GE 2013 Annual Report Download - page 92

90 GE 2013 ANNUAL REPORT
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We regularly review investment securities for impairment using
both qualitative and quantitative criteria. We presently do not
intend to sell the vast majority of our debt securities that are in
an unrealized loss position 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. We believe that the unrealized
loss associated with our equity securities will be recovered within
the foreseeable future.
Substantially all 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 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. In the event a U.S. corporate debt secu-
rity 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 fl ows to the amortized cost of
the security. We discount the cash fl ows using the original effec-
tive interest rate of the security.
The vast majority of our RMBS have investment-grade credit
ratings from the major rating agencies and are in a senior posi-
tion in the capital structure of the deals. Of our total RMBS at
December 31, 2013 and 2012, approximately $378 million and
$471 million, respectively, relate to residential subprime credit,
primarily supporting our guaranteed 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, 2013 and 2012, approximately $285 million and
$219 million, respectively, was insured by Monoline insurers
(Monolines) on which we continue to place reliance.
Our commercial mortgage-backed securities (CMBS) portfo-
lio 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),
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 are in a senior position in the capital
structure of the deals.
Our asset-backed securities (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 our ABS 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.
For ABS and RMBS, we estimate the portion of loss attribut-
able to credit using a discounted cash fl ow model that considers
estimates of cash fl ows generated from the underlying collat-
eral. Estimates of cash fl ows consider credit risk, interest rate
and prepayment assumptions that incorporate management’s
best estimate of key assumptions of the underlying collateral,
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 fl ows are considered in the context of
our position in the capital structure of the deals. Assumptions can
vary widely depending upon the collateral type, geographic con-
centrations and vintage.
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 credit worthiness 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 in
default or default appears imminent, and the potential for inter-
vention by an insurance or other regulator.
During 2013, we recorded pre-tax, other-than-temporary
impairments of $798 million, of which $767 million was recorded
through earnings ($15 million relates to equity securities) and
$31 million was recorded in accumulated other comprehensive
income (AOCI). At January 1, 2013, cumulative impairments rec-
ognized in earnings associated with debt securities still held
were $588 million. During 2013, we recognized fi rst-time impair-
ments of $389 million and incremental charges on previously
impaired securities of $336 million. Of these cumulative amounts
recognized through December 31, 2013, $120 million related to
securities that were subsequently sold before the end of 2013.
During 2012, we recorded pre-tax, other-than-temporary
impairments of $193 million, of which $141 million was recorded
through earnings ($39 million relates to equity securities) and
$52 million was recorded in AOCI. At January 1, 2012, cumula-
tive impairments recognized in earnings associated with debt
securities still held were $726 million. During 2012, we recognized
fi rst-time impairments of $27 million and incremental charges on
previously impaired securities of $40 million. Of these cumulative
amounts recognized through December 31, 2012, $219 million
related to securities that were subsequently sold before the end
of 2012.
During 2011, we recorded pre-tax, other-than-temporary
impairments of $467 million, of which $387 million was recorded
through earnings ($81 million relates to equity securities) and
$80 million was recorded in AOCI. At January 1, 2011, cumula-
tive impairments recognized in earnings associated with debt
securities still held were $500 million. During 2011, we recognized
fi rst-time impairments of $58 million and incremental charges on
previously impaired securities of $230 million. Of these cumula-
tive amounts recognized through December 31, 2011, $62 million
related to securities that were subsequently sold before the end
of 2011.