||||||
| Consolidated sponsored investment funds |
436 | 373 | ||||||
| Equity method investments |
509 | 457 | ||||||
| Deferred compensation plan hedge fund equity method investments |
10 | 19 | ||||||
| Cost method investments(1) |
365 | 337 | ||||||
| Carried interest |
125 | 21 | ||||||
|
|
|
|
|
|||||
| Total other investments |
1,445 | 1,207 | ||||||
|
|
|
|
|
|||||
| Total investments |
$ | 1,864 | $ | 1,631 | ||||
|
|
|
|
|
|||||
| (1) | Amounts primarily include Federal Reserve Bank Stock |
At September 30, 2012, the Company consolidated $503 million of investments held by consolidated sponsored investment funds (non-variable interest entities (“VIEs”)) of which $67 million and $436 million were classified as trading investments and other investments, respectively. At December 31, 2011, the Company consolidated $587 million of investments held by consolidated sponsored investment funds (non-VIEs) of which $214 million and $373 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:
| (Dollar amounts in millions) | Cost | Gross Unrealized | Carrying Value |
|||||||||||||
| September 30, 2012 |
Gains | Losses | ||||||||||||||
| Equity securities: |
||||||||||||||||
| Sponsored investment funds |
$ | 180 | $ | 10 | ($ | 1 | ) | $ | 189 | |||||||
| Collateralized debt obligations (“CDOs”) |
1 | — | — | 1 | ||||||||||||
| Debt securities: |
||||||||||||||||
| Asset-backed debt |
1 | 1 | — | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total available-for-sale investments |
$ | 182 | $ | 11 | ($ | 1 | ) | $ | 192 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Cost | Gross Unrealized | Carrying Value |
||||||||||||||
| December 31, 2011 |
Gains | Losses | ||||||||||||||
| Equity securities: |
||||||||||||||||
| Sponsored investment funds |
$ | 52 | $ | — | ($ | 2 | ) | $ | 50 | |||||||
| CDOs |
1 | — | — | 1 | ||||||||||||
| Debt securities: |
||||||||||||||||
| Asset-backed debt |
1 | — | — | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total available-for-sale investments |
$ | 54 | $ | — | ($ | 2 | ) | $ | 52 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
Available-for-sale investments included seed investments in BlackRock sponsored investment mutual funds.
14
Table of Contents
3. Investments (continued)
Held-to-Maturity Investments
The carrying value of held-to-maturity investments was $103 million and $105 million at September 30, 2012 and December 31, 2011, 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. The amortized cost of debt securities classified as held-to-maturity at September 30, 2012 by maturity date was as follows:
| (Dollar amounts in millions) | 1 Year or less |
After 1 Year through 5 Years |
After 5 Years through 10 Years |
After 10 Years |
Total | |||||||||||||||
| Foreign government debt |
$ | 88 | $ | 4 | $ | — | $ | 11 | $ | 103 | ||||||||||
Trading Investments
A summary of the cost and carrying value of trading investments is as follows:
| September 30, 2012 | December 31, 2011 | |||||||||||||||
| (Dollar amounts in millions) | Cost | Carrying Value |
Cost | Carrying Value |
||||||||||||
| Trading investments: |
||||||||||||||||
| Deferred compensation plan mutual funds |
$ | 46 | $ | 53 | $ | 45 | $ | 46 | ||||||||
| Equity/Multi-asset class mutual funds |
62 | 65 | 174 | 169 | ||||||||||||
| Debt securities: |
||||||||||||||||
| Foreign debt |
— | — | 12 | 12 | ||||||||||||
| Corporate debt |
6 | 6 | 39 | 40 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total trading investments |
$ | 114 | $ | 124 | $ | 270 | $ | 267 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
At September 30, 2012, trading investments included $61 million of equity securities and $6 million of debt securities held by consolidated sponsored investment funds, $53 million of certain deferred compensation plan mutual fund investments and $4 million of equity and debt securities held in separate investment accounts for the purpose of establishing an investment history in various investment strategies before being marketed to investors.
