American Express 2007 Annual Report Download - page 42

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2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
housing downturn as well as with U.S. small businesses. As a
result, the Company recorded a $438 million credit-related
charge in the fourth quarter. The credit-related charge was
comprised of additional provision for losses for U.S. Card
Service’s cardmember lending and cardmember receivables of
$288 million and $96 million, respectively, and a $54 million
charge relating to a reduction in the fair market value of the
Company’s retained subordinated interest in securitized
cardmember loans.
In managing risk, the Company’s objective is to protect its
profitability, but also protect, to the extent it can, the Company’s
ongoing relationship with the cardmember and their experience.
With this in mind, the following actions have been taken by the
Company across the U.S. Card Services portfolios:
•฀The Company has implemented a reduction of cardmember
lines of credit for specific segments of the cardmember
portfolio representing the greatest risk. These segments
include cardmembers holding sub-prime mortgages and
small businesses, in particular those operating in specific
industries, such as mortgage companies, home builders and
construction related businesses.
•฀The Company has adjusted its risk management models to
reflect the higher probability of default that exists during a
weaker economy, and in geographies that have been most
impacted by home price declines.
•฀To improve recoveries, the Company has increased its staffing
levels in credit and collection.
Investment Portfolios
The Company’s investment portfolios support specific
businesses such as the AEIDC certificate business within
international banking services, Travelers Cheques business,
and the contingent liquidity investment portfolio (as discussed
below). The Company’s objective is to manage the type and mix
of assets as well as their maturity profile to ensure that the cash
and liquidity needs of the respective business or portfolio can be
met without relying on the sale of investments prior to maturity.
As a result, the Company generally holds its investments until
their maturity. However, management may sell securities prior
to maturity due to changes in Company-specific business goals,
liquidity needs, and the credit and capital market environment.
The Company reviews and evaluates its investments at least
quarterly and more often as market conditions may require,
to identify investments that have indications of other-than-
temporary impairments. The determination of other-than-
temporary impairments is a subjective process, requiring the
use of assumptions and application of judgment. In addition
to its impairment evaluation, the Company corroborates the
prices provided by its pricing vendors to test the accuracy of
the fair values.
The Company did not experience any defaults or event of
defaults, or determine it would not receive timely contractual
payments of interest and repayment of principal, on any of its
holdings in its investment portfolios in 2007.
At December 31, 2007, the Company owned approximately
$2.5 billion of asset-backed securities, including mortgage-
backed securities. 99 percent of these asset-backed securities
were rated AAA at December 31, 2007. $1.6 billion of these
asset-backed securities are classified as Trading securities and
support the AEIDC certificate business. Unrealized holding
gains and losses on Trading securities are recorded in earnings.
The remaining asset-backed securities are classified as Available-
for-Sale. Unrealized holding gains and losses on Available-for-
Sale securities are included in accumulated other comprehensive
(loss) income until disposition of the investments. $838 million
of the asset-backed securities owned by the Company that
are classified as Available-for-Sale are included in Assets of
Discontinued Operations on the Company’s balance sheet.
Total gross unrealized losses remaining in accumulated other
comprehensive (loss) income at December 31, 2007, related
to the asset-backed securities classified as Available-for-Sale
amounted to $11 million ($10 million related to discontinued
operations).
The Company owns state and municipal securities that
primarily support the Travelers Cheques business and are
classified as Available-for-Sale. Approximately 73 percent
of state and municipal investments owned by the Company
are insured by financial guarantors that guarantee timely
payment of interest and ultimate payment of principal on
insured obligations. Certain financial guarantors have recently
experienced credit downgrades and difficulty obtaining cost
effective capital due to the insurers’ exposure to mortgage-
related securities guarantees. As of December 31, 2007,
approximately 98 percent of the Company’s state and municipal
investments insured by financial guarantors were rated AAA,
the remaining were rated AA. The ratings of these securities
will depend in part on the ratings of the financial guarantors
as well as in part on the underlying issuers’ ratings without
respect to the guaranty, among other factors. The Company
has not, to date, incurred any significant losses in the value of its
holdings as a result of the financial guarantors’ credit problems.
Continued deterioration in the ratings and investor confidence
in the claims-paying abilities of the financial guarantors, or
their inability to pay guaranty claims, could result in declines
in the values of these securities. During 2007, the Company
sold certain investments insured by financial guarantors that it
considered to be most at risk to lose their investment grade
credit rating.
The current credit market environment had a small positive
impact on the values of U.S. Treasury and government sponsored
entities (Fannie Mae and Freddie Mac) securities included in the
Company’s contingent liquidity portfolio (as discussed below).
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