notes to consolidated financial statements 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 (b) Excluded inventory financing arrangements, which may be withdrawn at our option, of $11,044 million and $11,383 million as of December 31, 2006 and 2005, respectively.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

Counterparty credit risk We manage counterparty credit risk, the risk that counterparties will default and not make payments to us according to the terms of the agreements, on an individual counterparty basis. Thus, when a legal right of offset exists, we net certain exposures by counterparty and include the value of collateral to determine the amount of ensuing exposure. When net exposure to a counter- party, based on the current market values of agreements and collateral, exceeds credit exposure limits (see following table), we take action to reduce exposure. Such actions include prohibiting additional transactions with the counterparty, requiring collateral from the counterparty (as described below) and terminating or restructuring transactions. Swaps are required to be executed under master agreements containing mutual credit downgrade provisions that provide the ability to require assignment or termination in the event either party is downgraded below A3 or A–. In certain cases we have entered into collateral arrangements that provide us with the right to hold collateral (cash or U.S. Treasury or other highly-rated securities) when the current market value of derivative contracts exceeds a specified limit. We evaluate credit risk exposures and compliance with credit exposure limits net of such collateral. Fair values of our derivatives assets and liabilities represent the replacement value of existing derivatives at market prices and can change significantly from period to period based on, among other factors, market movements and changes in our positions. At December 31, 2006, our exposure to counterparties, after consideration of netting arrangements and collateral, was about $1,400 million. notes to consolidated financial statements Following is GECS policy relating to initial credit rating requirements and to exposure limits to counterparties. COUNTERPARTY CREDIT CRITERIA Credit rating Moody’s S&P Foreign exchange forwards and other derivatives less than one year P–1 A–1 All derivatives between one and fi ve years Aa3(a) AA–(a) All derivatives greater than fi ve years Aaa(a) AAA(a) (a) Counterparties that have an obligation to provide collateral to cover credit exposure in accordance with a credit support agreement must have a minimum A3/A–rating. EXPOSURE LIMITS (In millions) Minimum rating Exposure(a) Without With collateral collateral Moody’s S&P arrangements arrangements Aaa AAA $100 $75 Aa3 AA– 50 50 A3 A– 5 — (a) For derivatives with maturities less than one year, counterparties are permitted to have unsecured exposure up to $150 million with a minimum rating of A–1/P–1. ge 2006 annual report 103