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investment portfolio. 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. No hedge ineffectiveness was recognized
for the years ended December 31, 2004, 2003 and 2002.
Hedges of Net Investment in Foreign Operations
The Company designates foreign currency derivatives,
primarily forward agreements, as hedges of net invest-
ments in certain foreign operations. For the year ended
December 31, 2004, the amount of losses, including the
impact of forward points, related to the hedges
reported in accumulated other comprehensive income
(loss), included in cumulative translation adjustment,
was $259 million.
Derivatives Not Designated as Hedges
The Company has economic hedges that either do not
qualify or are not designated for hedge accounting
treatment under SFAS No. 133.
Foreign currency transaction exposures are economically
hedged, where practical, through foreign currency con-
tracts, primarily forward contracts and cross-currency
swaps. The foreign currency forward contracts entered
into by the Company generally mature within one year.
AEFA uses interest rate caps, swaps and floors to pro-
tect the margin between the interest rates earned on
investments and the interest rates credited to holders of
certain investment certificates and fixed annuities.
AEFA consolidated derivatives as a result of adopting
FIN 46. The derivatives’ value is based on the interest
and gains and losses related to a reference portfolio of
high-yield loans.
In addition, AEB enters into derivative contracts
both to meet the needs of its clients and, to a limited
extent, for trading purposes, including taking propri-
etary positions.
Embedded Derivatives
During the years ended December 31, 2004 and 2003,
the Company identified derivatives embedded in other
financial instruments that were required to be
accounted for separately from the host financial instru-
ment. Such items included certain notes, annuities and
investment products, provided primarily by AEFA,
which have returns tied to the performance of equity
markets. AEFA manages this equity market risk by
entering into options and futures with offsetting char-
acteristics. The total fair value of these instruments was
$387 million and $348 million at December 31, 2004
and 2003, respectively.
Note 10 GUARANTEES AND CERTAIN
OFF-BALANCE SHEET ITEMS
The Company, through its TRS operating segment, pro-
vides cardmember protection plans that cover losses
associated with purchased products, as well as certain
other guarantees in the ordinary course of business that
are within the scope of FASB Interpretation No. 45,
“Guarantor’s Accounting and Disclosure Requirement
for Guarantees, Including Indirect Guarantees of
Indebtedness of Others” (FIN 45).
The following table provides information related to
TRS’ guarantees that are within the scope of FIN 45 as
of December 31:
2004 2003
Maximum amount
of undiscounted
future payments(a)
Amount of related
liability at
December 31, 2004
Maximum amount of
undiscounted future
payments (a)
Amount of related
liability at
December 31, 2003
Type of Guarantee (billions) (millions) (billions) (millions)
Credit Card Registry
(b)
$ 23.8 $ — $ 23.4 $ —
Merchandise and Account Protection
(c)
51.4 45 46.6 43
Merchant Protection
(d)
7.1 46 5.6 108
Baggage Protection 8.2 19 9.5 18
Other
(e)
0.2 147 0.4 317
Total $ 90.7 $ 257 $ 85.5 $ 486
(a) Calculated based on the hypothetical scenario that all claims occur within the next 12 months.
(b) This benefit will cancel and request replacements of any lost or stolen cards, and provides for fraud liability coverage and passport replacement, among
other benefits.
(c) These benefits (i) protect eligible purchases made with the card against accidental damage or theft for up to 90 days from the date of purchase; (ii) ensure that
a cardmember pays the lowest price available on covered items purchased entirely with an eligible American Express card; and (iii) provide account protection
in the event that a cardmember is unable to make payments on the account due to unforeseen hardship.
(d) Represents the Company’s contingent liability arising from billing disputes between the cardmembers and the merchant, primarily for non-delivery of goods
and services.
(e) Other primarily relates to contingent consideration obligations associated with American Express Tax and Business Services acquisition-related guarantees.
AXP
AR.04
105
Notes to Consolidated Financial Statements