Other Investments
A summary of the cost and carrying value of other investments is as follows:
| September 30, 2012 | December 31, 2011 | |||||||||||||||
| (Dollar amounts in millions) | Cost | Carrying Value |
Cost | Carrying Value |
||||||||||||
| Other investments: |
||||||||||||||||
| Consolidated sponsored investment funds |
$ | 396 | $ | 436 | $ | 345 | $ | 373 | ||||||||
| Equity method |
465 | 509 | 487 | 457 | ||||||||||||
| Deferred compensation plan hedge fund equity method investments |
15 | 10 | 17 | 19 | ||||||||||||
| Cost method investments: |
||||||||||||||||
| Federal Reserve Bank stock |
330 | 330 | 328 | 328 | ||||||||||||
| Other |
35 | 35 | 9 | 9 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total cost method investments |
365 | 365 | 337 | 337 | ||||||||||||
| Carried interest |
— | 125 | — | 21 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total other investments |
$ | 1,241 | $ | 1,445 | $ | 1,186 | $ | 1,207 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
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.
Equity method investments primarily include BlackRock’s direct investments in certain BlackRock sponsored investment funds.
15
Table of Contents
3. Investments (continued)
Cost method investments include non-marketable securities, including Federal Reserve Bank stock, which is held for regulatory purposes and is restricted from sale. At September 30, 2012, there were no indicators of impairment on these investments.
Carried interest represents allocations to BlackRock 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 in accordance with GAAP. The investments owned by these consolidated sponsored investment funds are classified as trading or other investments. The following table presents the amounts 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:
| (Dollar amounts in millions) | September 30, 2012 |
December 31, 2011 |
||||||
| Cash and cash equivalents |
$ | 46 | $ | 196 | ||||
| Investments: |
||||||||
| Trading investments |
67 | 214 | ||||||
| Other investments |
436 | 373 | ||||||
| Other assets |
5 | 5 | ||||||
| Other liabilities |
(36 | ) | (37 | ) | ||||
| Non-controlling interests |
(198 | ) | (276 | ) | ||||
|
|
|
|
|
|||||
| BlackRock’s net interests in consolidated sponsored investment funds |
$ | 320 | $ | 475 | ||||
|
|
|
|
|
|||||
BlackRock’s total exposure to consolidated sponsored investment funds of $320 million and $475 million at September 30, 2012 and December 31, 2011, 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 non-controlling interests for the portion not attributable to BlackRock.
In addition, at September 30, 2012 and December 31, 2011, five and four, respectively, consolidated CLOs and several investment funds, which were deemed to be VIEs, were excluded from the balances in the table above as the amounts for these investment products are reported separately on the condensed consolidated statements of financial condition. See Note 6, Variable Interest Entities, for further discussion on these consolidated funds.
The Company may not be readily able to access cash and cash equivalents held by consolidated sponsored investment funds to use in its operating activities. In addition, the Company may not be readily able to sell investments held by consolidated sponsored investment funds in order to obtain cash for use in the Company’s operations.
16
Table of Contents
5. Fair Value Disclosures
Fair Value Hierarchy
Total assets measured at fair value on a recurring basis of $152.6 billion at September 30, 2012 were as follows:
| Assets measured at fair value | ||||||||||||||||||||
| (Dollar amounts 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) |
September 30, 2012 |
|||||||||||||||
| Assets: |
||||||||||||||||||||
| Investments |
||||||||||||||||||||
| Available-for-sale: |
||||||||||||||||||||
| Equity securities (funds and CDOs) |
$ | 189 | $ | — | $ | 1 | $ | — | $ | 190 | ||||||||||
| Debt securities |
— | 2 | — | — | 2 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total available-for-sale |
189 | 2 | 1 | — | 192 | |||||||||||||||
| Held-to-maturity: |
||||||||||||||||||||
| Debt securities |
— | — | — | 103 | 103 | |||||||||||||||
| Trading: |
||||||||||||||||||||
| Deferred compensation plan mutual funds |
53 | — | — | — | 53 | |||||||||||||||
| Equity/Multi-asset class mutual funds |
62 | 3 | — | — | 65 | |||||||||||||||
| Debt securities |
— | 6 | — | — | 6 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total trading |
115 | 9 | — | — | 124 | |||||||||||||||
