American Express 2007 Annual Report Download - page 54

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2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
managed by the Funding and Liquidity Committee, chaired
by the Corporate Treasurer. The Company has developed a
contingent funding plan that enables it to meet its daily cash
obligations when access to unsecured funds in the debt capital
markets is impaired or unavailable. This plan is designed to
ensure that the Company and all of its main operating entities
could continuously maintain business operations for a 12-month
period in which its access to unsecured financing is interrupted.
The hypothetical 12-month liquidity crisis is assumed to occur
as a sudden and unexpected event that temporarily impairs
access to or makes unavailable financing in the unsecured debt
markets.
Liquidity risk is managed both at an aggregate Company
level and at the major legal entities in order to ensure that
sufficient funding and contingent liquidity resources are available
in the amount and in the location needed in a stress event. The
Funding and Liquidity Committee manages the forecasts of
the Company’s aggregate and subsidiary cash positions and
financing requirements, the funding plans designed to satisfy
those requirements under normal conditions, establishes
guidelines to identify the amount of contingent liquidity
resources required, and monitors positions and determines any
actions to be taken. Contingent liquidity planning also takes
into account operating cash flexibilities.
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 regulations. 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.
General principles and the overall framework for
managing operational risk across the Company are defined
in the Operational Risk Policy approved by the ERMC.
The Operational Risk Management Committee provides
governance for the operational risk framework including
related policies and is chaired by the Chief Operational Risk
Officer with 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 multi-year program to identify, measure,
monitor, and report inherent and emerging operational risks
through the process and entity-level risk self-assessments. The
process risk self-assessment methodology is used to facilitate
compliance with Section 404 of the Sarbanes-Oxley Act, and
is also used for 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’s businesses are organized into two customer-
focused groups, the Global Consumer Group and the Global
Business-to-Business Group. During 2007, the Company’s
segments were realigned within the two major customer
groups. Accordingly, U.S. Card Services and International Card
Services are aligned within the Global Consumer Group and
Global Commercial Services and Global Network & Merchant
Services are aligned within the Global Business-to-Business
Group. The Company has reclassified the prior period amounts
to be consistent with the new reportable operating segments.
The Company considers a combination of factors when
evaluating the composition of its reportable operating segments,
including the results reviewed by the chief operating decision
maker,economic characteristics, products and services offered,
classes of customers, product distribution channels, geographic
considerations (primarily U.S. versus international), and
regulatory environment considerations.
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.
REVENUES NET OF INTEREST EXPENSE
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, International Card Services, and 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. Cardmember lending finance 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.
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