GE 2009 Annual Report Download - page 43

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GE 2009 ANNUAL REPORT 41
Monoline insurers (Monolines) provide credit enhancement for
certain of our investment securities. The credit enhancement is
a feature of each specific security that guarantees the payment
of all contractual cash flows, and is not purchased separately by
GE. At December 31, 2009, our investment securities insured
by Monolines totaled $2.7 billion, including $0.8 billion of our
$0.9 billion investment in subprime RMBS. The Monoline industry
continues to experience financial stress from increasing delin-
quencies and defaults on the individual loans underlying insured
securities. In evaluating whether a security with Monoline credit
enhancement is other-than-temporarily impaired, we first evaluate
whether there has been an adverse change in estimated cash
flows. If there has been an adverse change in estimated cash flows,
we then evaluate the overall creditworthiness of the Monoline
using an analysis that is similar to the approach we use for
corporate bonds. This includes an evaluation of the following
factors: sufficiency of the Monoline’s cash reserves and capital,
ratings activity, whether the Monoline is in default or default
appears imminent, and the potential for intervention by an
insurance or other regulator. At December 31, 2009, the unreal-
ized loss associated with securities subject to Monoline credit
enhancement for which there is an expected loss was $0.3 billion,
of which $0.2 billion relates to expected credit losses and the
remaining $0.1 billion relates to other market factors.
Total pre-tax other-than-temporary impairment losses during
the period April 1, 2009, through December 31, 2009, were
$0.8 billion, of which $0.5 billion was recognized in earnings and
primarily relates to credit losses on corporate debt securities,
RMBS and retained interests in our securitization arrangements,
and $0.3 billion primarily relates to non-credit-related losses on
RMBS and is included within accumulated other comprehensive
income.
Our qualitative review attempts to identify issuers’ securities
that are “at-risk” of other-than-temporary impairment, that is, for
securities that we do not intend to sell and it is not more likely
than not that we will be required to sell before recovery of our
amortized cost, whether there is a possibility of credit loss that
would result in an other-than-temporary impairment recognition in
the following 12 months. Securities we have identified as “at-risk”
primarily relate to investments in RMBS securities and corporate
debt securities across a broad range of industries. The amount
of associated unrealized loss on these securities at December 31,
2009, is $0.6 billion. Credit losses that would be recognized in
earnings are calculated when we determine the security to
be other-than-temporarily impaired. Continued uncertainty in
the capital markets may cause increased levels of other-than-
temporary impairments.
At December 31, 2009, unrealized losses on investment
securities totaled $2.6 billion, including $2.4 billion aged
12 months or longer, compared with unrealized losses of
$5.7 billion, including $3.5 billion aged 12 months or longer, at
December 31, 2008. Of the amount aged 12 months or longer
at December 31, 2009, more than 70% 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,
$1.5 billion and $0.7 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 in an unrealized
loss position at December 31, 2009, the vast majority relate to
debt securities held to support obligations to holders of GICs
and annuitants and policyholders in our run-off insurance
operations. We presently do not intend to sell our debt securities
and believe that it is not more likely than not that we will be
required to sell these securities that are in an unrealized loss
position before recovery of our amortized cost. The fair values
used to determine these unrealized gains and losses are those
defined by relevant accounting standards and are not a forecast
of future gains or losses. For additional information, see Note 3.
FAIR VALUE MEASUREMENTS. We adopted ASC 820, Fair Value
Measurements and Disclosures, in two steps; effective January 1,
2008, we adopted it for all financial instruments and non-financial
instruments accounted for at fair value on a recurring basis
and effective January 1, 2009, for all non-financial instruments
accounted for at fair value on a non-recurring basis. Adoption of
this did not have a material effect on our financial position or
results of operations. Additional information about our application
of this guidance is provided in Note 21.
Investments measured at fair value in earnings include
retained interests in securitizations accounted for at fair value
and equity investments of $3.1 billion at year-end 2009. The
earnings effects of changes in fair value on these assets, favorable
and unfavorable, will be reflected in the period in which those
changes occur. As discussed in Note 9, we also have assets that
are classified as held for sale in the ordinary course of business,
primarily credit card receivables, loans and real estate properties,
carried at $3.7 billion at year-end 2009, which represents the
lower of carrying amount or estimated fair value less costs to
sell. To the extent that the estimated fair value less costs to sell is
lower than carrying value, any favorable or unfavorable changes
in fair value will be reflected in earnings in the period in which
such changes occur.
WORKING CAPITAL, representing GE current receivables and
inventories, less GE accounts payable and progress collections,
was $(1.6) billion at December 31, 2009, down $5.5 billion from
December 31, 2008, primarily reflecting the effects of operating
initiatives and the classification of NBCU and our Security busi-
ness as held for sale. As Energy delivers units out of its backlog
over the next few years, progress collections of $13.0 billion at
December 31, 2009, will be earned, which, along with progress
collections on new orders, will impact working capital. Throughout
the last three years, we have executed a significant number of
initiatives through our Operating Council, such as lean cycle time
projects, which have resulted in working capital decreases. We
expect to continue these initiatives in 2010, which should have
the effect of significantly offsetting the effects of decreases in
progress collections.