| Other investments: |
||||||||||||||||||||
| Consolidated sponsored investment funds: |
||||||||||||||||||||
| Real estate |
5 | — | — | — | 5 | |||||||||||||||
| Hedge funds / Funds of funds |
10 | 48 | 55 | — | 113 | |||||||||||||||
| Private / public equity(2) |
13 | 7 | 298 | — | 318 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total consolidated sponsored investment funds |
28 | 55 | 353 | — | 436 | |||||||||||||||
| Equity method: |
||||||||||||||||||||
| Hedge funds / Funds of hedge funds |
— | 60 | 180 | 30 | 270 | |||||||||||||||
| Private equity investments |
— | — | 90 | — | 90 | |||||||||||||||
| Real estate funds |
— | — | 103 | 15 | 118 | |||||||||||||||
| Equity/Multi-asset class, alternative mutual funds |
31 | — | — | — | 31 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total equity method |
31 | 60 | 373 | 45 | 509 | |||||||||||||||
| Deferred compensation plan hedge fund equity method investments |
— | 10 | — | — | 10 | |||||||||||||||
| Cost method investments |
— | — | — | 365 | 365 | |||||||||||||||
| Carried interest |
— | — | — | 125 | 125 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total investments |
363 | 136 | 727 | 638 | 1,864 | |||||||||||||||
| Separate account assets: |
||||||||||||||||||||
| Equity securities |
89,217 | — | 33 | — | 89,250 | |||||||||||||||
| Debt securities |
— | 34,463 | 3 | — | 34,466 | |||||||||||||||
| Derivatives |
— | 29 | — | — | 29 | |||||||||||||||
| Money market funds |
2,223 | — | — | — | 2,223 | |||||||||||||||
| Other |
— | 1,102 | — | 943 | 2,045 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total separate account assets |
91,440 | 35,594 | 36 | 943 | 128,013 | |||||||||||||||
| Collateral held under securities lending agreements: |
||||||||||||||||||||
| Equity securities |
18,367 | — | — | — | 18,367 | |||||||||||||||
| Debt securities |
— | 4,195 | — | — | 4,195 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total collateral held under securities lending agreements |
18,367 | 4,195 | — | — | 22,562 | |||||||||||||||
| Other assets(3) |
— | 11 | — | — | 11 | |||||||||||||||
| Assets of consolidated VIEs: |
||||||||||||||||||||
| Bank loans |
— | 1,406 | 89 | — | 1,495 | |||||||||||||||
| Bonds |
— | 80 | 45 | — | 125 | |||||||||||||||
| Debt securities |
— | 30 | — | — | 30 | |||||||||||||||
| Private / public equity(4) |
2 | 5 | 26 | — | 33 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total assets of consolidated VIE |
2 | 1,521 | 160 | — | 1,683 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ | 110,172 | $ | 41,457 | $ | 923 | $ | 1,581 | $ | 154,133 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (1) | Amounts comprised of investments held at cost, 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) | Amount within Level 3 included $240 million and $58 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) | Amount within Level 3 included $24 million and $2 million of underlying third-party private equity funds and direct investments in private equity companies held by private equity fund, respectively. |
17
Table of Contents
5. Fair Value Disclosures (continued)
Fair Value Hierarchy (continued)
Liabilities measured at fair value on a recurring basis at September 30, 2012 were as follows:
| (Dollar amounts in millions) |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
September 30, 2012 |
||||||||||||
| Liabilities: |
||||||||||||||||
| Borrowings of consolidated VIEs |
$ | — | $ | — | $ | 1,843 | $ | 1,843 | ||||||||
| Collateral liabilities under securities lending agreements |
18,367 | 4,195 | — | 22,562 | ||||||||||||
| Other liabilities(1) |
13 | 4 | — | 17 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total liabilities measured at fair value |
$ | 18,380 | $ | 4,199 | $ | 1,843 | $ | 24,422 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) | Amounts include credit default swap (Pillars) (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 statement of financial condition. |
18
Table of Contents
5. Fair Value Disclosures (continued)
Fair Value Hierarchy (continued)
Total assets measured at fair value on a recurring basis of $141.6 billion at December 31, 2011 were as follows:
| Assets measured at fair value | ||||||||||||||||||||
| (Dollar amounts 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, 2011 |
|||||||||||||||
| Assets: |
||||||||||||||||||||
| Investments |
||||||||||||||||||||
| Available-for-sale: |
||||||||||||||||||||
| Equity securities (funds and CDOs) |
$ | 50 | $ | — | $ | 1 | $ | — | $ | 51 | ||||||||||
| Debt securities |
