American Express 2010 Annual Report Download - page 94

NOTE 11
OTHER LIABILITIES
The following is a summary of other liabilities as of
December 31:
(Millions) 2010 2009
Membership Rewards liabilities $ 4,500 $ 4,303
Employee-related liabilities
(a)
2,026 1,877
Book overdraft balances 1,538 1,422
Rebate accruals
(b)
1,475 1,309
Deferred charge card fees, net 1,036 1,034
Other
(c)
5,371 4,785
Total $ 15,946 $ 14,730
(a) Employee-related liabilities include employee benefit plan obligations and
incentive compensation.
(b) Rebate accruals include payments to third-party card issuing partners and
cash-back reward costs.
(c) Other includes accruals for general operating expenses, litigation, client
incentives, advertising and promotion, derivatives, restructuring and
reengineering reserves.
MEMBERSHIP REWARDS
The Membership Rewards program allows enrolled cardmembers
to earn points that can be redeemed for a broad range of rewards
including travel, entertainment, retail certificates and merchandise.
The Company establishes balance sheet liabilities which represent
the estimated cost of points earned to date that are ultimately
expected to be redeemed. These liabilities reflect management’s
best estimate of the cost of future redemptions. An ultimate
redemption rate and weighted average cost per point are key
factors used to approximate the Membership Rewards liability.
Management uses models to estimate ultimate redemption rates
based on historical redemption data, card product type, year of
program enrollment, enrollment tenure and card spend levels. The
weighted-average cost per point is determined using actual
redemptions during the previous 12 months, adjusted as
appropriate for recent changes in redemption costs.
The provision for the cost of Membership Rewards points is
included in marketing, promotion, rewards and cardmember
services. The Company continually evaluates its reserve
methodology and assumptions based on developments in
redemption patterns, cost per point redeemed, contract
changes and other factors.
DEFERRED CHARGE CARD FEES
The carrying amount of deferred charge card and other fees, net
of direct acquisition costs and reserves for membership
cancellations as of December 31 were as follows:
(Millions) 2010 2009
Deferred charge card and other fees
(a)
$ 1,194 $ 1,213
Deferred direct acquisition costs (67) (60)
Reserves for membership cancellations (91) (119)
Deferred charge card fees and other, net of
direct acquisition costs and reserves $ 1,036 $ 1,034
(a) Includes deferred fees for Membership Rewards program participants.
NOTE 12
DERIVATIVES AND HEDGING
ACTIVITIES
The Company uses derivative financial instruments
(derivatives) to manage exposure to various market risks.
Market risk is the risk to earnings or value resulting from
movements in market prices. The Company’s market risk
exposure is primarily generated by:
•Interest rate risk in its card, insurance and Travelers Cheque
businesses, as well as its investment portfolios; and
•Foreign exchange risk in its operations outside the
United States.
General principles and the overall framework for managing
market risk across the Company are defined in the Market
Risk Policy, which is the responsibility of the Asset-Liability
Committee (ALCO). Market risk limits and escalation triggers in
that policy are approved by the ALCO and by the Enterprise-
wide Risk Management Committee (ERMC). Market risk is
centrally monitored for compliance with policy and limits by
the Market Risk Committee, which reports into the ALCO and is
chaired by the Chief Market Risk Officer. Market risk
management is also guided by policies covering the use of
derivatives, funding and liquidity and investments. Derivatives
derive their value from an underlying variable or multiple
variables, including interest rate, foreign exchange, and equity
indices or prices. 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 management. The Company does not
engage in derivatives for trading purposes.
The Company’s market exposures are in large part byproducts
of the delivery of its products and services. Interest rate risk
arises through the funding of cardmember receivables and fixed-
rate loans with variable-rate borrowings as well as through the
risk to net interest margin from changes in the relationship
between benchmark rates such as Prime and LIBOR.
Interest rate exposure within the Company’s charge card and
fixed-rate lending products is managed by varying the
proportion of total funding provided by short-term and
variable-rate debt and deposits compared to fixed-rate debt
and deposits. In addition, interest rate swaps are used from
time to time to effectively convert fixed-rate debt to variable-
rate or to convert variable-rate debt to fixed rate. The Company
may change the mix between variable-rate and fixed-rate
funding based on changes in business volumes and mix,
among other factors.
Foreign exchange risk is generated by cardmember cross-
currency charges, foreign currency balance sheet exposures,
foreign subsidiary equity, and foreign currency earnings in
units outside the United States. The Company’s foreign
exchange risk is managed primarily by entering into
agreements to buy and sell currencies on a spot basis or by
hedging this market exposure to the extent it is economically
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AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS