GE 2007 Annual Report Download - page 55

ge 2007 annual report 53
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Financial Resources and Liquidity
This discussion of fi nancial resources and liquidity addresses the
Statement of Financial Position, the Statement of Changes in
Shareowners’ Equity, the Statement of Cash Flows, Contractual
Obligations, Off-Balance Sheet Arrangements, and Debt
Instruments, Guarantees and Covenants.
The fundamental differences between GE and GECS are
refl ected in the measurements commonly used by investors, rat-
ing agencies and fi nancial analysts. These differences will become
clearer in the discussion that follows with respect to the more
signifi cant items in the fi nancial statements.
Overview of Financial Position
Major changes in our fi nancial position resulted from the following:
• During 2007, we separately reported the assets and liabilities
of Plastics, Lake and WMC as discontinued operations for
all periods presented. As of December 31, 2007, we have
completed the sales of Plastics and WMC, reducing assets
and liabilities of discontinued operations by $13.2 billion and
$2.1 billion, respectively.
• During 2007, we completed the acquisitions of Smiths
Aerospace Group Ltd.; Vetco Gray; Oxygen Media Corp.;
Sondex PLC; Sparrowhawk Holdings Ltd.; Phoenix; Dynamic
Imaging, LLC; Sanyo Electric Credit Co., Ltd.; DISKO and ASL,
the leasing businesses of KG Allgemeine Leasing GmbH & Co.;
Trustreet Properties, Inc.; Dundee REIT; Crow Holdings; and
a controlling interest in Regency Energy Partners LP.
• Our principal pension plans had a surplus of $16.8 billion at
December 31, 2007, compared with $11.5 billion at the end of
2006, refl ecting strong asset returns and an increase in the
discount rate.
• The U.S. dollar was weaker at December 31, 2007, than it was
at December 31, 2006, increasing the translated levels of our
non-U.S. dollar assets and liabilities. Overall, on average, the
U.S. dollar in 2007 was weaker than during the comparable
2006 period, resulting in increasing the translated levels of
our operations as noted in the preceding Operations section.
Statement of Financial Position
Because GE and GECS share certain signifi cant elements of their
Statements of Financial Position — property, plant and equipment
and borrowings, for example — the following discussion addresses
signifi cant captions in the “consolidated” statement. Within the
following discussions, however, we distinguish between GE and
GECS activities in order to permit meaningful analysis of each
individual consolidating statement.
INVESTMENT SECURITIES comprise mainly investment-grade debt
securities supporting obligations to annuitants and policyholders
in our run-off insurance businesses and holders of guaranteed
investment contracts (GICs). Investment securities were $45.4 billion
at December 31, 2007, compared with $47.8 billion at December 31,
2006. Of the amount at December 31, 2007, we held mortgage-
backed securities (MBS) and asset-backed securities (ABS) with
estimated fair values of $8.4 billion and $2.2 billion, respectively.
Such amounts included unrealized losses of $0.3 billion and
$0.1 billion, respectively. Of the MBS amount, $5.5 billion related
to residential MBS and $2.9 billion to commercial MBS.
At December 31, 2007 and 2006, we had approximately
$1.6 billion of exposure to subprime credit supporting our
guaranteed investment contracts, a majority of which relates to
residential MBS receiving credit ratings of Double A or better
from the major rating agencies. We purchased an insignifi cant
amount of such securities in 2007. Our subprime investment
securities were collateralized primarily by pools of individual,
direct mortgage loans, not other structured products such as
collateralized debt obligations.
Monoline insurers (Monolines) provide credit enhancement
for certain of our investment securities. The current credit envi-
ronment could have a signifi cant effect on the ability of such
fi nancial guarantors to fulfi ll their obligations. At December 31,
2007, our investment securities insured by Monolines amounted
to $3.5 billion, including $1.2 billion of our $1.6 billion investment
in subprime residential MBS.
We regularly review investment securities for impairment using
both quantitative and qualitative criteria. Quantitative criteria
include length of time and amount that each security is in an
unrealized loss position and, for fi xed maturities, whether the
issuer is in compliance with terms and covenants of the security.
Qualitative criteria include the fi nancial health of and specifi c
prospects for the issuer, as well as our intent and ability to hold
the security to maturity or until forecasted recovery. Our impair-
ment reviews involve our fi nance, risk and asset management
functions as well as the portfolio management and research
capabilities of our internal and third-party asset managers. Our
qualitative review attempts to identify issuers’ securities “at-risk”
of impairment, that is, with a greater than 50% chance of default
in the following 12 months. At December 31, 2007, investment
securities in an unrealized loss position included $0.1 billion that
was at risk of being charged to earnings in the next 12 months.
Impairment losses totaled $0.1 billion in both 2007 and 2006,
primarily at Commercial Finance. In 2007, we recognized impair-
ments primarily for our retained interests in off-balance sheet
arrangements. In 2006, we recognized impairments on securities
of issuers in a variety of industries; we do not believe that any of
the impairments indicate likely future impairments in the remaining
portfolio. Investments in retained interests in off-balance sheet
arrangements at GE Money also decreased by $0.1 billion during
2007, refl ecting declines in fair value accounted for in accordance
with a new accounting standard that became effective at the
beginning of 2007.
Gross unrealized gains and losses totaled $1.4 billion and
$1.3 billion, respectively, at December 31, 2007, compared with
$2.9 billion and $0.3 billion, respectively, at December 31, 2006,
primarily refl ecting a decrease in estimated fair values of U.S.
corporate and MBS debt securities and a decrease caused by
sale of certain equity securities. At December 31, 2007, available
2008 accounting gains could be as much as $0.7 billion, net of
consequential adjustments to certain insurance assets that are
amortized based on anticipated gross profi ts. The market values