— | 1 | — | — | 1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total available-for-sale |
50 | 1 | 1 | — | 52 | |||||||||||||||
| Held-to-maturity: |
||||||||||||||||||||
| Debt securities |
— | — | — | 105 | 105 | |||||||||||||||
| Trading: |
||||||||||||||||||||
| Deferred compensation plan mutual funds |
46 | — | — | — | 46 | |||||||||||||||
| Equity securities |
163 | 6 | — | — | 169 | |||||||||||||||
| Debt securities |
— | 52 | — | — | 52 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total trading |
209 | 58 | — | — | 267 | |||||||||||||||
| Other investments: |
||||||||||||||||||||
| Consolidated sponsored investment funds: |
||||||||||||||||||||
| Hedge funds / Funds of funds |
— | 20 | 22 | — | 42 | |||||||||||||||
| Private / public equity |
18 | — | 313 | — | 331 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total consolidated sponsored investment funds |
18 | 20 | 335 | — | 373 | |||||||||||||||
| Equity method: |
||||||||||||||||||||
| Hedge funds / Funds of hedge funds |
— | 33 | 193 | 14 | 240 | |||||||||||||||
| Private equity investments |
— | — | 85 | 21 | 106 | |||||||||||||||
| Real estate funds |
— | — | 88 | 20 | 108 | |||||||||||||||
| Equity mutual funds |
3 | — | — | — | 3 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total equity method |
3 | 33 | 366 | 55 | 457 | |||||||||||||||
| Deferred compensation plan hedge fund equity method investments |
— | 19 | — | — | 19 | |||||||||||||||
| Cost method investments |
— | — | — | 337 | 337 | |||||||||||||||
| Carried interest |
— | — | — | 21 | 21 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total investments |
280 | 131 | 702 | 518 | 1,631 | |||||||||||||||
| Separate account assets: |
||||||||||||||||||||
| Equity securities |
74,088 | — | 3 | — | 74,091 | |||||||||||||||
| Debt securities |
— | 38,596 | 7 | — | 38,603 | |||||||||||||||
| Derivatives |
8 | 1,487 | — | — | 1,495 | |||||||||||||||
| Money market funds |
2,845 | — | — | — | 2,845 | |||||||||||||||
| Other |
— | 920 | — | 917 | 1,837 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total separate account assets |
76,941 | 41,003 | 10 | 917 | 118,871 | |||||||||||||||
| Collateral held under securities lending agreements: |
||||||||||||||||||||
| Equity securities |
14,092 | — | — | — | 14,092 | |||||||||||||||
| Debt securities |
— | 6,826 | — | — | 6,826 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total collateral held under securities lending agreements |
14,092 | 6,826 | — | — | 20,918 | |||||||||||||||
| Other assets(2) |
— | 11 | — | — | 11 | |||||||||||||||
| Assets of consolidated VIEs: |
||||||||||||||||||||
| Bank loans |
— | 1,376 | 83 | — | 1,459 | |||||||||||||||
| Bonds |
— | 105 | 40 | — | 145 | |||||||||||||||
| Private / public equity |
4 | 4 | 27 | — | 35 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total assets of consolidated VIEs |
4 | 1,485 | 150 | — | 1,639 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ | 91,317 | $ | 49,456 | $ | 862 | $ | 1,435 | $ | 143,070 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (1) | Amounts comprised of investments held at cost, 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) | Amount includes company-owned and split-dollar life insurance policies. |
19
Table of Contents
5. Fair Value Disclosures (continued)
Fair Value Hierarchy (continued)
Liabilities measured at fair value on a recurring basis at December 31, 2011 were as follows:
| (Dollar amounts 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, 2011 |
||||||||||||
| Liabilities: |
||||||||||||||||
| Borrowings of consolidated VIEs |
$ | — | $ | — | $ | 1,574 | $ | 1,574 | ||||||||
| Collateral liabilities under securities lending agreements |
14,092 | 6,826 | — | 20,918 | ||||||||||||
| Other liabilities(1) |
15 | 11 | — | 26 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total liabilities measured at fair value |
$ | 14,107 | $ | 6,837 | $ | 1,574 | $ | 22,518 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) | Amounts include credit default swap (Pillars) (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 statement of financial condition. |
Level 3 Assets. Level 3 assets recorded within investments of $727 million at September 30, 2012 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 $60 million at September 30, 2012. 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 are 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 cash flows to a single present amount using current market 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.
