American Express 2001 Annual Report Download - page 58

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
readily marketable. As a result,the carrying values of these structured investments are based on cash flow projections which require
a significant degree of judgment and as such are subject to change.
Mortgage-backed securities primarily include GNMA, FNMA and FHLMC securities at December 31, 2001 and 2000.
The table below includes purchases, sales and maturities of investments classified as Available-for-Sale and Held-to-Maturity for
the years ended December 31:
2001 2000
Available- Available- Held-to-
(Millions) for-Sale for-Sale Maturity
Purchases $ 19,427 $ 8,465 $ 110
Sales $ 11,058 $ 2,998 $ 61
Maturities $ 5,603 $ 3,647 $ 848
Investments classified as Held-to-Maturity were sold during 2000 due to credit deterioration. Gross realized gains and losses on
sales were negligible.
Gross realized gains and (losses) on sales of securities classified as Available-for-Sale,using the specific identification method, were
$322 million and ($1,035 million),including the effect of the sale of high-yield securities discussed below,$170 million and ($47 mil-
lion) and $64 million and ($23 million) for the years ended December 31, 2001, 2000 and 1999, respectively.
The increase in net unrealized gains on Trading securities, which is included in income, was $16 million, $16 million and $30 mil-
lion for the years ended December 31, 2001, 2000 and 1999, respectively.
During the first half of 2001, the company recognized pretax losses of $1.01 billion ($182 million and $826 million in the first and
second quarters, respectively) from the write down and sale of certain high-yield securities. These losses are included in interest
and dividends on the Consolidated Statements of Income. The second quarter pretax charge of $826 million is comprised of: $403
million to recognize the impact of higher default rate assumptions on certain structured investments; $344 million to write down
lower-rated securities (most of which were sold in the third quarter of 2001) in connection with the company’s decision to lower
its risk profile by reducing the level of its high-yield portfolio, allocating holdings toward stronger credits, and reducing the con-
centration of exposure to individual companies and industry sectors; and $79 million to write down certain other investments to
recognize losses incurred during the second quarter.
Subsequently, during 2001 the company placed a majority of its rated Collateralized Debt Obligation (CDO) (obligations of various
credit ratings that are backed by high-yield bonds) securities and related accrued interest, as well as a relatively minor amount of
other liquid securities (collectively referred to as transferred assets), having an aggregate book value of $905 million, into a securi-
tization trust. In return, the company received $120 million in cash (excluding transaction expenses) relating to sales to unaffili-
ated investors and retained interests with allocated book amounts aggregating $785 million. The book amount is determined by
allocating the previous carrying value of the transferred assets between assets sold and the retained interests based on their rela-
tive fair values. Fair values are based on the estimated present value of future cash flows. The retained interests are accounted for
in accordance with EITF Issue 99-20.
In connection with the spin-off of Lehman Brothers Holdings Inc. (Lehman) in 1994, the company acquired 928 shares and Nippon
Life Insurance company (Nippon Life) acquired 72 shares of Lehman’s redeemable voting preferred stock for a nominal dollar
amount. This security entitles its holders to receive an aggregate annual dividend of 50 percent of Lehman’s net income in excess
of $400 million for each of eight years ending in May 2002, with a maximum dividend of $50 million in any one year. In each of
the three years ended December 31, 2001, the company received a pretax dividend of $46 million on these shares.