GE 2013 Annual Report Download - page 50

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48 GE 2013 ANNUAL REPORT
Financial Resources and Liquidity
This discussion of fi nancial resources and liquidity addresses
the Statement of Financial Position; Liquidity and Borrowings;
Debt and Derivative Instruments, Guarantees and Covenants;
Consolidated Statements of Changes in Shareowners’ Equity and
Comprehensive Income; Statement of Cash Flows—Overview
from 2011 through 2013; Contractual Obligations; and Variable
Interest Entities (VIEs).
Overview of Financial Position
Major changes to our shareowners’ equity are discussed in the
Shareowners’ Equity and Comprehensive Income section. In
addition, other signifi cant changes to balances in our Statement
of Financial Position follow.
Statement of Financial Position
Because GE and GECC share certain signifi cant elements of their
Statements of Financial Position—property, plant and equipment
and borrowings, for example—the following discussions address
signifi cant captions in the consolidated statement. Within the
following discussions, however, we distinguish between GE and
GECC activities in order to permit meaningful analysis of each
individual consolidating statement.
INVESTMENT SECURITIES comprise mainly investment-grade debt
securities supporting obligations to annuitants and policyholders
in our run-off insurance operations and supporting obligations
to holders of guaranteed investment contracts (GICs) in Trinity,
and investments held in our CLL business collateralized by
senior secured loans of high-quality, middle-market companies
in a variety of industries. The fair value of investment securities
decreased to $44.0 billion at December 31, 2013 from $48.5 bil-
lion at December 31, 2012, primarily due to the sale of U.S.
government and federal agency securities at our treasury oper-
ations and the impact of higher interest rates. At December 31,
2013, we held debt securities with an estimated fair value of
$43.3 billion, which included corporate debt securities, asset-
backed securities (ABS), commercial mortgage-backed securities
(CMBS) and residential mortgage-backed securities (RMBS) with
estimated fair values of $23.5 billion, $7.4 billion, $3.0 billion and
$1.9 billion, respectively. Net unrealized gains on debt securi-
ties were $2.5 billion and $4.8 billion at December 31, 2013 and
2012, respectively. This amount included unrealized losses on
corporate debt securities, state and municipal securities and
CMBS of $0.3 billion, $0.2 billion and $0.1 billion, respectively, at
December 31, 2013, as compared with $0.4 billion, $0.1 billion
and $0.1 billion, respectively, at December 31, 2012.
We regularly review investment securities for impairment
using both qualitative and quantitative criteria. For debt securi-
ties, our qualitative review considers our intent to sell the security
and the fi nancial health of and specifi c prospects for the issuer,
including whether the issuer is in compliance with the terms
and covenants of the security. Our quantitative review considers
whether there has been an adverse change in expected future
cash fl ows. Unrealized losses are not indicative of the amount of
credit loss that would be recognized. We presently do not intend
to sell the vast majority of our debt securities that are in an unre-
alized loss position and believe that it is not more likely than not
that we will be required to sell the vast majority of these securi-
ties before recovery of our amortized cost. For equity securities,
we consider the length of time and magnitude of the amount that
each security is in an unrealized loss position. We believe that
the unrealized loss associated with our equity securities will be
recovered within the foreseeable future. Uncertainty in the capi-
tal markets may cause increased levels of other-than-temporary
impairments. For additional information relating to how credit
losses are calculated, see Note 3.
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 collat-
eralized debt obligations. The vast majority 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 December 31, 2013 and 2012, approximately
$0.4 billion and $0.5 billion, respectively, relates to residential
subprime credit, primarily supporting our guaranteed investment
contracts. A majority of this exposure is related to investment
securities backed by mortgage 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 diversifi ed pools
of mortgages that were originated for securitization (conduit
CMBS) and pools of large loans backed by high-quality properties
(large loan CMBS), the majority of which were originated in 2007
and 2006. The vast majority of the securities in our CMBS portfo-
lio have investment-grade credit ratings and the vast majority of
the securities 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 diversifi ed 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 fl ows for RMBS,
management considers credit enhancements such as Monoline
insurance (which are features of a specifi c 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 suffi ciency of the Monoline’s cash
reserves and capital, ratings activity, whether the Monoline is