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 valuations received from internal as well as third-party fund managers, 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 September 30, 2012
| (Dollar amounts in millions) | June 30, 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 |
September 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 |
46 | 8 | 3 | (2 | ) | — | — | — | 55 | 8 | ||||||||||||||||||||||||||
| Private equity |
298 | 22 | — | (14 | ) | (8 | ) | — | — | 298 | 20 | |||||||||||||||||||||||||
| Equity method: |
||||||||||||||||||||||||||||||||||||
| Hedge funds / Funds of hedge funds |
187 | 14 | — | — | (21 | ) | — | — | 180 | 14 | ||||||||||||||||||||||||||
| Private equity investments |
88 | 1 | 1 | — | — | — | — | 90 | 2 | |||||||||||||||||||||||||||
| Real estate funds |
101 | 6 | 6 | (7 | ) | (3 | ) | — | — | 103 | 4 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total Level 3 investments |
721 | 51 | 10 | (23 | ) | (32 | ) | — | — | 727 | 48 | |||||||||||||||||||||||||
| Separate account assets: |
||||||||||||||||||||||||||||||||||||
| Equity securities |
7 | (4 | ) | 3 | (7 | ) | — | 34 | — | 33 | ||||||||||||||||||||||||||
| Debt securities |
— | — | 3 | — | — | — | — | 3 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total Level 3 separate account assets |
7 | (4 | ) | 6 | (7 | ) | — | 34 | — | 36 | n/a | (3) | ||||||||||||||||||||||||
| Assets of consolidated VIEs: |
||||||||||||||||||||||||||||||||||||
| Bank loans |
85 | 2 | 7 | (24 | ) | 7 | 36 | (24 | ) | 89 | ||||||||||||||||||||||||||
| Bonds |
44 | 1 | — | — | — | — | — | 45 | ||||||||||||||||||||||||||||
| Private equity |
25 | 2 | 2 | (3 | ) | — | — | — | 26 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Total Level 3 assets of consolidated VIEs |
154 | 5 | 9 | (27 | ) | 7 | 36 | (24 | ) | 160 | n/a | (4) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Total Level 3 assets |
$ | 882 | $ | 52 | $ | 25 | ($ | 57 | ) | ($ | 25 | ) | $ | 70 | ($ | 24 | ) | $ | 923 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Liabilities: |
||||||||||||||||||||||||||||||||||||
| Borrowings of consolidated VIEs |
$ | 1,439 | ($ | 27 | ) | $ | — | $ | — | $ | 377 | $ | — | $ | — | $ | 1,843 | n/a | (4) | |||||||||||||||||
n/a – not applicable
| (1) | Amount includes distributions from equity method investees, repayments of borrowings of consolidated VIEs, and loans and borrowings related to the consolidation of one additional CLO. |
| (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 Company’s condensed consolidated statements of income. |
| (4) | The net gain (loss) on consolidated VIEs is solely attributable to non-controlling interests on the Company’s 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 Nine Months Ended September 30, 2012
| (Dollar amounts 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 |
September 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 |
22 | 4 | 30 | (2 | ) | (2 | ) | 3 | — | 55 | 4 | |||||||||||||||||||||||||
| Private equity |
313 | 43 | 2 | (46 | ) | (8 | ) | — | (6 | ) | 298 | 38 | ||||||||||||||||||||||||
| Equity method: |
||||||||||||||||||||||||||||||||||||
| Hedge funds / Funds of hedge funds |
193 | 33 | — | — | (46 | ) | — | — | 180 | 33 | ||||||||||||||||||||||||||
| Private equity investments |
85 | 7 | 4 | — | (6 | ) | — | — | 90 | 8 | ||||||||||||||||||||||||||
| Real estate funds |
88 | 8 | 19 | (7 | ) | (5 | ) | — | — | 103 | 6 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total Level 3 investments |
702 | 95 | 55 | (55 | ) | (67 | ) | 3 | (6 | ) | 727 | 89 | ||||||||||||||||||||||||
| Separate account assets: |
