GE 2012 Annual Report Download - page 51

management’s discussion and analsis
GE 2012 ANNUAL REPORT 49
Our RMBS portfolio is collateralized primarily by pools of indi-
vidual, direct mortgage loans (a majority of which were originated
in 2006 and 2005), not other structured products such as col-
lateralized debt obligations. Substantially all of our RMBS are in
a senior position in the capital structure of the deals and more
than 70% are agency bonds or insured by Monoline insurers
(Monolines) (on which we continue to place reliance). Of our total
RMBS portfolio at both December 31, 2012 and 2011, approxi-
mately $0.5 billion relates to residential subprime credit, primarily
supporting our guaranteed investment contracts. A majority of
this exposure is related to investment securities backed by mort-
gage loans originated in 2006 and 2005. Substantially all of the
subprime RMBS were investment grade at the time of purchase
and approximately 70% have been subsequently downgraded to
below investment grade.
Our CMBS portfolio is 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 2007 and 2006.
The vast majority of the securities in our CMBS portfolio have
investment grade credit ratings and the vast majority of the secu-
rities are in a senior position in the capital structure of the deals.
Our ABS portfolio is collateralized by senior secured loans of
high-quality, middle-market companies in a variety of industries,
as well as a variety of diversified pools of assets such as student
loans and credit cards. The vast majority of the securities in our
ABS portfolio are in a senior position in the capital structure of the
deals. In addition, substantially all of the securities that are below
investment grade are in an unrealized gain position.
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 creditworthiness of the Monoline, we use an analy-
sis 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.
Monolines provide credit enhancement for certain of our
investment securities, primarily RMBS and municipal 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. The Monoline industry contin-
ues to experience financial stress from increasing delinquencies
and defaults on the individual loans underlying insured securi-
ties. We continue to rely on Monolines with adequate capital
and claims paying resources. We have reduced our reliance on
Monolines that do not have adequate capital or have experienced
regulator intervention. At December 31, 2012, our investment
securities insured by Monolines on which we continue to place
reliance were $1.4 billion, including $0.2 billion of our $0.5 billion
investment in subprime RMBS. At December 31, 2012, the unre-
alized loss associated with securities subject to Monoline credit
enhancement, for which there is an expected credit loss, was
$0.2 billion.
Total pre-tax, other-than-temporary impairment losses during
2012 were $0.2 billion, of which $0.1 billion was recognized in
earnings and primarily relates to credit losses on non-U.S. corpo-
rate, U.S. corporate and RMBS securities and other-than-
temporary losses on equity securities and $0.1 billion primarily
relates to non-credit related losses on RMBS and is included
within accumulated other comprehensive income (AOCI).
Total pre-tax, other-than-temporary impairment losses dur-
ing 2011 were $0.5 billion, of which $0.4 billion was recognized
in earnings and primarily relates to credit losses on non-U.S.
government and non-U.S. corporate securities and other-than-
temporary losses on equity securities and $0.1 billion primarily
relates to non-credit related losses on RMBS and is included
within AOCI.
At December 31, 2012 and December 31, 2011, unreal-
ized losses on investment securities totaled $0.8 billion and
$1.6 billion, respectively, including $0.8 billion and $1.2 billion,
respectively, aged 12 months or longer. Of the amount aged 12
months or longer at December 31, 2012, more than 64% are debt
securities that were considered to be investment grade by the
major rating agencies. In addition, of the amount aged 12 months
or longer, $0.3 billion and $0.4 billion related to structured secu-
rities (mortgage-backed and asset-backed) and corporate debt
securities, respectively. With respect to our investment securi-
ties that are in an unrealized loss position at December 31, 2012,
the majority relate to debt securities held to support obligations
to holders of GICs. We presently do not intend to sell the vast
majority of our debt securities that are in an unrealized loss posi-
tion and believe that it is not more likely than not that we will be
required to sell these securities before recovery of our amortized
cost. For additional information, see Note 3.
FAIR VALUE MEASUREMENTS. For financial assets and liabilities
measured at fair value 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 hypothetical transaction that occurs
at the measurement date. Additional information about our
application of this guidance is provided in Notes 1 and 21. At
December 31, 2012, the aggregate amount of investments that
are measured at fair value through earnings totaled $5.1 billion
and consisted primarily of various assets held for sale in the
ordinary course of business, as well as equity investments.
WORKING CAPITAL, representing GE current receivables and
inventories, less GE accounts payable and progress collections,
increased $1.0 billion at December 31, 2012, compared to
December 31, 2011 due to an increase in inventory and lower
progress collections, partially offset by decreased accounts receiv-
able. As Power & Water, Oil & Gas and Aviation deliver units out of