American Express 2003 Annual Report Download - page 46

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The Company’s foreign exchange exposures arise primarily from cross-currency charges made by cardmembers, as well as
from cash flow and balance sheet exposures denominated in foreign currencies. The Company primarily uses spot and for-
ward foreign exchange contracts to manage the cross border transaction exposures resulting from cardmember cross bor-
der spending in which the merchant transaction currency differs from the billing currency.
In addition, the Company funds a portion of its local currency operations by raising U.S. dollar funding and converting U.S.
dollars to local currency through foreign exchange derivative contracts. These foreign exchange instruments are sometimes
combined with interest rate swaps to achieve the desired level of local market interest rate risk. Finally, the U.S. dollar value
of anticipated future earnings in foreign currencies is economically managed from time to time using foreign exchange for-
ward contracts.
The risk management sections for each segment include sensitivity analyses of different types of market risk and estimate
the effects of hypothetical sudden and sustained changes in the applicable market conditions on the ensuing year’s earn-
ings, based on year-end positions. The market changes, assumed to occur as of year-end, are a 100 basis point increase in
market interest rates, a 10 percent strengthening of the U.S. dollar versus all other currencies, and a 10 percent decline in
the value of equity securities under management at AEFA. Computations of the prospective effects of hypothetical interest
rate, foreign exchange rate and equity market changes are based on numerous assumptions, including relative levels of mar-
ket interest rates, foreign exchange rates and equity prices, as well as the levels of assets and liabilities. The hypothetical
changes and assumptions will be different from what actually occurs in the future. Furthermore, the computations do not
incorporate actions that management could take if the hypothetical market changes actually occur. As a result, actual earn-
ings consequences will differ from those quantified.
SUPPLEMENTAL INFORMATION — MANAGED NET REVENUES
The following supplemental information is presented on the basis used by management to evaluate operations. It differs in
two respects from the accompanying financial statements, which are prepared in accordance with GAAP. First, revenues are
presented as if there had been no asset lending securitizations at TRS. This format is generally termed on a managed basis,
as further discussed in the TRS section of the Financial Review. Second, revenues are considered net of AEFA’s provisions
for losses and benefits for annuities, insurance and investment certificate products, which are essentially spread businesses,
as further discussed in the AEFA section of the Financial Review. A reconciliation of consolidated revenues from a GAAP to
a net managed basis is as follows:
Years Ended December 31, (Millions) 2003 2002 2001
GAAP revenues $25,866 $23,807 $ 22,582
Effect of TRS securitizations 943 948 743
Effect of AEFA provisions for losses and benefits (2,122) (1,954) (1,966)
Managed net revenues $24,687 $22,801 $ 21,359
Managed net revenues increased 8 percent in 2003 to $24.7 billion, compared with $22.8 billion in 2002, which was 7 per-
cent higher than 2001. Managed net revenues rose in 2003 due to greater discount revenues, higher cardmember loan bal-
ances, increased management and distribution fees, larger insurance and annuity revenues, greater card fees and higher
other revenues. Managed net revenues rose in 2002 due to higher revenues related to AEFA’s investment portfolio, greater
discount revenues, higher lending spreads and loan balances and greater insurance and annuity revenues. In 2002, these
items were partially offset by lower management fees and weaker travel revenues.
See TRS and AEFA segments for a discussion of why a managed basis presentation at TRS and net revenues at AEFA is used
by management and is important to investors.
(p.44_axp_ financial review)