GE 2008 Annual Report Download - page 35

management’s discussion and analsis
ge 2008 annual report 33
Other-than-temporary impairment losses totaled $1.6 billion in
2008 and $0.1 billion in 2007. In 2008, we recognized other-than-
temporary impairments, primarily relating to retained interests in
our securitization arrangements, RMBS and corporate debt securi-
ties of infrastructure, financial institutions and media companies. In
2007, we recognized other-than-temporary impairments, primarily
for our retained interests in our securitization arrangements.
Investments in retained interests in securitization arrangements
also decreased by $0.1 billion during 2008, reflecting declines in
fair value accounted for in accordance with a new accounting
standard that became effective at the beginning of 2007.
Monoline insurers (Monolines) provide credit enhancement for
certain of our investment securities. At December 31, 2008, our
investment securities insured by Monolines totaled $3.1 billion,
including $1.1 billion of our $1.3 billion investment in subprime
RMBS. Although several of the Monolines have been downgraded
by the rating agencies, a majority of the $3.1 billion is insured by
investment-grade Monolines. The Monoline industry continues to
experience financial stress from increasing delinquencies and
defaults on the individual loans underlying insured securities. We
regularly monitor changes to the expected cash flows of the
securities we hold, and the ability of these insurers to pay claims
on securities with expected losses. At December 31, 2008, if the
Monolines were unable to pay our anticipated claims based on
the expected future cash flows of the securities, we would have
recorded an impairment charge of $0.3 billion, of which $0.1 bil-
lion would relate to expected credit losses and the remaining
$0.2 billion would relate to other market factors.
Our qualitative review attempts to identify issuers’ securities
that are “at-risk” of impairment, that is, with a possibility of
other-than-temporary impairment recognition in the following 12
months. Of securities with unrealized losses at December 31,
2008, $0.7 billion of unrealized loss was at risk of being charged
to earnings assuming no further changes in price, and that
amount primarily related to investments in RMBS and CMBS
securities, equity securities, securitization retained interests, and
corporate debt securities of financial institutions and media
companies. In addition, we had approximately $2.9 billion of
exposure to commercial, regional and foreign banks, primarily
relating to corporate debt securities, with associated unrealized
losses of $0.4 billion. Continued uncertainty in the capital markets
may cause increased levels of other-than-temporary impairments.
At December 31, 2008, unrealized losses on investment secu-
rities totaled $5.7 billion, including $3.5 billion aged 12 months or
longer, compared with unrealized losses of $1.3 billion, including
$0.5 billion aged 12 months or longer at December 31, 2007. Of
the amount aged 12 months or longer at December 31, 2008,
more than 80% of our debt securities were considered to be
investment-grade by the major rating agencies. In addition, of the
amount aged 12 months or longer, $1.9 billion and $1.4 billion
related to structured securities (mortgage-backed, asset-backed
and securitization retained interests) and corporate debt securities,
respectively. With respect to our investment securities that are
December 31, 2008, and December 31, 2007, respectively. This
amount included unrealized losses on RMBS and CMBS of
$1.1 billion and $0.8 billion at the end of 2008, as compared with
$0.2 billion and an insignificant amount, respectively, at the end
of 2007. Unrealized losses increased as a result of continuing
market deterioration, and we believe primarily represent adjust-
ments for liquidity on investment-grade securities.
Of the $4.3 billion of RMBS, our exposure to subprime credit
was approximately $1.3 billion, and those securities are primarily
held to support obligations to holders of GICs. A majority of these
securities have received investment-grade credit ratings from
the major rating agencies. We purchased no such securities in
2008 and an insignificant amount of such securities in 2007.
These investment securities are collateralized primarily by pools
of individual direct-mortgage loans, and do not include structured
products such as collateralized debt obligations. Additionally, a
majority of our exposure to residential subprime credit related to
investment securities backed by mortgage loans originated in
2006 and 2005.
We regularly review investment securities for impairment
using both quantitative and qualitative criteria. Quantitative crite-
ria include the length of time and magnitude of the amount that
each security is in an unrealized loss position and, for securities
with fixed maturities, whether the issuer is in compliance with
terms and covenants of the security. Qualitative criteria include
the financial health of and specific prospects for the issuer, as
well as our intent and ability to hold the security to maturity
or until forecasted recovery. In addition, our evaluation at
December 31, 2008, considered the continuing market deterio-
ration that resulted in the lack of liquidity and the historic levels
of price volatility and credit spreads. With respect to corporate
bonds, we placed greater emphasis on the credit quality of the
issuers. With respect to RMBS and CMBS, we placed greater
emphasis on our expectations with respect to cash flows from the
underlying collateral and, with respect to RMBS, we considered
the availability of credit enhancements, principally monoline
insurance. Our other-than-temporary impairment reviews involve
our finance, risk and asset management functions as well as the
portfolio management and research capabilities of our internal
and third-party asset managers.
When an other-than-temporary impairment is recognized for
a debt security, the charge has two components: (1) the loss of
contractual cash flows due to the inability of the issuer (or the
insurer, if applicable) to pay all amounts due; and (2) the effects of
current market conditions, exclusive of credit losses, on the fair
value of the security (principally liquidity discounts and interest
rate effects). If the expected loss due to credit remains unchanged
for the remaining term of the debt instrument, the latter portion
of the impairment charge is subsequently accreted to earnings
as interest income over the remaining term of the instrument.
When a security is insured, a credit loss event is deemed to
have occurred if the insurer is expected to be unable to cover its
obligations under the related insurance contract.