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[ 53 ]
2006 fi nancial review
american express company
OPERATIONAL RISK MANAGEMENT PROCESS
The Company defines operational risk as the risk of not
achieving business objectives due to inadequate or failed
processes or information systems, human error or the
external environment (e.g., natural disasters) including
losses due to failures to comply with laws and reg u lations.
Operational risk is inherent in all business activities and
can impact an organization through direct or indirect
financial loss, brand damage, customer dissatisfaction,
or legal or regulatory penalties.
The Company’s operational risk governance
structure includes the Operational Risk Management
Committee, which is responsible for maintaining the
operational risk framework and related policies and for
overseeing the Company’s operational risk program.
The Committee is chaired by the Chief Operational
Risk Officer and Vice Chairman of the ERMC, and has
member representation from business units and support
groups. The business units have the responsibility for
implementing the framework as well as for the day-to-
day management of operational risk.
Managing operational risk is an important priority
for the Company. To mitigate such risk, the Company
has developed a comprehensive program to identify,
measure, monitor, and report inherent and emerging
operational risks. The Company has a multi-year
program, which uses the same process risk self-
assessment methodology used to facilitate compliance
with Section 404 of the Sarbanes-Oxley Act, to effect
non-financial operational risk self assessments. The
Company also has a reporting process that provides
business unit leaders with operational risk information
on a quarterly basis to help them assess the overall
operational risks of their business units. These initiatives
have resulted in improved operational risk intelligence
and a heightened level of preparedness to manage risk
events and conditions that may adversely impact the
Company’s operations.
BUSINESS SEGMENT RESULTS
The Company is principally engaged in businesses
comprising three reportable operating segments: U.S.
Card Services, International Card & Global Commercial
Services, and Global Network & Merchant Services.
Results of the business segments essentially treat each
segment as a stand-alone business. The management
reporting process that derives these results allocates
income and expense using various methodologies as
described below.
NET REVENUES
The Company allocates discount revenue and certain
other revenues among segments using a transfer
pricing methodology. Segments earn discount revenue
based on the volume of merchant business generated
by cardmembers. Within the U.S. Card Services and
International Card & Global Commercial Services
segments, discount revenue reflects the issuer component
of the overall discount rate; within the Global Network
& Merchant Services segment, discount revenue reflects
the network and merchant component of the overall
discount rate. Net finance charge revenue and net card
fees are directly attributable to the segment in which
they are reported.
EXPENSES
Marketing, promotion, rewards and cardmember
services expenses are reflected in each segment based on
actual expenses incurred, with the exception of brand
advertising, which is reflected in the Global Network &
Merchant Services segment.
The provision for losses and benefits includes credit-
related expenses and interest credited on investment
certificates directly attributable to the segment in which
they are reported.
Human resources and other operating expenses
reflect expenses incurred directly within each segment.
In addition, expenses related to the Company’s support
services are allocated to each segment based on support
service activities directly attributable to the segment.
Other overhead expenses are allocated to segments
based on each segment’s level of pretax income.
Financing requirements are managed on a consolidated
basis. Funding costs are allocated based on segment
funding requirements.
CAPITAL
Each business segment is allocated capital based on
established business model operating requirements, risk
measures, and regulatory capital requirements. Business
model operating requirements include capital needed to
support operations and specific balance sheet items. The
risk measures include considerations for credit, market,
and operational risk.
INCOME TAXES
Income tax provision (benefit) is allocated to each
business segment based on the effective tax rates
applicable to various businesses that make up
the segment.
ASSETS
Assets are those that are used or generated exclusively by
each segment.
The following segment results are presented on a
GAAP basis except as otherwise noted in the U.S. Card
Services discussion.