GE 2009 Annual Report Download - page 78

76 GE 2009 ANNUAL REPORT
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The following tables present the gross unrealized losses and
estimated fair values of our available-for-sale investment securities.
In loss position for
Less than 12 months 12 months or more
December 31 (In millions)
Estimated
fair value
Gross
unrealized
losses
Estimated
fair value
Gross
unrealized
losses
2009
Debt
U.S. corporate $ 3,146 $ (88) $ 4,881 $ (669)
State and municipal 592 (129) 535 (117)
Residential mortgage-
backed 118 (14) 1,678 (752)
Commercial mortgage-
backed 167 (5) 1,293 (435)
Asset-backed 126 (11) 1,342 (294)
Corporate — non-U.S. 374 (18) 481 (32)
Government — non-U.S. 399 (4) 224 (25)
U.S. government and
federal agency — — — —
Retained interests 208 (16) 27 (24)
Equity 92 (2) 10 (3)
Total $ 5,222 $ (287) $10,471 $ (2,351)
2008
Debt
U.S. corporate $ 6,602 $ (1,108) $ 5,629 $ (1,369)
State and municipal 570 (44) 278 (50)
Residential mortgage-
backed 1,355 (107) 1,614 (945)
Commercial mortgage-
backed 774 (184) 1,218 (604)
Asset-backed 1,064 (419) 1,063 (272)
Corporate — non-U.S. 454 (106) 335 (60)
Government — non-U.S. 88 (4) 275 (15)
U.S. government and
federal agency — — 150 (100)
Retained interests 1,403 (71) 274 (81)
Equity 268 (153) 9 (4)
Total $12,578 $ (2,196) $10,845 $ (3,500)
We adopted amendments to ASC 320 and recorded a cumulative
effect adjustment to increase retained earnings as of April 1, 2009,
of $62 million.
We regularly review investment securities for impairment
using both qualitative and quantitative criteria. 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. We believe that the unrealized loss associated with our
equity securities will be recovered within the foreseeable future.
The vast majority of our U.S. corporate debt securities are
rated investment grade by the major rating agencies. We evaluate
U.S. corporate debt securities based on a variety of factors such
as the financial health of and specific prospects for the issuer,
including whether the issuer is in compliance with the terms and
covenants of the security. In the event a U.S. corporate debt
security is deemed to be other-than-temporarily impaired, we
isolate the credit portion of the impairment by comparing the
present value of our expectation of cash flows to the amortized
cost of the security. We discount the cash flows using the original
effective interest rate of the security.
The vast majority of our residential mortgage-backed securities
(RMBS) have investment-grade credit ratings from the major rating
agencies and are in a senior position in the capital structure of
the deal. Of our total RMBS at December 31, 2009 and 2008,
approximately $897 million and $1,310 million, respectively, relate
to residential subprime credit, primarily supporting our guaran-
teed investment contracts. These are collateralized primarily by
pools of individual, direct mortgage loans (a majority of which
were originated in 2006 and 2005), not other structured products
such as collateralized debt obligations. In addition, of the total
residential subprime credit exposure at December 31, 2009 and
2008, approximately $768 million and $1,093 million, respectively,
was insured by Monoline insurers (Monolines).
The vast majority of our commercial mortgage-backed secu-
rities (CMBS) also have investment-grade credit ratings from the
major rating agencies and are in a senior position in the capital
structure of the deal. Our CMBS investments are collateralized
by both diversified pools of mortgages that were originated for
securitization (conduit CMBS) and pools of large loans backed by
high quality properties (large loan CMBS), a majority of which
were originated in 2006 and 2007.
For asset-backed securities, including RMBS, we estimate the
portion of loss attributable to credit using a discounted cash
flow model that considers estimates of cash flows generated
from the underlying collateral. Estimates of cash flows consider
internal credit risk, interest rate and prepayment assumptions
that incorporate management’s best estimate of key assump-
tions, including default rates, loss severity and prepayment rates.
For CMBS, we estimate the portion of loss attributable to credit
by evaluating potential losses on each of the underlying loans in
the security. Collateral cash flows are considered in the context
of our position in the capital structure of the deal. Assumptions
can vary widely depending upon the collateral type, geographic
concentrations and vintage.
If there has been an adverse change in cash flows for RMBS,
management considers credit enhancements such as monoline
insurance (which are features of a specific security). In evaluating
the overall credit worthiness of the Monoline, we use an analysis
that is similar to the approach we use for corporate bonds,
including an evaluation of the 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 inter-
vention by an insurance or other regulator.
During the period April 1, 2009, through December 31, 2009,
we recorded pre-tax, other-than-temporary impairments of
$780 million, of which $455 million was recorded through earn-
ings ($42 million relates to equity securities), and $325 million was
recorded in accumulated other comprehensive income (AOCI).
Prior to April 1, 2009, we recognized impairments in earnings
of $423 million associated with debt securities still held. As of
April 1, 2009, we reversed previously recognized impairments of
$99 million ($62 million after tax) as an adjustment to retained
earnings in accordance with the amendments to ASC 320.
Subsequent to April 1, 2009, we recognized first time impair-
ments of $108 million and incremental charges on previously
impaired securities of $257 million. These amounts included
$124 million related to securities that were subsequently sold.