||||||||||||||||||||||||||||||||||||
| Equity securities |
3 | (5 | ) | 7 | (12 | ) | — | 48 | (8 | ) | 33 | |||||||||||||||||||||||||
| Debt securities |
7 | — | 3 | (6 | ) | — | — | (1 | ) | 3 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Total Level 3 separate account assets |
10 | (5 | ) | 10 | (18 | ) | — | 48 | (9 | ) | 36 | n/a | (3) | |||||||||||||||||||||||
| Assets of consolidated VIEs: |
||||||||||||||||||||||||||||||||||||
| Bank loans |
83 | 2 | 25 | (31 | ) | 7 | 89 | (86 | ) | 89 | ||||||||||||||||||||||||||
| Bonds |
40 | 3 | 2 | — | — | — | — | 45 | ||||||||||||||||||||||||||||
| Private equity |
27 | 4 | 2 | (7 | ) | — | — | — | 26 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Total Level 3 assets of consolidated VIEs |
150 | 9 | 29 | (38 | ) | 7 | 89 | (86 | ) | 160 | n/a | (4) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Total Level 3 assets |
$ | 862 | $ | 99 | $ | 94 | ($ | 111 | ) | ($ | 60 | ) | $ | 140 | ($ | 101 | ) | $ | 923 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Liabilities: |
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| Borrowings of consolidated VIEs |
$ | 1,574 | ($ | 66 | ) | $ | — | $ | — | $ | 203 | $ | — | $ | — | $ | 1,843 | n/a | (4) | |||||||||||||||||
n/a – not applicable
| (1) | Amount includes distributions from equity method investees, repayments of borrowings of consolidated VIEs, and loans and borrowings related to the consolidation of one additional CLO. |
| (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 Company’s condensed consolidated statements of income. |
| (4) | The net gain (loss) on consolidated VIEs is solely attributable to non-controlling interests on the Company’s 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 September 30, 2011
| (Dollar amounts in millions) | June 30, 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 |
September 30, 2011 |
Total net gains (losses) included in earnings(2) |
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| Assets: |
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| Investments: |
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| Available-for-sale: |
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| Equity securities (CDOs) |
$ | 2 | ($ | 1 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1 | ($ | 1 | ) | ||||||||||||||||
| Consolidated sponsored investment funds: |
||||||||||||||||||||||||||||||||||||
| Hedge funds / Funds of funds |
17 | (2 | ) | — | — | (1 | ) | — | — | 14 | (1 | ) | ||||||||||||||||||||||||
| Private equity |
312 | (7 | ) | — | (10 | ) | (1 | ) | — | — | 294 | (10 | ) | |||||||||||||||||||||||
| Equity method: |
||||||||||||||||||||||||||||||||||||
| Hedge funds / Funds of hedge funds |
211 | (19 | ) | — | — | — | — | — | 192 | (20 | ) | |||||||||||||||||||||||||
| Private equity investments |
77 | 3 | 1 | — | — | — | — | 81 | 2 | |||||||||||||||||||||||||||
| Real estate funds |
48 | 3 | 5 | — | (1 | ) | — | — | 55 | 3 | ||||||||||||||||||||||||||
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|
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| Total Level 3 investments |
667 | (23 | ) | 6 | (10 | ) | (3 | ) | — | — | 637 | (27 | ) | |||||||||||||||||||||||
| Separate account assets: |
||||||||||||||||||||||||||||||||||||
| Equity securities |
4 | (1 | ) | 1 | (3 | ) | — | — | — | 1 | ||||||||||||||||||||||||||
| Debt securities |
10 | (1 | ) | — | (1 | ) | — | — | — | 8 | ||||||||||||||||||||||||||
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|
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| Total Level 3 separate account assets |
