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[ 49 ]
2006 fi nancial review
american express company
The Company also has certain contingent obligations to
make payments under contractual agreements entered
into as part of the ongoing operation of the Company’s
business, primarily with co-brand partners. The
contingent obligations under such arrangements were
$3 billion as of December 31, 2006.
In addition to the off-balance sheet contractual
obligations noted above, the Company has off-balance
sheet arrangements that include guarantees, retained
interests in structured investments, unconsolidated
variable interest entities and other off-balance sheet
arrangements as more fully described below.
GUARANTEES
The Company’s principal guarantees are associated with
cardmember services to enhance the value of owning
an American Express card. At December 31, 2006, the
Company had guarantees totaling approximately $75
billion related to cardmember protection plans, as well
as other guarantees in the ordinary course of business
that are within the scope of Financial Accounting
Standards Board (FASB) Interpretation No. 45,
“Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of
Indebtedness of Others” (FIN 45). Expenses relating to
actual claims under these guarantees were approximately
$15 million for both 2006 and 2005.
The Company had approximately $1 billion of
bank standby letters of credit and bank guarantees
and other letters of credit within the scope of FIN 45
which had supporting collateral with an approximate
value of $940 million. Additionally, at December
31, 2006, the Company had $447 million of loan
commitments and other lines of credit, as well as
$756 million of bank standby letters of credit, bank
guarantees, and bank commercial and other bank
letters of credit that were outside the scope of FIN
45. At December 31, 2006, the Company held collateral
supporting these bank, commercial, and other letters
and lines of credit with an approximate value of $490
million.
See Note 11 to the Consolidated Financial
Statements for further discussion regarding the
Company’s guarantees.
RETAINED INTERESTS IN ASSETS TRANSFERRED TO
UNCONSOLIDATED ENTITIES
The Company held, as an investment, $266 million of an
interest-only strip in the cardmember loan securitization
trust at December 31, 2006. See the Consolidated
Liquidity and Capital Resources section and Note 5
to the Consolidated Financial Statements for details
regarding the Company’s securitization trusts.
CERTAIN OTHER OFF-BALANCE SHEET
ARRANGEMENTS
At December 31, 2006, the Company had approximately
$264 billion of unused credit available to cardmembers
as part of established lending product agreements.
Total unused credit available to cardmembers does
not represent potential future cash requirements, as a
significant portion of this unused credit will likely not
be drawn. The Company’s charge card products have no
pre-set limit and, therefore, are not reflected in unused
credit available to cardmembers. As discussed in the
Consolidated Liquidity and Capital Resources section,
the Company’s securitizations of cardmember loans are
also off-balance sheet. The Company’s cardmember
receivables securitizations remain on the Consolidated
Balance Sheets.
See Note 11 to the Consolidated Financial Statements
for discussion regarding the Company’s other off-balance
sheet arrangements.
RISK MANAGEMENT
INTRODUCTION
The key objective of risk management at American
Express is to drive profitable growth and exceptional
customer experiences, while limiting the exposure to
adverse financial impacts. By building analytical and
technological capabilities, creating transparent limits on
risk exposures, optimizing investment decision-making,
and identifying unacceptable risks, risk management
contributes to the Company’s efforts to create shareholder
and customer value.
In addition to business risk, the Company recognizes
three fundamental sources of risk:
• Credit Risk,
• Market Risk, and
• Operational Risk.
These risk types, which are described below, are
interrelated and span the Company’s business units and
geographic locations. Because of their nature and scope,
the Company believes in managing and monitoring
these risks centrally at the enterprise level and/or at the
business unit level, as appropriate. Further, management
has adopted well-defined risk-taking principles to
guide the Company’s business strategy, achieve long-
term shareholder objectives and deliver outstanding
customer experience.