GE 2009 Annual Report Download - page 104

102 GE 2009 ANNUAL REPORT
    
A description of how we estimate fair values follows.
Loans
Based on quoted market prices, recent transactions and/or
discounted future cash flows, using rates we would charge to
similar borrowers with similar maturities.
Borrowings and bank deposits
Valuation methodologies using current market interest rate
data which are comparable to market quotes adjusted for our
non-performance risk.
Investment contract benefits
Based on expected future cash flows, discounted at currently
offered rates for immediate annuity contracts or the income
approach for single premium deferred annuities.
Guaranteed investment contracts
Based on valuation methodologies using current market interest
rate data, adjusted for our non-performance risk.
All other instruments
Based on observable market transactions, valuation methodolo-
gies using current market interest rate data adjusted for inherent
credit risk and/or quoted market prices.
Assets and liabilities that are reflected in the accompanying
financial statements at fair value are not included in the above
disclosures; such items include cash and equivalents, investment
securities and derivative financial instruments.
Additional information about certain categories in the table
above follows.
INSURANCE — CREDIT LIFE
Certain insurance affiliates, primarily in Consumer, 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) 2009 2008
Ordinary course of business lending
commitments (a) (b) $ 6,676 $ 8,507
Unused revolving credit lines (c)
Commercial 31,803 26,300
Consumer — principally credit cards 231,880 252,867
(a) Excluded investment commitments of $2,659 million and $3,501 million as of
December 31, 2009 and 2008, respectively.
(b) Included a $972 million and $1,067 million commitment as of December 31, 2009
and 2008, respectively, associated with a secured financing arrangement that can
increase to a maximum of $4,998 million and $4,943 million based on the asset
volume under the arrangement as of December 31, 2009 and 2008, respectively.
(c) Excluded inventory financing arrangements, which may be withdrawn at our
option, of $13,889 million and $14,503 million as of December 31, 2009 and 2008,
respectively.
Derivatives and hedging
As a matter of policy, we use derivatives for risk management
purposes, and we do not use derivatives for speculative purposes.
A key risk management objective for our financial services busi-
nesses is to mitigate interest rate and currency risk by seeking to
ensure that the characteristics of the debt match the assets they
are funding. If the form (fixed versus floating) and currency
denomination of the debt we issue do not match the related
assets, we typically execute derivatives to adjust the nature and
tenor of funding to meet this objective. The determination of
whether we enter into a derivative transaction or issue debt
directly to achieve this objective depends on a number of factors,
including customer needs for specific types of financing, and
market related factors that affect the type of debt we can issue.
Of the outstanding notional amount of $353,000 million,
approximately 87%, or $307,000 million, is associated with reduc-
ing or eliminating the interest rate, currency or market risk
between financial assets and liabilities in our financial services
businesses. The remaining derivative activities primarily relate to
hedging against adverse changes in currency exchange rates and
commodity prices related to anticipated sales and purchases,
providing certain derivatives and/or support arrangements to our
customers, and contracts containing certain clauses which meet
the accounting definition of a derivative. The instruments used in
these activities are designated as hedges when practicable. When
we are not able to apply hedge accounting, or when the derivative
and the hedged item are both recorded in earnings currently, the
derivatives are deemed economic hedges and hedge accounting
is not applied. This most frequently occurs when we hedge a
recognized foreign currency transaction (e.g., a receivable or pay-
able) with a derivative. Since the effects of changes in exchange
rates are reflected currently in earnings for both the derivative
and the transaction, the economic hedge does not require hedge
accounting.
The following table provides information about the fair value
of our derivatives, by contract type, separating those accounted
for as hedges and those that are not.
2009
December 31 (In millions) Assets Liabilities
DERIVATIVES ACCOUNTED FOR AS HEDGES
Interest rate contracts $ 4,477 $ 3,469
Currency exchange contracts 4,273 2,361
Other contracts 16 4
8,766 5,834
DERIVATIVES NOT ACCOUNTED FOR AS HEDGES
Interest rate contracts 977 889
Currency exchange contracts 1,639 658
Other contracts 478 136
3,094 1,683
NETTING ADJUSTMENTS (a) (3,851) (3,860)
Total $ 8,009 $ 3,657
Derivatives are classified in the captions “All other assets” and “All other liabilities” in
our financial statements.
(a) The netting of derivative receivables and payables is permitted when a legally
enforceable master netting agreement exists. Amounts included fair value
adjustments related to our own and counterparty non-performance risk. At
December 31, 2009 and 2008, the cumulative adjustment for non-performance
risk was a gain of $9 million and $177 million, respectively.