14 | (2 | ) | 1 | (4 | ) | — | — | — | 9 | n/a | (3) | ||||||||||||||||||||||||
| Assets of consolidated VIEs: |
||||||||||||||||||||||||||||||||||||
| Bank loans |
41 | (2 | ) | 5 | — | 16 | 23 | (11 | ) | 72 | ||||||||||||||||||||||||||
| Private equity |
29 | — | — | — | — | — | — | 29 | ||||||||||||||||||||||||||||
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|
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| Total Level 3 assets of consolidated VIEs |
70 | (2 | ) | 5 | — | 16 | 23 | (11 | ) | 101 | n/a | (4) | ||||||||||||||||||||||||
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| Total Level 3 assets |
$ | 751 | ($ | 27 | ) | $ | 12 | ($ | 14 | ) | $ | 13 | $ | 23 | ($ | 11 | ) | $ | 747 | |||||||||||||||||
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| Liabilities: |
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| Borrowings of consolidated VIEs |
$ | 1,292 | $ | 38 | $ | — | $ | — | $ | 332 | $ | — | $ | — | $ | 1,586 | n/a | (4) | ||||||||||||||||||
n/a – not applicable
| (1) | Amount includes distributions from equity method investees, repayments of borrowings of consolidated VIEs, and loans and borrowings related to the consolidation of one additional CLO. |
| (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 Company’s condensed consolidated statements of income. |
| (4) | The net gain (loss) on consolidated VIEs is solely attributable to non-controlling interests on the Company’s 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 Nine Months Ended September 30, 2011
| (Dollar amounts in millions) | December 31, 2010 |
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 |
September 30, 2011 |
Total net gains (losses) included in earnings(2) |
|||||||||||||||||||||||||||
| Assets: |
||||||||||||||||||||||||||||||||||||
| Investments: |
||||||||||||||||||||||||||||||||||||
| Available-for-sale: |
||||||||||||||||||||||||||||||||||||
| Equity securities (CDOs) |
$ | 2 | $ | — | $ | — | $ | — | ($ | 1 | ) | $ | — | $ | — | $ | 1 | $ | — | |||||||||||||||||
| Consolidated sponsored investment funds: |
||||||||||||||||||||||||||||||||||||
| Hedge funds / Funds of funds |
19 | (1 | ) | — | (2 | ) | (1 | ) | — | (1 | ) | 14 | — | |||||||||||||||||||||||
| Private equity |
299 | 23 | 8 | (38 | ) | — | 2 | — | 294 | 20 | ||||||||||||||||||||||||||
| Equity method: |
||||||||||||||||||||||||||||||||||||
| Hedge funds / Funds of hedge funds |
226 | (7 | ) | 5 | (1 | ) | (31 | ) | — | — | 192 | (7 | ) | |||||||||||||||||||||||
| Private equity investments |
68 | 10 | 4 | — | (1 | ) | — | — | 81 | 10 | ||||||||||||||||||||||||||
| Real estate funds |
36 | 5 | 17 | — | (3 | ) | — | — | 55 | 5 | ||||||||||||||||||||||||||
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|
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| Total Level 3 investments |
650 | 30 | 34 | (41 | ) | (37 | ) | 2 | (1 | ) | 637 | 28 | ||||||||||||||||||||||||
| Separate account assets: |
||||||||||||||||||||||||||||||||||||
| Equity securities |
4 | 1 | 8 | (41 | ) | — | 38 | (9 | ) | 1 | ||||||||||||||||||||||||||
| Debt securities |
170 | (3 | ) | 96 | (168 | ) | — | — | (87 | ) | 8 | |||||||||||||||||||||||||
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|
|
|
|
|||||||||||||||||||||
| Total Level 3 separate account assets |
174 | (2 | ) | 104 | (209 | ) | — | 38 | (96 | ) | 9 | n/a | (3) | |||||||||||||||||||||||
| Assets of consolidated VIEs: |
||||||||||||||||||||||||||||||||||||
| Bank loans |
32 | (4 | ) | 25 | (16 | ) | 16 | 46 | (27 | ) | 72 | |||||||||||||||||||||||||
| Private equity |
30 | 3 | — | (4 | ) | — | — | — | 29 | |||||||||||||||||||||||||||