American Express 2004 Annual Report Download - page 73

addition, a universal life insurance policyowner can
determine within limits, the amount of the premium to
pay for the coverage. The larger the premium that the
policyowner pays, the larger amount of coverage that
will be provided and the greater the universal life poli-
cy’s cash value will be.
Variable life insurance — Variable life insurance is a
form of whole life insurance under which the death
benefit and the cash value of the policy fluctuate
according to the investment performance of a special
investment account. In the United States, this special
account is usually called a separate account. In other
countries, it is usually called a segregated account.
Most variable life policies in general permit policy-
owners to select from among several separate accounts
and to change this selection from time to time.
Variable universal life insurance — Variable universal
life insurance combines the premium and death benefit
flexibility of universal life insurance with the invest-
ment flexibility and risk of variable life insurance. Simi-
lar to a universal life policy, a variable universal life
policy allows the policyholder to choose the premium
amount and face amount. Similar to a variable life
policy, the cash value of a variable universal life
policy is placed in a separate investment account.
The policyholder chooses from among several invest-
ment accounts and may change the chosen option at
least annually.
Wrap account — Represents an AEFA non-discretionary
investment advisory program that offers clients the
opportunity to select products that include proprietary
and non-proprietary funds. AEFA earns fees at time of
sale and ongoing management fees that are based on the
value of the underlying assets invested.
American Express Bank
Consumer Financial Services — AEB business line
which provides consumer products in direct response
to specific financial needs of retail customers and
includes interest-bearing deposits, unsecured lines of
credit, installment loans, money market funds, mort-
gage loans, auto loans and mutual funds.
Financial Institutions Group — AEB business line
which provides financial institution clients with a wide
range of correspondent banking products including
international payments processing (wire transfers and
checks), trade-related payments and financing, cash
management, loans, extensions of credit and invest-
ment products, including third-party distribution of
AEB offshore mutual funds.
Non-performing loan — Loans other than certain
smaller-balance consumer loans (including loans
impaired under SFAS No. 114, “Accounting by Credi-
tors for Impairment of a Loan”), are placed on non-
performing status when payments of principal or inter-
est are 90 days past due or if, in management’s opinion,
the borrower is unlikely to meet its contractual obliga-
tions.
Private Banking — AEB business line which focuses
on high net worth individuals by providing such cus-
tomers with investment management, trust, estate plan-
ning and banking services, including secured lending.
Risk-based capital — Pursuant to the FDIC Improve-
ment Act of 1991, the Federal Reserve Board, among
other federal banking agencies, adopted regulations
defining levels of capital adequacy. Under these regu-
lations, the minimum ratio of qualifying total capital
(Total Capital) to risk-weighted assets (including cer-
tain off-balance sheet items) is 8%. At least half of the
Total Capital must consist of common stock, retained
earnings, qualifying noncumulative perpetual pre-
ferred stock, minority interests in the equity accounts
of consolidated subsidiaries (including preferred trust
securities) and, for bank holding companies, a limited
amount of qualifying cumulative perpetual preferred
stock, less most intangibles including goodwill (Tier 1
Capital). The remainder (Tier 2 Capital) may consist of
certain other preferred stock, certain other capital
instruments, and limited amounts of subordinated debt
and the allowance for loan and lease losses. Not more
than 25% of qualifying Tier 1 Capital may consist of pre-
ferred trust securities. In addition, the Federal Reserve
Board has established minimum leverage ratio (Tier 1
Capital to average total assets) guidelines for bank
holding companies and banks. A bank is deemed to be
well-capitalized if it maintains a Tier 1 risk-based capi-
tal ratio of at least 6%, a total risk-based capital ratio of
at least 10% and a leverage ratio of 5%.
Value-at-Risk — AEB manages counterparty credit
exposure on foreign exchange and interest rate deriva-
tives with a maturity greater than one year through a
dynamic mark-to-market and potential future exposure
process, in which the current positive fair value and
potential future exposure are calculated and managed
against counterparty loan equivalent limits.
Forward-Looking Statements
This report includes forward-looking statements, which
are subject to risks and uncertainties. The words
“believe,” “expect,” “anticipate,” “optimistic,” “intend,”
AXP
AR.04
71
Financial Review