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amount. The 2003 prepayment amount includes $335
million related to the final payment and termination of
the agreements.
The following table provides a reconciliation of com-
mon shares outstanding:
(Millions) 2004 2003 2002
Shares outstanding at
beginning of year 1,284 1,305 1,331
Repurchases of
common shares:
Purchases from open
market and Incentive
Savings Plan (69) (21) (16)
Prepayments under
share purchase
agreements —(15) (17)
Other, primarily
employee benefit plans 34 15 7
Shares outstanding at end
of year 1,249 1,284 1,305
The Board of Directors is authorized to permit the
Company to issue up to 20 million preferred shares
without further shareholder approval.
At December 31, 2004 and 2003, no preferred shares
were issued or outstanding.
Note 9 DERIVATIVES AND HEDGING ACTIVITIES
Derivative financial instruments enable the end users to
manage exposure to credit or various market risks. The
value of such instruments is derived from an underly-
ing variable or multiple variables, including commod-
ity, equity, foreign exchange, and interest rate indices
or prices. The Company enters into various derivative
financial instruments as part of its ongoing risk man-
agement activities as well as for customer and limited
trading purposes. The following summarizes the
Company’s use of derivative financial instruments.
Cash Flow Hedges
The Company uses interest rate products, primarily
interest rate swaps, to manage funding costs and interest
rate risk related to TRS’ charge card business, as well as
AEFA’s investment certificate and fixed premium prod-
ucts. For its charge card business, TRS uses interest rate
swaps to achieve a targeted mix of fixed and floating rate
funding as well as to protect the Company from the
interest rate risk through hedging of its existing long-
term debt, the rollover of short-term debt and the antici-
pated forecasted issuance of additional funding. AEFA
uses interest rate products to hedge the risk of rising
interest rates on investment certificates which reset at
shorter intervals than the average maturity of the invest-
ment portfolio. Additionally, AEFA uses interest rate
swaptions to hedge the risk of increasing interest rates
on forecasted fixed annuity sales. Finally, for selected
major overseas markets, the Company uses certain for-
eign currency forward contracts with maturities not
exceeding 22 months to offset the effect of changes in
foreign currency exchange rates on certain forecasted
transactions. During 2004, 2003 and 2002, the Company
reclassified into earnings pretax losses from accumu-
lated other comprehensive income of $459 million, $639
million and $572 million, respectively ($298 million,
$415 million and $372 million after-tax, respectively). At
December 31, 2004, the Company expects to reclassify
$438 million of net pretax losses on derivative instru-
ments from accumulated other comprehensive income
(loss) to earnings during the next twelve months. Cur-
rently, the longest period of time over which the Com-
pany is hedging exposure to the variability in future cash
flows is approximately 14 years and relates to forecasted
fixed annuity sales. For 2004, 2003 and 2002, there were
no gains or losses on derivative transactions or portions
thereof that were excluded from the assessment of
hedge effectiveness. During 2004, certain hedge rela-
tionships were discontinued, and the related derivatives
terminated because certain forecasted transactions were
not expected to occur according to the original strategy.
The amount of other comprehensive income that was
immediately recognized into earnings was a gain of
approximately $16 million. No hedge relationships were
discontinued during the years ended December 31, 2003
and 2002 due to forecasted transactions no longer
expected to occur according to the original hedge strat-
egy. The amount of hedge ineffectiveness recognized
for cash flow hedges in the year ended December 31,
2004 was a gain of approximately $1 million. No hedge
ineffectiveness was recognized for the years ended
December 31, 2003 and 2002.
Fair Value Hedges
The Company is exposed to interest rate risk associated
with fixed rate debt and uses interest rate swaps to con-
vert certain fixed rate debt to floating rate.
From time to time, the Company also uses interest rate
swaps to hedge its firm commitments to transfer, at a fixed
rate, receivables to trusts established in connection with
its asset securitizations. AEFA is exposed to interest rate
risk associated with its fixed rate corporate debt securities.
AEFA enters into interest rate swaps to hedge the risk of
changing interest rates as investment certificates reset at
shorter intervals than the average maturity of the
AXP
AR.04
104
Notes to Consolidated Financial Statements