American Express 2006 Annual Report Download - page 95

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notes to consolidated fi nancial statements
american express company
NOTE 9 COMMON AND PREFERRED SHARES
The Company has a share repurchase program to return
equity capital in excess of business needs to shareholders.
The share repurchases both offset the issuance of new
shares as part of employee compensation plans and
reduce the number of shares outstanding. In May 2006,
the Company’s Board of Directors authorized the
repurchase of an additional 200 million shares of the
Company’s common stock. At December 31, 2006, the
Company has 165 million shares remaining under the
share repurchase authorizations. Such authorizations
do not have an expiration date, and at present, there
is no intention to modify or otherwise rescind the
current authorizations.
Of the common shares authorized but unissued at
December 31, 2006, approximately 174 million shares
were reserved for issuance for employee stock, employee
benefit and dividend reinvestment plans.
The following table provides a reconciliation of
common shares outstanding:
(Millions) 2006 2005 2004
Shares outstanding at beginning of year 1,241 1,249 1,284
Repurchases of common shares (75) (34) (69)
Acquisition of Harbor Payments 2——
Other, primarily employee benefit plans 31 26 34
Shares outstanding at end of year 1,199 1,241 1,249
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, 2006 and 2005, no preferred shares
had been issued.
NOTE 10 DERIVATIVES AND HEDGING
ACTIVITIES
The Company uses derivative financial instruments
to manage exposure to various market risks and for
customer accommodation and for limited proprietary
trading purposes. These instruments enable end users
to increase, reduce, or alter exposure to various market
risks and, for that reason, are an integral component of
the Company’s market risk and related asset/liability
management strategy and processes. Within each
business, market risk exposures are monitored and
managed by various asset/liability committees, guided
by Board-approved policies covering derivative financial
instruments, funding, and investments. The value of
derivative instruments is derived from an underlying
variable or multiple variables, including commodity,
equity, foreign exchange, and interest rate indices or
prices.
For the Company’s charge card and fixed-rate
lending products, interest rate exposure is managed by
shifting the mix of funding toward fixed-rate debt and
by using derivative instruments, with an emphasis on
interest rate swaps, which effectively fix interest expense
for the length of the swap. The Company endeavors to
lengthen the maturity of interest rate hedges in periods
of low or falling interest rates and to shorten their
maturity in periods of high or rising interest rates. For
the majority of its cardmember loans, which are linked
to a floating rate base and generally reprice each month,
the Company uses floating rate funding. The Company
regularly reviews its strategy and may modify it based on
the market conditions.
Credit risk associated with the Company’s derivatives
is limited to the risk that a derivative counterparty
will not perform in accordance with the terms of
the contract. To mitigate the risk, counterparties are
required to be pre-approved and rated as investment
grade. Counterparty risk exposures are monitored by the
Company’s Institutional Risk Management Committee
(IRMC). The IRMC formally reviews large institutional
exposures to ensure compliance with Enterprise-
wide Risk Management Committee guidelines and
procedures and determines the risk mitigation actions,
when necessary. Additionally, the Company may, from
time to time, enter into master netting agreements where
practical.
The following table summarizes the total fair value, excluding accruals, of derivative product assets and liabilities
at December 31:
(Millions) 2006 2005
Assets Liabilities Assets Liabilities
Cash flow hedges $64 $21 $ 226 $ 5
Fair value hedges —74 497
Net investment hedges 82020 13
Derivatives not designated as hedges 355 303 280 214
Embedded derivatives accounted for separately from the host contract —30—25
Total fair value, excluding accruals $ 427 $ 448 $ 530 $ 354