GE 2009 Annual Report Download - page 72

70 GE 2009 ANNUAL REPORT
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GECS Investment Contracts, Insurance Liabilities
and Insurance Annuity Benefits
Certain entities, which we consolidate, provide guaranteed
investment contracts to states, municipalities and municipal
authorities.
Our insurance activities also include providing insurance and
reinsurance for life and health risks and providing certain annuity
products. Three product groups are provided: traditional insur-
ance contracts, investment contracts and universal life insurance
contracts. Insurance contracts are contracts with significant
mortality and/or morbidity risks, while investment contracts are
contracts without such risks. Universal life insurance contracts
are a particular type of long-duration insurance contract whose
terms are not fixed and guaranteed.
For short-duration insurance contracts, including accident and
health insurance, we report premiums as earned income over the
terms of the related agreements, generally on a pro-rata basis.
For traditional long-duration insurance contracts including term,
whole life and annuities payable for the life of the annuitant, we
report premiums as earned income when due.
Premiums received on investment contracts (including annui-
ties without significant mortality risk) and universal life contracts
are not reported as revenues but rather as deposit liabilities.
We recognize revenues for charges and assessments on these
contracts, mostly for mortality, contract initiation, administration
and surrender. Amounts credited to policyholder accounts are
charged to expense.
Liabilities for traditional long-duration insurance contracts
represent the present value of such benefits less the present value
of future net premiums based on mortality, morbidity, interest
and other assumptions at the time the policies were issued or
acquired. Liabilities for investment contracts and universal life
policies equal the account value, that is, the amount that accrues
to the benefit of the contract or policyholder including credited
interest and assessments through the financial statement date.
Liabilities for unpaid claims and claims adjustment expenses
represent our best estimate of the ultimate obligations for reported
and incurred-but-not-reported claims and the related estimated
claim settlement expenses. Liabilities for unpaid claims and claims
adjustment expenses are continually reviewed and adjusted through
current operations.
Fair Value Measurements
We adopted ASC 820 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.
For financial assets and liabilities fair valued on a recurring
basis, fair value is the price we would receive to sell an asset or
pay to transfer a liability in an orderly transaction with a market
participant at the measurement date. In the absence of active
markets for the identical assets or liabilities, such measurements
involve developing assumptions based on market observable
data and, in the absence of such data, internal information that
is consistent with what market participants would use in a hypo-
thetical transaction that occurs at the measurement date.
Observable inputs reflect market data obtained from inde-
pendent sources, while unobservable inputs reflect our market
assumptions. Preference is given to observable inputs. These
two types of inputs create the following fair value hierarchy:
Level 1 — Quoted prices for identical instruments in active markets.
Level 2 — Quoted prices for similar instruments in active markets;
quoted prices for identical or similar instruments in
markets that are not active; and model-derived valuations
whose inputs are observable or whose significant value
drivers are observable.
Level 3 — Significant inputs to the valuation model are
unobservable.
We maintain policies and procedures to value instruments using
the best and most relevant data available. In addition, we have risk
management teams that review valuation, including independent
price validation for certain instruments. Further, in other instances,
we retain independent pricing vendors to assist in valuing certain
instruments.
The following section describes the valuation methodologies
we use to measure different financial instruments at fair value on
a recurring basis.
INVESTMENTS IN DEBT AND EQUITY SECURITIES. When available,
we use quoted market prices to determine the fair value of
investment securities, and they are included in Level 1. Level 1
securities primarily include publicly-traded equity securities.
When quoted market prices are unobservable, we obtain pricing
information from an independent pricing vendor. The pricing
vendor uses various pricing models for each asset class that are
consistent with what other market participants would use. The
inputs and assumptions to the model of the pricing vendor are
derived from market observable sources including: benchmark
yields, reported trades, broker/dealer quotes, issuer spreads,
benchmark securities, bids, offers, and other market-related data.
Since many fixed income securities do not trade on a daily basis,
the methodology of the pricing vendor uses available information
as applicable such as benchmark curves, benchmarking of like
securities, sector groupings, and matrix pricing. The pricing vendor
considers available market observable inputs in determining
the evaluation for a security. Thus, certain securities may not be
priced using quoted prices, but rather determined from market
observable information. These investments are included in Level 2
and primarily comprise our portfolio of corporate fixed income, and
government, mortgage and asset-backed securities. In infrequent
circumstances, our pricing vendors may provide us with valuations
that are based on significant unobservable inputs, and in those
circumstances we classify the investment securities in Level 3.