NOTE 8 - Fair Values of Financial Instruments
The following table discloses fair value information for on- and off-balance sheet financial instruments. Certain items, such as life insurance obligations, employee benefit obligations and investments accounted for under the equity method are excluded. The fair values of financial instruments are estimates based upon market conditions and perceived risks at December 31, 1999 and 1998 and require management judgment. These figures may not be indicative of their future fair values.
The carrying and fair values of other off-balance sheet financial instruments are not material as of December 31, 1999 and 1998. See Notes 2 and 7 for carrying and fair value information regarding investments and derivative financial instruments. The following methods were used to estimate the fair values of financial assets and financial liabilities:
FINANCIAL ASSETS
Assets for which carrying values approximate fair values include cash and cash equivalents, accounts receivable and accrued interest, separate account assets and certain other assets.
For variable rate loans that reprice within a year where there has been no significant change in counterparties’ creditworthiness, fair values are based on carrying values.
The fair values of all other loans, except those with significant credit deterioration, are estimated using discounted cash flow analysis, based on current interest rates for loans with similar terms to borrowers of similar credit quality. For loans with significant credit deterioration, fair values are based on estimates of future cash flows discounted at rates commensurate with the risk inherent in the revised cash flow projections, or for collateral dependent loans, on collateral values.
FINANCIAL LIABILITIES
Liabilities for which carrying values approximate fair values include customers’ deposits, travelers cheques outstanding, accounts payable, short-term debt and certain other liabilities.
Fair values of fixed annuities in deferral status are estimated as the accumulated value less applicable surrender charges and loans. For annuities in payout status, fair value is estimated using discounted cash flows, based on current interest rates. The fair value of these reserves excludes life insurance - related elements of $1.4 billion and $1.3 billion in 1999 and 1998, respectively.
For variable rate investment certificates that reprice within a year, fair values approximate carrying values. For other investment certificates, fair value is estimated using discounted cash flows based on current interest rates. The valuations are reduced by the amount of applicable surrender charges and related loans.
For variable rate long-term debt that reprices within a year, fair values approximate carrying values. For other long-term debt, fair value is estimated using either quoted market prices or discounted cash flow based on the company’s current borrowing rates for similar types of borrowing.
Fair values of separate account liabilities, after excluding life insurance - related elements of $4.0 billion and $2.3 billion in 1999 and 1998, respectively, are estimated as the accumulated value less applicable surrender charges.
