GE 2006 Annual Report Download - page 104

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Insurance — credit life
Certain insurance affiliates, primarily in GE Money, issue credit
life insurance designed to pay the balance due on a loan if the
borrower dies before the loan is repaid. As part of our overall risk
management process, we cede to third parties a portion of this
associated risk, but are not relieved of our primary obligation to
policyholders.
LOAN COMMITMENTS
Notional amount
December 31 (In millions) 2006 2005
Ordinary course of business
lending commitments(a)
Fixed rate $ 3,186 $ 4,188
Variable rate 9,515 6,068
Unused revolving credit lines(b)
Commercial
Fixed rate 868 779
Variable rate 24,095 20,779
Consumer — principally credit cards
Fixed rate 136,920 170,367
Variable rate 341,656 281,113
(a) Excluded investment commitments of $2,881 million and $1,418 million as of
December 31, 2006 and 2005, respectively.
(b) Excluded inventory financing arrangements, which may be withdrawn at our
option, of $11,044 million and $11,383 million as of December 31, 2006 and 2005,
respectively.
Derivatives and hedging
We conduct our business activities in diverse markets around
the world, including countries where obtaining local funding is
sometimes inefficient. The nature of our activities exposes us to
changes in interest rates and currency exchange rates. We manage
such risks using straightforward techniques including debt
whose terms correspond to terms of the funded assets, as well as
combinations of debt and derivatives that achieve our objectives.
We also are exposed to various commodity price risks and address
certain of these risks with commodity contracts. We value deriv-
atives that are not exchange-traded with internal market-based
valuation models. When necessary, we also obtain information
from our derivative counterparties to validate our models and to
value the few products that our internal models do not address.
We use interest rate swaps, currency derivatives and com-
modity derivatives to reduce the variability of expected future
cash flows associated with variable rate borrowings and com-
mercial purchase and sale transactions, including commodities.
We use interest rate swaps, currency swaps and interest rate
and currency forwards to hedge the fair value effects of interest
rate and currency exchange rate changes on local and non-
functional currency denominated fi xed-rate borrowings and
certain types of fixed-rate assets. We use currency swaps and
forwards to protect our net investments in global operations
conducted in non-U.S. dollar currencies. We intend all of these
positions to qualify as hedges and to be accounted for as hedges.
We use swaps, futures and option contracts, including caps,
floors and collars, as economic hedges of changes in interest
rates, currency exchange rates and equity prices on certain types
of assets and liabilities. We sometimes use credit default swaps
to hedge the credit risk of various counterparties with which we
have entered into loan or leasing arrangements. We occasionally
obtain equity warrants as part of sourcing or fi nancing transactions.
Although these instruments are derivatives, their economic risks
are similar to, and managed on the same basis as, risks of other
equity instruments we hold. These instruments are marked to
market through earnings.
Earnings effects of derivatives designated as hedges
At December 31, 2006, approximately 57% of our total interest
rate swaps accounted for as hedges were exempt from ongoing
tests of effectiveness. The following table provides information
about the earnings effects of derivatives designated and qualifying
as hedges, but not qualifying for the assumption of no ineffec-
tiveness.
PRE-TAX GAINS (LOSSES)
December 31 (In millions) 2006 2005 2004
CASH FLOW HEDGES
Ineffectiveness $10 $(27) $20
Amounts excluded from the measure
of effectiveness (16) 17 25
FAIR VALUE HEDGES
Ineffectiveness (47) 4 11
Amounts excluded from the measure
of effectiveness 33 (8) 3
In 2006 and 2005, we recognized insignificant gains and losses
related to hedged forecasted transactions and fi rm commitments
that did not occur by the end of the originally specifi ed period.
In 2004, we recognized a pre-tax loss of $46 million, before
cancellation penalties, for terminating a forward euro contract
when our customer cancelled its hedged, firm order for equipment
and services.
Additional information regarding the use of derivatives is
provided in note 18 and note 23.
102 ge 2006 annual report